AEROSPACE, MARITIME AND DEFENCE ASSOCIATION
DISCUSSION DOCUMENT: INPUT TO THE SECOND DEFENCE REVIEW RATIONALE

It is believed that the following aspects of defence acquisition policy formulated during the period following the transition to democracy, requires reconsideration in view of subsequent developments:

- The nature, extent and structures of Government support to the South African Defence Related Industries (SADRI) to ensure that the Industry, notably including the growing number of defence-related SMME's and BEE businesses, retains and grows the business and technological capabilities to be of strategic support to the SANDF and to continue to be a valuable foreign policy instrument of the South African Government.

- The South African defence acquisition process, with particular reference to the role of Armscor, aimed at arriving at a process driven by a "proudly South African" agenda and reflective of defence policy in a democratic environment and the political and economic developments in Africa such as NEPAD + AU;

- The South African arms trade control process, with a view toward the streamlining of the process without compromising the effectiveness of controls.

GOVERNMENT SUPPORT OF SOUTH AFRICAN TECHNICAL CAPABILITIES
The rationale of Government support to the South African Defence Related Industry (SADRI), particularly in respect of its export potential, is based on the following:

- The role of the Industry to provide cost-effective support to the SANDF and to ensure the strategic independence of the SANDF in certain strategically essential technologies.

- The strategic contribution of the Industry to the broader technological, industrial and economic bases of the country, which extends to the mentoring of a significant portion of the highly skilled labour force and the potential of substantial earning of foreign exchange.

- SADRI can be considered as one of the repositories of high technology in South Africa. Governments globally have recognised the importance of high technology industries, due to:

= The perceived high-profit margins of companies in the High technology markets.

= The spill-over effects associated with high-technology companies, which force other companies to improve their quality, response time, competitiveness, etc. The net effect is a more capable and efficient economy.

- High-technology companies provide the following benefits to nations:

= They are associated with innovation.

= They are associated with high value-added production and success in foreign markets, which help to support higher compensation to their employees and the creation of more high paying employment opportunities.

= Industrial R&D performed by high-technology industries have spill over effects, which benefit other commercial sectors, and facilitate in the establishment of clusters of related capabilities.

The growing potential of the role of the SANDF and the SADRI in support of peacekeeping in Africa underscores the importance of a sound Government Industry partnership, particularly in view of the imperative of strategic independence in close support of foreign policy objectives in the Continent.

The role of the SADRI, as the custodian of the investment of the people of South Africa in its ability to independently research, design, develop and manufacture defence equipment requires special attention. (The issue here is: Is Defencetek part of industry as custodians of the ability to design etc or does it need to indicate its role explicitly?)

The following factors, which have developed subsequent to the formulation of current policy relating to the Defence Industry are however impacting on the ability of the Industry to remain viable and provide strategic support as indicated above.

- Significant decline in global demand for defence equipment, causing the formation of rationalised global defence conglomerates dominating the market;

- Continued significant foreign government investment, subsidisation and protection of foreign competitors of the SADRI;

- A significant decline in local demand for South African defence equipment and technology, and a concurrent decline in government investment in the abilities of the Industry.

- Significant acquisition of foreign defence equipment for the SANDF, failing to utilise the full potential of the local Industry and failing to secure optimum benefit to the industry through the Defence Industrial Participation Programme.

- Significant investment by the Industry in line with government policy to convert to civilian technologies, which has proved to be unviable globally.

- The lack of a Defence Technology Strategy which could focus local product and technology development, innovation and DIP related technology transfers. Such a strategy must be aligned with other government strategies and initiatives such as the National Research and Development Strategy, the Advanced Manufacturing Technology Strategy and the Broad Based Black Economic Empowerment Strategy.

- The fractured nature of the current research and development facilities also needs to be addressed to ensure that government investment in such facilities yields the best return not just to the DoD but also to other government sectors and initiatives.

- Refocusing of the SADRI to the requirements of foreign defence forces as a result of its significant success in the export market, and notably the growth in export sales versus local sales.

TOWARD A "PROUDLY SOUTH AFRICAN" DEPENCE ACQUISITION POLICY
It is therefore proposed that South African defence acquisition policy be reviewed in the following areas:

- The extent of Government support to the SADRI, mainly in view of the global experience that defence industries are not viable in the absence of significant government support.

- From an Industry perspective, the extent of investment should be guided by the following:

= Major local or foreign defence contracts on the System level are vital to the Industry, as it provides the catalyst for technological innovation and attracts the best engineering and technical minds to the Industry and its supporting research and development institutions on a significant scale. It is doubtful whether the country will be able to successfully produce a new generation of world class scientists, engineers and technicians in the absence of such projects.

= While it is conceded that self-sufficiency in the South African context is not viable, great circumspection should be exercised when the foreign procurement of defence equipment is contemplated. The potential benefits in scientific, technological, economic and empowerment terms of setting of a technological challenge to engineering and scientific labour pool of the country can far outweigh short-term savings in capital expenditure gained through foreign purchases of defence equipment.

= The technologies that are developed for defence purposes are increasingly finding their way into the civilian applications that benefit society-

= In view of the proven track record of the SADRI to successfully act as prime contractors and deliver world-class products on the systems level, the exclusive allocation of prime contractorship to the South African Industry is proposed.

= It is also proposed that policy and legislation should be introduced to the effect that the South African industry is afforded a first right of refusal in respect of all defence acquisition and procurement for the SANDF, and that such contracts must be placed with the local industry if it poposes an acceptable solution at a cost premium of 20% or less compared to the best foreign offer.

= In order to ensure maximum local industry participation, foreign sellers of defence equipment must also be required to enter into a teaming agreement with a local supplier and should not be in a position to sell directly to the SANDF, as is the international practice
in this regard

Regarding government marketing support to the defence industry, AMD wishes to propose the following structural adjustments to ensure that the organised industry contributes appropriately, and that the Industry be afforded the opportunity of direct interaction with relevant government departments:

- That the current support structure (SADESO) be limited to a coordination forum between the DOD and AMD.

- That AMD establish in terms of Memoranda of Understanding similar forums with other government departments such as Trade and Industry, Science and Technology, Safety and Security and Foreign Affairs as may be required..

- That an AMD/Government discussion forum involving the departments of defence, foreign affairs and trade and industry be created in as far as interdepartmental coordination is required.

- That AMD provides the secretariat to the abovementioned interdepartmental forum as well as to the other forums in as far as such services may be required.

Following the review of the Armscor Act by parliament, the legislator defined Armscor's only remaining role as acting as the acquisition agency for the DOD. AMD wishes to raise its concerns regarding certain functions that were retained by Armscor and related developments subsequent to the review. Such concerns include the following:

- Ownership by Armscor, instead of the DOD, of all intellectual property (IP) funded from the special defence account, while concurrently potentially competing with the co-owners and original developers of such IP in the market. The retention of the statutory right to trade commercially is
believed to be the root cause of the problem.

- The exclusive statutory right to dispose of surplus SANDF stock for gain, potentially competing in industry markets, viewed in conjunction with its statutory right to export its services, and the right to retain and build reserves, constitutes misalignment with the objectives of government and the legislator.

- The management of strategic facilities and technology projects on behalf of the Department of Defence, in respect of which the industry could potentially be contracted.

- Exercising of control over the tender-, contracting and industrial participation processes during foreign defence acquisitions, while competing and potentially forming alliances in the market, especially in the absence of a DOD technology strategy.

- Participating in the prior review of applications for government export approvals by the industry, white potentially competing for the business being the subject of the application.

In this regard, it is proposed that the promulgation of the effective date of new Armscor Act be delayed pending thorough review thereof aimed at ensuring that the Act conforms with the requirements of government and the legislator.

GOVERNMENT CONTROL OF TRADE BY THE INDUSTRY
In can be stated with confidence that the organised South African Defence Related Industry has embraced the South African control regime and has included compliance measures as an integral part of its business processes.

The industry views effective arms control as a critical ingredient of its quest to be accepted as a responsible global player in the arms market, and most importantly in support of the foreign policy imperatives of the South African Government.

Regarding the South African control system, it is the experience of the Industry that the system, while being effective, is not optimally designed and importantly requires refinement to provide for the complex nature of defence technology transfers on par with foreign control systems, in aid of creating an export- enabling environment.

The Industry would also submit that without diminishing the pivotal importance of foreign policy concerns, that its experience is that foreign policy considerations are applied dogmatically in arms export decisions and not always in balance with other national interests.

It is believed that the arms control system can be streamlined to a great extent without compromising its efficacy and also refined to the requisite level of sophistication by the reviewing the following aspects:

- Refining of the control system in as far as it relates to transfers of technology, technical data and services in terms of technical assistance agreements and manufacturing licence agreements.

- Introduction of controls relating to Distribution and Warehousing Agreements.

- Introduction of controls relating to the responsibilities of the Customs Service, which should in essence be the enforcer of the arms control system.

- Introduction of licencing system to replace the current permit system, as is the international norm, which would reduce the administrative burden significantly without compromising the effectiveness of the system in any way.

- Devolving of the issuing of additional routine approvals to the Departmental level.

- Merging of the various arms export control legislation and relevant control authorities, including the Directorate for Conventional Arms Control, the Non- Proliferation Secretariat and the export control functions of the Inspectorate of Explosives and the SAPS, as envisaged by the White
Paper on the Defence Related Industries.

- AMD wishes to indicate that it is the experience of the organised industry that the current arms control system, notably including the non- proliferation control system, is not being implemented in the full spirit of Constitutionally guaranteed rights to administrative justice and access to information.

ISSUES REGARDING CROSS-BORDER DEPLOYMENT OF INDUSTRY PERSONNEL IN SUPPORT OF THE SANDF
The previous White Paper limited itself on proposing some options regarding the status of industry members deployed cross-border in support of SANDF forces, but no firm conclusion or direction has been given. The status, management, insurance, health-care and general well-being of industry members operating outside the borders of South Africa needs to be properly addressed, regarding the contingency where industry members could be killed, wounded, otherwise hurt or captured. This should be entrenched in legislation.

CONCLUSION
The aspects of defence acquisition policy addressed above are not presented as an exhaustive agenda, but rather as an indication of the need for thorough review of defence policy related to the acquisition process and the defence related industry.

Factors that may cause review of relevant policies following proper research include developments related to the global defence threat environment, technology requirements of the SANDF particularly in view of its developing peacekeeping role, developments related to the Strategic Defence Packages and the associated DIP programme and growing foreign ownership of the South African Defence Related Industries.

It is proposed in order to mitigate the policy concerns of the South African Defence Related Industries, it must be ensured that the organised industry through AMENDMENT be included as direct participants to research and drafting relating to the review of related policies and legislation such as the White Paper on Defence, The White Paper on the Defence Related Industries, the Armscor Act, the National Conventional Arms Control Act and Regulations and the Non-Proliferation Act and Regulations.