Publication: GCIS Issued: Date: 1998-08-03 Reporter: RF Haywood Reporter: Reporter:

Parliamentary Briefing by Mr R.F. Haywood, Executive Chairperson of Armscor,
on Proposed Armament Procurements

 

Publication 

GCIS
Date

1998-08-03

Reporter

RF Haywood

Web Link

 www.info.gov.za

 

Ladies and Gentlemen

Commenting on the Government to Government package deals has so far been the prerogative of the Office of the Minister of Defence. It is therefore a great privilege for me to be able to make this presentation to you today.

The White Paper on Defence states:

"The SANDF has to maintain a long-term capability to fulfil its primary function. It is not possible to create such capability from a low level of preparedness if the need suddenly arises. It is therefore imperative to retain a sustainable core force and to upgrade and, where necessary, replace obsolete equipment."

The Defence Review, unique in the comprehensive way in which it was formulated, further supports the acquisition of major procurement projects to replace the ageing equipment of the SANDF. The comprehensiveness of the review is important as it assures the concurrence of a vast spectrum of role players and it was unanimously endorsed by Parliament.

It is against this very substantial background that Armscor has embarked on the government to government acquisition project to re-equip its major client.

Defining the need is an ongoing process between Armscor and the client. It started many years ago and will continue into the future.

Through this process, the requirement for five major programmes namely, corvettes, submarines, light utility helicopters, light fighter aircraft and main battle tanks was identified and defined some time ago and a first round "Request for Information" for such products went out to potential suppliers in 1997. Reports of this in the press occurred in October 1997. Eight countries were initially approached with a request for information. At this stage no preferences had been indicated for any specific weapon systems. In line with procedures, all information was dealt with on an equal footing. At that time a MOD policy for dealing with international offers and a complete "Work Breakdown Structure" were already in place.

The process to obtain information was completed by 31 October 1997 at which time information was submitted to Armscor. A press release made by us at the time indicated that we actually received information from nine countries. These were the UK, Germany, Spain, France, Italy, Canada, Russia and the Czech Republic. Different countries provided information on different products - those that they considered they could offer competitively. Information on Maritime Patrol Helicopters which had originally been part of the Corvette project was now treated separately.

At that stage the information received covered some 36 different products.

Information from the first round of offers was evaluated and from this a short list of potential suppliers was determined. On the 13th February 1998 a "Request for Quotation" was sent out for Corvettes, Submarines, Maritime Helicopters, Light Utility Helicopters, Light Fighter Aircraft and Marine Battle Tanks to seven countries.

The closing date for responses was mid-May. Bids for the different projects were spread from the 11th to the 15th of May as they could not all be handled at once.

Since that time the L.I.F.T. (Lead in fighter trainer aircraft) project had been added to the Government to Government Packages or Strategic Initiatives and the UK, Italy, Italy together with Russia and the Czech Republic were invited to submit their best and final offers by 15 June 1998.

The bids received by the cut-off dates included 22 products covering the whole range of requirements. (A list of these is included in my hand-out for your information.)

The evaluation of the offers began soon after receiving the bids and is a mammoth task. Mountains of documentation have to be evaluated. To illustrate the point, 450 kg of documentation was received from just the German's for only one project. The focus in the evaluation process is on three elements:

Each element of equipment required has its own dedicated project team to do the evaluation and each is a multi-disciplinary team. Representation on the teams is from:

The composition ensures also that members of the different arms of service, that is, the army, navy and air force are represented. A number of checks and balances are naturally built into the process.

Ladies and Gentlemen, this indicates more or less what has happened to date. I wish to concentrate on the benefits of the programme to South Africa but before doing that I wish to stress that this is possibly the largest government to government package programme that the world has seen and with a very large offset component.

The tender process, we are told by international groups, has been one of the most demanding they have experienced, particularly in our requirements for contractual obligations in our countertrade programmes but, at the same time they say, it has been one of the most transparent.

Technical requirements are very specific and these we might mention were in sealed envelopes until the bids were opened.

We also have the offset department within Armscor which has been responsible for adjudicating the Defence Industrial Participation. Trade and Industry, independent of Armscor, have been adjudicating the national industrial participation. Furthermore the Department of Finance has a team who looked at the financial aspects together with Armscor's Financial General Manager. Each of these teams have been working totally independently of one another and this applies to each and every product. But there is a steering board to which the final results eventually came known as SOFCOM (Strategic Offer Committee) and here we had the Director General of Trade and Industry, Mr Zav Rustomjee, together with Mr Chippy Shaikh from the Defence Secretariat, other senior members of the Ministry of Defence, the Ministry of Finance, Armscor and the Arms of Service, together with their Committee members, reviewing inputs from the evaluation teams. The reviewing includes aspects of relative weightings of evaluation points, value determination, screening of findings and acceptance of ratings.

The process itself also takes into account the acquisition management process and its structures which formed part of the Ministry of Defence Acquisition (MODAC) workgroup's MODAC1 report which was approved by the Minister of Defence in February 1995. The approval structure for project submissions consists of three levels. All the projects identified as part of these government to government packages have to ultimately go through the highest level of approval for acquisition known as the Armament Acquisition Council (or AAC) which is under the Chairmanship of the Minister of Defence.

At this stage, that is to date, the project teams have completed their evaluations and the process is now in its political approval phase. Once the Minister of Defence, with his committee, has reached a conclusion he will have to take his recommendations to cabinet and parliament with a request to continue.

I cannot at this stage say what will happen. Decisions will be dependent on the funds which will be available in the defence budget together with whatever other funds may or may not be made available by Cabinet. One must also remember that this is a far-reaching planning strategy and will be spread over a number of years.

The final decision will have to be made so as to achieve the objectives of economic stimulation, investment, job creation and the advancement of previously disadvantaged groups and not just product procurement.

At the outset our Minister of Defence, Mr Joe Modise, had a vision. He indicated that we would have to be prepared to make severe budget cuts and that we would have to 'think innovatively' to meet the requirements of the National Defence Force. He realised that we would have to devise some kind of Marshall Aid Plan, as had been applied by the USA to Germany after the 2nd World War and that countertrade would be an important element. In other words, it is a total economic planning strategy to boost the whole economy - not just the defence sector.

Reports, highlighting this thinking, also appeared in the press in October 1997 when the first "Requests for Information" were going out. Indicating the level at which the project was being driven, Deputy President Thabo Mbeki himself stressed the importance of industrial participation and offset deals to the country. Deputy Minister of Defence Ronnie Kasrils, is also on record as saying that boosting South Africa's military power would benefit all in Africa. He referred to the teams that would do the evaluation and stressed that these teams would ensure that the acceptance of prospective packages hinged on substantial participation by local industry in the development, production and sales of defence systems and should provide access to major global markets. Agreements, he said, would also ensure that previously disadvantaged groups are given opportunities to participate. "Most significantly", he said, and I quote, "We will ensure that these packages promote social and economic projects leading to industrial development and employment opportunities." The Minister of Defence, Mr Joe Modise, said that for every rand spent abroad, the same amount, or even more, will be invested in South Africa. He indicated that, therefore, the overall countertrade commitment from abroad would more than recover the costs of the funds we spend. The Minister said that this would solve the 'guns or butter - houses or corvettes' debate. He said it will no longer be a question of guns or butter but of guns and butter. The packages would create jobs and training opportunities and also have other benefits such as housing and construction. In other words the agreements would benefit the government's whole macro-economic policy of GEAR.

Achieving these ideals is tied in with the Defence Industrial Participation Process (DIP) and the National Industrial Participation Programme (NIP) as defined by the Department of Trade and Industry.

DIP is defined as the process where purchases of the Department of Defence, are used as a leverage to oblige a foreign seller of defence commodities or services to do defence related business in South Africa on a reciprocal basis in order to advance military strategic and defence related industrial imperatives. The objectives of all DIP programmes, in addition to the National Industrial Participation (NIP) objectives, includes the:

DTI has listed special projects which it would like to realise through IP projects. Twenty-two such special projects have been identified ranging from steel and motor manufacturing through advanced transport systems to transfers of technology.

No matter what the projects, or what partnerships may be entered into, the objectives are to provide sustainable economic growth, attract foreign investment to South Africa, export value added goods and services, create jobs, develop human resources and generally collaborate with research and development in South Africa.

At this stage, what do these government to government packages actually offer us?

As mentioned earlier, when the government to government offers were first sent out Minister Modise made it very clear that he would expect a minimum of R1 income for every R1 we were to spend. Furthermore, that this should heavily favour industry as a whole and not just the Defence sector. In fact, he was prepared to allow for a higher participation in the national industrial participation than in the Defence industrial participation although we talk generally of a 50/50 split.

The government to government offers also would assist the whole question of the increasing costs of research and development which was making it very difficult to keep up with the world let alone stay ahead of the world.

So what really have been the results?

Quite frankly Minister Erwin will tell you as will Minister Modise that all of our goals have been exceeded by considerable percentages.

We have found that the world has not only wanted to help us in the selling of product but they have wanted to be part of the new South Africa and want to invest in South Africa, to spend money on research and development, to help increase jobs, to develop joint ventures and to help us to become international players. We also have had the remarkable situation of the single largest offset program, probably in any country of the world, across a range of products as already described.

All of the offers that have now been consolidated will bring enormous benefits to South Africa, in fact, I as an industrialist and having been in organised business for a considerable time, can say that without any doubt this will be the largest and most strongly supported offset offers we have received or are likely to receive. Perhaps we need to stop here and pause to ask, "What does this really mean to the man in the street?'

Firstly, it means economic growth for South Africa at a time when we desperately need it. It means job creation particularly in the manufacturing sector. It also will help to assist SMMEs (Small, Medium, Micro Enterprises). It will give a major boost to industry as a whole but in particular to the manufacturing sector where jobs are created and will enable us to keep our key defence technology which will guarantee our independence and sovereignty. We will become international players of significance. We will be able to continue with research in key areas in order to ensure that we remain in charge of our own destiny with regard to sensitive products such as electronic warfare. In creating jobs we are going to be able to do so in many areas of South Africa, including places such as Simon's Town which will support the Cape Flats, we are going to look at areas such as the Eastern Cape which desperately needs job creation and where extremely large potential investments can be made, also in KwaZulu Natal and of course in the Gauteng region.

There are also many spin-offs that are in the non-defence related areas. Examples of these are, rock busting charges, mining drill guidance systems, agricultural vehicles, distress flares, composite materials piping, underground radios for use in mines, long shelf-life food, training simulators, civilian aircraft components, off-road vehicles and trailers, sporting parachutes, commercial ammunition, and many more.

We believe that, thanks to the many friends we have and with the enormous support we have received, we are going to be made "offers that not only we cannot refuse", but, as said before, which are going to have a very positive impact on the total South African economy. Obviously it will be for cabinet to decide whether they are prepared to go for the full product option but, as mentioned earlier, it should not be all that difficult to accept these as we are talking about a time span of some fifteen years.

These packages have the potential to ensure that South Africa is established once and for all in many new sectors of industry and that our defence industry, which may seem to be a low key sector, will give us greater opportunities than the current R1billion exports and 50 000 jobs than it does presently and what is more, this is likely to be on an ongoing basis. Armscor is proud, as the Procurement Department of the Ministry of Defence, to have been able to work with not only the Defence Force itself and the Secretary for Defence but, in an extremely unique way and for the first time ever, the Department of Trade and Industry worked with a Department of Defence Team and so did the Department of Finance. We have become wiser together, we have formed a wonderful team and this can only auger well for the future of the Defence Force and broader industrial base. We have also had the Department of Foreign Affairs being involved and we are extremely proud of their interest in helping our Defence Industry.

Ladies and Gentlemen, in conclusion, Minister Trevor Manuel in his address to Parliament two weeks ago, urged support for the GEAR policy. He stated that transformation of our society and economy requires vision, bold leadership, commitment and above all courage. He stated that, and I quote, "Our goal is an economy that is growing, creates jobs and is capable of delivering a better life for all our people."

Countertrade is not a myth. From 1989 until now, countertrade agreements resulting from defence purchase contracts have been signed with various international companies and countries to the value of approximately R3.8 billion. The Defence Industrial Participation and the non-defence, Industrial Participation, will be substantial. Minister Modise requested a 100%, 1:1, that is R1 Industrial Participation return for every R1 spent as part of the offers made by the various offering countries. Incredible offers in the order of 200%, that is R2 in for every R1 spent, have even been received.

We believe that whatever decisions cabinet might make, the final and major benefits of the packages to re-equip the SANDF will be a significant boost to the government's GEAR policy.

As I said, we have been made offers we cannot refuse. In two to three years time they are unlikely to exist, we may have to import 100% of our needs in certain product areas, paying in foreign currency. We will lose our strategic independence and we will no longer be able to afford research and development. All the gains I have pointed out to you will have been lost.

The question ladies and gentlemen is not whether we can afford to go for these package deals, but, whether we can afford not to?

I thank you and I will now take your questions.

Bidding Countries and Products Offered
Final List

Project

Country

Equipment

1. Corvettes

Germany: German Frigate Consortium

United Kingdom: Gec Marine/Yarrow Shipbuilders

Spain: Bazan

France: Dcn International

Meko 200sa

F3000

Project 590b

La Fayette

2. Submarines

Italy: Fincantierri

Sweden

France: Dcn International

Germany: German Submarine Consortium

Langobaro Class S1600

Kockums Ab Type 192

Scorp Ne Type 1400 Mod

3. Maritime Helicopters

United Kingdom: Gkn Westland

France: Eurocopter

Super Lynx 300

Cougar As532 Sc

4. Light Utility Helicopter

Italy: Augusta-finmakanika

Canada: Bell Helicopter

France: Eurocopter

A109

Mod 427

Ec635luh

5. Light Fighter Aircraft

Germany: Dasa

France: Dassault Aviation

United Kingdom/Sweden: Ba/Saab

At2000 Rsa

Mirage 2000 Rsa

Gripen

6. Main Battle Tank

United Kingdom: Vickers

France: Giat

Challenger Ii

Leclerc

7. Lead In Fighter Trainer Aircraft

United Kingdom

Italy: Aeromacchi

Italy/Russia

Czech Republic

Hawk 100

Mb 339fd

Yak-aen 130

Aero Vodchody - L159b

With acknowledgements to GCIS and Ron Haywood.


Chickens coming home to roost.