by Simphiwe Hamilton, Executive Director – AMD

1. AMD PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON DEFENCE: 26 JUNE 2007 by Simphiwe Hamilton, Executive Director – AMD A STRONG DEMOCRACY NEEDS THE SUPPORT OF A STRONG DEFENCE INDUSTRY

2. PURPOSE & SCOPE OF PRESENTATION • PURPOSE • To brief the Committee on the current state of the defence industrial environment and its possible futures. • SCOPE • Overview of the evolving SADRI position on key developments within the defence landscape on each of the areas listed below: • Denel restructuring; • Armscor restructuring; • Formation of a Defence Evaluation and Research Institute; • Acquisition Processes and Industrial Participation; and • Defence Industrial Development Strategy. IN SUPPORT OF PEACE AND SECURITY IN AFRICA

3. SADRI POSITION ON KEY DEVELOPMENTS

4. SADRI CONTRIBUTION TO KEY GOVERNMENT OBJECTIVES The SADRI is well poised to significantly contribute to South Africa’s key national objectives as articulated by Pres. T.M. Mbeki in his 2007 State of the Nation Address: • Promoting the growth of the SMME business sector; • Skills development; • Improving export performance, focusing on services and manufacturing; • Increasing the spend on scientific research and development; • Promoting BEE; • Improving safety and security of all citizens and communities; and • Accelerating the process of renewal of the African continent SADRI – COMMITTED TO A SAFE, SECURE & DEVELOPING SOUTH AFRICA

5. BACKGROUND TO POSITION PAPER SA Defence Industrial Environment interventions by the SA government are understood to be arranged into Inter- Ministerial Committees (IMC) that focus on the following: • Denel restructuring; • Armscor restructuring; • Formation of a Defence Evaluation and Research Institute; • Acquisition Processes and Industrial Participation; and • Defence Industrial Development Strategy. FROM DYSFUNCTIONALITY TO SUSTAINABILITY IN ALL SPHERES

6. BACKGROUND TO POSITION PAPER, cont. This restructuring is occurring within the context of two important events: • AMD commissioned SADRI Feasibility Study of which the results were presented to the Parliamentary Committee on Defence on the 12th of September 2006. • Defence Update • Clarity must be attained as to what aspects of the defence policy framework are being reviewed & how these impact on SADRI. • The DoD should involve the SADRI and other stakeholders in a process of meaningful participation to ensure the legitimacy of the process as well as to ascertain the requirements that may emanate from these stakeholders. PARTICIPATION IS A TENET OF LEGITIMACY

7. IMC 1: DENEL RESTRUCTURING Characterised by the disposal on non-core assets and the attraction of credible technology partners, the restructuring of DENEL is a multi-pronged approach aimed at returning this company to sustainability and profitability whilst urging for the establishment of ‘home market’ advantages for the SADRI as a whole. RECOMMENDATION: A comprehensive feedback session be facilitated for the DENEL to interact with the broader SADRI and to report on the progress to date. Need to verify impact of this process on SADRI as well as on strategic capabilities as identified by the SANDF. DENEL NEEDS THE SADRI IN AS MUCH AS THE SADRI NEEDS DENEL

8. IMC 2: ARMSCOR RESTRUCTURING In the past few years, Armscor has been through various challenges ranging from the changes in the Act that governs its activities to the recent attempts at restructuring of the organisation. RECOMMENDATION: SADRI be afforded an opportunity to at least remain officially and regularly informed of the developments in this arena to prevent uncertainty and misinformation that tends to accompany lack of official information and non-participation. ARMSCOR – A KEY PARTNER IN SADRI’S ABILITY TO DELIVER

9. IMC 3: FORMATION OF A DERI Government has decided to form a Defence Evaluation and Research Institute (DERI) out of the relevant capabilities that reside in Denel, the CSIR and Armscor (Business). The primarily responsibility of the DERI is that of conducting of basic research as well as tests & evaluations in specified areas on behalf of the SANDF. RECOMMENDATIONS: AMD supports this process & recommends adherence to the following basic principles: • SADRI involvement in the process should be established at a meaningful level. • The DERI’s mandate, scope and parameters be clearly defined. • Measures should be put in place to ensure that the DERI does not compete with industry & that regulatory ‘hand over mechanisms’ are in place. • Measures be put in place that the research activities undertaken by the DERI are clearly guided by the SANDF requirement and that where so desired an attendant local industrial capability is in place in good time to be able to meet the requirements of the SANDF. R&D IS A KEY INPUT TO SADRI COMPETITIVENESS

10. IMC 4: ACQUISITION PROCESS & INDUSTRIAL PARTICIPATION Of all the intervention processes, this seems to be least spoken of and is one in which AMD has little to no insight. RECOMMENDATIONS: • AMD’s recommendation in this regards is that clarity should first be attained on the status of this intervention and to secure its involvement in the process as it directly impacts on the SADRI’s sustainability. • The key guiding principles in this regards are as follows: • The continued commitment to existence of a robust acquisition process that separates the user from the buyer and ensures the objective adjudication of competing bids whilst adopting emerging acquisition practices like incremental acquisition, technology infusion, partnership with industry and the creation of a home market for local industry • The visibility of short, medium and long term planning priorities. • The deliberate implementation of the tenets and provision of the White Paper on Defence Related Industries particularly with regards to strategic capabilities, regular interaction between the Arms Acquisition Board and organised industry to provide a long term view on acquisition planning and the nurturing of local defence industry capabilities. • The review of risk mitigation strategies as applied in the acquisition of capital equipment in the recent past especially the preference for foreign military off the shelf equipment whilst disregarding the implications in terms of the complete life cycle costs. • The utilisation of industrial participation as an integral part of the acquisition process to achieve mutually agreed strategic objectives particularly those related to the development and sustainment of world class defence industrial capabilities within the SADRI. ACQUISITION IS A KEY LEVER FOR TRANSFORMATION & SUSTAINABILITY

11. IMC 5: DEFENCE INDUSTRIAL DEVELOPMENT STRATEGY This process is led by the Department of Public Enterprises with the participation of the DoD, the dti, the DST, DENEL and AMD as paying partners. AMD participated as a paying partner and a legitimate stakeholder. Final interpretation, packaging and recommendations to Cabinet and Parliament being compiled without SADRI/AMD participation RECOMMENDATIONS It is recommended that a fully fledged, commonly understood and accepted defence industry strategy that addresses at least the following aspects, be developed: • The role and importance of the SADRI as an integral element of the SANDF’s defence capability; • The identification of strategic defence industrial capabilities and indications of mechanisms to establish, sustain and enhance these; • The alignment of the defence related (defence affecting) mandates of the DoD, the dti and the DST; • The establishment of a ‘home market’ for the SADRI; • The mechanism for the formulation, implementation & funding of the capital & technology acquisition strategy; and • The importance of defence exports and the requisite mechanism and resources for the support of the SADRI. STRATEGY AS A GUIDE TO A COMMON & PROSPEROUS FUTURE

12. SUMMARY & CLOSURE AMD supports and appreciates the SA Government’ efforts to ensure the sustainability of the SADRI and will co-operate with these efforts & those of this Committee in ensuring that the concerns and inputs of all key stakeholders are meaningfully considered as part of this process. The focus is on: • Participation; • Relationship; and • Impact. DEFENDING DEMOCRATIC GOVERNANCE AND PARTICIPATION