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Commercialisation of the Defence Industry
Issues Faced in the Procurement of Arms*
INTRODUCTION
In order to fully understand Armscor's role in the new national order and how this role relates to its organisational status, it is necessary to briefly review the historical events from the start of the present decade.
The advent of the nineties brought with it an era of world-wide political change. The USSR disintegrated, bringing an end to the communist threat and changing the global balance of power. Closer to home, the failure of communism brought an end to Russian international expansionism in Angola - an onslaught which had in any event been firmly quelled by the SADF. In South Africa itself, the abolition of apartheid announced to the world that a new Republic was taking shape. Although the advent of peace was welcomed by all, it also brought about drastic cuts in the South African defence budget and a sharp decline in the SADF's arms requirements. This meant that Armscor had to consider seriously its future role in the national household.
It was obvious that any intended course of action would have to guarantee the survival of the armaments industry and would also have to ensure that the state-of-the-art technology, built up through many years by the armaments industry, would be retained. Hence, Armscor adopted a three-point plan: it would downsize to the extent demanded by cost efficiency, increase its exports substantially in order to increase its foreign exchange earnings, and commercialise its product range so as to gain a share of the civilian market. It made reasonable progress with its domestic product range by concentrating on import replacement. However, a legal problem cropped up: Armscor operated under the Armaments Act, which specifically prohibited it from competing in the civilian market, whether by import replacement or not. The solution was to split Armscor into two organisations, which would perform separately the two primary functions of the old organisation, namely acquisition and manufacture.
The plan was to restructure the manufacturing arm into an economically independent industrial company group which would fall under the Minister of Public Enterprises and would operate under the Companies Act. This would enable the Group to manufacture military as well as civilian products. Denel, as this group is now known, was established on 1 April 1992. It includes all the old Armscor subsidiaries - with the exception of the Institute of Maritime Technology in Simonstown and the ballistic test range at Alkantpan.
Armscor, on the other hand, continues to perform its acquisition function in terms of the Armaments Act. It reports to the Minister of Defence, and it remains responsible for the acquisition of weapons and associated equipment for the SA security forces. It contracts Denel and other local manufacturers in the private sector, as well as international defence manufacturers, to supply the required equipment.
Armscor also has a number of very important secondary functions. It has to ensure that the technology and infrastructure required for the local manufacture and maintenance of weapons and equipment are maintained. It also controls the import and export of armaments, and markets surplus SADF equipment.
Not only must this new dispensation ensure the survival of certain critical technologies in the country, but it must also facilitate full utilization by the private sector of the expertise built up by Armscor over the years. In this manner the right of South Africa to be independent in areas of weapon manufacture and supply is ensured.
As an acquisition organisation, Armscor has a comprehensive infrastructure and experienced personnel, whose expertise lies in the fields of programme management, quality assurance, industrial planning, technology management, financial control, testing and evaluation, marketing, import and export regulation and foreign procurement.
ACQUISITION - A COMPLEX TASK
Having looked at Armscor's structure and function, let us now consider the complexities of the acquisition process it manages.
Obtaining armaments is a complex, difficult task which requires foresight, extensive technical knowledge, careful planning, and strict control of budgets.
Armscor is the SADF's acquisition organisation and as such seeks the most cost-effective product or system to fully meet the SADF's requirements, while ensuring that the required levels of quality are maintained. Acquiring military equipment requires considerable control and coordination to ensure that specifications, quality standards, time scales and budgets are strictly adhered to. Through its well-tried programmes for project and financial management, Armscor has established proven flexible systems to achieve this.
Acquisition firstly involves identifying a client's current and future armaments requirements. These requirements are then translated into actual technical specifications for particular equipment and the necessary equipment is then acquired via one of two methods.
The first method is to purchase off-the-shelf equipment from either local or international suppliers. This presupposes that such equipment is available and that the supplier is willing to sell it to the RSA. Should this be the case, the acquisition organisation must administer the entire purchasing process and also exercise the necessary quality control.
The second method is commissioning or contracting suitable suppliers to develop and manufacture the required products or systems. Where this method is followed, the acquisition organisation plays a pivotal role in the overall coordination and management of the project. It also ensures correct configuration control and the supply of logistic and maintenance support during the operational life cycle of the product.
Choosing between the two methods is not always easy. Such 'buy-or-develop' decisions are often complex and are taken with the aid of an objective value system, with criteria pertaining to technical and industrial aspects, cost and logistics.
Armscor has decades of practical experience in the acquisition field, as well as a particularly solid reputation as a service-oriented, well-managed organisation which combines innovation and flexibility to provide a reliable, technologically excellent and professional acquisition service to its clients.
One of the major problems facing Armscor in its acquisition task is the need for greater transparency. It should actually be more publicly accountable, which means that its actions should be more open, but at present the international arms embargo seriously restricts transparency. The arms embargo may be lifted soon, and the only restriction then will be normal military security. The reality is that countries seldom want the number of tanks or aircraft they possess to become public knowledge. Hence one should not expect that Armscor will ever achieve complete transparency.
An interesting possibility is the commercialisation of Armscor's procurement expertise. It might make its infrastructure and expertise in the procurement field available to other organisations, thereby adding to its value in the national household. There are some possible snags along this route, but the possibility is being considered.
PLANNING AND BUDGETARY CONTROL
I referred earlier to arms acquisition as a complex and difficult task which requires careful planning and strict budgetary controls. Let us now take a closer look at this process of planning and control.
Firstly, there must be an Acquisition Plan. The plan must be well thought out, documented, and properly applied. This is imperative, since Armscor's annual procurement of equipment and services amounts to more than R4 000m. Mistakes could be very expensive.
The acquisition plan is also a guideline for establishing and maintaining technological and industrial capabilities to meet our clients' future requirements. Without proper planning, an acquisition organisation could never be successful.
Now, let us consider the control aspect. How does one make sure that everything goes according to plan?
In the acquisition process, we apply joint civilian and military control through a hierarchy of bodies - such as the Defence Planning Committee, Authorisation Committees, Technical Review Boards, the Armscor Board of Directors and the Minister of Defence. Although the system is elaborate, it ensures, it ensures that even the least expensive project is adequately controlled and runs little risk of failure or cost overruns because of unauthorised actions.
However, Armscor does not control only its own acquisition programme. It also issues permits for the import, marketing and export of armaments by the rest of the industry. These permits are issued subject to the Armaments Development and Production Act, No 57 of 1968, which reads that arms can only be marketed to countries approved by the Government.
RESEARCH AND DEVELOPMENT
When it has taken care of acquisition, planning and control, Armscor faces a further challenge - research and development.
The first problem encountered in this field is the declining defence budget. From 1989 to 1992, the Defence budget declined by 37% - a substantial drop, which resulted in a decline of 70% in the spending on research and development and of course a general downsizing of the defence industry. The expenditure on South African manufactured equipment was reduced drastically - a downturn which culminated in a crucial struggle for survival of the industry. During this period, critical industrial capabilities were maintained with the help of a Technology Survival Plan.
This new industrial plan calls for a more flexible approach. In the previous dispensation, 'self-sufficiency' was the watchword and was applied all over. Now, the accent is on competitive procurement in the international market, with self-sufficiency the aim only in certain essential areas. The selection of these areas is based on SADF requirements as regards operational advantage (e.g. electronic warfare), environmental suitability (e.g. mine protected vehicles) and logistic support, as well as on strategic opportunities for the local industry.
Meanwhile, although self-sufficiency is no longer the watchword, we have to have a strategy for maintaining a Defence Industrial Base. Possible strategies are discerning procurement of spares and essential services such as upgrading and maintenance, in order to sustain critical facilities. Other strategies, like increased international marketing, emphasising dual purpose technology (both military and commercial) and infrastructure development will also assist in maintaining the industrial base.
Counter-trade agreements with foreign suppliers are also important in maintaining our Defence Industrial Base. The current policy is to negotiate 50% counter-trade on all foreign contracts, a fraction of which must involve the local armaments industry.
Lastly, we have a strategy for technological development through the retention of certain critical projects. This involves the continued development of prototypes which have not yet reached the production stage. Here. the Rooivalk helicopter is an excellent example. Continued development ensures that the technology stays alive while suitable markets are sought.
CREATION, MAINTENANCE AND EXPANSION OF THE ARMAMENTS INDUSTRY
Having looked at the acquisition function and strategies for survival of the local armaments industry, I will now examine factors which may influence the future of the armaments industry.
It is common knowledge that the local armaments industry resulted largely from the arms embargo against South Africa. The fledgling industry of the seventies soon became a major world player and by 1982 it was described as the 10th largest armaments industry in the world. Soon thereafter it became the largest exporter of finished products in South Africa.
Although it is now smaller in size than it was, the armaments industry still plays a vital role in the South African economy. It currently employs 70 000 people, of which 80% are in the private sector.
The lifting of the arms embargo (UN resolution 418) and the arms boycott (UN resolution 558) will have both negative and positive repercussions on the armaments industry. Initially, the local industry will experience the adverse effects of international competition in terms of price. Improved price-competitiveness in the local industry will be a prerequisite for it to survive the international competition.
However, the local arms industry has many strong marketing points, which bodes well for its future. Of these, its unique innovative products are the most important. The G6 artillery system, which again caused a stir at a recent overseas weapon exhibition, is an excellent example.
In addition, it will be easier to penetrate the overseas markets once the arms boycott is lifted.
The so-called New World Order, in which the USA sees itself as the word's policeman, will have a definite effect on international and local arms trade. Third World weapons supplies are seen as undesirable in the New World Order and South Africa will have to act very responsibly in the international arms market to prevent conflict with the USA. However, our market share at present is approximately 0,3%, and the opportunities are attractive. Armscor's role as marketing facilitator gives it a definite opportunity to guide the local armaments industry through the pitfalls of this New World Order.
Also important for the future of the arms industry are political developments within South Africa. These developments will undoubtedly lead to the normalisation of South Africa's international position, and this will open up new opportunities for the arms industry. An interesting development is the proposed Conference on Peace, Security, Stability, Development and Co-operation in Africa. It has been suggested that developments in the direction could lead to the joint participation of all African countries in weapons procurement and production.
At the moment, that last statement may sound like wishful thinking, but such is the future we face: anything is possible for one who is prepared for the impossible. As the saying goes: 'Whatever the mind of man can conceive, he can achieve.'
That, then, was a summary of Armscor's situation at present as well as the challenges facing it. Although we are currently in less than optimum times, owing to the various national and international circumstances I sketched at the beginning, I have confidence that Armscor will continue to make a substantial contribution to the security and economic welfare of South Africa.
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