In September 1995 Cabinet released a discussion document on the restructuring of state assets. The document lists a set of objectives for the restructuring of state assets and spells out a four-step implementation process. The objectives include the following:
The discussion document also divides state assets into three categories;
Assets in the first category will only be restructured once sectoral policy has been substantially developed. Assets in the last two categories will be treated as ideal targets for restructuring (including privatisation) and their restructuring will start along with the development of sectoral policy.
During February 1996 government and labour concluded the National Framework Agreement at the National Economic and Development Labour Council (NEDLAC), which contains agreed principles and procedures to guide the restructuring of state assets.
A key component of the government's macroeconomic strategy, Growth, Employment and Redistribution (GEAR), which was presented in June 1996, is to accelerate the restructuring of state assets in order to optimise investment resources.
RESTRUCTURING THE PUBLIC SECTOR DEFENCE RELATED INDUSTRIESWithin the public sector defence related industries there are four categories of state assets that could be considered for restructuring (including privatisation):
The restructuring of the public sector defence related industries should be determined within the context of government's overall policy framework for the restructuring of state assets including the National Framework Agreement
Restructuring should be consistent with the principles and features of other national policy initiatives, including GEAR and the Reconstruction and Development Programme (RDP).
The restructuring of the public sector defence related industry should be integrated with national policy processes in other government departments (e.g. trade and industry, labour, and science and technology).
Decisions about restructuring should be seen within the context of government policy towards defence related industries
The Ministry of Public Enterprises, in conjunction with the DoD and the DTI, should be responsible for formulating and implementing policy on restructuring.
The aims and objectives of the restructuring should be clearly articulated, and should be developed in consultation with all relevant stakeholders, including the defence related industries (e.g. AMD), labour and civil society.
Government needs to articulate a clear vision for the future of defence related industries, particularly the extent to which it is prepared and willing to support these industries
Government needs to be clear at the outset about the aims of restructuring. These could include
There are a number of options for the restructuring of Denel Pty (Ltd)
Option A: Complete Privatisation. The state sells 100% of the share capital in Denel or in its constituent divisions and clusters (e.g. Aerospace, Heavy Ordnance, Light Ordnance, and Informatics). This restructuring option is currently being pursued with respect to some other state-owned enterprises (e.g. Aventura, Sun Air).
Option B: Partial Privatisation. The state sells less than 100% of the share capital in Denel or in its constituent divisions and clusters. This restructuring option is currently being pursued with respect to other state-owned enterprises (e.g. Telkom, Airports Company).
Recommendations for Restructuring Denel Pty (Ltd)Government’s preferred restructuring option is to break up Denel as a single corporate entity and sell off less than 100% of the shares in each cluster (e.g. aerospace, heavy ordnance, light ordnance) or divisions as separate entities.
Those clusters or divisions that are easy to privatise, or those defence-dependent divisions, which are attractive to local and foreign investors, will be restructured first. The revenue from these sales will be used to restructure the remaining divisions in order to prepare them for the market. Given the high degree of inter-linkage that exists between most of Denel's divisions, selling off clusters or divisions as single corporate entities, might make it difficult for many divisions to survive, which in turn might reduce their attractiveness to prospective investors. This approach to utilise the funds realised, might however be problematic in that the Treasury may be unwilling to allow the proceeds from the restructuring of some divisions to be used to finance the restructuring of other less 'attractive' divisions.
The restructuring of Denel may involve a number of different, or complementary strategies such as a public share offer, various different types of employee ownership schemes, a sale to a single local or foreign investor or strategic equity partners, management share options or preferential share options for disadvantaged groups (as in the case of Telkom and Airports Company).
In order to achieve economies of scale, obtain new technologies and gain entry to international markets, Government will encourage rationalisation within the public and private sectors of the local industry coupling this to joint ventures with overseas partners and new local empowerment equity partners. Foreign government industrial participation obligations arising from major defence equipment replacement programmes offers an ideal opportunity to achieve the above.
Government will design a clear policy framework that specifies obligations and duties for Denel’s potential new strategic equity partners so that the broader socio-economic objectives of restructuring (e.g. redistribution) can be realised.
If government decides to implement share ownership schemes, or preferential share offers for disadvantaged groups, government will have to develop the framework to prevent the immediate sale of these shares, especially to foreign investors. Government should consider the issue of management share options with respect to the restructuring of the various Denel divisions as separate corporate entities.
To ensure the retention of strategically essential technologies and capabilities, government will consider issues such as ownership of immaterial property rights, and foreign ownership of domestic defence firms. In this case, in terms of a public share offer, or the sale to a single investor, government may wish to limit the amount of equity that foreign individuals or investors are allowed to own in each defence-dependence cluster or division that is privatised.
It is less strategically important for government to limit the amount of equity that foreign investors are allowed to own in Denel’s clusters or divisions that have no defence business.
A key issue concerns the ownership of immaterial property rights. Currently the DoD owns the immaterial property rights, while Armscor has custody of the property rights on behalf of the DoD. This issue will have to be carefully considered and addressed before any restructuring of Denel (or other parts of the public sector defence related industry) can take place.
RESTRUCTURING ARMSCOR SUBSIDIARY COMPANIES AND GOVERNMENT RESEARCH INSTITUTESThere are parts of the public sector defence related industries (Armscor subsidiary companies and Government Research Institutes) that are extremely difficult to restructure (or privatise) because they are not commercially viable, or because they are deemed to be of strategic importance.
For these organisations there are a number of restructuring options which Government may consider.
Decisions regarding the above will depend to a large extent on Government's overall policy towards the defence related industry.
Restructuring SANDF Industrial FacilitiesGovernment could consider restructuring some or all of the SANDF's industrial facilities. There are a number of options for restructuring SANDF industrial assets.
Each facility should be restructured on a case-by-case basis. The state may however want to prohibit (or limit) foreign ownership of certain strategic industrial facilities.
RESTRUCTURING OF THE PRIVATE SECTOR DEFENCE RELATED INDUSTRYAs discussed above, a large component of the South African defence industrial base is located in the public sector, particularly in Denel, Armscor’s subsidiary companies, government research institutions and SANDF industrial facilities.
A restructuring of the public sector defence related industries, including complete or partial privatisation, will have a profound effect on the nature, composition, ownership, structure and profitability of the domestic defence market.
Government will therefore have to consider how the restructuring of public sector defence related industries will impact on private sector defence related industries.
Government should not dictate the nature, pace or process of restructuring of the private sector defence related industries which may occur as a result of the restructuring of the public sector industry.
However, if the private sector defence related industries wish to alienate immaterial property rights or technology which are owned, or part owned, by the SANDF, then they will have to obtain written permission from the Ministry of Defence (see section on Immaterial Property Rights and Ownership of Technology).
THE BROAD-BASED RESTRUCTURING AND TRANSFORMATION OF DOMESTIC DEFENCE RELATED INDUSTRIESGovernment (particularly the SANDF) is the single largest, and sometimes the only client of the domestic defence related industries. Therefore it has a number of measures at its disposal to assist and influence the broad based restructuring and transformation of the domestic defence related industry.
In this context broad based restructuring and transformation refers to fundamental changes in the structure, composition, ownership, profitability and outputs of domestic defence related industries.
Measures that can assist with this include national policies on procurement, industrial participation and labour and employment issues; and departmental policies related to acquisition, immaterial property rights, international joint ventures, government to government agreements, and diversification and conversion.
These various measures should be used to assist and influence the broad-based restructuring and transformation of defence related industries in order to reflect South Africa’s demographic, political, economic, social and historical realities.
In April 1997 the Ministry of Finance and the Ministry of Public Works issued a Green Paper on Public Sector Procurement Reform in South Africa (see Chapter 2). This Green Paper, if adopted, will have profound implications for procurement policy in the DoD.
In October 1996 the Ministry of Defence released a policy document on affirmative procurement (see Chapter 2). This MOD policy document states that the MoD will give preference to those companies that have progressive internal empowerment policies and practices (e.g. affirmative action and equal opportunity). The MoD will similarly give preference to those defence contractors, which support capacity-building measures in disadvantaged communities.
This affirmative procurement exercise will be guided, monitored and controlled by the Secretary for Defence. In the case of defence related industry organisations that are responsible to the Minister of Public Enterprises, those organisations will be subject to any departmental policy formulated, in consultation with the Secretary for Defence, by that Minister.
Government is committed to seeing the principles of affirmative action being applied to defence related industries and in a broader context, to economic empowerment of previously disadvantaged groups. This includes redressing the imbalances created by previous practices arising from all forms of discrimination with respect to race, gender and disability.
Defence related industries should be committed to redressing previously created imbalances in the working population of South Africa. The industries should support government initiatives to encourage previously disadvantaged persons as entrepreneurs, owners and managers of productive assets and wealth.
National Industrial Participation and Defence Industrial ParticipationIn 1997 Cabinet approved national industrial participation (IP) policy. The DoD in conjunction with the DTI (see Chapter 2) has also approved policy on defence industrial participation (DIP). The DoD’s industrial participation policy is consistent with, and integrated into, national industrial participation policy.
The objectives of DoD industrial participation are to advance national industrial and economic objectives through the leverage of economic benefits and to provide support for the development of South African industry at large.
Defence Industrial Participation (DIP) programmes are structured to provide direct support for sustainable indigenous defence related industries in order to maintain strategically essential technologies and capabilities as identified and prioritised by the SANDF (see Chapter 4).
The DoD, in conjunction with the Department of Trade and Industry, will negotiate, manage and control all inward and outward defence industrial participation programs.
Labour RelationsThe Labour Relations Act No 66 of 1995 (as amended) seeks to resolve conflict in the workplace via mechanisms for negotiation, mediation and reconciliation. The Act is applicable to all employees and employers in the Republic, including the Public Service, with the exception of members of the SANDF, the National Intelligence Agency and the South African Secret Service. As such, it governs labour practices in the entire defence related industry, inclusive of civilians in SANDF installations, but excludes uniformed members of the SANDF. The rights of Civilians in SANDF installations may, however, be limited through the classification of their posts as essential service posts.
Bargaining Councils. The Act provides for the establishment of a bargaining council for a sector or area, where one or more trade unions and one or more registered employers’ organisation adopt a motion to establish such a bargaining council. The State may also be a party to such a bargaining council if it is an employer in the sector and area in which the bargaining council is established. The powers and responsibilities of the bargaining councils are described in Section 28 of the Act.
Workplace Forums. The Act provides for the establishment of a workplace forum in any workplace in which the employer employs 100 or more workers. A workplace forum seeks to promote the interest of all employees and enhance efficiency, and is entitled to be consulted on activities within the workplace and participate in joint decision making. This is described in greater detail in Sections 84 and 86 of the Act. A workplace forum is entitled to be consulted on:
Dispute Resolution. The act envisages that disputes are resolved via mechanisms of conciliation, mediation and arbitration before industrial action is embarked upon (e.g. a strike by employees or lockout by employers). Members of essential services are compelled to enter compulsory arbitration in the case of unresolved disputes.
Basic Conditions of Employment BillThe government has prepared the Basic Conditions of Employment Bill, which was discussed within the NEDLAC forum and in April 1997, was presented to Cabinet. It is envisaged that the bill will repeal the Basic Conditions of Employment Act of 1983 and the two subsequent amendments in 1992 and 1993. The bill applies to all employers and employees, yet excludes (uniformed) members of the SANDF, the National Intelligence Agency, South African Secret Service and unpaid charitable workers. When enacted, the provisions of the Bill will be applicable to all companies in the defence related industry.
Occupational SafetyThe Occupational Health and Safety Act no 85 of 1993 is applicable in all aspects to the defence related industries.
Industrial ActionAs only uniformed members of the SANDF are excluded from the act, the Act applies to both public and private sector workers in the defence related industries. The right to embark on industrial action is not limited in a State of Emergency or of National Defence. Basic fundamental human rights may however if it is necessary and justifiable in an open democratic society. This right may also be limited in cases were the post which the employee holds is classified as an essential service.
States of National Defence and EmergencyIndustrial Action during times of National Defence or State of Emergency may be contrary to the national interest at that time. It is recommended that, in times of National Defence or State of Emergency, the defence related industries be declared an essential service and that the right to strike be limited under Section 36 (1) of the Constitution (Limitation of Rights) and that employers and employees be required to enter into compulsory arbitration to resolve unresolved disputes, as provided for in the Labour Relations Act of 1995.
During times of National Defence or State of Emergency the Minister of Defence should promulgate a list of companies which are involved in the production of armaments and which should be excluded from the provisions of Section 36(1) of the Constitution.
Operational and Extra-Territorial Deployment of Civilian ContractorsIn the changing defence environment, and in the context of budgetary constraints, civilian technicians and specialists are increasingly being used to maintain defence equipment on an outsourced basis. This means that first, second and third line levels of maintenance are being carried out by civilian contractors. Should the SANDF be deployed extra-territorially, as has already been the case in humanitarian and disaster relief operations, civilian defence contractors have to be deployed with the force to conduct maintenance.
Defence ActThe Defence Act, when amended due to the Defence Review and changing defence policy, should cater for the administration and discipline of civilian contractors, when deployed extra-territorially with the SANDF.
Consideration should be given to the new Defence Act being made applicable to the administration and discipline of civilian contractors when deployed extra-territorially with the SANDF.
Similarly, in the case of peace support operations, all Status of Force Agreements, agreements between the UN and troop contributing nations and any other bi-lateral or multi-lateral agreements that are reached, should provide for, cover and include civilian contractors deployed to the area of operations with SANDF forces.
Insurance and MedicalMany of the medical and life insurance policies that are held by civilian contractors add penalties (or may even be negated) should the insured person be involved in dangerous activities such as parachuting. Extra-territorial deployment of civilian contractors to an area of operations with SANDF forces may similarly prejudice these contractors, making medical and life insurance policies either unobtainable or inappropriately expensive.
Consideration could be given to obligating defence related firms to negotiate adequate coverage for civilian contractors with the providers of medical and life insurance. Consideration should also be given to obligating defence related firms to make up the cost difference on behalf of individual civilian contractors deployed extra-territorially with SANDF forces.
Consideration could be given to the state bearing the cost of providing additional medical and life insurance policies for civilian contractors deployed extra-territorially alongside SANDF forces, should government choose to commit itself to an operation outside the borders of South Africa.
International Joint VenturesSouth Africa’s defence related industry is very small by global standards and constitutes less than one per cent of the world defence market. In order to compete internationally, many South African defence firms and companies have entered into joint ventures and strategic alliances with foreign defence companies.
A "Joint Venture" is defined as a contractual arrangement, which involves the purchase or exchange of equity shares and/or the transfer or alienation of technology and immaterial property rights between two firms.
In the context of the globalisation of defence production government will encourage and support joint ventures between local and foreign defence firms. Government will have responsibility for approving all joint ventures between local and foreign defence firms, which involve the transfer or alienation of strategically essential technologies and capabilities, as identified in Chapter 4.
Approval for such international joint ventures must be sought in writing from the Minister of Defence. The Minister of Defence may consult with other government departments before giving approval for such international joint ventures. Approval for such international joint ventures will be consistent with South African law and South Africa’s international legal obligations.
Government will not contribute to the uncontrolled proliferation of armaments and armaments technology through the approval of international joint ventures and strategic alliances between local and foreign defence firms.
Government to Government AgreementsGovernment to government memoranda of understanding, treaties and defence agreements are essential in forming international joint ventures. They give confidence to the companies involved and demonstrate government’s political support for international joint ventures. Four types of agreements can be entered into:
Defence and military co-operation agreements. Co-operation is agreed to on military and general military issues, such as training and combined exercises.
Defence industrial co-operation agreements. Co-operation is agreed on defence industrial issues, such as research and development or co-operation on a particular project.
Government will enter into agreements with other governments to enable their respective defence related industries to co-operate. Responsibility for identifying defence industrial requirements and establishing guidelines that are pertinent to defence industrial co-operation will reside with the DoD
Close co-ordination will take place with the DFA and DTI, and defence foreign policy objectives should be synchronised with national interests. Close co-ordination will also take place with the defence related industry (e.g. AMD) prior to entering into any agreement on defence industrial co-operation.
Immaterial Property Rights and Ownership of TechnologyThere has been a significant reduction in R&D funding from the DoD in recent years. In many cases, defence manufacturers have continued to develop the original technology after the DoD withdrew its funding, and have consequently added value to that technology through the application of their own funds.
Currently, government retains ownership of the immaterial rights of the technologies funded by public monies, but no royalty payments have been required to date. Currently, the business plans of South African companies do not usually cater for royalty payments in the defence area, and if payment of royalties is required, it may no longer be profitable for the company to produce that item.
The government cannot demand royalty payments retrospectively, but may require royalty payments from defence firms in future.
Policy Options.
Ownership.
Royalties.
In a declining international defence market, defence industries in many developed and developing countries have pursued a number of adjustment strategies, including conversion and diversification.
Conversion implies that the defence firm eventually stops producing goods and services for the local or foreign defence market. It involves the development of new or alternative civilian products using existing defence resources.
Diversification, on the other hand, is an adjustment strategy whereby a defence firm attempts to reduce its dependence on defence business by divesting itself of some defence interests, or by acquiring all or part of the assets or products of civilian companies. This strategy may include mergers, joint ventures and co-production agreements between defence and civilian firms.
Diversification and conversion are regarded as the most effective strategies for ensuring that the resources (capital, labour) previously tied up in the defence related industry are successfully transferred to the civilian sector and/or utilised for civilian purposes.
Diversification and conversion are also important in order to ensure that resources previously tied up in the defence related industry are not wasted or lost, but preserved or retained for the benefits of the country’s industrial sector. There are a number of macro and micro level barriers to successful diversification and conversion efforts.
At a macro level, political and environmental conditions, such as a lack of political will on the part of government, or the presence of a severe domestic recession may impact negatively on diversification and conversion efforts.
At a micro level, cultural, technological and industrial factors such as the nature of defence firms, and the nature of the defence market may also act as significant barriers to successful diversification and conversion efforts.
The government will consider taking steps to create a policy and economic environment, which is conducive to encouraging diversification and conversion efforts amongst local defence firms.
Government will not, however, interfere or intervene in an individual defence firm’s conversion and/or diversification efforts.
Government measures (including policy initiatives) to support diversification and conversion may be used to assist in the broad based restructuring and transformation of the domestic defence related industry.
LEGISLATIVE ENACTMENTS AND AMENDMENTSIt may no longer be necessary for this Act to provide for the transfer of assets, liabilities, functions, employees etc from the Armaments Board and other bodies to Armscor [Sections 2A, 2B, 2C, 3 (2) (a),4 Abis, 4 Ater and 6 (5) ].
The powers of Armscor regarding search, seizure and arrest of persons on its premises may have to be revised in the light of the new Constitution [Section 4B].
The powers of the Minister of Defence in relation to the export, import and conveyance in transit of armaments should be deleted since these matters will be addressed in new arms control legislation [Sections 4C, 4D, 4E and 4F].
If the Minister’s power to authorise the manufacture and development of armaments is transferred to the National Conventional Arms Control Committee, then the sections of the Act referred to in the previous paragraph could be deleted entirely.
The Armscor Act should redefine the role of Armscor as the DoD acquisition agency tasked by the Departmental Acquisition and Procurement Division (DAPD) to do contract management on behalf of the DoD. The Act should further define the relationship between Armscor and the Defence Secretariat and the DAPD as spelt out in the Defence Review.
Reference to the ‘Senate’ and the ‘House of Assembly’ should be amended, and references to the ‘Legislative Assembly of the Territory of South West Africa’ should be deleted [Sections 5 (6) and 8 (4)].
The provisions enabling the prohibition of disclosure of information on armaments should be amended [Sections 8 (4) and 11A]. As currently worded, these provisions emphasise secrecy rather transparency and are therefore inconsistent with Sections 32 (1) of the Constitution and with the Open Democracy Bill.
Armscor should not be exempt from the provisions of the Companies Act or any other law related to companies [Section 12].
New Arms Control LegislationLegislation is required to give statutory affect to the establishment of the National Conventional Arms Control Committee and new policy and systems for arms control. The legislation should cover the following topics:
The legislation should also provide for the establishment of a central arms control agency, depending on the decisions made in respect of the options presented in this White Paper.
If the arms control function of government is to be centralised, as recommended in this White Paper, then existing arms control legislation as described in Chapter 6 will have to be consolidated accordingly.
Contents | Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | Chapter 5 | Chapter 6 | Chapter 7