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State defence group Denel could be transferred from Public Enterprises to Defence

Pre-Cabinet level discussions are under way within the government about transferring State-owned defence industrial group Denel from the aegis of the Department of Public Works to that of the Department of Defence(DoD). This was stated by Defence Secretary Dr Sam Gulube at a function marking the twenty-fifth anniversary of the South African Aerospace, Maritime and Defence Industries Association (AMD) in Pretoria on Thursday. He was responding to a question from the audience.

He reported that, so far, the attitudes regarding this proposed transfer of supervision had been positive. This included the responses from Denel itself.

In response, AMD executive director Simphiwe Hamilton posed a few pertinent questions. What would such a move mean for the country’s defence acquisition process? Would the DoD be effectively buying from itself? And, should Denel need a bail out, would not that funding have to come from the DoD, putting even more pressure on the defence budget?

Gulube did not respond directly. He did, however, say that “[l]et’s continue having those platforms of consultations and interactions between the [defence] industry and the Department of Defence”. He observed that such a process has already been taking place, but that there was a need to continue it.

A matter of considerable concern to the local defence industry, both public- and private-sector, is the financing of contracts, especially for exports. Gulube noted that, in South Africa, it was always a problem to get financing for defence projects and defence business, whether from public- or private-sector funding institutions. Lack of easily accessible financing has resulted in the South Africa defence industry losing export business.

To deal with this problem, an industry-specific financing mechanism, referred to as a defence industry fund, has been proposed. This has, the Defence Secretary said, been approved in principle. Its establishment would be coordinated by the DoD’s defence acquisition, disposal and research and development agency Armscor.

“We do need a dedicated defence industry fund,” observed Gulube. “How it will be set up – we will welcome all ideas. … Other countries have their own funding mechanisms … for their defence industries.”

“The fund will have a very close relationship with Armscor,” added Hamilton. This will be necessary because the fund will likely rely on Armscor to approve contracts and projects for funding. “There is [also] an element of enterprise development within the fund,” he pointed out.

Another concern is the need for government-to-government agreements, especially with other African countries, to help win export orders. A number of countries regard such agreements as providing a secure political framework which will guarantee the successful execution of an order.

Exports have already established themselves as crucial to the health of the sector. “Export, for our defence industry, is definitely the biggest contributor to our turnover,” highlighted AMD Export Council chairperson Isaac Motale. “The statistics speak for themselves.”

Since the association began collecting these statistics during the 2009/2010 financial year, the industry’s revenues have risen from R12.5-billion then to R19-billion today. Back then, 50% of the revenues came from exports; now the proportion was 62%. The industry was a major earner of foreign exchange and exported far more than it imported. On the other hand, over the same period, the total defence industry workforce had remained static, at 15 000.

“If you look at the numbers this industry generates, this should be the least risk industry in South Africa, in financial terms,” asserted Motale. “It’s about time our voice is heard by this government. We need to engage. We need to be present in these forums with Treasury and the DoD.”

AMD’s membership today comprises all the major South African defence companies and those international defence groups which have a significant local presence. An example of its success is the inclusion by government of the sector in its Industrial Policy Action Plan.

Source : Engineering News