Cash-strapped Denel Dynamics Is Shattered, What Next?

Denel Turrets

Government’s actions, or perhaps better inaction, have made it quite clear that it has no interest in maintaining an effective defence force; nor any interest in retaining the defence industry. Or perhaps it does not grasp that armed forces and defence industrial capacity cannot be switched off and on at a whim; both take decades and much treasure to develop or rebuild.

Either way, the result has been ever-declining defence funding and failure to support the defence industry.

Hence ever-declining military capability and a dying defence industry; a combination that will cost South Africa dearly. If we are lucky, it will only cost treasure when we find that we must import equipment we once manufactured. More likely the price will be exacted in casualties. And the inability to respond to threats even in our own backyard will undermine our standing, both in Africa and internationally.

The Defence Force does understand the challenges it faces and the value of a defence industry, but lacks the funds to address capability challenges and gaps, let alone to support the industry that supports its equipment, can provide it with optimised equipment and gives South Africa a measure of strategic independence.

Underfunded, there is not much the Defence Force can do about – or for – the private companies in the sector. They will either sink or swim by their own efforts or, the lucky ones, prosper as subsidiaries of foreign defence groups. That leaves Denel, which developed, manufactured and supports much of equipment currently in service, but again there is not much the Defence Force can do for the group.

Ideally government would give the Defence Force the funding to acquire new equipment from Denel (e.g. Badger, A-Darter, Mokopa, Umbani), continue upgrading existing equipment (e.g. Rooivalk, Rooikat, G6, Umkhonto) and resume some technology projects (e.g. electric drive Rooikat, Cheetah missile, beyond-visual range missile). That would save Denel, assure foreign clients that South Africa is serious about defence and thereby also underpin the export potential of other defence companies, and improve defence capability.

Ideally, too, government would seek international partners for the key Denel divisions, to offset the fact that our own requirements cannot support the industry in peacetime. Foreign partners will bring wider market access, investment and new technologies, skills and processes. This is perfectly illustrated by the diverging fortunes of Rheinmetall Denel Munition and the Hensoldt-owned companies in South Africa on the one hand, and the Denel divisions on the other.

Unfortunately, neither is likely to be realised: Government is not interested or does not grasp the reality of the situation, and Denel itself has dodged several beneficial partnership proposals and may have lost so many engineers that its divisions are no longer attractive to any potential partners worth considering.

That leaves only hard choices.

The Defence Industry Strategy identified four possible courses of action:
• Uncontrolled Shut-Down: Do nothing and let the industry slide into oblivion.
• Planned Shut-Down: Control the shut-down to retain maintenance, repair and overhaul (MRO) capability and perhaps the ability to adapt, modernise and upgrade equipment.
• Secure, Stabilise and Sustain: Provide focused acquisition and R&D funding to sustain key production, development and design capabilities, and actively support exports.
• Secure, Stabilise, Sustain and Develop: As above but with additional R&D funding to expand export potential and secure the long-term future of the sector.

The last was not viable at the time of drafting, and neither of the first two was acceptable. That left the third option, which could have been implemented but was not.

So, failing a last-minute change of mind by government, we have only the choice between the two unpalatable options – uncontrolled shut-down and planned shut-down.

The former, apart from the strategic and economic effects, would leave the Defence Force with main equipment that can no longer be supported. That would result in further loss of capability until funds can be found to import new equipment, and so is clearly not an acceptable approach.

That leaves planned shut-down. Carefully managed it should result in retained MRO capability and perhaps limited adaptation, modernisation and upgrade capability, albeit utilising imported components. It might even, if optimally planned and managed and given some luck, enable us to retain a basis from which to restart some manufacturing or even development capability in the future.

The optimal approach would be to move Denel back to the Department of Defence as an MRO organisation, while moving the acquisition and support management functions of Armscor to the Chief of Materiel in the Defence Secretariat, supported by a tender board. That would in effect replicate the pre-1992 structure, eliminating a head office and a board that have never been much more than cost-drivers, and would help restore trust between Denel and the Defence Force, making the MRO process more efficient.

Having made this argument, it is not too late to save Denel as a development and manufacturing entity. But the remaining window of opportunity is exceedingly small, and:
• Government would have to act promptly and decisively to firmly state its support for the industry and Denel, and actively support efforts to find partners for the Denel companies;
• Denel would still have to move back to the Department of Defence. There is no point to attempting to save it if left under a ministry that failed to manage anything effectively.

In closing, it is worth making the point that Denel would need a cash injection to make any of this work. That would not be a ‘bail-out’ due to failings by the group, which was set to become usefully profitable, but necessary to undo the damage done by the state capture enterprise. That enterprise was the result of negligence, even dereliction, on the part of government, and not any fault of the Denel leadership that was unceremoniously ousted lest it get in the way.

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