Why SA needs Denel and a defence industry
Unless the government acts quickly it will lose the benefits of exports, jobs and technological development
From the late 1960s onwards, SA developed a defence industry with a remarkable breadth and depth of capabilities, from rifles to nuclear weapons and satellites. It became particularly well known for mine-protected vehicles, long-range artillery and secure communications equipment, and surprised with the development of guided weapons and the Rooivalk attack helicopter.
From the end of the 1980s it began to do well internationally, with mine-detection and mine-protected vehicles, long-range artillery, infantry support weapons and some of its guided weapons. Exports reached just over R15bn (in 2020 rand) in 2012.
Today that industry is dying for lack of government support: the defence budget is too tight to allow the defence force to acquire new equipment and upgrade or properly maintain what it has in service, let alone fund research & development. And, unlike other countries with a defence industry, the government has failed to strongly support exports. Worse, state-owned defence group Denel became entangled in state capture; its finances imploded and its performance suffered.
Failing urgent government action Denel will implode and drag most of the industry down with it. So what? Losing the industry would have huge implications. A defence industry is an integral part of defence capability and brings other advantages:
- From a strategic perspective it provides a degree of independence, freeing the country from depending on others for equipment and munitions.
- From the military perspective it provides equipment optimised for the theatre.
- From the foreign affairs perspective it allows support to friendly countries.
- From the industrial perspective it brings new technologies, skills and processes that spin off to other sectors, and educates and trains engineers and artisans who migrate to other sectors.
- From the economic perspective it brings hard currency export revenues, reduces hard currency outflows and generates employment at home rather than in other countries.
A 2014 report of the European Defence Agency, comparing a hypothetical €100m investment in the defence sector with the same investment in other sectors, gave some interesting results. A Swedish study of the Gripen fighter project found that the 132-billion krona (R250bn) spent developing and manufacturing the Gripen generated 350-billion krona for the economy by 2007, a multiplier of 2.6, or 3.38 “to capture the long-run effects”.
Gunnar Eliasson of the department of industrial economics of the Royal Institute of Technology in Stockholm argued that the effect of investment in the defence industry will be highest in countries with some high-technology capability and some level of unemployment, which sounds rather like SA.
The Rooivalk project is interesting in this context. Developing the Rooivalk and producing 12 aircraft cost just under R9bn (2017 rand). None were exported, but subsystems exports had by the end of 2013 generated about R18bn and continue; defence industrial participation work made possible by the project had come to over R10bn. The project employed about 1,500 engineers, many of whom are now active in other sectors. It also spun off Aerosud, a company with about 800 staff and exporting some R1bn of aircraft components annually.
Other examples could include R110bn earned from exports of mine-protected vehicles by 2017, R7.2bn from mine-detection vehicles, R4.2bn from Badger turrets, and R5bn each from guided weapons and certain electronic warfare systems.
All of that is at risk. As is the case regarding the defence force, what is required first is a decision: does the government intend SA to have a defence industry or not? If the answer is no, we should at least attempt to retain some maintenance, repair and overhaul (MRO) capability, moving Denel back to Armscor for that purpose.
We should look to sell whatever Denel intellectual property (IP) we can — there is some really good IP — and then we would have to leave the private companies to sink or swim. We will have to accept losing strategic independence, optimised equipment, export revenues, technology development and jobs, and accept that we will have to pay substantial amounts for imported equipment and its through-life support.
If the answer is yes, the government will have to move promptly and swiftly to prevent further loss of capability and capacity. Not to bail out Denel, but to provide the defence force with the funding required to acquire equipment that it needs and to cofund the development of new equipment. That will give Denel and the other companies some basic throughput, make exports more viable — countries are reluctant to buy what the manufacturing country does not use — and enable them to develop new products with which to compete internationally.
The government will also have to do what all other countries with defence industries do: it must become the chief salesman of the industry and it must encourage joint ventures by the industry and encourage Denel to find equity partners. The latter is still — just — possible, but not for much longer.
All of this will, of course, cost money. But here it is worth noting that the World Bank, never a great friend of defence, has found that a country can spend up to 4% on defence without harming its economy, and in some cases to some benefit. The latter applies particularly in a country with a defence industry that can turn a proportion of defence funding into employment, technology development and exports.
• Heitman is an independent security and defence analyst.
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