HELMOED RÖMER HEITMAN: Don’t shoot Denel in the foot

State-owned military equipment producer Denel is finally being moved back to the department of defence, from which it should never have been separated.

While the department may not be better at business management than the department of public enterprises — though it could hardly be worse — it does at least understand the sector in which the group must operate, the requirements of the SA National Defence Force and what might be of interest to other armed forces.

But the move alone won’t save Denel. The group needs active support if it is to survive, let alone prosper and grow. There are several reasons why we should bother to ensure the survival and growth of Denel.

Denel is the original equipment manufacturer of much of the equipment and weaponry the defence force now uses. Most of that will be in service for many years yet, and will need to be maintained and modernised, and in some cases upgraded or repurposed. That is best done by Denel.

For instance, Denel absorbed the companies that manufactured most of the army’s vehicles and would be far better able to refurbish them properly than Cuban mechanics. If it had retained control if may not have had to lay off SA staff.

Having the ability to develop and manufacture equipment, weapons and munitions gives SA a valuable measure of strategic independence. Just how important that can be is illustrated by Ukraine’s dependence on Western aid in its fight for survival against Russia.

Keep it local

Local development, or even just adaptation and manufacture, enables the defence force to acquire equipment optimised for its requirements, which often won’t be identical to those of other armed forces operating in different theatres and to different doctrines.

When the time comes to replace equipment, local development and manufacture of some or even most of it will reduce hard currency outflows and employ and upskill South Africans rather than, in effect, exporting jobs. For example, the development and production of the Rooivalk involved 25 major contractors and 100 subcontractors, and employed about 2,000 people, mainly engineers and technicians.

The G5 and G6 cannon projects involved 20 major contractors and employed about 1,000 people, while the earlier Ratel project involved 24 major contractors and 180 subcontractors and employed about 2,500.

Then there is the potential for exports. They may be small markets relative to other sectors of the economy, but they aren’t negligible. For example, Badger turrets cost R4.2bn, Umbani guided bomb kits R2.25bn, Umkhonto surface-to-air missiles R1.5bn and Ingwe anti-tank missiles R1bn. A different example would be the Rooivalk, which cost about R9bn to develop and manufacture but generated subsystem exports worth more than R18bn by 2014, and more since then.

Finally, there are economic multipliers. To give one example, a report by Sweden’s Royal Institute found that the development of the Gripen fighter generated an economic multiplier effect of at least 2.6, potentially rising to 3.38 taking longer-term benefits into account.

No more bailouts

The bottom line is there are good strategic and economic reasons to turn Denel around. The second question then is how to enable Denel to prosper and grow? The answer is not and never was bailout funding. That achieves nothing related to a turnaround or long-term survival and is essentially money wasted. But that is now history.

The first thing to do now, and what should have been done six years ago, is to give the defence force ring-fenced funding for the acquisition of equipment and weapons from Denel and for the refurbishment, modernisation and upgrade of existing equipment and weapons by Denel. Examples would be:

• Army: Acquisition of Badger infantry combat vehicles; repurposing the Ratel fleet for other roles; upgrading the G6 guns and the Bateleur multiple rocket launchers; and moving ahead with the ground-based air defence system project.
• Air Force: Refurbishing and upgrading the Oryx and Rooivalk; acquisition of the A-Darter air-to-air missile and the Umbani guided and stand-off bombs for the Gripen and Hawk; and the Mokopa missile for the Rooivalk and Super Lynx.

That would give Denel the throughput to again become a functioning defence industry group, to retain and attract engineers and technicians, and to rebuild its reputation in the eyes of potential export clients. 

The next step should be to provide ring-fenced funding to resume development of items that were already in development:

• Army: The future infantry support missile (similar to the US Switchblade), the long-range 105mm gun in towed and self-propelled form.
• Air Force: The Marlin long-range air-to-air missile; and the development of anti-radar weapons for air defence suppression.
• Navy: The long-range Umkhonto-R surface-to-air missile, which would also slot into the army’s air defence system.

All of these would draw in other companies in the defence sector, such as Hensoldt, Incomar, Reutech, Rheinmentall Denel Munition, and a large number of smaller companies that supply components and subsystems. That would help develop an integrated defence industry ecosystem that would benefit all of the companies and serve as a major technology incubator for the wider economy.

Government must also shake up the National Conventional Arms Control Committee, which has long been an obstacle to exports, sometimes deliberately and sometimes simply because key members didn’t bother to attend the meetings, preventing decisions being taken. We also need to revisit our policy on defence exports. It sounds nice not to export into a zone of conflict, but what that actually means is also refusing to supply a victim the arms it needs to defend itself against an aggressor, which is downright immoral. Ukraine would be a good example.

Finally, government should go out of its way to encourage joint ventures, equity partnerships and similar arrangements for Denel with international defence groups. That will bring new ideas, new technologies, new processes and new markets, and further increase export client confidence.

The myth that we must under all circumstances own and jealously guard intellectual property might have been relevant once; today the half-life of technologies is so short that it simply isn’t worth doing that. Better to share it — or even better sell it and move on to the next level or the next generation.

Denel can be turned around to again become a strategic asset, an anchor for the wider defence industry and a valuable contributor to the economy. But then there must be prompt, decisive action.

Of course, we could instead carry on as before and let Denel sink. Then we forgo the potential export revenues and technology development and, come the day we have to re-equip the defence force, we will have to export hard currency and jobs to import what we could have produced here.

• Heitman is an independent security and defence analyst.