How much is enough?

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Denel is still short R1.7 billion of the R5.2 billion Treasury reluctantly promised the perennially loss-making state arsenal in 2006.

The company this week went on the offensive to secure the money that it had hoped would be included in former finance minister Trevor Manuel`s February budget.

 

Talib Sadik, Denel’s chief executive Wednesday said the company will likely post a loss for the year-to-March, in part because the money was not received.

 

He was at pains to say the company`s turnaround was “on track” and that the parastatal had “performed better than budget” but added Denel may have lost more than the negative R347 million posted for the year ended March 2008.

 

The good news to emerge from Sadik`s briefing was that he expects the company to return to the black for the first time since 2001 in the year ending March 2012. The bad news is the indication that the anticipated R1.7 billion may not be enough and that more may be sought.

 

How much will be enough? In spite of all our potential wealth South Africa has much poverty and there is a definite upper limit to what the country is prepared to spend on defence – and on Denel, especially at present with the world gripped in the so-called “Great Recession.”     

Sadik commented that “South African defence spending is about 1.2% of gross domestic product (GDP).” According to the Engineering News he argued that to sustain a defence industry, it needs to be higher. “The capabilities we have in our national industry are not maintainable on our current defence expenditure. Other developing countries have defence expenditure between 1.7% and 2.5% of GDP.”

 

The Engineering News adds that for comparison, India spends 2.5% of its GDP on defence, Chile is 2.7%, for Egypt 3.4%, and Turkey 5.3%.

The National Assembly`s Portfolio Committee on Defence (PCOD) in March recommended an increase to 1.7% over the next four years.

But defence spending does not automatically translate into arms acquisition or defence research and development (R&D). Rear Admiral Robert “Rusty” Higgs notes elsewhere that the current R32 billion defence budget only puts aside R303 million for R&D. Of that R28 million goes the Navy and it is impressive how far they stretch it.      

 

Arms at a profit

Denel last posted a net profit in 2001 when it recorded R24.1 million. The last time before that was R81.5 million in 1997. Last year they posted a loss of R347 million. The biggest loss to date was for the year to March 2005 when Denel was R1.5 billion in the red.

 

Ten years of losses may suggest to the casual reader that arms cannot be made at a profit. Perhaps not by Denel but the state arsenal is not the only defence manufacturer in SA. It is also by some definitions not even the largest.

 

What distinguishes it from its peers is not just that it is not in the private sector, but that the latter has to – and succeeds in – operating at a profit. There cannot be a private sector defence company on the planet that with the 2001 takings aside can post a decade of losses and still be in business.

 



To be sure they have their off-seasons too, but if other SA companies can mostly earn more than they spend, why can`t Denel?