Egypt has apparently cancelled its contract with Denel Dynamics for Umkhonto surface-to-air missiles after Denel failed to provide guarantees for the R4.5 billion contract due to its financial problems.
This is according to the Mail & Guardian, which reported on Saturday that the contract was cancelled by Egypt in late 2019. Denel usually receives bank or insurance guarantees from financial institutions, but banks have been reluctant to have any dealings with the loss-making Denel for some time now.
Egypt had been looking at buying up to 96 Umkhonto surface-to-air missiles in a potential R4.5 billion deal for its new Meko A200 frigates, which are being built by ThyssenKrupp Marine Systems (TKMS). Denel was also hoping to sell 32 infrared-guided versions of its Umkhonto missile to Egypt.
In early September 2019, in presentation to Parliament, Denel said its “largest export contract” was “imminent” with an advance payment of R1.5 billion. The presentation said the contract would boost Denel’s production portfolio and cover equipment fit for TKMS vessels for the Egyptian Navy. It added that the Egyptian order had the potential to grow its order stock by 32% and listed its order backlog at R18 billion.
The Meko A200 vessels in service with Algeria and South Africa are equipped with Umkhonto missiles while the Finnish Navy uses the weapon on its Hamina fast attack craft and Hameenmaa class minelayers.
Darren Olivier, defence expert and Director at African Defence Review, stated that the Egyptian Umkhonto contract cancellation was not a surprise.
“Multi-billion Rand arms sales are quite complex, they’re never just a straight trade of cash for goods. In most cases the client, in this case TKMS on behalf of the Egyptian Navy, first provides a portion of the contract value as an advance payment to pay for ramp up costs,” he explained.
“In these cases the advance payment is essentially like a deposit, and manufactures like Denel are obliged to pay back most or all of it if they fail to deliver the contracted value. To ensure this happens, nearly every buying country insists on a bank guaranteeing the payment.
“Because of Denel’s precarious financial position, no local commercial bank is willing to provide any guarantees to it for advance payments, even for a relatively straightforward order like this. They’re too afraid it’ll be unable to deliver because of another cash crunch.
“This means Denel is in a ridiculous catch-22 bind. It had a lucrative contract that could save the company, bring in billions, and resolve its liquidity, but could not start work on it because no bank would guarantee the advance payment with Denel’s current state and liquidity.
“In some countries, like the US, this is where government would step in through something like an ExIm bank, which would be able extend guarantees that the private sector would normally balk at. But despite many recommendations for it, South Africa hasn’t created a similar structure.
“What’s even worse is that this is not just a R4.5 billion contract,” Olivier stated. “The total value of the Egyptian Navy purchases from Denel was expected to be over R30 billion, starting with Umkhonto-IR deliveries then moving onto an Umkhonto-R development and delivery contract. It was huge.
“Losing the Egyptian Navy Umkhonto deal, on top of the staff exodus over the past few months caused by salary short-payment, almost certainly means the end of Denel Dynamics as we know it. Some product lines have lost all their staffing, from engineers to project managers.
“So the next time you hear that Denel is failing only because it was mismanaged, or ‘could not sell’, think back to this story. It had a product, it had a customer, and it had a contract: Yet it couldn’t overcome the lack of trust from banks or the lack of care from government.”
The contract cancellation is more bad news for Denel Dynamics. An industry source has told defenceWeb that Dynamics used to employ around 900 people but now it’s less than 400 as people keep leaving, mostly due to salary non-payment, resulting in a lack of critical skills at the division. “I think it’s the end of an era,” he said, as the loss of capabilities is detrimental not just to Denel but the industry as a whole.