Hoefyster the biggest threat to Denel – Hlahla


The Hoefyster project for new Badger infantry combat vehicles for the South African Army is the biggest threat to Denel’s financial stability, board chairperson Monhla Hlahla has said.

Speaking during a presentation to the Portfolio Committee on Public Enterprises on Denel’s Funding and Governance Challenges in late October, she said that “Hoefyster remains the biggest threat to Denel. If the parties do not find a way to resolve the technical issues around the programme, Hoefyster remains the single biggest programme on Denel’s balance sheet or income statement.”

In September, Defence and Military Veterans Minister Nosiviwe Mapisa-Nqakula said in response to a Parliamentary question that, “Project Hoefyster suffered significant delays and Denel is currently reneging on contractual deliveries for this project. In 2018 Denel formally indicated to Armscor it cannot complete the project within timescales, specifications or budget and requested a reset of the contract.

“Armscor presented several options going forward with the project to relevant DoD forums. These options were thoroughly considered by Armscor and the DoD and a preferred option for deferment was further developed and motivated. This was supported by the SA Army, and presented to the DoD governance forums and eventually recommended to the Armaments Acquisition Council (AAC) chaired by the Minister of Defence and Military Veterans. The AAC is the final decision making authority on projects and will provide guidance regarding going forward with the project,” Mapisa-Nqakula’s reply read.

Denel told the Committee on 21 October that “technical alignment on compliance against the Armscor specification is achieved,” and that there has been “positive feedback from the SANDF following a successful Badger Section Variant Preliminary Operational Test & Evaluation.”

Denel is now trying align production with current realities (budget and schedule), and is involved in the Inter-Ministerial Task Team to resolve Hoefyster problems under the leadership of the Deputy Minister of the Department of Defence.

Hlahla said it was “pleasing” to see efforts between the Department of Defence, Department of Public Enterprises, Denel and acquisition agency Armscor around Hoefyster. “Discussion with Armscor is critical as Denel took a large payment for Hoefyster,” she said, and cautioned that it is dangerous to rely on advance payments to fund working capital as this means projects can’t be delivered on and the company faces penalties from past programmes.

Denel has received R1.935 billion in advance payments in relation to the Hoefyster project but only has R800 million in stock and WIP (work in progress) against this prepayment “and cannot repay this prepayment if the contract is cancelled or executed at negative margins”, Denel said in June. The company also faces penalties of R653 million on Hoefyster (total potential penalties for the group are R857 million).

Hlahla said that Hoefyster is “the single most important programme for the business for many many years and if we do not resolve the technical issues, the Denel of today may face other related penalties.”

Hoefyster is Denel Land Systems’ biggest project. The R1.2 billion first phase is ongoing to December 2022 while the R8.4 billion second phase is ongoing to March 2029, according to a June presentation by Denel. Denel is to produce 244 Badgers (16 pre-production and 223 production) in five main variants (section, command, mortar, missile, fire support) and four other variants (ambulance, signals, command post, artillery observation).

Whilst Denel has made progress with subsystems, including the 30 mm CamGun, 60 mm long range mortar and turrets, it has struggled with the technical complexity of the programme, the closure of supplier VR Laser, liquidity issues and an eroded supplier base. This means the programme is years behind schedule.

Armscor has said by mid-2020 it had paid R7.3 billion towards Hoefyster, but the total cost could escalate to R16.75 billion.