The declining defence budget and the poor state of Denel are having a negative impact on the South African defence industry, Parliament’s Joint Standing Committee on Defence (JSCD) has said.
In a committee report dated 26 February, the JSCD examined the state of the South African Defence Industry (SADI), after engagements with the National Conventional Arms Control Committee (NCACC), Armscor, Denel, the National Defence Industry Council (NDIC) and the South African Defence Industry (SADI), represented by the Aerospace, Maritime and Defence Industries Association (AMD).
It said one of the biggest challenges facing the defence industry in South Africa is the declining defence budget and its subsequent negative impact. The Defence Budget shortfall means that the South African National Defence Force (SANDF) cannot modernise through the acquisition of equipment and systems while maintenance, repair and overhaul (MRO) is also falling behind. The fact that the Special Defence Account (SDA), which is designed for the SANDF’s weapons acquisition and long-term research and development (R&D) projects, is being phased out is one of the main reasons for this situation.
The 2015 Defence Review expressed itself strongly on this situation and derived milestones to address this decline, with the intention of Milestone 1 being to Arrest the decline in critical capabilities through immediate and directed interventions. Against the background that the implementation of the 2015 Defence Review cannot be funded and only non-cost interventions can be implemented to arrest the decline, South Africa will have to agree to a significantly reduced level of defence ambition for the future.
“If these factors are taken together with the view of the Secretary for Defence that without urgent proper support, the industry would implode and even lose the MRO capabilities, it underscores the perilous situation facing our country,” the JSCD said.
Apart from reduced defence spending by the state, the local defence industry is also suffering due to the COVID-19 pandemic, issues with End User Certificates (which have been resolved after causing many companies to lose business in key markets), the fact that the Defence Sector Charter is not yet fully operationalised and the poor situation at Denel, which has made it difficult for many small companies to survive because they formed part of Denel’s supply chain.
Denel has been experiencing a liquidity crisis for almost three years and this has resulted in a delay in the implementation of projects such as the Hoefyster infantry combat vehicle. Denel has been struggling to pay full salaries since May 2020, resulting in skilled personnel leaving. Turnaround efforts have been hampered by difficulty concluding strategic equity partnerships, and declining Department of Defence spending.
“Denel as the major holder of South Africa’s sovereign and strategic capabilities, is not able to sustain it and requires around R683million for the current financial year to do so. Two thirds of that amount was to keep the missile capability in a stable and growth footprint,” the JSCD stated.
The South African defence industry is reliant on exports for its survival, but there are challenges faced by the industry in respect of how the arms control regime is implemented. “The current system hampers the ability to compete and successfully export due to inefficiencies and unpredictability of the system, resulting in loss of not only currently contracted exports, but future ones as well,” the JSCD stated.
“SADI expressed a need for the proper resourcing of the Directorate Conventional Arms Control (DCAC) so that it addresses the challenges which the stakeholders have observed. SADI also raised challenges faced in relation to the policy framework, especially the NCACC Act. SADI expressed the view that the system needs to be digitised. It was also emphasised that given SADI’s global impact, these issues need to be sorted out. The industry for instance stands at risk of losing opportunities in the Middle East to the value of approximately R24 billion.”
The South African defence industry tabled suggestions on what could be done to address the challenges it faces. This includes obtaining high-level political and government-wide support for the industry, receiving stable and predictable local defence spending, stabilising Denel, achieving an effective arms control regime to facilitate arms exports, and improving financing mechanisms.
If the industry loses export contracts, it faces reputational damage of the South African brand; a decrease in tax revenue; a potential decline in technology investments; the further loss of supply chain and 25 000 job losses; and a halt in training and development of engineers.
The defence industry pointed out it also plays a role in foreign policy through supporting and allowing South African forces to assist forces of friendly countries and to assist UN deployments. In addition, the industry also supports other government departments, agencies and other sectors in the economy, e.g. the intelligence services, the Police, Home Affairs and Sea Fisheries.
The SADI sought assistance from the JSCD in improved political support; brand reputation management in the Middle East region and a number of African countries; engagement with the Presidency on these implications and the image of the country; fast-tracking of National Conventional Arms Control Committee approvals; and digitisation of the permit application system.
In respect to policy interventions, the SADI suggested the following:
An implementation of a policy on designation and localisation of certain products for local consumption; government should look at introducing a bulk approach to safety and security requirements across state departments; government should expedite and prioritise the implementation of the Border Management Agency (BMA) and related enabling projects by Department of Home Affairs; enable the exploitation of the Intellectual Property rights that allows for the reasonable generation of royalty based revenues; and the Arms control regime needs to be reviewed, updated, restructured and capacitated.
The Joint Standing Committee on Defence recommended that a whole-of-government approach should be adopted to assist and support the Defence Industry in order to prevent the loss of scarce skills to other countries and to attract new scarce skills to the Industry.
The committee added that the NCACC is having more predictable meetings and has pledged to migrate to a new IT system in 2021 but that it would inform the NCACC of industry frustrations.
In terms of intellectual property rights, the committee welcomed the view that the IP rights can be exploited for additional revenue and that Armscor and Denel are managing most these rights on behalf of the DOD, and recommended that the Defence Industry should enhance its efforts in this regard.
The committee said it undertook to engage the Portfolio Committees on Public Enterprises and International Relations in order to highlight the need for a whole-government approach to support the industry.