Joint Standing Committee on Defence wants full implementation of Denel turnaround strategy

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Parliament’s Joint Standing Committee on Defence (JSCD) has called for the full implementation of Denel’s turnaround strategy so that it can continue to support the South African National Defence Force (SANDF).

Denel, the JSCD said, “plays a central role in sustaining the defence industry” and as such needs to fully implement its turnaround strategy so it can retain and create jobs as well as keep existing SANDF equipment serviceable and deliver new hardware.

JSCD co-chairs Cyril Xaba and Mamagase Nchabeleng made the comments after a 16 March briefing by Denel on its ability to support the SANDF. Denel also gave an update on its turnaround strategy, saying it aims to reduce dependence on the fiscus for the maintenance of critical strategic and sovereign capabilities, with restructuring intended to right-size the organisation. Exports will be used to generate funds to support local capabilities, including maintaining strategic capabilities which will otherwise have to be imported at increased cost.

“Alignment with DoD and Armscor on identified sovereign and strategic capabilities and the funding thereof [is] to be identified and articulated through a formalised tripartite Memorandum of Co-operation between the DoD [Department of Defence] (SANDF), Armscor and the DPE [Department of Public Enterprises] (Denel),” the state-owned defence conglomerate said.

“Once Denel has been stabilised and reputational damage reeled in, Denel will employ a strategy of credible long-term strategic partnerships in all its businesses to entrench our position in the local and international market that is aligned to national interests and maximise the value of the Intellectual property and capabilities within Denel,” the company said.

One initiative being explored, for example, is Denel partnering with local industry to get the A-Darter missile into production for the SA Air Force.

At present, Denel is pursuing “immediate markets” and diversifying from the Middle East and North Africa (MENA) to Eastern markets. The company said it has placed a lot of emphasis on restoring traditional networks through engaging key market diplomats, attaches and representatives in South Africa, as well as partners and customers in key countries. Evidence of Denel’s return to international marketing can be found in its presence at Africa Aerospace and Defence in September 2022 and IDEX in the UAE in February 2023.

“Part of Denel’s revenue and liquidity crisis can be attributed to the drastically reduced spending of the SANDF over a prolonged period, which has led to Denel’s Sovereign, Strategic and other supporting parts of business and industry being woefully underfunded. Attempting to retain underfunded parts of the business will continue to impact negatively on Denel’s sustainability,” the company warned.

“Denel has therefore embarked on a restructuring of its core capabilities towards the SANDF’s needs and reduced budget, exiting of non-core non-profitable parts of business for funds that have been ploughed back into restoring the core, and rightsizing resources to the current order book. The recap funds from the Medium-Term Budget Policy Statement (MTBPS) allocation will enable Denel to settle its remaining legacy debt, initiate critical CAPEX [capital expenditure] and maintenance programmes, fully complete the restructure, and drive growth once again.”

Although Denel has for years been battling with a liquidity crisis following state capture and a subsequent decline in production, “it has continued to support the SANDF in critical deployments for disasters (July 2021 unrest, KZN Floods) locally as well as operations abroad (DRC, Mozambique, etc) by keeping the SAAF’s assets airworthy and the SA Army vehicles and armaments supported and functional,” it said.

Denel said it intends to grow and diversify its system level design, development, integration and support capabilities towards the broader Justice, Crime Prevention & Security (JCPS) Cluster, as wells as to support other state-owned entities such as Transnet, Eskom, Prasa, etc. for the security of infrastructure.

PMP is one division that is aiming to secure JCPS Cluster contracts. With orders from the SANDF, South African Police Service and the export market, Denel PMP’s small and medium calibre munitions capability has restarted production but is still battling to deliver on time to its clients. “While it has sufficient human capital, a substantial backlog in CAPEX for maintenance and replacement of equipment is leading to many failures of old equipment. The most critical CAPEX is planned as part of the MTBPS allocation, but no funds are available so far. The ongoing rejuvenation of the plant is planned to be facilitated through strategic partnering as part of Denel’s turn-around plan. The current dire position will improve as soon as funding is available to upgrade facilities,” Denel stated.

Giving an update on some of its other divisions, Denel noted that its Overberg Test Range (OTR) has also been severely underfunded in recent years resulting in a significant backlog in CAPEX for maintaining and upgrading the facilities. “However, some funding from the SANDF has improved the situation recently, foreign clients are beginning to return to OTR, and a funding from the MTBPS allocation will continue to have a positive impact on OTR’s availability to support the SANDF for tests, trials, training and exercises in this world class, unique strategic capability.”

Denel’s guided weapons division – Denel Dynamics – has been very hard hit by the company’s liquidity crisis, with much of its skilled staff leaving. “This capability of Denel has been severely impacted by the skills drain which started with the cancellation of a major export contract due to an inability to secure bank guarantees. It was then further exacerbated by the poaching of resources by local and foreign companies when Denel was unable to pay salaries. Denel is able to restore capabilities and capacity for the production of these products, but some key engineering resources will be required from the broader industry for obsolescence re-engineering and new product development. A partnering model has been developed with support from Armscor to restore this capability in South Africa. The restart of the A-Darter programme (pending a SAAF Project Control Board (PCB) would go a long way towards supporting the capability restoration and render the sovereign capability available to the SANDF again,” Denel said.

Denel concluded its presentation to the JSCD by saying that it if its capabilities are eroded, it will have a fundamental adverse effect on the SANDF’s ability to ensure operational readiness and execute its national security mandate.