Denel PMP may be getting an investor as the struggling firm takes steps to stay afloat, according to Secretary for Defence Sonto Kudjoe.
Kudjoe was speaking during a Joint Standing Committee on Defence (JSCD) meeting on 5 November. In her presentation, she revealed that a company comprising Black South Africans and a military veteran is willing to invest in PMP and the Denel Group CEO has been made aware of this.
However, nothing has been finalised and the Denel board and government stakeholder still need to inform PMP on the details of the possible investment going forward. PMP remains open to possible investors.
Kudjoe said the difficult financial situation at Denel has also made it hard for small defence companies (particularly Denel suppliers) to survive, especially when combined with a decreased Department of Defence (DoD) budget. More than 200 companies are negatively affected by Denel’s inability to function normally and this has led to job cuts, with some companies closing.
Previous problems with End User Certificate (EUC) requirements from the National Conventional Arms Control Committee (NCACC) also caused many companies to lose business in key markets, but Kudjoe said the EUC issue has been resolved.
For its part, state arms procurement agency Armscor has been requested to pay Denel suppliers directly in order to keep them afloat while Armscor is looking at waiving penalties against Denel in order to ease the company’s financial burden, Kudjoe revealed. She added that Armscor is considering a request for an advance of R34 million to enable Denel to buy spares for the South African Army.
Small calibre weapons
Kudjoe revealed that a concerted effort is being made to support the production of certain military hardware, including small calibre weapons and ammunition. “The initiative has been presented and shared with many key stakeholders and it is being supported,” Kudjoe’s presentation stated.
In the past, the production of small calibre weapons was done by Denel, but it stopped producing as the local demand declined below economical levels, although small calibre ammunition is still being produced at Denel PMP.
“There is a need for consolidation of all the user requirements, especially the law enforcement agencies — SANDF, SAPS, Metros, Border Management Agency, and Intelligence Services— which will help with the economies of scale. When these items are produced in large quantities, their cost per unit will decrease, thus making it cheap to procure and produce – all orders from these agencies have to be placed with Armscor, which is a state acquisition agency,” Kudjoe’s presentation stated.
Kudjoe’s presentation centred on the state of the local defence industry. She said the industry faces several scenarios. One is an uncontrolled shutdown where, without urgent proper support, the industry will implode or at best fade away as it runs out of SANDF orders and exportable products. This would also see South Africa lose its maintenance, repair and overhaul (MRO) capability.
A second scenario is a planned shutdown: if there is no likelihood of increased defence acquisitions and research and development funding, this ‘graceful degrading’ option would allow retention of MRO capabilities.
“Securing, stabilising and sustaining the industry will require focussed acquisition and R&D funding to sustain selected key production, development and design capabilities. This is the option that was recommended and adopted by the National Defence Industry Council,” Kudjoe stated. However, this is not affordable at likely funding levels, but the ‘stabilise and sustain’ approach can lay the basis for later development.
The Department of Defence would like to have a globally competitive and integrated defence industry that supports national interests and that is the preferred choice for defence related solutions on the African continent.
“Government understands the importance of this industry. One cannot overemphasise that. We are amongst the best in the world despite the fact that we have Denel in distress,” Kudjoe said.
The DoD hopes to develop and sustain an effective defence industrial capability based on synergy between government and private roleplayers. This would ensure sovereign and strategic capabilities are retained and would entail stabilising existing capabilities, supporting a turnaround and repositioning sovereign capabilities.
Some suggestions for improving the state of the defence industry are, according to Kudjoe, developing a ‘favoured nation’ system that allows exports to certain countries with general pe-approval (without going through the NCACC) and enabling non-contentious marketing contracting and exports permits to be approved by just one member of the NCACC.
Another possibility is looking at a resource-based alternative funding model. “We need to look at other ways of selling from our defence industry. You find countries that don’t have cash to pay but they may have natural resources. We were going to have a pilot with Zambia but of course due to COVID we couldn’t pursue this further,” she said.
Meanwhile, the Defence Industry Fund (DIF) is up and running and providing contract/project financing to small to medium enterprises (SMEs) operating in the defence and security sectors. It is being run by Crede Capital and is specifically contract or purchase order funding. Crede is currently reviewing five loans applications.
Kudjoe suggested public sector institutions could provide support to the DIF and the Denel Retirement Fund and Armscor Retirement Fund could also provide funding to the DIF with the aim to promote the industry.