Stuck record: The South African defence industry can be a South African growth engine

273

2024 has come and gone. There are good and bad elements that have been reported related to the South African defence industry.

Good/positive highlights of 2024

The most positive element for me was the increased visibility that the South African defence industry (SADI) received from government representatives. President Cyril Ramaphosa visited the September Africa Aerospace and Defence (AAD) exhibition. The new Minister of Defence Angie Motshekga and her two deputies have shown an interest in the potential of the defence industry. Towards the end of the year, the president and Minister referenced the target of increasing the defence budget allocation to 1.5%.

2024 was an election year. The election manifestos provided good insight into each party’s expectation on security and defence. The view was generally positive support for defence needs, with multiple calls for an increase in defence spending and defence capability renewal. The positive aspect is that the new parliament seems to be following through on the pre-election calls. The parliamentary committees related to defence have already provided robust oversight discussion and re-iterated the calls for increased spending.

The South African defence industry also experienced several highlights in 2024. Exports have surged. The consolidated 2024 export value total will be an interesting read when it is collated. Under positive developments, Denel is now under the guidance of the Department of Defence.

Bad/negative lowlights 2024

The National Conventional Arms Control Committee (NCACC) lack of commitment: The NCACC is an important role player in the defence industry. Yet, the committee only managed to meet for about 50% of its pre-scheduled required engagements. The increase in SADI exports during this environment of reduced support is incredible. The loss of business potential due to a lack of NCACC answers/engagement was highlighted in the reports that Rheinmetall decided to move some Rheinmetall Denel Munition (RDM) related production opportunities away from South Africa.

Lack of significant local defence acquisition programmes: This can be seen as a function of the defence budget allocation. This lack of programmes seems to be eroding Armscor’s capabilities. The Personnel Carrier RFP process seems to indicate that institutional knowledge has been lost within Armscor. This is to the detriment of both the South African National Defence Force (SANDF) and SADI.

The SADI generally had a good reporting year up to October, including AAD. In November two items soured the feel-good mood. It was revealed that Project Hoefyster was formally deferred. Also, in November it was reported that Paramount Industrial Holding entered into business rescue due to lack of funding via a loan facility from Paramount Group Limited in the UAE that had voluntarily filed for Chapter 11 protection in the United States after an arbitration award issued in August 2024. All of this while Paramount celebrated its 30th anniversary in December.

Into 2025

The government has three strategic priorities for the next five years: 1) to drive inclusive growth and job creation, 2) to reduce poverty and tackle the high cost of living, and 3) to build a capable, ethical and developmental state.

First reading of the three strategic priorities states that the SADI has a role to play in the future of South Africa.

The SADI is an employer that has potential for significant expansion. The defence supply chain is significant. There are currently over 130 defence focused businesses offering products. This is offset with at least three times this number of companies that are producing dual use sub-system products that are applied in mission systems. This capability is captured in around 600 local entities with defence sector exposure. Component level suppliers number in the thousands, but these suppliers have a significantly lower percentage of turnover related to defence products.

The SADI is ready for expansion to drive inclusive growth and job creation. With the correct interventions, the defence industry could easily grow fivefold from its current levels. The initial focus would be on re-establishing the main equipment for the defence force, while expanding into the export market. A stretch target would be to grow the SADI to supply 1% of global arms and have 2-4 companies in the SIPRI (Stockholm International Peace Research Institute) top 100 international defence companies. There are sufficient niches that current SADI capabilities can exploit.

The stretch target for the future SADI should be for minimum annual revenues of R70 billion coupled with the expansion of employment capacity to over 50 000 employees. Transformation of resources is a natural progression with this amount of growth in employment. This growth can be achieved in the five-to-ten-year medium term. The first challenge remains securing funding for the SANDF’s capability rejuvenation. Local funding will stimulate projects within the defence industry sector. There needs to be projects to retain and attract skilled resources to develop technology for future products.

The SADI could use government support in supporting the export focus. In this aspect the streamlining of the export control system needs to be addressed. The SADI can then apply the partnership model to unlock the full potential of the sector.

Defence could be included in the Operation Vulindlela initiative. This would elevate defence to the visibility of the Presidency and National Treasury. The aim is to fast-track the implementation of high-impact reforms, addressing obstacles or delays to ensure execution on policy commitments. The promotion of defence trade could then be on the agenda for foreign delegation interaction. The SANDF force design could then be aligned to achieve maximum coverage of SADI capabilities. The outcome must be the expansion of the industry. This translates into: 1) Support SADI to support government and the SANDF and 2) SADI is jobs.

Suggestion: Operation Vulindlela Project Management Office priority Reforms for Defence

Overall Desired Outcome: Well-equipped, professional defence force supported by a local defence industry capable of meeting local and export demand.

Fast tracking the processing of a Defence Review that aligns with the current parliament’s expectation is essential for realizing a well-equipped, professional defence force and realigning the defence capability with the required funding expectation. Using the public-private partnership or performance-based contracting mechanisms would enable long term defence capability projects. Supporting the SADI would ensure support for the SANDF.

Exports are the key to unlocking SADI potential with the benefit of jobs and growth. The defence sector is one of the few South African industry segments that has a positive balance of payments. The NCAC Act needs to be amended to support a growth industry. The SADI has transformed itself over the last decade from a public-owned supplier (Denel) dominated sector into a diverse privately owned sector. This then aligns with the objective of unlocking private investment to facilitate growth through the majority export business.

The SADI has significant potential for assisting the new government with some easy wins in the jobs and growth domain. Government needs to place a focus on the defence sector and the SADI’s revenue generating potential.

Written by James Kerr, Orion Consulting CC, which provides Market Entry Strategy and Bid & Proposal services to the Aerospace & Defence related industry and assists international SME mission system product suppliers to gain traction in South Africa.