Offsets work: Denel

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State arsenal Denel says industrial participation linked to major state procurement initiatives has benefitted the local manufacturing sector significantly. Denel Group Executive: Technical, Major General (Retd) Otto Schür maintains that these have led to extended manufacturer-supplier relationships well beyond the terms of their initial contractual obligations, thus ensuring long-term gains for the greater economy.

South African legislation has placed an onus on state entities to expand the country’s manufacturing potential through industrial participation initiatives linked to sizeable procurement contracts. This legislation requires state departments to exact at least 30% industrial participation on contracts exceeding US$10 million, with defence acquisition to add a further 50% defence-related industrial participation as soon as a US$2 million threshold is exceeded, Denel says in a opinion article provided to defenceWeb.

The requirement for sustained industrial growth in South Africa has resulted in government identifying foreign expertise and high-end demand as an ongoing and critical source of skills transfer, industrial development and manufacturing opportunity. The collective impact of these opportunities is seen as a means to accelerate job security and creation, as well as to stimulate growth in the national economy. From real results over the past decade it can also be proven irrefutably that both private sector as well as defence-related industries have benefitted from these initiatives, Denel says.

The first of these successful agreements came into effect in the 1990s. A contract between South Africa and Pilatus for the supply of 60 new-generation PC7 Mk2 military training aircraft saw Pilatus required to implement an aggressive offset programme amounting to 50% of the contract value thanks to regulations that were effective at the time. This agreement formed the basis for the development of stringent regulations within Armscor and the Department of Trade and Industry (the dti) that acted as precursors to current legislation and associated practices in directing industrial participation programmes.

In addition to these initiatives, the Department of Public Enterprises has created a Competitive Supplier Development Programme that provides state-owned enterprises with an alternative (in lieu of the existing national industrial participation options) to include local industry in meeting the accelerated manufacturing objectives of government. While the notable benefits of offset programmes typically relate to direct skills transfer, defence industry players in South Africa have identified additional means to further capitalise on offset opportunities. The need for more innovative ways of exacting real value from such opportunities has been emphasised by the current economic climate. Positive sentiments towards South Africa at political level have underpinned the development of mutually-beneficial trade opportunities with key industrial and trading nations. “This has led to the expansion of our technology and manufacturing base while adding significantly to the forex earnings that are being generated through stable multi-year contracts,” the opinion reads.

Established on the back of an initial offset obligation, the industrial capability that is now Turbomeca Africa (a strategic equity partnership between France’s Safran Group and Denel), offered a highly competitive business growth opportunity that found further benefit from opportunities created under the strategic defence package initiative. Other local industry players also benefitted from the acquisition of defence equipment over the past decade. This has seen a significant portion of the original acquisition costs being reinvested in local industry through the negotiated offset initiatives.

This successful partnership approach has led to Denel eliciting the interest of other major international industry players in taking a share in other local business entities, rapidly transforming these into stable and profitable enterprises. One such opportunity has seen the turnaround of Denel’s optronics business within two years of creating a partnership with a leading international player. The state-of-the-art technology injections and expansion of the existing intellectual property base at Carl Zeiss Optronics (ownership: 70% Carl Zeiss GmBH and 30% Denel) has positioned this Denel business to access an expanded global market place which has led to a doubling of its order book. The recently published results of Rheinmetall Denel Munition (Pty) Ltd are another example of a highly successful turnaround that has led to wide ranging positive impact on the expanding local supplier base, Denel says.

The creation of the highly-successful BAE Land Systems (Pty) Ltd is a prime example of the broader impact that offset opportunities can have on local industry. The partnership with the former Vickers OMC in Boksburg (Gauteng) found its inception in the obligations emanating from the Hawk acquisition programme. Although the company did not benefit the aerospace sector through its creation, it secured major export orders for mine-protected vehicles. These have brought sustainable industrial benefits through an expanding workforce and in-country supply chain, while securing substantial foreign earnings that have bolstered the national fiscus.

Through constructive engagements with foreign suppliers to widen industrial opportunities beyond pure goods and services, South Africa’s regulatory environment (the dti and Armscor) has optimised the benefits of the substantial offset obligations that have resulted from defence acquisition programmes over the past fifteen years. By finding niche opportunities and harnessing key capabilities, this process has ensured significant local participation in all of the more recent acquisition programmes. It has also secured a stable industrial base that is now well-positioned to provide complete lifecycle support to the South African National Defence Force while also creating continued export opportunities for established competencies. These actions, and the cross-cutting industry support initiatives that are linked to these offset plans, have secured thousands of jobs while adding significantly to local human capital, manufacturing potential and the country’s technology base.

Well-managed offset programmes therefore warrant the continued backing of the greater defence industry and country as a whole as a key enabler for Government to deliver on its promise of a better life for all, Denel says.