Business and government move between phases of centralisation and decentralisation. At this moment in South Africa, it seems as though government is moving towards a decentralised approach for the entities within the Department of Public Enterprises (DPE). Eskom is unbundling into three entities. Elements of Portnet within the Transnet stable are being given independence. The major change is the DPE approach of offering a majority private share in SAA.
DPE could use this current environment to address the future of Denel. Denel has lost a lot of goodwill built up over the last thirty years. It would be optimistic to believe that even 25% of the current Denel order book potential identified in the Aerospace & Defence Masterplan will be realised. DPE needs to intervene with speed if it wants to retain what has been built up over time.
Denel represents massive financial, investment, labour, technology and infrastructure resources. South Africa does not want, or need to lose these resources completely.
Clive Coetzee, over 20 years ago in the document the Privatization of Denel from a Competition Perspective, proposed that the privatization of Denel could contribute to economic growth, via higher investments, lowering of government dissaving and debt, and increase in foreign exchange. Privatization can also contribute to the government’s aim of black empowerment by earmarking shares for black investors.
The option is still available to DPE for the full privatisation of Denel. Unfortunately, government as the shareholder can expect little in the way of payment for the business, which in all likelihood ends up in liquidation. DPE can then look at the disposal of the Denel business units, or sub capabilities to private entities. The key goal in the distribution would be for the country to retain these capabilities. DPE would also be in a position to further the ambitions presented in the Defence Sector Charter as a bonus.
DPE has full insight into the assets and liabilities of the group. The assets are slim, goodwill is moving lower by the day, and DPE will have to stand in for Denel Group liabilities. DPE needs to obtain an agreement from the President, with agreement from the Department of Finance (Treasury), the Department of Trade, Industry & Competition (DTIC), the Department of Science and Technology (DST), the Department of Higher Education, the Department of International Relations & Cooperation (DIRCO) and critically, the Department of Defence & Military Veterans (DoDMV).
DPE needs to manage the distribution of the Denel capabilities in line with the Parable of the Talents. DPE is entrusting the current Denel capabilities to deserving servants of the country in the South African Defence Industry (SADI) family. The chosen SADI entities each need to put their talents to work, and aim to double the value of the property with which they were entrusted. The reward for the SADI entity is additional future ownership. If the designated SADI entity does not achieve growth in the capabilities allocated, then DPE needs to retrieve the property. This is then distributed to another entity that can grow the value of the property.
DPE needs to find entities that 1) value hard work, 2) understand the value of investment and treasure what is given to begin with, 3) value the relationship with the DPE and DTIC, 4) value the task, and then critically 5) value the reward. The target SADI entities need to be opportunity focused entrepreneurial ventures, not corporate entities.
Distribution of Capabilities
The Denel Group capabilities still have the capacity to contribute to the growth of the Aerospace & Defence sector within South Africa. The Aerospace & Defence Masterplan references a number of Denel Group initiatives. The Denel Group can no longer guarantee delivery of these targets. DPE needs to find a willing and able set of custodians for the viable capabilities. DPE needs to understand that it is no longer going to be majority owner, i.e. government minority shareholder.
The new Denel capability custodians should as far as possible be wholly owned South African entities. Ideally, Denel Group capabilities should remain within control of the country. The target custodians need to embody a transformed technical operator, backed by a stable private equity investor. Maybe DPE can inspire a new generation of defence industry related black industrialists. DPE has indicated a potential path with SAA. DPE can assist in meeting the goals of the defence charter, which is languishing with minimal Armscor and SANDF driven orders.
The custodian and the Denel Group organs are not strong enough to make the desired growth legacy on their own. It would be possible for DPE to set a condition to call on the custodians to align the wider industry to unlock greater wealth for future generations. DPE could support a defence cluster approach, enabled by the Denel organs, under the guidance of DTIC. The clusters act similar to the current Special Economic Zones (SEZ), yet are not necessary co-located. A set of DTIC benefits for the clusters need to be identified.
The clusters need to cover all of the current National Conventional Arms Control Committee (NCACC) export monitored sectors. I suggest eight clusters. 1) C4ISR Enabled Awareness Cluster, 2) R21 Aerospace Manufacturing Cluster, 3) N1 Aerospace and Defence Technology Cluster, 4) Eastern Gauteng Defence Mobility Cluster, 5) Fire-Power, Manoeuvre and Protection Cluster, 6) Cape Maritime and Defence Cluster,7) KZN Maritime and Defence Cluster, and a focused element to enhance Armscor business viability 8) Defence Facilities & Asset Management Capability. The DTIC and DIRCO need to work together to ensure that the clusters are supported to extract maximum growth potential from the international market.
Each cluster needs to have at least one institute of higher learning as sector entity for knowledge expansion. The Department of Higher Education can then assist in promoting the clusters with the DTIC. Aligned with this, the Department of Science and Technology need to assist in the innovation and creative generation of future solutions aligned with the cluster identified future needs. Each cluster needs a cluster R&D war chest to be used on a grant and incentive basis. If possible R&D funding could be linked to a minimum of 2.5% of annual defence related turnover within the sector for R&D.
The clusters each need to establish, or partner with, at least one apprenticeship college for ensuring future capabilities. The target is to bring +1,500 new trade apprentices into the market every year. This can be funded by grants from the Defence Industry Skills Development Fund. The Denel Technical Academy and the Paramount Technical Aviation Academy show the way forward. Maybe the Aerospace and Defence sector can unlock value from the education sector similar to the Curro model. The standard engineering apprenticeships can be offset with sector specific training, e.g. Black Hat Cyber Security, User Interface, and Certified Coding in the software environment, or HVAC, cabinet, plumbing and pipe fitting in the maritime sector, or iron monger, glass and ceramic technology for specific land and aviation applications.
The President, the Department of Finance (Treasury), and the Project Vulindlela & Infrastructure Investment teams, needs to engage the identified custodians, investors and cluster leads to plot the short-term, high-value, cluster projects that can impact the country as a whole. The goal is to unlock investment to increase the future GDP impact of the whole SADI community. This entrepreneurial investment approach is able to unlock future defence and commercial export revenue for South Africa.
The following independent Denel entities can be used to gain critical mass for each of the identified clusters, while transforming the industry in line with the Defence Charter:
Denel Aeronautics, Denel Aerostructures, Denel Dynamics, Denel Industrial Properties, Denel Land Systems, Denel Mechem, Denel Overberg Test Range, Denel PMP, Denel S3, Denel Technical Academy, and Denel Vehicle Systems.
Structure follows strategy. The Aerospace and Defence Masterplan provides the vision of “Repurposing Aerospace and Defence to improve South African lives for generations to come.”
The Denel Group may be gone, but it can enable a transformed South African Defence Industry that is a force to be reckoned with. The target should be to enable the creation of at least 10 new majority black owned defence system houses.
SADI entities can be Better Together by watching out for each other, caring for others in the sector and support the local networks.
The Denel Group demise can be the entry into an entrepreneurial approach that is a “pragmatic, affordable and focused response”.
Re-establish a base that is convenient, fit and comes at the right time.
Denel is Dead, Long Live Denel Capabilities.
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. Kerr has assisted various companies to enter, or expand footprint in, the defence industry with air, land and naval systems. He also served as a navigator, and completed an engineering degree, while in the South African Air Force for 13 years.