The long-awaited Defence Industry Fund (DIF) was launched on Thursday 5 July 2018. The fruit of the 2015 Defence Review and consultations between Armscor and South African defence industry association AMD, the fund is to be managed by Crede Capital Partners.
Crede principal Sandile Sokhela told potential investors and the chiefs of service from the South African National Defence Force (SANDF) at the launch at CSIR’s International Convention Centre in Pretoria, that the fund would go out to attract R1 billion in investment from the market.
Some of the potential investors that Crede would be talking to, he said, included the EskomProvident Fund, the Compensation Commission Fund, Prasa’s Provident Fund, Telkom retirement fund and Old Mutual Corporate, who were all represented at the launch. Other potential investors included the Public Investment Corporation, government agencies and enterprise development funds.
“Our role is to raise the capital, deploy it and return it to the investors with more than they expected,” he said, promising returns of inflation plus 8 percent per year. Loans will be granted to a maximum of R50 million for repayment periods ranging from one month to 36 months.
“We are asking South Africans to put their hard-earned money into the defence industry.”
There were many existing opportunities to capitalise on, he said, starting with Armscor’s inability to spend R1.8 billion last year alone that had been set aside for empowered and transformed companies in the defence sector. The DIF would act as a bridge between the companies that would have been registered with funds after being vetted, and the actual contracts put out for tender – and then, if necessary, advance bridging capital to let the winning contractor start the work.
“We won’t fund a contract if the actual business is falling apart,” Sokhela said.
The rationale behind the DIF is to enable the growth of the South African defence industry, developing what are mostly small and medium enterprises into internationally competitive industries with the ability to compete locally and supply the South African National Defence Force’s equipment and supply needs – as well as expanding the BBBEE strategic imperatives of the industry.
As Armscor CEO Kevin Wakeford noted, “the fund exists because the formal banking sector has a jaundiced view of the defence sector. Elsewhere defence is regarded as economic royalty.”
Figures presented by DIF project lead Dr Moses Khanyile bore this out. Using rand figures adjusted to 2017 for parity, the defence industry had plummeted from a turnover in 1988-90 of R31.6 billion to R19 billion now, with defence force acquisitions showing an equally precipitous drop from R26.2 billion to R7 billion now. As a result, said, Khanyile, the industry had shrunk from 3 000 companies then to only 120 now and from a total workforce of 130 000 to just 15 000.
In 1988-90, the defence industry had accounted for 9% of all manufacturing jobs in the country, employing 10% of the country’s engineers and scientists. It is an industry internationally acclaimed for its pioneering work developing the Rooivalk attack helicopter, the world’s best mine protected vehicles and ground-breaking work with missiles and drones, but it was an industry under threat, he said.
“If we do not invest we will be dislodging ourselves,” he said.
The military threat though had not diminished on the continent since 1990, with troop deployments across Africa rising from 75 000 to 120 000 between 2008 and 2015 and six of the biggest eight multinational military missions in the world currently in Africa.The UN is spending $50 billion a year on procurement, but the local defence industry sees none of this.
“It’s a dangerous neighbourhood,” he said, with South Africa’s own troops deployed on at least one of those missions currently.
“Why can’t we have our guys in the forward bases being supplied with their food at least from a retailer like Checkers?” he asked. “It’s not the absence of demand, but the absence of a potent and cogent solution for our soldiers.
“The defence industry will remain relevant as long as the SANDF remains an instrument of foreign policy, but it’s difficult to sell products that are not in service with the country of origin.”
Wakeford agreed: “70% of the defence industry is based on exports, it’s what’s keeping us alive, quite frankly.”
The problem is that the industry is shrinking, unable to service the SANDF’s needs and not transforming either as a result, with most of the big contracts going to international defence contractors.
“The defence industry is the second most regulated after the banking sector,” said Khanyile, “with high barriers of entry; a highly complex industry; need for secrecy paramount; high need for quality and highly specced products and difficult to access funding.”
The DIF would address this, as well as providing financial help for local firms going into joint ventures with international companies.
“Transformation is a no-brainer, it’s a business imperative now, not a compliance issue, any longer.”
The defence industry, he said, had to start working collaboratively, adopting a Team South Africa approach, reducing industry fragmentation, to win contracts and service the SANDF.
As Armscor chair Rear Admiral Johannes Mudimu noted: “The local defence industry has to aggressively work abroad to safeguard jobs, but does that bode well for a vibrant defence industry working to keep the SANDF mission ready?”
The DIF, he said, would improve the plight of small to medium enterprises in the defence sector and create jobs in a country desperate for employment.
Quoting Marcus Garvey, he said: “There is no force like success, and that is why the individual makes all effort to surround himself throughout life with the evidence of it; as of the individual, so should it be of the nation.”
Speaking to the potential investors at the launch, Mudimu said: “Embrace DIF, embrace change.”