The South African defence sector needs to be given higher priority and allocated more funding in order to drive innovation, economic growth and transformation, according to Armscor CEO Kevin Wakeford.
Speaking at the recent Aerospace, Maritime and Defence (AMD) conference held at the Council for Scientific and Industrial Research (CSIR) in Pretoria Wakeford said that “the first priority is the national psyche has to acknowledge we as the defence industry/sector are pivotal to peace and stability and sovereign integrity and industrial innovation, are pivotal to the prosperity of the continent of Africa.”
Otherwise the local defence industry has “a very very bleak future,” Wakeford cautioned, especially in light of defence budget cuts. He called on industry to make the case for defence and make it clear to lawmakers and budget managers in South Africa that the defence industry is a driver of economic growth and without it the world would not have had the Internet or GPS, for example. “It is time we highlight the fact that defence industry products are not just for the department of defence but all security aspects of this country and help in growing the economy of this country.”
Continentally, Wakeford noted that the South African National Defence Force’s SANDF’s) mandate has shifted from protecting the sovereignty of South Africa to being an expeditionary force and keeping the peace in Africa. “We have seen the rewards of that…the peace dividend and the growth in South African exports in those countries where we have had or have a presence. A presence brings stability and enhances trade and investment.”
However, although the 2015 Defence Review calls for the rejuvenation of the SANDF, Wakeford noted that “truth be told there isn’t a cent available for the implementation of the Defence Review. Part of the blame lies with us as the defence sector because there’s a disconnect in the national psyche of the importance of defence on the one hand and what its resourcing requirements are.”
“We are presently facing challenges within the South African economy that has resulted in the reduction of the budget to all government departments especially when it comes to the cost of employees and the SANDF is one of the most affected departments…Our budget has been reduced by R5 billion over the next Medium Term Expenditure Framework which calls on us to do things differently within the Department of Defence,” Wakeford said.
Armscor is dealing with funding cuts not by cutting personnel but by looking at alternative revenue streams. “Our core business is complex acquisition, research and development, testing and evaluation, quality assurance. We are offering those services to state security clusters,” Wakeford said, noting that Armscor has been engaging with the Department of Corrections, for instance and South African Police Service, as it broadens its client base.
“We don’t want to replace industry in selling and marketing but what we can offer is services to other nation states and the broader state security cluster where we can assist them with acquisition and quality assurance.” Armscor is also looking at sweating and selling its own assets to generate funding.
Tough times for industry
With regard to the industry, Wakeford said “hats off” for surviving in a shrinking local demand setup. He noted some of the challenges facing the industry include an ageing workforce with few youngsters joining, the reduced SANDF operating budget, frustrating defence export procedures, interference from foreign governments and companies who are not meeting Armscor’s contractual milestones.
With regard to companies not meeting contractual obligations, Wakeford said that every year Armscor has a R10-12 billion maintenance, repair and overhaul and capital equipment budget, but every year R2-4 billion of that is not spent because milestones haven’t been met.
Wakeford said the local defence industry needs to collaborate as there are many companies that are really struggling. He said Armscor and the South African Aerospace, Maritime and Defence Industries Association (AMD) are close to finalising a defence industry funding model so that the defence sector can be treated as a normal member of the funding community.
Defence expert Helmoed Romer Heitman said some of the things he would like to see improving the local defence sector are tender processes that aren’t stopped halfway through, projects that are fully funded with a ring-fenced budget, and a more efficient export permit system that does not discourage foreign customers from buying South African equipment.
Heitman also pointed out that it is difficult to export equipment when there are no orders from the local defence force, and this is not helped by the shrinking defence budget. Stephan Burger, the CEO of Denel Land Systems, agreed with this and emphasised that the Malaysian armoured vehicle turret order it received was because the SANDF had ordered the Badger infantry fighting vehicle and that “there is no chance we would have received the Malaysian order without a local order…The defence industry is not sustainable on local business alone; export is a prerequisite in maintaining this strategic capability.”
Burger added that there is stiff competition regarding cost, quality and performance and thus South Africa’s current competitive advantages are job creation, transfer of technology and skills and the development of local capabilities.
Another issue highlighted by Heitman is a lack of a financing mechanism, which is hampering the South African defence industry. “Every country in the world has a means of financing exports but we don’t. Most customers can’t afford cash. We don’t have something like that,” he said.
Sipho Mkwanazi, Group Executive Acquisition at Armscor, acknowledged the importance of a financing mechanism for industry and said Armscor is “looking at a way of establishing an entity that will be in a position to finance industry. That fund is in the process of being established. There is a plan.”
This needs to be a key priority. As Wakeford said, “if we are to become the industrial powerhouse of Africa there must be an implicit acceptance that defence needs to be on the national priority list. Then if it’s not defence can’t lead innovation and transformation.”