Opinion: The SA defence industry and the public private partnership model


Recent news about the SA Air Force’s C-130BZ Hercules fleet upgrade shows that the custodians of South Africa’s defence capability do not yet understand the power that the SA Defence Industry (SADI) can bring to bear.

The time could be ideal to re-examine Performance Based Contracting, but in the Public Private Partnership framework.

Airlift is an ideal element to implement a Public Private Partnership (PPP) initiative for providing defence capability on a Performance Based Contracting (PBC) mechanism. I would refer defenceWeb readers to the Atlantis Aviation maritime surveillance aircraft related articles published leading up to the 2016 edition of the Africa Aerospace and Defence (AAD) exhibition.

South Africa’s defence sector is living with the reality that there has been a loss of defence industry resources to other sectors of society. We also see that there has been a change in the application of South African National Defence Force (SANDF) resources. There is a move away from the supporting activities of research and development (R&D), Acquisition and Support towards the core operation-driven activities within the defence sector. Just think of the July 2021 application of the SANDF in response to civil unrest.

Under Phase 2: Sustain Existing Capabilities of the 2015 Defence Review, it is mentioned that multi-year contracts are required for training, for support and to meet immediate and near-term defence matériel for the SANDF to rebuild capabilities. The critical element for unlocking potential is in performance-based contracting for the supply of these multi-year contracts.  The Defence Review, chapter 15, paragraph 48.b.iv states that “the Defence Force is to develop coherent long term acquisition plans, to make possible properly planned lifecycle management of equipment, which may include using availability- or performance-based contracts placed with the industry to complement or supplement internal capacities and capabilities.”

The key element in any future solution is into “doing more with less”. In South Africa we have multiple challenges, but currently finances are the major constraint. The SANDF may disagree and state that time to solution is the biggest challenge. If we combine these two elements, we then need a new business model that can enable “faster, better, cheaper”.

Is there an acquisition solution that is adequate, while reducing the support footprint? We need to be looking at potentially smart defence acquisition focused on affordability, while sharing or grouping capabilities for best outcomes.

Globally, there is various performance-based contracting best practices that provide an insight into what is capable for defence forces. The literature, based on UK, US, Australian and Swedish solutions, gives an insight into what is possible and indicates a significant cost reduction in the throughout-life support of products and services. For the South African option, the country can look at acquisition being incorporated into a PPP solution for products and services, within the context of a hybrid PBC solution.

  • Lewis and Roehrich, 2009

Performance-based contracts have been positioned to bring about service innovation and potentially act as a vehicle to explore different aspects of value co-creation in new types of partnering solutions.

This has resulted in a situation where organisations are necessitated to widen their view of innovation, and also embrace the services aspect. Instead of the traditional value proposition, where equipment and support were divided into different offerings, organisations now move in the direction of offering and procuring integrated product-service bundles through performance-based contracts.

  • Carlson, 2010

From the point of view of the public sector, the idea behind this is to invite the industry to assume a larger responsibility for the entire life cycle of the system and to incentivise the industry to decrease the Total Cost of Ownership (TCO). Moreover, PBC entails increased risks and rewards for the supplier as performance achievement translates into financial bonuses and/or penalties (Carlson et al., 2010).

  • Sampson and Spring, 2012

PBC also further stresses the co-production of specified outcomes through customer-supplier interactions. PBC, as opposed to other forms of contracting, emphasises the bi-directionality of supply chains and the customer’s role and responsibilities in achieving desired performance.

The 2014 Swedish study by Ekstrom & Selviaridis provides the easiest representation of PBC for a short article. PBC has three key dimensions to be managed in order to make this a reality in a new business model.
-Performance: focuses on the processes and practises of specifying, measuring, evaluating, and reporting performance.
-Incentives: addresses the structure of incentives as well as their impact on supplier behaviour. The design of the payment mechanism is a key to the success of PBC.
-Risk: focuses on allocation of financial and operational risk depending also on the risk preferences of contracting parties. A key feature of PBC is risk transfer to the supplier.

The Swedish study indicates what needs to be addressed in changing the contracting environment.

This input aligns well with the UK Defence Acquisition Transformation Staircase that was introduced to me by my go-to logistics experts, Ian Serfontein and George Jenkins. Ian and George have modified the UK model into an SA tailored support Stairway to Heaven.

There is a quick guideline generated by the consulting house Strategy& that indicates how the contracting model solution based on the Stairway to Heaven matches to different contracting complexity environments. This could be a basis of thinking towards the PBC based PPP for South Africa.

The PPP option would be to include the acquisition cost and operational allocation in the life cycle cost element. The South African defence industry takes on greater risk sharing. PPP would be applied over typically the 15 years that takes the system capability to a mid-life upgrade. Then a second contract can be applied for life extension or replace with new systems. Think of the Strategic Defence Package equipment due for upgrades using this model.

Capability-based contracts are viable for all non-core defence capabilities, e.g. airlift, support vessels and support vehicle solutions. Availability-based contracts are more suited for the core force applications. The approach aligns with the Defence Review 2015, chapter 15, paragraph 34 that states “The support of equipment, systems and weapons, and related training systems and facilities, may (where it is practicable and it holds no disadvantage in respect of operational readiness, the ability to deploy forces, sustainability and resilience) be considered for out-sourcing, which may include using availability- or performance based contracts placed with the industry to complement or supplement internal capacities and capabilities.”

A PBC Framework that encapsulates this concept of Capability-based contracts is presented below

The current SANDF support structure provides for Operator (O), Intermediate (I) and Depot (D) level support.  O-Level is done by the squadron, company or vessel maintenance team. I-Level is performed by the SANDF maintenance teams, while the D-Level is conducted within industry.

As suggested in the PBC Strategy below, a PPP structure could look as streamlined as a two-level repair structure. Forward Repair level done by SADI personnel deployed as Reserve Force members with the SANDF operator maintenance personnel. Depth Repair level is executed by the South African defence industry.

The biggest issue that gets asked is how the South African defence industry can assist in the operational domain. The risk of civilian members assisting the SANDF is addressed in the Defence Review 2015 in chapter 15, paragraph 138. Civilian members of defence industry companies who deploy with South African forces on an operation will be appointed to the Reserve for the duration of that deployment.

Why would this offer a viable solution to the SANDF?

The acquisition and operational funds are merged into a single pool. The SANDF can budget better with PBC as the force preparation and force employment equipment, training and support funding is a fixed cost based on the minimum number of operating hours per year. The PBC cost element saving versus traditional transactional contracts is in the order of 15% lower for availability contracting, and 20% for capability contracting.

SADI needs to assist the SANDF with sharing the risk. This would require a new trust environment.

The SA Defence Review provides three strategic policy options available to government.

While the SANDF is going to have to shrink to allocation (Red Line), the allocation can be more optimally applied in partnership with the SA defence industry (Blue Line). This aligns with the Defence Review 2015, chapter 15, paragraph 93 which states that “In some cases where this might be a logical course of action, the state may enter into a public-private partnership arrangement with a defence industry entity.”

Naturally, the Armscor role would be amended as stated in the Defence Review 2015 Ch15, Para 44 that setting the parameters within which Armscor (as the defence acquisition agent) will support the defence acquisition process. I would leave the Armscor element to examine the following image prepared in the Swedish study with the FMV roles.

Armscor effectively becomes the SANDF asset management entity, while performing the contract management house role responsible for monitoring SADI performance.

This is why the Atlantis Aviation solution presented in 2016 should be more of the norm into the future.

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.