Defence industry ownership under spotlight

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The 2012 Defence Review will have significant impact on industry ownership, if the current consultative draft is implemented.

The document, released last Thursday, states that with “an eye to ensuring sovereign control over identified vital technologies and wider strategic independence, the government will control the extent of foreign ownership of South African defence industry companies”, private and public.
“Restrictions will apply in respect of equipment and systems related to capabilities that are required to be under sovereign control or are considered essential in the interests of strategic independence,” it cautions. In principle, it reads, the development, manufacture and support of equipment and systems over which sovereign control is deemed essential will, to the extent possible, be restricted to South African defence companies; and the development, manufacture and support of equipment and systems related to strategic independence will, to the extent possible, be restricted to South African defence companies, but may also be contracted to South African based defence companies.

A “South African defence company” is defined as one held by at least 51% and fully controlled by South African owners. Other definitions, elaborated in the draft, include “South African-based defence companies”, “foreign companies” and “local defence companies”.
“All companies wishing to compete for Defence Force contracts must also have a record, or in the case of newer companies the demonstrated intent, to support the national development agenda as outlined in government policy from time to time, particularly in respect of a commitment to training and skills development and to deepening and expanding South Africa’s knowledge and technology base. Their performance and/or commitment in this respect, with due allowance for variances in what is practicable in a particular sector and in the case of smaller companies, will be a factor in evaluating bids,” the review’s drafters added.

The document continues that the “State may retain (or acquire) control, majority or full ownership of companies active in sectors considered sovereign or otherwise particularly strategically sensitive”, and adds the “State may establish state-owned enterprises in sectors that are key to the intent of the defence industry policy and strategy, as developed from national security and defence policy objectives; but that are not commercially viable in South Africa.
“Private defence entities may not be sold, in whole or part, to foreign entities without the agreement of the Minister of Defence. In a case where the existing owners must divest themselves of their ownership of a defence industry entity, the State may choose to acquire that entity or a portion thereof at a fair value… Similarly, private defence entities may not close certain capabilities or exit the industry without the agreement of the Minister of Defence. Where existing owners must take such action, the State may enter into an agreement with the owners to support retention of that capability, or to ensure the survival of the entity or a part of the entity; or acquire the entity, in whole or part, if applicable, compensating the owners to fair value… 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, for instance a ‘government owned/contractor operated’ arrangement in respect of a manufacturing facility. All such acquisitions, disposals or other such arrangements will be in accordance with the relevant legislation and regulations except where the exigencies of the defence and security environment might demand a departure, in which case a fair outcome for the other party will be ensured by negotiation or arbitration.”

Denel will remain a publicly-owned entity, owned by the Department of Defence [apparently not Public Enterprises, as is currently the case], that has the primary purpose of developing, manufacturing or supporting such equipment, weapons and systems as are designated as “sovereign” or “strategic”; and the development, manufacture or support of which is not commercially viable.
“Strategic independence” means “the ability of the Defence Force to perform its key functions for extended periods without a need for direct foreign support in respect of critical capabilities”, while “sovereign capability” is defined as “the ability to ensure, under full national control and without reliance on any direct foreign assistance, certain capabilities identified as vital to national security, including secure communications, elements of electronic warfare and specifically, the relevant algorithms and relevant software.”



Denel will, in carrying out such projects, make maximum optimal use of private South African companies in the defence industry and in the general industrial sector, acting as the prime contractor and, where it has the capability to do so, as the system integrator, the review elaborates. “The relationship between the Defence Force and Denel will, despite its ownership by the Department of Defence, at all times remain a normal contractual one, managed by the Defence Matériel Agency” [that will replace Armscor].