Denel needs partnership to survive

South Africa’s defence industry is facing a crisis as the state-owned arms maker, Denel, struggles to survive and rapidly agreeing equity partnerships is the only way to save it, a top defence official says.

Denel’s woes put at risk an industry estimated to directly employ 15 000 people and which is one of the most advanced sectors of Africa’s most developed economy, said Kevin Wakeford, CEO of Armscor.

Armscor is responsible for procuring military hardware for SA’s armed forces. It also serves as custodian for South African defence-related intellectual property.

“The defence industry is the beachhead for high-level engineering and technological jobs in the South African economy,”

Wakeford said: “We are at an inflection point. If Denel collapses those capabilities could be lost forever.”

Denel has been plagued by years of mismanagement and exposure to a far-reaching influence-peddling scandal that led banks to cut off lending. It recorded a R1.7 billion loss – its first in eight years – in the financial year that ended in March.

Its cashflow crisis has led to delays in paying suppliers and left assembly lines idle. Many small companies producing components for Denel products have folded.

Wakeford said: “The situation has never been more severe than it is now.”

Saudi Arabia, the world’s third largest defence spender, has approached SA, seeking to partner with Denel as part of efforts to establish its own defence industry.

One source familiar with the offer said the bid, which would include acquisition of Denel’s stake in a joint venture with Germany’s Rheinmetall, was worth about $1 billion (R13.6 billion).

But a potential deal has been complicated by the recent murder of journalist Jamal Khashoggi in the Saudi consulate in Istanbul. Concerns have also been raised over ceding strategic security assets. Wakeford said the country’s national interests could be safeguarded by including veto rights in agreements. “For Denel’s turnaround, there shouldn’t be any holy cows ... it can’t trade itself out of its current predicament.”

President Cyril Ramaphosa has said Saudi Arabia was one of several suitors interested in Denel. – Reuters