Cape Town - Denel, the state-owned defence and aerospace equipment manufacturer, hoped to see tough restructuring start paying off soon but still needed to be recapitalised and given preferential access to state contracts, parliament heard yesterday.

Denel chairman Sandile Zungu and chief executive Victor Moche told the portfolio committee on public enterprises that although Denel expected to break even by 2005/06, it still desperately needed to be recapitalised by the state and, as was the case for most other defence manufacturers, be given preferential access to local defence contracts.

Zungu was reluctant to give any indication of how big a cash injection it would need from the state, but said "very frank" discussions were under way with public enterprises minister Alec Erwin, who had been very receptive to Denel's approaches so far, and who would be discussing the issues with defence minister Mosiuoa Lekota.

But according to projections given to the committee, it was looking to a "recapitalisation impact" kicking in on its balance sheet in 2005/06 at R154.5 million, rising modestly each year after that to reach R170.3 million by 2008/09.

Recapitalisation would help Denel reduce debt and would allow it to replace badly outdated equipment and step up neglected research and development.

Denel would show modest profit again "and give us space to do the sort of things that we want to do", Zungu said.

If the government could take the policy decision to drop or amend the open tender system for arms procurement, Denel would be in an even better position.

The system was adopted in 1997 and allows foreign arms manufacturers to tender for local contracts.

Moche said that opening up a domestic defence industry to international competition before the country's defence forces used its equipment extensively was almost unheard of in other countries. The UK was only now beginning to toy with the idea and "the US is not even discussing it".

Denel had seen its sales to the SA National Defence Force slip, while it had to seek out new and tougher export markets abroad.

"The open tender system is jeopardising our wellbeing and we would like to hope that the issue of the recapitalisation of Denel is discussed within the context of the open tender regime, but we would like to see them as completely different issues," Zungu said.

He believed that after the sometimes painful restructuring it had been through over the past year, which had involved shedding non-core assets such as arivia.kom, Irenco and Voltco as well as about 5 000 staff, Denel showed promise although it still had some difficulties ahead.

Zungu said that although there had been reports from India that Denel had successfully secured contracts to supply turrets for about 100 long-range artillery vehicles with the help of its Indian partner, Bhim, which could be worth about $200 million (R1.3 billion), it had not yet been signed, sealed and delivered.

"We are very excited about it and we hope that the Indian government signs this contract," Zungu said.

The contract had been negotiated as part of an overall new thrust into a potentially large new market.

But even if it was confirmed, its impact would take some time to filter through to the company's bottom line, he said.

Despite good publicity, the recent defence air show in Pretoria had not resulted in any major new contracts for Denel itself, but mainly for the companies it had hosted at a time when it was officially launching its aviation assembly plant for parts for the Hawks, its fighter aircraft.

With acknowledgements to Lynda Loxton and the Business Report.