Cape Town - Almost all of the defence industrial participation projects that involve state arms producer Denel as part of the multibillion rand arms deal are loss-making and in the process of being renegotiated, Denel CEO Victor Moche said yesterday.

Parliament's defence committee heard that the margins earned by Denel on the projects were low or non-existent.

In recent months parliamentary committees have been told the projects are 12% ahead of schedule, but no mention has been made of profitability and whether they are delivering the growth and jobs anticipated.

Moche told the defence committee that the record loss suffered by Denel of R377m for the year ended March had its origins in these contracts, as well as a reduction in orders from the South African National Defence Force.

Speaking to journalists , Moche said the companies executing the contracts were not involved in the original contracting. State-owned Armscor placed the orders on behalf of government .

"A whole host of factors were not taken into account. As a result, most of the contracts are inefficient and loss-making.

"The basis on which a whole host of operational issues were calculated were essentially projections and the reality has turned out to be different ."

An example was the work being done in a joint venture with Snecma-Turbomecca .

Calculations were based on an assumption of certain costs in SA but did not take into account the fact that steel, for example, was priced in SA as the same it is in France. The French calculate on an estimated South African price , robbing the contracts of profitability, he said.

" We have rewritten and modified some of the contracts that we have Eurocopter and Augusta, SAAB on the Gripens, where we have engaged the counterparts and modified so that they at least break even.

"Of course people are making a lot of money so they are not happy to change that. We had lease contracts for helicopters and they did not want to discuss them with us so they were all cancelled and we are now renegotiating them because they were all loss-making. We have to do this or give up on Denel."

Moche also told the committee that relations between Denel and Armscor were strained. He called for the acquisition role of Armscor and the marketing role of Denel to be clarified .

He also accused Armscor of selling the same product to various clients of Denel at a different price. This had happened in India and had "confused the market".

With acknowledgements to Wyndham Hartley and the Business Day.