The news that SA’s once mighty defence company Denel has been reduced to near bankruptcy really ought to come as no surprise.

Its main customer, government, decided for better or for worse to buy foreign *1. The outbreak of peace in the region after a period of apartheid-sponsored military adventurism meant that all its main products nurtured for “bush war” application rapidly became outdated. And its potential foreign customers were substantially reduced by the strong human rights ethic that government sought to impose on arms exports.

Combined with some questionable management decisions, Denel has now lost money for the past six years, and has just announced that it will report a quite staggering R800m loss in the current year.

The question now is whether the corporation can or should exist at all. There is a good argument in favour of maintaining a local defence industry; there can hardly be a more strategic industry than this. Relying on foreigners to produce your defence equipment is strategically foolish. Allowing the local defence industry to wither on the vine is doubly foolish, since it increases foreign dependency in a strategic area where there was none before. But the point is this: if government does not intend to use Denel as primarily its own defence industry innovator and production capacity, then it seems hard to justify why taxpayers should continue to support the organisation.

One problem is the structure of the industry, which is housed in a single entity. The international trend is for governments to reduce their direct ownership of defence companies, which tend to become money-guzzling machines if they are not forced to compete for government procurement contracts.

It does not seem an appropriate moment to put Denel on the block since it is losing buckets of money, but at some stage, the blood needs to be stemmed. At least a timetable for the sale of Denel needs to be considered, otherwise next year another emergency package will suddenly become necessary.

You can only sympathise with the difficulty of new Denel CEO Shaun Liebenberg’s predicament. His strategy for turning around the organisation announced this week does not seem unreasonable. But his fate lies essentially in the hands of government, his primary customer *2. If government continues to prefer foreign defence equipment dependency to local innovation, then no amount of restructuring will save the business.

With acknowledgement to the Business Day.

• did we need them at the acquisition decision time?
• did the foreign manufacturers have to take lead in the supply organisation?

The answers are :

• no - either the acquisition was either unnecessary or far too early;
• yes - because only they have the propensity to pay the bribes and kickbacks.