Arms maker to provide defence force with 264 combat vehicles

CAPE TOWN — Struggling arms maker Denel has been given an R8bn vehicle contract lifeline by Armscor. This comes hard on the heels of its failure to win a bid to supply Turkey with Rooivalk helicopters.

Denel has now decided that the Rooivalk, on whose development the government spent R8bn, is not commercially viable and it will not spend any new money on the helicopters.

Armscor and the defence department will now have to decide whether to subsidise the maintenance of Denel’s Rooivalk capability so that it can continue servicing the 12 helicopters bought by the South African Air Force over their 25-year lifespan.

The other option would be for the air force to mothball the helicopters and for the costs to be written off entirely.

Denel group CEO Shaun Liebenberg announced Denel’s decision on the Rooivalk and details of the Armscor contract — the biggest in the company’s history — ahead of Public Enterprises Minister Alec Erwin’s budget vote speech in Parliament yesterday.

He said Denel would not be able to afford to look after the air force’s Rooivalk aircraft in the future.

“There are some big strategic decisions which the air force and the shareholder must make on this product. The government could decide to subsidise it because of the defence force’s operational requirements,” said Liebenberg.

Erwin said in an interview that the departments of defence and public enterprises would have to decide later in the year what to do about the Rooivalk.

The R8bn Armscor contract, known as Project Hoefyster, would see Denel Land Systems supply the South African National Defence Force with 264 infantry combat vehicles in five variants over 10 years.

The new-generation combat vehicle would replace the Ratel and would be based on a Finnish Patria platform with a Denel- designed turret. It would be an 8x8-wheeled vehicle in the 25-ton class to transport and protect infantry troops.

“The contract signifies a tremendous boost to local industry and the economy,” Liebenberg said. “This contract puts Denel Land Systems on the road to sustainability” as well as commercial viability. South African companies would deliver more than 70% f the total value of the contract, 18% of which would be for the development of the turret systems.

Denel as main contractor would involve numerous local defence companies and subcontractors such as BAE Systems’ subsidiary Land Systems OMC in delivering the product.

The vehicle itself would be built locally under a Patria licence.

Liebenberg said that after Denel’s failure to win the $2bn Turkey tender for 50 helicopters after giving it its best shot, the company realised that it would not be able to sell the Rooivalk anywhere else and that it could not sustain the project commercially.

Liebenberg has always maintained that Denel cannot be a global prime contractor competing on price with the major defence manufacturers as it does not have the necessary critical mass and economies scale.

Denel lost the Turkey bid as its pricing structure could not compete with that of the other shortlisted bidder, the Italian Agusta. It had had to revise its price upwards when it learnt that it would be prohibited from selling the industrialised product from Turkey into other markets in the region.

“I am satisfied that our marketing approach was superb and very satisfied that we had government support. Technically we were successful,” Liebenberg said.

Liebenberg said Denel had obtained a cash injection of about R600m-R800m from the disposal of large properties and R400m from noncore asset sales.

Erwin said in his speech that government and representatives of the local defence-related industry were working closely to develop the very fragmented industry, estimated to consist of 49-70 companies.

An estimated 85% of total industry revenue of R9,5bn was produced by the top 15 companies.

“Fragmentation makes it unlikely that all capabilities will be sustainable and we believe that consolidation is desirable and inevitable,” Erwin said.

Government departments would focus on interventions to develop the industry over the next couple of years.

“It is imperative that consolidation and upgrading of capabilities, plant and equipment is achieved for our industry to serve South African, regional and international defence requirements,” Erwin said.

Already the consolidation of test and evaluation facilities was under way and a Defence Evaluation and Research Institute would be established.

With acknowledgements to Linda Ensor and Business Day.