Cycle of cease fire, reload

With the end of the war in 1945 came the dismantling of much of SA's defence manufacturing capacity. The National Party, which came to power in 1948, continued the process. "They allowed SA's armed forces to run down," says defence analyst Helmoed Heitman

Dramatic change

A mandatory UN arms embargo against SA, the war of independence in Namibia (then South West Africa), SA's involvement in Angola and militarisation of SA's liberation struggle forced a dramatic change in the 1970s and 1980s. The National Party government put SA onto a war footing, lifting defence spending from 2,1% of GDP in 1971 to around 4% until hostilities began winding down in 1986.

Arms production was centred on state-owned Armscor, which at its peak directly and indirectly through over 2,000 private companies employed 130,000 people, according to a study by the University of Cape Town's Centre for Conflict Resolution (CCR).

With the advent of democracy came a spiralling down of SA's defence spending. The defence budget was cut by half between 1989 and 1996 and procurement fell from 60% of expenditure to 18%, notes the CCR study.

Many smaller defence-focused companies went to the wall and large companies such as Altech sold their defence interests to foreign arms firms, which integrated them into their global operations. In the state sphere, change came in 1992 with government's creation of Denel as its manufacturing arm. Armscor became the defence force's procurement arm.

Exports counter domestic decline

The industry has countered the decline in defence spending through exports, which now account for about two-thirds of its sales. Despite this export success, Heitman argues that the decline in domestic arms spending jeopardises the industry's long-term viability, a view shared by other players.

The department of defence's draft defence review makes a strong case for a big increase in defence spending, particularly to replace much of the army's dated equipment. The army was overlooked in government's 1999 R30bn arms deal with foreign suppliers.

The deal has been criticised in many quarters for having been wasteful spending and the costs have been put at much higher than the initial R30bn. However, was it a bad deal? Heitman believes it was not. "SA got good value for its money," he says. On allegations of corruption, he adds: "I don't believe there was corruption in the selection of equipment. What was bought made sense."

A key failing

Talib Sadik, Denel group CEO between June 2008 and August 2012, says Denel and other SA companies benefited from offset agreements through workshare packages with foreign suppliers.

Sadik believes the offset agreements failed in one key area. "We had hoped for sustainable workshare agreements [with foreign firms] after they had met their offset obligations," says Sadik. "But when they had met them they stopped spending."

Corruption claims have persisted but in 2010, the Hawks dropped their investigation into the deal.

Last year President Jacob Zuma, in response to a constitutional court challenge, set up a judicial commission of inquiry under Judge Willie Seriti. It is expected to hold hearings next year.

A big lesson learnt from the arms deal is not to let equipment reach a point of obsolescence, says Heitman. The navy and air force were in this situation at the time of the arms deal and the army faces it now. The solution, he says, is a replacement programme running over a three-decade cycle.

A phased approach also benefits the industry by preventing big spikes and troughs in demand, says radar and telecom firm Reutech's chief operating officer, Peter van der Bijl

Source: Financial Mail via I-Net Bridge