South Africa is set to announce a foreign partner for Denel Aerospace as part of its industry rationalisation


The South African Government hopes to announce a strategic equity partner for Denel Aerospace by the end of next month, says Dr Ian Phillips, a special adviser to government on privatisation.

South Africa's privatisation programme has been criticised for delays in the sale process. Phillips, however, says there should be no further hold-ups.

The introduction of a partner for Denel Aerospace was first mooted in 1998, with BAE Systems (then British Aerospace) emerging as the early favourite to purchase a 20% to 30% stake in the division.

The government started a concurrent initiative to streamline South Africa's aerospace industry in preparation for its R32 billion ($4.6 billion) defence procurement plan last year. Phillips says restructuring the aerospace industry was given priority to optimise commercial benefits from trade offset deals linked to the defence contracts. He says the public enterprises ministry, which is tasked with selling and restructuring state assets, will focus on finding an equity partner for Denel while the department of trade and industry assists in rationalising private sector industry.

BAE Systems and Saab were awarded the contract to supply the South African National Defence Force with Hawk trainers and Gripen multi-role attack aircraft. Each of the defence suppliers was tied into industrial investment obligations roughly equivalent to the value of the equipment purchased.

"But instead of linking the arms procurement and the offset programmes to the search for an equity partner in Denel Aerospace we decided to separate the two completely," says Phillips.

BAE Systems' regional director for South Africa, Stuart McIntyre, says the decision was necessary for the government to ensure that no compromises were made in either process.

"The two issues are separate. The future of South Africa's aerospace industry is a strategic national issue and should be attended to on its merits. To link them would have been a mistake," says McIntyre.

BAE Systems has already given Denel several contracts to manufacture aerospace structures as part of its offset obligations.

Phillips would not be drawn on who the partner was likely to be when the government makes its announcement next month, but says British Aerospace's merger with Marconi Electronic Systems to create BAE Systems, made it a strong contender because of its increased scope of influence. The government's imperatives in choosing the partner, however, appear to extend beyond its stated objectives of recapitalising Denel Aerospace and introducing new technology into the company.

Export Potential

"South Africa's foreign policy recognises a wide range of countries with which we do business, which gives Denel a wide range of potential customers. When bringing in a strategic equity partner we have to make sure that the integrity of our foreign policy remains intact. We shouldn't alienate customers or allow the new partner to unduly influence which countries we should deal with," says Phillips.

But McIntyre says the geopolitical profile of South Africa and Denel in particular is an attractive business prospect for BAE. "Their profile means they can reach countries that are not easy to reach by other companies. That means that we can operate in the areas in which South Africa has political influence if we were awarded the stake in Denel," says McIntyre.

BAE is also interested in Denel's CSH-2 Rooivalk attack helicopter programme, which has struggled to secure any export orders.

Although the South African Government has come under political pressure at home to shelve the programme because of its lack of commercial success, Phillips says a total shutdown would not be a viable option. He says doubts over Denel's future among potential customers had hampered its quest for orders.

"But the future of Denel is now guaranteed and along with that is the fact that the missile systems on the Rooivalk were successfully integrated with the avionics last month," says Phillips. McIntyre says BAE, as a supplier of complete defence systems to customers, is open to an involvement in Rooivalk. "Having a rotary wing solution is attractive as it adds breadth to our own capabilities, but all aspects of a deal must be done on proper business terms".

The department of public enterprises is also seeking partners for Denel Aerospace's separate divisions, which include Denel Aviation, Airmotive and Kentron, the missile manufacturer. "Besides the strategic equity partner, which will come in at a high level and take a significant stake in Denel Aerospace, we are also trying to find the best mix of equity partners and joint venture partners further down the food chain at a business unit level, to advance areas which may be peripheral to the overall partner," says Phillips.

Meanwhile the government is preparing a proposal which explores synergies in wide-body aircraft maintenance between Datam, the maintenance component of Denel and the technical division of South African Airways.

Source: Flight International