This is something a few of us have known about but been unable to write about till now. Staff at Denel Dynamics were told that a crucial contract to sell Umkhonto surface-to-air missiles to Egypt was cancelled because no South African bank would guarantee the advance payment. 1/
Multi-billion Rand arms sales are quite complex, they’re never just a straight trade of cash for goods. In most cases the client, in this case TKMS on behalf of the Egyptian Navy, first provides a portion of the contract value as an advance payment to pay for ramp up costs. 2/
In these cases the advance payment is essentially like a deposit, and manufactures like Denel are obliged to pay back most or all of it if they fail to deliver the contracted value. To ensure this happens, nearly every buying country insists on a bank guaranteeing the payment. 3/
Because of Denel’s precarious financial position, no local commercial bank is willing to provide any guarantees to it for advance payments, even for a relatively straightforward order like this. They’re too afraid it’ll be unable to deliver because of another cash crunch. 4/
This means Denel is in a ridiculous catch-22 bind. It had a lucrative contract that could save the company, bring in billions, and resolve its liquidity, but could not start work on it because no bank would guarantee the advance payment with Denel’s current state & liquidity. 5/
In some countries, like the US, this is where government would step in through something like an ExIm bank, which would be able extend guarantees that the private sector would normally balk at. But despite many recommendations for it, SA hasn’t created a similar structure. 6/
What’s even worse is that this is not just a R4.5 billion contract: The total value of the Egyptian Navy purchases from Denel was expected to be over R30 billion, starting with Umkhonto-IR deliveries then moving onto an Umkhonto-R development & delivery contract. It was huge. 7/
Losing the Egyptian Navy Umkhonto deal, on top of the staff exodus over the past few months caused by salary short-payment, almost certainly means the end of Denel Dynamics as we know it. Some product lines have lost all their staffing, from engineers to project managers. 8/
It’s all so frustrating, especially because of how unnecessary this was as Denel was still able to win these mega contracts on the strength of its product line & engineering skills. It’s a stupid outcome that should not have been allowed to happen by DPE & National Treasury. 9/
So the next time you hear that Denel is failing only because it was mismanaged, or ‘could not sell’, think back to this story. It had a product, it had a customer, and it had a contract: Yet it couldn’t overcome the lack of trust from banks or the lack of care from govt. 10/10
