South African Aerospace and Defence Ecosystem MASTERPLAN …

Aerospace and Defence- Final Masterplan 2020

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Francois Denner;Philip Haupt;Khalid Manjoo;Jessie Ndaba;Linden Petzer;Josie Rowe-Setz. Defence Experts: H Heitman, CM Zondi

BLUEPRINT

South African Aerospace and Defence Ecosystem MASTERPLAN 2020


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Acronyms A&D Aerospace & Defence AfCFTA African Continental Free Trade Area AISI Aerospace Industry Support Initiative AMD Aerospace Maritime Defence (Industries

Association) AMO Approved Maintenance Organisation APDP Automotive Production and Development

Programme BASA Bilateral Aviation Safety Agreement BB BEE Broad Based Black Economic Empowerment CAA Civil Aviation Authority CAASA Commercial Aviation Association CAIDS Commercial Aerospace Industry Development

Strategy CAMASA Commercial Aerospace Manufacturing

Association CAV Centurion Aerospace Village CIS Communications and Information Services CSIR Council for Scientific and Industrial Research COTS Commercial Off the Shelf CSPD Competitive Supplier Development

Programme CTK Cargo & mail Tonne/Km DARPA Defense Advanced Research Projects Agency DCAC Directorate of Conventional Arms Control DCDT Department of Communications and Digital

Technologies DFI Development Finance Institution DHET Department of Higher Education and Training DIP Defence Industrial Participation DIRCO Department of International Relations and

Cooperation DoD Department of Defence (South Africa) DPE Department of Public Enterprises DSI Department of Science and Innovation DTIC Department of Trade, Industry and

Competition EACP European Aerospace Cluster Programme EASA European Union Aviation Safety Agency EDP Enterprise Development Programme EO Earth Observation EOC Executive Oversight Committee


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ESEID Economic Sectors, Employment and Infrastructure Development

EXIM Export-Import (Bank) GDP Gross Domestic Product GGDA Gauteng Growth and Development Agency GPS Global Positioning System GSO Geo Stationary Orbit GTAC Government Technical Advisory Centre GVA Gross Value Added GVC Global Value Chain HVAC Heating, ventilation, and air conditioning IATA International Air Transport Association ICAO International Civil Aviation Organisation ICT Information and Communications Technology IDC Industrial Development Corporation IP/IPR Intellectual Property/Intellectual Property

Rights IPA Intelligent Pilot Assistant IPMS Integrated Power Management Systems ITA International Trade Administration JASC Joint Aerospace Steering Committee KZN KwaZulu Natal M & E Monitoring and Evaluation MALE Medium-altitude long-endurance (unmanned

aerial vehicle) MOTS Military Off the Shelf MRO Maintenance, Repair & Overhaul MTBPS Medium-Term Budget Policy Statement MTEF Medium Term Expenditure Framework NAC National Aerospace Centre (Wits) NCACC National Conventional Arms Control

Committee NEDLAC National Economic Development and Labour

Council NDIC National Defence Industry Council NGSO Non- Geo Stationary Orbit NICC National Infrastructure Coordinating Council NIF National Infrastructure Fund NIP National Industrial Participation programme NPAT Net Profit After Tax NSI National System of Innovation NT National Treasury OEM Original Equipment Manufacturer OPV Optionally Piloted Vehicle PIC Public Investment Corporation


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PKO Peace Keeping Operations POPI Protection of Personal Information Act R&D Research & Development RD & I Research, Development and Innovation RFI Request for Information ROI Return on Investment ROIC Return on Invested Capital RPAS Remotely Piloted Aircraft System RPK Revenue Passenger /Km SAA South African Airways SAAT South African Airways Technical SACAA South African Civil Aviation Authority SACU Southern African Customs Union SADC Southern African Development Community SANDF South African National Defence Force SANSA South African National Space Agency SAR Synthetic Aperture Radar SARS South African Revenue Services SATAWU South African Transport and Allied Workers

Union SBAC Society of British Aerospace Companies SBAS Satellite Based Augmentation System SBU Strategic Business Unit SCAMP Strategic Capital Acquisition Master Plan SCM Supply Chain Management SDA Special Defence Account SDP Supplier Development Programme SEIAS Socio Economic Impact Assessment System SEZ Special Economic Zone SITA State Information Technology Agency SME Small, Medium Enterprise SMME Small, Medium and Micro Enterprise SOE State Owned Enterprise STEM Science, Technology, Engineering and

Mathematics TIA Technology Innovation Agency UAM Urban Air Mobility UAS Unmanned Aerial System UAV Unmanned Aerial Vehicle UTM Unmanned Aircraft Systems Traffic

Management VC Value Chain WAAC Weighted Average Cost of Capital WTO World Trade Organisation


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Table of Contents

1. INTRODUCTION 1

1.1 MASTER PLAN CONSULTATION 1 1.2 PRELIMINARY COMMITMENTS 1 1.3 THE AEROSPACE AND DEFENCE ECOSYSTEM 8 1.3.1 DEFENCE 9 1.3.2 AERONAUTICS- COMMERCIAL, & CIVIL 11 1.3.3 SPACE 14 1.3.4 SUB SEGMENTS- CONCLUSION 15 1.3.5 IMMEDIATE OPPORTUNITIES- DEFENCE 16 1.3.6 MEDIUM TERM OPPORTUNITIES 21

2. OVERVIEW & BACKGROUND ANALYSIS 28

2.1 AEROSPACE AND DEFENCE 32 2.2 IMPACT OF DEFENCE BUDGETARY CONSTRAINTS 34 2.3 IMPACT OF COVID 19 ON COMMERCIAL AERONAUTICS, DEFENCE, AND SPACE 34 2.4 IMPACT ON TRADE (AND RELATED STATE REVENUES) 35 2.5 STRENGTHS & OPPORTUNITIES 35 2.6 IMMEDIATE PATH 37

3. FOCUS ON THE MASTERPLAN 38

4. DETAILED MASTERPLAN TABLES 39


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5. ANNEXURES 56

5.1 ASSESSMENT MATRIX FOR SUB VC SELECTION (EXAMPLE) 56 5.2 ADDITIONAL POSSIBLE EXPORT SHORT-TERM REVENUE GENERATION OVERVIEW 57 5.2.1 OMAN 57 5.2.2 PAKISTAN 57 5.2.3 UNITED ARAB EMIRATES 57 5.2.4 DENEL LAND SYSTEMS 57 5.2.5 DENEL VEHICLE SYSTEMS 57 5.2.6 BRAZIL 57 5.3 DEFENCE INDUSTRY STABILISATION 58 5.3.1 BADGER (PROJECT HOEFYSTER): 58 5.3.2 ROOIVALK MK 2 58 5.3.3 RATEL MODERNISATION, UPGRADE AND CONVERSION 58 5.3.5 SAMIL REPLACEMENT (PREVIOUSLY PROJECT VISTULA) 59 5.3.6 UMKHONTO: 59 5.3.7 LEO 59 5.3.8 PROJECT MARLIN 59 5.3.9 C-RAM 59 5.3.10 FISM AND IMPI 59 5.3.11 SHIPBUILDING 60 5.4 AEROSPACE AND DEFENCE- SELECTED ECONOMIC MULTIPLIER EFFECTS 61 5.5 PROCUREMENT PROCESS & SUPPLY CHAIN – RECOMMENDED REFORMS 64 5.5.1 PROBLEM STATEMENT 64 5.5.2 KEY ISSUES 64 5.5.3 RECOMMENDATIONS 65 5.6 OVERVIEW- PROGRAMMES 67 5.6.1 NATIONAL INDUSTRIAL PARTICIPATION PROGRAMME (NIP) 67 5.6.2 DEFENCE INDUSTRIAL PARTICIPATION (DIP) 67 5.6.3 COMPETITOR SUPPLIER DEVELOPMENT PROGRAMME (CSDP) 68 5.7 ECONOMIC RECONSTRUCTION AND RECOVERY PROGRAMME (ERRP) 69


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Figures Figure 1- Commercial Aeronautics growth trends ...................................................................................... 12 Figure 2- Project Space revenues by type ................................................................................................... 15 Figure 3- The Apex Ecosystem .................................................................................................................... 29 Figure 4- A&D- Apex Ecosystem Vision ....................................................................................................... 30 Figure 5- Institutionalisation of the A&D eco system ................................................................................. 31 Figure 6- Summative overview of the A & D ecosystem Masterplan ......................................................... 32 Tables Table 1- Broad categories of contributors to the Aerospace and Defence Masterplan ............................... 1 Table 2- Commitments table ........................................................................................................................ 2 Table 3- Investment options table (0-36 months) ........................................................................................ 6 Table 4- Aerospace and Defence main segments ......................................................................................... 8 Table 5 - Defence allocations to the SDA (ZAR 000,s) ................................................................................. 10 Table 6- Allocations to R&D in Armscor ...................................................................................................... 10 Table 7- Worldwide Airline Industry Forecast (2020-2021) ........................................................................ 11 Table 8- Defence export pipeline in order of readiness ............................................................................. 18 Table 9- Summary -backlog of export orders to be authorised .................................................................. 20 Table 10- Selected South African product sales values .............................................................................. 21 Table 11- A&D sub Value Chains, prioritised .............................................................................................. 24 Table 12- Rooivalk return on investment ................................................................................................... 36 Table 13- Pillar one: Market access ............................................................................................................ 40 Table 14- Pillar two: Localisation ................................................................................................................ 44 Table 15- Pillar three- Increase Industry Competitiveness ......................................................................... 47 Table 16- Pillar four: Human Capital Development & Inclusion ................................................................. 52 Table 17- Cross-cutting: Designing and implementing the new A & D ecosystem ..................................... 54 Table 18- Aerospace and Defence Economic Multiplier Effects ................................................................. 61


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1. Introduction 1.1 Master plan consultation The Aerospace and Defence Master Plan has been developed using all available evidence (literature, statistical and document review) in the context of an extensive consultation and engagement process with industry; organised labour (SATAWU, Solidarity, COSATU and others); relevant government agencies; government departments; Research and Development (R&D) entities; and various Development Finance Institutions (DFIs) and other funding institutions. This masterplan has determined the actions necessary to, in the immediate term, stabilise the industry and halt its decline of the industry. A game changing vision- encompassing a vision of an Entrepreneurial State and focussed collaborative action to move forward into growth, is supported. Actions which are supported in the very short term to stabilise and ensure the survival of the industry have been approved by the working stakeholder partnership of the State, the Private Sector and Organised Labour, as shown below. There are immediate opportunities for exports, localisation and commercialisation. COVID- 19 did not stop the consultation process and those who contributed to the development of the Aerospace and Defence Masterplan, in one on one engagements and in focus group and workshop discussions nationally1, included the following (the consultation report and a complete list of stakeholders (contained in a separate data base) have been supplied with this plan2): Table 1- Broad categories of contributors to the Aerospace and Defence Masterplan

Classification Industry Associations

Development Finance Institutions Educational & skills institutions

Manufacturers Research & Development Institutions

Government Departments Organised Labour

Government Agencies & programmes International agencies and producers

Upstream input manufacturers Independent experts

All parties participated in the development of the Masterplan between end January 2020 and mid November 2020. 1.2 Preliminary commitments During the process of consultation, specific firms have made commitments – to the support of the Masterplan - and also to support for selected pillars of the plan. These firms are available immediately to engage on discussion around implementation of these commitments once the

1 300 entities consulted in a combination of workshops and interviews. 2 Complies with the Protection of Private Information Act (POPI)


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Executive Oversight Committee (EOC) is convened by the Minister. Even though the blockages of the current export pipeline in Defence (now being addressed by the State), and the COVID response realities of international travel (potentially to recover once the COVID vaccine is made available) have contracted demand for the commercial aeronautics element of ecosystem to levels barely above survival, the confidence displayed by the State, the Private Sector and Organised Labour in the Aerospace and Defence ecosystem is indicative of how important the sector growth opportunities actually are for the South Africa Economic Reconstruction and Recovery Plan (ERRP). Further- there is a very significant asset base which has been invested over time in this ecosystem on the part of the private sector and the State combined, over the last ten years. This is estimated3 to be approximately ZAR21 billion on the part of the State (largely Defence expenditure on equipment and Research and Development (R&D)) and a minimum of ZAR9 billion on the part of the private sector (largely production R&D and production facilities, as well as marketing). The unblocking of the export pipeline has already begun, thanks to speedy action on the part of the State. This is going to result in the retention of existing jobs with the potential for significant (doubling) of increases in export earnings over the next 18 months. It could additionally provide a significant liquidity injection for Denel – on a project/programme level- in the short term. Table 2- Commitments table

Name Commitment

Adept Commitment to additional internships and apprenticeship training;

Aerosud Provide Letters of Intent for investment in the Centurion Aerospace Village (CAV); Lead Foreign Direct Investment (FDI) reactivation, of interest originally lost as a result of slow uptake by South Africa; Confirm investment in CAV (own) focus on SMMEs Black Owned enterprises- possible expansion of supplier development programme; Pre-lease letters of intent- SMME incubation, Artisan Training Facility; Possible investment in Maintenance, repair and Overhaul (MRO) for fixed wing and helicopter; Implement a 600sqm training school for artisans in CAV CEO4 willing to serve on Executive Oversight Committee (EOC);

Aerosud International Will resuscitate discussions with Boeing, Airbus, Embraer, and others once EOC convened to kick start investment process (refer formal letter);

African NDT Centre Potential for expanded facilities;

3 No confirmed data. Estimate only 4 Mr Johan Steyn


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Name Commitment

Aerospace, Maritime & Defence Industry Association

Will provide an expert task team (product and service) to define and provided optimal border management framework and solution for South Africa; Will provide an export task team to customise AMD company owned solutions for non-Defence based challenges and problems; Willing to provide online model to the Directorate of Conventional Arms Control (DCAC) for license application process;

Armscor Provide project management services for the proposed online application system for the National Conventional Arms Control Committee (NCACC) and DCAC; Ongoing development of prioritisation model for selection of export ready and local build ready opportunities;

CAMASA Facilitate international investment in CAV via global OEMs engagements; Letters of interest lodged once EOC convened;

Commits to leading the setup of a formal collaboration with the NAAMSA/NACAAM automotive team to develop cross sectoral skills/capacity;

Transformation goals will be implemented i) to identify, establish and incubate black owned SMME and black industrialists to contribute at least 30% of exports by 2024 and ii) new entrants to the Skills development pool target 80% black and/or women South Africans by 2024.

CSIR Executive head- Defence5, willing to serve on EOC, and to facilitate focused industry centric R&D, via SA ARPA; Will continue to support DTIC AISI initiative in enabling industry activities and growth; Will fast track review of potential, based on existing work, for advanced surface technology for industry application; Support the industry by conducting R&D in transformative technologies and accelerating their localisation and diffusion, as well as in commercialisation of viable technology; Develop/maintain and leverage unique test facilities and laboratories required by industry.

Damen Shipyards Main Board Executive representing investor.6 Willing to serve on EOC

5 Dr Motodi Maserumule 6 Ms Sefale Montsi


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Name Commitment

Denel Will secure strategic equity partners in core Strategic Business Units as approved by the Board. May include Missiles, Artillery, and UAVs – to be finally determined. Chief Operating Officer (COO) 7 willing to serve on EOC and relevant task teams.

GEW CEO 8willing to serve on EOC Hensoldt Optronics CEO9 willing to serve on EOC

Paramount Group Group CEO10 willing to serve on EOC; Further potential investment in AHRLAC.

Reutech Group11 head Reutech specialist electronics willing to serve on EOC

Reutech willing to lead/support industry export programme design and development for international markets and provide resources to be determined;

Reutech willing to assist in resourcing online administrative system design and implementation for the benefit of NCACC and DCAC immediately;

Reutech will implement investment in local production and international markets to the value of ZAR750 million resulting in retention of 600 jobs and a significant increase in export sales within 3 to 5 years;

Rheinmetall Denel Munition (RDM)12

CEO willing to serve on EOC; CEO serving on NCACC task team currently; RDM will fund bursaries for engineers; support high schools with equipment and capacity to strengthen Science, Technology, Engineering & Mathematics (STEM) training and outcomes; currently providing 80 interns per annum with workplace internships and retaining over 20% in permanent positions; will support Small, Medium, & Micro Enterprise (SMME) development through 1% and 2% of Net Profit After Tax (NPAT) spent on programmes; and continues to support Military Veterans programmes with significant financial resources per annum.

Sandock Austral Chair13 willing to serve on EOC; Commit to implementation of the largest apprenticeship

programme in KZN province through shipyards; Will implement an Enterprise Development programme

by allocating between 30% and 40% of each project revenues to black-owned SMME support in the supply chain;

7 Mr William Hlokoane 8 Mr Hennie Venter 9 Mr Deon Olivier 10 Ms Alison Crooks 11 Mr Peter van der Byl 12 Mr J P Helmsen 13 Dr C M Zondi


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Name Commitment Willing to participate in the support of women- owned

enterprises, into the Sandock-Austral supply chain. South African Civil Aviation Authority

(SACAA) SACAA will ensure through its working groups with the relevant State entities and the industry, that the final regulatory framework and related systems for RPAS/UAS (drone) design, manufacturing, utilisation, training, certification and operations, will be concluded by end March 2021.

SACAA will convene, once a year, an indaba with the Civil Aviation industry and those affected, to feed back on its benchmarking of application and certification systems, as well as its international benchmark performance and confirm ongoing engagement with the industry.

SACAA will complete its shift to electronic and online application processing by end November 2021.

Current investment in the Aerospace and Defence ecosystem, where the private sector believes that expansion and new investment is viable, is approximately 14 ZAR18,99 Billion. New investment of just under ZAR 5 Billion is considered viable in an enabling environment and a supportive relationship with the State. Aerospace and Defence is not highly labour intensive15 (in direct terms) but has an estimated multiplier of four (excluding downstream jobs created by upstream activities). Thus, in the event of this investment being realised, direct employment will increase from current levels by approximately 31 percent. A doubling of export sales will result in a shift from current sales levels of roughly ZAR19 Billion to ZAR 38 Billion from 2021 to 2025. As well as the commitments outlined in Table two above, the Aerospace and Defence ecosystem private sector entities believe the following investments (at minimum) will prove commercially viable in an enabling environment over the next five years, and the relevant firms are open to discussion as to how these investment opportunities can be realised with the support of the State. These do not include potential investment in Commercial Aeronautics and Maintenance, Repair & Overhaul (MRO). See Table three below.

14 Numbers are estimates only 15 Although it is Advanced Skills intensive


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Table 3- Investment options table (0-36 months)16

Focus Current Market (annual) (Rbn)

Current employment

Capacity utilisation

Potential Market (Rbn)

Export/Local Potential jobs (direct)

Investment required

Enabling actions

Mission aircraft 1,5 Billion

120 70% 15 Billion Middle East Africa USA NATO

450 Double production R150 million

Upgrade CAA certification system (speed & relevance); Engineering support- CSIR; SAAF flight test support; Marketing support high level from the State.

Armoured vehicles

0,550 Billion

200 60% 1 Billion Export 300 Double production R500 million

Improve Export permit system efficiencies; Marketing support high level from the State;

Maritime (MRO & Manufacturing), Defence Technology Development, Sub-system manufacturing (landward & aerospace)

5 Billion 559 50% 12 Billion Local Near and Middle East Asia

500 (+2 000 downstream)

1,2 Billion (over 3 years)

Upgrade & update local procurement process Share long-term procurement plans with industry; State owned IP shared for commercialisation by Industry;


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Focus Current Market (annual) (Rbn)

Current employment

Capacity utilisation

Potential Market (Rbn)

Export/Local Potential jobs (direct)

Investment required

Enabling actions

Missiles (air) 0,90 Million

2,100 2% 6 Billion Export Middle East

2,500 150 Million (expansion)

Improve efficiency of export regulatory framework. Senior State marketing support; EUC17 process support

Artillery 8 Billion 1,000 50% 11,8 Billion

European Union Middle East South East Asia

1,400 1,5 Billion (expansion)

Improve efficiency of export regulatory framework. Export approval of Category A & B products; Support on EUC process; Senior State marketing support;

Mortars 3,2 Billion

500 25% 8 Billion Turkey European Union Middle East South East Asia

800 1 Billion (expansion)

40MM 1,5 Billion

50 30% 4 Billion Turkey European Union Middle East South East Asia

120 50 Million (expansion)

Plant Engineering

140 million

800 30% 8,9 Billion

Middle East Hungary, Egypt, Indonesia

900 100 million (expansion)

TOTAL 18,99 Billion

5,329 66,7 Billion

6,970 4,650 Billion

17 End User Certificate


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1.3 The Aerospace and Defence ecosystem Although historically defined as an industry sector, this is no longer the most useful way to classify A&D economic activity. It is in reality an advanced high technology eco-system, which is the leader and forerunner of national competitive capability across the board- rendering it the Apex ecosystem in the South African economy with the potential to make very major contributions to the ERRP goals. In effect there are three main categories of economic activity which underpin the A&D ecosystem. In each case, there are differing internal industry dynamics, and different externalities which engender activities, barriers to growth, and demand realities. At the same time, there are cross cutting issues which affect all three main categories. The A&D ecosystem consists of the following broad categories. Not all subcategories are included here due to an extremely high number of options and permutations. Table 4- Aerospace and Defence main segments

Segment Sub-Categories (examples) Commercial Aeronautics- Manufacturing &

services Design & Manufacture; light and heavy flight testing and certification; heavy system engineering; concurrent engineering; light reconnaissance aircraft; unmanned, optimally manned, UAV/MALE18 et al.

Civil Aeronautics- Manufacturing & services Design & Manufacture; light flight testing and certification; UAM; OPV19s et al.

Defence Aeronautics- Manufacturing Includes: fixed wing mission systems; rotary wing mission systems; ground support; surveillance aircraft; systems integration & testing, et al

Aeronautics services (MRO) Line and base maintenance; component maintenance; Avionics maintenance & support; airframe heavy maintenance; engine maintenance; modifications; et al.

Drones Small drones, UAV surveillance, Armed patrol, UAM, OPV et al.

Precision guided weapons Guided missiles; Defence Landwards- Manufacturing Mission computers & related; armoured vehicles;

weapons; artillery, small arms and ammunition, Stabilised and non-stabilised manned and unmanned turrets; cannons; Machine guns; vehicle and turret upgrades; Composite armour and advanced armour technologies; Mine-protection and qualification testing and; De-mining technologies and products

Defence Maritime- Manufacturing & Services Warship MRO20 (Hulls, Structures, Outfit and furnishings, Propulsion, Electrical plant, Auxiliary systems); Warship modification and upgrade

18 Unmanned Aerial Vehicle/Medium Altitude, Long Endurance 19 Optionally Piloted Vehicle/ Urban Air Mobility 20 Maintenance, Repair & Overhaul


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Segment Sub-Categories (examples) (installation and integration of mechanical, electronic and weapons systems); turrets et al

Space- upstream Sovereign telecommunications satellite; small satellite systems design and manufacture; small satellite launch systems; et al

Space- downstream Acquisition, analysis, and manipulation of big data (Earth Observation); App development; et al

Electronics- Crosscutting Specifically, Radar (passive, air traffic management, Synthetic Aperture Radar); Information Warfare (Electronic Warfare, Network Warfare, Command & Control Warfare, Information Infrastructure Warfare, Information Based Warfare); telecommunications, including cryptology; command and control; et al

1.3.1 Defence The global Defence industry is characterised in the main by intense, close relationships between the industry and the State wherein it is located and undertakes the leading role in the development of advanced technology. The technology typically is developed for sovereign purposes, to provide the home State with technology not available to others for the purposes of Defence. There is a significant focus, beyond that of any other economic activity, on R&D. The technology developed for sovereign21 Defence purposes is often effectively adapted for commercial use within the Defence industry and is then used to develop competitive exports to other nations, without removing the element of sovereign Defence associated with advanced technology leadership. Further to this, the technology is then diffused into the general industrial base of the country and used to sustain competitive advantage or build new advantage for industries across the board. A typical example is the development of the internet22 which was first invented for military purposes, and then expanded to the purpose of communication among scientists. In the early 1990’s, with the development of the World Wide Web, the internet was taken up by the public. Other well-known technologies invented for military purposes include Global Positioning System (GPS), which was originally intended to keep soldiers safe; weather radar; microwave technology; digital cameras and super glue. Because of its central role in defending the State, its economic and resource assets and the people, the Defence industry has traditionally been largely State funded, and in particular, the acquisition of capital equipment and critical MRO goods and services is made possible by State Defence budgets. Advanced R&D to meet sovereign needs is the critical factor for any State which wishes to preserve sovereign independence in Defence, and further, to ensure industrial competitiveness on an ongoing basis. Defence is typically the catalyst required to catapult innovation, R&D, sovereign capability and skills development, to drive economic growth supported by free trade and

21 Sovereign is the ability to ensure, under full national control and without reliance on any direct foreign assistance, certain capabilities identified as vital to national security. Strategic independence means the ability of the Defence Force to perform its key functions for extended periods without reliance on direct foreign support in respect of critical capabilities. 22https://www.internetsociety.org/internet/history-internet/brief-history-internet/?gclid=EAIaIQobChMI1ris1tex7AIVE-ztCh2Auw0UEAAYASAAEgIOjPD_BwE

https://www.internetsociety.org/internet/history-internet/brief-history-internet/?gclid=EAIaIQobChMI1ris1tex7AIVE-ztCh2Auw0UEAAYASAAEgIOjPD_BwE

https://www.internetsociety.org/internet/history-internet/brief-history-internet/?gclid=EAIaIQobChMI1ris1tex7AIVE-ztCh2Auw0UEAAYASAAEgIOjPD_BwE


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free markets, create new jobs and higher incomes in post-apartheid South Africa. However, Defence budgets in South Africa have not kept pace and this has been reflected in national economic performance. While the overall Defence budget has been decreasing over the last ten years in real terms, the portion of the budget allocated to the development and production of new technology and maintenance, repair and overhaul of existing equipment (the Special Defence Account (SDA)) has reduced at a faster real rate, as has the portion allocated to Armscor R & D. Table 5 - Defence allocations to the SDA (ZAR23 000,s)

2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 5,654,160 6,377,577 5,930,764 5,699,626 5,376,947 839,603 872,999

Table 6- Allocations to R&D in Armscor

2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 386,200 411,200 306,300 307,600 321,500 337,600 354,500

Source: National Treasury, 2020

Defence budgets globally are increasing, especially in the developed nations but the proportion of budget allocated to personnel costs is increasing faster than the allocation to capital spending, and spending on MRO. This is also the case in South Africa, although in South Africa the overall budget has declined significantly over the last ten years in both nominal and real terms- as a result, the industry has not been able to rely on domestic sales as a platform for growth, and has turned to exports. At the same time, the DoD has not been able to replace, service, maintain and/or upgrade essential equipment. R&D budgets have also reduced significantly. However, because Defence budgets are set and allocated between two and five years in advance, export is viable- if the very significant barriers to export are removed. There is immediate opportunity available to be unlocked and at virtually no cost to the State, in localisation (small arms and ammunition and others); finalising the build programme for two already funded programmes in South Africa24 (although there are challenges, they can be dealt with); and removing obstacles to export as well as implementing low to no cost export marketing support measures. These are reflected in the Masterplan tables in this report. Industry barriers to export growth are largely within the approval system for export licenses and are currently being addressed by the State in terms of i) clearing the existing backlog and ii) ensuring that an efficient and effective system is implemented going forward to avoid delays in meeting client orders. This process, recently initiated by the State, is critical- as the South African industry cannot currently survive on domestic sales given budget constraints as outlined above. At this stage, most of the current permit allocation backlog has been cleared with significant positive effects for the industry, and the process of upgrading and fully resourcing the licence and permit system is outlined as a key programme in the Masterplan shown later in this report.

23 Nominal 24 A Darter and Badger


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1.3.2 Aeronautics- Commercial, & Civil The Commercial and Civil aeronautics sub segment is impacted by international commercial aviation trends, standards, license, and accreditations and at least for large commercial aeronautics, is controlled by the international Original Equipment Manufacturers (OEMs). Recent COVID-19 lockdown requirements internationally and domestically have resulted in industry carnage, where global and South African operations have been affected to the extent that local firms are running at an average of 40 percent of production. A critical element for South African industry is to become part of global OEM supply chains, and to incentivise local production as part of those chains, insofar as possible. Accreditations and standards are a major factor- without adhering to these stringent requirements, it is not possible to participate even at the most basic level, such as aeronautics cabling or simple metal components. The International Air Transport Association (IATA) is forecasting the worst financial performance in the history of commercial aviation for 2020- estimating a global loss of US$84 billion, with all airlines reporting negative operating income for the year25. Additionally, MRO activities and after-market parts, have stated that this portion of the industry is confronting a serious crisis- shakeouts, closures and rescues are expected to be the highest in the history of the industry. 32 million jobs globally, including tourism jobs, have been placed at risk. This represents a 45 percent reduction over 2019. Table 7-Worldwide Airline Industry Forecast (2020-2021)26

Key Metrics 2019 2020 (e ) 2021 (e ) Spend on air transport US $billion

876 434 598

% change over year 3.6% -50.4% 37.7% % global GDP 1.0% 0.5% 0.6% Return fare, $/pax. (2018$)

317 254 257

• Compared to 1998 61% -68% -68% Freight rate, $/kg (2018$)

1.82 2.31 2.26

• Compared to 1998 64% -54% -55% Passenger departures, million

4,543 2,246 3,384

• % change over year

3.8% -50.6% 50.6%

RPK27, billion 8 680 3 929 6 099 • % change over

year 4.2% -54.7% 55.2%

CTK28 billion 254 211 263

25 https://www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance-june-2020-report/ 26 2020 Forecast is based currently on six months data. 2021 forecast was made prior to the announcement of the COVID vaccine 27 Revenue Passenger Km 28 Cargo & mail Tonne Km

https://www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance-june-2020-report/

https://www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance-june-2020-report/


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Key Metrics 2019 2020 (e ) 2021 (e ) • % change over

year -3.2% -16.8% 24.6%

World GDP growth, %

2.5% -5.0% 7.1%

World trade growth, %

0.9% -12.9% 21.3%

Sources: IATA, ICAO, PaxIS29, CargoIS30, WTO, 2020 In 2020, commercial airlines had approximately 960 new aircraft scheduled for delivery- which is nearly 40 percent lower than the number originally planned for the year, pre COVID. By the end of May 2020, only 235 new aircraft had been delivered, and even the much lower number of new aircraft estimated to be delivered in 2020, is likely to reduce further (IATA, 2020). Figure 1- Commercial Aeronautics growth trends

Source: ICAO, 2020

Demand for new aircraft from the OEMs is expected to remain very subdued in 2021, with some potential for increase in 2022. Return on Invested Capital (ROIC) for all operating airlines regardless of region is expected to be a negative -16,9 percent for 2020. This results in severely reduced demand for new aircraft, as well as the likelihood that many airlines will seek to sell off existing aircraft. Furthermore, airlines will be less likely to retire older aircraft. The current in service fleet globally is 20, 261, with smaller aircraft being deployed more widely- as passenger loads decreased from 82,5 percent in 2019, to 65,7 percent in 2020. Africa was the weakest region in the pre-COVID period, with few airlines achieving the load factors needed to be profitable. The COVID response has placed further pressure on the airlines in the region, and large losses are expected in 2020 (IATA, 2020). However, the trends in the industry, and the shake-up resulting from the pandemic, present new opportunities in markets. The potential to continuously improve the market share position of South Africa as the MRO Provider of choice to the sub Saharan continent, is increased by the extending

29 https://www.iata.org/en/services/statistics/intelligence/paxis/ 30 https://www.iata.org/en/services/statistics/intelligence/cargois/

https://www.iata.org/en/services/statistics/intelligence/paxis/

https://www.iata.org/en/services/statistics/intelligence/cargois/


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of the service lives of existing aircraft. The option of significantly improving returns in terms of ROIC and WACC by increasing the capacity utilisation of smaller regional aircraft on the subcontinent, suggests the opportunities for South Africa to re-assess its investment in, and commitment to, the development and sale of already designed and tested aircraft31. By the end of 2021- mid 2022, forecasts suggest that passenger traffic will be close to reaching pre COVID levels, while freight and military traffic will increase before them. The opportunities for the South African industry lie in its ability and commitment to ready itself for a resurgence of demand by means of a number of enabling interventions, outlined in the Masterplan tables. The main thrust will be the vital clustering of facilities in the Centurion Aerospace Village (CAV) which has been moving towards implementation for ten years- and a highly focussed crowding in of existing resources and programmes to support and enable the facility. The facility will, once activated (within 18 months) be able to offer a highly attractive competitive package to local and international OEM investors, layered across many levels, and building on existing competitive advantage ready to be unlocked. Key barriers here are largely linked to non-alignment across essential national departments with regard to releasing land and similar easy to fix issued. Detail of the case for the immediate implementation of the CAV is shown in the Masterplans. Additionally, in commercial, civil and recreational aeronautics, there are regulatory requirements linked to safety and international standards set by the international Civil Aviation Authority (CAA), which includes non-Military drones, small aircraft, helicopters, and other smaller aircraft. To the extent that the local South African Civil Aviation Authority (SACAA) processes are effective, this industry has significant potential to grow, even under COVID-19 lockdown and post lockdown conditions. At the same time, training of pilots (drone and other), the fast tracking of local South African Drone capability, as well as MRO activities, represent significant opportunities for job creation, SMME development and transformation at these levels of the value chain. A review of the potential for a small regional aircraft in the light of the improved economics of using smaller regional aircraft32 may provide the evidence for an improved business case in the post COVID era. The opportunity to commercialise light reconnaissance aircraft on a fast track through available support mechanisms easily and immediately deployed, at very low or no cost to the State, seems clear. While Drones may fit in the military as well as the civilian/other government sub sectors, major growth is expected in non-military applications in the short term. South Africa has access to technology and markets and is in a position to substantially leverage its assets to take a strong regional and export (as well as local market) position in the design, manufacture, testing, piloting and maintenance of drones, which are used in a large number of applications ranging from the delivery of critical medical supplies to remote areas, to the delivery of pizza to a local suburb. Data are collected by drones which ensure that policy and decision makers in the State sector as well as financial services (insurance), agriculture, and many others have real time data and information which ensures best decision making, and allows for pre-emptive action prior to natural disasters,

31 The Small African Regional Aircraft, (SARA), South African developed, is a projected 24-passenger turboprop regional airliner with rough field capabilities; the Advanced High Performance Reconnaissance Light Aircraft (AHRLAC)) is a South African light reconnaissance and counter-insurgency aircraft 32 This is assisted by low fuel prices


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fish poaching and other similar governance and management needs. The fast-growing sub sector also demonstrates significant options for transformation, skills repurposing for the digital economy, and In the immediate term, there are opportunities for industrialisation which lie in the exploitation of synergies between different sets of advanced manufacturing activities. Synergies exist for example, between Commercial and Civil aeronautics manufacturing in terms of certifications and accreditations and the international regulatory environment, as well as in terms of the OEMs which control the market. There is potential in the optimisation and synthesis of these requirements. There is also solid potential for scale-based industrialisation across Automotive/Aeronautics boundaries. These opportunities include machined components, electrical wiring, pop rivets, and gimbals, inter alia. 1.3.3 Space Even prior to COVID-19 the trends in Space privatisation- shifting from entirely State funded operations to private sector R&D and operations, were noticeable (Blueprint, 2019). The exponential increase in digitisation of activities (such as online retail, live streaming, need for big data as decision support and other) led to a clear and ever increasing demand for satellites and linked onboard technology to serve the ever increasing demand for access to services. At the same time, the cost of providing access to connectivity and data using land based infrastructure has steadily increased, making it very high cost to connect people across large areas and/or difficult terrain, especially when the areas concerned are low population density and there is no real return for private sector investors. The demand therefore for the manufacture and launch of constellations of smaller satellites, combined with the ability to download real time data not available on land, and the ability to connect people across large and inhospitable distances, has increased, and with it, private sector investment in the industry. COVID-19 hastened an already developing trend to the point where the industry has grown far more than originally anticipated and in a much shorter time frame. Recently, the President announced the funding of a South African Space Infrastructure Hub which will certainly unlock South African capacity to manufacture and provide downstream services (South Africa has a strong legacy in Space engineering and development) and increase South African participation in this sub segment. Much depends on the speedy adoption of a regulatory framework updated for the current realities- the existing regulatory framework for Space was last reviewed pre 1994 and is unsuitable for today’s South African Space industry. Key opportunities lie in small satellite design, manufacture, testing and launch, combined with satellite payloads for data acquisition, and then the download, manipulation and application of the data for substantially improved and/or essential pre-emptive decision making (such as in imminent natural disaster conditions and similar).


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Figure 2- Project Space revenues by type

Source: Euroconsult, 2020

Linked to this early stage manufacturing opportunity is the potential for South Africa to implement its own sovereign telecommunications satellite (SatCom). The business case for the SatCom33 suggests significant savings to the State (instead of paying to use telecommunications satellite owned by others); income generation opportunities (leasing of capacity on the SatCom); significantly improved State security and sovereignty; and the ability to cross subsidise access to the digital world and data for even the deepest, poorest rural area. This is a catalytic infrastructure project of national strategic importance for consideration by the National Infrastructure Fund (NIF) and the National Infrastructure Coordinating Council (NICC). 1.3.4 Sub Segments- conclusion Immediate results of significant value can be achieved by unlocking Defence sector exports, and speedily implementing two already budgeted local build programmes, as well as beginning the process of designation for the localisation of at least four products which are made locally. There is potential for immediate value to be extracted from Commercial Aeronautics manufacturing, in some cases through cross sector industrial production (for example machined components), by fast tracking the commercial drone sub sector, and by intensive marketing efforts with the OEMs. A solid evidence base suggests that there is an excellent case for getting ready for growth to come from 2022 with the implementation of the CAV so that South Africa can continue to strengthen its position in international supply chains. International trends towards smaller aircraft suggest that a re-examination of a small regional aircraft option, and the support of a light reconnaissance aircraft, may provide viable catalytic programme interventions of national value.

33 The current case, developed in 2019, suggests a full payback of under six years (Sentech, 2019)


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The use of older aircraft while airlines navigate the current industry crisis, suggests that even in the short term, strengthening the South African position in terms of sub Saharan MRO is an immediate job creator and foreign revenue earner. Civil aeronautics manufacturing shows short term potential for job creation and transformation with the removal of administrative barriers and solid support for SMMEs and technical training across the board- including recreational and commercial drone manufacture, piloting and services. These should be located inside either the ORT Special Economic Zone (SEZ) using dormant facilities, or inside the TASEZ or CAV to provide an initial level of cost advantage while growing Finally, Space has already been allocated the essential budgets to implement a path of growth and development which will take South Africa firmly into the Space economy. Some regulatory and administrative barriers to short term growth remain however- such as the transfer of the Houwtek facility to the DSI/SANSA, and these are dealt with in the tables to follow. All of the sub segments in the A&D apex ecosystem must comply with international standards and accreditations, and all are highly dependent on advanced technology and manufacturing capability, as well as leading edge R &D in order to survive, sustain and remain competitive. A&D activities are also undoubtedly the drivers of a viable National System of Innovation (NSI). These high tech and advanced manufacturing activities are best described and viewed as constituting the leading ecosystem from which any Nation derives its industrial competitiveness, its ability to defend and protect and to ensure an effective system of innovation- leading to an ability to meet national socio economic goals. The analysis and realities of each sub segment, the challenges faced, and the regulatory environment in which local development and export excellence will thrive, are very different. However, all depend to a large extent on a working partnership between the South African State- which can enable the private sector by improving regulatory and/or administrative processes in the short term, and the private sector, which is well placed to identify, invest in and implement clearly viable opportunities. It is this partnership and commitment to South African socio-economic goals as outlined in the Masterplan, which will ensure growth for the nation. 1.3.5 Immediate opportunities- Defence Some anomalies exist in the current Defence procurement approach and system that should be addressed to avoid significant and unnecessary revenue and employment leakage from South Africa (refer annexure for Procurement process recommendations for change and see tables for recommended related programme). 34 1.3.5.1 Localisation From a localisation perspective, South Africa has invested over ZAR1 billion in the development of the technology blocks for products and sub-systems over the last ten years yet has procured items which can be produced locally from international suppliers. For example, South Africa has purchased critical items from overseas which arguably in some cases, could have been made locally. Where manufacturing capability does not exist, MRO work, which is labour intensive,

34 For example, The RFO that eventually goes out for open tender process should already impose restrictions on work packages set aside for local industry. This would ensure guaranteed participation by local industry on big programmes.


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can be localised. In the case of the South African Navy for example, frigate anti-ship missiles35 are currently sent to France for maintenance even though the MRO capability exists in South Africa. Such arrangements can be confirmed in the acquisition stage. The procurement process will require revision to ensure this leakage does not occur in the future. Small arms and ammunition, restocking of army ammunition, handheld radios, and turrets, represent some of the important and immediate manufacturing opportunities for localisation through designation. 1.3.5.2 Exports In terms of the Masterplan objectives related to exports, it is clear that – unlike commercial aeronautics and MRO, which have been highly constrained by the impact of COVID-19 on the global industry- and unlike Space, which is at the very beginning of its production life cycle- the Defence sub-segment of the industry can double high value exports within a 12 to 18-month period. The industry has the production capacity and the knowhow and has i) an order book valued at over ZAR20 billion in the pipeline and ii) potential to increase exports quickly of competitive products and service further at a value of ZAR45 within a 12 month period, with a further ZAR60 billion within 60 months. The overview table below36 provides an aggregate count of the value of exports achievable within 12 months, and the level of investment required. For 22 export ready products listed below, seven can be ready to export in six months or less. Projected revenues (conservatively) are in the order of ZAR3,6 billion within six months, and just over ZAR42 billion between seven and 60 months, with the majority in place by 25 to 30 months. A second overview table which follows, also shown below37 indicates the value of the backlog of orders confirmed, produced but still awaiting permission to export. This value is just over ZAR20 billion38 . The main barriers to achieving this export potential in short order and consequently the retention and expansion of jobs in the industry lie within the control of the State which has already begun to address these issues. First the current system of processing applications and decision-making regarding export permits and licenses is under resourced and not optimally structured for such processing and decision making. When compared to international best practice, in the UK for example, the South African system is not transparent and needs to be automated. In the UK system39, the number and nature of permits is reported monthly online, and the process or authorisation takes a maximum of six weeks in 98 percent of cases. Second, the time it is taking to resolve project capacitating and working capital at Denel (for existing projects which are budgeted) has resulted in a loss of advanced skills, the shelving of otherwise potentially profitable projects built on competitive strengths, and a perception of execution risk which increases the cost of finance and decreases propensity to invest. These challenges if addressed quickly on a programme/project level (as opposed to a corporate level) will assist in retaining essential advanced skills and could improve Denel liquidity.

35 Excocet 36Detailed table provided separately 37 Detailed table provided separately 38 Please request if required 39 https://www.gov.uk/government/collections/strategic-export-controls-licensing-data

https://www.gov.uk/government/collections/strategic-export-controls-licensing-data


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Table 8- Defence export pipeline in order of readiness

SYSTEM / PRODUCT

DESCRIPTION

EXPORT READY

(Y/N)

MONTHS TO

EXPORT

REQUIRED INVESTMENT

(RM)

POTENTIAL REVENUE

(RM)

COMMENT

Artillery Ammunition Y 1 0 500 One major local producer has become a supplier of choice for 155 mm and other munitions. This is an export market that will continue to expand.

Electronic Warfare Equipment

Y 6 0 1 500 Various systems.

Armoured Vehicles Y 6 0 900 Many other countries produce mine-protected vehicles, but SA has a reputational edge. Also, the Husky mine-detection vehicle is the best in the world today.

Optics and Optronics Y 6 0 450 Airborne sensors, laser rangefinders, submarine periscopes Optronic/Radar Tracker

Y 6 0 120 This tracker is being fitted to SA Navy vessels and has been exported.

Coastal/Air Border Surveillance Radar

Y 6 0 100 This radar is in service in South Africa and overseas, with good further export potential.

Command and Control Systems

Y 6 0 54

Submarine Periscope Simulator

Y 12 0 45 The periscope simulator is backed by two major local firms giving it good long-term export potential.


Y 24 0 4 500

Artillery Ammunition Y 24 0 4 000 Optics and Optronics Y 24 50 1 500 Armoured Vehicles Y 24 0 600 Command and Control Systems

Y 24 0 320

Artillery Ammunition Y 60 0 14 000 Armoured Vehicles Y 60 0 650


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SYSTEM / PRODUCT

DESCRIPTION

EXPORT READY

(Y/N)

MONTHS TO

EXPORT

REQUIRED INVESTMENT

(RM)

POTENTIAL REVENUE

(RM)

COMMENT

Navigation Radar Intercept Sensor

N 6 0 10 This is a low-cost naval intelligence system that enables a patrol vessel to identify and locate radar signals that, if not matched by a ship identification signal, indicate likely illegal activity. It is well suited to naval and coast guard forces.

Naval C2 System N 12 0 338 This is a generic system for use by navies and coast guards with the ability to integrate across the fleet and across services for better cooperation.

Naval Maritime Domain Awareness System

N 18 0 134 This system fits into the growing awareness of the need to monitor activity in maritime zones.

Ground Border Surveillance Radar

N 18 0 60 This is a lower-cost radar developed on the basis of experience with the radar in use in the Kruger Park. It lends itself to military and police use.

3D Air Space Surveillance/Air Defence Radar (Army & Navy)

N 32 0 825 This radar is being developed for both naval and ground forces applications, and both as a surveillance radar and as a missile guidance radar.

Hostile Fire Indicator (helicopter)

N 48 0 75 This system will become critical for helicopters as guerrillas and even criminal groups become better armed and will have good export potential.


N 60 0 12500

Source: Industry, 2020

As well as the list above, there are other options and competitive capabilities where South Africa is strong, and those opportunities are currently valued at ZAR100 billion, with a time frame to implementation of between 24 and 60 months. This is however dependent almost entirely on i) ensuring the relevant skills are available (currently Denel alone is reported to have lost over 300 highly skilled engineers) and the capacity to deliver exists and ii) that there is sufficient funding available domestically in the SDA (or via commercial


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funding) to permit for the most critical DoD projects to be implemented. Two are potentially ready for intervention if the capacity and funds to implement are identified and deployed. Table 9- Summary -backlog of export orders to be authorised4041

Region Types of permits Estimated Value ZAR Africa Contracting

TTW Import permits

430m

Middle East Multiple Export Export EUC Export extension Contracting TTW

1,9bn

Asia Import Export Extension authorisation Multiple Export TTW Contracting

258m

North America TTW TW Import

300,000

South America Extension authorisation TTW n/a Europe Import

Export DU Letter Contracting Dep Review TTW

2,3bn

Source: AMD, 2020

40 The data are as at end July 2020 and more licences may have been processed since that date 41 Does not include non-AMD members


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The Return on Investment (ROI) for the State (not taking into consideration the diffusion of competitive technology advancements into industry at large) in the development and production of Defence products and services is high, as original equipment sales are typically outweighed in value terms by a factor of 10x at minimum by related and linked products and services, as the table below indicates. Table 10- Selected South African product42 sales values

Product Development cost (ZAR millions)

Export sales (ZAR millions)

Rooivalk 8 98843

18 03844 (sub-systems)

Product A 300 7 200 Product B 373 4 145 Product C 700 4 200 Product D 114 2 250 Product E 250 1 500 Product F 100 1 000 Product G 13 943

Source: Industry, Heitman, 2020

The technology underpinning development and production has a major effect on any economy and can turn the creation of wealth from a dependency on traditional South African inputs like natural resources, land, or labour, and on increasing the efficiency of existing capabilities- to an innovation driven economy where the discovery and development of new ideas to solve old and forthcoming problems allows for the pervasion of competitiveness throughout the industrial base and in particular to other advanced manufacturing industries such as Aeronautics and Space. 1.3.6 Medium term opportunities 1.3.6.1 Commercial aeronautics and linked Commercial aeronautics in South Africa has export growth, job creation and transformation opportunities linked to manufacturing of aerostructures, components45, and MRO. The development of a transformative package where resources are crowded in around the stabilisation and consolidation of existing capacity, as well as the ability to attract OEMs and component suppliers, is a clear opportunity in this domain and is outlined in detail in the Masterplan tables- around the proposed CAV. Attention should be paid to re-investigating the potential for development of a smaller regional aircraft in the context of expanding African and regional air travel markets and improved State export marketing efforts. .

42 Details of the equipment can be provided on a confidential basis 43 2017 Rand; R 3 549 million in then-year Rand. Including the development of the Mokopa missile, manufacture of 12 production aircraft for the SA Air Force and initial spares and logistic support items. 44 In addition, some R 10 496 million of Defence Industrial Participation (DIP) work was made possible by the technologies, skills and processes developed in the course of the Rooivalk project. Both to the end of 2013, with additional revenues since then. 45 Includes complex components but also simple components such as gimbals, pop rivets, tooling, electrical wiring with both scale and export potential. Most are likely to cross value chain boundaries and be relevant across the ecosystem.


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1.3.6.2 Space For Space, the medium-term opportunities are clearly outlined in the Space Strategy as linked to the Space Infrastructure Hub also outlined in the tables to follow. 1.3.6.3 Commercialisation of Intellectual Property Portfolio An immediate review of the South African Intellectual Property (IP) portfolio, and a reconsideration of some elements of the Act to promote commercialisation and industrialisation, should begin in month one for completion in month 20. There is significant Defence Intellectual Property that is unused and there is very real and valuable international demand for the technologies linked to this intellectual property. These technologies include: i) air-to-air missile technology ii) UAVs, and iii) anti-material weapons but there are other, equally valuable technologies which, if the State partners effectively with the private sector, can be swiftly deployed to unlock value for South Africa. Currently, the Intellectual Property Rights from Publicly Financed Research and Development Act (Act No. 51), 2008 makes provision that intellectual property emanating from publicly financed research and development is identified, protected, utilised and commercialised for the benefit of the people of the Republic, whether it be for social, economic, military or any other benefit. In light of this, the DoD should make the IP lying within Denel and Armscor available to local companies that have the capability (technical, commercial and financial) to industrialise it for military and/or industrial dual-use applications within local and international markets. A study done by Armscor in 2016 showed that the then portfolio of IP was worth more than ZAR400 billion if industrialised. This could create at least 10,000 direct jobs, and 40,000 indirect jobs. 1.3.6.4 Optimise Offsets There is potential to optimise the offsets programme further. Offsets can require international OEMs to assist in building capable local companies that can participate in the international value chains of such OEMs. The Denel participation in Airbus A400 programme through their aerostructure business is an excellent example in that Airbus ensured Denel built fuselages for most countries that ordered the A400 aircrafts. There is also the possibility to set up an internationally reputable local OEM certification and accreditation skills hub in the CAV, funded by offsets obligations for a period of five years, focussing on building local capacity to undertake this work as well as to train local people (in particular black South Africans and female South Africans) to train others going forward. 1.3.6.5 Update and streamline Defence Procurement Process The South African Defence Procurement Process should be reviewed and updated to international best practise. DoD Supply Chain Management (SCM) process is not integrated and is far less effective and efficient than it could be, the ownership of the end-to-end processes is not clearly defined and therefore accountability cannot be effectively assigned. Service unique requirements are not adequately catered for. The processes are cumbersome and not supportive of SANDF operations and the Defence Industry (refer annex).


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1.3.6.6 Develop Sub Value Chains46 An examination of some of the more relevant sub value chains for South Africa, linked to domestic capacity and valuable R&D investigations already undertaken by industry and by research organisations such as the CSIR, has resulted in a short list of sub VCs which represent the currently viable opportunities for all three sub segments. This analysis provides a dimension of verification regarding South African capacity and options in the medium term to build new competitive capability and takes cognisance of where attention can be focused for intervention once the short term opportunities have been leveraged as noted above. The process of developing sub VCs for attention has been complex, as the potential in the A&D ecosystem is endless. An approach to modelling was taken which combined the inputs of the CAIDS (CSIR/DTIC, 2018) work on technology and supply chains, the views of industry leaders as to the sub Value Chains which, if prioritised, could generate returns in the short- medium term, and the development of a preliminary evaluative model47. This combination has led to the identification of sub VCs which can be catalysed for action and which can export successfully over time. It is envisaged that the industry stakeholders will continue to identify sub Value Chains with commercial and competitive potential for the South African industry on an ongoing basis, once more immediate opportunities have been accessed. The sub Value chains below have been selected and scored by the industry and Armscor on the basis of military relevance and importance and commercial importance (specifically on the dimension of export competitiveness). These categories contained sub scores indicated in the detailed model. Only those sub Value chains scoring above 44 have been included in this summary table, but there are another 12 sub VCs included in the model as worthy of development consideration for export. The model does not take job creation into consideration as an overarching criterion, thus MRO/AMO which has significant job creation and SMME creation opportunities, is not included, but is included in the Masterplan as having major potential in these two areas. The full list includes domestic capability in areas such as radar, which may for example, have very high scores in dual use potential, which has not been scored on this model.

46 Full model submitted separately 47 The model was developed by Armscor (Erasmus, 2020) and populated by Heitman, (2020) with quantitative inputs reported by industry.


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Table 11- A&D sub Value Chains, prioritised484950

Primary value chain

Sub value chain Sample applications

Military importance score (30 max)

Economic (export) Importance Score (30 max)

Total priority ranking

Defence electronics

Telecommunications Including cryptology; signal, communication, and electronic intelligence

29 28 57

Space Telecommunications Satellite

Defence and Civilian

28 28 56

Small satellite and systems design and manufacture

All remote sensing, navigation, communications missions

24 30 54

Small satellite and systems design and manufacture

All remote sensing, navigation, communications missions

24 30 54

Defence Aeronautics

Guided missiles Air to ground, air to air. Sovereign capability retention and capability expansion

26 28 54

Defence landwards

Weapons/Mortars Air to ground, ground to air

26 28 54

Artillery Defence 26 26 52

49 Refer annexures for scoring model, Detailed model submitted separately (Source; Armscor, Industry and CAIDS inputs) 50 Not all sub value Chains identified have been included in this table. Refer full model for detail


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Primary value chain





Drone aeronautics UAV surveillance and armed patrol (niches)

MALE surveillance UAV development Border security and maritime patrol (• Weapons carrying and all-weather capability Need for sophisticated data link, sensing and encryption

25 26 51

Commercial Aeronautics

Ground flight testing General 26 25 51

Defence landwards

Armoured vehicles; vehicle and turret upgrades

General 22 26 48

Armoured vehicles; vehicle and turret upgrades

General 22 26 48

Small arms and ammunition

General 26 22 48

Commercial Aeronautics

Design and Manufacture, significant Heavy flight testing and certification/ Heavy system engineering/ Concurrent engineering/Multi party collaboration

Unmanned or Optionally manned MALE UAV

26 21 47


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Primary value chain





(DOA & multiple POA)

Naval/Maritime Warship MRO & manufacturing

Hulls, Structures, Outfit and furnishings, Propulsion, Electrical plant, Auxiliary systems, HVAC, IPMS; Dry docks

28 16 44

Space Big data and associated

Acquisition, down streaming, and app development

23 21 44

Defence aeronautics

Ground support surveillance aircraft

Border security and maritime control/surveillance

23 21 44

Defence Electronics

Information Warfare Electronic Warfare (attack and protection) Network Warfare, Command & Control Warfare, Information Infrastructure Warfare, Information Based Warfare

25 19 44

Defence aeronautics

Fixed wing mission systems

Border security and maritime control/surveillance

22 21 43


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Primary value chain





Landwards Stabilised and non-stabilised manned and unmanned turrets; cannons; machine guns; Composite armour and advanced armour technologies; Mine-protection and qualification testing; de-mining technologies and products

General To be scored

Source; Erasmus, D., (Armscor), industry at large This approach was taken to ensure that the most export ready and commercially competitive sub Value Chains were identified in order to rapidly contribute to stabilising the industry and to retaining jobs and sustaining companies. It is recommended in the Masterplan as a cross cutting initiative that the model is fully developed, and that social impact score such as job retention and growth potential, as well as other valuable factors, are developed and scored and that the model is used as a guideline into the future in sub VC prioritisation for intervention, ranging from R&D to company rescue, and export support.


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2. Overview & Background Analysis51 Over the last 15 years, the A&D industry (State and private sector) has been working with continuously declining budgets (in real terms), clarity regarding the needs of the Defence industry for Defence equipment and special services, market support for government to government contracts, the removal of very real administrative barriers which not only affect the industry but which have had negative effects on specific State Owned Enterprises also, and some level of procurement predictability to the extent possible. In the absence of clarity, the industry has turned to export markets to ensure its survival and has successfully achieved market share in selected products and services to approved buyers. However, the COVID 19 impact on commercial and civil aeronautics, combined with the backlogs in licenses and permissions for exports of defence products, are eroding the ability of the industry to survive. At the same time, some of the most inhibiting barriers are the most straightforward to solve. These realities are well known, what has been less clear is how to mobilise the aerospace and defence industry (which encompasses significant State sovereign interests as well as private sector) in a way that supports the socio economic goals of the entrepreneurial and developmental State. While the Masterplan interventions are clearly outlined for immediate action over the planning and implementation period of 60 months, and are the focus of this report, there is a deeper issue which should be engaged in parallel by policy makers if the A&D ecosystem is to provide the advantages so urgently needed in South Africa today. This requires a complete review and overhaul of the purpose, establishment and national infrastructure within which these economic activities occur, and within which the National Innovation and R&D systems operate. Viewing the A&D industry as a set of single sectors, and/or industries, and/or value chains, is not useful in determining goals, value to society, or economic value to South Africa. Further, the complexity of the A&D system- effectively the apex ecosystem in an economy, is such that simple measures, models, and approaches do not suffice when used in isolation of each other. Instead, the A&D industry needs to be viewed as the lead ecosystem which is the only means by which South Africa can successfully transition the current interregnum from third wave industrial growth perspective, to the fourth wave (4IR).

51 Interventions outlined in Masterplan pillar tables


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Figure 3- The Apex Ecosystem

Without this Apex A&D ecosystem effectively organised around national socio-economic goals, South Africa cannot transition competently to the fourth wave (4IR) and will not be able to meet its socio- economic goals. Finally, the cul-de-sac that represents the wicked problems52 which set the end boundaries of the third wave (third industrial revolution) cannot be dealt with, using a simplistic industry/sector model and 3IR solutions. Climate change, eradication of inequality and environmental pollution cannot be dealt with effectively without leveraging the apex A&D ecosystem and its innovation capacity and technology. It is important that the A&D ecosystem is repurposed and reimagined for what is really is, and the contribution it can and must make to South Africa’s economic future, rather than being understood in the traditional mode of a military-industrial complex. Even in the short to medium term, the potential of this Apex ecosystem to provide competitive impetus to the broader South African industrial base is truly essential to growth and job creation, and significant in terms of the overall competitiveness of the nation. It will catalyse, if effectively organised and deployed as a system and not a sector, the entire economy. This means that South Africa can emerge from the current economic crisis whole, stronger, and more able to meet socio economic goals. Increasingly, the technology intensity of the industry is applicable to domains far wider than Defence alone. For these reasons, the overarching vision of the A&D ecosystem as defined by its participants, is as follows:

52 In planning and policy, a wicked problem is a problem that is difficult to solve as a result of: because of incomplete, contradictory, and changing requirements that are often difficult to recognize. and the interconnected nature of these problems with other problems.


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Figure 4- A&D- Apex Ecosystem Vision

The re-purposing and reimaging of the so called set of interconnected industries and sectors into a dynamic apex ecosystem which underpins South African growth and success into the future for the benefit of all its citizens, is the industry vision for the future. No longer embedded in the military paradigm it will still serve defence and protective needs, but equally importantly, the needs of sustaining and growing the South African industry base competitive position into the fourth industrial wave so that the quality of life and opportunity, based on the apex ecosystem advanced technology focus, is attainable. To give effect to an ecosystem, the way the industry and its sub segments are organised must change from the current fragmented silo approach which results in poor outcomes and a fundamental misunderstanding of the contribution that can be made. As a result, the institutionalisation of the ecosystem into an effective dynamic requires a new structure, similar to the Defence Advanced Research Projects Agency (DARPA) of the US, or the new UK ARPA, modelled on the DARPA,5354 structure. The Masterplan tables provide immediate pragmatic and achievable actions, implementable now, but the transition to a 21st century high technology and advanced manufacturing ecosystem should be attended to as a matter of urgency, and in parallel. In short, the current system is broken, not useful in the 21st century, unhelpful and results in serious wastage and poor implementation. The figure below provides a high-level overview of the structure believed to be optimal for the apex A&D ecosystem. South Africa needs an SA-ARPA. However, in the immediate term, the ecosystem requires urgent stabilisation if it is to be able to repurpose itself to provide optimum value to the State and the people. A&D can unequivocally increase its exports to the benefit of the fiscus and the economy in short order and at almost no cost to the State.

53 https://www.theguardian.com/uk-news/2020/mar/11/budget-2020-uk-800m-blue-skies-research-agency 54 Refer annexes

Repurposing Aerospace and Defence to improve South African lives- for generations to come

https://www.theguardian.com/uk-news/2020/mar/11/budget-2020-uk-800m-blue-skies-research-agency


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Figure 5-Institutionalisation of the eco system

Over time, it is in the national interest (Defence, Industrial Competitiveness and Trade) to ensure that the eco-system is well organised, well-funded (not only by the State) and effectively focussed on national goals. The development of an SA ARPA structure permits for the crowding in of funding and investment from all possible partners, including public and private sector, risk investors, and finance institutions along the continuum of risk. The executive management of the structure is shared and its direction established by a collaborative model including the private sector (beyond the boundaries of the simple sector approach) and will include investors in advanced technology, and partners with an appetite to be involved in the eco system, as well as traditional manufacturers and the State. All existing stakeholder and mandates fit easily into the model. The level of value add via this ecosystem is the highest in the economy, and its contribution to sustainable competitiveness is unmatched. However, there is urgent need for the development of a business-friendly relationship between government, the private sector and organised labour and the swift removal of unnecessary administrative barriers. This is what this Masterplan seeks to achieve. A summative overview of the underlying principles of this Masterplan is shown below. The Masterplan confirms the urgent need to stabilise the industry and to increase viable exports with immediate effect in the first stage, while the ecosystem institution is being built. The detailed tables in the final section show the actions to be undertaken to stabilise, repurpose and re organise the eco system for the future.


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Figure 6- Summative overview of the A & D ecosystem Masterplan

Stage one (0-18 months) will begin immediately and attempt to stabilise the industry with the swift and viable export and localisation programmes ready for immediate action- this is entirely dependent on i) removal of barriers to export by the State and ii) implementation of existing funded projects (two recommended) by Denel as well as iii) implementation of designation for small arms and ammunition. At the same time, the Space regulatory environment and the repositioning of Houwtek will be for immediate attention. The process of defining, designing and implementing the SA-ARPA structure begins. Stage two (0-36 months) begins in parallel, and will include the commercial and civil aeronautics strategies, as well as the building of SMME support, training, and MRO capabilities in South Africa. This relies on a combination of State and private sector action, and a crowding in of existing, sufficient and essential resources around the key mid-term projects as outlined in the tables. Sub VCs become a focus of attention for commercialisation of existing IP and diffusion into the general industrial economy. As part of Stage two, a review of the national defence procurement system is considered important and the finalisation of the SA-ARPA ecosystem structure and operations design is targeted. Stage three (0-60 month) sees SA- ARPA bedded down and running and the system is functional in its entirety. During the preceding time frame and stages, it is expected that new development will have adjusted various trajectories of action, and that any adjustment of prioritisation will have occurred at the EOC. 2.1 Aerospace and Defence The South African Aerospace and Defence economy has been declining in terms of production and sales for some considerable time – pre COVID -19- as a result of a number of factors. These include a major decline in the relevant Defence budget for equipment procurement, acquisitions, maintenance and more); significant administrative blockages; the impact of COVID-19 on commercial and civil air travel and related industries; and slow responses to changing external environmental conditions. Over the last two decades, the industry has seen steady erosion of local


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demand (via the Department of Defence (DoD)) in landward, maritime, Space and aviation demand and budgetary support. Since the strength and performance of any Aerospace and Defence industry has traditionally in large part been highly dependent on strong domestic support, this resulted in declining growth from domestic demand, and a refocus of the Defence section of the industry on exports in order to survive. The impact of COVID-19 on commercial aeronautics has been highly negative, and the industry is currently running at an average of 40 percent to 60 percent of capacity. These and other factors have also resulted in the need to restructure related State-Owned Enterprises (SOEs) such as Denel and South African Airways Technical (SAAT), inter alia. The Space section of A&D, however, is beginning to grow from a low base, but has the benefit of a long national heritage. Recently the announcement by the President of the implementation of a Space Infrastructure Hub has stimulated interest, and the side effects of COVID-19 lockdown has resulted in exponential increases in demand for Space based products, including communications, data (including interventions for the pandemic itself) and other critical elements of the National ecosystem. There is little likelihood of an A&D recovery in the short term (0 to 18 months) without deliberate intervention- most of which is not costly to the State. Most estimates suggest that commercial (and civil) aeronautics manufacturing and related such as MRO will not recover fully until approximately 2022, regardless of when passenger air travel is fully reinstated. South African order books have declined by over 80 percent in the short term. This has a negative knock on effect on linked industries manufacturing components and performing services and has resulted in a number of company closures. The Defence section is not affected in the same way or to the same extent, as globally, Defence budgets are typically confirmed and allocated at least two years in advance. Finally, Space based communications and data activities have seen almost exponential growth during COVID-19 and will continue to grow. The A&D ecosystem is characterised by the following: • It is the apex ecosystem in all industrial and 4IR economies, and the highest tech- it is the

source of all advanced technology and ultimately, industrial competitiveness of a nation; • The Defence related R&D undertaken maintains sovereignty, safety of the people and the

nations assets55 and provides the basis for commercialisable Intellectual Property and a competitive industrial base;

• It attracts the most advanced Science Technology Engineering and Mathematics (STEM) talent in South Africa which results in high levels of valuable intellectual property;

• It offers options for high levels of employment in Space data development, MRO for all equipment throughout the eco system and SMME development along a number of sub value chains;

• It offers meaningful transformation and job creation opportunities; • The State has very high leverage for localisation, market access, and R&D focus; • It is a significant source of demand for electronics and digital industries and implements major

value add for both; • It is SMME friendly in some areas such as MRO, civil aviation, pilot training (including drones)

and services and Space downstream and;

55 For example, protects South African Exclusive Economic Zone from fish poaching; provides surveillance for borders and similar


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• It can be practically and extensively leveraged by the State through procurement thus facilitating transformation and localisation.

2.2 Impact of Defence budgetary constraints The total Department of Defence (DoD) budget56 as a percentage of Gross Domestic Product (GDP) has seen a decline from 4.7 percent of GDP in 1989/1990 to just over 1 percent of GDP in 2019/2020. The budget amounts have increased almost fivefold, from ZAR9,937Bn in 1989/1990 to ZAR52,44B in 2019/2020- but the portion allocated to acquisition/procurement (and to R&D) has steadily declined. In 1989/1990, the Special Defence Account (SDA), which included R&D and acquisition, was ZAR5,816 B, and in 2019/2020 this had reduced (not adjusted for inflation) to ZAR5,4 Bn. The SDA for 2020/2021 is ZAR1,4Bn and there are no funds currently allocated to the SDA for the following year. It is uncertain how National Treasury envisages handling Defence acquisition funding without the SDA. A further issue arising from lack of spending on acquisition is linked to market reputation- typically, if the nation providing the Defence solution does not itself use that solution, buyers are uncomfortable and perceive a risk. From an industry perspective, turnover dropped from ZAR31.6 billion in 1989/90 to ZAR12,5 billion in 2019, employment dropped from some 130 000 employees in 3 000 companies in 1990 (nine percent of manufacturing employment and 10 percent of manufacturing companies), to some 12 500 employees in some 120 companies in 2019; and there has been loss of capabilities- some of which are strategic (NDIC, 2019) (AMD, 2020). The impact is felt not only on capital equipment but also procurement for replenishment of important stock and the critical funding of maintenance, repair, and overhaul (MRO). As MRO funding has been reduced less funds flow into the industry with commensurate job losses, erosion of skills and an adverse impact on serviceability of systems and equipment. 2.3 Impact of COVID 19 on Commercial Aeronautics, Defence, and Space Pre COVID-19, the industry was characterised by a combination of reducing Defence budgets; a disproportionate percentage increase in the share of personnel and linked costs, declining funds available for essential R&D and acquisition (as well as preventative maintenance), poor financial management and difficult working relationships between the State sector and the Private sector and R &D institutions- due to a break down in trust between the stakeholders. Inefficiencies in critical administrative procedures linked to export performance, a clear fragmentation of responsibilities and activities linked to the sector in the State (multiple departments and agencies, often working in silos and often underfunded) and a difficult external trading environment have exacerbated the situation to the point where today, the South African industry shows few signs of being a coherent industry, and can better be defined as a collection of firms occupying niches, albeit some very successfully. Post COVID 19, the industry position has worsened. The Defence budget seems likely to undergo more severe budget cuts as a result of weak State finances for the foreseeable future and the need to redetermine the future of dysfunctional State-Owned Enterprises (SOEs). This has a strong negative impact on firms with a focus on Defence needs, and where the South African National Defence Force (SANDF) and SOEs are their main customers. The commercial aeronautics sector

56 Sources: NDIC, 2020 via Head of Acquisitions. Values are nominal


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has seen its markets decimated as a result of the pandemic and the potential for the Original Equipment Manufacturers (OEMs) to redefine long global supply chains excluding some regions may make matters worse. The Space sector on the contrary, if well supported, may see new opportunities for growth, in terms of massively increased demand for communications capacity and navigation, surveillance and data products thus increasing demand for satellites, data related payload, and launch facilities for small satellites57. However, there is an urgent need for the creation and finalisation of a supportive regulatory environment through the legislative framework to enable this activity. This is more important now ever than before as current South African legislation is 27 years old and cannot cater for today’s needs. The finalisation of the regulatory framework additionally demonstrates the commitment of the State to comply with International Treaty obligations, thus attracting investment in the industry. 2.4 Impact on Trade (and related State revenues) Many firms in the sector chose to focus on exports as a consequence of declining local demand. For the companies focused on Defence products, this represents a major opportunity in a global market valued at over ZAR30 Trillion in 2019. However, stringent international and domestic administrative, certification and approval systems apply. Should they not be able to function in effective ways, this means limitations and loss of business for firms. At the same time, due to the steady erosion of local economic activity, many firms import between 50 and 100 percent of their needs, prior to adding value and re-exporting. While therefore there are significant barriers to growth to overcome, and not all areas of the industry can be rescued, there are very real, immediate and important opportunities for the industry in the short term, with the potential to at least double industry exports in the short to medium term, expand production in certain key areas, and in so doing, address South African socio economic goals. Impacts on commercial aeronautics are outside of the industry control but may provide some opportunities to enter Global Value Chains (GVCs). 2.5 Strengths & Opportunities Notwithstanding these factors, the basis for the Aerospace and Defence industry in South Africa remains strong- albeit largely in niches. The underpinning ability in process engineering is extremely strong and there is significant skill, expertise, and track record. There are a number of already successfully exported goods and services in A&D electronics, maritime, landwards and aeronautics which could permit for a very swift short-term turnaround to benefit the industry and South Africa, if unnecessary barriers are equally swiftly removed. One estimate58 suggests that over ZAR20 billion of opportunities have been lost over the last two years alone due to administration and decision system issues. South Africa, however, demonstrates real commercial strength in a number of sub value chains in the overall industry and has done for some time. Other capabilities are at a stage of development which, if resources are focussed and crowded in around priority and catalytic elements, will show results in the medium term (0-36 months), while yet others are at the early stages, and will mature over the longer term (0 -60 months). R&D is a clear strength.

57 The implementation of a Space Infrastructure Hub at a value of ZAR3,1 Billion has recently been announced by the Presidency 58 AMD, 2020


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While the data are not available for South Africa, research from other countries in the EU, Australia, and Canada59 suggests that the Aerospace and Defence industry demonstrates solid multiplier effects in its current form. The GDP multiplier (including induced effects) varies but estimates suggest that a one percentage point increase in the growth rate of Defence expenditure is associated with an approximate 2.67 percentage point increase in defence exports and a multiplier effect of roughly 28.7 jobs created for every €1 million investment. Of significant importance is the role of R&D where an investment of €1 million resulted in a defence multiplier including induced effects (and diffusion into the broader economy) of 111.36- relative to health for example- where an investment of €1 million resulted in 8.73. In South Africa, investment in the Rooivalk provides a useful indicator of the added value to the economy, as shown in the example below. Table 12- Rooivalk return on investment

Development & Production Cost

Revenues -exports of Subsystems

Revenues- Defence Industrial Participation

Jobs during the project

ZAR 8 999 million60

ZAR 18 038 million (to end 2013)

ZAR 10 496 million 1 500 engineers (plus, artisans, etc)

Source: Heitman, H., 2019 Advanced and relevant skills are available but are leaving South Africa at an ever-increasing rate due to lack of work opportunities, taking their personal intellectual capital with them. Nonetheless, South Africa still has a cohort of highly skilled people with advanced and hard to acquire skills, a long history of innovation and excellence in engineering and innovation and the ability to manufacture - there is a platform of capacity available which can be immediately deployed. Indeed, if it is not, the skills are likely to move out of the country to find employment (young people) or retire (older people). In many key areas we may already be at or beyond critical mass of those skills. It will be important to develop a formal mentorship programme for young, qualified professionals to learn from people soon to exit the industry to ensure the experience and expertise is not lost. There are viable additional opportunities ready to be actioned. The Space segment, drones, and big data are driven by market forces where COVID 19 interventions have effectively increased the volume and rate of demand for Space communications, and Space derived data. The Presidency has also announced a ZAR3 billion budget for the development of a national Space Infrastructure Hub. This, combined with the trend towards small satellites and South African legacy in manufacture, and the need for a continental small satellite launching facility, has resulted in real interest from investors in the Space value chain and thus may become a source of Foreign Direct Investment (FDI). At the same time, South Africa has the opportunity to ensure communications sovereignty, reduce or remove the digital divide and inequality of access to the digital world, and stimulate growth downstream in the areas of 4IR through investment in Satellite Communications (SatComs).

59 The Economic Case for Investing in Europe’s Defence Industries; study prepared by Europe Economics Ltd for the EDA. Figures rounded off as per the summary. 60 2017 Rand


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2.6 Immediate path For South Africa, this industry represents a very important opportunity to swiftly increase export earnings in the short term. Defence budgets for global markets across all product ranges have already been fixed for the next two years and COVID -19 impact is likely to be minor. There is the possibility of potential to almost double local procurement of a number of essential items with a swift overhaul of some procurement policy and practices, in stages one and two. The potential for import replacement is almost limitless, although meeting international standards is onerous. While the commercial aeronautics market is in severe distress and likely to remain so for some time, this provides an opportunity to reimagine the industry and improve and incentivize relationships with at least the lower tiers. New product development and entering new and fast-growing markets for UAVs, small satellites, and other similar areas, are well within South African capabilities and show real capacity for commercialisation and industrialization. South African abilities in MRO have the capacity to increase employment over time, increase SMME participation along most supply chains and increase the rate of transformation in the industry. The recent announcement that South African Airways (SAA) will be retained has important impact on industries such as MRO, and entities such as South African Airways Technical (SAAT)61 It is crucial for policy makers to have an understanding of the immense technical capabilities that exist in the industry, and to recognise the bigger role that such industry capability could and does play in economic growth and the attaining of South Africa socio-economic imperatives – without the A&D system the South African innovation and technology diffusion system and related opportunities to ensure broader industrial competitiveness, would not be possible. Defence products are largely dual use- the base technologies that are applied in Defence electronics for example, can be applied in many other industry sectors with little alteration needed (Zondi, 2020). Turning the A&D industry around will require bold and fast steps on the part of policy makers and industry stakeholders. These will include a reorganisation of the Defence establishment to optimize industry support, a consolidation of multiple State departments and agencies around a common vision and goals for the industry (crowding resources in around priority and catalytic actions) immediate and meaningful support for exporters, a true strengthening of marketing support, and an immediate focus on building long term relationships with OEMs and friendly States. The critical working relationship between the State and the private sector requires a restructuring to better promote viable commercialisation and ultimately, industrialisation of products to be diffused into the broader national industrial base. The industry is extremely complex and has many theoretical options for growth. However, in the short term, focussing on immediate returns through catalytic action on the part of all stakeholders will be of critical importance.

61 80 percent of all SAAT revenues are derived from SAA.


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3. Focus on the Masterplan The Masterplan is made up of specific actions linked to the overall model as shown below62.

62 Refer Masterplan tables for more detail, and implementation detail in Implementation Plan

Repurposing Aerospace and Defence to improve South African lives- for generations to come

Key objectives: Increase local production of selected products by 70% from current baseline levels by ZAR 2 billion by end 2024;

Improve export sales by 100% from ZAR6,5Bn to ZAR12 Bn by end 2023; Increase formal employment from 12,500 to 20,000 by end 2025;

Participation of black and/or women participants in industry employment will increase to 50% by end 2025. Participation of black and/or women owned SMMEs in ecosystem supply chains will increase to 30% of SMME supply by end 2023

PILLAR ONE: INCREASE MARKET ACCESS Programme one: increase exports of South African defence products from ZAR6,5 Bn to ZAR13 Bn by end 2023; Programme two: Implement Senior State supported government to government marketing programme for Defence and Aeronautics and linked products by mid-2021; Programme three: increase SDA budget in MTBF to cover essential maintenance and mid-term overhaul of all SANDF critical equipment. Programme four: Implement MRO cluster & hub inside ORT SEZ

PILLAR TWO: LOCALISATION Programme five: Replace imports where local manufacture is viable to achieve 100% local production by end 2022 to a value of minimum ZAR2 Billion; Programme six: Implement at least two confirmed home build programmes as identified beginning mid 2021; Programme seven: Space Infrastructure Hub Houwtek work stream implemented and RFI for national Telecommunications Satellite by mid-2021;

PILLAR THREE: INDUSTRY COMPETITIVENESS Programme eight: Immediately finalise the implementation of the Centurion Aerospace Village under the SEZ policy and launch construction work by mid-2021; Programme nine: Design and implement funding package (State and Private sector) to support the A&D ecosystem Programme ten: Review South African IP portfolio, State and Private sector with a view to revenue generation and local production options deriving from the portfolio. Review IPR to ensure optimum flexibility as required.

PILLAR FOUR: HUMAN CAPITAL DEVELOPMENT AND INCLUSION Programme eleven: Retention and Development of advanced skills, and job retention and growth in the overall A&D ecosystem Programme twelve: Increase local capacity via BASA and IPA

Programme thirteen - https://youtu.be/IcV4pgB5QY0: FULLY IMPLEMENT SA ARPA BY END 2025 TO SUPPORT NATIONAL VISION & GOALS


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The platform for the Masterplan implementation process is the Executive Oversight Committee (EOC) which focuses on unblocking, growth and performance measurement pertaining to implementation of the Masterplan strategies. The EOC also provides the leadership needed to take the Masterplan forward into the future as actions are implemented and new decisions are made. However, there are many State stakeholders, and it may be more useful to initially report into the EOC but ultimately, into the DARPA type structure reporting to the Presidency.

4. Detailed Masterplan tables The detail of the masterplan stages is outlined below in the tables which are organised by the pillars for action shown above. Pillars are shown, with goals, tasks, outcomes, and responsibilities. A number of these are directly linked to the commitments shown above. The A&D ecosystem is complex and ranges across many activities and thus a large number of government agencies and departments, as well as niche industry actors, are involved. The task teams should remain highly implementation focussed, but there is a risk of slow pace of action if they are too big. It is recommended that only the major stakeholders participate in the task teams, where their expertise is clearly needed. The decisions regarding the critical participants needed to unlock action can be taken by the main stakeholders at the first task team meeting, with the understanding that fast-tracked implementation is the focus of the work.


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Table 13- Pillar one: Market access

Programme Requirements Targets & Commitments Oversight & responsibility PILLAR ONE: INCREASE MARKET ACCESS

Programme one- Double exports of South African defence products Goal: Increase export earnings to ZAR13 Bn by the end of 2025 through optimisation of existing strengths and capacity, and support of viable new products to market. Task team 1- made up of the DCAC, Industry (AMD/CAMASA), Armscor (inter alia) to finalise design and implementation plan for viable online system; Determine international best practice for non-standard decision-making processes and final system implemented; DCAC/Industry/NCACC implement fast track decision process until revised system in place. Task team 2- CAMASA, DTIC, DPE, CSIR, SAAF, SACAA, ARMSCOR and private sector partners to determine final viability of i) light reconnaissance aircraft (under test) and ii) rejuvenation of the production of the small regional aircraft, given new Post Covid conditions. Task team 3- Industry, ARMSCOR, DoD, and NDIC, and industry experts, to review potential for existing short term export opportunities to a value of over ZAR25 billion in under 18 months for two opportunities only, and expedite (refer annex 5.5 for list) and include list of short term investment opportunities for export in executive summary in particular armoured vehicles.

• Immediately reduce current backlog through a process of fast tracking within DCAC and NCACC;

• Revise application, verification, review and export permissions procedures for all categories of export to international best practice63;

• Design improved system for submission and approval of strategic exports;

• Implement improved systems for strategic exports;

• Review business case for light reconnaissance aircraft and determine potential for crowded in support;

• Review business case for small regional aircraft and determine potential for PPP;

• Review list in annex 5.5 and develop action plan for implementation of short-term export opportunities.

• Finalise task team to report to EOC by end January 2021;

• Finalise design for approval by NCACC end April 2021 and submit for review;

• Implementation and testing end June 2021 and final launch end July 2021;

• Backlogs remain cleared- increase pace of current applications processing until revised system in place.

• Review decision making process for category A & B applications against international best practice and determine best fit for South Africa by end June 2021;

• Finalise review and way forward for light reconnaissance aircraft in national marketing and support plan by end February 2021;

• Finalise revised business case for small regional aircraft and PPP by end July 2021;

• Task team to finalise online system feedback to EOC by end February and end July 2021;

• Report on international best practice decision making processes for strategic exports to EOC by end February 2021’

• DACC and NCACC improved system implemented and debugged by end August 2021;

• Review of light reconnaissance aircraft for marketing and support tabled by end February 2021 and action determined;

• Review of small regional aircraft business case tabled by end August 2021 and way forward determined;

• Table export options short list action plan (annex 5.5) by end July 2021;

• Progress review and report to EOC by end October 2021.

63 https://www.gov.uk/government/collections/strategic-export-controls-licensing-data

https://www.gov.uk/government/collections/strategic-export-controls-licensing-data


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• Confirm export options short list from Annex 5.5 and complete action plan with roles and responsibilities by end June 2021;

Programme two- Government to Government Aerospace & Defence marketing programme designed and implemented. Goals: Increase export earnings to ZAR13 Bn by the end of 2025; Increase South African participation (manufacturing and exports) in global OEM Commercial Aeronautics supply chains by 30% off current base by end 2023; Position South Africa as the regional centre of excellence for MRO inside ORT SEZ; Position South Africa as the supplier of choice for commercial drone manufacture and piloting and armoured vehicles. Task team: AMD. CAMASA, CAASA led, supported by DTIC/DPE and including DIRCO, Denel, Armscor, SAAT, DBSD, and private sector stakeholders to design and confirm international marketing plan for Defence, Aeronautics, MRO and Commercial Drone contracts and finalise implementation plan and; Determine South Africa’s international marketing strategy and deploy Trade and DIRCO officials and senior politicians where needed to open up markets; ensure South African industry participation in international contracts; Clarify and obtain agreement on role of Head of State in finalising contracts of significant value.

• Develop system of information acquisition and dissemination regarding Defence and Aerospace major contracts available for bidding;

• Confirm priority focus list of local products, derived from current investment list as tabled above and project contract list as shown in annexures for action;

• Confirm responsibilities and briefing of foreign affairs trade personnel, DTIC and others, and ensure military attaches and trade attaches briefed on requirements;

• Set up and maintain core list of potential international defence and aeronautics OEM contracts in real time;

• Use trade relations to develop ongoing systemic processes for inclusion of South Africa in international contract calls;

• Focus on the existing core of successful products as

• Finalise task team to report to EOC by end January 2021 with sub work streams i) Defence ii) Aeronautics to OEMs iii) Commercial Drones and iv) MRO ORT SEZ hub; by end January 2021;

• Confirm focus priority list for export marketing by end March 2021;

• Develop government to government marketing framework by end March 2021;

• Develop briefing mechanism for attaches and trade representatives in relevant foreign states and ensure quarterly briefings, First briefing end June 2021;

• Review marketing activities and achievements against the real time list of opportunities quarterly and adapt as required;

• Crowd relevant State and private sector resources and programmes in around the identified export investment opportunities,

• Submit marketing and sales plan to EOC for review, with targets for each of the four focus areas, including trade agreements to be leveraged, by end April 2021;

• Submit real time contracts intelligence reporting system to EOC for review by end March 2021;

• Annual report to EOC of activities and outcomes in October annually;


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outlined in investment commitment list, commercial drones and MRO, for priority support64;

• Implement strong export support programme in target markets with immediate effect;

• Determine trade relationships for leverage including AfCFTA;

• Engage with the Presidency for top level government to government policy and practice brief for State to State contracts.

sub Value Chains and MRO/Drones opportunities, budgets and resources committed by end June 2021 -outlined by focus area (includes essential R&D);

• Initiate major marketing drive with marketing and action plans developed and implemented by, inter alia, Invest SA, Proudly SA, DTIC, AMD. CAMASA and CAASA by end August 2021.

Programme three- Increase budget for the Special Defence Account (SDA) for the time frame 2021-2015 inclusive and ensure alignment within the MTEF and the MTBPS. Critical MRO activities to be maintained for the SANDF, and midterm work to be undertaken on all critical equipment to ensure optimum national performance Goals: To provide i) funding for essential maintenance and upgrade and ii) funding for essential capital spend to ensure sovereign and strategic needs are met. Increase domestic market demand while simultaneously preserving essential Defence capability; using local Defence industry strengths and capacity; improving marketability of prioritised and focus products and opportunities and

• Immediate budget review for inclusion in next METF and MTBPS- to determine needs above current budget, to ensure national security critical requirements and optimum performance;

• State engages with Industry in the event the budget is appropriately increased around short listed investments to i) cater for the requirements as outlined in a new SDA and ii) at the same time, optimise exports of similar

• NT Task team to initiate SDA budget review to determine minimum critical requirements to maintain sovereign defence capability, and where possible at the same time to support the priority local production and export lists. First meeting by end February 2021;

• Task team to engage revised SDA budget discussions and come to final agreement with NT for the period 2022-2025 and ensure alignment with

• Task team provides action plan for NT engagement and discussions to EOC by end February 2021;

• Core list of short-listed investment options for negotiation between State and Private sector tabled to EOC by end June 2021;

• Denel provides execution risk mitigation strategy for EOC review end February 2021 to ensure existing contracts can move forward;

• Overall task team report to EOC end October 2021

64 Industry is already very successful in secure tactical communications, radar, electronic warfare, artillery and mortar ammunition and precision weapons for example and has genuine competitive capability in some few other areas of strong growth


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improving Denel liquidity and local industry stability in the short to medium term Task team: To include NT, DoD, Armscor, Denel, DPE, AMD, CAMASA, CAASA, DTIC to develop budget for critical priorities which serve multiple purposes as outlined above to provide sufficient budget for essential maintenance, upgrade and overhaul as well as to complete two focussed programmes until 2025.

or same (refer investment options list, and potential projects as per annexure);

• Denel addresses perceived project execution risk and provides strategy for same for projects identified as priorities for the SDA in the MTEF and MTBPS;

MTEF and MTBPS by end October 2021;

• Denel to engage with Armscor, DoD and Industry, to confirm execution risk mitigation strategy on existing contracts by end January 2021;

includes high level implementation plan of agreed actions.

Programme four: Implement African MRO Hub and Centre of Excellence inside ORT SEZ using existing structures Goal: Build on South African strength in MRO to revitalise SAAT and the local industry; develop inclusive Black and/or Women owned SMME programme of action and; attract extensive demand for South African based MRO inside the SEZ to support the cluster. Task team: including CAASA, CAMASA, AMD, DPE, SAAT, SAA, other airlines, SACAA, the DTIC SEZ unit and GGDA/ORTSEZ, to finalise arrangements to initiate the hub. Include The Innovation Hub Group or similar for linked digital training centre. DBSA to engage around funding to include township youth in the area as trainees.

• Formal agreement to develop and set up MRO cluster inside ORT SEZ;

• Confirm composition of cluster to include existing firms, training and development option; certification and accreditation option and digital learning options, inter alia;

• Confirm budget requirements and identify sources of funds to meet requirements;

• Complete regulatory and administrative tasks;

• Launch cluster with tenants;

• Link strongly to national marketing plan for South African MRO regional centre of excellence.

• Formal agreement by end March 2021;

• Composition of cluster confirmed end July 2021

• Full business plan including sources of funds and list of confirmed tenants by end November 2021;

• SACAA to finalise all regulatory processes and procedures, and remove any barriers to speedy administrative processing by end November 2021;

• Full implementation plan completed and agreed end November 2021;

• Implementation begins July 2021.

• Business plan and implementation plan tabled with EOC for review January 2022;

• Reporting on implementation progress against performance goals and targets quarterly beginning May 2022.


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Table 14- Pillar two: Localisation

Programme Requirements Targets & Commitments Oversight & responsibility PILLAR TWO: LOCALISATION

Programme five: Replace imports of selected products to achieve 100% local production by end 2022 (to a minimum value of ZAR3 Billion import replacement65) Goals: Ensure that all products and services which can be made locally and which are procured by the State, are locally produced and procured, beginning with quick wins and where possible, scaling to support exports at the same time. Task team: AMD, CAMASA, ARMSCOR, DTIC, SANSA and DPE to review current procurement processes and procedures to optimise localisation and to work closely on an ongoing basis to determine priority lists for ongoing localisation manufacturing options. Include major DTIC programmes such as Black Industrialist, and other relevant to ensure optimum Black investor participation, and DBSD to ensure black and/or women owned SMME participation and entry where viable.

• Review existing procurement processes for South African State security entities including SAP, SANDF, ARMSCOR, DENEL and all relevant SOEs and determine best procurement practice to support local manufacturing (refer annex 5.8);

• Immediately build the case for i) State procurement of and ii) local capacity to supply turrets, small arms and ammunition, transceivers, IP routers, and handheld radios and replace all army ammunition stores with local production;

• Consider designation of commercial drones at this developmental stage and review current tariff levels of protection (10-12% of Chinese drones) to ensure local production advantage;

• Consider support programme for local commercial drone production, including proof

• Procurement process review completed and recommendations for change made by end May 2021;

• Designation process initiated for priority products, turrets, handheld radios, and small arms and ammunition by end May 2021;

• Decision regarding i) designation of locally produced commercial drones and ii) increase in tariff protection against very low-cost imports by end September 2021;

• Private sector and the State to implement discussions on investment needed and means to fund, expansion as per the expansion list outlined above where required, by end October 2021;

• New procurement system confirmed and approved by end January 2022;

• Industry (inc SOEs) commitments to increasing black and/or women

• Task team to report to EOC on procurement process recommendations for action, and procedure and timeline to take it forward, by end June 2021;

• DTIC to provide action plan with rationale and timeline for designation to EOC by end June 2021;

• Investments agreed and reported to EOC by end October 2021;

• Report on black and women owned participation targets and performance to EOC quarterly;

• Implementation progress on all issues reported to EOC quarterly.

65 Current imports of handheld radios alone are valued by industry at ZAR2Billion per annum


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of concept, prototypes, and market validations, including the funding of a market feasibility study;

• Initiate designation process – 100% where possible- for the products outlined above and others identified in the process;

• Determine investment needed and potential to scale for export as well as local production in the identified products and begin engagements for such investment;

• Determine required R&D to improve manufacturing process and engage existing programmes around improvements;

participation in supply chains confirmed.

Programme six: Implement at least two confirmed home build programmes as identified beginning mid 2021; Goals: Increase local build activities in the short term to stabilise the local industry; improve Denel liquidity and ensure strategic supplies to SANDF; and provide proof of product where possible. Task team: ARMSCOR led, DENEL, AMD, CAMASA and DoD to finalise action plan to implement A-Darter and Badger (or similar where budget is already available); address execution risk elements and work with local industry to implement, Build dynamic list for attention which may include A440 wing fuselage fairing; R55 tail plain; Cargo guide vehicle restraint system and others

• Confirm implementation programme, plan and timing of two home build programmes;

• Determine risk profile and mitigate;

• Review working capital requirements and investigate private sector funding and other resource inputs;

• Prepare final implementation plan

• Confirm two programmes with existing budgets suitable for local build implementation by end May 2021 (considering the A Darter and Badger inter alia);

• Determine programmes to be implemented, and prepare implementation programmes with due reference to risk and working capital requirements, sources of funds and execution risk elements by end August 2021;

• Task team to report in stages to EOC


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• Prepare final implementation plan with agreement to execute by end October 2021;

• Begin execution latest January 2022 if execution agreed.

Programme seven: Implement catalytic Space programmes, specifically Houwtek upgrade and National Telecommunications Satellite procurement process; Goals: Begin to upgrade Houwtek site as approved and budgeted (ZAR75 million) and confirm Space sector investor requirements and commitments; Begin the process of implementing the National Telecommunications Satellite (SatCom) procurement process. Task team 1- DPE, Denel, DSI, SANSA to finalise Houwtek transfer agreement and ensure successful handover; SANSA to finalise Houwtek implementation plan. Task team 2- Sentech, DTPS, NIF and NICC, with inputs from CAMASA and major private sector stakeholders, to review the business case for the procurement of a sovereign South African SatCom and to issue RFI to begin the process.

• Complete transfer of Houwtek site to SANSA/DSI from Denel;

• Initiate Houwtek upgrade; • Brief NIF/NICC on

SatCom business case; • Prepare RFI for SatCom; • Release RFI for SatCom.

• Transfer of Houwtek ownership agreed by end February 2021;

• Transfer of Houwtek ownership implemented by end May 2021;

• Houwtek upgrade implementation programme begins June 2021;

• NICC and NIF briefing completed end April 2021;

• Process to issue RFI (if approved) to begin May 2021;

• RFI issued July 2021; • RFIs analysed and short

list developed end November 2021;

• Next steps determined by Sentech/DTPC and NIF/NICC by end February 2022.

• Houwtek transfer confirmed to EOC when complete;

• RFI process confirmed to EOC when complete;

• Further actions to be undertaken by relevant parties, SANSA and Sentech reporting to their respective principals.


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Table 15- Pillar three- Increase Industry Competitiveness

Programme Requirements Targets & Commitments Oversight & responsibility PILLAR THREE: INCREASE INDUSTRY COMPETITIVENESS

Programme eight- Implement the Centurion Aerospace Village Goals- Increase competitiveness of the local commercial aerospace manufacturing industry; initiate and fast track a South African commercial drone development and commercialisation programme; crowd in fragmented resources around key catalytic programmes and goals; provide additional layers of competitive advantage for the local industry and increase local industry aeronautics industry participation in OEM supply chains. Task team: Led by CAMASA and Industry, supported by the State. Includes DTIC, Invest SA, AISI, SACAA, TETA and merSETA , TIA, as well as The Innovation Hub Group, and including DBSA, IDC and possibly PIC, with the objective of finalising the planning and implementation of the CAV by end 2023. Include GEDA, GGDA, City of Tshwane, DBSD, other relevant stakeholders with a clear focus on implementation;

• Finalise township proclamation issues;

• CAV is brought in under the TASEZ banner and incorporated into the existing SEZ;

• GGDA and City of Tshwane, as well as DTIC SEZ programme to ensure planning alignment with CAV project;

• Design the CAV with component parts including (but not limited to): SMME support centre; Commercial Drone Accelerator Hub;

• International accreditations and certifications centre, (supported by offsets commitments to certify and to train local people); entrepreneurial support centre; Surface treatment facilities; components facilities including cross sector components such as machined parts; wing components; Special focus on third party approvals and internationally accepted quality;

• Initiate reinvigorated partnerships between OEMs and South Africa;

• DPW to issue POA to conveyancer to complete transfer by end January 2021;

• Task team to finalise CAV design and participation plan by end May 2021;

• Task team to finalise business plan for the CAV by end October 2021;

• DTIC SEZ to complete necessary work to integrate CAV with TASEZ by end November 2021;

• DTIC incentives to consider setting up of an Aerospace incentive scheme for inward investors with the same functionality as the APDP and report to task team by end August 2021;

• BASA, SACAA, FAA/EASA resolution by end June 2021;

• SACAA final regulatory framework and related systems for RPAS/UAS drone design, manufacturing, utilisation, training, certification and operations concluded by end March 2021;

• EACP participation – Global Aerospace Cluster

• Task team to provide EOC with inputs in real time on any blockages which cannot be resolved;

• Task team to provide final agreed business plan and budgets for the CAV by end November 2021, including private and public sector commitments, letters of intent and committed investment;

• Goals and targets for SMME participation in supply chains set, and monitored;

• Goals and targets set for Black Owned Industrialist participation set and monitored;

• CAV implementation against performance targets to be reported quarterly to EOC.


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• Ensure regulatory environment effectiveness;

• Provide solid incentive package- composed of a portfolio of existing incentives based on SEZ status via TASEZ;

• Linkages to ORT aerotropolis and MRO cluster;

• Collaboration across the spectrum of advanced manufacturing capacity in Gauteng including GACP – Automotive, Capital Equipment Transport and Space Hub.

• Linkages to tertiary institutions and skills development supply side in Gauteng including Intsimbi and NTIC;

• Appropriate digital and ICT hub facilities for advanced manufacture as well as training and skills upliftment related to advanced manufacturing and digital design, as well as AI and Machine learning, inter alia;

• Reengineering of existing constructive programmes such as AISI, JASC and NAC to support the CAV ecosystem;

• Initiate working relationship with the EOC

Program (GACP) to be initiated and membership finalized by end March 2021;

• SACAA will complete its shift to electronic and online application processing by end November 2021;

• Private sector and Government to have begun reinvigorated engagement with international OEMs by end May 2021;

• All skills supply entities to have finalised commitments by end November 2021;

• Schedule of engagements with ICT/Digital Masterplan task teams competed by end March 2021;

• Digital and ICT hub funding and implementation plan achieved by July 2021;

• Attract at least two OEMs (and components suppliers) to South Africa by means of extremely attractive investment and synergy package, by mid-2022;


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for the Digital/ICT Task team and engage regularly;

• Development of a funding mechanism including a number of tools, to permit for i) SMME support ii) Set up of OEM approved certification and accreditation facilities iii) incentives for local manufacture of selected products with particular reference to transformation targets and iv) package incentives for investors.

Programme nine- Implement funding and finance support mechanisms for the industry as per international best practice. Goal: Ensure that export sales and local production expansions have relevant funding and financing mechanisms available to support growth. Includes consideration of: • Export Credit insurance/EXIM

Bank/International Guarantees as an urgent option for those products and services allowable in terms of international treaties;

• The IDC’s investment policies and strategies for the industry should now be aligned with the requirements of the A&D Master Plan to the extent legally possible. The investment view must take into account the needs of the sector and sub-sectors, as well as those of individual companies and investors. The focus should be on products and services identified as priorities and on ensuring the viability and

• Banking support for the industry in the provision of working capital and trade finance solutions;

• Access to a guarantee system in order to meet international customer requirements for first class bank guarantees related to both Performance Bonds, Advanced Payment guarantees and Construction bonds;

• Government risk underwriting ensuring that the relevant fees are kept at a minimum;

• Consider EXIM bank option;

• Consider integration of the Armscor ProActive DIP credit mechanism;

• Report on portfolio of proposed funding and financial mechanisms to support the ecosystem tabled to the EOC by June 2021;

• Report on risk management mechanisms and related systems and participation tabled to the EOC by June 2021;

• EOC makes recommendations for action and implementation by September 2021;

• Implementation set in motion by January 2022.

• Portfolio of supported mechanisms confirmed by EOC;

• Implementation team reports to EOC by task team at each meeting with a target for overall completion (staged implementation beginning with guarantee system) end 2022.


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competitiveness of the aeronautics industry and allowable defence products;

• The PIC requested to develop and make available a blended fund option or some such investment funding mechanism for advanced technology investment in applied research as well as manufacturing production expansion- this will include small satellite production, aeronautics production, and allowable Defence projects manufacturing expansion;

• For Defence products not allowable, consider a fund similar to the European Defence Fund, adapted for South Africa. Priorities are cutting edge technologies. Objectives are to i) strengthen essential military capabilities, and ii) contribute to job growth by supporting the competitiveness of the sector and the dissemination of adapted technology to the industrial base.

Task team – Led by international finance experts appointed by the Presidency, includes industry, PIC, IDC and other DFIs, possibly including BRICS banks and other similar, Commercial Bank association and DTIC, will engage around improved financing, guarantees and funding options as relevant for the industry.

• Develop international best practice funding and risk management mechanisms for all three industry segments.

Programme ten: Review South African State and Private Sector IP Portfolio with a view to commercialisation and revenue generation Goal: Valorise South African IP portfolio to generate commercial, industrial and licensing opportunities, as well as dual use options. Task team: Led by AMD and ARMSCOR, with the support of DoD, CAMASA, TIA, the HSRC, NDIC,

• Review existing State and private sector IP portfolio and categorise available IP in terms of commercialisation, licensing, industrialisation, dual use and licensing potential.

• Short list IP ready for transformation into value

• Appropriate permissions made available by DoD, Armscor and private sector IP owners, for the team to review the portfolio by end February 2021;

• Task team develops categorised and reality checked shortlist using industry expertise as

Table report, shortlist, business and investment plans to EOC February 2022; Report quarterly on progress to EOC against stated goals and targets; Table specific gender policy and strategy and action plan for all projects to EOC.


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SARIMA66, NIPMO and the CSIR, develop a viable commercialisable portfolio of IP, for the benefit of South African Defence, the A &D ecosystem and South African industry at large. Strong consultation with fund and investment management of DFIs.

generation with rationale and estimated outcomes;

• Review IPR elements that are counterproductive to commercialisation of IP and/or create barriers for SMME participation;

• Obtain all essential permission from State and Private sector IP owners;

• Develop partnerships for value creation and funding, and business plans for implementation of short-listed items between 2021 and 2025;

• Finalise all legal arrangements.

benchmark by end July 2021;

• Business and investment/funding commitments and plans developed for quick win options by end October 2021;

• Ensure explicit Gender Policy and Strategy for women research and scientist inclusion in all short-listed options;

• Implementation plan for quick wins finalised end January 2022;

• Legal contracts concluded and approvals granted for plans end March 2022;

66 SARIMA- South African Research and Innovation Management Association


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Table 16- Pillar four: Human capital development & inclusion

Programme Requirements Targets & Commitments Oversight & responsibility PILLAR FOUR: HUMAN CAPITAL DEVELOPMENT & INCLUSION

Programme eleven- Retention and Development of advanced skills, and job retention and growth in the overall A&D ecosystem Goals: Retain existing jobs in the short term, and existing advanced skills. Focus on job creating sub value chains for all types of skills levels relevant to the industry. Increase participation of SMMEs in local supply chains; Task team led by DSI and SANSA, with organised and other labour representatives, industry representatives and the CSIR, DBSD, Drone organisations and the DHT, to develop a retention strategy for jobs and skills, as well as a growth strategy for jobs and skills in South Africa.

• Advanced skills redeployed in the A& D apex ecosystem in South Africa to ensure retention;

• MRO value chain removes barriers to growth and increases sales and jobs for SMMEs and individuals;

• Confirm skills required for Earth Observation and Big Data applications downstream and design curriculum framework in TVET and similar;

• Confirm skills supply chain and demand profiles;

• Ensure firm linkage with ICT and Digital Masterplan to ensure effective integration of STEM and Digital skills;

• Develop strategy for Advanced skills deployment in STEM and Digital/Cyber/4IR and ICT by end August 2021;

• Task team to review job creation potential and barriers in MRO/AMO and drone sub Value Chains, and develop focussed job retention and skill upgrade strategies, as well as SMME entry strategies, with CAASA, CAMASA , SAAT and the SACAA by end May 2021;

• Confirm advanced skills requirements with the DHE and confirm skills supply chain by end October 2021;

• Design mentorship programme in SOEs and large firms, to ensure transition of young black and/or women professionals into middle and senior management ranks prior to the imminent departure of existing older and senior management by end August 2021;

• Drone industry standards for training and testing are finalised by SACAA and training begins for SMMEs

• DHET, labour organisations, Industry to agree on systemic retention and job growth strategies suitable for the sub Value Chains and in the context of growth over time and present implementation plan to EOC in February 2022;

• Feedback to EOC on strategies and take implementation forward at the company level, and with the DHET on the supply side;

• Report on deliverables quarterly to EOC.


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Programme Requirements Targets & Commitments Oversight & responsibility PILLAR FOUR: HUMAN CAPITAL DEVELOPMENT & INCLUSION

and job seekers, especially the youth using the Drone accelerator programme by end January 2022;

Programme twelve – Increase local capacity via BASA and IPA Goal- increase domestic capacity, earnings, and jobs by expanding local capacity in this regard, Process takes between 2 and 6 years to complete- requires extensive documentation as well as diplomatic agreement. Task team led by CAASA and CAMASA and the SACAA, possibly including the NIPP, complete bilaterals with USA/ FAA and European Union/EASA. Working with DTIC and industry, develop list of firms willing to participate and finalise implementation procedure for airworthiness (IPA) and begin application processes with interested firms.

• Industry, DTIC, SACAA, Invest SA and other relevant to confirm agreements to proceed;

• If no local firm agreement, investigate potential for international/regional firms to locate in SA in CAV or SEZ, with interest in proceeding;

• Finalise list of participants; • Implement process.

• Determine local firm appetite, or international firm appetite to enter local market by end May 2021;

• For interested firms, DTIC to arrange funding for the purposes of certifying selected Annex 8 products while Industry confirms investment in the production capacity required by end July 2021;

• Applicants begin process with support of regulator and DTIC and other relevant parties by end September 2021.

• SACAA and Industry to oversee process;

• Go/no go decision end August 2021 based on interest from applicants.


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Table 17- Designing and implementing the new organisation of the A & D ecosystem

Programme Requirements Targets & Commitments Oversight & responsibility CROSS CUTTING ISSUES FOR ACTION

Programme thirteen -Design and implement SA -ARPA. https://youtu.be/IcV4pgB5QY0 Goal: To upgrade, organise and partner in collaboration between State and the Private Sector for the optimum use of the A & D apex ecosystem for the benefit of all South Africans; In so doing to maximise R&D spend on advanced technology work through optimum management of funding and skills resources; to significantly improve focus for R&D in the national interest; to ensure that the pathways from R&D to commercialisation and ultimately, industrialisation, are clear, unencumbered and effective for the benefit of the national economy. Task Team: The team will investigate the DARPA and UK ARPA models with a view to adaptation for, and implementation in, South Africa.

• Task team appointed by the Presidency; TOR set, mandate approved, and budget and other resources allocated. PPGI and the Presidency might jointly supervise task team;

• Presidency begins consideration of a National Advanced Technology Fund (similar to the NIF) and a National Advanced Technology Coordinating Council, under which SA ARPA will eventually functions;

• A succinct and pragmatic report on the potential, process, timing and high-level action plan to implement AA ARPA is prepared and submitted for consultation and ultimately, approval;

• SA ARPA implementation begins- includes legislative and regulatory changes; mandate alignment changes et al.

• Briefing to Presidency on DARPA and SA ARPA rationale and expected outcome by end March 2021;

• Approval/no approval to proceed with quick review report by end April 2021;

• If approved, resources allocated, and investigation begins by end May 2021;

• Report developed (and full consultation with stakeholders concluded) by end November 2021;

• Report considered and adopted/not adopted by end February 2020;

• Implementation plans developed a drawn up by end May 2022

• Implementation begins, end July 2022

EOC Other to be determined.

https://youtu.be/IcV4pgB5QY0


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ANNEXURES


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5. Annexures 5.1 Assessment matrix for sub VC selection67 (example only)

The matrix for sub Value Chain selection was developed and populated with inputs from industry overall. The detailed sub value chain list has been shown in the executive summary above. Over time, the same matrix can be used to assess further potential sub Value Chains for focussed attention.

67 Source: Erasmus, D. Armscor, 2020.


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5.2 Additional possible export short-term revenue generation overview68 There are several pending export opportunities that could begin to generate revenues within 18 months. 5.2.1 Oman- Major contract for upgrading existing G6s, supplying additional G6s and establishing a local maintenance and training facility. Total value ZAR18 000 million. 18 to 30 months. 5.2.2 Pakistan - Half of the Pakistan Army’s requirement for truck-mounted guns has gone to Norinco (China) but the remaining half is still potentially available for Denel, given government to government intervention. This would be worth some ZAR7 000 million, with the first revenue flowing within 18 months. 5.2.3 United Arab Emirates. There is ammunition to the value of ZAR500 million in store at RDM, waiting to be shipped, which has been held up for the better part of two years by difficulties and inaction at the NCACC level. There are signed ammunition contracts for RDM ammunition worth some ZAR4 000 million that would be signed immediately on the pending permits being issued. There is a longer-term order pipeline of ZAR14 000 million pending. 5.2.4 Denel Land Systems: Upgrade of existing G6 fleet; worth some ZAR3 500 million with first revenue flow within 18 months of commencement. Trials of T5 with a possible initial order worth ZAR800 million. New Technology Weapon (anti-materiel rifle): Initial quantity worth some ZAR700 million with revenue flowing within 12 months. Full requirement is worth some ZAR3 500 million. 5.2.5 Denel Vehicle Systems- Signed contract for 30 RG31 mine-protected vehicles for R 300 million, with possible follow on order for another 70 vehicles. 5.2.6 Brazil -Brazil has contracted a local firm to carry out integration of the Denel Dynamics A-Darter air-to-air missile on the Gripen E fighters being acquired for their air force. Contract value unknown.

68 Overview selection. More opportunities exist but are not tabled here.


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5.3 Defence Industry Stabilisation There are several projects that would contribute in important ways to ensuring the stabilisation and survival of the industry. 5.3.1 Badger (Project Hoefyster): This meets a major requirement for the Army to ensure its ability to counter potential threats in the medium term, including the well-armed ‘technicals’ increasingly used by irregular forces. The project has been delayed by defence budget cuts; the delay having resulted in some subsystems having become obsolescent and no longer being available; and the collapse of VR Laser. The Badger remains the cheapest proper infantry combat vehicle in the world, and its unit cost in US Dollar terms has decreased since contract signing. Production of the section variant of the Badger using components on hand could begin immediately at low cost with the production of other variants to follow as their development is completed and funding is available. This would allow the Army to equip two battalions with Badger section vehicles (retaining the Ratel in other roles) and ensure the survival of Denel Land Systems and Denel Vehicle Systems.

The cost of acquiring 150 Badger-30 section vehicles would be approximately ZAR6 300 million over five to six years. This would give the Army a very effective infantry combat vehicle for the next two to three decades at a unit cost of US$ 2.4 million, which is less than any imported vehicle, and less than some simple armoured personnel carriers (e.g. Colombia paid $ 2.65 million for the less capable LAV and Australia is paying US$11.2 million for the similarly capable Boxer).

5.3.2 Rooivalk Mk 2: The Rooivalk attack helicopter has proved itself to be extremely effective in the course of operations in the DRC. But these aircraft lack a precision weapon (the Mokopa missile was designed for them but the SAAF has lacked the funds to purchase any) and are now in need of an upgrade. A pilot project is in hand at Denel Aeronautics that involves replacing old electronics and the main sight (with a sight available locally that will greatly enhance combat capability). The full upgrade can be carried out using almost only local items, as can the provision of precision engagement capability (Mokopa and with the new sight also Ingwe). The cost of upgrading the present 11 aircraft in service and repairing the one damaged aircraft and upgrading it, will be approximately ZAR4 billion. Logically and practically the Rooivalk upgrade would link to the development of an Oryx Mk2 to replace the present Oryx fleet, as there is no other medium helicopter with the ‘hot and high’ performance of the Oryx. There have been some expressions of interest for the upgraded Rooivalk. The production of additional aircraft would involve mainly local companies, although the engines and gearbox would be imported.

5.3.3 Ratel Modernisation, Upgrade and Conversion: Regardless of Project Hoefyster, the Ratel will be in service for at least the next 15 years. There is a case to be made for refurbishing, modernising and upgrading (e.g. night capability) sufficient Ratels for at least one mechanised infantry battalion, and for converting other Ratels to replace the older armoured personnel carriers (Casspir), thereby reducing the new vehicle requirement by several hundred.

5.3.4 Project Sapula: This covers the acquisition of a new family of armoured personnel carriers to replace the Casspir and Mamba. The concept – correctly – is to base these vehicles on the drive lines of the future truck family. The manufacture of the vehicles would otherwise be entirely local,


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and the requirement is sufficiently large (at least 1 000 to begin with) to allow spreading of this work over several companies, especially if carried out in parallel with Project Vistula.

5.3.5 Samil Replacement (previously Project Vistula): The SANDF needs to begin replacement of its fleet of Samil trucks, most of which date from the mid-70s to the mid-80s. The concept of developing a truck family in South Africa is neither practical nor affordable, but following the original Samil model would be both: Select suitable trucks, adapt them to meet SANDF requirements and assemble them in South Africa, using imported engines and transmissions and locally designed and built bodies. Much of this work could be spread across elements of the motor industry as well as the defence industry. This is a long- term option. 5.3.6 Umkhonto: The Umkhonto surface-to-air missile has proved very successful and is in service with the navies of Finland and Algeria as well as with the SAN. It was also selected by Sweden, although funding constraints there stalled the project, and by Egypt (which contract was lost by the failure of Denel to obtain a bank guarantee in time). Further development of a longer-range radar guided version would considerably expand the market for this missile, as would finalising the development of the ground-launched version and bringing it into SA Army service.

5.3.7 LEO: Denel Land Systems has a long-range 105 mm gun in development that is estimated to have considerable export potential. It exists in towed and turreted form and would probably require some ZAR 700 million to bring to production standard in both variants. This could be done over a period of three years.

5.3.8 Project Marlin: This is the project to develop a beyond-visual-range air-to-air missile and is quite far advanced. Taken to production level, this would make South Africa one of fewer than half a dozen countries able to produce such a missile, allowing other countries to acquire it rather than be forced to depend on one or another of the major powers. Completing development of this missile would require some ZAR 4 000 million over five years, which is extremely low compared to the development cost in other countries, suggesting that this missile would generate a very useful return on investment, in addition to giving South Africa additional strategic independence.

5.3.9 C-RAM: This is a Counter-Rocket, Artillery and Mortar protection system for bases and ships, and its development to production level would make South Africa one of three or four countries with this capability. It comprises the Cheetah Mach 3 __ km missile, which also has potential in the general surface-to-air role and as an air-to-air weapon for helicopters, and the Mongoose 3 close range missile that also has potential as a self-protection system for helicopters. The system is inherently flexible, using industry standard dimension containers and being linked to any air defence radar used by the forces being protected. Completing development of this system would require approximately ZAR 3 000 million over six years. 5.3.10 FISM and IMPI: FISM is a light ‘future infantry support missile’ that allows an individual soldier to engage a target with precision; IMPI is a small, guided missile for use by UAVs or light aircraft. Each would require some ZAR450 million to bring to production standard, which could be done within four years.


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5.3.11 Shipbuilding: There is potential for a 30-year shipbuilding programme spread over two shipyards. Added to that would be smaller yards to build service craft and the like and the companies that would provide auxiliary machinery, electrical systems, electronics, interior fittings, fire-fighting systems etc. The programme could be continuous because by the time the last new ship is delivered, the first ship built would be due for replacement. This is a model that has been selected by Australia and Canada and, in somewhat different form, the United Kingdom, and by countries such as Japan on a large scale. Adopting and committing to such a shipbuilding programme would also enable the industry to take on other work at competitive pricing because it would have the infrastructure and the baseline workload. There would also be a real possibility of building and fitting out patrol vessels and other vessels for other African navies.


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5.4 Aerospace and Defence- selected economic multiplier effects

Table 18-Aerospace and Defence Economic Multiplier Effects

Country Findings Source/s Australia Australia’s participation in

the United States’ F-35 fighter programme will result in the economy being some A$ 1 026 million larger by 2023 and will have generated some 5 000 sustainable new jobs by 2023 and some 6 300 by 2038.

PwC

New Zealand 5-year, ten-ship (two for New Zealand), A$ 5.6 billion ANZAC frigate programme using input-output modelling found that the project economic benefits could have “generated up to A$ 10 900 million in national output” and “supported up to 57 000 full-time equivalent jobs”. Using general equilibrium analysis, the project could have contributed “at least A$ 3 000 million to GDP”, “at least A$ 2 200 million to consumption” and generated “around 7 850 full-time equivalent jobs”.

Tasman Asia Pacific69

Canada Every C$ 1 spent on defence acquisition in Canada generates C$ 0.71 in direct and indirect impact on the GDP; Every C$ 1 million spent on defence acquisition in Canada generates 5.6 direct and 8.68 indirect jobs.

KPMG

69 Report to the Senate Standing Committee on Foreign Affairs, Defence and Trade: Inquiry into naval shipbuilding in Australia (7 December 2006; Chapter 11).


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Country Findings Source/s The C$ 12.6 revenue of the Canadian defence industry in the year under study (total of local acquisition and export) generated: C$ 1 700 million in personal taxes; C$ 693 million in corporate taxes; and C$ 321 million in indirect taxes.

Sweden The Gripen fighter project – Sweden spent SEK 132 billion which resulted in returns of almost SEK 350 billion for the Swedish economy by 2007, giving a multiplier of 2.6. Longer run effects increased this number by 30%.

Professor Gunnar Eliasson of the Department of Industrial Economics of the Royal Institute of Technology in Stockholm

Europe The defence industry in Europe “employs about 400 000 people and generates up to another 960 000 jobs” for an employment multiplier of 2.4. For each € 100 million cut in EU defence expenditure, there is a € 150 million fall in EU gross domestic product, and a € 40 million fall in EU tax revenues, as well as 2 870 jobs lost, including 760 skilled jobs. The macro-economic impact of defence spending is 12 to 20 times greater than that generated by other forms of public spending Investment in defence R&D has a multiplier of 111.4, compared to multipliers of

European Commission report of July 201370 European Defence Agency report of 201471

70 A New Deal for European Defence. 71 The Economic Case for Investing in Europe’s Defence Industries; study prepared by Europe Economics Ltd for the EDA. Figures rounded off as per the summary.


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Country Findings Source/s 8.7 for investment in health R&D, 5.7 for investment in transport R&D and 5.6 for investment in education R&D.

Source: Heitman, 2019


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5.5 Procurement Process & Supply Chain – recommended reforms This note is provided as a baseline paper for the task team addressing procurement reform in the Defence sub segment. 5.5.1 Problem Statement. DoD Supply Chain Management (SCM) process is not integrated and is far less effective and efficient than it could be, the ownership of the end-to-end processes is not clearly defined and therefore accountability cannot be effectively assigned. Service unique requirements are not adequately catered for. The processes are cumbersome and not supportive of SANDF operations and the Defence Industry. 5.5.2 Key issues • An intervention is required to improve the performance of the DoD SCM system. The focus

must be on the improvement of the overarching business process and supporting sub-processes. The intervention should include logistics, through-life product systems management, acquisition, asset management and procurement contracting as well as capacity and competency requirements.

• At present, the deployment of forces for Peace Keeping Operations (PKOs) into harsh conditions is being done with outdated equipment. This circumstance makes it difficult to adhere to prescribed UN standards which have a direct impact on reimbursements.

• The SA Defence Industry carries a wide range of capabilities for which it requires sustenance through DOD spending. Given the pressures on the DoD budget during the prevailing period, it is not possible to sustain all such capabilities. The DoD will need to declare which capabilities are strategic and how these will be sustained in the future. The review of the White Paper on Defence Industry needs to be completed as soon as possible and a concomitant Defence Industry Strategy finalised for the DoD. The identification and determination of strategic capabilities needs to be completed and aligned with verified adequate industrial support.

• The initial purchase price of equipment represents only a fraction of the total life cycle ownership costs and is therefore an insufficient basis for the comparison of competing options. The project study phase of the acquisition process should ensure the reduced likelihood of project risks becoming events that become unaffordable and unsustainable.

• The current approved acquisition policy prescribes a specific sequence of events that ensures governance compliance. The delay of any of the prescribed approval processes has vast implications, leading to poor performance and financial rollovers. Time value of money considerations often result in additional costs.


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5.5.3 Recommendations • Ensure that the integration of SCM is supported by a singular overarching IT system that

integrates all applications into an appropriate, coherent and functional management system that provides visibility.

• Confirm and implement logistic policies, including inventory management, that address logistics from a strategic, operational and tactical view. The reserve stock level policy must be reviewed and aligned with projected force preparation and operations consumption. Furthermore, a comprehensive inventory management strategy - that incorporates critical spares management, strategic reserves management, vendor-managed inventory, and inventory cost optimisation mechanisms – must be developed and implemented.

• Match DoD strategic requirements with strategic defence capabilities inclusive of defence industry considerations.

• An Industry Support Framework has to be developed whereby local defence industry will be assisted with marketing their services and products [in order to make them sustainable] outside South Africa through established bi-national structures and interaction platforms, e.g. defcoms. Care must however be taken to “insulate” SANDF end-users [i.e. war fighters] from exposure resulting from direct interaction with industry by ensuring that such framework prescribes an effective governance mechanism.

• The Strategic Capital Acquisition Master Plan (SCAMP) must reflect all SANDF requirements; however, it should be prioritised in terms of need and affordability as well as the development of balanced combat capabilities.

• Avoid over specification of solutions or product/brand driven solutions when there are opportunities to go for less costly solutions. Emphasis should be placed in acquiring fit-for-purpose capabilities as opposed to cutting-edge technology, which is costly and unsustainable.

• Develop a process that facilitates decision making when life cycles of systems are extended beyond the initial projected life span.

• Capabilities should not be considered for acquisition if the life-cycle cost is not economical and affordable and therefore imposes risk.

• Far greater consideration must be given to the buy vs make, lease, modify, second hand, re-condition options to satisfy requirements.

• Before developing new capabilities, consideration must be given to commercial-off-the-shelf (COTS) solutions (usually more affordable) before military-off-the-shelf (MOTS) solutions (much more expensive due to specific military standards) are considered.

• Ensure that contracts for common commodities are concluded so that Services and Divisions know who to deal with. Where possible and practical the DoD should procure from local communities.

• Review the protracted approval process for SDA spending with a view to improving efficiency and effectiveness and preventing roll-overs.

• Preference for the OEM for MRO work to be reviewed. A specification that major repairs and maintenance in the DoD platforms should be performed by the OEM sees economic leakage of jobs and revenues, as well as skills. Where there is proven capability to perform the same quality of work locally this should be the preferred option. The mid-life refit of SAS


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AMATOLA in Durban created 180 direct jobs, and an estimated 750 indirect jobs vertically through the value chain, for the duration of the project (i.e. three years).

• Have a long-term planning process for military equipment (similar to India, Canada and Australia), and involve local industry in the pre-tender process, thereby allowing them to position themselves accordingly.

The above recommendation can be implemented through a sub-committee of NDIC, which already includes all the key role-players within the Defence ecosystem.


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5.6 Overview- programmes 5.6.1 National Industrial Participation programme (NIP) The NIP programme was approved by Cabinet in September 1996 and sought to build the country’s industrial capabilities through the leveraging of public procurement. NIP required all suppliers to Government to participate in one or more of the following: investment to raise production capacity and competitiveness; export promotion; Research & Development collaboration; technology transfer; and acquisition. This applied to all Government purchases that have an imported content of US$10 million or more and is valued at 30 percent of the imported portions of the procurement contract (DTIC, 2014). NIP formed part of the four-tier system of public procurement levers approved by Cabinet in December 2012, i.e. designations in terms of the amended regulations of the PPPFA; the Competitive Supplier Development Programme; Direct NIP and Indirect NIP. NIP was not to be used to determine the value of a bid prior to award, but to be implemented post the bid award as a condition of procurement. However, the most recent report available regarding the DIP is 200872. The programme is currently under review and elements of the DIP may change significantly going forward. 5.6.2 Defence Industrial Participation (DIP) The Defence Industrial Participation programme complements the NIP and focuses on Defence. DIP is part of the Department of Defence (DoD) policy framework for the retention and development of the South African defence industry. ARMSCOR73 has reviewed and revised the current DIP Policy and Practice to ensure a more focused approach. DIP contributes to ensuring South African self-sufficiency in key areas, the establishment of life cycle support of sophisticated equipment, the earning of foreign exchange through exports, the creation of domestic employment and the development of defence technology. The DIP programme also contributes to the BBBEE development and now requires a minimum of 25 percent benefit to companies that have at least 25 percent Black equity ownership. Since 2009, over ZAR1 billion worth of credits were granted for activities benefiting Black empowered companies, 90 percent of which related to export contracts. ARMSCOR manages the following in terms of the DIP: • Strategic Defence Packages (SDPs) obligation; • Active portfolio addresses the DIP obligations resulting from all new procurements by the

Department of Defence with an imported content equal to or higher than USD2-million; • Pro-active portfolio addresses all the pre-emptive agreements with foreign companies – credits

are banked in anticipation of future defence purchases by the South African Government; • Police contracts portfolio addresses DIP obligations resulting from all procurement of the

Police Service directed through ARMSCOR. The DIP is a form of countertrade and is a sub-category of offsets. The South African DIP programme played a developmental role in the country’s defence industrial base (DIB) and contributed to arresting its steady decline since the 1980s. Some researchers claim that the DIP

72 http://www.thedtic.gov.za/wp-content/uploads/nipp-report2008.pdf 73 https://www.armscor.co.za/?page_id=4578#:~:text=An%20important%20part%20of%20the,and%20capable%20local%20defence%20industry.

http://www.thedtic.gov.za/wp-content/uploads/nipp-report2008.pdf

https://www.armscor.co.za/?page_id=4578#:%7E:text=An%20important%20part%20of%20the,and%20capable%20local%20defence%20industry

https://www.armscor.co.za/?page_id=4578#:%7E:text=An%20important%20part%20of%20the,and%20capable%20local%20defence%20industry


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tripled gross national product (GNP) and improved the economy through the retention of some 58 000 jobs but that the 2014 Defence Review changed the defence industrial dispensation. Currently research is being undertaken regarding the value of the DIP as a value-adding tool, and how to better promote the developmental aims and objectives of government using this reciprocal trade mechanism optimally (van Dyk, J., Haines, R., & Wood, G., 2016). 5.6.3 Competitor Supplier Development Programme (CSDP) The CSDP was introduced by the Department of Public Enterprises (DPE) to promote investment and develop internationally competitive capabilities in supplier sectors to the capital and relevant operational spends of the State Owned Enterprises (SOE)/State Owned Companies (SOC), with the aims of reducing costs through increasing efficiencies; reducing dependency on imports and foreign exchange exposure; and by developing niche export areas (Department of Public Enterprises, n.d.). The overall long-term national target for the programme (set at inception) was to increase the participation of the national industry from 60 percent to 70 percent of SOE capex and opex expenditures by 2012.


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5.7 Economic Reconstruction and Recovery Programme (ERRP)74 President Cyril Ramaphosa has stated that “We are determined not merely to return our economy to where it was before the coronavirus, but to forge a new economy in a new global reality.” This requires concerted attention from all social partners to reconstructing the economy in order to move towards recovery. There is a consensus amongst the social partners (as represented at NEDLAC) that there should be substantial structural change in the economy to unlock growth and allow for development. The South African ERRP75 was thus launched by the President in early October 2020, as the outcome of an extensive consultation with the National Economic Development and Labour Council (NEDLAC) social partners – laid out a clear and inclusive path to recovery and reconstruction. Initiatives include large-scale public works, employment stimulus, reindustrialisation and rapidly expanded energy generation capacity. Additionally, the ERRP identified specific government-led interventions for action. One example is the ZAR1 trillion in targeted infrastructure development projects over the next four years (The Presidency of South Africa, 2020). The ERRP has three phases as follows: • Engage and Preserve - includes a comprehensive health response to save lives and curb the

spread of the pandemic; • Recovery and Reform - which includes interventions to restore the economy and control

health risks; and • Reconstruct and Transform - which entails building a sustainable, resilient and inclusive

economy. The following is a list of the priority interventions as outlined by the plan • Aggressive infrastructure investment; • Employment orientated strategic localization, reindustrialization and export promotion; • Energy security; • Support for tourism recovery and growth; • Gender equality and economic inclusion of women and youth; • Green economy interventions; • Mass public employment interventions; • Strengthening food security; and • Macro-economic interventions The sector focussed Masterplans are a key tool in the progression of the ERRP and the Aerospace and Defence Masterplan speaks to the goals and targets of the ERRP especially in terms of increasing exports, increasing localisation and increasing employment at all skills levels and the specific actions the ecosystem will take to contribute to the ERRP are outlined in the Masterplan programmes as shown above.

74 The full plan can be found here https://www.gov.za/sites/default/files/gcis_document/202010/south-african-economic-reconstruction-and-recovery-plan.pdf

https://www.gov.za/sites/default/files/gcis_document/202010/south-african-economic-reconstruction-and-recovery-plan.pdf

https://www.gov.za/sites/default/files/gcis_document/202010/south-african-economic-reconstruction-and-recovery-plan.pdf

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