Embattled Denel Dynamics appears to have had a significant contract cancelled due to alleged failure to supply adequate financial guarantees.
Reports circulating in South Africa at the weekend suggest that Egypt has cancelled its contract with Denel Dynamics for up to 96 UMKHONTO surface-to-air missiles for its MEKO A200 frigates currently under construction. Valued at up to ZAR4.5 billion (€225 million), the contract was supposed to carry a ZAR1.5 billion advance payment with it, according to a Denel report to Parliament last September. The reports suggest that Egypt cancelled the contract late last year, when Denel failed to provide adequate bank guarantees.
UMKHONTO is already in service on MEKO frigates in South Africa (since 2001) and Algeria: the Finnish Navy also uses the system on its HAMINA and HAMEENMAA-class vessels. Denel had expressed hopes that it would also be able to sell and additional 32 UKHONTO-IR systems to Egypt.
The true irony of the situation that Denel finds itself in is that this contract had the potential to rescue the company from the financially-induced crisis it has been in for months. However – since the client in this type of deal legitimately expects bank-underwritten guarantees that the company will repay the advance payment in the event of non-performance – and since no commercial bank is willing to support Denel further, they have to watch the lucrative and potentially game-changing contract disappear. What makes it worse are comments from observers close to the company, which suggest that not only was the UMKHONTO-IR sale a reality, but there was a very real prospect of a design and development contract for an UMKOHONTO-R radar-guided variant – which would have boosted overall contract to around the ZAR30 billion mark.
The cancellation – a product of the combination of lack of confidence by the banks and complete lack of action by the government – almost certainly spells the end of Denel Dynamics as currently constituted. Over half the staff of left, salaries are unpaid and the company – as well as the nation – is haemorrhaging critical skills.