JOHANNESBURG (Reuters) - South Africa is blocking arms sales to countries including Saudi Arabia and the UAE in an inspections dispute, endangering billions of dollars of business and thousands of jobs in its struggling defense sector, according to industry officials.

FILE PHOTO: Denel company logo is seen at the entrance of their business divisions in Pretoria, South Africa, December 4, 2018 Picture taken December 4, 2018. REUTERS/Siphiwe Sibeko/File Photo

The dispute centers on a clause in export documents that requires foreign customers to pledge not to transfer weapons to third parties and to allow South African officials to inspect their facilities to verify compliance, according to the four officials as well as letters obtained by Reuters.

Officials at major South African defense groups Denel and Rheinmetall Denel Munition (RDM) said the dispute was holding up their exports, as did a third big defense company which asked not to be named. RDM said some of its exports to the Middle East had not been approved since March.

Saudi Arabia and the United Arab Emirates, which account for at least a third of South Africa’s arms exports and are engaged in a war in Yemen, have rejected the inspections which they consider a violation of their sovereignty, the sources said.

Oman and Algeria have also refused inspections and seen their imports from South Africa blocked, the industry officials added.

Government officials in Saudi Arabia, the UAE, Oman and Algeria did not respond to emails and phone calls from Reuters seeking comment, nor did their embassies in South Africa.

Asked about the inspection clause issue, Ezra Jele, South Africa’s director for conventional arms control in the defense ministry, said that authorities considered criteria including human rights, regional conflict, risk of diversion, U.N. Security Council resolutions and national interest when evaluating applications for export permits.

He did not comment on specific cases.

The Aerospace, Maritime and Defence Industries Association of South Africa (AMD) says the dispute could threaten the sector’s survival.

“We’ve got one clause that’s disabling us from exporting 25 billion rand ($1.7 billion) worth of value today, right now,” Simphiwe Hamilton, the head of the AMD, told Reuters.

The industry body estimates the export blocks put an additional 50 to 60 billion rand in future business at risk and could cause the loss of up to 9,000 jobs at defense firms and supporting industries.

Graphic: Weapons exports ()

YEMENI CONFLICT

Since democratic rule was established in 1994, South Africa has sought to reform its defense industry – once a pillar of the racist apartheid regime – by making export approvals subject to human rights considerations.

Saudi Arabia is leading an alliance of Arab states, including the UAE, to try to restore the government of Yemeni President Abd-Rabbu Mansour Hadi, who was ousted from the capital Sanaa by the Iran-aligned Houthis in 2015.

In February, Amnesty International accused the UAE of diverting arms supplied by Western and other states to militias accused of war crimes in Yemen. In the same month, a CNN investigation said Saudi Arabia and the UAE had transferred American weapons to Yemeni fighters, breaking the terms of their arms sales with the United States.

The UAE did not respond to the Amnesty allegations. The Saudi military coalition did not respond to CNN’s allegations, but a senior UAE official denied it violated end-user agreements.

The South African defense industry has become increasingly reliant on exports, which have grown more than 12-fold since 1990 as domestic defense spending has declined.

Exports now make up the bulk of revenues for major defense companies including Denel, Paramount Group, Hensoldt South Africa and RDM, which is a joint venture between Denel and German industrial giant Rheinmetall.

Saudi Arabia and the UAE alone represented a third of South Africa’s 4.7 billion rand of authorized arms exports in 2018, according to data compiled by the National Conventional Arms Control Committee (NCACC), a group of ministers and deputy ministers that approves the exports.

‘ENCROACHING ON SOVEREIGNTY’

Requiring buyers not to transfer weapons to third parties is common practice in the international arms trade, stipulated in export documents known as end-user certificates. Requiring inspections, though uncommon, is not unheard of. Germany, for instance, requires them for small arms sales to certain countries.

The industry officials told Reuters that South Africa had long included a clause in its end-user certificates requiring on-site visits, though it was rarely acted upon.

Clients regularly amended or deleted the clause, which was included in an annex, and the NCACC still granted export permits, they said. But in 2017, arms control officials moved the clause to the front page of the certificates, and some countries refused to sign them, according to the officials.

The clause requires customers to grant “access and permission to South African Government Authority’s representative(s)” to verify they are in compliance with South Africa’s defense export regulations.

“This is what’s making some of these countries uncomfortable,” Hamilton said. “You are encroaching on their sovereignty, and they cannot allow that.”

An NCACC official, who was not authorized to speak publicly, would not comment on the reason for the new format, and industry officials said they had not been told.

Matters did not come to a head until this year because arms contracts are often signed years before the anticipated delivery date, the company officials said.

JOB LOSSES ON ‘MASSIVE SCALE’

Some companies have already indicated that they will need to cut more than 500 employees if they can’t export their products soon, trade union Solidarity said.

On July 3, Solidarity and other unions wrote to Public Enterprises Minister Pravin Gordhan stating that failure to resolve the impasse would lead to “job losses on a massive and irreversible scale”.

“Customers in the UAE have already begun firing trials with China, India as well as Serbia with the intention to replace RDM as a preferred supplier of ammunition,” said the letter seen by Reuters.

Three weeks later, Norbert Schulze, RDM’s CEO at the time, wrote to the NCACC urging it to take action.

In his Aug. 5 response, also seen by Reuters, NCACC chairman Jackson Mthembu said the body would not grant an exception.

“The NCACC is aware of the possible loss of jobs occasioned by the inability to export in the time being. However, as your organization would appreciate, compliance with regulations sometimes produces negative impact,” he wrote.

The government is encouraging defense companies to avoid an over-reliance on the Gulf, the NCACC official told Reuters.

But building up business in new markets would take time.

“It’s not like selling Coca-Cola. It can take 5-7 years to go into new markets,” one defense company official said. “I don’t think the politicians are aware how serious this is.”

($1 = 14.7662 rand)