How to save Denel

Denel is in deep financial trouble. It has not been able to pay full salaries for months and it is rapidly losing skills to competing weapons manufacturers around the globe.

The once-proud weapons company with world-leading technology and products has been gutted by corruption and mismanagement and is now begging for money to stay afloat.

Denel recently told parliament it faces a funding gap of R2.749 billion over the next five years and asked the National Treasury for R3.8 billion in financial support to stay afloat.

The company’s inability to pay full salaries and its uncertain financial future has resulted in low staff morale and the mass resignation of skilled professionals.

296 employees have left the company between April to October this year, which included many experienced and knowledgeable engineers.

Many Denel board members and executives have been hoping for a bailout to save the company, but they were snubbed by Finance Minister Tito Mboweni in his medium-term budget.

Mboweni allocated R10.5 billion to South African Airways, but other struggling state-owned enterprises (SOEs), including Denel, received nothing.

This places Denel on rocky ground, with the company facing serious liquidity challenges and heading towards possible bankruptcy.

Saving Denel

Many people have called on the government to sell or close down failing SOEs like SAA and Denel.

Helgard Cronje, Solidarity’s sector coordinator for defence and aviation, believes this is not necessary, adding that Denel can be saved.

Cronje told MyBroadband Denel will not be able to simply trade itself out of the current liquidity challenges and will need a capital injection.

The National Treasury, however, has decided that the capital injection will not be provided in the form of a bailout.

Another important facet of the turnaround is strategic equity partners (SEPs) for certain parts and divisions within Denel.

This plan, Cronje said, have been proposed by Denel’s management and the board and seems to be supported by DPE and Treasury in principal.

“The government, however, is under the illusion that whoever buys into Denel will simply be willing to be minority shareholders.”

Cronje said the biggest challenge is that it takes the Department of Public Enterprises (DPE) months to approve the section 54 PFMA applications made by Denel to sell shares or parts of the business to new shareholders.

The Department of Defence (DoD) is also very reluctant to sell a majority stake in Denel because they are afraid that some of their capabilities might be lost.

Cronje said what is necessary to save Denel is for the DPE to expedite their approval processes and for DoD to realize that if they aren’t willing to share their capabilities with outsiders they might lose it in totality.

“The Government should realise and accept that if they cannot afford to invest the capital themselves and want to pursue SEPs that they might lose majority shares in some of the businesses and IP,” he said.

This is, however, better than losing everything if the business does not survive.

“They basically have 6 to 9 months to finalise Denel’s strategic equity partners processes,” he said.

The project which could have saved Denel Dynamics

One of the biggest blows to Denel and its missile research, design, and development unit Denel Dynamics lost a contract to supply Egypt with Umkhonto surface-to-air missiles.

Cronje told MyBroadband this contract was critical to the survival of Denel Dynamics.

“There are some active projects within Denel Dynamics, but none as substantive as the Egypt one and the skills that were within the environment is expensive and scarce,” he said.

Denel Dynamics needed a big project to generate the revenue to sustain the contingent of employees they had, and there was nothing else of the same magnitude on their order book.

Cronje said Egypt cancelled this project because Denel failed to secure a R4.5-billion bank guarantee, which it was contractually obliged to do.

“The DPE took more than three months to give approval for bank guarantees, and when Denel finally got the go-ahead, their normal South African banking financiers decided as a matter of principle not to support any projects with ties to Egypt,” he said.

Denel then attempted to get a guarantee from Egyptian banks, but by the time they got one the deadline for them to secure the guarantee had already been missed.

Now read: Secret weapons information walking out Denel’s front door

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How to save Denel