Denel owes R636m in unpaid salaries, parliament told

24 August 2021 - 18:15
By andisiwe makinana AND Andisiwe Makinana
Denel has a confirmed order book of R11bn but is experiencing operational and financial difficulties, parliament heard on Tuesday. File photo.
Image: REUTERS/Siphiwe Sibeko Denel has a confirmed order book of R11bn but is experiencing operational and financial difficulties, parliament heard on Tuesday. File photo.

Arms manufacturer Denel owes its staff R636m in salaries, and a further R900m is owed to suppliers.

On top of this, its available cash is insufficient to meet operational requirements, including the payment of salaries and suppliers.

The embattled company which has been struggling to pay full salaries for more than a year told parliament’s standing committee on public accounts [Scopa] that it was pinning its hopes on a turnaround plan and is requesting financial support from the state to keep it afloat.

“We hope for a recap because the hole is quite big and the revenues of Denel in the immediate future will not be able to carry us through,” Denel chairperson Gloria Serobe said in parliament on Tuesday.

Interim CEO William Hlakoane told MPs Denel’s balance sheet shows the company is technically insolvent running below budget at around a R360m deficit.

MPs were shocked to hear the company does not have tax clearance status due to non-payments of PAYE and VAT.

Hlakoane said the SA Revenue Service [Sars] indicated on Monday it was willing to give Denel tax clearance as long as its PAYE and VAT payments were up to date by the end of August.

MPs also heard the latest cash flow projections for the 2021/22 financial year indicate a negative R600m if no mitigation action is taken.

Among the reasons for this was that the company was unable to trade efficiently since last year when the Covid-19 pandemic hit SA.

We have been battling to come out of the situation we are in and the trend is still continuing
Denel interim CEO William Hlakoane

“We have been battling to come out of the situation we are in and the trend is continuing,” he said.

“We are also cognisant of the fact that our revenue for this current year, R27bn it is at risk due to the current liquidity situation.”

The below investment grade rating by ratings agency Fitch due to the group’s severely constrained liquidity and amplified by a lack of visibility on future additional government support has further negatively impacted the company.

Hlakoane said as a result, its customers nationally and internationally are concerned about its ability to deliver on contracts, leading to a possible call on prepayment and performance guarantees of about R1.4bn.

He said due to the non-payment of salaries, the company has seen an exodus of employees and some are taking it to court.

Denel is in court defending an application for its liquidation by SAAB Grintek Defence . The matter was  in court while parties continue to find an amicable resolution.

Beside unions taking Denel to court over the non-payment of salaries, some employees in their individual capacity have submitted court applications for the amounts owed to them.

“This poses a threat to Denel’s assets as execution orders to attach assets have been granted by the courts.”

The threat of suppliers making a similar application persists as increased letters of demand are delivered to Denel, said Hlakoane.

The company has suffered the loss of 138 employees between April 1 2021 and June 30 2021, with 71 of them possessing critical skills in the technical space including engineers who are project managers, artisans and other technical employees.

“It's a precarious position we find ourselves in. The sooner we stabilise the company the better is it going to be for the business to continue to trade,” said Hlakoane.

He said the current strategy to stabilise Denel has limitations in terms of implementation and the vision of being a holding company in current economic conditions was untenable as the time frames to implement are too long and do not solve current liquidity issues.

That strategy assumes strategic equity partnerships in the short term, no changes to the current operating structure, expects Denel to deliver current product portfolio as is and focuses on delivery of defence products only.

He said maintaining the current product portfolio and the underlying related costs has proven to be expensive without the base load from the department of defence. A review of the operating model was required to retain core capabilities, drive contract execution and efficiencies and improve the cost structure, he said.

Hlakoane said despite the comprehensive turnaround plan approved in February 2019, Denel continues to experience severe liquidity constraints while finalisation of the tasks identified in the plan to generate the required funding have been difficult to implement.

Among these tasks is the disposal of assets and engaging in equity partnerships.

He said while many of the operational, financial and other strategic initiatives implemented as part of the turnaround plan have been effective and are still relevant to Denel, they have so far proven to be insufficient to deliver a profitable Denel in the short term.

“The current business model remains inflexible and untenable, and capital distribution to unproductive assets has continued to negatively affect viable projects across the divisions,” he said.

Hlakoane said the latest strategy [Denel 5.Y Strategy] has been designed to improve and accelerate the February 2019 turnaround plan through restructuring into a lean operating model, repurposed for profitability and sustainability.

The innovations to make sure Denel remained sustainable include:

• adapting to changing industry and markets;

• evolve to a commercially driven high performance culture;

• restructuring the balance sheet to ensure financial sustainability;

• reduce overheads and redundancies in the cost base;

• retain core capabilities (strategic and sovereign) and exit non-core business;

• optimise properties portfolio;

• access new markets and technologies through smart partnering;

• reduce reliance on government funding and expand relevance beyond defence markets;

• leveraging of IP and strategic capabilities commercially through partnering;

• develop new non-military business and technologies; and 

• become the leader in research and development, innovation and technology development

Serobe told MPs to be patient as it will take time to undo the damage done to the company.

“The destruction of Denel was a very sophisticated, systematic process. We also have to be systematic and sophisticated in how we undo it. Forgive us if we look like we are not in a hurry,” she said.