Arms manufacturer Denel had been unable to take advantage of fast-growing Asian markets because the Treasury has still not given approval for the establishment of Denel Asia, Public Enterprises Minister Lynne Brown said on Wednesday.
The restraint on its marketing drive existed while the company faces liquidity challenges and the falling off of local demand.
Denel Asia is a joint venture between Denel and VR Laser Asia, owned by Gupta family associate Salim Essa.
Denel submitted a formal application for approval for Denel Asia under the Public Finance Management Act in December 2015. When it did not get a response within 30 days, it went ahead and registered the joint venture company in Hong Kong in January 2016.
This resulted in a standoff between Denel’s board and Finance Minister Pravin Gordhan. Brown has approved Denel Asia, but has told Denel it is not allowed to trade until Treasury approval has been obtained.
"We have not heard from [the] Treasury," Brown said in a briefing to the public enterprises committee, despite her having written to the Treasury several times to ask about the matter.
The state of limbo placed Denel in a difficult position, Brown said, as it was unable to participate in the fast-growing arms market of the East.
Brown said Denel, the Treasury and the Department of Public Enterprises needed to meet to discuss the matter. She had suggested it to the Treasury, but has not had a response.
The Treasury has argued that the joint venture is unauthorised and illegal.
Brown told MPs it was critical that a sustainable funding solution was found for Denel as it relied on client advance payments and short-term paper to finance its working capital requirements. This strategy was not sustainable and exposed Denel to cash flow shocks.
"A long-term recapitalisation plan needs to be found to ensure liquidity and sustainability," the minister said.
The reliance on foreign markets stemmed from the decline in capital spending by the Department of Defence. Altogether 58% of Denel revenues were derived from exports.
"Foreign governments expect technology transfers when procuring from external suppliers. This results in Denel cannibalising its own long-term future in order to ensure short-term cash flows.
"The state needs to guarantee Denel’s role as a prime contractor of strategic defence and security products, and compelling, among others, the South African National Defence Force, the South African Police Service, the National Disaster Management Centre and Correctional Services to protect Denel’s right of refusal on critical requirements," Brown stressed.
Denel’s revenues had more than doubled from R3.9bn in 2013 to R8.2bn in 2016. Its order book included the Hoefyster production contract, the A400m Airbus work packages, the Al-Tariq standoff weapons contract and mine-resistant protected vehicle contracts.
Brown held up Denel as flagship on how to implement a turnaround strategy. It provided an important lesson for the state on how to optimise a partnership of a state-owned enterprise with the private sector, she said.
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