Denel’s reliance on foreign markets is leading to a liquidity crisis

State-owned arms manufacturer Denel is facing problems of liquidity along with the company’s over-reliance on foreign markets, Public Enterprises Minister Lynne Brown told MPs on Wednesday.

Ensuring a sustainable funding solution for the business was critical as the company relied on client advance payments and short-term paper to finance its working capital requirements.

This strategy was not sustainable and exposed Denel to regular cash flow shocks, said Brown in a briefing to Parliament’s public enterprises committee." A long-term recapitalisation plan needs to be found to ensure liquidity and sustainability."

The reliance on foreign markets stemmed from the decline in capital spending by government. Currently 60% of Denel revenues are 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," Brown said.

"The state needs to guarantee Denel’s role as a prime contractor of strategic defence and security products and compelling among others: SANDF (South African National Defence Force), SAPS (South African Police Service), National Disaster Management Centre, and Correctional Services to protect Denel’s right of refusal on critical requirements."

The minister said Denel’s revenues had more than doubled from R3.9bn in 2013 to R8.2bn in 2016. Its order book includes the Hoefyster production contract, the A400m Airbus work packages, the Al-Tariq stand-off weapons contract and mine-resistant protected vehicle contracts.

Brown said the Treasury had not yet approved the establishment of Denel Asia. She said she had given Denel an instruction prohibiting it to trade until this approval was granted.

"We have not heard from Treasury," Brown said despite having written to Treasury several times to ask about the matter.

The state of limbo placed Denel in a difficult position. Brown said the arms market of the East was the fastest-growing but Denel could not participate in this growth.

She said Denel, the Treasury and the Department of Public Enterprises needed to meet to discuss the matter. Brown had suggested this to the Treasury but had not had a response.