The department of public enterprises has asked the Treasury to fund R3.4bn of Denel’s turnaround plan, which is estimated to cost R5.2bn, public enterprises minister Pravin Gordhan said on Wednesday.
The turnaround plan, which was submitted in July, aims to ensure the stability of the cash-strapped state defence entity, bringing it to financial and operational viability.
In a written reply to a parliamentary question by EFF MP Rosina Komane, Gordhan said the balance of R1.8bn will be financed by the sale of noncore assets and R990m derived in July from the Denel Medical Benefit Trust.
“The final fate of Denel is in the hands of the National Treasury and the budget allocation process,” Gordhan said.
Finance minister Enoch Godongwana will possibly make an announcement on the funding request in the medium-term budget policy statement that he will table in parliament on October 26.
Due to liquidity shortages the state-owned arms manufacturer has been unable to pay salaries, fulfil orders and take up the substantial potential orders on offer. It has also experienced the loss of specialised personnel and intellectual property. Denel’s bonds were suspended by the JSE earlier this year after it failed to submit its annual financial results within the required time.
Denel has been technically insolvent since 2019.
Gaining access to the surplus in the medical aid scheme enabled it to pay salaries and avert court action.
Gordhan noted that the Denel board had appointed former Denel CEO Riaz Saloojee as the chief restructuring officer (CRO) in June.
“After the appointment of the CRO, Denel developed and submitted to both the department and National Treasury a strategic turnaround plan in July,” he said.
“The turnaround plan seeks to ensure stability of the entity bringing it to financial and operational viability. This will be achieved ... by restoring the damaged reputation of the state- owned company (SOC), improving productivity, building a solid order book and leveraging strategic partnerships.
“The overall assessment of the restructuring plan by the department shows that the restructuring plan presents a solid business case and a strong basis for requesting recapitalisation,” the minister said.
Reuters has previously reported that Denel anticipates it will execute the restructuring plan over the next 12-18 months and quoted Saloojee as saying that unlocking working capital should allow Denel to begin delivering on a confirmed order book worth about R12bn and eventually access a potential pipeline of R30bn-R35bn over the next three to five years.
Department of public enterprises acting director-general Jacky Molisane said in a briefing to parliament’s public enterprise committee on Wednesday that the department is encouraged by the turnaround regarding Denel’s liquidity issues, the order book pipeline that needs to be unlocked and the “green shoots” that are emerging there.
Gordhan said in terms of his department’s assessment, several challenges affected Denel’s ability to deliver on SA National Defence Force contracts.
“These include liquidity constraints, which meant the SOC was unable to source required materials and to pay salaries on time. Both these aspects had a negative impact on operational activities. This created uncertainties that have led to the loss of a significant number of skilled and experienced personnel that further affected execution of contracts,” Gordhan said.
“Denel and Armscor are engaged in discussions with the aim of finding workable options to improve delivery on some of the critical contracts.”
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