State-owned arms manufacturer Denel has fully paid outstanding salaries of R318m to its staff up to end-July and has payment plans in place with the SA Revenue Service (Sars) for PAYE and the pension fund to settle its obligations, the group’s chair, Gloria Serobe, announced on Thursday.
Some staff have not been paid salaries for more than two years while others have only received a percentage of their salaries, contributing to a loss of critical skills.
The funds to make the payment of salaries were derived from the surplus in the Denel Medical Benefit Trust, which released R992m after a process of about two years, including an application to court. The assets of the trust exceeded its actuarial liabilities. Of the R992m, R190m will be used for working capital and the remainder to finance the payment plans.
Payment of the salaries meant trade union Solidarity could lift the hold on Denel’s corporate bank account, which was effected when the company could not comply with a February labour court order for it to immediately pay R90m in outstanding salaries, the union’s national sector co-ordinator for defence and aerospace, Derek Mans, said. Solidarity has also paid Denel the R1.6m it obtained from the auction of Denel Land System’s premises in Lyttleton two weeks ago and has suspended any further auctions.
Serobe stressed that payment of the salaries would not address the immense problems facing the company which has to be restructured to create a self-sustaining business with a significant order pipeline. The restructuring plan adopted by the board involves the sale of a number of noncore assets, which will assist in addressing Denel’s legacy debt. She indicated that Denel was in talks with the government about a recapitalisation but did not give an amount that was needed and stressed that this had to be underpinned by a sound restructuring plan.
“We are quite positive about where we are going,” she said. interim Denel CEO William Hlakoane said R1.2bn could be raised from the sale of noncore assets.
Former Denel CEO and now chief restructuring officer Riaz Saloojee emphasised that it was critical for Denel to unlock its revenue stream if it were to get back on its feet as a sustainable business. Revenue had gone from about R8.2bn in 2015/2016 to just under R2bn in 2021/2022 while the cost base had remained the same.
“The current problem remains that the fixed cost of the business is far in excess of the revenue and executable business. The only way for Denel to support itself is through a deep restructuring and reduction of the cost base to affordable levels.”
He noted that there was a self-sustaining order book of about R12bn but there were no liquidity and skills to execute it. There was a potential order book of R30bn that Denel could execute over the next three to five years if it were successful in implementing its turnaround strategy. Denel had been unable to secure orders because of credibility issues and its inability to put up performance and bank guarantees.
The immediate aim of the turnaround plan was to stabilise the company.
“There is a clear business case that underpins the turnaround strategy,” he said, stressing that that would involve strategic partnerships to get access to markets, new technologies and funding mechanisms as well as joint ventures. The restructuring would require a recapitalisation by the state, the sale of noncore assets to reduce Denel’s footprint, and the removal of duplication and excess fat.
The turnaround plan, which has the support of the SA National Defence Force, aims to make Denel — which Saloojee said was a strategic asset for SA — a self-sustaining business at the centre of SA’s defence capabilities. For years, Denel has suffered from a declining defence budget, as well as from state capture.
“It is critical that there was an intervention that we had to stop the bleeding right now, that we had to do something in order to ensure that we retain these strategic and sovereign capabilities,” Saloojee said. These capabilities ensured SA had strategic defence independence, he said.
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