Analysis: Why battle-scarred Denel has sunk into cashless black hole
Experts say it cannot produce bank guarantees to secure contracts
Cash-strapped arms manufacturer Denel has dug itself into such a deep hole that it cannot produce bank guarantees to secure contracts, causing an exodus of engineers and leaving staff with a shorter work week and lower pay.
An order for 1,000 missiles worth more than R1-billion from Denel was ditched earlier this year because it didn’t have money to set up a production line or provide a bank guarantee, said defence analyst Helmoed Heitman.
On Monday Public Enterprise Minister Pravin Gordhan announced a new board for the entity, which is R3.7-billion in debt. Former Airports Company SA CEO Monhla Hlahla is the new board chairperson at Denel and Gordhan said the move was to ensure that good governance was restored and that the role the SOE played in state capture was reversed.
Denel subsidiary, ammunitions manufacturer Denel PMP, told staff in December it could not pay salaries, but the Treasury stepped in to provide R580-million so suppliers could be paid.
About 900 staff at Denel PMP were given letters on Friday saying they would be put on short time due to financial difficulties at the company. One staff member said they had been told this would mean a four-day work week and lower pay.
Denel has increasingly looked abroad for work as the SA Defence Force has reduced its budget and ordering since the 1990s.
But Heitman said without money to develop new products and get bank guarantees, contracts were being cancelled or could not be finalised.One of the reasons for Denel’s liquidity challenge is that it cannot raise bank guarantees allowing it to secure new orders, according to three experts who spoke to Times Select.
Private orders require a guarantee. This means overseas buyers pay a deposit upfront for goods which Denel can use to buy materials for the project. But Denel has to provide a guarantee that, if its quality is not up to scratch or it falls behind on an order, the deposit is paid back.
Solidarity union’s Willie Venter said banks had refused to provide guarantees to Denel and its subsidiaries.
Outa (Organisation Undoing Tax Abuse)’s Rudi Heyneke said he knew of a large order from the United Arab Emirates that had been cancelled.
“They can make the specific product as they have staff and expertise, but they could not provide an upfront monetary guarantee, so the order was cancelled.”
African Defence Review analyst Darren Oliver said the board ousted on Monday had run the company badly, leading to cancelled overseas orders. It had also not managed the transition to selling more to overseas companies.“The main priority for Gordhan and the new Denel board will be to try to get a handle on the company’s cash liquidity crunch and ensure a competent and respected executive leadership team is appointed,” said Oliver.
“The new board and leadership team not only failed in the crucial task of managing that cash flow, but made things worse with the unjustified establishment of the Gupta-linked Denel Asia [and] by allowing critical production orders to fall behind schedule.”
Denel Asia was a joint venture with the Gupta company VR Laser Asia to cash in on Denel’s lucrative Asian market, including a possible R62-billion tender to deliver long-range artillery to the Indian army. The deal collapsed after the Guptas’ involvement was exposed.
“Much depends on whether the company can get sufficient additional funding, either from Treasury or from the bond markets, to get out of its immediate cash crisis and begin to undo the damage of the past few years,” said Olivier.Heitman said Denel could partner with foreign companies for a cash injection, but government did not want to do so. He said if Denel got a large cash injection it could finish developing products with export potential.
He said Denel was developing a gun that could shoot at 30 kilometres (most shoot at 18 kilometres) but did not have the R300-million needed to finish it.
“If government is clever it would inject money into Denel to develop the gun and improve exports.”
Defence Web editor Guy Martin said: “Denel’s financial woes started with the capture of the board in 2015 and the subsequent suspension of Riaz Saloojee and other competent personnel.
“Denel’s precarious financial situation – which includes struggling to pay suppliers and staff – is not due to a lack of orders. It is largely due to poor management and behind-the-scenes political machinations. The good news is that with the right people, Denel can save its reputation and turn its business around.”