In spite of recent bailouts, Denel is making slow progress on implementing its turnaround strategy, something compounded by going concern and financial sustainability challenges.
This is according to the Auditor General of South Africa (AGSA), which on 19 November briefed the Standing Committee on Public Accounts (SCOPA) on audit outcomes of the Departments of Defence and Military Veterans, and Denel.
In its presentation to SCOPA, the AGSA found that Denel is experiencing significant challenges relating to liquidity constraints and cash flow challenges resulting to the entity being unable to pay its debts as they become due.
It added that Denel is experiencing net operating losses and operational difficulties including “significant challenges in implementation of major revenue projects including loss of considerable market share to its international competitors and with some major customers cancelling their contracts with the entity, others imposed significant penalties.”
Skills and capacitation constraints are affecting the state-owned company as it has lost skilled staff due to a lack of job security, and implementation of Section 189 retrenchments.
On the information technology (IT) side, Denel “has not been able to do any capital infrastructure investments in the recent years. The entity operates on ageing IT infrastructure and inadequate IT environment which continues to negatively impact its operations,” the Auditor General found.
This is in spite of recent bailouts, including a R3.4 billion cash injection in the 2022/23 financial year, with a total of R2.4 billion (70% of the total bail-out money) utilised by the end of the 2023/24 financial year.
However, as at 31 March 2024, Denel had not been able to access roughly R900 million of the bailout funds due to unmet bailout conditions.
Of the R2.4 billion utilised, 5% was used towards the restructuring turnaround implementation plan and the rest was utilised to pay legacy debts including SARS.
“With majority of the bailout spent on legacy creditors, no alternative funding models/strategies have been identified by management to fund the successful implementation of the turnaround plan,” the Auditor General warned, adding that Denel “does not have sufficient funds available to fund the turnaround strategy. A portion of the recapitalisation is still locked due to conditions not met.”
Furthermore, Denel has not been able to continue with the sale of non-core assets to unlock the funds needed to implement the turnaround strategy.
“The entity’s financial and operational challenges are posing a threat on the entity’s financial sustainability and its ability to continue as a going concern and risk an additional pressure to the fiscus,” the AGSA said.
It gave a list of recommendations, including accountability and commitment by the board, more efficient execution of initiatives, rebuilding internal workforce capacity, preserving institutional knowledge, and timeous submission of annual financial statements.
The Auditor General said the Denel 2023/24 audit is outstanding as Denel has not yet submitted its 2023/24 annual financial statements – these are only expected on 30 November.
To SCOPA, the Auditor General recommended Denel fall under a sustainable state-owned enterprises funding model that does not rely on additional recapitalisation. It encouraged the Department of Defence and National Treasury to monitor the progress made on implementation of the turnaround strategy, and the fast-tracking of the rationalisation of state-owned entities.
