Fate of Denel lies with Treasury – Gordhan


This week’s medium-term budget policy statement may offer some clarity to Denel, which is trying to obtain additional funding in order to implement its multi-billion rand turnaround strategy.

Public Enterprises Minister Pravin Gordhan has said the fate of Denel lies with National Treasury, as it will decide on whether or not to grant the R3.4 billion the state-owned defence company is asking to complete its turnaround.

On 26 October, Finance Minister Enoch Godongwana will deliver his medium-term budget policy statement (MTBPS), which sets out the policy framework for the upcoming budget. The 2022 MTBPS will indicate any adjustments that may be recommended to Parliament regarding the current year’s expenditure plans, and this will include for Denel.

The state-owned defence conglomerate’s latest turnaround plan calls for R5.2 billion, of which R990 million has come from the Denel Medical Benefit Trust, and which has already been used to pay outstanding salaries, while R1.8 billion will come from the sale of non-core assets.

The remaining R3.4 billion has been requested from National Treasury. In a written parliamentary reply to Economic Freedom Fighters (EFF) MP Rosina Komane, Gordhan stated that, “The final fate of Denel is in the hands of the National Treasury and the budget allocation process.”

In a 19 October Portfolio Committee on Public Enterprises Budgetary Review and Recommendation Report (BRRR), the Committee noted that for the 2021/22 financial year, Denel was allocated R2.9 billion for the settlement of government guaranteed debt as “The entity is in financial distress and was not able to settle its debt and interest hence it has requested government to settle the guaranteed debt and interest.”

In reality, a total of R3 billion was ultimately authorised by the Minister of Finance to settle guaranteed Denel debt, with final approval for this revised amount given in January 2022.

As Denel is unable to satisfy the criteria for being a going concern, it has been unable to submit its 2020/21 annual report to Parliament by 30 September this year as required.

“Denel was unable to table its 2019/20 Annual Report and financial statements by the due date of September 2020 to Parliament…due to uncertainty regarding its going concern status. Despite receiving R1.8 billion from National Treasury in August 2019, the entity still reported a comprehensive loss of R1.962 billion compared to a loss of R1.469 billion in the previous year,” the BRRR report noted.

“The entity again received a disclaimed audit opinion for the 2019/20 financial year, for a third consecutive year, citing insufficient audit evidence to verify the figures in the financial statements. Given the disclaimer audit opinion, the company’s financial statements were questionable,” the report continued.

“Given Denel’s liquidity constraints, a turnaround strategy was approved by the Board in February 2019, where the company embarked on a process to exit unprofitable, non-core businesses. This created an opportunity to acquire strategic equity partners, which enabled Denel to secure market access and generate cash, thereby restoring its financial sustainability. Denel was also engaging with interested parties for equity injections.

“In November 2020, R271 million of the R576 million recapitalisation received from National Treasury was released on condition that, ‘Denel should deploy these proceeds in priority activities that will allow the business to restart operations with immediate cash generation’. R167 million was allocated to projects that can deliver a return in the short term – R753 million planned to be generated to deal with creditors’ backlog. The entity received a further R3 billion in the 2021/22 financial year to settle government guaranteed debt and interest payments,” the BRRR reported stated.

It added that Denel’s guarantee facilities declined to R3.4 billion from R6.9 billion after R2.5 billion lapsed following the cancellation of the Egyptian Umkhonto missile contract and the maturity of R1 billion of its debt.

“However, given that the entity could not submit its annual financial statements due to its liquidity constraints, the turnaround strategy and the capital injection does not seem to have made a huge impact on the success of the business. Government needs to address the long-term strategy of the company and the support required by the Department of Defence and Armscor,” the BRRR report reads.

The Portfolio Committee on Public Enterprises urged Government to “take a decision on the fate of Denel, which requires funding to support its restructuring process.” It reminded readers that Denel is a critical supplier of sovereign and strategic capabilities ensuring security of supply to the Department of Defence and that “Shifts in geopolitical dynamics in Europe, Asia and other parts of the world further justify the significance for the country to preserve and grow its current industrial defence capabilities to meet its own requirements and to grow exports.”