Denel will be getting an extra R2.9 billion in the 2021 Medium Term Budget, to cover debt, while the South African National Defence Force (SANDF) will receive an additional R700 million, mostly to cover the response to the July unrest.
Finance Minister Enoch Godongwana announced this in his medium-term budget policy statement (MTBPS) on 11 November.
He pledged ‘tough love’ for state-owned entities (SOEs) including Denel, which he said are a fiscal risk. Not every SOE will be rescued by the state and “some will have to fall.”
In the policy statement, Godongwana noted that “Denel is experiencing difficulties in meeting its obligations and is negotiating with stakeholders on a way forward. Government provided recapitalisations of R1.8 billion in 2019/20 and R576 million in 2020/21, and extended a R5.9 billion guaranteed debt facility to Denel. Several repayment obligations have fallen due this year. Government has allocated R2.9 billion in 2021/22 to settle these repayments.”
It is not clear how the bailout will affect Denel’s outstanding debts to suppliers and staff, who are respectively owed R900 million and R650 million. Many staff have not been paid since May last year, while operational activities are significantly below capacity at 20-30% in most divisions. Revenue is 60% behind the year-to-date budget, the Department of Public Enterprises (DPE) revealed this week.
The DPE said that although Denel has an order book of around R11 billion, liquidity constraints are hampering the translation of these opportunities into cash flows. It added that significant numbers of critical and experienced staff have left the company, but “there is still international interest to collaborate with Denel.”
Meanwhile, the MTBPS revealed that the South African National Defence Force (SANDF) will be getting an additional R700 million as part of 2021/22 spending. Much of this will go towards covering the cost of the SANDF’s response to July unrest under Operation Prosper. In September, National Treasury proposed this amount to cover the costs of military deployments internally in South Africa, and in Mozambique.
Of the R700 million, R354 442 000 would go toward the compensation of employees and R324 260 000 towards goods and services. The South African Police Service will be getting an additional R250 million.
The MTBPS noted that, “earlier this year, public violence in KwaZulu-Natal and Gauteng illustrated the need for improved capacity in this [peace and security] function. Both the South African Police Service and South African National Defence Force received additional funding through the Second Special Appropriation Bill to provide for unforeseen costs resulting from the unrest. Over the next few years, the Department of Defence will reprioritise funds to set up a rapid response unit. It will also implement reforms to manage longstanding pressure on compensation that is resulting in irregular spending.”
The government’s peace and security cluster, which includes the police and defence departments, is budgeting to spend on average R218.1 billion a year over the next three years, of which more than 60% will go to compensation of employees.
Defence and state security spending is put at R54 billion for 2020/21; R49.4 billion for 2021/22; R48.9 billion for the following year; R48.1 billion for the next; and R50.3 billion for 2024/25.