Denel this week received a R1.8 billion recapitalisation injection, which has drawn criticism in some quarters, but defence expert Darren Olivier believes that opposing the injection “is a terrible idea” as letting Denel go bankrupt would be far more costly. It would also mean the South African Air Force could be forced to withdraw aircraft manufactured and supported by Denel.
“First, and most important, none of the executive team and board who drove Denel into the ground remain. All were sacked and some now face legal proceedings. The new c-suite and board had to present a restructuring plan to National Treasury and the Department of Public Enterprises (DPE) before receiving support.
“Second, Denel’s cash flow crunch is a peculiar one. It has billions [of rands] in unrealised revenue from signed orders, but can’t complete them because it doesn’t have the cash for the required material and parts. Being able to complete deliveries on these would improve its cash flow.
“Third, Denel has R3.3 billion in outstanding bonds, mostly government-guaranteed, most held by the PIC [Public Investment Corporation]. In the event of bankruptcy these become due and either government (taxpayers) or the PIC (pensioners) are going to have to pay up. Getting order revenues flowing means those can be paid off.
“Fourth, the SA Air Force is completely reliant on Denel for most depot-level maintenance of its aircraft, especially as it’s the Oryx & Rooivalk OEM [original equipment manufacturer]. If Denel Aeronautics goes under, aircraft availability will plummet. Foreign maintenance contracts are largely unaffordable long-term.
“Because Denel is the OEM on the Oryx and Rooivalk, if it goes under and nobody acquires the design authority for those aircraft and commits to maintaining them, the SA Air Force will be forced to withdraw them from service.
“Given enough time and stability perhaps Denel Aeronautics could be privatised or a Joint Venture (JV) set up with another maintenance company. But none have the available cash in this economy to absorb it immediately should Denel go bankrupt. The impact on would be substantial and costly.
“Fifth, the effect of a sudden bankruptcy would be devastating on a strategically vital group of specialist high-tech engineering companies which are largely reliant on Denel and preserve scarce skills. Too many have already closed because of Denel’s inability to pay suppliers.
“Sixth, as we saw in 2006 with [former Denel Group Chief Executive Shaun] Liebenberg’s successful restructuring of Denel, you need stability and ongoing operations in order to split the group and create joint ventures or part privatisations like RDM (Rheinmetall Denel Munition) and Hensoldt Optronics. The same is true today.
“Seventh, despite claims to the contrary this is the first cash injection Denel has received in more than ten years. The rest has been guarantees on bond rollovers, meaning no new cash entered the business and that taxpayer money would only be spent if there was a default.
“I can’t emphasise that last point enough. None of the R3.3 billion in guarantees was spent, it was effectively the government signing surety. It’s also dwarfed by the R300 billion+ in guarantees held by other State Owned Entities (SOEs). The R1.8 billion is the first actual disbursement of money from the revenue fund.
“To sum up: Letting the SOEs go bankrupt means all those guarantees quickly become due, at far greater cost than stabilising and then privatising them. Provided the restructuring plan is sound, giving Denel a comparatively small cash injection saves South Africa money in the long term.”
Olivier added that the Denel bailout doesn’t mean SOEs should be given a blank cheque. “Both the public and Parliament must hold government and the SOEs to account to ensure that reforms take place as promised rather than this sustaining business as usual.”
Olivier is Director at African Defence Review. He can also be found on Twitter.