Denel has over a dozen product and support contracts with the South African National Defence Force (SANDF) but these are under threat from the group’s liquidity and other challenges, although Denel is confident its new turnaround strategy can put the state-owned conglomerate back on the right path.
Briefing the Portfolio Committee on Public Enterprises and Select Committee on Public Enterprises on Denel’s turnaround and financial challenges on Wednesday morning, Acting Group CEO William Hlakoane revealed that Denel has multiple contracts with the SANDF.
On the landward side, Project Muhali is for the obsolescence upgrade of 15 of the SA Army’s G6 self-propelled howitzers. Although due for completion in June 2021, Muhali has been delayed until 2023.
Project Topstar covers a gun laying and navigation system for the South African Army’s G5 and G6 artillery systems and 127 mm multiple rocket launchers (MRLs). The system will provide laying, navigation, orientation and fixation functionalities and is in the ‘production and transition phase’.
Denel Land Systems’ biggest project is Hoefyster, to supply Badger infantry combat vehicles to the South Africa Army. The R1.2 billion first phase is ongoing to December 2022 while the R8.4 billion second phase ins ongoing to March 2029. Denel is to produce 244 Badgers in five main variants.
Other Denel Land Systems contracts include various product support contracts for legacy products, including spares for vehicles, and Samil 100 truck maintenance and upgrades.
Under Project Biro, Denel Land Systems is supplying three GI2 cannons for the SA Navy’ three new inshore patrol vessels.
Project Sable is for ground-based air defence system (GBADS) support for two years while Project Fellowship (also with Denel Dynamics) is for the design and development of a mobile air defence system (MoBADS).
Other Denel Dynamics projects include supporting the SA Navy’s Umkhonto surface-to-air missile systems; developing a low-cost target drone demonstrator (Project Loki); Seeker 400 unmanned aerial vehicle support; A-Darter air-to-air missile industrialisation and production (Project Kamas); and developing an all-weather air defence missile demonstrator (Glow II).
On the aviation side, Denel Aeronautics is supporting a number of South African Air Force (SAAF) aircraft, including Oryx and Rooivalk helicopters. These support contracts are worth a combined R2.2 billion over three years.
C-130 Hercules support is worth R350 million over three years while Hawk jet trainer ground support and test equipment support over three years is worth R18 million.
In his presentation, Hlakoane, citing the National Defence Industry Council, warned that the liquidity challenges facing Denel have the potential impact of compromising South Africa’s national security; collapsing the entire defence industry irretrievably; and exposing South Africa to a mass exodus of skilled personnel; as well as losing critical defence capabilities, including sovereign and strategic capabilities.
He said Denel’s current state is “not a rosy picture,” with the company running at a loss and unable to meet operational requirements. Denel owes employees more than R600 million and suppliers R900 million. The group has a negative cash flow of around R600 million.
“If we do not do anything in the industry and don’t assist Denel to operate efficiently, we will become a technology taker and adopt technology developed by other countries,” Hlakoane warned, meaning South Africa will have to import technology at high cost and be unable to compete on the global market. “The nonexistence of Denel will collapse the entire industry,” he said.
Efforts are underway to try and rescue Denel, with an intergovernmental team working to come up with financial support for Denel and to ensure there is a pipeline of work that is directed towards the company. “The Department of Defence and Treasury have joined us in that effort. The first hurdle has been to ensure government guaranteed debt is taken care of and we get the capital required to restructure Denel,” Hlakoane said.
The new turnaround plan that Denel is implementing should help reposition the company and Hlakoane said he is confident it will help Denel become self-sufficient and not dependent on the public purse for support.
The new operating model will hold divisions to account and assist with delays and cost overruns. Other turnaround efforts include exiting division Denel Gear Ratio as it is unsustainable; evaluating the best use of property; and exiting joint ventures including Hensoldt Optronics, Barij Dynamics and Rheinmetall Denel Munition to address immediate liquidity issues. Denel will also partner with local entities like the Council for Scientific and Industrial Research.
A key tenet of the turnaround strategy is the diversification of capabilities into other industries, including the automotive, rail, maritime, mining, construction, energy generation and rapid prototype and industrialisation sectors. Denel’s integrated systems, UAVs and other capabilities will be adapted to employ military bred capabilities towards a more commercial and competitive environment in the national security domain outside of the SANDF, the company said.
Denel is working with Armscor on commercialising intellectual property (IP), namely its data packs and is currently auditing this with Armscor.