Denel’s solvency a serious challenge: Gigaba


Minister of Public Enterprises Malusi Gigaba says although state arsenal Denel has made some progress since the company embarked on a turnaround strategy in 2005, its solvency position continues to pose serious challenges, with Denel Saab Aerostructures (DSA) being the major contributor to the entity’s losses.

DSA was to blame for a loss of R328 million of a total Denel Group loss of R246 million for the year to March 2010. A framework for the resolution of DSA has been developed and is underway, Gigaba said in his annual budget vote yesterday. Whilst the trading losses in the other entities have been brought down, the majority of Denel’s business entities remain loss-making, he said.
“Clearly, the business is not sustainable in its current model. A more robust turnaround plan that pursues financial recovery and stability through improvements in its operational and financial performance needs to be developed to secure the company’s long term viability.”

Denel is currently in talks with private company Aerosud to sell it all of DSA. Addressing a Portfolio Committee on Public Enterprises on the future of DSA last week, Public Enterprises director-general Tshediso Matona said Saab, which had owned 20% of DSA since 2007, exited the business at the end of March.

A Denel spokeswoman said SAAB purchased the 20% stake when they entered the business and Denel repurchased the 20% stake for the same value. The INet Bridge financial news service reported in June 2006 that Saab would provide an “investment of R66 million over the first two years, ongoing skills and technology transfers, as well as management and market access.”

Denel last posted a net profit in 2001 when it banked R24.1 million. The only other profit recorded since its formation in 1992 was in 1997, when it reported R81.5 million. Its worst loss was in 2006 when it posted a deficit of some R1.6 billion. A turn-around strategy was put in place that included government guarantees for debt raised commercially. This project has been mostly successful with the state arsenal in August posting an operating profit of R200 million for the year to March 31, 2010. But CE Talib Sadik last November complained of the debt and interest burden, when announcing the numbers.

At the end of March last year, debt stood at R1.9 billion and interest payments stood at R130 million. Sadik lamented Denel would have posted a R200 million profit but for the loss at DSA caused by delays with the Airbus A400M project and the interest payments due “in the absence of recapitalisation requested from the National Treasury.”

Gigaba says a “structured mechanism is required in order to effect the necessary alignment of Denel’s business plan with the requirements of the Department of Defence. Shrinking defence budgets have resulted in scaling back of certain procurement programmes, with lower economies of scale and increasing unit costs. There is a need to re-think Denel’s strategic direction going forward to ensure its financial sustainability.
“Denel will be expected to accelerate its efforts towards skills development and transformation. The company must generate skills across the full spectrum, ranging from artisan level to engineers and high-tech technologists,” Gigaba said. He did not elaborate what this meant. Neither did he comment on what is described as ongoing talks regarding the placement of Denel. Defence minister Lindiwe Sisulu in 2009 said she wanted Denel to fall under her department to facilitate better coordination.