SOEs, including Denel, on a “death spiral” – DA

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National Treasury’s third quarter government expenditure report confirms the apparent “death spiral” of State-owned enterprises (SOEs), including Denel, continues.

The observation by Democratic Alliance (DA) shadow deputy finance minister, Ashor Sarupen, covers six SOEs – referred to as State-owned companies (SOCs) in the National Treasury (NT) Asset Liability Management Division presentation to Parliament’s Standing Committee on Appropriations (SCA) on 14 February. They are the Land Bank, Eskom, SAA (South African Airways), Transnet, the South African Post Office (SAPO) and the Irene, Centurion-headquartered defence and technology conglomerate Denel.

The NT reports that as of 31 December last year, Denel’s year-to-date revenue was 37% behind budget amounting to R847 million compared to a year-to-date budget of R1.343 billion.

“The shortfall was a result of delays in the placement of orders by SAAF (SA Air Force) as per budget, non-delivery of spares within required timelines and breakdown of critical machinery.”

The full year forecast to end of March 2024 amounts to R1.671 billion against a budget of R1.972 billion – a 15% shortfall.

Operating costs year-to-date are R566 million compared to a year-to-date budget of R456 million ascribed to a delay in implementing cost reduction measures. The presentation further notes high under-recoveries due to reduced productivity.

“Denel’s earnings before interest and tax (EBIT) worsened to a negative R359 million compared to the projected negative R179 million. Consequently, net losses deteriorated further than expected. As at 31 December 2023, Denel’s realised net loss amounted to R463 million, 37% worse than the projected R339 million in losses. The deterioration was due to lower revenue and higher operating costs, further contributing to this is the loss from Associates, primarily RDM (Rheinmetall Denel Munition) and Barij [Dynamics, formerly Tawazun Dynamics].

“Denel,” according to the NT presentation, “remains financially vulnerable” and “delivering on the turnaround plan remains priority” with “Denel consistently urged to finalise asset disposal initiatives”.

Reacting to what he calls “alarming financial distress” in multiple SOEs, Sarupen said Denel received a R3.3 billion bailout in 2022 and by the end of the third quarter last year lost R463 million – R124 million more than budgeted for.

Denel continues to implement its latest turnaround plan, which includes the disposal of non-core assets, consolidating core capabilities, and achieving growth through collaborations.

The turnaround plan has a funding requirement of R5.203 billion, of which Denel committed to raise around R1.8 billion through the disposal of identified non-core assets. The remaining balance of R3.378 billion was allocated through the Special Appropriation Act 2022, subject to meeting certain pre- and post-disbursement conditions.

To date, Denel has drawn down R2.203 billion. The remaining portion of the allocated funds (R1.175 billion) has been ringfenced by Denel and only to be drawn down when realising proceeds from the sale of the remaining non-core assets. This enforces accountability on Denel to follow-through on these augmenting initiatives, National Treasury stated.

Treasury’s reported noted Denel has been unable to finalise any other asset-disposal apart from unlocking the surplus funds from the Denel Medical Benefit Trust (DMBT). “This is due to stakeholder misalignment in the defence industry, given that the anticipated Memorandum of Co-operation (MoC) to outline alignment on the identified sovereign and strategic capabilities, including the funding thereof, has been delayed and still not finalised to date.”

“Despite the delays being experienced, National Treasury maintains that Denel needs to realise proceeds from the sale of non-core assets before the ringfenced portion of the recapitalisation can be accessed.”