Additional R3.4 billion bailout funds for Denel

South Africa’s state-owned entities (SOEs) continue to rely on government bailouts to stay afloat and remain economically viable.

The country’s Finance Minister Enoch Godongwana has announced conditional in-year allocations to various SOEs in the National Budget speech delivered on February 22.

Funds amounting to R3.4-billion have been allocated to Denel through the Special Appropriation Act of 2022, with set conditions relating to the implementation of its turnaround plan and clarity on a sustainable business model.

The 2022 Budget review outlined the need for a new framework for managing bailouts to SOEs to reduce fiscal risks and promote long-overdue reforms.

The preliminary framework will be published in March for consultation and will, thereafter, be submitted for Cabinet approval. The framework aims to link bailouts of these entities to a range of reforms needed to make them sustainable and efficient.

Godongwana affirms in the 2023 Budget that oversight teams have been set up to monitor progress on the implementation of bailout conditions and that action will be taken against the transgressor in the case of non-compliance.

For a while now, given Denel’s liquidity constraints, the company embarked on a process to exit unprofitable, non-core businesses. This created an opportunity to acquire strategic equity partners, which enabled Denel to secure market access and generate cash, thereby restoring its financial sustainability. Denel was also engaging with interested parties for equity injections.

In January 2022, a total of R3 billion was authorised by the Minister of Finance to settle guaranteed Denel debt.

Denel’s turnaround strategy requires R5.2 billion, of which R990 million has come from the Denel Medical Benefit Trust, and which has already been used to pay outstanding salaries, while R1.8 billion will come from the sale of non-core assets. The remaining R3.4 billion from National Treasury.

Challenges identified in Denel’s turnaround include insufficient funding to complete restructuring, a continued brain drain and loss of critical skills, funding not available to take advantage of the R30 billion export opportunity pipeline, insufficient working capital and an inability to fund “critical capital expenditure initiatives”.

In October last year, Denel also sought additional funding in order to implement its multi-billion rand turnaround strategy.

In the new business model, the company’s divisions will be converted to smaller business units to improve cost-efficiency and agility to better cope with current market conditions.

As part of the turnaround strategy, Denel will be restructured into four divisions: Guided Weapons, Land, Air and Integrated Systems. Guided Weapons will cover missiles and precision guided munitions and their support; Land will cover infantry systems, artillery, armoured vehicles, ammunition and mechatronics; Air will cover aircraft and engine maintenance and repair, aircraft systems integration and upgrades, test and evaluation and unmanned aerial vehicle production; and Integrated Systems will cover complex system integration such as ground-based air defence systems and cyber solutions.

Denel Land Systems (DLS), Denel Vehicle Systems (DVS), and PMP will be combined into the Land Division, while Air will comprise the Overberg Test Range (OTR) and Denel Aeronautics. Guided Weapons will incorporate Denel Dynamics.

Denel Integrated Systems Solutions (DISS) aims to grow substantially as it seeks commercial and defence business locally and abroad.

The restructuring of Denel which will be implemented by 1 April, will allow the company to be more efficient and better placed to meet the demands of the current marketplace, interim CEO William Hlakoane said on 28 March during the opening day of Defence Services Asia (DSA) 2022 in Kuala Lumpur, Malaysia.

With the restructuring in place, Denel will focus on building strong partnerships overseas with industrial JVs and providing Denel’s research, technology, and skills to countries wanting to develop indigenous products.

The new strategy would ensure that new and existing customers will enjoy substantial local industry partnerships and become part of Denel’s supply chain.

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