State-owned arms manufacturer Denel has settled all unpaid wages, as well as PAYE tax and pension fund payments, after releasing excess funds into the Denel Medical Benefit Trust.
Denel ran into cash flow problems more than two years ago and fell behind in paying workers’ wages. The company was sued by union and non-union workers to force it to catch up on its late payments. Revenues have fallen from a peak of R8.2 billion in 2016 to less than R2 billion in 2022.
“We have turned an important page in the history of Denel. We can now proceed with the restructuring and repositioning of Denel as a sustainable business and a valuable and strategic asset for South Africa,” Denel Chairman Gloria Serobe said during a press briefing on Thursday.
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Riaz Saloojee, Denel’s chief restructuring officer, said the company now has a clear and sustainable business case, with an order book of 12 billion rand, six times the current annual revenue. There is scope to increase this backlog to R30 billion, he added.
Saloojee said a streamlined Denel will focus on its areas of expertise in guided weapons, land defense systems, aircraft engineering and maintenance, and the delivery of complex integrated systems for security and cybersecurity environments.
The new growth trajectory is to create 1,000 jobs within three years and 5,000 jobs by 2027.
Denel’s cash flow problems left its 2,800 employees without full pay, some of them since May 2020.
The company was ordered to settle workers’ payments after unions Solidarity and the National Union of Metalworkers of South Africa (Numsa) took it to the industrial tribunal. A small group of current and former (non-union) employees sued the company in the North Gauteng High Court, which ordered Denel to pay R13.2 million in unpaid wages.
In March, Public Enterprises Minister Pravin Gordhan allocated Denel 3 billion rand to cover interest payments on the group’s growing debt, but refused permission to use it to pay staff salaries.
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The loss of an Egyptian missile contract contributed to the company’s liquidity crisis.
Serobe said that Denel Medical Benefit Trust had an actuarial surplus of R1.47 billion in April 2022, but it took two years to release this funding due to the nature of the trust and the legal procedures that had to be followed.
The defined benefit fund was overcapitalized and it made no sense that Denel, as the trust’s corporate sponsor, couldn’t access that excess, she said.
Nearly R1 billion was transferred to Denel in July, allowing it to settle all unpaid wages and associated benefits.
“The new restructuring plan supported by us as board and shareholder will create a stand-alone business with a strong order book,” Serobe said.
“The sale of non-core assets is well underway and together with the recapitalization request – which the Public Enterprise Department has requested through the National Treasury – will address legacy debt and the introduction of cash. will immediately improve profitability, [and] enable the company to retain and appoint competent skills and leadership.
The Treasury and the Department of Public Enterprises have come under heavy criticism from employees and defense analysts for not acting sooner to prevent a crisis that resulted in the loss of critical strategic capabilities.
The company will now focus on generating cash through the sale of non-core assets and the creation of new partnerships.
Denel plans to restore its operational status and reputation, providing “vital leadership to the local defense industry which exports some R7 billion of mostly advanced manufactured goods a year”, Saloojee said.
Denel’s intellectual property in a rapidly changing global defense environment will create opportunities to commercialize the company’s products and build deeper strategic relationships, he added.
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