State-owned arms manufacturer Denel continues to grapple with significant financial and operational challenges, despite receiving substantial government bailouts, according to a recent report by the Auditor-General of South Africa (AGSA). The AGSA's findings, presented to the Standing Committee on Public Accounts (SCOPA) on 19 November, paint a concerning picture of the company's precarious financial position and slow progress in implementing its turnaround strategy.
The AGSA highlighted severe liquidity constraints and cash flow problems, rendering Denel unable to meet its debt obligations as they fall due. The company is experiencing substantial net operating losses and operational difficulties, significantly hampered by the slow implementation of major revenue-generating projects. This has resulted in a considerable loss of market share to international competitors, with some major contracts cancelled and others incurring significant penalties.
A further complication stems from skills shortages and capacity constraints. Denel has experienced a significant loss of skilled personnel due to job insecurity and Section 189 retrenchments, impacting its operational capabilities. The AGSA also noted a critical deficiency in Denel's IT infrastructure, describing ageing systems and an inadequate IT environment as significantly hindering operations. This lack of investment in IT capital infrastructure has persisted for several years.
These issues persist despite a substantial R3.4 billion cash injection during the 2022/23 financial year. While R2.4 billion (70% of the total bailout) had been utilised by the end of the 2023/24 financial year, approximately R900 million remained inaccessible due to unmet bailout conditions as of 31 March 2024. Furthermore, the AGSA report revealed that only 5% of the utilised funds were allocated to the restructuring and turnaround implementation plan; the remaining portion was used to settle legacy debts, including those owed to the South African Revenue Service (SARS).
This allocation of funds raised serious concerns. The AGSA warned that the lack of alternative funding models to support the turnaround plan, coupled with the insufficient funds available to implement it, poses a significant risk. A portion of the recapitalisation remains inaccessible due to unmet conditions, further hindering progress. Efforts to generate funds through the sale of non-core assets have also proved unsuccessful.
The AGSA concluded that Denel's financial and operational challenges seriously threaten its long-term sustainability and its ability to continue as a going concern, potentially placing an additional burden on the national fiscus. The report included several recommendations, urging improved accountability and commitment from the board, more efficient execution of initiatives, rebuilding internal workforce capacity, preserving institutional knowledge, and the timely submission of annual financial statements. The 2023/24 audit remains outstanding, pending the submission of the annual financial statements, expected by 30 November.
The AGSA recommended that Denel transition to a sustainable state-owned enterprise funding model, eliminating reliance on further recapitalisation. It further urged the Department of Defence and National Treasury to closely monitor progress on the turnaround strategy implementation and accelerate the rationalisation of state-owned entities. The ongoing challenges facing Denel underscore the need for decisive action to address its financial and operational vulnerabilities.
