Cash-strapped Denel must dig deep to pay salaries

Denel has until Friday to pay 3 700 workers their May, June and July salaries, after the Labour Court ruled in favour of workers represented by trade unions Solidarity and Uasa on Tuesday.

The workers were forced to take legal action against the global defence, security and technology giant, and African Defence Review director Darren Olivier says despite reducing the number of staff by 27% and cutting salaries, Denel still hasn’t been able to free up enough money to ensure it stays afloat. 

Uasa metal and engineering industries sectoral manager Frik van Straaten said defaults on salary payments have been experienced by members since last year. 

The matter was taken to the labor court two months ago, and as a show of goodwill, Denel agreed to host an independent facilitation process. This, van Straaten said, was “a complete parody”.

“The chairperson on the Denel board claimed she didn’t know our members weren’t being paid, and claims to have never seen projects for Denel to recover. She pleaded ignorance and left the meeting.”

Denel board chairperson Monhla Hlahla serves as the link between Denel and government, van Straaten explained.

If Denel fails to pay worker salaries by 7 August, it will be in contempt of court, he warned.

Denel also cannot receive repayments for new orders, as this requires bank guarantees that are not feasible, giving its liquidity crisis and outstanding supplier payments, Olivier said. 

Denel needs at least R370 million every month in working capital to keep operations running. But Olivier said it has R866 million in “outstanding legacy obligations”, some of which is owed to suppliers essential to Denel being awarded contracts. 

“Without National Treasury providing the remaining R504 million of its promised turnaround funding, it’s very likely that it will be forced into business rescue or liquidation.” 

The decline in the country’s defence budget means acquisition and support funding by the South African National Defence Force (SANDF) that accounts for a significant amount of Denel’s revenue has shrunken substantially, Olivier said.   

According to military analyst and author Helmoed-Römer Heitman, this would cost the country billions in exports, and result in Denel and feeder companies dependant on it having to forfeit as many as 40 000 jobs.

Heitman emphasised that letting go of Denel would be short-sighted. 

He said South Africa’s defence sector enjoys strategic independence, but losing Denel would mean not being able to develop optimised equipment for our needs. 

Military technology is used in many sectors that rely on good engineering work – from mines and cars to cellphones and pharmaceuticals, many devices used by ordinary citizens originate from the defence sector. 

Denel’s failure would not only put many technology and engineering companies at risk, but would mean not being able to maintain many of the SANDF’s aircraft and equipment. This means certain systems would have to be removed from service, Olivier said.

The state-owned entity is riddled with corruption and mismanagement, which peaked during the State Capture era, Olivier explained. 

This drove it into a “cash flow crisis”, where too much debt was taken on and a lack of liquidity meant it couldn’t trade its way out. Production stoppages cost Denel non-delivery penalties. 

National Treasury failing to provide approved funding, and the Department of Public Enterprises being too slow to approve proposed divestments and equity partnerships, has exacerbated Denel’s precarious financial situation. 

“Denel just started making money again, but the bad guys got their hands on it again,” Heitman lamented. 

He said saving the SOE means giving the SANDF money to buy equipment from Denel. 

Denel is worth saving – this much is clear. 

But how quickly this happens, and how willing those in senior positions are to admit what they don’t know, will determine whether it sinks or swims. 

Potentially devastating knock-on effects throughout the defence, technology and engineering sector would wreak further havoc on South Africa’s economy and cost even more jobs. 

“Denel is of strategic importance to South Africa,” van Straaten concluded. 

Denel was approached for comment, but no response was received by the time of publication. 

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