South Africa’s state-owned arms manufacturing and marketing company, Denel, “is practically at the doorstep of bankruptcy”, CEO Victor Moche told MPs on Wednesday.
However, he said there is light at the end of the tunnel if the entity focuses on research and development and balancing its budget.
Addressing the National Assembly public enterprises portfolio committee meeting on Wednesday — chaired by African National Congress MP Yunus Carrim — Moche said despite revenue of R4,4-billion in 2003/04, the entity suffered a loss of R358-million — before tax.
“We are very highly borrowed and we are very badly geared,” he said, noting that Denel has about R1-billion in borrowings. “We are in a situation in which we don’t generate enough cash flow to carry out our business. That has to turn around, otherwise we are looking at bankruptcy.”
“We are practically at the doorstep of bankruptcy,” he emphasised to MPs.
He said supplies to the South African National Defence Force are constantly diminishing and it is ironic that South Africa can procure its defence needs from around the world, while the European and American markets are for all practical purposes shut to Denel’s products.
The only way to enter those markets is to work through an American or a European Union company. Even in its own defence package deal in South Africa, Denel has not won a single “major” contract. The parastatal was part of the subcontracts of the multibillion-rand arms deal — including the combat suites (weapons systems) for the corvettes — but “not a single South African won any [major] contract”.
He said the entity “has to return to its core business”, which is manufacturing. For example, through Irenco — based at Potchefstroom — Denel is producing plastic goods for non-military purposes.
Research and development spending is too low and capital expenditure is declining, “which is not a good thing”.
The company has also “drastically” cut back in its social investment. Salary increases are also “relatively flat”, which does not necessarily make for a highly contented workforce, he said.
But he predicted that the company — through pruning its operation, ending production of products that are not selling and focusing on its core activities — could turn around in up to 36 months.
On the positive side, exports have risen from virtually nothing five years ago to 60% of sales today.
“There has been no capital injection into Denel and it has thus had to since day one [in 1992] borrow money,” he said. Initially the costs had not been a concern as South Africa was unable to access military technology from abroad in the apartheid era — but now the entity is required to be self-sustaining.
Without calling directly for a state subsidy, he said Armscor — South Africa’s acquisition entity — puts out international tenders that are bid for by suppliers.
“South Africa will always lose, I submit, because the competing entities will come in with better products because they have had better research and development funding.”
While the entity is producing fine products — including the Rooivalk helicopter — it has been in a process of development “for 20 years … because there is never enough funding to complete development to get it to markets”.
The G5 and G6 guns are expensive, although of world-class standard.
“Denel has priced itself out of the market. This needs to be addressed by dealing with our balance-sheet issues and development funding.” — I-Net Bridge