Low on ammo: Denel could run out of cash by end of next month, Treasury warns

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Denel se kantoor in Pretoria. Foto: Reuters
Denel se kantoor in Pretoria. Foto: Reuters
  • Denel's liquidity challenges has seen it struggle to pay creditors and staff their salaries.
  • The state arms manufacture risks running out of cash by March – further delays to the implementation of its turnaround plan would risk it being liquidated.
  • Another entity on the brink of collapse without a reconfiguration of its business is the Post Office, according to Treasury.


State arms manufacturer Denel risks running out of cash by the end of March, according to National Treasury.

Treasury officials on Tuesday appeared before the Standing Committee on Appropriations to brief members of Parliament on the third-quarter spending of the 2020/21 financial year, and state-owned enterprises (SOEs) were in the spotlight.

Treasury's chief director of sectoral oversight Ravesh Rajlal weighed in on Denel's liquidity challenges and said it would run out of cash at the end of March. It would need additional funding of around R500 million, he explained.

Denel has in the past struggled with paying salaries, creditors and even making statutory payments for medical aid and UIF, for example.

Government had already provided Denel with guarantee facilities amounting to R5.93 billion and  Treasury in 2019/20 provided it R1.8 billion as recapitalisation for its turnaround plan. Denel has been allocated R576 million for 2020/21.

According to Treasury's presentation Denel is battling with meeting sales targets, and its costs remain high.

Rajlal also explained there is a hold up in Denel implementing its turnaround plan- particularly when it comes to the sale of non-core assets and finding strategic partners – it is also the basis on which the support was provided.

Rajlal explained that Minister of Public Enterprises Pravin Gordhan - who has oversight of Denel – will be engaging with Cabinet on its turnaround plan and support needed.  Rajlal said that the plan requires "buy-in" of all players.

Finalising the future state of Denel – and the role it will play as an entity – would help inform its funding model, according to Treasury.

Forecasted net loss of R1.6bn

Denel recorded a net loss of R1.2 billion, as at the end of December 2020 and a forecasted net loss of R1.6 billion is expected by the end of March 2021. Rajlal noted that lockdown had an impact on the performance of the entity.

"The key concern for us as Treasury is around the ability of the entity to meet its obligation in terms of debt," said Rajlal. He warned that if the turnaround plan is not implemented there is a risk that Denel would be placed in liquidation.

Another entity which is on the brink of collapse if it is not restructured or repurposed is the SA Post Office, Rajlal said.

It will not be able to continue in its current form – without yearly funding from government to cover its losses. Treasury noted the "disarray" of management structures - acting positions for the chief executive officer, the chief financial officer and the chief operations officer. This is impacting accountability when it comes to the implementation of its turnaround plan.

"The restructuring of the Post Office is crucial, we have been talking about it for a number of months and years," said Rajlal. "We have reached a point where entity not restructured or repurposed soon it will collapse," he added.

Treasury has recommended government undertake a market study to determine the extent to which its involvement is required in the postal sector. The outcome of the study will determine the extent to which the Post Office would be restructured.

Going postal on staff bill

Rajlal also noted the Post office's bloated staff figures, which account for 61% of its R4.7 billion reported expenditure. Revenue from financial services provided by the Post Office, such as the disbursement of social grants and motor vehicle licences outweigh that of revenue from postal service which is in decline.

"Revenue is still low, we need to look at how it intends to arrest the decline in revenue," said Rajlal.

The Auditor General is expected not to sign off on the Post Office's financial statements as a going concern. As at the end of December 2020, the Post Office owed its creditors R2.54 billion. This is expected to affect its operations and cause further deterioration to revenue performance.

Responding to a question on why there are delays in the implementation of turnaround plans, Rajlal said that implementation is often linked to stability of management. Changes in leadership often see plans being reworked or shelved, he said.

Eskom getting no more than what's already promised

Commenting on power utility Eskom, Rajlal noted that no further financial support has been provided to Eskom other than what has already been announced. In the October Medium-term Budget Policy Statement, Treasury outlined the R230 billion would be allocated to the power utility over ten years. Rajlal noted that Treasury was robust in ensuring Eskom met certain conditions for the disbursement of funds.

The entity is not in a position to pay off all its debt - which is why the support package was provided to help it settle debt obligations, Rajlal explained. He said if support had not been provided to Eskom, it would have defaulted on its debt and government would have had to step in to settle it.

"The entity would have gone into business rescue mode," said Rajlal.

He added that the unbundling process into three entities - generation, transmission and distribution – is necessary to reduce Eskom's reliance on the fiscus.

Providing an update on Airports Company South Africa (ACSA) – Rajlal said for the nine months ended December 2020, its revenues declined 70%, compared to the same period in the previous year. The loss for the period was R1.9 billion, compared to profit of R424 million generated in the same period last year.

ACSA forecasted cumulative net losses of approximately R5 billion up to 2022/23 and a further R5.2 billion in losses by 2025/26. ACSA managed to alleviate liquidity challenges by securing R810 million funding from the Development Bank of Southern Africa.


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