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Denel’s troubles are a big worry for South Africa’s armed forces  

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 18 May 2021 04:37

Members of the National Union of Metalworkers of South Africa hold placards during their march to the ministry of public enterprises in the capital Pretoria, South Africa, 9 November 2018. REUTERS/Siphiwe Sibeko

The operational and financial woes at Denel, the state-owned defence systems company, are threatening the combat readiness of South Africa’s armed forces. 

Denel is a key product supplier and service provider to the South African National Defence Force (SANDF) and the South African Air Force (SAAF).

Revelations about how Denel’s precarious state of affairs is affecting the SANDF and the SAAF, and the danger that this poses given the current volatile situation in northern Mozambique, have alarmed parliamentarians. South Africa also plays an important role in peace-keeping and rescue missions throughout the continent.

A letter written by Major General Setete Malakoane, SAAF’s chief director of force development and support, which was leaked by Democratic Alliance MP Kobus Marais, details the extent to which Denel’s shortcomings are affecting the armed forces.

DPE oversight

Denel is one of the state-owned entities (SOEs) overseen by the department of public enterprises (DPE). It was one of the worst-affected by state capture – the corruption under former president Jacob Zuma – and its current financial and operational problems stem that. As a result, Denel’s ability to supply ammunition, among other essential products, to the SANDF and maintenance support for the SAAF have been severely compromised.

We have said it in the past that the troubles Denel has found itself in were a direct result of some of the bad appointments made with the last board we had at Denel,” said DPE director-general Kgathatso Tlhakudi.

Last week, Tlhakudi said: “The worry about Denel is the worry that we all have. Our armed forces are reliant on products [provided] … by Denel. Their [armed forces] operational readiness and operational effectiveness are impacted.”

Denel’s latest financials show that it generated R2.7bn ($192m) in revenue, but recorded a loss of R1.7bn. The defence technology company has assets valued at R8.7bn ($619m), and slightly more than 3,000 employees, whose salaries Denel has been struggling to pay.

Its major contracts include those with Malaysia for the supply of turrets and Project Hoefster (also spelled  ‘Hoefyster’) with the SANDF, through Armscor, for the production of new-generation armoured vehicles. In addition, Denel is an original equipment manufacturer accredited as a maintenance repair organisation for the Rooivalk (red falcon) and Oryx helicopters used by the SAAF.

Poor programme performance, dismal revenue prospects

The DPE refers to these as Denel programmes. As the shareholder representative department, the DPE keeps a close watch on programme performance on a quarterly basis because they are an important revenue source for Denel.

But, “as we know, Denel has suffered of late with poor programme performance that is reflected in poor financial performance. There has been a challenge to keep up salary payments at Denel. We are working hard to address that,” said Tlhakudi.

The government’s proposed solution is restructuring Denel. That means retrenchments, either through voluntary severance packages or attrition by way of early retirement, will be part of such a process.

“The restructuring of Denel is critical for us in view of the reduction in revenue in recent times. We need to size the industrial capability – or the manufacturing capability – and ensure going forward that we can grow from a strong and sustainable base,” according to Tlhakudi.

Denel’s new board and recently appointed executive team have produced a plan to accomplish the task. They have also come up with a new business model for Denel. “They are working on securing funding to ensure the restructuring of the business,” Tlhakudi said.

A major component of Denel’s new plan will feature a defence and aerospace masterplan.

How state capture ruined the business

“We have said it in the past that the troubles Denel has found itself in were a direct result of some of the bad appointments made with the last board we had at Denel,” Tlhakudi said.

That former board was appointed during the Zuma era, summarily dismissing Denel’s CEO, CFO and company secretary. They were replaced by other executives. This modus operandi was replicated at other SOEs to advance the cause of the Zuma-aligned Gupta family of businessmen and their proxies.

“If you are a business like Denel that is reliant on the capital markets to raise funding, you don’t do things like those. As the market tightened on its provision of funding to Denel, we started to see its operations grind into a halt. That’s what we are dealing with – [and] what we are trying to correct,” the DPE director-general explained.

However, Tlhakudi readily admits that the rot did not stop at SOEs. “The rot made its way to DPE. It has been covered in the media in terms of what happened; the role the DPE played in terms of appointment of boards during that particular time to enable the capture of the SOEs. That really is the main reason why DPE did not do its role. And that’s what we are trying to correct,” he said.

South African government on terror watch

As Denel attempts to sort itself out, the South African government remains concerned about the security situation in Mozambique and continues to monitor developments, according to a statement released this week.

The South African cabinet has also approved the publication of the Protection of Constitutional Democracy Against Terrorist and Related Activities Amendment Bill for public comment. “The review seeks to align the South African legislative framework to international laws that seek to combat terrorism,” reads part of the statement.

Last week, Daily Maverick reported that South African international relations and co-operation minister Naledi Pandor and US secretary of state Antony Blinken met at the sidelines of the Group of Seven (G7) Foreign and Development Ministerial Meeting in London. Pandor and Blinken agreed on the need for the two states to combine efforts in addressing the Islamist insurgency in Mozambique.

Earlier this year, the SAAF played a key role in the repatriation of South Africans from Mozambique following attacks in Cabo Delgado.

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