A Denel G-6 howitzer tank. Picture: BUSINESS DAY
A Denel G-6 howitzer tank. Picture: BUSINESS DAY

Cash-strapped arms manufacturer Denel has said its board has appointed a panel of forensic investigators to probe procurement irregularities and is working with the Special Investigating Unit (SIU) to identify and root out any corruption in the company.

It said irregular appointments of employees and business partners were also under investigation.

The entity faces a number of challenges, which include a weak balance sheet, an unaffordable cost structure and an unsustainable creditor backlog, which has affected the operations negatively. All these combined have curtailed its ability to generate revenue.

Denel, which has been weighed down by allegations of mismanagement and corruption, slipped into such a severe financial crisis that in December 2017 it needed a government guarantee to enable it to pay its workers and suppliers.

Its year-end report was supposed to have been released six months ago. The arms manufacturer is one of the state-owned entities (SOEs) that delayed releasing their annual reports, along with SAA and SA Express. On Wednesday, it finally released its delayed annual report which showed irregular expenditure running to R500m. 

The group is embroiled in the state-capture scandal in which the  Gupta family, friends of former president Jacob Zuma, were allegedly taking advantage of the close ties to get lucrative business from the state and the entities it owned.

There is a process underway to unwind Denel Asia and to terminate all the contracts with VR Laser. Denel Asia was a joint venture between Denel and VR Laser Asia, owned by Gupta-family associate Salim Essa.

On Wednesday, Denel said that while it had posted “modest profits” for the past seven years, the significant losses in the company’s 2017-2018 results clearly showed a business that had a difficult year, marked by lapses in governance, mismanagement and poor contract execution that resulted in severe liquidity challenges

The company’s revenue dropped by 38% to R4.9bn from R8bn in the 2016-2017 financial year. This was due to delays in two of its major programmes, it said. The development phase of the programmes were delayed leading to cost increases and delays in production.

The liquidity challenges further affected deliveries to clients as suppliers were finding it difficult to deliver on critical  components required, the company said.

Export revenue had decreased by 8% to R2.7bn, mainly due to reduced sales in the Asia Pacific and Middle East regions. Denel said its gross margin loss of 2.42% deteriorated as a result of the high base cost, which could not be recovered as revenue and plant activity were at very low levels.

It said the operating costs were under severe pressure which included negative impacts brought on by foreign exchange losses of R273m (2016-2017: R232m). The company said the decline in revenue led to reduced earnings before interest and tax, -R1.4bn, compared to the 2016-2017 year of R556m.

This was against the backdrop of an increase in net finance costs to R292m, largely as a result of the increased cost of borrowings.

Denel’s total assets had decreased to R11bn (2016-2017: R12.5bn) driven mainly by the decrease in cash and cash equivalents R1.3bn (2016-20/17: R2bn).

The company said it is “undertaking a review of the cost base to ensure that the business is able to contain costs at a sustainable level”.