R500m owed to staff: Denel veers closer to collapse as key business unit fails to pay full salaries
State-owned arms company Denel said it lacked the cash to pay May salaries in full. Workers received only 20% of their net salaries. This underscores the crisis in South Africa’s state-owned industry.
The financial crisis at Denel has intensified as the state-owned entity’s business division, which is at the heart of South Africa’s armoured vehicle and artillery innovation, has again failed to pay the full salaries of its 400 workers.
Denel’s lack of cash has resulted in workers at Denel Land Systems receiving only 20% of their net salaries for May 2021 — another sign that the state-owned entity is near collapse.
In a memo to Denel Land Systems workers on 28 May, which was obtained by Business Maverick, the division’s CEO Mxolisi Makhatini also warned workers that “the payment of salaries for the upcoming months will continue to be a challenge to honour” due to the company’s worsening financial situation.
Makhatini said Denel is going through an “unprecedented storm” as it cannot pay full salaries, but continues to pay medical aid cover on behalf of workers as well as the risk portion of their pension contributions.
Denel Land Systems, which is one of Denel’s largest divisions and manufactures armoured vehicles and heavy artillery, has, since early 2020, remained deeply indebted to staff for outstanding salaries.
Other Denel divisions — Denel Aeronautics, Denel Pretoria Metal Pressings and Denel Vehicle Systems — have also failed to pay workers their full salaries since 2020, especially after the start of the Covid-19 pandemic.
It’s unclear if other Denel business divisions were able to pay full salaries in May as the company didn’t respond to Business Maverick’s request for comment at the time of publishing this article. But in April 2020 alone, most of Denel’s divisions were able to pay only partial salaries of between 37% and 50%.
Public Enterprises Minister Pravin Gordhan, who oversees the governance and operations of state-owned entities, recently told Parliament that Denel last paid full salaries in May 2020 and owes employees about R500-million.
A financial, operational and leadership crisis
Denel, the manufacturer of Umkhonto missiles and Rooikat armoured vehicles, is another sorry chapter of SA’s state-owned industry as it has been embroiled in allegations of State Capture. Denel joins the ranks of other SOEs such as the financially distressed SAA (and its subsidiaries) and SA Express. They either cannot pay full salaries or any salaries at all.
In Denel’s case, it has faced a crisis on financial, operational and leadership fronts. Denel recently reported a financial loss of R1.9-billion in the year ending February 2020.
At an operational level, Denel has failed to implement many turnaround plans that involved selling non-core assets, cutting costs by R1-billion and attracting private investors that would pump money into the entity in exchange for shareholding.
At a leadership level, Denel has had three CEOs since 2019 and several board members have stepped down after failing to secure more bailouts from the Treasury. Denel received no additional funding from the Treasury’s 2021 Budget Review, despite its worrying financial position.
Trade unions weigh in
Trade unions have been forced to drag Denel to court to honour outstanding salary payments.
Solidarity, which represents about 600 Denel workers, recently secured a court order to seize Denel assets to the value of R12-million to recover members’ unpaid salaries from May to July 2020.
Solidarity defence spokesperson Helgard Cronjé told Business Maverick that the assets have not yet been seized by the Sheriff of the Court, saying Denel’s assets are still being determined.
“We have to determine which salaries have been paid and which have not. Quantifying the claim for unpaid salaries of about 600 workers is difficult as some of the members have resigned from Denel,” said Cronjé.
He estimated that the claim for unpaid salaries for Denel workers who are represented by Solidarity is about R100-million.
The salary crisis has also resulted in an exodus of workers — workers with many years of technical and engineering skills. This will undermine Denel’s ability to return to its former glory of being at the centre of innovation, especially in the arms manufacturing industry. Denel’s workforce (including all divisions) has fallen from 3,332 to about 2,800.
The crisis also has a human cost. Mawonga Madolo, a metal sector coordinator at the National Union of Mineworkers (NUM), said two of its Denel members committed suicide as they ran into financial difficulties after not receiving their full salaries. NUM represents 400 workers at Denel Land Systems and has estimated that its members are owed R8.3-million in outstanding salaries since May 2020.
The NUM has written a letter to Denel’s management and board asking for outstanding salaries to be paid within 14 days, failing which the union would institute legal action.
“The second plan of action is working with Cosatu to organise a march to the national treasurer office in an attempt to force the government to take responsibility for the matter as the sole shareholder,” said Madolo. DM/BM