NEWS & ANALYSIS

Treasury and DPE condemned for strangling Denel – NUMSA

Union says SOE’s story ever since 1992 has been one of moving from one crisis to the next

NUMSA condemns treasury and DPE for strangling Denel

9 November 2020

The National Union of Metalworkers of South Africa (NUMSA) strongly condemns government’s failure to capitalize Denel. NUMSA, as a responsible and caring union, has written several letters, since 2018 to date to the current President, Cyril Ramaphosa, where we have reminded government of the strategic importance of Denel as a company. We have also said that the defense sector exists to ensure that sovereign and strategic capability are preserved for the domestic economy to ensure security of supply.

Nations throughout the world ensure that they are in control of sovereign capabilities, such as ammunition, weaponry, artillery, telecommunication, command-and-control systems, and in some cases, even missile technology and cyber warfare capabilities. These capabilities are generally in the realm of import substitution, not for market related reasons, but to sustain operational readiness for the security of the country for disaster relief and other matters of national security.

It stands to reason that a nation state cannot rely on other countries to supply critical military capabilities during a crisis situation and in particular during a state of disaster. It is also a well-known fact that the defence sector generally needs research and development for the balance of the industrial sector.

Strong economies, in particular industrial economies, rely on innovation and technology development in the defence sector. In the 1980’s, Denel was the manufacturing arm of South Africa’s acquisitions agency, ARMSCOR. During that era, Denel was responsible for close to 80 per cent to 90 per cent of defence production of almost every form of military technology. At the same time, the defence sector represented at its peak, close to 28% of GDP. At the time when we wrote to President Cyril Ramaphosa in 2018, this had reduced to a meagre 1 per cent of GDP. Yet no red flags have been raised. Our government seems indifferent to this potentially enormous loss to our remaining capability.

In 1992, the former National Party government separated Denel from ARMSCOR and migrated Denel to what is now known as the Public Enterprises Department. Denel’s story ever since has been one of moving from one crisis to the next. This is a clear indication that a civilian department has no clue as to the dynamics of what it takes to sustain a military manufacturing machine of that scope and scale. Producing large, medium and small calibre ammunition does not necessarily make good business sense, but any nation worth its salt would never rely on importing such strategic capabilities. In other words, there is a clear logic for subsidising certain product ranges that fall into the category of sovereign capability.

Furthermore, at the time when we raised this issue with President Ramaphosa, Denel provided approximately 25 000 direct and indirect jobs in the local defence industry and had earned the South African economy in excess of R16 billion in foreign currency revenue over the last 5 years. Denel created approximately five thousand direct jobs, 30 per cent of which was youth employment.

Denel, together with its supply chain, were experiencing an obvious economic meltdown at that time, in that in the 18 months preceding our letter to the President, Denel had not been in a liquid position to pay suppliers for their outstanding invoices – a situation that created a vicious cycle of non-payment, resulting in no supply.

The majority of Denel’s workforce has been subjected to a situation where despite Denel having a huge demand and a market to supply, at that time workers were unable to work because Denel had no money to buy the raw materials to produce and service the demand.

Six thousand five hundred workers are at risk of potentially losing their jobs with a vulnerable supply chain, which could be sucked into an abyss of hopelessness. Denel’s supply chain is made up of hundreds of small black owned suppliers, many of whom have had to close shop because Denel could not pay them. Denel’s liabilities exceed the available balance sheet, albeit that it has an order book of approximately twenty billion rand. 

Between 2016 and 2017 Denel had an order book of no less than R40 billion. The major challenge has been the consistent failure of this government to allocate a budget and capitalize it to improve liquidity, and to allow it to service its order book. The situation at Denel has further deteriorated since 2018. It has shed no less than 500 workers during 2019 by enticing workers to take Voluntary Severance Packages (VSPs), this amounts to a retrenchment. During the first quarter of 2020, Denel again retrenched approximately 200 workers.

It is immoral that to date Denel has failed to pay these retrenched workers their full packages – Denel released them from employment without paying their packages in full. Workers have only been paid 30 per cent of their packages. We condemn this conduct in the strongest terms. How can Denel subject poor workers to poverty after terminating their employment? What adds salt to the wound is that management committed that they will not release workers until they can guarantee that they can pay VSP packages in full.

However, they did not honor that agreement, and in May they released workers without paying the full package. How do we negotiate and work with a company which does not live up to its own commitments? We call on Denel to pay all that is due to retrenched workers, failing which we will be left with no option but to take legal action against them.

We strongly reject what has happened to the permanent employees of Denel. For most of this year, the retrenched workers have been victimized and condemned to survive off a small portion of their salaries. During the past few months, Denel has only paid 10per cent to 60 per cent of workers’ salaries and it refuses to make statutory payments on behalf of workers despite deducting these amounts from their salaries e.g. PAYE, Medical Aid, provident funds, etc.

Even worse, Denel has unilaterally embarked on a process to decentralize its operations and unbundle the company. This has created business divisions with poor liquidity and as such, they cannot pay salaries in full to workers who work in those divisions. This divisionalization has led to a situation where money is ring-fenced to pay workers according to their division, and as such workers who are in divisions that are not financially liquid, are not paid the salaries that are due to them. However, senior management and those in the corporate office are treated favorably and are on full pay, but ordinary workers are left to survive with a meagre fraction of their salaries of no more than 30%.

It is very obvious that National Treasury, the DPE and the current board of Denel should be feeding the chicken (Denel). Instead, the chicken is being starved, sold off piece by piece, and the proceeds of the sale will be used to purchase the eggs from private businesses. One glaring example of this is when Denel sold the Kempton Park campus to ACSA and now it is renting it back. Now, Denel must pay an exorbitant amount of money in rent in what appears to be no less than a javelin exercise in a country which is rife with corruption.

NUMSA condemns the deliberate strangulation of Denel and all our SOE’s. We are of the view that government – in particular National Treasury – is deliberately refusing to capitalize them. Their agenda is to sell off the SOE’s and push them into private hands, who no doubt are politically connected to the ANC leadership.

At the center of the crisis plaguing SOE’s is Government’s strategy of extending guarantees to SOE’s instead of capitalising them. Denel is held hostage by these guarantees in that out of the R1.8 billion which Denel was capitalized with and whatever little cash flow which Denel may generate, is being used to service the debt which they owe to the banks at the back of the guarantees. NUMSA condemns the fact that government has no political will to engage the banks to be part of a turnaround strategy for Denel and other SOE’s. All that government is busy championing, is ensuring that the very untransformed and selfish banks, who continue to impose red tape on the majority of South Africans and small companies, continue to receive money from servicing the loans they extended at the back of government guarantees. The banks do not care whether the SOE’s that were given these loans are economically viable or not. In fact, as things stand the banks have demonstrated that they do not care about the survival of these SOE’s. They are only happy to receive the money. This is happening under government’s watch.

NUMSA is of the view that these government guarantees given to the banks which are charging above-market interest rates, deserve to be investigated. In our view, they constitute another form of state capture which no one is prepared to talk about.

Furthermore, we condemn them for the fact that for over two years, government has consistently failed to sort out the issue of permits which are strangling Denel’s market. As a result of this, Denel has got a demand but it cannot supply because government is failing to sort out the simple matter of permits. Government must take full responsibility for this failure of the National Conventional Arms Control Committee (NCACC) which is currently chaired by the Minister in the Presidency, Jackson Mthembu.

It is against this background that NUMSA calls on the National Treasury and the DPE to capitalize Denel. We also demand that Denel workers must be paid their full salaries (including their 13th cheque) as they have continued to tender their services throughout. NUMSA rejects the current retrenchments when Denel has not even paid severance packages of the workers who left their employment in May of 2020.

Government owes us all an explanation as to why arms and ammunition is imported when we have invested as a nation in Denel, which has the capability to produce all we need. There is absolutely no reason why arms and ammunition is imported from foreign nations, for SAPS and the SANDF, when we can use our own resources.

Workers and their families’ are victims in this process and are treated with contempt by the ANC government. They are suffering and languishing in poverty as a result of not being paid their salaries in full and also, as a result of retrenchment.

We have instructed our lawyers to take whatever legal action is necessary to remedy the situation. We are demanding that workers who were forced to take VSP’s in May 2020 are paid their separation packages with immediate effect. We also demand that workers be paid their full salaries and we reject divisionalisation which has led to some workers being paid their salaries in full, whilst others are not. It is appalling that workers continue to suffer, for the sins of executives and government ministers in our SOE’s.

Aluta continua!

The struggle continues!

Issued byPhakamile Hlubi-Majola, NUMSA National Spokesperson, 9 November 2020