Arms manufacturer Denel conceded yesterday it had understated last year’s losses of R850m by almost 50%, attributing the discrepancy to “unexpected expenditures” .

Denel has been technically insolvent for more than a year, and has been surviving on a R1bn government guarantee for its funding requirements since July. It has also asked the state for another R5bn lifeline.

Denel’s financial quagmire has been further aggravated by reports from India that crucial contracts entered into with that government will be scrapped due to alleged “irregularities”.

CEO Shaun Liebenberg told Parliament’s public enterprises portfolio committee yesterday that the arms company’s annual report had been delayed to address the shortcomings.

Last year’s loss was initially budgeted at R381m (2003: R377,5m), but was later pushed to R850m. Yesterday the parastatal put last year’s losses at R1,6bn and predicted a R700m loss for this year.

Although the audited results will be released only in mid-November, Denel is expected to record revenue of R3,8bn (2003: R4,4bn). The financial statements will be qualified, however.

Liebenberg said unexpected expenditures included retrenchment and labour costs of R50m, financial instrument readjustments of R37m, the call-up of the R64m performance guarantee on the Indian arms contract, a R54m pension fund provision and legal costs of R25m.

A lack of orders in a globally contracting defence industry meant it was currently using only 20% of capacity and was utilising cash more quickly than it was generating income, he said.

“Denel is under tremendous pressure from a balance sheet point of view.

“It is facing a funding crisis, and there is significant risk associated with current financial projections,” Liebenberg said.

It would cost about R8bn to close down Denel because of penalties and advance payments on existing contracts.

Public Enterprises Minister Alec Erwin’s special adviser Ian Phillips said government was committed to the survival of Denel in those areas where it supplied strategic equipment to the South African National Defence Force (SANDF. It was not necessary for Denel to make money out of supplying these security needs, Phillips said.

International and local equity partners would be sought to provide capital, technology and markets in each of Denel’s unbundled technology clusters.

Liebenberg said that the arms company would sell equity stakes of between 30%-70%, but that it would always keep a golden share to ensure it retained its intellectual property rights.

The commercial viability of each of Denel’s business units would be evaluated to determine whether they could be turned around or should be closed.

Time frames were in place as to when decisions should be made, with the turnaround strategy expected to be completed in the next three to four years, Liebenberg said.

Unless certain contracts were secured within the next six to 12 months, Denel would be forced to quit some of its businesses, Liebenberg said.

A decision would be taken in the next six months on whether to limit the Rooivalk operation to servicing the SANDF’s 12 aircraft, or whether to continue marketing it internationally.

The Swartklip munitions facility could be closed.

Liebenberg would not give details on the number of employees that are facing possible retrenchment.

With acknowledgements to Linda Ensor and the Business Day.