Denel made a whopping loss of between R850 million and R1.6 billion in the last financial year and appears set to slash its products and staff, MPs have been told.

The loss included R64m in performance guarantees that India recalled following its investigation into an arms deal with South Africa.

The state-owned arms manufacturer also expects to make a loss of R700m in this financial year and in the short term is to look to the government to keep it afloat.

Denel's chief executive officer, Shaun Liebenberg, told parliament yesterday that the company was "under immense pressure" and had come "very close to insolvency" on a number of occasions this year.

Denel had not handed its annual report or financial statements for 2004/2005 to parliament and expected to do so in mid-November, Liebenberg said.

"I would like to advise categorically that the financials for that year will be qualified by the auditor-general and that there is a likelihood that the figure of R850m could increase to around R1.6bn," Liebenberg said.

He presented the figures to a joint sitting of parliament's committee on public enterprises and the National Council of Provinces' select committee on labour and public enterprises.

He said the main reason for the huge jump from R850m to R1.6bn was the internal audit processes, which highlighted risks "in terms of provisions not taken".

Exceptional costs of R626m not budgeted for during the period included the R64m called back by India and retrenchment and labour dispute costs of R50m.

The figures were unacceptable, Liebenberg said. "We need to know where we stand and have integrity in our figures and we're working on that process as we speak."

Although Denel has received a cash injection this year to tide it over until the end of the financial year, Liebenberg says it has asked the treasury to recapitalise the company. "Recapitalisation does not just mean that we need money to buy new equipment, but is a working capital requirement."

It was not yet clear how much money recapitalisation would require. Denel media relations officer Priya Pillay said figures would be made available by the end of next month.

Liebenberg said the departments of defence and trade and industry as well as the treasury were comfortable with the turn-around strategy Denel had proposed.

It appears certain that Denel will reduce its range of products and slash its staff numbers.

The company hoped to dispose of 80% of its non-core businesses by the end of the financial year, Liebenberg said.

As thing stood, there was not enough work for Denel's workforce of about 10 200 employees.

Pierre Rabie (DA) said the situation was not sustainable. "Denel must be part-privatised or radically restructured. We harm the economy by locking up skills in an unviable business model and we destroy jobs elsewhere in the economy by unnecessarily raising taxes." Referring to the Indian arms deal, the DA urged Liebenberg to address "the allegations of international misconduct, by agents or employees of the parastatal, in a spirit of transparency and openness".

With acknowledgements to Janine Stephen and the Cape Times.