Denel on its 2009/10 Annual Report

Meeting report

Denel briefing
Dr Sibusiso Sibisi, Chairman: Denel, said that he had been on the Board for quite a while and it was the first time that the core security and defence entities of Denel were showing a profit of R200 million. Of course, there were still financial losses for entities such as the Denel SAAB Aerostructures (DSA). The core message stemming from Denel’s finances showed that Denel, excluding DSA, has attained the turnaround objective that was contained in the turnaround strategy started in 2005.

Mr Talib Sadik, Group Chief Executive: Denel, informed Members there were eleven core entities within the Denel Group. There were strategic equity partnerships within three of the entities. The equity partners included the Safran Group, Carl Zeiss Optronics and Rheinmetall Defence. Denel owned 80% of DSA while SAAB, a Swedish based company, owned 20%. Other supporting businesses consisted of Denel Properties, Denel Technical Academy and Densure. 61% of Denel’s revenue stemmed from the local market. Denel operated in four distinct clusters – Defence, Security, Certification and Training, and Aerostructures.  The first three clusters had experienced a turn around. They were not quite operating at the margins Denel wanted them to operate at, but there had been progress. Due to the losses that the Aerostructures cluster had experienced over the past few years, a turnaround strategy was implemented.

Prior to 2005/06, Denel’s losses had reached approximately R1.5 billion and had utilised approximately R500 million worth of cash. Denel had become insolvent. As a result, the company had to embark on a turnaround strategy. Some of the challenges that had led to Denel becoming insolvent included a lack of accountability and performance, major financial losses, salaries below market level, poor programme performance, significant decreases in domestic defence spend, constraints to global market access, and an unfocused export approach. The decrease in defence spending put a burden on the budget, especially when there were high salary costs, maintenance costs, the addition of border control to Denel’s functions, plus Military Veterans had been added to the Department of Defence and Military Veterans (DoDMV).

Denel embarked on a strategy to “fix” its performance. They focused on becoming a profitable, commercially viable and dynamic entity. Denel had to overhaul its governance processes and try to attract, retain and develop the appropriate skills needed in the sector. They aimed to achieve world class productivity by partnering with state agencies to meet the defence needs of the country. Therefore, the five strategy pillars that were put together in 2005 consisted of:
▪ Capabilities and productivity
▪ Growing commercially viable businesses
▪ Securing strategic equity partnerships
▪ Partnering with state agencies to do business planning and to establish export marketing responsibilities
▪ Securing privileged access to a minimum portion of South Africa’s defence development and procurement spend.
 
Denel took certain steps between 2007 and 2010 to achieve sustainability. These steps consisted of decentralising Denel’s operations, restructuring the company, implementing governance policies, acquiring equity partnerships that provided investment and access to markets, participating in business development initiatives as well as transformation initiatives, disposing of non-core assets and improving Denel’s programme performance. In the next eighteen months to 2012, Denel wanted to become the respected South African provider of innovative defence security and related technologies. Its growth strategy would focus on business development, cost-cutting measures, funding and recapitalisation, and restructuring DSA.

Mr Sadik focused on achievements for 2009/10. Denel’s first intention was to play a role in the provision of defence capabilities. Over the past year, Denel improved the performance of its defence and security businesses. No non-core capabilities were discontinued or established, and Denel managed to maintain all of their key strategic capabilities. There was an improvement in access to local markets. Denel spent R835 million on Research and Development, which represented approximately 22% of the Group’s revenue. This would contribute to the company’s intellectual property. Denel’s debt/equity position was a concern. At the moment, the Group’s debt amount to R1.8 billion. At the end of March 2010, Denel’s sales margin was 52% and there was an improvement in productivity. Denel was pleased to say that it had achieved a Level 4 Broad-Based Black Economic Empowerment (B-BBEE) status.

Denel Group’s workforce profile showed that 3 707 employees out of 7 460 employees were African, Coloured and Indian (ACI). The rest of the employees were white. This meant that ACI employees made up almost 50% of Denel’s workforce. 24% of the overall workforce was female. There were skills development programmes in place such as the Talent Management Programme, System Engineer Development Programme, mentorships and bursaries to encourage people to get into the sector. There were 352 apprentices training at the Denel Technical Academy. Pre-employment programmes such as School Outreach Programmes (SOPs), SA Women in Engineering (SAWomEng) and bursaries were also used to encourage learners to join the engineering field. Some of the human resource achievements for 2009/10 included leadership development, the introduction of a succession planning framework, developing a group skills development strategy, and hosting a third annual leadership symposium. Transformation committees were in place and functional and Denel hoped to achieve a B-BBEE Level 5 status in the next financial year.

Ms Denise Wilson, Executive Manager: Air-to Air Programme, told the Committee that an A-Darter Programme was developed by Denel. The programme is a bi-national project that supports the government’s aim to have closer ties with Brazil. The Brazilian Air Force invested 50% of the funding at the start of the programme. Without this funding it would not have been possible to develop the missile. Brazil and South Africa both benefitted from the technology embedded in the fifth generation missile capability. Both countries would have a first class capability to effectively protect their airspace. The programme ensured valuable engineering skills development and retention in South Africa and provided career opportunities for young people to grow in programme management and systems engineering disciplines. Denel wanted to ensure that its business development was aligned to the Denel Group strategy, met the needs of the different equity/ownership structures, optimised the Group effort and was aligned to the Group strategy management processes.

Mr Sadik briefed the Committee on Denel’s financial highlights. The Denel Group achieved revenue of R3.6 billion. If Denel’s associates were included, revenue amounted to almost R5 billion. Spending on Research and Development amounted to R835 million while cash spending amounted to R416 million, largely in DSA. Denel had improved its loss position before interest and tax by R283 million. The net profit before DSA’s loss amounted to R82 million. The net loss was improved from the previous year to R246 million. Overall, Denel’s financial statements showed steady improvement. Despite inflation Denel managed to decrease its operating expenditure by 18%. There was a significant improvement from Denel’s financial position in 2005. Denel’s debt was a concern, but it was backed by government guarantees. The total debt at 31 March 2010 was R1.8 billion. Denel’s equity position at the end of March 2010 was just over R600 million.

Denel discussed its impact on the country. The entity’s primary focus was on national security. Through the improvement of their relationship with the DoDMV, Denel had managed to reduce the cost of ownership for the Department. Denel provided full life cycle support and had been able to ensure military independence in the country. Denel was also involved in border protection and peace-keeping campaigns. During the 2010 Fifa World Cup, Denel had provided stabilised observation platforms for the South African Police Service for the purpose of land surveillance. Denel also contributed to industrial competitiveness and skills development. 

Overall, Denel’s net loss was reduced from R1.4 billion in 2006 to R246 million in 2010. Defence and security businesses within Denel generated a profit of R200 million from a loss of R1.3 billion in 2006. This meant that the cash burden was reduced from R1 billion to R416 million in 2010. The Annual Report also showed improvements in governance and compliance, programme management, transformation and the performance culture of employees.

Discussion
The Chairperson asked Denel to provide the Committee with a breakdown of the staff composition within the next two weeks.

Mr Sadik replied that he was aware that the Committee had scheduled a study trip visit to Denel. This would be taking place very soon. If the Committee needed some more information on certain issues, they would make the information available at the visit. Denel looked forward to the visit.

Ms G Borman (ANC) asked whether Denel was happy with the way that the media was reporting on their business activities. The media did not seem to get across to South Africans what Denel was actually doing. She wondered how Denel encouraged young people to get involved in the sector. Could Denel give more clarity on the pre-employment programmes for South African Women in Engineering? This programme was interesting because there were more and more women coming into the field of engineering.

Mr Sadik answered that Denel had developed a media strategy, both to communicate information internally and externally. The strategy was supported by a public relations company. The strategy consisted of conveying information to internal and external stakeholders, going on road shows and engaging with broader stakeholders that were not part of Denel but were close partners such as the DoDMV as well as the Department of Science and Technology (DST). Internal communications included having newsletters and having senior leadership forums that would take place twice a year. Each entity under Denel would also produce newsletters to communicate information to employees and key stakeholders. Denel has set itself a target to showcase all the entities within the Denel Group with a strong focus on the technology and the value they added to the country. He noted that there had been progress in terms of the coverage that Denel was getting from the media. He understood that newspapers were under pressure in terms of space and coverage, and many of the things that were not news worthy were not covered. There were only so many good things that the media could report on. Engaging with the media was a priority and Denel was making a concerted effort to do so.

Ms Wilson replied that there were a number of activities that Denel was engaged in to attract young people to the engineering sector. Denel Dynamics worked with Dinaledi schools, which taught maths and science to matriculants. This helped to attract young people to maths and science. Denel has noticed a significant improvement in these students’ results.

There was a Denel Academy of Engineering where students were given projects to do that simulated projects that would be done in the external environment. This was followed by a mentorship programmes for each young person. This also addressed the challenge of transferring skills from the ageing workforce to the younger workers, and it allowed young workers to grow in the engineering field. 

Ms Patience Mashungwa, Group Executive: Human Resources and Transformation, Denel, addressed the question on SAWomEng. She said that it was similar to the mining sector where the engineering sector seemed to be a man’s environment. Denel took it upon itself to look at enticing female learners into the engineering field. Denel went to institutions for higher learning and started working with students that were interested in the sector. Denel found that women were discouraged because they thought engineering was too mechanical and “dirty”. The SAWomEng programmes were started two years ago and worked with women at universities so they could be attracted into the sector.

Dr G Koornhof (ANC) said it was a pity the Committee had only half a day to engage with Denel on such an important report. There were many issues that the Committee had to discuss in detail and he was afraid they would not have time to do so. He was of the view that Denel was a strategic asset for the country, but they had serious challenges. In the independent auditor’s report, it said that the Group incurred a total comprehensive loss of R205 million for the year, which resulted in an accumulated loss of R4.8 billion at 31 March 2010 (page 138 of Annual Report). This was a serious challenge. The Committee sympathised with Denel, but they had to look at the situation realistically because the Denel Group was in trouble. The Directors’ Report was very good, as it was honest (page 140-151 of Annual Report). He agreed that many of Denel’s business entities were functioning very well and had good financial results. Progress had been made but the Report showed that DSA had made a major financial loss. The Directors’ Report showed that various restructuring processes had been established. What progress had been made with the restructuring initiative, which included retrenchments, cost cutting and seeking new business opportunities?

He asked Denel to elaborate on the matter of the contract for part manufacturing A109 helicopters for Agusta, and the A400M military transport aircrafts and the Airbus project. What progress had Denel made finding solutions to the DSAs “messy” affairs? He asked if Denel had spoken with SAAB and if they had a view on how to resolve the DSA’s situation. The Committee had been speaking about the equity partner Dynamics Missiles for quite some time. Three of Denel’s business entities had already entered into equity partnerships with them. Page 17 of the Annual Report spoke about the choices Denel had to make i.e. they had to choose between going with an equity partner or to hire local production. Denel acknowledged there was a revenue challenge and they were in constant discussion with the DoDMV. He asked why they could not make a decision on whether they wanted an equity partner or not.

Mr John Morris, Head: Denel Strategy and Commercial, addressed the question on the A109 helicopters and the A400M military transport aircrafts. He replied that the DSA was the supplier to Agusta and the airbus project. This was where Denel’s function started and ended. The contract for Agusta had “run out”. The A400M programme had been delayed for approximately 2 to 3 years, which meant that the revenue coming through to DSA was delayed.

Denel worked with SAAB in terms of benchmarking what they had done to restructure their aero-structures. The DSA was in a difficult position because it had received a 50% reduction in revenue. It was going to be particularly difficult over the next two years as revenue was going to be reduced significantly. Denel looked at all possible measures to reduce DSA costs. DSA would be cutting costs in a number of areas going forward and there would be engagements with DSA shareholders to discuss the entity’s restructuring plan.

Mr Sadik answered the query on Dynamic Missiles. He said Denel was going to move forward and conclude new equity transactions as the dependence on the local Defence Force was going to be quite significant on certain businesses. As a result, the defence sector said it needed to complete a defence strategic review prior to Denel completing its other equity partnerships. This was seen as being quite strategic or sovereign for the South African National Defence Force (SANDF). There was a defence strategic review taking place currently. Denel understood that they would receive an update in December on progress being made with other equity partnerships. To date, the equity partnerships that were completed were left dependent on the SANDF. Denel had submitted an application to the Department of Public Enterprises (DPE) and they were engaging with the defence environment on the future equity partnership profile. In terms of financial viability and in light of delays in concluding the equity partnership for the current year, Denel was engaging with the DoDMV to see how they could close the gap. These discussions were gong well. Denel hoped to reach a solution soon.

The Chairperson asked Dr Koornhof to recall the Standing Committee on Public Accounts (SCOPA) meeting, in which he represented the Committee. She wanted him to voice any concerns that were raised at that meeting.

Dr Koornhof replied that the questions that he had asked stemmed from concerns raised at the SCOPA meeting. The Annual Report showed that Denel was going to renew the guarantees of R1.3 billion by 30 March 2011. They would also be extending guarantees by R500 million by 30 July 2011. These dates were between six to ten months from today. What would happen if they did not get these guarantees on time? If Denel did not achieve the renewal and extensions of guarantees, they would be in a worse position than they were currently.  

Mr Fikile Mhlontlo, Group Financial Director (Denel), answered that if Members looked at the Annual Report they would see that shareholders equity closed at about R644 million. If one looked at the losses that Denel had, one would see that there was a going concern risk, just as the auditor’s pointed out. If the guarantees were not available for backing up the debt, Denel would be in serious trouble. There were a number of interventions that were being implemented and Denel was working with its stakeholders to find relevant solutions. Denel was not in a position to share this information at the meeting.

Mr K Dikobo (AZAPO) noted that the ACI figure in the staff composition was approximately 50.8%. This showed how disproportionate the staff composition was. He asked what percentage of students was classified as ACI. He asked Denel to elaborate on their contribution to skills development in the country. Was there any relationship between the Denel Technical Academy and Further Education and Training (FET) colleges as well as other higher education institutions in the country? He wanted to know if there was a social plan in place for the 300 staff members that were being retrenched. Was there any kind of skills training given to prepare them for life outside of Denel?

Ms Mashungwa noted the Committee’s concern about the disproportionate profile of the staff in Denel. If the Committee referred back to the Annual Report they would see that Denel targeted for Broad-Based Black Economic Empowerment (B-BBEE) level 5, but ended up with level 4. The transformation programme in Denel was something that all the executives were passionate about. However, there were two challenges. The first area was employment equity and the second challenging area was skills development in terms of training. The financial statements showed that Denel was not growing. When a company did not grow they did not have the number of opportunities needed to diversify the organisation. Denel then ensured that every opportunity they had assisted them in diversifying the workforce.

The Chairperson replied that Denel had the opportunity to recruit young people, especially women. The Committee wanted Denel to prove to them that they were cognisant of their situation and the small opportunities they had. She was not happy with Denel’s response.

Mr Sadik referred Members to page 94 of the Annual report. He said there was reference made to the terminations of employees, but if the Committee looked at the appointments that were made over the past year they would see that 52% of the overall appointments were black males. Also, 275 of all appointments were black females.

Ms Mashungwa added that Denel Training Academy was used as a source of skills development. The Academy was responsible for artisan training, which linked to the accreditation of artisans in the country. The Academy trained learners for Eskom, CSIR, the DoDMV, and for Denel’s own use. The institution was well placed to ensure skills development for the country.

She added that Denel had a very competitive social plan that was signed by all relevant entities in organised labour in 2005. The plan assisted with business training and funding of businesses, counseling and re-skilling of workers, and re-deployment of workers. There was also a provision for post-retrenchment medical cover.  

The Chairperson raised a point of order. She said the question was not a general query about the social plan; the Member asked if there was a social plan for the 300 people that were retrenched. She asked Ms Mashungwa to answer the question more accurately.

Ms Mashungwa replied that she was trying to imply that the 300 people were going to be covered by the social plan. Denel tried to redeploy all workers affected by the retrenchment within the organization. If this failed, the social plan kicked in.

The Chairperson asked if Denel could account for the 300 people that were retrenched.

Mr Sadik assured the Committee that they would supply the Committee with the details of all the workers that were retrenched. He added that some of the 300 workers were affected by the design completion of the design of the A400M. The work would come to an end in July 2011. As a result, those services would be retrenched. Some of the workers being retrenched consisted of international contractors, local contractors and permanent staff and apprentices. This all depended on where Denel stood financially.

Ms Mashungwa addressed the question on Denel’s collaboration with universities and FET colleges. She replied that Denel had found that there were quite a few skills within the company that had been depleted over the past ten years. Denel has now found itself assisting universities to keep some sort of capability that would help Denel retain skills that were in demand. Denel was forced to collaborate with universities due to this depletion of skills.

The Chairperson told Ms Mashungwa that the Committee wanted to know the names of the universities that Denel was collaborating with. She asked Denel to report back to the Committee once they had the information.

Mr Sadik answered that they would do so.

Ms Mashungwa added that Denel collaborated mostly with universities and FET colleges. However, this was an area that Denel wanted to explore.

The Chairperson challenged Denel to collaborate with FET colleges and to recruit more learners from rural areas. She wanted Denel to report back on their recruitment plan in six months.

Mr M Sonto (ANC) said that one could applaud improvements made in and around certain disciplines, but there was still a long way to go. He understood that Denel was looking to reduce their number of staff and asked which skills in particular they were looking to get rid of. Denel was battling to retain certain skills and as a result they had an ageing workforce. He asked what problems Denel was experiencing in their aim to attract these skills. He asked what characteristics Denel was looking for when they were headhunting women for SAWomEng.

Ms Mashungwa noted that the questions posed by the Member had already been addressed.

Mr C Gololo (ANC) asked Denel to elaborate on the Rooivalk programme. He thought the programme had been discontinued, but now it seemed it was making a “come back”. He addressed the whistle-blowing system that Denel had as part of their Fraud Prevention Plan. Were there any incidences or cases of unethical behaviour that occurred within Denel? The Annual Report did not mention any.

Mr Sadik replied that the Minister of Defence and Military Veterans had taken the decision that the Rooivalk programme was required for capabilities within the air force. Currently, Denel was in discussions with Armscor and the DoDMV to move forward with the programme. There was a requirement to have the aircraft fully operational by April 2011. Denel was working towards this goal.

Mr Mhlontlo answered that the fraud hotline was controlled by an independent audit firm. A report is written and given to an Audit and Risk Committee. All the issues that are reported on are investigated and appropriate action is taken. In some cases there could be issues that would result in disciplinary hearings and some would be fired.

Mr Sadik added that Denel did not have the details of the hotline because some of the complaints were valid and some were not. However, they could give the Committee their governance processes. Also, each Audit and Risk Committee of each company within Denel had a list of the matters reported to the hotline and how each matter was being handled. Page 95 of the Annual report showed a list of all the disciplinary and grievance cases. This was a matter that Denel could discuss with the Committee when they visited Denel in November.

Mr Sonto asked Mr Sadik to elaborate on disciplinary and grievance cases that were ruled against Denel.

Mr Sadik responded that Denel would get back to the Committee on that question as the answer contained quite a lot of detail. They could discuss the matter when the Committee visited Denel. They could also make the answer available in writing as the information was public. 

Mr Nhanha asked Denel to include in their response a list of cases that were brought forward by whistle-blowers.

Dr Sibisi replied that they would do so.

Dr M Oriani-Ambrosini (IFP) said that Denel was a great company with a great product, but he was more concerned about how they ran their business. He wanted to know what Denel’s thinking was at a financial level as they had suffered such a great financial loss. He asked if Denel thought that the government and the tax payers would continue to fund their losses forever, or was there a time when they would be able to stand on their own.

Dr S van Dyk (DA) read that the Chief Executive Officer’s report said that the Group continued to work towards profitability and expected positive returns for the shareholder in the medium term. His observation was that this statement was made year after year in Denel’s Annual reports, yet there was no recovery. The Directors’ Report (Page 145 of the Annual Report) spoke of funding concerns. It was said that Denel made a loss of R1.5 billion and became insolvent. They then made a borrowing of R1.8 billion and applied for an extension of the guarantees from the government until 31 July 2011. If Denel failed to meet this extension they would probably just apply for another extension. It seemed as if there was no recovery in sight and that Denel hid behind the view that they were a strategic asset. He asked Denel to explain to the Committee what being a “strategic asset” entailed. The Committee heard this term year after year but they did not know what it actually meant. There was no war taking place in the country. What contribution has Denel made to the country in the past ten years? If Denel had performed well, they would have had many more contracts abroad, which would have made them a profitable organisation. If the Committee looked at just one of the remuneration packages of just one of the executives, Mr Sadik, Members would see that he received R5 674 000 in 2009 and R3 841 000 in 2010 in terms of remuneration. The additional variable pay was based on performance. Taking into account Denel’s situation, he could not see how executives could have received additional pay based on performance. The presentation showed that Denel’s productivity was only at 25%.

The Chairperson added that she thought the question of whether Denel was a strategic asset was quite critical. She proposed that when the Committee visited Denel they would spend a few hours discussing this question. She noted that Members replied in the affirmative.

Dr Koornhof agreed with the Chairperson’s proposal, but he wanted to take it one step further. Denel’s Annual Report (page 15) said that they had to declare their capabilities to the DoDMV as either strategic or sovereign. This was a key question. The Committee and Denel also had to look at the definitions of strategic and sovereign, as well as what progress had been made. He was concerned that Denel was still waiting for the Defence Strategic Review.

The Chairperson noted that Mr Sadik and she would prepare for the discussions that were going to take place at the Committee’s oversight visit.

Dr Sibisi responded to the question of how Denel had contributed to the country over the past ten years. He said that Denel had contributed, alongside other defence entities to the manufacture of un-manned aerial vehicles. This was a world-class project. The achievements over the past ten years included developing, maintaining and retaining certain programmes that were seen as strategic. There was a variety of projects within and outside of the defence sector. For example, in the security arena, there was a high level project amongst a variety of institutions that looked at modalities of monitoring the country’s offshore and territorial waters as well as borders using a variety of technology. Denel also contributed to areas such as optronics.

Ms Mashungwa addressed Dr van Dyk’s query on remuneration of executives. In the previous Committee meeting Denel had told Members what the R5.6 million consisted of. The figure included a long term incentive that had been agreed upon and needed to be closed. The structure used for the Group remuneration was a result of historical problems from paying market related salaries. The Board approved and introduced a variable pay system. This system was used to enhance performance and formed part of the employees’ total pay. Denel could not afford market related salaries and had to come up with ways to retain skills within the Group.

Mr Sadik added that the 25% productivity level that the Member spoke of was present in one entity, the DSA, and no variable pay was given due to the entity’s poor performance.

Ms Borman referred to page 149 of the Annual Report, which showed that Mr Sadik received a reduction in remuneration between 2009 and 2010. But, the rest of the executives received increases. Page 180 of the Annual Report showed that executive directors received a total of R10 million for both 2009 and 2010. She could not understand how one table showed increases for remuneration while the financial statements did not show a difference in remuneration from 2009 to 2010.  

Mr Mhlontlo answered that the amount of R10 million on page 180 of the Report referred only to executive directors and did not include the amounts for variable pay. All the relevant amounts were duly disclosed.

Dr Koornhof noted that if one looked at the 2009 and 2010 figures for variable pay for the top six executives, the pay, percentage-wise, amounted to much higher than the inflation rate. Was the concept of variable pay used as a retention strategy?

Mr Mhlontlo explained that the salary increases at an overall level was approximately 4% for 2009. The unions were unhappy with this. The reason why there was an adjustment on executive pay was because a number of executives only joined the company during the course of 2009. The increases were not as high as the Member thought. 

Dr Koornhof replied that there had to be footnotes to explain that the figures were taken over a different period than the Annual Report date. Denel could not publish a document such as the Annual Report without publishing such information for the public. He appealed to Denel to correct their information.

Mr Sadik answered that there was in fact a footnote on page 149. The financial statements were prepared in accordance with the Public Finance Management Act (PFMA) and they were audited. He added that the average salary increase for 2010 was 4.8%. The average salary increase for the Group in 2009 was 9.8%. He added that the information contained in the Annual Report had been audited properly so the Committee could rely on the integrity of the information.

The Chairperson assured Mr Sadik that the Committee was not questioning the integrity of the information. Members wanted to understand what was happening within the entity.

The Chairperson said she knew of a person that was a Chief Executive Officer for one of Denel’s companies, who was supposed to become the Director-General of the government departments. She asked if executives within the Denel group were involved in the retention strategy by way of receiving bonuses.

Mr Sadik answered that Denel did not have retention bonuses. 

Dr van Dyk added that variable pay was just a glorified name for performance bonus. He failed to see what performances the pay could be based on. What was the relationship between the five strategy pillars (slide 10 of the presentation) and the performance bonuses? The pillars were very vague and he did not know how Members would explain it to their constituencies and the public.

Mr Sadik explained that the strategic pillars were condensed into key performance indicators in their performance contracts. They were called Key Performance areas (KPA). Because Denel was in a turnaround phase and was focused on financial improvement, they attached a high weighting on business performance. The financial performance then addressed all of the strategic drivers.

Mr M Nhanha (COPE) looked at page 94 of the Annual Report, specifically the table that looked at terminations of employees by race and gender. There were 220 black male workers whose employment had been terminated. He asked for clarity. He referred to slide 37 of the presentation that looked at turnover per region for Denel and associated companies. He asked why North Africa was paired with the Middle East. Was it not part of Africa? He was glad that the Annual Report spoke of the Dinaledi programme as it was a matter that was very close to his heart. The presentation showed that there were 127 learners that were part of the programme. He wanted to know which provinces the learners were from, their races and the disciplines that they were studying.

Mr M Nonkonyana (ANC) referred to slide 44 of the presentation. He noted that Denel compared its improvements in financial performance for 2010 to its financial performance in 2006. He wondered why they chose to compare 2010’s financial performance to 2006’s performance. He asked if Denel had a turnaround strategy in place. He wanted to know what Denel’s impact has been on rural communities and disadvantaged communities.

The Chairperson added the Committee had to know the significance of 2006. Members had to know what the financial trends were.

The Chairperson asked if there was a common understanding, on the part of the shareholder, that Denel was centrally placed to focus on national security. Did Denel have relationships with other entities that were mainly focused on national security? She noted that Denel’s partnership with Brazil did not show in the amount of turnover received for South America (slide 37 of presentation). Denel had told the Committee that its relationship with Brazil had helped them to penetrate the South American market. Denel said its current ICA figure was around 50%. She asked why they had not unpacked their recruitment strategy. Denel had also not told the Committee how the retrenchment of 300 workers was impacting on the 50% ICA figure. The Committee had to discuss, very deeply, Denel’s demographics for race, gender and age. Denel said it had created 30 000 jobs, but they did not say whether these were permanent or temporary jobs. Where was this figure derived from? According to the Annual Report, Denel spent approximately 20% of the budget on Research and Development (R&D). It was her opinion that if an entity spent so much money on R&D, they should have a lot of Intellectual Property (IP). Denel has never mentioned IP, yet they were such a strategic and scientific orientated company.

Mr van Dalen asked why Denel’s consultation fees were so high. He knew that in some instances people that resigned from the company were sometimes hired back as consultants and were paid large amounts of money.

Mr Sadik answered that Denel, generally, did not rehire people that resigned from the company.

Ms Mashungwa confirmed that this was true. Most of the consultants were used for the DSA.

Mr Sadik added that consultants were brought in to address specific matters across the group. He confirmed that consultants were paid to implement a turnaround plan within the DSA.

Mr Mhlontlo said that Denel would include this in the list of questions that had to be answered in writing.

Mr Sadik added that Denel would provide the Committee with a breakdown of the consultancy fees.

Mr Anthony Kamungoma, Acting Deputy Director-General: Chief Investment and Portfolio Management (DPE), told Members that although Denel had progressed since 2005, their solvency position continued to pose serious challenges. Overall, trading losses for DSA had decreased but they were still the biggest risk to Denel’s financial position. Denel was still overloaded with significant debt levels. Given the fiscal constraints that the country was facing, the recapitalization of Denel was not really an option. Denel had to focus on improving its operational and financial performance to secure its long term position.

The Chairperson thanked Denel and the Members for having such an engaging discussion. She hoped to continue the discussion when the Committee performed oversight on Denel in November.

The meeting was adjourned.