Infraco and Denel progress reports on issues emanating from their 2011/12 Annual Reports

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Public Enterprises

12 March 2013
Chairperson: Mr P Maluleke (ANC)
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Meeting Summary

Executives from Denel briefed Members on the recapitalisation payments made to the company by government. Guarantees had also been put in place. Issues of debt were being managed. There were several major projects both in South Africa and with overseas customers that should restore the company to financial sustainability. The company was committed to transformation, and was making many learnership opportunities available to the youth. Young engineers, particularly females, were being supported through various initiatives. Staff retention was improving. The Denel Board Chairperson said that there was light at the end of the tunnel.

Members asked for more clarity on the need for restructuring. The delays in the approval of the Department of Defence contract were interrogated. It was noted that the country was gaining a positive image from some of the work done by Denel. Clarity was requested on the retrenchments that had resulted from the termination of the maintenance contract with the South African Air Force. Members asked about the measures being put in place to ensure staff retention. It was noted that state owned enterprises often competed with each other for skilled personnel. New funding options were also discussed.

Broadband Infraco had received R1.8 billion from the shareholder, which had been used on various projects to develop its network. Members were briefed on various projects which had been completed recently, or were nearing completion. There was some progress on six key performance indicators which had not been achieved in the period under review, 2011/12. One of its main priorities was developing networks in rural areas. There was a focus on suppliers, with an emphasis on empowerment of black suppliers and those with disabilities.

Members asked how the integrated technology divide between the north and the south was being bridged. Questions were raised over the leadership of Infraco, but Members were assured that the situation had been remedied. More policy guidance was needed from the Department of Communications. While the continued lack of an Electronic Communications Systems licence was a hindrance, it was not the major issue it had been in the past. There had been a lack of cooperation with the Minister of Communications, and Members felt that the Committee should meet with the Department of Communications in an attempt to resolve the situation. Management felt that another R2 billion was needed to develop infrastructure in the rural areas, as the lack thereof impacted on business.

Meeting report

Denel progress report
Mr Zoli Kunene, Chairman of the Board of Denel, introduced the delegation.

Mr Riaz Saloojee, Denel Chief Executive Officer, said that Denel had received R400 million from the shareholder in December 2012 for recapitalisation, and the balance of R300 million should flow by the end of March 2013. There was a five-year R1.85 billion guarantee from government, where previous guarantees had only been for twelve or eighteen months. Debt had been restructured into three and five year bonds. There had been positive discussion with National Treasury on a sustainable funding model. There were good prospects that would improve financial performance.

Mr Saloojee said there were advanced discussions on how to address issues of debt and guarantees. There was consensus that the better way to create a funding mechanism was the acquisition of new business and funding streams. The outlook was positive at present. Denel was hoping that this would be the key to future sustainability. Denel would be improving its financial position significantly in the following five years.

Mr Saloojee said that on the local market, there had been significant attempts to procure a new infantry combat vehicle for the South African National Defence Force (SANDF). This matter had been addressed under the Hoefyster project, and Denel was confident it would go ahead. This would rejuvenate the combat vehicle capability of both the SANDF and Denel. Many jobs would be created and many local companies would be involved with the supply of parts and manufacture of the vehicle. The programme would last for about ten years.

Mr Saloojee said that phase one of the ground-based air defence system had been handed over in March 2012. All trials had been completed. Denel could now demonstrate its systems integration capability. Not many companies operated at systems level five, and Denel had now proved its capability. One of the defining characteristics was the significant missile technology capacity. There was a strategic partnership with Brazil on the A-Darter programme. Funding was available. There would be more cooperation with the Brazilians in the production phase.

Mr Saloojee said that there were many other ground and air programmes. External revenue sources had been investigated. There was a big order from Malaysia regarding turrets for their new combat vehicle. There was new business in the Middle East, particularly the United Arab Emirates. There had been significant business in Africa. There had been a lot of business with the United Nations (UN) in their peacekeeping role. The Southern African Brigade being formed by the Southern African Development Community (SADC) should provide a role for Denel.

Mr Saloojee said that Denel would make a significant announcement at the BRICS (Brazil, Russia, India, China and South Africa) summit, regarding helicopter maintenance with Russia. He was confident that there would be a more positive outlook at the end of the Denel financial year (FY) in March 2013.

Ms Natasha Davies, Denel Human Resources Executive, said that staff retention was improving. Better salaries were still the most important factor in staff resignations. The turnover rate in the previous FY was 6.7%, within the target range. In-depth exit interviews were conducted with all staff leaving the company. With Generation Y, namely people born around 1990, people were more inclined to change jobs. Many former employees were keen to return. There had been increased attrition during the recent times of uncertainty. A five-year employment equity plan was being employed. A 70% transformation target for previously disadvantaged individuals (PDI) was being employed. Management focus was on employing women and people with disabilities. There were programmes to fast-track PDIs.

Ms Davies said there was a two-pronged approach to the youth. Awareness was being generated by going around the country and making presentations. Some 100 learners from the Free State would be hosted at the premises. There had been an exhibition at the Defence Show. Young female engineers at Denel were encouraging young female students to take up opportunities. Learners at North West University were being sponsored. Denel sponsored the Technology Olympiad. Denel hosted the Technogirl programme, a job-shadowing scheme. There was collaboration with various tertiary institutions. Many students were keen to work for Denel.

Ms Davies said that there were various bursary and apprenticeship programmes. These were only available in North West and Gauteng at present, but the programme would be expanded to other provinces shortly. Denel had donated over 3 000 textbooks to learners. The Denel Academy covered twelve trades, particularly in the aeronautical industry. There were more than eighty students at present. Internship programmes were available. Some other divisions also offered learnership and apprenticeship programmes.

Ms Davies said that Denel was committed to transformation, both in terms of race and gender. There was increasing interaction with young people.

Discussion
The Chairperson asked how long the contract with Malaysia would last. He noted that it had not yet been confirmed.

Dr G Koornhof (ANC) asked about the R700 million recapitalisation plan. Members had held informal discussions with Treasury. He was happy to see that the R400 million had been received, and the remainder would soon be paid out shortly. Two figures had been quoted, and Denel had not received all that it had applied for. Denel Aerostructures had been restructured significantly. In the budget, the Minister of Finance had talked about five state owned entities who persistently lost money, and needed to be recapitalised from time to time. Long term strategies were needed to address the problems. At least this was happening with Aerostructures. He asked if this would spread to other divisions of Denel. At the Committees last meeting with Denel, they had said that they were hoping for the production phase to be approved for the Department of Defence (DoD) contract. This had still not happened, and he asked where the delay was. Nothing seemed to have changed in five months.

Mr M Sonto (ANC) said that South Africa was being noticed through the work of Denel. He asked if there was any impact on the domestic market. He asked about the relationship between Denel and the SANDF. The landmine removal project in Angola was a good example of a presence on the African continent. He asked what was being done to retain young people. They were trained only to rotate within the industry without any impact for Denel. He asked if there was any benefit from the bursary programme.

Ms N Michael (DA) wanted some feedback on the retrenchment of the 580 highly qualified airline maintenance staff. There was some controversy over this. The unions had been vocal. There was a misconception of the position of Denel with trade union Solidariteit and the South African Air Force (SAAF). The SAAF had said that it would absorb these people, and that Denel was too expensive. She was impressed with the work being done with the youth. This was evident in her constituency of Centurion. She had been the recipient of a learnership programme which had been very beneficial.

The Chairperson noted the positive discussions with Treasury. He asked if there had been agreement on the terms.

Mr Saloojee replied that on the DoD production order, there had been extremely positive discussion. The requirement was critical, and he hoped to have good news in the following week or two. It had gone through a number of processes, and he understood that a decision was awaited. He did not give a direct reply to the question as to where the decision was to be made.

Mr Saloojee said that the Malaysian contract was a three to five year programme. The contract with the UN for de-mining was also a long term one, with the participation of many Denel personnel.

Mr Fikile Mhlontlo, Denel Financial Director, replied that the amount request for recapitalisation was R2.2 billion. What was being honoured now was the portion for the aerospace business. This component would take the business forward.

Mr Saloojee said that there had been a significant restructuring process. The governance model had been structured into a more integrated concept. There had been decentralisation of activities in the past. There was more accountability and responsibility, and sense of collective responsibility. Seven boards had now become one. Some businesses had been consolidated into one entity. Overhead costs had been reduced. A voluntary retrenchment package had been put in place to reduce staff costs. Denel now felt that it was at an optimum level. At Aerostructures, a critical mass had now been reached. He was hoping that there would be a need to employ more people.

Mr Saloojee said that Denel should be custodian of strategic capability for the SANDF. This meant that a level of understanding was needed, with formal relations between the different parties. This would enhance planning. This was being done. There was pronounced international recognition. There were huge budgetary pressures on the SANDF.

Ms Davies said that there were work-back obligations. Engineers were being fast-tracked in their professional development. A forum had been established for young employees. This built loyalty.

Mr Saloojee said that there had been a Young Achievers Awards ceremony in January 2013. Twenty engineers went into internship programmes annually. The group was completely transformed. The class of 2012 had been given the task of developing a satellite the size of a shoebox, and this would go into orbit during 2013. Denel was one of the few companies with this level of capability. It was a well-known fact that the contract with the SAAF was up for renewal for some time. The Auditor-General (AG) had found problems with the structure of the contract. There had been negotiations with the SAAF to minimise the impact of the termination of the contract. The decision to terminate the contract had been re-invoked at the end of 2012. The SAAF could not retain that level of funding. It was accepted that there would be retrenchments, but there was negotiation with the SAAF on the critical skills needed. Those not part of this group would face consequences. The SAAF wanted to keep its in-house capacity. A key capability would be retained despite the retrenchments. This was being done in a responsible way. Negotiations were on-going.

Ms Michael was pleased to hear that some myths were being dispelled. There had been a message to Members that Armscor was putting pressure on Denel to reduce its foreign dependence.

Mr Sonto asked about skills retention. People were poached by other organisations. Denel might lose engineers to Eskom, as an example. Something should be done about this.

Dr Koornhof said that in the budget the Minister had announced a review the development activities of state owned enterprises (SOE). Where such activities were mandated, the Minister had announced three funding options. He asked if Denel had such a mandated role, and which of the three models presented by the Minister were appropriate.

Mr Mhlontlo said that the positive funding discussion did incorporate the models raised by Dr Koornhof. All of the models were incorporated.

Mr Saloojee said that there were developmental goals and objectives. These were being explored.

Mr Kunene confirmed that Armscor was concerned with foreign control over SOEs. Dividends should revert to South Africa. Denel had been in a dismal state, and had been nursed back to financial health by its foreign partners, who also gave guidance on best practice. Sizeable interests were needed to attract investment. Denel had benefited from the investment and he had no regrets.

Dr Koornhof was hearing that Denel would not revisit its strategic partnerships.

Mr Kunene confirmed that there would be no review at present. Its partners were viable entities. Denel was sensitive to Armscor's sentiments. Of 170 or so aircraft engines that were refurbished annually, 150 were brought in from outside South Africa. If the company involved were to withdraw its business, this division would no longer be viable.

Mr Weekend Bangane, Acting Deputy Director General: Denel, Department of Public Enterprises (DPE), said that the Department was engaging with Armscor in its continued support for Denel. It now had confidence in the sustainability of Denel. A world class capability was being maintained. Denel had to be supported in terms of order.

Mr Kunene appreciated the questions posed and hoped that the delegation had answered them satisfactorily. Denel was well on its way to trading itself out of the difficult position it had been in. There was excitement in the group. The Malaysian contract would be the biggest single contract the country had ever enjoyed, and there were even bigger contracts in the pipeline. Over the previous three years, up to 80% of the losses had come from Aerostructures. There was now a contract in place with an American company, and Airbus Industrie had also given its vote of confidence. There was light at the end of the tunnel.

The Chairperson congratulated Denel on its achievements. There was a need for DPE to work closely with the DoD. The good work being done had to be recognised.

Infraco progress report
Mr Mandla Ngcobo, Board Chairperson of Broadband Infraco, said that his delegation was present to present a follow-up report.

Ms Puleng Kwele, Infraco CEO, gave a breakdown of how the R1.8 billion in shareholder funding had been spent. In terms of projects, R504 million had gone to the West African Cable System (WACS), R36 million for integration with SADC, R317 million on internal broadband expansion, R89 million on operations and R444 million on enabling government through the State Information Technology Agency (SITA). There were 151 points of presence (POP) and the internal network covered over 12 500 km.

Ms Kwele listed a number of projects. The WACS connection at Yzerfontein was completed in March 2012. The Southern African Large Telescope and KAT projects had been delivered in August 2012. The design of the SITA installation at Upington was being reviewed. An access point for connectivity to Zimbabwe was to be completed in March 2013. Connectivity to the East Africa cable at Mtunzini was due for completion in September 2013. New infrastructure projects for open access POPs were due in April 2013.  Additional network capacity for the 10G overlay had been completed in April 2012. The Internet Protocol technology had been developed by August 2012.

Ms Kwele said that 27 key performance indicators (KPI) had been identified for 2011/12, of which six had not been met. The balance had been the appointment of key personnel, which had been completed after the period covered in the 2012 Annual Report. The development of product portfolio had also since been completed. Work was still in progress on debt funding and the business operations strategy. There was continual monitoring of projects put into commercial use, and of project time variance. Structures had been put in place for projects. A lot of time was spent on planning and pre-engineering. This enabled quick responses on the costs involved.

Ms Ramasela Magoele, Chief Financial Officer (CFO), Infraco, said that Infraco realised that there was a need to develop into the rural areas. An application had been made for medium term expenditure framework (MTEF) funding of R4 billion to reposition the network. A capital development plan had been submitted.

Ms Kwele said that Neotel was still an anchor client. Plans were well advanced with Namibia. The strategy was changing to include communities. Priority provinces had been identified as Mpumalanga, Limpopo, Eastern Cape and KwaZulu-Natal where the infrastructure had to be developed. There had been a redefinition of capital projects to integrate other users. There was compliance with all safety regulations. The structure would work.

Ms Magoele said a critical element of the business was looking at suppliers and localisation. There had been a focus on this since October 2012. The focus had always been on Black Economic Empowerment (BEE) suppliers, but had been broadened to groups of people with disability. Every contractor would be allocated points on their project management ability. OEM was the bulk of critical expenditure, but Infraco wanted support on training. Broader participation was needed on fibre optic supply and installation.

Mr Magoele said that internal controls were enforced continually. There was compliance with legislation. There was a culture of compliance. Infraco was still not where it wanted to be, but was on the way. There was an acceptance of the need for internal control. It was a continual process.

Ms Kwele said that quarterly reports were submitted to the shareholder. There was oversight, and tremendous pressure was applied by the shareholder. There was continual engagement with the regulator. Some issues had to be handled by the executive authority. Infraco did assist as a co-ordinating authority. There was also continual engagement with the policy making elements of the Department of Communications (DoC).

Ms Kwele was confident in reporting that there was now stability in its staff, where there had been a high turnover in the past. A premium was paid for talent. Engineers had been attracted. A change management strategy was in place. There was a culture of performance. Staff turnover had reduced to satisfactory levels.

Ms Kwele said that security measures had been put in place to safeguard new POP. There was engagement with provincial government, and Saldanha Bay was one of the points of the engagement with the Western Cape government.

Discussion
Mr A Mokoena (ANC) asked how the digital divide between north and south was being bridged. He asked how much had been received from Treasury. If Infraco were to make a prognosis, he asked how long they thought it would take to reach a break-even level. He asked if Infraco was involved in the Square Kilometre Array (SKA).

Mr C Gololo (ANC) said that Infraco was established to provide service in the underdeveloped areas, and to reduce the cost of doing business. In the capital projects undertaken, he wanted to know when this mandate would come to fruition. He knew there was a licensing problem.

Dr Koornhof noted that the 2011/12 Annual Report painted a picture of an organisation in dire straits. He wanted an assurance that the worst was over. There were leadership problems. A young board had been appointed. There had been governance issues, and issues of sustainability. He had heard that Infraco needed guidance on where it must go. This guidance was of a political nature, and should come from the Department. If there were gaps, then the Committee should be informed. On the Electronic Communications System (ECS) licence, he asked what progress was being made.

Mr Sonto noted the suppliers listed. He asked if these suppliers were located in the area where infrastructure needed to be developed.

Mr Ngcobo said that the board was satisfied that the executive team was complete. It was giving guidance where needed. Leadership understood the mandate and understood the values involved.

Ms Kwele said that on the digital divide, in northern Africa there was an integrated network in place. In leading countries, government made an investment in network. There was a high penetration in the urban areas, but outside of these the main support was for voice communication only and not data. This did not create the climate for doing business. Capacity was provided for SKA on the WACS. There was only one link to the Northern Cape at present, but a second was being considered.

Ms Kwele said that affordability issues in spreading the network to the rural areas was being considered. Plans were cognisant of the rural development plans in the provinces. In the absence of an ECS licence, Infraco had to lean on other state authorities like Sentech and SITA.

Ms Magoele said that Infraco had received R1.8 billion from DPE. Close to R500 million had been invested in creating capacity. Every investment was made purely for the benefit of the second network operator. Neotel's plans did not cover the majority of the country. Infraco was not even close to achieving its mandate. A lot of its network had been mothballed by Telkom, and had to be refurbished before it could be used. An investment in infrastructre was needed. More cooperation was needed with mobile and internet networks. A lot of investment was needed to connect schools. She estimated R2 billion was needed to reach these customers. The company would not be sustainable until these investments were made. Companies like Cell-C were waiting to make use of Infraco services. Investment would also lead to reduced costs. Penalties would be incurred if the network was not reliable.

Ms Magoele continued that internal control was a continual process. A lot had been developed since the last meeting with the Committee. The culture still needed to be reinforced. New recruits underwent an induction problem, including the Public Finance Management Act (PFMA). It was not perfect yet, but Infraco was striving to make better efforts.

Mr Mokoena asked why Infraco was maintaining such a low profile.

Ms Magoele said that Infraco was taken to provincial road-shows in all provinces by DPE. There was so much talent and activity in the provinces that was not noticed. Integrated Communication Technology (ICT) was not the exclusive business people thought it was. There were electricians in every province who could be trained. Accredited suppliers were needed to do work on Eskom lines. Infraco would piggy-back on Eskom to benefit from their experience.

Ms Kwele said that while Neotel was on the network, one of the customers was SITA. Infraco had provided the backhaul. Immediate neighbouring states were connected. It was also an issue of the communities through which lines passed. Neotel had enjoyed exclusive rights of use. Other customers such as Transnet now were able to utilise the network. Governance issues arose when structural issues for projects were not in place. Infraco's focus was on the engineering aspect.

Mr Rendani Musetha, DPE Director: Infraco, agreed that there had been policy issues. It had been agreed that the two Ministers should meet. There had been a meeting between the Minister of Public Enterprises and the late Minister of Communications. Policy issues had been discussed. There had been a meeting with Mininster Pule in January 2013. Since then there was no movement on the part of the DoC, which was responsible for policy. DPE was supporting DoC on policy development. Until the issues were resolved it would be difficult to make progress on ECS. The Minister of Public Enterprises was still ensuring that Infraco was still fulfilling its mandate. Help was still needed. A key need was a policy directive from DoC, which would invoke an invitation to apply for an ECS.

Mr Sonto said that the ECS licence had been seen as in impediment in 2012. He was pleased to see that Infraco could operate without it. There were good human resource policies in place. He was worried about a remuneration policy. There were incentives in place. If the company was not financially sound, he wondered how this policy could be implemented.

Dr Koornhof asked where the R2 billion should come from. DPE was correct in blaming the DoC for the delay in creating policy. It was a deadlock. He asked who would get the wheels turning.

Mr Mokoena said that the money received from the Industrial Development Corporation (IDC) was a loan, and there would be interest. He asked if there was any link with the African Union (AU) in terms of broadband roll-out.

Ms Kwele said that Infraco was in a very competitive sector. There were established companies. Rewards and remuneration were guided by the Department. The policy also provided a framework and prevented anomalies. IDC was a shareholder their contribution should be seen as an investment rather than a loan.

Ms Magoele said that the balance sheet did list liabilities in the form of loans from IDC and others. There was a difference in the requests for immediate and longer-term assistance. At present, there was no allocation in the MTEF. The Minister of Finance had said that the funding for broadband was now on hold. The R2 billion would not have commercial benefits, but was critical. Infraco was looking at investing R12 billion over the following ten years, and was looking at financial houses for assistance. R2 billion would not make a great impact on the economy.

Ms Kwele said that there had been a look at which provinces were covered, and which not. In terms of the areas where returns were expected, the commercial market could be approached. Infraco had been working through the Southern African Telecommunications Association (SATA), a chapter of SADC. There were forty landing stations on the west coast of Africa for the WACS. Direct engagement was held with immediate neighbours.

Mr Musetha said that discussions had been held on the Bill in 2007. The Committees for Public Enterprises and Communications had requested the then Minister to effect the ECS to licence Infraco, and to create the policy directive. A joint sitting was needed at present to pressure the Minister of Communications to implement this earlier request. The ECS came after policy.

Ms Kwele said that the lack of policy was impacting more on the industry than on Infraco.

Ms G Borman (ANC) said that it was a critical issue. The current Parliament had been dealing with this matter since 2009. She asked if it would be correct to call the Minister of Communications to appear before the Committee. Private funding was part of the National Development Plan (NDP). The Committee should support, and be seen to be supporting, the NDP.

The Chairperson said that he would take guidance from the Portfolio Committee on Communications.

Dr Koornhof said that this Committee should have a meeting with Infraco and DoC.

Committee Minutes
The minutes of the meeting of 19 February 2013 were adopted with amendments.

The meeting was adjourned.

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