Denel on its 2014/15 Annual Report; Public Enterprise Budget Review and Recommendations Report

Meeting report

Mr Zwelakhe Ntshepe, Acting Chief Executive Officer: Denel, said that Denel was charged with the custodianship of assigned sovereign or strategic defence capabilities, technologies and abilities, inclusive of those that may be at risk, as the loss of thereof would threaten the required defence capability of South Africa. The entity was also charged with the design, development, manufacture and support of important capabilities that may not be commercially viable.

He said that Denel was strengthening its current capabilities. Some notable examples were:

• Rooivalk (upgrade and new build baseline);
• Artillery (modernised T5 and G6 offerings);
• Missiles (beyond visual range Marlin missile and unmanned aerial vehicle (UAV) launched missiles);
• Demilitarised operations for the safe destruction of small-medium-large calibre ammunition;
• Armoured vehicles (new generation armoured vehicles).

The entity was also diversifying into new capabilities. Notable examples were:

• Non-lethal riot-control products (both from Pretoria Metal Processings (PMP) and Rheinmetall Denel Munition (RDM);
• Command, Control, Communications, Computer Intelligence (C41) and lead systems integration (LSI) offered to civil security sector;
• Standards, Authorisations, Reviews and Assessments (SARA) – potential to rejuvenate the local aviation sector;
• Civil maintenance, repair and overhaul (MRO).

On research and development, he indicated that developing new defence systems was done globally, primarily through customer funding. Companies invested their own R&D effort in the initial stages to prove concepts only, or to research new areas, but the major cost to fully develop and industrialise a system could not be commercially recovered through product sales only.

Denel had invested R467 million in initial phases of R&D. The entity was the biggest recipient of funded R&D from the Department of Defence/Armscor. Current focus areas included the Marlin missile and Rooivalk 2 definition phase. Most local and export systems contracts provided for completion of development and industrialisation within the cost base of the contract.

The Council for Scientific and Industrial Research (CSIR) was the primary research partner of Denel. There was a drive to widen and deepen this relationship to future important areas like C41, radar, aero structures, satellite sensors, and border security. Denel worked closely with Armscor to manage research work-packages in selected areas at various universities identified and funded by Armscor. The goal was primarily to develop future human resources capacity.

Denel leveraged the strategic relationships of the SA government—the Southern African Development Community (SADC), the African Union (AU), India, Brazil, South Africa (IBSA) and Brazil, Russia, India, China and South Africa (BRICS). Products and services were derived from the operational needs of its primary customers. The entity was a strategic industry partner to the SA National Defence Force (SANDF), the SA Police Service (SAPS) and other security agencies, with a growing footprint in Africa and globally.

(A table was shown to illustrate key performance indicators as of 31 March 2015)

Ms Natasha Davies, Group Executive, Human Resources and Transformation: Denel, said that the entity had appointed 824 new employees. 87% of them had come from the African, Coloured and Indian communities. 30% were females. 25% of the workforce was under 35 years of age. It had created 275 jobs. With regard to female representation, Denel employed 1 064 females and 16.5% of executives and senior managers were female. In order to improve the representation of women within the organisation, Denel participates in various programmes that target female learners such as GirlEng, Technogirl, SawomEng, and Cell C’s “Take a Girl Child to Work.”

On the skills development programme, the entity runs a schools outreach programme in Mpumalanga, Gauteng, North West, Limpopo, and the Free Sate. Denel also provides on-the-job training, internships, and learnerships. It holds air shows, career exhibitions, national campaigns and facility tours in order to expose children to careers in military engineering. 800 learners had been sponsored. 340 bursaries had been awarded to tertiary students. 455 schools had participated in the schools outreach programme.

Each employee had a personal development plan to target learning interventions. Career paths had been developed, to encourage younger employees to choose the paths that best suited them. Each Denel division had a mentorship plan that was constantly tracked and evaluated by the divisional training and transformation committee. Formal executive coaching relationships had been established for Denel executives and managers as part of the leadership and management development programmes. A succession plan was in place. 4% of the payroll was spent on employee training.

Ms Vuyelwa Qinga, Head of Communications: Denel, told Members that Denel had achieved a score of 93% for preferential procurement under the black economic empowerment (BEE) codes. During the year under review, the entity had spent R3.1 billion on local procurement. Black-owned companies had shared R684 million and black women-owned companies had shared R251 million. Various supplier development initiatives had been implemented. 114 black-owned companies had been trained and developed. A contract worth R2.2 million had been awarded to a company owned by military veterans for the recovery of old ammunition, as part of the demilitarisation programme. R1.9 million worth of machinery had been donated to the military veterans’ company. No instances of non-compliance with environmental laws and regulations had been reported. There had been no complaints or concerns regarding environmental matters filed.

She concluded that Denel supplied about 50% of its annual activities to the local defence and security cluster. The entity was building on an exceptional track record as a world leader in humanitarian de-mining and as a valued partner in the United Nations (UN), and was rejuvenating the space capability of SA through Spaceteq.

(Tables and graphs were shown to illustrate finances)

Discussion

Ms N Mazzone (DA) wanted to know why certain executives had been placed on special leave. No reason had been given for that. Leaked information from the media pointed to the purchasing of anti-mine vehicles amounting to around R887 million. There was secrecy around this matter. Most state entities did not communicate with the SA public when something went wrong. She also wanted to find out if Denel was selling arms to Syria, because the entity worked closely with the UN and it would not be a good idea to sell arms to undesirable elements. Lastly, she commended the entity for its training programme and exposing children to engineering, and showing them military tanks because they fascinated them. Girls should be made aware that engineering was not only for boys.

Mr Daniel Mantsha, Board Chairman: Denel, responding to the suspensions, explained there was no intention to hide any information. The Board was encouraging management to share information with the Committee. The acting Chief Financial Officer had indicated the use of borrowings from ABSA and Nedbank in order to fund the purchase of the vehicles. The CEO, CFO and Company Secretary had been suspended regarding the contravention of the Public Finance Management Act (PFMA) and other governance issues. The disciplinary hearing was taking place. The Board would report back to the Committee on the outcome of the hearing. The Board would cooperate with the Auditor-General and Committee on this case, and the funding of the operation. He added that when it came to communicating special matters, they had to adhere to an agreed way so as not to cause panic among the entire staff. The Board had communicated with the relevant stakeholders, like the unions and executive, regarding the suspensions and other issues.

On the sale of arms to Syria, he said no arms were sold to Syria. There was a protocol that was followed. The entity was not selling to countries prohibited by the UN.

Dr Z Luyenge (ANC) asked if the entity had a strategy in place for skills retention. He enquired if the entity conformed to the employment equity required by the transformation agenda of the government. He wanted to establish if the entity had a suspense account, and how it managed it. Did the entity have an asset register or an asset management policy in place? Was the entity utilising local content without compromising quality, and what was its contribution in this area?

Ms Davies responded that a skills retention strategy existed, explaining that younger employees changed their careers four times before they reached 40 years of age. There was a Denel Alumni Programme that looked at them when they wanted to come back, and it accommodated their career aspirations. Regarding employment equity, the plan did exist. The entity had achieved a score of 21% compliance.

Mr Odwa Mhlwana, Acting Chief Financial Officer: Denel, concerning the suspense account, said there was no such an account in their environment. Pertaining to the asset policy, he said there was a fixed asset register that had control mechanisms regarding the use of the assets of the entity, and how some generated cash for the entity. With regard to localisation, he indicated they paid attention to it as it was aligned to the policies of the country. Most of the procurement of Denel was localised. The entity had a localisation programme that was funded and accelerated.

Ms D Rantho (ANC) wanted to establish how Denel was going to manage Power Dynamics, in which it had 49% equity, because there were projected losses in that company.  Was Denel exploring opportunities for expansion in other parts of the country, as that would make Denel known and grow as an entity? What was the plan and strategy of the entity for achieving its mandate and training of engineers? She enquired if the entity was happy with its 28% growth in revenue collection.

Mr Mhlwana, with regard its relationship with Power Dynamics, said Denel had to consider the strategic position of that business. Their relationship was starting to bear fruit, because it helped Denel in the area of exports. Concerning the 28% growth, he elaborated that Denel was in a growth phase and was focusing on the programmes of the entity. Funds had been funds allocated to these programmes. Sometimes the funds were not enough and that was why they always tried to secure funding for some of these projects.

Mr Ntshepe, on the expansion of Denel facilities to other provinces, said the entity had to look at where it was going to place other facilities, because the country now had 23 universities, and it had to target those areas that had universities. Denel had tried to diversify their product offering, but that had not worked. That was why they had decided to focus on military equipment. There were products they would like to produce, but matters were determined by the research and development (R&D). Concerning the plan and strategy of the entity, he said the strategy was being implemented. There were challenges for the entity. It was using self-funded R&D. It had learnerships that provided work contracts. The ideas were there but they needed to sift them. The entity was moving in the right direction when it came to training the young.

Mr R Tseli (ANC) commended the entity for achieving far above the set targets, saying Denel was a success story that had moved from decline and was now on the rise. He asked what strategies were in place to promote female representation at the executive and other levels. He also remarked that the entity must find ways of trimming the number of representatives it sends to the Committee. It was not a good idea to have all ten Board members present, plus other executives. (The entity had 15 representatives).

Ms Davies said specific targets had been set regarding the promotion of female representation. Mentoring and coaching was taking place. The schools outreach programme provided a pool from which to pull young females. The issue was achievable, but there were still challenges.

Mr Mantsha, concerning the trimming of the contingent of representatives to Parliament, said he had felt it was a good idea to bring the new Board members so that the Committee could interact with them, but the issue was noted.

Mr N Singh (IFP) wanted clarity on unsecured bonds, and said that during 2015 there had been a decrease of cash deposits in local banks while they were increasing in foreign banks.

Mr Mhlwana responded that the unsecured bonds were a viable funding mechanism for the business and the entity wanted to stick to them and make use of them. There was R1.8 billion worth of guarantees which were not sufficient to cover certain orders. On the issue of decreasing and increasing cash deposits, he explained that Denel did not place deposits directly into foreign banks. It made use of local banks. It was the local banks that took the money and invested it in foreign banks. Those were indirect cash deposits.

The Chairperson commented that state-owned enterprises were supposed to drive the developmental agenda. Denel was in an engineering space and produced military equipment. The entity was capable of producing engineers in order to close the skills gap.

Ms Davies said there were bursaries that were provided to tertiary students. Denel could not employ all of them. Denel not only trained them for itself, but they were trained to start their own businesses and apply their skills in other areas. The Corporate Social Investment of the entity focused more on technology education, maths and science. It was collaborating with the Departments of Basic Education and Public Enterprises. It operated in only five provinces (Gauteng, North West, Free State, Limpopo, and Mpumalanga) because of budget constraints, but they were looking at other provinces as well. There were programmes like TechnoGirl that focused on producing female engineers, especially in the rural areas because most of the military testing stations were located in rural areas and that also helped when they did career exhibitions.

Adoption of minutes and Budget Review Report

The Committee could not adopt the Budget Review Report because it had minor areas of concern that it needed to sort out first. It was agreed that Members should forward their inputs before the report was adopted.

Ms Mazzone moved the adoption of the minutes of 21 October 2015.

Dr Luyenge seconded her.

The meeting was adjourned