Denel on its 2014/15 Annual Report; Denel suspensions

NCOP Public Enterprises and Communication

17 February 2016
Chairperson: Ms E Prins (ANC, Western Cape)
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Meeting Summary

Denel Group presented its integrated annual report for 2014/15, with the acting Chief Financial Officer briefing the Committee on Denel’s financial success since 2011, their financial statements, and their unqualified audit report. He stressed the importance of viewing Denel as a solvent group thanks to unprecedented growth over the last few years. The Group Executive for Human Resources addressed human resources and transformation and lastly, the Group Communications Manager looking at its corporate social responsibility commitments and showed the Committee the success of their school outreach programme in Gauteng, Mpumalanga and the North West.

The Chairperson expressed concern over the negative media reports about Denel. Other Members agreed and were concerned that Denel had not reported on the suspension of three executive members, which had taken place in September 2015. Members were assured by Denel that it was because it had happened after the preparation of the financial statements and that the suspended executives were subject to the standard disciplinary procedure at Denel and that the Committee would be updated as the process unfolded.

Mr Tsepo Monaheng, Group Chief Executive Officer (CEO): Denel Group, assured the Committee that the negative media reports would be addressed but in the interim, the Members were to know that the suspensions were done in the interests of Denel.

Members went onto question what had been reported in the media about the merger between Denel and VR Laser. Members said this was controversial given the 25% ownership of VR Laser by the Gupta family and Duduzane Zuma, son of President Zuma. The Chairperson and Members questioned whether the deal had been approved by the Minister of Public Enterprises and by Treasury as required by Section 54 of the Public Finance and Management Act.

The Denel delegation assured the Committee there had been full compliance within the parameters of the legislation. Yet, the Members questioned why the Committee had not been briefed on the issue by Denel and why there were differing reports in the media. The Members asked about the reported rift between the Minister and Denel and wanted Denel to address this. The Denel delegation assured the Committee that Denel enjoyed a good relationship with the Minister and that any media comments on the relationship were attributable to the Minister, rather than to Denel.

The relationship between VR Laser and Denel was further questioned by Members and Denel assured the Members that VR Laser was a good partner for Denel as the company had been a strategic partner of Denel’s for ten years. The Chairperson concluded by indicating that the Committee would like a full report on the media reports on Denel and the deal between Denel and the associate companies.
 

Meeting report

Denel on its 2014/15 Annual Report
Mr Daniel Mantsha, Denel chairperson, introduced the presentation saying that it would be broken into three parts. He called on Mr Mhlwana to present the financial statements for 2014/15.

Mr Odwa Mhlwana, acting Chief Financial Officer at Denel, explained the history of Denel as it transformed from Armscor after 1992. Denel is comprised of Denel, the core company, and her associate companies with whom the company has strategic offshore partnerships. He stressed the importance of exports in maintaining Denel's sustainability as group, as exports accounted for 52% of their turnover in the given financial year. Denel is the largest defence manufacturer in Africa and the company is growing significantly in its international competitiveness, thus adding to its status as a national asset. Denel takes its mandate specifically from that given to the company by the Department of Public Enterprises and has, thus far, received excellent support from that Department and the Ministry of Defence. He explained the group structure of Denel, showing all the subsidiary activities in which the group is involved.

Mr Mhlwana explained the strategic formulation framework in which Denel operates. Denel operates within the parameters of the government's needs and foreign policy, but also through the strategic analysis of the market to bring about the effective implementation of their policies. He emphasised the importance of Denel as a national asset, the importance of the defence industry and the need for Denel to be a self-sustaining national partner moving forward.

Looking at the actual financial statements themselves, Mr Mhlwana drew attention to the success that Denel has achieved over the past few years. There were two areas where Denel had underperformed: investment in research and development, and in local procurement as a percentage of total procurement. The reason for the under-performance in R&D investment was due to the way it was reported in the financial statements, as it did not include an externally funded component in the statements. The local procurement was a small portion of total procurement and he assured the Committee that they are taking measures in this financial year to ensure they reach those targets. He explained that there are impediments to measuring the percentage of black youth-owned companies in procurement, which is because of problems with their supplier database that they are looking to improve.

Mr Mhlwana next addressed the immense growth trajectory of Denel as it grew from R5 billion to R35 billion between 2011 and the reported financial year, which reflect credible results of their success. He indicated the need to maintain a dynamic business and one with a diverse product portfolio. The future of Denel relies on its current strategic plans, which have been successful so far, and the aim is to continue delivering on their mandate. The synchronisation of three layers - tactical, strategic and political - must be achieved going forward to ensure the viability of Denel.

Mr Mhlwana explained that Denel has been generating a profit with interrupted growth since 2011, and that the company received an unqualified audit opinion for 2014/15. The 28% increase in turnover is indicative of Denel's growing success. He believed that that would allow Denel to move away from government reliance, bring foreign exchange into the country and lighten the load of fiscal pressure in South Africa. Denel will face funding challenges in the forthcoming years, which is made worse by the fact that Denel has a history of loss-making but which the Denel Chairperson believes the company is slowly overcoming in its impressive profit-making streak.      

Mr Mhlwana highlighted Denel's solvency as group, but moreover, that it is a stable and very liquid company with sufficient cash reserves. Drawing attention to the balance sheet, he indicated that although assets were very much reliant on debtors, there have been no bad debts. The main concern for Denel is the large amount tied up in loans and borrowing amounts. He said Denel needed to reduce their debt. In closing he spoke of the clean external audit report Denel had received.

Human Resources and transformation
Ms Natasha Davies, acting Group Executive for Human Resources and Transformation: Denel, stated that Denel had maintained its Level Two Triple Broad-Based Black Economic Empowerment (B-BBEE) status in the given financial year. 50% of Denel's workforce is comprised of black employees and in 2014/15 Denel created 275 new jobs; 87% of which were given to African, Coloureds and Indians (ACIs), and 30% of which were given to females. Ms Davies spoke positively of their new employment figures and noted that the median age at Denel is currently forty-six years of age, indicating the sustainable mix between more experienced employers and young people.

Ms Davies addressed Denel’s multitude of programmes targeting females and young women at school level to encourage young women to enter their field of work. Denel has put into practice models focusing on leadership and talent. The career outreach programmes in place in the given year trained 355 first year students, notwithstanding the short courses offered to students, too. She mentioned the bursary programme they had in place, which would then absorb those learners into the company, thus creating employment.

Beyond this, Ms Davies mentioned the merits of the organisational culture of Denel and how the company has created a culture of learning through spending 4% of its payroll on training, technical skills, mentorships, succession plans to ensure no strategic void. Denel faces serious transformation issues in the industry but she stressed that Denel aimed to increase their procurement through black youth-owned companies, focusing on females and people with disabilities, too.

Corporate social investment
Ms Vuyelwa Qinga, Group Communications Manager: Denel, spoke on Denel's schools outreach programme which is operational in Gauteng, Mpumalanga and the North-West provinces. The programme provides extra tuition in mathematics, physical sciences and technology. Of the learners that Denel tutored for their final school year, 117 out of 230 learners got distinctions in these subjects and 60% of their learners obtained a university pass. Ms Qinga followed by addressing the environmental aspect of Denel's strategy. She stressed the importance of adhering to environmental standards and the company's strategic plans to mitigate damage through the protection of species and habitats and through operating carefully so that their operations do not cause disturbance and deterioration

Discussion
The Chairperson thanked Denel for a comprehensive presentation and noted that Denel is doing well in business. She expressed concern that Denel has been in the news recently over questionable issues and she indicated that the delegates were to brief the Committee on the media concerns.

Ms N Mokgosi (EFF, Northern Cape) questioned the delegates about the criteria used to choose in which provinces the Denel schools outreach programme operates. She questioned why her province, the Northern Cape, being in such dire need of these programmes, had been neglected. She was worried that only 30% of employees are female. She felt this was inadequate and she asked for an explanation.

Ms C Labuschagne (DA, Western Cape) indicated her support for Denel and that she was impressed with their effort. She wanted to know if the way that research and development was reported on the statements would change going forward or will every year include an explanation for the targets that have not been met. She asked when the integrated report was compiled and she required an answer thereto to continue. Mr Mantsha replied that it was completed in July 2015. In response to Mr Mantsha's reply, Ms Labuschagne questioned why the Committee had not yet been reported to on the matter of the dismissal of three executives in September. She was quite adamant to know what had happened and why the Committee had not been briefed. She also questioned whether Denel had plans to expand their schools outreach programme to all nine provinces and she expressed concern about the Western Cape's absence in the programme. She mentioned that 1% of profits spent on youth-owned companies is small considering the high youth unemployment and she questioned if Denel had any plans to increase this expenditure item. As a final question, she directed her attention to Denel's role in conflict countries and asked if Denel was selling products in countries engaged in conflict.

Mr J Julius (DA, Gauteng) highlighted Denel's employment figures and asked how it could be that of eleven executive members, only one is female, yet the breakdown indicates that 16.5% of the executive and management are females. This did not make numerical sense and he asked if Denel were trying to hide critical information. If not, he asked if they would amend their figures to represent the true state of affairs.

Mr Tsepo Monaheng, Denel Dynamics CEO at Denel, thanked everyone for their questions and agreed that there should be a full report to the Committee about the negative media publicity surrounding Denel. He recognised the importance of Parliament’s roles to oversee what State-Owned Companies (SOC) do. He emphasised that Denel executes its mandate within legislative frameworks and the management team will prepare a comprehensive presentation that focuses on the media reports. He corrected Ms Labuschagne in saying that that the members were suspended and not dismissed and in answer to her questions, he said Chief Excecutive Officer (CEO) and the Chief Financial Officer (CFO) were in breach of law and that is the reason for their suspension.

Mr Monaheng said a disciplinary process is currently underway and Denel will inform the Committee as soon as a verdict is reached, but in the interim, the Committee should know the suspensions were done in the interests of Denel. He recognised the seriousness of the questions raised by media and he said that Denel, along with the department, would inform the public soon.

Mr Mantsha addressed the question on research and development and assured Ms Labuschagne that there are plans to increase the amount spent. He indicated that although 1% of profits spent on youth-owned companies, it is also difficult for Denel to monitor because their databases do not always reflect correctly where are the youth-owned companies and involvements. He mentioned that having spent R3.8 billion on procurement, relatively speaking 1% is not so small and he asked Members to keep that in mind. On the conflict countries, Mr Mantsha indicated that Denel operates within a regulatory framework and that there are many permits Denel must acquire before even exporting to those countries. He addressed Mr Julius' concerns about hiding information about Denel's employment of women and assured him there was no intention to hide any information and that the statements will reflect the breakdown at an executive and managerial level going forward.

Ms Qinga addressed the concerns raised by Ms Mokgosi about the operational capacity in all provinces,  saying they would like to increase their capacity to reach all the provinces. She acknowledged the need for these programmes in the Northern Cape. She also cited fronting within the B-BBEE context and indicated that they have systems in place to mitigate against these encounters with fronting. She told Members that Denel had even suspended business with other companies over fronting and she hopes it will not happen going forward.

Ms Davies added to what the other delegates had addressed by replying that at the first three levels of management, including, the executive, 16.5% of employees are female. She hoped that this would clear up the ambiguity of the reports.

The Chairperson commented that as Members of Parliament, their duty is to look at SOCs to ensure they deliver on their mandate. Their other role is to ensure that the SOCs actually practise at a ground-level what is reported on in the Committee.

Ms Labuschagne asked to respond to the answers given by the Denel delegates and she noted that that Denel's new part ownership of 40% in VR Laser seemed risky given that in the first year the company experienced losses of R37 million and then losses of R8 million. She asked when profits could be expected from VR Laser. She followed up on responses about the suspensions and commented that the suspended members did not comply with legislation or Section 54 of the Public Finance Management Act, given that that the Gupta family and Duduzane Zuma own 25% of VR Laser. She asked the Denel delegation if that is the lack of compliance to which they are referring, why Denel did not comply with Section 54 by informing the Minister of Public Enterprises, Ms Lynne Brown. Ms Labuschagne said there were no previous mentions of this new company, VR Laser, and she asked for Denel to report back on this.

Mr Julius expanded on Ms Labuschagne's questions and asked when the venture with VR Laser was planned and why a merger of that size had not been signed off in accordance with Section 51 and Section 54 as there needs to be approval for this from the Treasury and the Minister. He also noted the public animosity between Denel and the Minister, Ms Lynne Brown, and he asked why Denel did not get approval from her for this merger and when Denel plans to get the needed approval.

Mr Julius commented on the transparency measures needed in this deal given that VR Laser is owned by the Gupta family and asked why Denel was going into a business venture with VR Laser when the company does not have any experience in Denel's field. He questioned whether or not Denel would comply with legislation and the Minister given that Denel has put out conflicting information on their website. He expressed his concern that Denel was undermining the Minister in circumventing the necessary procedures.

The Chairperson also then brought into question the lack of compliance with Section 54 and called on Mr Mantsha to explain what happened when the procedure is usually that a company receives authority and the go-ahead from the Minister.

Ms Labuschgne raised a point of order and asked why the reports in the media about this deal had not been addressed in the Committee. She expressed concern that Mr Julius had to ask these questions and she wanted to know why the process of the merger with VR Laser had not been adequately reported on.

The Chairperson reaffirmed that she as the Chairperson would be guiding the Committee and with that, confirmed she was waiting for the full report on the matters at hand.

Mr Julius added there was no intention to be political about the discussion but that the Committee must hold Denel accountable and he wanted to know why there was no mention of the deal in the given report.

The Chairperson thanked the Members for their comprehensive questions and welcomed the response by the Denel delegation.

Mr Mantsha commented that accountability to the Committee was the very reason Denel was at the meeting and he added Denel was not hiding anything although it had been difficult to deal with the media reports. He addressed the alleged rift between Denel and the Minister, Ms Lynne Brown and he said there is no rift. He attributed all the comments in the media to the Minister and he said that Denel was meeting with the Minister later that day (17 February), and he urged the Committee not speculate until there had been sufficient engagement between the Minister and Denel. On that, he commented that Denel had been working well with the Minister and he asked not to have misunderstandings through media statements.

Mr Monaheng said that Denel had not broken any laws and that all activities are conducted within the parameters of the legislative instruments. He said that the suspension of three executives related specifically to an accusation of R855 million on a venture Denel undertook, but that amount or venture had nothing to do with Denel Asia. He noted that there had been full compliance from Denel Asia and all statements made thereon in the media were attributable to the Minister. Yet, he emphasised that there was a good relationship with the Minister and they possessed a common vision of increasing exports, bringing in foreign currency and narrowing the current account balance deficit in the country.

Mr Mhlwana asked that the Committee look at the relationship with Denel Asia and her subsidiaries in a broader context. He noted the strategic importance of the contract in terms of opening up export markets. He noted that Tawazun, their associate company, was an important entity and contract and he was convinced it was a profitable extension of Denel. He commented on the exclusion of Denel Asia from the integrated reports and said this was so due to the nature of the business model at Denel. He said this particular strategic initiative had not yet matured and that it was more of a growth market at the moment. He said they do not report on all initiatives until such a time that they have matured enough to bring money into Denel so that is why Denel Asia had not been reported on in this integrated report. He also noted that their financial statements are finished in May and then go onto a process of compilation so at that time, Denel did not report on that market as it had not matured.

The Chairperson questioned the Denel delegation on these occurrences and asked when the incident happened. She wanted to know whether it would be reported in the 2015-2016 integrated report.

Mr Julius commented on the thoughtfulness that goes into these strategic discussions and asked why Denel would go into business with a company with such limited experience in Denel's field. He questioned how that was a tactical or strategic move and he asked for it to be addressed.

Mr Mhlwana noted that it was important for Mr Julius and the rest of the Committee to understand VR Laser as a business. He said that VR Laser had been the military fabrication space for ten years and that it had been a strategic supplier to Denel for ten years, too.

The Chairperson thanked Denel for their comprehensive presentation and for trying to address all the issues brought forward. She said she awaits the full report coming from Denel on these matters going forward.

The meeting was adjourned.

 

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