Denel on progress update regarding implementation of the turnaround strategy and financial challenges

Meeting report

Opening Remarks

 

Chairperson Magaxa welcomed Members and said he would co-chair the meeting with Mr Matibe since this was a joint meeting of the Portfolio Committee on Public Enterprise and the Select Committee on Public Enterprises and Communication. He welcomed officials from Denel and the Department of Public Enterprises (DPE). He said the purpose of this meeting was to receive a briefing by Denel on progress made since the last engagement in addressing governance and challenges in the state-owned entity (SOE). It was common knowledge that Denel was facing serious financial challenges emanating from state capture; lack of business from both government and internationally; lack of investment infrastructure; and the inability to meet financial obligations, particularly to employees who were forever not sure if their salaries were coming or not. The Committee wished to understand how the Board and the Government had been addressing these matters. It was hoped that the presentation would speak to that.  It was expected that the Ministry would be part of the session. No apology had been received from them so far. He asked the Director General of the Department or the Ministry, as the shareholder, to give an overview before the presentation.

 

Remarks by Department of Public Enterprises

Mr Kgathatso Tlhakudi, Director-General, DPE, said the presentation from Denel would address the state of the business and the plans formulated to reposition Denel as a critical component of the national security system. An intergovernmental team was working to come up with financial support for Denel and ensure that there was a pipeline of work directed towards Denel. The Department of Defence and National Treasury had joined in that effort. The first hurdle had been to ensure that, going forward, government-guaranteed debts were taken care of. The second was to get the capital required to restructure Denel. This was not a bailout. It was important to properly classify it. A bailout was when an entity was continually funded to cover operational losses, with no plans to restructure the business to be sustainable. This was a different scenario. The initial tranche of funding that would be given to Denel was for a business that would be able to live within its means. To put things in context, it would be a smaller Denel, but a much stronger one with a very strong base for growth.

The presentation would also give a sense of some of the historical wrongdoings that went on in the business, and what had been done to address that to develop a new culture in the business. A more ethical leadership emerged from all this. There was confidence in the ability of the current Board and Executive to lead such an important entity of state. The Department was grateful that the leadership had opted to come in, despite the challenges that were already there. They should be commended for showing patriotism in helping to help sort out the business.

Briefing by Denel

Mr William Hlakoane, Group Chief Executive Officer, Denel, said the presentation would be on the current state of Denel, and the relationship with the Armaments Corporation of South Africa (Armscor) and the South African National Defence Force (SANDF). 

In the current financial year, Denel’s revenue was 60 percent behind the year to date budget and budgeted revenue of R3.7 billion was at risk as the business continued to lose skills and operational activities were at low levels. The balance sheet showed that Denel was technically insolvent, with insufficient cash available to meet operational requirements, including the payment of salaries and suppliers. Denel currently owed R636 million in salaries to employees and related costs and about R900 million to suppliers. The latest cash flow projections for the 2021/22 financial year indicated a negative R600 million, if no mitigation action was taken. Denel’s tax clearance status had not been extended due to non-payments of Pay As You Earn (PAYE), Value Added Tax (VAT) and others. The uncertainty about Denel’s future state had impacted the current customers who were concerned about Denel’s ability to deliver on contracts on hand, leading to a possible call on prepayment and performance guarantees.

Denel was defending the following legal matters: an application for liquidation by SAAB; court applications by unions over the non-payment of salaries; court applications by some employees over amounts owed to them; and the threat of other suppliers making similar applications, with an increase in letters of demand delivered to Denel.

In formulating the five-year strategic roadmap to sustainability, Denel had determined whether businesses were core or non-core to sustainability and formulated a strategy for turnaround or exit in each business area. The restructured operating model included reduction in overheads and redundancies in the cost base, with a target of 35 percent; protection of Intellectual Property (IP); retention of strategic capabilities; and development of new non-military business and technologies.

Armscor, as an independent acquisition organisation, was mandated to act on behalf of the SANDF to preserve capabilities within the country and to acquire defence matériel according to the requirements of the SANDF. Denel’s primary purpose was the designing, developing, manufacturing and supporting of defence matériel.

Discussion

Ms J Tshabalala (ANC) said the Department of Police and the Department of Defence and Military Veterans (DoDMV) should be invited to address the two Committees on why they were not supporting or procuring from Denel. Or was Denel unable to deliver what was wanted? These issues needed to be understood. The meeting should also speak to issues of defence in the country and hear from the two departments. In the debate in the National Assembly the previous day, the new Minister of Defence had spoken about how important Denel was. The Department had mentioned to the Committee that they had not reached a decision to let go of Denel. Members supported this.

The meeting needed to invite the Special Intelligence Unit (SIU) to appear before the Committees. She would have moved to have an investigation into stolen intellectual property, but the group CEO had reported that the SIU had undertaken some work around that and around issues of corruption. The SIU needed to be invited to understand where they were on the matters of concern.

Denel required financial assistance for its recovery. It was a no brainer. Government support was required to cover its liability. This was the legal responsibility of the shareholder. Funding was also required for its working capital and operational costs to ensure that it could implement the turnaround strategy. The decline in the defence budget was creating a security risk for the country, given the current events in Mozambique. The recent unrest and looting in the country also showed the consequences of the budget cuts. It was worrying that Denel was showing a loss of equity of R3.6 billion. Could Denel explain this? What had resulted in the loss of revenue at Denel? The turnover was a third of what was budgeted. Why did the company not realise its budgeted turnover? What confidence could be given to Members that the management would be able to fulfil contracts and attain revenue targets? The company owed R1.5 billion to staff and suppliers, which must come from the shareholder as part of clearing its liabilities. If this clearing of immediate liabilities did not include suppliers and staff, which were the two key ingredients for restructuring, it would mean that the company was technically insolvent and restructuring might not work in this instance. There was a need for a cash injection from the shareholder for the company to focus on its core competencies and reduce non-core costs.  Members supported the need for a cash injection.

Ms Tshabalala said slide 13 of the presentation further demonstrated the need for the shareholder to finance Denel. The slide on human capital also showed that the company was a tight ship and could not trim its skilled workforce any further for restructuring. The problem illustrated by slide 18 was that Denel was dependent on the SANDF and did not factor in other government security agencies as part of its sales drive. This needed to be highlighted.  Slide 19 made absolute sense in terms of restructuring, but it needed to be matched with a revenue stream from the businesses it sought to retain. This must be clear. Referring to slide 22, she said there was no problem with the repurposed Denel and its focused strategy. The new operating model could only work if the shareholder ploughed capital into the company to ensure its liquidity as a going concern. The slides on diversification were currently not relevant to the restructuring and ensuring that Denel was a going concern. However, they were critical slides for the economic reconstruction and recovery plan for local industrialisation. This was very critical, hence the need to get past the going concern hurdle first.

The roadmap to sustainability also depended on the Government financing Denel to normalise its balance sheet. The critical issue was how to package Government financial support for Denel. She supported the restructuring plan and called on Members to accept the proposed business plan. Denel needed to be supported, but loopholes around finances and corruption must be closed.

Ms M Mokause (EFF, Northern Cape) said the lack of leadership in saving Denel was extremely worrisome. This was a very important state owned entity, yet there was no will save it. Defence depended on the functionality of Denel, yet it was weak. There should not be talk about state capture in this era. State capture happened in the hands of the ANC administration, and it was up to the leadership of Denel to detect some of the problems at that stage, and deal with them to save the entity.

When Denel said they were on a path of resolving issues to do with the South African Revenue Service (SARS) and tax clearances, they were not clear on what exactly was being done. Were they paying SARS? Were they avoiding paying SARS? What steps were they taking? Was the Group CEO being paid monthly? If he was getting paid, how did he feel when the lower grades of employees were not getting paid while top management were pocketing salaries monthly? How far were they in covering 100 percent of salaries for workers in Denel? The presentation spoke about the reduction of the workforce. This was a very important and strategic state owned entity. How did it affect Denel’s functionality so far?

Ms W Ngwenya (ANC, Gauteng) thanked Denel for the presentation and for complying with the recommendation made in February 2021, when the Select Committee met with Denel, among others, that Denel appear before the Committee again to give a briefing on progress in implementing the turnaround strategy. This meeting was taking place because of that recommendation.

The slide presentation showed the business continuing to lose skills and operational activity being at a low level. Which business was mostly affected by the staff turnover? Were there any plans to avoid further staff turnover in future? If so, what were they? If there was no plan, why not? Had Denel managed to implement all the turnaround plans of 2019?  What was achieved? Did that turnaround strategy address SMMEs? How was it contributing towards localisation?

Ms Ngwenya asked about properties that were classified as national key points and whether Denel was considering relocating businesses in order to sell them. What was the nature of Denel’s legal representation given the legal challenges? Was there a legal team within Denel or was it being outsourced?  Did Denel have enough capacity to compensate the legal team given the current financial situation in the entity? Finally, had there been feedback from the Treasury on the Government’s financial support for the entity. 

Ms M Clark (DA) said there was a sense of déjà vu about Denel. There had been a R7.1 billion loss between 2017 and 2020, R2.8 billion in government bailouts, six permanent CEOs, three acting CEOs, the appointment of compromised individuals to the Board, the influence of the Gupta family, and the list went on.  Why had the budget for defence in South Africa declined drastically, while in the rest of the world there had been a significant increase?  Could Members get an explanation for the decline in revenue and exports? Currently there were 12 500 employees in the structures. Was that the status quo now? Which employees still had outstanding payments due to them? Were senior employees being paid? Were Board members being paid? DId Denel have the capacity to implement a five-year recovery plan? What amount was needed when they spoke about a significant cash injection? What bailout would Denel need to succeed? The Committee did not know this. What would be different in this new five-year business plan?

 Could Denel present a consequence management plan to the Committee? Members needed to understand that Denel would not fall into the same situation they were in now. Denel had stated that consultations on strategy and regulatory aspects with relevant stakeholders were underway. Were these stakeholders consulted on the new five-year model of Denel? What were their inputs? What would the size of the staff complement be? Would they be able to afford the staff salaries?

How did Denel plan to secure the critical skills needed? How would Denel deal with the risk of losing critical intellectual property to competitors, which would impede the ability to produce or maintain critical products?

How would Denel deal with Pretoria Metal Pressing (PMP) not being tax compliant? This was a huge risk at this stage. Currently, PMP was not able to supply the South African Police Service (SAPS) or any government sector with ammunition or small arms, because it was in contravention of the Public Finance Management Act (PFMA). What international offers were received in terms of PMP, and what was the DPE’s response to these offers? Could Denel confirm that they had had offers for business units, and were these offers considered or not, and why? What was the DPE’s view on selling ownership of sovereign and strategic assets but executing control over those assets through the National Conventional Arms Control Committee (NCACC) regulatory framework? Had there been any strategic offers on equity partners and had the DPE and Denel investigated the regulatory protocols around these offers? What international interest had there been in purchasing PNP? Would Denel consider such a purchase? Could Members get a report from the Standing Committee on Public Accounts (SCOPA), since Denel had appeared before SCOPA the previous day? How many criminal cases of corruption were still outstanding?

Ms Tshabalala asked for a report from the SIU. That would help Members to understand the extent of fraud and corruption, and the value linked to those cases. Considering the current financial status of Denel, especially the outstanding legal aspects, would it not be the best solution to put Denel under business rescue? What was the status of the warrants of execution against Denel? What was the status of the sale of non-core assets and what would be raised financially during this process? How would those funds benefit the restructuring of Denel? What were the current orders outstanding at PMP? Would Denel be in a position to table a current annual report and financial statement to Parliament going forward?

What was the rationale for entering into contracts with Venezuela, the Democratic Republic of Congo (DRC) and Chad? What were the consequences of these erroneous contracts? Could Denel later on make a presentation to the Committee on the Hoefyster project? That could be very interesting to see. The presentation said overdue creditors had been reduced by 80 percent. What was the current state regarding the outstanding amounts that still needed to be paid? How far were the negotiations with Saab Grintek regarding its application to the High Court to liquidate Denel?

Ms T Modise (ANC, North West) said Denel was a very important entity for the country, but the situation raised a lot of questions. Had Denel put any systems in place to prevent the current status occurring again in future? Had they engaged every employee to make sure that Denel did not collapse? The presentation spoke about capital. How much capital did Denel need overall to successfully turn the company around and return it to profitability?

Mr A De Bruyn (FF+, Free State) said the presentation stated that R636 million was owed to employees. It was likely that everyone had seen media reports that morning about suspended managers who were still receiving salaries. Was that really the case? If so, how would it be dealt with? There should not be an expectation that government or anyone else would have faith in any new plan if the conduct on Denel was to pay suspended managers that made themselves guilty of corruption, instead of paying the employees.

Mr S Gumede (ANC) commented on Ms Tshabalala’s contribution that Members were very grateful the previous day to hear the positive contribution by the newly appointed Minister Modise which showed support for Denel and her commitment to assist Denel’s survival. In his analysis, there were four critical elements in the survival of Denel, in terms of the structure. Many others had commented on the business plan, which was critical as it informed the roadmap and quantified how much Denel needed to be in a position to wake up and walk. There needed to be the right Board with capacity, and credible members. There must be management with proper administration. The DPE must provide proper oversight over all this. This was key to survival of the entity. The Committee would keep flagging the matters that were very thorny to the Department, and the Board Members. Denel must be able to explain how they planned to address the challenges being faced. This is of interest to the Government and equity partners.

Revenue had plummeted from R8.2 billion to R2.4 billion in 2019/20. Probably, the R2.4 billion could have declined further. The hope was to get R1.5 billion in non-core sales, spread over five years. No one was sure whether the stock was in fact saleable. The understanding was that some of these assets might be very obsolete. How did Denel see itself overcoming some of the hindrances that could cripple the entity going forward? The Committee did not want to see a repetition of state capture. There was talk of losses and decline in revenue. What could have caused these pitfalls? The Committee needed a good explanation. The security of intellectual property was of serious concern.

Chairperson Matibe asked Members to switch on video when speaking since the meeting was live on TV. Members could have the video off only where they were experiencing low bandwidth challenges.

Mr A Arnolds (EFF, Western Cape) said this was not the first time that Denel had appeared before the Committee. Could the Director General give an update on the investigations into the explosion at Rheinmetall in Somerset west in the Western Cape where eight workers were killed in an explosion? Members needed to get an update. A report had been requested previously. It was now three years after the explosion. The families still awaited the outcome of that investigation.

All the stolen money must be recovered. There was an update in the report about the ongoing forensic investigations, but only summonses and letters of demand had been sent. These matters must be concluded. The country, and especially those people waiting for resources, were waiting. All the resources must be recovered from employees who were implicated in wrongdoing.

Denel had presented the roadmap to sustainability. Could the Committee be assured that the current turnaround strategy and the roadmap would not take things backwards? Were they sure that this roadmap and turnaround strategy would have 100 percent capacity to deliver? The Board was there to provide leadership and strategic oversight and oversee the internal control environment. The Committee had not seen a lot from the Board. Was the Board still stable?

Mr M Nhanha (DA, Eastern Cape) apologised for keeping his video off due to connectivity challenges. He promised that he was not in his pajamas. He agreed with Mr Arnolds that all stolen money should be returned, including the VBS money.

The Group CEO could advise accordingly if he had been understood incorrectly, but he said Denel was now shifting focus, exiting non-core businesses, that it would focus on design rather than manufacturing. Mr Nhanha said that he was not an expert in manufacturing designs, but with his little knowledge about running a successful and profitable business, he believed the capability to design and manufacture one’s own designs added value to the business and could bring in more money. How did Denel see themselves being a profitable state owned entity if they were throwing away the key component of manufacturing, which would have made them money?

Regarding the disposal of non-core assets and non-core business, would this be an open process where all those interested would be given equal opportunity to bid? Whenever there was this kind of disposal of Government companies, the same old connected elite of the ANC were always first in line. Finally, was Denel exiting Rheinmetall with the 49 percent that they previously owned in that company. Members would recall that in the past, he had raised the issue of Rheinmetall and the Hoefyster project. Seeing that Denel was now exiting Rheinmetall, what were the risks that came with that exit as far as the Hoefyster project was concerned?

Ms L Bebee (ANC, KZN) referred to the financial difficulties in Denel and the fact that some of those difficulties were due to maladministration and financial mismanagement. How much money had the entity recovered so far? On the question that Ms Ngwenya had asked on skills, had Denel considered diversifying the business to include consumer goods, such as cell phones, high-tech devices like GPS trackers and CCTV cameras? 

Mr G Cachalia (DA) commented on the Director- General’s statement at the start of the meeting about bailouts. He said in his view, bailouts were money from the public purse, in effect the provision of good money, to bad or no effect. As such, Denel and many SOEs were exemplary case studies in a continually failing series of bailouts.

Ms Clark had dealt with a plethora of micro issues that required answers and attention. On 28 May 2020 the same CFO had made a presentation to the committee. A year before that in 2019, Denel issued a statement saying Denel was implementing critical steps to return to sustainability. It had said it would maximise the value of business areas, deliver on strategic partnerships, exit non-core business areas, combat fraud corruption and wastage, drive cost reduction, secure financing and high-level support from the shareholder, grow the order book, ensure retention of core skills, and restore Denel’s reputation to improve morale. Mr Cachalia said Denel had failed miserably on each of these for years. The Committee was now presented with another set of high-level endeavours and plans, which he said he would write in blood, “will fail again.”

The Chairperson at the time had said the fundamental challenge was the liquidity of Denel. That liquidity had since gone from bad to worse, and it was now said that more money needed to be pumped in. This was folly. This was madness. This could not be done. There was a responsibility to the citizens for proper use of the public purse. The company was insolvent. There should not be the use of words like “technically” or “effectively.” The company was bankrupt and could not meet its obligations. How could it pay salaries? How could it pay for the new restructuring and repurposing? It could not. It again needed to take money from the public purse to put into the company. It had done this before and promised what it was going to do in 2019, but things had gotten worse.

Denel had no capacity. It had lost key engineering staff, it had lost key intellectual property and key contracts. Aviation systems were dead, there was no money, and the list could go on. Without pouring more money into this madness, what was to be done? The fact was that the competitive edge had been lost and would not return by the separation of engineering capacity from maintenance and manufacturing, and establishing a commercial business unit, which amongst other things was now going to enter non-core areas while getting a lot of non-core assets. The contradiction was startling. Even if it did all this, at what cost and at what projected return? That was what business people did, but nobody seemed to be addressing those questions.

Historically, Denel owed its existence to an arms embargo in the Apartheid era. A monopoly was created. It was a public company doing business as a private entity. Despite that monopoly, and because of a host of other factors, it was now bankrupt. The involvement of the state, which resulted in some stellar market performance, had now resulted in market failure because of mismanagement, malfeasance, state capture, and cost addition. What would be done in the face of this market failure? The penny had seemed to drop in terms of public enterprises and what needed to be done across the board. There were moves in Transnet and Eskom, and there should be moves in other entities like Denel to involve the private sector, because the public sector had failed. The private sector would come in on their own terms, but this could be negotiated. What efforts had been made to involve the private sector, while in parallel ensuring that the strategic sovereign interests of the state were protected? How were they going to be protected? Who would be enticed to come in? On what terms? How would this be effected to obviate the bailouts affecting the country? What efforts would be made to streamline the duplication with Armscor?

There was a golden opportunity to apply one's mind to this in a very real way. Could Denel give a detailed declaration of what money was sought and how much was being sold? This should include how it would be employed, what revenue was projected against the deployment of these funds, what payback was envisaged, and the feasibility of this envisaged structure. Consideration must also be given to business rescue, potential liquidation and privatisation options. This was the stark reality and there was no need to live in cloud cuckoo land anymore. These issues must be addressed, both at the micro level and the high level.

Mr NE Dlamini (ANC) said the one thing being picked up from the presentation was that the current status in terms of the lost intellectual property was because of the strategic partner, yet the turnaround strategy was still largely based on this strategic partner. What sort of lessons had been learned from the previous experience, and what measures were put in place to prevent history repeating itself? 

Responses from Denel

Denel’s Group CEO, Mr Hlakoane, said he wanted to give a disclaimer that he was trying to summarise several questions and he apologised if he missed some. On the revenue losses, he said Denel had multi-year contracts that had to be renewed. Sixty percent of revenue came from Armscor. At the start of each financial year, the financial authority needed to give permission to proceed. However, this came more than two months late from the sister company, which resulted in some of the revenue losses. Some of it was because Denel did not have enough resources to resume work in some instances. Denel could not realise the projected sales.

With regard to the R1.5 billion that was envisaged from the sale of non-profitable or non-core assets, he said this would be over a five-year period as there were processes that needed to be followed, both from the PFMA perspective and governance within Denel, which took time.

It was envisaged that the sustainability roadmap would help to stabilise the business. Dealing with diversification, he said maintenance and manufacturing was a core business that Denel wanted to secure and would not get out of. Denel wanted to make sure that this was sustainable. However, Denel was looking for other ways of securing business from the non-defence market, including ventilators and thermo screens. Denel wanted to move away from reliance on the defence sector for sustainability.

The SARS issue was still being dealt with. SARS had communicated that they would give the certification by the end of the month when Denel paid the PAYE which was due.

With regard to salaries, he said the corporate office did not generate any cash. However, the operations divisions were asked to contribute a certain margin of their profits into the corporate office to deal with corporate matters such as litigation and administration. The CEO did not get full pay. If Denel was paying staff 20 percent, the CEO got 20 percent, where they are paying 30 percent, the CEO equally got 30 percent. While he was not getting a full salary, he was diligent in ensuring that the company was moving forward. On the Solidarity trade union action, he said Denel had managed to pay between 80 and 90 percent of what was owed between May and July in 2020, This was for salaries, pension funding, and medical aid bill. However, one division, Denel Dynamic, had been struggling.  They were incapacitated, as Mr Cacharia had said. A lot of skills had been lost. It was this loss of skills that resulted in the decision to merge some of the capabilities. Denel would never be sustainable if divisions operated with a silo-mentality as they had before. One of the interventions was to share resources. In this model, it meant a division could not have a resource of which it was using 20 percent while another division could use the unutilised 80 percent. In future, business units would be able to buy hours from engineering, for example, so that their people could be kept busy doing other non-engineering work.

On the question on the 2019 strategy, he referred to a slide in the presentation that dealt with the exit from Spaceteq, Aerostructures and other strategic actions that had been approved. The Spaceteq matter just needed to be concluded and Denel was busy analysing the winding down of Aerostructures. Referring to Mechem and Gear Ratio Manufacturing, he said Denel needed to ascertain if these were still viable. It was found that they were not viable and would not be in the future. Money had to be pumped into them, but that money was not available. As such the best thing was to exit. Denel had not engaged DoDMV about relocating any assets. Denel was able to restructure itself. However, if it were to do with relocation of Denel as a whole, this would be a shareholder matter that the CEO would not be able to answer at his level. On outsourcing of legal representatives, Denel had one legal resource working in the corporate office, and another one working in one of the divisions. These were the legal resources that Denel used. However, where they were incapacitated, they made use of a panel, which included ENS Africa, to assist on critical matters of the business. Denel did owe them quite a lot of money.

On the question about the reason for the decline in the Defence acquisitions, he said he could not respond at his level since the DoDMV had its own strategy in terms of acquisitions. Denel did not have 12 500 employees, as a Member had said. These were employees within the sector and not in Denel. Denel had 2 400. Some employees of Denel had been suspended. Denel was compliant with the Labour Relations Act. Some of those who were suspended were still being paid while matters were finalised. Although they were suspended, they remained contracted employees until that contract was disposed of.

Denel did have the capacity to implement the turnaround strategy. Most of the things in the strategy were being done in-house. The roadmap and resources tapped into internal capacity. However, there would be a need for external assistance at certain times.

Consequence management happened not only at executive level but throughout the business, although it was not reported. What was reported was the investigations that involved particular executives.

With regard to the security of intellectual property, the presentation dealt with measures being put in place, including a centralised Enterprise Resource Planning (ERP) system where it could be properly managed. Denel was employing a governance framework dealing with how programmes  were executed and the implementation of consequence management.

Responding to the question about PNP and its tax status, Mr Hlakoane said PNP was a division, and tax clearances were given at the SOE level. As stated earlier, this had been dealt with. SARS would be paid, and tax certificates would be issued across all divisions within Denel.

Regarding criminal cases, the SIU would be able to give the details of where they were and what value is envisaged to be brought out of those investigations. These were criminal matters outside the jurisdiction of Denel since they were being dealt with by the SIU.

On the rationale for contracts with the DRC and others, he said these were the legacy contracts resulting from state capture at the time. Denel now had to deal with this burden. There was indeed state capture which resulted in current debts because of what happened in Venezuela, the DRC, and others. Denel was considering reimbursing some of the countries for the contracts that had not been finalised. On the Saab litigation, Denel was reviewing the orders to indicate the amount of money owed. Denel needed to do some verification, because at the time that the litigation happened, Denel was not privy to the process followed behind the scenes. Two teams from Saab and Denel were working together to verify the claim and reach a settlement.

Responding to Mr Gumede’s comment about obsolete assets being sold, he said there were three shareholdings from which Denel thought it could get good value - Rheinmetall, Barij Dynamics, and Hensoldt Optronics. However, for physical assets like Mechem Gear Ratio, Denel was still doing evaluation to see if it was feasible to sell or not, or to resuscitate. There were issues relating to employees who had left the company which needed to be resolved. Denel had to decide whether to execute projects relating to those employees who, in the main, were in the missile business. Denel was still able to deliver on its mandate despite that hindrance in the missile portfolio.

With regard to governance, Denel was implementing a framework to improve its ability to contract and deliver. Lessons learnt previously were that contracts were erroneous and that there were no legal resources. The governance structure was thus set to ensure that Denel had the resources to overcome past pitfalls.

Mr Nhanha’s interpretation that Denel was getting rid of the manufacturing business was incorrect. Manufacturing remained the core of Denel’s business and there was no intention to move away. Engineering would be given more freedom in the diversification strategy being pursued. Denel had taken a decision together with the shareholder to exit Rheinmetall Denel Munition (RDM) and that process was ongoing.

In response to Mr Cachalia’s comments about Denel losing its competitive edge, not all had been lost. Members could be assured that Denel was still getting clients for products and services, despite the current situation. A lot of the clients had assisted Denel to remain liquid. While the competitive edge might have been lost in Dynamics, it did not mean Denel as a whole had lost its competitive edge. The fact that Denel had lost employees did not mean that everything was lost, as Denel still had infrastructure and intellectual property. Denel believed that they would be able to develop young engineers to look at future technology.

With regard to the loss of intellectual property and strategic equity partnerships (SEPs), the focus in the five-year plan was to restore capabilities and try to rebuild Denel, rather than rushing into SEPs. It was noted that with SEPs, Denel could lose intellectual property. Measures and infrastructure were being put in place to better manage the intellectual property. Once the business had matured, decisions could be made on whom to do business with and on what terms to protect the intellectual property. The lesson learnt was the need for a paradigm shift from how business was done previously, and how it would be done in the next five to ten years. Denel was aware of the issues from the past and the vultures that were hovering around it. The intellectual property must be protected.

Ms Gloria Serobe, Chairperson of the Board of Denel, said she was mindful that this was an executive meeting, and the DPE was just there to provide support. It was important to stress that the Board and Executive were willing and able to take Denel forward. The problems were inherited, but the Board and CEO could not say, “I was not here.” The problems must be inherited and owned. The leadership was keen to do what was possible to take Denel to where it needed to be, given that this was a different environment from the previous Denel. On top of Denel’s own problems, the past 15 months had not been easy, but Denel was not the only one affected. The leadership was keen to take Denel forward with the help of Parliament, Committee Members, and the shareholder.

Responses from the DPE

The Director-General, Mr Tlhakudi, responded to the question about the explosion at RDM. The report by RDM had been completed and improvements to the layout of the facility had been implemented, such as ensuring that there was adequate distance between the blending facilities and where employees were located. RDM had incorporated training and improvement of processes and procedures as a result of lessons learnt from the incident. The Department of Labour had started its own inquiry in May 2020, and it was ongoing. It was stopped at a point due to pandemic restrictions. However, it would resume soon.

On the need to recapitalise, both private and public businesses at times approached their shareholders to be recapitalised. What Denel was departing from was the history of funding operational losses and not demanding fundamental restructuring of the business to ensure that it was sustainable. Denel was restructuring itself. It remained a viable business. It had healthy order books, and it deserved to be given a chance to continue to play a positive role in the country. This business was fundamental and integral to the South African security system. There were many products across the armed services, for which Denel was an original equipment manufacturer (OEM). With Denel’s demise the country’s defence would be in a very difficult position. Some of the well-known products of which Denel was the OEM included a transport helicopter for the Air Force and the G5 and G6 artillery pieces for the army. There were also missiles and other arms that Denel provided. Liquidating the arms industry would place the country at risk. Other companies were dependent on orders that Denel secured and outsourced. It had been determined that every job in Denel supported six others in the industry. There was a huge ripple effect when Denel encountered challenges. It was important for the Government to protect Denel, not just for security, but also to sustain the economy. The leadership wanted to bring Denel back to its glory days, but would do this slowly to ensure that it did not overstretch capital.

On state capture, a comment had been made that this should be forgotten as there was now a different environment and thus the current leadership must not keep raising it. However, it must be raised. Denel was in this situation because of state capture, corruption, and mismanagement by those who left Denel. The legacy they left was what the current leadership must contend with. It was easy to destroy but difficult to build. The damage that was done by the previous Board during their tenure meant that despite a healthy order book, Denel could not access markets for capital to finance the projects. This meant that some of the projects had to be cancelled and good people in Denel had to be chased away. This was the history being dealt with. In rebuilding and repositioning the organisation, South Africans must be reminded of the history. This had been seen across the SOEs. It would be incorrect to be told to mask all this. How would the problems be explained by not going back? The current Board and Executives were firefighters putting out the fire that was started by those who left. They required support to do what they must do. Even with the current liquidity position, and the inability to pay salaries the leadership was willing to work. This should be commended as patriotism and should be extended to other employees of Denel who had continued to do their work despite the conditions.

Denel continued to enjoy the support of the Government, which was reflected by the Government stepping in to ensure that guaranteed loans were paid off. Denel was restructuring to ensure that there was working capital to fill orders and generate cash flows to pay salaries and suppliers. Business rescue and liquidation would thus not be applicable in this case, neither would it be appropriate. The Government had provided the required support. Denel was working responsibly within Government prescripts in using this.  

Closing Remarks

Chairperson Matibe thanked the DG, the CEO, and the Board Chairperson for the responses. Some questions had not been addressed. There would have to be a joint meeting, as proposed by Ms Tshabalala and seconded by other Members, to be briefed by the DoDMV, the SAPS and SIU. He thanked Members for an insightful engagement. Follow-up questions could be made in writing to the Secretariat to be forwarded before the all-inclusive session to deal with all the outstanding issues.  He handed over to the co-chairperson for closing remarks.

Chairperson Magaxa thanked Chairperson Matibe for the wonderful way everyone was allowed to participate in the session. Some of the proposals would be dealt with outside the session, and Members would be informed about the way forward. He expressed appreciation to the officials and observers who joined the session.

The meeting was adjourned.