Denel: briefing

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Public Enterprises

15 March 2000
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PUBLIC ENTERPRISES PORTFOLIO COMMITTEE & joint standing committee on defence: JOINT MEETING
15 March 2000
DENEL: BRIEFING

Denel website: http://www.denel.co.za

Documents handed out:
Denel presentation (electronic version unavailable; synopsis of document is provided in this report; email
info@pmg.org.za for further information)

SUMMARY
Mr Andries Botha, the acting CEO of DENEL, gave a presentation to the two committees wherein he outlined the background to DENEL as well as the current state of the market it operated in and its objectives for the future including its restructuring plans. One of DENEL's main goals in restructuring was to find overseas equity partners. Divisions within DENEL that were not profitable would have to be brought to profitability before they could be privatised or restructured. Also, DENEL as a whole is not currently profitable, and members expressed some concern about this. Concern was also expressed about the role DENEL's restructuring would play, in promoting black economic empowerment and the need for greater representation of black women, in DENEL. The atmosphere of the meeting was productive, but at times tense, with the need for further meetings acknowledged by all.

MINUTES
The chairperson of the Joint Standing Committee on Defence, Mr J Mashimbye welcomed the two committees to the meeting as well as the Director General of the Department of Public Enterprises and the team from DENEL who were to give the briefing. He indicated that this was the first meeting since the 1999 elections in which DENEL would be sharing information with parliamentary committees. He introduced the DENEL team and specifically, Mr Andries Botha, the acting CEO of DENEL, who was to begin the briefing.

Briefing
Mr Botha gave a presentation on the current status of DENEL and the industries within which it operated, outlining nine key aspects that would be focused on, which were the following:
Background
Vision
Group structure
Products
Export legislation
Global trends
Operating environment
Restructuring plans
Way forward

1. Background
DENEL's background can be traced back to 1 April 1992 when DENEL was formed out of part of ARMSCOR. ARMSCOR split up, remaining as a procurement company only, leaving all manufacturing divisions to fall under the wing of DENEL. DENEL has eleven factories with approximately 11,000 employees, although the figure rises to around 13,000 when there are major projects underway. Its annual turnover is between R3.2 and R3.5bn.

2. Vision
DENEL's vision is to be a truly global player in the international aerospace and ordnance industries and in so far, to grow its business significantly.

3. Group Structure
DENEL is divided into four groups, namely: ordnance, aerospace, IT and commercial products. Within each of these groups, there are a number of divisions, some of which operate as separate companies.

4. Products
DENEL's focus, on the military side of its business, is on five areas:
Artillery (including the 155 mm G5 and G6 units)
The Rooivalk attack helicopter
Unmanned Aerial Vehicles (UAV's)
Missiles
Combat Turrets

On the commercial side of its business, the focus falls on the following six areas:
Maintenance of civilian aircraft
IT solutions
Property developments
Rock busting technology for use in mining
Motor Industry components
Landmine clearing operations

Mr Botha introduced one of his colleagues, Mr Sisulu, who proceeded to speak more about DENEL's products. Mr Sisulu mentioned that DENEL has a test range facility in the Southern Cape, which is currently the focus of a feasibility study looking at the possible use of the site for the launch of satellites. DENEL is also developing, amongst other things, a new advanced rock breaking technology for use in the mining industry and a new process for the extraction of protein from Soya beans. It also has important products that are used in de-mining, which have already been successfully employed in Bosnia and Mozambique, as well as new UAV's suitable for non-military purposes.

Mr Botha continued, talking about DENEL's current market situation. He pointed out that DENEL produced around 63% of its goods directly for South Africa's own defence needs in 1992/93, whereas today that figure has dropped to around 37% of all goods produced. A rule of thumb for the allocation of DENEL's current production, is that one third of production goes to commercial products, one third to products for export, and one third to local defence needs.

It was noted that the arms procurement package that the South African government has recently approved, will be of great benefit to DENEL since it will be directly responsible for producing a number of the components making up some of the systems ordered. Furthermore, DENEL will benefit in increased exports since some of the components produced will be suitable for orders placed by other countries and DENEL will be in a perfect position to meet these orders. The procurement package will be directly responsible for R5bn in work over seven years and additional work after that too.

5. Export Legislation
The export of arms is heavily regulated, it was noted. The government directly controls which countries DENEL may or may not sell to. The industry is bound by many rules among which are: The South African Conventional Arms Control Legislation, The South African Non-proliferation Legislation, and various multilateral and bilateral agreements. Some of the multilateral agreements include The Missile Technology Control Regime (MTCR), The Chemical Warfare Regime, The Nuclear Non-proliferation Treaty and a number of other UN regulations. Noteworthy among the bilateral agreements, are those signed with the United States. Furthermore, general principles apply, such as that arms can not generally be sold to regions where there are conflicts and that all relations must strictly be on a government to government level; DENEL can not sell to individuals.

6. Global Trends
It was shown how there is a shrinking international market with reduced demand for products. This, together with a general over-capacity, has led to increased competition. Furthermore, defence industries worldwide are seeing consolidation and an increase in the mergers of companies. Budgetary constraints are also causing more prospective buyers to increasingly consider second hand products, upgrades and service life extensions, as well as the ever increasing use of offsets when making purchases. South Africa has been able to obtain a number of offsets in its current procurement package which are very beneficial, but when DENEL is filling the role of supplier, it is increasingly seeing the requirement for offsets in reverse, among prospective buyers. Another important feature of the current market situation, is an increasing incidence of technology transfers between countries.

7. Operating Environment
The environment in which DENEL is currently operating, therefore can be characterised by a number of features. Key among these are: a shrinking domestic market, an increasingly competitive international market, a heavily regulated market, the growing prominence of offsets and counter-trade, an increase in consolidation and mergers, the need to include black economic empowerment objectives and an atmosphere of impending restructuring and privatisation.

8. Restructuring Plans
Among some of DENEL's key restructuring objectives, are the following:
To become part of the global consolidation in the industry
To strengthen its capital base
To improve its market access and penetration, bringing onboard overseas partners in the process
To remain financially sustainable
To effect significant empowerment strategies
To gain effective partners in order to increase research and design (R&D) efficiency
To improve its ability to serve the South African National Defence Force (SANDF)

The Way Forward
Ms Tulwana spoke briefly about some of the restructuring plans in greater detail as well as some of the training schemes DENEL is involved in. DENEL already has divisional restructuring and transformation committees (RTC's) in place as well as other restructuring plans in place at a group level. Furthermore, the executive management, the DENEL board, and the inter-ministerial cabinet committee (IMCC) are all heavily involved in restructuring plans that are on the table.

The training schemes DENEL sponsors include a bridging programme for students who are below average in maths and science, which has to date, assisted 455 students, as well as the DTA DENEL Training Academy and the DENEL bursary scheme. In addition to these schemes, DENEL has assisted 53 projects involving Small, Medium and Micro Enterprises (SMME's). Through all these efforts, the company wants to be seen to have a caring corporate image.

Mr Botha continued to talk about objectives in the positioning of DENEL for the next millennium. He said that some of the key points in this regard were to grow the business, through getting more orders in two of its key products, the Rooivalk attack helicopter and the G5 and G6 artillery pieces. Also, DENEL would be actively seeking international partnerships and through restructuring, it was envisaged that empowerment could be heavily promoted.

The plan that DENEL would follow going forward, was as follows: For the aerospace group, a key priority would be getting international partners on board such as Agusta and SAAB. With respect to the ordnance group, the plan was to first turn around any loss-making divisions, through obtaining big orders, before advancing the plans for their privatisation. In the IT group, the plan was to look at consolidation with other state owned enterprises (SOE's), such as Transnet and Eskom as well as with international partners and finally, with respect to the commercial group, the focus would fall less on this area.

Questions and Answers
Members of the committees put forward a number of questions to the DENEL team, beginning with the chairperson who asked several questions.

He asked what are the current levels of cash in DENEL, in light of the fact that it inherited R3bn from ARMSCOR in 1992, and can DENEL today be called a profit-making company? Mr Botha replied that DENEL's financial statements would be made known in a few weeks time. It had made a loss the previous year and for the coming year was expected to almost break even, having been significantly turned around.

The chairperson also asked what is currently in the order book and how did DENEL fare with potential customers such as Malaysia and Saudi Arabia? Additionally, are there any orders for the G5 or G6 artillery pieces and is more being invested in these products? Mr Botha replied that in some divisions the order book was full for up to three years but in other divisions, specifically for the Rooivalk and G5/G6 artillery pieces, the order book was not looking good. It was anticipated that Saudi Arabia and India would be placing large orders for artillery though, and in addition to that, the defence procurement package would bring R5bn of orders in.

The chairperson asked why Mr Botha was still the acting CEO after quite some time, expressing his desire to see some permanence in the company's leadership? Mr Botha replied that he had been the acting CEO since 1 August 1998 and the impact of this had been discussed with the board and the minister. There would be permanent appointments very soon. Mr Botha reassured the committees that he had taken on the acting CEO job on the condition that he could act as though he were permanent. A member of the Department of Public Enterprises added that letters of appointment were currently being processed.

The chairperson asked what was the role of the DENEL board and whether it was non-executive, to which Mr Sisulu replied that the board was governed by rules.

The chairperson also asked what was the future of the Rooivalk and another member later reiterated this question about the Rooivalk, asking whether it was still technologically up to date and in fact, a viable product? Also, was there still a need for the missile testing range in the southern Cape?

Mr Botha said concerning the Rooivalk, that it was a very big cash drain for DENEL and that there was currently only one order from the SANDF for 12 helicopters although there were currently options open for Algeria and Malaysia. The programme needed to be reviewed and five different options had been put forward to the ministry, which should be responded to by the end of March. If no orders were received though, that would represent a big problem for the programme. The helicopter was still technologically viable, remaining competitive with the Apache. If no further investment into the technology of the helicopter were made however, it would not be competitive in the future. The missile testing facility in the southern Cape is the only facility of its kind and currently breaks even or makes a small annual loss of approximately R1-R2m. A study is currently under way involving Russia and other countries, looking at the feasibility of launching satellites from the site.

Another member commented that the presentation was very illuminating and asked a number of questions. She asked:
How many MTCR countries are there and which are they?
Is the army sufficiently trained to handle the most technically advanced weapons?
How long does it take to clear landmines?
With regard to empowerment, will blacks be included as employees only, or in respect of ownership as well, bearing in mind that the majority can not afford to participate in buying state assets?

Mr Sisulu responded to some of these questions, saying that the MTRC was a very small club, comprising just a few countries. He said that it was difficult to give an absolute figure on how long it took to clear mines as many factors influenced this. Where accurate maps existed, as was the case with Bosnia, DENEL's equipment was able to help with the very speedy removal of those mines.

Mr Botha replied to the empowerment question, also answering another query of the chairperson's regarding what was the likely time-scale before privatisation could occur in DENEL. He said that experts had done a number of reviews, including legal and financial reviews. However, since then a number of changes in the industry had occurred and had to be taken note of, even necessitating the re-evaluation of some of the findings of these reviews. For some divisions it would first be necessary to turn around the programmes and bring them to profitability, such as in the case of the Rooivalk programme, however for other divisions, including all of the remaining business identified as non-core, DENEL would be privatising them very soon. Key to every proposal though, was the inclusion of empowerment goals. In this regard, DENEL was due to receive from the government, a framework on how to implement empowerment goals, very soon.

Mr B Mkhize (ANC) congratulated the DENEL delegation on a good presentation and asked about UN regulations stipulating that companies such as DENEL can not go to customers directly, but must rather wait for foreign governments to come to them. Was this in fact, the case? What also, about short-term mergers - were these being considered? Mr Sisulu replied that marketing was a national effort, that DENEL did indeed operate on a government to government basis only, and that DENEL did receive government support in respect of marketing. He also said that DENEL did in fact work closely with UN structures, especially on de-mining.

Another member also congratulated the delegation on the quality of their presentation, thanking them for their "helicopter view". She asked for more details on DENEL's Research and Development work, and whether a strategic partner would be buying a stake in DENEL? She also asked whether shares would be reserved for empowerment partners, specifically with respect to its non-core businesses and had DENEL actually seen a decline in profits, and if so, why? Mr Botha responded to the mergers question as well as that regarding strategic partners, saying that possible equity partners were being considered for a number of divisions within DENEL, and that in the aerospace group specifically, one partner, BAE, might take up a 20% equity stake. It was always DENEL's intention though, to maintain a majority stake, and therefore control of the company. With respect to non-core businesses, the intention is to hive it all, using black empowerment amongst other things.

Another member asked about the deal between South African Airways (SAA) and Boeing, saying that if the contract had been awarded to Airbus, DENEL would have benefited in offsets. Would DENEL still benefit from the deal now that it is with Boeing? The DG of the Department of Public Enterprises answered this question, saying that both Boeing and Airbus had committed to a 30% industrial participation and a fair portion of the deal would go to DENEL in the manufacturing of components.

Another member asked whether DENEL had any obligations with respect to profitability, and what were the tax implications? Does DENEL pay tax, he asked? He said that other SOE's had restructuring committees set up and shouldn't the Department of Public Enterprises be looking at which SOE was the most advanced in its restructuring plans so that they could learn from each other? The DG also answered this question, saying that in most enterprises there was a need for sector specific restructuring committees, but that the department would indeed look at where the best practice was in order for others to benefit from it. Neither he, nor anyone else, addressed the tax questions.

Another member asked why 275 men had been trained for security work, yet no women, and whether or not DENEL actually had a woman's empowerment, or gender equity, committee in place?

Another member asked what is being done to bring DENEL to profitability and to increase the number of black women within the company? A member of the Department of Public Enterprises remarked that the issue of profitability would be addressed at "a more convenient time."

Ms N Shope (ANC) asked how many black women were benefiting from DENEL bursaries? Neither this question, nor either of the previous two about the role of black women in DENEL, was apparently answered.

Mr D Bloem (ANC) asked what is the racial breakdown of the bridging programme and also DENEL's management? Mr Botha responded that there had been a decision to appoint a transformation director and there were some vacancies in the top-level management, therefore significant opportunities existed at present to transform the top-level leadership at DENEL.

Another member repeated Mr Mkhize's earlier question regarding UN regulations saying that it had not been answered satisfactorily and that the answer could be provided in writing.

Another member asked why there were apparently no bursary recipients from traditional "bantustan" universities, and hardly any, even from rural areas? This question too, was not answered by anyone from DENEL or the Department of Public Enterprises.

The chairperson thanked the DENEL delegation for their excellent overview of the company's current situation, expressing regret that time had run out on the questions and answers session, saying too that further meetings addressing more specific issues, lower down in DENEL, would have to be arranged. He said, "you have the support of the legislators, but once all is said and done, what the committee wants to see, is a profit-making organisation." He closed the meeting.

Immediately after the chairperson closed the meeting, several committee members - those who had asked the questions about the role of black women in DENEL - berated Mr Botha for not addressing their concerns and answering their questions. It was not apparent what Mr Botha's response, if any, was.

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