Denel Annual Report

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Public Enterprises

14 October 2004
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Meeting report

PUBLIC ENTERPRISE PORTFOLIO COMMITTEE
14 October 2004
DENEL ANNUAL REPORT


Chairperson Mr Y Carrim (ANC)

Documents handed out:
Summary and Analysis of Denel Annual Report
Denel Annual Report 2003/04
Denel PowerPoint presentation on Annual Report

SUMMARY
Denel briefed the Committee on the financial status of the company. The decline in orders from the SANDF had had a negative impact on the company's balance sheet. Currency fluctuation had contributed to the drop in revenues. The Rooivalk helicopter had been wasting much money as it was in perpetual development with no single model to sell to other countries. Members raised concerns about the increase in white employees in 2004, as compared to the previous year. The plight of workers who had been working for Denel non-core business was another concern, as was the decline in research and development spending.

MINUTES

Mr Victor Moche, Denel Chief Executive Officer, reported that revenues had risen by 1.6%, and there had been slight increase in profit of 0.9%. Meanwhile, there had been a decline in capital reserves The company had experienced major losses before taxation. Revenues per region were as follows: 42% were from the South African National Defence Force (SANDF); 20% were from Middle Eastern countries; 15% from European countries; 11% from Asian countries; 5% from South American countries; 4% from African countries and 3% from North American countries. Foreign exchange losses were nearly R152 million for 2003 and R254.5 million for 2004.

The reasons for Denel's unfavourable financial situation included the decline in orders from the SANDF; a decline in research and development funding (R & D); investment in and losses from the Rooivalk Programme (R2 billion over nine years); and an unsuccessful commercial diversification strategy that had cost R900 million.

Voluntary retirement packages had taken a large portion of revenues. The devaluation of old factory equipment had also affected the overall assets of the company. Currency fluctuation had impacted strongly on counter-trade contracts. At the time of signing the arms agreement, the South African currency had not as strong so the strengthening of the Rand had affected Denels's profits. Losses at non-core business such as their information technology company, had contributed to Denel's financial performance.

Mr Moche emphasised that Denel would be embarking on turn-around strategies to enhance profitability. Disposal of non-core business such as plastic manufacturing and vacant landm, was expected to increase income earnings. Vector would be integrated back to Denel Aviation, saving millions of Rands on duplication of management structures. Aggressive marketing to attract more business from the SANDF and foreign countries would be pursued.

Denel would focus on alignment of skills and performance management to ensure that productive staff were utilised effectively. Employee trends at Denel were curently not compliant with the Employment Equity regulations. In 2004, 49.9% of the staff were white as compared to 48.4% in 2003. Women comprised 25.6% of personnel. The Board and Executives intended to give incentives and modernise the workforce. Management had prioritised increased spending on research and development to benefit Denel and the local defence industry.

Discussion
Mr Hendricks (ANC) asked the whether the Rooivalk was functioning and if any country had ever bought one. Furthermore, he enquired about the Public Finance Management Act (PFMA) status of the report and about the counter-trade benefits of the arms deal. Mr Hendricks enquired about the role of the Transformation and Empowerment Committee at Denel. He asked how Boardmembers were remunerated.

Mr Moche replied that 60% of the Rooivalk body parts had been designed by the French during the apartheid era. About 80% of arms manufacturers in South Africa had large French shareholding companies. The old regime had not fully supported the Rooivalk financially, but they had also not opposed it. The apartheid government had also developed a space programme from the Rooivalk operation, with the aim of launching satellites into space. Improvement changes kept being suggested by the Air Force and Denel, so not one finished helicopter model could be sold to other countries. The Rooivalk was internationally regarded as third in terms of specifications, even better than American and Chinese counterpart models. Much interest had been shown by foreign defence forces. However, potential buyers were worried that South Africa would not be able to service the Rooivalk due to all the work in progress. The Minister and Denel executives felt it was necessary to speed up the process and put a finished a product on the market.

Mr Moche continued that Denel had understood the need for a Public Finance Management Act (PFMA) structure, but as a company, Denel was accountable for a company review. The corporate governance guidelines used had been similar to those of the PFMA.

Mr Zungu said that Boardmembers were not paid, except the Chairperson as he also sat on three other committees (including the transformation committee). The Minister would reconstitute the Board after Denel's Annual General Meeting.

The Chairperson enquired about the open tendering system practised by the SANDF, as other country's primary buyers were their domestic defence forces.

Mr Moche replied that in 1997, the SANDF had been free to buy arms anywhere in the world. Foreign defence forces would not buy from the South African defence industry if the domestic defence force had not bought from Denel. Britain and the EU countries did not put arms procurement on tender.

Mr I Davidson enquired why Denel had been spending more funds on the Rooivalk helicopter if it was not selling.

Mr Zungu replied that the market research had shown that potential clients thought Denel would be unable to maintain the Rooivalk. Denel had to finish one model that could be sold to other countries to generate more revenue.

Ms N Khondlo (ANC) asked about the impact of the disposal of non-core businesses on jobs. She further asked at which work levels the job cuts were most severe. She also questioned the rising numbers of white employees and the dropping levels of women employees in 2004, as compared to 2003.

Mr Moche replied that disposal of non-core business would not lead to job losses. The businesses that had to be disposed of were profitable businesses on their own, but Denel had wanted to focus on arms manufacturing. ''Over-employment' had been an issue, especially for people who were not productive.

Mr S Zungu reported that cuts had started from the management level to allow for a flat management structure. Denel had been hiring more technical staff in 2004. The South African reality was that educational institutions produced few black and female engineers, hence the necessary hiring of more white men.

Ms Khondlo enquired what percentage of revenues had been lost due to fraud and corruption, and what steps had been taken to rectify this situation.

Mr Moche said that a report had been compiled by the Forensics Unit that had shown losses due to fraud, corruption and criminal conduct, had amounted to around R1 billion.

Mr (ANC) Salim Allie asked what was the Denel Board was doing to increase spending on research and development.

Mr Moche replied that he had tried to raise the issue of research and development with the Public Enterprises Minister in order to access more funds.

Mr Allie enquired about the processes followed when disposing of non-core businesses. Furthermore, he asked why Denel was projecting revenue growth as far as 2006, and what were the assumptions behind these projections.

Mr Moche replied that they were projecting the large part of the revenues used to service dept. It would take up to two years for the parastatal to be profitable again. The arms trade had been exposed to currency fluctuations, unlike other public enterprises that were dealing with internal customers only. Denel could not dispose of non-core business without the Minister's approval.

Mr K Minnie (DA) asked why Denel was training matriculants.

Mr Zungu replied that Denel had been supporting matriculants who had obtained inadequate maths and science symbols. The money was channelled through the Development Foundation. About 200 students were sponsored by Denel and 200 by the SANDF. The purpose was to attract skilled technical staff.

The Chairperson asked what Denel expected the Committee to do to assist in the completion of the Rooivalk.

Mr Moche replied that the Minister had been busy discussing the Rooivalk issue with the SANDF and other affected parties. Mr Allie suggested that the Committee discuss the matter on their own. The Chairperson differed, saying that the Defence Portfolio Committee was also handling the issue.

Ms Khondlo asked what Denel was doing about its 'ageing' staff.

Mr Moche replied that some older employees had taken voluntary retirement packages.

Mr Hendricks asked what was happening with the Swartklip Plant near Mitchell's Plain.

Mr Moche replied that Swartklip was about 70 years old and was in need of equipment upgrade. The surrounding communities were building too close to the safety rings. Denel had been making plans to sort out this problem.

The Chairperson reported that the Committee had been engaging with the Department on ways of involving civil society to scrutinise reports. Communities could ask questions and the Committee would advertise the dates, venues and topics. Treasury wanted to make some amendments to the PFMA around mismanagement issues. The Board, with management, should in future report to Parliamentary Committees more regularly.

The meeting was adjourned.

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