Denel Annual Report: briefing

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Public Enterprises

18 October 2005
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Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE AND SELECT COMMITTEE ON LABOUR AND PUBLIC ENTERPRISES: JOINT MEETING
18 October 2005
DENEL ANNUAL REPORT: BRIEFING

Chairpersons: Mr Y Carrim (ANC) [NA]; Ms M Themba (ANC) [NCOP]

Documents handed out:
Creating a viable Denel (PowerPoint Presentation)
Denel Media Release

SUMMARY
Denel briefed the Committee on its turnaround strategy. Its new CEO, Shaun Liebenberg made it clear that firm action had been taken to address all issues that could have contributed to Denel’s current poor state. A complete overhaul of the organisation’s functioning was currently underway. Members were curious how the new strategy differed from the last one and were concerned that Denel had not yet submitted its annual report to Parliament. Members were particularly concerned about job security and the impact of Denel’s proposed restructuring on BEE companies.

MINUTES
Chairperson Carrim informed Mr Sibusiso Sibisi (Chairperson Denel Board) and Mr Shaun Liebenberg (CEO) that the Committee would become more rigorous in its oversight role as per the requirements of the Government, the Public Finance Management Act (PFMA), the Constitution and the ruling party. The Committee was aware that the shareholder compact between the Government and Denel was not yet complete but would like to see it completed within the next year or two. This had been communicated to the Minister. All shareholder compacts should be tabled in Parliament. This would then enable the Committee to hold Denel accountable. Such shareholder compacts had been signed with ESKOM, and one would be signed with Transnet later in the year.

The Committee wanted to look at the corporate plans of state–owned enterprises (SOEs) for the financial year under review to see to what extent they tallied with the Government’s shareholder compact with it. What was the budget it had allocated? What was its corporate plan for the financial year under review? What were the specific budgets allocated for the programmes? What were its performance targets and had they been met? What lessons had it learnt in its experience of the last financial year? How would they apply them in the current year? The Committee also requested a six-month overview of what had been happening since the end of the financial year.

Chairperson Carrim informed the Committees that the National Assembly Chairpersons’ Committee took the decision to approach the National Treasury on the fact that it only received Annual Reports on 30 September. This was too late. It suggested that reports should be submitted by 30 August. The aim over the next year or two would then be to have an independent expert evaluate all reports. Public hearings would also be held but this would apply more to SOEs that dealt directly with the public. These public hearings would be co-hosted by the NA and NCOP committees.

Denel Briefing
Mr Liebenberg said that Denel was in the process of undergoing major changes. He emphasised that this was a period of change and not merely a turnaround. The changes that needed to occur were not merely superficial but fundamental.

Under the Apartheid government Denel was essentially a state-owned Department with a huge subsidy mindset and with very little accountability and responsibility. This resulted in a company that was performing below par. Every component of the organisation needed to be reviewed.

Denel would have to deliver consistent growth. It would have to attract, develop, retain and reward superior skills, which would improve the company’s productivity. Partnerships should be formed with state agencies to meet South Africa’s defence needs.

Denel and its stakeholders had an inconsistent understanding of its true position in the global procurement market, its true financial situation and of how it was perceived by the Department of Defence as well as its customers. Along with the changes that started on 1 June, clarity on the true position and status of Denel had to be reached. All stakeholders had to have a common idea as to where the organization was headed. The Cabinet, the Denel board, the Department of Defence and various other Departments had done a lot of work during the past four months to reach this common vision. This had resulted in the stakeholder climate being better than it had probably ever been.

Much of the global defence spend was inaccessible to independent contractors. Independent contractors in Turkey, China and the Middle East, for example, were highly reliant on their domestic markets. It was nearly impossible for independent contractors to serve the US and North Atlantic Treaty Orgnisation (NATO) countries because they had a closed bidding and tender process. At present it was virtually impossible to generate revenue in these markets. As the US and European companies were trying to expand their markets they were beginning to infiltrate markets which were previously served almost exclusively by Denel.

To ensure Denel’s survival in a rapidly changing arms environment there would have to be extensive domestic demand as well as funding. Research and Development was vital to competing in the global market. Government would need to consistently support Denel’s export sales. Focusing on specific products, strategic alliances (in order to gain market access, skills and minimise scale) teamed with excellent execution would further guarantee success. In addition Denel should pursue a strategy based on prime contracting in the domestic market and the export of systems and components through selective equity partnerships and alliances with global prime contractors.

The Change Management Project Office, which reported directly to the Chief Executive Officer, was established to track, control, evaluate, prioritise and position strategy and project issues. It was critical to have a timeline and a roadmap to track progress on projects.

People were critical to Denel’s future success. The organisation would embrace transformation with regard to equity obligations and diversity management in all its future activities. Corruption would not be tolerated and non-compliance with the Denel vision would be unacceptable.

Mr Liebenberg went on to briefly touch on five major issues that had been raised in the past.

India
Over the last three months various senior officials of the Government had interacted with senior officials within the Indian Government. Legal council in India and South Africa had been engaged. Denel was committed to a transparent investigation process should one be required and was not being investigated by the Scorpions in any way whatsoever. Neither the South African nor the Indian legal community had found that Denel had contravened any laws in either country. The fact that Denel had been tainted by these accusations created a very difficult situation. No one wanted to do business with a company that had a cloud hanging over its head. Mr Liebenberg asked for everyone’s support in this process. He said that any more dramatic statements would only worsen the situation. The management had tried to insulate itself from the situation so as to focus on the future, and to encourage organisations local and abroad to do business with Denel. Any further questions should be forwarded to the Department of Public Enterprises.

Rooivalk
The Denel Board and Management were fully aware of the status of the Rooivalk attack helicopter. Denel had an obligation to deliver 12 Rooivalk helicopters to the Air Force. They would also need to be maintained over the next 30 years. The Rooivalk project could not be closed down; it was operational and would be utilised by the Defence Force. Was there life for Rooivalk beyond the South African National Defense Force? The Board and the Management team had agreed that certain guidelines, time frames and a certain roadmap would have to be adhered to. If opportunities could not be achieved then it would no longer be marketed in the open market.

Swartklip
All the safety requirements had been retained. Denel was investigating the opportunity to consolidate operations. An investigation to review the viability and sustainability of the three operations in the Western Cape relative to the four operations in Gauteng was underway. The seven munitions operations in the country could be consolidated into five or six. Swartklip was one of the operations to be investigated. Any Investigation would be done purely from a commercial point of view.

Organisational structure and the implications for where Denel was headed
Mr Liebenberg had instituted a process of decentralization. Corporate office staff would be reduced. Denel had engaged extensively with organised labour in all their facilities to explain the reason behind this action. Responsibility and accountability needed to be replaced in the business unit. A number of facilities had started formal Section 189 processes.

Suspensions
There had been about 72 suspensions in the last 24 months. 12-18 had not yet been concluded. In April, 32 positions had been in limbo for about 18 months. All of the suspensions would be concluded by the end of November. There had been dismissals, some employees had won their appeals and in some cases it had been found that there had been no grounds for the suspensions.

Discussion
The Chairperson noted that each time a new person took over in an organisation they were being turned in a new direction. He suggested that when somebody took over, he/she should pick up from where the previous one had left off. The Chairperson recommended that the Board needed to be given firm direction in order to ensure durability and stability. The Chairperson reminded the Denel delegation about the Committee’s recommendation based on the previous report by Denel. They suggested that the strategy needed to have timebound and measurable outcomes. They had also raised concerns about the negative balance of the enterprise. He commented that if the state enterprise failed the responsibility should be put squarely on the management.

The Chairperson asked why Denel had not tabled its annual report in Parliament. Mr S Kholwane (ANC) inquired when the report would be tabled. Mr Liebenberg replied that they had identified some shortcomings in the figures. He explained that they needed time to scrutinise the figures and effect adjustments. He undertook that the report would be tabled in mid November.

The Chairperson asked how many members the Denel board had and for its gender balance. Mr.Sibisi (Chairman of the Board) replied that there were nine members of whom two were women.

Dr P Rabie (DA) asked if it was Denel policy to offer commissions in order to secure deals. He also asked if the Indian market was a closed one now. The CEO replied that they made use of consulting support, and technical advisors. They paid for these services. He indicated that the Indian situation was a temporary scenario. He emphasised that Denel would do everything in its power to win back the Indian market. He alluded that the Indian armed forces were very interested in Denel's products.

Mr. P Hendricks (ANC) asked what were the obstacles that inhibited Denel from competing with the US. He inquired how many people Denel employed and what had led to unsatisfactory productivity. He wanted clarity about the state of finances at Denel.

The CEO replied that the Americans had huge production capacity. He also explained that the Americans were infiltrating the markets where Denel had a competitive edge. Mr Ian Philips (Member of Denel Board) added that the increasing use of private companies for security had increased the defence market. He explained that the laws of the country forbid South Africa companies from providing arms to these companies.

The CEO told the Committee that Denel employed about 10 000 persons. He explained that the losses at Denel were reflected in the balance sheet. He further revealed that the liabilities were close to exceeding the assets. He expounded that productivity was unsatisfactory because they did not have enough work for their workers.

Mr Gamede (ANC) questioned how Denel hoped to dispose of its non-core business equitably and fairly The CEO replied that they had put a team together to look at non-core businesses. They would dispose of 80% of the non-core businesses. He explained that they had broad-based procurement and the process was very transparent. Mr Nogumla asked whether there was any structured co -operation between Denel and Armscor. The CEO responded that a change in Denel strategy had a direct bearing on Amscor. He reported that they met on a monthly basis with Amscor discussing the way forward for Denel. They also discussed the ways and means of minimising the implications of the turn-around strategy on Amscor. Mr Sibisi added that the cooperation among other entities was of paramount importance.

Mr Hendricks asked in which project areas Denel could form partnerships and had there been any progress in that regard. Mr Liebenberg replied that Denel would be divided into six clusters: technology; ammunition; aerospace; aviation and maintenance. He informed the Committee that they were engaged in talks with about six to eight major players in the world. They were also engaged with local industry. He told the Members that they had shared their strategy with these potential partners.

Mr C Gololo (ANC) asked Denel to put "new blood" in its personnel. He suggested that in the light of declining defence budgets globally, Denel should concentrate on manufacturing of parts. The CEO concurred that they should concentrate more on maintenance and repair. He agreed there had to be space for "new blood".

Mr S Kholwane asked about job security and how the current financial state of Denel impacted on Black Economic Empowerment companies within Denel. He asked about recapitalization and how much was available for it. He also asked how the current strategy differed from the previous strategy.

The CEO responded that the current strategy fundamentally differed from the previous one. He explained that the strategy sought to change the business model of Denel. They had received approval from the Board to seek equity partners. They were transparent about their financial position. Their strategy had articulated and detailed action plans with deadlines. He explained that their strategy applied common sense commercial principles. He further said that their strategy was radical and would be a challenge to management capability.

The CEO stated that they would have a projected financial loss for the next two to three years. He mentioned that these losses could be in excess of R1 billion. He suggested that the enterprise needed to be smaller and this could strengthen its balance sheet. He urged that when they exited some businesses that were not commercially viable; that should not be perceived as a failure. He said that of the 10 000 employees, 6 000 were permanently employed and 3 500 on contract basis. He hinted that the situation enabled the company to scale up and down as contracts came and went. He further explained that the protection of jobs was paramount and they were continuously engaged with labour on this.

A Member asked if Denel had a risk management team and how long had existed. She further asked if they had school outreach programmes aimed at attracting new blood. The CEO responded that they had a risk management team but it was under review. He explained that the work of the team had been unsatisfactory. They had scholarships, but had not yet identified social corporate investment programmes.

The Chairperson asked how much the recapitalisation of Denel would cost. The CEO replied that it would be in the region of R1 billion.

Prof. E Chang (IFP) asked if Denel had considered the Taiwanese market for the sale of its weapons. Mr P Hendricks (ANC) responded that it would not be proper to sell arms to a state that SA had no diplomatic relations with.

The CEO commented that business relied heavily on leadership. He added that Denel had a clear operating mandate as a result of Government engagement.

Mr I Phillips (Member of the Board) pointed out the strategic importance of Denel. He said that the organisation was uniquely placed as it was the supplier of other Government Departments. He raised the importance for the enterprise of having cross-pollination of ideas with other relevant stakeholders. He argued that the defence industry existed to serve the security needs of the country.

The meeting was adjourned.

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