Denel briefing: Creating a Viable Denel

DEFENCE PORTFOLIO COMMITTEE
20 June 2006
DENEL BRIEFING: CREATING A VIABLE DENEL
 
Chairperson:  Ms T Tobias (ANC)

Documents handed out:
Presentation: Creating a Viable Denel
 
SUMMARY
Denel made a presentation on the defence environment, the new threat scenarios, the current concerns, and how the staffing and models of Denel addressed these concerns. He stressed the importance of political support. presented to the committee and the ensuing discussion focused on the relationship between Denel and Armscor, political support for Denel, their turnaround strategy and timeframes. Other issues included transformation within Denel and skills development. Questions were asked on the privileged access, rumoured investigations into Denel, and the time frames. The Defence Evaluation and Research Institute was explained further, and staff issues, the involvement of BEE companies and lack of political support were clarified. Further questions related to the Rooivalk project, protection of patent rights, and the possibility of joint meetings with stakeholders.
 
MINUTES
Creating a Viable Denel: Presentation by Denel
Mr Shaun Liebenburg (CEO, Denel) addressed the Committee on the defence environment and stated that threat scenarios had changed since the end of the cold war. Military threats no longer presented themselves as a heavy conventional nuclear threat but asymmetric threats. There had been change in doctrine with greater emphasis on joint operations, peacekeeping and enforcement, lighter and more mobile forces, and rapid deployment to distant places.
 
The situation analysis featured global concerns over proliferation of weapons of mass destruction, and polarisation of governments over anti-terrorist actions. Locally there had been high-level government support of defence related industry and the growing role of South African National Defence Force (SANDF) in peacekeeping operations. Highlighted in this were economic, social, technological and legal issues.
 
Denel employed more people over the age of 55 than between 30 and 40. No staff were below the age of 30, and most were ageing white males. Denel had been 30 years behind any of the state owned enterprises in terms of transformation, but had recently embarked on an aggressive plan to change their staff profile. They had also tried in the last ten years to find business on their own, but had failed; recently there had been political support from The Hon. Terror Lekota, Minister of Defence, who, together with Mr Liebenburg, had visited four countries in the past weeks to seek assistance for Denel.
 
Political support was more often more effective than technological advancement. The worldwide defence industry worked according to a specific model that needed to be understood by stakeholders if they were to align appropriately. According to the McKinsey findings domestic demand had been the nucleus for success in the defence market and this included a secure source of domestic research and development funding.
 
Although the international defence market was very large, only a small part of it had been accessible and this could only be grown through alliances. Denel needed to operate in the second and third tiers and find its place in an international alliance network.
 
Denel’s guiding imperatives were based on a six-point plan - to engage state agencies, to secure privileged access, to evaluate commercial viability, to create equity partnerships, to raise capabilities and productivity to world standards, and to give attention to transformation.

Denel had also established ten new companies, so that the risk would be reduced if one failed, and to assist with governance. Denel needed to move from engineering to a commercial focus, and to correct the lack of succession planning and skills development. A consultant (Seth Selati) had been appointed to undertake a climate survey within Denel.
 
 Discussion
 Mr M Sayedali-Shah (DA) referred to the privileged access that Denel had suggested in the six-point plan, but was concerned that this might be irregular.

Mr Liebenburg responded that everything relating to privileged access was in the interest of the industry as a whole and not Denel only. All other companies had unique capabilities; Denel concentrated on missiles but others had different technologies.
 
Mr Sayedali-Shah stated that there was a suggestion that Pretoria Metal Processings (PMP) had received preferential status.
 
Mr Liebenburg felt that the bigger question was whether there was understanding that the defence industry needed to be consolidated. If there was another company making bullets, for instance, then they needed to be supported, but the defence budget could not support four other suppliers. If Denel needed to exit then it would do so. He was not aware of any investigations into PMP. He clarified that there had been two suppliers in France, that both had tried to use their political connections, but that the government had decided to approve only one supplier. Denel had a full board of directors and everything that he took to them was approved.
 
Mr Sayedali-Shah referred to rumours that the Auditor General had been conducting investigations on Denel, and queried what the status be if irregularities were found, how Denel’s accountability would follow.

Mr Liebenburg responded that he was not aware of any investigations been done into Denel.

Mr Sayedali-Shah asked whether a business plan had been formulated. He asked whether any conflict of interest arose as a result of Mr Liebenburg’s previous employment.

Mr Liebenburg clarified that he was previously employed not by any subsidiary of SAB but by Grintech.

Dr G Koornhof (ANC) commended the presentation. He noted that portfolio committees were stakeholders, and suggested that the Department of Public Enterprises and Department of Defence Portfolio Committee should consider joint meetings with Denel.

Mr Liebenburg agreed that Denel should engage more with Portfolio Committee.

Dr Koornhof was concerned that Denel should not lose technical capabilities to business viability. He noted that there had been poor relations with Armscor in the past. He asked the time frame for the strategy, whether there would be a white paper, and also the time frame for the Defence Evaluation and Research Institute (DERI) referred to in the presentation. He enquired how far this had been discussed with the Department of Defence (DOD) and Treasury.

Mr Liebenburg confirmed that Denel needed to go through PFMA process. He stated that he had not been in a position to change policy, and that Denel had simply responded to the mandate given to it.

Mr Liebenburg stated that DERI had been vested within DoD, DST and DPE. He could not make categorical statements on funding, which had to be decided upon by the relevant politicians. Investors came into companies where they could get equal share or majority and wanted to be part of a debt free company. An investment company was being created and Denel would have shareholding powers in it. Different businesses would enter different deals and the structures would alter.
 
 
Mr S Ntuli (ANC) how much had Denel and SAB been holding in terms of relationships. He asked about incentives, retention and training of staff. He also enquired about participation in the Airbus.

Mr M Booi (ANC) asked how those who left Denel would reintegrate into the industry, and whether they received the opportunity to increase their skills.

Mr Liebenburg answered that the engineers in the defence industry were passionate about their work, and if a stable environment could be created for them, they could be retained. Those that had left had moved to other businesses, as they tended to follow the best financial offers. He pointed out again that there were no employees less than 30 years old. In regard to Airbus, he commented that Denel had a good working relationship but he could not comment on policy issues.
 
Mr M Booi stated that emphasis was placed, in emerging markets, on human rights, and enquired how Denel balanced this with increasing arms.

The Chairperson stated that there were many challenges in terms of oversight role. Denel had unique capability, but their emphasis had been on defensive rather than offensive. The issue raised by Mr Booi was important, as it was vital to know if the arms were going to be used to violate human rights.
 
Mr Liebenburg responded that there had been many initiatives in the Defence Force for Africa. The problem had been that most of the countries did not use first world technological arms, but purchased second hand arms from the Eastern bloc. Procurement issues were certainly a focus. . The strategic imperatives touched on by Dr Kornhoof could also not be ignored whilst focusing on business and viability. Discussions had already taken place with DST and DE. If the mandate changed then Denel would change its strategy.
 
The Chairperson stated that they had not been doing enough in the defence sector. It did not mean that if the world had this problem then South Africa could not be exemplary. We should have a strategy. There had been a lot of initiatives in defence force for Africa. The problem had been that most of the countries did not use first world technological arms. They used second hand arms bought from the Eastern block. They could work harder at changing procurement issues. The strategic imperatives touched on by Dr Kornhoof could also not be ignored whilst focusing on business and viability. There had been second tier discussions taking place with DST and DE. If the mandate changed then Denel would change strategy. There were no people under the age of 30 years old working for Denel.
 
The Chairperson believed that not enough had been done in the defence sector. South Africa should be exemplary, and should have a strategy.

Mr Booi asked Denel to comment on alliances in the African continent, and whether Denel had a vision for such alliances. Finally he asked whether Denel considered working with BEE companies.
 
Mr Liebenburg stated that he had visited Germany, with the Minister of Defence, the previous week. Denel had invited Zahrst to become involved. No black economic empowerment company could assist as this was a global project, and Zahrst products would be fitted into submarines. Mr Liebenburg answered, in relation to questions raised earlier, that he had direct access to the CEO of ARMSCOR and the Secretary of Defence. He had good relations with Defence leaders including the Chief of Navy and Air force.
 
Adv Z Madasa (ANC) commented favourably that the business aspect of Denel had received more focus and that coordination of stakeholders had been emphasised. He suggested that Denel should include science and technology and education in their targeted programmes to youth.
 
The Chairperson asked Denel to clarify what it had meant by lack of political support, and at which level this occurred.

Mr Liebenburg clarified that he was referring to, for instance, the National Intelligence Agency, the government and others who had a responsibility to protect the industry. The defence environment was very political and the political arena could influence change in Denel.
 
 Mr Monareng asked whether, in peacekeeping missions in Africa, Denel was suggesting that Rooivalk could not be used. He commented that ARMSCOR was still trapped in old mindset and he hoped Denel was not also.

 Mr Liebenburg responded that the Rooivalk project was still ongoing. Turkey was on the same level as South Africa, and they had agreed to share technology. Turkey held the advantage that Russia had agreed to build a pipeline under the Balkan Sea that would supply them with energy resources, and France had agreed to support their bid into the European Union.
 
 Mr J Schippers (ANC) asked what the financial implications on the Airbus had been? This question did not appear to have been answered specifically.
 
 Mr Sayedali-Shah asked if Denel had developed systems to ensure that technology would not be misappropriated, used elsewhere or later sold to or compete with Denel.

Mr Ntuli asked how they patent rights were protected if parts were sold.

Mr Liebenburg commented that some countries did take parts and develop them. The focus of training had been internalisation. As far as internships were concerned there were some inadequate processes but Denel was working on this.
 
Mr M Moatshe (ANC) asked if Denel trained private companies and knew where they were deployed.

The Chairperson commented that the Committee would like to have a workshop with DoD and Denel, and that, when visiting Denel, the Committee would raise exit strategy, turnaround strategy and risk management. She suggested that Denel might make a further presentation to the Committee on rejuvenation strategies.
 
The meeting was adjourned.