Denel Annual Report 2006/7:briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
29 October 2007
DENEL ANNUAL REPORT 2006/7: BRIEFING

Chairperson: Ms F Chohan (ANC)

Documents handed out:
Denel Annual Report presentation
Denel Annual Report 2006/7

Audio recording of meeting

SUMMARY
Members met with Denel in order to discuss the annual report.  Denel’s presentation outlined the company’s performance during the financial year, and focused on the achievements and challenges that had been faced during the financial year. It was stated that Denel planned to be financially viable on a sustainable basis within 24 to 36 months. However this could only be possible if all plans, some of which were outside Denel’s plans, were implemented.

Members raised several issues with regard to Denel’s human resource management and its financial performance. They questioned whether the many directorships held by the board members of Denel’s board to State Owned Enterprise’s (SOE’s) poor performance. Members also seeked clarity on Denel’s new incentive programme, and whether employees would loose their fixed salary. Denel was also questioned on why the presentation made no reference to the disciplinary actions taken against managers, and the steps that had been taken to boost the low staff morale at the organisation. The Chairperson asked comment on whether the army was a sufficient client base and also whether it was possible for Denel to compile a report, which detailed the legacy issues at the organization.


MINUTES
Denel Annual Report presentation
Mr Shaun Libenberg, Group CEO, and Mr Hugo M Ivy, Group Executive: Human Resources, provided a detailed presentation which outlined Denel’s performance during the financial year. Denel was faced by many challenges, many of which stemmed from the fact that Denel had a fixed cost problem as a result of insufficient local sales and high sales costs. It however planned on forming partnerships with various agencies in order to stabalise the balance sheet. Some of the achievements during the financial year include the progressive unbundling of the organization into separate entities and the completion of the software acceptance programme. Denel planned to be financially viable on a sustainable basis within 24 to 36 months. However this could only be possible if all plans some of which were outside Denel’s plans were implemented.

Discussion
Dr M Van Dyk (DA) stated that Denel board consisted of 13 directors who together served on 111 different boards. Denel should state whether the many directorships contributed to the state-owned enterprises’ (SOE) poor performance. Clarity should also be provided on why senior managers received performance bonuses increase of between R50 000 to R80 000.

Mr Libenberg replied that he could not answer for the board. However it had not found that any of the board members were lacking in contribution. The Board members meet regularly, and members were briefed regularly.

Mr Talib Sadik, Group Financial Director, replied that the numbers provided by Mr Van Dyk could not be commented on, however there was an interim incentive method paid to the executives, before the new system was implemented.

Mr C Gololo (ANC) asked for comment with regard to criteria used for youth development programmes, and also comment on how the youth could get in touch with the development programme.

Mr Sadik replied that the youth development programme was done in conjunction with the Department of Defence. Students came from all areas within the country. The programme was of great success; however Denel felt that whenever a particular request was made, Denel was open to looking into it.

Mr P Hendrikse (ANC) asked for clarity on whether the 25% quartile listed in the presentation was meant to address the top 25% or bottom 25%. The Committee was concerned with the amount of directorships in which the board members sat on and Denel should other boards they served on.

Mr Libenberg replied that the amount listed represented 25% at the bottom quartile.

Mr R Nogumla (ANC) stated that the presentation made no reference to the disciplinary actions taken against managers. Clarity should be provided on what caused the low staff morale at Denel, and what remedy programmes have been implemented to address the situation.

Mr Sadik replied that Denel did take disciplinary action against its staff and it was reported to the audit committee.

The Chairperson asked for an analysis on how many cases there were

Mr Sadik replied that at the moment there were no disciplinary cases pending, and Denel was tightening up its systems and processes

Mr Libenberg replied that there was a huge improvement with regard to the low morale of staff. The staff at Denel had belief and faith in what was happening to the company, despite the huge losses. It should be noted that in some of Denel’s businesses morale was very high.

Mr Z Kotwal (ANC) asked for clarity on whether there were any programmes in place for pilot training.

Mr Sadik replied that Denel had a number of students on youth and development programmes, and when they left Denel some would join the airforce, as Denel did not offer pilot training.

Ms Kondlo asked whether the incentive bonus made to all employees, applied to all employees. With regard to the Board of directors, it was pleasing to see that one member has 100 percent board attendance.

Chairperson also asked for elaboration on how the incentive bonus system worked.

Mr Sadik replied that the incentive bonus system operated on a pay at risk system. If an individual was on a fixed pay Denel would increase the amount paid to the individual and then incentivize the increase. Therefore amount incentivized would be the one at risk. The higher the employee was at the organization, the higher the amount of incentive at risk. The system was introduced in April 2007, and each employee received a letter notifying them of the increase.

The Chairperson stated that Denel’s next annual report should provide information on whether the incentives were achieved.

Mr C Gololo stated that if Denel continued to incur huge loses, would that mean that salaries would have to be cut down.

Mr Sadik replied that the whole reward programme was based on Denel achieving. Since Denel had been decentralized, the incentive system was easy to implement in that individuals would receive incentives for areas in which they had control over

Ms N Kondlo (ANC) stated that the presentation indicated that Denel was selling off some of its non core assets, and clarity should be provided as to whether the sale affected employees.

Mr Libenberg replied that the non core assets were in most cases property. No employees were involved in most of the selling process, as some of the companies sold were sold as a going concern, with the employees.

Dr Van Dyk asked Denel to explain the fact that R3.5 million was issued to the CEO as a performance bonus, despite the huge losses.

Mr Libenberg replied that the issue was an issue of principles. If one was tasked with fixing a company then they should at least be some sort of incentive for his efforts if there was an improvement.

Mr John Morris, Chief Director: Defence Strategy, added that it was not fair to discuss individual packages. The package was discussed and determined by the Department and the individual.

Dr van Dyk stated that Denel claimed that no company in the world could do what it did, yet at the same time it perfromed poorly. Reasons should be provided for Denel’s poor performance.

Mr Libenberg replied that Denel undertook a recapitilisation project of R3.5 billion. The money was used to pay off past debts. The total recapitalization projects were divided into two. It should be noted that all debts and loans had been paid off. The reason why Denel ran at a loss was because it had a fixed cost base. The recapitalization project was implemented in order to put the balance sheet into place. Denel still urgently needed to raise sales, because the sales were still not at the correct level. Denel was also looking into proposing equity partnerships in order to help the company run at a profitable level.

The Chairperson asked Denel to provide a report to the Committee which outlined all the legacy issues. Denel should also provide clarity on how much it spent on research and development and also provide clarity on the once off costs.

Mr Ivy replied that spending on research and development was between 1 and 2% of the budget. Research and development meant decentralizing all of the entities and aligning them with the market needs of the