ATC110823: Report on Oversight Visit to Denel

Public Enterprises

Report of the Portfolio Committee on Public Enterprises on the oversight visit to Denel, dated 23 August 2011

 

1.         Introduction

The Portfolio Committee on Public Enterprises (the Committee) undertook an oversight visit to Denel on the 24 June 2011 as part of executing its oversight mandate as promulgated by the Constitution of South Africa. The purpose of the visit was to familiarise the Committee with the challenges faced by Denel Saab-Aerostructures (DSA), which is one of the business units at the Denel group. DSA has been recording financial losses for the past number of years, which had adversely affected the overall performance of the Denel group.

 

1.1        Parliamentary delegation

The delegation of the Committee consisted of the following members of Parliament: Mr HP Maluleka (ANC, Chairperson), Ms CC September (ANC), Mr A Mokoena (ANC), Mr C Gololo (ANC), Dr GW Koornhof (ANC), Mr P van Dalen (DA), Mr M Nhanha (Cope) and Mr KJ Dikobo (Azapo). The delegation was accompanied by Mr D Mocumi (Committee Secretary), Ms B Tsana (Committee Assistant) and Mr E Boskati (Researcher).

 

1.2        Denel delegation

The Committee met with the executive management of DSA. Mr T Sadik (Group Chief Executive of Denel),and Mr I Dockrat (Chief Executive of DSA) tendered their apologies for their absence during the oversight visit due to prior international commitments. The Denel delegation consisted of the following persons: Ms D Wilson (Executive Manager), Ms P Mashungwa (HR Executive), Mr F Mhlontlo (Chief Financial Officer), and Mr J Morris (Head: Denel Strategy).  

 

2.         Presentation on DSA

Mr J Morris, Head of Denel Strategy, informed the Committee that DSA operated in an uncertain and unstable business environment that was filled with complexities. This environment has required DSA to remain competent and competitive in the industry. The presentation by Mr Morris covered the following key areas:

 

2.1        Strengths of DSA

            The strengths that were highlighted in the presentation included the following:

-          The ability to develop and certify complex metallic and composite structures for the international military and commercial markets;

-          The development of highly skilled professions;

-          A world-class facility and modern equipment for advanced manufacturing;

-          Training and incubation programmes designed to enhance DSA’s current capabilities and for the world market.

 

DSA is rich in engineering knowledge and employed the following disciplines:

-          Metallurgical and mechanical engineering which focus on structural design, stress analysis, structural analysis, loads analysis and certification;

-          Industrial engineering which focus on programme industrialisation and manufacturing processes (aeronautical, mechanical and chemical engineers);

-          Chemical engineering which focuses on the development, certification and monitoring of chemical processes such as water and effluent treatment, electroplating of steel,  conversion treatments for aluminium, painting, analytical and physical process control testing.

 

2.2        Projects of DSA

DSA was involved in the Airbus A400M WFF Project which involved the development of metallic substructures and composite panels for the substructures. The complex design of the metallic structure and composite panels must be capable of carrying various loads and impacts such as bird strikes and ice impacts. The aircraft must be capable of continued safe flight and landing after such impact. Saab had since sold its 20% shareholding in the A400M project with DSA.

 

2.3        Contribution of DSA to South Africa’s aerospace industry

DSA plays a leading role in the aerospace in South Africa in terms of world-class design and manufacturing and produces highly skilled graduates in engineering. In the continent and globally, it continues to be the powerhouse for ability, opportunity and innovation in the aerospace industry. Locally, it has played a critical role in the promotion of local manufacturing and local skills through broad-based black economic empowerment.

 

3.         Achievements for 2010/11

The major achievements related to governance and compliance with contractual obligations and commitments, and implementation of restructuring. The achievements were reported as follows:

 

3.1        Governance

The entity has established a new inventory policy, which focused on the improvement of stock turnover, cycle counting, and buffer stock and procurement management.  Furthermore, the entity has implemented an internal audit plan and improved asset management processes.

 

3.2        Contractual obligations

The major contractual obligations reported during the period under review included the passing of the airbus A400M final design acceptance and bird-strike certification tests, the maintenance of green status on programme review to ensure excellent performance rating by the customer, and the delivery of the first airbus A400M new design baseline unit as well as Airbus future delivery dates.

 

3.3        Restructuring

The progress reported in respect of restructuring included the successful implementation of section 189 of the Labour Relations Act, which reduced personnel by 300 people by March 2010, a reduction of rental footprint by 32%, outsourcing of non-core activities, improvement of cost centre management and the improvement of long-term procurement agreements.

 

4.         Strategic scenario and future projects

Denel has developed a sector development plan aligned to the industrial policy action plan and was working closely with the Department of Science and Technology, the Department of Higher Education and Training and the Department of Defence and Military Veterans. The focus of the entity was the restructuring of DSA and ensuring that the entity became financially sustainable. In terms of the future of DSA, Aerosud which was a South African-owned company, had submitted a conditional proposal to acquire DSA in 2010. The discussions on the proposal were ongoing between Aerosud and DSA at the time of the visit.     

 

Furthermore, the entity had revised its business plan which included the following key interventions:

·         Building a robust revenue stream;

·         Negotiating contracts with key customers;

·         Improvement of cash flow management and balance sheet solvency; and

·         Further outsourcing of non-core activities to reduce fixed costs.

 

5.         Visit to Denel Training Academy (DTA)

The Committee visited the DTA and interacted with some of the trainees enrolled in the programme. The DTA was established in 1965 under the auspices of Atlas Aircraft Corporation. The minimum requirement for entrance to the DTA is a grade 12 certificate.

 

5.1        Accreditation

The DTA has been accredited by:

·         Aerospace Chamber within the Transport Education and Training Authority;          

·         Manufacturing, Engineering and Related Services Training Authority (MERSETA);

·         South African Civil Aviation Authority (SACAA);

·         Energy Sector Education and Training Authority (ESETA);

·         Quality Management System is based on AS9100 International Standards.

 

5.2        Training methodology

Regarding the training methodology, the DTA complied with the following:

·         The Competency Based Modular Training (CBMT) model.

·         The standards and quality of the training is set by the training authority according to the curriculum and per programmes.

·         Programmes include theoretical and practical tasks as set out in the curriculum in which learners must prove their competence.

·         The academy produced artisans in the following trades: fitter and turner, tool and jig maker, turner machinist, maintenance electrician, welder, machine tool millwright, aircraft instrument mechanic, aircraft radiotrician and electricians.

 

5.3        Challenges facing the DTA     

The enrolment at the academy did not reflect the demographics of the country due to the high cost of tuition. The contributing factors that have been identified include the following:

·         Socio-economic reasons like the unemployment rate in the country;

·         The DTA would like to get  most of the students from previously disadvantaged communities;

·         The training is specialised and the DTA is not subsidised in any form which makes the training largely unaffordable and it is not offered by Further Education and  Training colleges;

·         The DTA is unable to attract students from rural communities because of high

tuition and accommodation costs;

·         The aviation industry is not yet attractive and sufficiently appealing to the youth; and

·         The industry does not have an integrated skills development strategy.

 

5.4        Mitigating interventions

The DTA has explored initiatives to resolve the existing challenges. These initiatives include the following:

·         The possibility of additional funding by the Department of Public Enterprises;

·         Meetings with the Department of Higher Education and Training to discuss possible funding for artisan development;

·         Approaching the National Student Financial Aid Scheme for bridging funding for the apprenticeship programme;

·         Engaging Merit (Pty) Ltd to assist in raising donor funding for DTA initiatives;

·         Increased international student intake for cross-subsidisation of local students;

·         Cost management and cost reduction interventions;

·         Capacity utilisation to generate extra income; and

·         The possibility of raising funds within the Denel group.

 

6.         Issues raised by the Committee

The Committee raised the following issues:

6.1        The Committee acknowledged that Denel anticipated a financial break-even in 2014/15 but was concerned with the continued financial losses by DSA.

6.2        The Committee noted with concern that DSA was not expecting any income from the airbus A400M project in the foreseeable future, that SAAB had withdrawn its 20% shareholding and the adverse effects these two factors would have on the viability of the entity going forward.

6.3        The Committee was concerned about how important and strategic the A400M project was for DSA, and inquired whether there were prospects of new strategic partners for DSA.

6.4        Clarity was sought on the reasons why SAAB terminated its shareholding in DSA and what the financial implications were for the entity.

6.5        What interventions were required from government to ensure that DSA had a conducive policy environment, and what was it that the executive had not done to enable DSA to progress?

6.6        Information was sought on Aerosud, which was the company that proposed to acquire DSA, on whether the proposal entailed a total takeover or a strategic partnership.

6.7        Detailed information was sought on all non-core assets that would be outsourced. What would this process entail?

6.8        The Committee expressed concern at the challenges facing DTA and proposed that the entity work closely with FET colleges to improve on its capacity for enrolment.

 

7.         Responses by Denel Management

 

Management of Denel responded to the issues raised by the Committee, as follows:

7.1        Denel had improved revenue generation for all the other business units with the exception of DSA. 

7.2        The airbus A400M project was the main project for DSA as the entity was responsible for the manufacturing and design of the whole product.

7.3        Denel had developed advanced manufacturing skills and competencies through skills transfer; hence the airbus A400M project was of strategic importance for DSA. The financial position of DSA was the primary reason why Saab pulled out of the shareholder compact with DSA.

7.4        Aerosud was a South African company. Negotiations were underway regarding the acquisition of DSA.

7.5        The non-core assets to be outsourced would include activities and portions of the manufacturing process that were not key capabilities of DSA.

7.6        The Denel group was in need of recapitalisation of about R2 billion to recover from the financial situation, in particular in relation to DSA. This emanated from a shortfall in funding received from the Department of Public Enterprises. 

7.7        There are businesses internationally that have shown keen interest in entering

            into strategic partnerships with DSA, and the management of DSA was in continuous

discussions with interested parties. They also sought political support from government to enhance the marketing efforts of the entity.

7.8        The nature of business, the business environment and the contracts of Denel

posed a challenge to the entity. In most instances, financial losses were as a result of legacy contracts.

7.9        The Industrial Policy Action Plan did not provide substance on the role of Denel regarding the aerostructure sector.

7.10      The New Growth Path referred to the strengthening of the aerostructure sector in

             South Africa.

7.11      The absence of a defence strategy and the lack of orders from the Department of Defence and Military Veterans posed serious challenges for Denel and its business units.

             

8.         Recommendations

 

            The Committee made the following recommendations:

8.1        Noting the financial difficulties of DSA, Denel should provide the Committee with a progress report on its restructuring by 28 October 2011;

8.2        The Department of Public Enterprises should submit a written report on the reasons why Denel had not received the amount it required for the restructuring;

8.3        The Denel Group Chief Executive Officer and top management should be present in future oversight visits of the Committee;

8.4        DTA should make a deliberate effort to recruit learners from rural communities;

 

9.         Conclusion

           

            The Committee resolved:

·         to have frequent interactions with Denel to monitor progress on the implementation of the turnaround strategy for Denel and its business units.

·         to have a meeting with the Portfolio Committee on Defence and Military Veterans regarding orders by the Department of Defence and Military Veterans from Denel, and to receive an update on the defence acquisition strategy from the Department of Defence and Military Veterans. 

 

Report to be considered.