Denel on progress made in addressing governance challenges & advancing developmental objectives; with Deputy Minister

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Public Enterprises

04 September 2019
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

Denel said the company presented a great opportunity for the country to improve its balance of payments, and there was a need for it to liberate its knowledge to benefit the citizens of the country. The Committee was told Treasury had approved a R1.8bn guarantee to the state-owned company (SOC). The presentation was an update on its turnaround strategy with a focus on governance, and gave a historic overview of Denel’s financial performance.

There had been a reduction in staff of 950 people. Turnover was R3.8bn, and exports accounted for 46% of sales. A number of investigations had been completed, and Denel was proceeding with civil and criminal charges. It was working towards releasing the financial statements by the end of September because there were a number of challenges that needed to be addressed before the financial statements could be released to the public. Its partnership with the Auditor General (AG) had helped them to understand where the problems lay. Denel was looking at the manufacture of non-defence products. The board wanted it to be a self-sufficient entity with a strong relation to the state, but not dependent on the fiscus.

Members expressed concern about employees’ salaries, and whether Denel was in jeopardy. Would it continue to depend on the government for bailouts? What progress was being made on attaining self-sufficiency? Was there a better working relationship with Treasury? Should Denel enter into Public-Private Partnerships (PPPs)? Members did not want Denel privatised because of the involvement of the private sector in corrupting the public sector. Private investment in Denel must not be at the expense of losing control of the entity.

Other issues raised during discussion included the financial and human resources (HR) challenges, and the stabilisation of the company; when the financial statements would be submitted; the effect of staff cuts on company morale; how its skills development programme was aligned to the needs of the fourth industrial revolution; progress with its investigations into Denel-Asia, and how it was attempting to recover funds lost through irregular expenditure; the possible sale of loss making and non-core entities to deal with liquidity challenges; the decrease in defence force and police orders, and the need for political accountability on the South African Police Service (SAPS) and the SA National Defence Force (SANDF) to source their requirements from Denel; and whether lifestyle audits were being carried out at state-owned companies.

Meeting report

The Chairperson said the Committee had conducted an orientation oversight visit to Denel. Before the trip, he had heard only negative reports relating to Denel, and a lot of questions relating to governance and the poor financial situation it was in still needed to be answered. However, he had also experienced positive things being done there.

Ms Monhla Hlahla, Chairperson: Denel Board, said she believed Denel was a great opportunity for the country in relation to its balance of payments. It was a sad day when one spoke about a company at the cutting edge of technology while at the same time, within the country, people could not be protected. There was a need for Denel to liberate its knowledge to benefit the citizens of the country. The board had been in existence for two years and Treasury had approved a R1.8bn guarantee to the company.

Denel progress report

Mr Daniel du Toit, Chief Executive Officer (CEO), said the presentation would be an update on the turnaround strategy, with a focus on governance. He had joined Denel on January 14 this year and a lot had been achieved. He gave a historic overview of Denel’s financial performance and said that there was a staff of 3 587 currently, which was a decrease of 950 people. The staff included 620 development engineers, and there were 1 740 technicians in its manufacturing operations. Turnover was R3.8bn, and exports accounted for 46%. There were 12 plants around the country. There were a number of divisions, the key division being Denel Dynamics. First quarter sales had been R250m.

Mr Talib Sadik, Chairperson: Denel Board’s Audit Sub-Committee, said that a number of investigations had been completed and Denel was proceeding with civil and criminal charges which were at a pre-trial stage regarding the bursaries’ matter. The VL-Lazer investigation had been completed and independent lawyers had confirmed the findings of the investigations. Denel was working towards releasing the financial statements by the end of September, because there were a number of challenges that needed to be addressed before the financial statements could be released to the public.

Mr Du Toit referred to the development objectives of Denel, and said that in the previous year 83% of people employed fell within the African, Coloured, Indian (ACI) profile. 27% of the workforce were female, of whom 19.9% were in the ACI profile. 71.2% of procurement fell under preferential procurement.

Ms Hlahla said the first task had been to get to the root cause of the problems at Denel. In the process, the board had seen that there was a value to keeping Denel, and had put together a value proposition to the shareholder. The partnership with the Auditor General (AG) had been impressive in helping them to understand where the problems lay. In the following year, the figures for the 2014-18 financial statements would most likely be reduced, and Parliament should anticipate this. She believed the turnaround strategy would work. Denel wanted to look at the manufacture of non-defence products. The board wanted Denel to be a self sufficient entity with a strong relationship to the state, but not dependent on the fiscus. She said a women had been appointed as the group chief financial officer (CFO), and this would help with governance.

Discussion

Ms N Mazzone (DA) said the press Denel had received recently had not been good. She herself had received letters from employees that they were getting only 85% of their salaries. Denel was continuing to depend on the government for bailouts. What was the tranche period organised with the Treasury? Denel had in the past had serious disagreements with Treasury on Treasury’s requirements. Was that relationship mended -- was there a better working relationship? Denel should enter into Private Public Partnership (PPP). Were there any companies that were looking at, or had approached Denel regarding such a partnership, and what was Denel’s reaction? She said the deal with Saudi Arabia was a massive concern, and she wanted an update. Were the salaries of staff in jeopardy?

Mr E Marais (DA) asked how sure Denel was on the matter of a winnable order pipeline of exports. When would it break even?

Ms D Dlamini (ANC) asked what financial challenges were facing Denel, and what the challenges to retaining human resources (HR) skills were. What were the remuneration packages of officials, and how much of the total compensation allocation did they account for? How was the skills development programme aligned with the fourth industrial revolution, and how many benefited from the skills programmes?

Ms J Mkhwanazi (ANC) said sight should not be lost of the mandate of the company. What progress was being made on attaining self sufficiency and what time frames had been put in place to achieve it? She was interested in plans to integrate service skills and capacity to assist other state-owned entities (SOEs), because it would benefit the country. What lessons had been learnt from the 2016-18 period, and the big drop in income in 2018? What was the role of the Department, and were they comfortable with the progress made to ensure delivery on the mandate?

Mr S Gumede (ANC) wanted a guarantee on the time frames proposed by Denel. His view was that abandoning non-core parts of the business may open it up to competition. How was the entity attempting to recover irregular expenditure monies? The big question was whether Denel would be coming back to the Committee for more money.  

Dr M Ndlozi (EFF) said Denel should share its reports on the investigations it had conducted on Denel-Asia, and the Committee should be taken through the reports. He took issue with the comments that blamed a drop in profits on state capture, as the term ‘state capture’ needed to be clarified. The Opposition was part of the state, but had not been part of the capture of Denel. It had recorded its single biggest drop in profits in 2017/18.

It appeared that Denel’s stabilisation plan comprised staying out of contracts and selling parts of its business and exiting a number of companies. Were these sales through private public partnerships or complete sales? Who were the companies interested in Denel’s companies. He asked if the CEO’s previous company was one of the interested companies. Where had the money been found to resolve the salary crisis? He did not think the idea of diversifying Denel was sustainable. The proposals to sell parts of the business meant that the executive was being lazy, inefficient or deliberately selling the companies, because other companies were interested and saw value in those parts of the business.

Why was Denel not tendering for a huge contract to issue each policeman with a body camera? It should make long term planning strategies and projections. Parliament would give money for such requests, because Denel had the manufacturing capacity. The CEO should not be leading the company if he was thinking of selling off its assets. The research and development budget had been cut, as well as Denel’s relationship with the Council for Scientific and Industrial Research (CSIR). The company’s trajectory was that of privatization, but the company should not retreat.

Mr S Swart (ACDP) said he had been very impressed with Denel on the oversight visit, and felt a sense of pride in its work. Denel had a sovereign strategic value and had to be protected. The state capture of Denel was highly regrettable, and the decrease in the SA National Defence Force (SANDF) orders was undesirable, especially regarding munitions, as there was a possibility they would buy them from elsewhere. It was important for the Committee to cooperate with other relevant committees, and there should be political accountability on where the South African Police Service (SAPS) and the SANDF purchased their goods. He asked what the impact of the reduction of staff had been on research and development.

Ms J Tshabalala (ANC) asked the Deputy Minister how often the ministry met with the policy arm of the defence ministry, as Denel was not getting orders from the defence ministry, while acknowledging the severe budget cuts of that ministry. She asked if lifestyle audits had been done on the DPE’s SOCs, and whether the Minister and Deputy Minister would also take them. The Zondo Commission had highlighted that Parliamentary committees had not done oversight, and she hoped Denel was not hiding things from the Committee. It wanted to have interactions with the board, because the board was also an oversight body. The minister had appointed 12 members to the board the previous year, and three this year. How many members were expected to be on the board? She called for one-on-one interactions with the Denel board.

She asked the Deputy Minister whether the ministry had an appetite for PPPs, especially taking into consideration working with the Department of Trade and Industry on localisation strategies and supporting small businesses. What was being done on youth unemployment? Would the financial statements be submitted this year? How was staff morale affected by the many resignations? Would Denel be paying salaries, as this was a concern? On the bursaries matter, she asked who the summons would be directed to and if the recipients would be punitively affected. The Minister had said in the budget vote that there were pending legal actions to be taken, but Denel was saying that it was waiting for the Zondo Commission to be completed. Had there been any resignations since the advent of the Zondo Commission? Was any money being recovered, as her view was that Denel should not wait for the Zondo Commission to be completed?

She asked if Treasury was meeting with Denel on its liquidity challenges. Denel had received a disclaimer on its new supply chain policy. What were the checks and balances on the new supply chain policy? She asked if Denel was waiting for the Zondo Commission to be completed and for it to inform the Committee of the intensity of the damage to Denel. How could the sovereignty of Denel be protected?

The Chairperson said he also did not want Denel privatized, and he agreed with the sentiments of Mr Ndlozi. The country was shooting itself in the foot, because with the capabilities he had witnessed at Denel and Transnet, he could not understand why South Africa was not producing its own car. His concern was the radical involvement of the private sector in corrupting the public sector. Private investment in Denel must not be at the expense of losing control of the entity. He feared there would be an increase in corruption if the private sector became hegemonic in the sector. He asked what informed the list of areas earmarked to be divested. How could Denel assist with the current ills of the country, of violence against women and children and xenophobia? How did it reconcile the intention to cut costs and staff without affecting staff morale? The public relations (PR) function of Denel and all the other entities, if there was one, was poorly performing. The good stories of Denel were not being promoted.

Denel’s response

Ms Hlahla said the board members came as volunteers to support SOEs. It was a ‘restructuring’ or ‘clean up’ board, and the presentation to the meeting had focused on these aspects. The board was building a strategy and operational plan around these aspects. Once this was achieved, it could begin building Denel’s capability for the future.

She said the relationship with Treasury was quite strong, because there had been serious challenges at Denel. Rigorous investigations were undertaken when contemplating whether to enter into partnerships, sell or keep its assets. Even if Treasury said Denel had to sell land, the board was accountable for the decision to sell and would do rigorous investigations.

The execution of the business plan was under the oversight of the Committee.

She said it was important to simplify the way Denel worked. The board wanted Denel to have a strong base to rebuild, and this was the position taken for two years. The board would explore partnerships and review its subsidiaries.

Parliament should support Denel. It was not easy to operate while not knowing whether one would be able to pay salaries. The R1.8bn would assist to pay for guarantees on sales, which would in turn generate revenue.

Denel would do a presentation on the lessons learnt.

She was hoping that the presentation of Denel’s financial statements would allow Parliament to dream about what Denel could do in future.

On why there had been so much irregular expenditure in the past, she said Denel in the past had asked to be allowed not to comply with the PFMA, so as the past financials were interrogated the figure for irregular expenditure got bigger and bigger.

The future looked better than the past, and Denel would get back to research and development when it could afford to do so. In the past, it had been the place where people landed up when they got fired from some other post, and management had needed to make calls on keeping people based on company policy.

Denel wanted to get back to engaging with the CSIR, and did not want to go amok in selling off subsidiaries.

Mr Sadik said the board was committed to the 16 King code principles, starting with ethical culture and effective control at Denel. The non-payment of salaries was not about not paying staff, but about performance and accountability and whether someone was doing their job.

There was a need to increase the orders from the SANDF.

A forensic investigation into the finances of Denel had begun, and he was impressed with the AG as previously Denel had external auditors, and he did not believe in the integrity of the figures signed off in previous years. These figures were undergoing review. There were investigations into VR-Lazer and VR-Asia on irregular spending, and he was pleased with the Special Investigating Unit’s (SIU’s) decisions on these matters, as they would open up further areas for investigation. The SIU was engaging to increase the scope of proclamation.

He said there was no equity deal with Saudi Arabian Military Industries (SAMI).

Denel was not pursuing the beneficiaries in the bursaries matter, but rather the officials who had bypassed company rules.

Other cases it was pursuing involved VR-Lazer regarding unlawful transactions, and Denel was claiming R370m through a legal process. VR-Lazer in turn had claimed money from Denel, but Denel was taking the stance of not paying it.

Mr Du Toit said that when he arrived in January, he had been unsure whether salaries would be paid that month, but the salaries had been paid in all the months except in June when there had been a hiccup in the processing of bridging loans and the process was a day late, resulting in the inability to pay 15% of the salaries. The bridging loan finance had eventually arrived. It was not true that SAMI provided the finance.

Denel was not planning any further staff reductions at the moment. There were pockets of staff not being utilised efficiently, but they would be redeployed.

With the arrival of the further R1bn, break-even status would be achieved in 2021.

On the credibility of the sales pipeline, he said there were opportunities for R50bn. However, Denel was taking a conservative view of R30bn being attainable, and two deals had already been done in the first quarter. Its largest export contract of R5-6bn would soon be signed. It was dependent on certain market areas and was looking at diversifying into the Indian market.

He said Denel would supply a report on the supply chain costs to the Committee.

Ms Hlahla commented on Denel’s support for SOEs, and said that it was supporting chemical engineers. A report would be written on its SOE activities. The Department of Public Enterprises (DPE) had brought in a panel on how to synergise effectively with other SOEs

Denel would check to see if there was still an opportunity to bid for the body camera tender.

Mr Godfrey Masualle, Deputy Minister: DPE, said Denel’s accountable authority was the board and DPE had oversight of the work being done. Treasury was present in management meetings and if matters involved the Department of Defence, then they were brought into the loop.

He said Denel had capacity in aviation and provided services to the air force, and the concentration of these capacities would be looked at by Denel to service other aviation operators. It was operating in a constrained financial environment, and this imposed a need to look at how it could operate. It was imperative that it did its best at the lowest cost. He said some entities had to be looked at with a long term view, while not diminishing the capacity and output of Denel.

Life style audits were in different stages of implementation at SOEs. The Department of Public Service and Administration (DPSA) was refining its lifestyle audits to include executives, and he and the Minister would be the first to take them.

The SOCs had been battered, and there was a need to communicate the good that was being done.

Mr N Kwankwa (UDM) said the oversight visit to Denel had put things into perspective for him. The Committee needed to track Denel’s progress after the guarantees were given to them and see how its financial position had improved. The presentation should be accompanied by a brief narrative document. Parliament should build its own capacity and conduct its own risk assessment, which would be different from Treasury’s one.

On the sale of loss making and non-core entities to deal with liquidity challenges, he said the issue was complex because government had made a policy decision to sell non-core assets, but that was referring to SOEs, not the assets themselves. Therefore this was not a Denel issue -- it was a government policy issue.

Mr Gumede asked how much it cost Denel to run non-core assets, and if Treasury would support retaining them.

Ms Hlahla said the Members’ comments were valid, and the board would try to make the Committee more informed so that it could make policy decisions. The board needed to find better ways to inform the Committee and how best to engage with it.

Ms Tshabalala reiterated that the Committee expected to receive the promised reports, and wanted the execution time-frames.

The meeting then discussed Committee business, adopting minutes and discussing the forthcoming meeting agendas.

The meeting was adjourned.

 

 

 

 

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