Denel on financial and governance challenges; with Deputy Minister

Meeting report

Mr Phumulo Masualle, Deputy Minister of Public Enterprises, said that the Ministry was there to provide support, but that the meeting would be handled by the board of Denel. He would come in when called upon to support the board. He asked whether all the board members were present.

Mr Talib Sadik, Interim Group Chief Executive, Denel, stated that the company’s chairperson was still busy connecting to the virtual meeting.

The Chairperson said that they should wait for the Denel board to join the meeting.

Mr G Cachalia (DA) pointed out that the presentation dealt with governance, which fells under the direct responsibility of the board. If there were no members of the board available to present, that was a problem. They needed a responsible person from the board, or someone that it sends as its proxy.

The Chairperson clarified that there were members of the board who were present, and it was only the chairperson who was still struggling to get into the meeting.

Mr Sadik introduced the executive members of the board.

Denel presentation

Mr Sadik presented on the strategic relevance of Denel, including an overview of their capabilities and critical governance issues. He provided the Committee with the state of business and their journey towards a new Denel, and updated them on its future plans and the risks to its future sustainability.

Ms Monhla Hlahla, Chairperson of Denel, having joined the meeting, said the challenges that Denel faced still remained, despite the good efforts of the executive committee to try and chip away at them. These efforts included making sure that the Public Investment Corporation (PIC) could look at extending their debt programme. She wanted the Members to know that for a business of the nature of Denel, to have one’s debt programme renewed annually basically meant that they had to have very short term debt, and for a business whose nature was very multi-year, this was very unsuitable. This remained a huge challenge, as they were a company highly dependent on debt, but had debt that was very short-term.

Every year they had to face the fact that they had inherited close to R3 billion in debt, and every year they had to find a way for them to extend it. Otherwise, they had to find enough internal resources to service that debt, or they had quarterly interest payments that ate up any money that they made. They could not allocate it to working capital, so they could not reinvest in the business, because every quarter they faced a very big interest payment bill.

That remained a big challenge for Denel. She did not want the Committee to forget that they had inherited debt associated with specific programmes that had not necessarily been implemented properly. This was what was inhibiting today’s team from reinvesting and rebuilding the Denel that they wanted.

It was pleasing to see the efforts being made by the Department of Defence (DOD), their shareholder in the Department of Public Enterprises (DPE) and Armscor and Denel, around the Hoefyster project to supply infantry combat vehicles. Hoefyster remained by far the biggest threat to Denel. If the parties did not find a way to resolve the technical issues around the programme, it remained the single biggest programme on Denel’s balance sheet or income statement. When one depended on one client -- in their case, it was the DOD and Armscor -- the dependence on a single client was a threat.

As everyone knew, when one needed to diversify, one would go overseas and expand the market. It meant one could reinvest and partner with people in order to counteract the balance of dependency on one client. However, as the national fiscus continued to suffer and the DOD did not receive the kind of budgets they had in the past, they were gradually reducing the capacity of both Armscor and Denel. Regardless from how much Armscor had received from the state, the allocation to Denel had been consistently and massively undercut, and that was an issue.

Hoefyster had been the single most important programme for the business for many years. If they did not resolve the technical issues, the Denel of today may face other related penalties. They were chipping away at the challenges. One of the approaches that the board and management was trying reduce and eliminate was the notion of taking money and advance payments for projects, and using it for working capital. This meant that when the project was due for completion, Denel had not provided for it financially, and it could not be actually implemented because the money had been used somewhere else, so all they were doing today was to face penalties for such programmes from the past.

The discussion on Armscor was critical, because a large portion of the advance payments used for working capital was intended for Hoefyster. Those currently working at Denel still had to find a way to start paying back what previously had been used for working capital, instead of being used on the programme itself.

Referring to strategic equity partnerships (SEPs), Ms Hlahla said she believed that Denel could be saved if they just moved fast -- not just as Denel, but also the shareholder (DPE) and the DOD -- and where they did not agree, they should come together. This was because speed was of the essence when they were dealing with a very vulnerable and weak entity such as Denel. She asked that all egos be put aside, and that Denel be supported with guidance and with everything possible in implementing SEPs. It would be the right way to save jobs for the economy and retain them in South Africa.

Lastly, the staff situation remained highly strained. In any situation where one could not provide 100% of what is due to a person, it causes a lot of stress. Her biggest concern as she watched the people of Denel, was the environment being created and how focused people were going to be because of the worries over their financial insecurity. All it did was create many layers of stress among the employees, so that it would eventually start to stress the environment. She worried that if this continued for too long, it would influence the views of the DPE, the DOD and the Treasury about the entity’s future. She feared they may even reverse the group efforts they had made at Denel simply because its employees were stressed.

However, she was comfortable that management was continuing to develop programmes to create hope and focus, so that this potential risk did not become a reality at Denel. It was no pretence to state that she cared and felt for the staff, and on behalf of the board, she wanted to say to all the employees that they were asking to “hang in there,” that they were doing everything possible to try and arrive at a point where they could at least have a future outcome where they could say in so many years or so many months, they would be okay.

She thanked the board and management for hanging in -- it was worth hanging in for a potential sustainable business. It was not easy for now, but she hoped that there would still be light at the end of the tunnel to continue to engage their critical stakeholders.

Discussion

Mr S Gumede (ANC) said that although the presentation seemed a good story to tell, they could not ignore the liquidity problem at Denel. The survival of Denel was critical. They needed to find a mechanism to resuscitate Denel and get it running. He appreciated the Group CEO’s comments at the end of the presentation, which had showed a positive outlook. He requested that it form part of the presentation.

If this was the recovery plan for Denel, how much time would they need to have this plan implemented? What kind of assistance would they need? The CEO had mentioned that there was an exodus of skilled people, but that he was in a position to attract those skilled people back. How would this be done? With regard to the downsizing of Denel, how would this look?

He hoped that the interaction between the DoD and Denel would yield fruit. He hoped that the R683 million that was being negotiated would come through, and that the R271 million that was coming through as working capital would give Denel the kind of starter pack that it needed to never lose track again. The presentation indicated that revenue had started declining in 2016 -- had the CEO studied the factors that had brought Denel down. What was the approach to addressing these factors? It could be corruption, or it could be the fact that people were leaving. Had these factors been looked at?

Mr G Cachalia (DA) said that it was common knowledge that Denel used to be a world leader.
In 2019, revenue was in a worst situation than when it had started off in 2013, so this decline was more than serious. There were a number of areas that this had been attributed to, such as local and international contracts, poor leadership, management, skills lost and debt. The presentation had been somewhat useful to gain an understanding, but it had not given him the confidence that he needed. Earlier on, in line with the oversight for which the Committee was responsible, he had requested a meeting with Denel to gain an in-depth understanding of the situation, but the Department of Public Enterprises (DPE) and the Minister had blocked that. He believed this to be unconstitutional, because as a Parliamentary Committee, they were empowered to do oversight. Be that as it may, they had a presentation now, but it did not fill him with considerable hope because it hinged on a number of things. What he would like to see -- and these were his questions:

What was the state of the current contracts?
What were Denel’s abilities deliver on these contracts, and what impeded them from doing so?
What would ensure that they possibly could? This needed to be unpacked in clear operational terms.
What were the future contracts?
What was Denel’s ability to fund these in financial terms, and their ability to deliver on these with their staff?

In terms of funding, it was common cause, in the words of the CEO, that they were borrowing more than they could repay. All they were doing was servicing debt, and not very efficiently. They were not even paying their people properly. How could they delivery financially and retain people under these circumstances?

Denel had shrunk by 9.3%, but the figure was much higher in terms of key personnel. He wanted clarity. If they were paying 25% of staff a full salary, and the executive committee (Exco) and the Board and other senior people were being paid 60%-80% of their salaries, what about the missing middle? What were they being paid or not being paid? Key technical skills accounted for two-thirds of the headcount, and if they were not being looked after, it would be no surprise that they were leaving to competitors. That needed to be addressed. He emphasised that Denel needed to be able to fund and deliver current and future contracts with its staff complement, so sanity had to prevail and there must be a plan B. If they could not delivery on these simple things, what would they do? Would they be selling off units? Would there be consolidation? Otherwise, this state-owned entity -- like almost every other state owned entity -- was in a mess and would continue on that path. Could they please address this?

Ms O Maotwe (EFF) stated that the chairperson had mentioned the Hoefyster project, and had said there were technical issues that were hindering its progress. What was the plan to address these technical issues? They could not just comment that there were technical issues. Were they saying that they could not be resolved? If they could be resolved, what was the way forward on the project?

The Chairperson had also stated that the debt programmes that had not been implemented properly were causing a big problem, and had acknowledged that they could only overcome the huge debt by getting more revenue. What was Denel’s plan to get more revenue, or was it a hopeless situation, and they could never get more revenue? The dependence on a single entity, like the Department of Defence, was a threat. They needed to look beyond the DoD and go outside the local market. There were issues regarding export permit approvals, and challenges regarding key customers that needed to be aligned. The presentation was basically saying that Denel was hopeless. There were issues that should be advanced to improve the operation of Denel, like the permit approvals. What were they doing to make sure that they met the conditions of any agreement that they entered into?

In the presentation, they had said that they had submitted a document to the DPE regarding the future of Denel, but the Committee had not seen this document. Could the Deputy Minister give the Committee feedback on how far this future Denel document or strategy had progressed? How was it going to turn the situation at Denel around? What would they see happening at Denel as soon as this document was approved? They ought to look beyond their current customers if they were unable to get more revenue. In any organisation, in any company, there would be time when one needed machinery and equipment, but there would also be a time where one stabilised and could not afford to pump in more capital to buy equipment. Denel should have seen there would be a point where the DoD and Armscor would not be ordering as much as they used to. Therefore, what was the plan to ensure that Denel was still able to service its debt and pay the salaries?

How would the transition period help them in turning around their situation? What had been achieved so far, and what did they hope to achieve and by when? In 2014, there had been talks of launching a South African regional airline and a lot of money was pumped into that project. There were models that had been presented. How far was that project, or was it something that they would not continue with? If so, why had it been abandoned? What had happened to all those resources that had been pumped in,?

When they did a model for the future of Denel, they needed to take into account that they had lost critical staff or critical skills. What did it mean for the company? If certain skills had been lost, they could not say that they could still produce products requiring the specific skills that had been lost. T They could not base their model on the hope that these people would come back. They could not base their model on hopes. Their model should factor in that they had lost critical skills, and take that into account.

Ms J Mkhwanazi (ANC) said the last presentation by the board had spoken about the speedy intervention and cooperation by the DPE, Denel and the board members themselves. Could the Department clarify the issue of the time and the timeframes, because she picked up that there had to be cooperation between the stakeholders and the Department? What progress had been made?

Going forward, would Denel be able to deliver on the SOE’s mandate? SOEs had to create more employment, develop skills and address the issue of economic growth. She requested clarity on the new Denel programme that was in place. In future, would Denel deliver on these principles and policy matters? Could the chairperson clarify the timeframes regarding this?

Did the state capture issues have any impact on Denel?

Ms R Komane (EFF) asked if Denel could take them through the impact of state capture issues. The board of Denel had insinuated that there was no cooperation between the board and the Department. Could she elaborate and substantiate this claim so that the Committee would know how to assist them?

The presentation lacked timeframes. It did not specify what support they anticipated from the Department and the Committee. It was very vague. Regarding the audit findings, she wanted clarity as to where the overspending was, and how it would be addressed. They could not just say that there were audit findings and that they would be addressed. They needed to explain how they would address them, and what they would address. What specifically were the findings? The board had indicated the situation regarding the non-payment of employees -- which level of employees had been affected by the non-payment? Was the senior management also affected by the non-payment? How long would this last? Had people not been paid for some time now?

Ms C Phiri (ANC) said it might be asked if it was just for the sake of compliance that an entity came and presented and answered questions from the Committee -- but would they implement suggestions going forward? The questions were meant for the entity to restructure. She expressed concern that the Committee asked questions and even advised the entity, but they did not seem to take advice. The Committee had conducted oversight and had asked why the SOEs could not trade amongst themselves. For instance, South African Airways (SAA) had the capacity and the skills to assist Denel, but they were not doing that.

Mr E Marais (DA) asked the CEO a question about his reference to an application for funding for an emergency in the case of a liquidity problem. What amount had he been talking about? Would that be seen as a second form of bailout?

Ms J Tshabalala (ANC) asked about the current balance sheet of Denel. What was the situation with the employees to whom they were unable to pay full salaries? What was the discussion and agreement with the employees? Did they just wait for Denel to give them what they could and just move on to the next month, or was there any form of discussion?

She said the country needed Denel. The problems at Denel, which produces ammunition and all sorts of armaments, could really get the country into trouble regarding issues of sovereignty and protection of the country. What was happening? Could the Minister give the Committee a report?

She remarked that Mr Cachalia had said that the Minister had blocked the Portfolio Committee from doing oversight. She did not know what he was referring to. All the Members were talking about the oversight they had done. If he had his own oversight he wanted to make, but he needed to clarify that. He could not make a claim like that on behalf of the Portfolio Committee.

Denel’s response

Ms Hlahla, said she would start with the broader questions, and the acting CEO would answer the more detailed questions.

She thanked the Parliamentarians for their input. Denel should make a separate report with regard to the suggestion about partnering and selling to other SOEs. The Committee had given them a lot of great ideas. The board took the Committee seriously and appreciated them, and they did not take the input that they provided for granted.

With regard to cooperation between the DPE and Denel, it was about recognising the effort made by the DPE, the Department of Defence, Armscor, Denel and various committees, and the wish that it could crystallise sooner into speedy execution as they continued to engage on important issues. The Committee continued to engage with an institution that still had enormous intellectual property, and had dedicated and focused people, even if they had lost some of them. Denel’s financial position got so fragile at times that all it needed was speed. It was her way of getting Parliament to keep its focus on them.

Some of the Members had said they wanted to see timeframes, and she agreed. The Committee needed to keep pushing Denel, and the sooner the great ideas would crystallise. If they timed these ideas, they might be able to win.

With regard to future contracts, one of the bizarre issues at Denel was the amount of people that kept phoning who wanted to keep on doing business with Denel. They asked whether Denel would soon stabilise, and also asked to speak to the teams. It seemed that they were dealing with an entity for which there was still a demand. That was why she wanted to resolve all the immediate issues in order to crack the challenges, no matter how small, to make things easier for Denel. The entity used to be the hope of many Afrikaner families in the past, and it had been able to give opportunities to engineer after engineer. Even if there was a small opportunity that all the effort they were all putting together could regenerate a Denel that could make that dream possible for all the other South African families who had children who were technical, to start producing things at Denel, it would be worth it. She and her board kept at it because they still saw hope.

Some people would say that hope was not enough. Some divisions would be able to turn themselves around faster than other divisions. All of them still believed that there was something that they could salvage in Denel, which could possibly add value to this new world. Through management, they needed to doctor the places where there were weaknesses and turn them around for the better. In discussions with the DPE and DOD, they also remained positive. They had to figure out and deal with the financial challenges in order to offer a different future for Denel. They needed to make the best effort to save some of the SOEs so that they could one day be self-supporting. She believed that Denel was one of them.

Mr Sadik thanked Mr Gumede for his suggestion, and said that they would send the Committee the latest version of the presentation, which would contain some of the points that he had made towards the end.

In order to attract some of the skilled employees back, in the presentation they outlined that they were engaging with the DOD and DPE with regard to funding for the strategic and sovereign capabilities. They had found that the employees that left them had not done so because Denel was unable to pay their full salaries. It had been more about their career growth within Denel, and for the engineering experts, they would want to be involved in research and development programmes, hence their request to the DOD for sovereign and strategic funding, and funding for research and development projects, and obsolescence management. This was what would help to retain the skilled people and give them the confidence in their career. These engineers wanted to use their skills and intellectual property. Therefore, Denel believed they would want to come back, because where they had gone to they were not able to use their intellectual property and skills.

Denel needed to move from not being just a design and development house, but being to a mass producer of products, because that would enable them to deliver tendered margins on the contracts.

They had seen that they had not been strong in performance management and consequence management. Having organised labour take them to court, had not helped. The publicity that they had been getting had not been great, as it had had an impact on their reputation both locally and internationally.

Referring to the alignment with key state agencies for their success, he said their alignment with the DOD was growing, and they needed their support to help Denel drive its export business. When one went to the export market, one needed to demonstrate that one’s local customer was buying one’s products. Unfortunately, the declining DOD budget had had an impact.

With regard to their revenue going down in 2019, the board had established committees on the board. There was a focused audit committee, a focused risk committee, and a finance and risk committee, so the integrity of the numbers was key. In the past, revenue recognition had been applied, so the Auditor General (AG) had issued a disclaimer. They had to be satisfied with Denel applying the correct standards. They needed to ensure that they had motivated people and their technical alignment with the contacts that they signed. Most of the material contracts were now overseen by the finance and investment committee before they submitted bids, and the investment committee and the board were there to oversee how they managed the risk around these contracts. They were also looking at back-to-back arrangements with their suppliers, so that some of the penalties that Denel carried, they would also carry.

Responding to the question regarding the missing middle employees, he said that at the lower levels of staff remuneration, they were receiving their full salaries. The balance of the staff, from the lower levels and all the way to the top, were receiving between 60% and 80% of their salaries during this time. One of the factors that had affected them in not being able to pay their staff salaries was the lockdown.

They had had an issue with permitting, and productivity had been around 30% of what it should have been, and this had affected their cash flows. As they were ramping production up, they would expect to get back into a position to pay full salaries.

One of the key structural changes that they had implemented was to devolve authority to the divisions to make them client centric in order to have a motivated workforce -- it was not just about the salaries, but also about managing the supply chain and the delivery to key customers, such as the South African Air Force, which was quite dependent on Denel for the delivery of aircraft.

They were making steady progress in terms of the technical baseline, and believed they had good support with the South African National Defence Force (SANDF). They now needed to have discussions at a contractual level, and those discussions were taking place with both the DOD and Armscor under the leadership of the Deputy Minister of Defence. They were hoping that this would be quite a big programme for Denel, as pointed out by their chairperson. They were hoping to sign off on the production baseline of the contract and then move into the production phases of the contract. In the development phase, they had identified what needed to be fixed. They now needed to go with a formal process with Armscor to put in the changes requested formally, get approval from the board where required at the Armscor level, and then they could implement.

The loss of staff at the company had had an impact, and they were looking at mitigating that.

Regarding new revenue opportunities, the Defence Department had been focusing on Denel’s defence capabilities. They had also looked at moving from conventional warfare to asymmetrical warfare, and had been having discussions through the Justice, Crime Prevention and Security (JCPS) cluster regarding border management to see whether they could provide an integrated management system to the South African border management authority. An integrated national disaster management system had also been put on the table with the South African Police Service (SAPS). Through the JCPS, they were looking at coordinating a bigger expenditure from the South African police.

One of the questions was around working with other state-owned companies and agencies. Some of Denel’s business involved working with Transnet on the engineering side, so those discussions were ongoing and were going quite well.

As for timeframes, the board was putting pressure on management to ensure that they did deliver. At this stage, they had just launched all these projects. They were headed up by all the different executives, and the group executive committee was looking at it.

Mr Sadik said the emergency funding was what they were seeking from the DOD for their sovereign and strategic capabilities, because in the past they had been funding it off their very weak balance sheet, so this year they had asked the DOD, through the DPE, for funding of around R683 million.

With regard to the question around the development of South African regional aircraft, he said that on the back of the Rooivalk and Oryx upgrades, Denel had the engineering skills in their company and had then looked at using these skills at developing this concept. However, due to recent liquidity issues, they had not taken it forward. However, they had done a market study which indicated that there was a market.

Ms Carmen le Grange, Group Chief Financial Officer (CFO), addressed the question around the audit findings. One of the things they had done since their last briefing to Parliamentary Members had been to compile a report dealing with the 13 key issues around why they were getting disclaimers. As Mr Sadik had mentioned, those issues ranged from technical issues around how they reported their revenue, to financial and internal control matters. There had also been some cash flow findings in terms of presentation and disclosure. As the finance function, they believed that they had gone a long way in addressing the technical challenges.

There was a difference between how the AG interpreted technical findings and how Denel interpreted them, and they needed to work together to make sure that they address this. There had been some level of improvement in technically accounting for financial results, but they still had some way to go to close all those findings and move Denel from a disclaimer opinion to a qualified opinion and then to an unqualified opinion. They had put in significant work around that.

The other issue remained the issue of cash in the bank. It became difficult for auditors to make positions around whether or not they believed Denel would have enough money to continue. Being drip-fed funds did not help Denel, because it got more and more difficult to stave off many creditors when one had to go into arrangements with them around how to pay them. While they had brought the quantum amount down, in August it had been R1.1 billion, and in this presentation they had reported that they owed creditors around R735 million. Unfortunately, they were taking longer to pay because they had to juggle the little bit of money they had to try and make sure that they allocated funds towards sales and revenue.

She addressed the findings of the AG and how it had gone, as well as the comment that Denel’s presentation lacked timeframes. Timing at Denel was critical, because they needed to prove that they were in a position where they were able to pay their creditors when they were due. and this included their staff.

Their capital structure was way too short-term. They did need their investor community to believe in them and give them longer terms of capital. They had been looking at how to strengthen their balance sheet. Some of the revenue opportunities that Mr Sadik had mentioned were about ensuring this.

Referring to Mr Cachalia’s question about what the funding requirements to deliver were, she said one of the things to understand about Denel’s financial position was that in the past it had used guarantees to fund its projects, and those guarantees would often get disclosed under line items. In the past, when they got those guarantees, they would use them as working capital. They no longer tried to do that. They now ring-fenced the guarantees that received and kept them separate for specific projects in order to execute them. In future projects, when they find a partner to go in with them, they try to make an arrangement so that they help them with the funding of those guarantees. The arrangements they had for future projects was to help them with financing arrangements to make sure that they were able to deliver on projects.  

If they did not get their funding from having an arrangement with their partners, they had to generate that funding from their reserves and from generating enough revenue from the business. She expressed concern that in the immediate to short term, they would not be able to trade. When Members talked about timeframes, Denel needed an injection of funding in the short term to help them move this business and to help get them to the point where they were able to trade more effectively and bring cash into the business.

Ms Hlahla interjected that that Ms Le Grange needed to explain that part of what the Auditor General had focused on was taking them back to an old contract, requiring them to try and state their numbers correctly, because they had not been able to explain them properly.

Ms Le Grange said that in the last two years of audit, they had been disclaimed on the basis that Denel was using the wrong standard of accounting. One thing their chairperson had also said was that Denel was a business that had multi-year projects, so when they did the exercise of correcting the revenue amounts, they had to go all the way back to contracts that could go back up to nine or eleven years. Therefore, this year they had tested over 90% of their contracts to try and get to the right calculations. They had had to do a restatement of the revenue that was recognised using the old standards, and then look at what it should have been. They still had some technical interpretation issues with the auditors, but believed that they had corrected the significant contracts. Where there had been lots of discussion with their external auditors over the new system was where there were two ways to recognise revenue. They would also have asked them to include a contingent liability in terms of the credit part of the revenue. They had done that in order to address that issue. Of course, this would have to be tested as part of the audit, and they would see what the outcome with the auditor would be.

Ms Hlahla referred to some of the schedules indicating where they were growing in terms of their business with other SOEs, and said they would start to develop a report that they could share with the Committee. They had been very focused on that aspect, and in some ways this Denel was a “cleaning up Denel.” They were trying to provide satisfaction from a quality point of view. The rigour that the AG required from an SOE, no matter how much it had taken for them to go back to review all their contracts, was to account for them correctly. It was the right thing to do. They had had to get out of some onerous contracts and try to relieve Denel from having to pay all of these creditors.

They had also tried, even with their limited resources, to service both their historical and short term debt as it existed, because the market had become too short-term for SOEs, and maybe even worse for Denel. They had attempted to do that correctly, but sadly that meant that the little bit that remained they had to spread among their employees, and the board needed to make sure that the “middle” that they had to look after was not sacrificed in the process. Management was looking into that.

This was a team that was trying to clean up Denel and make it possible for them, with support from the DPE and their management, to effectively accelerate some of the strategic equity partnerships that would make the situation much better than it was today. If they added to that the discussions with the DOD and Armscor, the combination would make a big difference to Denel going forward. It was her hope that they could all work together towards those timeframes.

The Chairperson repeated a question that had been asked by one of the Members regarding the cooperation between the board and the officials.

Ms Hlahla responded that the cooperation was there. Everybody was working hard. From Denel management, to the staffing divisions, and to the DPE, the unit there was talking to Denel every day.. What Armscor and the DOD needed to do now was to push all of their work into one programme with a timeline so that they did not miss out on the critical timelines that were there, to keep Denel going.

That was where they were. That was the essence of her messages. Everybody was working hard and doing the right things, but it was time that everyone came together with similar timelines so that they could make more material injections, whether it was of liquidity or programmes. To come in at the right time would go a long way in turning this story around.

Follow up questions

Mr Gumede said that Denel should to come back and answer some of his questions, which had not been answered for strategic reasons. For instance, there was the issue of downsizing, where they had requested more information to get a better understanding of how much time they needed to get it implemented. He was aware that it was very dependent on funding, but he wanted an attempt at an answer. There was also the question on the attraction of skills and getting them back, as the answer was not clear as to how they were going to do it. For him, looking forward was much better. This was the kind of report or presentation that required a quick follow up so that they did not lose the momentum.  If they did not lose momentum up until the recommendations were implemented, it was good. However, the tendency from his past experience was that the SOEs would present and the Committee would see them after three months, by which time it would be difficult to have an appropriate follow-up.

Mr Cachalia stated that he would follow up with written questions through the secretary.

Ms Mkhwanazi said that she had no follow up questions.

Ms Komane said that the point of engagement was to look for remedies and to assist each other. She agreed with Mr Gumede that there were questions that had been strategically been left out. One would have to ask why those were being left out, because the intention was not to crucify anybody but to see how they could assist each other.

Regarding the timeframes that she had asked about, as much as Denel had said these were critical for them, they were also important for the Committee to know in order to understand how they reported and for holding them accountable as part of exercising their oversight. There should not be a divide between the board of Denel and the Committee -- they should be seen as one, trying to move towards one goal.

Ms V Malinga (ANC) said she had not heard the presentation, because she had joined late from another meeting, so she did not have any questions.

Ms Maotwe wanted clarity on “evergreen projects,” and asked if there were such projects at Denel. What was the value of these contracts? What were the implications on its operations? How did they relate in terms having lost critical skills which might have been critical in executing those contracts or projects?

Ms Tshabalala said that she was happy with the presentation.

Ms Phiri stated that she was covered.

Denel’s response

Ms Hlahla summarised the questions, and said the Deputy Minister would also answer some of them.

Mr Gumede had asked for clarity on downsizing -- how it would be implemented, and timeframes. He had wanted to know about the opportunities and challenges around that. The second question had been the attraction of skills and how Denel hoped to do so within their current circumstances. There were some questions on looking forward -- how Denel would look and some timeframes. Mr Cachalia had stated that he would follow up with written questions. Ms Komane had emphasised that timeframes were needed that from an oversight point of view so that they could be held accountable as a team. Ms Maotwe had asked about evergreen projects.

Denel would challenge themselves, and would come back through the Committee for guidance, and would answer these questions properly.

The Chairperson asked whether the Director General wanted to say anything.

Mr Sadik replied that the DG was not present, as he had had to leave to be present at a Select Committee meeting.

Deputy Minister Masualle said that the Department had taken note of all the questions and comments that had been made by the Members, as well as the responses that had been given, and gave an undertaking to follow up on them.

Denel was very strategic and important, not just for the country, but was also an important asset for the region as a whole. The capabilities that resided there were strategic and could not be ignored. He shared the concerns of the board that sometimes the rigidities in the government system did not bode well for companies that needed agility, speed and certainty in terms of decision making. These were some of the lessons that they were learning. The Presidential SOE Council that had been established would go a long way to streamlining and smoothing the operational environment of some of the SOEs. They were big companies, and they could not operate as if they were just another government department.

The Chairperson said he hoped that the issues that the Members had raised would be part of Denel’s homework to deal with. He thanked the board for their contribution, as it had given the Committee some understanding of the developments at Denel. He thanked the Department and the Ministry.

The meeting was adjourned.