Denel Annual Report 2006: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
1 November 2006
DENEL ANNUAL REPORT 2006: BRIEFING

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Presentation on Denel Annual Report – 1 November 2006
Denel Annual Report (available at www.denel.co.za)

SUMMARY

Denel presented its 2006 Annual Report to the committee. A notable topic of contention was the issue of equity partnerships with foreign companies – the committee was worried about foreign companies gaining intellectual property ownership of technologies developed in conjunction with Denel (Pty) Ltd and its subsidiaries. The Denel Board assured the committee that South Africa would not suffer any strategic risk from the existing equity partnerships and that each partnership was negotiated with the sensitivities particular to the concerned industry taken into account.

The Denel contingent stressed that the company’s financial strategy was working but that it would take time to see a tangible financial turnaround. The committee agreed.

The Committee stressed the need for a humane approach to retrenchments and asked Denel to furnish it with a documented outline of their policy in this regard. Denel agreed to provide this in writing.

MINUTES

The chairperson opened the meeting and made apologies for those unable to attend. He told the Denel contingent that the key concerns that needed to be addressed were: key performance targets and whether they were met, and budget allocation.

Presentation of Denel Annual Report
Mr S Liebenberg (Chief Executive Officer (CEO)) presented the annual report and noted that they had taken their cue from the Department of Public Enterprises’ (DPE) guidance document. He stated that he had no doubt that the momentum of the company was going in the right direction after the 12-month turnaround programme. The financial indicators were good, but he stressed that Denel is subject to a long cycle due to the nature of the business. It was stated that Denel still suffered from poorly negotiated deals prior to the turnaround point. However, SAAB has purchased 20 percent of Aerospace Structures and Carl Zeiss has offered to purchase 70 percent of Optronics. The results of a climate survey across 45 percent of the group showed unfavourable results, which the board hoped to resolve. Despite this, deals earmarked for the future have been moved forward – two very large deals will be made within the next two months in conjunction with Armscor and The Department of Defence (DoD). Mr Liebenberg stated that significant progress had been made in Unmanned Aerial Vehicle (UAV) development.

With regards to financials, Mr Liebenberg stated that revenue was down due to increased financial costs and that the issue of insolvency was avoided courtesy of the recapitalisation injection from government totalling R2 billion. However R3.17 billion is still needed by Denel, but it appears that National Treasury will not provide this sum.

The Strategy Implementation Process and Status was highlighted and Mr Liebenberg assured the committee that the process of converting all the wings of Denel into (Pty) Ltds. was going well. The Rooivalk attack helicopter bid in Turkey is looking promising despite heavy American competition – the bid has exposed Denel to a promising situation into the Middle Eastern and Central Asian markets. Carl Zeiss’s partnership deal with Optronics has saved it from closure.

Discussion

Mr C Gololo (ANC) wanted to know how the R2 billion government funding was spent and the status of the contract with the Indian government.

Mr T Sadiq (Chief Financial Officer (CFO)) responded that they had repaid an old loan to the value of R1.5 billion and spent the rest on capital expenditure.

Mr Liebenberg stated that the intent was that the new company would be born debt free. He stated that in April 2006, Denel was blacklisted in India and the contract was cancelled. However the Central Bureau of Investigation (CBI) investigated ten institutions involved in the deal in India, but they found no irregularities. Denel has initiated a process of arbitration against the Indian government and are waiting to see how the situation will play out.

Mr J Stephens (DA) said that a turnaround seems to be in the offing and he hoped to see results. He asked whether retrenchment had ended and if one could hope to see employment figures increase. Mr Stephens was concerned about Research and Development (R&D) spending decreasing. He asked whether the Zeiss/Optronics deal allowed for a measure of control and wanted to know how the resultant funds would be utilised.

Mr Liebenberg replied that pending equity deals were R&D orientated and that the Zeiss deal would see an influx of funds into R&D at Optronics. Furthermore in the Zeiss/Optronics equity partnership deal, Denel has a golden share that protects intellectual property rights in conjunction with the South African government.

Mr Liebenberg added that retrenchment would not cease because the structure of the company was being changed. Outsourcing was being utilised and Denel is engaged in stripping out all personnel that are utilised in non-defence related activities.

The Chairperson asked Mr Sadiq to furnish him with an email showing how these funds were utilised. He then asked what relations with the trade unions were like.

Mr Liebenberg replied that Human Resources were performing very well in the matter and that they had been in constructive discussion with seven unions.

The Chairperson wanted to know what retrenched employees were doing now.

Mr Liebenberg replied that 30 percent had been re-employed and that there are insurance funds in place.

The Chairperson said that he was not making a value judgment but that he was concerned about the way in which personnel streamlining were happening. He asked for a written explanation of where these people were and what they were doing to be emailed to him within the next 48 hours.

Mr Gololo asked for the reason behind the retrenchment of 1000 employees.

Mr Liebenberg responded that with the streamlining and reorganisation of Denel Holdings many people were redundant and that it was necessary to let them go.

Mr H Ivy (Group Executive: Human Resources) added that they had a social plan that assisted employees in finding alternative employment and opening up small businesses. He stated that he would give the Chairperson a paragraph on the topic.

Mr Stephens asked how intellectual property rights worked and if one could use the propriety technology outside the company.

Mr Liebenberg responded that the DoD had approved their equity strategy. In terms of existing technologies the intent is that Denel (Pty) Ltd will licence technology to the new company owned by Zeiss. If new technology is developed, Denel will retain 30 percent ownership in it.

Mr Stephens asked what would happen if the utilisation of a new technology became strategically important and Zeiss refused to part with it.

Mr Liebenberg responded that this was a policy issue that had already been decided and said that they had had no choice; if it were not for equity deals these companies would be closed.

The Chairperson stated that they would raise these concerns with the Minister of Public Enterprises.

Mr Stephens felt that the problem was that R&D must be for the strategic benefit of South Africa, not a company. If a company will not licence a product, we cannot use it. He wanted to know why no clause existed that licensed intellectual property to Denel for non-commercial use.

The Chairperson agreed and stated that they were not trying to be obstructive; they were just worried about sovereignty.

Mr C Wang (ANC) asked for clarification of the R134 million related to investment. He also wanted to know the extent of policy regarding country credit safety.

Mr Sadiq replied that they had disposed of arivia.kom and that they had a risk management policy when dealing with foreign exchange. The borrowing position referred to Treasury bonds issued to the value of R825 million that will mature in 2007. He said that they were looking at alternative mechanisms for generating cash besides government recapitalisation as this would not appear to be forthcoming again after the previous R2 billion injection.

Mr Gololo asked about HIV policy and required clarity on the issue of borrowing. He also asked about the likelihood of selling arms to contending forces in the Middle East.

Mr Ivy replied that they did have an effective HIV program that has been implemented already.

Mr Liebenberg said that everyone does business in the Middle East but that the US tries to muscle out other bidders. He stated that all exports go through the National Conventional Arms Control Committee (NCAAC) that has to give its permission before any exports could be made.

The chairperson thanked the Denel contingent for appearing before the committee and alerted the members to the extent of the turnaround. He was pleased with the consistency of strategy displayed by Denel management.

The meeting was adjourned.