Department of Public Enterprises & Denel briefings: Winter School 2009

Meeting report

Department of Public Enterprises briefing
Ms Portia Molefe, Director-General: Department of Public Enterprises, told the Committee and the delegates from the various departments and parastatals attending the meeting, that Post Apartheid South Africa was characterised by the longest period of sustained economic growth in its history. However investment in fixed capital declined and remained low after 1990. She noted that prior to 1994, South Africa had seen a peak in public sector investment of more than 15% of GDP in 1976.

The cumulative under-investment was going to ultimately constrain growth. Key sectors that had been weak during the period of sustained growth were agriculture, mining and manufacturing. Mining and manufacturing were weak despite the fact that there had been a global boom in those sectors.

Even though South Africa was aiming at creating jobs, those jobs were not being created in the right fields. This was because a large portion of the population was unskilled. For the government to really create jobs, manufacturing had to be increased as it had greater labour absorptive characteristics. Manufacturing was also able to employ a greater intensity of low skilled and unskilled workers than other sectors. So if South Africa did not have a serious manufacturing drive, the country would find itself in serious crisis. South Africa imported 60% of its final products and this had an effect on the country’s growing current account deficit.

Global developments in finance and capital markets also presented SA with additional challenges and opportunities. The operation of a global capital market and its volatility could generate macro-economic instability in national economies.

South Africa’s overarching challenge was to achieve accelerated growth with higher labour absorption. This required accelerated investment both in infrastructure to support the growth and in higher value-added tradables to make the growth more sustainable. It was thus necessary for the state to drive the process by forming partnerships with dominant multi-national companies as this would give it access to leading technologies.

However the global crisis was also putting South Africa in a much more unfortunate position, as the country would be faced with an infrastructure bottleneck at the end of the dark tunnel.

And thus the challenge was for the state to coherently and systematically leverage both its own and the markets capacity to drive the process.

A developmental state was characterised by the ability to plan, invest and form strategic economic partnerships. Ms Molefe added that a South African developmental state needed to undertake the following key economic initiatives to strategically intervene in the economy:
▪ policy and regulation,
▪ direct agency investment and partnerships in infrastructure and
▪ strategic procurement and investment partnerships to promote manufacturing.

The developmental state needed a vehicle able to drive investment and partnerships, and State Owned Enterprises as such a vehicle had a number of relevant advantages. Some of the advantages were:
▪ They were able to enable consistency of strategic intent;
▪ Were able to charge a commercial tariff thereby insuring that the sector paid for its development.
▪ They can leverage broader capital markets 
▪ Were able to partner the private sector while using an established legal framework.
However for the SOE to play that role they needed an enabling environment to be put in place.

Discussion
Mr M Oriani- Ambrosini (IFP) stated that 15 minutes was not enough to discuss the points that Ms Molefe had raised. However, he believed that how they reacted depended on how they looked at the global crisis. The crisis was going to destroy South Africa’s manufacturing capacity. As it was noted in the presentation that South Africa saw a peak in public investment during apartheid, so South Africa today needed to adopt the manner in which it was done back then. The Department of Public Enterprises had to make things happen that the markets could not make happen.

Ms Molefe said that people tended to look at countries as moving at the same pace. That was not true, there were countries that were moving at a faster pace and were sometimes using the recession to develop and move faster. This meant that if South Africa was not taking advantage of the situation by investing, one had to question by how far the country was going to drop when it came out of the recession. Many countries saw recessions as a time to invest. And thus investment decisions had to be taken as they happened.

Mr P Van Dalen (DA) said that they were focusing on the wrong places sometimes. They as taxpayers wanted value for their money. They wanted to know that their money was not wasted. And thus the state had to get people with skills to run the companies that it owned. The state needed to spend money in building confidence.

Mr L Greyling (ID) asked if the country was sufficiently interrogating the kind of plans it was coming up with regarding infrastructure development. The question was in line with choice of technology used in the power stations that were going to be built by Eskom. To what extent did the Department of Public Enterprises (DPE) assess the choices made by parastatals when it came to technology choices?

Ms Molefe said that the Department did not run nuclear stations and they could not tell the parastatals about which technology they could use. The choice of what technology to use was up to these enterprises.

Denel briefing
Mr John Morris, Head: Strategy and Commercial, Denel, in his overview, explained that Denel had decentralised and thus Denel was a holding company. The reason for decentralisation was to drive accountability.

The company was divided into Denel Dynamics, Denel SAAB, Denel Land Systems, OTB (Overberg Range, Denel Aviation, Mechem (Pty) Ltd, PMP and Denel Integrated Systems Solutions. The core business of Denel Dynamics was missiles and unmanned aerial vehicle systems (UAV). Denel Aviation focused on Rooivalk business. Denel’s equity partners were SAAB, SAFRAN, Zeiss and Rheinmetall Defence.

Mr Morris told the Committee and the delegates present at the Winter School that in the absence of Denel, South Africa would have to import arms and thus create a security risk. Thus Denel contributed to national security and high technology manufacturing.

Denel played a major role in technology development. The company’s Research and Development (R&D) spend totalled R1, 2 bn in 2008/09. This was because there was a need for strategic spending on new products to maintain competitiveness.

However Denel was facing difficulty in getting into certain markets such as the United States. The US market was closed to independent contractors such as Denel as they consumed products produced only within the US. Another factor that has been making business hard for Denel was the fact that military spending had dropped drastically since the 1990s.

Russia, China, India, Brazil and Saudi Arabia had the highest average annual growth of military budget (2002-2007). In 2005, the US was the biggest spender in defence equipment with $123.3 billion spent on defence equipment.

Due to the nature of the business, Denel had had to form or enter into partnerships to gain access into markets that it would have never had seen itself in. The company had a major market in India, however they had been banned from doing business in India.

In 2005, Denel ran into financial difficulties. The company had also posted loses year on year since 1998 except in 2001 when it posted a R 40 million profit. The losses from 2005 to 2008 were caused by loss of export market, inadequate orders resulting in under-utilisation of labour and facilities, and high interest costs resulting from loans.

The changing nature of conflict has somehow given the company hope, South Africa now played a major role as a peacekeeper in the rest of Africa. South Africa also had exceptional design and engineering skills and there has been a significant demand for unmanned platforms and thus the company aimed to pursue growth in that area.

Denel had adopted a turn around strategy in 2005 and has made significant progress in implementing it. All of Denel’s business’s have turned around except for missiles and Denel Saab Aerostructures (DSA).

However Denel’s traditional markets still remained under threat. Of the 2008/09 sales 65% were made in South Africa, 8% in Africa, 1% South America, 4% Asia Pacific and the Middle East consumed 8% of the total products sold by Denel with Europe accounting for 15% of the total sales.

Denel’s major priorities were to achieve transformation goals and reduce working capital requirements.

Discussion
Mr Gerhard Koornhof (ANC, NCOP) asked if there was not risk in all of Denel having minority shares in the equity partnerships that were outside the country. Further, had there been any discussion to market the Rooivalk so that it could be produced at an optimal level?

Mr John Morris said that one needed to understand how those partnerships were structured. There were no risks since the government had a golden share in those partnerships. The Department of Defence’s security had never been compromised; instead quality and production time had been improved.

Mr Morris said that Denel had delivered five of the upgraded Rooivalk to the South African Airforce and the remaining six aircraft will be retro-fitted. There were a number of countries that were showing an interest in the Rooivalk. South Korea was looking for the technology. In terms of marketing, there was however no active campaign in place at the moment.

Mr Koornhof asked Denel to explain why the Department of Defence (DOD) was not purchasing all of its requirements from Denel.

Mr Morris replied that he believed that this was a consequence of the fact that South Africa did not spend on defence.

Ms Molefe added that the DoD might have been buying from other companies locally. South Africa’s defence spending was tiny and there was then a need to form partnerships.

Dr M Mangena (AZAPO) asked if Denel had been approached by other departments such as those dealing with the marine environment and the Department of Sport. Maybe the UAVs that Denel manufactured could be used at stadiums. And they could be used to monitor the country’s coastline to try and minimise poaching.

Mr Morris said that it would be dangerous to have UAVs at stadiums and international laws did not allow that. If a AUV fell from the sky, it would cause an awful disaster.

A Committee member noted that Denel was still lagging behind with regards to transformation in the company. He asked how Denel was planning to address this problem.

Mr Morris admitted that 57% of Denel employees were white; they were however trying to deal with the problem. A major cause for this was the fact that Denel was not seen as an attractive place to work due to the nature of their business. Many people preferred to work for sexy technology companies rather than for an arms company. However, they were trying to meet their transformation agenda by providing bursaries and putting people through their training programs to try and meet transformation targets.

Mr M Nhanha (Cope) asked why was Denel not marketing its products in Africa as it seemed as if the company was scattered all over the world.

Mr Zwelakhe Ntshepe, Denel Goup: Marketing Director, said that the company’s products were present in Nigeria, Lesotho and Botswana, although these had been small arms that they had been selling to these countries. An obstacle that the company faced was compatibility, as most African countries were using AK 47s and Denel produced R4s. Issues of politics also stood in their way.

Mr V Dalen (DA) asked the company to explain what had happened in India, with regard to Denel being banned from doing business there. It seemed as if something was being hidden when it came to the question of India.

Mr Morris replied that a newspaper article alleged that there had been bribes involved in Denel’s contracts with India. However there was no evidence of that, and the company was in legal proceedings (arbitration). They would be happy to discuss the issue in a closed session if the Committee wanted more information.

Briefing on Advanced Manufacturing
Mr Mehleli Mpofu, Deputy Director General: Advanced Manufacturing (DPE), spoke on the topic of Advanced Manufacturing (see document).

The session was adjourned.