Outgoing Denel chairman Sibusiso Sibisi’s open letter to Business Day raises interesting questions, some of which might be answered at the state arsenal’s annual results presentation on July 6.
In a tart letter published on June 14, Sibisi notes he has “seen a media release” that speaks of the need for an “immediate business turnaround and strategic redirection” at the state business that is again expected to post a loss for the year to March 2011.
“This is too clever by half,” Sibisi fumes. “Given that Denel’s turnaround strategy of 2005, whose main pillar was international equity partnerships to enter global markets, is effectively on hold, with no coherent alternative, save the suggestion for Denel to “include civilian products in its product offering”, the apparent tough talk amounts to little more than weasel words.
“Ironically, an exemplar of defence and civilian outcomes is in the product suite of Carl Zeiss Optronics SA, an equity partnership between Denel and Carl Zeiss (an international brand), that is a commendable outcome of the 2005 turnaround strategy.
“There can be no consensus on Denel’s business model until there is shareholder consensus on the primary objective. This must be complemented by coherent identification of the oft-cited ‘sovereign assets” that are off-limits in any foreign equity negotiations. In the meantime, it is disingenuous to blame losses on the board.
“Denel’s woes are compounded by shareholder obsession with the products of engineering rather than the engineers themselves. There is much indignant thumping of the table regarding loss of family silver (through foreign equity partnerships) rather than concern with nurturing and replenishing the craft of making silverware in the first place.
“Intellectual value and productive knowhow reside in people’s heads and hands. That is where the primary focus should be.
“Lest this all sound like so much self- exoneration, it is worth pointing out that there is an example of a state- owned entity whose focus is science, engineering and technology where the accent is precisely on people first. It earns a healthy income from local and international sources that vastly exceeds its public funding allocation. It has an excellent demographic profile of researchers (race, gender, age) and an impeccable record of corporate governance to boot.
“I should know; I run it. It is called the Council for Scientific and Industrial Research. I have been the CEO of it for the past 10 years. In that capacity as my day job, it has been nothing short of pleasurable to report to three supportive ministers of science and technology. No lack of shareholder vision here. Maybe our leadership should talk a great deal more.”
Minister of Public Enterprises Malusi Gigaba earlier this month said Denel has made “some progress” since the company embarked on a turnaround strategy in 2005. But he added its solvency position continues to pose serious challenges, with Denel Saab Aerostructures (DSA) being the major contributor to the entity’s losses. “Clearly, the business is not sustainable in its current model. A more robust turnaround plan that pursues financial recovery and stability through improvements in its operational and financial performance needs to be developed to secure the company’s long term viability.”
DSA, Gigaba said, was to blame for a loss of R328 million of a total Denel Group loss of R246 million for the year to March 2010.
Denel last posted a net profit in 2001 when it banked R24.1 million. The only other profit recorded since its formation in 1992 was in 1997, when it reported R81.5 million. Its worst loss was in 2006 when it posted a deficit of some R1.6 billion. A turn-around strategy was put in place that included government guarantees for debt raised commercially. This project has been mostly successful with the state arsenal in August posting an operating profit of R200 million for the year to March 31, 2010. But CE Talib Sadik last November complained of the debt and interest burden, when announcing the numbers.
At the end of March last year, debt stood at R1.9 billion and interest payments stood at R130 million. Sadik lamented Denel would have posted a R200 million profit but for the loss at DSA caused by delays with the Airbus A400M project and the interest payments due “in the absence of recapitalisation requested from the National Treasury.”