Denel is one of six government owned enterprises reporting directly to the Public Enterprises ministry where a clean-up is underway, according to Minister Pravin Gordhan.
He told Parliament’s Portfolio Committee on Public Enterprises on Wednesday that the defence and technology conglomerate had a new board with “diverse skills ranging from engineering, finance, legal, business and stakeholder management” in place since May. Prior to the new board taking office Denel Group chief executive Zwelakhe Ntshepe resigned and was replaced – in an acting capacity – by Mike Kgobe who previously headed Denel Aviation (subsequently Denel Aeronautics).
Denel group chief financial officer Odwa Mhlwana is on special leave pending the outcome of a disciplinary process and Gordhan told the committee the new Denel board “was getting to the bottom of a number of forensic reports to ascertain if more disciplinary action would be forthcoming”.
Another mechanism to prevent possible corruption is that of lifestyle audits which Gordhan said were “yet to commence” at Denel.
According to him the Denel board has revised the 2018/19 corporate plan to put more emphasis on turning around the entity and improving governance processes and structures.
He told the committee overall revenue generated by the six state-owned companies falling under the Department of Public Enterprises was R284 billion. In aggregate the six – Eskom, Denel, Transnet, SA Express, Safcol and Alexkor – made a loss of R12.6 billion. “This must change,” he added.
Denel, along with other new State-owned company boards, have to deal with issues of the past, mainly corruption. They also have to put the various businesses back on their feet ensuring sufficient revenue is generated to cover operational expenses for financial sustainability.
“In the five-month period the basic theme has been to deal with the past, survive the present and create a basis for sustainability for the future,” he is reported as having said.
Gordhan also indicated his department would create a whistleblower hotline, separate from others, for more information so that “nonsense” can be uncovered.
In his report to parliament, Gordhan said Denel “experienced liquidity with unpaid creditors at R1.1 billion resulting in a suppliers withholding supplies, further putting operations under pressure. As a result, the SOC is likely to realise a significantly lower revenue than planned in the 2017/18 Corporate Plan.
“A temporary reprieve was received from National Treasury: R580million in the third quarter.
“The culture of performance was negative with major contracts running well behind schedule and significant cost overruns. Projections shows that the entity is likely to post a record loss.”
Regarding governance, Gordhan’s report stated that the Denel board was “depleted and the individual members did not have the requisite skills to manage an organisation of Denel’s type – key areas like audit and risk, contracting and stakeholder management were not optimally covered. Management was weak. It lost confidence of the workforce, clients, suppliers and funders.”
Much of Denel’s woes are due to corruption. “Forensic reports reviewed by the Department reveal existence of rampant corruption at the highest level of the organisation,” the report stated.
Irregular expenditure across the entity points to lax internal controls, the report notes, with irregular expenditure for the 2016/17 period amounting to R116 million. The newly acquired division Denel Vehicle System was responsible for R83 million.
Dispute between Denel and external auditors on issues of irregular expenditure for 2016/17 have not been resolved – over six months after Denel’s Annual General Meeting.
To address the problems at Denel, multiple solutions are being implemented. This includes the new board installed in May; an acting Group CEO; an acting Group CFO; the investigation of forensic reports; future lifestyle audits and work on a new Corporate Plan for 2018/19.