Oversight committee terms Denel turnaround strategy “re-engineering”

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Parliament’s Portfolio Committee on Public Enterprises (PCPE) maintains Denel’s strategic restructuring plan is “a re-engineering of the business”.

The comment comes in a statement issued after the committee was briefed by former chief executive Riaz Saloojee, now back at the State-owned defence and technology conglomerate as chief restructuring officer.

He, according to a Parliamentary Communication Services statement, told PCPE members the plan’s intent is “to reduce dependence on the fiscus for maintenance of critical strategic and sovereign capabilities”. Further, the turnaround plan’s success is “premised on timeous cash inflow of working capital to execute operations and restructuring costs”.

“Committee members,” the statement has it, “said the presentation needs to be understood for what it is – an organisational re-engineering of the business” adding it was not “clear on the role” of government in the turnaround strategy. This was highlighted when Denel lost out on an R8 billion deal “notwithstanding” government as the shareholder could offer a guarantee to secure the deal.

The PCPE heard one part of restructuring at Denel is to “grow the order pipeline is to secure local orders from state-owned entities and government departments where Denel has a suitable value proposition”. One example is ammunition for the SA Police Service (SAPS), provincial authorities and the broader security cluster to secure “sufficient baseload” for Pretoria Metal Pressings (Denel PMP) to operate more efficiently. Another initiative, according to Salojee, is development of a national infrastructure security capability to benefit SAPS, Transnet, the Passenger Rail Agency of South Africa (PRASA) and Eskom. The committee noted it is important for Denel to be profitable and suggested it look beyond the SA National Defence Force (SANDF) for new markets, including the wider African continent.

In its presentation to the portfolio committee this week, Denel said part of its turnaround strategy includes retrenchments, with Section 189 processes initiated in September; a 16 September memorandum of understanding (MOU) with Armscor to unlock key programmes such as Hoefyster; provision of support in recovering market opportunities and IP (intellectual property) exploitation among others.

Challenges identified in Denel’s turnaround include insufficient funding to complete restructuring, a continued brain drain and loss of critical skills, funding not available to take advantage of the R30 billion export opportunity pipeline, insufficient working capital and an inability to fund “critical capital expenditure initiatives”.

Denel pointed out its 2022/23 performance shows a five percent increase in revenue (R486 million) due to additional rental space at Denel Properties and 224% improvement in profitability (R525 million) and income from the liquidation of the Denel Medical Benefit Trust (DMBT) with gross profit decreasing by 77% (to R18 million) due to penalties on late deliveries.

An indication of the importance government attaches to Denel comes in the 2022 medium term budget policy statement (MTBPS). In it, Finance Minister Enoch Godongwana indicated the Irene, Centurion-headquartered conglomerate was to be allocated R3.4 billion “as long as certain conditions are met”.

In the presentation on 16 November, Denel noted the success of its turnaround plan is premised on timeous cash inflow of working capital to execute operations and cover restructuring costs. “So far this has been funded by Denel already securing R990 million (from DMBT) of its commitment to provide R1.88 billion for stabilising and sustaining Denel. For the balance of activities to proceed Denel requires immediate access to some recapitalisation funds before the completion of the sale of all non-core assets supports the balance of its commitment. This is specifically for working capital to execute operations for the next six months and restructuring to bring the cost base to acceptable levels are of critical importance.

“The impact of delayed capitalisation may materially impact the turnaround as previously communicated to NT [National Treasury]. Denel requests support for its request for timeous release of funding allocated to Denel in the MTBPS.” Denel aims to raise R890 million by the sale of all non-core assets.

Under the turnaround strategy, Denel will be restructured into four divisions: Guided Weapons, Land, Air and Integrated Systems. Guided Weapons will cover missiles and precision guided munitions and their support; Land will cover infantry systems, artillery, armoured vehicles, ammunition and mechatronics; Air will cover aircraft and engine maintenance and repair, aircraft systems integration and upgrades, test and evaluation and unmanned aerial vehicle production; and Integrated Systems will cover complex system integration such as ground-based air defence systems and cyber solutions.

Denel Land Systems (DLS), Denel Vehicle Systems (DVS), and PMP will be merged in the Land Division, while Air will comprise the Overberg Test Range (OTR) and Denel Aeronautics. Guided Weapons will incorporate Denel Dynamics.

Also in Parliament, the Standing Committee on Public Accounts (SCOPA) this week heard from Advocate Shamila Batohi of the National Prosecuting Authority (NPA) on progress with corruption investigations – mostly linked to State Capture. Denel Daily Maverick reports: “The Hawks (Directorate for Priority Crime Investigation) have two cases at the state arms manufacturer involving the theft of intellectual property and corruption. According to the Hawks, 33 statements were taken in the two cases which involve R4.3-billion”.

The digital daily continues, reporting the NPA “has a Denel deal in sight”. This will be authorised for investigation in the third quarter of 2022/2023.