Wrong questions asked about Denel group
Whenever I see an article about Denel such as Terry Crawford-Browne’s letter in Business Day on February 1 (Sound Denel the death knell) my hair stands on end. Having being appointed CEO of Denel in 2005 and now reading articles and opinions about the company’s status, I feel hugely disappointed that much of the great work we did to adjust perceptions and put the business on a solid financial footing has seemingly been destroyed.
I say “seemingly”, as the real picture is not entirely clear despite Crawford-Browne’s claim that Denel can pay employees only until March.
There is no single Denel, often referred to as if it’s one big business, so when everyone refers to “Denel not being able to pay its staff’s salaries”, it is fundamentally incorrect.
Some of Denel’s subsidiaries and associate companies are cash-positive and their thousands of staff are employed in highly successful businesses. “Denel” should qualify which staff, division or head office could face a salary payment crisis, for the sake of accuracy and to prevent sending out a confused and factually incorrect message.
Denel was restructured from 2005 as an investment holding company, with a lean central corporate office (from 200 down to 40 staff), an array of wholly owned subsidiaries (with some joint ventures) and a number of associate companies. This structure was created by unbundling essentially a single legal entity with numerous fragmented divisions, into 11 focused legal entities. This meant assessing where Denel could be globally competitive on its own (retain wholly owned companies) or where it would need to create international equity partnerships to build commercially viable businesses (associate companies).
In effect, these separate legal entities created their own boards, own balance sheets, managed their own cash and were relatively responsible for their own destiny. The impact of closing Denel would be catastrophic from a number of perspectives, even if the government had the money to do so. (In 2005, the cost of closing Denel down was estimated at R18bn.) Denel’s group of companies employs many thousands directly, feeds an industry of more than 50,000 employees and is the hub of arguably the most qualified engineers on the African continent.
Over time, as they develop their careers, these engineers are often successfully deployed in many other sectors in SA.
In May 2005, Denel posted an operating loss of about R1.6bn and was fraught with allegations of corruption, racism and poor governance.
The balance sheet had been radically eroded and Denel’s revenues had dropped to a record low of about R2.7bn, with an overhead structure and capacity capable of at least R15bn turnover.
The order book lacked acceptable quality and quantum, major contracts were not being delivered and some client countries had black-listed Denel for alleged corrupt activities.
The organisation was crippled by an inefficient centralised structure, overstaffing, management incompetence and a basic lack of commercial knowledge.
The local customer, the Department of Defence, was contributing less than 10% to Denel’s overall revenues, against a global benchmark of 60% to 75% for local industry support (Denel and the local industry also did not benefit appropriately from the multibillion-rand arms deals).
Even so, Denel’s engineering capability and some of its products — including artillery systems, missiles, fighter aircraft, munitions and other solutions — were regarded as technically way ahead of any global competitor.
The process of creating a hybrid state-owned defence group and investment holding group, with some wholly owned companies combined with a select element of privatisation, culminated in Denel and its group of companies moving from the R1.6bn loss to consolidated profits of hundreds of millions within five years, improving its order book to more than R35bn and becoming the foremost state-owned enterprise in corporate governance by 2011.
The impact of these changes was a major culture shift, with an apolitical bias supported by a strong and dynamic focus on commercial fundamentals.
In the period up to 2013-14, Denel’s image improved nationally and globally and the group’s balance sheet strengthened, placing no pressure on taxpayers or the state. The last state-funded capital injection of about R3.5bn was received in 2007. It was mainly the “privatised joint venture” associate companies — into which the international partners had pumped hundreds of millions in capital while contributing to revenue and efficiencies — that were showing world-class returns and growth, enabling Denel to create financial stability.
The issue is not that SA should “sound Denel the death knell”. But questions should be asked how a highly successful business restructuring, which led to a sustainable and respected global defence group of which SA could be proud, has since 2014-15 once again allegedly suffered the consequence of degradation, political meddling (VR Laser and the firing of competent senior executives), poor management decisions (Denel made some poor equity investments) and seemingly cash flow constraints in the centre.
Denel proved from 2005 to 2013-14 that it could be financially sustainable and independent, add great employment and be a centre of engineering excellence.
It is essential that the true status of Denel and other stateowned enterprises be made clear to ensure perceptions are managed productively. Denel is clearly failing in this regard.