South Africa’s official opposition Democratic Alliance says it will oppose arms-manufacturing parastatal Denel’s request for a R5-billion lifeline, should the matter come before Parliament.
In a statement on Wednesday following Tuesday’s address to the National Assembly public enterprises committee by Denel CEO Shaun Liebenberg — during which it emerged that a lifeline is being sought from the government — DA spokesperson Pierre Rabie said: “The path to profitability for Denel lies in radical restructuring, selling off of non-core assets and part-privatisation.
“Unless the minister of public enterprises and management at Denel address the situation, the bloated parastatal risks becoming a permanent drain on the fiscus.”
He noted that Liebenberg said on Tuesday that the parastatal may have lost as much as R1,6-billion during the financial year ending March 2005.
“This loss — a loss to the taxpayer — is quite simply unacceptable. It was also revealed that the arms manufacturer may lose as much as R700-million during this present [2005/06] financial year.”
Rabie said the current situation is unsustainable.
“We harm the economy by locking up skills in an unviable business model and we destroy jobs elsewhere in the economy by unnecessarily raising taxes.
“The DA offers its full support to Mr Liebenberg, who was appointed in April this year, in his efforts to return the company to a profitable state. We call on him to address the allegations of international misconduct, by agents or employees of the parastatal itself, in a spirit of transparency and openness.”
Revision of loss
On Tuesday, Liebenberg told parliamentarians Denel is scheduled to revise its pre-tax loss for the 2004/05 financial year to R1,6-billion, about three times the R500-million originally forecast.
He also divulged that a R700-million loss for the arms parastatal for the current financial year ending in March 2006 is provisionally projected. Included in this figure for 2004/05 were “exceptional costs” of more than R600-million.
Liebenberg said the final figures are scheduled to be released in November this year after the new management and audit team has carried out investigations.
The figures he presented on Tuesday were not the final figures and had not been signed off by the auditors, but he had been given permission “to reflect” some figures to MPs.
He said that included in the exceptional losses were various impairments of investments in associated companies, impairment of plant, equipment and property and impairment of inventories.
Labour disputes and retrenchments amounted to R50-million in the past financial year. Financial instrument adjustments cost R37-million and certain performance-guarantee provisions called back by India cost R64-million.
Legal costs amounted to R25-million and pension-fund costs amounted to R54-million in exceptional costs, he said.
Liebenberg said it is “clearly not acceptable” that the projected figures of projected losses had first been put at R500-million and had then risen to R850-million — and now to R1,6-billion.
“We need to know where we stand … and have integrity in our figures,” said the CEO, who was appointed on the recommendation of Minister of Public Enterprises Alec Erwin.
Turnaround strategy
Liebenberg was frank that Denel “may have to exit certain business units if it did not secure contracts within the next six to 12 months”. However, he said, as part of his macro-strategy, he has set up a change-management project office to support him in the process of implementation of a turnaround strategy.
He acknowledged that Denel is facing “a funding crisis” going forward and there is “significant risk associated with the current financial projections”.
He warned further that Denel is “not viable under the current model”. Compared with its international competitors, it should have a staff of about 3 500 people, but instead it has 10 000.
He said Denel has had a declining share of the local market — despite an upturn in spending — and the road forward will focus on seeking equity business partnerships “with major global players” and restructuring the business, which is too broad-ranging at present, on “complementary capabilities” and niche markets.
“To succeed, Denel should pursue a strategy based on prime contracting in the domestic market and the export of systems and components through selective equity partnerships and alliances with global prime contractors,” he said.
Denel has to achieve privileged access to a guaranteed minimum proportion of South Africa’s defence development and procurement spend, he said. It also has to partner with state agencies to underpin export marketing responsibilities. — I-Net Bridge