Denel’s R30bn pipeline, ambitious or achieveable?

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JIMMY MOYAHA: Denel, the South African aerospace and military technology state-owned entity, believes it can turn its fortunes around if it can tap into its R30 billion ‘pipeline’.

Read: The deindustrialisation of SA

As it stands, the business reported a little over R1.4 billion of revenue in the previous financial year, despite revenue reported showing a R360 million loss for the [latest] financial year.

We are going to take a closer look at this pipeline and the plans that Denel may have here with independent defence and military expert, Kobus Marais.

Kobus joins me on the line now to see what we make of this. Kobus, lovely having you on the show, as always. Thanks so much for taking the time.

As somebody who has served within the government of South Africa, particularly in the portfolio of Defence and Military Veterans, let’s perhaps start with your view on where Denel sits as an institution now compared to similar types of institutions around the world.

KOBUS MARAIS: Well, obviously, when we look back in a bit of context, Denel was certainly the pride in the parcel of the government of South Africa.

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It has worked tremendously well, it has achieved, it has developed, it has built, it has been a market leader in the sector of defence, military hardware and equipment, as well as ammunition.

Since the government assumed power more than 30 years ago we know what has happened with Denel through the state capture days with the Guptas … and through that process, there was a huge amount of money that disappeared and hollowed out Denel.

So Denel is a shadow of what it was, and even less – compared to similar organisations and companies in the rest of the world.

In its day Denel was by far the market leader, and especially companies in the Middle East like Edge [UAE Defence & Technology Conglomerate] and other Saudi companies were basically learning from South Africa and buying from South Africa

But obviously since Denel has fallen from the skies, so to speak, they have let go many, many people – all those with the knowledge between the ears who knew how this works, all the IP [intellectual property] work – without having a process of making sure that all that knowledge stays behind and that other people can do the job.

So those people who have taken over the role of producing what Denel produced and manufactured are now the market leaders in all of these areas, and Denel sits as only a shadow.

Even with those skills that it still has, the potential that it still has – which is quite a lot – it’s not doing very much with it, to put it very, very, very mildly.

JIMMY MOYAHA: Well, Kobus, can we take a closer look at this R30 billion pipeline of opportunities that was mentioned by the Denel CEO? It was outlined that if this opportunity set were to be realised, it would have a significantly positive impact on Denel’s revenue and its future successes.

KOBUS MARAIS: One must remember that the R30 billion that they talk about as increase in revenue, most of that, if not all, comes from the performance of associated companies like Rheinmetall Denel Munition [RDM], Hensoldt and others.

That’s not self-generated revenue; that is absolutely reliant on how other companies are performing.

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I know that some, like RDM and its mother company, Rheinmetall, have been interested in parts of Denel in the past – and obviously Denel was not prepared to talk of anything like that in terms of partnerships and agreements.

So that ship has sailed, and that opportunity has been lost.

The R30 billion pipeline that they are talking about is nothing new. That has been there for years – and they always use this calculation of ‘the potential for business’.

How they calculate it is often questionable and, if you analyse all of these things, especially when you are in a committee situation with them, you will see that much of that is like a dream, it’s like a wish list, it’s like a hope that if this and this and this realise, then we can have R30 billion.

But that is no guarantee.

Some of that is not even in confirmed orders, because any company that places an order of that magnitude must have guarantees from government as the shareholder, or banks must provide the guarantees – or they must be able to issue promissory notes, in other words bonds.

Denel is in no position to get government guarantees; no bank wants to help them with guarantees and therefore they cannot issue any bonds either. Their position is just too weak.

They cannot issue proper financial statements and, if those are issued, it is with severe findings and things like that.

JIMMY MOYAHA: Oom Kobus, Denel’s historical value has always been around the intellectual property that it held and the advancements it held from a military perspective.

Is that still the case and, if that is the case, can that value be realised if we’re looking at the pipeline and we’re looking at the turnaround plan that’s in place here?

KOBUS MARAIS: Denel sits in a position where most of its real assets in the past were intellectual properties.

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But many of those intellectual properties are so outdated because there was no constant research and development taking place, no investment into future technologies and requirements staying at least 10 to 15 years ahead of current demand.

So, Denel, in my opinion, has few options other than to collaborate with companies locally and abroad in both public-private partnerships, in agreements in terms of licensing and intellectual property – things like that.

If they’re not doing that I don’t see a bright future for Denel. If this was a pure private company with similar financial statements and forecasts, it would have been closed down a long time ago.

What they can still provide is a shame. And remember within Denel there are certain divisions that really have potential, as separate business entities, to be self-sustainable.

I’m referring to Denel PMP [Pretoria Metal Pressings], which has been broken down, currently in Pretoria West.

The foundry cannot even use electricity because that has been cut off by the Tshwane municipality because of unpaid bills. Other facilities are the Denel Aeronautics and Dynamics.

So there are certain divisions that they should – I don’t want to use the word – sell off, where they would have to bring in partners.

Those could be equity partners, but I know that government doesn’t like equity partners. Those could be and should be equity partners, but also public-private partnerships and, as I said earlier, agreements in terms of licensing their IP and potentials.

JIMMY MOYAHA: A highly ambitious turnaround strategy set forward by Denel on how they intend to improve their business. Still, many questions remain around the feasibility of this turnaround strategy and its achievability. We’ll see how that unfolds going forward.

We’ll leave the conversation on that particular note. Independent defence and military expert, Kobus Marais, joined us to take a look at Denel’s R30 billion pipeline and whether or not that can be realised.

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