Mon séjour en Afrique du Sud (Cape Town)

Misfiring Denel seeks success in fast-changing defence landscape JUST over two years ago, Victor Moche, outgoing chief of state-owned defence group Denel, was sitting pretty. He had a challenging job at Telkom as head of regulatory affairs and public policy, which he was good at, and which he enjoyed.

Moche had helped steer the then phone monopoly through some difficult times, dealing with issues ranging from the introduction of competition in the phone market to concerns about the group's pricing policies. His position at Telkom required keeping regular contact with government and other parastatal officials, so he travelled extensively, often interacting with erstwhile comrades in the struggle. Moche is a soft-spoken man, but has a militant background as a veteran of Umkhonto weSizwe, the armed wing of the African National Congress.

Perhaps it was for this reason that government called on Moche to serve at Denel in May 2003. It apparently took all the persuasive powers of former public enterprises minister Jeff Radebe to get him to take the position. Even then, it was President Thabo Mbeki who clinched the deal, giving the final seal of approval to Moche, who he had known well while in exile.

Moche's reluctance to shift to Denel may also have reflected the turmoil at the armaments group at the time. The group's long-awaited partial privatisation had just been called off after government failed to reach agreement with preferred bidder BAE Systems. In addition, a political storm had erupted over the appointment of a new CEO amid objections about the process raised by then deputy CEO Max Sisulu. Sisulu had been the crown prince at Denel since November 1998, when he was redeployed from his position as ANC chief whip in the National Assembly. He was not happy at being passed over.

And further, Denel was financially unstable. It had moved into the red in 2001-02 with a loss on activities of R359m after briefly becoming profitable in the previous financial year. Times had changed for Denel since it was first set up in 1992. Internationally, it had to cope with a global economic downturn and shrinking defence expenditure. On the local front, Denel had been largely passed over by government in its arms-procurement deal. International products from Italy, Germany and others were favoured, sending a poor signal to Denel's potential global customers.

Nevertheless, Moche attacked the challenges at Denel with vigour, launching a cost-cutting exercise and adopting a zero-tolerance approach to fraud and corruption. All the group's contracts were reviewed, new business was sought in global markets and the sale of noncore businesses began. Inroads were made into the notoriously tightly held international market, but the decline of the South African National Defence Force's (SANDF's) budget hit hard. In 2003-04, revenue remained largely static and the net loss widened to R377,5m from R72,6m.

Given the state of the market and government's insistence that Denel remain a strategic state asset rather than taking on a global partner, it is difficult to see what Moche and the board could have done differently. Nevertheless, a new leader, Shaun Liebenberg, has been called in to try and rescue Denel. But is this possible? Further, should Denel continue to exist at all? The answer to both questions depends on what the shareholder - government - expects of Denel and to what extent it is prepared to support the group. The argument for retaining Denel is based on the need for states to have their own arms-research and development facility. With SA playing a greater peacekeeping role in Africa, Denel has a role to play in providing equipment to the SANDF.

But to do so, Denel needs a big capital injection, and steady orders from the SANDF. Even then, there is a strong chance Denel will not be profitable any time soon if it remains in its current form. The only real chance it has of moving back into the black is to become a lean and mean organisation, run along private-enterprise lines and capable of reacting swiftly to new demands and market changes. Its prospects would be significantly enhanced if it partnered with one of the big global conglomerates that have formed in the US and Europe.

It's a huge task for Liebenberg, but he seems to have the experience to deal with it. As head of technology group Grintek, he has dealt extensively with the global defence industry, and knows what is required. This will be invaluable, although he may have to work hard to convince some in government of the need to cut through the bureaucracy and transform Denel into a more nimble enterprise. The real question now is whether government will give him more space to succeed than Moche was afforded.