Denel Asia: Denel Board, National Treasury & Department of Public Enterprises briefing

Meeting report

Opening remarks
The Chairperson said that the Minister of Public Enterprises, Ms Lynne Brown, and the Minister of Finance, Mr Pravin Gordhan, had forwarded their apologies for not attending the meeting, as they had to attend a Cabinet meeting. The Committee had also been unable to get the previous board members of Denel to attend the meeting, although it had been insisting that they brief Members on the matter of Denel Asia.

Ms N Mazzone (DA) said that the Committee had requested a meeting with Denel, and this had been followed by the meeting which had taken place on 11 May 2016. Agreement had been reached that the matter of Denel Asia was an issue of national importance, so it had been decided that there should be a joint meeting with the Select Committee on Public Enterprises and Communications. The Committee had also requested that National Treasury (NT), Denel, the previous boards members and the relevant ministers should be present at the joint meeting, as this was to publicly and transparently clear out all the outstanding issues or scandals in regard to VR Laser Asia. It would be a complete waste of time for Denel to come to make a presentation at this meeting if Treasury or all the relevant ministers were absent, as the very reason for this meeting was to get to the truth on all the accusations involving the Treasury, the Ministry, Denel and the previous board members.

Ms Mazonne proposed that the National Treasury and the relevant ministers should be present in the meeting, and an invitation to the meeting should also be extended to the Standing and Select Committees on Finance. A commission should be granted for the previous board members to be present. Denel should be allowed to make a presentation, but the Committee should hold over the meeting that dealt with Denel Asia deal until a suitable time when all the relevant people could be present.

Ms D Rantho (ANC) said that the Committee had invited the Treasury and the Minister to the meeting, but the response had been the Minister was not in the country at the moment. It would be important for the Committee to perhaps reschedule the meeting with the Minister to a Tuesday, as Wednesdays were assigned for Cabinet meetings. The meeting for today should go ahead as scheduled, as the Committee could still schedule a meeting with all the relevant people present.      

Dr Z Luyenge (ANC) supported the proposal for the Committee to consider shifting its normal Wednesday meeting to either a Tuesday or Thursday so as to be able to meet with the relevant ministers. The Committee should also be cost-effective in trying to deal with the issue of the Denel Asia deal by inviting all the relevant people on the same day.

Ms L Mathys (EFF, Gauteng) commented that it would be completely unproductive for the Committee to continue with the meeting while all the relevant stakeholders were not present at the meeting. The previous board members should be compelled to be part of the meeting, as this was a matter of public interest and it had been going on for ages. The Committee should rather get a date when all the relevant stakeholder could be present.

Mr J Julius (DA, Gauteng) added that it would indeed be pointless for the Committee to listen to only one side of the story without hearing the other. Members were given a responsibility of performing oversight over the Executive, and a continuation of the meeting today would essentially be undermining that responsibility.

Co-chairperson Letsatsi-Duba also supported the proposal for the Committee to perhaps shift its normal Wednesday meeting to either a Tuesday or Thursday so as to be able to meet with the relevant ministers. However, she rejected the proposal of Ms Mazzone for the Committee to hold over on the matter of the Denel Asia deal, as the Denel board was already present in meeting.

Ms C Labuschagne (DA, Western Cape) indicated that it would be pointless for the Committee to listen only to the Denel presentation without having all the relevant people in the meeting. It must be made patently clear that the role of Members of Parliament was to conduct a proper oversight.

Ms Letsatsi-Duba said that the suggested cancellation of the meeting would result in fruitless expenditure for the Committee.

Ms E Mlambo (ANC, Gauteng) proposed that the Committee should listen to the presentation of Denel, and then reorganise a meeting with all the relevant stakeholders to handle the matter of the Denel Asia deal.

Ms Mazzone said that Denel had already briefed the Committee and explained its side of the story regarding the Denel Asia deal. The reason the Committee had requested a joint meeting was to hear from National Treasury, the ministry and the Department of Public Enterprises, so that Members could be afforded an opportunity to hear all sides of the story.

Ms Mlambo responded that the Select Committee on Communications and Public Enterprise had not been present at the previous meeting with Denel, and therefore this needed to be taken into consideration.

Ms Mazzone added that the Committee could be not blamed for what the Chairperson labelled as “wasteful and fruitless expenditure” if the meeting was to be cancelled. Members had not had any involvement in the organisation of this meeting, and everyone had expected to find all the relevant people present, as had been decided at the meeting that took place on 11 May. It was completely unacceptable for Members to be taken for granted by being subjected to the same presentation that had been made by Denel on 11 May. The DA refused to be caught up in a same vicious cycle where pertinent questions would not be answered in regard to the Denel Asia deal. It was clear that the Committee was now employing what could be considered a “farcical approach” in sorting out all the scandals that were related to the Denel Asia deal. The meeting should be adjourned until an appropriate date where the relevant stakeholders would be present.    

Mr R Tseli (ANC) agreed that the matters surrounding the Denel Asia deal were the issues of national importance, and there had been an agreement that Members should hear all sides of the story. It would be wrong for some Members to block the presentation and deny an opportunity to those Members who were interested in hearing the presentation. The Chairperson should allow those Members who were not interested in listening to the presentation by Denel to leave the meeting. It was quite clear that the presentation by Denel today was not exactly the same as the one that had been presented to the Committee in May.

Ms Rantho commented that the meeting should go ahead, as Members could be given an opportunity to also hear about the recent activities that had taken place within Denel.

Ms Letsatsi-Duba expressed shock at what she referred to as the “repugnant behaviour” of Members, as they were shouting and screaming at each other. She proposed that the secretary should call security to remove those Members who were behaving in an unruly manner.

Dr Luyenge suggested that Members should be responsible enough to respect the decorum of the House. It would be proper and responsible for the Chairpersons to request those Members that were hurling insults at each other should be afforded an opportunity to apologise and recant those insults.

Ms T Stander (DA) supported the suggestion that the meeting should be cancelled, as the presentation that was to be presented by Denel was similar to the one that had been presented to the Committee on 11 May. It was a failure of Parliament for not having ensured that all the relevant stakeholders were present in the meeting. The Committee would not be able to get to the truth and depth of the matter of Denel Asia deal without having all the relevant parties.

Ms Letsatsi-Duba proposed that the Denel should go ahead with its presentation for the benefit of the Select Committee Members present at the meeting.

Ms C Labuschagne (DA, Western Cape) expressed disappointment that both Chairpersons had decided to even schedule the meeting, despite knowing that the ministry, National Treasury and the previous board members of Denel would not be present.

Dr Luyenge insisted that those Members who had been misbehaving in the meeting should be ejected from the House, as per the rules of Parliament.

Mr J Parkies (ANC, Free State) wanted to make it clear it would be unacceptable for some Members to undermine other Members of Parliament by suggesting the cancellation of the meeting. The responsibility of Members was to play an oversight role. There had been written apologies from the Ministers of Finance and Public Enterprises. There was a lack of cogent reasons for the postponement of the meeting.
 
Ms Letsatsi-Duba ruled that the meeting should go ahead as planned, as the Committee would still schedule a meeting to meet with all the relevant stakeholders.

Ms Mazzone rose on a point of order, and indicated that the ruling that had been made by Ms Letsatsi-Duba had not taken into consideration any of the suggestions she had made in regard to how to proceed with the meeting. It was clear that the apology from the Minister of Finance had arrived at the desk of the Chairperson on 2 September, and this could have given the secretariat of the Committee ample time to reschedule the meeting. The DA from both the National Assembly and National Council of Provinces (NCOP) would not be present at the meeting, as it was a further cover-up for some of the things that were highly irregular. The Denel Asia deal was a matter of national importance and it was clear that it was not being taken seriously. The DA would not be part of anything that contradicted the role of oversight for Members of Parliament. It must be placed very clearly on Hansard that the DA would be leaving the meeting.

Ms Mathys also said that the EFF from the NA and NCOP would not be part of the meeting, as it would not be part of a meeting that was aimed at steamrolling and covering up the resources of State-Owned Enterprises (SOEs).  

Briefing by Denel
Mr Mogokare Seleke, Director-General (DG): Department of Public Enterprises(DPE)  introduced the board members present and proceeded to give a breakdown of the operational structure of the Denel company.

Mr Daniel Mantsha, Chairperson: Denel, said that Denel had been the focus of intense media reporting in recent weeks. The main topics had been the formation of a joint venture to establish Denel Asia with VR Laser Asia, and the suspension of employees. As part of the strategy to create a financially self-sustainable defence business, Denel was expanding into the export market. This was particularly important in order to fulfil its role of supporting the Department of Defence, especially during phases when there were limited contracts from its partners.

In the 2015/16 financial year, export sales had accounted for 52% of total turnover. This 52% was largely from the Middle East, Asia Pacific, Europe and South America. The Middle East remained the biggest and most important market. Denel had seen remarkable growth in its Asian-Pacific market, which remained very important. To achieve such global penetration, markets required not merely transactional supplies, but transfer of know-how through joint venture models.

The strategic partners were selected through due diligence, and these partnerships had
yielded very positive results for Denel. One such partnership was the Tawazun partnership in the United Arab Emirates (UAE), which had produced over R52 million sales and orders worth over R2 billion through the marketing strategies of Denel. The process of selecting strategic partners was largely driven by market intelligence and trusted relationships already existing, and this process was not a procurement process. Players which met Denel’s value systems and criteria were selected. For the Tawazun partnership in the UAE, no public advertisements had been placed. With the Denel Asia joint venture, four partners had been approached because of the geographical spread, and the best partner had been selected.

Mr Odwa Mhlwana, Chief Financial Officer: Denel Vehicle systems, referred to the ownership of VR Laser South Africa, and said that contrary to media reports, Mr Rajesh Gupta owned only 25.1% of the equity shares, which made him a minority shareholder. The majority of the shares were owned by Mr Salim Essa, who owned Elgasove (Pty) Ltd. Aerohaven Trading (Pty) Ltd, owned by Ms Ragauan owned 10% of the shares. He debunked media reports which stated that VR Laser was getting R10 billion from the Badger Vehicle Project. The total amount which would accrue to VR Laser from that project was R400 million. According to Mr Mhlwana, VR Laser was the cheapest and technically strongest partner available for that project.

VR Laser Asia had been incorporated on 20 June 2014 as a private company in Hong Kong. This business was strongly related to VR Laser South Africa, and this was one of the reasons for going into partnership with it. VR Laser Asia would be funding the operations and business development activities of the joint venture. This was a key agreement in the joint venture, similar to how the Tawazun joint venture had been structured, with Denel providing its product technology through a manufacturing licence.

The rationale for the joint venture with VR Laser Asia was because the Asian market, especially India, was the fastest growing defence market in the world. Denel had been out of the Indian market for over ten years due to a black-listing, and this had been lifted in 2015 following a thorough investigation that had cleared Denel of any wrong-doing up until the black-listing. Denel had spent in excess of R500m on business development activities in India. VR Laser Asia, as a potential partner, had offered to contribute R100m to support business development activities and operations of the joint venture, to provide market and industry knowledge, and steel cutting and fabrication intellectual property (IP).

On the legality of the partnership with VR Laser Asia, Mr Mhlwana said permission had been requested by Mr Riaz Saloojee, the previous CEO of Denel, during the first meeting of the current board and authorisation had been given to him to pursue the formation of Denel Asia and to find a strategic partner. On 29 October 2015, a pre-notification submission had been submitted to both the National Treasury and Department of Public Enterprises. On 23 November 2015, the Department of Public Enterprises had approved the pre-notification, with certain conditions attached. On 11 December, all the conditions mentioned by Department of Public Enterprises had been met and a formal application was submitted to both the Department and National Treasury. Denel insisted that it had a right to read National Treasury’s failure to respond to notifications of intent, as tacit approval for the deal.

Mr Mantsha said: “If you do not receive any response from the shareholder department. you may deem that the approval has been granted after the expiry of 30 days”. Those 30 days had expired on 12 January 2016. Denel Asia had been established on 29 January, and by that date, it was important to note, Denel had still not heard anything, neither from the shareholder department nor from National Treasury. On 5 February, a letter was received by Denel from National Treasury asking for more information, but by then Denel Asia had already been incorporated. Despite the misunderstandings, Denel executives were still engaging with National Treasury through Department of Public Enterprises to clarify Denel’s legal compliance in establishing Denel Asia.

Mr Mantsha talked about the suspensions of the former Group CEO, the Group CFO and the Group Company Secretary, who had been suspended with effect from 23 September 2015. The cause of the suspension was a result of the Land Systems South Africa (LSSA) transaction which had compromised the liquidity of Denel. They had borrowed from two financial institutions and played them against each other, ignoring the instructions of the shareholder. They had renegotiated the terms of the funds borrowed, without the approval of the Denel board. R455 million had been borrowed from Nedbank with an agreement that the loan would be repaid within a five year period, but these executives had ignored the shareholder and renegotiated this loan to be paid back within six months, placing Denel in a precarious financial position, compromising its liquidity. Denel was proceeding with disciplinary action against two of the officials, and the proceedings had already commenced. The Denel board had decided not to recommend to the Minister the renewal of the former CEO’s contract of employment, which would expire on 31 January 2017.

Mr Manthsa wanted to make it very clear that National Treasury and the Department of Public Enterprises had been informed of the intended deal as early as October 2015. The parties that were involved knew the matter was urgent and in subsequent meetings, there had been no objections. Denel had decided to go ahead with the deal on 29 January 2016, as it had not had ‘a single communication’ from National Treasury about the intended deal. At that point, it had been 47 days since the formal application to have the deal authorised, and 91 days from the initial submission. However, there had been no comment and there had been no one who was willing to give the Department time and information.

National Treasury had objected to Denel’s deal with VR Laser Asia, arguing it was in contravention of the Public Finance Management Act (PFMA). Legislation required state-owned companies (SOCs) to hand in a section 54 applications if they wanted to enter into a joint venture, which Denel had not done. There was nothing wrong with the process Denel had followed. Denel’s shareholder, the Ministry of Public Enterprises, had come to the same conclusion. He insisted that the process of finding a business partner, as was the case with VR Laser Asia, was not the same as a procurement process, which was subject to the PFMA.

It had to be emphasised that the Gupta family did not hold shares in the joint venture. The rumours that the Guptas were shareholders in Denel Asia were false. Not one of them was a shareholder. It was not true that Denel had been ‘captured’ by the Guptas. However, Mr Mantsha did not deny that Mr Salim Essa, a business partner of the Guptas, was the sole shareholder of VR Laser India and the majority shareholder of VR Laser South Africa. 


Discussion
Ms Prins welcomed the presentation that had been made by Denel, as it had been informative and covered a number of issues. It would be important for the Committee to be provided with a list of companies that Denel was doing business with. It was good that the Chairperson had decided that the meeting should go ahead as planned as this had provided Members of the Select Committee on Communications and Public Enterprises an opportunity to be updated on what was happening in regard to the Denel Asia deal.

Mr Tseli firstly wanted to apologise for the behaviour that had been displayed by Members in the meeting, as this showed a complete disregard for the decorum of the House. The behaviour that was displayed by some Members needed to be condemned in the strongest form, as it was highly unacceptable and the secretary of the Committee should ensure that this type of behaviour was on record. The information that had been provided today had been helpful in the sense that it had assisted Members to be able to be on the same level of information with Denel, the Department of Public Enterprise and National Treasury. The Committee should be briefed on the cost-benefit analysis that had been set by the Department in the Denel Asia deal. It would be interesting to also hear about the four potential partners that Denel had approached for the establishment of the Denel Asia venture in conjunction with the VR Laser Asia deal, and the response of the potential partners in the process of interaction.

Mr Parkies said that the Committee should reject any attempt that was aimed at tarnishing the image of Parliament. The issue of Denel Asia was indeed a matter of public interest, but also a sensitive matter. It was unclear if there was any specific reason why the Department had not gone into detail in explaining all the processes that had been followed in the establishment of Denel Asia in conjunction with VR Laser Asia. He requested more information on the people who had been involved in the Denel Asia deal, as this had not been clearly explained in the presentation. What was the contract duration that Denel had signed with VR Laser Asia? It would be important for the Committee to have clearly explained whether the decision to make a deal with VR Laser Asia had been based on a recommendation from the United Nations (UN) or the scientific assessment that had been done by Denel.

Mr Parkies asked if any progress had been made with regard to the suspended officials in the organisation. It seemed like Denel was under some sort of pressure to make an urgent decision to conclude the deal with VR Laser Asia, despite the fact that the Treasury had issued a public statement warning Denel directors that they could face charges of financial misconduct under the Public Finance Management Act (PFMA) if it was found that they had formed the venture without permission from the Minister of Finance.

Dr Luyenge said it would be interesting to hear if the Department was satisfied with the due diligence assessment that had been undertaken in the Denel Asia deal. He asked if Denel and the Department had been warned of the consequences of doing business with VR Laser Asia. The Committee should be provided with detailed information in regard to the likely consequences for the termination of the contract with VR Laser Asia, including the costs that were likely to be incurred.  

Mr E Mlambo (ANC, Gauteng) sought clarity on the particular shareholder ministries that Denel had engaged with in the process of doing business with VR Laser Asia. It would be important to hear if Denel had applied to the National Conventional Arms Control Committee (NCACC) for the conclusion of all the deals, as this was required by the law.

Mr O Sefako (ANC, North West) appreciated the presentation that had been delivered, as it had provided clarity on a number of issues. It would be imperative for the Committee to hear if Denel had ever been blacklisted, and the damage of that blacklisting to the company. It is quite clear that the relationship between Denel and National Treasury was cordial, as there had been engagements between the stakeholders. However, it was unclear as to why there had been delays in the conclusion of the deal with VR Laser Asia.

Ms Rantho expressed concern that Denel had not followed some of the conditions that had been set by the Minister of Finance on the establishment of the Denel Asia in conjunction with VR Laser Asia. It seemed like a response from the National Treasury had been regarded as a priority, more than the conditions that had been set by National Treasury for Denel to go ahead with the deal. The Department should also have involved the ministers of both countries involved in the deal, as this would have ensured that there was coordination and synchronisation between the two countries in regard to the Denel Asia deal.

Ms Prins also asked about the possible consequences to Denel as an organisation if the Denel Asia deal did not go forward.    

Mr Seleke responded that the Department had learned some lessons in the handling of contracts, and this would help when the Department was conducting business in the future. There was an expectation that Denel would operate like any other private sector company, despite the fact that there was fierce competition out there in the market. The Department had signed performance contracts with the board and set targets for meeting certain profit levels and the performance rate that the company was supposed to achieve going forward. The board was already operating in a very restrictive legislative environment, and this was becoming a disabler to a certain extent. The Department was fully aware that the decisions that were being taken had a direct bearing on the company. It had to be made clear that the conditions for the conclusion of the Denel Asia deal had all been met, and the Minister of Public Enterprises was also satisfied that all the required submissions had been made by Denel.   

Mr Seleke added that VR Laser Asia had met all the requirements, and the Minister of Public Enterprises had also regularised the deemed approval for the deal. It was safe to say that the matter of the Denel Asia deal was closed from the side of the Department. The Department would now focus on the realignment of all the processes for the conclusion of any particular deal, so as to prevent the recurrence of this problem. It would be ideal if Members could rely more on the official information that had been submitted by the Department than the one that was in the public space, so as to prevent the situation where the officials would be accounting for something which could easily have been managed. The Minister of Public Enterprise had already indicated that there would be a need to have a meeting with Treasury and the Minister of Finance in order to resolve the issue of the Denel Asia deal. It has been nearly a year since Denel had submitted an application for approval for the deal to the Department of Public Enterprises and the Treasury and, while the Department of Public Enterprise had already given the green light, the Treasury had not, citing reservations. Until the reservations were resolved, the operation of the joint venture remained frozen by the Department.

Mr Seleke said it was patently clear, from reading the media, that State-Owned Companies (SOCs) were blamed for non-performance, and there was also a strong view that these SOCs should be privatised. This might lead to a situation where SOCs would face a reputational risk and eventually end up being privatised, and this was probably not the position in which the state would look to find itself. The board members of Denel would explain to the Committee why it had taken a deemed approval as a provision allowable for themselves.

Mr Zwelakhe Ntshepe, Acting Chief Executive Officer: Denel, said that Denel had approached more than four potential partners before settling on a deal with the controversial Gupta-linked company VR Laser as a partner for a joint venture to penetrate the Asian market. He had been with Denel for 21 years and this experience was probably one of the reasons why the Board had decided to choose him for the position of Acting CEO. The contract duration with VR Laser Asia was about ten years, with the aim of producing about 264 military vehicles. The urgency of the Board in concluding and accepting deemed approval was because of limited time, and Denel had already missed out on other opportunities because of this limitation. Denel had approached the NCACC, as this was required by law, and it was aware of the operation of joint venture.

Mr Ntshepe said that Denel had been thrown out of the market before. This had happened in India in 2004, and Denel had been making about R2 billion a year from India. Denel was particularly focused on India, because “things are moving to India at a very fast speed”. It must be made clear that this was the first time that Denel had formed a joint venture with any company.

Mr Mhlwana said that the major criterion in the partner selection was to avoid or minimise financial and reputational risk. The partner would have to bring money to the table, Denel would have to have control over the company, and the chosen partner would have to have suitable relationships with players in the market.

There was a need for both Denel and Members to find each other in regard to the nature of business in which the company was operating under. Members needed to understand that Denel was a SOC, and this was the same company that was supposed to help the country to get rid of problems of unemployment and to promote skills training. Denel could only perform better if there was a mutual understanding of the environment in which Denel was operating. There should be a plan in place in how the company would move ahead in terms of conducting business out there. Denel was involved in a highly competitive market and delays such as with the Treasury’s consideration of its joint venture with VR Laser Asia put state-owned companies at a disadvantage.

Ms Prins said it was quite clear that there was nothing close to a scandal in the Denel Asia deal, as the deal was aimed mainly at promoting the interests of the country. There were many achievements that had been recorded by Denel without listening to the negativity that was aimed at promoting a certain agenda.

The meeting was adjourned.