Denel Asia; Denel CEO & CFO disciplinary action: update, with Deputy Minister

Meeting report

The Chairperson welcomed the Members, the Denel delegation, the media and the Deputy Minister, Mr Ben Martins. She said that Minister Lynne Brown would not be present as she was in a Cabinet meeting.

Reason for absence of National Treasury
Mr N Singh (IFP) asked, in light of the two items on the agenda, who had been invited to the meeting. He said there were glaring absentees. Treasury played a major role regarding the matters to be discussed, so had Treasury been invited to the meeting? Secondly, the last time the Committee had requested that the entire board of Denel be present, so he asked Denel to introduce who was present and who was not before they took the matter further.

Ms N Mazzone (DA) supported Mr Singh, and reminded Members of a time when opposition parties refused to take part in the 7 September meeting with Denel because once again they had asked for a joint meeting with Treasury, and once again they had not been available. She was glad that the Deputy Minister was present and that he could witness at first-hand what they had to deal with. The Deputy Minister could report back to the Minister that the Committee had a constitutional mandate and it was difficult to execute when one of the pieces of the puzzle -- a big piece -- was still missing. It was important that Treasury be present, otherwise what was going to take place at the meeting was that Denel was going to paint Treasury as the “big bad wolf”, and Treasury was not here to defend itself.

The Chairperson clarified that the Committee had invited the Department of Public Enterprises (DPE) and the board of Denel, but had not invited Treasury because they first wanted to hear what the developments were at Denel, and would then have a meeting with Denel and Treasury in the same room.

Dr Z Luyenge (ANC) said he was in agreement with the notion that that the meeting should have been extended to include Treasury. While this particular meeting served the purpose of hearing about developments at Denel, the Committee had stated before that they must call a joint meeting with Treasury and Denel, because Treasury was the common denominator.

Mr Singh said he was disappointed that Treasury was not present, adding that the meeting would be a half-weighted exercise.

Ms Mazzone said that she had requested that Treasury should be present at the meeting. In the Denel briefing documents they had received, she had thought they would be getting an update on the investigation of former Denel executives, yet the documents stated that “the matter was still under investigation and caution was to be exercised not to prejudice the parties involved prior to the conclusion of the disciplinary process”. If the board could not tell the Committee about the disciplinary process, then why did they bother coming all the way to Cape Town?

The Chairperson said that if Ms Mazzone had written to the secretary or the Chairperson about having Treasury present, she had not received that notice. The Committee had room the following week to accommodate Treasury. She had received the suggestions to invite Treasury only the day before, so it had already been too late to invite them, but they could invite them for the following week’s meeting.

She invited the Members’ guidance on how to proceed -- should they call the meeting off and have it the following week? Everything had been set up, and Denel was already present, so what should happen?

Mr M Gungubele (ANC) appealed to the Committee to avoid fruitless expenditure on the part of Denel. The Committee should listen to Denel and engage with them on what they had to update the Committee.

Mr R Tseli (ANC) agreed with Mr Gungubele -- that they should proceed with the meeting as planned. They could not postpone the meeting.

Mr P Gordhan (ANC) agreed with Members that they should proceed with the meeting as planned.

Mr Singh said that the invitation for that meeting had been extended to the whole board of Denel, and he asked for an explanation why the whole board was not present.

The Chairperson said that they had invited the whole Denel board, but she had received apologies from some of the board members. At the next meeting, it was expected that all board members, all executives, Treasury and all Committee Members, should be present, and she would not be accepting any apologies.

Mr Singh stated that seeing the board chairperson present at the meeting, was the one who had written the apology on behalf of the board members who were absent, he should explain their absence.

The Members of the Committee, the delegation, and the media personnel all introduced themselves.

Ms Mazzone, on a point of order, said that there were members of the press who were making rude comments about the Committee.

The Chairperson responded that she had not been aware of that, and invited everyone present at the meeting to continue to introduce themselves.

Denel Chairperson’s overview
Mr Daniel Mantsha, Denel Board Chairperson, said that the entity had always attended meetings at the invitation of the Committee. The absence of some board members was because they were busy with a strategy session. Denel welcomed the opportunity to discuss the matters that they had discussed with the Committee on more than six occasions already.

He wanted to put it on record that Denel served the Republic of South Africa, and they did so with pride, dignity and commitment. He wanted to place that on record because it appeared that one Member of the Committee did not seem to understand this fact.

The Chairperson interrupted, and said that Mr Mantsha had started on the wrong note. He could not state that the information that he was presenting at the meeting was the same information he had presented to the Committee six times before. He could not cast aspersions on Members, because if he said that he had been giving the Committee the same information six times before, then it implied that Members of the Committee were brainless. He could not speak to Members of Parliament, who have been sworn in under oath, in that manner. If he pushed the Committee that far, they would not listen to what was being said. She asked him to apologise profusely to the Members, and invited Members to raise their concerns.

Ms Mazzone said that Mr Mantsha represented South Africa because he was employed, but she represented South Africa because she had been voted in, therefore he was not the voice of South Africans. He was required to account to her and he was in front of a Portfolio Committee and therefore it was her job, according to the Constitution of South Africa, to hold him to account. There was not just one Member of the Committee that seemed to disagree with him -- they all disagreed with him. It was not one person in Parliament who thought something was amiss; it was all of them, which was why Denel had been called again and again. He must not underestimate the intelligence of the Committee, the intelligence of Parliament and most importantly, the intelligence of South Africa.

Mr Singh agreed with the Chairperson that it was unfortunate that the Denel Chairperson had started on that note. As Ms Mazzone had stated, they were elected by the people of South Africa, they had a responsibility to the Constitution and they had the responsibility of oversight of any state department and state owned enterprise. He also asked the Deputy Minister to advise whether all the board members needed to be present for the next meeting. He added that the Committee could call Denel even 50 times if they were not satisfied with the answers. It may be members of the board or executives that were serving their personal interests, but the Committee would dig. The whole idea of state capture had been highlighted in a report, and they needed to know that there was no state capture at Denel.

Deputy Minister Martins said that if board members were asked to attend meetings at Parliament, they needed to attend. It was important that members of boards of SOEs took Parliament seriously. It was not a special favour to Members of Parliament, as they had an oversight responsibility. Therefore it was important that board members of entities had an appreciation of the parliamentary process. With regard to the opening remarks made by the Denel Chairperson, he said that Members of Parliament had the right to seek and find answers on the basis of the presentation.

The Chairperson said that Members of the Portfolio Committee on Public Enterprises did not see themselves as political parties, but saw themselves as a family. Whatever comment was made, there was no need to individualise it -- it was said to the whole Committee. She invited the Denel Chairperson to give Members a briefing on the update.

Mr Mantsha apologised for the misunderstanding. When he indicated the number of times that they had been there, he had not intended to convey that Members of Parliament had been misunderstanding Denel. He wanted to convey that Denel always attended at the request of the Committee. It had been a misunderstanding of his statement, as Denel had no reason to impugn the integrity of Members, He understood that they had a responsibility to account to Members and that Members represented constituents. He was merely emphasising that Denel had always taken their attendance seriously, and he profoundly apologised for any misunderstanding.

He said Denel had appeared in September 2016 and made an undertaking before the Committee, as per the instructions of the Minister and the Denel board, and as per the request of the Committee, that the entity called Denel Asia should not trade until such time as all the matters between Denel and National Treasury had been resolved. They would take the Committee through the various presentations made on the issue. As they spoke, Denel Asia was not trading and would not trade until all the related matters were cleared.

Secondly, there was a press statement in some newspapers, claiming that Denel Asia was going to trade irrespectively. This was fake news, and he wanted to put it on record that this was not a statement from Denel.

Thirdly, the litigation which Denel had brought against the National Treasury was specifically meant to obtain a clear interpretation of the law. Their understanding of the law was what they would present. The only honourable thing to do had been to ask the courts to interpret those conditions, which was precisely why the matter had been brought to the attention of the board.

Fourthly, there had been a lot of media speculation which had impugned the integrity of board members and the executive of Denel. The Denel board had taken a decision to have an independent, impartial judiciary where the processes would be fair and reasonable. That had been done because the board members and executives of Denel kept on being maligned and impugned by all sorts of speculation, which some Members of the Committee had been asking about. Those were the matters that he wanted to put upfront.

In terms of the executives, those matters had been closed, and the presentation would include how they had been closed. He repeated that through the Director-General of the Department of Public Enterprises (DPE) and the Minister, Denel had pursued a process to settle the misunderstanding with National Treasury, and to have a discussion on those matters.

What Mr Singh had said about a meeting between the Denel Chairperson and the Minister of Finance, he could confirm that such a meeting had taken place. The Minister of Finance had obviously been concerned about what had been going on, and had wanted to hear what had transpired since the inception of the matter, and what the current situation was. He confirmed that the company was not trading, and the reason the company was not trading was because the Minister, the board and Parliament had instructed it not to.

Engagement between Denel and the National Treasury was currently under way. The Minister of Public Enterprises, Denel executive and the Director-General were in contact with National Treasury. He could assure the Committee that the matter would be resolved in the interests of both Denel and Treasury.

Denel CEO & CFO disciplinary action & Denel Asia: Group Chief Financial Officer briefing
Mr Odwa Mhlwana, Group Chief Financial Officer (GCFO): Denel, said he would give a background to the position of Denel which had necessitated the discussion of that day.

Denel had remained an asset of South Africa that provided military equipment in support of the endeavours of the Department of Defence (DOD) in terms of securing sovereignty. However, for them to successfully deliver on that objective, it was absolutely important, in order to save themselves from dependence on the strained fiscus of South Africa, that they had to find their way into the international market to prove their competitiveness and to secure the capability that was required of the South African National Defence Force (SANDF). This meant the export market was critical to Denel, and therefore that was the premise on which this type of structure found a basis.

None of Denel’s endeavours in the export market involved a direct trade with governments, and all of them relied on partnerships to exploit opportunities. They had utilised different mechanisms to exploit opportunities. One mechanism was a marketing activity in which they got assistance from a partner residing in an export country, which had a clear understanding of the culture of the environment and provided them with the necessary intelligence to better position themselves.

The second model was a distribution model. A partner in an export market primes the opportunity, in other words, contracts the opportunity, and then sub-contracts to Denel in South Africa. In that particular environment, there was no transfer of any capability; it was merely a sub-contracting contract.

The third model was where an export market asked them to supply, but were not interested in creating an offshore supply without creating a capability in their own country. They wanted a transfer of capability to create a capacity within their own shores. This was a market issue that stated terms to suppliers in the environment. In response to this requirement, Denel would embrace it to take a foothold while its competitors figured out how to move forward.

Therefore, Denel’s approach was that in the market, they would go in and identify a suitable partner and with that partner they would transfer the necessary expertise into that market as part of the value proposition. They had had a couple of these dealings, and he would discuss them at a later stage. That was where the Denel Asia matter was.

What Denel had tried to articulate over time was that the process of procurement, as governed by legislation such as the Public Finance Management Act (PFMA), was different to what they used to get to a particular strategic partner. Therefore he would like to create a clear distinction between those processes. The process of identifying a strategic partner was not a procurement process.

Mr Singh interrupted on a point of clarity and said that it seemed that the GCFO was talking to the second agenda item, as the first item was regarding the disciplinary action of the executive.

The Chairperson acknowledged that she heard Mr Singh’s point, but advised that Denel should continue.

Mr Mhlwana said that what he was discussing was a precursor to the presentation.

Continuing, he said that in the spectrum of identifying strategic partners, they had different mechanisms depending on different markets. They had markets which approached Denel but had no specific intelligence on that market, so they approached Denel and informed them that they wanted to work with them, and they would work together in creating a win-win value. In those situations, they followed through by doing due diligence on the basis of the individuals who approached Denel. What they were clear about in those processes was that, as they contractually bound themselves to those parties, they created enough mechanisms contractually so that in the event performance did not come up to requirements, they could get out of it.

On 28 October 2015, in presenting their 2014/15 Annual Report, Denel had been confronted by the Committee about the executives that had been put on suspension. At that particular session, they had held the position that the disciplinary process had started, and the parties concerned needed to be protected. Yet they had been clear in stipulating the fact that the suspensions were for no other reason than the governance process followed in acquiring BAE Land Systems South Africa (LSSA) (Pty) Ltd. That had been Denel’s position before, and on 17 February 2016 they had repeated the same position. In other words, it was still early days.

On 11 May 2016, in the interests of transparency and accountability to the Committee, Denel reported that the disciplinary process had not yet been completed. They were clear about the rationale of the board, as part of its oversight responsibility, that the individuals should be put on suspension for the purposes of getting to the bottom of the governance process which had been followed.

With regard to Denel Asia, at that particular meeting they had articulated the rationale for Denel wanting to play in the Asian market. They had specifically referred to the point he had spoken about earlier, which was the requirement of governments looking for ways to create value in their own markets.

One of the critical points they had made was that VR Laser Asia, which was currently a partner in the Denel Asia joint venture, was not the first entity they had approached. They had scanned the market and looked at what the market potential was, as well as the key defence businesses in the particular market. When they approached the key businesses, it was clear that they were already informed, as they had already partnered with competitors of global defence businesses for the same opportunities, in other words, they were in exclusive arrangements for that particular market in which Denel could not participate. So VR Laser was not the first option, and they landed up in this particular position.

Denel was clear on what gave them comfort that VR Laser Asia was the next best opportunity available to them. One of the things they were looking at was financial investment in pursuing opportunities. After spending close to R500 million, they had ultimately been chased out of the market over accusations of unethical business dealings, which were later found not to be true. So they had footed a bill of over R500 million for no benefit to South Africa at all. They were clear at the 11 May 2016 meeting that Denel at that stage was in no position to fork out such an amount.

So they were specifically looking for a partner that could put their money where their mouth was in terms of chasing opportunities. As Denel, they were aware of questions around the ability of VR Laser to meet their commitment to foot the bill. Denel’s response to that was that in the contractual agreement, Denel had created enough safeguards that in the event that the money did not eventuate, they had the ability to respond accordingly and recuse themselves. All of those details were in the shareholder agreement. Denel had built enough safeguards into the contractual arrangements, and if the promises that were made could not be realised, they could get out.

More importantly, they had heeded the call of this Committee, that while they looked at the legal framework in establishing this particular business, they had not traded. Denel had not been ambiguous on that position. They had heeded the call that until the legal framework had been evaluated, it must not trade. As Denel, they maintain the position that they had followed the proper protocol, but that did not mean that they had started trading. That was why they had presented this particular case to the court, so that the court could make the final judgment.

When Denel had appeared before the Committee, they had said that when the “state capture” investigation had started, one of the entities had been approached by the Public Protector for the purpose of evaluating this transaction and their dealings with VR Laser South Africa, and they had taken that as an opportunity. They had called the Public Protector’s office and offered to give a background to the transaction, and they had advised that they could pinpoint specific documents. They had had a fruitful encounter with the Public Protector’s office, and had submitted the necessary documents. The outcome was known to the public, and it had been a watershed moment for Denel.

With regard to the meeting on 7 September, which Treasury did not attend, Denel had given an update on the former executives. They had reported that with regard to the CFO and the Company Secretary, they had reached a separation agreement. The rationale for reaching that conclusion had been that the disciplinary process was taking almost year, and obviously Denel was footing the bill.

Following an investor roadshow with the funders of Denel, backed by government, they were comfortable with the fundamentals of the business going forward, but were particularly uncomfortable with the leadership instability, specifically in respect of the executives. The same concern had been expressed by their banking partners and the capital market. For that reason, Denel had had to close the matter regarding the former executives.

As far as the former Group Chief Executive Officer (GCEO) was concerned, his contract was expiring in January 2017, which was roughly four months from the last meeting of 7 September 2016, so the board concluded that his contracted would not be renewed. The matter of his continued employment at Denel was closed in that manner, the rationale being exactly the same as the other two executives. The board was busy with filling the vacancies.

Nothing was happening in respect of Denel Asia, and they were currently concerned about using those particular people in that particular market. Even when they had been blacklisted in that market, it had been on the basis of alleged unethical behaviour, so that market was extremely sensitive to this particular issue. Even in the event that they concluded the matter, their ability to trade in that market was questionable. Where monies had been exchanged was in the VR Laser South Africa business, which was the business that was currently contracted by Denel.

Mr Mhlwana said the key issue was that VR Laser SA had been contracted to Denel not less than five years ago. This had been the inception of the programme. The second issue was that they, as the board and executives, were satisfied with the process that had been followed in selecting VR Laser SA -- there was nothing wrong with the process they had followed.

Denel had two key international strategic partners who followed their own process in evaluating VR Laser SA as a supplier in the defence space. One of them was the United Nations, which supplied armoured vehicles for the peacekeeping missions in Africa, and this had been going on for years. The second one was Patria Land Systems of Finland. The Hoefyster project consisted of a vehicle platform, and with the vehicle platform Denel was producing vehicles under licence from Patria, so they were there as the prime key owner.

He invited Members to look at the quotations displayed in the presentation. The first one was from the UN, which took a hard stance by saying, “VR Laser would be the only and sole Amoured Hull manufacturer and vehicle product assembler for all products on offer as filled in the LTA agreement…” He said that the background to this acquisition was that the UN had taken that position after they had threatened to cancel the contract. The UN had then proceeded to assess VR Laser SA, which had led them to become comfortable with their capability.

The second quotation was about Partia Land Systems, where they had taken a lighter stance. They had evaluated all the suppliers in the market and then they selected who they thought was best in fulfilling that particular function. Therefore they had never propositioned that, “they would only be..”.  Instead, their stance was, “this was who we think is the best, but we leave the decision to you”.

There were media statements about a contract between VR Laser SA and Denel being R10 billion. He wanted to put it on record that the contract in its totality was about R10 billion, but the value that had been contracted to VR Laser was to the value of R400 million. Between the R400 million and the R10 billion, taking out the labour, the value component and the profit, it left a lot of value that was going to other suppliers that were earning much more than VR Laser from this particular project.

Mr Mhlwana said that slide 15 of the presentation discussed the process that Denel had followed in establishing VR Laser.

Mr Gordhan raised a point of order, saying that since Treasury was not present at the meeting, those areas Mr Mhlwana was discussing should be avoided so that Treasury could hear what he was saying and that they could respond accordingly.

The Chairperson said that the presentation had already included points that involved Treasury. When they met Treasury, they could respond.

Mr Gordhan said words were being added that were not in the presentation.

Ms Mazzone said that this was exactly what she had warned the Committee of earlier on. Words were being said that were not in the presentation. Unless Treasury was going to watch the video footage of the meeting, which was not going to happen, they could not answer.

Mr Gungubele said it was difficult to present like a robot, and what was being said was being recorded. When Treasury came, they could respond to what had been said and recorded. It was a live presentation, and there was the possibility of extra comments. He proposed that they proceed.

Mr Tseli agreed with Mr Gungubele.

The Chairperson warned Mr Mhlwana not to elaborate too much, especially on issues pertaining to National Treasury. She suggested that he stick to the presentation.

Mr Mhlwana thanked the Chairperson, and said that he would take her guidance.

He wanted to clarify two issues. Firstly, the engagement with VR Laser SA, which was partly owned by the Gupta family, was an engagement that had contractually taken place five years ago. From a time perspective, that was a period when the current board and the current executive had definitely not been in office. Then, with regard to Denel injecting itself into the Indian market, they were faced with the anomaly that had they not been chased away 15 years ago, they would have secured their position in that market and made appropriate relationships. The situation was so dire for Denel, that when they were chased away, they had already signed contracts and had already provided bank guarantees for that market.

Lastly, the approval process for Denel Asia was definitely not the first of its kind in their dealings internationally, as well as with their stakeholders. He gave an example of the Middle East, where Denel had benefited South Africa through jobs, foreign reserves, and a supply chain rejuvenation within South Africa of more than R3 billion from a joint venture in the region. That joint venture had never been approved in terms of section 51 of the PFMA.

Mr Mantsha told the Committee that the two vacant positions of the CFO and CEO had now been filled.

On Denel Asia, Mr Mantsha said Members needed to appreciate that Denel had to make business decisions, and Denel Asia was a business decision that they had taken. They were fully aware that in the debate over state capture, that did fit into that narrative. However, as Mr Mhlwana had said, the contract that was in question was from 2013, and neither had been appointed by then.

Mr Mantsha made a plea to Members that Denel needed to make decisions and evaluate ways to run the business efficiently. This was a state owned business, and it was in business to make money. The environment should allow the state to compete. Under the current conditions, which relied on private funding, how could Denel compete with the regulatory environment they found themselves in? He pleaded with Members to have those kinds of discussions. Denel Asia was purely a business decision, and they had gone into it to further their business

Discussion
Mr P Gordhan (ANC) said that although Denel Asia had been described as purely a business decision, many things may look like business decisions on the surface, but one needed to find out what was below the surface. They had to persuade the public that they were not serving the family that was mentioned, but serving the state.

He asked the Denel Chairperson to clarify whether a law firm called Dentons, which had completed a report on Eskom recently, had also done an investigation into Denel. He asked when the Dentons report had been requested, and whether it was true that the board chairperson had decided not to pursue the investigation.

On the establishment of the DND project, he asked if it had been subjected to a due diligence process by Edward Nathan Sonnenbergs (ENS) Africa. He referred to an affidavit in the Gauteng High Court (Pretoria), which raised concerns about Denel’s proposed deal with ‘politically exposed persons,’ in which it was alleged that VR Laser was in financial difficulty. He asked whether that was true.

He said that South Africans were worried that there was a common pattern in the capture process of state-owned entities. A new board comes in and uses the excuse of misconduct and suspends executives, three in this case. And then a particular number of deals continue. They had seen similar patterns here, and therefore Denel needed to persuade the Committee that they had no choice at all but to enter into this deal. It had to persuade Members that this had nothing to do with state capture. He asked who owned VR Laser at which stage -- they must give the Committee a clear timeline.

A former colleague, who had chaired the national accounts’ procurement department, used to state that a formidable amount – billions of rands -- used to go to Denel. If that was the case, why did they have liquidity problems? Why did they have to look for money?

He asked Mr Mantsha to elaborate on his meeting with the new Finance Minister, Malusi Gigaba, who had allegedly ordered Mr Mantsha to cancel the joint venture and withdraw Denel’s court application against National Treasury. They had been instructed to destroy the joint venture, as there was a concern that the joint venture did not make business sense to National Treasury.

Ms Mazzone stated that she would not be as diplomatic Mr Gordhan. She was more of a South African than a Member of Parliament, and she did not like hearing that state entities were doing business with the Gupta family or Gupta-linked families. The Constitution had Chapter 9 institutions for a reason -- to look after the interests of South Africa.

She used the term “hostage,” because she felt like she was a hostage to state capture and a hostage to that family. She found it very unfortunate that she felt the necessity to pray every time there was a rating downgrade on the cards.

There needed to be a very frank discussion about a couple of things, and mostly about state capture. It was Denel’s responsibility to prove to the Committee that they were not captured. She said that Denel was very much captured. She asked the Denel board members whether they had had any dealings directly or indirectly with the Gupta family. Had they been instructed by anyone to conduct business with the Gupta family or Gupta-linked families?

She said that Kamal Singhala Gupta, Ajay Gupta’s son, was a director of VR Laser SA. Denel blamed Treasury for being difficult in terms of giving them certain assurances, but certainly Treasury had a right to be concerned when a company did not have a viable bank account. VR Laser had had their bank accounts shut down by Nedbank, Standard Bank and most recently the Bank of China. The reason behind this was that they realised that the risk was too high. For the Bank of China to know that there was a reputational risk was a serious matter.

She found it difficult to understand why a middle-man company had been employed to increase their footprint in Asia and the Middle East. The very existence of VR Laser was unnecessary. Denel was a big enough corporation with enough expertise to not need a middle man company to go into Asia.

How was this deal financially prudent and financially sound, and how were monies going to be paid over to these accounts if banks were refusing to be associated with the company? Yet Denel claimed that the media was crazy, but the media, just like Parliament, was trying to get to the bottom of these questions. As South Africans, they had every right to be concerned, when they saw the name “Gupta” associated with our state owned entities.

Mr Luyenge said that the Committee was in a predicament, because whatever Denel had said, rightfully or wrongfully, the name “Gupta” cut across a number of SOEs. As the Committee, they could not be objective with Denel because of this Gupta name.

He made a proposal, similar to the one made for Eskom, which was to ensure that all the SOEs accounted to the Committee, and it had to declare and investigate who the beneficiaries of all the SOEs were, and find out who the service providers were and how much they had got in last financial year. They should have a clear understanding as to whether the suppliers or service providers in Denel were all owned by the Gupta family. If that was the case‚ had the correct supply chain processes been followed? If that was not the case‚ then one should ask why the Gupta name was not blacklisted‚ because they were doing wrong in terms of the Constitution.

It was unfortunate that the integrity of board members, as individuals and collectively, was being implicated by this family. The Committee should just call the Guptas, and they should tell us how they had come to provide services at the level at which they were doing. Then the Committee could take a decision without tainting entities in their entirety. Members could not recognise the experience and expertise of the board members because of this issue.

Mr Tseli said the company that they were discussing was technically insolvent. The joint venture had been incorporated from 29 January 2016, and from what had been stated it had not been trading because of the directive from the ministry, and he wanted to know the status of the company now. He said that Denel had tried to justify the R400 million from the first contract. Was there no other contract, or could they confirm whether that was the only contract?

Mr Singh said that the Committee needed to look at the report in detail. Seeing that Denel had made mention of meetings with Treasury, he asked if they could receive the minutes from those meetings with Denel to see what they had discussed. He asked if the individuals who had been appointed to fill certain positions, had received official approval from the shareholder.

Three very senior individuals had been dismissed from Denel, and he had noted that there had been agreements. Had any misconduct hearing been conducted, or had it been a matter of a payment, and a “you do not say anything and I do not say anything, so go quietly”? What had been the detailed nature of the agreements with those three people?

He said he was trying to understand this middleman concept. What was the role of VR Laser SA? Did they go out looking for business on behalf of Denel? What kind of commissions did they earn? Did they get paid for worked performed? Could they get a list of engagements with Denel? In the presentation, it said that VR Laser had been doing business with Denel for 15 years, yet the CFO had said that they had been doing business for five years, so what was the position? What role did VR Laser Asia fulfil that Denel could not do themselves? What kind of contractual relationship would Denel have with VR Laser Asia? Were they agents?

Mr Gungubele said that after reading the article that was being circulated, he was tempted to respect why Members were apprehensive about hearing the presentation in the absence of Treasury.

The Chairperson said she was not sure when they said Denel was not trading with Denel Asia because they had made proposals, and they might have made commitments; so what did that mean in the books of the company? How was the issue now being dealt with?

She referred to the disciplinary process which had started in 2015, seeing that it was now 2017, if the executives were suspended without pay, she did not have a problem. However, if they were suspended with pay, it meant that Denel was paying for two people in one position -- the individual who was currently acting and the one who was suspended.

Denel itself was not speaking about what was happening within the company, so Members had to rely on the media, who they trusted had done their research. Whatever they read, they assume that is the correct version of the story if Denel is quiet about it.

With reference to Mr Mantsha’s statement that the rest of the Denel board members were at a strategy session, she said they needed to respect the Committee’s programme, because they based their programme according to the interests of the public. She warned Denel to avoid starting with the second agenda item instead of the first in future. She invited the Denel delegation to respond.

Denel’s response
Mr Mantsha said that there had been an occasion in the past when they had brought all the members of the board to the meeting, and Mr Tseli had then suggested that it was a waste of money when all of them attended.

Denel were deeply concerned about the allegations of state capture. A perception had been created that because of the relationship that Denel had with VR Laser, which had led to the creation of Denel Asia, Denel was therefore “captured.” The capturing was a question of facts.

He said Mr Gordhan had referred to matters under the surface which needed to be unearthed. Those matters under the surface were that VR Laser SA had signed the Hoefyster contract with Denel in 2013, and the value of that contract had been around R400 million. Denel had spent close to R3 billion in the procurement process, and out of the R3 billion, R250 million had spent on black companies. The black companies had included VR Laser.

If the question was whether VR Laser was captured, then surely the figures should show that VR Laser was getting the lion’s share of Denel’s procurement spending, and that was not the case. The contract that was being referred to had been signed in 2013, and both he and the CFO had not been present when it was signed. Denel had conducted it its own due diligence to see if there was anything underhand about that transaction, and the process had revealed that there was not.

There was fiction and facts, and perceptions were based on fiction. Members were fully aware of the extent to which fake news was received. Denel was not captured by anyone. They had demonstrated over the past year that Denel was not captured.

With regard to Mr Gordhan’s comment that there was a common pattern in the capture process, it was important to refer to the liquidity issue. The CFO could discuss in detail why Denel had a liquidity issue, but one of the reasons was because of a transaction for the services of Ajay Gupta, when they bought a company with a capability that Denel already had, for just close to a billion rand. As Denel was not funded by the state, they had had to raise R855 million to settle that debt, and that had placed Denel under serious financial pressure. This had led to the decision to suspend those executives.

Although it may have looked like a similar pattern of firing executives, the disciplinary process that took place with the executives was based on the fact that their decisions did not make financial sense to the board.

When the new board had come into existence in July 2015, they had to face that challenge of liquidity. A decision needed to be taken, and they had taken it.  When the board came into existence, there was already a contractual relationship between Denel and VR Laser SA. This contractual relationship invited all sorts of perceptions. Under the normal circumstances, when boards sit they do not tell the executives that they must please bring all the contracts that had been signed because they want to investigate. With the concerns surrounding this contract, management undertook an investigation and found there was nothing underhanded about it. As had been said, there was nothing wrong with the Guptas entering into a lawful business relationship with a state company, or any company for that matter.

There was a thorough process by the former Public Protector to investigate if there was something wrong with that contract, and Denel had submitted all the requested documents. The report had not made any adverse finding against Denel.

Mr Mantsha said that it was difficult to fight a battle against perceptions. Denel felt that these perceptions were not borne out by the facts. Most of these perceptions were the result of fake news, and it was very difficult for Denel to deal with every single fake news story that came their way.

Regarding the statement on the National Contract Cleaners Association (NCCA) and Mr Radebe, there were orders worth billions of rands that they processed. However, Members needed to take note that the defence business was one that involved long contracts, and this created liquidity issues, as one was paid in full only after five or 10 years.

Denel was government-in-the-business-of-armaments, and needed to find the resources to fund themselves. They had to make decisions that were not necessarily easy to make, but they had to protect the business. This took them to the Denel Asia matter, as Denel Asia was an opportunity for them to enter into a market.

The Chairperson intervened and asked Mr Mantsha to conclude because there was very little time remaining, and the CFO still needed to respond.

Mr Gungubele said that Denel should not debate with the Committee. Factual questions had been raised, so it needed to respond to the facts and the Committee would reach its own conclusions.

Mr Mhlwana responded on the question of whether ENS Africa had carried out due diligence work on VR Laser Asia, and confirmed that this had taken place.

On the risks that the report had identified as they related to politically exposed persons, Mr Mhlwana said that within the process of doing business, Denel had developed mechanisms to deal with this. When they sold arms to governments in the export environment, they specifically took an approach of seeking assistance from individuals within those markets who understood the workings of those environments -- the working culture and the procurement process. He added that one would find that some of those individuals were actually ex-government officials, so they had processes in place to actually deal with these issues. The report had gone into detail about the risks identified concerning politically exposed persons. Naturally, dealing with politically exposed persons was a day-to-day matter for Denel, and they developed mechanisms for that.

On the solvency issue, VR Laser Asia and VR Laser SA had a common shareholder. The statement in the article was that the VR Laser Asia was a business without enough balance sheet for financial stability, and was being supported by its shareholder. Denel was in partnership with a shareholder of that particular business through VR Laser Asia.

Denel ensured that with their contractual arrangements, they had clear, articulated mechanisms in the shareholder agreement that gave them the right to react. Members had asked that Denel should give an assurance that they were not going to move on that basis, and then later fund this solvency issue. The answer to that question was that Denel worked on the basis of the Public Finance Management Act (PFMA), the basis of proper governance and control processes. The relationship was about capturing markets, and not assisting solvency.

In terms of the timeline of the ownership of VR Laser South Africa, the Gupta ownership came around 2013, and there was already a contractual relationship prior to that, before the Guptas took ownership.

On the question of whether the Hoefyster contract was the only contract, Mr Mhlwana said that it was a significant contract, but there had been other contracts, such as the United Nations contract.

The Chairperson intervened, and said that Mr Mhlwana needed to conclude to make provision for any follow-up questions that Members may have.

Mr Mhlwana said that Members could draw attention to questions if he had not answered them.

On the question of Denel’s footprint in the Middle East and the need for joint ventures, Mr Mhlwana replied that in the space that they operated, it was extremely competitive. For example, in the Middle East, the organisations that Denel was competing with were coming out strongly, particularly with political influence. The latest example was the announcement of the arms deal between the United States and Saudi Arabia. The Middle East was a key market for Denel’s growth.

If one’s understanding of the procurement environment was not up to speed, one was probably too late. It was ultimately important to be in partnership with people who understood the “nitty gritty” discussions so that Denel could better position themselves. Any successful defence contractor followed this procedure.

The Chairperson said that Members should identify specific questions that were not yet answered.

Mr Gordhan said that the question on the Denton report and the interactions between the board chairperson and Minister Gigaba had not been answered. He also requested a copy of the Denton and ENS reports so the Committee could study them.

Mr Singh said that the staff issues had still not been addressed.

Ms Mazzone said that the question on the VR Laser bank accounts was still not answered.

The Chairperson thanked the Members, and requested the Denel delegation to stick to short answers and rather not elaborate.

Mr Mantsha replied that as far as the Denton report was concerned, the executives had been suspended and disciplined as a result of the transaction they had entered into. In the process of probing that transaction, the board was of the view that it appeared that there had been governance issues in the acquisition of this kind of entity.

At that stage, they had had another R50 million to pay for an acquisition at another company, but they had told themselves that they needed to investigate those activities. On the other hand, they were proceeding with the disciplinary hearing on the main charge.

In the process of the different proceedings that had commenced, and for reasons that had been given to the Committee, Denel had decided to settle with the parties. It was never a question of, “you keep quiet” and “we keep quiet”. It was a question of acknowledging that Denel was running a business and they could not afford to have instability, or a vacuum. So in the business of parting ways, those individuals were never charged because there was a settlement. It was purely a business decision.

Mr Mantsha explained that the Minister of Finance had wanted to understand why there was an impasse and how the impasse could be resolved. An informal introductory meeting had taken place alongside the Africa World Economic Forum, where they had just informed the Minister as to where the impasse was coming from, and what had been done thus far. The Minister wanted the impasse to be resolved as soon as possible. The contact to try and approach National Treasury had been initiated as well -- they were all state organs and they all had to work together in the spirit of the Constitution. The Minister had undertaken to meet with the Minister of Public Enterprises, where the matter was going to be finalised.

As far as the solvency or insolvency and the bank accounts of VR Laser was concerned, as the CFO had indicated, these were partners and Denel had no access to their bank accounts. Therefore he was not in a position to tell the Members whether they had a bank account or not.

The Chairperson thanked the delegation and invited the Deputy Minister to offer closing remarks.

Deputy Minister of Public Enterprises, Ben Martins, said that they needed to get Denel back, with Treasury officials, in order to get responses to the issues and to close this matter properly.

The Chairperson thanked Denel for the presentation, and the Members for their contribution.

Members adopted meeting minutes.

The meeting was adjourned.