Denel Annual Report, deviations, expansions & SIU investigations; with DPE Deputy Minister

Meeting report

Opening Remarks
Chairperson Hlengwa gave a brief introduction. The annual report of Denel had a disclaimed audit outcome for the third consecutive year. There was evidence of increase in irregular, fruitless and wasteful expenditure. Some of the increases were over ten percent year on year. There were Special Investigating Unit investigations (SIU) underway. The picture at Denel was not pleasing. The Committee was not impressed about the situation; the continuous regressions did not inspire confidence at all. It was an entity that was fast becoming a shadow of its former self.

Mr Phumulo Masualle, Deputy Minister of Public Enterprises, stated that the Acting Chair of the Denel Board was present who had been appointed recently to fill the shoes after the resignation of the former Chairperson. Ms Gloria Serobe was appointed to fill those shoes and carry the ship going forward. In the recent past Denel had been suffering from serious liquidity constraints that had impacted the programmes. It was afflicted by a number of decisions made by the previous Board. This had left the institution with serious challenges in respect of the debt situation. The Board was present in the meeting as well as the executive team. The Group Chief Executive Officer (CEO) had also resigned and an interim position was in place. The Board was in the process of trying to fill that vacancy.

Briefing by DENEL
Mr William Hlakoane, Interim Group CEO, and Ms Carmen Le Grange, Chief Financial Officer (CFO), presented the Denel Annual Financial Results for the financial year 2019/20. The presentation covered irregular fruitless and wasteful expenditure relating to the financial year under review. It also went through the external audit report and HR and socio-economic matters.

The third quarter performance of the financial year 2020/21 was briefly covered and the irregular expenditure that related to that year.

Financial year 2019/20 financial results
- Reduction in revenue over the last three years and at low levels of R2,7 billion in FY2019/2020 primarily due to reductions at Denel Aerostructures (DAe), Pretoria Metal Pressings (PMP), Dynamics and Denel Vehicle System (DVS).
- R4,4 billion losses in the last three years due to revenue decline, contracting and export permit related issues with NCACC during Covid-19 pandemic lockdown in FY2019/2020, high cost structure including labour under-recoveries, interest, legacy obligations and inability to secure new business and execute on existing work due to liquidity constraints.

Financial Position
Denel is insolvent with an increased debt position in the short term; Domestic Medium Term Note (DMTN) – R3,4 billion at 31/3/2020 (Today: R3,2 billion), Cash at R635m (with R331m ring-fenced), Advance Payments Received – R3 billion (R1,945 billion – Hoefyster of which R800 million in stock, contract assets and trade receivables)

Cash Flow
- Cash generated from operations has reduced significantly as increased investment in inventories, trade receivables and contract asset persists due to delays in contract execution.

- Prepayments received from clients at c. R3 ˇ reported, whilst R331m ring-fenced cash remains, with the rest utilised in working capital and operational requirements.
- 576m allocated in FY2020/21 medium-term expenditure framework (MTEF) cycle; R305m allocated to debt and interest. National Treasury waived conditions in Sep 2020, R271m received mid-Nov 2020. Consequence: short-term liquidity position has steadily worsened.

Severe funding issues
Despite the turnaround, Denel remains rooted in a liquidity crisis; its order book significantly exposed to risk. Consequently, it has seen:

- Denel was downgraded by Fitch to ‘CC(zaf)’ due to delayed and insufficient support from the Shareholder, resulting in a weakened Standalone Credit Profile. Banks / Financial institutions are no longer willing to provide facilities critical for operations and winning new business. In fact, Banks are reducing facilities.
- Reducing order backlog and pipeline and business exposed to significant risk as damage to their reputation - which influences customers and markets.
- Local defence budget continues to shrink and impacts Denel and the rest of the South African Defence Industries (SADI). Geo-political landscape rapidly transforming. Treaties signed in the Middle East with the United Stated of America (USA) changing Denel’s traditional export advantage where access has been limited for Western suppliers.
- Denel Balance Sheet reflects short-term debt of R3.2 billion, <12 months; and negative equity of R2.3 billion.
- Debt profile has worsened; Whilst Government guarantee extended to Sept 2023, Lenders have invested short-term.
- NT waived conditions for balance of recap (R271m of R576m as part of the FY20/21 MTEF); allocated to restart operations with priority on projects that can deliver a significant return and be cash generative to deal with creditors backlog and outstanding salaries. DMTN Programme – Risk of potential call on Notes – Key investors agreed to roll over notes investment due for redemption on 11 Dec 2020 for R290m, Denel’s disclaimer from the AG on the going concern poses a risk with market regulation and could prevent us from rolling the Notes further, posing cross-default risks. Slow progress on sale of non-core assets and exit from loss-making businesses continue to put strain on already poor liquidity position.
- Ring-fencing of funds due to Customer demands does not allow efficient allocation of resources.
- Under-funding for projects of strategic national importance.

Irregular expenditure incurred
- Annual incurred irregular expenditure decreased by 80% since April 2018. Backlog of expenditure under investigation for possible condonation/recovery- R1,5 billion. AG identified a further R119m (2019: R23m; 2018: R111m) due to Supply Chain Policy misalignment with PFMA and inability to prove fair, equitable & competitive process followed for certain historical suppliers, especially OEMs.
- Appointed SCM Head on 17/2/2020 and implemented improved SC Policy on 26/3/2020 aligned with legislation – however, improvements must include change in performance culture, knowledge & accountability.
- Consequence management requires significant improvement as well as processes for reviewing all potential IE.

External Audit Report New Findings
- Auditor General of South Africa (AGSA) had concluded on a Disclaimer audit opinion due to various matters including:
- Going concern due to material uncertainties in cash forecast and liquidity assumptions; Preparation of consolidated financial statements Inappropriate audit evidence provided relating to the elimination of inter-company journals;
- LMT – Preparation of consolidated financial statements – Non-submission of financial statements by LMT for audit;
- Inventories – Non submission of sufficient audit evidence information for audit in relation valuation of stock;
- Cost of sales – Incorrect allocation of provisions for an onerous contract at Denel Aerostructures and non-submission of sufficient audit evidence to the auditors;
- Provisions – Insufficient audit evidence submitted to support amounts recognised as warranty provisions;
- Non-current assets held for sale – Incorrect application of IFRS 10 for the assets held for sale relating to the transfer of assets by Denel Aerostructures (auction stock);
- Investment in associates – Incorrect applications of IAS 28 in accounting for gains and losses on intragroup transactions between associates; and
- Right of use of assets and lease liability – Incorrect application of new Accounting Standard IFRS 16 (Deniprop only).

External audit report repeat findings
AGSA had concluded on a Disclaimer audit opinion due to various matters including:
- Revenue - Incorrect of International Financial Reporting Standards (IFRS) 15 application
- Trade and other receivables and contract assets – Incorrect application of IFRS 9(ECL);
- Investment in subsidiaries – Incorrect application of IAS36 Impairment of investments;
- Retirement benefit obligation - Service costs and net interest not adequately disclosed;
- Operating expenditure and Contingent liabilities - Inappropriate supporting evidence for expenditure;
- Property, plant and equipment and Intangible assets - Did not adequately review the useful lives, residual values and impairment of property, plant and equipment at each reporting date;
- Disclosures – Inadequate disclosure for change in accounting policies, prior periods, related parties, financial risk management, segment reporting and related parties;
- Deferred tax and income tax – Tax implications due to the prior year period could not quantified at the conclusion of audit; and
- Irregular and fruitless and wasteful expenditure – Additional expenditure identified by AGSA.

Irregular expenditure relating to the 2020/21 financial year
The main contributor/transgression category for Irregular Expenditure is attributed to Order Variations Exceeding 15% and participating in expired contracts. These are related to:
- Freight Forwarding & Clearing contracts. This was resolved during December 2020 with the appointment of 2 Service Providers. Will be expanded during Q1 of FY22
- ERP contract extension. Approval from NT did not cover preceding expenses
- Other matters related to personal protective equipment (PPE) which went through a quotation process but prices were not compared to NT price list
- No fraud, corrupt and/or other criminal activities related to these transactions were reported.
- Divisional CEOs were requested to submit reports around consequence managements which will be considered by the Loss Control Committee during the Determination tests for Irregular Expenditure

Discussion
Ms N Tolashe (ANC) stated that she wanted to dig deeper in terms of the financial performance highlights for the year 2019/20. Denel was in a dire financial situation. In terms of the revenue for the 2019/20 year it had fallen by 20 percent to R2.7 billion, and in 2018/2019 to R3.4 billion. The loss for the 2019/20 year was R1.9 billion and 2018/19 was R1.5 billion. Denel was insolvent with a debt position of R3.4 billion, as of 31 March 2021. The entity had incurred losses of more than R5 billion over the past three financial years. Denel had lost kosher business contracts in its traditional markets in the Middle East and North Africa due to geo-political factors. The entity had received a R3.4 billion five-year government guarantee from National Treasury which would expire on 29 September 2023. This was provided for the DMTN programme. Despite the government’s guarantee, the debt profile had worsened, and lenders had borrowed for short-term. She wanted to highlight this situation as a starting point to engage with the Board regarding the mess.

In 2019 Denel requested capitalisation by the shareholders and government to the value of R2.8 billion. The business was recapitalised by R1.8 billion on 31 August 2019. This was used to pay creditors, outstanding salaries, taxes and bond interest.

The audit highlights from the Auditor General were outlined in terms of the three-year audit outcome and findings from 2017/18 through to 2019/20. The entity received a disclaimer – significant weakness was identified in internal controls as the main driver for the disclaimer outcome. Management was unable to produce financial statements from that time. As a result, the following findings were made by the Auditor General, the going concern related to Denel’s significant losses over the past three financial years which had negatively affected the reserves and shareholders equity. Liabilities amounted to R10.4 billion. This resulted in the entity being in a net liability position. Denel’s liquidity reduced in the previous financial year – this had created multiple uncertainties regarding the going concerns status. This was coupled with the lack of sufficient audit evidence to support the assumptions which further resulted in the disclaimer for the current year under review.

Ms Tolashe asked what the detailed turnaround plan was on Denel’s solvency and liquidity position.

Ms Le Grange replied that in terms of the solvency and liquidity situation, one of the things Denel had done was strengthen the balance sheet. In terms of the turnaround strategy, part of that strategy and plan was to say to their note holders, ‘here was a turnaround strategy and explain how it was modelled in terms of the liquidity assumptions and forecast assumptions.’ These assumptions were based on exiting non-core businesses as well as exiting loss-making business. That strategy and plan translated into the numbers that then brought cash into the business so that they could strengthen their position. Part of that strategy was to make sure that in terms of the plan to solvency was that one got ones note holders to support the plan and to continue to invest in the notes. They did that on the plan or the turnaround strategy which had numbers that they believed Denel would be able to achieve. As part of that process one also ensured that the shareholders supported that plan and believed that that turnaround strategy could work and hence that was the plan in trying to turnaround the solvency position.

In terms of the liquidity situation, Denel worked with its bankers and lenders group. They had three sets of bankers: Rand Merchant Bank (RMB), Absa and Nedbank that formed part of a consortium in the lenders group. Part of what the banks did was ensure that when Denel asked for funding, the banks would ensure that they believed Denel could execute on the projects outlined. Those cash-flows and assumptions were based on how and what Denel modelled in the turnaround plan. The section 189 structuring was also a major issue, without going into any of the detail on that, the aim was to reduce the cost base and see how quickly the business could return to profitability.

Mr Hlakoane stated that Denel was in the process of revisiting that turnaround plan and part of the strategy going forward was to design a new model to enable it to reduce its cost base. The main driver of the cost was right at the top. This was part of the interventions they were making internally in the absence of any government support.

With regard to the programmes, Denel had designed a new governance framework to ensure that the issues it had relating to programme governance were addressed. That was submitted to the Board for approval.

Ms Gloria Serobe, Acting Board Chairperson, Denel, stated that the Board fully took ownership of the bad state of the financial results, as it was presiding over everything that was happening there. It was not a good picture. The Board was established three years before, half of which was trapped in the COVID-19 space for about 16 months. 20 months before that, it would have been said that the economy was in a normal period. While they all understood that Denel was broken, once one was inside, it was much more broken than one imagined.

The turnaround strategy needed to take many factors into account. One of the difficulties for Denel, was that one almost needed to get three separate departments on board in terms of what Denel did, being the Department of Public Enterprises (DPE), National Treasury and the Department of Defence (DoD). DoD needed to have sign off on what was sold – so as to avoid selling something that was essential to defence or security. That also meant that defence was very important to them, and sometimes Denel was a reflection of the Defence budget itself. While Denel had its own issues to deal with, they had these many dependencies.

The depth of the problem which was playing out in the Zondo Commission meant that Denel was paying huge amounts of money to people it owed, with no business coming from that. That was about R1 billion. Then one had massive interest expenses of R450 million a year. Whatever turnaround strategy Denel had, it had to be supported by government for the time being. The business could not cope with all those numbers at the same time while the turnaround was being looked into. Part of the turnaround was selling the non-core assets, they could sell just about everything Denel had, for a while it would support them. The turnaround strategies were in front of their shareholders, some of it was doable immediately – irrespective they need to look up to the shareholder to support it.

It was quite overwhelming for the Board that almost every entity post-COVID-19 - both in the private and public sectors - had to look to the shareholder for support. This was particularly overwhelming for Denel in respect of exports – and the reduction thereof as a result of the pandemic. It was disappointing not to have seen support from Treasury. As a result, Denel had to fend for itself in the midst of the chaos. The market was tempered with the unnatural occurrence of COVID-19 - that was not their only excuse. The turnaround strategy had to be vetted appropriately by government because of the nature of the business. It would be odd for them to make huge profits from the Police or Defence, which were all in one place (i.e government) – they did need to be covered and secured. Despite the problems there was a strong need for support from government to make it work because of the nature of the business.

Ms Tolashe requested that when it followed up regarding the other questions, the Committee needed to be given the correct timeframes on the turnaround that was outlined. Taxpayer money was involved, they needed to keep this in mind, thus Denel needed to be able to account on that, regardless of the situation it was in.

In terms of the irregular expenditure, the report tabled indicated that the irregular expenditure increased from R2.9 billion in 2018/19 to R3.2 billion. This represented a 10% increase. According to the Auditor General’s report, the irregular expenditure was made up of the contraventions that were haunting Denel. This included the deviation from competitive bidding, that went up to 65%, the expansion in variation orders that went up 13 % and the evaluation criteria, which were not adequately applied and went up 11 %. Then other items included bids not adequately approved, contracts not signed, declaration of interest, tax clearance etc which went up 21 %. SCOPA would want to hear more about the steps that would be taken by the Board and executives to ensure that the internal controls were applied to prevent irregular expenditure. Had the Denel Management developed any system to prevent or detect a record of non-compliance in accordance with the National Treasury framework on irregular expenditure?

Mr Hlakoane responded to the question relating to the timeframes of the turnaround strategy. The plan was previously approved in 2018. Denel was revisiting some of those aspects and remodelling the business to address the current situation. Denel was hoping that in the next month or so, once business cases were done for the new model, they would present to the Board and the shareholders for approval. The shareholders had alluded that in the next three months they would have a new operating model. This was what they were working on. He stressed the point relating to Denel’s other shareholders, being DoD. Some of the strategy actions that Denel would like to undertake were dependent on DoD accepting or approving the actions. In terms of timeframes, that model would be implemented after three months which was dependent on everyone’s support. They needed support from DoD to allow them to action those plans.

Ms Le Grange stated that in March 2020, Denel finalised the Group Supply-Chain Policy. Since then, Denel had started implementation to make sure that it was able to first identify irregular expenditure. Denel would then have processes in place to ensure that there was a proper system of consequence management. To do consequence management, one also needed to train people, so that when one accused them of not doing their job, they would have at least said to them, ‘this was what you were supposed to do.’

The actual irregular expenditure had reduced year on year; what had increased was the balance. The reason the balance increased was because the company finalised a number of investigations, where it was then able to put those expenditures into those specific buckets. There were about ten big investigations that were currently underway, six of those investigations related to suppliers implicated in corruption. Of those six, there were three that were sitting with the SIU. Denel had another ‘bucket’ of investigations which related to governance matters regarding when it had not got a contract deviation order or not followed the specific process. For those investigations there was a process where it went through the Audit Committee and then it went through a legal process so that from there, it was able to implement the recommendations. Those recommendations were around implementing disciplinary processes against employees, trying to recover amounts from employees. This might also involve recovering amounts from suppliers through the Court. These were some of the measures Denel had put in place to prevent the deviations that had occurred in the past.

Denel also had a Loss Control Committee, which on a divisional basis and at a group level, implemented this and had considered how Denel would recover. The Loss Control Committee had also looked at how to implement consequence management in a proper manner that did not impede employees’ rights.

Ms Tolashe expressed concern that it seemed that Denel was waiting to first train employees before applying consequence management. She hoped that was not the case and that she had misunderstood. She asked whether Denel was appointing the correct people for the correct positions – especially if they were having to workshop people. She asked for clarification on this matter. Were there any disciplinary actions taken against those implicated – how many were undertaken? What progress were they making? The governance framework was introduced in 2018, it was now 2021, it still needed to be reviewed – why the delay? This framework did not seem to work from day one.

Ms Le Grange responded that Denel had a number of employees that were going through disciplinary processes in terms of the investigations relating to governance matters. Across the business there were a number of people, more than 10 to 12 people in that category that were going through disciplinary processes. There were others where Denel was trying to recover money. Then on the other side there were the suppliers implicated in corruption. Denel had instituted disciplinary action against existing employees and past employees. It had cancelled contracts in terms of particular reports that were issued and finalised. Denel had also gone after, in terms of recovery, some of the specific matters. For this session, she had not listed the exact specific cases or names because some of them were still undergoing criminal processes. Without having to implicate specific people, she hoped the Committee understood why she had chosen to give a summary rather.

In terms of the new policy that was implemented after 17 February 2020, with respect to the PFMA legislation, there were already more than ten employees who had gone through disciplinary hearings. They were at different stages, either being at a consequence management stage or undergoing a disciplinary and performance management process.

Ms Tolashe requested more information regarding the suppliers that were awarded contracts without valid clearance certificates. If the officials in the supply chain units, who were provided with adequate training on the PFMA, Treasury regulations and other relevant policies… She requested more clarity on this and asked whether this was what Ms Le Grange had tried to explain previously.

Ms Le Grange stated that in respect of suppliers, for those that had procurements and legal services contracts, there was about R10 million that was under investigation. There was a process underway in that respect. In terms of the IT security assessment process that related to a particular contract, the relevant people were fired and the procurement process was being investigated by the SIU, in terms of numbers.

Then in respect of a very big contract for about R356 million that related to a steel fabrication service – that contract was cancelled. A court application had been lodged to challenge the validity of that particular contract.

In respect of the two other matters, one related to the Casspir vehicles and the manufacture thereof for a particular contract that had become onerous, they had disciplinary action against those employees which had been completed. Summonses had been issued against those four main employees who were implicated in the transactions. The forensic investigation had found other employees to have been implicated in the transaction, they were also issued with the relevant summons. That covered the questions around the suppliers.

In respect of tax clearance certificates, she did not have a specific list of all of them. She could get that. She thought that Ms Tolashe may have previously misunderstood her because Denel did not have money at the time. Denel paid some of the PAYE late. As a result of that they incurred penalty and interest. Sitting in that bucket was the associated penalty and interest amounts that would not be reversed by SARS - it was a late payment as Denel did not have money to pay. That was where some of that increase had occurred. In July 2019 Denel did not have any money to pay salaries. Denel borrowed money from the bankers – the bankers lent them a facility to pay that money but Denel was late in paying the South African Revenue Service (SARS) and that’s where that interest and penalty was incurred. She was happy to provide additional information in terms of tax clearance certificates specifically. Usually, Denel did not do business with people that did not have tax clearance certificates.

Ms Tolashe asked whether the Supply Chain Management (SCM) Unit’s management team was fully capacitated. If it was not, what was the vacancy rate? Why was the entity experiencing challenges in that area?

Ms Le Grange replied that unfortunately the Department was not fully capacitated. This was because it had seen a number of resignations as people were not getting 100 percent of their salaries - especially during the COVID-19 period when Denel had severe challenges in terms of its liquidity. There was also a problem in that people did not want to join Denel because of the uncertainty around salaries being paid. They were slowly in the process of trying to use people internally that put their hands up to assist and help. That specific Department really did need capacity. Denel had one Group Supply Chain Manager and Group Supply Chain Officers in each of the entities. In each of the six entities they had a support function that supported them. Many of those people in those divisions and in the Group division had been resigning due to the inability to pay salaries. It was something that they were going to have to look at going forward but Denel did expect that everybody in the business that worked in a public sector environment should understand and have knowledge of the PFMA.

Ms Tolashe asked that the number of vacancies be quantified so that they had a total picture of what they were talking about. She asked to move onto the fruitless and wasteful expenditure – this had undergone significant increases. Fruitless and wasteful expenditure was defined as payments made in vain. What were the consequences taken against responsible parties in as far as fruitless and wasteful expenditure was concerned? The Committee also wanted to know whether there were disciplinary processes against those responsible in respect of the fruitless and wasteful expenditure.

Ms Le Grange stated that the main causes of the fruitless and wasteful expenditure in this financial year was due to interest and penalties on late payments to SARS. In relation to that particular one Denel simply did not have money and therefore paid late. It was also in relation to late payments to suppliers where suppliers would charge Denel interest and penalties. In fact, Denel was now in a place where its suppliers were requesting advanced payments before they even did work for Denel. With respect to the late and penalties of late deliveries of contracts, that related to the governance framework programme that Mr Hlakoane had previously outlined. This included making programme managers responsible for the fact that Denel implemented or delivered contracts late. The last bit of fruitless and wasteful expenditure was where Denel was unable to recover the funds from those suppliers. That’s where they had the consequence management and performance management processes in place at the entity level.

Ms Tolashe requested more information about the entities that were controlled by Denel, which in the majority of times they were falling into the trap where Denel was. Denel had certain oversight responsibilities over the entities – ownership and control. Most of these entities received unfavourable audit outcomes, having received disclaimers. Denel received an adverse audit outcome. A number of the entities did not submit annual financial statements for audit. That automatically raised the issue for consideration. To an extent the Auditor General reported weak internal control systems. Did the Denel Group have adequate finance personnel to adequately prepare consolidated financial statements? The Committee’s worry was that this had been happening and it looked like it was not going to stop anytime soon.

Ms Le Grange responded to the question about the entities control by Denel. Denel Vehicle Systems was a subsidiary company of Denel, it had its own Board, Denel owned 51 percent. The key matter there in terms of the auditor’s issues was around the going concern of Denel Vehicle Systems. That was predominantly why they received a disclaimer opinion. The second one was around Denel Aerostructures which was a subsidiary of Denel, its key contract was the A400M and in 2015 Turbomeca transactions took place where there was a sale of a part of the business to SAFRAN and then 51 percent was taken over into Denel. That business became Denel Aeronautics, which was a division of Denel. They had a resignation of the CFO of Denel Aeronautics shortly before lockdown. The issue that the Auditor General raised was in relation to a journal entry – it did not appropriately account for that particular transaction. That was what cause that disclaimer in that entity. When a business goes into business rescue – LMT products went into business rescue on 3 September 2020. It had two other companies on the top which were holding companies. The one was LMT Holdings SOC Ltd, which was a ring-fenced company. It had a small entity called LMT properties. In terms of the LMT Holdings Group – 51 percent sat with Denel. When LMT products company, the main operating entity, went into business rescue Denel did a lot of work to get a set of financial statements out and help LMT. The Board, at that point, was not responsible for LMT, the LMT business rescue practitioner was. While Denel still took responsibility for it, it got consolidated into its records. The fact that LMT did not provide financial statements with all the supporting backup was why the auditors put a disclaimer on that.

The other divisions of Denel had financial managers on the Group level. The finance capacity at Denel became an issue during the period for two reasons. The first being its inability to pay salaries and the loss of two critical people in the Denel environment at a Corporate level – who assisted them with their audits. In terms of that capacity issue and all the prior period errors they had – to revert to a manual way of consolidating their accounts was difficult, and the Auditor General was not happy with this. The issue there was an enterprise resources planning (ERP) system issue, where each entity had its own system and the consolidation tool, that was supported by a particular supplier also became a problem. Denel’s inability to make sure that they gave the auditors sufficient evidence to satisfy them became an issue. Working off-site, as a result of the pandemic, had affected turnaround times relating to the audit and viewing of hardcopy documents etc. In terms of the fix-up plan going forward they had looked at a procurement system that Denel would be able to make proper manual adjustments. They had also looked at re-organising the finance structure. In terms of internal controls, in July 2019 Ernst and Young were appointed as internal auditors for Denel. While they did complete their internal audit plan and had findings for the full year, there was a non-reliance on their work by the Auditor General. At of 31 March 2020, the finding was that they had not done sufficient amount of work for the Auditor General to rely on the internal auditors.

Ms Tolashe said that the answer was not to the satisfaction of the Committee. They were consistently asking for a plan to avoid all this but the response made Denel sound as if it was a new entity – as if everything would be started afresh. She expressed her concern regarding the SCM unit, the Committee was unable to get a precise answer on what was going to be done in the shortest period between the financial year end and moving forward. She did not hear the Group CEO stating anything regarding what would be done in trying to avoid this in future. She was not convinced by the response that was provided by the executives. There was no answer that provided hope. It did not seem as if the current problems would ever be resolved.

Mr M Dirks (ANC) asked a question relating to revenue. The CEO gave the Committee a breakdown of the revenue. The CEO failed to mention the revenue coming in, in terms of weapons being supplied to Yemen - that was causing mayhem in that country. Denel’s joint venture partner in Germany, Rheinmetall Denel Munition (RDM) had been supplying weapons to Yemen since 2010. Since 2014 they had supplied weapons worth billions of Rands to that unjust war in Yemen. Denel needed to be able to explain to the Committee and South Africans what was the revenue received from those weapons in Yemen.

Mr Hlakoane replied that Denel was a minority shareholder in RDM, therefore the partnership was that Denel provided ammunition that was part of the IP that RDM bought from Denel. The issue of the weapons that were manufactured by RDM – Denel was not sure where those weapons were coming from. Denel was not sure whether they were coming from RDM in South Africa, or the RDM Holding Company in Germany. They still needed to establish the facts. They needed to understand what the allegations were all about. From where they were sitting as Denel, they had no direct link to the statement made by RDM.

Mr Dirks suggested he rephrase the question. Denel was a 49 percent shareholder in the joint venture partnership with Rheinmetall. When Mr Hloakoane said they were a ‘minority’ shareholder, Denel was not a five or ten percent shareholder, it was a 49 percent shareholder. What was the income stream from that joint venture from 2014 to 2019?

Mr Hlakoane stated that they had not received any dividends from RDM as a 49 percent shareholder in the company.

Ms Le Grange clarified that because RDM was an associate company, Denel accounted for what was received from them through dividend income. RDMs year end was December. In December 2019 RDM did not declare any dividends because they made losses in that year. Denel did not receive any dividends in the year ending 31 March 2020. However, in previous years, Denel did receive dividend income from RDM. She offered to go and pull those specific numbers for the Committee after the meeting.

Mr Dirks stated that this was something they needed to look into. He requested that they pull out the reports and look at the benefits relating to the war in Yemen and then how to move forward with that partnership.

Mr Hlakoane requested clarity regarding the question so that they responded properly. Did Mr Dirks want information since the joint venture was constituted or a certain term period?

Mr Dirks asked for records from 2010 because that was where it all started. He stated that both sides in Yemen were relying on their weapons – that was why he could not understand why Denel was running at a loss. Destruction and loss – that was when arms companies cashed-in. His information was that Rheinmetall had made billions from the war in Yemen.

Ms Serobe stated that income could only come in the form of dividend income – Ms Carmen Le Grange would pull those numbers out.

Chairperson Hlengwa requested that Denel provide all the information that had been requested during the course of the meeting by the following Wednesday – allowing them seven days to submit that.

Mr B Hadebe (ANC) stated that Denel was insolvent with a debt position of R3.4 billion as of 31 March 2020, including losses of R1.9 billion for the financial year under review. Its total assets amounted to R8.1 billion and total liabilities were R10.4 billion. In essence Denel was in a net liability position. Was the company trading recklessly? What was the latest regarding the payment of salaries to employees? Were there still employees that had not yet been paid? Were their jobs safe in terms of the future outlook? Was Denel looking at further retrenchments? How was performance appraisal done if Denel’s argument was that they still needed to train employees? He was under the impression that training and induction were done at the early stages of signing contracts or acquiring new employees. Was that not done at the earlier stage when recruitment of employees took place?

Ms Serobe stated that the balance sheet weakness of Denel was public knowledge. On the question whether Denel was trading recklessly, there was a lot of formulation before one declared to be ‘trading recklessly.’ At this point the Board did not think so. If it did, it would do the right thing. It would do all the necessary processes around it – in terms of unions and shareholders etc. She stated that it was quite a big statement to make. Presently Denel was absolutely not trading recklessly. Despite the Company’s position Denel did have plans that they thought were doable in terms of dealing with the issues together with shareholders. One of those was the process of getting rid of the non-core assets. In the meantime, Denel was not capable of taking itself out of this without the support of the shareholder. They were overwhelmed as a Board. Of all the Treasury issues - Denel did not feature. Even the Board was mindful that those gaps were legacy costs. Denel could not trade itself out of this on its own. In the short-term it needed help from government. The shareholder needed to decide what kind of company Denel was – in terms of being an arms company, a defence company etc. Everything that the Board did had to be signed off by the shareholders. Were they trading recklessly? – absolutely not. If they were, the Board would follow all the formal processes of announcing the reckless trading. She was concerned that Mr Dirks had raised this – as this was a public platform. It allowed the whole of South Africa to listen to the meeting. To create more anxiety around reckless trading. It was about turning Denel around, they were meeting with the shareholders and five unions that afternoon. She appealed not go the route of using language such as ‘reckless trading,’ as it was frightening and meant a lot. It was Denel’s obligation to announce when they were trading recklessly in terms of their bond holders. There was a formula before talking about reckless trading.

Chairperson Hlengwa interrupted Ms Gloria Serobe…

The Chairperson lost connection

Acting Chairperson Mr S Somyo (ANC) stated that the Chairperson had lost connection. He permitted a question from Mr Hadebe

Mr Hadebe stated that he wanted to make it clear that the Committee was not trying to create panic and anxiety. They wanted certainty. The Committee did not want another South African Airways (SAA) situation. SCOPA needed to ask these questions. Denel needed to take the Committee and the Nation into confidence. The financial situation spoke volumes for itself – he did not think Denel expected the Committee to ask ‘sweetheart’ questions or to ‘sugar-coat’ the truth. The Committee was doing this for the sake and interest of the public.

Mr Dirks stated that what Ms Gloria Serobe had done was totally out of order. He had wanted to raise that point of order.

Acting Chairperson Somyo stated that the essence of the questions asked by the Committee were to get some guarantees from the Board that through their own action, the Board sought to take the organisation away from the current financial position. There was no intention to create panic.
Ms Serobe stated that it was not a criticism from her side either, it was to say that the event itself, of reckless trading, was a very big event. Denel would deal with it very sensitively and they would have reported it to SCOPA when that point came.

Mr Dirks stated that they should make it abundantly clear that SCOPA was not a portfolio committee of a department. SCOPA’s mandate was totally different from other portfolio committees in Parliament. When Denel came with consecutive disclaimers – what did it tell SCOPA? A disclaimer itself was ringing the alarm bells that there was some recklessness taking place. When you came to SCOPA one needed to answer those sort of questions.

Acting Chairperson Somyo stated that the issue had been thoroughly addressed from both sides.

Mr Hadebe stated that they needed to work together with State Owned Enterprises (SOEs) to ensure they fulfilled their mandate. The Committee asked questions to ensure that they were all on the same page – this was their mandate. He asked whether Denel had a detailed turnaround plan dealing with the solvency and liquidity position. He also asked for a response to his previous questions regarding outstanding payments in terms of salaries for their employees. In the near future were they considering retrenching any of their employees. In terms of consequence management and training of staff – he also wanted a response to the questions asked previously.

Mr Hlakoane responded to the question around salaries. Since the previous year Denel owed to date R467 million – this included salaries, it included medical aid etc. However, in terms of salaries specifically, when they received the tranche fund of R271 million the year before, they had re-invested some of that money into operations to ensure that Denel got some revenue back. As and when the money was available, they were paying back some of the remaining salaries. There were different operations that had ‘clawed’ back. The medical aid was up to date – the only remaining issues were salaries. They were refinancing some of those activities with the absence of any funding.

In terms of the turnaround plan, he said that they still needed to take that particular plan to the Board for approval. It was still under construction. They were hoping that in the next three weeks or so, they would have reached agreement with the Board and then they would take it to the Minister for approval. In terms of the retrenchments he did not want to answer the question as they were going through processes of developing the new operating model. When they did the operating model, they went through a number of iterations. They were therefore not sure at the current stage whether the operating model would yield such processes – it was possible because they were top heavy. They were not sure of the number going forward. In the previous corporate plan – on their financial statements – they had alluded to the fact that they were embarking on section 189. That process had happened, specifically with the Aerostructures. Some of the entities were also top-heavy and tried to reduce numbers.

With regard to the training and consequence management, it was true that when policies and procedures were implemented, personnel needed to be trained in these. Most of them had been trained. They were addressing the issues relating to processes specifically.

Chairperson Mr Hlengwa gained connection again

Chairperson Hlengwa requested he go back to the issue previously discussed regarding the ‘reckless trading’ and the Chairperson of the Denel Board. The response of the Board Chairperson was not kosher in how it was couched. Mr Hadebe was not stating the issues of the reckless trading as a fact, he was posing a question for the purposes of clarity and pulling out the issues from the shadows and placing them on the table. The reprimand which anchored the response of the Board Chairperson was not acceptable. The Committee would ask those very difficult questions because as he had said from the outset – Denel was a shadow of its former self, riddled with serious financial challenges. There were three consecutive years of disclaimers. The state of health of Denel was of an entity that had collapsed. It was incumbent on the Board to provide the responses required. This was a very serious issue. If the Board did not see it as seriously as the Committee did – they had a problem.

He realised that Members may have aired their views in the interim, when he had lost connection but he felt that as Chair he needed to respond so that Mr Hadebe could ask his questions. SCOPA should not be dictated to – in terms of how questions were asked and what questions must be asked. If the Board was of the opinion that Denel was not trading recklessly – that must be placed on record. It must not ever happen again that those who appear before the Committee dictated how things were asked or what was censored. He had wanted to listen to Ms Gloria Serobe’s response to its end as he was taken aback by it. He stated that Mr Hadebe’s question was sustained – it was the Board’s responsibility to provide responses.

Deputy Minister Masualle said he thought that the matter was clarified to the satisfaction, in his view, and a clear understanding from the point of view of the Board. There should not be a sense that there was or there could be an intention to prescribe to the Committee the nature of the questions that may be asked. It was simply a matter of such intensity, that there was that intensity in engaging the issue. The question raised by Mr Dirks was somewhat concluded – in that there was a request that some information be given in so far as what had been the nature of the relationship and proceeds from the joint venture with Rheinmetall. The country, through Cabinet, had a Committee that oversaw and approved all manner of external trading in arms, given the sensitivity of geo-politics in so far as the relationships the Country maintained. Arms trade was therefore a controlled matter.

Mr Somyo asked in terms of trade, Denel got into partnership with a company that manufactured arms, the IP was sold to that company, then Denel remained a minority shareholder in that company in partnership with that company. What is the wisdom why Denel is in such an arrangement? Denel lost its IP, because it was sold. Denel got into partnership with that very company, as a minority shareholder, making use of the IP that was manufactured by Denel’s own technology. What was happening there? He asked to be schooled in that scenario.

Ms Le Grange stated that when Denel entered into that arrangement with RDM, part of the joint venture arrangement for the 49 percent, was what they call a ‘golden share arrangement. This allowed RDM to use Denel’s IP, but Denel still retained the ownership rights in that IP. The details of the golden share arrangement, in terms of South Africa’s first right of use in the event of having to defend the borders, were all relevant.

Mr Hlakoane stated that in terms of the issue raised earlier regarding the arms, there was a National Conventional Arms Control Committee that controlled how some of those items were sold. Application had to be made to that Council in order to trade internationally.

Mr Somyo stated that the IP did not seem to indicate loss. The entire intellectual property scenario was the wealth of any organisation. If one considered Denel, Denel was on defence technology. Therefore, the South African defence technology would be somewhat ‘sold’ to a number of entities out there. Denel may have retained some control through the golden share plan – however the IP at the core of it had gone to a new entity/owner/non-South African. Through that they preserved their right to produce. It might be necessary for the Board to look into the nature of how this kept the identity and strength of Denel. How could the Board preserve some kind of a value in this regard within Denel as a South African company going forward. This was probably where he would have wanted to see a change in a strategic approach.

Mr A Lees (DA) emphasised that the money that Denel had expected to receive was not budgeted for nor included in the budget. About half of what they needed had been allocated and they had had to get permission from National Treasury to use conditional funds for operational expenses including salaries, late payments to SARS and salary payments. The Board had come to the assumption that the company was a going concern. In terms of a going concern assumption, the company had to be able to operate for 12 months without any danger of going into liquidation. On what basis was that assumption made, the going concern, if the funding needed to come from the shareholder was clearly not coming? The budget was clearly done for the year – there might be an adjustment budget in October 2021, but that money would not come through till the following year. On what basis was the going concern assumption that the Company could survive for the next 12 months, without going into liquidation, being made?

Ms Serobe responded that the annual statements in front of them were for the year 2020. All the expressions the Board had made were on that basis. In 2021 the Board needed to keep reviewing the situation – knowing that the company was under financial stress and make a determination at a certain point in time for the financial year 2021. For 2021, the unions and stakeholders were having to look at the going concern and financial distress. At this point they did not have a going concern problem until certain things were traded. At this point in the year, the Board did not see a going concern issue. They would review everything again at the end of July/beginning of August 2021.

Mr Lees stated that the question was not really being answered. The Companies Act was very specific; the determination of reckless trading was not an annual event. As directors, the Board had an obligation to ensure that the Company did not trade recklessly. If it was not a going concern – then they were trading recklessly. He understood that the going concern assumption for the year under review was now a year old. But the question asked earlier was whether or not the company was a going concern presently and whether they were trading recklessly. To put off that assessment until July 2021, put the Board members at enormous risk. The directors of a company had an obligation in terms of law to not trade recklessly. Given the liquidity issues, given the required funding – a figure of R1 billion was not made available from the shareholder. How then, at this point, and not in July did the Board come to the conclusion that it was not a going concern? He suggested the Board might have information that the Committee was not aware of. He highlighted what had happened with SAA.

Ms Serobe stated that every six months the Board did a financial distress test. Every 12 months the Board did a going concern test. The Budget speech was important – with that together with their shareholder department they were having to make a plan as to how they answered the going concern test and the financial distress test. At this point they were not there. 

Ms B Swarts (ANC) asked how Denel had hired people who did not know supply chain processes – it was concerning that people in the SCM, who had such a huge responsibility still needed to be trained in PFMA. How were they hired without the requisite skills?

Mr Hlakoane stated that the manner in which Denel traded internationally and locally was very different to how other SOCs were treated. Whenever one had to go through a process of advertising a particular programme – because it was a controlled environment it was difficult at times to conform to the PFMA. For example, there were qualified items within the products that they dealt with, be it in missiles, ammunitions etc, there were specific companies that qualified to do a specific job in a specific item. It required them to confine to those particular companies because they were further down the supply chain. These were some of the intricacies they dealt with, with regard to the PFMA. Not to defend Denel.

With regards to training, they were doing their best to revamp the entire supply chain. The issue was not about the skills sets but the processes to follow in implementing some of the directives from the PFMA itself.

Chairperson Hlengwa stated that that cop-out was very dangerous. It could not be because of PFMA. If Denel was confined to certain limitations, such as applying for expansions and deviations, it was precisely to interact and engage with National Treasury. That response would not fly – it opened a pandora’s box. The standardisations of the PFMA remain. The Committee did not accept that response.

He noted that it was said that the Board was waiting for the Budget speech. He did not get the impression that the Budget speech answered what was being awaited. For all intents and purposes the Budget Speech was a ‘political’ speech. It spoke volumes about the Board – it spoke to bail outs.

Ms B van Minnen (DA) stated that SIU had appeared earlier in the month to talk about the proclamations to investigate issues at Denel. In terms of the Telspace Systems – the procurement for IT security that had a value of R6.6 million - was Telspace Systems still doing business with Denel or any of its subsidiaries? Why was there an irregular procurement process – this issue came up repeatedly. Then Denel made a 70 percent advanced payment of R4.6 million to them. It would appear from the SIU that the possible civil recovery was only R1.9 million from a settlement – one was looking at a loss there. In terms of the report, how long was that still outstanding to Denel? The officials concerned had left Denel – this was also a repeated pattern.

Mr Hlakoane stated that they had since engaged with SIU. The SIU had promised that it would be giving Denel a referral letter in terms of the proposition and conclusion of the settlement agreement that was reached with Telspace Systems. There were a couple of matters the SIU had indicated that it wanted to table before the Board. The Board was not privy to a lot of the information. The SIU would seek information and then report back to the Board once things were finalised. With regards to Telspace Systems they had not come back to Denel and communicated the conclusion.

Ms van Minnen stated that there were certainly a number of questions that could still be answered. Was Denel still doing business with Telspace Systems and were any of its subsidiaries doing business with them? Why was there an advanced payment? Those questions could be answered.

Mr Hlakoane stated that in terms of those transactions – those were being investigated, they did not have the details presently. That investigation had not been concluded. Until SIU came back and gave feedback, they were not in a position to respond to those questions. The SIU had indicated that in terms of those who had left the country – the SIU would seek extradition of those people to come back and answer to those matters and transactions.

Ms van Minnen stated that this was essentially deferring everything to the SIU. These things should be within the ambit of the Board to answer. Can the questions regarding continued work with Telspace Systems not be answered? It was a completely bizarre argument – that it depended on the SIU. In terms of Televax  [spelling unconfirmed] – 5.7 million. Was the white paper still outstanding? It appeared that it had been outstanding for quite sometime. Had the Board received value for money in this regard.

Ms Le Grange stated that she did not know all the detail of the Televax [spelling unconfirmed] matter, the information they had was that it was related to the suspension and subsequent firing of the previous GCFO and GCEO. Denel was waiting to get feedback on that particular matter. It was suggested that this be followed up with SIU.

Ms van Minnen stated that they had already communicated with SIU and that was why the Committee was posing their questions to Denel directly. To refer it back to the SIU, showed no willingness by the Board to grapple with the issues.

Ms Le Grange stated that there was a process for how the SIU engaged with Denel’s compliance function. In terms of that process, SIU initiated an investigation. They would then come to Denel – uplift certain information and Denel would be issued with a statement stating the hours worked on various cases. SIU would then formally report to Denel, when that took place, it went to the Board. Those reports from the SIU had not formally come to Denel and therefore had not formally gone to the Board nor through Board process.

Ms van Minnen stated that she would have to direct her questions to the SIU as Denel seemed to have no knowledge of any of the investigations within the company.

Ms Le Grange stated that out of the six investigations that Denel had done on its own, three were with SIU. In the respect of that, the three were done in terms of some of the items in their presentation – they had some of that information.

In terms of SIU’s report they had six areas, there were three areas that Denel had investigated on its own. Based on Denel’s investigations they could report the following, in terms of the procurement and contracting of the IT security assessment services – the Telspace Systems vulnerability test that was done – Denel no longer did business with Telspace Systems. They were waiting to hear the final outcome of that.

In respect of the procurement of services to develop a white paper – Denel paid R6.9 million for an investigation into that - the conclusion of that investigation report was that no recovery was recommended as Denel had received benefits as the funds were raised for that particular transaction. The matter was closed.

In respect of the matter of the procurement of the legal services, the amount was for R10 million – that was one with SIU and they were awaiting the report in terms of the procurement process.

Ms van Minnen asked whether there was a link between these procurements in terms of the previous members who were fired. She also pointed out that Denel now actually did have the answers to her previous questions.

Ms Le Grange stated that she did not know – as this was part of an ongoing SIU investigation. The fourth investigation that SIU raised was around the procurement of a contract for steel fabrication services and steel fabricated goods – this was around the VR Laser matter. Denel did do its own investigation, there was an amount paid to the VR Laser Group for R356 million. The investigator used was BDO. The status was that even though the contracts were cancelled – Denel had lodged a Court application to challenge the validity of the contract. They were undergoing processes to recover the irregular amounts.

Ms van Minnen asked how much of that was irregular.

Ms Carmen Le Grange responded that it was in that region, excluding interest amounts that were on there. The total value they were investigating was R356 million. The other two were the awarding of bursaries by Denel – that matter was being dealt with. The process of recovery of three of the bursaries awarded was negotiated with the SIU and they were in the process of recovery for the three bursaries that were awarded irregularly. The last two were around the manufacture of Casspir vehicles – disciplinary actions were taken against the employees and summons were being prepared. This was in relation to an amount of 720 000 USD. The last related to the chassis for Casspir vehicles, which was for R69 million and disciplinary actions were being taken against those employees as well.

Ms van Minnen expressed her concern around the fact that so many officials had left. The lack of controls had allowed for people to participate in an activity of looting money from Denel. Then those implicated left the employ and no follow-up nor re-claiming of the money took place. She was eager to know what internal controls were being introduced within Denel to stop that from happening. If one considered how it was being reflected in the annual losses over the past here years – it indicated that there appeared to be internal looting by officials who worked for Denel and then left.

Mr Hlakoane stated that they were doing things differently. Permission was requested from various levels of authority to transfer the IP when a request was made. During that particular time when those things happened, the people that were sitting in the positions of authority were those that then left – most of those people who were sitting overseas were CEOs of those divisions. Those people would have given authority to people below them to extract that. It was an issue of control – they could put controls in – but if the CEO gave one permission those transactions could take place. Hence, the SIU investigations. Any access was recorded within a particular program. It was a coordinated effort across levels.

Ms van Minnen asked in terms of the misappropriation of the IP, whether those instructions were given across levels – by various parties such as the GCFO and GCEO who were sitting overseas?

Mr Hlakoane stated that it appeared so and that was why they were awaiting the conclusion of the SIU investigation.

Ms van Minnen stated that the real issue seemed to be that the system allowed people to download on authorisation from people higher up in the system. This indicated a certain lack of security or double checking. What internal controls were now in place to prevent that?

Mr Hlakoane stated that Denel was trying to have a centralised system that would not be controlled from a particular division. If one did not have access – one could only view files and not alter them. Denel was in the process of integrating systems across divisions to ensure greater control at Corporate Office. Those being investigated were the CEOs of particular divisions.

Ms van Minnen asked whether the people who were now sitting in those positions had been vetted. Were there controls? There seemed to be a pattern spanning several years of internally looting the IP and the finances of the Company.

Mr Hlakoane stated that to his knowledge, having joined a year and a half before – one had to go through certain security checks and vetting processes to work in Denel – in any position at any level. The vetting was done and then a classification was assigned in terms of clearance.

Ms Serobe stated that even the Board members had to get security clearance every six months.

Ms van Minnen asked whether there were any outstanding security clearance tests – anyone who had not been vetted at all?

Ms Serobe stated that the most recent one was during COVID-19 October/November 2020 – she did not think there were any outstanding ones – in terms of the Board.

Mr Hlakoane stated that in any of the applications that Denel did to trade internationally through the NCACC, one could not apply for any certification if the Board members were not vetted and did not have security clearance. This was required to trade.

Ms van Minnen asked whether all the divisions’ members had been vetted, specifically division management. 

Mr Hlakoane stated that to his knowledge everyone had been vetted – he was not sure about the engineers though. They could provide this information in the coming week as all that information was at a divisional level.

Ms van Minnen asked whether SIU could respond regarding the six investigations.

Ms Zodwa Xesibe, Programme Manager: Denel Investigation, SIU, responded that when SIU started the investigation it had engaged Denel. As a normal practice it requested that there be a steering committee from Denel’s side that would deal with the SIU. Due to the nature of the business at the time and the fact that they were working on skeleton staff, the office of the Group Executive Officer of Legal Services at Denel was appointed as the liaison. The SIU had therefore been liaising with that Office in terms of documents, issue engagement and settlement proposals between Denel and Telspace Systems. The Group Executive Officer for Risk had also been involved in term of liaising.

As of the previous month she requested a meeting with the Board through the Office of the Executive Legal Manager. This was to bring the Board up to speed on some of the matters currently underway. Unfortunately, the response the SIU got was that there were a number of resignations and at the moment the Board could not make a quorum – however the liaison was going to arrange that meeting between SIU and the Board. She was not sure how far that had gone. To circumvent that issue at the time – because they wanted to advise on the Telspace settlement – a letter was written to Denel to advise them. Status reports were issued to Denel on a monthly basis – for Denel to note that SIU were involved in some of the matters. Certain issues were also reported there. 

With regard to the civil recovery, the R1.9 million was the civil recovery that Telspace Systems was willing to settle out of Court – this came as a result of a civil suit that was lodged by Telspace Systems against Denel. That was not the only amount that they would be recovering from that contract. The entire contract was irregular, in that there were no procurement processes that were followed. Denel never got the report from Telspace Systems. Even if Telspace Systems could table that report and give that report back to Denel – that report would be obsolete because it would be raising issues that were identified back in 2017 that may not assist Denel at present. The SIU was seeking to nullify the contract. The SIU wanted to approach their special tribunal in respect of that and declare the contract invalid. The SIU would still pursue the recovery of the R4.6 million that was paid as an upfront payment.

With regards to the white paper, there seemed to be a number of white papers that were sought by Denel. The SIU was involved in one of the white papers; that was the report that was presented to the Committee previously. R1.4 billion was unlocked on behalf of Denel of which Denel had to pay 0.47 percent. The amount was negotiated down to R5.7 million plus value added tax (VAT), from R6.5 million.

With respect to IP, the SIU had provided Denel with a list of systemic recommendations in terms of the status reports that were submitted to Denel. Those status reports would accompany their invoices. She was unsure whether Denel had implemented any of those.

Ms van Minnen noted that Ms Xesiba had stated that the Denel Board could not make a quorum – she requested clarity on this – was this a current situation? In terms of the Telspace Systems civil recovery, it was essentially a set-off. She was concerned that SIU had said they had been unable to meet with the Board – surely it would be normal practice for the Board to be more than happy to meet with SIU at this point.

Ms Serobe responded to state that the Board did have a quorum, the week before the Board had met about the corporate strategy. The many resignations in Denel might have caused that concern – but they did have a quorum.

Ms van Minnen asked why the Board had not yet met with the SIU.

Mr Hlakoane stated that SIU seemed to be dealing with a person in the Legal and Risk Division. He was not privy to the fact that SIU wanted to meet with the Board – and usual channels would prescribe that such a request went through him. The Board would accept such a presentation from the SIU.

Ms Xesibe stated that SIU had requested to meet with the Board the previous month – because they needed to urgently advise the Board with regard to the Telspace Systems legal situation between the two companies. The SIU was told that there was a high number of resignations from the Board at that time – not now – and it would be difficult for the Board to make up a quorum. As an alternative they were requested to draft a letter in terms of how to deal with the Telspace Systems settlement issue.

Ms van Minnen asked if there had been any response to the letter from SIU. She asked whether the Legal division was present.

Ms Le Grange responded that they were not present in the meeting underway.

Ms van Minnen stated it was important that they had a meeting where they were present. This was a serious matter, on the one hand SIU was saying that they had approached Legal for meetings, the Board was saying they were not aware of it and Legal was not there to answer that. That was an issue.

Chairperson Hlengwa agreed with Ms van Minnen, the Committee would set up another date for the Board, Legal and SIU to present to them.

Ms Serobe stated she could confirm that she had received no formal request for a meeting – and this would have been something they would have prioritised. The Board was happy to do that.

Ms van Minnen suggested that she leave the rest of the questions for the meeting that would take place which would include Denel’s Legal Division.

Chairperson Hlengwa emphasised the situation at Denel – in relation to the three disclaimers. Substantive issues had been raised. The Committee would set up another date for the meeting

Mr Hadebe wanted to latch onto the issue regarding the Legal Division person who seemed to have taken it upon him/herself to indicate to SIU that the Board was unable to meet because of issues of quorum. The Board was saying there had not been an instance where they were unable to meet as a result of not making up a quorum. As a result, the SIU and Denel had lost almost a month where they could have met and dealt with those pressing and urgent matters. Someone had misled the SIU – that should not be taken lightly. The Board needed to act accordingly. He wanted to know what action would have been taken against that person when the Board returned to the Committee.

Chairperson Hlengwa suggested they park that matter and they would just deal with the investigations specifically. He would give Mr Hadebe and Ms van Minnen the opportunity to continue with questions in the following meeting.

Ms Serobe thanked the Committee and stated that they looked forward to meeting with it and resolving the matters.

Deputy Minister Masualle assured the Committee that they did not take the performance issues lightly, particularly financial performance issues. Together with the Board they were looking at sharpening the turnaround strategy at Denel. There were very tough questions that needed to be asked by the whole government system. They were in the process of getting ready to submit a Cabinet submission that requested certain decisions that government needed to make in terms of procurement related matters. This would embolden the position of this asset, that the country had. Given the financial situation at Denel – given the short period of time, the necessity of some financial injection was unavoidable because some of the elements of the turnaround plan would only take effect in the medium to long-term. They were engaged with Treasury in that regard.

Chairperson Hlengwa stated that the Committee would reflect on all the matters that related to Denel and find time to have a ‘family’ meeting as a Committee. They had had a lot of entities present to them that they needed to consider. Denel’s financial situation was serious – something would need to give. Financial injections should not be solutions to non-financial problems. Restructuring must happen accordingly. Financial bail outs needed to occur towards transformation. The matters would be finalised soon in a follow-up meeting.

The meeting was adjourned.