In a virtual meeting, Denel briefed the Committee on its current state and the progress being made on investigations into irregularities and malpractices.
Denel said it was technically insolvent, as its turnover was R363 million below budget. It owed R636 million in salaries to its employees, as well as close to R900 million to suppliers. The South African Revenue Service had initially refused to grant Denel its tax clearance certificate on account of the non-payment of Pay As You Earn and Value-Added Tax. (It had since indicated that it would grant the certificate on the condition that Denel finalise those payments by the end of August).
Due to the non-payment of salaries, applications had been instituted in court by the unions. Some employees who had resigned, and even those still employed by Denel, were taking Denel to court for the amounts owed to them. Some of the suppliers who had not yet taken action, may do so should Denel not be stabilised soon. The majority of the employees who resigned were from the technical and engineering departments of Denel. The company was in a precarious position as a result of the loss of human capacity. A proposal had been made to exit or transfer business from Spaceteq, and Denel was looking to exit Mechem and DGR. The exiting of these non-performing business units would improve liquidity. For Denel to become sustainable, over the next few months, it would need funding of about R335 million to remove the current inefficiencies and work on stabilise the business.
In terms of the ongoing investigations, disciplinary action against the implicated employees had been completed, with summons being prepared to take further action. Further, the implicated executives had been suspended. The investigation into the Khampha Attorneys Incorporated matter was ongoing through the Special Investigating Unit. On the allegations of theft of Denel Intellectual Property, a criminal case had been opened, and the matter was being dealt with by the Hawks and the Special Investigating Unit. A report had been completed on the extension of loans by Denel to Land Mobility Technologies. It had been presented to the audit committee and will be legally reviewed for implementations once finalised. Reports had also been completed on the out-sourcing of the Denel fuel farm at the Kempton Park campus and the recommendations were currently being implemented for the sourcing and contracting of Fireblade as Denel’s tenant. The investigation into the Intellectual Property arrangements with Barij Dynamics had been finalised, with the consequence management process under way. One implicated person had been suspended, and the other individuals involved were being sought after by the Hawks and the Special Investigating Unit.
The Members were extremely concerned by the fact that Denel was technically insolvent and thus appeared to be trading illegally. Questions were asked about the significance and influence of shareholder support for the decision to continue trading. Members asked about the tax clearance certificate, which Denel projects and divisions were still financially viable, the lack of apparent consequence management, and why Denel was exiting its joint venture relationship with Rheinmetall Denel Munitions. Members were aggrieved by what they felt was a lack of agency and accountability, as well as misrepresentations on the part of Denel, as all questions were referred to the Special Investigating Unit for more details. Numerous requests were made for Denel to provide the Committee with written responses and more detailed information on various points. The issue of the need for a government bailout was emphasised by the Members.
The Chairperson felt strongly that Denel was not moving at the necessary speed to resolve various issues it had and that this impacted on and undermined the ability of the Committee to provide effective oversight of Denel.
The Chairperson welcomed everyone to the meeting. He said that upon his return from leave, he found court papers had been served the Speaker of the National Assembly, the Chairperson of the Portfolio Committee on Public Enterprises, and himself, as well as other respondents, on a matter brought before the Constitutional Court by the National Union of Metalworkers of South Africa (NUMSA) for the purpose of, amongst others, appealing to the court to direct the Committee to handle South African Express and Denel SOC Ltd (Denel) related matters in a particular manner. He had since had a meeting with Parliament Legal Services to clarify the issues. The papers would be circulated to the Members by the end of the day. Parliament Legal Services would urgently brief the Committee for the Members to formulate a response.
Mr Phumulo Masualle, Deputy Minister of Public Enterprises, said that he did not have anything specific to say at the moment. He would, with the permission of the Chairperson, allow the Denel delegation to present and respond to any of the matters raised.
Ms Gloria Serobe, Chairperson: Board of Directors, Denel, introduced the team which would present the Denel briefing.
Mr William Hlakoane, Acting Chief Executive Officer, Denel, took the Committee through the presentation. [Please refer to the slides for full details.]
Overview and current state
Denel was still a national security asset, with the primary purpose of designing, developing, manufacturing, and supporting defence material. DENEL still controlled this intellectual property. The developmental mandate was focused on job creation and youth and disabled persons development. Denel competed globally, and was very strategic to South Africa on account of supporting the South African National Defence Force (SANDF). Denel was economically viable and could play a significant role in the country’s economic development.
Denel’s current state was not a very good picture, with its turnover being R363 m below budget for the current financial year. This was due to Denel being unable to trade efficiently for a period of time since the start of the pandemic. Denel currently had a net loss of R368 m. The delivery of the budget of R3.7 bn was at risk as Denel continued to lose skills and not operate actively.
Denel was technically insolvent. Its available cash was insufficient to meet operation requirements, including the payment of salaries and suppliers. Denel currently owed about R636 m to its employees and R900 m to suppliers. If no mitigation action was taken, the 2021/22 financial year cash flow projection indicated a net loss of R600 m. The South African Revenue Service (SARS) had not extended Denel’s tax clearance status due to the non-payment of Pay As You Earn (PAYE) and Value-Added Tax (VAT). SARS had indicated that it would give Denel a tax clearance on the condition that it paid the PAYE and VAT owed by the end of August. As a result of poor Fitch Ratings, investment was decreasing.
In March, SAAB instituted a liquidation order. This matter was in court while the parties worked on finding an amicable solution. Due to the non-payment of salaries, applications had been instituted in court by the unions. Some employees who had resigned, and even those still employed by Denel, were taking Denel to court for the amounts owed to them. Some of the suppliers who had not yet taken action, may do so should Denel not be stabilised soon.
Between April and June, 28 employees had entered the company, with three people being transferred, and 138 employees leaving. The majority of the employees who resigned were from the technical and engineering departments of Denel. The company was in a precarious position as a result of the loss of human capacity.
Denel had to be restructured to improve employee engagement and morale. The shared services model had to be implemented. The key challenges pertained to the loss of key capabilities, the inability to pay salaries, and the inability to fund the exit payments of some of those exiting employees. To move forward, Denel had to establish and ensure that there was a flexible workforce plan in place, as well as ensure that there was agile leadership.
Denel had not reneged from its plans regarding the non-core business areas, but rather, it had begun to focus on ensuring that the company was stable and sustainable. The focus was on the retention of core capabilities, the driving of contract execution and efficiency, and improving the cost structure within Denel.
A stabilised and refocused Denel would remain financially sustainable by meeting the SANDF requirements, leveraging its innovation and technology development capabilities to lead the industry in meeting South Africa’s Homeland Security requirements, and transitioning optimally into the fourth Industrial Revolution.
This new model would assist in saving costs from shared activities, or the transfer of core capabilities within the group structure. Currently, everything was being done in silos. It would also aid in leveraging shared services, significantly reducing the executive cost structures, implementing horizontal integration, lowering the cost of capital, and increasing its market power to be able to negotiate lower prices and transact more confidently with banks and other firms.
The focus in terms of the restructured operating model was on the two divisions of Engineering and Maintenance and Manufacturing. This would deal with the issue of costs, and reform the business, and focus on core operating areas. A decision had been made to exit from ventures with associated companies, namely Rheinmetall Denel Munitions (Rheinmetall), Barij Dynamics (Barij), and Hensoldt Optronics (Hensoldt). This would result in the realisation of liquid money.
A proposal had been made to exit or transfer business from Spaceteq, and Denel was looking to exit Mechem and DGR. The exiting of these non-performing business units would improve liquidity. Denel was still evaluating the strategy regarding the disposal or use of its property. The plan was to consolidate various departments in order to centralise operations within the two main divisions in the company, and in this way reduce overheads and improve efficiency. It was important to ensure that intellectual property (IP) protection was emphasised throughout this restructuring process.
The strategy behind the repurposed Denel was to achieve the requisite market share, become a technology leader in innovation and security, a maximise profits. This would be done by improving the efficiency of various sectors and segments, and ensure delivery certainty and quality, and competitive pricing. For Denel to become sustainable, over the next few months, it would need funding of about R335 m to remove the current inefficiencies and work on stabilise the business. Thereafter, the plan would be to excel in all areas.
With regard to Mr Philippe Solomon, a letter of demand for $720 000 paid to the technical advisor of the commission had been sent out, and disciplinary action against the implicated employees had been completed, with summons being prepared to take further action. For the VR Laser Group matter, all of the contracts were cancelled, and the three executives named in the Ngidi report, who remained in the employment of Denel, had been suspended and would participate in disciplinary hearings.
With regard to the ENNE 7 matter, disciplinary action against the implicated employees, and summons were being prepared. With regard to the Regiment Capital, no recoveries were recommended as Denel received the benefit as funds were raised. None of the involved persons were still employed by Denel. For the Khampha Attorneys Incorporated (Khampha) matter, the investigation was ongoing through the Special Investigating Unit (SIU). Denel and the SIU were finalising the claim relating to Telspace. The State Attorney had been engaged for assistance in this regard. On the allegations of theft of Denel IP, a criminal case had been opened, and the matter was being dealt with by the Hawks and the SIU.
On the extension of loans by Denel to Land Mobility Technologies (LMT), a report had been completed and presented to the audit committee and will be legally reviewed for implementations once finalised. A report had been completed and was currently under review for the out-sourcing of the Denel fuel farm at the Kempton Park campus. A report had been completed and the recommendations were currently being implemented for the sourcing and contracting of Fireblade as Denel’s tenant. For these matters, Denel was constrained with regards to the funding required to implement the recommendations. The investigation into the IP arrangements with Barij had been finalised, with the consequence management process under way. One implicated person had been suspended, and the other individuals involved were being sought after by the Hawks and the SIU.
Discussion and responses
Ms B Van Minnen (DA) said that the Members were being told that Denel was technically insolvent. If that was the case, she asked why, looking at the lack of a tax clearance, the figures, the application from SAAB, the issue of the salaries, Denel was still trading. Were there any parts to Denel that were still financially viable that could be split off? The financial situation was looking even more dire than before. Legally, Denel should not and could not be trading, and had to be declared insolvent.
Mr Hlakoane said that most of the divisions were financially viable. He explained that within the Maintenance and Manufacturing division, the Denel Aeronautics, Pretoria Metal Pressing (PMP), and Overberg Test Range (OTR) units were still financially viable. The most affected unit was Denel Dynamics, which did a lot of developmental work, as a large cohort of engineers had left. One of the subsidiaries, Denel Vehicle Systems (DVS), was still financially viable, and the hope was to merge it with Denel Land Systems (DLS). DLS’s dependence on the contract under Hoefyster was a problem that had to be unlocked as the contract had not yet been cancelled.
Ms Van Minnen noted that the lack of a tax clearance certificate from SARS meant that Denel was committing a criminal offence in terms of the Tax Administration Act 28 of 2011. She asked what the state of negotiations were with SARS, and why SARS had failed to act in this regard. She would also be asking SARS this question directly.
Mr Hlakoane said the issue with SARS was almost resolved. A letter had been received indicating that SARS was willing to give Denel the tax clearance certificate subject to the payment of the PAYE and VAT by the end of August. There was a Denel team working with SARS on this matter, to determine how much could be paid within the timeframe to abide with that condition.
Ms Van Minnen asked if the Committee could request to see that letter and get information before the end of August on whether the PAYE and VAT was paid.
The Chairperson acknowledged that request and said that it would be done.
Ms Van Minnen asked whether the employees implicated in the Mr Phillipe Solomon matter were still in the country, or whether they had left the employ of Denel and left the country. What were the chances of those summons being served on those individuals?
Mr Hlakoane said Denel was working closely with the SIU. The SIU was working on ensuring that those summons would be served, even where the individuals had left the employ of Denel as well as the country.
Ms Van Minnen asked what the outcome of the disciplinary action against the current employees implicated in the Mr Philippe Solomon matter was.
Mr Hlakoane said that the State Attorney had been engaged to finalise this matter. The investigation was still ongoing.
Ms Van Minnen suggested that the SIU should also give an indication on this matter. She asked what the progress was on the validity of the contracts with VR Laser Group as well as on the suspensions of the executives. Where those executives suspended with pay or without pay?
Mr Hlakoane said that the executives were suspended with pay to allow the investigations to proceed, in light of their employment contracts and the Labour Relations Act 66 of 1995. The details on the VR Laser Group matter were with SIU. The court application had been lodged, as the contracts were invalid.
Ms Van Minnen noted that it appeared as though more detail would have to be received from the SIU on the investigations. She asked for the outcome of the action against the employees implicated in the ENNE 7 matter.
Mr Hlakoane said those employees had been exited on the system. He would have to find more specific details. But those who had exited the system were still being targeted by the SIU.
Ms Van Minnen asked for a more up to date report on these investigations, as it seemed that there had been developments since the report being presented was submitted. She was concerned about the Khampha matter, as the SIU report indicated that Khampha claimed not to have any documentation. The reality was that attorneys had to retain documentation for a certain period of time. She asked for an update in this regard.
Mr Hlakoane said that the current status was that he had approved access to those documents. The SIU had thereafter been able to access the documents and had made good progress on the matter.
Ms Van Minnen asked for clarity on the Telspace investigation.
Mr Hlakoane said that the issue in the investigation had to do with jurisdiction, and that the SIU would explain that problem in detail. He stated that the investigation was being finalised, with the State Attorney being asked to assist on the matter.
Ms Van Minnen asked for a more extensive report on the investigation into the theft of Denel IP.
Mr Hlakoane said the criminal case had been opened in April. The case had been sent to the Hawks, which was working with the SIU, to ensure that all of the investigations done were properly concluded. From what he knew, good progress had been made.
Ms Van Minnen noted that most of the information given by the presentation and Mr Hlakoane was not extensive, and every response referred her questions to the SIU. She suggested that the Committee take these investigations up directly with the SIU to ensure a more fruitful discussion.
The Chairperson noted that when the Committee last met with Denel some of these matters had been raised with Denel stating that extensive answers could not be given due to the non-receipt of documents from the SIU. That was why Denel was briefing the Committee again. The back and forth being displayed placed the Committee in a difficult position. He recommended that Ms Van Minnen finish asking her questions to Denel on the investigations, then proceed to ask the SIU, and subsequently return to ask Denel any remaining questions.
Ms Van Minnen said it was concerning as Denel was trading when it was clearly insolvent, staff were leaving the employ of Denel and popping up in other jurisdictions, and IP was being stolen. The Committee had been in this situation with Denel before, where in many ways Denel merely abdicated agency and responsibility and handed everything over to the SIU. The Committee needed to have proper reports on these investigations. The lack of information provided made it difficult for the Committee to conduct oversight. It really seemed like Denel was acting in a disingenuous manner in not disclosing specific details.
Mr Hlakoane said he had alluded to the fact that due to financial constraints, Denel was unable to act on and implement the recommendations made by the investigators on the LMT, Environmental Measurements Laboratory (EML), and Fireblade matters. He stated that he had mentioned, with regard to the IP arrangement with Barij, that an employee had been suspended. He was unsure whether he had been requested to provide the names of the involved individuals. The individuals who had left the system were being sought after by the SIU, hence the investigation was not yet finalised to know with certainty how many people had to be charged.
The Chairperson said the issue was not the names of the individuals, but rather the progress of the investigations and actions taken. The issue was the fact that there had been a prolonged period where the persons implicated had been suspended with pay. It was evident that when it came to junior employees consequence management moved quickly, but when it came to senior employees or managers it moved at a snail’s pace, with the hope that the Committee would forget, which it would not. The pace of the investigations and actions begged the question of whether that pace was influenced by the particular persons implicated. It was in the interest of Denel to move with the necessary speed. The names of those people should be given to the Committee.
Ms Van Minnen said her concern was that Denel was clearly insolvent and trading under illegal circumstances, with regard to the tax clearance issue. There were employees who had left and popped up in other jurisdictions and there seemed to be no consequence management, with the excuse being a lack of finances. She failed to understand why Denel was not moving faster to resolve the issues. She requested that the Committee receive a detailed document containing the names of individuals as far as legally possible, track matters with SARS, and hear from the SIU, as well as to hear more details from Denel on the progress made. The one-liners contained in this presentation did not suffice.
Mr Hlakoane said that Denel had made progress in completing some of the investigations. The best was being done under the circumstances. Some of the cases were criminal, and Denel did not have the capacity to deal with criminal matters. That was why there was a reliance on the SIU. Denel was guided insofar as the content of the presentation was concerned by its shareholder. If it was requested that names be given, that could have been disclosed as far as legally possible.
The Chairperson said that bearing in mind the lack of speed and efficiency with which Denel was dealing with the matters, the Committee was well within its right to request those names. The reason of potentially being jeopardised was insufficient. The Committee was not going to accept a situation where executives were suspended, but at home on the payroll with no real consequences having arisen, as if it was business as usual. The Committee’s patience was very thin.
Ms Serobe said that when Denel last met with the Committee, it had not met the SIU. Since then, Denel had met with and received reports from the SIU. That was why Denel was able to open up the criminal cases and get things started. On those criminal charges, although it seemed like there was slow movement, these matters were complex. Denel was just as anxious as the Committee with regard to ensuring that consequence management occurred. Denel had to be guided properly by the Hawks and the SIU. The stealing of IP was a very complicated process, and hence Denel had to ensure that everything was done properly.
She said that the whole reconstruction of Denel was extremely sophisticated, and management and the board had to be very smart and cautious about how it went about it. Some of these things, such as the extension of loans, required Denel to have capacity. This meant that problems had to be worked around. Denel was just as anxious as the Committee to finalise these matters. Denel had a liquidity problem, thus other things had to come behind the issues of insolvency. Denel had good assets, and once approval was given to move those it would free up cash. However, disposing assets was not sustainable. Everything was very closely managed. Denel was engaging closely with the shareholder as well. The Committee should not think that Denel was not in a hurry to resolve the issues, as it was in its interest to do so.
Ms Van Minnen said she looked forward to hearing from the SIU. It was a very unfortunate situation. She heard what the Mr Hlakoane and Ms Serobe were saying. However, it was very concerning that Denel was essentially the victim of mass looting, to the point that it was trading in insolvent circumstances. She would need a great deal of persuasion to believe that Denel should not be placed under liquidation immediately.
The Chairperson asked the delegation from the SIU to take note of the issues to ensure that it could respond wholistically and not deal with overlapping matters.
Mr M Dirks (ANC) asked if the Members could be given an explanation of the joint venture relationship between Rheinmetall and Denel, how it was structured, and the financial viability of that relationship.
Mr Hlakoane said that Denel had 49% shareholding in the joint venture with 1% being held by Rheinmetall. It was a very good relationship, however a business decision had been taken to exit that joint venture.
Mr Dirks asked what the reason was for disposing of the shares in the joint venture.
Mr Hlakoane said it was because of Denel’s financial situation, in order to create liquidity. One of the assets capable of being moved to create capacity for trading the shares held in Rheinmetall.
Mr Dirks asked when those shares were disposed of. He could not understand how Denel was insolvent when it had this relationship with Rheinmetall.
Ms Serobe said the shares had not yet been completely disposed. To the extent that Denel was merely a shareholder in Rheinmetall now, its access to liquidity was on the basis of the declaration of dividends, otherwise it merely remained a valuable asset. Rheinmetall had not declared dividends for the past three years.
Mr Dirks was curious as to why, after making more than R50 bn in arms sales over the last ten years, there were no dividends declared by Rheinmetall to Denel. He could not understand how this could be the case.
Mr Hlakoane said that Denel had only not received dividends in the last three years. Looking at the years before that, Denel had received low margins of dividends on an inconsistent basis. This was due to strategic decisions taken by the board of directors of Rheinmetall during those years.
Mr Dirks said he would support the termination of the joint venture relationship. It was very lucrative, but it was very problematic in that it was fuelling further warfare and killing in Yemen. It was known that Germany had banned the sale of arms to countries involved in the war in Yemen, hence Rheinmetall could not sell arms directly. Thus, there was a strong suspicion that Rheinmetall was using this joint venture to sell South African arms to parties involved in the conflict in Yemen. That much was confirmed in a recent report.
He said he was surprised why the security agencies had not made any investigations into this joint venture relationship over the past few years since there had been so many reports indicating issues.
The Chairperson noted Mr Dirks’s proposal. He said it would require a certain amount of due diligence. Further information would be needed, hence it would be flagged for later discussion.
Mr S Somyo (ANC) said that the Denel story was complicated in the technology environment, particularly with regard to weaponry. Denel had been reserved as one of the strategic elements of South Africa’s defence capabilities. He acknowledged that the current board had been brought in during very difficult circumstances. He asked if there were any conditions attached to the employment of the members of the board of directors. In light of the troubling state of affairs, and the potential impact it would have on the board members’ reputations, had any stipulations been made to the shareholder pertaining to staying on the board and seeking to resolve the situation?
Ms Serobe said that generally, the tendency was to fear being in a space such as that which Denel currently occupied. The competing interests of working for the country and protecting individual reputations had to be weighed up. Other than the normal issues of protecting the board members’ reputations, the shareholder had been asked to give strong support—the shareholder being Mr Pravin Gordhan, Minister of Public Enterprises, and by association, the Department of Public Enterprises (DPE).
By strong support, she meant that the board members had asked the shareholder to indulge them as they proceeded to work on improving the situation. The board members were prepared to expose themselves, in a professional sense, if the shareholder and the state was behind everything they tried to do, provided it was not criminal nor fraudulent. The board members were comforted to know that the shareholder was extremely helpful. The board members had appeared in court for unprecedented matters, but they were able to do so with the assistance and support of the shareholder.
She said that under these circumstances a new director of the audit committee had been appointed. She came on board based on the promise made indicating that there was shareholder support. As soon as the government said that Denel was important, psychologically, for her, that was the support that she needed.
Hence, there was no written conditions, but there was an unwritten condition for support when the board was doing the right things. And by that same token, there was an unwritten condition that the board members would be removed if they did something illegal or fraudulent. The board members agreed to take positions in Denel was because they believed the dire situation could be salvaged, and because they were assured of strong shareholder support in navigating through the issues.
Ms V Mente (EFF) asked what the sources of revenue-making was for Denel. How would Denel conduct business without relying on the DPE and government funding? If there were projects that could generate revenue, could they be outlined clearly? What was Denel doing to generate revenue for itself? As things stood, the only source of revenue was based on the income from the state.
She noted that the heavy reliance on law enforcement was very problematic because the opening of criminal cases meant that Denel had created an environment filled with irregularities wherein its employees could commit criminal offences. What was Denel doing to completely remove any of those individuals who were causing financial strain on Denel? Denel had its audit reports and other documents which indicated where the irregularities and who the causes of those irregularities were. There had to be internal consequence management. Denel should not be resorting to going to law enforcement. Has any money been recouped from those individuals who had caused these issues in Denel?
Mr Hlakoane said that 60% of revenue came from the SANDF. The list of the multitude of projects could be provided. Those projects would make Denel close to R11 bn of revenue in the next three years. Maintenance was being done for SANDF, with regard to armoured vehicles and aircraft. Those maintenance operations constituted part of that 60% of revenue. Globally, 40% of revenue was being provided across various countries which could not be disclosed. However, those revenue streams could be provided to the Committee.
The employees who had committed the malfeasance and were still employed by Denel had been suspended and action had been taken against them. With regard to the individuals who had left, as the cases were still ongoing, the SIU had been engaged for assistance. The reliance on law enforcement was due to the fact that law enforcement was best placed to deal with certain aspects of the matters outside of the domain of Denel.
On recouping some of the money, as the criminal offences were sitting outside of Denel’s domain, the SIU would provide information on how Denel would recoup the money. Money that was lost in one of the matters under investigation was being recouped, and commitments had been made to the interested parties. Some strides had been on recouping money lost. For the IP matter specifically, Denel would have to wait for the investigation to be concluded so that Denel could follow a proper legal route to recoup the money involved.
The Chairperson noted Mr Hlakoane’s statement to the effect that some of the information relating to Denel’s revenue streams was not for public consumption. Denel was a state-owned company (SOC), and thus its information should be publicly accessible. There would be a slippery slope if the executive management of Denel decided what information should and should not be disclosed. All information, as far as legally possible, had to be made available. The entity could not solely determinate what was for public receipt, the Committee had to have a say in this regard, otherwise its oversight capacity would be undermined.
Ms Mente asked how long the suspended members of Denel had been suspended. She asked whether the relevant cases were being investigated by the SAPS and the SIU, or only by Denel? Was the outcome of those matters dependent on what the SAPS and the SIU determined, or on internal findings made by Denel.
Mr Hlakoane said that the members had been suspended for more than eight months. Internally there were disciplinary actions dealing with the theft of IP that did not link up with the criminal investigation conducted by the Hawks and the SIU. The members involved in the VR Laser Group matter had been suspended for more than a month.
Ms Mente suggested that the Committee receive a written response outlining what Mr Hlakoane explained, as the explanation did not align well with the matter of internal investigations. The finding of internal irregularities should be enough to dismiss a member of Denel. If there was more information required to make a solid case, could the Committee get a clear indication as to who was being suspended for which matters, and what investigations were being done internally, by whom, to establish what?
She noted that in the past, investigations into malpractice were prolonged, which meant that the board of directors changed, and those implicated members left and appeared elsewhere. That approach had been taken for South African Airways (SAA) and South African Express, and where were those entities today? The same mistakes would not be made with Denel under the watch of the Committee. There had to be accountability. The correct information had to be provided. The Committee needed an indication as to when the investigations would be thought to be completed.
Mr Hlakoane said that the information requested by Ms Mente would be provided to the Committee.
Ms B Swarts (ANC) was concerned that no consequence management had been conducted on the investigations done by PricewaterhouseCoopers (PWC) and Edward Nathan Sonnenbergs (ENSafrica). This meant that the payments made to those firms were fruitless and wasteful. She asked how much money had been paid to those firms for them to conduct the investigations.
Mr Hlakoane said that he did not have the details on the amounts paid to those firms for the investigations. However, that expenditure was not fruitless and wasteful, as the investigations had to be conducted into matters of irregularities in order for Denel to take the necessary action. Denel ensured that the necessary advancements were made with regard to reclaiming the money spent on those investigations.
Ms Swarts said that she was not satisfied with the response by Mr Hlakoane, as Denel had already paid the money to the firms for the investigations, yet no consequences had been implemented. She wanted to know how much was paid.
Mr Serobe said that the complete figure could be provided in addition to the requested written response. The expenditure was definitely not fruitless and wasteful. The investigations had been conducted, and wrongdoing had been determined. The next step was to take people to court, which required more money. But, the expenditure had resulted in Denel knowing what was done, and who did it, so that it could easily proceed, when money was freed up, to take legal action.
Mr A Lees (DA) noted the emphasis placed by Ms Serobe on shareholder support. He was curious about this statement as the shareholder was the South African citizen represented by the Minister. The Minister was not the shareholder, but merely the representative. He alleged that the shareholder did not share the Minister’s support for Denel. Hence, shareholder support had to be looked at very cautiously.
He said that, in terms of the law, Denel should be in insolvency, and as it appeared that the board chose not to follow the law, he asked whether that was due to the Minister ignoring the provisions of the Companies Act 71 of 2008 and the Public Finance Management Act 1 of 1999 (PFMA). Was the shareholder indicating that Denel should ignore the provisions of the Companies Act and the PFMA?
Ms Serobe said that she knew the actual shareholder was the South African citizen, but due to the size, there was a representative. She understood that the support came from the shareholder representative. She stood by her previous comment, that a board without the support of a shareholder representative would not be able to function. She was mindful of the fact that the Minister was merely a representative of the people. Denel would hear through the Minister, as he was the link, whether the people were really in support of Denel. The board was very serious about that.
On the second question, she stressed that Denel was not ignoring the PFMA nor the Companies Act. In fact, the law was being followed thoroughly, and everything was processed properly under the PFMA and the Companies Act. Due to the PFMA, approval had to be waited for in order to dispose of certain assets. Those legal processes were adhered to. Denel was following the law. The Companies Act was helpful even where a company was challenged in the way that Denel was challenged. She stressed that the Minister was not encouraging the flouting of the law.
She clarified her earlier response to Mr Somyo by saying that the shareholder support she had referred to had nothing to do with the undermining of the law, but rather the support of the board members in working to make the right decisions for the good of Denel.
Mr Lees said it was good to receive that comment, however, he needed clarity on the statement that Denel would not continue without shareholder support. He asked why Denel would not continue without shareholder support.
Ms Serobe said this was the state with any and all companies. In the absence of shareholder support, Denel, or any SOC was not in a position to engage with the government on its turnaround plans and other matters and negotiations properly and effectively. Shareholder support assisted the board in navigating through the intricacies of working with other government entities in a legal and efficient manner.
Mr Lees said that in a way this statement complicated things more. He asked if she was saying that the provisions in the Companies Act which required certain steps to be taken for insolvency had or had not been followed.
Ms Serobe said that for Denel to get to the stage where the board members had to say that Denel was in that much trouble, it had to have exhausted all of the steps required to be taken by any company in the same position. Those steps were being taken. Internally, the board members had to look at disposing of some assets and reallocating certain resources to ensure the use of the existing unnecessary surplus. If the situation gets to the point where all these steps had been taken, and the board members feel that nothing else could be done, the Committee would be the first to know that all the necessary procedures would be followed. Denel was being properly technically and legally advised in order to take the necessary steps.
Mr Lees said that Denel Aerostructures had been closed, its employees had been retrenched, and as a result there had been a loss of the high-technology manufacturing capacity for Airbus 400. He asked if the Committee could be assured that all existing contracts which Denel and its subsidiaries currently had were being completed and could be completed with the available resources on time and as required.
Mr Hlakoane confirmed that Denel was doing everything it could to complete all of the contracts as required. Where there was a lack of resources, the board members were looking at ways of insourcing those lost resources, to ensure that all that was required could be done.
Mr Lees asked for clarity on whether this meant that Denel was still looking at completing the contracts and that outcome was not yet certain.
Mr Hlakoane said that not all of the projects had the requisite resources. Those which did not were being completed, and contracts were being put in place to finalise those which were not yet completed. He noted that some of the contracts were for multiple years. Hence, it was still believed that there was the capacity to complete those contracts.
Mr Lees asked if Denel Aerostructures would be able to provide the services, maintenance, and upgrades required for the relevant helicopters. Were all the required resources available?
Mr Hlakoane said that those resources were available. Denel had continued to support the SANDF on all of the relevant contracts.
Mr Lees asked if the Committee could obtain a projected cash flow from Denel for the next 12 months, showing the source of its funds. The names of the entities providing the revenue need not be disclosed, all that was required that the Committee be made aware of the sectors from where Denel was deriving its revenue.
The Chairperson said the deadline for the requested documents would be 31 August at midnight. The Members would be advised on the legal aspects that had to be understood, and would also receive the papers by the end of the day. As things stood, in terms of Denel’s outlook, he asked whether the board members were looking for a government bailout, or whether there were plans to secure a government bailout.
Ms Serobe said that the executive management understood financial support was termed recap. The board members hoped for a recap, as there was a major liquidity problem. In the immediate future, Denel’s revenue would not be sustainable nor enough to keep the business afloat. Hence, support was needed from the state to keep Denel solvent for the foreseeable future. If that recap was understood as a bailout, then yes, that was what Denel was seeking.
Mr Kgathatso Tlhakudi, Director-General, DPE, said that it would be wrong to describe the recap as a bailout. Denel had requested a recap to enable its restructuring to ensure more effective operations and increased revenue. That request had been submitted through the government system. That funding request was for the provision of working capital for around R10 bn to ensure that Denel could operate in the future.
The Chairperson said whatever it was called, it was essentially a government bailout. The Committee would liaise with the Standing Committee on Appropriations to look at that request. The Committee was constantly being put in a precarious position with regard to bailout decisions. This spoke to the urgent need to tweak the parliamentary processes.
He stated that it was clear that the financial position of Denel was a problem. All of these matters were raised by the Members to bring the board members’ attention to problems that were public concerns and ought to be resolved. The Committee’s outlook was that SOC’s should make money for the state, and the state should not be pumping money into SOCs. The Committee was alive to the challenges that may come with the PFMA. The Committee had to look constructively at the challenges of the PFMA with regard to the flexibility of SOC business and operating models.
The Committee’s view was to help and to be solution-oriented, but this required a proper diagnosis of what the real problems were. This necessitated constructive discussion between the Committee and all the relevant parties.
Mr Lees said he had been very particular about asking Ms Hlakoane and Ms Serobe about what shareholder support meant, and yet Ms Serobe chose not to mention the government bailout. Neither did Mr Hlakoane even in his response to the matter of resources. He felt aggrieved by what he believed to be misrepresentation on the part of Denel. He did not expect a response on this comment.
Ms Zodwa Xesibe, Head: Eastern Cape Division, SIU, said that she believed the SIU had been invited to present to the Committee on the Denel investigations on the 15th of September. As a result, a presentation had not been prepared for this meeting, but she could give high level responses to the investigation questions. She confirmed the cooperation between the SIU and Denel. The SIU had briefed the board on its investigations, and were in constant liaison on matters relating to the investigations.
She stated that the SIU had assisted with the IP investigation and the opening of that criminal matter. There was collaboration with the SAPS on those investigations. The SIU had requested instructions from the Civil Investigation Unit to brief counsel on interdicting at least one of the companies in possession of Denel’s IP from unlawfully using and profiting from the use of that IP. The SIU was also considering aspects such as the loss of business and royalties by Denel in this regard. The detailed report would be presented on the 15th of September.
She said there was a civil claim lodged against Denel by Telspace. Those papers had been looked at, and the SIU was confident that Denel had a very good case with high prospects of success. However, the SIU joinder in that matter was viewed as something that should be kept at an academic level, hence the SIU was assisting Denel in getting assistance from the State Attorney. The special pleas brought by Denel in that matter were very good. A counterclaim for the R4.6 m that was paid had also been lodged. That was being thoroughly followed.
She said that Khampha had approached the Legal Practice Council (LPC) and raised an issue of professional privilege. The LPC agreed with the raising of that right. Denel was requested to waive that privilege. A letter had been issued by Mr Hlakoane waiving that privilege. The SIU had received the documents two weeks prior from Khampha. On the analysis of some of those documents, the SIU was confident that there was a very strong case of fraud against Khampha for fees claimed for services that were not rendered. The private legal matters attended to by Khampha were also being attended to.
On the VR Laser Group investigation, the SIU had since extended scope on the request of Mr Hlakoane to include the entire Hoefyster contract, which included about 30 other contracts between the Armaments Corporation of South Africa (ARMSCOR) and Denel, and other subcontractors. The investigation included all of the parties. The SIU had already established that ARMSCOR had already paid Denel an excess of R7 bn, but the SIU still had to establish what was delivered by Denel.
The Chairperson thanked Ms Xesibe for her comments, as it gave the Committee a sense that work was being done.
Mr Hlakoane responded to Mr Lees’s comments and said that he was perturbed by the remarks made alleging that there had been misrepresentation. He explained that his response was in accordance with the question asked by Mr Lees. He clarified that in his response regarding the lack of resources he had mentioned that Denel’s operations may be impacted by funding. That funding would be the recap or bailout.
Ms Serobe thanked the Chairperson for inviting the board members of Denel to brief the Committee. There was no reason to misrepresent anything to the Committee. There was no intention or any reason to do so. If it appeared that there had been a misrepresentation, she apologised for it.
The Chairperson said all was well. The information would be interrogated accordingly and there would be constant communication, subject to the legal guidance received. He thanked Mr Hlakoane and Ms Serobe for briefing the Committee and responding to questions.
The Deputy Minister believed that the board members of Denel had briefed the Committee as truthfully and objectively as possible. Similar concerns about Denel finding its feet and thereafter being able to stand by itself were shared by all interested parties. Due to the circumstances, some form of recap was necessary in order for Denel to function better in the future. The entire government system appreciated the necessity for this intervention, but it had to be supported by a proper plan and ability to execute the plan. He commended the board members for their effort, and hoped it would start bearing fruit. He thanked the Members for their thorough investigations of matters, and said that could only make them better.
The Chairperson said the Denel matters could be suspended for the day. He thanked the Deputy Minister, the DPE, Denel, as well as the SIU for attending the meeting. He announced that on 25 August the Committee would deal with the Masilonyana Local Municipality matter in the morning, which would require an oversight visit later in the year. In the evening the Committee would meet with the Department of Higher Education, Science and Innovation on the National Student Financial Aid Scheme (NSFAS) and the National Skills Fund.
He thanked everyone for attending the meeting and asked that all documentation reach the Members. The Committee would be in touch with Denel and the DPE. The end goal was for there to be a Denel to generate its own revenue with the help of the state and to operate efficiently. The Committee was fully reliant on the board members to step up and push matters to ensure that Denel became a much better SOC.
The meeting was adjourned.
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