In a virtual meeting, the Joint Standing Committee on Defence received a briefing from Denel and the Armaments Corporation of South Africa (Armscor) on the management of defence intellectual property and Denel's maintenance of defence equipment. The Committee was also briefed on the progress of the investigation into allegations of food poisoning of soldiers in Mozambique and the deployment of the South African National Defence Force (SANDF) under Operation Prosper.
The Joint Standing Committee on Defence highlighted the risks posed by the continued challenges faced by arms manufacturer Denel on the operational capacity of the SANDF to deliver on its mandate. While the Committee appreciated the hard work undertaken by the executive to resolve Denel's challenges, it also highlighted the need for Armscor to find alternative suppliers to ensure the continued supply of components and spares normally procured from Denel. However, although this was done to ensure a sustainable supply of the required material, its adverse effect was that it posed a financial risk, as alternative suppliers were potentially costlier, especially considering the reduction of the defence budget.
Further, the Committee was averse to a situation where the SANDF could lose its sovereign capability and strategic independence as a result of over-reliance on the international market. Members were of the view that the development of defence technology domestically was critical in protecting South Africa's national interests. With the loss of this capability and the reduction in the defence budget, and the resultant decline in defence equipment spending, the South African defence industry had seen significant reductions in its capacity. This had heightened the need to take urgent measures to ensure the survival of Denel and secure the defence industry.
The Committee was concerned by the continued loss of critical skills within Denel, which posed a risk to the intellectual property (IP) held by the company and its ability to service its contracts. While it welcomed assurances that the country's IP remained largely protected with reviewed protection processes, it was cognisant that the IP was not only developed and stored in documents and data banks but also that the most effective IP memory was retained in people whom Denel continued to lose in numbers. Regarding the protection of IP, the Committee had called for a review of the Intellectual Property Rights Act to entrench Armscor as the custodian of the Department of Defence's IP capability, which was seemingly being lost as a result of the Act. The Committee would await a report in this regard within a reasonable time.
The Committee acceded to a request from the Minister of Public Enterprises that discussion on the viability of Denel should be deferred, to give the Department time and space to see if their interventions would bear fruit. The Committee would engage soon with the Department to ascertain progress.
The Committee was briefed on the progress of investigations into the allegations of food poisoning of SANDF members in Mozambique, and learnt that investigations had been undertaken, relevant senior officials had been interviewed, and the team of investigators had been given access to the affected area and soldiers. However, the final report on the investigation was unavailable in the meeting, which led the Committee to defer the matter to a later date when the report would be in front of the Members.
The Chairperson welcomed everyone and acknowledged the presence of the Minister Public Enterprises, Mr Pravin Gordhan. He reminded Members that when allegations of food poisoning among the South African forces deployed in Mozambique were reported, the Committee had requested the Minister to ask the Ombudsman to investigate the matter. This request was made after a briefing by the Chief of Joint Operations, and the belief was that an independent body like the Ombudsman would give an objective opinion on the allegation. The Committee was also aware of the renewal of the deployment of the South African National Defence Force (SANDF) in Mozambique, but Members had not received the letter yet. He asked the Secretary for Defence to touch on that issue.
Apologies were received from the Minister of Defence, who could not make it due to other commitments, and the Deputy Minister and the Co-Chairperson, who were running late.
Minister’s opening remarks
Minister Gordhan said Denel was one of the institutions, like Transnet, Eskom and many others, that had been directly impacted by "state capture," and the Zondo Commission had already presented a report on its findings on Denel. One of the findings was that through VR Laser and many other mechanisms, the intent of the Gupta alliance had always been to steal as much intellectual property as possible. The second intention was to divert as much cash as possible out of the Denel, and that was why there was an attempt to create Denel in Asia. They had dismissed good people and professionals in Denel and replaced them with those who could do their bidding, including Daniel Mantsha and many others whose names feature in the Zondo Commission's report.
What was inherited in 2019 was an entity that was broken and in serious trouble as far as delivering contracts was concerned. Sometime before 2018, or a year after, what happened -- even though contested by others -- was that there was a deliberate appropriation of the intellectual property, particularly in the hi-tech area, by individuals who later made their services available across the fence to join entities elsewhere in the world. At one stage, he was advised by the Hawks investigators and the Special Investigating Unit (SIU) that the case was fairly advanced. This may have been two and half years ago, but nothing had transpired, although there were ample leads to be followed for the investigators to follow and find the culprits that were involved. There was no mystery about who they were, where they were residing, and how they continued to undermine Denel in certain areas.
Thereafter, the board was changed in 2018, and the management remained for a short while until it was discovered what they were up to, and they were laid off as well. Interim management was put in place, but Denel continued to decline. There had been various discussions between the Director-General (DG) of the Department of Public Enterprises (DPE) and the people from the Armscor hierarchy to find a way of securing funding for Denel during this period. Unfortunately, the DG was unwell and could not attend this meeting, but the Minister said he was aware of the discussions held. There had been a blurring of roles during this period, something that he and the Minister of Defence had agreed to talk about soon, in order to understand the current status of Denel and the way forward.
He said there were slightly better prospects today, and the management would give more details. A high court decision had been made that surplus funds that were held in the medical aid could be accessed by Denel, provided the welfare and the wellbeing of the members left in the medical aid trust was provided for. The Minister said he was told that the amount in question was just a short of R1 billion, which would give Denel room to meet its financial obligations -- for example, with SARS -- and place its entities on a better footing to be able to deliver on contracts. The management could tell the Committee what was lacking all along, and where the company assistance was.
Denel lacked operating capital, and without operating capital the company could not produce anything. It could not sell anything and there was no revenue coming in. Government had assisted by paying out certain obligations that Denel had in terms of debt which was guaranteed, and a couple of billion rands had been paid out. There was only a small outstanding amount.
The entity may well be at the beginning of a process or period where Denel could find its feet again. There was now an interim chairperson and a board that were committed to making Denel work, and there was high regard for those members of the board that had stuck it out through thick and thin under the interim chairperson, Ms Gloria Serobe. The hope was that they would be able to get Denel, which had been on its knees for a long time, on its feet again. That could also mean better interaction with the SANDF on the forces’ needs. However, it would require some agility and flexibility to fashion Denel going forward, based on what he had just outlined. He committed to keeping the Committee informed on the new developments at an appropriate time.
The other issue that had been a sharp feature at the moment was that although government and the wider public was aware that there was this phenomenon of state capture, corruption and mismanagement within Denel and other entities as well, no money had been set aside yet to enable the Department to get important institutions to recover from the period of state capture. They had been able to pull themselves up by their bootstraps and continued to operate by making necessary adjustments in their operating environment to ensure that they reached some kind of equilibrium. In some cases, the entity was getting there. In other cases -- for instance, Eskom that had a R400 billion debt that was still outstanding -- technically speaking there was still more work to be done to help it deal with that debt burden.
Minister Gordhan said he had painted a broad picture of where Denel had come from, what its status was, and indicated that there was hope for a better future provided there was the necessary imagination, agility, flexibility and resilience to get it going along a very different path.
The Chairperson thanked the Minister for his address and the hope for a better future, which assured the Committee that there were prospects for Denel to recover and that it was attending to the outstanding issues. That was the context in which the Committee would be receiving the presentation. Denel had been a subject of discussions in the last two years since he became a Member of the Committee. The SANDF was the main client of Denel and if Denel collapsed, so would the SANDF. This was the context of the presentation for the meeting today.
Secretary for Defence's comments
Ms Gladys Kudjoe, South African Secretary for Defence, agreed with the Minister's sentiments. The Department of Defence (DOD) had its concerns, and it would help if solutions could be found. She emphasised the need for the DOD to have good relations with its colleagues at the DPE because the DOD had put a lot of money into multi-year projects that were being worked on by Denel. For instance, the DOD had put over R7.6 billion into the Hoefyster project, and it was still at the design and development stage. These were some of the issues that needed to be looked at to pave the way forward. At the moment there was nothing to show for it. The Department was already getting being asked about the way forward by the Auditor-General (AG). The Armscor presentation would dwell more on the issues she was raising.
Intellectual property (IP) was critical for the DOD because a lot of money was put into research and development (R&D) to get the IP. The Department was operating in a financially constrained environment, and it could be explored how some of these could be monetised. It was not clear how Denel’s problems would be resolved, and if not resolved, some of the DOD's IP would be lost if it was decided that the DOD had to partner with other strategic partners that had an interest. The DOD could not go into those negotiations without anything that it could offer. There was also the issue of the IP Act of 2010, which falls under the Department of Science and Innovation. This Act was critical for the DOD as far as the issues of IP were concerned because they did development, evaluation and research in all the arms of the services. The Act stipulates that the Department could put money into research and development through the Council for Scientific and Industrial Research (CSIR), but could not lay claim to the IP born out of that project. It meant that it could not be monetised, although money had been put into it.
Moving forward, the DOD needed to look at the exploitation of the IP to augment its budget. The fact of the matter, which would reflect in the presentation by ARMSCOR, was that some of the challenges that had been faced by Denel, even from the service contract point of view, were critical for the DOD and they must be fixed. She was hopeful that going forward, the DOD would be able to work well with the DPE, as it may help move things forward.
Dr Noel Mkaza, Group Executive: Research and Development, Armscor, delivered the presentation which described the IP governance process, including how the IP was generated and the approvals.
He said Armscor was the custodian of the DOD's IP in terms of the Armscor Act. The IP was generated through acquisition and R&D projects. All its IP was developed for sovereign and strategic reasons which were key to national security.
There was an IP governance process in place which ensured that the approval for exploitation of the DOD's IP was granted to industry. In doing so, due consideration was given to ensure that no entity was allowed to exploit sovereign IP or any technology that would compromise national security. The DOD was the final approver of IP exploitation transactions. Every request from the industry had always been approved, except for those that were withdrawn by the requestor due to their processes with a third party.
Commercialisation of A-Darter Missile and impact on SAA
Mr Dawie Griesel, General Manager: Acquisitions, Armscor, said the A-Darter was a fifth-generation air-to-air missile that had been developed under Project Assegaai. It was co-funded by the Brazilian Air Force, and development was completed in November 2019 (four years late).
The contract for the industrialisation and production of missiles for the South African Air Force (SAAF) was placed on Denel Dynamics in March 2015 for production of eight practice inert missiles, 21 trainer missiles, and 41 operational missiles. All deliveries had to be completed by March 2018.
The SAAF was currently utilising IRIS-T missiles on the Gripen aircraft that were acquired from Diehl-BGT in Germany during 2009, and it was intended to serve as an interim missile until the A-Darter became available.
On the contract execution status, the following progress had been made:
- Eight practice and eight (of 21) trainer missiles had been substantially completed and were awaiting missile hangars to be qualified.
- There had been no progress to date on the balance of the missiles, including all the operational missiles, due to the challenges being faced by Denel.
- The current missile design was already facing obsolescence in some areas and would require limited re-engineering before production could commence.
Denel's capacity to continue existing SANDF service contracts
Mr Griesel pointed out that as a result of financial constraints experienced by the Denel Group, it was experiencing challenges with obtaining components and subsystems from suppliers.
Describing the key challenges, he said Denel's capacity and supply problems were significantly hampering deliveries against most of the Armscor contracts. Denel was the original equipment manufacturer (OEM) of a number of equipment and sub-systems in use by the SANDF. It was in possession of the data packs -- for example, vehicles -- and in some cases was the design authority of critical items, such as the unique pyrotechnics for the SAAF. This posed challenges to obtain the required equipment and services from other sources, as such equipment and services could be obtained only from Denel.
Describing the way forward for the entity, he confirmed that Denel Aeronautics was continuing with product support services to the SAAF. ARMSCOR would continue to assist with direct payment of selected critical suppliers and with the direct procurement of selected spares for the SAAF. Ring-fencing of funds should reduce the outflow of critical personnel. Armscor would continue with the utilisation of the alternate supplier of critical Denel Vehicle Systems spares and would continue to engage with potential alternate suppliers of spares and services traditionally sourced from Denel Land Systems.
Armscor was investigating options/mechanisms to assist Pretoria Metal Pressings (PMP) with the procurement of raw materials to facilitate the continued production of munitions for the SANDF.
Mr William Hlakoane, Acting Group Chief Executive Officer, Denel, said IP protection was a process that Denel undergoes to protect the IP that was in its hands. The IP was stored in very protected networks and access was strictly controlled, in such a way that there were several roles of approval to access it.
Intellectual property was developed and stored not only in documents, data packs and data banks -- IP memory was effectively retained in the people, processes, tools, procedures, complex computer-aided design applications, licences and computer infrastructure of the developer. All of these aspects were required to effectively store, retain and exploit the IP effectively.
It was a standing procedure to report allegations of DOD IP theft to the Armscor Security Department for investigation. Allegations pertaining to IP theft had been reported to Armscor for investigation, and allegations of IP of Denel Dynamics having been illegally handed over to a foreign company had been investigated by Armscor, but not proven. This matter had also been included in the SIU investigation.
The presentation revealed a gloomy outlook of Denel’s financial standing:
- The year to date balance sheet showed that Denel was technically insolvent;
- Available cash was insufficient to meet operational requirements, including the payment of salaries and suppliers;
- At the end of December, Denel owed R789m to employees and related costs, and about R900m to suppliers;
- The latest cash flow projections for the 2021/22 financial year indicate a negative R600 million if no mitigating action was taken;
- The current tax status was “non-compliant” due to the substantial tax liability that remained unpaid. The total amount owed to SARS was R529m to date, made up of VAT (R83.7m), PAYE (R440m) and corporate tax (R5m).
Following Denel’s decision not to submit the annual financial statements for the 2021 financial year before 30 October 2021, the Johannesburg Securities Exchange (JSE) had communicated concerns on Denel’s ability to meet its debt listing requirements. Management had submitted several requests to the JSE to consider not suspending the listing. The JSE had gone ahead and suspended the Denel listing at the beginning of February.
The uncertainty on Denel’s future state had impacted the current customers, who were concerned about Denel’s ability to deliver on contracts on hand, leading to a possible call on prepayment and performance guarantees of around R3.4bn.
Minister Gordhan reemphasised that Denel was, and always had been, an important part of the SANDF's capacity. It was important to put it back on its feet, not necessarily in its old and expensive form, but in a lean way and focused on the right areas, with some cash in its pocket to do the things it needed to do. There was a greater possibility of executing some of the ideas that the Acting CEO had put across, and as he had pointed out, there was a lot of what was available if the liquidity problem was sorted out on the one hand, and it could re-attract the skills it had lost. It was the same in the other state-owned entities (SOEs) as well. The consolidation that was shown on the second last slide into two divisions was an important step in restructuring an entity affected by state capture. It was important to reduce the costs, and also to find partners within government itself so that the entity could move on to a new phase whilst taking into account the needs that the Defence Force had, and also doing some creative and smart partnering outside. These were the matters that over the next month or six weeks, the Department would be engaging with the board on, now that there was a little bit of cash. Treasury must find some way of supporting the direction that the entity liked to go. Further discussions with both the Defence Force and Armscor would give some kind of focus and the alignment that was required to move forward.
On the question of the IP, there had been a fair exposure to the Committee about the protective measures that had been put in place. There was no doubt that Denel was a prize target of many of those concerned who had engaged in offences within South Africa, as well as those who had benefited from that elsewhere in the world. Denel was like a broken house that still had its basic pillars in place, but a lot of work still had to be done to renovate it and for it to become habitable again.
Mr S Marais (DA) addressed his first question to the Minister, based on everything he had told the Committee and also what had been presented in the meeting. He said that if the Minister had listened very carefully to both Denel and Armscor, he would realise that it was two different opinions on the same matter. They were quite contradicting presentions to a large extent. Armscor had expressed frustration over what it had started to do, whereas Denel was still talking exclusive use of that and ownership. That showed that there was a major problem and a challenge if the SANDF was Denel's major client and, if the Chairperson was right, that 80% of the order book was for the SANDF. Denel and Armscor had to talk from the same hymn book and the same page, but this was not the case.
Some years ago, the future of Denel was supposed to be discussed by Cabinet. Had Cabinet decided on its future? Had they considered allowing private equity partners? Had they considered selling the 49% in Rheinmetall Denel Munition (Pty) Ltd (RDM) for a liquidity injection as well? The R1 billion referred to seemed like the Minister thought it was a lot of money, but Denel had said it owed SARS R500 million, employees R800million, and suppliers R600million. All this was about R2 billion -- in other words, the R1billion was about 50% of what they needed to just start moving forward, and then there would be no operational capital available. There had been court cases where judgment had been granted against Denel by trade unions. It seemed like several court cases had been concluded. He asked about that because it appeared that the order book they relied on was a very flimsy one.
The SANDF and the DOD also did not have money, and as a former Finance Minister, Minister Gordhan could read the budget and would know what had happened with the Special Defence Account and what had been appropriated yesterday in the budget. There was not even enough money to do the midlife upgrades of one frigate. He asked the Minister to indicate the future for Denel in dealing with all the cases. When should the R1 billion be expected? Was the Department liaising with the trade unions as well?
Denel had said the IPs were well secured, but how many of the security contractors had withdrawn from the various SANDF sites due to non-payment? The Committee was aware of the security systems, such as the surveillance system which could not be maintained due to a lack of funds. If they lost contractors, how secure were those IPs? Had staff been requested to work from home? In other words, it was not in a secure campus or building where those things could be protected. Those things were very important.
On the A-Darter, he asked if any company had been approached to assist Denel, specifically companies like Hensoldt, and some of the local industries, suppliers and producers. Armscor specifically indicated that it had started working with other companies, approaching them to develop and manufacture the A-Darter. Could Armscor provide the names of the companies approached? Referring to the A-Darter contract with Brazil, he said there had been a long overrun and it should have been delivered a long time ago, so had there been any penalties for Denel, and what was the amount? How could that implicate the entity going forward?
The presenter said security to a large extent belonged to people with knowledge. Denel had lost many engineers, and it was no secret that they were in the Middle East, Saudi Arabia and the United Arab Emirates, so was it not too late for Denel?
He said the entity had to start to rationalise. Had the Minister considered starting to migrate some of the strategic divisions of the SANDF to the DOD? In the last couple of days, he had seen vehicles significantly similar to Denel's Badger being used by Malaysia -- was that a through a contract with Malaysia? To what extent could that be beneficial going forward? Denel had indicated that it had settled a court case with SAAB, the suppliers of the Gripen. If the entity could supply the missile going forward, there still needed to talk about the Umkhonto, which was also a missile needed by the navy. Would Armscor have enough money to maintain the Gripen maintenance contract, or the Umkhonto maintenance contract, based on what had been appropriated in the budget yesterday? It was not a beautiful and nice picture to look at, so that was a major concern.
He was concerned about Denel because maybe the Committee was not getting the same information, and it seemed like conflicting information. What the Committee perceived, what was reported out there, and what Armscor presented, contradicted what Denel had given the Committee. It was therefore the duty of the JSC on Defence to get to the bottom of this because the entities would have to sing from the same hymn book and talk from the same page.
Mr D Ryder (DA, Gauteng) said the meeting would have been more beneficial if the Finance Minister and the Minister of Defence had been in attendance as well. This did not mean that Minister Gordhan's presence was unappreciated, but that it could have enhanced the discussion on the future of Denel. Realistically speaking, Minister Gordhan was the former Minister of Finance, so he knew what had transpired yesterday afternoon [referring to the budget speech]. The picture that was presented today fell fairly short of what could be potentially hoped for Denel, even with the best intentions, because there was no money to back them up. He appreciated the Minister's frankness in the introduction, and he believed they were at a stage where they needed to be honest about the state of Denel.
It was quite obvious from Armscor's discussion that Denel had let it down, and it had also let down SAAF and the SANDF. Mr Marais had been right when he said there was a need to pave the way forward. To say our IP was guarded was naive and extreme. It was probably guarded, but in the Middle East or somewhere out there -- certainly not in SA. The future of Denel was the biggest discussion that should be held. How could the little IP that remains, be safeguarded in the care of Denel? The answers would be given by the newly announced SOE Special Committee that the President had spoken about.
The reality, looking at the structure of Denel that had been presented, was that it could not survive in its current state. Some divisions were still beneficial and were still doing what was expected of them well. When does one get to the point where one pulls the plugs on certain divisions, focus on what they could still do properly, concentrate attention, and focus on the engineers -- the design guys that were still involved there? The focus should be on what would work to get Denel out of the hole it was in. A big step back should be taken to look at what could work. Using a shotgun approach to fix Denel to retain things the way they are, would be a waste of the taxpayer's money and not achieve what needed to be achieved. There was a massive redesign required, and it was sad to see the state of Denel. The focus should be to get Denel out of this situation, and there should be consequences for the people involved in getting it into this situation. The Zondo Commission and the SIU must deal with all those issues.
Mr T Mmutle (ANC) said there had been a resolve to relocate Denel from the DPE to the DOD -- what was Minister Gordhan's take on that? Had there been any engagements to ensure that was implemented? The presentation given by Denel and the several presentations from Armscor, as already raised by Mr Marais, did not give the same picture. The picture had always been that of a Denel that was beyond revival, but the presentation of Denel today seemed to be diplomatic, saying it was not that bad, and it was only in the dynamics that there were challenges. There was an element of dishonesty on the part of Denel, and the Committee was not sure if the entity was giving a correct picture. (At this stage he was cut off by a network breakdown).
Admiral Anthony Morris, Chief Director: Defence Materiél, said he was airing his opinion from the perspective of the end-user, the SANDF. The observation from the presentation from Denel was that there was a challenge in terms of the loss of capacity, and the possible IP that had been taken abroad. The challenge faced in terms of the SANDF was not only the loss of the security contracts and the IP but also the potential insecurity of the entity's hardware at Denel premises. It had got to such a state that the SA Defence Force had to intervene because of the nature of the assets that Denel had. The SANDF was seriously concerned over the non-payment of salaries and the inability to pay security contracts because if these assets fell into the wrong hands it might escalate to a threat from within. SANDF was very concerned about this and had released correspondence to that effect.
Looking at the loss capacity from Denel, there had been a suggestion in the presentation by Armscor that there was a possibility to extend the life of the current missiles by another two years. That had been discussed, but if one looked at the capacity to deliver the current A-Darter missile, the Umkhoto, and so on, it was doubtful if Denel Dynamics, even if they had the data packs, would be able to deliver the missiles to the SA Navy or the Umkhonto missile to the SA army, as well as the rest of the missile family at this moment. This was very concerning because it touches on the very same nerve regarding the protection of SA's air space, which was the mandate of the Chief of the Air Force and the Chief of the SA Navy. If the SA Navy did not get the Umkhonto missile, it would be dependent on the SSF 40 missile from abroad, which was very costly.
It must be noted that the Defence Force had been subjected to budget cuts. There was an understanding of the fiscal pressure on National Treasury from other departments. The challenge was that if the SANDF was not capacitated, did somebody see the need for an increase in the baseline for capital acquisition, as well as technology funding? He said Denel could be revived the way the stakeholders wished, but a balanced approach had to be followed.
Another concern was the 1992 document that the entity had received, which was in Afrikaans. The document was called "Separation Agreement," but the entity called it the Sharing Agreement, which spoke to three options if a situation arose like the one Denel was finding itself in right now. Option one was liquidation, two was that the remainder of Denel be transferred back to the DOD, and the third option was an injection from National Treasury. These three options were still in force and could still be contested in a court of law.
He concluded that the SANDF needed hardware, and even though it understood the circumstances, it was in a predicament.
Mr Mmutle picked up where he left off after being disconnected by the network, and asked which presentation had depicted the real state of Denel. On the IP issue raised by the SecDef on the funding of the CSIR, and the limitations on the ownership of the IP despite funding the programme, what did the SecDef suggest should be done? Should there be a need to revisit the legislation that limited the DOD’s ownership of the IP, despite funding the initiative?
The Chairperson said he associated himself with the comments that the two presentations were parallel to each other. On one hand, Armscor said this relationship was problematic and it was time that they moved on. To that extent, it had started weighing options and had listed those options in the presence of Denel. In other words, it was moving on. After all, it could not wait for Denel to address its challenges because it needed the capability. Denel seemed to be in a state of denial that the DOD, as its major client, was starting to weigh other options. The DOD could not wait for Denel because it was unlikely that Denel would get out of this situation soon. The issue should be ironed out so that the two entities did not run parallel to each other whilst Denel's problems were being fixed.
The Chairperson said there should be a shared understanding, where one accepted that there were challenges Denel was facing and the impact they were having, and agreed that the DOD should move on while it was fixing things, and when all was in order, they could then work together again. At least there was a way forward on the part of Armscor, given the situation Denel was facing. With Denel, it was problem after problem, and it was not clear what they were doing to come out of this situation. In his view, Denel would lose more personnel and by the time it woke up, there would be very few people to rebuild Denel with. It would take ages for them to attract skills back to Denel. This was a capability that had been built over a long period and once lost; restoring it would not be an event. It would take a very long time to do so, especially in a current environment of competition. The competition was not as it was when Denel was building its capability, so it would be trying to restore its capability in an environment that was highly competitive. By then it would have lost part of the IP which was in the heads of some people, some of who had run away with it. These were the challenges that were being faced.
Minister Gordhan said what Committee Chairperson had said could have been said about many other entities that had been affected by state capture, mismanagement, theft, corruption, or any other phenomena. Some had begun to be placed on the road to recovery, and some were struggling. He asked Members to be patient with the entity and indicated that it would be getting systems from a private sector component. Some financial analysts and turnaround specialists would be brought in to assist the Department. Recovery from state capture and rebuilding a broken house took hard work and tough work, which Mr Marais had not referred to. He did not think the presentations were contradictory because both described the shortcomings of Denel, the certain needs that the SANDF has, and that strategic measures would be put in place to be able to meet the needs of the SANDF. That was already happening and had been happening for some time.
The Minister said everyone wanted an SANDF that was modern, and fit for purpose in the modern environment. That should be the objective to work towards. If Denel had cash tomorrow morning, say R3 billion or R4 billion for operating capital, Members would be talking a different story today. That was not available, and as Mr Marais pointed out, a billion was nothing compared to the numbers indicated in the presentation, but it was a start for where Denel needed to get to. Mr Ryder had given a much more realistic perspective on Denel where he said they should work on the things that still had the capacity for the future, and evaluate whether they still wanted to get involved in areas that were damaged, and at the same time, work out solutions with the Armscor and SANDF colleagues. The Minister and the Deputy Minister (DM) of Defence would engage in a dialogue as to what could strategically be outsourced, and what for certain reasons capacity needed to be built.
He said liquidation was not on the table at this point in time, although some would like to see that happen. There would be a few more discussions among the stakeholders before coming back to the JSC. On the position that Cabinet had taken, the Minister said a mandate had been given to restructure and reposition Denel, with the help of the SOE Council. There was a need to evaluate the SOEs that were currently on the country's list to see which of them needed to be consolidated, which needed to find a way out of existence, and which needed to continue and be strengthened in some kind of way. Those were the issues that needed to be dealt with as a way forward. IBM and Hensoldt were the private equity partners, and the list showed that there were many initiatives involved that had already taken place.
Referring to the flimsiness of the order book, the Minister said he was not familiar with the order book, and neither did he think Mr Marais was, so he did not know, but it was there and it could be handy in paving the way forward. Regarding a partnership with local companies, he would have a discussion with the board of Denel on that matter, and there were other issues where the Armscor colleagues needed to be addressed on the companies they had spoken to.
Because this was a public forum, Members had to be polite about the countries where the engineers and the IP had gone to, but that point had been noted.
On Denel being at a point of no return, the Minister said he would update Members in two to three months, but at the moment he did not believe so.
He said the use of the words 'honesty' and 'dishonesty' had been a bit unfair, because the presenters had been frank with the Committee, and all the facts were tabled. As far as he was concerned, this was the DPE’s first presentation to the JSC having requested opportunities to brief the Committee on progress and new developments. The SOE Council had been instructed by the President to look at some of the issues raised on the viability of all the SOEs. Some tough choices would have to be made going forward, whether they involved Denel or not, but the Committee would be informed. He admitted that there were some divisions that with a little bit of assistance could get back on their feet. For example, some arrangements could be made with SARS about tax clearance certificates. He agreed that the focus should be on what works -- it was not about denial, but taking a positive approach and being hopeful in a context where there was a tough road to recovery given all the things that had taken place, in addition to state capture. The culture of corruption had not been eradicated, as it was still evident in other entities.
In response to the question asked by Mr Mmutle on the relocation of Denel to the DOD, he said he would get back to the Committee once he could address the question.
He said the Admiral's question required a bilateral meeting between the relevant entities to find common ground and points of departure and where alternative solutions needed to be found. He agreed with Chairperson that this was a process that may take a bit of time and the state would have to do what it had to do to acquire the things it needed to acquire. However, a common purpose must be found, not contradictory purposes amongst stakeholders, to make the institutions work for all. Partnering between government and private entities, as Members had advised, would be important going forward, and other possibilities had to be explored, as the management of all the entities was already doing. He committed to coming back to the JSC with updates on the progress made.
Ms Kudjoe said both the Armscor and the Denel presentations may have been different because Denel one was just painting a picture of what was happening there, and the challenges experienced. ARMSCOR's presentation was about specific and pinpointed areas that had to do with things they were procuring on behalf of the Department. However, the common denominator between the two presentations was the fact that the picture that had come out had not given Members a source of comfort. Even the Armscor one said the maintenance was falling behind with some complications, and the Denel one talked of the loss in capacity. The question was how long were they going to find themselves in this state they were in? The point, as already mentioned by the Members, was that the two Departments needed to engage each other because even though Denel fell under the DPE, the business it was involved in had to do with the security factor and the capability of the DOD. That was where the issue was.
How quickly a solution was found to resolve the Denel situation would determine whether SA had an ailing defence force or a defence that was still able to protect and defend SA’s borders and the state institutions. There should be a frank and open discussion, but at the same time had to be objective. Money was one of the issues being dealt with regard to Denel's challenges when the CEO indicated the human capacity that they had. If all those people had left and their knowledge imparted to the countries they went to, to what extent could they be relied on, even if there was money and they were called back? How were they going to be of use to SA?
The SecDef said she was very nervous about the speed at which they were trying to find a solution to Denel, because if great care was not taken they would end up with a situation where it would not be clear whether a strategic capability had to be sourced elsewhere outside SA's borders. From a security point of view, it was a move that was going to pose a lot of challenges, because SA could not be a country that relied on strategic capabilities sourced elsewhere. Of course, some could be imported from a broader SA defence industry, and some sourced externally. Those were the matters that needed to be discussed.
Central to everything else was whether the Defence Force would be able to continue playing the right role and for how long. If it continued, the onus would be on every stakeholder to continue with research and development to be able to derive SA's IP. There needed to be a frank conversation as to whether Denel was salvageable, and to what extent. As all these things were looked at, it was safe to say there was no luxury of time, because it was moving very fast. That was why she had mentioned that the presentations did not give a sense of comfort, and even the work that was being done had been delayed, some of it running five years behind schedule. These were very critical issues because they determined the survival of the DOD.
Mr Thabang Makwetla, Deputy Minister of Defence, said he was covered by the comments made by Minister Gordhan. What he had said was adequate for the JSC on defence business in today's meeting. He agreed that the entity was in unprecedented technical trouble, as the defence establishment of this country had not been in this situation before. However, the point was that challenged as it was right now, the macroeconomic and political consequences of the problem had to be faced. The industry in question was a highly political development because it was an intervention to buttress a highly political programme that the country was embarking on, and it should always remain that way. The place of this industry could not be divorced from national affairs and the political agenda.
He also agreed with his counterpart that it was not Denel alone that had been a victim of wrongdoing that had happened because of state capture. There were other SOEs that were going through stabilisation and getting the opportunity of restoring the capacity they had before. Government had taken that stance, which was good, and the reasons were strategic because it would have been easy to recommend liquidation, and the same principle would apply to what was being discussed. Liquidation was the appropriate move if faced with the situation Denel was facing, but just like other state-owned enterprises, you could only cut your nose off to spite your face. The JSC on Defence mandate and the responsibility of Parliament was to ensure that the country’s defence force was fighting fit, and here the issue was what capabilities of the SANDF were being compromised by the state of the defence industry, in particular the SOEs? The answer to that was to say the strategy of SA's defence industry should be to keep it in good hands to prevent it from orientating towards the external market, rather than the domestic budget of the SANDF. It was still correct practice that could work, and it had worked.
Denel was where it was today, not because it had failed to make business sense like some SOEs, but because of factors that were not business-related. It had been subjective interests that had created the problems. The other point was that the SANDF had to be able to fight, to be a combatant because it was constitutionally obligated to do so. The budget allocation for the SANDF needed to be turned around because if the government does not allocate the budget to acquire the necessary weapons capability, the problem would still be there.
He said his ministry insisted that the two departments should meet Armscor and Denel in the context of the JSC on Defence this evening, and work out a plan that would resolve the crisis. The two enterprises must meet, and thereafter the Ministers of Defence and Public Enterprises must meet to pave a way forward, based on advice from the technicians.
Follow up questions
The Chairperson said one issue that needed to be followed up on was to request both departments to review the IP Rights Act in order to put Armscor in a position where it became the custodian of the DOD's IP. It had been doing a good job of maintaining that capability and keeping it up to date, but with the IP Act, Armscor was losing this capability. The CEO mentioned that the capability that was there before the Act was introduced was now suffering obsolescence due to the changes that had come about due to this legislation.
The Chairperson said a capable defence industry was a key element of the country’s defence capability, and the challenges faced by Denel must be quickly addressed. The Minister of Finance had said the SOEs must be reviewed to see which ones should be kept and which should be let go. Denel had to be kept because it was critical in supporting the SANDF to maintain its systems without reliance on other countries. It also provided the cheapest form of maintenance and systems upgrade to the SANDF because it was homegrown, and it was SA's sovereign capability. It was accepted that there were divisions that were still performing, such as the aeronautics division, which continued to provide the service and it was good that its budget was ring-fenced so that it was paid directly for the service provided to Armscor and the SANDF.
He did not want to comment on contracting directly with sub-contractors that contracted with Denel, because it was not what was ideal. However, if Denel was having challenges and sub-contractors were losing confidence, they needed to be contracted directly to keep them afloat and retain the capability within the country. That was the environment so far -- Armscor had not washed its hands of Denel, and as soon as it could provide service, working relations would be renewed.
The Minister had said they were working hard to turn around Denel, so at some point a turnaround strategy would be called for as soon as the Minister had developed it. The turnaround strategy that was promised two years ago had been overtaken by events. It had been looking at three or four countries to maintain their order book of about R26 billion with Denel, but due to liquidity challenges, Denel had not been able to service those orders. Liquidity remained an issue.
Mr Marais said the Minister had forgotten to respond to the question of when the R1 billion would be available to Denel. Comparing this to the amount of debt revealed by Denel -- about R2 billion -- how did he propose making up the difference?
The Minister said he was not avoiding that question. All he was saying was that when one's pocket was empty and all of a sudden it had a half volume of some cash -- it was something that had happened only today. He was therefore not going into details, as it had to be worked out with the board, and details would be shared later. It gave the entity something to work with, rather than an empty hand. It was a work in progress.
The Chairperson thanked all the teams that had presented today, and Minister Gordhan for responding to the questions asked by the Members. He promised him an opportunity to brief the Committee on the progress and released the delegation.
Mr Marais said the past three hours had been tough because the issues discussed went to the heart of the SANDF, and the security and integrity of SA. What had been clear to him was that Armscor and the Committee were on the same page. This made him happy because it was the Committee's job to support the DOD and Armscor. However, from what the SecDef and Armscor had said, there was no time to have discussions, because it was known why SA's fleet of aircraft was on the ground. The Committee must see how it could influence the direction that Denel and Armscor had to take. He agreed with the Chairperson that if contractors needed to be paid directly, this should be done, as there was a huge lack of confidence in the operations of Denel. He supports the idea proposed by Armscor that there must be negotiations with other suppliers because they did exist in SA. It could not continue to go on like this -- something had to be done urgently. The Committee must have this issue constantly on the agenda because it was the one sending troops to Mozambique and they had no proper equipment to embark on such missions properly.
DOD on Mozambique food poisoning allegation
Ms Kudjoe said two investigations had been carried out into allegations that soldiers deployed to Mozambique had suffered food poisoning. The first one was done by the DOD to follow up and check on the situation and the status of everything. The second one followed the Minister's interaction with the Portfolio Committee on Defence, and she had then mandated the military Ombudsman to conduct an investigation.
The Chairperson asked how this presentation would differ from the one that had been presented before, which had made the Committee request an independent investigation into the allegations.
Lt Gen Lucky Sangweni, Chief of Joint Operations, SANDF, said he was correcting the record because when the allegations emerged in the media, the headlines in some of the papers read that the SA army had been fed rotten food. Following the questions that were asked at the November meeting, the Committee had requested that he provide feedback and answers based on the reports he had.
He said the Chief of the SANDF had appointed a very strong team of about five to six generals to go to the deployment mission, and then to the deployment area to conduct a physical investigation on the matter. In that team, there was no General from the Joint Operations Division involved, so it was an external investigation led by Maj Gen Eric Mnisi, Adjutant-General of the SANDF. The Ombudsman had furnished him with the details of the investigation that was carried out.
Part of the investigation had involved interviewing identified relevant officials at joint operations, including Gen Sangweni himself, on the process of Operation Vikela. Thereafter the Ombudsman's investigating team had gone to the mission area for about a week, particularly in the areas where the allegations had emanated. It was unclear, however, where they were with the investigations and findings, as the report was with the Defence Minister.
He was confirming that the investigations had been carried out and the relevant officials had been interviewed and were granted access to the affected area and soldiers.
The Chairperson asked the SecDef to clarify matters because he was of the view that the Minister had instructed the Ombudsman to conduct an investigation and make a conclusion of the findings, and come up with a determination, so were they not pre-empting the investigation right now? He told Gen Sangweni that maybe they had read a different article on the matter -- for example, the one he had read that “special forces deployed from SA to Mozambique have suffered a diarrhoea breakout after consuming rotten food and washing done in dirty water.” So, was it food poisoning in that sense? He asked the SecDef if it sufficed to say that the military Ombudsman was working on this matter. Could they leave it at that right now and then interact with the matter when they had the report before them?
Ms Kudjoe agreed with the Chairperson, indicating that the investigations had taken place and those that needed to be interviewed had been interviewed, so the matter should be left at that for now.
President's letter on Operation Prosper
Ms Kudjoe said what she could confirm on Operation Prosper (OP) was that the entity had done all its work on the employment papers. It had been signed by the relevant stakeholders in the Department. Operation Prosper was focusing on the deployment in support of the South African Police Services when it came to the protection of critical infrastructure and the strategic route network in KZN that needed to be in place. This had been signed and forwarded to the Office of the President for a signature, and would be transmitted directly to Parliament. It had gone from the DOD to the Presidency for that signature, and that was as far as Operation Prosper had gone.
Mr Marais said the Committee knew what OP was, but what was of concern to him was Operation Vikela, because he had read in the newspapers that the Southern African Development Community (SADC) had confirmed the extension of the deployment, and newspapers such as "Defence Web" had published that SA was sending more troops to Mozambique, but the JSC had not received a letter on that. This was quite a huge deployment, and he was concerned about the number of soldiers being deployed. What kind of support were they providing them, with the Gripen and others? They were sending their soldiers in with their hands tied behind their backs, and like Corporal Tebogo Radebe, they would come in body bags. The Committee had made a decision and communicated it to both the Minister and the Presidency sometime at the beginning of last year, and a meeting was even called during recess to at least consider the letter. Now there was a situation, and it was going into March, and Operation Vikela and its authorisation had already lapsed on 15 January. It had been one and half months already, with no authority. The fact that it was not with the Committee was problematic. He did not know if the soldiers were getting enough out there.
The Chairperson asked Members to process the letter of 4 January. He quickly summarised it and opened the floor to Members for comments.
Mr Ryder said his point was linked to that raised by Mr Marais, indicating that paragraph 201 of the Constitution was clear that if Parliament did not sit during the first seven days after the defence force was employed, as envisaged in subsection (2), the President must provide the information required in subsection (3) to the appropriate oversight committee. The reference to the seven days clearly showed urgency. The Committee had made a point in the past that it did not mind being called out during recess or weekends as may be deemed fit. With lives at stake, the Committee had a duty to those soldiers to consider these letters as a matter of urgency. To consider a letter dated 4 January on 24 January was unacceptable. The oversight role of Parliament had been called into question on numerous occasions in the judiciary, including at the Zondo Commission. Parliament needed to do its oversight work, and that could only be done if it got the right information timeously. The JSC must look after the well-being of the soldiers. He objected to considering a letter dated 4 January in the meeting today. It was good that the letter had been received, but more information was needed to give support to SA's soldiers, wherever they were deployed. The massive difference in the dates was very problematic.
The Chairperson said asked to whom Mr Ryder was directing his concerns, and suggested that it should be to the JSC, not the Department.
Mr Ryder responded that the Department should also give better information to back up and motivate these letters when they were received.
The Chairperson said it did not work like that. The procedure was that the Department prepared a letter for the President’s signature, and once the letter was with the President, it was out of its control. The President would send the letter when he was in a position to do so because he had a busy schedule. When he had signed it, he would then dispatch it to the relevant offices of Parliament, when then send it to the different stakeholders in Parliament such as the Speaker, the Portfolio Committee (PC), the Chairperson, the Co-Chairperson, and the JSC. The reason why the JSC could not meet earlier was that some Members were not available, and if they were not available, they should not feel guilty because they were having a well-deserved break. He said if a matter happened to be extremely urgent, then it must be checked if the available Members could form a quorum so that the issue could be dealt with. He took note that Members would like to be called when they were on leave.
Mr M Shelembe (DA) wanted to know what the purpose of the letter was. Was it for a meeting or consideration? The function of the JSC was to ensure that the country and its people were protected. As such, the Committee needed to be available every hour where possible. There was no excuse not to attend the meeting because the Zoom platform facilitated meetings from anywhere. However, the question still remained -- what was the purpose of the letter being tabled in this Committee? Was it for a meeting or consideration? If Members could agree on that, they would know that the President would do his thing and tell the Committee what he had done. What was the JSC's role in this House? The availability of Members was important, even if it was a holiday. In short, what was the purpose of the letter -- meeting or consideration?
The Chairperson said the issue should not be complicated. There was a letter which was written on 4 January, and it should be processed first before moving to the Operation Vikela letter had not been received yet. The SecDef would comment on that one because it concerned her. He asked by how much the deployment of Operation Prosper had been reduced.
General Sangweni said Operation Prosper was a new deployment, not an extension of the deployment. The first deployment was in December and had 2 700 members of the SANDF.
The Chairperson said he normally saw the soldiers along the N3 highway and some in strategic areas supporting the police, but the Constitution was clear if the Committee did not support that deployment.
Mr Marais said the Committee supported essential deployments.
The Chairperson interjected, saying he had accepted everything the Members said and had stated how the Committee could not meet, and that issue had been put aside. The question now was whether the Committee supported the deployment or not.
Mr Marais responded that it was irrelevant whether the Committee supported the deployment or not. What it had to do was just to take note of it. The Committee was there to support the soldiers, and if it was done the right way, it was noted. The issue of supporting the deployment was irrelevant because they would be almost finished in less than a month. The Committee condoned the deployment.
The Chairperson asked the Committee to confirm that it had no objection to the deployment. That would be part of his report to Parliament.
Deployment under Operation Vikela
Ms Kudjoe reminded the Committee about the recent SADC Summit on the review of the situation in Mozambique. After discussing the matter, it had been agreed that there should be an extension of the deployment of SADC troops in that country. The period of the extension was not specified, but when the DOD prepared employment papers, it did so in December on the understanding that the current employment papers it had to deploy in Mozambique were coming to an end at the end of January. The papers were therefore sent and signed by the relevant people who had to sign them in the Department, and thereafter they were transmitted to the Presidency for signature. The SecDef committed to following up with the Presidency to check where it was. In the papers, the entity had asked for an extension of another three months. The Summit had not expressed itself on the length of the period.
The Chairperson said that that was where Mr Marais' issue became relevant because there was an extension that had happened in January and Parliament had not been informed about it. He asked the SecDef to enquire with the office of the President to determine the status of the matter and report back to the Committee meeting next week. Had the extension happened?
Ms Kudjoe confirmed that the extension had happened, because when the DOD was working on it, there was still a month before the other deployment papers would expire. The papers were going to kick in at the end of January, and they were made for a period of three months as well. They had now left the system of the Department and been transmitted to the Office of the President.
Mr Marais said he was frustrated by the information he had received, which stated there were already thousands of soldiers in Mozambique, and nobody knew about them except the SecDef and others, such as the Chief of Joint Operations. There was no way that a thousand soldiers could be deployed to Mozambique with nobody knowing about it. However, it had happened, so someone must inform the JSC about it, and the right people were at the meeting. The Committee must know whether those soldiers were being looked after and properly resourced. What were the dangers and the threat to them? How could they give them the support? The JSC was aware of what happened to Tebogo Radebe. Where was the air support? It was now 1 000 soldiers, not 300 like the first deployment. The Committee must be informed about these things because it was unfair to be left in limbo.
Ms Kudjoe said she was talking about papers of employment because she did not want to talk about operations. The opportunity was going to be given to General Sangweni to talk about that.
The Chairperson repeated that the Committee was pre-empting the letter that must be formally presented to Parliament. Parliament had not yet received it. Section 201(3) of the Constitution said: “When the defence force is employed for any purpose mentioned in subsection (2), the President must inform Parliament, promptly and in appropriate detail, of—(a) the reasons for the employment of the defence force; (b) any place where the force is being employed; (c) the number of people involved; and (d) the period for which the force is expected to be employed." Section 201(4) says “If Parliament does not sit during the first seven days after the defence force is employed as envisaged in subsection (2), the President must provide the information required in subsection (3) to the appropriate oversight committee." The Chairperson said he was just reading the sections of the Constitution for the record because the Committee was aware of it. He suggested that the discussion on the matter should not continue, since the Committee did not have the letter. He asked the DM to escalate the matter to the Minister, and then she would know what to do about it.
Mr Marais interjected, saying the Chief of Joint Operations (CJOPS) could brief the Committee about the deployment and whether the SA soldiers had enough resources.
Deputy Minister Makwetla responded that the anxiety expressed by Mr Marais about the scanty information the JSC had on the deployment in Cabo Delgado was respected and appreciated. He expressed his personal view that the JSC may take a briefing on the deployment concerning a host of issues so the oversight could satisfy itself that the deployment had taken into consideration everything that must be taken into account. He was wary that the information the Member was bringing up may be in part unintentionally compromising the deployment there. He agreed with the Chairperson that in the absence of the deployment letters before Parliament, it was a matter that should be brought to the urgent attention of the Minister that there was concern by the JSC that such procedural matters seemed to have been overlooked.
The Chairperson agreed with the DM, saying he was also considering the matter of oversight and requested that it be deferred to the next meeting where the JSC would receive a report from the Minister on when the letter would be received from the President. If the letter was available by then, the Minister would be allowed to present it. Chairperson itemised the matter on the agenda for the next meeting.
Mr Marais said Members were not being unreasonable, but this was a first opportunity for the Committee and the right forum for him to raise it in the presence of the relevant stakeholders. The JSC wanted to support the soldiers and be fully involved with the right information, otherwise, the Members' hands were tied if the entity was not playing the game with them. He had no problem with deferring the matter to the next meeting since the DM had indicated that they would present a report shortly. He disagreed with the DM, saying he was not disclosing any information that may compromise the deployment. The information was already out there -- the only problem was that the JSC did not know about it.
The Chairperson itemised the matter in the agenda for the next meeting, and due to time constraints, he suggested that the two outstanding items on the agenda be deferred to the next meeting.
The meeting was adjourned.
- Media Statement: Defence Committee Calls For Urgent Action To Salvage Denel to Secure The Future Of Defence Industry
- ARMSCOR Presentation
- DENEL Outstanding Responses
- President’s Letter to NCOP: Deployment of SANDF under Operation Prosper
- President’s Letter to NA: Deployment of SANDF under Operation Prosper
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