South Africa

Venture with Gupta-linked company is above board, Denel insists

By Marianne Merten 11 May 2016

A hawkish Denel board chairman Daniel Mantsha has refuted any controversy or illegality over its Asia joint venture with a company associated with the Gupta family. On Wednesday Mantsha and Denel acting CFO Odwa Mhlwana told Parliament’s public enterprise committee the state-owned armaments manufacturer complied with all legal prescripts in establishing the joint venture with VR Laser Asia. And they repeatedly emphasised that “market intelligence” helped identify that this partner needed to overcome its “shoestring budget” and break into the Asian market, where defence spending is booming. By MARIANNE MERTEN.

It seems it’s a question of whether the “may” in a section of the Public Finance Management Act (PFMA) means “must go ahead”. As far as Denel is concerned, if the shareholder (effectively government) does not respond within 30 days of being informed of a joint venture, it’s a go. As far as the National Treasury is concerned, it’s a no-go until a deal has been official approved – and last month it said the Asia joint venture is still under consideration. Public Enterprises Minister Lynne Brown has tread somewhat more softly, saying publicly that the whole venture was on hold until issues were resolved.

But on Wednesday Mantsha told MPs it was a question of interpretation of the PFMA, not of any wrongdoing.

If the difference is interpretation (that) does not mean there’s a violation of the law,” he said, adding that if the National Treasury wanted more time, it should have said so: “There’s no letter where they require ‘Denel, we want more time’.”

Denel, in its presentation to MPs, quoted Section 54(3) of the PFMA as “if no response is received from the executive authority within 30 days, the applicant may assume that approval has been granted”. The National Treasury in its statement last month, saying there’s been no legal approval, more fully quotes that subsection of the act as allowing an SOE to “assume that approval has been given if it receives no response from the executive authority… within 30 days or within a longer period as may be agreed to between itself and the executive authority”. The subsection cross-refers back to Section 54(2), which requires an application for approval outlining various details of the transaction, including a starting date.

In Section 51(1)(g) the PFMA says an SOE’s accounting authority must “promptly inform the National Treasury on any new entity, which that public entity intends to establish or in the establishment of which it takes the initiative, and allow the National Treasury a reasonable time to submit its decision prior to formal establishment”.

Earlier Denel briefed MPs on the timeline of what it called its legal compliance, highlighting that the required 30-day period had expired by 12 January 2016.

We didn’t establish Denel Asia on 13 January 2016. We established (it) on 29 January 2016,” said Mhlwana, pointing out this was 47 days after Denel first informed both National Treasury and Public Enterprises. That first notification was sent on 29 October 2015, while the formal PFMA application for the joint venture was submitted on 11 December 2015. Mhlwana said Denel received letters saying they could go ahead, if they addressed certain “issues”, which were all addressed on 11 December last year. “We have followed all due process”, he added.

While Denel promised MPs that all correspondence would be made available, it also emerged on Wednesday that at least one further meeting with National Treasury, and also public enterprises, is set for later this month. It comes in the wake of verbal sparring after Finance Minister Pravin Gordhan in his reply to the National Treasury budget debate said some SOE boards were acting with “arrogance and belligerence”. The Denel board responded a day later saying it was “taken aback” by the minister’s comments, which it described in a statement as “unsubstantiated, baseless and unfounded”.

SOEs have for some time found themselves at the sharp point of accusations they are being used to further factional political and business interests. Many, for example SAA and Eskom, but also others, have required billions of rand in government guarantees – at stake at Denel is a R1.85-billion government guarantee – to shore up their financials. President Jacob Zuma in his 2016 State of the Nation Address (SONA) announced a shake-up of SOEs, including the possible phasing out of some. “For the state-owned companies to contribute to the successful implementation of the National Development Plan, they must be financially sound, be properly governed and managed,” said Zuma.

The Denel Asia joint venture is a messy affair. And interests of the Gupta family, alongside Duduzane Zuma, are again involved. Denel’s joint venture partner VR Laser Asia is wholly owned by Salim Essa, who also has a 64.9% majority share in VR Laser South Africa, in which Rajesh Gupta and Duduzane Zuma jointly hold 25.1% stake through other investment companies.

The Mail & Guardian in late March situated Essa as a regular partner to the Gupta family business interests. His investment vehicle Elgasolve, involved in VR Laser South Africa, also holds about 22% of Tegeta Exploration and Resoures, linked to the controversial Optimum Coal mine deal, according to the Mail & Guardian.

Mantsha on Wednesday acknowledged such political connections, but added it had dealt with this by applying recommendations, among others, “to deal with people who are politically exposed” arising from a due diligence report by an independent law firm. “Denel is not involved in illegal activities. We are not involved in any criminal activities,” he added.

The Denel Asia joint venture is also messy because it appears to coincide with internal management and leadership turbulence. The new Denel board, appointed in July 2015, was briefed by former Denel CEO Riaz Saloojee on 10 September 2015 – according to Denel on Wednesday he raised the Asia joint venture then – but the CEO was suspended two weeks later, alongside the CFO Fikile Mhlontlo and company secretary Elizabeth Africa. While Mhlontlo and Africa are undergoing disciplinary proceedings, it emerged on Wednesday that Saloojee is set to be paid out over R3-million for his contract ending in January 2017.

And that’s not the only financial worry for Denel as Mantsha said it was scrambling to come up with just over R450-million to repay one of the two loans from two commercial banks after it had been renegotiated from a five-year term to six months.

Now we have 30 days to pay and we don’t have the money,” he told MPs.

The two-hour meeting didn’t resolve anything. However, MPs from across the party-political spectrum agreed a further meeting with all the interested parties, including public enterprises, National Treasury and Denel, should be held. With budget debates in full swing until the 2016 budget is passed vote by vote next week, and a prolonged “constituency period” ahead of the 3 August local government elections, that’s unlikely to happen for months. DM

Photo: Atul Gupta and President Jacob Zuma and the First Lady MaNtuli Zuma at the Bidvest Wanderers Stadium for the T20 match between South Africa and India. South Africa. 30/03/2012. (GCIS)

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