It is “unthinkable” and “unacceptable” that state arms manufacturer Denel is more than eight years behind on key deliverables in Project Hoefyster, a multibillion-rand deal to manufacture combat infantry vehicles for Armscor, State Capture Commission of Inquiry chairperson Raymond Zondo said on Monday.

Zondo expressed his shock during the testimony of Armscor’s Sipho Mkwanazi, acting group executive for acquisition and supply chain management at the state-owned military procurement company since 2015.

“These kinds of delays, they reflect nothing else but simply a disaster, isn’t it?” Zondo asked on Monday.

“It’s just completely unacceptable. How can something that has been required in 2012 and had been promised to be delivered in 2012, eight years later, have not been delivered?”

The deputy chief justice referred to testimony from Denel’s chairperson, Monhla Hlahla, who has described Project Hoefyster as the most significant threat to the company’s finances.

“Why is this situation allowed to continue? Has anybody been fired for not doing their job? Has anything happened? It’s just unthinkable,” said Zondo.

“It’s like there’s nobody who supervises that ministers do their job, DGs do their job, heads of SOEs do their job, people under CEOs do their job, boards of SOEs do their job. How can this kind of situation be allowed to happen?”

After focusing on SAA last week, the State Capture Commission returned its focus to Denel on Monday. Evidence leader advocate Paul Kennedy said the commission will spend the week delving into Denel’s deals with Gupta-linked VR Laser and the suspension of top executives.

Mkwanazi explained how Armscor awarded Denel the Project Hoefyster contract in 2007. He was not involved in the process.

Denel was the only bidder, apparently because it was the only company that knew Armscor’s required specifications.

Armscor wanted to consider multiple bids to design and build more than 200 Badger infantry combat vehicles, but other potential bidders complained that Denel, which had helped develop the technical specifications, hadn’t released the required information for others to compile their bids.

Denel said it had developed the intellectual property under an exclusive agreement with the European Aeronautic Defence and Space Company. 

Armscor’s board disputed that and instructed Denel to send the technical details to other potential bidders. There’s no evidence Armscor ever followed up on its instruction.

“Was this not a predetermined process? Was this not a sham or a facade aimed at ensuring Denel would get the business?” asked Kennedy.

Mkwanazi struggled to provide an answer from the information he had gathered retrospectively.

I mean eight years and five years, it just seems really intolerable.

Under the contract, Denel was due to finish the development phase in May 2012 so it could start manufacturing and then start delivering the vehicles in 2015. It still hasn’t met the 2012 deadline.

“I mean eight years and five years, it just seems really intolerable,” said Zondo.

Denel has proposed new deadlines, but Mkwanazi said they depend on whether the SOE gets a state bailout. Denel has reportedly asked the Treasury for R3.8-billion in financial support.

Mkwanazi said Armscor risks losing R1.5-billion of the funds it has spent on the project if Denel doesn’t deliver.

“If they don’t get a bailout, they’re not in a position to buy critical parts, they’re not in a position to pay suppliers. So, literally, there’s minimal that is taking place in Denel,” he said.

“It’s because of DLS’s own financial problems,” he explained regarding the ongoing Project Hoefyster delays.

Denel Land Systems (DLS) is the Denel subsidiary that’s meant to develop and manufacture the vehicles. Against the advice from some of its procurement team, DLS contracted VR Laser to perform some of the Project Hoefyster work.

VR Laser won the deals after Gupta associate Salim Essa took a majority stake in the company in 2013, with the minority reportedly owned by the Gupta family and Duduzane Zuma. VR Laser’s liquidation further interrupted delivery.

DLS contracted VR Laser to build hulls for the vehicles in 2014, a deal worth about R200-million, despite having acquired a company, Land Mobility Technologies (LMT) with similar capabilities, albeit on a smaller scale.

Former DLS CFO Pieter Knoetze testified about the acquisition of LMT on Monday. Denel became the majority shareholder at LMT, which was going through a liquidity crisis, after making a prepayment of R12.7-million on an order.

The deal included a clause that ended up giving Denel 51% ownership of LMT. Knoetze said the deal would ensure Denel could meet its Project Hoefyster timelines in case LMT collapsed and avoid hefty penalties.

But LMT continued to struggle as DLS instead contracted VR Laser to perform its work, even entering into a single-source agreement with the Gupta-linked company.

Mkwanazi estimated that Armscor has imposed R200-million in penalties on Denel for late delivery on Project Hoefyster.

“If South Africa was, God forbid, at war, presumably this would have a material impact on its capacity to defend the nation, the defence force, correct?” asked Kennedy.

Mkwanazi said, “In the sense that the capability that is supposed to be delivered is not delivered.”

Former Denel CFO Fikile Mhlontlo, who left the SOE in 2016 after he was suspended for a year, began his testimony on Monday afternoon. He will continue testifying on Tuesday and is expected to be followed by former CEO Zwelakhe Ntshepe. DM