Denel continues to defend Asian venture

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Denel is adamant it has compiled with all the necessary regulations as far as the formation of its joint venture with a Gupta-linked company is concerned, notwithstanding court papers submitted by National Treasury’s former Director General.

Last week details of a responding affidavit submitted by Lungisa Fuzile brought to light that the keeper of the country’s purse did not want the joint venture to go ahead.
“The legal position set out in the Public Finance Management Act (PFMA) is clear and unambiguous. There can be no reasonable doubt about the proper interpretation of this section. In these circumstances, in exercising its discretion under the Superior Courts Act, this court (the North Gauteng High Court) should decline to grant the declaratory relief sought by the applicant,” was what the affidavit said in part.

Fuzile also said VR Laser SA did not seem to be in a position to raise the funds that would enable VR Laser Asia to establish the joint venture. “VR Laser SA runs its business operations and capital commitments through loan-financing raised from its shareholders,” he said in the affidavit. “The shareholders have been identified as politically exposed persons.”

He added that VR Laser Asia, registered in Hong Kong, is a shell company which has so far not conducted any trade.

A statement issued today has Denel acting chief executive Zwelakhe Ntshepe saying: “Denel would like to reiterate the fact that this Asia Pacific market is critical for any progressive global defence company. The defence competitive international landscape requires among other elements, that companies such as Denel maintain the highest degree of agility.
“With this in mind, Denel conformed to all governance and statutory prescripts leading up to the formation of [the] Denel Asia joint venture.
“The selection of a partner to this joint venture followed a rigorous process which started with two major defence businesses which unfortunately had already committed themselves to exclusive partnerships with other competing global defence businesses.
“VR Laser Asia’s proposition was found to be the next best opportunity given the financial commitment made risk free to Denel, demonstrable defence adjacent industry network as well as direct links to defence capabilities.”

Ntshepe also maintains the financial commitment was “adequately embedded” in the shareholder agreement with the necessary default clauses to deal with the “unlikely event” of the commitment not being fulfilled.

The Denel Asia joint venture was, according to chairman Daniel Mantsha’s report in the last Denel annual report, established in Hong Kong on January 29, 2016, via a strategic partnership with VR Laser Asia.

The entity has not traded since inception to allow for engagement with Public Enterprises Minister, Lynne Brown, and National Treasury, which is “currently underway” according to the latest Denel statement.
“Given the competitiveness of our environment, this delay and negative publicity around Denel Asia has cost us valuable time in positioning Denel appropriately for export opportunities that would have been of huge advantage to our developmental agenda as a nation. There are still a number of opportunities opening up this market which we are resolute in chasing.
“The East-Asia market, in particular India is the fastest growing defence market in the world. This is an important region for Denel to expand its business and find new markets for our world-class products, especially in the fields of artillery, armoured vehicles, missiles and unmanned aerial vehicles,” Ntshepe said in the statement.

As far as the correct procedure to establish the joint venture is concerned, the statement has it that: “Denel submitted a pre-notification pack detailing among others who the potential partner was, rationale for selecting them, business opportunities in that market and draft agreements with the partner to both the Department of Public Enterprises (DPE) and National Treasury on October 29, 2015 until January 29, 2016, the date of incorporation of the JV, no response had been received from National Treasury. This process was not the first of its kind, as Denel had incorporated a joint venture in a Middle Eastern market in 2012 which still today has never been expressly and formally approved or rejected by National Treasury.
“Denel believes Denel Asia was duly established after following and complying with all the relevant prescripts of the PFMA. It acted in accordance and in compliance with the provisions of sections 51(1)(g), 54(2)(b) and 54(3) of the PFMA in concluding and forming the joint venture.”



Denel, which would own 51% of Denel Asia, and VR Laser Asia (with a 49% stake) hoped to generate profit of R4.5 billion over ten years from the Denel Asia Venture.