The need to export its products to remain profitable has been cited by State-owned defence industry conglomerate Denel in a presentation this week to the Parliamentary Portfolio Committee on Public Enterprises as one reason for a currently disputed joint venture based in Hong Kong.
Odwa Mhlwana, acting Denel Group Chief Financial Officer, told the committee the decision to extend its business footprint in South-East Asia via a strategic joint venture with VR Laser to create Denel Asia came from former chief executive Riaz Saloojee.
He said the selection of partners (for joint ventures) was largely driven by market intelligence and existing relationships. “VR Laser has been doing business with Denel for more than 15 years and is responsible for fabricating hulls for mine-protected vehicles and mechanical structures for weapon systems,” he said, adding the decision to form Denel Asia was initiated by Saloojee and presented to the new Denel board at its first meeting on September 10.
Shortly afterward Saloojee, Chief Financial Officer Fikile Mhlontlo and group company secretary Elizabeth Africa were suspended. Saloojee will not be returning to Denel as his contract expired in January this year and disciplinary proceedings are apparently underway against Mhlontlo and Africa.
“He made a proposal in this regard to the current board on September 10, 2015. The board approved Saloojee’s request for authorisation,” Mhlwana said, adding that four other potential partners were considered before a decision was taken to go with VR Laser. This was based on the company’s experience and its track record with Denel.
The committee heard that VR Laser was wholly owned by Salim Essa and the company was “familiar with the landscape in the world’s fastest growing defence market, specifically India”.
Denel was blacklisted from doing business in India for over 10 year but was cleared of any wrongdoing by a thorough investigation last year. Since then Denel has spent more than R500 million exploring business opportunities in the sub-continent.
Mhlwana said Denel submitted a pre-notification letter for the approval of Denel Asia to the Department of Public Enterprises (DPE) and National Treasury on October 29, 2015, and received approval, with conditions, the following month.
It then submitted an application in terms of the Public Finance Management Act (PFMA) to both Public Enterprises and Treasury on December 11, 2015. No response to this request has yet been received from Treasury. In terms of Section 54 (3) of the PFMA applicants may assume approval has been granted if no response is received within 30 days. Denel proceeded with the registration of Denel Asia in Hong Kong only after 47 days and 98 days after the first pre-notification was sent.
He also pointed out the Denel Asia joint venture was not the first the government owned defence industry conglomerate had been part of.
Others include a 49% stake in Turbomeca Africa, a subsidiary of the global Safran Group; Airbus DS Optronics with Airbus Defence and Space; Tawazun Dynamics in the United Arab Emirates and Rheinmetall Denel Munition, which contributes more than R2 billion to Denel annual revenue.
In the current financial year exports account for 52% of total Denel turnover with the primary markets being the Middle East, the Asia Pacific region, Europe and South America.
Mhlwana said the decision to suspend Saloojee as Group CEO as well as the Group CFO and Company Secretary relates to the funding model used for Denel’s acquisition of BAE Land Systems South Africa (LSSA). “The Board is of the opinion that LSSA’s liquidity to service the loans were misrepresented and decided to suspend the executives to allow an unfettered investigation.”
There has been widespread speculation that Saloojee’s suspension was to make way for the creation of Denel Asia, which has links to the Gupta family, and that Saloojee was urged to make ‘prescribed’ appointments at the group’s subsidiaries, but he was reluctant to do so and was subsequently suspended.
Last month Public Enterprises Minister Lynne Brown said Saloojee, Africa and Mhlontlo were being investigated into irregularities in the state-owned company’s profit statement, and not the LSSA deal.