Denel’s Asian partner insolvent, says Fuzile

State arms manufacturer Denel entered into its Asian joint venture with a technically insolvent company and one connected to the politically exposed Gupta family.

This is according to an affidavit lodged by former Treasury director-general Lungisa Fuzile in response to Denel’s high court bid to acquire approval for the joint venture.

Fuzile said Gupta-owned VR Laser SA did not appear to be in a position to raise the funds that would enable VR Laser Asia to establish the joint venture.

VR Laser Asia is owned by Gupta associate Salim Essa.

"VR Laser SA runs its business operations and capital commitments through loan-financing raised from its shareholders," he said in his answering affidavit. "The shareholders have been identified as politically exposed persons."

The affidavit also revealed that the joint venture could be heading for a cash shortfall this financial year.

Denel has gone from the shining success story of state-owned enterprises in SA to finding itself in financial difficulty.

Denel lodged the application with the High Court in Pretoria, despite the Treasury — under former finance minister Pravin Gordhan — not giving it permission for the joint venture, as required by the Public Finance Management Act.

Furthermore, Denel was going ahead with its court application despite Finance Minister Malusi Gigaba reportedly telling its board chairman, Daniel Mantsha, to withdraw it.

Denel, in a statement on Tuesday, said the Asia-Pacific was an extremely important region in which to expand its business and to find new markets for "our world-class products, especially … artillery, armoured vehicles, unmanned aerial vehicles and missiles". Denel said it would continue to engage with the Treasury to ensure that "misunderstandings" could be resolved.

Fuzile filed his answering affidavit in the court last week. He resigned from the Treasury from May 15.

Fuzile said in his affidavit that VR Laser SA — one of the companies that had its bank accounts closed by the country’s major banks — had approached Denel to form a joint venture, which resulted in the formation of Denel Asia.

Fuzile said Denel had revealed that its contribution to the joint venture would be in the form of intellectual property, which would give it a majority shareholding of 51%.

The remaining 49% would be held by VR Laser Asia via its R100m contribution, which would be made over a period of five years (at R20m a year). VR Laser Asia was to fund its contribution through a shareholder loan from VR Laser SA.

Fuzile said VR Laser Asia was a shell company registered in Hong Kong, which was yet to start trading.

Analysis of the application had highlighted a number of issues including that there was no significant Asian focus contemplated in Denel’s 2015-16 corporate plan and there seemed to be no sound basis for selecting VR Laser Asia as a partner

—  Lungisa Fuzile

He detailed the back and forth correspondence and meetings between the Treasury and Denel regarding the approval of the joint venture and the lack of information provided by the company. This had led to the Treasury not approving the formation of Denel Asia.

He said, with regard to VR Laser Asia’s track record, the Treasury had asked for additional information regarding the competitive landscape, business strategy and marketing plan, but this had not been provided.

Fuzile said the analysis of the application for approval had highlighted a number of issues that needed to be appropriately resolved before the application could be supported. This included that there was no significant Asian focus contemplated in Denel’s 2015-16 corporate plan and there seemed to be no sound basis for selecting VR Laser Asia as a partner.

The motivation given for the transaction was that it would enable job creation and advance broad-based black economic empowerment in SA.

However, this appeared to be misaligned with India’s requirements, Fuzile said.

Furthermore, the proposal that the applicant would sell products at preferential terms to the joint venture was not in the best interests of Denel or the government, Fuzile said.