State-owned arms manufacturer Denel is reeling after a bad year in which weapons orders plummeted, half its board jumped ship and a disastrous and costly partnership with associates of the Gupta family came to an end.
Denel’s bungled partnership with Gupta-linked VR Laser Asia, which was cancelled on Friday, has cost it dearly by delaying its critically needed re-entry into the Asia Pacific market by more than a year.
Denel had identified concrete opportunities for selling artillery, armoured vehicles, missiles and drones to India worth R100bn after being blacklisted for a decade following a kickbacks scandal in 2005. But its partnership with the Guptas to drive SA’s re-entry into the lucrative market, through a shelf company in Hong Kong, put paid to these plans after the Treasury withheld approval for the establishment of the partnership, in which Denel would own 51%.
VR Laser Asia is wholly owned by close Gupta business associate Salim Essa, but the Gupta leaks have revealed the joint venture was secretly controlled by the Gupta family through Anil Gupta, who is brother-in-law to the Gupta brothers Tony, Atul and Ajay.
Denel’s chief financial officer, Odwa Mhlwana, conceded the failed partnership had come at the huge cost of lost opportunities. "We’ve lost valuable time in terms of positioning for opportunities," he said. "Now we have to think quite creatively of how to regain that lost time. So, the risk of us losing some of those opportunities is heightened."
If the joint venture had proceeded as planned, Denel would have sold weapons to a joint venture secretly controlled by the Gupta family at preferential terms, granting it exclusive rights to pursue arms deals to India, the world’s largest importer of arms.
In terms of the law, in December 2015, Denel applied to the finance minister for permission to enter into the joint venture with VR Laser Asia, but when it did not receive the minister’s approval, it went to court to force former finance minister Pravin Gordhan to grant approval.
The Treasury’s objection in court papers said that selling arms at preferential terms to the Gupta joint venture was "not in the best interests" of Denel or the government. Denel withdrew the court case last week, saying the negative media publicity had made it untenable.
While no money had been spent on Denel Asia, "which has not traded due to differences of opinion with the Treasury", the Denel Asia debacle had resulted in an opportunity cost. The company would look at "alternative marketing approaches to access the Asia Pacific market", acting CEO Zwelakhe Ntshepe said.
Denel’s top brass put on a brave face at the results presentation, where chairman Dan Mantsha and Public Enterprises Minister Lynne Brown were conspicuous by their absence. Both were expected to answer questions on why Denel had wasted more than a year of potential sales worth billions to India by the unnecessary partnership with the Guptas.
Leaked e-mail correspondence by the Gupta family and their associates shows that Mantsha, in particular, has been at the centre of scandals involving the Guptas.
He sent his utility bills to the family’s Sahara Computers for settlement, while the company he chaired and the Guptas were putting together the Denel Asia deal. He was also flown around in the Guptas’ private jet and put up in hotels at their expense and sent them confidential documents from Denel, the e-mail correspondence shows.
Finance Minister Malusi Gigaba welcomed the news that Denel would exit the venture, saying that it demonstrated to the investor community that state entities were committed to good governance.
While the company focused on the Asia misadventure, profits and revenues dropped amid shrinking defence spending in Denel’s main market of SA — meaning the company has to rely more on exports, which now account for 63% of total revenue.
Net profit was down to R333m, from R395m. This was "way below benchmark", and revenue fell to R8bn, from R8.2bn. Finance costs increased to R272m, from R203m.
It was a "cause for concern" that Denel’s order book had shrunk from more than R30bn to R18bn in the year to March, Odwa said.
The South African National Defence Force has slashed its orders as the country spends less than 1.3% of GDP on arms, well below the international benchmark of 2.2%. Denel has to increasingly rely on exports for growth.
Denel also announced at its annual results presentation that irregular expenditure almost doubled to R116m in the year to March from R49m in 2016.
This was largely because of the acquisition for R641m of BAE Land Systems from the British arms maker.
The private entity did not initially comply with public finance rules, but "they are now fully compliant", Mhlwana said.
The Treasury has rejected Denel’s request for a five-year guarantee amid unsustainably high debt levels.
"We need to address our reliance on debt, which will automatically address our reliance on government support," Mhlwana said.
He would not "speculate" on the Treasury’s reasons for reducing its guarantee from five years to one. "We are engaging with Treasury in a constructive manner," he said.
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