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Denel blows R250m arms deal with Chad

2019-09-23 01:00

State arms company Denel has failed to supply R250 million worth of army vehicles to the government of Chad, despite having been paid a R100 million deposit almost two years ago.

In 2017, Chad bought 40 military Casspirs from Denel, but the company could not deliver them while officials squabbled over the ownership of the lucrative intellectual property (IP) rights – which had been given to the Gupta family for free – to build the vehicles.

Chad has since cancelled the contract and demanded its deposit back from the cash-strapped arms company.

Denel’s failure to deliver comes at a time when the firm is struggling with liquidity issues.

Last month, Denel received a much-needed bailout of R1.8 billion from Treasury.

At the time, Treasury said the company would get another billion next year.

In recent months the company, which has been implicated in state capture, has struggled to pay employees on time. At the end of June, it only managed to pay its staff 85% of their salary.

Sources with knowledge of the deal with Chad said a diplomatic row had ensued and that the African country had threatened to refer South Africa and Denel to the International Court of Justice, which is responsible for mediating legal disputes between countries.

And now, President Cyril Ramaphosa has been roped in to quell the diplomatic fallout.

A senior South African diplomat stationed in N’Djamena, Chad’s capital city, told City Press last week that the diplomatic row over the delivery of the vehicles started unfolding during the first quarter of last year.

The diplomat said: “Some time in the middle of last year, Chad sent envoys to Ramaphosa, asking for his intervention. They are demanding their money back and they have threatened to report us to the International Court of Justice.

“After their conversation with the president, they were placated somewhat, but they are still very angry. They are quite unhappy about it. Diplomatic relations are strained but okay.”

The Chadians wanted to use the Casspirs to shore up their anti-terrorism fights in Mali and in the Sahel.

After launching an investigation into the contract, Denel said on Friday that its findings so far were that the deal with Chad was unlawfully entered into.

As a result, some officials are facing disciplinary action and a criminal case has been opened with the police for investigation.

The company said it was also working on repaying the deposit it received.

Confidential documents, memos and correspondence in City Press’ possession show how, between November 2017 and February last year, Denel’s senior executives transferred Denel’s lucrative Casspir-manufacturing IP to Gupta-owned company VR Laser.

The documents show that, at the time, Denel’s top brass had irregularly appointed VR Laser to manufacture the Casspirs ordered by Chad, arguing that the company owned the IP and was therefore best placed to produce the vehicles.

THE IP HEIST ATTEMPT

The documents show that after securing the contract from Chad, senior executives irregularly handed it to VR Laser, without following procurement procedures.

The executives had given the tender to VR Laser, which the Guptas bought out in 2014, despite the fact that Denel Vehicle Systems (DVS) and Land Mobility Technologies (LMT) – both subsidiaries of Denel – have the capability and capacity to manufacture the Casspirs.

In an email written to Denel Land Systems’ procurement manager, Douglas Masuku, in January last year, Denel group’s former supply chain boss, Dennis Mlambo, argued that VR Laser should not be appointed.

“What was the basis for selecting VR Laser to execute the order when the same capability is available within the group?” wrote Mlambo.

“LMT and DVS have the capability and there is capacity available at this stage.”

One of the reasons that Denel’s executives had given in support for their decision to appoint VR Laser to manufacture the Casspirs for Chad was that the latter owned the IP.

There is no satisfactory answer as to how the IP ended up being the property of VR Laser, despite irrefutable evidence that Denel developed the Casspir

In a series of emails to Masuku, Mlambo stood firm and maintained that the IP to manufacture Casspirs belonged to Denel.

“There is no satisfactory answer as to how the IP ended up being the property of VR Laser, despite irrefutable evidence that Denel developed the Casspir,” said Mlambo in his correspondence.

“If Denel has the capability and capacity to assemble said vehicles, then we should simply demand our IP from VR Laser, unless there is evidence that they paid for it, in which case they should be allowed to execute the order.”

In February 2018, Masuku and other executives prepared another submission for the approval of VR Laser to manufacture the Casspir.

They argued that the Casspir was originally developed by the Council for Scientific and Industrial Research (CSIR) and was manufactured by Mechem.

Initially, Mechem was a unit of the CSIR, but it was eventually incorporated into Denel.

In Masuku’s submission, he stated that the IP belonged to VR Laser because Mechem had approached the company, requesting it to redevelop, modernise and improve the Casspir.

Mlambo signed the submission but drafted the following notes with a pen: “Conditional approval subject to validation that the IP belongs to VR Laser and a proper process was followed to sell that to VR Laser.”

The submission had recommended that “Denel Land Systems should immediately negotiate for a fair and equitable price at which the Casspir IP developed by VR Laser can be purchased”.

VR Laser was placed under business rescue after the Guptas fled the country last year. The business rescue practitioners auctioned off the company’s assets in September last year.

Louis Klopper, one of the business rescue practitioners responsible for winding up VR Laser, told City Press last week that when the firm was shut down, the Casspir IP was returned to Denel, “where it rightfully belonged”.

THE MYSTERIOUS MIDDLEMAN

The documents show that on November 20 2017, the Chadian government paid Denel an upfront fee of R100 million, with the expectation that the first 10 Casspirs would be delivered by March 2018. Denel was to deliver 10 Casspirs each month thereafter, completing the order in June.

But, sources said, not a single Casspir was delivered.

An executive in the arms industry with intimate knowledge of the contract said Denel used R10 million of the R100 million deposit to irregularly pay a technical adviser.

In arms procurement, technical advisers are often used as a go-between between buyers and suppliers of defence equipment to make sure that the supplied arms are to the client’s specifications.

The source said that the technical adviser, identified only as Solomon, was paid the money after the contract with Chad had already been signed.

“There was no need to pay a technical adviser as the contract had already been signed with Chad. His advice, if any, would have been needed before the contract was signed,” said the source.

DENEL RESPONDS

Pamela Malinda, spokesperson for Denel, said the company had since launched an investigation into the Chadian contract and that its findings showed the deal was irregular in that it was “initiated and contracted outside of Denel’s internal governance processes”.

She laid the blame at the doors of the company’s previous management.

Processes were not followed when VR Laser was appointed as a single-source supplier, she said, adding that “the IP for the Casspir vehicles belongs to Denel”.

Based on the findings of the completed leg of the ongoing investigation, Denel has initiated disciplinary actions against the employees who played a role in the conclusion of the contract.

The company is in the process of instituting civil proceedings to recover losses that may have been incurred by Denel.

A criminal complaint had also been opened with the police to investigate further, said Malinda, adding that Denel was in the process of paying back Chad’s money.

Read: Denel woes sow increasing discontent among workers

With regard to the money paid to Solomon, Malinda said: “While Denel has a stringent policy about the appointment and management of technical advisers, the appointment of the technical adviser for this contract was flawed. Therefore, the payment related to this is deemed irregular and Denel is in the process of recovering the money.”

Denel is also cooperating with the judicial commission into state capture, as well as with a probe by the Special Investigating Unit and other applicable state agencies.

The Chadian embassy in Pretoria did not respond to detailed questions sent on Thursday morning.

The presidency did not respond to a request for comment on the matter.


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October 13 2019