Denel’s secret R6.3bn export deal

Bilateral relations: President Cyril Ramaphosa visited Saudi Arabia last year; R10-billion of investment was raised.  (Kopano Tlape/GCIS)

Bilateral relations: President Cyril Ramaphosa visited Saudi Arabia last year; R10-billion of investment was raised. (Kopano Tlape/GCIS)

Struggling state-owned military technology and defence company Denel has clinched a R6.3-billion export deal but the details are still being kept secret after its presentation before Parliament’s public enterprises portfolio committee this week.

Denel’s board chairperson, Monhla Hlahla, told the Mail & Guardian that Denel had recently signed its largest export contract, worth R6.3-billion, but would not divulge with whom, as she was not at liberty to disclose such information.

“This is the largest contract. Now imagine if we can repeat such [get another big contract] and what we can do with the new technology. We are open for business, as long as no one wants to buy Denel,” said Hlahla.

Although the deal has been kept quiet, last month, during one of its presentations to the same portfolio committee about its turnaround strategy, Denel said it was negotiating an imminent contract — including a R1.5-billion advance — focusing on Egypt’s navy and ThyssenKrupp Marine Systems vessels.

READ MORE: Denel wants to sell arms to Egypt

Denel chief executive Danie du Toit said it anticipated R30-billion in business in the next two years, which will reverse the entity’s financial misfortunes.
In August, the government had to pump R1.8-billion into Denel because it was struggling to pay salaries and suppliers.

The R6.3-billion export deal comes at a time when Saudi Arabia is also said to have once again shown interest in establishing a partnership for a military equipment joint-venture with Denel.

Details of the talks are scant, but the M&G understands that a delegation from Saudi Arabia has held meetings on the sidelines of the second South Africa Investment Conference, which began this week in Sandton, Johannesburg.

“Saudi Arabia has been one of the client countries for Denel’s products and solutions for a number of years; and we continue to enjoy a good business relationship with the country, over and above the diplomatic relations,” said Denel’s spokesperson Pam Malinda.

“With regards to the Saudi Arabian Military Industries company, Denel is not planning any joint venture and there have been no agreements reached with them. Also, because Denel is state-owned, with the shareholder representative being the department of public enterprises, if they wanted to have any talks it would have to be on a country-to-country basis.”

This is the second attempt by the Saudi government to become involved with Denel, following its failed $1-billion bid last year to buy Denel’s minority stake in Germany’s Rheinmetall, a munitions manufacturer. This followed President Cyril Ramaphosa’s state visit to the Saudi Arabia last July, during which $10-billion in new investment was raised. In a statement at the time, the presidency said the investments would be directed towards the energy sector to enhance energy security, create capacity and reduce costs in South Africa.

In July, Saudi Arabia Military Industries, which is state-owned, signed a deal with Paramount Group, a privately owned South African arms manufacturer, to develop its domestic defence industry.

In its presentation to parliament’s portfolio committee this week, seen by the M&G, the state-owned defence company reported that it has no fewer than 40 expressions of interest “to partner with Denel businesses and to acquire parts”.

Denel, which has experienced severe financial challenges, refused to sell a stake to Saudi Arabian Military Industries, after media leaks of the proposed deal and the pressure that was being exerted by different players for it to sell.

Saudi Arabia, which has been at war with Yemen since 2015, is the world’s third-largest defence spender and has been accused of a litany of human rights abuses, including the indiscriminate bombing of civilians and the assassination of journalist Jamal Khashoggi at the Saudi embassy in Turkey. In Yemen, about 12 000 civilians have been killed since the beginning of the war — the total death toll is more than of 100 000 — with the majority of the casualties resulting from airstrikes by the Saudi-led coalition.

According to sources, the discussions with Saudi Arabia now revolve around forming a partnership with Denel to manufacture military equipment for the Saudis.

“They [Denel] seem amenable to this because the Saudis want to invest $500-million,” said a senior government official with knowledge of the discussions. Another senior government official confirmed that discussions between Denel and Saudi Arabia Military Industries were taking place and that there is a planned state visit to Saudi Arabia later this month.

Hlahla said Denel will be guided by the National Conventional Arms Control Act (NCACC) in terms of what kind of products Saudi Arabia is looking for, as that country is currently in conflict with Yemen.

The Act stipulates that South Africa will not export armaments to countries that abuse human rights and countries that are in conflict or subject to United Nations and other international embargoes.

“If they [Saudi Arabia Military Industries] met our management, the management team will look at what kind of products they [the Saudis] are looking for and if the NCACC approves that, we can export to Saudi because we are signatories to a number of international obligations. At times we can’t supply certain products to a country [that] is at war, so our team will look at what products they want. We want business and we are open for business, as long as it is the right kind of business, because we are hungry for it. If they want products that are allowable, we won’t mind a partnership,” said Hlahla.

She added: “As we have agreed with the shareholder, there is no selling of any stake, unless there is another high-level meeting we know nothing about, but there are a lot of rumours going on.”

In August, the government had to pump R1.8-billion into Denel because it was struggling to pay salaries and suppliers. This came after it posted a R1.76-billion loss in 2018 — about R600-million more than 2017 — while irregular expenditure grew from R1.9-billion in 2018 to more than R2.1-billion in 2019.

In the past year the state arms manufacturer has run into severe financial problems, to the extent that it could not pay staff their full salaries on several occasions in 2018, as well as in June and July this year, prompting the department to step in to save the day. In the last quarter of 2018 things became so bad that the company asked staff to bring their own toilet paper and coffee to work.

In July Du Toit asked government for a R2.8-billion cash bailout, saying the money would be used to unlock potential export deals worth R30-billion.

Last year the company reported to Parliament that its revenue fell from R7.8-billion in the financial year that ended in 2017 to R5.8-billion in 2017-18. This was as the company recorded a R1.7-billion loss at the end of 2018.

This year the company recorded a 38% drop in revenue from last year, with R3.7-billion brought in. This was less than the R4.9-billion forecast earlier this year.

Much of the waste at Denel, including severe financial losses amounting to billions of rands, has been attributed to the capture of Denel and ill-conceived decisions by its previous leadership, including the Denel Asia-VR Laser tie-up.

Thanduxolo Jika

Thanduxolo Jika

Thanduxolo Jika is an investigative Journalist and Co-Author of We are going to kill each other today:The Marikana Story. The Messiah of Abantu.
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