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Corrupt practices brought Denel to its knees – Zondo report

Law enforcement agencies should investigate directors who stood aside while colleagues who stood up to corruption were suspended.
Denel was steadily improving its financial position, then the Gupta capture project began. It was downhill from there. Image: Siphiwe Sibeko/Reuters

Former Denel chair Daniel Mantsha, who was appointed by former public enterprises minister Lynne Brown, and other members of the 2015 Denel board played a critical role in helping to capture Denel for the Guptas, according to the State Capture Commission chaired by Deputy Chief Justice Raymond Zondo.

Part 2 of the Zondo report released on Tuesday says Denel, was once highly regarded internationally, yet it is now “almost on its knees”.

Access the Zondo report on Denel here.

Denel was under capable management in the form of CEO Riaz Saloojee, chief financial officer Fikile Mhlontlo and company secretary Elizabeth Africa, but they were removed by Mantsha, a former attorney struck off the roll for misconduct.

Astonishingly, then minister Brown saw it fit to appoint Mantsha to head Denel.

So began the Gupta capture project, led by Mantsha and other former Denel board members who supported him.

Those who supported Mantsha in his efforts to suspend the three directors who stood in the way of the Gupta’s capture of Denel are unfit to be directors of a company, says the report.

It recommends law enforcement agencies investigate possible breaches of the Public Finance Management Act (PFMA) with a view to prosecuting the board directors during this period.

Who should take action, and how

Denel, the Department of Public Enterprises, and the Companies and Intellectual Property Commission (CIPC) all have standing to bring appropriate proceedings against Mantsha and his cohorts, and “it is therefore recommended that they all be asked by the Government to consider bringing such proceedings”.

One of the recommendations made by the Zondo Commission is to make intentional abuse of public power a statutory offence.

“Such potential violations might range from the case of a president of the Republic who hands over a large portion of the national wealth, or access to that wealth, to an unauthorised recipient to the junior official who suspends a colleague out of motives of envy or revenge.”

The commission bemoans the inadequacy of punitive measures in SA law which allowed abuses at Denel to proceed occur.

Read:
Second Zondo report details rampant corruption at Transnet and Denel
Corruption Watch demands accountability and action following release of Zondo Commission Report

Two forms of abuse were noted: interfering in board composition to violate the Companies Act and other laws; and, suspending executives for improper purposes. Such abuses pervade our public life, says Zondo.

The recommended penalties include a fine of R200 million or imprisonment for up to 20 years, or both.

This would apply to any official at national, provincial or municipal level acting “otherwise than in good faith and for the purposes for which such power was conferred,” says the report.

Such penalties should cool the heels of those officials who have robbed the public purse blind and then walked away unharmed.

Several contracts awarded by Denel to Gupta-linked VR Laser were irregular and in breach of the Constitution, which mandates fairness, equitability, transparency, competitiveness in all state contracting.

Take power away from politicians

The appointment of CEOs and CFOs cannot be left solely in the hand of politicians because of their proven failure to protect these institutions from ending up dependent on bailouts. The report recommends the creation of a body tasked with identifying, recruiting and selecting the right talent for positions of CEO and CFO at these entities.

Read: With cadre deployment like this, state capture is a certainty

The reputational damage that Denel suffered from its capture and the fact that control passed into unscrupulous hands was enormous. The evidence shows that rebuilding Denel will take a long time – if it does not go under.

VR Laser 

VR Laser, once the primary supplier of steel armour plate within SA, fell along with the rest of the Gupta companies because of the withdrawal of its banking facilities and its association with the Gupta family.

Salim Essa (a close Gupta associate) and the Guptas manoeuvred themselves into VR Laser as a vehicle to capture Denel.

Read:

The report concludes that former public enterprises minister Malusi Gigaba abetted the Guptas and Essa in their capture project.

Once the objecting executives were out the way, VR Laser was able to participate “in any lucrative undertaking in which Denel became involved within the borders of the Republic” and, through the Denel Asia joint venture, outside these borders.

Through the Denel Asia joint venture, the Guptas presumably thought they would gain access to the worldwide arms industry.

Former minister Lynne Brown is also implicated in the report, with the commission rejecting her claim she could not remember phone conversations between herself and Essa during the period when appointments to the board were being made.

“Why would she lie about her telephone conversations with Mr Essa. The only possible conclusion is that Ms Brown was a witting participant in the Guptas’ scheme to capture Denel and Eskom,” reads the report.

The commission concludes that she was assisting the Guptas based on how she dealt with certain matters relating to state-owned entities (SOEs), and cellphone records between her, Essa and Tony Gupta.

She failed to come to the assistance of Saloojee when he and two fellow executives were suspended, even though she had previously commended him in public and he was now accused of wrongdoing in relation to a transaction that had been comprehensively vetted by her predecessor, Treasury and the Competition Commission.

Pressure

The Guptas were not prepared to compete for Denel’s business. They pressured Saloojee to give preference to VR Laser, their chosen vehicle for capture, and orchestrated a meeting between him and his boss, then public enterprises minister Gigaba.

As always, the meeting – brief as it was – took place at the Gupta compound in Saxonwold, Johannesburg. When Saloojee would not play along, steps had to be taken to get rid of him. The means used to do this was the end of the term of office of the members of the 2011 board.

The commission then questions why Brown chose Mantsha as board chair, a man who had previously been struck off the roll of attorneys, “for something to do with his trust account”, and then readmitted as an attorney.

“Surely, a prudent minister would have had nothing to do with bringing an attorney who had been struck off the roll of attorneys for something to do with his trust account into the board of an SOE, not to mention making him the chair of such a board.

“Were there no other attorneys who had never been struck off the roll, if the board required an attorney? Gauteng has thousands of attorneys.”

Denel was a juicy target, showing a profit (a rarity for an SOE at the time) in 2015, and was given a clean audit by the Auditor-General.

The report focuses on several contracts awarded by Denel to VR Laser – two so-called Single Source Contracts awarded by divisions with the group called DLS (Denel Landward Systems) and DVS (Denel Vehicle Systems) for complex armour steel fabrications and related steel products, extending for a period of 10 years.

Questions arose within Denel about VR Laser’s ability to fulfill complex projects such as this, but such objections were brushed aside. A third “hulls contract” was awarded by DLS to VR Laser.

Bailouts

By March 2021, it was reported that Denel was in serious financial trouble and was battling to pay salaries and creditors. It needed another R500 million to stay afloat.

This was despite government extending guarantee facilities of R5.93 billion and Treasury stumping up R1.8 billion for recapitalisation, on top of R576 million allocated to it for the 2020/21 financial year.

Evidence presented to the commission shows Denel improving its financial position steadily until 2015, when the Gupta capture project rolled into motion. It was downhill from there.

The report is loaded with explosive material, such as Saloojee being asked by Tony Gupta why he would not take money.

There was no attempt by the Guptas to hide their corrupt plans.

They were ordering around ministers, directors-general and chief executives, who they would berate for “not co-operating” when bribes were refused.

They acted as if they ran the country – which, it seems, they did.

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And there was a time when this company was a sought after place to work by skilled engineers and technicians who evaporated to other sectors and countries in the early twenties when the cadres started taking over.

The entire Zondo Report is an indictment against the collectivist system itself. The system enables and rewards criminal behavior. This is merely another example of the economic principle of the Tragedy of the Commons where the most unscrupulous individuals in the community are incentivized to plunder the shared resources at the maximum rate.

Accountability is a crucial element in any political-economic system. Capitalism and property rights have strong and efficient structures to enforce accountability. The owner pays for his own mistakes and he carries the cost of overgrazing of pastures or the abuse of resources. Property rights ensure that he only steals from himself and goes bankrupt in the process.

There must be very strong rules and customs to regulate behavior and to hold people accountable in a communalist or collectivist system. Whenever resources are shared, to be effective, the rules must be enforced mercilessly and ruthlessly. Think of the firing squad in China.

This brings us to the point. In a free-market capitalist economy with property rights, a democratic political system with a charter of human rights is the ultimate solution. This system is effective in Europe. On the other hand, if the predominant system is communalist or collectivist, then rules must be enforced ruthlessly and mercilessly and such a nation cannot be a democracy and certainly cannot have a human rights charter that prohibits the process of enforcing accountability. This system is very effective in China.

The Zondo Report makes it is clear that South Africa has the worst combination of economic-political systems. We are a communalist society with a collectivist government that is also a constitutional democracy. This combination is a recipe for disaster.

The process will inevitably lead to one of the following scenarios. If we privatize all spheres of government, from SOEs to municipalities, the accountability that is inherent to the capitalist system will support the viability of our constitutional democracy. If, on the other hand, we remain a collectivist society, the unpunished criminality will lead to the implosion of the state. Then, in a failed state, we will be governed by warlords, dictators, and demagogues and the constitution and human rights will be meaningless anyway.

Errr … “Then, in a failed state, we will be governed by warlords, dictators, and demagogues and the constitution and human rights will be meaningless anyway.”

But that’s where we are … in a tribalist society which uses capitalism as a tool of self-enrichment. Privatisation would remove control and access to the fiscus.

And now Dear Cyril wants to establish a specialised court to deal with these “dastardly criminal” (his description of the Marikana miners) and “allegedly corrupt” (my description) state officials.

But, Dear Cyril, how will you find sufficient competent and uncorrupted judges and prosecutors out of the already compromised judiciary? And will they complete their trials and sentencing before the turn of the century?

Sigh … trice …

oops …. thrice …

Nah, never, can’t be, Zondo has it wrong again!

It’s just too surprising and too much of a character assassination of the Cadre’s!

End of comments.

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