Public Enterprises Minister Lynne Brown.  Picture: TREVOR SAMSON
Public Enterprises Minister Lynne Brown. Picture: TREVOR SAMSON

THE joint venture between state-owned arms manufacturer Denel and the Gupta-associated company VR Laser has not been approved by Public Enterprises Minister Lynne Brown or by the Treasury and is, therefore, not legal under the Public Finance Management Act.

Denel and VR Laser formed Denel Asia last month and registered the company in Hong Kong. But before any state-owned company can enter a joint venture or partnership it must complete a section 54 application under the Public Finance Management Act and obtain the consent of the executive authority.

Though Denel took the preceding step under section 51 of the act and requested pre-qualification to explore the arrangement, it never secured permission to form the company.

Ms Brown said on Monday that she had set a number of conditions prior to giving her approval. These included that a cost-benefit analysis and a due diligence of the company be performed before approval.

These conditions have still not been met.

Ms Brown read about the launch of the company in the press after Denel released a statement publicising the deal.

She said that she had asked for an explanation.

"Denel must get a section 54 to go ahead, which is signed off by the department and by the National Treasury. I’ve written to them to ask them why they went ahead. The joint venture is not approved yet," she said.

Denel’s business model, on which its successful turnaround in the 2000s was based, involves the formation of joint ventures between its subsidiaries and international companies, in which it retains 49% ownership. The joint ventures, which are typically with companies linked to large international firms, have provided Denel with both capital and technology.

When it announced the Denel Asia deal last month, it said that this would open up markets for Denel in the East in the fields of artillery, armoured vehicles, missiles and unmanned aerial vehicles. However, critics have questioned what value VR Laser could add in this arrangement. It has had limited exposure to the defence industry and has not conducted business in Asia before.

The Mail & Guardian has reported that it had established that the Gupta family and Duduzane Zuma, a son of President Jacob Zuma, were the owners of 25% of VR Laser. The Gupta family share was later also confirmed by family spokesman Gary Naidoo.

Denel did not respond to questions on Monday.

Instead it sent the press release it put out last month announcing the deal.

Ms Brown is also awaiting a second report from Denel, providing an explanation of the suspension of two top executives and the company secretary in September last year.

She had given them until December 10 to investigate the matter and report to her.

On Monday, she confirmed that she was still waiting to receive the report.

It is believed by insiders that CE Riaz Saloojee, chief financial officer Fikile Mhlontlo and company secretary Elizabeth Africa were suspended to clear the way for the VR Laser deal.

The three were suspended shortly after a new board was installed. Previously, Mr Saloojee, in particular, enjoyed a good reputation and Denel was viewed as a success story.

Shortly before the suspension, Denel experienced a cash crunch, which unconfirmed rumours claimed was due to a transaction managed by Mr Saloojee to acquire BAE Land Systems.

The board has pointed to this transaction to justify the suspensions.

Ms Brown said that the board had said that "at face value" the problem had been the BAE Land Systems transaction.

She said the board needed to provide her with the details of this in the report.

Although the executives have been suspended for five months the disciplinary process has not yet begun.

Instead of a hearing, a source sympathetic to the three said they were being encouraged to leave the company.