State-owned weapons manufacturer Denel circumvented its own supply chain bosses to sign a highly irregular 10-year “single source supplier” deal with Gupta-owned VR Laser, according to a forensic “review report” that has made its way into court papers.
After internal opposition from senior procurement executives, the decision to send hundreds of millions of rands worth of business to VR Laser without tenders was apparently approved at an informal coffee meeting of executives which was not recorded or minuted.
According to the report, Denel’s supply chain management executive Denisse Mlambo claims that he left the office for a week in 2015 and came back to learn that a massive R235 million contract “had been concluded with VR Laser ... and that there was also a signed MoA [memorandum of agreement] in place with
Furthermore, Denel executives lied to Parliament when they said procurement processes had been followed in all dealings with VR Laser, according to the review report.
VR Laser is one of the eight Gupta companies that voluntarily entered business rescue earlier this year.
The rescue practitioners controlling VR Laser are pursuing Denel for up to R40 million, which the company is owed for work done.
However, Denel is refusing to pay because all deals it did with the Gupta company were “tainted by irregularity, unlawfulness and/or corruption”, according to an affidavit by Denel legal executive Carene Geldenhuys filed at the Johannesburg High Court last week Friday.
This was in response to an application for summary judgment against Denel for some of the outstanding money.
Not only will Denel not pay, it will institute a counter claim and review proceedings against “all its transactions concluded with the plaintiff and its subsidiaries or antecedent companies”, said Geldenhuys.
The affidavit is accompanied by a forensic “review” of Denel’s May 2015 MoA with VR Laser, which was compiled by Ngidi Business Advisory.
This review, dated April this year, sheds light on how Denel ended up making VR Laser its go-to contractor for work on its massive Project Hoefyster contract to supply the SA National Defence Force with 238 Badger armoured vehicles.
The Ngidi report sketches the background to the MoA, starting in July 2014 with emails between Denel executives.
A group of them, especially Denel Land Systems CEO Stephan Burger, argued in favour of the VR Laser deal. Denel Land Systems was the division of Denel that was to supply the Badgers.
The problem was that Denel has a policy to do work in-house as far as possible, in this case at a subsidiary called LMT Holdings.
Burger argued with colleagues about LMT’s actual ability to do the job compared with VR Laser’s more impressive past performance.
VR Laser had been a subcontractor to Denel for years before the Gupta family took control of it in 2013, just in time for the Hoefyster bonanza.
One tender process in 2014 saw VR Laser seemingly enjoy insider knowledge and ended in Denel choosing VR’s more expensive bid with a proviso that it would later negotiate the price down, according to the report.
That tender soon ballooned into the 10-year MoA, which was opposed by Denel’s supply chain department.
This duration was suggested by VR Laser itself to coincide with the duration of Project Hoefyster. This MoA made VR Laser the “single source supplier” for fabricated steel components under Hoefyster.
This alone contravenes Denel procurement policy, which allows for contracts to be, at most, three years in duration and calls for tenders whenever more than R500 000 will be spent, according to the report.
According to a letter from Burger reviewed in the report, Denel’s procurement department’s objection to the MoA “was debated and analysed at the Denel Land Systems executive committee and it was agreed to recommend the conclusion of a memorandum”.
According to the Ngidi report, this meeting was in fact a “mere coffee session and not appropriately recorded”.
Instead of Denel’s actual boss of procurement, Mlambo, signing off on the VR Laser deal, the key approvals were signed by, among others, Zwelakhe Ntshepe, the group CEO of business development at Denel.
He had no power to approve any procurement, according to the report.
The review report also cites an email exchange in April 2016, where Celia Malahlela, who was then supply chain executive manager at Denel Land Systems, wrote to Burger to register her discomfort.
“I would like to reiterate that it is my humble opinion that Denel Land Systems failed to follow the correct process when appointing VR Laser as a preferred supplier,” she wrote.
She went on to mention that “the current CEO of VR Laser has acknowledged their ties with the Gupta family and the president’s son in the meeting we had yesterday”.
The Ngidi report is meant to be the first of multiple reports to be prepared for Denel as it tries to recoup R400 million spent with the Guptas’ company.
A “second phase” of the investigation will look at Denel’s R238.9 million deal with VR Laser to produce the hulls of the Badgers, according to the report.
The report recommends that Denel act against Burger, former Denel group CEO Riaz Saloojee and others for concluding the MoA, which led to millions in irregular expenditure.
The Ngidi report suggests that VR Laser had inside knowledge of Denel tender evaluations shortly after becoming controlled by the Gupta family in 2013.
- In 2012, Denel Land Systems asked for quotations from its fellow Denel subsidiary LMT and two private companies to build the hulls of Badger vehicles.
- LMT quoted R1.74 million per unit, while VR Laser and competitor DCD came in at R865 010 and R896 000, respectively. VR Laser was the cheapest.
- In 2013, Denel authorised the signing of a contract by Denel Land Systems for 238 Badger vehicles under Project Hoefyster.
- That year, the Guptas bought VR Laser.
- In 2014, Patria, the Finnish company that owns the Badger design, visited the three bidders and ruled out DCD. It said LMT needed to improve its welding and that VR Laser was suitable.
- Also in 2014, Denel Land Systems put out a request for quotations to update the 2012 prices.
- The bidders had by then completely changed their prices. LMT was now the cheapest at R788 191 per hull. VR Laser quoted R1.21 million per unit, while DCD, which wasn’t really in the running any more, quoted R1.39 million.
- Denel Land Systems’ evaluation committee objected that the LMT price was “unreasonably too low”. The price quoted by VR Laser was, however, “in excess of Denel Land Systems’ current budget”.
- Someone seems to have alerted VR Laser to this because the evaluation committee for some reason received an unsolicited new proposal with a lower price and a new BEE certificate showing better black ownership.
- While VR Laser’s apparent access to the tender process clearly raises red flags, the Ngidi report says that it did not look at this any further because it was not part of its mandate.