The former chief financial officer of Denel Land Systems (DLS) Pieter Knoetze has that said in hindsight, he would do the same thing and make the same decisions today regarding prepayments the state-owned entity (SOE) doled out in 2010 to a supplier, LMT.
Knoetze was on Monday giving Denel-related evidence to the Commission of Inquiry into State Capture, chaired by Deputy Chief Justice Raymond Zondo.
Denel had the objective of becoming an industry one-stop shop and so sought to acquire 51% shares at LMT, which was a long-existing supplier to the SOE.
Ahead of the acquisition of the shares, Knoetze had a look at LMT’s financials and found that there was no good oversight on these and the supplier.
The commission heard that by 29 April 2010, Denel made an advance payment of about 25% of R52 million, R12.7 million to LMT and that a few weeks later the “full complement” of the amount was paid to the supplier.
The commission has previously heard that the advance payments the SOE paid to the supplier were not best practice and were a way to channel money to LMT because it was in financial difficulty.
The advance payments to LMT were done to ensure that a project it was handling for Denel would not be in danger, and to avert the financial collapse of the supplier, Knoetze told the commission.
Knoetze said security measures were put in place to protect Denel should LMT fail, and that the financial risks of the advance payments were discussed at Denel, even at executive committee level.
Account firm KPMG was tasked with conducting due diligence checks on LMT and in its report, it identified a number of issues relating to the company’s financial strength.
These issues included a distortion of LMT’s gross profitability – meaning its reported profitability could not be relied on – the prepayment DLS made to LMT being referred to as deferred income in its financials and that LMT would require capital investment of R43 million.
Knoetze said it was “correct” that these concerns did alarm him.
However, he added that in hindsight, in light of all the evidence before him and all the advice he received, he would “probably do the same and make the same decision today” and that after the acquisition of the 51% shares of LMT, had the SOE and supplier been properly integrated the move, would have been a success.
The commission heard that the cash injection DLS made to LMT was used to pay creditors and fund the company’s projects at the time.
The commission also heard that the prepayment of R12.7 million was approved by the DLS board while the acquisition of the shares was to be approved by the parent Denel board and the minister of public enterprises at the time.