“Project Marlin” could have been the deal that launched Paramount Combat Systems (PCS) to new heights. Instead, the €90-million (about R1.8-billion now) project for Singapore Technologies Kinetics (STK) would prove to be the armoured vehicle maker’s undoing, pushing it into liquidation and costing hundreds of jobs in South Africa.

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The implosion of the Paramount subsidiary also casts a shadow on the image of group executive chair Ivor Ichikowitz as a pioneering industrialist with lofty ambitions for Africa.

With Ichikowitz at its helm, Paramount set up a complex offshore structure that, say critics, allowed profits to be creamed off in Cyprus.

Meanwhile, back in South Africa, PCS was left short of working capital, and its management team at odds with Ichikowitz and the Paramount high command.

Paramount, however, claims its critics are “part of a wider misinformation campaign orchestrated by disgruntled former employees attempting to compete with Paramount for international contracts”.

The story begins in 2011, when PCS’s forerunner, Paramount Land Systems, clinched the contract to provide STK with 101 armoured personnel carriers based on the four-wheel Marauder, destined for the Singaporean army.

The project included an additional 186 Marauder hulls to be shipped for further assembly in Singapore.

The way the deal was structured, Paramount Logistics Corp (PLC), an intermediary company in Cyprus, held the contract with STK, subcontracting PCS to deliver the goods.

This meant STK’s payments would be routed through the Cyprus company, which would then inject capital into its South African affiliate for production.

It also meant the bulk of the profits could be extracted in Cyprus, subject to a much lower corporate tax rate.

In the years after the deal was inked, STK made advance payments to PLC — a total of about €45-million by late 2016, a spreadsheet circulated internally suggests.

That in itself is not unusual in the industry: large downpayments allow buyers to benefit from economies of scale and prevent their exposure to multiyear price inflation.

Only, in the case of the STK deal, that seemingly did not happen.

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The spreadsheet suggests Cyprus-based PLC deducted the entire 30% budgeted profit for the deal — more than €27-million.

In other words, the initial tranches for the contract were paid into the Cyprus account, with PLC setting aside the profit it planned to earn over the course of the multiyear contract.

“They were working the wrong way around,” said Andrew Charter, the former head of commercial and programme management for PCS. “It is so evidently irresponsible. How can you in your right mind take profit upfront when you have such a complex long-term contract?”

What it meant, according to Charter and several other PCS sources, is that instead of having the required cash available for Project Marlin, PCS was drip-fed the working capital it needed to meet its contractual obligations. It is not only that PCS was short-changed, Charter argued, but that the payments that did arrive came too late.

The spreadsheet reflecting the €45-million payment shows that by October 27 2016, PLC — by Paramount’s own calculations — had transferred only about €15-million of the €18-million it had earmarked as working capital for Project Marlin. This was nearly five years after the deal had been signed.

Said Charter: “You need the money when you need it. If you get the money over 10 years that you need in one, that doesn’t help. From the outset you’re undermining your subsidiary’s ability to perform.”

The production line was extremely complex and sensitive, and any delays in payments would hold up delivery of parts. If one component was late, the whole production process would grind to a halt, causing further hold-ups and rising cost inflation — precisely what STK’s downpayment was supposed to avoid.

“We were being drip-fed insufficient sums of money at the incorrect time — much less than required and over a staggered timeframe,” said Charter.

“We then got bogged down in micromanaging [local suppliers], saying we know we owe you X amount, can you just release this one part so we can get one vehicle moving and we’ll pay for that.”

In response to a detailed question about the alleged front-loading of profit on the STK contract, lawyers for Paramount told amaBhungane: “There is no truth to the allegation that funds due to Paramount Combat Systems were intentionally withheld.”

In written replies, Paramount’s lawyers said there was a difference between a shareholder deciding that it was no longer willing to fund a loss-making operation and, on the other hand, holding back on paying amounts that were due — something they denied took place.

The lawyers did not directly address the claim that profit of €27m was set aside, stating: “Without the ‘financial records’ on which you rely for your assertions, our clients cannot respond thereto.”

Fallout

Over the years, the deal between STK and PLC was subject to no fewer than five contract variation agreements, including variation four, in 2015, which provided for the contract to be ceded from PLC to PCS.

This, according to Charter and another senior Paramount source, was due to pressure from the Singaporeans, who were aware of the cash flow problems. From then on, STK paid invoices directly to PCS.

But the new arrangement caused its own problems, as PLC still owed its South African affiliate money from STK’s advance payments. As a result, Charter said, the Singaporeans at times withheld payments to PCS, to pressure PLC into meeting its own funding commitments.

STK clearly also had concerns that its payments were subsidising other, unrelated PCS projects.

And so, in November 2016, matters came to a head.

On November 9, STK’s Project Marlin manager wrote to Charter, raising concerns about further slippage: “ST Kinetics has upheld our part of [the] agreement … by completing the payments earlier… As discussed earlier we require the documentary proof to show that the payments made [go] back to Marlin Project only… As before we require this before the next payment can be processed. Please be informed that our confidence slips further when [PCS] does not keep [to] the delivery schedule.”

At that point Ichikowitz got involved, asking: “How can we possibly be slipping again?” — especially given a R43-million loan facility he had made available to PCS.

PCS chief executive Ben Jansen tersely explained how the money had simply gone out the door again to keep long-delayed creditors at bay. “We still owe R65-million today to local creditors and R35-million to overseas [creditors],” he wrote. “We have accelerated the Marlin hull production to meet the schedule — we will meet it but [are] now slowing down due to suppliers on hold. We have only managed to put 12 [Marauder units] in assembly and are awaiting parts being on hold due to [late] payments.”

On November 18, Jansen, trying to calculate how much PLC still owed PCS, wrote to Paramount executive Morris Kotzen.

“We are trying to figure out how the Marlin invoicing to the relevant parties work[s]. Can you please explain?” Jansen asked.

Kotzen replied: “There is no invoicing on the main contract from [PCS] to PLC.”

The spreadsheet he attached showed PLC still owed PCS nearly €3-million of the €18m from STK’s advances.

By the end of November, Jansen had had enough. He wrote to Ichikowitz and Ravinder Singh, the president of STK and a former chief of the Singapore army.

In his e-mail, Jansen said PCS had for a long time found itself between a rock and a hard place due to inadequate project funding from PLC and delayed payments from STK.

“This causes major distress in the business … My appeal is very simple — kindly resolve the funding/payments on an urgent basis so that we can keep the show on the road. Currently the PCS factory is grinding to a stop due to [a] lack of parts.”

Ichikowitz sent an icy response, saying he was “interested to understand your logic in involving a customer in what should be an internal discussion”.

Jansen shot back: “All the contracts that [PCS] holds from PLC are deprived of working capital though it is clearly stipulated in the contracts. The Marlin contract is a very good case in point. It is completely undercapitalised from a cash flow perspective and this is also very well-known but ignored…

“Why involve Ravi — who else must I involve? No-one pays attention. STK are delaying payments because we don’t make progress and so the story goes around and around. I cannot allow my team and the suppliers to be put at risk here any more — enough is enough.”

In early December, STK executive Gan Boon Jin e-mailed Kotzen, expressing concern about the failure to inject sufficient cash, as had been agreed, and inquiring about a €3.5-million injection promised on October 25 “in the presence of Ivor”.

In a whiff of what was to come, the e-mail also read: “Heard rumour that Ben is moving on. Hope it is not true.”

‘Cannibalisation’

On December 16, two weeks after Gan’s e-mail, Ichikowitz flew to Singapore for an urgent meeting with STK. He was the only Paramount executive to attend.

When draft minutes were more widely circulated by STK in early January, they set a cat among the pigeons.

According to the minutes, Ichikowitz pledged that PLC would inject €3-million for PCS’s working capital by February 2017 — but he also requested that STK pay invoices amounting to €3-million to assist with cash flow problems.

Significantly, the minutes also recorded Ichikowitz blaming the problems on Jansen and PCS’s management.

“Ivor deduced that PCS had failed to use the available funds to purchase the required parts [according] to the Marlin production requirement, and that seems to be the cause of the current shortcomings at PCS,” the minutes noted.

It is a line Paramount continues to push.

In written replies to amaBhungane, the company said: “PCS’s management team at the time did not ensure PCS’s on-time performance of its obligations and as a result of their financial mismanagement, the company faced serious cash flow challenges.”

In addition, the December 2016 minutes recorded that “Ivor revealed his intention to replace Ben with John Craig as CEO of PCS”.

Craig, a senior Paramount executive, is a longtime confidant of Ichikowitz.

Charter said PCS’s senior management was furious to learn that Ichikowitz had “thrown them under the bus”.

The minutes were hastily withdrawn, but the damage had been done.

Jansen was removed as chief executive later that month. Charter, who had been working closely with him, claimed he too was effectively pushed out. (He challenged this at the Commission for Conciliation, Mediation & Arbitration, but the matter ground to a halt after PCS was put into liquidation.)

In a memo dated January 10 2017, Charter wrote: “It is clear from the minutes that the poor financial status of [PCS] and the Marlin programme is … being blamed on the executive management of [PCS] by the group chairman and beneficial owner of Paramount group [Ichikowitz].

“This is an inaccurate assertion, as acts of transfer pricing and a cannibalisation of revenue on the part of the group are at the heart of our financial and general operational predicament.”

Another former employee also blamed the opaque structure of the offshore arrangements for the demise of PCS. “When funding comes in, it should go to [PCS], not to Cyprus. There is no way of ensuring that money was properly managed and channelled.”

Charter and two senior PCS sources claimed that Paramount did not simply draw on some of its banked profit to inject cash, but instead provided loans to the ailing company. These would then be used to offset money PLC owed PCS as products were delivered.

Intercompany loans

So what of the roughly R500-million Paramount has claimed was “a matter of public record” PCS’s shareholders had put into it?

In written replies, the company said: “Paramount Industrial Holdings [PIH — a South African holding company for the Paramount Group] has loaned PCS in excess of R446-million over the years and stands to lose this investment.”

That figure has not stood up to scrutiny.

The claim that PIH submitted to PCS’s liquidators was slightly less, about R423.6-million, which it said was advanced to PCS via loans.

After liquidators advised that there was a large error in the PIH claim, Paramount was obliged to admit that R54-million, reflected as owed by PCS to PIH was, in fact, funding that had not only been received by PIH, but was also owing to PCS.

Following the correction of this “unintentional accounting error” the claim was reduced by R108-million, to R315-million.

Other claims against PCS by companies within the Paramount stable were rejected by the liquidators — notably a R97-million claim by a subsidiary in the United Arab Emirates and a R43-million claim by Socintra, an entity incorporated in the British Virgin Islands and owned, confidential banking records suggest, by Ichikowitz and one of his brothers.

Socintra owns the now resurrected Paramount Land Systems — forerunner to PCS — which bought some of PCS’s key assets out of liquidation in a process that is being challenged by Canadian creditor General Kinetics.

Loan accounts contained in annexures to court documents, while incomplete, bolster the allegation that PCS was starved of capital when it needed it most.

The records suggest that, from the beginning of 2016 until around at least September of that year — a critical period when PCS was desperate for cash — PIH does not appear to have advanced more than about R23.3-million.

Sources told amaBhungane that PCS needed roughly that amount each month just to keep production going.

PCS did, however, receive significant loans prior to this.

Over the years, Paramount loaned about R170-million to the companies that would become PCS. But a large portion of that — about R60-million, according to one source — was for acquisitions of other companies.

Only after Jansen’s departure in early 2017 did money start to flow into the company in amounts approaching what was required.

It is unclear why Paramount only started to turn on the taps then. But it was too late: production had ground to a halt and the company had fallen so far behind on deliveries that it could not hope to catch up.

Collapse

It was not just Project Marlin that PCS had fallen behind on. The pattern was repeated across other contracts.

A former longtime employee who worked in production told amaBhungane of how, when clients asked to inspect components for their vehicles, he would have to pass off parts meant for other contracts as their own.

He said resources from one project would be used to plug holes in another. “We had to come up with all kinds of excuses and try and postpone delivery … and steal from Peter to pay Paul.”

PCS was also desperately lagging in its payments to other companies. The former employee said he had doors slammed in his face by increasingly hostile suppliers. “After a while some were just saying: ‘Get lost. You people don’t pay, so get lost!’”

After Craig replaced Jansen as chief executive, the company stumbled on for another year, falling even further behind target.

Tertius Pienaar, who had worked for the Paramount group for eight years and was a supervisor on the production floor at the time, said production ground to an almost total halt after Jansen left.

“For the better part of eight months or so we did absolutely nothing production-wise except for the odd demo,” he said.

The following year, in February 2018, STK applied to have PCS liquidated. Paramount did not oppose the application.

In its application, STK claimed to have channelled about €68-million (of the €90-million contract price) into Project Marlin, yet “received nothing resembling complete performance and the prospect of substantial (let alone complete) performance … is now so remote as to be negligible”.

Paramount told amaBhungane that “the impression that the STK contract was the only or main business of PCS … was not the case”.

It was not the only contract, but it was the largest by a very long way. The next-largest deals after STK’s 101 vehicles and 186 hulls were with Azerbaijan, for 60 vehicles, and Jordan, for 50.

The Azeri and Jordanian contracts, according to sources, were each valued at about $50-million, though neither came close to completion.

According to Charter, the Azeri deal turned sour because of delivery delays and a conflict over licensing rights. “The same problems were replicated — get the deal, get the downpayment, and none of the programmes are delivered as planned.”

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The Jordanian deal collapsed at the end of 2017, when the kingdom experienced severe financial challenges. The Jordanians defaulted on payments, and advised they did not have funds to cover the balance of the order.

Paramount claimed the demise of PCS was brought about, in large part, by “the cancellation of certain contracts, the insolvency of certain subsuppliers, market conditions and yes, indeed, failure of the then executive management”.

But the company emphasised that, “as a result of Paramount’s investments in South Africa, there have been significant exports from South Africa, significant foreign exchange inflows into South Afirca and significant job creation in South Africa”.

Charter, however, said the collapse of PCS cost hundreds of quality jobs in South Afica. People who “were on site for 18, 19, 20 hours a day” ended up as “blood sacrifices”.

Several former employees are still furious.

“Paramount is still operating today like nothing happened,” said one, “and people’s livelihoods went down the drain.”

In written answers the company said: “From April 2018, Paramount … hired a number of staff (most of them ex-Paramount Combat Systems employees who were left without employment due to the liquidation of thereof) and started operating a new vehicle business.”

Reckoning

The suspicion that Paramount was able to walk away from the wreckage and continue “like nothing happened” forms the core of General Kinetics’ challenge to the sale of some PCS assets by the liquidators. General Kinetics is unrelated to STK.

In court papers Paramount stated: “Kinetics alleges or at least infers that [PCS] incurred losses building up significant creditors, and when this happened the Paramount group decided to liquidate this company with the intention of diverting its valuable assets to a different Paramount entity…

“This version is, however, patently false and not supported by any factual substantiation; it is denied in toto.”

Paramount may be correct — but a general suspicion about the manner in which the company collapsed has been given further credence by the liquidators’ application for a so-called section 417 inquiry into the affairs of PCS.

The liquidators’ application for the 417 inquiry itself is secret, but in correspondence with amaBhungane the commissioner appointed to conduct the inquiry, advocate Chris Eloff, noted that the liquidators told him they “intend to investigate whether potentially impeachable transactions … were concluded … and whether criminal offences were committed”.

Ichikowitz’s critics say the case of PCS gives the lie to his self-styled image of a benevolent, patriotic industrialist who has taken up the country’s causes as his own.

It remains to be seen whether they will be proved correct.

*Read more of Micah Reddy’s investigations here.