Is Airbus “blackmailing” SA on the A400M?

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A South African Sunday newspaper is claiming Airbus Military is “blackmailing” the country by not paying back a R2.9 billion deposit for eight A400M strategic transport aircraft and threatening to pull out of industrial partnerships related to the buy worth R2.3 billion. But the company denies this.

The Weekend Argus on its front page also stated that Airbus has “made a cut-throat counter-offer of four planes at a cost lower than the 2005 deal, despite that a four-year delay is likely to push up the price. … The new discount offer sets the total price, without the first two years’ maintenance costs, at about R4.3 billion for the four planes, and states that the deposit already covers two- thirds of the full price.” The article was also published in the Sunday Independent and posted on the Independent Online website.
“In documents leaked to Weekend Argus, Airbus made its terms clear,” the paper says: “Termination by Armscor of the South Africa acquisition contract leads to automatic termination of the (2005) Letter of Understanding. As a consequence Airbus has no further obligation with respect to the industrial participation of this programme.” It reportedly added it may be forced to relocate the R2.3 billion work packages to other participating countries.

The paper says government maintains that its legal reading of the deal did not suggest any conditions between the acquisition of a fleet and the industrial partnership, despite a plea by Denel CEO Talib Sadik, in a letter to Armscor in January, for a reassessment of the government’s cancellation of the Airbus contract, given the “adverse consequences” to Denel should the plug be pulled.
Cost conundrum

Defence Minister Lindiwe Sisulu cancelled the deal in November due to the delay and cost escalations, which the government estimated could balloon from the original R17 billion to about R30 billion, the Weekend Argus said. The cost of the A400M project has long been contentious.

The South African Air Force in 2005 said the cost of the aircraft was €837 million (then about R9.6 billion, although a South African Air Force press insisted it was R7 438 200 001.88). In October last year then Armscor CE Sipho Thomo told Parliament the cost had escalated from R17 billion to R47 billion. Sisulu and Airbus denied the R47 billion figure but no-one has ever explained where the R17 billion figure came from. It is also not clear were the Weekend Argus found the R30 billion figure. The paper continues SA had given Airbus a January deadline to repay the deposit.

The Weekend Argus further states Airbus Military chairman [sic, correctly managing director] Domingo Urena Raso suggested in a letter to SA that the impact of South Africa’s cancellation could be “severe” and could include:

  • The loss of industrial investment of R990 million.
  • Future sales of R4.8 billion.
  • The loss of 160 direct skilled, and other, jobs.
  • The loss to Airbus of R1 billion of investments in the SA aerospace industry.

Since the letter, for which the Weekend Argus gives no date, Airbus has cancelled one of the three “work packages” that went to parastatal Denel SAAB Aerostructures ( DSA). The paper says government has pumped more than R673 million into DSA and the company itself invested R400 million, while Aerosud, a private company, has doubled its capacity to accommodate the deal. Speaking through the defence ministry, Armscor said its stance was still that “the money must come back”. “Any other negotiations will happen subsequently,” it stated.

Both Denel and DSA indicated that they remained “hopeful” that Airbus would not pull the plug.
Airbus responds

Airbus Military’s SA spokesman, Linden Birns, denied that there were hostile negotiations, but confirmed to the paper their threat to pull the offsets. “Obviously, if the doors are closed and another tender is not coming up… we would have to review the (industrial partnership) programme,” he said.

Birns indicated that since the letter was written in mid-February, Airbus had entered into a dialogue with Armscor and that the CE of Airbus – Sipho Mkwanazi – would seek a meeting with Sisulu soon to understand the circumstances around the “sudden cancellation” and “the way forward”.
“There was and is no blackmail,” he told defenceWeb in an emailed response. “The letter that Sunday Independent referred to was written in mid-February. Things have moved on since then. The letter was addressed to Mr JS (Sipho) Mkwanazi, Acting CEO, Armscor. It was not addressed to Minister Sisulu.
“Far from being hostile, the letter responds to Armscor’s letter of November 5 2009 and provides an assessment of the investments made by SA and Airbus Military in the South African industry, the contractual obligations underpinning these and the industrial and military operational impacts of South Africa’s decision to terminate its A400M contract (this decision was announced by SA Govt [sic], without any discussion with other contract parties or with affected organisations and businesses).
“The letter included an Annex containing a revised proposal for Armscor’s consideration. This was in response to Armscor, which, last October, raised the possibility of a reduced order.
“Nowhere in this letter or in any other correspondence with Armscor – the party nominated by Govt to manage its A400M contract – has a gun been put to its head or any threat issued to the effect that SA must accept the revised proposal, or else…,” Birns said.
“Over the past two decades, Airbus, Airbus Military and South Africa have cultivated a set of close partnerships in the country’s aeronautical, air transport, research & technology, academia and industrial communities. It is in this spirit that Airbus CEO, Tom Enders, and Airbus Military Managing Director, Domingo Urena, said they hoped that SA Govt will be open to discussions once the Soccer World Cup – which has been a pressing issue for the country – was over.”

He continues that Airbus Military and Armscor began discussions “a few weeks ago” on unwinding the A400M contract. “This is a legal process that has to be followed.” Meanwhile, he says, Airbus Military has been in discussion with its SA industrial partners. “In the meantime, local design engineering and manufacturing of A400M components continues.”

Fallout

Sisulu has repeatedly indicated that while South Africa “badly” needed heavy-lift capability to fulfil its African peace missions, any future acquisition would go through rigorous and proper needs and tendering processes. Asked for comment on the Airbus threat, she stuck to her guns. “The government position is very clear. We have withdrawn. We want our money back. Instead of threatening, they should concentrate on finalising the termination of the contract,” her spokesman Ndivhuwo Mabaya said. Mabaya rejected any suggestion that the minister would meet individual arms companies, effectively slamming the door in the face of Airbus.

The Weekend Argus continued it is not clear what steps the government is considering to protect the aerospace industry. Ismail Dockrat, chief executive of DSA, was confident that the tone of discussions with Airbus had changed and indicated retention of the work packages and the 650 jobs at the company.



The opposition Democratic Alliance party says it believes that Parliament must now step in to ensure that there is a “clean” acquisition process for any new aircraft purchased. “The fact is that this country cannot afford to be dragged down by another strategic defence package-style corruption scandal,” Sisulu’s shadow, David Maynier, said.
“The original acquisition of transport aircraft ran into trouble in part because the acquisition process was not properly followed. The defence department reportedly did not obtain the necessary exemptions from national treasury to deviate from the standard tender process. This resulted in R2.9 billion being identified as ‘irregular expenditure’ in the 2008/2009 audit of the special defence account,” Maynier said.