DTI reveals arms deal offsets, shortcomings; promises review

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The Department of Trade and Industry (DTI) has provided a detailed report on arms deal offsets under the National Industrial Participation Programme, prompting a review of the offsets following a shortfall in delivery.

The DTI provided the following information on the performance of each consortium or company as follows:

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Name of Consortium

Actual Obligation

Actual Investment

New Jobs Created

BAE/Saab (Gripen/Hawk Fighter Aircraft)

 US$7 200 000 000

 US$398 910 686

 7 474

German Frigate Consortium (Meko A200 Frigates)

 US$2 047 600 000

 US$44 433 395

 780

German Submarine Consortium (Class 209 Submarines)

 €2 852 460 454

 €69 795 413

 2 202

Thales (Combat Suite)

 US$652 408 990

 US$ 139 656 198

 1625

Agusta (Light Utility Helicopter)

 US$767 930 000

 US$ 70 932 466

884

 Agusta/Westland (Maritime Helicopter)

 £108 644 495

 £18 748 560

725

“The arms deal was supposed to generate roughly R110 billion in investments and 65 000 jobs,” said David Maynier, the Democratic Alliance’s (DA’s) shadow defence minister. “However, the figures revealed…show that the arms deal actually generated roughly R6 billion in actual investment and 13 690 new jobs.”

However, the aforementioned figures quoted by Maynier exclude performance related to exports and sales, which also formed part of the obligations.

DTI deputy director-general Nimrod Zalk told Business Day that the DA did not take into account the 58 000 indirect jobs created and the 15 000 direct jobs that were saved.
“The gaping hole between what was promised and what was delivered is explained by the complex system of “multipliers” to calculate the final arms deal offset credits of each consortium or company,” Maynier said.

The DTI concede that mistakes were made and that lessons must be learned. Therefore, the DTI will conduct a comprehensive review of the arms deal offsets under the National Industrial Participation Programme and change the way future offsets agreements are handled.

Zalk told Parliament’s trade and industry committee that the multiplier system would change following a comprehensive review. In one example of questionable multipliers, a multiplier of 90.1 was used, turning an investment of R560 000 into a R50 million offset credit, reports the Cape Times.

In addition, Zalk stated that in future, offsets would have to be made outside the contractor’s core business and contractors should have to provide updates on their performance. Zalk said each and every project undertaken under the offsets scheme would be investigated, with performance measured against credits awarded. Zalk noted that there was a possibility that distortions arose when officials relied solely on number supplied by companies.

Zalk added that an analysis would be made as to why certain projects (approximately 10% of the total number) had failed. “Where we find contractual obligations have not been met, we would seek to ensure performance on the commitments,” Zalk said.

Offsets were required investments in industry in South Africa and were a condition of winning contracts under the Strategic Defence Package aka ‘arms deal’. Companies had defence industrial participation (Dip) and national industrial participation (Nip) obligations. Nip activities were documented and monitored by the Department of Trade and Industry while Armscor approved and documented all Dip projects.

South Africa in 1998 announced that it was to acquire frigates, submarines, helicopters and fighters from a number of European suppliers to rejuvenate the prime mission equipment of the South African Navy and Air Force. The contracts, worth some R30 billion at the time, became effective on April 1, 2000.

The deals would see South Africa gain four sophisticated German-built Meko A200SAN frigates, three state-of-the-art Type 209 MOD1400 submarines (also German-built), 26 Saab Gripen fighter aircraft, 24 BAE Systems Hawk Mk 120 lead-in fighter-trainers and 30 AgustaWestland A109 light utility helicopters. All of these, except for the last four Gripens, have now been delivered and paid for.

In October last year President Jacob Zuma appointed a commission of inquiry to investigate allegations of wrongdoing in the Strategic Defence Procurement Package, which is now estimated to cost around R47 billion. The commission is expected to complete its work within two years.

In June last year, Swedish defence multinational SAAB announced BAE Systems had paid Fana Hlongwane R24 million to help secure the Gripen contract. The Swedish company adds that news of the payment was hidden from it by its partner in the deal. The British defence giant last year reached an agreement with the UK’s Serious Fraud Office (SFO) over allegations that it failed to provide accurate records in connection with the supply of an air-traffic control system to Tanzania. It admitted the charge and agreed to pay a penalty of £30 million, while the SFO waived its right to investigate other allegations, including those related to South Africa. BAE Systems in June sold the last of its shares in the Swedish defence company.

In August the Süddeutsche Zeitung reported that Ferrostaal, part of the German Submarine Consortium, had made R300 million in “questionable” payments to secure its SA contract.