DTI reveals multipliers used in arms deal offsets

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The Department of Trade and Industry has revealed the investment multipliers used when calculating offsets made by companies that supplied equipment to South Africa as part of the Strategic Defence Procurement Package (SDP or ‘arms deal’).

Offsets were required investments in industry in South Africa and were a condition of winning contracts under the Strategic Defence Procurement Package. Companies had Defence Industrial Participation Programme (DIPP) and National Industrial Participation Programme (NIPP) obligations. NIPP activities were documented and monitored by the Department of Trade and Industry (DTI) while Armscor approved and documented all DIPP projects. In order to encourage investment in certain sectors, multipliers were added to some investments.

In response to a parliamentary question posed by David Maynier, shadow defence minister with the Democratic Alliance, the Minister of Trade and Industry Rob Davies stated that for the National Industrial Participation Programme (NIPP) offsets, BAE Systems and Saab invested US$8 870 968 in Denel, partly acquiring Denel Aerostructures. After an investment multiplier of 67.4 was applied, the two companies were credited with US $1 704 936 013 worth of investment.

BAE Systems and Saab had a joint DIPP obligation of US$1.5 billion and a joint NIPP obligation of US$8.7 billion. Saab became a strategic partner in Denel, to form Denel-Saab Aerostructures (DSA). In June 2006, Saab and Denel formed a strategic equity partnership, with the Swedish group purchasing an initial 20% of Denel’s Aerostructures business. In 2005, Saab acquired a major share in Grintek, a hi-tech communications, Electronic Counter Measures (ECM) and avionics business originally established to meet South Africa’s domestic requirements. In June 2008, Saab concluded a Black Economic Empowerment transaction with Imbani Amandaba, a 100% black-owned company whose members consist of investors from previously disadvantaged groups. The consortium has subscribed for 25% plus 1 share in Saab-Grintek Defence. Saab said that by mid-2008, the Gripen shareholders’ activities had created over US$5 billion of new economic activity in South Africa. In total, NIPP involved Sanip (a joint venture established to execute Saab and BAE Systems’ NIPP obligations) bringing US$8.7 billion worth of economic benefits to South Africa. Examples of beneficiaries of Nip include Dunlop tyres (Durban and Ladysmith), Silplat platinum jewellery (Cape Town), Global Forest Projects (now York Timber), ABB (exporting South African-manufactured power station components to the US) and Atlas Copco (the manufacture of heavy mining equipment for export).

The German Frigate Consortium made a number of NIPP investments, including in the SAMES Hi Tech facility, Mechtronics (installing training labs at three universities/technikons), Glass Bottle Manufacturing (expanding and modernising a production facility), EC Biomass (establishing a fuel pellet production plant), Sabie Wood Pellet (establishing a wood pellet production plant), URI Project (producing and assembling vehicles), and PhyloEnergy Bio Diesel (feasibility study for a bio diesel refinery). In total, the Consortium invested US $18 373 334 million in these projects. After a multiplier of 23.44 was applied, they were credited with US$1 493 414 093 worth of investment.

The German Submarine Consortium made a number of investments, including in Magwa Tea (investment in a plantation), Atlantis Training Centre (setting up infrastructure), SAMES (financing a loan), Oil and Gas Projects (constructing oil and gas fabrication and maintenance facilities in Saldanah Bay), Abalone (abalone farms), Limpopo Tea (revitalising tea estates), Yachtport Facility (establishing a dedicated yacht load out facility), HPVA (investment into venture capital fund), Long Walk To Freedom Movie and Desmond Equipment (expanding facility). In total, these investments amounted to €43 million. After an investment multiplier of 19.31 was applied, the Submarine Consortium was credited with €2 742 800 000 worth of investment.

The German Submarine Consortium under the National Industrial Participation Programme invested €64.5 million in South African industry and after a multiplier of 48.33 was applied, was credited with investing €3.117 billion in South Africa. “The average investment multiplier was 14.90. Taking into consideration sales credits, the average total multiplier was 48.33,” the DTI said.

The Department said that a total of 2 203 new direct jobs and 4 406 new indirect jobs were created while 4 889 jobs were saved by the Submarine Consortium.

Meanwhile, Thales invested US $4 000 000 in Evertrade Medical, which deals with the treatment of toxic waste. After a 15.91 multiplier was applied, the company was credited with US$171 213 256 worth of NIPP investment.

Earlier this year the DTI provided a detailed report on arms deal offsets under the National Industrial Participation Programme:

 

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 Maynier. “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. Davies stated that, “as communicated to the Trade and Industry Portfolio Committee, the DTI will commence in the 2012/2013 financial year with a detailed review of all NIPP projects to make an independent assessment of the actual economic value generated by these projects, with the component on SDP projects to be completed by the end of the financial year. The Portfolio Committee will be briefed on the findings of this project review.”

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.