New arms acquisitions generate fresh offset obligations

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Two new arms acquisitions have generated significant Industrial Participation (IP, “offset”) obligations for the Italian Beretta company and the European missile maker MBDA.
The Department of Trade & Industry`s (DTI) 2007/8 IP Report, tabled in Parliament this month also shows that Strategic Defence Package (SDP) vendor Thales had discharged its obligation in the reporting period and that more were on the cusp of doing so. AgustaWestland has discharged its Light Utility Helicopter obligations but still had some way to go on its maritime helicopter offset:  
Obligator
Project
Contract value
Obligation value
NIP to date
NIP outstanding
AgustaWestland
Light Utility Helicopter (Project Flange)
R2 451 000 000
$767 930 000
$774 674 530
None
AgustaWestland
Maritime Helicopter (Project Maulstic)
£80 000 000
£108 644 495
£41 667 890
£66 976 605
Denel
GBADS (Project Guardian)
R300 000 000
$17 500 000
$15 456 653
$2 043 347
BAE Systems
Hawk LIFT (Project Winchester)
Gripen ALFA (Project Ukhozi)
R19 908 000 000 (Gripen)
R7 200 000 000 (Hawk)
$7 200 000 000
$6 335 000 000
$865 000 000
GFC Thyssen
Frigates (Project Sitron)
R9 690 000 000
(includes combat suite)
$2 047 000 000
$1 610 596 276
$436 403 724
GSC Ferrostaal
Submarines (Project Wills)
R8 152 000 000
€2 852 460 454
€1 692 839 846
€1 159 620 608
Thales
Frigate “combat suite” (Project Sitron)
(Included in frigate price)
$652 408 990
$700 736 671
None
NIP applies to all government acquisitions sourced abroad worth more than $10 million and is seen as a method of “offsetting” the outgoing foreign currency payments with inward investment, also in overseas denominations. Defence acquisitions are separately subject to defence IP.       
The report notes IP “has some very beneficial outcomes”. It says NIPP, in particular, directly addresses “a key binding constraint on the growth of the SA economy, namely the shortage of suitably skilled labour, with an emphasis on the ‘suitable` part of the equation”.
The DTI adds “NIPP obligators have played a key role in supporting projects that assist in government`s massive R370 billion investment in infrastructure and logistics, such as the Gautrain. Other examples include, for instance, Eskom turbines, telecoms equipment, South African Airways, aerospace manufacturing and alternative energy sources”.
A third justification says the DTI is that NIPP assists provinces with their special projects “to accelerate and share growth, for instance via agro-processing and rural tourism initiatives. “This benefits the poor provinces in particular.
NIPP also catalyse AsgiSA priority sectors and plays a role alongside the Industrial Development Corporation and National Empowerment Fund in assisting with access to finance and venture capital.
New offsets
The DTI report says Beretta has a €250 million obligation regarding the acquisition of new pistols for the SA Police Service. The police have acquired 4200 pistols at a cost of about R5000 each, accounting for a contract worth a minimum of R21 million.
MBDA, providing Milan ADT upgrades to the SA Army and Special Forces as well as Milan 3 missiles, have a current obligation of €18 million.   
Other noteworthy offset obligators are Eurocopter in relation to (irt) the sale of helicopters to the SA police, Boeing and Airbus for the purchase of airliners by state airway SAA, as well as Damen and Farocean Marine for the acquisition of offshore and inshore patrol vessels for the Department of Environmental Affairs and Tourism:
Obligator
Contract with
Contract value
Obligation value
NIP to date
NIP outstanding
Eurocopter
Police
S13 923 107
$13 923 107
None
Boeing
SAA
$237 500 000
$237 500 000
None
SAFRAN
SAA
$33 600 000
$29 485 070
$4 114 930
Airbus
SAA
$452 846 000
$286 008 144
$166 837 856
Damen Shipyards
DEAT (OPV)
R150 000 000
$5 580 000
$5 580 000
None
Prodiba (Thales)
DoT (Drivers` licenses)
$8 680 000
$3 290 000
$5 390 000
Farocean Marine
DEAT (IPV)
R280 000 000
$4 800 000
$4 800 000
None
Jan de Nul
NPA
€9 480 000
€1 400 000
€8 080 000
Sumitomo
Eskom (Turbines)
$84 634 064
$34 685 877
$49 948 187
The report notes Sumitomo has facilitated the export of SA-made armoured vehicles to the Saudi Arabian Ministry of the Interior. “Using base vehicles supplied by Daimler Germany, [local firm] AS&P (Armoured Systems & Projects) provides value-add and the completed vehicles are exported to Saudi Arabia. Sumitomo provides finance and manages shipping logistics both for the acquisition from Daimler and the export of vehicles from SA. Thus AS&P is able to overcome its cash-flow problems and is guaranteed a market for its product.” The
DTI adds the venture has generated $32 million in “new exports” and created up to 70 new jobs.               
      
Other highlights in the year include a MAN Ferrostaal-Hasso Plattner Ventures Africa venture capital fund worth some €29 million. (Plattner is a cofounder of SAP, the German IT giant. He and his wife have several personal investments in SA.) MAN Ferrostaal also invested R200 million to build an oil platform fabrication yard at Saldanha, now operated by Grinaker LTA and Atlantis Marine Projects. “Technology transfer ensures that the local fabrication meets North Sea and ANSI offshore standards. … Clients are being sourced with the assistance of MAN Ferrostaal.”
Other offsets
DTI sees the project as a new industry sector and a new export market. They are also pleased with its 15% BEE (black economic empowerment) ownership and expect a foreign exchange income of $40 million per year. The project created 914 direct jobs during construction and in the operational phase could create a further 720. “For the first time SA is a player of significance in the oil rig industry, just as demand worldwide is expanding, driven by high fuel prices.” The latter have somewhat diminished by early 2009 (the average oil price has fallen from a peak near $150 in June 2008 to around $40), which will have an effect on the oil rig industry. This is, however, offset by efforts to bring “greenfields” oil fields in the Gulf of Guinea on line.               
Canadian multi-industrial Bombardier (it makes trains and planes) also created some 40 heavy industrial jobs to offset its R25 billion+ Gautrain contract. “Bombardier has selected local BEE manufacturing company SWASAP to manufacture railway axles, which are supplied to the London Underground and North East London Railways in the UK. Further opportunities for exports are being opened up via Bombardier projects in Europe, North America, India, Japan and China.
Thales in 2008 launched a $30 million fund for small and medium business (SMB) with the Industrial Development Corporation. The fund will run for three years and “be used for higher risk ventures which can`t easily obtain funds through conventional commercial channels (which with the current global economic crunch and the consequent reluctance of banks to lend, could be any project). The fund follows a “soft financing” scheme for SMBs launched in 2005 that supported 49 companies and created 5500 jobs.
The Airbus A400M also makes it into the report, the DTI noting that local component manufacturing for the plane forms part of Airbus` offset programme. “The project is set to establish Denel Saab {Aerostructures] as an internationally competitive supplier in the aerostructure market…”
                   
“The project will create some 165 short-term jobs and 185 long-term jobs with an additional 100 jobs for skilled artisans to be created. … Sales projections up to 2018 are close to €120 million (€118.68 million) and significant growth potential exists as Airbus is doing strategic planning for 200 more aircraft.   
Denel and Aerosud Aviation also still has offset business related to SAA`s Boeing acquisitions in the 1990s. Denel Aviation is manufacturing machine components for the B737, B747 and B777. The DTI expected sales worth R5 million for 2008 and R35 million up to 2011. Aerosud is manufacturing interior panels and thermoformed plastic fittings. The DTI believes Aerosud`s R22.5 million investment should realise it annual sales of $9.8 million.      
Other notable successes included a technology transfer by French aircraft engine group SNECMA to the Council for Scientific and Industrial Research and the development by the latter of a technology for non destructive testing under high temperature and pressure as well as “investment by Saab in Grintek”.
Another achievement is the development and manufacture of a range of aviation engines by KwaZulu-Natal firm ADEPT and Durban Shipyard investing in a floating dock for ship repair and engineering work, while Farocean Marine`s construction of three DEAT IPVs is also listed as an offset, likely for Damen`s building of the OPV Sarah Baartman. Farocean subsequently went out of business and Damen bought its assets.             
Controversy
Offsets remain controversial. SDP critic Terry Crawford-Brown, a trained economist that was once a senior officer with Nedbank`s international division, believes offsets are “a scam … promoted by the arms industry with the connivance of politicians [who receive kickbacks] to fleece the taxpayers of both supplier and recipient countries”.
He adds offsets are banned under the rules of the World Trade Organisation (WTO) governing civil trade. “That prohibition flows from recognition by the WTO that offsets distort normal market operations, and are an invitation to corruption. Arms trade lobbying secured an exemption … under the guise of national security, and the industry has run a proverbial bus through the gap.” Offsets, he alleges, also drive up the cost of arms as their cost to the arms industry is factored into the final sales price. 
Another SDP critic, defence company C2I2 CEO Richard Young, says it is time to audit DIP and NIP. “There are literally dozens of projects spread across the different [SDP] component programmes,” he says. The DTI`s 43-page report “can only provide the briefest of overviews. But this is the way DTI has always wanted it and always played it.”
“It is time for a full-blown audit. A special consideration should be given to causality, i.e. whether there is direct causation from an SDP contractual obligation. Another equally important factor is whether each offset credit will result in a clear financial gain for the country over the stipulated discharge period”. He adds offsets such as “marketing credits” are “smoke and mirrors” while “‘rescuing` existing tea estates are not true offset projects,” a reference to one MAN Ferrostaal NIP. “Things like buying under-capitalised sawmills and giving them to one BEE`s connections are not offset projects at all.”
He also criticises Thales being awarded “several hundred million US dollars in offset credits” for the local component of the frigate combat suite, which contractually had to be South African anyway.
He facetiously notes that Thompson-CSF and successor Thales are currently under indictment regarding allegations of corruption regarding the combat suite. He adds that in addition to alleged bribes they`ve spent several hundred million Rand on legal fees. “Did DTI give them offset credits for this?”
However, times have changed. SA finance minister Trevor Manuel last week criticised a massive US bailout package, saying it was protectionist and could distort global trade.
Reuters reports the world`s longest serving finance minister as saying the $787 billion economic package has features “that are exceedingly worrying because they are highly protectionist, highly nationalist and take that country back as though it is not part of this global entity.”
The wire service adds the global economic crisis has choked international trade as countries try to stem job losses and factory closures by protecting their industries, raising barriers to imports or promoting exports at the expense of competitors.
World leaders have vowed not to raise trade barriers, although a number of measures suggest the emergence of protectionism, including the “Buy American” provisions in the U.S. package and the resumption of export subsidies for European Union dairy produce.
A World Trade Organisation report last month found “limited evidence” of trade measures such as tariff increases, although it warned against the danger of industrial aid packages in wealthy nations.
“When countries take these highly nationalistic decisions, what doesn’t disappear is the extent of global imbalances and unless we put heads together… all that you have in an endeavour to deal with the crisis are palliatives,” said Manuel.
Manuel said he did not expect the global economic crisis to be resolved within the next year or two and that people should brace themselves for a “pretty long haul.”
In such circumstances offsets may well get SA exports into previously open markets.