DA sees “arms deal” jobs shortfall

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Offsets related to the Strategic Arms Package have only generated 26 000 direct jobs in ten years, instead of the 65 000 opportunities promised when the acquisitions were first mooted in 1999. That’s the word from Tim Harris,the opposition Democratic Alliance party’s shadow minister of Trade and Industry.

He says the National Industrial Participation Programme’s (NIPP) Performance Review 2009, tabled in Parliament by the Department of Trade and Industry (DTI) last week “reveals that international ‘Arms Deal’ contractors have created only 40% of the jobs they committed to. Harris says the R47.4 billion package was signed on the condition that international arms companies “offset” their contracts by investing directly in South Africa. “This industrial participation was often the main reason contracts were signed with specific bidders.”

In the report the DTI says the programme is working, “and it is working by and large along the lines intended. There is little doubt that the NIPP has beneficially impacted on the growth and trajectory of the South African economy and thus on the lives of our citizens.” The DTI said the programme has led to the implementation of 220 projects, sometimes in remote rural areas, and contributed an annual average of R14.8 billion to the gross domestic product. Some 44 percent of the jobs created were filled by semi-skilled workers.

But Harris is unimpressed and says “it is close to impossible to assess the status of the NIPP because the DTI continues to obfuscate in its reporting… Each year, the NIPP reports fail to provide specific detail on the sales and investment targets of each international contractors – and the milestone periods applicable to them. What numbers there are, however, point to a general failure to create sufficient jobs and a R1.4 billion breach of contract by the German Frigate Consortium.
“The NIPP report refers to R136 billion (US$19 billion) of offsets realised but – given that the SDP “accounts for approximately 85% of the NIPP in value terms” – the total amount of ‘Arms Deal’ offsets realised so far would be around R116 billion. Eleven years ago the Defence Minister announced that the NIPP would bring in R110 billion, but in 2010 prices that amount should be upwards of R200 billion. If that were the case, where would the missing R84 billion come from?
“Furthermore, the report shows that the major player behind the German Frigate Consortium, Thyssen Krupp, is R1.4 billion (US$205 million) short on their offset obligation. This is apparently because of a “lack of administrative capacity” on the part of Thyssen Krupp – hard to believe from a global company with revenues of €40 billion and almost 200 000 employees. The company should be fined in line with the performance guarantee clause in their contract,” Harris averred.

Last year February the DTI told MPs most foreign companies with obligations related to the acquisition of 50 fighter aircraft, 30 helicopters, four frigate and three submarines were nearing the completion of their offset programmes. The Engineering News at the time reported that French firm Thales, had secured US$700.7 million in offset credits against an obligated value of US$652.4 million. The company had supplied the “combat suites” fitted to the frigates. AgustaWestland, which supplied light utility helicopters, had also met its full obligated value of US$768 million, having received NIPP credits worth some US$775 million, the publication said.

The DTI noted that, while most defence suppliers were meeting their NIPP milestones, BAE System’s milestones then still had three years to run. The company, which was supplying Hawk and Gripen aircraft to the South African Air Force, also had the highest obligated value of US$7.2 billion. By February last year it had earned NIPP credits amounting to US$6.3 billion, leaving a residual of US$865-million outstanding.

The second-largest obligator was Ferrostaal, which led the German Submarine Consortium. It had accrued credits worth €1.7 billion against an obligated value of €2.9 billion. The leading participant in the German Corvette Consortium, Thyssen, had an outstanding balance of US$436 million, having earned credits worth US$1.6-billion against an obligation of just over US$2 billion. The DTI then noted that some of the defence groups were progressing faster than their milestones demanded, while others “have some catching up to do”. That seemingly remains the case this year.

Meanwhile, while not part of the SDP, AgustaWestland, which supplied the Navy four SuperLynx 300 maritime helicopters, had an outstanding balance of £66.9-million against an obligated value of £108 million.

Then acting DTI deputy director general Sipho Zikode had previously told Engineering News previously that the DTI was planning to refashion the NIPP programme in a way that aligned the offset project to the industrial sectors with which the obligator was intimately involved. “This model emerged following a … review of the NIPP programme, which showed that there was a higher probability of offset failure, when projects fell outside the ambit of the obligator’s core business portfolio.

In June 2003 then Trade & Industry minister Alec Erwin told Parliament the offset programmes had “markedly improved the economic landscape of South Africa in the six years to that date. Writing in the 2002 NIPP review, Erwin said the NIPP obligations on the foreign arms suppliers had “helped fundamentally and strategically reshape the economy.” The programme emphasised industrial expansion on the “basis of mutual benefit, driven by sound business principles so vital to ensure that projects are sustainable over the longer term”.
“Investments generated through industrial participation requirements of the NIPP in return for large state procurements offshore have enabled foreign investors to add value to their local supply chains and guarantee the quality and consistency of local supply, while still making a profit. For the state the benefits are considerable,” he said. But the DA and other opposition parties disputed this at the time saying that even then Erwin was long on rhetoric and short on detail.



The South African Press Association reported NIPP came into effect in South Africa on September 1, 1996. The programme is obligatory for all overseas purchases greater than US$10 million and could be discharged in various ways, including investment, export promotion, research or collaborative business activity.