Defence offsets can be business multipliers

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There is nothing inherently incorrect with the offset system when applied to either general industrial or defence industry participation, a study initiated by the South African defence industry has found, with R15 billion in offset benefits since 1999.

According to the study, defence industrial participation (DIP) flowing from the acquisition of new front-line equipment for the SA Air Force and SA Navy (Strategic Defence Packages – SDP) saw “some R15 billion injected into South Africa defence companies over the decade following 1999”.
“This is a substantial amount, the more so when viewed against the total expenditure of some R72 billion under the Special Defence Account (SDA) over the same period. The importance of those R15 billion is even clearer when considering the total allocated to the SDA in 1999 and 2000 (including some operational funding) was R1.21 billion and R1.82 billion respectively, rising to R4.58 billion in 2001 as funding for the packages began to flow and reaching R10.33 billion in 2009 as other projects came on line to replace expenditure on SDP programmes. This expenditure obviously gave rise to specific DIP contracts as well as indirect DIP opportunities, as well as approved technology transfer projects while in most instances obligors were also obliged to commit to National Industrial Participation activities.”
“The picture that emerges from these figures is one of the DIP related to the SDP programmes as being a lifeline that saw parts of the industry through the catastrophic funding decline that began in 1989,” the report states.

It also points out DIP projects in particular acted as a showcase for the local defence industry and this, in time, saw alliances “forged” with original equipment manufacturers (OEMS), such as Airbus Defence and Space.
“This created longer-term opportunities for a wide spectrum of local companies, some of which had no formal link to the actual acquisition programmes that would have been difficult if not impossible to create in any other way, especially when it came to becoming part of a major international group’s supply chain.”

Historically, according to the study the first industrial benefits accrued from the initial and follow-on Cheetah programmes while the first example of “regulated” DDIP (direct defence industrial participation) came with the development of an avionics suite for the Pilatus PC-7 Mk II by ATE, now PAT, by the then Atlas Aircraft Corporation and Aerosud when the type was selected as the future primary trainer for the SA Air Force in 1992.

Experience gained on the Pilatus and preceding SAAF Mirage F1AZ avionics upgrade projects as well as Rooivalk development and manufacturing work saw work come the South African defence industry’s way from Spain (Mirage F1 mission computer development and associated avionic systems) and Algeria (Mi-24 upgrade). Locally this subsequently saw an upgrade of Oryx secure communication systems and the modernisation of the Rooivalk’s secure communications management system.
“As negotiated at the time, the total DIP commitment was made up of local sales, equipment and systems acquired in South Africa for the ships and aircraft; foreign sales; approved technology transfers to South African defence companies, as well as direct investment in selected local defence companies. The international defence companies were so impressed with the technologies available and engineering competence in the local defence companies that many of them took up authorized equity in these companies, some at controlling share level. Although the purchase of shares in South African companies was specifically excluded from being considered towards the discharge of DIP commitments, such transactions were considered for credits under the national industrial participation obligations on a case by case basis,” according to the study.

In conclusion the study points out that “carefully planned and focussed, mandatory industrial obligations flowing from national capital acquisition programmes have the potential to become true ‘business multipliers’ for the defence industry and the general manufacturing and related services sector while ably meeting next generation objectives to establish a sustainable and vibrant manufacturing economy in South Africa”.

The study, available on the SA Aerospace, Maritime and Defence Industries Association (AMD) website, details effects of offsets tied to South Africa’s first major arms acquisition since democracy. It does carry a disclaimer to the effect that “the views, findings and opinions expressed in the paper are based on an independent study AMD had undertaken on IDIP stemming from the Strategic Defence Package in particular or otherwise in general”.
“The information (in the study) is not meant to represent any of the views of any AMD members, Armscor, the Department of Defence, the Department of Trade and Industry nor any of the IDIP obligors whether jointly or severally.”



Earlier this year an Armscor official told the Seriti Commission that Armscor’s offset deals with foreign weapons manufacturers amounted to R5,4 billion between 1988 and 2000, almost as much as the R6 billion in offsets from the 1999 arms deal.