Armscor introduces harsher offset penalties


Foreign defence companies are facing harsh penalties when doing business in South Africa if they fail to meet new defence offset requirements, defenceWeb has learnt.

Whenever the Armaments Corporation of South Africa (Armscor) does business with a foreign company, if the value of the deal exceeds a certain amount, that company is obligated to invest a percentage of the deal’s value in South Africa through offsets. In addition, local companies/suppliers must ensure that any foreign suppliers they use must meet offset obligations when required.

There are two kinds of offsets: Defence Industrial Participation (DIP) workshare and procurement contracts placed with local defence and aerospace manufacturers and suppliers, and National Industrial Participation (NIP) offsets projects involving certain industrial sectors (primarily commercial industry).

DIP offsets come into effect on contracts exceeding $2 million of foreign content. Until recently, DIP required offsets to the value of 50% of the deal’s value and contracting with broad-based black economic empowerment (BBBEE) companies to the value of 25% of the DIP obligation. If the offset obligation was not met, the penalty was 5% of the deal’s value.

This penalty has recently been changed to 100% of the deal’s value.

Meanwhile, NIP applies to foreign companies in deals exceeding $10 million. The required offset is 30% of the deal’s value and contracting with a BBBEE company to the value of 20% of the NIP obligation. If the offset obligation is not met, the penalty is 5% of the deal’s value.

There has been concern that the new offset rules will discourage foreign companies from selling equipment to the South African National Defence Force, which has a number of requirements for new hardware. These include inshore and offshore patrol vessels (Project Biro), a hydrographic survey vessel (Project Hotel) and maritime surveillance aircraft (Project Saucepan).

Offsets were an essential part of the 1999 Strategic Defence Procurement Package (aka ‘arms deal’) that saw South Africa gain four German-built Meko A200SAN frigates, three 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. The offsets attracted criticism over the use of ‘multipliers’ that inflated the value of the offsets.