Internal audit report reveals failures in arms deal offsets

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With former Trade and Industry Minister Alec Erwin set to appear before the Seriti Commission before month-end, the acquisition of a “devastating internal audit report” on arms deal offsets could not have been better timed.

The report, titled “Strategic Defence Packages Performance Review Report” together with a final audit report, was tabled in Parliament by Rob Davies, current Trade and Industry Minister, after what opposition Democratic Alliance (DA) party shadow defence and military veterans minister David Maynier termed “a four month political battle to crowbar the report out of the department”.

The internal audit now in Maynier’s possession audited 40 of 121 arms deal offset projects and found, among others, some companies obtained more credits compared to investments and sales created or caused by them.

He said the audit could not verify the total number of jobs created or whether they were sustainable. It also states economic growth, access to new markets, establishing new trading partners and technology transfers could not be determined.
“The findings of the internal audit report are particularly devastating when it comes to job creation. One of the primary justifications for the arms deal was that it would create jobs.
“However, the internal audit finds: some arms deal offset projects did not include an obligation to deliver on job creation; the actual contribution of some arms deal offset projects were not described in terms of sustaining existing jobs or creating new jobs; baseline employment figures were not provided at the beginning of some arms deal offset projects so as to be able to determine whether additional jobs were created; and evidence of jobs created, in some arms deal offset projects, was simply not collected.
“In fact, of the 40 business plans audited, only 24 included estimates of the number of jobs to be created,” Maynier said.

Offsets related to the arms deal only generated 26 000 direct jobs in ten years, instead of the 65 000 opportunities promised when the acquisitions were first mooted in 1999, according to the National Industrial Participation Programme’s (NIPP) Performance Review 2009. This means that arms deal contractors only created 40% of the jobs they committed to.

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.

For example, for the National Industrial Participation Programme (NIPP) offsets, BAE Systems and Saab invested $8 870 968 in Denel, partly acquiring Denel Aerostructures. After an investment multiplier of 67.4 was applied, the two companies were credited with $1 704 936 013 worth of investment.
“The arms deal was supposed to generate roughly R110 billion in investments and 65 000 jobs,” said Maynier in 2012. “However, the figures revealed…show that the arms deal actually generated roughly R6 billion in actual investment and 13 690 new jobs.” These figures, however, exclude indirect jobs and jobs saved.



Meanwhile, a statement on the Arms Procurement Commission website indicates Erwin “will present evidence concerning the nature and scope of the mandate of the Inter-Ministerial Committee (established to oversee the Strategic Defence Procurement Packages [SDPP]), South Africa’s economic and National Industrial Policy (NIP) and its application through the National Industrial Participation Programme (NIPP) as it related to the SDPP, including dealing with the allocation of credits and the use of multipliers and address the role of the International Offers Negotiating Committee (IONT), inclusively.
“Finally he will give a brief summary of the rationale for and the benefits that were realised with regard to the various aspects of the projects undertaken.”