One defence industrial participation obligation still outstanding from Arms Deal

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Armscor has only one obligation left regarding defence industrial participation (DIP) emanating from the 1999 Strategic Defence Procurement Packages (SDPP).

DIP, the state-owned defence and security procurement agency’s latest annual report says, is the “obligation of a foreign supplier to reciprocate defence-related business in South Africa as a result of defence acquisition.
“It forms an integral part of the DoD (Department of Defence) policy framework for the retention and development of the South African defence industry.
“The DIP portfolio managed by Armscor during the year under review comprised one remaining obligation relating to the SDPPs, 16 existing DIP agreements resulting from other capital acquisition projects and one DIP agreement resulting from the procurement of pistols on behalf of the SA police Service,” according to the agency’s annual report.

The last leftover from the now notorious arms deal acquisitions, estimated to have cost up to R70 billion, is with MBDA, a missile and missile systems supplier regarding Exocet missiles for the SA Navy’s Valour Class frigates.
“MBDA has until 2016 to discharge its obligation, it has to date not been able to propose any acceptable business plan to discharge the obligation. Regular high-level interaction is taking place with MBDA in an attempt to ensure MBDA will discharge its obligation by means of acceptable and sustainable industrial participation, rather than merely by paying the contractual penalty for defaulting on the obligation.”

The report puts an outstanding monetary value of R933 million on the MBDA DIP obligation. This is more than half the total monetary value (R1 064 million) of DIP owed.

Industrial offsets were a controversial aspect of the SDPP, aka ‘arms deal’, and were a condition of winning arms contracts. Companies had Defence Industrial Participation (DIP) and National Industrial Participation (NIP) obligations. NIP activities were documented and monitored by the Department of Trade and Industry (DTI) while Armscor approved and documented all DIP projects. In order to encourage investment in certain sectors, multipliers were added to some investments.

For example, for the National Industrial Participation Programme (NIP) 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.

A report titled “Strategic Defence Packages Performance Review Report” was tabled in Parliament by Trade and Industry Minister Rob Davies earlier this year, shedding more light on offsets. The internal audit 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.

Opposition Democratic Alliance (DA) party shadow defence and military veterans minister David Maynier, who obtained a copy, 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 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.”

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 (NIP) Performance Review 2009. This means that arms deal contractors only created 40% of the jobs they committed to.
“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.



Earlier this year Jayendra Naidoo, the government’s chief negotiator for the 1999 arms deal told the Arms Procurement Commission that the initial cabinet decision in 1998 reflected offsets valued “in excess of R100 billion even though the rand value amount committed did not exceed R30 billion for DIP and NIP combined.” The NIP system was subsequently amended to avoid exaggeration of benefits.