Revisiting contract's why and how paints more positive picture than usually given

SA's multibillion rand arms deal has received much coverage over the past few months, most of it negative and much of it based on incorrect assumptions. Perhaps this is a good time to revisit the core questions of the why, what and how of the deal.

Why is government spending money on defence equipment when SA is not at war? The answer is because it takes a long time to rebuild armed forces once they have been allowed to run down. The most cost-effective way to maintain defence capability is to maintain a steady rate of equipment acquisition and replacement, not the "boom and bust" cycle that SA has seen since 1948.

Other considerations are that SA is in a very unstable part of the world, in a strategically very uncertain era. There are already two fullscale civil wars within the Southern African Development Community, both of which have spilled over to neighbouring countries, and several guerrilla wars elsewhere in subSaharan Africa. SA cannot afford to ignore those conflicts.

There are also growing paramilitary problems in Africa, such as cross-border banditry and coastal piracy, all of which affect the region's ability to develop its economies and to attract needed investment. SA must be able to assist friends affected by those problems, and should be able to take part in peace support operations.

That requires properly equipped armed forces. These packages will, in fact, not be the last. There are still several other key gaps to fill airlifts and maritime patrols are two examples and there is other equipment that is ageing rapidly and that must be replaced.

What is government buying; is this equipment relevant to SA's defence needs? The answer is an unreserved yes in respect of the categories of equipment being acquired. At the level of the actual systems one can always argue for some other system, but the systems being bought are all well suited to SA National Defence Force needs.

Much of the recent debate has focused on whether the right equipment was selected, with most of the focus at system level on the BAE System Hawk versus the Aermacchi MB-339. What this debate has overlooked entirely is that few major arms acquisition decisions are ever taken on the basis of military value versus cost alone. Major arms acquisitions are also an act of foreign policy and of economic and industrial policy.

The decisions taken in respect of SA's "strategic packages" were guided primarily by the intention to develop long-term strategic alliances with SA's major European trading partners and to develop long-term alliances with internationally successful defence equipment groups for the SA defence industry. The equipment selections line up neatly with those considerations. The selection of the BAE System Hawk over the Aermacchi MB-339 is one of those, quite apart from its performance advantages.

Another major factor was the quality of the industrial participation proposals and how they meshed with defence department aims for the defence industry and the trade and industry department's long-term thinking.

In this respect it is worth mentioning that far from being internationally discredited, as some opponents of the packages claim, offsets are in fact required by countries such as Australia, Britain, Canada, Denmark, Finland, the Netherlands, Norway, Sweden and Switzerland when they acquire defence equipment from abroad. Australia and Canada require offsets for any government purchases from abroad.

There have also been repeated claims that SA is being overcharged for the equipment. The reality is that SA is paying market price or better: the four patrol corvettes will cost SA less than India has recently paid for a single Godavari class frigate, and less per ship than the smaller Lekiu class recently acquired by Malaysia. The Gripen will cost substantially less than the UAE is paying for F-16s, and the Hawks will cost less than Canada paid for its Hawks.

Finally there is the issue of what the packages will cost the most recent figure bandied about was R66bn. That argument seems, however, to be based on the reported cost of R29,3bn combined with a set of incorrect assumptions. The problem with all this is threefold:

The R29,3bn included VAT, customs and excise duties, and project management charges, which are expenses to the defence department but not to the country. The actual cost to SA was R25,3bn at the contract signing date.

The amounts that must be paid are not all in US dollars. The dollar component is, in fact, the smallest of the foreign currency sums, with the rest being in sterling, euros and Swedish kronor. There is also a substantial rand portion that covers the locally sourced subsystems. At exchange rates quoted yesterday, the cost comes to R35,47bn, and that is the actual cost at that date.

The decision whether to pay for the equipment in cash, or to defer payment and take up credit is surely not one to be made by the defence department but the treasury. So the finance charges are not strictly a part of this equation, but the terms are favourable to the extent that the treasury will probably draw on the credit lines, as it is unlikely to find money that cheap anywhere else.

The one issue that remains open is how well the suppliers will perform in respect of the defence industry offsets and civilian industry offsets commitments. The evidence on the defence offset side is positive, with performance ahead of budget. The civilian offset side is difficult to judge so early into a 12year programme, but there is action and it is far too early to claim they will not perform. Penalties aside, the suppliers need to perform if they want future offset offers to other countries to be taken seriously.

Heitman is a Defence Consultant and SA correspondent for Jane's Defence Weekly.

With acknowledgement to Helmoed-Römer Heitman and Business Day.