Reputations are at stake, not only in SA but also in other countries, he says BAE Systems and Saab, which will supply SA with Gripen fighter aircraft, have opened an office in Johannesburg dedicated to managing the controversial nondefence industrial programme linked to the arms procurement package.

The office will be opened officially today by Richard Caborn, the UK trademinister, at a function at which the Anglo-Swedish partnership is expected to allay concerns about the defence procurement plan. Controversy has been raging about the arms deal for a range of reasons, including fears that the overall price tag will surge to R43bn from the initial estimate of about R30bn. 

There are concerns also that the industrial offsets will fail to get off the ground. Stuart McIntyre, BAe Systems executive director in SA, said concerns that the offset programme would fail because of inadequate performance guarantees were misplaced.

His comments followed warnings by auditor-general Shauket Fakie that the guarantees of 10% of the contract price were too low and could undermine the counter-trade element of the arms deal. However, McIntyre said it was "unthinkable" that a manufacturer would forfeit the 10% guarantee rather than deliver on its offset commitments, as business reputations were at stake.

"If we failed to deliver, it would have a negative effect on our potential to do business in other countries. Much of our new business is linked to offsets. We cannot afford not to deliver in SA," McIntyre said. In addition, the defence companies had to begin delivering on offset commitments before the equipment purchases took place. 

They could not opt to pay the 10% guarantee instead of facilitating industrial participation. BAe and Saab's non-defence industrial commitment was $7bn over 11 years, of which $3,2bn would be earned from eight projects already launched. 

The value included foreign direct investment flows as well as exports. Projects included the automotive industry, procurement projects and export facilitation. McIntyre was unable to estimate job creation. McIntyre disputed the impression that the price tag of the aircraft could escalate, saying the deals were fixed-price contracts set in US dollars. 

Moreover, the SA government had hedged against adverse exchange rate movements. Fakie described the process used to determine the successful bidder for fighter trainers as "a material deviation". BAe has been contracted to provide 24 Hawk trainers to the air force. Fakie said the use of the "non-costed option" in picking the successful bidder had led to a "much more expensive" choice ( BAe Systems). 

McIntyre said the expense of the trainers should be measured against the cost of supporting outdated aircraft, as well as BAe Systems's ability to generate sufficient industrial participation. BAe and Saab's offset programme includes projects in the automotive industry, component procurement deals and a project to seek foreign markets for SA's manufactured products. Still in planning are several other projects.

With acknowledgement to Greta Steyn and Business Day.