Fluctuations in the rand and interest charges make a mockery of the original R30-billion price 

The cost of South Africa's increasingly controversial arms package has risen to more than R50-billion from an original R30-billion, according to parliamentarians monitoring the deal. 

The chair of the standing committee on public accounts, Gavin Woods, said this week that, in recent discussions with government officials charting the cost of the deal, he had been informed that the figure was now close to R51-billion because of fluctuations in the relevant exchange rates. Woods said officials in the defence and treasury departments used a computer model that calculated the changes in the rand price of the machinery on an ongoing basis. 

Woods said the R51-billion figure excludes the interest bill stemming from the deal's financing. This could be as much as R20-billion, he said. 

The cost of the deal has already caused tension between the government and the parliamentary committee, which has used a more recent figure of R43,8-billion. The government has questioned the merits of recalculating the cost of the deal beyond its original R30-billion price tag. Officials have said the defence package includes agreements with financial institutions to hedge against fluctuations in price. 

Minister of Finance Trevor Manuel told the public accounts committee in February that the cost of the deal on the day of the signing should be the official price, questioning the committee's use of the R43,8-billion figure as opposed to the original R30-billion. 

In response to a parliamentary question by the Democratic Alliance's Raenette Taljaard about the deal's effect on the economy, President Thabo Mbeki has said the package will lead to slower growth until about 2005, and will initially have a negative impact on the balance of payments because of higher interest and import bills. Thereafter, the deal is supposed to have a positive effect on exports and employment because of the trade offsets linked to the deal. Whether these offsets live up to expectations remains to be seen. 

Meanwhile, the Mail & Guardian has obtained a confidential document prepared by the defence secretariat that raises new questions about the propriety of the deal. Describing aspects of the selection process, the document contradicts claims by four Cabinet ministers that government cannot take responsibility for possible wrongdoing at subcontractor level. The document also sheds new light on allegations that Chippy Shaik, the arms procurement head at the secretariat, was guilty of a conflict of interest. 

Minister of Trade and Industry Alec Erwin, Manuel, Minister of Defence Mosiuoa Lekota and Minister of Public Enterprises Jeff Radebe said in a statement in January that "procurement does not deal" with subcontractors, and to "insist that the government must be held to account for minor subcontracts is to misunderstand procurement". This refrain has since been repeated several times in response to claims that officials encouraged main contractors to tie up with specific subcontractors. 

One example of such alleged undue influence has been the claim on M-Net's Carte Blanche by the United States's Bell Helicopters that Shaik strong-armed Bell into teaming up with local company Futuristic Business Solutions (FBS). 

The latter company has already attracted considerable controversy as it includes as shareholders and directors two relatives of former defence minister Joe Modise. Bell has suggested there were hints that, if it did not team up with FBS, it would not get the contract. Bell withdrew from the bid, which was eventually won by Italian company Agusta, which did see fit to contract with FBS. 

The bulky document, handed by the defence secretariat to Parliament's joint standing committee on public accounts last October, details the process by which one subcontract on the navy's corvette patrol ships was awarded. 

The subcontract was for the corvettes' information management system (IMS), worth several million rands. A dispute arose over whether a system developed by local company CCII should be used, or a system of Detexis, a subsidiary of French arms company Thomson CSF. 

The document says that "in light of the fact that the IMS was considered a contentious issue, the matter was presented to the Cabinet's sub-committee of ministers (dealing with the arms acquisition process) on May 26 1999. The document records the Cabinet committee as deciding that the defence department should "make final recommendations on the combat suite", of which the IMS is part. 

The document also says that in August 1999 the Project Control Board - another key body in the selection process - "ratified" the selection of the French system as proposed by the main contractor, and that the chief executive of Armscor - government's arms procurement parastatal - supported the decision. 

So, while the document makes it clear the original preference for subcontractor came from the main contractor, various government bodies, to the level of a Cabinet committee, involved themselves in the process. 

As for Shaik, the government has so far relied on the fact that he recused himself as chair of key procurement committee meetings when a conflict of interest arose. The conflict stemmed from the fact that Shaik's brother, Shabir, has interests in the local arm of Thomson CSF as well as African Defence Systems, a related company which benefited from the corvette combat suite deal. 

But the defence document suggests Chippy Shaik still sat in on some of those meetings after ceding the chair to the chief of the navy. "The project control board agreed that the procedure to be followed would be that he would hand over chairmanship of the project control board to the chief of the navy during discussion/decisions on combat suite matters in which he would take no part unless requested to amplify a point." 

The document continues: "This procedure was followed throughout the combat suite tendering and contract negotiation phase. In several instances the chief of acquisition [Shaik] physically absented himself from the meeting room during such discussions/decisions." 

The clear implication is that Shaik was present in at least some of the meetings, even if he relinquished the chair. The possibility remains that he could have influenced proceedings or been a conduit of information to his brother. 

What the document also shows is that, while Shaik recused himself from that body, he did not recuse himself from two other crucial bodies involved in the selection process. 

The first was the strategic offers committee, a multi-departmental body which looked at the original tenders. The second was the negotiation team, which finalised details with companies whose tenders had been provisionally accepted by the Cabinet.

 With acknowledgment to Stefaans Brummer, Mungo Soggot and the Mail and Guardian.