MUCH of the multibillion-rand foreign direct investment government has negotiated in exchange for buying arms may never materialise, said British defence economist Paul Dunne yesterday.

Addressing at a seminar hosted by the Ceasefire Campaign In Johannesburg, Dunne said international experience showed that investment offsets packaged with arms procurements were often "pie in the sky".

"Suppliers often underestimate the cost of offsets and then renege," Dunne said. "There is a penalty for reneging built into the price of the deal, but it is extremely difficult to fix a penalty high enough to keep suppliers to their word."

British Aerospace, which is supplying fighter aircraft, would invest in the SA defence industry irrespective of an offset agreement. "The notion that British Aerospace will only invest if SA buys its aircraft is just not true," Dunne said.

The defence industry was an inappropriate sector for any viable domestic growth strategy to target, Dunne said.

"Defence industries offer little opportunity for vertical integration. They import components and do not create much work either upstream or downstream."

Large defence industry investments also incurred large opportunity costs, Dunne said, particularly in regard to the deployment of human capital.

"Highly skilled personnel, like programmers, are drawn into the defence industry when they could be working in sectors that create more jobs and stimulate more domestic growth," Dunne said. Even if taken at face-value, he said, the offsets were an expensive and inefficient job-creating investment.

Meanwhile, public protector Selby Baqwa said the arms deal investigation would produce its report in September and not July, as initially announced. 

With acknowledgment to Jonny Steinberg and Business Day.