The cost has escalated and the benefits could differ from initial estimates. The much-vaunted economic benefits of government's R30bn arms procurement deal could be far less than was hoped for, while the cost of the package has already escalated beyond initial estimates.

Projected escalations in inflation and exchange rates during the 12-year lifetime of the acquisition programme had already pushed the cost of the deal up to R43,8bn, excluding finance charges, Parliament's standing committee on public accounts heard from defence force chiefs yesterday. The final cost could be more than R50bn, committee members suggested. At the same time, international experience shows that industrial participation projects, valued in the SA deal at R104bn and supposedly creating 65000 jobs, often fail to materialise.

African National Congress (ANC) MP Alan Feinstein noted that the arms purchases had been presented to the country on the basis that they would generate massive industrial and export benefits. He said some assurance was needed about whether these socioeconomic benefits would be forthcoming. Committee chairman Gavin Woods said the cost and benefits of the deal might have changed and asked whether the cabinet had been fully informed of all the facts when it took its decision to approve it. Much of the promised offsets could be "pie in the sky".

"Early indications suggest the deal we thought we had in rands and cents terms has turned out for the worse. It appears we are paying more than we thought we would have to and could be getting less," Woods said after a lengthy interrogation by the committee of top defence officials involved in the acquisition project. A cost-benefit analysis of the deal might be necessary. The hearing came after Auditor-General Shauket Fakie's special report on the acquisition programme identified a number of irregularities. The department has been asked to provide figures on projected cost escalations.

ANC MP Laloo Chiba asked how the deal had been motivated to cabinet without having been presented with the total cost, including escalations. Chief government negotiator for the acquisitions, Jayendra Naidoo, said the counter-trade spinoffs were intended only to provide some additional benefit for what was a necessary purchase of equipment. They were meant as a "risk management exercise" and it was questionable whether they would provide a massive boost to the economy.

The committee heard that performance guarantees had been secured for only R3bn of the national industrial participation commitments or 10% of the contract price. Together with Fakie, committee members were concerned about whether this was adequate to ensure total delivery of the R104bn in commitments. Since April, contracts worth R249m have been placed with SA companies by foreign arms suppliers. Acquisitions chief Chippy Shaik said the 10% was within international norms.

Foreign suppliers had made upfront commitments to deliver the offsets against approved business plans. Committee members were shocked that there were no in-built procedures requiring those involved in finalising the deal to make declarations of conflicts of interest. This is mandatory for all government departments and parastatals. Shaik conceded this was a major flaw in the process. He told the committee he had voluntarily declared a conflict of interest, and had recused himself from decisions on the awarding of the contracts for the combat systems and helicopters. The conflict of interest centred on his brother's involvement with one
subcontracting company, African Defence Systems.

With acknowledgement to Linda Ensor and Business Day.