The department of trade and industry (DTI) on Thursday rejected a report it was inflating arms deal offset figures, saying the value of the investments were misunderstood. "There has been no over-inflating, and no reduction in the value of investments, but there has been a misunderstanding of the real value of beneficiating gold," DTI chief director Lionel October told Sapa.

He was responding to a report in the Mail & Guardian, which says the value of industrial participation (IP) deals arising from South Africa's multi-billion rand arms deal is "melting away". The report said billions of rands in exports, claimed as offsets, were made up of raw material exports that would have left the country anyway, and investments claims were hugely inflated. Many of the offsets had been exposed as shams, built on loopholes in the rules, it said.

The government is expecting about R140-billion in offsets from companies that win contracts in the arms deal. October said the newspaper had "confused time periods" when stating that the value of BAe-Saab's IP to upgrade a gold refinery had shrunk from US2,3-billion to US595-million. He said the first amount was the value of the offset credits for the entire 11-year period, while the figure of US595-million was for the first milestone, or 2004.

BAe-Saab won the contract to supply South Africa with Hawk trainer and Gripen fighter aircraft. October said beneficiation was an important part of government's strategy, and offered substantial added value. "South Africa is trying to move away from just exporting raw materials... in the long term it is definitely in the interests of the country." Just one jewellery factory could create 500 jobs, he said. In its report, the Mail & Guardian said BAe-Saab had been allowed to claim "virtually the full US300 an ounce, not the value the refining adds of a few dollars an ounce".

The newspaper also claimed a key weakness in the offset rules was the way in which investments were calculated. Only 30 percent of the claimed investment had to come from offshore, meaning little foreign exchange would flow into the country. However, if an arms company could argue it facilitated loans for the investment, it could claim the full investment as "offset credits", the newspaper said. October said a company received credit for investing in a project, as well as for attracting funding from other companies for that project.

The Mail & Guardian had confused export value and credits regarding an offset investment in a silicon panel plant in Cape Town, he said. According to the Mail & Guardian, Thales -- part of a consortium providing corvettes for the navy and which invested in the plant -- is claiming export credits of US105-million over seven years on an investment of US6-million. This was in spite of the fact that the silicon panel factory added only about 20 percent value to an imported product before re-export.

The newspaper also claimed BAe-Saab received offset investment credits of US90-million, as well as US81-million for timber exports, despite putting only US6-million into a planned Mpumalanga forests and sawmill operation. BAe's involvement was hailed by government, although Anglo American and a United States company had apparently formed a joint venture a year before to pursue the project.

The arms deal will come under scrutiny in Parliament next week when MPs debate various committee reports on the probe into the deal, released late last year. Trade and Industry Minister Alec Erwin is expected to address the National Assembly on concerns surrounding the IP deals.

With acknowledgement to Sapa.