South Africa's Multi-billion Arms Programme Revisited [Defence Systems Daily, 2001-10-15]

Publication	Defence Systems Daily
Date	2001-10-15
Author	Leon Engelbrecht
Web Link	defence-data.com/features/fpage45.htm

In a two-part series, Leon Engelbrecht takes an insider's look at the state of South Africa's Defence programme. Whilst there is a case to rejuvenate the SAAF and SAN with more modern equipment, South Africa's 1996 Defence White Paper and subsequent Defence Review did not establish any major external military threats.

So what is to become of South Africa's declared intention to re-equip the SANDF? Leon Engelbrecht explains...

When two elephants fight, it is the grass that gets trampled. The sniping between political parties, the government and the media over South Africa's multi-billion rand strategic arms acquisition programme and the investment it is meant to generate remains an ongoing saga.

The probe into between 40 and 50 allegations of wrongdoing in the selection and tender processes that preceded the signing of the final contracts in December 1999 has found little wrong. But, to date it has done equally little to clear the dust of battle and has raised several questions of its own.

As a result, many South Africans are now unsure whether their elected leaders in government made prudent decisions on what equipment to buy for the SANDF at which price from whom. What are the "pros and cons" of the programme as a whole and what exactly is being bought and what for? What else was on offer, and why was it not taken? Most of these questions have been previously answered, most notably by the South African government itself in a number of "background briefings". These, unfortunately, have generally been reactive - usually after a spate of poor publicity - and have not always reached the intended recipients. They have also not always been convincing.

The history of the procurement programme precedes the 1998 Defence Review which some cabinet ministers insist gave the go-ahead for the acquisitions. The final years of Apartheid saw increasingly intense civil disobedience and low level guerilla activity in South Africa's townships. As budgets were shifted to favour the army, police and counter-revolutionary social spending, the main equipment of the SA Navy (SAN) and to a lesser extent, the SA Air Force (SAAF) was allowed to run down. By the mid-1990's it was painfully clear that the SAN needed urgent capital investment if it was to remain a seagoing service.

As the then Navy chief put it, the service was already searching the "scrap heaps of the world" for spare parts for its three Daphne class submarines. The SAN's nine Reshef-class fast attack craft (missile) had also suffered heavy wear and tear in the awful sea conditions along the South African coast. The lead FAC(M) ship, SAS Jan Smuts, is already retired. Its nickname, "Old Patches," explains why. In late 1994, then Minister of Defence Joe Modise authorised a request for proposal (RFP) and a request for tender (RFT) for new frigates for the SAN. A Spanish design from the Bazan yard won. But the process was overtaken by the so-called Strategic Defence Procurement Package, which called for new RFPs and RFTs.

This course of events came to a head at DEXSA 98, held at AFB Waterkloof, in Pretoria in November 1998. Expectations were high and the question on all lips were which offers, many in the form of "national packages" the government would accept. Leon Engelbrecht's concluding summary of DEXSA 98 is available here. On offer was

Not all the offers were taken up and even fewer reached the short-list from which the final selections would be made. At the time the requirement was for 38 ALFAs, 24 LIFTs, 60 LUH, 6 maritime helicopters, about 150 to 180 MBT, four patrol corvettes and four submarines.

Russia was in particular upset that none of its offers even made the short-list, while Italy was offended that its frigate design was described as inferior and unsuitable to South African waters charges they strongly denied.

The South African cabinet through its Government Communication and Information System (GCIS) announced the preferred bidders on November 18, 1998. It also said an inter-departmental team would be established to negotiate the final contracts with the German Frigate Consortium for the Meko A200SAN, the German Submarine Consortium for the Class 209 1400 MOD, Agusta for the A109M, BAe for the Hawk 100, BAe/Saab for the Gripen and Westland for the Lynx.

The MBT programme was not approved, apparently because the SA Army had not decided how many it needed. Financial considerations also played a role. Cabinet also altered numbers. It would still be four corvettes but now only three submarines. The number of ALFAs was trimmed to 28, the number of LIFTS remained the same but the LUH acquisition was cut to 40 and the maritime helicopters to four meaning a single helicopter per corvette with no attrition or servicability margin.

Negotiations took a year and the contracts underlying the acquisitions were signed on December 3, 1999. They became effective on April 1, 2000. Construction of the corvettes and submarines as well as the aircraft is presently underway. One contract was notable by its absence the maritime helicopter. While SAN insists the corvettes will carry helicopters and the government avers that AgustaWestland remains the preferred bidder, no contract has been signed.

An official explanation is that the ships are still in an early stage of construction and the helicopters will not be required immediately. A more likely reason is the apparent high cost of the four platforms. DSD in November 1998 reported the order could be worth UK80-million (US132-million) to the company. A dark horse of late is Kaman's SG-2G Seasprite, said to be cheaper but is equally effective.

The total cost of the programme as well as the real value of the related offsets has been at the centre of much of the furore surrounding the acquisitions. Cabinet ministers and the GCIS have throughout insisted that the programme will cost "R29,9-billion (in real 1999 rand)." They have also continued to assert that the package would generate offsets (or counter-trade) worth at least R104-billion and create 65 000 jobs.

GCIS has been critical of media reports saying that the programme's cost has variously escalated to R43-billion and R51-billion as a result of currency and interest rate fluctuations. In a number of media statements and briefings it has sought to convince the public that the real 1999 figure remained accurate as it included provision for rand depreciation and interest appreciation. The drive has not been entirely successful and has been dealt a number of blows, most recently in July, in the testimony of a former Department of Finance official at a public hearing on the programme.

The hearing formed part of a larger criminal and forensic probe by the Public Protector (an ombudsman), the Auditor-General and the powerful National Directorate of Public Prosecutions in the Department of Justice into the programme. The official, Roland White, told the hearing that retired Defence Minister Joe Modise essentially short-circuited his department's affordability study by signing a draft contract for the submarines with the German Submarine Consortium before any conclusion was reached on the viability of the purchase or its linked offsets.

White also punctured assertions that the programme was properly costed, saying that aspect could have been better researched and should have been subjected to more cost-escalation models. But he also contradicted himself and testified that British officials later commented to him that the fiscal and economic analysis in the affordability study was the "most thorough" they were aware of.

In order to reduce the risks of the procurement to the country, part of the programme has been divided into tranches. This, GCIS said, will allow government to limit its expenditure to R21.3-billion, if adverse economic circumstances demanded it, by canceling 12 LIFTs and 19 single-seater ALFAs. The LUH order was reduced by a further 10, although an uncosted option to purchase remains, which government has said it was keen to do.

Government has repeatedly stressed that the negotiation process achieved substantial savings and gave it a number of tools with which to minimise "the risks intrinsic to a large, import oriented procurement of this kind." These include the tranching approach outlined above, a price reduction of approximately R300-million through aggressive negotiation, the altering of cashflows - mainly through delaying and extending payments over a number of years - to bring the annual payments in line with funds available on the government budget; the state's ability to pay for all the local content in rand, thus reducing government's exposure to the risk of currency fluctuation and financing the payment in foreign currencies through officially supported export credit loans.

The imported content of the equipment (about 85 percent) will be financed through Export Credit Agency loans guaranteed by the governments of the supplier countries. "During the negotiations the Finance Negotiating Team, led by the Department of Finance, was able to secure terms which are highly attractive to the SA government and which are much better than it could achieve on the commercial markets. In fact, as a whole, these terms are much better than is typical of defence deals internationally," GCIS said in a statement issued in September 2000.

The domestic component of the packages will be paid in rand raised, to the extent necessary, by the South African government on the domestic market as part of its normal treasury operations. "Because government is not exceeding its deficit targets to fund the packages, they will not add to the total public sector borrowing requirement or to government's total projected interest burden," GCIS said. Payment for most of the equipment - hence the impact on the national budget - will be spread over an eight year period, with some payments extending over as much as 14 years. "The impact on the budget will, therefore, be relatively attenuated and is entirely manageable.

The fiscal impact analysis conducted as part of the affordability assessment indicated that Government will be able to cover these amounts without altering its existing deficit targets. Government will ensure that nominal revenues are sufficient to meet the package expenditures without cutting into the budget allocations of other departments excessively," the statement said. But many main-stream economists doubt this will be the case. They expect the financing to affect growth, the country's Gross Domestic Product (GDP) and the value of the Rand.

While there is no doubt that the SAAF and SAN need rejuvenation by way of new main equipment, it is also clear from the 1996 Defence White Paper and the Defence Review that followed that the country faces no immediate military threat. The only invasion underway is of refugees and economic migrants and the only conflict the dual "campaigns" against poverty and disease - mainly HIV/Aids. Although these documents, both approved by all parties then in Parliament, foresaw South African involvement in peace support operations, the re-arming of the SANDF could not be justified on this ground alone. The government has therefore used other techniques to do so, principally the offsets and job creation that stands to gained from the programme.

In this regard it has sought to assure the public that the nett effect of the total procurement on the economy would be "broadly neutral." It has also attempted to convince voters that the programme's offsets will, in effect, pay for the equipment "Over the medium and long term the benefits deriving from the Defence Industrial Participation (DIP) and Non-defence Industrial Participation (NIP) programmes will fully offset the economic and fiscal costs of the military equipment," the September 2000 statement said. Others, before and since then, have repeated the message, as have comments and public statements by ministers, including Trade and Industry's Alec Erwin, Finance's Trevor Manuel and Defence's Mosioua Lekota.

The ministers have also worked hard to dispel doubts on the likelihood of the NIP and DIP materialising. (Little came of the offsets promised in the 1970s by Israel when South Africa purchased the FAC(M) from it.) "Government is naturally aware that the risk of the NIP and DIP benefits not materialising fully is intrinsic to the procurement. During the negotiations, specific measures were taken to ensure these risks are minimised. Moreover, special steps will be taken by the Department of Trade & Industry (DTI) to ensure that the NIP and DIP commitments of the supplier companies are monitored and enforced. In this context, government is confident that the aggregate economic impact of the procurements will be acceptable," GCIS said.

Government says the actual economic benefit deriving from the R104-billion in expected offsets will amount to R70-billion over a period of 11 years. The benefits will come in three forms :

DTI spokesman Edwin Smith told DSD if one believed the cost of the programme had escalated to R43-billion by last year, one also had to increase the offset figure by a similar amount, as the two were linked and both were in real 1999 Rand. He bemoaned the fact that very few of the reports on the programme's supposed cost escalation mentioned that the offsets would increase by a commensurate amount.

The government also believes the offsets will "create significant numbers of jobs in sectors where the new investments are to take place." In addition to the jobs created directly, the programme will also have an indirect impact in the labour market. The demand for raw materials, the spending of incomes earned by employees and the spending by the government of its tax revenues obtained from the companies will all contribute to economic growth and job creation.

A less honest approach has been to co-opt the Defence Review process as a justification. As mentioned, it was approved by all parties and was preceded by lengthy consultation and public hearings involving government departments, Parliament, non-governmental organisations (NGOs) and the general public. GCIS and cabinet ministers have recently sought to portray any opposition to the programme as backsliding by those who had earlier agreed to it. But many NGOs at the time complained that although their views had been sought it had been ignored in the final document.

Others have since alleged that the Defence Review process was cynically manipulated by the DoD and that their presence during its drafting was merely for purposes of co-option. Some opposition political parties by mid-2001 felt the same. The fact is that the Defence Review did include several proposed tables for re-equipping the SANDF and one of these was adopted. Lekota in early July used this as evidence to show Parliament had approved the programme. But the Defence Review was uncosted and general consensus at the time was that it did not give government licence to purchase equipment or unilaterally increase the defence budget. Both have since occurred.

Equipment Type	Number	Price in Rands (Millions) @ 1999
Tranche 1 ALFA and LIFT	9 two-seater ALFA, 12 LIFT	7,110
Light Utility Helicopters	30 costed/10 uncosted	1,949 for 30
Patrol Corvettes	4	6,917
Submarines	3	5,354
Total incl Tranche One		21,330
Tranche Two + 3 ALFA and LIFT	19 single-seater ALFA, 12 LIFT	8,662
Total incl Tranches One, Two and Three		29,992