While targets are met on paper, the value of investments is being debated

Government is confident that its large suppliers in the controversial defence re-equipping programme are up to speed in delivering their offset obligations under the industrial participation programme.

Specific details on the progress of the investments will be made public in government's next report on the subject, due out on June 10.

The public and private sectors had huge expectations from the offset programme, which included R110bn in investments and about 65000 direct and indirect jobs. And while the suppliers may meet these targets on paper, the value of the offset s is still being hotly debated.

Terry Crawford-Browne, SA representative for Economists Allied for Arms Reduction, is leading the debate. The body has taken government to court over the arms deal, and has raised a number of concerns about the offsets.

The main suppliers include BAE Systems together with Saab, the German Submarine Consortium, the German Corvette Consortium and Agusta.

For its award of multibilliondollar contracts , government generally requires reciprocal investment at 30% of the supplier's total contract value.

The largest supplier, BAESaab, has a total offset obligation of $8,7bn by 2011. The group's next milestone is in April next year, by which time it is required to have invested about $2bn.

In the year to date, BAE-Saab has made a R40m investment in a gold jewellery project, R75m in a gold beneficiation project, R24m in an HIV/AIDS treatment project, and R40m in a tyre manufacturing facility, among others.

Using the gold beneficiation project as an example, Crawford- Browne argues that the credits suppliers earn for some of these projects are artificially inflated.

BAE-Saab facilitated a project in Free State to turn raw gold into beneficiated gold products, creating at least 200 jobs. "But BAE gets the value of the whole gold product, instead of the value added," says Crawford-Browne. "This will inflate the number of credits they receive for the deal."

Lionel October, the trade and industry department's deputy director-general responsible for the offset programme, admits that BAE-Saab would get full credits for the project. He argues, however, that the project is in line with government's intention of growing beneficiation.

Full credits for the entire gold product are awarded based on the fact that the gold used is a local material. If government awarded credits only for the value added, October argues, suppliers in the arms contract could very well use imported raw materials.

A key tool for government to determine whether offset projects do add value is a causality clause contained in offset contracts with suppliers.

The clause essentially forces arms suppliers to prove they facilitated new investments, as opposed to them becoming involved in investments that would have taken place regardless of the arms supplier's involvement.

"There is no way that anybody can claim for projects they were not directly responsible for," says October. In addition to a strict monitoring system within the department, these companies also risk far too much reputational damage to lie, says October.

Crawford-Browne says offset obligations are notoriously difficult to monitor and police, so offset trade is frowned on by the World Trade Organisation. A recent study by Transparency International called for offsets to be banned, citing the potential for corruption they entailed. There was proof offset programmes did not deliver on job targets.

October says there is a misunderstanding that the programme is all about jobs. It is about generating investment with a focus on exports. "This will create jobs."

With acknowledgements to Carli Lourens, Chantelle Benjamin and the Business Day.