Press Statement by :

Economist Allied for Arms Reduction - South Africa

The Arms Deal : Betrayal of the Struggle Against Apartheid

September 22, 2003

To people in South Africa and millions around the world who supported the struggle against apartheid, it is a matter of bewilderment that the ANC government's first major decision was to buy warships and warplanes. There is no conceivable foreign military threat. The very real threat to South Africa's transition to democracy and security is poverty.

President Thabo Mbeki on Thursday again rejected calls for a judicial inquiry into the arms deal, saying that "no evidence had been produced that the deal had been soiled by corruption of any kind". Corruption is not the issue or the reason for ECAAR-SA's litigation to cancel the arms deal. The reason is "affordability".

President Mbeki declared that the arms deal has been properly investigated by the auditor-general, the public protector and the national directorate of public prosecutions. The Joint Investigation Team report purportedly exonerates the government of improper or unlawful conduct, and declares "there are no grounds to suggest that the government's contracting position is flawed". That is one paragraph, paragraph 14.1.1.

Virtually every other paragraph of the 380 page report reveals that the arms deal was riddled through with tendering irregularities and malpractices. Chapter four, in particular, regarding BAe Systems details how bid criteria were twice altered after Air Force chiefs and the Secretary for Defence had rejected the BAe Hawks and BAe/Saab Gripen fighter aircraft as unsuitable for South African requirements. The Air Force and Secretary for Defence were overruled by the Minister of Defence and other cabinet ministers. The Minister of Trade and Industry confirmed that so-called "non-costed" options were then applied to award the aircraft contracts to BAe Systems.

I have it on good legal authority that such interference with tenders violates fundamental contract law, and is valid reason to set aside the BAe contracts. Even more pertinently, Section 217 (1) of the Constitution declares:

"when an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective".

There is no way that "non-costed" options conform to that constitutional requirement. Likewise, the tenders for the submarines, frigates and helicopters are contractually flawed and should be set aside.

The JIT criticises Modise's behaviour in numerous aspects of the arms deal but, conveniently, the man is now deceased. Modise was but one member of a cabinet sub-committee chaired by then Deputy President Thabo Mbeki, which also included the Minister of Finance, Trevor Manuel and the Minister of Trade and Industry, Alec Erwin.

ECAAR-SA filed its application in November 2001 for cancellation of the arms deal. Its litigation has been brought in terms of Section 38 of the Constitution, as an action on behalf of a class of poor people. It has done so in the conviction that the legacies of poverty facing post-apartheid South Africa jeopardise our country's transition to democracy, and its security.

Our litigation focusses upon the loan agreements signed by the Minister of Finance because these give effect to the arms deal. We start from the assumption that without payment, there will be no arms deal. The Minister responded to our first papers by declaring that the agreements he signed "are self-standing loan agreements with binding force and not dependent on any other agreements entered into by government". We were astonished for his argument was tantamount to insisting that the purchase of a house has nothing to do with its mortgage. As the BAe loan agreements prove conclusively, the Minister lied under oath.

Having originally filed in November 2001, we finally got the matter into the Cape High Court on March 19 and 20 this year On March 26 2003 the Court ordered the President, the Minister of Finance and the government of the Republic of South Africa within ten court days to make discovery of: "the documents containing the advice of the International Offers Negotiating Team and the Financial Working Group".

These documents refer to chapters eight and nine of the JIT. Two paragraphs of chapter nine confirm that the final affordability assessment was submitted to the ministers' committee in August 1999, and that it was a voluminous document that dealt comprehensively with all the relevant issues. We know from Roland White's testimony to the Public Protector's hearings in July 2001 that this document was indeed "voluminous", and that it comprised at least 643 pages. It included charts on the impact of the arms deal on education, health and housing, and warned that the costs of the arms deal would squeeze out state expenditure on these priorities.

By August 20 we still had not received the IONT documents. We requested the Court to express disapproval of the contempt displayed by the government in frustrating its order. And, as a result, 28 pages (instead of at least 643 pages) were handed over on September 8.

I refer you now to the executive summary of the affordability study that IDASA released to the public in May 2001. On page 99 or roman numeral iv, the top half of the page refers to loan packages and 2.4.1. and 2.4.2. In contempt of court, we've been given the detail of only this portion of the affordability study relating to export credit agency funding. It is marked appendix G, but we have not received appendices A to F or H onwards. You can see what is missing.

Cast your eyes over the IDASA summary and the analyses of economic issues, fiscal issues, financial issues, risks, scenarios, conclusions and recommendations. There are various issues of risks, including non-materialisation of the offsets and foreign exchange risks. Under conclusions on page viii, the summary notes:

"The proposed armaments procurements are distinguished from other government procurements by four key characteristics. The sums involved are extremely large; they involve fixed contractual commitments extending over long periods with high breakage costs; they are heavily import-biased; and their costs are offset by a set of associated activities (the NIPs) which cannot be guaranteed".

These characteristics create a set of important and unique risks for government. The analysis of these risks suggests that as the expenditure level increases, these risks escalate significantly. Government could be confronted by mounting economic, fiscal and financial difficulties at some future point.

It is not surprising that the Minister of Finance and Ms Ramos are desperately trying to prevent the public from learning that the government was warned by its own officials that the arms deal is a highly risky business. The government was warned, and recklessly went ahead with the purchases.

The consultants also project rand/dollar exchange rates from 1998/99 to 2018/19. They project R13.96 by 2009/2010 and R26.25 by 2018/2019. Even on these questionable projections -- remember the rand fell to R13.86 in 2001 before its recent recovery -- the final cost of the arms deal can be calculated at not R30 billion, but at a staggering R370 billion. The point is that no one, most especially the Minister of Finance, knows what the arms deal will cost by 2019. Anything anywhere close to R370 billion, and South Africa's transition to democracy will collapse.

On September 12 2003 we filed new papers drawing the Court's attention to the government's continuing abuse of judicial processes, and we intend to move for a final order that the loan agreements are declared null and void.

The history of the BAe loan agreements is interesting. I obtained them literally over the internet. They run to 255 pages, which I now make available on CD rom. The Minister of Finance thought I was bluffing, but the government's senior counsel conceded in court on March 20 that these documents are authentic. The main loan agreement is dated 25 January 2000 and is made between:

Barclays Bank PLC, Her Britannic Majesty's Secretary of State acting by the Exports Credit Guarantee Department (ECGD) and the Republic of South Africa acting through its Department of Finance (the borrower) on behalf of the buyers, the Armaments Corporation of South Africa Ltd (Armscor). On page 12 you will see that the purpose of the loans is to purchase BAe Hawk and BAe/Saab Gripen fighter aircraft. It reveals that the minister's defence that the agreements he signed have nothing to do with the arms deal to have been a lie.

In conceding that the documents are authentic, the government's senior counsel then drew the Court's attention to the representation, covenant and default clauses on pages 30 to 35. He declared that it would be naive to cancel the agreements because of the terrible consequences that would follow. In short, the minister has for 20 years ceded control of South Africa's economic and financial policies to European banks and governments and the International Monetary Fund.

He has put our necks into the noose of third world debt. This is how Zimbabwe got into the chaos that it is in. Studies in England find that 95% of all third world debt to Britain originates in ECGD transactions such as the arms deal.

You will see on page 47 that the agreements are signed by Trevor Manuel for South Africa, and by Chris Leeds for the British government. We had warned both Manuel and Leeds before the agreements were signed that allegations and evidence of corruption had been referred to the Heath Special Investigating Unit in November 1999. Given that knowledge, their signatures were fraudulent and violated the representation clauses.

Even more interestingly, it was evident in Court on March 20 that there is no parliamentary authority for the arms deal. The government claims parliamentary approval in the "Defence in a Democracy" document. Other commentators describe the core force as being nothing more than a "wish-list". Chapter 8 specifically declares that "option one was approved subject to available finances" but "does not constitute blanket approval for all implied capital projects or an immutable contract...At best, it constitutes approval in principle".

Government's counsel then claimed that the Minister acted in terms of Section 85 of the Constitution and of the Exchequer Act. Examination of the Exchequer Act reveals that it provides for borrowings to meet a financial deficit and to borrow foreign currency. It does not however, authorise negotiation of long-term foreign credit facilities, such as to purchase armaments or other major acquisitions.

The default clauses are alarming. The IDASA summary notes on page vii that "particularly adverse economic conditions may cause the government to consider the cancellation of some or all of the packages at some point into the contracts. The risks and costs associated with cancelling the procurements after contract signature are significantly higher than usual".

Wille's "Principles of South African Law" notes "that agreements which are clearly inimical to the public interest will not be enforced. When the occasion so demands, the courts will not shrink from a duty of declaring a contract contrary to public policy". The arms deal clearly falls within such a definition. It is strategically, economically and financially irrational. Escalating costs will limit the State's ability to meet the social and economic commitments contained in the Bill of Rights.

The combination of the IONT documents and the BAe loan agreements, we believe, will convince the Court that the cabinet and Minister of Finance, in particular, were warned about the risks, and that they recklessly and irrationally and unconstitutionally committed South Africa to the arms deal.

A decision to strike down the loan agreements will obviously embarrass the government, but the courts are not permitted to abdicate their responsibility. Section 2 unequivocally declares that the Constitution is the supreme law of the Republic. The Vienna Conventions similarly uphold the precedence of the Constitution over international agreements. The financial consequences of cancellation will fall not to South African taxpayers, but to the European export credit agencies including the ECGD that guaranteed the loans.

Archbishop Ndungane in August 1999 called for judicial investigation into the affordability of the arms deal. Such an investigation is now essential to expose how the government got itself entangled in such a fiasco. It is evident that political influence of the armaments industry in Europe rather than the needs of South Africans is what motivated the arms deal. Germany would win the navy contracts: Britain and Sweden would supply the warplanes. The Joint Investigation Team report does not exonerate the government, but instead confirms that the tenders were a sham and should be set aside.

Success in cancelling the arms deal will mark a new paradigm of civil society holding the government to account.

Terry Crawford-Browne