An examination of the budget review gives an idea of what is being spent

It will be a relief for opponents of SA's R60bn arms package to know that the equipment and weapons are being paid for with something known as "quasi money". But sadly this does not mean that billions of rands in real money is not changing hands.

A small corner of the financing arrangements involved in the arms deal was lifted in the auditor-general's report on the Strategic Defence Packages. When supplemented with brief mentions of the package in the voluminous budget review documents issued each year as part of the budget, it is possible to gain the broadest of outlines about the process used in paying for the package.

Key to this process is something called quasi money, which, according to the report, is an approval for loan funds from the Special Defence Account.

The account is the arms procurement account, which has a rich history in SA, particularly for its use and abuse during the apartheid years in breaking the arms boycott.

The fact that money is being used from this account is the reason the auditor-general was forced to submit his report to government prior to publication, since specific legislative requirements are attached to the Special Defence Account.

The submission of the report prior to publication has been one of the controversial aspects of the process, though Auditor- General Shauket Fakie has said no significant changes were made.

The auditor-general's report explains the financing in this way: "If a foreign supplier submits an invoice for payment to be made to itself or a foreign subcontractor, Armscor is instructed to authorise a foreign bank, with which an arrangement has been made, to pay the supplier."

The funds for such payment are drawn from a loan pool in terms of an agreement between foreign banks and the finance department (now the treasury).

So payment for the arms is made essentially by drawing down on previously negotiated credit lines with foreign banks.

This tallies with the information published each year in the budget review, which lists payments to foreign suppliers for the arms procurement programme under "foreign loan issues".

For the past three years, these "foreign loan issues" have been briefly specified in the budget review, a document intended to explain and amplify on the budget itself.

From the three payments that have been made so far, it is possible to get a loose idea of the costs involved in the arms procurement programme, even though the amounts mentioned are merely liabilities to foreign banks at this stage.

These liabilities may change depending on the specifics of the financing programmes, currency movements and other variables. But ultimately, of course, taxpayers will have to pick up the tab.

So far, R9,5bn has been drawn from these loans over a three-year period, and since the period involved has coincided with peculiar currency volatility, the real rand value of these commitments has changed dramatically.

The review comments briefly on the programme, noting the favourable financing terms, which are listed as between 150 and 200 basis points lower than the foreign public bond markets, for example, in the 2000-01 financial year.

Interestingly, this rate of discount increases in the following year to 260 basis points and then in the 2002-03 financial year, it increases again to 350 basis points. Quite why this change occurs is not explained, except that the report is laudatory of the financing arrangements negotiated by government.

But big jumps in the overall payment levels are also noticeable, with drawdowns rising from R1,9bn in the 2001 financial year to R3,3bn in 2002 and R4,3bn in 2003. Presumably this reflects not only the fall in the rand over this period, but the increases of momentum in the production process and therefore the invoicing by the arms production companies themselves.

The payments are also broken down by category of equipment bought. The submarines, corvettes, aeroplanes and helicopters are all specified separately.

But it is interesting to note that two banks, one French and one German, are specified separately regarding the corvettes in all three years.

This difference is amplified slightly in an unpublished report produced by an investigator from the public protector's office.

Broadly, the breakdown follows the same pattern except for one small difference. Instead of saying simply "corvette" the report states that the bank responsible for the "corvette combat suite" is Société Générale and a German bank is responsible for the "corvette platforms", the boats themselves.

This makes sense because the company involved in supplying the corvette combat suites is a French company, Thales, formally Thomson CSF.

This might appear unimportant, but it may turn out to be more significant than it seems as it apparently refutes government's claim that it did not have a contractual relationship with anyone other than "prime" contractors. Actually, it seems, it did.

With acknowledgements to Tim Cohen, Paul Kirk and the Business Day.