Publication: Business Day Weekender Issued: Date: 2006-11-18 Reporter: Linda Ensor Reporter:

Jobs from Arms Offsets Fall Short

 

Publication 

Business Day Weekender

Date

2006-11-18

Reporter

 Linda Ensor

Web Link

www.bday.co.za

 

The offset programme of the strategic defence procurement package is expected to deliver only a quarter of the direct and indirect jobs promised by cabinet ministers at the time the controversial R30bn arms contracts were signed about six years ago.

A government official has made the first admission that arms contractors were likely to create only 2 000-3 000 direct jobs via offset investments by 2011, and not the 12 000 promised at the time by then trade and industry minister Alec Erwin.

In his special report on the arms deal tabled in Parliament in 2000, auditor-general Shauket Fakie referred to government estimates that the offsets from the arms contracts would result in industrial participation commitments of R110bn, which would create more than 65 000 job opportunities. Using the multiplier of one direct job creating five indirect jobs in use at the time, this meant about 12 000 direct jobs would be created.

The five largest suppliers, including aircraft suppliers Saab and BAE Systems, were obliged contractually to facilitate $13,6bn (R99,4bn) in sales and investment in new economic activity in SA over several years.

But trade and industry chief director Sipho Zikode said Erwin, who is now public enterprises minister, was probably referring to the entire national industrial participation programme and not just its defence component.

Zikode said the entire national industrial participation programme was expected to create 15 000 direct jobs, or 45 000 indirect jobs, if a conservative multiplier of three was used.

This was clearly not the understanding Erwin and other cabinet ministers gave at the time they were trying to sell the controversial arms deal to a sceptical public.

However, Zikode stressed in a briefing to Parliament’s trade and industry committee on the national industrial participation programme that, apart from Italian helicopter manufacturer Agusta and ThyssenKrupp *1, the main arms contractors were well on target to meet their obligations.

In terms of the industrial participation programme, foreign suppliers of goods to government or to parastatals such as South African Airways, Telkom, Eskom and Denel have to commit to offsets to be awarded a supply contract. Zikode said the current obligation of suppliers was $15bn, of which $4bn was for investments.

Since its inception 10 years ago, more than 150 projects had been approved and implemented, generating investment of more than $2,2bn, and export and local sales credits of $4,5bn.

He was satisfied with the programme’s progress so far, though committee members were concerned that its benefits should be spread more evenly across SA, particularly in rural areas. Projects should also be commercially sustainable in the long term.

Zikode said of all the national industrial participation projects undertaken so far, there was a 2%-5% failure rate, and between 6% and 10% were in “intensive care”, with problems needing resolution.

“Not all projects have a happy ending. Some have encountered severe problems,” Zikode said, referring, for example, to the $30m gold jewellery beneficiation project which collapsed because of fraud perpetrated by its Peruvian and Canadian partners. The gold was sent abroad, but the proceeds never returned.

The Industrial Development Corporation and BAES was trying to revive the project, Zikode said.

Hiccups had also occurred in MAN Ferrostaal’s plans *1 to establish a R1bn oil and gas-rig manufacturing plant at Saldhana Bay. Zikode said there had been delays in getting Transnet’s approval for a lease agreement.

There were also delays with the German manufacturer’s plan to invest in a precision strip stainless steel plant at Coega due to disagreement with the Industrial Development Corporation on the of interest rate it would charge on its loan for the project. These negotiations were hopefully nearing finality, and construction should begin in the first quarter of next year, Zikode said.

The R120m investment by BAES/SAAB in a diesel economiser project had also hit obstacles which had led to litigation.

Zikode said the department wanted to revise its national industrial participation policy guidelines to ensure offset projects led to empowerment of women, blacks and small businesses. So far, they had not benefited much.

With acknowledgements to Linda Ensor and Business Day Weekender.


*1      ThyssenKrupp as part of the German Frigate Consortium (GFC) and Ferrostaal as part of the German Submarine  Consortium (GSC) won the corvette and submarine contracts respectively. Neither were frontrunners until cabinet upgraded their scores and downgraded those of their competitors. The GSC's IP offering was vastly inflated and was indeed incredible, i.e. not credible. Furthermore only a fraction of it was subject to guarantees.

Cabinet also gave extra value to the GFC's IP offering based on the GSC's offering.

In short neither the GFC nor the GSC should have won the corvette and submarine contracts. The process appears to be irregular and possibly unlawful.

Overall, Erwin, the prime mover behind the Arms Deal, seems to have adopted the Goebbels maxim - the bigger the lie, the more who will believe you.

Certainly, the Germans are laughing all the way to their Swiss banks.

Or has it got more to do with the DM40 million Thyssen and DM40+ million Ferrostaal paid to Thabo Mbeki and his political party of choice.