Helping local weapons manufacturer's subsidiary to meet foreign obligations is part of costs of arms deal

Cape Town ­ The government has had to pay R660m to enable a loss-making Denel subsidiary to honour its international contract obligations, including those related to the supply of equipment for purchases made under the R47,5bn arms deal *1.

Alarmed MPs learnt yesterday that, in addition, the state has to carry a further contingent liability of R940m on its books in terms of the R1,6bn indemnity issued for the company's contracts.

It emerged that the payments were not made to contractors for late delivery but were meant to ensure the cash-strapped company could continue operations and fulfil its contract obligations.

The company, Denel Saab Aerostructures, is 80% owned by Denel and 20% by Swedish arms manufacturer Saab. *2

It has been involved in supplying parts for the Gripen aircraft, the Agusta light helicopters and A400M airbus military transporter, and the assembly of the Hawk fighter aircraft.

Defence Minister Charles Nqakula has revealed that the strategic defence acquisition will cost taxpayers R47,5bn, nearly R17bn more than the original amount. So far R36bn had been spent on it, Nqakula said in a written reply to a parliamentary question by Freedom Front Plus defence spokesman Pieter Groenewald.

The minister said the Gripen, Hawk and Agusta programmes had not yet been finalised.

The deputy director-general of the treasury's budget office, Kuben Naidoo, told a meeting of Parliament's finance and joint budget committees that the first tranche of about R400m was paid under the guarantee last year.

The second payment of R259m was included in the Adjustments Appropriation Bill, which was approved by the committees, though finance committee chairman Nhlanhla Nene said members were not happy in effect "to just sign cheques" without further interrogation.

The bill included R15bn of allocations to departments and government entities over and above the amounts appropriated in the February budget.

Finance Minister Trevor Manuel highlighted the accumulation of liabilities by state-owned enterprises as a risk to taxpayers and said the control over their contractual obligations had to be strengthened.

He said it was "very clear we need a centre that will check and verify the contractual obligations of all of those kinds of things.... We must have the wherewithal to deal with these matters as these are effectively subsidiaries on our balance sheets which have to be accounted for".

Manuel said greater co-ordination was needed between the different development finance institutions such as the Land Bank and the Development Bank of Southern Africa, which reported to different ministries and therefore heard "different drumbeats".

Manuel said direct equity ownership required to comply with black economic empowerment (BEE) would be 10% instead of the 15% required by the Broad Based Black Economic Empowerment Act and the BEE codes, and which trade unions were insisting upon.

With acknowledgements to Linda Ensor and Business Day.