Red tape, delays and cost escalations threaten take-off of ambitious A400M project

It was dubbed "Project Continental" - a grand vision of South Africa spreading its wings of peace over Africa - backed by 14 of the world's biggest military aircraft.

And the Airbus-led project to develop the massive A400M Airbus heavy-lifter freight planes represented the largest joint project ever undertaken by European military aircraft manufacturers.

Involving British, German, French, Spanish, Turkish, Belgian and Luxembourg interests along with South Africa in the partnership, the A400M has an order book of some 200 aircraft - mainly from the venture partners, but also from developing countries including Chile and Malaysia.

Its conception may have been grand, but the A400M has been dogged by controversy, and recently major partners, including Britain and Germany, threatened to pull out of the deal in the face of delays and cost escalations.

Notable among the causes has been the bureaucratic insistence by European governments on using turboprop engines of European origin to drive the goliaths of the skies - rather than the originally-suggested slotted Canadian Pratt and Whitney engines, universally acknowledged to be cheaper, more efficient and more fitted to requirements.

The viability of the Airbus project has been placed in question as competitors, notably Boeing, are delivering transport aircraft at significantly lower prices - though with a lesser payload, cruise speed range and the A400M's capacity to transport fully assembled tanks.

Last week Armscor chief executive Sipho Thomo entered the fray, dropping a bombshell before Parliament that the eight A400Ms ordered by the South African military would cost the country R47 billion - as opposed to the original R7.4bn estimate in 2004, and the R17bn estimated when the deals were finally sealed in 2005.

In the outcry which followed, it emerged that Thomo had been performing what Airbus insiders refer to as "voodoo arithmetic" *1. Thomo had been factoring in the "throughlife" costs of the aircraft - the costs that would be incurred over the 30-year lifespan of the planes and the cost of chartering flights for peacekeeping deployment given the four-year delay.

Also included in Thomo's figure was the cost of maintenance and spare parts, and the financial burden of phasing out the aircraft after their 30-year lifespan.

Armscor's managing director of acquisitions, Sipho Mkwanazi, explained how the R17bn figure was calculated: "You take the acquisition cost of the system and the interim package of two years maintenance while you do operational tests. That would bring you to R17bn.

"Then you use a set of assumptions to work out a model for flying hours over 30 years, the operational cost, the parts and maintenance, and the impact on the state when the system starts to be phased out."

An industry source confirmed that the government had decided to use throughlife costs as part of its costing process after having burnt its fingers with estimates on the strategic defence package known as the Arms Deal, which it now cannot maintain and operate properly.

In fact, the figures mentioned by Thomo were drawn from a confidential bargaining position drawn up for South African negotiators to thrash out a better deal with their Airbus partners.

Defence Minister Lindiwe Sisulu subsequently slammed Armscor's disclosure of the bargaining stance, saying it not only jeopardised prospects of securing an affordable deal, but placed in question South Africa's standing as an honest negotiator in Europe's eyes.

South Africa is withholding a further payment of R1.1bn pending the outcome of negotiations, likely to be concluded within the next week. If it continues to play hardball, the government is likely to forfeit the R2.9bn already paid from the secret special defence account for the Airbus project - not to mention its international credibility in the aerospace community.

The government has already invested substantially in the industrial participation of South African companies, but the total amount is not known.

The manufacturing consortium placed a moratorium on contracts and production of the planes earlier this year due to large scale production delays of at least four years and considerable cost overruns and slippage on crucial milestones such as getting a prototype in the air for test runs.

The first formal statement on the government's intention to buy the A400M aircraft was when the Ministry of Transport said in December 2004 that negotiations had begun with Airbus Military to determine the terms of South Africa's industrial participation in the project.

Private company Aerosud Aviation and the state-owned Denel Saab Aerostructures also started talking to the European consortium as part of the Departments of Trade and Industry, Public Enterprises and Defence's strategy for a "long-term development and sustainability of South Africa's high technology aerospace sector".

The main reason was, however, to "enhance the airlift capability" of the force, particularly on peace missions in Africa.

The statement said, at the time, South Africa had to spend more than R100 million over three years on private airlifting charters to assist in its deployment in African peacekeeping operations. At the time, another R1bn had been spent to extend the life of existing transport aircraft.

Denel Saab Aerostructures chief executive Lana Kinley said Denel's contract was pegged at about R13bn over 15 years of production, likely to kick off in 2011.

Kinley confirmed that the company had received R660m from the government to finance the design phase of the project. The other South African component manufacturer, Aerosud Aviation, would not disclose the value it hoped to bring back to South African shores.

The defence budget is currently just over R32bn. In 2005, the Defence Department faced a R300m budget shortfall, according to sources.

The special defence account - from which the first payment for Airbus was made - is projected to grow over the medium term to R1.880bn * in 2011/12, doubling from five years back, with the lion's share going to the procurement of equipment.

With acknowledgements to Christelle Terreblanche and Sunday Independent.