Publication: Weekend Argus Issued: Date: 2012-11-18 Reporter: Ivor Powell

Arms deal offsets of ‘no benefit to economy’



Weekend Argus (Sunday Edition)

Date 2012-11-18
Reporter Ivor Powell
Web Link

THERE is no evidence that defence industrial participation (DIP) investments concluded under South Africa’s controversial arms deal have resulted in any benefit to the economy, according to Armscor’s 2011/12 annual report.

Declaring itself “not satisfied with Armscor’s management” of the offsets programme, the corporation’s new governing board states: “To date, Armscor cannot show the impact of DIP obligations in the SA economy.”

Restructured in April last year under the chairmanship of former Military Intelligence chief lieutenant general Maomela Moreti “Mojo” Motau, the new Armscor board has embarked on an aggressive repositioning of the corporation they inherited from former chairman and one-time North West premier Popo Molefe.

The Motau board assessment starkly contradicts the awarding – as of March 2012 – by Armscor officials of offset credits valued at R14.165 billion to weapons manufacturer “obligors”, in terms of the strategic defence packages (SDPs) signed off at the end of 1999.

Nor is there much more to come into the fiscus. At present, only one contractor still has DIP commitments outstanding – French manufacturer Thales (formerly Thomson CSF) which secured the contract for the combat suite on the SA Navy’s four frigates.

The report notes that obligations to the value of € 147.8 million (R946m) have yet to be discharged. It indicates that an extension has been negotiated until 2016 for final sign-off.

Along with national investment participation (NIP) programmes – ie investments in the general economy – the DIP investments were used by the government to justify the enormous expense of the weapons procurement programme (around R30bn in 1999, around R70bn today) – and to persuade the public the country would make money out of the arms deal.

Describing the offsets scenario developed by the government as the “guns and butter” argument, and “part of the public sweetening process” not taken seriously after contracts were awarded by either of the foreign suppliers of (sic)*1 Armscor, defence contractor and arms deal critic Richard Young said a “cursory review of the current health of the South African defence industry more than bears out the fruitlessness of the DIPS in the arms deal”.

As the deals were structured, payments for the new frigates, fighter and trainer jets, submarines and helicopters were to be pegged to the fulfilment of NIP and DIP investments.

But earlier this year it emerged from figures released by the Department of Trade and Industry that, though duly signed off by South African officials, the NIP programme had, in reality, fallen woefully short of projections.

Slated to benefit the economy to the tune of around R110bn, and to generate 65 000 jobs, the NIP programme had delivered just over R6bn in actual investment in a decade, and created somewhat fewer than 14 000 new jobs.

Although Armscor remains non-committal on the particulars, the Armscor board’s commentary appears to mirror that of the Department of Trade and Industry.

Responding to questions from Weekend Argus, Armscor identified two primary categories of DIP offsets awarded by the officials responsible: technology transfers – accounting for R4bn, and export sales – R9.9bn.

In both cases, the actual benefits appear to have been questionable.

The Armscor report notes that in the context of the SDP, offset credits were awarded against export orders – that is to say, contracts for South African companies to produce components for overseas counterparts, or sell armaments (like Rooivalk helicopters) to overseas buyers in deals set up by arms deal obligors.

In several instances on record, such deals fell through before benefits would accrue to the economy, but, apparently after more or less extravagant offset credits were awarded.

In the light of this experience, the new board specifies that subsequent to Armscor’s experience of the arms deal, offset credits are to be granted only “once sustainability can be demonstrated by means of follow-up business”.

As early as November 2004, Victor Moche, former chief executive of Denel – the state-owned armaments manufacturer where the bulk of the DIP business was done – complained to a parliamentary committee that DIP deals had been foisted on Denel, and that at least 80 percent of the deals in question were running at a loss to the SA partner.

He later amended the estimate of loss-making partnerships to “practically 100 percent”.

In several other cases, where such orders did in fact come to fruition, the obligor contractor was allowed to manoeuvre itself into a position to buy a controlling interest in the South African defence manufacturer in question – and thereby apportion to itself and to overseas economies the lion’s share of the benefits and profits.

French manufacturer Thomson CSF (now Thales), for example, was in a position to doubly benefit from technology transfers and specialist training – earning DIP credits, but at the same time holding a controlling 60 percent share in African Defence Systems, the beneficiary of the skills transfers.

The other 40 percent is shared between Schabir Shaik’s Nkobi holdings and Futuristic Business Solutions, another entity which featured prominently in arms deal corruption investigations.

Another beneficiary of DIP skills transfer programmes was the Midrand-based Aerospace Monitoring and Systems (AMS) which, in the mid-2000s, developed strategic partnerships with three of the successful arms deal contractors – Thales, UK manufacturer BAE Systems, and European Aeronautics Defence and Space Company.

By 2006, the benefits to the South African economy became increasingly remote after the company was acquired by Saab Grintek Defence (Pty) Ltd (itself the site of a buyout of South Africa’s Grintek by the Swedish Saab).

The company is now, according to its website, “part of Saab Avitronics, a business unit focusing on avionics and electronic warfare systems which already has operations in both Sweden and South Africa”.

Commenting on the revelations, DA spokesman on defence David Maynier noted that the Armscor report marked “the first official statement indicating that there was something seriously wrong with the arms deal DIPs”.

“One has to wonder why Armscor has been silent for so long. Perhaps, with the arms deal commission looming, it has decided to air some of its dirty linen,” Maynier suggested.

Meanwhile, Weekend Argus has confirmed that Armscor has networked on the issue with the Jacob Zuma-appointed Seriti Commission of Inquiry.

“Copies of all documents in the possession of Armscor that relate to the special defence packages were handed to the commission as requested,” spokeswoman Daphney Chuma said.

But many observers believe it could be too late.

As Young put it: “The family silver has been pawned.”

With acknowledgement to Ivor Powell and Weekend Argus.

The current state of SADI (South African Defence Industries) :

  • Denel sold its optronics business to Zeiss;

  • Denel sold part of its munitions business to Rheinmetall;

  • Denel sold part of its aero business to Saab Aerostructures;

  • Denel is still effectively bankrupt without begging the treasury annually;

  • ATE even after its R500 million Arms Deal contract from BAE Systems is in business rescue;

  • ADS changed its name to Thint South Africa, then to Thales Defence Systems (TDS), then to Thales South Africa Systems (TSAS), its defence business is a shadow of its former glory;

  • Grinaker Avitronics was sold to Saab;

  • Saab Communications sold its business to Reutech;

  • Saab is downsizing and possibly largely pulling out of the country;

  • Reumech OMC was acquired by corruption giant British Aerospace.

And if SADI doesn't get some fresh orders soon it's only going to get worse.

If fact it's going to see its arse.

As a letter for the Acting General Manager: Acquisition of Arms said this last fortnight :

"In pursuance of its responsibility to ensure the continued survival of strategic capabilities within the South African Defence Industry, the Armscor Board of Directors has resolved to undertake an assessment of the status of suppliers and to gain better information on the financial implication of sustaining identified critical capabilities in industry.

In this regard, you are requested to complete the subsequent questionnaire as accurately as possible in order to allow us to update the industry database with the relevant information that is deemed to be imperative to allow the Armscor Board of Directors to make informed decisions with respect to the level of contracting that is required to sustain strategic capabilities within the industry."

Without a hurried increase in this level of contracting, there is not going to be survival*.

As many observers put it, it could be too late.

As Young put it: “The family silver has been pawned.”

*1      "foreign suppliers or Armscor".

*2      This is part of a deliberate stratagem, to finish off the SADI, get the main business into foreign hands and then reap the local participation stipulations.

Great business if one can get it.