Highlights from the Department of Finance briefing presented to Cabinet ministers in August 1999:
l “The South African government is fully exposed to the depreciation of the rand against foreign currencies, which account for about 75% of the total purchase amount. There is no effective means of hedging the currency risk inherent in the procurements.”
l “There is clearly a risk that currency depreciation could be more rapid than anticipated, either on an ongoing basis or due to a sudden shock such as that precipitated by the 1998 Asian crisis. Any deviations from these assumptions are for the account of the government, with the obvious implication that the costs of the packages and their financing could be considerably higher than expected.”
l “The defence procurements are associated with significant foreign exchange and interest rate risks. It is clear that these costs, particularly in the currency market, can be very large.”
l “The intention of the [counter-trade] programmes is to offset or mitigate the negative effects of the arms procurements. To the extent that these projects fail to deliver their expected results, the negative economic effects of the procurement will be exacerbated.”
Elsewhere, the report warns the trade offsets cannot be guaranteed. Despite knowing this, in September 1999, after approving the arms package, Cabinet told the public it was “fully satisfied regarding the offset arrangements attached to this package, which will benefit the economy and advance the socio-economic interests of the country.”
l “The proposed armaments procurements are distinguished from other government procurements by four key characteristics. The sums involved are extremely large; they involve fixed contractual commitments, extending over long periods with high breakage costs; they are heavily import biased; and their costs are offset by a set of associated activities [the counter trade offsets] which cannot be guaranteed. These characteristics create a set of important and unique risks for government.”
l “The additional expenditure implied by the [arms procurement] will consume a significant proportion of the additional fiscal resources available to the government in the short- and medium-term future … For example in 2000/01 the R16,5-billion expenditure level [the lowest on offer, which was turned down in favour of a much bigger picture] will consume 73% of the increase in government expenditure over that of 1999/2000.”
l The briefing explained that the government would fund the deal by entering into a range of loans separate from its normal borrowing. These were to be gradually paid back by the Department of Defence. The briefing said both the depreciation of the rand and increases in interest rates for the loans meant higher rand costs.