Howard Barrell and Barry Streek
South Africa’s reduced R21,3-billion international arms deal represents an uneasy compromise between government ministers who have been arguing over the size of the deal for the past year.
The ministries of defence and of trade and industry, enthusiastic supporters of the deal, came under heavy pressure from Minister of Finance Trevor Manuel and his senior officials.
Manuel was determined to ensure that the conservative fiscal policies he and his department have fought hard to put in place in recent years were not disturbed to pay for the armaments. Finance did not want to have to increase government borrowing to pay for the deal.
Other pressures for reduction in the size of the deal came from the major spending and delivery ministries, such as education, health and welfare, which feared the deal could eat substantially into their own budgets.
Significantly, the government claimed in a briefing paper on the deal, released on Thursday, that it would not cause the state to exceed its budget deficit target in coming years or raise its interest burden.
The government also stated, delicately, that it did not expect the deal to cut into the budget allocations of other departments “excessively”.
South Africa is buying three submarines and four corvettes from Germany, 30 light utility helicopters from Italy, nine dual-seater Gripen fighter aircraft from a joint Swedish-British consortium and 12 Hawk trainer aircraft from Britain at a total cost of R21,3-billion.
If South Africa exercises its options to buy a further 19 Gripen fighters and 12 Hawks – which Minister of Defence Mosioua Lekota said it “most probably” would – the total cost of the deal will rise to R29,9-billion.
Minister of Trade and Industry Alec Erwin was a strong, though qualified, supporter of the deal, seeing it as an opportunity to draw billions in fixed investment into the country from the successful arms suppliers.
But the Ministry of Finance and a number of other economic analysts doubted that much of the offset investment into South Africa promised by the successful bidders would materialise. The government admitted as much on Thursday at the briefing on the deal in Cape Town.
It said in a paper: “Government is naturally aware that the risk of the Defence Industrial Participation and Non- defence Industrial Participation programmes not materialising fully is intrinsic to the procurement.”
Similar offset deals reached between smaller countries and the major arms producing nations have more often than not failed to produce the benefits promised. An exception was Australia which – apparently because of its relatively sophisticated industrial base – managed to ensure that two American guided-missile frigates and ANZAC Class frigates were built in Australia, and that 21 Hawk Lead In Fighter trainers were assembled in Australia. In the course of a major international defence procurement programme in 1996/97, Australia managed to spend more than half of its R10-billion on major and minor capital equipment inside Australia.
The South African offset deal in industrial participation projects is supposed to result in total contracted commitments of R104-billion.
The deal takes three forms:
l Defence-related offsets, R14,5- billion, with local defence firms earning over R4-billion through direct participation in the production of aircraft and ships.
Suppliers will also transfer technology worth about R3-billion in royalties and licence agreements to South African firms and will direct export orders to South African firms for more than R7-billion.
l Counter-purchase by the defence equipment suppliers of South African goods, worth R31-billion, including automotive components, furniture, fabricated metal goods including railway wagons and electronic goods.
l Foreign investment in South Africa by companies associated with the equipment suppliers, estimated at R24-billion.
The investments are supposed to include projects for a steel minimill to make autobody steel for cars for export and galvanised sheet which at present is being imported; the production of automotive crankshafts at Atlantis, a stainless steel plant; a steel minimill to produce special steels for tool, bearing, engineering and forging steels; manufacture of gold chains by a gold manufacture jewellery firm; the manufacture of mohair products; a Volvo purchasing organisation to source component parts including alloy wheels, starter motors, wiper motors and catalytic converters; a manufacturing facility, originally planned for Hungary, to produce base stations for use in extreme climatic conditions; a fish- processing facility; a programme to increase furniture purchases in South Africa for Sweden; and the production of circuit breakers.
Various other projects are under consideration, including the manufacture of kitchen sinks from stainless steel, the manufacture of cutlery, an ostrich skin tannery, a British Aerospace Industrial Park, an industrial agri- business park, and other manufacturing projects.