The ‘countertrade’ component of South Africa’s weapons package is in danger of falling through
Ivor Powell
Promises by foreign companies and governments to organise substantial investments in the South African economy in exchange for weapons contracts are going sour – before the government’s controversial R32-billion arms deal is even finalised.
Government sources defending the weapons procurement programme have claimed that investment guarantees concluded around the arms deals will create 65E000 jobs and generate R110-billion for the South African economy – a claim that was central to the public relations spin required for the deal to go through.
However, at least one part of the weapons deal has been put on ice after foreign investors baulked at offset guarantees and, in another instance, only a quarter of the promised investment has thus far been tied down.
It is understood that the purchase of three submarines from a German submarine consortium, led by manu-facturing giant Thyssen, has been put on hold until the German principals can meet offset guarantees to build a stainless steel factory at the new proposed deep-water harbour of Coega in the Eastern Cape.
The impasse follows a refusal by senior officials in the Department of Trade and Industry to sign off the deal after the weapons suppliers failed to guarantee productivity targets at the proposed manufacturing plant.
The immediate bone of contention was the demand by senior department officials that the investors should underwrite and guarantee earlier undertakings that the plant would sell $1-billion in the first year of operation. The stipulation was prompted by fears that a worldwide glut in stainless steel production could turn the plant into a white elephant before it was even built – and the department was demanding that the investors put their money where their mouths had been.
But in the event the Germans wanted to find a third option: proposing a separate deal with a Mozambican-based company which, in conjunction with South Africa’s Columbus Stainless Steel, was prepared to guarantee sales of $750-million. This was rejected by the department, which was unconvinced of the bona fides of the German investors and the Mozambican outfit.
According to figures released in late 1998 by the government, the submarine deal – and its offsets – were to have created more than 16E000 jobs. In terms of the “non-defence industrial participation agreements”, the German weapons sale, which also included the purchase of four frigates (earlier designated as the smaller Corvettes), was supposed to have generated R30-billion for the South African economy.
Another deal running into difficulties is that with the British and Swedish governments around the purchase of 28 Gripen fighters and 24 Hawk aircraft trainers. After the announcement that a British trouble-shooter would be brought in to salvage the deal, the Mail & Guardian has learned that only 25% of the R55-billion offsets promised by the British and Swedish governments has yet been realised.
Confidential department sources said that while nearly the entire commitment to have materialised thus far is from Sweden, the minor partner in the deal, even this has been jeopardised by the recent collapse of the business empire of Zimbabwean businessman Billy Rautenbach. Rautenbach (who is facing prosecution by the National Directorate of Public Prosecutions after his assets were seized late last year) was reportedly integrally involved in the offset programme, which had to be revived after he left the Volvo franchise in financial ruin.
Meanwhile it appears that, as the purchaser, South Africa could inadvertently be subsidising the cost of the offsets from the outset.
Terry Crawford Browne of moni-toring agency Economists Allied for Arms Reduction, said this week that prices being paid by South Africa for the Gripen fighters ($65-million an aircraft) are wildly inflated, with the benchmark price standing at $32-million, just under half of that amount.
Despite the leaks, however, little has yet been revealed about what offset deals are actually in place, with government representatives claiming that commercial confidentiality agreements would be breached if the public were to be informed.
Thus far the government has only made public a wish list of possible offset commitments which weapons sellers mooted (without being tied down to them) during negotiations aimed at securing the supply contracts.
But critics of the process note that the practice of demanding investment offsets against foreign trade is being discredited internationally – with the European Union, the United States, Canada and other developed nations having agreed to a ban on investment offsets in relation to trade in deals among themselves. The reason is understood to be because offsets have, in the past, been little more than a recipe for corruption.
More recently the US Department of Commerce proposed a prohibition of offsets in relation to all trade, including armaments, between the EU and the US.