Mail & Guardian reporters
The Cabinet signed off South Africa’s R50-billion arms deal despite being warned of serious repercussions the buying splurge could have on the country’s economy.
In August 1999, the Department of Finance stopped just short of advising the Cabinet not to proceed with the package on the scale proposed because of the risks it could pose to macroeconomic stability.
The department presented a Cabinet subcommittee, chaired by President Thabo Mbeki, with a comprehensive risk analysis. The study, which has never been made public, shows a discrepancy between the government’s reassurances on the deal’s economic impact and the scenario sketched by the briefing.
The government appears to have specifically skirted the way the cost of the package can still escalate, and how the costs of the deal are vulnerable to vagaries of currency markets.
The briefing shows that apart from the allegations of impropriety stemming from the deal recently dominating public debate, another scandal is brewing over the way the government decided on the multi-billion rand expenditure.
The African National Congress government’s defence spending plans have been controversial from as far back as 1995, when the guns versus butter debate began. But the briefing Cabinet received gives unprecedented insight into the extraordinary decision to spend at the level Cabinet decided.
The government has consistently fudged the issue of the cost of the package. The Minister of Finance, Trevor Manuel, has even criticised Parliament’s standing committee on public accounts for suggesting last year the figure had risen from the initial R29,9-billion to R43-billion despite the fact that the national budget in March also used the latter figure.
The government’s suggestion has been that the figure that matters is the cost of the equipment at the time of signing. It has subsequently emerged that the defence department has a computer model that projects the cost of the package on a regular basis according to the fluctuations of the rand. The Mail & Guardian reported two weeks ago that the latest figure was R50-billion.
The finance department briefing lays out the different levels of risk associated with various levels of possible arms expenditure. It was for Cabinet to decide on the size of the shopping basket. It went ahead and committed as much as R36-billion at the time of signing. At the time, however, a Cabinet statement told the public there were two cost options R21,3-billion and R29,9-billion. The study shows that the actual figures the Cabinet was working on were R25,4-billion and R36,5-billion. The study indicates the significant cost of the deal’s financing, which the government has consistently downplayed along with the currency risk.
Some government officials have gone on record saying they have hedged against the depreciation of the rand, the clear implication being that any weakening in the currency is not a problem. The finance department’s briefing shows that this is untrue; that the government could not afford to fully hedge, both because it would cost too much, but also because it would be seen to be betting on the decline of the rand. The document shows the department thinks the rand can only depreciate, going as low as R26 to the United States dollar by 2018, when South Africa will still be paying for the package.
Among other things, the briefing warns of the significant impact the arms acquisition deal could have on the budget deficit and on South Africa’s ability to borrow money. It says that when the deal kicked in, the budget deficit, which has been steadily shrinking as part of the government’s highly successful efforts to curb spending, was at risk of swelling an extra 1,25% of gross domestic product. The briefing stated:”The impact of this increase in the deficit will involve a significant alteration to the government’s deficit targets and, by implication, its macroeconomic strategy. The international and market reaction to this constitutes a potentially serious risk to government.”
The briefing raises serious questions as to how, at that time, the Cabinet could have justified such expenditure considering the challenges facing post-apartheid South Africa. The briefing contains many comparisons with other departments’ budgets. “Under the R25-billion scenario, for instance, the additional arms spending [the arms deal] is about the same as the current [annual] budget of the department of housing, about 50% more than the current investment in municipal infrastructure, and is roughly a third to half the budget of the department of education.”
The briefing nevertheless expressly states that it is not meant to persuade the Cabinet either way on the merits of the deal. But it is peppered with warnings, one example being: “The risks intrinsic to the procurement are substantial and require serious attention.” The briefing signals the threat the deal poses to the ANC government’s revered conservative macroeconomic policy: “The trade off here appears to be between the purchase of the strategic packages and the government’s macroeconomic strategy. To some degree, this is an accounting issue and further discussion on it is necessary before any final position can be taken. But at the end of the day there may not be too much room to manoeuvre.”
The government has sought to counter allegations that the country cannot afford such an extravagant package on the grounds that the “counter trade” deals that are part of the package essentially undertakings from foreign companies to invest in South Africa will provide a stimulus to the economy. The Ministry of Trade and Industry has been a particularly enthusiastic proponent of these deals.
The finance department’s analysis does not set much store by the “counter trade” deals, stating that there is no guarantee they will materialise. “The sums involved are extremely large … and their costs are offset by a set of associated activities which cannot be guaranteed.” Throughout, the briefing suggests the government consider spending less, concluding that even the smallest arms shopping basket on offer “may create a situation in which the government could be confronted by mounting economic fiscal and financial difficulties at some future point. Ultimately the decision about expenditure levels really constitutes a decision about the government’s appetite for risk.”
Reservations about the counter trade aspect of the package are not new. Even Jayendra Naidoo, the former unionist who was appointed by the president to steer the deal, told Parliament’s public accounts committee in October that the counter trade deals were meant as a “risk management exercise” and that it was questionable whether they would boost the economy. As for Manuel’s position on the deal, there has been widespread speculation that he has been one of government’s most vocal critics of the package.
In response to a parliamentary question by the Democratic Alliance’s Raenette Taljaard about the deal’s effect on the economy, the Office of the President last month referred to the finance department’s affordability study. It gave a selective and muted summary of the briefing that it would lead to slower growth until about 2005, and would initially have a negative impact on the balance of payments because of higher interest and import bills. The government’s communications service this week declined to formally release a copy of the briefing on the grounds that it was a “working document”. A government representative said the briefing had been forwarded to the investigation team probing the deal. Bulelani Ngcuka, the National Director of Public Prosecutions, whose office is part of the investigation team, has indicated that the probe includes an examination of the deal’s affordability. At the moment, Ngcuka is investigating together with the Office of the Auditor General and the Public Protector.
The chair of Parliament’s public accounts committee, Gavin Woods, said the report made it “difficult to understand why the Cabinet was not more cautioned”. Woods said there was now “huge public interest and concern” about the cost of the deal, adding there was now a danger of a situation in which the economy would be “tested with escalating costs that cannot be hidden”.
The finance department’s briefing study was produced in association with the International Offers Negotiating Team, a multi-departmental group composed of finance, trade and industry and defence officials.
The team’s primary responsibility was to negotiate final details of contracts after the preferred bidders had been selected by Cabinet in November 1998. But it also undertook the “affordability exercise”. High-level participants in this exercise were the Bureau for Economic Research (BER) at Stellenbosch University, Development Bank of Southern Africa economist Stephen Gelb, and Roland White of the finance department.
BER director Ben Smit this week said figures relating to the arms deal were fed into their macroeconomic models to determine the likely effect of different levels of expenditure. The results were conveyed to the DBSA’s Gelb. “We gave an input, and Gelb processed it.”
Gelb, who was drawn into the exercise by Naidoo, said this week: “It was an economic analysis of a major government expenditure programme, which happened to be arms … as is the case with any expenditure programme, we analysed the implications and assessed the risks very carefully. We took full account of the risks and presented [the results] to the political decision makers.”
Asked about the study’s conclusion that there were very high levels of risk attached to the higher levels of expenditure, he said: “You have to ask the decision makers why they took the decisions they took.”