Stefaans Brmmer
Two of the main contracts in South Africa’s R66-billion arms deal submarines and corvettes from German consortia are open to challenge: they were awarded largely on the strength of pie-in-the-sky investment promises.
The joint investigation report on the arms deal released to Parliament last week points to serious procedural and technical irregularities in the way the German Frigate Consortium and the German Submarine Consortium won the tenders to supply four corvette patrol vessels and three submarines.
But the report remains strangely silent on the fact that arguably the single most important factor that helped the Germans win their bids is now worth a fraction of its former value. Both consortia promised, as part of their countertrade obligations, to invest heavily at the proposed Coega industrial development zone in the Eastern Cape. The development is a pet project of the Department of Trade and Industry, which scored the countertrade proposals of bidders when tenders were judged in 1998. The department valued the proposed Coega investments highly.
Now, more than three years later, Coega remains little more than a grandiose dream and the Germans seem unlikely to fulfil more than a small part of their promises there. The Coega Development Corporation, the state body created to develop the zone and chaired by President Thabo Mbeki’s former econo-mics adviser, Moss Ngoasheng, admitted as much earlier this month.
In a faxed reply to questions from the Rhodes University-based Public Service Accountability Monitor, the corporation said it “has not confirmed any commitments to investments in the Coega project” and that “there have been no contracts signed which would secure [arms countertrade] investments”.
What the German Submarine Consortium had going for it during the tender process was a commitment from German steel group Ferrostaal to help build a R6,5-billion integrated steel plant at Coega although this was later revised down to a R1,2-billion steel mill. And Thyssen, one of the companies in the German Frigate Consortium, promised a R1,5-billion galvanised steel plant.
Business Day reported this week that Ferrostaal’s oft-revised and downscaled plans now stood at two “downstream” stainless steel plants worth a combined R860-million, with only one likely to be built at Coega.
Arms companies that renege on countertrade promises are liable to a fine equal to 10% of the arms contract value, a figure criticised by many as too low to be an effective deterrent. They may also be given approval to substitute alternative investments. Ferrostaal this week trumpeted its intention to invest in a condom factory in East London in partnership with, among others, Zanele Mbeki’s Women’s Development Bank.
Thyssen is also unlikely to follow through on its investment at Coega.
But why was Coega so crucial to the success of both German consortia’s arms bids?
Corvettes: The arms report shows that Spain’s Bazan would have beaten the German Frigate Consortium hands down were it not for the high scores the Department of Trade and Industry awarded to the German consortium for the non-defence industrial participation (NIP) component of its bid, which included the proposed Coega investment. NIPs and DIPs the latter referring to defence industrial participation, or the extent of collaboration with local defence companies together make up the countertrade component of a bid.
The report says Bazan offered the lowest price (R1-billion less than the German consortium’s R8,5-billion); it scored the highest in military value and DIP; and it offered a better financing deal than the Germans. “The [German consortium], however, was nominated the preferred bidder on the basis of their NIP offer.”
The rand value of Bazan and the German consortium’s NIP offers were roughly the same. But somehow the trade and industry department awarded a score more than twice as high to the Germans for their NIP projects a significant part of which would have been Coega and this allowed the Germans to overtake Bazan in the total evaluation.
The arms report, in a surprisingly cursory look at this single factor that determined the outcome of the corvette bid, states that during the arms investigation the trade and industry department could produce no “approved value system” to justify how it had arrived at the “multipliers”, which scored the German NIP so much higher than that of its Spanish competitor.
Elsewhere in the report, however, it is clear that the department determined the multipliers largely on its assessment of the strategic value of any particular NIP if it thought Coega was of more such value, it would apply a greater multiplier.
Submarines: The arms report documents a litany of mathematical errors, among other irregularities, that unfairly advantaged the German Submarine Consortium. The arms investigators recalculated the department’s scoring. They found that Kockums, the Swedish bidder that came second, should have been awarded a combined NIP and DIP score 11% lower than the German consortium and not the 30% lower the trade and industry department determined.
The report says these miscalculations alone were not enough to overturn the overall evaluation of the bids but that tells only part of the story. As in the corvette tender, Coega weighed heavily.
In this case the arms report gives more detail: it shows that by far the largest portion of the German NIP offer was the proposed steel plant at Coega and the department multiplied the Coega rand value by 23 out of a possible 25, way above the multipliers that were awarded to most projects offered by competing bidders.
The report states that this high multiplier was arrived at, among other reasons, because of the “new technology” the Coega steel plant would have used, but that this technology was later withdrawn and that “renegotiation of the NIP commitments has taken place” presumably a reference to Ferrostaal’s retreat from Coega. Consequently the “score for strategic considerations appears to be rated highly in comparison with other bidders”.
To make matters worse, the arms report refers to an international consultant’s report found at the Department of Finance that warned even before the arms contracts were finally approved by the Cabinet in September 1999 that the Coega steel project was “risky”.
In retrospect the consultant’s assessment was spot-on. Coega is not yet off the ground and has no firm investors. Why did the trade and industry department rate these promised yet largely dud investments so highly? That remains in the realm of speculation, but that Coega was the department’s pet project is no secret.
Colm Allan, director of the Public Service Accountability Monitor, says that in August 1998, well before the Cabinet first identified the preferred arms suppliers in November of that year, the trade and industry department was actively selling Coega on the basis of the German proposals. Paul Jourdan, then the department’s director of special projects and now a Coega director, listed both Ferrostaal and Thyssen’s plants as “key projects” for Coega.
And, Allan charges, both German consortia “deftly exploited this advantage by both submitting hugely exaggerated proposals”. In May 1999, with the final Cabinet approval of the arms contracts still four months away, a Ferrostaal project manager told the press that all he needed to start construction was the signatures on the deal: “I’m ready to go. But I have to keep my foot on the brake until the military … deal is signed.”
Two years after the deals were signed nothing has transpired at Coega yet both German arms consortia have their slice of the arms cake.
Trade and industry department representative Edwin Smith commented: “The way the [countertrade] offsets worked is that they had to be economically viable; they have to fly.” If market conditions are “not favourable” at, for example, Coega, bidders are allowed to substitute their promises with projects elsewhere.
Said Smith: “You must look at Coega in terms of an industrial strategy Coega is not the only industrial development zone [and] the difficulty is that people are looking at it in isolation.”