/ 8 August 2002

The great arms for jobs sham

Minister of Trade and Industry Alec Erwin recently claimed South Africa was on target to achieve about $14-billion in trade and investment linked to the arms deal.

But the Mail&Guardian has discovered that billions of rands of exports claimed as offsets to balance the cost of the deal are made up of raw material exports that would have left the country anyway — and that many investment claims are hugely inflated.

As political parties prepare for a tough debate on the arms procurement saga in Parliament this week, the offset claims may emerge as the biggest scandal of the deal.

In 1998, when opposition parties, African National Congress members and NGOs raised concern about the cost of the weapons, the government touted the billions of rands in offsets, or counter-trade investments, attached to the deal.

The contract to buy jet trainers, fighters, corvettes, submarines and helicopters might carry a price tag of R30-billion (in 1998 rands), but it came with offset obligations worth R104-billion. About 86% of the offsets were in the non-defence sector in a move that was designed to give South African industry a massive boost.

Three years after the contracts kicked in many have been exposed as a sham, built on loopholes in the rules.

Perhaps the most outrageous example is the staggering offset figure claimed by BAe-Saab for their gold beneficiation project.

BAe-Saab sold South Africa Hawk trainers and Gripen fighters, together the biggest single contract, attracting $7,2-billion in National Industrial Participation (NIP) obligations.

NIPs are civilian offsets not linked to the local defence industry, which benefits from much smaller defence offsets.

According to official figures, BAe-Saab will invest a mere $70-million over the 11 years of the contract and on that basis claim a staggering $2,324-billion in offset credits — absolving themselves of roughly a third of their total obligation.

BAe-Saab can do this mainly by upgrading a gold refinery at the Harmony mine in the Free State.

The latest figures from the Department of Trade and Industry show that the claimed offset under the Harmony project has been reduced to $595-million, off a reduced investment of $42-million. Neither BAe spokesperson Linden Birns nor the department’s chief director, Lionel October, could explain the discrepancy in the figures, but the dramatic changes underline how arbitrary the process is.

South Africa doesn’t lack refining capacity: the extra gold to be refined at Harmony will be diverted from the available capacity at Rand Refinery. The Harmony refining process, developed by the parastatal Mintek, is slightly cheaper. But according to the rules developed by the Department of Trade and Industry, BAe-Saab are allowed to claim virtually the full $300 an ounce, not the value the refining adds of a few dollars an ounce.

Bernard Swanepoel, Harmony’s CEO, told Mining Weekly last year that the offset would fund an increase of refining capacity from 2,4-million ounces to 3,5-million ounces a year, along with proposed new value-adding technology capable of producing slightly more sophisticated gold products, such as wire, powder and gold strip.

The increased capacity alone would have accounted for the full BAe-Saab offset obligations within three years. A former Department of Trade and Industry employee told the M&G that the Department of Finance had stepped in to put a cap on the amount BAe-Saab could claim.

Another key weakness of the offset rules relates to the way investment is calculated. Only 30% of the claimed investment has to come from offshore, so many investments reflected in the Department of Trade and Industry figures in dollars are not bringing in much foreign exchange. Many are loans by local banks or the taxpayer-funded Industrial Development Corporation.

But if the arms company can argue that it facilitated the loans, the company can claim the full investment as “offset credits”, though it may have put in little money.

The Department of Trade and Industry is supposed to apply a test of causality and additionality to establish if the proposed project flows from the arms deal and was not in the pipeline. But this principle is crumbling as the department seeks to show it is producing results.

The Global Forest Products deal is a good example of how the supposed offset benefits are artificially inflated.

In December 2000 Anglo American established a joint venture called Global Forest Products between its subsidiary Mondi and a United States company called the Global Environmental Fund. Capital investment of $60-million was planned in Mondi’s Mpumulanga forests and sawmill operations. There was no mention of offsets or BAe.

Fast forward to last November and Minister of Defence Mosioua Lekota announces a $60-million investment in Global Forest Products by BAe as part of the offset programme — an intervention that “saved” the Sabie sawmill and its workers.

Erwin described the investment “as a clear demonstration of South Africa’s National Industrial Participation Policy’s ability to leverage economic benefits from the state’s procurement of goods and services”.

But the plan was already under way and much of the finance was provided by the Industrial Development Corporation. BAe reportedly put in only $6-million. Nevertheless, accord- ing to the department’s figures, BAe-Saab will be claiming offset credits of $90-million of investment and $81-million for the export of timber products.

Birns, BAe’s representative, justifies this by claiming that BAe was able to provide capital leverage without which Anglo “would not have been able to raise sufficient financing”.

A similar principle is involved in the case of Dunlop Tyres, where BAe is helping to recapitalise a local plant and is claiming millions of dollars in export credits.

Another example is the $120-million investment claimed on behalf of Swedish Match, which bought into two South African tobacco companies. Again there was no mention that this investment was part of the arms deal when Swedish Match bought into Leonard Dingler in 1999 and also bought Best Blend from the Rembrandt Group.

Now BAe says it has taken “a small equity position” in the deal and is claiming the full $120-million as an offset credit.

Other companies have also made extraordinary claims. On the basis of a $6-million investment in upgrading a silicon panel plant in Cape Town, Thales is claiming export credits of $105-million over seven years though the factory adds only about 20% value to an imported product before re-export. Thales is part of the consortium providing corvettes for the navy.

Offset obligations are notoriously difficult to monitor and police, so offset trade is frowned on by the World Trade Organisation. A recent study by Transparency International called for offsets to be banned, citing the potential for corruption they entailed.

“In the non-comparable, non-transparent arrangements that surround them, the potential for corrupt manoeuvres is extensive,” the study noted. “Companies use offsets as an alternative inducement to reducing prices. Equally, importing governments can use them as alternative justification for awarding the contract to the more expensive bidder”, as happened here in the case of the BAe Hawk jet trainer.

“The combination of these factors can create situations where off- set arrangements conceal hefty commissions.”