A condom project touted this week as one of the most ”innovative” to stem from the offset programme linked to South Africa’s multibillion-rand arms deal does not yet exist and has yet to create a single job.
The purported East London factory, Condomie, was put on ice in April, the Mail & Guardian has established. Yet researcher David Botha says in a report, Offsetting the Costs of South Africa’s Strategic Defence Package, that ”a plant for the manufacture of high-quality condoms has created 520 new jobs in the Eastern Cape”.
Botha’s research was presented this week at a meeting in Pretoria packed with government and industry officials beleaguered by public criticism of the arms deal.
Auditor General Shauket Fakie and officials of the departments of trade and industry and defence attended to buttress Botha’s view that the arms offsets are yielding their promised fruit.
”I am impressed with the results being achieved,” said Botha, a former Armscor manager who based his research findings on government data. ”Here’s a tremendous story and government’s not telling it.”
Condomie, a German manufacturer of ”erection attire” planned the condom factory as a project with Ferrostaal, which is supplying the submarines that form part of the arms deal.
Previous investigations by the M&G have revealed similar disjunctions between claim and reality.
South Africa paid $3,9-billion for four corvettes from the German Frigate Consortiums; three submarines from Ferrostaal; 28 Gripen fighters from BAE/Saab; 24 Hawk jet trainers from BAE; and 25 light utility helicopters from Agusta. In return, it signed offset contracts valued at $16,6-billion.
Direct industrial participation (DIP) in the defence industry by winning bidders makes up $2,4-billion, while indirect participation in the rest of the economy, called national industrial participation (NIP), comprises the rest.
Government and industry representatives claim to have negotiated countertrade benefits four times the value of the signed contracts. Botha quotes an industry source as saying: ”Proportionally, it is the largest offset clause in defence industry history.”
Critics say achieving the figures will require a task equalling the miracle of the loaves and fishes. Offsets are notorious for fizzling out.
Botha’s research found that by end-March contractors had met more than a quarter (26,5%) of their commitments to the defence industry, valued at R3,7-billion.
”Orders have been placed with 38 local companies, and the estimated work content of the contracts placed is 3,6-million man-hours, or an estimated 1 677 jobs,” he says.
While the first tranche of the offsets has been delivered quite quickly, Botha says, other contracts are likely to come more slowly. ”It will become progressively more difficult to find acceptable projects as time goes by.”
Information on the NIPs, the more substantial and difficult part of the offset package, is sketchy in Botha’s research. The government’s team had approved 45 projects by end-March, but not many have moved beyond the drawing board.
”These projects are expected to generate credits to the value of $6-billion over between seven and 11 years. Thus over 40% of the total commitment of $14-billion has already been approved after only three years,” Botha says.
Big projects listed in the research include a solar-panel manufacturing plant in the Western Cape with projected revenues of $20-million a year; Filk Gold Chains in Cape Town, with revenue of about $26-million a year and employing 50; and assistance to agricultural and floricultural exporters in the Western Cape that has created 1 500 jobs.
A beneficiation project with Harmony gold mine in the Free State is projected to raise $37-million in jewellery sales by April next year.
It costs between R600 000 and R1-million to create a job in the high-tech defence industry, so NIP is where the arms deal must deliver jobs. Professor Paul Dunne, in a forthcoming book, argues that the projection of 65 000 jobs from the arms deal is ambitious and that international research shows that downstream employment creation is limited.
The key weakness of the offset programme is the absence of independent monitoring and detailed accounting. Neither Botha’s paper nor the Department of Trade and Industry has provided details of how offset credits are calculated. Parliament’s trade and industry committee lacks the capacity to audit the claims, while the auditor general will only do so when the first ”milestone” for offset fulfilment falls due next year.
To date Fakie has audited only the systems and procedures in place at the trade and industry department, not the offsets themselves. He found these to be inadequate, while Botha conceded that the high turnover in the department’s industrial participation secretariat was a problem.
On the face of it, the projects mesh with industrial strategy — to support value-added industries and industrial growth in the poorest areas.
But under the rules, offsets can be given only if the economic activity is clearly generated by the offset obligation and would not have happened anyway. The related concept of ”additionality” means it must be new business.
In practice, this assessment is extremely tough to make. ”Proving causality and additionality is difficult. The lack thereof has given industrial participation a bad name,” says Botha.
M&G research last year showed that many projects do not satisfy these two conditions.
At Global Forest Products in Sabie, Mpumalanga, an Anglo-American expansion project announced with no reference to offsets later became an offset project for BAE Systems.
BAE’s involvement in the expansion of Dunlop Tyres is another case of piggybacking on existing expansion projects without any obvious added value.
Also problematic is the rule that companies can claim full offset credits for investments they claim to have ”facilitated”. Many projects are majority-funded by the Industrial Development Corporation or local banks, with the foreign arms company investing little. At Dunlop, for example, the major portion of the investment was provided by Citibank, with BAE emerging as a small ”secondary lender”.
Without a project-by-project breakdown of the sources of investment, how much has come from each source and the basis on which ”facilitation” is claimed, it is impossible to evaluate the offsets’ true economic benefits.
Another key flaw in the rules is that export credits are claimed on the full value of the export rather than on the value added. For a high-value commodity like gold, this can lead to bloated calculations.
A BAE investment of a few million dollars to upgrade the Harmony gold refinery could have covered the bulk of its multibillion-dollar offset obligations. Only the Treasury’s intervention put a cap on this scheme.