Publication: Cape Argus Issued: Date: 2002-02-26 Reporter: Charles Phahlane and Jeremy Michaels Editor:

The Public has a Right to Know - Woods


Publication  Cape Argus
Date 2002-02-26
Reporter Charles Phahlane and Jeremy Michaels
Web Link


Standing Committee on Public Accounts chairman Gavin Woods has slammed the Joint Investigation Team report on the arms deal. Here he gives his assessment of the eight issues raised by Scopa that he argues the team failed to address adequately and hence left the public in the dark about the allegations raised concerning the arms deal.

Cost of the strategic package

Scopaís primary concern was with the substantial increase in the overall cost of the arms package and the possibility of this increasing further, says Gavin Woods.

This concern was motivated by the serious implications that the rising cost of the arms deal has for social spending, the fiscus and the macro-economy.

The Joint Investigating Team promised in its introduction to investigate "the full financial and fiscal implications of the SDP." But instead, he says, it merely confirmed what Scopa had identified in its report. Their investigation was expected to look at issues including the contract price, statutory costs like insurance and freight, project management costs, escalations, finance costs and higher maintenance costs which JIT said were the "biggest cost challenge", operation costs and currency adjustments.

Trevor Manuelís Budget Review released last week says the total cost figure is R52.7-billion which excludes many cost items such as the estimated R20bn for debt servicing, notes Woods. The JIT was expected to look at the implications of the rising cost, and to have sought governmentís thinking on how they might manage such a situation if it arose.

While Cabinet stretched every aspect of affordability to arrive at R30-billion, how can the fiscus afford at least double that cost, asks Woods. "Through curtailed social spending, loans, higher taxes?"

The 30:110 (cost to industrial participation value) proportions which government said were necessary to render the SDP economically neutral are now closer to 60:110 and rising.

"There will be implications and the public has a right to know what these might be," Woods says.

Conflicts of interest

The public accounts committee had expressed concern about possible conflict of interest and "too great a concentration of influence", as well as the possibilities for improper influence having been exerted in the selection of contractors in the arms deal.

These concerns could bring into question the integrity of the arms deal and centre on the possibility that there were opportunities for individuals to dishonestly benefit at the stateís cost," he says.

The JITís investigation had listed all the positions held in the arms deal structures by the defence departmentís head of procurements (HoP), Chippie Shaik, as well as all the business interests of his brother, Shabir Shaik. But the investigators had failed to "establish a more comprehensive view" of the HoPís "staggering" appearance "at virtually every level of the selection process," and had also been "unable to attribute blame" for who else was responsible for "this highly irregular state of affairs."

"The JIT report, while doing some good work in cataloguing the conflict of interest and potential conflict of interest ... fails, through poor investigative quality of its work to deliver answers to the questions of parliament and the public, "Woods concludes.

Offsets and industrial participation

The public was led to believe that the decision to purchase arms was motivated by the industrial participation programme which would deliver jobs and strengthen the manufacturing sector, says Woods. Government says the R30bn cost of the arms package will result in IP offsets of R110bn.

Among issues Scopa was concerned about were: the need to verify the makeup of the IP amounts, uncertainties as to the enforcement of these amounts and attainment of these promised offsets, the exceptionally high IP demands on suppliers and the seemingly low penalties, the unconditional release from IP obligations once a penalty is paid, the possible over-optimistic estimations of jobs and the IPís defiance of business logic.

JIT simply discarded most of the 14 concerns raised and the four it looked at were not satisfactorily addressed, says Woods. Also, JIT addressed the Defence IPs (for which there would be no payment if they were not completed) and not the non-defence IPs which comprise 86% of Ips. International practice is to have 85% DIPs and 15% NIPs because DIPs are easier to enforce than NIPs, says Woods.

The ration of 3.5:1 (value of the Ips to cost of arms) was the highest in the world and should have raised alarm bells as to whether it was sustainable or even possible.

"The likelihood of it all is that many of the promised IPs will not turn out as hoped and given governmentís potential embarrassment it is equally as unlikely that the public will ever know of any serious failing in this regard," Wood says.

Progress on IPs could prove impossible to record and monitor after the easier IPs had been forthcoming and the more difficult IPs have to be met.

"The sensible thing for JIT to have done would have been to closely evaluate the viability of the IPs from the business plans tht suppliers were obliged to submit rather than to have resigned itself to a Ďlets wait and seeí approach," Woods says.

Selection of suppliers and awarding of contracts

The question here is why was the evaluation system for the LIFT (Lead-In Flight Trainer) changed after the submission of tenders, and was there the possibility of price loading in the case of the Gripens and Hawks, says Woods. Scopa was concerned about the appropriateness of the policies and procedures.

Scopa wanted to establish if government had put sufficient procedures in place to limit the risk of inappropriate actions and decisions.

JIT conscientiously and sequentially documented the historical process, Woods says, but failed in the analysis of the facts established. It understated serious actions and tried to justify shortcomings found, he charges.

The JIT report listed well over 50 instances of non-compliance in the awarding of the 5 prime contracts. These instances of non-compliance broken - such as missing documents and missing records of meetings, substantial inconsistencies in the evaluation process, changes to criteria at advanced stages - are considered to be fundamental to good practice.

"These many failings go beyond being simply being unacceptable. These would in fact represent a crisis of credibility for procurement transactions anywhere else, and would see those responsible for such flagrant disregard of the rules being the subject of considerable sanction," Woods says. But in no case does JIT criticise anyone for having departed from the rules. Te auditor-general normally reports in strong terms on far less significant acts of non-compliance by government departments in their ordinary course of business.

In the case of LIFT JIT seemed to run out of "reasons" to rationalise the departures form the rules and ends up saying it was ultimately Cabinetís decision to do whatever it wanted to do he says.

"This is a shocking position to take especially as it dismisses the need to establish the truth ... Never once do they even hint at possible irresponsibility or incompetence of the decision makers," Woods says.

Regarding the Hawk and Gripen, JIT said no evidence was found to suggest that South Africa was paying more than the normal basic unit price for the aircrafts. But since South Africa was the only country outside Sweden to buy the Gripens where did JIT find the "normal" basic unit price to compare against, Woods asks.

Selection of sub-contractors

Scopa was concerned about the role played by influential parties in the selection of sub-contractors; that government had no influence in the appointment of sub-contractors; the basis on which comparisons were made between competing products; and the basis upon which the risk for a particular South African product was calculated.

These issues were important to examine "to establish whether there was any improper influence from individuals" from within the procurement process and to answer questions about "why a seemingly acceptable South African product was rejected in favour of a more expensive foreign one."

The JITís investigation into governmentís involvement in the selection of sub-contractors had been sufficiently informative and provided answers to general questions.

However, the investigation team did not adequately answer questions relating to a Cape Town-based computer company which had initially been promised a contract to supply computer systems for the Corvettes, but was then turned down, he says.

Notwithstanding denials from the Department of Defence, proof had been "forthcoming that government (on occasions via Armscor)did intervene and even instruct prime contractors regarding the selection of sub-contractors."

This was out of line with Armscor policy.

The JITís finding that it was not feasible to pursue an explanation as to why "risk loading" had put the company out of contention was "disappointing", especially since there was a clear local interest and "associated allegations of underhanded manipulation."

"There is something wrong if such explanations are just Ďnot feasible to pursueí..." says Woods.

Responsibilities of cabinet

It was "appropriate to question whether the decision-makers acted responsibly and competently," especially given the JITís "frequent and unsolicited defence of their involvement," according to Woods.

Scopaís initial investigations had found that an Affordability Team had put cabinet in a position to "know and understand the full financing and economic implicationsí of the arms deal".

"The number of serious deviations from good tender practices that went unchallenged or unnoticed by cabinet was astounding," Woods says.

The evidence produced in the JITís detailed report indicated that the cabinet, as well as itís committee of ministers who dealt with the arms deal, had not acted in a "sufficiently responsible manner when applying their minds to the SDP process and when making the important decisions," Woods argues. He wonders whether some cabinet members had realised their "failings" which could have resulted in their subsequent "disapproval and ridicule of Scopaís proposed investigation" into the arms deal.

Allegations of criminal wrongdoing

The importance of questions concerning allegations of wrongdoing is that if true, they would have a negative impact on the morale of the public, on respect for government and ultimately on economic sentiment.

JIT did not go much further than to dismiss many of the over 50 allegations and say that the National Directorate of Public Prosecutions would look into seven allegations that it believed to be worthwhile.

Woods says JIT did not explain the scope of its investigation and singles out four allegations for public dismissal. He alleges that JIT gave them an incorrect slant so that they were easier to dismiss. For instance, he says, a "consultant" became a "director" and "subcontractors" became "prime contractors."

The JIT dismissed the allegation that former Minister of Defence Joe Modise paid for his share in Conlog with a bribe from a successful prime contractor.

"Surely the question in the publicís mind is ĎHow much did Mr Modise pay for his large Conlog shareholding, where did he suddenly get this money from, and did he and/or his associates receive any other material benefit as it is alleged? ...

"The JIT does not answer these obvious questions - leaving one to wonder why not," Woods says.

Of the seven cases, the JIT does not say if these were the only ones being investigated.

"It is not clear whether there will be an indication of the extent of investigative efforts or whether the public will be left in the dark," Woods says.

With acknowledgements to Charles Phahlane, Jeremy Michaels and Cape Argus.