Publication: Defence Systems Daily Issued: Date: 2001-11-16 Reporter: Leon Engelbrecht Editor:

Arms Report Clears South African Government


Publication  Defence Systems Daily
Date 2001-11-16
Reporter Leon Engelbrecht


After a year of investigation the three agencies tasked by the South African Parliament to investigate a flood of allegations and rumours regarding impropriety and corruption in the country's multi-billion rand arms acquisition programme have reported their findings. The Public Protector, the Auditor General and the National Directorate of Public Prosecutions (NDPP) gave the prime contracts a clean bill of health and found no fault with government's actions or selections in the process. Government, in the shape of the ministers most closely associated with the programme immediately accepted the outcome. Opposition parties did not. One walked out of the parliamentary session called to hear the report and another refused to attend. At least two defence companies that lost out in the tender process may now sue the South African government for damages. Meanwhile, the FBI-style directorate of special operations within the NDPP struck this morning, arresting Thales International director Schabir Shaik in connection with theft and offences under the Protection of Information Act.

The report, available at, rejected allegations of widespread corruption and cleared government and cabinet ministers of any improper or unlawful conduct. But it did find evidence of wrongdoing by officials when it came to subcontracts, including that some officials received gifts from bidders. The report by Auditor-General Shauket Fakie, national director of public prosecutions Bulelani Ngcuka and Public Protector Selby Baqwa uncovered conflicts of interest, deficiencies in procurement procedures and cases of fraud and corruption that remain the subject of a continuing investigation. An investigation is also under way into whether "an important role-player" in the acquisition process told several bidders that they would have to come to an arrangement with certain subcontractors if their bids were to succeed.

The three agencies also cleared government's decision to change the evaluation criteria to include a non-costed option for the lead-in fighter trainer programme which ultimately resulted in BAE Systems with its Hawk 100 LIFT being awarded the contract. They said this was cabinet's prerogative, although they pinpointed procedural deficiencies. BAE Systems has welcomed the outcome. No evidence could be found of improper influence in the selection of Agusta for the light utility helicopter contract. Bell Textron officials had alleged they had been told by a DoD official to form a relationship with a black empowerment concern if they wished to stand a chance to win the bid. Procurement practices, involving former Defence Minister Joe Modise, in the selection of the German Submarine Consortium for the submarine contract were found flawed and "fair and competitive procurement practices for the selection of subcontractors were not followed in all cases."

Department of Defence chief of acquisitions, Chippy Shaik, seen by some as the scapegoat of the probe, was found to have acted with conflicting interests and failed to properly recuse himself from discussions involving companies in which his brother, Schabir, had a stake. Schabir is a shareholder and director in African Defence Systems (ADS) and also serves on the board of the French pan-European defence giant, Thales. ADS was contracted to act as systems integrator for the four Meko A200SAN corvettes currently under construction for the SA Navy. Another Thales company, Detexis, was contracted to supply the ships' combat information systems. Ngcuka said conflicts of interest in the procurement was a matter of great concern and had to be addressed legislatively.

Speaking after the tabling of the report, Defence Minister Mosiuoa Lekota said he was not convinced action should be taken against Shaik as it had not been proved that the conflict had resulted in a crime. Shaik said the report was a kick in the teeth as he had revealed Schabir's interests. He said the current government code of conduct did not list brothers as a source of conflict, listing only parents, children and one's spouse. He said he would fight the reports findings in court.

Shaik's brother beat him to it when he briefly appeared in Durban Magistrate's Court in connection with charges of theft or offences under South African official secrets legislation related to the finding of classified documents in his possession during a search of his home and offices last month. NDPP spokesman Sipho Ngwema, said Shaik was allegedly in possession of Cabinet minutes in which the arms procurement was discussed, and also correspondence between the departments of Public Enterprises and Defence. He said Shaik was a bidding contractor, competing with other contenders, yet he had inside information. "He must explain that in court." More arrests are expected. Other high-profile arrests to date include European Aeronautic Defence and Space Company South Africa managing director Michael Woerfel and the ruling African National Congress' Parliamentary chief whip, Tony Yengeni on fraud and corruption charges related to an "influence for cheap cars" conspiracy. Yengeni claims his arrest was related to the arms programme, but Justice Minister Peneull Maduna denied it.

The South African government sees the report as a means of ending three years of public speculation about the integrity of the programme. Lekota, Finance Minister Trevor Manuel, Trade and Industry Minister Alec Erwin and Maduna stressed at a press conference after the Parliamentary briefing that the conflicts of interests arose only in relation to the subcontracts, which were not government's final responsibility. "The decisions of the acquisition process stand there will be no further review. We welcome this vindication of government's standpoint," they said. "In the light of the damage to our country, caused by unfounded allegations of massive corruption on the part of government and reputable international companies, government will institute its own investigations to ascertain the source of these allegations and the purpose they sought to achieve," Lekota said in what newspapers called a thinly disguised threat. They lashed out in particular at former judge Willem Heath and Pan Africanist Congress MP Patricia de Lille. Both had been outraged when Heath, who headed a special anti-corruption unit that had the power to cancel government contracts, was excluded from the probe.

Erwin said the public service rules were vague as to what should be done once a conflict of interest was declared. He said irregularities in the relationship between prime contractors and subcontractors were matters for courts to resolve. Erwin conceded a finding of the report that the rules and systems for contracts were inadequate and needed to be tightened up and said his department was busy with this. The importance of proper documentation was also crucial to permit thorough audit trails of decisions taken and this too needed to be improved but the deficiency identified in the report did not alter the validity of the contracts. Referring to former defence minister Joe Modise's entering the defence business shortly after leaving office, the ministers said Cabinet had already decided to introduce a "cooling off" period for ministers.

The cost of the programme again surfaced as a matter of considerable dispute. Fakie said the contract price was R30.3 billion 1999 rand, excluding finance charges of 49% of that price. This contract price would rise, reflecting the weakening exchange rate. But Manuel said it is more complex than that. The report found there were deficiencies in the model, that included costs, which was presented to the cabinet, but it found no wrongdoing on the part of the ministers. The four expressed relief at this, and promised to get to the bottom of the weaknesses in the model.

Part of the investigative team's task was to determine whether the arms deal costs presented to the cabinet and the model used to arrive at them were reasonable and reliable. The team was also supposed to look at the completeness of the model, the treatment of finance charges and the full financial and fiscal implications of the arms deal. "It is extremely difficult. You can work out the arithmetic yourself. Part of the report actually does refer to the 1999 dollar value (US4.39 billion) and was converted at an exchange rate at that time of R6.25. And that was the value, so you can apply that and do the calculations yourself," Fakie said. Fakie also said that the R43 billion price that was subsequently quoted from October last year had taken exchange rate fluctuations into account. But that would have required an exchange rate of R9.79, which was not the prevailing exchange rate at the time. The present rate is R9.70. Manuel was quoted in September as saying the arms deal cost would rise to R66.7-billion when finance charges of R22.9-billion were added. But yesterday he vehemently denied saying so.

At least one company is carefully scrutinising the report with an eye to recover damages. CCII Systems, a small, Cape Town based defence electronics concern, had received state funding to develop a South African corvette combat information system. When the project's budget was cut the company spent its own money to fund it on the understanding that the system would automatically be selected for the corvettes. When this did not happen the company's MD, Richard Young, cried foul. Although critical of the report, Young welcomed the finding that "Chippy" Shaik had a conflict of interest.

"That certainly vindicates my position," he said. "The report on the investigation shows that my allegation was correct," Young said. The report said Shaik declared the conflict of interest in December 1998, but continued to participate in the process that led ultimately to the awarding of contracts. "He did not recuse himself properly," the report said. Young has indicated that he intended suing for damages of between R100 million and R200 million.

It was recently reported that Italian aviation concern, Aermacchi, was also contemplating legal action. Its LIFT bid, the MB339 was a successor to the MB326 used for decades by the SA Air Force as the Impala and allegedly topped the lists on technical and financial aspects until deposed by the non-costed Hawk option.