New Light on Arms Deal Cost
Mail and Guardian
Newly revealed confidential arms contracts have confirmed a massive increase in the cost of the SA government's weapons package, initially estimated at R30-billion.
The documents show that finance charges will add at least another 50% to the arms package and that key components are significantly more expensive than was revealed by the Joint Investigation Team (JIT) report on the deal.
Terry Crawford-Browne, who is spearheading a legal challenge aimed at cancelling the deal, on Monday released copies of the confidential British-South African loan agreements that set out the terms on which the purchase of BAE Hawk jet trainers and Gripen fighter planes would be funded.
Obtaining copies of the loan agreements, signed by Minister of Finance Trevor Manuel, represents a remarkable coup for Crawford-Browne's Economists Allied for Arms Reduction (ECAAR), an international NGO that monitors arms sales and their economic impact.
According to Crawford-Browne, electronic scans of the documents were placed on the internet, page by page, by an undisclosed source and downloaded by ECAAR. They include notes prepared for the British government Export Credit Guarantee Department setting out the financial details of the aircraft package.
Opponents of the deal will be dismayed by the indication of the total cost of the package that is contained in the loan agreement notes. At around $2 800-million for the Hawks and the Gripens combined, this is about $700-million more than the $2 107-million quoted in the JIT report.
Finance charges go on top of that. Although these will be affected by changes in interest rates, the gold price and other variables, the writer — apparently an official from the United Kingdom Export Credit Department — calculates the total cost of the two weapons systems as $4 355-million. That's about R32-billion at current exchange rates. Assuming similar finance charges for the rest of the arms package, the total acquisition bill is running at R52-billion.
The documents also offer the first means of working out the size of local commissions paid on the BAE deal.
The contract value of the 24 Hawk jet trainers is estimated at $781-million. The note says, of that, R912-million is denominated in rands, which "includes consulting services and agents commission".
The contract value of the 28 Gripen fighters is $2 088-million, of which R628-million is denominated in rands — noted as including "consulting services and agents commission".
BAE Systems, the company supplying the aircraft with its Swedish partner Saab, has admitted paying a commission on the deal to a South African company, Osprey Aviation, but has denied the payments were in any way corrupt. The company and the British government have refused to divulge the value of the commission, but BAE has confirmed it is a percentage of the contract price.
The British Trade and Industry Department told the Mail & Guardian's sister paper, The Guardian, the commission had been "within acceptable limits". Industry sources say prime agents can generally expect to receive 5% to 10% of the contract value.
The two rand figures amount to about 18% of the Hawk contract and 5% of the Gripen contract respectively.
The selection of the Hawk was probably the most controversial decision of the arms acquisition process. The JIT report revealed that the selection criteria were shifted on several occasions to push the Hawk to the front of the queue, including introducing a so-called "non-costed option", which removed "value for money" as an adjudication criterion, thereby pushing aside the cheaper Italian bid from Aermacchi.
In the case of the Hawk, the R912-million approximates the difference between the figure quoted by the JIT report (which made no mention of commissions) as the cost of the Hawk package and the higher figure noted in the loan agreement documents.
However, the two rand figures cited in ECAAR's documents do appear to match up with the "local content" portion of the aircraft contracts, which might explain the rand amounts.
Armscor documents seen by the M&G suggest that what is known as Direct Defence Industrial Participation — local sourcing of elements of the actual weapons systems being purchased — amounts to R1,49-billion, compared to the R1,54-billion (Hawk and Gripen) total that emerges from the loan agreement notes. This leaves just R50-million for local "consulting services and agents commission" or about 0,3% of the contract value.
Osprey Aviation's Richard Charter previously dismissed suggestions by The Guardian that the commission might be in the order of R1,5-billion as "absurd". He had told the M&G that the percentage of the commission and the identity of his company as agents were declared upfront in BAE's bid documents.
If accepted, this represented a departure from Armscor procedures, which rule that the state arms procurement body should deal directly with suppliers and not with agents. Armscor spokesperson Bertus Cilliers confirmed that Armscor dealt only with suppliers, but noted that suppliers could choose to use their own consultants.
With acknowledgements to Sam Sole and the Mail & Guardian.