Publication: SCOPA Issued: Date: 2001-02-26 Reporter:

SCOPA Meeting and Transcription of Four Ministers' Deliberations

Standing Committee on Public Accounts (SCOPA)

Transcription of Four Ministers’ Deliberations

Wednesday, 26 February 2001


Mr T Manuel, Minister of Finance
Mr A Erwin, Minister of Trade and Industry
Mr M Lekota, Minister of Defence
Mr S Gounden, Director-General: Public Enterprises
Mr S A Fakie, Auditor-General

Media Statement on Strategic Defence Procurement, and Summary of Background Information on Strategic Defence Procurement, as presented by the hon the Ministers of Finance, Trade and Industry, Public Enterprises and of Defence,

in response to

SCOPA’s Fourteenth Report on Acquisition of Armaments,

on the

Auditor-General’s Special Review, RP 161/2000


Chairperson] The matter under discussion today is the media statements of the hon the Ministers before us on this Committee’s Fourteenth Report of 2000, and the Auditor-General’s Report, RP161/2000, that dealt with the Arms Deal. I went through the press statement presented at a media conference held by the three Ministers before us and the Minister of Public Enterprises, on 12 January 2000. There was a 6-page press statement released by the Ministers on that occasion. The Ministers brought questions into bearing, regarding SCOPA’s 14th Report. These questions are the basis of perceived differences regarding the Government’s integrity regarding the Arms Deal and the Committee’s alleged ill-considered and misleading Fourteenth Report. The Ministers have offered specific examples which they feel support these broader contentions. The Committee today wishes to explore with the Ministers both these broader contentions as well as the specific issues, in the hope that a shared understanding can be reached. I am sure we are going to do this in a cordial and constructive way. As discussion on the Ministers’ views is a prerequisite for the production of SCOPA’s next Report to the National Assembly, it is important that we complete these discussions this afternoon. I appeal to all Members, and also to the Ministers, to help us get through these issues this afternoon. As requested by the Committee, and given the time management problems, I am sure that some time will be allowed for Members’ questions and for Ministers’ explanations which gather a little wider than the immediate agenda which I described a moment ago. Now, along with expressing the Committee’s appreciation for this meeting with the hon the Ministers, there is one more matter I expect the Committee will wish me to clarify up front, and that is the matter concerning a perceived snub of the hon the Ministers by the Committee. We just want to give you a view on that. A day or two after 26 October 2000 we discovered a press article, in which there was an announcement by Cabinet requesting the Ministers, yourselves and Minister Radebe, to avail themselves to the Committee. That happened close to 26 October. The deadlines which SCOPA was working with at the time was that within four days we had to meet a deadline of producing a report. Included in those four days was a weekend. The points we would like to make here is that we were never formally made an offer in any way, not by phone or any correspondence, to discuss the Fourteenth Report with the four Ministers. We checked this up with the departments and with the Cabinet Secretary. So, there has been some misunderstanding here, and the Committee just wants the hon the Ministers to know that we never declined any offer from them to discuss this matter. However, the purpose of this meeting is to discuss the matter. The purpose of meeting with this Committee as expressed by the hon the Ministers was to give us a fairly broad overview of the Arms Deal. What will come across this afternoon as we respond to some of your questions and the points you make, is that the method employed by this Committee - our particular approach - causes us to acquire a particular limited understanding of the financial management dimension of the Arms Deal. If that was what you generously wanted to offer us, it might not have direct relevance on the way we approach our work. That matter will become clear as we go through the issues this afternoon. One other point which I have been requested to make is that Members who have had sight of the highly classified documents, particularly those documents in the custody of Madam Speaker, must remember that as things stand we must honour the undertaking that those documents remain confidential and we may not quote from those documents in public proceedings such as these. We will now proceed if everybody is happy with the way forward. There is one of two ways we can do this. We can say that we have identified the issues, as raised by the Ministers, and this is essentially about discussing the issues the Ministers have arranged. We can go through them one by one. However, the preferable way is to more or less hand the meeting over to the Ministers at this point, for them to raise the issues one by one, the issues that have troubled them that they have mentioned, what it is about our Report and the way we express ourselves that concern them, and then to afford us the opportunity to respond to those matters. In that way we will work through the issues. If at the end of that we feel there are any outstanding issues which the Ministers have raised in their document which I referred to and which have not been dealt with, then by all means we can bring those up as well. Would that way forward be acceptable to members?

Ms R Taljaard] Mr Chairperson, could we please get some indication from you of what time limit you will impose per speaker for that process to go forward?

Chairperson] I simply ask people to be as succinct as possible, and to the point. As we go through the afternoon we can judge whether we are getting ahead of the agenda or not. I will guide members as the afternoon goes on.

Mr V G Smith] We would accept the second proposal, namely that we afford the Ministers an opportunity to put whatever they want to on the table, and for us then to interact with them thereafter. We are quite comfortable with that way.

General B Holomisa] Mr Chairperson, I thought that since we have been given a statement by the Ministers, as well as the Fourteenth Report, and now we are given homework to formulate whatever question, we would go directly to ask questions and get the Ministers to respond, because otherwise they are simply going to repeat what they have already given to us. I thought we would start at point number one of the Report, on which they have made their statements, and then let the parties ask questions for clarity; to ask them to repeat what they have already told us is not going to take us anywhere.

Chairperson] It works out to the same thing, in my opinion. We would want to go through each of those issues. We have asked members to check whether there are issues not covered at the end of those raised by the Ministers this afternoon. We will pick those up. I also made a point that, in raising the issues, the Ministers should refer to the issues, and recheck on what your concerns are. It helps us to reintroduce the issues even though we have read the document, and then we will respond accordingly. Will that be a way forward, or are there any strong objections? Not? Then I hand over to the Ministers.

Minister A Erwin] Mr Chairperson, we will try to assist you by drafting a particular procedure. What we are proposing is that I go through quickly the points made in our statement of 12 January 2001, and then we would be happy to take more detailed questions on these. My colleagues will clearly help as we take those questions on the points made. It is not my intention to go through each and every point in detail, but merely to once again set out our reasoning, and the basic reason for the concerns we have expressed.

Chairperson] Are you proposing to go through every issue up front?

Minister A Erwin] Very quickly.

Chairperson] I want you to retain some sort of structure for the Minutes. So let us note the issues as the Minister raises them, keep them in sequence so that when we respond, we can respond to them systematically.

Minister A Erwin] We support that. We need to go through the list and then come back with the report. What we presented on behalf of the Government on 12 January 2001 was that it had been our original intention to attend your further Hearing where we could address the matters that were of concern to us. However, it was the view of Government that speculation was becoming really extreme. A range of issues was being introduced into the debate that we felt were not in the interest of South Africa, or in the interest of a correct perception of this deal and the accuracy of what happened at the brokering of the deal. Accordingly, we released a public statement dealing with the matters as we saw them. The first question that we looked at in that statement was that this was in no way an attempt to prevent any investigation going through the correct processes. The investigations, as you know, are already in process. Our concern stem from, and remain, the fact that the Report did not seem to us to contain an understanding, - I refer to both the Auditor-General’s Report and the SCOPA Report - about how the decisions were made, and accordingly, many of the questions asked and the findings and judgements made on the result of the replies did not take that into account. It is our view, as we indicate there, that a presentation of the total deal would have been useful at the very onset, and it is clear to us, from a study of the report on the proceedings, that whilst such explanations were given late in the Hearing, clearly this did not seem to have made much impact on SCOPA. The first point that we make, and which is crucial, is that the decision to purchase the equipment emanated from the Defence Review, a decision taken in Parliament and executed by the Cabinet to procure the Defence equipment. We also then made the point that the process for making this purchase was characterised by some important new features of decision making, particularly with regard to armament. The decision was to put the requirements into a total package, despite the fact that discussions on this had stretched over a number of years, and to deal with them as a comprehensive Strategic Procurement, so as not to allow them to be dealt with year on year as distinct items of equipment, as the requirements were made. This means - I think it is an important point - that four departments and four Ministers were immediately involved, and we were chaired by the then Deputy President, subsequently President Thabo Mbeki. This means that the evaluation process which was examined by the Auditor-General, and questioned by SCOPA, was not identical to the decision-making process. The decision-making process was informed by that evaluation that the decisions were taken by a Cabinet Subcommittee, making recommendations to the Cabinet. This is important from our viewpoint because it means that we had structured the process in a manner that meant that many players were involved in the decision, and this was done explicitly to ensure that we could manage this decision in an optimal manner. We were highly conscious of the magnitude of this expenditure, and accordingly, the important decision made at the outset was that we would deal with the procurement in phases. That was, we took a decision to purchase equipment provided that it was within the realm of affordability. These exercises then commenced to establish that, through a process of bidding an ongoing assessment by Cabinet at different stages as to whether we were meeting these two objectives, namely of re-equipping the South African National Defence Force (SANDF), and of ensuring affordability. As we explained to the Portfolio Committee on Trade and Industry, and it is dealt with here in this statement, all procurements made by Government and State corporations, where the imported component is valued at above $10 million, are subject to the National Industrial Participation Programme. That means that bidding parties must put forward proposals and offers related to the military equipment, and the specifications that we set for the Defence Industrial Participation, as applied here, in dealing with Defence equipment as such, for the non-Defence Industrial Participation programmes, as well as for the price of the equipment. That establishes a structure, which means that we can enter contracts with prime contractors. They must meet military specifications and the DIP and NIP specifications. They are the party with which we contract for finance. In the Review of the Auditor-General, the point we make, therefore, is that when we talk of conflict of interest, we have to accept that it is extremely difficult for any one person, who may be conflicted, to have a decisive impact on this decision in any way. Where we were aware of the fact that a significant person, viz. the Chief of Procurement, had a relative in a certain company, we took steps to ensure that we asked that person to recuse himself from decisions in that regard. However, it is inevitable that there will be many persons that may, in one or other way, have relatives in one or other company in the South African Defence industry. Our protection, as we pointed out, was to ensure that the deal was not constructed and decided upon in a complex manner.

Let us deal then with the LIFT Programme. The point that we fundamentally make in this regard is that we must distinguish between the evaluation and the decision. Options were provided to the Ministers. In your Hearings a great deal was asked of what was meant by a non-costed option. From a technical evaluation point of view that is relatively simple, and that is that we had a range of prices. If you left out those prices, what would the decision be? The Ministers discussed that at some length. I am sure you would have seen that this is a minuted process, that we made our decision to go for the pilot trainer, the Gripen combination for a range of reasons, each Ministry having slightly different reasons, and obviously the National Treasury and Finance watching continuously as to whether that remained within affordability. So, the assertion that in some way this decision was made at the Arms Acquisition Council is what we are correcting in our statement.

In the statement we deal with the performance guarantees for the NIP. As we point out this Government Policy is 5%. This is a public document. It covers everything. It is on any of the websites. The issue of 10% arose in the negotiations. I can assure you that we would not have authorised any higher performance requirements than that, because our view is that that creates an incentive to increase or build that performance guarantee into the price. We also point out that it is the prime contractor that is liable for this amount, and an amount of 5%or 10% cash payment for failure to perform on the value of the order that they sell, in our view, is significant. We also point out that, and we can go into much more detail if you wish, we covered this a little bit in the Trade and Industry Portfolio meeting, that one has to understand how these projects were ranked, the point system that was used, and the precise meaning of what a credit is. We then addressed - I will be happy to go into more detail - some of the issues around the procurement processes, the value systems, etc. that had been used. We also wish to point out that, as is manifest from the Cabinet decision making process, this was no ordinary procurement or budgeting process. Accordingly, many of the queries that were raised with regard to whether there were staff compliments, etc. have to be taken in the light of the fact that Cabinet went through a phase-like process. We got the final bidders. We did further exercises, and as became apparent by now, the final decision was taken on the basis of a very complex and detailed affordability study, where all risks were evaluated, and the final decision taken. So the budgeting procedures used had to be of a longer time span, and whilst they are presented within the framework of the medium term expenditure framework, the decision process had to take into account a much longer period.

I come to your own Report, Chair, and the view expressed in it that maybe Cabinet was not fully apprised at the position, that we did not understand the costing of this, or maybe we were not given accurate information on it. We just want to indicate to you, as I am sure you have seen, the Affordability Report is a long and detailed Report, and that in total, the Ministers concerned, must have had somewhere close to nearly 20 hours of discussion on this matter. We doubt, and we are confident in our mind, that that amount of time allowed us to consider every option. You need to bear in mind, as well, that each department had its own teams working on its component of work, checking that work, and as we have pointed out, the International Offer Negotiating Team, specially set up to carry out the final negotiations, was bolstered with additional support. This matter came up in your Report. We are happy to deal with it as to the additional technical support we brought in.

On the issue of costs, we want to deal with this in some detail as questions, because it is apparent to us that, despite our explanation for what this figure of R43 billion is, in our release in January 2001, the media and others continually use the figure of R43 billion. We suggest that when we come to this matter, the Minister of Finance deal with it at some length, because it is quite clear that this matter is not understood, either inadvertently or through intent. There are questions about the cost build-up of the aircraft, and of other equipment. You have the information before you. We are happy to answer any questions on that. The Government is confident that we accurately assessed what those costs were and that we were able to compare them, although it is very difficult on all major projects like this, not only defence projects, to compare prices, because its specifications and differences of projects are very different. But Government is confident that we paid for the equipment what could be expected, given the requirements we set for the equipment maintenance, etc. We raise a very strong reservation, as is stated, regarding the sentences in the Report which say quite clearly that there may have been undue influence in the decisions of the prime contractors. We have not been told what this is. In reading the transcript of the proceedings, it is our view that no such statements were made. Inferences are drawn by certain Members, but no statements were made by anyone to that effect. So, we are puzzled at the inference drawn that, in effect, the Ministers before you as well as Minister Radebe (who apologises for his absence from this meeting as he had to be in London) were unduly influenced. We reject that insinuation absolutely.

That is the content of the statement released by us, as suggested correctly by you. We will not go into line-by-line explanations of each of those, but support your proposal that members may ask questions on each one of those matters. We are quite happy to deal with them in whatever depth you desire. It is our view that this matter must be dealt with accurately and comprehensively, and that it is necessary for full airing of these points to be made. With regard to our offer to appear before you before, the answer is yes, it was made through Cabinet and through my department. I just do want to put it on record that I made three telephonic requests through my department to address the Committee on NIPs, and I was told that this was not possible, that you were about to complete your Report and that we should put our request in writing, and our response in writing is documented, and you have that response.

Chairperson] Would any of your colleagues like to add to your introductory observations?

Minister T Manuel] Not at this stage.

Chairperson] Before I hand over to General Holomisa, let me suggest some guidance on the way forward. The Minister has given us some background comments on the decision-making processes on particular issues of the deal as well as to the SCOPA Report and made reference to three or four key issues. Are there any suggestion on how we approach these? Do we engage the background issues first before we come to the issues that he specifically referred to in our Report, or do we try and combine them? Would you like me just to go through the list and suggest what we talk about in a particular sequence?

Mr V G Smith] If you highlight what you think we should be talking about, we can go that route, and if Members feel they want to add to that, they should feel free to do that.

Chairperson] Many of the first issues will be general background issues which the Minister has not necessarily indicated he has a problem with, as they appear in our Report, but we will touch on them and the Minister can enlighten us if we are not picking up on a particular criticism he has.

General B Holomisa] I wanted to perhaps direct my question to the Auditor-General. It is a matter of public record that the Ministers in charge of the procurement process have insinuated that you have no knowledge at all of the process itself. Are you still confident that we need to proceed with this Investigation, which is a direct result of your own view in the first instance? If you are confident of the process, and that the Investigation should go on, should the Ministers in charge of the procurement process be allowed to raise queries which undermine the work of this Committee, or should they be instructed to raise those queries with the investigation team itself? Lastly, can you explain your position on the need for this Committee to deal with substantive issues of the investigations, so that we may know which questions to ask, and how far we can go in interrogating the Ministers, so that we do not seem to be prejudicial to either these people who have taken the decision at an Executive level, or to the witnesses which are still lined up to give evidence? I am afraid we might be tempted to discuss substantive issues and yet you are not interested at this stage. Please give us direction.

Chairperson] Many of your points actually miss the agenda for this afternoon and what we are aiming to do here. So I will limit Mr S Fakie, that Auditor-General, to a very brief response, but please do not go to the details of questions which, firstly, are not going to take us forward.

Mr S A Fakie] Yes, we do understand the process. In fact, we have been given two presentations by the Department of Defence on exactly how the procurement process took place, so we have a fairly good understanding of what your process entails. And yes, I will still stand by my recommendation in my Report that requires a forensic investigation. Concerning the other issues I am not in a position to comment.

Minister A Erwin] Can we just make it clear that the statements we made are no insinuations. Only the statement that is in our document of 12 January 2001 is what we have indicated. We should just say quite unequivocally, as the Auditor-General has just indicated, that we are co-operating fully with the Auditor-General, because forensic audits done on subcontractors, in our view, fall within the ambit of Auditor-General. If process matters were not followed - we are arguing that more work will show that within the context of the deal that is with a reasonable process – that is within the ambit of the Auditor-General. So there is no attempt to prevent the Auditor-General from continuing his work. His Office must continue its work. We have co-operated fully with them. We hope, as was indicated by the Auditor-General, that by interacting with them, and explaining the process, we will help speed this matter up.

Chairperson] I am sure the Committee accepts that.

Ms R Taljaard] I have a number of questions related to the list that you are going to reaffirm, but I do have one or two general questions. The question that I would just like to ask is whether the Ministers are aware of what background documentation was used in the compilation of the Fourteenth Report which the SCOPA worked on, and the National Assembly has adopted. Are you aware of that background documentation and do you know exactly what documents the Report is based on? Then, just two questions also to the Auditor-General, but I could also get comment on this from the Ministers after the Auditor-General has spoken. Has the Auditor-General you ever had a meeting with the three specific Cabinet Ministers here today after the press conference was held on the 12 January? If so, could you give us an indication of when that meeting took place and whether there is more than one, if any, and what the substance was that was discussed. Secondly, given the Ministers’ clear indication that they are quite willing to co-operate fully with the Investigation and the comments made in this regard in the press statement and also in a background document, is he having any difficulty accessing any of the information currently lodged in either one of the three departments represented by their Ministers today? Could we also have commentary from the Ministers if there is any difficulty for the investigating team in accessing any of the documentation?

Chairperson] We did say that issues that if members wanted to raise matters not on the list that should be done at the end. But you and the General are bringing up issues upfront. We are trying to get a sense of priority and sequencing here.

Mr V G Smith] Our understanding was that this meeting was an interaction between SCOPA and the Executive. My fear is that if we continue to allow questions to be raised to the Auditor-General, it takes away the very limited time we have to interact with the Executive. We have interacted with the Auditor-General in his capacity as co-ordinator of the Investigating Unit. If members want to raise questions to the Auditor-General or any of those components, that should be put onto this agenda. We should not at this meeting deflect focus to that. Our resolution was very clear that we would interact with the Executive, and the agenda says exactly that. So I am asking you to manage that for us, otherwise we will miss the point.

Mr B Nair] Ms R Taljaard should actually go through the Report presented by the Auditor-General on 7 February 2001 when the team comprehensively handled the issues raised by her just now. On Page 7 it deals with the documentation and access thereof.

Mr G Q M Doidge] In the meeting when the Deputy Auditor-General presented his Report, these were the specific questions I asked the Deputy Auditor-General. Was the Executive co-operating? The answer was yes. Did he have access to all the documents required? He responded in the positive. We do not need to go into this again.

Chairperson] Let us wrap up these questions that have come from Ms R Taljaard, and then get into our list.

Minister T Manuel] The only question that remains for us to deal with is the first question she asks, and the answer is no. We had sight of the transcript of the recorded proceedings on 11 October 2001, or one of the pages thereof, and of course the Fourteenth Report, but none of the other information available to the Committee.

Chairperson] The first issue that I noted here, raised by Minister A Erwin, was his allusion to the decision to purchase the equipment, the Defence Review, which was in fact approved by Parliament. I know the Committee does not have a problem with that. We do not engage in policy. We accept policy. Our view is more the financial management dimensions, value-for-money, whether good, sound financial management policies, procedures, best practices are followed. So we do not have any problem with that aspect, and we do not see the Ministers as voicing that as a criticism of the Committee. The decision to do the purchases, and the package itself, are largely policy decisions with no discernable financial management negatives or disadvantages that I feel the Committee picked up on. We get to a more relevant issue to our Report, and this regards the Ministers telling us about the decision-making process, about the many structures and many people involved, and where the decisions were in fact made.

Mr F Beukman] In additional information made available by Minister A Erwin last week it was mentioned that there were two committees, the Directors-General Oversight Committee and the Members of the International Offers Negotiating Team. Maybe the Minister could give us more detail on what specific role the Directors-General Oversight Committee played in that regard? Could the Minister indicate what steps were taken to ensure accountability? Was there, for example, a continued vetting procedure of the Members of the International Offers Negotiating Team? Was there a re-evaluation of the security clearances? Was they checking on the International position? Was that part of the task of the Director-General’s Oversight Committee? What exactly did they do to ensure accountability by the International Offers Negotiating Team?

Minister A Erwin] The member is referring to the discussion we had in the Trade and Industry Portfolio Committee where we were asked who the members of the International Offers Negotiating Team were, and we provided that information to that Committee. We also pointed out the Directors-General of the relevant departments constituted an oversight committee, in the sense that they were not part of all negotiations. The Negotiating Team went to Europe on a number of occasions. They interacted with that Negotiating Team on certain occasions. The Director-General of Trade and Industry was part of the negotiations for the National Industrial Participation Programme, and we, as Ministers, also drew on the advice of the Directors-General, as well as the Report from the Chief Negotiator, Mr J Naidoo. With regards to the question as to whether we continually updated security clearance, and whether it was their task, the answer is no, it was not their task. Their task was to deal with the negotiating process. The question of security clearance and internal procedures are besides the work, certainly in the latter case, of the Auditor-General and irrelevant to the investigations that are now underway. If allegations are made - we cannot go on fishing expeditions - that certain persons benefited from something, those will be investigated.

Mr F Beukman] I understand now what the Directors-General Oversight Committee’s role was, and what they did. But was there any other structure within the Department or the Government, on the Executive side, who played that continuous role of vetting the International Offers Negotiating Team, looking at their financial statements, looking at their role in the negotiations? Was there any such mechanism within the Executive, apart from the Auditor-General?

Minister T Manuel] The International Offers Negotiating Team was short-lived It was not a permanent body. It was an ad hoc arrangement to deal with a particular set of circumstances, and for that reason it was not deemed to be necessary to do any more than that. The presumption is, of course, that if there is enrichment at all, it would be legal, it would be within the framework of existing criminal law, and that would be ex-post facto business. This operation obtained until such point as contracts were signed.

Mrs P de Lille] The Minister mentioned that the evaluation was not identical to the decision making process. Can he elaborate on that statement? Also, can he just give us an idea of the composition of the Evaluation Team and the Decision- making Team? That would clear up quite a few misunderstandings.

Minister A Erwin] Quite extensive documentation has been provided on who the Evaluation Teams were. I cannot remember the names of every person on the four teams. The evaluation would be done on any contract, not just Defence. It would be done on any process where there is a request-for-proposal. In the request-for-proposal, one must set out specifications and rules. So specifications for the military equipment, the rules for participation, the weighting that we used, etc, were set out and that documentation is available. Those involved in the evaluating process then make recommendations. The easiest way of explaining this would be to say that when they rank the equipment, they would rank it on the basis of the point system, derived from the evaluation process. The decision-makers have to take that into account. One cannot ignore that, or one would be violating the request-for-proposal process. The decision-makers clearly can make decisions on the basis of qualitative information, but not in a manner that completely violates the request. One cannot introduce into one’s qualitative decision something that one never asked in any way for the bidder to tell one anything about. That would clearly lead very rapidly to court actions by the bidders, and quite rightly so. The example that emerges very clearly in the LIFT core is that the Ministers Committee took into account various qualitative dimensions and technical dimensions of the aircraft that we felt weighted the decision towards one option as opposed to the other. But we have to work on the basis of the evaluations that were done for us, and what they did, as members know from the SCOPA Hearings, was to say that these are the ratings of these aircraft with and without the costs, because there was a very big cost differential in terms of the family of aircraft that we were looking for. In fact, the cost factor, as members will see, and as is apparent from the discussion in the Ministers Committee, was not the decisive factor. The decisive factors were other technical aspects about the aircraft, and the structure that we felt would emerge over time for the DIPs and NIPs out of that combination, as opposed to another combination. The Ministers are the Ministers I think the Committee is aware of, plus the Deputy President. The reporting structure was the Chief Negotiator, Mr J Naidoo, who made the reports on the basis of documentation we had available to us, and we were to consult with our own departments on many matters.

Mr F Beukman] I have a question for the Minister of Finance. Judging from the answer he gave a minute ago, would he agree with the general statement that there was no vetting procedure from the Executive to look at the role of the members of the International Offers Negotiating Team from an accountability perspective?

Minister T Manuel] No, I will not agree with that statement.

Ms R Taljaard] May I put the following question to Minister A Erwin? He alluded to the fact that the International Offers Negotiating Team had four sections. Given the nature of the negotiation that was undertaken and the realm within which it took place, clearly the technical side would have been important. Terms of reference would as a matter of course surely have been issued to the International Offers Negotiating Team. Were there at any stage any changes or amendments proposed that would have shifted the balance or the bulk of the responsibility to the technical side, or was the bulk of the responsibility on the affordability side, given the role also of the International Offers Negotiating Team (IONT) finance people? Where would the balance of responsibility have rested within the four sections of the team that you have highlighted? Were there terms of reference issued and were there any changes, at any stage, that shifted the balance of responsibility within the Negotiating Team to one section of the Team as opposed to another? Given that there was a Head of the Team, as well, that took ultimate responsibility, were there shifts in terms of the respective importance of the four sections of the Team?

Minister A Erwin] I do not know what the status of the Minutes are of the meetings on that issue is, but let me just indicate the following, because this is clearly our negotiating strategy within Government. The terms of reference were drawn up. These are in the documentation that Members would have had access to. Then the IONT would report back to us on dates when the Ministers met. We had long discussions and we would issue and record new mandates, not terms of reference. Terms of reference were set up. We would record new mandates. Certainly our recollection would not be that we shifted weight between one or the other. A number of issues came up during the negotiations and we issued fresh mandates on a number of occasions. The documents are available to the Committee. I am not sure that we would be that keen in outlining our negotiating strategy to everybody as to what we did, but there are documents and mandates that the member can check.

Mr A J Feinstein] We have obviously in the documentation that was submitted at the Hearing, looked in some detail at the structure that was set up in diagrammatic hand-written in form. The one thing that struck us and that was recorded in the transcript that the Ministers have had access to, is the fact that given that this structure was being set up specifically for this purpose, as Minister Erwin mentioned, issues around declarations of conflicts of interest were not dealt with in a more formalised way. We were told in the Hearing that this was because in ARMSCOR no such declarations are required. Could we get comment on that aspect?

Minister A Erwin] The view of the Cabinet Committee, and we speak for the Cabinet Committee, was that the magnitude of the deals and the nature of prime contractors, were such that it was, and it remains our view, not possible for individuals to in any preferential or decisive way swing these deals. So, when it was known to us, and it was known at an early stage, that a person in a relatively critical position, the Chief of Procurement, and that there were now negotiations taking place between a company that his brother was involved in, we took specific steps to ensure that that person recused himself, but the general processes of negotiating a major contract like this were followed by Government. As I indicated, from the Cabinet Committee side, we were satisfied that we had taken sufficient precautions to deal with that. If the Auditor-General makes a recommendation - we have said in our statement that we seek advice on this matter - then I think we need to be very precise on how conflicts of interest will be handled. It will be good for everyone in Government on all deals to clarify exactly what conflicts of interest means, under what circumstances and how, because it is too imprecise just to say you will deal with conflicts of interest. There are many former generals who now occupy senior positions in the defence Industry, who were in fact, part of the early stages of this process. This would be a worldwide phenomenon, that you will have this link. We, as Cabinet Ministers attempted to ensure as the very best we could and we think we succeeded, that we put in as many cut-out points, as many new negotiators and critical times as was possible, and that we used international advice of reputed companies. But we will be open as Government to specific and concrete recommendations, that this is what conflict of interest means in these circumstances, this is the nature of the declaration one would sign, because it is an immensity complex process.

Ms R Taljaard] One assumes that in the nature of the IONT the Chief Negotiator would play the most prominent role when reporting back to Cabinet was taking place, or to the subcommittee of Cabinet. Given that the bulk of your press statement dealt with the fact that we have not spoken to the decision-makers, and we are doing so today, my question is really whether any other member of the IONT, and in particular Mr Shaikh, played a prominent role during the report-backs to the subcommittee, and if he did play a prominent role, what that role would have entailed? I noted the comments the Minister has just made. He referred to the due diligence that the Ministers undertook in order to ensure that there would be cut-out points to cut out conflict-of-interest issues, and that he also indicated that there were new negotiators at critical times. Could he highlight and unpack that for us, which new negotiators at which critical times? Is he specifically referring to the NIP and DIP process, or to any other processes?

Minister T Manuel] A bit of perspective on this issue might assist. The decision to acquire armaments as set out in the Package, arises from the Defence Review. This was not an exercise in the first instance about industrial participation, nor was it an exercise in the first instance about affordability. It was an exercise that dealt specifically with the need to upgrade the equipment capability of the Defence Force, in line with the Constitution and the Defence Review. That is important because it also ties in with the other question that Ms R Taljaard raised, because whilst that is the objective, one then has a amalgam of different interests, but the objective is the one that must be met, because one has due process to arrive at that objective. With different interests represented, it is important that the focal point be retained. That focal point is that one needs to equip the Defence Force. That is a constitutionally imperative. It is not a nice-to-have. Once one has clarified that, then the way in which these issues come together, is important. Of course there were different parts to the Team. If, in the briefings beyond the Chief Negotiator, the Head of Acquisitions in ARMSCOR was present, it was because that was the objective. At other times we called the people from the Finance Team who did affordability exercises, but primarily and probably more consistently and logically so, we had the Defence Acquisition Team represented, because if there were options that were not affordable, one would have wanted to send them back. Part of the sending back required revisitation of technical capability. That issue of respectiveness is exceedingly important. The rest falls into place thereafter.

Minister A Erwin] One must also remember that the Chief Negotiator and/or the Chief of Procurement, would report on the basis of documents, not verbally on documents that we have. Those documents were the product of the work of our own departments in many cases. So each Minister concerned would have had extensive discussions with their own departments and people that they brought into their departments to double-check that the responsibilities we have in participation, were being addressed adequately and well. The Chief Negotiator’s task was to pull that together and provide us with an assessment of the overall negotiation, what was happening and what the balance was. The task of the Chief of Procurement, as the Minister of Finance has just said, was to address specifically the Defence Procurement aspects on finance matters, on NIP matters and in part on DIP matters. Other departments had a significant say in that.

General B Holomisa] One would ask the Ministers, in the same vein, can they assure this Committee that the Government sought to distance itself from these nauseating allegations of unfair and irregular malpractices, such as the establishment of bogus black empowerment groups or companies formed by some of the very companies involved in the Procurement Deal? I do not have to mention the names of these companies. They have already been mentioned.

Chairperson] Sorry, General B Holomisa, I am actually going to overrule that question. We must stick to our agenda and what we are speaking about. If there is time at the end, as we have agreed, I will welcome any question. If you would not mind just holding on to that question you could be given the opportunity. The issues we are dealing with are about the decision-making process, the structures involved, the processes, and the conflict-of-interest issues.

Mr N Masithela] Regarding general questions, I just want to check if any of the Ministers, or the Ministers collectively, received the Report from the Auditor-General prior to it being tabled in the Committee. Minister A Erwin said they made some offer to discuss the matter with the Committee, and I assume it was prior to the tabling of the Report of SCOPA. Did any of the Ministers receive a Report of the Auditor-General tabled before us? That information could help us a great deal to understand why we did not offer them a platform to address the Committee so that we can then advance our Report succinctly, as we had wanted to.

Chairperson] Sorry, but you have also gone outside the issues we are talking about now. Hold that question, and if you feel it is relevant towards the end, please bring it up. The objective of this exercise, as we said upfront, was to link these issues back to our Report, and I want to do that in closing this section. Our Report on Page 1058, third to last paragraph, which is probably what the Ministers responded to in the press release, reads as follows:

The Committee also questions whether there was not too great a concentration of influence – from documentation through to decision-making.

 We recommended that that be part of the investigation. In addition, the Report refers to the conflict-of-interest issues. I want to tie back what we have been hearing and discussing with our Report, which we wish to defend, and the arguments which the Ministers wish to sustain. We have learnt via Mr Beukman’s questions that the Ministers did not have an independent checking facility as one might find in internal audit, where directors would use the internal audit function to check that people downstairs are following process.

Mr B W Kannemeyer] On appoint of order, Mr Chairperson: I thought that when Mr F Beukman asked his last question, the Minister’s answer was no. He did not agree with the way Mr F Beukman stated it. You may correct me if I am wrong, but you now seem to indicate that that was the answer that we learnt from the Minister’s response. I thought the Minister indicated that, no, he did not agree with the way in which Mr F Beukman put his follow-up question.

Chairperson] I will be advised by you on that, Mr Kannemeyer. So, Minister Manuel, the question to you is this: Did you have an independent function that could go down through those structures and processes? A function that reported specifically to make sure that all processes were fully followed, that all the work undertaken was vigorously undertaken, that everything was properly partite and all the arguments that were formulated in the correct way before coming to you?

[Minister T Manuel] It was built into the mechanism. Each of us had line-function responsibility, and together we had a collective responsibility. By virtue of the fact that you had a Cabinet sub-committee, you had an inbuilt mechanism. Internal audit functions work in the longer term. I am saying it was an ad hoc process that allowed us to interact quite directly. The word I used in response to Ms R Taljaard was “amalgam”. I can tell you without fear of contradiction that the affordability team reported through the Director-General of the then Department of Finance, to me as Minister of Finance, on a regular basis. Part of my responsibility was to raise this with my colleagues. I would immediately ensure that the affordability issues raised were within the framework of stated government policy. This was not something on a long leash; it was short-leashed. It allowed us to engage with the process. From that perspective, the point raised by Mr B Kannemeyer is correct, because the question here is whether we had the mechanism to check regularly each month or whatever, on the bank accounts of the individuals concerned. It is a different kind of issue. In an ad hoc arrangement the supervision function needs to be defined. I am of the view -perhaps my colleague Minister Erwin was not strong enough on this issue - when I read the transcripts of the recorded proceedings of SCOPA where this issue was discussed, as well as the oversight function of both Directors-General who were not involved in the negotiations. More importantly, the supervisory function of the Cabinet subcommittee was spelt out in some detail, and why it is not possible to have one line of communication to influence decisions all the way through the structure of the entity. The entity is all manner of Committees with different stages and different responsibilities. That issue, in fact, carries with it the very important check or balance against the notion of undue influence. If, in fact, that collapses, then we come back to the point that we raised, and we might have to debate this issue at some time, that influence or undue influence in respective of the then Deputy President and four Ministers responsible, is the inference that must be drawn because we took responsibility for the prime contracts. This is the issue. It is actually important that we try to utilise the opportunity today to clarify why we are so resolute, why we were on 12 January 2001, and why we stand by that position.

Chairperson] Unintentionally, you have answered my question. Already the answer is that there was no best-practice mechanism, that I was enquiring about, in place. I am not saying there were not checks and balances, and that you did not go to all sorts of extraordinary lengths. I am exploring a particular best-practice concept. This concurs with the advice given by officials we spoke to previously. In fraud and corruption case studies, of which there are many, it is very common that the formulation levels of argument, recommendations where that the pre-emption of particular decisions is contrived, actually happens every day. SCOPA cannot simply say that because the final stage decision-makers are beyond reproach, the Committee must simply assume that there could not have been any manipulation earlier on in any of the arrangements. We have to check this out. That is all we have done, and in our Report we expressed a small degree of concern because of particular observations, one being that which I have just referred to. The other is what we learnt from Minutes, that particular individuals, and one in particular, seemed to be always at the presentation stage of documents. These are genuine issues of concern. We are not accusing anybody. We are saying that this is enough to make us say that we need to note this in our Report. We need to defend that aspect of our Report. Let us now move on to the secondary but related issue, namely that of conflict-of-interest issue. This does concern the Department of Defence’s Chief Director: Acquisitions, and his particular role and his influence in the processes. It does concern his family connections in one of the companies that got a prime contract, one of the companies that owns a sub-contractor, over which there are many arguments as to why that company got the deal, in which there are family connections in ADS, which had quite an interesting role in certain of the deals we are talking about, and of FPS, another company which got a large part of this business. We do not accuse anybody, but we have to observe this and we have to note it and make our points, which we do. We do notice the weaknesses in the application of relevant conflict-of-interest regulations, to which Mr Feinstein referred, and to which was admitted in the Hearings. In particular this would refer to that same individual. We are also aware of that same individual being less than candid in his answers to questions put to him by this Committee, and we are also aware of many related testimonies which have been referred to the Joint Investigations Unit. We do not take too much notice of the latter issue, but it is something that we have sighted. At the end of the day we make a couple of observations in our Report. If the Ministers are objecting to those, we would defend them.

Minister T Manuel] I made an objection to how the Committee arrived at the point. We are dealing with the prime contractors. I am sorry to raise this issue here, but there was the suggestion in a press statement last week, that the Ministers concerned had no idea of financial transactions. It is a suggestion that we are in dereliction of duties. I take that very seriously. I am trying to describe the character of how this worked. These were not long-leash issues. There were reports often, more frequently than once a week, in this arrangement. To then move from there to the points that were arrived at, is a leap that cannot be made in one glance.

Chairperson] The reference you made to Ministers having no idea of financial transactions, who was that attributed to?

Minister T Manuel] One Dr Gavin Woods, in an interview with Mr R W Johnson in the Sunday Independent last week, and not retracted since.

Chairperson] I have not seen that, but I do not think that I would have said something like that. You have made your case on this issue, and we have defended our case, and we will study the transcripts of this, formulating our response for our Report to Parliament. I want to move onto the next issue, but I have had a suggestion from this side that you might want to suggest a change of the process.

Mr G Q M Doidge] I do not want to disobey your ruling, but I was not at the Hearing at that time, but I have read through this transcripts. I am not quite sure about what comes out in the transcripts, and I am looking at what the transcript says Mr Shaikh said in terms of his declaring his conflict of interest. I am not quite sure when I hear you saying, when you use the term “we”, I am not quite sure whether we are all in agreement with you, because what I see in the transcript is that some of the answers given were, in fact, not taken into account when drafting the Report. So, I cannot say that you speak on behalf of the entire Committee, because here is the transcript, there is the Report, and I cannot tie the two up. I cannot say that I go along with that.

Ms R Taljaard] On a point of order, Mr Chairperson: I believe that a Committee member is actually contesting a Report that was adopted by the National Assembly, and that Point of Order must stand, and all the members of this Committee have reaffirmed in the media and elsewhere their support for the Fourteenth Report, and independently on whether or not members have reaffirmed their support, this is now a report of the National Assembly. We have to be very careful on casting aspersions exposed on a Report of the National Assembly. That is the Point of Order I would like to raise. I would also like to make a comment on the comment by the Minister of Finance and on how we reflect that further in ongoing work of SCOPA and in our follow-up Report, which we will be submitting to the National Assembly, because there is something I do need to clarify. We will be working on our follow-up Report on Wednesday. I do just want your ruling on the Point of Order that I have raised before I proceed with my question.

Chairperson] I do take the basic point you made on the point of order. At the same time I do not have a problem with bringing Mr Doidge up to speed with the background documentation that we had to substantiate our Report, which he has not seen as yet. But we will do that at a convenient time.

Mr G Doidge] I do not agree with Ms Taljaard. I am not challenging this Report. I am talking about the transcripts, the evidence that was before the Committee. My views will be reflected in the follow-up Report.

Chairperson] Our evidence went way beyond those transcripts, which are not even a small portion of our evidence.

Mr D M Gumede] I just wanted to say that I am of the view that as I understand the situation, the evidence was not used as such. We will have to deliberate that as a Committee when we continue with our work.

Mr A J Feinstein] We must bear in mind the difficulty that exists on this matter, which is one of the reasons why the course of a forensic investigation was agreed to, and that is the point that you made very brief reference to, that the transcript was one aspect of information. There was also, and here is where the difficulty lies, some information that was passed on to individuals, and not formally to the Committee. The reason I raise this is because I was one of those individuals. This is fairly well known. It was difficult to know exactly how to deal with that, as a consequence of which discussions were held with the Speaker, and this information was handed over to the Investigators. What we are trying to do in the Report is to structure it in such a way that will allow for those matters to really be investigated by those who had the expertise to do so. We should not lose sight of that difficulty as we go forward.

Minister A Erwin] We will be requesting of the Committee, you made the point you read out now on page 1058 of the ATC, and you have argued that that Report was justified in making that statement. What we are saying is that we would wish you to take into account the submissions we have made, both in January and now, that in our view we had in place very extensive mechanisms to prevent precisely what is being said, that there could be undue concentration of influence. We want SCOPA to take that into account. The additional point I would like to add is that we recall too that in the IONT we bring in additional expertise for the first time to check a range of issues. So we are putting forward a number of issues, and whether that is best practice or not, I can tell the Committee something: it is pretty unusual in an Arms Deal that this is done. So, we want the Committee really to note that. We think the evidence was given the first time but we would like to note it again, so that when the Committee considers our submissions and the evidence that it has, that that will influence the thinking of this Committee, one or other way. It is for the Committee to decide, but it should be taken into account, not just dismissed and defended, as was our fear. If the Committee feels it does not have enough information, we are quite happy to go into even more detail, if members so wish.

Chairperson] Minister A Erwin, we can give you this Committee’s assurance that every bit of evidence we gather this afternoon and any other documents which you have submitted, will be taken into consideration. It will be done so in a transparent way. Transcriptions of this meeting will be available for you as well, when we come to make that judgement call as to whether our Report has withstood your criticism, or not. We assure you of that.

Ms R Taljaard] Mr Chairperson, I know that you want to reach closure on this particular topic, but having heard what the Minister has just said about his willingness to provide information if we do not feel that we have adequate information, I do have two follow-ups. The question that I asked about the detail on the other negotiators that were brought in we have not had a reply to. If we could just have that, it will be helpful. Then, I do believe there is an apparent contradiction, about which the Minister of Finance can allay my fear.

Chairperson] Ms Taljaard, I have closed the matter on this issue. I cannot allow you to engage the Ministers on those questions, because there are many other detail questions we could ask, but then we would get through half of our programme.

Ms R Taljaard] Will we be able to pursue this matter further later?

Chairperson] We will, and we can even take up the issues in questions in writing to the Ministers.

The next issue is that of contracts and the sub-contracts. Minister A Erwin, am I correct in saying the reason you brought up that point was again because our Report made reference to sub-contracts and perhaps suggests that Government has some role in subcontracts? Would that be the issue?

Minister A Erwin] There are a number of points made on subcontracting. We raised the one mentioned in the Auditor-General’s Report, and SCOPA’s own. As with all major contracts and private contracting, we would expect, as has commenced, the Auditor-General to do checks of a contract this size. I do not know whether he has the resources to do all of them, but I doubt it. My suspicion would be that as is normal practice, the Auditor-General’s Office would do some spot checks, or if there is some specific allegation made, they would do that. The point we make with regard to subcontracting is, what is the nature of the delict, and who has responsibility to deal with that matter. We contract with prime contractors. Between prime contractors and sub-contractors many things can happen. There can be civil claims, presumably there could be claims of fraud if there is something that has gone wrong, there could be some influence in that the sub-contractor tries to use the prime contractor. But as Ministers and as participants in the decision-making process, that is not our area of responsibility. We have to ensure that the product we give meets the technical specifications and is within the cost parameters that we have set for that product. This is the point we were making. There was a specific point made with regard to a particular sub-contractor. Our view is that, as Ministers, having assessed that at the time and subsequently, we do not believe that that sub-contractor has a case, but, in any event, it is not for the sub-contractor to come to the Ministers or to Government to solve that issue. That is a matter between the prime contractors and the sub-contractors. For forensic auditors we understand that that refers in this instance to dealing with the possible problems between prime contractors and sub-contractors. Exactly what the remedy is for Government would depend on the circumstances. It is not automatic that the Government would be involved in that, neither is it automatic that the sub-contractors have any obligation or requirement to deal with Government on this matter.

Chairperson] We turn to page 1058 of our Report, paragraph 5, which has two sections, the first dealing generally with reference to subcontractors, and the second one, with the specific aspirant sub-contractor, which Minister Erwin has raised. Do members of the Committee feel they still represent the genuine concerns of the Committee that we can sustain?

Mr D M Gumede] I just want to correct something. I do not think that it is a question of defending or protecting our position. Here we are dealing with getting to the bottom of the matter as to what exactly happened. So I would not go along with saying that we are defending the Report. It is in the interest of getting the correct information that we are here to deliberate.

Chairperson] If there is any more perfect way I can choose my words, do you agree, Mr Gumede, that normally we would be standing by our Report? Our Report has been criticised fairly or unfairly by both the Ministers before us and by the Deputy President. We know that we have to go back to Parliament to say it was a reasonable Report or it was not. We need to test the issues and tease them out, and in an honest way. Those are the issues before us: Sub-contractors and a specific aspirant subcontractor.

Mr V G Smith] This issue of subcontractors, was it not an issue that the Investigative Unit, the Auditor-General, the Public Prosecutor and Investigative Directorate for Serious Economic Offences (IDSEO) were going to hone in on? We agreed that they would report back to us in mid-July 2001. Therefore, I do not see the necessity of us interrogating the Ministers any further until we get a report in July 2001. So I am saying it is in this Report. But for me it is something that will be reported on via the Investigating Unit. I would be quite comfortable saying that, as and when the Auditor-General comes back to us, we can tackle this matter. We cannot do justice to it now, if the exercise has been undertaken through another forum. So my question is one of clarity. Is this something that is being focused on by the Auditor-General, and if it is, why do we discuss it here and now?

Chairperson] The Investigators’ job is to find out whether through their forensic endeavours whether there is fraud, corruption and bad practice. We expressed a view. It is in writing. It has been adopted. Can we defend it? Was it a reasonable view that we expressed, or did we suck it out of our thumbs? It is independent of whatever the Investigating Unit might come up with. The Ministers have put the issue on the table. We owe it to them to say whether we can support this remaining in our Report, or not. It is at two different levels.

Mr B W Kannemeyer] I refer to the second sentence of paragraph 5: Selection of subcontractors. When we dealt with that part the concern was exactly that the prime contractors had a free hand in appointing the sub-contractors. The Committee expressed the concern that Government had no influence in the appointment of the sub-contractors. My understanding, at the time, as why we felt that that was important to include that was probably to make provision for the question of local economic or black economic empowerment, and the concern was if Government gave the prime contractors total or free scope as to appoint whom where they want, that might be an avenue lost to Government, if we, in the whole process, did not give ourselves the opportunity to, in one way or the other, influence the prime contractors as to their selection of sub-contractors. I believe that that was the understanding. The second part of that matter concerns the question raised about the company CCII, about the computer system of the Corvettes, or something like that. There has been some information coming, but again, my understanding is that the reason why we included that aspect in our Report was that some information came to our attention and there was a need for us to get clarity on that. I can recall, in our discussions, there was some disagreement on interpretation of this particular one. That was the one where we used the example of a car being manufactured and the manufacturer of the car not having a say in who was supplying the battery for the car. We agreed to get some more information about that one. So, that was what we were trying to achieve by including that part in the Report.

Minister A Erwin] Let me make a few quick points concerning that which we stated in our earlier statement. Basically, as a matter of commercial principle and in the interest of ensuring that the performance contracts on the technical specifications can be met, the procurement process and Government policy, and our view, strongly, as Ministers, is that we should most definitely not deal with sub-contractors. We want the primacy of the obligation to remain between prime and sub-contractors. With regard to empowerment, yes, there were points awarded in the initial RFPs for empowerment. That would count. In the end, the Evaluation Team made a recommendation which administratively supported that we would rank it at zero. We did not take it into account, because we felt we were not getting sufficient true empowerment in this process, that the empowerment factor was not really proving to be of great importance in this matter. So we dealt specifically with the prime contractor and worked on the merits of the issue. With regard to the case that is mentioned, as was submitted to you in the first Hearing you had, this matter did get as far as the Ministers. It related to the overall integration of the command system. It was pointed out that there was a risk factor here, in that this so-called unproven technology could have been used. It was South African. It was been worked on, as you have heard in your earlier Hearings, but the feeling was that we could not afford it in such a sensitive area to take that additional risk. It may be that the particular sub-contractor felt aggrieved at that, but our view was that we must leave this matter entirely to the prime contractors, and that they had to take all risk. We are not prepared to share any forms of risk in any way. On those three points our contention was that we should not get involved with subcontractors; the empowerment factor, at the end of the day, did not prove to be decisive in this matter; and thirdly, we did look into this particular sub-contractor that made the point and our view is and remains that it is not a valid objection.

Ms R Taljaard] On that particular topic the Minister of Finance clearly indicated to us that the constitutional focus in the Defence Review was the driving force behind the decision in principle to acquire armaments. The Minister of Trade and Industry has just confirmed that this particular aspect, that of sub-contractors, did reach Ministerial level. From what has been said, is it the contention that the Ministry of Defence expressed a very strong reservation purely from the perspective of the technical dimension to this, and the technical dimensions impact on the risk cloning, is that the understanding of what you have said?

Minister A Erwin] This is a specific piece of equipment, as you know. I am sure this information was given to you. It is a piece of equipment that resides in the command centre, so there is a particular method of transferring information within this command centre. This bidder also bid for similar transmission mechanisms elsewhere. The view that was put to us at the command centre was that we should allow basically the prime contractor to make the final decision. As was submitted to you in your earlier Hearings, it was pointed out that there had been some work with regard to the future potential of this fibre-optic system of transmission. When it came to the Committee, we were asked whether this risk should be taken or not, because there is tremendous pressure from this particular sub-contractor. Our view as Ministers was clear. The decision lies with the prime contractor and we hold the prime contractor responsible. That is the end of it. Irrespective of what one thinks the potential or anything else may be, we are not prepared to go that route. We are sticking with the decision of the prime contractor, and from our point of view, developing new technology cannot be done ……. equipment in this manner. We are not in a position to do that. Others can do it if they wish to.

Dr G W Corncob] In our Fourteenth Report, this Committee did express concerns about the selection of the sub-contractors, and it seems that view differs from the view of the Ministers. In the Auditor-General’s Review, the Auditor-General pointed out that certain tendering procedures were not followed. I suggest the Auditor-General has taken note of this. The Investigating Team has taken notice of this. Let the investigation continue and let them report back to this Committee and to Parliament. There is no sense in pursuing this point any further.

Mr N Masithela] I refer to what Ms Taljaard is asking about. I have gone through the Report and the transcript. I do not have a sense that that comes from the Report, and she was not taking cognisance of the ruling of the Chair when the meeting was started. I am raising this matter, because I have just checked from page 69 to 71, on the issue that we are talking about, in the transcript, and the Minister has dealt with, and what the hon member is dealing with, in my view, is an issue that does not belong in this meeting now. It is important that when those issues come in the Report, maybe the Chair should take cognisance of those matters.

Chairperson] My feeling is that the question was relevant. I repeat: the Report of the Committee, the Review of the Auditor-General, and the transcripts are a very small fraction of the evidence we gathered. The correspondence between us and the departments was far more substantial. The member could have made a point from any one of those. It did seem to be relevant to getting this sort of clarity we seek here. I cannot always engage you in arguing about how I am chairing the meeting.

Mr N Masithela] What I am raising here, I am taking the matter from what the Chair ruled. I am not contesting what the Chair is doing now. I am saying, it is important for people to consider that we were told that the documentation that is not supposed to be part of this and I think the Ministers were contesting our Report. They were not contesting some documentation that was not known to them. They were contesting the contents of the Report. My understanding is that the issue that the hon member is raising has nothing to do with the matter that is in the Report. I am not contesting the ruling of the Chair.

Mr V G Smith] I want to talk on meeting procedures. I think there was a firm proposal put by the UDM on this matter and we supported it or vice versa. We put it on the table. It was supported by the UDM, it does not really matter. What the two parties are saying, is that this thing should be taken to another forum. Now, we are asking you as Chairperson to maybe summarise the feeling of the House. If you want to put your own position as Chairperson, then you should put your position and let all the parties look at it. We have put a firm proposal in the matter. I am restating that I am supporting what Dr Koornhof has said, that this matter is one that the Auditor-General has taken note of, and that the Auditor-General, together with his team should do that Investigation. Chairperson, I am asking you to consider our proposal, that if you feel differently, put it on the table and let us debate how we take this thing forward. I am again saying that we have three hours with the Ministers and we cannot be bogged down on this matter forever. We need to get to a stage when we have dealt with this sufficiently, we move on or we reach consensus. We have reached that stage around the selection of sub-contractors.

Chairperson] I am abiding by the decision or recommendation which actually came from this side of the House, that we should achieve a certain position by Wednesday. I am trying to do no more and no less. If members want to reverse that decision, we can entertain that. I do not think we have been courteous to the Ministers or to any other guests that are here. I did repeat this arrangement at the beginning of this meeting and the Committee agreed. We should continue with that, namely to listen to what the Ministers are saying, the issues they have raised in an honest and open way, and to look at it against what our Report says. We will have this on transcripts so that we can consider it and start writing our Report on Wednesday, as was the suggestion. So to say that we should delay this for an investigation is really not helpful. The investigation really has nothing to do with us expressing a view in our Report and whether it is a correct or not correct view. So unless anybody else wants to propose a dramatic change to the way we are running this meeting, can we continue, please?

Minister A Erwin] The point from our perspective would be a relatively simple one. What we have said about contractors and sub-contractors in this matter stand. We have made our views known and you will take it into account. The point we made is that further aspects of sub-contracting require forensic work to be done. Obviously, that is not this Committee’s responsibility. So if there is any delict or misdemeanour or anything that happened at sub-contracting level, all that was being suggested was, and which we would support, is that it has to be dealt with concretely by the Auditor-General to check what is happening.

Chairperson] As we understood your objections to our Report in this particular instance is that you were insistent - maybe correctly so - that subcontractors had nothing to do with Government, and that for us to have included that in our Report, and for the Auditor-General to have included it in his Review, was perhaps misplaced. We have put it in our Report and we owe it to you to say why we put it in our Report. We say there was reason for us to believe that maybe there were some interventions which influenced the selection of sub-contractors. The one particular case in point, the CCII, which was referred to, for which we have received a deluge of documents and arguments from both sides which is pretty inconclusive, we believe that we argue that we are justified in putting it in our Report, and we are hoping that we are going to convince you that it is well placed to be here in the very vague terms that we put used here.

Minister T Manuel] Part of the problem is the vagueness and ambiguity in the way in which it is crafted here. I read it to say that Government must be held accountable for what happens in sub-contracts. What Minister Erwin advises this Committee is that, in the realm of things, and the C-squared, I-squared case may be one in point. We contract for the supply of Corvettes. The minute we take responsibility for the appointment of sub-contractors on the base of their technology, if this Committee asks us to do that, we would have to take responsibility for the risk of failure, because it is not a contract between the prime contractor and sub-contractor. You are asking that the nature of the contracting be shifted. We contest that. We are saying that we contract to buy a full ship in this instance, in working order, and therefore, those with whom we contract must be able to take responsibility. I am sure that if you in a quiet moment re-read the sentence, you would find that the suggestion is, in fact, that Government take on that risk. Certainly, from a fiscal perspective, my pleading would be that it is not a risk that we should consider taking.

Chairperson] We will certainly look at it again to see if your interpretation is as may be read in there or not. I just want to assure you that there are many other issues which are observed. On the basic issue of sub-contracts, we have hard evidence that there was a prescription coming from Government, at least in one case. On the C-squared, I-squared issue, the correspondence is very unconvincing, where C-squared, I-squared would claim that they were never given the opportunity to provide the guarantees. You have gone to the department and said, where is the correspondence or notification to C-squared, I-squared that you did ask them for the guarantee. They produced a letter in which somebody claims to have said to the Managing Director of C-squared, I-squared informally that they were going to guarantee. The Managing Director said only on certain conditions would that happen. That is the sort of vagueness which leaves it an open question which needs to be looked into.

Minister T Manuel] I am not pleading specially on behalf of a particular contractor or sub-contractor. The issue from our perspective is one of principle. Because, indeed, the Standing Committee on Public Accounts is asking Government to manage sub-contractors. It is asking Government to take on the risk which, even in the right of this Arms Procurement Package, we do not consider an appropriate risk for Government. That is the principle and we are asking that the Report be examined within that context.

Chairperson] So we are all sticking to the issue here, are we?

Ms R Taljaard] On that particular issue that was raised by the hon the Minister, is he satisfied that the existing mechanisms that would look into the primary contracting – sub-contracting dimension, and also into conflict-of-interest issues, are sufficient that there can never be manipulation from the process point of view when looking at the primary contractor – sub-contractor interface? Is he satisfied that that can never be manipulated, and that it had not been manipulated in this case from the interface between Government and the prime contractor, that nods and winks were not given to prime contractors to indicate which sub-contractors would be preferable? Is he adequately satisfied that firstly, from the perspective of the conflict-of-interest issues that we were talking about earlier, and also from the perspective of general practice, best practice, that the existing mechanisms are sufficient to curb that type of activity or that type of possible linkages, be it informally between prime contracting and sub-contracting when Government is contracting?

Minister T Manuel] The only reply I have to that is what I have in front of me in paragraph 5 of SCOPA’s Fourteenth Report, on page 1058. None of the issues that Ms Taljaard raises now are covered in that paragraph, and if it is about the drafting of the follow-up Report, I question the way in which the sentence stands in this Report.

Minister A Erwin] Can I just make another point in this because it is in our statement and I make reference to that statement and probably the version you have got which is document presented to Parliament on page 36, the last paragraph, where we deal with paragraph 3.6 from the Auditor-General’s Review. I want to stress again and again, that the Government Ministers and Government, as the Minister of Finance indicated, are not prepared to take responsibility for sub-contracting. It follows, therefore, that the question of how a prime contractor and sub-contractor got together is their business. What they have to deliver to us is a product that meets the specifications. If there were attempts by officials to try and influence sub-contracting, we ask the Auditor-General to look at that. Now you asked an earlier question and we are quite happy to make this information known. The Auditor-General does not have to answer this question. We will answer it. We convened a meeting with the Auditor-General, the Public Protector, National Director of Public Prosecutions, and we said, okay, the investigation has to proceed. Now this particular area, as will be testified by everyone in the meeting, we said, how are we going to handle this, because what is the nature of the delict, what comes up, what are the investigative procedures, because we need to be clear that when we move on this matter, we move correctly and decisively. So yes, we did have a meeting. It is no secret. It was a meeting that I think fast-tracked the investigative process, because it dealt with issue of confidentiality of information, etc. The Government’s point is very clear. We should not be responsible for sub-contractors. The Auditor-General, as I said earlier, has a responsibility to check that we get value for money. If the Auditor-General believes that we did not get value for money because of something happening at the sub-contracting level, they will have to investigate that. As I am sure the Auditor-General knows, the procedure in doing it will be relatively complex, because of the nature of things the contracts are not always in our possession. That is what a forensic audit is about. They will have to dig into this matter. They may well find that they do not have the authority to do it, and they may have to then refer the matter to the National Director of Public Prosecutions. The Government’s point is very simple. All we are saying is that the Committee seems to be implying we should take responsibility for sub-contracting. We want to make it absolutely clear that we do not want to take responsibility for that. We cannot be held accountable for sub-contractors.

Chairperson] There are three people who wish to ask questions who are not members of the Committee. So I am going to ask them, in view of the time problems that we are running into, to keep them very succinct, because we are trying to be very direct. And as a Committee we have a particular agenda, a particular plan which we are trying to follow in referring to the Report we passed. So please keep them very brief.

Ms P de Lille] I want to come back to the point raised by Mr Kannemeyer, the issue of Black Economic Empowerment. I understand Government would not like to accept responsibility for sub-contractors. My question really was, in their dealings with the prime contractors, did they have criteria or a requirement that there should be a certain amount or percentage of the contracts involving Black Economic Empowerment?

Minister A Erwin] I tried to answer this earlier. Yes, there was a certain specification in the particular cases we are looking at, and we agreed to discount that point scoring, but as a matter of policy, the Government would seek to try and get empowerment in those deals. But that cannot override, particularly in critical equipment, that cannot override the other special specifications. I was just trying to find the weighting for the members’ information, but we will find that soon.

Mr H Schmidt] The Ministers have referred to the record of the Committee meetings on 11 October. I am sure you have a copy of it. If you page to page 47 thereof, it was in answer to a question asked by Mr A Feinstein concerning the link between prime contracting and sub-contractor. On page 47, Mr S Shaikh is indicated to have stated to a certain extent to what you have been saying. Mr Shaikh said the following:

The package concept was initiated from a Government-to-Governments initiative. All tendering documents were issued to respective embassies, be it the U.K. Embassy, the Swedish Embassy, ….

In that particular regard, if one turns to page 48 of this transcript, Mr Shaikh also gives an answer towards the middle of page 48 which explains the process. He says –

In the tender documents that went out, the respective projects were given what we call a direct counter trade weighting …

… and then what follows. But my concern, and my question is about what follows on that when Mr Shaikh says –

We ensure that the suppliers met the minimum committed figure and percentage, not necessarily with regard to which the supplier they particularly choose to use.

Then we come to the important part, when he says:

We further ensure that through a project team process that the supplier remains contactable, recommending the sub-contracts to us, that we ensure that we concur with the recommendation. It was their recommendation. We either support or reject their recommendation.

Now, implicit in that, it means that at least the Government had knowledge of the prime contractor as well as the sub-contractor. In our view it is very difficult for me to see how far and why the Ministers are divesting themselves at arm’s length from the sub-contractor when Mr S Shaikh seems to have indicated that there was at least knowledge within the process of (a) who the sub-contractors were; and (b) what the sub-contracts entailed. So, I would like to take dispute with the Ministers on that particular issue as to the fact that sub-contractors are so far vested outside their prerogative or their scope of deeds that they do not really take responsibility for them.

Minister A Erwin] When one is told by someone that he would produce this Corvette, one wants to know how, who and where. So it seems that the member understood me to say that we were not interested in sub-contractors and what they supply, and that we have no legal hold over the sub-contractor. If someone comes to us and says he is building us a ship and he is going to use in the command system certain equipment, our technical team is going to say, no, that is not proven equipment. Of course they are going to do that. That understanding is absolutely correct. That would be the case for any major contract. If one build a bridge or anything like that, one wants to know who is doing it, and how, and why. The point that was raised in SCOPA’s Report here, the point that we are responding to is, that when it comes to contractual liability, be it for performance contracts, payments, etc. that contractual liability lies between the prime contractor and Government. So Government clearly is not going to accept a piece of equipment that it feels is not going to meet the technical specifications. But the responsibility for meeting that technical specification must be the prime contractor’s.

General B Holomisa] I will try to propose a way out here. It would be wrong to say that we have not noted the Ministers’ attempts to defend the Executive’s decision on the Arms Procurement. However, SCOPA was very sober in producing its Fourteenth Report, which was subsequently passed by Parliament. It was based on the Auditor-General’s Review, as well as the documentation from the Department of Defence and the interrogation of some people who appeared before it. In the light of this then, we would like to endorse Parliament’s decision that there should be an investigation into this matter. It is a pity that the Ministers responded to this parliamentary decision by seeking to undermine and delegitimise that decision rather than to give it the Executive’s support, which was so eagerly awaited by the public. Finally, despite this misjudgement by the Executive, the investigation must continue as per recommendation of SCOPA and Parliament. I do not think the issues raised here need to be changed out of this debate we are engaged in now. Let us accept that Fourteenth Report and that the investigation must continue. What Parliament has to ponder now, is the refusal by the Executive not to include the Heath Special Investigative Unit as recommended by SCOPA. It is puzzling to the public why it was excluded. It is not going to take us anywhere if we continue to raise these issues because we already said it must be investigated.

Chairperson] You are entitled to your views but this is the wrong forum.

Mr A J Feinstein] I suddenly lost my train of thought but I think I have been covered in an answer to a previous question. I want to seek clarification. The Ministers did have the understanding, for the reasons that Minister Erwin has given, that civil servants were having contact with potential sub-contractors around issues related to the deal.

Minister A Erwin] Yes, there is inevitably contact between technical teams and sub-contractors. I have absolutely no doubt in my mind that at various times in this long process each of us as Ministers probably met in one or other way sub-contractors. The framework that we are putting forward is that contractually Government must contract with the prime contractor. It should not enter any into any arrangement with the sub-contractor. That is the response to that question. It is also quite clear that Government can say they are not satisfied with the technical specifications because the supplier that has given it is inaccurate or wrong, and we did that, and the evidence shows that the officials did that. In fact, it came to the Cabinet Committee, which took a decision in that respect. So that is what we are arguing. So what we are then also saying is that the specific matter of prime and sub-contractor, the issue of delict and nature of delict is a relatively complex issue which will have to be dealt with on the basis of allegations made by the Investigating Unit.

Chairperson] At the beginning of this meeting we said we were going to stick to the issues in the Report, that we are going to give Members the opportunity to go wider on some issues. We have run out of time, so I am going to have to insist that Members only direct their questions to the specific issues raised by the Ministers, as they pertain to our Reports.

Ms R Taljaard] I just want to have clarity on the one sentence that both Ministers kept highlighting in the context of the misunderstanding of procurement which was so prevalent in their press release and also at the press conference in Johannesburg. I wish to understand that the entire thrust, of the bulk of the thrust of their comment that neither SCOPA nor the Auditor-General’s Office understood Government Procurement is predicated on this one particular sentence. That is the one question. I want clarity on the Ministers’ understanding of the sentence which the Minister of Finance placed so much emphasis on when he highlighted the ambiguity that he referred to. Are we to understand that the entire thrust of the media statement, both in terms of the references made to the Auditor-General and to SCOPA, on the basis of Procurement, in particular, and sub-contracting is predicated on this one sentence? Then there is a second question. The Minister referred to a meeting that he confirmed they had had with the Auditor-General. Please explain that. If the Chair wants me to explore that in the last list of further matters raised, I will be happy to do that or to have it placed there. But could the Minister indicate to us the date of that meeting?

Minister T Manuel] On a point of order, Mr Chairperson: Is this an inquest? I need to know the nature of the discussions we have here, because if we are unclear about it, we are going to talk past each other.

Chairperson] Do you want the member to be more specific and perhaps quote from the documents?

Minister T Manuel] No, if we are asked to come here and supply off the cuff dates of meetings, what transpired in those meetings, etc, it changes the nature of this engagement. I would say it moves away from the request that we received by letter in your name, requesting us to clarify the statement which we issued on 12 January 2001. That was specifically the purpose of this meeting. I do not think that we have a relationship with SCOPA that requires Members to ask of us to be subject to an inquest. An inquest is something of a very different order. I ask your judgement on this.

Chairperson] The word “inquest” might be a strong one, but I would think that perhaps the member is going beyond the arrangement. Would you concede to that?

Ms R Taljaard] I would concede to that, but I would also then ask whether the Ministers could indicate their willingness to engage SCOPA in the future on this particular issue when we compile our further reports, and also when we follow the ongoing investigation in terms of the report-back mechanism created by the Auditor-General to this Committee.

Minister A Erwin] The point we are making is that the Committee must be precise on what this is. In any investigative process - this is why we have specialised bodies to do it - those being interrogated must know what they are going to answer. One would have to reconstruct completely the procedures and mechanisms one uses. What is the point of that? We have already dedicated bodies and constitutional structures that are dealing with the matter. If you want to put questions about the issues we raised, or any other reasonable piece of information, of course we will co-operate, as we will be co-operating fully with the Investigating Unit. But we cannot just have continuous interrogation when we do not know what is happening.

Ms R Taljaard] It was a particular question relating to the relationship between the Executive and a Chapter 9 institution, and a parliamentary Committee’s view on that. That is why I raised this as a possible future issue for SCOPA to revisit.

Chairperson] The Committee will consider it in time.

Mr B Kannemeyer] I am just trying to keep to the order of the meeting. Can I proceed with the question relating to the overall cost of the package?

Chairperson] I am trying to finish off this issue. Has everyone finished on this issue particular issue of subcontractors and the subcontracting in Section 5? Then I would like to move on. The next issue which was raised by the Minister is the issue of the LIFT Hawk deal, the evaluation thereof and the way the options were given to the Cabinet Committee and how the decision was formulated. This was an issue we raised in our Report, and one which the Ministers do not seem happy with. Who would like to take up on that issue? Nobody wants to pick up on that issue? It seems that here is a direct contradiction between the information we received from the Secretary for Defence and the Minister. In its own time the Committee is going to have to re-evaluate that information to see whether we had been misinformed by the Secretary for Defence, or not. It does give us something of a different programme. Of course, there have been a number of different reasons given for why, what we saw as a midstream change in the selection process, why this in particular took place. I would agree with the Committee that that is what we are suggesting. We do have sufficient information on which to evaluate the points made by the Ministers.

Minister A Erwin] We want to clarify our position as set out on Page 36, paragraph 3.2. Our view is that if you would read through the record of the Hearing there is no direct contradiction at all. What was reported to you by the Defence officials was that they did exercise the evaluation. One of those exercises was the so-called, no-cost option, and they put the various possibilities to the Committee of Ministers. The Committee of Ministers then made a decision which we are confident – no bidder has challenged that decision - that was within the accepted practice when considering a bid, and an RFP in exercising our judgement. We are confident that was accurately and correctly done. Our check on that, as I say, is that we would have been taken to court if we had been outside of those parameters. The only point that we make, specifically with regard to the Auditor-General, is that his Review reflects that this decision was made by the Arms Acquisition Council. The point we make is that was not correct. The decision was made by the Committee of Ministers. That information was made available to you in your first Hearing. So, by just correcting, we do not think it is a major contradiction in the information provided to this Committee. We are merely restating quite clearly that we made the decision. We are confident we made it for the correct reasons, and within the correct procedures.

Chairperson] If you read the reply to the Management Letter which the Auditor-General sent to the Secretary for Defence, you will see certain inconsistencies, in how the whole emphasis shifted away from cost into industrial participation benefits. Then the second part to this comes into the cost of the actual Hawk, the largely unexplained costs which are the basic costing we have, which might turn out to be perfectly legitimate, but we have included it in here, and have asked the Auditor-General to have a closer look at the detail. So, I do not think we have any problem with that issue. You would accept that they are our inclusion of that particular interest.

Minister A Erwin] There is a lot of work that the Auditor-General will still have to do. We are familiar with the Management Letter. We are familiar with the issues. We are just checking with you that the Committee is recording, and will take into account the view that, the Arms Acquisition Council and the Evaluation Committee were not shifting the goal posts. They were putting a range of options to the Ministers. We took a decision. In doing that we had to take into account whether this would violate the RFP requirements. That is the critical area. One cannot put forward a request or a proposal and then make a decision on something different. That is going to get you into court. That is a violation of the processes. The Ministers are confident. That is what we want recorded, that the advice given to us by the Arms Acquisition Council, was perfectly in order. The options given to us were perfectly in order. That we were not unduly misled. Information was not manipulated. We were perfectly capable of taking that decision with the advice that we had.

Ms R Taljaard] You raised the aspect of the role that considerations of industrial participation, particular defence industrial participation, would have played in this particular instance, given that this was the prerogative ministerial decision making as your point out, and not of the AAC. Could the Ministers elucidate further on the Industrial Participation sway, and the strength that the Industrial Participation held over this particular decision? Could they also indicate whether there were specific concerns about the cost dimension to this particular item that were expressed or followed through any further.

Mr A Erwin] This was explained in the previous Hearing. On the scoring are all of these factors, a ranking was achieved. What we did was, within that scoring, to look at the specific propositions particularly in regard to the DIP, as to what would be the proposed purchases, what would be the equipment that would go into the various aircraft, the trainer as opposed to the fighter trainer. It was our view that in the DIP, that is the South Africa’s Defence Industry, was better equipped to deal with the equipment going into the Hawk-Gripen combination. It was our view that at the time, if one looked at the way in which the Defence Industry was merging and coming together in Europe, that the DIP proposals were more stable in the long run, and it is our view that the need for the fighter-trainer combination, along with that, was important. Finance then assessed what would be the overall impact of this on the financing of the deal. That matter was looked at. It was felt it would not be an absolutely decisive in the issue. But we looked at it once again when we did the final Affordability Report, and when we did that Report, as you know, we then did contracts that purchased in three tranches, to deal with the affordability issue.

Chairperson] One error on your part is that the Auditor-General was requested by the losing bidder who won on the first round to look into the issue, and I think he was advised to do so. The Committee was also approached by that particular bidder. Hence just partially more of an explanation as to why this appears in our Report.

Minister A Erwin] We were not fully aware of that, but the losing bidder can go to court if they wish.

Chairperson] I do no think they are intending to do that.

Minister A Erwin] I am fairly confident they would not, yes.

Chairperson] The next issue is the performance guarantees for NIPs and DIPs, the 10% issue. Here again, it is an issue we picked up from the Auditor-General’s Review, which we did some more work on, commented on, and which the Ministers have responded to. Does anybody want to take up that issue?

Mr A J Feinstein] Minister Erwin mentioned that there was a feeling that had the guarantees been any higher than 10%, it would in all likelihood have led to some sort of building into price. Would that not apply if the guarantees were put at below 10%, as well? Some of the literature does reflect that building guarantees into prices is fairly common practice in armaments deals.

Minister A Erwin] This is a policy choice one has to make. During our investigations in preparing for the National Industrial Participation Programme - I dealt with this in the Trade and Industry Portfolio Committee meeting - we analysed some 17 countries or so, and the range is from 2,5% to 10% in the countries we looked at over the last 10, 15 years. So we had to make a decision. We made our decision, not in terms of the Arms Deal per se. We made our decision when we, in April 1997, adopted a policy for National Industrial Participation. The reason for the IONT - it is recorded in the Minutes - looking to go slightly higher, was a trade-off with the bidders, because we were urging them to adopt specific industrial-strategy-type investments. We acknowledged in those negotiations that certain of them - and the most obvious ones are the very large investments in steel mills - these projects would have to be thoroughly built up in the feasibility studies and we accepted that by the time we entered those negotiations the steel markets were very difficult in the world as a whole. So the negotiating team began exploring whether we could strengthen our position, in the light of the complexity of these major investments, by increasing the performance part. In certain cases that was agreed to, and in others it was not agreed to, but our policy remains clear that it is 5% performance bond. There were specific circumstances that were applied here, and the 10% figures were reached in the very final stages of the negotiation as we began confirming that contract prices.

Ms R Taljaard] The international literature on this particular dimension of off-sets and industrial participation and the performance guarantees lays quite an extensive emphasis on the implementation mechanism or agency or structure that is created to ensure that there will be compliance. We know, for example, that the United Kingdom has established a particular export services organisation that works quite closely with the Ministry of Defence and the Board of Trade, to ensure that that delivery does take place. Are we satisfied that we have a similar or better mechanism in place to ensure that the due diligence with the oversight over NIP and DIP implementation will happen, i.e. so that we would not trigger the 10% penalty? In addition to that, the Ministers have highlighted some of the concerns and reservations from the big projects perspective, and it relating to the big three steel projects. Is there a concern that these three steel projects still remain in peril or remain problematic, given the ongoing downturn in the steel industry, and also given the amount of consolidation that is taking place in the steel industry globally, and the impact that that might have on the possibility of attracting investment capital into some of these areas and financing for these particular deals?

Chairperson] Ms Taljaard, does that relate directly to our paragraph at the top of page 1057 and the clarity we are trying to get on the Minister’s objection to that?

Ms R Taljaard] It does, and the implementation mechanism in particular. I realise that the question on steel is an indulgent one because the Minister raised the topic, but if I could get clarity on the implementation mechanism or agency.

Minister A Ervin] I was not being so indulgent. I was just describing why we negotiated 10% when our policy is 5%. Yes, our own studies confirm the view as I outlined them to the Portfolio Committee on Trade and Industry, that we must have the capacity to monitor and implement the work being done as through the support in the case of the United Kingdom or the very service organisation the member mentioned. In the case of all the major consortia, they have put full-time people into South Africa whom we work with, and hold regular meetings with, to monitor and check that the programme is going forward. In my own department we have made two additions, the upgrading capacity to monitor the actual business plans, which is one of the components of industrial participation, and overall we probably increased our capacity by some 50% to work with the NIPs. Are we concerned about the projects? No, not particularly. The timing of the projects may alter, but it is our view that the merits of the cold-rolling mill are very strong, as are the other two mills. So we would be negotiating specific timing. You may be aware of the fact that these mills produce slightly different types of steel for different purposes. We remain confident that the projects are sound. In any event, the commitment of the credit still has to be met. So as we negotiate with companies, if it appears that the prospects for a particular project are not going to emerge because of the market conditions, they must then fill the gap with other projects. In certain cases we are already negotiating to change the project, within the time-limits that are set out in the contracts.

Mr A J Feinstein] I refer to the issue of the use of two different foreign currencies in one of the contracts. I accept that these documents are amongst the confidential ones we spoke about and I wonder if we could not then communicate with the Ministers in writing and give them the specific reference, which they can then respond to.

Chairperson] Yes, let us do that. We have had a document asking for details, which we will furnish them with.

Mr B Nair] The Minister has made an important statement to the effect that the NIPs were not decisive in the procurement process. Could he elaborate on that?

Minister A Ervin] We made this point in relation to the Review of the Auditor-General, and some of the comments made in the SCOPA Report. I think we must accept that there may have been many who argued in the public that will insist it is the off-sets and the participation that justify this. We want to make it absolutely clear exactly what the decision-making process is. As the Minister of Finance and I said earlier, there is no possibility that participation can justify a purchase. One has to justify the purchase on its own merits. As I said in the Portfolio Committee on Trade and Industry, when I was quoting from the public policy document of the NIPs, this is a mechanism used to facilitate incoming investment in line with our industrial strategy. What we point out in our statement of 12 January 2001 too is that - I think this is extensively documented in the Affordability Study - the outcome of the NIP, both on the export side and the incoming investment side, was utilised in the risk analysis for the growth-rate and the effect on the overall macro-economy that this decision may have. So we used it in that way. It cannot be the rationale for making a purchase like this. That rationale has to be in terms of the Defence Review and our constitutional obligation.

Chairperson] The Ministers, as far as I understand, have not raised too many objections against the general thrust of the DIPs/NIPs section in our Report. Are there any other issues that we need to discuss with the Ministers on the DIPs/ NIPs paragraph?

Minister A Erwin] We commented on the statement that this must be an objective of the deal has to be qualified in the way we have indicated. Concerning the argument that the performance contracts are too low, we want the Committee to take into account our response to that, which is a policy response and an operational response. Statements were made such as it would make sense to buy arms now because one gets more investment. We just hope that kind of complete misunderstanding is now well understood.

Chairperson] I think that does not open our way up for wider discussion on the NIPs or DIPs. We only want to respond to the issues that the Minister raises. If we have time at the end we may come back to some of these issues. The next issue raised by the Minister was the procurement processes and he mentioned some peculiarities to this.

Mr V G Smith] I do not want to deal specifically with the procurement processes. I am just asking what are the other issues that you had highlighted. We have half an hour left. We might have to reprioritise, depending on what issues you have to deal with, without necessarily saying the one is less important than the other one. So you will assist me by saying these are the two or three issues that we need to cover, unless we start putting timeframes so that we could get some comment from the Ministers before the meeting adjourns at 5 o’clock. I need to understand if you are comfortable with that, otherwise we can reprioritise.

Chairperson] We have four more issues that we have to cover that the Ministers raised today. There could be other issues from the written documents which members might try to raise. The first one would be the procurement processes. Are there any comments? I think this is perhaps the biggest single issue for the Committee. It regards these policies and processes and best practices etc and non-compliance therewith. We had to take into account, as one of the Ministers’ documents referred to, that the Auditor-General produced what he called a “Review”. It was not a thorough investigation. He identified certain issues from this very sort of random approach and these he produced in his Review. Amongst those issues, and from the communications and documentation which flowed from this Review, we were made aware of something like 18 instances of where there had been non-compliance to laid-down procedures. This is a very serious issue for us, because these procedures are established by the Collective International Experience. Many of them are written into regulations. Some come from law and some from conventions. When we see that many, we ask ourselves how many more would there have been if this had been more than a Review. It is enough to show us that the tried and tested and best accepted practices had on many cases been non-complied with. Some of these are relatively less important procedures, but others were more important. It did give us some sense of foreboding and a sense that we had to dig as deeply as we did manage to dig. I think the degree of non-compliance in itself, in our opinion, against the amounts of money we are talking about, that in itself justified the forensic investigation we called for. besides any other issue. It is important to note that.

Minister A Erwin] You said there are “many other things”. We cannot answer “many other things”. What we referred to in our statements and they contained in the answers to paragraphs 3.4, 3.5, 3.7, 3.8 of the Review, and we make a further comment. We have argued that - this was presented in earlier evidence to SCOPA, but it seems not to have been accepted by the Committee, so we wish to have it restated quite strongly - the specific incidents that were referred to here are matters around, first of all, the value systems. There is a debate between Defence and the Auditor-General on that matter. That evidence did not appear in the Fourteenth Report of SCOPA, because it was dealt with in the evidence that this Committee chose to ignore. We want that to be reconsidered by the Committee, and if members need to, SCOPA should get more evidence on that, because we as Ministers are confident that the position put forward by the Defence Department is an accurate one and that their justification is correct. There is the issue then of staff targets and other targets. Again, in our statement we explained how this deal was decided upon. One could not therefore use the procedures for single-item-purchase for such a major purchase. I think, again, the officials from the Defence Department, in their presentation, gave quite lengthy documentation which was not taken into account. It was not dealt with. So the assertion is that there were irregularities in the procurement, but the Committee have not commented on the evidence given by the Defence Ministry that justify why these things existed and whether, in fact, they were transgressions. We also deal with in our analysis - it was dealt with in the evidence to SCOPA, and we urge the Committee to look at this again and we are prepared to discuss this further - how we got additional support in the contracts in ARMSCOR where it was argued that we did not use ARMSCOR procedures. Ministers take responsibility for that decision. This was the decision make in the ministerial sub-committee to employ the additional resources that we indicated. There is minuted documentation which is available to SCOPA as to why we took that decision and why we adopted that procedure. That has not been dealt with. We also point out to SCOPA, because it was raised by the Auditor-General that this matter was dealt with by our Chief Negotiator who gives evidence to this Committee, that the way in which budgeting was done for this deal is different. There is, as I said in my opening remarks, differences in the way this was done. Accordingly some of the criticisms made of Defence that they did not look for the resources first, cannot apply in this case. And then we make a point, which is something that we have discussed with the Auditor-General, because we are very open to it, that it is the responsibility of the Auditor-General to go back and check what procedures were used, but we would urge, as we did in this statement, that further discussions take place so that we get clarity on precisely happened. Our comment in this regard was that the role of the Minister’s Committee in making decisions are entirely justified and without any male fides. We presented that evidence, as the Auditor-General said himself earlier. I have explained at some length to all investigators why we took those decisions, and we co-operated fully on it. We request SCOPA to review, when preparing its follow-up Report, that it not only make reference to the earlier evidence given, but also to the information we are giving you now. Should there be further need for SCOPA to have further documentation we need to know what it is. One thing that concerns us a little bit - this has been mentioned twice – is that the Committee has more documentation that is not in the Report. We are responding to the documentation we know exist, and presumably all documentation relevant to this decision must exist with us. I do not know if there is documentation that SCOPA has over and above that. It is a little unfair on the Executive to keep making reference to documentation that we have not seen. Unless you are telling us that it is documentation we already have, then we will be comfortable. With regard to the allegations, that is another matter. All sorts of allegations are made. But these are not allegations. This that we are dealing with now deals with actual procedures undertaken by government. So we have in our possession all the documentation necessary.

Chairperson] Yes, it is quite factual that we have a substantial amount of documents which would appear that you have not had sight of. It is documentation that we took into consideration in producing our Report. We do not refer to every document in our Report. We draw our conclusions and these came of our appraising of all these documents. The fact of the matter is that the Ministers did choose to criticise our Report before coming to us and saying that we must send them the relevant documents. We would have gladly shared all our documents with them. So we could find that we have missed one another here.

Minister T Manuel] I think this is one of those reciprocal issues, because the point that Minister Ervin raised earlier is pertinent. We were not called. We were told that there was insufficient time. I indicated our willingness, not only to have the Minister address SCOPA at that point, but also, if needs be, to invite Mr Roland White who headed the Affordability Team in the Treasury then, who currently is employed in the World Bank, to bring him back from Washington DC to appear before the Committee to deal with these issues. That is a matter of record. It was not taken account of. Yet the Committee arrived at certain conclusions. I think we need an even-handed approach to this. I just ask you as the Chair that even-handedness be demonstrated in dealing with this kind of issue. We cannot be asked to comment on issues or documents that to the best of our knowledge does not exist if we have not been privy to them. What we have been privy to is a record of what transpired in the Committee, all 100 pages of the transcript of 11 October 2000 and presume there needs to be some reflection of that in the Report of the Committee. That is the disadvantage that we have.

Chairperson] I agree. You are at a disadvantage. Of course you cannot comment on documents that you have not seen. I am saying that you have made a judgement on a number of issues before seeing those documents. We can find out afterwards that who is responsible and who is to blame, and that is the fact of the matter.

Minister T Manuel] No, Sir. I am saying that the Committee had cast a judgement without hearing us. That is the context.

Chairperson] That is another whole debate which I do not think we are going into. Those are the procedures and method of work which have been approved by Parliament that the Committee follows, as do all Public Accounts Committees in other parts of the world, but we are happy to have this opportunity to get some clarity. We are going to take everything you say into consideration. We are happy to have further communications with you and we hope that we can achieve some shared understanding of these matters. Are there any other questions on the matter of processes?

Mr T Makwetla] I am of the view that as members of this Committee we should not deceive ourselves and in the process also deceive the public. What I mean by that is that in the normal proceedings of the work of Parliament the Fourteenth Report is one that was produced by us as this Committee. We produced this Report on behalf of Parliament. There are no Members of Parliament who are more knowledgeable about the contents of that Report than we, because we produced it. I think it is something that the way we handle our work in relation to this Report we should take that into consideration. From time to time it happens that members say that we are dealing with a Report of Parliament, presenting that point, as if saying that we are incapacitated to do certain things. This point I am raising is very much in line with the intervention that was made earlier on by Mr Gumede when he said in our interaction with the Executive, in his understanding of what we are doing, it is not a question of defending that Report against what the Ministers are saying. I still want to understand your latter remarks just before I came in when you said it is a practice all over the world that the Committees of Parliament has a particular way of work. I am not sure what it is that you are referring to. It is a very relevant fact that the exercise we are having now, if it had taken place before the Fourteenth Report was tabled before Parliament, the quality of the Fourteenth Report would have been different. I have no doubt about that. This Committee would have benefited from the interaction with the Executive for purposes of growing from the information which we are only getting now. Such as that some of the formulations that we have in the document would obviously have been of a better quality, in my view, for example, where we wanted to talk about government ensuring that there is affirmative action in this programme, we would have said so very clearly, aware also that the reason why the Executive did not include that factor in the deal. They take this firm view that as the Executive in relation to this Arms package to only deal with contractual matters with the family contractors. I do not think that it is proper for us to deal with this exercise in a manner that seeks to defend what is there, regardless of the new information that is now being made available to the Committee.

Chairperson] I am sorry to interrupt you. We are way off the agenda and I have given you quite a lot of time. We did take your points. You need to bring it to an end, because the Ministers also want to leave and we have work to do.

Mr T Makwetla] Maybe I should not belabour the point. I thought that we were through with the issues that we wanted to deal with today. The other aspect that I wanted to point out is that if we approach our exchange with the Executive now with an attitude that we are defending the Report, what will be communicating to the public? We will be giving the public a wrong understanding of what is happening. It would be that we are saying to the public that the Executive is against the conclusions of the Report that there should be an investigation. That is what General Holomisa was also implying. That is what we would imply. We would be giving a wrong impression if we take this exercise with that kind of attitude.

Ms R Taljaard] The Minister indicated that there was a great degree of unhappiness that the Ministers did not come before SCOPA through the course of the compilation of the Fourteenth Report. A large part of the press statement also highlights the fact that the Ministers believe that we did not benefit from an engagement about the decision-making level that involves the Executive. Then the Minister indicated that he would have wanted to have taken special measures to make a civil servant available to the Committee, Mr Raymond White. Would he clear up what is an apparent contradiction in that statement?

Mr T Manuel] There is no contradiction whatsoever. The point is that the Treasury was not heard by SCOPA. And over and above my own participation, we would have been able to bring in those involved in the affordability exercise, because these are matters and hopefully it will get to the relevant matters on the agenda quite soon, under your capable guidance, Mr Chairperson.

Dr S Gounden] I wish to make to raise a question. On three occasions in this meeting or more I have had a standard response from you to a number of queries to participants, namely that the Fourteenth Report has been prepared after studying far more substantive information. I have been doing the rounds with a lot of Members here. I want you to assure me and the meeting that this other substantive information that helped in the compilation of the Fourteenth Report has been seen by all members of the Committee. So far it does seem to me that it is chiefly known by yourself and merely one of the SCOPA members. I will take your word for it.

Minister M Lekota] On a point of order, Mr Chairperson: It does appear that there is business that you wanted to discuss with us and that there is business which needs to be discussed by yourselves after we are gone. Could I appeal that perhaps we dispense of that business relating to us, so that the Committee can then beyond that deliberate on issues domestic to itself.

Chairperson] I am supportive of your suggestion. That has been one of my frustrations this afternoon to try and keep us directed, but I have not had too much co-operation. I am doing my best. Let us move onto the next issue, which is the R30 billion – R43 billion increase one. Mr Kannemeyer would you like more comment from the Minister?

Mr B W Kannemeyer] A comrade that I have a lot of respect for, once said that when we are dealing with matters like this it is not so important for us to impress one another here, but it is important the signal or message that we send out to our mothers out there who may be listening to this thing. I think the question of the cost to the State of this thing certainly is something that my mother in Mossel Bay would want clarity on: exactly how much money are we going to spend on the Arms Deal. When the Committee engaged for the first time with the relevant departmental officials our line of questioning was only referring to an increase of about R300 million, where the initial cost was R29,9 billion, and then on the day of the signing of the contracts that cost was R30,3 billion. That line of questioning was covered by Mr Chiba and in the reply in the evidence from pages 23 to 28 of the evidence a Rear-Admiral Visser, I think was the one who covered those responses, came up with a figure of first of R46,5 billion, and subsequently with a figure of R43,828 billion. That figured shared by that particular official’s submission was inclusive of exchange-rate fluctuations, as well as provision for price escalation. The question that I would want to pose is from a year prior to that when the figure was R29,9 billion or R30,3 billion, as the case may be, if the Ministers could explain how that figure moved to R43,8 billion, particularly if the Admiral is saying that it is only on a basis of exchange-rate fluctuations and/or price escalation. If that is correct then I am worried, because then the indication is that in less than a year, either in terms of price escalation or exchange-rate fluctuations, the protection which the government has built in to the process led to an increase of almost 50%, from R29 billion to R43 billion. When we prepared for this Hearing, I specifically asked that we do not restrict ourselves to the Minister’s statement, but that we do a follow-up in terms of our own Report, which actually said that we would engage with the Ministers to provide further clarity on certain issues. I am hopeful that the Minister’s response to this can actually send out a signal that the cost of this project is either R30 billion or it is whatever billion rands, and that he will tell us what mechanisms the State built in to protect us as taxpayers against the event of price escalations as well as exchange-rate fluctuations?

Minister T Manuel] I think that the eloquence of Mr Kannemeyer in fact answered Ms Taljaard’s earlier question as well. The Admiral did not ask me to steer his ships, but he answered all the financing questions. When I can steer his ships, he can answer the finance questions. Between September and the end of November there were the final negotiations. The broad framework was accepted by Cabinet. Issues of detail, the t’s we crossed and the i’s we dotted, were dealt with in the final negotiation. I think the figure that arises out of that is the figure as explained then, namely R30.3 billion. Perhaps one must put it differently. It was the total contract cost for the Acquisition of the Arms Package of 4,77 billion US dollars, rounded up to 4.8 billion in further dollars. That is the cost of the purchase as at the date of contract. It is an important figure to imprint, because sadly I think that the crafting of the Fourteenth Report does not do justice to that fact. It says on the top of page 1055 of the Report as printed in the ATC as follows:

In September 2000 the cost at current foreign exchange rates, together with contractual price escalations, had risen to R43,8 billion.

Ask any journalist what they have told South Africa, and they will tell you that they told South Africa that the cost of the Arms procurement was R43,8 billion. But the value of a contract is the value as at contract date. That is pertinent in this circumstance. What the affordability model does, which we were responsible for, is to look at future value over the life of the payment period, which is also tied into the life of the delivery period. Now included in that are all monitories. There are certain elements of escalation which take account of shifts in price of both the raw material inputs, labour and the escalation on foreign contractors in the order of 2,5% per annum. In respect of the South African input it varies between 4% and 5%. That is not unique to these contracts. You will find that in all construction contracts and in any contract of this nature that requires delivery at various points and payment tied into that delivery over a period. It would also include exchange-rate fluctuations and the best assumptions that can be made for that. And then it includes elements of the discount which is in the financing of the way in which we deal the structure. It is almost impossible to take a retro-view that arrives at that figure, because it is a moving target. The contract value is 4.77 billion US dollars. Now we can argue that part of that is in Swedish pounds and part of it is in British pounds and part of it in Deutsch mark, part of it in euro. But one converts it all as at date of contract and that is the amount that one ends up with and that is the amount that needs to be valuated in the contents. That amount would be reflected as a principal sum on the budget of Defence going forward. Outside of this one must recognise that that money would have to be borrowed. In the instance here, as a result of government-to-government negotiations, these deals are covered by export credit arrangements of the respective countries concerned which not only reduced the cost of borrowing quite considerably, but also provided us with a number of fairly favourable options relating to future fixing of interest rates etc to ensure that we can secure the best contract-in-terms for South Africa. If we borrowed that 4.77 billion on the global capital markets, we would not have had the same favourable terms. Other issues dealt with in the model also include the fact that we needed to sort out certain timelines, because at delivery the requirements are higher sometimes and so this phenomenon of bunching had to be dealt with, and also in the early period, to ensure that we could smooth over the macro-economic implications of such significant outflows. This issue had to be dealt with. That is essentially is the financing story. It is important that we bring it back to the contract value which I say is 4.77 billion US dollars. One’s best estimates in retrospect are going to be wrong. They are going to be wrong on inflation, exchange rate and the discount at any given time. So this assistance of the Admiral about a date of some day in October, I submit blurs the issue.

Chairperson] Perhaps we approached it from a far simpler angle. To some extent that angle was covered in your Budget Review last week, where we do not see an amount of R30 billion, we see R43 billion. That suggests to us that the call on the fiscus is ultimately, as things stand now, R43 billion. We know the model has since gone up from that, but we do appreciate that there are other considerations, such as the value of the rand, etc.

Minister T Manuel] The figures on future value set out in the Budget Review have all of the normal flaws that future value-estimates have, but in contracting in this way, one does not contract on the premise of future value. One contracts on the basis of nett present value, and one cannot lose sight of that in the way in which this issue is articulated.

Chairperson] Let me put it in a different way. We simply repeated the warnings which was stressed in the strongest terms in your affordability study. I do not know if you are picking up more than what we are trying to say here.

Minister T Manuel] Yes, Sir, I am. I am referring to the possible suggestion that we misled the public. Such a suggestion is made in two different places. It comes through in a suggestion that Cabinet misinformed the populace as against what the Treasury was doing. And it comes through again in the paragraph on the top of page 1055 of the Fourteenth Report, as published in the ATC. If one reads those two together, I think there is more than just the fact that we may have slipped up in evaluating nett present value, because that is the only tool that one has at one’s disposal at the time of entry into force of a contract.

Chairperson] I agree with you. I think what we have from were the press statements that came out from Cabinet at the time of the announcement of the deal. They are there on record for GICIS which said R30 billion was the total cost, all costs included. We just felt - this is all we are trying to say - that we should have suggested that this was nett present value and that there were other factors which could influence the price. That is the type of disclosure that is all we are inferring from this.

Minister T Manuel] We dealt with this issue in the Medium Term Budget Policy Statement, which we tabled in October 1999, with the best estimates available. We dealt with it in more detail in the Budget Review, which we tabled on 23 February 2000. By that time the contracts had been concluded. The contract for delivery had been concluded and at the end of January 2000 I signed the financing contract. That has to be essence. I think the suggestion which seeks to take the role of Treasury or cast it as separate from the central responsibility in the Executive is not correct. My role within the ministerial committee speaks to that and hence they use the term ………………… Of course, I had to look after issues of affordability. But at the end of the day one had a different set of objectives that one needed to appreciate in the context. It is essential that when one articulates this, and this is something that we tried to explain differently: If one enters a mortgage agreement with an institution to purchase a house valued at R100 000 you can take a midstream look and say now that I have dealt with the issue, the house is not R100 000. We are talking of a house that is much more expensive. That is what we are talking about. It is exceedingly important that we communicate a single set of message that everybody understands. From our perspective that message: is the nett present value of the contract at the time of entry.

Minister A Erwin] What we are disputing is the figure. It is not a contractual value at all. It has been explained very clearly. So you cannot go from one to the other and say this is the escalation from one to the other. Financiers, accountants cannot do that. So it is absolutely wrong to call this the escalation cost. If one now wants to say what is the effect of that risk of R43 billion, one has to compare like with like, because when one is assessing risk of this matter, the same exchange-rate depreciation that leads to the rand escalation will lead to a rand escalation of exports as well, which could have all sorts of impacts on the tax level, etc. So you must compare like with like. If we are going to talk about risk dimensions, we talk down one track. If we are talking about the contraction obligation we must talk down another track. This Committee has gone from one to the other. Technically one cannot do that. There is no way that one can possibly justify that proposition.

Mr A J Feinstein] If on the day that the contracts were signed we would have paid cash for those contracts, we would have paid R33,3 billion, or there about. The figure that was given to us in our Hearing was that as at 20 September, given certain things that have happened to the currency and inflation, etc, if that scenario had been played out over the life of the contract, because we were not paying for it on the day on which the contracts were signed, then we were looking at the fiscus having an obligation of about R43,8 billion, or whatever the figure is, the figure that was put into the latest Budget Review. Maybe where have missed each other, and this is extremely important, is what we need to do - we need to ensure that in terms of the way in which we communicate this we are absolutely clear – is to establish is what is the cost to the fiscus over the life of the deal and thus to the South African taxpayer. Now the reality is that the R33,3 billion would have been the liability on the day when those contracts were signed. But the reality also is that over the life of these contracts, notwithstanding a variety of economic miracles for which we all pray, the cost to the fiscus and to the South African taxpayer is going to be significantly more than R33,3 billion. I think that is the sort of issue where the communication, maybe from both sides and maybe for ordinary South Africans, has become confused. I think that is the area where we need to be clear on.

Minister T Manuel] I think the first part of what Mr Feinstein used is the message that we need to get across. If we had cash in hand on the day that we entered the contract, that would have been what we would have paid. What the Fourteenth Reports says – the member must listen –

… the cost at current foreign exchange rates, together with contractual price escalations had risen to R43,8 billion.

That is not correct. We were not dealing in the bazaar, where they say up front, “We will charge you R33 billion”, and the minute one turns one’s back they say, “This is actually not R33 billion. We have caught you. This is a R43 billion deal.” It is not anything like that. The literature on these issues, including future value and time value of money on all of those things, is very loaded. We can spend a long time discussing this. The key issue is what do we communicate and why. And if we miss each other at that point, because the problem is Bruce’s mother thinks that he lied to her. She thinks that he told her, “Oh mom, it is not going to be so bad. It is only R30 billion.” Now along come this Committee and says, “No, Bruce go and tell your mother the truth. It is not R30 billion, it is something else.” Now we need to restore that relationship between Bruce and his mother. We can only restore it if we understand and we speak exactly the same language.

Mr A J Feinstein] If one looks at the Report and one looks at the second paragraph under the issue of Cost to the State, it is clear that what the committee has said is –

. . . it has become clear to the Committee that the Cabinet’s announcement omitted to mention certain other cost implications which, it would seem, will significantly add to the State’s commitment. These factors include the cost of servicing the loan portion of the payment obligations . . ., the price escalation conditions contained in the supplier contracts and the cost effects of negative foreign exchange movements.

Now, that is accurate. That is correct. So what I am saying is that I think we are perhaps both missing the mark in some sense and then we have a responsibility, as a Committee, in our next report, and, obviously, in future communications around this from government, that if we were paying cash on that particular day when the contract was signed, that would have been the cost to the fiscus and to the South African taxpayer. However, we are not. And therefore we do have this model that is projecting various things. I think that however one reads the literature, the overwhelming expectation - that is certainly what the Minister of Finance has reflected in the Budget Review - is that the ultimate cost to the fiscus is going to be more than the cost of the contracts on the day that they were signed. All I am saying here is that I think we both have a responsibility to try and clarify the amount, so that Bruce’s mother and I can be clear about whether we see different figures, that we know exactly what we are talking about. I think that is the way that we have to go forward on this matter. I don’t think we can say the one figure is correct or incorrect. If one looks outside of just that section that you quoted there are other references that suggest how that figure was arrived at. I think we do need to clarify that, and we can, as we follow up, which has been one of the values of this exercise.

Mr V G Smith] On a point of Order, Mr Chairperson: I propose that we extend the time limit for this meeting, as we have already gone beyond 5 o’clock. These matters are so important that we should request the Ministers to give us another 45 minutes, until 6 o’clock, to complete what we set out to do.

Chairperson] What is the availability of the Ministers? Would be able to impose on you to proceed until about 6 o’clock?

Minister T Manuel] As the court pleases, Sir. If it is 10 o’clock tonight, or tomorrow morning, I am more than willing to sit.

Minister A Erwin] We are in the same court, so we agree, Mr Chairperson.

Chairperson] We are very appreciative. Thank you very much.

Ms R Taljaard] The question that I would like to ask relates to some of the escalation issues that the Minister has touched upon. He has indicated some of the escalation clauses. He has also highlighted the percentages applicable. When the financing arrangements went through in January 2000 and the contracts formally went through, clearly we are already one year down the track in that regard. So already we are in peril of the escalation clauses applying to the first per annum application. We are in peril of that in the context where we have seen a rather dramatic decline in value of the rand in the beginning of this year. Has Treasury done any calculations as to what the exact impact is in terms of the escalation clauses in terms of the first per annum in which we are? Then, in addition to that, in terms of the export credit agencies and the exports credit arrangements made, most of the European agencies charged quite an excessive risk premium and they asked quite an excessive risk premium for developing countries, depending on the risk profile that they draw for that particular country. Could we get an indication from the Minister what the risk premium escalation concerns would be?

Chairperson] Ms Taljaard you are not on the direct issue. You are talking about related issues and you are asking a number of questions.

Ms R Taljaard] But they all pertain to escalations.

Chairperson] But they do not relate specifically to issues that the Ministers have raised and they do not relate specifically to what our Report says.

Ms R Taljaard] But the Report does draw a number of concerns relating to how escalation dimensions would impact. On the basis of what Mr Feinstein has highlighted, the fact that we are busy working on information that will feed into our follow-up Report, I do not wish to be only restricted to the Fourteenth Report in this respect.

Chairperson] I think there was the understanding that we are going to deal with the key agenda which was the Minister’s issues and our response to those. See if you cannot just take one or two of those questions and make them more specific.

Ms R Taljaard] I would like some of the escalation issues dealt with, but if you want it to be more specific, one of the important assumptions here is that the Defence Budget itself will make the movements that it is expected to make from personnel to capital expenditure. Could we get an indication about that as well and the cost implications involved there, because while I take on board what the hon Minister Ervin has said about the distinction between the escalation and the risk issues, the one does feed into the other. There is no Chinese wall that one can construct between the two. Then also, the Maritime Helicopter cost and the different delivery dates of the Hawks, have they been built into the total as it is portrait in the Budget Review?

Minister T Manuel] I ask for your indulgence on this matter. What are we discussing here? If Ms Taljaard wants me to answer those questions, then I would expect her to give them to me beforehand, because my engagement in this issue is as a policy maker. And as policy I am prepared to slug this issue out. If she wants commas and fullstops, I will bring her the brightest and the best that this country has in terms of financing, because they all sit in the Treasury and they can answer whatever she wants. Let us talk about the policy issues, because that is our responsibility.

Chairperson] I think we have to accept the point the Minister is making. We have said in our report that we do intend to meet with the Minister and with the Portfolio Committee on Finance to look at the more financial implications, but these do go outside of the issue now at hand. It is unfair to ask the Minister to have all this information at his fingertips.

Ms R Taljaard] The point is accepted. If we can then limit the focus to the question whether the Minister is satisfied that we negotiated the best possible deal with the European Credit Agencies and with the banks related in terms of the cost escalation that the Committee expresses a concern on.

Minister T Manuel] Yes I am. It was the area of policy oversight. The floating multi-currency options carried an interest rate of 0.4% above relevant liboll or uriboll. We could not get it better than that. And with the optile clauses it strengthens even that. I am convinced that we secured the best deal in the circumstances.

Mr N Bruce] I refer to page 1055 of the ATC, the first paragraph. It says:

The Committee expresses its concern at the possibility of the overall cost of the arms packages increasing further over the term of the contracts concerned.

 Now while I accept completely what the hon Minister of Finance, Mr Manuel, says about the dollar cost of the contract, there are two things which justify this statement in your Report. One is that at the Portfolio Committee of Trade and Industry meeting the hon Minister, Mr Erwin, did say that there were price escalations involved and at some degree there had been an increase in price. The other one is the question of the value of the contract in rand terms while it has to be repaid. It is clearly going to be a very material amount of money. Having been through some of the documentation which I am not allowed to mention, the question of whether there could not have been some hedging mechanism or the route of markets used seems to my mind to arise, and to justify the concern in your particular paragraph here. I just wonder why, today, there should not have been some hedging mechanism put in place. I would just mention that in the past when large pieces of equipment have been bought from abroad, it was commonplace for the Reserve Bank to take on the foreign exchange risk if it could not be covered commercially, but the cover is extended substantially in those days. The advantage of the Reserve Bank taking on the foreign exchange problem like that was that although there was no straight cover available in the market for that period it could tray off over a period of time, which Treasury could not do. So there was some advantage in it. I would be curious to know why there is not a hedging mechanism put in place.

Minister T Manuel] What the hon member Mr Bruce may not be aware of is that losses on the nett open forward position, the forward book of the Reserve Bank, are for fiscal count. You can find a detour mechanism to hedge against yourself. It does not sound very sensible in the circumstances. That is why in the government-to-government relationships we opted for the various credit agencies, Hermes in respective of Germany, the ECA etc, because on the balance that could offer to modulate the risk in a way that just transferring to the fiscal account for the future might not be able to do, because, again, these issues arise. Part of the difficulty of the debate is the difference between cash and accrual accounting. That is part of the difficulty here and when we write off anything part of our overall commitments is that we can effect that shift to accrual accounting. The other part of it is that whilst we can give the broadest possible indication, we are unlikely to add anything beyond the three years and Medium Term Expenditure Framework in respect of the detail. The table in the Budget Review which you referred to on page 132 is a rule-of-thumb illustration of future value. It does not help us with the detail. What we need is a single set of definitions that we can talk to.

Minister M Lekota] At the risk of being misunderstood, I must say that I am not an uninterested party in us being able to say one thing to the population of this country and I agree that that is what we should be saying. My mother tongue is Sotho, so although I try to express myself in English, it is not always so good, but I try my best. So I try to make things as simple as possible. I think what we are saying is that as at the date when the contract was signed South Africa had committed itself and signed a contract to pay something to the nations that are selling that is invariable. That is not going to change. And those people committed themselves to give us something that is not variable. A submarine will be a submarine 10 years from now. It does not matter that the models may change, but a submarine will be a submarine. That will not change. The problem is that what South Africa is going to give these people who are selling these things to us is going to be in different forms. International trade started as bartering, and it actually remains bartering to this day. It is just that the form in which you carry it out differ. So let us for argument’s sake say that for all of that equipment that South Africa is going to receive that South Africa committed itself to give to those countries R30.3 billion giraffes. Those giraffes are living animals and they will remain like that. It will be like that. Now, paper money or a coin, which is a symbol of something concrete, its quantities change in relation to the commodity. The commodity does not change. And what we are saying here is that the amount of money South Africa that it signed and it is going to pay, in real terms, t will remain the same, but because the nominal forms change, the quantities change. That will change, but we will still be paying the same quantity of those things that concretely they would have been embodied as. Money is a receipt, a paper that indicates that one has been given a certain amount of value. The value itself does not change. Now all these other rules relating to how the quantities of money in relation to a real concrete object change. Those rules are responsible for the fact that this Minister has lost all his hair. The thing itself does not change. The question is whether there anybody contesting that when we signed the contract on the day we signed it, is there anybody who are saying Cabinet was lying when it said on that day when you signed it was R30,3 billion? Because if the assertion is that Cabinet was involved in some conspiracy, that the nation was being told a lie, then we must prove that R30,3 billion was not going to be the amount of money involved, had we been buying on that day. Then the rest of the other things can then flow from there. I don’t think there is any argument amongst all of us that once one has signed on that price that there are other things that are going to play a role beyond that. But to suggest that Cabinet was lying when it said that, is completely unacceptable, unless somebody can prove that Cabinet did so-and so, that it was a falsehood to say that on that day the thing cost R30,3 billion, and that Cabinet’s attempt is not a mistake if it is different, but that there was a conscious decision to mislead the country. Because once we are agreed that on that day it was R30,3 billion, all the other things are less important and I am content to walk out of here. I am not going into the arguments about what the value of the rand would be. That is not the issue. The issue is whether all of us can agree that on that day it was R30,3 billion, and then tell this country. Because now it appears that Cabinet has said as on that day the thing would be R30.3 billion, but in fact somebody else has discovered that we were lying, that it was not as like that. That is the thing that is causing the problem. It is not what is going to happen tomorrow. It is what has happened on that day. That is what we need to resolve.

Chairperson] We will consider your input very carefully. If you are suggesting that the Report in any way suggests that Cabinet was lying, I think the Committee would reject that. We have never said that. By no stretch of the imagination could we ever have said that.

Minister M Lekota] I am sorry if I suggested that. I am not suggesting that you have said that. There is a general sense abroad in this country and beyond, whether it was created intentionally or unintentionally, that Cabinet has not been honest to the electorate. We are trying to resolve that issue.

Minister T Manuel] If I may offer a direct answer and draw this to the attention of the Committee in reconsideration, it says in paragraph 2 of the Fourteenth Report, on page 1055 of the ATC:

The Committee’s scrutiny of the documentation presented to it by the various departments, and from which Cabinet made its ultimate decision, indicates that Cabinet was sufficiently well informed to have made the public aware of the fuller cost possibilities of the deal.

 A rand today compared to what its value will be in 2012, is a very emotive issue. That is the point. What is R1,027 billion in 2012? It is about the cost of running a ministerial office now. It is an emotive issue. And by this suggestion it is feeding an emotion, and that emotion is the result of the increase in liability between the R30 billion and the R43 billion. It is the drag issue. My concern is that very few people have the tools to distinguish between these costs over the life of the contract in the detail that we can talk about here, because people would say no, why does one spend R43 billion this year on armaments, and look how little one is spending on education? Newspapers and radio talk shows are full of it. I think that we have a responsibility to ensure that we do not feed that kind of emotion that might make some people feel very good.

Chairperson] It comes down to a question of who was irresponsible. Were you responsible by not qualifying the amount of were we irresponsible in reporting the way we did? I think that is one of the issues we will have to weigh up.

Minister A Erwin] Could I make a comment for the Committee to consider when it considers that? It is an important comment that has been raised and I think that SCOPA is quite capable of dealing with this issue and should deal with it. It is the Committee’s responsibility. The point was made that we do cash accounting. So every expenditure figure of government is quoted at the NTV cash value. We do it throughout. Now at every expenditure of government there is the possibility of alterations that emerge from foreign currency purchases. In an accrual system the purchase that created this length of exposure in another currency may well have been dealt with differently in its reportage. It most certainly would have been dealt with differently. So what you are asking of us is what is our responsibility? Our responsibility is to report to the public in terms of normal budgeting reporting. Our second responsibility, which the Committee credit us with, is to make absolutely certain that we did not expose this country to unnecessary risk, and that we were aware of all the implications. We did that. Now what SCOPA really is saying is that on this particular deal, because it is a Defence deal, we should have reported differently, i.e. we should have reported the full risk over 17 years. Now as you have already seen, to do that is an immensely complex task. We must be judged by a common standard. Our standard was to report as required of us in the budget fully in the Budget Review. We did it. Our second responsibility is to take into account the risk factors. We did it. And our contention is that an impression is created here, put in Sotho by the Minister of Defence, that suddenly the price escalated, which is not correct.

Minister T Manuel] If I may just offer another example for the Committee to consider. In the budget we tabled last week we raised the fact that our fiscal framework for the new fiscal year is premised on a deficit of 2,5% of GDP and something in the order of R24,88 billion. If you make the assumption that we would raise all of that in the bond market as at last week, and take that same figure, take the interest, that the discount, take it over the maturity of the special instrument created, you will come out with a very different figure, and therefore we do not do it. It is correct to say that the deficit before borrowing is R24,88 billion. Now the minute you introduce extraneous issues into the calculations, they actually distort them. Would you, Mr Chairperson, say that the deficit before borrowing based on this R24,88 billion is suddenly R50 billion? No, you would not. It would be wrong to change the way in which we internalise things and have always done so. That is the plea that we make in asking the Committee on its own to consider this matter before drafting its follow-up report.

Mr F Beukman] I want to ask the Minister of Finance something. The Minister of Defence mentioned the important factor of perception that the possibility that it may be wrongly worded would have an effect outside. I just want to ask the Minister of Finance when was the first time he took notice of this Report and when he read it for the first time or was made aware of that by his Department?

Mr T Manuel] It was about the time of publication. I raised this matter and I discussed it at length with Mr Feinstein, and he can confirm it that we raised these issues as a matter of concern. Thereafter Parliament was in recess and partly because of our battle for communication and perhaps as a kind of frustration about the circumstances, perhaps also because of we were not heard in the circumstances, we opted to release a statement on 12 January.

Mr B W Kannemeyer] If we were talking about this procurement in dollar terms all the time consistently, would we have referred either today or in ten years from now to the cost of this deal being R4,77 or R4,8 billion US dollars? Would that have contributed to reducing the uncertainty or confusion or would there still have been a difference in the dollar price of the deal of more than 4,8 billion dollars?

Minister T Manuel] I think it is an important question. There is a marginal difference and that comes about in the escalation. It takes account of raw material inputs and labour cost, and we have shared those figures as being 2% on the foreign component. Just bear in mind that part of the complication here is that part of this total figure of the contract - that is why the figures do not always match and there is an exchange rate at any given time has to be remembered - is also in rand denomination. It is a domestic addition to the entirety of the contract. I think for purposes of the affordability exercise we have made assumptions and of course those assumptions carry with it, if it is euro, the exchange rate between the euro and the dollar. If one made it last year in dollars, then one would have been much better off because one was paying for so much into euros now. Those kinds of issues are going to arise. So it would not be 4,77 US dollars; it would be 4.77 US dollars plus that moderate escalation of around 2% per annum on the external components.

Dr G W Koornhof] The model included risk analysis. If I hear the Minister of Finance correctly, that included, among other things, the possible interest rate shocks, the possible depreciation of the rand, the possible underperformance of the NIPs, and things like that. If the contract price was x billion on contract date, and for some reasons, beyond the control of government, there were increases in the value of that contract, who takes the final risk of that? Is that risk being carried by the government, or is it somebody else who carries that risk?

Minister T Manuel] My understanding of this matter - it is something that we can check and come back on - is that we contracted to the value of 4.77 billion dollars, plus the escalation. Now what could go wrong? The contractor building, the corvettes made, we being unable because of a huge and unprecedented increase in the cost of the price of mild steel plates not covered by or way beyond the escalation clause, that has to be borne by the contractor. This is why you have the two components. We had the Bureau for Economic Research at the University of Stellenbosch, by the Jan Smuts group, and Warburg Dillon Reed doing some of the cashflow analysis. Those were put together to try and assist us in understanding this. But at the end of the day it is less an economic modelling exercise and more of a hard legal issue. There it is a contract price for the goods that must have a limited escalation.

Minister A Erwin] I want us to all be clear as to what we exactly did, because this figure that emerges and what we are debating now of the R43 billion is essentially a fiscal risk analysis, a cashflow risk analysis. That is what it is and that is what the Treasury had to do. It is important that they do those exercises. But bear in mind that we did other kinds of assessments as I said in my opening remarks. We asked what is the impact on growth? Now, consumer expenditure of this magnitude is growth negative. When one is doing that risk assessment, when the exchange rate depreciates, the rand value of the incoming investments and the rand value of the outgoing exports both rise at the same time of one’s outpayments for the equipment are rising. That model is a different model we did altogether. It was an attempt to assess the impact on growth, balance of payments, etc. It was a much more complex model that started to take into account as I have indicated some of the other flows that will take place in our economy. So this is a cashflow risk assessment. It is not automatically there for the same thing as the risk to the economy or to the total fiscus, because things could begin changing.

Ms R Taljaard] I am partly covered by the comments you made about the fact that SCOPA will still have to decide and determine whose responsibility it was to have given the public a clear picture of the escalation dimensions of this deal. I believe that we will take that forward in our follow-up Report. I want to highlight one sentence from the Fourteenth Report, the last two sentences in the first paragraph, which read as follows:

The committee express its concerns at the possibility of the overall cost of the arms packages increasing further over the term of the contracts concerned. As all this is hugely material to the public interest, the Committee believes that the public should have been informed of these possibilities.

I think that Minister Lekota touched eloquently on that. I think it would not have been such a complicated communication exercise, because Minister Erwin, in his evidence to the Trade and Industry Portfolio Committee on this topic, explained this very well. The briefing that he gave to that Committee could quite easily have been encapsulated in a statement issued by Cabinet. He said, and I quote:

And this is why we say technically it is not possible to call this a cost. This is a projection. What the final cost will be to us will depend at the end of the payment on what the actual exchange rates and interest rates were over that period, so in terms of the escalation clauses in the contracts as denominated in dollars that is contractually set. What we will have to pay in rand to get those dollars will depend on the exchange rate at the time and depend on interest rates that we have to borrow at.

 I think that would have been quite a clear communication to the public that would not have been lost. I think that in terms of the criticism raised it is a legitimate criticism.

Minister A Erwin] As the member has just pointed out, if take the deficit to the extend that we borrow foreign currency, everything we have spoken about that will change in this deal is exactly the same for that. So we are asking to be treated with consistency. The points that the hon member has just quoted me as making in a portfolio committee, if the expectation is that I never made that before, it is wrong. I have made those points before, and so has the Finance Minister. If the media does not carry that, we cannot be held accountable for it. We are just asking to be treated consistently. Every deal that is done in terms of cash accounting has these weaknesses. The longer the deal, the greater the foreign currency exposure, the bigger the problem. We have met our responsibilities. If SCOPA is saying there should be now a new procedure in announcing budgeting processes where things are different, we will have to look at that. But essentially that is why we are moving to accrual accounting where we can project in advance the assets and liabilities more accurately. Cash accounting has built into it the inherent weaknesses we are now looking at. Just hear what we have said. We are asking to be treated consistently. We have fulfilled our responsibility in announcing the expenditure in the way we announce all other expenditures and we fulfilled our responsibility in assessing the risk to this country in a way that we think no other deal in South Africa’s history every had the same assessment.

Ms R Taljaard] Because of the nature of this particular expenditure, and as the hon the Minister has highlighted the impact that it has on the growth-rate and balance of payments, does he not think, despite his plea to be treated consistently, that there would have been an added imperative to have communicated in this regard?

Minister T Manuel] We have dealt with this issue. Go back to the budget speech last week where we also raised what we will borrow in foreign currency during the year. If the hon member Ms Taljaard is saying that we need to change all of those things, then even when one announces tax increases or tax reductions one has to develop a future value for these things. One cannot do it and one should not do it. It is absurd to ask that we begin to do it. When we take arguments about what was clearly a very legitimate process, ignore national interest about these things, in order to score a few party political points, we turn a committee like this into something that could become rather unfortunate. My plead is that we deal with the issue of what is on the table.

Mr A J Feinstein] I was going to mention the fact of my bald head, and what would happen if we gave the giraffes in 12 years’ time, and the offspring that we would hope that they had had in those 12 years that we would have to hand over as well. I do think that there is a key issue here and that is the issue both of the cost on the day of signing and the overall cost to the taxpayer. I have just read through it now. If I look at paragraph 2 of the Report I think that we can say that we were probably valid in saying what we said. We might have excluded something more specific. That might be the problem. And similarly I think there is a public interest argument that suggests that maybe in a public statement, not in the calculations etc, there might be something that was omitted from that original statement from government on the cost. I think that what we need to do now is we need to go back to that and we need to look at all of that and reflect that in our next report.

Chairperson] Does that conclude this marathon session on this particular issue? There is one last issue which Minister Erwin raised in his introductory comments. If I understand that correctly, he referred to a particular sentence at the beginning of the paragraph on Selection of prime contracts. He was puzzled by this, and interpreted it as our having suggested that the Ministers had been influenced. There again, I think the Committee would suggest an alternate interpretation. I think we are saying because the possibilities of a proper influence having been exerted in certain of these selections refers to the processes in the former sentence, the process that lead to those selections. So there is no suggestion on the Committee’s part of any improper actions by the Ministers.

Minister A Erwin] As we have indicated in our statement on 12 January, the concern we had was that neither Report had effectively dealt with or being exposed to, or asked the opinion of, the decision-makers on how certain decisions were made. Since, as we have pointed out, the prime contractor decision was made by our ministerial subcommittee making a recommendation to Cabinet. The only inference we can draw from this must be that those who made the decision were improperly influenced.

Chairperson] If one reads it together with the first sentence, which is there for a purpose, it is clear that we are talking about the processes and we have spoken long and hard already this afternoon about some of the flaws in the processes.

Minister A Erwin] Mr Chairperson, may I draw to your attention something which is not the subject of this discussion, but very relevant? In the Introductory comment, reads as follows:

By many accounts the international arms trade industry experiences a high incidence of malpractice, with purchasing countries often having been the victims . . .

It is fairly clear that SCOPA’s predisposition as a Committee was that there would be corruption. Accordingly, for those responsible for the prime decisions, the Committee is saying there was undue influence. Our view is that that is a judgement on those who made the decision. If it is SCOPA’s judgement it has to be substantiated very clearly in any reports you produce from this point. Our view is that there is no prospect of making that judgement on the basis of the information SCOPA had or have reported on. We take exception to that. We are basically accused here of being unduly influenced.

Chairperson] Any linkage between the two parts you refer to, is a highly contrived, Mr Minister, and there certainly was no intention on behalf of the Committee to link paragraph 1 with paragraph 65 of the Report and make something of it. But I might ask you, do you have any disagreement with that opening paragraph? The Deputy President has taken very strong exception to that.

Mr A Erwin] Yes, certainly we do. I think it is not correct at all for any structure that is assessing a matter like this to prejudge it. SCOPA quite clearly prejudged it. It is like saying that certain people are prone to violence and because I come from that population group I am probably going to be violent. I think it is completely inaccurate that one makes those kinds of comments when it is a committee responsible for ascertaining whether value for money was there.

Chairperson] Again, I think it is a very unfair interpretation on your part. I can give you World Bank references and one from Transparency International which I have here, on a very well recognised report. They say that they have identified the arms industry as being an industry which is seen to suffer from absolutely massive corruption, especially in developing countries. Now they did not suck that out of the air. I have also taken the trouble to compile a list from the internet, and within to minutes I found a number of Arms deals where there have been corruption. It does exist. The Committee must take not of that, just as it takes note of any area where there is potential problems. That is our approach, just to say we are aware of this happening. Not that we are going to prejudge any situation. I just do not know how you can make that inference.

Minister M Lekota] One would assume that this parliamentary Committee, when it is faced with a matter like this one, whatever the World Bank may have said, by the time it reaches its conclusion it probably would have studied a number of cases. So they are drawing a conclusion like that at the end of an exercise like that. This Committee has not in its history reason to start from this kind of premise in relation to this matter. It is as good as a judge saying, who may have tried many cases, and now I am brought before such a judge and he says, generally, booth are prone to eat horse meat, and since this booth is accused of having eaten horse meat . . . One can see what that will lead to. Even if you are not going to say that, as a person being accused I probably conclude that because you have that orientation that as a general rule booth are like this, therefore that. SCOPA has this orientation that as a general rule arms procurement packages are corrupt, and SCOPA is about to examine one, while it has no prima facie evidence as such, because there have been allegations made. The Fourteenth Report starts with a very unfortunate statement, because that statement compels those who are accused to answer to it to assume that we are fighting a losing battle, because there is already this understanding that these things are generally corrupt. The Report states that corruption happens especially in developing countries. I said to my colleague sometime ago why are we trying to prove that we are not corrupt? Because there is this general belief, not only in general that Africans are corrupt. Somebody was saying in Parliament that there is Afro-pessimism that this country, like others which have failed, because it is governed by blacks is due to collapse. Our objection to that statement is not that whoever may have made it, wherever they are, may not have studied and come to a conclusion. But we object to a Committee of our Parliament, which has not yet established evidence that we have acted inappropriately, proceeds from that foundation. That is wrong.

Chairperson] Thank you for your views, Mr Minister.

Mr B W Kannemeyer] Mr Chairperson, I concur 100% with what you said about the start of paragraph 5 about which the Ministers indicate that the inference might be that the Ministers involved in this deal might have been prone to corruption, and you have correctly said that it was never the intention to create that type of suspicion. I still stand by the Report that this Committee passed. If we look at it a number of the responses to the Report, it seems that we could have said everything that we said and we could have engaged in everything that we did and probably the Report might have been received differently if we did not preface our Report with that reference as to how this industry is perceived. In drafting our Report and presenting it, we could have made exactly the same points and put across our views of certain procedural or concerns that we had. That particular introductory paragraph, which I did not object to at the time when we passed it, definitely created some concern to the effect that oh, it is because of the fact that there is this tendency in arms deals that there is a need to look into this and our investigation was not necessarily based on information that we had. I think in terms of that we might have done ourselves a favour had we introduced the Report a little differently.

Ms R Taljaard] I think if we were to pretend that somehow international practice or even international statutory instruments have not been created with specific reference to the armaments industry, we would be deluding ourselves. Similarly, if we were implying that somehow South Africa’s Arms Procurement Deal could remain completely unaffected, we would also be deluding ourselves. We did not reach the Fourteenth Report in isolation of a Review of the Auditor-General. Some of the issues raised by the Auditor-General’s Office led to a lot of the phrasing and elements contained in this Report. If we cast dispersions on the phrasing in the Report that SCOPA had adopted, then we also cast dispersions on some of the background work that raised some of the issues that were raised by SCOPA.

Minister T Manuel] I think it is a bit too rich for my blood when somebody who was not a member of the Committee at that stage was party to the drafting of it. I have heard of omnipotence but this stretches the point that I think Ms Taljaard raises. The issue here is that we need to be precise in the drafting, because of the sensitivity of the issue. I read from the transcript of the arms deal Hearing you said in opening the Hearing (page 24 of 1000) as follows:

SCOPA has learnt a fair bit about the international experience regarding the somewhat murky business of arms procurement and arms trade.

It confirms this point raised by Mr Erwin about prejudice. One of the issues - perhaps the Committee will take a view of this in its own time - is that why try to construct is sufficient gridlocks within the system to ensure that we could in the end know all is well. What does it take for me, Trevor Manuel, the Minister of Finance, to say that I stand by the nature of the decisions, because if it were only affordability then nobody would get anything, because the country would never be able to afford anything. We would have a perfectly balanced budget and to heck with everything else. But we engaged with this issue because there was a mandate from Parliament. And we engaged with it and defined systems, structures and procedures in line with the issues. Let me say that when we came into office in 1994 there were some deals on the table. We asked why those deals did not go anywhere. We asked sometimes who might be asking the questions now, and ask where those deals were and one suddenly developed a somewhat different perspective. And because of that history we were compelled, in our interest, to ensure that we could ensure that we constructed gridlock mechanisms in decision-making so that one could start somewhere and take this thing right through to the top. Some of us had been in prison for long enough reading spy novels in that period to understand a little bit about this thing too. That empowered us to ensure that we did not create or recreate the same mistakes. Mr Kannemeyer’s point that there may have been a bit more care and attention given to the drafting of the Report is relevant, so as to ensure that the Committee applied its mind properly. The circumstances here are very different. Before the Auditor-General goes I want him to hear what I am saying. This is not unsolicited enquire by the Standing Committee on Public Accounts, nor was it an unsolicited Review by the Auditor-General. The Minister of Defence asked for the Review. And one would do that either because one is completely naïve or because one thinks that one has so well covered one’s tracks or because one believes fundamentally that one’s decision-making was sound enough to deal with fundamental issues. Now, that I submit is pertinent in the crafting of the opening paragraph of that statement.

Chairperson] Mr Auditor-General, did the Minister of Defence ask you to do this Review or not?

Mr S A Fakie] No. It is in the detailed documents which came through background notes to the Strategic Defence Procurement, and the press statement issued by the Minister is the very last paragraph. It says –

It is also fundamental to our democracy that the Standing Committee on Public Accounts (SCOPA), and the Auditor-General took it upon themselves to look into the allegations of impropriety and what, if proven, would amount to criminal activity.

I am not sure exactly whether that is referring to the initial Review or whether that is relating to the investigation that is currently in place. What happened is that we at the Office initiated that Review, but we had to work very closely with the Ministry. I contacted the Minister whose permission we did get to go ahead with the Review. So the Review was initiated by the Office. and we got full co-operation and consent to go ahead with it.

Mr M Lekota] We should really not make an issue of this matter. There is correspondence that the Auditor-General will find in his Office, because I have also been tendered with a copy. When I had been frustrated by the hon Member of Parliament Mrs de Lille, because she would not give me any evidence that she purported to have, I had some discussion with the Auditor-General and after that I formalised a letter to the Auditor-General’s Office and discussed what we did. There is available correspondence to that effect. The fact of the matter is that we us had the discussion. Initially I wrote the letter all by myself, then I withdrew that letter and wrote a new letter, because I had not consulted the other members of the Minister’s committee. When they agreed to my suggestion, I wrote that letter on behalf of the committee. So you have two letters in your Office. The other one I withdrew and then formalised another and substituted that with a letter on behalf of all of us. The Auditor-General himself was interested in the matter because it was all over the papers. It will be recalled that by the time I became Minister of Defence the matter was already being discussed. It is not as if the Auditor-General was not interested in the matter.

Mr A J Feinstein] First, given the historical conjuncture our nation found ourselves in, I do think it is important to differentiate comments made about the economic sector based on research or literature review from any sort of racial stereotyping. For instance, it is not uncommon for people to say that the banking sector experiences high rates and some countries extreme rates of money laundering. Now that is something that somebody might say about an economic sector. I do think that there is sufficient literature that does suggest that the defence industry has certain difficulties. I take Mr Kannemeyer’s point entirely, in that we might have been more judicious to not open our Report in the way that we did. That is something that we have to give serious consideration to. The second point is the issue of undue influence. I think it has become clear both through the Report and in deliberations of previous meetings of the Committee that there are certain concerns that we have enunciated. I mentioned earlier on that certain information that came to people as individuals, not formally to the Committee, has been passed on to the investigators. So before we determine this whole issue of undue influence and whether we were accusing the Ministers - which I must say in my reading of it I do not believe we were, and again it might be an example of shoddy drafting, and again we need to look at that - I think with certain of the concerns that we have raised that the purpose of the investigation will be to show if that has been the case, especially in the linkages we have spoken about. We should just bear that in mind.

[Minister M Lekota] I really would like to appeal to the Committee, and I am sure I speak on behalf not only of my colleagues who are here with me but also on behalf of Members of Cabinet. The task of this Committee was to pass judgement, not on every armaments deal everywhere and so on. This Committee was charged with the responsibility to check whether in this particular armament package whether we had acted appropriately or not. That was the question. It was not about what happened in the past with what deals and so on. Therefore, whilst this Committee was entitled in it research work to examine that, to start with the conclusions that it starts with, is extremely dangerous. And certainly it is unacceptable to us. Therefore there should not be an attempt to defend that position there. That particular position is unacceptable. The members of SCOPA are our colleagues and we sit together as Members of Parliament. They are supposed to review the work we have done and reach a conclusion on the basis of what we have done, not on the basis of what the United Nations or the Commonwealth had said. That was not what you were supposed to do. To bring that kind of conclusion in is therefore unacceptable. I must appeal to the Committee that that is an issue that will go a long way towards addressing some of the feelings that many of us who are implicated here are involved. That is what we are asking for. If tomorrow the Committee were to find evidence, and then SCOPA bases itself on that evidence, we would have no objection whatsoever. It is important, however much we may feel very strongly on this matter, South Africa is the richer for what the Executive has done and what all of us have done. We said there was a need in the country, and we did this transparently. This debate is a healthy and critical exercise. It has tested the loyalty of all of us to the Constitution, our commitment to the institutions we have set up, because we are a new democracy. We have set up these institutions, including SCOPA itself. SCOPA will come out of this a stronger and a better committee than it was. We ourselves at the Executive will come out of this exercise much wiser, better than before. But it is important that certain basic rules must be kept in mind. So however strong we may express ourselves it must never be understood to mean that SCOPA was wrong in raising some questions seeking clarity on them. We fully support that, but we will and we must criticise one another from time to time on the issues where we feel that there have been mistakes. And therefore when we do this, we do not do this because we are saying do not do that tomorrow. We are doing it because we want to strengthen even the product of the work of SCOPA.

Ms R Taljaard] Given the close nexus between the concern that all the Ministers have raised about the introductory paragraph and the replication of that in the communication by the Deputy President, was there ever a communication between the Ministers and the Deputy President about this particular matter above and beyond only the Deputy President including your press release in the letter that he has submitted to the Committee?

Minister T Manuel] We do not act in individual capacity. We act as Cabinet. Our participation in this process all the way through from day one was in the exercise as we were mandated. So of course we would discuss this issue. Did the hon Ms Taljaard decided to come here herself, or was she sent by her caucus? These things happen. They happen where there are Executives as described by the Constitution.

Mr G Q M Doidge] I think we will revisit this. I am confused. When the Deputy Auditor-General reported to us on how the investigation was going, I said to the Deputy Auditor-General that the Minister of Defence had requested this audit to be carried out and the matter to be investigated, and the Deputy Auditor-General was saying that he had problems with funding; was the Ministry of Defence coming to the party? He said yes. He did not correct my statement that the investigation had been initiated by the Minister of Defence. It is a pity that the Auditor-General has left, but I had to wait my turn and he has left in the meantime. We will have to look at the transcripts and we will have to look at what we make of that, because I am now confused.

Mr P A Gerber] I am also confused. The Minister of Defence on the one hand says that he asked the Auditor-General to do this Review. Yet when we asked the Auditor-General how this Review originated, he said it was the result of a discussion between SCOPA and himself. Did you as Chairperson have interaction with the Auditor-General initiating a review like this, so that it might have happened at the same time as the Minister of Defence did so as well?

Chairperson] No, there was no communication with me personally.

Minister M Lekota] Mr Chairperson, tomorrow morning I could send copies of the letters that I am talking about. I did not think that is a matter of contention. I said in the presence of the Auditor-General that I sent him a letter initially on my own behalf as the Minister of Defence, but on review of the process, because this thing has involved all the other Ministers, I then reviewed that and wrote a letter still asking for this to happen, but indicating that I had consulted the committee and I was asking as part of the committee that this should be done. So both of those letters are in the Auditor-General’s Office.

Mr B Nair] I think due process would have demanded that we present evidence before we aim to convict someone of a crime. Indeed, from the input of the Ministers and their drawing our attention to the introductory comment, linked with the prime contractors issue in paragraph 4 in our Report, it is through innuendoes and even direct remarks that were made that there was the suggestion that this whole arms deal is vrot with corruption. Now we have to go through the report. We do not want to have a public debate here, we must examine our own behaviour to ascertain whether it was not influenced by matters that were extraneous. For instance, there are those reports which only certain members were privy to. You, also, Chair made this point earlier that you were in possession of documents which the Cabinet committee, the Ministers had not been privy to. The end result was that we were influenced in the formulation of our Report. I am not here trying to make excuses, but I was totally ignorant of documents and what influence it might have had on the SCOPA sub-committee who had formulated this report. I think in fairness to the ministers they would also have to have that document. We are unfair, we make accusations and wild statements based on some information that we have got and just a few members of our committee had been privy to. The end result is that we are adding to the conclusion generally. I do not think we have the opportunity to think about this now. I will have a lot to say when it comes to formulating the follow-up report. Also, the Minister did report to us and I think the Auditor-General also reported that the Minister actually requested an investigation. He initiated the investigation. It may be an extraordinary coincidence that the Auditor-General himself was interested in that, but the whole thing was initiated and financed by the Defence Department.

Chairperson] Wednesday is the day where you can distance yourself even further from the Report.

Mr B Nair] Mr Chairperson, that is an insult.

Ms R Taljaard] I refer to the important issue that Mr Doidge. The Minister of Defence has indicated that he would make copies available of the letters that he had written to the Auditor-General’s Office. I think we clearly saw that there had been a dispute between the Executive and the Auditor-General as to who had initiated the Strategic Review. If we can have the letters from the Ministry of Defence and also if we as SCOPA can request the letters that the Auditor-General had sent to the Ministry of Defence to indicate willingness to work on this, so that we could have the full ambit of correspondence that was entered into around the request for the Strategic Review or otherwise, because we are in a fortunate position where we do not need speculation and chronology can be the juror in this particular instance.

Mr T Makwetla] I don’t think there is confusion on the matter. I am not confused. I am just surprised that there was supposed to be direction from the Chair on the matter. The record that I have before 7 February 2000, on page 16, the Deputy Chief Whip of the ANC asked the question in the committee and I want to quote him as follows:

I would like to direct my question to the Deputy Auditor-General. It is correct that the original request of the Special Report did come from the Minister of Defence.

The Deputy Auditor-General said in response –

Starting from the first question as to whether the request for the first Review was from the Department of Defence, I have been given the allegations that we are flying around this time. The Minister of Defence did feel it necessary that a review be conducted, first to clarify some of the matters which lead up to the issue.

 I am just saying that the issue is not questionable. There is no confusion about the matter. I do not think the issue of whether that investigation was originated from the Minister of the Auditor-General is an issue. I do not think it was, because it was not captured in the Report necessarily. We should be discussing with the Ministers issues that they raised in the press statement. If permissible, because we had agreed that at 6 o’clock we would release the Ministers, I want to officially move that we adjourn this meeting for now.

Chairperson] I have two more speakers. Will the Committee be happy if after those two speakers we adjourned?

Ms R Taljaard] About the correspondence, I just want us to pay attention to that, because it is something that I would wish to see reflected in our follow-up Report.

Minister A Erwin] We are going to make a short point just to get absolute clarity on what we have said, particularly with regard to the Auditor-General. Firstly, the reservations we raised about a predisposition that we feel SCOPA has had does not apply to the Auditor-General. If one reads that Report, one finds that there is no allegation of corruption. I think that is very important that that is spelt out. The allegations made or the judgements drawn relate to certain procedures and the suggestion that there should be a further forensic audit at the level of the sub-contractor. So our appeal is for accuracy on this matter. I do not think one can justify the predisposition that we are critical of on the basis of the Auditor-General’s Report. Secondly, the Minister of Finance was pointing out that we as the Executive feel it is wrong to judge us on a predisposition that there will automatically be corruption. The task of SCOPA is to judge whether there has been value for money. In the process of doing that, if they uncover corruption they know that that has to be passed over to the appropriate authorities. In making that point, the Minister of Finance pointed out that we acted in a manner to try and ensure that we uncover corruption as quickly as possible. And in that context he mentioned the initiation with the Auditor-General of the Special Review. Now what we pointed out on 12 January, and again we want us to be very clear, that as the Executive, and as my colleague the Minister of Defence has said very strongly a moment back, we are not questioning in any way whatsoever the rights, duties, responsibilities and functions of SCOPA which is to check that there has been value for money and to investigate matters it feels need to be investigated and hold Hearings such as this, if those are necessary. In addition, we have made it quite clear, and this is an important point, that the Auditor-General has a constitutional responsibility to audit the State’s finances. So irrespective of whether the Minister of Defence did or did not ask for the review, our statements make it clear we expect the Auditor-General to check on the finances and make suitable reports. So we want that to be absolutely clear that our starting point is that we should be accurate and in conducting ourselves as the elected leaders of this country we should work within what is accurate and correct within the procedures of this Constitution and the laws. We will do that and we believe it is in the interest of everybody to do that.

Chairperson] On behalf of the Committee I want to thank the Ministers again for affording us these many hours. Thank you for indulging us clarifications of the issues that had been worrying you regarding our Report. I have given you the undertaking that we will go through everything you have said and weigh it up against our Report before coming to you on any further views we might have on these issues and before concluding our next Report to Parliament. Thank you to everyone else who has been present this afternoon. The meeting is adjourned.