Erwin’s arms deal offset flop

As the first senior politician to serve in the ­Cabinet that signed off on the controversial arms deal prepares to take the stand ­tomorrow at the Arms Procurement Commission headed by Judge Willie Seriti, a damning audit report reveals just how badly South Africans were conned.

Former trade and industry minister Alec ­Erwin (pictured) is set to take the stand ­tomorrow. He is the first politician to do so after months of evidence from the military, Armscor and government officials.

Today City Press can reveal details of a ­damning audit report into some of the economic benefits the country received from the arms deal – which proves that the offset deals were little more than an elaborate con.

This is the first time any audit of the offset deals – contracts obliging foreign companies to provide investments and jobs in return for buying their arms – has been made public.

Not only does it appear that the much-vaunted jobs and investment promised by government failed to materialise, but the audit makes it clear that government made it possible for arms companies to write off billions they owed South Africa.

The report, an audit conducted by the department of trade and industry (the dti) of 40 out of 121 offset projects, reveals that:

Arms deal companies, including two that would not have won deals were it not for their massive offsets offerings, later negotiated dodgy deals that saw their actual investments massively inflated by the dti. This, in effect, enabled them to write off billions of rands owed to South Africa;

Out of 24 audited projects in which arms companies had promised the creation of 56 531 jobs, only 3 815 jobs (6.7%) had materialised;

The dti’s reported figure of 3 815 jobs was unreliable ­because the audit team “could not verify from the supporting documents if the total number of jobs reported were created and whether they were sustained or not sustained”;

French arms company Thales was credited with an ­investment worth $171.2 million for a failed medical waste plant that cost them just more than $1.1 million;

German Submarine Consortiums (GSC) failed to meet specified conditions, resulting in a €15.2 million shortfall in investment; and

The failure of an entire “carbon manufacturing” project by British Aerospace/Saab (BAE Systems) was never reported and only discovered when the audit team asked about it.

The report, dated October 2012, was obtained this week by DA MP David Maynier after a lengthy battle with the dti.

Asked about the report, former ANC MP Andrew ­Feinstein, who was forced to resign from the party over his stand on the arms deal corruption, said it “shows that the offsets are a complete disaster, which is exactly what we said at the time”.

“We warned them when I was still in Parliament about the dangers of offsets. They knew … But the imperative of getting the bribe was so profound they would not heed any advice.”

Feinstein, who studied the methods used by arms ­companies the world over, said experience showed that arms companies very seldom made good on the “vast majority” of economic promises.

Paul Holden, a co-author of a definitive book exposing arms deal malfeasance, said the dti’s report was “incredibly ­damning”.

“It basically shows that the actual economic benefit is far less than what was promised,” he said.

“When government undertook these [arms] transactions, they did so on the basis that the economic impact would be mitigated by offsets. This report suggests that has not ­happened,” said Holden.

An example of this is the case of British Aerospace/Saab (BAES) and the GSC, which respectively supplied fighter jets and trainers and submarines.

Neither of these companies would have been selected ­purely on the competitiveness of their bids.

It was the massive offset offerings (or National Industrial Participation Programmes) that swung the projects their way.

Holden’s book, which he co-authored with Hennie van ­Vuuren, called The Devil in the Detail, shows that BAES offered roughly 10 times what its competitors offered in offsets at the time it won the deal – about R10 billion.

Similarly, the GSC contracted for R18.25 billion in offsets.

But the 40 projects audited in the report show that both these arms companies were able to claim massive deductions in offset projects.

This was done through the controversial use of “multipliers” which were negotiated through subsequent “package deals” with the Industrial Participation Control Committee (IPCC), responsible for administering the arms offset deals.

Holden said the use of these “multipliers” was originally banned, companies were supposed to get one credit for one dollar or euro of investment, local sales or net exports. These credits would then go towards removing the company’s offset obligation.

“But only one year down the line, they agreed on package deals,” said Holden.

These allowed for one dollar or euro of actual investment in risky or unattractive investment areas to be multiplied many times over, in one case 95-fold.

The real picture is far worse as the ­report highlights only 40 of 121 offset projects.

In the audit of the BAES projects, the company was given credit for a ­staggering $460.4 million in investment although their actual investment was no more than $14.46 million.

Similarly, the GSC audit revealed an actual investment of €27.574 million, which was inflated to give it credit for an investment of €1.285 billion.

But another dti document that City Press has obtained, and testimony ­before the commission, indicates that the total value of the credits BAES was granted in terms of its offset commitment was the equivalent of $7.65 billion on an actual ­investment of just $398 million.

The same document indicates that the GSC’s actual total investment of €69.7 million was inflated to €3.11 billion.

The audit report states that the dti accepts “no ­methodology” was developed to multiply the actual investments and that it would have been based only on the ­“perceived importance of the project”.

Maynier said the report was likely to create some difficulty for Erwin.

“The internal audit report provides terrifying insights into the maladministration of the arms deal offsets. There is little doubt now that the arms deal offsets were a monumental fraud,” he said.