Arms deal alarms ignored

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IOL CW_erwin0 Independent Newspapers. Ex-minister Alec Erwin did not have to account for the decision to go ahead with the deal. Picture: Thobile Mathonsi.

Cape Town - Experts warned the government that the country’s controversial arms deal would be bad for the economy and impact negatively on the country’s credit rating.

The warning was sounded by international consultants before the contracts were signed off, but was never made public.

They also warned that going ahead with the National Industrial Participation (NIP) projects could impact negatively on the balance of payments and lead to interest rate hikes in the short term – and carry high risks of non-performance in the longer term. This is in stark contrast with the view expressed by the then-government that these projects would turn the arms purchases to massive fiscal profit.

These warnings are recorded in a dossier of appendices to a 1999 document titled The Affordability of the Defence Strategic Armaments Packages: An Assessment of their Economic, Fiscal and Financial Impacts. The assessment was commissioned by the Department of Finance before the government signing off on the arms deal.

The affordability report – which seriously questions the viability of the defence procurement programme – was formally declassified late last month in order to make it available as evidence before Judge Willie Seriti’s Arms Procurement Commission.

The declassification was, however, effected too late for lawyers acting for arms deal critics and authors Andrew Feinstein, Hennie van Vuuren and Paul Holden to use in their planned cross-examination of former trade and industry minister Alec Erwin, and Erwin was excused as a witness without being required to account for the decision to go ahead with the deal.

Analysing the variables, international investment bankers Warburg Dillon Read concluded that the strategic defence procurement packages could draw South Africa into a critical debt scenario “with serious implications for funding costs and the country’s ability to raise funds in the international capital markets”.

Warburg Dillon Read’s numbers were crunched against estimates that the deal would cost R25 billion or less. Latest estimates put the total bill at around R70bn, nearly three times the 1999 figures.

But even at R25bn, according to Warburg Dillon Read, the danger signs were clear to read and, in the then-prevailing global economic climate, any “increases in budgetary financing requirement would be viewed negatively… This suggests that the government has severely limited capacity to incur non-revenue-producing expenditure that widens the deficit”.

At the same time the bankers warned that – on the R25bn expenditure estimate – the arms deal could plunge the country into a nightmare of debt where at worst an additional 20 percent of GDP would be tied up in public-sector debt and, at best, around 6 percent.

In both scenarios, Warburg Dillon Read concluded, South Africa’s position in the community of nations would probably be negatively affected.

“The financing of the defence procurement programme is expected to widen the budgetary deficit and to result in an increase in the level of the government’s debt.

Although the deterioration in the budgetary deficit and the overall debt position is likely to be gradual, the ratings agencies and market analysts and commentators are likely to look unfavourably on these changes, as an indication of a drift away from the government’s disciplined fiscal policy.”

The bankers said such additional debt would probably “cause international investors to pay much closer attention to the creditworthiness of a country in the future, with the result that adverse fiscal or external developments that previously elicited a relatively benign response may in the future provoke a more negative response from investors with serious implications for funding costs and the country’s ability to raise funds.”

Also included in the appendices are documents analysing the possible scenarios for the government’s NIP programme.

The NIPs were projected as offsets to expenditure on defence material – with Erwin’s Department of Trade and Industry estimating benefits to the tune of R110bn flowing out from arms dealers’ investments in the South African economy.

Subsequent audits showed that less than R6bn in investment had occurred. It also came to light that unprecedented “multipliers” – sometimes at levels of 100 to one – had been used in government officials’ accounting to calculate “investor credits” as opposed to what was actually stumped up. Once credits were awarded, the obligors were judged to have fulfilled their contracted obligation and final payment would have to be made for the arms purchases.

Now, it has emerged that even back in 1999 there were serious questions about the probity and viability of the offsets programme. At the time, what was on the table was a collection of envisaged major investment projects, three of them focused on developing stainless steel plants, and the fourth a plastics factory.

None saw the light of day, replaced instead with a patchwork of radically scaled down investments such as jewellery plants and the recent Nelson Mandela film, Mandela: Long Walk to Freedom.

Predicting that arms expenditure would lead to “interest rate shocks”, Stellenbosch University’s Bureau for Economic Research noted that the effect would be worsened by the NIPs since the cost of setting up the infrastructure for the industrial facilities would not be covered by the obligors in the short term and would need financing leveraged by the government.

l Arms deal crusader Terry Crawford-Browne this week filed papers at the Constitutional Court to reinstate his earlier application to have the arms deal declared unconstitutional, and to suspend the Seriti Commission.

A defence review high-lighted a “critical state of decline” in the armed forces. - Weekend Argus



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