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A report tabled in Parliament on the arms deal showed how the offsets were projected to benefit the economy by about R110 billion, when in reality,– as an earlier Department of Trade and Industry report made clear – less than R6bn had actually flowed into the fiscus.
Trade and Industry Minister Rob Davies on Wednesday tabled the report into his department’s handling of the National Industrial Participation (NIP) investments entered into by weapons contractors to offset South Africa’s massive expenditures in the arms deal of the late 1990s.
DA defence spokesman David Maynier described it as devastating.
Titled the Strategic Defence Packages Performance Review Report, together with a final audit report titled “Final Internal Audit Report: NIP Performance Review: Strategic Defence Package”, the document is based on an analysis of 40 of the 121 projects entered into in offset of the arms deal.
The authors justify this partiality by saying it was accepted that those examined made up a representative sample and the issues raised by the other cases would be essentially similar.
The cost to the taxpayer of the arms deal, meanwhile, has skyrocketed from somewhat less than R30bn in 2000 to about R70bn today.
Between the under R6bn that was actually invested by the arms manufacturers and the R110bn that department officials credited was actually invested, the department’s auditors have highlighted a cluster of anomalous accounting practices, used in arriving at credits as awarded to the manufacturer “obligors”.
These include using so-called “multipliers” – formulas whereby actual investment would be multiplied in some cases 10 and even 20-fold to arrive at the amount credited against the manufacturers offset obligation.
Several of these multipliers were justified, it emerges in the Strategic Defence Packages Performance Review Report, and an accompanying audit report, by the argument that incentives needed to be offered to obligors to invest in sectors of the economy (like training) which, while strategically important to South Africa, would not necessarily deliver profits to the investor.
In other cases identified by the auditors, NIP credits were awarded upfront – against the promise of future investment. In some of these cases, when that promised investment was not forthcoming and the projects fell away, the credits were allowed to remain anyway.
The report finds furthermore that in awarding credits to the Strategic Defence Package (SDP) obligors, the officials concerned deviated significantly from department policy, adopting a credit methodology under the umbrella term “Package Deals”, that fell outside of established department procedure. So too the allocation of multipliers in relation to the SDP obligors fell beyond limits set by department policy.
The report specifies that in future no multipliers higher than twice the actual value may be awarded in terms of offset management.
Alongside this criticism is also levelled on the failure of officials to monitor projects over time or to note, or to factor into credits awarded, that several had fallen apart or had never got off the ground in the first place. In some cases documents had simply gone missing – among them those detailing three offset claims to the value of just over $50 million (now R553m) submitted by BAE Systems, which could not be found.
Also highlighted in the report are major discrepancies between jobs credited and those actually created.
In the case of the recent movie Mandela: Long Walk to Freedom, for instance, only 69 jobs could be discovered in the audit, but 13 030 were claimed by the German Frigate Consortium. The audit was put together under the leadership of department director-general Lionel October and acting deputy director general Garth Strachan.
Its initial purpose was, as is stated in the document, to examine and refine systems and procedures employed in the management of offsets, in reporting to Parliament’s trade and industry portfolio committee.
Maynier said he would be asking committee chairwoman Joanne Fubbs to schedule a hearing on the findings of the internal audit report.