Defence Procurement Package Investigation: discussion with Ministers of Finance, Trade & Industry & Defence

Meeting report

STANDING COMMITTEE ON PUBLIC ACCOUNTS
26 February 2001
DISCUSSION WITH MINISTERS OF TRADE AND INDUSTRY, FINANCE AND DEFENCE

Chairperson: Dr Gavin Woods

Relevant Documents:
Auditor General's Report: Selection Process of the Strategic Defence Packages
Fourteenth Report of the Standing Committee on Public Accounts
Media Statement on the Strategic Defence Procurement Package from Ministers of Defence, Trade and Industry, Finance and Public Enterprises
Letter to Dr G Woods, Chairperson: Standing Committee on Public Accounts, from Deputy President J Zuma, dated 19 Jan. 2001

SUMMARY
The Committee had the opportunity to question the Minister of Trade and Industry, Mr Alec Minister Erwin, the Minister of Finance, Mr Trevor Minister Manuel and the Minister of Defence, Mr Mosiuoa Minister Lekota, on the controversial strategic arms procurement package. Also present was the Auditor General, Mr Shauket Fakie.

The Ministers asserted they are responsible for prime contractors only and not subcontractors and that the apparent rise in cost from approximately R30 billion to R43 billion is due to exchange rate fluctuations and future values, among other things, which are normal in contracts of this nature. The Ministers also said the Committee was wrong to begin its investigation with the premise that the international arms industry is corrupt. They assert they had a mandate to purchase equipment for the South African Defence Forces and they did so.

MINUTES
[Editor's Note: What follows is an edited first person account of the meeting]

Chairperson Woods: This meeting follows a press conference by the four Ministers on 12 January and the release of their six page press statement in which they question the Standing Committee on Public Accounts' (SCOPA) Fourteenth Report regarding the government's integrity in the arms acquisitions deal. SCOPA wishes to reach a shared understanding prior to its next report to the National Assembly.
The first perceived contact from the Ministers to SCOPA was a press article on 26 October, requesting a meeting with SCOPA. This was four days before SCOPA was to report to Parliament, and the summer recess. SCOPA was never contacted prior to 26 October.
SCOPA considers the financial dimensions of government spending, and thus has no need of a comprehensive understanding of the arms deals. Members have had sight of confidential documents; these documents remain confidential and may not be quoted from in public. This meeting is to ascertain from the Ministers where they disagree with SCOPA's Fourteenth Report.

Minister Erwin: It had been Cabinet's intention to await SCOPA's hearings before expressing the government's concern, but extreme speculation and debate regarding the arms acquisitions led to the public statement of 12 January. It was not an attempt to stop a proper investigation.

Ministerial Concerns
Minister Erwin: The report did not understand how the decisions were made. A presentation would have been useful, but intended presentations to SCOPA by the Dept of Defence were disregarded. The decision to purchase equipment came from Parliament, and was supported by Cabinet. The process was characterised by discussions of a total package purchase over many years, rather than isolated purchases of distinct items of equipment. Four Ministers were involved, chaired by the then Deputy President Thabo Mbeki. The Auditor General's process is thus not identical to that of Cabinet. It was an evaluation process, rather than a decision-making process. This is important because we had structured the process for many players in an optimal manner. Many players were involved in the decision and we were very conscious of the magnitude of the proposed expenditure. The procurement was conducted in phases. The first objective was to re-equip the South African National Defence Forces (SANDF); affordability was the second.
All government foreign procurements above US$10 million are subject to the industrial participation programme (offsets). This establishes a structure to deal with prime contractors, who must deal with Defence Industrial Participations (DIPS) and National Industrial Participations (NIPS). Conflicts of interest are therefore extremely difficult because of the steps taken to spread the decision processes so that no one person can have a decisive impact on any decision. This includes the influence of the Director of Procurements.

Lead-In Fighter Trainer (LIFT)
Minister Erwin: The Ministers were given options with a range of prices. We made our decision for BAE/Saab Gripen fighter aircraft because of a range of reasons, with Finance watching regarding affordability.

Performance guarantees for NIPS
Minister Erwin: Public policy had been for five percent performance guarantees, and ten percent was ample. Beyond ten percent would have introduced distorting factors. The prime contractors are responsible companies, and their performance is significant. The SCOPA report implies that Cabinet did not receive accurate information. We had twenty hours of discussions, and we considered every option. Additional support came from various authorities, including international consultants. The media and others continue to use a figure of R43 billion, which is a distortion and has led to misunderstandings.

Cost of Aircraft
Minister Erwin: The government accurately assessed the costs of the aircraft, and we are confident that we paid appropriately, although it is hard to compare prices in deals like this. We have strong reservations at the Report's declaration of undue influences of the prime contractors. We reject such insinuations.

General Holomisa (UDM): I have a question to the Auditor General. It is a matter of public record that the Ministers have insinuated you have no knowledge of the process. Are you still confident that we need to proceed with this investigation? Should the Ministers be allowed to raise queries which undermine the work of SCOPA and the investigation? Can you explain SCOPA's need to deal with this investigation? Please give us direction.

Chairperson Woods: Your questions, General, are not on today's agenda.

Mr Fakie: Yes, we do understand the process. Yes, I stand by my recommendation of a forensic investigation. It is still necessary.

Minister Erwin: Our statements are not an insinuation. We are cooperating fully with the Auditor General. Forensic investigations of the sub-contracts are within the ambit of the Auditor General.

Ms Taljaard (DP): Are the ministers aware of what background was used in the Fourteenth Report? Has the Auditor General met the cabinet ministers since 12 January and, if so, what is the substance of those meetings? Is the Auditor General having difficulty in obtaining documentation?

Mr Smith (ANC): This meeting is an interaction between SCOPA and the Executive. Questions to the Auditor General defeat that purpose, and should be posed at another time. The agenda is to deal with the Executive.

Minister Manuel: The Ministers do not know what documents SCOPA holds. We just have the Fourteenth Report and records of proceedings.

Chairperson Woods: We as SCOPA deal with financial management, not acquisition policy.

Minister Erwin: Four teams went through the proposals, specifications, rules, evaluating process, and ranked the equipment on the basis of points. Decision-makers must take this process into account, but have the right to make a decision on additional criteria ie the LIFT technical aspects and the DIPS/NIPS were decisive rather than cost. Jayendra Naidoo would report to the Cabinet committee.

Ms Taljaard (DP): Terms of reference would have been given. At what points were these terms of reference changed to shift the balance of responsibility from one Ministry to another?

Minister Erwin: We would record new mandates, not terms of reference.

Mr Feinstein (ANC): We have looked in detail at structures to prevent conflicts of interest, and these are recorded in SCOPA transcript of the October hearings. The hearings said that Armscor did not require such procedures.

Minister Erwin: The magnitude of the deals was such that we ensured no individual could decisively swing the deal. Any person with any conflict of interest recused himself. We are satisfied we took sufficient precautions, and we await the Auditor General's recommendations in this regard. Many former generals were also involved. We put in as many cut-off points as possible, and used internationally reputed companies. "Conflict of interest" is an imprecise term. We put in as many "new" people as we could.

Minister Manuel: We need a bit of perspective. The decision to acquire armaments came out of the Defence Review. It was not an exercise in offsets or affordability, but came from the need to re-equip the SANDF. It is a Constitutional imperative. Thus, if the head of Armscor was present, it was proper for him to be there. If the options were not affordable, then they would have been sent back.

General Holomisa (UDM): Can you reassure SCOPA how the government sought to distance itself from allegations of unfairness, such as bogus black empowerment companies being established to take advantage of the negotiations?

Chairperson Woods: Question overruled. Stick to the decision-making process.

Minister Manuel: We each had a line function in addition to our collective responsibility. It was an ad hoc arrangement. The structure of the decision-making process then carries a check against the notion of undue influence. I can say that the affordability team reported to me regularly. The issues raised were within government policy. The record of proceedings in SCOPA implies that four Ministers and Deputy Ministers took responsibility for the prime contractors.

Chairperson Woods: There was apparently no "best practice" concept, which confirms the previous advice of officials, and no independent checking mechanism. But SCOPA cannot assume there was no manipulation just because the final decision-makers were beyond reproach.
The conflicts of interest do concern SCOPA in that the Chief Procurement Director is associated with African Defence Systems (ADS) which received contracts to the loss of one of the complainants. We also believe that the same individual was less than candid at our hearings. This is not an accusation but something that must be noted.

Minister Manuel: I object to how you arrive at that point. You are dealing with prime contractors. You are suggesting that we are in dereliction of our duties as Ministers.

Chairperson Woods: To whom and what are you referring?

Minister Manuel: I am referring to RW Johnson's interview with Chairperson Woods, published by the Sunday Independent 11 February 2001. Why should four Cabinet Ministers have held a press conference to denounce SCOPA?

Chairperson Woods: They tried to insist that we were amateurs who didn't understand, but the opposite is the case. I think we know a great deal more about key financial aspects of the arms deal than they do. I suppose the Executive wants to involve as many Ministers as possible in backing up its case.

Mr Doidge: The transcripts of the October hearings show that some of Mr Shaik's answers were not taken into account in the final draft of the Report.

Ms Taljaard (DP): Point of order: The Committee member is now contesting the Fourteenth report which was adopted by the National Assembly. Therefore, aspersions cannot be cast upon it. Similarly, the Minister of Finance is prejudging our second report.

Chairperson Woods: I uphold the point of order.

Mr Feinstein (ANC): We must bear in mind that a forensic investigation was agreed to because of a variety of information passed to individuals as well as to the Committee. The Report allows for that.

Minister Erwin: You have argued that in the Fourteenth report. We would like you to take account that we had established procedures and expertise. We want SCOPA to note that.

Contracts and Sub-Contracts
Minister Erwin: The government expects the Auditor General to check on some of the sub-contracts. We as government contract with prime contractors, not sub-contractors. A lot can happen between prime contractors and sub-contractors, but that is not our area of responsibility. The sub-contractor cannot come to government with its problems with the prime contractor.

Mr Gumede (ANC): I do not think it is a matter of defending our report. We are here to get correct information.

Chairperson Woods: Our report has been criticised. Do we stand by it, and its adoption by Parliament?

Mr Smith (ANC): This issue of sub-contractors, isn't this the investigators' prerogative? I don't see the need for us to investigate this before we get the Auditor General's report in July.

Chairperson Woods: We expressed the view. Can we defend that, or did we just suck it out of our thumbs?

Mr Kannemeyer (ANC): The prime contractor has a free hand in appointing sub-contractors, without any influence from government. I understand that opportunities for black economic empowerment are lost if prime contractors are not inclined to this.

Minister Erwin: We should not deal with sub-contractors. As regards black economic empowerment, points for this were issued initially, but in the end it was ranked as zero. We also pointed out that unproven technology could not be risked even though it was South African. That point had to be decided by the prime contractor. Also, we share none of the risk factors of the prime contractors.

Ms Taljaard (DP): The Defence Review was the driving force in the acquisition process. Did the Department of Defence express any concerns regarding the technical specifications of c2i2's tender?

Minister Erwin: We believe that the hearings covered this in detail. The Navy pointed out that there had been work done. The Cabinet was clear that the prime contractor was responsible, and that we would not overrule in terms of developing new technology.

Dr Koornhof (UDM): The Auditor General pointed out that tendering procedures were not adhered to. Let us proceed with his investigations.

Mr Smith (ANC): The UDM is saying that this should go to another forum, to the Auditor General. I likewise propose this.

Chairperson Woods: I am abiding by the decision from the ANC to reach consensus by Wednesday. The Ministers have raised these issues, and this includes sub-contracts. The role of the Auditor General has nothing to do with this.

Minister Erwin: The point we made is that forensic investigations should go ahead by the Auditor General.

Chairperson Woods: The government raised the matter of why we placed the issue of sub-contracts in our report. The c2i2 complaint justifies why we put it in the Fourteenth report.

Minister Erwin: The vagueness of the report holds government responsible for sub-contracts. We cannot accept that responsibility. The Attorney-General has to deal with what happened at the sub-contract level.

Chairperson Woods: Yes, you have said our Report was wrong to look at the sub-contract level. We think it was justified in the Report.

Minister Manuel: This issue is one of principle. The Report is vague on this. The government cannot take on the matter of the sub-contracts. We cannot take responsibility for the risk of failure. You are suggesting we take on this risk, but we can't shift the nature or contracting. We cannot manage sub-contractors; this is not an appropriate risk for government to take. We look at the Report in this light.

Ms Taljaard (DP): Are you satisfied that the mechanisms in the contract system are sufficient so that there can never be manipulation? So that government can never "nudge and wink" at prime contractors to select certain sub-contractors?

Minister Manuel: This is not raised in section 5 of the Report. We do not take responsibility for sub-contracting. How prime and sub-contractors get together is their business.

Minister Erwin: I stress that government Ministers are not prepared to take responsibility for sub-contracts. That is the Auditor General's task. If the Auditor General believes that South Africa did not get value for money, then he must take action.

Ms De Lille (PAC): Has the government any criteria on how black empowerment is handled?

Minister Erwin: We decided to drop black empowerment, but it had initially been a factor.

Mr Smit: Page 47 of the SCOPA hearings transcripts refers to the links between contractors and sub-contractors. That the acquisitions were a government to government initiative involving foreign embassies anddocuments. On page 48 Mr Shaik explains that tender documents had counter-trade weighting, and that to ensure suppliers met the terms, a project team will recommend sub-contractors. We either support or reject the recommendations. In view of the statement by Mr Shaik, how do you now distance yourself from any responsibility for sub-contracts?

Minister Erwin: Obviously the government knows who the sub-contractors are, this is normal, but we are not responsible for sub-contractors.

General Holomisa (UDM): I propose a way out. It would be wrong to say that we have not noted the inisters' attempts to defend the government. SCOPA's Fourteenth report was very sober, and was accepted by Parliament based on the Auditor General's review, plus documents and hearings. We endorse Parliament's decision for an investigation. It is a pity that the Ministers' response sought to undermine that decision. Despite that misjudgement by the Executive, the investigation must continue. Let's accept the Fourteenth report. We must consider the Executive's refusal to include Judge Heath.

Chairperson Woods: This is the wrong forum for your remarks, General.

Ms Taljaard (DP): Both Ministers keep highlighting that neither SCOPA nor the Auditor General understand the acquisition process. Is their stance predicated on the sentence in the Report "what further concerns the Committee is that the government had no influence in the appointment of sub-contractors?"

Minister Manuel: Are we being subjected to an inquest? Is this an inquest?

Ms Taljaard (DP): Will the ministers engage SCOPA's future questions in connection with
the Chapter Nine bodies viz-a-viz the Executive?

Minister Erwin: You must be precise about what this is. WE have to know what we are expected to answer about. We can't be subjected to continuous interrogation where we don't know what's happening.

The LIFT/Hawk Evaluation

Minister Erwin: We are confident that the process was correctly done.

Chairperson Woods: The costs of the Hawks seem to be high, though they may be legitimate.

Ms Taljaard (DP): Regarding the role of the DIPS, given the prerogatives of the Department of Trade and Industry, what was the sway of the DIPS and the cost implications?

Minister Erwin: On scoring and ranking of the process, we looked at specific propositions regarding DIPS. South Africa's defence industry, we considered, was better placed to deal with the equipment needed. The DIP proposals were more stable than the NIPS.

Performance Guarantees on the NIPS and DIPS
Mr Feinstein (ANC): Had the guarantees been higher than ten percent why shouldn't that apply to offsets per se?

Minister Erwin: The National Industrial Participation Programme was adopted in 1997. It is a trade-off with bidders with specific industrial strategies, especially steel mills.

Ms Taljaard (DP): The literature on offsets emphasises a high level of non-compliance. Are we satisfied that South African can monitor the DIPS and NIPS? Is there concern that the three steel projects are imperilled? How will that impact on attracting investment?

Minister Erwin: Yes, we have the capacity to monitor. We still believe in the merits of the steel mills. The projects are sound. If the circumstances change, the contractors must pursue new projects.

Mr Nair (ANC): The NIPS were not decisive to the procurement process.

Minister Erwin: There may have been public statements regarding offsets, but there is no possibility that offsets justify the purchases. Offsets are a mechanism to facilitate industrialisation. The offsets were included as part of the risk analysis. The rationale must be the Defence Review and constitutional obligations.

Procurement Processes
Chairperson Woods: Regarding non-compliance, the Auditor General produced a review, and we became aware of at least eighteen instances of non-compliance of the tendering processes. Tried and tested procedures were not followed.

Minister Erwin: We restate: specific instances are matters for debate between the Department of Defence and the Auditor General. We are confident that the Department of Defence is correct, and that staff targets are appropriate. We urge SCOPA to relook at this work in conjunction with the Department of Defence. We also point out that budgeting for this deal is different from the norm. The availability of resources first cannot apply in this deal. Procedures for a single-item purchase cannot be used. We are concerned that you are referring to documentation that is not in your Report. It is unfair to the Executive.

Chairperson Woods: Yes, we do have documentation that you have not seen, and you chose to criticise the Report before coming to see us.

Minister Manuel: This is an issue of reciprocity. We offered the Committee complete openness and transparency, but the Committee has arrived at its conclusions nonetheless. We cannot comment on documents we do not know about.

Chairperson Woods: We followed procedures accepted by public accounts committees in parliaments all over the world.

Ms Taljaard (DP): The Minister of Finance is unhappy that the Ministers did not come before SCOPA, or that Mr Roland White wasn't seconded to the Committee? What is the contradiction?

Minister Manuel: Treasury was not heard by SCOPA.

Mr Mashimbye: Mention has been made three times that other substantive information has been considered. Has all that substantive information been seen by all members?

Minister Lekota: Point of order: we as Ministers are here to interact with SCOPA. Stop talking to yourselves and talk to us.

Chairperson Woods: I take your point, Minister. I would like more co-operation from members of the ANC.

Costs
Mr Kannemeyer (ANC): We should be thinking about what all of this means to people like our mothers. I think about what my mother in Mossel Bay will make of this. The signal to our mothers is important. I think my mother is asking herself why a deal that was originally supposed to cost around R30 billion suddenly seems to cost R43 billion. Ministers, what is the cost of the arms deal?
When the Committee engaged inquiries the cost was R29.9 billion, and rose to R30.3 billion. Rear Admiral Visser gave a figure first of R46.5 billion and then R43.8 billion. That figure was inclusive of foreign exchange fluctuations as well as price fluctuations. Could the ministers explain how the figures moved from R30.3 billion to R43.8 billion only on foreign exchange fluctuations,ie an increase of almost 50 percent? Is the cost R30 billion? What mechanisms exist to protect the taxpayers?

Minister Manuel: Between September and November 1999 the contracts were costed at US$4.77 billion. That is the cost of purchase as of date of contract. The affordability model looks at the future value of the life of the equipment over the delivery period, escalation of labour and raw materials (2.5%pa for overseas, 4.5-5%pa for South African contracts). It considers exchange rate fluctuations. There is a discount in the pricing and the financing of the package. It is a moving target. The contract value is US$4.77 billion, but the contracts are in Swedish kroner, British sterling and deutschemarks. That money would have to be borrowed at export credit arrangements, and at more favourable options at fixed interest rates at the best terms to South Africa. The cost of procurement rose to R43 billion; such a rise is not unique to this contract. It covers delivery at various points of the contract.
There are also time lines and delivery bunching. The net present value is R30.3 billion, but we cannot consider future value. Anybody who suggested that we can is misleading the public.

Chairperson Woods: The CGIS press statements said R30.3 billion with no provision being made for escalations.

Minister Manuel: In January 2000 I signed the financing contracts. My role with the Committee comes from the set of objectives to re-equip the SANDF. You buy a home in rand, when you have income in rand; with foreign currency, it is more complicated.

Minister Erwin: The depreciation of the rand will also lead to an escalation in the value of exports and investments.

Mr Feinstein (ANC): What is the cost to the fiscus and to South African taxpayers over the life of these contracts? The cost is going to be considerably more than R30.3 billion.

Ms Taljaard (DP): Has the Treasury done any evaluation of the collapse of the rand? Most European agencies charge a high risk premium.

Minister Manuel: Losses on foreign exchange markets are for the account of the fiscus. There would be no purpose in hedging against ourselves. If we had cash in hand on the day of the contract future costs would have been moot. But "future value" is a very loaded concept. I agree that what is important here is to restore our relationships with our mothers.

Minister Lekota: There is the belief here that the government was not honest with the country.

Minister Erwin: We do cash accounting in government, including the possibilities of foreign exchange fluctuations. Our responsibility is to report to the public in terms of normal reporting, and that we do not expose the country to unnecessary risks. We took the risk factors into account.

Mr Kannemeyer (ANC): If we had talked about the costs of the procurement in dollars, would that have resolved the confusion?

Minister Manuel: There are marginal differences in escalations, but there are also rand costs for domestic contracts.

Ms Taljaard (DP): In the DTI committee, the Minister referred to the final costs in terms of foreign exchange currency and international fluctuations.

Minister Erwin: We have fulfilled our responsibilities in terms of cash accounting as consistent with government's needs to report to the country.

Minister Manuel: It is absurd to have to consider foreign exchange risks in cash accounting when local borrowing does not consider such risks.

Mr Feinstein (ANC): There is a public interest statement that government should have considered the rand escalations.

Introductory comments to the Fourteenth report
Minister Erwin: Our concern was that the Report did not ask the opinion of Cabinet Ministers. It declares that the international armaments industry has a reputation for corruption. That is a judgement call which colours the Fourteenth Report.

Chairperson Woods: I suggest your comment is highly contrived to cover the Deputy President's letter.

Minister Erwin: It is inappropriate for any committee to prejudge the arms industry, and international companies.

Chairperson Woods: The World Bank and Transparency International see the arms industry as being subject to massive corruption. The Committee must take note of that history.

Minister Lekota: This Parliamentary Committee, whatever the World Bank says, has no reason to start from the premise of corruption in the arms industry. It is wrong for thisCcommittee to start from such a premise. The assumption is that anything to do with Africa and Africans is corrupt. It does enormous damage to this country.

Ms Taljaard (DP): We would be deluding ourselves if we thought that South Africa's arms deal could isolate itself from malpractices in the arms industry. We would also be casting aspersions on the Auditor General's report.

Minister Manuel: We need to be precise in the drafting. Regarding the somewhat murky history of the arms industry, we tried to construct sufficient grid locks to say that we as government stand by the decisions. There was a mandate from Parliament to buy this equipment. More care should have been taken in the drafting of the Fourteenth Report. In addition, it was the Minister of Defence who initiated this investigation by asking for the review by the Auditor General.

Mr Fakie: No, the Auditor General's office and SCOPA took it upon themselves given the implications for democracy. We initiated the review. We later got co-operation from the Minister.

Minister Lekota: When Ms De Lille refused to give me evidence, I formulated a letter to the Auditor General. I then wrote a letter on behalf of all the Cabinet. You can have copies in the morning.

Ms Taljaard (DP): It would be important to have that correspondence, and to establish the timelines.

Mr Feinstein (ANC): I think it is important to distinguish between economic sectors such as the arms trade, and racial characteristics. Perhaps we might have been more judicious in our drafting, but the history of the arms industry must be considered. The purpose of this investigation is corruption.

Minister Lekota: I appeal to this Committee. The task was to pass judgement on whether the Cabinet had acted appropriately. It is unacceptable to start with the conclusion that the arms industry is corrupt. You are supposed to judge what we have done, not what the United Nations or World Bank has done. South Africa is the richer for what the Executive has done in stimulating debate around the Constitutional issues. SCOPA will come out of this a better Committee.

Ms Taljaard (DP): Given the concern about the opening paragraph, did the Ministers liase with the Deputy President?

Minister Manuel: We do not act as individuals, but as a Cabinet. Of course, we discuss this in the Executive.

Conclusion
Minister Erwin: We want to make it clear that our concern about SCOPA's predisposition does not apply to the Auditor General as he does not refer to corruption. The Minister of Finance has pointed out that it is wrong to prejudge us. Has there been value for money? If there has been corruption, pass the details on to the appropriate authorities. We pointed out on 12 January that as Executive we are not questioning SCOPA's check on value for money, and to hold hearings. We make it clear that the Auditor General has a Constitutional role to audit the state's finances. We should be accurate and correct within the Constitution.