JOHANNESBURG. Swedish arms manufacturer Saab states that it has started to scale down a joint Saab/BAE Systems offset programme after the South African Government, the company says, has cleared two thirds of a US $ 7.2 billion obligation.
“The South African government’s agency for the national industrialization programme announced late November that offsets to the tune of $ 5.3 billion have been approaved. It means that we are well ahead of our target. As a consequence we are not engaging ourselves in ventures with any new co-operation partners but will stick to those we have already worked up a relationship with. We believe that enough will come up”, says Fredrik Nordh, a Saab’s representative at the joint BAE Systems-Saab South African offset delivery company Sanip, to Africascan.
The Saab/BAE Systems commitment to South Africa’s National Industrialisation Programme, NIP, was the clinch maker when the pair won the contract to deliver 28 Gripen and 24 Hawk jetfighters for a combined $ 2.3 billion to South Africa seven years ago.
BAE/SAAB won the contract thanks to a “non-costed option” introduced by the then Minister of Defense Joe Modise, which made it possible for cabinet to ignore the issue of price as well as technical merits and instead focus on “strategic reasons, including the total benefit to the country in terms of countertrade investment and the operational capabilities of the SANDF”, as it was later stated in a controversial report by the country’s Auditor General – a report that arms critics alleges had been doctored by Government.
For Saab the sale of 28 Gripen jetfighters was particularly welcome. The company had been under a lot of pressure for a long time at home, as it needed to get its first export brake or face possible closure.
The British Serious Fraud Office (SFO) has for more than a year tried to verify possible bribes and has so far, according to South Africa’s Mail & Guardian, traced unusually large payments of “commissions” to official agents as well as to former South African Government defense advisors.
Neither BAE Systems or Saab have defended any of these allegations, as they have not been confirmed by the SFO, but various spokespersons have repeatedly stated that everything they have done is legal.
Contractually the South African government could cancel the deal if it was found out that bribes had been paid. But, as insiders note, that is not likely, as the South African government hasn’t shown much willingness to co-operate. President Mbeki has instead publicly critiscised the British PM Tony Blair for closing down SFO’s investigation of BAE’s massive Saudi deal, stating national strategic reasons, while instead encouraging an investigation into the, for the UK, reasonably insignificant South African deal.
A former ANC representative in the South African parliamentary audit committee, Andrew Feinstein, suggests in a new book that the South African governments unwillingness to allow for a comprehensive arms probe was due to probable payments directly to the ANC’s coffers ahead of the 1999 elections and due to the cover up that followed where individual government ministers also were likely recipients of arms bribes – most prominently diseased former Defense minister Joe Modise and his advisor.
Between the two partners Saab had the overall responsibility to come up with an offset programme and deliver on it with the help of the Swedish Wallenberg group of companies assistance – which had the largest stake in Gripen through Saab and various Swedish subcontractors – while it was BAE System’s responsibility to get the sale through, including excecute payment of commissions to those that facilitated the deal.
It was argued by industry insiders early on that Saab’s creative marketing team had won the contract by getting the Department of Trade and Industry officials – not the least minister Alec Erwin – onboard.
“The South African’s bought it hook and sinker, but the projects included in the original proposal amounted to very little, what was presented then is nothing like what’s being delivered”, a number of Saab sources that were involved in the NIP discussions at the time have told Africascan.
The BAE/Saab offset included many imaginative projects, including plans to manufacture a Swedish transport moped and to build train carriages for export in South Africa, while there were more realistic ones too, such as exporting various car components. The bulk of the projects were confidential, allegedly on commercial grounds.
Many projects failed dismally, most prominently a huge scheme to bring Nordic tourists en masse to the Port Elizabeth beach front, an industrial city that South African’s themselves are shying, and a large gold beneficiation scheme set up together with Harmony Gold – where the Peruvian partners siphoned off tens of millions before the project collapsed and the officials were charged.
By and large Saab learnt from the mistakes – how much it cost the company is a well kept secret though arms analysts point out that offset costs are accounted for in the original arms sales price – and started to re-orientate its modus operandi and invest in “core business” activities. The company, which had to bring in a much larger chunk of offset than BAE, began to purchase defense – and technology companies that could fit into the larger group. Four years ago it bought into listed defense and technology group Grintek, an acquisition that was finalized last year.
But what really saved the day and the offset programme for Saab – and BAE – was Saab’s purchase of Denel Aerostructures earlier this year.
The deal was only worth SEK 60 million on paper, but in offset terms Saab’s CEO Per Erlandsson managed to twist a massive concession out of the South African government. In return for Saab taking management responsibility and a 20 % stake – with an option to purchase outright control – the South African Government agreed to give very generous offset credits that all in all amounted to USD 1.5 billion (ZAR 10 billion).
“The Denel deal is by far the largest part of the NIP (non-defence industustrial participation project). It is an important part of our way to satisfy the offset criteria”, says Fredrik Nordh.
For Saab these investments mean that the company, and rightfully so, now counts South Africa as its “second home” – well beyond the call of duty as far as investment analysts were concerned, but probably necessary from an offset point of view.
It wasn’t an easy bargain to drive home. The South African government effectively, says observers, had to agree to move the goalposts so that the investment in what is essentially an arms company was seen as an investment in a civilian operation and therefore would be accepted as a civilian part of the offset deal – this was crucial for Saab as it had to find ways to catch up with some other failed offset deals.
Four years ago Saab purchased another defense related South African company Grintek for ZAR 500 million – a deal Saab has good reasons to be happy about as it has contributed towards the arms offset and has proven to be a sound investment.
So in the end it was these two, essentially defense related, own investments that have saved the day for Saab and its partner BAE Systems, not their attempt to go beyond their core business and act as an investment- and trading house.
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The Saab-Denel deal markup gives a rare insight to the difference between sales price and offset credits, the latter being negotiated behind closed doors between South Africa’s politicians and the defense supplier, in this case Saab, as they try to beat the deadline, contractual regulations and potential embarrassment.
Saab operatives feel the company has dragged through the mud by unsympathetic media, which favours highbrow moral language and is less than sympathetic to legalistic la
Legally, as the company rightly points out, the South African government is happy with Saab’s delivery, and has approved the company’s delivery of offset as contractually correct.
Equally Saab officials point out, there is no proofs whatsoever that the Swede’s have been involved in bribery and corruption – the company says it has no knowledge of any bribes being paid and that whatever has been done in that department was done by Saab’s former marketing partner BAE Systems.
This is possible, but not likely. Arms deals, as any massive business deal, are done by flesh and blood businessmen on one side of the negotiating table and politicians and their administrators on the other.
To sum up, the real course of events points towards the following:
● Saab and its partner BAE Systems are on their way to fulfill offset obligations. Rules were always open for political interpretation to help to save face for South African, British and Swedish politicians, as well as for BAE-Saab. If any rules are transcended or not is almost impossible to establish as decisions are political and kept secret for commercial reasons.
● The likelihood of irregular payments of bribes, beyond legitimate commissions, is large but yet unproven. Weather there is a case of bribery of South African officials can possibly be proven in a court of law without assistance from South African authorities, but the likelihood is that politicians can continue to block investigations and cover up for as long as crucial figures can conspire to stay silent. The National Prosecution Agency’s possible charge of ANC president Jacob Zuma early 2008 could offset that balance. The British SFO is not likely to go ahead without further proof. The Swedish Attorney General has decided there is no evidence against Saab.
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