All government purchases from foreign suppliers of $10 million or more are subject to industrial participation, also known as "offsets". The theory goes that to offset the outflow of foreign exchange, the supplier is obliged to invest a corresponding or larger amount into the South African economy to stimulate growth and employment. It is a fine theory.
But what to make of Carl Zeiss Optronics` plans to buy a majority share in the optronics division of SA`s loss-making state-owned arms manufacturer, Denel?
If a deal earlier this year between Swedish defence giant Saab and Denel is anything to go by, Zeiss will soon be sitting pretty. Under that deal, Saab was to pay Denel R66 million for a 20% equity stake and management control in a company manufacturing aircraft components, as part of the 1999 arms deal and the more recent decision to buy the Airbus A400M transport aircraft.
In return, Saab gets to repatriate a slice of the profits and can claim R16.4 billion in offset credits - the very credits that were meant to generate new jobs and new investment.
More equity?
The bleeding is not over. Denel is looking for more equity partners in its ongoing battle to recover from insolvency and all is aflutter at Reunert`s defence businesses, after CEO Gerrit "Boel" Pretorius put the lot on the market. Makhup Nyama, of Saab Grintek, says it has already made bids for some of its businesses.
The more conspiratorial have always decried offsets as "voodoo economics" and have hinted that the arms suppliers factored the cost of offsets into their asking price.
Leon Engelbrecht, group senior writer, ITWeb
Admittedly, SA`s defence industry has shrunk from shark to minnow in the last decade, but the point is that according to a recent study by the South African Aerospace, Maritime and Defence Industries Association, close to 50% of the R10 billion industry is broadly IT-related. Twenty-two percent is already foreign-owned, mostly by companies involved in the controversial R30 billion arms deal that has seen SA buy four frigates, three submarines, 30 helicopters and about 50 fighter jets.
The more conspiratorial have always decried offsets as "voodoo economics" and have hinted that the arms suppliers factored the cost of offsets into their asking price.
This raises the spectre of the taxpayer helping foreign defence companies pay for local acquisitions from which they then repatriate profits and claim offset credits.
Richard Young, the IT developer who first raised questions about the arms deal, says offsets, especially the National Industrial Participation (NIP) programme "is real smoke and mirrors stuff. It is meant to be the equivalent of hard cash, but with NIP they get all these marketing credits and multipliers that no one else can work out."
Part of that must surely be how a scheme that in 1998 was touted to bring investment of the R110 billion and create 65 000 jobs in seven years ended up subsidising the expropriation of the local industry.
Share