2003 report on the deal (pdf) - campaign against arms trade

The South African dealA case study in the arms trade

This study was carried out by Christopher Wrigley on behalf of

Campaign Against Arms Trade (CAAT)

Published in the UK by Campaign Against Arms Trade

11 Goodwin Street, London N4 3HQ. June 2003

June 2003

ISBN 0 9543329 2 X

Cover photos by Juda Ngwenya/Reuters

Gripen fighter jet (L) Alexandra township, Johannesburg (R)

Executive summary 1

Introduction 3

South African background 3

Politics of the transition 3History of the arms industry 4A regional power 5Arms procurement and arms exports 6

The arms deal 7

First approaches 7The non-participant 9The successful suppliers 10Financial arrangements 11Loans 12Offsets 13Europe takes over 14Corruption? 15

The sellers 17

The merchants 18The governments 20The UK and South Africa 21

Postscript 22

Acknowledgements 23

Abbreviations 23

Table of contents

The government of South Africa is currentlypurchasing warships and military aircraft to thedollar value of $4.8 billion from UK and otherEuropean suppliers.The package is made up asfollows: from the UK, 24 BAE Systems Hawktrainer aircraft and 4 GKN Westland SuperLynx naval helicopters; from Sweden, 28SAAB Gripen fighters, in which BAE Systemshas a half share; from Germany, 3 submarinesand 4 surface warships, variously described ascorvettes and frigates; from Italy, 30 utility hel-icopters. A similar procurement package forthe Army, including air-defence systems,nearly a hundred main battle tanks and hun-dreds of other armoured vehicles, has beendeferred but is expected to go ahead beforelong, and this too will require heavy overseasexpenditure.

Some of the usual objections to arms-tradeactivities do not apply here. South Africa is ademocracy, which is entitled to make its ownchoices. It is not at war or likely to be at war,and any military action outside its borders willtake the form of peace-keeping in a troubledregion. Nevertheless there are grounds fordeep concern about the transaction andespecially about the UK’s part in it. SouthAfrica urgently needs to spend money on thedevelopment of civil industry, water supplies,education, housing and health, above all onmitigation of the catastrophe that is AIDS. Onthe other hand, it faces no military threat, andpeace-keeping in Africa needs troops and lightequipment, not warships, fighter planes andtanks.

Up to a point, the new South Africa’s pri-orities were skewed from the beginning, inthat preservation of the armed forces was a keycondition for the peaceful transfer of power.However, the European deal was not conclud-ed until September 1999, after five years ofanxious debate within the country and thegovernment. On the one side, besides a strongpeace movement led by the churches, werepoliticians whose priorities were social andeconomic. On the other were the vested inter-ests of the armed forces and military industry,and politicians who felt that a well-equippedSouth African National Defence Force was apatriotic necessity.The balance was eventuallytipped in favour of the militarists by two fac-tors: the easy financial terms which South

Africa was able to negotiate in a global buyers’market, and the promise of ‘offset’ expendi-tures amounting to more than twice the valueof the purchases.

Offsets take two forms: counter-purchases,mainly of industrial components, includingmilitary ones; and ‘industrial participation’,investments in South African industry, espe-cially the arms industry, by the supplying com-panies and others. In the later apartheid eraSouth Africa had developed significant armsproduction, mostly under state ownership butwith an important private sector as well.During the transitional period between 1989and 1994 the industry, like the armed forces,was allowed to run down, losing more thanhalf its workers, but the new governmentdecided to preserve what it saw as a nationalasset.To do this it was necessary to break intothe international market, and in principle thiswas possible since South Africa had important‘niche capacities’ and products of world class.(It was capable of producing platforms such asaircraft and tanks, and had done so in theapartheid era, but only at prohibitive cost.)Results, however, were disappointing, and itbecame clear that the industry could not pros-per without foreign money, technology andmarketing organisation.While European com-panies saw offsets as the bait for contracts,South Africans saw the arms purchases as ameans of luring the companies into SouthAfrica. As a result, large parts of the armsindustry, both public and private, have passedor are in process of passing under foreigncontrol.

The new foreign owners are often in part-nership with black business interests, whichhave probably advanced more rapidly in thearms industry than in any other part of theeconomy. One motive for the programme wascertainly to accelerate ‘black empowerment’,which in principle means the matching ofpolitical with economic emancipation, but inpractice can mean unmerited rewards forpolitically influential individuals. This distor-tion was much more important than the casesof direct corruption that have been discoveredin connection with the purchases.

With the aid of some creative accountingthe promised offsets are likely to be delivered,but the hoped-for net gain of 65,000 jobs will

1

Executive summary

not. For arms production is capital- and tech-nology-intensive, and an equivalent investmentby South Africa in, say, water supplies wouldhave provided far more employment.

For the vendor companies, South Africansales were useful in themselves. The Hawkpurchases helped BAE Systems to keep animportant production line going, while itsshare in the Gripen would provide income inthe awkward gap between the Tornado and theEurofighter and the Joint Strike Fighter. Butprobably more important was the opportunityfor BAE and others to gain effective controlover the South African arms industry.This willhelp to secure future business. For instance, iftanks had been ordered in 1999 they wouldhave been French Leclercs, not VickersChallengers. But Alvis Vickers now owns mostof South Africa’s main manufacturer ofarmoured vehicles, so is well placed to get thetank order when it materialises. In addition,the companies are acquiring facilities which,being both high-tech and low-cost, are idealfor the ‘outsourcing’ that is the order of theday.

The deal, however, could never have gonethrough without the support of the vendorgovernments. The banks which financed thepackage were able to offer generous termsbecause the loans were underwritten by theExport Credits Guarantee Department andsimilar bodies in Germany and Italy. The

South African authorities had always knownthat to get the best deal they must negotiatepackages with governments, not individualcontracts with companies.Their choice of sup-pliers was dictated partly by financial but evenmore by broader political considerations. USarms companies were excluded by the mutualsuspicion that existed between the two coun-tries. (It was even whispered that the real func-tion of the new warships was to deter a USattack.) In Europe, a prime object of SouthAfrican policy was easier access to the EUmarket.The UK and Germany, which receivedthe bulk of the orders, were better disposed inthis matter than France, which got little, andSpain, which got nothing.

The vendor governments, especially that ofthe UK, did not merely help to lubricate thecontracts but actively promoted them. SouthAfrica’s decision to rearm was in part the resultof sustained external pressure, culminating in avisit by Tony Blair to Pretoria in January 1999,which is said to have clinched the deal. It isalso remarkable that in the selection of shipsand aircraft South Africa ended up with themost expensive of the available options.London’s motives (and doubtless Berlin’s andRome’s) were those which have so long sus-tained the arms export trade. The jobs argu-ment has little economic but considerablepolitical validity. More important is the deep-seated conviction that a flourishing armsindustry (which requires exports to survive) isa badge of national status.

So the deal supports the mutual interests ofthe European and South African politico-mil-itary-industrial complexes. The real needs ofthe South African people do not figure.

The deal supports the mutual interestsof the European and South Africanpolitico-military-industrial complexes.The real needs of the South Africanpeople do not figure

2

Politics of the transition

The explanation of South Africa’s extrava-gance is not to be found solely in the offsets. Italso lies deep in the history of the apartheidregime and of the liberation struggle. Theprocess that resulted in the establishment ofthe Mandela government in 1994 was not astraightforward victory for the democraticforces nor a simple capitulation on the part ofthe former ruling class. It was a negotiatedcompromise whereby the non-white majoritywas granted political power in return for guar-antees of essential white interests.The AfricanNational Congress (and its Communist allies)had to accept the capitalist structure of SouthAfrican society, and, perhaps even more cru-cially, it had to come to terms with the mili-tary-industrial complex.The key to the peace-ful transition was found in talks held during1993 between the ANC leaders NelsonMandela, Thabo Mbeki and Jacob Zuma onthe one hand and the recently retired generaland right-wing politician Constand Viljoen on

the other.The dialogue, it is said, was surpris-ingly friendly. (The labour leader CyrilRamaphosa, believed by many to be Mandela’sdestined successor, did not achieve similar rap-port and was before long in political eclipse.)There had also been ‘social meetings’ betweenthe commander of the South African DefenceForce (SADF), Andreas Liebenberg, and hisformer enemy Joe Modise, a prominent leaderof Umkhonto we Sizwe, ‘the Spear of theNation’ (MK), the armed wing of the ANC.2

Though there was a strong pacifist strain in theopposition to apartheid it was not dominant.Mandela himself, the founder of MK, hasnever professed pacifism, and he was open tothe patriotic argument that the new SouthAfrica, though eschewing aggression against itsneighbours, should be a respectable militarypower. So there was the basis for an accord.The South African Defence Force (SADF)would acquire a middle initial N (forNational) and would absorb the former guer-rillas, but would keep its command structureand its capacity to be a fighting force.

3

1 Financial Times,19.11.98; Jane’sDefence Weekly,25.11.98

2 Africa Confidential,11.9.92 and 7.1.94

In November 1998 the government of SouthAfrica provisionally agreed with UK and otherEuropean arms companies to purchase anarray of weaponry valued at just under 30 bil-lion rand – then equivalent to roughly $5.2billion or £3 billion.The object was to mod-ernise the South African Navy and Air Force –the Army’s needs were held to be less urgentbut the prospect of a similar package of tanksand artillery was held out for a later date.Thecurrent package consisted of the followingitems:1

4 frigates and 3 submarines to be suppliedby German shipbuilding consortia forR11.2bn28 Gripen fighter aircraft from the Anglo-Swedish company SAAB for R10.875bn24 Hawk lead-in fighter-trainers fromBritish Aerospace (soon to be BAESystems) for R4.728bn4 Super Lynx naval helicopters from theUK company GKN Westland for R787m40 utility helicopters from the ItalianAgusta company for R2.168m.On the face of it, this deal was a great mys-

tery. The new South Africa has no enemies,and there is no power within thousands of

miles that could do it harm. On the otherhand, there is a crying need for social and eco-nomic expenditure of every kind, above all oncoping with the catastrophe that is AIDS. Sowhy on earth should it lavish vast sums ofmoney on warships and warplanes which, withthe exception of the utility helicopters, werenever likely to be used?

A partial answer is provided by a remarkablefeature of the deal. In return for the purchasesthe vendors promised ‘offset’ expenditureamounting to R110bn. This would take theform partly of purchases from South Africansuppliers and partly of capital sums to beinvested in both military and civil industry. Itwas calculated that 65,000 jobs would therebybe created in a country with a massive andintractable problem of unemployment. It is nothard to see how this bait proved tempting evento those ministers and others who were leastimpressed by the military case.

But the solution to one mystery merely cre-ates another.Mackerels are not commonly usedto catch sprats. How could either the armscompanies or UK and Germany plcs benefitfrom outlays that would be more than three-and-a-half times the prospective receipts?

Introduction

South African background

Accordingly the armed forces and their sup-porters in the white community did not usethe veto that they undoubtedly possessed.TheConstitution under which Mandela tookoffice in the following year prescribed thatSouth Africa should have ‘a modern, balanced,technically advanced National Defence Force’.Equally important was the implied corollary,the survival of the manufacturing industry thathad grown up to sustain the military. In fact afuture for both the armed forces and the armsindustry was more or less guaranteed by theappointment of Modise as Defence Minister inthe new government, with Ronnie Kasrils,another hero of the armed struggle, as hisdeputy. These were people who were notmerely coming to terms with the military-industrial complex but enthusiasticallyembracing it.

History of the arms industry

Until the mid-70s the apartheid regime hadmaintained its grip on the country chiefly bythe use of civilian police and intelligence serv-ices. But the advent of pro-Soviet regimes inAngola and Mozambique in 1974/5 persuad-ed the government that it faced a seriousexternal military threat. In 1978 the premier-ship was taken over by P.W. Botha, whose linkswere with the armed forces rather than withthe security services, and from then on mili-tary expenditure rapidly increased. A stateentity, the Armaments Corporation of SouthAfrica (Armscor) was charged with the task ofequipping the forces with modern weapons.This was not easy, as a UN arms embargo,promulgated in 1964, was made mandatory in1977. However, the voluntary ban had beenmore or less ignored by France, which sup-plied Mirage fighters and Daphne submarines,and even the mandatory ban was ignored byIsrael, which helped South African engineersto update the somewhat antiquated Mirages,to develop sophisticated missiles and even toproduce and test nuclear weapons. There wasalso some leakage of military equipment and,more importantly, of technology from theUnited States (see page 9).

South Africa had had a small arms-produc-ing capacity since the Second World War, andit did not lack scientists and engineers who,with a little foreign help, could respond to thechallenge of the embargo and substitute localmanufacture for imports.Generally it proceed-ed by acquiring specimens of foreign equip-ment, sometimes through third parties, andthen applying its skills to their improvement.In fact, the industry boasted of being ‘a world

leader in the field of upgrading outdated sys-tems’.3 Thus South Africa’s Olifant tanks werebasically old British Centurions which hadbeen bought from India. Its Cheetah fighters,just coming into production as the regimecame to an end, were Mirages that had beenimproved with Israeli help.An Italian advancedtrainer was the prototype of the Impala, whileFrench Panhard armoured cars were devel-oped as South African Rooikats, and theFrench Puma helicopter emerged as theRooivalk (Red Falcon). By the end of theapartheid era local industry was producing afairly full range of reasonably efficientweaponry. In certain areas, notably mine-pro-tected vehicles, guided missiles and long-rangeartillery, it had products of world class.

However, external sanctions undoubtedlyset limits to South Africa’s war-making capac-ity. Early in 1988 the SADF suffered a defeat atthe hands of Angolan and Cuban forces in thebattle of Cuito Canavale – an event which, bydenting the reputation of the military, certain-ly contributed to the unwinding of theregime. And the main reason for the setbackwas that control of the air had been lost; SouthAfrica’s fighters were not a match for Angola’sMiGs. More obvious was the decline of theNavy, which had ceased to be a ‘blue-water’fleet, possessing only a few coastal patrol craftin addition to three ageing submarines.

Military expenditure reached a peak ofR10bn in 1990. Under the transitional regimeof F.W. de Klerk, between 1989 and 1994, itwas cut by 55 per cent in real terms, and thearms industry likewise lost more than half its160,000 workers. All the same, the industryinherited by the new regime was a significanteconomic power, contributing about 4 percent of manufacturing output and 1 per centof GDP, and an even more significant politicalforce.

The bulk of the arms output took placeunder the aegis of a new state-owned corpo-ration called Denel Pty Ltd which had takenover the production function, leaving Armscorwith responsibility for procurement andexports. Denel was a holding company with anumber of specialist operating subsidiaries, themost important being Atlas (later Denel)Aviation, which produced Rooivalk and Oryxhelicopters and upgraded Mirages; LIW(artillery and small arms); Kentron (missiles,unmanned aerial vehicles and avionics); andSomchem (ammunition and explosives).Therewas also a significant contribution from theprivate sector. As many as 1500 firms acted assub-contractors, but the main players weredivisions or subsidiaries of three large engi-

4

3 SADIA, ‘DefenceIndustry Overview’,25.3.96

neering companies: Altech Defence Systems;Grintek, which was part of GrinakerElectronics (Grintel); and Reunert’s Reumech(armoured vehicles) and Reutech (radio andradar).4 Just before the transfer of power, 50companies (including Denel) formed theSouth African Defence Industries Association‘to promote the development of an economi-cally viable, internationally competitivedefence industry in South Africa, serving theneeds of the SANDF and other internationalneeds for defence equipment and services.’SADIA’s conference would be assured byKasrils in 1996 that ‘our local defence industry(was) a national asset’.5 It is of some interestthat he put its contribution to sovereignty,diplomatic status and national pride ahead ofits role in providing jobs and maintaining thetechnological base.

By no means everyone shared his views.The Anglican church, which under the leader-ship of Desmond Tutu had fronted the legalopposition to the apartheid regime, called for‘the dismantling of the South African armsindustry’.6 Tutu’s successor as Archbishop ofCape Town, Njongonkulu Ndungane, hasbeen equally forthright, and Terry Crawford-Browne, a banker with close links to Tutu, hascampaigned tirelessly for the demilitarisationof the country.Also influential has been LaurieNathan’s Centre for Conflict Resolution(attached to the University of Cape Town),which has insisted that national security wasbetter promoted by social and economicadvances than by military expenditure, andwanted South Africa to commit itself ‘to theinternational cause of disarmament’ and to‘reduce its force levels and armaments to thegreatest extent possible in the light of thedomestic and regional security environment.’That formula, of course, was open to varyinginterpretations.Within government, the minis-ters responsible for social programmes and forthe economy had every reason to resist expen-diture on the military. Among them was JoeSlovo, the former commander of MK who hadbecome Minister for Housing. But Slovo wasa dying man, and Joe Modise, now ensconcedat Defence, was a very different kind of war-rior, a hard man whose administration of dis-cipline in the guerrilla camps was described inan obituary, after his death in November 2001,as ‘an extraordinary abuse of power’.7 Of himit was said that he was ‘probably more popularwith the SADF than with the MK cadres ofwhich he was formerly commander’,8 and hecould well have been the target of the causticcomment of a Mozambican officer: ‘Thoseinvolved in the armed struggle fall in love with

weapons; now the ex-guerrillas are looking atbeautiful new toys’.9

In the early years of the new regime, ideal-ism, reinforced by financial restraints, kept mil-itarism in check, but the story of the Europeanarms deal is one of the steady strengthening ofthe forces which act as motors of arms pro-duction everywhere: vested interest andnational pride, or vanity. In 1997 foreign war-ships gathered at Cape Town to help celebratethe 75th anniversary of the South AfricanNavy. President Mandela, it is said, was embar-rassed by its feeble appearance, and promptlypromised new ships.10 Five years later the firstblack commander of the SANDF, GeneralSiphwe Nyanda, pointed out that the Army,which was not getting any major new equip-ment, would be ‘the main tool of power pro-jection in the region’, but diplomaticallyagreed that the new aircraft and warships,however useless strategically, would ‘addimmensely to the prestige of the defence forceand the government’.11

A regional power

South Africa is far and away the leadingAfrican economic power south of the Equator,and even south of the Sahara. It could, if itchose, be the leading military power as well;and the West was eager to enlist it in the causeof reducing the unruly continent to order. Asearly as March 1995 the UK government waspressing it to ‘play a key role in southernAfrican peace-keeping’, and so was the gov-ernment of France.12 In the following year theUnited States invited it to join, and lead, aregional peacekeeping force, paid for by theUS and Europe but staffed by Africans.13 Theseovertures, however, were coolly received.Nothing in the record of the old regime wasmore criminal than the havoc it had wroughtby its interventions in Angola andMozambique; and Mandela had vowed not todo anything remotely similar. An ill-managedintervention in the Lesotho enclave was awarning against police action on a wider stage.Nevertheless it could not afford to permitinstability on its northern borders. The‘Southern African Development Council’, atfirst a purely economic body, acquired anInterstate Defence and Security Committee,chaired by Modise, in November 1994. Andgradually the seductive appeal of peace-keep-ing began to take effect. By mid-1997

5

4 SADIA Statistics19.3.96; Kuan-MinSun, Issues andStudies 34 (98) 124-34

5 Africa Confidential,27.3.96

6 Arms Trade News,26.11.93; DailyTelegraph, 22.8.94

7 Times, 28.11.018 Africa Confidential,

29.7.949 Quoted in Red Pepper,

June 199510 Natal Witness,

18.11.9811 Jane’s Defence

Weekly, 26.6.0212 Africa Confidential,

3.3.9513 Jane’s Defence

Weekly, 30.10.96

‘Those involved in the armed struggle fall in love withweapons; now the ex-guerrillas are looking at

beautiful new toys’

Mandela was stressing the ‘regional dimension’of policy and speaking of ‘a more meaningfulrole’.14 Unlike some other states in the region,South Africa stayed out of the morass of theDemocratic Republic of the Congo; but sincehis retirement as President, Mandela has per-sonally worked tirelessly to mediate betweenthe conflicting parties both there and inBurundi, where he is now supported by aSouth African infantry battalion – command-ed, incidentally, by a white female officer.

The prospect of the beneficent use of forceput a trump card in the hands of the militaryand the arms industry in their efforts to securea larger share of the nation’s resources. Underthe new government the decline in real mili-tary spending was briefly reversed in 1994 butthen continued, albeit at a somewhat slowerrate, partly because of pressure from the IMF,which was alarmed at the country’s risingdeficit. Moreover, most of the available moneywas now going on personnel (especially theintegration of the former guerrillas) and oninternal security activities. Procurement ofnew equipment continued to fall, and by 1997the complaints of both military and industrialleaders were becoming strident. Armscor wassaid to be desperate;15 military officers werereported to be resigning in despair and theindustry was no longer training engineers;16

and the Chief of Staff, General Meiring,addressing fellow professionals in London, saidthat ‘the (South African) Parliament mustdecide what value it places on the insurancepolicy provided by an adequate defencemachine.’17 His words have recently beenechoed almost exactly by his successor,General Nyanda.18

Arms procurement and armsexports

The ending of the country’s isolation in May1994 had opened up two different opportuni-ties for the military complex. First, it couldnow – if it had the money – purchase foreignweaponry openly. While the production ofmajor armaments in South Africa had provedfeasible it was wildly uneconomic, and it hadbeen embarked on in the later apartheid eraonly because the regime believed it to be amatter of life and death. For the new govern-ment, it made no sense to struggle to makesmall numbers of warships, warplanes or tankswhen the latest models could be procuredmore cheaply from foreign industries thatenjoyed economies of scale. Secondly, theSouth African arms industry could use its spe-cialist capacities to sell abroad, thus bringing in

valuable amounts of foreign currency andkeeping itself in being until the outlook fordomestic orders brightened.

Between 1984 and 1993 the UN operatedan embargo on arms purchases from, as well assales to, South Africa; and though it was notmandatory, sales were effectively limited to fel-low-pariah states such as Pinochet’s Chile,Argentina under the junta and SaddamHussein’s Iraq, together with non-state actorssuch as Somali clans, Lebanese militias and, it isalleged, Ulster Loyalist paramilitaries.The newgovernment was deeply embarrassed by ahangover from this traffic which became pub-lic in September 1994, when a cargo of SouthAfrican weaponry arrived in Yemen just afterthe end of a civil war and was impounded bythe victors.A Commission set up under JudgeErwin Cameron to investigate this affair wasscathing about the conduct of Armscor, and itsrecommendations for transparency and forstrict control over future sales were in the mainadopted.The final decision on the licensing ofexports was taken out of the hands of Armscorand the Ministry of Defence and entrusted toa high-level committee headed by theMinister for Water Resources, Kader Asmal,who was one of those least favourable to themilitary. But while Armscor was reformed, itwas not, as some had hoped, disbanded. Thegovernment saw no objection in principle tothe export of arms, so long as the purchaserswere of good repute.19 So far from suppressingthe trade it set itself to quadruple the value ofsales, to a hoped-for R2bn a year.

For a while virtue prevailed. In 1996 salesto obviously undesirable customers such asAfghanistan, Iraq, Yugoslavia and Zaire werebanned. On the other hand restrictions werelifted on Algeria, which was in the throes ofcivil conflict, and more surprisingly on Israel,whose support for the apartheid regime hadmade it non grata to the ANC. Other coun-tries, including Iran, Indonesia, North andSouth Korea, Syria and Turkey, were being‘reviewed’.20 In fact a large prospective orderfrom Turkey was forgone on account of itstreatment of the Kurds – and Mandeladeclined the award of the Ataturk PeacePrize.21 On the other hand he announced thathe would support the sale of arms to Suharto’sIndonesia provided they were not used inter-nally – much the same position as that of theLabour government in the UK.22 (Suharto hadearned credit by supporting the anti-apartheidcause.) A prospective package of sales to Syriafell through because of US opposition, butSouth African critics alleged that in this andother cases moral arguments were being

6

14 Jane’s DefenceWeekly, 9.7.97

15 Daily Telegraph,20.6.97


17 Army Quarterly andDefence Journal, 127(97) 261-70


19 Independent, 27.5.9420 Jane’s Defence

Weekly, 22.5.9621 Arms Trade News,

Aug/Sept 199722 Jane’s Defence

Weekly, 6.8.97

ignored and official guidelines flouted.23 Thetrouble with an ‘ethical’ arms sales policy isthat unethical markets are often the mostlucrative; and it was therefore argued that itwould be better to drop the trade altogether inorder to preserve the country’s moral authori-ty.24 This plea, however, had no chance of pre-vailing over the powerful interests committedto the business.

Ethical or not, the arms trade made slowand erratic progress. Sales rose 34 per cent toR1,325m in 1997, but fell back to R847m in1998 and climbed only to R1,090m in 1999.South African exporters had certain valuableassets, specifically the G5 155mm howitzer andits self-propelled version the G6 which, withtheir advanced fire-control systems and pro-jectiles, were as accurate and long-range as anyin the world, and were sold in some numbersto Gulf states, India and Malaysia. But for therest the trade consisted of bits and pieces.TheSwiss Army bought mortar fuses, the Algeriansunmanned aerial vehicles and anti-tank mis-siles. Light armoured vehicles, specially pro-tected against mines, were sold to India, to UNpeace-keepers and (with US engines) to theUS Army. But really large deals were elusive.Particularly disappointing was the fortune ofthe Rooivalk combat helicopter. Thismachine, which had been designed for thespecial conditions of war in Namibia andAngola but became available only after thosewars had ended, was a serious candidate for thelarge UK requirement in 1994/5, worth morethan £1bn, but lost out to the US Apache.Thereafter, though there was no prospect oflocal use, the South African Air Force feltbound to order 12 machines, to get a produc-tion line going and raise the confidence of for-eign buyers.25 But to date, though it has beenequipped with mostly foreign engines,armour, missiles and electronics, it has won noexport orders.

Expectations of major sales were consistent-ly disappointed. A visit by President Mandelato Saudi Arabia in 1997 appeared to haveclinched a R7bn deal, mostly for artillery26, buta drop in the oil price, and probably moreimportantly the displeasure of the UnitedStates, forced the Saudis to shelve it.Arms sales

were promoted by Deputy President Mbekion a visit to China and Korea, but with fewresults.27 President Mahatthir of Malaysia, whowas awarded the Order of Good Hope in grat-itude for financial help to the ANC, seemed tobe on the point of signing a large arms pack-age, including Rooivalks,28 but this was scup-pered by the South-East Asian financial crisisof 1999. Purchases of G5 guns were laterresumed, but not of Rooivalks or anythingelse.

By 1998, when Denel was in the red for thesecond year running, the South African armsindustry was clearly in crisis. It would be res-cued, not by exports, but by imports.

The arms dealFirst approachesDiscussion of arms procurement from abroad,more specifically from the UK, had begunbefore the transfer of power. In November1993 there were reports that South Africamight place orders for as many as eightcorvettes from the struggling Yarrow shipyardon the Clyde, then owned by GEC, whoseusual customer, the Royal Navy, had stoppedbuying.29 In the following year a £1bn dealappeared to have been concluded involvingthe exchange of Rooivalk helicopters andartillery technology for corvettes and Hawkaircraft.30 When the helicopter purchase fellthrough, however, the South Africans felt freeto look elsewhere. In early 1995 the preferredsource of corvettes (now reduced to four) wasthe Bazan shipyard in Spain, which, beingstate-owned, was able to offer more attractive‘offsets’. But then in June 1995 the Cabinet,responding to a storm of public protest againstsuch wasteful expenditure, decided to suspendthe purchase.

Though it might have been postponed, theproject for the creation of a blue-water fleetwas not abandoned; and in 1996 the politicalmood was clearly changing.As in the matter ofexports, the initial idealism of the new SouthAfrica was yielding to what some called real-ism and others military opportunism.The gov-ernment now launched a ‘Defence Review’with extensive consultations which turnedinto a skilful public relations exercise by theMinistry of Defence. At public meetings‘peaceniks’ found themselves outnumberedand outgunned by the ‘brass’,31 and it seemedthat the idea of a ‘strong’ South Africa struck apopular chord. By August 1997 Modise hadwon the political battle; the Cabinet and

[The South African authorities]realised that it was no use trying tobargain with individual armscompanies. It was necessary toassemble a package deal that wouldinvolve the vendor governments andso secure favourable financial terms

7

23 Ceasefire, Feb/Mar1997

24 ‘Swords orPloughshares?’,22.2.2000

25 Flight International, 12-18.3.97

26 Guardian, 26.7.97;Mail and Guardian(Johannesburg), 15-21.8.97

27 Cape Argus, 6.4.9828 Flight International,

9–15.4.97; Guardian,24.4.97


30 Observer, 10.9.9431 Ceasefire, Nov 1996

Parliament approved the principle of a massivemodernisation of all three services,32 and inOctober 1997 a formal ‘request for informa-tion’ was sent out to eight countries judgedcapable of supplying corvettes, submarines,light fighters, light helicopters and main battletanks – the core requirements of the SANDF.33

It remained to negotiate the best terms – andto find the money.

In 1995 the then Army commander hadremarked ruefully that military expenditurewas a function of the threat, which was nil, andof the purse, which was empty.34 After theusual custom of Defence Ministers, Modisebrushed aside the absence of a visible threatwith talk of ‘unforeseen aggression’ and‘defending our freedom in an unpredictableworld’.35 But the purse was still empty. In fact,so far as the military were concerned, it wasemptier than ever. R700m was cut from thedefence budget at the same time as the gov-ernment was approving the new procurementprogramme, and it was reckoned that there wasa R4bn gap between the sum demanded bythe Defence Review and what the govern-ment was actually providing.36 But the SouthAfrican authorities now calculated that theycould count on the generosity of the suppliers.

They realised that it was no use trying tobargain with individual arms companies. It wasnecessary to assemble a package deal thatwould involve the vendor governments and sosecure favourable financial terms. At first itseemed that the UK would walk away withthe whole prize. In March/April 1997 UKjournalists wrote excitedly about a deal worth£1.5–£2bn, the biggest of its kind since the AlYamamah agreement with Saudi Arabia. ByAugust this had risen to £4bn.37

In addition to the four corvettes, the UKhoped to sell South Africa four Upholder classdiesel-powered submarines which had beenbuilt in the ‘80s for an Arctic conflict with theSoviet Union. The MoD had been trying todispose of these now redundant vessels forsome time without success (they were amongthe items touted to Saudi princes by JonathanAitken at the notorious meeting in the ParisRitz in 1994) – and they were now offered toSouth Africa at the bargain price of £200m,with offsets, having originally cost £930m.38

However, South Africa’s Defence Secretaryhad caustically observed that a bargain wasonly a good one if you could afford it.39 Theywere eventually sold to Canada instead, andSouth Africa looked elsewhere – much moreexpensively – for its submarines.

The Army had declared an urgent need formodern air-defence weapons and a somewhat

less urgent need for tanks.The UK was readyto meet the first requirement with ShortsStarburst or British Aerospace Rapier missilesand the second with Vickers-built tanks –either second-hand Challenger 1s or the newChallenger 2 model.

The South African Air Force wanted afighter to replace its old Mirages and perhapsalso an advanced trainer to replace its Impalas.For the first requirement UK industry – that isto say, British Aerospace – had nothing tooffer, since its Harriers and Tornados wereapproaching the end of their careers and werefor different reasons unsuitable. However, BAehad just taken a 35 per cent stake in the SAABcompany, marrying Swedish engineeringdesign to the marketing prowess that was theUK company’s greatest asset; and SAAB had astate-of-the-art fighter plane, the Gripen, thatwas about to go into production for theSwedish Air Force but had no foreign cus-tomer in prospect. It was hoped that SouthAfrica would place an order for as many as 48of these planes.

What BAe itself could offer was the Hawk,a versatile and successful machine that was pri-marily an advanced trainer but could alsofunction as a combat plane, specialising inground attack. There were hopes of an orderfor 40 of these. However, at this stage, in early1997, the South Africans were not sure thatthey needed such a plane, for they were alreadyacquiring a large number of Swiss Pilatus pro-peller-driven trainers and it was hoped thatpilots could graduate straight from these to theGripens.40 Moreover, if they did decide on a jettrainer to bridge the gap they were aware ofcheaper alternatives to the Hawk.

By the end of 1997 it was clear that theSouth Africans would not make themselvesdependent on a single supplier but wouldbreak up the package so as to distribute itspatronage.The auction was now thrown wideopen, and prospective sellers included France,Germany, Italy, Spain, Russia, Brazil andCanada as well as the UK. It was also clearthat, since there was no real military need forthe equipment, its efficiency was very much asecondary consideration. Other things beingequal, the successful bidder would be thecountry that could provide the easiest financeand the most generous offset investments, or‘industrial participation’, as these were nowcalled. But other things were not entirelyequal, for the deal was also linked with widerquestions of foreign policy.

A well-informed commentator, Helmoed-Römer Heitman, has explained that the gov-ernment’s first priority was to secure ‘long-

8

32 Independent, 22.8.9733 Jane’s Defence

Contracts, Oct 199734 Jane’s Defence

Weekly, 29.4.9535 Independent, 22.9.97;

Daily Telegraph,19.11.98


37 Sunday Times, 30.3.97and 31.8.97

38 Sunday Times, 29.3.9839 Jane’s Defence

Weekly, 20.10.9640 Jane’s Defence

Weekly, 23.4.97

term strategic alliances with our majorEuropean trading partners’, including ‘alliancesfor our defence industry with internationallysuccessful defence groups’.41 It was concernednot to offend the most important of its tradingpartners, the UK, which remained very muchin contention, especially after a meeting inLondon between Thabo Mbeki and TonyBlair, who promised to seek better access forSouth African goods in the European Union.42

Spain, on the other hand, despite its largepromised offsets, was soon out of the running,partly, it is said, because it was obstructive inthat matter, and the prospects of French armsexporters were also not improved by theircountry’s commercial stance. Russia was alsoexcluded, mainly because of its poor record inafter-sales service.The Germans, on the otherhand, had begun to take an interest in SouthAfrica’s naval requirements after a visit fromMbeki in the spring of 1996,43 and it was theywho landed the orders for corvettes – orfrigates as they were now sometimes described– and submarines.

The non-participant

The Europeans were here almost uniquely for-tunate in the conspicuous absence of theirmost formidable competitors, the arms com-panies of the United States. This was not anaccident. There are signs that in the NewWorld Order the management of Africa hasbeen assigned to Europe. Also there were his-toric impediments to a close relationshipbetween the United States and South Africa.US policy towards the apartheid regime hadbeen highly ambivalent. Liberal opinion aswell as the African-American lobby hadpushed it towards hostility, but geopolitics, thefear of a Communist take-over of a mineral-rich country at the junction of the Atlanticand Indian oceans, had made it in practice asupporter. And the new democratic regime,which had Communists in high places, wasregarded in Washington with deep suspicion.Mandela insisted on maintaining friendly rela-tions with Iran and Libya, which had helped inthe liberation struggle, and at the beginning of1997 he was defiantly pushing the sale of high-ly sensitive equipment to Syria.44 So theAmericans had some reason to fear that anyarms sold to South Africa might end up inundesirable hands.

The US government had blocked the saleof Rooivalk helicopters to the UK in 1994 byrefusing to let them be armed with the USmissiles that the RAF deemed essential. It wasacting partly in the immediate interest of

Boeing, makers of the rival Apaches, but alsobecause a thriving South African arms indus-try was not perceived to be a good thing. Laterit threatened to veto the sale of Gripens,whichhave US-designed engines, though it eventual-ly relented.

Even after the change of regime, Armscorwas actually being prosecuted in aPennsylvania court for the alleged theft of mil-itary technology in the 1980s and its transferto Iraq.This was rather bizarre, for there is lit-tle doubt that elements in previous US admin-istrations had deliberately used South Africa asa conduit for the arming of Saddam Hussain.That was how South African industry hadoriginally acquired the know-how whichwent into its high-quality guided missiles andlong-range artillery.45 Two hundred of its G5guns had indeed been sold to Iraq in the lateeighties.46

The Syrian arms deal was quietly droppedin January 1997, and so, not by coincidence,was the long-drawn prosecution of Armscor,47

the case being settled by the payment of a£1m fine. The Americans, however, clearlyregarded South Africa as being on probation,and did not lift their embargo on arms salesuntil the following year. (As in the apartheidera, however, Canadian subsidiaries of UScompanies were exempt; Bell Textron’s offer ofhelicopters counted as a Canadian bid.) TheUS then made a rather half-hearted attempt toenter the procurement competition, offeringused equipment (Abrams tanks, F-16 fighters)at knock-down prices or even free. By then itwas too late, for negotiations with Europeansuppliers were far advanced.

In any case, however, the US would nothave been a preferred bidder, for its suspicionsof South Africa were fully reciprocated. ANCsupporters had not forgiven its backing for theold regime, and they were also fearful of itsfuture influence. Modise reportedly believedthat arms purchases from the US would give itleverage over the country’s foreign policy.48

And indeed the offers were made primarily ‘todraw South Africa into Washington’s client cir-cle.’49 In its early days the Mandela governmenthad certainly aspired to a degree of bothstrategic and economic independence, in loosealliance with other non-Western powers.Thishad been revealed to be a chimera, but if SouthAfrica had to be a client it would rather bedependent on European countries, which

9

41 Mail and Guardian(Johannesburg),16.12.01

42 FCO briefing, 25.11.9743 Ceasefire, 16.11.9844 Ceasefire, Feb/Mar

1997; Daily Telegraph,17.2.97


46 SIPRI Yearbook 1995,Oxford UniversityPress, 1995




The Europeans were here almost uniquely fortunate in theconspicuous absence of their most formidable competitors,

the arms companies of the United States

50 Coalition for DefenceAlternatives, 3.2.99






56 Jane’s InternationalDefence Review, Feb1998; FlightInternational, 10.6.98

57 Guardian, 28.5.01

could be played off against one another, thanon the remaining superpower.A highly placedsource actually said that the real purpose ofrearmament was to deter a US attack – or, ashe put it, to be able to ‘give the Americans abloody nose’.50 The promulgation of the BushDoctrine has made that apprehension perhapsnot quite as far fetched as it seemed at thetime; what remains absurd is the idea that, ifthe US were to decide on regime change inSouth Africa, it would be scared off by threesubmarines, four corvettes and a squadron ortwo of fighter planes.

The successful suppliers

In February 1998 the President toldParliament that it was now possible to start re-equipping the SANDF, without strain on thebudget and with benefit to the economy.51 Butthough the argument of principle had beendecided in favour of the military, there was stillinfighting within the government as the keep-ers of the purse strove to limit the ambitions ofthe Ministry of Defence.There were also pro-tracted negotiations with the potential suppli-ers, whose evident eagerness enabled SouthAfrica to drive a series of hard bargains.

By the late summer of 1998 the outlines ofthe deal were becoming clear. The Army’srequirements were dropped from the currentprogramme altogether. A military think-tankhad pointed out that for its actual and prospec-tive tasks – the enforcement of border controlsand perhaps regional peacekeeping missions –it needed light weapons, radio, transport andwell-trained troops, not high-tech armamentand certainly not a fleet of 108 main battletanks.52 The suspension of the tank order wasone of a series of disappointments that broughtlow the once mighty firm of Vickers, though ifan order had been placed at that time it wouldprobably have been for French Leclercs, notChallengers.

The Air Force requirement survived, butonly in part and after intense debate. DidSouth Africa really need as many as 48 fight-ers? The answer was no; the order was pro-gressively cut from 48 to 38 and then to 28planes. Did it need two different machines, ajet trainer as well as a fighter? The answer wasyes; direct transfer from a propeller trainer to amodern jet fighter would be too much toexpect of the new generation of pilots.A ‘lead-in fighter-trainer’ (LIFT), such as the Hawk,was essential.53 Was it then necessary to orderdedicated fighters as well? Would not a dual-purpose plane, an advanced trainer that couldalso be a combat aircraft, meet South Africa’s

needs? Evidently not; though reduced in num-bers, the fighter requirement stood, and theonly real question was whether the choicewould fall on the latest version of the FrenchMirage or the Anglo-Swedish Gripen. In theevent the decision was for the ultra-modernGripen. Besides its proclaimed (though untest-ed) technical merits, the Gripen enjoyed polit-ical and financial advantages. The ANC hadnot forgotten the help and sympathy it hadreceived from Sweden in the dark years.Probably more important, like most ofSwedish industry SAAB is part of theWallenberg empire, and so could hold out theprospect of purchases and investments by arange of apparently unrelated manufacturers.And that was in addition to the benefitsderived from its new UK connection.

It remained to choose the LIFT plane.Some argued that, since this would not have acombat role, there was no need for an expen-sive dual-purpose aircraft such as the Hawk.54

There were at least three other candidates:55

the MB339, a product of the Italian Aermacchicompany which had provided South Africawith the design for its Impalas, the Czech L-159, and a newly-designed product of theGerman company DASA, known as the AT-2000.The Italian and Czech planes were muchcheaper than the Hawk, but were consideredto be rather dated (yet the Hawk was basicallya design of the ‘70s), and it was doubtfulwhether the Czechs could supply adequateoffsets. (A new plane developed by Aermacchiin collaboration with the Russian companyYakovlev was, by contrast, rejected asunproven.) The German plane was only adesign study, which had not been ordered evenby the Luftwaffe; in fact DASA hoped thatSouth Africa would not only be the launchcustomer but also a partner in the plane’sdevelopment, and that was felt to be too largean undertaking.56

The arguments are complex and partlytechnical, but the upshot is clear. South Africahad chosen the most expensive possible pack-age: both a high-tech specialised fighter forwhich there was no reasonably conceivableopponent, and also a trainer with combatcapability but no prospective combat role.Thiswas the combination most profitable to theUK, but it is difficult to argue that it was theone best suited to South Africa. The decisionto order Hawks (24 of them, not 40) came lateand was taken by politicians, who are allegedto have altered the specifications to ensure theHawk’s victory.57 Suspicion of corrupt influ-ences was natural (see page 15) but in this caseunnecessary; for broader considerations of for-

10

58 Sunday Business, 3.1and 10.1.99

59 Financial Times,18.1.99

60 Business Day,18.11.98

61 Business Day, 28.8.9962 Financial Times,

16.9.99

eign policy pointed to the Hawk. The UK isthe most important investor and trading part-ner, and the negotiators were reluctant to leaveit with only a part-share of the Gripen con-tract. The knock-on from that decision wasthat Italy needed to be consoled by the awardof the light helicopter contract, in preferenceto Canadian and Franco-German machines.Here again irregularities were alleged but wereprobably only a subsidiary factor.

Germany scooped the naval orders, exceptthat the helicopters to be carried on thefrigates would be made by Westland at Yeovil,and the electronics would be supplied by theFrench company Thomson-CSF (now Thales).That could not conceal the fact that Francewas the main loser, having bid for the subma-rine, fighter and helicopter contracts and wonnone of them. It was unlucky in that the tankorder, for which it was favourite, was droppedfrom the package.

In the naval programme, too, there was evi-dent ‘procurement creep’.The Navy’s require-ment had been for corvettes (vessels usuallyunder 2,500 tons) but the ships ordered werefrigates of 3,600 tons. It is true that the bound-ary between these classes of warship is notquite clear-cut. It was claimed that frigate-typehulls were needed to withstand the rigours ofthe Southern Ocean and that the armamentwas more like that of corvettes. Even so, shipsarmed with Exocets as well as South AfricanUmkhonto guided missiles seem something ofan extravagance, given that their stated func-tion was fishery protection. Likewise, if SouthAfrica decided that it must have submarines, itdid not need to buy brand new ones.The UK’sUpholders had been on offer at a far lowerprice, and both the French and the Italians hadvessels ready for sale.

Financial arrangementsThe announcement of this programme inNovember 1998 was by no means the end ofthe story.Tony Blair visited Pretoria in January1999 and was reported to have ‘clinched’ thedeal by the promise of £4 billion’s worth ofUK investment in return for the arms sales.58

But in fact there was still considerable opposi-tion. The veteran ANC sympathiser SheenaDuncan professed herself ‘astonished’ by thedeal. The churches and their allies continuedto protest, and the opposition Pan-AfricanCongress declared against it. Probably moreimportant was worry about the cost. Thoughthe Cabinet was claimed to be united, it wasobvious that the Finance Minister, TrevorManuel, was less than happy, and was insistingthat the deals should be ‘affordable’59; and thefinancial community had let it be known that,while it accepted the principle of rearmament,it considered the programme too extravagant.60

Accordingly a senior ANC politician, JayendraNaidoo, was commissioned to carry out areview. The Department of Finance’s ‘afford-ability team’ pointed out that the claim ofR110bn offsets was inflated by the inclusion ofhoped for secondary benefits such as ‘regionaldevelopment’ and ‘black empowerment’.61 Amore realistic figure of R70bn was now adopt-ed.The Naidoo review proposed and the gov-ernment appeared to agree that for the timebeing the purchases should be scaled downfrom R30bn to R21bn.The Lynx helicopterswould be eliminated and there would beimmediate firm orders for only 9 Gripens and12 Hawks; the remaining 19 Gripens and 12Hawks would be deferred until 2004 andwould be ordered then only if the promisedoffsets had been delivered and if the economywas in good shape.The order for Italian heli-copters would be cut from 40 to 30.62 Theseconcessions, however, were no more than tac-tical.The government let it be known that theLynxes would be re-instated later (withoutthem, the frigates would lose much of theirefficacy) and that the deferred aircraft orderscould be confidently expected to go ahead.Everyone continued to talk of a R30 billion

11

Agusta Westland SuperLynx helicopter ondisplay at Farnborough2002 (left); SAABGripen fighter (right)CAAT; BAE Systems

South Africa had chosen the mostexpensive possible package: both ahigh-tech specialised fighter for whichthere was no reasonably conceivableopponent, and also a trainer withcombat capability but no prospectivecombat role

package.63 The order for the second batch ofHawks was in fact confirmed in April 2002and the Lynxes have now been reinserted.

The haggling over terms continuedthrough most of 1999, supported by hints thatSouth Africa might after all buy American, orthat either the Hawk or the Gripen ordersmight be suspended. But in September theCabinet approved the whole package, includ-ing firm orders worth R21.3bn with theprospect of another R10bn to come.64

Detailed contracts for the warships, sub-marines, aircraft and helicopters were signedbetween then and the following January.

Loans

By this time Manuel and the Treasury hadbeen won over, claiming with some justicethat they had ‘secured unprecedentedlyfavourable arrangements’.65 Payment was to bespread over 14 years, and the purchases (i.e. thetotal programme minus local expenditure)would be funded by low-interest loans,totalling R29.3bn or $4.8bn, from UK,German, French and Italian banks on termswhich have not been disclosed but were saidto be ‘highly attractive to the South Africangovernment’.66 The generosity of the banks(mainly Barclays and Commerzbank) wasmade possible by support from the UK’sExport Credits Guarantee Department andsimilar organisations in the other countries.

More information is available about theexport credit support for this deal than is usu-ally the case. For the first time, the UK’sECGD Annual Report for 2000/1 lists guar-antees issued during the year covered. Thetrainer/fighter aircraft for South Africa werecovered by a guarantee of £1,679.9 million.This is 49% of the total for all the guaranteesissued in that financial year. Although there isno official confirmation, the amount of thecover seems to indicate it covers all fifty-twoaircraft.67

Further details emerged as a result of anapplication being pursued by objectors to thedeal in the South African courts. Respondingto the objectors’ affidavit, the South AfricanMinister of Finance listed the following for-eign loan agreements entered into by his gov-ernment in January 2000 in relation to themilitary deals:68

a) with AKA Ausfuhrkredit-GeselleschaftmbH, CommerzbankAktiengesellschaft and Kreditandstatalt furWiederaufbau and a further agreementwith Societe General and Paribas withrespect to the frigates

b) with AKA Ausfuhrkredit-GeselleschaftmbH, CommerzbankAktiengesellschaft and Kreditandstatalt furWiederaufbau with respect to the sub-marines

c) with Barclays Bank plc and the UK’sSecretary of State (presumably of Tradeand Industry) acting for the ECGD inrespect of the Gripens and Hawks

d) with Mediocredito Centrale SPA withrespect to the helicopters.According to the South African Finance

Minister, export credit agency (ECA) financeaccounts for all the imported content; thenon-UK export credit agencies had matchedthe ‘attractive options’ offered by the ECGD;and what the ‘finance package finally achievedhas greatly pushed out the boundaries of ECAdefence financing and is probably unique’.TheECA finance arrangements offered ‘markedlypreferential rates’.69

The South African Finance Minister hasargued that he had three choices regarding thearms procurement package: he could raisetaxes, build the amount needed into his gov-ernment’s normal borrowing requirements, orhe could use ECA finance arrangements. Bypicking the last-mentioned he argues he hasmade savings of over R600 million. However,a number of organisations within South Africabelieve their government had a fourth option.It did not have to embark on its massiveweapons procurement programme in the firstplace.

The South African government claimed inDecember 1999 that the impact of the pur-chases on the budget would be ‘relativelyattenuated and entirely manageable’.70

‘Relatively’ is always an evasive word, and itbecame clear that the financial drain would bea heavy one.The Naidoo team had warned ofa shift away from social expenditure, and of‘mounting economic, fiscal and financial diffi-culties.’71 In February 2002 the governmentestimated that the total cost would beR52.7bn, or about R3.7bn a year on averageover the life of the programme. That meantthat the purchases would increase militaryspending by about a third. It was calculatedthat the defence budget, including a SpecialDefence Account that was a device inheritedfrom the old regime, would rise by 15 per centper annum between 1999 and 2004, comparedwith annual rises of only 5 per cent in inflation

12





67 ECGD Annual Reportand ResourceAccounts 2000/01

68 Response of SouthAfrican Minister ofFinance to ECAAR-SAclass action, Mar 2002

69 Response of SouthAfrican Minister ofFinance to ECAAR-SAclass action, Mar 2002

70 Defence SystemsDaily, 3.12.99

71 ECAAR-SA, 2001

Tony Blair visited Pretoria in January 1999 and wasreported to have ‘clinched’ the deal by the promise of £4

billion’s worth of UK investment in return for the arms sales

and 6.5 per cent in the health budget. It is per-haps not surprising that the government hasfound it so difficult to spend money on anti-retroviral drugs.

The difference between the R31bn figureof 1999 and the nearly R53bn of the 2002estimate was accounted for partly by inflationand interest payments, but there was also aproblem over the rate of exchange, which hadbecome sharply adverse. In 1999 the randstood at 6 to the dollar, but by early 2002 ithad fallen to 10, and there was a similar declinein its sterling value, from 10 to over 15.Therewas stark disagreement over the impact on thecost of the programme. Projecting the fall ofthe rand into the future and allowing for pref-erential financial costs, critics calculated that by2010 the rand cost would have risen to287bn!72 That was doubtless a worst case sce-nario (in fact the fall of the rand was checkedand to some extent reversed during 2002); butindependent testimony suggests that ‘thefalling rand is substantially raising the cost’.73

Trevor Manuel insisted, however, that the loancontracts he had negotiated were proof againstexchange-rate risks and that in dollar termsthe total cost would remain at $4.8bn.74

Offsets

Be that as it may, the warships and warplaneswere not being given away, and $4.8bn wouldhave bought any number of hospitals, drugs,schools, houses and waterworks. So, leavingaside a military case that it would be charita-ble to call dubious, judgement on the pro-gramme has to turn on the promised offsetexpenditure, which, if pledges were taken atface value, would bring in more than twice asmuch money as was spent on the arms.Whenthe programme was initiated in October 1997,the South African Department of Trade andIndustry was demanding 80 per cent offsetsand the Ministry of Defence wanted at least 50per cent and ‘if possible’ 100 per cent. By thistime, such was the buyers’ market for arms, off-sets of 100 per cent on military contracts (onall other kinds they are illegal) were beginningto be seen as normal, but rewards of 200 percent would have seemed to most bargainers tobe in the realm of fantasy.The government ofHungary has recently extracted 110 per centin return for its lease of Sweden’s Gripens. Soit was with some reason that the Economist 75

congratulated the ‘ANC hagglers’ on having‘squeezed unusual bargains’. It neverthelessremarked that ‘spending so much on high-tech weaponry, even at a discount, seemsextravagant’.

Offsets, now called ‘industrial participation’,can take various forms.The simplest is a barterdeal, whereby commodities are exchanged forarms.The Spanish bid for the corvette contractin 1995, for example, had been supported byan offer to buy South African coal and fish. Inthe present deal, purchases would consistmainly of industrial components, such as con-verters (using South African platinum) andother parts for Swedish cars, railway equip-ment, avionics for civil aircraft. Also includedunder this head would be the work done bySouth African subcontractors on the pur-chased ships and planes, and the sale of partsfor other UK and Swedish arms products, suchas display units for Sweden’s own Gripens andgearboxes for Rolls-Royce aero-engines.

The other kind of offset was investment inSouth African industry, both military (DefenceIndustrial Participation, or DIP) and civil(National Industrial Participation, or NIP).

When the deal was done in September1999 the promised offsets were summed up asfollows, in billions of rands:

Investments Technological Purchases Totaltransfers

Military 4 8 7 14.5Non-military 24 31.5 55.5Total 70

It does not appear that these pledges had anycontractual force, but the South Africansretained the sanction of refusing to proceedwith the second phase of the purchases if theywere not fulfilled. Although by mid-2000 theDepartment of Trade and Industry was warn-ing people not to expect much in the way ofresults for several years,76 there is no reason todoubt that the commitment will in some sensebe honoured. Indeed, by August 2002 the NIPprogramme was ahead of schedule, with slight-ly over half the obligation already committed.The question was: what did the programmeactually mean? Critics allege that many of the‘offset’ purchases were raw materials thatwould have been exported anyway, and thismay be true of some of the investments.Despite their disappointment over thecorvettes, the Spaniards have gone ahead withplanned investment in South African fisheries.So there are some obvious questions. If theinvestments are an optimal use of the foreigncompanies’ funds, why are they made condi-tional on the sale of arms? If they are not, whyare they being made at all – especially by com-panies not involved in the arms deal? Are thedevelopments chosen in the light of SouthAfrica’s needs or in those of the investors?

13

72 ECAAR-SA, 200173 Jane’s Defence

Weekly, 19.12.0174 Business Report,

16.11.0175 Economist, 18.9.9976 Defence Systems

Daily, 27.7.00

77 Coalition for DefenceAlternatives 15.10.99;Times, 3.8.00

78 Mail and Guardian(Johannesburg), 8.8.02



81 Flight International,25.11-1.12.98


83 Jane’s InternationalDefence Review, Sept2002

84 Southscan, 19.7.9685 Finance Week, 18-

24.7.9686 Ceasefire, Feb/Mar

1997

The largest single investment was the proj-ect for a new stainless steel plant at Coega onthe coast of the Eastern Cape. German steeland engineering companies involved in thefrigate and submarine consortia proposed toinvest R6bn in this scheme, which came underfierce attack. A new deep-water harbourwould have to be constructed, which will costthe South African government R1.5bn andwould be both redundant and environmental-ly damaging. The steel plant would also besuperfluous, since South Africa already pro-duces far more than it can consume and theinternational market is glutted. The projectwas capital-intensive and would generate nomore than a thousand permanent jobs.77 If thiswere typical, the number of new jobs generat-ed by the arms deal would not be 65,000 butaround 12,000.Any increase in employment, itis true, would be valuable in a poor region thathappens to be in the heartland of PresidentMbeki, who as deputy president enlisted theinterest of the German government.The steelplant was eventually dropped, but the offsetcredits may be transferred to a French alu-minium plant which would depend on mas-sively subsidised electricity and water.

Some other plans may be more genuinelyuseful, but have been wildly overstated.Nothing could be more vital to South Africathan a supply of cheap condoms, and a con-dom plant is on the German list. It is valuedfor offset accounting purposes at €72.6mthough the actual investment is to be €15m.Italy gains $13.2m credit for an actual invest-ment of $1.3m in a mohair factory, $84.7m fora mere $5m in a jewellery works. One of themain Anglo-Swedish projects is the upgradingof the Harmony gold refinery. This will pro-duce gold slightly more cheaply than the exist-ing Rand refinery, but the companies willclaim as offset, not the difference, but the valueof the full output at $300 an ounce. By suchmeans an outlay of $70m will enable BAESand SAAB to meet their combined obligationof over $2bn in investments.78

Dr Neil Cooper’s prediction in 1998 thatthe benefits from offsets would be ‘ultimatelynon-existent’ may have been too sweeping, butadvocates of the deal have certainly overstatedthem by a very wide margin. Indeed the gov-ernment itself seems to have had doubts, sinceit announced in September 1999 that ‘this isnot a job-creation but a defence procurementprogramme’.79 In fact the employment argu-ment is based on a fallacy, since it ignores theopportunity cost of the programme. It is nec-essary to ask, not just how many jobs may becreated directly or indirectly by arms procure-

ment, but how many could have been createdif the money had been spent in other ways.Arms production is not labour-intensive, norare steel-works or other spectacular industrialdevelopments. Critics pointed out that on theofficial projections the jobs generated by theoffset programme would cost R1.7m each, andcontrasted this with the 42,000 peopleemployed by the ‘Work for Water’ project, runby a department whose whole budget wasonly R2.1bn.

Military offsets (DIP), at R14.5bn, wereonly a small part of the total, and of these onlyR4bn were scheduled investments, yet it wasthese that were the key to the whole opera-tion. By 1998 it had become clear that theSouth African arms industry had no future asan autonomous player on the internationalstage. The only way to keep the industrygoing, as Modise explained early in 1999, wasto find ‘strategic partners’.80 In fact the gov-ernment had already decided to sell 30 percent of Denel’s Aviation and Kentron sub-sidiaries (the most marketable parts of the statecorporation), with BAE as the most likelybuyer.81 The arms purchases were seen by someas a means of attracting the investment thatwould enable the South African industry togain ‘a solid foothold in the global defencemarket’.82

Europe takes over

Foreign involvement in the industry actuallybegan in September 1993, when the UK’sAlvis company entered into an agreementwith Reunert to market Mechem’s Mambaand Ysterarend armoured cars.83 A version ofthe latter, known as the Scarab, was manufac-tured in the UK and used in the Yugoslav wars.Later the Vickers company acquired a 75 percent stake in the private armoured vehiclemanufacturer Reumech, which emerged as‘Vickers OMC’, and in 2002 Vickers was itselftaken over by Alvis.

British Aerospace (now BAE Systems)entered South Africa in 1996, when it award-ed contracts to Grinel and AMS for the supplyof radios and other equipment for its Hawks.84

The deal was described as a ‘pathfinder’, show-ing that South African companies’ ‘niche’capacities made them ‘ripe to break into theinternational market’.85 In the following yearBAe made its first actual investment, taking 20per cent of Advanced Technologies andEngineering (ATE), which would supplyavionics to South Africa’s Hawks.86 A little laterit bought a small but high-tech companycalled Paradigm Systems Technology, purveyor

14

of software for the Eurofighter. Its rivals andallies followed suit. Early in 1998 the Frenchcompany Thomson-CSF (now Thales) bought50 per cent of Altech Defence Systems (ADS),appointing a French chief executive.87 In thefollowing year the Swedish company Celsius,which was about to merge with SAAB, took49 per cent of South Africa’s Grintek, whileDASA, the German component of theEuropean giant EADS, bought 33 per cent ofReutech Radar.88 In May 2002 a companycalled Turbomeca Africa was established forthe local manufacture of aero-engine compo-nents. It was a 49:51 per cent arrangementbetween Denel Airmotiv and Turbomeca,which was itself a joint subsidiary of Rolls-Royce and the French aero-engine companySNECMA. Turbomeca celebrated the dealwith the rather incautious boast that it (that is,SNECMA) had been supporting the SouthAfrican Air Force for over 25 years, implyingthat links with the apartheid regime were nowa cause for congratulation rather than shame.89

Meanwhile talks between Denel,which likeother state corporations was scheduled for atleast partial privatisation, and BAE Systemswere proceeding slowly. They did not gainmomentum until September 1999, and theGripen purchase was explicitly the precondi-tion for their resumption.90 The result was theStrategic Agreement arrived at in May 2000,whereby BAE Systems promised work-shareof up to R2.5bn in addition to technologicaltransfers worth R1.5bn.That was only a fore-taste of the gains that were expected to followthe actual purchase of a stake in Denel’s busi-ness. The UK company would then provideDenel with design, manufacturing and man-agement skills, assistance with research anddevelopment, and above all with marketing. Inreturn it would gain access to Denel’s specialcapabilities in artillery and ammunition, heli-copters, missiles, unmanned aerial vehicles andoptronics.91 In the first instance it was pro-posed to sell only 30 per cent for a reportedprice of a mere R375m.92 It was now beingsaid, however, that the government was anx-ious to dispose of its entire holding in the armsindustry, except for a golden share to protectvital national interests, similar to the one thatthe UK government holds in BAE Systems.Earlier, the government had let it be known

that it intended to hang on to the specialistsubdivision Kentron as well as the ammunitionplants.93 But this was proving impractical.Kentron had designed a highly advanced air-to-air missile called the A-Darter, which wasmeant to be installed in South Africa’sGripens, but it could not afford to develop itwithout a foreign partner.94 However, in April2003 the South African governmentannounced that the long drawn out negotia-tions with BAE Systems had been broken off.

Nevertheless, the dream of an independentSouth African arms industry had faded. Butrather than dismantle the industry in favour ofmore useful forms of production, the govern-ment decided to preserve it as an annexe ofEuropean companies. In the big procurementdeal it was buying not only, or even mainly,planes and warships but admission to a cornerof the Western-dominated international armsindustry.

In its own terms, the policy has shown signsof modest success. ‘After ten years of cuts’,reported one observer in 2000, ‘the armsindustry is finding its feet’.95 Its exports rosefrom R1.09bn in 1999 to R1.7bn in 2001, andthere was clearly more to come. As a directresult of the deal Denel’s explosives divisionwon an order worth R1.5bn for propellant;the normal supplier, Royal Ordnance, a sub-sidiary of BAE Systems, stood aside to allowthis. Denel also hoped that its high-poweredartillery projectiles would be adopted byNATO and supply the ammunition for theUK’s new howitzers.The private sector of thearms industry was also showing gains. African(formerly Altech) Defence Systems, now part-ly French-owned, would provide much of thepurchased frigates’ electronics. GrintekAvitronics, in which SAAB had invested heav-ily, would help to equip not only SouthAfrica’s but also Sweden’s own, far morenumerous Gripens. With a German input,Grintek hoped to invade the world market forelectronic warfare equipment. The financialgains from these transactions, however, wouldbe diluted by the share of profits accruing tothe foreign investors, and the employmentgains would mainly be to the benefit of high-ly skilled engineers, most of them inevitablywhite, and had little relevance to the unem-ployed masses.But there was a small number ofnon-white individuals who were certainlydoing well out of the deal.

Corruption?

The sheer inappropriateness of most of thepurchases naturally led to suspicion of corrupt

15



89 African Armed Forces,May 2002

90 Flight International,29.9.99


92 Defense News, 20-26.5.02

93 Jane’s InternationalDefence Review, Mar1998

94 Jane’s InternationalDefence Review, July2002


Rather than dismantle the [arms]industry in favour of more useful formsof production, the governmentdecided to preserve it as an annexe ofEuropean companies

96 Guardian, 28.5.01;Financial Times,10.9.99; ECAAR-SA,26.5.00

97 Mail and Guardian(Johannesburg), 9-15and 16-22.11.01


99 Natal Mercury,16.11.01



inducements; and by September 1999 theopposition Pan-African Congress hadacquired enough evidence to force a publicinvestigation. Its parliamentary motion tabledon 9 September asserted that ‘the absence oflogical explanation, total lack of transparencyabout offset deals and the arms industry’snotorious reputation makes South Africa’sweapons purchase programme a matter ofgrave public concern’. Parliament’s PublicAccounts Committee agreed that there wasground for enquiry by the government’s spe-cial investigation unit headed by Judge WillemHeath, among other agencies. (The ANCleader on the Committee, Andrew Feinstein,was removed by the party’s Chief Whip,TonyYengeni, who would himself later be indicted.)Judge Heath, after complaining of governmentobstruction, was furiously attacked in a broad-cast by President Mbeki himself; and theConstitutional Court eventually ruled that as asitting judge he could not properly head a stateagency.96

However, the controversy would not goaway. The Auditor-General, Shauket Fakie,ruled that proper tendering procedures hadnot been followed, especially in the matter ofthe Hawk contract, and recommended furtherenquiry into accusations of nepotism. Themost thorough investigation was that of theNational Director of Public Prosecutions(NDPP), Bulelemi Ngcuka, whose team,known as the Scorpions, was reckoned themost muscular of the anti-corruption agen-cies. The Auditor-General’s report, backed bythe Public Protector and the NDPP, appearedin November 2001 after it had been ‘reviewed’by the government. As published, it describedthe government’s intervention in the aircraftcontract as ‘unusual’, but not ‘unlawful orirregular’. It also noted that only the unsuc-cessful Spanish tender for warships had com-plied with key criteria.97 It was at once dis-missed by Judge Heath as ‘a whitewash’ and ‘afarce’.98 Nevertheless the powers that be werenot left unscathed. There were high-levelarrests, and the behaviour of Joe Modise, whohad retired two years earlier and died verysoon after the report, was described as ‘highlyundesirable’, in that he had invested in con-tractors who stood to benefit from the deal.99

It is important to distinguish between dif-ferent kinds of activity that might qualify as‘corruption’. In the first place there are corpo-rate payments designed to generate goodwillin influential quarters. Under this head comeseveral outlays by BAE Systems, ranging from£500,000 for the training of former guerrillasin business methods to £30,000 for the re-

writing of history textbooks. Such sweetenersare probably within the range of normal busi-ness practice, and could be compared with thesame company’s contribution to theMillennium Dome. At the other extreme issimple bribery of powerful individuals inreturn for political favours. Thus the SouthAfrican representative of the European armsconglomerate EADS, which obtained a smallslice of the action, was found to have been giv-ing large discounts on Mercedes cars to asmany as 33 MPs and others.100 (The Germancomponent of EADS is owned by the Daimlercompany).The most prominent casualty of thisoperation was Tony Yengeni, a very popularANC politician who was the party’s ChiefWhip and at the relevant time chairman of theparliamentary defence committee. (Plea-bar-gaining allowed him to be charged with fraudrather than the more serious offence of cor-ruption and he has now been sentenced tofour years in prison.) Such conduct was ofcourse regrettable – not least because a careerwas wrecked for small cause – but not reallyvery important. Petty inducements of this kindmay perhaps have influenced the details of thearms deal but do not begin to account for it.Much more significant is institutional mal-practice resulting from a policy that was initself defensible.

According to an astute observer, PresidentMbeki ‘plans a second revolution, whereby theapartheid economy’ (which is still essentially inplace) ‘will be overthrown and will be replacedby a modern African, capitalist state based on askilled labour force and a growing body ofblack entrepreneurs’.101 This alludes to theconcept of ‘black empowerment’, which needsa little background explanation.

The system of racial domination that wasinaccurately called apartheid had two mainobjectives.The overriding one was to preventthe upward mobility of non-whites and soensure that no white man could be poor. From1948 there was also a determination that someAfrikaans-speaking whites should be enabledto become rich, at the expense of the English-speakers who had until then monopolised thetop ranks of government and the economy.Tothis end, state power was used to leverAfrikaners into the civil service and theexpanding public corporations and to givethem a foothold in big business. By and large,English-speakers were willing to make room

16

The sheer inappropriateness of most of the purchasesnaturally led to suspicion of corrupt inducements

for them, in return for the continuance ofoverall white supremacy.

In a sense the new regime repeated thisprocess in reverse. Its ultimate objective, ofcourse, was that non-whites should cease to bepoor, but that could be only a long-term aspi-ration.What could be done in the short termwas to ensure that some non-whites couldbecome upwardly mobile, by removing insti-tutional barriers, but also, more positively andmore controversially, by using state power toaccelerate the formation of a black businessclass through the selective award of govern-ment contracts. By and large, whites maderoom for the newcomers without muchdemur, unless they were personally affected.But the problem with all kinds of positive dis-crimination is that fairness between categoriesmeans unfairness towards individuals, in thatsome people may not get the jobs, promotions,contracts that they personally deserve. Andthey are then likely to cry foul.What is more,when the strict criterion of personal merit isnot observed, the selection of individuals foradvancement becomes arbitrary, and theprocess may descend into nepotism and crony-ism.

An informal condition of the arms con-tracts was that between five and ten per cent ofthe offset investments should be used for ‘blackempowerment’.The subcontract work offeredby the European manufacturers to SouthAfrican industrialists was an obvious honey-pot; and it was alleged that fortunes were madethere by a group of former MK cadres sur-rounding Joe Modise.102 It was hardly surpris-ing that the victorious guerrillas should lookto be compensated for their years of exile andhardship, but the rules were undoubtedly bentin their favour. Linked with them was a so-called Asian Muslim ‘mafia’ around the broth-ers Shaik. Shamin Shaik, commonly known asChippy, was the official in charge of arms pro-curement. His brother Shabir (or Schabir),who had contributed to ANC funds, emergedas the de facto head, along with two ofModise’s in-laws, of African (ex-Altech)Defence Systems, a formerly Afrikaner compa-ny in which Thomson-CSF had acquired ahalf interest. Inside information, it was alleged,allowed ADS to revise its bid for the equip-ment of the frigates, undercutting a rival(white-owned) company, and so landing acontract worth R700m.103 As a result of theScorpions’ investigations ‘Chippy’ Shaik, whohad not properly recused himself, lost his joband his brother was arrested. Similar accusa-

tions of scandal, involving many of the sameplayers, surrounded the award of the Cell Cmobile phone network, in which Saudi capitalcollaborated with local power-brokers.104

Modise and his associates set up ‘shell’ com-panies called Ubambo Investments andFuturistic Business Systems (later Conlog)which were heavily involved in the Germanfrigate and the helicopter contracts. The Bellhelicopter company of Canada claimed that,being pressed to award subcontract work toFBS, which had little or no manufacturingcapacity, it virtuously dropped out of the bid-ding, while its Italian rival complied.105 It mustbe recognised that much of the informationabout corrupt practice comes from disap-pointed bidders or from the political opposi-tion, though there is said to have been somewhistle-blowing by concerned governmentsupporters as well.

That there was some irregularity and nest-feathering in high places is beyond reasonabledoubt. The new Defence Minister, PatrickLekota, has acknowledged ‘some wrongdo-ing’.106 But it must be stressed that, unlike someof the UK arms industry’s favourite customers,South Africa is not a corrupt dictatorship. It isa democratic society with an elected parlia-ment, a remarkably free press and a responsiblecivil service, which has made it clear that itwill insist on more regular procedures beingfollowed in the future.Whatever might be saidabout the late Joe Modise, he was a patrioticSouth African, and his primary motive inpushing for arms procurement was not toenrich his family but to promote what he sawas the national interest. Corruption was a mar-ginal factor in this arms deal. It probably dis-torted its priorities and raised its cost, but wasnot its prime mover. Or rather, the corruptionthat drove it was of a more subtle kind, notfinancial and personal but arising out of theinternational power system.

The sellers‘South Africa will make its own decisions ondefence spending’.107 Quite so; but that doesnot excuse the government of which ClareShort was then a member for doing its levelbest to push South Africa’s ‘defence’ spendingup. Ever since it came to power in May 1994the democratic regime has been experiencinga very hard sell from UK and other Europeanarms companies and an even harder one fromtheir governments, especially that of the UK.

17

102 Financial Mail, 6.5.01103 Sunday Times (South

Africa), 18.11.01104 Independent on

Sunday, 5.3.00105 Guardian, 28.5.01106 Africa Confidential,

9.2.01107 Clare Short, 16

January 1999

The merchantsThe interest of the arms companies does not atfirst sight need much explaining. Neverthelessthe South African deal has to be seen in thecontext of the post-Cold War problems of thearms industry (for which see CAAT publica-tion,The Arms Industry, Goodwin Paper no.1,Mar 2001). And the UK industry’s particularproblems must be set in the context of theseemingly inexorable decline of manufactur-ing in this country.The arms industry survivedbetter than most, because it had a captive cus-tomer in the Ministry of Defence.Thus mer-chant shipbuilding in the UK virtually ceasedin the 1970s but at the end of the century fouryards were still building warships.The Anglo-French Concorde was almost the final flourishof UK civil aircraft production. Since then,apart from the Avro regional jet, which ceasedproduction in 2002, and the work done byUK subcontractors for companies such asBoeing, the only non-military interest of theUK aircraft industry has been BritishAerospace’s 20 per cent share in the EuropeanAirbus, for which it makes the wings. But thecompany (BAe, now BAE Systems) survivedand prospered as a maker of warplanes both forthe nation and for export. It inherited twovery successful but rather specialised planes,the Harrier jump-jet and the Hawk fighter-trainer, but for more mainstream aircraft it hadto rely on co-operative ventures; the Anglo-French Jaguar of the ‘70s was followed by theAnglo-German-Italian Tornado of the ‘80s;and the same group, with the addition ofSpain, went on to design the Eurofighter orTyphoon, optimistically christened the EF-2000.The drive behind the Airbus was French,but the UK company and government werethe prime movers of the military projects, theGermans being particularly reluctant partners.

Even military manufacturing came underthreat in the early ‘90s, as the UK government,along with others, cut back on procurement inthe brief post-Soviet euphoria. BritishAerospace was saved by a huge order fromSaudi Arabia for Tornados and Hawks, whichbrought in some £2bn a year for most of the‘90s. But that programme came to an end in1998, apart from a lucrative service contract,and the question clearly arose: what next? TheTornado had proved unsaleable to anyoneother than the Saudis and the European spon-sors, and it ceased production in 1998. TheEurofighter was still some years from activeservice and, being designed for dog-fightingover the north European plain, had no greatcustomer appeal in the new era. 630 planeswere ordered by the sponsor governments, but

some of these are now in doubt, and there isno sign of the 600 additional sales on whichthe companies were originally counting. TheHawk was still finding customers – Australia,for instance, and Bahrain – but the £1bn orderfrom India, which has been in prospect for thepast decade and more, has never actually cometo pass. In any case, the company could not liveby Hawks alone.

An obvious way forward, and one stronglyurged by the UK government, would havebeen to merge its resources with those of itsFrench and German partners. But inNovember 1998 the company turned awayfrom that path. Instead, it spent £7bn on thepurchase of the military branch of GEC, itsonly rival in the UK arms market. The dealwas of doubtful value to either party. GEC,now called Marconi, decided to forgo thesecurity it enjoyed as a privileged supplier tothe Ministry of Defence and to plunge intothe global market-place for telephonic equip-ment. Within a couple of years it was effec-tively defunct. BAE Systems has not collapsed,but its present capital value is barely a third ofthat of BAe just before the merger.

Behind its move on GEC there were twofundamental strategic decisions. First, the com-pany would indeed move away from beingprimarily a workshop for the UK military, butwould seek its fortune, not (mainly) in Europe,but in the United States, using the ‘special rela-tionship’ to prise open that country’s immenseand heavily protected military market. In thelate ‘90s the US giants, Boeing, LockheedMartin and Raytheon, were financially weak,and BAE Systems, flush with its Arabian dol-lars, aspired to buy one of them, or at any rateto merge with it on equal terms. It did in factacquire bits of Lockheed as well as some small-er US companies, and it has won some sub-stantial orders from the Pentagon, including apromise of 15 per cent of the huge Joint StrikeFighter project; but the biggest prizes haveeluded it.

Secondly, as its new name proclaimed, itwould move away from being a mere plane-maker and emerge as a designer and integratorof electronic ‘systems’. (Its French rival Thaleshas acidly pointed out that it was into elec-tronics when BAE was merely sticking bits ofaluminium together.) Purchase of GEC wasmeant primarily to provide it with the neces-

18

Ever since it came to power in May 1994 the democraticregime has been experiencing a very hard sell from UK and

other European arms companies and an even harder onefrom their governments, especially that of the UK

19

sary brain-power. But GEC had been starvedof investment for many years, especially in per-sonnel, and the results were clearly disappoint-ing. The purchase also brought with it threestruggling shipyards which to date have yield-ed more trouble than profit.

BAE Systems aspired to be a ‘prime con-tractor’, organising the work of a vast array oflesser companies. As far as possible it would‘outsource’ the actual business of production,preferably to places where costs were lowerthan in the UK.

So the UK arms industry, especially its air-craft division, had two powerful motives forpressing its wares on South Africa. In the firstplace, it needed sales to keep its productionlines open and its dividends steady in the awk-ward interval between the winding down of itsSaudi business and the cranking up of theEurofighter and Joint Strike Fighter pro-grammes. And it also sought control of theSouth African arms industry, parts of whichcombined high technology with low cost.

The direct financial benefits to BAES fromthe South African deal are not likely to beenormous, even if the full complement of 24Hawks and 28 Gripens are eventually pur-chased. The company owns 35 per cent ofSAAB but 50 per cent of the marketing sub-sidiary, Gripen International; so it stands toreceive half of the £1.08bn that is due for theGripens plus £470m for the Hawks, or a totalof just under £1bn.That is about the sum thatwould accrue from the still-awaited sale of 66Hawks to India, with the important differencethat the South Africans have agreed the askingprice while the Indians, so far, have not.Withpayment spread over 14 years, the company’sturnover should be increased by about £70ma year – a far cry from the al Yamama bonan-za. Currently, some 2 per cent would be addedto its order book.The deal, in other words, isuseful. It should postpone the closure of theHawk production line for a while. But it ishardly life and death for the company as awhole.

More important, almost certainly, is the roleassigned to South Africa in the company’sglobal strategy. According to Major-GeneralSharman, head of the Defence Manufacturers’Association,‘South Africa is near the top of thelist for the outsourcing of British militaryequipment’.108 By taking control of the SouthAfrican industry, whether through purchase orjoint ventures and partnerships, BAES, Rolls-Royce, SAAB,Thales and EADS, are ensuringthat they can direct and profit from that

process, and from South Africa’s advance intothe wider arms market. When South Africagets round to ordering some 100 tanks, as itintends to do, Alvis Vickers, having acquired acontrolling share in the South Africanarmoured vehicle industry, is well placed tosecure the order that Vickers would have failedto win in 1998. Even though most of the workwill be carried out locally, the UK companycan expect a design fee and a share in the prof-its. Much the same applies to the hundreds oflighter armoured vehicles that are also inprospect.

The deal has wider implications for indus-try. Thus Thyssen and Ferrostaal, members ofthe German warship consortium and contrac-tors for the Coega project, would not onlyreceive income from the warship sales but alsopresumably looked to gain from the transfer ofsteel production from Germany to SouthAfrica.

There are admittedly some contradictions.Denel’s intrusions into the UK military marketare at the expense of Royal Ordnance andpotentially of the former Vickers artilleryworks at Barrow-in-Furness,109 and both theseare owned by BAES. Royal Ordnance, purvey-ors of guns and ammunition to the nationalarmed forces since the time of the Tudors, wasunloaded on to British Aerospace by theThatcher government. It is not a profitableoperation and the company would like to berid of it. But its ammunition plants provideemployment on Clydeside and in north-eastEngland, and Labour MPs were indignant atthe export of jobs to South Africa. (‘Defence’debates in the House of Commons are con-cerned almost entirely with constituencyinterests of this kind.) On this matter a com-promise has been worked out; but there is lit-tle doubt that outsourcing of UK arms pro-duction will continue, with South Africa andeastern Europe as its main destinations. BAESseems to have convinced its core workers thatthere will be a net gain to them, since the sub-contracting to foreigners is part of a packagethat includes export orders.

There are other complications. Denel alsohas an arrangement with German companyDiehl gmbh, which competes with BAES inthe UK and Kuwaiti markets for artilleryshells. And for good measure South Africa’sFuchs Electronics competes with Diehl in thesale of fuses. But such rivalries must notobscure the common interest of the interna-tional arms industry in maximising the sale ofequipment which is at best useless and at worst

108 Defence SystemsDaily, 25.5.01

109 Financial Times,24.8.98; Jane’sInternational DefenceReview, Aug 2002

20

destructive, to the benefit of directors, share-holders and select groups of highly-paid work-ers and the detriment of everyone else.

The governments

The industry could not function, however,without the complicity of governments, whoare the sole buyers of arms and often theirenthusiastic salesmen. The South African dealhad the backing of successive governments inthe UK. Nelson Mandela had hardly settledinto the presidency when a large team of busi-ness magnates, led by John Major, descendedon him in June 1994, eager to explore thenewly legitimate market. Among them werethe leaders of British Aerospace, GEC andRolls-Royce. Major is reported to havepressed the case for the corvettes that thenheaded both the UK and the South Africanwish-lists.110 The project was promoted againin April 1995 by the Defence SecretaryMalcolm Rifkind, who visited South Africaaccompanied by a senior official of theDefence Export Services Organisation.And inMarch 1996, having announced an ambitiousprogramme of arms procurement, Joe Modisesigned a ‘memorandum of understanding’ withthe UK High Commissioner which in someways prefigured the eventual deal. Hawks aswell as corvettes were now in view, and a sumof £1bn was mentioned.111 But at that timeModise’s rearmament scheme was only anaspiration with no political or financial back-ing. By the middle of the year it was finallyclear that the UK was not going to get anorder for warships, and its interest appeared toslacken. At any rate the industry used the UKpress to complain of Foreign Office ‘indiffer-ence’ which, it alleged, had allowed theGermans to win the naval orders.112 In fact theUK’s own naval rearmament plans were reliev-ing the pressure on the shipyards, making theneed for warship orders less desperate. It is alsopossible, though unprovable, that the UK andGerman governments had agreed to divide theSouth African spoils.

If there was any UK indifference, however,it was short-lived. In January 1999 Tony Blairinterrupted a family holiday in the Seychellesto visit Pretoria, partly at least to ‘clinch’ theorders for Hawks, Gripens and Lynxes. Theground had been prepared by previous high-level discussions; and indeed the visits paid byThabo Mbeki to Germany in 1996 and toLondon in 1997 were very probably the cru-cial events in the whole story.

It is well known to be an article of faiththroughout the UK establishment that the

arms export trade is a matter of the highestnational interest. Usually this is presented ineconomic terms, with a special emphasis onjobs. In 1998 the government initiated a cost-benefit analysis of the trade to be carried outin conjunction with academic ‘defence econ-omists’, confidently expecting the results to befirmly positive. They were in fact so disap-pointing that they appeared simply as a publi-cation of the University of York, without gov-ernment blessing. Generally, the conclusion ofeconomists is that the net benefits of the armstrade to the UK economy are either insignifi-cant or negative (see CAAT publication,Subsidies Factsheet, Feb 2002).The jobs argu-ment is nevertheless of some political impor-tance. A complete cessation might have nogeneral adverse effects in the long run, but itwould certainly do short-term damage insome politically marginal areas such as centralLancashire. In many other constituencies, too,arms industry workers form a small but iden-tifiable interest group that politicians are reluc-tant to offend. But employment is not the realreason for government support of this particu-lar industry.

Tony Blair took advantage of a visit toPrague early in 2002 to plug the sale ofGripens to the Czechs. (New and aspirantmembers of NATO in eastern Europe areunder heavy pressure to exchange their oldSoviet fighter planes for modern Western ones,whether they want them or not; the onlyquestion is whether they will buy French, USor Anglo-Swedish.) ‘Backing British exportsabroad’, he explained,‘is part of my job’.113 It isdoubtful, however, whether he would havegone out of his way to tout for Anglo-Swedishsaucepans. The arms trade is special, becausethe arms industry is special, and cannot survivein peace-time on domestic orders alone. Andthe industry is special because the many gov-ernments see it as the indispensable accessoryof a state that wishes to count for something inthe world.

That belief is firmly held in the UK bypoliticians of most political persuasions, andmost firmly of all by the present PrimeMinister, whose vision of the UK, as hasbecome abundantly clear, is dominated by theability and willingness to wage war, if notalone then as a significant ally of the UnitedStates. His support for the UK arms industry

110 Arms Trade News, Dec1994

111 Engineer, 28.3.96112 Sunday Times, 5.7.98113 Hansard, 25.4.02, Col.

429W

[Tony Blair’s] support for the UK arms industry has beenunwavering. One of his first actions in government was to

sanction the continuing sale of Hawks to Suharto’sIndonesia, probably overruling his Foreign Secretary

21

has been unwavering. One of his first actionsin government was to sanction the continuingsale of Hawks to Suharto’s Indonesia, probablyoverruling his Foreign Secretary. He laterinsisted on licensing the sale of Hawk spareparts to Zimbabwe, despite its military inter-vention in the Congo. In the summer of 2002he was asked whether he thought it right tolicence arms sales to India and Pakistan, thenapparently on the brink of war. He replied thathe thought it ‘a bizarre idea that we shouldclose down the British arms industry becauseof what is going on out there.’ Nor has hisgovernment merely permitted the sale ofweaponry to India; it has actively promoted it.‘The government’, a defence minister toldParliament in April, ‘continues to supportBritish Aerospace’s (sic) efforts to exportHawk trainers to India.’ So there is no mysteryabout its pursuit of arms sales to South Africa.

The UK and South Africa

South Africa has some special advantages as amarket for UK armaments.There are the his-toric ties, personal, financial and cultural, thatlink the British and South African elites. Oneof the official languages, and the main lan-guage of business, is English.The UK is SouthAfrica’s principal trading partner and thebiggest source of its foreign capital, with anestimated £10bn already invested. BothNelson Mandela and Thabo Mbeki areanglophiles, who are probably more at homein London than in any other foreign capital.

In addition there is a powerful feeling in theUK, especially on the Left, that the new SouthAfrica is a special case, a country which shouldnot be denied anything that it might appear towant. The most celebrated anti-apartheidactivist in the UK, the South-African bornPeter Hain, was by the late ‘90s a ForeignOffice minister with special responsibility forAfrica; and he clearly did not expect to becontradicted in either country (though hewas) when he declared that ‘no-one shouldobject to selling arms to South Africa’.114 Theformer leader of the Swedish anti-apartheidmovement has likewise backed the Gripensale. It is perhaps time to recognise that SouthAfrica is a country like any other and that thejudgement of its leaders is not immune to crit-icism. Its people deserve not to be subjected toself-interested pressures from European states.

Above all, in the face of the AIDS disaster,those who have helped to persuade it to divertresources from health to arms bear a heavyresponsibility. Like cigarette salesmen, whoclaim that their advertisements do not influ-ence the decision to smoke but only thechoice of brands, UK ministers would proba-bly argue that South Africa in its sovereignwisdom decided to equip itself with high-techweaponry and they did no more than persuadeit to buy British. That, however, is at best ahalf-truth; for, as we have seen, buying Britishwas the most expensive option.

The arms deal needs to be seen in a stillbroader context. South Africa has emerged asthe leading sponsor of the New Partnershipfor African Development (NEPAD). This is agrandiose plan for the regeneration of thecontinent, in which large but not very specif-ic promises of Western money would induceAfrican governments to put their houses inorder and create suitable conditions for capi-talist investment, thus unblocking what TonyBlair has described as its ‘vast untapped poten-tial’. As the most developed, democratic andstable country in the region, South Africa isthe West’s indispensable partner in this enter-prise; and under Mbeki it is willing in princi-ple to act as such. For some observers NEPADis a genuinely idealistic and hopeful venture.For others, it is the new face of imperialism. Itmay of course be both; and it may also be nei-ther. For the most likely outcome is that, whenit comes to the crunch, the West will not comeup with the money that is needed to get theprocess launched.

The particular relevance of NEPAD is thatit inevitably has a military aspect, for everyoneagrees that economic reform is impossiblewithout the restoration of peace and order –though most would insist also that peace andorder are unlikely without economic improve-ment.Again, South Africa is now less reluctantto take up the role of guardian than it was inthe first years of the new regime. That willinevitably mean more expenditure on the mil-itary – though perhaps not on the kinds ofweaponry that the UK and Europe are mosteager to sell.

114 Independent onSunday, 23.11.99

Local economists have actually taken the government tocourt over the loan contracts, arguing that they are so

disastrous as to be unconstitutional

22

PostscriptThe arms deal is now more than three yearsold, but it is not just of historical interest.There is still the second batch of 18 fighter air-craft; and it is still open to South Africans todecide that they have better things to spendtheir money on. Local economists have actual-ly taken the government to court over the loancontracts, arguing that they are so disastrous asto be unconstitutional. On the other hand,there is also growing pressure for a furtherround of expensive purchases, this time for theArmy, which is demanding large numbers ofarmoured vehicles, probably including 95main battle tanks (to crush what opposition?)as well as air-defence systems (to shoot downwhat enemy planes?). It is intended that theseneeds should be met within a decade or so, bya complex mix of imports and local manufac-ture, mostly by companies that are now or willsoon be wholly or partly foreign-owned. InSouth Africa the debate continues, and itshould continue here as well.

This paper has been composed mainly frommaterials in CAAT’s files, and its greatest debtis to the staff and volunteers who create andmaintain this invaluable resource. It is alsomuch indebted to Terry Crawford-Browne, ofEconomists Allied for Arms Reduction –South Africa, who supplied information and

ideas and saved me from several errors of fact.In addition it benefited from comments byAnn Feltham and Mandy Turner, and I am verygrateful to Ian Prichard,CAAT’s Research Co-ordinator, for his encouragement and editorialhelp, to Rachel Vaughan for proof-reading andto Richie Andrew for his elegant production.

ANC African National CongressCeasefire Ceasefire Anti-War NewsDIP Defence Industrial ParticipationECA Export Credit AgencyECAAR – SA Economists Allied for Arms Reduction – South AfricaFCO Foreign and Commonwealth OfficeLIFT Lead-In Fighter-TrainerMK Umkhonto we Sizwe (‘Spear of the Nation’)NIP National Industrial ParticipationNDPP National Director of Public ProsecutionsNEPAD New Partnership for African DevelopmentSADIA South African Defence Industries AssociationSA(N)DF South African (National) Defence Force

Acknowledgements

Abbreviations

23

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