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DENEL: An Industry Out of Control
a commentary on the misappropriation of public funds The evils of apartheid belonged to the civilian leaders: its insanities
were entirely the property of the military officer class. It is an
irony of our liberation that Afrikaner hegemony might have lasted
another half century had the military theorists not diverted the national
treasure into strategic undertakings like Mossgas and Armscor that,
in the end, achieved nothing Terry Crawford-Browne About R4 billion in public assets is invested in Denel, whose losses
to South African taxpayers over the past five financial years were:
It is notable that the "profits" during the first two years were attributable to the General Export Incentive Scheme (GEIS) and other government subsidies, and that even during the "profitable" years the returns on investment were pathetically poor. The organisation was established in 1992 from the manufacturing operations
of Armscor, and is fully owned by the Department of Public Enterprises.
Denel's financial statements are however, so "qualified"
that they are barely worth the paper that they are written on. Pricewaterhousecoopers
Inc in the 1999/2000 report declares: Without qualifying our opinion we specifically draw your attention to the relevant paragraph in the Directors' Report regarding the restructuring of business activities and to the fact that the future of the company as a going concern depends on the successful outcome of restructuring and finance strategies as proposed by the directors. The Directors' Report refers to: investigating different options to involve strategic equity partners
in the defence business to enhance the globalisation of the business
and to attract investment funds, Recent announcements have predicted that Denel will break even or even make a profit during 2000/2001 because of the benefits flowing from the offsets related to South Africa's armaments acquisition programme. The Chief Executive Officer declares in the 1999/2000 annual report that "Denel stands to benefit by more than R2 500 million in turnover over the next ten years from this procurement programme." This relatively feeble increase in turnover over ten years hardly tallies with expectations of "break even or even make a profit." Press comment has forecast that the benefits accruing to Denel from
the acquisition processes may total R14 billion over the period. The
Chief Executive Officer's report also declares: the contracts entered into with international companies as a result of the conclusion of the SANDF packages procured, will also create long-term relations and income. The outcome of the restructuring will play a major role in making Denel part of the globalised defence industry. Undisclosed however, is that expenditure on armaments from one branch of government to another to disguise Denel's calamitous circumstances amounts to financial "spin doctoring" with public monies. In violation of auditing norms, the 1998/99 report which declared a loss of R745 million was tabled in Parliament only on October 6, 2000. In February 2000 the acting chief executive, Flip Botha had refused to tell a joint meeting of the Public Enterprises and Defence committees just how bad the losses were lest the information would have a negative impact on Denel's public image. The 1999/2000 report and the lower losses of R206 million has been released literally only a few weeks after the 1998/1999 report. The rooivalk and G5 and G6 artillery: Denel's two "prestigious" products, the rooivalk attack helicopter and the G5 and G6 155mm howitzer artillery both illustrate that South Africa's armament's industry is economically unviable, and also completely discredit Denel's boast to be the "cutting edge of South African technology." The rooivalk was supposed to be the South Africa's entry into the "big league" of the international armaments industry. The rooivalk project was based upon an early 1980s perception that NATO required an attack helicopter to counter a threat by the Soviet Union to launch an invasion of Western Europe by tanks. Yet the rooivalk technology was incompatible with NATO requirements because the United States maintained an embargo on American Hellfire missiles and other equipment. In 1994 Denel even despatched President Mandela to plead with President Clinton to drop the American legal action against Denel for piracy of American missile technology. President Mandela, who should have known better, came away empty-handed. The rationale was Denel's hopes of selling 91 rooivalks to the British
Army for The development costs of the rooivalk are conceded to have been in excess of R2.5 billion. A helicopter test pilot informed the writer that the costs had in fact been R17.5 billion. Whilst that figure does seem excessive, it confirms the financial disaster of the project as a "Mossgas with rotary blades!" The United States maintained its arms embargo against South Africa long after the United Nations embargo was rescinded in 1994. The reason was that Armscor was caught pirating American missile technology supplied by International Signal Corporation, and of selling it to countries such as China and Iraq. An out-of-court settlement was eventually reached in 1997 after the interventions of Deputy President Thabo Mbeki and Vice President Al Gore. The Chief Executive Officer of ISC, James Guerin, had been sentenced in the United States to 15 years imprisonment. Dr Gerald Bull spent six months in an American prison for passing American armaments technology to South Africa. He was the designer of the 155mm artillery, and also of the "Big Guns" for Iraq. He was assassinated in 1990 either by Israeli Mossad agents or by assassins for other armaments companies that wished to put an end to his independent operations. South Africa's involvement with Iraq during the 1980s included the trade of US$4.5 billion's worth of oil for G5 artillery. These guns were intended as the mainstay of Iraq's army, but were not used as the Gulf War was overwhelmingly an aerial bombardment. Bull had intended his armaments to be capable of launching satellites and also of delivering nuclear weapons. It has also been reported that the warheads for G5 and G6 artillery can deliver chemical and biological agents. At the outbreak of the 1991 Gulf War, Iraq was understood to be only six months short of nuclear capacity. The development costs of the G5 and G6 artillery are unknown, but can be assumed to have at least equalled and probably to have exceeded the rooivalk attack helicopter. With the failure of the rooivalk, the 155mm artillery is now the "showpiece" of South Africa's armaments industry. The G5s and G6s are manufactured by Denel's LIW division. Sales to date have been mainly to the United Arab Emirates and Oman, and government ministers -- including Presidents Mandela and Mbeki and Defence Ministers Modise and Lekota -- have been heavily involved in export marketing to Saudi Arabia, India and China. A prospective sale to Saudi Arabia was aborted in 1997 when the Sunday Independent leaked the news. It was subsequently announced that Saudi Arabia had merely "suspended" its decision. Moreover, sales commissions of R100 million have already been paid, reportedly to an organisation called ZAM Trading linked to Al-Baraka Bank. Saudi Arabia is now understood to be negotiating a deal for G6 artillery to the value of US$1.5 billion. Yet it is also reported that Al-Baraka Bank, on behalf of Saudi royals, is negotiating to purchase LIW. Why would Denel be willing to sell this division if it is on the verge of major marketing breakthroughs in Saudi Arabia, India and, possibly, China? Denel is also hoping to conclude a major deal with India, which used Bofors artillery (equipped with Denel shells) in its 1999 war against Pakistan. In addition, the Minister of Foreign Affairs has just visited China where she declared (Cape Times, October 10 2000) that "the South African government is ready to sell arms to China or to develop weapons jointly and will not be influenced by western countries' arms embargoes against China." Of course, Armscor and Denel have a long relationship with China including an office in Beijing despite the political antipathies of the apartheid and communist governments. AK-47s made by China North Industries (Norinco) were imported by the apartheid government for distribution to Renamo and Unita as part of the destabilisation of Mozambique and Angola. As noted above, China and Armscor collaborated in pirating American missile technology. In addition, the sinking of the Apollo Sea in June 1994 off Saldanha was reportedly connected to an Armscor countertrade deal of iron ore for Chinese armaments. The Conventional Arms Control Bill: The Middle East, the Indian sub-continent and the Far East are all politically volatile regions. Under no circumstances can South African exports of armaments be compatible with the rationale and principles of the National Conventional Arms Control Committee that was established in August 1995 under the chairmanship of Minister, Professor Kader Asmal. The NCACC rationale and principles declare: QUOTE Transfers and Trade will be avoided, which would be likely to: 3.6.1 be used for the violation or suppression of human rights and
fundamental On paper, the NCACC has been one of the world's more comprehensive commitments to limit the spread of weapons. In practice, its non-enforcement has made a mockery of democratic South Africa's professed commitments to human rights. Proposed exports of weapons to Rwanda, Saudi Arabia, Syria, Turkey -- countries that under no circumstances can meet the NCACC criteria -- were blocked only because of public and international uproar. The current Palestinian/Israeli crisis and the hijacking of the Saudi Arabian airliner this past weekend have yet again confirmed that the Middle East is a powder keg ready to explode. It also illustrates the mood of Islamic militancy, and that political instability likely to erupt in Saudi Arabia on the death of King Faud. During the recent Parliamentary recess the Department of Defence introduced the Conventional Arms Control Bill -- B50-2000. The Bill was withdrawn on September 19, 2000 following representations to the Parliamentary Portfolio Committee on Defence by organisations of civil society, including Ecaar-SA. The government intends to reintroduce the Bill early next year, an ominous prospect that confirms the increasing disdain for human rights exhibited by the Mbeki Administration. Most notably, the guidelines were completely omitted. The objects of the Conventional Arms Control Committee were declared in paragraph 3 as being to "implement government policy." Just what is government policy? The Director of Conventional Arms Control at the Defence Secretariat declares: "if it is government policy to sell to Algeria or Colombia, then it is the task of the Committee merely to implement that policy." In response to questions on how prospective sales to Saudi Arabia could be compatible with the NCACC's regarding human rights, Frederic Marais declares: "Arabs don't object to Saudi Arabian practices regarding human rights. "Who are we to impose South African values upon the Saudis?" Paragraph 23 (1) of the Bill declared: No person may disclose any information in relation to the acquisition,
supply, Paragraph 23 (1) was particularly ominous given the history of the South African armaments industry. We were back to the obsessive secrecy of the apartheid era. Even this commentary would become illegal. Why is South Africa now so desperate to sell weapons to Saudi Arabia given that country's human rights record? Firstly, it is pay-back time for Saudi contributions to ANC campaign funding, which President Mandela publicly admitted amounted to US$60 million (over R400 million). The Saudi financed Cell C cellphone tender seems to be another part of the conditionality. As mentioned above, members of the Saudi royal family are reportedly interested in purchasing LIW. There has also been a dramatic increase in recent years of South African purchases of Saudi oil which now account for about two-thirds of our oil imports. The Saudi connections come about through influential Muslim Indian South Africans -- men such as Essop and Aziz Pahad, Dullah Omar, Yusuf Surtee and the four Shaik brothers. Prince Bandar -- the Saudi Ambassador to the United States and aspirant to the Saudi throne on the death of King Fuad -- also has a close relationship with both Mr Mandela and President Mbeki. During his recent visits to England and the United States, Mbeki stayed at the Prince's residence near Oxford, and then flew to Washington in the Prince's private aircraft. The principal of Saudi Oger which controls the CellC cellphone tender is Rafik al-Hariri, a former Lebanese prime minister who became a billionaire in Saudi Arabia, and who allegedly is a "front" for members of the Saudi royal family. Al-Hariri was dismissed from office two years ago because of alleged corruption, but has just been re-elected in September's election in Lebanon. A common denominator in the ferment besetting the Islamic world is reportedly the involvement of Osama Bin Laden's network based in Afghanistan. It manifests itself even in Cape Town in riots and bomb attacks. Bin Laden's objective is to overthrow the Saudi royal family. That the South African government should actively market armaments in the Islamic world is completely irresponsible. Sadly, the international reputation of South Africa's armaments industry is precisely that. Human Rights Watch will release its next Arms Watch report on October 30, 2000. What is the role of Denel in this other than its expectations that exports of armaments such as G5 and G6 will reverse the losses the organisation has suffered? The role of BAe Systems which is "driving" South Africa's R32 billion armaments acquisition programme is salutory. BAe Systems derives its dominance of the European armaments industry as a result of the notoriously corrupt £20 billion Al Yamamah deal between Britain and Saudi Arabia. BAe Systems is now the world's second largest armaments company, after the American Lockheed Martin. Saudi Arabia has been the world's largest armaments importer for many years, overwhelmingly bought from the United States. Prince Bandar is an agent for Lockheed Martin. Mrs Cheney, wife of the American Republican Vice-Presidential candidate Dick Cheney, is a director of Lockheed Martin. Yet despite vast quantities of armaments, the Saudi Arabians depended upon American and British intervention during the 1991 Gulf War. The political conflicts, intrigues and corruption that characterise Saudi Arabia mean that the Saudi armed forces are unreliable. BAe Systems is finding domestic political opposition in Britain to be increasingly embarrassing. Its annual general meetings are disrupted by demonstrators who object to its record of arming Saudi Arabia, Turkey, Indonesia, Nigeria, Sierra Leone and other dictatorships including Zimbabwe. The Blair government came to office promising (but quickly forgetting) an ethical foreign policy regarding the arms trade. British labour costs are now extremely high, hence the attraction to BAe Systems in transferring its production to low wage, newly industrialising countries such as South Africa. Denel and BAe Systems have concluded numerous joint venture and licensing agreements in recent years, and BAe Systems has taken a 20 percent equity participation in Denel Aviation. BAe Systems is "globalising" its production by way of licensing agreements with organisations such as Denel. There is simply no possibility that Denel could afford the vast sums required for research and development to develop a niche in the international armaments market. Denel's relationships with BAe Systems obviates such expenditures. BAe Systems has seconded personnel to the South African Department of Trade and Industry to supervise the offset programme. As the Denel report and press announcements make abundantly clear, Denel stakes its hopes of survival on export markets. BAe Systems is seen as the conduit into these markets. The collapse of Denel's expectations of survival through BAe Systems would undoubtedly be but one consequence of the cancellation of South Africa's R32 billion armaments acquisition programme. The Anglican Church: The repeated stance of the Anglican Church (and also the South African Council of Churches) since at least 1990 has been to call for a total prohibition on exports of armaments from South Africa, and for the conversion of Armscor and Denel to peaceful purposes. The reasons for this position have been that post-apartheid South Africa should be internationally committed to the promotion of human rights and peaceful resolutions of conflicts, and that the subsidies paid to maintain an economically unviable armaments industry divert public resources away from socio-economic upliftment. The Cameron Commission of Inquiry into Armscor of 1994/95 declared that whilst it had sympathy for this stance, it accepted the assurances of President Nelson Mandela's government that South Africa would pursue a "responsible arms trade policy." Sadly, the Cameron Commission has, with hindsight, proved to have been hopelessly naïve. There is no such thing as a "responsible arms trade policy." The international armaments industry, including Denel, is an industry
out of control. To paraphrase Anglican Bishop David Beetge: how does one tell a mother that the Denel-made bullet or shell which killed her child provided someone with a job? The families and employees of Denel's Somchem subsidiary near Somerset West are now providing reports of personnel and environmental abuses, and of complete disregard for safety standards. The residents of Rooi-Els after lengthy litigation were eventually successful in forcing the closure of a Denel warhead testing facility that, they claimed, was contaminating their community's water supply. The involvement of European governments: Transparency International reports that corruption in the "third
world usually originates in the first world." In addition, it
declares the armaments industry to be the industry most prone to corruption.
The testimony of Chippy Shaik on October 11, 2000 at the Parliamentary
Standing Committee of Public Accounts hearings referred several times
to the government-to-government nature of the acquisitions. He said
that foreign embassies provided much of the impetus to the R32 billion
armaments acquisition proposals and tender processes, and declared: The package was government-to-government with tenders provided by
the respective embassies. There were government commitments to the
pricing structures, and also government undertakings of responsibility
to perform the offsets.
The complicity of western governments in creating and arming Saddam Hussein as dictator of Iraq is one of the most sordid episodes of the past 20 years. They supplied Iraq with huge quantities of weapons for use against Iran. President Jacques Chirac was so heavily involved that he was nicknamed in France as Monsieur Irak. President Chirac is now under investigation in France for municipal irregularities whilst he was Mayor of Paris. The Scott Report and the Matrix-Churchill case highlighted the duplicity of the British government. The Germans were similarly very heavily involved. The massive expenditures bankrupted Iraq. Saddam Hussein then invaded Kuwait in an attempt to acquire Kuwait's financial resources, and the Gulf War of 1991 followed. Economists Allied For Arms Reduction has been in correspondence with the British High Commission on several occasions over the past six years to object to the British government's promotion of armaments sales to South Africa. In particular, we drew attention to the economic absurdity that expenditure of R30 billion on armaments would result in offsets worth R110 billion to create 65 000 jobs. The British component of these offsets were publicly declared during Prime Minister Tony Blair's visit to South Africa in January 1999 to be worth R40 billion. Our letter to Mr Blair drew a response on his behalf that "South Africa has the right to take its own decisions on its defence requirements and secure maximum job creation through industrial participation programmes." Similarly, during Swedish Prime Minister Goran Persson's visit to South Africa in November 1999, his special advisor Roger Hallhag praised South Africa's offset requirements as "brilliant." When pressed hard, Hallhag conceded that offsets are prohibited in civil trade arrangements in "first world countries" because of the propensity for corruption, but attempted to justify their use in "third world countries". A former German ambassador to South Africa was the writer's houseguest in early 1996. Inadvertently, he let slip that the German government was determined at all costs to win the tender for corvettes. Having been excluded from the corvette programme during 1994/95, Germany suddenly came back into consideration following the intervention of Deputy President Thabo Mbeki as a result of the German-South African Bi-National Commission. A political scandal continues in Germany regarding former Chancellor Helmut Kohl and the German armaments industry. Conversion and closure of Denel: It has been conclusively shown by defence economists that the armaments
industry is a non-productive application of financial resources, most
especially in "developing" countries such as South Africa.
In his book The Overburdened Economy, Professor Jeff Dumas of the
University of Texas writes: military-orientated activity is undoubtedly the pre-eminent example
of distractive use of resources. Both military forces and their entire
apparatus of support systems absorb huge amounts of virtually all
categories of productive resources. Resources used in the fighting of wars are obviously employed in distractive activity. But what of the resources used in preparation for wars? A fighter bomber, a nuclear warhead, a missile, a submarine, are not consumer goods. They do not add to the present material standard of living. They also do not enhance the economy's capacity to produce, and so do not augment the future standard of living. In a developing country desperately trying to build an industrial base and improve agricultural productivity, what is needed is contributive investment: increased education of the labour force, improved health care, an expanded transportation and communication system, and more and better production capital. Present living standards have to be improved. Future capacity to produce has to be strengthened to help these nations out of poverty and give them a chance to make development a self-generating and self-sustaining process. Another critical resource in very short supply in less developed countries is a highly educated, skilled labour force. Yet much of this type of labour is diverted into the noncontributive sectors [of military spending].
Economists Allied for Arms Reduction, during the Cameron Commission of Inquiry of 1994/95, offered the expertise of its overseas associates in converting the assets of Denel to peaceful purposes, and of recovering as much as possible of the public assets which have been expended on South Africa's parastatal armaments industry. That offer was ignored at the time, but still holds. Had the South African government applied a conversion strategy at that time, the value and utility of those assets would have been considerably greater than is likely now given the inevitable obsolence of tools and equipment. Nonetheless, some R4 billion of public assets is tied up in an organisation that is economically unviable. Concerns will inevitably be raised about the employment of Denel staff which, as of March 31, 2000, numbered 11 090 people. These are, generally, well educated personnel, who should be the last people in South Africa to shelter under subsidised and protected employment. The Denel report declares that the staff pension and provident schemes were valued per December 1998 at R1.947 billion. This will more than amply fund retrenchment packages. Moreover, their retrenchment could open new opportunities to apply their technical skills to better and economically more productive purposes. Recommendations: 1. The cancellation of South Africa's R32 billion armaments acquisition programme is imperative, given the scale of corruption now being exposed through the Parliamentary Standing Committee on Public Accounts and other investigations. 2. The disbandment of Denel is a logical progression. An independent audit of Denel's assets is necessary, and should include international authorities such as the Bonn International Conversion Centre. Recovery of public assets and their conversion to peaceful purposes should be urgently undertaken. 3. That thorough and transparent investigation is undertaken into
the roles of the British, 4. The document entitled "The Betrayal of the Struggle Against
Apartheid" dated September 28, 2000 quoted from the executive
summary of the United States Senate investigation into BCCI Bank,
as follows: "BCCI's unique criminal structure -- an elaborate corporate
spider-web with BCCI's founder, Agha Hasan Abedi and his assistant,
Swaleh Naqvi, in the middle -- was an essential component of its spectacular
growth and a guarantee of its eventual collapse. The structure was
conceived by Abedi and managed by Naqvi for the specific purpose of
evading regulation or control by governments. It functioned to frustrate
the full understanding of BCCI's operations by anyone.
Terry Crawford-Browne
Dr Gavin Woods Dear Dr Woods The Auditor General's Report I refer to my document handed to you entitled "The Betrayal of the Struggle Against Apartheid." Given the connections between Denel and the armaments acquisition process, I now provide a further document entitled "Denel: An Industry Out of Control." I consider the analysis of allegations referred to me by my sources to be even more serious in light of the crises in the Middle East. May I refer you to the recommendations on page 11? Unless I hear from you to the contrary, I propose again to release this document to international human rights organisations and to the media. Yours sincerely Terry Crawford-Browne |
