· Very disproportionately located in the Gauteng metro areas, and
· Characterised by concentrated ownership, with four companies accounting for 90 per cent of output.

The defence industrial participation projects will aggravate the dichotomies in the economy and not narrow them. Furthermore, to the extent they mobilise local capital into a fairly capital-intensive sector, they will actually limit employment creation.

In the event, reports suggest that the Industrial Participation programmes will actually increase the capital intensity of the sector. Estimates suggest that the cost will come to R1,7 million per job (Batchelor 1998) – this is about four times the current capital intensity of the defence sector and significantly higher than other highly labour intensive sectors where jobs can be created at considerably less than R100 000 per job.

Union shop stewards in the defence industry report that the development of industrial participation programmes at the political level makes planning difficult for both labour and management. As a result, they cannot maximise positive spin-offs from the procurement programme.

Finally, the defence industry remains significantly export oriented. But military exports are obviously more subject to political and economic instability than most other products.
In sum, much of the benefits from industrial participation programmes are expected to go into a stronger defence industry. In the absence of a more explicit strategy for ensuring a diffusion of skills and growing backward and forward linkages to the civilian economy, this concentration is likely to aggravate economic and social divisions. Furthermore, it exposes the economy as a whole to the risks associated with the defence industry. Finally, it seems likely to divert investment resources into a relatively capital-intensive sector.

The impact on the social wage
The arms procurement programme effectively shifts spending from the main social services and the criminal justice system to defence. That change will affect the productivity of communities and the labour force in general, which will have significant implications for the long-term growth in employment. The implications for the social wage are aggravated by the exchange-rate risk.

According to the 2000 Medium-Term Budget Policy Statement, defence spending rose from 6,7 per cent of total spending in 1999/2000 to 7,5 per cent in 2000/1, and will stabilise at 7,7 per cent for the next three years. (Department of Finance 2000b, Table 5.2, p. 66) Defence will grow by 8,5 per cent a year over the period, compared to 7,6 per cent for expenditure as a whole, and only 6,6 per cent for the main social services and the criminal justice system. (calculated from, Finance 2000b, Table 5.1, p. 65)

It is instructive to compare this pattern of expenditure with the priorities officially set in the Budget Policy Statement:

As part of the 2001 Budget process, the Ministers’ Committee on the Budget, the Budget Council and Cabinet have given in-depth consideration to Government priorities and medium term spending options…

This review identified the following critical areas:

· Maintenance, rehabilitation and investment in economic and social public infrastructure

· Targeted interventions aimed at improving the efficiency of the criminal justice system

· Continued emphasis in the social services on improving the effectiveness of service delivery and strengthening the distributional impact of spending, while targeting additional expenditure at critical maintenance and operational needs

· Provision for the impact of HIV/Aids in welfare expenditure, public health and other services

· Programmes aimed at accelerating employment creation. (p. 63)

In short, it appears that one of the fastest-growing areas of the budget, namely defence, was not identified as a priority.

To illustrate the distortions introduced into government development strategies by the procurement programme, and the implications for job growth, consider the figures provided in the 2000 Budget Review on expenditure for "poverty relief and job creation." According to Table 6.2, total spending on these programmes will come to R5 billion between 1999/2000 and 2002/3, as compared to R43 million for arms procurement. (Department of Finance 2000a, p. 144)

An unexpected deterioration in the exchange rate could lead to even more severe implications for the social wage. Some 85 per cent of the package is denominated in foreign currencies. The divergence in estimates of costs for the arms package – ranging from R30 billion in real terms to R43 billion in current rand – underscores the resulting importance of the exchange rate in determining the cost in rand. But the Medium-Term Budget Policy Statement allows an annual increase of only around 1 per cent over inflation for the next three years. That is far less than the depreciation of the rand in the recent past.

The risk of depreciation is underlined by some of the cost estimates produced in 1998, when the package was first explored. Cilliers then came up with exchange-rate estimates based on a long-term depreciation of 5 per cent a year – leading to a rate of R7,76 to the dollar in 2006. (Cilliers 1998)

Even at current cost estimates, it is clear that the armaments programme is absorbing enough of the budget to place strict limits on developmental spending. Looking at the MTF, the budget has protected infrastructure and economic spending, to a degree. But the big social services, which are crucial for development, will grow less than the population for the coming three years. That will have long-term effects on the broader social and economic conditions required for employment creation.

Skills development
As noted above, the defence industry absorbs a disproportionate share of high-skilled labour. It is alleged that the industrial participation programmes do not include training or employment-equity requirements. (Batchelor 1998) There is no overall training programme for the defence industry, which is split amongst several SETAs. Furthermore, the secrecy surrounding the defence industrial participation plans makes it difficult for SETAs to include projects in their planning exercises.

This situation will presumably limit the extent of broad-based training in the industrial participation programmes. Currently, however, the skills in the defence sector are monopolised by white men. In the absence of systematic and coherent training and employment equity programmes, this situation will persist for the foreseeable future.

Employment in the State sector
Agreements reached recently at the Public Service Job Summit note the importance of the public service as a source of employment. It accounts for 20 per cent of formal employment. To the extent expenditure goes into the labour-intensive social services – especially education, health and policing – it will increase employment substantially. In contrast, the current arms package shifts expenditure away from personnel expenditure. This shift comes at a cost in terms of public-service jobs.

The loss is clear within defence itself. The procurement programme forms part of a plan to raise the share of expenditure on equipment to 30 per cent of defence spending. The Department of Defence anticipated that the increase in the capital budget would be achieved through the rationalisation of 30 000 personnel over 3 years. In effect, the procurement project in itself marks a shift toward a more capital-intensive defence force. While this may be appropriate from a security standpoint, it cuts formal jobs at a time of extraordinarily high unemployment.

It is also unclear how many jobs will be created in industries other than defence, the nature of the investment in those sectors, and the nature of the jobs created. How these investments link into a new growth path and industrial policy are unclear.

Summary and conclusions
Government has stated that the decision to procure arms on the current scale arises primarily from strategic considerations, not from a desire to maximise employment. COSATU feels that this decision did not adequately look at the broader economic, social and employment costs. It takes an inappropriately narrow view of national security, underestimating the importance of ensuring greater employment and equity as the basis for a more peaceful and dynamic society. It also fails to appropriately assess the opportunity costs against the objectives of a developmental state which include reducing poverty and inequality, and meeting developmental targets.

In any case, whatever the security considerations, in light of the opportunity costs, it is clearly inappropriate to justify the arms deals in terms of job creation. If we as a nation are serious about employment, we must look much harder at ways to ensure growth in relatively labour-intensive sectors, such as food and food processing, clothing and textiles, tourism and other services. We hope that the sector job summits, planned to take place in the course of the coming year, will contribute substantially to the development of such a development strategy. That should obviate the current, misguided dependence on risky arms procurement packages as a driver for job creation.

Recommendations
· Given the national importance of the issues, both in terms of accountability and expenditure, this should be regarded as a preliminary exercise. If the channelling of resources is found to be problematic and the opportunity costs are found to be high, there should be a multi-disciplinary parliamentary enquiry by the relevant committees.

· In the spirit of the Promotion of Access to Information Act, all relevant information should be made available to interested parties. This should include detailed presentations to NEDLAC and parliament.

· Parliament should review the contracts and assess whether they are justified.

· The contracts should be reviewed for flexibility and exit possibilities.

· The Money Bills Amendment procedure allowing Parliament to amend the budget need to be urgently introduced to allow oversight into these and other matters.

· Further recommendations should be based on the findings of the above, using the processes set out. Should further hearings or inquiries take place, COSATU will consider making a more detailed input.

References
Batchelor, Peter. Guns or Butter? The SANDF’s R30 Billion Weapons Procurement Package. 1998. IDASA Budget Briefs. Cape Town.
Cilliers, Jackie. 1998. Defence Acquisitions - Unpacking The Package Deals. ISS. Johannesburg.
Department of Finance. 2000a. Budget Review. Pretoria.
Department of Finance. 2000b. Medium Term Budget Policy Statement. Pretoria.