SOUTH AFRICAN CHAMBER OF BUSINESS
Counter trade (Arms Contract Hearings)
SACOB represents some 40 000 businesses throughout South Africa both large and small. Although it has taken a peripheral interest in the armaments counter trade negotiations and has held a meeting with one of the counter trade negotiators (Mr. Jayhendra Naidoo 22 March 2000), it has not expressed a view on the issue. It is not really within the competence of a business body such as SACOB to offer an opinion on the need for sophisticated armaments of the type listed in the negotiations. Suffice to say that peace is not built on sand and that it is necessary for South Africa to have a defensive capability sufficient to defend itself and to safeguard its legitimate interests.
SACOB has been invited to make input to the Parliamentary Committee on Trade and Industry on the subject of counter trade. This follows on certain allegations of irregularities associated with the 1998 armaments counter trade deals variously estimated at R40 to R30 billion.
This memorandum will make no comment on those arrangements and allegations. Instead it will focus on the shortcomings of counter trade and the principles under which such transactions should be conducted.
2. Counter trade
Counter trade is a term that covers various forms of barter transactions broadly outlined below: -
Barter – the straightforward exchange of goods for goods (e.g. the barter deal entered into between S.A. and Rumania in the early 80’s involving ammonia fertilizer for maize).
Counter purchase - a device used by developing countries whereby suppliers to a country are required to buy a certain amount of goods from that country for every amount they sell to it.
Offset – a more subtle form of counter purchase in which the seller guarantees to use goods and services from the buyer country in the final product.
Switch-trading – a sophisticated form of barter in which several countries are linked up in a way that allows them to swap goods more freely than they could under a bilateral arrangement.
Buy-back – an arrangement whereby a company providing equipment to a capital project takes its payment in the form of product produced by the project.
A study done by the American International Trade Commission in 1985 showed that armaments accounted for 80% of all the counter trade transactions undertaken by 500 of America’s largest companies. However the practice has grown beyond military hardware. Surplus capacity in aircraft, motor vehicles, chemicals and electronics has led manufacturers to offer counter trade as an option in their business dealings with developing countries. Although most developed country Governments frown on counter trade (believing it to be contrary to the spirit of the open market trading system), debt service problems, depressed commodity prices and fluctuations in exchange rates have encouraged its growth.
The nature of the recent S. A. armaments deal would appear to fall into the ‘offset’ category.
Counter trade conceals prices and thus offers scope for corruption. South Africa features in Transparency International’s ‘corruption index’ with a score of 5 out of 10 (1). To be sure this is well above the 1 out of 10 score for Nigeria. But it suggests both to domestic and foreign investors that there is a fifty percent likelihood of some odd / corrupt practice featuring in any business transaction.. Counter trade practices must accordingly be handled extremely circumspectly.
Counter trade also distorts markets and has a ‘beggar- thy- neighbour’ consequence as competitors are compelled to follow suit.
Specifically there are three drawbacks to the practice of counter trade, namely it is inefficient, it is complicated, and it is risky.
Inefficient. A 1986 study by the World Bank (2) of Indonesia’s counter trade policies showed that only 12 % of the ± $100 million paid in commissions for counter trade deals found its way back to Indonesian exporters. The bulk of commissions went to brokers who arranged the deals. When other hidden costs are added, such as finding a buyer and insuring to cover the risks of non – delivery, counter trading becomes an unprofitable way to trade.
Complicated. Too often the only participants to profit from a transaction are the intermediaries. One quoted example is a deal involving Caterpillar (an American construction equipment company) that sent machinery to Venezuela, which sent a load of iron ore to Romania, which in turn sent some men’s suits to Britain for cash which was used to settle the Caterpillar account.
Risky. When a deal involves a highly price-volatile commodity such as oil the risks can be enormous. The commodity price can move considerably before a buyer can be found.
In short therefore SACOB would see counter trade as a last resort measure to be adopted under conditions of extreme economic duress.
3. Defence Procurement Deals.
The end of the cold war has seen a sharp reduction in world military expenditure from $960 billion in 1988 to $700 billion in 1998 (3). The USA, Japan, France, Germany and Britain account for 60% of that expenditure. Whether or not this has led to procurement advantages to armament buyers is debatable, though the stampede by potential armaments sellers to secure a slice of the South African armaments market suggests that it is a buyers market. This in turn would present opportunities to make demands on armaments sellers outside a normal commercial transaction - counter trade.
In any counter trade transaction consideration must be given to the impact such a transaction will have on South African industries affected either as suppliers or as users of the transacted product/service. For example in the case of the 1982/83 ammonia/maize barter there was much discontent among farmers who were given no choice but to use ammonia as a fertilizer. Similarly in the case of weapons procurement it could be argued that the country’s own armaments industry was allowed to collapse in favour of procuring from outside. Thus if counter trade destroys or harms a specific industry, its cost must be taken into account when assessing the possible benefits that might accrue.
Bearing in mind the shortcomings of counter trade transactions and acknowledging the opportunities for officials and politicians to be ‘bought’, there is a need for government to devise a procedure to be followed. Proper and transparent supervision must be a prerequisite in any such procedure.
In short, future procurements of this nature must be governed by an accountable process that must do no more and no less than constrain the actions of the non-elected (officials) and submit the power of the elected (politicians) to the scrutiny of the public. In addition, in order to build and maintain a high level of economic motivation in the business sector, there must be an assurance that the opportunities arising from government’s procurement measures and the policies associated with such procurement are even-handed and based on the principles of equal opportunity.
Acknowledgements
(1) Business Day. 25 October 1999.
(2) An analysis of Indonesian trade policies: counter trade, downstream processing, import restrictions and the deletion program / Bruce Fitzgerald. World Bank 1986.
(3) Stockholm International Peace Research Institute Year Book 2000.
Johannesburg 31 January 2001