Defence Procurement Package Investigation: Second Committee Report

Meeting report

MINUTES
The Committee considered its 14^th Report on the arms procurement package, issued in October last year, and discussed the way forward for issuing a follow-up report on the matter.

Mr Vincent Smith (ANC) summarised the process which had preceded this meeting. A subcommittee/drafting team had been put together to consider input from all political parties. The parties represented in this drafting team were the Democratic Alliance (DA), the United Democratic Movement (UDM), the Inkatha Freedom Party (IFP) and the African National Congress (ANC).

Mr Smith said it was clear to the drafting team that initial gaps and differences between the parties were big. He noted that on the eve of the last parliamentary recess, the SCOPA Chair, Mr Woods, had presented a one-pager to capture all the views of the Committee and all the principles in this matter. However, neither the ANC nor the DA were successful in "selling" this one-pager to their parties. Only the UDM found the contents of the one-pager acceptable.

Subsequently the ANC had tabled their own report and had advised the drafting team that parties should be allowed to interact with the ANC on this report. The Chair, Mr Woods, then said that he had interacted with members of the working group and had found no need for the drafting team to meet again.

Mr Smith recommended that the document drawn up by the ANC be the basis for discussion in the meeting. If the Committee felt there were legitimate views, these could be included in the report. He emphasised that they would make it a Committee report, incorporating all views.

The Chair said that he had considered the ANC report and had a lot of difficulty with it and could not support it as it stands.

Ms R Taljaard (DA) said that her party had initiated a parallel process to resolve the question of minority reports. She had approached the Speaker, who has elicited a legal opinion (awaited) from Mr Fink Haysom on the inclusion of minority views. Ms Taljaard felt that there are key areas of disagreement on the report. She did not agree that the ANC report was a base document to work on.

The Federal Alliance argued that they needed clarity on whether a minority view would be reflected or if there would be a separate minority report.

Mr Masithela (ANC) replied that the ANC would concede on a matter if they were convinced of a particular viewpoint of another party but they would not 'cake' the views - they would not have the varoius view presented but one SCOPA view.

Mr Holomisa (UDM) said his party was unable to support the report if it would not reflect the different views of parties. He also wanted clarity on the investigation brief to the three investigating bodies. He asked that the Committee go through the document to see where their differences lay.

The Chair posed the question: how can these differences be bridged?

The ANC said they wanted to engage and debate on issues in the report with other parties.

Mr Smith said that there could be no debate on whether or not there would be a minority report. The ANC only wanted to entertain minority views. The ANC was not ashamed to use their majority and a willingness to entertain minority views was not a sign of weakness on their part.

Mr Smith invited the UDM for a bilateral with the ANC and thereafter a report could be presented to the Committee which could then be tabled. A date for this meeting should be set.

Ms Taljaard asked the ANC to clarify how it understood "minority views".

Mr Makwetla (ANC) proposed that the Committee reconvene on this issue on 30 May to finalise the report. This would give parties sufficient time to engage with the ANC on the report.

The process on the 30 May would be: a motion would be put forward that the ANC report be adopted as a draft report. The Chair would then table whether there is agreement or not and whether there are amendments.

Ms Taljaard requested members to study the correspondence between Mr Bantu Holomisa and the Speaker and furthermore reiterated that the ANC should clarify what they meant by minority views and how these views would be accommodated.

Mr Doidge (ANC) said that the role of the Chair should also not be undermined as the Chair is obligated to produce a report to the National Assembly. Mr Woods therefore needed to indicate what his role is.

The meeting concluded with Mr Smith (ANC) inviting the UDM and any other interested parties to bilateral meetings with the ANC to discuss their report.

Appendix 1:
Draft Second Report of the Standing Committee on Public Accounts, dated May 2001:

A. Introduction
In its Fourteenth Report for 2000 to the National Assembly, the Standing Committee on Public Accounts placed before the House matters relating to the Strategic Defence Package procurement. The Committee indicated that it would be presenting a further report on these matters to the House early in 2001. This report would therefore cover the following areas in particular:
* Progress with the investigation.
* Interaction with the Ministers.
* Engagement with correspondence from the Leader of Government Business.

Since the adoption by the House of the Committee's Fourteenth Report on 3 November 2000, there has also been extensive interaction between the Committee, the House and the executive, as well as a progress report (First Report for 2001) tabled in the National Assembly on 4 April 2001. This interaction raised matters relating both to the substance of the matters raised in the Fourteenth Report as well as issues relevant to interaction between the executive and the legislature. The Committee reports on these matters, as follows:

B. Joint Investigating Team
On 7 February 2001 the Committee met with the Joint Investigating Team. During this interaction the latter presented a written report and answered questions posed by the Committee. The following emerged from this interaction:

1. An investigating team comprising of the Auditor-General's Office, the Public Protector and the Investigative Directorate of Serious Economic Offences (IDSEO) was formed to investigate the matter after the exploratory meeting convened by the Committee on 13 November 2000.

2. An investigation charter, giving a clear description of the investigation team's functions, modus operandi and other relevant detail pertaining to the investigating team, was compiled by the Auditor-General, after among the above agencies had held meetings on 16 November and 1December 2000.

3 The skills, legal mandates and resources of the different agencies have been effectively facilitated. The investigating team currently consists of the following core members which were allocated to the task team:
(a) Three members from the Auditor-General's Office (two chartered accountants and one
advocate).
(b) Five members from IDSEO/Scorpions (two advocates and three investigators).
(c) Two senior investigators from the Public Protector's Office (one advocate and one attorney one of them with military expertise).
Additional resources will be made available from the different agencies as and when required.

4. The Joint Investigating Team has assured the Committee that their team commands all the skills and legal mandates needed to ensure a comprehensive and credible investigation.

5. The following expertise will be contracted to assist with the investigation:
(a) Chartered accountants and auditors.
(b) Forensic auditors/accountants.
(c) Legal expertise.
(d) Technical experts (naval and aeronautical).

It has been decided to make use of outside audit firms with the necessary skills and international contacts. The cost of these contracts will be borne and recovered by the Auditor-General.

6. Broad Framework of Investigation
(a) Investigation of alleged irregularities
* Documentation from the various departments, Parliament and cabinet has been requested.
* The statutory records of 68 entities have been requested.
* Three audit firms of specific companies have been summonsed for documentation.
* Some informal interviews have already been conducted.
* One formal questioning has been conducted.
* The bank statements/information of 24 entities and individuals have been requested.

A proposal has been received from an audit firm with respect to the compilation of company structures, the flow of funds between bank accounts and the capacity of the entities.

(b)Other areas to be investigated
* Cost to the state of the Grippen and Hawk deals.
* Selection of prime contractors for the LIFT programme (Hawk).
* Selection of subcontractors for all the programmes.
* Review of Defence/Armscor procurement procedures and regulations.
* Review of all final contracts (NIP and DIP).
* Independence of roleplayers.

In view of the nature and extent of the investigation, the Joint Investigation Team has agreed to produce a report to Parliament towards the end of July 2001.

The Committee is satisfied that the forensic investigation is under way, and the Committee will continue to monitor its progress through regular interactions with the Team. The Committee expresses frill confidence in the capacity and integrity of the three agencies comprising the Team. The Committee's inability to issue an investigation brief, flowing from its Fourteenth Report, is because of the constitutional provisions, which stipulate separate and independent legal mandates for each of the agencies.

Given that the Team will comprehensively investigate the areas listed above, the Committee will report on the areas not specifically covered by the Team.

C. Inclusion/exclusion of Special Investigation Unit (SIU)
The exploratory meeting of 13 November decided on a follow-up meeting. This meeting never took place. The views therefore contained in the letter from the chairperson of the Committee to the President, dated 8 December 2000, requesting a proclamation for the inclusion of the SIU headed by Judge W Heath, was arrived at without due consideration by the Committee of the final composition of the Team. Although this request had the support of the Joint Investigating Team, it was made without the Committee having applied its mind to the matter or to the constitutional court finding relating to the SIU.

The Committee, having considered the contents of the Fourteenth Report, as well as subsequent events and interactions, resolved on 28 February 2001 that there was no recommendation to include the SIU in the Team. This view is supported by the Parliamentary Law Advisers' memorandum of 8 January 2001 and confirmed in their memorandum, dated 13 March 2001, as follows:

"The report envisages that a chosen investigation body will undertake the investigation, but there is no indication that that body should necessarily be the Unit or include the Unit".

The Team indicated to the Committee that it commands the necessary skills, resources and legal powers to conduct the current phase of the forensic investigation it is engaged in. The Committee reaffirms the view expressed in the Fourteenth Report to the House that the best combination of skills should be utilised in conducting the investigation. Should the Team indicate the need for the appointment of an SIU at some later stage of the investigation to recover funds lost to the State, the Committee would be supportive of such a request. This is consistent with the view expressed by the Speaker in her letter to the Leader of Government Business, dated 29 January 2001:

"...the Committee may pursue this and make a specific recommendation to the Assembly''.

D. Interaction with members of executive
Interaction between the Committee and members of the executive dealing with the Strategic Defence Procurement, prior to finalising its Fourteenth Report to the House, could have gone a long way towards clarifying various issues raised in that report. A request for such interaction was made by the executive but never brought before the Committee.

On 26 February 2001 the Committee met with the Ministries of Defence, Trade and industry and Finance, and engaged with them at length on the issues raised in the Fourteenth Report.

During this interaction the Ministers outlined the process followed by the Cabinet in arriving at decisions concerning the awarding of prime contracts in the strategic defence procurement. With regard to the awarding of the prime contracts, the Committee wishes to place on record that there was never any intention at any stage to accuse the executive of being involved in dishonesty and/or corruption.

The Ministers emphasised that the Cabinet was not responsible for, nor involved in the awarding of, sub contracts. The Cabinet's commitment to deal with any possible irregularities was reinforced by the Ministers' submission at the meeting:

"If there were attempts by officials to try and influence subcontracting, we ask the Auditor-General to look at that".

The Committee concludes that the equipment price as contracted in September 1999 was US $4,77 billion, plus escalations based on the industry-wide norm of 2.5%. Apart from the contract price, there is also the adjustments to payments arising from exchange rate fluctuations.

The figure of R43 billion stated in the Budget Review is one of a number of projections of possible future costs.

The fact that the government budgets on a cash basis and not on an accrual basis, explains why the cost should be reflected as R30,3 billion and that any attempt to affix any possible future cost would be merely one of a number of projections.

The Committee requested the Portfolio Committee on Trade and Industry to evaluate and report on the issues relating to guarantees of national industrial participation and, to indicate whether it is satisfied that the targets will be met. The resultant report from that portfolio committee is attached.

E. Letters from Leader of Government Business
Many of the issues raised in the letters from the Leader of Government Business were revisited during the interaction with the Ministers. Issues identified for further scrutiny have been referred to the investigation team. As regards the general characterisation of the international arms industry being corrupt, the Committee restates its position that there was never any intention to taint the Cabinet as being prone to corruption and dishonesty. Any inference in that regard was unintentional and is regretted.

It must be noted that at no stage did the Committee (as a committee) consider the utilisation of any international forensic accounting facility. Engagement with any such facility with the aim of it participating in the investigation was outside the Committee's mandate.

F. Documentation
During the period immediately prior to the Committee finalizing its Fourteenth Report, a vast volume of documentation pertaining to the Strategic Defence Procurement was made available to the chairperson of the Committee.

The documentation was made available on the following conditions:
1. The documents were to be kept at the Office of the Auditor-General.
2. The documents were not to be removed from the above Office.
3. The documents were not to be photocopied.

The chairperson indicated to members of the Committee that the documentation was available under the conditions outlined above.

However, due to the fact that the National Assembly was in recess at the time, the majority of Committee members did not have sufficient time to scrutinise the documentation before the Committee finalised its Fourteenth Report.

Prior to the Ministers appearing before the Committee, it became apparent that this vast volume of documentation pertaining to the Strategic Defence Procurement was in the possession of the chairperson. In terms of the Rules of the National Assembly, the Speaker intervened to ensure that the documentation be surrendered to the custody of Parliament, and a process was facilitated to allow all Committee members access to this documentation.

G. Conclusion
The Committee will continue to exercise its oversight role, but should any further evidence pertaining to the arms deal come to hand, this evidence will be placed before the investigating team for action. The Committee will submit its final report to the National Assembly after the investigating team has completed its work.

Appendix 2:
MINORITY REPORT SUBMITTED TO THE SCOPA ON THE STRATEGIC DEFENCE PROCUREMENT REVIEW AND SUBSEQUENT EVENTS

We are unable to associate ourselves, or our parties, with the recommendations and comments by the majority of the members of the SCOPA.

We are of the opinion that the Majority Report is an inadequate response to unacceptable criticism and an attack by the Executive (four key Ministers and the Deputy President) on the integrity of Parliament's key watchdog committee - the Standing Committee on Public Accounts and on the work of the Auditor-General that formed the basis of the 14^th Report.

We believe that the motivation for this constitutionally problematic attack must be questioned.

We believe that the broader constitutional issues that the attack by the Executive, and more particularly the letter of the Deputy President, raises must be addressed by the National Assembly as the integrity of the SCOPA was brought into question.


We believe that the Majority Report will tilt the executive-legislature relationship in favour of the Executive and distort the balance the Constitution envisages. In this respect the Majority Report will add to the marginalisation of Parliament, the key institution in our constitutional democracy. It is for this reason that the SCOPA and the National Assembly must assert its role vis-à-vis the Executive. We believe the Majority Report fails in this respect.

We note with concern the possible intervention by the Executive in the drafting of the Majority Report and the associated constitutional difficulties

We have applied our minds to the criticism of the work of the Auditor
General and SCOPA by the Executive, the ongoing
investigations and the exclusion of the SIU from the arms probe
initiated by SCOPA and wish to submit the following views:

that in their appearance before SCOPA on 26 February 2001 the Ministers of Trade and Industry, Finance and Defence failed to allay or rebut any of the concerns expressed in the 14^th Report of the SCOPA on the substantive matters relating to:

the selection of prime contractors and sub contractors
the choice of the Hawk trainer
the independence of role players
the adequacy of industrial participation guarantees
the adequacy of Department of Defence and Armscor procedures and negotiations
the cost to the State

These concerns of the SCOPA remain and the Committee must
continue its work on these matters with other Committees of the
National Assembly including Finance, Defence, Trade and Industry and
Public Enterprises.

that the 14^th Report of SCOPA expressed a desire that the SIU form part of the Joint Investigating Team and that the unit's powers and functions remain relevant and desirable for the ongoing investigation

that the Joint Investigating Team should keep Parliament informed about their approach to the investigation and submit progress reports in this regard as envisaged in the 14^th Report of SCOPA.


We deal with these issues in more detail below:


MINISTERS REACTION TO THE 14^TH REPORT

The Committee has given careful consideration to the points made and positions taken by the Ministers of Finance, Defence, Trade and Industry and Public Enterprise at their press conference on 12 January 2001 and the 26 February 2001 appearance before the Committee.

In as far as the positions relate to the Committee's 14^th Report, the Committee is satisfied that these were not sufficient to address enough to charge any of the concerns raised, questions asked, observations made and recommendations made in that report and in the Review of the Strategic Defence Procurement conducted by the Office of the Auditor General.

In terms of the specific substantive issues raised by the Ministers the Committee reports as follows:

Selection of Prime Contractors and Sub Contractors

The Committee believes that it is problematic for the Ministers concerned to attempt to delimit their accountability for decision making entirely to the realm of primary contractors. Evidence is clearly emerging that shows a degree of government involvement in sub-contracting, and possible quid pro quo links between prime contracts and sub-contractors. To aim to limit the decision-making role and responsibility in this manner is to reduce the scope of executive accountability.

The Ministers make three key comments that require attention in evaluating their contention that Government had no role to play in subcontracting.

That requirements for Black Economic Empowerment did play a role in the RFO/Ps but that these considerations were later discounted when selections were made
That the prime contractor is responsible for delivering a functioning system (including all subsystems) without government involvement at this interface
That the only government involvement at the primary-sub contractor interface is through the civil servants that were responsible for the technical side of the deal (which was headed by the Chief of Acquisitions, Mr Shaik).

While the Ministers make a compelling case that Government should not be involved in subcontracting as there are two different legal liabilities at stake here - that between the primary contractor and the government, on the one hand and that between the primary contractor and the chosen subcontractor, on the other, the Committee is not convinced by the Ministers' arguments that government did not play a role in the subcontracting dimensions of the SDP - particularly given the role of BEE concerns in the initial RFO/Ps and the relative prominence of the technical side in the negotiations.

These concerns of the Committee are closely linked to the insufficient checks and balances to guard against conflicts of interest and the prominent role played by the technical side of the civil servants in the negotiating team in terms of the subcontracting level. Thus although there are two distinct contractual relationships (government and prime contractor and prime contractor and subcontractor) to somehow allege that government cannot be held accountable for subcontracts or to pretend that a solid Chinese wall separated the two, given that key players in the technical teams could have manipulated the process, is untenable.

The Hawk Trainer

The key question here is the fact that the Ministers chose to
justify a deviation from procedure and their decision to opt for
the Hawk/Gripen consortium as opposed to the Aeromacchi on
two key grounds - one of which was also repeated by the
President in a recent interview - namely:

the technical arguments that graduation from the Hawk to the Gripen would be more feasible than from the Aeromacchi to the Gripen, and
that the downstream DIP benefits were more attractive and more stable from an implementation perspective in the hands of the successful bidder.

The Minister of Trade and Industry made specific reference to the fact that the decision makers - the Cabinet sub-committee therefore - had to take into account the specifications and rules in the RFOs and take this into account when making their decision. As there was a deviation in the Hawk/Gripen case from a costed to a non-costed option the Committee believes that this area must receive further attention above and beyond a mere deconstruction of the pricing and financing aspects to the LIFT contract which are themselves compelling given the size of the Hawk/Gripen cost in the overall cost structure of the deal.

The Committee notes the Minister's confidence in stating that he does not believe there was a violation of the RFO/P processes that could result in litigation by losing bidder Aeromacchi: "…the losing bidder can go to court if they so wish".

The Committee believes, however, that further work needs to be done by the Auditor General as to whether the deviation by opting to weight certain criteria (the DIP downstream benefits) at the expense of others (i.e. cost) in the decision making stage constitutes a material deviation from the RFO/P process highlighted by the Minister of Trade and Industry. In addition the Auditor General should consider whether all bidders were given due notice and opportunity that the decision makers were prioritizing DIP criteria over cost and whether they were given the opportunity to alter their DIP proposals before the decision was finally made.

While the Minister of Trade and Industry is correct to highlight that this was a decision by the Ministerial sub-committee that Committee had to work within the confines imposed by the REO/Ps process and the boundaries drawn by the requirements of just administrative action. The Committee therefore believes that many questions remain unresolved with reference to the weight attached to the DIP obligations over cost considerations and about the technical arguments about the ease of the training transition from the Hawk to the Gripen versus the transition from the Aeromacchi to the Gripen. As both these factors are material to an assessment of the Ministerial decision to opt for the Hawk, the Committee will be investigating both these matters further with the assistance of the Office of the Auditor General and the joint investigating team


Independence of Role Players:

In October last year the Committee looked into the processes that led to the evaluation processes for the SDP and the interaction with the Ministers as the final decision makers on Monday 26 February 2001 has left many questions unanswered and the Committee will have to interact with the Ministers concerned in its further Reports to Parliament on the SDP.

Particularly in the realm of the decision-making process and the steps taken to minimize the risks of conflicts of interest the Committee is not satisfied that the Ministers involved in the SDP took all the necessary precautions to guard against problems in this area. The Ministers made a strong distinction between the evaluation process and the decision making process arguing that the very new features of decision making, including the decision to opt for a total package as opposed to an incremental year-on-year acquisition as well as and the distinctive structures of the evaluation teams, International Offer Negotiating Team (IONT), Committee of Directors General and the role of the Cabinet sub-committee itself in decision making ensured that, by the very nature of the complexity and staged approach, no single individual had the capacity to influence the process disproportionately.

The Committee believes, however, that the Chief of Acquisitions played a prominent role, albeit in a complex and institutionally unprecedented negotiating structure, and that its concerns about the pivotal role played by someone who had not sufficiently been subjected to a formal screening of conflicts of interest concerns.

The Committee notes from the comments by the Minister of Finance that the structure of the team itself and its complex nature was the only mechanism of conflict regulation that existed and that in the final analysis Cabinet was the ultimate 'checking mechanism' due to its overall responsibility. The Committee does not believe that this would constitute best practice and registers its concern that a more formalized arrangement was not made to minimize conflict of interest issues.

The Committee believes that while the Ministers are decision-makers of integrity one cannot assume that there was no manipulation of the process early on in the arrangements by key role players. The Ministers were at great pains to point out to the Committee that the decision making process was complex and that a distinction had to be made between the evaluation process and role players and the decision makers.

The Ministers make this statement repeatedly: "In the light of how decisions were made in this matter the only inference that can be made is that the improper influence could only be decisive if it held sway where the Ministers made the decision. Government rejects this with and in the light of the massive amount of information available regards this as a careless statement that government must be allowed to dispel entirely."

In the light of the fact that the Committee's concerns about conflict of interest were insufficiently addressed by the Ministers the concerns around conflict of interest issues and how conflicts could have impacted from the evaluation process straight through to the decision making process itself remain valid. The Committee stands by its previous statement that this matter will need to form part of the investigation currently co-ordinated by the Auditor General.

Adequacy of Industrial Participation (NIP and DIP) Performance guarantees:

The Minster's press release makes the following four points about the performance guarantees:

Standard performance guarantees are set at 5% as part of the NIPP and the SDP negotiated guarantees above that,
The 10% is in line with or exceeds international norms,
A higher performance bond would have created an incentive to build it into the purchasing price, and
The prime contractor assumes liability for the guarantee but it is a consortium that provides the NIPs.

The performance guarantee must not be measures against the size of the NIP but against the loss the prime contractor will make if the NIP is not fulfilled.

The question which the Committee must consider is how this Ministerial argument compares with international norms given the Statement by the Minister of Trade and Industry that the NIP programmes in some 17 countries was analyzed where the guarantee ranged between 2,5% and 10%. The Committee has noted comments made by the Minister of Trade and Industry before the Portfolio Committee of Trade and Industry that the South African industrial participation programme is largely based on the models evolved by Canada, Switzerland, Australia and Abu Dhabi. In addition it appears to the Committee that the preference by the Department of Trade and Industry to opt for specific industrial strategy type investments in based on the Taiwanese model where offset projects are targeted to areas considered "strategic" to economic development. The Committee has further noted that the negotiating team aimed to strike a balance between securing 'big projects' (i.e. the steel mills) and securing adequate performance guarantees.

Having heard the evidence from the Minister about the 10% guarantees, and in the light that international experience shows a degree of variance as to whether the NIP default penalty's size is attached to the contract price, the possible banking of credits of transfer of credits between various contractors and a host of other factors that have a bearing on the functioning of the performance guarantee and credits system which have not been addressed the Committee believes that this area needs further attention. In addition a key factor that has restricted the effectiveness of offsets in other developing countries has been the limited number of commercially viable investment opportunities in those countries for offset opportunities. The Committee has noted the efforts by the negotiating team to secure a 10% penalty - - double the penalty of the stated NIP default policy of government. However, the Committee still believes that the concerns raised in its 14^th Report about the negative impact of possible defaults on NIP obligations in the light of the 10% penalty would substantially diminish the economic benefits that are to flow through the NIPs aimed at ameliorating the balance of payments shock inherent in a foreign exchange outflow of the scope and size of the arms procurement, With the continued consolidation in the global steel market with the increased competition for export markets this brings coupled with the continued downturn in the steel industry, the Committee is particularly concerned at the possible difficulties in securing the steel projects envisaged when the negotiating team was concluding and comparing the NIP offers.

The Committee believes that it is imperative that the Portfolio Committee on Trade and Industry request regular reporting from the Ministry of Trade and Industry on NIP implementation and that the Portfolio Committee on Defence receives similar updates on DIP implementation from the Ministry of Defence.

Department of Defence Armscor procedures and regulations:

The Committee reiterates its concern at the inadequate regulation of conflict of interest in the DoD and Armscor procedures and regulations.

While the Minister of Finance expressed a view that an independent checking mechanism was not required to curtail conflicts of interest because the mechanism and institutional arrangements of the negotiating team and its structure was in itself sufficient and ad hoc in nature - and therefore not requiring special codified measures to regulate conflicts - the Committee remains concerned that in the clear absence of distinct guidelines on conflicts of interest in the ARMSCOR procedures and the structure of the negotiating team, conflicts of interest did have a bearing on the outcome of the deal. The Minister of Finance's argument that the due diligence was built into the mechanism is therefore not convincing. The Committee therefore believes that the Ministers failed to substantiate their criticisms, contained in their press release of 12 January 2001, of the SCOPA's 14^th Report in their appearance before the Committee on 26 February 2001.


Cost to the State:

The Committee finds the Minister of Finance's "Net Present Value" argument insufficient The Committee remains concerned that the R30,3 billion figure quoted at 1999 prices does not give an adequate reflection of the overall cost to the State of the defence deal. The Committee notes the Budget 2001/02 projected cost for the deal of R43bn included in the Estimates of Expenditure. The Committee remains concerned at the fact that the total cost of this deal comprises:

The tender/contract price and the requisite escalation clauses included in the contracts
Statutory and freight costs
Project management costs
ECA premia and escalations
Financing costs for the more favourable cash flows negotiated
An absence of sufficient hedging arrangements

The Committee remains concerned that the R30,3bn figure quoted at 1999 prices does not give an adequate reflection of the overall cost to the State of the Strategic Defence Package inclusive of the factors listed above. The Committee further notes that the Minister of Finance declined to answer questions about the arms deal and its financing in response to questions before the Portfolio Committee on Finance citing that he was to answer such questions at a following meeting with SCOPA. The Committee expresses its concern that the financing and further cost escalation questions received inadequate attention in the SCOPA hearing with the Ministers on 26 February 2001. The Committee stands by its recommendation in its 14^th Report that the cost to the State of the Strategic Defence Procurement Package needs to be investigated thoroughly in a joint sitting between the Committee and the Portfolio Committee on Finance as recommended in the 14^th Report.

The Committee resolves that this meeting will be convened as soon as is practically possible with regard to the programme of the Portfolio Committee of Finance.

The Committee notes that Ministers took strong exception to the following paragraph of the 14^th Report in the hearing on the 26^th February 2001: "The Committee's scrutiny of the documentation presented to it by the various departments, and from which Cabinet made its ultimate decision, indicates that the Cabinet was sufficiently well informed to have made the public aware of the fuller cost possibilities of the deal".

The Committee notes the Ministerial objection to this statement in the 14^th Report but believes, in accordance with the oversight functions ascribed to Parliament and its Committee in the Constitution and the doctrine of the separation of powers, that the Committee was fully in its ambit of responsibility to question the manner in which Cabinet communicated the cost of the deal and the driving factors that could drive future costs upward, to the public in a more comprehensive manner than a mere price tag in Rands at 1999 prices.

THE DEPUTY PRESIDENT'S LETTER:

The Committee has evaluated the matters detailed in the Deputy President's letter of 19 January 2001 to the Committee's Chairperson. with the exception of the Deputy President's position regarding the Chairperson's action in favour of the inclusion of the SIU, which has been dealt with by a majority vote in the Committee, the Committee finds that all other aspects of its report which were challenged by the Deputy President remain relevant and appropriate. The Committee believes that the Deputy President raises significant Constitutional issues which the Committee wishes the National Assembly to address.


RELATED CONSTITUTIONAL ISSUES:

Having confirmed the validity and soundness of its 14^th Report, which is also a report of the National Assembly, the Committee refers to the Ministers and Deputy President's incorrect assertions of incompetence, irresponsibility, dishonesty and dubious motive, which they attributed to the work of the Committee and therefore to the National Assembly itself. The Committee would wish the National Assembly to address this matter. In addition the Committee believes that the Constitutional questions around the Executive's comments on the work of the Office of the Auditor General requires attention.

THE INTERPRETATION ISSUE:

On 27 December 2000 Madam Speaker issued a Statement indicating that: "The Speaker is not aware of any resolution of Parliament or the National Assembly instructing the President to issue any Proclamation regarding the work of the Heath Commission. Any such action would be of dubious legal and constitutional validity".

On 8 January the Parliamentary Law Advisers advised Madam Speaker as follows: "Therefore, in our opinion the Report (as adopted by the House on 3 November 2000) does not amount to a recommendation to the Executive to refer the matter in question to the Unit for investigation (by proclamation under section 2 of the Special Investigating Units and Special Tribunals Act, 1996).

It is however quite clear from the wording of the 14^th Report that it refers to the four bodies to be included in the exploratory meeting and then refers to 'and any other appropriate investigative body should be invited'. Legal interpretation would clearly state that 'any other appropriate body' begs the question 'appropriate' for what purpose? Clearly 'appropriate' refers to the body's envisaged role in the arms probe and therefore the preceding four bodies are logically, by legal implication, 'appropriate' for the broader purpose of the investigation.

The 14^th Report of the Standing Committee on Public Accounts was given a specific interpretation by the Speaker of the National Assembly. This interpretation was subsequently quoted by the Minister of Justice in his recommendation to the President which resulted in the exclusion of the Special Investigating Unit from the forensic investigation called for by Parliament. This narrow interpretation of the 14^th Report has caused difficulty for the SCOPA. Against this historical background to the 14^th Report, legal interpretation and substantive subsequent events clearly show the Committee's intention to have the SIU involved in the probe.

The Agenda of the 13 November 2000 meeting in Pretoria - drawn up by the AG and adopted by the SCOPA meeting without dissent - earmarked a clear discussion and agenda item that dealt with the special areas of interest of each of the agencies and item 9 of the Agenda dealt with 'Area of responsibility of each party in further investigation'

It is clear from the substantive developments that there was a clear intention to include the Special Investigative Unit in the probe and that all subsequent development and the specific contribution which SIU's legal powers would have made to the probe confirm this fact..

According to the Parliamentary Law Advisors advice to the Committee even the ANC's own Resolution, adopted on 28 February 2001 with only ANC members of SCOPA voting in support, inadvertently shows that the 14^th Report did indeed call for the Heath Unit's inclusion and any subsequent attempts to walk away from this intention constitutes a distinct departure from previous SCOPA positions and procedures including a proud tradition spanning more than 8 years of unanimous SCOPA decisions.

It is clear from historical background to the 14^th Report, legal interpretation, and substantive developments pursuant to the exploratory meeting with the four agencies in Pretoria and, ironically, the Resolution passed by the ANC in SCOPA that there was a definitive intent to include the Heath Unit in the arms probe. This substantive interpretation and events at the exploratory meeting in Pretoria led the Chairperson of SCOPA to write to the President, after further being urged to do so by the Joint Investigative Team and the AG, requesting a proclamation for the involvement of the Heath Unit in the probe.

With Parliament having passed the Special Investigative Units and Special Tribunals Amendment Bill and given the continued lack of clarity as to whether the current three agencies have sufficient powers to investigate the arms deal the SCOPA believes that the possibility of including the Special Investigative Unit in the arms probe, after the appointment of the new head, must be considered.

Due to the unprecedented vote in the Committee on 28 February 2001 the majority view within the Committee holds that the 14^th Report in no way expressed in favour of the Heath Special Investigation Unit's involvement in the recommended forensic investigation. As such, the Chairperson's December 2000 letter to the State President on the issue did not represent the view of the majority within the Committee. This situation is a regrettable dimunition of the 14^th Report adopted by the National Assembly.


THE ARMS INVESTIGATION:

Pursuant to the exploratory meeting between SCOPA and the four agencies mentioned in SCOPA's 14^th Report at the Office of the Auditor General on 13 November 2000 subsequent meetings were held between the investigative agencies on 16 November 2000 and 1 December 2000.

As the Heath Special Investigative Unit was not granted a proclamation by the President as required by the Special Investigative Units and Special Tribunals Act (Act No. 74 of 1996), the responsibilities envisaged for the SIU in the correspondence SCOPA received from the Office of the Auditor General as co-ordinator of the joint team now falls in the ambit of responsibilities of the Auditor General: "As a proclamation was not granted to the SIU, the responsibilities and costs relating to the SIU had to be transferred to the other agencies. At this stage the Auditor General has taken over most of the responsibilities of the SIU which will have the effect that additional funds, will, most likely, be required by the Auditor General."

The House is advised that the original estimated cost of the forensic investigation is R13,5m. The investigation team currently comprises:

Three members of the Auditor General (two CA's and one advocate)
Five members from IDSEO/Scorpions (Two advocates and three investigators)
Two senior investigators from the Public Protector (One advocate and one attorney - one of them with military experience)

Further expertise, including charted accountants and auditors, forensic auditors/accountants, legal expertise and technical expertise, will be contracted in as and when required. The investigation focuses on all alleged irregularities and specifically the cost of the Hawk and Gripen deals to the State.

The Committee received a progress report from the combined investigation team on 14 February 2001 from the Deputy Auditor General on behalf of the Joint Investigating Team. While the Committee welcomes the commitment by the JIT to produce a joint report to SCOPA towards the end of July 2001 which will contain "the findings of any status of matters still in progress at the time", the Committee anticipates having the opportunity to discuss the full approach used at the completion of the investigation, it hopes to be kept abreast of developments at regular intervals during the course of the investigation.

In this regard the Committee has noted the decision by the JIT to convene public hearings/inquiries as part of their approach to the investigation. The Committee hopes to be informed of the relationship between the forensic investigation it has called for and the public hearings/inquiries approach adopted by the investigators as this will not form part of the information presented by the Deputy Auditor General on 14 February 2001. The Committee wishes to have such an interaction before the public inquiry proceeds.

Further aspects of concern about the investigation remain. The Committee has noted, for example, that access to documentation remains a key challenge for the joint investigative team. This is of deep concern to the Committee as all role players have given numerous assurances that there will be full co-operation with the forensic probe.

The Committee has taken note of a meeting that Madam Speaker convened with the joint investigative team to discuss their reporting lines to the SCOPA and access to information issues. The Committee would also ask the Speaker to make available her understanding of the accountability obligations of the three agencies to the National Assembly and SCOPA.

For and on behalf of the Democratic Party:
Raenette Taljaard
Nigel Bruce
Nick Clelland

For and on behalf of the New National Party:
Francois Beukman
Adriaan Blaas

For and on behalf of the Federal Alliance:
1. Sakkie Blanché