Countertrade as a development tool: a comparative analytical approach

Van Dyk, Johannes Jacobus

Title: Countertrade as a development tool: a comparative analytical approach
Creator: Van Dyk, Johannes Jacobus
Subject: Countertrade
Subject: Countertrade -- South Africa
Date Issued: 2015
Date: 2015
Type: Thesis
Type: Doctoral
Type: DPhil
Identifier: http://hdl.handle.net/10948/5054
Identifier: vital:20795
Description: This study explores the consequences of defence countertrade arrangements for national development based on the South African experience in comparative perspective. Although defence countertrade has been controversial in many contexts, it is concluded that it may play a positive developmental role. This is premised on the central role governments can play in ensuring that countertrade's role in national economic development – global pressures and neo-liberalism notwithstanding – remains an important tool through which active industrial policy may be pursued. This can include developing and maintaining a defence industrial base (DIB) in those countries that have such capabilities. Countertrade occurs under two kinds of market conditions. The one is where there is a natural need for trading but it is constrained in some way, for example, by an absence of currency or an oversupply. Under these conditions countries can resort to bartering, which involves a commodity for commodity exchange and no money. The second market condition is one where countertrade is purposefully structured to secure reciprocal benefits as a condition of a commercial sales transaction - defence or civil in nature. This is referred to as leveraged procurement and manifests primarily as defence offsets involving the defence industrial base, which is the concern of this study. Around 40 per cent of countries, including South Africa, use various purposely structured government procurement programmes when procuring goods and services abroad. These programmes apply the principle of reciprocity through the use of internationally accepted countertrade practices that manifest in many diverse ways. Although „countertrade‘ is the collective term, it is regularly referred to as „offsets‘. Procurement leverage is used to secure some reciprocal benefit from the foreign seller (benefits sought vary from country to country). Countertrade-related practices occur widely despite the fact that the World Trade Organisation's (WTO) Agreement on Government Procurement (GPA6) rules out the use of offsets. Their use is viewed as a discriminatory procurement practice that interferes with free trade. However, the WTO allows for exceptions in the case of developing countries and also for national security and public health contracts. It is important to note that countertrade (and offset) practices, valued in billions of US Dollars, are applicable mostly to defence contracts, although becoming increasingly relevant in non-defence (i.e. civil) government procurements. This research systematically interrogated and investigated issues surrounding the origins and subsequent popular and increased use of countertrade since the 1980s. The purported negative impact of defence-related offsets on the defence industrial base (i.e. the loss or gain of jobs, technology and market share) of both the exporting and receiving countries is of particular concern to the US government and the European Union (EU). My exploratory mixed method research, together with practitioner (insider) and reflexive research approaches, culminated in a primarily descriptive, qualitative, analytical narrative. The research is further founded on structured survey questionnaires. These specific research approaches are known to be subjective and biased and I thus needed to take extra care to prevent emotive subjectivities, primarily through triangulating my findings against a variety of other views and arguments pertaining to the research question. This was done to provide for a holistic overview, and in consideration of the case study, in particular. It must be noted that South Africa has two sets of industrial participation policies and practices. One is Defence Industrial Participation (DIP) managed exclusively by Armscor, South Africa's acquisition agency, which favours pursuing defence industry development objectives. The other is the National Industrial Participation Programme (NIPP), managed independently by the Department of Trade and Industry (DTI). The NIPP is primarily focused on the civil industry with a bias towards manufacturing, investments and exports. The DIP is the focus of the case study element of this research. Since its inception in 1968, Armscor has been tasked with establishing a DIB. Until the late 1980s, this DIB made huge strides in developing unique defence equipment to cater for the harsh Southern African environment and its military operational conditions. The DIB's development was enhanced further by the various UN embargoes imposed on the former South African apartheid government. Owing to these embargoes, Armscor dealt with all its defence imports (and exports) in a clandestine manner. Armscor was the only government entity that applied countertrade from around 1988 until 1996 when the DTI introduced NIPP. During the latter part of 1996, Armscor redrafted its countertrade policy with the new DIP policy approved in early 1997. This policy was applied during the biggest arms transaction in South Africa‟s history, namely, the Strategic Defence Package (SDP). A DIP commitment of circa R15 billion resulted from the equipment bought under the SDP. This study investigated how the DIP manifested in practice from 2000 to 2012 within the DIB that involved numerous South African Defence Industry (SADI) entities. The study considered the DIB, its growth and decline, and to what extent the DIP assisted it to retain its capabilities and capacities, including the retention of jobs. Hence, parts of the case study cover issues related to the South African military complex and the SDP‟s selection process. Subsequent investigations into alleged acts of misconduct and maladministration in the selection process, fraud and corruption are also covered, although not in detail, since this matter is sub judice the outcome of the 2011 presidential appointed Arms Procurement Commission (APC) of inquiry that is anticipating completing its investigations in 2015. Although there are many derivative views on the actual defence equipment needs of the South African National Defence Force (SANDF), the study did not endeavour to analyse these views in depth as they are adequately covered in the 1996 Defence Review. Similarly, there are views expressed that South Africa paid much more for its equipment compared with similar types of equipment bought by other countries. A cost comparative analysis was not performed as the exact configuration of each type of equipment can differ substantially due to the unique operational needs of the various defence forces – the exact configuration of such equipment is not in the public domain, since it is a sovereign security concern. Despite many opposing views, it is concluded that DIP (also referred to as defence offsets) has worked for South Africa: in many ways the South African DIP practice compares favourably with internationally accepted best practices. The research‟s postulation that countertrade can be used as a possible development mechanism is therefore supported by the findings of this study that showed that DIP had a positive retention impact on the DIB, and jobs, and made a positive contribution to Gross National Product (GNP7). The study found that the 1997 DIP policy needed to be much better aligned with the broader strategic national industrial development aims and objectives, including better corroboration with the NIPP. In this respect critical inferences are made that the DIP policy primarily focused on the SADI and its capabilities, without considering its wider application in a broader industrial sense. However, in the context of the Armscor legal mandate (i.t.o. Act 57 of 1968) ensuring the establishment of a DIB in South Africa, the DIP policy was clear in its intent to specifically further the interests of only the SADI. However, the 2014 Defence Review recommends that the DIP policy should be much more focused and even prescriptive when considering specific strategic defence needs. Although DIP policy directives contain requirements for establishing strategic local capabilities and capacities that could adequately cater for logistic support, repair and maintenance of foreign produced defence equipment, this aspect was not well contracted in the 1999 SDP. There is also general consensus that foreign obligors should in future not be allowed the freedoms of choice evident in the SDP‟s DIP process, which resulted in numerous smaller companies not benefitting as was generally anticipated. Future defence contracts should not be signed without an appropriate DIP business plan. Hence, all indications are that the DIP regime in South Africa is set to become much more stringent in its application and subsequent discharge administration.
Format: xxv, 458 leaves
Format: pdf
Publisher: Nelson Mandela Metropolitan University
Publisher: Faculty of Business and Economic Sciences
Language: English
Rights: Nelson Mandela Metropolitan University

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