MINISTRY: TRADE AND INDUSTRY

SUPPLEMENTARY SUBMISSION TO THE PORTFOLIO COMMITEE ON TRADE AND INDUSTRY ON PUBLIC HEARINGS ON THE ESTIMATION OF ECONOMIC OFFSETS
FROM THE RECENT DEFENCE PROCUREMENT PROGRAMME

1. INFORMATION ON THE NEGOTIATION TEAM.

In response to the questions asked by Mr. Bruce the following information is provided:
1.1. Members of the Director General's Oversight Committee:
Ms. M Ramos Director General : Finance.
Dr. Z Rustomjee Director General : Trade and Industry.
Mr. M Netsianda Acting Director General : Defence.

1.2. Members of the International Offers Negotiating Team. (IONT)
Mr. J Naidoo Chief Negotiator
Mr. S Shaik Department of Defence: Chief of Acquisition
Mr. R White Department of Finance: Chief Budget Officer
Mr. P Jordan Department of Trade and Industry: Deputy Director General
Mr. V Pillay Department of Trade and Industry: Director Ind. Participation
Mr. L Swan ARMSCOR : CEO

1.3 Consulting Firms used by the IONT and fees paid.
Warburg Dillon and Read. Fees Paid: R 8.821 Million
White and Case. R 4.720 Million

2. Projections of Job Creation in the NIP
The projection of job creation from investments is inherently imprecise. This is even more the case in a complex investment facilitation exercise such as the Non-Defence Industrial Participation (NIP). These notes therefore provide information as to how the various estimates were made and the significance of the jobs created.

In order to understand how the estimates are calculated certain basic issues have to be taken into account.
The NIP is a process that will develop as the projects are assessed and then implemented. The initial agreements are based on the magnitude of the NIP obligation calculated by means of the National Industrial Participation Program (NIPP) credit system. The individual projects that would then fulfil this obligation are assessed and approved. The projects must also be assessed over time as the credits relate to the performance and sustainability of the projects. Accordingly in the first two years of the NIP it is possible for individual projects to change even though the total obligation will not change. This will impact on the precise employment effect.

The contracts were only concluded when it was clear that a credible initial portfolio of projects did exist. So the initial base for projections is the business plans for these projects. However, it has to be borne in mind that the projects commence over a period of time so that the projection that is made is one of attempting to assess what the employment effect will be over the seven to ten year period where the obligations have to be fulfilled.

In the main the estimates relate to new investment but they also include jobs that will be retained because of new market opportunities opened by the NIP and DIP. Estimates have also been made of the employment effects on existing investments of increased export orders.

There are three separate estimations that have all been used to provide the basis for the announced projection of about 65 000 jobs.

The first is based on the business plans of known projects where the direct employment is then increased by the indirect employment effect. This is set out in Appendix A. A slightly different exercise is set out in Appendix B that links revenue generated to the likely jobs that will be created. These estimates will be different depending on the time they were done as pointed out above and a simplifying assumption is made as to how projects start.

The IONT and its technical team of economists also had access to a study done by consulting economists for one of the bidders. This study worked on the business plans and did more detailed sectoral analysis. In addition it assessed the likely impact on the income of workers. The study was done fairly early in the final negotiations but it provides some important insights. It points out that although the impact of the NIP projects on overall employment is small, the impact on net job creation is significant - especially once its sectoral composition is taken into account. The impact on the growth of employment incomes in manufacturing is particularly significant, as a result of the high value added of the NIP projects.

In the projects assessed the number directly employed on the projects was estimated to average 6,264 over the first ten years, representing just over one-tenth of one percent of total non-agricultural employment of 5,95 million in 1998. Taking into account the fact that all of employment directly generated by the projects is within the manufacturing sector, the proportion is half of one percent of 1998 manufacturing employment, rising to almost one percent by year ten.

The contribution of the NIP projects to net job creation is, however, significant - even without taking account of indirect employment generated by the projects. This contribution can be seen both in relation to recent trends in employment and in relation to expected growth in employment over the next five years.

It was projected that the impact on net job creation of the NIP projects would be even greater in the second five years, when a further 6,200 new manufacturing jobs are created. On the projections of the business plan the average growth rate in direct employment generated by the projects is 16.2 percent per year - a rate at which the number of new jobs created more than doubles every five years. This compares with an average contraction in manufacturing employment in South Africa of -0.8 percent per year between 1993 and 1998 and of -3.8 percent per year between 1996 and 1998.

Again using the business plans and allowing for sectors the contribution of the NIP projects to the growth of incomes is even more significant, as a result of the high value added of the constituent manufacturing projects. The effects on employment incomes provide a better indication of the economic impact of the projects than employment numbers alone. They also provide a good indicator of the magnitude of the indirect employment effects of the projects by capturing the spending power that the projects would generate. It was estimated that the domestic salaries directly generated in the NIP projects by year five would be equivalent to 3 percent of total salaries and wages in the manufacturing sector rising to more than 6 percent in year ten.

An analysis done by the same economists on the exports generated indicates that they are concentrated in the higher value sectors and that they constitute an increase over current trends. This along with the information on the income effects points to a relatively high multiplier effect. An analysis of projects in the current NIPP program outside the NIP has shown a 1 to 10 direct to indirect employment ratio can be achieved.

In the final affordability study the economists also made estimates that were done to ensure that they were conservative. These came to some 9400 workers in all projects by 2008 with 4000 construction workers involved in construction of steel mills and then some 1500 permanent workers in the mills. A multiplier of 1 to 4 can be applied on the figure of 9400 or 11900 or 14900 depending on how one assumed the projects would unfold. This would give a range from 37400 to 59600.

In summary then the figure of 65 000 jobs is based on one of these exercises (Appendix B) and is in the upper range of estimates but in the light of the supporting studies, the unfolding of further projects and reasonable multiplier coefficients of direct to indirect employment based on the sectoral patterns of investment it is not an unrealistic estimate.

3. Report on Progress to Date
Industrial Participation First Performance Report: February 2001
Performance report indicates all projects that have commenced to date, their relevant investment values and export values, included is the total value of the project over the projected life of the project.

BAE/SAAB

AGUSTA

THYSSEN

THOMSON

FERROSTAL

The above tables contain the performance data relating to the described projects for the 4 contracts signed, the Frigate contract has two suppliers Thyssen and Thomson.
The Value To Date is reported on projects that have commenced, where there is no value reported the project has commenced but no information has been received as yet on values contributed to the South African economy.
Total Values reflect the project potential over 7 to 10 years.
The total values are for 13 out of the 70 projects received to date of the total portfolio. This is 15 % of projects mentioned in the briefing.

4. Sectoral Breakdown of Current Project Portfolio