National Industrial Participation Programme: Department briefing

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
17 November 2004
NATIONAL INDUSTRIAL PARTICIPATION PROGRAMME: DEPARTMENT BRIEFING

Chairperson:

Press Release on National Industrial Participation Programme
Department presentation on National Industrial Participation Programme
National Industrial Participation Programme Report 2003/2004 [available shortly at www.dti.gov.za]

SUMMARY
The Department of Trade and Industry briefed the Committee on the history of industrial participation, its main purpose and the National Industrial Participation Programme (NIPP) obligations, the milestones for defence obligors, the defence industrial participation (DIP) strategic defence packages, the performance of defence obligors and the projects engaged in and the performance of non-defence obligors. Members sought clarity on the following matters:
- the statement in the presentation that some of the offsets were as high as 300% of the purchase costs;
- the Department's philosophy on the usefulness of offsets in general;
- a breakdown of the female-owned and Black Economic Empowerment companies benefiting from the NIPP;
- the geographical spread of the programmes throughout the provinces;
- the milestones for defence obligors referred to in the presentation;
- whether the Department had any recourse when the international investors did not abide by the agreement;
- the sustainability of the project and
- whether the Department monitored the cost raising effect of this programme.

MINUTES

Department briefing
Mr L October, DD-G: Enterprise and Industry Development Division, stated that this was the third NIPP Report being tabled in Parliament and was probably the most important of them all, because this year the first targets of the defence aspects of the offset programme had come due. The Department had assessed those targets and they were reflected in the report. He then conducted the portion of the presentation (document attached) which outlined the history of industrial participation, its main purpose and the National Industrial Participation Programme (NIPP) obligations, the milestones for defence obligors and the defence industrial participation (DIP) strategic defence packages.

Mr Sipho Sikode, Chief Director: Industrial Participation Programme conducted the portion of the presentation, which outlined the performance of defence obligors, and the projects engaged in.

Mr M Zimela, Director: Non-Defence Aspects of NIPP conducted the portion of the presentation that dealt with the performance of non-defence obligors, including the Boeing and Airbus projects.

Mr October stated that DENEL had indicated that some of its contracts under the NIPP were not yielding sufficient profit and some were even running at a loss. Government monitored the companies' performance against its targets and milestones, but did not involve itself in the actual commercial transaction that took place between the two partners.

Discussion
Dr E Nkem-Abonta (DA) asked the Department to comment on the philosophy of the usefulness of offsets in general, and to provide a time-series of foreign investments within the sectors concerned.

Secondly, he questioned why foreign investments would only flow into South Africa now as a result of the offset deals, and why they not have occurred before the offset deals.

Mr October replied that offsets formed part of a global debate, and there were many countries that did not support their use. The American government was currently considering a Bill that would expressly outlaw any counter-trade. The Department had looked at the matter and believed that government could not be allowed to be a normal player in the market as a buyer and to acquire goods at normal market prices, and leave it for the market to create the investment opportunities. Large international companies that have a significant market presence in several countries would not help a small company in South Africa, and thus the normal market would not ensure that investments flowed to countries. In reality, companies merely raised the cost of the product, and that was how they built in the offset.

The NIPP was a very important industrial policy tool and consisted of over 100 projects, but South Africa's investment in it was about 17% of Gross Domestic Product (GDP) per annum. The Department monitored it via actual contractual arrangements but also through six-monthly reviews with the companies.

Dr Nkem-Abonta asked the Department to explain the statement in the presentation that some of the offsets were as high as 300% of the purchase costs, as this was very peculiar.

Mr October responded that the United Nations had conducted a study on the actual costs of these offset programmes, and indicated that these programmes did not raise costs more than 3-5%. The South African view was that, because it had missed the offset boat in the 1960's, it had to be allowed a window of opportunity to use this programme and integrate into the global world. Many companies did not like this, and they were clearly supporting the World Trade Organisation (WTO) push to do away with these kinds of programmes.

Professor B Turok (ANC) stated that many books had been written on the fact that there was no real transfer of research and development in Asia, although technology was transferred. He asked whether it was low-level technology that was being transferred, or was it transferred along with research and development?

Mr October responded that this was the greatest concern. The Department's view was that South African manufacturers should start somewhere, and once good relationships were built with the large multinationals, South Africa would be able to 'move up the value chain' and build in more sophisticated areas and the higher levels of research and development.

Ms D Ramodibe (ANC) sought clarity on the role played by the Department in the NIPP, and whether it had made investors aware of government's gender policy programme. Secondly, she sought a breakdown of the number of women benefiting from the NIPP.

Dr M Sefularo (ANC) asked whether any active application of the Black Economic Empowerment (BEE) scorecard had been used.

Mr October responded that it was correct that the Department had not put any targets in place for gender and BEE, because the programme was developed in 1996 before these matters were put on the agenda. These were however built into all the new contracts. The Department engaged those companies outside the context of the contract to look at those areas of skills development, and some have invested in actual education projects in South Africa's own technical education system.

Mr Sikode added that there was a hand-made gold chain manufacturing project in Virginia which involved women and which exported those products. The BEE companies had benefited although it was not an express requirement of the contract.

Dr Sefularo sought clarity on the geographical spread of the programmes throughout the provinces.

Mr Sikode responded that it was only the Northern Cape province that had not benefited from the offsets. The problem was that the partners in the Northern Cape projects had not agreed on the terms of the arrangement, especially the offset company and the Independent Development Corporation (IDC).

Mr October added that the Department would report back to the Committee at its next meeting on the projects in the pipeline.

Ms N Khunou (ANC) sought clarity on the milestones for defence obligors referred to in the presentation.

Mr October responded that the contract indicated the total obligation and milestones or mid-range targets were built into the contract, which were set at every four years. The targets were thus specific and the penalties attached to the guarantees were linked to that. Thus if a company failed to meet its first milestone the Department could begin instituting the penalty and did not have to wait for the end of the contract period.

Ms F Mahomed (ANC) asked whether the Department had any recourse when the international investors did not abide by the agreement.

Mr October replied that once a company had won a contract the Department's tender document stipulated that the company had to fulfil the tender conditions, which created the legal obligation. The Department would then enter into a signed contract which would specify the obligation, the level of the obligation, the milestones and the time period within which it must be fullfilled. This was legally binding. There was no legal framework which oversaw this programme, as it was purely a commercial contractual relationship between government and the multinational company.

The guarantees were really a mixed bag. There were bank guarantees given of about 10% of the defence contracts, and if a company failed to meet the milestones the government would then be able to claim the penalty and have immediate access to that guarantee. The large companies such as Boeing were reluctant to give a guarantee because they were the 'biggest company in the world' and would meet their obligations, but the Department was able to persuade most of them to give a corporate guarantee.

Ms Mahomed stated that the Science and Technology Committee found that there were agreements that were only benefiting the overseas constituencies, and stated that this should be guarded against with regard to the NIPP.

Mr S Rasmeni (ANC) stated that offsets were necessary in order to realise skills and technology transfer. Secondly, he sought clarity on the zero figure for the plan's performance in 2003/4.

Mr October responded that this programme fell under ARMSCOR and the Department of Defence. The defence purchases of maritime helicopters were only concluded in August 2003, and their commitment only came into effect in 2003.

Mr Rasmeni sought clarity on the status of the NIPP in provinces such as the North West and Mpumalanga.

Mr Sikonde replied that the projects reflected in the report were merely selected projects and did not mean that there were no projects in North West and Mpumalanga provinces. A list of projects that were not included in the report was available.

Mr Rasmeni asked whether the Department had the necessary tools to ensure that the investors implemented BEE and gender empowerment.

Ms Khunou sought an accurate breakdown of the extent to which gender and BEE policies have been implemented in the NIPP.

Mr Sikode responded that one of the Department's tools was to put multipliers on the credits that companies would receive if they assisted BEE companies and women companies to participate in the offsets. The Department was currently drafting an amendment to the policy, and those involved in the defence contracts would receive one credit for every US$1 spent.

Mr October added that the detailed breakdown would be provided to Members.

Ms Khunou asked the Department to indicate the sustainability of the project, as the project in Virginia referred to earlier was not sustainable.

Mr Sikonde replied that the project in Virginia was a fairly new project. There was a problem with the training of the 500 women involved using the available projects of gold and silver. The offset company invested about US$6 million in that project, and the operators of the project were not the offset companies. The project would have to be managed by the jewellers.

Dr Nkem-Abonta stated that the Department indicated that Ferrostaal could not meet its first deadline because of a decline in investment in the steel sector, yet the price of steel continued to increase in South Africa.

Mr October responded that the Department had recommended that Ferrostaal should engage in a much more diverse portfolio of projects rather than relying on one or two projects to meet their targets. Dr Nkem-Abonta was correct that steel and iron ore prices were now shooting through the roof, but in 2000 steel prices were at their lowest levels and there was consolidation globally.

Dr Nkem-Abonta sought clarity on what was meant by 'commitment' in the slide entitled 'DIP', and what was meant by 'Siemens, Ericsson and Alcatel all have credits above current obligations'.

Mr Zimela replied that the Department awarded companies credits when they invested, and these credits were recorded on the Department's system. The Department would then monitor their purchases against the current credits and, since the programme started, those three companies had more credits from their projects than actual purchases from Telkom.

Dr Nkem-Abonta urged the Department to monitor the cost raising effect of this programme because companies could raise their prices because they knew they had to discharge a certain obligation.

Mr October replied that the Department had been fortunate in two contracts. The Airbus contract was concluded just after the September 11 incident and the aviation market was in a crisis. As a result, the Department was able to get very good prices for those aircraft. In fact, Boeing was planning to take Airbus to the World Trade Organisation (WTO) for dumping because they sold to South Africa at such a large discount.

Ms Ramodike sought clarity on the training taking place in Germany with regard to engineers and skills development.

Mr Sikode replied that the nuclear physics students were being trained in France not Germany, and all 21 students were black students.

Mr Zimela added that this training programme involved only Previously Disadvantaged Individuals (PDI's) from the Nuclear Energy Corporation of South Africa, the National Nuclear Regulator and Eskom to train students in nuclear safety and related matters.

The following questions were not answered by the Department:

Professor Turok stated that the Committee had always maintained that the major thrust for South Africa's industrial development must be beneficiation, because South Africa was one of the most resource-rich countries in the world. He stated that he would have preferred the very starting point of the NIPP to be that as South Africa became a major manufacturer of components on the international scene, beneficiation should be central to it all.

Secondly, he requested the Department to indicate the national strategy on industrial policy, and to locate the NIPP in that strategy. This would contextualise the NIPP. At the moment it seemed as though this was a case-by-case activity, and as though South Africa was bargaining with the large multinationals on individual projects.

Thirdly, Professor Turok asked whether any emphasis was placed on those partners who invested in South Africa to use their skills and capacity to do appropriate technology and introduction into our Rural Development Programme (RDP).

Ms Ramodibe asked whether the NIPP dealt with raw or finished goods. She also asked the Department to indicate whether there was dialogue between the government departments in the NIPP.

Dr Sefularo asked the Department to indicate whether the NIPP involved all government departments, and whether the relevant SETA was involved.

Mr Rasmeni sought clarity on the omission of micro-enterprises in the 'performance of obligors' slide.

Mr S Maja (ANC) asked whether the Department could ensure that the large multi-nationals pay a percentage of their profits to assist poor communities in remote areas.

Mr Moss (ANC) asked the Department to indicate the extent to which the NIPP took research and development, beneficiation and appropriate technology into account.

The meeting was adjourned.