1. Executive Summary………………………………………………………… 3

2. Non Defence Portfolio…………………………………………..……………6

1. Introduction………………………………………………….………………..7
2. Siemens………………………………………………………………………..8
3. The Boeing Company…………………………………………………………8
4. General Electric………………………………………………………………11
5. Ericsson………………………………………………………………………12
6. Rolls Royce…………………………………………………………………..12
7. Alcatel Altech………………………………………………………………...14
8. Future programme for non-defence………………………….……………….14

3. Defence Portfolio……………………………………………………………16

1. Introduction………………………………………………….……………….16
2. Overall Performance………………………………………………………….16
3. Ferrostaal……………………………………………………………………..18
4. Thyssen Krupp……………………………………………………………….20
5. Agusta………………………………………………………….……………..22
6. Thales………………………………………………………………………...22
7. BAE/SAAB…………………………………………………………………..23
8. Conclusion……………………………………………………………………27

Launched in April 1997, the national Industrial Participation Programme (IPP) has as its principle objective to raise investment levels and increase exports and market access for South African value-added goods and services by leveraging off government procurement. Participation in the Industrial Participation Programme becomes obligatory when the imported content of any public sector purchase exceeds US$ 10 million.

This report on the national Industrial Participation Programme covers obligations arising from both the defence and the non-defence sectors. It reviews the performance of companies (obligors) that have incurred an obligation in terms of the IPP, and provides a detailed report on investment and export projects that have been caused or facilitated by these obligors.

In the period 1997 – 2000, Industrial Participation obligations arose mainly from the telecommunications (Telkom), transport (Transnet) and energy sectors (Eskom). There has since been a massive increase in the size of the obligations due to the acquisitions by Armscor and SAA (South African Airways).

The size of obligations being monitored at present is approximately US$ 13 billion. The principal obligors and the estimated value of investments and exports that they have facilitated are listed in Table 1. With the exception of BAE Systems, all obligations need to be discharged over a seven (7) year period.

The projects arising from the SAA and defence obligations commenced in 2000 with approximately 18 projects becoming operational by the end of 2001. This includes both greenfield and brownfield ventures (see Table 2).

In the period 1997 to March 2000 projects generated investments and exports worth US$ 300 million. These arose mainly from Telkom tenders and Strategic Partnership Agreements (SPAs) agreements pro-actively entered into by potential suppliers. Projects in the non-defence sector and from companies with SPAs are expected to generate credits to the value of USD 450 million over the next six (6) years. These projects are mainly located in the telecommunications, information technology, aviation and engineering sectors. As indicated in the report, binding agreements for the placement of work and the purchase of locally produced goods between obligors and domestic firms have been signed for most of these projects. The most significant projects involve General Electric, Boeing, Siemens and Rolls Royce.

The obligations arising from defence-related purchases needs to be discharged over an eleven (11) year period and run from 2000 until 2011. Over 33 investment and export projects have been approved thus far. These projects are forecast to generate export and investments to the value of just over US$ 6 billion by 2004, the date when the first milestones are due. The planning, construction and installation phases of 22 projects (66%) were completed by March 2002. A number of projects in the automotive and gold jewellery sectors will commence full production in 2002.

Our third six monthly review conducted in November 2001 indicated that all of the obligors are on track to fulfil their contractual obligations. Agusta has already achieved its first export milestone, almost 18 months ahead of schedule. British Aerospace, the largest obligor, has already claimed close to 50% of its 2004 investment target of US$ 300 million. The other major obligor, Ferrostaal, has finalised the engineering and feasibility studies for projects that will be located in Coega. These projects will develop in tandem with the development of the Port and Industrial Development Zone. A detailed report on the projects approved by the DTI can be found in the defence section of the report.

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The major non-defence obligations arise from purchases made by Telkom and SAA. Other obligations arise from purchases made by government departments and other SOE’s such as Soekor, Eskom and Portnet. Total obligations arising from these purchases amount to more than US$ 450 million. In the case of Telkom there are currently more than 15 companies that have an IP obligation. However, with the exception of Siemens, Ericsson and Alcatel Altech, the size of the obligations are usually less than US$ 10m. This report will mainly focus on the larger obligors.

In the past year the Industrial Participation control committees have approved 27 projects related to obligations and tenders arising out of the non-defence portfolio. A significant amount of IP-related investments and exports are also generated by Strategic Partnership Agreements (SPA’s). These are pro-active agreements that serve to encourage investments prior to obligations being incurred as the credits accumulated may, in certain specified circumstances, be used to offset future commitments. These agreements are common internationally and are used by most of the larger international corporations such as General Electric, Rolls Royce and others. The SPA with General Electric, for example, has generated important investment and export opportunities for South Africa. This is spelt out in more detail in this report.

We expect a significant increase in the amount of non-defence obligations as a result of the new SAA tender as well as the purchase of patrol vessels by the Department of Environmental Affairs and Tourism. A number of projects relating to the SAA tender have already been approved and significant opportunities for the local aviation industry have been identified. Other major tenders likely to generate significant IP obligations are by Eskom and Transtel for next- generation telecommunications equipment. These tenders have already been allocated to Siemens and Ericsson respectively.

Siemens has long-term contracts with Telkom for the supply of switching equipment and synchronous digital hierarchy microwave systems. Its current obligation is approximately US$ 101.2 million. To satisfy this and future obligations, Siemens is involved in two projects, which to date have been awarded a combined total credit of US$ 27.3 million, including exports worth US$ 21.9 million:

• Software Development Centre

• Manufacture of MDF strips

The Boeing Company incurred an obligation of US$ 258 million as a result of the purchase and lease by SAA of the 737 aircraft. A further obligation of US$ 37 million was incurred in 2001.

Major projects being undertaken by Boeing to satisfy its obligation include:

• Aerosud Work Package

• SAAT Work Package

In addition to the above projects, General Electric and Snecma as providers of engines for these aircraft are promoting exports by sourcing components from South African manufacturers. To date a total of US$ 17.7 million credits for sourcing silicone metal have been approved.

• Scaw Metals

• Production of TV series in SA by NBC

• Production of hot plates in SA under GE brand

Ericsson’s current obligation is estimated at US$ 40.9 million for the supply of low and medium microwave equipment to Telkom. Towards the end of November, Ericsson was awarded a contract estimated at US$ 100 million (an obligation of US$ 30 million) to supply Transtel with new generation switching equipment to position it for participation in the second network operator. A total of US$ 102.9 million investment and export credits have been approved for the period from 1998 to 2001.

Projects implemented include:

• Microwave Mini-link

• Regional Hub activities

Rolls Royce, one of the world’s largest producers of aircraft and marine engines, participates in the Industrial Participation Programme through a Strategic Partnership Agreement signed in 2000. Rolls Royce also produces engines for the aircraft purchases arising from the defence acquisition. The IP obligations amount to GBP 66 million. Rolls Royce is currently involved in three projects, as set out below:

• Tay Gearbox

A number of other projects have been submitted and are presently under consideration. These include South African participation in the development and manufacture of the Rolls Royce Fuel Cell Hybrid Power Generation Project.

Alcatel Altech has an obligation in excess of US$ 41.2 million for the supply of switching equipment and digital enhanced cordless telephone (DECT) system to Telkom.

One of the projects implemented is the subcontracting to Alcatel Altech (SA), of R&D work and engineering services (design, contracting, and installation) by Alcatel France for its products in Africa. Alcatel France has, for example, allowed Alcatel Altech (SA) a substantial involvement in the GSM roll out planned in the Democratic Republic of Congo by Vodacom International. This will entail the supply of all towers and masts and installation from South Africa. The other projects relate to the manufacture of digitally-enhanced cordless telephone components for export markets.

The IPP has assisted a range of South African firms to attract new investment, technology transfer and increase export opportunities. These firms have been able to upgrade and expand their productive capacity, contributing to the diversification of the manufacturing sector and the development of new products.

The IPP with respect to the non-defence sector has mainly focused on expanding the knowledge-intensive sectors of the economy, in line with South Africa's industrial strategy. This includes the capital goods, aviation and ICT sectors.

This will be expanded to shipbuilding and labour-intensive sectors. The IPP in future will also develop increased opportunities for research collaboration between local firms and multi-national companies. This is in line with international trends where offset programs are being used to drive the growth of high technology sectors.

The Industrial Participation obligations arising from the Strategic Defence Package (SDP) came into effect in April 2000. The companies engaged in this programme are reviewed on a bi-annual basis. The third bi-annual review of the companies engaged in the SDP was completed in December 2001.

The companies are reviewed on the basis of the investment and export milestones stipulated in their contracts. Only confirmed projects that have been approved and are actively being pursued by the obligors are taken into account when assessing the companies' performance in relation to their contractual targets.

2. Overall Performance

The total Industrial Participation obligations arising amount to approximately US$ 13 billion. There are five companies and the extent of their obligations (separated into exports created and investments made) are listed below.

Industrial Participation obligations have to be discharged within a period of seven years, with the exception of BAE / SAAB which has eleven years. The contracts also have specific milestones or targets that need to be achieved over the period of the contract. These milestones are set at 3, 5 and 7-year intervals. The first milestones need to be reached by 2003/4.

The obligors as a whole need to achieve investment and export/sales targets amounting to US$ 3 998 million by 2003/4. The DTI has to date approved active projects that are expected to generate credits to the value of over US$ 6 billion over an eleven-year period. Graph 2 shows the performance of individual companies in relation to the first milestones. All the companies are forecast to meet their investment and export targets.

GSC Ferrostaal has a total obligation of €2 852 million. Projects to the value of €1700 million have been submitted and approved. A large number of the projects by Ferrostaal involve the beneficiation of stainless steel, and two of these projects will be located at Coega.

Detailed engineering and location studies for the Coega plants have been completed and these projects will proceed in tandem with the construction of the port and Industrial Development Zone (IDZ).

• Precision Strip Mill

• Stainless Steel Fabrication Plant

• Condom Manufacturing Plant

• Engineering Services

• Conveyer Pipes

• Ferisa Venture Capital Fund

• Agro–Processing

The export of engineering and other products valued at €182 000 has already been delivered and long term commitments to purchase SA products have also been secured.

Thyssen Krupp has a total obligation of US$ 2 047 million. This company is implementing four projects. The establishment of a Brewery in East London is under construction and feasibility studies are currently underway for a Titanium project. These projects are expected to generate investments and exports totalling US$ 1 317 million. The company needs to achieve investments and exports of US$ 444 million by 2004.

• Aluminium Tube Plant

• Export of Automotive Components

Thyssenkrupp Metallurgie (TK Met) has signed a off-take agreement with SA Chrome for the purchase of 100% of their ferrochrome capacity to be produced at their new plant. Currently the project, which involves the establishment of a new ferrochrome smelter, is in construction phase and is due to be operational by mid- April 2002 and up to full production a year later.

The company needs to achieve exports and investment to the value of US$ 42.6 million by 2003. The company has achieved its export milestones almost 18 months ahead of schedule. The technology transfer and productivity improvements brought about by the Filk Gold joint venture has improved the competitiveness of these products and exports have exceeded projections contained in the initial business plan. The company has achieved exports/investments to the value of US$ 35.8 million.

The Cape Mohair and Alpela joint venture had generated investments/exports to the value of US$ 5.5 million by the end of 2001.

The location for the Silicon Smelter has been identified and the initial environmental and viability studies have been completed. Equity and operating partners have been identified and a full feasibility study is presently under way.

This company has to achieve an investment and export target of US$ 278 million by 2003. The company has four active and approved projects, expected to generate investments and revenues to the value of US$ 307 million.

The export of solar panels has already commenced and the establishment of the medical waste management facility and medical waste bin manufacturing plants commenced production at the end of January 2002.

The silicone smelter upgrade and silicone densification plants are operational and generating exports.

The participants in the medical waste company, Evertrade, include a black economic empowerment company and Stericycle, a NASDAQ-listed company. This joint venture is establishing several waste bin facilities around the country, which will be using state-of-the-art technologies to treat medical waste in a friendly environmental way.

The JV has also established a bin manufacturing plant in Cape Town for local use and exports to the United States, Japan, Australia and other countries. It will be using advanced injection moulding technology enabling it to produce products four times faster than existing technologies.

BAE Systems has the highest obligation, over 50 % of the total obligations. BAE Systems and SAAB have established a local company, South African National Industrial Participation (SANIP), to manage their offset programme. Their first milestone is due in 2004. Investments to the value of US$ 300 million and export/local sales to the value of US$ 2 000 million need to be attained.

Active and approved projects that will contribute to the attainment of this milestone are expected to generate US$ 2 405 million in investments, exports and local sales by 2004. A number of export and investments projects have already been implemented. The export of mining tools, house appliance, power generation and automotive equipment generated credits totalling approximately US$ 120 million in 2001. As indicated in the accompanying table BAE/ SAAB have an extensive list of projects. Some of the important projects in automotive, environmental, engineering and gold jewellery sectors are discussed below.

• ABB Procurement

• Manufacture and Export of Automotive Components

• Global Forest Products

• Ecoplug

• Gold Beneficiation and Jewellery

The investment and construction phases in large number of the defence-related projects were completed in the first eighteen months of the programme. The next two years should see a significant increase in exports as these plants reach full capacity. All projects are monitored to ensure that the forecasts stated in business plans are adhered to and that the contractual milestones are met.

End.