Agricultural Research Council & Onderstepoort Biological Products: Strategic Plans & Budgets 2009/10

Agriculture, Forestry and Fisheries

06 July 2009
Chairperson: Mr M Johnson (ANC)
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Meeting Summary

The Committee was briefed by the Agricultural Research Council (ARC) on its budget and strategic plans for the financial year 2009-2010.  An outline of the ARC’s activities was provided, as well a break down of budget issues. ARC noted that its three mandates lay in the areas of research, development and technology transfer. The budget was tabled, and it was noted that the ARC’s greatest expenses lay in staff remuneration, which was to be expected in a research institution. However, the baseline allocation from Government failed to meet even that bill. In order to break even, ARC had had to test a number of budget simulations, and had eventually adopted one that might work, although it would severely restrict capability, and would prevent ARC from giving the optimal level of support. Members expressed strong concern over the funding, noting that it was vital for agriculture to have a research institution, and that the under-funding must be rectified. They asked whether the cuts in budget were sustainable, why the private sector was also doing research that ARC should undertake, what had happened to the report on the audit of property and assets, what the figures for “other expenses” in 2008 represented, and what the Animal Improvement Scheme was achieving in respect of new cattle breeds. They further questioned the staff composition, whether the ARC could raise external income, noted that the ARC could not afford to lose researchers nor its prime research recognition, and proposed that the Committee should discuss the need for reconsideration of the allocation with the Department, whilst recognising also that ARC should take its own steps to assist itself.

Onderstepoort Biological Products (OBP), a wholly State-owned company, noted its mandate to deal with vaccine and biological reagent manufacturing and tabled the key vaccines it produced.   It was noted that the plant had been operating since 1968, that its infrastructure was crumbling and that it no longer met global manufacturing requirements and was thus losing its European market, but that steps were being taken to address this. The old equipment also meant a steady erosion of the value of the company, although it still had a strong management and work force, and had, on paper, experienced good business in the 2009 first quarter. OBP was seeking capital, not grants, in order to expand and deliver a return on that investment. Members again expressed their concern with the budgetary constraints, commenting that South Africa was not meeting the Maputo Declaration goals of putting 10% of gross domestic product to research and development. Members asked about employment equity policies and HIV policies, commented that the revenue increase had not been significant, that the marketing was apparently not effective, and questioned the decision to seek capital investment rather than use other options.  Members also questioned its involvement in the H1N1 vaccines, handling of fish diseases, upskilling of the youth, transfer of skills, and sought clarity on certain financial figures. They also indicated a desire to engage further on rural development. 


Meeting report

 

Agricultural Research Council (ARC) Strategic Plan and budget 2009-2010
Mr Shadrack Moephuli, Chief Executive Officer, Agricultural Research Council, stated that the Agricultural Research Council (ARC) had three mandates: namely, research, development and technology transfer. Mr Moephuli outlined the Council’s policy considerations, the Council’s strategic review, and the considerations that the ARC needed to focus on in order to meet its strategic goals (see attached presentation for full details).

Mr Gabriel Maluleke, Chief Financial Officer, ARC, tabled and took Members through the budget of the ARC (see attached document). He noted that the staff comprised the largest expense and that a major challenge faced by the ARC was that the baseline allocation from government was less than the staff bill. Mr Maluleke added that in order to break even the ARC had run a number of budget scenario simulations, finally adopting one that should work, although it would severely restrict the Council’s capability.

Mr Hamish McBain, Committee Chairperson, ARC, stated that over the last five years, the grant increase amounted to 10%. He added that ARC could not deliver its mandate on the basis of the funding being given, as it was too highly geared, with high liabilities. Mr McBain stated that the ARC had had a qualified audit three years ago, but that over the last two years it had received unqualified audits. He reiterated that the level of funding received could not cover the level of support the Council was supposed to give. Mr McBain stated that ARC could not focus on research while managing risk, and that although management had done a very good job, the ARC simply could not function with the limited funding.

Discussion
Mr L Bosman (DA) stated that he was worried about the comments. In order for agriculture to thrive, it was vital to have a research institute that supported agriculture and kept up production. He added that the big problem was finances, not services, and that the under-funding must be rectified. Mr Bosman asked whether the cuts in budget made so that the ARC could break even were sustainable in the long run. He also questioned why the private sector was doing research that ARC should be doing.

Mr Moephuli replied that these budget cuts would not be sustainable if ARC hoped to continue providing the services that it did currently. He added that the private sector and universities did their own research and that the ARC did have some laboratories, but that if ARC did not have enough money to maintain them, then the lack of funding would take its toll. Mr Moephuli stated that the ARC had tractors and cars that were reaching 44 years of age in service.

Mr Bosman also requested more information on the issue of foot and mouth disease.

Mr S Abram (ANC) stated that the history of the ARC over recent times reflected gradual improvement, but despite this there were still some problems. He stated that the previous Committee had asked that an audit be done of property and assets allegedly worth R1.036 billion, and that this was apparently done, but the Committee had not been furnished with it.

Mr Moephuli stated that the asset register had been sent to the Committee as requested, but that he would resubmit it.

The Chairperson asked when Mr Moephuli submitted the asset register.

Mr Moephuli replied that he had done so last year.

Mr Abram asked what the figure of R317 million for “other expenses” incurred in 2008/09 represented.

Mr Moephuli replied that he could supply a detailed written report what the “other expenses” were composed of.

Mr Abram referred to the Animal Improvement Scheme (AIS), and stated that previously disadvantaged individuals (PDIs) owned the majority of cattle in the country, but produced significantly less meat per head, and he asked ARC to send the Committee a report on exactly what ARC had done with new breeds.

Mr Moephuli confirmed that he would send through a report as requested. He added that the AIS operated in many different sections, including one targeted specifically at black people, which aimed to teach them how to manage and measure livestock.

Mr Abram also asked what the ARC’s relationship with Onderstepoort Veterinary Station was.

Mr Abram noted that the ARC would need to tell Members that they need the tools to do their job and should be frank about which projects are going require large amounts of money.

Ms M Pilusa-Mosoane (ANC) stated that agriculture, mining and tourism were the backbone of the country yet it seemed as though agriculture was only being looked at now. She added that there was a ten year plan for science and technology. Ms Pilusa-Mosoane asked how many skilled personnel and research stations ARC had. She stated that the personnel costs were too high, and asked what the reason was for not filling vacancies.

Mr Moephuli replied that ARC did not fill vacancies because it did not have the money to do so. He said that he could provide a written report on the research institutions. However, in brief, he stated that the ARC was composed of eleven entities, of which Onderstepoort Veterinary Station was one. Mr Moephuli stated that 36% of the staff comprised skilled people. The ARC’s Professional Development Programme aimed to have ten people complete their PhD degrees. Hopefully, in five years time, ARC would have fifty PhD-qualified individuals.

Mr Maluleke added that the bulk of the ARC’s work comprised research, and that for this reason the ratio of expenses was skewed to human capital, and for this reason the high personnel costs were normal in this kind of institution.

Mr P Pretorius (DA) stated that all entities were asking for more money. He asked whether, if ARC did not receive a high enough government grant, it would have the capability to grow its own income. He asked whether the budget, seen against a predicted income of R281 million, was on track.

Mr Moephuli replied that ARC would only be able to gauge whether its activities were in line with the projected budget by the third quarter. He added that Mr Pretorius was correct in asking questions about the government grant and that the issue of raising external income had been discussed by the ARC Board, and agreed to, but that ARC still needed the right balance of resources as they were currently in a deficit situation.

Prof Michael Kahn, Chair: Research and Development Committee, ARC, stated that the ARC was the apex agricultural research body in South Africa and Africa, but that its role was being jeopardised. He added that 60% of research and development in agriculture was done by the ARC, but that the staff’s output of journal articles had fallen by a factor of three, and this was a factor that the Committee needed to look at critically. Prof Kahn added that in spite of this drop, the ARC was deeply embedded in agricultural research in South Africa, that it was in the top ten in terms of global cultivars, and that this strength needed to be honed.

Mr Bosman stated that the situation at the ARC was not sustainable and that Members could not allow it to go backwards. He added that the standard was so high that ARC could not afford to lose more researchers, and that the Committee needed to propose that the Department of Agriculture, Forestry and Fisheries must look at the ARC’s needs. The Committee must recommend that the ARC budget allocation be reconsidered.

The Chairperson agreed that Members should support these proposals. However, the ARC would also have to take steps to help itself. There was unfortunately not sufficient time at this meeting to engage further, and another longer meeting should be scheduled. When the Committee was considering the medium term budget, it should re-engage with the ARC. He commented also that a number of Committee for Conciliation, Mediation and Arbitration (CCMA) cases did not speak to workforce retention strategies.

Onderstepoort Biological Products (OBP) Briefing
Adv Dave Mitchell, Acting Chairperson, Onderstepoort Biological Products, outlined the governance of OBP, as set out in more detail in the presentation document (see attached document).

Dr M Dyasi, Managing Director, OBP, provided an overview of its operations and strategic thrust, outlining the history of the Onderstepoort complex, its current mandate, vision and mission. He stated that OBP dealt in vaccine and biological reagent manufacturing and provided a list products and species covered. Dr Dyasi  provided an outline of key vaccines produced by OBP. However, due to the age of the plant, these did not meet the European Union’s Genetically Modified Product (GMP) requirements and thus OBP, despite being a leader in its field, was losing the European market. He added that the strategic thrust to arrest this problem would be comprised of a plant upgrade, development of a vaccine bank and new products, research and development, market growth, human capital development, as well as a contribution to rural development.

Mr A Ntsho, Chief Financial Officer, OBP, presented the budget (see attached document for details), reiterating that due to old equipment the income statement indicated a steady erosion of value of OBP.

Adv Mitchell stated that OBP was a public company, which developed, supplied and manufactured bio-products, and that it had a strong management and work force. He stated that it had experienced an excellent first quarter in the 2009 financial year, with no debt and a strong balance sheet. Adv Mitchell added that it was seeking capital, not grants, in order to expand and deliver a return on that investment.

Discussion
The Chairperson stated that one feature common to both presentations was the fact of under-funding for research and development. This meant that South Africa was not living up to the Maputo Declaration of 10% of gross domestic product (GDP) ideally being provided for research and development.

Dr Dyasi stated that the mandate of OBP was disease prevention and that if this mandate could be achieved, then it would prevent infection of meat, and thus have a positive effect on meat production. This was the overarching mandate.

Mr L Gaehler (UDM) stated that OBP’s presentation did not mention employment and employment equity or HIV policies in the workplace. He added that he would like to engage with the OBP also on rural development but that it did not seem that the Committee had enough time.

Dr Dyasi replied that by law they were required to enforce employment equity practices, and that he was comfortable with the level of employment equity in OBP, except in the technical expertise area, which was dominated by ageing white males. He added that OBP was trying to rectify this. OBP dealt with HIV in the workforce by having compassionate policies and that it employed a medical doctor who dealt with all staff ailments.

Adv Mitchell added that OBP did include employment equity figures in its Annual Report, and that currently approximately 75% of the workforce was black.

Mr Abram stated that an investigation into the balance sheet and challenges facing the livestock industry would show that OBP was not performing as it should. There was a definite deterioration, compared to the situation ten years ago. He took issue with OBP’s lack of marketing effectiveness compared to its competitors. He added that the revenue increase from 2007, being  R64 million to 2008, when it was R70 million, was not significant and should have been greater. Mr Abram stated that OBP was running at a loss.

Mr Ntsho replied that he had already alluded to the dwindling of value of OBP, but would like to feel that it was moving in the right direction. With regard to marketing, he stated that OBP had identified this as a strategic point that required to be addressed.

Mr Bosman asked why OBP had been privatised, and asked if government was not still liable to help in terms of maintenance. He was worried why Government had taken away support.

The Chairperson asked OBP about its role in Influenza H1N1 vaccines.

Dr Dyasi  replied that the research on swine flu was done under the Medical Research Council, as OBP did not have anything to do with human vaccines.

Ms M Mabuza (ANC) stated that the marine life units of the Department had indicated a scarcity of specialists in fish diseases. She asked how OBP dealt with fish diseases.

Dr Dyasi  replied that OBP did not deal with fish disease, as this fell outside its mandate. He said, however, that there was a general shortage of veterinarians, and that this was partially due to having only one training facility in the country. Furthermore, the majority of those qualifying tended either to emigrate, or to focus on treating domestic animals.

Mr Gaehler asked what was the OBP policy on skilling the youth, and what OBP had done since its inception to transfer skills.

Dr Dyasi  replied that Onderstepoort actually dated to 1968, which was the reason why the infrastructure was now crumbling. He said that skilling workers was an ongoing goal and that OBP was trying to get those currently having the expertise to pass this knowledge on to others before the former retired or left.

The Chairperson asked OBP to comment on its options for capital investment. He wanted to know whether OBP was suggesting that it would be engaging with private investors if Government could not provide the funds.

Adv Mitchell replied that OBP did not wish to go that route. Selling shares was the shareholders’ decision, and the shareholders in this case were government. He stated that OBP rather wished to raise funding by borrowing or by receiving a cash injection, rather than by diluting the company.

Mr Abram, referring to the financial figures, asked for clarity on the R531 000 foreign exchange loss, the R436 000 figure for consultants, and the R5.8 million figure for services from State departments.

Adv Mitchell replied that the foreign exchange loss was due to a discrepancy between the finalised price and the expected price, arising from currency fluctuations.  He stated that the R436 000 figure for consultants was paid to engineering consultants who had given advice about the plant and proposed upgrade. The R5.8 million amount related to work done by Onderstepoort Veterinary Institute for OBP. Adv Mitchell also added that some provincial departments had blacklisted OBP as a supplier, stating that it did not have any Black Economic Empowerment (BEE) ownership, when in fact OBP was wholly owned by the Government. He added that this problem had since then been rectified now, but that this had led to an income loss.

The Chairperson thanked OBP and the ARC, whom he described as very important structures in the Department.

The meeting was adjourned.

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