Joint Investigation Report into the Strategic Defence Procurement Packages: Chapter 12

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
21 November 2001
JOINT INVESTIGATION REPORT INTO THE STRATEGIC DEFENCE PROCUREMENT PACKAGES: CONSIDERATION OF CHAPTER 12

 

Chairperson: Dr R H Davies

Relevant documents:
 

Joint Investigation Report into the Strategic Defence Procurement Packages
Department of Trade and Industry input on Industrial Participation Programme (Appendix 1)
Announcements, Tablings, Committee Reports (ATC): 14/11/01 (Appendix 2)

SUMMARY
The Committee had planned to interact with the Department as well as the Auditor General, the Public Protector and the National Director of Public Prosecutions on the Industrial Participation Programme but the investigating agencies were unable to attend the meeting. The Department however did make an input on the Industrial Participation Programme. Discussion ensued on the ability of the Department to ensure that investors fulfilled their contractual obligations. Members were also interested to hear the Department's response to the recommendation in the Report that legal opinion has to be obtained on whether sufficient controls are in place for the proper implementation of the NIP and DIP programmes.

MINUTES
Chapter 12: National Industrial Participation (NIP); Defence Industrial Participation (DIP)
The Chairperson, Dr Davies pointed out that it is not the task of the committee to interrogate the processes that led to the findings and recommendations on this chapter. The aim of the meeting is to elicit comment from committee members. The Chair had invited the Department of Trade and Industry as well as the investigating agencies to address the Committee on the issue. It was evident that the Committee was disappointed that only the Department was present at the meeting.

Deputy Director General, Mr B Sibisi, and Chief Director, Mr L October, were the representatives from the Department. Mr Sibisi read out a statement that the Department had prepared on the industrial participation programmes (see document).

It was evident from the statement that the Department was supportive of the findings and recommendations of the Auditor General, the Public Protector and the National Director of Public Prosecutions on the Industrial Participation Programme.

The Report had found the framework of the Industrial Participation Programme to be sound and that it conforms to international best practice. Furthermore, performance guarantees were found to exceed minimum requirements and compare favourably to similar programmes elsewhere. The Department would however heed the recommendation that legal opinion has to be obtained on the enforcement of contracts. Steps are already underway to see to its implementation.

Discussion:
Prof S Ripinga (ANC) asked the following questions:
(i) What is the minimum requirement for performance guarantees?
(ii) In what currencies would the penalties be paid in. Is it dollars, euros or rands?
(iii) What steps has the Department taken to implement the recommendation given in the Report on Chapter 12?

Mr Sibisi gave the following responses:
(i) A performance guarantee of 5% is attached to each obligation.
(ii) The penalty would be in the same currency as that of the original obligation.
(iii) The Department has called on the State Law Advisers to assist them in putting together a legal team.

Dr Davies (ANC) asked the following questions:
(i) Are the Industrial Participation Investments the sum of investments and exports?
(ii) It seems that the Industrial Participation Investment amounts are far greater than the value of the arms deals. What is the secret of South Africa's success?
(iii) What are the critical elements to ensure that Industrial Participation obligations are implemented?
(iv) Are there controls on all the contracts or only on some? How are the legal opinions going to be of use?

Mr Sibisi responded in the following manner:
(i) There is a separation between investments and exports.
(iii) Ensuring that obligations are met does not only lie with the performance guarantees. Companies would be hesitant not to meet their obligations for fear of being blacklisted all over the world.
(iv) The legal opinions would assist in identifying whether there are sufficient deterrents in the contracts that would dissuade the investors from not meeting their obligations.

Mr M Rasmeni (ANC) asked if, prior to signing the contracts, legal opinion had been obtained to ensure that the provisions are favourable to South Africa.

Mr Sibisi confirmed that legal advisers had always been present at the signing of contracts.

Ms C September (ANC) referred to the possibility of substituting one project for another in the event that a project loses its viability and asked what assurances are there that the new project would be viable.

Mr October noted that the substitution of projects would only be allowed if the new project is viable. The substitution must be equal in value and must be in line with policy goals.

Mr C Frolick (UDM) asked if there are limitations to the extent to which projects could be substituted. He also asked if deadlock mechanisms were in place in the event that a substitute project could not be agreed upon.

Mr October noted that a substitution would only take place if there were agreement between parties. In the event of deadlocks, provision is made in contracts for third-party arbitration.

Dr Davies concluded that the emphasis should not be on finding deterrents for non performance but rather to create conditions conducive for positive performance.

The meeting was adjourned.

Appendix 1:
Statement to the Trade and Industry Portfolio Committee on the Industrial Participation Programme

1.The Department of Trade and Industry welcomes the report of the joint investigation by the Auditor General, the Public Protector and the National Director of Public prosecutions relating to the Industrial Participation Programme and fully accepts the findings and recommendations.

2. The Report has found that the broad architecture of the Industrial Participation Programme was sound and conforms to international best practice. The extent of the obligations negotiated as well as the performance guarantees exceed the minimum requirements, and compare favourably to similar programmes elsewhere. We have, however, noted the recommendation that legal opinion be obtained on the enforcement of contracts. The Minister of Trade and Industry has already indicated that this recommendation will be implemented. Whilst the department will not be seeking to renegotiate the contracts, all legal mechanisms to ensure compliance will be pursued.

3 The report has identified shortcomings in the recording of decisions and the absence of minutes and documentation supporting various decisions taken during the procurement process. We have noted these concerns and have put in place a range of mechanisms to upgrade the administrative and monitoring capacities of the Industrial Participation Secretariat. A brief summary of these measures is attached. Auditors will also be appointed shortly to conduct a thorough review of all internal processes.

Contractual Obligations and performance
4. The Industrial Participation obligations arising from the SDP is substantial and amount to over USD 13 000 Million. It should be noted that each contract clearly specifies the value of the obligations as well as the specific projects that will be implemented. These obligations need to be fulfilled over a period of seven (7) to eleven (11) years. The contracts further stipulate clear targets or milestones that need to be attained during the currency of the contract. Each of the obligors therefore has clear targets to meet in years 3, 5 and 7 of contract.

Company	Obligation (US$m)	Duration (years)	Milestone in 2003/4
BAE/SAAB	7200.00	11	2300.00
Ferrostal	2742.75	7	923.37
Thyssen	2047.60	7	444.01
Agusta	767.93	7	42.64
Thales	652.41	7	278.41
Total	13410.69		3988.43

 

· Internal re-organisation to tightly manage and monitor the implementation of individual obligors and projects.
Dedicated portfolio managers have been appointed manage and monitor each of the companies that have large obligations. In addition to the six- monthly review meetings, assessment meetings take place on a monthly basis. This means that early warnings signals are put in place in the event of non-performance or changes in particular projects. This plan also entails the creation of an electronic management system and database to effectively monitor and track the performance of projects and obligations.

A review of the performance of companies that was conducted recently shows that there has been a clear improvement in the management of the programme. The performance review of the IP Programme will be released to the public in the next week.

· Improving systems of internal control
The process for the approval of projects and the awarding of credits when obligations are fulfilled is now subject to increased oversight and monitoring. Capacity on both the internal and external control (inter-departmental) committees have been strengthened and meet on a regular basis. Administrative and record- keeping systems have also been improved. Systems have also been put in place to ensure that any deviations from policies or guidelines are authorised at the appropriate level. The transition to an electronic management system has also assisted in improving the auditing and monitoring function.

Conclusion
The performance of IP program is an important element in the achievement of the government's objective of raising investment levels and increasing market access. An effective monitoring and implementation mechanism has been put in place to achieve this. A full report on the performance of the IP program will be released separately.

Appendix 2:
Announcements, Tablings, Committee Reports (ATC): 14/11/01:
The Speaker:

Report of the Investigating Teams into the Arms Deal.

(1) Referred to the -
(a) Portfolio Committee on Defence for consideration of matters falling within its portfolio, and in particular Chapters 3-7 and 10-12, and for report on the relevant findings and recommendations;
(b) Portfolio Committee on Finance for consideration of matters falling within its portfolio, and in particular Chapter 9, and for report on the relevant findings and recommendations;
(c) Portfolio Committee on Justice and Constitutional Development for consideration of matters falling within its portfolio, and in particular Chapter 13, and for report on the relevant findings and recommendations;
(d) Portfolio Committee on Public Service and Administration for consideration of matters falling within its portfolio, and in particular Chapter 10, and for report on the relevant findings and recommendations;
(e) Portfolio Committee on Trade and Industry for consideration of matters falling within its portfolio, and in particular Chapter 12, and for report on the relevant findings and recommendations;
(f) Standing Committee on Public Accounts for consideration of matters within its area of competence and for report on the relevant findings and recommendations; and
(g) Joint Committee on Ethics and Members' Interests in so far as it relates to members of Parliament.

(2) The committees to report by not later than 6 December 2001.

(3) The report is also forwarded to the Executive for such action as necessary.

 

5 It is important to note that one of the principles underlying the industrial participation programme is that investment and export projects must be sustainable and continue well beyond the contract period. This impacts on the types of projects accepted and means that market conditions, both domestically and internationally, may affect the commercial viability of certain projects. The contracts, accordingly, make provision for projects to be substituted. The critical issue is that whilst an industrial participation project may be substituted, the total obligation remains.

6. The contracts require the Obligors and the Department to conduct six monthly performance reviews. The contracts came into effect in April/May 2000 and the third six monthly review is in the process of being completed. The Minister intends tabling a full report to the Portfolio committee at the beginning of next year. We can, however, provide a preliminary overview of the performance.

7. The first milestones or targets are due in 2003 and 2004. The obligors, as a whole, need to achieve investment and export targets amounting to USD 3 998 million by this date. Our preliminary audit of the projects that have been approved and have either commenced or are in the final stages of feasibility studies, show that this target will be reached and even exceeded. Projects to the v4ue of USD 5008 million has been approved and are active. This constitutes over one third of the total obligation and exceeds the contractual milestone by a safe margin. Whilst adverse market conditions internationally may impact on export targets~ we are confident that there is a robust enough portfolio of projects to allow the obligors to meet their obligations.

Overall performance
Approved active projects 5,008.72 US $ million
Milestone in 2003/2004 3,988.43 US $ million

8. Some concerns have been expressed about the implementation of specific projects. The building of an integrated steel mill by Ferrostaal has been mentioned in this regard. We can report that the building of the steel mill has been put on hold as a result of a change in shareholders. Ferrostaal has, however, committed themselves to the building of two stainless steel beneficiation plants along the coast. This includes a Precision Strip Mill. Operating and equity partners have already been secured. Contractual arrangements with partners are being finalised and a formal announcement will be made soon. We wish to reiterate that whilst investments have long time lags and may change over time, the department has put in place adequate mechanisms to ensure that the targets stipulated in the contract are adhered to. The companies that need to fulfil these obligations have also increased their presence in South Africa to ensure that IP obligations are fulfilled. Full details will be present as part of the annual review report that will be submitted next year.

ANNEXURE 1
Update on measures to improve the administrative, oversight and monitoring functions of the Industrial Participation Secretariat.

As a result of the qualitative increase in the level of obligations that need to be managed, the Department has upgraded the capacity of the Secretariat and implemented a clear plan to manage the Industrial Participation Programme. This includes an improvement in the internal control processes, as well as increasing the capacities of structures to perform their monitoring and oversight functions.

The department appointed a Chief Director to manage the programme on 1 July 2001. An additional director has also been appointed to exclusively manage the obligations arising from the Strategic Defence Package.

The improvements came into effect on 1^st July and focus on the following areas;