Joint Investigation Report into Strategic Defence Procurement Packages - Chapter 12: adoption of Committee Report

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Trade and Industry

05 December 2001
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Meeting report

5 December 2001


Chairperson: Dr R H Davies

Relevant documents:

Joint Investigation Report into the Strategic Defence Procurement Packages
Committee Report (see below)

The Committee unanimously adopted this report:
Report of Portfolio Committee on Trade and Industry on Findings and Recommendations in Joint Investigating Report into the Strategic Defence Procurements Packages (RP 184/2001), Chapter 12.
In accordance with the directive of the Speaker published in the Announcements, Tablings and Committee Reports of 14th November 2001, the Portfolio Committee on Trade and Industry met to consider "matters falling within its portfolio, and in particular Chapter 12" of the Joint Investigating Report into the Strategic Defence Packages (RP 184/2001), and reports as follows:

The Committee met with Mr Bahle Sibisi, Deputy Director General, and Mr Lionel October, Chief Director in the Industrial Participation division of the Department of Trade and Industry (DTI) on November 21st and December 4th. Members of the Committee also had an opportunity to clarify certain matters with members of the Joint Investigating Team at a joint Committee meeting on December 4th 2001.

The DTI team gave the Committee their response to the recommendation in paragraph 12.4 on p370 of the Joint Investigating Report. They indicated that the Minister of Trade and Industry had already stated that this recommendation would be implemented. They also indicated that steps were being taken to upgrade administrative and monitoring capacities in the Industrial Participation Secretariat and to deal with a number of procedural shortcomings that had been highlighted in various chapters of the report. These include the appointment of dedicated portfolio managers to manage and monitor each of the companies that have large obligations; six monthly review meetings and monthly assessment meetings; improved procedures for the approval of projects and awarding of credits; and improved administrative and record-keeping systems.

The Department indicated that the Industrial Participation (IP) contracts came into effect in April/May 2000 and that the third six monthly review is in the process of being completed. While the Department was not in a position to provide a full report at this stage, they did provide the Committee with a preliminary overview of the performance of the National Industrial Participation (NIP) projects that fall under the DTI. The total NIP obligations arising from the Strategic Defence Procurement Packages (SDPP) (value of investment in projects and export earnings generated by them) amount to US $ 13.410,69 million. The first "milestones" are due in 2003 and 2004, by when obligors are required to meet investment and export targets of US $ 3. 998 million. The Committee was told that projects to the value of US $ 5.008 million have, in fact, already been approved and are active, meaning that the implementation of the NIPs "exceeds the contractual milestone by a safe margin". The Department undertook to table a fuller progress report to the Committee early next year.

The Committee is strongly of the view that the implementation of both the NIPS and DIPS is of major importance to the country and an integral part of the "value for money" of the Strategic Defence Procurement Packages.

The Committee accepts the "Findings" in Section 12.3 and notes in particular the concern expressed in Paragraph 12.3.8.

The Committee also notes the report by the DTI indicating that certain measures are in place to improve procedures and conduct regular performance reviews. The Committee further notes the Department's view that the implementation of IP projects to date is broadly on track and exceeds contractual milestones, and that there are no indications at present that any of the prime contractors are preparing to take advantage of the "opt out" provisions of the contracts.

The Committee endorses the recommendations in:

Paragraph 4.13.6. Proper evaluation of IP offers should take place at the RFO stage of a procurement process in order to ensure that only feasible projects are selected and that the need to negotiate with bidders to replace projects at a later stage is consequently minimized. At the same, it needs to be recognized that market conditions can change in ways that make some adaptation unavoidable or desirable. A delicate balance needs to be struck between the need for clarity and certainty as a basis for monitoring implementation and the need for flexibility to allow adjustment as new market conditions arise.

Paragraph (e). Credits towards the discharge of IP obligations based on signed contracts with local suppliers rather than the presentation of invoices could be open to the abuse indicated in the report. The DTI team told us that the latter was already established practice.

Paragraph 12.4. In the interaction with the Joint Investigating Team on December 4th, it became clear that a major concern in this regard was the sharp drop in the value of the penalty charge that would arise from non-completion as distinct from non-implementation of an obligation (a reduction from 10% to 5% of the contract price). The Committee hopes that the legal opinion will contribute to identifying ways in which the closure of this and other possible loopholes can contribute to ensuring compliance with rather than opting out of IP obligations.

At the same time, we believe that ensuring effective implementation of IP projects (both those related to the SDP and those arising from other procurements) is a function of much more than tight controls in contracts. It depends also, and perhaps even more critically, on follow up actions by Government and the DTI in particular to interact with the contractors and create the conditions for IP projects to go ahead. This includes working together with contractors to identify locations for projects, generate infrastructure services and provide other services on a similar basis as those provided to other investors. All of this relates to broader issues of investment policy and industrial strategy.

It is, moreover, of critical importance that the lessons of administrative and procedural shortcomings in respect of the IP projects arising from the SDP are translated into more effective processes of negotiating IP projects in respect of future procurements. The fact that the Department has identified the need for improvements and implemented some reforms is to be welcomed.

All of the above are matters that fall well within the overall oversight responsibilities of the Portfolio Committee. We note and welcome the Department's commitment to providing us with a fuller report early next year. This, the Committee has indicated to the Department needs to be broken down project by project, with the benefits to be derived from each project also disaggregated into clear categories - investment, export earnings, direct and indirect jobs. We need also to receive timely and regular reports from the Industrial Participation Secretariat on IP projects arising from other procurements.

The Committee, finally, welcomes the indication by the Auditor General that monitoring of implementation of IP projects will form part of the regular audits of the DTI carried out by his office.



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