Defence-related public-private partnerships: briefing by Brown and Root

Meeting report

DEFENCE PORTFOLIO COMMITTEE
20 February 2001
DEFENCE-RELATED PUBLIC-PRIVATE PARTNERSHIP: BRIEFING BY KELLOGG BROWN & ROOT

Chairperson: Ms T R Modise

Document issued:
Kellogg Brown & Root slide presentation (See Appendix 1 for an extract).
For the full version, please email [email protected]

Kellogg Brown and Root delegation: Roderick Kyle, Chairman; Ian Robertson, Defence Business Director; Herbert C Abela, Defence Business Manager; Peter Rogers, Defence Adviser in South Africa

SUMMARY
This UK-based company deals with public-private business partnerships in defence and other economic sectors around the world. It is interested in forging further business partnerships with South African companies, particularly the Defence parastatal, Denel. Although this company indicated its capability for developing South Africa's defence industry and creating more jobs, the Committee was concerned that such involvement could compromise national security. There were questions which were not addressed to the Committee's satisfaction. However, there is a likelihood that this type of consultation between Brown & Root and government will continue.

MINUTES
The company has had a permanent regional office in South Africa since 1992 to pursue different projects in the Southern African region.

Brown & Root (B&R) have completed more than 30 projects in RSA valued at R3 billion in the last eight years. These projects involve companies such as South African Breweries, Mossgas, Sasol and Engen. South Africa is opening some of its state-owned companies for privatisation and others have been put under contract. They see this as an opportunity to become involved.

Brown & Root would like to explore partnerships in the improvement of the defence infrastructure, including the improvement of naval bases, the training of personnel (such as pilots and engineers) and assist in the improvement of services such as catering, communication, water provision and sanitation in the military establishment.

In the process of engaging in these partnerships there will be an enormous transfer of technology and expertise that will benefit both South Africa and the company. The British company clarified that they do not want to be involved in the actual defence industry but rather would like to bring a civilian element to the South African military, especially during peacetime.

Discussion
A DP Member asked B&R if they will take over South Africa personnel during any partnership process as well as equipment? How is B&R going to align two conflicting decision-making processes during war. On one hand, you have to make decisions based on your financial costs and financial objectives; on the other hand, your commanders think of strategic objectives and strategic costs which normally do not take finances into account.

Mr Kyle replied that it would be dealt with according to the contract. If the contract says equipment should be transferred, it will be. The same applies to personnel. He agreed that it is very clear that war operations are different and a transition from peace to war operations should be taken very seriously. He added that trained soldiers know how to handle this situation. The contract itself should take that into consideration so as to accommodate such situations whenever if they arise.

Mr Schalkwyk (DP) asked B&R how they would liaise with the different spheres of government.

Mr Robertson (B&R) said liaison could be discussed with the government as it involves many issues. It also depends who you contract with and for how long the contract will be.

Mr Ntuli (ANC) asked B&R if they could assure the Committee that if they take over a section of the South Africa National Defence Force there will be no job losses.
How many shares does the UK government have in Kellogg Brown & Root? In the case of South Africa, is Brown & Root going to make partnerships with the government or with the private sector?

B&R responded they can form a joint venture with any company in South Africa, even private companies, as long as it is guided by the rules of that contract. If, for instance, Brown & Root forms partnerships with a private sector company, rules will be set. The same applies with government. The partnerships will differ because private companies and the government each has its own set of rules. That will depend on the agreement between the two contractors.

Mr Ngculu (ANC) asked, given world-wide reductions in defence budgets, how did they intend to make a profit in this sector? Their presentation indicated that the company is not involved in the actual military and defence industry, but they talk of involvement in arms and training of military personnel. This sounded contradictory.

Mr Kyle (B&R) said there is also a contradiction here in that the government is reducing its defence budget whereas on the other hand it wants to develop the defence industry and create more jobs. Their involvement in defence is to create jobs, so it is a question of addressing the contradiction that is already there. Their aim is to lower defence costs during peacetime by including as many services as possible.

Mr Ngculu (ANC) asked if civilians who are working in the defence during peacetime would fight during times of war.

Mr Robertson (B&R) replied that the military must keep its own capability intact, these people will not be involved in any military operation.

An ANC MP asked whether the company would be of assistance during a war in moving military personnel from one area to another.

Mr Rogers replied that they would definitely be able to do that, but it would depend on the contract.

Mr Mashimbye (ANC) asked if they are going to train engineers or bring some from the UK?

Mr Abela replied that they would train engineers in South Africa. In fact they would bring experts from the UK to train engineers here.

Mr Gogotya (ANC) was concerned about security. If they were to train engineers and staff, the national security of this country would be compromised in the process.

Mr Robertson replied that there should be security clearance for all people who will be employed by both B&R and the defence industry in South Africa. This is what happens in the U.K.

The Chairperson commented that if state security is not compromised then there would be no problem with B&R's involvement. It was the first time that they had had discussions with B&R and they had to consider such issues as jobs and national security.

Appendix 1
[Ed note: This is not the complete presentation]

Kellog, Brown & Root: Presentation to Defence Portfolio Committee
February 2001

Proposed Agenda
Introduction to Brown & Root and to Public Private Partnerships
-PPP examples - Defence Projects
-Public Private Partnerships
-Discussion

Kellog Brown & Root Projects in South Africa
Johannesburg office opened in 1992 after completion of F.A. offshore platform for Mossgas and has completed more than 30 projects valued at some R3 billion in the last 8 years.
-SASOL - Chlorine expansion, Sasolburg
-SASOL - Low capex alliance, Secunda
-Polifin - Polyethylene plant revamp
-South African Breweries - brewery relocation to Kenya
-Sappi - Usutu pulp mill consultancy
-Sappi Enstra - pulp storage and transfer modifications
-Sappi Tugela Mill - Evergreen maintenance contract
-SABI - Coca Cola bottling plant, Angola
-Palaborwa Mining - Evergreen sp capital and maintenance
-Engen - refinery maintenance programme
-Fedmis Phalaborwa - maintenance audit
-Mossgas - Offshore gas development, Mossel Bay
Engen - Evergreen maintenance Durban refinery

Introducing Public Private Partnerships
Public Private Partnerships in UK :
-Defence, Local Government, Roads, Hospitals, Prisons

-Other countries taking interest:
Australia, Singapore, Sweden, USA, Italy, Holland, Israel, Romania

Public Private Partnerships In South Africa
Salient Features:
The Department of Finance: Guidelines for Public-Private Partnerships
The Department of Defence: Alternative Service Delivery

Why Alternative Support Processes?
· Rising defence equipment costs
· Procurement
-Cost overruns and delays
-Pace of technology change
· Need for increasing efficiency in delivering public services
· Need to reduce government borrowing
· Declining defence budget - peace dividend
· Nobody can be the best at everything

How has this come about?
Industry has changed:
- Lower costs
- More hungry for work
- Deeper and wider competence

Public sector has changed:
- political priorities are economic
- more pragmatic approach
- review of internal priorities

What Forms can Alternative Services Take?
- Competing for Quality (CFQ)
- Private Finance Initiative (PFI)
- Partnering

Private Finance Initiative (PFI)
The public sector purchases services from the private sector, which is responsible for up-front investment in capital assets and their subsequent operation.

· Considered for all capital projects
· MOD is interested in the service, not the underlying asset
· MOD pays for service as it is delivered - purchaser, not provider
· No payments are made before service begins

How Risk is Allocated
· Public sector good at taking risk, but bad at managing it!
· A risk should go to whoever is best placed to manage it
· Risk and reward provide incentives and opportunities for the private sector.

Benefits to Both Sides
· Industry:
- "Secure" long term (30 years) income
- Third party revenue opportunities
- Export of concepts

· Government:
- Focus on core business
- Lower costs
- Access to "best in class" in many fields
- Improved quality of service

Conclusion
- Better value for money
- Enabled by changes in private and public sectors
- Improved quality of service
- Better risk allocation
- More affordable solutions
- Access to best in class