Onderstepoort Biological Products Business Plan: briefing

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Meeting report

AGRICULTURE AND LAND AFFAIRS PORTFOLIO COMMITTEE
8 March 2005
ONDERSTEPOORT BIOLOGICAL PRODUCTS BUSINESS PLAN: BRIEFING

Chairperson:

Mr N Masithela (ANC)

Documents handed out:

Onderstepoort Biological Products Business Plan
Onderstepoort Biological Products Budget 2005/06
Onderstepoort Biological Products Human Resources Development Plan
Onderstepoort Biological Products Dividend Policy

Onderstepoort Biological Products website

SUMMARY
Onderstepoort Biological Products informed the Committee that the company had been transformed into a viable business, although it now faced considerable challenges. Upgrading of facilities to levels acceptable by international standards would facilitate accreditation, which in turn would be conducive to market penetration in Africa and East Asia, Europe and South America. The company would first have to process the transfer of the land and buildings from the state and would have to start carrying the cost of premise expenses. Members were generally impressed by the performance of OBP and in its Business Plan and budget for 2005/06.

Onderstepoort Biological Products briefing

The outgoing Chairperson, Mr S Makama, said he was proud of being part of a team who had managed to turn a previously state-owned entity into a viable business. The first few years had been a "bruising" experience", as there were no business structures and the Directorate had been neglected, but at present it could compete with multi-nationals in the business of production, supply and marketing of vaccines. A new board would now take over and challenges for the year ahead would be to facilitate the transfer of land and buildings and to remain competitive in a global market. He handed over to Managing Director, Dr L Makuleni.

Dr L Makuleni explained that a new board of directors had been appointed for 2005/06 although she would remain as Managing Director. She said the company mandate was to "play a pivotal role in the management and prevention of animal diseases in the country, Southern African Development Community and Africa". Onderstepoort Biological Products (OBP) was in the business of biotechnology, animal health and the production, supply and marketing of vaccines. It intended extending its reach into Africa and the world. OBP had produced 50 different products for the benefit of cattle, sheep, goats and horses. This product line grew annually and other animals might be targeted as well such as poultry. The company also kept abreast of trans-boundary diseases. OBP had approximately 40% of market share in the South African health market. Their challenges and opportunities were in penetrating the international market. They would need accreditation for certain markets. OBP held the advantage in a niche market. They would have to develop more effective distribution to the emerging market. Their strategic objectives for the year ahead would be to increase sales substantially, to invest in the upgrading of their facility through capital expenditure of R29.5 million. Black Economic Empowerment (BEE) would form 40% of its procurement. The packaging facility would be upgraded to international quality standards. Employees were constantly in the process of being upgraded as well, through mentorship programmes and succession plans.

Mr Pierre van Jaarsveld, Chief Financial Officer for OBP, said they intended growing sales in local and export markets by 30%, from R71.5 million to R93.2 million. Locally, this growth would be partly made up of tender business and more effective sales and marketing. Export sales would be dependent on increased marketing efforts. An increase in sales meant an increase in cost of sales from R40.7 million to R60.8 million, an increase of 49%. This consisted mostly of increased depreciation and repair and maintenance. Staff constituted the highest expense at R34.6 million for 2005/06. There would be more research and technical staff would be employed and training would entail an investment of about R1.2 million. Travel expenses would also increase by 57% and marketing expenses by 45%, as a result of increased efforts in sales and marketing. Premises expenses would increase as a result of the land and buildings transfer, necessitating the payment of electricity and water expenses for the first time and R1.2 million for repair and maintenance of buildings. Increases in operations and administration expenses were 219% and 113% respectively. Net Profit Before Tax would see a negative amount of R3.6 million and Net Profit After Tax would be around R0.9 million, although cash flow would remain positive at R5.4 million.

In conclusion, the coming year held the challenge of achieving excellent sales, upgrading and repair of facilities and being able to respond to the needs of the market in animal health, both locally and internationally.

Discussion
Mr Bici (ANC) asked if the OBP was sufficiently visible and accessible to small farmers and how affordable their products were to this part of the agricultural sector. He asked what the 40% allocation towards BEE constituted and whether the Committee could assist the OBP in any way to gain accreditation.

Dr E Schoeman (ANC) congratulated the board for the work accomplished and said that the sceptics had certainly been quietened in this instance. It seemed that the transfer of the land and buildings was going to place considerable strain on the budget and he hoped that these would be transferred at a nominal fee only. The OBP should be considered a national asset. He said the plans for investing in the future through capital expenditure certainly seemed the sound route to take.

Dr A van Niekerk (DA) extended his congratulations for the successes that had been achieved in OBP, considering the fact that about ten to fifteen years ago it had started as a backyard facility and had now turned into something to be proud of in South Africa. He asked whether the expenditure in research and development could be optimised, by working together with other research institutions like the Veterinary Institute. He said the latter experienced shortfalls in staff, especially in the diagnostic division. What was the situation at OBP.

Mr T Ramphele (ANC) agreed and asked whether there was a framework for interaction between OBP and other institutions in the animal health sector, such as the Department of Agriculture and the Agricultural Research Council. He asked in which ways the OBP was responding to the land reform challenge. How did they intend growing their market internationally? He asked which portion of the increase in operational expenses would be dedicated to research, as this would be paramount in maintaining competitiveness and sustainability in the global arena.

Dr Makuleni said their technicians worked closely with the Wool Growers Association and other animal health technicians. She said that dosages were typically R1 to R2 per dose of vaccine. They had managed to package these vaccines in smaller than 100ml bottles for the benefit of the small farmers. One dose was approximately a 1ml injection. They received support in the commercial sector and they had recently launched an anthrax vaccine for the emerging farmers market, which was slowly starting to pick up sales.

More funding was needed to upgrade facilities, in order to meet international standards for accreditation.

OBP was in the process of interacting with other institutions such as the Onderstepoort Veterinary Institute (OVI), with whom they had met for discussion around forming a joint strategy and implementation plan. She also sat on the Intergovernmental Committee and was in contact with the Department of Agriculture on a regular basis.

The organization had offered workshops on vaccines to state vets and maintained many points of contact with technicians in animal health. Regarding land reform, Dr Makuleni said that Department of Agriculture and other public entities met twice a year to discuss strategies in implementing the Comprehensive Agricultural Support Programme.

Research made up 5% of operational expenses. This did not include equipment and salaries. Challenges ahead would be attaining accreditation. Information leaflets would be translated into various African languages.

Mr P van Jaarsveld said they gave all their suppliers questionnaires to complete regarding their BEE status, staff component and Employment Equity compliance. These were then taken into consideration when awarding tenders.

Dr Makuleni said there were monitoring systems in place and physical audits were conducted to see to what extent companies were BEE.

Mr van Jaarsveld said according to the OBP Act, no costs were to be incurred in the transfer of land and buildings, except for operational expenses.

Mr D Dlali (ANC) asked why the cost for repairs and maintenance and the upgrading of the packaging facility were the same. He asked if the costs incurred for skills training were perceivably reinvested into the organisation. Did they charge the same prices for small emerging farmers, as for established farmers.

A Member asked what had been the initial challenges facing the organisations and what future challenges were anticipated. He asked whether the OBP had any influence over veterinary services, as emerging farmers struggled to receive such services. How did the OBP intend marketing itself in Africa.

A Member questioned the disparity between the cost in salaries for top management and salaries for lower management, and semi-skilled staff. Top management consisted of seven staff Members, who together were paid R2.13 million, while 58 unskilled staff received a total of R200 000 and semi-skilled technical staff only R300 000. Only two women were employed under unskilled and decision making staff and there were no Coloured or Indians among these. The Member also questioned the large increase in travel expenses and asked what mode of transport did staff use and did they fly first class, business or economy.

Mr Masithela said that other considerations besides cost had to be taken into account when looking at the last question.

Mr Radebe (ANC) congratulated the board on the good work. He was concerned about the cost of sales being so high, as well as that of variable costs. He commented that a Production Success Rate of 90% should be higher.

Mr Masithela asked why the maintenance of an old building should be less than for the new facilities. He suggested that the organisation build relationships with National African Farmers Union (NAFU) and Agriserv.

Mr Makama said that one could not place any blame for the initial challenges of the organisation, but the enormous backlog in maintenance left by the Public Works Department had affected the productivity greatly and was still being rectified at great and ongoing cost. Issues around intellectual property between OBP and OVI also meant that the lack of control over and management of genetic material had caused the loss of certain genetic material to competition. This had cost them dearly and continued to be a grey area needing clearer parameters. Mr Makama said that matters would be greatly helped if the OBP were classified a key installation. These were challenges still facing OBP.

Mr P van Jaarsveld said the R10.5 million for repair and maintenance was not related to the R10.5 million earmarked for upgrading the packaging department. The first amount was related to Sales and therefore the Cost of Sales. Mr van Jaarsveld said that the transfer of land and buildings would not cost OBP anything, but thereafter it would be carrying the expenses. He said OBP contributed to the Skills Development Levy.

Dr Makuleni said because the cost of sales had gone up, depreciation on equipment had also increased. This cost would have to be carried for the next five years approximately. Once the land and buildings had been transferred, OBP would have to start paying for expenses like water and electricity for the first time. This also accounted for the increased invariable costs. She commented that such sacrifices needed to be made in the short to medium term in order to ensure the core business viability. It would require some R200 million to revamp the facility and this would be done in phases. The capital expenditure of R29.5 million was one phase of this process. Even though the organisation would show no net profit for the next three years, it still would have a cash flow of about R5 million for operations, which would have to be carefully managed. The net profit was essentially tied up in depreciation costs and capital expenditure investment.

Dr Makuleni said that OBP had identified its core business areas and identified individuals for special skills training. This would cost R1.3 million. These individuals made up part of the succession plans.

Marketing in Africa was being approached in various ways, but OBP enjoyed the support of ten vaccine-manufacturing facilities around the continent and had been invited to Nigeria to share with a key veterinary institution their experience of becoming a viable business over the last few years. Various bilateral agreements were conducive to marketing in other African countries.

Ms Mpoko said that OBP had received R100 000 from Sector Education and Training Authorities (SETAs) in the form of grants. These were used for adult basic education and training projects. Succession plans would ensure that top management positions could be filled, as their positions were critical. This required mentorship programmes for the proper transfer of skills, as well as management training, in order to capacitate individuals who would be expected to perform in a technical and competitive industry. She said such programmes were not without substantial cost to OBP. The organisation had also embarked on training long term unqualified employees through a programme at the Tswana University, to become technical assistants. This would hopefully serve as a stepping-stone to further training and qualification. They were committed to ensuring 100% adult literacy among all unskilled employees. Diversity had improved over the years as could be proven by comparing previous records. In 2000 management included only one black man and two white females. Presently 50% of management were from previously disadvantaged groups, including women in the executive and management. No coloureds or Indians were present in 2000, while now they had one Indian in management and two Coloured specialists. Disabled persons would have to be employed in the future. Recruitment was an ongoing process whereby the diversity of a department was taken into consideration for diversity purposes. Regarding gender imbalances she said that some posts were traditionally male dominated because they had a physical element to them, but even this was slowly changing.

A Member commented that products were often not available in certain areas.

Mr Makama said he sincerely hoped that the transfer of land and buildings would occur before the end of the year.

Mr Masithela said there was no need to be defensive about certain issues raised by Members. The Committee understood that the organisation had started out with very little representation and that they had already come a long way. The Committee was asking for time frames and strategies to continue on the path of addressing these matters rather than accusing them of anything. He said that the disabled were still being marginalised, often subconsciously and employers had to be sensitised to this issue. Disabled people were often quite capable of doing the work. He said that the Committee should be seen as partners to the board and as such they had to be kept fully informed. Mr Masithela suggested that the board submitted a proposal to the Committee, motivating the categorisation of OBP as a key installation.

The meeting was adjourned.

 

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