National Industrial Participation Programme: briefing by Department

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Trade and Industry

13 October 2005
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TRADE AND INDUSTRY PORTFOLIO COMMITTEE
14 October 2005
NATIONAL INDUSTRIAL PARTICIPATION PROGRAMME: BRIEFING BY DEPARTMENT

Chairperson:

Mr B Martins (ANC)

Relevant documents
 

National Industrial Participation Programme Report 2005
Armscor report on performance of foreign suppliers’ DIP obligations on SDP’s – 31 March 2005
Department Presentation on National Industrial Participation Programme
Press Release on progress of Strategic Defence Acquisitions (see Appendix)

Department delegation: Mr Lionel October, DDG: Enterprise and Industry Development Division; Mr Sipho Zikode, Chief Director: Industrial Participation Programme and Ms Saroj Naidoo: Parliamentary and Cabinet Services

SUMMARY
The Department explained that the National Industrial Participation Programme (NIP) allowed government and state entities to leverage purchases above $10 million from foreign companies by requiring those companies to assist with invest in South Africa, in addition to assisting with exports and the generation of domestic sales. Despite public perception, the NIP functions for defence purchases as well as all civilian purchases.

As at 31 March 2005, 51% of the Strategic Defence Procurement (SDP) obligations had been fulfilled, and 60 South African companies in the defence-related sector benefited from the Defence Industrial Participation (DIP) programme with approximately 5000 jobs created and maintained. Most companies were on schedule to complete their obligations within the stipulated timeframe. Many had either already reached their milestone or were close to achieving it. Agusta appeared to be the furthest behind schedule due to a conflict situation with Denel that had subsequently been resolved. A problem was foreseen with Thales because one of its subcontractors, MBDA, was not able to fulfil its offset obligation within time, but efforts were currently underway to ensure that the obligation was met.

The Committee asked the Department to explain how the offset obligations imposed on multi-national companies operated, how its performance milestones were decided upon, and further clarity was sought on the difference between the NIP and DIP programmes. The Department was asked to explain the reasons for the failure of the gold project in Virginia, in the Free State, and the measures put in place by the Department to resurrect that project. Members questioned whether black South Africans were benefiting from the NIP and DIP programmes, and Armscor was asked to explain what the worst case scenario would be if Thales was unable to meet its obligations.

MINUTES
Briefing on National Industrial Participation Programme
Mr October provided the background to government's National Industrial Participation Programme (NIP) before Mr Zikode reported in greater detail on the programme and its performance.

 

 

Mr October explained that the Department reported annually to Parliament on the NIP. The NIP sometimes appeared more complicated than it was. This was because government and state entities purchased goods and services which were mostly imported, and government had therefore decided in 1996 to increase the leverage of those purchases by requiring any foreign company from whom it made a purchase above $10 million to assist with invest, exports and the generation of domestic sales. Although the NIP was known primarily for arms offsets, it related to defence purchases as well as all civilian purchases. The NIP was aimed at increasing the levels of investment and exports in South Africa and thus, as it was an economic programme, it resided with the Department of Trade and Industry.

Mr Zikode stated that the NIP was a large programme that enjoyed many successes but also experienced a few failures. However, the Department was pleased with achievements to date. Companies had, on average, exceeded their milestones by reaching 114% of their investment obligations and 82% of the sales obligation. The successful discharge of the sales obligation took place despite a range of other impacting factors, including delays in commencing projects and the general economic situation. A total of 130 projects had been implemented and others that had been approved were currently being developed by local partners and multi-national corporations. The projects permeated all sectors of the economy. He proceeded to provide a breakdown of the milestones and achievements to date of the various multi-national companies (obligors).

He concluded by stating that Armscor officials, who were administering the Direct Industrial Participation Programme (DIP), were present and would provide clarity on the achievements and performance of that programme. He explained that the NIP targeted civilian companies only, and only those companies would benefit from the offsets generated from the purchase. Therefore, even if the Defence Department purchased equipment, the civilian companies benefited from that purchase and that offset would thus be managed by the Department of Trade and Industry. The DIP however, aimed at investing in local defence-related companies that supplied services related to the product being purchased from the multi-national company. That offset programme was managed by Armscor. All DIP obligations had to be discharged over a six month period.

As at 31 March 2005, 51% of the Strategic Defence Procurement (SDP) obligations had been fulfilled, and 60 South African companies in the defence-related sector had benefited from the DIP with approximately 5000 jobs created and maintained. Obligations that arose out of the defence purchases, which had benefited civilian companies in the NIP, had been difficult to manage, in that the defence companies were investing in projects and sectors that they did not know much about. However, obligations that arose from the DIP were easier to manage as they related to the defence sector, which was the investing company's area of expertise, thus enabling it manage the performance of the multi-national partner. For that reason, and with the exception of Thales, performance in the DIP was not poor.


Ms Brenzia Potgieter, Armscor Senior Manager: Defence Industrial Participation, explained that Thales was not currently behind schedule. However, a problem was foreseen as one of its subcontractors, MBDA, would be unable to fulfil its obligation within the two remaining years. Efforts were currently underway with Thales to manage that process at a senior level and to identify other plans that would ensure fulfilment of the offset obligation. She stated that, while all hope had not been lost, there was raised concern that MDBA would not be supporting Thales.

She explained that the DIP was an additional programme, with only 15% of the total NIP dedicated towards the defence industry. Most of the companies were on schedule to meet their offset obligations within the stipulated time-frame. Many had either already reached their milestone or were very close to achieving it. Aerospace company, Agusta, appeared to be the furthest behind schedule, however this was not the case as its projects were running, and the lag was due to a conflict situation it had experienced with Denel, which had subsequently been resolved. She was therefore confident that Agusta was on track, although the following two years would be challenging.

The remainder of the DIP slide-presentation explained the different categories of local sales and exports. Ms Potgieter noted that the technology required for the Grippen project was ahead of the sales rate, but because those obligations were to be discharged over an eleven year period, the technology first needed to be transferred before the production could begin.

Discussion
Mr J Maake (ANC) asked the Department to generally explain the offset obligations, that is, how exactly they worked in practice and how the milestones decided upon related to the purchase.

Ms N Khunou (ANC) asked the Department to explain the different between NIP and DIP, especially with regard to the beneficiaries of each programme.

Mr October responded to the two questions by stating that the Department had no influence on the goods or services purchased by government or a government entity under these programmes, nor was it involved in deciding whom the goods would be purchased from. The sole interest of the Department was to increase the leverage of the purchase to ensure an economic gain for the economy. Once the tender was awarded for a purchase of over $10 million, the Department would enter into a contract with the company supplying the equipment. There would be two components to the DIP contract. The first was the direct defence component and the second was the non-defence component. Thus, part of the multi-national company's obligation in the contract was to ensure that any related work was passed on to South Africa defence companies. Government therefore did not import an aircraft that was manufactured entirely in another country. This would generate work for, and build capacity within, the local defence industry. Furthermore, the Department required the multi-national company to assist in investment outside the defence industry. It was for that reason that Ferrostaal, for example, was investing in the Eastern Cape tea industry. Even though it had no knowledge of the tea industry, the aim was for Ferrostaal's capital to be used to assist in generating a broader industry.

Ms Potgieter replied that 15% of Strategic Defence Procurement was focused on the DIP programme, while within the DIP a portion related directly to procurement, meaning that the milestones for performance were correlated. Regarding the remainder of the obligations, Armscor had informed them as to the type of progress it expected at specific points in the project. The progress made was reviewed every six months, in contrast to the NIP, which had set milestones every few years. It was important to understand that it was a business opportunity, and government was therefore neither involved in the negotiations of contracts nor did it prescribe the supplier or products to be used. Instead, the matter was left to be decided by market. The program merely provided an incentive for foreign obligors to investigate the South African defence industry market and find partners.

Mr Maake questioned why banks required a 300% collateral for gold loans. He felt that this practice could hinder development of the economy.

Ms D Ramodibe (ANC) requested the figures relating to the number of BEE companies that participated in the NIP and DIP, as well as an indication of how they benefited from the programmes.

Ms Khunou asked whether black South Africans were in fact benefiting from the NIP and DIP programmes.

Mr October replied that the programme commenced in 1996 before the BEE legislation was enacted, and thus the NIP and DIP contracts did not contain specific provisions requiring multi- national companies to abide by South Africa's BEE prescripts. However, the multi-nationals were encouraged to invest in local economically-depressed areas and struggling sectors of the economy, such as the tea plantation in the Eastern Cape. Government was essentially requesting the multi-national companies to invest in higher-risk areas where the local private sector had not ventured due to the risk involved. Ferrostaal was therefore asked to invest in the black tea industry in an attempt to resurrect the Eastern Cape project as jobs were lost and people were not paid for two years.

With regard to the gold loans, the biggest problem faced by small jewellery manufacturers was that their working capital was a valuable commodity, and thus banks required strong collateral to pay for the gold. As it was a high risk venture, the costs were high and banks required a 300% collateral. For that reason government used the multi-nationals to enter into those high risk industries and provide the capital. For example, British Aerospace was assisting South African banks to provide the loans at cheaper rates.

The Chair reminded the Committee that the last time the Department had reported to it on the NIP it had referred to a gold project that was implemented in the Free State, but which had failed. He requested the Department to indicate the progress made in saving that project.

Mr October replied that British Aerospace had approximately 40 active projects in high risk areas and there were therefore also some failures. One such was the Free State case referred to, which was currently under investigation. Problems had been experienced with foreign partners, as they had not generated the sales promised.

Mr Zikode added that the offset company had invested $6 million, which was a substantial investment, and thus that project needed to be resurrected to prevent the funds being wasted. The company was working closely with the Industrial Development Corporation and other partners to resurrect the project.

The Chair asked the Department to provide further information on the Thales project, which the Department had expressed concern about. He queried what the worst-case scenario would be if Thales was unable to meet its obligations in two years.

Ms Potgieter responded that a contract had been entered into with Thales but its subcontractor, MBDA, was causing serious problems. Where previously Thales had laid the responsibility with MBDA, in this case it had taken up the challenge and assured that the obligation would be fulfilled. The worst case scenario was that government would have to employ its bank guarantee and invoke the contractual penalty for failure to perform. She did not however believe it would get to that point, but felt it necessary for the Committee to nevertheless be cautioned of a potential problem. Government could also decide to grant them an extension, but all efforts were focused on completing the project as initially agreed rather than invoking the penalty.

Mr Maake asked the Department to explain how exactly the milestones were decided upon, and whether they were related to the purchase amount.

Mr October replied that, in general, the NIP set the obligation at 30% of the total purchase price, which was then divided into local investment and export sales. However, regarding the DIP projects, because the programme was large, the obligation could at times be as high as 50% or even 100% of the total purchase amount. This practice was in keeping with an international standard of imposing higher obligations for the defence industry.

Ms Khunou asked to be informed of the specific companies that had failed in the Virginia project in the Free State. She questioned what the Department was doing to revive the project, as $6 million was a substantial amount and the subsequent joblessness needed to be addressed.

Mr October responded that the problem in those projects did not arise from the obligor because, as stated earlier, government was asking the multi-national whose area of expertise was the defence industry to invest in the South African jewellery industry, which it had no knowledge of. They merely provided the capital for the project, and were required to contract the services of local companies that involved in the concerned industry to run the project. The obligor was currently resurrecting the project. It was important to note that less than 1% of the NIP and DIP projects had failed, because the Department scrutinised the business plans and only countenanced viable projects that were sustainable in the long-term.


Mr Zikode added that the Department was currently engaged in negotiations with the offset company to invest more funds into the project. In turn, the Department would grant the offset company the proportionate credits. It was doing so because the company had initially invested $6 million and was now being asked to invest more to resurrect the project.

Ms Ramodibe requested a gender breakdown of the companies involved in the NIP and DIP programmes.

Mr October replied that many of the projects were specifically focused on the employment of women. The bulk of the employees in the large projects were women, and the Department insisted that women formed part of the BEE consortium in all new projects.

Mr Zikode added that most of the projects employed women. The Free State project referred to, employed approximately 500 women, and the Green Heat project in Kwazulu-Natal employed more than 100 women. More than 70% of the employees in all the gold beneficiation projects were women.

Prof Cheng (ANC) questioned whether the local market or the export market was the target of the NIP and DIP programmes. If the intention was to target the domestic market, it was not clear who the buyer was. He felt this to be an important consideration.

Mr October agreed that it was a key issue. It was in recognition of this important consideration that, when government set the investment obligations for the multi-national companies, it did not only set an investment target but also a sales and export target, aimed at ensuring the long-term sustainability of the project. Government attempted to "get a very good mix of domestic demand and exports" in each project.
 

Concluding remarks by Chairperson


The Chair thanked the presenters for the input, and stated that the Committee would continue to follow the issues.

The meeting was adjourned..

Appendix: Press Release on progress of Strategic Defence Acquisitions

MEDIA RELEASE
14 October 2005

EMBARGOED: For release at 11h00, 14 October 2005

PARLIAMENT UPDATED ON PROGRESS OF STRATEGIC DEFENCE ACQUISITIONS

South Africans have benefited to the tune of US$3,5 billion in the last eight years as a consequence of the country's Strategic Defence Procurement (SDP) programme and other government purchases.

This was revealed when the Parliamentary Portfolio Committee on Trade and Industry received an updated (March 2004 - August 2005) report on the implementation of the National Industrial Participation (NIP) programme today from the Department of Trade and Industry (the dti). The briefing covered the areas of Black Economic Empowerment (BEE), partnerships between participating entities, skills development and a review of milestones set for the primary contractors involved in the SDP programme. The NIP programme arose as a result of the SDP programme entered into by government in 1997, with the majority of projects beginning in 2000.

The committee was told that the NIP programme had generated investment and sales credits valued at US$3,5 billion. This includes investment credits estimated at US$1 billion, with export and local sales, technology transfer, BEE and SMME promotion making up the balance. To date, the dti is monitoring total obligations to the value of US$ 15 billion. The NIP obligations arising directly out of the SDP are expected to be discharged by 2011.

Addressing the committee, Lionel October, Deputy Director-General: Enterprise and Industry Development, of the dti, said that progress in the implementation of the NIP programme and the meeting of contractual milestones had been "largely satisfactory."

"Two of the five main contractors in the SDP have achieved the targets in their contracts, with one exceeding the set target. At this stage of the reporting cycle, we are confident that the others have identified projects that will help them reach the two-thirds milestone target set out without the need to invoke the penalty clauses in their contracts. The dti is in constant touch with those entities that seem to be falling short of their obligations." The medium-term view shows that obligors were willing to meet contractual requirements and that South Africa is on track to enjoy the benefits of the contracts as intended, he added.

Partnership projects arising out of the NIP programme range from the local manufacture of galleys for the Airbus A319 and A320 to the production of cockpit modules for the BMW 3 Series for export purposes. The BEE component has seen a South African company being awarded the contract to print the owner-manuals for the Mercedes Benz C-Class right hand drive models assembled in South Africa. These manuals will be distributed internationally as the vehicles are exported to countries which use right-hand drive vehicles.

The fact that 8 000 new work opportunities have been directly created and 134 new projects approved, across the country, as a consequence of the NIP programme was a welcome sign that the targets set for 2011 are realistic and will help achieve some of the country's broader socio-economic goals said Mandisi Mpahlwa, Minister of Trade and Industry.

"The objectives of the NIP programme have included fast-tracking investment, fostering partnerships in technology transfer and creating market opportunities for locally manufactured goods abroad. We are confident the NIP programme is a building-block in helping us reach key identified goals in broader national economic growth," he said.

The full report is available on www.thedti.gov.za.

Issued by the dti. For further information, contact Sipho Zikode on 012 394 1396.

Note to Editors:

There are two elements to the Industrial Participation (IP) programme in South Africa, namely a National (non-defence) and a Defence element. The dti manages the National IP (NIP) programme, which becomes obligatory when the foreign content of the procurement, purchase or lease contracts of Government Departments and parastatals exceeds the threshold of US$ 10 million, in which case an NIP obligation of 30% on the foreign content will be attracted. NIP focuses on National objectives, mainly in the commercial environment.

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