Business Plans & Budgets 2006/07: Onderstepoort Biological Products Ltd &Agricultural Research Council

Meeting report

AGRICULTURE AND LAND AFFAIRS PORTFOLIO COMMITTEE
8 MARCH 2006
BUSINESS PLANS AND BUDGETS 2006/07: ONDERSTEPOORT BIOLOGICAL PRODUCTS LTD AND AGRICULTURAL RESEARCH COUNCIL

Chairperson:

Proposed Business plan and budget for 2006/07 of Onderstepoort Biological Products Ltd
Agricultural Research Council Strategic Plan 2004/05 to 2008/09 [available at www.arc.agric.za]

SUMMARY
Onderstepoort Biological Products Ltd presented its proposed business plan and budget for 2006/07. It played a pivotal role in the management and prevention of animal diseases in South Africa, SADC and Africa. It dealt in biotechnology, animal health and veterinary vaccines, both in the domestic and international markets. It produced about 50 vaccine products across a broad range, including products unique to African diseases and held about 65% of the vaccine market. It gave an analysis of its market, its current situation, and the position of its various products. It presented its strategic financial objects, other non-financial objectives, strategic initiatives and new projects. It described co-operative ventures with other organisations. It presented the budget for 2006/07 and summarised that it anticipated achieving sales revenue of R113, 6 million and a gross profit margin of 41%. Spending allocation was tabled, with particular emphasis on training and gender targets. Capital expenditure would be at a high figure of R33 million, but Onderstepoort aimed to tighten its infrastructure. The balance sheet showed that the company was in a strong financial position with an overall R8.9 million improvement. Members of the Committee raised queries and received detailed answers on the extent and nature of Onderstepoort support to emerging farmers, its market share, its distribution networks, procurement and retention of skilled personnel, transfer of skills to the community, and the research and development programmes.

The Agricultural Research Council presented its draft strategic business plans and budgets for 2006/07. The Council was part of the national system of agriculture, mandated through the Agriculture Research Act to conduct research, to develop technology and to transfer technology to promote agriculture and related industry. It also held an agency mandate to maintain national assets, and provided national services to the agricultural sector. The Council described the drivers of the core and agency mandates, and outlined how it intended to reach its goals. It had made significant progress in the past year, not only achieving good profit, but also improving financial and organisational management.

It had recently implemented a new approach aligning research more closely to the identified needs of the nation. The Council’s business plan for 2006/07 addressed key priorities as research, poor farmers, the bio-diesel industry, and the formation of synergistic partnerships. The key targets and financial resource allocations were tabled and explained. Members raised questions relating to scientific personnel, indigenous knowledge systems, co-operative ventures with other institutions and dissemination of information to the rural areas.

MINUTES
Proposed Business Plan and Budget for 2006/07 of Onderstepoort Biological Products Ltd (OBP)

Ms N Shabalala (Chairperson of the Board: OPB) gave an overview of the composition and work of the Board of OBP and its various review committees.

Dr L Makuleni (Managing Director: OBP) reported that OBP was mandated to play a pivotal role in the management and prevention of animal diseases in South Africa, the Southern African Development Community (SADC) and Africa. It therefore dealt in biotechnology, animal health and veterinary vaccines. In the domestic market it dealt in the commercial, emerging and government markets, and its international markets, which ensured continued growth, were not only limited to the African continent. OBP targeted cattle, sheep, goats and horses, and dealt also in other species. OBP produced about 50 products, across a broad product range, which addressed preventative, viral, bacterial and diagnostic issues and included products unique to African diseases.

The total animal health market for 2005 amounted to R843 million. Challenges, which were identified and addressed in OBP strategy, related to well-established competitors, stringent regulatory requirements and international accreditation. For the 2006/07 year OBP aimed to achieve sales revenue of R113, 6 million, rising to R164 million by 2008/09, to achieve a gross profit margin of 41%. The anticipated spending for the current year was R1.3 million, rising to R1.7 million in the next year. Training was a major priority at all levels of the staff, with emphasis on employment equity, and it was hoped that the targets of 40% female professional staff would be reached during the year. Capital expenditure would be at a high figure of R33 million, but OBP aimed to tighten its infrastructure. It had identified a need for spending at least 5% on research and development, which would be customer-driven. OBP aimed to produce at last two new products each year, and would be initiating a succession plan that had already been approved by the Board. Risk assessments were done on an annual basis.

Strategic initiatives in the next year focused on people, products, processes, performance and markets. OBP had set up training programmes for staff and customers in conjunction with the University of Pretoria, and with professional veterinarians. OBP had identified a need for engineers in the biotechnology field, had appointed two interns, and cooperated with the Land Bank in finding placements for bursary holders. Licensing technology, and intellectual property protection were focus areas. OBP was looking to the African continent to achieve accelerated growth and was currently sharing experiences with fourteen other African institutions.

Mr M P van Jaarsveld (Chief Financial Officer: OBP) presented the financial statements. He reported that OBP was aiming for a profit of R5, 2 million, as opposed to the previous year’s loss. The improvement had arisen largely through increased sales, as OBP was volume-driven. There had been a sales increase of 22%, with a corresponding increase in the cost of sales. OBP hoped to improve sales in the local market by R15 million (37%) and in the export market by R5, 4 million (10%). The increase in cost of sales, which ran at 10% compared to the budget, was made up of depreciation based on the capital expenditure, and repairs and maintenance. Overheads would increase by 15%, which included increased costs of travel (to open up new overseas markets), salary adjustments and new HR appointments in the sales and marketing, engineering and maintenance departments. The buildings and land were transferred to OBP during the current year, invoking ownership and maintenance costs. Mr van Jaarsveld reported that the cash flow was negative, because of the capital expenditure, but by the end of 2006/07 OBP would have R56 million on hand. He presented a breakdown of the capital expenditure and reflected items of expenditure as percentages of cost of sales, showing that they were well within normal limits. The balance sheet showed that OBP was in a strong financial position with an overall R8.9 million improvement.

Discussion
Ms C Zikalala (IFP) asked how the technologies offered by OBP were made known and available to rural farmers who might not even be aware of OBP’s existence.

Ms B Ntuli (ANC) asked if the national and international distribution networks differed. She asked whether there were now sufficient researchers in the research and development (R&D) team and whether there were sufficient personnel to support the proposed extension of OBP activities to other countries, as well as offer sufficient support to the emerging sector.

Ms B Thomson (ANC) asked for clarity on programmes to transfer skills.

Ms C Nkuna (ANC) asked what mechanisms were in place to ensure that there was not a "brain drain" from OBP and to ensure preservation of skills and knowledge. She pointed out that there were many excellent agricultural students without access to funding, who should probably be assisted to apply for bursaries.

Mr S Abram (ANC) asked for clarity on whether OBP had already positioned its product line. He believed most of the competitors were foreign companies and asked whether OBP was being aggressive enough in marketing itself as a South African producer. He pointed out that the majority of cattle stock was being raised in the rural areas, and asked how stockowners were advised of OBP products. He noted that OBP controlled only R38.8 million of a total market share of R843 million and asked what OBP was doing to increase market share; in particular whether, through its joint ventures with the Land Bank and co-operatives, it was seeking to have products carried in larger quantities. He queried whether some of the issues were not perhaps being duplicated by the various organisations. He asked for a progress report on bird flu vaccines. Finally he asked for a report on how OBP rated internationally.

The issues raised were grouped and answered as follows:

Emerging farmers: Mr W Botha (National Sales Manager: OBP) reported that emerging farmers were one of the focus areas and OBP aimed to educate and uplift the farmers, to give them knowledge of symptoms, causes and transmission of animal diseases, and to encourage timeous and regular vaccinations. To this end OBP produced a number of brochures in all languages, and worked closely with the Department of Agriculture in the provinces, with animal health divisions and with distributors in the emerging and commercial sectors. OBP was involved in hundreds of "Farmers’ Days" each year. It visited and gave presentations in the local languages in numerous rural areas, interacting with commodity groups and national associations and encouraging them to convey the information to all farmers. OBP’s technical manager was proactive in producing lectures, arranging radio presentations with phone-ins and publishing articles in Farmer’s Weekly and other targeted publications on symptoms and cures for animal disease.

Market share: In reply to Mr Abram’s questions, Mr Botha conceded that international companies had become well established in the South African markets, but that OBP was well placed, particularly as the sole producer of products for South African endemic diseases. He stated that OBP vaccines would not necessarily be kept on the shelves of co-operatives, but in their fridges, and that OBP and its partner Bayer had provided fridges in exchange for sole sale rights. Many of the vaccines had a limited shelf life and the turnover of stock was fast. In regard to the share, Mr Botha confirmed that the total of R843 million represented the whole animal health industry, and that OBP concentrated only in the vaccine segment, where it in fact held a 65% to 70% market share. Dr Makuleni added that OBP’s training ventures with commodity groups were intended to increase market share and visibility.

Distribution networks: In reply to Ms Ntuli and Mr Abram, Mr Botha stated that most South African manufacturers would sell through co-operatives, pharmacies and small wholesalers. OBP had more than 800 points of sale, although he conceded that it was difficult to reach the deep rural areas that were not close to co-operatives. OBP was making concerted efforts to reach these areas through mentors and other distributors and he requested Committee Members to assist in identifying entrepreneurs in their constituencies. Mr Botha readily accepted the Chairperson’s suggestion that OBP should become involved in Members’ constituency work. Distribution in the international market similarly relied on a co-operative structure, using veterinarians, pharmacies and government structures.

Accelerated growth: Mr Botha stated that since livestock was a core business area, OBP produced 50 vaccines and aimed to educate farmers to vaccinate in time, and on a regular basis, increasing its own sales. This would have a knock-on effect, assisting accelerated growth in agriculture. He pointed out that a vaccination for lumpy skin disease would impact upon the tanning industry as it would help to regulate the quality of the hides.

HR Procurement and retention of skills: Ms S Bokwe (General Manager: HR, OBP) reported that OBP was concerned with the retention of its knowledge base. OBP had ensured that its salaries were competitive within the industry. It had focused on skills development over the past few years, and had in addition set up a succession plan to ensure transfers of skills to younger employees. OBP had also identified and addressed the need to include engineers in its own organisation and had given more engineers exposure to mentors in the biotechnology field, entering partnerships with the Land Bank to ensure placement of Land Bank bursary holders. OBP was very close to its target in terms of gender appointments.

Dr A Kgasi (Business Development Manager: OBP) confirmed to Mr Abram that at present OBP had sufficient HR capacity and expertise to supply not only SADC, but to venture into other markets, thus growing its competitive edge.

Transfer of skills: Mr van Jaarsveld stated that OBP ensured transfer of skills by working with the Department of Agriculture, developing disease management programmes, disseminating research information by way of the veterinary profession and media workshops, and training animal health technicians through formal training and through commodity groups, who brought their own members for training. The University of Pretoria would shortly hold a workshop on management and control of trans-boundary diseases to help future planning. OBP was grateful for and would discuss suggestions from the Committee in regard to training of uneducated farmers and provision of assistance to school-leavers.

Research and development: Dr B Dungu (General Manager: Operations, R& D, OBP) reminded the Committee that although the core business of OBP was manufacturing, it was also mandated to conduct R&D. Research was conducted internally by 15 staff members, representing 8% of the staff component, and was also outsourced to the Agricultural Research Council (ARC) and the Universities of the Free State and Pretoria. OBP conducted research into national and international licensing technology. All research helped to drive the marketing and production processes. There had traditionally been collaboration with the ARC and during the past year the ARC and OBP had formulated new plans of action and projects. In reply to Mr Abram’s queries on research into bird flu, Dr Dungu stated that although this was mainly a bio-safety issue, OBP and other institutions were working with the National Department, and were currently represented at a SADC workshop on this issue.

Presentation of the Draft Strategic Plan and Budget for 2006/07 by the Agricultural Research Council (ARC)

Dr N Tau-Mzamane (President and CEO: ARC) reported that the ARC was part of the national system of agriculture, mandated through the Agriculture Research Act to conduct research, to develop technology and to transfer technology to promote agriculture and related industry. The ARC’s business strategy and plans were driven by national priorities and government strategy. From the mid-1990s their mandate was extended to encompass an agency mandate to maintain national assets, such as gin banks and scientific material. The ARC also provided national services to the agricultural sector, including diagnostics, soil conservation programmes, warranty and services. It was also mandated by its shareholders to manage some ring-fenced programmes and to carry out ad hoc projects.

The ARC’s organisational business was driven by national legislation, policies drawn from the State of the Nation address, contributions to the New Partnership for Africa’s Development (NEPAD) initiatives, presidential programmes and technology applications arising from MinMEC and Cabinet decisions. The ARC also responded to the national systems of agriculture and innovation, to international conventions and protocols, institutional reviews (which provided an opportunity to benchmark ARC) and internal reviews (to ascertain progress).

The ARC’s research mandate was driven by three main factors: (a) strategic public interest research – identification of medium and long term needs and enhancement of its R& D stature; (b) risk management of the agriculture value chain, by development of technologies that would minimise risk; and (c) contribution to shared plans and initiatives, including equitable access to the sector and development of safe and nutritious food.

The ARC aimed to provide agricultural and technical solutions by creating centres of innovation and learning, by developing and retaining scientific capacity, by investing in innovation and biomechanical support, and by building value-add alliances that would also enhance its reputation. The ARC aimed to extend business opportunities to Black Economic Empowerment (BEE) and previously disadvantaged groups, and ensure the needs of the second economy were supported. It aimed also to effectively manage its financial resources.

The ARC had made significant progress in the past year, not only achieving good profit, but improving financial discipline, which had resulted in positive cash flows, the ability to generate and use own funding and minimise wastage. It was well on target in creating a well-functioning and integrated organisation. Compliance issues had been addressed and delivery of quality service had been improved across all sectors. It had established a division to ensure quality delivery had been established. It had raised staff satisfaction through a system of better rewards and reduction of disabling HR practices, while demanding better performance. It had set up a single streamlined performance management system. Strategy was implemented through business plans, and each manager had to motivate for funding.

The ARC’s products and services included new plant varieties, animal breeds, vaccines, agro-value chain technology, testing of new farm implements and down-scaling implements to make them suitable for smallholdings, methodology in plant and water harvesting and monitoring disease in domestic and game animals. The ARC was increasing its volume of work in the pharmaceutical and medicinal plant fields, and in development of new eco-systems.

The ARC’s agency mandate required it to ensure that agriculture, plants and biotechnology were recorded in an up-to-date reference database, and managed properly to provide service in future. National services demanded integrity and proper maintenance of knowledge, particularly in regard to new diseases and pests, monitoring of migratory disease and provision of early warning systems. Different factors that impacted on the delivery ranged through economic and social, intellectual property, and demographic spread of scientists. Challenges and risks included competition for skills and funding, increasing the customer base, unlocking the indigenous knowledge system, the HIV pandemic, impact of climatic change, natural disasters, trans-boundary disease and bio-physical factors. In regard to R&D, the ARC had now implemented a new system where research should align to the identified needs of the nation, justify the technical processes involved, and be tied into a specific time frame.

The ARC’s governance was divided between the R&D division and the support services. A further division dealing with sustainable rural livelihoods (SRL) had been established. 25% funding was invested in addressing the needs of poor farmers who needed massive technical support.

Dr Tau-Mzamane tabled the business plan, which addressed the key priorities. The ARC’s research drew on reviews, interaction with other organisations and experience of the industry. It aimed to improve forecasts on successful research programmes and improving strategic investment in those programmes. The ARC would increase research on goats and assist poor farmers to access the mohair industry. Greater emphasis overall would be placed on poor farmers. Water and the development of efficient agricultural systems would be addressed. The ARC would concentrate on the bio-diesel industry. It had a competitive edge in maize, sorghum, ground nuts, sunflower and soybeans, but would shift its focus from producing high quality seed and yields to developing technology to produce plants high in extractable starch, oil and fuel products. The ARC needed to disseminate technology to the population. There were only a thousand scientists in the field, and the ARC worked intensively with the national and provincial Departments of Agriculture. Livestock and animal diseases remained a key issue, in conjunction with the vaccine programme of OBP. In summary, the ARC aimed to establish and enhance synergistic relationships with other role players. The ARC would also improve its customer orientation and build a better structure.

A review of the finances as at 31 December 2006 showed that the ARC had exceeded some targets but had fallen behind on others. The key targets and financial resource allocations were tabled briefly and ratios discussed. Dr Tau-Mzamane stated that the ratio of salaries to operations needed to be adjusted. No figure had yet been allocated to capital assets. No provision had been made for the avian flu research. Full financial statements would be drawn up and discussed at the end of the financial year.

Discussion
Ms B Ntuli sought clarity on other institutions conducting research, and asked whether the decline in the number of researchers and scientists had created a problem and whether the ARC had any strategies in this regard. Mr F Guma (Group Executive: Horticulture, ARC) confirmed that there were a number of other institutions conducting agricultural research. The ARC regarded itself as a government organisation and agency established to assist the populace. Although the ARC’s research might not always produce a high monetary return, it had a very high social value. The ARC’s expertise benefited other organisations and it aimed to establish areas of synergy. Although the numbers of scientists had declined, there seemed to be a turnaround as many scientists were keen to take on the new challenges in the ARC pioneering fields.

Ms B Ntuli asked for further explanation on the "unlocking of indigenous knowledge systems". Mr F Guma replied that indigenous knowledge related largely to plants which were used in traditional medicine, and which had been identified as having commercial value. The ARC wished to ensure that traditional knowledge was codified and preserved, and that monetary benefits resulting from commercialisation of the knowledge would accrue to the communities. The Department of Science and Technology was responsible for registration of local and international intellectual property protection, based upon the ARC’s research into plant habitat, propagation, extraction processes and medicinal properties.

Ms B Thomson asked how the ARC conveyed its knowledge and research results to the population. Ms B Ntuli asked how the ARC would ensure that those with indigenous knowledge were made aware of their rights so they would not be open to exploitation, and ensure protection of the plant species. Dr S Masia (Group Executive: Sustainable Rural Livelihoods, ARC) replied that the ARC had appointed coordinators in each province to deal with sustainable rural livelihoods, who would also identify and record indigenous knowledge about plants and animals. She undertook to send a contact list of coordinators to the Committee. She stated that although the ARC did not deal with protection of intellectual property, they and the Department of Trade and Industry (DTI) were active in community education.

Mr V Ngema (IFP), commenting that the budget figures had not been provided to the Committee, asked for further explanation on spending, and whether SADC made a contribution or provided a benefit. He also asked whether the ARC was involved in water harvesting. He commented that the budgetary figures had not been provided to the Committee in advance. Dr Tau-Mzamane replied that the parliamentary grant addressed the core business but not the safeguarding of national assets. The ARC and the Department of Agriculture were presently discussing this issue. Some areas had not been addressed due to lack of funding. There were various forms of partnerships within SADC, and neighbouring countries had in the past been able to progress research emanating from one country for the benefit of all within the region. Some countries that did not have the necessary research infrastructure nonetheless had excellent scientists who were able to link in to ARC work, for their common benefit. Links in the region would assist in protecting the country from new diseases or pests, and links with international organisations, including participation in consultative groups, enabled the ARC to be recognised as one of the major drivers in sub-Saharan Africa. Research funding generated would not only be of direct benefit to South African research but would benefit the whole region.

Water harvesting was a peripheral concern of the ARC. Although the various agricultural organisations were limited by their mandates, the ARC dealt with water harvesting within the context of agriculture – for instance investigating how to contain run-off and improvement of soil. Dr Tau-Mzamane detailed a specific project where an infield harvesting system had tripled yield.

The meeting adjourned.