National Industrial Participation Annual Report Department Presentation; adoption of Committee’s Annual Report & Minutes

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
17 November 2006
NATIONAL INDUSTRIAL PARTICIPATION ANNUAL REPOR;T ADOPTION OF COMMITTEE’S ANNUAL REPORT

Chairperson: Mr B Martins (ANC)

Documents handed out:
The National Industrial Participation Programme PowerPoint Presentation
National Industrial Participation Programme Report 2005/06
Department of Trade and Industry Annual Report 2005/06 [available at www.thedti.gov.za]

SUMMARY
The Committee received a briefing on the National Industrial Participation Programme’s activities during 2006. Issues related to sustainable job creation and the need for more offset projects and development within rural areas and less developed provinces dominated the discussion. Members while cognisant of the need for commercially viable projects, felt that concerted efforts should be made for more of these to be situated within rural areas. If this was not done development would remain skewed in favour of urban areas.

Minute
Department Presentation
Mr Sipho Zikode, Chief Director of the Department of Trade and Industry’s Industrial Participation Programme briefed the Committee on the programme’s activities of 2006 which marked the institution’s tenth year of existence. He gave members a short overview of the programme’s background and value and then proceeded to detail the programme’s current obligations as well as the performance of some of its major obligors such as BAES/SAAB, GSC Ferrostaal and Thales. He also spoke to some of the programme’s major challenges, successes and plans for the immediate future.

Discussion
The Chairperson wondered whether the Department had any mechanisms in place to track the lifespan of the jobs that were being created through the programme. It was important for the Committee to know the nature, the quality and the lifespan of the jobs that were being created.

The Chairperson said that it was good to know that many of the projects were doing well but felt that it would be valuable for the Committee to also know more about the reasons why some of them had failed.

Ms M Ntuli (ANC) noted that at present there were 44 active projects. She wondered whether any attempts had been made to remedy the causes for the failure of some of the other projects and asked how many jobs had been lost due to their failure.

Mr Zikode explained that many factors contributed to the failure of the offset projects. Some reasons were purely commercial – due to unexpected market changes, which resulted in them no longer being commercially viable. Sometimes the partner-company themselves caused the failure: in many instances the offset companies relied on other partners that had the necessary expertise to develop and administer commercial activity. The Department did not expect the offset companies to be the only funders but expected the other partners to contribute to the project too. The project might start off with funds from the offset company and when the time came for other partners to contribute funds might not be forthcoming thus resulting in the project suffering.

He continued explaining that in the event of a project failing the offset company was obliged to replace it with a new one. While the new project might not necessarily replace the jobs that had been lost, it might create new jobs somewhere else. In many cases the Department got involved in trying to save a project. At times it might give an offset company more credit to invest additional funds.

Mr S Rasmeni (ANC) agreed that the projects that had failed were of concern to the Committee. He was particularly interested in the Free State Gold Beneficiation project that had benefited women and wondered what had become of the women and whether the project might be resuscitated.

Mr Zikode explained that those women had unfortunately lost their jobs. BAE Systems and the Industrial Development Corporation (IDC) were looking at ways in which they could resuscitate the project. Obviously legal processes aimed at getting the partners to account for the money that never came back from exports the project had generated in the beginning were also underway.

Mr S Rasmeni (ANC) asked how many jobs the programme had created and how many people had been trained.

Mr Zikode did not have the actual numbers of the people who had been trained in the different projects at hand. He explained that at times people were trained in the project itself and that the Department also had stand-alone training programmes.

Ms Ntuli noted that the Department spoke of adding value to agriculture and local natural resources. It also spoke of developing new sustainable agri-businesses in rural areas. She wondered where these plants would be and commented that in most cases one found that produce was taken from rural areas to big cities to be processed there. She wondered whether it might be possible to situate production plants in rural areas so that jobs could be created there.

Ms Ntuli recalled that there was a textile factory in Atlantis but the plant that was used to produce the textile was in another country. She wondered whether production plants could not be developed locally so that local natural resources could be used to produce goods and jobs that would benefit locals.

Ms Ntuli asked the presenter to clarify what was meant by the unexpected benefits NIPP had as far as the development of agro-processing was concerned. (See p22 of the Annual Report).

Mr Zikode clarified that initially offset companies had not been allowed to get involved in any primary agriculture activities. While they could not put money into any plantations, they were allowed to take the produce from those plantations and develop them further into agro processes. Offset funds could flow into these projects.

As time went one and due to the nature of South Africa’s economy the Department realised that there were some primary agricultural activity that could really generate jobs. The Magwa Tea Estate in the Eastern Cape was one of the projects that was borne of this realisation. As a high job creator Ferrostaal was allowed to put money into the primary tea plantation. This new avenue could be considered as part of the unexpected benefits of the programme. He admitted that many people were surprised that the Department used offset funding to support agricultural activity but what they did not realise was that within the plantation, tea processing activity also took place. The new Laroche winery in Stellenbosch was a similar example. He added that due to their nature offset companies all over the world were usually targeted for high tech industries and not other sectors.

Ms Ntuli noted that Mr Zikode had indicated that South Africa could not compete with cheap unskilled neighbour. She wondered how the Department saw the contribution the Sector Education and Training Authorities (SETAs) made and wondered what remedies it could propose as far as unskilled labour was concerned.

Mr Zikode responded that he was not an expert when it came to SETAs. The Department of Labour administered SETAs. He could comment however that some SETAs did good work in terms of skills training, while others experienced some challenges.

Dr P Rabie (DA) noted that Ferrostaal was involved in quite a number of projects particularly ones relating to defence. He was concerned that tax payers’ money used to support these industries at the expense of South Africa’s own industry.

Mr Zikode explained that institutions like the IDC contributed to many offset projects. Colombus Steel was partnering with the IDC and Ferrostaal to develop a project that would provide stainless steel. Ferrostaal was giving a non-repayable grant of Euro 6, 8 million and another German technology partner would be running the project. He pointed out that one needed local people to also take part in the project and that the IDC almost always got involved. Taxpayers’ money would thus be used via the IDC in some projects.

Dr Rabie wondered what South Africa’s total contribution was. Mr Zikode did not have that information at hand but would provide it at a later stage.

Mr S Njikelana (ANC) thought the NIPP an exciting initiative. Noting that some documents indicated that 8 000 jobs had so far been created he wondered what the programme’s rate of job creation per annum was.

Mr Zikode replied that jobs created were reported on cumulatively and that he did not have a jobs per annum breakdown.

Mr Njikelana said that he was pleased that IDC was involved but wondered what role the other Council of Trade and Industry agencies played.

Mr Zikode said that the Department involved the Council of Trade and Industry agencies where necessary. Agencies like the Council for Scientific and Industrial Research (CSIR), Mintek, and IDC formed part of the evaluation proves of the projects. Their expertise was used where necessary. They also took part in some of the research and development aspects related to the programme.

Mr Njikelana wondered what the success rate and sustainability of the projects were. Quoting Mr David Botham of the Institute for Security Studies noted in a 2003 report he said that important principles applied to ensure the true benefits that accrue from the offset obligations – the projects had to be economically and operationally sustainable for example.

Mr J Maake (ANC) said that his constituency in the Limpopo province was rural and was thus concerned about the claim that offset projects were focused on high tech industries mainly situated in urban areas. He wondered why the South Africa had to follow a general trend when its situation was different. At the moment development projects were focused on the golden triangle thus “dooming” those in the rural areas where there was not even agro processing activities. He urged the Department to at least try and shift to “a more South African approach” because what was done internationally might not be good for South Africans.

He was also interested in the criteria used to select projects. He wondered whether companies proposed projects or whether a village could for instance make a proposal for a possible project. He feared that should companies always determined what kind of projects they wanted to get involved in South Africa’s economy might develop in a very skewed manner.

Mr Zikode explained that the offset projects were meant to be commercially viable. and that unfortunately this criterion made it difficult for offset projects to be situated in rural areas because of the oft experienced infrastructure challenges. He added that there were some provinces that benefited a lot e.g. the Western Cape, Gauteng, Eastern Cape, and KwaZulu Natal, while others like the Northern Cape did not really benefit from the programme. He assured Members that where there was a need for a project and a viable proposal was made, and if the offset companies and the local partners had identified it as viable the Department would always support it.

Mr Zikode did not necessarily agree with the opinion that South Africa was following an international trend. In developed countries offset activities were found only in three sectors: the defence, aerospace and biotechnology sectors. South Africa allowed for offset programmes in all sectors. He assured Members that the Department did not want to follow a European trend because it realised that in South Africa most jobs could be created in the low-tech sectors and therefore it tried to balance the spread between low-tech and high-tech projects so as to be in libe with Government’s objectives in terms of job creation.

He confirmed that offset companies could propose a project. The Department assisted local businesses that had proposals for sustainable commercially viable projects and this applied to rural areas too. These proposals were taken to the offset companies who if they were interested could contact the local company so that they could develop the project together. Some projects were proposed by the offset companies themselves – they established offices in South Africa and their representatives then had to look for viable projects. Many proposals also came from ordinary South Africans.

Mr Njikelana noted that at some stage the programme had focused on small, micro and medium enterprises (SMMEs) – now the focus appeared to be on large companies. The aforementioned Mr Botham had pointed out that one of the principles that applied in order to ensure true benefits was that there should be no increase in prices i.e. for the economic activity to be truly economic it should not increase the cost of doing things. The President also from time to time raised this point.

Mr Zikode explained that in most cases the offset company participated in the funding of the project and as explained before they brought along their partners who had expertise in running such projects. They often also tried to get local partners to participate. Many times a large multinational might be involved in the project along with big as well as smaller local companies. In the past two years the balance in the ratio had increased in favour of SMMEs due to offset funds that had been established within offset companies specifically to support SMME and Back Economic Empowerment activity. He assured Members that at present the balance was very healthy but could unfortunately not supply them with the official numbers.

Mr Njikelana wondered to what extent the programme was aligned with the overall development objectives. He added that many people were querying Magwa Tea and said that there were people who tried to determine South Africa’s development.

Mr Zikode pointed out that as mentioned the programme would achieve its overall target as far as job creation was concerned. It project aimed to create between 12 000-15 000 direct jobs. Economists predicting the overall direct and indirect impact estimated that about 65 000 jobs would be created.

Mr Njikelana noted that project management had been identified as a challenge across the board and that the Department had not escaped it. He wondered what measures had been put in place to address the problem. One assumed that due to the complexity of the programme there was a greater need for project management.

Mr Zikode said that project management remained a major challenge throughout Government As well as the private sector. There were a number of committees within the DTI, National Treasury, the departments of Foreign Affairs and Defence as well as other government institutions such as the IDC that assisted the programme in managing this area.

Mr Njikelana wondered what happened to the assets and functions of the project as well as the jobs it generated once a project had been completed. He asked whether the setoff company moved out completely and South African businesses moved in.

Mr Zikode said that the Department tried to accept only sustainable projects that would survive even after the offset obligations had expired. Some offset companies took equity and remained after the expiration of the obligations in order to ensure that the projects were sustained. Others expected the loans they had made to be repaid by the time the obligation period was over.

Mr Njikelana recalled that at a briefing in 2005 the Department had said that it was largely satisfied with the progress made in the programme. He wondered whether the Department was still of this opinion

Mr Zikode explained that about 2-3% of the projects had fallen by the wayside. 6-10% were “in ICU” due to problems that they were trying to solve e.g. the Atlantis training centre in the Western Cape. He was confident that about 80-85% of the projects were running very smoothly.

The Department still maintained that notwithstanding the fact that some of them had failed it was satisfied with the progress of the offset projects and was confident that come the end of the obligation period companies would have met their overall commitments.

Mr D Olifant (ANC) was also concerned about the sustainability of the jobs that the projects generated. He requested that at some time in the future the Committee should be informed as to the real figure of the total investments so that Members could get the bigger picture. He also sought clarity on the terms and conditions attached to the offset programme.

Mr Zikode said that the programme was still on track as far as meeting it targets in terms of job creation was concerned. In 2007 14 000 would have been created and the total investment the offset would have generated by the end of the 2011 period would be between $5-$6 billion. The investments also include funding from local companies.

Ms Ntuli wondered how successful the programme has been as far as changing the lives of the previously disadvantaged were concerned through job creation, closing the gap between the first and second economy, BEE and SMME empowerment was concerned.

Mr Zikode felt that considering the number of jobs that had been created one could say that the programme was impacting positively on people’s lives.90% of the 12 000 positions that had been created were filled by black, coloured and Indian people. Some projects were very high tech and thus required more skilled people while others were low tech requiring lesser skilled individuals. 70% of the jobs created were for skilled or unskilled people while the remainder were high tech positions requiring specifically-skilled professionals.

After this first round of questions the Chairperson commented that there appeared to be “a struggle of hopes and wishes”.

Mr Maake remained concerned about job creation and whether targets would be met and wondered whether it was not possible to come up with a ratio for the number of jobs created per Rand invested. This might encourage investment in rural areas. He feared that if high-tech sectors were targeted the programme would not reach the rural areas. He emphasised that it was up to South Africa to determine the criteria so that developmental goals could be met.

Mr Zikode said that although the Department had done a review of the programme they had not gone into greater detail in order to determine jobs or skills per rand invested ratio. He agreed that it would perhaps be necessary to do that. He realised that many jobs could be created in the rural areas but explained that at times it was difficult to do so.

Mr Njikalana said that he was born in St Matthews (close to Keiskamma) where during the Bantustan period there had been an excellent project run by either the Israeli Government or an Israeli company. After the rupturing of the Bantustans the project simply collapsed and even today locals still wanted to see the project revived. He said that this proved that not all rural areas were unsuitable for offset projects and cautioned against making blanket comments about rural areas not being viable. This was especially important in the context of the Regional Industrial Development Strategy (RIDS), which was still on the Department’s drawing boards. If projects were only going to be initiated in ‘viable’ areas there would be unevenness in the development and this was what made Members “very very jumpy”. An integrated approach was very important and the NIPP had to make sure that it was in line with whatever else the Department was involved in. He added that development objectives were broad and did not only encompass job creation and skills transfer but also job sustainability, job quality and equity amongst others.

Mr Zikode assured the Committee that other divisions within the Department formed part of the programme’s evaluation process thereby ensuring that projects were in line with the Department’s other programmes. They ensured that the programme was aligned to other objectives such as geographic spread and the achievement of a rural urban balance.

Mr Njikelana hoped that the NIPP would ensure that its work and results did not exacerbate the uneven development between rural and urban areas. He reminded everyone that Khula Enterprises took a conscious decision to start veering away from just the richer provinces and consciously, in a supply driven manner, went towards the disadvantaged provinces. The Department’s mission was to give leadership to the economy and not to just be reactive but to redirect wealth if there appeared to be a risk of exacerbating the uneven development.

Mr Njikelana also commented on the impact of this programme vis a vis micro economic reform and felt that it t some extent addressed some of the elements of division within the context of micro economic reform. Micro economic reform spoke of geographical spread of social and productive investments and one could raise rural concerns here as well.

Mr Zikode explained that if one spoke of RIDS one knew what one was developing and that the Government would put money aside to achieve those goals. Offset projects needed to achieve milestones within certain timeframes and were subject to penalties if these targets were not met. It was difficult for the Department to demand that offset companies invested in rural areas because if those projects were to fail the Department would have a moral obligation not to call on those penalties. He admitted that it was not easy to strike the balance. Offset companies were also under pressure from Government, politicians and the media to perform. Thus pressure resulted in them looking for areas where everything was already in place thus making it easier to start performing.

Mr Zikode further explained that the Department’s offset policy was benchmarked against the best policies in the world. Most offset policies across the world offered a 5% performance bonus with a few going beyond that to 10%, even 100%. The threshold varied from country to country depending on what that country wanted to achieve. South Africa’s threshold was 30% of the foreign content as far as non defence obligations were concerned; the obligation increased when it came to defence procurement. There were specific reasons for penalties and thresholds to be set at 30% and Mr Zikode felt that with the policy revision not much would change. Real changes would be seen in terms of the BEE, SMME and gender equity requirements.

Chairperson’s closing remarks
The Chairperson said that the Committee took cognisance of commercial sustainability and realised that wherever the Department partnered that would be a cardinal element. He felt that from a policy point of view the broader context of carrying out Government policy it was important to intensify movement towards rural development especially towards those provinces that had so far largely been excluded and where there has been little development.

He said that the South African National Defence Force had bases all over the country and the ones in the Northern Cape were used for major military exercises. If people consciously looked in rural areas they could be made to meet the criteria. He warned that if one started off thinking that one could only invest in the “comfortable” areas the necessary impetus for people to go broader would not be there. As a Government department the DTI should ensure that all areas were considered for projects in order to facilitate overall development.

Policy implementation was also vital because if no one consciously moved towards rural areas things would remain the same. He said that members ere concerned about rural development and were not merely ignorant of aspects related to the criteria for commercial viability. Concern about rural development was part of their responsibility. He assured the Department that one the Committee’s oversight visits Members would interrogate the failures and would engage with the challenges to see where laws and regulations could assist in the movement into all these areas.

In conclusion he assured Mr Zikode that the Committee would be in touch with the Department throughout 2007 to assess the NIPP and similar agencies’ progress. The Committee would also be working very closely with the Select Committee. He concluded by saying that the ultimate objective was to find ways of making South Africa better for all its economic citizens.

Other Committee Business
The Committee adopted its annual report and minutes.

The meeting was adjourned.