Despite an upbeat report to Parliament by the Department of Trade and Industry, questions about the performance of the offset programmes agreed with foreign contractors in terms of the 1999 arms deal persist.
Only limited, and sometimes contradictory, information is available in the public domain, but it seems increasingly likely that at least one major contractor involved in the German submarine consortium will miss its extended deadline for investment, and another appears to have fallen short already.
The department is now weighing whether it will impose the penalties in terms of its contracts with arms deal suppliers.
Lionel October, Deputy Director General in charge of industrial policy at the department, this week told the portfolio committee on trade and industry that investments in local companies by contractors such as BAE-SAAB, Thales and Ferrostaal had created 7 000 direct jobs, and that investments total $677-million.
The programme successfully integrating local companies into the global supply chain of multinationals like Boeing and Airbus, he said.
But the report provides details on just 25 of a total of 125 projects, and it appears to rely on inconsistent performance measures at times.
For example BAE-SAAB, the consortium responsible for the supply of Hawk and Grippen aircraft, and the biggest single contributor to the programme with $7-billion in obligations, says all job creation figures it has supplied are real numbers as of April this year. But other companies have provided projections, which they expect to be realised in the outer years of the programme.
Blackstone-Tec, a manufacturer of carbon-fibre motorcycle wheels, received an investment of R15-million from Thales, and is said to have created 165 new jobs. But Terry Annecke, its head of operations and marketing told the Mail & Guardian the company currently employs 37 people, and expects to grow that number to upwards of 160 by 2007.
More rigorous auditing of projects by the department has revealed wildly inaccurate projections in its own earlier reports.
In 2002 the department said GFC Thyssen’s ferrochrome smelter in the North West province would achieve sales of $573-million. That has now been cut by more than half to $264-million.
Ferrostaal’s stainless steel pipe facility in Gauteng was expected to sell products to a value of US$285-million, but the current report slashes that estimate to ess than US$100-million.
”The milestones are now falling due,” October says, ”so we’ve drastically tightened up our auditing. We are conducting site visits, and the numbers are now based on their actual accounts and interviews with managers, not simple business plan projections.”
In fact, more than one ”milestone” has been missed.
At the time the report was compiled and its first milestone fell due, Thales had fulfilled just 85% of its obligations, although October says it is now at 93%. And Ferrostaal is so far behind that the department has warned it is ”running out of time”.
Asked whether either company would be penalised, October told the M&G they had six months after the expiry of each milestone to provide evidence that they had caught up with their obligations.
”Thales might say they’ve reached their target,” he said.
But a tougher line may be taken with Ferrostaal, a participant in the German submarine consortium which has â,¬3-billion in obligations. It was given an extension to December this year after it pulled out of a planned smelter at Coega due to the weak global steel market of 2000.
The company insists it is back on track after a slow start and ”has the will to meet this agreed target within the contractually agreed time”.
October says the company has made a real effort to catch up, but it could still be penalised.
”We’ll make representations to the German government if necessary, and their MD has already been out here. But we do need to act, or other companies will see the government as soft on this matter.”
During the presentation the department faced questions from both African National Congress and opposition MPs about the economic rationale of the programme.
Enyinna Nkem-Abonta, trade and industry spokesperson for the Democratic Alliance, questioned the quality of the data in the report, and called for a more robust economic analysis of the programme’s impact on the economy. ”If it was profitable for them to come here, why wouldn’t they come anyway, and if it isn’t profitable, how do we know they aren’t loading the contract price?”
October conceded that offset or counter-trade agreements are fast losing favour internationally, pointing out that the United States Congress was readying legislation to ban them, and that the World Bank specifically advises against such deals. He cited a European Union study to the effect that offset obligations increase the price of the original contract by 3% to 5%, suggesting this was an acceptable price to pay for the industrial policy benefits they bring.
Other studies put the cost loading at anywhere from 10% to 30%.
ANC MPs were more concerned about the details of implementation than whether offsets are an effective tool as such. Ben Turok noted the apparently piecemeal character of investments, which range from agriculture to jewellery manufacture and aviation components.
”We are bargaining with big multinationals on a case-by-case basis, but whether we are setting terms based on a strategy looks in doubt.”
He also questioned whether any real transfer of research and development — as opposed to just technology — was taking place.
”We want to be self-sustaining, not junior partners,” he said. The department has consistently refused to provide detailed information on the progress of each contractor, citing confidentially agreements.