Academics question offsets

Academics have questioned government’s industrial participation or “offsets” policy that applies to all government contracts of over US$10 million. 
According to the Business Report they have also accused the Department of Trade and Industry (DTI) of turning offsets “into a disincentive scheme – in effect, discouraging foreign investment”.
Matthew Stern of Development Network Africa, an economic development agency, on Friday also questioned the effectiveness of the DTI national industrial participation programme, saying it “arguably increased the price” of the subject acquisition.
“The result: Bae/SAAB was spearheading tourism in Port Elizabeth, Agusta was “spinning and knitting mohair”, Thyssen Krupp was producing wheat beer and Ferrostaal was testing and sealing condoms,” he said in reference to the R47 billion 1999 Strategic Defence Package (SDP) that attracted national and defence offsets in excess of R100 billion.
Economist Mike Schussler has described offsets as voodoo economics.
The DTI has always insisted offsets are a real investment and have denied that the cost of offsets were included in the purchase price as stern alleged. SDP companies have also insisted that their offsets are a success. The British government, which has been auditing BAE Systems and Saab`s offset obligations, has confirmed the veracity of their reports.
However, officials in the British government and at the companies concerned have conceded that some meetings between the companies and the DTI regarding the recognition of offsets have been “robust”.   
BAE Systems executive vice president for SA John Williamson in September said his company and Saab have since 2000 delivered US$5-billion in new, measurable, additional economic activity to South Africa.

The two companies are obliged to provide “offsets” worth $8.7 billion for the purchase of 24 Hawk and 28 Gripen (later reduced to 26) for $2.2 billion. The entire obligation is targeted to be fulfilled by April 2012. “We have met all of our DIP and NIP milestones,” he says.

This was confirmed by the United Kingdom Trade & Investment (UKTI) Defence & Security Organisation’s (DSO) operations director Malcolm Haworth. He also commended SA for not allowing companies to cop-out of offset obligations by paying penalties. Haworth said the approach of rather giving companies more time to comply made more sense and ultimately benefited the country.
“There are companies around the world who have a reputation for committing themselves to offset programmes and then building the penalty into their price and making no effort whatsoever to deliver.

Paul Williams, the UKTI`s oversight officer, says the penalty is generally a fraction of the contract price, and if exercised, ends up in the Treasury’s coffers. NIP and DIP, by contrast, create real jobs and investment in the real economy.      

Complex programming
Business Report adds the academics, speaking at a competitiveness conference in Cape Town on Friday also criticised the DTI “for developing a complex industrial policy that focused too much on big projects and black empowerment requirements.”
Queen’s University Bangkok professor emeritus Frank Flatters told the Trade and Industrial Policy Strategies forum that South Africa had gone through “an amazing economic transformation”.
He says South Africa’s success story of industrialisation is the motor industry, where exports had ballooned, “but there was a downside.”
Motor industry programmes, which pumped R12 billion a year into the automotive sector, had cost the state about R114 billion in the past 14 years. “These are big subsidies,” Flatters said.
Flatters has previously criticised the DTI`s Motor Industry Development Program (MIDP), most notably in a paper delivered at a National Economic Development and Labour Council (NEDLAC) conference in November 2005.   
A paper presented there by Flatters noted that the “MIDP`s success makes it an obvious model for new approaches to industrial policy, and in particular for increased emphasis on sectoral strategies and interventions.”
“Despite its importance there has been surprisingly little analysis of MIDP`s economic benefits and costs.” Based on his own observations and previous research, Flatters finds that the MIDP provides very large subsidies to the automotive sector; that these have substantial economic costs, “and that some of the program`s alleged benefits, especially in terms of consumer interests and employment, have been overstated”.
He warns that “the failure of policy makers to appreciate the costs of such an important program raises serious questions about the government`s capacity to design and manage sector specific policies, and about the transparency and accountability of processes for monitoring and reviewing them.”
The DTI has recently sought to replicate the MIDP`s success in the aviation sector. After two years of planning Trade and Industry Minister Mandisi Mpahlwa in August turned a symbolic sod at the launch of the Centurion Aviation Village, a R600 million project to develop the aerospace industry to the level of the automotive industry and as a “sustainable, growing, empowered and internationally recognised industry”.
“This will allow for small companies to now be located around primary suppliers such as Denel and Aerosud and a lean supply chain to be established resulting in a cluster focused on aerostructure manufacturing,” Mpahlwa said. “Not only will a significant number of jobs be created, but also the integration of small companies into the industry will be advanced significantly.”
Mpahlwa said the national industrial policy framework (NIPF) recognised aspects of advanced manufacturing, particularly the long-term intensification of the country’s industrialisation process. “The aerospace industry provides us with an opportunity to ensure that we remain within the broad ambit of the technological advances in the frontier of human endeavours.”
In 2006, the DTI`s then-chief director for future industries and enterprise and industry development, Francois Denner, said he foresaw SA being able to produce a 50-seater commercial jet aircraft “within probably the next 10 years”. Denner subsequently became the founding director of the DTI-supported National Aviation Centre of Excellence, but has since resigned.