Infamous arms plan is only one of many aimed at drawing foreign investment

The much publicised arms procurement programme, marred by claims of corruption, has seen the industrial participation programme being thrust in the limelight in recent months. But it is only one of many such projects government is supporting to draw foreign investment to SA's shores, while at the same time boosting exports.

Other plans include the home affairs department's national identification system and the environmental and tourism department's procurement of fishing and environmental vessels.

The reason government set up its industrial participation programme in 1996 was to gain as much industrial benefit for the country as it could through the large purchases made by government departments and parastatals, which carry an imported content of more than $10m.

Obviously, when government awards large contracts, it would prefer to "buy SA" but this is not possible when it does not have the technology, or where SA producers cannot supply goods at a competitive price.

Jobs are created when overseas contractors get involved in local projects, such as Ferrostaal's steel plant in the Coega industrial development zone, near Port Elizabeth.

Lionel October, chief director of the industrial participation programme at the trade and industry department, says that if government simply imported everything, this could lead to a drain on foreign reserves.

He said it would also reduce government spending in the country, leading to job losses and a reduction in economic activity.

"It will also disappoint local manufacturers who will hold back investment in research and development and in training."

But there is the worry, arising from the strategic defence procurement programme, that getting the industrial offsets off the ground is taking too long. Delays in the procurement programme slows economic growth and foreign direct investment inflows.

October says the programme not only tries to minimise government's purchases overseas but also promotes value-added activity, black economic empowerment and small and mediumsized enterprises.

He says a total commitment value, to be managed by the department over the next six to 10 years, is about $13bn.

The strategic defence procurement has taken a large chunk of the industrial participation programme. So far $5bn more than one third of the total industrial participation obligations have been approved or are already active.

A sticking point for some foreign companies which want to get involved is the criteria set by the trade and industry department for awarding contracts under the industrial participation programmes. They also felt the department was too arbitrary in allowing or disallowing particular projects based on the department's viewpoint, even though the projects might have qualified for the programme.

October says the department assesses projects submitted to see if they meet the objectives of the programme.

A successful bidder enters into an agreement with the department in which the value of the seller's obligation cannot be less than 30% of imported content.

The obligation is usually divided into an investment and an export-sales component which must be discharged within seven days. The principles that apply include no increase in price of the purchase and that the commercial activity should aid the SA economy by creating new investment or expand an existing business locally. October says while most industrial participation obligations have come from defence-related contracts, a significant portion has come from parastatals including SA Airways.

Under the SAA procurement contracts, the department has approved three projects totalling 270m $21m in new direct investment in SA and $249m in sales by SA aviation companies.

However, US Chamber of Commerce executive director Luanne Grant says major complaints from US firms looking to use the programme included the lack of guidance from the directorate. Grant says the department needs to upgrade the level of staff training or outsource the evaluation of projects. There was also a suggestion that the department support the programme with affiliates like the Industrial Development Corporation.

With acknowledgement to Patrick Wadula (Trade Editor) and Business Day.