Economic Assistance Agreement with Cuba: approval, Overview of Aviation by Robin Coss Aviation, Committee Report on DTI strategic plan 2012

Meeting report

Agreement between South Africa and Cuba on Economic Assistance: Department of Trade and Industry briefing
Mr Xavier Carim, Deputy Director-General: International Trade and Economic Development Division, Department of Trade and Industry, tabled and provided information on South Africa’s Economic Assistance Package (EAP) to Cuba, which needed to be ratified. The EAP was approved by Cabinet in November 2010.

Mr Carim noted that South Africa and Cuba had strong political and diplomatic relations, but bilateral trade was under-developed, due to Cuba’s foreign exchange rate. In 2008, Cuba suffered serious infrastructure damage during the hurricane season, and South Africa sought to assist Cuba to address the devastation and to build bilateral trade relations. Despite its embargo, the United States was Cuba’s major source of agricultural imports and medical suppliers for humanitarian reasons, and several other countries traded with Cuba, mainly through the extension of credit lines.

In November 2010, Cabinet approved an Economic Assistance Package to Cuba, to strengthen bilateral trade and investment relations and to assist in addressing the effects of the natural disasters. Cabinet instructed the Ministers of Trade and Industry and Finance to determine a package. During a State visit to Cuba on 6 December 2010, President Jacob Zuma announced an Economic Assistance Package of R350 million, and an interdepartmental technical committee was established to give effect to this announcement.

South Africa and Cuba initiated engagement on the issue in May 2011, and, after three rounds of engagement, the Agreement was concluded on 25 November 2011 and signed on 3 February 2012. On 20 March 2012, Cabinet instructed the Agreement to be submitted to Parliament for ratification.

The Agreement contained:
- Main text, which sets out the overall framework and main elements;
- Annex 1, which set out SPS requirements for the purchase of South African seeds;
- Annex 2, which set out requirements to operationalise other grants and export credit facility

Mr Carim detailed the sources of funds. Through the African Renaissance Fund, the Department of International Relations and Cooperation (DIRCO) provided R100 million. R110 million came from the Export Credit Insurance Corporation (ECIC) interest mark-up account. In addition, administrative costs were to be financed through the EAP.

Facility A consisted of a R40 million grant for purchase of seeds by Cuba, of which R5 million was for purchase of South African seeds and R35 million for purchase of seeds from any country, including South Africa. This was non-repayable. Facility B consisted of a R100 million solidarity grant that was also non-repayable. Facility C consisted of a R210 million credit line, in two tranches of R70 million and R140 million, which needed to be repaid. R70 million must be available on entry into force of the Agreement, to be repaid in two years, and R140 million was available after the first tranche had been repaid, and needed to be repaid over the next five-year period.

Mr Carim noted that the Industrial Development Corporation (IDC) would hold an account for the R350 million and would manage the payment on behalf of the Department of Trade and Industry (dti). Cuba would identity the goods it sought to purchase for South Africa, and then the IDC would pay authorised companies for goods exported to Cuba, on receipt of invoices and supporting documents. Only R35 million would leave South Africa, and all funds would be used for the purchase of South African goods. Cuba was not required to repay grants. Once it had repaid the first credit of R70 million in two years, Cuba would access the second credit line of R140 million, which was to be repaid in five years.

Discussion
The Chairperson thanked Mr Carim for the presentation, and was pleased to hear that only R35 million would leave South Africa and the rest would be returned in the form of goods.

Dr M Oriani-Ambrosini (IFP) was concerned about South African money being given to Cuban and wondered where the R35 million would go. He asked what South Africa would get from the EAP. He questioned why South African was “reaching out to one of the worst totalitarian governments of our time”, said that the state of the economy was “self-inflicted” and the regime had impoverished the country.

Mr A Alberts (FF+) agreed with Dr Oriani-Ambrosini’s comments and asked if this Agreement was in any way connected to human rights and progress in Cuba. He also asked how this would affect South Africa’s credit rating. He also questioned if the International Monetary Fund (IMF) or the World Bank had offered any views on this topic. In addition, he enquired if there was any guarantee of the repayment of the money, and asked if the dti had liaised with the Department of Agriculture, so that South African farmers were also assisted in the process.

Mr G Hill-Lewis (DA) said that the Committee was not considering the full picture. Members needed to remember that there had been a R1. 1billion debt write-off for Cuba. R140 million of South Africa’s money was not going to be repaid, because it was in the form of grants. He said it was quite possible that South Africa would again have to write off this debt.

Mr Hill-Lewis asked for clarity on what a “solidarity grant” was, and asked if South Africa was “declaring  solidarity with a terrible regime”. In his view, there were far more important and geographically-closer countries on whom South Africa should focus. There was no proof that this EAP would increase bilateral trade. It would simply be South Africa’s own money coming back to South Africa.

Mr G McIntosch (COPE) said he was partly covered by the other Members’ comments that had already been expressed. He thought this was a very puzzling proposal. To him, the term ‘solidarity’ meant identifying with a government. He thought that this should rather be termed a “charitable grant” and not “solidarity”, since South Africa was a leading democratic nation that needed to be careful in its foreign policies.

He McIntosch asked Mr Carim to tell the Committee about the impact of international trade with other major trading partners, particularly the United States.

Mr McIntosch also wanted a clarification of the reference, in Article 6 of the Agreement, to exclusion of the trading in tobacco, beverages with a certain percentage of alcohol, and armaments.

Mr W James (DA) said that it was in South Africa’s national interest to look to the East and to the South when it came to expanding trade. South Africa also needed to integrate Africa as this was its biggest market. He did not understand where Cuba fitted into these aims. He believed the real reason was the ANC’s long history with Cuba. This was important, but it was not necessarily in the national interest. He was concerned about the fusion of the ANC’s interest and national interest.

Mr B Radebe (ANC) said that South Africa was a modern democracy and it could not forget that countries like Cuba helped it in the past. Cuba promoted reversal of colonialism in Africa, and for this very reason, South Africa should pledge solidarity with Cuba. If had not been for Cuba, Namibia and South Africa would not have been liberated. He reminded the Committee that many doctors in rural communities in South Africa had been trained in Cuba.

Mr Radebe noted the questions around South Africa’s relationship with the United States, but said that the policies of other countries could not be taken into account. He believed that everything had been taken into consideration to make this package one of the best.

Ms C Kotsi (COPE) was disappointed in the way the Committee responded to this Agreement. She believed that Members were demonising Cuba. She agreed that if it were not for Cuba, there would be very few doctors in South Africa. However, she also agreed with Mr James, and said that the Committee should concentrate on the benefits, not the ethics, of an EAP.

Mr N Gcwabaza (ANC) said that there was much hypocrisy in the comments. South Africa should not simply stand by and watch Cubans suffer, and should help a country if it could do so. The critical point was the legality of the agreement. It was said that it was perfectly legal, and therefore this should strengthen the resolve of the Committee. It was critical that they respected the sovereignty of Cuba. It was not for this Committee to decide if its form of government was “saintly” or “satanic”.

The Chairperson asked Members not to get lost in semantics. The purpose of this Agreement was bilateral trade.

Mr Carim answered questions on what South Africa stood to benefit from this EAP. There would be an increase in trade, with linkages and relationships that could extend beyond the programme. South Africa would be giving support to Cuba, as the Cubans had requested, in order to overcome the devastation of the hurricanes. There would be support of South African industry. He noted that questions of human rights or human rights linkages were not dealt with, as this was a trade agreement and a programme of assistance to Cuba.

In relation to the comments on the repayment, he noted that the EAP set out a dispute mechanism that established a framework, within which any non-payment or failing on either side would require engagement, to resolve that issue.

Mr Carim confirmed that there had been liaison with the Department of Agriculture, who had been involved in the discussions on the EAP, in regard to seeds.

Mr Carim clarified that the title of “solidarity grants” was used because the money came out of the African Renaissance Fund, and that this Fund was also used to support other countries in Africa.

Mr Carim noted that It was decided jointly by the countries that there would be exclusions on the trading of tobacco, beverages with a certain percentage of alcohol, and armaments.

He said that many countries already traded with Cuba, and the United States was Cuba’s number one source of agricultural products.

In terms of broader relations with Cuba, he was aware of an extensive programme for training of doctors and scholarships, Cuba’s provision of vaccines to African countries, and a world-class pharmaceutical industry.

Mr James reiterated his points that the ANC’s relationship with Cuba was important, but it was not in the interest of the state. The invoice should be sent to the Luthuli House, not the taxpayers. He said it was difficult to avoid raising the human rights issue. This was the same as the United States’ “constructive engagement”’ with the apartheid regime, and that was not right.

Mr Hill-Lewis asked if this was the first instance of the African Renaissance Fund being used for countries outside of Africa.

Mr McIntosch said that Cuba was in need and that this was a “neat” agreement.

Mr Alberts clarified that his party was not against helping the people of Cuba. If the ANC had such close ties to the Cuban people, then it must have a strong moral say in how the government conducted itself. There needed to be a clear connection between the provision of the money and enforcing greater respect for human rights. Cuba seemed to be open for change at this stage.

Dr Oriani-Ambrosini said he liked the structure of the Agreement, but this was the “right agreement with the wrong country” because of the opportunity cost. He also wanted clarity on Article 7, and observed that Article 10 prevented South Africa from being able to take its money back. If Cuba failed to repay, South Africa could not do anything about it.

Dr Oriani-Ambrosini stated that South Africa would not be the most powerful or the richest country, but it could become the moral conscience of the world. This kind of deal would, he feared, set the country back.

Mr Radebe said it was not possible to quantify Cuba’s aid to South Africa. There was no need to play the  moral high ground. This was a good agreement for everyone involved.

The Chairperson said that Members needed to consider that this was a bilateral trading agreement, and to look at what the benefits were. There were many things that Cuba could offer, that the rest of the world could not. A Swiss Ambassador once told her that the size of the country did not decide its relevance. She wanted to correct Members and note that from 1994 to 2004 it had been the South African government, and not a decision of the ANC, that resulted in calling in the Cuban doctors.

Mr Carim said the African Renaissance Fund did support non-African countries, but he was not sure of the particular countries. He stressed again that the EAP was established on the basis of an instruction from Cabinet. He also noted that, generally speaking, trade agreements did not reference human rights.

The Chairperson asked for a show of hands for a recommendation that the Agreement be ratified.

Mr Hill-Lewis stated the DA’s objection and asked for a vote on the matter.

Members then voted, and five were in favour of recommending ratification, and five were opposed to it.  The Chairperson read the rule for such an occurrence, which was that the Chairperson then had the power to cast a vote. She voted in favour of recommending ratification.

Committee’s Draft Report on Budget Vote 36, and Strategic Plan of the Department of Trade and Industry
The Chairperson tabled and went through the draft Report on the Budget Vote 36, asking that Members note any corrections or comments. She queried if the point in paragraph 2.2.4 affected micro enterprises as well.

Members suggested various changes to the wording, and grammatical corrections. These were noted, and the Chairperson asked that any further recommendations for alteration be submitted to the Secretariat.

Members adopted the Report, subject to the amendments made.

There were several wording and grammatical corrections.

Overview of aviation sector: Robin Coss Aviation
Mr Rob Cooke, Representative, Robin Coss Aviation, explained that the general aviation sector faced many challenges. The industry was striving to expand and increase manufacturing potential, yet had difficulties in accessing appropriate funding and entry into the global supply chain. He described Robin Coss Aviation (RCA) as a local company that had the expertise, knowledge base, well-established track record and the passion to provide a solution to some of these challenges. RCA was an approved manufacturer of light conventional aircrafts, with production facilities in Cape Town. It was strategically placed to make a valuable contribution to the government’s Industrial Policy Action Plan (IPAP) in a key cluster identified to develop long-term advanced capabilities. A short video clip to give an overview of the company was shown.

Mr Cooke said that aviation played a key role in economic development, supported long-term growth, facilitated integration into the global economy, and had a positive impact on productivity and economic performance. Aviation was a major industry in its own right and employed large numbers of highly skilled workers. Investment in aviation would boost long-term productivity, economic growth, and global competitiveness. Global aviation supported 33 million jobs and generated $3.5 trillion in economic activity, while aviation in South Africa contributed to 2.1% of Gross Domestic Product (GDP), generated about R51 billion, and provided 227 000 jobs. Global connectivity would open up new markets, improve supply chain efficiency, and create much-needed employment.

Many air forces and aviation training organisations around the world were favouring locally-built trainers to meet their pilot training needs. Mr Cooke went over several examples that illustrated the positive effect that technology transfer, preferred procurement, and support for the local industry had on the aviation industry in other countries, such as Nigeria, Columbia, New Zealand, and the United States.

RCA’s RV aircraft supported local industry in South Africa, with RCA as the only approved manufacturer in the world. A total of 40 aircrafts had already been produced, and it was the ideal trainer for Air Traffic Officers (ATO’s), South African Air Force (SAAF) personnel and South African Airways (SAA) pilots. RCA was strategically placed to produce South Africa’s first certified powered aircraft. Full certification would enable South Africa to compete globally.

IPAP identified aviation as a key cluster, with the potential to develop long-term advanced capabilities. Increased investment would make the country less dependent on imports, promote long-term industrial diversification, grow its domestic technology base, and act as a catalyst to build the economy and ‘a better life for all’.

Mr Cooke went over the challenges RCA faced. These included critical skills shortages, a growing shortage of pilots, engineers and management, old facilities and equipment, a critical loss of apprentices, the failure to modernise, a lack of funding, ‘brain drain’, the cost of importing nearly 100% of raw materials, and the availability and cost of capital to facilitate expansion. In addition, the manufacturing of aircraft assemblies and components was almost non-existent and two of the largest companies in South African operated in niche markets and were the only ones who benefitted from the Arms Deal Offset programme.

The forecasts by Boeing and Airbus for the aviation industry in Africa predicted that the industry would require an additional 13 000 pilots, 15 000 maintenance personnel, and 1 100 new aircrafts for African airlines. South Africa would have an average passenger growth rate of 6%. The questions that needed to be asked were who were provide the training aircraft, who would train personnel, who would provide facilities, and who would fund the critical requirements.

The industry needed quality training in modern, locally manufactured aircrafts, to meet the challenges. Support of the industry would allow South Africa to extend its component and part-manufacturing capabilities, which would enable the country to enter the high-value global supply chain.

Mr Cooke went over RCA’s offer to provide the “perfect training platform” for SAAF pilots. A new tender was to be released within the next three months, and this provided an ideal opportunity for the Committee to “act as an interface between RCA and the Department of Defence and SAAF”. He also described RCA’s offer to provide a new training aircraft to the SAAF, which received an initial favourable response from the SAAF, but RCA was later told that the SAAF would not consider RCA’s aircraft for pilot training, without giving a reason. This decision conflicted with the government’s policy and attempts to develop manufacturing capabilities and job creation.

Mr Cooke also summarised RCA’s liaison with the Department of Trade and Industry (dti), which had been slow, as the RCA was still waiting for the dti to visit RCA to advise it on the incentive and rebate schemes.

Mr Robin Coss, Chief Executive Officer, RCA, emphasised again that RCA was a local company that had a proven track record and a proven product, and was actively involved in the advanced manufacturing sector identified by IPAP. The company could make a positive contribution to increasing South Africa’s manufacturing capabilities. There was a demand in South Africa for the products manufactured by RCA. However, the company was battling to get key role-players and decision makers to recognise the merits and the benefits of what RCA could offer. It seemed that there was very little interest in supporting local companies to achieve the goals of IPAP.

He noted that SAA was looking for a local company to train pilots, and this provided the opportunity for a local company to supply the aircrafts required for training. However, there was a question of whether the aircraft were going to be imported, or whether the government would implement its preferred procurement policies.  This situation was another opportunity for the Committee to act as an interface between RCA, SAA, and the SAAF.

South Africa needed to produce training platforms that were in line with world-wide trends. There was a  valuable opportunity for RCA and the government to work together to stimulate the manufacture and certification of South Africa’s own fully certified aircrafts, equipped with glass cockpits, that simplified aircraft operation and navigation.

He emphasised that RCA was also the only manufacturer of Aero Medical Life Support System for rotor and fixed wing aircrafts in Africa, and this again was an excellent opportunity for RCA to expand its manufacturing capability and to sell customised systems internationally. As with the RCA aircraft, funding was required for international certification of the Aero Medical Life Support System.

Mr Cooke explained that many doors had been closed on RCA, because all arms deal offset funds had been allocated, and no further funds were available. Years later, however, a different picture emerged. Foreign companies that benefitted from the deal had only invested a portion of what they were supposed to, and the promise of job creation had not been sufficiently achieved. Offset credits had also been given to these companies totalling billions of rands.

Those responsible for implementing IPAP policy had very little knowledge about certain industries and their specific requirements, especially in aviation. Mr Cooke also detailed his difficulties with receiving funding from the Technology Innovation Agency (TIA) and the IDC, as well as receiving rebates through the dti’s incentives programs.

Mr Cooke suggested that, in order to overcome these problems, discretionary funding was required to meet the goals and objectives of the government’s IPAP. This would lead to the development and sustainable growth of an industry that would make a meaningful contribution to job creation and skills development.

Mr Coss stressed that RCA’s vision and expansion plan were in line with IPAP, and intervention was required to make things possible. The importation of raw materials and aviation grade aluminium was one of the biggest obstacles. South Africa was in a position to produce these materials, but a manufacturing plant had not yet been set up, and partnerships would be required with the government to do so. The costs in the industry would be reduced. Private partnership agreements had worked in other countries, so there was no reason why they could not work in South Africa.

Mr Cooke explained that RCA had a business plan and an action plan that addressed the needs of the industry and offered many benefits to South Africa’s overall economy. He said the local aviation industry needed to become an exporter of complete aircrafts, aviation parts, components and assemblies rather than an importer of products. This required government interventions and technology transfer agreements with well-established international companies.

Mr Coss reiterated that the biggest constraint facing the successful implementation of the project was getting access to and discussion with decision makers, key role-players, and discretionary funding. RCA needed the opportunity to present its proposals to relevant stakeholders. He therefore specifically asked that the Committee assist RCA with the following:
- Consultation with the Minister of Defence to provide locally built aircrafts for defence pilot training requirement
- Consultation with South African Airways to provide a locally built aircraft for SAA’s pilot training requirements
- Discussion with relevant role-players to ensure that preferred procurement became a reality
- Consultation with the Defence Revenue Committee regarding preferred local procurement
- Access to discretionary or donor funding that RCA might not be aware of
- Consultation and interaction with key role-players that would enable RCA and its subcontractors to enter the global supply chain

Discussion
The Chairperson thanked the presenters and opened the floor for discussion.

Mr Alberts said that he had attended the South African Air Force (SAAF) Show in Cape Town, which was where he met RCA and became aware of their needs. He urged Members to take this presentation seriously and to find a way to assist them, so that the government could become involved in expanding the aviation industry.

Mr James said he was confused about the Committee’s role in this.

The Chairperson said that the Committee must consider how the aviation industry fitted in with IPAP, and to encourage the industry’s growth for job creation purposes. The Committee, however, was not concerned with financing, nor was it empowered to act as an intermediary.

Mr G Selau (ANC) said that the appropriate Committees for RCA to brief would be the Portfolio Committees on Defence, Finance, and Transport. In his view, they would be better equipped to deal with the matters raised.

Mr Gcwabaza asked what the RCA wanted this Committee to do. He also wanted to know if RCA was as big as a commercial aircraft company, how much local content was present in its aircrafts and how much was imported, the number of jobs that had been created by RCA, and the projections for the future.

Mr McIntosch said it would be inappropriate for the Committee to act as an interface, as requested. However, there was merit in the Committee receiving a briefing on the topic of aviation. He asked if RCA actually manufactured, or just assembled, and if they were prepared to relocate if necessary.

The Chairperson said that if South Africa could build and export, then it would save on foreign exchange rates.

Mr Cooke said that funding from banks was near impossible and they were not prepared to invest in this industry.

Mr Cooke conceded that he had used the wrong terminology in asking the Committee to ‘act as an interface’. However, he did not know with whom he should be discussing the issues.

Mr Cooke explained that the ratio of manufacturing to assembly work was about 60:40. RCA needed direction to change this, because South Africa needed to be able to manufacture the supplies it required, rather than importing them.

Mr Cooke answered that relocation did not make economic sense to RCA at this stage.

Mr Coss added that, in answer to questions about capacity, RCA was planning an expansion if it was able to get itself to exporting internationally, and this would create jobs.

The Chairperson indicated that other Committees needed to be briefed as well, and that RCA should pursue meetings with these Committees.

The meeting was adjourned.