Revised Industrial Policy Action Plan (IPAP): public hearings Day 9

Meeting report

Public hearings on Revised Industrial Policy Action Plan (IPAP2)
Eskom submission
Mr Brian Dames, Managing Director: Engineering Enterprises, Eskom, stated that Eskom had established a procurement process that effectively enabled localisation of government empowerment, skills, employment and industry development policies. It applied strict standards to ensure ‘fair and equitable, transparent, competitive and cost-effective’ procurement, and he noted that checks and balances were applied to avoid undue process influences. The procurement philosophy of Eskom consisted of structured commodity methodology and strict governance control. The structured methodology was helping to develop the most appropriate sourcing strategy such as securing supply of strategic items at the lowest total cost of ownership, leveraging the buying power of Eskom, and integrating sourcing strategy with user requirement.

The Medupi and Kusile Projects by Eskom, which involved the establishment of coal fired power stations, were projected to create 40 000 direct and indirect jobs that would have an impact on 160 000 people in total. Other projects, such as 765kV and RTS, would provide 11 000 direct employment opportunities during construction and a further 1 700 during operation. Across all major build, the localisation of content had exceeded 50%. For example, the composition of total project spent on Medupi was 58%, for Kusile it stood at 56%, and for Ingula it reached 74%. New local supply chains for boiler and turbine parts had already been created and benefited local businesses and addressed the industrialisation agenda of South Africa.

He also noted that the implementation of large capital expenditure (capex) programmes and establishment of supporting local industries attracted significant challenges. It was felt the programmes were slowed down because skills development and shortage of technical and professional skills led to reliance on international labour. Strong international vendors dictated price, and this required strong negotiation skills and rapid conclusion. Therefore, the revised IPAP should integrate with other government programmes through regular communication to address identified challenges. The development of the South African energy industry was severely constrained by critical skills shortage. The industry was in dire need of welders. Affected areas were Mpumalanga, Gauteng, and Limpopo. Suppliers had not yet met targets for training but Eskom was driving hard to achieve this goal. New training facilities had been created at Medupi, Delmas and Middelburg. The challenge was that the welding qualification required significant time and was followed up by intensive on-the-job training. A-class welders needed three to four years to reach proper execution and productivity level after qualification, while specialist welders needed up to ten years experience to reach a suitable level.

Moreover, there had been experiences and lessons learnt from local South African companies on localisation of industrial capacity over the last five years in various South African projects. Firstly, Eskom, as a local partner, generally knew and understood more than the international company realised. It had been discovered that local companies had greater knowledge of local conditions, including labour, productivity, supply chain, standards and regulations, as well as practical and application technology and engineering for implementation of the job in their environment. Secondly, South African clients underestimated the challenge of skills availability, experience and development. It had been established that the domestic construction economy was in a long-term decline between 1977 and 2002, during which skilled and experienced resources left the industry. The deep skills of that time were largely gone, with new skills being shallow and having limited experience. There was discordance in the education system where far too few technically trained youth were being educated.

Thirdly, there had been a deterioration of the productive national industrial asset base. New capex to improve and enhance capacity had only been possible with receipt of firm new orders forcing equipment procurement and implementation of capacity to be done in parallel with commencement of production. Lastly, design information was generally incomplete and incorrect and not adequately advanced to support projects. Several cases were encountered where the concept design had been changed, and this resulted in higher costs of construction. Local companies, instead of building the best of a kind, would rather opt for “first of a kind” which demanded numerous changes and a high level of skills.

It had been learned that weaker presence of major suppliers in the Southern hemisphere drove up costs and historical procurement challenges had resulted in an additional restriction on risky practices and improved transparency. Suppliers charged a significant premium because of lack of local skills, suppliers leveraged time pressures of South Africa to gain better bargaining positions, and a funding model should be secured at the start of the build programme and that the project scope should be defined early.

Eskom acknowledged its responsibility and impact upon the South African economy, and was very conscious of the need to align its activities with IPAP. In partnership with National Energy Regulator of South Africa, the Department of Education, Eskom would be implementing the roll out of the Renewable Energy Feed in tariff. This would enable significant development of renewable Independent Power Producers (IPPs) in future. Short-term plans of Eskom included a 100 megawatt (MW) Wind Farm – Sere – and a 100 MW solar thermal plant. All these would emanate from the World Bank funding. Eskom also had an internal energy efficiency programme aimed at reducing its own use of energy by 15%. To date, the organisation had achieved almost 2000 MW in demand reductions through its Demand Side Management programme. Ambitious targets were to improve this by more than 3000 MW by 2013.

Lastly, Eskom had identified certain trade-offs and interfaces within the revised IPAP that needed to be resolved:

Long term procurement plans for future fleet procurement required clarity on the energy mix and funding model of South Africa

South African capital expansion could be procured internationally at lower cost but national imperatives guided high localisation which added a cost premium. The sustainability of industries established would need to be addressed after the current build wave. Eskom must ensure the integrity of inputs to its capital programme and be ready to procure from alternative, established vendors. The urgent need for South Africa for increased electricity generation capacity required security of supply for local industries

Discussion
Eskom Presentation
Mr P van der Westhuizen (DA) asked what plans Eskom had for future solar heating programmes, which had potential to create jobs, although the current scheme was seen not to be attractive to users.

Mr Mpho Makwana, Acting Chairperson: Eskom, replied that for the next twenty years Eskom had to balance security of supply and funding. Eskom had applied for funding through NERSA, but some was turned down. Tariffs allowed Eskom to keep existing business going. As a result of lost revenue, Eskom had to cut its plans tighter and see what it could do with available funding. Eskom was in the process of giving a detailed input to the Minister of Public Enterprises as to what it must do. He also noted that a new type of power station would be built in Northern Cape for solar power. The solar heating programme would be up and running in five years time, but would “belong” to the Department of Energy. The current challenge related to training of plumbers.

Mr S Radebe (ANC) wanted to know what systems were in place to ensure there was no corruption in the awarding of tenders.

Mr Makwana stated that Eskom was doing a lot to try to manage ethics. Every tender at Eskom that was above a certain threshold (R500 million and above) was subjected to forensic audit. A watertight process was followed.

Mr N Gcwabaza (ANC) asked what the plans were of Eskom to recruit students from the Further Education and Training Institutes (FET), and asked what Eskom’s focus was, in relation to supplying solar energy in order to develop rural areas.

Mr Dames elaborated that Eskom would make investments into retraining graduates of FET colleges and finding them employment. Many had been retrained in boiler-making and welding. He emphasised that bursaries were awarded but Eskom was concentrating on specialist skills that it required most. One problem was that there was a shortage of welders in South Africa. When Eskom had projects, it trained and employed people in the region where it was operating. He said that 1 million solar heaters would be rolled out, but Eskom was looking at interconnected value chain. This also required retailers on board. Already it was investigating ways of streamlining that value chain.

Ms F Khumalo (ANC) enquired what strategies would be employed to attract women and the disabled into the industry.

Mr Makwana explained that there was a robust strategy to recruit women. The percentage of women within Eskom was standing at 53%. Policies were developed to make the industry attractive to women. He further said a detailed report about figures on women, disabled and BEE would be submitted to the Committee.

The Chairperson asked what Eskom was doing to encourage learners in high schools to become welders, fitters and turners, because it appeared that Eskom was desperate for such skilled people.

Mr Makwana explained that much had been done to attract learners into the industry. Efforts were made with the Department of Science and Technology. Details of programmes undertaken would be sent to the Committee.

Transnet Presentation
Mr Chris Wells, Acting Group Chief Executive: Transnet, told the Committee that Transnet had registered a successful financial turnaround over the past six years. There had been a continuous increase in revenue and this had showed initiatives to grow the business. The company had recorded a revenue increase of 7.4%, thus increasing its worth from R25.3 billion in 2004/05 to R33.6 billion in 2008/09. Balance sheet restructuring and cost effective debt structures yielded positive results, with consistent below-target gearing, from 61% in 2004/05 to 36.2% in 2008/09. This had enabled Transnet to fund capital investments more cost effectively and without government guarantees. Total investment over the past five years amounted to R72 billion. The current five year investment plan was standing at R93.4 billion. The Transnet R80 billion capital investment programme would make a significant contribution in terms of additional Gross Domestic Product (GDP), both in terms of magnitude and spread.

Transnet had improved efficiencies but operations were not yet at world class levels. Certain necessary improvements were identified. These included efficiencies required to the turnaround times of wagons, predictability service delivery (on-time departures and arrivals), reduction in the number of train cancellations, reducing security incidents such as cable theft, shipping delays due to tugs and pilots and container handling rates

Quantum leap targets for 2010/11 reached an average of an 8.4% increase in operational efficiency and productivity, and over the last three years there had been a cumulative 20% improvement in customer service delivery.

It was highlighted that transport costs and inventory carrying costs had increased at a faster rate than other cost components. As a consequence, South Africa would require more transport over the coming years. High forecast volume growth would put an impossible strain on the current transport infrastructure if the current modal split remained intact. Increasing rail market share would reduce transport costs, but an increase in electricity tariffs would place additional costs and inform infrastructure and rolling stock procurement processes. It was emphasized that Transnet would expend its energies on increasing its rail market share through greater operating efficiencies and a wider employment of inter-modal solutions.

Interestingly, Transnet increased its spend with Broad Based Black Economic Empowerment (BBBEE) suppliers significantly over the past four years. Of a total procurement spend of R20, 68 billion, R13.52 billion was spent on BBBEE companies in 2009/10. Significant focus was placed on the BBBEE score card ratings and improving on Preferential Procurement and Enterprise Development. Industrial policy influenced development, and Transnet was currently partnering with government on a number of key action plans. The organisation had made significant progress in the adoption of CSDP. Over the past two years a phased approach to embedding a Competitive Supply and Development Programme (CSDP) at Transnet was followed. Transnet would augment its short term purchasing strategy with a move towards a more long term strategic Fleet procurement.
Also, Transnet had had a number of successful Supplier Development initiatives over the past three years. This had resulted in significant development opportunity for the local industry.

It was also noted in order to execute IPAP requirements, Transnet would focus on its procurement skills and capabilities. Already, three successful bootcamps were held to train procurement staff nationally in professional procurement principles. Transnet had launched a comprehensive procurement capability building programme. Core to the programme was an ambitious procurement skills development programme that was being run in partnership with the Chartered Institute of Procurement in the United Kingdom of Great Britain (UK). Transnet was also in partnership with the United Nation’s UNIDO with the objective of enhancing the competitiveness of suppliers (top 60 tier 3) and position them as key components of the Transnet Original Equipment Manufacturers (OEM) supply chain.

Migration to programmatic fleet procurement practices provided significant value opportunity for Transnet. This would result in standardisation of local fleet and a standardisation strategy commensurate with international demand to ensure industry sustainability, alleviation of the legislative restriction on long term supplier contracts to enhance the opportunity for supplier development, and improved demand visibility resulting in stronger investment commitment from international OEMs.

Furthermore, there was an important demand to support a strategic procurement programme as envisaged in IPAP2 so that South Africa could become a supplier to the African continent, Australia, Brazil and all other countries that run on Cape or metric gauge. The procurement programme should also  boost steel industry locally by using local supply for structural components, and stimulate local control system industry by increasing technology requirement. Therefore, Transnet saw every reason to support IPAP2 because it stood to reap benefits from its implementation. It accepted that a world class freight system was critical for increased industrialisation in South Africa and the region; and the company was focused on improving market share, customer service, infrastructure, and accelerating the implementation of the CSDP across the business.

Discussion
Mr S Marais (DA), asked about Transnet involvement in Africa, if the organisation was renting stock, or if it was directly involved. Secondly, he asked if Transnet had the capacity of transporting people in rural areas, rather than focusing only on freight. Thirdly, he asked the views of Transnet regarding the transportation of agricultural goods.

Mr Wells stated that Transnet used to have, but no longer had, arrangements in the continent, when it used to work with Zimbabwe, Botswana and Mozambique regarding rolling stock. Currently, Transnet only transported freight. The Passenger Rail Agency of South Africa (PRASA) was transporting passengers. Regarding agricultural products transportation, he stated Transnet was more into long distance transportation, as opposed to the short distance transport that agriculture demanded.

Mr Radebe asked how Transnet ensured that spend on BEE was done correctly, and how it would deal with corruption on tenders.

Mr Wells explained there was a high level of governance over Transnet processes. Although Transnet had experienced collusion, it had been dealt with decisively. It had learnt a lot from that. Most exceptions seemed to occur in smaller procurements.

Mr Gcwabaza wanted to know the standpoint of Transnet on regional and intercontinental integration. Secondly, he asked what it was doing to ensure its cables were not stolen. Thirdly, he enquired if in the long term Transnet was going to look at a faster rail transportation in order to ease traffic on the roads.

Mr Wells elaborated Transnet had a cooperative agreement with Southern African Development Community (SADC) countries. The Maputo Port had been identified as a good link. Transnet had initiated a programme with Eskom to address the issue of cable theft. Copper had been classified as a precious metal. Not much had been achieved and the problem did not seem to be lessening. Lastly, on the fast rail matter, he stated that would be a great idea but first there was a need to improve scheduling. Much work needed to be done on fixing departure and arrival times.

Due to time constraints, Chairperson asked Transnet to reply in writing to questions it could not answer.

Kumba Ore Presentation
Mr Chris Griffith, Chief Executive Officer, Kumba Iron Ore, said that the focus of Kumba was to find ways of how to support the objectives of IPAP2. Kumba understood that the core objectives of IPAP2 were to focus on production in value added sectors with high employment and growth multipliers, and to shift focus away from debt driven consumption in the South African economy.

Kumba believed that for South Africa to meet the objectives of IPAP2 it had to focus on job creation and skills development, sustainable BBBEE, sufficient and competitively priced energy, and reliable and affordable transport systems (including rail and ports). IPAP2 was seeking to outline a new growth path, and was building on the National Industrial Policy Framework and sought to promote long-term industrialisation and diversification as well as job creation.

The Committee was given an overview of the industry. Kumba owned 4% of the global market share, and in the local steel industry it was monopolising 6%. Kumba was the fourth largest supplier of seaborne iron ore in the world. The organisation employed more than 11 900 employees and contractors, and was making major investments in job creation and skills development.

Kumba had also made a major commitment to transformation. In 2006, Kumba completed an empowerment transaction, whereby 26% of the company SIOC was acquired by its empowerment partners. In 2009, R3.2 billion (36.9%) was spent on preferential procurement. Empowerment partners received R5 billion in dividends since 2007, and the organisation was compliant with the Mining Charter. Over the last 24 months, “enterprise businesses” benefiting from Kumba Enterprise Development spend had generated revenues of R54 million and created 250 permanent jobs.

Regarding skills development and employment equity, Kumba had spent R234 million since 2007 on skills development. The organisation had accredited training centres at both the Sishen and Thabazimbi Mines. In 2009, 69 bursaries were awarded and 522 learnerships were created. Total female representation in the company was standing at 14%, and figures for blacks in management were at 31%.

Kumba had extensive mining beneficiation expertise. Its involvement included the upgrading of iron ore resources to saleable product. Its research and development focused on reducing energy requirements and waste production as well as maximising mineral resource utilisation. Kumba was working closely with other participants in the iron ore and steel value chain to explore further metallurgical beneficiation and shaping. Kumba was continually in engagements with the Industrial Development Corporation (IDC) and Department of Trade and Industry (dti) on their efforts to attract new South African steel producers.

It was noted that the current dispute between Kumba and ArcelorMittal was caused by the latter because it failed to convert to new mining order rights. Those rights lapsed under the Mineral and Petroleum Resources Development Act (MPRDA). SIOC had then applied for the lapsed rights to protect its interests. Prospecting rights were awarded to Imperial Crown Trading. The position of Kumba was that, as a result of the lapse of the mining rights of ArcelorMittal, SIOC was no longer obliged to supply ArcelorMittal with iron ore at cost plus 3%. Kumba had made several proposals for both interim and long term pricing. But these appear to had been rejected by ArcelorMittal. Kumba believed that that the Sishen Supply Agreement had lapsed. The matter was likely to be resolved through arbitration.

Kumba saw IPAP2 as a key tool in the commitment of government to sustainable growth of the South African economy. The organisation was a key stakeholder in the achievement of the IPAP2 objectives. Kumba was convinced it could make a contribution to certain key objectives of IPAP2 by, amongst other things, providing growth in employment, showing commitment to skills development, increasing utilisation of infrastructure, facilitating a competitive steel industry, and generating significant foreign income by doubling exports by 2013.

Discussion
Mr Marais wanted to know if Kumba had links or shareholding with other role players in the global arena. Secondly, he asked how Kumba compared globally in terms of pricing. Thirdly, he enquired if Kumba was able to produce any kind of steel because the country was not able produce steel that could make cars. Lastly, he asked for explanation on the disagreement between Kumba and ArcelorMittal.

Mr Griffith explained that Kumba had no links or shareholding with the other role players. He said the big three players (BHP Billiton, Rio Tinto and Vale) determined prices. Once that was done, Kumba would only go and negotiate with them. Regarding steel for cars, he explained that ore was needed to produce base metal, and it was important to blend base metals together in order to produce the kind of metal that was needed. Iron ore was the base ingredient to produce steel. He noted that in respect of the disagreement between Kumba and Mittal, this had to do with what Mittal had failed to do. Kumba mined ore on behalf of Mittal, so there was not strictly a customer relationship. However, Mittal did not convert its rights. In other words, it did not have a Black empowerment partner. Mittal failed to comply with regulations.

Mr Radebe noted that IDC was providing funding for industrialisation, and enquired about Kumba’s relationship with it, since many companies were having difficulties working with the IDC. He also wanted to find out about the kind of training Kumba emphasised so that it could be applied to the upliftment of rural areas.

Mr Griffith said the IDC was a significant shareholder in Kumba. Therefore, the IDC was able to obtain funding from Kumba. Further, he emphasised that its training focused on geologists, mining engineers and other mining related professions.

Mr Westhuizen enquired about future opportunities of iron ore extraction in South Africa, and if there would be any new fields that needed investigation.

Mr Griffith stated there were no new significant ore bodies in South Africa. There were small bodies but Kumba could expand. Capacity was available but it would need to come from the lower grade ores.

The Chairperson wanted to know the views of Kumba regarding affordable transportation and skills development.

Mr Griffith explained that the existing rail capacity was affordable. Expansion was happening. In regard to training and skills development, Kumba had two accredited training centres. Artisans were trained in-house. Kumba was training its own technical people in Khethu (Northern Cape) and Thabazimbi. The Northern Cape had more intakes of artisans because of the mines in that area. If Kumba was not able to employ some of the artisans after training, they were free to join any employer of their choice. For the Khethu operation, Kumba trained and employed people from the surrounding areas. The artisans were participated in share ownership. In addition, Kumba was making use of labour brokers because they had contractors but the labour brokers had to adhere to the business guidelines.

Mr Gcwabaza asked if Kumba was providing bursaries for skills needed in mines. She asked why its female representation was at a low 14%.

Mr Griffith confirmed that there were bursaries, but Kumba focused on technical skills. He explained there was no stumbling block for women not to be employed. Many women in their employ were truck drivers, and there was a significant number of them in technical areas like geology and engineering.

The meeting was adjourned.