Long-term procurement strategy of State Owned Companies to support local industries and small businesses: briefing by the Department of Public Enterprises; Consideration of oversight report

Meeting report

Briefing by Department of Public Enterprises (DPE)

Mr Tshediso Matona, Director-General of the Department of Public Enterprises (DPE), said that the long-term procurement strategies of  State Owned Companies (SOC)’s would be a new area of oversight for the Committee as the Department grappled with the SOCs’ drive to industrialisation. In the depressed global economy and with decreased private investment, procurement was the only area where Government had leverage and through this hoped that private capital would be unlocked. The Competitive Supplier Development Program (CSDP) had been started a few years ago and the program was now taking the next step and dealing with longer--term contracts.

The program was about changing the way companies procured so as to develop vibrant supplier industries in the global market. The challenges that needed to be overcome were a skills shortage and SOC procurement legislation, especially the Preferential Procurement Policy Framework Act (PPPFA) agreement. There was a need to find a balance between value for money while, at the same time, developing supplier industries. Other challenges were policy gaps and co-ordination within state structures.

Ms Femida Mohammed, Strategic Relations Executive, said that the decrease in infrastructure investment from 16% to 4% of Gross Domestic Product (GDP) in the period between the 1980’s and 2000 had had a devastating impact. Since the mid 2000’s, infrastructure spending had increased, leading to a concomitant increase in imports, which was not a sustainable situation.  SOC’s were attempting to leverage procurement spending to rebuild industry. Government needed to take on this investment, as it was not commercially viable, in the short term, for companies.

There was thus a need to integrate the supplier development objectives into the procurement processes of SOC’s.  Therefore the Department had introduced the CSDP in 2007. Factors that needed to be in place for it to be successful were; a predictable long term demand platform; a procurement process that integrated incentives and penalties coherently; the coordination of supplier support programs and rewarding suppliers that built globally competitive capabilities. There were three phases to the CSDP. At the start, the CSPD was nor geared to SOC procurement and was of a short-term transactional nature, with no supplier development concerns. Now the Department was seeking a longer-term, developmental planning approach inclusive of an entrenched methodology to integrate supplier development requirements. Phase three would be the development of innovation capabilities. There was no text book methodology and SOC’s had been learning by doing, with Eskom capturing and sharing a large body of knowledge. Eskom and Transnet had integrated CSDP into its implementation planning and because of this had reorganized itself, its policies, its governance procedures and processes.

Transnet had introduced CSDP in 2008 and had embedded it into the organisation and changed its investment plans. Skills had been developed, import offsets had been negotiated and supplier development integrated. It had not only affected its capital expenditure but also its operational expenditure. Transnet had moved from 37% Broad-Based Black Economic Empowerment (B-BBEE) spend to 80% in the period 2007-2012.

Eskom had introduced CSDP in 2007. Initially, in the National Industrialisation Participation Program (NIPP) run by the Department of Trade and Industry (dti), the dti and the supplier had been the two parties involved, with the SOC’s bearing no responsibility. Eskom had defined five key performance areas; skills development; localisation; industrialisation; job creation and supplier development. It had categorised supplier development initiatives into five categories according to the complexity of the intervention needed. These were where the initiatives were government-led, or government-supported, or coordinated, or natural, or Eskom-supported. It had prioritised 42 projects for development over the next 24 months, eight of which had an industrialisation focus.

Fleet procurement involved a long-term partnership of between seven and ten years. Examples of possible fleet procurement were Transnet’s locomotive and rolling stock requirements and Eskom’s requirement for fabric filter bags used in power plants. Performance risk, lifecycle costs, capital costs and industrialisation needed to be systematically integrated into the procurement process.  It was expected that one of the benefits of these investments were that it would be the catalyst in a range of other key technologies.

The Department had hosted a boot camp to explore how SOC’s could operationalise procurement policy. Proposals arising from the camp were:

The Department to provide SOC’s with guidance as to where, when and to what extent it would be appropriate to pay a premium, as it was in the shareholders’ interest to decrease imports.
The SOCs to provide a plan on how supplier development and empowerment would be integrated into the sourcing cycle.
The Department to produce guidelines relating to preference and penalty points for suppliers.
The Department to produce guidelines on the importance of export offsets as part of all contracts.

Challenges to implementation identified were a serious shortage of sophisticated procurement skills, the PPPFA being the single biggest threat to supplier development, as the 80/20 and 90/10 splits were insufficient, and the need to align the dti designation policy and definitions with the SOC’s leveraged approach.

Key considerations for the Committee in assessing the plans were whether SOCs had learnt their lessons, what their targets were, that the SOCs present a compelling methodology and how the SOCs would report back on deliverables.

Discussion
The Chairperson said the Department needed to see what it could do to retain skilled staff and prevent private sector poaching.

Mr C Gololo (ANC) asked about the confidentiality of the presentation document. When would the General Electric (GE) locomotive project start? Would GE train local suppliers?

Dr G Koornhof (ANC) asked what needed to be done to unlock the human resource potential through the supplier development program. How achievable were the localisation plans? He wanted to know what the Department wanted the Committee to do in respect of current legislation having been identified as one of the biggest threats to the supplier development program. 

Ms G Borman (ANC) asked if the skilled human resource losses had been discussed at the boot camp. She was concerned that Eskom’s build plan would end in 2017 and wanted to know what the forward thinking on this issue was.

Ms C September (ANC) asked why a tender that did not support localisation had been allowed by Transnet. How could Transnet improve the skills deficit in port cities such as Cape Town and Saldanha? Did the figures presented in the document have any correlation to the New Growth Path targets?   

Mr A Mokoena (ANC) said the Department should be involved in the procurement process. He was concerned that only Transnet and Eskom had been presented and none of the other SOCs. He added that the document did not speak to the State Of the Nation Address.

Ms N Michael (DA) said that it was important that there be other enforcement mechanisms, apart from penalties, for bad performance. She said there needed to be better communication between SOCs and the Department as it appeared as if the SOCs treated the Department with a level of disdain.

The Chairperson said the Department had to provide some guidelines to the SOCs so that SOCs would know what was expected of them and be held responsible.

Mr Matona replied that the Department’s procurement complied with the relevant legislation and BEE and could supply the Committee with the details.

Regarding Dr Koornhof’s question, he said the State could not do the infrastructure build on its own.  Private capital had to be part of the equation. However the State accounted for 40% of the economy and Eskom and Transnet were the two biggest State-owned companies. He said the more visible the intention of the State’s long-term plans, the better private capital could plan its own investment and establish practical ways of interaction, as at the leadership level, there was not enough engagement.  Private capital was too fragmented because of differing interests. Government needed to reach out more.

He said legislation needed to be modified to allow for more localisation and thus job creation. He said that after Eskom’s build program came to an end in 2017 there was still the nuclear build plan, and that there was a need to improve critical high level skills.

In response to the question of Eskom’s build plan post 2017, Ms Jacky Molisane, Deputy Director General for SOCs, said that in terms of the Integrated Resource Plan (IRP) the build plan included the diversification of SA’s energy needs into renewable sources.  After this, IRP 2 indicated what the energy targets would be, but the Minister of Energy had still to determine who and what would be built. The Department was being proactive and preparing for when the decision was made so that the SOCs could be ready. She said private sector participation was an important element and the Department had been readied to interact with the private sector.

Ms Mohamed said the focus of the presentation had been on Transnet and Eskom because in terms of scale, Transnet and Eskom were important as they far outstripped the others, but the Department was looking at all the SOCs.

Dr Edwin Ritchken, Strategic Projects Advisor, added that the programme needed sustained demand and Denel and Safcol did not have this, while SAA had irregular demand.  Therefore the focus was on the two companies.  All SOCs had taken part in the boot camp.  He said the General Electric locomotive project had started and training had taken place which had benefited Transnet’s operations.  Quality control was a very important factor in the purchase of locomotives and standards were extremely high, so suppliers needed to produce to global quality standards. The opportunity also existed for companies to become part of General Electric’s global supply chain, but this needed a culture shift within companies to improve their quality.

He said there were communication problems between SOCs and suppliers and there were legitimate concerns that SOCs were not looking at the cases of suppliers.  He added that suppliers themselves needed to improve too. The Department would be holding a supplier development summit with suppliers.

Mr Matona said he recognised that communities had not been very involved in mega projects, neither had provincial and local government. He said there should be no project without local leadership and stakeholders involved and that this should be part of the planning.

Other
Consideration of the oversight report was postponed.

The meeting was adjourned.