Competitive Supplier Development Programme (CSDP) and electricity administered prices: Department of Public Enterprises (DPE) briefings; creating wealth and jobs through the maritime: South African Maritime Safety Authority briefing; NERSA responses on ou

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Trade and Industry

13 November 2012
Chairperson: Mr B Radebe (ANC)
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Meeting Summary

The Department of Public Enterprises briefed the Committee on the Competitive Supplier Development Programme, which had been introduced as an intervention to build a demand platform that would promote investment in plant, skills and technologies and the development of internationally competitive capabilities in supplier sectors relevant to the state-owned corporations (SOCs). This would lead to a reduction of costs through increasing efficiencies, a reduction of dependency on imports and foreign exchange exposure and the development of niche export areas.

Supplier development would span a number of key performance areas, like skills development, localisation, industrialisation, job creation, supplier development and local development.
Fundamental critical success factors for the redevelopment of competitive supplier industries included the ability to design and manage longer term development relationships with suppliers, a procurement process that coherently integrated incentives and penalties for supplier development requirements in the management of suppliers, co-ordination of supplier support programmes with the SOC procurement process, and a Government consensus that rewarded suppliers focused on building globally competitive capabilities and disciplined rent seekers.

The Department of Public Enterprises would be leading key initiatives both to embed and enhance the impact of the supplier development programme and the consideration of ‘blacklisting’ as an alternative to penalties.

Committee Members asked questions around the tender that had been awarded to a Chinese company, how co-operatives would be brought on board to benefit from supplier development, the role of the Department, and the measures in place to industrialise the African continent.

The Department also briefed the Committee on electricity administered prices. Eskom price increases were less reflective of the regulatory rules than of a pragmatic attempt by Government and Eskom to manage the shock of the price correction. For the year 2012/13 of the Multi Year Price Determination, Eskom had voluntarily decreased the tariff increase from 25% to 16% based on optimising operational efficiencies and capital expenditure, something that would come at a cost of strengthening Eskom’s balance sheet. Eskom continued to apply for tariff increases in its Multi Year Price Determination 3 application well below the 8t% return on assets to which it was entitled, reflective of a sacrifice of R209 billion. This was designed to protect poor households. South African industries were energy intensive. If South Africa was to remain competitive relative to its Organisation of Economic Development and Cooperation (OECD) counterparts under more stringent trade regimes, including carbon and climate change considerations, improvements in efficiencies would be necessary. The Department was proposing aggressive, targeted and well administered incentives intended to result in a process of technological upgrading and increased competitiveness, in addition to the provision of transition credits proportional to existing electricity consumption which could be a means to accommodate the special characteristics of the most vulnerable industries.

Members asked about illegal connections, the energy efficiency of private and public sectors, and communication between the Department and energy intensive users.

The South African Maritime Safety Authority briefed the Committee on an integrated maritime agenda to create wealth and jobs. South Africa’s 3 000 km long coast was a major traffic route with annual calls of 12 000 foreign trading ships. Approximately 95% of South Africa’s total imports and exports trade by volume and 80% by value was carried by foreign ships. South Africa currently had no ships on its Register and R36 billion was paid out in 2007 for maritime transport services to foreign owners and operators. The maritime industry was in dire need of skills in shipping and logistics, marine tourism, offshore, naval security and fishing with a shortage of about 250 000 mariners in shipping alone. At the same time South Africa's unemployment was 40%. There was need for 'interpretation' of all possible opportunities into a provincial maritime roadmap and the development of a provincial integrated maritime industry development programme covering vessel construction and repairs, marine tourism; and aquaculture.

Committee Members asked questions around South Africa’s manufacturing capacity, the viability of purchasing vessels from other countries and the need to work on South Africa’s competitiveness in terms of exports.

The National Energy Regulator of South Africa (NERSA) responded to outstanding issues that had been raised at a previous meeting on, among others, tariff disparities between municipalities, enabling regulation on compliance, submission of accurate data by municipalities, and the impact of the relationship between municipalities and Eskom on the attainment of a fair and balanced pricing regime.

Meeting report

Department of Public Enterprises (DPE) Competitive Supplier Development Programme (CSDP)
Dr Edwin Ritchken, DPE Strategic Project Advisor, said that understanding the Competitive Supplier Development Programme (CSDP) required an understanding of the reality of the supplier industry for State-Owned Corporations/ Enterprises (SOCs). In 1976 South Africa was investing 16% of its Gross Domestic Product (GDP) in infrastructure but, by 1994, this had had dropped to 4.5%, until 2004 when it started picking up. There was a similar graph for value added in the transport equipment sector, something that marred the SOC investment programmes. The trauma and associated loss of trust and confidence by suppliers resulting from this process could not be over-emphasised and something beyond business as usual was required from SOCs if their national industrial supply chains were to be developed.

It was in this context that the DPE had introduced the CSDP as an intervention to build a demand platform that would promote investment in plant, skills and technologies and the development of internationally competitive capabilities in supplier sectors relevant to the SOCs. The aim would be a reduction of costs through increasing efficiencies, a reduction of dependency on imports and foreign exchange exposure and the development of niche export areas. He emphasised the need for a consistent demand platform and an increase in the duration of the procurement which would increase the leverage to achieve more in giving suppliers certainty and as such attracting them to invest.

Supplier development would span a number of key performance areas, like skills development, localisation, industrialisation, job creation, supplier development and local development. A predictable and convincing long term demand platform, against which suppliers could invest in new plant, technologies and skills and go through a sustained learning curve, would ultimately enable or constrain SOC supplier development.

The other fundamental critical success factors that needed to be in place for the redevelopment of competitive supplier industries were the ability to design and manage longer term development relationships with suppliers, a procurement process that coherently integrated incentives and penalties for supplier development requirements in the management of suppliers, co-ordination of supplier support programmes with the SOC procurement process, and a Government consensus that rewarded suppliers focused on building globally competitive capabilities and disciplined rent seekers.

When the CSDP was launched in 2007, the SOC procurement capability was not geared for supplier development. It was a process, rather than substance oriented, with a culture that was rigid, inward-looking and limited learning. The DPE has since focused on supplier development through a complete re-engineering of SOC procurement practices and the building of new capabilities, focusing on content rigour and substance with a flexible, outward and learning oriented culture.

With no simple text-book methodology, the first phase of the Competitive Supplier Development Programme was designed to enable a 'learning by doing' process by the SOCs. It involved bottom up execution, showing care from the top and provision of support through putting in place resources and enabling initiatives. The complexity of the procurement re-engineering process for supplier development required a change in procurement policy, procurement tool-kits, organisation, process, governance and controls, system, people/change management, and organisational culture.

The CSDP involved three steps: transactional capabilities, manufacturing partnership capabilities, and innovation capabilities. DPE was presently moving from phase one to phase two, although enterprise capability remained a weak and very uneven.
By way of example, Transnet initiated the CSDP in 2008, applying its first transactions in 2010. In 2011, the experience gained in CSDP transactions enabled Transnet to refine policies, processes and procedures, and in 2012 it launched its Market Demand Strategy (MDS) with significant supplier  development (SD) opportunities (the launch of its R300 billion capital expansion programme over seven years). Eskom, on the other hand, had also leveraged over R1 billion in investments in its supply chain and leverage significant skills development commitments from suppliers.

The CSDP had to be seen in the context of the strategic sourcing process. It involved strategic planning, strategic sourcing and execution. In order to focus its supplier development plan, Eskom had screened 188 strategic focus areas for the next five years with a core leverage strategy to each commodity. Transnet had, on the other hand, had identified over 1 800 procurements that would involve supplier development processes under the MDS. It was also leveraging its operational expenditure with a focus on achieving transformation and enterprise development objectives.

The DPE pre-feasibility study suggested that, to renew Transnet's locomotive fleet and create new capacity for growth, approximately 150 locomotives would be required per annum but Transnet’s Market Demand Strategy, on the other hand, required 1 064 locomotives over the next seven years at an average of 152 locomotives per annum. The locomotive fleet procurement would achieve the objectives of getting the best value for money in relation to locomotive power, promotion of investment, economic activity and employment creation; and driving a process of black economic empowerment through the locomotive supply chain.

There was need for a systematic integration of the multiple objectives of capital cost, risk performance, life-cycle cost and industrialisation into the procurement process. Realistically, of the 44% of future potential to localise, approximately 30% could be converted to tangible development opportunities. The locomotive fleet procurement could drive the localisation of key technologies relevant to a number of industrial sectors, such as mining, power transmission, automotive, power generation, defence and yellow metals.

An example was Eskom, which was trying to localise filter bags (used in coal power stations to filter out toxic gases) in re-equipping its fleet of power stations. The annual demand for filter bags for its power stations for the period up to 2050 created a strong case for a localisation strategy. A filter bag manufacturing development programme could provide much needed support for South Africa’s clothing and textiles industry. However, fibre and needling costs accounted for 86% of the cost of a filter bag. Eskom was trying to put in place a local supply chain through competitive procurement from local suppliers.

In conclusion, the DPE would be leading key initiatives both to embed and enhance the impact of the supplier development programme. In terms of enhancement; penalties were not effective on certain suppliers as the suppliers would factor the penalties into their supply prices. The DPE was considering ‘blacklisting’ but that this was something that required much discussion. The next stage of enhancing the planning process would involve designing a longer term 'localisation blueprint'.
(See presentation document.)

Discussion
Mr X Mabasa (ANC) asked if South Africans were aware of this information. To what degree was the manufacturing world moving with universities and to what extent did local industries have internal training institutions? He noted a tendency to cater for big companies and that there was a possibility of ignoring co-operatives. DPE had to find ways of bringing them on board.

Dr Ritchken replied that the communication had not been adequate. However, a Supplier Development Summit was to be held with the Minister to systematically communicate the DPE’s plans and how it worked. The other weakness was dealing with individual suppliers – there was need for an industry association to make communication effective. He added that the relationship between manufacturing and technical and training institutions was uneven. Areas of technology development were to be pointed out at the Supplier Development Summit.

Mr N Gcwabaza (ANC) asked for clarity on a tender that had been given to a Chinese company and whether it was true that Transnet had set aside for broad-based black economic empowerment (BBBEE) only R1 billion of the R3 billion for infrastructure.

Dr Ritchken replied that the tender was for 95 locomotives and that the Chinese supplier development proposal was significantly strong as opposed to the Japanese proposal. The assembling of the electric locomotives was going to take place in South Africa. In terms of the BBBEE's R1 billion, there was a possibility that the figure was incorrect – DPE was going to confirm this.

Dr W James (DA) wanted to know about the private sector take up.

Dr Ritchken replied that the private sector take up was mixed in case of locomotives. Companies had to be certified in order to able to meet global quality requirements and, although South Africa was doing the mechanicals, there was need to move to complex manufacturing.

Mr G Selau (ANC)  asked for clarity on the role of the DPE.

Dr Ritchken replied that sector departments were responsible for sectoral policies by looking after consumers while DPE was responsible for translating the sector policies to the SOCs and ensuring that these were implemented. DPE provided support by driving changes to ensure that they were in line with national policies.

The Acting Chairperson asked what would happen after 20 years and what strategies were in place for the intra-Africa region.

Dr Ritchken replied that the key lesson learnt from the global financial crisis was that sustained current account deficits resulted in sustained economic crisis and South Africa was currently running such an account. That there was need to develop an export oriented strategy to the African continent and the global economy.

The Acting Chairperson asked the DPE to make written submission to the unanswered questions to allow the Committee to incorporate the responses into its report.

DPE Electricity Administered Prices briefing
D
r Ritchken said that the electricity price trajectory could only be understood in the context of a progressive decline of investment in infrastructure between 1980 and 2004. Eskom’s average selling price for electricity had been declining since the early 1980s. The sector between 1994 and 2004 was devoid of investment and unsustainable. Had Eskom been given inflation linked increases between 1990 and 2005, its balance sheet would have had R142 billion of additional capital on its balance sheet.

Had prices kept up with inflation since 1990, it would have translated to a tariff level close to what would have been achieved with a 60% increase in 2008/09. In the same period costs for inputs like coal had been rising at a rate higher than inflation against Eskom’s price, which had been declining in real terms. The challenge lay in correcting the price while providing Eskom with capital for the build programme  without overly exposing the consumer to massive price shocks

The Eskom price increases were less reflective of the regulatory rules than of a pragmatic attempt by Government and Eskom to manage the shock of the price correction. For the year 2012/13 of the Multi Year Price Determination (MYPD), Eskom had voluntarily decreased the tariff increase from 25% to 16% based on optimising operational efficiencies and capital expenditure, something that would come at a cost of strengthening Eskom’s balance sheet. Eskom continued to apply for tariff increases in its MYPD3 application well below the 8t% return on assets to which it was entitled, reflective of a sacrifice of R209 billion. This was designed to protect poor households. Larger customers would subsidise small customers, although their cost per unit would be cheaper. However, Government’s and Eskom’s sacrifices  would come to naught if the municipalities simply 'taxed' the electricity price (by charging 110% premiums on the Eskom price).

A 2008 report by the Human Sciences Research Council (HSRC) on South African industries indicated that of the 94 sub-industries, the non-ferrous metals sub-industry was by far the most reliant on electricity and, in terms of electricity intensity, the basic metals industry, which included iron, steel and non-ferrous metals, was the most electricity-intensive of the 13 industries.

A comparison of the electricity intensity of South African industries with that of their counterparts in the Organisation for Economic Cooperation and Development (OECD) suggested that there was significant scope for energy efficiency gains. It also indicated that, if South Africa was to remain competitive relative to its OECD counterparts under more stringent trade regimes, including carbon and climate change considerations, improvements in efficiencies would be necessary.

Manufacturing was also exposed to reliance on electricity in the areas of basic metals, cement production and paper and pulp-manufacturing. The DPE was proposing aggressive, targeted and well administered incentives which would result in a process of technological upgrading and increased competitiveness. The other proposal was provision of transition credits proportional to existing electricity consumption or other carefully targeted subsidies which could be a means to accommodate the special characteristics of the most vulnerable industries.
(See presentation document.)

Discussion

Dr James said that South Africa was not doing well in terms of energy efficiency. He wanted to know how both the private (including residence) and public sectors were doing in this regard. An assessment of every public sector building would be useful in determining the energy efficiency.

Dr Ritchken replied that, in terms of demand side management, Public Enterprises were not leading by example. An increase in price would trigger behaviour change in the public when purchasing electrical appliances.

Ms S van der Merwe (ANC) said that, in terms of industrial procurement and designation, co-ordination amongst Government departments was not happening, especially in areas such as monitoring. She asked how DPE was dealing with co-ordination. Had DPE spoken to intensive energy users?

Dr Ritchken replied that, in terms of the designation of sectors, the SOC procurement policy required procurements for above a certain amount of imports to have a supplier development component and a lack of such component would cause the auditors to declare the procurement illegal.

Dr Ritchken replied that co-ordination was problematic and that the DPE was still working to see how best to resolve it.  A week long boot camp had been held with some of the SOCs and managements, Eskom, Transnet, and officials from the dti, and this had been productive. DPE was looking at how to set up forums to address co-ordination.

Mr Mabasa said that perhaps investments should be more in components such as sensor lights. He added that more campaigns were needed in informing the public of the drive to promote energy efficiency through switching off lights when not in use. He also expressed a concern that municipalities were still charging high prices.

Mr Selau asked what the DPE was doing about the illegal connections.

The Chairperson asked the DPE to respond to some of the questions in writing to allow for other presentations to be made.

Towards an integrated maritime agenda: creating wealth and jobs through the maritime
Mr Lolo Raphadu, Company Secretary: South African Maritime Safety Authority (SAMSA) said that maritime policy and mandate was rooted in the 1996 Transport White Paper. SAMSA was created by the South African Maritime Safety Authority Act (No. 5 of 1998) to protect life and property at sea, prevent and control pollution of the marine environment by ships and the promotion of the country’s maritime interest.

South Africa’s maritime area, which might be considered as the country's tenth province, was three times bigger than its land area; it hosted offshore industries in energy (oil, gas and renewables), fishing, minerals and tourism. Its 3 000 km long coastal area had eight commercial ports and various fishing harbours. South Africa’s coastal shore was a major traffic route with annual calls of 12 000 foreign trading ships
. (See map, slide 4.)

I
n 2008, 98% of South Africa's trade volume was carried by sea. South Africa was in the top 15 by tonne-mile and handled 3.5% of the world shipping trade. (See map, slide 5.)

Mr Raphadu illustrated the density of maritime traffic passing South Africa's shores or calling at South African ports (see map,  slide 8). South Africa was the top exporter on the African continent to the rest of Africa and the second exporter in Africa to the rest of the world (see slide 10). It was also the top importer in Africa from within Africa and the top importer in Africa from the rest of the world (see slide 11).

However,
approximately 95% of South Africa’s total imports and exports trade by volume and 80% by value was carried by foreign ships. South Africa had no ships on its Register and that in 2007 it paid R36 billion for maritime transport services to foreign owners and operators (slide 13). In 1993 South Africa had 11 cargo carrying vessels flying the South African flag, but these had since been taken off the register.

South African port mariners numbered only about 1 500, whereas the 12 000 merchant ships visiting South African ports annually carried about 240 000 mariners who transported and handled South African imports and exports (about 98% of total trade). (See pie chart, slide 14, on securing South African jobs.) In other words, the percentage of South African mariners was 0.63% compared to the 99.38 % of non-South African mariners on board the 12 000 merchant ships visiting South African ports. South Africa's proportion of global cargo was 3.5%. (See pie chart, slide 14.)

SAMSA’s focus areas were shipping, ports and logistics, vessel construction and repairs. Also it focused on maritime leisure and tourism, off-shore energy and minerals, fishing and aquaculture, boat building and repairs, national shipping line, maritime skills development, infrastructure development, the ship registry, and maritime business support services. He noted that South Africa had a long range identification target system that would tell that a vessel miles away from South African shore was in distress, but there was a lack of infrastructure to take such ships in for repairs, which explained why they got stuck in the coastal area.

Commercial and ancillary services, such as engineering and technology services, business consulting services, legal, banking, auditing, assurance, shipping/cargo operations and logistics, skills training research and innovation, and port, coastal and maritime administration were necessary for an integrated maritime development framework.

In terms of maritime skills development, the maritime industry was in dire need of skills in shipping and logistics, marine tourism, offshore, naval security and fishing. In shipping alone, there were shortages of about  34 000 officers and 224 000 ratings (about 250 000 mariners altogether). At the same time, South Africa had 40% unemployment. 

He gave details of scarce and critical maritime skills (see slide 25), and skills development initiatives (see slide 26).

As a way forward, there was need for 'interpretation' of all possible opportunities into a provincial maritime roadmap and the development of a provincial integrated maritime industry development programme covering vessel construction and repairs, marine tourism; and aquaculture. He added that the Department of Education provided R94 million on a yearly basis to train seafarers on board the SAS Agulhas.
(See presentation document.)

Discussion
Mr Gcwabaza asked what South Africa’s manufacturing capacity was and if there were any plans for developing the capacity. He added that there was need for an integrated approach together with a time line. South Africa had to have its own cargo ships to avoid spending much money on renting.

Mr Raphadu replied that South Africa had capacity but that a lack of support had caused the system to collapse. SAMSA was working on resuscitating it. He added that the skills were there but, given the state of the industry and the lack its own ships, foreign companies were benefiting from the situation by hiring them.

Mr Mabasa asked if it was viable for South Africa to purchase vessels from other countries while planning on building its own.

Mr Raphadu replied that it was viable for South Africa to purchase vessels from other countries and that there was capacity to effectively run and manage the ships. He gave an example of Ethiopia, a landlocked country, with 15 cargo vessels.

Dr James said that there was a need to work out South Africa’s competitiveness in terms of exports before going into ship building.  In terms of the scarce skills, he said that the restrictions on immigration meant that scarce labour could not be imported from other countries. He added that there was a need for alignment between Government enterprises.

In summing up, Mr Raphadu said that the Government needed to produce enabling legislation to make it conducive for South African business people to venture into the ship industry. Priority should be given to vessels carrying South Africa's flag.

NERSA’s Written Responses to outstanding issues 
Mr Charles Geldard, Regulatory Specialist: NERSA, read out to the Committee NERSA's responses on outstanding issues that had been raised at a previous meeting.

Current legislation provided for compliance to ensure a fair and balanced electricity pricing regimes in municipalities. In the current financial year 2012/13, 18 municipalities had deviated from the NERSA approved guidelines in increasing prices. NERSA accepted deviations only to deal with extensive repairs and maintenance programmes, capital expenditure programmes, filling critical vacancies and demand side management initiatives.

There were about 40% municipalities that failed to submit accurate and usable data forms information to NERSA. Municipalities that failed to meet the requirement of submitting data forms would be limited to a guideline increase and to NERSA’s approved benchmarks.

The tariff disparities between municipalities were due to the difference in size, location and customer mix. NERSA was currently looking at a project of tariff harmonisation and a consultation paper would be published to all stakeholders for comment and discussion in due course.

Much of the discrepancy in the impact of the relationship between municipalities and Eskom on the attainment of a fair and balanced pricing regime was due to historical reasons that Mr Geldard would not comment on. NERSA was still trying to attempt address the issue of a common approach through a project.

It was not a change in the type of regulatory structure that was required to ensure that municipalities followed pricing practices prescribed by the Electricity Regulation Act (No. 4 of 2006) but a change in understanding, something that NERSA was working on.

The issue of industry structure was a policy issue that had to be raised with Government.

The best solution to the issue of contestable customers would be for the municipality to agree with Eskom and the customer on an approach, the basis of which would be that the customer would provide employment for its residents.
(See presentation document.)

The meeting was adjourned.

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