Industrial Policy Action Plan (IPAP) 2015: public hearings Day 1

Meeting report

The Chairperson welcomed everyone to the meeting and the agenda for the day was adopted.

Department of Trade and Industry presentation on Metals Fabrication Sector

Ms Thandie Phele, Chief Director: Metals Fabrication, Capital and Rail Transport Equipment, DTI, said the Metals Fabrication Sector was classified into ferrous metal, non-ferrous metals, capital equipment and rail transport equipment. Ferrous metals in the upstream referred to primary iron and steel and to fabricated metal products in the downstream. Non-ferrous metals referred to slabs, billets and ingots of aluminium, copper, brass, lead, tin and zinc. Capital equipment and machinery were valves, transformers, handing equipment and it also included engineering and allied services. Rail transport equipment included rail rolling stock such as locomotives, electric multiple units, wagons and coaches and rail infrastructure referred to signalling, Perway infrastructure and overhead electric transmission. These sectors were vital components of modern economies with practically every other economic sector dependent on it for the ‘tools, castings, components and systems’ to operate. Put simply, this sector produced the parts and machines which other sectors used to produce their goods and services.

Recent key global dynamics and drivers of growth included:

-Declining global output, exacerbated by decline in the Chinese growth and consumption

-Declining commodity prices resulting in decline in mining activities, further resulting in a decline in demand for metal products

-Increased Chinese exports of primary steel and mid-stream non-ferrous and ferrous finished goods

-Higher tariffs and non-tariff barriers in potential export markets

-Increased use of light metals (aluminium) in vehicles

Ms Phele showed graphs on performances in the sector in terms of value addition, employment, gross fixed capital formation, trade analysis and exports of scrap metals. She highlighted key opportunities and said public infrastructure-built programmes, both in the local and the African economy, remained the single largest opportunity to stimulate the industry, as well as mining turnkey projects in South Africa, the rest of Africa and South America. Extending the value chains through further downstream manufacturing initiatives and turning the lack of maturity in existing South African beneficiation chains into strengths, should also be explored. The sector should also take advantage of the Automotive Production Development Programme (APDP) to create additional opportunities for metal-component manufacturing. Key binding constraints were the supply, availability and rising energy (electricity and gas) costs on the melting industries, availability and costs of key intermediate inputs and the availability and reliability of rail and associated high logistics costs. Global overcapacity and declining global prices seriously threatened the viability of the local primary steel industry, downward tariff pressures on a number of value-added products resulted in a surge of imports and there was a lack of understanding and compliance to the localisation programmes.

Key pillars of the sector strategy included the response to the government target of 75% local content across government procurement, competitiveness enhancement programmes deployed at company-level and dedicated training. Dedicated sector support programmes to address costs and access to relevant industrial financing and the development of a comprehensive industry position paper to consolidate government’s objectives and interventions were also vital to the sector.

She summarised some of the interventions and said that the Economic Development Department (EDD), through a policy directive, introduced a new price preference system was introduced in September 2013 with the objective to first offer the scrap to local processing industries at a discount before export permits could be issued. The National Foundry Technology Network (NFTN), an intervention programme housed at the Council for Scientific and Industrial Research (CSIR) assisted the foundry industry to improve its competitiveness. Through a partnership with the South African Institute of Foundrymen (SAIF), three new trades (pattern-making; moulding and melting) have been developed and were in the process of approval by relevant authorities. To-date, more than 500 foundry workers have been trained and completed various modules under the newly MerSETA approved foundry NQF 2-4 qualification. Due to the erosion of the apprenticeship programmes, a partnership was formed with the tooling industry in 2009 to develop a new qualification and trade test. To-date, 272 students have completed the coursework of the pilot apprenticeship programme, waiting to be trade tested under the new qualification.  These students were currently deployed in industry for ongoing workplace experience.

Ms Phele gave an overview of interventions made to date in terms of industrial financing and on the Rail Recapitalisation Programme she said the Passenger Rail Agency of South Africa (PRASA) signed a R51 billion contract with the Gibela Consortium for supply of 3 600 coaches over 10 years. The contracts embedded more than 65% local content to be achieved over the contract lifespan. In 2014, Transnet awarded a 1 064 locomotive tender to four Original Equipment Manufacturers (OEMs), General Electric, Bombadier, China South Rail China North Rail, to a collective value of R51 billion. All four OEMs have to adhere to the requirements of designation.

Significant opportunities existed to improve the local content and supplier development processes within procurement programmes. Exports of scrap metals have not significantly reduced, because the permit system was still being circumvented and there was an urgent need for alternative and stringent interventions. Global conditions called for support to the primary steel industry against conditionalities to ensure viability of both the up and downstream industry. Further Economic Support Package funds needed to be allocated to unlock private sector investment and to catalyse industrialisation.

Discussion

The Chairperson expressed concern that the scrap metal issue has not yet been effectively addressed.

Mr B Mkongi (ANC) said the agenda of government was to make sure that there was inclusive growth and it essentially meant that the majority of the population needed to be affected by this growth. He asked what the transformation barometer of the industry was. He asked who controlled the industry and asked for statistics with regards to race, gender on who participated in it. He also asked which province dominated the industry, because it was essential to identify the people that drove the economy to determine if it served inclusive growth. DTI just released a report that showed there was a shortage of engineers and artisans in South Africa and he asked what was being done with the Department of Higher Education and Training (DHEt) to address this matter. He asked if efforts were being made to encourage domestic demand, because the graphs showed that more employment opportunities existed in the downstream industry. Curbing the exploitation of scrap metals would assist with the vandalism and the theft of copper and aluminium. He asked what the reason was for the decline in electrical and equipment and downstream aluminium in the downstream exports.

Ms Phele replied transformation in the manufacturing industry was happening, but it was happening at a slow pace. The new Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice looked at all elements that would help in measuring transformation. The sector was still lagging behind in terms of ownership, but the Minister had announced the Black Industrialists Programme that would fast track transformation in the manufacturing industry. It was not a standalone programme and it remained within the “basket” of mechanisms to drive transformation within the industry. The industry still very much resided within Gauteng, Cape Town, KwaZulu Natal and the Eastern Cape.  The Department was also focusing on revitalising previous industrial areas where industrial activities had diminished over time. Growth and transformation were mutually enforcing, because if the industry did not grow, there would be no opportunities for transformation. The sector was very demand driven, because if there were no markets the sector might as well not produce. Traditionally the sector had been able to support the domestic needs and find export markets. The decline in the Chinese growth led to competition for the same markets. In the past the steel industry in China was producing for its own internal use, but now had to find alternative markets and South Africa was being “squeezed”, because demand had shrunk. Domestic demand would be raised by the localisation programmes. Within the law, the state could only control what was bought as a state and could only influence the process. There was no way to force the private sector to procure from the local industries. Government was maximising localisation within its own procurement processes to stimulate demand. South Africa needed to address the approach to the African Continent in terms of African growth and development. As local capacity grew, alternative markets needed to be sourced. Supply, development and localisation should not be regarded as a ‘rule’, because it was strategic to have a supplier close to where production took place. The foundry industry was very strategic and interventions that could be made to address vandalism of theft of infrastructure were not part of the mandate of DTI.

The Chairperson asked how long the 272 students that had completed the coursework of the pilot apprenticeship programme have been waiting and how long did they still have to wait to be trade tested under the new qualification. She referred to the Rail Recapitalisation Programme and asked if there had been any challenges with the R51 billion contract PRASA signed with the Gibela Consortium for the supply of 3 600 coaches over 10 years. Transnet might want to comment on the locomotive tender they awarded when they presented. She asked for more information on the binding constraints in terms of the availability of and rising energy costs, as well as the availability and reliability of rail and associated high logistics costs. The export of scrap metals have not significantly reduced despite the policy directive by EDD and the new price preference system. Scrap metal consumed less energy and she wanted to know why the policy was not being enforced. She asked what was being done to address the lack of understanding and compliance to the localisation programmes.

Ms Phele replied that the Second-Hand Goods Act guided trading in the ‘second market’ and the core rules introduced by EDD in the price preference system was not insufficient, but players in the market have found ways to circumvent the efforts. Currently the scrap collection was greater than the demand and the price preference system gave the local industry first option to provide for local need and to export the excess. A decision needed to be made on what should be done in order to serve the development agenda. DTI was engaging with EDD, with the International Trade and Administration Commission (ITAC) and with the South African Police Services (SAPS) to deal with theft. In terms of energy, foundries were paying Megaflex and municipal rates which moved them outside the competitive boundaries. The introduction of energy efficiency programmes would ensure that production was as sufficiently as possible, but an escalation in costs remained the key issue in the engagements. The National Ports Authority had already announced a proposed rebate to companies at a certain level of the value chain in the value addition sector. Transnet and PRASA would address the Chairperson’s questions in their presentation.

The National Foundry Technology Network (NFTN) Project Presentation

Mr Steve Jardine, Project Leader, NFTN, said NFTN had a mandate to enhance the competitiveness and transformation in the casting industry sub-segment, through focused interventions designed to enable the industry. In existence since 2008, the NFTN was funded by DTI and was hosted by the CSIR who ensured compliance to the Public Finance Management Act (PFMA). The NFTN provided program management, coordination, and facilitation to support and enable the revitalisation of foundries in the metal casting industry through appropriate skills training, technology transfer and diffusion of state of the art technologies.

The foundry industry was in decline with 15 foundries having closed and 1 080 jobs lost since 2010, of which 850 were in 2014/15. Foundries lacked the volumes to achieve manufacturing economies of scale and had an aged infrastructure for capital equipment parts. High levels of capital investment were needed and there was low capacity utilisation at many foundries. Local buyers were offering ad-hoc low volume orders and there was limited collaboration in the industry to develop the collective capacity and capability.  The foundry industry comprised of 170 companies creating 10 285 direct jobs. The majority of companies were privately owned small businesses, employing less than 50 employees and was characterised by high use of scrap metals as a primary material input. Challenges to the industry included human capital development, access to markets, commitment, cost, availability, quality of scrap metals, energy management, competitiveness, environmental and waste management, technology and innovation and capital for investment into new plants and equipment.

Foundries were a link in the value chain for most metals related manufacturing processes and were closing due to lack of business opportunities. This was due to high volumes of import products, perceived cost and quality gap, localisation of castings, poor transparency of the buy-sell transactions in the supply chain, limited opportunities cascading down to foundries and poor business confidence.  As part of the intervention strategy, 65 foundry assessments were done to identify gaps in terms of international best practice benchmarks. Future activities included collaborative partnerships to unlock identified opportunities in individual foundries on a case by case basis and to facilitate industry forums to address specific technical needs.

Foundries did not have the required skills to grow and capitalise on the opportunities and South African foundry skills lag other BRICS countries and the world. There were insufficient qualified artisans for current needs and training capacity expansion was required for key regions. He proceeded to give an overview of the interventions that included learnership programmes, artisan training programmes, skills development training programmes and the New Foundry Generation Forum (NFGF) programme.

Foundries were finding it difficult to compete for new business and the global competition had a direct impact on castings sourced in South Africa. Traditional markets were changing and negative market trends, such as in the mining sector, were negatively impacting the foundries. Assistance had been provided to 31 foundries and support packages included assistance to address accreditation and compliance needs, product development and product / process innovation. Continued assistance would be given to 20 foundries enrolled in the Competitiveness Improvement Program (CIP) annually. Foundries were categorised as small or capable by buyers and were not being considered for new business. OEMs have basic requirements to qualify supplier capacity including compliance and certification to market norms and 39% of all foundries were accredited to an accepted quality standard. The aim was to facilitate assistance for foundries to achieve relevant accreditations. Foundries relied on electricity as a primary source of energy and the availability of electricity was a constraint. The cost of electricity was rising rapidly with limited or no availability of alternate energy sources for melting. Assessments were being done to evaluate energy reduction opportunities and special attention was being paid to electricity conservation and to implement energy management systems. The cost and availability of scrap metals as a primary input material were concerns for foundries. Availability of scrap metals should be a national strategic advantage and raw materials used as an alternative to scrap were energy intensive to melt and less environmentally friendly. High quality materials needed by foundries were scarce and the dollar value of South African scrap was highly favourable for importers. Interventions included the development of alternate alloys that required less usage of scrap metals as a primary input and product development to improve efficiencies and yield in manufacture.

Future activities for the NFTN included support interventions to unlock the potential in private foundries and to enable and empower growth and development by engaging and supporting individual foundries. Mr Jardine concluded his presentation by showing two case studies of two black owned companies (more than 51% black ownership) that showed how interventions focused on research support and how material reduction had assisted the foundries.

The South African Institute of Foundrymen (SAIF) on the Impact of IPAP on the Foundry Industry

Mr John Davies, Chief Executive Officer, SAIF said SAIF was formed in 1964 and was a registered non-profit company with 174 members of which 72 were companies. The organisation aimed to improve the competitiveness of the South African Metal Casting Industry by generating sustainable growth and employment opportunities in the manufacturing sector. 

The industry had contracted since 2007 and Mr Davies echoed much of the NFTN’s presentation on the decline of foundries in South Africa, the decline in job opportunities and the challenges facing the industry. He also mentioned that the output in 2013 of 375 240 tons was down from 660 400 tons in 2007, or 43% lower.  He also gave a summary of the geographical location of foundries in South Africa where the highest concentrations of foundries were found in Gauteng (114), KwaZulu-Natal (27), Cape Town (14) and the Eastern Cape (8).

In 2003 SAIF initiated revision of the artisan skills curriculum for moulders, patternmakers and the new trade for melters and all three were registered with the South African Qualifications Authority (SAQA) in 2013. The industry skills shortage was confirmed at a Rapid Appraisal of Local Innovation Systems (RALIS) workshop in 2008 and SAIF will facilitate the trade testing of the learners in 2015/2016 to enable them to have qualifications consistent with other artisans and acceptable to industry. The NFTN conducted a feasibility study in Gauteng leading to the decision to establish the Gauteng Foundry Training Centre (GFTC) at the Ekurhuleni East College (EEC) in Kwa Thema with the NFTN, the Gauteng Department of Economic Development (GDED) and the EEC as the joint funders. SAIF along with industry and other subject matter experts from academic institutions developed the curricula which were registered with the relevant authorities in 2013. It was essential that this initiative became part of the DHET’s funding structure and MerSETA had responded positively this year with funding assistance to the learners at the GFTC. Assets intended for the Western Cape Training Centre, subsequently sold to Atlantis Foundries (Pty) Ltd were installed in the GFTC to enhance the equipment level. The positive feedback from the “new generation” about the interaction, teamwork and collaboration was a significant benefit.

Technology Assistance Packages (TAPS) were introduced in 2010/2011 by the Department of Science and Technology (DST) and there had been positive responses from 23 of the 26 foundries and 18 considered the programme valuable. Continued interventions by placing interns in the foundries had been positively received and it was unfortunate that some momentum had been lost by the short duration of the intervention. He gave examples of how the Competitiveness Improvement Programme had benefited the industry and again highlighted all the constraints as highlighted by both DTI and the NFTN.

The Aluminium Federation of South Africa (AFSA): Impact of IPAP and the NFTN on the aluminium foundry industry

Mr Mark Krieg, Executive Director, AFSA, said the purpose of AFSA was to promote the use of aluminium, to promote the South African Aluminium Industry and to promote and represent the interests of its members. AFSA’s members included smelters, secondary smelters, semi-fabricators, fabricators, foundries, distributors and suppliers. The South African aluminum industry encompassed the complete value chain. There had been a decrease in production per annum (37%) and 81% of products were produced for the automotive sector.

Numerous technical benchmarks on foundries were completed. The energy audit found that one foundry reported an energy cost reduction of 21% and another launched a major energy saving program that reduced energy intensity from 900 kWh per ton to 675 kWh per ton which was a 25% reduction. Technology transfer from local and international experts have helped in preventing the closure of more foundries. Other initiatives saw recommendations by an aluminium die casting specialist turn companies around. It resulted in reduced energy use, quality improvement, reduced scrap and it improved competitiveness. A training initiative for another foundry boosted knowledge and morale on the shop floor and management gained new insights.

A 2013/14 assessment was done on whether foundries in the automotive supply chain needed a competitiveness improvement initiative. It was a high level assessment of foundries in the automotive supply chain and was undertaken by both the NFTN and AFSA. It was found that automotive component orders were increasing for smaller, jobbing foundries. It was also found that tier 2 and 3 foundries would continue to benefit from NFTN type initiatives. Tier 1 foundries in the automotive supply chain were qualified to international automotive standards and significant investments had been made in state-of-the-art equipment and foundries have benefited from interventions. However, volumes were too low to be competitive and were shrinking and there were no new model range orders. The global automotive industry represented a major development for South African based component manufacturers, but intense international competition existed.

Customer perspective findings showed support for the APDP and Vision 2020. It also showed that customers were surprised by the extent and diversity of the local foundry industry and would prefer a local casting supply chain which were competitive and secure, with an international partner. Overall, many foundries in the supply chain have benefitted from NFTN initiatives.

Castings were essential to any manufacturing sector and the challenge was to maintain and grow the remaining foundries. Scrap at a preferential price would immediately make the industry more competitive. Raw material made up 40% of the cost of an aluminium casting and the raw material was secondary aluminium which was based on aluminium scrap. Scrap was a key cost driver in producing castings.

Many NFTN interventions have been successful and very valuable to the foundry industry.  Interventions have assisted foundries to become more competitive, and ensured the survival of some foundries.  Foundries have upgraded equipment and skills and were more competitive with relatively low cost interventions and investment. Improved skills, processes, local and international know-how and technology laid the foundation for future expansion and the challenge was to maintain and develop the remaining foundries as new opportunities developed.

Discussion

The Chairperson asked that all names of actual companies mentioned as examples in the presentations be forwarded to the Committee.

Mr  Mkongi said the fundamental challenge illustrated in all the presentations was the declining trend in the sector. One of the reasons put forward for the declining trend was uncompetitiveness in South Africa and he asked why South Africa was less competitive than global trends. Lack of volumes was being constantly raised as a reason for not achieving manufacturing economies of scale. He asked if the problem was production capacity, the cost of capital or the availability of financing to support manufacturing. He wanted to know whether the competitive improvement initiatives were being applied across the sector or if it was just for the foundry industry. The trades were only registered with SAQA in 2013 and he asked how artisans had been produced since 2003 without this foundation. The automotive sector was being funded by the Department and there were many schemes DTI had implemented to support the industry.

Mr Jardine replied that the industry had been declining, because technologies in the global markets had moved past the industry and those technologies had not necessarily been localised. As a result, training was focused on those technologies. Economies of scale were challenging, but it came down to the risk factor rather than the cost of capital. The volumes needed to sustain the investment needed and it should be assessed whether the investment was on par with competitive global trends. Competitiveness should be assessed by looking at what the South African market could offer and the DTI’s designated products gave the industry a chance to localise products and to develop capacity. Time needed to be taken to develop each and every foundry on a case-by-case basis to make sure that the products buyers wanted, could be produced. It had been shown that there was capacity in many of the different products and the erosion needed to be illuminated. Any project should be assessed in term of revenue generation, employment opportunities and localisation, because any component that was imported eroded these opportunities.

Mr Davies replied that multi-factorial issues resulted in the closure of foundries and in trying to compete on price; the local industry would probably fail, because there was almost always a lower imported price. All other elements, i.e. a value proposition should be explored for local foundries to service their customers. A number of issues, such as better supply chain management in terms of inventories, responsiveness and agility with regard to the required volumes and more specifically, to have design capabilities so that a better product could be produced, would improve competitiveness. For many small and medium sized foundries, the cost of capital and access to financing were concerns. There were and training that took place in the industry in the interim, but it was not sufficient to fill the gap. The training of artisans declined during the 1990s and it really started emerging in 2011 as a focus point for the industry and for DHET. The accreditation took time, because existing curricula for trades had to be revised and there were a lot of challenges. The newly registered trades took into account the new needs of the industry.

Ms Phele replied that volumes and demand went together and to increased competitiveness and economies of scale were determined by what was being done at factory level. Some of the industries were very dependent on the infrastructure and because South Africa went through dips in its infrastructure development, it resulted in a decrease in economic industries. It was a collective approach, because a piecemeal approach would see some of the opportunities missed. DTI was working with institutions such as the Industrial Development Corporation (IDC) to look at proving working capital at more competitive rates, and was also looking at how the incentive schemes could help entrepreneurs to identify opportunities.

Mr D Macpherson (DA) said in 10 or 20 years there would be no industry left if things continued the way they were. The NFTN showed a detailed cost structure and input materials were the lowest out of all the BRICS countries, yet South Africa’s overheads were the highest. Any small business trying to make its way through a competitive market dealing with those sorts of overheads was not going to survive. Bar Gauteng and KwaZulu-Natal, the numbers of foundries have halved in all other provinces and it spoke to a crisis in an industry battling to survive. When labour constituted 33% of the overhead costs it was not surprising that companies were battling to survive in a globally competitive market. He asked whether there was an industry to be saved and he asked whether the industry could continue to exist with its current framework and overhead costs.

Mr Jardine agreed that the overhead costs limited competitiveness and the industry did not assess diligently whether prices were competitive before actually paying. There was definitely an industry to be saved and people were trying very hard to ensure the sustainability of the industry for generations to come.

Mr N Koornhof (ANC) asked whether Brazil had better tariff protection than South Africa and he asked whether there were any opportunities for the industry in terms of African growth.

Mr Jardine replied that most of the foundries were privately owned, so they would look at the risk of manufacturing in Africa versus the risk of manufacturing anywhere else. Business confidence would determine those decisions.

Mr J Esterhuizen (IFP) said the ability to combust gas when smelting was a massive energy saver and he said temperature uniformity was needed in the decarbonisation of steel. He said the safety aspect in the industry had not been raised in any of the presentations thus far.

The Chairperson said it seemed that when experts were brought in, energy consumption and intensity were being reduced. The Committee; 10 years ago already asked why the industry was not training, because of its aging labour structure. The issue of scrap metals was critical as it related to energy and aluminium. There did not seem to be enough training colleges and the output was hardly radical transformation and she asked what the impediments were. There had been no advertisements on the ‘career days’ held by the industry and she asked who was being invited, because there were lots of young people, especially in Gauteng that could benefit from such exposures. All the presenters needed to provide written submissions on the strategies put in place to address the skills deficit. It seemed that competition could be address by intensifying localisation and solving the scrap metals concerns and she asked for some constructive ideas to be provided to the Committee. She also asked those involved in the industry to actively work together to address the challenges.

Mr Jardine agreed that the industry needed a collaborative approach in addressing all the issues.

Mr Davies replied that career days were being advertised in local areas and at the last opportunity there were over 100 aspirant learners that participated and 20 new recruits were chosen this year for training at the GFTC.

Ms Phele said there had been an evolution in the development of the curricula for training artisans and DHET introduced new institutions on how qualifications and occupational trades had to be done going forward. It took time to institutionally arrange the system in order to deliver on what the industry needed. The DTI got involved in skills development, because it was important for the competitiveness and sustaining of the industry going forward. In order for the programmes to yield the desired numbers, it had to take place in the mainstream of the education system so that it could be offered by DHET on a systematic basis.

The role of the Toolmaking Association of South Africa (TASA) in the Intsimbi National Tooling Initiative (NTI) in partnership with the DTI

Mr Vusi Mkize, Chairman, TASA, said the Tools, Dies, Moulds, Jigs and Fixtures (TDM) sector enabled all manufacturing and the distress in the sector was caused by the skills gap, the decline in competitiveness, the lack of transformation and a lack of support.  The sector had more than 500 local companies involved in direct tooling supply chain. The local manufacturing sector purchased more than R15 billion per annum, with less than 20% of this demand sourced locally. The TDM sector provided more than 6 000 direct employment, but it was estimated that one TDM sector job supported 20 downstream jobs according to a study done in 2005.    

TASA was a Section 21 non-profit company that represented industry through six provincial chapters. TASA sought to promote the importance of the TDM sector in support of IPAP objectives. Approximately 25% of TDM sector companies participated actively in the Association.

The Intsimbi National Tooling Initiative (NTI) of South Africa

Mr Dirk Van Dyk, Chief Executive Officer, NTI, said the NTI was developed in support of the turnaround of the demise of the TDM sector and in support of the South African manufacturing sector’s competiveness improvement, economic growth and job creation goals. The main focus areas were the re-development and alignment of South Africa’s manufacturing skills delivery capacity with that of leading re-industrialising manufacturing economies globally. The NTI also focused on providing focused enterprise development support to SMME’s in the TDM sector through benchmarking and intervention support to stimulate competitiveness improvement, localisation of tooling and job placement of learners exiting the new skills delivery system.

The new skills system focus for the TDM sector encompassed the entire skills value chain such as engineers, designers, project managers, researchers, technicians, Master Artisans, artisans and entry level factory workers. The system included theory, practical and workplace based learning, job placement and migration management, career path tracking, continuous development and ensured international accreditation to support global competitiveness. Therefore, strategic and extensive partnerships had been formed with the DTI on a national level, six provincial Department of Economic Development partnerships, a local partnership with the City of Tshwane and the educational environment. The partnerships also included 15 Technical Vocational Education and Training (TVET) colleges, four universities and three successful Tooling Centres of Excellence had been set up. International partnerships with Germany and the USA completed the skills value chain the NTI had set up to effectively address the skills gap.

Mr Van Dyk said more than 80% of the people driving the tooling industry were 48 years and older, but they no longer drove the innovation part of the sector, because they would be exiting. New entrants to the industry had to be provided on a large scale, because they would be future factory owners, designers and engineers. It was an ideal opportunity to redress transformation and the NTI had over 1 600 learners in the pipeline, across all provinces, with 98% of those learners coming from previously disadvantaged and rural communities. It should be noted that 30% of those learners were female and 85% of learners secured permanent employment by the time they exited the programme. Over 200 companies participated nationally, both during training and during the job placement process.

The Chairperson said questions and clarifications would be forwarded to the presenters in the interest of time. The Committee would interact in future to track the commitments made.

Transnet’s progress on IPAP interventions and localisation on locomotive procurement

Mr Garry Pita, Acting Group Chief Financial Officer, Transnet, said localisation through supplier development at Transnet came about from the policies government had developed in order to address the challenges faced by South Africa. He gave an overview of the national challenges, the national agenda and government’s responses through policy to those challenges. DTI had identified sectors in which it would be strategic for South Africa to gain capabilities and set minimum local content thresholds for components within those sectors. Slide 5 of the presentation showed the local content requirements when tenders were being awarded. The requirements did not only take local content into account, it also looked at skills development and black ownership. With DTI, Transnet had also been looking at Overhead Track Equipment (OHTE) and Signalling Equipment. DTI was engaging with various stakeholders (manufacturers, suppliers, customers, etc) to understand to what extent these could be localised and how feasible designation would be.

In order to drive localisation, Transnet supported driving three different key localisation drivers. In order to localise manufacturing, skills were a prerequisite to capability. Skills should be transferred from existing market players to local suppliers. To be able to efficiently and sustainably manufacture locally, best practice and technology transfer needed to take place. Another key driver to local manufacturing capability was investment in plant and machinery, because this would support the use of skills and technology. Through this approach Transnet aimed to facilitate and influence established suppliers to engage with local emerging suppliers to enable downstream supplier development. Transnet’s Enterprise and Supplier Development (ESD) strategic approach was to focus on tier 1 suppliers and to influence them to engage local tier 2 and 3 suppliers. As an example, Mr Pita showed how, through a large locomotive transaction, General Electric partnered with a local manufacturer, Siyahamba Engineering, and that company was now part of General Electric’s supply chain. Siyahamba now provided services to General Electric, not just for Transnet and PRASA locomotives and coaches, but for the global supply chain. From a bottom up perspective, Transnet would support Siyahamba Engineering with preferential procurement and enterprise development.

Mr Pita said Transnet had recognised four key areas of opportunity that could be leveraged in order to develop the local supplier base. These areas were targeted skills development, maintenance and repair capabilities, component manufacture / upgrade capabilities and system / sub-system manufacture and assembly. The rail sector spend was significant enough to drive industrialisation through programmatic procurement events.

Mr Edward Thomas, Group Supply Chain Officer, Transnet, said in response to questions raised earlier, that the locomotives completed by the 95 x 20E locomotives tender awarded to China South Rail (CSR), were rolling in Transnet’s general freight business. The tender had been awarded before Transnet had exemption from the Preferential Procurement Policy Framework Act (PPPFA), but still pushed hard for a lot of terms on supplier development. In terms of achievement, 67% of the contract achieved supplier development value. The intention was to make local assembly capability for electric locomotives and this had been achieved through a fair amount of investment in the plant. On slide 17, he listed 11 South African companies that benefited from the build programme and seven out of those 11 companies had significant black ownership. These were the first electric locomotives assembled by Transnet Engineering and 275 jobs were created and 110 individuals were skilled, focusing on car body manufacturing and preparation and technologically advanced items. The Transnet Freight Rail 1 064 locomotive tender was the largest locomotive tender in the world to the value of R51 billion. This tender was in support of the general freight business where Transnet was trying to move freight from road to rail. The local content requirements had been met by the suppliers in terms of their commitments. The designs had been finalised and approved and the OEMs would now finalise their local suppliers in terms of who would be assisting them in manufacturing of the components for the assembly of the locomotives. The skills development percentage was contractually confidential, but an average of 70% was committed to and it fell within the pillars of localisation, industrialisation, technology transfer, job creation and retention, small business development and rural integration. The project would create over 6 000 jobs and over 9 000 jobs would be maintained (slide 22). The establishment of two locomotive production facilities in Gauteng and KwaZulu-Natal would enable the development of industry clusters around the production facilities with many potential economic benefits. Slide 24 gave an overview of the delivery schedule and Mr Thomas said the final work would conclude in March 2018.

Mr Thomas said, in terms of rail infrastructure commodities, Transnet was driving some of the existing contracts and strategies were being looked at to achieve 100% localisation over the long term (five years) and to grow its supplier base. Transnet was also looking at strategies to achieve 10% local content in terms of OHTE and to drive technology improvement. A wagon consisted of four primary components (bogeys, body, brakes, drawgear). Bidders have struggled to meet 70% local content locomotives and coach brake blocks. Some of the raw materials required on the components were imported and the volumes were low as compared to the ones used in the wagons. The other challenge with the Instruction Note was that it did not provide the procuring entity with an option when industry was unable to support operations and meet local content.

Mr Thomas continued to give an overview of Transnet’s achievements (Slide 31), and said recent contract prices compared to benchmarks indicated that no price premiums were applied, despite skills development value being realised. Across all these transactions, contract prices were lower than benchmarks, implying that no price premiums were imposed for the skills development obligations. A significant Competitive Supplier Development Programme (CSDP) initiative was the EMD 50 like new locomotives which had 66% of its components sourced locally. Transnet had finalised the fuel transaction and ESD was included at 40% pre-qualification and the focus of the transactions was to drive job preservation, skills development, small business promotion and rural integration. This was the largest single tender for fuel in the country’s history valued at R17 billion and the contract was awarded to nine black owned businesses of which eight were are 100%  black owned and five were 100% owned by black women. After approaching the market for the supply internal audit services, Transnet appointed a consortium led by home-grown professional services firm, SekelaXabiso, to run Transnet’s internal audit function for the next five years. Transnet also appointed SizweNtsalubaGobodo, a home-grown firm, as its external auditors. The combined value amounted to R1.7 billion.

The Chairperson noted that both Transnet and PRASA would be returning on Wednesday, 19 August 2015, but the Committee would forward questions in the mean time.

Impact of IPAP on the Passenger Rail Agency of South Africa (PRASA) Rolling Stock Fleet Renewal Programme

Mr Piet Sebola, Group Executive: Strategic Asset Development, PRASA, said PRASA was focused on its investment outlook and high levels of localisation would not be achieved without long terms investments. Rail commuter services in South Africa needed a complete overhaul to ensure efficient and enjoyable passenger experiences. PRASA had initiated a programme to transform and modernise passenger railways in South Africa. PRASA was looking to invest approximately R172 billion over 10 years and the investment outlook
encompassed the acquisition of new rolling stock, station improvements, network improvement, signalling system upgrades, communication and marketing, and the renewal of the Metrorail brand.

A detailed feasibility study for commuter/suburban rail services was undertaken in 2011 and the results of the study had been submitted to the Minister of Transport and National Treasury and were tabled before Cabinet in November 2011. Funding commitments were confirmed by the Minister of Finance in February 2012. PRASA wanted to migrate from 1950’s technology to a modern fleet which was up to world standards. It required the procurement of 360 coaches per year for two 10 year contracts which would amount to a total of R123.5 billion over a 20 year period. It would create 65 000 direct and indirect jobs. The study examined three scenarios of localisation (60%, 65% and 70%). PRASA aligned to IPAP2 and the Designated Sector report by the DTI and selected the 65% Scenario. The total Gross Domestic Product (GDP) impact of R103.16 billion expenditure amounted to a R255.3 billion GDP impact. Approximately R65.9 billion was anticipated to be returned to the government in the form of indirect taxes, direct taxes and personal taxes. PRASA undertook market engagements in 2011 to test the project’s appeal to the market, the appetite for localisation, B-BBEE structures, manufacturers’ ability to supply the quantities of rolling stock required and the ability of financiers to provide long term funding for the programme. The results of the market engagement (slide 11) showed among others that, financiers had sufficient capacity to finance the project, the expected cost of capital was accepted on a lower risk premium and a penalty and deduction regime was an acceptable concept.

Mr Sebola gave an overview of the aligned government policies and said it became clear that this was much more than a train supply contract, because the project needed to regenerate South Africa’s rolling stock manufacturing industry and supply chain. The bottom was line was to develop a sustainable local supply chain over a period of time, which would eventually become globally competitive.

On 14 October 2013, PRASA and Gibela signed a Manufacture and Supply Agreement (MSA) and a Technical Support and Spares Supply Agreement (TSSSA). The MSA had a contract value of R51 billion for 600 new rains (3600 vehicles) over 10 years. The TSSSA governed the maintenance of the new trains and the scope of the TSSSA ensured that Gibela would perform at least one overhaul on each new train. The economic development impact of the programme was illustrated on slide 23. Local content was measured throughout the supply chain, i.e., up to the raw materials used within a component. The site selected for the local factory was in Ekurhuleni and Gibela would be responsible for the development of the local factor and for the manufacture and assembly of the new trains.

The Chairperson thanked PRASA and Transnet for agreeing to return the following Wednesday. She thanked everyone and said follow-up engagements would be scheduled with everyone that presented today later in the year.

The meeting was adjourned.