State-Owned Companies contribution to Industrial Develpment: briefing by Department of Trade & Industry

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Public Enterprises

18 August 2015
Chairperson: Ms D Rantho (ANC) (Acting)
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Meeting Summary

The Department of Trade and Industry (dti) said the National Development Plan (NDP) identified the risk to sustainable, inclusive growth if the country did not purposively diversify its economy. Government’s 9-Point Plan is a response to the current global and domestic challenges. The Plan identifies the role of State Owned Companies (SOCs) as fundamental to the recovery of South Africa’s economy. Global experience suggests that SOCs are in a unique position to drive industrialisation through investments in infrastructure and direct investment and support for building domestic industrial capabilities. The problem in South Africa was that many of the SOCs have not been carrying out their mandates. SOCs needed to invest in infrastructure, transport infrastructure, broadband rollout and the electricity build programme. Another critical lever for industrial development was localisation.

With regard to procurement, government’s purchasing power through public procurement contributed between 15 and 25% to the GDP. The Minister of Trade and Industry designated sectors, subsectors or products for local procurement in terms of the Regulations of the Preferential Public Procurement Finance Act (PPPFA). All state entities were obliged to procure locally where a designation has been promulgated by the Minister. The Minister has designated 16 sectors/products including many important to government’s procurement programme. The dti was working closely with Transnet and suppliers to maximise support, including the possibility of a supplier park for all suppliers. Other SOCs the dti was working with were the Passenger Rail Agency of South Africa (PRASA) and Denel. PRASA has committed to rolling out a stock programme to procure 7 224 new coaches at a projected cost of R 123 billion over the next 20 years. Denel was playing a leadership role in the development of a small African regional aircraft that would catalyse development in the whole sector. SOCs have a particularly important role to play in the economy through providing network infrastructure and investing where and when the private sector did not. Insufficient investment in infrastructure would create binding constraints to the economy. Government’s infrastructure build programme was one of the largest in the world, providing powerful levers to re-industrialise and deepen industrialisation in the South African economy.

Questions raised by Members included: Where there any other SOCs which contributed to the dti other than Transnet and Denel? How were the SOC public procurement policies contributing to the work of the dti? What was interlink between Transnet and the dti? Could the dti provide an update on the Industrial Development Zone (IDZ) in Saldanha? How much contribution of SOCs in the creation of jobs? How much were they contributing to the realisation of NDP targets? How was the dti identifying and dealing with the fronting of companies with regard to BBBEE status, especially where procurement was concerned? To what extent were these companies being investigated? Was the private sector legally bound to comply with the accord signed with the dti? How could local companies be assisted capacity wise by SOCs so they could also participate in the localization process? What was the structure that facilitated interaction between the dti and the SOCs? What impact did localisation have on the ground, could the dti provide examples? How would the slowing down of the Chinese economy impact on South Africa?

Meeting report

Role of State-Owned (SOCs) in Industrial Development
Mr Lionel October, the dti Director-General, indicated that the National Development Plan (NDP) noted the risk to sustainable, inclusive growth if the country did not purposively diversify its economy. Therefore while there has been an increase in investment over the past five years the country needs to upscale in order to deal with the legacy of under-investment in the country. Government’s 9-Point Plan is a response to the global and domestic challenges currently being experienced. The Plan identifies the role of State Owned Companies (SOCs) as fundamental to the recovery of South Africa’s economy:
▪ Direct impact on growth (energy and broadband constraints were potentially costing the economy 1% each)
▪ Transport (port infrastructure was constraining value-added exports)
▪ Not localizing would worsen the current account deficit and became a brake on economic growth
▪ Resolving the infrastructure constraints and localizing infrastructure inputs could add as much as 2.4% to 3.2% to the country’s Growth Domestic Production (GDP).

Global experience suggests that SOCs were in a unique position to drive industrialisation through investments in infrastructure and direct investment and support for building domestic industrial capabilities. The problem in South Africa was that the SOCs have not been doing what they were responsible for. Many of the SOCs have not been carrying out their mandates. SOCs needed to invest in infrastructure, transport infrastructure, broadband rollout and the electricity build programme. Another critical lever for industrial development was localisation. Government has put out a 75% local content requirement on all state procurement. SOCs needed to be the drivers of the country’s industrialisation programme.

The dti has a range of policy instruments which must be used in close consultation with and support of the Department of Public Enterprises (DPE) and State Owned Companies, these were the:
- Localisation Public Procurement
- National Industrial Participation Programme.

It was also important that SOCs work closely with the Department of Science and Technology and the Council for Scientific and Industrial Research (CSIR). CSIR’s Technology Localisation Programme supports supply companies in rail procurement to raise the competitiveness required of supply companies in the original equipment manufacturer (OEM) supply chains. With regard to procurement, government purchasing power through public procurement contributed between 15 and 25% to GDP. In 2008 DPE working closely with the dti introduced the Competitive Supplier Development Programme (CSDP) to create a platform for the development of suppliers. The objective of the intervention was to promote investment and the development of internationally competitive capabilities in supplier sectors to the SOC’s capital and operational spend, with the aim of:
•Building industrial capabilities in key, ‘big ticket’ industrial sectors such as rail and achieving transformation in the manufacturing sector
•Reducing costs through increasing efficiencies.
•Reducing dependency on imports and foreign exchange exposure.
•Developing niche export areas eg; SA as rail production hub for Africa.

Mr October indicated that the Minister of Trade and Industry designated sectors, subsectors or products for local procurement in terms of the Regulations of the Preferential Public Procurement Finance Act (PPPFA). All state entities were obliged to procure locally where a designation has been promulgated by the Minister. The Minister has designated 16 sectors/products including many important to government’s procurement programme. For example, infrastructure provision was not presently adequately supporting the competitiveness of the automotive industry. The SOC-Automotive Competitive Forum has therefore been established to improve service delivery to the automotive industry. One of the initiatives by the Forum was that of facilitating regular meetings between industry and Transnet to see how efficiencies could be enhanced. Industry was also required to collaborate so that inward and outward volumes could be optimised. Also, although South Africa has significant potential to grow the ship repair sector, the absence of relevant infrastructure was severely limiting growth. Transnet National Ports Authority not investing in new specialised infrastructure severely limited sector growth. Following the Marine Phakisa process, Transnet has agreed to invest R5 billion in the maintenance and refurbishment of existing dysfunctional infrastructure. Plus, Transnet has agreed to enter into Private-Public Partnerships (PPPs) to raise a further R10 billion for investment.

With regard to rail fleet procurement, he indicated that the Passenger Rail Agency of South Africa (PRASA) has committed to rolling out a stock programme which aimed to procure 7 224 new coaches at a projected cost of R 123 billion over the next 20 years. The initial phase was estimated to create over 8000 direct jobs. The procurement would focus on industrialisation through long term procurement aiming for above 65% of the value of a coach to be produced locally. The Transnet locomotive fleet procurement could result in the establishment of a world class locomotive manufacturing cluster and position South Africa as a global rail production hub, particularly with respect to the African continent. The dti was working closely with Transnet and suppliers to maximise support, including the possibility of a supplier park for all suppliers. With regard to Operation Phakisa, Transnet has committed R7 billion for public sector investment in domestic ports to support industrial opportunities in the ports. Saldanha Bay would be established as an oil and gas hub. He indicated that SOCs such as Denel and Transnet Engineering could make direct investments in industrial capability. For example, Denel was playing a leadership role in the development of a small African regional aircraft that would catalyse development in the whole sector. SOCs had a particularly important role to play in the economy through providing network infrastructure and investing where and when the private sector did not. Insufficient investment in infrastructure would create binding constraints to the economy. Government’s infrastructure build programme was one of the largest in the world, providing powerful levers to re-industrialise and deepen industrialisation in the South African economy.

Discussion
Ms G Nobanda (ANC) asked how regularly were there meetings between the dti and DPE SOCs. How was implementation of policy between these two ensured? Where there any other SOCs which contributed to the dti other than Transnet and Denel?

Mr Morapela (EFF) asked how working relations were between the dti management and the SOCs. How did it affect business? He said the country needed to do more to protect local industries from unfair competition. How were the SOC public procurement policies making contributions to the work of the dti?

Mr E Marais (DA) referred to the investment by Transnet in Saldanha; what the was interlink between Transnet and the dti? Could the dti provide a brief explanation on the Industrial Development Zone (IDZ)?

Mr R Tseli (ANC) asked how much contribution were SOCs making in the creation of jobs? How much were they contributing to the realisation of the NDP targets? How was the dti identifying and dealing with companies fronting with regard to their Broad-Based Black Economic Empowerment (BBBEE) status, especially where procurement was taking place? To what extent were these companies being investigated? Was the private sector legally bound to comply to the accord signed with the dti?

Dr Z Luyenge (ANC) asked about the accessibility of local companies, he said the 75% pronouncement by the President was quite commendable. How could local companies be assisted capacity wise by SOCs so they could also participate in the localization process? Local companies needed to be capacited so they could also be able to compete on a global scale.

Ms D Rantho (ANC) asked the dti to unpack the statement that SOCs were not doing what they were supposed to be doing. What was the structure that facilitated interactions between the dti and the SOCs? What impact did localisation have on the ground, could the dti provide examples? She said another SOC whose potential was not being utilised was the South African Forestry Company (Safcol). There were many areas especially in provinces such as the Eastern Cape, where there was an abundance of trees; how was the dti working with Safcol to unleash that SOC’s potential? How would the slowing down of the Chinese economy impact South Africa? Why was the gold price fixed outside the country? The Committee received a briefing from the Fruit Growers Association not too long ago, and the association was complaining that Transnet was charging a lot of money to export goods and products. How would the dti get involved to ensure that the prices for exportation were reduced to reasonable amounts?

Mr October agreed with the Chairperson that dti should add Safcol to the list of SOCs the department was working with. Forestry was a major sector within the economy. The reason dti was emphasizing Transnet, Prasa, Eskom, PetroSA and Denel was that these companies had a significant impact on economic growth and could add up to half a percent in growth in the economy. The entire manufacturing industry revolved around the decisions of these big industries. Management decisions were not fundamental, what was of more concern were the strategic decisions that the SOCs made. For example, the dti expected Transnet to be a port operator and to have rail lines to transport goods to the ports. Instead of building railway lines Transnet has not been doing this, goods were being transported on roads instead of on rail. Transnet was a rail transport company and this was its core mandate. Transnet’s biggest investments were the iron ore line from Northern Cape to Saldanha and the coal link to Richards Bay, however these were currently not being done by the current generation of Transnet, they were old Transnet investments. The first investment decision Transnet has made recently was the Manganese line in Coega; South Africa was the second biggest producer of manganese in the world.

On cooperation and coordination between dti and SOCs, Mr October said over the past two to three years there has been a big change and dti was getting very strong cooperation from many of the SOCs. But this was still not the culture. As an example, he said some companies still did not want to buy local goods and services, they preferred to buy internationally. He indicated that the United States of America had a law which forced companies to buy all rail equipment locally, but South Africa still did not have such a culture.

Ms Rantho asked whether the country had the capacity for companies to buy locally.

Mr October replied that South Africa did have that capacity. South Africa had more advanced capabilities than China and some of the main European manufacturers. He indicated that the manufacturing of buses such as MyCiti was produced locally. South Africa used to be an exporter of locomotives to the whole continent. Countries such as Zimbabwe and Zambia were running on trains built in Pretoria West. A company in Pretoria West made locomotives at rate which was 30% cheaper than China but Transnet did not want to buy from the company because it was a private company. The mindset that everything from outside the country was better than anything locally produced needed to be changed. The land vehicles of Denel were the vehicle of choice in the whole Middle East. Denel currently has the largest order book for these. South Africa also produced aircraft. There was therefore more than enough production capacity within South Africa – what was lacking was demand and investment from SOCs. Prasa’s locomotives were very old, and the country needed to invest in rail again. Products like coal could not be transported on trucks. There has been no investment in the country’s rail infrastructure in the last 20 years.

Mr Stephen Hanival, dti Chief Economist, responded to the question on the Chinese economy. He said two trends were emerging in China, the one was that the Chinese government has made a conscious decision to move from an investment driven growth path to a much more consumption driven growth path. Some of the reasons for this decision were around the need for managing job creation rates, managing pollution and the fact that Chinese wage rates were going up. All these had an impact on South Africa - primarily a negative impact on commodity prices; the impact of this was massive. Some of the country’s minerals today have prices 40 to 50% off the highs they experienced during the 2007/8 period. During that time the economy was growing at a 5 to 6% rate. The reason the gold price was set on the London Metal Exchange was that the major users of South African gold, platinum and iron ore were often located outside South Africa, and so South Africa’s growth path has been that of mining and shipping mineral commodities to other parts of the world, rather than adding value locally.

Mr Hanival said part of the 9-Point Plan was beneficiation for job creation. South Africa was losing out because the country was not adding enough value locally, which would expose the country less to international volatility. The Department of Science and Technology (DST) working with the University of the Western Cape has been looking at fuel cells, chemical processes which allow you to use platinum to convert hydrogen into electricity. In the current context of electricity challenges, this was something which was particularly interesting for South Africa. In Japan the response to the nuclear crisis was to invest in fuel cells and there has therefore been a big explosion of fuel cells being sold in Japan. DST was therefore trying to develop the fuel cell industry in South Africa so we can add value to the country’s platinum products and the country could be less dependent on what happened on the London Exchange. The challenge for South Africa with regards to the growing Chinese consumer market was selling products to that emerging market.

Dr Tebogo Makube, dti Chief Director: Industrial Procurement, responded to the procurement related questions, saying the dti’s focus was on local manufacturing. The definition of local content therefore had to do with manufacturing, which was why the dti had powers in terms of the PPPFA to designate sectors for local production. There were 16 products which have been designated for local production. There were instruction notes for each and every product which has been designated; the instruction note was issued by National Treasury, which was the custodian for supply chain policy in government. Therefore once an instruction note has been issued all spheres of government, including SOCs, were bound to buy locally manufactured products at 100%. The dti worked with SOCs such as Eskom on the procurement of transformers; the instruction note for transformers was not yet out, but the dti was able to use Regulation 9.3 to support local procurement and manufacturing of transformers. The challenge was the mindset that certain departments and SOCs still wanted to buy imported products. The dti was going around the country trying to sell the idea that Regulation 9.3 should be used to support local manufacturers to achieve the 75% local content target. The dti has been working with the Auditor-General which has started to audit tenders designated for local production. On interactions with other SOCs, the dti was hosting the State Owned Companies Procurement Forum where a number of SOCs were represented by procurement officials. Discussions took place not only on local procurement but also on supplier development. New suppliers of products needed to be developed. The private sector also needed to play a role in increasing demand.

Mr October responded to the question around what impact the investment had on the ground, he said some of these decisions were made less than a year ago therefore the effects would show in the next 2-3 years. However last year a decision was made that Operation Phakisa designate a tender to build tug boats which was estimate at R 1.4 billion. The first tug board would be ready by the 1st November 2015. On Saldanha he said about two years ago the dti designated the Bay as one of the additional IDZs. There has been a major development of the oil industry around the West Coast of Africa ie Nigeri and Angola, but all the oil rigs went past South Africa’s coast and South Africa only received less than 1% of those who stopped for repairs. Saldanha Bay’s feasibility study indicated that there was a massive potential for oil and gas sectors and repairs. Three major projects have therefore been agreed on regarding Operation Phakisa. The important thing to remember about ship repairs was that the work was very labour intensive. There was also a training programme which was currently underway to prepare skills for when the harbor was fully functional. Koega was being developed as a manganese hub and the Chinese have already invested in the hub, creating an entire manganese beneficiation.

Ms Rantho asked about the duty-free trade between the Southern African Development Community (SADC) countries; how did this affect South Africa’s economy? She asked about Eskom’s 9/10 which indicated that black industries should be given 10% of Eskom’s procurement; was this a regulation which applied to every company?

Mr Morapela asked about the protection of industries and some companies such as Transnet insisting on procuring products produced abroad. What legislation could be put in place to compel companies and government to support local industries? He asked to what extent ownership of industries were being transformed to include more blacks. Has the dti approached Prasa about the procurement which had recently made major headlines and if so, what has been the outcome?

Mr Tseli suggested that in the next quarter there be a meeting with the dti and the SOCs being discussed to talk about procurement in particular.

Mr Marais said the Saldanha harbor was the biggest in South Africa and there could be a building of boats in the harbor. One major challenge in the Saldanha area was sanitation. A major plant should be built there for the three major towns.

Ms Rantho said the hub for building locomotives was in Pretoria and some were being built in Port Elizabeth. To create more jobs, can the country not expand its industries to other provinces as well, especially inland?

Mr October responded to the question on duty-free trade in the continent, South Africa’s biggest growth would come from the continent. Previously, 30% of South Africa’s exports, which were primarily raw materials, went to China but this has slowed down. Another big market used to be Europe but this has also slowed down. South Africa’s biggest savior has been the African continent; all of South Africa’s biggest exports were manufactured goods. The African Union Transport branch has designated South Africa as the leading manufacturer for local automotives for the whole continent. With regard to the protection of local industry, before the designations, all SOCs mostly looked for international suppliers. The dti started reversing this four years ago. The instruction notes issued by the Minister of Finance were legally binding. He welcomed the suggestion that there be a discussion between the Committee, the SOCs and the dti on changing the culture around localisation and supporting local industries. It was not true that the country did not have capabilities; it was an excuse to not build local industries. On BBBEE and local production, he said the dti’s first priority was to ensure that goods and products were made locally, the second was to be strict about BBBEE, these were not mutually exclusive; they reinforced each other.

Mr Morapela asked what a level four BBBEE company was.

Mr October explained that companies were scored according to the Codes of Good Practice; level one meant that a company was 100% black owned, level two meant that the company was 51% black owned and so on. Previously white companies which had a BBBEE partner of about 26%, and they did procurement at a certain level, they could also go up to a level one or level two status.

Ms Rantho agreed that the problem was that the mindset that international products were better than locally produced ones was wrong and it needed to be changed. During an engagement with South Africa Bureau of Standards (SABS), it said that one of the biggest contributors to the problems at Medupi was that some of the products used in the building of the plant, which were not manufactured locally, were not SABS approved. This problem was highlighted to the dti, DPE and the Department of Economic Development.

Adoption of Committee Minutes
Committee minutes of the 5 and 12 August 2015 were adopted without amendments.

The meeting was adjourned.

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