Localisation: State Owned Companies role: dti briefing with DPE, Eskom & Transnet

Meeting report

The Chairperson noted that the meeting would not follow the usual procedure where only Members interacted with the delegation. The floor was open to everyone to make a comment or a suggestion that could help the State owned companies perform better.

State owned companies role to support localisation and local procurement: dti briefing
The Department of Trade and Industry Director General, Mr Lionel October, gave an overview of the economic changes facing South Africa and the role of the SOCs in economic development, the Preferential Procurement Policy Framework Act (PPPFA) and local content as well as Regulation 9.3 of the PPPFA.

The national economic challenges facing South Africa are: unemployment, inequality, skills shortage, growing population, infrastructure shortage, limited industrial capacity, and reliance on resource export.

The economy has been focused on the mining industry and it is currently in crisis because of a fall in demand from the Chinese market. There has been a major contraction in the mining industry and a different economic path needs to be developed. The DG stated the only way out of the current unemployment crisis was to give other sectors equal attention especially the agricultural sector. South Africa is currently underspending on infrastructure and this needs to be addressed urgently. To address these problems, a national agenda has been set to look into job creation, skills development, local procurement, and infrastructure development. There are some economic challenges being faced by the SOCs. SOCs have not been investing adequately in infrastructure development. As a result the binding constraints to industrialisation include decades of under-investment in economic infrastructure, rising administered costs such as high port and freight charges with port charges amongst the highest in the world, electricity supply challenges and rapidly rising costs, amongst others.

Fixed investments by the public sector has seen a sharp decline over the years. The manufacturing sector’s contribution to SA GDP declined sharply from 20.9% in 1994 to 11.6% by 2014, while the mining sector’s share increased from 7.3% to 9.2%. There are a lot of manufactured materials such as steel, transformers, boilers being imported into South Africa that can be locally manufactured and create more jobs thus helping to reduce the current unemployment challenge.

SOCs play an important role in the economic development of the country. The Nine-Point Plan to boost economic growth and create much-needed jobs identifies the role the SOCs can play in the economic recovery of South Africa and in the development of a new growth path. The Nine-Point Plan shows that if energy and broadband are grown and the bottlenecks removed, there will be an economic growth of 2% from that. In transport there has been a complete turnaround, real localisation has been going on in that sector and thousands of jobs have been created there, especially in the locomotive industry. 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.

An important lever for industrial development is localisation, when SOCs invest in infrastructure they must ensure they use locally manufactured products because this is in line with Government’s local content programme as well as the 75% local procurement target, but sometimes there are no clear instructions from leadership. If these bottlenecks could be broken, then it will go a long way in achieving the local procurement target. The industrialization programme therefore is not a narrow departmental objective but a national one that needs to be committed to by all state agencies. In trying to be drivers of the industrialization policy of government, the SOCs have several policy levers that empower them. They are:
- National Industrial Participation Programme (NIPP): Applicable to all government procurement, except SOCs that have opted for Competitive Supplier Development Programme (CSDP).
- Defence Industrial Participation, which is managed by Armscor and applicable to all defence procurement.
- CSDP managed by DPE in conjunction with SOCs and used in instances where there are long term supplier development plans in place.
- Designation and Local Production used in instances where government has carried out an in depth analysis of the sector and there is local production capacity and public procurement opportunities.

The first three tools are weak tools in implementing localisation because they impose no obligations on usage of locally manufactured goods. These have been used over the last 15-17 years. The last tool is the only tool with a legal force. Localization also aims at empowering South Africans especially black South Africans. Agood example can be seen with the MyCiti project. All the buses are now locally produced and the biggest industrialist in this sector is a black South African. Same thing can be said with the Navy where all the naval ships are now locally made. A comparison was made with the United States where there is an Act backed by law mandating manufacturers to use only locally made in America products in their various industries. This can be applied also to the South African economy. In driving the local content agenda, the Preferential Procurement Policy Framework Act (PPPFA) was enacted in 2000, and its regulations promulgated in 2001.The regulations were amended in 2011 and new regulations came into effect in December 2011. Section 9 talks about local production and content. 9(1) of the regulations empowers the dti to designate specific industries where tenders should prescribe that only locally manufactured products with a prescribed minimum threshold for local production and content will be considered. There are some delays in the implementation of section 9 and also some disagreements with National Treasury on what should be designated. The dti asked for the designation of transformers but only the small ones were designated, with the big ones still being imported despite the fact that they can be locally made.With the locomotive industry, textiles and leather, there is almost a total implementation and this is yielding results as can be seen from the fact that 21 new leather industries have been established despite the difficult and challenging economic conditions. If this can be repeated across board then there will be big openings in the economy and more jobs will be created. About 15 sectors have already been designated. Some of them are furniture, bus bodies, rail rolling stock, textile, leather and footwear sector, electrical and telecom cables, working vessels and certain pharmaceutical products. Other sectors such as solar PV cells, rail signaling systems, yellow metals and two way radios have been forwarded to the National Treasury for designation.

Transnet was congratulated on a job well done on its localisation drive and this has made South Africa the continent’s leading rail country in terms of both freight and passenger rail infrastructure, as well as rolling stock assets.The South African rail sector has developed capabilities, skills and expertise as manufacturer, assembler and supplier of rail infrastructure, rolling stock and components, including the refurbishment and rejuvenation of aged rail and rolling stock infrastructure and components.Transnet National Ports Authority (TNPA) and Transnet SOC Limited have adopted a Public-Private-Partnership (PPP) model to finance new Operation Phakisa infrastructure. TNPA has committed R7 billion for public sector investment in domestic ports to support industrial opportunities in the ports. A R1.4bn tender by TNPA for the procurement of tug boats was awarded to a South African company in support of local procurement.

A legal instrument which can be effectively used in the promotion and implementation of the local content drive of the government is Regulation 9(3) of the PPPFA. Transnet is currently using this instrument.

Priority areas for consideration includes the alignment of procurement levers to optimize industrial development by developing and agreeing on instruments to support the government’s 75% local procurement target, Finalizing and implementing guidelines on Regulation 9.3 of the PPPFA. There is an on-going effort to secure stronger alignment with the Department of Public Enterprises (DPE) and Transnet with respect to localisation and supplier development in the rail procurement across all OEM’s in the rail fleet procurement and securing stronger alignment with the National Industrial Participation programme (NIPP) to secure investment in key industrial sectors. An engagement is currently taking place with the Auditor General’s Office to develop a framework to audit compliance and expenditure on designation / local content and capacity building in local content management, planning, sourcing and supplier development.

In conclusion, the DG stated there was a high level of non-compliance with the localisation policy and efforts were being made to correct this.

Mr Sipho Zikode, dti Deputy Director General: Special Economic Zones, stated that local content is a game changer and if provinces and municipalities embrace this, it will create jobs directly. He also appreciated the good work Transnet was doing in the implementation of the local content policy. The dti is working with all the three tiers of government in ensuring that the local content policy is being implemented. Without the right legal instruments, the 75% local content target would be difficult to achieve.

Discussion
Ms N Mazzone (DA) appreciated the meeting because it gave the opportunity for different people to brainstorm and find solutions to some of the problems facing the South African economy. She was disturbed by the fact that a lot of procurement activities revolved around the same set of companies. She cited the Medupi example where there were issues with boilers and this generated into a scandal. She wanted the dti to define at what period a company could be blacklisted if it failed in its responsibility. She also suggested the opening up of tender processes and making them more transparent. Speaking further, she emphasized the bottlenecks associated with setting up a business in South Africa. She asked about the locomotive industry, she wanted to know if the locomotives were being assembled here or there was a total manufacture at the plants in South Africa. In her opinion, South Africa has the ability to not only assemble locomotives but also manufacture them and produce a lot of jobs. She commented on the lack of enthusiasm on the part of young ones to become artisans and this is impacting negatively on the country. It is important to encourage young ones to become entrepreneurs.

Dr Z Luyenge (ANC) agreed with Ms Mazzone on entrepreneurship. He encouraged the provinces and municipalities to take part in this. Public-private partnerships must also be encouraged. He recommended that partnerships be entered with fellow Africans so that there can be skills transfer.

Mr R Tseli (ANC) asked how network providers could access information. He was worried about the steady decline in the manufacturing sector though other sectors of the economy were doing well. Were there any strategies in place to deal with this because the decline in that sector implies a decline in employment in that sector? He asked about job creation with respect to the government target – what was the situation with that? Lastly, he asked about the recommendations of the Presidential Review Committee. He asked about the level of implementation of the recommendations as it affects the dti.

Ms T Stander (DA) welcomed the idea of buying in bulk Made in South Africa goods but she was not comfortable with the total designation of locally made goods because it would reduce or eliminate competition and there would be the high risk of price fixing. She also asked if there was provision for de-designation of certain goods in situations where local demand outweighs supply for example.She was of the opinion it would be better to have a higher ratio of local designated products but with a low fraction still open for importation. On those SOCs that were not economically viable, she was of the opinion that government should rather sell off such entities.

Ms Z Rantho (ANC) also praised the presentation. For South Africa to develop economically, there was need to look at the resources in the country and how to utilize them. She also spoke of the need to have skilled people who can survey an area to know the potential of such areas before projects are cited. This will help in the reduction of white elephant projects and reduce waste of resources. Talking about youth employment, she questioned the figures being bandied about and asked about the veracity of such figures. She commented that a proper monitoring system is important for SMEs. She also talked about the coordination of the Nine-Point Plan as regards to its alignment to the National Development Plan.

Ms Stander commented on the Black Industrialists policy, stating that she felt the departments responsible for coordinating this were not doing enough and there had been too much talk and less action.

The DPE Director General, Mr Mogokare Seleke, emphasised on the importance of SOCs in driving the economy. To drive the developmental agenda, there is a need for a long-term plan. Talking about skills development programmes, it is important that there is adequate in-service practice, especially for the artisans. There is the need to get to some point of understanding on public-private partnerships. It is important for communities to be active in business development. It is also important that cooperatives stay alive because they are an integral part of economic development. On localisation, if it is not strictly enforced there would be a spiral effect on other parts of the economy. There is the need for more engagement on the legislative aspect of localisation. There is also the need to maintain a healthy relationship with South Africa’s various trade partners.

Ms Kgomotso Modise, DPE Deputy Director General:  Transport Enterprises, suggested the Department of Public Enterprise come back to talk about the high costs at the ports because it would take away the focus of the presentation if that is talked about now. She stated that the SOCs had taken some initiatives with regards to skills development and they may seem very little but they have to start somewhere and this also entails importing skills sometimes but a lot of effort is being focused on localising skills.

Mr Kgathatso Tlhakudi, DPE Deputy Director General:  Manufacturing Enterprises, also welcomed the presentation and appreciated some of the comments on local procurement. He spoke about the Arms Deal, which involved a lot of importation. He spoke on the need to take manufacturing to the smaller towns so that jobs could be created in those towns. On the procurement leverage programme, he agreed that designation was indeed a powerful tool. There was a need to work closely with the dti to ensure that the sectors, which had been designated, actually implement those. He also spoke on the need for professional development in the SOCs and the incentives, which are difficult for SOCs to access. He stated that the National Treasury was a major stumbling block in achieving some of the objectives of the SOCs.

Ms Stander reiterating her earlier position said everyone knows the problems and mistakes that had been made in the past. She stated that there was no need talking about those problems over and over; instead discussions should be focused and centered on the way forward.

Ms Mazzone disagreed with Ms Stander and rather held the position that talking was good because it helps to know exactly where the problems are. She talked about the establishment of public enterprises and how the management of those enterprises is rotated amongst them. She was of the opinion that it was problematic rotating the same set of people for the management of such enterprises. She also pleaded that National Treasury should not be demonised especially since they were not present to respond to any questions that might have risen.

Mr N Kwankwa (UDM) talked about the need to be clear on exactly what should be done with some of the SOCs. He lamented the situation where South Africa was caught unawares in fulfilling its obligations in the manufacturing sector. On the establishment of white elephant projects, he asked if there was adequate communication between the departments or SOCs. He cited the example of schools being built in certain communities, but such schools were never used.

Mr Tseli, commenting on the progress made by the Presidential Review Committee on SOCs, suggested that a progress report should be submitted to the Portfolio Committee.

Mr October once again restated that localisation is the game changer. He asked for a commitment from the big six State Owned Companies that they would implement the local content policy in their organisations. He once again talked about the benefit of job creation and stated that thousands of jobs are lost when simple goods that can be manufactured locally, are imported.

Mr Zikode said it would be good if all SOCs do what Transnet is currently doing in terms of local content. He stated that the fact that a sector has been designated does not limit it to South African companies.

Mr Seleke recommended that whatever regulations are introduced, these should be applied across the board so that all sectors of the economy grow proportionally.

Mr Anjoh Singh, Eskom CFO, took note of all the comments and recommendations.

Ms Mmadiboka Chokoe, Transnet Executive Manager: Enterprise and Supplier Development, agreed with the previous speakers on the importance of utilizing section 9(3) of the PPPFA regulations.

The Chairperson in her closing remarks highlighted some of the points raised during the meeting.

The meeting was adjourned.