Local public procurement colloquium with DTI, Treasury, Department of Public Enterprises, Transnet, General Electric, Bombardier

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Trade and Industry

06 April 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry (DTI) briefing focused on procurement levers, the Preferential Procurement Policy Framework Act (PPPFA) reforms, the list of designated sectors, local content highlights, the role of regulation 9.3 for non designated sectors and priority areas for consideration. DTI wanted to use government purchasing power, which was equivalent to 15-20% of GDP, to drive industrial development. For the rail fleet, the focus was around the value chain, for pharmaceuticals there was no minimum threshold and it was done on a tender by tender basis. While regulation 9.3 on non designated items had a 70% target, instruments were needed to apply this. DTI would guide entities on how to invoke regulation 9.3. DTI was working with Treasury to strengthen compliance which was weak and working with Auditor-General South Africa (AGSA) to audit tenders.

Treasury said government spent R500b on goods and services. However a 2015 Supply Chain Management (SCM) review found that there was a fragmented SCM environment, operational inefficiencies, limited or no accountability, limited transparency and a lack of coherence between departments, amongst others. Treasury wanted the SCM to provide value for money while delivering services and achieve a savings agenda of R25b per year in the process. However SCM skills were not present to match the scale of government procurement. There was not proper demand and process management and planning was not good enough. Centralised spending was R26b out of the R500b and Treasury wanted to increase this to R90b this year. A number of areas had been earmarked for centralised spending. Travel and accommodation spend was being centralised and had already achieved savings of R1b. Areas for urgent review or intervention were construction, human settlements, public entities and infrastructure delivery. All municipalities from 1 July would have to register with the central supply database. A G-commerce website was being set up where every government tender would be and this would save R1b because newspaper advertisements would become redundant.

Members expressed interest in the leveraging of government purchasing power and asked what the impact of the local procurement accord was. Regarding the steel crisis in South Africa, members said South African companies were buying cheap steel from China. Members asked Treasury if government had a database of supply chain managers of the State. Members asked the dti when local content verification would occur. What measures had been put in place to ensure compliance on local content. What measures could be put in place to compel the private sector to procure locally. What were other governments doing and could incentives be used? Members said major state owned entities were spending even more than government, over R1tr. What could be done to have more disciplined spending in state owned entities? Members asked Treasury why there was such a high staff turnover in supply chain management and what it was doing to solve this issue. Members noted that textiles only accounted for R33m in the economic classification table.

Members said it appeared that the Department would use incentives more. Members said a violation of the 30 day payment rule was a huge problem for small business. Members asked whether the New Age newspaper would also not get tender advertisements anymore. Members said local government bought non South African products because there was no quantified percentage of their spend nor was there an audit of their spend. Members said South Africa did not make polyester textiles yet there was a 22 per cent import duty on polyester fabrics and goods which penalised the local market. Members said there needed to be a reduction in red tape to make it easier to do business with government. Members said there was no verification of local content before a tender was given. What kind of persuasion could be used to influence local procurement?

Members asked what the challenges arising from the PPPFA and asked how Parliament could intervene.
Members asked what the premium government would be prepared to pay for purchasing local goods.
Members said that the Department had talked of the removal of the ‘deeming’ clause. This could not happen unless local producers commit to reducing their prices. The Department needed to talk to the steel producers who kept claiming the input costs were rising. Regarding the time taken for designation to occur which was long. How had the designation of wheelie bins been addressed? How was the Department meeting with investors to set up syringe plants when surely that had to first go through a tender process. Members asked how the management of SCM would be tightened up as it had far too many holes. Members asked what premium would be appropriate for locally manufactured products and for how long that premium would be appropriate.

The Department of Public Enterprises (DPE) spoke Competitive Supplier Development Programme (CSDP). After 20 years of low levels of infrastructure investment, the SOCs were now driving investment in fixed capital but the trade balance related to manufactured inputs had also increased and this was not sustainable. Therefore higher levels of coordination between SOCs and government were required to develop more complex industrial capabilities. This was the context of the CSDP and needed buy-in by state owned entities. The Department then spoke to critical success factors and weaknesses on procurement planning, execution and industrial outcomes. The major challenge of Eskom, which was a major constraint, was that it did not have a supplier development component initially. Eskom had prioritised 42 projects and commodities in both short and long term strategies and created and fostered an environment that supported local development.

Transnet presented on the key principles regarding the localisation of supply in terms of locomotive procurement. Transnet supported three key drivers namely skills development, Investment in plant and technology and technology transfer. Sector design was important and Transnet had to have a long term view on how it procured in the rolling stock industry. Transnet had recognised four key areas of opportunity for leveraging to engage and support the development of the local supplier base. The SABS was doing local procurement verification and monitoring and oversight in this regard was important. There was limited scope for further localisation regarding brake blocks because of limited local demand. The challenges for Transnet were that local and global economic conditions had a direct impact on commodities which had a short to medium term impact on demand for products, local companies were not producing to international standards and were unable to access funding for expansion and were over dependant on Transnet.

General Electric (GE) said the current status of localisation was at 56%. GE was building a sustainable supply chain locally focussed on operational efficiencies and had added business development services and an investment fund. GE was struggling to scale up operations because while some supplier SMEs were moving along with GE, others were stuttering and needed support. GE’s CSDP focussed on building capability, capacity and technical transfer, skills development and rural and regional integration. Amongst its recommendations was that there be a short cycle to tender as this would change the value proposition and that it differentiate between projects and partners as this would be an incentive to invest.

Bombardier Transport said it was busy with type testing locomotives at Transnet Durban’s facilities. The main scope of localisation were in cubicles, traction converters, locomotive assembly, car bodies, drives traction motor blowers and transformers and it supported local industries through a supplier development initiative. The challenges were supplier capacity and capability where local suppliers needed to develop their production facilities, locomotive engineering and design where the design specification was based on Bombardier’s worldwide technology and project timelines where the ramp up of local suppliers was not in line with project timelines. Bombardier had agreed to 60% localisation for the 240 23E class locomotives.

Members said that given GE and Bombardier’s inputs, when would the Committee be hearing China North and China South rail’s inputs and Siyahama Engineering? Members asked if all the public enterprises complied with the designated product list, in particular textiles clothing leather and footwear and furniture. He encouraged GE and Bombardier to comply with local content even though they could not be compelled.
Members asked how the train component local content was measured and when was a local supplier regarded as being at 100%. Would China South Rail be manufacturing in China and assembling in South Africa? Members asked who the investment partners for China North and China South Rail were. Members said local content reports on locomotives should be submitted to the Committee.

Members said that fabricators were compelled to use South African steel but that these were 30-40% more expensive than imported steel. Members asked how many diesel and electric trains would be built per year at Transnet’s Koedoespoort and Durban facilities. Members asked if GE was happy with the quality of its local content. Members said the DPE presentation said infrastructure investment had increased. Members said if the manufactured inputs were increasing where were these inputs coming from? Regarding objectives, Members asked whether this was measured in terms of the aggregate demand. What was the thinking of the DPE on Treasury’s proposed three year procurement cycle? What was the DPE’s take on the intransigence to comply with the implementation of local procurement to attain the target of 75% and what was DPE doing regarding that. What was meant by ‘building industrial capacity?’ Members asked SABS what it was looking at with regard to verification.

Other issues raised by MPs surrounded the number of verifications of companies carried out by Transnet; whether or not verifications were carried out on all four companies; random testing for determining the authenticity of the contracts; verification of the local contents of wagons; matters of non-compliance of companies; the periods of designations of various entities; clarity on the overall targets for the end of all Transnet projects; time-lag in achieving local content; the interface of all entities with the broad-based black economic empowerment (B-BBEE) Commission and the black industrialist programme; methodology used in measuring local content, as well as the element of compliance to the percentage factor; the prices used in determining the percentage of local content; contractual issues around the R50 billion contract; and the loopholes surrounding supply chain management.

Meeting report

Department of Trade and Industry on designations for local procurement
Dr Tebogo Makube, Chief Director Industrial Procurement, discussed procurement levers, reforms of the PPPFA, the list of designated sectors, the highlights on local content, the role of regulation 9.3 for non designated sectors and priority areas for consideration.

He said there were six levers where DIP kicked in above R10m. The Department wanted to use government purchasing power, which was equivalent to 15-20% of GDP, to drive industrial development. He spoke to designation process flow and designated products. For the rail fleet, the focus was around the value chain, for pharmaceuticals, there was no minimum threshold and it was done on a tender by tender basis. That while regulation 9.3 on non designated items had a 70% target, instruments were needed to apply this. The Department would guide entities on how to invoke regulation 9.3. This clause had assisted manufacturers especially in the transformers sector and Transnet also want it to be used for manganese material handling equipment. On priority areas for consideration, that the way the levers were being applied was not yet optimal. DTI was working with Treasury to strengthen compliance which was weak and working with AGSA to audit tenders.

National Treasury on Supply Chain Management Reform

Mr Kenneth Pillay, Director: Strategic Procurement in the Office of the Chief Procurement Officer, National Treasury, said government spent R500b on goods and services. However a 2015 Supply Chain Management (SCM) review found that there was a fragmented SCM environment, operational inefficiencies, limited or no accountability, limited transparency and a lack of coherence between departments, amongst others. Treasury wanted the SCM to provide value for money while delivering services and had a savings agenda to save R25b per year. SCM skills were not present to match the scale of government procurement. There was not proper demand and process management and planning was not good enough. Centralised spending was R26b out of the R500b and Treasury wanted to increase this to R90b this year.

Mr Pillay looked at spending per commodity class, where building construction services at R23b was first, followed by leases and rentals at R17b. A number of areas had been earmarked for centralised spending. Travel and accommodation spend was being centralised and had already achieved savings of R1b. Areas for urgent review or intervention were construction, human settlements, public entities and infrastructure delivery. All municipalities from 1 July would have to register with the central supply database. A G-commerce website was being set up. Every government tender would be on an e-tender website as from 1 April. This would save R1b because newspaper advertisements would become redundant. There would be a conference with all supply chain heads in May.

Discussion
Mr B Mkongi (ANC) said he was interested in the leveraging of government purchasing power. He asked what the impact of the local procurement accord was. Regarding the steel crisis in South Africa, South African companies were buying cheap steel from China. He asked Treasury if government had a database of state supply chain managers.

Mr A Williams (ANC) asked the dti when local content verification would occur. What measures had been put in place to ensure compliance on local content. What measures could be put in place to compel the private sector to procure locally. What were other governments doing and could incentives be used?

Mr G Hill-Lewis (DA) said major state owned entities were spending even more than government, over R1 trillion. What could be done to have more disciplined spending in state owned entities? While construction was the biggest of the commodity classes, this was not what the dti was looking for.

Mr N Koornhof (ANC) asked Treasury why there was such a high staff turnover in supply chain management and what was Treasury doing to solve this. He noted that textiles only accounted for R33m in the economic classification table.

Adv A Alberts (FF+) said it appeared that the Department would use incentives more. violations of the 30 day payment rule was a huge problem for small business. He asked if the New Age newspaper would also not get tender advertisements anymore.

Mr D Macpherson (DA) said local government bought non South African products because there was no quantified percentage of their spend nor was there an audit of their spend. South Africa did not make polyester textiles yet there was a 22% import duty on polyester fabrics and goods which penalised the local market. There needed to be a reduction in red tape to make it easier to do business with government.

The Chairperson said there was no verification of local content before a tender was given. What kind of persuasion could be used to influence local procurement?

Mr Grant Strachan, DTI DDG: Industrial Development, replied that under WTO rules, government was not allowed to insist that the private sector procure locally and it was not allowed to designate services for public procurement. an important question had been raised, that of whether the private sector had come to the table with respect to the procurement accord. He suggested that the Department of Economic Development give the Committee a report as the procurement accord fell under its mandate. The amount being procured was not the only issue; it was more a case of supply chain development which would build industrial capability. He disagreed that Proudly South Africa should be the verification agency for local content, it should be the South African Bureau of Standards (SABS). The cost of verification was another issue which the Department was working on. His own view was that it should take the form of a declaration together with a ‘one strike, you’re out’ policy but that verification should occur for fleet procurement and large procurement. The issue of compliance was important and it should be an audit function in addition to verification and the Auditor-General should be involved.

Regarding steel, the DTI was removing the ‘deeming’ clause for steel in all designations. It was necessary to move away from having to take months to act and therefore there was a need to take a closer look at legislation and regulations. The Ministers would be making an announcement with regard to steel.

DTI was doing a full review of the National Industrial Participation (NIP) and the Defence Industrial Participation (DIP) working closely with Armscor. The public procurement instrument here needed strengthening. However the deployment of NIP had made a significant contribution to local component suppliers into the automotive sector in terms of localisation and empowerment.

Regarding Mr Williams’ question, there were localisation conditionalities in the incentives and stronger conditionalities were being brought in working in conjunction with Treasury.

On clothing, textiles, leather and footwear, the government spend figures given by Treasury need to be revisited. This was the one sector where DTI had provided exemptions for certain inputs including polyester. Tariffs for textiles for clothing was something the Department was working on strongly.

Mr Strachan agreed on the need to reduce red tape. He said the red tape in the City of Cape Town was amongst the worst in the country. The one stop shop was a step in reducing red tape and DTI was open to other ideas.

On Mr Macpherson’s point on the premium to the fiscus, this was a valid point. His view was that procurement on designations had shown that if the procurement design and supply development was done properly, one could not only not have a cost to the fiscus but also generate savings and this was related to the investment strategy. The link between building aggregate demand for domestic manufacturers and investment promotion to build industrial capabilities was critical.

His understanding was that leases were services and so fell under TRIPS and Trade Related Investment Measures (TRIMS) and consequently fell foul of the WTO, if conditions were imposed on leases.

On vehicle procurement, DTI was in process of designating yellow metals but did not want to designate vehicles if original equipment manufacturers (OEMs) themselves were opposed to designation. The Department was in discussions with OEMs about this.

On the application of local content, Mr Makube said that DTI designated local products not tenders. There were cracks in the process systems where procurement officers did not insist on designated products. One could not force the private sector to comply on local content, so the state needed to get another instrument.

Mr Pillay said one had to look at how fragmented government purchasing was. State bodies were not working together in unison and were not streamlined. Treasury had held a workshop with AGSA on reforming the supply chain.

On how to get the private sector involved, he said Treasury was busy negotiation with the top 100 suppliers and had reduced airline ticket prices by 30% for example.

There was a high SCM staff turnover and historically the talent had not been there and that there was a lack of coherence in purchases while supply chain was also not high on the agenda of departments.

Mr Pillay said that, excluding the SAPS and SANDF spend, government spending on textiles was going down.

He said some suppliers waited 180 to 360 days before being paid and so Treasury had established a help desk and a call centre and sent reminders to accounting officers. It was thinking of setting up a ‘name and shame’ list and also of reducing departments’ budgets. The New Age was included with regarded to not receiving any tender advertisements in the print media. Treasury was looking for a mathematical formula it could apply with regard to the local price versus the international price issue which needed debate.

With regard to leases which accounted for R7.5b, the Chairperson asked what percentage was procured internally and what percentage was procured externally.

Mr Pillay replied that he could not answer that as even the Department of Public Works did not have all the provincial leases because of the separation of powers between national and provincial levels. He gave the example of the state paying R144 per square metre in a building for which the equivalent in the private sector would go for R80 per square metre.

Mr Mkongi asked what the challenges arising from the PPPFA were and asked how Parliament could intervene.

Mr Hill-Lewis asked what premium the government would be prepared to pay for purchasing local goods.

Mr Macpherson said that DTI had talked of the removal of the ‘deeming’ clause. This could not happen unless local producers commit to reducing their prices. The Department needed to talk to the steel producers who kept claiming that input costs were rising. The time taken for designation to occur was too long. He gave the example of the designation of wheelie bins and asked if that had been addressed. Why was DTI meeting with investors to set up syringe plants when surely that had to first go through a tender process?

Mr Strachan replied that government was committed to 75% local procurement and was working with Treasury on a procurement review and was sorting out issues like verification. Progress was not as fast as one would like but attaining the outcome would not be an overnight solution.

On the premium paid for local content, discussions needed to take place. DTI provided reference pricing for commodities. Steel for example did have inputs that needed to be considered such as imported coking coal and the increasing cost of electricity. DTI was in negotiations so that a bouquet including pricing agreements could be reached. He agreed that the wheelie bins process had taken too long.

Mr Pillay said there were issues with the PPPFA and that Treasury was reviewing the Act and was sitting on the tenth iteration of the proposed amendments to the PPPFA. The main challenge however was the work being done before: the market research, the demand planning and procurement planning.

The Chairperson asked how the management of SCM would be tightened up as it had far too many holes.

Mr Hill-Lewis asked what premium would be appropriate for locally manufactured products and for how long that premium would be appropriate.

Department of Public Enterprises (DPE) on Competitive Supplier Development Programme (CSDP)
Mr Gcina Hlabisa, Head of Strategy: DPE, said he would only speak about how the programme came about and the progress made by Eskom as Transnet would also be making a presentation. The economic crises had resulted in a slump in infrastructure investment which had eroded the country’s industrial capabilities. After 20 years of low levels of infrastructure investment, the state owned companies (SOCs) were now driving investment in fixed capital but the trade balance related to manufactured inputs had also increased and this was not sustainable. Therefore higher levels of coordination between SOCs and government was required to develop more complex industrial capabilities. This was the context of the CSDP and needed buy-in by state owned entities. He spoke to critical success factors and weaknesses on procurement planning, execution and industrial outcomes. There were three phases to the CSDP and it was currently moving from phase one to phase two.

In reply to the Chairperson asking how long the present phase was, Mr Hlabisa said that the phase started in 2007 when local content was under 20% and was now up to 40-50%.

Mr Hlabisa said the major challenge of Eskom, which had been a major constraint, was that it did not have a supplier development component initially. Eskom had distilled five main development objectives to maximise CSDP rollout while increasing industrial capability and transforming the racial context rather than align itself to individual policy and government programmes. Eskom had prioritised 42 projects and commodities in both short and long term strategies. It had created and fostered an environment that supported local development.

Transnet’s local procurement of locomotives and wagons

Mr Eddie Thomas, Transnet business services manager, presented on the key principles regarding the localisation of supply in locomotive procurement. Transnet supported three key drivers: skills development, investment in plant and technology and technology transfer. Sector design was important such as material handling equipment for manganese. Transnet had to have a long term view on how it procures in the rolling stock industry. Transnet had recognised four key areas of opportunity for leveraging to engage and support the development of the local supplier base

Ms Madiboka Chauke, Transnet executive, said that of the 1 064 locomotives to be built, 998 would be built through Transnet Engineering (TE) and 9.8% of a total supplier development commitment of 69% had been delivered so far.

Mr Thomas said the SABS was doing local procurement verification. Monitoring and oversight in this regard was important. Wagon procurement would attain 100% by month 25 for bogie casting. Steel was sourced locally and for slack adjusters it was 45% as the current global market was very limited. There was limited scope for further localisation regarding brake blocks because of limited local demand.

Ms Chauke then spoke to the challenges and solutions. The challenges were that local and global economic conditions had a direct impact on commodities which had a short to medium term impact on demand for products, local companies were not producing to international standards and were unable to access funding for expansion and were over dependent on Transnet.

The Chairperson asked at what point were items such as brake blocks, regarded as local.

Mr Pragasen Pillay, Transnet General Manager: Logistics, said raw rubber was imported and the rubber pads were manufactured locally.

General Electric presentation on Local Content and CSDP

Mr B Glass, GE executive, said the current status of localisation was at 56%.

Mr Ross Boyd, General Manager: Sub Saharan Africa, said GE was building a sustainable supply chain locally. GE focussed on operational efficiencies and had added business development services and an investment fund. GE was struggling to scale up operations because while some SMEs were moving along with GE others were stuttering and needed support.

GE’s CSDP focussed on building capability, capacity and technical transfer, skills development and rural and regional integration. Amongst its recommendations were that there be a short cycle to tender as this would change the value proposition, that it differentiate between projects and partners as this would be an incentive to invest.

Bombardier Transportation presentation

Mr Aubrey Lekwane, Managing Director, said Bombardier took up the option to build locomotives. It was busy with type testing at Transnet Durban. The main scope of localisation were in cubicles, traction converters, locomotive assembly, car bodies, drives traction motor blowers and transformers and it supported local industries through a supplier development initiative.

Ms Nokolitha Zwene, Bombardier executive, gave an overview of localisation noting the highlights and challenges. The challenges were supplier capacity and capability where local suppliers needed to develop their production facilities, locomotive engineering and design where the design specification was based on Bombardier’s worldwide technology and project timelines where the ramp up of local suppliers was not in line with project timelines. Bombardier had agreed to 60% localisation for the 240 23E class locomotives.

Discussion
Mr Hill-Lewis said that given GE and Bombardier’s inputs, when would the Committee be hearing China North and China South Rail’s inputs and Siyahama Engineering?

The Chairperson said it was because of time constraints.

Mr Williams asked if all the public enterprises complied with the designated product list, in particular textiles clothing leather and footwear and furniture. He encouraged GE and Bombardier to comply with local content even though they could not be compelled.

Mr Hill-Lewis asked how the train component local content was measured and when was a local supplier regarded as being at 100%. Will China South Rail be manufacturing in China and assembling in South Africa?

Mr Macpherson asked who the investment partners for China North and China South Rail were. Local content reports on locomotives should be submitted to the Committee. He noted that fabricators were compelled to use South African steel but that these were 30-40% more expensive than imported steel.

Mr N Koornhof (ANC) asked how many diesel and electric trains would be built per year at Transnet’s Koedoespoort and Durban facilities. He asked if GE was happy with the quality of its local content

Mr Mkongi said the DPE presentation said infrastructure investment had increased. If the manufactured inputs were increasing, where were these inputs coming from? Regarding objectives, he asked whether this was measured in terms of the aggregate demand. What was the thinking of the DPE on Treasury’s proposed three year procurement cycle? What was the DPE’s take on the intransigence to comply with the implementation of local procurement to attain the target of 75% and what was DPE doing regarding that? What was meant by ‘building industrial capacity.’

The Chairperson asked Chairperson of the SABS what the SABS were looking at with regard to verification. Were there criteria that was looked at?

Mr Jeff Molobela, Chairperson of the SABS, replied that the numbers regarding local content were self declarations and there was no comparisons across companies.

A SABS representative said clear guidelines had been developed to calculate and verify local content. The guidelines had been published in SABS’ technical document 1205 and was distributed to a number of state owned entities. The Chairperson of SABS had correctly stated that most of the percentages presented to the Committee were yet to be verified, and could be assumed to amount to self-declarations, in the sense that the entities could have appointed independent service providers to conduct verifications. This would however, be surprising as SABS had been appointed as the local content verification agency. If this was the case, it would mean that SABS would have to verify self-declared percentages and confirm which entities were involved by approaching the different suppliers used. It would also confirm if the percentages given were accurate.

Mr Edward Thomas, Acting Group Chief Supply Chain Officer, Transnet said that achieving local content referred to physical manufacture and not the contract value. The manufacturing at this stage would be measured through the SABS’ standards and process because it was usually time-consuming once a contract had been awarded, for suppliers to produce a product and go through the testing processes. Once the testing processes had been passed, the implementation and investments into the plants could then be kick-started to carry out the local manufacture. It was for this reason that Transnet followed the processes allowed by the Department of Trade and Industry (DTI) in terms of reaching month 25 for commodities to be produced locally. The local content did not refer to the overall contract value.

Transnet Engineering (TE) was a sub-contract to the original equipment manufacturers (OEMs). Transnet’s contract for the delivery of the 1 064 locomotives was with the four OEMs. TE had a separate contract with the OEMs to assist with the delivery of the locomotives to Transnet. Each of the OEMs would have had different negotiations with TE to spell out the latter’s role in the delivery of the components. For example, wheel assembly on some locomotives would be carried out by TE based on parts provided by the OEM. The OEM would focus on parts and components and whether these parts met the localization criteria and obligations facing it. The OEMs may source the components from local companies or look into its international supply chain where such components could not be sourced locally. Nonetheless, the components still had to meet the local content requirements of whichever sector it was being used for.

With regard to whether or not there was a preferential pricing given for locomotives, it was pointed out that Transnet had a fixed price for its locomotives.

Mr Pragasen Pillay, General Manager: Logistics , Transnet, said that the delivery period for all locomotives would run into the end of the 2017/18 financial year. There was a ramp-up phase that already started last year, and would end in March 2018.

Ms Siphokazi Sanjira, Bombardier Project Finance Manager, said that Bombardier measured local content by approaching its local suppliers with its locally-sourced materials for them to confirm how much of the materials had been sourced locally and how much was imported. The result of such findings would be developed into a model that would bring out a figure of the measured local content.

Mr Gcina Hlabisa, Head of Strategy, Department of Public Enterprises (DPE) said that the issue of compliance of state-owned enterprises from designated sectors was a legislative requirement, audited by the Auditor-General (AG). DPE had not picked up any deviation from the compliance with the designation of sectors. Nonetheless, an oversight and further assessment would be conducted on the reports received from the AG, and a written comment would be provided for the Committee.

With regard to the three-year procurement cycling, it was noted that most state-owned enterprises had long-term plans that informed their procurement expenditures. Transnet had a market demand strategy that articulated how much a company could spend on the acquisition of locomotives and building capacity depots. This would also give an indication to the local suppliers on what they were likely to get from the companies.

Eskom’s investment was similarly informed by the integrated reserves plan that defined the energy-mix. However, there was no opposition to the development of a three-year procurement plan that could be used to coordinate interventions around this area.

Most state-owned enterprises were currently being stretched to achieve a local content of 70% at the minimum. This target would be increased gradually. This would require a gradual process based on the existing capabilities.

On issues raised around building capabilities, it was noted that continuous research, development and innovations were necessary to ensure that capabilities could compete in the global space. It was for this reason that continual assessments of where DPE was and where it ought to be, were carried out.

Mr Santhosh Pillay, Localisation Manager: General Electric (GE), said that the regulation was a mandate that was implemented on 2 December 2011. The practice notes by Treasury had just been released. It was therefore, important to note that although DPE stated that it would react to findings, the findings that would emanate from the AG would be numerous as no entity had complied with the regulations. DPE was advised to remain cautious of its intention to react to findings. Rather it should go ahead of the findings since the practice notes were only just released.

Mr Ross Boyd, GE Enterprise and Supplier Development, said that GE’s measurements of local content was in line with its contractual agreement with Transnet. A large technical documentation and calculation methodology would thereafter, be agreed upon and would be self-reported based on the calculation policy, as well as various legal and accounting requirements that would be audited. GE had received guidance on this area from both DTI and SABS.

On the issue of moving local content to 56%, it was pointed out that GE did not compromise on quality. Suppliers were only confirmed only after they were willing to adhere to the requirements of the Bill. This was because GE worked on its locomotives on a global standard level. The resultant effect of not compromising was that resources were only put into specific suppliers to help close the gaps, whenever challenges arose.

Mr Dobri Makhubela, Bombardier Project Contracts Manager, responded to the issue raised on requesting that the OEMs should encourage buying locally. Bombardier had taken a step towards opening a factory in South Africa, which would amount to a first of its kind in Africa. A drastic decision had been taken to close a similar factory in Germany, so that operations could take place at the one in South Africa. This would create export potential, and also enable this factory to participate in the global international supply value chain.

Mr D Macpherson (DA) wanted to know the number of times Transnet had verified the four companies and/or which of the four companies had the verification being tested, especially since the contract was a R50 billion contract.

Mr Thomas replied that local production had only commenced by the OEMs in South Africa. Verification was currently taking place during the month of April. No verifications had been carried out before now because local manufacturing had not commenced. Transnet was still busy with its first verifications.

Mr Macpherson further asked if the verifications were being done on all four companies. There was a need to submit the verification reports to the Committee for scrutiny. A continuous follow-up was important in this area. Random testing was also required to determine the authenticity of the results all through the entire process of the contract.

The Chairperson wanted to know if Transnet had verified the local content of the wagons.

Mr A Williams (ANC) sought clarification on what SABS meant by non-compliance from no one – since the Committee only understood the concept of zero percent local content already presented before it.

Dr Tebogo Makube, DTI Chief Director, Industrial Procurement, replied that the regulations on the implementation of local content and compliance was established on 7 December 2011. Every designated product had an instruction note. There was a six to seven months delay on the instruction notes. The first batch of the instruction notes was released around July 2012, which showed that the existence of a gap in terms of non-compliance. However, all procured entities had to comply with instruction notes from 7 July 2012. Compliance differed from one entity to the other. Some entities would advertise without putting the conditions while some others would have problems when they award. Some of these issues had been identified and entities had been approached. Some entities were withdrawn, while the information on some others had been forwarded to the AG’s office.

The Chairperson asked if all entities were made at the same time, and Dr Makube replied that not all the entities were established at the same time.

The Chairperson emphasized the importance of clarity in this regard to help with accurate information when reports were prepared.

Mr G Hill-Lewis (DA) observed that Transnet’s table showed that local content for China South Rail (CSR) was currently 0% and would move up to standard in 25 months. He opined that it would be difficult to move from 0% to 100% within 25 months without the existence of infrastructure on the ground. Verification in this area would be extremely important, as it was not certain that such targets would be met. The remaining targets however, ranged from 25 to 36 months, which meant that there would be no compliance for the next three years. Clarity was sought on the overall targets for the end of the projects. Explanation was also sought on the necessity for different facilities and the concerns around intellectual property if companies only subcontracted their manufacturing to TE, for instance; and also whether these suppliers were mainly agents since it had been explained that they subcontracted the assembly and manufacture to TE and collected all the parts needed from other businesses, both locally and foreign.

The Chairperson said that the points raised by Mr Hill-Lewis had formed part of the Committee’s challenge in understanding the long lag. It was understood that not all designations took place on the same date. An explanation was requested on the content of the bogie cast, since the component was made from recycled steel; and on the meaning of ‘primary’ steel. She wanted to know from Bombardier, what the cause of the delay was. All entities were asked to send in writing an explanation on the way they interfaced with the broad-based Black Economic Empowerment Commission and the black industrialist programme. Reference should be made to the lag that had been identified. Another issue to which entities were asked to send responses in writing to the Committee included how their partnerships with local companies worked.

Ms Colette Yande, Senior Manager, Enterprise and Supplier Development, Transnet, responded to the question on the element of verification on the wagons by noting that percentage alluded to during the presentation had been verified by TE, but the details could not be shared at the meeting.

The Chairperson pointed out that it was only SABS that was saddled with the responsibility of verification.

Mr Pillay (Transnet) said that the details of the above mentioned verification would be submitted to the Committee at a later date, in order to keep the confidence of the verification process.

With respect to CSR moving from 0% to 70%, it was pointed out that the first 40 locomotives were assembled and imported into South Africa, which meant that the product design was done outside South Africa. The next 15 that was assembled by TE. Developments of the suppliers took place from number 56 onwards, in terms of the lessons that had been learnt from their processes, which was then transitioned into the local economy. Reference was made to Bombardier Transportation (BT), who sourced most of its products locally and had approached special industries in areas where TE had no specialization. BT procured items from the specialized industries and then free-issued them to TE as part of the assembly. An example was seen in the way DCD manufactured car bodies and shipped them to Durban for TE to assemble. It was noted that in cases where ‘NO’ appeared on the table in page 10 of the attached document by Transnet, most of the materials were locally sourced but were not sourced out of TE due to factors such as specialization or the OEM choosing a local partner to deal with such elements.

In measuring the element of compliance to the percentage factor, it was noted that as the quantity of local suppliers increased based on the development processes that were currently taking place, TE would gradually increase the factor towards 55% to 60% that had been contracted with the various suppliers of OEMs. It was for this reason that TE was confident that at the end of the current cycle of delivery, it would have met the 55% and 60% target factor depending on the type of locomotives.

The lag was caused by factors such as the design, testing, prototyping, and so on, of the locomotives. This was part of the reason that TE went through a process, because learning curves came up during the building process. All OEMs would go through the same process, and TE would also go through the process as a sub-supplier. These technologies amounted to series of technological progress from what obtained in the 70s, because this volume of assets was only purchased between 1968 and 1975. A technology leap had begun 40 years after, and it would take some time to understand the manufacturing processes.

Mr Thomas clarified that the first part of Transnet’s presentation dealt with the locomotives, while the second part of the presentation dealt with the wagons. It seemed that the wagon components that would be localized in year 3 had been confused with the components that would not be used in the locomotive programme to be delivered over a period of three years. The components that localization would be achieved for between months 24 and 36, would not be used in the locomotives. Instead, they would be used in the wagon-built programmes. This also applied to the issues around the lag, and why localization had to be considered over a period of time. Transnet could not invite people to build factories without letting them know that they would be producing items out of the factories. In terms of launching the processes and getting security of supplies, Transnet sought companies that would invest in factories but contracts had to be signed with such investors immediately. The facilities to produce the local content would afterwards, be given to the factories. In essence, the production of components was another factor that contributed to the lag.

[There was a break for a nomination of an acting chairperson for the Committee for the coming week. The Chairperson, who was also chairing the South African European Union International Committee, would be out of the country to chair that committee. Mr M Kalako was nominated by Mr Hill-Lewis and seconded by Mr N Koornhof (ANC) to fill the post. The Chairperson informed Mr B Mkongi (ANC), the Sub-Committee chairperson on gambling, alongside Mr Koornhof that she had signed off the request for an oversight.

Mr Mkongi replied that Mr Koornhof had brought to his attention, the fact that Saturday and Sundays were days already set aside as the re-registration period. The Chairperson clarified that the re-registration was not until the following week after the oversight. Details of the meeting were read out to MPs.

Entities were reminded to send clearer responses to the issues raised at the meeting, in writing latest by 14.00 on Monday, 11 April 2016.]

Mr Aubrey Lekwane, Managing Director : Bombardier, continued with the responses to questions raised on the lag. The lag experienced at the factory only affected the public launch. Bombardier considered this a milestone, and it had an interest to share with local markets and key players in the region, who were also looking at the need to build locomotives, as well as upgrading their locomotives. Bombardier believed that the local factory was a unique milestone, in addition to its obligations to import electric locomotives.

It was not uncommon to hit obstacles in the process of developing anything. However, it was important to develop an ability to speed up such processes and be more efficient. The challenge of having lags was not inevitable, but Bombardier was currently engaging with its suppliers, both local and international, to solve this challenge.

He noted that he was privileged to be present at some of the contract negotiations for some opportunities Bombardier came across. The length of the contracts was not an excuse for ignoring them. Bombardier understood that the contracts it had entered into, was binding. It therefore, ensured compliance with the provisions of the contract, for the sake of its performance in South Africa and all over the world.

It was certain that SABS would do a good job. However, there should be less debates around what portion would be local and what would not. This would help in understanding the data, once it had been analysed and made available to the entities.

Bombardier recognised the need for teams to be created to engage with businesses.

A locomotive bogie referred to simple-looking components. However, the forging or casting of these simple components was a critical and safety issue due to the things the components were subjected to. Importation of these simple components was self-explanatory. The issue of competing with manufacturers of these components would be a business case that would be determined locally.

Not much had been discussed on the opportunity for local companies to focus on the maintenance of these assets. The maintenance business for Gautrain had spanned for several years. Practices like this enabled businesses to master the global supply chain.

Dr Makube, DTI, clarified the issue of time-lags but noting that the instruction notes allowed companies to ramp-up the investment and reach the threshold of the required local content in year 3. The reason for this was because some companies would have to set up investments in the country, and build factories, where necessary. It was impossible for companies to meet the local content target from the start of a project.

Mr Hill-Lewis wanted to know what prices were used to determine the percentage of local content – was it the cost price to the supplier or the final price that Transnet paid for the final product? Would the price include the wages that had been paid to labourers and employees throughout the supply chain? What were the financial prices used to determine the percentage?

Mr Thomas replied that a specific methodology had been designed for the measurement of the local content. This methodology contained all the rules that pertained to the values that should be used in calculating local content. Transnet suggested that the Committee should allow it return with an explanation of the formula used for measurement. It was however confirmed that the prices included labour.

Mr Williams wanted more clarity on non-compliance, and more particularly, what government recognised as local content.

Dr Makube said that there was a formula to calculate local content. The formula was managed by SABS, and was referred to as the South African Technical Specification (SATS), No. 1286 of 2011. The formula had to be read in line with the content of the instruction notes, as they contained details of the components that should be manufactured at a particular threshold. Bidders were to show the material cost, and highlight what materials were sourced in the country, and those imported. This data would then be compared with the minimum threshold to measure local content. For example, if the threshold was at 100%, it meant that imported components were not allowed. The total cost of production, including the materials, labour, over-heads, and mark-ups were included in the formula. Bidders submitted their bidding documents, along with annexures showing how the costs of products were arrived at.

Mr Garth Strachan, DTI DDG, said that the SATS was an instrument and a methodology used to evaluate local content. DTI was working with teams from the Department of Energy to develop another methodology that would include traceability in relation to local content. DTI was also working closely with [inaudible] to develop an electronic platform that would ascertain local content, and traceability down the value chain, as there was room for more hazard, unless concerted efforts were made to improve the instruments used for ascertaining local content. This would be done with the intent not to place a huge regulatory burden on the private sector companies in the area of compliance. DTI had to work closely with Transnet, National Treasury and the private sector, to improve the existing formula.

Mr Molobela (SABS) pointed out that most companies and entities had been unwilling to work with SABS. This would lead to a lot of difficulty for the companies in developing protocols that would help them understand how to arrive at the local content verification. Difficulty would also arise when all the companies decide to get their verifications done at the same time. It was important for these companies to commence their verification immediately before adverse findings were made by the AG to work with SABS. It was only the Passenger Rail Agency South Africa (PRASA) that had begun working with SABS.

Mr Macpherson said that the DTI and SABS had to intervene urgently in the contractual issues around the R50 billion contract, as quite a number of loopholes had been identified.

The Chairperson said that the ‘fiscal cliff’ referred to in the presentation made by Treasury, would continue to worsen unless the supply chain management was dealt with, and loopholes were closed. The supply chain management was currently characterized by opportunities for abuse.

Mr Pillay, National Treasury, said that there was a whole value chain that cut across the DTI, SABS, and the Treasury. It would be necessary to draw out a proper map and identify areas where leakages existed. A proposal would be prepared and submitted to the Committee at the next meeting. Implementation would also commence in earnest.

The Chairperson said all entities had to work effectively with Treasury.

The Committee would further engage with other entities and the private sector, and thereafter compile a report that would be ready by the end of April.

The meeting was adjourned.

 

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