Local Public Procurement Colloquium: day 1

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Trade and Industry

17 August 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Portfolio Committee on Trade and Industry held a colloquium on local public procurement. Those participating were the Department of Trade and Industry (DTI), Transnet, the Passenger Rail Agency of SA (PRASA), the South African Bureau of Standards (SABS) and the suppliers of locomotives to Transnet – Bombardier Transport (BT), China South Rail and China North Rail (together known as CRRC), and General Electric (GE). They updated the Committee on their performance in the field of local content and supplier development.

The DTI highlighted the importance of having global companies using SA as a long-term strategic hub, and cited GE as an example. It also noted that the private sector support for materialisation had been slow to progress, so the National Treasury was reviewing the Preferential Procurement Policy Framework Act (PPPFA) and regulations. The Department still faced hurdles, such as the lack of compliance to procurement prescripts and verification issues.

CRRC said it prioritised skills development, industrialisation, job creation and preservation. In its commitment to deliver local content and supplier development of 55% and 64% respectively, the company had so far reached 42% local content and 47.76% of supplier development.  The overall supplier development target for Transnet was, as a percentage of contracts, 69.12%. So far, 18.01% had been achieved.

Transnet saw a strong opportunity to trade in Africa, but the biggest challenge was funding.

Bombardier Transport had made progress in activating localisation through local production and procurement, the integration of black-owned businesses into the supply chain, job creation and skills transfer.

GE enjoyed an accelerated timeline, partnership with the local supply base, aggressive localisation, robust quality control, and improved stock control, input processes and output on the production lines. Nonetheless, there was still a lack of alternative local material. Thus far, GE had achieved more than 55% local content.

PRASA informed the Committee of the critical implementation elements required for sustainability. These were partnership with government, reservation of land for local factories and supplier parks, centres of excellence, and active monitoring and support. It also encouraged the government’s different bodies to collaborate and purchase in bulk together in order to benefit from economies of scale.

Members asked whether the government or the contracted companies should bear the verification costs, what the verification cost was, and suggested that there should be a timeline for the National Treasury to work on, when making decisions on this matter.  

Meeting report

Presentation by Department of Trade & Industry
Mr Garth Strachan, Director-General, Department of Trade and Industry, first reminded the colloquium of the fundamental goals of the procurement policies.  These were to stimulate growth in the manufacturing sector, maintaining a sustainable security of supply, improving material and end-product standards, charging competitive prices and to improve exports. It was the responsibility of the procuring entities or the Original Equipment Manufacturers (OEMs) to comply with contracts, including policies on local content and supplier development requirements.

He pointed out the progress that the Department has made so far, saying he was proud that General Electric (GE) was using South Africa as a long-term strategic production hub. In this regard, 1 300 candidates had been trained in engineering disciplines. Over 100 parts and components had qualified from 27 local suppliers after an intense certification and capability building process. GE had established a $20 million supplier development fund with a specific focus on developing black industrialists, and a $50 million Customer Innovation Centre, with a specific focus on addressing the critical shortage of skills in the engineering sector. This illustrated the importance of using SA as a long-term strategic hub, and the Department hoped to bring more companies into the fold.

In spite of the commitments the Department had made, private sector support for localisation had been slow to take place. This needed to be improved, otherwise the government’s 75% localization target would not be met. In response to the slow materialisation, the National Treasury was reviewing the Preferential Procurement Policy Framework Act (PPPFA) and regulations in order to enshrine and strengthen localisation and supplier development.

The Department still faced other challenges, such as the lack of compliance to procurement prescripts and the use of clause 9(3) of the PPPFA, which required building capacity in a large number of procuring entities and ensuring that compliance became an audit function. There were also verification issues, such as whether the cost of verification should be incurred by the procuring entity, or the government. The processing of designation requests and issuance of instruction notes required speeding up as well.

Presentation by China Railway Rolling Stock Corporation (CRRC)
Mr Jeff Wong, Project Manager, CRRC, described the Corporation’s role in the Department, which was to support it by providing technical support, skills development, industrialisation, job creation and preservation.

CRRC divided its localisation plan into two, separating it into local procurement and local production. In its local procurement plan, it had budgeted to spend R3.4 billion. Of that, R1.8 billion had already been signed and more than 30 local suppliers would be contracted in the project. CRRC would spend R2.2 billion on local production.

Through these measures, the company aimed to achieve a reduction in import leakage, to build and expand local production, improve local manufacturers’ capabilities, and support job creation and job preservation. CRRC had committed itself to a local content and supplier development of 55% and 64% respectively. At this point, the company had contracted 42% of local content, and 47.76% of supplier development.

Presentation by Bombardier Transportation (BT) SA
Mr Aubrey Lekwane, Managing Director of BT, together with Ms Siphokazi Sonjica, Head of Project Management & Finance, and Ms Nogolide Zweli, the local content expert delivered the BT presentation.

Mr Lekwane described the responsibilities of the company, which included providing maintenance and servicing for the Passenger Rail Agency of SA (PRASA) and Transnet. He also announced the launch of the first ever propulsion factory built in Africa, located in Ekurhuleni.

Ms Zweli added that the propulsion factory was now fully functional and would be used to manufacture cubicles and convertors, and would be very useful in helping meet the 60% local content commitment. The propulsion factory, which would encourage exports, fell under one of the five pillars that BT had identified as the main drivers of localization, and had set its priorities in line with them. These pillars were local production, local procurement, integration of black-owned businesses into the supply chain, job creation and skills transfer. It had founded, trained and mentored more than 150 black-owned businesses and created more than 800 jobs.
She also informed the Committee of the support it provided through the transfer of technical skills and ‘know-how’ from European suppliers, and listed the biggest drivers that drove local content, where Transnet Engineering was top of the list. BT was providing financial support to the businesses of the black suppliers in order to extend the supplier chain for locomotives. Bombardier still had setbacks in its operations caused by a lack of supply diversity, suppliers not meeting their deadlines, the high cost of quality ramp-up and employee retention.

Discussion

Mr. A Williams (DA) asked what type of local procurement verification processes OEMs used, and who was doing it for them. He was especially interested in knowing specifically the verification processes CRRC used. Did all the local suppliers manufacture the components they supplied, or did they import them? He was more interested to know about the BT suppliers. He further asked what DTI was doing to address the challenges facing BT.

Ms Thandi Cele, Chief Director: Transnet Freight Rail, replied that an agreement had been reached and signed. that the South African Bureau of Standards (SABS) would do the verification for the OEMs. She added that the components in question were manufactured in SA.

Regarding the verification of CRRC’s local procurement, Mr Wong replied that the company was guided by the terms of the contract on the local content.

Mr D Macpherson (DA) was concerned that if SABS left the verification until the end of contracts in 2018, they may only realise in the end that the processes had not been done according to their standards. He therefore asked if the SABS had a timeline it used in the verification process. He also asked how CRRC would meet a production requirement of more than 300 locomotives, since it planned to build only 12 in 2016 and also 12 in year 2017. Did China South Rail (CSR) have any linkages with Duduzane Zuma, anyone with the Gupta surname, or Lucky Montana, or if they had business dealings with VR Laser. He wanted to know who bore the verification costs.

Mr Strachan replied that the verification cost concern was a decision that should come from National Treasury.

Regarding the question of volume, Mr Wong said that CRRC was behind with production because of a lower learning curve at the beginning of production, but they believed that they would improve as time passed. Regarding the CSR linkages with the people in question, the Company did not have any linkages with them.

Mr B Mkhongi (ANC) asked what the OEMs and the DTI were doing to improve industrialisation that would upskill local people with actual manufacturing skills, besides using SA just as an assembly point. He also asked if the DTI had a structure that fostered and coordinated the efforts of industrialisation, and how it was monitored. Did CRRC have a structure that monitored and verified their procurement and supplier development process? Were they using SABS?
 
Mr Strachan said that there was a committee that coordinated industrialisation. On the question about the manufacturing of material in SA instead of abroad, at the beginning of each project, the DTI first investigated the capability of local companies, the quality of the goods and then decided on what percentage should be produced in SA.

The Chairperson asked what the respective local content percentages had been for China North Rail (CNR) and CSR before the merger, and what they would be after the merger.

He said the individual local content for CSR and CNR had been 60.53% before the merger, and this commitment of 60.53% would not change after the merger.

Mr Macpherson showed his dissatisfaction over the delay in manufacturing locomotives by CRRC. He asked who was causing the delay. Was it Transnet or CRRC, and if it was Transnet, what were they doing about it?

The Chairperson reminded the colloquium that the questions on verifications would be answered at the next meeting.

Presentation by Transnet
Lindiwe Mdletshe, Senior Manager, Transnet, said that Transnet supported the government’s efforts to achieve a skills and knowledge transfer from multi-nationals to achieve industrialization, the development of established local suppliers to increase localisation and exports, and grassroots enterprise development. Transnet was committed to building sustainable local industries with meaningful black ownership, and to extract the most meaningful value from existing operations.

GE had been employed to build 233 diesel locomotives. Of that total, six had been completed in the USA, and the rest would be manufactured in SA. GE was committed to delivering a local content of 55% in the production of these locomotives.

CSR had been employed to build 359 electric locomotives. It had already built 40 of them, and these had been manufactured and completed in China. 304 would be manufactured in SA. CSR was committed to delivering 60% of local content.

CNR had been contracted to build 232 diesel locomotives, and 212 of them would be manufactured in its Durban facilities.

Bombardier had been contracted to manufacture 240 electric locomotives, and all of them would be manufactured in SA. The assembly of the first locomotive was already in progress. CNR and Bombardier were required to deliver local content of 55% and 60% respectively.

The South African Bureau of Standards (SABS) had been authorized to verify, monitor and report the local content obligations and achievements of the OEMs. The overall supplier development target, as a percentage of contracts, was 69.12%, and so far 18.01% had been achieved. Only 113 of 1 064 locomotives had been built. Transnet saw a strong opportunity to trade in Africa, but the biggest challenge was funding.

Other challenges facing Transnet included identifying suppliers with the capacity to execute according to OEM’s acceptable specifications, an uninformed local supplier base, language barriers  – communication during the up-skilling of local suppliers -- verification costs, and reporting and monitoring tools.

Presentation by General Electric
Mr Lwazi Sikhwebu, Director of the Board, GE South Africa, said GE believed that companies were better equipped to meet local content requirements when the focus shifted from single contracts to long term partnerships that took a holistic view of the market capabilities and demand, in order to create sustainable local businesses that can export their products or services beyond the borders of SA. GE enjoyed accelerated timelinea, partnerships with the local supply base, aggressive localisation, robust quality control, and improved stock control, input processes and output on the production lines. However, there was still lack of alternative local material. Thus far, GE had achieved more than 55% local content.

Presentation by PRASA
PRASA pointed out that the critical implementation elements required for sustainability was partnership with government, land for local factories and supplier parks, centres of excellence, and active monitoring and support. However, the key challenges for localisation were the lack of insight into current local supply chain capability and capacity, lack of existing industry skills, shortage of volumes, investment uncertainty and the fact that OEMs did not recognise a partnership approach with government. PRASA recommended that the definition of the local content policy must be reviewed, and that synergies should be required within the government departments. For example, Transnet, PRASA and Gautrain could gather for purchase of trains, rail equipment and locomotives so that they could benefit from the economies of scale.

Discussion

Mr A Williams (ANC) commented that if localisation was not carried out hand in hand with transformation, inter-racial inequalities would worsen. He asked if the manufacturers were reconciling localisation with transformation. What percentage of the suppliers used by OEMs was black-owned?

Mr Strachan replied that the DTI always took into account transformation in their dealings through regulations such as those for Broad-based Black Economic Empowerment (BBBEE), the Black Industrialisation Programme, and Enterprise and Supply Development. The question about the percentage of black suppliers would be addressed at the next meeting.

The Chairperson wanted clarity on the number of people appointed by the Gibela Rail Transport Consortium, an affiliate of Transnet.

M G Hill-Lewis (DA) wanted clarity on the term ‘investment uncertainty.’ He also asked if the project at Ekurhuleni was up and running, as the presentation had suggested.

He was told the Ekurhuleni Training Centre Project had been delayed, and would be ready in June 2017.

Mr Williams asked PRASA why independent verification was not part of the contract, what was its drive to work with National Treasury to have verification take place. Did it know of some other approved verifier who could conduct verifications in case the SABS did not have the capacity to conduct verifications? Who should bear the cost of that verification?

Mr Strachan replied that it was agreed that the verification questions would be addressed at the next Committee meeting.

Mr Macpherson suggestion that there should be a time line on the verification cost issue.

Mr Mkongi agreed with Mr Macpherson’s suggestion.

The Chairperson expressed her discontent with the fact that verification was carried out after the tender. She also emphasised the importance of time lines in the presentations.

The meeting was adjourned.

 

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