Transnet and PRASA on localisation

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Trade and Industry

05 September 2017
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The intention of the Portfolio Committee on Trade and Industry meeting with Transnet and the Passenger Rail Agency of South Africa (PRASA) was to obtain more detailed and specific information on the localisation of the major rolling stock programmes that were under way. Previous meetings had not provided clarity as to whether there was genuine localisation according to government policy.

The Committee first addressed internal matters relating to legislation. The Copyright Bill had to be re-crafted in Parliament and a sub-committee, which would include technical experts and some of those who had made submissions, was being set up to do the work. The Debt Relief Committee Bill should be out for public comment in November. A proposed overseas visit by the Committee would cover issues of debt relief, the World Intellectual Property Organisation (WIPO) and the fourth Industrial Revolution.

Transnet had requested that they present first, as they had another engagement in Parliament. However, the CEO of Transnet was not in attendance, as he would be arriving in Parliament only in an hour or two following a BRICS meeting. The Chairperson was extremely annoyed, especially as it was Transnet that had requested the move to the earlier timeslot. Other Members agreed that it was unacceptable, and showed contempt for Parliament. The allegations levelled at Transnet were of such a serious nature that the CEO had to be there.

After the presentation by Transnet, the Chairperson allowed questions to be put and the Transnet team to respond, although she described the presentation as being “next to useless,” as it had given the Committee no additional information. An ANC Member said the Committee could not believe the presentation, because it contradicted what had been found during an oversight visit, and an EFF Member demanded evidence of statements that Transnet had made about the involvement of local manufacturing businesses. The DA asked hard-hitting questions about the R5.3 billion in kickbacks that had apparently gone to the Gupta’s bank account in Hong Kong, as it believed that Transnet was “Ground Zero” for state capture. The FF+ asked questions about the Transnet Pension Fund class action suit of R80 billion. The majority of the questions went unanswered, even after three times of asking. The Chairperson indicated that Transnet would have to submit the answers in writing and would then have to return with the CEO to clarify any questions that the Committee might have.

PRASA said its rolling stock renewal programme involved replacing 1950s technology. The process would create 65 000 direct and indirect jobs. The requirements meant that it would be procuring 7 224 units at 360 coaches per year for two ten-year contracts, totalling R123.5 billion over a 20-year period. The focus was on industrialisation through long-term procurement, aiming for above 65% of the value of a coach to be produced locally. The Manufacture and Supply Agreement (MSA) for 600 six-car trains had been signed and only 20 trainsets would be made in Brazil, while 580 would be made in a local factory. However, even the 20 trains had 21% South African value. From May 2020, trains would have 43.3% local content, but this would rise annually. There was greater local content in respect of maintenance. The new factory at Dunnottar Park, Ekurhuleni, would be central to the manufacture of the 600 six-car trains and would contain both training facilities and facilities for suppliers. 

Meeting report

Committee matters

The Chairperson addressed matters relating to the Debt Relief Committee Bill, the Copyright Bill and the Protection of Performers Bill. A decision had been made to deal with the Copyright Bill first. However, the tabled Bill was in no position to go forward in the state in which it was, and had to be re-crafted in Parliament. A sub-committee had been set up under the Ms L Theko (ANC). The consultants were Prof Tobias Schonwetter and Prof Caroline Ncube, both from the University of Cape Town (UCT).

Ms Theko said that the panel would be ongoing once the technical experts had completed the task. The panel would be open to other Committees that worked jointly with the Portfolio Committee of Trade and Industry.

The Chairperson invited all of the Members in the meeting to think about who else should sit on that panel. Initially, the Committee had decided that members of the panel would be drawn from those who had submitted input on the Bill. However, they should not let that confine them and they could nominate members from their parties. The panel had to reflect the demographics of the country.

In respect of the Debt Relief Committee Bill, the Chairperson said that they had realigned their programme according to the Parliamentary programme. The Committee Bill should be out for public comment in November, before the holiday season. It was being brought back into the Committee in the hope of getting it back on track. The Chairperson would be meeting with the Finance Committee to see how far they were. The Secretariat had worked out a process document in regard to the Debt Relief Bill, and hoped that Members would take cognisance of it.

The Committee needed a decision on its overseas visit. A number of applications had not been accepted, and the Committee needed to remain within the budget of Parliament. It was decided that the Committee would try to undertake a visit covering debt relief, the World Intellectual Property Organisation (WIPO), and also the fourth Industrial Revolution. They were considering five members to undertake the study tour, together with Committee staff.

The Chairperson referred to the Intellectual Property (IP) conference which was taking place at UCT on the following day. It clashed with the joint meeting on Finance, but she had explained that it was the mandate of the Committee and therefore attendance was essential. The Committee would be going to the conference and when they returned, they would catch up with the Finance meeting.  

Transnet had informed the Chairperson that Mr Siyabonga Gama, its chief executive officer (CEO), was flying back from a BRICS meeting in China and would be there in approximately an hour’s time. The Chairperson said she was extremely annoyed. She pointed out that it was Transnet that had requested the time change from later to the first slot. It was not acceptable.

Mr D Macpherson (DA) agreed that it was unacceptable and showed contempt for Parliament. Mr Gama had not made adequate measures to present himself to the Parliament to which he accounted. The allegations levelled at Transnet were of such a serious nature that the CEO had to be there.

The Chairperson repeated that it was unacceptable. However, to avoid fruitless expenditure -- which the state-owned company did not seem to worry too much about, although she did -- Transnet would start with the presentation but the Committee would not engage until the CEO arrived. If the CEO was not in attendance by question time, the Transnet executive would come back the following week at their own expense. She had never before issued a summons, but she was prepared to do it then. Transnet had had the invitation long enough, and even if the CEO’s business was with the President, she doubted that the President would have told the CEO not to worry about Parliament.

Transnet Presentation

Mr Gert de Beer, Acting CEO: Transnet, explained that Transnet had brought a large group, including senior executives, because the entity had two meetings at Parliament on that day. Transnet, including the CEO, took Parliament and the Committee on Trade and Industry, and the task of manufacturing developments in the country, seriously. The presentation would address the two points raised by the Committee. It was important to understand that it was not just a procurement issue, but a strategic imperative for Transnet, which was building an advanced manufacturing business to position itself for business with Pan Africa, not just on rolling stock and facilities, but also moving into the fourth Industrial Revolution and to anticipate trade in the future from a manufacturing perspective. The procurement event was designed to create its own capability and local industry. Transnet wanted to fulfil its ambition of a R15 billion revenue business by creating advanced solutions for Africa. The procurement event was a building block.

Ms Linda Mabaso, Chairperson of Transnet, apologised for the CEO’s absence and asked that Mr Thamsanqa Jiyane, CEO of Transnet Engineering, be permitted to present.

Mr Jiyane said background was that Transnet had presented a report on the progress with localisation to the Portfolio Committee for Trade and Industry in August 2016. At that meeting, it had reported that the South African Bureau of Standards (SABS) was engaging original equipment manufacturers (OEMs) regarding the monitoring and verification process. However, there was a challenge with regard to who should pay for the verification costs, so engagement with SABS had not gone ahead. Transnet continued to receive local content updates from OEMs while they awaited the local content audit. 66 locomotives were to be imported and 998 locomotives were to be built or assembled domestically. To date, 160 locomotives had been manufactured in Durban, i.e. between nine and 12 per month. Contrary to what had been said, only 40 had been manufactured in China.

The Chairperson interjected, stating that no dates had been provided for when the locomotives had actually been built, and that was what Committee had asked for.

The target for local content was R24 billion, and to date R4.119 billion had been spent on local content. The names of all the local supply companies and parts manufactured by them were presented. Transnet had a legacy fleet that had been built in the 1970s, and which would need to be replaced with new stock by 2022. As far as the wagon build programme was concerned, since its commencement there had been a reduction in demand for wagons which, in turn, had translated into low demand for the components, which were a key aspect of the localisation strategy.

Mr Jiyane concluded by stating that Transnet Engineering had been aggressively going into the market to source business, but the impact of the economic downturn had reduced demand.

Discussion

The Chairperson asked whether the CEO, Mr Gama, was available. He had not yet arrived.

The Chairperson indicated that she had decided on a two-stream approach which meant that the Committee would ask questions on the little that Transnet had presented, but that if Mr Gama did not arrive before the end of the question time, Transnet would be required to return the following week. The presentation had been next to useless, as it had given the Committee no additional information.

Mr A Williams (ANC) said that he could not believe the presentation given by Transnet. The Portfolio Committee had gone on an oversight visit where they had found out that Transnet was not buying locally, so he was very sceptical about everything that they had said that morning. Of the 100 locomotives, he would like to know what percentage had been locally manufactured. He would also like to see letters, from all of the providers who had been indicated on the slides, confirming the percentages that had been ordered from them because he did not believe Transnet. He thought they were coming to the Committee and telling them nonsense.

Mr Macpherson said that Transnet was “Ground Zero” for state capture and the looting of state coffers through the Guptas. That was a fact of life. He wanted to know what Transnet’s relationship was with Salim Essa and the Tequesta Group, which had received a 21% -- R5.3 billion -- kickback for facilitating the deal between Transnet and China South Rail (CSR). What was their understanding of that interaction? He believed that the Board had started an investigation to establish what the levels of corruption in that deal were, and they should inform the Committee about that investigation. The bottom line was that for every R50 million locomotive from CSR, R10 million went into the Gupta’s bank account in Hong Kong. That was a fact of life and the contracts were continuing.

Why were there no penalties clauses in any of the locomotive contracts for failure to meet localisation requirements? The Department of Trade and Industry (DTI) had described Transnet Engineering as a black box in which one could not see what was going on. He suspected that it allowed Transnet to hide a lot of local content in Transnet Engineering. It crowded out competition and took away the jobs that manufacturers should have been doing, and shielded Transnet from the lack of verification. Were they prepared to open up the books of Transnet Engineering? What was the status of Transnet Engineering in the whole business? South African Verifications Services (SAVS) had said that they were relying on OEMs to provide letters stating the content requirements, and not facts. SAVS was required to do verification work, but they had not done that work. The Committee had been requesting answers to that for over a year. They had a R50 million contract. Surely verification was important? Who would fund the verification? They could not allow the cosy relationship between SAVS and the OEMs to drag any longer.

Ms Theko said that the absence of the CEO said it all. Transnet was importing and the Committee needed to know the volume and the value of local content to date. The Transnet presentation had not shown the financial year in relation to the important build of locomotives and wagons. At which assembly plant was the local assembly taking place, and what were the numbers so that the Committee knew where to go for oversight visits?

Ms S van Schalkwyk (ANC) commented that when she had looked at the number of wagons, 4 119 had been forecast for 2015/16, but only 100 wagons had been produced. There was a huge discrepancy between the forecast and the actual number of wagons produced. The numbers were not making sense to her. Transnet had blamed the reduction in numbers on economic conditions, but she needed more detailed information about the lack of wagons. She asked for the unit value of freight wagons and passenger carriages produced locally to date. Also, she wanted the total volume and unit value of locomotives, freight wagons and passenger carriages that had been assembled domestically to date. Could the Committee have a breakdown in terms of financial years?

Ms N Ntlangwini (EFF) wanted the full names and owners of companies mentioned in the presentation. The presenter had talked about what they would do in the future, so how many had been assembled locally to date? Of the 40 units purchased in China, had they been purchased from China North Rail or from China South Rail? Were any of those 40 units the ones that did not fit the South African rail system, or had those been the ones purchased in the USA? Where was the technical advisor who was responsible for the units that did not fit, and had he been charged in any way or form? In some parts of the presentation, company names were not properly indicated. She requested that those company names, and those of the four companies from which Transnet was sourcing its steel, be provided, as well as details of where they were located, either at the meeting or by email. The presentation had not shown where Transnet was sourcing its steel and rail tracks, or the engines for the locomotives.

The Chairperson wanted to take the Committee back to some of the points it had made about Transnet’s local stock and local suppliers. The self-verification had already been questioned. The contracts had not met the expectations laid down by the DTI. In March, they could not meet various targets, so she wanted to know how many had already been built. What were the problems with schedules? Was there a company for which they were waiting? She wanted clarification as to why that was the case.

In March 2016, Transnet had been unable to meet any targets. How many of the 1 064 locomotives had actually been delivered and what were the challenges with the delivery schedules of the locomotives? How did Transnet take the capacity and the ability of the local companies to manufacture parts into consideration when determining the design of the locomotives or wagons?

During the Committee’s oversight visit at the beginning of the year, it had become evident that one of the companies, possibly Forge, was retrenching people because they had not received orders, though they had won the tender. However, on the weekend before the Committee meeting, all had been transformed and the company had said that all orders had been received and that there was no retrenching. Forge was in operation, so why did the document say that Forge was setting up prior to March? There was no relation between the in loco visit made by the Committee in January, the information received from Transnet and the current presentation. That was a concern.

Another concern was the “as and when” process of supply, which meant that companies were expected to supply at extremely short notice when it suited Transnet. However, everyone knew that it was not possible to supply overnight, so it seemed that the short notice undermined the tender and the practice of localisation. What had they done to address that? It now seemed that Transnet was manufacturing as well as procuring. Why was Transnet competing with the companies that they were supposed to be building up?

Transnet’s response

Ms Mabaso, Transnet’s Chairperson, said that the Board had set up a committee to do an investigation into the allegations of corruption, and expected an interim report by the end of September. She could not pre-empt much, but independent attorneys were involved in the investigation.

Mr Jiyane, Transnet Engineering’s CEO, said that members of the Transnet team would be answering the questions, but confirmed that they would engage with the suppliers and ask them to forward the requested information to the Committee. Local manufacturing of locomotives took place in Pretoria for China South Rail and for General Electric. 115 locomotives from China South Rail and 153 from General Electric were manufactured in Pretoria. They were still running the production line in Pretoria, and would be delighted to host the Committee at the facility. They could meet the people who were assembling the locomotives.

Transnet Engineering (TE) had over 100 years’ experience in manufacturing and maintenance of locomotives. They had started supplying wagons when no one else was doing it and had received orders from all over Africa. TE was by far the biggest hub in South Africa/Africa, and so they were discussing supporting railways across Africa by manufacturing wagons, locomotives etc. He understood the DTI’s concerns, but they had sourced supplies and components in South Africa. Transnet had bought locomotives in China and USA because there were no manufacturers of locomotives locally. Transnet’s Freight Rail was the entity that used the locomotives. Transnet Engineering was a separate division that had long been involved in manufacture and maintenance. OEMs who were contracted to manufacture locomotives had contracted to TE to use its facilities and manufacture some components, and were the ones who were sourcing from the local suppliers.

The Chairperson asked about a specific company, Naledi Inhlanganiso.

Mr Macpherson repeated his question: What was the relationship between Transnet and Salim Essa and Tequesta Group? For every CSR locomotive, R10 million went back to the Guptas. What was Transnet’s view on the R5.3 billion 21% kickback that had been paid?

The Chairperson enquired whether kickback was speculation or factual, to which Mr Macpherson replied that it was factual.

Ms Ntlangwini had not received a response to a question about whether the 40 or the six locomotives were the ones that did not fit the system. She also asked whether Transnet could email with the owners’ names and the full names of the companies, as she did not want to wait for the next presentation by Transnet. She asked what the relationship was between China North Rail, China South Rail, Bombardier and General Electric, as well as how much each company charged per locomotive.

The Chairperson pointed out that the Naledi Inhlanganiso Group was a 100% black-owned South African industrial group that was aligned with the policy that would radically transform the manufacturing sector. The Committee knew that they could forge wheels etc, and were not only then setting up the foundry. Transnet had already ordered 1 000 sample wheels, but the order seemed to have gone to China South Rail (CSR). CSR had stopped the localisation. Transnet might not agree with the localisation policy but they worked at the state-owned enterprise (SoE) at the state’s pleasure, and the state had a policy to promote black industrialists. She wanted a more informed response on the crowding out of the private sector.

Mr Ndiphiwe Silinga, Legal Counsel for Transnet, responded to the questions from Mr Macpherson. They were aware of the allegation against China South Railways (CSR). The allegation was that CSR had channelled money to a Gupta-led company, Tequesta. Transnet did not have a contract with Tequesta. They had engaged with CSR, who were investigating and would respond by the end of September. The allegation was that R10 billion was channelled towards the Guptas. Because the allegations had questioned the integrity of Transnet, the Board had instituted a commission of investigation by an independent local firm and they would get an interim report by the end of September.

Mr Jiyane responded to the question about foreign prototypes. None had had challenges or were out of specification. The engineers had gone to OEMs to check on them. The prototypes from CNR had not yet been accepted, and they were working on testing etc.

Mr Ali Tshabalala, Transnet Chief Procurement Officer, said that Transnet needed two types of wheels – cast and forged. Both the South African cast supplier, Score, and Naledi had been awarded contracts. Score supplied wheels, as they were an approved supplier, whereas Naledi had to develop the wheel and have it approved before production. It had to supply a prototype for approval in the laboratories, which then had to pass a two-year test on rolling stock. However, Transnet had done accelerated testing in Europe which had vastly reduced the testing time but because of the necessary safety testing, Naledi had been approved to supply wheels only the previous year in March. Regarding forging, there was no actual forging facility in the country. One company had created a machining facility for forging wheels, but that was not Naledi. In 2016, they had had a drop in the number of wagons required, therefore there had been a drop in the number of wheels required.

Mr Peter Volmink, Senior Legal Specialist at Transnet, needed to know what the Department of Trade and Industry’s concerns were, and then they would provide a written response. The Chairperson agreed

Mr De Beer informed the Committee that, as reported in the Annual Report of 2016/17, of the planned 116 class 22E Electric Locomotives, 80 had been taken into production; of the ten 23E locomotives, two were in production; of the 153 Class 44D Diesel locomotives, 117 were in production; and the two Class 45Ds were undergoing testing. They were operational locomotives.

Ms Ntlangwini asked about the total number of locomotives -- how many were assembled by CNR, CSR, Bombardier and General Electric, and where were they being assembled? The presenter had seemed to say that the locomotives were being assembled at Transnet under the name of CSR.

Mr Williams asked what percentage of the total spend on those locomotives had been spent on local procurement, which companies had received the money, and the black economic empowerment (BEE) status of those companies.

Adv A Alberts (FF+) asked Transnet to explain if Mr Stanley Shane had been chairperson of the acquisition and disposal sub-committee when the acquisitions were made. Had they been aware that he had links with the Gupta family? Why was he not a director any more? Why was he not the chairperson of the Transnet Pension Fund any more, and why had he been appointed to that position in the first place? He asked Transnet to explain how the relationship with McKinsey to advise on locomotives had come about and why the contract had been passed on to Regiments,which had no real relationship with McKinsey. How did the contract get passed on to Trillion? What was Transnet doing about the Transnet Pension Fund class action suit of R80 billion (R100 billion including interest) against them, which would cripple Transnet? Would trains have to be sold in execution?

Mr Macpherson said that CSR had shown how flawed the idea of local content was. Would they release the Board report on corruption as soon as they received it? Would they give a commitment to release the report, even if there were negative findings? Had the allegations of corruption been reported to the police? Why did they not suspend the contract with CSR until the allegations had been resolved? They were talking about R6 billion in kickbacks being paid by the State to the Guptas. CSR had invested little or nothing in South Africa, as most of the work was being done in TE. GE and Bombardier had invested money in local factories. Why were there no penalties for failing to use local content as required? What had Transnet done to show that local content was important to them? What had they done to see the local economy and jobs flourish and prosper? Their smoke and mirrors presentation was not acceptable. They were protecting the people behind them.

The Chairperson noted six tiers of the value chain, but said it was not clear what the percentage of local content was at each level. They had to have that information. If not, there was something wrong with the Chief Operations Officer’s management. They did not have the information at hand, although they had been asked for it in March. The Committee had information from one supplier, that only five locomotives had been produced locally between January and October 2016. If so, why? It was the third time that she had asked for a matrix of both the amount and period during which it was spent, what was produced, what the localisation at each of the six tiers was, and explanations for any deviation. She needed factual information. They had received cosmetics for use in toilets and bathrooms in the presentation that day.

Mr G Cachalia (DA) asked Transnet to confirm whether any of the CSR locomotives were made in South Africa, or were they all made in China?

Dr Tebogo Makube, Chief Director: Industrial Procurements, DTI, asked Transnet to clarify the matter of local content. According to the rules of local content, the procuring companies were supposed to submit bidding documents, contracts and annexures to the DTI, but Transnet had sent only annexures, so it was impossible for the DTI to determine exactly what the company had declared. It was a matter of compliance.

Mr Jiyane referred to their presentation, which had alluded to all locomotives in the contracts. All locomotives assembled domestically had been assembled in the facilities of Transnet Engineering. In terms of the contract, the CSR was awarded 359 locomotives, Bombardier was awarded 240 locomotives, General Electric (GE) was awarded 233 locomotives, and CNR was awarded 232 locomotives.

The Chairperson interjected, asking in which year the bids had been awarded.

The bids had been issued in March 2014, according to Mr Jiyane. Of the 269 locomotives that had been handed over to Transnet Freight Rail and were in service, 116 had been assembled in Transnet facilities in Pretoria on behalf of CSR, and 153 of the General Electric locomotives had also been assembled by Transnet. Only 40 locomotives were manufactured by CSR in China and six locomotives were manufactured by General Electric in the USA. Transnet would provide detailed information on the costs etc to the Portfolio Committee. GE had sub-contracted to various local companies to provide components.

The Chairperson said CSR and CNR had amalgamated, so the question was when CSR had first assembled locomotives in South Africa as CSR. She had information that CSR and CNR together, as one company, had produced more than 61% of the locomotives in China and not in the country.

Mr Jiyane said that Transnet had contracted with CSR and CNR when they were two different companies. They had now formed CRC. One division was responsible for electronics and CRC Zozo was manufacturing locomotives, 116 of which were assembled in Pretoria.

Ms Ntlangwini claimed that locomotives were being built in China and assembled in Pretoria at the cost of Transnet. CRC was stealing from the country, and Mr Jiyane was protecting those people or his bosses. They were going to jail. She urged him to stop protecting those people.

Mr Macpherson said he was amazed that Transnet had not answered any of his questions. Had anyone reported the allegations to the police? Would they be releasing the investigation report as soon as it was available? Why were there no penalty clauses for lack of local content? Why had contracts not been suspended until the allegations were resolved? It was unacceptable for money to flow offshore to a company in Hong Kong that supplied money to the Guptas.

Adv Alberts stated that none of his questions had been answered either. Had Mr Stanley Shane been chairman of the procurement committee when Transnet had procured the locomotives? How did McKinsey and Regiment come into play, why had McKinsey said that they had no relationship with Regiment, and why had the contract been transferred to Trillion? What value had Transnet obtained from the Gupta-linked companies?

The Chairperson said that Transnet would respond in writing by Thursday afternoon. As the CEO was not at the presentation, they would have to return on a Friday. The Transnet team had to meet with the Appropriations Committee at 11 am, and it was past that time. She noted that Mr Siyabonga Gama, CEO of Transnet, had slipped into the room moments before. They would be invited for two to three hours the next time.

Mr Macpherson objected that Transnet was just walking away without answering questions that he had put to them three times. Responding in writing was the easy option, and he would lay criminal charges if any word in the response was incorrect.

The Chairperson explained that Transnet would return to answer questions after the Committee had had the opportunity to examine the written response.

Mr Macpherson proposed a motion that the Transnet officials personally pay for the return trip to Parliament, and that Transnet not spend any money on the costs of the visit.

The Chairperson was concerned that they had come for another meeting in Parliament on that day and therefore could claim that it was not wasted expenditure.

Mr Williams agreed that the appearance of Transnet before the Committee was unacceptable, as he believed that they had shown contempt. It had to be dealt with, as they kept lying to the Committee.

The Chairperson said that she could not support the allegation of lying, and asked Mr Williams to withdraw the word “lying”, which he did.

The Chairperson asked for a seconder for Mr Macpherson’s proposal, and Ms Ntlangwini seconded it. The Chairperson stated that she would take advice, but she did not believe that she or Parliament had the power to make them pay for their own costs to Cape Town.

Passenger Rail Agency of South Africa (PRASA) Presentation

The Chairperson requested honest and accurate answers from PRASA.

Mr Lindikhaya Zide, Acting CEO, said that every effort would be made to give specific, detailed and honest information. He was pleased at the progress at PRASA since the last meeting with the Committee.

Mr Piet Sebola, Group Executive: Strategic Asset Development, Transnet  presented a report on the rolling stock fleet renewal and the refurbishment of the existing fleet. In terms of rolling stock renewal, PRASA had to replace 1950s technology. The process would create 65 000 direct and indirect jobs. The requirements meant that PRASA would be procuring 7 224 units at 360 coaches per year for two ten-year contracts, totalling R123.5 billion over a 20 year period. The focus was on industrialisation through long-term procurement, aiming for above 65% of the value of a coach to be produced locally.

The Manufacture and Supply Agreement (MSA) for 600 six-car trains had been signed and only 20 trainsets would be made in Brazil, while 580 would be made in a local factory. However, even the 20 trains had 21% South African value. PRASA also had a Technical Support and Technical Supply Agreement (TSTSA). From May 2020, trains would have 43.3% local content, but this would rise annually. There was greater local content in respect of maintenance.

He said that the Committee’s oversight visit had been cancelled as a result of a strike at the new factory in Dunnottar Park, Ekurhuleni. PRASA had been extensively involved in the skills training of workers for the factory and was running an apprentice programme. The entity provided bursaries at universities and technical colleges. A maths and science programme to help students improve their competency in those subjects had kicked off in 2016 in Ekurhuleni, Soweto and Tshwane.

The refurbishment of the existing fleet had been completed with 100% local labour. 542 coaches had been refurbished in 2016/17 and 492 coaches would be refurbished in 2017/18.

Discussion

Mr Williams asked if there was any non-compliance with government departments. Was the plan to build or to assemble the coaches in South Africa? He wanted to know the BEE status of the big companies locally.

Ms Van Schalkwyk asked whether the jobs to which they had referred were fulltime or part-time jobs. When would the 65% local content be reached? She appreciated that women owned small, medium and micro enterprises (SMMEs) but she was concerned about the low percentage of youth-owned SMMEs. The youth were the future and the skills needed to be transferred to the youth. Was the maths and science programme to be rolled out to rural communities?

Mr Macpherson asked where they were in terms of trainsets 21 to 33. When would they start manufacturing the units? What or how was the SABS measuring local content? Apparently, SABS would go to the company and verify the production and the materials in terms of local content. That was not happening with Transnet, so he wanted to know how they had come to work with SABS, and who paid for the verification.

Mr Cachalia wanted to know why the Gibela Rail Transport Consortium was struggling to maintain local content. He expressed concern about all the relatives involved. He asked how Gibela had ensured local content and how it was being monitored.

Ms Ntlangwini asked why there was a limitation on the refurbishment local content. Local content seemed to be restricted to peripheral items, and was not included in core aspects of the units. Where did they source the engines and other core material and parts? There had been R14 billion in wasteful expenditure at PRASA. Had they put in systems to deal with irregular, fruitless and wasteful expenditure?

Ms Theko asked to whom they were transferring skills if they were not transferring skills to the youth? What was going to be built or manufactured in the Dunnottar factory? Why was the local hub being privatised only at that stage, and not in the initial stage? She would have assumed that the place to start would have been with privatisation of the hub.

The Chairperson asked about the 580 trainsets, and in which financial years they were going to be built. She was also interested in the verification of local content. Did PRASA or the contracted companies pay for the verification? In presenting the training programme, PRASA had included an extract from a speech by the local mayor. Which companies had been referred to by the Ekurhuleni Mayor? PRASA had said that the programme had made a significant difference to the matric results of the participants. Had that been communicated to the Department of Basic Education? Was it a programme that could be rolled out in greater support of maths and science?

The Acting CEO responded to the questions about non-compliance. When PRASA had started the programme, PRASA, DTI, National Treasury and the Department of Transport had ensured that all contracts were compliant, so there was no question of non-compliance.

Mr Sebola informed the Committee that the Dunnottar plant was a manufacturing plant, not an assembly plant. The penalties for not meeting localisation content were very strict. They had a penalty of 20% of the contract, plus there was a penalty point system. After a company had been given nine points, the contract would be cancelled. PRASA did not have details of the BEE component of the large companies, but they could confirm that every company that they worked with was BEE compliant.

Responding to Ms Van Schalkwyk, he said that his slides had indicated that PRASA had achieved the indicated local content targets to date. There were very few black youth-owned companies, but they had employed a large percentage of youths in the factory, to whom they were transferring skills. In addition, PRASA had a scorecard and they required a percentage of youths in every SMME.

Over the past few decades, the rail industry had lost its capacity and now they were trying to build it on a broad front and in many areas. The commotion that had broken out in Ekurhuleni was because local people had wanted only local people to benefit. They had objected to people from outside of the area benefiting from the programme. The maths and science programme focused on schools in Ekurhuleni, but they had also included schools in Soweto. PRASA was moving outward to rural and other areas, but it was a sensitive issue.

In response to Mr Macpherson, Mr Sebola said that PRASA had believed that it would be better to work with a partner on monitoring, rather than simply doing self-monitoring. The services were paid for by PRASA, and it was quite expensive. They were hoping to negotiate a better price when the contract was renewed. As far as PRASA knew, there were no difficulties meeting local content by Gibela, but it was still in the early stages and they would have to see whether there were any challenges with local content.

In response to the question about whether partners were active or passive, he said that PRASA had hoped to be able to select active partners, but the partners had come through when they had done the bidding and PRASA was therefore obliged to accept the chosen partners. However, they encouraged all partners to be active and already one company had withdrawn because the partner had not participated actively.

He admitted to Ms Ntlangwini that local content in refurbishment was largely limited to small items, but maintenance was highly labour-intensive and was done 99% by South Africans at any given time. PRASA did maintenance, and there was 100 % local employment in that area, and there had been training for young people to be able to do the maintenance. The young people were already fully competent in performing maintenance tasks.

Production in Dunnottar would start in November, so the first South African-produced train would leave the factory in November 2018. Training facilities had been developed on the Dunnottar site, and included facilities for training, such as areas with train rails etc. The site comprised 268 hectares in total, but only 110 hectares had been developed, and 53 hectares would be developed for the supplier park which would become a central industrial rail hub to support localisation.

62 trains would be produced per annum at the peak in 2023. PRASA would provide the Committee with a detailed background report.

PRASA had engaged with the Department of Education in respect of the maths and science programme. He admitted that it was not all that good as yet, but they supported students in a broad way, and not just academically, to allow them to focus on their studies.

The supplier hub would provide facilities for rail suppliers to participate fully. The supplier park would ensure that the skills and expertise was retained so that they might over time be able to export rolling stock to countries throughout Africa. The Mayor of Ekurhuleni had been recognising the work done by PRASA and Gibela, and had suggested that other companies should follow their example.

The irregular expenditure was specific to the overhauls contract. When the contract had expired in 2012, the Board had extended the contract instead of getting a new contract. The Auditor General had thought that it was wrong not to go out on a new tender, and had deemed all monies spent on the contract from the time of its renewal as irregular expenditure. The irregular expenditure therefore covered all money expended on that contract in the following years. PRASA hoped to receive a condonation, and would then go out on a new tender for bidders for the contract.

Ms Ntlangwini responded that the Acting CEO could not say that the Auditor General “had thought,” as he “had known.” He did not make his findings based on feelings, and PRASA had to respect the findings of the Auditor General, which were based on legislation.

Ms Van Schalkwyk asked about skills development. Could PRASA clarify the number of junior management positions? She was concerned that unskilled and semi-skilled workers were not being given training opportunities to move up to more advanced positions.

Mr Zide agreed with her comment. The reality was that many companies simply employed unskilled and low skilled workers, and did not want really want to engage in training programmes and did not do much to improve the skills of their workers. PRASA had therefore determined that companies would start with unskilled workers, but the expectation was that those workers would receive training and that they would measure the capacitation of employees within a company.

Dr Makube said that the DTI wanted to see entities assisting them in producing transport vehicles locally. He was concerned about the percentage of expenditure that related to localisation. The DTI would also measure PRASA by the percentage of components imported.

The Chairperson said that it would appear that PRASA’s presentation was more in line with what was required by the Committee. The issue about localisation was not only to increase the value chain and jobs, but because South Africa would improve its trade balance. Another intention was to grow a local industry to supply Africa. She enquired about a point in the presentation, which indicated a stage at which local content declined. She also noted that the current contract/quote system sometimes bypassed the local supply chain. When supplies were not purchased directly from the supplier, there was an intermediary who took a cut, and that was a waste.

The Chairperson said she had been advised that the motion proposed that Transnet executives should bear the cost of their return to Parliament could not be supported, as Transnet was an entity independent of Parliament and with separate powers. She had been advised that they could not do it, but the Committee could hold them to account and would do so.

Mr Macpherson suggested that they requested the Minister of Public Enterprises, as a shareholder, to instruct the executives to pay for themselves, but the Chairperson closed the meeting without any further discussion.

The meeting was adjourned.

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