Transnet on localisation: follow up

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Trade and Industry

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

The Portfolio Committee on Trade and Industry has resolved to hold a Parliamentary Committee inquiry into the acquisition of 1 064 locomotives by Transnet. This decision followed its discussion with the state-owned transport manufacturing company regarding localisation. The Committee felt it was the second time it was not getting satisfactory answers from the entity regarding the many allegations it faced regarding the localisation programme. These allegations were around kickbacks from the China South Rail amounting to R5.3 billion, the acquisition of 1 064 locomotives at a cost of R50 billion with an inflated price of R10m per locomotive, a maintenance contract valued at R80 billion, and a service provider supplying forged wheels.

It was for these reasons the Committee considered applying Rule 227C of the National Assembly, which states that a Committee of Parliament may institute a Parliamentary inquiry. It agreed to draft the terms of reference for the inquiry itself, and they would be adopted in October when it met again.

Transnet informed the Committee during the sitting that it had implemented contract management controls and processes which were being used regarding the original equipment manufacturers’ (OEMs’) reporting of local content delivery. Transnet had appointed appropriate resources for the execution and oversight of these contract management controls and processes. The South African Bureau of Standards (SABS) had been appointed as the official independent local content verification agency, and it was understood the SABS would be suitably funded by the fiscus to be able to perform its function.

The Group CEO reported Transnet had local content engagement with DTI prior to the RTF (Request for Tender) for the 1064 locomotive acquisition. During the RFP (Request for Proposals) preparation stages, Transnet engaged with the DTI on a continuous basis to ensure the RFP was compliant with the local content requirements. The designations were fairly new and Transnet wanted to ensure the RFP complied in all aspects regarding local content.

The Committee was briefed about the1 064 locomotive acquisition. In August 2016, Transnet, the Department of Trade and Industry (DTI), the Department of Public Enterprises (DPE), the SABS and the OEMs had presented to the Portfolio Committee on the localisation progress. Transnet had reported that local content documents for the 1 064 locomotive build programme had been submitted to the DTI as required for monitoring and auditing by the SABS. It had also been reported the the SABS was engaging OEMs regarding the monitoring and verification process. However, there had been a challenge with regard to who should pay for the verification costs.

The reasons for not suspending the China South Rail (CSR) contract were explained. The locomotive supply agreement made provision for a standard process that needed to be followed when the OEMs were not performing according to their contractual obligations. If Transnet wished to suspend the contract, Transnet had to provide proof based on a tracked series of events that showed the contractor had failed to deliver according to the contract. To date, the CSR had been delivering locomotives according to the delivery schedule

Members wanted to know what the relationship was between Transnet’s Group CEO and Mr Essa of the Tequesta Group, because the Tequesta Group were said to have received kickbacks amounting to R5.3 billion from the China South Rail; asked Transnet to provide the Committee with the identities of the shareholders of the OEMs that conducted business with it, and reminded the entity it was required by law to reveal the ownership of those entities; wanted to know why there were no penalties on local content contracts; asked why Transnet had not reported the illegal CSR contract to the police; wanted to establish why Werksmans, instead of Webber Wentzel, had been appointed to investigate corruption that involved kickbacks amounting to R10 million; commented they had not received satisfactory answers when they asked the DTI and Transnet to explain how long it was going to take to finalise localization, because there was no need to import when the country could produce locally; and asked Transnet to update the Committee on the Naledi wheels contract.

Meeting report

Mr Siyabonga Gama, Group Chief Executive Officer (GCEO): Transnet, centered his presentation on a range of areas: local content verification; local content with the Department of Trade and Industry (DTI) prior to the Request for Tender (RFT) for 1 064 locomotives; the 1 064 locomotive acquisition; reasons for not suspending the China South Rail (CSR) contract; and local content challenges.

On local content and verification, he indicated Transnet had implemented contract management controls and processes which were being used regarding the original equipment manufacturers’ (OEMs’) reporting of local content delivery. Transnet had appointed appropriate resources for the execution and oversight of these contract management controls and processes. According to Transnet’s understanding, the South African Bureau of Standards (SABS) had been appointed as the official independent local content verification agency, and it was understood that SABS would be suitably funded by the fiscus to be able to perform its function. The legislation and National Treasury Instruction notes were silent as to who should carry the costs. To ensure that SABS was seen as independent, it was decided it should be funded by the fiscus and not by parties directly or indirectly affected by verification.

Transnet had had local content engagement with the DTI prior to the RTF for the 1 064 locomotive acquisition. During the Request for Proposals (RFP) preparation stages, Transnet hadengaged with the DTI on a continuous basis to ensure the RFP was compliant with the local content requirements. The designations were fairly new, and Transnet wanted to ensure the RFP complied in all aspects regarding local content. The DTI had provided Transnet with the local content documents that were required to be included in the final RFP. These documents were included in the final RFP. When the tender was completed, these local content documents, which the bidders had to include in their responses, were provided to DTI as agreed. The general understanding was that the DTI would manage and monitor the local content reporting by the supplier, including the verification thereof, and also the consequence management of non-compliance to the legislation by the supplier.

Then he enlightened the Committee about the1 064 locomotive acquisition. In August 2016, Transnet, the DTI, the Department of Public Enterprises (DPE), the SABS and the OEMs came to present to the Portfolio Committee on the localisation progress. Transnet reported that the local content documents for the 1 064 locomotive build programme had been submitted to the DTI as required for monitoring and auditing by SABS. It was also reported that the SABS was engaging OEMs regarding the monitoring and verification process. However, there was a challenge with regard to who should pay for the verification costs. Transnet continued to receive local content updates from OEMs while it awaited the local content audit.

Mr Gama took the Committee through some of the following challenges with the delivery schedules:

  • Setting of production lines;

  • Training on new systems and processes;

  • Language barriers;

  • Change of traction motor blower motors due to inadequate cooling.

  • Implementation of incorrect welding method on the under frame of the locomotives. This necessitated a recall of 20 already built locomotives for stress relief, as well as the introduction of pre-heating methodology on locomotive manufacturing going forward.

  • A longer than anticipated design period due to excessive vibration levels of the engine/main alternator combination. This was esolved and tested in March;

  • The move to Bayhead, Durban, from Koedoespoort, Pretoria;

  • An extraordinary requirement for foundation depth where jigs and fixtures were to be situated, due to the seabed geological formation.

  • Inadequate provision for modifications based on the outcome of acceptance type testing

He explained to the Committee the reasons for not suspending the CSR contract. The locomotive supply agreement made provision for a standard process that needed to be followed when the OEMs were not performing according to their contractual obligations. If Transnet wished to suspend the contract, it had to provide proof based on a tracked series of events that showed the contractor had failed to deliver according to the contract. To date, the CSR had been delivering locomotives according to the delivery schedule, and Transnet had issued delay penalties where the OEMs had failed to deliver in accordance with planned delivery. Similarly, for supplier development, non-compliance penalties were issued to the OEMs if they delayed on their supplier development obligations. A view of an OEM performance in terms of local content would be determined only once the SABS conducted an audit as the appointed DTI local content auditor.

Lastly, he identified the following local content challenges:

  • The number of Request for Quotations issued to the market for designated items.

  • The three-quotes system was an issue for suppliers, especially if they were repetitive and the parts were designated.

  • Turnaround times for exemptions applications took too long, resulting in tender closing date extensions.

  • Suppliers’ interpretation of local procurement vs localization vs local content.

  • Difficult to localise on the legacy fleet parts, as these rolling stock fleets were to be phased out in the next few years.

  • Difficulties in forecasting, especially on unscheduled maintenance, based on the nature of this procurement activity.

  • Interpretation challenges on the ramp-up period from the instruction note.

Discussion

Mr D Macpherson (DA) said Mr Gama was contradicting his team, because it had said in its previous engagement with the Committee that there were no penalties for non-adherence to compliance and localisation.

Mr Gama said there were penalties for non-adherence to localisation, but they did not apply to local content.

Mr Macpherson said it was known that Transnet had become a ‘ground zero’ for the Guptas to rob and loot South Africa of its resources. Mr Gama had met Mr Salem Essa of the Tequesta Group in Dubai, and he wanted to know what the relationship was between him and Mr Essa, because the Tequesta Group had received kickbacks amounting to R5.3 billion from China South Rail. He asked Mr Gama to provide the Committee with the names of shareholders of the OEMs that had done business with Transnet, and reminded him he was required by law to reveal the ownership of those entities. He also wanted to know why there were no penalties on local content contracts. He found it strange, because Transnet wanted to develop local content, but was not clear on supplier development -- why would the SABS not be able to do verification on local content? He remarked it was misleading to say there were locomotives that were manufactured in SA. It was possible the locomotives were assembled here. Finally, he asked why Transnet had not reported the illegal CSR contract to the police.

Mr Gama, responded that the ownership of the entities contracted to Transnet was very simple. General Electrical was listed on the New York Stock Exchange and had got of shareholders, and their names changed all the time because people bought shares time and again. It was difficult for Transnet to provide the names of the shareholders, because at the close of business things might have changed. Bombadier was a foreign-owned company. Transnet procurement procedures required them to ensure the company that was dealing with it was not blacklisted by Transnet. He stressed that Chinese entities were state-owned, just like the ones in SA.

The Chairperson interjected, saying that Transnet had indicated it did not know the shareholders of the OEMs and suppliers it had contracted.

Mr Gama said that in his presentation, he had shown a list of entities that manufactured components for electric and diesel locomotives. These listed entities were local. Transnet did not manufacture locomotives, except for only one locomotive that was manufactured locally. The rest were assembled locally. Regarding the CSR contract, he said many allegations had been reported about it in the SA media. Transnet had asked an independent forensics company to investigate the allegations in order to deal with the issues raised as soon as possible. The CSR had indicated it had to follow stringent procedures in its dealings, and had nothing to do with the company in Hong Kong. This matter was subject to investigation. When allegations were made, Transnet took them seriously, and it was difficult to say they were true or false until a forensic investigation had been done. He noted in their interactions with people to discuss business, some people met to discuss unethical matters. That was why Transnet wanted the allegations to be tested.

Mr Edward Thomas, Chief Procurement Officer: Transnet, explained that local content was driven by legislation, while localisation was one of the pillars that drove supplier development. The reason there were penalties on localisation was because it was not driven by legislation, whereas on local content there were no penalties because it was driven by legislation.

Mr Thamsanqa Jiyane, Chief Advanced Manufacturing Officer: Transnet, added that local content was subject to legislation designated through the National Treasury. When the tender was issued, there were exemptions that were made. On designated components, Transnet did not have the information because this was done through the DTI and Treasury. Transnet would only get to know of exemptions when the whole matter had been finalised.

Mr A Williams (ANC) pointed out he was disappointed with the responses and suggested they should be submitted in writing. South Africans expected Parliament to push for economic growth. He indicated steel companies were complaining about the practices of Transnet, because it awarded tenders and the people who got the contracts opened factories and manufactured the products. Regarding local content, he said an independent audit needed to take place and local content should be checked independently. Maybe some of these components were manufactured outside the country and the assembling was done locally. He asked the DTI to respond to the statement from Transnet.

Dr Tebogo Makhube, Chief Director: Industrial Procurement, DTI, said the issue was about different interpretations of the law. In terms of regulations, the DTI was designated to procure. The local content was a condition for the tender. The question was why there were no penalties for non-adherence to local content. The organs of state, according to the law, knew what to do when there was no adherence to local content conditions.

Another official from the DTI added that Transnet had indicated there were no penalties on local content. Concerning exemptions, prior to the evaluation of tenders, the DTI wrote a letter clarifying products that were exempted. All the details were given to Transnet. There were things that were supposed to be done locally, like alternators, but they had not been done. She said the regulations were clear on exemptions and designations. Though there were new preferential regulations, nothing had changed.

Mr Gama said that with regard to penalties on local content, there had been a communication issue between the DTI, the DPE and Transnet. He was not familiar with the letter from the DTI on exemptions. There would be an engagement with the three entities on what had transpired during the Committee meeting regarding penalties, but there was a common purpose to localise.

Mr Macpherson remarked the concerns of the Committee had got no basis according to what Transnet was saying. A lot of these trains were being assembled in SA, but when the Committee tried to figure out how local content was being put into these products, the answer was not clear. It was not clear why there were no penalty clauses on non-adherence to local content. The Department said local content was regulated and it was the condition of the contract. It was not clear why Transnet had included default clauses on contracts. The CSR had received a contract from Transnet, and Transnet knew from the beginning that CSR did not comply with the requirements. If Transnet wanted to protect its reputation, it must terminate the CSR contract.

Mr Ndiphiwe Silinga, Chief Legal Counsel: Transnet, regarding reporting the allegations about the CSR contract to the police, said the allegation around the acquisition of 1 064 locomotives at inflated prices was being dealt with by the Hawks. He had no knowledge of allegations of prices being inflated by R10m per locomotive. Internally, this allegation had been denied. A similar investigation was taking place in China, but there was no basis for not believing what the internal officials were saying.

Mr Gama said that supplier development and localisation were new in the rail sector, and that everyone was learning. There was a huge commitment to ensure they avoided economic flight, and that entities produced components locally in order to achieve the 55% to 60% target. This had been discussed to ensure it happened on a progressive basis. Transnet wanted to achieve more, but the situation was not perfect. He had asked the Department of Public Enterprises to engage with National Treasury and the DTI on the matter of localisation and supplier development in order to industrialise and make sure Transnet was the centre of excellence in locomotion manufacturing. It appeared there had been a lack of communication during discussions of components that may be unlocalisable now, but localisable in the future. It was not going to be easy for Transnet to put a penalty on everything while there were still discussions with the DTI.

Mr Williams commented that being on the learning curve was costing SA billions of rands. He found it hard to understand how miscommunication could be blamed for problems regarding localisation. He proposed the Committee should investigate this matter, as stipulated in Rule 227C of the National Assembly, which stated that Committees of Parliament may monitor, investigate or do an inquiry.

Mr G Cachalia (DA) asked for clarity on the maintenance contract amounting to R80 billion. He wanted to know why Werksman, instead of Webber Wentzel, had been appointed to investigate the corruption that involved the kickbacks amounting to R10 million. Did Transnet have plans to promote road transportation, because the entity appeared to focus only on rail, and might lose market share on road.

Mr Silinga, on using Werksman instead of Webber Wentzel, reported that leading to the signing of the contracts for locomotives, the process had involved negotiations and the drafting of contracts. Transnet had engaged the services of Webber Wentzel for the negotiations and drafting of contracts. When the allegations had surfaced, Transnet had then asked Werksman to investigate these allegations.

Mr Cachalia wanted to establish if Webber Wentzel had raised a flag on the issue of governance when it was dealing with Transnet.

Mr Silinga said Webber Wentzel was only providing advisory services, and he had no knowledge of any flag raised on the issue of governance.

Mr Gama, concerning the maintenance contract, said that 20% of the locomotives had been assembled in the country and carried a warranty of two years. The responsible OEM would fix broken components, if there were any, within the two-year period. The maintenance contract had not been entered into yet. There were many types of maintenance contracts that Transnet entered into. There would be maintenance contracts with each OEM. The long-sighted discussions they were dealing with were about contracts for maintenance. There was no contract which had yet been concluded.

Mr Jiyane added that Transnet Engineering had been maintaining the locomotives within Transnet for many years. They sourced components from the OEMs for maintenance.

Mr Silinga added that Werksman’s involvement in the 1 064 contracts had to do with the investigation around the allegations, not the maintenance. Mr Scott was with Webber Wentzel and was leading the negotiations and drafting of contracts between Transnet and Webber Wentzel. Mr Scott had never raised any issue on governance.

Mr Gama, concerning the focus on rail and losing market share on road, told the Committee they had discussed as a company that production of locomotives was going to be a programmatic event. The last locomotives had been bought around 2010. Transnet had been very aggressive in saying it could take more general freight. The entity undertook to buy more locomotives and was making steady inroads. As a result, there had been 24% increase in rail locomotives and containers. There had been an increase in general freight and taking of market share from road freight. However, road freight had potential to grow.

Ms L Theko (ANC) wanted to find out what plans were in place to change the system from being an assembler to a manufacturer.

Mr Gama said he invited the Committee to visit the Transnet plants in Pretoria and Durban to see local machinery in place. 50% to 60% was produced locally, though they had not reached the levels where they wanted to be. General Electric had developed suppliers that worked with Transnet, and these suppliers were also working with other outside companies. He mentioned that Transnet had 15% market share in the manufacturing of locomotives, which it wanted to increase to 40%. It was looking at a particular amount of cargo. There was a gradual need to produce reliable locomotives to meet logistical systems.

The Chairperson said her concern was with the ‘as and when’ policy, because it affected black industrialists.

Mr Gama explained that Transnet was into ‘as and when’ contracts with many entities and suppliers. The entity knew which suppliers to go to because they had been vetted, and the entity knew what these suppliers could do. However, they did not know how much to order per year. Entities set up businesses not knowing when an order was going to be made to them. Transnet ordered when it was necessary or when it needed things. It was a question of commerce. The ‘as and when’ policy was part of maintenance. He assured the Committee that some of those who had complained in the past were now not complaining, and were asking to manufacture locally instead of importing.

The Chairperson commented the Committee had asked the DTI and Transnet to explain how long it was going to take to finalise localization, because there was no need to import when the country could produce locally. The country needed productive investment. Overseas companies should be encouraged to open plants locally in order for the country to have a direct and effective skills transfer. This was not happening as speedily as the Committee would like to see it happening. She asked Transnet to update the Committee on the Naledi contract.

Mr Ali Tshabalala, Chief Procurement Officer: Transnet Engineering, said Naledi had been awarded a contract to supply a 34-inch wheel. That wheel was manufactured in France. The wheel needed to be tested before it was supplied and used for the rolling stock. The Transnet technical team had taken an accelerated test of the wheel instead of letting it run for two years. The contract had been given to Naledi, and it now supplied forged wheels. Transnet was not aware of that, and these forged wheels were produced in Europe and Italy.

The Chairperson said the Committee would try to seek clarity on the matter directly from Naledi Foundries. When it had received the report that it was supplying forged wheels, it did not believe it and no one had raised anything about it. The whole matter sounded had realistic.

The Chairperson wanted to establish why Transnet did not switch to supply and demand.

Mr Gama said the difficulty was this was a technical discussion, and some of it could only be believed when it was seen. That was why the Committee had to visit the plants and see the assembly line. Written submissions on Black Economic Empowerment (BEE) and local manufacturing of locomotives would be forwarded to the Committee, but it needed to experience things at first hand so that it could better understand their submissions.

The Chairperson asked Members to second Mr Williams’ proposal for a Committee investigation into the 1 064 locomotives’ procurement process.

Mr Macpherson supported the proposal, and said the terms of reference should be discussed and drafted by the Committee. The Committee inquiry was the one that could get to the bottom of the mess and bring accountability to the theatrical act that was costing SA billions of rands.

The Committee adopted the idea with no objections.

The meeting was adjourned.

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