The Role of State Owned Companies in Supporting

Localisation and Local Procurement in South Africa

PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES

16 March 2016

• An overview on some of the economic changes facing South

Africa • Role of the SOCs in Economic Development • PPPFA and Local Content • Regulation 9.3 of the PPPFA • List of Designated Sectors (approved, outstanding and not

approved) • Highlights on Designated Sectors • Priority areas for consideration

Purpose of the

Presentation

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The National Challenges

The National Agenda

Government Response

• Unemployment • Inequality • Skills shortage • Growing population • Infrastructure shortage • Limited industrial capacity • Reliance on resource export

• Job creation • Skills development • Normalising society and economy • Local procurement and economic

growth • Infrastructure development

• National Development Plan

• New Growth Path • IPAP • Local Procurement

Accord • CSDP

• B-BBEE • SME development • Overall policy

reform • PPPFA, designation

Socio-economic challenges facing

South Africa

Problem statement

• The problem in South Africa is that the SOCs have not been investing adequately infrastructure development.

• Consequently the binding constraints to industrialisation include:

decades of under-investment in economic infrastructure;

rising administered costs such as high port and freight charges with port charges amongst the highest in the world; and

electricity supply challenges and rapidly rising cost amongst others.

• The resolution of all these depends on how the SOCs carry out their mandate.

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Economic Challenges

Facing SOCs

1. Problem statement 5

0

2

4

6

8

10

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1960-69 1970-79 1980-89 1990-99 2000-14

Perc

enta

ge

Years

Public Sector CapitalFormation as % of GDP

Fixed Investments by the

Public Sector

RSA: Manufacturing challenges &

the need for localisation

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• The manufacturing sector’s contribution to SA GDP declined sharply from 20.9% in 1994 to 11.6% by 2014, whilst the mining sector’s share increased from 7.3% to 9.2%.

Agriculture, forestry & fishing4.6% Mining & quarrying

7.3%

Manufacturing20.9%

Electricity, gas & water3.6%

Construction3.1%Wholesale & retail trade,

catering & accommodation

14.2%

Transport, storage & communication

8.7%

Finance, insurance, real estate & business

services16.0%

Community, social & personal services

5.3%

General government16.2%

Sectoral composition of the South African economy in 1994

Source: IDC, compiled from SARB data

Note: Sector share according to GDP at basic prices (current prices)

Agriculture, forestry & fishing2.4%

Mining & quarrying9.2%

Manufacturing11.6%

Electricity, gas & water3.0%

Construction3.7%

Wholesale & retail trade, catering &

accommodation16.6%Transport, storage &

communication8.9%

Finance, insurance, real estate & business

services21.5%

Community, social & personal services

6.0%

General government17.1%

Sectoral composition of the South African economy in 2013

Source: IDC, compiled from SARB data

Note: Sector share according to GDP at basic prices (current prices)

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2015 Source: SARB, IDC, the dti

40

45

50

55

60

65

70

75

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ma

nu

factu

rin

g im

po

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& e

xp

orts

(a

nn

ua

l %

g

ro

wth

)

Year

Manufacturing exports (% of merchandise exports)

Manufacturing imports (% of merchandise imports)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

10

12

14

16

18

20

22

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20022003 2004 2005 2006200720082009 20102011 20122013 2014

Ma

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MV

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% o

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DP

)

Year

Manufacturing import leakage (SIC 3) Manufacturing, value added (% of GDP)

Manufacturing Import

Leakage in South Africa

1. Problem statement

• The 9PP identifies the role of SOC’s as fundamental to the SA economic recovery:

• Direct impact on growth e.g. Energy and Broadband constraints are potentially costing the economy 1% each,

• Transport incl. port infrastructure is constraining value-added exports,

• Not localising will worsen the current account deficit and become a brake on economic growth,

• Resolving the infrastructure constraints and localising infrastructure inputs could add as much as 2.4% – 3.2% to our GDP.

• Global experience suggests that SOCs are in a unique position to drive industrialisation through investments in infrastructure and direct investment and support for building domestic industrial capabilities.

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The Role of SOCs in

Economic Development

Problem statement Cont’

• Another critical lever for industrial development is localisation, when

SOCs invest in infrastructure they must ensure they use locally

manufactured products.

• This is in line with the Government’s local content programme as well

75% local procurement target.

• This industrialisation programme therefore is not a narrow

departmental objective but a national one that needs to be committed

to by all state agencies

• SoEs must be the drivers of our industrialisation programme and there

are several policy levers that empower them to do that.

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Procurement Levers

National Industrial Participation Programme (NIPP)

– Applicable to all government procurement, except State Owned Companies (SOCs) that

have opted for CSDP

– Imported Content => US$10 million

– Direct NIPP & Indirect NIPP

Defence Industrial Participation

– Managed by Armscor and applicable to all defence procurement

– Imported Content => US$2 million

CSDP

– Managed by DPE in conjunction with State Owned Companies (SOCs)

– Used in instances where there are long term Supplier Development Plans in place

Designation & Local Production

– Used in instances where government has carried out an in depth analysis of the sector and there is local production capacity and public procurement opportunities.

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Different and Linked Aspects

of Localisation

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Key policy objectives Focus areas

Industrialisation Leveraging procurement spend to foster

industrial and competitive capabilities in the

South African economy

Localisation

Country

Province/Municipal

Site/Operation

Utilisation of procurement spend to develop

South African based suppliers (integrating B-

BBEE and Black Owned suppliers)

Skills development Increasing the skill base (number and skill

level) of South African workers, especially in

areas where there is a national scarcity of

skills

Employment and job creation Creation of new jobs directly and indirectly

by suppliers in the value chain

Enterprise and supplier development

programmes

Providing a platform for SA-based suppliers

to develop into national and international

suppliers, through Capability, Capacity &

Competitiveness development

SD&L evaluation criteria

The evaluation criteria seeks to increase SD&L evaluation score allocation in the overall scoring and to ensure all dimensions of local development are considered:

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Eskom’s Supplier Development &

Localisation Criteria

Eskom’s Supplier Development &

Localisation Criteria

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Criteria Weight (%)

Total

Target

(%)

Proposed

Target (%)

Total Overall

Weighted

Score

Local Content to South Africa 30% 70% 0 0

Local to site 15% 10% 0 0

Procurement from LBS 15% 10% 0 0

Procurement from BWO (Local to

site) 10% 5% 0 0

Procurement from SBE(Local to

site) 10% 5% 0 0

Skills development 20%

0

Total 100% 0

Localisation Score. 0

Note: A Supplier’s tender response must achieve a total Localisation

score greater than 60% to get to the next stage of tender evaluation

process.

Some suppliers might be locally-based but importers.

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Understanding of Local Content

Value Chain & Linkages

Supply Chain Programme Management: Once off opportunity Manufacturing has longer term opportunity due to added

O&M phase

Design Material Manufacturing/

Construction Testing Commissioning O&M

Decommissioning/

Disposal

Sco

pe

Understanding Current Industry Capabilities

GA

P A

na

lysi

s

Research ad Development

Finance / Funding

Skills Development

BBBEE / Transformation

Intellectual Property / Technology Transfer

Appropriate Legislation

Procurement Process

Contract Management (Penalties and Incentives)

Supplier Relationship Management

PPPFA and Local Content

• Preferential Procurement Policy Framework Act (PPPFA) was

enacted in 2000, and its Regulations promulgated in 2001

• The Regulations were amended in 2011 and new regulations

came into effect on 7 December 2011.

• Section 9: Local Production and Content

• Paragraph 9 (1) of the Regulations empowers the dti to designate

specific industries where tenders should prescribe that only locally

manufactured products with a prescribed minimum threshold for

local production and content will be considered

• To give effect to government decisions on public procurement;

sectors/products were and are being designated for local

production 15

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Key Elements of a Local Content

Programme

Source: Adapted from Lunde (2013)

“Local Content” means that portion of the tender price which is not included in the imported content, provided that local manufacturing does take place within the borders of South Africa (SABS Approved Technical Specification SATS 1286:2011)

Designated Products

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Minimum Sectors Forwarded to the NT Minimum

Local Content for Designation** Local content

Thresholds Thresholds

Description Date Description Date

1. Rail Rolling Stock 65% 16-07-12 1. Building & Construction Materials 14/15 Q1

2. Bus Bodies 80% 16-07-12 2. Yellow Metals 14/15 Q1

3. Canned/Processed Vegetables 80% 16-07-12 3. Two Way Radios 14/15 Q1

4. Textile, Clothing, Leather and 16-07-12 4. Solar PV Components 14/15 Q2

Footwear Sector 16-07-12 5. Rail Signalling System 14/15 Q2

5. Solar Water Heaters (collectors 1. Guidelines on the Implementation of Reg. 9.3 of the PPPFA 11-12

and storage tanks/geysers)

6. Set-top Boxes 30% 26-09-12

7. Certain Pharmaceutical Products Per Tender 07-11-12

8. Furniture Products 85% 15-11-12

9. Electrical andTelecom Cables 90% 08-05-13

10.Valves Products and Actuators 70% 06-02-14

11. Working Vessels 10-100% 01-08-14

12. Residential Electricity Meters 50-70% 01-08-14

13. Steel Conveyance Pipes 80-100% 28-09-15

14. Powerline Hardware and Structures 100% 28-09-15

15.Transformers 10-100% 28-09-15

Designation Matrix

70% 19-07-12

Sectors Already Designated*

100%

Leveraging South Africa’s Rail

Industry Strengths

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As the Continent’s major rail country, the South African rail industry is uniquely

positioned to support the growth in freight and passenger rail on the continent…

• South Africa is the continent’s leading rail country in terms of both freight and

passenger rail infrastructure, as well as rolling stock assets.

• The South African rail sector has developed capabilities, skills and expertise as

manufacturer, assembler and supplier of rail infrastructure, rolling stock and

components, including the refurbishment and rejuvenation of aged rail and rolling stock

infrastructure and components.

• South Africa’s own substantial investments in its freight and passenger rail and rolling stock

infrastructure over the next decade will further strengthen and deepen its participation

in important aspects of the rail industry value chain.

Progress on Designated

Sectors

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• Rail fleet procurement

Under rolling stock, PRASA and Transnet Freight Rail (TFR) are implementing CAPEX

programme: Alstom-Gibela will build the PRASA coaches/EMUs (3600 coaches at the cost of

R51 billion) and the 1064 locomotive programme is delivered by GE & CNR for diesel locos and

CSR & Bombardier for electric locos. The following deliveries have happened to-date:

o First 2 of 20 train-sets for PRASA built by Alstom-Gibela in Brazil. The local factory is being

established in Nigel to assemble the remaining units

o First 6 of Class 44 diesel locomotives built by GE in the USA. The assembly of the remainder

has commenced at TE Koedoespoort

o First 40 of Class 22E dual voltage electric locomotives built by CSR in China. The assembly of

the remainder has commenced at TE Koedoespoort

o CNR will do the assembly at TE facility in Durban and also working with MTU SA for local

assembly on diesel engine

o Bombardier will do the assembly at TE facility in Durban

Progress on Designated

Sectors

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• Rail fleet procurement

At the back of these OEMs work packages:

o IEC Holden assembled the first SA made AC traction motors under the Bombardier loco

contract

o BT built a Propulsion and Controls Production facility in Elandsfontein

o Over 50 companies are benefiting from both the PRASA and TFR contracts directly or through

the Tier 1 suppliers. However, they are challenges (e.g. cash flow issues and weak balance

sheets) which has the potential to erode their installed capacity and be replaced with imports

Interventions have been made at the various foundries to improve competitiveness under the

National Foundry Technology Network

o Mitech, Guestro and Dhuva Foundries, amongst others, revamped their manufacturing

facilities with a state-of-the-art equipment to gear themselves to meet the local content

requirements for rolling stock and valves designations but have financing challenges

Rail fleet procurement

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Modern Fleet• PRASA wants to migrate from

1950’s technology to a modernfleet which is up to world standards

Rolling Stock

Fleet Renewal Programme

Modern Fleet

• PRASA wants to migrate from 1950’s technology to a modernfleet which is up to world standards

Programme Requirements• New Fleet requirement ~7224

procurement at ~360 coaches per year for two x 10 year contracts

• Total ~R123.5bn over 20 year period

Job Creation• Creating ~65 000 direct and

indirect jobs

Industrialization• Focus on industrialisation through

long term procurement aiming for above 65% of the value of a coach to be produced locally

Rail Rolling Stock

Opportunities

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Transnet National Ports

Authority (TNPA)

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• Transnet National Ports Authority (TNPA) and Transnet SOC Limited have adopted a

Public- Private -Partnership (PPP) model to finance new Operation Phakisa

infrastructure.

o TNPA has committed R7 billion for public sector investment in domestic ports to support industrial opportunities in the ports

• Establishment of Saldanha Bay as an oil and gas hub:

• Total scope of initiative amounts to R9.2 billion investment (public and

private).

1. Offshore Supply Base – work has commenced.

2. Berth 205 (rig repair facility)

3. Mossgas Jetty (extension)

• the dti designated working vessels for local procurement (60% local content).

National Treasury issued Instruction Note.

• A R1.4bn tender by TNPA for the procurement of tug boats was awarded to a South

African company in support of local procurement

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Paramount GroupDenel SOC LtdAviation,

Aerostructures,Dynamics, OTR

TurboAfrica (Pty) Ltd

Micromax (Pty) Ltd

Daliff Precision Engineering (Pty) Ltd

Cliff’s Way Engineering (Pty)

Ltd

African NDTCentre (Pty) Ltd

Council For Science &Industry Research

National Aerospace

Centre

TIER 1 & TIER 2 SUPPLIERS

Design, integration, assembly, &

manufacture of major and minor

sub-systems

TIER 3 SUPPLIERS

Design, manufacture and

integration of components

RESEARCH & DEVELOPMENT

Service provision

Universities

Aerosud Aviation

AISI

The Small African Regional Aircraft Program involves developing a 24 seat passenger / freight pressurised African air taxi. This can act as a base-load of demand for the sustaining and building of an entire cluster.

Role of Denel in Regional

Aircraft Development

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Defence’s role in Industrial

Development

Metals, plastics, fabrics,…

Railway rolling stock, transport & logistics

Engines, propulsion systems

Software, design,…

Automotive Road freight

Electronics

Mechanical & Electrical Engineering

• Regulation 9 (3) prescribes that “…where there is no designated sector, an

organ of state may include, as a specific tendering condition, that only locally

produced services, works or goods or locally manufactured goods with a

stipulated minimum threshold for local production and content, will be

considered, on condition that such prescript and threshold(s) are in

accordance with the specific directives issued for this purpose by the

National Treasury in consultation with the dti”.

Consideration:

– Constitutional and legal compliance – Economic and fiscal considerations – Long term public procurement plan and expenditure – Alignment with policy objectives, in particular the creation and

retention of decent jobs – Promotion of SMME’s, geographic spread, technological

capabilities – Local manufacturing capacity and security of supply

Local Procurement of

Non-Designated Products

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Priority areas for

consideration

• The alignment of procurement levers to optimise industrial development

– Develop and agree on instruments to support the government’s 75% Local

Procurement Target

– Finalise and implement guidelines on Regulation 9.3 of the PPPFA

• On-going efforts to secure stronger alignment with the Department of

Public Enterprises (DPE) and Transnet with respect to localisation and

supplier development in the rail procurement across all OEM’s in the rail

fleet procurement

• On-going efforts to secure stronger alignment with the National Industrial

Participation programme (NIPP) to secure investment in key industrial

sectors

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Priority areas for

consideration

• Participate in the PPPFA Reforms (amendment of the Act, Regulations and

Competition policy issues)

– Powers to deal with non-compliance on local content / designation

– An engagement is currently taking place with the Auditor General’s Office to

develop a framework to audit compliance and expenditure on designation /

local content

• Alignment of BB-BEE Scorecards (enterprise and supplier

development) and Competitive Supplier Development Programme

• Capacity building in local content management, planning, sourcing

and supplier development

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