Last week Friday, President Jacob Zuma unveiled a R4 trillion infrastructure roll-out plan for South Africa.
During his Keynote Address, he said:
“This year we decided to single out infrastructure for special focus. We are not saying that the other five job drivers are not important. They remain very key to economic growth and development. However, our view is that infrastructure development is a catalyst to sustainable economic development and to the improvement of the quality of life of our people in a most fundamental way… We must use that project management experience to change our country’s landscape and improve living conditions while growing the economy. We have developed an integrated, aligned and coordinated 20 year infrastructure pipeline. This is a necessary investment. The failure to invest in basic services in black communities over the decades of colonial oppression and apartheid is a critical element in the persistence of inequality today. To reverse the legacy of the past, we have already started building houses, schools, hospitals, clinics, nursing colleges, dams, power stations and other infrastructure.”
He proceeded further to say that:
“On economic infrastructure, we are creating enabling infrastructure such as rail, ports, energy, broadband and roads. No one can imagine a successful producer who lacks access to transport, telecommunications, water or electricity. There is a further benefit for economic development. Public investment requires huge amounts of inputs such as equipment, building materials, generators, cranes, trains and even tar for the roads. If all of these materials are bought locally, their production will give a real boost to the economy. That is particularly important given the uncertain global outlook. Therefore as a job creator, the infrastructure programme is a clear winner. Construction and maintenance alone will employ tens of thousands of people.”
In this extensive quote are summed up the critical challenges faced by our economy.
First, we must extricate the South African economy from its reliance on developed markets which are currently experiencing difficulties as a result of the global economic slowdown.
We will accomplish that by diversifying our production systems and processes and industrialising our economy, which would have the result drastically to reduce our current role in the international trading system as a producer and exporter of primary commodities and importer of value-added products.
Secondly, this is important in order to reverse the scourge of unemployment, poverty and inequality that is rampant in our society.
In this regard, the logistics and energy infrastructure, two of the largest investment programme in our infrastructure roll-out unveiled by the His Excellency, President Zuma, are the two vital enablers of economic activity and demonstrate by the sheer scale of their intended investment the direction our government intends to take with regard to transforming both the structure of our economy as well as its ownership patterns.
For this purpose, the rail system remains a core element of building a globally competitive logistics system to support global trade.
Rail, through its implicit economies of scale, has key advantages over road for the movement of large volume and heavy goods in that it decreases road congestion and road damages, whilst increasing road safety.
It also has less environmentally negative externalities and produces significantly less carbon emissions.
Yet, the last two decades have seen a massive migration of goods off the rail system and onto road.
Road transport has doubled in this period, while rail transport has decreased by 20%.
It is estimated that road externalities are costing the economy R34 billion per year.
The rapid migration from rail to road was a natural response to the removal of restrictive regulations which required special permits for bulk freight on the road.
Another factor of this migration was the inadequate rail system due to under-investment and a perceived unreliable performance by the operator.
A principal tenet of the South African government’s road freight strategy is to facilitate an optimum split of cargo between road and rail.
As a start, it is critical that we improve the quality of our rail infrastructure and associated operating equipment which will invariably contribute to improving the performance and reliability of rail.
In order to reverse the rail to road migration, Transnet has expanded its capital expenditure budget from R110 billion over five years to R300 billion over seven years.
Critical in this strategy is that 55% of the Capex will be investments in new logistics capacity, which goes beyond the predominantly maintenance expenditure typical of previous Capex plans.
Firstly, it needs to be emphasised that choosing our technology partners to provide equipment that is core to the reliability and competitiveness of our national infrastructure is not something that we do lightly.
Should this equipment be poorly designed or produced and should the ability to maintain it be inadequately localised, our entire economy will be put at risk.
Consequently, we are looking for partners that will give priority to our needs and show a serious commitment to delivering on the value we are looking for.
Secondly, it must further be emphasised that we have the objective to leverage our SOC procurements to promote investments in plant, technologies and skills in our national supply chains.
Our overarching economic objective in terms of this approach is to increase national economic activity, create jobs, decrease imports and stimulate industrial activities through enterprise development.
A key element of this process will involve moving from a transactional relationship between SOCS and their suppliers to a longer term, developmental relationship.
We have been putting considerable effort into enhancing our procurement planning so as to create a coherent demand platform on which these relationships can be built.
The synthesis of the procurement planning is that when procuring complex equipment we look at three different dimensions of value:
- we are procuring equipment,
- we are procuring an industry and supplier development process, and
- fundamentally, we are procuring to ensure transformation of our economy which delivers equitable share of wealth through our buying power, so that we address racial economic disparities.
We are aware of the economic cost associated with all these different dimensions of value and believe that it is an appropriate growth path we should take so that more South Africans can have a stake in the economy and to ensure proper distribution of economic benefits.
Let me briefly expand on what I mean:
- Firstly, when we buy equipment we take into account the projected productivity of the asset, the initial capital cost, the full life-cycle cost as well as a risk factor related to the reliability of the equipment. Hence, we strive to select a supplier whose equipment will give us the best over-all return on our investment;
- Secondly, when we buy equipment we are procuring commitments by suppliers to enhance the capabilities of our national industry. This can take the form of, for example, direct investments in plant, technology transfers, skills development programmes and commitments to promote exports from South Africa. All suppliers are given an equal opportunity to compete to make the best industrial development value proposition to us. This value proposition is not necessarily limited to only the locomotive supply chain. Those who are most competitive in this area will have a considerable advantage in providing us with the value we are looking for.
- Thirdly, when we procure equipment we are procuring a process of empowering historically-disadvantaged people to participate in the mainstream of our economy and of creating new opportunities for such participation. This can include for example, equity participation opportunities, management development programmes and small business development processes.
We are here today to announce the procurement of 95 electric locomotives from China South Rail (CSR) Zhuzhou Electric Locomotive and Basadi Matsete.
This tender required the suppliers to meet a minimum of a 60% localisation threshold in order to qualify.
The consortium and Transnet have agreed on a tight delivery schedule that will see the first batch of locomotives delivered to TFR by December 2013, while the last batch is planned to be delivered in September 2014.
The parties committed to produce the majority of the locomotives locally.
The first 10 locos will be assembled in CSR’s factories in China, while the remainder will be made in South Africa in line with the agreed supplier development targets of 60,5% of the total value of the contract.
This marks a significant increase on the previous levels of localisation in the production of electrical locomotives and is in line with the New Growth Path and social compact agreement on local procurement.
We believe this will inject massive economic benefits and lead to the development of intermediary sectors who will serve as suppliers because fifty percent (50%) of the capital budget will be spent on rail.
This tender is historic in that it marks the first time that Transnet has procured locomotives to provide capacity for our key rail corridors from a Chinese Original Equipment Manufacturer (OEM), which reflects our commitment to the BRICS strategic trade and investment relationships within this emerging economic community.
It also recognises the tremendous progress made in China to build globally competitive capabilities in sectors involving the manufacture of highly sophisticated capital equipment.
In the next quarter, Transnet will implement a locomotive fleet procurement of unprecedented scale in South Africa’s history, amounting to approximately R35 billion for 1064 locomotives made up of 599 new dual-voltage electric locomotives and 465 new diesel locomotives,
The procurement will lay a platform for a seven-year strategic partnership between Transnet and their suppliers in the locomotive cluster.
We also expect the scale of the procurement to increase in the second phase of the procurement in seven years time.
This process will not only significantly expand Transnet’s haulage capacity with reliable modern locomotives to enable the move from road to rail, but we also expect to more than double the amount of local content in locomotives from this procurement.
This Capex programme puts South Africa on the path of becoming one of a number of manufacturing centres competing on the basis of price and quality.
We need to set up a global centre of excellence for targeted capabilities in partnership with a leading OEM, which will involve coordinated investments in manufacturing facilities, skills, university curricula, technology transfers and technology development facilities.
In summary, we need to develop a technologically-dynamic and globally-competitive industrial cluster supporting the needs of our rail system.
In this context, we want to see our OEM partners become truly entrenched in the South African economy, in exchange for a partnership with the SOCS in our infrastructure build programme.
We would like to work with our OEM partners to make direct investments into the South African economy and to develop South African companies to become part of their global supply chains.
We are seeking to partner OEMs not just for the South African market, but also for the purpose of exporting to the regional and global market.
In summary, we would like to see our partners make South Africa the design and manufacturing hub for their regional activities, not just in the locomotive supply chain, but in all the spheres in which the OEM is active.
In conclusion, I would like to congratulate Transnet, CSR and Basadi Matsete on the closure of this historic procurement which, I hope, marks the start of a long and fruitful partnership between the three companies.
I thank you.
