Build Programme impact on local businesses, skills development, job creation and beneficiation: briefing by Department of Public Enterprises

Meeting report

Ms Matsietsi Mokholo , Acting Director General, Department of Public Enterprises (DPE), extended apologies on behalf of the Minister and the Deputy Minister. The Department wanted to share the policy context of build programme because it was not limited to one entity and in most cases, people associated the programme with ESKOM. Transnet was also incorporated in the programme and would be discussed as well. The Department, as a shareholder department, operated within a number of policies that defined the national development priorities. As an entity, the DPE was aligning itself with the National Development Plan (NDP), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP), amongst other policies. Each of the policies had been broken down in terms of the policy’s strategic focus and relevance to the Department in its desired outcomes.

Ms Mokholo  said the NDP defined the 2030 vision and was a long term plan. The plan set very ambitious targets for the country, and focused on aspects of the NDP that were relevant to the DPE and took on the role of the state and State Owned Companies (SOC) to drive the developmental agenda. The expected outcome for the NDP strategic focus had been a 30% increase in investment expenditure of GDP at a 5% growth rate. However, the growth rate had now been reduced to 2%. It was expected that unemployment and poverty would be reduced through this strategic focus.

The NGP’s main strategic focus was how to address structural impediments created by uneven growth levels. The expected outcome was the creation of five million jobs by 2020 as well as an increased labour absorption rate of the economy to over 60%.

The country’s industrial base had not been performing well due to the historical economic reliance on resources which had had unintended consequences on some sectors of the economy, like manufacturing, which was suffering. The DPE wished to reverse the trend and ensure creation of an industrial-based economy by accelerating growth of priority sectors -- like automotive, clothing and textiles, pharmaceuticals and metals. The desired outcomes were enhanced competitiveness of the manufacturing sector, development of new industrial capabilities and expanding employment in the manufacturing sector.

All these policies had been translated into an action plan for the DPE through the Medium Term Strategic Framework (MTSF) set for a period of five years (2014-2019). The MTSF objectives had been plotted for each SOC. For instance, there were specific activities that Eskom was responsible for, to support the MTSF goals, as well as the need to support the Presidential Infrastructure Coordinating Council (PICC) through its strategic programmes. In addition to activities in the build programme, there were still other activities that SOCs could carry out to contribute to economic growth and support the MTSF. The DPE would provide more details about the MTSF and specifically what it would be doing to support it, when presenting strategic plans at an upcoming meeting.

In terms of industrialisation and localisation, the DPE had established the Competitive Supplier Development Programme (CSDP), which focused purely on SOCs within the Department’s portfolio. The programme was piloted through Eskom and Transnet, with engagement from the National Treasury and the DTI. There was interest to expand outside the portfolio, as it would be a positive contribution by the SOCs.

It was a known fact that investment in the economy by the private sector had not been at an optimum level. The DPE had looked at the rationale for this. It was found that if the state was unable to create and catalyse an environment that was conducive for private sector investment, the rate of investment for the private sector would be slow. To catalyse the environment after a private sector halt following the 2008 recession, the Department had pushed SOCs to invest, which had put a strain on the balance sheet of SOCs as well as the fiscus. The current electricity challenges and the challenges on ports and rail infrastructure were a clear sign that there had not been enough infrastructure capacity to drive economic activities. Now the Department had to play catch-up, which was creating a deficit in time and resources. The projected economic growth in the NDP would not be realised if investment was not accelerated, and the build programme of Transnet and Eskom was beginning to do that. It was also important not to create a perception that the state did not require the private sector in investment. There was a need for a complementary relationship between the public and private sectors. Involvement of the private sector in the rolling out of infrastructure together with the SOCs was encouraged, because the fiscus remained constrained and higher tariff adjustments were no longer feasible. Sustainable funding models for infrastructure development was crucial for this purpose.

Transnet Program

Ms Kgomotso Modise, Deputy Director General: Transport Enterprises, DPE, said that to contribute to the build programme, Transnet had embarked on a market demand strategy (MDS) in order to contribute to the growth of the economy. Previous strategies embarked on by Transnet had focused on investment, but with the current strategy, investment levels had been heavily accelerated. The MDS was about rolling out about R300 billion of capital investment over a period of seven years. The MDS investment was meant to expand the rail, port and pipeline infrastructure to ensure sufficient capacity to move the required freight in the country, as well as to export freight to other countries. In addition the MDS was ensuring that Transnet maintained continued financial stability and strength. Through investments, the balance sheet of the company had been strengthened to ensure that Transnet was able to generate revenue.

Ms Modise said the MDS was also meant to significantly improve productivity and operational efficiency through the various investments that had been made in infrastructure and the leasing of equipment required to move freight. In addition the MDS aimed to shift traffic from road to rail, thereby reducing the cost of doing business and lessening carbon emissions. This did not necessarily mean that the price of the services would decrease, but it meant that through efficiencies and increased productivity, Transnet would be able to gain from these investments. The logistical supply chain would actually become more efficient and bear more benefits for the country, reducing the actual cost of doing business due to the increased efficiencies. The MDS would also enable economic growth, thus contributing to job creation, skills development, localisation, empowerment and transformation opportunities.

Transnet’s seven-year capital investment plan currently stood at R336.6 billion. The bulk of it was allocated to freight rail investment because the bulk of Transnet’s infrastructure was rail infrastructure -- locomotives and wagons that were used to move freight. Due to the level of under-investment in these assets throughout the years, the bulk of this capital investment had to go to freight rail to ensure improvement in the productivity of rail assets. The remaining 37% of the investment capital was divided as follows; engineering 2%, National Ports Authority 16%, port terminals 15% and pipelines 4%.

One of the key projects that Transnet had engaged in was the Strategic Infrastructure Project (SIP), which has five components. SIP 1 was about developing a heavy haul corridor to the Waterberg coal fields to increase the export coal rail capacity through Richards Bay port up to 81 million tonnes per year. The SIP 2 project was about the National Multi Product Pipeline (NMPP) which was a strategic investment to transport petroleum products to the inland market over a network of 555 kilometres. However, the project is five years behind schedule of its intended completion date. Within SIP 2 ,Transnet would be expanding and establishing a new inland port terminal at City Deep and Karsene, Sentrarand, Pyramid South and Tambo Springs, as well as developing the Durban container capacity.

SIP 3 entailed the relocation of the manganese export terminal from the port of Port Elizabeth to the port of Ngqura, as well as increasing the capacity to 16 million tonnes per annum. SIP 5 entailed further expansion of the export iron ore channel from the current 60 million tonnes to 70 million tonnes. Thereafter there would be incremental improvements, in line with customer demands. Within the project, Transnet would be acquiring 1 219 locomotives for general freight business, and 100 locomotives and wagons for coal.

In addition to the SIP projects there was also the Swazi Rail Link project, which entailed the construction of a new rail line as well as the reconstruction and upgrade of existing rail links from Lothair in South Africa through Swaziland in order to move general freight traffic from the export coal line. The general freight business required infrastructure revitalisation. Under-investment in past years meant that Transnet had to play catch up to improve its infrastructure to ensure it was fit for purpose and able to cater for capacity ahead of demand.

In 2014, the government had initiated Operation Phakisa, which was an initiative championed by the Presidency with the Department of Environmental Affairs, to accelerate investment in stimulating the marine economy. The objectives of Operation Phakisa were to increase the maritime contribution to the GDP by between R14 bn and R23 bn by 2019 and generate 40 000 to 50 000 jobs by 2019. The Transnet National Ports Authority (TNPA) had been identified as a critical role player in implementing the initiatives of Phakisa.

The TNPA was responsible for key infrastructure projects, such as the acceleration of identified ship or rig repair, and supply base investments at the Port of Saldanha. Transnet was refurbishing the general maintenance quay for oil and gas supply as well as investing in a rig repair facility at Berth 205 and extending the Mossgas quay. Over the next five years, Transnet would be involved in the refurbishment of existing ship repair facilities in Durban, East London, Port Elizabeth, Mossel Bay and Cape Town ports. Other projects included dredging at the port of Richards Bay to accommodate a floating dock and refurbishing the East London slipway to accommodate a boat building facility. Within Operation Phakisa, Transnet was also engaging the private sector to ensure that all the investments required could find some collaboration with the private sector. Even though investments for Operation Phakisa had been provided for in Transnet’s capital plan over the seven years and beyond, there was still room for private investors, whether in the form of funding or operations. Transnet was also prioritising projects which should come first in order to take consumers’ needs into consideration.

Job creation as a result of the build programme was modelled on Transnet’s macroeconomic impact model, to show the number of jobs that would be created, whether direct or indirect. It was estimated that 540 000 direct and indirect jobs would be created. Through the build programme, procurement spending would be leveraged to increase localisation and therefore maximise local job creation. In addition to the direct and indirect jobs, another 480 000 job opportunities were expected to be induced through Transnet’s spending.

Transnet was expecting to spend R1 billion per annum in skills development to support the build programme over the next seven-year MDS period. In total, it was expecting to train over 3 000 artisans and 1 600 engineers.

The localisation and supplier development outcomes from the Competitive Supplier Development Programme (CSDP) also entailed the development of a supply chain at Transnet that made it much easier and cheaper for Transnet and its supplier base to be able to deliver on the MDS programme. Looking at finalised contracts using the CDSP programme, and the benefits that came out of it, Transnet had managed to promote the objective of increased localisation and industrialisation. Recently a R50 billion contract had been awarded to four global original equipment manufacturers (OEMs) to build 1 064 locomotives. CSR Zhuzhou Electric Motives and Bombadier Transportation South Africa were contracted to supply 599 electric locomotives. General Electric South Africa Technologies and CNR Rolling stock South Africa were contracted to supply 465 diesel locomotives. The award of these contracts had stringent local content, skills development and training commitments, as dictated by the Supplier Development and Localisation (SD & L) programme. The OEMs had complied with, and exceeded, the minimum local content criteria for rolling stock of 60% for electric locomotives and 55% for diesel locomotives.

ESKOM Build Programme

Ms Makgola Makololo, Acting Deputy Director General, responsible for Energy, said she would present Eskom’s build programme in terms of skills development, job creation and industrialisation, particularly the projects at Medupi and Kusile power plants. Within the MTSF, a target had been set for Eskom to improve the reserve margin by 19% by 2019, even though the projects had started before the current MTSF activities. The projects were also expected to contribute to 25% of GDP investment. Eskom also participated in SIP 9 and 10, which talked of new generation and investment in transmission and distribution infrastructure. Through the build programme, Eskom had accelerated the supplier development and localisation initiatives.

The Eskom presentation was more of an account of how the build programme had unfolded -- for instance, some of the achievements insofar as supplier development and localisation was concerned. The supplier development role was to increase the capacity and capability of local suppliers across Eskom’s value chain to source supply competitively and get fair pricing. The strategic imperative was to create an enabling environment for new suppliers by identification of priority and high impact commodities which were not locally available in South Africa, as well as creating an enabling environment for the development of new suppliers to do business with Eskom. Secondly, Eskom was set to develop and grow existing emerging suppliers by sourcing Exempt Micro Enterprises (EMEs) and Qualifying Small Enterprises (QSEs) from the data base, and through industry analysis for development to increase capacity and capability to contract with Eskom in high impact areas. The third strategic imperative was to grow emerging suppliers into sustainable large to medium enterprises to ensure participation in bigger projects. For instance, some suppliers had been in the supply chain for a number of years but were not able to grow into medium or larger sized entities.

The strategies would be achieved by creating clear linkages to priority or high impact spend areas by ensuring access to local suppliers and understanding of supplier types. Strategic partnerships would be established with both local and international suppliers to ensure that whatever programmes Eskom was involved in, there would be a large supplier or skills base available.

So far, contracts to the value of R150 billion had been awarded and R102 billion was the total local content committed by suppliers, representing 66% of the total contract value. As of December 2014, the cumulative local content actual spend had been R78 billion, amounting to 76% of the local content contracted out. An amount of R43 billion of the local content contracted had been committed for sub-contracting to empowerment companies, such as large black suppliers, black women-owned companies, and small and medium entities.

In terms of skills development, since the inception of the respective projects, a total of 9 689 people had been identified to be trained by the end of September 2014. The target had been exceeded by December 2014, with 9 957 people trained. Currently, 2 277 learners were being trained. SOCs had a principle of training for their own needs, but also in general to create a pool of talent and skills for the South African market.

Eskom was committed to contributing to the government’s objectives of creating jobs and developing skills and boosting the local economy. Eskom had a four-year action plan, with set targets for job creation. As of December 2014, a total of 24 251 jobs had been created by Eskom and its suppliers in Medupi, Kusile and Ingula.

Eskom had a significant impact in local development as a result of the new CSDP build programmes, which involved suppliers making a commitment to investment in local manufacturing activities. Since the inception of CSDP in 2008, supplier commitment to investment was sitting at R1.2 billion, which was 82% of the value to the end of the project. The largest suppliers with significant values for commitment were Hitachi, Alstom and Voith Siemens. At the end of the programme, there should be clear local benefits.

Some of the projects and joint ventures committed in the programme varied from infrastructure investment. Some of Eskom’s suppliers, such as Exxaro, had jointly invested R180 million in roads upgrading in Lephalale. There had also been investments in health and education facilities. Various projects had been achieved through Medupi and Kusile with various suppliers and joint ventures.

Medupi also had programmes that were more focused on high impact development, such as engineering and doing joint ventures between smaller suppliers and large suppliers to be able to develop engineering capabilities that could be employed at the end of the programme when the station became functional.

Kusile prioritised education on its corporate social investment (CSI) list by investing in a number of schools to ensure benefits in the community and also to enjoy support from the local communities. At the inception of the build programme, one of the drivers of labour unrest was the fact that local people were not benefiting from projects that were in their own areas. A lot of investment had gone into ensuring that there was local beneficiation within the local communities.

The Hitachi project had a commitment of R1.6 billion to invest in the know-how and technology transfer, to ensure that at the end of the programme there would be local capability to maintain the Kusile boilers. In addition there should also be capability to manufacture the boiler pressure parts. A steel manufacturing facility was being created in Wadeville, in the east of Johannesburg. The construction of the ducting and bunker workshop on the Medupi site had also been completed. Equipment had been erected at Medupi and it was made sure that there were local capabilities to provide services which would be utilised on an on-going basis within the power plant. It had also been ensured that at the end of the project, Eskom would be in a position to have a wider supply base to source these resources, unlike long-term OEM contracts, which had relatively low leverage.

The Siemens partnership had brought a R20 million investment in a Further Education and Training (FET) college in Limpopo. A Power Academy had also been constructed in eMalahleni in Mpumalanga. In addition, there was an NX Air Switchgear production line which had produced most of the equipment used at Ingula power station. All this showed the leverage that could be used to ensure that local capabilities were improved. As such, subsequent projects would have greater benefits for the South African economy and its balance of payments, reducing the need for importing material and equipment.

Discussion

Ms N Mazzone (DA) asked Transnet for an update on the building of a pipeline from Richards Bay to Johannesburg, as there were numerous questions about the project, with deep concerns about time constraints.

With regard to Eskom, in terms of skills development and job creation, she asked if it was true that just over 1 800 engineers were going to be retrenched, based on race. This was highly problematic, as she did not want to see highly skilled labour being lost simply because of skin colour. In addition, these were trained engineers who could pass on skills. She wanted to know if the job creation programme that Eskom had embarked on was race or gender based. What kind of job creation was being looked at, considering that there could be a group of people who were being fired for being white?

Ms Mazzone asked why Eskom used middlemen instead of going directly to the source. She referred to a recent story in the media regarding the use of diesel. She wanted to know why a middle man was needed, because Eskom was a big company that could manage going directly to source. In addition, Eskom bought materials or inputs in bulk and should be getting discounts from suppliers. She understood the need to create jobs, but it should not be at the expense of an already financially cash-strapped organisation. Why did Eskom not go directly to PetroSA, or to whoever supplies diesel directly, thus avoiding the middle man scenario.

She asked for some background on the suppliers used in the build programme, because when it was said that the supplier was Alstom, and the amount invested was R106.9 million, in her understanding Alstom had had to be replaced by Siemens at the Medupi project to finish the computerisation programme of Medupi. Why was Eskom still using suppliers who had created problems in the past?

Dr Z Luyenge (ANC) said he appreciated the coordinating role the DPE played. He asked for clarity on what Transnet had been doing. It was not very clear as to how the localisation concept would really apply, because the expertise that existed locally and the competitiveness that was required might not be available for that particular aspect to be achieved. Was there no local supplier development programme that could be introduced by both entities to ensure the competitiveness of local suppliers?

Dr Luyenge asked if the re-introduction of the rail line in rural areas like Mthatha, Queenstown and Matatiele was to relieve the burden on the roads like the N2 and R61 in the Eastern Cape. These roads had high accident rates due to the huge trucks that were on the roads and the manner in which they destroyed the infrastructure being built by municipalities and provinces. It might not be Transnet’s mandate to manage the problem but nonetheless, what could Transnet do to address the problem?

In regard to Eskom, he said he had heard about community involvement in their programmes, but the level of involvement was not particularly clear. He asked Eskom to be specific and upfront. If there was a pilot programme that Eskom was intending to implement, it should be named, and a general usage of community involvement should not be applied.

He asked how Eskom ensured the safety of electricity lines that were crossing all over shacks in Cape Town and Alexandra in Gauteng. How could deaths be minimised or communities be utilised to raise awareness on the dangers of installing electricity like that?

Mr E Marais (DA) echoed Ms Mazzone’s question about progress on the pipeline, because to be so far behind and not being able to rectify the situation was bad. Clearly, there were problems which were not being highlighted. He asked for clarity on the SIP 5 project intention for further expansion of the export iron ore channel from 60 million tonnes to 70 million tonnes -- was it only for the Saldhana line, or was there another line? It would be interesting for the Committee to see the strategic plan for job creation so that it could match the annual achievements against the strategic plan.

Ms P Van Damme (DA) said she had enjoyed Transnet’s part of the presentation, as it was great to see that jobs would be created for thousands of people. However, there was a tendency to be great at creating great plans, but to be poor at implementation. She hoped that all the plans would be implemented and jobs created. As had been clearly stated, the backlog in infrastructure investment could be a hindrance to the plan, as the backlog was still at R30 billion in 2014. How much had Transnet succeeded in reducing the backlog? She echoed other Members’ concerns that too many people were losing their lives because of trucks on the roads, and it had been mentioned that Transnet was focusing on shifting traffic from road to rail. Would the Department provide the Committee with more details on what Transnet was actually doing?

Mr K Morapela (EFF) said he had questions about job creation and understood that Transnet’s presentation was more forward looking, but he was interested in understanding the proportion of the R50 billion contract to build locomotives that had been awarded to local businesses. Time and again he had raised a concern that sometimes the Department was very good at making presentations, but looking at the details of the presentation or in practical terms, there was a whole different story. The presentation was not clear on how many black-owned companies were benefiting from this contract. He asked the Department to be specific as to how many blacks or whites had benefited.

The manifesto of the ANC was that six million jobs would be created. He understood that not all of those jobs would be created by the Build program, but he wanted to know how many jobs DPE had created to contribute towards the six million target.

Mr Morapela asked how the SDP and the skills development programme were going to be affected, given the financial challenges faced by Eskom and the current developments. He asked what would happen to the 4 350 people employed on the multi-purpose pipeline once the whole programme was completed. What were the exit strategies, as these jobs were on a temporary basis?

Ms D Rantho (ANC) said that in the presentation on industrialisation and localisation, the presenter had talked about the contribution that the Department wanted to make towards increasing economic growth, as per the NDP. She was concerned about the efficiency, sufficiency and competency of the people to do what was expected. Resources might be available, but if there was insufficient or inefficient human capacity, then it might be difficult to achieve the intended goals of all the SOCs. She asked whether the seven year period for the Market Demand Strategy included training and human capacity development. Was the DPE certain that within the seven years it would be able to acquire the essential skills?

Ms Rantho raised a concern about rail transportation and the big trucks that were on the road. Did the DPE have a relationship with the Department of Transport? She was of the view that the Department of Transport should be involved in Transnet’s efforts to reduce road accidents by moving freight from road to rail.

She asked why the Department had presented only about Medupi and Kusile, and had referred only to Ingula’s expenditure. It gave the impression that there were no programmes at Ingula. Moreover, Ingula had also had an impact on surrounding communities.

Ms Rantho said that the Eskom presentation had alluded to the billions of rands that had been spent on infrastructure investment, but the amount spent on the refurbishment of the Oliphant Street Primary school had not been made available -- or perhaps it was an oversight.

The Chairperson referred to job creation, and asked whether there were any measures in place to ensure that part of the legacy projects were light industries, such as women sewing uniforms, or some light industry involving the youth? She asked for progress on how far the country was on moving from road to rail. She asked what the interventions for the infrastructure deficit were.

Ms Modise said that the pipeline from Sekunda was still in the feasibility study phase, and Transnet was waiting for the gas master plans from the Department of Energy.

Ms Mazzone asked if these were the Gas Utilisation Master plans.

Ms Modise said they were. She added that she did not have the details yet of the Richards Bay to Johannesburg pipeline. However, she would forward the information to Ms Mazzone.

Localisation was applied through the Competitive Supplier Development programme (CSDP), as it included all the elements of localisation. There was a CSDP supplier development programme. Each and every contract awarded contained a clause that ensured a partnership with a local company. This applied to foreign companies who were awarded major contracts, as the DPE wanted to promote the objective of localisation. Within the contracts there were certain commitments which Transnet would expect the contractor to make. For instance, there would be a requirement to train local suppliers, local partnerships, skills development and skills transfer. The contracts took into account elements of localisation and industrialisation. Furthermore the Department was able to track development through the shareholder contact. At the beginning of each financial year, targets were set for Transnet to meet with regard to localisation and industrialisation.

She said that in support of the road to rail initiative, it would be helpful to sketch a structure of how the network was managed between the different rail operators. Transnet was responsible for rail infrastructure that carried freight, whilst the Passenger Rail Agency of SA (PRASA) was responsible for the network that carried passengers. Some of the freight rail lines were in the passenger networks. For instance, the Mthatha line had predominantly been carrying passengers, but the line was owned by Transnet and had been used to carry both freight and passengers in the past. However, since the freight business was no longer operational, the only feasible services that could be offered were for passengers, and even the passenger numbers were not enough to sustain the operation of the line in the long run. In the past, the line had been leased to the Eastern Cape government and a contractor had been engaged to run the services, but unfortunately the services were just not feasible and the operation had ceased. In cases where there were lines that were not being used in certain areas, the lines were maintained for a reason. The main reason was that although the service was not feasible, the line might be in the branch lines which were mainly in the rural areas. Transnet had come up with a strategy that was meant to introduce private sector operators on to such lines, because it could be much more efficient or feasible if operated by the private sector. However, she could not say for certain if the private sector could operate the lines on a scale that would be sustainable, as the private sector would probably use different models to the ones used by Transnet. Currently the strategy was in the implementation phase, as the public had already been invited to bid for operation of branch lines.

Ms Modise said the National Multi Product Pipeline (NMPP) was envisaged to be finalised in the 2018 financial year.

The Chairperson asked whether Ms Modise was saying that the supply of pipelines was being outsourced.

Ms Modise responded that it was only the operation of lines which was being outsourced from the private sector. It was only those lines which Transnet was not currently operating and had failed to operate efficiently in the past, due to its business models. As a result, the lines had become less profitable and had lost traffic to road. Also Transnet was trying to promote the private sector participation objective.

Various factors had contributed to the delay of the NMPP. Firstly, it was meant to be built to specific dimensions, which were for a narrower pipeline. The government had later decided to change the dimensions to a wider pipeline which had led to a delay in the building of the pipeline. For a long time, South Africa had not invested in such mega projects, so teething problems were to be expected. Some of the delays in the NMPP had been attributed to design, engineering and management problems, and as a result Transnet had had to change the company contracted with the engineering works and management of this particular project.

Mr Marais said he was seeking for clarity on SIP 5 regarding the expansion of iron ore exports, and whether Transnet was relying on the Saldanha channel only, or if there was another line which could be used.

Ms Modise replied that the expansion was on the Saldanha channel. In the past year, Transnet had invested about R18.5 billion of the R31 billion to catch up with the infrastructure backlog.

The road to rail initiative was part of the build programme that was meant to alleviate the heavy traffic on roads. However, not all traffic that was on the roads was rail friendly, and such traffic would still remain on roads. In addition, certain distances were not economical to be operated by rail. As such, enhancing road safety was the responsibility of the Department of Transport and the DPE was not qualified to answer on the issue. However Transnet was investing in infrastructure to ensure capacity to carry the spillage that had gone to the road. Improvements in efficiency would ensure that the move from road to rail was realised.

Ms Modise said the companies that had benefited from the R50 billion local contracts had already been mentioned. As earlier indicated, the four major companies did sub-contract to local suppliers, as each contract had an element of local sub-contraction. There was also the element of training and skills development. The country would be at a different level of development with regard to manufacturing capabilities because of the level of skills that were available in the country. As an example, one company could have the steel required to manufacture traction motors, but the country might not have all the skills and capabilities to manufacture the traction motors. As such, the commitments required of the foreign companies, together with the training supported by the government, should ensure that in time the country would have the capabilities to build all the components for locomotives. Already Transnet engineering was engaged in research and development to help develop capabilities. In addition, within the African Union (AU) South Africa had been appointed to champion manufacturing of locomotives for the continent.

As a Department in the seven-year rolling programme, at the beginning of each financial year all SOEs sign a shareholder contract which sets targets in terms of training, skills development and so forth. At the end of every year, the Department assesses whether targets were met or not. In Transnet’s case, the targets had always been met and in some instances surpassed.

Ms Makololo said that the constraints and challenges faced by Eskom did indeed put pressure on programmes and measures being implemented. One of the measures that the Cabinet had set for Eskom was finding levers to close the funding gap, and to find efficiencies within its businesses and within some of the contracts that it has. That had set the tone as to how Eskom should be dealing with suppliers to ensure greater value. This had placed constraints in terms of Eskom’s ability to spend on additional programmes and had also placed pressure on existing contracts that had been committed to. Such contracts needed to be renegotiated and this had had an impact on programmes that were not already committed to, as they might have to be deferred to a later date in order to execute programmes that were already committed to.

Issues of efficiency and competency to execute a programme still remained a challenge. This was somehow linked to the investment backlog, as there was a lot of catching up that Eskom was trying to do. The construction of Medupi, Kusile, Ingula and all the other projects simultaneously placed huge pressure on the South African market and the Eskom environment itself. Concerns still remained, but measures had been put in place to try and create capabilities from the construction and contract engineering perspectives to be able to execute these contracts.

Ms Makololo explained that in her presentation, Ingula had not been covered because she wanted to focus on larger expenditure projects. However, there were certainly some benefits which had been derived from Ingula and other projects. The Department would be quite happy to furnish the Committee with the expenditure details for the refurbishment of Oliphant Primary School, if they were required.

The DPE was making sure that light industries were being put in place at Medupi. For instance, some of the projects compiled in the presentation were not all engineering related. There was expenditure that had gone into secondary markets that had been created because of the projects. Details could be made available if the Committee required.

Ms Makololo said that middle men were used to source certain commodities, in particular diesel, which might be due to the philosophy that Eskom had built long-term relationships with some suppliers. However, the current environment ,with the shortfalls in energy and having to supplement and run diesel plants more than they were originally planned for, had resulted in Eskom having to go into the spot market to procure diesel in an open process. This was not a long term arrangement, but was because Eskom had had to go to the spot market to procure.

Ms Mokholo  said one of the lessons learnt involved public-private partnerships. The issue of diesel at Eskom had made the Department realise that there was a need to introduce mechanisms on how SOCs related to one another. The DPE had intervened to ensure that Eskom concluded its Memorandum of Agreement with PetroSA, the Strategic Fuel Fund and Transnet, so that a reliable supply for diesel was facilitated. Members should be aware that part of the investigations initiated by the Eskom board had also been to look at the details of some of the contracting mechanisms. This would also help to sharpen how Eskom engaged with all its suppliers going forward. At the same time, the Department did not want to seem as if it were creating a situation wheerby the private sector was being crowded out.

From the DPE’s perspective, there were common trends and features coming out in terms of the build programme, both locally and globally. As colleagues had also mentioned, the lack of past investment was having an impact on the projects. In the past, when the government was focusing on privatisation and had made the decision for SOCs not to invest, skills had been lost. When the decision had been made for SOCs to invest again, it had not been possible to regain the skills for the massive build programmes, hence the reliance on the OEMs.

Another trend coming out was the project scope, as mentioned earlier -- that constantly changing decisions affected the planning phase. The effects of such changes affect a project’s timeline. Project execution and monitoring are also affected. The work done by the DPE with SOCs was not only capacitating SOCs, but also the Department for shareholder oversight. Lessons learned from the current build, the NMPP and delays at Medupi and Kusile, should not be repeated. The Department should ensure that the pipeline of skilled workers through development programmes was constant. Even when constant electricity supply was available in the future, training should continue not just for build programmes, but for the country as a whole.

Ms Mokholo said that Eskom had suspended the retrenchment of 1 800 employees reported in the media. The Department had engaged with Eskom not only to assess challenges related to the build programme, but also the challenges faced as a whole by the entity. In the current situation faced by the country, Eskom should first have a plan on how it would strike a balance between skills lost and financial gains from the retrenchment. Eskom had reported to the Department that it would not go ahead with the reported retrenchment.

Dr Luyenge asked whether Transnet had any means of assisting private sector companies which might be interested in operating the Mthatha lines. The assistance could be in the form of a grant to financially empower a private sector company that wished to be a part of the programme. He also asked whether there was any incentive to bring the private sector on board the initiative of road to rail. He further asked on how best communities could be used to utilise indigenous means of producing power.

Mr Morapale said his question about the 4 350 jobs around the multi-purpose pipeline had not been answered. What was the exit strategy at the end of the project? He understood the explanation for why foreigners had been awarded contracts in the R50 billion pipeline project -- the lack of skills among local suppliers. Perhaps his earlier question had lacked clarity, in that he sought an exact figure as to how many black owned businesses had benefited from the project. In most such projects, black people benefited only on a small scale, and in some cases there were black-owned companies which could have supplied the service.

Ms Mazzone sought clarity on the 1 800 Eskom jobs. She asked if there had been a confirmation from Eskom that this was just an issue of incorrect reporting, and people would not be losing jobs based on race. The confirmation was important, because the DA was constantly receiving reports from concerned Eskom employees.

She said perhaps she had missed the explanation regarding Alstom and Siemens, but why did Eskom continue to use companies that had been problematic in the past? She did not think the question had been sufficiently answered, especially considering the costs that had been incurred at Medupi because of this.

The Chairperson raised a concern about the monitoring mechanism of the Department. The Committee had been told that SOEs had targets that they reported on to the Department, so why had the Department not been able to pick up on the cash flow problems much earlier? Also, what about the contracts costing huge amounts -- particularly diesel -- and not being able to realise in time that there would be a cash flow problem? The Committee had been told that the Exxaro was being paid, yet it was not being used. Could the Department clarify that?

Ms Modise said that the issue of providing grants to private companies who wished to operate lines which were no longer feasible for Transnet to operate was really a policy decision that the government had to make. At some point, Transnet had identified some branch lines for private sector participation, mainly because of the fact that in its turnaround strategy, only services considered to be core would be focused on. At the time, branch lines had been considered as non- core, mainly because they had lost a lot of traffic to road, they were unprofitable and there was a backlog in maintenance. However, after discussions between the DOT and the DPE, it had been decided that Transnet should continue operating non-core lines irrespective of the fact that they were loss-making purely because they served as a feeder lines to core lines. SOEs were still required to make profits in order to re-invest in infrastructure, but this was not possible if Transnet continued operating lines which were not making any profits. That was when the decision to bring in the private sector was made. However, the question of who funded that gap still remained. Looking at how other countries manage what are considered to be socio-economic services, most governments funded these services or provided grants. Currently South Africa did not have a policy that supported that kind of funding mechanism for the operation of loss-making SOEs.

Transnet had come up with a strategy that where lines were deemed feasible to be operated by the private sector, the private sector should indicate interest in operating the lines. Transnet had been investing in those lines to keep them at a fit-to-operate level. That was the contribution that Transnet was making to meet the private sector half way -- instead of giving a grant to the private sector, Transnet was maintaining the line. Risks would be shared, but the government would still own the infrastructure. However, through long-term concessions, the private sector would have to ensure that the rail structures were maintained.

In terms of the strategic roles involving black people in infrastructure contracts, in most cases it was found that when such contracts were put out for the public to bid, the readiness of black-owned companies would determine what role such companies would play in the contract. Transnet did not determine the roles for black-owned companies. For instance, if there was a contract to manufacture wheels, if a black-owned company that manufactured wheels was available, then it would bid. That was what determined the strategic role that black people played in these contracts.

Ms Makololo said that the procurement of extra energy remained in the ambit of the Minister of Energy. However, Eskom had been receiving several proposals over the last few months since load shedding had started. There was an expression of interest process that was run through the Department of Energy just to get a sense of what technologies were available, where were they placed within the integrated resource plan, and whether they were fit for purpose in terms of the current shortfall. The proposals were being assessed by the Department of Energy, and they would go through the procurement process. If other options were available, they could still be submitted but they would still have to be assessed for merit and affordability.

In terms of Alstom and Siemens, Alstom did not just do work at Medupi and Kusile, it had also done the centre line at Thabang, which was a completely separate, and Alstom was performing there. As stated by the DG, it was quite an onerous process to test the system and then decide whether to accept or reject the system and pursue other options in the contract. In terms of unit 6, Siemens had been appointed to take over that contract, but for the other units an engineering process had to be undergone to test the system and certain units fail before certain clauses could be exited. It all came down to the ability to contract and the onerous clauses might actually turn out to work more in favour of the suppliers. Eskom would then have to honour such contracts to minimise the cost of litigation which might add additional costs to the project.

It would be correct to say that the Exxaro contract was running ahead of schedule in terms of deliveries versus the Medupi unit 6 burn, when the unit was supposed to be on load. Exxaro was ready to deliver coal and Medupi unit 6 was still burning behind schedule. The contract was a pay-or-take type, so Eskom had had to pay penalties for the coal that could not be received.

Ms Makololo said it was not easy to pick up on Eskom’s cash flows from monitoring mechanisms because the financial woes went back as far as 2012. The Department was aware of the situation since the regulator had made a decision about Eskom’s tariff levels which had been based on assumptions about how Eskom‘s operations would perform. The decision was also based on how certain costs would grow in the business. Subsequent to that, a lot had changed and the operating regime had changed from what was in the decision. Eskom had gone through a regime of burning a lot more cash through the open cycle gas turbines (OCGTs), due to the levels of availability of the plant. The DPE had worked closely with Eskom and the Department of Energy to try and derive an appropriate response plan to try and deal with the funding shortfall. The reality was that there were a lot of moving parts within the Eskom environment. The DPE had therefore found itself constantly trying to monitor and find an appropriate place to intervene and be able to provide requisite support, to ensure the entity remained a going concern.

The challenges remained over the Multi-Year Price Determination (MYPD) 3 period. The DPE was continuing with monitoring and ensuring that the support provided by Cabinet in 2014 was implemented fully. The Department was also aware that a number of things would have changed and that additional levers would have to be procured to ensure that the energy shortfall could be closed. This would require additional funding, and additional processes would have to be undergone to understand the new developments, to minimise load shedding and contribute to economic growth.

Ms Makololo said that she did not have any statistics about incidents involving contact with electricity -- whether they were rising or declining. However, even a single incident was treated with the utmost seriousness. Eskom was trying to raise levels of awareness, but there still seemed to be an attractive market for people to steal and sell copper. The punitive measures against this offence were inadequate and not as harsh as they should be. Eskom continued to do its part by educating people and doing awareness campaigns. There was a need to understand the drivers of such behaviour. Task teams had been set up to look into the matter. One was chaired by the DPE and worked with the justice and security cluster, to look at legislative measures that could be put in place to stop this behaviour. In addition to the fatalities, the behaviour also affected service delivery.

Ms Modise said that, in relation to the 4 350 pipeline jobs, it was natural that once the project was completed those functions would also cease to exist. However, there would still be maintenance required on the NMPP. She was of the view that those skills would still be required for the on-going maintenance of the NMPP. In addition, there would still be some work to be done on the NMPP in other areas.

The Chairperson said that for information purposes and not in relation to the presentation, last year an issue had been raised concerning the remuneration and bonuses for members of various boards, and the Committee would like an update.

Ms Mokholo said a memo had been sent to the economic sector infrastructure cluster for full submission by 15 April 2015. All work that was supposed to have been done had been carried out. Details regarding the application of a remuneration standard would be shared at a future engagement with the Committee. In terms of bonuses and incentives the Department would engage soon and conditions would be put in place. Short term incentives were no longer paid. However, long term incentives which had been invested still had to be paid, but there was a cut-off date.

The Chairperson thanked the Department for the presentation.

Adoption of Minutes

Ms Mazzone moved the adoption of the minutes of 25 February 2015.

Ms Rantho seconded the motion.

The minutes were adopted.

The meeting was adjourned.