Detailed plans for the building of local industrial capacity around the large procurement programmes of State-owned enterprises (SoEs) such as Eskom and Transnet, which together will spend R250-billion over the next five years, will be in place by February of next year, Public Enterprise Minister Alec Erwin said on Tuesday.

The initiative, known as the Competitive Supplier Development Programme (CSDP), was premised on the notion that procurement planning and execution was a key transmission mechanism for translating SoE expenditure into sustainable investment.

It was effectively a new localisation programme that would replace the National Industrial Participation Programme (NIPP) in those instances where SoEs had long-term procurement programmes.

At present, foreign suppliers make a 30% local-content commitment on every sale above $10-million. However, government had adapted the CSDP plan given new global dynamics, where power- and transport-equipment suppliers were enjoying new market strength and where there was a risk that costs associated with NIPP could simply be priced in by these suppliers.

Speaking at a Star-Safmarine business breakfast in Johannesburg on Tuesday, Erwin described the impending SoE investment as an “unprecedented programme” for the public sector, pointing out, too, that it represented only a portion of the R420-billion that would be spent by the public sector, as a whole, over the next three years.

“There is no doubt that such investment will drive growth but how do we ensure that it transforms the South African economy into a leading economy and how do we share the fruits of such growth?” he questioned.

He said the building and rebuilding of South Africa’s industrial capacity was a key thrust and that the CSDP was viewed as the vehicle through which an environment conducive to investment in manufacturing, based on the demand created from the SoEs, could be created.

It was understood that Transnet and Eskom had started a process of developing supplier development plans, honing in on areas of supply which were important to their needs and for which there was potential for local industries to be more competitive.

“The plans will also identify interventions to be undertaken by the SoE, and will include targets and key performance indicators for measuring the impact of these interventions on supplier industry competitiveness and national value add,” Erwin said.

State enterprises begin to respond

SoEs would need to make special application to the Departments of Public Enterprises (DPE) and Trade and Industry (DTI) to substitute the NIPP for the CSDP. In addition, unlike the NIPP, which did not stipulate the form that the local content should take, the CSDP demands that the SoEs draft investment plans that would help in lowering the overall life-cycle cost of the capital programme and identify investment priorities in areas where South Africa had a comparative advantage.

In a bid to make their respective procurement programmes more attractive to the already overextended international supplier community, both Eskom and Transnet had attempted, where possible, to enlarge the scale of their tenders. For instance, Eskom was looking to award its boiler and turbine tenders across two power stations, Medupi and Bravo, which also created greater leverage in negotiating higher local content frameworks with suppliers.

Similarly, Transnet was aiming to increase the size of its contracts, with a strong possibility, for instance, that its locomotive procurement programme would be scaled up from 404 to 500 new units – some of these would be electric, but the bulk would be diesel.

In the case of Eskom, former CEO Thulani Gcabashe would remain at Eskom for the next 18 months, to “leverage the economic benefits resulting from the utility’s capital expansion programme”. He was reportedly focusing on the establishment of local manufacturing capacity in the economy to supply products required for the capacity-expansion programme, as well as the development of a nuclear industry.

Supplier development and SA’s value-added export thrust

Also envisaged was the integration of the CSDP with South Africa’s National Industrial Policy Framework and its implementation work plan.

“My department will also be working together with other government departments, including the departments of trade and industry and science and technology, and industry associations to put in place supply side support measures at the firm and cluster level, such as supplier benchmarking initiatives, and programmes aimed at improving technology and productivity. Industry associations will be consulted regarding the content of the plans, which are due to be finalised by February 2008,” Erwin said.

Industrial Development Corporation chief economist Lumkile Mondi told Engineering News that, while the DPE and the DTI were driving the programme, it saw the need to support the programme for building industrial capacity around the big SoE investment prgrammes.

He noted that much of the investment currently under way was of a replacement nature, but that if the CSDP was properly implemented it could begin adding to South Africa’s productive base, which had contracted over the past couple of decades.

“However, for the first time since 2003, manufacturers, in quarter one this year, indicated an improved outlook for investment in additional production capacity, driven mainly by strong deamand in the domestic market,” Mondi said, adding that there was a need to also increase capacity in sectors that produced value-added exports.

He argued that investment in export-led manufacturing would be crucial in narrowing South Africa’s trade deficit, which had swelled to R42,5-billion in 2006, resulting in a 7% deficit-to-GDP ratio on the current account of the balance of payments.