Localisation will push up prices and hamper recovery, warns Transnet
State-owned freight, rail and logistics group Transnet has bemoaned the government’s local content requirements, saying the policy could further weaken its financial position.
“We have challenges of policy constraints which we have been discussing with the government. Part of the challenge arises out of the local content requirements,” Transnet board chair Popo Molefe told legislators on Wednesday.
The government has highlighted localisation — the use of locally made inputs in manufacturing — as a main policy objective for economic recovery and has asked business to target 20% of non-petroleum imports for local replacement within five years.
“Our understanding initially was that local content requirement would mean that we should procure products that are manufactured in SA … but in its application, local content requirements have now included compelling state-owned companies to procure through [local] middle persons [who buy goods outside the country] and then put their own mark-up.
“So even before you acquire equipment you have already lost a significant percentage of your budget,” Molefe said.
Molefe was leading Transnet executives who appeared before parliament’s public enterprises committee to discuss the company’s annual report for the 2020/2021 financial year, in which it recorded a R8.4bn loss, down from a R2.9bn profit in the previous year — the first loss the company has recorded in at least a decade.
“We have been engaging with the DTIC [department of trade, industry & competition], public enterprises and recently we met with National Treasury to discuss this [local content rules]. Because all of this means we cannot move these things [trains] as fast as we can,” Molefe said, without providing further details of the discussions.
Critics of the localisation drive say it will kill the competitiveness of local industry. Business Unity SA (Busa) has previously cautioned the government about taking a blanket approach to localisation, citing a study that had found that conditions in most industries are not yet right and input costs could be pushed up by 20%.
Transnet’s procurement policies have been under scrutiny in recent years, not least because of the four controversial contracts worth R54.5bn for the acquisition of more than 1,000 locomotives.
Transnet signed the multibillion-rand contracts, one of the largest procurement initiatives by a state-owned entity, for the acquisition of the locomotives in March 2014. The deal was signed with China South Rail, China North Rail, General Electric and Bombardier Transportation as part of a strategy to renew Transnet’s rolling stock.
The initial estimated price of the locomotives tender was R38.6bn but it soon shot up to R54.5bn amid claims of corruption in awarding the contracts. The controversial Gupta family, friends and business partners of former president Jacob Zuma and his son Duduzane, were alleged to have received millions of rand in kickbacks, according to testimony at the commission of inquiry into state capture chaired by deputy chief justice Raymond Zondo.
Transnet has since lodged a high court application to review and set aside the contracts.
Molefe said Transnet was still reeling from the state capture project but executives were making every effort to stabilise the company and return it to profitability.
Transnet was issued with a qualified audit opinion for the past three years (2017/2018, 2018/2019 and 2019/2020) for various reasons including irregular expenditure and lack of adherence to supply chain policies and procedures. It also received a qualified audit opinion for the 2020/2021 financial year.
Transnet group CEO Portia Derby said: “It’s been a tough year and we are still a company in trouble, going through a process of recovery. There is a lot that we still need to do to get Transnet onto a firmer footing and back to profitability on a sustainable basis.”