Transnet Acting CEO Siyabonga Gama on the developmental role of State Owned Enterprises

Transnet Acting CEO Siyabonga Gama tells Tim Modise that Black Economic Empowerment is an imperative for the growth and future of South Africa’s economy. He says the R30 billion loan from China is going to be used to build locomotives that will generate 55 000 new jobs. He says Transnet paid “school fees’ of more than R 6 bn when building the Oil Pipeline to Gauteng. – Tim Modise

Mr Siyabonga Gama, the CEO of Transnet. Thanks for joining us.

Thank you very much, Mr Modise.

You signed a deal with the Chinese Bank recently for R30bn and it is said to be one of the biggest amounts ever to be raised by a State Owned Enterprise, in South Africa. How did you pull that one off?

We began with a MOU with the China Development Bank, where in fact they agreed that over time they would extend credit facilities amounting to US$5bn. The set billion is actually half of what we could potentially borrow from the China Development Bank, so we have taken US$2.5bn, which is equal to R30bn. The draw down itself, we’ve only really taken $1.5bn, which is R18bn, which is what we need at the moment.

This is really part of the support from the China Development Bank, for us to build the Chinese OEM Locomotives that will be built in Pretoria and Durban.

Well, there’s a bit of misunderstanding (and I’ll come back to the amounts in a moment), in terms of where and who gets to build the locomotives from China. The perception out there is that you are importing these locomotives as a finished product.

No, not at all, actually Tim, what is happening here is we have a contract to build a total of 1,064 locomotives from various manufacturers. There are four of them in total, which is GE, Bombardier, and then the two Chinese, which is China South and China North Rails.

Out of all of these locomotives only 70 will be built outside of South Africa. 994 locomotives will be built in South Africa and, in fact, we’ve just finished a programme where 85 of 95 locomotives have been built in South Africa, and with GE we’ve got a programme where they are building 60 locomotives. They are all being built in Pretoria, Koedoespoort.

Now, is the deal the same with the other original equipment manufacturers that you are building these locomotives for- are they providing you with the funding?

In the case of the American and the North American – we were able to get funding from the U.S. Action Bank. We announced that Bill just over a month ago, (probably two months ago), so the Americans – we are getting that from the U.S. Action Bank. Then with the Chinese, we are getting the money from the China Development Bank.

I think, to assist with the perception that locomotives might be built overseas. The prototypes are normally generated and designed in the facilities of these OEM’s in their overseas offices, and then the prototype gets shipped to South Africa after it has been tested, but the rest of the locomotives are actually being assembled, here, in South Africa.

Do you have the skills and expertise to build such locomotives?

Yes, in fact as part of the Supplier Development Programmes that we’ve signed with all of the manufacturers. We have sent literally hundreds of our own employees to the facilities of these OEM’s and some of them are spending up to six months in those facilities, where they’ve built other peoples’ locomotives alongside our people, so that they can acquire the artisanal, welding and technical skills that are required to put together locomotives of this nature.

Now the Government likes to tell us that the State Owned Enterprises must play a developmental role, and it sounds like you are doing exactly the same in Transnet, but if you can expand on this developmental role that you see yourselves playing, besides the fact that you’ve got to provide the country with the services.

Yes, the developmental perspective is actually quite critical, in the SOE sector. Part of the developmental role that we play is to create employment in the economy, and not just to create employment in our enterprises, but it goes much, much further than that. What we are looking at, within locomotives and the R18 billion that we have announced, we hope to create fifty-five thousand jobs, in South Africa, as a result of this transaction.

What that means is we have jobs that will be created, in terms of component supply, in terms of the supplier development, as well as the local content perspective. With each of those locomotives for the diesel, we expect 55pc local content, and with electric, it will be 60pc local content, so it means that some of the critical components, as we do with the motor industry, will actually be manufactured by companies in South Africa. Those jobs will then be created here, so that we avoid capital slide where a lot of our money ends up going to other countries, but in fact, we domesticate and we domicile production in South Africa.

Now you spoke about the Supplier Developmental Program, local component, manufacturers, what about Black Economic Empowerment in the whole process of Supplier Development. How much of a focus is that to you?

In order for the OEM to actually qualify to win bids from us, they have to have Broad-Based Black Economic Empowerment in their bid, but also in everything that we do, we have enterprise development, which focuses on women, youth, and disabled people. We have a local supplier development, which looks at BBBEE in the entities that are going to supply those components, so at each touch point, of the Supplier Development, as well as the localisation, there is BBBEE that must be met by the suppliers. And, our people go about auditing the different suppliers that will be making components, to make sure that their BEE status is the correct one and that in fact, the people of South Africa, as a whole, are beginning to participate in the broad space of our economy.

Now what is it that other big companies in South Africa can learn from yourselves, as Transnet, I mean the way you do business, especially when it comes to the empowerment elements?

Tim, I think that there’s a lot that we could probably share with other entities. We have, for instance established Enterprise Development Hubs across the length and breadth of our country, and we continue to set up new ones. Just two weeks ago, where we set up a new Enterprise Development Hub in the Saldanha area, which is going to focus on Operation Phakisa, in terms of ship repair and, also the oil and gas cluster that we want to create in this country.

We work with a number of agencies, like the National Youth Development Agency, The Small Enterprise Finance Corporation, SARS, and also the Registrar of Companies, so that we can have a ‘one-stop shop’, where people can come and register their companies, get their tax clearance, but we also teach people how to run enterprises. We have an entrepreneurial program, where we are helping people, especially women and the youth, in terms of how to prepare their business cases; how to prepare their bids, when they bid for business but also, general business principles that are going to help them, going forward, in terms of how you sustain businesses.

Some people, for instance, start businesses and when they don’t know how business runs, they see cash and they think that’s profit, and they go and buy a big Mercedes. We have to show people that working capital needs to be retained in the business, and the people must take as little as possible, in order for them to be able to grow business.

What is your view about BEE eroding value and driving up costs, and this is the common complaint, if you will, or argument that one hears now and again when people say, “It’s difficult to implement the new BBBEE codes?”

Our bids and the business that we are giving out is actually sufficiently large for us to absorb a small premium, in terms of the price, but we don’t really think that it is too big a premium if you look at the developmental objectives that we want to attain as a country. I think it is quite critical that people understand that there is a cost to doing business in South Africa.

Part of the cost of doing business in South Africa is to ensure that we have a broad base of participation in the economy. We need to try and avoid the type of short-term myopia that business has, where they think that you can continue with business as usual. This country will burn, if there is only one sector of the economy, which is the previously advantaged that continues to move forward and people cannot see other people coming into the economy.

It is very important that there’s a share of the cake. That the established business have got programs, where they make sure that they’ve got enterprise development, they develop suppliers. We all need to have some kind of program, where we can make sure that the smaller entities can also be brought into the mainstream of the economy. It is actually quite critical that we do so.

But you’ve had your own fair share of trouble, as Transnet, when it came to the building of the oil pipeline. How is that project coming along and what about the cost overruns there?

Yes, we have paid our school fees, Tim, in terms of building the new multi-product pipeline. Yes, there was an overlay, in terms of the cost, but I believe that we’ve paid our school fees. I think the critical thing that we learnt there is that project management is actually quite critical to do this, but also, we had not built a new pipeline for 40 years, so the skills that we had were quite limited, and we relied heavily on the advice of external people.

When you don’t have very strong EPCM internally, you will tend to pay the price, so it is very important that you’ve got your own cost engineers that can check some of these things, and when you don’t have any expertise, in these types of things, then you would tend to pay a heavy price.

So how much did you pay? How much was your school fees?

Our school fees, Tim, were quite high. In the range of six to R8 billion that we had not foreseen, but also you must understand that when you dig a new pipeline, you choose a route. Sometimes when you get to the route that you had chosen, and you find that there are rocks, and you can’t really do geotechnical studies on every little piece of the route that you select – we have had to deviate and that comes at a huge cost. When you have to build a 700km pipeline, underneath the ground, and in certain places you find rock, and other places you find water. Then you have to do things that you never really thought you were supposed to do, so those were just some of the unforeseen costs that we had to bear, so it was not just based on project management but it was also the soil conditions that we found, as we started to build this pipeline.

Now, coming back to your business, your operations, having to move the goods around the country as well as assisting the exporters get their goods transported to overseas markets; to what extent are you playing a critical role, especially when it comes to taking freight off the roads, where most of the road freight, the trucks that use the roads, damage such infrastructure.

Tim, our mandate is to strengthen the logistics platform of our country, so to that extent, it is quite important that people involved in trade, which is importers and exporters, can become competitive in the markets in which they operate.

Our role in that is to make sure that we build strong supply chains, so that these entities can compete. Our role is catalytic in ensuring economic growth. Part of the market demand strategy and the investments that we are making are to make sure that we begin to move freight off-road, into the rail space. Critically, we avoid congestion on our roads. We avoid accidents. We try to reduce carbon emissions, as a result of moving the stuff from the trucks to the trains.

But importantly, the rail freight system is much cheaper than trucks, so it means that the cost of doing business in South Africa, actually begins to go down and we hope that when the cost of doing business goes down, it can be shared with all consumers at large, and we can have a much more competitive platform, and a much more efficient and reliable system going forward. When you have a reliable system, you are able to take on even more freight onto rail. I think we’ve made very good progress, in terms of our market penetration where we are moving quite a lot of cargo that was, before the investments were made, on the road, which is now beginning to come onto the rail because of our efficiencies and the reliability that we are recording.

And how did you resolve the squabble that you had with the major coal exporters in the country, when you wanted to have ‘set-asides’ for the smaller coal exporters?

I think the coal exporting parties have all really come to the party. To begin to understand that having only four million, which is really the subject of the quattro, in which and we had negotiated, you know, around 2002/2003, were not enough because there are now much more black people that own coal mines and they want access into the coal channel. So everybody has agreed that an additional five percent be set aside in a growing coal market, to make sure that we can bring in additional, largely BEE and new entrants, into the coal space, so that they can also meaningfully participate in the space.

It took a long time and we’ve had three years of negotiations but I’m happy to indicate that we have signed with all of the different entities. Barring one or two small mines, where there are a few small issues where we are crossing the ‘T’s’ and dotting the ‘I’s’, but all of that will have been done by the end of the month. So we’ve made very good progress because I think, also in terms of their own transformative agenda, they’ve been able to come to the party, to realise that to hog capacity and be the only ones, isn’t really what we need in this country.

We’ll remove a lot of bitterness amongst people who cannot participate in the economy by being much more receptive to other people coming in and making sure that we level the playing fields.

Now there is a generally held view, and in some instances very justified, that State Owned Enterprises can be wasteful and inefficient. It appears that Transnet are doing things differently. What’s the secret of your success, what differentiates you from everybody else?

I think the secret of our success is that we have realised, for quite some time now, that in terms of our dual mandate we need to be able to generate profit and stand-alone. So we have reduced wastage, we have put in place a number of controls that make sure that our costs are in check. Controls that make sure that whatever it is that we’ve spent on has been budgeted for and that it will make an impact, so cash flow and the ability to generate operating profit actually gives you the right to be able to do the second part, which is the developmental part of our mandate.

If you do not have cash and you do not make operating profit, it would be very difficult and challenging to make the kind of impact that we want to make, as an enterprise, to the rest of the South African economy.

Mr Siyabonga Gama thanks very much for talking to us.

Thanks very much Tim.