Briefing on long-term procurement strategies of SOC

1. Presentation to the Portfolio Committee on Public Enterprises Tuesday, 14 August 2012 Briefing on long-term procurement strategies of SOC CONFIDENTIAL

2. Contents CONFIDENTIAL • Introduction to the Competitive Supplier Development Programme. • Transnet’s CSDP journey and Supplier Development Strategy. • Eskom’s CSDP journey and Supplier Development Strategy. • SOC Fleet Procurements. • Supplier Development Boot Camp. • Implementation Challenges. • Next steps.

3. After 20 years of low levels of infrastructure investment, the SOC are now driving investment in fixed capital.

4. The drop in infrastructure investment between the 1980s and the 2000s had a devastating impact on national supplier industries. CONFIDENTIAL

5. As infrastructure investment has increased, the trade balance related to relevant manufactured inputs has increased – this is not sustainable. CONFIDENTIAL

6. Higher levels of coordination between the SOC and Government is required as you try to develop more complex industrial capabilities. Level of Industry Support Rationale • Government driven investments for strategic economic purposes – not commercially viable in the short term e.g Sasol. Government Led Coordination Required • Commercially viable but high complexity. Government support required in plant, specialised skills and technology transfers to enable investment. Government Support Planning Commitment • Investment requirements within capability of company balance sheet but clear medium term commitment required. SOC driven • Within current industry capability but proper planning and communication required to optimise use of local capacity and encourage investment. Natural

7. In this context, the Department of Public Enterprises introduced the Competitive Supplier Development Programme (CSDP). • The objective of the intervention is to promote investment and the development of internationally competitive capabilities in supplier sectors to the SOC’s capital and relevant operational spend, with the aim of: • Reducing costs through increasing efficiencies. • Reducing dependency on imports and foreign exchange exposure. • Developing niche export areas. CONFIDENTIAL

8. There are some fundamental critical success factors that need to be in place for a successful supplier development process. • A predictable and convincing long term demand platform against which suppliers can invest in new plant, technologies and skills and go through a sustained learning curve – it is the quality of this platform that will ultimately enable or constrain SOC supplier development. • A procurement process that coherently integrates incentives and penalties for supplier development requirements in the selection and management of suppliers. • A means of co-ordinating supplier support programmes (e.g. government industrial incentives and cluster development programmes) with the SOC procurement process. • A Government consensus that rewards suppliers focused on building globally competitive capabilities, and disciplines rent seekers. CONFIDENTIAL

9. Execution Procurement Planning • Short term, transactional focus – often crisis driven. • Narrow engineering bias leads to over complex technical requirements and limited standardisation. • Institutional fragmentation means demand is not aggregated. • Balance sheet perspective further limits planning horizon – particularly when degraded. • Supplier development concerns and incentives absent from procurement requirements. • Short term relationship duration – transactional. • Focus on penalties to suppliers, rather than incentives making suppliers risk averse. • Integration of procurement with broader government resources. When the CSDP was launched, the SOC procurement capability was not geared for supplier development. Industrial Outcome • No case to invest in scale. • Short term investment mindset by suppliers. • No sustained learning curve or specialisation. • Seen as an unattractive market by OEMs. Degraded Industrial Capability SOC Governance - Process, rather than substance orientated. SOC Culture - Rigid, inward-looking, limited learning. CONFIDENTIAL

10. Procurement Planning Execution • Entrenched methodology to integrate supplier development requirements as core to procurement selection process. • Ability to enter into and manage the risks of longer term supplier relationships through appropriate incentives and penalties. • Longer term, developmental planning focus. • Engineer to build locally based on national industry capabilities. • End users define functional requirements to enable standardisation, (rather than customisation). • Aggregation of demand across all business units. • Shareholder support for long commitments to suppliers. Supplier development required a complete re-engineering of SOC procurement practices and the building of new capabilities. Industrial Outcome • Adequate duration, scale and scope of demand to enable investments in capability building and learning curve. • SOC becomes “customer of choice” by international and national suppliers. Advanced Industrial Capability SOC Governance – Focused on content rigor and substance. SOC Culture - Flexible, outward and learning orientated CONFIDENTIAL

11. As there is no simple text-book methodology, the first phase of the Competitive Supplier Development Programme was designed to enable a “learning by doing” process by the SOC. Developing an effective operational approach and associated management capability to accumulate experience and learning so as to find out what works within constraints and opportunities of the environment. Show care from the top: Hands-on top down accountability and dialogue (e.g. regular, substantive report-back meetings on progress and obstacles) Bottom up execution: Delivery organisation driven planning, implementation and learning (e.g. clear definition of projects, focus areas and targets.) Provide Support: Put in place resources and enabling initiatives that enhance delivery (e.g. specialised skills development) Output of phase one: Learning about what works in practice! CONFIDENTIAL

12. There are three phases to the Competitive Supplier Development Programme. • Optimisation of what is to be procured (to optimise capital, lifecycle cost, industrial impact). • Methodology to define, contract and manage localisation requirements. • Develop methodology for defining procurement process (how to procure). • Strong contract management skills. Phase One: Transactional Capabilities Phase Two: Manufacturing Partnership Capabilities • Ability to identify key fleets and define long term fleet requirement. • Standardisation of methodology to ensure economies of scale. • Across government – enterprise coordination capability including long term funding strategy, definition of procurement vision and comprehensive government support for advanced manufacturing capabilities. • Identification of design capability vision. • Structuring of design partnership. • Management of design technology transfers. Phase Three: Innovation Capabilities • We are presently moving from phase one to phase two, although enterprise capability remains weak and very uneven. • Continued focus on entrenching supplier development at a transactional level. • Eskom is developing a complex procurement, project management and supplier development Body of Knowledge. CONFIDENTIAL

13. Based on the lessons learnt from the first phase of implementation, Transnet and Eskom have spent the last year embedding the CSDP in their procurement policies and processes. 1 • After an ad-hoc start, Eskom and Transnet have both put in considerable effort into comprehensively integrating supplier development concerns into the procurement process. • Both organisations have also implemented procurement skills development initiatives. • However, a key risk remains whether there are adequately skilled people to implement: • top people have been systematically poached by private sector. • Requires a quantum leap in capability. CSDP Strategy CSDP Foundation 2 Procure- ment Policy Other Policies 3 Procurement toolkits Other toolkits 4 5 6 7 Governance & controls Organisation Process Systems 8 People/Change Management CONFIDENTIAL

14. Transnet’s CSDP Journey and Supplier Development Strategy CONFIDENTIAL

15. Transnet’s Supplier Development journey began in 2008 and has evolved to service current opportunities within its 7 year investment plan and align with broader SA objectives over time. 2008 2010 2011 2012 Pre 2008 NIPP Initiation of CSDP within Transnet Transnet applies SD in first transactions SD begins to be rolled out to all transactions Transnet launches Market Demand Strategy (MDS) with significant SD opportunities • Transnet was the first SOC to launch the DPE’s Competitive Supplier Development Programme (CSDP) as an initiative within the Transnet group • The first SDP developed and submitted to DPE in 2008 • Transnet designs SD structure into business procurement operating model • Plans in place to expand SD to all transactions • R5,2bn committed to local content via CSDP contracts, including: • 100 GE locomotives • Additional 43 loco’s • Long-term parts agreements for the locos • 32 Mitsui/Venus 15E locos • Mobile harbour cranes • Draft gear components • The experience gained in CSDP transactions enabled Transnet to refine policies, processes and procedures • In 2011 the SD concept broadened beyond CSDP • Pursuing a broader range of SD opportunities through the supply chain could lead to improved industrial capability building and economic transformation • Transnet launches its R300bn Capital expansion programme over 7 years • SD becomes a cornerstone of the overall programme • The SD strategy and SDP is updated to ensure maximum realisation of SD over the course of MDS • The revised SD Strategy and SDP is integrated into the new SCMPolicy and Framework • Post tender process not offering much leverage • Investment not necessarily industry-related (30% of contract) • Penalties were negligible and often built into price • DTI programme mandatory for all SOC’simports over US$10 million • Suppliers were clear of what was expected of them at outset Source: Transnet *New Growth Path ** National Development Plan *** Industrial Participation Action Plan CONFIDENTIAL

16. Since the inception of the supplier development journey, Transnet has had successful supplier development transactional impact. • Successes • The SD value as a percentage of the total contract (R2,300m) is 54% including: • Skills development at TRE & TFR (17%) over 4 years, local assembly (15%) • Purchasing of local content and services (17%) over a ten-year period and other commitments (5%) • R388m or 31% spent on SD as at Jan 2012 • GE • 100 X Class 43 Diesel Locomotives • GE* • 43 X Class 43 Diesel Locomotives • The SD value of the contract is R631m or 65% of the total contracted value • The CSDP finalised and signed off by GCE* • The SD value as a percentage of the contract (R1,312m) is 40% including: • Skills development (1%), local assembly by UCW (12%) and purchasing from local suppliers (27%) • 734 jobs were preserved and R79m realised to date, as a result of this build • Venus / Mitsui • 32 X Class 15E Locomotives • Cruzaco* • Draft gear • CSDP signed off by all stakeholders as of March 2012 • Contract valued at R128m with SD portion R15m or 5% (imported goods) • Training and IP transfer is the key component of this CSDP agreement, including finding ways to improve efficiencies, reducing costs • RTA Alesa* • Pneumatic Ship Unloader • Total contract value is R125m • R16m of contract value is committed to SD over the life of the contract • SD obligation amounts to 12% of contract value • Liebherr* • 6 X Mobile Harbour Cranes • Total project contract is worth R248m • 23% of this or R58m is committed to SD CONFIDENTIAL Source: Transnet *contracts recently awarded or in the process of being awarded

17. 0 Systems have been put in place to monitor and manage the supplier development elements of contracts. Illustration SKILLS DEVELOPMENT INVESTMENT IN PLANT IDENTIFIED INITIATIVE OVERALL CSDP CONTRACTUAL TARGET LOCALISATION GE 100 Loco’s (TRE) % Target Actual Target Actual Target Actual % % % % % % 54* 37 3 7 3 10 0.8 GE LTPA (TRE) % Target Actual Target Actual Target Actual % % % % % % 12(*)(**) 8 0 4 0 0 0 EMD LTPA (TRE) % Target Actual Target Actual Target Actual % % % % % % 39* 10 0 39 10 2 2 MITSUI/VENUS (32 New 15E Loco’s)*** % Target Actual Target Actual Target Actual % % % % % % 40* 39 0 1 0 0.1 0 *** Mitsui 32 New 15E Loco’s - Since the introduction of the CSDP obligation in February this year Mitsui mainly focused on Skills development and Development of a Welding School 110 19E Loco’s and 44 15E Loco’s - Mitsui / Venus : Detailed information is currently being sources by TFR from the supplier “50 Like New” Loco’s - EMD : Detailed information is currently being sources by TFR from the supplier • Percentage Localisation as a percentage of the overall contract value • ** Other Potential savings as a percentage of the contract value is in the region of 18% which still needs to be verified CONFIDENTIAL

18. Transnet has progressed significantly in transforming its supplier base in line with a Broad Based Black Economic Empowerment supply base. B-BBEE spending (Rbn Total Measurable Procurement Spend ) 31 March 2012 Black-Owned Enterprises R3.96bn (~15% of B-BBEE spend) Exempted Micro-Enterprises R2.2bn (~9% of B-BBEE spend) 25,8 +46% 19,4 13,5 Qualifying Small Enterprises R2.91bn (~11% of B-BBEE spend) Black Woman-Owned enterprises R2.25bn (~10% of B-BBEE spend) 11,6 6,9 3,9 2007 2008 2009 2010 2011 2012 • Transnet is fully committed to empowering small, medium and black enterprises in supporting Government's policy on B-BBEE • Significant focus has been placed on B-BBEE spend evidenced by the large increase in spend in recent years • Emphasis will be placed on improving direct Enterprise Development which is led by the Supplier Development Centre of Excellence (COE) • 62% of the R25.81bn TMPS spend in 2011/12 FY was from B-BBEE-compliant companies that are certified on levels 1 to 4 Recognised B-BBEE % spending against TMPS 80% 75% 65% 59% 41% 37% 2007 2008 2009 2010 2011 2012 CONFIDENTIAL Source: Transnet

19. Capex and Opex spend allows for the development of manufacturing capability and can be linked to specific MDS opportunities. Estimated spend over 7 years Rbn MDS opportunity Main areas of opportunity 56,190 Locomotives 47,927 47,318 Perway 40,871 38,716 Port Facilities 37,219 CAPEX 31,096 Wagons Land, Buildings & Structures Machinery and equipment Pipeline 53.7 45.9 40.3 37.4 33.1 OPEX 31.4 Personnel Costs 27.3 Fuel Electricity Other Operating Costs 2012 2013 2014 2015 2016 2017 2018 • While MDS Capex spend is set to peak in 2016, Operating expenses will continue to rise as the operating tempo of the company increases with increased volumes being moved • Capex spend of R300m over 7 years whilst Opex spend will be R328 million • Significant opportunity to extract SD through both Capex and Opex plans CONFIDENTIAL Source: Transnet

20. Contribute to job creation and skills development Promote a modal shift (road to rail) Transnet’s Market Demand Strategy will develop and transform Transnet by 2019. • Increase Transnet employees: +25% (~14 700 jobs) • Increase indirect jobs: +85% (~78 800 jobs) • Qualification of 5 000 artisans and 1 000 train drivers (over 4 years) • Training spend of R7.7bn over 7 years, especially first line management and supervisory skills • Training students from the ODs in Transnet’s schools of ports, rail and pipelines SD Focus • Rail market share growth: From ~25% to 35% • 6 200 track reduction p.a. • 28 Mt low cost C02 emissions (over 7 years) • Reduction of logistics costs: 4-7% (0.5% as a % of GDP) through rail initiatives alone • Modal shift from road to rail (from ~25% to 35%) • Operational efficiencies and reduced transport times (e.g., reduction of loading times) • Economies of scale (e.g., attracting larger vessels through berth deepening) • Coastal trans-shipment (trans-shipment hub at Port of Ngqura) Reduce the cost of business • Increase maintenance, regional connectivity, especially through trans-shipment hub at Ngqura, growth of the Maputo corridor and construction of the Swaziland rail link • Increase over-border rail volume (+14% within 7 years) Influence SADC regional integration • Localisation program for rail and port equipment, e.g., increase local content share of contract value to 40% by FY16/17 (CSDP); partnership with IDC, coordination with Eskom • Improving Transnet BBBEE level from 5 to 3 (within 2 years), e.g., increase preferential procurement to 80% of spend by FY16/17 Capacity & capability building* and transformation 15,000 direct jobs 60% local content – electric locomotives 55% local content – diesel locomotives 70% local content – wagons 20% local content – port equipment** * Previously referred to as localisation ** All target s to be validated by baseline survey Source: Transnet CONFIDENTIAL

21. Drawing on the DPE procurement guidelines, Transnet classifies Supplier Development opportunities into four quadrants: each with its own focus, though transformation is all pervasive. Transformation • ‘Programmatic’ Focus Areas: • Creating sustainable new industries • Development of new technology and innovation • Active Industrial Policy through CSDP and Programmatic policies outlined by the DPE • Investment in infrastructure and manufacturing industries • Skills development amongst scarce resources enhancing the intensity and quality of jobs available in South Africa • >R1bn value of transaction/s* • ‘Strategic’ Focus Areas: • Preference and development will be used to transform and grow local industry • Skills development amongst scarce resources, increasing the quality of jobs • Transfer of technology and innovation to local suppliers from foreign OEM’s • >R70m and <R1bn value of transaction/s* Program-matic • High Not currently a focus area Strategic Transformation • Industrial • leverage Enterprise Development Focused • Low • Low • High • Value leverage • ‘Enterprise Development’ Focus Areas: • The focus will be on providing small enterprises with opportunities and preferential trading terms • Empowering HDI’sto create their own business resulting in quality job creation • < R35m value of transactions* • ‘Focused’ Focus Areas: • Preferential Procurement and B-BBEE used to develop local industry owned and managed by HDI’s • Development of quality job creation reducing the lower income inequality and reducing poverty • R35m to R70m value of transaction/s* CONFIDENTIAL Source: DPE Policy * These values serve as a GUIDELINE only

22. Based on Pre-feasibility analysis the following key opportunities exist within Transnet Business Divisions Transversal1 TFR TRE TPT TNPA TCP TPL Programmatic initiatives • Locomotives2 Strategic initiatives • Fuel • Electricity • Gas and Lubes • Fleet • Travel • Consulting • Security • Telecoms • Wagons2 • Locomotive Telemeters and Radios • Rails • On track Machines • Rail Fasteners • Signalling • Sleepers • Bearings • Steel • Draft Gear • Wheels • Axles • Ship to shore Cranes2 • Straddle Carriers2 • Haulers • Ship Unloaded • Ship Loaders • Rubber Tyred Gantry • Stevedoring • Tug Boats2 • Marine Craft • Dredges • Dredging Services2 • EPCM (Engineering, Procurement, Construction Management) • Engineering Services • Plant Hire • Construction • Cement • Construction • Repairs and Maintenance • OD specific gas • Pumps Focused initiatives • Advertising and Promotions • Forklifts • ICT • Office Automation • Health Care Services • Transformers Installation • Signalling Installation • Overhead Track Wire • Overhead Track Equipment • Ballasts • Tools • Carbon Brushes • Paint • Equipment Rental • Labour Brokers • Repairs and Maintenance • Building Materials • Tools • Building Maintenance Small enterprise initiatives • In-house Catering • Stationary • Uniform Clothing • Protective Equipment • Recruitment Services • Cleaning • Repairs and Maintenance • Vegetation Control • Thermite Welds • Track Switches • Coach Components • Castings • Repairs and Maintenance • Driving Services • Environmental Management • Personal Protective Equipment 1 Driven by Group via Cross Divisional & Cross Functional Sourcing Teams, 2 Potential programmatic fleets

23. Eskom’s CSDP Journey and Supplier Development Strategy CONFIDENTIAL

24. 1 899 In 2007, Eskom agreed to develop and implement a CSDP plan. • Competitive supplier development programme (CSDP) • Promote investment through continuity of demand in focus areas • Driven by ‘bi-lateral’ coordination between SOC and suppliers • Actively identify and promote industries where SA suppliers could have global competitive advantage (SOC with government partners) Framework for SOC procurement • National Industrial Participation Programme (NIPP) • Suppliers obliged to invest 30% in non-related industries for imported contracts >$10m • No framework guiding prioritisation of investment areas Historical framework The CSDP is a key feature of national development frameworks CSDP objectives and background Components of the CSDP plan submission • Develop a procurement tool-kit and supporting measures to promote investment, learning and the development of internationally competitive capabilities in supplier sectors to the SOC’s capital and relevant operational spend, with the aim of: • Ensure security of supply • Reducing costs through increasing efficiencies • Reducing dependency on imports and foreign exchange exposure • Developing niche export areas • Spend Analysis (detailed 5 years and high level 10-15 years) • Supplier Industry Analysis • Priority Interventions and Associated Sectors • Key Performance Indicators • High level implementation plan Source: Eskom CONFIDENTIAL

25. 0 Since the inception of CSDP (June 2008), a total actual investment spend in manufacturing facilities by suppliers was R644 million against a committed value of R1,2 billion over the life of the respective contracts Eskom has had successful supplier development impact. CONFIDENTIAL Source: Eskom

26. Eskom has made progress in procuring from B-BBEE compliant suppliers. Spent on B-BBEE compliant suppliers CONFIDENTIAL Source: Eskom

27. Eskom has leverage significant skills development commitments from suppliers. • Since inception of the respective contracts till end of December 2011 there were 5151 people who had completed their training at various training site throughout the country against a commitment to train 7214 people. • The skills types include: • Engineers • Artisans • Technicians • Quality Control Inspectors • Safety Officers • Construction Managers • etc. CONFIDENTIAL Source: Eskom

28. 0 In developing the Supplier Development Plan, Eskom looked into its CAPEX spend over the next six years … Eskom Holdings six-year capital expenditure plan1 Rbn (nominal) Generation Other Transmission 75 027 511 050 Distribution Nuclear 86 870 The capital expansion programme has been a major economic stimulus, however Eskom's capital spend including operations and maintenance spend provides many opportunities for local development. 99 819 90 756 81 916 76 662 FY11/12 FY12/13 FY13/14 FY14/15 FY15/16 FY16/17 5 yr total 1 Future capital spend excluding any future commitments to the IRP 2010 CONFIDENTIAL SOURCE: Eskom Corporate Plan

29. Eskom has defined five key performance areas for its procurement leverage programme. Key performance area Definition • Increasing the skill base (number and skill level) of South African workers in areas relevant to the energy sector and where there is a national scarcity of skills. 1 Skills development 2 Localisation • Utilisation of Eskom and suppliers’ spend to develop South African based suppliers relevant to the energy sector (focusing primarily on BBB-EE and Black Owned suppliers). 3 Industrialisation • Utilisation of Eskom and suppliers’ spend to foster the establishment of new competitive industries in the energy sector. 4 Job creation • Creation of new jobs by suppliers as a direct result of Eskom business. 5 Supplier development • Providing a platform for SA-based suppliers to develop into national and international suppliers, including a platform for emerging suppliers to develop the ability to do business with Eskom. CONFIDENTIAL Source: Eskom

30. Eskom categorises its supplier development initiatives in relation to the complexity of the intervention required. Level of Industry Support Rationale • Government driven investments for strategic economic purposes – not commercially viable in the short term e.g Sasol. Government Led • Commercially viable but high compexity. Government support required in plant, specialised skills and technology transfers to enable investment. Government Support Coordinated • Investment requirements with incapability of company balance sheet but clear medium term commitment required. • Within current industry capability but proper planning and communication required to optimise use of local capacity and encourage investment. Natural • Potential spend area to enable development of a community of small enterprises based on careful structuring of volumes and duration. Eskom Support

31. Eskom has developed a methodology to define commodity focus areas and targets against the different supplier development KPAs. 1 2 3 4 5 6 • Demand and Spend Analysis 2. Supply Analysis 3. Classification 4. Strategy 5. Execution 6. Monitoring and Reporting External Policy Eskom Strategy Project Grouping Not applicable Strategic importance to Eskom Long-term Strategy Established national companies Future Direction OEM/ MNC Medium-term Strategy Supply Analysis Fledgling 5 year Group spend (Rbn)1 Standard Guidelines Small/ medium Large Value 2 Supplier Development Plan Focus SOURCE: Team analysis 1 Capital spend including Gx Operational spend, excluding new build.

32. 8 24 10 • 0-6 months • Tx Line Construction • Cables & Conductors • Mills • Metering • Protection • Pumps • Air heater pack • Transformers • Valves • Nuclear early packages Long-term strategy Short-term strategy • 6-24 months • Mechanical Maintenance • PE (Primary Energy ) • Network Strengthening • Substation Construction and refurbishment • Electrification of homes • Turbines • Control systems • Generation Spares • Civil construction • Pipes • Rotors • Conveyor • Generators • Koeberg Nuclear • Tubes • Boiler • Switchgear • Vessel • Economiser • Ash & stockpile handling • Building and building Maintenance • Capacitor Bank • ICT • DC Equipment Eskom has prioritised for development a total of 42 projects and commodities over the next 24 months, 8 with industrialisation focus. Period Product Total • Over 24 months • Fabric Filter Bags • Fabric Filter Plant Retrofit • Biomass • Nuclear new build • Solar • Wind • CSP • Gas CCGT CONFIDENTIAL Source: Eskom

33. Locomotive and Filter Bag Fleet Procurements CONFIDENTIAL

34. The DPE prefeasibility study suggests that to renew the locomotive fleet and create new capacity for growth, approximately 150 locomotives will be required per annum. Long Term Growth 3% Long Term Growth 6% Long Term Growth 9% Volume Scenario mtpa Transnet’s Market Demand Strategy requires 1064 locomotives over the next seven years at an average of 152 locomotives per annum. Recommended locomotive demand Plan +3% Plan +6% Plan +9% Locomotive Demand Scenarios* Units Ø 148 • *Small increases in efficiency of between 1% y.o.y. (GF) and 0,5% y.o.y. (Export ore), spike post 2026 due to locomotive 45 year run out, could be smoothed through procurement practices CONFIDENTIAL

35. The locomotive fleet procurement has a number of objectives. • To get the best value for money in relation to locomotive power – that is the lowest cost per ton kilometer combined with high levels of reliability through the lifetime of the locomotive. • To promote investment, economic activity, employment creation and the building of world class industrial capabilities throughout the locomotive supply chain. • To drive a process of black economic empowerment throughout the locomotive supply chain. • We are not leveraging the procurement in the hope of achieving supplier development and empowerment. • We are procuring supplier development and empowerment as a core dimension of value required from the suppliers for the money we pay them CONFIDENTIAL

36. These multiple objectives need to be systematically integrated in the procurement. • Capital Cost • The initial cost of the locomotive • Lifecycle cost (LCC) • The total cost of the locomotive over its lifecycle including energy, maintenance and operating costs. • The speed of absorbing a technology into the system. • Industrialisation • The capability and capacity of the domestic locomotive manufacturing & service industry to “absorb” a technology. • The ability to use capabilities for manufacture in different applications • The ability to compete in global supply chains • Performance Risk • The cost to the company in lost revenue due to the non-availability, delay or cancellation of trains • The cost of customers moving from rail due to poor perception of rails reliability Capital Cost Performance Risk Lifecycle Cost Industrial-isation • Standardisation • Higher standardisation leading to larger demand and lower LCCs through inter-operability, lower maintenance costs, less specialised skills. CONFIDENTIAL

37. Localisation from the locomotive fleet procurement can be significant. Current Localisation Breakdown for Locomotives Percentage of Loco Value (%) ILLUSTRATIVE • Localisation can be improved from ~ 33% of the value of a locomotive to as much as ~ 85% through focussed programmatic procurement of locomotives • An additional 8% of the locomotives value is currently localisable and would not require large amounts of support to achieve • A further 44% of future potential exists to localise components. This would require support and investment into the supplier industry to facilitate learning and incentivise supplier effort • Realistically, of the 44% of future potential to localise, approximately 30% can be converted to tangible development opportunities • Approximately 15% would not be feasible to localise owing to a lack of financial and commercial viability 100,00 43,39 15,00 8,18 33,43 Local Content Localisable Future Potential to Localise Not Feasible to Localise Total CONFIDENTIAL Source: Transnet

38. Rolling Stock The locomotive fleet procurement could drive the localisation of key technologies relevant to a number of industrial sectors. • Companies producing components for locomotives tend to manufacture for a variety of sectors. • Industrial capabilities such as robotics, lean, six sigma, kaisan, etc. developed for the localisation of the locomotives will be utilised in complementary industries such as the manufacturing of mining equipment, power transmission equipment, defence equipment etc. • Similarly, skills developed in locomotives manufacturing such as quality engineering, welding, electrical & electronic engineering can be transferred to other heavy industries. Mining Power Transmission Yellow Metal Power Generation Automotive Defence CONFIDENTIAL Source: Transnet

39. Filter Bags are used in coal power stations to filter out toxic gases - as Eskom is re-equipping its fleet, the annual demand for filter bags for its power stations for the period up to 2050 creates a strong case for a localisation strategy. 1 Ton represent 503 filter bags. Assumptions : Length = 8m, Diameter = 135mm, Wastage 2.5% Source: Eskom

40. A Filter Bag manufacturing development programme could provide much needed support for our clothing and textiles industry. Final Product Fibre Production Filter Bag Bag Stitching Weaving / Needling of Fabric • The fibre is produced from synthetic material suitable for the thermal boiler conditions. • The fabric is weaved or needled to Eskom’s specifications. • Filter bags are stitched according to each power stations dimensions.

41. There are opportunities to localise to localise the fibre production and needling as this comprises 86% of the cost of a filter bag and is presently imported. 14% 43% Acquisition Costs Component Breakdown 16% 100% 70% Final Product Fibre Costs Needling Costs Bag Acquisition Costs Stitching Costs • The fibre and needling cost account for 86% of the cost of a filter bag. • Local suppliers are currently active in the filter bag stitching in the value chain which accounts for only14% of the acquisition cost of filter bags. • The potential localisation opportunities are within the 86% in fibre and needling costs in the value chain.

42. Eskom has developed a strategy to progressively localise the value chain. • Eskom has three approved imported fibre for filter bag usage namely Polyacrylonitirle (PAN), Polyphenylene sulphide (PPS) and Polyimide (PI) for low and high temperature applications. • The fabric is weaved by seven suppliers and only one of these is locally based in South Africa • The bags are stitched by four local suppliers. • In the short term: • Eskom to consolidate filter bag volumes and engage in a strategic sourcing process to secure bags for the period until the local supply chain is in place. • Skills transfer, in line with the long term strategy, to be driven as part of the SD&L targets. • Long term: • As a buyer, Eskom will share the fabric filter forecasted tonnages to inform the aggregated volumes with other buyers. • Eskom to commit to utilising the outcome of the hub process as the value chain becomes successfully implemented by competitively procuring locally through the value chain. CONFIDENTIAL Source: Eskom

43. Supplier Development Boot Camp

44. The Department recently hosted a week long boot camp to explore details of how SOC procurements could be operationalised to realise the DPE’s vision. • The boot camp was a six day process involving Eskom, Transnet, SAA, Denel and PRASA as well as the Departments of Public Enterprises, Trade and Industry, Science and Technology, Economic Development, the National Treasury and the IDC. • The objectives of the boot camp were: • To get alignment across all key stakeholders on the approach to procurement leverage and how co-ordination can be facilitated. • To provide educative inputs around strategic sourcing and supplier development. • To review the next generation Supplier Development Plans of Eskom and Transnet. • To share lessons learnt in the supplier development process. • To integrate supplier development concerns with commercial and technical considerations as core to the strategic sourcing process. • To create supplier development champions across Government. CONFIDENTIAL

45. Several key actions aimed at enhancing the SOC supplier development and localisation efforts were proposed at the boot camp. CONFIDENTIAL • DPE to provide the SOC with guidance as to where and when, and to what extent, it will be appropriate for the SOC to pay premiums to suppliers in support of national production. • It has become clear that it is in the Shareholder interest that imports are decreased even if this means paying a certain level of premium, because increased national economic activity will create taxes which accrue to the State. • The SOC to provide a plan to the DPE to show how supplier development and empowerment concerns will be integrated throughout the sourcing cycle. • Presently, supplier development and transformation concerns are integrated at a relatively late stage into the sourcing process, ie. only when the commercial process begins resulting in a significant loss of value. • The DPE to produce guidelines relating to preference points for suppliers who perform on their supplier development commitments and penalties for those who don’t, should they participate in future SOC tenders. • Currently, aside from limited contractual penalties for bad performance (2% performance bond), there is no mechanism in place to incentivise or penalise supplier performance. • The DPE to produce guidelines on the importance of export off-sets as part of all contracts involving imports given the need to relieve pressure on the current account and open up new markets for industry. • Export off-sets are being used in a limited way by the SOC yet they should be associated with small price premiums whilst potentially having significant structural impact.

46. Beyond the initiatives that emerged from the boot camp, the Department and SOC are currently working to overcome a number of implementation challenges. CONFIDENTIAL • Serious shortage of sophisticated procurement skills to implement complex procurements. • Detailed regular reporting by the SOC on progress in respect of filling vacancies and capacity building initiatives. • The extension of the Preferential Procurement Policy Framework Act and Regulations to SOC is a hindrance to the achievement of their supplier development objectives (and achieving value for money from procurements). • DPE, Eskom and Transnet Task Team has developed a joint position paper seeking full exemption from the PPPFA. • Alignment of DTI Designation Policy and definitions with SOC leverage approach. • Joint workshops being held between DPE, DTI and SOC to produce enhanced policy.

47. Next Steps

48. Transnet and Eskom are due to submit their next generation Supplier Development Plans to the Shareholder. • Key considerations in assessing the Plan: • Clear statement of lessons that have been learnt in Phase One. • What: Need to see clear focus areas for the plan with targets? • How: Need to see a compelling methodology for implementation with enabling organisational environment? • Who: Are, or will, skilled people be in place to implement? • Solution to reporting put forward in the plan. It is recommended that the Portfolio Committee request comprehensive presentations from Eskom and Transnet on their Supplier Development and Fleet Procurement Plans. CONFIDENTIAL

49. Thank You CONFIDENTIAL