Against the background of South Africa’s urgent need for infrastructure development in critical sectors, Mervyn Naidoo, Group CEO at ACTOM, calls for project procurement to prioritise local manufacturers, looking beyond pricing alone to the longer-term cost and other benefits.
Infrastructure plays a fundamental role in driving growth and economic development. In South Africa, this is evident particularly in critical sectors including energy, logistics and water.
The country is currently facing a significant infrastructure backlog in its electricity supply and requires substantial investment to expand infrastructure across all elements of generation, transmission and distribution. Development projects of this nature rely on specialised equipment, such as towers, transformers, high voltage equipment, switchgear, electric motors, alternators, turbines, and associated products, some of which are imported.
Additionally, South Africa is currently experiencing a logistics crisis as it is unable to transport the required volumes of commodities to its ports for export. Consequently, as a country, we are missing out on opportunities for economic growth due to inadequate and poorly maintained infrastructure in the energy and logistics sectors – and deficiencies in the water sector are manifesting similarly.
There is thus a massive need for a capital injection to fix some of the fundamental backlogs. Naidoo emphasises that it is important to recognise the capabilities which are available in the country to manufacture some of the required infrastructure locally. Only where local capacity becomes saturated, or the local industry lacks the capability to manufacture some of the required equipment, should we be looking at importing it from overseas markets.
Expanding local capacity
In such cases, it is key that instead of simply importing, South Africa should rather look at encouraging both local and foreign original equipment manufacturers (OEMs) to invest in expanding local capacity and ensure technology transfer and localisation.
Naidoo makes the point that price should not be the only adjudication factor in buying locally made versus imported products. Life cycle cost considerations are significant in buying local. Localisation provides for ‘cradle to grave’ support which, in turn, enables optimised plant availability due to aftermarket support and thus delivers optimal return on investment.
This is evident he says, when, for instance, we look at Transnet’s historical locomotive procurement programmes versus the more recent 1064 procurement initiative. The previous procurement programmes, which supported localisation extensively, have fleets that are still functional. By comparison, in programmes where procurement was not localised in more recent times, there are currently a high number of new locomotives that are out of service, as is the case with part of the Transnet 1064 procurement programme. The lack of localisation on elements of that contract is one of the major contributors to the country’s current lack of locomotive capacity. Localisation would have facilitated spares availability and aftermarket support.
On the home front, he says, local companies should strive towards process efficiency and product development to ensure they can make products that compete against imports. Where local manufacturing is viable, it is crucial that project owners and developers should maximise localisation.
Where products are imported, we should partner with foreign suppliers, especially in areas where local companies can add value through assembly or in providing basic components. However, local procurement practices should prioritise South African manufacturers, enabling reduced logistics demands and working capital costs, with the added benefit of aftermarket support.
Wider challenges
A further consideration is that spare parts will typically not be localised for imported products, and this can pose significant challenges related to the unavailability of components needed for aftermarket support. It could result in extended plant downtime, reducing plant availability, and increased costs stemming from a reliance on imported components and spares.
This could force local companies to stock up on spares, pushing up working capital costs due to the need to invest in inventory to avoid long lead times related to the import of spares. However, when companies source a product locally, they can depend on a vertically integrated supply chain that would secure spares availability and support in the local market.
Naidoo highlights that, in the bigger picture, imports result in unemployment and contribute to deindustrialising the South African economy, which leads to a loss of critical skills in areas such as engineering, development and innovation. Over time, this unfolds into greater unemployment, poverty and social challenges as more people become dependent on social grants. Furthermore, when there are fewer economically active people, government sees less revenue in terms of taxes, and it is detrimental to the growth of the country’s gross domestic product and the broader economy.
Instead of importing, South Africa should leverage its significant need for infrastructure to localise production for infrastructure development. This in turn will enable the upskilling of people, the transfer of technology, as well as the evolution of technology, engineering and competence. It will enable us to grow our economy and contribute to a better South Africa.
For more information visit: www.actom.co.za
