Infrastructure plays a critical role in driving growth and economic development in South Africa, particularly through projects involving the country’s Energy, Logistics and Water sectors. The country is currently experiencing a significant infrastructure backlog in its electricity supply landscape and requires investment to expand infrastructure across all elements of generation, transmission and distribution.
Infrastructure 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 our ports for export. Therefore, as a country, we are missing out on economic opportunities due to the lack of infrastructure, both in the energy and logistics sectors.
There is thus a massive need for a capital injection to fix some of the fundamental backlogs in both sectors and capabilities do exist 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 this 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.
Price should not be the only adjudication factor in buying locally-made versus imported products. Life cycle cost considerations are key in buying local. Localisation enables “cradle to grave” support which enables optimal return on investment, through optimised plant availability due to aftermarket support.
This is evident when you look at Transnet’s historic locomotive procurement programmes versus the more recent 1064 procurement initiative. The previous procurement initiatives which extensively supported localisation have fleets which are still functional relative to that which was not localised in more recent times.
There are currently a high number of new locomotives, which were a part of the Transnet 1064 procurement program, out of service. The lack of localisation on segments of that contract is one of the major contributors to the current lack of locomotive capacity. Localisation would have facilitated spares availability and aftermarket support.
Local companies should strive towards process efficiency and product development to ensure that they can make products that can compete against imports. Where local manufacturing is viable, it is crucial that 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 providing basic components. However, local procurement practices should prioritise South African manufacturers, which enable reduced logistics and working capital costs, with the added benefit of after-market support.
Significant challenges
On the other hand, spare parts will typically not be localised for imported products, and this can pose significant challenges related to the unavailability of components needed for after-market support. This could result in extended downtime of a plant, reducing plant availability, and increased costs stemming from having to rely 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 enable spares availability and support in the local market.
Additionally, imports result in unemployment and contributes to deindustrialising the South African economy, which leads to a loss of critical skills in areas such as engineering, development and innovation. This can culminate in greater unemployment, poverty and social challenges as more people become dependent on social grants. Fewer economically active people means less revenue in terms of taxes, and this is largely detrimental to gross domestic product growth and the broader economy.
Instead of importing, South Africa should leverage its considerable demand for infrastructure to localise products 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. Ultimately, this will grow our economy and contribute to a better South Africa.
Mervyn Naidoo is the Group CEO at ACTOM.
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