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Transnet splits R50bn, 1 064 locomotives contract between four global rail groups

Transnet CEO Brian Molefe on the award of the 1 064 locomotives contracts and the localisation opportunities surrounding the deals. Camera Work & Editing: Nicholas Boyd. Recorded: 17.3.2014.

17th March 2014

By: Terence Creamer

Creamer Media Editor

  

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Freight logistics group Transnet has awarded the much anticipated contracts for the procurement of 1 064 locomotives, collectively valued at R50-billion, to four separate companies, including two from China.

The R50-billion contract value, which is the largest ever concluded by the State-owned utility, included hedging and escalation costs and the procurement was conducted through an open tender, initiated soon after the project received shareholder and board approvals in April 2012.

CEO Brian Molefe announced on Monday that China South Rail (CSR) Zhuzhou Electric Locomotive and Bombardier Transportation South Africa, led by the German arm of the Canadian company, would collectively supply 599 electric locomotives, while General Electric South Africa Technologies and China North Rail (CNR) Rolling Stock South Africa would supply the 465 diesel locomotives.

Four companies had been chosen, Molefe said, because Transnet was not convinced that a single supplier had the capacity to deliver on the full package in the timelines envisaged. The first units were expected to be introduced into the aged general freight business (GFB) fleet within 15 months, with the full deployment expected to be completed during 2019.

CSR Zhuzhou Electric Locomotive would supply 359 electric locomotives at a contract value of R14.6-billion, excluding hedging and escalation costs. Bombardier Transportation South Africa would supply 240 electric locomotives at a base cost of R10.4-billion.

General Electric South Africa Technologies would supply 233 diesel locomotives at a base cost of R7.1-billion and CNR Rolling Stock South Africa would supply 232 diesel locomotives for R7.8-billion.

The average base price for a single electric locomotive was estimated at R41-million, while a single diesel unit would cost R32-million.

“It has been a long, complex and difficult process,” Molefe said at a contract-signing function in Johannesburg attended by senior officials from each company, as well as by ambassadors from Canada, China and the US.

CSR Zhuzhou Electric Locomotive was represented by company president Liu Hualong, Bombardier Transportation, by president and COO Lutz Bertling, General Electric South Africa Technologies by General Electric Transportation Southern Africa CEO Tim Schweikert, and CNR by president Xi Guohua.

Molefe insisted that the procurement process had been conducted “to the letter” by a negotiation team that included CFO Anoj Singh, Transnet Freight Rail (TFR) CEO Siyabonga Gama and Transnet Engineering CEO Richard Vallihu.

A board subcommittee for acquisitions and disposals, comprising independent directors, oversaw the six-stage evaluation process. The evaluation of the bids was also monitored by Transnet’s internal audit function, itself made up of independent companies, which had issued a report “confirming that all governance and procurement procedures were followed to the letter”.

LOCALISATION EMPHASISED

Besides commercial, technical, black economic-empowerment, training and technology-transfer commitments, the successful original-equipment manufacturers (OEMs) had also met the Department of Trade and Industry's 55% local-content stipulation for the diesel vehicles and the 60% threshold for the electric locomotives.

But Molefe said some suppliers could well deliver localisation spin-offs of 65% or higher and stimulate a domestic railways reindustrialisation process, while creating the platform for the transformation of Transnet Engineering into an African rail OEM.

Transnet Engineering would invest R300-million at its facilities in Pretoria and Durban to facilitate the localisation programmes, while the OEMs had been given 90 days to finalise their arrangements with local suppliers, including private domestic suppliers.

It was anticipated that CSR Zhuzhou Electric Locomotive and General Electric South Africa Technologies would build on the localisation platforms that they had already created north of Pretoria for other TFR contracts, while the other two OEMs would implement their build programmes primarily in Durban.

Transnet estimated that the procurement would create over R90-billion in localisation benefits over the life cycle of the locomotives. “Approximately 30 000 direct and indirect South African jobs will be created,” Molefe enthused, noting that only about 70 of the units would be assembled abroad.

In their respective presentations, Hualong, Bertling, Schweikert and Guohua emphasised their commitment to meeting the local-content stipulations and to partnering with Transnet Engineering, notwithstanding the group’s OEM aspirations, which are focused primarily on the opportunities that were likely to arise in the rest of Africa.

OPERATIONAL IMPROVEMENTS

The performance of the TFR’s GFB unit, which transports all cargo barring freight moved on the dedicated commodity export lines, was expected to improve materially as a result of the acquisition.

At present, the average age of a GFB locomotive was 33 years, which would fall to 22 years by the end of the contract period – that period was officially five years, but Transnet hoped it could be shortened to three-and-a-half years.

The contracts were central to the rail portion of Transnet’s seven-year, R300-billion market demand strategy (MDS), which was launched in 2012 in a bid to modernise and expand the utility’s rail, ports and pipelines businesses.

It is also the single largest portion of the R194-billion set aside for TFR’s modernisation, which is being pursued in an effort to support a material modal shift from road to rail.

At present, TFR had an estimated 15% market share of South Africa transportable gross domestics product, but was targeting to raise this to between 25% and 30% by 2022.

The aim was to increase TFR’s volume from 208-million tons yearly to 350-million tons by 2019, with GFB (which currently moves about 83-million tons a year) increasing its volumes to 170-million tons over the period. The balance of the forecast volume growth would be derived from its dedicated coal and iron-ore export lines, which were also being expanded and modernised.

The acquisition of the locomotives would be funded through a combination of internally derived resources and through the R80-billion bond programmes associated with the larger MDS. However, Transnet was also hoping to receive some funding support from export credit agencies from the home countries of the four suppliers.

Edited by Creamer Media Reporter

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