Monday, March 17, 2014

Transnet: 1,064 locomotives, $5 billion

Written by  William C. Vantuono, Editor-in-Chief
GE ES40ACi diesel-electric locomotive GE ES40ACi diesel-electric locomotive
Transnet, South Africa’s state-owned freight transport and logistics company, on March 17, 2014 awarded US$4.7 billion in contracts for 1,064 locomotives to four global original equipment manufacturers—General Electric South Africa Technologies (a unit of U.S.-based GE Transportation), CNR Rolling Stock South Africa (Pty.) Ltd., CSR Zhuzhou Electric Locomotive, and Bombardier Transportation South Africa. The acquisition is the largest-ever locomotive supply contract in South Africa’s history and the single-biggest investment initiative by a South African corporation.

The majority of the locomotives will be deployed in Transnet’s Freight Rail GFB (General Freight Business) division, which does not include the company’s dedicated heavy-haul lines for iron ore and coal. Transnet said it expects Freight Rail, which accounts for roughly 50% of the company’s revenue and capital expenditure requirements, to grow its volumes to 350 million tonnes from the current 207 million tonnes. Just over 60% of the growth is expected to come from GFB.

Transnet Electric LocomotiveThe locomotive acquisition is divided among the four builders as follows: GE will produce 233 Evolution Series GE ES40ACi diesel-electric locomotives for the Transnet Freight Rail network. This is in addition to the 143 locomotives that Transnet has ordered from GE since 2010. CNR Rolling Stock South Africa will supply 232 diesel-electric locomotives. CSR Zhuzhou Electric Locomotive and Bombardier Transportation South Africa will supply 599 electric locomotives.

In line with South Africa’s commitment to boost its manufacturing capacity, all the locomotives except 70 will be built at plants in Koedoespoort, Pretoria, and Durban operated by Transnet Engineering, Transnet’s engineering, manufacturing, and rolling stock maintenance division. Transnet Engineering’s role in the agreement has been defined “to ensure that it transforms into an OEM over time,” the company said. “Transnet Engineering will share approximately 16% of the total build program, about one-third of which will be outsourced to local emerging engineering and manufacturing firms. This will enable it to create export capability for locomotives and related products, as well as drivie South Africa’s regional integration objectives. In total, the localization elements are expected to contribute over US$8.4 billion to the South African economy.”

The contracts have stringent local content, skills development, and training commitments as dictated by the Supplier Development Programme, a government initiative led by the Ministry of Public Enterprises, whose main goal is to localize the production of imported machinery and equipment.

Transnet said the four suppliers have complied with and exceeded the minimum local content criteria for rolling stock of 60% for electric locomotives and 55% for diesel locomotives. “Once all these locomotives are delivered, Transnet would have met all the rolling stock requirements needed to successfully execute our Market Demand Strategy, our record-breaking US$28.7 billion infrastructure investment program,” said Transnet Group Chief Executive Brian Molefe. He added that the contracts “mark a significant milestone in our company’s history together with substantial socio-economic benefits for South Africa. The drive to modernize our fleet is intended to improve locomotive reliability and availability. This will improve customer satisfaction, ultimately leading to our crucial goal of road-to-rail migration of cargo in line with government’s objectives, and transform the South African rail industry by growing existing small businesses and creating new ones. We are going to create and preserve approximately 30 000 jobs.”

The core components of GE’s 233 ES40ACi locomotives, including the engines, will be made in the U.S., with final assembly occurring at a facility in South Africa. “This technology will help Transnet lower fuel and maintenance costs over the long run,” said General Electric South Africa President and CEO Tim Schweikert. "GE South Africa Technologies is honored to be awarded the opportunity to partner with Transnet in revitalizing South Africa's rail sector. Over the past five years, GE South Africa Technologies has delivered more than 115,000 hours of training, more than 35% manufacturing of local content, social upliftment in communities, and technology transfer.”

Transnet’s contract awards followed a public tender process overseen by its Board of Directors through a subcommittee of independent directors. In addition, Transnet Internal Audit monitored the bid evaluations to ensure that the process complied with South Africa’s Public Finance Management Act.

The bid evaluation process had six stages involving Broad Based Black Economic Empowerment and Supplier Development; technical ability (including details of technical offers from the potential suppliers); and commercial. The latter included pricing, total cost of ownership and contractual terms, and compliance to the supply agreement.

The final locomotive is expected to roll off the production line within three and a half years. “In other words, at the program’s peak, we will be producing 480 locomotives per year at 48 per month,” said Molefe. Commenting on the rationale for splitting the work among four suppliers, Molefe said, “Ability to stick to an extremely tight delivery schedule was one of the key considerations in assessment of the bids. It is our view that no single supplier would have the capacity or resources to deliver within the timelines we had envisaged.”