Local bus manufacturing could add billions to SA’s economy

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JEREMY MAGGS: South Africa could add billions of rand to the economy and create thousands of jobs simply by building more of the buses we use locally.

There’s a new study by the Localisation Support Fund that suggests that every one percentage point increase in local content could add around a billion rand to GDP (gross domestic product) and support many hundreds of jobs.

But the study also blames inconsistent government procurement, weak enforcement and continued imports of fully built buses.

The chief executive officer of the Localisation Support Fund is Irshaad Kathrada and joins me on the programme now. Welcome to you.

If building buses locally then makes such good economic sense, and your numbers certainly indicate that, why aren’t manufacturers already doing it?

IRSHAAD KATHRADA: As you say, there’s a massive opportunity on the table. South Africa does already build world-class bus bodies. The challenge is that we’re doing it at a relatively small scale at the moment.

So roughly speaking, in South Africa, we are procuring around about 1 000 buses a year. To put that in context, India, as a country now significantly larger than us, is doing anywhere from 50 000 to 60 000 buses.

But we are expecting that demand to go up over the next number of years.

We’ve seen a number of metropoles, like the City of Cape Town, looking to expand the MyCiTi bus infrastructure. Even eThekwini municipality has announced a R9 billion to R10 billion investment in a bus rapid transit network, which they’re calling GO!Durban.

Now, with that increased demand, which should increase the level of buses anywhere up to about 50% to 60% above where we are right now, it begins to build the scale behind which bus manufacturers can begin to invest in tooling and component investment.

But it doesn’t just happen. It doesn’t happen without the proper policy levers. I think that’s a big part of what we’ve uncovered through the work that we’ve done is that just having the demand is not enough.

We’ve looked at what other countries are doing as well, and there’s a series of policy levers that they’re looking to implement.

I think the first, and we’ve seen this in a number of countries, is there needs to be some level of local content requirements. We’ve had that in the past in South Africa, but it’s been poorly enforced.

So there is a recommendation that for the componentry, where we are competitive, bus bodies being one of them, we can increase the local content thresholds way above where they’ve previously been, from around about 70% to about 85%.

What that does is it builds that consistency of demand. It allows the manufacturers to make the necessary investments.

We’ve seen India do something very, very similar. They give considerable subsidies to their transit network, but in return they require 50% of the value in the bus to come from domestic sources, be it either components or labour that’s there. Nigeria have done a similar thing, but they’ve been less successful.

JEREMY MAGGS: I want to pick you up on the comparison with India. Again, just test my argument, South Africa buys around 1 000 buses a year. Is that really a big enough market to sustain a competitive manufacturing industry?

IRSHAAD KATHRADA: At 1 000 buses a year, it’s challenging, but it’s not impossible because what we’re finding is that in addition to the local content, we’re very fragmented in our procurement.

What we’ve seen with a number of other countries, India have been very good at this, but other countries have been equally good. The UK, Italy, for example, have all centralised procurement of buses.

So irrespective of which municipality it’s going to or metropolitan area, there’s one agency that’s doing it. What that does is there’s scale. So yes, if it’s 1 000 buses and it’s all terribly fragmented, it’s very, very difficult to drive localisation.

If we can centralise procurement, and this is a big if, because this is something that as South Africa, we’ve not been particularly good at.

You and your listeners will be familiar with the Public Procurement Act, which recently has been referred back to parliament to address some of the deficiencies in the process.

But what was intended in that piece of legislation was to have a centralised and coherent procurement strategy that allows us to realise the economies of scale.

But I think the other thing that we’re seeing is that there is going to be increasing demand. There is investment in rolling out both the access and affordability of public transit, and with that, it does lay the grounds for increased localisation.

JEREMY MAGGS: Wouldn’t more expensive locally manufactured buses ultimately mean higher fares for commuters?

IRSHAAD KATHRADA: It could do, and I think this is where we’ve got to be really strategic with our procurement capability and how we think about this sector. I think we should really look at the work that we’ve done as an industrial cost-benefit analysis.

We’ve looked at what the value addition would be in terms of jobs and GDP. But we’ve also looked at the costs. We’ve looked at what this might mean in terms of increasing the cost of buses, but also what incentives might need to be in place.

But we’ve looked also at the mitigants to those costs.

So it is likely that in the short term, increasing local content thresholds will add to the cost of a bus.

The modelling work that was done as part of this study, which was done independently by Ernst & Young, suggested that it could increase buses in the short term by up to about 10%.

How do you allay some of those cost increases? Well, it’s through centralising your procurement.

What we’ve found in other markets around the world is that centralising procurement can reduce costs by 10% to 15%, thereby offsetting the increased costs that might come through local content.

So again, it points to the idea that if we are going to demand more local content from bus manufacturers, then we’ve got to streamline the procurement process so that we can ultimately reach the economies of scale where parts come down in the medium to long term.

JEREMY MAGGS: Just a quick answer as we finish this conversation. With electric buses becoming increasingly important, are we not at the risk of investing in conventional manufacturing technology that could soon, if not already, become obsolete?

IRSHAAD KATHRADA: So there’s a lot of componentry that will exist in an internal combustion engine in a diesel bus, the typical ones that we see, and in an electric bus.

The bus bodies are broadly similar, made of the same materials, look the same. The seating that’s inside is generally similar, the stability and other types of componentry will be very, very similar.

There will be new componentry that will be demanded as we electrify our buses, wire harnesses and battery management systems. But South Africa is beginning to build some nascent capability in that.

So there’s a lot that can be done that is a complete carryover. But there’s also a lot of new componentry that will breed demand for in South Africa.

JEREMY MAGGS: Irshaad Kathrada, thank you very much indeed, chief executive officer of the Localisation Support Fund.

‘There’s a massive opportunity on the table. South Africa does already build world-class bus bodies,’ says Irshaad Kathrada, CEO of the Localisation Support Fund.