Department of Public Enterprises Winter School: Transnet and SAA presentations

Meeting report

Transnet presentation
Mr Vuyo Kahla, Group Executive, Transnet, informed the Portfolio Committee that the shareholders’ mandate was that Transnet assist in lowering the cost of doing business in South Africa and enabling economic growth through the provision of appropriate port, rail and pipeline infrastructure. Under its previous CEO, Dr Maria Ramos, Transnet had put capacity ahead of demand. He defined Transnet as a self funded, focused freight transport company that was not State-subsidised. The focus was on delivering integrated cost effective services.

The shareholders had five compact strategic objectives: volume and revenue growth, capital and financial and efficiency, operating efficiency and effectiveness, infrastructure investments, and development. The governance structure of the Board was driven by the Articles, which stated that no more than eighteen members could comprise the Board. The current Board was twelve members in total, of whom two were executive directors and the rest were non-executive. The objective behind this to provide for external members to run the company without being constrained by parochial insider interest. The core operating divisions were rail, ports and pipelines.
 
The revenue of the company was R33.5 billion for the year ended 31st March 2009. This was an 11% increase from the previous financial year. The net operating expenses were R20.3 billion, which had increased by 18% from the previous year. Mr Kahla explained to the committee that the financial results should be looked at against the backdrop of an economy that went into tailspin. Mr Kahla highlighted property, plant and equipment as the focal area in the balance sheet. The assets of the company grew from R78.2 billion in 2008 to R96.4 billion in 2009. The total assets were now R118 billion. This was important for the growth of the company. This highlighted the growth of capacity ahead of demand. The reserves of the company had also grown. Freight rail was the biggest division, complemented by over twenty eight thousand staff members. The contribution of port terminals to external revenue dropped, which meant that less ships docked at the ports, but this was indicative of what was happening in the economy. Capital expenditure also increased during the last financial year. The impact of the economic crisis on Transnet resulted in a drop in rail volumes. He stressed that safety incidents had to be dealt with and reduced.

Mr Kahla felt that Transnet Pipelines was one of the most efficiently run divisions of the company. He highlighted that fact that the industry was experiencing many challenges. Efficiency and lower prices were essential in the current global markets. Customer requirements were global shipments, multi-modal solutions and integrated logistics solutions. Transnet's vision was to become one company operating on an integrated platform. An integrated supply chain was a global trend. Transnet already had an integrated supply chain, so it had to keep it and run it efficiently. The South African freight system was performing relatively well. It was ranked twenty-fourth out of 150 countries and was also ranked highest amongst middle income countries. The challenge of shipping connectivity was a major problem. More ships had to be drawn to South African shores. Transnet needed to look at building a hub port in South Africa. This would result in short-sea shipping and in turn create a lot of new business opportunities.

The key driver of costs was road transport costs. The challenge was the drawing of rail friendly cargo from road to rail. If the problem was not dealt with, then the tax payer would end up subsidising the road transport costs. Rail transport was more cost efficient and environmentally friendlier. Transnet also had to offer customers rail transportation as it was cheaper, as opposed to slashing prices. The transport cost challenge related to freight and not rail. An inter-modal strategy was thus required. Fuel in turn was the driver of high road transport costs. Mr Kahla stressed the point that even during this tough economic climate, there were still pockets of opportunity that could be exploited. Asian importers were growing and Europe was still the largest importer of South African coal. 2010 would continue to be tough for the logistics industry. The key challenges needing to be addressed were: high ocean freight costs, poor regional connectivity, investment backlog, traffic demand, limited inter-modal solutions, skills shortage and limited black private sector participation.

Transnet was now about getting the business to run efficiently and productively. Asset turnover had to be more efficient. Human capital optimisation was also important. The growth of Transnet's skills base and Black Economic Empowerment (BEE) participation was also highlighted as important. Transnet had moved from 2004, when it was decided that the bleeding of the enterprise had to stop, to stabilising the core business, and in 2009 there would be a focus on optimising and extending the growth of the company. The re-engineering of the business had been around effectiveness and efficiency. Transnet was looking forward to the new port Ngqura, which would soon be operational. Funding for Transnet's investments had to be obtained. Half of the required funding for 2009 had already been raised.

Transnet invested more than R141 million in its corporate social investment initiatives to grow its own skills and those to serve the market in general, improve access to quality primary health care, develop sports, develop and improve access to arts and culture and to provide containerised infrastructure assistance. Mr Kahla stated that the key challenge that Transnet faced was economic regulations.

South African Airways (SAA) presentation
Ms Nomvula Nkabinde, Acting General Manager: Commercial, South African Airways, outlined the vision, mission and values. The vision for South African Airways (SAA) was to be an airline with global reach and its values were listed as safety, valuing the people, customer focus, accountability, integrity and excellence in performance. SAA's strategic value was based on the fact that the geographical location of South Africa necessitated air services connectivity for the normal functioning of the economy and trade and industry. SAA also contributed to and supported the broader national governmental goals. She highlighted Africa as the key focus area. This meant leverage of the African network to capture global -Africa traffic flows (which allowed growth and economies of scale in Johannesburg hub). The strategy centered on the Johannesburg hub. SAA, with its alliance partners, was the preferred carrier in the domestic market. Domestic success would be achieved through maintaining Johannesburg as a hub and improving the connections for Africa and international traffic. The focus was on the premium market.

From a commercial point of view the key strategic goals were revenue management; responsibility for price setting on all routes, maximising revenue and overall responsibility to maximise revenue per available aircraft seat. The Initiatives focused on Africa aimed to raise the standards of African airports and on-board service to international standards, a performance based navigation project and an African Aviation training initiative. In 2007 SAA embarked on a restructuring programme to ensure sustainability. Global initiatives focused on re-engineering the business and fleet, revenue initiatives focused on enhancing revenue yields and generating more income, whilst departmental initiatives focused on reducing cost. The restructuring programme had assisted to place SAA on a sound operational footing. Africa would remain SAA's key operational focus for expansion.

Discussion
The Chairperson asked Mr Kahla how Transnet arrived at its figures for setting its targets.

Dr Andrew Shaw, Deputy Director General, Department of Public Enterprises, responded that the recession as taken into consideration when targets were set, and the company then looked at its capacity and then made stretch targets as benchmarks.

The Chairperson commented that the issue of high costs would be vigorously pursued by the Committee. She asked what the rating for lending was for the group.

Mr Kahla responded that the group applied was the same rating as did South Africa, and that it had to do with Broad Based Black Economic Empowerment and other features.

Mr M Mangena (AZAPO) asked if SAA was in discussion with Government, as well as other carriers, and whether the carrier had Japan as one of its destinations. He also asked the amount of recapitalisation the airline needed, and what were the pressures of an extended network with different hubs across the continent. He queried if the enlargement of the fleet would be cost effective, profitable or useful beyond the current economic crisis.

Ms Nkabinde affirmed that SAA was in talks with Government to win various accounts. SAA was looking to grow, but traveling to long distance destinations was a challenge, and the carrier was operating very thinly. She stressed that money was important for the feasibility of flying into countries like China and Japan. Secondary hubs would be established in North West Africa. In regard to the last point, she said that SAA had not completed its fleet plan.

Mr M Oriani-Ambrosini (IFP) commented that SAA was in a difficult position since it was a time of crisis, and perhaps it was a good time to move in where others had retreated. He wanted to know, from a corporate point of view, where State ownership fitted in with SAA's strategy. He requested copies of all the pleadings that the carrier had filed in the United States of America (USA) and European Union (EU) courts.

Ms Nkabinde stated that the advantage of State ownership was the national identity and branding that the carrier enjoyed. She confirmed that the documents would be released if this request, which she would convey, was approved by the legal department.

Mr Oriani-Ambrosini said he was requesting the release of old papers filed by the carrier.

Mr Kahla said that the proceedings in the EU case were closed. He stated that all parties involved in the case could be prejudiced against if the documents were released.

The Chairperson stated that if the proceedings were closed then the Committee requested any documents available in the public domain.

Ms Nkabinde responded that only public documents would be made available to the Committee.

Ms J Masilo (ANC) raised concerns regarding luggage theft, especially on the route from OR Tambo to Cape Town. She asked how far SAA was in resolving this issue.

Ms Nkabinde stated that the issue of pilferage was unacceptable. Luggage was handled by Airports Company of South Africa’s (ACSA) ground staff. Solutions would be implemented and SAA was working with ACSA. She added that it was impossible to follow each and every single bag.

Mr M Nhanha (COPE) requested further clarity on where SAA stood on the Airbus issue. He believed that somebody should be held accountable for the needless expenditure on the Airbus order.

Mr Jan Blake, General Manager: Mergers and Acquisitions, SAA,  responded to the issue of the Airbus transaction. Some progress had been made with Airbus but it had already faced 30% cancellations and thus it was also struggling. The order from Airbus was made in 2002 when the balance sheet was good and it was easy to obtain finance. SAA's options were to either get out of the order, or transfer obligations to other carriers. Unnecessary expenditure would be dealt with.

Mr Nhanha asked how much was involved in fuel hedging costs and whether this was a negative impact on the profit of the company.

Mr Blake said that fuel hedging had not been announced.

Mr Nhanha also complained that getting through to the call centre was a nightmare.

Ms Nkabinde responded that the call centre had been problematic since SAA outsourced. The training of staff took longer than expected, especially with the disruption of the strike. There was a lot of on the job training and calls were diverted to the call centers in the USA and UK to ease call volumes. SAA was also trying to hire Nationwide call center staff. The call centre problem was an issue of skills.

The Chairperson interjected and said that she would call the call center to monitor standards and the Committee would get back to SAA at the next meeting. One call not answered properly was a customer lost.

Logistics presentation by Department of Public Enterprises (DPE)
Dr Shaw focused on the globalisation of logistics. The introduction of containers was a new concept. The bigger ports became bigger and the smaller ports became smaller. South Africa had to be part of the main hubs in order to be part of the global dynamic. The port system needed to be developed in order to attract and handle large vessels. Rail freight was growing, especially in terms of containers. Technology cost a lot of money however. Inter- modal port connections posed a logistics challenge around which the Department had to move. South Africa had the highest levels of cost of logistics and this had to be looked into. The challenge facing Transnet was its reliance on freight.

One of the focal points of the Department was how to encourage airlines to develop and increase capacity in Africa. The commercial imperative in Africa would be most profitable. Expansion in Africa would be through SA Express (SAX). Part of the strategy was working in collaboration with other African carriers.

Discussion
Mr P Van Dalen (DA) requested clarity regarding the theft from Transnet of R1 billion worth of goods and asked why was security staff outsourced, as this posed a risk of security breach.

Mr Kahla responded that Transnet was not losing assets due to any security breaches. He admitted that the theft of copper impacted seriously on the efficiency of its operations. Fibre Optics cabling had since been used, but this was also stolen. Transnet was working with the South African Police Service (SAPS) as well as the National Intelligence Agency (NIA) to combat theft.

Mr van Dalen said that Transnet's outsourced unit did not speak any local languages and was inefficient.

Mr Kahla responded that Transnet had a mix of in house and outsourced security forces. He stated that Transnet would come back to the Committee with steps on how theft would be dealt with.

Mr van Dalen asked why ships were taxed so much for docking in SA.

Mr Kahla responded that there was not one single system of charging, and the Department was currently conducting a study on this matter.

Dr Shaw added that South Africa could well be charging higher port tariffs. He informed the Committee that South Africa was dependent on this revenue but this did not mean that prices should remain as they were. He warned that if port services were undercharged, South Africa would not want to be in a position of disadvantage when world markets picked up again.

Mr van Dalen asked why airplanes were bought when they could be leased, and asked for figures as to how many were owned and leased respectively. He also suggested that the Committee should inspect the servicing of planes, as well as how luggage was handled at airports.

Mr Blake said that SAA had outsourced the handling of luggage for many years. Most employees were presently full time. Nine planes out of 156 were owned, and the rest were leased.

Mr van Dalen asked if it was not better to lease planes, and what the reason was that SAA buy them now.

Mr Blake responded that sale and lease were not the same. Obtaining finance for purchases was extremely difficult and about $600 million was required to purchase the planes.

Mr van Dalen asked whether, if the State bought the aircrafts and then leased them, it would be able to get back its returns.

Mr Blake responded that it would, but this would be over a period of time.

The Chairperson asked how Transnet's interests were protected when it entered into partnerships. She enquired if there was a fleet planning strategy in place.

Mr Kahla stressed that Transnet had to enter into partnerships, but that it was very careful not to lose its own interests when doing so. How partnerships were structured was important. A lot more could be done for local content manufacturing.

The Chairperson asked if SAA owned cargo planes, or whether they were leased, and how much revenue was being generated. She asked if SAA analysed cargo in Africa.

Ms Nkabinde said that cargo turnover was R23 billion and the cargo division was profitable.

The Chairperson enquired into SAA's turnaround strategy.

Ms Nkabinde responded that SAA was looking for long term growth to move goods. High-sensitive goods comprised the movement of cargo goods. SAA's turnaround strategy involved a strong airline in Africa. However, a weak balance sheet was a problem that hindered growth.

The Chairperson asked who bore the costs of calls diverted to the international call centres, and whether SAA was serving and repairing its planes overseas. She also asked for details of SAA’s Customer Servicing Index (CSI) and what was done about risk management. She also posed the question whether SAA had been delinquent, or what other reason was given for it facing so much litigation.

Ms Nkabinde said that the reason for the outsourcing was due to the strike, that the calls were made through Skype and costs were minimal if not non-existent. SAA was involved in CSI through its staff and advertising revenue was used for CSI. Risk areas had been identified and a risk management plan was in place. She maintained that SAA was not delinquent and past mistakes were part of its legacy. SAA was not involved in any wrong doing. Moving forward, she confirmed that SAA was applying due diligence.

Mr Oriani-Ambrosini expressed his view that CSI interventions should not come from State owned enterprises.

Mr Blake noted that servicing of  planes was outsourced to China as there was no capacity to do this in South Africa. A technical team was sent out to oversee this.

Mr van Dalen asked why this was the case.

Mr Blake responded that South Africa had lost its technicians to the overseas market, and the fact that fewer technicians were receiving training was problematic. The cost of manpower was very high.

Dr Shaw said that SAA and the Department had approached the National Treasury for assistance. SAA technical teams would focus on being multi-technical.

Dr Shaw added that presently SAA was engaged in hiring a new CEO.

The Chairperson hoped that the screening process would be efficient.

The Chairperson asked about fleet planning.

Mr Kahla confirmed that fleet planning was being conducted.

Ms Nkabinde confirmed that SAA also had a fleet plan strategy in place.

The Chairperson asked what time frame was envisaged for this.

Mr Kahla responded that a tender for 100 off-shelf locomotives had been put forward, which were due to arrive next year. Another 50 were being assembled by Transrail Engineering. The fleet plan would be made available to the Committee.

Mr Nhanha (COPE) stated that he liked Transnet's concept of intra Africa trade.

Mr Kahla responded that Transnet had to be involved in intra African structural development. 

Mr Nhanha asked where the Dinaledi schools were situated and how many were in the Eastern Cape.

Mr Kahla responded that he could not answer this question off the cuff but that Transnet was involved, with Denel, on this.

Mr Nhanha noted that he was worried about the lack of investment in the East London harbour. He suggested that Transnet reconsider its resourcing of this harbour.

Mr Kahla said that Transnet would be in East London to engage with the hub on 27 August.

Mr Nhanha stated that he was reliably informed that SAA had many pilots fast approaching retirement and there were not enough pilots to replace them. He asked if, in this process, SAA was meeting its employment equity goals.

Mr Blake stated that he was not aware of any soon-to- retire pilots. He stated that there were a lot of pilots in the country and for most of them it was their ambition to join SAA. The human capacity risk lay in the technical department.

Ms Nkabinde stated that all employment equity goals were being reached.

Mr Oriani-Ambrosini commented that there should be a large African hub and airline. He asked why there were no city ports that were independent.

Mr Kahla said that competing city ports were not supported by Transnet. Its integrated supply chain system was being followed by other countries and it would not deviate.

Mr Nhanha asked if it would not make sense for SAA and SA Express to merge.

Dr Shaw responded that SAA and SAX had always been historically separate. A joint venture was not viable, as SAA had a large but weak balance sheet and SAX had a small but strong balance sheet.

The meeting was adjourned.