Transnet Annual Report 2009/10

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Public Enterprises

13 October 2010
Chairperson: Ms M Mentor (ANC)
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Meeting Summary

The Transnet management team gave a detailed briefing to the Committee on the Transnet 2009/10 Annual Report and financial statements. Transnet showed a healthy financial position and had achieved significant progress in increasing its capital assets to provide growth. It fully acknowledged the challenges ahead and recognised its key role in lowering the cost of doing business, enabling economic growth, by providing appropriate ports, rail and pipeline infrastructure and operations. Transnet was self-funded and was also mindful of the need to boost infrastructure, capital build and retain its credit ratings at international levels. A four-point growth strategy over the next five years focused on investment in infrastructure, setting good examples for safety and risk environments, human capital optimisation, and establishing world class efficiency in every part of the business. These were reflected in the compact with shareholders. More than R160 billion investment would be made over ten years. During 2009/10, even though container volumes fell because of the recession, there was nonetheless growth in several areas. In rail, volumes dropped 8% but transport distances increased, and use of rail containers had risen, in line with attempts to shift bulk haulage from road to rail. There was an increase in transport of magnetite, for which new markets had now been found. It was hoped that the turnaround increases already experienced in coal export would continue. Pipelines also showed growth, despite constraints which included the need to find certainty on tariffs with National Energy Regulator of South Africa. Operational efficiencies were not yet up to scratch, but Transnet had set itself ambitious targets and was striving to reach them. It contributed to the competitiveness of the domestic supply chain and procurement environment through the Competitive Supplier Development Programme, which was carried through to tenders, had created around 70 new job opportunities, and around 65% of its spending promoted Broad Based Black Economic Empowerment. It spent about R400 million on training of both engineers and artisans, including training of more people than it needed itself, to boost general marketable skills in the country, with specific targets for black and female bursary support and employment. Its Corporate Social Investment included the Phelophepa Primary Health Care Train running to rural areas, maths and science education, sport, particularly at rural and farm schools, and support to artists and crafters. It outlined its focus also on health and security, which formed a major part of its corporate culture campaigns. It was satisfied that it was addressing environmental and other risks, and was starting to reduce its own carbon emissions.

Members asked whether the increase in rail use was directly linked to a reduction of road use and wondered if it would be possible to move all freight to rail. They asked about the training and wondered if Transnet’s own attempts could be linked to a national process, particularly for training of artisans, the School of Excellence and Corporate Social Investment programmes, as well as interaction with other departments, 2010 World Cup legacy projects, and maize exports in the Eastern Cape. They asked if Transnet would be prepared to change gauge sizes to facilitate transport between African countries, and what it was doing to ensure that it did become an economic enabler for South Africa’s rich mineral reserves, and what it could offer for provinces such as Northern Cape in particular, as well as its attempts towards greening. The problems in KwaZulu Natal were outlined, and Members asked how compensation was determined, and stressed that Transnet should be sensitive to tensions between leaders and their communities, and the need to consult widely through appropriate forums.

Transnet’s financial statements showed that revenue increased to R35.9 billion, with earnings before interest, tax, depreciation and amortisation (EBITDA) growing 9%, largely due to aggressive cost savings measures implemented during the recession. Capital investment had reached R19.3 billion, and the projects of the last year were outlined. The gearing and cash interest cover ratios were strong, particularly since Transnet had paid off borrowings a few years previously once it sold its non-core assets. Capital investment would continue over the next 20 years. Transnet had effective borrowing strategies in place, with guarantees to reduce the cost of borrowing. It had achieved an unqualified audit, with one matter of emphasis in respect of a contract inappropriately attended to by a former Chief Executive. A separate presentation would be given on post-retirement benefit obligations and medical expenses. Finance costs had increased in line with the capital programme, as had property, plant and equipment. Transnet was anticipating even better financial results over the next few years. Members asked about the amounts lost through theft of cables, and discussed possible solutions to the problem, which affected other institutions in South Africa, and was also an international problem. They asked if Transnet was bound by any embedded derivative contracts, asked where savings were achieved, enquired about the use of consultants, and the areas in which key performance indicators were not achieved. Members enquired about the needs for capital financing, how they would be achieved, whether dividends were paid, the amounts paid to personnel, and Transnet’s likely involvement in high speed train services.

Transnet briefly outlined the decision by the Passenger Rail Agency of South Africa that no further work should be performed by Transnet on its rolling stock without purchase orders having been issued, as well as the unilateral decision on 13 August to suspend long-distance Shosholoza Meyl services. Transnet remained concerned that no alternatives were in place, but although it had attempted to put some suggestions to PRASA, there had been no response. The Minister had been asked to deal with a question of outstanding payments owed to Transnet by PRASA. PRASA had not yet approached the Ministers, nor an inter government body, to try to resolve the issues. Members noted their concerns and suggested that it would be necessary for the Portfolio Committees on Public Enterprises and Transport to deal with the matter together

Meeting report

Chairperson’s opening remarks
The Chairperson noted that South Africa should be proud of the capabilities at Transnet, particularly the engineering capability. She was sure that, had miners been trapped in South Africa similar to the Chile situation, Transnet and other companies would have been able to combine their engineering skills to rescue them. This Committee was interested in whether latent engineering skills capabilities could be fully developed, and that the potential for development was fully realised, to ensure that in the first place there was progress on skills development, and that in the second place the skills were properly placed, to achieve the projected 7% growth.

Transnet Annual Report 2009/10 Presentation
Mr Geoff Everingham, Acting Chairperson, Transnet, congratulated the Chairperson on being selected for training in the United States and hoped this would be valuable and stimulating for her.

Mr Everingham tabled the Transnet Annual Report for the financial year ending 31 March 2010.Transnet acknowledged fully its accountability to Parliament and recognised the various roles it must fulfil in the economy. The Annual Report set out its efforts, and reflected its commitments and plans for the future. Transnet showed a healthy financial position and had achieved significant progress in increasing its capital assets to provide growth, whilst fully acknowledging the major challenges and tasks that lay ahead.

Mr Chris Wells, Acting Group Executive Officer, tabled the presentation, and noted that the printed booklet was intended to be a source of reference for the Committee. He would present only the most critical slides, and, if time permitted, he could also address developments subsequent to April 2010.

Mr Wells outlined that Transnet had a key role in lowering the cost of doing business in South Africa, thus enabling economic growth, by providing appropriate ports, rail and pipeline infrastructure and operations. Transnet was self-funded and must earn an appropriate return on investment to ensure sustainability. It must provide the needed capacity, ahead of demand, which posed a challenge because of the absence of investment into infrastructure over the previous 25 years.

The organisational structure of Transnet was outlined (see slides 3 and 4) in respect of rail, ports, pipelines and specialist units. Transnet reported through a Board of Directors, to the Minister of Public Enterprises. It was compliant with King III. A four point growth strategy would apply over the next five years, focusing on investment in infrastructure, setting good examples for safety and risk environments, human capital optimisation (training more people than it would need itself and thus ensuring transformation in the sector) and establishing world class efficiency in every part of the business. Transnet had signed a compact with shareholders. The first part of this related to volumes and revenue growth. Secondly, this compact required Transnet to retain its currently strong financial position, which would include not increasing borrowings beyond 50% of the total funding of the company, and ensuring that total interest costs per year must be covered at least three times by the profit earned in that year, in order to ensure that it could continue to attract cost effective loans from foreign and domestic markets. The third aspect of the compact related to operational efficiency, and although Transnet recognised that it was often not at world-class levels, it was making progress. Over a ten year period, more than R160 billion would have been invested. Skills development, black economic empowerment, health, safety and environmental issues were also important.

Mr Wells then expanded on some of the achievements. During this financial year the effects of the economic recession were still being felt, and this had affected container volumes, between 15% and 20%. Only in about July 2010 did volumes begin to rise again to pre-recession levels.

In respect of its rail operations, Transnet owned almost 21 000 km of railway track, and wished to resuscitate branch lines to enable other operators to use them. Its freight rail business comprised three subdivisions, of which the biggest was general freight (excluding iron and coal export lines). On the ports side, the National Port Authority (NPA) was the owner of eight commercial ports and operated all the container terminals in the country, and operated multi purpose and bulk in competition with other companies. Pipelines were a major investment providing security for inland markets for the next 70 years.

Although rail haulage showed an 8% decrease from the previous year, entirely due to the recession, the average transport distances had increased by 2%, showing growth in long-distance freight haul. Manganese exports had been affected in particular. Despite volumes dropping overall, there was a 6% increase in rail containers, paving the way for future road-to-rail movement. Coal transport by rail would also increase. Magnetite, a by-product of other mining, had previously simply been stockpiled, but now that markets for it had been identified, it was being transported to the coast for shipping, showing 34% growth in this product export. Exports of coal had declined and this was disappointing, as this was largely due to under-performance through poor management in the past and operational problems, which had been turned around by the last quarter of 2009/10. In the current year, it was doing well and could reach an all-time high of 71 million tonnes export. Export of iron ore showed 11% compound growth, which would continue in the current year. He illustrated that although old locomotive technology was used, the longest trains had included 342 wagons, which was a major engineering feat.

Mr Wells outlined that there were some constraints in regard to pipelines, although this also showed growth.

Mr Vuyo Kahla, Group Executive, Office of the Group Chief Executive, added that there was a difference of opinion in regard to tariffs between Transnet and the National Energy Regulator of South Africa (NERSA). The two entities were in discussion to try to reach certainty on the cost of equity for the petroleum pipelines and to reach clarity on the appropriate regulatory regime.

Mr Wells said there was also improvement in productivity at ports, although container handling rates were below world norms.

Mr Wells conceded that operational efficiencies were not yet up to scratch, but noted that there had been capacity building, reduction of derailments (29%) and improvements to availability and reliability of rolling stock. More must be done to achieve better turnaround times, predictable delivery times and effective utilisation of wagons. Security incidents had plagued Transnet, as other companies, but there had been massive progress in reducing cable theft.

Mr Wells outlined briefly that Transnet’s revenue increased to R35.6 billion, and earnings before interest, tax, depreciation and amortisation (EBITDA) had grown 9%, largely due to cost savings measures implemented during the recession. Capital investment had reached R19.3 billion, a massive increase from the former levels of around R2 billion to R3 billion. He outlined the gearing and cash interest cover ratios (see slide 14 for details), and stressed that Transnet still had capacity to borrow more while still satisfying its investors, based on international benchmarking (which was followed by both domestic and international lenders). When Transnet had sold its non-core assets in previous years, it had paid off borrowings immediately.

Mr Wells indicated that capital investment had begun in 2005, and since then had been raised from around 3% to 19% in 2009/2010, with projections that it should continue for the next 20 years. He outlined the major projects undertaken in the financial year, noting that many of the projects had been delivered on time and under cost, and that awards had also been given (see slides 17 to 21 for full details). Finalisation of some projects would allow a move to rail of 60% of transport that was currently done by road. There had been massive acquisition of locomotives and wagons, refurbishment, infrastructure replacements and port infrastructure and cargo handling equipment. 

Ms Moira Moses, Group Executive: Capital Projects, Transnet, added that Transnet had been awarded best engineering project for the deepening and widening of Durban Harbour Entrance Channel (to allow new generation large ships to call there) as well as another award recently for the Ngqura Container Terminal.

Mr Wells noted that Transnet had an effective borrowing strategy in place. Its bonds were highly prized by investors. There were guarantees to reduce the costs of borrowing, and the Global Medium Term Note (GMTN) Programme enabled it to issue bonds at competitive rates. In the past year it had raised R20 billion at cost effective rates and did not believe there would be problems in raising the funding for the projects in the five year plan. However, for projects not included in that, there might need to be private sector funding. 

Mr Wells drew attention to the Competitive Supplier Development Programme (CSDP), which contributed to the competitiveness of the domestic supply chain and procurement environment. About 70 new job opportunities were created, and because tenders carried CSDP obligations, about R335 million investment and skills transfer would follow. Transnet had invested around R13,5 billion (43% compound growth) in Broad Based Black Economic Empowerment (BBEEE) in the last financial year. 65% of its total procurement spending was with BBEEE companies, and this would continue although it was to some extent limited by the imported skills component.

Mr Pradeep Maharaj, Group Executive: Human Resources, Transnet, noted that Transnet had spent about R400 million on training. It employed about 188 engineers, with over 300 more being trained through its bursary programme at present. It also trained apprentices and artisans, and had targets for black and female appointments both for bursaries and staff. As at March 2010, 75% of the total staff were black and 19% were female. Female skills had grown. Transnet had a Culture Charter, and had completed two sets of scoring, and this emphasised safety as a major driver.

Mr Wells noted that although this was included in the slides, he would not deal with the Transnet pensioners’ position at this meeting, as it was to be dealt with as a separate matter.

Mr Kahla outlined that Transnet had R116 million Corporate Social Investment spending, including primary healthcare through the Phelophepa Primary Health Care Train, which had won a United Nations award, and which operated largely on the branch lines to take healthcare to rural areas. A second train was being built. This train also offered training to medical students, and was superbly equipped. Transnet also offered maths and science education, farm schools and support to regional crafters through an arts and culture programme.

Mr A Mokoena (ANC) asked whether, in view of Transnet’s intention to privatise the branch lines, the private sector would continue to run the train.

Mr Wells explained that one of the terms of privatisation would reserve right of way for this train.

Mr Wells tabled statistics on health and safety issues. Transnet’s rolling disabling injury frequency rates had decreased. Although there had been reduction in fatalities, he pointed out that even one fatality was one too many. Many fatalities occurred through negligence, when buses and taxis tried to beat trains.

The Chairperson asked if the recent death of a woman cadet would be listed as a fatality.

Mr Komotso Phihlela, Chief Executive, Ports Authority, Transnet, noted that Transnet Ports was a leader in training women. In respect of this incident, a board of inquiry had been set up, with partners. However, Transnet was awaiting the outcome, and could do nothing about the time lapse that resulted from investigations conducted by the authorities in Croatia, where the incident occurred, and United Kingdom, where the vessel was registered. When it had the results of the investigation, it would assess how it could make improvements and ensure that similar incidents did not recur.

Ms Virginia Dunjwa, Chief Risk Officer, Transnet, noted that this particular fatality was not included in the statistics, because the woman was not a Transnet employee but was a cadet.

Ms Dunjwa then outlined that there were environmental risks inherent to the nature of the Transnet business, in relation to air quality, dust, spillage, ground water pollution. All were being addressed fully. Transnet worked with the Department of Environmental Affairs, to ensure that that Department’s plans and regulations were rigorously adhered to. Richards Bay, in particular, handled bulk products and had some historical environmental issues, as well as dust problems from the nature of the products. Transnet dealt with the root causes of environmental damage, and updated its equipment wherever necessary, to comply with ISO 14000 standards. It had also already commenced with a programme to assess and reduce its carbon emissions.

Discussion
Mr P van Dalen (DA) asked whether the recent matter concerning the Passenger Rail Association of South Africa (PRASA) had been addressed.

The Chairperson noted that this would be addressed later in the meeting.

Mr van Dalen questioned whether the increase in rail definitely also meant that there was a concomitant decrease of transport by road, and asked whether there was any measurement of road trucking, month to month, to ensure that the growth in rail meant a decrease in road, as opposed to a total growth in transport overall.

Mr A Mokoena (ANC) also asked about these statistics, and asked whether it would be possible to move all freight currently transported by road to rail.

Mr Wells noted that the rail market share on the busiest corridor had risen from 12% in 2005 to 30% in 2010. He said that nowhere in the world was all heavy haulage done by rail, and even in the USA, which had the most effective freight rail system in the world, long-distance road haulage was also still done. It was unquestioned that there should and would be massive moves to rail. The same applied to the pipeline as in future 60% of the existing road traffic for petroleum products would be moved to this pipeline.

Dr G Koornhof (ANC) expressed his congratulations on the positive developments. He noted that a substantial number of engineers were being trained by Transnet, as well as artisans, and wondered if this could not be linked to a national process, through the Centre of Excellence.

Mr Maharaj said that Transnet currently employed about 4 000 artisans, and the 1 100 currently being trained, over and above the current employees, represented 25% more than Transnet needed for itself, because Transnet intended to equip them with skills that could find them employment in the wider engineering sector. Transnet and six other large entities who employed engineers were working together on training programmes that were not necessarily company-specific but that met and complemented the broad needs and initiatives in the whole sector. Transnet funded its training on its own. It was ultimately training for the growing economy.

Mr M Nonkonyana (ANC) noted that Transnet was also working on projects that might have implications for other departments, and asked what interaction there was with these departments.

Mr Kahla noted that Transnet did interact and cooperate with, in particular, the Department of Public Enterprises, the Department of Energy and the Department of Transport. Although there was no formalised committee or structure with the Department of Cooperative Governance and Traditional Affairs (COGTA), there had been liaison with it about property rates and infrastructure projects, but more could be done in this regard.

Mr Nonkonyana asked about the 2010 World Cup Legacy Projects.

Mr Wells said that one of the main successes out of 2010 was that Transnet had ensured that there was continuous supply of jet fuel to Oliver Tambo Airport, and both this specific project, and the capacity developed for a bridging plan on rail to supply the fuel, had been successfully run. Other legacy projects included the multi- product pipeline, improvement of Durban harbour entrance, and new ports.

Mr van Dalen asked for clarity around issues in the Eastern Cape.

Mr Karl Socikwa, Acting Chief Executive, Transnet Port Terminals, responded that in East London, the grain silo and elevator had been shut down because of safety issues, because of their deterioration resulting in a stop certificate. Transnet had been doing import and export of maize, and this was converted to a skip operation. Transnet was currently looking at alternatives for export capability for maize products.

Mr van Dalen asked what it would cost to fix the silo, commenting that a failure to attend to the problems would have a massive impact on the export of grain.

Mr Socikwa responded that the cost of merely ensuring that safety measures were met would amount to about R250 million. It was possible for Transnet to look at alternative export and import through East London, was consultation with a wide variety of stakeholders, not just in that area, and could be provided to the Committee in due course.

Mr Wells added out that if other investors were interested in taking on projects that Transnet was not interested in pursuing, it would not stand in their way.

Mr Nonkonyana asked about the School of Excellence programmes and Corporate Social Investment.

Mr Kahla said that this was quite a complex matter. Transnet wanted to contribute to Mass Participation in Sport in rural and farm areas, and was putting money into schools situated in these areas. The relationship between Transnet and South African Football Association (SAFA) had not always been good, but was improving and it was now communicating with SAFA on the School of Excellence future plans.

Mr Nonkonyana thought that the emphasis on Corporate Social Investment funding for farm schools was positive, but asked about the linkages to local football associations and other structures, urging that these should be formalised so that development could also be monitored by sport governing bodies, and so that development at rural level could be escalated to other levels also.

Mr M Sonto (ANC) asked if there had been any negative impact caused by the divergence of opinion on NERSA and Transnet about the pipeline tariffs.

Mr Anoj Singh, Acting Chief Financial Officer, Transnet, subsequently reported that there had been some negative effects.

Mr A Mokoena (ANC) noted that the Department of Transport indicated that there might be need to change gauges to allow for penetration into Africa, and asked for comment.

Mr Wells said that Transnet and the Department recognised that if it made business and economic sense to move away from the Cape to Standard Gauge, then this would be done.

The Chairperson said that South Africa had incredibly rich and good mineral reserves, and had the latent capability to become a fast-growing economy, and she said that Transnet, Eskom and others must be ready for these developments. In terms of coal exports, she pointed out that China was energy hungry, and such exports could boost South Africa to having a developed economy in the next twenty years. Her province was rich in iron ore and manganese, yet the presence of these resources was not significantly raising the economic conditions of that province and the situation of its people. She asked what Transnet was doing to become an economic enabler for transport of the exports, and whether it was ready to be an enabler of growth.

Mr Wells noted that Transnet was trying to adapt internationally best performance standards to local conditions. In some instances, such as coal and iron ore, South Africa was already providing world-class services, but in respect of others, such as crane moves, Transnet was now benchmarking itself against high standards, to ensure that it would constantly improve. In the past it had not regarded enabling of economic growth as a strategic challenge, but this was now included. South Africa had small seaboard manganese, although it had about 80% of the best manganese resources. Even before the McKenzie report, Transnet had already resolved that it needed to enable growth. It was finalising a strategy to unlock exports. The current manganese export from Port Elizabeth was around 5.5 million tonnes, but these should rise over the next ten years to 14 million tonnes. If Transnet and the industry, working together, could work with 80 million tonnes of iron ore and 14 million tonnes of manganese this would have a huge positive impact on Northern Cape. Its Southern African Development Community (SADC) involvement lay in the Maputo corridor. It looked also at taking coal exports through Richards Bay. Transnet was also looking at the coal field reserves and rail infrastructure and supply for Eskom. If the Waterberg mines were to be opened, that would further raise potential to export coal up to about 30 million tonnes. There were ongoing feasibility studies, which meant that these items were not yet included in the five-year plan, but, if approved, would require huge investment including that from the private sector.

Mr Sonto asked about greening issues.

Mr Wells said that coal was a sensitive topic, and much investment was being put into reduce the emissions from coal, by Eskom and other users, as well as in the mining process. From mine to port, Transnet believed that it had good environmental controls in place.

The Chairperson noted that this was why the issues of coal, coal engineering and technology would be addressed with Eskom. South Africa could not ignore the use of coal, as it had ample resources, but must instead concentrate on cleaner coal. She noted that she had received a letter from the Green Movement, asking for a chance to address the Portfolio Committee. She would be meeting with the Green Movement on 15 December, to assess whether they had significant comment to make to the Committee, since Parliament was responsive and had to create opportunities for people to air their views. She would report back.

The Chairperson asked about port charges, and for comment on the Dube trade port.

Mr Wells responded that Transnet was busy with a study on cost effectiveness of port charges and would report to the Committee on this when the study was completed. In respect of the Dube Port, he noted that Transnet had regular meetings with the City of Durban to plan logistic requirements. Dube was an area set aside, bordering King Shaka Airport, to facilitate efficient movement of freight, within KwaZulu Natal and between KwaZulu Natal and Gauteng. It was at an early conceptual stage.

Ms Moses commented further on issues in KwaZulu Natal. She noted that the pipeline project extended over 500 km, with another 160 km of 16-inch pipe in the inland regions. This required an enormous amount of social interface. There were over 1 150 pieces of property that Transnet had to acquire, and this also involved dealing with tenants or farmers or croppers. There had been contentious issues in Kwazalu Natal with the Ingonyama Trust and Adams Mission. Transnet had appointed teams to go and speak with community leaders and landowners, as it was clear that some tenant farmers, although they may have been allocated land, had no ownership rights and did not understand that position, as there was insufficient communication by indunas.  Transnet hoped that continued engagement would ease the situation. In one area, the community had forced Transnet’s contractors to leave, and one contractor had left a trench exposed and not properly secured, resulting in the drowning of two children. Transnet had set up a Board on Inquiry into this incident and was awaiting the report. It was unfortunate that this happened when Transnet was trying to improve relationships. There was now an area of about 20 km from which the contractors had withdrawn their teams, but they were continuing to work on other areas, and were hoping to move back in time.

Mr A Mokoena (ANC) said that the community goodwill was essential both to ensure the success of the pipeline and to make people feel that they were involved.

Mr Nonkonyana urged that Transnet should be sensitive to the tensions in the rural areas between councillors and traditional leaders, as well as in regard to issues such as burial grounds. He asked about compensation, saying that there was a perception that traditional communities would not be compensated because they were not owners.

The Chairperson agreed that in view of the massive capital projects planned over the next twenty years, these issues were all important. She had engaged with South African Local Government Association (SALGA) and suggested that Transnet should perhaps consult with people such as Mr Nonkonyana, who sat on Contralesa, to ensure smooth running of future capital expansion projects.

Mr Wells appreciated the assistance and comments by the Committee. He added that the pipeline went through many magisterial districts, and Transnet was careful to recruit local people in each municipality to work on sections of the pipeline, boosting community skills and earnings.

Transnet Financial Statements presentation
Mr Anoj Singh, Acting Chief Financial Officer, Transnet, noted that the external auditors had issued an unqualified audit opinion. There were no Public Finance Management Act (PFMA) reportable items. However, there was one matter of emphasis, relating to the conclusion of a contract by the former Chief Executive of Freight Rail that had not been in line with the resolution of the Board. The Board and management had however taken reasonable steps to ensure that this did not recur.

The Chairperson said that the Committee had been aware of this.

Mr Singh noted that the financial performance was listed from Slide 33 onwards. He summarised that there had been an increase of 9% EBITDA to R14.4 billion. He reiterated that it was important for Transnet to be able to generate cash, and that ability had increased by 61% from the previous year, to R17.6 billion. He emphasised the importance of maintaining these key financial ratios in order to generate loans. Revenue for 2009/10 was at R36.6 billion, an increase of 6%. He repeated that the recession resulted in volumes decreasing. The impact of NERSA not approving the application by Transnet for tariff increase negatively impacted on its ability to generate revenue from pipelines. On the expenditure side, the net operating expenses only increased by 4%, owing to an aggressive cost-cutting exercise. A large portion of Transnet’s costs were fixed, because they related to personnel, energy, and materials and maintenance, so that the savings were even more significant, in line with Transnet’s decision to cut costs rather than cutting back on capital expenditure during the recession. There was only an 8% increase in spending year on year, despite increases in steel, fuel, labour and oil prices. Depreciation and amortisation were large expenses, but these were anticipated and planned for. He explained that depreciation measured the reduction in asset base, whilst amortisation related to software and other matters. The net operating profit was 8.3 billion which was more or les in line with the prior year.

Post-retirement benefit obligations had decreased from the prior year, in which planned payments had been made. Returns on assets would be reflected in benchmark levels over the next five to ten years. Net finance costs increased by about 23.9%, attributed to the borrowing programme, which showed an increase of about 21% over the five year period. Liabilities had been created for deferred tax, to be paid over the next five years. All this complied with international financial reporting standards. 

He tabled the balance sheet, stressing the increase in property, plant and equipment. There had been a significant amount of cash generated, and Transnet had been able to maintain trade receivables at 30 days. Cash and cash equivalents had increased, in line with a pre-funding strategy to address liquidity risks. explained that the next slide showed how this cash had been spent. Transnet had been able to fund the R20 billion it required in the current financial year. It had adopted a strategy of mitigating market risk, and had a prudent financial framework.

Mr Mokoena asked what a bond was worth.

Mr Wells explained that it was worth the amount for which it had been issued, and the low interest rates reflected that its bonds were desirable to the market.

The Chairperson asked about the labour strike impacts.

\Mr Wells said that these would appear in the next financial year’s statements, but assured the Committee that Transnet had recovered well and would achieve its budget.

The Chairperson asked if land fell under assets.

Mr Singh confirmed that it did.

In respect of post-retirement benefit obligations, Mr Singh indicated that both funds showed surpluses, although post-retirement medical obligations showed a deficit. A separate presentation would be made to the Committee on these.

Mr Singh said that the long term borrowings had increased, in line with plans to ramp up the capital expenditure programme. He reiterated that the borrowings, similar to those over the last five years, had been raised without government guarantees and the gearing ration over the next five years should remain within permissible limits.

The Chairperson suggested that at the Winter School next year, Transnet should focus on outlining its strategies around borrowing, in view of its plans to continue the capital expansion programme.

Transnet future plans
Mr Wells noted that although the presentation also outlined the future plans, he would not present on them at this meeting, owing to time constraints, but mentioned briefly that Transnet was anticipating even better results in those years. The profit on Coega for the next eight years would be low, because Transnet knew that not yet sufficient volume had not been generated there to recoup all the investment as yet, but would increase.

Passenger Rail Agency of South Africa (PRASA) matters
Mr Wells thought it was important briefly to outline the issues around the Passenger Rail Agency of South Africa (PRASA).

Mr Singh noted that PRASA had recently taken a unilateral decision to terminate the Shosholoza Meyl Service, and that Transnet had not been given forewarning of this, but learnt of it only through media reports. It was concerned that good governance was not in place. He noted that on 23 July 2010, PRASA had issued instructions to Transnet that it should not do any further maintenance work without a purchase order. This was impractical, as purchase orders took a substantial time to generate. At this time, 70 out of 104 PRASA rolling stock were standing with Transnet, awaiting generation of purchase orders. This meant that it would be difficult for PRASA or Transnet to provide reliable services. The long-distance Shosholoza Meyl services were then terminated on 13 August.

Mr Mokoena noted that safety issues were involved, and asked if there were models or references.

Mr Wells said that the Rail Safety Regulator required certain maintenance to be done. If there was a dispute between two State owned entities, then this should be resolved between the companies, failing which it must be referred to the Ministers involved, or to an inter government body. None of these avenues had been followed by 13 August. Transnet had communicated with PRASA to try to offer some constructive solutions on how Transnet could assist PRASA to resume services, and was concerned that PRASA did not have the ability to have its locomotives maintained elsewhere, but PRASA had not engaged with Transnet, who thus remained very concerned about resumption of that service.

He added that at the end of March 2010, PRASA already owed over R1 billion to Transnet, which made Transnet even more wary of running the risk of doing work without purchase orders being raised. A process had been implemented through the Minister to try to resolve this debt.

Discussion
Mr van Dalen asked about copper theft, noting the huge losses each year. He noted the suggestion to re-classify copper as a precious metal, but suggested that this might impose more burdens than it solved.

Mr Gololo asked if there were possible solutions to the cable theft problems, and whether there was any technology that could detect attempts to remove cabling.

The Chairperson agreed that it would make sense to try to find preventative measures, rather than security measures and asked if the Schools of Technology could not be asked to find a solution.

Mr Mokoena asked if it would be practical to use optic-fibre cables in place of copper.

Mr Tau Morwe, Chief Executive: Transnet Freight Rail, Transnet, said that there had been some reduction in copper theft, and that currently around 12 km was being stolen per month. Security had increased, with helicopter services being used. Transnet and other companies who suffered cable theft participated in a forum, together with South African Police Services and National Intelligence Agency, and this had contained the risk. Even where underground cables could be replaced with fibre optic cables, the thieves were experimenting on how they could use these cables. He explained that optic fibre could be used only for signalling, but not for overhead cables, where the majority of the theft occurred

Mr van Dalen said that Eskom was spending about R38 million on security, to address about R30 million of loss, and its attempts appeared to be more successful than Transnet’s, who was spending about ten times that amount. He suggested that the current measures were not effective.

Mr Wells noted that in fact Eskom was losing more than Transnet and the figures that Mr van Dalen had quoted referred to security throughout the whole company. Since the forum referred to by Mr Morwe had been initiated, copper theft had dropped by about 75%. He pointed out that cable theft was an international problem, involving worldwide and sophisticated syndicates. He commented further that the suggestions to reclassify copper as a precious metal were made in conjunction with Business Against Crime and SAPS, focusing on the second hand market. He agreed that more technology must be deployed, and although there were technologies that could detect interference with cables, it was impossible to actually stop that damage occurring at the time.

Mr van Dalen asked if Transnet was bound by any embedded derivative contracts

Mr Wells said that there were currently no financial embedded derivatives, as all had been settled five years ago. He was not aware of any onerous legacy issues.

Dr Koornhof congratulated the Board, the CEO and other presenters for their excellent reports, as well as the balance sheet achievements on the balance sheet.

Dr Koornhof asked where the R1.9 billion savings had been achieved. He asked if anything was spent on consultants in this financial year, and whether cost-cutting included reduction on use of consultants.

Mr Wells said the cost cuts had been wide-ranging, but focused on reducing overtime, consultant expenses, travel, entertainment, accommodation and overseas travel. Every single cost to the company was examined and a zero-based budget was implemented. Some consultants were hired for engineering, legal, business change, amounting to about R1 billion in 2009, with this being perhaps halved in the current year. However, Transnet did need to hire in consultants both because of its wide range of business, and to get independent advice on worldwide practice.

Dr Koornhof asked why Transnet had not achieved in nine Key Performance Areas.

Mr Wells outlined five of the areas in which Transnet was not happy with its achievements, which involved coal wagon turnaround times (also dependent on the mines) and Richards Bay turnaround times (which were not attributable to Transnet), as well as general wagon turnaround, port ship delays, and crane moves. All had since improved, with more ambitious targets also being put in place.

Dr Koornhof asked what Transnet’s anticipated needs were for capital financing over the next five years, and how it would achieve this.

Mr Wells said that in order to fund the five-year corporate structure plan, an amount of R40 billion would be needed to fund and refinance maturing borrowings, and Transnet was happy that these could be met. However, he reiterated that feasibility studies were still being conducted in respect of some matters, including expansion of coal and manganese exports, and if these were approved, then significant investment would be required. Transnet would need concessions and private sector participation, but believed it could be an agent to put together financing options in a transparent way.

Mr Gololo asked how Transnet was involved in the proposals for high speed trains between major centres.

Mr Wells said that there was an initiative, with the Department of Transport, to consider introduction of a high speed train between Johannesburg and Durban. Transnet would fund a feasibility study and would, if a proper business case was made out, participate in the whole process.

Mr Gololo referred to Mr Nonkonyana’s previous question around compensation paid to people in rural areas, asking how the amounts were calculated.

Ms Moses said that professional valuers were used to determine land value and compensation, based on recent sales in the appropriate markets, and on what activities were carried out on the land.

Mr Nonkonyana followed up on his previous remarks about the need to communicate with traditional leaders, and said that an integrated approach should be adopted for all developments. The Intergovernmental Relations Framework Act prescribed that forums should be used, so that all relevant departments and stakeholders were involved.

Mr Nonkonyana noted that there had been a matter of emphasis although there was an unqualified audit certificate. Ideally, no public body should receive any negative comment.

Mr Wells clarified that an independent audit firm had been contracted by the Auditor-General to do the audit. He said that the only matter of emphasis related to a contract which the previous Chief Executive had failed to deal with adequately.

Mr Nonkonyana said that Transnet had clearly delivered and become profitable, and asked if any dividends were being paid back to the fiscus.

The Chairperson noted that Transnet had provided substantial infrastructure for the country.

Mr Wells added that Transnet had reached agreement with the Minister that, instead of paying dividends to the fiscus, Transnet should rather plough profits back into the infrastructure build.

Mr Nonkonyana noted that personnel expenditure was more than half of total expenditure. He asked for an explanation on this, as well as on the “other” expenditure. He also noted that there was a perception that the top executives were receiving the bulk of the salaries.

Mr Maharaj said that a total of about R11.2 billion was spent on personnel. Transnet employed about 55 000 employees, with about 4 500 at top management. The bulk of the spending arose at the lower levels. Executive remuneration was set by a review committee appointed by the Minister. Over the last four years, senior executives had received average increases of 10%, management had received average increases of 11.6% and bargaining unit employees average increases of 32.8%.

The chairperson asked how this compared to international benchmarks.

Mr Maharaj replied that Transnet was within international benchmarks.

Mr Wells added that the bargaining unit employees were also able to, and did earn, extra amounts in overtime.

The Chairperson added that she hoped that internal grievances could be dealt with within the company. That morning she had received an explosive and nasty anonymous e-mail alleging sexual harassment of employees within a State Owned Enterprise. In general, it was desirable that proper grievance procedure mechanisms should be set up, and should be fully exhausted before such tactics were resorted to.

Mr Nonkonyana urged that the Committee must monitor the dispute between Transnet and PRASA for Shosholoza Meyl services.

The Chairperson said that she would convey to the Chairperson of the Portfolio Committee on Transport that this Committee had received a brief report on PRASA and suggested that this matter should perhaps be escalated to Ministerial level, and that the two Committees should deal with the matter together.  

The meeting was adjourned.

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