Transnet Infrastructure Spending Plan: R300bn over 7 years; Economic Development Department: 4th Quarter Performance

Economic Development

28 May 2012
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Transnet’s infrastructure spending strategy involved the investment of R300bn aimed at expanding the country’s rail, port and pipeline infrastructure to meet the anticipated increase in market demand. A key aspect was to create a shift from road to rail transport, thus reducing the cost of doing business and, at the same time, lowering carbon emissions. The resulting economic growth would enhance job creation, skills development, local purchasing, economic empowerment and transformation. The expenditure would be built on the financial strength of Transnet, so no financial demands would be placed on the fiscus.

During the next seven years, Transnet’s capital expenditure would be 154% higher than during the past seven years, while revenue would rise by 178% and earnings before tax and depreciation would increase by 258%. This would be achieved through a higher volume of business, and not through increased tariffs. While 70% of the R300bn investment capital would be funded from operating cash flows, Transnet was confident it could raise the balance externally.

A decision had been made to build a dedicated heavy-haul line from Sishen to Ngqura, outside Port Elizabeth, to transport manganese ore, rather than use the Sishen-Saldanha iron ore line. This would provide improved capacity for the transport of both iron ore and manganese. Major expansion and upgrading projects were planned for all of the country’s leading ports.

Increased funding would be allocated to bursaries and grants, recruitment in critical skills would be stepped up, and 2 000 apprentices would be in training at Transnet at all times. Overall, up to 220 000 additional jobs would be created during the seven-year period. A major objective of the programme was to promote localisation, transformation and empowerment.

The new multi-product pipeline between Durban and Gauteng would see the installation of a 555km 24-inch diameter line that would meet the demand for fuel in the heartland of the country’s economic region by increasing the capacity from the existing 4,4bn litres to 8,4bn litres. Overall completion of the project was scheduled for December 2013.

The risks inherent in such a long-term plan included the possible impact of the current global economic situation and the resultant effect on the demand for – and transportation of – South African commodities. Any adverse effects might require the demand forecasts to be modified.

During discussion, several Members said the success of this massive programme would ultimately rest on whether it would be able to bring the previously disadvantaged community into the mainstream of economic activity. If it did not provide sustainable growth opportunities to black-owned small, micro and medium enterprises (SMMEs), it would have failed. Concern was also expressed that “political vultures” might take the opportunity to enrich themselves at the expense of small businesses trying to escape the cycle of poverty.

Other issues raised included consideration of beneficiation as opposed to the philosophy of “dig up and ship out”, the transfer of skills by local and international suppliers, the capacity of Transnet’s human and financial resources, the impact of global warming on the future demand for coal, and Transnet’s drive to become a 100% original equipment manufacturer.

The Economic Development Department (EDD) reviewed its fourth quarter performance in the areas of economic policy development, planning and coordination, and development and social dialogue.

It reported that as part of its “green economy” initiatives, 265 476 solar water heaters (SWH) had now been installed, and a new model was being developed with more low-pressure heaters for low-income households. Funding to the value of R4,7bn had been secured for the rollout of the SWH project until 2014. The EDD was working with the Department of Trade and Industry to strengthen local procurement, and the IDC had invested in manufacturing through its
Green Energy Efficiency Fund. The programme was expected to generate 9 000 jobs, mainly in the installation of SWHs.

The Department had also held meetings with the Eastern Cape provincial government with a view to coordinating national policy on potential wind farm developments in the former homelands regions. The IDC continued to take the lead in green investments, providing funding for 19 of the 47 preferred bidders identified for renewable independent power producers (IPPs) involving technologies such as wind farms, concentrated solar projects and photovoltaic power systems, and hydro power. It had completed pre-implementation work for a major bio-fuels plant near Cradock, but implementation would depend on regulatory decisions by the Department of Energy.

Discussion covered the EDD’s under-spending of its budget, legal issues related to the merger of samaf, Khula and the IDC small business portfolio, the Department’s representation in the provinces, and capacity building at under-performing municipalities.

Meeting report

Transnet Infrastructure Spending Plan
Mr Brian Molefe, Group Chief Executive of Transnet, said the presentation would cover the market demand strategy behind the infrastructure spending plan, as well as provide details of some of the major projects to be undertaken during the next seven years.

The strategy involved the investment of R300bn aimed at expanding the country’s rail, port and pipeline infrastructure to meet the anticipated increase in market demand. A key aspect was to create a shift from road to rail transport, thus reducing the cost of doing business and, at the same time, lowering carbon emissions. The resulting economic growth would enhance job creation, skills development, local purchasing, economic empowerment and transformation. The expenditure would be built on the financial strength of Transnet, so no financial demands would be placed on the fiscus.

Describing the major differences in Transnet operations which will take place over the next seven years, compared to the previous seven years, Mr Molefe said capital investment would increase from R118bn to R300bn (154%), the personnel complement would grow from 59 000 to 74 000 (25%), and exports of coal, iron ore, general freight and containers would increase by between 44% and 113%. On the financial side, revenue would grow from R46bn to R128bn (178%), and earnings before tax and depreciation would grow from R19bn to R68bn (258%). This would be achieved through a higher volume of business, and not through increased tariffs. During this seven-year period, Transnet would maintain a solid financial position and credit rating. While 70% of the R300bn investment capital would be funded from operating cash flows, Transnet was confident it could raise the balance externally.

The split between expenditure on the maintenance of existing infrastructure and expanding Transnet’s operations would change significantly, from a 67:33 ratio in the 5-year corporate plan, to 42:58 in the 7-year corporate plan. This would allow for expansion in the form of replacement of old locomotives, most of which were bought in the ‘70s and ‘80s. A decisive move from road to rail required improved modern equipment. Investment would rise from its current annual level of R31,2bn, to a peak of R56,3bn in the 2016-17 financial year.

Just over half of the R300bn would be spent on general freight and freight rail, such as agricultural products, other ferrous metals and automotive products, with the rest divided among export coal, export iron ore, containers (ports), piped products, break bulk and other bulk. An amount of R4bn had been set aside for Transnet rail engineering, mainly for research and development, so that Transnet could become an original equipment manufacturer itself. It was already on track to produce a 100% local content “Made in South Africa” locomotive, which it hoped would attract interest from other countries on the African continent. Maintenance of wagons, cranes and port equipment would also be researched.

Turning to the major programmes to be undertaken, Mr Molefe said some people were proposing that the Sishen-Saldanha iron ore rail link should be also used to transport manganese. However, Transnet had decided to transport manganese from Sishen to the port of Coega, where a new terminal would be built, by strengthening the rail line so that it could accommodate heavy-haul trains. This would allow for both Sishen-Saldanha and Sishen-Coega to be dedicated lines, providing improved capacity for the transport of iron ore and manganese.

The impact of the investment would be felt nationwide, with R49,9bn being spent in the Richards Bay area, R38,5bn in Durban, R25,9bn in the corridor between East London and Port Elizabeth, R3,9 billion in Cape Town – which already had adequate facilities – and R28,6bn in Saldanha. Increased funding would be allocated to bursaries and grants, recruitment in critical skills would be stepped up, and 2 000 apprentices would be in training at Transnet at all times. Overall, up to 220 000 additional jobs would be created during the seven-year period.

A major objective of the programme was to promote localisation, transformation and empowerment. The potential local content commitment for locomotives was 52%, with international suppliers expected to transfer knowledge and expertise to local suppliers. On-the-job training and apprenticeships would be built into international supplier contracts, and jobs and procurement opportunities would be provided in rural areas where facilities were located. Help would be given to small businesses to foster innovation and create jobs.

Mr Tau Morwe, Chief Executive: Transnet National Ports Authority, gave a brief overview of projects at the country’s main ports. The development of the former Durban international airport into a “dig out” port entailed the acquisition of the site and associated land in order to develop a deep-water mega-container port, with an annual capacity of 9,6m TEUs (twenty-foot equivalents), to be provided in four phases between 2019 and 2037. Berths in Durban harbour itself needed to be deepened to handle larger vessels, and this was the subject of a feasibility study. The expansion of Pier 1 into Salisbury Island would increase capacity by an additional 1,1m TEUs a year. The container handling facility in Cape Town would be doubled in stages from its current level of 700 000 TEUs, while the Ngqura Container Terminal was a greenfields project with the objective of providing a full-service terminal, together with rail links to the port of Ngqura.

Mr Siyabonga Gama, Chief Executive, Transnet Freight and Rail, said the capacity of the export iron ore line from Sishen to Saldanha had been expanded to 60m tons a year, with plans to further expand the channel to 82.5m tons and – depending on future contracts – to ramp it up to 97m tons. This would depend on the lines being upgraded to handle 26 tons per wagon axle.

To cater for the anticipated increase in rail traffic, contracts had already been entered into for the purchase of 110 locomotives for the coal line, 32 for the iron ore line, 100 for general freight business and 138 for general freight. In order to increase the capacity of its general freight business from 80mt to 170mt over the next seven years, Transnet would need to acquire an additional 1 317 locomotives, 25 000 wagons, and upgrade its current wagon fleet. The line between Sishen and Saldanha would require upgrading to heavy-haul standards so that 200-wagon trains could traverse the channel.

A proposed Lothair link to a point on the Swaziland rail network presented an alternative route from Ermelo to the east coast deepwater port of Richards Bay, as well as to Maputo. The new link line would divert general freight traffic from the rail line and, at the same time, provide additional capacity for general freight exports to Richards Bay and Maputo. It was deemed a strategic regional investment in support of Transnet and the Government’s South African Development Community (SADC) objectives.

The Waterberg region had 40% of South Africa’s remaining coal reserves, and was regarded as the next strategic node for the coal sector. The availability of rail infrastructure was therefore critical to unlock the region’s potential. The investment would secure rail transport capacity from Waterberg for export and domestic (Eskom) consumption, and the initial capacity would be about 23mt. Eskom’s strategy to migrate coal traffic from road to rail would increase its transportation requirements from 7mt currently to 20mt by 2019.

Mr Morwe said Richards Bay was projected to experience significant growth in the volume of magnetite, ferrochrome, coking coal, chrome, ferromanganese, export coal and general freight business, and this would require a range of expansion and upgrading interventions. The future development of the port included the provision of additional berthing capacity for multi-purpose and dry bulk terminals.

Major developments for the Eastern Cape included the provision of a car terminal at the southern part of Port Elizabeth harbour, extension of the main breakwater and deepening of the entrance channel to East London’s port, development of a liquefied natural gas terminal and breakwater at Ngqura, and the construction of quays and the provision of services for expansion along the Coega River.

Future developments at Saldanha included the construction of a liquefied petroleum gas terminal, and a storage site and port infrastructure for the extension of the Mossgas quay.

Mr Molefe said the new multi-product pipeline between Durban and Gauteng would see the installation of a 555km 24-inch diameter line that would meet the demand for fuel in the heartland of the country’s economic region by increasing the capacity from the existing 4,4bn litres to 8,4bn litres. Overall completion of the project was scheduled for December 2013.

Mr Molefe acknowledged the risks inherent in such a long-term plan, pointing to the possible impact of the current global economic situation and the resultant effect on the demand for – and transportation of – South African commodities. Any adverse effects might require the demand forecasts to be modified.

The Chairperson commended Transnet for its commitment to invest in the maintenance of existing infrastructure while embarking on its expansion project, and for recognising the potential risks facing the organisation.

Discussion
Mr N Gcwabaza (ANC) said the success of this massive programme would ultimately rest on whether it was able to bring the previously disadvantaged community into the mainstream of economic activity. If it did not provide sustainable growth opportunities to black-owned small, micro and medium enterprises (SMMEs), it would have failed. Despite its focus on the transport of commodities, he hoped Transnet’s philosophy embraced beneficiation, rather than just “dig up and ship out.” The recruitment process should target black and rural high school students, women and disabled persons. The presentation had referred to the transfer of skills by international suppliers, but nothing had been said about major local contractors, and their role in sub-contracting to emerging entrepreneurs. He also asked whether Members could visit the facility where local locomotives were built.

Mr X Mabasa (ANC) asked what steps were being taken to ensure Transnet’s skills requirements were in line with the courses offered by educational and training institutions, warning that a skills shortage could create a “World Cup 2010” scenario, where time pressure had resulted in large scale importation, to the detriment of the local community. Proactive steps needed to be taken to avoid “fronting” by contractors, and to ensure that the benefits of the infrastructure expenditure were fairly spread, and did not benefit only those who were already rich.

Mr H Hoosen (ID) said the big issue was whether the system would ensure that ordinary South Africans benefited, and asked how one could keep the “political vultures” from enriching themselves through the programme. More than the R4,2bn allocated for the promotion of small businesses, was needed to help them out of the cycle of poverty. He wanted to know if Transnet had a “Plan B” if the forecast market demand did not eventuate.

Mr K Mubu (DA) asked how ready Transnet was to tackle the programme from a human resource and financial point of view. How closely was it working with Eskom to ensure there was sufficient power to handle the expanded rail requirements? If the Karoo gas project came to fruition, was Transnet ready to deal with this new scenario? Was there any way to eliminate corruption from the programme? What had been the financial impact of mistakes in the pipeline project?

Mr Z Ntuli (ANC) asked whether Transnet had taken into account the impact which global warming might have on the future use of coal, bearing in mind its forecast of growing demand. How much would South Africa have to depend on imported skills? How many SMMEs would benefit from the programme?

Ms D Tsotetsi (ANC) also called for the programme to have a positive effect on the incomes and conditions of employment of labour, and asked how the transfer of skills would take place.

The Chairperson asked where the 2 000 apprentices a year would be trained, and also questioned the method of transferring skills.

Mr Molefe said he fully supported the facilitation of beneficiation. The executive committee of Transnet were sensitive to the unemployment situation, where parents were unable to provide food for their children, so job creation was paramount in their minds.

Ms Nonkululeko Sishi, Group Executive, Human Resources, said Transnet was embarking on a big recruitment drive, focussing on the critical skills needed to meet their future needs. In line with its employment equity policy, it would give preference to blacks, women and people with disabilities. She said skills would be imported only where there was need to support the inclusion of specialised imported equipment.

Mr Molefe said Members of the Committee were welcome to visit Transnet’s manufacturing facilities. He showed them pictures of coaches and locomotives being assembled, pointing out that the only imported components were the traction motor and the engine.

Ms Sishi said Transnet had its own in-house training facilities, and took on more trainees than it needed, so that skills were transferred to people who could work outside the Transnet environment. Recruitment was generally conducted by means of advertisements in newspapers. It was increasing the number of bursaries for engineers, technicians and artisans, and would grow these numbers by 10% for each of the next seven years, creating a surplus pool of skills from which other companies could recruit.

Mr Molefe said there was a need for entrepreneurs to develop a more manufacturing-oriented mindset. South Africa was an industrial economy, and the education system should recognise this. Learners had to be prepared, through emphasis on science and mathematics, to become a part of this situation.

He doubted if it would be entirely possible to “keep the political vultures” out, but Transnet would do all it could to ensure that the programme was executed with the highest levels of integrity.

Referring to the question as to whether there was a Plan B, he said too many plans could result in “paralysis.” Transnet had based its plan on the facts available, and if the situation changed, Transnet would adjust to meet the circumstances.

Transnet was putting money into research and development regarding its power requirements. It was investigating alternative sources of energy, as locomotives’ combined electricity consumption was as much as that generated by an entire power station.

Mr Molefe said mistakes in the pipeline project had resulted in the cost escalating from R12bn to R23bn. Changes in pipe diameter, adverse weather, unexpected rock formations and other factors had provided Transnet with a dossier of information which was proving invaluable to those planning to build pipelines in other parts of the world.

He did not expect fears of global warming to have an effect on Transnet’s coal transportation plans. Germany, for instance, had rejected the nuclear option for power generation. However, this was a policy matter, and Transnet’s only responsibility was to ensure coal was moved efficiently.

He also commented on the use of foreign labour, and warned that Transnet would strongly discourage any attempt to supplant local labour in favour of foreigners at a lower cost.

Mr Molefe answered the question about measuring the transfer of skills by referring to Transnet’s artisan training programme. At any one time, there were 2 000 artisans being trained, and as Transnet’s requirements were only about 650, the balance could be released into the economy to provide skilled labour.

The Chairperson said time constraints meant any unanswered questions would have to be responded to in writing. She thanked the delegation for their presentation, and said she was confident that Transnet’s programme would “make South Africa proud.”

Fourth Quarter Performance Report: Economic Development Department
Mr Saleem Mowser, Acting Director-General (ADG) of the Economic Development Department (EDD), reviewed the Department’s fourth quarter performance in the areas of economic policy development, planning and coordination, and development and social dialogue (see document).

Reference was made to the EDD’s involvement in the “23 District Plan”, together with the Department of Rural Development, to improve the infrastructure in 23 of the worst-served municipalities in the country. Discussions and meetings involving financial intermediaries had been held, and the merger between the
South African Micro-Finance Apex Fund (samaf), Khula and the Industrial Development Corporation (IDC) small business portfolio – resulting in the formation of the Small Enterprise Finance Agency (SEFA) – had been approved.

Dealing with “green economy” issues, he reported that 265 476 solar water heaters (SWH) had now been installed, and a new model was being developed with more low-pressure heaters for low-income households. Funding to the value of R4.7bn had been secured for the roll-out of the SWH project until 2014. The EDD was working with the Department of Trade and Industry to strengthen local procurement, and the IDC had invested in manufacturing through its green industries fund. The programme was expected to generate 9 000 jobs, mainly in the installation of SWHs.

In other green economy developments, the Department had held meetings with the Eastern Cape provincial government with a view to coordinating national policy on potential wind farm developments in the former homelands regions. The IDC continued to take the lead in green investments, providing funding for 19 of the 47 preferred bidders identified for renewable independent power producers (IPPs) involving technologies such as wind farms, concentrated solar projects and photovoltaic power systems, and hydro power. It had completed pre-implementation work for a major bio-fuels plant near Cradock, but implementation would depend on regulatory decisions by the Department of Energy.

The EDD’s mandate had been expanded to support and co-ordinate the work of the Presidential Infrastructure Coordinating Commission (PICC). Its activities included administrative and secretarial support to the PICC, the Management Committee (MANCO) and the Secretariat, managing the technical team comprising officials deployed from state-owned entities and the EDD, and overseeing the development of the infrastructure plan, implementation framework and various work streams.

Mr Mowser said that during the fourth quarter, the value of special financing that had been facilitated for small businesses, targeted growth sectors and companies in distress, had reached R2.47bn, against a target of R1,5bn. The annual target of R5bn had been exceeded by R2.3bn.

During the 2011/12 financial year, the EDD had under-spent its allocated budget of R598,4m by R19,9m, or 3%. Revenue collection had been R591,8m, or 143% of the estimated revenue of R243,8m for the year. This was mainly due to fines and penalties imposed by the Competition Commission and the Competition Tribunal, as well as dividends received from the IDC.

Mr Hoosen said a recent presentation to the Committee on the SEFA merger had focussed on the amendment to the IDC Act, and wanted to know under what provision of the law the merger had been concluded.

Mr Mubu asked what the reason for the R19,9m under-expenditure had been.

Mr Ntuli asked whether the EDD had any strategy to increase its staff complement in the provinces. He also wanted to know why Competition Commission fines were not sent back to the National Treasury.

Ms Tsotetsi asked what criteria were used for the choice of municipalities for training, and what level of officials were being trained.

Mr Mabasa said there did not appear to be a successful strategy to pull struggling cooperatives “out of the mud” and questioned whether the Department was adequately staffed to reach all corners of the country to assist in the alleviation of poverty. He also suggested the EDD should put more effort into employing people with disabilities.

The Chairperson said the presentation was just a summary of the Department’s performance, and the Committee needed to receive the full report.

Mr Mowser said the merger of samaf, Khula and IDC small business portfolio had been approved by Cabinet. This had been done in terms of legislation dealing with the merger of entities in Section 51(g) of the Public Finance Management Act. He would report back to the Committee on the IDC Amendment Act.

As far as the under-spending of R19,9m was concerned, this was mostly due to not appointing a full complement of staff, although there was a certain amount of capital under-expenditure.

The EDD did not have provincial offices, and did not have employees in the provinces. This was the responsibility of the provinces themselves. However, it was realised that they were under-staffed, and working with the IDC and SEFA, the EDD was looking at ways in which to help capacitate the provinces.

Mr Zweli Momeka, Chief Financial Officer, said the Competition Commission fines were in fact returned to the Treasury. The EDD was merely a conduit.

At this stage, the Chairperson advised the delegation that the deadline for closing the meeting had been reached, and requested that all unanswered questions should dealt with in writing.

She thanked the delegation for the presentation and adjourned the meeting.


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