Transnet on its Annual Report 2011/12

Meeting report

Briefing
Mr Brian Molefe, CEO of Transnet, briefed the Committee on Transnet’s financial statements and Annual Report of 2011/12.  He said revenue was up 6.6% from R38bn to R45bn. EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) was up 19% from R15.8bn to R18bn. Cash generated from operations were up 24% from R18.3bn to R22.7bn and that capital investment was up from R21.5bn to R22.3bn.

Profit was R4.1bn, with Transfreight Rail providing around half the revenue. Notwithstanding the increased expenditure the budget was underspent by 2.5%. Net finance costs increased by 30.9% arising from a R5bn bond raised in the USA. Tax increased from R1.5bn to R2.1bn due mainly to capital gains taxes.

The balance sheet was strong and allowed borrowing without Government guarantees. Fixed assets had increased. Borrowings totalled R58bn of which R2.9bn had been repaid to reduce the stock of debt.
Cash interest cover at 4.2 times was above the Transnet board’s target of 3 times.

Transnet had transported 201m tons of freight, the highest ever and a growth of 10.4% on the previous year’s volume. Coal freight was up 8.8%, iron ore was up 13.2%, and gross tonnes per kilometre productivity was improved by 1%. Rail freight container usage volumes had increased by 21.5% and this was a reflection of the modal shift from road to rail that Transnet was engineering. Maritime container volumes had increased by 6.6%, although Pier 2 in Durban had experienced a decline as refurbishment was taking place. New cranes had been ordered for Durban so Pier 2 would improve in the future. Petroleum volumes decreased by 7.1% because of industry supply problems and the Durban - Johannesburg pipeline usage decreased by 8.8%.

Employee fatalities had decreased by 41.7% and public fatalities by 33.8%. The cost of these losses had decreased 57.9% from R1bn to R432m.

The capital investment programme had invested R22.3bn, of which 65% would be in rail infrastructure.  52% of the capital expenditure was in expanding operations, while 48% was spent on maintenance. It acquired 181 locomotives and 1736 rail wagons and had entered into contracts to purchase a further 32 Class 15E locomotives. One tug had been purchased for Durban harbour.

The representativeness of the workforce reflected 78.5% blacks and 21.5% whites with 78% being males and 22% being females. 

It would take on 60 engineering trainees, 181 technician trainees and 854 artisan trainees. Training accounted for 3.9% of personnel costs. The total number of employers was 50 992 which was a 6.6% increase.  

Transnet had made ad hoc bonus expenditures to pensioners totalling R1.5bn and ex gratia payments to the two pension funds, Transnet Second Defined Benefit Fund (TSDBF) and Transnet sub-fund of the Transport Pension Fund TTPF, of R385m as requested by the Committee.

In its competitive supplier development programme, it had executed R3bn (55%) of total obligations and its recognised B-BBEE spend totalled 80% in 2012.

In its corporate social investment it had spent R160m in health, teacher education and sport. The second Phelophepa Healthcare Train, a fully equipped train that travelled the country providing health care services, had been commissioned. There was a teacher development programme, a sports development at schools programme and involvement in the Transnet Football School of Excellence.

Transnet had received an unqualified audit opinion. The external audit had highlighted a number of reportable items under Section 55(2) b of the Public Finance Management Act (PFMA). 105 contracts in the audit were checked and internal audits on finance, governance, people and methods and practices all received satisfactory outcomes. Fruitless and wasteful expenditure totalled R89.6 m with finalised disciplinary cases standing at 62. Losses attributable to crime was down 74% to R76.9m and registered criminal cases had increased to 173. Irregular expenditure totalled R195.5 m, with 10 disciplinary cases finalised. The irregular expenditure had not been wasteful expenditure and Transnet had received value for services. It had implemented the CURA risk management system.

Transnet was financially stable and there was a growth in the volumes transported, an improvement in productivity and gains in safety which all served as a platform to execute its market demand strategy.

Discussion
Mr E Marais (DA) asked for a clarification of the loss of R4.8bn ascribed to Other Operating Activities in the cash flow statement. Why was the figure for disabled people employed still so low? Could Transnet address the fact that Transnet pensioners received a 2% increase annually while the inflation rate was around 6%? What was the average increase given to the workforce, middle management and senior management? He raised the issue of Transnet sitting with unused land in the Saldanha area for 20 years. The land was now zoned residential land and there was a backlog of 4000 low cost housing and gap housing units in the area and the municipality was willing to buy this land. 

Mr A Mokoena (ANC) said in the past, R8.4bn was lost to misconduct. How was the money to be recovered and how did this escape the various levels of auditors? Would the lack of product for transportation through the Durban Johannesburg pipeline continue to be a problem? How was the downturn in volumes linked to the Iran oil sanctions? Transnet Rail Engineering (TRE) was a fantastic entity but its achievements were under marketed.

Dr G Koornhof (ANC) said the Integrated Coastal Management Act would wipe R4bn from Transnet’s assets. Could the consequences to Transnet be explained? He said fees for non-executive directors had increased from R3m to R8m, even though the shareholder had put a moratorium on the remuneration of executives until a guideline document had been produced. Could this be explained? He questioned what work could be done by a board member who served on a large number of boards, noting an instance where one member had 59 directorships.

Mr N Nhanha (COPE) asked what stopped Transnet from doing all the locomotive and wagon building locally. He said Transnet should not underestimate the impact the Phelophepa train had on the communities it served.

Ms N Michael (DA) asked what the fruitless and wasteful expenditure was. Could the 10 disciplinary cases that were finalised be explained further?  She said she had asked the Public Protector to look into the matter of the 70 000 Transnet pensioners and their pensions and that Transnet should not look at the matter in a racial way.

Mr Molefe began responding to accusations that Transnet was treating its pensioners in a racist way, but the matter was put into perspective by Mr Koornhof who said that in 2009/10 a Committee task team had been established to investigate the pension funds and put together a report to Parliament. At the most recent meeting of the task team in June, an update on the pension funds as well a briefing on an initiative of Transnet was provided. This involved an ex gratia payment by Transnet to the poorest of the poor. He said one should be careful not to make race an issue as Transnet had addressed the poorest of the poor who happened to be old black widowers and Transnet had gone the extra mile. The initiative should be welcomed and Transnet should not be fought on this issue on a racial basis.

Mr Molefe said that the R4.8bn spent on Other Operational Activity was for finance charges and were not operational losses.

Ms Nonkululeko Sishi, Group Executive: Human Resources, said Transnet employed 414 people with disabilities in mainly administrative jobs and this comprised 0.8% of the workforce.

Mr Mafika Mkwanazi, Chairperson of Transnet’s Board, added that the target for disabled workers had been increased.

Mr Anoj Singh, Chief Financial Officer, said the statutory increase in pensions was 2%. In the long term the 2% would be supplemented by ad hoc bonuses.

Mr Molefe said that Transnet had established a property division, headed by Ms Raisibe Lepule, who would  look into the Saldanha land issue.

Mr Mkwanazi said that executives had not received increases because of the moratorium, but that they were working on a new guideline.

Ms Sishi said the salary increases for the bargaining unit had been 8.5%, for management 6.7%, for middle management 6.3% and for the executive 5%. In the current year it was 8.4%, 6.6%, 4.7% and 0% respectively.

Mr Molefe said that the R8.4bn issue related to previous years’ issues for which they had been hauled over the coals.

Mr Charl Möller, Chief Executive: Transnet Pipelines, said that there had been a decrease in volumes since 2010 but that it was similar to 2011.  He could not comment on the matter of Iran. 

Mr Richard Vallihu, Chief Executive:  Transnet Rail Engineering, said they had a number of projects for building wagons and locomotives in the future. The foundries were being revamped. 

Mr Mkwanazi said the board were appointed in 2010 for a period of three years, with a review taking place from year to year.

Mr Molefe said the management of Cape Town Port would be asked for an explanation why he could not be present for a Committee oversight visit.  He said Transnet did not have the intellectual property rights to build locomotives. The locomotives were bought from American companies but were being built in South Africa. South Africa would be developing its own locomotives in a few years’ time. He said Transnet ran a programme to train teachers in maths, science and sports.

Mr Singh said a special focus had been placed on the theft of goods which had resulted in a significant decrease in incidents and an increase in cases from 35 to 73.

Mr Molefe said that there had not been an agreed methodology between it and the  Ports Regulatory Authority which had resulted in a disjuncture. It had met with the Ports Authority and expected a rough alignment this year.

Ms Nonkululeko Mabandla, Group Executive: Legal Services, said that the ICMA was administered by the Department of Environmental Affairs (DEA). The implications of the Bill were that it would bring land currently owned by Transnet into the public sphere with a consequent effect on the balance sheet of Transnet. The matter was before the Executive. Transnet had conveyed its concerns to the DEA which had said it would amend the Bill to exclude Transnet land.

Mr Singh said the fruitless and wasteful expenditure of R89.6m was made up of over 200 incidences which were unlike the matter of the irregular expenditure of R115 m which concerned four contracts for construction, rail and project management contracts entered into in 2004/5.  The fruitless expenditure incidences were typically regarding vehicle accidents or penalty clauses as examples. All disciplinary cases regarding the irregular expenditure had been finalised.  60-75%  of the irregular expenditure was procurement related. Senior management involved in procurement decisions had been trained in procurement requirements and processes and the CURA risk management programme had been implemented to increase monitoring and reporting.

Mr Mkwanazi said the fees for non-executive directors were not attendance fees but were fixed fees for the year. The short term incentive scheme had been paid. The board was aware of the moratorium but that it had come too late and the payments could not be stopped. The long term payouts were old money.  It was awaiting the completion of new guidelines before rewarding executives in the current financial year. Board membership was the shareholders’ mandate. The person who had held numerous directorships had held them in investment companies which had not impacted on the value he had provided to the board

Mr Molefe said the 10 disciplinary cases referred to completed disciplinary cases. The number of cases initiated was a larger figure.

Mr Singh said judicial proceedings of R256m had been disclosed and Transnet were not expecting any other losses but it had made provision in the amount of R18m.

Mr Nhanha asked how Transnet was involved with the Soccer School of Excellence.

Ms Michael asked what incentives there were for youth to join Transnet.

Mr Mokoena asked about the roll out of standard gauge versus Cape gauge railway line. What was the strategy to make  branch lines viable?

Mr Koornhof  asked for an update on the problems Durban‘s Pier 2 faced as it impacted on ship turnaround times.

Ms Sishi said that Transnet was involved in the educational side of the School of Excellence and that SAFA ran the sport side. Transnet advertised in the media, at schools, universities and technikons and it sponsored bursaries especially for maths, science and for teacher training.

Mr Vallihu said that Transnet was becoming the employer of choice. It had started the “technogirl” programme where girls spent their school holidays at workshops. Transnet’s research and development programme was targeting cum laude students.

Mr Siyabonga Gama, Chief Executive: Transnet Freight Rail, said changing to the standard gauge would result in the writing off of R56bn worth of assets. In addition SADC countries were also on the Cape gauge system. Standard gauge was good for high speed passenger transport but the Cape gauge was better suited to the mountainous terrain in South Africa. The benefits therefore did not exceed the cost. Transnet’s branch line strategy was to revive branch lines and sell them to concessionaires to act as a hub and spoke system as part of its road to rail programme. 

Mr Moller said the reasons for the decrease in pipeline volumes was due to a slowdown in economic activity, market changes, improved fuel efficiency, and the introduction of Gautrain. There had been three cases of cable and product theft. A security group focussing on the issue had made progress. He said there had been underspend in the refurbishment of Durban harbour and that the two terminals would be completed by December next year.

Mr Karl Socikwa, Chief Executive of Transnet Port Terminals, said there had been significant productivity issues with Durban container terminal Pier 2. The dwell time of ships were three to four days. They were replacing old cranes and introducing seven new cranes. Pier 2 was basically a construction site at present.

Mr Gololo asked how much Transnet had received on the sale of the V& A Waterfront site.

Mr Molefe replied that it was before his time.

Other
Minutes of the 7, 14 and 21 August were adopted.

The meeting was adjourned.