Transnet Annual Report 2012/13

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Public Enterprises

28 January 2014
Chairperson: Mr P Maluleke (ANC)
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Meeting Summary

The Portfolio Committee on Public Enterprises received a presentation from Transnet on its Annual Report and Financial Statements for the period ending March 2013. The presentation was introduced by the Chairperson of the Transnet Board of Directors and the Transnet Group Chief Executive.

According to the Annual Report, Transnet’s performance for 2013 showed resilience despite depressed economic conditions. Some of the following performance indicators were highlighted: revenue had increased by 9.4% to R50.2 billion; Earnings before Interest, Taxation, Depreciation, and Amortisation (EBITDA) increased by 11.5% to R21.1 billion, almost 5 times the Gross Domestic Production (GDP) growth rate; capital expenditure increased by 23.4% to R27.5 billion; and Transnet had also created about 28 493 direct and indirect jobs and trained over 866 artisans. Electricity consumption declined by 3.4 % and about 151 MWh was regenerated by new locomotives.

Financial results indicated that Transnet’s revenue increased from R45.9 billion in 2012 to R50.2 billion in 2013, representing an increase of 9.4%. Cash generated from operations also increased from R20.6 billion in 2012 to R27.5 billion in 2013 representing a 9.6 % increase.
Revenue contribution was broken down into the following operating divisions: Transnet Freight Rail (TFR) made up 50% of Transnet’s revenue, followed by Transnet Engineering (TE) at 21%, Transnet National Ports Authority (TNPA) at 13%, Transnet Port Terminals (TPT) at 12% and Transnet Pipelines (TPL) at 4%. Operating expenses increased by 7.9% to R 29.1 billion mainly due to increases in material costs, personnel costs and energy costs.

On socio-economic aspects and sustainability, Transnet created 28 493 direct and indirect jobs. Transnet was committed to creating and maintaining a representative workforce in which black people made up 80.5% of the workforce, females at Group Executive level made up 41.7%, females at Extended Executive level made up 37.3%, and females below Extended Executive level made up 23.8% of the workforce. People with disabilities made up 1.4% of the workforce. As much as female representation was growing within Transnet, significant challenges were faced in attracting female employees in an operating heavy environment, especially at semi and unskilled levels. Transnet’s Corporate Social Investment spending for 2013 was R132 million.

Members of the Committee were very impressed with the Annual Report 2012/13 and the presentation. The efforts and strategy of the group’s management was highly commended. Most Members however raised concerns around Transnet’s Pension Fund and the various court cases which had been brought against the fund. Members were also concerned about the lack of communication between Transnet’s Pension’s Fund, the mainstream media and the pensioners. Members suggested that the annual increase to the pensioners be in line with inflation. In response, Transnet argued that this would be too much liability for the group and it was highly unlikely that the Board would agree to take up over R 2 million in annual liability on behalf of the pensioners. The 2% bonus incentive for the pensioners had therefore proved to be a more favourable option for both pensioners and Transnet. However, Members were warned that mainstream media saw the matter on the Transnet Pensions Fund as a “juicy” topic as a result, the matter was highly politicised. Members advised Transnet to open better lines of communication between the pensioners, mainstream media and the fund because in fact Transnet had done a great job with the pension pay-outs. 

Members also asked why targets for capital expenditure had not been met and how would progress on moving from road to rail be measured? What timeframes were in place to assess progress made on moving traffic from road to rail? Transnet Pipelines cited four spills in 2013; what were the causes of these and what preventative measures were in place to prevent future occurrences? Which external auditors did Transnet make use of and for how long was the contract?

Meeting report

Briefing by Transnet on its Annual Report 2012/2013
Mr Mafika Mkwanazi, Chairperson of the Board, Transnet thanked the Committee Chairperson for the invitation. He explained that the reason why Transnet had such a strong delegation present was because the Group Executives were attending a strategic session in Cape Town, where management was preparing a corporate plan for the current financial year. The presentation was to be done by Mr Brian Molefe, the Transnet Group Chief Executive and Mr Anoj Singh, the Transnet Group Chief Financial Officer.
 

Performance Overview
Mr Brian Molefe, Group Chief Executive of Transnet said Transnet’s performance for 2013 showed resilience despite depressed economic conditions. He highlighted some of the following performance indicators: revenue had increased by 9.4% to R50.2 billion; Earnings before Interest, Taxation, Depreciation, and Amortisation (EBITDA) increased by 11.5% to R21.1 billion, almost 5 times the Gross Domestic Production (GDP) growth rate; capital expenditure increased by 23.4% to R27.5 billion; and Transnet had also created about 28 493 direct and indirect jobs and trained over 866 artisans. Electricity consumption declined by 3.4 % and about 151 MWh was regenerated by new locomotives.

Financial Results
Mr Anaj Singh, Group Chief Financial Officer, Transnet reiterated that Transnet’s revenue increased from R45.9 billion in 2012 to R50.2 billion in 2013 and this represented an increase of 9.4%. Cash generated from operations also increased from R20.6 billion in 2012 to R27.5 billion in 2013 representing an increase of 9.6 %. Some of the key rations used to highlight Transnet’s financial performance were: EBITDA margins, gearing, net debt EBITDA, cash interest cover and return on average total assets.

Revenue contribution was broken down into the following operating divisions: Transnet Freight Rail (TFR) made up 50% of Transnet’s revenue; Transnet Engineering (TE) at 21%; Transnet National Ports Authority (TNPA) at 13%; Transnet Port Terminals (TPT) at 12% and Transnet Pipelines (TPL) at 4%.

Operating expenses increased by 7.9% to R 29.1 billion mainly due to:

•Material costs increased as a result of higher steel prices and levels of maintenance also increased to support current and future growth in rail volumes
•Personnel costs increased to R14,5 billion (2012: R14,1 billion) due to an 8,4% average wage increase as well as headcount and training cost increases in line with Market Demand Strategy (MDS) requirements, partially offset by a decrease in performance related incentive payments
•Energy costs increased due to higher electricity tariffs from Eskom as well as fuel price increases
•The increase in operating expenses was limited by rigorous cost reduction initiatives amounting to R2, 2 billion.
 

Personnel costs therefore made up 50% of the operating costs in 2013, while other operating costs made up 21%, energy costs made up 19% and material and maintenance costs made up 10% of the total operating costs for Transnet.

Mr Singh said the net finance costs increased by 36% due to increased borrowings of 25.7% to fund Transnet’s capital investments programme. However, despite increases in depreciation and net finance costs, profit for the year only increased by 5.4% and an increase of 8.3% in headline earnings. Transnet’s financial position remained strong with total equity and liabilities amounting to R203 896 million for 2013. Strong operating cash flows supported Transnet’s investment grade credit rating.

Capital Investments
Mr Singh explained that Capital Investments over the last 6 years totaled R125 billion. Capital Investments increased by 23.4% from 2012 to 2013. Investment in rail increased by 67% to 18.3 billion, investment in ports increased by 14% to R3.9 billion, investment in pipelines increased by 10% to R2.8 billion and investment in engineering and other operating segments increased by 9% to R 2.5 billion. He added that R11.3 billion of the investments were allocated for expansion and R16. 2 billion for maintenance.

Volumes and Operations
With regard to Rail – Generating Freight Business (GFB), volumes increased modestly by 1.6 mt to 82.6 mt. On-time departures (minutes delayed) decreased by 1.4% from 2012, while on-time arrivals (minutes delayed) decreased by 0.3%. He explained that volumes for coal increased by 0.7%. However this growth was negatively impacted by the economic slowdown and a two month shutdown of the RessanoGracia line. However Eskom volumes increased by 22%. The demand for steel and cement decreased mainly due to the slowdown in economic growth which then affected the demand from customers.

Safety
Mr Molefe explained that the disabling injury frequency rate (DIFR) increased from 2012 by 13.8%. However this was a significant decrease compared to the other years. Employee fatalities increased by 2% where nine employee fatalities were recorded during 2013; five of these were as a result of vehicle motor accident while on duty, three of these were as a result of criminal activity and one fatality was as a result of a health condition. Public fatalities increased by 25%. There were 125 public fatalities reported for 2013; trespasses in the rail reserve accounted for 53% of the fatalities while 23% of these fatalities were due to level crossing incidents.

Socio economic and sustainability
Transnet created 28 493 direct and indirect jobs. Transnet was committed to creating and maintaining a representative workforce in which black people made up 80.5% of the workforce, females at Group Executive level made up 41.7%, females at Extended Executive level made up 37.3%, and females below Extended Executive level made up 23.8% of the workforce. People with disabilities made up 1.4% of the workforce. As much as female representation was growing within Transnet, significant challenges were faced in attracting female employees in an operating heavy environment, especially at semi and unskilled levels. Transnet’s Corporate Social Investment spending for 2013 was R132 million.

Audit opinion and Controls
Mr Singh said the External Auditors of Transnet SOC Limited had expressed an unfounded audit opinion on the financial statements for the year ended 31 March 2013.

September 2013 Interim Results
Mr Molefe stated the following highlights:

- Revenue increased by 14,3% to R28. 5 billion;

- Strong volume growth in automotive and containers on rail of 26. 0%;

- Operating profit increased by 39. 3% to R7. 2 billion;
- Profit for the period increased by 71,2% to R2,9 billion;
- Capital investment for the period of R11,2 billion;
- B-BBEE spend of R19. 6 billion or 85,0% of total measured procurement spend for the period per DTI codes

Mr Molefe concluded that despite the economic challenges, Transnet reported robust performance underpinned by growth volumes despite a depressed economic environment, financial stability, improved operational efficiencies and productivity, the achievement of numerous socio-economic initiatives and supplier development and the enhancement of the company’s reputation both internationally and externally. The 2013 performance had therefore set a solid platform to continue with the execution of the Market Demand Strategy in the years ahead.

Discussion
The Chairperson thanked Transnet for the good report and commended the whole team on such outstanding performance.

Ms N Micheal (DA) thanked Transnet for the presentation and congratulated the Transnet team for the great report which was also sent through to Members on time. A concern had been raised against Transnet Pensions. She asked for an update on legal actions which were still pending against the Pensions Fund? She argued that her office had received various complaints from Transnet employees who had not received their bonuses. How were these bonuses paid out and why were increases not in line with inflation? What was the outcome of the Public Protector’s investigation into Transnet Pensions?

Dr G Koornhof (ANC) said for a state owned company, Transnet management needed to be commended for its contribution towards skills development, infrastructure development, economic growth and job creation, among other things. Why had targets for capital expenditure not been met and how would progress on moving from road to rail be measured? What timeframes were in place to assess progress made on moving traffic from road to rail? With regard to on-time departures and arrivals, why had targets not been met? The trend line for irregular expenditure was also highlighted as being incorrect. Why was information on the pensions fund not communicated properly to the media, seeing that in the report, Transnet was doing exceptionally good work in this regard? With regard to port terminals, the report indicated that there has been a conflict between the Act and Transnet policy. Why had Parliament not been approached as an attempt to resolve this conflict? Transnet Pipelines cited four spills in 2013; what were the causes of these and what preventative measures were in place to prevent future occurrences? On human resources, he asked about the measures which were in place to improve statistics on women and people with disabilities. He attributed the good balance sheet to good leadership, a good Board and good employees.

Mr C Gololo (ANC) asked whether branch lines in small towns and cities would be looked into. How was the current depreciation of the Rand against major currencies affecting Transnet’s capital expenditure? What was the progress made in moving freight from road to rail?

Ms G Borman (ANC) congratulated Transnet on its delivery of a good report. However the 33 targets which were not achieved were a major concern so she wanted to know the reason for this. Where the targets set too high? How was Transnet dealing with the pending court cases on Pensions Fund? Which external auditors did Transnet make use of and for how long was the contract?

Dr Koornhof said the rejection of the International Energy Agency (IEA) Report had huge consequences financially and time wise. He asked whether the fuel infrastructure terminal in Island View would be completed in 2014 and what would the extended costs to the company be. He said the Richards Bay terminal for junior exporters had been met with resistance. What was the reason for this?

Mr Harry Gazendam, a Transnet Board Member replied that the Transnet Pensions Fund had a guaranteed increase of 2% and was the only fund which guaranteed an increase. Issues of why pensions could not get an increase linked to inflation were indeed a fair question, however increases linked to inflation could not be guaranteed. Liability to the fund would shoot up to nearly R 2 billion and Transnet did not have this money. Employees did not under-write liability and liability was a legal responsibility. Transnet had a primary responsibility to the company and the shareholders. There was therefore no way the Transnet Board could justify a decision to incur an additional R 2 billion liability for which it was not currently responsible. With the support of the employees, Transnet had agreed to give annual bonuses on top of the 2% increase, and this bonus strategy enjoyed far greater support from pensioners than an additional increase to pensions.

Mr Gazendam argued that the topic on pensions was in fact a “juicy” subject in the media and the media simply wanted to make mischief and this was why the media gave a distorted view to the public. Some mainstream media however provided good coverage on the matter. Transnet had therefore agreed to engage the media. On the court cases, he said the Du Toits Transnet Pensions Fund case was an individual who took the fund to court. However the judge ruled against the complainant and included all funds incurred. There was no development in class action. On the question about the Public Protector, he said Transnet had sent through an extensive list of questions around mid-September 2013. However Transnet had not yet received any feedback since responding.

Mr Molefe reassured Members and said any individual cases which Members were aware about should be brought before Transnet. Transnet had an open-door policy.

Ms Micheal said Members were indeed concerned with the massive court actions against Transnet with regard to pensions. Communication from Transnet around the pensions fund was therefore lacking.

Dr Koornhof agreed that the relevant information should be communicated to pensioners, especially through the media.

The Chairperson said that the Transnet Pensions Fund in some cases had been miscommunicated as a political issue as a result the public was severely misinformed. Transnet therefore needed to communicate the right information to the public because the fund had in fact done good work.

Ms Sharla Pillay, Chief Executive: Pipelines, Transnet, replied to the question on deadlines and said the Helderberg terminal would be completed in 2014.

Mr Molefe replied that the conflict between the National Ports Act and Transnet policy was in fact being dealt with; the Department of Public Enterprises has taken the matter into account and was in discussions with the Department of Transport. However Transnet was not yet in a position to give a full account on progress made on the matter.

Ms Nonkululeko Sishi, Group Executive: Human Resources, Transnet, said that an environment to accommodate women and differently abled people within Transnet had been created. In an attempt to increase statistics on women and people with disabilities within the entity, Transnet had also aligned itself with various universities for bursaries, learnerships and many other programmes.  

Mr Mark Gregg Macdonald, Group Executive: Planning and Sustainability, Transnet, said the rising tide levels as a result of global warming were in fact a concern, and Transnet was in communication with the Department of Environmental Affairs and Forestry so that a solution could be agreed upon. Transnet’s carbon emission levels were at the moment at a globally accepted level. Transnet had sourced the bulk of its coal from Eskom to reduce carbon emissions.

Mr Kgomotso Phihlela, Transnet Group Executive: Communication replied to the question on Richards Bay and said Transnet was in discussions with the Richards Bay community in an attempt to unlock capacity so that junior miners could be included. The discussions had undergone a process where applications were still under consideration. Rail capacity would also be improved to incorporate junior miners and the idea of an alternative terminal was one which had been on the cards for some time.

Mr Molefe added that the issues of capacity at the terminal had been improved.

Mr Singh replied to the question on external auditors and said SizweNtsalubaGobodo had been contracted by Transnet for the last 2 years.

Mr Molefe added that it was the first time that a big entity such as Transnet appointed a Black Economic Empowerment firm and not one of the country’s big-five firms. SizweNtalubaGobodo had been commended internationally on its work.

The Chairperson thanked Transnet for the presentation.

The meeting was adjourned.
 

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