Ports Regulator on its 2014 Strategic Plan

Meeting report

Ports Regulator (PR) on its Strategic Plan and Annual Performance Plan (APP) for 2014/15
Mr Mahesh Fakir, Chief Executive Officer (CEO), PR, welcomed everyone to the Committee meeting and indicated that it was an honour to make a presentation to the Committee Members. The presentation focused on Strategic Plan and Annual Performance Plan (APP) for 2014/15. The Ports Regulator (PR) was established in terms of Chapter 5 (Section 29-55) of the National Ports Act, number 12 of 2005 and the Regulator is a key component of the ports regulatory architecture envisaged in the National Commercial Ports Policy. The Regulator’s key function is economic regulation of the ports in South Africa, in line with the strategic development context of the state. In accordance with this mandate, the Regulator performs certain functions and activities in the industry that relate mainly to regulation of pricing and other aspects of economic regulation, promotion of equity of access to ports facilities and services. The Regulator was also responsible for monitoring the industry’s compliance with the regulatory framework, as well as hearing any complaints and appeals lodged against it.

The objectives of the National Ports Act is to push for the development of an effective and productive ports industry for economic growth, promote and improve efficiency and performance in the management and operations of ports. The Act also promotes the development of an integrated regional production and distribution system in support of Government. The Regulator consists of 9 members (currently 6) that constitute the economic regulatory authority for the ports system in South Africa. The Regulator is independent in the performance of its economic regulation and tribunal functions from the Department and they also one of the key institutions envisaged by the Ports Policy.

Mr Fakir indicated that the functions of the Ports Regulator in terms of the Ports Act considered:
Exercise economic regulation of the port system in line with Government’s strategic objectives
Promote equity of access to ports, facilities and services provided to ports
Monitor the activities of the National Ports Authority to ensure compliance with the Act
Adjudicate complaints and appeals against the Authority
Approve or reject the Authority tariffs
Promote regulated competition
Regulate the provision of adequate, affordable and efficient port services and facilities

The purpose of equity of access to port facilities was to promote the movement of goods and export markets as well as domestic and regional distribution. The Regulator planned to prioritise on accelerating the access of Small Medium Micro Enterprises (SMMEs), Broad-based Black Economic Empowerment (B-BBEE) and women to ports in the country. It was essential for the Regulator to improve international trade, prevent the access to arbitrage in vertically integrated ports participants and promote efficiency and reliability of port services and facilities. The competition in the port system was stiff and the Ports Act requires the Regulator to promote regulated competition as well as ensuring the port system must be locally, regionally and globally competitive. The port user must have choice in facilities and service provided.

The Industry Development Programme (IDP) promotes equity of access to port facilities and services, competition in the port system and economic participation in the port system. The IDP also promotes infrastructure and planning, port infrastructure efficiency monitoring and participation of women. The Legal Programme focused on compliance project including the reviewing of S56 agreements and licences, lease agreements and B-BBEE compliance of the National Ports Authority (NPA). The complaints and appeals tribunals hears appeals on the decisions of the NPA and complaints about NPA in terms of the Act Directives, for example finalised and issuing of K and N Record of Decision (ROD), Columbus Stainless Steel, GMSA ROD. All the RODs are made public and available on the Regulator’s website.

Regulation is a balancing act between users of ports and service providers of infrastructure. The objective of economic regulation is to provide protection in cases of monopoly ensuring openness, transparency and due process. It also ensures that there are minimum service standards, protects public interests and also that of infrastructure owners. Economic regulation reduces risk (both port owner as well as users in terms of rules and guidelines.

The Regulator’s role in NPA tariffs included:
To ensure that NPA tariffs are utilised in ensuring that the port system is efficient
To ensure that the tariffs are affordable to port users
To ensure that the tariffs are predictable and non-discriminatory
To prevent the utilisation of tariffs for cross –subsidisation unless in the public interest

The purpose of NPA tariffs is to enable it recover its investment in owning, controlling and administering ports and its investment in port services and facilities. It is also enables recovery of its cost in maintaining, operating, controlling and administering ports and its costs in providing port services and making a profit commensurate with the risk involved in ports services and facilities. On the assessment of Authority’s Tariffs is in terms of the Act, NPA is to submit proposed tariffs to Ports Regulator and the tariffs cover all NPA’s activities as a Port Authority. The Regulator plans to hold hearings and invite submissions on proposed tariff increases and the elements of proposed tariff including manner of calculation, all financial information and evaluations, reinvestment of profits and revenues and the impact on port activity cost structure. The Economic Regulation Programme (ERP) is primarily responsible for tariff settings process and this involves assessment of tariff application and publication submissions and also tariff methodologies. The ERP was also responsible for tariff book restructuring- this concerns tariff incidence and other research like port pricing and cargo flows. Although it is important to emphasize that the Regulator does not have direct mandate to implement projects, its decisions on the NPA’s tariff have significant implications on the Ports Sector, the economy and ability of stakeholders to implement. Since the inception of the Regulator in 2009, there has been smoothing of the NPAs tariffs and the tariff decision has translated into a direct saving to users of about R5 billion over the period. The economic impact of the Regulator showed rationalised tariffs of R1 billion rebates, significantly lowered approved tariffs and continued sustainability of NPA. The Regulator managed to introduce proactive and risk mitigating measures including excessive tariff increase margin credit and R2.5 billion available to offset future increases. Looking forward, the Regulator plans to introduce a fair tariff incidence and have more accurate investment signals.
The presentation further outlined the mandate of the Ports Regulator of South Africa, the regulatory framework governing NPA tariff setting process and matters relating to compliance of the NPA with regulatory framework (see document), It had become important to lower regulatory uncertainty as this will narrow the difference between what is requested by the NPA and subsequently granted by the Regulator and also assist stakeholders in formulating responses to the NPA tariff application in a manner that will assist the Regulator in its decision making. The Regulator still needed to deal with persistent port pricing imbalances as this is clear when comparing South African pricing and pricing structures with other ports around the world. According to study by Global Port Pricing Comparator (GPPC) from 2012/13, there is no real relative system level structure change in port pricing despite large decreases in container cargo dues as well as export automotives-2013/14 ROD. There is also a significant cross-subsidisation from cargo owners towards primary exporters and vessel owners. The Regulator noted that all vessels face much lower overall costs in SA ports than the averages in the study, ranging from 32% below the global norm in the case of containers and 75% for iron ore. The real price decrease in the 2013/14 tariff year resulted in a relative increase of the discount to the global average and the depreciation of the South African Rand by 16.7% for the period also contributed to the decrease in the dollar price. The incidence of the tariff clearly indicates that foreign users of the ports are not contributing to the overall infrastructure costs in a similar manner than they do in global average. 

Key challenges experienced by the Regulator included the following:
Funding is not sufficient to fully discharge the mandate of the Regulator
Amendments to the Act  are required in order to give Regulator more powers and resources to honour its mandate
Limited staff capacity as a result of low budget results in a slow pace of implementation of some of the programmes of the Regulator
Dollar terms discounts increased as a result of the depreciation of the South African currency and will arguably support the dollar price of South African port price for the foreseeable future
Unavailability of tribunal members to eliminate tribunal backlog
Delays in receiving data for projects such as port efficiency, B-BBEE and S56 and S57 review as well as ports benchmarking
Delays on projects that need to be performed together with the DoT such as review of the (National Freight Logistics Strategy (NFLS)
Tenure for the current Regulator members ends in June 2015
High levels of cross-subsidisation in port system remained a concern 
Vessel owners costs below the global average

The presentation further provided the Committee with a very comprehensive breakdown of the performance of the Ports Regulator in terms of its Programme Areas. A breakdown of each Programme was given in terms of its strategic objectives, key performance indicators set in relation to the strategic objectives, the targets that were set in relation to key performance indicators and lastly the actual figures achieved which had to be compared to targets that had been set (see document). On the 2014/15 half year report of the APP, the first strategic objective was to run effective administration. The Key Performance Indicator (KPI) used was to fill the funded posts and the Regulator managed to fill all the funded posts. The filling of posts was part of the strategy to expand and capacitate the organisation with the technical and competent staff to enable the organisation to fulfil its legislative mandate and reduce external resource utilisation. The second strategic objective is to improve economic regulation of ports (price, access and institutional structure). The KPI used was to develop Medium-term Tariff Methodology and during the quarter, the Regulator was able implement and present the Tariff Methodology at the Regulator road shows. The Passenger Railway Agency of South Africa (PRASA) received an application in line with the methodology from the NPA.  The road shows were used to engage with and provide clarification to port users and stakeholders on the Multi-year tariff determination methodology, its components on effective infrastructure and service delivery in the South African port system. The Regulator had an engagement with the working group on the legislative components of the Single Transport Economic Regulator (STER) Bill; this has also been covered in the funding proposal to the Minister of Transport. The third strategic objective focused on industry development and infrastructure planning, integration and efficiency. The KPI used was completion of traffic statistics review for liquid and thereafter upscale, provide support required by the Department of Transport (DoT) in the industry at the Port Consultative Committee (PCC) and National Port Consultative Committee (NPCC) meetings. The Regulator support the DoT’s National and Port Consultative Committee processes through which port users across all 8 ports make inputs into the NPA’s Capital Programme and monitor the port performance. It engaged in a tariff methodology clarification workshop with the NPCC which advices the Department, on among others, measures that need to be taken to improve the regulatory framework, governing management and operations of ports and alterations to the Authority’s tariff. The fourth strategic objective is to monitor the port industry and its compliance with National Ports Act, Port Policy and other Regulatory Instruments. The KPI used was drafting recommended report to the Ports Act to enhance the power of the Regulator to police decisions made by it as well as enhance governance structures in compliance with overarching legislation. The draft report on which Sections of the Act are to be amended has been completed, internal consultation thereon has commenced to identify additional sections; the draft is to be submitted to the next meeting of the Regulator. The fifth strategic objective is to operate an effective and efficient tribunal to hear complaints and appeals under the National Ports Act. The objective statement is for the tribunal to be consistently operated to hear complaints and appeals and tribunal members to undergo on-going training to ensure efficient decision making. The KPI used is for the Regulator members to receive on-going training on judicial processes= the target was partially achieved with submission on service provider sent to CEO.

Mr Thokozani Mhlongo, Acting Chief Financial Officer (CFO) Ports Regulator, presented the Medium Term Expenditure Framework (MTEF) budget 2014/17 for the Regulator classified per programme, viz:
Economic Regulation- R3804 million for 2015/16 and expected to be R4191 million for 2017/18
Monitoring- R676 for 2015/16 and R850 for 2017/18
Tribunal- R3456 million for 2015/16 and R407 million for 20117/18
Industry development – R1648 million and            R1957 million for 2017/18
Administration- R8353 million and R8801 million for 2017/18
Support was required on challenges facing the Regulator; support for a new funding model will require legislative change. The small size and budget prevented the Regulator from achieving some APP targets like Evaluation project. The STER was supported but transitional arrangement will need to be reviewed carefully by legislators. The Regulator requires greater enforcement capability and amendments to the Act have been proposed and may soon be served before the legislature, therefore support from the Committee will be required.  

Discussion
Mr C Hunsinger (DA) welcomed the presentation and expressed concern that the study done by GPPC used averages as the benchmark to measure container tariffs and asked whether this was influenced by the volumes of the container. There must be some form of consistence in the number of harbours that are used in comparison to Cape Town and Durban harbours.

Mr Fakir responded that it was highly unlikely for every single port to respond in the same way to the request made by the Regulator, as language sometimes becomes a barrier. The study tries to standardise the ship size - admittedly some ports were not complying with this requirement. The study was important for South Africa to compare the container tariffs with other countries.        

Mr M de Freitus (DA) remarked that the tariffs charged by ports in the country were expensive and this needs to be addressed urgently as it emanated from inefficiency and unreliability.  Clarification was requested on the reason for the utilisation of the tariffs for cross-subsidisation except for public interest.

Mr Fakir responded that the issue of affordability of business needed to be contemplated considering that the Regulator was losing business to Maputo due to expensive ports charges. The Regulator was reviewing the benchmarking of the port system itself and also working with the NPA to improve efficiency. Members need to be aware of the return on regulatory asset-base, meaning if the assets-base become bigger, then the revenue become bigger; therefore it is imperative to build more assets than making them more efficient.

Mr G Radebe (ANC) said the dominance of cargo owners often makes it difficult for the Historically Disadvantaged Individuals (HDIs) to enter the industry and operate. What can be done by the Regulator to assist HDIs operate in ports? Was there a way for Members to assist the Regulator in order to improve its finances as this was also a key challenge? What was the link between the fillip up of organogram and the adding of tribunal members? There was a need to avoid situations where Boards are expanded for no reason than to pay members huge salaries.

Mr Fakir responded that the Members can assist in terms of motivating for an increase in budget that would allow the Regulator achieve its mandate.  The entity was set up as an economic regulator; looking at the tariffs therefore the Regulator is not expected to be present in each port around the country. However, there was a need to deal with the challenge of understaffing and getting skilled people to meet the capacity requirements and reducing external resource utilisation. There was already a strategy in place to deal with the targets that were not achieved and the fundamental problem was on understaffing and limited budget. The empowerment of previously disadvantaged individuals was part of the legal programme and the major focus was on B-BBEE and the empowerment of the Small Medium Micro Enterprises (SMMEs).  The Regulator is not a board in the traditional sense a governance board but rather an operational board, although the word board is not used in the Act. The addition of a Board will help improve throughput in dealing with compliance and tribunal matters against the NPA.  The regulation requires three members sitting in to hear tribunal; however the Regulator often struggled to get the three members to attend all the tribunal cases.

Ms S Xego-Sovita (ANC) echoed the same concern on the Regulator recommending an additional board- as already indicated, it was ideal to have only 12 board members. Where were the entire board members? In the next financial year, the Regulator should focus not only on the empowerment of women but also youth as they were often affected by unemployment and poverty. Is there transparency around 75% of discretionary procurement from B-BBEE? Who are the stakeholders for the Regulator? Is there a value for value when using discretionary procurement?

Mr Fakir responded that the CEO is mandated to account in accordance with the existing Act and mentioned that the Chairman was overseas and other members had to attend urgent meetings. The Regulator had not commenced the empowerment of women but as time progressed, young people will also be integrated into the whole package.

Mr Mhlongo added that the Regulator ensures that there is transparency when using discretionary procurement and it maintained a database of service providers. There was also an alternation of service providers.

Mr M Sibande (ANC) expressed concern about the capacity of the Regulator considering the amount of work that needed to be done. The utilisation of consultancy must not be used as recourse to reduce staff members as this is against the development of local skills. What was the relationship of the Regulator with other provinces? Who determines the tariff as this was not clear in the presentation? What is the strategy in place to deal with compliance? Who own the ships in the South African ports? Were there any laws and regulations the Committee can utilise to assist the Regulator to become effective and achieve the targets in the APP. What was the reason for the reliance on the South African Revenue Services (SARS) data? Is there a risk management system in place for the Regulator?

Mr Fakir responded that the Regulator utilises a small percentage on consultancy as this was often unsustainable. The Regulator still need to request to the Department for the addition of Board members as this was procedural. The Regulator regulates national entities and there is no provincial competency in its work. It is the Regulator that determines the tariffs as the NPA only applies to the Regulator for the tariff increase. The Regulator was still new and therefore forced to rely on SARS database to make decisions; the data is merely to check whether there are discrepancies. There is no risk management system in place yet as it was only developed 2 months ago and the risks had already been identified - both strategic and operational.

Mr T Mulaudzi (EFF) apologised for arriving late and expressed concern that the Regulator was failing to achieve some of the targets in the APP and asked whether the Department was aware of this. What is the problem with the STER as this was hugely supported by the Department? Further explanation was requested on the requirement for greater enforcement capacity (whether related to human resource, legislation or budget). 

Mr Fakir responded that the STER will look beyond to what the Regulator has and hoped that it will include regulating port operation. The transition to STER needs to be smooth and the legislation should take into consideration the transactional arrangement. The Department was aware of the fact that the Regulator needed an increase in budget in order to achieve the targets in the APP. The Minister requested a meeting with the Regulator around November 2014 to review the sustainability of the Regulator as a whole and its funding challenges. The issue of funds will give the Regulator more power for enforcement capacity.

Mr L Ramatlakane (ANC) asked whether the Regulator itself was in compliance with National Ports Act, 2005. What are other additional resources required by the Regulator to achieve its mandate and objective?

Mr Fakir responded that largely the Regulator complied with the National Ports Act, 2005 and the Department had done its job in terms of giving effect to the Regulator. It was appropriate for the Regulator to be funded by both fiscal allocation and tariffs so as to avoid the situation of being controlled by the industry.

The Chairperson asked about the revenue required methodology that is used for regulation of ports in the country and wondered if they were consistent throughout the provinces.

Mr Fakir responded that there are many methodologies used for regulations but the one currently used by the Regulator is asset-based. Further, there is a tariff manual on the website in order to see the different formulas. The ability of the Transnet group to draw funds from its port subsidies by way of dividends could deprive the port authority of the funds needed for investment and force it to push up tariffs as a way of generating the required funds.

Mr Sipho Dibakwane Policy Analyst, DoT, welcomed the presentation by the Regulator and the input of the Committee. The Committee together with the DoT and the Department of Public Enterprises (DPE) should convene as there was a need for legislative framework to response to National Development Plan (NDP) and Operation Phakisa and other legislative policies put forward by Government. The Department had noted the issues raised by the Regulator especially the challenges related to funding and the filling up of its Organogram. 

Mr Sibande suggested the Regulator list all the key fundamental challenges so as to form part of the package when meeting with the DPE.

Mr Dibakwane recommended that the Department provides the Committee with submission so as to assist in highlighting the key priority areas.  

Mr Fakir appreciated the assistance from the Department and the Committee Members and welcomed the suggestion to meet with the DPE.

Mr Dibakwane said the submission will be done by 10 November 2014 before being presented to the Committee meeting.

The Chairperson reiterated that transport played a crucial role in the economy of the country and needed to be maintained in order to ensure that there was sustainable and inclusive economic growth. It was important to tackle the issue of transformation in the ports industry so as to assist the HDIs to enter the market. The issue of funding for the Regulator needs to be addressed as it affected its ability to be efficient and reliable.

Adoption of Minutes
The Chairperson requested that Members adopt the minutes of 9 September, 16 October, 17 October, 21 October and 22 October 2014.

Mr Sibande moved for adoption of the minutes of the 9 September 2014 and Mr Ramatlakane seconded. The minutes were adopted as is.

Mr Muluadzi moved for adoption of the minutes of the 16 October 2014 and Mr Ramatlakane seconded. The minutes were adopted as is.

Mr Ramatlakane moved for adoption of the minutes of the 17 October 2014 and Mr de Freitus seconded. The minutes were adopted as is.

Mr Radebe moved for adoption of the minutes of the 21 October 2014 and Mr Ramatlakane seconded. Ms Xego-Sovita indicated that she was present on the meeting. The minutes were adopted with all amendments.

Mr Ramatlakane moved for adoption of the minutes of 22 October 2014 and Mr Mulaudzi seconded. The minutes were adopted as is.

The meeting was adjourned.