Transnet Market Demand Strategy

Meeting report

Transnet Market Demand Strategy (MDS)

Mr Anoj Singh, Group Chief Financial Officer, Transnet, said the market demand strategy was a R336 billion capital investment program with an operating expenditure of over R420 billion. It was targeted at expanding rail, ports and pipeline infrastructure, thereby enabling economic growth. Cash interest cover and gearing ratio had remained within target levels. Benefits of this market demand strategy included job creation, skills development, localization, empowerment and transformation with the expectation to create and sustain 584 00 jobs. It was also focusing on shifting from road to rail so as to reduce cost of doing business and carbon emissions. The majority of investments would be in general freight and freight rail.

Mr Singh presented a summary of Transnet’s 7-year capital investment plan. The majority of the investments would be in General Freight and Freight Rail. The successful execution of the MDS would have a significant impact on the economy. In the next seven years, Transnet’s average annual Gross Domestic Product (GDP) impact to 2021/22 was expected to amount to R225, 9 billion (calculated in constant 2014 prices). Over this period, Transnet expected to create or sustain 633 608 job opportunities across various skills levels economy-wide, comprising direct, indirect and induced contributions. The footprint of the infrastructure development plan would be felt nationwide. The MDS would focus on job creation and skills development, and Transnet would continue to invest significant resources in the retention of key skills.

Operation Phakisa: Strategic intent, marketing strategy and value proposition

The Strategic Intent of Operation Phakisa was to facilitate economic growth through optimization of available land and sea space and new business initiatives. The marketing strategy was to establish an oil and gas marine repair engineering and logistic services complex, boat building facilities and ship repair facilities. The value proposition was that in addition to refurbishing the existing facilities, Transnet would execute on the following initiatives: establishment of rig repair facilities in the Port of Saldanha; implementation of strategic prioritized projects in the Port of Richards Bay; and implementation of strategic prioritized projects in the Port of East London.

In 2012 South Africa serviced four rigs out of a possible market of 80 rigs along West African shores. The contribution to GDP from these four rigs was R1.2 billion. The proposed infrastructure investments at Saldanha would enable the repair of a minimum of 12 rigs per annum starting from 2018, as well as the provision of additional manufacturing support services through the Industrial Development Zone (IDZ). Berth capacity would not be available to service rigs until 2018. Once the enabling infrastructure was in place, modelling indicated that 42,650 jobs (including multiplier factor jobs and 7,970 new jobs) would be created. A rig repair facility and jetty should be developed to service supply vessels and manufacture offshore vessels in line with priority projects. Operators (industry or users) should be provided with incentivised access to port facilities in exchange for developmental commitments (e.g., investment, job creation, skills development, supplier development/transformation and use or pay).

Transnet sought to quantify and unlock opportunities in oil and gas, ship or rig repair and maritime vessel building in line with market requirements in Richards Bay, and to allow the market to implement a low risk, flexible capacity for ship or rig repair. Facilities for maritime vessel building would be implemented, and Transnet would explore the feasibility of Richards Bay establishing a Liquid Natural Gas cluster.

Unlocking boat building in East London would have significant synergies with the motor industry and would develop, support and grow the maritime vessel industry at the Port of East London. Transnet would refurbish the existing slipway facility and industry would make the necessary investments. The boat or ship building industry was provided with incentives in exchange for developmental commitments (e.g., investment, job creation, skills development, supplier development). Preferential access to Special Economic Zone land was granted in support of boat or ship building.

An overview of Operation Phakisa projects and the project engagement plan was given. Multiple skills would be developed through Operation Phakisa in constructing, professional services, manufacturing and other spheres. Many business opportunities would also be created.

Enterprise and Supplier Development (ESD) Philosophy

Transnet’s Supplier Development journey began in 2008 and had evolved accordingly to service government objectives. Transnet’s ESD aspirations and activities filtered back to the wider economy – aiming to make a positive and sustainable impact. The ESD focus would include supporting new entrants and existing suppliers through incubation and innovation initiatives. The MDS created a number of ESD specific outcomes, addressing transformation and growth of the local supplier base.

To effectively target opportunities, SD was involved in the planning stage of the procurement process. Several common success factors had been identified in order to ensure measureable value. Through this approach Transnet would influence established suppliers to engage with local emerging suppliers. Transnet had recognised key areas of opportunity that could be leveraged in order to develop the local supplier base. A number of the commodities fell within designated sectors and local content thresholds were stipulated. Key commodities with potential SD opportunity had been identified within Transnet’s Capex programme.

Enterprise and Supplier Development Achievements

Transnet had achieved an average SD commitment of 70% for the ESD targets for the 1064 Locomotive procurement programme. There would be an increase in the SD potential due to the establishment of two locomotive production facilities. It was envisaged that two productions facilities were to be established in Johannesburg (Gauteng) and Durban (KwazuluNatal). The establishment of these facilities would enable the development of industry clusters around the production facilities with the potential benefits such as local economic development and job creation.

Understanding the common technologies in rolling stock had allowed Transnet to prioritise its initial focus to achieve industrialisation around rolling stock. Sustainability of the industries was achieved through the purchase of the 1 400 locomotives, the upgrade and maintenance of the existing fleet of 2 210 locomotives, building 19 600 wagons and refurbishing a further 96 000. Across Transnet Operating Divisions, a number of procurement opportunities had been identified.

Transnet was rated as a Level 2 Broad-Based Black Economic Empowerment (B-BBEE) contributor and had achieved significant success in driving Supplier Development in its procurement process. Transnet had invested in and supported numerous ED initiatives. For example, there was a partnership between Transnet and Umnyakazo to empower 100% rural black women-owned cooperatives to run and operate container bakeries in their communities, and Transnet had partnered with Vuka Academy and Road Accident Fund to establish a driving school academy and computer academy for disabled people in Richards Bay.

The Transnet Enterprise Development (ED) Hubs promoted Small, Medium and Micro Enterprises (SMME) participation. The aim of the Transnet Small Business/Enterprise Development Hub was to ensure that there was an enabling environment for SMME’s to access products and services that were offered by both Provincial and National Economic Development Institutions under the same roof.

The Transnet-GIBS Programme had been very successful with delegates reporting that 83% had increased their revenue and 66% had employed more staff.

Skills Development

Transnet continued to invest significant resources in key skills to facilitate growth. Transnet achieved and exceeded its targets for black employees, and female representation was growing steadily despite significant challenges in an operations-heavy environment at semi and unskilled levels. ED Hubs were in the process of being established to drive SMME participation.

Corporate Social Investment (CSI) Achievements

Transnet supported a number of CSI initiatives, with a number of key regional and rural successes to date. For example, each year, 120 high school boys from across South Africa attended a school where they received a holistic education that focused on academic skills, life skills and football development. The school currently employed eight educators and four coaching staff. Transnet partnered with the South African Police Service (SAPS) in Dundee, KwaZulu-Natal, and provided the station with an extension of five containerised offices. The Department of Social Development had also used refurbished containers to build a R1.1 million multipurpose centre. CSI achievements for 2014/15 included a total investment of R242 million.

Discussion

Mr A Nyambi (ANC, Mpumalanga) said Transnet made the Committee proud among the state owned enterprises. He advised that there should always be a slide on provincial specifics. The SAFA Transnet Football was not performing well. The last notable player it produced was Steven Piennar who played for Everton in England. When a train hit a taxi and killed 24 children in Mpumalanga, Transnet would have had a bigger impact by investing in the community in that area rather than just targeting the affected families. Transnet should provide a breakdown on sector training per province.

Mr M Rayi (ANC, Eastern Cape) said the Select Committee would always be interested in provincial specifics. When the Committee toured Transnet offices the previous year, it received a good presentation of Transnet operations by its former Chief Executive Officer (CEO) now Acting Executive of Eskom. Would provinces not included in the seven year investment plan be looked after seven years? Investment by Transnet in the Eastern Cape was skewed to the western side, in particular Port Elizabeth. People would end up flooding the towns and Transnet had a mandate to revitalize small towns so that they did not become ghost towns as people migrate to urban centres. There should be a rail link between Port Elizabeth and East London, since these were the two major cities in the Eastern Cape Province. As Transnet assisted bakers, did it assist in accessing the market? In its enterprise development, was Transnet building small industrialists and not just small businesses?

Mr A Singh (ANC, KwaZulu Natal) said asked if Transnet had any plans for absorbing workers after the completion of the Joburg-Durban pipeline. He asked when the fast Joburg-Durban train would come on rail.

Ms B Masango (DA, Gauteng) asked about the media Transnet used to advertise outside metro cities, suggesting that it might consider targeting community small media to help their sustainability. What initiatives had been done to get rid of fronting on BBEE companies? Would the 4000 workers be absorbed after the completion of the Johannesburg Durban pipeline?

Ms C Labuschagne (DA, Western Cape) asked if negotiations had been done on the road to rail migration with road freight operators as this may drive truck companies out of business. What plans were in place to keep the 1000 locomotives functioning after their building? She asked if it was possible for Transnet to export its procurement and enterprise development to other government agencies.

Mr C Smit (DA, Limpopo) asked about the plans Transnet had in place in linking platinum towns and medupi coal mines in Limpopo. Transnet must put proper signage on neglected rail lines when they came into use again. Besides fronting, how did Transnet ensure that people who were involved did not continue benefiting?

The Chairperson asked why Transnet had low return on equity and said she would like to see a progress report of the market demand strategy.

Mr Singh replied that the plan was a rolling seven year infrastructure plan. Any new plans could be accommodated into the plan, for example Operation Phakisa was not there when the market demand strategy was launched. The demand strategy had a long term 30 year planning framework with local, provincial and national targets which guided the seven year framework. The Joburg-Durban pipeline was undertaken by Transnet, but the construction was outsourced from construction companies. The production of 100 locomotives per annum was envisaged after the 1000 locomotives and Transnet was cognisant of the need to keep the fleet running. The R450 billion was not the last capital investment, but a R150 to R200 billion investment was foreseen in the future. There was sustainability going forward in transfer of skills in producing locomotives as some of them would be made in South Africa. Transnet had a social and commercial mandate, hence the low return on equity. To have a high return, it would have to charge high tariffs. It was avoiding ending up like Eskom by maintaining its social and commercial imperative.

Ms Nonkululeko Sishi, Group Executive: Human Resources, Transnet, replied that the presentation would be made available to the Committee through the Department on its provincial footprint in all provinces. Transnet focused on education and SAFA on football skills. Transnet was interested in ensuring that students passed Matric.

Ms Cynthia Mgirima, Head, Transnet Foundation, said the students selected must have football skills together with academic performance. Those selected would then be sent to the SAFA School of excellence.

Mr Garry Pita, Group Chief Supply Chain Officer, Transnet, said that when identifying bakers Transnet had partnerships with nongovernmental organizations which asked communities if bakeries were necessary. It ensured there was a market within the community to ensure the business was sustainable. Transnet was part of the task team that ensured that small businesses had access to finance. Part of the Transnet strategy ensured that large multinational companies transferred skills to local companies to become part of the local economy. Where there were no local companies, it had to create a South African one. For example, General Electric (GE) had created GE Transport South Africa. Industrialisation meant creating for export potential while localisation meant buying locally. Members should not confuse those two terms. Transnet would improve on working with community media and local newspaper. It would also look at using social media such as Facebook and Twitter. Transnet had a monitoring and evaluation team that ensured that there was no fronting. It also blacklisted after awarding a tender if the directors were involved. The Preferential Procurement Policy Framework and National Treasury Regulations guided procurement in South Africa and its procurement strategy could be copied to other government departments. In procurement, Transnet ensured that large companies not only benefit, but issued performance points which ensured that they engaged in supply development with small companies.

Ms Masango asked what happened to the girls, since boys were only selected.

Mr Nyambi said he would like to know the location of the projects in Nkomazo because another department had once claimed it was building a nonexistent bridge.

Mr Ravi Nair, Acting CEO, Transnet Freight Rail, replied that the target was to increase rail freight from 226 000 tones to 350 000 tones and it was on track to meet this target. The aim was not to compete with roads but to make road freight the option for shorter distances while rail for longer distances. It had not yet looked at putting a railway between Port Elizabeth and East London. All rail crossing was well signed and sometimes there were people manning rail level crossing. Every year, Transnet embarked on a rail crossing campaign in every province.

The Chairperson said Transnet must ensure good governance. Denel and Transnet were the best performing state owned companies.

The meeting was adjourned.