Transnet on its 2015/16 Annual Report

Meeting report

Transnet 2015-16 performance
Mr Siyabonga Gama, Group Executive Officer: Transnet, said that revenue had increased by 1.7% to R62.2 billion for the year, driven by a 4.2% increase in rail containers’ and automotive volumes as a result of concerted efforts to shift rail-friendly cargo from road to rail, as well as a 1.4% growth in petroleum volumes. The operating expenses had been contained to R35.9 million, an increase of only 1.0%, which was well below inflation. Aggressive management of costs to preserve the financial performance of Transnet had resulted in R6.6 billion savings against planned costs. The earnings before interest, taxes, depreciation and amortization (EBITDA) had grown by 2.6% to R26.3 billion, which was 4.3 times the South African gross domestic product (GDP) growth for the financial year. The gearing was currently at 43.1% and cash interest cover at 3.1 times, and the cash that had been generated from operations had increased by 1.7% to R27.7 billion. The company maintained an investment grade credit rating, confirming its solid stand-alone credit profile.  

Mr Gama added that the capital investment had been R29.6 billion, bringing the spending during the period to R124 billion (including intangibles), with an expected spend of between R340 billion to R380 billion over the next ten years. The continued focus on operational improvements had resulted in the group’s operational efficiency increasing by 15.9%. The Broad-Based Black Economic Empowerment (B-BBEE) spending of R43.5 billion, had been 100.6% of the total measured procurement spend for the year, as per the Department of Trade and Industry (dti) codes. Enterprise and supplier development had equated to 36.7% of net profit after taxation. The company had spent 3.6% of its labour costs on training, focusing on artisans, engineers and engineering technicians. A total of 41% of the financial measures had been met, and the remaining four within 95% of budget. At 43.1%, gearing had remained well within Transnet’s limit of 50%, despite significant constraints in cash-flow from operations.

Transnet had achieved 63% on operational excellence, and this achievement had been mainly due to negative volume growth resulting from customer cancellations as a result of weak economic growth and declining commodity prices. Significant improvements had been made in general freight business (GFB) and export iron ore on-time departures and arrivals, as well as port and pipeline efficiencies. Export coal on-time arrivals had been negatively impacted by product availability, power outages, cable theft and challenges with locomotives. Operations centre telecommunications had been held daily to ensure rapid recovery from operational deviations. Transnet had managed to achieve 100% in development in the following:

• Market segment competitiveness key performance indicator (KPI) for the container and automotive segments by December 2015;
• Development of liquid fuel master-plan for three segments;
• Development of the strategic approach to the domestic inter-modal strategy.

Mr Gama said that the decline in global economic activity had resulted in a drop in volumes handled, and customers were also down-scaling their operations. Revenue had increased from R61.152 billion in 2015 to R62.167 billion in 2016 – and increase of 1.7%. Included in the revenue had been R2.8 billion generated by Transnet’s Africa Strategy, which extends business beyond the borders of South Africa. The operating expenses had been contained at a modest increase of 1.0%, well below inflation, despite a 5.9% increase in personnel costs, and 3.9% in electricity costs. These costs, which were largely fixed, constituted 64% of Transnet’s total operating expenses.

Transnet had managed to achieve a R6 billion saving against planned costs by implementing numerous cost-reduction initiatives. These included putting a moratorium on the filling of vacancies, overtime limited to critical activities and the reduction in professional and consulting fees through price negotiations and reorganising non-critical projects and programmes. There was also a limit on discretionary costs as they related to travel, accommodation, printing, stationery and telecommunications.

Transnet had noted that the global economic slowdown had resulted in key customers deferring their expansionary programmes. Accordingly, this had negatively impacted Transnet’s expansionary capital spend for the current year. Export iron ore volumes had decreased by 3%, from 59.7mt to 58.0mt, compared to the prior year, mainly due to:

• Khumba had ordered fewer trains as a result of production challenges (lack of sufficient quality ore and cost pressures);
• Tippler failures on the ore line.

Transnet was currently rated as a Level 2 Broad-based Black Economic Empowerment (B-BBEE) contributor, and the focus was mainly on industrial capability building and transformation. The total contract value for Supplier Development (SD) programmes had increased from R46.170 million in 2015, to R119.886 million in 2016 -- an increase of 160%. There had also been a major increase of 230% on committed SD obligations, from R17.131 million in 2015, to R56.608 million in 2016.
Productivity SA’s initiative had been aimed to provide operational support to qualifying black-owned small, medium and micro enterprises (SMMEs) who were Transnet suppliers, to ensure that they met Transnet’s demands and also addressed challenges affecting operational performance, and consequently product or service delivery. The audit committee had expressed concern about the limited or lack of controls existing, or not properly documented. There was also a concern that control activities had not always been undertaken as laid down.
In conclusion, Mr Gama said that the continued economic slowdown had posed challenges. Transnet had demonstrated resilience in both its financial and operational performance during the 2016 financial year, and therein an ability to adapt to changing market conditions. Transnet would continue to stimulate the economy, securing existing market share and aggressively capturing new market share, specifically in the general freight business, whilst executing its capital programme based on validated customer demand. The management was confident that the strategic initiatives related to road-to-rail opportunities and the reshaping of the core of Transnet’s operations would enable the company to achieve its targets.

Discussion
Ms D Rantho (ANC) complained about the late arrival of the presentation, as this had disadvantaged Members in terms of adequately engaging with the presentation. Transnet should be commended on the amount of work that was being done on the Phelophepa Train of Hope (mobile healthcare hospitals), as people in the Eastern Cape were appreciative of the assistance that was provided by this initiative. It would be important for the Committee to hear if it was indeed true that there was favouritism that was shown towards other clients in regard to pricing, as alleged in the Competition Commission. It would be interesting to hear the views of Transnet in relation to the proposed legislation that would be aimed at limiting the amount of goods from above 9 000 tonnes from the road, as this could have an impact on the operations of Transnet. 

Ms T Stander (DA) asked if Transnet was monitoring the training of artisans and engineers, as many South Africans were qualified with a number of skills but were unable to find work. There should be a concerted effort to ensure that those unemployed artisans and engineers were able to be immediately absorbed into the labour market. Was Transnet doing anything to grow its local market share in response to the global economic slowdown? She sought clarity on whether Transnet was having any discussions with Eskom about providing infrastructure for bringing gas into the country from Mozambique. The Committee should be briefed on how much grain Transnet was importing and the measures that had been put in place to improve logistical efficiency. What was the progress that had been made in regard to changing the rules to allow pension benefits to members to increase on a monthly basis?

Ms Stander commented that the audit committee had noted that the operational effectiveness of the entity for 2015 and 2016 required some improvements. Why had there been no improvement in this regard? What interventions had been put in place to improve on the perennial problem of operational effectiveness? It would be helpful if the Committee could be provided with a list of specific challenges that had been identified and the interventions that had been put in place to deal with those challenges.         

Ms N Mazzone (DA) said that there were increasing requests from the public regarding problems around Transnet and the illegal building of dwellings on Transnet land that remained vacant. It seemed it was becoming increasingly popular for people to illegally occupy a piece of land that belonged to Transnet, knowing that it would take a long time until action was taken. The issue of illegal invasion of land was creating a major problem for Transnet, and also for areas that were surrounded by open pieces of land. What mechanisms were in place to expedite the process of dealing with the removal of land invaders as quickly as possible? In relation to the issue of cable theft, Transnet was not the only company that was suffering because of cable theft, as the telecommunication companies were also suffering from this problem. What steps had been taken internally in trying to mitigate the problem of cable theft? It was quite clear that the Transnet security guards were not adequately trained or armed to fight those who were coming to steal cables.

Ms Mazzone said that Durban harbour’s volume had decreased drastically, because the country was continuously losing out to Maputo in Mozambique. Maputo was able to accept larger vessels that had become the world trade standard, and which Durban harbour was not willing to accept anymore. Durban harbour had lost its status as Africa’s busiest port to Port Said in Egypt, and it would be interesting to hear what Transnet would be doing in the interim to revitalise the port, as the Durban dig-out port would be finished only in 2025. It was critically important not to underestimate the importance of the dig-out port, as it was the largest and the most important infrastructure project after the Medupi and Kusile power stations. It was worrying to see that this massive project had been subsequently dropped from Operation Phakisa, although it had initially been included.

Ms Mazzone expressed concern that there had been an increase in Transnet pension queries to Members of Parliament in the last month and half, and this was something that needed to be resolved as quickly as possible. It was understandable that the pending court-case had somehow stalled the whole process of pensioners’ claims. What was the status on the pending court case? Who was to be contacted directly with regard to Transnet pensioners?         

Mr R Tseli (ANC) indicated that the fact that Transnet was sitting at 31.3% in terms of female representation, especially at group executive level, was not a good story, and this was even reflected by the delegation that was present at the meeting today. It was good to see that the CEO had acknowledged that there was something that needed to be done to improve female representation within Transnet. The Committee should be briefed on some of the good community development programmes that Transnet had been conducting through the Transnet Foundation, and this showed that the focus was mainly on where Transnet was operating. It would perhaps be appropriate for other areas, especially rural areas where Transnet was not operating, to also benefit from some of the community development programmes, as Transnet was a 100% state-owned company. To what extent was Transnet prioritising its community outreach programmes so that people could become familiar with this entity? What were the challenges that Transnet was experiencing in the implementation of its integrated port management system?

Ms G Nobanda (ANC) asked about the measures that had been taken to correct the problem of irregular and fruitless expenditure, as noted by the Auditor-General (AG). It would be interesting to hear how the global economic slowdown had affected Transnet’s Africa strategy. What was being done to correct the concerns that had been highlighted by the AG in regard to the difficulty to measure the performance indicators of Transnet?

Transnet’s response
Mr Gama responded that Transnet had engaged the Competition Commission to find out what the main issues were, and there was a certain level of comfort that Transnet would be able to deal with all the allegations that had been made. There was a strong belief that the allegations were unfounded, as they were not primarily based on facts. The introduction of legislation aimed at limiting the amount of goods from above 9 000 tonnes from the road was a good thing, but Transnet believed that 9 000 tonnes was still too high and should be reduced to about 3 000 tonnes so that there could be a major shift from transportation of goods from road to railway. Parliamentarians could perhaps provide assistance in terms of proposing this reduction. In relation to the issue of increasing its domestic market share, Transnet was planning to diversify its current market and would look more into the manufacturing.

Mr Gert de Beer, Chief Business Development Officer: Transnet, said Transnet was actively involved with the Independent Power Producer (IPP) unit that was within the Department of Energy, especially in regard to Liquefied Natural Gas (LNG). The role of Transnet was to provide infrastructure for the importation of gas, and the ports which were responsible for that were Richards Bay, Coega Bay and Saldhanna Bay. The entity was in an advanced stage in terms of working with the IPP unit in trying to find out how the infrastructure could be used to provide for the importation of gas. There was also a need to take into consideration the matter of the availability of land for power stations in the port precincts, or next to the ports. Transnet believed that rail could offer a solution to the importation of gas into the country, and Transnet engineers could perhaps provide assistance in building wagons that would transport the gas to the power stations in the port precincts.

Mr Gama said that Transnet and Eskom had formed a task team which was actively looking at how to transfer coal from road to rail. There was also a new project, where a new railway line was being built between Ermelo and Amajuba, and Transnet would provide assistance in the repatriation of large amounts of coal by rail.    

Mr Mlamuli Buthelezi, Chief Operating Officer: Transnet, responded that one of the lessons that Transnet had learnt on the importation of grain, was the state of readiness as there were not enough wagons that had been available to help in the importation process. The process had essentially been slow at the beginning, but Transnet had now “hit the right rhythm” in this situation. The main problem had been at the level of capacity, but this had been dealt with now, particularly on the rail side.

Mr Gama said that Transnet had just received R64.5 million from the Department of Higher Education and Training (DHET) from the National Skills Fund, and this was focused mainly on the training of artisans and engineers. Transnet believed that the level of training that was provided was adequate, and the focus should rather be on whether there were enough job opportunities, and on growing the economy at the rate that would absorb the number of young people who were coming out of universities. There should be more energy to create new industries and new sectors and build enough infrastructure that would assist in the exportation of more resources. The country would need to move forward with the kind of partnerships and compacts between businesses, government and labour, as this would help the country to create jobs more quickly.

Mr Gama said that the court case on Transnet pensioners was indeed impeding on certain issues, as there were certain engagements that Transnet would like to have, but the Board would need to take the pending court case into consideration. There had been a concerted effort to expedite the court case so as to deal with the other issues that were surrounding it.

The main issue around operation processes, as pointed out by the audit committee, was largely around the documentation of standard operating procedures and the work itself was continuing. Transnet was beginning to create an integrated Transnet entity, but there were also interface issues that had to be taken into consideration. There were a number of projects that were aimed at rectifying this problem, and these included “Order to Execution”. These projects would assist Transnet when it cames to the challenges in the area of operating procedures. The audit committee was comfortable with what Transnet was proposing to do in so far as dealing with the challenges in operating procedures was concerned.

Mr Gama suggested that perhaps any occurrence of the illegal invasion of Transnet land should be routed to his office in order for it to be dealt with very quickly. There were interfaces with South African Police Service (SAPS), the HAWKS, Telkom and Eskom in trying to deal with the problem of cable theft. There were also a number of other entities, like Johannesburg Water and Randwater, that Transnet was working with which were affected by this scourge of cable theft. The focus was on looking at various solutions that could be used, like technological interventions that would be able to assist in circumventing this problem. Transnet was also working very closely with Denel in order to provide assistance with drones.

The narrative around Durban and Maputo was absolutely incorrect, as the Durban harbour was not losing anything to Maputo. There was a R6 billion project that was assisting in stimulating the Durban harbour. The port of Maputo was not capable of taking away ships from Durban, as it was a small port that was unable to handle more than 150 000 tonnes, while Durban harbour was handling around 3 million tonnes. There were certain commodities that should go through the Maputo harbour, mainly from the Phalaborwa area.

The Durban dig-out port project was a massively important project in the country, and Transnet had been having inter-departmental discussions with the Department of Public Enterprise (DPE), the Department of Public Works (DPW) and the Department of Defence (DoD) in the prioritisation of the expansion of containers’ capacity. Transnet would add another two million Twenty-foot Equivalent Units (TEUs), and this was already at an advanced stage. The Durban dig-out project would start in 2024. The reality was that the container capacity in the world had decreased, and this was impacting negatively on Transnet. There were a lot of discussions in many nations about whether it would perhaps be ideal for a country to promote its own nationalism of globalism in response to the global economic slowdown.

There were still the same people that were responsible for Transnet pensioners -- nothing had been changed in this regard. The person who was responsible for these pensions could be reached at 011 308 2752.

Mr Gama added that Transnet had noted the concerns around the community development programmes, and it was indeed true that Transnet was the company of all South Africans. There was an effort in place to reach out to all the communities by having programmes in every province. The Committee could be forwarded with the list of projects that were being undertaken throughout the country.

There was a strategy in place to deal with any possible challenge on the matter of an integrated port management system.

The Africa Strategy was quite critical for Transnet especially when one considered that the global economy had slowed down and this was an opportunity to maximise on the local market.

Mr Yusuf Mohamed, General Manager: Office of the Chief Financial Officer (CFO), Transnet, said the issue around the key performance and audit performance information was not the fact that the results were being questioned by the Audit Committee, but rather that the definition of key performance indicators (KPIs), and this had formed the basis of Transnet’s agreement with its shareholder in terms of the shareholder compact. Transnet would be working on the revised KPIs as from the current financial year in order to rectify the concerns that had been flagged by the audit committee on the definition of the KPIs.

In relation to the issues that had been raised in relations to the Public Finance Management Act (PFMA), there had been a total of 19 interventions that Transnet had put in place since 2012. Twelve of these interventions had been completed, while seven were still on track. The category of PFMA issues that had been found was focused particularly on criminal conduct in the context of the R50 billion tender to build 1 000 locomotives to replace the parastatal’s ageing fleet, and the biggest issue here was fraud. The audit processes of Transnet were not designed to detect collusion and these three items of fraud had been as a result of collusive activity between various departments, as well some of the suppliers.

Mr Mohamed indicated that there were a number of disciplinary measures that had been instituted to those who had been involved in these fraudulent activities, as some had been suspended, dismissed or had voluntarily resigned. There was also a process to recover some of the losses, but none of those had been concluded as the investigations with the police were still on-going.  A lot of the 19 interventions that had been put in place had also been to deal with the issue of wasteful and fruitless expenditure.

The group executives and general managers had all gone through extensive and rigorous training. Transnet was currently training about 5 000 employees at level G and F, and this was an on-line accreditation process. Access controls had been removed for certain individuals of a certain level where there was the potential for collusive activity.

Discussion
The Chairperson appreciated the high level presentation that had been delivered to the Committee but expressed concern that there had been no mention of the key critical issues in relation to one part of the Nine-Point Plan, mainly the ocean economy and Operation Phakisa. There were reports that Transnet had invested so many millions around Saldanha Bay, and the Committee should be briefed on the progress of the capital investment. It would be important to hear if Transnet was implementing the Africa Strategy robustly in order to tap into the local market. It was unclear if Transnet had any strategy in place that would divert the truck market into the rail system.

Ms Rantho asked Transnet to provide detailed information on the community development programmes that were being undertaken, and the location of those programmes. What were the criteria that were being used to identify places to benefit from these programmes?    

Ms Stander feared that there seemed to be a lot of talk or conversations, but a lack of action on the ground. She wanted to know about the name of the local company that was primarily focused on the manufacturing of the new trains in the country. It would be interesting to hear if Transnet was considering using the existing rail infrastructure that was in place in the Dimbaza industrial hub in East London to stimulate economic growth and job creation.           

Mr Buthelezi replied that the investment had been made in Saldanha Bay for the provision of facilities to support the oil and gas industry, and the maintenance of the plants, and this was already being done by Transnet. There had been a slight decrease in oil prices. It was still unclear at the moment as to how much money had been spent on the total maintenance of the machines for oil and gas.

Mr Gama said that the Africa Strategy was quite an important initiative that was aimed at strengthening Transnet’s partnership with other African countries. There were certain opportunities for the importation of gas in countries like Mozambique, Tanzania, Zambia, Tanzania and Angola. There was a cross-border strategy in a number of projects that Transnet had already identified, and there was a strong belief that these would promote regional economic integration both on sea and land.

Rail was more specifically designed for longer distances and larger goods, and it would be difficult to completely eliminate trucks for the transportation of goods. Transnet could still do much more in terms of the transportation of goods for longer distances and there were a number of strategies and technologies that were being, invented including bimodal technology in an attempt to de-congest the roads of the country. Transnet had eliminated 339 631 tonnes of carbon dioxide emissions as a result of the road-to-rail strategy.

Mr Buthelezi clarified that in relation to bimodal technology, Transnet had gone out to the market, called interested parties, and had then selected two types of technologies to be piloted on the Durban-Johannesburg corridor. Transnet was in a process of contracting these bidders in order to  pilot these trailers, which were running on both road and rail. This bimodal technology would assist Transnet in many ways, as this was one of the things that were really in demand, particularly in the manufacturing sector. Transnet was in support of the new legislation that would be aimed at limiting the amount of goods from above 9 000 tonnes from the road. This was a good thing, as it was once again part and parcel of the de-congestion process.

Mr Gama said that the Transnet Foundation had published a lot of information on the number of community programmes that were being undertaken by Transnet. There was a booklet that was providing a breakdown of the community development programmes, including the district or the provinces in which each programme was located, and this could be made available to Members. There were complaints that Transnet was not doing enough in terms of community outreach programmes, and this was something that would be taken on board. Transnet was also planning to open its own newspaper, in order to tell the Transnet story.

Ms Sanet Vorster, General Manager: Human Resources (HR), said that Transnet was working closely with the Departments of Health (DoH) and Basic Education (DBE) to identify those communities that were in desperate need for assistance. There was indeed a booklet that provides all the details on the community development programmes that were undertaken by Transnet in different communities and this could be provided to the Committee. Transnet was also providing comprehensive educational and social support to young people and orphans, including the provision of mobile libraries to schools. It was also true that there should be a concerted effort to promote Transnet from the public domain, and this could be done through community outreach programmes.

Ms Rantho agreed that it was difficult to find any information about what was being done by Transnet and the projects that were being undertaken. She supported the idea of Transnet having its own newspaper that would be speaking about things that were happening at Transnet.   

Mr Molatwane Likhethe, Community Manager: Transnet, said it would be important for Transnet to exploit all the channels of communication to promote the image of the entity. Transnet was already on social media and this was upon the realisation that there was a need to “make a noise about activities that were being done by Transnet”. Transnet did have its own internal magazine that was circulated among board members, and plans were in place to ensure that this magazine was able to reach a wider audience.

Mr Gama said that the manufacturing of Alstom Gibela trains was mainly the project of Passenger Rail Agency of South Africa (PRASA).

Mr Edward Thomas, Chief Business Development Officer: Transnet, said that there were a couple of local companies that were involved in the manufacturing of Alstom Gibela trains. Transnet was also capable of manufacturing the trains for PRASA.

Mr Gama indicated that the African Union (AU) had designated South Africa as a rolling stock supplier for the entire continent, and Transnet was busy looking at how to benefit from this through the manufacturing of the rolling stock for the entire continent.        

Ms Stander said that it was pleasing to hear that Transnet would be looking at focusing on the manufacturing of trains, as this was indeed an important response to the issue of global economic stalling. It would be important to hear if Transnet was monitoring whether those artisans and engineers who had been provided with training were able to enter the labour market.

Mr Gama suggested that the Committee should be invited to observe some of the work that was being done by Transnet in assembling locomotives in Salt River, Cape Town, and also in Pretoria. There were a number of programmes that were aimed at the promotion of local economic development, especially to areas where infrastructure was already in existence.

Mr Buthelezi said that the local development projects were premised mostly on the demand that was required in a particular area. Transnet should be of assistance in ensuring that the infrastructure that was being put in place was being utilised to stimulate economic activities. BMW and Mercedes Benz had approached Transnet, wanting to use East London for the export of cars from Pretoria Roadlink.  

Ms Rantho wanted to know if s an assessment was done before beginning with local development projects that were aimed at boosting the economy and creating job opportunities to these small areas.

Mr Gama responded that in the past, there used to be marketing boards and agricultural entities that were organised in some of the local economic activities, but these had now long dried up. Transnet was looking at ways to boost local economic development, particularly the agricultural activities that could resuscitate economic activity in many areas. The resuscitation of local economic activities would be driven by what new industries could bring on board.

Transnet did not foresee any challenge to be encountered in the implementation of the integrated port management system. Transnet had engaged with Futuregrowth (Asset Managers) after it publicly announced last month that it had pulled the plug on lending to State-Owned Enterprises (SOEs). Transnet had engaged with Futuregrowth in writing, indicating that indeed what they said had the ability of moving the market and had had cost implications, and Transnet was already preparing a statement of claim in terms of that. Futuregrowth was not a significant player for Transnet, as the entity had borrowed less than 3% from the entity.

Mr Mogokare Seleke, Director-General (DG): DPE, said that Transnet was under tremendous pressure to diversify its market strategies as it went along. There was a flexibility that was allowed in terms of adjustments, to respond to the global economic stalling. Transnet seemed to have been making a profit, and the Department was happy about that. 

Adoption of minutes
The minutes of 31 August 2016 were adopted, with amendments.

The meeting was adjourned.