Transnet market demand strategy: implementation

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Public Enterprises

27 February 2019
Chairperson: Ms L Mnganga-Gcabashe (ANC)
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Meeting Summary

The Transnet board spoke of the progress made in ridding Transnet of malfeasance, recover stolen money, prosecute ex executives found of wrongdoing, restore the loss of integrity, refocus Transnet on its core mandate and reposition the company as an asset that serves the country. The board explained that Transnet qualified audit opinion for 2017/18 was due to the company disclosing R8bn irregular expenditure for the first time and this amount was incomplete. As a result, the auditors were unable to express an opinion on irregular expenditure. The impact of the qualified audit opinion was that the country and the company faced a R122 billion default on loans and the country would not have been able to deal with this. A Transnet team managed to convince the lenders to waive the right to recall their loans albeit with many conditions — one of which was to meet with them on a quarterly basis.

Transnet presented its market demand strategy noting improvements in operational efficiency and productivity together with its continued efforts to contain costs and optimise capital investment. The Acting Group Chief Executive said that Transnet continues to improve performance year-on-year. Transnet remains a strong cash-generating unit in sound financial health, enabling the company to continue to borrow on the strength of its own balance sheet without government guarantees.

Members asked Transnet about government guarantee; maintaining healthy relationships with Africa, on pending legal action against former employees; the whereabouts of the 1064 locomotives and about locomotives sent to Zimbabwe; Transnet pensioners; qualified audit remedial plan; B-BBEE procurement spend; staff morale and the Bellville shop floor complaints; core and non-core assets; road to rail conversion strategy; PRASA accident in Free State; Overvaal tunnel rebuild; skills development and cable theft was also mentioned.

Meeting report

The Chairperson welcomed the Transnet board and its executives and noted that this meeting had been rescheduled to today because Transnet had sent a letter to the Committee apologising that the board chairperson and CFO were travelling abroad. On Monday, the Department intervened and advised Transnet that even if the that the board chairperson and the CFO were unavailable, other strategic executives should be able to take the mantle and honour Parliament’s invitation. This Committee appreciates the intervention made by the Department to see that this meeting is held.

Transnet board overview
Ms Mpho Emily Letlape, Transnet non-executive director and the leader of the delegation, said that the present board appointed since May 2018 has refocused on its mandate, which is to rid this public institution of malfeasance, which has been prevalent here and in other SOEs. It is also bent on rebuilding the credibility of Transnet, restore the loss of integrity, refocus it on its core mandate and reposition the company as an asset that serves the country. The board wants to instil an ethical culture especially in areas of governance, accountability and transparency. On governance, the board has abolished the Acquisition And Disposal Committee which was within the purview of executive and management and in its place has established the Finance And Investment Committee that makes all the decisions on big tenders and this committee does the work and not merely performs an oversight role. The board also got involved in investigating corruption by working on reports issued by attorneys engaged by the previous board and another commissioned by National Treasury which all had common findings. The board took the decision to accept the recommendations and findings from those reports and acted on them. Disciplinary action was then instituted leading to the laying of criminal charges and letters of demand issued so that some of the funds misappropriated could be recovered. A conscious decision was also made to cooperate with the Zondo Commission on State Capture and Transnet will be appearing voluntarily within the next few months.

Certain executives have been suspended such as the former head of Transnet Engineering, Mr Thamsanqa Jiyane, Ms Lindiwe Mdletshe, chief supply chain manager at Transnet Freight Rail and Mr Edward Thomas chief procurement officer for Transnet itself. There was an outright dismissed of Mr Siyabonga Gama on the grounds of lack of trust and confidence as the board did not believe that he could take Transnet to the next level. A suspension letter was issued to the Treasurer Mr Phetolo Ramosebudi who opted to resign; Mr Thabo Lebelo, former head of Transnet Property also did the same when suspended for gross dishonesty. Letters of demand for recovery were issued to Siyabonga Gama, Brian Molefe, Anoj Singh, Garry Pita, Phetolo Ramosebudi and Edward Thomas.

Contractual action is being taken against China South Rail on the grounds of irregular contract performance concerning the new locomotives. Criminal proceedings have been started against Brian Molefe, Anoj Singh, Iqbal Sharma and to Regiments Capital. Criminal proceedings will soon be initiated against Iqbal Sharma, Garry Pita, Thamsanqa Jiyane, Edward Thomas, Phetolo Ramosebudi and Trillian Capital. Transnet is fully cooperating with the Special Investigating Unit (SIU) and the Directorate of Priority Crimes. Aggressive partnerships are now formed with law enforcement agencies and a war room is established with SAPS to deal with any reports of wrongdoing.

After Mr Gama was dismissed, Mr Tau Morwe, a sixteen-year veteran executive, who had earlier retired from Transnet in 2015 was re-engaged. He has done a lot of work to restore Transnet to its former glory. To be candid, Transnet is presently operating in silos and lacks organisational cohesion and this is creating problems with both customers and employees alike. A recent audit report has found that Transnet engineering is overstaffed while its National Ports Authority arm and the port terminals are seriously under staffed. Looking at the skills set, there is staff that could be moved from engineering to the port operating divisions but this is not being realised as Transnet is operating in silos. Mr Morwe when he joined Transnet disbanded the group leadership team based in the head office and formed an interim executive committee which constitutes all members. They get together regularly and now assist each other. Despite all the challenges, Transnet is financially sound and it borrows only against its own balance sheet.

Another blip when the current board came on-board was getting a qualified audit opinion, which alarmed Transnet lenders and that triggered default action. In a R16 billion loan agreement it had, there was clause that said if the entity gets a qualified audit opinion, the lender reserved the right to either accelerate the payment plan or recall the loan altogether. In June/July, a Transnet team led by the chair of audit was sent to engage aggressively with the lenders and they managed to convince the lenders to waive the right to accelerate or recall their loans albeit with many conditions — one of which was to meet with them on a quarterly basis.

Ms Joyce Ramasela Ganda, Transnet non-executive director and chair of audit committee, explained that Transnet got a qualified audit opinion in 2017/18 because for the first time the company was disclosing irregular expenditure which amounted to R8bn. This amount was incomplete as this was not the total money involved in irregular expenditure. As a result, the auditors were unable to express an opinion on irregular expenditure. The board joined in May 2018 whilst the financial year ended in March 2018 so in preparation for the 2019 financial year, management were asked to establish a team that will look at all the transactions since 2010 to review contracts entered into and every payment made to ascertain if they were done regularly or irregularly. The impact of the qualified audit opinion was that as a country and company, it was faced with a R122 billion default on loans and this country would not have been able to deal with this. One major condition given by creditors now is that if Transnet ever gets a qualified audit again, they reserve the right to recall their loan.

Transnet market demand strategy
Mr Michele Fanucchi, Acting Group Chief Executive of Transnet, said the mandate remains to assist in lowering the cost of doing business in South Africa, enabling economic growth and security of supply through providing appropriate ports, rail and pipeline infrastructure as well as operations in a cost effective and efficient within acceptable benchmark standards. Transnet has been focusing on three primary objectives: financially self-sustaining, responsible corporate citizen and competitive industry supply chains.

Overall volume performance
- GFB increased by 3,1% from the prior year mainly due to strong volume performance in manganese, chrome & containers on rail.
- Export coal increased by 4.3% from the prior year due to improved performance in response to increased demand.
- Export iron ore increased by 2.3% from the prior year in response to increased demand.
- Container volumes increased by 6.1% from the prior year due to better performance mainly as a result of improved customer demand.
- The increase in volumes was achieved albeit the October 2017 severe storms and floods at the Port of Durban that damaged port infrastructure and equipment.
- Petroleum volumes declined by 3.7% from the prior year mainly due to an unplanned customer shutdown and lower market demand.

Transnet’s Transition Strategy - ‘Yesterday’
- Create forensic prioritisation, allocation and treatment framework to manage key cases
- Finalise key individual’s disciplinary processes
- 1064 locomotive OEM renegotiations to commence 8 February 2019
- Settlement discussion with certain implicated service providers

- Ensure right leaders are in the correct areas of the business
- Stabilise the procurement environment
- Formulate new operating model for Transnet
- Address revenue gap to year-end
- Audit process and implications on loan covenants.

- Implement and embed operating model
- Seamless customer interface
- Create accountability culture and mindset
- Improve staff morale
- Operational efficiencies at rail and port

Transnet is continuing its transition from a strategy that focused on investing in capacity ahead of demand, to a strategy focused on fixing, optimising and growing core operations, while investing in new growth areas adjacent to the core operations and innovative opportunities across the logistics value chain.

In addition to efforts to improve operating efficiencies, reliability and visibility, the focus this next year is on:
- Improving internal governance and risk management processes;
- Restoring the reputation of the Company; and
- Repositioning Transnet as an integral asset to the South African economy.
- To achieve its strategic intent, Transnet needs to streamline its operating model to be both more agile and operationally proficient, whilst also able to be collaborative and partnership capable.

Financial Management 2018/19
- Identify assets for quick monetization by March 2019
- Significant improvement in internal control environment to address audit qualification
- Working Capital – continuation of discounting of accounts receivable
- Capital optimisation – spend capped at R21.5bn.

- Shift financial performance focus to Return on Invested Capital (ROIC) from April 2019 onwards
- Focus on cost optimisation and improved utilisation of Transnet Engineering existing capacity / resources
- Execute funding plan to contain weighted average cost of debt and achieve smooth debt repayment profile

Transnet continues to improve performance year-on-year in an economy showing signs of recovery. Transnet remains a strong cash-generating unit in sound financial health, enabling the company to continue to borrow on the strength of its own balance sheet without government guarantees. The Board will continue to stabilise the company by restoring integrity and dealing quickly and decisively with the various allegations.

Ms R Lesoma (ANC) appreciated the sense of comfort discerned from the presentation and overview by the board members. The concern is how this comfort would continue when a permanent board is in place. The present board has to engage with the Minister about ensuring that post May, there will remain a sense of stability infused into Transnet. In terms of loans, it said that Transnet has continued to survive on its own internally generated funds without government guarantees. Has Transnet never been a beneficiary of government guarantees in previous years? The Committee hopes Transnet has mechanisms that ensure checks and balances based on input made by the Acting Board Chair when invoking disciplinary action. Nothing was said about guaranteeing the wellbeing of the workforce because this is important for organisational cohesion especially amongst middle management who can make or mar any organisation. Transnet should therefore pay more attention to staff morale. Transnet should liaise with the Department of International Relations to ensure that they engage with the heads of missions in South Africa to get economic spin offs from treaties signed between SA and other countries.

Mr E Marais (DA) asked if there was a way to speed up the legal action so that Transnet could regain the trust of the people because citizens are watching Transnet and Eskom instituting legal action. His constituency being Saldanha Bay, what is Transnet’s prediction about an offshore supply base for oil and gas in that area? In 2015 Transnet made a presentation to this Committee that it planned to invest over R7bn over seven years in that area towards the export of iron ore. Contact numbers of the mayor and officials will be provided to Transnet after the meeting so that they can engage with Saldanha Bay because it is important that they stop operating in silos as was stated earlier. Since national government has earmarked that area as an important growth point, it is imperative that all levels of government work in unison and most importantly for the municipality to plan for roads, housing and water expansion to meet the anticipated demand. There is also a small portion of land at Saldanha Bay owned by Transnet, which might have been important to it in the years gone by but not as important to it now. There are two portions in the residential areas in Vredenburg that is surely not to be used by Transnet. The municipality would like to buy that land as the public road going across it links to the shopping centre and cannot be upgraded. The establishment of good governance is usually linked to procurement. Any red light to orchestrate fraud is in most cases linked to procurement, what has been put in place to secure this area? The Committee would want an update on Transnet pensioners concerning the 2% increase on their pensions.

Ms D Rantho (ANC) appreciated the presentation and hoped that it will help build staff morale especially the lower level staff. She read a complaint from a staff member at Bellville about nepotism going on there. She has been complaining to Transnet management about this and management has always assured the Committee that they will wade into the matter. She received an sms in February this year from a staff member who was complaining that they are powerless to fight Reggie Brown and that the union is siding with him. The same staff complained that rules and policies are not followed and anyone who applies them will be fired. They complained that workers who have relatives are given privileges and paid what they are not due and drivers are being held hostage to these unscrupulous activities. They claimed that a man who stole cables and was arrested but was brought back by his brother who is a manager. These are issues raised by Transnet staff at the lower levels. Every day messages like these are sent to her alleging that people working on the same salary scale are paid differently?

It is good to hear that Transnet has come to the realisation that rail is cheaper then road yet the conversion of Transnet freight from road to rail is slow moving. The former CEO said that only 30% of road freight could be taken to rail. Where do you stand now? The presentation mentioned that only 500 plus locomotives are operational; are these locomotives in the country and 200 in Zimbabwe? Why are locomotives left not in use lying idle and not earning income for Transnet? Standing idle means they are left to the elements and therefore will cost more to maintain. What is Transnet planning to do with them? What is meant when you say that regional freight is weakly integrated? Does Transnet intend to have a SWOT analysis as part of its strategy? At what stage is the investigation into the rail accident in the Free State?

The Chairperson wanted clarity on slide 15 on procurement spend. It stated 42% spent on black-owned businesses, 9.1% spent on Qualifying Small Enterprises, 31.4% on Black women-owned businesses and 8.3% on Emerging Medium Enterprises. Does this 42% exclude these other categories and, if not, what stopped Transnet from reaching 50% and more? Transnet budgeted over R300bn on market demand strategy over seven years but spent R292bn; what where the challenges that prevented Transnet from reaching the target? Slide 20 states that Transnet wants to increase manganese volumes by working with the private sector; what is the role of the private sector in this strategy? It mentioned there was a high risk of reconstructing the Overvaal tunnel, what are the timelines for reconstructing that tunnel? What are your timelines for your immediate financial priorities and your envisaged recapitalisation of assets with partners by March 2019. March 2019 starts this Friday so is this feasible and realistic? What is your audit action plan are to address the Auditor General findings that led to the qualified audit opinion? Can you mention some of the ports and locomotive contracts that were terminated?

Ms Letlape responded that the last time Transnet received a on government guarantee was in 1992 and 1994 and they were Euro loans. One of the loans was for €1 billion and the other for €3 billion and they will be repaid in 2027. All other loans were obtained against the Transnet balance sheet and it would want to keep it that way.

The advice of maintaining a healthy relationship with head of missions in SA will be followed and just to add that when Transnet executives were in Zimbabwe a few weeks ago, they met with Zimbabwe government officials and the SA High Commissioner that led the delegation to Zimbabwe.

On pending legal action, Transnet reports regularly on action being taken on this front. Stakeholders meetings with SIU, SAPS, labour unions and others are held regularly. The last was held in January and in these meetings, all actions taken are declared. The Committee should be reassured that no one found to have done anything wrong will be spared.

The locomotives sent to Zimbabwe were from the old stable and not the newly refurbished ones. In fact all the 1064 locomotives have been redeployed and none of them is lying fallow.

Transnet is busy processing the 2% increment for pensioners.

Since the qualified audit opinion, Transnet has had a remedial plan which sets out a number of milestones  – one of which is to disclose all irregular expenditure. Another is an integrated action plan due to the failure of management, risk and the internal audit departments. All executives for these departments are now being reappointed with capable people and safeguards put in place.
The combined procurement spend has been over 85% over the last four years.

Mr Fanucchi spoke to staff morale and the Bellville complaints. As Acting Chief Executive, he has done a lot of road shows with Transnet's various business units. There is an action plan to root out patronage and people employing and shielding relatives as raised by Ms Rantho. These challenges are receiving urgent attention, as they are key to a successful operation. Transnet is embracing the Fourth Industrial Revolution in its thinking concerning IT systems, collaborating with industry, using artificial intelligence for running trains, computer systems to run locomotives and data analytics. He agreed on the assertion that the regional freight network is weakly integrated. Take, for instance, Zimbabwe, if Transnet sends a train to the border carrying a certain load. Once it gets across the border, the actual loading allowed there and the gradients allow for only twenty wagons per train. As a result, Transnet cannot run big iron ore trains across the border because the network does not allow it. Transnet has to disassemble the trains so that they can shunt these up. These are some of the challenges in the recapitalisation of the network in neighbouring countries that have to be addressed.

Mr Govindra Naidoo, Transnet GM: Strategy & Business Modelling, responded about core and non-core asset descriptions. Core assets are the infrastructure that government needs to own because it has public benefit and national monopoly characteristics. In this sense, they are the rail, ports, pipeline networks because they are core assets that government needs to own for the public benefit and due to their characteristics government would not want to create private monopolies. Non-core assets are complementary infrastructure such as terminals, property holdings and others. For example, Transnet owns many rail terminals but most of the loading and off loading it does on rail are done through privately owned terminals. A distinction is made on how Transnet positions its non-core terminals to help the core business to grow. The plan is not about disposals but how it collaborates with appropriate private sector entities to reposition its terminals. Tambo Springs is going to be a new inter modal terminal in Johannesburg — the idea is to get a new private sector partner that will help Transnet to reposition the terminal and through their knowhow and model help to attract more customers to rail.

Mr Ravi Nair, Transnet Chief Executive: Freight Rail, replied about the situation at the Bellville unit. When Transnet met with the Committee last year, Transnet mentioned that the Bellville matter was investigated and a meeting held with the Acting Group Chief Executive and the people at the Bellville depot shop floor but unfortunately no one could provide hard evidence at the time. What will be done going forward now is to ask for an independent investigation into Bellville where people will be interviewed so that an independent report can be obtained. That report will be tabled to this Committee when Transnet is next in Parliament.

Mr Nair replied about road to rail that according to study done jointly with Stellenbosch University there is currently about 30% road traffic that can be converted to rail. Transnet has had successes on road to rail such as 2m tonnes going to Maputo has been moved to rail. Partnerships and collaboration are now being pursued with private sector in the fast moving consumer goods (FMCG) arena.

Mr Nair replied about the 1064 locomotives that the first 508 locomotives have arrived and are already in operation. The remaining 556 still have to be built.

Mr Nair spoke about the relationship with PRASA. Extensive discussion has taken place between the two entities, the two companies are closer than before, and this is important to eliminate duplication of functions and assets. In the accident in the Free State, a PRASA train collided with a truck that led to some fatalities. It was not a Transnet train but when an accident happens Transnet always assists PRASA because they might not have a nearby depot with emergency vehicles.

Mr Nair explained that the Overvaal tunnel is four kilometres long and is over forty years old. The project to build a new tunnel has begun and a tender will be put out within the next three months. Whoever wins the tender should be able to build it in three years. This tunnel is the only one in the coal export line. This tunnel is important because if it collapses, Transnet will lose over R300m a day.

The Chairperson asked Transnet to furnish in writing by 13 March what it has committed to do for skills development. The incoming Parliament might not follow through with an inquiry but that will not stop the board continuing to clean up Transnet. The Committee will make a recommendation in its Legacy Report that Transnet present to the incoming Portfolio Committee where they are on the road to rail conversion strategy. Cable theft will also be included in the Legacy Report because it is a high risk factor for Transnet. The Committee appreciates the presentation today and will be watching the Transnet appearance before the Zondo Commission.

The meeting was adjourned.

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