Transnet 2020/21 Annual Report: follow-up meeting; private sector participation model; with Minister

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Public Enterprises

16 February 2022
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

Annual Reports 2020/21

08 Dec 2021

Transnet 2020/21 Annual Report

In a virtual meeting, Transnet presented follow-up responses on its annual report presentation and briefed the Portfolio Committee on progress with the private participation model. The Minister of Public Enterprises said that Transnet was a stable entity, but needed adequate support to be sustainable. He reported that the Department had received reports from the Zondo Commission, and was working on the legal advice received. A detailed report would be submitted to the Portfolio Committee in a couple of weeks. It was counting on the support of the Committee to rectify the mishaps that Transnet had been subjected to.

The Committee asked for clarity on the relationship between Transnet and the Maputo Port Development Company. Members wanted to know who had the responsibility for the country's rail infrastructure, given the security challenges faced by both the Passenger Rail Agency of South Africa (PRASA) and Transnet. Questions were also asked about the impact of non-operational locomotives on service delivery. The Committee asked for details of Transnet’s segmented strategy and private sector partnerships, and the mechanism that would be adopted to ensure that transparency was demonstrated in these processes. The sabotage of infrastructure suffered by PRASA and Transnet was also raised, as well as the long-standing complaints of unfair dismissals received from Transnet's former workers.

The Minister of Public Enterprises called for support from the Committee to ensure that better security was operationalised. He stressed the need to instill a new consciousness in the general public about the impact of theft and sabotage on the country's infrastructure. There were ongoing interactions with the Minister of Trade, Industry and Competition on increasing the level of local content, and the constraints that had to be dealt with. He said Transnet was not being privatised, but would require investment in equipment and infrastructure, and needed to find alternative ways of generating revenue. On the usage of common rail infrastructure, the development of a new policy was underway, which would provide an alignment between rail policy and rail operations. 

Meeting report

Minister’s opening remarks

Public Enterprises Minister, Mr Pravin Gordhan, said that Transnet is a stable entity on the one hand, but would need to catch up with the legacy of state capture as described in the recent report released by the Zondo Commission.  He noted that the report of the Zondo Commission had outlined the effect of the neglect of infrastructure and the maintenance of equipment on the operations of Transnet. The Committee would be presented with a frank disclosure and an indication of what had been done to rectify the mishaps of the past on the one hand, while endeavoring to restore Transnet’s operational effectiveness and operational efficiency on the other.

The Department of Public Enterprises (DPE) had received reports from the Zondo Commission on South African Airways (SAA), Denel and Transnet and, at the request of the Presidency, measures had been put in place to ensure that appropriate action was taken to either recover funds or to initiate criminal charges or other civil proceedings. The Department of Public Enterprises received appropriate legal advice and would submit a detailed report to the Portfolio Committee in a few weeks. The report would include the Department’s response to the various support initiatives emerging from the Zondo Commission, and the Department was counting on the Committee’s support as it worked towards rectifying the various mishaps to which Transnet had been subjected. The Department’s objective is to ensure that Transnet was an important logistics provider, for rail, fuel pipelines and as a port. The Department would also ensure that Transnet was able to get back to first-class performance as soon as possible.

Transnet follow-up on annual report and private sector participation

Transnet presented a comprehensive report answering the questions Committee Members had. The answers touched on the following broad themes:

  • Business development, strategy and planning;
  • Group people management;
  • Chief Procurement Officer and Group Chief Financial Officer;
  • Transnet Engineering; Port Terminals; Freight Rail; Property and Pipelines;

An update was also provided on the segment strategy of the SOC and the private sector participation model. It was said the segment strategies were progressing well.

See presentation attached for further details

Discussions

Mr N Dlamini (ANC) commented that during the Committee’s oversight visit, it had been informed that the ports would be segmented. There had been a mention of Maputo as part of the plan, but there was no clarity on the relationship between Transnet and Maputo Port.  Would there be a partnership, or was Transnet investing in the port, or would it be a case of some traffic directed to Maputo?

The responsible entity for the rail infrastructure was not adequately addressed in the presentation. Currently, there was shared responsibility between Transnet and PRASA, and there was the outstanding issue of both entities owing money to each other and refusing to pay. How was the issue of security going to work if there was no single entity responsible for railage? Would Transnet employ security companies to secure its lines and ignore PRASA lines, or were both entities going to collaborate? How would issues of encroachment be dealt with, for example, where PRASA was responsible for a line that had been invaded, but Transnet gets affected?

Ms R Komane (EFF), said the report showed that 582 locomotives were not operational from the 1 064 in the contracts. He wondered how this would impact service delivery, and asked if there was an alternative plan in the event that the port-type testing was not successful.

Reports received during the oversight visit at Durban indicated concerns with policy. She asked if the Department could update the Committee on how it was assisting the entity to resolve this policy issue, and what strategy it was exploring in this regard.

Ms C Phiri (ANC) said that she expected that a detailed report would be given on the main issues around the China-North Rail (CNR) locomotive contract because she believed that a different approach was required to deal with it.

During the oversight visit, Transnet management had spoken about the hindrances on policy matters. She wanted to know how the DOT was assisting the entity to resolve the challenges around policy.

The presentation had referred to a segmented strategy and partnerships, but there was no detail provided on how the private sector partners would be selected, and the criteria that would be used to partner with Transnet. What would be the required process for private sector businesses to enter into this partnership?

Mr G Cachalia (DA) said that the presentation had outlined the segmented strategy and partnerships which Transnet wished to enter into with the private sector. Following the Zondo Commission and the various shocking revelations emerging, the Committee needed to ensure that transparency was demonstrated going forward. He asked about the mechanism that would be adopted to ensure transparency and due diligence around potential partnerships.

Mr S Gumede (ANC) observed that the slides presented were not the same as the document received by the Committee. He requested a resubmission of the documents presented due to the gaps in the presentation. However, he expressed his pleasure at the initiatives taken to fight corruption by the new Board.

Agriculture represented about 12.5 % of the country's gross domestic product (GDP), and this sector should therefore be harnessed and put into proper perspective.

Mr Gumede also sought clarification on whether approvals were required to deal with segment strategies. He requested that a report be made on the required approvals.

He noted that 22 slots had been lost, and asked if there were any intentions to resuscitate them. The vast operation of Transnet placed it as priority for the Committee. Transnet appeared to thrive in terms of efficiency and its potential to sustain itself. However, the Committee should endeavour to manage the entity to produce positive results and be sustainable within the Committee’s remaining two-year term.

In respect of the PRASA/Transnet situation, the Committee was concerned about sabotage and should find strategies to address these problems.

Ms J Tshabalala (ANC) asked if the Portfolio Committee could go on an oversight visit to review the outstanding challenges faced by Transnet. Its provision of services did not support the diversification of the economy, and it had a weak market share with regard to the movement of domestic freight, partly because of the high relative costs of rail to road.  Financial management also needed to be improved to ensure sound revenue collection.

The Chairperson said that the numerous complaints of unfair dismissal received from former workers had the potential of portraying the Portfolio Committee as failing the public. He asked for an explanation of how the matter could be resolved.

Transnet's response

Minister Gordhan said that the syndicates/individuals that were undermining the networks did so in a challenging way for the state, so a lot needed to be done to protect the infrastructure and addressing and educating communities that are close to the infrastructures. The Department fully supported the move by the Department of Trade, Industry and Competition (DTIC) to ban the export for sale of scrap metal. He asked for the support of the Committee in ensuring that better security was operationalised, and noted that a new consciousness must be instilled in the public domain in order for this to happen.

The 1 064 locomotive issue was a sensitive matter and was before the courts, so the Department might be restricted from making certain disclosures in the public domain.

On the question of local content and constraints, the Department was interacting with (DTIC) Minister Patel and on the official level with DTIC, and there was progress on a case-by-case basis. However, a structured understanding is required to appreciate what had a negative effect on Transnet operations and that the latitude was given to Transnet. However, it is understood that local content nevertheless played an important part in developing industries in South Africa, which in turn created jobs that were crucial.

There had been interactions with the Minister of Finance on National Treasury and procurement matters, and the Department was also providing assistance. However, with regard to Transnet and Eskom, there was a recognition that a different kind of dispensation needed to be put in place which would not handicap the quick responses for the parts or equipment that would be required to improve the overall operation of the organisations.

On how the private sector would be selected, transparency was already in place in the form of the Request for Quote (RFQ) and Request for Information (RFI), which had been published on both the Transnet and Treasury's website, and was available to the public. Secondly, details of the selection criteria and due diligence would be made available by Transnet. The Department was carefully considering, together with the boards of all of the state-owned entities (SOEs), the recommendations of the Zondo Commission, and the necessary machinery had been put in place to identify the correct line of action. Regular meetings would be held to ensure that the required civil and criminal procedures were instituted. Also, the Department would, in the next few weeks, get final approval which involved Cabinet, so that the executives were very clear about what they were implementing and would ensure efficiency in relation to the operations of Transnet.

Minister Gordhan said Transnet was not being privatised. However, it did not have the required capital to address every need that would arise in the sector. As part of its operational efficiency, Transnet required investment in equipment and infrastructure and needed to find alternative ways of generating revenue. This would assist in covering operational costs and investment in the new equipment required to reinforce its operations. It was important that there was a single bargaining council and a level playing field created in this regard. There would be the involvement of the private sector from both the revenue and capital point of view, and also from a competition and efficiency point of view, so that Transnet continued to improve on its operational efficiencies and performance of different components while taking into account the concerns that they actually had to work with.

On private sector involvement, there were indications firstly of the stock sale, both on the container line and potentially on the East London line. There were also indications of the RFQs and RFIs in relation to both Durban Tier 2 and the Ngqura port development as well. If Ngqura was to be successful, it was important that it was developed together with a global shipping line, ideally as a trans-shipment board. This was the projected process, and where the involvement of local players would be necessary.  

On the question of rail and the usage of common infrastructure by PRASA and Transnet, the Minister of Transport was in the process of assuring a rail policy which was an alignment between rail policy and rail operations. There were certainly challenges regarding finance for expansion, but Transnet was currently working on those challenges. Transnet was on the right path and had the potential to recover if given the necessary support. Transnet would deal with the challenges it faced, and take advantage of the available opportunities which at the appropriate time could be extended to other countries on the African continent.

Mr Ralph Mills, Chief Executive, Transnet Engineering, said the entity was able to maintain the daily train plan at the moment with the available locomotives. With respect to the 1 064 locomotives, there were two electric classes. One was the 23E, which continues to deliver at the moment. However, three out of the 74 total had stopped as there were no spares and maintenance problems with these locomotives.  The one giving problems is the second electric locomotive, the 22E. Of these, 228 were delivered, 100 had stopped and there were no channels to acquire spares for them at the moment. From an engineering perspective, sub-systems were being considered which could reverse-engineer the situation and allow access to the original equipment manufacturer. Each component on the locomotive had been analysed and a strategy was being developed as to what could be impacted and what could not be impacted. There were issues with the intellectual property (IP), however. The team at the component level, however, was trying to re-engineer other compressors to replace the compressors that were faulty on those locomotives.

There were two classes of diesel locomotives, the 45D and 44D. The 45D had not been a successful programme. Of the 18 locomotives that had been delivered and were still serviceable, 12 had stopped at the moment and only six were running. For the 44D, which was a GE Wabtec locomotive, 47 of the 197 had stopped and were waiting for spares. The problem with the 44D was not the channel, but certain of the items are long lead items -- for instance, the turbochargers had a six-month waiting list. There were also international constraints in terms of global logistics, and they also had setbacks in terms of delivering spares as a result of the Covid pandemic, and issues such as shipping had proven to be a challenge. These factors took quite a while to resolve, but efforts were being made to sustain the current train plan, which would have an impact on the expansion plans.

Ms Portia Derby, Chief Executive Officer (CEO), Transnet, said that Transnet currently had no equity position at the Maputo port, but it had approached the Maputo Development Corporation and the rail operator for an equity stake of 16%, which was what was available in the port, and engagements were still ongoing. However, with or without that equity position in Maputo port, Transnet still benefited significantly by moving chrome and magnetite through Maputo. The port had fundamental constraints and lots of problems, therefore the competitive port would be mainly for large, heavy vessels, and that was what Transnet would be pushing for.

The restructuring of Transnet was the responsibility of its board and the shareholders. South Africa had been removed from its original policy position that stated there should be a dominant rail operator and third-party access. In terms of the regulation of this industry, the Department of Transport (DOT) had put in place a transport infrastructure regulator who would ensure there was fair pricing and equity in access to the system. Secondly, the rail sector regulator decides who could come into the system. With regard to infrastructure, the rail sector regulator sets the standards to be maintained in the system and decides what is safe operation or not safe.

There were unanswered questions on the interface relationship between PRASA, Transnet and the corporate family rating (CFR), and the issues involving security were very crucial. There was a current grouping made up of ESKOM, Telkom, PRASA and Transnet, which was looking at how to coordinate activities and processes. The involvement of government departments was also required to help ensure that the operations were safe.

With the partnerships, transparency was key and, as indicated by the Minister, the necessary details would be provided on the website. Transnet had a framework that had been approved by the Board, which governs third-party investment. This was an investment framework that would be reviewed by the Department to ensure there was an alignment between Transnet’s governance process and the Departments’ requirements. Thereafter, the document would be co-owned by the DOT and Transnet and should be readily available to the general public.

The issue of the employment of locals was going to remain a challenge until the ongoing legal process was resolved.

Referring to local content, she said using procurement as a means of re-industrialising South Africa was fully supported. However, there were a lot of unanswered questions. Transnet was working with the DTIC on a rail master plan to look at the rail value chain in South Africa and the local manufacturing sector, to consider what aspects could be made competitive in South Africa. Transnet would commence by granting permits to companies who could supply local content, and then review what must still be imported.

The CNR issue was tied up with the 1 064 locomotive processes, and until such time the allegations had been responded to, not much could be done. She assured the Committee that Transnet would not undertake such procurement in future but would ensure that suppliers were experienced and it visited the facility and got confirmation from other companies which had already used the product. Transnet would also ensure that there was standardisation and alignment in the fleet with both the equipment at the ports and the equipment that they used in rail. As soon as standardisation could be achieved, there would be an increased ability to manage both inventory on the one hand, as well as develop a tighter capacity to develop its own intellectual property on the other.

She agreed that agriculture was an important area that should be developed and prioritised.

The case Transnet had won at the labour court had been in relation to workers who claimed that they were not getting enough money due to insufficient allocation of work, and they had stopped working. Transnet could not go against the ruling of the labour court but would be in support if the workers wanted to consider a legal review.

The Minister added that the current issue was that the employees’ ex-colleagues were relying on a defective report that had been leaked to them, and from a legal point of view, that was the point of contention. The report that they were seeking access to was defective.

Further discussion

Mr Dlamini said that his concerns on where the responsibility of the rail network would lie under the current circumstances had not been addressed. There could not be an effective rail network if there was no line of authority and responsibility.

The Chairperson said two reports from the Zondo Commission had been presented to the President, and the Committee had access to them. Most of these reports implicated entities such as Eskom and others. He asked if there have been consultations with the Special Investigating Unit (SIU) or the National Prosecuting Authority (NPA) on fast-tracking the issues in order to identify those involved in wrongdoing among the politicians, the companies, the private sector and officials of these institutions.

Response

The Minister responded that the Department had a legal team currently reviewing the report. It had also met with the relevant chairpersons of boards and the legal officials, requesting that they review the report and present an action plan. In about ten days' time, the plans would be collated. There had also been interactions with law enforcement entities, but action had not been taken in view of the President's statement that when the final report of the Zondo Commission was presented to the Presidency, government as a whole would collate all of these intentions and make a presentation to Parliament. However, the Department was reviewing all the questions raised, together with the various Boards and the legal department. The Committee would be advised and further action taken as soon as the reviews were collated.

The Minister of Justice had also addressed this question by referring to the independent directorate on the number of cases they had actually prepared. A new person would also be appointed to help the independent directorate. Also, there were different types of actions that could emanate from the recommendations of the Zondo Commission -- the first was criminal, the second was civil. In relation to SIU matters, there were claims that could be lodged via the special tribunal that had been set up under that legislation.

The question from Ms Tshabalala had indicated insufficient infrastructure development, which was due to a shortage of money, and she had asked about the different ways in which Transnet intended to bring in investment. This would involve private participation, in line with government policy.

On the trade-offs in relation to personnel costs versus investment in capital infrastructure, Transnet had just undergone a process of voluntary retirement packages which had created opportunities for some of these trade-offs to happen. However, training formed a very important component of SOEs general activities.  All the SOEs were going to be mindful of their responsibility in relation to youth training and unemployment, and where resources were available from other branches of government, those resources could be utilised by the SOEs as well.

On who was responsible for rail infrastructure, PRASA was responsible for its own rail infrastructure, and Transnet was responsible for its infrastructure, which was the majority of the rail infrastructure in the country. On the need for consolidation, they were waiting for the rail policy to guide them on the issues involving maintenance and securing of the network. However, he did not think that policy was required for law enforcement agencies to do their work and to create a mindset in South Africans that any infrastructure -- whether it was for rail or schools or Parliament -- involved public institutions and assets, and these needed to be protected for future generation as well. There was a need for a culture change, a mindset change, and tough action.

Ms Derby added that the issue of uncollected debts was quite a mountain. Part of the challenge was that the systems were manual. Work was ongoing towards digitalisation.

The Department of Transport was working on the rail policy, and hopefully there would be increased clarity coming from that.

Committee matters

First term programme and Committee minutes

The Committee considered and adopted its programme for the term and its minutes of 8 December 2021.

The meeting was adjourned.

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