Transnet on measures to expand capacity, internal and SIU investigations; with Deputy Minister

Meeting report

The Chairperson said that the agenda for the meeting had been circulated to the Members, but due to time constraints and the plenary happening later that afternoon, he had agreed with the secretariat to deal just with the presentation by the Department. The adoption of the minutes would be deferred to the next meeting.

He commented that he had heard through the grapevine that after several years of losses at Transnet, the company had made about R5 billion in profit. He expressed the Committee's delight and appreciation of the progress being made. He looked forward to the Department confirming this through the presentation.

Deputy Minister's introductory comments

 Mr Phumulo Masualle, Deputy Minister of Public Enterprises, conveyed the Minister's apology for being absent, as he had to attend another joint meeting of Cabinet committees and had therefore assigned some of his duties to him.

He said the opportunity to appear before the Committee was a welcome one, as it had given the Department an opportunity to relay efforts being made to create mobility, as well as the effectiveness of Transnet's logistics arrangements, to improve the performance of the nation's economy overall. This goal had been made even more urgent given the impact of COVID-19 on the global economy. The need to drive more efficiencies had been receiving more attention as part of the reconstruction and economic recovery plan put into motion by government.

 

The Deputy Minister invited the chairman of the Board at Transnet to speak.

Dr Popo Molefe, Transnet Chairman, thanked the Committee for the opportunity to present the goals that Transnet had set for themselves. He confirmed that Transnet had recorded an annual audit without a qualified opinion in the past financial year. At the beginning of the Board's life, they had set out to clean up the company, and create an effective management structure while restoring the public confidence in the company. The progress so far was taking the company closer to its goal of restoring public confidence, which was part of the responsibility of the Auditor General of South Africa (AGSA) and Transnet.

Presentation by Transnet National Ports Authority

Mr Pepi Silinga, Chief Executive, Transnet National Ports Authority (TNPA), said that the Port of Durban accounted for 40% of Transnet's business as far as financial and volume contributions were concerned. He emphasised that the port was a major player on the African continent as it sat at the apex of the apex system.

He said that the port developments were being done in a complementary manner. This meant that to restore Durban to its former competitive glory as a container hub, some of its functions need to be relocated to the port at Richards Bay. The main hub of the navy base currently located in the Port of Durban would be relocated to Richards Bay, and only a satellite hub would remain in Durban. The Point Container Terminal at Durban would be deepened to accommodate bigger vessels. A new cruise terminal in Durban had also been completed just as Covid-19 had started, which was ready for use.

He said there was a need to develop port framework plans and consultative committees. The expansion plans were based on a timeline in view of the legislation in place. There were checks and balances that would ensure that the plans were actually fit for purpose. This process was under way, and was a very interactive and consultative process. There had been independent and professional validation, with the assistance of the World Bank.

Transnet was looking into how to manage the total logistics chain by dealing with the volume of containers and their evacuation to reduce the current congestion. What was needed was an integrated intermodal system like Cato Ridge Terminal, and in some instances staging areas for cargo coming into the port.

He explained that the Port of Richards Bay would need to be reconfigured to accommodate the natural traffic resulting from the relocation of certain functions from the Durban port. These relocation plans were being done in collaboration with the Department of Defence and the Ministry of Public Works and Infrastructure.

Mr Silinga said that the ports of Mossel Bay, Richards Bay and Saldanha Bay were not making any profit. The TNPA was looking into how to improve the situation. He also said that they were looking into consolidating the container terminal of Port Elizabeth with the Port of Ngqura. The goal was to make the Port of Ngqura an automotive, hospitality and tourism port. The port was underutilised, but there was a plan to subject it to a professional service provider (PSP) transaction to attract a company that would bring in the additional volumes needed.

The Port of Mossel Bay was a loss-making port, so Transnet had developed a clear turnaround plan involving making it a fishing port.

At the Port of Cape Town, they focused on resolving the logistics issue by introducing a fast-track truck staging area, which should create a direct link with the port.

Presentation by Transnet Rail

Mr Rudzani Ligege, Managing Executive, Transnet Freight Rail, said that given the presentation by Mr Silinga, the success of the growth of the Port of Durban depended quite heavily on the rail being efficient and being able to evacuate the cargo. The line that connected Durban to Johannesburg was the biggest contributor to the nation's gross domestic product (GDP). Their numbers depended on the TNPA's number of 11.3 million twenty-foot equivalent units (TEUs), moving from the current 2.9 million TEUs. They were working on 6.3 million TEUs, which must be evacuated by rail, and were therefore trying to shift the dependency from road to rail.

For this to be achieved, certain dependencies needed to be factored in, such as the configuration of the port rail terminal capacity, which ought to be increased. Mr Ligege said that rail was pivotal to the success of the project, as well as the issue of funding.

He informed the Committee that they were facing issues such as the erosion of management slots and theft and vandalism. The KwaZulu-Natal floods helped increase the slot capacity by rehabilitating the line after the floods. The Department was also looking into changing its current model, which would be unable to support the projected 11.3 million TEUs, to a better model.

Transnet on investigations into alleged misconduct by Transnet employees

Adv Sandra Coetzee, Chief Legal Officer, highlighted that the relationship between Transnet's investigations department, the Chief Legal Officer, and the Special Investigating Unit (SIU) was interactive. The company had been collaborating and cooperating with the SIU.

Due to the complexity of the matters involved, the SIU had structured their work in three phases. (See presentation attached). The SIU had completed 11 investigations, six of which were ongoing. Between Transnet and the SIU, 17 criminal cases and referrals under the Prevention of Economic Crimes Act had already been made due to the investigations.

The investigations into the procurement of 1 064 locomotives had been completed and Transnet, along with the SIU, had filed for a review of the tender in March of 2021. There had been intentional delays by some of the original equipment manufacturers (OEMs) through interlocutory processes, which her department was dealing with successfully. She expected that the process of review would be expedited. She said that all the employees involved in the dubious transactions in question had left the employment of Transnet, and an additional three employees had been dismissed.

Ms Coetzee said that the issue regarding the appointment of transaction advisors was being investigated by the SIU, and criminal cases had been filed in respect of one of the advisory appointments made. A settlement had been reached, and the employees involved had already resigned from Transnet.

Concerning consequence management, the SIU investigation into two contracts awarded to a telecommunications company had found that there was wrongdoing, and therefore an application to set aside the tender award had been filed. Termination referrals had been made, but had not been received.

She said that all the employees implicated in the disciplinary referrals by the SIU, as well as the internal Investigations, had either been dismissed or had resigned upon realisation that disciplinary action was being instituted.

A total of 11 employees had been dismissed as a result of these investigations. The employees dismissed or voluntarily resigned at the beginning of disciplinary action were senior executives within the organisation.

Ms Portia Derby, Group Chief Executive Officer, clarified that the names appearing on slide 33 of the presentation referred to former board members, not current members.

Discussion

Ms W Ngwenya (ANC, Gauteng) questioned to what extent Transnet had responded to issues raised by the President's State of the Nation address in 2021 on the expansion of the capacity of the ports. She asked for an update on the development of partnerships with the private sector to address cable theft and the vandalising of the rail network.

She also asked how many of Transnet's ports had international terminal operators to assist Transnet in having a direct link to key trading partners. Lastly, she asked how many of Transnet's employees found responsible in phase one of the SIU investigation (focus areas one and three) had left Transnet employment, and what the conviction rate was of the employees who had been criminally charged.

Ms L Bebee (ANC, KZN) asked whether Transnet and the National Port Regulator had managed to reach a compromise over the issue of tariff increases. What was the staff morale like, in light of the investigations underway? She wondered whether there had been any resignations by employees for fear of being implicated in the investigations.

Mr A Arnolds (EFF, Western Cape) reminded Transnet of its responsibility for a safe, efficient and economically functioning national port system, which was in dire need of change. He acknowledged the need for change in the structure, as the current one was a bit outdated. He asked for an update on the status of stakeholder engagement following the feasibility study conducted regarding Richards Bay. In light of the fast-track truck staging project at the Cape Town port, he wanted to know the impact and when exactly that would be seen.

He inquired how much of the stolen money had been recovered to date following the SIU investigations, and whether there were still any outstanding disciplinary matters.

Ms T Modise (ANC, North West) asked for an explanation concerning the dispute with the Chinese Railway Rolling Stock Corporation (RRSC) over the supply of specialised spares. How had the cable theft and load-shedding affected Transnet's operations? Was Transnet relying on Eskom solely for power, or did they have an alternative power supplier?

The Chairperson asked what the reasons were for the Port of Ngqura being underutilised. He asked if any turnaround strategy was in place for the Port of Mossel Bay, which Transnet had said was loss-making.

He asked whether the new developments would relieve the pressure on the M3 between Durban and Johannesburg. What relationship did City Deep and the new management at Cato Ridge have? He asked for a breakdown of the financial investment being made towards Transnet's expansion of the ports within the country. How much was government going to spend on the expansion?

He expressed his pleasure with the improvements in the internal investigations and the management taking place within Transnet internally.

Transnet's response

Mr Jabu Mdaki, CEO, Transport Port Terminals, responded to Ms Ngwenya that Transnet had two focus areas to improve operations. The first was the availability of the equipment, and the Department was working on refurbishing and acquiring new equipment for the ports. Secondly, Transnet had started a number of initiatives to get the people involved motivated, which addressed the issue of staff morale she had raised.

On the question of international terminal operators, he said that there were none currently. He explained that international terminal operators formed part of the private sector with whom Transnet was trying to partner, as they had the necessary experience, knowledge and financial capabilities to help improve port operations.  

Regarding the underutilisation of the Ngqura port, he said that one of the reasons was its position. The port's position could not attract a large volume of vessels. The plan was therefore to get someone who would attract the numbers needed. The port used only 60% of its capacity, which was low.

Ms Derby acknowledged that the ports in the country were badly rated, and said that the only way to move up the ladder would be to get a business partner with a good reputation and strong linkages to the key export markets.

She added to Mr Mdaki's response, saying that if there was a big industrial base in the Eastern Cape, cargo would be moved in the direction of the Ngqura port. This would mean that the ports within the Eastern Cape could receive cargo for use in that economic area.

To fully develop the industrial zone around Ncqura, its port would need to be a trans-shipment hub. Transnet was therefore looking for a cargo owner who would understand the benefits of relocating to Ncqura and be able to live richly off the Industrial Development Zone (IDZ) at the Bay. They were therefore collaborating with the IDZ to ensure that once Transnet was able to secure an investment , the Coega Development Corporation(CDC) would be able to attract a lot more activities and generate jobs in that area.

Mr Ligege, in response to the question of cable theft, indicated that the issue was not really a Transnet issue, but rather an international one. Transnet had communicated this to some of its customers, who had responded quite positively. Its coal customers had provided drones, and people to man the Transnet lines, and this intervention had helped reduce the number of weekly incidents from 35 to 20. He said that ArcelorMittal South Africa (AMSA) had also made available drones on the Warrenton line, which had helped to reduce the number of weekly incidents from 12 to five. He said there were other ongoing discussions with some of its customers who responded positively to Transnet's request for help to reduce cable theft.

In 2017-2018, Transnet had lost R141 million in revenue, while in the year 2021-22, they had lost R2.1 billion due to cable theft. In terms of damage, it had lost 7.7 million tonnes due to cable theft. He admitted that the issue of cable theft was a cancer that needed to be handled with the seriousness it deserved.

Regarding relieving pressure on the M3, Mr Ligege said the logistics did not start and end at the port. Whatever was off-loaded at the port was destined for inland. Transnet was therefore focusing on creating more facilities like Cato Ridge. Back of the port, a facility like Cato Ridge would play an important role, as there would be no need to send all the containers at once. Some could be held back at Cato Ridge, sending only what was necessary to go on another vessel. Transnet was in the process of looking into other hubs equivalent to Cato Ridge on the Gauteng side. Once operational, these hubs would help ease the pressure on the M3, moving cargo to rail.

Ms Derby added that Transnet's move to have Durban as a hub port was a strategic move aimed at having South Africa become a part of the global network. She explained that the current global trends were that super vessels stopped only at certain ports worldwide and not just everywhere. Easing the pressure off of the M3 was therefore crucial.

On the issue of staff morale and the SIU investigations, she said Transnet had been quite careful to sift out incidents relating to malfeasance. As Transnet employees, they had been trying to have honest conversations among themselves to find out what had happened and what in the system had disempowered the employees in such a manner. She was grateful that the employees were being forthcoming about these questions.

She insisted that Transnet was trying to learn from its mistakes so that the same problems did not recur. They had insisted on more direct individual accountability and the use of committees, where they were crucial. Transnet was looking into ensuring that these committees were insulated from external influences.

Ms Coetzee, in response to the question on disciplinary action, said that they had structurally separated investigations from consequence management. This had been done to introduce checks and balances to avoid investigations being used as intimidation. Once the investigations were complete, these findings were interrogated to ensure that they were conclusive and that there was clear evidence of malfeasance. When a charge sheet was compiled, they ensured that it had the necessary objective facts to support disciplinary action.

She said that most resignations resulted from the strength of the charges reflected in the charge sheet being presented to the individuals. They had introduced independent presiding officers to ensure that the disciplinary hearings were fair and enforceable. There had been much improvement in the due process regarding disciplinary action.

Ms Coetzee said there were no outstanding disciplinary actions as far as referrals from the SIU and internal investigations were concerned. There was one that had just commenced, so the outcome was unknown.

On the KwaZulu-Natal case involving the multi-purpose pipeline and how much had been recovered, she said that the recovery process resulted from a forfeiture order secured through the Special Tribunal. The execution of those orders involved the tracing and attachment of assets. The assets available to be monetised amounted to R26 million. The process of monetising those assets related to their disposal through an auction or some other form of sale. To date, R14 million of the R26 million had been already recovered. The process of recovery was ongoing, in collaboration with the SIU.

Regarding collaboration with original brand manufacturers, she said there was one that had not been cooperative. Transnet had issued them a letter of demand for access to the relevant components and spares. Should there be no positive response, the next step would be legal action, for which her office was preparing. She therefore could not say much more for fear of jeopardising its strategy. Her office was ensuring that they were exhausting all the available remedies to ensure Transnet had access to the necessary components and spares to bring back to service the long-standing locomotives.

Mr Silinga, in response to Ms Bebee, said that the process of tariff allocation was often possessed by some tension, particularly the determination of how much those tariffs should be. The difference between the price application and the final determination was too wide to create predictability in the system. This was because the application submitted was based on the agreed tariff methodology. This would suggest a difference in interpretation, or factors that might be out of control of the TNPA and the Ports Regulator of South Africa (PRSA).

He said that one of the things that could be done was an update the tariff methodology. He explained the timeline, saying they usually submitted a tariff application on 1 August. The Regulator then decided almost five months later, and the tariff was applied seven or eight months later. In an environment subject to unpredictable price changes, this resulted in a significant difference in the tariff from the time of application to the time the Regulator had to decide. He admitted that there had been recent volatility in the prices, which were not explicit.

Despite availability, one of the biggest cost contributors had been the price of water and electricity. The price escalations in the last few years in the double digits had not been factored through in the formula that looked at inflation, because by the time it was being considered, it was a blended inflation. There were tariff methodology factors in variables that were not within the control of the TNPA, and if these went contrary to what the PRSA would have wanted, this would occasion penalties against the TNPA. He recommended a remodelling of the variables factored into the methodology within the control of TNPA, to the extent that they could be incentivised or dis-incentivised through the tariff methodology.

Mr Silinga said another concern was the replenishment of the regulated asset base. He explained that it would be one thing to recover money for the infrastructure that was being created, while also replacing the existing infrastructure, as one would run the risk of the life of the infrastructure running out while needing to replace it -- while the tariff structure had not been geared towards enabling one to accumulate sufficient financial muscle. This would be a huge risk to the long-term sustainability of the port. Another issue was how the progress was being measured, as that would determine any penalties that may accrue.

Transnet had found that the tariff management had not necessarily had the benefit intended, to the extent that the TNPA administered the prices determined by the Regulator. The terminal operators did not necessarily pass on the benefit to the end users, so one would therefore find that the rate of doing business in the country was declining, rather than at the rate that the tariff was intended to incentivise. Transnet was therefore looking at ways to ensure that there was a line of sight from the point of determination of the tariff to the time the end user used the system.

Mr Silinga said the TNPA was constantly engaged with the Regulator to close some of these gaps. Its biggest let-down was its failure to use its capital expenditure, which had been a legitimate source of anxiety for the Regulator over the last five years. Until recently, they did not have much defence against this.

Regarding the pre-feasibility study on the Richards Bay Port, he apologised as he was unable to determine on which particular project the study had been done. However, he responded to the fast track truck staging area issue, stating that this was a transversal project in which the intermodal logistics needed to be sorted out. Transnet had prioritised the truck staging areas in Durban, Ambrose Park, and Cape Town ports.

They would begin with the Port of Richards Bay, which was suffering from chronic congestion. The truck staging area would be important in ensuring a seamless traffic flow. The plan was to first implement it on a very basic level, like what was being done at the Port of Durban. The plan, for now, was to do what was possible within Transnet's means to respond with immediate effect with infrastructure fit for purpose.

He said that Durban's fast track truck staging area should be operating within the next five months. Each case would depend on the enabling infrastructure in and around the facility. If the listed activity would attract an environmental impact assessment (EIA), Transnet would then need to take another year before starting with construction. If not, the construction should start in the next seven to eight months.

There was a turnaround strategy in place for the Port of Mossel Bay. The leadership had spent a month in the Bay, and had met with all of the employees and got to understand what the issues were. Financial viability models had been undertaken. Among the proposals undergoing the final detailed iteration included the expeditious signing of the leases whose delay had sterilised any development or new prospective tenants.

Transnet was also advertising and promoting vacant plots to cultivate local interest. Another measure was trying to ensure that they had put people in the right places. There were a lot of vacancies in operational spaces where value could be added, and they might be able to generate perhaps more income than needed at the management level. There was also a boat repairing facility in Mossel Bay which required adaptation to accommodate more boats. This was the third revenue generator for Mossel Bay, the first being petroleum and the second being the fishing industry. Transnet's goal was to triple that income.

Mr Silinga that a new board member was appointed. He was Dr Zewa Mazibuko, who came with a lot of pedigree. They had also adopted the top structure model, which would reduce the barriers to entry and enable prospective tenants to use their limited resources to focus on the actual business instead of looking for capital to develop the top structures.

He remarked that from an efficiency point of view, part of ensuring that the infrastructure was fit for purpose was to ensure that the berths were of sufficient length to take bigger vessels, which ultimately resulted in the greater economy. They were also purchasing 65 hydraulic tension mooring systems which were used to attach a vessel to a berth so that one could work on a vessel even if it was extremely windy.

He again apologised for not getting the specific information regarding the pre-feasibility study for the Port of Richards Bay. He e would be glad to provide any additional information regarding that matter.

He said the new infrastructure budget for 2022 was R2.4 billion. The maintenance budget, scattered through the port system, would constitute another R1.3 billion in total.

Ms Derby interjected that Transnet's total budget for the development of the Port of Durban was below R100 million.

On the issue of employment opportunities, she clarified that one of the issues that Transnet was dealing with was what was referred to as an operating ratio -- a number that referred to productivity or the efficiency of the organisation. Its competitors' operating ratio was at 20%, while Transnet was at 58%, with some of the operating divisions being much higher. This meant that for every rand they collected, 62 cents went towards employment costs, which meant that what was left for investment was 38 cents, and they could not be competitive or sustainable on that basis. Their internal work focused on growing revenue off the base Transnet already had. Most jobs that would be created were outside of Transnet, and not necessarily in Transnet.

Mr Silinga explained that the work being currently done was, by its nature, project work that would be for people with a particular set of skills who were going to be employed by the National Transnet Port Authority. He said that they employed a model whereby they ensured that there was sufficient capacity within the organisation to discharge the type of work they were guaranteed would be there regularly. Transnet preferred to link specialised projects with the duration of the project, which was periodic while hiring the people with the required skill sets for the duration of the project.

Transnet had recently appointed 400 young people from previously disadvantaged backgrounds on an internship programme scattered throughout the ports. It was increasing its skills development levels to ensure that the opportunities within the specialised projects were being made available to people who would not ordinarily have access. Transnet's hope was to contribute to a skills revolution, targeting young people in particular without increasing the cost of employment.

He added that Transnet also measured capital revenue per employee, which was still much lower than they would like it to be.

Transnet Chairperson's comments

Dr Molefe clarified that in response to the President's comments in the state of the Nation address, Transnet had placed the competitive plane on which it needed to be as a priority. He admitted that Transnet was not yet anywhere near what it should be, and that there was still a lot to be done. However, as the Board of Transnet, they were happy with the strategic direction that the company was employing and how the executive team had placed focus on the functions and segments within its strategy. Through this, Transnet was experiencing a lot of traction from the market. The ability to unlock additional funding by the Deutsche Bank and the opening up of other new funding had enabled Transnet to continue its business and to ensure that the rating agencies did not give it an adverse rating.

He said the Board was of the opinion that a state-owned company (SOC), managed effectively and efficiently, could actually avoid relying on the fiscus. However, they also appreciated that they got as far they had through good support from the executive authority, National Treasury, and the Department of Trade, Industry and Competition. He acknowledged that there were still major problems that Transnet was experiencing, such as maintenance.

He emphasised that Transnet was collectively focused on ensuring that it became increasingly competitive and could ensure that its reliance on the fiscus was reduced. The Board was committed to working very closely with the executives to unlock any bottlenecks in respect of operations and ensure that they delivered better results in the next financial year.

He expressed his thanks to the directors, as well as the management, for being present in the meeting. He conveyed the apologies of the absent board members.

Closing

The Chairperson thanked the Board of Transnet and the executives for attending the meeting. He remarked that the presentation and the responses had given a clear picture of what steps were being taken by Transnet so far as investment and expansion were concerned.

The meeting was adjourned.