The Standing Committee on Appropriations invited the Department of Public Enterprises to make oral presentation on the Special Appropriation Bill as tabled by the Minister of Finance on 26 October 2022 with the focus on Transnet’s financial performance for the past three years, the reasons for the requested R2.9 billion, the inclusive measures to ensure effective economic expenditure of this proposed allocation, the possibility of bailouts request in the short to medium term, the Transnet Loan Book and Revenue Projections for the next five years, and to provide a summary of financial and non-financial performance at the end of the second quarter of the 2022/2023 financial year. Minister Pravin Gordhan was present.
Transnet says the entity needs R2.9 billion to aid its recovery from this year's floods and get locomotives running again.
The Minister said the funding for Transnet ought to be considered as a reimbursement rather than a bailout or recapitalisation.
The entity reported that it has had no fiscal support for over 15 years. This has resulted in a growing debt burden. ongoing
Members heard that Transnet has been experiencing a very constrained insurance market as a consequence of residual perceptions and diminished governance during the state capture period and the high degree of fossil fuel processing in Transnet’s operations.
The Minister said recovery from corruption and the decimation of big institutions takes time. The damage is in terms of culture, operations, revenue, and the lack of investment that was supposed to have occurred.
The Committee was informed that wanted to get to pre-Covid-19 levels and its current volume and performance are reaching that level. A lot of work is being done to ensure that there is a turnaround at Transnet and rebuilding inefficiencies.
Responding to a question about Eskom, the Minister said a statement will be issued later today indicating the status and availability of diesel as far as open cycle gas turbines (OCGT) are concerned. At the maximum, the OCGTs contribute about 2000 megawatts. That is not a neglectable amount but given the cost of crude oil and its derivatives, the cost of diesel has been rocketing for some time and that has serious implications for the cost factor. The Department does want to reduce load-shedding and have predictability as far as load-shedding is concerned. The Department will keep the country informed about access to money for Eskom in order to purchase the required diesel.
Concern was expressed that the ports are offering poor service and that leads to many shipping companies using neighbouring country ports.
Questions were asked about the shift from road to rail and the decline in the number of locomotives to be procured or repaired impacting Transnet’s operations in the passenger movement space.
Members asked about capital investment, the impact of the strike, the establishment of another company, if the entity was underinsured, loss through criminal activity, borrowing levels, the Blue Train, and opening up the space for black-owned and women-owned businesses.
The Chairperson greeted and welcomed everyone present at the meeting.
The Committee Secretary submitted the apology and this was noted.
The Chairperson explained that today’s meeting was a follow up to the Special Appropriation Bill that was tabled by the Minister of Finance on 26 October during the MTBPS. As part of considering the bill, the Committee requested the Minister of Public Enterprises and Transnet to appear before it to respond to specific questions asked by the Committee.
The Chairperson welcomed the Minister. He indicated that 45 minutes was allocated to the presentation.
He invited the Minister to come in.
The Minister was having some connection difficulties.
Briefing by Transnet
Ms Portia Derby, Group Chief Executive Officer, Transnet, made the presentation.
Transnet has 315 long-standing locomotives as of the 21st of November 2022. This is a problem because Transnet was at 308 longstanding locomotives three weeks ago. This figure grows and shrinks depending on whether Transnet can get components and parts. The 315 consists of 43 longstanding diesel Wabtec locos. This requires Transnet to get to closure on the maintenance agreement with Wabtec so that the delivery of the parts can be accelerated. The D45s would have been supplied by the China North Rail (CNR). 15 of the 22 locos that CNR has ever supplied to Transnet are longstanding. Transnet has indicated that they want to cancel their contract with CNR because only 22 of the 300-odd locos that Transnet was meant to receive from them were delivered. Transnet also has five 15E locos from Motsiwi. 29 of the 90 electric locos from Motsiwi are long-standing.
A lot more locomotives are longstanding in the case of the China Railway Rolling Stock Corporation (CRRC). Some of them are from the earlier procurement period. 43 of the 20Es, 28 of the 21Es, 80 of the 22Es,
Transnet’s operating fleet stands effectively at 1600.
The new generation locos are 12 years and younger. This stands at 1884. Transnet had about 2215 locomotives in the period where it was able to move 225 million tons. As things stand, Transnet has less tractive power than it requires to move the volumes in the system. That is why R2.9 billion is important for Transnet.
The Transnet KZN Floods Losses are estimated at R7 billion. The insurance settlement was estimated at R1.8 billion. Government support is estimated at R2.9 billion. Transnet started a process to sell slots at the beginning of the year. This had to be paused as a result of the damaged infrastructure. Transnet anticipates that they should be close to the full capacity of the slots by the beginning of the next year.
On Transnet’s financial performance she reported that there is a serious reduction of tractive power and the worst effect occurred on capital investments. Unique braking systems are needed because of the escarpment in South Africa. Not any locos can be used for that system. Coal has suffered significantly. There have been losses in the export of iron ore. Cable theft is also an issue.
The total borrowings by Transnet have somewhat stabilised but Transnet needs to work on actively reducing the borrowing.
The revenue remains stable but needs to grow. Issues that Transnet is facing in regard to this include the need to rebase tariffs and get to full cost recovery. This is not just to increase revenue but to put Transnet in a much stronger position to be able to reduce its debt and undertake more of the funding that is required for Transnet.
In rail economics, you charge tariffs on the basis of the weight of the commodity being moved but high-value manufactured commodities are not heavy. Transnet has always under-recovered because the commodities are low-weight in a system that is biased about charging based on weight. Transnet makes losses close to R3 billion annually on running the container corridor.
From an economic perspective, the statistics on capital investments are most troubling. Capital investments need to be upped in order to have a direct impact on economic growth and job creation.
Expansion investments are low and need to be focused on. This is not just about the expansion of the rail network this includes ports too.
On what Transnet has been doing given all of the issues discussed, she stated that Transnet has developed the Growth and Renewal Strategy. The idea of having infrastructure regulated is long overdue and Transnet supports it wholeheartedly. The short-term action plan (12 months) and the future state action plan are being run simultaneously. The short-term action plan consists of improving cash generation, enhancing operational performance, and leveraging strategic partnerships. The long-term action plan includes institutional reform, volume upliftment, and high-performance culture.
On the projected revenue for fuel, she stated that Transnet has reached an agreement with the South African Revenue Service (SARS) on the use of an inland terminal for fuel as a bonded storage facility for use by the fuel majors. They should be able to use these facilities as soon as they resolve their case with SARS. That should lead to significant growth on the pipeline side because the pipeline and rail will be back to playing a significant role in delivering fuel.
Transnet faces several challenges. This includes:
-Decreased locomotive availability.
-Increased non-operating locos.
-1064 contract suspension.
-Decreased infrastructure reliability.
-Increase in derailments/incidents.
-Crippling theft and vandalism resulting in operational disruption. This issue is beyond Eskom and the Passenger Rail Agency of South Africa (PRASA). Transnet lost 1500 kilometres of copper which Transnet has to replace. In those moments of theft, trains are not moving and revenue is lost. The government’s assistance in providing peace officers is crucial.
Initiatives to improve the availability and reliability of locomotives include:
-Returning non-operating locomotives. Transnet spoke to the Industrial Development Corporation (IDC) to see whether they could assist Transnet with the funding and help accelerate the delivery. Transnet is far with that additional funding.
-Maintenance support and spares supply.
-New locomotive supply.
-Service level agreement (SLA) with TE
She concluded by stating that Transnet plays a critical role in ensuring the economic growth and competitiveness of South African companies in a global setting and is ready to play that role. The three binding constraints that Transnet has to deal with are the availability of locos, infrastructure funding for maintenance, and dealing with security issues.
A number of external and internal factors have negatively impacted the financial position of Transnet. The support from National Treasury is to partly reduce the impact of external factors.
Transnet has had no fiscal support for over 15 years. This has resulted in a growing debt burden. However, Transnet looks forward to on-going engagements with the government on how infrastructure and maintenance are funded going forward to enable a shift from road to rail. Transnet’s rail infrastructure requires significant maintenance, full recovery of such investments will not assist with the mandate to lower the cost of logistics. Similar entities get continuous fiscal support.
Transnet is advancing the Private Sector Partnership strategy to increase capacity without adding the debt burden on the Balance Sheet. Transnet is aligned with the Balanced Funding Model advocated in the Rail Reform Whitepaper.
Minister Pravin Gordhan stated that he had difficulties joining earlier due to network issues and other engagements he was preoccupied with. He apologised for joining late and stated that he will respond to questions from members when they come up.
Mr O Mathafa (ANC) found the presentation helpful and clarifies many areas of the Committee’s concerns. He requested that Ms Derby confirm or correct his understanding of the R2.9 billion for the return of out-of-service locomotives. The idea is to procure 315 locomotives and the view is that there is no need to move back to the 1971 total number. How will the decline in the number of locomotives to be procured or repaired impact Transnet’s operations in the passenger movement space? What is the ideal locomotive stock target if money was not a problem for Transnet? Black Economic Empowerment and its representation is currently a hot topic. Is there a clear plan for the R2.9 billion that will allow previously disadvantaged people and companies owned by African people to be able to benefit from the allocation of the R2.9 billion? It appears that being black and doing business with the state is criminal. How is Transnet going to deal with this problem? There is a view that there is a capital disinvestment decline since 2015/2016. What is the main reason for the decline in capital investment? This is concerning. Is the situation ideal? Is there a plan to reverse the situation? Ms Derby stated that Transnet is interacting with the Industrial Development Corporation (IDC). Could this interaction be one of the efforts to try and close this gap? If not, what other solution is there, if any? On the loss of Transnet infrastructure due to criminal action, have the theft hotspots been identified? Have copper anti-theft measures or security patrol measures been considered to ensure that theft is mitigated before it happens? A headline stated that experts estimate that Transnet is losing R3 billion in revenue a year due to unproductive ports. Can the Committee receive a response to this headline? If there are unproductive ports, how many are they and what is Transnet doing to improve the situation? The presentation is silent on profits or losses at Transnet. Is Transnet making a profit or loss or is there financial stability? He appreciates the efforts to ensure that there is a turnaround at Transnet.
Mr A Sarupen (DA) picked up on the point of capital investment and the general decline over the years. What is the plan to raise capital investment at Transnet over the short and medium term? What kind of capital investments is Transnet looking at? Does Transnet foresee whether it would need any further bailouts in the future should the R2.9 billion be approved or is Transnet on a path to being sustainable? How does Transnet see its financial situation over the next two to three years? Does it anticipate that it will manage what it is doing? Does Transnet foresee that it would be the case that borrowing will decline over time and stabilise after 2024 or does it anticipate that borrowing will continue at a slightly higher level? On operations on things such as Locomotives, is Transnet engaging in full cost recovery for the services it provides to other state-owned enterprises and to the private sector? Is Transnet actually generating enough revenue to be self-sustaining in these operations? If not, what is the plan to turn that around?
Ms D Peters (ANC) greeted the Committee and Transnet’s delegation. She asked about the implication of the rail policy. She found the case study of how Germany spends on infrastructure interesting. The case study is interesting to know whether there is participation by the Department of Public Enterprises (DPE) in discussions on rail policy or the transport regulator. On private sector participation, she asked what would the DPE and Transnet’s allocation to private sector access. What is the percentage of access for black-owned companies and women-owned companies in the mining sector? They also need access to move their produce. What is the investment that the DPE and Transnet are putting in skills development, especially in regard to Transnet’s move from road to railway? South Africa needs skills to be able to work in those developments to increase the capacity at Transnet. Considering road safety issues and challenges to the move from the taxi industry, is there possible engagement between Transnet and PRASA about the Shosholoza rail on long-distance travel? PRASA says it does not own the derelict stations on the network. These stations become havens for criminality. What is Transnet doing about this? Can Transnet not lease out the properties they own at nominal fees to provincial or local government? During her tenure as Premier of the Northern Cape, there was an initiative with to safeguard old stations and Transnet’s properties. Is there a similar initiative in place by Transnet?
Mr A Shaik Emam (NFP) stated that South Africa’s ports are offering poor service and that leads to many shipping companies using neighbouring country ports. What are the Department and Transnet doing to prevent that? Transnet experienced a cyber-attack in 2021 that affected services. How is Transnet trying to prevent that from happening in the future? What was the estimated loss to the economy as a result of this? At some stage a factory was being built. Is that factory functioning? What are the latest developments around that? Why is the country so reliant on the outside world for things like train wheels even though it has the capacity to manufacture these things? Factories were shut down and jobs were affected. Why did we not try to save that, employ more people, produce the things the Department needs, and use them for the purpose of export? Some experts in the transport sector are saying that Transnet does not have what it takes to effectively deal with the crisis that the country is facing. What is Transnet’s comment on that?
To the DPE, he stated there is talk that the country might face fuel shedding. This would aggravate the situation at Eskom as Eskom needs diesel. The Committee is being told that there are no financial resources to provide diesel. The Committee is concerned that this is going to impact the energy crisis facing the country. Is there a plan in place to prevent this from happening so that there are not any further interruptions in the energy supply?
Mr Z Mlenzana (ANC) asked Minister Pravin Gordhan to provide the Committee with details on all these court details of individuals that have been charged with corruption-related charges and have their cases been investigated. Are there cases that are done? Has action been taken against such individuals?
The Chairperson thanked the CEO for the presentation. This is the first time the Committee has Transnet before it. He thanked the Minister for his attendance. He asked what the CEO would say if he were to say that Transnet is underinsured and it took the floods to expose this. The presentation makes a point that Transnet charges according to weight and then it undermines Transnet’s true charges as far as high-value commodities freight are involved. What stops Transnet from charging the correct way to prevent cross-subsidisation? What has the impact of the events at Transnet and the unavailability of coaches been on Transnet’s cost of capital? Is Transnet propagating for a separate company that is going to own infrastructure when Transnet speaks on government investing in rail infrastructure? Transnet would have to pay to access this infrastructure. Where is that going to take Transnet on a cost-benefit analysis? It is a nightmare to drive on the N3 due to truck drivers. There is a high number of trucks on the road. This has a negative impact on things such as the maintenance of the road and accidents. People say this is due to the sub-optimal operation of Transnet. What is Transnet’s view on this?
Whenever recapitalisation of companies is considered by the government, conditions are always looked at. He asked the Minister whether there are any conditions that the Minister is attaching to the recapitalisation that is being proposed to Parliament. If there are, then what conditions are being looked at? What is happening with the Blue Train?
The Minister started off the responses.
On BEE, its beneficiaries, and the benefit to small black-owned businesses, he replied that Transnet and Eskom have a lot of statistics on this. Their expenditure there is over R100 billion. There is nothing negative about this. What is required is an explosion of black-owned businesses that are equipped to supply the commodities that the country’s state-owned enterprises require. The Committee and Parliament should take a strong stand against criminals who are looting the state under false pretences such as supplying fake parts to Eskom. An explosion of the number of black businesses has to be kept going as that is what is going to increase economic inclusion and level the playing field.
On capital investments, he replied that the clear impression that the DPE gets from the Zondo Commission Inquiry around the 2015/16 period is that capital was shifted in the direction of these locomotive deals. That meant that maintenance and new investments took a backseat as far as infrastructure and equipment were concerned. State capture did have that kind of an impact. Transnet had over a R100 billion over ten years to be invested in building a new terminal at the Durban port alone.
On bailouts and capitalisation, he replied that the R2.9 billion is neither a bailout nor a recapitalisation of Transnet. This is about recovering from the devastating floods. It is a derivative of money holders of the locomotive transactions.
On Mr Shaik Emam’s questions on whether Transnet has the ability, he replied that from a public enterprises point of view, recovery from corruption and the decimation of big institutions takes time. The damage is in terms of culture, operations, revenue, and the lack of investment that was supposed to have occurred.
On Mr Mlenzana’s question on confidentiality, he was not sure what Mr Mlenzana was referring to but to the extent that it is possible, Transnet will be able to easily provide details on what actions have been taken against whom. Either within the Transnet rules or through the law enforcement machinery of the state. There is no confidentiality there as it is in the public domain unless some deal has been made that requires non-disclosure by particular individual entities. Some of those issues have previously been reported to Parliament. Mr Mlenzana is welcome to that information.
On the high number of trucks on the road, he replied that the trucks on the N3 and N1 should be far less than what they are now. Transnet’s ability to get an effective rail logistics system going is a crucial part of Transnet’s business objectives. The quicker that happens the better maintenance can be done on the roads. This is an area that needs a lot of attention. There are operational issues within Transnet that the team is giving its attention to. The results of this will be seen as this goes forward.
On conditions on the recapitalisation of companies, he repeated that the Department is not requesting a recapitalisation as much as it is a reimbursement of some sort. The conditionalities have to be for all of these entities. Is the money being spent well, is the money being invested in the right place, is the entity receiving value for its money in whatever procurement exercise it is engaged in? Has the culture of corruption been eliminated? There are still people in each of these systems, including the state, who engage in one or other kind of maleficence. There is work to do in this regard.
On diesel availability to Eskom, he replied that Eskom has used a lot of its allocated funds to be recouped in one way or another. A statement was issued on Sunday stating there was engagement on this matter and the cash will be found. A statement will be issued later today indicating the status and availability of diesel as far as open cycle gas turbines (OCGT) are concerned. At the maximum, the OCGTs contribute about 2000 megawatts. That is not a neglectable amount but given the cost of crude oil and its derivatives, the cost of diesel has been rocketing for some time and that has serious implications for the cost factor. The DPE does want to reduce load-shedding and have predictability as far as load-shedding is concerned. The DPE will keep the country informed about access to money for Eskom in order to purchase the required diesel. The leader of the opposition party claims that Minister Gordhan stopped him from going to the Kusile power plant. Minister Gordhan only stated to the leader of the opposition party, as a matter of courtesy, that he should work with the DPE so that his visit can be scheduled properly and receive a proper briefing. However, those sorts of courtesies are not taken into account when there is political grandstanding.
Ms Derby took over the response.
On the decline in the numbers of locomotives to be procured or repaired impacting Transnet’s operations in the passenger movement space on the 315 locomotives, she replied that the long-standing locomotives which are effectively broken and need to be fixed are 315 as of the 21st of November. The locomotives Transnet has in the fleets are 1971, this is inclusive of the 315. The R2.9 billion that Transnet has requested from National Treasury is to help Transnet fix the 315 long-standing locomotives so that they are back in operation.
On what the total number of locomotives would be if money was not a constraint for Transnet, she replied that the network is being opened up for third-party access. Therefore, Transnet cannot plan as though it will move every single inch of the volume that is available in the system. However, if you go by the fact that Transnet effectively has 1971 locos, we are looking to close off with Chinese Railway Rolling Stock Corporation (CRRC) as well as Alstom, to take final delivery of their orders. That would get Transnet to at least 2230 locos in total. Bearing in mind that the newer generation of fleets has greater traction power. With the newer fleets, fewer locos are needed per train set.
On the decline of capital investments, she replied that the slide that shows the Committee what the debt and revenue situation is showed that there was less free cash available to service the debt on the one hand and to fund expansion programmes on the other hand. There is no other fancier reason as to why there has been a decline in capital investment from Transnet. The expansion of Durban port to a 11.3 million TU container terminal is a significant investment that will have multiplier effects over a period between 10 and 12 years. Transnet should be able to get to full capacity. Transnet also has the LNG terminal in Richard’s Bay which has already been advertised. Another expansion is the terminal that will be built in Gqeberha which is also an additional capacity expansion. In the case of TFR, with the building of the new manganese terminal, Transnet would need to expand rail capacity by another 6 million tons. A lot of expansion projects have been planned and a lot of them are in partnerships. These will ensure that there is more cash brought into the business. The intention is to use that cash to modernise the equipment at the port.
On loss through criminal activity, she replied that Transnet has a big team that helps to do the investigations. There is a lot of success in fuel theft and cable theft. Arrests are being made. The issue is Transnet’s ability to ensure that people are imprisoned or fined once they are arrested. Someone was recently sentenced to 15 years. More people are arrested but many do not go through the court system. That remains a concern for Transnet.
Ms Nonkululeko Dlamini, Group Chief Financial Officer, Transnet, stepped in to answer finance-related questions.
She stated that Transnet’s financial performance is linked to its operational performance. Therefore, some of the work that was highlighted in the slides that the GCE shared is critical in ensuring that Transnet gets to its full operational potential. This will ensure better profitability and stability at the bottom line. The performance of some business areas is currently improving but resolving the locomotives issue will certainly drive better performance, profit, and stability levels.
On the borrowing levels, she replied that the target is “to remain between 40% and 50% of gearing with the balance sheet at any point in time to ensure that we continue to leverage and use money on balance sheet”. Transnet does not want to get to uncomfortable levels that make it difficult for it to borrow further. As a result of that, a strategy of paying the history of the debt that is already on the balance sheet is being driven. Transnet is not generating enough money from operations at the moment to be able to pay all the debt. Transnet then goes and re-finance some of the debt that is maturing so that it requests that this is paid later in time whilst it continues to fix the operations and look for more cash generated by the business. The borrowing would continue but Transnet is then looking at the balance sheet approach so that it can continue to support the country’s GDP requirements. Transnet will continue to raise debt but the level of debt is being monitored closely. The level of debt is planned to go down, but as Transnet contends with global challenges, the level of debt does not go as low as Transnet would ideally like it to be.
On whether Transnet is underinsured and this was exposed by the floods, she replied that Transnet has a process with its insurers where they review their insurability and the level of insurance. It is a balance between the premiums that need to be paid at any point in time and the expected eventualities as disasters. The Durban floods were at a level that is difficult to ensure and expect. The level at which Transnet has insured has contributed positively to closing the gap. It is not a complete position of being underinsured but rather an issue of an event that was significant for the region.
Adv Sandra Coetzee, Chief Legal Officer, Transnet, stepped in to speak on the climate of insuring state-owned enterprises and their assets.
She stated that the issues raised by the Committee and the statements of the GCE are very pertinent to all SOEs in South Africa. Transnet has been experiencing a very constrained insurance market as a consequence of residual perceptions and diminished governance during the state capture period and the high degree of fossil fuel processing in Transnet’s operations. This would apply equally to Eskom. To the extent that Transnet transports fossil fuels, we find that the international insurance market is reticent to engage with Transnet as the extent to which we have exposure to fossil fuels directly influences their ratings in the international market. She is not suggesting that access to insurance is impossible but the market has been narrowing down for state-owned companies as a result of the high degree of fossil fuels in our operations as well as perceptions associated with state capture. As a result, Transnet’s first loss part is increasing and the extent to which insured events are covered, those thresholds are decreasing quite dramatically with the cost of insurance conversely increasing.
Ms Derby stepped in to respond to more questions.
On the insurance issue, she replied that looting happened last year, and Transnet was subsequently hacked. This was not the first time Transnet suffers damage due to flooding. It happened in 2017 as well in KZN. Insurers look at the size and extent of Transnet’s claims. Transnet has to balance the cost of insurance and set aside additional funds in order for them to fund themselves should an event of this sort happen again. This is a constant struggle. Transnet is constantly re-looking at how much investments Transnet has to undertake vis-à-vis what it gets from the private sector.
On the turnaround plan for Transnet and the article on South Africa losing R3 billion in revenue at the ports, she replied that there is a turnaround at the ports. It is unfortunate that these headlines and stories get told without context. Transnet was not asked for its comment in the City Press article. The use of Maputo Port in the South African system is important. For Transnet, this means the most efficient route to move chrome and magnetite from Limpopo would be right from Steelpoort across the board and through to Maputo. This is not necessarily a loss for Transnet. Transnet looks at the benefit of having to carry a smaller rolling stock in the form of locos and wagons. The partnership with Ports and Railways of Mozambique (CFM) is crucial because regional integration is an essential part of South Africa’s economic strategy.
Mr Jabu Mdaki, Chief Executive Officer, Transnet Port Terminals, stepped in to speak on Transnet’s port operations.
He stated that Transnet operates the largest terminals within the port system. Transnet handles the containers auto, the bulk, and the break bunker. It is crucial for Transnet to get to pre-Covid-19 levels. Transnet’s current volume and performance are reaching that level. A lot of work is being done to ensure that there is a turnaround at Transnet and rebuilding inefficiencies. One cannot ignore the fact that Transnet experienced floods, and even then time-sensitive commodities such as agri-exports were still serviced and there was a growth of 3.95% in that sector. Transnet was able to get the volumes out despite the floods as part of its resilience. This is above what Transnet achieved last year when they still experienced unrest and hacking. Transnet saw a growth of 12% on the time-sensitive commodities.
On the volumes and turnaround, he replied that Transnet is seeing an improvement in their ability to service the vessels as well as the other associated industries. Transnet has just come out of a period of strikes and what has been important was how Transnet can recover from that period. That talks to Transnet’s resilience and efficiency. Transnet was able to recover within the container ports within the space of two weeks. This would include the Durban, Port Elizabeth, and Cape Town ports. Pier two in Durban is still being recovered. From the projected 90-day recovery, Transnet has been able to reduce this to just over 50 days. A lot of improvement in the port system is showing still. The turnaround time for vessels is a main focus area. It is important for Transnet to recognise that it works in a supply chain environment. Transnet needs to maintain a close relationship with its associated industries. A lot of trucks are coming through our its systems. We cannot continue to have trucks that concentrate on operating during the day, after hours, and on weekends. The ports are underutilised and this contributes to congestion at the ports. These are ongoing discussions that Transnet is having with the industry because the entire port system needs to be able to turnaround for Transnet to realise the efficiencies it desires. He assured the Committee that Transnet can handle the volumes required by the country, Transnet is able to improve on the efficiencies, and Transnet is receiving positive feedback from the industry.
Ms Derby returned to answer additional questions.
On BEE and Transnet’s total rated expenditure, she replied that Transnet spends about R29 billion. 43% of that amount goes to BBBEE companies, 25.4% is spent on women-owned companies. Concerning procurement, Transnet still applies preferential procurement because it was able to get the board to accept the policy that aligned with the original Preferential Procurement Act after the court case that stopped National Treasury. Transnet is working on access to capacity on rail for black-owned businesses, women-owned businesses, and emerging players. As a result of the 1987 decision taken by the De Villiers Commission which stated that the government must stop investing in rail infrastructure and increase investment in road, Transnet has had to approach the private sector for funding for capacity on rail. The private sector adds conditions when agreeing to fund. The conditions would either request a long contract for certainty or reduced tariffs. A long contract obliges Transnet to respect the contractual law in South Africa. More black emerging players can be brought in when capacity becomes available. The sooner the question of funding the infrastructure is solved; the sooner Transnet will be able to drive the inclusion of black players in the economy. Rail is about half the price of road. That is despite the fact that rail is fundamentally subsidised relative to road.
The Chairperson asked about the attempt to expand the port for access to smaller miners. What is happening with that?
Ms Derby replied that Richard’s Bay is one of those historical creations that have to be dealt with. The Richard’s Bay Coal Terminal (RBCT) terminal is owned privately by a lot of the mining companies. The Department of Mineral Resources and Energy (DMRE) secured Quattro in the late 2000s which is a four-million-ton allocation. The total capacity that they are able to move right now is 91 million tons at the port. Transnet was supposed to get up to 81 million tons on rail but is currently at 71 million tons. If the investment with Eskom on electrification had been closed off, Transnet would actually end up at 81 million tons. Transnet decided that it will not exceed 81 million tons partly for reasons indicated by Adv Coetzee around funders. Currently, no funder is interested in funding anything that Transnet has that uses coal. Therefore, no money is available. As a result of the unavailability of locos the 22Es for the coal lines, Transnet declared a force majeure with the coal mining companies as a result of the unavailability of locos to say that it can only move 16 million tons. The contracted tonnage Transnet has with the RBCT miners was that the minimum volume that Transnet would move for them would be 71 million tons or 74 million tons. Only when this 71 million tons has been moved is Transnet at liberty to bring additional capacity into the system. The contract was renegotiated as a result of the force majeure and the terms stand at 60 million tons. There is now an obligation to meet the 60 million tons. Transnet will be in a position to expand and bring in black players once the 60 million tons have been moved, including the 14 million tons for Quattro users. The team at Transnet Freight Rail (TFR) would be more than happy to help the Committee understand how the contracting works and what Transnet is trying to do to ensure that there is space for emerging miners and black players, whilst accounting for the risks of failure on their part and the risk Transnet is able to carry going forward.
On skills development and access, she replied that Transnet has extensive infrastructure for skills development. Transnet has a training centre in virtually every town that it operates in. Transnet has cut down on training due to its financial performance over the years. There is a problem with people expecting to be hired after they have been trained and they would like to see them hired within the industry. In terms of the rail sector, there will be more than just Transnet or PRASA as potential employers because train operating companies will also be able to hire the capacity that Transnet would have created.
On the case study on Germany, she replied that Transnet focused hard on Germany as a model because Germany remains the most robust export-orientated economy in Europe. China is probably the strongest exporter. What you look at is that under the World Trade Organisation (WTO) you cannot directly subsidise the production of the commodity, therefore the Germans directly subsidise the input cost that manufacture’s face. Logistics and transportation are significant input costs. That is the reason why the government gives 63 billion euros. That is why they cross-subsidise the economy in that fashion. That is why Transnet went for that model. Transnet was absolutely clear that it was not going to follow the British model because it is a franchise model with a single rail operator.
On whether another company is being created, she replied that this is not at all what is happening. Deutsche Bahn is still a single company, inside Deutsche Bahn there is still ring-fencing and infrastructure division, then there is operations. In the case of the Germans, Deutsche Bahn runs freight and passenger. This is not the case for Transnet. She agreed that there needs to be a better working relationship between Transnet and PRASA on infrastructure maintenance so that the standards are kept at the same level. It is the most regressive thing in South Africa that there is a rail system that is not able to move workers.
On the anticipated participation for the private sector and black companies, she replied that Transnet’s anticipation is that they would be at 60%/70% of operations on rail with 30% or so being for the private sector. There is an argument in the press that the two years are not sufficient for the slot sales that Transnet went out on. Transnet is aware that the two years is not the ultimate owning number but it is looking to design the system in such a way that it avoids the exclusion of emerging players and black players. One of the things that Transnet has done is to move fast toward the establishment of a leasing company. Transnet makes sense as a basis for a leasing company as it has the most wagons and locomotives that would be fixed and made available as lease stock to operators. What Transnet was doing with the two years was to understand what changes would need to be made internally at Transnet to be able to sell slots. There is an amazing appetite in the industry. Transnet will be able to indicate a totally different framework within the next year or so. Transnet anticipates that ten-year contracts will be available. Transnet does not see a separation and does not see it as incompatible to have the government funding infrastructure with TFR continuing to be the integrated rail operator. The national paper also sees the establishment of an economic regulator. The economic regulator is the ultimate arbiter on whether a third party has been fairly or unfairly priced. An ideal situation is where an infrastructure operator sets a price for the sale of a slot and it gets sold at exactly the same price whether it is bought by Transnet or a third party. This is important for Transnet as it leads to a complete view of the revenue and infrastructure and operations-related assets are optimised without constraining the industry due to low revenue. Transnet hopes that there will be a larger shift from road to rail going forward.
On the estimated loss as a result of the strike, she replied that Transnet calculated for itself. The loss was sizeable. An 11-day strike took away quite a bit of revenue on its side. This is a closed period so she cannot indicate those kinds of figures yet but this question can be revisited once the closed period is open. The workers experienced significant losses because of the no work no pay policy. Fortunately, Transnet was able to close the strike. In the end, having a three-year agreement is much more useful and creates certainty for Transnet and the workers.
On the court cases issue, she replied that these have been systematically worked on. Transnet can respond appropriately once they have received guidance from the courts.
On the tariffs charged by Transnet, she replied that, at some level, it is only because of the tradition of rail and heavy. Part of that challenge is that Transnet is a class A railway in large measure. Therefore, the idea of using weight as a basis for the tariff makes sense. Transnet basically cross-applied that model on the pricing to containers and wagons. There is nothing in the law that has stopped Transnet from ensuring that its tariffing methodology is one that accounts for the higher value-added commodities which are low weight. No opportunity is better than this one where there is a process to establish an economic regulator. Then we can approach the economic regulator and have a new model. The Spanish are struggling with the issue of weight vis-à-vis value for pricing of tariffs.
On what is happening with the Blue Train, she replied that Transnet was recently approached by the Department of Transport about a year ago. They indicated that Transnet’s mandate is to move freight and theirs is to move passengers. Therefore, the Blue Trains are effectively with PRASA and the Department of Transport.
On derelict vacant property all over the country that belong to Transnet, she replied that Transnet dealt with a little problem where, due to clause 217 of the Constitution which state that procurement must be transparent, open, and fair, it creates a bit of a consternation. A solution has been found between listing all of the vacant properties that belong to Transnet on its website. Transnet is also increasingly putting up signs at derelict and vacant buildings that advertise that the properties are open to be leased. Transnet is working fast on this. There are still properties that are between PRASA and Transnet which were tied up in the transfer when PRASA was created. The ultimate list of properties between PRASA and Transnet has been drawn up recently. All of the stations where there were passenger trains would be shifting to PRASA completely.
Mr X Qayiso (ANC) asked about the 1987 Commission recommendation. Given the economic recovery plan, is it not wise that Transnet re-work that it should not counter the intention of the economic recovery plan that there should no longer be investment or infrastructure in as far as rail is concerned. It should rather focus on road infrastructure. The message there reverses all the opportunity for the economy to grow. On cable theft, there was a recommendation from the Council for Scientific and Industrial Research (CSIR) that Transnet has not engaged them on security. Why is Transnet not engaging CSIR?
Ms Derby replied that this is why Transnet supports the new National Rail Policy Paper because it reverses the 1987 decision by stating that the government must fund infrastructure. Transnet is working closely with the Department of Transport to figure things. They state what the maintenance should be over a period of time.
She replied that Transnet works closely with the CSIR on all its security interventions.
The Chairperson stated that the Special Appropriations Bill was presented by the Minister of Finance during the MTBPS. This was a money bill proposal to Parliament that requires parliamentary approval. The Bill was referred to the Committee for consideration. As part of this process, the Committee engaged with the entity. Once the Committee is done, it will produce a report that will be referred to the House, either in support or against. By next Thursday, the report would have been submitted to Parliament about what it thinks, if there should be any conditions and all things that need to accompany the bill. The National assembly would then have to consider the bill and if passed, it will be referred to the NCOP.
He affirmed the importance of Transnet in the country.
He wished the Transnet team good luck.
Consideration and Adoption of draft report on the oversight visit to the SANDF and related entities in the Gauteng province from 19 to 22 April 2022
The Chairperson called for a move for the adoption of the report.
Ms Peters moved for the adoption of the report. This move was seconded by Mr Mathafa.
The Committee adopted the report.
Mr Qayiso raised concern over the alignment and numbering of the pages. This was noted by Mr Mashile.
Mr Mashile announced that the next meeting will be on Friday. The Committee asked admin related questions about their trip upcoming trip.
The Chairperson adjourned the meeting.
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