Transnet update on overall business, job creation, skills development, SMME support

Meeting report

The Chairperson said the Committee would be briefed by officials from Transnet on the challenges faced by Transnet Freight Rail (TFR) and the recent announcement that it would concession the country’s most important corridor -- from Durban to Johannesburg -- to a private sector company for 20 years. He wanted to know what impact this decision would have on the workers at TFR.

Transnet update on its overall business

Ms Portia Derby, Group Chief Executive Officer ( GCEO), Transnet, briefed the Committee on the current state of the entity's operations.

She said Transnet’s primary goal was to support economic activity in the country by efficiently moving commodities and goods to countries to and from the Southern African Development Community (SADC) at the lowest cost. Its mandate also required that it play both a developmental and commercial role. However, the entity’s ability to fulfil its mandate had been constrained by, among other things, the 1 064 locomotive contract suspension; decreased locomotive reliability and availability; increased non-operating locomotives; dilapidated infrastructure; as well as theft and vandalism.

A 1 096% spike in cable theft over the past five years resulted in escalating repair costs, which with the accompanied vandalism to critical infrastructure, had negatively impacted TFR’s network availability, thus leading to a 550% increase in the movement of tonnage lost. Revenue losses due to operational disruptions caused by the security incidents from 2017 to 2022 amounted to R4.1 billion. This was a major contributor to TFR’s increasing inability to generate sufficient funding to re-invest via cash flow from its operations.

Transnet had implemented certain initiatives to improve its rolling stock locomotives, including the return of 60 Wabtec diesel locomotives, and approaching the market and appointing an alternative original equipment manufacturer (OEM) to support the return to service and maintenance of locomotives. This would improve the availability and reliability of the fleet, as well as improve the turnaround time for the supply of spare parts and materials.

While Transnet had a theoretical slot capacity of 443 million tonnes per annum, the available capacity was currently 229 million, which it struggled to meet because of its operational challenges. Considering the challenges it faced, and their consequences, Transnet had decided to go out to the market and seek qualified parties to enter into an operating lease with it for the operation of the container corridor between City Deep (in Johannesburg) to Durban. For a period of 20 years, the lessee would be responsible for the container corridor’s operations, train operations, infrastructure, rolling stock maintenance and investment.

A minimum investment obligation of R5.5 billion from third parties would be required to rehabilitate and upgrade the rail network and rolling stock assets.

The Chairperson asked if the chairperson of the Transnet Board had any introductory remarks to make to the Committee before the presentation.

Mr Sydney Selepe, Company Secretary, Transnet, tendered an apology on behalf of the chairperson of the Board, who he said had a doctor’s appointment. 

The Chairperson opened the floor for discussion.

Discussion

Mr N Dlamini (ANC) asked Transnet why the private sector would want to invest in slots offered by the entity, as they had been said to be unprofitable. What steps would a private sector partner take to correct the challenges faced and make the slots profitable, that Transnet had not yet implemented? Also related to this point, he asked whether the National Ports Act 12 of 2005 had hindered Transnet from implementing corrective measures, thus making it easier for the slots to be given away to the private sector.

Did Transnet plan to also involve the private sector in managing the Durban Container Terminal Piers 1 and 2?

Would the private sector be asked to assist the entity in implementing a billing system for commodities transported from or to the container terminal, making it more profitable, as the entity had struggled to do so? This was especially important, because the container terminals did not carry the same type and weight of goods. Usually, Transnet would bill per ton (of a set of goods) loaded. If it was the case that the private sector’s intervention would make the container terminal more profitable, why had such a billing system not been put in place by Transnet?

He pointed out that during an oversight visit, Transnet had indicated that there was no back-of-port facility in KwaZulu-Natal (KZN), but recently a warehouse had been erected in the area. As such, he asked how Transnet had supported the operation and how much revenue it had generated from it thus far.

Prior to the separation between the Passenger Rail Agency of South Africa (Prasa) and Transnet, goods were moving on freight rail to various warehouses, but since then, it had not been clear who was responsible for the maintenance of the freight lines and the cost. Both entities owed each other money, and it remained unclear who would need to make the first payment, and when. Following on the point, he asked what revenue was generated from the transportation of goods by a locomotive from the north to the south coast, and what involvement Transnet Engineering (TE) had regarding the provision of spare parts for the locomotives. It seemed to him that there was no imminent solution to this issue.

Concerning Transnet’s model for procuring spare parts for locomotives, he asked if the engineers at TE could not replicate the parts, as was done in China, so that it did not have to rely on companies to obtain them. If the answer was no, what cost-cutting measures had been implemented to deal with the lack of spare parts? He questioned why Transnet had said it did not have funds when it had issued tenders to procure spare parts.

With the unbundling of Transnet into separate operating units, no one union would be able to organise around the entity. He asked what labour’s view on this matter was.

Mr G Cachalia (DA) -- after noting that at the bottom of the presentation, it said ‘confidential information’ -- stressed that no information brought before the Committee was confidential

He argued that most of Transnet’s issues included debt operations and significant incapacities caused mainly by cadre deployment. While he accepted that there were historical issues derailing progress, he disagreed with the argument that low-economic growth was a contributing factor. All the issues faced by Transnet should be resolved by the executive management.

Referring to the agency’s debt, he highlighted that Transnet had been provided with a $1 billion bond at an interest rate of 8.25%, which would be used to cover two existing bond repayments of R1.1 billion on 7 and 13 February. This bond formed part of a $6 billion global medium-term loan programme. Considering all of this, there had been no "green shoot" signs of progress, as previously mentioned by the Minister.

Transnet had recorded a profit only because its debt had been deferred, with 11 loans still outstanding that required interest cover of 2:5, which the entity could not meet. On this point, he asked what the cover provided by Transnet needed to be, and whether it would be able to realistically meet the target against a background of rising interest rates and a volatile rand. Such a situation showed that Transnet was being held to ransom by internationally-denominated debt, which was troubling. Concerned by this, he asked why local investors had not invested in the agency.

Transnet’s Standard and Poor’s (S&P's) 500 global rating was currently BB negative – with a negative output – which was three levels below investment grade. Furthermore, the entity had been given three months to address its liquidity and refinancing risks. While he did not believe that the entity could meet this challenge, he asked what its views were.

He said the TFR required R111 billion over five years to meet its debt obligations. As part of this effort, it had chosen to acquire a private partner to invest in the Durban-Johannesburg corridor to cover rolling stock and take over the 3 400 staff members.

He asked for an update on the agreed upon proposal between Transnet and Traxtion.

He asked who was expected to cover the costs of providing safety and security of assets, particularly given that 100 km of cable was stolen each month, contributing to the fall in freight capacity from 430 million tonnes to 180 million, despite commodity prices being 90% higher in dollar terms at the end of 2022. Furthermore, he asked how the road-to-rail policy would assist, given all the challenges faced at the entity. 

Still referring to its challenges, he asked why Transnet had decided to decrease its 2 000km rail network by at least one third, to prioritise profitable cargo deals. How did it plan to stabilise and deal with theft, vandalism, debt, labour challenges, procurement, cadre deployment and other governance problems, without splitting the monopoly? Who would be responsible for these tasks?

He then asked a quick set of questions:

• In global terms, how much did Transnet require to expand and sustain its operations?
• Which of the other state-owned enterprises (SOEs) was it looking to collaborate with?
• How sustainable were the subsidies provided by the OES to sustain local businesses?

He recommended that Transnet should place emphasis on securing the nation’s logistical needs, and accelerate privatisation.

Ms O Maotwe (EFF) said the Committee had only heard complaints regarding the 1 064 locomotives in the presentation, and not much on what was currently taking place in the running of Transnet. 

She asked for clarification on Transnet’s decision to partner with the private sector in moving commodities along the Durban-Johannesburg corridor. Further, why had Transnet decided to move away from its core mandate by taking this decision?

Was it not envisioned that there would be challenges along the railway lines once the 1 064 contract was cancelled? Had Transnet applied its mind to the consequences this would have for the country?

She asked why the salaries of Transnet executives had not been deducted, given that the entity had reported a 550% loss of tonnage. Such a performance was a reflection of their poor leadership.

She wanted to know how the privatisation of Transnet would assist its operations and the regaining of volumes lost, as theoretically, they should be at 440 million tonnes. In addition, what were the reasons behind this loss and what would be done to address the decline?

She asked the GCEO what her legacy would be, as she had thus far not demonstrated any capabilities or a capacity to do the work required to turn around the agency’s fortunes. She said that both Transnet and its workers should come together to address their issues.

Ms J Mkhwanazi (ANC) asked what the benefits of privatisation were, and how it aligned with the mandate of SOEs.

She asked for clarity on the plan for the shift from road to rail, as the trucks had been damaging the road infrastructure and contributing to the increase in accidents, what plans were in place to address the cable theft, and what consequence management would be implemented for those responsible.

Mr E Buthelezi (IFP) said that having listened to the challenges faced by Transnet, he anticipated that a National State of Disaster would be called for the entity as well.

Mr S Gumede (ANC) commented that Transnet had moved away from its developmental goals towards private capital due to its complexity. He asked Transnet to provide a programme on how and when it anticipated addressing all of its challenges.

Referring to the unqualified audit (which was caused by the exemption), he asked whether the entity would achieve a qualified audit opinion going forward, considering that the exemption would last for three to five years.

Regarding skills development, he argued that the entity would not achieve its target of training and developing 27 000 individuals.

Concerned by the number of issues faced by Transnet and its capacity to address them, he requested that the Committee schedule another meeting with the entity where it could be provided with all the facts and the turnaround plans.

Mr F Essack (DA), referring to the rail security, asked what sustainable plans had been put in place as a matter of urgency to mitigate the number of rail security incidents, which had led to losses amounting to R4.1 billion, and an increase in the loss of tonnage by 550%.

There had been a failure to resolve critical, strategic and operational challenges, with the inefficiency of the rail network forcing companies to shift their goods from rail to road. Mr Essack asked how Transnet planned to deal with these challenges, as they had caused damage to its reputation.

With the decline in cross-border sales, he asked what would be done to improve cash flows and cover the expenses. He also wanted an update on the progress of the agreement to allow private sector participation in the Durban Container Terminal.

Regarding the fuel tests on the pipelines, he asked whether Transnet had decided on a way forward on this matter.

Had consequence management been instituted against officials responsible for irregular, fruitless and wasteful expenditure (IFW)? He noted that there was no mention in the presentation of the Auditor-General's  (AG’s) findings for the 2021-22 financial year.

He asked if Transnet was confident of honouring its debts and loans, or if it would request another bailout from the National Treasury (NT).

Ms R Komane (EFF) felt that it seemed as if Transnet, through its decision to lease out the corridor, was heading towards privatisation.

She said that very little had been said about the progress of Transnet’s intervention with law enforcement agencies (LEAs) to tackle cable and diesel theft.

She also hoped that Transnet would manage to resolve all outstanding issues amicably with the workers. Transnet should return to the Committee and brief it on the measures it had taken, and what the results have been in this regard.

Regarding slide four, where it had been mentioned that 15 locomotives had not yet operated since delivery, she asked what had been done to ensure that the locomotives were operational, as this had been a long-standing issue which had even been mentioned during the Committee’s previous oversight at Transnet. Why had it taken so long to resolve this issue?

She pointed out that no consequence management had been implemented against senior management responsible for the IFW expenditure.

She asked what would be done to address the 550% increase in the loss of tonnage, particularly as it was a problem that had emerged under the current executive management’s tenure. 

Like other Members, she called for Transnet to return to the Committee and brief it on plans such as road to rail. She stressed that Transnet had forgotten its objectives and mandate.

Ms V Malinga (ANC) said she was covered by her colleagues.

Ms J Tshabalala (ANC) expressed her frustration with Transnet’s decision to advertise a 20-year concession for the Durban to Johannesburg container line. This action illustrated that the executives at the entity did not understand their jobs. Moreover, it highlighted that Transnet was now ignoring its developmental mandate, leaving the ruling party to be ridiculed by the public and voters, who had said that it had failed.

The ANC had not instructed Transnet to privatise, as it was aware that SOEs were meant to be developmental. She insisted that officials at Transnet needed to recognise which party it worked for.

She also took issue with the sale of coal to overseas buyers, and called for the Integrated Resource Plan to reflect coal as a strategic resource for the country. The public needed to be informed that it was private companies selling coal to international buyers, and not the ANC-led government. In this regard, she asked what was being done to resolve the challenges involved in the movement of coal by locomotives to the port.

She then posed a series of questions to Transnet:

• When would the newly-created Transnet National Ports Authority (TNPA) have its own Board, and how far along was the unbundling process?
• What measures had been put in place to improve female representation at the entity?
• What had the challenges with the operating divisions been during this financial year, and how would they be resolved within the same period?
• Had the executive management signed performance agreements, particularly in the face of a reduction in Transnet’s operating capacity?

She said the Transnet group had agreed to resolve the issues with procurement. Yet, these matters continued to affect divisions such as TE which, despite the several concessions provided by National Treasury (NT), continued to find itself in a poor financial and operational position. With its various issues, TFR may contribute to the downfall of the group.

To better understand Transnet’s challenges, she proposed that the Committee institute an inquiry into the entity.

She disagreed with the movement of rolling stock maintenance from TE, which would require that 70% of the revenue be shifted to TFR, as it would most likely lead to its closure. This was a poor strategy, leading to the group losing its engineering capability.

No clear strategy currently existed on how to address the material challenges faced by the group, which would allow it to deliver on its mandate. If trains could not run because of the inability to procure spare parts and conduct adequate maintenance on the fleet, Transnet would be left with no other option but to invite the private sector to assist it with its operations.

She feared for the employees at Transnet, and requested that the executives fix the mess they had created for the ANC.

The Chairperson asked if the Acting Director-General (DG), in the absence of the Minister and Deputy Minister (DM), could explain why local content was not part of the shareholder compact between the Department of Public Enterprises (DPE) and Transnet.

What was the policy mandate regarding the developmental objective of the current government, particularly in relation to localisation and beneficiation?

He described the decision not to allow the officials in Gqeberha back to work after a court had found them not guilty of the charges laid against them, as oppression of the highest order.

Ms Jacky Molisane, Acting DG, DPE, confirmed that Transnet had transformational targets for women-owned companies, Broad-Based Black Economic Empowerment (B-BBEE), and persons with disabilities. 

Transnet's response

Ms Derby said that she understood the frustration shared by Members, and agreed that a separate meeting be held, so that Transnet could report on each operating division.

The entity was also frustrated that this IFW expenditure continued to occur, and had implemented measures to ensure that it complied with the Public Finance Management Act (PFMA).

Referring to Transnet’s financial performance for the year under review, she said its revenue primarily relied on the running of locomotives, with the TFR constituting 47% to 50% of the group’s revenue, so if it was not operating properly, then the group would be in trouble. Other operating divisions, such as Transnet Pipelines (TPL), Transnet National Ports Authority (TNPA), Transnet Port Terminals (TPT) and Transnet Properties (TP) were able to generate enough money to fund their own operations and to make a contribution to the group.

Referring to the question on Transnet’s loss in tonnage, she said the idea of third-party access was first introduced in Transnet’s approved National Railway White Paper. At present, total capacity amounted to 229 million tonnes, which Transnet was unable to move at the moment, so it had to rely on third parties to do so.

She confirmed that the entity had struggled to implement an efficient billing model. It had engaged with other rail operating companies on how best to deal with the problem of pricing container usage, as they were used to storing different types of goods. Transnet needed an agreement with the government to price it on the back of the goods stored in the containers.

Responding to the question on whether Transnet intended to approach NT, she said that the entity had to fund itself from its balance sheet, so it approached the government only regarding funding for infrastructure maintenance. In that case, it ensured that a logistic system with the least costs was used.

Ms Sizakele Mzimela, CEO: Transnet Freight Rail, clarified that the 550% increase in the volumes lost was related to losses resulting from security incidents – with losses increasing from 1.2 million tonnes in 2019, to 6.3 million in this financial year – and not a decline in the overall volume movements. Presently, the system had the capability of moving 430 million tonnes, but the entity had to take into account the fact that the maintenance done on the lines and the separation of trains when they travelled on the lines also reduced capacity for a certain time. TFR’s best performance on volumes occurred in the 2017/18 financial year, where it managed to deliver 226 million tonnes. However, there had been a 32% decline in revenue in the last two financial years, with the bulk of that related to the decline in the number of locomotives.

Regarding the Durban-Johannesburg container corridor, she explained that while it had been making losses since 2016/17, it remained critical for the entity’s road to rail project. It currently competes with the trucking services that transport goods on the N4. One of the reasons Transnet was sitting with a market share of rail below 30% was because the system remained unreliable due to the continued underinvestment in infrastructure, which had eroded over time. Moreover, it was also the corridor which experienced the highest levels of theft and vandalism.

Still referring to the corridor, she said that in addition to the challenges it faced, Transnet required a freight movement logistics system which catered for the first and last mile of delivery. Many of Transnet’s customers were interested in it picking up goods at their warehouses, and delivering them – which was where it had competition with trucks. Due to these matters, Transnet had to go out to find a partner to assist it, who must, amongst other things, demonstrate that most of their goods would be shifted from road to rail.

A significant amount of investment was required in the corridor to deal with the infrastructure backlog, high debt levels – the partner must have access to cheap capital to do maintenance – and to be responsive to customers transporting goods on the road. Before settling on this option, the executive had looked at various options, such as providing a subsidy of over R9 billion for cargo moved. 

Responding to the question on the rate per ton versus how they billed on the container corridor, she said Transnet currently billed per box, which was a tariff on either a light or heavy box. Furthermore, it had trialed a block train, where it charged a customer for the purchase of an entire train.

She added that Transnet required the right level of investment to better deliver on its mandate,.

Ms Nonkululeko Dlamini, Group Chief Financial Officer, Transnet, said the entity was pleased with its performance results in September, with divisions such as TPT and TNPA recording improvements, and it was on track to get back to pre-Covid operational levels. TFR had performed less well than expected, which affected the group’s overall performance.

Referring to the questions on Transnet’s borrowings, she explained that the entity still worked very closely with local financing institutions -- for instance, both the South African banks and developmental finance institutions (DFIs) continued to fund it. However, considering the funds required, local markets were not enough to cater for its requirements, so many years ago, Transnet had set up the international bond framework through which it had managed to raise R1 billion in 2012. 

Transnet’s funding strategy entailed that a minimum of 20% of its debt repayments must come from its operations, so operations remained important in reducing the debt burden. As it could not always pay back in full when the funding was due, the entity had to refinance the debt. She clarified that the recent fundraising effort had been made to raise money to pay debt due in February.

The interest rates that the entity had to pay were determined by current market conditions and the credit assessment done on Transnet by the lenders it was working with.

Presently, Transnet was monitoring its borrowing levels to ensure they did not become unmanageable. Both the executive management and the Board had agreed to continue funding from operations and from raising money that had been borrowed, whilst making sure the latter was not excessive.

She explained why Transnet borrowed from international markets and said that the entity did not have the capacity to raise the funding needed in domestic markets. It had internal policies to monitor borrowing, as the entity did not want too much debt, which was impacted by foreign exchange movements. She pointed out that at the moment, not more than 35% of Transnet’s R125 billion borrowing debt was foreign-borrowed.

Transnet did work with the SA bond market, with the asset managers consistently engaging with the entity. In the previous year, Transnet had managed to raise a bond from the domestic market.

She said the rating agencies were monitoring Transnet, as they were concerned that it could default on its $1 billion debt in February. She confirmed that Moody's had issued a report showing that Transnet was stable.

She told Members that the next significant maturity was in November of this year, with the other payments due having been catered for in the entity’s budgets.

Concerning the question on the cash/interest cover, she remarked that Transnet had managed to get this ratio to 2:1, despite lenders requesting it be 2:5. The entity had been able to do so after convincing lenders to waive the requirement. With the assistance of lenders, it closely monitored the ratios, as it was linked to the performance of the business.

Mr Ralph Mills, CEO: Transnet Engineering, referring to the question on the spare parts, indicated that a locomotive had between 4 000 and 6 000 parts. During the manufacturing locally of the locomotives, Transnet referred to the local content prescripts which required that 55% of diesel and 60% of electric locomotives' manufacturing was localised. This was also impacted by the demand in turnover for specific parts -- for instance, cab units were not replaced on a regular basis, although they were done locally.

One of the other challenges was related to the different number of locomotives and OEMs supported. As there were 23 different types of locomotives from 12 different OEMs, standardising between them was difficult because a sufficient number of components in order to localise them effectively was required. Currently, Transnet is looking to standardise a component level through, for example, taking the broad spectrum of diesel or electric locomotives and standardised compressors. The entity had conducted an exercise on that recently, where it had used the same compressor for three different types of locomotives.

A serious challenge for Transnet was its lack of access to certain intellectual property (IP), for example, to create new diesel engines for locomotives. To resolve this, the entity was risk-engineering some of the areas, but access to certain electronic power systems which act as control systems of locomotives, was difficult. If one did not obtain access to the core software, then there would be challenges with powering the locomotives.

As a solution to this, Transnet had initiated 118 reengineering projects, 69 of which had been completed across its three CRC locomotive fleets, which were from China, and it remained confident that it could complete the rest. Where it could not obtain an easy solution was the updating of locomotive software control systems and power systems, as this required them to be completely stripped. While it was possible to do, as it already had been, it was a long process which took 18 to 24 months.

Ms Derby highlighted that the chairperson of the Board had logged into the meeting. Due to the time constraints, she said Transnet would respond to all the remaining questions in writing.

Dr Popo Molefe, Chairperson: Transnet Board, explained that he had missed most of the meeting as he had a medical consultation. Due to the time constraints, he could not respond to the concerns raised by the Members, but he had taken note of them. Going forward, he assured Members that Transnet would provide greater clarity in its reports.

Referring to the Durban-Johannesburg corridor, he emphasised that none of Transnet’s assets would be privatised. Concessioning some of the assets meant that Transnet would continue to retain ownership of the assets, but for a defined period, it would partner with the private sector to see whether combining the capacities of both would help it to enhance both its investment, particularly in infrastructure, and enhance operational efficiency and share the necessary skills.

He thanked the Committee for the questions asked, and assured them that the Board and executive management were working tirelessly to overcome the material challenges the entity currently faced.          

The Chairperson requested that Transet responds in writing to all outstanding questions posed by the Committee.

Mr Dlamini felt that the presentation gave the impression that Transnet, through its decision to invite the private sector, was looking to create monopolies. Following that point, he asked the Board for an update regarding the issue with Sunrise Company, which was based in Saldanha Bay, after the judgment released by the Competition Commission on its monopoly, and its effect on other companies.

Ms Tshabalala suggested that the Committee organise a joint meeting with Transnet and NT to address the entity’s complaints on procurement constraints.

The Chairperson proposed that the Committee deal with the minutes at the next meeting, as Members had to attend the State of the Nation Address (SONA) debate.

Ms Tshabalala seconded the proposal.

The meeting was adjourned.