Transnet 2022/23 Annual Report; with the Minister present

Meeting report

The Chairperson welcomed everyone present and acknowledged the presence of Mr Pravin Gordhan, Minister of Public Enterprises. He also welcomed Dr M Gondwe from the Democratic Alliance, who was joining the Committee.

Minister’s opening remarks

Minister Gordhan said Members would be aware that the Transnet board had been in place for four months. Since it had commenced its tenure, the shareholder had asked the Board to look into the under-performance in various areas at Transnet, to undertake a diagnosis of the problem, and to come up with some recommendations that would constitute a recovery plan for the entity.

Members would also be aware that the Group Chief Executive Officer (CEO) and the head of freight rail had since left the entity. The Chief Financial Officer (CFO) had also left and taken up another job at Telkom. The President’s interactions with the business sector had constituted three crisis committees, including one on energy, logistics and the finance structure. The Board would be meeting with the President in six weeks to report on the progress thus far.

In the presentation, the Board and the management would focus on the results that they had announced at the 22/23 year-end (31 March 2023), and touch on some of the aspects of the recovery plan, which still had to be processed within the government. This would be an initial insight into the recovery plan, but the Department would return to present a full recovery plan to the Committee.

Transnet Board chairperson’s remarks
 
Mr Andile Sangqu, Chairperson of the Transnet Board, said the Board and management understood and supported the critical work of Parliament in exercising oversight over Transnet. The Board had been appointed in July 2023 and spent the past three months understanding the myriad of challenges the entity was experiencing and charting a path towards recovery. As the Minister alluded to when Transnet released its annual results in September, there was an urgent need to turn around its operational performance.

Transnet must be radically transformed. Operational performance must be optimal, it must develop a new framework for transparency and accountability, it must conduct a management review, embrace digital transformation, develop a rigorous system of controls, and prioritise cost containment. The primary focus of the recovery plan was to develop tactical initiatives to drive volume recovery to enhance rail and port operations. Through the plan, Transnet seeks to improve the availability and reliability of critical equipment and enhance the quality of its assets. This must be seen in the context of the constraints that exist concerning the current quality and availability of moving assets such as rolling stock, ports, marine equipment, and fixed infrastructure assets. A clear element of the plan was to improve maintenance planning and adherence to plans to resolve operational bottlenecks and equipment shortages.

The recovery plan, which was announced on 26 October, takes into consideration several factors, given Transnet’s operating environment, which includes the need to meet existing customer requirements for quality services. Transnet’s continued socio-economic contribution to the broader South African economy was one of the considerations brought to bear in the conceptualisation of the recovery plan. The other pillar was the alignment of the plan to the changing policy environment that was liberalising the rail industry – the National Rail Policy of March 2022 and the Economic Regulations of Transport Bill 2022 -- which were part of what was considered and effected within the recovery plan.

The plan also considered the limited availability of shareholder capital to support the repositioning of the organisation. Transnet was implementing the recovery plan amidst a deteriorating financial position, as attested by the high debt level and a weak liquidity position. Between 2017 and 2018, revenue had fallen from R72.9 billion to R68.6 billion, translating to a minus .94% compounded annual growth rate. In the same period, operating expenses had increased from R40.4 billion to R45.9 billion, translating to a compounded annual growth rate of 2.15%.

Transnet’s total borrowings had increased from R123 billion to R130 billion in the past five years. Due to limited funds, the maintenance backlog had increased to R50 billion. This high backlog led to poor asset health and weak operational performance. Operations had been experiencing a decline in volumes and the most significant decline had been in the rail business. This presented a serious risk to the South African economy, and as such, the National Logistics Crisis Committee (NLCC) was providing Transnet subject expertise and resources to ensure a robust, achievable plan that would deliver the desired results. Transnet participated in the NLCC to enhance operational performance in ports, rail and port terminals, streamlining the procurement procedures and maintaining safety.

On 1 November, the establishment of the Interim Infrastructure Manager was announced, which was part of the initiatives to liberalise the country’s rail network and open the market to third parties with effect from April 2024. This was in line with the National Rail Policy provisions for third-party access to the freight rail network and the establishment of a separate Infrastructure Manager within Transnet Freight Rail (TFR) to create a level playing field for private rail operators.

The Interim Infrastructure Manager would manage, operate, and maintain the Transnet rail infrastructure. They would be responsible for freight rail operations within the country and the region, the haulage of network mainlines and branch lines, yard operations, train safety, rolling stock ownership and management. The Board of Directors of the Transnet National Port Authority (TNPA) had been appointed, providing certainty over the governance and management of this key part of the Transnet business. The appointment of this Board underlined the Board's commitment to provide independence and affirmed the determination to drive policy reform that encourages third-party access to logistics infrastructure.

Ensuring effective leadership remained a key focus area for Transnet, as it needed stable, experienced, and competent leadership and operational management teams as it strives for financial sustainability in the short- to medium term, and to unlock growth in the medium- to long-term. To this end, the GCEO, CFO and TFR Chief Executive positions had been advertised. Further updates would be provided on the recruitment processes.

The next six months were crucial for Transnet as implementation of the recovery plan gets underway. The Board and the Executive Committee (EXCO) were fully committed to the recovery of the operations. They collaborated with stakeholders, including organised labour, employees, government, and the business sector, to ensure the company was stabilised and claimed its rightful place in the economy.

Transnet 2022/23 annual report

Ms Michelle Phillips, Acting Group CEO, said she had been asked to step in after the departure of the former GCEO, Ms Portia Derby. The presentation would cover, among other things, the interventions to stabilise the entity and the improvements towards the end of the year. The important thing was to turn the situation around, but there was a lot of work to be done, such as mobilising the 50 364 workforce, which management depended on for Transnet to deliver.

[See the presentation for details]

The Chairperson welcomed the presentation and noted that Members had hardly concluded deliberations with Transnet in past meetings due to time constraints. Members had been compelled to submit written questions, comments, and written responses. He hoped that would not be the case this time.

Discussion

Mr N Dlamini (ANC) said the report was virtually identical to the first report he read when he first joined Parliament in 2021. The issues reported were not new, and there was not much reported on the solutions in the report. He had visited the Transnet port after the floods in Durban, and had seen the damage that had been caused. He commended Transnet for the work done at the Durban port. It had done all the work to restore the port without procuring any services from the private sector to assist, which was indicative of its capabilities.

One of the issues that had not been ventilated enough was the significant number of Transnet’s employees being poached by private companies, which meant it failed to match and compete with such entities.

Regarding Transnet's revenue, the TFR would be important because of the commodities transported to the harbour. Some would argue that the main corridor linking the port of Durban to Gauteng was not making as much money as other corridors. He heard it was one of the corridors advertised to the private sector, to table slots. Changing the port of Durban to a container port meant it could not compete with the Saldanha, which dealt with other resources. There should perhaps be consideration of a billing model to bill on the value, not on the weight. This was what the private sector already did, and there was a need to ask what the private sector was going to do differently to make the corridor a profit-making corridor, and how that profit was going to be realised. Why was Transnet not doing what the private sector intended to do on that corridor to make profits?

Regarding the poor retention of employees, he was uncertain if Transnet had undergone a process of ascertaining that its employees were fully loyal to the entity. In the past, he had been involved in the unions, and to this day people from his previous life phoned him about their concerns. Had Transnet asked a senior manager involved in the 1 054 locomotive procurement project if he considered his contribution to the projects successful? Was there a relationship with PricewaterhouseCoopers (PwC)? How safe was the information obtained from Transnet by PwC?

In the four months of the Board, how long had it taken to formulate the recovery plan? What challenges had been identified, and how did the Board propose to resolve them? He also asked the Board to table Transnet’s main challenges, and how they would be resolved.

The SA Transport and Allied Workers Union (SATAWU) had once alleged that there were ten tugboats, but the port was using only three or four. The rest were said to be under service, but there were no parts. They had been parked until Transnet procured two from the private sector. These were operated by outside individuals, which meant workers at Transnet were watching these individuals work. This begged the question: what had become of the role of Transnet Engineering (TE)? Transnet had many engineering problems, yet the Committee was not being told how Transnet was assisting and enabling TE to play a role in resolving these issues. Hence, some felt that TE should be put under TFR so that it would be bundled together when the private sector got involved. This needed to be discussed further.

The land claims in Richard’s Bay were reported to be virtually finalised, but what had been the final resolution? Were these land claimants going to receive any compensation, or were they going to be part of the owners of the land and rent it out? How would one ensure no internal conflict over the disbursement of rentals and compensation? There had been a similar problem with Alexkor, and it was acknowledged that these communal property associations (CPAs) did not work, so how had this been resolved at Richard’s Bay?

There were residential properties that belonged to Transnet across the country, and some of these houses were occupied by foreigners. Did Transnet have an asset register that was updated and accounted for each property? Confirmation was needed as to whether Transnet was aware of the occupants of these properties, as some were dealing drugs from them.

The recovery plan must also refer to the tugboats from TNPA, and Transnet Port Terminals (TPP) would have a challenge with straddle carriers, which was not new. He recalled that when Members visited the Durban port and asked about this, they had been told that it had been resolved -- but it was still a problem. Even in the Cape Town port, it was still a challenge, with a cost of R230 million. Nothing seemed under control about this. The Committee was occasionally told versions that would make them happy, but was not the reality at the ports.
The 3% success rate in convictions was very low. However, there was a concern from the South African Police Service (SAPS) that when it caught the cable thieves, government entities would not come forward to claim their cables. This had been discussed before -- it had included Transnet, the Passenger Rail Agency of SA (Prasa), and municipalities. If no one claimed these cables, it created a challenge to establish whether they were stolen, so had Transnet claimed its cables to improve the 3% success rate?

Had the Transnet board identified the factors that had led to the increased operational costs? If so, what were they, and what were the plans to mitigate the increase? Did Transnet have insurance? Some people affected by the floods had claimed from their insurance companies.

Transnet had issued an advertisement inviting the private sector to participate in Pier Two in Durban. The concern was that this Pier was the busiest, and Transnet had spent a lot of money on upgrading its capacity to 2.4 million twenty-foot equivalent units (TEUs), and the maximum capacity was 2.5 million TEUs. After spending so much money, Transnet had invited the private sector to take over Pier Two under the guise that it would improve it. Did this mean the private sector would improve only the last 100 000 TEU capacity available at Pier Two? Why spend so much money if this would be given to the private sector? Why not give the private sector Pier One, which was less developed than Pier Two?
Dr Gondwe said she had been on the Committee for only a short while, but she was already inundated with complaints about the Durban port and the new ship delay tariffs. These complaints seem to suggest that there was a crisis at the port, with ten-day delays at sea, vessels now allowed in for only a few hours to offload and go back to sea and wait another seven days, and dysfunctional cranes, amongst others. What was being done to address some of these concerns?

Secondly, regarding the low conviction rate for cable theft, what discussions were taking place with crime intelligence and law enforcement agencies to curb these thefts? Was anything tangible happening? During the presentation, it was alluded to that a lot of people were being apprehended but not being convicted. Had Transnet engaged the Department of Justice about intensifying convictions?

Regarding long-standing legal matters and concluded settlements, there were three concluded settlements, but how much was involved in these settlements? How much was Transnet spending on legal fees to finalise these matters?

She said a R5.7 billion loss was a huge amount for an entity with a going concern challenge. How had it lost so much money? How was it still a going concern when it was losing such large and significant amounts? Transnet could not lose so much money -- and there had also been no consequence management.

Although there had been a reduction in irregular expenditure, this should not be celebrated as Transnet should not be incurring it anyway. How had it incurred R565 million in irregular expenditure, and was consequence management implemented against the perpetrators or the officials responsible for this? Although Transnet was exempted from reporting irregular expenditure in its financial statements, it was required to report it adequately in the integrated report -- was this done? Was the AGSA satisfied with the reporting of this irregular expenditure? The R566 million in irregular expenditure had resulted from repeated non-compliance with supply chain management (SCM) prescripts. Of this, 79% was due to flood-related expenditures, but why was no one held responsible for the non-compliance with the SCM prescripts?

Dr Gondwe referred to the concerns raised by the Office of the Auditor-General of South Africa (AGSA) on the awarding of contracts and quotations, the contracts awarded to bidders that did not score the highest points in the evaluation process, and insufficient internal controls within the entity, and said that if there were no stringent internal controls within Transnet, the entity would continue losing money. The AGSA had also indicated that the action plan developed by the leadership to address the root causes for material findings was ineffective, because repeat findings had been raised during the audit process. The audit action plan developed by the accounting authority and management to strengthen accountability and consequence management was not being implemented. If the plan was not implemented effectively, it was useless to even have the plan.

She welcomed the recovery plan, but said the Board must ensure that it brought about tangible changes so that Transnet stopped losing money. Performance on the targets was sitting at about 26%, which was extremely concerning, so when was the action plan going to translate into tangible changes?

Ms N Mhlongo (EFF) asked how Transnet was planning to ensure that the ageing infrastructure was maintained and the maintenance backlog reduced to prevent further ageing of the infrastructure. What security measures had been introduced to deal with cable theft and vandalism of the infrastructure, how much was spent in the last three financial years to replace stolen cables, and how had these thefts affected the overall operations and revenue generation for Transnet? Did the Board believe there was value for money spent on security measures for cable theft and vandalism?

With the high rate of unemployment of youth in the country, she had expected to see youth representation in the employment programmes of the entity. She asked for this information to be shared.

How was Transnet addressing the issues that emanated from the audit management plan? Had the audit action plan been developed to address these issues? She said fruitless and wasteful expenditure could be avoided if controls were in place in the entity, so she wanted to know if the internal controls had been reviewed and if they were going to address all the loopholes identified by the AGSA. Lastly, on the group revenue decline, what was the plan to ensure this was prevented from occurring again soon?

Mr S Gumede (ANC) said he did not expect much from the team, since it had been in office for only four months. He commended the board chairperson for his strategy to set women to lead the entity.

Transnet must reflect what it had planned to achieve. This report had said a lot about the floods, but if it were not for the floods, the entity would still have been hampered from performing optimally and could not have reached some of its targets. Had the impact of the floods been addressed?

He had picked up similarities between Eskom and Transnet on the resignations of the executives. The chief executive had resigned, followed by the CFO and the board chairperson. They were becoming a training ground for private companies competing with Transnet. The trend saw the poaching of the highest leadership personnel. Did Transnet have a retention strategy? Were exit interviews conducted with the executives who left the entity?

There was a need to reflect on why Transnet had been granted a three-year exemption. Had the exemption served the intended purpose? What was the difference between 'unmodified' and 'unqualified'? Transnet was a public entity, and public entities did not receive unmodified audit opinions, but unqualified ones.

Ms S Graham (DA) noted that it was rather unfortunate that the current Board and executives were taking the hammering for things they were not present for, or responsible for. Unfortunately, the AGSA report was not alongside this report as part of the presentation, as this had been a one-sided report.

Some of the issues that the AGSA brought to the table included whether Transnet was complying with its mandate in terms of its key performance indicators (KPIs), and if its KPIs spoke to its mandate. Transnet had reported a 25% reduction in its available locomotive fleet, and this was huge in terms of achieving the business. It was deeply concerning, and had a massive effect on the export of coal. At the end of the financial year of 2019/20, there were 106 long-standing locomotives, and she assumed these were locomotives that could not be repaired. There had been an increase of 209 in the last financial year, which brought it up to 315 locomotives. Had any of them been returned to service, or had these unrepaired locomotives gradually increased over the years?

Most of the time, visual inspections of the pipelines had been done with a helicopter, but were these helicopters properly maintained to ensure compliance with the Civil Aviation Authority (CAA)?

She assumed that the CEO and the CFO would have been appointed on fixed-term contracts, and wanted to know if Transnet had incurred any contractual financial obligations as a result of their departure from the entity.

Regarding the high levels of debt, she had read an article about the Public Investment Corporation (PIC) rollover of R4.4 billion, which had now been extended until 8 March. She wanted to know if Transnet would meet that obligation or if it would have to approach the Treasury for a bailout. The underspending on capital projects remained an issue if it contributed to the inability to generate revenue. Were there plans in place to address that?

Of most concern was that Transnet had met only 26.3% of its annual targets in the current financial year, translating to a decline in performance of 12.3%. Additionally, the shareholders’ compact had not been signed, which affected the Department and the Committee's capacity to properly conduct oversight. There were also repeat findings in the audit report, which included inadequate oversight responsibility, and the information communication technology (ICT) control environment being flagged by the AGSA was concerning, given the cyber attack in 2021. She wanted to know if this was receiving attention.

Ms T Siweya (ANC) said as a member of the Standing Committee of Public Accounts (SCOPA), she was aware that they had been seized with the exercise of relocating people from the Nyanga and Philippi lines. Prasa had indicated that it was up to the task, but not all the property belonged to it, as some belonged to Transnet. She asked Transnet to confirm which spaces or patches of lines or land belonged to it. Was there any intention to remove these invasions on Transnet lines?

People were camping outside Acacia Park and slowly invading that land -- was Transnet aware of this, and was anything being done about it? Transnet should also bring the Committee into its confidence about the cable thefts.

Ms J Mkhwanazi (ANC) said the Committee was supposed to have met Transnet in the last three weeks, but Transnet was not ready. This was concerning, because the Committee had wanted to engage the departed executives. It seemed as if Transnet had avoided the Committee, which had compromised its ability to conduct oversight. Some of her questions would not apply to the new executives, as they had just started. However, she wanted to know about the review and timeframe of the locomotive situation.

What was the plan to address the vandalism and theft? She also wanted to know about the plans to move the transportation of goods from road to rail, and asked the delegation to unpack how this would be achieved, or if it was just a wish list.

She welcomed the decrease in irregular expenditure, but wanted to know if any consequence management had been implemented on the officials responsible. She asked about Transnet’s relationship with the unions and if they were part of the new turnaround strategy and their role in it, and she wanted to know the role of the shareholder in ensuring that the recovery plan was implemented.

The Chairperson welcomed the inputs and questions from Members, and noted their concerns about time constraints. He acknowledged the positives that Transnet had achieved, and commended the delegation for a well-prepared presentation.

He said there were allegations that Transnet paid hundreds of millions of rands to security companies, but it seemed it was still losing the battle despite all these efforts. The Committee had met the unions last week, and they had alluded to this issue. They questioned the capacity of these security companies appointed by Transnet to carry out this task. He believed that this contributed to the low conviction rate. The unions felt that most of these companies did not have even a clear understanding of their responsibilities and could not foresee problems before they happened. They were poorly equipped, and it seemed the criminals were more advanced than they were. Members saw many people entering the Cape Town port, but it seemed the security was just guarding cars -- it did not seem like they were protecting the infrastructure. They could easily be chased away by a gang.

Conversations about moving from road to rail had been ongoing since the inception of the Sixth Parliament. Transnet’s appetite for this commitment was low. Road transport made business expensive and negatively affected the road infrastructure, as was evident on the N1 and N2. They also contribute to accidents on the road. There was also corruption, extortion and criminality ongoing in that area. Members would like to see a process of moving from road to rail commence, as this was a necessity.

There was a crucial matter of privatisation being discussed at Transnet. However, was it justifiable for Parliament not to be involved in these crucial decisions as an oversight body for this entity? He criticised Transnet for not engaging with the Committee regarding the privatisation of Transnet. He believed that Parliament should be involved in such significant decisions and provide meaningful contributions to them.

He also lambasted the entity for the fact that the Committee was meeting Transnet seven days after three strategic members of the executive had departed without properly accounting to Parliament for their work. It would have been fair to ask these officials about what had contributed to the poor performance in the areas that they were overseeing or responsible for. These engagements would have informed the Committee on how to engage the incoming incumbents about these issues so that they would be capacitated to deal with the weaknesses or any challenges. The Committee had been extremely disadvantaged by this.

Responses

Ministry
Minister Gordhan expressed regret that Parliament could not scrutinise the performance of some recently departed Transnet executives, reflecting both public and private sector practices.

The issue of privatisation has been discussed many times in the Committee. It had been stated that no official privatisation policy affected large institutions like Transnet. However, Cabinet members had acknowledged the fiscal constraints, corruption issues resulting from the state capture era, and the high levels of debt in some of the SOEs. As a result, it was important to consider private sector equity participation, to prevent the state from losing control of these SOEs. Transnet had already adopted this approach, but there needed to be a more extensive debate about what private sector participation entailed.

The issue of converting from road to rail was not due to a lack of willingness, but rather a practical concern regarding the condition of the corridor and the vandalism that took place there, as well as the efficiency with which the corridor was used. The new team had started tackling these issues to improve the situation in the corridor.

Improving the security situation in the corridor was a pressing matter. While he did not play a role in selecting security companies, he wanted to understand the unions' concerns and try to manage any issues better. Several Members had raised the security issue, and high-level meetings with senior police officials and the President's security advisor had been held periodically.

The Energy Crisis Committee had a work stream that dealt with crime-related matters in the Logistics Crisis Committee. This was where the integrated approach came from. Although no report was available on the ongoing work, there was a crisis committee on crime and corruption. This committee had gathered resources from within and outside the state to invite entities that could assist on crime-related matters. An update on the situation would be sought.

The Ministry would provide more details on the recovery plan to the Committee at a later time. Meetings about the new turnaround strategy had been held between the Ministry, the Board, and the unions. The unions had contributed valuable insights based on their experience in the workplace.

There was a shortage of skills in Department of Public Enterprises (DPE), and performance had declined. This had been highlighted in the September statement, which had prompted the formulation of the recovery plan by the Board.

Regarding the 1 064 locomotive procurement matter, there was a current impasse with the Chinese government, but new efforts were underway to resume discussions. Updates on this matter would be provided to the Committee. However, the Chinese company involved had been shifting the goalposts unreasonably.

He expressed gratitude to the PIC and other bondholders for their cooperation on the rollover. He hoped to see the operational impact of the changes that the Board had in mind. The shareholder's compact was expected to be signed within the next two weeks.

Concerning tariffs, it was important to be transparent in determining and making payment arrangements. This was crucial for Transnet's cash flow. He had closely monitored Transnet after the floods, and was impressed with the speed at which it had found alternatives and dealt with the damaged harbour. Within 24 hours, the first ship had been able to dock in the harbour.

The three-year exemption granted had been to account for the historical irregular expenditure that was currently being recorded. It was not intended to conceal, but rather to isolate and address it. Several events occurred during the state capture period, and some institutions lacked the necessary documentation to explain them.

There had been progress in Transnet, and the Board and management were committed to improving its performance from the previous period. South Africa was a free country, and workers were free to choose where they worked. However, Transnet needed to retain the necessary skills and remain an attractive employer. The team is currently working on this.

The cost of legal fees would be investigated and provided to the Committee in writing. These were all legacies of the state capture period. In some cases, the matters had gone to court, and the Special Investigating Unit (SIU) had been assigned to investigate them. The previous Board had taken certain measures to urge management to reach settlements so that Transnet could still benefit from these arrangements.

On the AGSA’s findings, the management team and the Board would write and provide a detailed answer on the steps to resolve those issues.

Transnet Board
Mr Sangqu concurred with the observation that the problems of Transnet were not new – this observation was correct. However, there had not been much progress in addressing some of these issues, and there was a myriad of reasons why this was the case. They were still living with the aftershocks of state capture, and they were manifesting themselves in the figures and the financial realities of the company.

Transnet was facing a debt burden of R130 billion, which was too much for it to handle. The interest costs of R13 billion annually were excessive and needed to be reduced. Although the company could improve in many areas, the debt burden was a major roadblock. Transnet required assistance to alleviate this burden. The debt obligation had significantly impacted the company's ability to generate sufficient cash to remain afloat and build a sustainable financial reservoir that could help it grow. This was one of the observations made by the Board. Until this issue was resolved, Transnet would continue to face challenges, and stakeholders would keep asking the same questions. Moreover, in a high-interest rate cycle, it costs even more money to service the debt, which compounded the problem.

Transnet's greatest advantage of was that the company did not struggle with demand, as it already had clients. However, the company lacked the ability to meet the expectations of its clients. If Transnet could tackle these issues and fulfil its clients' needs, it would have the potential to experience exponential growth.

During negotiations with departing executives, settlements had been reached and information would be provided to the Committee in writing. This information was also included in the integrated annual report.

He felt that the recovery plan was being met with scepticism, and wished he had more time to discuss the rigorous process that had gone into creating it. It had been developed through an iterative process with the involvement of independent advisors who were experts in the field, who had endorsed it. If the Board secured the necessary funding to support the plan, Transnet's challenges could be addressed.

Transnet management
Ms Phillips said the AGSA report included comments on the performance of the Transnet pipeline division. A lot of effort had been put into improving the internal control environment, and several engagements with the AGSA had been held to help them understand how Transnet operated. The report also highlighted lessons that other operating divisions (ODs) could learn from, and mentioned the ongoing efforts to engage with the business and prevent recurring issues flagged by the AGSA.

However, a major challenge had been the prevalence of irregular expenditure due to minor issues such as not adhering to the prescribed tender advertisement period. While this may render the entire contract irregular, it did not imply that Transnet had not received any value from it. The company was committed to addressing cases of fruitless and wasteful expenditure and had clear consequences and disciplinary actions in place for officials found to be misusing funds, or receiving unauthorised benefits.

The AGSA wanted Transnet to review its financial records as far back as 2010, but as a business, it should not focus on the past but rather on stabilising the business and focus on moving forward. Despite this, the AGSA had been asked to separate past financial records and focus on current actions that would lead to business growth. The management team would be having another discussion with the AGSA about the recovery plan, and how they planned to achieve the set targets.

Ms Phillips said she regretted having to inform the Committee that Transnet would not be able to meet the targets set in the shareholder compact. They had identified the problems within the business, and were actively working to address them. The management team had taken measures to tackle the issues at hand, and they had requested the Minister to evaluate their progress during this period of recovery. They had to address the current issues to be able to tackle the other matters in the shareholder compact. They hoped to make significant progress going forward and meet the expectations set by their shareholders.

She had engaged with various entities and structures to address the security issues. Transnet's environment included the ports, rail, and pipeline, each requiring different security levels. However, they were audited by the State Security Agency (SSA) on the resources they had in place. The port and pipeline were also audited by the International Ship and Port Facility Security (ISPS) services. Additionally, they operated a national key point, which demanded a high level of security. The security guards in these environments were heavily armed, and providing this level of security could be quite expensive. Transnet had made applications to be declared as a critical infrastructure or national key point for all its facilities. To meet the requirements of such a declaration, they needed various levels of security.

Security costs had been a major concern in the past, but not much attention was given to the expenses incurred when dealing with the aftermath of a security breach. For instance, Transnet had paid billions of rands to rehabilitate contaminated sites in the past. It was better to invest a similar amount in securing the infrastructure than dealing with the consequences of a security breach. Cable theft was something they could not afford, and they had engaged with various government departments and agencies, such as the SA National Defence Force (SANDF), SAPS, Provincial Commissioners, and the Prosecuting Authority, to address this issue. They had a vast dataset on the types of incidents that occur on their network, and had requested the SAPS and the National Prosecuting Authority (NPA) to investigate and prosecute, respectively. Although they procure security services to gather intelligence and provide crime detection analysis, they could not use this information unless the security companies had the necessary Private Security Industry Regulatory Authority (PSIRA) registration. They had had issues with some agencies to ensure that the people they contracted had the requisite registrations.

There was a serious issue at hand that required Transnet's attention. Various organised syndicates were involved in illegal activities that required the attention of all authorities. These syndicates were clever and had even managed to bribe some of their employees and security guards who were professionally registered. However, one must not let them get away with their illegal activities. Transnet had seen attempts to bribe some of their officials to access their systems and police systems. To deal with this matter, they had to take special interventions to ensure that they could stop them in their tracks. It was better to pay for security measures than to suffer a breach which could result in significant losses for all involved. A breach to the rail and pipeline systems would have disastrous consequences, so they had to take all necessary precautions. The security presence must be visible and strong, to ensure that perpetrators were stopped before they could carry out any breaches.

Transnet's entire system was plagued with encroachments, and even their underground pipelines were not spared. At some point, it had experienced between 16 to 22 incidents per month, which caused sleepless nights for the team. Transnet still had a long way to go, and as a result, it would continue to invest money in security. The country could not afford the consequences of a breach, and Transnet would be transparent about where the security funds were going and the progress made to improve the situation. Although specific rail lines were being targeted, the hope was that making enough noise about implementing new technologies would deter these breaches from happening.

Ms Hlengiwe Makhathini, Head: Corporate Finance, Transnet, acknowledged that the entity had experienced a significant revenue loss due to various challenges, such as floods, security incidents and derailments, which had resulted in a loss of over R6.5 billion. However, the profit before interest and tax showed a positive of R4.6 billion. Transnet's debt burden continued to be a challenge, and the increased interest rates added to the financial pressure.

Regarding unmodified and unqualified audit opinions, Transnet followed the International Financial Reporting Standard (IFRS), not Generally Recognised Accounting Practice (GRAP), like other SOEs. It also had bonds listed on the Johannesburg Stock Exchange, which required Transnet to use the IFRS.

Ms Silindile Kubheka, General Manager (GM): Governance, Risk and Compliance, Transnet, acknowledged that irregular expenditure should not be incurred. However, she also emphasised that management could not give an impression that Transnet would receive nothing due to the complexity of the SCM-related issues. As part of the recovery plan, there were interventions in place that were solely focused on transforming the supply chain and implementing measures to strengthen internal controls. All internal control deficiencies had been identified, and there was a commitment to report and resolve the issues identified by the AGSA.

The 2021 audit was concluded in October. During this period, the AGSA had been overseeing Transnet due to Public Finance Management Act (PFMA) related issues. Interestingly, this was the same year that Transnet had started engaging with the National Treasury in a bid to secure an exemption. The exemption was necessary due to state capture and legacy issues that were difficult to pin down in terms of completeness. It was worth mentioning that Transnet had consistently been qualified on this matter. As a result, the irregular expenditure decreased from R1.5 billion in 2021 to R1.1 billion. The number has since decreased further to R565 million. Although this was not something to be celebrated, it was important to note that their internal control interventions were starting to bear some fruit. They would provide more details about this in writing.

Ms Phillips said the Durban port required six tugs for operations, but there were no private tugs currently operating, nor had there been any engagements with them. No employee had been forced to watch any private operator work. However, there were some challenges with tugs breaking down in Durban and the Port of Richards Bay on 4 December last year. By April, the port had acquired six tugs, and by September, there were five, with one currently in service.

As of 1 and 3 December, MSC and Maersk -- two of the largest shipping lines -- would impose a surcharge on all containers leaving South Africa. This was due to the vessels waiting along the coastline, causing delays in delivering cargo, which incurred additional costs for operations. The surcharge would be about US$200 per TEU, as announced by the companies. Transnet's team had been negotiating with the shipping lines to avoid the surcharge, but the situation was complicated by the fact that much of their equipment in the port terminals had exceeded its lifespan, or was close to doing so. New equipment should have been purchased three or four years ago, but it had not been done. Ordering new equipment now took 18 to 24 months due to manufacturing lead times, which was too long to wait, as they were in the peak season. The team was actively sourcing alternatives that could be obtained within a reasonable time frame, but if no action was taken, it would significantly impact Transnet.

Chairperson's conclusion

The Chairperson welcomed the responses and thanked the delegation led by the Minister. Members could have a second round of engagements, but any salient questions and follow-ups would be sent in writing. This was a continuous engagement -- it was not the end, and the Committee would be meeting Transnet soon. Often, issues came up and Members were tempted to convene a meeting with Transnet immediately to come and explain.

The meeting was adjourned.