Spoornet Programme & Structure: briefing

LABOUR AND PUBLIC ENTERPRISE SELECT COMMITTEE
4 April 2000
SPOORNET: BRIEFING

Document handed out:
Presentation available in PowerPoint Slides (e-mail [email protected] for copy).

Chairperson: Mr SE Fenyane

Note: This is the same briefing given to the Public Enterprises Portfolio Committee on 5 April 2000, only the questions at the end of the briefing differ.

SUMMARY
Spoornet is currently undertaking a process of transformation to run its business profitably. About 5800 kilometres of railway line have been identified as profitable, Spoornet would like to concentrate on doing core business in this area. The remaining unprofitable 11 000 kms of line would be given to concessionaires to operate. International consultants will be assisting Spoornet for six months starting mid-April to identify which businesses to keep, which to shed and how best to go about the transformation.

Freight business contributes 96% of the total Spoornet turnover, but its functioning is hindered by regulations that make it more favourable to use road transportation. Government needs to reconsider these regulations together with subsidising the Mainline Passenger Service if Spoornet is to be profitable and comparable to similar international businesses.

MINUTES
The Chairperson pointed out that the Committee expected the Spoornet presentation to focus on issues such as:
the restructuring of Spoornet;
whether the restructuring resonates with the objects of the RDP;
whether the parastatal would not end up shedding jobs;
whether the restructuring would promote competition;
what Spoornet's employment equity plans are;
whether there are plans in the pipeline to promote Black empowerment;
whether the provinces are going to benefit from such restructuring.

Mr Zandile Jakavula, CEO: Spoornet, noted that he had just been appointed CEO of Spoornet in February 2000, but was not altogether new to the job, as he has been CEO of Metrorail.

Spoornet's vision is to be a leader in profitable freight logistics solutions while contributing to the ideals of South Africa. He stated that Spoornet is involved in five core businesses, namely: COALLINK, OREX, General Freight, LUXRAIL, AND MAINLINE PASSENGER SERVICES.

The Five Businesses:
COALLINK
This is a world class coal transport business from the coal fields to Richard's Bay Coal Terminal and the Port of Richard's Bay in KwaZulu Natal. It contributes 22.4 % of Spoornet freight turnover and has been benchmarked as 8% above the world best service provider of the same kind.

OREX
This business is dedicated to movement of iron ore over a 861 km track from Sishen to the port of Saldanha. Orex provides heavy haul logistics solutions for local and international markets. It is responsible for 4.6% total freight turnover and has been benchmarked as being 38% better than the next best business of the same kind in the world.

The Board has invested to purchase new and more efficient equipment to deal with business service needs.

GENERAL FREIGHT BUSINESS (GFB)
This business operates in the mining, light and heavy manufacturing industrial sectors serving customers in 15 specified market sectors. It moves about 96 million tons of commodity freight per year and is responsible for 70% of Spoornet revenue and 52% of its tonnages. It is currently focused on restructuring and transformation.

LUXRAIL
This business operates the famous Blue Train which was voted the best luxury train in the world having been refurbished at a cost of R70 million for the two sets of trains.

Although there has been a gradual increase in the profits, this has not been enough to make Luxrail a profitable business. The number of passengers travelling on this service are always few because of the cost factor and are mostly overseas tourists. Spoornet feels it is the wrong business for them because tourist packages are designed at point of departure and it is too late for these tourists to decide to board such a train on arrival in South Africa. Hence Spoornet is looking at selling the business.

MAINLINE PASSENGER SERVICE (MPLS)
This business provides an affordable inter-city passenger service between major destinations in South and Southern Africa. It conveys in excess of 4 million passengers per annum. However, it is acknowledged that the service still leaves much to be desired in terms of the quality of service to passengers A survey by Spoornet shows that this is the only service of its king in the world that is not subsidised. Even the richest countries that Spoornet usually benchmark itself against, subsidise this service. Spoornet has to carry the whole expense itself: obtaining capital assets and laying infrastructure, maintenance, operational expenses and at the same time trying to make a profit. This needs to be revisited in order to level the playing fields so that apples can be compared to apples in the benchmarking process.

The MPLS service used to be profitable until taxis started encroaching on the long-distance transport business with the advantage of shorter hours on the road and the ability to deliver to the passenger's doorstep.

About 96% of Spoornet revenue comes from the freight business. The organisation is proactively engaged in developing services here.

STATISTICS:


EMPLOYEE NUMBERS

EMPLOYEE NUMBERS

Mr Jakavula emphasised a commitment on the part of Spoornet to employment equity. He mentioned the fact that Spoornet's attempts to address employment equity were being defeated because competing companies (that did not invest in training employees) benefited from Spoornet by being able to use the money they have to entice away these very employees Spoornet had invested in. However, he said that it is still the duty of Spoornet to see to it that something is done about employment equity.

EMPLOYEE NUMBERS

Mr Jakavula pointed out that there are two special committees within Spoornet, one comprising of women and another of Black managers, that contribute to discussions around the issues of employment equity and see to it that it is driven in the right direction.

SPOORNET BUSINESS UNIT PERFORMANCE

SPOORNET FINANCIAL PERFORMERS

PRODUCTIVITY FACTORS
With fewer employees and less equipment they intend to improve on productivity.

FOCUS AREAS 2000/01
Spoornet's six main focus areas for this financial year are: Efficiency, Profitability, Safety Improvements, Transformation and Communication

ACTIONS FOR IMPROVED PERFORMANCE
A moratorium on all unfilled vacancies has been introduced. A close examination to see whether those positions are needed will be undertaken. Only those jobs that are critical will be filled.

Strict financial controls have been instituted. Also attached to this has been the signing of performance contracts between the CEO and his managers. An incentive scheme is being looked at to motivate performance of managers. A leaner budget is emphasised with emphasis on improved corporate governance. A cut down on the operational budget to force managers to come up with ideas for a leaner budget is planned.

The Restructuring and Transformation processes are underway

RESTRUCTURING AND TRANSFORMATION PROCESSES
The Transformation process at the direction of Spoornet's new CEO, Mr Jakavul, seeks to address: customer focus; quality services; operational efficiency; asset utilisation efficiency; outsourcing. Spoornet is undertaking this Transformation exercise with the aid of Halcrow "turn around specialists" who will be arriving on 10 April 2000 to assist in the business efficiency process. These specialists will be working side by side with Spoornet managers. In this way there will be transfer of skills in addition to operational improvement at the end of the six month contract.

Restructuring is done under direction of Transnet assisted by Rothschild Consultants who have been in the country for about two months. It is almost a month since the process started. Experts in audit, legal and other fields are already on board. The process seeks to address: Procurement of private sector capital; Control over policy; Risk sharing and transfer; Realisation of value; Expertise and technological transfer; Change of ownership.

Spoornet is undertaking corporatisation of CoalCo, ORECo, MLPSCo, LuxCo, LinkCo. The organisation is looking at whether to concession or sell the customer facing businesses under the above companies, such as COALLINK, OREX, MLPS, with a concession package being looked at for LINKRAIL. LUX RAIL would most probably be sold outright. An intention is to move out of Low Density Lines business and giving that to new operators with the maintenance of the network also their responsibility.

Structures that are involved in the restructuring process include the Department of Public Enterprise and other departments, labour and interested stakeholders. These structures collectively form a Steering Committee to focus on policy and direction of the process. Senior level staff provide general direction and have ultimate authority and responsibility. A Project Delivery Committee is responsible for the day to day management and co-ordination. The Committees deal with the Corporatisation Group, Industry Group, Restructuring Group and Human Resources Group.

By September 2000 Spoornet foresees the completion of the corporatisation process and planning of the industry framework and structure. By November 2000 or at the latest early 2001Spoornet would like to be finished with Luxrail. Towards June/July 2001 the MLPS, OREX, COALlink, Linkrail restructuring transactions should have been finalised. GFB and RTTS are to be ongoing projects to be taken beyond 2001.

CHALLENGES FACING SPOORNET
LIGHT DENSITY LINE MANAGEMENT
Mr Jakavula believes that Spoornet needs to concentrate on its core business and to use the profits to develop infrastructure for this core business. The other businesses should be left to entepreneurs whether that be own employees. Spoornet would require aid from Government for future operation of those lines by a concessionaire. An operator that would be suitable would be one with a cost structure appropriate for class II, III, IV railways. Approximately 5 800 kilometres of line have been identified as sufficient for Spoornet to make good profit. There would still be a need to address issues relative to infrastructure access.

CAPITAL INVESTMENT
Spoornet plans to assume full and timely capital investment. Significant investment is planned for projects to:
Maintain and enhance efficiency;
Maintain and enhance service quality;
Expand core business;
Retain technological leadership;
Access capital funding.

COMPETITIVE LANDSCAPE
Spoornet's General Freight Business faces an increasingly competitive environment. Concerns to keep in mind are:
- There is over capacity in the roads.
- Increasing productivity and efficiency of road haulers.
- Overloading of trucks.
- The regulatory environment favours road freight.
- There are market pressures in terms of quality of service delivery and new technologies.

SPOORNET LOW DENSITY LINES
Spoornet needs only 5800 km to run a profitable business. It is believed that Spoornet's financial performance could be improved by removing over 11 000 km of network that does not generate profitable income (11 430 km route with a total of R820 million negative contribution).

Specialist consultants would be called in to deal with rail and terminal services, financial services, support services in IT, marketing and sales, identifying pieces of legislation causing problems.

REGULATORY ENVIRONMENT
- insufficient costing and charging externalities.
- Government needs to re-examine policy of road and rail haulage.
- need to establish rail safety regulatory regime.
- policy for access rights, priorities and rates.
- fuel levy for RAF and diesel locomotives.
- inadequate policing of overloading, speed and safety.
- South Africa has to keep pace with the rest of the world in reforming statutory regulations and institutional transformation
- imbalance in user-pay principle.

REGULATORY ENVIRONMENT
The Transport Deregulation Act, 1988 increased maximum axle loads from 8.2 - 9.0 tons for single axles and from 21 - 24 tons for tridem axles. It also increased the maximum vehicle length from 20 - 22 metres.

The Road Traffic Act 1989 prescribed gross permissible road vehicle mass 57 tons (later reduced to 56 tons). The Department of Transport recommended that a 5% tolerance in permissible limits be allowed before offenders are prosecuted for overloading. The policy of the National Director of Prosecutions is that offenders be allowed a 10% tolerance before being prosecuted.

Spoornet believes that it is losing business because of these regulations. South Africa is second only to Zambia in having the highest axle loads world-wide.

ROAD VEHICLE MASS
South Africa stands at 56 tons maximum permissible mass per vehicle, second only to Zambia at 63.25. Countries that South Africa is usually benchmarked against permit very low tonnage. Britain stands at 38 tons and USA at 36 tons.

MAINLINE PASSENGER SERVICE
For this to fulfil its macro transport role it will require a subsidy for:
- operations, between R60 - 80 million per year
- capital, about R312 million.
The subsidy is required if MPLS is to operate at world best standards.

International Examples Of Subsidised Passenger Services:
- UK - Great Northern Eastern Railway - subsidy of 45% on fares phased out over seven years
- Swedish State Railway - infrastructure owned by State, financed 100% Capex, 25% subsidy on fares
- Canada Via Rail - 30% fares, 100% Capex.

INTERNATIONAL JOINT VENTURES
These are ventures that show Transnet's commitment to development and co-operation in Africa:
1. ETHIOPIA/DJIBOUTI Building and rehabilitation of track and infrastructure.
2. ZIMBABWE Proposed concessioning of Western/Eastern Railway
3. UGANDA Development and operation of an inland container facility
4. ANGOLA Spatial development initiatives
5. GUINEA/CONAKY/LIBERIA Design and construction of a railway line and inland container facility
6. DRC future possibilities of BOT
7. LYBIA Planning to build 3170 km railway
8. NIGERIA Supplying rolling stock and management of rail and ports.
9. CAMEROON Railway concession
10. MADAGASCAR Vertically integrated 20 year concession

QUESTIONS AND COMMENTS
Mr LG Lever (DP, North-West) asked what has been causing the shortfall in operational costs if the pension fund problems had been resolved.

Mr Jakavula said that whilst the media has reported that the pension problem is resolved, this is not accurate. The Government had to step in and remove the burden to attract interested parties. The funding level of the pension fund has indeed improved and is fully funded, but the retrenchments that had to take place open a big hole in the ability of the fund to deal with that. Every time people have to go, this impacts on the capacity of the fund.

Mr Lever said that Spoornet had indicated that they intended to sell some of their business. Are they going to sell it with the infrastructure.

Mr Jakavula replied that with Coalco and Orex the decision has still to be taken between selling outright or concessioning. With Luxrail the intention is to sell outright, but the infrastructure would remain the property of the country. With the Low Density Lines the intention is to move out of the business and it would be given to other operators possible with the requirement that they lease, upgrade and maintain the network for approximately 30 years after which they give back ownership to the Government.

A committee member asked whether the 5800 km of profitable lines include lines to Mozambique and northern neighbouring states as there are partnership projects with these countries, such as the Maputo Corridor.

The response was that the railway network goes to those boundaries but beyond that the network belongs to those countries. The 11 000 km is inside the country where Spoornet is servicing underdeveloped areas and it is here that it would want to hand over to other operators.

(Q) Would there be agreements with the concessionaires about use of equipment and expertise?

Mr Jakavula said that these will be kept as they are at the moment but would be revisited and reviewed from time to time on the basis of good business practices.

(Q) Is it Mr Jakavula's argument that in First World countries the railway is subsidised?

Mr Jakavula agreed and said that Spoornet is saying if they are to be benchmarked against these countries there should be a levelling of the playing fields in order to compare apples with apples. It is fine to say Spoornet should run a profitable business, but without the subsidies it would mean that Spoornet would have to raise their prices and that way the service would not be affordable to the poor.

Mr B Willem (ANC, Eastern Cape) asked in line with affirmative action, how many people with disabilities does Spoornet employ.

Mr Jakavula said that Spoornet is looking at fair representation of all races and the opening up opportunities for the disabled and women as well. He had asked managers at Spoornet to identify those jobs that can be taken over by people with disabilities but he is aware that the number would still be very low.

(Q) What effect has the restructuring process had on employees?

Mr Jakavula replied that retrenchments and natural attrition had reduced the number of employees from 50 000 to 38 000. In the past, the parastatals were never meant to produce a profit. When the Government changed in 1994 and it was decided that the parastatals should be run along business lines and make a profit, there was a need for a reduction in numbers of employees. The decision had been that when positions become vacant, they would not be filled unless the core business could not run without them being filled.

Mr Lever asked if there has been any thought of using technology such as the Internet in advertising the services of Spoornet.

Mr Jakavula replied that Spoornet is already advertising on the Internet but would still need to use it more. A brief has been given to Halcrow to identify those parts of the business that can best be helped by information technology enhancements.

Ms C Botha (DP, Free State) commented that Mr Manuel had given a rebate on shipping diesel because it is argued ships do not use roads. Regarding the RAF levy it might be important for Spoornet to get together with farmers who have been protesting that like the shipping industry they do not use roads and so should not be paying the levy. The inconsistency in Government treatment of the different industries is shown also by the fact that the farming industry is heavily subsidised while rail is not. It is true that road conditions are deteriorating and the country cannot keep up with the maintenance costs. Ms Botha stated that she had not been aware of the regulations impacting on issues such as this one of road usage.

(Q) Spoornet was asked to comment on the profitability of the Blue Train.

The response was that in the last four years the train has not been profitable that is why Spoornet is selling it to operators that will be better placed to make it profitable.

(Q) Are there equity targets on the Blue Train?

Mr Jakavula pointed out that most of the staff on the Blue Train are Black, which includes drivers and hostesses.

Mr N Raju (DP, KZN) asked to what extent the process of corporatisation would impact on unemployment.

Mr Jakavula said the option is either to act now and correct what is wrong with the way Spoornet is doing business or "be nice to employees and sit with the wrong because we do not want people to lose jobs". Spoornet has identified its core business. The people in the other businesses are not necessarily going to be unemployed. Some may be taken over by the new operators, and some may even come together and take over as new operators because they have the necessary skills. But it is important to be frank and admit that there might be casualties if it is found that these businesses cannot take all those people on board.

Ms E Lubidla (ANC, Northern Cape) asked whether it is possible for those lines that have been closed to be reopened, especially in the Northern Cape - the Junction at De Aar used to give people so many jobs.

If the lines would provide an opportunity for being profitable they would be opened. Halcrow would identify areas where business needs to move out or increase its presence. It is also possible that concessionaires might open those lines.

Mr Lever pointed out that there are steam trains mothballed at the De Aar Junction, suggesting that these be turned into living museums this way they could generate great business, bring in tourists, and could eventually be sold like the Blue Train.

Mr Jakavula welcoming the suggestion stated that the question would be how to best use those assets currently not in use and how to best benefit local people. All related issues would be looked at.