Transnet Financial Results: Treasury briefing

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Public Enterprises

07 September 2005
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PUBLIC ENTERPRISES PORTFOLIO COMMITTEE

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
7 September 2005
TRANSNET FINANCIAL RESULTS: TREASURY BRIEFING

Chairperson:
Mr Y Carrim (ANC)

Documents handed out:
Treasury briefing: Financial Analysis of Transnet Financial Results, 31 March 2005

SUMMARY
National Treasury compared the Transnet financial results for 2004 and 2005, and spent much time explaining the meanings of the customary terminology used in financial statements. The presentation highlighted the commendable improvements in turnover and operating margin, the turnaround from a loss to a profit from 2004 to 2005, and the containment of the growth in operating expenses. Huge capital investment in infrastructure was envisaged for the following five years. This would require focused management.

Members were curious about the details of the move of SA Airways (SAA) out of Transnet, and whether there had been adverse consequences of the tightening up in Transnet, such as the limited growth in operating expenses.

MINUTES

National Treasury briefing
Ms N Radebe (Treasury Director: Asset Management) explained that she was not an expert on Transnet, but gave an introduction to the way in which financial statements were normally approached. She dwelt at length on the meanings of accounting terms such as:
- impairments (adjustments to convert depreciated values of deteriorated capital assets to real market values);
- non-current (long-term, more than one year) and current (short-term) assets;
- hedgebook (contracts with banks for protection against exchange rate weakening);
- equity (the monetary value of shares plus reserves, equalling shareholders’ interest);
- liquidity ratio (current assets divided by current liabilities); and
- net profit (profit after taxation).

It was commendable that the growth in net operating expenses during 2005 was only 3%, down from 20% for the previous year. This was an indication of good management. The turnaround from a 2004 loss of R6.3 billion partly due to hedgebook losses at SA Airways (SAA), to a profit of R6.8 billion in 2005, was outstanding. Fair value adjustments required good cost management, but would always be risky. It was encouraging that for 2005, turnover had increased by 6%; the operating margin by 12.9%, and the contribution to operating profits of the rail segment had improved substantially from 9% to 20 % of the total. Success would ultimately be measured in sustained value creation over the following five years, through capital expenditure of R40.8 billion funded by Transnet.

Discussion
Mr P Hendrikse (ANC) asked whether the total turnaround from 2004 to 2005 had been R 12 billion, to which Ms Radebe replied that it was not the case.

Ms D Ngcengwane (ANC) asked whether SAA had made losses, and Ms Radebe replied that SAA had made a profit during 2005.

The Chairperson enquired how the savings posted were effected. Had this resulted in job losses, lower capital expenditure and/or lower levels of service? Ms Radebe recommended that such "politicians’ questions" be directed to Transnet.

Ms Radebe explained that new accounting rules required that hedging figures be shown. Transnet had made a strategic decision to consolidate and refocus their core business by concentrating on good risk management, corporate governance and better management of human capital.

Mr C Gololo (ANC) asked about the move of SAA out of Transnet. Ms Radebe replied that Transnet had other problems apart from SAA . The transaction was being discussed. SAA would go with its own balance sheet and history.

Dr P Rabie (DA) questioned Transnet’s target benchmark for a gearing ratio of 50% or more, which he considered higher than current practice in the private sector. He cited a benchmark of 40% to 50% for Sasol. Ms Radebe pointed out that there was no standard norm, and that Transnet required much capital-intensive infrastructure.

Mr Gololo asked whether Transnet was involved in the Gautrain project, to which Ms Radebe replied that it was not.

The meeting was adjourned.

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