Transnet Annual Report: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
10 October 2006
TRANSNET ANNUAL REPORT: BRIEFING

Chairperson: Mr Y I Carrim (ANC)

Documents handed out:
Presentation to the Portfolio Committee by Transnet
Transnet Annual Financial Report

SUMMARY
The committee was briefed on the annual report and financial statements of Transnet for the past financial year. The reports included details of the sale of the assets SAA, Metrorail, Transtel and V&A Waterfront. Details were given of future disposals and the use of the proceeds of the sales. The report also included the business growth strategies for the next five years, projections on the budgets and how the entity had performed over the past year. The Committee expressed appreciation for the clear and concise presentation and commented that the progress had been excellent. There were still some improvements that could be made to make the entity more lucrative in terms of finances and social development.

Questions were asked by members on the Gautrain,  the switching of Transnet operations from road to rail, prevention of fraud and corruption within the business, and the contribution towards social investment. Clarity was sought on the SAA and Metrorail sales, and the Autopax review. Congestion at the Durban port was discussed. The sale of the V&A Waterfront was raised. Further questions related to repair or reuse of old rolling stock, employment equity targets and equity in pension payouts, gender equality and training programmes for women, the procedures for sale of non-core assets, the remuneration and operation of the Board, and the result of the sale of MTN shares.

MINUTES
Ms Maria Ramos, Group Chief Executive, Transnet, explained that the presentation would focus on the financial statements of Transnet over the past financial year and the growth strategies and implementation over the next couple of years. The growth strategy and turnaround plan focused on four pillars, being human capital development, corporate governance and risk management, balance sheet restructuring and redirection and re-engineering of the core business. There was a major re-engineering programme underway, and Transnet had commenced the rollo out of a R64.5 billion investment plan. Non core assets had been disposed of, governance structures and risk plans implemented and a comprehensive HR strategy planned. Details were given on the specific progress in each area, including details on the sale of the four assets SAA, Metrorail, Transtel, and V&A Waterfront. It was stressed that the successful turnaround would depend upon human capital investment, and to this end Transnet had introduced various strategies, including transformation imperatives. It had made significant progress in achieving equitable representation across the divisions. In respect of corporate governance and risk management a framework and due diligence had been completed. The salient figures for 2006, broken down into difference categories, were tabled and were compared to the previous year and to budgets. The financial statements also examined the retirement benefit obligations. The budget for the next five years was tabled, which indicated a gross capex spending of R64.6 billion, with a projected surplus by 2009/10. Ms Ramos indicated that certain processes had continued after the balance sheet had been drawn, and summarised the main developments in regard to SAA and Metrorail sales, and the processes to dispose of Viamax, Freight dynamics, TPFA, and freight dynamics. The Neotel telecommunications assets were to be sold and SAX was awaiting PFMA final approval.

Ms Ramos summarised that there had been sound financial performance for the year, that the investment programmes were underway, that the disposal of non-core entities would be completed by December 2006. The progress had been pleasing but there were still significant challenges. The sustainability of the turnaround must be achieved by relentless effort and driving of strategies. Management and staff were fully committed to working as a team on delivering priorities.

Discussion
The Chairperson thanked the representatives of Transnet for the clear and concise presentation, and noted that the progress and achievements over the past two years were outstanding.

A visiting DA member from the Portfolio Committee of Transport asked when the oversight on the Gautrain would be done by Transnet, how the future expenditure in capital wouldl be financed and if there were any exercises or contingency measures that Transnet was taking to ensure the availability of materials, given the fact that they would now be competing with the demand of the construction of the Gautrain.

Ms Ramos explained that Transnet was in no way involved in the construction of the Gautrain as it was not awarded any contracts in the process.

The Chairperson questioned if Transnet had made any progress in switching its operations from road to rail.

Ms Ramos replied that the issue of road to rail was not a tariff issue since rail is cheaper per ton per kilometer than road. The problem was that rail is slower, impacting upon time and efficiency, and there would need to be sustainable investments by entering into this division, since currently Transnet had less than ten percent of the market. However, Transnet had introduced new running scheduled container trains that would help establish a reliable and efficient service and create client confidence.  At the moment the entity could not compete effectively with road until investments in the rail business increased.  At this stage no dent had been made in the plans because Transnet would need new equipment, which was part of the investment strategy. Plans had been made with a target date of 2008. An order of locomotives had been made and would  take about 12 to 24 months to fulfil. Hence the locomotives would only be received in 2008 which is the time that Spoornet plans to go into road freight. At the moment Transnet transported about 80 million tons of general freight but with the new locomotives it planned to increase the figure to about 140 million, or 160 million by 2011 if achieved its target high growth level.

The Chairperson asked how Transnet was ensuring prevention of fraud and corruption within the business.

Mr. C Madasa (ANC) enquired how Transnet was contributing towards social investment, and the general attitude of the entity towards this issue. He also asked how it was dealing with fraud and corruption with regard to awarding contracts.

Ms Ramos replied that social investment strategy was an imperative part of the business transformation. Transnet’s corporate social investment (CSI) was handled through the Foundation, which had its own Board of Directors. The Board reviewed the key projects and deciced whether the focus of projects was appropriate. She gave the example of Pelophepa Health Train, which was appropriately targeted and had adequate reach and impact on the communities it was directed towards. Transnet was also working with other state owned entities for increasing impact and a more integrated approach. Ms Ramos stressed the point that transformation was not social investment but a business imperative and formed part of core business objectives.

In response to the fraud prevention questions, she stated that Transnet had a fraud prevention strategy that was used to detect, prevent and encourage reporting of fraud in the business. The employees were put through a prevention programme as part of the strategy, and experience had shown that the programme had increased the number of reports of fraud. Steps were taken whenever fraud was reported.

The Chairperson asked what the review of CSI would entail, and why Transnet had planned to do this.

Ms Ramos explained that a tenth of the growth strategy structure was directed towards social investment. Last year 500 wagons were bought, in 2006 a thousand and in 2007, 1500 wagons will be bought by Transnet. The maintenance of these wagons needs skills which will increase employment of a lot of engineers and other technical staff. In 2006 Transnet had already hired a thousand people in this regard.

Mr P Hendrickse (ANC) asked for a clear elaboration on the difference between the SAA and the Metrorail sale, and what exactly was under review with regard to Autopax.

Ms Ramos replied that when SAA and Metrorail were disposed of, a valuation on both businesses was done. At the time,  Metrorail reflected a negative balance on its books. The entity did not receive any proceeds or any shares from the disposal of SAA, as all the shares of the business were transferred to the Department of Public Enterprises.

In regard to Autopax, the strategy of was under review. This sale was made within the agreement with the unions which laid the foundation for the restructuring of Transnet. Autopax had two lines of business, being Translux, which was a luxury line, and City to City which was a semi-luxury line. The project team Intercity had been set up to look at different options with labour and government to ensure that the strategic significance of the service provided by these lines was not lost in due to the sale.

Mr Hendrickse asked how Transnet was dealing with congestion at the Durban port.

Ms Ramos explained that part of the cause of congestion was weather delay. She acknowledged that there were capacity constraints in Durban, but the high wind delays contributed to the problem which then led to operations being held back. The capital investments programme included purchases of containers for both Durban and Cape Town.

MrZ Kotwal (ANC) expressed concern that the V&A Waterfront was sold to foreigners, and asked if it was not possible to sell to local people, which would tie in better with the restitution of land processes. He asked if a share awarding scheme could have been used.

Ms Ramos explained that the point in selling the V&A was to maximize value and obtain cash to finance large capital spending and the pension funds. The criteria that were set did not exclude foreign buyers and once the process was underway it could not be undermined by changing the rules. The consortium had foreign and local participants and long-term commitment had been made.

Mr J Stephens (DA) asked if the wagons that were presently unused could not be repaired and reused by Transnet, instead of purchasing new wagons. He asked if the locomotives purchased would be electrified since the high fuel consumption and fuel pricing could be a problem.

Ms Ramos replied that the Spoornet team had been looking for old wagons that could be reused. Most of the wagons that were idling could not be used for the iron ore line since it was very specialized and the wagons were old and insufficiently technologically advanced. Furthermore some wagons could not be reused as they were designed for different rail systems.

Mr L Gololo (ANC) enquired about the strategies that Transnet was using to ensure that it reached its BEE targets and what submissions were given to the Department of Trade and Industry with regards to the BEE Codes. He further asked if and how Transnet would ensure that the pension payouts were equal across all races of employees.

Ms Ramos clarified that the submissions that were made to the dti ensured that Transnet did comply with the Labour Relations Act and BEE codes. The purchase from the company Matshi was an example of how Transnet was working towards achieving the BEE codes. She noted that 42% of Transnet went to BEE companies. However, a small percentage went to women and no demographic breakdown of women owned enterprises was listed.

In terms of the salary pension payout, Transnet followed what had happened in society as a whole and ensured that there was an equal pension payout across race. It planned to increase the pension of those pensioners who earned less than the current state pension and also planned to consolidate the ‘black widow’s fund’, increasing payouts to the same level as state pensions. This was still subject to approval by the trustees.

Mr Carrim noted that Transnet did not address the issue of gender equity salaries with the issue of the pension payouts. He asked if the entity had any succession training and any management training of women to ensure they increase in management.

Ms Ramos explained that entrepreneurs had to be nurtured and hence Transnet had leadership skill training programmes. She stressed that there remained challenges in recruiting women in the highly industrialized engineering professions; but Transnet were busy training a significant number of women, for instance as tug masters and train drivers, in hard core engineering environments.

Mr C Wang (ANC) asked how Transnet communicated the sale of non-core assets.

Ms Ramos explained that Transnet used the national newspapers to communicate the intention to sell assets to interested parties and set the criteria to follow to ensure that the bidders are serious in buying.

Mr Wang asked how responsive the business was in terms of handling possible increased numbers in the demand of materials.

Ms Ramos stated that Transnet would not increase infrastructure before they had conducted research  with their clients as to how much and when they would need materials. Only once this information was received would Transnet be able to set an appropriate response to the possible increase in demand.

Mr Wang asked what Transnet was doing with the increasing labour intensity of their operations.

Mr Hendrickse requested clarity on the significant increase of the remuneration of the one Board member from the last financial year to 2006 on page 77 of the report, and questioned if board members were subject to sanctions.

Ms Ramos replied that the Board of Transnet had constituted in August of 2004, and in the following year the Minister made changes to the renumeration strategies. That was the reason for vast changes in the amounts reflected over the past two years. She confirmed that the Board could impose some sanctions on members who made poor decisions.

Mr Hendrickse asked if the sale of the MTN shares had achieved the desired effect.

Ms Ramos replied that the MTN shares proceeds were used as a closed pension fund. The sale had made a difference to the pension fund scheme since it contributed a significant amount, and had therefore achieved its desired effect. The pension scheme was closed to further injections, so the investment portfolio was steered towards fixed income investments and minimization of risk.

The meeting was adjourned.