Transnet: Response to Sunday Times & Annual Report 2007/08

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Public Enterprises

26 August 2008
Chairperson: Ms. FI Chohan (ANC)
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Meeting Summary

Transnet and its various divisions presented the Annual Report for 2007/08 to the Committee, giving a full and detailed analysis of trends, performance, challenges and the moves to turn around the business. There was emphasis on both the physical assets of the business and the human assets, and Transnet aimed to integrate its business, do better planning and coordination, and enable economic growth through providing appropriate ports, rail and pipeline infrastructure and operations in a cost effective and efficient manner, and within acceptable benchmark standards. Transnet had met all performance objectives in 2007/08 except volume growth. The balance sheet was strong, and appropriate gearing enabled it to lend money. The operating margins had improved through addressing costs, and the investments and development showed correlation between budget and actual capital spending. All employees had been extensively involved in an exercise around culture and values, supported by a Culture Charter. Having completed the turnaround, Transnet was now focusing on growth. There were operational efficiencies, but more volumes needed to be moved. There had been a huge increase on spending in the maintenance fields. There was good corporate governance, which was described. Ambitious growth targets had been set, but it was noted that the volumes had not been moved in the last year because of unavailability of the correct volumes of iron ore from the mines, and shortage of coal. The capital investment was R16 billion, to replace existing capacity and to expand further capacity for growth. The major challenges included the global slowdown, energy costs and availability, and the cost of steel. The financial statements were presented in detail, showing a net profit of R6.2 billion, with total asset worth of around R100 billion. The post retirement benefit obligations were described, and the surplus in the Fund in 2008, the ex gratia payment, and the increases were explained. The balance sheet was strong, and significant amounts of capital would be spent for growth. The interventions in the area of human resources were described, and it was noted that there was a six year comprehensive plan for sustainable growth, with the aim of having 13 800 skilled individuals over the next five years.

The National Ports Authority, the Port Terminals, the Transnet Freight Rail, Rail Engineering, Transnet Pipelines and Transnet Capital Projects gave further specific briefings. Each of these addressed the main focus, the achievements and the specific projects that were being undertaken. Members asked questions on the five-year plan, the breakdown of total assets, what interventions were to be made in respect of freight rail, how Transnet ensured that it was competitively priced, and asked for a copy of the report from the World Bank that had ranked South Africa 20th in the world for ports and rail. Specific questions were also asked around freight rail, and the interventions put in place. Further enquiries were made on line items on the balance sheet, procurement, the retention strategies for staff, the contributions to the agricultural sector, the cost of loans, and the tender process for scrap metal, and Transnet was requested by the Committee to submit a written report on the last matter within two weeks.

Transnet addressed the Sunday Times article of 14 August, entitled “Transnet sold our sea to foreigners”, and reported that this had been factually incorrect and that Transnet was taking legal advice. It was explained that Transnet, not being the owner of the sea, could not have sold it, but instead had divested itself of the 26% shareholding in the V& A Waterfront, as well as the 74% shareholding in the same company that was held by three retirement funds. It retained Duncan Dock and the container terminal. The Governing Agreement had required Transnet to undertake certain contractual obligations relating to the reclamation of land from the sea that would be required for the remaining anticipated development of the V & A Waterfront. Members asked what claims Transnet were likely to make against the Sunday Times, and noted that a submission was to be handed in concerning the pension funds, and what was being done about the plight of the Transnet pensioners.

Meeting report

Transnet Annual Report 2007/08 briefing
Mr Fred Phaswana, Chairman, Transnet Limited, gave an opening review of what had happened in the previous year. He stated that the pace at which a business was turned around and how far it could go was determined by what was inherited, and this in turn depended upon what might be termed hardware - the physical assets - and software – the people – attached to a business.  He stated that it was important that the organisation and its tasks became unified. Lessons could be learned about planning and coordination, where business had to be looked at in an integrated fashion.  He further added that Transnet’s key role was to assist in lowering the cost of doing business in South Africa and enabling economic growth through providing appropriate ports, rail and pipeline infrastructure and operations in a cost effective and efficient manner, and within acceptable benchmark standards.

He noted that Transnet, in terms of key performance results for 2007/2008, had met all objectives except volume growth. Under capital and financial efficiency, it showed a strong balance sheet and appropriate gearing which enabled them to lend money. With regards to operating efficiency and effectiveness, the operating margin improved due to costs being addressed.  Infrastructure investments and development showed correlation between budget and actual capital spending.  He concluded that the management had made satisfactory progress in implementing Transnet’s strategy. In moving forward, their focus was shifted towards growth.

Ms Maria Ramos, Group Chief Executive, Transnet, reiterated Transnet’s mandate, vision and mission. An extensive exercise was conducted with all employees of Transnet around the culture and values of the organization, and to reinforce the mission and the vision of the company. That was supported by a culture Charter which focused on the software of the company. She felt that there was sufficient progress from a turnaround strategy to growth. The growth strategy rested on four pillars; namely, business, re-engineering, strategic balance sheet management, corporate governance and risk management and human capital. The turnaround strategy was about ground efficiency and stabilising the finances of the company. In terms of operational efficiencies, there was an increase in what was transported with regard to rail, ports and pipelines. There was an upward trend but there needed to be more volumes moving.

Ms Ramos also stated that with regard to freight rail business, there was a massive increase in spending on maintenance. Historically not much was spent on maintenance. Capital expenditure for the year was R15,78 billion. There were strict systems of corporate governance in place. A detailed fraud prevention strategy was in place and this included a ‘whistleblower mechanism’. The growth strategy that was being pursued focused on increasing volumes, new customer services and development. The business was being run more on an integrated level as well as a network level. The growth targets for volume that were set for the next five years were ambitious. The reason why the volume target was not achieved was because iron ore volumes were not available from the mines, and there were shortages in coal. 

In terms of capital investment, in 2001 the amount was R2 billion, and by 2008 this had risen to R16 billion. That capital investment was split to replace existing capacity and to expand capacity for volume growth. Ms Ramos said that the business faced major risks and challenges, such as trying to expand in a middle of a global slowdown. Energy costs were also an issue, since oil and electricity had increased in price and scarcity. One of the other costs that had gone up very significantly was the cost of steel.

Mr Chris Wells, Chief Financial Officer, Transnet, explained in detail Transnet’s income statement which provided the results of the operations for the year. Revenue increased by 11.9% to R30 091 billion. That referred to external revenue, which comprised the services outside the Transnet Group. Operating expenses increased by 7.3% to R16 906 billion. According to Mr Wells, that amount reflected good cost control.  Earnings before interest, tax depreciation, and amortisation (EBITDA) increased by 18.3% to R13 185 billion. At the beginning of the current year, MTN shares were sold for nearly R5, 7 billion, which resulted in Transnet not having to borrow significantly. The net profit for the year was R6, 232 billion.  In terms of the balance sheet, the total assets of Transnet were worth nearly R100 billion.

Mr Wells then spoke about the post retirement benefit obligations. In 2004, there was a deficit in the Transnet second defined benefit fund. That fund was not part of Transnet. In 2008, it had a significant surplus. Members were entitled to a 2% annual increase. The fund also provided bonuses to members, in addition to that2%.   Transnet also contributed R100 million as an ex gratia payment, in terms of which every pensioner had received a one-off increase. The minimum pension amount would be R8 400 per year. With regards to the cash flow statement, cash flow from operating activities increased by 22% to R10 858 million. The balance sheet was at its strongest, and significant amounts of capital would be spent for growth, which would require planning and commitment.   

Mr Pradeep Maharaj, Group Executive: Human Resources, reiterated Transnet’s human resources initiatives. Key drivers of the organisation were around culture, performance management, and skills development. It had mobilized the workforce to cast 44 000 votes in order to develop a Culture Charter.  By scoring themselves, they could identify gaps that needed to be addressed.  Mr Maharaj mentioned the seven key performance areas for the culture charter. With reference to sustainable growth, Transnet had a six year comprehensive resource plan. They hoped to achieve 13 800 skilled individuals over the next five years.

Sunday Times Article 24 August 2008 : “Transnet sold our sea to foreigners”
Ms Maria Ramos then dealt with the accusations made by the Sunday Times, in an article entitled “Transnet sold our sea to foreigners,” on 24 August 2008. She said that Transnet was taking legal advice on the allegations. She viewed the claims as being inaccurate and malicious, and expected responsible reporting from the Sunday Times. She stipulated that Transnet did not own the sea sketched in the Sunday Times map and therefore could not have sold it.  She said that Transnet had instead sold its 26% shareholding in the V & A Waterfront Holdings (Pty) Ltd, as well as three retirement funds’ 74% shareholding in the V & A Waterfront Holdings (Pty) Ltd. In terms of the sale agreement, Transnet and the three retirement funds sold all their shares and claims in the V & A Waterfront Holdings to Lexshell for approximately R7 billion. In terms of the Governing Agreement, Transnet undertook certain contractual obligations relating to the reclamation of land from the sea that would be required for the remaining anticipated development of the V & A Waterfront. In the past, Transnet had relied on the provisions of the Seashore Act to procure the reclamation of land from the sea-shore, in support of its ports development programme. She emphasised strongly that no secret deals had been made.

Mr Wells provided background information with regards V & A Waterfront, Governing Agreement and the Sea-shore Act. He said that Transnet owned the V & A Waterfront between 1990 and 1995. In 1995, it was sold to the Transnet Pension Fund. In 2001, Transnet Pension Fund split into three separate funds. The three separate pension funds owned 74% of shares in the V & A Waterfront Holdings and Transnet had owned 26%. In terms of the Governing Agreement, sea areas earmarked for reclamation were identified in that agreement and were restricted to the sea areas immediately adjacent to the V & A Waterfront. 

Discussion
Mr C Gololo (ANC) asked how much it was likely that Transnet would claim for defamation, arising from the report in the newspaper. He also wanted to know whether the three separate funds were included in the amount of R7 billion from the V & A sale. Furthermore, with regards to the MTN shares, he wanted to know whether the case was winnable.

Ms Ramos replied that in relation to the Sunday Times, Transnet had engaged lawyers to advise it on the matter. Transnet would ask Sunday Times for a retraction and an apology, as Transnet’s reputation was very important. With reference to the MTN shares, she noted that the case was ongoing and was due for court. Transnet was confident in their position on that matter.

Mr M van Dyk (DA) wanted to know whether he could hand in a submission regarding the pension funds.

Ms Ramos said that he could send in the submission.

Mr P Hendrickse (ANC) wanted to know what happened to the surplus pension fund amounts, and then queried why the increase was limited to 2%.  He also asked, with relation to the sale of the V & A Waterfront, who owned the land, since it appeared to have been shares that were sold.

Ms Ramos said that Transnet owned the container terminal and Duncan Dock, but that the hotel, apartments and shops were now part of Lexshell.

Mr Wells said that Transnet took the plight of the pensioners very seriously, and was trying to set up a strategy for pensioners. Transnet was concerned about the previously disadvantaged pensioners. They particularly focused on black widows of pensioners, when the pension fund of the spouse was not transferred to the widow on death.  Transnet was putting a lot of strategic work into increases in pensions. With relation to the actuarial surplus, it was looking at a strategy on how to apply this surplus in the future.

Mr Gololo wanted to know, in terms of procurement, who were the companies that benefited. He further asked, with reference to the balance sheet, why there was a drastic increase in 2008 in total equities and liabilities.

Ms Ramos said that it was impossible to give the list of companies off hand as there were thousands of companies that Transnet procured. She added that it worked closely with the Department of Public Enterprises (DPE) on a project that identified those areas that competitively localised procurement, and in that way would build sustainable local businesses.

Mr Wells said that the increase was as a result of an increase in capital expenditure.

Mr van Dyk wanted to know how Transnet would ensure that its people who underwent training would stay. He also wanted to know how it was going to contribute to the agriculture sector.

Mr Pradeep replied that Transnet’s strategy had shifted from attracting people to retaining people. With reference to skills demand, it would be looking at how what was needed could be tied in to what was happening in the market.

Mr Siyabonga Gama, Chief Executive, Transnet Freight Rail Transnet, added that Transnet was involved with different farming communities and was working towards an integrated strategy, but had not yet finalised issues.

Mr P Gerber (ANC) noted that Transnet had one of the biggest scrap metal contracts. He asked why it was not going through a public process.

Mr Louis van Niekerk, Chief Operations Officer, Transnet, said that the scrap metal contract was a public process. They were concerned about the value of steel and that they had gone to auctions to verify prices in the market. He also added that the tender was awarded for two years.

Mr Gerber argued that the process of renewing was not a public process, as people had been approached to tender.

Ms Ramos added that she would investigate the matter.

The Chairperson gave a timeline of two weeks in which Transnet must report back on the matter to the Committee.

The Chairperson asked Ms Ramos, with regard to the volume issue, what problems Transnet had experienced around coal. She then posed a question to Mr Wells asking if Transnet was able to do an analysis on the costs of loans, and the impact they would have on profits.

Ms Ramos said that the issues revolved around reliability and availability around fleet locomotives, since the fleet was old. From time to time Transnet also experienced problems around infrastructure or derailment and was also impacted by load shedding. All these issues contributed to a decrease in volume. There were also matters regarding availability from the mines’ side as well. 

Ms Ramos ended the session by saying that it was important that Transnet maintained its credit rating as it could affect the cost of borrowing in the future.

Transnet National Ports Authority Briefing
Mr Khomotso Phihlela, Chief Executive, Transnet National Ports Authority, gave an overview of the growth strategy in Port Services. He stated that the key strategy in this sector was to ensure the fast and efficient transfer of cargo within the country. He maintained the argument that increase in tariffs was not the issue, but rather the efficiency in cargo movement. He stated further that the Ports Authority had faced the challenges of shortage in marine skills, but that a lot of effort had been put into improving training. Part of the capital expenditure lay in the acquisition of skills. He stated that dredging also needed to improve efficiency, especially for the Durban Port. He mentioned that Port Rules had been finalized and that the National Ports Authority was simply waiting for the Minister to gazette them so they could be implemented. . He however stated that the Ports Act Guidelines had started to be implemented. He highlighted the fact that the revenue growth moved from 2.5 million TEUs (twenty foot equivalent units) to 3.7 million TEUs and at least 1 million TEUs were coming in productivity improvements. He stated that the public comments on the draft directives of the regulatory principles were still being awaited before the directives can be implemented. He mentioned in conclusion that in order for the National Ports Authority to provide a submission to the regulator, they made sure that tariff proposals were higher than inflation, in order to get a decent return on re-valued assets.

Transnet Port Terminals Briefing
Mr Tau Morwe, Chief Executive, Transnet Port Terminals, highlighted the successes of the Port terminals. He mentioned that there had been a productivity improvement and capital improvement of the Durban Port. He stated that there was a perception that public sectors were not involved in Port Terminals but from the figures on page 96 of the Slides, Members could see that this was not so. He stated that the container business was the key business to improve in the future. He mentioned that from the customer perspective, it was vital for the Port Terminals to improve their organisation. He stated the need for strategic partnerships, which were to grow the business and grow understanding of the needs of customers, as this would help identify the skill requirements that were needed. He discussed their strategy of the creation of capacity ahead of demand. He gave the example of how surcharges were previously imposed on coming-in cargoes in 2001, but certain members of Transnet had then convinced the regulators that, due to capacity improvement, these surcharges were no longer required. He stated that instances like that enabled Port Terminals to realise that capacity always had to be catered for, to anticipate congestion. He also remarked that a key objective was to ensure that operating costs were contained so that they were lower that the Consumer Price Index increases. He explained that it was important to maintain market dominance in the area of the container business. It was also vital that a culture of performance be created within the organisation. He mentioned the successful steps that had been taken so far and stated that, within the context of their turn-around strategy, the business had been revamped and the annual capital expenditure, which had been R131 million in 2001, had increased to R2.2billion as at 2008. He referred to the financial performance, set out on page 99 of the Annual Report,  and remarked that Transnet Port Terminals were finally beginning to see the light at the end of the tunnel and were bringing in the culture of continuous improvement. He did state that the capital expenditure that was budgeted for, for 2007, had not been achieved, but as at July 2008 The Port Terminals were only 17% behind in their budget. He concluded by referring to the Action Plan on page 101, and mentioned the need to create capacity ahead of demand.

Transnet Freight Rail Briefing
Mr Siyabonga Gama, Chief Executive, Transnet Freight Rail stated that he was going to deal specifically with the growth of volumes within this sector. He explained that the freight business had been showing a decline for the past decade but recorded a slight growth in the year under review. He stated that had it not been for load shedding, it would have grown even faster. He stated that capital investment grew from R7.3 billion to R9.3 billion and, in their year end review, the growth of EBITDA went up by 45%. He remarked that a key issue that took up much time in the year was the decline of coal. He explained that factors such as bad weather, cable theft and old equipment played a role in the slow growth of this division. He explained that as a result of Eskom’s supply problem, export coal was re-routed to power stations, and this was also a contributory factor to their slow growth. He stated, however, that iron ore grew, and was expected to grow still further beyond 31million tons. He concluded by mentioning that there was a need to acquire a new fleet of wagons to increase performance.

Transnet Rail Engineering Briefing
Mr Richard Vallihu, Chief Executive, Transnet Rail Engineering stated that there was a need to focus on maintenance of assets, especially those giving high yield. He stated that in terms of creating capacity, there was a faster turnaround time through optimisation of maintenance processes. As far as safety was concerned, he stated that world-class practices were being adopted and technology upgrades were being done as well. He mentioned that the Rail Engineering revenue increased by 11% and their EBITDA by 9%. He concluded by stating that 900 wagons were being developed for coal movement.

Transnet Pipelines Briefing
Mr Charl Moller, Chief Executive, Transnet Pipelines, remarked that there was a bit of tension in this sector. He referred to the New Multi Purpose Pipeline Project (NMPP) and stated that Transnet Pipelines had received the license to construct NMPP, and had got approval of the board to continue with the project. He stated that the Pipeline contract had been approved and construction had started. He recapped the successes of Transnet Pipelines and stated that they were able to save the economy R475million.

Transnet Capital Projects Briefing
Ms Moira Moses, Chief Executive, Transnet Capital Projects, stated that the Capital Projects were not able to achieve everything they had set out in their target for this year. She remarked that the reasons for this included the problems they experienced with the Quarantine Container Terminals, as certain environmental issues had to be dealt with. She also mentioned that there were problems with the vehicle terminal in Durban because there had been the intention to extend it, but it had taken longer than usual to acquire the land from Department of Public Works. She stated that a number of initiatives were implemented to try to overcome some of these challenges. These included skills development. She stated that there were about 800 employees in Transnet Capital Projects. However, they also worked with two joint ventures to help with Port and Rail Projects and Pipeline Projects, which gave Transnet access to about  2 500 engineering specialists, to assist them with skills and procurements. She also discussed the governance structures, which included compliance to the South African Construction Industry’s regulations. Also included in the governance structure was the Transnet Internal Delegations Authority. This Authority ensured that all documents were recorded and kept, and ensured that regular audits were regularly done.

Discussion
The Chairperson informed the delegation that the Committee Member who had been assigned by the Committee to ask questions for the ANC was Mr Chris Wang. However, he had fallen ill and could not attend the meeting. He had submitted a written list of questions, and the Chairperson asked that these be handed to Transnet to answer in writing, to be conveyed to the Committee by Mr Wang.

Mr Gololo wanted to know about the on-going five-year plan of Transnet. He also wanted to know the breakdown of the total R99 billion assets that Transnet owned.

Ms Ramos informed the Committee that the 5-year plan was a rolling plan, because every year another planning year was added on. Effectively Transnet would actually plan for more than five years, and future evaluation needed to be adequately done.

Mr Wells stated that assets for the different divisions of Transnet could be found listed on pages 164 to165 of the Annual Report.

The Chairperson stated that she realised that the performance indicators of the freight rail were the biggest concern, so she wanted to know, apart from the maintenance issues that had been highlighted, what other interventions would be made in respect of freight rail. She also sought clarification on the tariffs set out on page 131 of the Annual Report. She wanted to know what the reference to “target” and “actual” on page 131 meant.

Mr Wells stated, in respect of tariffs, that what was included in the corporate plan was what underpinned the budget, by estimating percentage increases. He stated that the “tariff” indicators were really a misnomer, because there were no economic regulators for freight rail.

Ms Maria Ramos added that Transnet made sure their prices were competitive with global prices, because it engaged in negotiations with clients who were aware of global trends.

Mr Phihlela stated that the overall margin for Port Authorities was not that far off from world figures. He stated that clients may get cheaper services but that they tended to patronise Transnet because of the efficiency of their services.

Mr Maharaj also commented by stating that the World Bank did the first-of-its-kind survey that looked at Ports and Rails across countries. He stated that on the Port side, South Africa ranked in the top 20 and the best African Country in the world from a cost efficiency perspective.

The Chairperson requested this report.

On the question of freight rails, Mr Gama answered that there was focused training in terms of operations, and there was a New National Operations Centre with the ability to track assets and make timely interventions on ageing assets and fleet renewals. This, according to him, would reduce locomotive years from 34 years to 24-26 years. He stated that there were also people-related interventions, such as maintenance mobile teams being put in place. He stated that external factors such as cable theft also played a role. He stated that Transnet found it surprising that the theft did not decrease after the replacement of the cables with the fibre optic systems.

The Chairperson requested that that some of the initiatives that he had highlighted be given in writing along with the other reports that the Committee had requested, which she summarised as a report on scrap metal, the V&A contract and the World Bank Report. She hoped that the media matter had now been put to rest and thanked the delegation for hosting the Members during the Committee’s oversight visit.

Mr Phaswana commented that this engagement and discussion had been highly constructive. He emphasised the importance of governance and accountability and said that patience was required to guard against most of the problems that had been highlighted.

The meeting was adjourned.

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