ATC220328: Report of the Portfolio Committee on Public Enterprises on the Oversight Visit to Transnet Port of Durban, dated 23 March 2022

Public Enterprises

Report of the Portfolio Committee on Public Enterprises on the Oversight Visit to Transnet Port of Durban, dated 23 March 2022

1. Introduction

The Portfolio Committee on Public Enterprises (the Committee) undertook an oversight visit to the Transnet Port of Durban, Transnet Engineering and Transnet Pipelines from the 3 – 4 February 2022.

The main purpose of the visit to the Port of Durban was to: assess progress that has been made in the expansion of the port, the impact of corporatisation of the port, challenges and efficiencies of the port. The Committee met with the executive management of Transnet led by the Group Chief Executive Officer, Ms Portia Derby. The Committee visited Transnet Engineering (TE) and Transnet Pipelines (TPL). The Committee also met with organised labour, representatives of the KwaZulu-Natal Department of Economic Development and Tourism and the City of Ethekwini.

1.1 Delegation

The Committee delegation included the following members: Mr K Magaxa (Chairperson of the Committee, ANC), Ms J Tshabalala (ANC), Ms J Mkhwanazi (ANC), Mr N Dlamini (ANC), Ms C Phiri (ANC), Mr G Cachalia (DA), Ms R Komane (EFF) and Mr Buthelezi (IFP). The delegation was accompanied by the following parliamentary officials: Mr D Mocumi (Committee Secretary), Mr M Dodo (Committee Assistant) and Mr R Mnisi (Content Advisor).

2. Overview of the Port of Durban

The Port of Durban is ranked 1st in Sub-Saharan Africa, 3rd in Africa 4th in Southern Hemisphere in terms of container through-put. It is the busiest port in Africa in terms of vessel calls (+4000pa). The Transnet National Ports Authority (TNPA) owns the land of the port and terminals. The Transnet Port Terminals operates the terminals; it operates the container handling, and bulk container terminals. The customers of Transnet include terminal operators; shipping lines; ship agents; cargo owners; and clearing and forwarding industry. The Port contributes 20% to Durban GDP, 11% to KZN GDP and 2% to South African GDP. In terms of employment, it directly employs 1183, Indirect 50,000 and Projects 37,200.

2.1 Operational challenges of the Port

Challenge	Intervention	Progress to date
Berthing Delays as result of high marine craft breakdowns (Tugs, Pilot Boats, Launches)	A capital investment Programme is underway to address challenges. ▪ Interim Measure: Introduction of chartered marine fleet contract.	TNPA deployed resources to focus on capital investment plan. Business Case is going through corporate governance approval structures.
Old Ship Repair Facilities and Infrastructure	Revitalization of Dry-Dock & Workshop 24 to improve service level agreement	Expediting Operation Phakisa Initiatives
Maydon Wharf Congestion	A MW (Maydon Wharf) decongesting Stream has been established as a subcommittee of the Decongestion Task Team. ▪ Maydon Road Deproclamation: TNPA in collaboration with eThekwini Municipality to transfer Maydon Wharf Road to Port of Durban	Progress tracked on daily operations platform and bi-weekly on Decongestion Task Team ▪ Port of Durban awaiting eThekwini Municipality Counsel approval on the Deproclamation process
Declining levels of operational efficiencies at Container Terminals.	T/O Technical department has done root cause analysis and they are engaging OEM to deal with equipment challenges	Deviations tracked on daily operations meetings
Island View T/O SWH	Re–installation of infrastructure at berths to improve tanker vessel pump rates whilst alongside (IV5), to allow simultaneous discharge of 3 vessels at different berths (IV4) and improve discharge rate to decrease vessel stay on the berth (IV2)	TNPA working with T/O who are reinstalling infrastructure
Automotive Terminal Stack Management	Auto terminal partnering with shipping lines to initiate time and motion study to assist in mapping processes and improve productivity (STAT) ▪ Incorporation of GCOS stack planning module to improve stack management	In progress

2.2 Update on Port decongestion initiatives

a) Establishment of a multi-party work team: Integrated Decongestion Team formed with daily operations meetings held and implementation review done bi-weekly. Progress feedback integrated into District Development Model (DDM)

b) Back of port operating hours & slot booking: Best operating procedure agreed to: 24 hours Truck pre–booking; 16 Terminal Container Handling facilities in the port, only 4 have adopted truck booking system (70% market share); TPT (Pier 1 (P1), Pier 2 (P2), Point) Grindrod Depot, Fresh Produce Terminal (FPT) & Bidvest Bulk Connections. ICT infrastructure failure is persistent – Tender in adjudication phase.

c) Trucking association accreditation & training: Comprehensive induction program developed by the Maritime School of Excellence (in consultation with industry) for truck drivers; E-learning platform has been set up to conduct training.

d) Container terminal efficiencies: Team performance & equipment availability tracked on hourly basis; Additional working teams from 11 to 13, 14th being trained (P2), P1 has 5 – 6th in training; Container incentive scheme has been rolled out, subject to review as part of comprehensive Transnet review of conditions of service; Equipment spares procured and managed closely – long procurement processes including OCPO approvals and all 23 straddle carriers have been deployed.

e) Increased rail utilisation: Started a shuttle between Durban Container Terminal (DCT) and Bayhead Precinct (2019); Rail supply to Island View (IV) has increased from 1 train per week to 4 for manganese & chrome, reduced bulk trucks on port surrounding roads; Supply to Maydon Wharf 4 trains for grains.

f) Joint stakeholder engagement: Comprehensive stakeholder engagement is active (daily & bi-weekly); Regularly share progress feedback in the District Development Model (DDM) forum.

g). Port access roads: The City-Transnet National Port Authority Memorandum of Agreement (MoA) on the 2nd access road signed; Owners' requirements for Bayhead and Langeberg Roads expansion complete; Metro Police deployed in Bayhead and Langeberg Roads; Traffic impact assessment for the Deproclamation of Maydon Wharf roads completed and awaiting counsel approval from City.

2.3 TNPA interventions to improve terminal efficiencies and oversight

2.3.1 Performance Oversight Management Initiatives

a) There is in extensive stakeholder consultation and buy-in by Port users on the implementation of the Penalty and Incentive Model and revision of the Terminal Operator Standards for the Terminal Operators Performance Management. These are Terminal Operators Statutory Bodies; Industry Bodies (cargo owners, SASSOA); Government (DPE, DOT) and Regulator (PRSA).

b) End to end visibility in the Port Value Chain (improved predictability and deviation management)

User specification defined in collaboration with Terminal Operators;
Pilot/simulation study in partnership with Terminal Operators (Bidvest Tank Terminal, Richards Bay Coal Terminal).

▪ Implementation of the Performance Improvement Process to ensure that remedial actions are closed-out by Terminal Operators in cases of non-performance/any other findings.

▪ Review of the terms and conditions of the Terminal Operator Licence and Agreements pertaining to performance clauses to enhance the performance management and enforcement.

▪ War Rooms have been established with a purpose of improving terminal operational efficiencies, through establishing a focused, real[1]time problem-solving forum that will also provide strategic direction for the operations improvement initiatives within the Ports.

KZN Ports Master Plan Strategy: The strategy for the Eastern Ports Master Plan is as follows: The Port of Durban is to be positioned as a Container Hub. The Port of Richards Bay is to be positioned as a Dry Bulk & LNG gas Hub. The SA Navy is to be relocated from Salisbury Island; Base at the Port of Richards Bay and Satellite Station at the Port of Durban.

2.4 High Level Enablers

These are some of the major projects which will enable the growth of the Port of Durban:

▪ Widening and Deepening of the Maydon Wharf Channel.

▪ SA Navy Relocated from Salisbury Island to Richards Bay.

▪ Existing IV Berth 9 decommissioned and demolished.

▪ Dig-Out/Dredging of Pier 1 side of IV channel.

▪ IV Berths 1-8,10 unaffected.

▪ Dedicated access for Point.

▪ TNPA admin building relocation.

▪ MW leases require early termination.

▪ The South African Container Depot (SACD), Mediterranean Shipping Company (MSC) and Grindrod sites in Bayhead are to be part of the container terminal.

▪ Relocation of Dry, Break and Liquid Bulk cargo from Point, Maydon Wharf and Bluff.

▪ TFR rail master plan to increase Port of Durban capacity.

▪ Development of second access road to link the Port with N2 to alleviate traffic congestion (in partnership with EThekwini Municipality).

▪ De-proclamation of the MW road for TNPA to manage, control and maintain.

▪ Increasing Dry-dock capacity to service and maintenance of larger vessels calling into the Port.

2.5 Milestones

There are major milestones that have been achieved in the Port of Durban:

▪ Completion of the Cruise Terminal

▪ Appointment of Consultants to validate Master Plans

▪ Completed Phase 1 Engagements – Tabled Master Plans to Port Consultative Committee (PCC) and National Port Consultative Committee (NPCC)

▪ Land Swap Agreement for Pelican Island with uMhlathuze Municipality finalized

▪ Agreements reached to relocate SA Navy to Naval & Pelican Islands (Port of Richards Bay)

3. Portfolio Committee on Public Enterprises Oversight visit to Transnet Engineering (TE) Durban Operations

3.1 Overview

Transnet Engineering (TE), is still the largest single heavy engineering capability in the country, with extensive manufacturing capability and maintenance services. In its current form, TE is facing serious challenges in terms of viability and sustainability when evaluated on a purely commercial basis. The reasons for this are:

Insufficient demand in current rolling stock requirements both locally and in terms of the accessible demand on the African Continent to sustain TE.
Constraints placed on TE in terms of legislation and developmental imperatives that have a National strategic connotation, but do not necessarily support the commercial imperatives by which TE is measured and which therefore also impact the competitiveness of TE.
The variability of internal demand from Transnet Freight Rail (TFR) which is unpredictable on an annual basis, particularly in terms of maintenance spend which deviates considerably in terms of the actual maintenance required to support the targeted freight tons to be moved (maintenance treated as a discretionary spend).

With SA’s de-industrialization and switch to a services economy, coupled with the subsequent impact of COVID, there are very few heavy engineering companies left in SA in terms of size or turnover, and none of the same size as TE. Only the automotive manufacturing sector in SA comes close to offering a similar capability, albeit with a very narrow focus.

Total Transnet Engineering Headcount (8,599 in total):

Maintenance –about 3,500 people
Manufacturing –about 3,400 people
Engineering (R&D) –about 640 people
Facilities & Infrastructure –about 650 people
Other support services –about 550 people

The Committee was taken through the assembly line of its rolling stock in particular the assembly line of the Bombardier locomotives. The Committee was taken through the phases of assembly and process of constructing the electric locomotives. The Committee was also taken through a manufacturing process of the CRRC Corporation limited which was formed through a merger of China North Rail (CNR) and China South Rail (CSR). The challenges experienced in the program were explained to the Committee. Transnet has instituted civil claims in the high court with regards to the entire procurement, including having the award to four companies — CNR, CSR, General Electric and Bombardier — set aside. Of the 1,064 locomotives only 583 were delivered, with General Electric having delivered the 233 locomotives it was contracted for. CSR was contracted for 359 locomotives and delivered 260. CNR, contracted for 232 locomotives, delivered 22. Bombardier Transportation, contracted for 240 locomotives, delivered 68.

4. Meeting with Stakeholders

The Committee met with organised labour (Satawu and Untu), representatives of the KwaZulu-Natal Department of Economic Development and Tourism and the City of Ethekwini. These were some of the salient issues raised by the stakeholders:

4.1 Organised Labour

The Committee interacted with organised labour to understand their challenges and relationship with Transnet. Organised labour raised the following issues:

4.1.1 Threat posed by the National Ports Act, 2005 (Act No 12 of 2005) which allowed for competition from the private sector. The Act imposed obligatory competitive processes to allocate the port operations, thus making Transnet Port Terminals to compete with private sector operators. Organised labour argued that the private sector would automate work and maximise profits with no focus on job creation.

4.1.2 Concerned regarding the corporatisation of the port, and feared the threat of privatisation and retrenchments;

4.1.3 Procurement of incompatible cranes for the port, which have not been used as no one had been trained to operate the cranes.

4.1.4 The shortage of equipment due to long procurement processes and ageing equipment.

4.2 City of Ethekwini

The representatives of the City of Ethekwini welcomed the opportunity to be part of the oversight visit. They informed the Committee that the City has one vision plan informed by the District Development Model. The plan is centred around the plot. There is a strategic alignment between the plans of the City and Transnet, and that is because there is a stakeholders’ forums which meets regularly to discuss challenges and plans for development.

4.3 KZN Department of Economic Development and Tourism

The provincial Department of Economic Development and Tourism in KwaZulu-Natal was represented by the Deputy Director-General, Mr Sihle Mkhize, who informed the Committee that they regarded Transnet as a partner and had good working relations. All the plans of Transnet have been presented to the Provincial Executive and have been endorsed by the province. He highlighted challenges such as illegal imports, congestions and road degradations due to trucks. He also raised concern with regards to the plan to move all container terminals to Durban port, as some businesses in Richards Bay also require container terminals.

5. Portfolio Committee on Public Enterprises Oversight visit to Transnet Pipelines (TPL) National Operating Centre (Durban)

5.1 Overview

TPL has three regulated business activities petroleum, storage and gas. The pipeline activities stretch over five provinces. The division has an asset value of over R42 billion with 679 employees.

In the short term the TPL has identified areas to fix and areas to sustain. Amongst the areas to fix are the following volumes, fuel theft, project execution, transformation and revenue costs. Volumes are impacted by low petroleum demand, Covid-19 (3rd and 4th Wave), and fuel theft. Fuel theft have led TPL to experience environmental cost, security costs, mean time to repair and contractor management. Project execution is impacted in these areas; Transnet prices vs real prices, funding, project management (implementation), contractor management and prudency. Transformation relates to Transnet having six active customers, 38 new entrants not yet trading, inability to raise funding, inability to gain the offtakes, inability to access the import facility at Island view and inability to land product at a competitive price. Revenue costs are impacted by low volumes leading to low revenue and neutrality (short term payment by Sasol and Total on Crude conveyance).

The areas to sustain and improve by TPL include the following: security of supply, customer service, maintenance and safety.

5.2 Financial Analysis as at December 2021

TPL in its financial analysis for the December 2021 met most of its key performance indicators. The only indicator not met is the gearing, net debt and total capital expenditure. A summary of the results is tabled below.

5.2.1 December Results

Revenue before the Natref provision is above budget due to higher crude volumes transported and a positive impact on the distribution pattern from the coast.
Based on the continued short payment from both Sasol and Total, the Natref Provision is accounted for in revenue as there is probability that TPL will not recover the shortfall. The change in accounting treatment was effected for interim reporting.
Operating expenditure for the month is below budget by R11.2m due savings in labour (R7.1m) and electricity(R3.0m) costs.
Year to date revenue after the Natref provision (R388.1m) is R178.9m above budget. This is attributable to the budget assumption that there will be lower volumes in the first 3 months of the financial year due to COVID third wave. This did not materialise.
The positive deviation of R352.5m in operating expenditure to date is mainly due to the reduction in the environmental provision of R311m based on the reassessment conducted at interim reporting and savings in other cost element (Note: expenditure includes R34m relating to actual VSP).
EBITDA is therefore R531.4m above budget.
The forecast revenue before the Natref provision and levy of R5.570 billion is based on volumes of 15.143 billion litres.
Forecast EBITDA of R3.930 billion is R354.2m above budget mainly due to the reversal of environmental provision.

5.3 Volumes

The impact on volume was elaborated to Declining volume budget 15.850bl to LE 15.143bl –FY22/23 estimate 14.7bl, GDP growth, Fuel Theft and Higher Tariff. What was achieved was Utilisation of Jameson Park TM2 Buffer stock and ensure uninterrupted security of supply to the inland market and keep Johannesburg wet. The planned activities in terms of volumes: sign term sheet with customers, utilisation of 24’MPP trunk line capacity 148Ml/week, utilisation of Tarlton Storage facility e.g. Bonded warehouse, strategic storage for Botswana Pipeline, Supply TFR fuel depots, collaboration with Vopak and Standard Bank in Island View i.e. unlocking opportunities for HDSA’s at intake and Introduction of jet into the 24’ MPP.

5.4 Transformation

The impact on transformation is; TPL has only six customers which are oil majors, inability of TPL to accommodate Historically, Disadvantaged South Africans (HDSA) customers, inability to raise funding, inability to gain the offtakes, inability to secure import storage, slippage of HDSA volumes from the pipeline and failing to implement sector economic transformation. What was achieved was, TPL on boarded 38 HDSA customers, collaboration with Vopak at Island view Durban to secure storage facility for independent, collaboration with Standard Bank to secure funding, offered inland storage at Tarlton, waivered the requirement for contribution to line fill and offered an immediate product availability inland. TPL planned TFIT and Jameson Park Road Distribution.

5.5 Long term outlook

TPL is now gearing itself for the long term when petroleum products will be in low demand and the introduction of electric vehicles. It has set out to adapt and innovate its business model. Adapting the business model whilst leveraging the Transnet strategic assets and core competencies and collaborating across the energy ecosystem. Transition Financial Risks to TPL include the following:

Revenue Loss: It is expected that energy transition will have a significant impact on the demand for liquid fuels, this may have serious implications leading to revenue losses. Decline in petroleum demand may start as early as 2030 and by 2050 demand will be less than half the demand of 2019.
Capital investment, stranded assets and repurposing: New capital investment in petroleum pipelines will likely result in stranded assets with the expected decline in liquid fuels demand.

TPL has identified the following emerging opportunities:

Accelerate TPL Transition strategy to reduce the potential gap in revenue due to move to cleaner fuels.
Richards Bay LNG Project.
Ngqura LNG Project.
Saldana LNG Project.
Repositioning of the Lily to support Transnet’s participation in Richards bay LNG.

5.6 Fuel Theft

TPL made a presentation on fuel theft, this was done to explain the extent of the environmental damage, the security effort in securing the pipeline and the revenue losses resulting from the pipeline damage caused by the theft. TPL does not have reasons why people are stealing because recently there were incidences of theft of crude oil. Transnet is using drones and helicopters to secure the pipeline. There is a need to get everyone involved

The pipeline is a servitude right; a person can still plant on top on the pipeline but they cannot put a permanent structure on top of where the pipeline is. TPL has a product theft task team which seat on a monthly basis, all the initiatives are reported as well as statistics. Three members of NERSA seat in the task team. There is an opportunity to interact with the challenges that TPL faces in fuel theft and its correlation with determining tariff. The number of incidents has been lowered through interventions of the task team from 15-16 a month to 3-5 a month.

6. Findings

These were some of the findings that were identified by the Committee:

6.1 Although there are challenges related to the capacity and efficiencies of the port, it was impressed with the plans to expand the port in order to unlock its potential;

6.2 Noted with concern that Transnet had not determined the financial impact of the corporatisation of the port on the financial performance of group;

6.3 Noted with concern that there had been no extensive consultation and engagement with organised labour on the strategic direction of the port, particularly on the corporatisation;

6.4 Noted with concern the impact of legislative and policy impediments which affect the efficiency of operations, particularly the turnaround time for procurement of equipment and parts;

6.5 Acknowledged the advanced manufacturing capabilities and capacity of Transnet Engineering, however was concerned with the slow delivery of the 1064 locomotives.

6.6 The Committee observed that fuel theft is the work of organised syndicates and requires intervention from the Justice, Crime Prevention and Security (JCPS) cluster as it costs TPL a loss of revenue.

6.7 Clarity was sought on the land rights where the pipelines were located and what are the costs related to that.

6.8 A concern was raised that there are 38 HDSA who are still yet trading with TPL in terms of strategies to ensure that they are supported to participate.

6.9 The need to explain the tariff application process with NERSA

6.10 The Committee observed with the calls for a greener economy which will lead to a decline in the use of petroleum how is TPL positioning itself for this future eventuality.

6.11 The Committee was expected to visit Transnet Freight Rail but due to weather conditions the oversight visit was postponed for a later date to be confirmed.

7. Recommendations

The Committee made the following recommendations:

The Minister of Public Enterprises should ensure that Transnet:

7.1 engages with National Treasury, Department of Trade, Industry and Competition and the Department of Economic Development, to address the policy and legislative impediments that are hindering SOEs from advancing developmental objectives;

7.2 engages organised labour on the public-private partnership and on the policy direction of the company;

7.3 engages the City of EThekwini and the KZN Provincial Government on investing in the rail network in the province;

7.4 avoids job losses in the reforms that will be implemented at Transnet, particularly the corporatisation of Transnet National Ports Authority;

7.5 creates an inter-departmental freight unit within the city of Durban that can bundle expertise and act as a one-stop shop for freight-related issues in the city. This unit could act as a vehicle to improve coordination on freight transport and engage in joint planning, aligning various actors including Transnet, SANRAL, the national and provincial departments of Transportation and the various departments within the city of Durban;

7.6 increases the autonomy of TNPA and streamline decision-making procedures within Transnet. This includes more financial autonomy, e.g. by creating a separate fund at the disposal for TNPA for port infrastructure and maintenance;

7.7 focuses on the performance of the whole business value chain, as too much focus seems to be on one indicator (e.g. crane productivity) without much consideration for (and sometimes even at the detriment of) other indicators;

7.8 undertakes a comprehensive environmental port impact study and implements green-port mitigation policies if necessary;

7.9 institutes legal proceedings against companies who failed to deliver on their commitments in the rolling stock;

7.10 follows up on recommendations of the State Capture Report in the investigation and prosecution of individuals who were implicated in the acquisition programme of the 1064 locomotives;

7.11 improves efficiencies, economy and effectiveness in the TE supply chain management process;

7.12 increases efforts to secure the pipeline from fuel theft by improving governance structures through stakeholder engagement with JCPS cluster to protect revenue loss from TPL;

7.13 expedites transformation targets and streamlines efforts through strategies and making infrastructure available in order to get the 38 HDSA to trade with TPL;

7.14 ensures that there are strategies and capital outlay at TPL in preparation to transition from petroleum to green initiatives;

7.15 ensures that the copper theft initiatives are put in place as it is a challenge in the rail network and ensures that this should be done in conjunction with law enforcement agencies;

7.16 ensures that there are detailed timelines and budget in addressing the recommendations.

Report to be considered.

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