Transnet Annual Report 2008/09 briefing

Meeting report

Chairperson’s opening remarks
The Chairperson noted that the Deputy Director General from Department of Trade and Industry had been invited to deal with an issue related to port fees, but had sent an apology as he was ill. She noted that during the previous week officials were late because they had only caught flights that morning. Departments must not try to skimp on costs and thereby inconvenience Parliament and if someone was ill then a colleague should be asked to step in. 

Transnet presentation of Annual Report 2008/09
The Chairperson noted that Mr Andrew Shaw, Deputy Director General, Department of Public Enterprises, and Mr Chris Wells, Acting Chief Executive Officer, Transnet, were present. She said that there was general awareness of problems around the chief executive officer at Transnet. These would not be discussed at the meeting, but the Committee would discuss this in a closed session after the meeting, and would, if necessary, call the Minister or Board.

Mr Chris Wells, Acting Chief Executive Officer, noted that one issue was the succession issue, and the other was the disciplinary procedure in relation to Mr Gama.

Prof Geoff Everingham, Acting Chairman: Transnet, noted that there had been a number of changes to the Board since the previous year. Transnet was running well. Since the last meeting it had to deal with sudden and traumatic economic events globally, which affected Transnet and its budgeting process for the current year, but he assured the Committee that the Board had closely examined matters, was managing through the downturn and was on track to meet budgeted results in the current financial year. The governing structures and committees were in place and functioning, and the membership of the Board, apart from Mr Wells and Mr Singh, comprised independent non-executive directors.

Transnet had established a solid base and had made some tough decisions and done a lot of hard work in the last financial year, which was reflected in the Annual Report. Transnet believed it could grow the business, could be financially successful and meet the requirements of the shareholder and play its important role in the economy. He described the governing structures. The Group Exco provided strategic direction to the business, and provided sufficient oversight to the operations, to ensure the strategy was successfully implemented. In addition, Exco provided oversight for financial and operational risk management across the company.

Mr Wells continued with the organisational and results overview. He noted that the shareholder’s mandate enabled economic growth and ensured the necessary infrastructure from a logistics point of view. The business was run in a cost efficient manner. Transnet was self funded in that its only equity shareholder was Government, through the Department of Public Enterprises. Funding needed for infrastructure investment came from internally generated funds or amounts borrowed on the debt capital markets. It had not required a government guarantee since 2004. Transnet was focusing on strengthening the balance sheet to enable the business to be able to access the debt capital markets without the need of a government guarantee.

 The Shareholder’s Compact had five key points. The first was volume and revenue growth. The rail side had not been strong, and detailed plans were in place in order to focus on growth opportunities. In terms of capital and financial efficiency, Transnet must have a strong balance sheet to enable it to access cost-effective local and international debt capital markets. He explained that the gearing was the ratio of interest bearing debt to debt plus shareholders funds. Transnet would have to increase its operating efficiency and effectiveness, which had been hampered by old equipment, but this was being addressed. Infrastructure investment was a key focus. Transnet had a five year capital investment plan of R80 billion. Each investments must earn an appropriate return to maintain the balance sheet and thereby strengthen its position to access debt capital markets.

The Chairperson interjected to ask what had caused the operational inefficiencies.

Mr Wells replied that many were caused by old equipment. Average capital investment in early 2000 was about R2 billion. Currently, about R20 billion per annum was being spent, mostly in upgrading existing facilities.

Mr Wells described the growth strategy, saying that in 2004 Transnet had adopted a turnaround strategy to strengthen the balance sheet and fund capital investment. The components of the growth strategy were set out. Reengineering was broken up into logistics corridors, with a focus on running them seamlessly from origin to loading at berth. 

Transnet’s core operating divisions were rail, comprising freight rail and rail engineering; ports, comprising the National Ports Authority and port terminals; and pipelines. Non core businesses had been disposed of, other than Luxrail (the Blue Train) and Arivia, an ITC company jointly owned with Eskom, and both were being disposed of.

Mr Wells considered the impact of the economic crisis on Transnet: General freight business, the largest segment of Transnet’s business, had shown a 19% decrease between the first and second halves of the year. The coal business was not operating at full capacity but there was significant growth in iron ore volumes. Containers, another large revenue generator, showed a sharp fall of 11% in the second half of the year. Transport of automotives fell 24%.

There had been significant improvement in operational efficiencies since the turnaround in 2004/05, which were detailed in the presentation.  The Refined Products Pipeline, taking refined petroleum from Durban to the interior, was operating beyond the desired capacity. From a financial point of view, there was significant turnaround. Revenue had increased to R33.6 billion, showing a compound annual growth of 7% in revenue since 2004. Earnings showed improvement from R7.9 billion in 2004/05, to R13.2 billion in 2008/09, which was evidence of improved efficiency and better utilisation of the assets. Gearing was brought down from 61% in 2004 to 36% in 2008/09, below the 50% target that the rating agencies would insist upon to maintain existing rating.

Transnet was committed to providing a safe work environment. Unfortunately there were thirteen employee fatalities during the past year, which was deeply regretted. Each one of those was examined in great detail through a Board of Enquiry and action was taken to implement improvements. The Disabling Injury Frequency Rate (the internationally recognised way of measuring disabling injuries) showed a 12.8% improvement in the year under review.

Transnet aimed to set an example in South Africa of proactive compliance with environmental laws and accepted norms. About a decade ago, it had already identified the likely needs to rehabilitate after transporting asbestos, and rehabilitate contaminated soil. Transnet therefore engaged with specialists to identify the degree of contamination and what had to be done to rectify the situation. A provision of R700 million was raised to complete that rectification and that was well under way. There were some environmental challenges at Port Elizabeth, involving the tank farm and the Manganese terminal, but Transnet had a detailed action plan to resolve them with clear dates and responsibilities set. An oil spill at Richards Bay was addressed together with the Department of Environmental Affairs.

Mr Wells noted that one of the ways Transnet focused on productivity was through the corridor approach. He described how the corridors were identified, but noted that focus on all the depots and complexities of one route, and involving all divisions, would cut time delays significantly.

Mr Wells then went on to discuss the restructuring of the Transnet Second Defined Benefit Fund (TSDBF). This was established in November 2000 as a closed fund and only had pensioners in November 2000, so there were no contributions. Until recent times it had largely invested in equities, with a significant proportion of its investment being quite risky, being placed in both the V&A Waterfront and in MTN shares. In 2004, it had been in deficit by R4.3 billion, but at end of March 2009 the fund showed a surplus of R2.7 billion, despite the downturn in markets. This enabled it to pay significant bonuses to members. In 2009 the bonus plus increase was 10,5%, and Transnet was hoping that trend of increase continued.

He then outlined that in 1990, Transnet had assumed significant medical liabilities for staff. There were 26 000 beneficiaries under the South African Transport Services Pensioners’ medical benefits. Transnet had subsidised each family at R213 per month, which then amounted to R200 million per year. The total liability and surety value at present was about R1.2 million. The medical plan was running into liquidity problems, because of costs and numbers, and a new strategy was being negotiated with the Council of Medical Schemes.

Mr Wells reiterated that the non-core business had been disposed of, with two exceptions. He set out the figures for disposal of South African Express Airways to the shareholder, and Shosholoza Meyl and Autopax to Passenger Rail Association of South Africa (PRASA). A non-core investment in Neotel was sold to the Tata Group. R191 million of property had been sold to government departments.

Mr C Gololo asked for clarification on the sale of Autopax for R1.

Mr Wells explained that that was an assessment of fair value because the business had made losses and needed capital injection.

Transnet had worked to develop the Competitive Supplier Development Programme, and had one hundred locomotive tenders in place for R3 billion. Significant progress was made on Black Economic Empowerment (BEE) procurement, from R 6.8 billion in the past year to R11.59 billion in 2007/08.

The current Five-Year Capital Investment Programme, despite economic downturn, was at about R80.5 billion. Almost R22 billion would be spent in the coming year, of which nearly R13 billion was on expansion, and this trend would continue over the next five years. Funding was very important for Transnet, being a self-funder. The significant investment in infrastructure over the next five years resulted in  R28 billion cash shortages over the next three years, which would be borrowed from the debt capital market. There was a defined borrowing strategy. Some of the highlights were set out. Transnet was rated Investment grade both internationally and domestically, which meant it could borrow cost effectively in those markets and the rating was very similar to South Africa’s own rating.

Risk factors included the need to improve safety, setting excellent environmental practices, and focus on  regulatory risk.

Discussion
Dr G Koornhof (ANC) asked that the Committee be presented with a business plan so that it could evaluate the annual report.

Mr Wells stressed that the Public Finance Management Act (PFMA) required a three-year corporate plan to be produced, but Transnet in fact produced a five-year plan, which was published in the annual financial statements. It would be presented to the Committee once approved.

Dr Koornhof asked for confirmation that Transnet netted about R7 billion on disposal of non-core assets in the year under review, and used that to strengthen the balance sheet, thus achieving the target of the mandate of doing cheaper business in South Africa.

Mr Wells clarified that the non-core disposal had not been R7 billion in this year, but R1.5 billion in proceeds, which was made available for funding of infrastructure.

Dr Koornhof said one of the major tasks for the Committee would be to look at Transnet’s long-term procurement strategies and to follow up on its infrastructure build programme, so he would like these to be included in future reports.

Mr Wells noted that for both procurement and infrastructure, Transnet had well structured programmes and would be happy to share if required.

Ms D Ramodibe (ANC) referred to the restructuring of the SATS Pensioners’ Post Retirement Medical scheme and asked how long it would be on hold pending negotiations.

Mr Wells noted that Transnet was working closely with the Council for Medical Schemes and other medical aid service providers, and the Board had allocated an additional R500 million to enable resolution of this problem. Since this was taken over by Transnet in 1990 it had contributed a large amount, had used an expert almost full-time last year just to discuss matters with members and with stakeholders. It was difficult to put a time frame on finalisation, but Transnet was hoping for resolution by the middle of next year.

Ms Ramodibe asked for clarification whether the internal audit had yet taken place.

Mr Wells responded that Transnet had always had internal audits in place. Until 2005 the internal audit was done internally through its own employees, but in 2005 it was outsourced to improve quality, through open tender to the major service providers. One of the international auditing firms was appointed as Internal Auditors in 2005, and that had remained in place.

Dr S Pillay (ANC) asked what engagement Transnet had with other government departments to contribute towards the strategic development of South Africa, especially in terms of priority areas such as preventing migration to urban areas and concentrating on rural development.

Mr Wells noted that strategies were shared and discussed with the shareholder, the Department of Public Enterprises, and the requirements of Cabinet and government informed the strategies they developed. Transnet had many interactions with those departments that were involved in their business, together with the Department of Public Enterprises.

Dr Pillay appreciated that Transnet needed to get rid of non-core assets to get the balance sheet right, and raise funds for the infrastructure needed to generate higher revenue from the core business. He asked whether Transnet had been cautious about disposals in view of the current depressed economy. He also noted that there was sensitivity about land issues, especially land disposal, since people acquiring land in Port Elizabeth had been unable to get casino licences, and asked if the disposal was contributing to a national plan. Similarly he thought the tender on the locomotives must contribute to internal growth.

Mr M Nhanha (COPE) sought clarification of the percentages of the disposal of non-core assets that contributed to revenue for the year under review.

Mr Wells noted that Transnet had been very responsible on the non-core portfolio, in identifying what it was and how it needed to be sold. The Public Finance Management Act required that if Transnet deemed something to be non-core, it must get the approval of the shareholder before selling it. Transnet was ready to dispose of the Carlton Centre last year, but because of the downturn of the market believed it would not be right to sell it in that market at that time. It had therefore held back on the sale until the market was appropriate.

In respect of land disposal, he noted that Transnet worked with the shareholder, produced a total list of all non-core land for development, and gave this to the shareholder for approval for disposal.  That list was also shared with other government departments. Through this process, the Department of Housing, for example, or the Department of Public Works got first priority for the land. He noted the mention of the land deal in Port Elizabeth. This had resulted from an agreement dating back a number of years with the previous administration. Here, Transnet was effectively forced into doing that land disposal, and the disputes had arisen around pending casino developments at that time.

Dr Pillay thought the manner of reducing the risk on the Benefit Fund, by transferring existing people to a closed fund, was contrary to social solidarity and the current policy on medical schemes. He commented that other processes could be followed. He commented that it was incorrect to have no increase in capital investment in a fund for pensioners.

The Chairperson asked Dr Pillay to analyse and report back to the Committee, within two months, on the Fund, and the problem regarding membership.
 
Mr Wells explained the Second Defined Benefit Fund. In 2000 Transnet decided to restructure the pension fund as there were significant risks and concerns. The existing fund was divided into two defined benefit funds and one defined contribution fund. That strategy was approved by the Board, and also by the Shareholder. That strategy cemented all people who were retired at that stage, and put them into the Transnet Second Defined Benefit Fund. A separate fund, called the Transport Pension Fund, was created for those current employees who did not, at that time, want to go on a defined contribution fund. The third fund, in line with the modern pension fund, was for employees hired after 2000, and it was a defined contribution fund. The Second Defined Benefit Fund, which was run only in respect of pensioners, showed a significant deficit in 2004/05, when the current management team was put in place. Today, it was showing a R2.7 billion surplus. The investment of assets was now appropriate for a closed fund of that nature. There were challenges but the positioning of that fund was significantly better than it was in the past.

Ms G Borman (ANC) noted that it was very important to improve delivery and time through the corridors, and asked how substantial the time reductions had been.

Mr Wells said that the standard time for a container train to run from Kaserne to King’s Rest, where the containers were offloaded, was eighteen hours. There were significant bottlenecks both at Kaserne and at King’s Rest. That was an ongoing challenge, but those had been cut by about half of what they were previously. He noted that this was the busiest corridor and one of the key strategies of Transnet was to put more containers on rail. He could provide detailed plans if required.

Ms F Hajaig (ANC) said Cabinet had taken a decision some years ago to cease service on some branch lines. Subsequently there were discussions around reopening the lines, or installing new lines, to make access to rural areas easier and reduce the cost of wear and tear on our roads. She asked whether anything had happened.

Mr Vuyo Kahla, Group Executive: Office of the Group Chief Executive, Transnet, explained that a year or two ago there had been a move away from discontinuing branch lines, as it was recognised that these offered possibilities of greater activity for freight and also for tourism. One of the points agreed with the shareholder was that the branch lines be identified, and that a process start to concession participation of the branch lines, so that private operators could be invited to operate as a branch line. The plan for branch lines was ultimately to remove them from Transnet to the Department of Transport, under what was currently conceived as a strategic infrastructure utility, consistent with the national logistic strategy framework of the Department of Transport.

Ms Hajaig enquired what discount Eskom was providing to Transnet.

Mr Wells noted that Transnet operated like other large customers of Eskom who had a billing schedule and process. The various businesses were billed according to the schedule negotiated with Eskom as commercial billing.

 Mr Nhanha asked if the cancellation of the 212 locomotives tender was related to the disciplinary process currently under discussion.

Mr Wells said that the cancellation of the 212 locomotives tender did result in disciplinary processes, but was not the subject of the current disciplinary process.

The Chairperson asked if long term fleet plans would involve manufacturing locomotives in Africa within the near future; including components for refurbishing the locomotives within the next three months.

Mr Wells confirmed that Transnet did have a long-term fleet plan and would be happy to present it. It made projections on volume needs over a period, but primarily was involved in getting the average age of the fleet into a replacement cycle, which would require a certain number of locomotives to be purchased annually.

He added that in terms of the CSDP programme with the Department of Public Enterprises, all future tenders would require that a significant amount of work be done in South Africa. Even now a Rail Engineering programme was doing engineering and assembly and would do more as the programme was expanded. 110 electric locomotives for the coal mine and 44 electric locomotives for the iron ore mines were being assembled, with engineering work being done by Union Carriage within South Africa. The CRS presentation would show the extent of South Africanisation achieved.

The Chairperson asked if the non core assets were allowed to run down, and only sold when on the brink of collapse. She noted that SAA and SA Express were both once within the Transnet stable, but had been disposed of individually. She did not understand the rationale of having two national carriers; one performing well and one not so well. She asked whether any analysis had been done whether it was economically and conceptually correct to continue to have two national airlines, and why they were not merged prior to sale. She also asked if Transnet was sure that these assets were not strategic nor critical for a developmental state.

Mr Wells noted that in 2004, in conjunction with the Department of Public Enterprises, Transnet developed a revised strategy, which meant it was only focused on freight, no longer on passengers or anything not concerned with rail freight, ports and pipelines. Anything not connected to the new strategy was to be sold, so that all resources of Transnet would be concentrated in the core areas that were considered most important by the shareholder and the Board, which would involve developing a world-class freight logistics system. Some good businesses, such as the V&A Waterfront, were sold in order to redeploy funds. At the time, Transnet had held discussions with the SAA Board on the integration of SA Express (SAX) with SAA and it was turned down. Transnet then got approval from the shareholder to sell SAX separately.

The Chairperson said that Transnet’s risks seemed to be very high, largely because of the volumes and nature of business, and she asked for a report, within three months, on whether Transnet believed its risk management was satisfactory.

Financial Performance Review of Transnet
Mr Ashwin Singh, Chief Financial Officer, Transnet, reported that in 2009 revenue increased by 11.6% to R33,6 billion, primarily driven by volume increases in the first six months of the year, as well as an increase in the coal export tariff charged for customers. Freight rail and National Ports Authority contributed about 75% of the revenue. Operating expenses increased by 18% to R20.4 billion.

One of the targets of the Group was to maintain a lower cost increase relative to revenue. That was not possible in this year, as a result of higher fuel costs, higher energy costs and higher steel prices. The division between the various elements of the cost base was set out. Mr Singh further explained the increase in profit, depreciation and amortisation of assets, and explained how these arose. He noted that the post retirement benefit obligations were of significant cost to the group, and he explained that R500 million had been set aside to restructure the medical fund.

Profit from operations before tax and net finance costs showed a 21% decrease compared to the prior year as a result of the increase in depreciation costs, the increase in post retirement benefit obligation costs, and a decrease in fair value adjustments. Net finance costs were in line with the previous year, notwithstanding the significant increase in the borrowings. There was a R5 billion profit after tax. The income statement for discontinued operations (where the results of the non-core businesses were captured) reflected a loss of R516 million against R1.9 million in the prior year.

Mr Singh tabled and explained the balance sheet. Non current asset increased significantly for the current year, largely because Transnet was maintenance intensive, with long lead times in terms of supply, therefore the build up of inventory. Trade and other receivables increased as a result of the accrual of the coal line tariff of about R900 million, as well as the sale of Shosholoza Meyl. He pointed out that the post-retirement benefit obligations were also noted in the balance sheet. Long-term borrowings followed a planned trend, since one of the focal points of the turnaround plan was to create or enable capacity to borrow. He noted that cash flows from operating activities increased marginally to R13.5 billion. Working capital requirements were negatively affected by the accrual of the revised coal line tariff, as well as recording amounts receivable for Shosholoza Meyl. He noted that cash interest cover was at four times cover, above the credit ratings agencies’ requirements of three times. He clarified that investors, before lending, wanted to know how much cash was generated in a business. If this was three times the interest to be paid, it would be acceptable. Transnet tried to maintain high cash flows, but in the current year there had been some decline, since R19.4 billion was spent on the capital investment programme.

Mr Singh concluded that the financial performance for the year was credible and resilient, and the balance sheet was strong, showing the ability to generate strong cash flows.

Discussion
Dr Koornhof congratulated Transnet on a clean audit report, which was a significant achievement.
He asked whether attendance records of members of the Audit Committee were available.

Prof Everingham responded that attendance at the audit committee meetings was set out in the Annual Report. He hoped the Committee found there was sufficient regularity of attendance at meetings to discharge that function.

Dr Pillay commended Transnet on its report and balance sheet. He was concerned about the coal line tariff, and asked if it was dependent on price of coal, which would create a risk in terms of what profit could be made.

Mr Singh explained that the coal line tariff was a contract that Transnet effectively renegotiated with coal customers in the current year, as a result of relatively low below-inflationary increases over the past number of years. The new coal contracts had a new tariff associated with the capital structure of the line, and contained clauses allowing Transnet to review those contracts in line with changing economic circumstances.

Mr Wells added that previous long-term contracts expired in March 2005, and were then for complex reasons extended annually up until now, when longer-term contracts were put in place.

The Chairperson noted the previous comments on the internal audit function. She asked for clarification how the internal audit function could be converted to an external one, and asked if this meant there were no internal audits.

Prof Everingham explained that the external audit function – which independently assessed the veracity of the financial statements - was conducted by Deloittes, who were independent external auditors. The King I report had suggested that companies should have internal audits, and that the internal auditors should be independent and report to the Chairperson of the Audit Committee. Transnet had originally used its own staff to run that internal audit. However, it believed that it could improve the quality of that internal audit team, by going out to tender. The internal audit was still being carried out, but it was now done as an independent function conducted by an independent firm, which had in fact employed some of the former employees to protect their job security.

Ms Hajaig was concerned about government’s responsibility towards the Continent, and asked to what extent Transnet collaborated with the New Partnership for Africa’s Development (NEPAD) programme of action in Africa.

Mr Kahla explained that Transnet did have various initiatives relating to Africa. One key point related to developing South Africa into an effective trans-shipment hub and, connected to that, improving shipping to allow for the movement of goods within Africa coming through the South African hub. Transnet Rail Engineering was involved in a number of activities in Botswana, Namibia, Angola and Swaziland, relating to the manufacture of wagons, as well as maintenance programmes, and Transnet was looking more and more into activities to fulfil its responsibilities on the African space, including working with other African countries, subject to the approval of the shareholder, on investment infrastructure that ensured regional collectivity within Africa.

Ms Hajaig said when the NEPAD programme was discussed one of the main problems was the fact that there were not adequate road, rail and airways systems, which were needed for transportation of goods, services and people. The attempts to improve that had been going on for some years. She wanted more detail on what exactly South Africa was doing to alleviate that problem. Although she had seen programmes from Nigeria and other parts of Africa, nothing concrete had been produced from South Africa.

Ms Ramodibe took the Chair at this stage.

Transnet Operating Divisions Review
The presenters noted that  Transnet Freight Rail moved about 14% of South African freight annually. Its revenue had risen 12.6%. Coal volumes had dropped, which required attention. Good progress had been made on the key area of safety. By the end of the following year, 10% of the fleet would be new locomotives.

Mr Richard Vallihu, Chief Executive, Transnet Rail Engineering, noted that  this division was responsible for the availability and reliability of the entire rolling stock fleet of Transnet Freight Rail, but it also did a lot of modernisation of coaches for the Passenger Rail Association (PRASA). The challenges were the age of the fleet and the need to lower the life cycle costs. There were six factories where the locomotives and components were being made and assembled in South Africa. There were eight businesses, which contributed to the Rail Engineering’s capability to build, upgrade and maintain stock. Revenue stayed stable because price increases were not being passed on to customers. It had a presence in thirteen countries in Africa, and its main competitors were China and India. It focused on improving productivity, and was doing well in this area.

The National Ports Authority was responsible for the safe, efficient and effective economic functioning of the national ports system. It owned and managed seven ports on the coastline of South Africa, and would shortly add Ngqura in 2009. It was also responsible for marine services, which included dredging, navigation aids, ship repair and marine operations. It provided port infrastructure. Revenue showed a 3.9% improvement on the previous year. Petroleum and iron ore volumes had increased, but there had been some tapering off of automotive shipping. There were some challenges in efficiency of tugs. It aimed to improve real estate revenue and cost containment, to upgrade infrastructure and capacity, and attend to economic regulations for the Ports Authority.

Transnet Port Terminals operated nineteen cargo terminal operations across seven South African ports. A large part of investment was in containers. It was prioritising investments to support the growth strategy, and pursuing new volume opportunities, particularly in the bulk sector. The initiatives were set out, together with the targets. It was planning to reduce overtime costs, implement planning and training programmes to improve productivity, and undertake succession planning.

Transnet Pipelines were an energy transporter, transporting a range of petroleum products and gas through 3 000km of strategic underground pipelines, divided into four types of lines. It played a vital role in ensuring security of supply inland, as highlighted in the Energy Security Master Plan of 2007. The new Multi-products pipeline(NMPP) was the most important investment in this sector. This had affected the capital expenditure spending. Volumes had increased because of chemical additives that decreased friction, but tariff increases were not high. Alternative funding options were under consideration. There were action plans (outlined in the presentation) to create capacity and improve service delivery.

Discussion
Dr Koornhof said that a few weeks ago the Department of Trade and Industry had indicated that the cargo dues at the South African ports were the largest component of revenue and, compared to other international harbours, were amongst the highest in the world. He asked why this was so and commented that these must  have an impact on the manufacturing sector in South Africa.

Mr Wells responded that the Ports Authority had a high asset base and high margins, similar to ports all over the world. The actual tariff was a complex issue. The World Bank had done a study of costs of imports and exports worldwide, including in South Africa, which was rated high among developing nations in total logistics, including all tariffs and throughput costs. It was difficult to compare one port to another without understanding the local tax structures. Some cities would own their port themselves, and provide some funding from taxes, so it was not included as recovery on port charges. Transnet had done some substantial work on the costings and could provide information.

Dr Koornhof said he would like to compare Transnet’s figures to those of the dti.

Mr Wells asked that he also be provided with the dti information to comment upon it.

Dr Koornhof asked how sensitive Transnet was, in its various expansion projects, to the environment. He commented that targets for Saldanha Bay terminal of 10 000 tons per hour by 2010 were huge. The plans to expand to 16 million tons per annum in 2013 on the railway lines and the terminal would have an impact on the harbour itself, which allegedly had impact in turn on the internationally sensitive environment of the Langebaan Lagoon.

Ms Moira Moses, Group Executive: Capital Projects, Transnet, noted that Transnet would undertake long range planning, ranging from five to thirty years. A project would go through various gate reviews at all stages, and would look at environmental concerns for any area where development or new infrastructure were required. As projects progressed, Transnet would then draw up environmental and sustainability criteria and would determine, along criteria set by Department of Environmental Affairs, whether an environmental approval was required, and would, if necessary, undertake a full Environmental Impact Assessment, with the necessary public engagement process. Only after approval was given would a project proceed. During the project, the construction environmental management plan, and the project environmental specification would be followed. Transnet’s own environmental specialists monitored the project team to ensure they adhered to the two management plans, and there would be regular reports and audits. It would submit reports to Department of Environmental Affairs on a regular basis on the progress of all projects.  Transnet appreciated what a sensitive area Saldanha was, and had established an Environmental Monitoring Committee, including  members of the various stakeholders in that community as well as members from Department of Environmental Affairs. This Committee met regularly and addressed concerns. 

Mr Gololo asked Rail Engineering what would be done with the old locomotives when they were replaced with new ones. He noted that during 2007, during an oversight visit to Malaysia, Members had seen South African locomotives, and he asked why foreign stock was being purchased.

The Chairperson pointed out that the decision to import 500 locomotives did not seem to tie in logically with plans also to manufacture.

Mr Wells referred members to the locomotive acquisition update section in the presentation, and also to the CSDP, which set out how Transnet approached the locomotive programme. Transnet acquired 110 dual carriage locomotives for R3.4 billion. Those were being assembled by Union Carriage Works in Nigel. If that  programme were to be expanded increasingly more work would be done in South Africa. However, since South Africa had not manufactured a locomotive for twenty years, it had lost that capability and know-how. The current programmes would retrain South Africans in lost skills, and more engineers and equipment would be acquired over time to do more locomotive manufacture and assembly. A locomotive had become a very technically advanced piece of equipment, with significant communications and intelligence software. It was unlikely that Transnet would focus on that, but rather concentrate on engineering, the assembly, and manufacturing of components, while outsourcing design and technology to the original equipment manufacturers, similar to how the motor vehicle industry worked. The acquisition of 44 locomotives for the Iron Ore line was similar.

The Chairperson was surprised to hear that technology was being outsourced.

Mr Wells replied that it was one step at a time. South Africa had not built any locomotives for twenty years. Transnet was only now doing the base assembly and engineering work. This would increase as the programme developed. Research and development would be justified only by the huge volumes that equipment manufacturers currently undertook. There were relatively few locomotive manufacturers in the world. South Africa would probably focus on heavy engineering, which created more jobs. Locomotives would be assembled at Union Carriage Works. The fifty ‘Like New’ were being assembled by Transnet Rail Engineering itself, and it had just gone out to tender for 100 ‘fast track’ locomotives for General Freight Business.

Mr Gololo asked the National Ports Authority whether the 13% real estate was core business.

Mr Mohammed Abdool, Chief Financial Officer, TNPA, Transnet, said it was, since one of the core functions of the Ports Authority was to ensure the provision of port services, including the management of port activities and the Port’s regulatory function at all South African ports, which represented everything behind the waterside.  These activities generated a key revenue stream.

Mr P van Dalen (DA) asked who at the Ports Authority ensured no illegal goods were exported.

Mr Tau Morwe, Chief Executive, Transnet Port Terminals noted that Transnet Port Terminals worked closely with the National Ports Authority and the South African Revenue Services to detect illegal cargo and stowaways. Ports had scanners, which were operated by South African Revenue Services (SATS), who would randomly select and scan trucks bringing in or taking out cargo to detect whether the papers matched the goods.

The Chairperson asked what was the margin of error.

Mr Morwereplied that he would have to get that information from SARS and submit to the Committee.

Mr van Dalen asked how many losses were suffered by the Pipelines because of vandalism and theft.

Mr van Dalen enquired why only 14% of the country’s goods were transported by rail. Noting that the country had a major problem with roads, he asked what were the targets and the time frames for increasing rail, which he would like to see rising to 50% or more.

Mr van Dyk noted that Transnet had asked for a tariff increase but was heading for a 15% income loss this year, and also needed R80 billion for its capital expenditure programme. Transnet business had declined. The report showed that Transnet could not cope with the transport requirements, due to the economy. Against this background, he called for an explanation of the salary of R86 million for fourteen directors, and the performance bonus to them, also R86 million, for the past three years.

Mr Wells said that he thought that Transnet had had a good year, since it had achieved its corporate plan, improved on the five years under difficult circumstances, and achieved the cash flow it required. Although there were some disappointments in the tariffs received from regulated business, Transnet had planned around that in appropriating salaries and bonuses.

Mr P Maharaj, Group Executive: Human Resources, Transnet, responded that Transnet was a R118 billion asset-based company with a turnover of revenue of R34 billion, so it was a very large company compared to any other on the Stock Exchange. Its remuneration strategy determined how it would attract and retain management and staff, realising that it had to be competitive. Salaries and benefits for the Senior Executive Team were benchmarked annually, and were compared to equivalent sized companies and jobs in the marketplace. The survey would include twenty-five of the top South African companies, as well as other SOEs. In some instances where there were no direct comparatives, it would also look at international benchmarks. The incentive scheme was also benchmarked to market norms, and Transnet was well within those market norms. Cost of living adjustments were done from time to time to ensure Transnet kept in step with what was happening in the marketplace.

Mr van Dyk said that the Transnet Second Defined Benefit Scheme members had received a 10.5% total increase this year. He thought that was misleading. Metropolitan, who administered the TSDBS, said the bonus was only a once-off payment, calculated on the broad pension of a certain member, and paid into that member’s account as a once-off amount. The actual per annum increase was only 2%, paid monthly, and he felt it was incorrect to add bonus and once-off payments together and calculate the percentage. 

Mr Wells regretted any misunderstanding on the question of the Defined Benefit Scheme. It was specifically stated that there was a 2% annual increase, which was supplemented bonuses. Because of the repositioning of the fund the trustees, with the support of Transnet, were able to declare annual bonuses and that was reflected.

Mr van Dyk asked if the aim to make progress in infrastructure was the reason for Transnet’s aim to involve the private sector. He asked how many kilometres of railway line would be made available to the private sector, and whether this investment would include locomotives and other logistics. He asked for details of participation of the private sector in the past financial year, and what it intended to add in the coming financial year.

Mr Maharaj said that Transnet currently transported about 14% of freight on rail, which reached competitive costs only for distances in excess of 400 kms. The bulk of freight in South Africa was metropolitan traffic. More than 90% of the goods coming into Cape Town harbour was destined for a 100 kilometre radius of Cape Town and therefore were not suitable for rail. Rail economics also depended on rail friendly cargo. Road was a better option for cattle. An international generalisation calculated that 20% to 25% of freight was suitable for rail transportation. Since South Africa was only at 14% there was substantial headway to grow volumes to attract more cargo on to rail, and efficiencies and productivity gains could improve capacity. Over the next five years, Transnet was aiming for 25%. The 40% suggested by Mr van Dyk was not possible in the economy, and internationally was not achievable.

Mr van Dalen was not very happy with the answers, but was encouraged by the planned increase. He noted that much of the freight was local, but queried why so many rail trucks appeared to be standing idle. He believed that if Transnet had to be subsidised, as a State Owned Enterprise, to get the goods off the roads and on to the trains then the Committee must look at that, and also at issues of affordability and reliability.

The Chairperson said this was an issue that must be taken further.

Ms Borman was interested in relations with employees as happy employees meant good outputs. She commented that the sale of assets seemed to have gone well. She also noted that there was training and skills development. She noted that the total days lost through stay-aways had been reduced and asked how this was done.

Mr Maharaj responded that Transnet had counted the number of days lost due to people going on strike. In the 2008 financial year it was just over 2000 days, but in 2009 had dropped to 488 days. That did reflect an improving relationship with labour, because the Charter played a huge role. A Leadership Forum also meant that leaders of management and labour would deal with strategic issues that shaped the organisation. The size of Transnet meant that a dispute would not necessarily involve the whole group going on strike. Industrial action this year had been related to the wage increase negotiations.

Ms Hajaig asked for the differences between other ports and Ngqura, which was built for a specific reason.
She noted that investment in Ngqura, which should have been an industrial development zone, had not happened as anticipated and asked about challenges and blockages.

Mr Morwenoted that the strategy in South Africa was to run a complementary port system, so one port would not compete with another, but had its own hinterland and focused on cargo coming from that area. In maritime nations across the world there was a hub associated with the maritime nation. During the 1830s Cape Town was the Southern hub, but had since been replaced by Singapore. The port of Ngqura aimed to take South Africa again to the level of being a maritime hub nation, by attracting transhipment, competing with cargo that moved via the Suez Canal, bringing cargo to South Africa, creating jobs within the maritime sector, and building additional port infrastructure. It would not compete with local ports.

Ms Ramodibe asked about Transnet’s overall demographics from an employment equity perspective.

Mr Nhanha noted that Transnet had a host of ports in its Expansion Plan. Although the East London harbour appeared on the Expansion Plan, nothing concrete came from Transnet to say what it would be doing. The Daily Dispatch had noted that expansion of the parking area had enabled Daimler to increase exports to America. He urged that substantial investment must be employed in East London for those factories and industries to be sustainable.

Mr Morweagreed that the focus for East London was on the automobile side, catering mainly for Daimler, Chrysler, and Mercedes. There was a need to determine whether to build new infrastructure or to refurbish the current one; and Transnet would be approaching stakeholders within East London to discuss that. There was close work being undertaken with Industrial Development Zones to determine infrastructure of the pylons.

Ms Mentor took the Chair at this point.

The Chairperson pointed out that Port Nolloth was under utilised and under developed, despite richness of minerals in that area. Transnet should be planning for the next twenty to forty years. About 80% of the people in the Northern Cape depended on social grants, thus burdening the State and there was little economic development, yet this could be triggered by development of Port Nolloth.

Mr Morwenoted that Transnet had a National Infrastructure Plan. In the past, Transnet initiated development of projects. The National Ports Act was now the National Ports policy, and did not recognise the existence of a State-owned port operator. The Act stated that Transnet could not decide to do a feasibility study on building a port in Port Nolloth, but had to invite the private sector. The State must resolve the issue of what the role was of a State Owned Enterprise in a developmental state, since the policy seemed to be contradictory. He suggested that this could be expanded upon outside this meeting.

The Chairperson was not happy that Mr Morwehad referred to “a so called developmental State”.

Dr Pillay agreed that it was a developmental State, which was why two Green Papers were sent out last week regarding monitoring and evaluation. He agreed that it was clear from the workshop that the way business was done would have to be re-examined, because compliance with international norms as a way of getting a foot into the international market was sometimes at odds with bringing about the changes that were needed, and many people had advocated that South Africa should see this as a window of opportunity to take a bold and innovative approach, without worrying about international opinion, to build the economy. He thought it was important that Mr Morwegive feedback to the Green Papers, because he was on the coalface.

The Chairperson asked that Mr Pillay’s remarks be placed on record.

The Chairperson noted a shortage of fuel at OR Tambo recently.  Although ACSA was responsible for stocks, Transnet was responsible for transport, and she enquired what was being done to ensure there would be no repetition of the problem.

The Chairperson pointed out that this Committee could play a facilitating role in relation to tariffs.

Ms Hajaig noted that in terms of gender, of the four delegates from Transnet only four were women, and that was just not good enough.
 
Human Resources presentation
Mr Maharaj reported that Transnet had a Human Resources (HR) strategy. In the year under review it had  focused on the Culture Charter, comprised of seven behavioural values and principles, leadership development, to ensure that Transnet had competencies at strategic, operational and merging levels to allow for sustainability in the long-term, and skills development, which accounted for 4.2% of personnel costs. The culture charter was outlined (see attached presentation). Transnet had redefined its targets for employment equity and disability, and just over 74% of the organisation was black, with 18% female and 1% disabled people in the organisation. 90% of bursaries last year went to black people.

The Chairperson interjected that the Committee wanted further breakdowns.

Mr Maharaj said there was a detailed breakdown of Employment Equity on page 86 of the Annual Report.

Mr Maharaj stressed that Transnet was growing skills rather than buying them in, which was the reason for investing in bursaries. 6 700 employees were older than 56 years of age, and there was a need for succession planning. Transnet currently had 11 learners on the Training Outside Public Practice (TOPP).

Ms Virginia Dunjwa, Group Chief Risk Officer, Transnet, briefly outlined Transnet’s Risk Management, saying that Group Risk was responsible for developing, implementing and embedding an Enterprise Risk Management (ERM) strategy and framework for the management of all risks across the Group. Mitigating plans were in place to manage key risks, and were monitored by the governance structures. There would be focus on embedding the ERM culture, reviewing operational risks, improving safety performance and culture, improving environmental management performance and promoting integrated sustainability management.

Discussion
Mr Gololo commented that Sharpening of Young Minds was a good project, and requested more information so that Members could convey this to their constituents.

Dr Memela congratulated Transnet, but wondered whether skills development retention and acquisition, which looked good on paper, were translating into being able to acquire all the skilled people needed.

Mr Maharaj noted that he would be happy to provide more details around the projects. He noted that sustained work had been required to build up the presence of Transnet in the minds of potential employees, as well as students, and that higher education institutes, schools, employers and the communities would all create a pipeline for Transnet to attract new talent.

Mr van Dalen noted that cable theft and theft of railway line was a problem; he was aware that 26kms of railroad was stolen. He enquired how that had happened, and what Transnet was doing to stop it. There was a need to take ownership of assets. He also asked the value of the trains that were vandalised and burnt recently.

Ms Dunjwa noted that in respect of cable theft there were specialist teams, including Transnet members, sitting on various committees with Eskom, Telkom, SAPS and other parties, to combat cable theft, but the problem was that it was a moving target, the theft didn’t happen in one place. Transnet’s core Internal Security Managers managed those contracts. She added that the vandalism issue raised by the Member had related not to Transnet, but Metrorail.

Ms Ramodibe appreciated the work Transnet was doing to empower people, but would like to know where those people came from. She asked how the projections for skills were made.

Mr van Dalen referred to non-compliance with safety and standard operating procedures, noting that 497 people were hurt because they did not follow the safety standards. He enquired whether that was due to lack of experienced or qualified workers doing the work, or lack of training to those standards, and asked what the Board was doing to address the problem.

The Chairperson also asked for clarification on the high number of injuries due to lack of adherence to safety standards. She asked to what extent was Transnet applying the Health and Safety Act, and noted that the Committee would want to meet the prescribed committees when doing site visits and question them on the safety measures. It would also be necessary to meet with artisans and engineers during site visits.

Ms Dunjwa reported that an independent Board of Enquiry would enquire into all incidents. The causes varied from lack of experience, to experienced people not taking due care because they thought they knew the safety drill, or the need for more training, or issues of discipline, or lack of supervision. However, safety structures were in place.

The Chairperson was concerned with so many vacancies at strategic level, and suggested that the number of acting positions showed lack of succession planning.

Mr Maharaj said that the organisation had a very comprehensive talent management process that allowed it to identify talent.

The Chairperson noted that the Committee was very interested in R&D and would ask whether they were working with the relevant stakeholders on R&D.

Mr Andrew Shaw, Deputy Director General, Department of Public Enterprises, reiterated some of the issues in respect of the impact of the recession on Transnet. Some were not mentioned in the presentation, particularly the regulations in the Pipelines and the Ports environment, which were of  concern for the shareholder. However, the Department was encouraged by the results that Transnet had been able to achieve this year and its ability to improve on productivity in all of the operating divisions. Many of those targets were set in place as part of the shareholder compact, and the benefits of a more rigorous shareholder compact were being seen in the increased operation and profitability of Transnet.

The Chairperson proposed that, given the publicity around issues at Transnet, the Minister be asked to give the Committee a report.

Ms Borman supported the giving of a report, but commented that the programme must not become overloaded.

Port Elizabeth Manganese Terminal and Petroleum Tank Farm
Dr S Pillay (ANC) reported that there were certain environmental issues with a manganese terminal and petroleum tank farm at Port Elizabeth harbour, and the location of these also clashed with the integrated development of the Nelson Mandela Bay. Subsequent to an Environmental Impact Assessment, a complaint had been lodged as to what Transnet needed to do to comply with environmental issues, and Transnet had come up with proposed solutions. He welcomed a delegation from the Nelson Mandela Metropolitan Municipality, the Port Elizabeth Chamber of Industry and Commerce; the Coega Development Corporation and the Nelson Mandela Development Agency. They would attempt to find a solution to the problems.

The open portion of the meeting was adjourned.