Transnet 2016/17 Annual Report

Meeting report

Opening remarks

The Chairperson welcomed everyone to the meeting, especially the guests from Transnet. She addressed the matter of apologies and immediately handed over to Transnet to begin their presentation.

Briefing by Transnet on the Annual Report and Financial Statements for 2016/17 Financial Year

Mr Siyabonga Gama, Group Chief Executive (GCE): Transnet, led the briefing, indicating that precedence concerning the presentation of the Annual Report and Financial Statements would have seen the briefing take place around September 2017 and that the six months delay could be attributed to scheduling difficulties.

Nevertheless, it was important for Transnet to account to the Committee in light of the recent media allegations surrounding other state-owned entities as Transnet, too, was not immune from contract mismanagement, deviations, procurement irregularities and, generally, lapses in corporate governance. Specifically, the board and management had been seized with investigations into alleged irregularities relating to commission earned by third parties on contracts over the period 2012-2015 and would be ready to report the outcomes very soon as 90-95% of those investigations had been completed. Referral of the allegations to the relevant justice agencies had taken place. National Treasury was dealing with investigations relating to Regiments, Trillian and McKinsey. That was, therefore, a separate matter. Despite that, Transnet had attained an unqualified audit report.

Mr Gama proceeded to present an executive summary of the Annual Report and Financial Statements for 2016/17, noting revenue received of R65.5 billion, a 5.3% increase from the previous year. Transnet was engaged with a road to rail migration, endeavouring to increase its share in the General Freight Business (GFB) market from the current approximate 24% to 30% by 2020.

Notwithstanding a consumer price index (CPI) of 6.8%, operating expenditure growth was contained at 5.6% with savings of R2.4 billion realised against planned costs. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) increased by 5.0% to R27.6 billion while company profit increased more than 600% from R 393 million in the previous year to R2.8 billion. Gearing for financial year 2016/17 was at 44.4% with a cash interest cover at 2.9 times. An increase of 16.4% in cash, generated from operations after working capital changes, was realised. R24.9 billion of borrowings were repaid during the year with a simultaneous accrual of R17.0 billion in borrowings. Capital investment increases during the period allowed for the acceptance into operations of 452 locomotives since 2014.

Transnet had seen an increase in fatalities during the year which had prompted an intensification of investment into safety management. As per Department of Trade and Industry (DTI) codes, the company was able to attain 103.1% of total measured procurement spend on Broad-Based Black Economic Empowerment (B-BBEE) suppliers. Training of artisans, engineers and engineering technicians covered 3.1% of personnel costs. Corporate Social Investment (CSI) programmes saw an investment of R234 million during that period.

Mr Garry Pita, Group Chief Financial Officer (GCFO): Transnet, continued the presentation with an analysis of the five-year review emphasising the 24.3% year-on-year increases in rail containers and automotive, a reflection of the intention to increase market share in road to rail migration. Revenue and EBITDA had grown by approximately 7.0% over the period 2013-2017. The substantial decrease in 2015 of capital investment reflected commodity price decreases in iron ore, steel and coal. The Asset base had doubled over the five-year period in line with the objectives of Transnet’s Market Demand Strategy (MDS). Emphasis was placed on the 7.2% decrease in borrowings from 2016 to 2017.

Cash interest cover for 2017 was 2.9 times which is above loan covenant requirements of 2.5 times. Loan covenant requirements additionally dictate that gearing should not exceed 60%, which Transnet had achieved with gearing of 44.4% in 2017. Price reprieves to the value of R600 million were provided to Transnet’s customers during 2017, a decrease from over R 2 billion in the previous financial year. Half-year results as at September 2017 indicated a 17.7% increase in EBITDA. Transnet Freight Rail (TFR) represented 57% of Transnet’s earnings encompassing take-or-pay contracts representing approximately two-thirds of Group EBITDA. Transnet Pipelines (TPL) and Transnet National Ports Authority, both regulated entities, represented 31% of profit. As at December 2017, 619 locomotives had been accepted into operation. Half-year results indicated that the return on total average assets had increased to 5.9%.

Transnet had not received a government guarantee since the 1998/99 financial year. Owing to the downgrade of the sovereign credit rating, Standard & Poor’s (S&P) downgraded Transnet’s credit rating on 5 April 2017, preceding a similar downgrade by Moody’s on 13 June 2017. Transnet’s stand-alone credit profile, however, indicated a BBB credit rating as per S&P’s detailed review. Private negotiations with lenders, in an effort to avoid government guarantees, had resulted in higher interest rate payment agreements. Spend on local content in equipment was 83.86% exceeding a target of 75%.

Despite low commodity prices, low demand and adverse weather conditions, coal export volumes grew by 2.4% from 2016 to 2017. Export iron ore volumes decreased by 1.5% in 2017 as compared to 2016 owing to, amongst others, tippler breakdowns in Saldanha. A mega-infrastructure project, aimed at replacement and refurbishment, had been initiated. Transnet had transported a record 12.1 million tons of manganese in 2017, a 17.5% increase from 2016. Operational challenges and adverse weather conditions facilitated a marginal 0.7% increase in port container volumes over 2016/17 financial year. Petroleum volumes in pipelines decreased by 2.6% from 2016 to 2017, due mostly to reduced demand from customers.

Mr Pita then proceeded to expound on Transnet’s Sustainable Development Outcomes. He noted 15 employee fatalities experienced in the current year. Transnet had, subsequently, introduced various driver awareness and other safety campaigns. 85.2% of Transnet employees in 2017 were black, exceeding its target of 80.0%. At the executive level, Transnet met its target of 50.0% female employment while actual employment of people with disabilities at 2.3% fell short of the targeted 3.0%.

Expenditure on training, through Transnet’s Schools of Excellence, exceeded annual targets with an approximate R746 million spend, with a strong focus on Black Economic Empowerment (BEE) and youth development. Health care services over the period assisted 173 016 patients on-board Transnet’s two Phelophepa health care trains. Rural and farm schools sports development programmes saw the participation of 100 000 learners in sporting talent events. Mobile libraries were provided to various schools and Transnet assisted in the delivery of educational material.

2017 saw an increase to 103%, from 59% in 2009, in B-BBEE spend of total measurable procurement spend (TMPS). The 2016/17 financial year saw an increase of 4% of TMPS on black-owned businesses and 3% on black woman--owned businesses. B-BBEE supplier development commitments increased by 39% in 2017 from the previous year.

R160 million had been spent on the Transnet Design and Innovation Challenge and Research Centre which was aimed at stimulating the entry of black youth in high-tech sectors since 2014. Transnet planned to develop future incubation centres as part of the Transnet-Shanduka Black Umbrella Incubation which aims at incubating 100% black-owned small, medium-sized and micro enterprises (SMMEs). New Enterprise Development Hubs, which assist SMMEs with registration, tax administration and BEE certification, were planned for Tubatse and Empangeni. Container Bakeries operating in the Eastern Cape, KwaZulu-Natal and North West assisted 100% rural black women-owned cooperatives to run bakeries in containers. Transnet’s Furniture Manufacturing Incubation with a spend of R18 million offered skills development in furniture manufacturing specifically to black people living with disabilities. Total electricity consumption decreased by 1.7% in 2017.

On internal controls initiatives, corporate governance and consequence management were highlighted. Root causes of Public Finance Management Act (PFMA) violations lay in contract mismanagement and non-adherence to delegations of authority. The automation of procurement processes was highlighted as a means of reducing procurement abuses. To this effect Transnet’s “Step-Up Programme” which had commenced in February 2017 aimed to remedy those shortcomings. Efforts were being doubled to avoid contract extensions due to poor planning. Engagements with the Standing Committee on Public Accounts (SCOPA) had helped in highlighting areas of improvement.

In conclusion, Mr Pita outlined the short-to medium term outlook which necessitated a focus on diversifying revenue streams, productivity and cost management while the long-term outlook of Transnet required an emphasis on the need to equip Transnet with the tools needed to meet the demands of the Fourth Industrial Revolution, particularly the integration of the latest digital technology to implement real-time customer solutions and new-product offerings. The establishment of infrastructure networks for the transmission of natural gas and the intention to expand internationally as a fully integrated logistics service provider were additionally highlighted as long-term goals.

Discussion

Dr Z Luyenge (ANC) expressed appreciation to Transnet for the presentation and particularly Mr Gama for addressing those issues in the public domain about Transnet and committing to report back to the Committee on the investigations outlined by Mr Gama in his presentation. Those reports might assist the Committee inquiry as Transnet was one of the institutions that had been identified, especially on matters that related to McKinsey, Regiments and Trillian, the “Gupta-related aspects”. Beginning his questioning, he inquired into how Transnet dealt with petitions that were sent to the company, in the form of complaints or cases of litigation whereby Transnet had not risen to the expectations of society. Shifting to properties at Transnet’s disposal, he inquired where Transnet had located itself in light of expropriation without compensation, particularly methodologies Transnet could employ to pre-empt court cases brought by disgruntled communities who demanded land from Transnet.

On financial issues, Dr Luyenge commended Mr Pita’s eloquence and his “promising” stance and attitude. He inquired whether Transnet had a suspense account or equivalent policy which regulated the handling and disposal of unclaimed monies for people who had worked for the company, or for items that accumulated funds but did not belong under line functions. He then solicited information with regards to Transnet’s asset management policy, particularly its policy of depreciation and disposal, and Transnet’s asset register. He questioned whether the GCE or GCFO were inventory holders of the assets of Transnet.

On human resources, he inquired whether Transnet’s organogram was fully populated, what the vacancy rate was, at what levels were there vacancies and the methods of dealing with that. Further, did Transnet have a leave register and how was it managed? As leave, whether authorised or unauthorised, had a financial impact, he felt it needed to be addressed. Concerning social responsibility programs, he inquired into the method that Transnet implemented to track the realisation of transfers made to civil society organisations and community-based organisations.

Mr E Marais (DA) complimented the executive and the board on the finances and expressed a renewed hope for the future of SOEs. He addressed the National Development Plan (NDP), particularly the national government’s identification of Saldanha Bay as a national growth point with a focus on the export of iron ore and Transnet’s indication of an investment in iron ore of R8.9 billion. He stated that Transnet had made a presentation two years previously regarding the capital programme for Saldanha Bay which complemented the national government’s announcement of an industrial development zone (IDZ) around Saldanha Bay. He indicated that he had, on multiple occasions, in the Committee, requested an update on that capital investment programme focussed on the Saldanha Bay area.

He added that the Western Cape provincial government had, following suit from the national government, identified Saldanha Bay as a provincial growth point and had invested a lot of money into the upgrading of roads in the area. He noted, however, what seemed to be a slow-down in investment in the area, conceding that that might be due to the slow-down in the economy and perhaps a slow-down in the demand for iron ore. He appealed to the Executive and the Board for an update on the capital investment programme in Saldanha Bay, noting that the investment had been estimated at R 8.5 billion for a seven to nine-year period.

He conveyed his appreciation to Transnet for its CSI programme three years ago when it had joined, on a 50-50 basis, with the Saldanha Bay Municipality to build a pavilion at the rugby sport complex. However, it was noted that the municipality had since, at its own cost, built a brand-new youth indoor sports facility, opening this April. The municipality wanted to join Transnet once again in developing an indoor programme for developing indoor sports. Behind the facility, a secured space was being developed for a youth cafe where computer training would be provided to the surrounding community with no need for transportation to the facility. He expressed hope that Transnet would engage with the Saldanha Bay Municipality in that regard.

Mr M Dlamini (EFF) began by addressing the GCE and the Board chairperson indicating that their counterparts in Eskom, including the former Minister, were “in a hole” but kept on “digging”. He then inquired into the current status of Regiments, McKinsey and Trillian, and whether they were “in the system” and whether payments were being made to them. He noted, in agreement with Dr Luyenge, that if those companies were still working, the inquiry would deal with that in addition to other investigations and the state capture inquiry. He wanted to know whether the Committee was making parallel inquiries while those companies continued to loot money from Transnet. In relation to the 1064 locomotives, he inquired into the status of the R5.2 billion the Guptas were supposed to have received. Was Transnet in contact with the companies that had been awarded those projects and were the Guptas getting kickbacks? Addressing the issue of the market share competition between truck and rail, he requested further elaboration.

He agreed with the reduced use of consultants and was glad that the leadership of Transnet was listening to the superior logic of the EFF in building state capacity. Regarding the BEE procurement spend, he sought an elaboration. He noted that Eskom had come to the Committee to notify them that Transnet had “evergreen contracts” which while it was alleged they were BEE compliant. There were no black people, especially Africans, that are benefiting there. Expressing concern that that phenomenon was an impediment to transformation, he wanted an assurance that the companies involved in the supply chain were 100% black-owned, black as in black people, not paperwork, because we’ve seen with the Guptas they were BEE all of a sudden even though they were not South African citizens. Was Transnet auditing that?

Addressing the Transnet National Ports Authority (TNPA), he asked how the oil and gas storage facilities were structured, particularly as they were built by oil companies that were holding Transnet to ransom because Transnet had given them land to build the storage facilities. There was no transformation happening there. He asked about the current occupation of the storage facilities. He asked who was sitting in Durban and all the ports in terms of storage facilities? Were they the established multinational oil companies or was there participation of black people? His understanding was that the oil companies owned the infrastructure and Transnet just owned the land. Did Transnet not think that, as everyone was agreeing again with the EFF, Transnet should expropriate those storage facilities without compensation? Shouldn’t Transnet tag along and expropriate without compensation?

Shifting to rail, particularly to wagons, he wanted Transnet to hear the complaints of black companies who, while they had access to coal, had no access to the wagons, even through leasing, and therefore no export capacity. Addressing the #GuptaLeaks, he asked about the status of the investigation being conducted by Werksmans. Following up on the 1064 locomotives, he asked whether the 1064 locomotives included the 95 and 100 locomotives that Transnet had acquired in 2012 and 2013 because the Guptas had already been there at that stage. Was that part of the Werksmans investigation? He asked whether the Transnet Human Resources Office was communicating with their employees in light of the media allegations surrounding SOEs, noting that Transnet employees, some lifelong, might be angered, or fearful of job security.

Stressing the importance of infrastructure, specifically rail, and its contribution to industrialisation, he asked how many kilometres of rail had been laid inland, noting that Apartheid rail planning had facilitated the swift exit of products from inland to the sea for export. With rail transport being key to industrialisation, he wanted to know what the current setup with Transnet was.

Mr R Tseli (ANC) welcomed the presentation and the efforts of the GCE in dealing with cases of fraud and corruption and requested feedback in the future as to the development of those cases. He requested the location of Transnet’s community development projects. That would assist Members of Parliament to conduct visits during constituency work.

Mr Tseli questioned the job creation contribution Transnet had made in relation to government targets in the past five years. He expressed unease in respect of borrowings, particularly the debt of R29.1 billion. He was pleased at Transnet’s ability to make debt repayments, noting that that indicated stability in terms of Transnet’s finances. He asked whether the 7% decrease was in terms of interest or payments in the previous financial year. While appreciating the reduction in consultants and the representation of females and people with disabilities, especially at the executive level, he was concerned about the moratorium on the filling of vacancies and the impact that would have on service delivery.

He referred to an article in Sunday’s City Press which concerned a case of B-BBEE fronting by a man at a panel beating company for a white couple for 12 years and who, after that time and notwithstanding a 40% ownership, had received no returns on his stake in the company. He asked what mechanisms Transnet had for the detection of fronting. Lastly, he asked what Transnet’s communication strategy was. It was essential that Transnet effectively communicated positive developments in the company, especially when negative portrayals of SOEs dominate the media.

Ms N Mazzone (DA) began by noting a decline in the interest of the youth in the careers offered in Transnet’s sector of the economy. She inquired how Transnet’s artisanal training programmes were going and how they were advertised. Noting the high unemployment in the country, those job opportunities ought to be encouraged. She had received a large number of requests and inquiries from Transnet employees about variations in salaries and processes between the various divisions of Transnet. Variations occurred with people doing exactly the same jobs in different cities under different employment conditions. She asked if there was a salary differential in those organisations according to city and, if so, why. Were different human resource processes employed?

Regarding the Systems, Applications & Products in Data Processing (SAP) investigation, the elephant in the room, she asked whether there were any suspensions as a result, or whether any persons were under investigation. CAD, a company linked to Duduzane Zuma, had been front page news the previous week and two contracts were being investigated. She asked whether work had been suspended with CAD and whether anybody had been suspended following the outcomes of those stories being broken. The Hawks had alerted SCOPA of four cases with Transnet that they were investigating, of which some were 96% had been completed. One of the cases dealt with tender bids being increased over 500%. She asked for an update on where Transnet stood with those cases and whether those people involved were still walking the corridors of Transnet.

Ms Mazzone asked if Transnet’s membership to Business Leadership South Africa (BLSA) had been renewed in light of its suspension. Seven companies were noted as being under investigation by South African Security Services regarding dealings that could be improper. All seven companies had had dealings with Transnet. The companies were SAP, China South Rail, McKinsey, Neotel, T-Systems, Shanghai Zhenhua and Liebherr-Africa. Had Transnet suspended dealings with those companies and, if not, why not? Finally, the status of the Transnet pensioners’ case before the court was questioned. She had noted on a previous occasion, that negotiations were taking place. However, a statement by a Member in the House had contradicted that understanding.

A brief altercation ensued between the Chairperson and Mr F Shivambu (EFF) with regards to Mr Shivambu’s status in the Committee. According to the Chairperson’s understanding Mr Shivambu was an alternate Member of the Committee only during the proceedings of the inquiry and not on the full Committee. Mr Shivambu insisted that he was an alternate member of the Committee and indicated that he would instruct his office to forward to the Chairperson the rules of the National Assembly which indicated that all Committees had alternate members and that the Chief Whip’s Forum had agreed, in principle, that all Committees could have alternates from their parties and that alternates could participate concurrent to the serving member and have full participation rights. The Chairperson accepted Mr Shivambu’s explanation and indicated that Mr Shivambu could proceed with questioning.

Mr Shivambu began by asking about the value of debt owed by Transnet and the value of its government guarantee. He asked for the percentage of Transnet’s procurement spend on fully black-owned companies. He noted that a case had been opened by the EFF on 9 June 2017 against Iqbal Sharma and Garry Pita for the locomotives tender. It was beyond doubt that an agreement had been reached with Trillian and Salim Essa, who had registered a company in Hong Kong that was receiving facilitation fees for that tender. Besides Iqbal Sharma, who had resigned, who present in the Committee that day, had served on the adjudication committee of the locomotives tender? Were those people still serving on the board of Transnet and what was the status of that tender? Was Transnet still receiving the locomotives and was Transnet still paying the same price which was evidently ballooned for corruption purposes? If that was the case, he asked how much Transnet was paying for that contract. He recommended that the tender be ended immediately as a result of a prima facie case of corruption in the awarding of the tender. From the Chairperson of the Transnet Board, the CE, the CFO and other board members, he requested, on record, whether they had had any relationship with members of the Gupta family or Salim Essa. Mr Shivambu made a recommendation that the Committee to put a moratorium on the locomotives tender until it was dealt with adequately.

Ms D Rantho (ANC) began by welcoming the presentation by Transnet. She expressed concern about the migration from road to rail. Addressing the GCE and the GCFO, she implored them to manage it adequately in light of the poor status of national roads. Empowering the youth and job creation necessitated the rethinking of the shift from road to rail. The expansion of railway lines and revitalisation of the closed lines needed to be realised. She asked whether Transnet had received a return on its footprint across Africa and what the associated challenges were.

According to the audit report, Transnet had not been meeting its Key Performance Indicators (KPIs) for the past four years, an issue which she felt Transnet had brushed over in the presentation. She requested that Transnet indicate the KPIs achieved and those not achieved. She expressed concern that perhaps standards were being set unreasonably high, given the actual capacity of Transnet to reach those high standards, especially in the light of Transnet not achieving even 50% of its KPIs. She asked how the global recession had affected Transnet. What was Transnet’s involvement in the accident in the Free State? Fruitless and wasteful expenditure for the past four years as indicated in the Auditor-General’s Report was a cause for concern. How was Transnet managing those findings and had any recommendations been made? A progress report on Transnet’s Africa strategy was requested, or at least an assurance that Transnet would come back to the Committee on the process.

She expressed concern at Transnet’s absence from their planned second engagement with SCOPA . Could Transnet outline why they did not attend the meeting? Was Transnet not prepared for the presentation or was the entity running away from telling the truth?

The Chairperson, joining other Members of the Committee, welcomed the presentation and progress report by the GCE in relation to governance issues in Transnet and noted the extensive period between that presentation and the Committee’s last engagement with Transnet. That was, in large part, a result of the inquiry processes into Eskom that had commenced in July 2017. The hope was expressed that the Committee and Transnet would be able to meet regularly in light of the public interest in SOEs. Good employees ought to be acknowledged for the role they played, notwithstanding that those employees were alleged to have been involved in fraud and corruption.

The Department of Public Enterprises (DPE) was asked if KPIs, targets and actual achievements of the entities in the DPE could be included in quarterly reports. It was noted that the Medium-Term Strategy Framework (MTSF) would be ending in approximately 14 months. Therefore, it was important for the Committee to analyse the performance outcomes of the DPE and its SOEs. The Committee had to see the link between those achievements and the outcomes and vision of the NDP, particularly outcome four and six, and the government’s manifesto. The Committee needed to know whether DPE’s budget and spending was linked to the NDP, cabinet resolutions, and pronouncements in various State of the Nation Addresses (SONAs) over the MTSF.

Shifting to the board of Transnet, she inquired whether Transnet had a policy which allowed board members to do business with Transnet or a policy which allowed employees to do business with Transnet. She made the board of Transnet aware of the pronouncement by the President in the 2018 SONA that board members of SOEs should not involve themselves in operational matters, including procurement.

The Department needed to address the vacancies on the board of Transnet and to regularise the number of directors. The Chairperson was comfortable with the state of finances of Transnet. She commended the board of Transnet and the GCE for an unqualified audit report. Was the Auditor-General involved in Transnet’s audit report? A recommendation was made to DPE to follow up on issues raised in SCOPA. Debt servicing and debt control was a cause for vigilance by the board of Transnet, especially with the higher interest rate.

Transnet ought to be seen as a home for engineers and therefore efforts to train black engineers and transfer skills had to be emphasised as those efforts could see the reduction in the employment of consultants. A succession plan for engineers, aimed at building inner capacity in different disciplines, ought to be prioritised. A report-back would be greatly welcomed. The Chairperson stated that information about the proportion of companies which were owned by Africans, Indians, Coloureds, by type and level, would assist the Committee. Figures on females, people with disabilities and youth proportions, in addition, would provide clarity on the outcomes of these empowerment efforts. She hoped that the employment of people with disabilities could reach 5%. Had the national government target of 2% been attained?

Response by Transnet

Ms Linda Mabaso, Chairperson of Transnet Board began by addressing the questions around Transnet’s absence at the SCOPA meeting, attributing the absence to a misunderstanding. Transnet had since appeared before SCOPA and the matter had been cleared up, finalised and dealt with.

Mr Gama welcomed the questions and guidance given by the Committee. McKinsey had not done any work at Transnet since February 2016. The contracts with Trillian and Regiments were cancelled by Transnet around September/October 2016 when allegations of wrongdoing began to surface. Monies to have been paid to those companies had been kept in a suspense account pending the outcome of the court case.

Addressing some of the seven companies mentioned, Mr Gama indicated that each company would be

dealt with on its own merit through forensic investigations. Any breaches in contract law would trigger Transnet seeking remedies such as contract terminations. Petitions, litigations and complaints from the public were plentiful and were dealt with in the manner in which they were received. Tip-offs were provided through anonymous telephone lines, but perpetual complainers were prevalent, some being disgruntled or former employees who were rogue and masqueraded as whistle blowers. Transnet was willing to investigate any of the tip-offs. However, approximately only 15% of the allegations were found to be true.

There were no monies in the custody of Transnet which did not belong to Transnet. Balances of such a nature might be present in the pension funds, which was a separate entity from Transnet. Transnet kept a comprehensive asset register of its R 400 billion worth of asset, with a fixed asset register project completed in the past 12 to 18 months. Transnet did possess an asset disposal policy which had Ministerial approval, and which was almost always consulted in order to dispose of assets. Transnet’s depreciation policy was closely aligned with International Financial Reporting Standards (IFRS). Transnet’s assets lasted between 30 and 100 years and therefore the depreciation policy followed that lifespan. On a two to three-year basis there was an evaluation in terms of the IFRS standards themselves. As the accounting officer of Transnet, he had an overall view of the entity and accounted to the Accounting Authority and the Executive Authority. The vacancy rate in Transnet was very low with no executive level vacancies. Transnet had a leave provision of about R700 million owing to employees. Employees and management were encouraged to take their leave.

Over the past two years there had been problems in the oil and gas sector. Transnet was involved with the Saldanha Bay Industrial Development Zone and had recently signed a lease agreement for 35 hectares of land near the port. Placing of equipment on site would commence shortly as permission had recently been granted by the port. Transnet had spent around R 16 million on a new stadium with the Saldanha Bay Municipality and enjoyed good cooperative governance relations with the municipality. Transnet would look at further cooperation in terms of the indoor sports stadium within Saldanha, especially to retain employment in the area.

A titanic battle was taking place between road and rail for market penetration in GFB. Transnet would address the storage of containers. Many leases of the port authorities that had been with traditional white firms had come to an end. The rights to the leases were reverting to the state and to Transnet. Island View Storage in Durban was being targeted for between 51% to 74% black participation in the new facilities. A process to quantify the value of the land was taking place. Those efforts were important as they gave expression to radical economic transformation. The issue on access to coal did not relate to access to wagons through Transnet, but rather to access at the port. Richard’s Bay Coal Terminal (RBCT) allocated the use of that facility to members of the Coal Terminal, making it difficult for B-BBEE entities to participate. RBT Resources, partnering with Grindrod, was endeavouring to bring in junior miners.

Mr Dlamini interjected, asking Mr Gama what Grindrod did. What part was Grindrod playing in transformation in the Richard’s Bay Terminal?

Mr Gama explained that there were two coal terminals in Richard’s Bay, one being the traditional Richard’s Bay Coal Terminal run by, amongst others, Anglo Coal, Glencore and BHP Billiton who had agreed to set aside a further 5% of the terminal to B-BBEE entities. The second terminal was a black-owned terminal which was a joint venture with Grindrod. Grindrod’s share was 40% with 60% BEE ownership. Discussion was commencing with Grindrod for them to reduce their share.

Transnet continued to communicate with employees as investigations were ongoing and there was an express intention to implement outcomes and share with them employees. Developing inland capacity with regards to facilitating industrialisation was integral to the branch line strategies extending to small and remote towns in an effort to develop rail infrastructure. Lines near Knysna and Grahamstown were being revived. Additionally, lines supporting agriculture in the Free State and forestry in the Empangeni area were seeing revival. Transnet’s job creation contribution to the economy was close to 600 000 employees. A reduction of R7 billion in debt had been realised in the previous financial year.

Transnet was a centre of excellence in terms of railway engineering and was working closely with engineering schools in various universities across the country. Railway engineering and maritime academies within Transnet took in artisans. Transnet maintained that it should train more people than needed, so that the surplus could help the broader economy in replenishing depleting skills like welding and plumbing. Diesel mechanics were needed but it was incredibly difficult to find young people to fill those vacancies.

The size of jobs in each division of Transnet differed, resulting in salary differentials, even though individuals might feel they were doing the same job as the next individual. Differentials could also be apportioned to allowances given to retain and recruit people in areas of the country that are generally unattractive employment areas. An initiative of Transnet 4.0 was to integrate and contract the range within job families and hence narrow the salary differentials.

The SAP investigation was complete. Findings of the investigation had been given to the board previous week. There was no finding of wrongdoing against Transnet. No employee of Transnet had been paid commission as a result of a person having engaged in contracts with SAP. SAP had been in business with Transnet for over 21 years but had begun to pay commission on work done in Transnet in the 2014/15 period. There was a risk in blacklisting SAP. SAP had found that three or four of their employees had broken SAP’s rules and had started paying commissions to certain entities. One such entity was CAD House, and another was Global Softech Solutions (GSS). The former was unknown to Transnet and had never done work for Transnet while the latter had done some work in terms of IT resource services with SAP. The last payment paid to them around April 2015 was about R7 million that had been over two to three years. Transnet was looking into the process to blacklist these entities. Findings in that regard would be shared with the Committee. BLSA had never suspended Transnet’s membership. Transnet had decided that there was no value in being a member of BLSA. BLSA was grandstanding on the issue as Transnet had sent a letter to BLSA cancelling its membership.

Cross-functional teams in Transnet dealt with tenders. In the 1064 locomotive tender, approximately 150 people had been involved in the adjudication, some of them dealing with technical aspects, BEE aspects, supplier development or local content. Different gates were entered in the process of tender awards. Transnet had a report on Iqbal Sharma who had retired from the Transnet board in 2014. An investigation by the board at that time was conducted in regard to VR Laser. Transnet’s policy was not to allow board members and employees to do business with Transnet as a general rule.

There was a declaration of conflict of interests process which allowed recusal. In the past three or four years commodity price fluctuations and the global recession of 2008 had greatly affected forecasting on KPIs in corporate plans. Moratoriums could not be entered into lightly considering the business Transnet conducted with various entities. Transnet was not involved in the Free State accident in which a train went through a truck that had illegally crossed the railway crossing, resulting in the death of more than 21 people. Only the network in Kroonstad belonged to Transnet. Issues around the shareholder compact and the achievement of KPIs could once again be attributed to unrealised forecasts in GDP growth. The pension fund issue was quite sensitive as closed discussions were being held with the trustees of the pension funds. The CEO recommended that a closed session of the Committee be conducted to discuss that matter.

Mr Pita confirmed that approximately R8.9 billion would be spent over the next seven years on various aspects of the iron ore line in Saldanha Bay, including rail, engineering and port infrastructure. In 2014/15, Transnet had spent R951.9 million on the iron ore line in the area. In 2015/16 Transnet had spent R 1.4185 billion and in 2016/17, R 772 million was spent in the area. Transnet had spent 103% of its total spend on B-BBEE entities.

Spend with black-owned businesses was R 12.2 billion, representing 34% of total measurable spend. Spend with black woman-owned businesses was R 4.6 billion, representing 12.81% of total measurable spend. Those figures exceeded all shareholder compacts and KPI targets. Fronting was taken very seriously. However, with over 27 000 vendors it was difficult to monitor. Due diligence was applied in respect of the BEE certification. Transnet visited companies to check legitimacy. If malice were found, Transnet would blacklist and report to National Treasury who would blacklist the company across all departments. Transnet had no “evergreen contracts”.

Transnet was bound by the limitations of the Preferential Procurement Policy Framework Act (PPPFA) and National Treasury Instruction Notes. Transnet would be proposing certain changes to have more transformation and empowerment initiatives in the procurement processes. R124.78 billion and R30.1 billion worth of debt had acted as triggers for rating agencies. Negotiations with credit agencies had led to the successful changing of triggers, staving off the need for government guarantees. The last government guarantee had been in the year 1998/99. Transnet worked closely with the Auditor-General and the external auditors, SizweNtsalubaGobodo. The Auditor-General office sat in on every Audit Committee meeting.

Mr Molatwane Likhethe, General Manager for Corporate Communications at Transnet, highlighted Transnet’s below the line approach which allowed for Transnet’s good stories to sell themselves to the public. The current situation meant that the communications strategy had to change in the face of negative narrative surrounding the company to an above the line approach which would see Transnet pay to make sure good stories were not lost. Initiatives included billboards to tell stories of hope and success, the Phelophepa initiative and women empowerment.

Rolling stock delivery in Zimbabwe had made the media rounds as part of Transnet infiltrating Africa. TV and radio advertisements were utilised to notify the public to job and procurement scams around the country. The ONE magazine was shared internally in Transnet and with the Committee, at about 40 copies, on a monthly basis. The group leadership team undertook site visits and broadcasts were organised to clarify issues in the public domain while allowing for live engagement. A broadcast on the Werksmans issue was on the agenda.

Ms Nonkululeko Sishi, Chief Human Resource Officer at Transnet, outlined the various Schools of Excellence such as the Maritime School of Excellence which provided marine-related training, the School of Rail, School of Pipeline, School of Engineering and School of Leadership which provided management training. Young professionals in training programmes comprised approximately 720 graduates. In the past five years, Transnet had trained about 18 533 youth through the Schools of Excellence. Learnerships and internships were offered. Advertisements relating to artisanal registration in the Schools of Excellence could be found in all newspapers. Advertisements were printed in November for admission in March, with a second round of advertisements in May. Most programmes required students to have English, Maths and Science for admission. Requirements for particular programmes were specified in the advertisements.

Mr Seth Radebe, Chairperson of Audit Committee at Transnet, indicated that the 1064 locomotives investigation report by Werksmans had been given to the Transnet Board in mid-December 2017. Deliberations on the report commenced in January 2018. The Audit Committee had been given responsibility for the investigation in respect of the terms of reference, and to ensure a proper investigation. The report was, in all material respects, incomplete and inconclusive in that it had made four recommendations, of which three had been implemented by Transnet. The filtering of matters to the Commission of Inquiry on State Capture had taken place as instructed.

Transnet had an internal process that ensured all matters requiring presentations to the Commission of Inquiry on State Capture were attended to. The report recommended that Transnet undertook further investigations as it had limitations around subpoena powers and around documentation that was not forthcoming from witnesses and sources. The Transnet Board had instituted a further forensic investigation of the matter. Completion was expected in the next two months. The report additionally recommended that certain matters be reported to law enforcement agencies. That had been done. The report also recommended that certain people be suspended within Transnet. However, a list of names or grounds for suspension had not been provided. The report had been made available to investors on a database.

Ms Mabaso outlined the structure of the Transnet Board which comprised eight non-executive members, two executive board members, the GCE and GCFO. The Transnet Board was short of an engineer with flight logistics skills, capital management skills, project costing skills and an economist.

Conclusion

Mr Lebohang Ntwampe, Deputy Director-General, Transport Enterprises at the Department of Public Enterprises stated that the Chairperson had outlined key issues that the Department would be reporting to the Committee. He had taken note of those matters and that the report to the Committee would touch on all entities that DPE was responsible for, not only Transnet. Concerns and notes would be tabled with the Minister as soon as possible in order to organise dates for a report-back to the Committee by the DPE.

The Committee Chairperson noted the request by Mr Gama for a closed session on the pension fund issue and the report-back on the various forensic investigations being conducted by Transnet. Following that would be deliberations around the Budget for the year 2018/19.

The meeting was adjourned.