Transnet 2018/19 Annual Report

Meeting report

The Chairperson welcomed all Members and invited apologies from those unavailable to attend the meeting. There were apologies from Mr N Kwankwa (UDM) and Ms N Mazzone (DA). The Chairperson then invited the delegates from Transnet to make their presentation.

Briefing on Transnet 2018/19 Annual Report

The Chairman of Transnet, Dr Popo Molefe, introduced all the delegates from Transnet starting with Mr Mohammed Mahomedy, Acting Group Chief Executive, Mr Louis Von Zeuner Board Member, Ms Mpho Letlape, Transnet Director, Mr Mark Gregg-Mac Donald, Acting CFO and Mr Richard Valllihu, Acting Group COO. He then briefed the Committee about the economic climate under which Transnet was operating in the reporting period. Transnet was guided by President Cyril Ramaphosa’s mantra “The New Dawn”. The mantra prompted Transnet to create three strategic goals namely Rebuild, Restore and Refocus. State Capture disrupted internal controls within Transnet especially in the area of procurement and finances hence leading to irregularities that resulted in the irregular expenditure of R49 billion. Dr Molefe alleged that proponents of the State Capture brought in advising companies in the financial department, Trillian and Regiments, in order to siphon money from the entity. He explained that Transnet had conducted investigations which resulted in the suspension and resignation of several senior staff members. Consequently, there were a number of vacancies within the organisation.

Mr Mahomedy, the Acting Group Chief Executive explained that Transnet received a qualified audit opinion because the external audit was not able to obtain sufficient appropriate evidence that the disclosed irregular expenditure was complete and accurate. For this reason, Transnet was found in contravention of the Public Funds Management Act (PFMA). Mr Mahomedy emphasised that the qualified opinion was neither related to compliance with the International Financial Reporting Standards nor the Company’s Act of South Africa, 2008. In addition, he explained that R41.5 billion of the R49 billion total account of irregular expenditure had to do with locomotive contracts that were entered into prior 2015 and not during the reporting period.

On Performance against 2018/19 Shareholder’s Compact, due to a number of constraints in the areas of operational excellence and, infrastructure development and capacity creation, Mr Mahomedy told the Committee that Transnet achieved 53 percent of its assigned objectives. He proceeded to show the Committee a graph assessing Transnet’s financial performance against the corporate plan during the reporting period and the previous financial period. He told the Committee that Transnet’s increase in revenue showed a positive development when measured against the financial performance in the previous year. However, the increase was not so significant when assessed against the corporate plan. This also applied to cash generated from operations at the end of the reporting period. However, Mahomedy emphasised that Transnet funded its obligations without making applications to the National Treasury or any other institutions within the government. This made the cash generated from operations significant.

On volumes and revenues, Mr Mahomedy showed the Committee a graph illustrating that there was a decrease in volumes on the freight line and ports containers. This impacted revenue. However, an increase in petroleum volumes resulted in a significant increase in revenue. The amount of revenue obtained was not impacted by net operating costs. Mr Mahomedy told the Committee that net operating costs decreased by 0.1 percent due to cost-optimisation in initiatives including rationalising overtime and reducing professional and consulting fees. On the costs bill included personnel costs which accounted 57 percent of the total cost.

On EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation), depreciation, impairment, fair value adjustments and finance costs, Mr Mahomedy told the Committee that there was an increase in depreciation impairment and net finance costs compared to the previous financial years. On the contrary, Transnet registered a significant fair value gain of R3.3 billion. This and a 3.8 increase in EBITDA accounted a large percentage of the increase in net profit for the reporting year.

Mr Mahomedy told the Committee that property, plant and equipment value decreased from R335.5 billion in the previous financial year to R313.6 billion in the current financial year. On the Abridged Group Cash flows Mr Mahomedy showed the Committee that Transnet borrowed a total amount of R6.2 from the ICBC, the African Development Bank and China Development Bank.

On capital investment analysis Mr Mahomedy explained that capital investment fell from R35.6 billion to R17.9 billion due to delays in the production of locomotives. Transnet planned to sustain capital to ensure improvement in this area.

On safety and human resources, Mr Mahomedy said that there was a decrease in the disabling injury frequency rate and the employee fatalities rate. He emphasised that despite the decrease, the death of employees within the organisation was saddening and not to be taken lightly. Transnet did not achieve its equity employee targets at Exco, which was very concerning.

Transnet was involved in several corporate social investment programmes in areas including Phelophepha health trains, teenage health, socio-economic investment infrastructure and employee volunteer programme. On teenage health, Mr Mahomedy said that Transnet exceeded its target by 46 percent.

On industrial capacity and transformation objectives, Transnet achieved a 93 percent total spending on B-BBEE.

Finally, on energy efficiency and carbon emission, Mr Mahomedy said that energy consumption and efficiency decreased slightly during the reporting period compared to the previous period. He said the issue of carbon emissions remain a key focus for Transnet especially considering South Africa signed agreements with international environmental institutions.

Mr Louis Von Zeuner, Financial Committee Board Member, said that the credit rating of Transnet was important. He stated that qualified audit opinions based on wrong doings of the past and anything that the Auditor General finds to be new undermines Transnet’s credit rating with international rating agents. Transnet was preparing a letter requesting the National Treasury, the DPI and the DTI to engage the AG on working differently with items of state capture in relation to the definition of a qualification.

Mr von Zeuner also stated that Transnet’s ports were being severely criticised. Transnet was aware of these problems and was working relentlessly to fix the problems depending on capital intensity and funding.

Mr Molefe added that state capture created bottlenecks and extra ordinary situations that requires Transnet to adopt a different procurement approach. The reluctance to have the Transnet adhere to timeous PFMA procedure created delays in having urgent problems resolved.

Mr Mahomedy provided an update on the rail accident that happened near Thabazimbi.

The Chairperson asked if the two fatalities which resulted from the accident were included in the statistics presented to the Committee.

Mr Mahomedy told the Chairperson that the fatalities did not fall within the reporting financial period but the current financial period.

The Chairperson invited questions from the Committee.

Discussion

Ms D Dlamini (ANC) asked the delegates to explain the decrease in Transnet’s revenue from R11.3 billion to 10.5 billion especially given the entity’s influence in Southern Africa. Secondly, she asked the delegates to inform the Committee of Transnet’s vacancy rate. Thirdly, she asked the delegates to tell the Committee what measures Transnet had put in place to increase female employees within the organisation. Fourthly, she stated that Transnet budgeted R151 million for CSI but only R109 million was spent on primary health care. She asked the delegates to update the Committee on the remaining balance. Fifthly, she asked what Transnet was doing to improve procurement administration and avoid recurring irregular expenditure within the organisation. Sixthly, she recalled that in 2015 Transnet requested proposals to concession the Committee on the Belmont Douglas branch line. She asked the briefing delegates to update the Committee on this matter. Ms Dlamini asked what measures Transnet has put in place to ensure that the entity account for failure to meet its KPIs. Finally, she asked what Transnet Freight Rail has done to ensure realisation of the road to rail strategy.

Mr E Marais (DA) first thanked God that Transnet was not asking for bailouts. He said that it is problematic to have vacancies in key positions of the organisation and he requested Transnet to focus on resolving this. He then commended Transnet’s CSI. However, he recommended that Transnet ensure that the CSI programmes expand to the rural areas. Mr Marais also asked how successful the road-rail project was. He asked if the previous CEO and CFO that moved to Eskom benefited from irregular expenditure within Transnet. If so, Mr Marais asked what the executive and the board was doing about this. He also added that Transnet should go after all resigning members that were implicated in irregular expenditure within the organisation.

Mr Marais said Transnet should trace Trillian and Regiments as have been done by Eskom. In addition, he commented on the upgrades/construction of ports in Durban. This would benefit the economy. He further requested updates on the capital investment project involving the Saldanha Bay Harbour that Transnet was working on. He asked what the Board was doing about exorbitant port charges that are making South Africa less competitive in the global market. Finally, he asked Transnet to engage with the Treasury to regain what it had lost during the state capture period.

Ms C Phiri (ANC) said that Transnet was demonstrating a lot of confidence which she hoped that the organisation would maintain over time. She applauded Transnet for trying to recover money that was lost through state capture. There was still a lot of work to be done. She asked Transnet to elaborate on how the decline in global economic growth affected Transnet’s engineering influence in the southern African region. She stated that Transnet’s personnel costs showed that the number of engineers within the organisation was reduced.  She wanted to know if Transnet was working on implementing the President’s dream to have a bullet train that operates between Cape Town and Mussina. She also asked why cross border rail operations were now limited to cargo trains. On Transnet's port authorities, she stated that the financial statements indicated a revenue increase. However, she asked Transnet to explain whether the revenue increase was related to the exorbitant port charges that are under investigation within the Competition Commission. She asked further for Transnet to elaborate on the facts of the investigation since there were also allegations of preferential treatment of clients by Transnet; on Port Terminals, for the reasons for the decline in container volumes and what plans Transnet hade to recover from this; how much Transnet budgeted and spent on the multipurpose pipeline project; and finally she wanted to know about Transnet’s relationship with other African countries.

Ms J Mkwanazi (ANC) wanted to know causes of the decrease in revenue within Transnet and how this impacted job creation within the organisation. She also wanted to know Transnet’s plans to improve the audit outcomes. On equity employment, she wanted to know Transnet’s plans to improve the employment of women within the organisation; if Transnet had a risk management plan to avoid the fatalities of employees within the organisation; how the unfilled vacancies within Transnet were impacting operations; whether Transnet had a plan to fill these vacancies; an update on the report of the Transnet-Transport pension fund and the Second Generation fund and the differences between the two funds.

Mr S Gumede (ANC) wished Transnet luck in challenging the audit outcomes and the localisation policy. He said the Committee would love to hear the outcomes of the challenge. He said that three of Transnet’s entities registered an increase in revenue during the reporting period. He wanted to know what strategies Transnet had in place to achieve a sustainable increase in revenue within these organisations. He asked further what lessons the other two entities had that did not register an increase in revenue had learnt from their counterparts. Unrest within communities had impacted upon Transnet’s operation during the reporting period. ‘What plans does Transnet have to circumvent this in the future’? ‘Is Transnet’s transformation programme impacting on the entity’s budget’? “What is Transnet doing to address the verification of localisation”?

Ms J Tshabalala (ANC) criticised Transnet’s report for not demonstrating a good legacy. She said the Committee needed to strengthen its oversight. She asked if there was a legal department within Transnet and what Transnet was doing to recover money that was lost through State Capture. She said the challenges that Transnet was facing were similar to those faced by PRASA. She asked one of the Transnet delegates from PRASA what policies and strategies he had learnt from PRASA that Transnet needed to adopt to deal with the problems that Transnet is currently facing. She asked how the issue of the downgrade in 2017 affected the entity’s borrowing programme for the 2019 financial year and whether Transnet was taking any disciplinary action on those implicated in fruitless and irregular expenditure. The findings of irregular expenditure were similar to those noted by the AG three years ago; hence she wanted to know what Transnet was doing to address the AG’s findings. She asked what systems Transnet has put in place to ensure that KPIs and shareholder compacts adhered to the National Treasury framework for management programme performance; and for Transnet’s views regarding the overlap in the functions of PRASA and the Ports Regulator as had been observed by the Department of Transport.

Ms Tshabalala asked if Transnet has faced any challenges in its implementation of the Integrated Port Management Systems; to tell the Committee about the investigations on the allegations of fraud stated in page 15 of the entity’s annual report; to elaborate the facts on the court application against the entity over alleged irregular payments made by contractors on the multi-product pipeline; how many youth were empowered in Transnet’s skills development and capacity development program; whether the Transnet Board and other senior officials within Transnet went through vetting and a lifestyle audit; and if Transnet can work without the strategic unfilled vacancies since these vacancies are costly. She told the delegates that corruption is not a question of race.

The Chairperson asked Transnet to provide written submissions of all disciplinary processes going on within the organisation and all the names of affected members.

Responses

Dr Molefe said that Transnet identified all the individuals and companies that were enriched through state capture including former two CEOs of the group, the former CFO and Acting CFO, the former Chief Engineer and the former Treasurer. He declined to mention the names of the people who held these positions. He said that they recovered R618 million from the Chinese company contracted for maintenance. Transnet was also in the process of recovering a substantial amount of money from Regiments. Transnet was being assisted by the National Treasury of the United States (US) to recover money that left the country. In addition, disciplinary action was not only being taken on black individuals, but also on white individuals found to have been implicated in cases of corruption.

On Transnet’s relationship with Africa, Dr Molefe said that the entity was working with countries including Nigeria, Zambia, Swaziland, Botswana, Angola, Ghana and Zimbabwe. However, he said competition with China is stiff, but Transnet is working on an agreement with China in relation to this.

On the issue of the bullet train, Dr Molefe said that this did not fall within the functions of Transnet. He emphasised that Transnet was only responsible for cargo rail and not passenger rail. Transnet could contribute through building locomotives. With regard to cross border rail, he said Transnet’s responsibility will be to provide maintenance of the railway tracks.

Mr Mahomedy said that Transnet is constantly pursuing opportunities within the southern African region whether be it for coaches or railway track maintenance. He said the reason for the decline in revenue is because some of the contracts anticipated did not come through. He also said Transnet was very cautious to avoid bad debts within the region.

On the issue of the CSI, Mr Mahomedy said that all of the R151 million was not spent on primary healthcare but on other initiatives such as educational schemes and development schemes.

On fruitless and irregular expenditure, Mr Mahomedy said that Transnet was going after all individuals responsible as the chair had already explained. In addition, Transnet will continue to pursue justice with regard to all criminal activities that it has uncovered.

Mr von Zeuner added that Transnet initiated a complete overhaul of its procurement administrative processes in order to avoid future irregular expenditure. For example, the previous Board had a committee that allowed it to get overly involved in procurement administrative processes. The new Board terminated that committee and replaced it with a new one. However, there were still more improvements to be made.

On the multi-purpose pipeline, Mr Mahomedy said the SIU is reviewing all of the contracts related to this. The entire pipeline is operational. The construction of the pipeline cost over R30 billion. The anticipated cost 12 years ago was R12 billion.

On the Belmont-Douglas branch line, Mr Mahomedy chose to address the branch line strategy. He said the strategy was confusing. Transnet had MoUs in this area but unfortunately the MoUs were not implemented. Transnet was working on the implementation of the MoUs.  

On the Road to Rail strategy, Transnet is focusing on removing automotive containers from the road. He said Transnet is having discussions with various stakeholders in the industry as well as automotive manufacturing companies such as Ford to move manufactured cars by rail. In addition, Mr Mahomedy said Transnet was in discussion with Eskom to increase the quantities of coal moved by rail.

On industrial development on ports, Transnet was aware of the economic value of ports and was still assessing the costs of developing and constructing these. The demand for ports was also key in their consideration. On the issue of Saldana Port, Mr Mahomedy said this project depends on the customer base.

On the issue of port charges, Mr Mahomedy said that Transnet was looking into this. Transnet had made some significant changes but there is still room for improvement. Transnet was learning how to determine port charges from other countries including the US.

On the issue of the number of engineers/employers within Transnet, Mr Mahomedy said this was determined by productivity within the organisation.

On the issue of community unrest, Mr Mahomedy said that one of the key issues is localised procurement. Transnet has teams that are constantly meeting with communities to resolve issues. 

Mr Macdonald explained that the amount indicated for irregular expenditure does not entirely relate to the reporting period. 75 percent of it related to the prior years. On the issue of the 2017 downgrade, Mr MacDonald said that this had no significant impact on funding during the financial year. However, Transnet cannot afford to have another downgrade.

The Chairperson asked Transnet to provide written submissions to the questions that Ms Tshabalala had asked.

Meeting adjourned.