Spoornet: briefing

Meeting report

LABOUR AND PUBLIC ENTERPRISE PORTFOLIO COMMITTEE
5 April 2000
SPOORNET: BRIEFING

Document handed out:
Spoornet Presentation to Labour & Public Enterprises Portfolio Committee (See Appendix 1)

SUMMARY
Chairperson: Mr TS Belot
Spoornet is currently undertaking a process of transformation to run its business profitably. About 5800 kilometres of railway line have been identified as profitable, Spoornet would like to concentrate on doing core business in this area. The remaining unprofitable 11 000 kms of line would be given to concessionaires to operate. International consultants will be assisting Spoornet for six months starting mid-April to identify which businesses to keep, which to shed and how best to go about the transformation.

Freight business contributes 96% of the total Spoornet turnover, but its functioning is hindered by regulations that make it more favourable to use road transportation. Government needs to reconsider these regulations together with subsidising the Mainline Passenger Service if Spoornet is to be profitable and comparable to similar international businesses.

MINUTES
The Chairperson pointed out that the Committee expected the Spoornet presentation to focus on issues such as:
the restructuring of Spoornet;
whether the restructuring resonates with the objects of the RDP;
whether the parastatal would not end up shedding jobs;
whether the restructuring would promote competition;
what Spoornet's employment equity plans are;
whether there are plans in the pipeline to promote Black empowerment;
whether the provinces are going to benefit from such restructuring.

Mr Zandile Jakavula, CEO: Spoornet, noted that he had just been appointed CEO of Spoornet in February 2000, but was not altogether new to the job, as he has been CEO of Metrorail.

Spoornet's vision is to be a leader in profitable freight logistics solutions while contributing to the ideals of South Africa. He stated that Spoornet is involved in five core businesses, namely: COALLINK, OREX, General Freight, LUXRAIL, AND MAINLINE PASSENGER SERVICES.

The Five Businesses:
COALLINK
This is a world class coal transport business from the coal fields to Richard’s Bay Coal Terminal and the Port of Richard’s Bay in KwaZulu Natal. It contributes 22.4 % of Spoornet freight turnover and has been benchmarked as 8% above the world best service provider of the same kind.

OREX
This business is dedicated to movement of iron ore over a 861 km track from Sishen to the port of Saldanha. Orex provides heavy haul logistics solutions for local and international markets. It is responsible for 4.6% total freight turnover and has been benchmarked as being 38% better than the next best business of the same kind in the world.

The Board has invested to purchase new and more efficient equipment to deal with business service needs.

GENERAL FREIGHT BUSINESS (GFB)
This business operates in the mining, light and heavy manufacturing industrial sectors serving customers in 15 specified market sectors. It moves about 96 million tons of commodity freight per year and is responsible for 70% of Spoornet revenue and 52% of its tonnages. It is currently focused on restructuring and transformation.

LUXRAIL
This business operates the famous Blue Train which was voted the best luxury train in the world having been refurbished at a cost of R70 million for the two sets of trains.

Although there has been a gradual increase in the profits, this has not been enough to make Luxrail a profitable business. The number of passengers travelling on this service are always few because of the cost factor and are mostly overseas tourists. Spoornet feels it is the wrong business for them because tourist packages are designed at point of departure and it is too late for these tourists to decide to board such a train on arrival in South Africa. Hence Spoornet is looking at selling the business.

MAINLINE PASSENGER SERVICE (MPLS)
This business provides an affordable inter-city passenger service between major destinations in South and Southern Africa. It conveys in excess of 4 million passengers per annum. However, it is acknowledged that the service still leaves much to be desired in terms of the quality of service to passengers A survey by Spoornet shows that this is the only service of its king in the world that is not subsidised. Even the richest countries that Spoornet usually benchmark itself against, subsidise this service. Spoornet has to carry the whole expense itself: obtaining capital assets and laying infrastructure, maintenance, operational expenses and at the same time trying to make a profit. This needs to be revisited in order to level the playing fields so that apples can be compared to apples in the benchmarking process.

The MPLS service used to be profitable until taxis started encroaching on the long-distance transport business with the advantage of shorter hours on the road and the ability to deliver to the passenger’s doorstep.

About 96% of Spoornet revenue comes from the freight business. The organisation is proactively engaged in developing services here.

STATISTICS:

EMPLOYEE NUMBERS

EMPLOYEE NUMBERS

Mr Jakavula emphasised a commitment on the part of Spoornet to employment equity. He mentioned the fact that Spoornet’s attempts to address employment equity were being defeated because competing companies (that did not invest in training employees) benefited from Spoornet by being able to use the money they have to entice away these very employees Spoornet had invested in. However, he said that it is still the duty of Spoornet to see to it that something is done about employment equity.

EMPLOYEE NUMBERS

Mr Jakavula pointed out that there are two special committees within Spoornet, one comprising of women and another of Black managers, that contribute to discussions around the issues of employment equity and see to it that it is driven in the right direction.

SPOORNET BUSINESS UNIT PERFORMANCE

SPOORNET FINANCIAL PERFORMERS

PRODUCTIVITY FACTORS
With fewer employees and less equipment they intend to improve on productivity.

FOCUS AREAS 2000/01
Spoornet's six main focus areas for this financial year are: Efficiency, Profitability, Safety Improvements, Transformation and Communication

ACTIONS FOR IMPROVED PERFORMANCE
A moratorium on all unfilled vacancies has been introduced. A close examination to see whether those positions are needed will be undertaken. Only those jobs that are critical will be filled.

Strict financial controls have been instituted. Also attached to this has been the signing of performance contracts between the CEO and his managers. An incentive scheme is being looked at to motivate performance of managers. A leaner budget is emphasised with emphasis on improved corporate governance. A cut down on the operational budget to force managers to come up with ideas for a leaner budget is planned.

The Restructuring and Transformation processes are underway

RESTRUCTURING AND TRANSFORMATION PROCESSES
The Transformation process at the direction of Spoornet’s new CEO, Mr Jakavul, seeks to address: customer focus; quality services; operational efficiency; asset utilisation efficiency; outsourcing. Spoornet is undertaking this Transformation exercise with the aid of Halcrow "turn around specialists" who will be arriving on 10 April 2000 to assist in the business efficiency process. These specialists will be working side by side with Spoornet managers. In this way there will be transfer of skills in addition to operational improvement at the end of the six month contract.

Restructuring is done under direction of Transnet assisted by Rothschild Consultants who have been in the country for about two months. It is almost a month since the process started. Experts in audit, legal and other fields are already on board. The process seeks to address: Procurement of private sector capital; Control over policy; Risk sharing and transfer; Realisation of value; Expertise and technological transfer; Change of ownership.

Spoornet is undertaking corporatisation of CoalCo, ORECo, MLPSCo, LuxCo, LinkCo. The organisation is looking at whether to concession or sell the customer facing businesses under the above companies, such as COALLINK, OREX, MLPS, with a concession package being looked at for LINKRAIL. LUX RAIL would most probably be sold outright. An intention is to move out of Low Density Lines business and giving that to new operators with the maintenance of the network also their responsibility.

Structures that are involved in the restructuring process include the Department of Public Enterprise and other departments, labour and interested stakeholders. These structures collectively form a Steering Committee to focus on policy and direction of the process. Senior level staff provide general direction and have ultimate authority and responsibility. A Project Delivery Committee is responsible for the day to day management and co-ordination. The Committees deal with the Corporatisation Group, Industry Group, Restructuring Group and Human Resources Group.

By September 2000 Spoornet foresees the completion of the corporatisation process and planning of the industry framework and structure. By November 2000 or at the latest early 2001Spoornet would like to be finished with Luxrail. Towards June/July 2001 the MLPS, OREX, COALlink, Linkrail restructuring transactions should have been finalised. GFB and RTTS are to be ongoing projects to be taken beyond 2001.

CHALLENGES FACING SPOORNET
LIGHT DENSITY LINE MANAGEMENT
Mr Jakavula believes that Spoornet needs to concentrate on its core business and to use the profits to develop infrastructure for this core business. The other businesses should be left to entepreneurs whether that be own employees. Spoornet would require aid from Government for future operation of those lines by a concessionaire. An operator that would be suitable would be one with a cost structure appropriate for class II, III, IV railways. Approximately 5 800 kilometres of line have been identified as sufficient for Spoornet to make good profit. There would still be a need to address issues relative to infrastructure access.

CAPITAL INVESTMENT
Spoornet plans to assume full and timely capital investment. Significant investment is planned for projects to:
Maintain and enhance efficiency;
Maintain and enhance service quality;
Expand core business;
Retain technological leadership;
Access capital funding.

COMPETITIVE LANDSCAPE
Spoornet's General Freight Business faces an increasingly competitive environment. Concerns to keep in mind are:
- There is over capacity in the roads.
- Increasing productivity and efficiency of road haulers.
- Overloading of trucks.
- The regulatory environment favours road freight.
- There are market pressures in terms of quality of service delivery and new technologies.

SPOORNET LOW DENSITY LINES
Spoornet needs only 5800 km to run a profitable business. It is believed that Spoornet’s financial performance could be improved by removing over 11 000 km of network that does not generate profitable income (11 430 km route with a total of R820 million negative contribution).

Specialist consultants would be called in to deal with rail and terminal services, financial services, support services in IT, marketing and sales, identifying pieces of legislation causing problems.

REGULATORY ENVIRONMENT
- insufficient costing and charging externalities.
- Government needs to re-examine policy of road and rail haulage.
- need to establish rail safety regulatory regime.
- policy for access rights, priorities and rates.
- fuel levy for RAF and diesel locomotives.
- inadequate policing of overloading, speed and safety.
- South Africa has to keep pace with the rest of the world in reforming statutory regulations and institutional transformation
- imbalance in user-pay principle.

REGULATORY ENVIRONMENT
The Transport Deregulation Act, 1988 increased maximum axle loads from 8.2 – 9.0 tons for single axles and from 21 – 24 tons for tridem axles. It also increased the maximum vehicle length from 20 – 22 metres.

The Road Traffic Act 1989 prescribed gross permissible road vehicle mass 57 tons (later reduced to 56 tons). The Department of Transport recommended that a 5% tolerance in permissible limits be allowed before offenders are prosecuted for overloading. The policy of the National Director of Prosecutions is that offenders be allowed a 10% tolerance before being prosecuted.

Spoornet believes that it is losing business because of these regulations. South Africa is second only to Zambia in having the highest axle loads world-wide.

ROAD VEHICLE MASS
South Africa stands at 56 tons maximum permissible mass per vehicle, second only to Zambia at 63.25. Countries that South Africa is usually benchmarked against permit very low tonnage. Britain stands at 38 tons and USA at 36 tons.

MAINLINE PASSENGER SERVICE
For this to fulfil its macro transport role it will require a subsidy for:
- operations, between R60 – 80 million per year
- capital, about R312 million.
The subsidy is required if MPLS is to operate at world best standards.

International Examples Of Subsidised Passenger Services:
- UK – Great Northern Eastern Railway – subsidy of 45% on fares phased out over seven years
- Swedish State Railway – infrastructure owned by State, financed 100% Capex, 25% subsidy on fares
- Canada Via Rail – 30% fares, 100% Capex.

INTERNATIONAL JOINT VENTURES
These are ventures that show Transnet’s commitment to development and co-operation in Africa:
1. ETHIOPIA/DJIBOUTI Building and rehabilitation of track and infrastructure.
2. ZIMBABWE Proposed concessioning of Western/Eastern Railway
3. UGANDA Development and operation of an inland container facility
4. ANGOLA Spatial development initiatives
5. GUINEA/CONAKY/LIBERIA Design and construction of a railway line and inland container facility
6. DRC future possibilities of BOT
7. LYBIA Planning to build 3170 km railway
8. NIGERIA Supplying rolling stock and management of rail and ports.
9. CAMEROON Railway concession
10. MADAGASCAR Vertically integrated 20 year concession

Questions and Comments
(Q) Mr MD Msomi (IFP) asked if there had been discussions between Spoornet, the Department of Transport and trucking companies on the issues raised.

Mr Jakavula responded that there have been numerous discussions, also through the auspices of the "Moving South Africa" programme.

(Q) Mr V Smith (ANC) asked whether there would be an outright sale of obsolete assets or would ownership be retained, because in the future there might be a need to use these railway lines.

Mr Jakavula said that in his view it would be unwise for the country to give away its assets. It is the operation that would be given away and assets would remain the property of the country. The contract might include an arrangement requiring the operator to upgrade the assets and maintain them, and when the contract comes to an end these revert back to the country.

(Q) "Ghost towns" existed because historically railway lines had operated through them. Is there any strategy for those particular lines?

Mr Jakavula said that if the issues that he had raised as concerns are not addressed there will be more ghost towns. If the regulations are not tackled people will still opt for trucks because they will be offering a cheaper and more efficient service. Another reason is that these towns had been built as junctions to receive trains from different areas. A decision had been taken to "cut out the middle man" and have trains run from point of departure to final destination. This was in line with the transformation process.

Mr Macozoma added that the emergence of ghost towns is not very different from what the mining industry does when operations are no longer profitable. In some of these towns the only source of water and fuel is via the railway freight passing through them. A national solution on these issues is required.

(Q) Do any plans exist relating to internal integration of companies under Transnet, for instance Portnet and Spoornet, to bring door-to-door service to customers?

Mr Jakavula replied that this is an ongoing process. Spoornet Freight Services and the ports have held discussions in order to build better services and increase income. In some instances the two have embarked on joint investment ventures to acquire capital assets to enhance common business.

(Q) Is there any inter-parastatal strategy to ensure that a duplication of services does not occur unnecessarily?

Mr Mafika said the parastatals such as Telkom, Eskom and Transnet have been cooperating in solving common problem areas such as the theft of copper cables. However it must be remembered that certain parastatals are competing against each other for the bandwidth. In the De Aar area, Transnet and Eskom have been cooperating in electrification of lines that would bring electricity to communities that have never had it before.

(Q) How is subsidisation seen operating parallel to concessioning?

Mr Jakavula pointed out that concessioning had been going on in Britain for about six years. There is no company not receiving subsidy and in some instances such subsidies have been increasing. One cannot run a community service of the kind Spoornet is doing with MPLS without subsidy. Provision of affordable transport is Spoornet’s social responsibility. Subsidy should be there but it can be said that over a period of time it would be reduced to manageable levels.

(Q) How does Spoornet view the post-restructuring regulatory regime and enforcement?

Mr Jakavula said there is a need to revisit regulation if there is to be multiple operators. Newcomers must not be disadvantaged because Spoornet, for instance, has the competitive advantage of having been there longer. A neutral body would be required to regulate leveling of the playing field.

Mr Macozoma added that it is not that there are no regulations to deal with some of the problems. Some of the South Africa’s regulations are the best in the world. The problem is that the responsibility for enforcing these is at provincial level where there are not enough resources to do so.

(Q) Mr Msomi asked if there are time frames regarding the strategic plans.

The reply was that this is determined by Spoornet’s business plan. Spoornet is looking at a ten-year cycle bearing in mind the restructuring process.

(Q) Regarding the erosion of market share, does Spoornet need this Committee to do something?

The response was that erosion of market share is mostly because of the regulatory framework. These are the issues that need to be addressed so as to grow and to compete effectively.

(Q) Mr LP Nzimande (ANC) asked if Spoornet sees a change in the involvement of parastatals in helping communities as part of their social responsibility. Is there any thinking on how communities will continue benefiting?

The reply was that Transnet always has a budget for community development and has been involved in building of schools and so on.

(Q) Sppornet was asked to comment on the access of disabled people to Spoornet facilities.

The response was that the issue of access is an ongoing exercise at Spoornet.

(Q) Would geographical areas that had been left out by Spoornet in the past still be left out now that commercialization is talked of?

The response was that the process Spoornet is currently embarking on of transforming its business would determine if those areas are suited for its business and if a need is seen to expand to them. If so, it is believed that they would be covered. Spoornet had suggested to taxi operators that the two modes of transport should operate some form of "relay system" where the taxi industry would bus in passengers from remote areas not serviced by trains to the nearest railway stations, and the trains would empty passengers from their lines into taxis. This way would benefit everyone through reduced operating costs and prices.

(Q) Mr Msomi commented that the issues raised by Spoornet would necessitate a workshop to look at the role the Committee could play in addressing some of the concerns.

The Chairperson observed that it is the Committee’s duty to look at issues such as regulations and that he supported Mr Msomi suggestion.

The meeting was adjourned.

Appendix 1
SPOORNET PRESENTATION TO THE LABOUR AND PUBLIC ENTERPRISE PORTFOLIO COMMITTEE
[A PowerPoint Slide Presentation for this Document also available]

Vision:
Spoornet is the leader in profitable Freight Logistics Solutions contributing to the ideals of South Africa.

SPOORNET TODAY
[Graph not included, Spoornet has the following businesses: Coallink, Orex, General Freight Buisness (GFB) – all 3 offer rail freight services; Luxrail, Mainline Passenger Services (MLPS) – both offering passenger services]

· COALlink provides world class rail transportation for South Africa’s export coal

· The coal line extends from the coalfields to the Richards Bay Coal Terminal (RBCT) at the Port of Richards Bay in northern Kwazulu-Natal.
· A benchmark study rated the operation of this line as 8% more efficient than world best practice
· COALlink boasts world class technology leadership
· Contributes 22.4% to Spoornet’s turnover

· GFB comprises 70% of Spoornet freight revenue and 52% of tonnages
· GFB conveys approximately 96 million tons of commodity freight per annum
· GFB operates in mining and light & heavy manufacturing industrial sectors serving customers in 15 specialised market sectors

· MLPS provides an affordable intercity passenger service between major destinations in South and Southern Africa
· In excess of 4 million passengers utilise this service per annum
· Incentives to improve service:
- New Reservations System
- On Board services provided in cooperation with private sector contractors (Fedics, BJ’s)

SPOORNET TODAY: VITAL STATISTICS

EMPLOYEE NUMBERS

EMPLOYEE NUMBERS

EMPLOYEE NUMBERS

SPOORNET BUSINESS UNIT PERFORMANCE

FINANCIAL PERFORMANCE

PRODUCTIVITY FACTORS

FOCUS AREAS 2000/01
· Efficiency
· Profitability
· Customer Service
· Safety
· Transformation
· Communication

ACTIONS FOR IMPROVED PERFORMANCE
[graph not included, the above includes moratorium on vacancies, instituted financial control, restructuring (Rothschild), Transformation (Halcrow), Performance Management, Incentive Schemes, Leaner Budget, Corporate Governance]

COMBINED SOLUCTIONS: ADOPTED AND ENDORSED
[Graph not included]

Restructuring Direction
[Graph not included]

Restructuring Structures
[Graph not include]

Restructuring Process Overview
[Graph not included]

CHALLENGES FACING SPOORNET: Light Density Line Management
· Require a process via Government for the future operation of these lines by a concessionaire
· Operator with a cost structure appropriate for Class II, III or IV railways
· Approximately 5 800 km of line identified
· Address issues relative to infrastructure access

Capital Investment
· Spoornet plans to assume full and timely capital investment
· Significant investment is planned for projects to:
- maintain and enhance efficiency
- maintain and enhance service quality
- expand core busines
- retain technological leadership
· Accest to Capital Funding

SPOORNET LIGHT DENSITY LINES
[Graph not included]

Challenges Facing Spoornet: Competitive Landscape
· Spoornet GFB faces an increasingly competitive environment
- over-capacity in road
- In creasing productivity & efficiency of road hauliers
- downward pressure on prices
- overloading
- regulating environment favours road
- market pressures in terms of quality of service delivery and new technologies

Regulatory Environment
· Insufficient costing and charging of externalities
· Government re-examination of policy for Road-Rail haulage
· Need to establish Rail Safety Regulatory regime
· Policy for access rightss, priorities and rates
· Fuel levy for Road Accident Fund on diesel locomotives
· Inadequate policing of overloading, speed and safety
· Speed of statutory/regulatory/institutional transformation against that of global competitors
· Imbalance in user-pay principle

Regulatory Environment
Key Legislation Impact
Road Transportation Act,1997 Replaced Motor Carrier Transportation Act
Transport Deregulation Act, 1988 Increased maximum axle loads from 8,2 to 9,0 tons for single axles and 21 to 24 tons for tridem axles
Increased maximum vehicle length from 20 to 22 metres
1994, maximum vehicle length increased from 2,5 to 2,6 metres, and height from 3,8 to 4,3 metres
Road Traffic Act, 1989 Gross permissible road vehicle mass 57 tons (later reduced to 56 tons).
Department of Transport recommended that 5% tolerance in permissible limits be allowed before offenders are prosecuted for overloading.
Policy by the National Director of Prosecutions that offenders be allowed a 10% tolerance before being prosecuted.

ROAD VEHICLE MASS
(Graph not included)

MLPS
For MLPS to fulfil its macro transport role it will require a subsidy for:
- operations - R60-80m per annum
- capital - R312m
This subsidy is required even if MLPS is to operate at world best standards.
International Examples of subsidized passenger services:
· United Kingdom - Great Northern Eastern Railway
Subsidy - 45% on fares phased out over 7 years
· Swedish State Railway
Infrastructure owned by state, financed 100% Capex, 25% subsidy on fares
· Canada Via Rail -
30% Fares, 100% Capex

International Joint Ventures
COUNTRY PROJECT
1. Ethiopia/Djibouti Building & rehabilitation of track and infrastructure
2. Zimbabwe Proposed concessioning of Western / Eastern Railway
3. Uganda Development & operation of an Inland Container Facility
4. Angola Spatial Development Initiatives
5.Guinea/Conaky/Liberia Design & construction of railway line, and Inland Container Facility
6. DRC Future possibilities of BOT
7. Lybia Planning to build 3 170 km railway
8. Nigeria Supplying rolling stock and management of Rail and Ports
9. Cameroon Railway concession
10. Madagascar Vertically integrated 20 year concession