Transnet and Spoornet: briefings

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
18 May 2005
TRANSNET AND SPOORNET: BRIEFING BY TRANSNET CHIEF EXECUTIVE

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Transnet Strategy: Progress and Review
Spoornet Strategy, Business Turnaround and Investment Plan
Committee Report on Annual Reports of Department and State-owned Enterprises

SUMMARY
Transnet delivered a report on their strategy progress in order for the Committee to evaluate their business turnaround and investment plans. The main focus of the meeting was on how Transnet had improved their services to be more reliable and credible in the public eye. The management of Transnet admitted that their organisation was still in the beginning, rather at the end, phase and that much work needed to be done in order for project management and implementations strategies to be completed successfully.

Spoornet felt it needed to return to the basics of providing transport suited for specific needs. It had the ability to become a key enabler for economic growth by ensuring that South African transport companies became more competitive in the markets in which they operated. The company felt it had to reduce the cost of doing business in order to ensure that more cargo was moved by rail rather than road. Spoornet needed to dramatically improve their business performance, in order to recreate the right values, which had been destroyed in the past. Once they had stabilized the business, they would have created the core competencies and core capabilities that were required for them to grow their market share.

MINUTES

Transnet briefing
Ms M Ramos (Transnet: Group Chief Executive) said she would present the Committee with a general overview of the Transnet strategy. They had tried to respond to most of the issues that had been raised by the Committee, but that some problems had continued and would be addressed.

Ms Ramos referred Members to the Transnet Strategy: Progress and Review document and indicated that she would go through the document slide by slide. Previously they had given a very detailed and long vision and mission of Transnet. They had since tried to focus their activities and keep it simple. The biggest challenge to the group had been to utilize all their assets in their core divisions efficiently and appropriately, as well as to extract value from these assets. She had stressed the importance of a healthy financial company and a good and strong balance sheet, but said that the company should also deal with the human development-, cultural- and operational issues. The group had developed the slogan "one company, one vision" during their strategy meetings and this slogan had become part of what the group stood for. The slogan had emerged during talks about Spoornet and the crises that it had experienced. Therefore, the slogan had become very much a part of the way in which Transnet would approach the future.

She stated that the presentation looked at the strategic direction, implementation plan, progress and infrastructure plans. They would speak about the same issues for the next three to five years as some progress had been made in some areas, but they recognised that a lot still had to be done to turn Transnet around. Transnet was a very large organisation and had to deal with a lot of issues. Such large corporations could not be transformed within a short amount of time.

She indicated that their focus would be on how to reduce the cost of doing business in South Africa. Transnet had begun to internalize the role they could play in the generation of economic growth and development. The company tried to understand, from a strategic point of view, not only the sort of investment that would be required in infrastructure but also what else had to be put in place to make the investment productive. The business processes of the core-divisions had to be re-engineered.

Strategic Intent
Ms Ramos said that Transnet was clear about their strategic intent and that it had been accepted by the Board and their shareholders. She indicated that this strategic intent had ended the end-state debates that surrounded Transnet. She referred to the slide Strategic Direction on page three of the document. She added that the pictures on the slide indicated what Transnet would look like and what the relationship between certain entities and their relationship to Transnet’s core business would be.

Implementation Plan
She referred Members to the slide entitled "Implementation Plan". They had tabled a four-point turnaround Plan. The four-point plan consisted of the re-direction of business, balance sheet restructuring, corporate governance and risk management and human capital development. No single point was more important than the others, but she stressed the importance of human capital development.

She added that the current Corporate Head Office environment was too big and made little contribution to the functioning of the operation. The office should set the policies, ensure their implementation and maintain control of what was happening in the businesses to ensure the appropriate management. Head Office had been doing a lot of things in detail, but not well enough. This would change in the near future and it would be an ongoing process of change.

The synergy of operations was an integral part of the ongoing work they were doing. A working group had been established between the SA Post Office (SAPO), Spoornet and NPA which would meet weekly, and if needed on a daily basis. A Chief Operational Officer had been brought on board at group level to ensure that the operational synergies would start to deliver for the company.

A lot had been said about customer focus. The strategies had been implemented to ensure that they serviced their clients. They had spoken to clients and were trying to respond to their needs. They had tried to understand where their customers were going. This had been important for the company to ensure that investment would take place as the payback period for their projects would be ten to fifteen years, or even longer.

She referred Members to Balance Sheet restructuring and said that they had taken action on the key financial pressures that faced Transnet. Some relief had been given, but that relief would not be meaningful if their operational performance did not improve. The one issue that they were working on was the pension fund deficit. Different options were explored to address the problem, but there was no threat to Transnet employees that had gone on pension. The actual evaluation of the liabilities had been greater that the actuary evaluation of the assets in the pension fund. A deficit had occurred but pensioners should not worry about their pensions not being paid out at the end of the month. Lastly, she added that they were in the process of going through the legal requirements with regards to the disposal of non-core business.

Major challenges regarding human capital development existed. Transnet had not invested sufficiently in human capital. Their skills base had not been revitalized and neither had sufficient investment in skills taken place. A successful, robust and significant bursary program had not been put into place and the recruitment of young people had not taken place sufficiently. She emphasised the importance of changing the image of the core jobs at Transnet, for example, train drivers. People should be aware of the new technology that had been brought in with regards to trains, in order to get young people exited about jobs in the railway sector. She stressed the need for a better policy on the retrenchment of the appropriate skills. Transnet had worked on a performance management approach, which would reward correct behaviour.

With regards to corporate governance and risk management, they had engaged in an ongoing project with the Department of Public Enterprises on the shareholders compact synergy project. This project had not been specific only to Transnet, but also to other State Owned Enterprises (SOEs). She stressed that performance management should be focused on the right issues to ensure that they got the right behaviour out of people. This would ensure the measurement and monitoring of progress in performance. Nothing had been done about IFRS (International Financial Reporting Standards), but a strategy had been put into action which would bring Transnet in line with the IFRS. They would report on the basis of IFRS in 2006. Transnet had also been involved in the EWRMF (Enterprise Wide Risk Management Framework) project. Previously, their risk management framework had not been very useful. The timeline for the project would be nine to twelve months. She stated that if risk management were to work, all people involved had to know the risks involved.

Ms Ramos indicated the progress that had been made within Transnet (please refer to the attached slide show document).

She referred Members to the Implementation Plan slide and indicated that she would focus on the projects that had been approved. The approved projects could move to phase one which entailed the feasibility studies and would include, amongst others, environment impact studies. The following slides indicated the major rail and port projects, the NPA and SAPO strategic projects and the major projects of Petronet. They had been broken down into their key components and indicated how much Transnet was planning to spend on the components for the next five years.

The Transnet team had a lot of work ahead of them. They had undertaken big projects and human capital investment would provide the biggest challenge. Transnet would look for the best skills to ensure delivery on these projects and to ensure greater productivity. Transnet would contribute to the reduction of the cost of doing business in South Africa. The team did not underestimate the enormity of the challenges and they were committed to making the necessary changes. They had realised that now would be the time to turn Transnet around.

Discussion
Ms N Mnandi (ANC) asked for clarity on the gender sensitivity at top management levels, since they were mainly composed of men.

Ms Ramos stated that gender representivity was important and they had to look at broad-based transformation. If they had a few women at the top level, it would make the numbers look good, but if it did not become a part of the culture of the organisation, it would not be meaningful. They had tried to put a transformation and employment equity strategy in place that would permeate throughout the organisation. They would like to see more women at the top level and it should be part of the long-term strategy, but she would also like to see more women at all levels of the organisation. They also needed to drive a more aggressive equity transformation agenda within the group as a whole. The organisation had tried to be sensitive and to get the right people involved, as well as to focus on gender and race issues in their employment strategies, but it remained a challenge.

Ms N Mnandi (ANC) asked what mechanisms had been put in place for human capital development.

Ms Ramos said that a team had been established that was looking at all aspects of the human resource strategy. This would inform the strategies that would be implemented at divisional level. She indicated that they were still in the planning phase and that it would be taken to the Board within the next few months. More information with regards to the substance of the strategy would be given at the next meeting with the Committee in October. They were in the process of identifying the main areas of skills shortages. Transnet had employed a lot of people but there were many areas where shortages of skills had been experienced. The skills that had been available had not been sufficient to drive a modern organisation where technology played an important role to sustain the organisation and to take it to the next level. Note should be taken of the aging labour force and that they had to make sure that they were developing the necessary skills. Getting younger people involved had been part of their strategy, but except for one or two divisions, Transnet did not have a strategy that targeted universities, technikons and schools in order to get young people involved. This had to change, as they would want Transnet to be an employer of choice for young people, which it had not been. This was the result of practices that had been in place for a long time, and they were duty bound to look internally for the necessary skills. They had not expanded their core or looked outward to bring new people on board. The suggestions that had been made for Transnet to go out to schools and communities would be considered.

Mr S Kholwane (ANC) asked what mechanisms had been put in place to get young people interested in, for example, becoming train drivers. Many young people were unaware of the opportunities that existed within Transnet.

Mr Kholwane said that job opportunities would result from investments and because projects were moving into the first phase of development.

Ms N Ngcengwane (ANC) asked for more information on Black Economic Empowerment (BEE) and the extent of the pension fund deficit.

Ms Ramos said that Transnet had a policy on BEE. The policy was in line with the legislative framework. Transnet was very committed to broad-based BEE. The disposals that Transnet would make lent themselves to exiting prospects on the BEE side. The objectives should be sought on a case-by-case basis

The Chairperson asked for the deadlines on rail passenger restructuring.

Ms Ramos replied that the deadlines for Metrorail to disengage from Transnet would not be met. Metrorail would leave first, followed by Shosaloza Mail, but at a later stage than the initial deadline. She added that they were working with the Department of Public Enterprises and the Department of Transport, as well as with other stakeholders, in order to achieve this.

The Chairperson said that the Committee should complement Transnet for achieving their objectives. The Minister told them that an evaluation of all SOE properties would be done. He stressed the importance of broad-based BEE and indicated his sympathy towards the turnaround that has to take place within Transnet. They knew that it would not happen overnight, but that the progress that had been made since November 2004 was impressive.

The Chairperson commented that the issues that were raised were not only about reducing the cost of doing business in South Africa, but also about reducing the cost of living in South Africa. He asked what guarantees existed for a reduction in the cost (by a third, as Transnet had indicated) in order to make business more competitive. He indicated that the latter would compliment economic growth and would result in development. He also asked what guarantees existed in order for the private sector to invest in job-preservation and growth stimulation. He asked whether Transnet would re-invest in ways that would contribute to the government’s goals, and if so, how.

Ms Ramos said that there were no easy answers. Job creation was a big issue. The first economist that could find the link between sustainable development, growth and job creation in a foolproof way would win numerous Nobel Prizes. Transnet as a company had not sought to create jobs. Restructuring could lead to job losses. She expressed the hope that Transnet would be able to create jobs as the projects moved into the implementation phase. Jobs would be created during the construction stage, but they would be temporary. She hoped that by putting the necessary infrastructure in place, companies would become more productive. If Transnet succeeded, it would lead to job creation for the economy as a whole. If exports were limited due to a lack of capacity in the export channel (whilst a demand existed for these exports), they needed to increase the capacity of the companies that operated in the export sector. This would enable them to create jobs.

The sectors that created jobs were not always the ones in which South Africa had invested. She referred to the textile sector and the role that China played in it. Similar debates had taken place in the United Kingdom and United States. Economic development showed that some sectors had become very developed and new players had entered the markets. In some sectors, production had occurred at lower costs, whilst an enormous displacement of labour had taken place. The challenge was to find out what the company’s human capital looked like, how skilled it was and how flexible it could be in response to new developments, alignments and competition. No guarantees could be given. If companies in South Africa could export iron ore cheaper than the Brazilians, then the South African companies would have a good chance in the attainment of the relevant contracts. If the companies were unable to do this, then the Chinese would rather buy from the Brazilians. She hoped that as opportunities were be created, and as the cost of doing business was been reduced, more economic opportunities would be created. She thought that the country had started to benefit, if the growth rate was considered. South Africa had done much better than many other countries, as well as some of the developed countries.

The Chairperson asked (with regards to infrastructure) what form private sector participation would take in terms of public private partnerships (PPPs).

The Chairperson asked what would happen to the staff if and when the restructuring at the Head Office took place.

The Chairperson said that it was good to see consistency from the November 2004 meeting up to date. This meant that the staff had fewer excuses to be unproductive as the requirements and guidelines were made clear.

The Chairperson asked what the Committee could do to help, as they would be able to help during the second half of the year (since they would have more time on their hands).

Ms Ngcenwane (ANC) asked about the succession plan for skill development and wanted to know whether concrete plans had been made that were ready to be put into action.

Ms Ramos replied that succession planning had been part of the strategy they were trying to implement. She said Transnet had to be clear on what was meant by the retention of skills, as the wrong skills could also be retained. Transnet was in need of a succession plan where people throughout the organisation would be multi-skilled, as seen in other smart organisations. It would be more effective if management were able to move between different entities and companies within the same group, having multiple skills. She stressed that they had to continuously replenish the skills of the management team as part of succession planning, but it should also occur at levels below management. Succession planning was important, but they should avoid the appointment of one person as the successor. She suggested that an environment should be created where anybody could feel they had the opportunity to become a successor. This would enhance the excitement and commitment levels amongst staff in order for everyone to feel the organisation was performing well and that the best person for the job would most probably be the person to get the job.

Dr P Rabie (DA) asked what was occurring with respect to Transnet’s shares in MTN.

Mr C Wells (Transnet) elaborated on the question regarding the MTN shares. Due to the strong movements in the MTN share price, Transnet had decided to unwind their shares. They would be paid back for the funding they had provided to MTN.
Dr P Rabie (DA) asked what the exact value of the shares was and how many shares they were talking about.

Mr Wells replied that no definite numbers could be given, since he did not have the number of shares or the values of the shares.

The Chairperson asked for clarity on Transnet's skill development strategies and how it had been prioritised within the organisation. Although skills development within South Africa received main priority, there was a general shortage of skills to such an extent that foreign skills were needed at times. The Chairperson asked what the feeling was within Transnet regarding recruitment, while the new emigration regulations "were easing things". He asked whether there were statistics available on the percentage skills that Transnet got from within South Africa and what percentage was required from foreign countries.

The Chairperson said that their study group decided not to ask any questions regarding Transnet's Pension Funds, since it would be premature and they were not experts in that specific area. The Committee would, in a year's time, raise the topic of Pension Funds to hear what had been done in order to address the deficit.

The Chairperson raised the issue on women empowerment within State-owned Enterprises (SOEs) and said the Committee would in future again want to see how Transnet's procurement plans had developed. He emphasized the importance of Broad Based Black Economic Empowerment, since it had to be implemented at all levels for all employees.

The Chairperson said he would get a presenter from the Gender Equality Commission to speak about B-BBEE, in order to facilitate the transformation into a culture which was not gender-biased and which addressed and rectified issues of the past.

Ms Ramos replied that she would first comment on private sector participation before commenting on the questions raised by the Chairperson. South Africa were looking at Public Private Partnerships (PPPs) on a case by case basis. Government had made it clear that the core of Transnet was going to stay in public hands and railway infrastructure would stay in the hands of the State. The operators were privately owned, but not the basic infrastructure. On the operational side, Transnet was looking at PPPs and within the past two months, she had opened two PPP projects. One dealt with cold storage and the export of oranges, lemons and grapefruit to Japan and the other, which was opened the previous week, also had a target market in Japan. Transnet was looking at practical and smart PPPs that worked for both sides. Transnet's commitment was to use as many skills available in South Africa, but at the same time she admitted that Transnet would use any other skills if required. Ms Ramos said that Transnet would be launching big projects within the next few years, which required specific skills and that if not found in South Africa, the vacancies would be open to skilled foreigners.

She added that it was not the easiest time to put infrastructure projects on the table. There were many projects, which had not been worked through properly, that had hurt Transnet’s credibility and public image. She emphasised the necessity for Transnet to identify projects that they would start and end with properly, by a conscious decision from the board to make the project work. Transnet did not have a good reputation in reaching conclusions on projects. She mentioned an example where Transnet had signed a contract four years ago but decisions about the project and its implementation had only been made this year. Their biggest concern was an orderly transition to a new entity. Ms Ramos was confident that between Transnet, the Department of Public Enterprises and the Department of Transport, they would effectively manage the process of transformation and change in the best way possible.

Transnet would come back to the pension fund issues at a later stage, but would like to emphasise the points made by Mr Wells, in that Transnet were looking at different options to solve the problem of their current deficit of R5 billion.

Ms Ramos referred to the gender issues and said she wanted to make sure that there existed commitment within Transnet towards gender transformation. It needed to alter the whole organisation and should not form part of a numbers game. Transnet complied with B-BBEE in their management (20% women representivity and 60% black employed workers), but she wanted to see more women in the other levels of employment as well. Transnet's management team was committed to implementing the changes in order to transform the organisation.

Mr S Gama (Acting Chief Executive: Spoornet) was given the opportunity to deliver his presentation. Please see the electronic version attached in this document. Mr Gama said that Spoornet wanted to focus on transport suited for specific needs, and that from a railway perspective, they needed to go back to the basics. Spoornet could become a key enabler for economic growth by ensuring that South African transport companies became more competitive in the markets in which they operated. The second key element was reducing the cost of doing business in order to ensure that more cargo was moved by rail rather than road. A third key element was to develop the future skills required for Spoornet to become a world class railway system.

Mr Gama mentioned that it was important to begin strategically with a scenario in mind. It was necessary to create a picture of what the railway system would look like at a future date, in order to determine how to get there. The railway had lost credibility as a reliable form of transport and they needed to focus on regaining that credibility and reliability.

They wanted to create low cost, predictable and credible railway services in future. They would respond to customer demands by improving operational efficiency and by extracting additional capacity out of the available infrastructure. They needed to maintain their rail tracks in order to be available and reliable as part of the operational efficiency project they were working on.

Mr Gama said Spoornet needed to dramatically improve their business performance, in order to recreate the right values, which had been destroyed in the past. Once they had stabilized the business, they would have created the core competencies and core capabilities that were required for them to grow their market share. They would have to determine what they had to do in order to deliver their strategic intent, also by investing more. They wanted to create a sustainable business position in order to play a bigger role in the economy. They would have to create a human capital philosophy in order to address the skill shortage problem more effectively.

He commented on Spoornet's current position and what they had to do in order to be more forward and outward driven in terms of their performance culture (please refer to the slides). He also addressed the five key themes they need to adhere to in order to be accountable to their mission and vision, by referring to the presentation and commented that Spoornet needed to upgrade some of their structures in order to become more modern and reliable (via the proper technology).

Mr E Kholwane (ANC) referred to page three of the Transnet report, and asked whether the theft and corruption issue could be specified. The Committee and the public saw it as a big problem and it was negative for Transnet’s image. He asked for an update on this issue in order for the Committee to assist Transnet in their decisions where possible.

Ms N Ngcengwane (ANC) referred to Transnet’s infrastructure and their development programs. She asked how Transnet planned on balancing their plans for improving infrastructure while initiating development programmes (such as skills development and broader employment). She also asked how Transnet planned on turning around the public’s negative perception of their organisation as a whole (in terms of delivery of services as well as corruption and theft within the organisation).

The Chairperson said that Transnet had made tremendous advances since their last meeting, but what interested him was getting an opinion from an expert outside the Committee in order to give a more critical and informed report on Transnet’s presentation. He asked Transnet to comment on the integration of port and rail facilities.

Mr S Gama (Spoornet) commented on the movement of cargo from road to rail. He said the key elements that customers expected from rail service were dependability and reliability. They had been focussing on their operational structure during the past few months. It was important to have the appropriate structures in place in order to narrow the gap of their aging equipment (the relative age of their transport machinery was 27 years in comparison with the 12 years of the average world class companies). He said they were working on having the right systems in place in order to sustain the operational plans that they were trying to make. Hopefully some of the issues around the question of their reliability in the public eye would begin to fade as they gradually improved their structures and services. They still had a lot of projects to complete and they were in the beginning stage rather than the end. They needed to keep their operational focus on a weekly and monthly basis by means of evaluation. The problem of theft would possibly be solved in the future by means of technological equipment determining when theft had taken place. They had set up a team to deal with issues that were identified by the Committee in their visit to Transnet, in order to deal with the issues more comprehensively.

Ms Ramos indicated their key objectives were to create interfaces between rail, port and pipelines. They had technical working groups that met weekly to plan ahead and evaluate their performance. The net effect of just talking to each other had already generated significant improvements. They previously took 4.53 days to get a train from City Deep down to Durban, but that has now been reduced to 1.7 days via better co-ordination. The basics of people talking and planning together had brought about a lot of improvements and it had embedded new operational strategies in their company. They were building multi-disciplinary project management teams to run the projects across the different developments.

Mr L van Niekerk (Chief Operating Officer; Transnet) said that Transnet had to focus on their implementation programs. They had to evaluate and be strict on project management effectively since they were spending R40 billion over the next number of years. He said they were therefore going to be very aggressive in implementation programs in order to evaluate it on a weekly and monthly basis. They were going to have to stop measuring input, and start measuring output. He said they had listened to many excuses why they had not reached the required outcomes (as determined in their strategic plans), and that in the next two or three years, they might be in serious trouble if they did not work hard on project management and evaluation. He said the team had a serious approach to implementation.

The Chairperson concluded that the Committee would talk more about the Transnet and Spoornet reports in the next meeting. They would touch on certain areas of importance such as African involvement. It was good that Transnet’s National Operation structure was functioning, but the Committee needed to understand Transnet’s development aims in broader terms. The Committee would like to be briefed on Transnet’s aim of improving capacity by 30% by 2010 at the next meeting. The presentation and overview was impressive overall, but that they wanted to know what the Committee could do to help Transnet improve their performance. He asked Ms Ramos to present concluding remarks from Transnet’s point of view.

Ms Ramos indicated that the development of their fixed assets, especially trains, was a challenge. They were focussing on the infrastructure and on human capacity in terms of the availability of skills. It was necessary to change the culture within the organisation as well, in order for people to understand the trends in Transnet’s transformation.

The Africa issue would be attended to via a strategy (as spoken about by Minister Alec Erwin). It was necessary to approach the African market prepared and informed, in order to prevent Transnet from making losses. It was an opportunity that needed to be followed up on, but they had to do it right in order not to lose reliability.

She concluded by thanking the Committee for their advice. She said they would need the help of the Committee regarding security issues, especially within the Committee’s constituencies. Transnet had to build on their credibility and ability to deliver, in order to attend to reputation issues. Corruption and theft issues needed to be dealt with harshly, in order to change the reputation risk issue. Transnet’s focus over the next year would be mainly on improving their service reputation. During the next six to eight weeks, Transnet would be ‘pulling down the blinds’ and would not be releasing any statements until they announced their resolutions. The interest from the Committee and the press had encouraged Transnet to move faster to improve the status of their organisation.

The meeting was adjourned.