Report of the Portfolio Committee on Public Enterprises on an oversight visit to Transnet’s Durban Container Terminal and Transnet’s operations at Sentrarand and Koedoespoort, dated 19 November 2008.

The Portfolio Committee on Public Enterprises, having undertaken an oversight visit to Transnet’s Durban Container Terminal and Transnet’s Rail Cargo operations at Sentrarand and Rail Engineering operations at Koedoespoort, reports as follows:

A. Introduction

Transnet is one of the state-owned enterprises falling under the jurisdiction of the Department of Public Enterprises and is mandated by legislation to annually report to Parliament. Transnet is made up of the following corporate divisions:

· Transnet Freight Rail

· Transnet Rail Engineering

· Transnet National Ports Authority

· Transnet Pipelines

· Transnet Port Terminals

The Portfolio Committee’s visit to some of Transnet’s operations forms part of Parliament’s oversight role over government departments and organs of state. Apart from doing high level oversight into the corporate soundness of SOE’s, Parliament also has an interest in how government policy is achieved and how SOE’s in their activities maximise their influence over the economy.

In 2007 government put emphasis on Transnet in finalising plans to improve the functioning of rail and port operators. By 2008 Cabinet once again committed itself to finalising the development of an integrated infrastructure plan. This entailed co-ordinating the programmes of all SOEs and overlaying all their infrastructure plans, including freight and other logistics as well as energy pipelines. From government’s perspective Transnet is ideally expected to provide an efficient and competitive logistic infrastructure which in turn will reduce the costs of doing business in the country.

Visit to Transnet Operational Sites

The Portfolio Committee on Public Enterprises resolved to visit the Transnet Container

Terminal in Durban, the Sentrarand Rail Terminal and the Koedoespoort Rail Engineering

Terminal in Johannesburg during the second term of the Parliamentary session. The visit took place on the 26 and 27 May 2008.

The delegation from the Portfolio Committee on Public Enterprises comprised of Ms F Chohan MP (Chairperson), Mr C L Gololo MP, Mr S E Kholwane MP, Mr R Z Nogumla MP, Mr Y Wang MP, Mrs V Meruti MP, Mr S Mukhithi (ANC Researcher), Ms R Lepule (Department of Public Enterprises), Ms R Fourie (Department of Public Enterprises – Parliament) and Mr L A Brown (Committee Secretary).

Apologies: Due to prior commitment, Mr P A C Hendrickse was unable to accompany the delegation on this visit.

The Portfolio Committee was informed of the passing away of four Transnet employees on Saturday, 24 May 2008 who had lost their lives in a tragic motor-vehicle accident en route from a colleague’s funeral. They were:

· Njabulo Radebe

· Thomas Mahlangu

· Nxanile Yedwa

· Wilson Rathlaga

May they rest in peace. Other employees who were in a critical condition in hospital included:

· James Mooketsi

· John Ncapai

· Cederick Njokwe

· Thomas Ndlovu

· Vessel Ntshong

· N Mshuni

The Committee extended sincere condolences to the family of the deceased and conveyed

wishes for a speedy recovery to those injured and in hospital.

B. Objectives

The focus of the oversight visit was to gain insight into some of Transnet’s operations and to discuss some of the priority issues with key management. Transnet is currently implementing its turnaround strategy and an R 80 billion build-programme. The Committee was keen to establish how Transnet was progressing in both respects.

C. Durban Container Terminal (Durban Ports and Harbour)

The delegation from Transnet Limited included:

Mr K Phihlela – Chief Executive: Transnet National Ports Authority,

Mr S Letsoalo – COO: Transnet Port Terminals,

Mr V Kahla – Group Executive: Office of the Group Chief Executive,

Mr L van Niekerk – Group COO: Transnet Limited,

Mr T Morwe - Chief Executive: Transnet Port Terminals

Mr C Teffo – Executive Manager: Transnet National Ports Authority

Ms M Moses – Group Executive: Transnet Capital Projects,

Mr J Dludlu – Spokesperson: Transnet Limited,

Mr S Nzuza, Transnet National Ports Authority

Mr M Motlohi - Transnet National Ports Authority,

Mr R Lekala – Habour Master: Transnet National Ports Authority,

Mr R Chetty - Transnet National Ports Authority and

Ms A Ceba – Executive Manager: Office of the Group Executive (Office of the Group Chief Executive).

The Committee received a broad overview of the core functions and port services provided by Transnet Port Terminals – which included warehousing/cargo storage, cargo repairs, cartage, baggage handling, fire protection, pollution control, ship chandler’s and waste disposal. The infrastructure features of the port included a total land and water area of 1, 854 ha protected by north (335m) and south (700m) breakwaters. The distance around the port was 21km with 16 km of quay wall. Currently there are 57 berths serviced by 20 different terminals with 302km of rail tracks connecting all port areas. The port is divided into container, bulk, break-bulk and automotive precincts including a recreation and cruise liner facility.

The competitive advantage of the port included:

· South Africa’s eastern cargo hub with easy access to the eastern seaboard

· Marine infrastructure capable of servicing current economic demands

· Approximately 444 leases across large industry players

· Full operational integration of State Law Enforcement Agencies.

The Committee received some figures on the dry bulk cargo, liquid bulk cargo, break-bulk cargo and vehicle cargo handled. The total number of commodities imported during 2007 was 32,677,681 tons of which 68.67% were petroleum products. The total number of commodities exported during 2007 was 9,331,927 tons of which 70.06% were vehicles, steel, coal, chemicals, sugar and wood chips.

The Committee also received a broad overview of the port development currently and for the future with development proposed for 2030. Significant projects approved totalled R 12, 31 Billion. The Committee was given details of the various areas of development with a breakdown of the scope of the development, the costing and progress to date on these projects.

Challenges being faced included a scarcity of land to accommodate growth, environmental and social impacts, traffic flows, condition/scarcity of marine equipment, scarcity of human resources and electricity supply risk. Initiatives to counter the challenges included:

· efficiency improvement, port planning that consider land outside the legal port boundaries

· environmental programme, stakeholder engagement and growth of recreation sectors

· truck staging, traffic studies, traffic control and road expansion

· fleet replacement programmes

· accelerated development programmes and sourcing skills off-shore

· electricity master plan, emergency power and network redundancy.

D. Container Capacity and Developments

The Committee was briefed on the container handling equipment, process and capacity. Transnet also gave the Committee an overview of the capital investment programme per port, the national container capacity versus demand and the container capacity versus demand per port. The Committee looked at the port layout and future layout after re-engineering for the different terminals. The Committee also received a breakdown of the demand versus the capacity for KwaZulu-Natal, Eastern Cape and Western Cape as follows:

15% growth pa assumed	2005/06	2006/07	2007/08	2008/09	2009/10	2010/11	2011/12	2012/13
KZN demand (15% growth)	1,936	2,211	2,543	2,924	3,363	3,867	4,447	5,114
capacity current terminals	2,095	2,200	2,750	3,470	3,770	4,050	4,450	4,450
Capacity with new terminal						4,050	5,250	6,050
Eastern Cape Demand (5% growth)	367	385	383	402	422	443	466	489
Capacity	373	373	450	500	800	1,300	1,300	1,300
New business and Dbn overflow	367	385	383	421	522	693	1,016	1,089
Western Cape Demand (10% growth)	658	734	748	823	905	996	1,095	1,205
Capacity	658	719	790	950	1,150	1,350	1,450	1,450

The Committee was taken through the port performance against shipping lines targets per line service (moves per ship per working hour).

After a safety briefing the Committee was taken on an in-loco site visit of the Durban Container Terminal – its operations centre, rail terminal, staging area, quay side and refrigeration area.

E. Visit to Sentrarand

The delegation from Transnet Limited included:

Ms M Ramos – Group Chief Executive: Transnet Limited, ,

Mr V Kahla – Group Executive: Office of the Group Chief Executive,

Mr L van Niekerk – Group COO: Transnet Limited,

Mr S Gama - Chief Executive: Transnet Freight Rail

Mr R Vallihu – Chief Executive: Transnet Rail Engineering

Mr M Likhethe – Executive Manager: Transnet Freight Rail

Ms N Mdawe – Operations Manager: Transnet Freight Rail

Mr D Moodley - Transnet Rail Engineering

Mr S Dlamini - Transnet Freight Rail

Mr M Asefovitz - Transnet Freight Rail

Ms A Ceba – Executive Manager: Office of the Group Executive (Office of the Group Chief Executive).

Briefing by Ms M Ramos

The Committee received an in-depth briefing on the four-point plan developed to stabilise Transnet. The four-point turnaround strategy include:

· Redirecting the business

· Restructuring the balance sheet

· Improving risk management and adherence to high standards of corporate governance

· Developing human capital.

The above four-point strategy was adopted in 2004 and by 2008 Transnet’s Board Chairman, Mr Fred Phaswana indicated that the four-point turnaround strategy has delivered its objectives that Transnet is now poised for growth through capacity expansion and integration. In other words, Transnet will no longer focus on the four- point turnaround strategy but on growth through expansion.

Ms Ramos indicated that significant achievements have been realized and substantial improvements in financial performance have been demonstrated. The Committee received an overview of the shareholder mandate and the major levers for growth (including the key drivers for success). Ms Ramos also touched on the growth opportunities and expectations over the next 5 years. The new growth strategy was based on:

· reengineering – integration, productivity and efficiency

· capital optimization and financial management

· safety, risk and effective governance

· human capital execution.

The Committee was taken through a business overview – their purpose, customers and resources – touching on the strategic objectives and the reengineering programme aimed at addressing the challenges faced. It was stressed that the two major challenges faced by their operations programme was cable theft and an aging fleet. Efficiency improvements in all elements of operations have created capacity supported by an investment programme. Capital has been invested primarily in rolling stock and infrastructure.

Progress was being made in the implementation of the Turnaround Plan. Improvement was reflected in volume growth of specific key commodities e.g. containers and iron ore. Turnaround was evident in the improvement of rolling stock efficiency and utilsation. Capital investment had increased significantly in the past three years. Improved maintenance practice, major progress with the backlog maintenance programme and operational initiatives has resulted in efficiency gains and improvements in asset utilisation in the interim. Capacity had been created for higher coal volumes but the industry was lagging behind in production cargo.

The Committee received an overview of the 14 defined corridors and Transnet’s evolution to a network business. Transnet’s key initiatives were as follows:

- Integration and Efficiency (the Corridor approach)

§ Improve corridor performance by integrating rail and ports

§ Focus on asset utilization

§ Establish the foundation to capture market share from road

- Capital Optimisation and Financial Management

§ Focus investment on the most attractive opportunities

§ Sequence investment through corporate-wide planning

§ Un-block existing capacity bottlenecks on major corridors

- Safety, Human Resources and Governance

§ Safety is the critical foundation for reliable operations and effective service delivery to customers

§ Logistics is people business

§ Effective governance is pivotal.

The two major risks Transnet may face along its growth path were power supply and regulatory framework. Some of the operational risks included safety, volumes and revenue targets and capital programmes. To advance Transnet’s transformation into a world-class transportation, infrastructure and logistics company they require:

- optimal capital investment without compromising reliability of infrastructure and capacity

- planning and coordination along the corridor value chain, across geographies, functions and divisions

- informed, empowered and fit-for-the-job workforce

After a safety briefing the Committee was taken on an in-loco site visit of the facility which included the staging area, main tower, Sisonke Building and secondary tower.

F. Koedoespoort

F (1) Transnet Rail Engineering

The delegation from Transnet Limited included:

Ms M Ramos – Group Chief Executive: Transnet Limited

Mr V Kahla – Group Executive: Office of the Group Chief Executive

Mr R Vallihu – Chief Executive: Transnet Rail Engineering

Ms A Ceba – Executive Manager: Office of the Group Executive (Office of the GCE)

Mr T Majoka, Mr F Potgieter, Mr P Pillay, Mr M Patrick, Mr S Mohlakoana, Ms B Susan, Mr M Nxasana, Mr D Maneka, Mr D Singh, Mr J Diale, Mr S Sikhosana, Mr P Lond, Mr L Dube, Ms C Mgidi, Mr J Struwig, Ms M Govendor and Mr T Griesse.

The Committee received a broad overview of the Division which, of the 8 National Businesses (locomotives, coaches, wagons, wheels, rotating machines, rolling stock equipment, auxiliary business and foundry business), performed seven - of which locomotives, coaches and wagons were the main business at Koedoespoort. The Committee received an overview of the goods and services provided as well as the industry/market in which the division operated. Key objectives were to maximize availability of the rolling stock fleet, improve reliability of the rolling stock and reduced maintenance cost. It was mentioned that the business was aligned to the four strategic key growth corridors in Transnet Freight Rail.

The Committee was impressed with the extent of capacity at Koedoespoort. Transnet Rail Engineering has grown its carriage-making capabilities to the extend that it now supplies state-of-the-art business train carriages to its customers. The Portfolio Committee was pleased to note that there is renewed commitment by the rail engineering division of Transnet in developing capacity to manufacture locomotives on site.

G. Observations

Profit for the group for the year amounted to R4,3 billion and shareholder’s equity increased by R14,1 billion. According to Transnet’s Chief Financial Officer, these increases have had the effect of strengthening the balance sheet and improving the gearing ratios. This placed the group on a solid financial footing and allowed it to fund the Build Programme off its own book. Cash generated from operating activities increased by 22% and cash interest cover improved to 7 times, evidencing the strong cash flow generating capacity of the Group. Transnet’s investment plan is as follows:

Transnet Freight Rail	R 38.0 billion
Transnet Rail Engineering	R 2.3 billion
Transnet National Ports Authority	R 16.4 billion
Transnet Port Terminals	R 9.6 billion
Transnet Pipelines	R 11.9 billion
Total Investment Programme	R 80.3 billion

The planned capital expenditure over the next five years will require the raising of approximately R36,5 billion from debt capital markets in the medium term. The main part of this debt will be raised in the domestic market under the R30 -billion domestic medium term note (DMTN) programme and the balance will be raised in foreign markets.

H Appreciation

The Portfolio Committee extends its appreciation to all those at Transnet Freight Rail, Transnet Rail Engineering and Transnet Port Terminals for accommodating the Committee during this intensive oversight visit.

Report to be considered.