Transnet Online Integrated Report 2017
Market Demand Strategy (MDS) themes
  • Financial sustainability
  • Capacity creation and maintenance
  • Market segment competitiveness
  • Operational excellence
  • Human capital
  • Organisational readiness
  • Sound governance and ethics
  • Constructive stakeholder relations
  • Sustainable developmental outcomes
Sustainable Developmental Outcomes (SDOs)
  • Employment
  • Skills development
  • Industrial capability building
  • Investment leveraged
  • Regional integration
  • Transformation
  • Health and safety
  • Community development
  • Environmental stewardship
The Capitals
  • Financial Capital
  • Manufactured Capital
  • Intellectual Capital
  • Human Capital
  • Social and Relationship Capital

Performance review

Regulatory affairs
Key compact KPIs

Our ability to maintain financial stability is aided by the achievement and management of key profitability ratios, such as the EBITDA margin, gearing, cash interest cover and return on total average assets. Earnings before interest, taxation, depreciation and amortisation (EBITDA) increased by 5,0% to R27,6 billion (2016: R26,3 billion), with a resultant decrease in the EBITDA margin to 42,1% (2016: 42,2%).

The gearing ratio increased marginally to 44,4% (2016: 43,1%), due mainly to the execution of the capital expenditure programme. This level is below the Group’s target range of 50,0%, and is well below the triggers in loan covenants, reflecting the available capacity to continue with the investment strategy, aligned to validated market demand. The gearing ratio is not expected to exceed the target ratio over the medium term.

The cash interest cover ratio at 2,9 times (2016: 3,1 times) is below the internal target of 3,0 times, due to the significant increase in net finance costs, which resulted from borrowings to fund the capital investment programme. This is, however, higher than the triggers in loan covenants.

Transnet is engaging with the Department of Public Enterprises and the Department of Transport on the Revised White Paper on National Transport Policy, which was last developed in 1996 to ensure that the Company’s inputs are considered.

During the financial year, Transnet was granted a single-entity Railway Safety Permit valid from 31 August 2016 until 31 August 2017 by the Railway Safety Regulator. Transnet paid Railway safety permit fees amounting to R69,95 million for the 2017  financial year.

The following regulatory developments took place for each of the divisions during 2017:

Freight Rail

Draft Railway Levies Bill and Draft Railway Safety Bill

Transnet submitted comments on the Draft Railway Levies Bill and Draft Railway Safety Bill to the Department of Transport in August 2016. Further comments on the Draft Railway Safety Bill were submitted to the Department of Transport in March 2017. Transnet will continue to engage the Department of Transport through existing protocol to contextualise its views and proposals prior to submission of the Draft Railway Levies and Draft Railway Safety Bills to Cabinet for approval.

Pipelines

Pipelines filed its 2018 petroleum pipelines tariff application on 1 November 2016. In its application, Pipelines requested an Allowable Revenue decrease of 6,83%. On 23 February 2017, NERSA granted Pipelines a 1,43% increase in allowable revenue compared to the prior tariff period.

Pipelines filed its multi-year piped-gas transmission pipeline (Lilly Pipelines) tariff application on 9 December 2016. In its application, Pipelines requested allowable revenue increases of 0,2% for 2018, an increase of 7,5% for 2019 and an increase of 6,8% for 2020. On 31 March 2017 Nersa approved the multi-year tariffs as per the application.

Nersa published the Amendment to the Guidelines for Monitoring and Approving Piped-gas Transmission and Storage Tariffs (Guidelines) for public comment on 8 February 2017. The key reason for the review was for the harmonization of the three regulated industries to ensure coherence and consistency across Piped-gas, Petroleum Pipelines and Electricity.

National Ports Authority

The National Ports Authority submitted its 2018 tariff application to the Ports Regulator on 1 August 2016. The application requested a revenue requirement translating into an average tariff adjustment of 8,02% for the 2018 tariff year.

The Ports Regulator made the tariff determination for the National Ports Authority on 1 December 2016 and declined the proposed average 8,02% tariff increase in favour of an average tariff determination of 5,97% for the 2018 tariff year.

Transnet engaged with the Ports Regulator and port users on the review of Multi-year Tariff Methodology. The Ports Regulator, published the Multi-year Tariff Methodology for the 2019 to 2021 tariff periods on 31 March 2017.

Draft Comprehensive Maritime Transport Policy, 2017

Transnet has made inputs into the Draft Comprehensive Maritime Transport Policy on 23 March 2017 prior to the Department of Transport submitting same to Cabinet for approval.

2018 Focus

Contribute meaningfully to the work of the Ministerial Task Team in establishing the Rail Economic Regulatory model.

Manage the process and inputs regarding the Ports Regulator of South Africa’s intended discussion document on the National Ports Authority’s asset base.

Monitor the respective Nersa and Transnet NMPP project prudency studies.

Participate in the Department of Transport-led review of the existing Railway Safety Permit Fees Methodology.

Engage Nersa on the 2018 petroleum pipelines system tariff application.

Conduct a tariff gap analysis of the Record of Decisions versus submitted tariff applications.


Income statement

for the year ended 31 March 2017

    AUDITED
(in R million) 31 March 2017 31 March 2016
 
Continuing operations
Revenue 65 478  62 167 
Net operating expenses excluding depreciation and amortisation (37 921) (35 917)
Profit from operations before depreciation, derecognition, amortisation
and items listed below (EBITDA)
27 557  26 250 
Depreciation, derecognition and amortisation (13 471) (15 275)
  Profit from operations before items listed below 14 086  10 975 
Impairment of assets (2 538) (1 524)
Post-retirement benefit obligation expense (243) (346)
  Fair value adjustments 1 576 (590)
  Income from associates and joint ventures 20 26
  Profit from operations before net finance costs 12 901  8 541 
Finance costs (9 045) (7 481)
  Finance income 409 408
  Profit before taxation 4 265  1 468 
Taxation (1 500) (1 075)
  Profit for the year 2 765  393 

 

Revenue for the year increased by 5,3% to R65,5 billion (2016: R62,2 billion), driven by a 4,9% increase in general freight and a 2,4% increase in export coal railed. The respective increases were due to growth in market share arising from a shift in rail-friendly cargo from road to rail, and improved operational efficiency attributable to the deployment of new-generation locomotives on the network. Port container volumes increased marginally by 0,7% to 4 395 962 TEUs (2016: 4 366 376 TEUs), notwithstanding weaker demand. Petroleum volumes transported for the year decreased by 2,6% to 16 978 million litres (2016: 17 426 million litres). The decrease relates predominantly to the lower market demand for refined volumes stemming from current depressed commodity prices and the economic slowdown.
Operating costs increased by 5,6% to R37,9 billion (2016: R35,9 billion), notwithstanding a 10,1% increase in electricity costs mainly due to higher electricity tariffs and a 7,5% increase in personnel costs. Numerous cost-reduction initiatives implemented throughout the Company helped to limit the increase in operating costs, resulting in a R2,4 billion saving in planned costs. These initiatives included the limiting of overtime, a reduction in professional and consulting fees, and placing a limit on discretionary costs as it relates to travel, accommodation, printing, stationery and telecommunications.
Consequently, EBITDA increased by 5,0% to R27,6 billion (2016: R26,3 billion) with a resultant decrease in the EBITDA margin to 42,1% (2016: 42,2%).
Depreciation, derecognition and amortisation of assets decreased by 11,8% to R13,5 billion (2016: R15,3 billion), due to annual useful life adjustments to rolling stock and the rephasing of capital investments to align with lower market demand.
Impairment of assets, amounting to R2,5 billion (2016: R1,5 billion), is primarily due to the impairment of property, plant and equipment, mainly due to derailments, as well as an impairment of trade and other receivables.
Post-retirement benefit obligations are actuarially assessed in accordance with IAS 19: Employee Benefits, and adjusted accordingly. A cost of R243 million (2016: R346 million) was recognised during the year.
Net finance costs increased by 22,1% to R8,6 billion (2016: R7,1 billion) in line with expectations, due to the increased cost of borrowings. Capitalised borrowing costs amounted to R3,9 billion (2016: R3,5 billion).
The taxation charge of R1,5 billion (2016: R1,1 billion) is comprised of a deferred taxation charge. The increase in the deferred taxation charge arose mainly due to an increase in wear and tear allowances, as well as capitalised borrowing costs that are deductible for tax purposes. The deferral of certain foreign exchange gains (due to a legislative change in the current financial year) was partially offset by the impact of the Company’s calculated taxation loss. The effective taxation rate for the Group is 35,2% (2016: 73,2%), which was impacted by expenses that are non-deductible for tax purposes.
Statement of comprehensive income

for year ended 31 March 2017

  AUDITED
(in R million) 31 March 2017 31 March 2016
Profit for the year 2765  393 
Other comprehensive (loss)/income (3 552) 792 
Exchange differences on transition of foreign operations
Losses/gains on revaluations (742) (780)
Cash flow hedges (2 887) 1 403 
Actuarial gain on post-retirement benefit obligations 107  167 
Taxation relating to components of other comprehensive loss/(income) 1 030  (223)
Other comprehensive (loss)/income for the year, net of taxation (2 492) 569 
Total comprehensive income for the year 273  962 
Headline earnings summarised reconciliation

for year ended 31 March 2017

  AUDITED
  (in R million) 31 March 2017 31 March 2016
Profit for the year attributable to the equity holder 2 765  393 
Profit on the disposal of property, plant and equipment (34) (51)
Loss on the disposal of intabgible assets
Loss (profit) on the disposal of investment property (49)
Total remeasurements 1 653  620 
Investment property fair value adjusments (182) (439)
Impairment of intangible assets
Impairment of property, pland and equipment 1 835  1 058 
Total taxation effects of adjusments (471) (187)
Headline earnings 3 915  729 
Segment information

for the year ended 31 March 2017

Transnet
Freight Rail
Transnet
Engineering
Transnet
National Ports Authority
Transnet
Port Terminals
Transnet
Pipelines
Total
reportable segments
Other1 Total
Transnet
(in R million) Audited 31 March 2017 Audited 31 March 2016 Audited 31 March 2017 Audited 31 March 2016 Audited 31 March 2017 Audited 31 March 2016 Audited 31 March 2017 Audited 31 March 2016 Audited 31 March 2017 Audited 31 March 2016 Audited 31 March 2017 Audited 31 March 2016 Audited 31 March 2017 Audited 31 March 2016 Audited 31 March 2017 Audited 31 March 2016
External revenue 38 696  36 474  1 622  1 356  8 943  9 825  11 143  10 199  4 352  3 663  64 756  61 517  722  650  65 478  62 167 
Internal revenue 418  478  7 758  9 378  1 436  1 319  11  9 622  11 191  (9 622) (11 191)
Total revenue 39 114  36 952  9 380  10 734  10 379  11 144  11 150  10 210  4 355  3 668  74 378  72 708  (8 900) (10 541) 65 478  62 167 
Earnings before interest, taxation, depreciation, derecognition and amortisation (EBITDA) 17 263  15 468  (457) 389  6 367  7 284  3 794  3 035  3 377  2 626  30 344  28 802  (2 787) (2 552) 27 557  26 250 
Total assets2 175 865  175 876  17 083  13 283  89 243  82 962  18 341  19 259  41 619  38 929  342 151  330 309  9 374  25 920  351 525  356 229 
Total liabilities 116 105  112 575  14 415  9 077  45 112  45 163  8 277  9 877  22 856  22 401  206 765  199 093  1 307  14 010  208 072  213 103 
Capital expenditure3 15 746  22 619  945  1 002  2 020  2 938  1 208  1 126  1 706  1 550  21 625  29 235  (95) 326  21 438  29 561 
Cash generated from operations after changes in working capital 19 202  12 763  (753) (298) 7 277  8 718  3 854  2 773  3 403  2 041  32 983  25 997  (218) 2 158  32 765  28 155 

1 Other includes other segments, inter-unit eliminations and consolidation adjustments

2 Excludes assets held-for-sale.

3 Capital expenditure excludes the effects of borrowing costs, includes capitilised finance losses and capitalised decommissioning liabilities.

See income statement

See income statement

Statement of financial position

As at 31 March 2017

AUDITED
  (in R million) 31 March 2017 31 March 2016

ASSETS

 
Non-current assets 333 646  328 192 
Property, plant and equipment 311 927  302 463 
Investment properties 10 333  10 105 
Intangible assets 1 404  1 489 
Investments in associates and joint ventures 155  137 
Derivative financial assets 8 206  13 076 
Long-term loans and advances 20  21 
Other investments and long-term financial assets 1 601  901 
Current assets 17 989  28 201 
Inventories 3 354  3 594 
Trade and other receivables 7 768  8 535 
Derivative financial assets 324 
Other short-term investments 332  1 641 
Cash and cash equivalents 6 422  13 943 
Assets classified as held-for-sale 110  164 
Total assets 351 635  356 393 

EQUITY AND LIABILITIES

Capital and reserves 143 563  143 290 
Issued capital 12 661  12 661 
Reserves 130 902  130 629 
Non-current liabilities 168 533  171 254 
Employee benefits 2 624  2 646 
Long-term borrowings 111 026  117 468 
Derivative financial liabilities 1 938 
Long-term provisions 1 944  1 886 
Deferred taxation liabilities 44 853  44387 
Other non-current liabilities 6 148  4 867 
Current liabilities 39 539  41 849 
Trade payables and accruals 21 673  20 220 
Short-term borrowings 13 754  17 049 
Current taxation liability 14  13 
Derivative financial liabilities 46  247 
Short-term provisions 914  932 
Other current liabilities 3 138  3 388 
Total equity and liabilities 351 635  356 393 
Statement of cash flows

for the year ended 31 March 2017

    AUDITED
(in R million) 31 March 2017 31 March 2016
Cash flows from operating activities 25 104  28 572 
Cash generated from operations 31 018  27 747
Changes in working capital 1 747  408 
Cash generated from operations after changes in working capital 32 765  28 155 
Finance costs (7 622) (6 002)
Finance income 357  361 
Taxation paid (3) (23)
Settlement of post-retirement benefit obligations (192) (208)
Derivatives settled and raised (201) 6 289 
Cash flows utilised in investing activities (24 689) (34 328)
Investment to maintain operations (16 486) (18 864)
Investment to expand operations (8 867) (14 353)
Changes in investments, loans, advances and other investing activities 664  (1 111)
Cash flows (utilised in)/from financing activities (7 936) 13 435 
Borrowings raised 17 009  40 905 
Borrowings repaid (24 945) (27 470)
Net (decrease)/increase in cash and cash equivalents (7 521) 7 679 
Cash and cash equivalents at the beginning of the year 13 943  6 264 
Total cash and cash equivalents at the end of the year 6 422  13 943 

 

Cash generated from operations amounted to R31.0 billion (2016: R27,7 billion), an increase of 11,8% from the prior year.
Cash generated from operations – after working capital changes – increased by 16,4% to R32,8 billion (2016: R28,2 billion) reflecting the company’s strong cash generating capability.
A well-defined funding strategy has enabled Transnet to raise R17,0 billion for the year without Government guarantees, comprised mainly of the following funding sources.
  • R5,5 billion from development finance institutions;
  • R7,6 billion of commercial paper and call loans;
  • R2,9 billion from export credit agencies; and
  • R1,0 billion in domestic bonds.
The Company borrows on the strength of its financial position, and has maintained an investment-grade credit rating, confirming its solid standalone credit profile.
Transnet repaid borrowings amounting to R24,9 billion, which related predominantly to loans, bonds and commercial paper that matured during the year.

Read more
Additional information
The Group Company Secretary certificate, as well as the approval of the Annual Financial Statements, can be found on www.transnet.net

Operational efficiency

Operational efficiency

Overall, Transnet’s operational efficiency ratio exceeded the 2017 target by 14,9%.

Rail volumes

Key compact KPIs



  • Total TFR volumes increased by 2,3% to 219,1 mt (2016: 214,2 mt).
  • General freight volumes increased by 4,9% to 88,1 mt (2016: 84,0 mt); this growth is also attributable to a 7% increase in tons for containers transported, including Eskom coal in containers, with a growth from 14,6 mt in 2016 to
    15,6 mt in 2017.1
  • Export coal volumes increased by 2,4%, mainly due to the deployment of new-generation locomotives on the network improving operational efficiencies.
  • Manganese volumes increased by 17,5% to 12,1 mt
    (2016: 10,3 mt), mainly due to recoveries in commodity prices, resulting in customers increasing production outputs.
  • The container and automotive business increased volumes by 24,3% to 9,2 mt (2016: 7,4 mt), evidencing continued market share growth from the road-to-rail modal shift.
  • Mineral mining and chrome volumes increased by 6,3% to 22,0 mt (2016: 20,7 mt), with price recoveries for chrome and magnetite boosting customer demand.
  • Iron ore export volumes decreased by 1,5% to 57,2 mt (2016: 58,1 mt), mainly due to the lower demand for iron ore. Tippler challenges at the port also slowed volume performance.
  • Steel and cement volumes decreased by 12,0%, from 17,5 mt to 15,4 mt. Adverse weather conditions negatively impacted the cement industry. Performance was also impacted by a plant shutdown of a large steel customer.
  • Agriculture and bulk liquids volumes decreased by 1,1% to
    9,0 mt (2016: 9,1 mt), due to the poor grain season given severe drought. Adverse weather and flooding also negatively impacted the timber industry.

1 Including Eskom coal containers, with a growth from 14,6 mt in 2016 to 15,6 mt in 2016.

Ports volumes

Key compact KPIs



  • While total export volumes increased by 3%, volume performance varied across sectors.
  • Import and export volumes across commodity classes showed mixed outcomes, with most commodity volumes generally improving from the prior year.
  • Bulk and break-bulk volumes grew by 2,1% to 98,0 mt (2016: 178 354 090 mt) despite downward pressure from low commodity prices.
  • Container volumes increased by 0,7% to 4 395 962 TEUs (2016: 4 366 376 TEUs) despite weaker demand due to the slower global economy.
  • Total automotive volumes declined by 4,2% to 679 792 (2016: 709 891). Sluggish vehicle imports and exports were due to unfavourable domestic economic conditions.
  • Liquid bulk volumes declined by 1,6% to 41 042 050 mt (2016: 41 704 885 mt), due to decrease in petroleum volumes.
Pipelines volumes

Key compact KPIs



  • Transported petroleum volumes decreased by 2,6% to 16 978 million litres (2016: 17 426 million litres), due mainly to lower market demand for refined volumes stemming from current depressed commodity prices and the economic slowdown.
  • Gas volumes increased by 2,4%.
Operational efficiency/excellence
Rail efficiency

Key compact KPIs



Freight Rail’s General Freight efficiency KPI for Density (GTK/Routekm), has neither met nor exceeded the target set for the year. The shortfall in general freight volumes transported negatively impacted GTK and thus the density performance. The density of the GF network is further impacted by the traffic mix that was made up largely of shorter trains.

Overall, volumes executed on Natcor performed beyond expectation, falling short of budget by a small margin.

Freight Rail realised excellent volume and density efficiencies on Capecor and Southcor. This is largely due to the high concentration of dense iron ore and manganese commodities conveyed on these corridors. These trains are designed to run with the longest trains possible over a fixed design for route/km. The efficiencies realised in operating these services by far exceeded targets.

Locomotives


NTK/Loco

Despite the slump experienced in volumes due to market conditions, the active locomotives that were used in the execution of services were planned and utilised efficiently. The shortfall against target could also be ascribed to the volume shortfall and a complex network (viz. diesel, AC and DC electrified sections) over which a large fleet of older and modern locomotives are deployed.

NTK/Wagons

The ratio of net tons transported against available wagons reflects a shortfall against target. This is largely due to a variety of wagon types on offer for a variety of services and commodity types. The seasonal and specialised wagon types demanded are included in the ‘available wagon’ fleet even though they may only be used to transport freight for certain periods in the year.

Port Terminals efficiency

Port Terminals’ primary measure of operational efficiency, average moves per ship working hour (SWH), has declined across all the terminals. In Durban, the Pier 1 SWH decreased from 53 to 45 moves, while the Pier 2 SWH declined from 63 to 55 moves. The Durban Terminals experienced equipment and weather challenges, which negatively impacted performance. The Ngqura Container Terminal SWH declined from 66 to 63 moves due to the lower parcel sizes resulting from the current global economic environment. The Cape Town Container Terminal SWH decreased marginally, from 54 to 53 moves, having been impacted by uncommonly harsh weather conditions.

Container terminals have reduced their train turnaround time to below the targeted four hours. Targets were met at all our container terminals except Saldanha, where the target was marginally missed; the terminal achieved 112 minutes vs the 109 minutes target. Saldanha was impacted by a number of equipment challenges earlier in the year; however, these have since been addressed and performance has improved.

Ports performed exceptionally well regarding ‘average anchorage waiting times’ performance targets. The favourable performance is attributable to minimal equipment failure disruptions, continuous terminal operations’ monitoring and proactive stakeholder engagement geared towards operational efficiency.

Capacity creation and maintenance

Capital investment and progress on major projects

Transnet has invested R145 billion on MDS initiatives over the past five years and expects to invest a further R229,2 billion. The latter includes an amount of R20 billion, to be set aside expressly for the identification of validated opportunities to diversify revenue streams, so as to accelerate and facilitate growth beyond the MDS period to 2024.

We have maintained financial stability and agility by optimising capital expenditure based on validated demand. Our capital investment for the year amounted to R21,4 billion (excluding capitalised borrowing costs), representing a 27,5% decrease from the prior year (2015: R29,6 billion). The capital investment for the year represents R5,2 billion invested in the expansion of infrastructure and equipment, while R16,2 billion was invested in maintaining capacity in the rail and ports divisions.

Locomotives

The composition of the 1 064 diesel and electric locomotives for General Freight business are as follows:

  • 359 class 22E electric locomotives: 80 locomotives have been accepted into operations;
  • 233 class 44 diesel locomotives: 117 locomotives have been accepted into operations;
  • 232 class 45 diesel locomotives: to date two locomotives have been delivered and are undergoing acceptance testing; and
  • 240 class 23E electric locomotives: the first two locomotives have been delivered and are undergoing acceptance testing.
Wagons

Wagons are maintained and built according to the wagon modernisation plan, customer demand and operational requirements. The type and number of wagons to be provided is thus reviewed annually. During the year, 100 SCL automotive wagons were built by Transnet Engineering (TE) and delivered to Freight Rail. These specialised wagons enable Freight Rail to provide capacity for transporting high-profile motor vehicles. In addition, a total of 18 948 wagon maintenance interventions were carried out on various rail wagons.

Intervention Quantity
Liftings 13 905
Barrel testing 688
Unscheduled maintenance 4 238
Wreck repair interventions 117
18 948
Capitalised maintenance

The total capitalised maintenance for the year amounted to R6,2 billion of which R2,0 billion was invested in interventions to sustain the Company’s rail infrastructure, with R4,2 billion invested to maintain the condition of the rolling stock at a sustainable level.

Manganese expansion

South Africa accounts for 75% of global manganese identified reserves and 31% of manganese exports by value, making it a sustainable, lucrative supply market to Europe and China. The prevailing market conditions and fundamental changes in forecast manganese ore prices necessitated the introduction of a scalable export capacity, initially at 12 mtpa and then growing to 16 mtpa, to meet sustainable export levels.

The phasing of the investment over a longer period will sustain the competitive position of existing and future producers. The manganese expansion programme will increase manganese export capacity through the upgrade of the rail network between Hotazel (Northern Cape) and Coega (Eastern Cape); and the provision of a new bulk terminal at the Port of Ngqura. The project aims to retain South Africa’s position as the leading exporter of high-grade manganese ore.

R811 million has been invested in expanding capacity for manganese beyond 5,5 mt, with R137 million being invested in the project during the year.

Coal line investment programmes

The coal line is the main channel for export coal. It commences at the mines in Mpumalanga, extending through the Overvaal Tunnel all the way to the Port of Richards Bay Coal Terminal (RBCT).The coal programme comprises the following key projects:

  • Export coal expansion to 81 mtpa: To date R2,7 billion has been invested to expand capacity on the export coal line to 81 mtpa. For the year, R145 million was invested in the coal line expansion to upgrade yards, lines and electrical equipment.
  • Waterberg upgrade Stage II: This project grows rail capacity
    to 6 mtpa through incremental upgrades of the existing rail networks and yards using additional loops; while maintaining the existing axle loads, electrical upgrades and improved train control systems. Since inception, R126 million has been invested in the project, and for the year R28 million has been invested.
  • Overvaal Tunnel doubling: The condition of the current Overvaal Tunnel is deteriorating and it only provides a single rail line.
    A new double-track tunnel will be constructed adjacent to the existing tunnel. In all, R3,5 billion has been approved for the doubling of the Overvaal Tunnel. Execution has not commenced due to further assessments being conducted for an alternative technology solution to develop the tunnel.
New Multi-Product Pipeline (NMPP)

The NMPP is a strategic investment to secure the supply of petroleum products from the coastal terminal in Durban to the inland (predominantly Gauteng) market over the long term. It is one of the largest and most complex multi-product pipelines in the world.

Transnet invested R1,5 billion in the NMPP project in the 2017 financial year. The 24” main pipeline and 16” inland pipelines have been fully commissioned and are operational, having transported 15 billion litres of diesel from Durban to the inland region since commissioning. This ensures secure supply of fuel for the South African economy over the medium to long term. The multi-product operation of the NMPP trunkline via the implementation of tightlining at the coastal terminal and completion of the Inland Accumulation Facility is expected to be operational by the end of November 2017.

Port infrastructure, equipment and floating crafts

As part of the MDS, Port Terminals and National Ports Authority intend to invest in infrastructure and equipment to unlock demand as well as to contribute to the economic development of South Africa.

During the year, Transnet invested approximately R1 billion in the maintenance and acquisition of cranes, tipplers, dredgers, tugs, straddle carriers and other port equipment.

Durban Container Terminal (DCT)

The Port of Durban is the largest South African container port situated on the east coast of South Africa, with dedicated container- handling facilities at the DCT. DCT handles approximately 65% of the total containerised cargo of South Africa and is the main link to South Africa’s industrialised hub, Gauteng.

The project has been approved for the lengthening and deepening of DCT Berths 203 to 205 to further enhance
the ability of the port to handle large container vessels.

Market segment competitiveness

Market segment competitiveness

Transnet’s rail network faces strong competition from road and has lost significant tonnages over the past two decades
to road. Transnet’s rail development framework, therefore, aims to expand the region-wide rail service capacity, but at the same time it is vital to accomplish this in a competitive manner to grow tonnages and capture market share.

Rail freight demand forecasting takes into consideration that:



Market competitiveness for rail is measured in terms of Rail Addressable Market Share (RAMS) based on tons measured per calendar year.

 

 

The maritime shipping industry is an essential co-ordinating and cohesive element of many other industries. It is an integral component to physical trade and economic exchange, enabling businesses to thrive in a globally interdependent economy. Competitiveness for ports is measured in terms of the maritime connectivity index, which captures how well countries are connected in global shipping networks. This index considers five important components of the shipping sector:

Number of vessels;
Vessel’s container-carrying capacity;
Maximum vessel size;
Number of services; and
Number of shipping liner companies that deploy container ships to the country’s port.

 

Expanding Transnet’s business on the continent

Transnet, in collaboration with General Electric (GE), plans to deliver a digital solution that will enhance efficiency and productivity in Africa’s transport sector. The proposed plan will connect shippers and transport operators, making it easier for a company to understand pricing and capacity on the network, plan a shipment and get goods to market. Transnet delivers on average 13 000 containers and 620 000 tons of goods critical to Africa’s economy daily. Africa’s intra-continental trade has almost doubled since 1995, and the increase in volume of goods moving through the supply chain is creating transportation and logistical complexities that slow down shipments.

Our integrated ‘Go-to-Market’ approach will enable Transnet to pursue international opportunities in a co-ordinated and well-planned manner by defining specific opportunities to pursue, determining how to position Transnet in the market and by defining the support services required.

Key aspects developed as part of our integrated
‘Go-to-Market’ approach during the year include:

  • An integrated value proposition for Transnet, capturing its cross-Operating Division capabilities to support customers across the logistics value chain and across their lifecycle of requirements;
  • Levers across which internal and external stakeholders, including Government structures, can be leveraged to support Transnet in gaining traction across revenue drivers; and
  • A competitive process for selection of partners across functional areas and geographies to offer services essential for the full value proposition.
Regional integration

* Excludes Port Terminals and National Ports Authority.

 



Investing in emerging technologies

We acknowledge that disruptive innovations are appearing across the digital sphere to challenge dominant business models, and have thus positioned the Company as a catalyst for African innovation and industrialisation. Innovation and enterprise development are central to Transnet’s plans to improve its service offering and contribute to the advancement of the economy; we will achieve this by creating new industries and thereby contributing to job creation.

Transnet Engineering successfully tested the TransAfrica Locomotive during the year and is proud to report that during testing the locomotive has had no major failures. Engineering also successfully developed and prototyped the following innovations:

  • Transnet’s first in-house designed traction motor. This scaled model is currently undergoing critical tests. Learning from this prototype will be used in the manufacture of the full-scale prototype;
  • Transnet’s first in-house designed Condition Monitoring System, which uses satellite, 3G, WiFi and GPS for real-time condition monitoring of both stationary and mobile assets. The first configuration of the system is being deployed to TFR as a Locomotive Condition Monitoring System (400 units);
  • Transnet’s first in-house designed Advanced Data Analytics and Machine Learning platform called IRIS (Intelligent Rail Information Services). This platform can be used across Transnet for predictive maintenance and to improve asset reliability and productivity. The first applications deployed on the platform are a wheel wear prediction tool, which TE uses for predictive maintenance of wheels, and a fleet monitoring service that is deployed with the Locomotive Condition Monitoring System at TFR;
  • Transnet’s first Standard Gauge Wagon Bogie, which is currently being manufactured;
  • Transnet’s own Port Hauler, which is a truck-like vehicle for the ports, is currently being manufactured; and
  • Software commissioning tool for locomotives, the first of which is TAL. This is a desktop application that can connect to Transnet’s in-house designed control system for advanced diagnostics and monitoring. This tool will be packaged with every sale of TAL.

During the year, we showcased 20 entrepreneurs from the Transnet Design Research and Innovation Centre, who invented ‘life-changing ideas’ that would provide solutions to challenges in ‘SA Incorporated’. We selected ideas from 1 200 candidates who recently completed an innovation accelerator programme. The programme is designed to advance entrepreneurial ideas into sustainable solutions with commercial viability.

Research and development
Group performance in support of Transnet's Sustainable Development Outcomes

Group performance in support of Transnet's Sustainable Development Outcomes

Responding to stakeholder issues

In July 2017, we commenced employee training on a stakeholder engagement database which was developed to help embed Transnet’s Stakeholder Engagement Policy and accompanying process control manual.

Stakeholder perception survey

We performed a multi-stakeholder perception survey during the year, with 150 participants across all stakeholder groups. The survey focused on areas where we have significant operations. Overall, the quality of our stakeholder engagements improved by 60% with an overall satisfaction rating from 65% of participants.

Customer satisfaction survey

Our 2016 Customer Satisfaction Survey was the sixth survey conducted since 2011. The survey was conducted in September 2016 with 150 existing customers and was extended to include 24 potential customers. While we improved our overall customer satisfaction rating to 56% (2016: 26%), we fell short of our target score of 60%.

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More on our performance relating to stakeholder engagement

Sustainability Report online at www.transnet.net


Managing our environmental impact

Transnet recorded a 0,3% decrease in energy consumption during the year, while energy efficiency increased by 1,2% from the prior year. Regarding freight rail traction (which constitutes more than 70% of total Company power consumption), electrical traction energy efficiency decreased by 4,3%, and diesel traction achieved a 7,9% energy-efficiency gain, compared to the prior year. The new 15E, 19E, 20E and 21E locomotives together regenerated 242 788 MWh for the period.

The Company’s carbon emission intensity decreased by 2,3%, compared to the prior year.

Freight Rail’s top 10 general freight commodities’ market share gains from road hauliers resulted in 637 152 tC02e carbon emissions savings for the South African transport sector.

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Sustainability Report online at www.transnet.net

Partnering communities to build mutual value

Transnet’s total Corporate Social Investment (CSI) spend for 2017 was R234 million. CSI spend contributed to the achievement of an overall B-BBEE score of Level 2. In all, R197,1 million was spent on programmes and R37,3 million on support functions. The total CSI spend amount includes external sponsorships and donations of R17,6 million, as well as Transnet employees’ directorship fees of R1,0 million, and the Transnet CSI budget allocation of R215,2 million.

Community development

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More on our performance relating to CSI
Sustainability Report online at www.transnet.net

Environmental stewardship



Promoting health and safety

Transnet measures safety performance against the industry-recognised rolling 12-month ‘disabling injury frequency rate’ (DIFR). We recorded overall company DIFR performance of 0,69 against a target of 0,75. This is the sixth consecutive year that Transnet has recorded a DIFR ratio below 0,75.

Safety performance is measured against industry recognised indicators such as the disabling injury frequency rate (DIFR) including fatalities, as well as loss incidents and derailments. During the year, running line derailments decreased from 84 in 2016 to 81 in 2017, whereas shunting derailments decreased from 171 in 2016 to 159 in 2017.

While our overall DIFR performance continues to be exceptional by international standards, we regret to report 15 employee fatalities during the year. Of the 15 fatalities, three colleagues passed away in road vehicle accidents, and six as a result of train-related incidents. The remaining fatalities were mainly due to employees not adhering to internal operating procedures. The number and nature of these fatalities indicate that greater efforts are required to improve safety vigilance and performance. We continue to monitor and mitigate, as best possible, both operational and behavioural risks that are inherent in a highly industrialised manufacturing work environment. To this end, the Transnet Board of Directors and Executive Management have heightened their oversight roles of operational performance – and safety performance in particular – in more visible ways through site visits, and by instituting an integrated systems management approach to ensure the various levels of safety performance are clearly understood and adhered to within the organisation.

We continue to analyse and review our current safety approaches and efficiency, while proactively striving ‘towards zero harm’. Numerous vehicle safety, driver awareness and other safety campaigns have been introduced to further embed a safety culture within Transnet’s operations.

We further regret to report 82 public fatalities during the year (compared to 97 in the prior year). These fatalities were due mainly to people trespassing onto operating railway lines. During the year, Transnet collaborated with local municipalities, schools, the South African Police Service and other relevant stakeholders to extend its Level Crossing Awareness Campaign
to educate communities, the public – and children in particular – about the dangers of living near railway lines.

The Board of Directors conveys its deepest condolences to the families, colleagues and friends of the employees and members of the public who lost their lives. We wish to reiterate our continued commitment to the safety of employees and the public as a vital component of the Company’s operations.

Staff wellness

We experienced an increase in the rate of unplanned absenteeism, from 2,25% in 2016 to 2,96% in 2017. A change in leave policies may have led to this increase. The sick absentee rate decreased from 2,61% to 2,39% in 2017. Transnet continues to improve governance related to the management of attendance to curtail absenteeism.

Community wellness

A process is under way to convert contract Phelophepa staff to permanent employment. Overall, 173 016 patients were treated at the health, dental, eye, psychology and pharmacy clinics. In all, 438 807 individuals benefited from services through community outreach activities. Transnet Foundation implemented various health-awareness campaigns from April 2016 to January 2017, focusing on cancer and diabetes screening and testing. In all, 1 591 students from South African Training Institutions and 33 optometry students from Glasgow Caledonian University in Scotland received experiential training on board Phelophepa between April 2016 and January 2017. Health and hygiene workshops were implemented in nine provinces, with 9 105 female learners receiving dignity packs.

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Sustainability Report online at www.transnet.net

Having the right skills at the right time

Transnet’s total headcount decreased from 64 467 in 2016 to 58 828 in 2017. Headcount comprises 53 661 permanent employees and 5 167 fixed-term contract employees. There has been a gradual decrease in headcount over the past three years. To curb recruitment costs and support cost savings initiatives within the Company, a moratorium was placed on the appointment of external candidates during 2017. The focus for the year was on training and further skills development, as well as job preservation.

The Company spent 3,1% of its labour cost on training during the period, focusing on artisans, engineers and engineering technicians. Overall, 173 full-time engineering bursaries were awarded in various disciplines and 229 engineering technician trainees were given workplace experience opportunities. In all, 250 new apprentices joined the Company’s apprenticeship scheme and 77 new Young Professionals-in-Training were contracted. Sector-specific skills development continued to focus on maritime, rail and port terminal operations, with 1 813 learners participating in these programmes. Currently, the Company has access to 1 700 apprentices and 597 engineering bursars in its talent pool.

Overall 1 247 employees were trained as part of leadership development, a decline in training figures compared to the prior year due to cost-cutting measures as the Company responded to the lagging growth in volumes and revenue. We aim to increase our training participants in 2018.


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Sustainability Report online at www.transnet.net

 

Supply localisation

Transnet continued to provide both financial and non-financial support to qualifying black-owned, black women-owned, black youth-owned businesses; businesses owned by people with disabilities; qualifying small enterprises; and exempted micro-enterprises. Transnet opened yet another Enterprise Development (ED) hub in Mdantsane, which aims to foster an enabling environment for small business to access economic development interventions and to create a culture of entrepreneurship by supporting new entrepreneurs through structured training and mentorship programmes. This is the fourth hub opened by Transnet, with additional hubs due to be launched during the MDS period.

Transnet’s Supplier Development (SD) programme promotes skills development and the creation and preservation of jobs. It further encourages the transfer of intellectual property and the localisation of supply; and ultimately promotes industrialisation through contractually obligated supplier development plans. Since programme inception, total contract value to date amounts to R134,4 billion (2016: R119,9 billion). SD obligations concluded with suppliers amounts to R62,6 billion or 46,6% of contract value (2016: R56,6 billion or 47,2% of contract value). To date, R32,2 billion or 51,5% (2016: R23,2 billion or 41,1%) of these SD obligations have been met. The SD numbers include the locomotive awards and related SD obligations. Transnet is working to improve its SD programme so that it can deliver even more tangible value-adding results going forward.

 

Promoting transformation

Transnet achieved – and exceeded – its employment equity targets across all job grades. The employee race profile for the period was 71,5% black, 10,0% coloured, 3,7% Indian and 14,8% white. Female representation now exceeds 27,7% in executive, senior, professional and skilled technical levels, including a 50,0% representation in the Group Leadership Team. Increasing representation of people with disabilities remains a challenge, at 2,3% of the total headcount (2016: 2,3%).

Preferential procurement

2 Total Measurable Procurement Spend

Legislative compliance

To the best knowledge of Transnet’s directors, the Company has complied, in all material respects, with all regulations applicable to it during the period, except as noted below.

PFMA reportable items

Category of reportable items
2017
R million
2016
R million
Fruitless and wasteful expenditure 21,9 3,9
Losses through criminal conduct 43,1 60,3
Irregular expenditure – spent in current year 142,4
Irregular expenditure – spent in prior year 550,3 25,1
Total irregular expenditure 692,7 25,1
Less: Irregular expenditure condoned subsequent to year end1 (293,3) (4,5)
Less: amounts recoverable (not condoned)2 (158,6)
Less: amounts not recoverable (not condoned) (240,8) (20,6)
Remaining irregular expenditure awaiting condonation 0 0
Potential irregular expenditure under investigation 32,8 4 229,8 3

The Company is committed to complying with the provisions of the PFMA and handling alleged governance breaches in a firm and expeditious manner. During the financial year, the Company enhanced its reporting systems for irregular expenditure, which resulted in additional items – largely from previous years – being identified and reported in the current year.

Accordingly, the Company has implemented a number of preventative initiatives. The specific root causes of the irregular expenditure relating to the current and prior years have been assessed and mitigating controls have been developed as tabulated below.

Root cause Mitigating controls
Contract value exceeded. Implementation of automated controls in SAP.
PPM5 tender/bid process not followed. Enablement of the end-to-end procurement process. Strict implementation and monitoring of documented processes via exception reporting.
Procurement and capital expenditure procedures not adhered to. Enablement of the end-to-end procurement process. Strict implementation and monitoring of documented processes via exception reporting.
Non-compliance with DOA6. Capital and procurement approval processes to be automated.
Incorrect use of procurement emergency procedure. Ongoing training and monitoring.
PPM confinement process not followed. Automation and ongoing monitoring through exception reporting.

1 Irregular expenditure amounting to R319,8 million was being assessed for potential condonement at the time of the Annual Financial Statements being signed off. Subsequently, R293,3 million has been condoned. The final impact of the condonation process will be disclosed in the 2018 Annual Financial Statements Annexure E, accordingly.

2 The Company’s external auditors reported irregularities in terms of Section 45(1) of the Auditing Profession Act, 2005 (No. 26 of 2005) to the Independent Regulatory Board of Auditors. The details of the reportable irregularities are disclosed in Note 36 of the Annual Financial Statements. A total of R158,6 million may be recoverable, pending finalisation of the investigations.

3Irregular expenditure relating to foreign vendors under investigation in the prior year (R229,8 million) has been condoned by National Treasury subsequent to the Annual Financial Statements being signed-off.

4 As at 31 March 2017 there is one reportable item exceeding R25 million reported as irregular expenditure under investigation relating to Transnet Property where an official offered a lessee a lease contract at a reduced rental without having the proper delegation of authority, which may result in financial losses amounting to R32,8 million over the period of the lease. Transnet Property noted the matter as a potential finding. The lease is currently being renegotiated
by Transnet Property and the lessee, which may result in a reduction of the potential loss.

5Transnet Procurement Procedures Manual.

6 Delegation of Authority Framework.