Creating value through the six capitals
Transnet creates financial value from two perspectives:
- The creation of financial returns for the Company, its Shareholder and providers of capital; and
- The economic value created for its broader stakeholder base and the South African economy.
Economic tariffs are key outputs of Transnet’s business activities, while revenue from tariffs is an important capital input. Tariffs for both Pipelines and National Ports Authority are subject to economic regulation.
Pipelines holds operating licences for the petroleum and gas pipeline network as well as the associated storage facilities and applies the Nersa tariff methodology for setting tariffs in the petroleum industry.
National Ports Authority applies the guidelines set out in the Regulatory Manual for the tariff years 2017 to 2018. Freight Rail is free to set market-related tariffs without economic regulation. In determining tariffs, Transnet considers major input cost increases.
To justify tariff increases for improved service pricing, Transnet must provide services (e.g. port services), infrastructure service reliability and technical innovation. Through its operational efficiency and R&D activities, infrastructure reliability and technical expertise are enhanced, thus helping to maintain pricing levels and strengthen Transnet’s market position in the non-regulated business for its Africa Strategy.
Transnet aims to contain price increases through improved efficiency in all areas of operations. Its role is to create infrastructure capacity and to improve the reliability of existing services. Consequently, it must recover the cost of its investment while maintaining operational performance, and generate a return commensurate with the risk on investment. Failure to obtain an appropriate return on investment would impact Transnet’s financial position and ultimately its ability to access the debt capital market cost effectively.
Transnet accesses debt capital markets for funding. We aim to retain and constantly improve our financial strength. Given the Company’s commercial objectives, it has to remain within acceptable capital and debt structure parameters to ensure:
- Adequate reinvestment in the Company to sustain infrastructure and expand capacity;
- Optimal cost of capital, including external debt; and
- Optimal utilisation of working capital.
The Board of Directors has set specific financial metrics to enable the preceding objectives:
- Maintain a maximum capital-to-debt structure (gearing) at 50%; and
- Maintain a cash interest cover of at least 3 times.
As a State-owned Company (SOC), the financial strategy reflects the higher risk profile of the business. The capital structure parameters are included in the Shareholder’s Compact to uphold sustainability and provide assurance in respect of the long-term sustainability of the Company and to evade undue financial risks.
- Cash and cash equivalents R13,9 billion
- Share capital and reserves R143,3 billion
- Long- and short-term borrowings R134,5 billion
Approaches to managing financial capital outcomes
Diversifying revenue sources to reduce risk related to commodity demand and associated volatility.
Ensuring stringent cost management and optimisation as well as striking a healthy balance in capital expenditure.
Aggressive working capital management.
Generating a return on assets equal to the risk.
Maintaining cost-effective structured funding.
‘Take-or-pay’ contracts with customers.
Maintaining credit ratings and attracting funding from various sources.
Changes in freight logistics market demand driven by global economic growth.
Macroeconomic risks – currency devaluation and energy-price risk (electricity and diesel).
Credit ratings breaching investment-grade thresholds.
Execution of capital projects in a volatile economic climate.
De-risking capital projects – ensuring positive returns even under market pressure.
Risk modelling and management according to the overall capital portfolio – particularly co-dependencies.
Holistic portfolio of measures to optimise the business to buffer
Revenue source diversification – including driving Africa revenue.
Sound management of working capital.
- EBITDA R27,6 billion
- Operating profit R14,1 billion
- Cash generated from operations (after working capital changes) R32,8 billion
- EBITDA margin 42,1%
- Gearing 44,4%
- Cash interest cover 2,9 times
- Cash and cash equivalents R6,4 billion
- Share capital and reserves R143,6 billion
- Capital investment R21,4 billion
- Long- and short-term borrowings R124,8 billion
1 1 On 5 April 2017, Standard & Poor’s lowered the Company’s foreign currency rating to BB+ from BBB- and the local currency to BBB- from BBB, both with a negative outlook. On 13 June 2017, Moody’s also lowered the Company’s foreign and local currency ratings to Baa3 with a negative outlook. Both these actions were due to the rating action on the Sovereign as Transnet is viewed to be closely linked to the Government. Transnet evaluated the potential impact on its financial position, liquidity and solvency and expects no significant negative effect on estimates.
Personnel cost R20,8 billion
Capital investment in expanding infrastructure R5,2 billion
B-BBEE spend as % of total measured procurement spend 103,1%
Investment in property, plant and equipment R311,9 billion
Committed Supplier Development (SD) R62,6 billion
Investment in research and development R185 million
Investment in skills development R746 million
CSI spend R234 million
To meet future market demand, Transnet must invest for long-term growth prospects as per the MDS, while responding with agility to short- to medium-term volatility in markets. This approach is reflected by the reduction in our Capital Investment Plan from R277,8 billion to R229,2 billion over the next seven years in response to the lower-than-anticipated freight demand. For now, we must align our infrastructure development and manufactured capital creation more closely to validated demand. Transnet must reduce investment in infrastructure-related capital projects (or its manufactured capital) in the near term to remain financialy sustainable.
There are also trade-offs in terms of Transnet’s ability to consistently meet its developmental mandate to create and sustain jobs in the domestic economy and remain financially agile in a tough global economy.