The governance of risk
Accountability is key in the management of risks – named individuals will be associated with specific risks, controls or tasks. The primary risk roles are:
- Risk owners: ensure that the assessment of that risk is up to date and is properly recorded in risk registers;
- Control owners: provide periodic assurance that controls are adequate, effective and efficient; and
- Task owners: take risk treatment actions
Transnet’s risk control and assurance environment
Integrated Assurance Model for capital projects programmes
Transnet has an established, principles-based Integrated Assurance Model (IAM) that provides a clearly defined, documented approach for integrating and aligning Transnet’s assurance processes and control systems thereby, enabling appropriate risk and governance oversight.
Integrated Assurance Model for capital programmes
Management of risk
During 2007, Transnet introduced one framework for the management of all risks across the business. While the framework is now established, we continue to consolidate and embed Enterprise Risk Management (ERM) activity across the organisation.
ERM aims to achieve an appropriate balance between opportunities realised for gain, while minimising adverse impacts. The general activities in a formal ERM process include risk identification, evaluation, prioritisation, treatment, monitoring, reporting and integration into strategic decision-making and key business processes.
The emergence of generally accepted corporate governance principles has seen risk management focus increasingly on Transnet’s strategic objectives. Rather than striving only for inherent efficiencies and operational performance, ERM helps to shape the business’ strategic direction. The risk management approach is evolving from being process- and compliance-focused, to one of data-centricity.
To achieve best-practice levels, Transnet considers the requirements of the guidelines of the King Report on Corporate Governance for South Africa, 2017 (King IV), and ISO 31000: 2009 Risk Management Standard. The strategic risk profile is based on the five strategic imperatives of the MDS and the nine Sustainable Developmental Outcomes (SDOs):
- Financial sustainability;
- Capacity creation;
- Operational performance; and
- Market segment competitiveness.
Fraud and Corruption Risk Management Strategy
Transnet’s Fraud and Corruption Risk Management Strategy, as contained in the Fraud Risk Management Programme (FRMP), provides mechanisms for the prevention, early detection and investigation of irregularities. The FRMP also provides corrective measures to address control breakdowns and the related root causes from a fraud and/or corruption perspective.
The MDS strategic imperatives and SDOs represent the overarching themes of the FRMP in that they not only embrace the fraud risk management initiatives undertaken in previous years, but also emphasise the related root causes of fraud and corruption emanating from the areas of governance, people, methods and practices. Further, the successful implementation of the various initiatives contained within the identified themes will continue to assist Transnet in positioning itself as a leading company with a robust fraud and corruption risk management strategy.
The following emerging risks were identified over the past financial year and are receiving appropriate attention:
Update at the time of writing this report
Emerging financial risk – Sovereign credit downgrade: The risk of obtaining a negative Sovereign credit rating impacts Transnet’s investment appeal. Transnet’s rating is linked to that of the Sovereign.
At the time of writing this report (as at 5 April 2017), Standard & Poor’s had 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 rating 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.
Emerging operational risks – Extreme weather conditions, such as flash floods, lead to washaways and mudslides on major routes which increase the severity of rail safety-related incidents, which could result in derailments, asset losses and even employee fatalities. An agreement was reached with the CSIR to share weather updates with Transnet as an early warning of expected adverse weather conditions. The Company also employs activity-based risk assessments to determine unsafe conditions in operations.
Emerging ICT risks – New technologies have the potential to drive innovation, new opportunities and create value, while they also have potential to negatively impact society and the business environment if skills are not sufficient to adopt and implement these technologies. It is imperative for South Africa to develop skills capacity for emerging technologies.
A transition in the global economy is under way. The emergence of disruptive technology fuelling the 4th Industrial Revolution, driven by extreme automation and artificial intelligence, is already changing business globally. The social system also is experiencing disruptions in power dynamics as evidenced by increasing social activism campaigns across the world (e.g. Arab Spring, Keystone XL, #feesmustfall), all enabled by digital platforms. South Africa has experienced a significant deterioration of its electricity security situation over the past 10 years and, increasingly, decision-makers are realising that biodiversity loss is not a second-order issue but is intricately linked to economic development, food challenges and water security. Transnet’s emerging risk landscape holds both challenges and opportunities for growth.
Circular economy – decoupling of economic progress from resource utilisation
Transitioning from the current global industrial economy towards a circular economy necessitates that we continue to adapt and evolve Transnet’s business model to remain fit for purpose. Moving forward in the medium term, Transnet could expect a reduction in the transportation of certain mining commodities within the domestic market (e.g. coal) as a direct result of the reduced need for energy per unit of output, and the move to cleaner energy. There are likely limits to growth on Transnet’s iron ore export line in the medium to long term, and demand is even likely to follow a pessimistic outlook in an increasingly ‘sustainable world’. The flow of manufactured goods by rail will be negatively impacted where such goods can be manufactured at the point of use, particularly using 3D printing. Such technologies may also displace Advanced Manufacturing’s work in the medium to long term, as organisations shift to their own manufacturing.
Transnet has already begun to adapt its business model and operational structure in earnest to meet this new industrial paradigm, with due consideration for the opportunities and major risk areas presented by the future business landscape as summarised below:
- Disruptive technology
- Social inequality
‘Disruptive’ technology is known to displace or discontinue an established or sustaining technology and shake up an industry. It can also be a groundbreaking product that creates a completely new industry. Transnet can create new and innovative technologies to adapt to the 4th Industrial Revolution paradigm or, conversely, have aspects of its business displaced by external disruptive technological innovations. Disruptive technology can be good and bad depending on response.
Disruptive technology has not yet displaced any aspects of Transnet’s business. However, if left to chance and ‘business as usual’, Transnet may find it difficult to be competitive in the next decade. Transnet is an energy-intensive company with ownership in the country’s freight rail, ports and pipeline infrastructure. The development of technologies, such as Internet of Things, fuel cells, drones, driverless cars, renewable energy and energy storage system, will have consequences for Transnet’s business model. It is thus paramount to understand this impact and how it will evolve. Agility, speed and investment in emerging technologies will be crucial for Transnet to succeed as beneficiaries in this rapidly changing developmental revolution.
In the medium term, driverless vehicles may impact Transnet as road transport may be favoured over rail based on the efficiencies that driverless technology will bring. This can have an impact on volumes, especially in General Freight. In the long term, it is expected that driverless technology would have displaced the traditional mode of transportation.
The current global energy system is based on fossil fuels and this will change in future as the global economy is shifting towards cleaner fuels. Social inclusion by providing access of energy to all will be critical as the energy system transforms.
Demand for coal transportation by Transnet for Eskom power generation is unlikely to be affected in the short to medium term, as South Africa is locked into coal-powered generation, but it is likely to be affected negatively in the longer term. Coal exports could be affected negatively before 2020. If South Africa opts to import LNG, this is unlikely to happen much before 2020, but it does present a new opportunity for Transnet to off load and distribute the gas throughout the country.
Electricity security is expected to have an impact on all SDOs over Transnet’s long-term planning period. Industrial capability building and investment are already being impacted for the immediate term due to the energy security risk. Electricity security is critical to Transnet to remain a going concern, although no material business disruption has yet been reported.
Water stress is expected to amplify over the next decade and further if governments, businesses and civil society do not implement mitigation measures. There is a high probability of an increased volatility to catchments and subsequent impact on dam levels. Regionally, the Kariba Dam, which feeds Zimbabwe and Zambia, is currently at 14%, which is an extremely dangerously low level. This will have a ripple effect on Zambia’s energy sector as it is 95% reliant on hydro power. With global population expected to exceed the 9 billion mark by 20501, more strain is expected on the global water system.
In the business operation water stress has already been experienced. The uMhlathuze Municipality has been imposing restrictions since 2014 and continued through 2016. Water at the Port of Richards Bay terminal is used for dust suppression, washing conveyor belts and sanitation and hygiene. Although there are alternatives to using water for dust suppression, this comes at a cost premium and subsequent increase in the cost of operations. Having adequate water for sanitation and hygiene is critical to ensure the health of employees and is a basic requirement for a workplace as shortages can increase the level of absenteeism due to ill health. Absenteeism can have an impact on operational efficiencies and thus impact costs and revenues.
Transnet has a percentage of the market share in the transportation of maize and thus this may have an impact on the business in the short to medium term. Further, having a large percentage of market share of coal transportation, the impact on volumes is inevitable, not only due to emission reduction pressures, but also owing to the difficulty in obtaining water use licences for mining. The prioritisation of allocations for water will be of fundamental importance in terms of industrial versus domestic water needs.
While it is a challenge, water risk also presents an immediate opportunity in the business operation from an import perspective. South Africa may need to import up to half of its maize requirements over the course of 2016 and beyond. Five of our ports have grain handling facilities with substantial storage capacity to handle the growth in volumes. The Port of Durban is geared up to act as the importation hub for maize.
Biodiversity loss presents many more risks to Transnet’s value network, value chain and business operations. In the medium and long term, future corridors are at risk due to population increase, and human settlement along those corridors. De-ballasting remains a challenge at the ports and poses a risk of alien invasion.
This can have a great impact on the marine environment and can greatly impact aquatic life. An increased difficulty in obtaining licences (Water Use Licences and tree-cutting permits) resulting in payment of standing time and possible deviations is expected throughout the MDS and LTPF – this is a cost to the business. This would be due to increasing stringency in conservation laws and Government’s drive towards sustainability.
Social inequality has been widening throughout many economies. This has a potential to erode social contracts between states. Transnet has a development agenda to support economic growth and job creation. It operates across South Africa and has a regional agenda. The Company is susceptible to societal risks to gain a licence to operate. There will be growing expectations from societies for Transnet to be inclusive in its development and to collaborate. Community unrest may emerge due to Transnet’s inability to meet community expectations.