Group Chief Executive's Review
Group Chief Executive
Before reviewing our performance for the year ended 31 March 2007, let
me introduce you to the new Transnet corporate identity, its rationale
and our new vision and mission.
The current year marks the end of the structural transformation of Transnet
from a diversified group into a focused and integrated freight transport
company as envisioned in our four-point turnaround strategy. Consequently,
to signal the realignment of the business as Transnet gears itself for
sustained growth in its new form, we have rebranded from a multi-brand
organisation to a single, overarching monolithic Transnet
brand to align our corporate identity with our business strategy. The
rebranding underscores the fact that Transnet is now an integrated freight
transport company with five operating divisions that necessarily complement
But first, some background
The name and the Company Transnet
came into existence in 1990 when the old South African Transport Services
(SATS) was corporatised and renamed Transnet Ltd. Although the name Transnet
has existed for only 17 years, the organisation itself has existed for
more than a century in one form or another, under different names, with
different ownership and reporting arrangements and with different organisational
Before 1990, the organisation operated largely as a Government department
with no commercial culture to speak of. As it evolved over the years,
the organisation assumed different names, including South African Transport
Services (SATS) and South African Railways and Harbours (SAR&H). Due
to the diverse nature of its operations, it could safely be said that
SATS was responsible for moving South Africa, its people and its freight.
In August 2004, a new Board (still in office today) took office and the
new management team tabled a turnaround strategy, proposing a fundamental
restructuring. This would see Transnets structure and focus change
over the next three years from a diversified group into a focused freight
transport and logistics business. Thistransformation strategy, known today
as the four-point turnaround strategy, was adopted by the Board late in
2004 and endorsed by the shareholder in 2005 when the Corporate Plan was
The focused implementation of this strategy, which enjoys the support
of all our stakeholders, has seen all non-core assets being sold to the
private sector or unbundled to the State in the quest to build a focused
and integrated freight transport and logistics business.
The new Transnet, as envisaged by the four-point turnaround strategy,
is essentially driven by five operating divisions that complement each
other. These are supported by a number of Company-wide specialist functions
such as Transnet Projects which underpin the turnaround.
The conclusion of the structural transformation prompted us to rethink
the Transnet brand, its
relationship with the sub-brands and the appropriate architecture to give
content to the philosophy of One Company, One Vision.
To guide and inform our decisions, independent research was commissioned
to canvass the views of various stakeholders, including our customers
and employees. This emphatically concluded that:
- The name Transnet should be retained and
- Transnet should refresh its brand image to reflect:
- Customer focus;
- Reliability and flexibility;
- Cost-efficiency and competitiveness;
- Improved communication and divisional alignment; and
- An integrated solution of bulk freight transportation.
Therefore, the rejuvenation of the brand is designed to optimise the
equity embedded in the Transnet brand so as to communicate with brevity
the revitalised Company, its new corporate structure, its people and our
emerging service culture. In addition, it will provide an appropriate
architecture to govern the relationship between the mother brand
and the sub-brands. Refreshing the brand also provides an
ideal opportunity to communicate the repositioned Transnet a business-to-business
player and will enable the entities we no longer own to be positioned
within the strategies of new owners.
Following the monolithic brand route, recommended by the research we
have done away with the old semi-autonomous and fragmented structure and
replaced it with a single, integrated one. So, the new Transnet, which
we present to you, is made up of:
- Transnet Freight Rail (formerly Spoornet);
- Transnet Engineering (formerly Transwerk);
- Transnet National Ports Authority (formerly the NPA);
- Transnet Port Terminals (formerly SAPO); and
- Transnet Pipelines (formerly Petronet).
The new singular structure and corporate identity is an optimal platform
to reinforce the One Company, One Vision drive, and it mirrors
our new corporate culture. Inevitably, with a new focus, we had to rethink
our vision and mission.
Transnets new vision and mission
Transnet is a focused freight transport company delivering integrated,
efficient, safe, reliable
and cost-effective services to promote economic growth in South Africa.
This is being achieved through increasing our market share, improving
productivity and profitability and by providing appropriate capacity to
our customers ahead of demand.
In line with our new vision and mission as well as the new brand, we have
refined the values that underpin our business and our brand. We trust
that in your dealings with us you will experience this unity of purpose
and be convinced that we live our new values and are loyal to our brand.
"We are reliable , trustworthy, responsive and safe."
In brief, we would like our customers:
- To prefer us because we are reliable, trustworthy, responsive and
safe; and because
- Our employees think and are committed, safety-conscious, accountable,
ethical, disciplined, and results-oriented.
New tag line
We have hitherto been using delivering on our commitments
as a tag-line, accompanying the corporate identity. This remains relevant.
But we wanted to emphasise our commitment to you, our stakeholders
our customers, employees, shareholder, the communities in which we operate
and our lenders. Accordingly, our new tag line is delivering on
our commitment to you.
Conclusion on the rebranding
The rebranding signals the change in the direction and focus of the business,
it communicates the progress in its transformation and it explains the
essence of the new Transnet. It is more than a name change for our operating
STRATEGY IMPLEMENTATION AND PERFORMANCE REVIEW
At the start of this transformation journey, we made it clear that it
was going to be a three- to five-year journey. We are entering the third
year with a Company that is stable and that has started investing in creating
appropriate infrastructure capacity to ensure sustainable growth.
Perhaps the best measure of the progress we have made as we review the
third year of the journey of Transnet is to retrace our steps. The table
below reflects the substantial progress Transnet has made when compared
to 2004 in all the key measures of performance and the Companys
The results so far provide telling evidence that:
- The financial turnaround is well under way and succeeding;
- The operational turnaround is progressing well and is sustainable;
- The five-year capital investment programme is on course and we
have the capability to roll it out;
- The non-core portfolio has largely been disposed of;
- A solid platform for growth is in place; and
- We have a committed team to sustain the strategy into the future
Our financial and operating results show that this is the second consecutive
year in which most of our operating divisions delivered revenue increases
based on growth in volumes. This is in line with our strategy as well
as with our mandate to enable economic growth through helping make the
economy competitive by optimising South Africas freight transport
and logistics system.
Progress since 2004
(Shareholder Compact) 2007
vs 2004 (%)
vs target (%)
|Operating profit (R billion)
|Cash interest cover (times)
|Cash flow return on investment (CFROI) (%)
|Capital expenditure (R billion)
||Achieved 99 (target > 90)
|Shareholders equity (R billion)
It is really heartening to report that the relentless application of our
approved strategy is reflected in our financial statements for the year.
All operating divisions, with the exception of Freight Rail, grew volumes
strongly, enabling revenues to increase 8% to R28,2 billion. Transnet
kept the increase in operating costs, at 6%, well below that of revenue,
enabling the EBITDA (earnings before interest, depreciation and amortisation)
margin to increase to 40,7% (2006: 39,6%). This was due to sustained productivity
improvements and cost-control. In fact, adjusting for once-off provisions
for the ex-gratia contribution to the TSDBF, TPF and for Freight Rail
restructuring, the cost increase would have been only 3,8%.
Depreciation, however, showed a substantial increase of 42% to R3 billion
as a result of the combined impact of depreciation of new capital plus
that of Freight Rails capitalised major maintenance. This trend
is expected to continue. Therefore, the challenge is to ensure that capital
expenditure drives planned volume increases and productivity improvements.
There were many operational challenges during the year, but the business
showed extreme resilience in overcoming them. A few are worth noting here:
a ship loader structure collapsed in Saldanha; derailments (Basklook-Cordier/
Duiwelskloof, Camden-Ermelo, Dassieshoogte and Ensel-Klipdrift); rough
seas experienced in March 2007 caused most ports to close for more than
five days; and adverse weather conditions saw the coal mines failing to
produce and supply the required volumes.
However, the ongoing transformation to make the business customer-oriented
ensured that Transnet was able to meet its customers requirements
despite these challenges.
Given the scale of our five-year capital expenditure programme, we have
paid special attention to cash flow. Fortunately, this focus paid off:
the 20% increase in cash flows from operations to R13,5 billion reflects
the emphasis we placed on cash generation.
Transnets balance sheet continues to strengthen as reflected by
the 27% growth of the capital and reserves of the Company and the decrease
in gearing to 39%, a 15% improvement. This strength is important as Transnet
will be accessing the debt capital markets during 2007 and into the future
as it needs to secure cost-effective funding of relatively long tenors
to assist in the financing of the capital expenditure programme.
It is hard to underestimate the importance of transport to a countrys
economic and social development. The efficient and effective movement
of goods and people is one of the principal economic inputs and plays
a significant role in the global competitiveness of that countrys
As the custodian of ports, rail and pipelines in South Africa, our strategy
is to ensure that we operate these assets according to world-class standards,
thereby enhancing the growth potential of our economy.
It is this that contextualises the framework in which Transnet operates
and this is captured in our turnaround strategy which drives the transformation
of the organisation from a diversified group of loosely-connected logistics
businesses to a focused port, rail and pipeline business providing world-class,
cost-effective, appropriate and integrated bulk freight transport solutions
to the South African economy. This gives local firms an important competitive
advantage in the global marketplace.
"In the past year we completed the restructuring of the balance sheet"
STRATEGIC MANAGEMENT OF THE BALANCE SHEET
In the past year, we completed the restructuring of the balance sheet.
The greatest progress took place in two areas in the disposal of
the non-core assets and in the resolution of the pension fund deficit
We have now substantially strengthened the position of the Transnet Second
Defined Benefit Fund (TSDBF). In the past year, we reported the sale of
the entire holding of 75 million shares in MTN, the mobile phone group,
belonging to the TSDBF. These shares were held in trust through
the M-Cell Trust for the beneficial interest of the TSDBF members.
They, together with a further minority stake belonging to Transnet Ltd,
were sold in the market through a book-building exercise.
During the year, Transnet and its three pension funds, the TSDBF, Transnet
Pension Fund (TPF) and Transnet Retirement Fund (TRF), also agreed to
sell their interests in the Victoria & Alfred Waterfront to the London
and Regional Consortium for R7,04 billion. The transaction was probably
both the largest real estate deal and property empowerment deal in our
country. It brought together international investors (Dubai Worlds
Isthitmar and London & Regional) and local and black investors (who
now hold more than 25% of the shares in the new company). It also saw
black employees being allocated 2% equity in the new company.
As the largest single shareholder in V&A, the TSDBF (which held 44%)
was the main beneficiary of the transaction. The disposal price was significantly
above the carrying value in the respective funds balance sheets.
These two transactions, together with the performance of the equities
market and interest rates movements, bolstered the TSDBFs performance,
taking it into an actuarial surplus position of
R1,9 billion. An independent actuarial valuation has confirmed this surplus
(refer to the Chief Financial Officers report).
The changes to the pension fund rules that are dealt with later in this
report will bring our funds more in line with global best practice.
Transnet played a vital strategic leadership role in achieving the TSDBF
Of the vast and varied portfolio of our non-core assets, the transfer
of SAA, the national airline, was by far the largest and most complex.
Whilst risk and reward transferred to the DPE, the new owner, on 31 March
2006, there were several suspensive conditions that had to be fulfilled
by the end of the year. They included the enactment of the law setting
up SAA as an independent company, International Air Services Council approval,
Air Services Licensing Council approval, third-party contractor approval
and the listing of SAA as a Schedule 2 public entity in terms of the Public
Finance Management Act (PFMA).
|Four-point turnaround strategy
||Redirecting and reengineering the business
||Strategic balance sheet management
||Ensure corporate governance and risk management
||Develop human capital
- Improving efficiencies and effectiveness of the core operating
- Realising port-rail synergies
- Improving customer focus
- Infrastructure and maintenance programme
- Sell remaining non-core portfolio and achieve a better focus
on core operating divisions
- Appropriate return on invested capital
- Post-retirement funding
- Optimise cash flow management
- Cost of capital
- Strategic asset and liability management
- Cost-effective funding
- Ensure that the highest standards of corporate governance are
- Ensure that the Companys risk management, especially the
safety of all its operations, is improved
- Revitalising human resources by transforming culture and behaviour
- Be a preferred and sustainable employer
- Improve talent management and leadership development, transformation
management as well as performance and reward management
We are pleased that all these conditions were fulfilled within the agreed
time frames, and the disposal of SAA was recorded in our financial statements
on 31 March 2007. Whilst SAA was sold for R2 billion, no cash flowed as
the settlement was by means of a share buy-back of Transnets shares.
Consequently, there was a R2 billion reduction of Transnets share
capital at 31 March 2007. In summary, since 2004 Transnet has injected,
out of its own funds, R8,4 billion in cash which has now been written
The disposals included all or some of the following key features:
- The participation of black investors;
- Setting up employee share ownership;
- Due process was followed at all times;
- A competitive public bidding process was followed except in instances
where there were explicit pre-emptive ownership arrangements or the
disposal/sale was to the State;
- All were sold as going concerns and at fair value;
- There were no job losses as a result of the disposals (in fact, management
secured job guarantees from the buyers);
- Conditions of service of the transferring employees were largely unchanged;
- Our employees (especially management) were prohibited from buying
any of the businesses being sold in keeping with our strict conflict
of interests policy; and
- The integrity of the process was never in doubt (none of the disposals
have been subject of a credible litigation).
During the year, the following entities were successfully sold:
|Transnet Pension Fund Administrators (100% administration
and investment services)
||Metropolitan Life (including Kagiso Trust Investments) and Fifth
||R20 million and R3 million, respectively
|Equity Aviation Services (Pty) Ltd (49%)
||Equity Aviation Services (Pty) Ltd (plus an employee share scheme)
|Transtel Telecom FSN
|Neotel (Pty) Ltd (formerly the Second Network Operator)
||R251 million (funded by issue of equity of 15% in Neotel (Pty) Ltd
via Transpoint Properties (Pty) Ltd)
|VAE Perway (Pty) Ltd (35%)
|V&A Waterfront Holdings (Pty) Ltd (26%)
||London & Regional Consortium
|South African Airways (Pty) Ltd (100%)
||Department of Public Enterprises
||R2 billion (no cash flow transaction effected by a share
The disposals enabled Transnet to achieve its goal of concentrating
its energies on owning and operating rail-freight, ports and pipelines,
while securing knowledgeable and visionary buyers for the non-core businesses.
This will allow employees to develop their careers under focused and growth-oriented
In the first half of the new year, we shall accelerate the disposals
programme by selling or transferring the remaining non-core entities.
The remaining programme includes concluding talks with the preferred bidder
on the sale of freightdynamics, our road haulier, and restructuring the
fuel and container divisions of freightdynamics.
Subsequent to the year-end, we concluded an agreement with First National
Bank, providing for the sale at fair value of Transnets housing
lending book to FNB for about R1,4 billion. In terms of a service level
agreement, FNB will continue to provide housing and other loans to Transnet
employees. Not only does this release cash, but it will provide employees
with a better and expanded service.
The process of selling arivia.kom (in which we own 42% of the issued
shares) to the private sector and outsourcing our IT services, is at an
advanced stage. The process to sell The Blue Train to the private sector
has recently been launched.
Following the transfer of Metrorail to the South African Rail Commuter
Corporation (SARCC), the utility belonging to the Department of Transport,
plans are in place for the transfer of Shosholoza Meyl, the long-distance
passenger rail service, to the SARCC during the course of the year.
South African Express Airways (Pty) Ltd, our wholly-owned airline subsidiary,
is in the process of being sold to the DPE, marking our complete exit
from civil aviation.
In my last review, I referred to our plans to:
- Dispose of non-core properties (including residential, commercial
and vacant land);
- Sell Subco (holder of the preference share), a special-purpose vehicle
used to fund the purchase of a minority shareholding in MTN by its management
and black employees; and,
- Agree the future of Autopax, our passenger bus subsidiary. Negotiations
are at an advanced stage for the sale of property to Servcon, a company
wholly owned by the Department of Housing.
A strategy is in place to sell those remaining properties we have deemed
non-core to our corporate strategy and PFMA approval has been received.
On 21 June 2007, Transnet accepted an offer from Newshelf 664 (Pty) Ltd
for the redemption of the C class preference share held by
Transnet in Newshelf 664 (Pty) Ltd. The offer amounted to R5,8 billion.
The transaction is subject to certain suspensive conditions.
The delay in moving Autopax out of our stable was caused by the need
to explore various options proposed by different stakeholders, including
our labour unions. The DPE has now furnished us with the mandate to proceed
with the disposal of Autopax.
"The completion of the disposals programme has released resources - cash, time, management and personnel - to concentrate on our five core operating divisions."
The completion of the disposals programme has released resources
cash, time, management and personnel to concentrate on our five
core operating divisions.
As we accelerate the roll-out of our investment programme, finding an
appropriate mix of funding solutions will become a top priority. This
explains why the focus on strategic management of the balance sheet has
assumed such significance.
More precisely, this will entail reducing the weighted average cost of
capital by reducing the weighted average cost of debt; improving the liquidity
position; implementing a robust cash-management system; and diversifying
sources of funding.
REDIRECTING AND REENGINEERING THE BUSINESS
This pillar of our strategy covers a range of programmes. I wish to focus
on the business
reengineering, capital investment; and other related initiatives.
Readers of this report will now be familiar with Vulindlela (a Zulu word
meaning opening the way). This is the name of our reengineering
Now into its second year, this programme is designed to:
- Optimise the performance of Freight Rails coal, iron ore
and general freight businesses;
- Lift productivity and profitability levels;
- Re-orient the business towards its customers;
- Address safety problems;
- Cultivate and embed a culture of planned maintenance;
- Improve operational efficiencies and synergies between our various
- Optimise the performance of the port system;
- Increase our market share; and
- Contain costs and simplify systems.
One of the major achievements of the programme during the year was to
roll it out across all the operating divisions. Initially, the focus had
been on our rail freight division.
"During the year Vulindlela contributed over R2 billion in sustainable savings."
In the year, priority programmes contributed over R2 billion in sustainable
savings, bringing the
cumulative savings to almost R2,5 billion since Vulindlelas inception
in August 2005.
The Vulindlela initiative lies at the heart of Transnets turnaround
strategy and is the core initiative to redirect and reengineer the business.
Vulindlela is also making a strong contribution to Transnets other
key strategic pillar, namely HR.
Highlights from the rail freight programmes:
- The Commercial redesign programme, which focuses on key customer account
management, has achieved
greater stability in priority freight flows, consistently meeting customer
demands. Consequently, delivered volume tempo for the freight flows
has exceeded budgeted volume by over three million tons across these
- Total general freight business flow (an area with massive growth potential,
but which has historically been neglected) has now been stabilised with
substantial improvements forecast for the future. Operational improvements
on the KZN corridor programme have increased the number of trains per
week by over 25%. Lessons learned on the KZN corridor are now being
applied at the Cape corridor as part of the overall National Operating
Centre (NOC) programme;
- Since October 2006, the Iron Ore Line programme has consistently set
new weekly volume records, with an all-time record of 705 kt/week achieved
early in December 2006. Since the beginning of calendar year 2007, rail
capacity has exceeded mine supply;
- The Coal Line has sustained volume improvements of 1,4 mt/week, translating
into an annual tempo of 72 million tons for the third quarter of the
year. Volumes are now constrained by the mines ability to supply
coal. This capacity increase has been accompanied by a significantly
improved delivery record net cancellations have remained below
3%, almost all arising from delivery postponements
by customers. Consequently, trains are being diverted to other areas
where they are needed; and
- The Safety programme has delivered savings of R200 million on the
previous years figure through a significant reduction in major
incidents. The overall programme is, however, performing below expectations,
which remains an area of major concern and focus for us (also refer
to the Chairmans Statement and the Risk Management
Highlights from the other programmes:
- The Rolling Stock Maintenance programme has consistently sustained
its productivity improvements in key focus areas and the roll-out of
this ambitious programmes objectives is well under way at all
of our wagon and locomotive depots. During the year, we also completed
the integration of Freight Rails maintenance into Engineering,
a task that involved moving more than 6 000 employees;
- The Ports Optimisation programme has consistently achieved new monthly
handling records, with 186 000 TEUs for November 2006 (significantly
above the November 2005 record of 158 000 TEUs). Improved alignment
between Port Terminals and National Ports Authority has played a significant
role in this achievement and is central to making our ports internationally
- The Procurement programme has produced gains of more than R500 million
this year. The programme continues to concentrate on improving operational
alignment, with the focus on managing drivers of demand, volume forecasts
and lengthy technical evaluations.
Thus far, Transnet has benefited from Vulindlela not only through operational
and financial improvements, but also through the mobilisation of people
at all levels of the organisation.
Looking forward to the coming year, Vulindlela has plans to build upon
Transnets substantially improved financial and operational performance,
and to address issues that might affect the speed at which we are achieving
Capital investment programme
The business logistics sector has been characterised by rapid innovation
over several decades, driven primarily by advances in transport and in
information and communication technologies that enable ever-deepening
integration and collaboration between supply chain partners. The goal
of these innovations is to improve the speed, reliability, flexibility
and responsiveness of supply chains while at the same time reducing overall
supply chain costs.
In this regard the logistics sector has experienced considerable success.
The first Annual State of Logistics Survey (2004) noted that over the
past five decades, developed economies had realised a reduction in the
cost of transport as a percentage of GDP of approximately 5% per decade
and almost three times as much in inventory carrying costs.
Behind all this innovation, however, still lies a physical chain that
determines what can be moved, where and how. This physical chain is therefore
a key cost component, not only for companies in terms of their bottom-line
but also for countries and regions which want to compete successfully
for the limited and fickle supply of investment and development capital.
As the custodian of port, pipeline and rail infrastructure in South Africa,
Transnet is a central enabler in South Africas freight logistics
and, therefore, a critical factor in South Africas growth agenda.
Transnet adopted a corridor approach as the framework for infrastructure
investment. The corridor approach provides support for promoting concentration
and density within the freight system and ensures alignment between rail
and port planning and investment. Focusing investment around high density
corridors creates a high density core for the bulk freight transport system
which will contribute significantly to higher service quality at lower
More than a year ago, Transnet Projects was set up to implement major
capital investment projects that is, those investments worth more
than R300 million. The rationale for setting up a dedicated unit was to
free divisional executives to concentrate on dayto- day operations yet
ensure that the major projects are rolled out on time, thereby creating
capacity for future growth. At the time, there were seven major construction
projects. The unit, with some 2 000 employees (in Richards Bay, Durban,
Port Elizabeth, Cape Town, Saldanha and Johannesburg), incorporates Protekon,
our former project management subsidiary. Over time, Transnet Projectss
scope has been widened to include smaller projects, special projects (these
currently include work on the ship loader in Saldanha and on the manganese
facility in Port Elizabeth) as well as on repairs, maintenance and emergency
The successes of the programme have ensured that:
- We have hastened the pace of implementing the investment programme;
- Project conceptualisation, planning and design are of the highest
- There is better co-ordination of the planning of the major capital
projects in the Company;
- There is greater focus on environmental issues throughout the project
- There is adequate transparency in the projects; and,
- Technological skills and knowledge are being transferred to local
and young professionals
"Over the next five years the Company will be investing R78,9 billion in expansion and replacement of assets."
On an annual basis, the business requirements are revisited and the investment
plan is updated to ensure that we keep track of changes in the economy
as well as customer requirements. Over the next five years, the Company
will be investing R78,9 billion in the replacement of assets and expansion
of activities in all the core divisions. It should be noted that all new
projects are subject to the successful completion of rigorous feasibility
studies which require returns which exceed our cost of capital and of
obtaining necessary environmental authorisations. The areas of investment
and the major projects are as follows:
Rail-related projects (R38,9 billion)
The major capital investment projects in the coal and iron ore lines are
to ensure sustainability and to increase capacity. New locomotives (110
dual voltage) have also been included in the plan for the coal line as
well as the proposed acquisition of 212 locomotives for the general freight
business of Freight Rail. This will improve efficiencies and service levels,
specifically in the general freight business.
Port-related projects (R28 billion)
To increase capacity at the ports, several new projects are being undertaken.
They include the widening and deepening of the port entrance in Durban,
the construction of a new container terminal at Ngqura, the expansion
of the Cape Town container terminal as well as new equipment to handle
the projected increase in volumes at all the major ports. Several projects
have also been included to replace existing assets in the ports which
includes equipment and facilities at Port Elizabeth, Richards Bay, Durban
Pipelines-related projects (R10 billion)
The major project is the new multiproduct pipeline (NMPP) from Durban
to Gauteng. This project will create the capacity required from 2010 onwards.
Due to the substantial investment and the long payback period of pipeline
assets, the affordability of the project is dependent on a suitable tariff
structure. Other projects have also been started to improve the efficiencies
of the existing pipelines to ensure that sufficient capacity is available
until the completion of the NMPP project.
TBI (Transnet Business Intelligence)
The TBI programme supports Transnets executive decisions through
providing accurate, relevant, consistent and timely information, and also
in enhancing the control environment in which we operate.
TBI is therefore aimed at:
- Aiding in the improvement of corporate performance management;
- Improving the processes and systems that enable information management;
- Assisting Transnet to become a world-class bulk freight organisation
through effective use of technology, world-class systems and processes.
A major TBI project for the year is the roll-out of the key performance
indicator (KPI) process throughout the business. This project has identified
the critical KPIs across the business and will measure and report these
against international benchmarks on an automated basis. This will facilitate
substantial productivity and performance improvements throughout the Company.
RISK MANAGEMENT AND CORPORATE GOVERNANCE
Our approach to risk management and corporate governance is straightforward.
We ensure vigilance in dealing with risk and that all our officers adhere
to the highest standards of corporate ethics at all times. Ours is a zero-tolerance
In previous years we adopted and implemented an extensive enterprise-wide
risk management (ERM) framework that included the establishment of risk
structures to reinforce the framework. Our focus during the year was on
formulating, adopting and implementing Company-wide safety, health, environmental
and quality (SHEQ) risk-management policies together with compliance.
Transnets SHEQ risk management standards ensure a uniform approach
throughout the Company that is in line with world-class standards. This
will be measured against the ERM Framework and best practice with the
ultimate objective of reducing incidents and of minimising repeat mistakes.
While considerable progress has been made in improving safety in all
our operations, we are saddened to report the deaths of 26 employees during
the year. Our hearts go out to their families and loved ones. One death
is too many.
We have reviewed our safety procedures and have strengthened our capacity
in problematic areas. Our safety strategys objective is two-fold:
first, to increase accountability and to hold accountable those responsible
for lapses in judgement; and second, to openly recognise the positive
contribution being made by those responsible for safety improvements.
New measures include:
- Assessments of the implementation of corrective actions or plans that
have been recommended by the BOI;
- Continuous provision of assurance on the effectiveness of the safety
and risk controls by the compliance and Internal Audit units; and
- Promoting incident-recall sessions and information-sharing meetings
to inculcate a culture of accountability for safety in all spheres of
We are rolling out an extensive safety awareness and training campaign.
The training covers management and supervisory level. Also, we increased
the number of permanent safety and risk officials in the rail regions.
We welcome the strategic support and guidance provided by the Board through
its newly established Risk Committee (refer to the Chairmans Review). During the year, we created a new position in the Group Executive
Committee for the Chief Risk Officer. The post highlights the significance
we attach to prudent risk management, especially the safety of our people,
assets and customers cargo. It is also designed to direct Company-wide
safety initiatives and give safety the requisite attention by our Executive
We have appointed a leading international consultancy to assist us in
this area especially in our rail-freight operations. This is a critical
factor in the continuing success of our business.
Our internal control environment is continuing to improve, supported
by the decision two years ago to outsource our internal audit function.
Ernst & Young, our internal auditors, are playing a critical role
in assisting management to improve controls and in investigations of allegations
of fraud, including those from tip-offs received through our toll-free,
independently-managed anti-fraud line.
The campaign against fraud cannot be won by strict enforcement of our
anti-corruption policies alone. It requires a partnership approach. A
corporate neighbourhood watch that includes our suppliers, customers and
trade unions acting in concert against wrongdoing is needed. We encourage
our suppliers to uphold integrity at all times and to report any misconduct
by any of our employees.
The role and composition of the Group Executive Committee remained largely
the same during the year. Given the significance of human capital in sustaining
the turnaround, we agreed to set up an HR sub-committee to deal with human
resources matters prior to their tabling in the wider monthly meeting
of the Executive Committee.
In the final quarter of the year, I reorganised the executive team to
ensure that we could continue to build on the successes of the implementation
of the strategy to transform Transnet into a world-class freight transport
business. The changes were informed by the need to maintain our focus
on operations and on implementing the capital investment programme efficiently
and effectively; the need to build quality relationships with our key
clients and customers and with other stakeholders, especially regulators;
the need to pay even greater attention to safety and risk management;
and the necessity to hasten the implementation of our strategy to revitalise
our human resources.
In consultation with the Board, I made the following changes:
- Mr Pradeep Maharaj, the Group Executive: Strategy and Transformation,
assumed a newly-created position of Group Executive: Human Resources;
- Mr Vuyo Kahla, the Group Executive: Legal and Risk, moved with his
legal portfolio to the Group Chief Executives Office, taking on
the new position of Group Executive: Office of the Chief Executive to
assist me in the day-to-day running of the Office and in stakeholder
relations, especially with key customers and regulators;
- Ms Moira Moses, the GM: Business Reengineering, became Group Executive:
Transnet Projects, a newly created post that she assumed in March 2007;
- A new post of Chief Risk Officer was created. Ms Virginia Dunjwa,
the GM: Group Risk Management, was appointed on 1 June 2007 to the post.
To further drive cohesion, which is important for providing integrated
services to our clients, we integrated the next level of executive leadership
that is, the Divisional Executive Committees. For example, Mr Siyabonga
Gama, the CE of Freight Rail, serves on the Executive Committee of Rail
Engineering and Mr Richard Vallihu, his counterpart in Engineering,
sits on Freight Rails Executive. Below this level of leadership,
more cross-functional and divisional teams have been set up to ensure
that Transnet is more customer-oriented and increasingly offering more
synergistic services to its customers.
HUMAN CAPITAL DEVELOPMENT
This is the first full year in which we implemented our human capital
development strategy since its adoption by our Board. The strategy, implemented
by the Group Executive Committee, is vital to sustaining our turnaround
strategy in the years ahead. To recap, it focuses on the following:
- Skills demand planning;
- Recruitment and retention;
- Capacity building and skills development;
- Performance management;
- Talent management; and
Following the disposal of non-core assets, the Company now has 48 578
permanent employees and 8 543 employees on fixed-term contracts.
Although the year kicked off with industrial action over Transnets
proposed restructuring and the disposal of its non-core assets (also refer
to last years Annual Report on www.transnet.net), the overall employee
relations climate subsequently improved and is now significantly more
engaging, positive and productive. The Company currently enjoys a sound
relationship with its recognised trade unions.
During the year, Transnet made significant strides in the effective management
of its human resources. Achievements include:
- The management of talent through the mapping of future skills demand,
priority technical skills planning and acquisition, leadership development
as well as the priority skills required for the Vulindlela reengineering
- Laying the foundation for sound performance and reward principles
and practices across the business;
- Establishment of sound employee relations across the organisation;
- Concluding an agreement with the unions on the principles that guide
the implementation of the disposal of Transnets non-core assets
and facilitating the employee aspects of all the disposals;
- Increasing the efficiency of the HR function through the enablement
of HR systems; and
- Focusing on change and transformation to support the Companys
four-point turnaround strategy.
"Transnet is striving towards a performance-driven culture."
Transnet is striving towards a performance-driven culture as one of the
outcomes of the turnaround strategy. Our remuneration philosophy is also
focused on the establishment of a performance and reward culture in the
Company. Performance management has been implemented for all non-bargaining
employees across the business. Part of the performance management roll-out
included the design of individual strategic performance objectives (SPOs)
that are aligned with Company objectives. A performance incentive scheme
was implemented for staff in the non-bargaining unit as well as for those
in the bargaining unit category.
In support of skills development, a strategy to ensure the future availability
of quality skills is being implemented. Various initiatives were launched
to increase the effectiveness of skills pipeline development to increase
numbers of previously disadvantaged people in technical, supervisory and
During the year, Transnet initiated several new training programmes to
augment existing initiatives. A few are worth mentioning:
- At present, Transnet supports 175 bursars in various engineering disciplines
at tertiary institutions. This is a new initiative over and above those
undertaken by our operating divisions;
- We are also supporting some 173 students at institutes of technology.
The plan is to increase this number to 300; and
- To address future needs of artisans in our Company, we have recruited
1 261 apprentices who are currently undergoing training in different
trades. This is a five-year project.
Apart from addressing Transnet-specific skills challenges, Transnet is
also committed to tackling the shortage of skills across the country.
We are working with other organisations in addressing this challenge.
Together with Denel, the State-owned arms manufacturer, we are supporting
50 students who have been enrolled in the Youth Foundation and Schools
We are also active members of TOPP (training outside public practice)
and its Thuthuka bursary programme. The Transnet TOPP Programme, launched
in 1996, seeks to increase the number of chartered accountants, particularly
from previouslydisadvantaged communities, in South Africa. Trainee accountants
get the opportunity for on-the-job training in Transnet and its operating
divisions, in order for them to qualify subsequently as chartered accountants.
The Transnet TOPP programme is also a sponsor of the South African Institute
of Chartered Accountants (SAICA) Thuthuka bursary programme. At present,
Transnet is funding 20 accounting students who are part of this scheme.
Transnets involvement will continue until 2010 by which time Transnet
will have sponsored 50 students. All these students will join the Transnet
We also support the Government-led Joint Initiative on Priority Skills
On talent management, we have identified mission-critical positions and
have developed a talent management policy and a leadership development
Change management is a cornerstone of any major corporate restructuring.
Emphasis was placed on ensuring that top managers were aligned to Transnets
turnaround strategy, and on cascading this to lower levels of management.
On its first anniversary, the Strategic Leadership Forum (SLF), has lived
up to its mission of being the centrepiece for high-level consultation
between the leadership of trade unions and our Executive Committee; the
participation of all its members has significantly enriched the quality
of the engagement; and, it has been a good consultative forum on the implementation
of our strategy.
OPERATING DIVISIONAL HIGHLIGHTS
This section will highlight some of the major achievements of the five
operating divisions and identify our key challenges. These are dealt with
in detail in the divisional reports in the later sections of this Annual
"All our operating divisions are trending in the right direction."
All our operating divisions are trending in the right direction with
volume increases driving growth in revenue. Volume increases and better
asset utilisation are key to achieving our goal of reducing the transport-related
costs of doing business in our country.
Also, the past year showed the distance we have travelled in re-orienting
our divisions towards customers the key stakeholder and
in strengthening the resilience of all our divisions to withstand critical
challenges including equipment failures and exogenous factors such as
adverse weather conditions.
This operating division, by far our largest and most complex, is showing
pleasing progress. Its
performance during the year showed that the focus of our efforts
management, financial, people resources and reengineering are starting
to yield desired results.
Achievements in the year include:
- Productivity improvements enabled the operating margin to increase
to 14,8% (2006:14,3%);
- Operating profit increased 8% to R2,2 billion in the year;
- Capital spending for the year grew to R7,4 billion (including capitalised
maintenance expenditure of R3,3 billion), compared to the R3,8 billion
in the previous year;
- Revenue rose to R14,6 billion (2006: R14,1 billion);
- Finalising the transfer of 6 253 maintenance employees into Engineering
during the year; and
- Completing the integration of maintenance depots into Engineering.
This programme, which doubled the size of Engineering, yielded
positive results both in terms of productivity improvements and reliability
of rolling stock.
Volumes transported did not meet our expectations. This was due to a
range of factors. The coal export line was severely affected by the mines
inability to produce coal during the rainy season which was particularly
severe in the first quarter of the year. Derailments and other safety-related
incidents reduced capacity on the coal and general freight business lines.
The national strike in the security sector, which saw a rise in the incidence
of cable theft, also adversely affected the delivery of volumes.
Our focus remains on addressing all the factors within our direct control,
which constrained the growth in volumes and revenue in this division.
Improving the safety of the railway and its perational efficiency remain
key initiatives of the Vulindlela programme.
The priority is to increase volumes in the general freight business of
Freight Rail where there are significant opportunities.
Additionally, we are investing heavily in maintenance, rolling stock
and infrastructure with the objective of improving our service offering
to our customers and taking advantage of the growth opportunities in the
We expect the finalisation of the transfer and sale of the two remaining
passenger rail services Shosholoza Meyl and The Blue Train, respectively
to contribute towards improving productivity further as management
can now focus on freight.
This division plays a vital support role in the turnaround of Freight
Rail. During the year, the successful integration of 6 253 rolling stock
maintenance employees from Freight Rail into the organisation was completed.
The consolidation of the rail maintenance function is a key step in our
plans to create, cultivate and embed a culture of planned maintenance
in our business, especially in the rail operations.
Significant progress was made in this regard during the course of the
Achievements in the year included:
- Revenue increased by 90% to R7,3 billion;
- Operating profit increased by 41% to R1 billion; and
- Reliability and availability of rolling stock on the coal and iron
ore lines of Freight Rail were significantly improved.
National Ports Authority
This division had another good year, benefiting from strong volume growth
and economic expansion. This was in spite of the fact that the increase
in capital investment from the previous periods R783 million
to R1,1 billion fell short of what was planned due, in part, to
difficulties with obtaining environmental impact assessment (EIA) approvals
(affecting the expansion of the Cape Town Container Terminal) and delays
in completing the first phase of the Port of Ngqura.
The new National Ports Act came in effect in December 2006 and National
Ports Authority is investing time and resources into dealing with this.
An extensive internal programme to reorganise the divisions functions
to comply with the Act and its Regulations is in place. Considerable progress
was made in this regard. Post-balance sheet, the Government announced
the names of the members of the Independent Ports Regulator under the
chairmanship of businesswoman Ms Gloria Serobe. We look forward to building
a healthy working relationship with the Regulator.
Achievements in the year included:
- Revenue increased by R669 million which includes an average tariff
increase of 1,3% and a volume increase of 15,5%; and
- Operating profit increased by R409 million or by 10% to R4,5 billion.
Capital spending for the year grew to R1 billion compared to R783 million
in the previous year. This was considerably behind our budgeted plans
which were set back by regulatory delays, relating to the EIA challenges
in the planned expansion of the container terminal in Cape Town and delays
in completing the first phase of the Port of Ngqura.
The appointment during the year of the General Manager responsible for
EIAs within Capital Projects and the attention we are paying to speeding
up the approvals process are expected to address these challenges.
This division achieved another set of positive results. During the year,
it faced a number of challenges including a major equipment failure at
Saldanha and a surge in container volumes coinciding with extremely bad
Following the resumption of operations, a string of loading performance
records was achieved.
Achievements in the year included:
- Revenue increased by 14% year-on-year;
- Operating profit improved year-on- year by 48%, to R1,4 billion;
- The containment of cost increases, in percentage terms, has been
brought to levels less than the growth in revenue, resulting in the operating
margin increasing from 26% to 33%.
This division is continuing to perform exceedingly well and is poised
for further growth in the future especially rolling out the Bridging
Plan and other initiatives to address capacity constraints ahead
of the commissioning of the planned new multi-product pipeline.
Its achievements during the year included:
- Revenue increased by 15% to R1,2 billion mainly due to volume growth;
- Operating profit improved by 8% to R672 million; and
- Overall petroleum volume throughput increased by 8,1% and gas by
For the future, though, it is worth pointing out that its prospects will
depend on the tariff determination methodology that has still to be announced
by the regulator. This will determine the prospects of success in generating
revenue sufficient to cover the cost of capital required for investment
especially in the NMPP which is vital for addressing the countrys
future petroleum needs.
For the new year, the budgeted tariff of 5,6% was turned down. The start
of the NMPP is dependent on the imminent licensing process and appropriate
tariff increases that will confirm a fair return based on Transnets
weighted average cost of capital being confirmed.
SUPPLY MANAGEMENT AND BROAD-BASED BLACK ECONOMIC EMPOWERMENT (BBBEE)
In undertaking the process of disposing of our non-core assets, we drew
up a range of criteria that had to be met by prospective buyers of these
entities. In addition to technical expertise and price (backed by guaranteed
funding), prospective acquirers were required to include in their proposals
participation by broad-based black economic empowerment partners as defined
in the Broad-Based Black Economic Empowerment Act (and subsequently amplified
in various codes of good practice of BEE). We are pleased to report that
all the transactions we concluded and those in which Transnet was a majority
shareholder save for those where there were pre-emptive arrangements
with existing shareholders resulted in significant BEE participation
or were concluded with empowered parties.
- V&A Waterfront (Pty) Ltd more than 25%, including 2%
participation by black employees of the company;
- TPFA sold to empowerment players Kagiso Trust Investments,
Metropolitan Life and Fifth Quadrant; and
- Transtels FSN metro assets sold to Neotel (Pty) Ltd,
an empowered telecoms player. Our biggest and real lever for facilitating
BEE comes not from the disposals of non-core assets but from our significant
We have completed the overhaul of our procurement system and processes
to make them more efficient, transparent, ethical and fair. We have significantly
streamlined the processes by replacing tender boards with acquisition
councils. We have in place an internal process that seeks to ensure that
we are meeting our objectives of conducting fair and transparent dealings
with the public.
On strategic sourcing, we have set internal targets of savings. We saved
R552 million during the past year and are on track to meeting our target
without comprising the quality of our services.
We are also working with the DPE on helping local suppliers to become
globally competitive as part of our support for the Governments
Accelerated and Shared Growth Initiative of SA (AsgiSA).
All these initiatives should considerably enhance our ability to meet
the developmental expectations of our shareholder as set out in the Shareholder
"37% of operational expenditure this year went to companies owned or controlled by black entrepreneurs."
During the year, we spent R10,6 billion on a range of services in support
of our operating divisions. Of this, 37% went to companies owned or controlled
by black entrepreneurs. These amounts relate to operational expenditure.
Transnet operates in a highly-regulated environment. The regulation covers,
amongst others, an economic, safety, health, environmental and labour
focus. The challenge posed particularly by economic regulation requires
continual interaction with policy makers especially in the light of the
developmental needs of our country.
National Ports Act
The commencement of the National Ports Act in November 2006 ushered in
a new regulatory regime for Transnets port divisions, bringing with
it a range of challenges. The legislation places significant responsibilities
on National Ports Authority to ensure the safe, efficient and effective
economic functioning of the national ports system. It introduces an independent
ports regulator which must oversee the performance of the National Ports
Authority functions, approve its tariffs and hear complaints and appeals
from port users. Transnet has therefore embarked on a programme to invest
in new systems and capacities within the National Ports Authority to perform
the additional functions prescribed by the legislation, and to prepare
for the wide-ranging ports regulatory powers that the Act creates. Due
to the significance we attach to our interaction with regulators, we have
set up a subcommittee of the Groups Executive Committee, to oversee
this interface. We look forward to a productive and sound working relationship
with the new Independent Ports Regulator. We are also confident that the
continuous engagement between our Board and the shareholder over some
aspects of the Act will yield satisfactory outcomes.
Pipelines tariffs and the construction of the new multi-product
On 31 March 2007, Transnet was informed that NERSA, the energy regulator,
had declined its application for a 5,6% across the board increase in tariffs
for Pipelines. The reasons were supplied over a month later.
It has to be pointed out that, at the time of compiling this report,
NERSA had yet to approve a formal methodology for pipeline tariffs, and
that its process to do so was only expected to be finalised during the
second half of 2007.
We are, however, engaging with the relevant authorities through agreed
channels to bridge the differences and ensure that an appropriate tariff
regime which will enable Transnet to achieve a fair return (that is, one
greater than the weighted average cost of capital) on the planned investment
would be in place.
LETTER TO SOCIETY
A compassionate Company
Reforms for the benefit of the members of the
TSDBF and TPF
Pensioners and their dependants are important stakeholders
in any company. At Transnet, we have three pension funds namely,
the Transnet Second Defined Benefit Fund (TSDBF), Transnet Pension Fund
(TPF) and Transnet Retirement Fund (TRF). The first two are defined-benefit
funds, while the TRF is a defined-contribution fund.
I wish to take this opportunity to outline the measures we, as a Company,
have taken with trustees of these independent funds, to enhance the welfare
of their members. I will only deal with the defined-benefit funds
that is, the TSDBF and the TPF.
These funds are audited by independent auditors and assessed by independent
actuarial firms. They have independent Boards of Trustees, rules that
govern a range of matters (including benefits) and investment committees
that decide each funds investment strategy.
Transnet cannot unilaterally change any of the pension funds rules.
Any changes to the rules require the approval of the respective Boards
of Trustees; Transnet Ltds Board of Directors; and the Ministers
of Public Enterprises and Finance.
This fund, which is a closed (meaning no new members are allowed) pensioner-only
fund, has been restructured over the past two years to resolve a number
of problems including a deficit of approximately R5 billion. It is now
in a financially strong position in fact, it now has a surplus
of R1,9 billion.
Its assets are now split into two categories: the first comprises assets
invested to secure the pension payments and the 2% increase for the future.
These are mainly made up of a bond portfolio so that asset cash flows
approximate forecast payments. The second comprised the balance of the
assets that will be invested in a balanced portfolio where any surpluses
will be available for trustees to consider bonus payments to pensioners.
One rule has given rise to a great deal of concern to pensioners. This
relates to the scale of the increase in benefits to which members are
entitled each year. This provides for a guaranteed 2% increase each year
regardless of the funds performance or whether the funds financial
health is such that it can afford an increase of greater than 2%. This
rule has been in existence since the inception of the TSDBF and arose
long before 1990, in the old SATS funds.
Accordingly, together with the trustees, we have been working on an initiative
which will benefit the pensioners of the TSDBF. I am pleased to announce
that in January 2007 we agreed rule amendments that will provide Trustees
with the power to pay pensioners bonus amounts. These will be in addition
to the guaranteed 2% per annum increase that pensioners already receive.
This is part of our bid to ensure that the trustees are able to supplement
the pensioners current pension benefits when the fund has delivered
strong returns (subject to affordability).
Ex-gratia bonus for the members of the TSDBF
In the interim, however, Transnet understands fully the difficulties faced
by those pensioners who are battling to meet their daily living expenses
as a result of the effects of inflation, medical costs, fuel price increases,
etc. Therefore, to assist these pensioners and their beneficiaries, Transnet
has funded the payment of a once-off ex-gratia bonus for the pensioners
and beneficiaries of the TSDBF. This will also be paid to previously
disadvantaged widows (those spouses of black pensioners who retired
from Transnet between 16 December 1974 and 1 April 1986 but who died prior
to 1 November 2000 and whose spouses are not entitled to a spouses
pension from the Transnet funds). This bonus is from Transnet and not
from the TSDBF. It will cost Transnet in the region of R125 million.
In determining this bonus, the plight of those pensioners with long service
(as these individuals are unlikely to have significant alternative retirement
funding income), those over the age of 65 years (it is unlikely they are
in a position to earn supplementary income), and, for obvious reasons,
those with very low pensions, took priority.
This payment is in addition to any benefit currently being received from
the TSDBF, including the 2% annual guaranteed increase.
This fund has also been restructured and is now in a significant surplus
position. We are awaiting the approval of various rule amendments and
the promulgation of amendments to the Transnet Pension Funds Act, 62 of
1990, in order to implement the planned reforms including the ability
to pay pension increases in excess of 2%, subject to affordability.
A new pensions dispensation
The disposal of all the non-core companies means that, amongst other things,
thousands of employees leave our employ with each disposal to become a
new owners employees. Ordinarily (and this is the practice across
the globe), the employees have to participate in the retirement provision
arrangements of their new employer.
In discussions with us, the unions requested that we create an unprecedented
regime which would let employees of those entities transferring to Government
and/or State-owned enterprise type operations (eg Metrorail and SAA) to
remain members of the Transnet pension funds.
This was a difficult request, but we agreed to it. Consequently, amendments
to the existing Transnet Pension Funds Act were passed by Parliament and
are awaiting the required Presidential approvals. In terms of the amendments,
the TPF and TRF will become multi-employer funds.
In the case of the defined-benefit fund, the TPF, the different employers
will be the guarantors of the sub-fund applicable to their employees.
In essence, this means the transferring employees can stay as members
of the TPF and Transnet Retirement Fund, though their new employers will
contribute to the funds and take on all the appropriate and applicable
obligations. This option (only available to cases where the State is the
employer) means that the new employer is the responsible party.
Corporate social investment
"We believe that our business and the communities in which we operate are interdependent."
We believe that our business and the communities in which we operate are
interdependent. Accordingly, we cannot be indifferent to the issues facing
the communities around us.
We are also aware that we cannot solve all of the issues faced by these
important stakeholders. However, the positive impact of our interventions
can be enhanced by a careful selection of fewer, but not insignificant,
In last years Annual Report, I reported on the process to re-orient
the work of the Transnet Foundation strategically so as to better align
it with our new corporate strategy and to maximise the impact of our philanthropic
interventions. Considerable progress was made during the year to redefine
the work of the Foundation. Henceforth, it will focus on three main areas:
health, education and the arts. Accordingly, strategies are in place for
the Foundation to exit from a range of projects that no longer have a
strategic fit. These include support for the heritage activities, moral
regeneration and some provincial cultural activities as well as support
for entrepreneurial development initiatives.
On the health front, we are delighted that prospects for the second health
train or Phelophepa 2 are brighter than ever before. There are plans for
the second train to improve the delivery of mobile healthcare services
in primary health (including HIV/Aids), dental care, pharmacy and eye
care. This is based on the runaway success of Phelophepa 1.
In education, the Foundation continues to support the Transnet- SAFA
School of Excellence a soccer academy for young gifted football-playing
learners from disadvantaged backgrounds and neighbouring countries. The
founding partners Transnet and SAFA, footballs controlling
body are working towards revamping this initiative and placing
it at the centre of the preparations for the 2010 Soccer World Cup.
The re-orientation also entails a reappraisal of the legal structure
of the Foundation with a view to finding a more taxation-efficient form
without losing the benefit of the wealth of insight, skills, expertise
and experience brought to the Foundation by its various trustees.
Containerised freight continues to be the fastest growing segment of the
freight transport market both internationally and domestically. The increasing
penetration of containers into traditional bulk and break-bulk cargo has
seen the importance of this segment grow steadily over the past three
decades, and most global manufacturing supply chains now depend on the
efficient and effective handling and processing of containers. Containerisation
has also been a significant enabler of the global production system, which
is seeing the emergence of new international trade corridors.
South Africa is well located in relation to these new trade corridors,
especially the emerging south-south trade routes, and this creates significant
advantages for local manufacturers to participate in global supply chains.
To take advantage of this highly significant opportunity, Transnet has
developed a strategy for the container market that is aimed at reducing
ocean freight costs and at increasing the countrys maritime connectivity
with the rest of the world, particularly Asia.
A key enabler of this strategy is an integrated and complementary port
and rail system working in pursuit of common goals.
The opening of the container terminal at the port of Ngqura provides
Transnet with the opportunity to look for an international terminal operator
as a strategic partner to operate this port.
Freight handling infrastructure is a critical determinant of the performance
of the bulk freight sector. In South Africas case, over the past
two decades there has been too little investment in bulk freight handling
infrastructure. Consequently, the overall performance of the transport
system experienced a steady decline. The focused implementation of Transnets
strategy over the past three years, with its emphasis on infrastructure
investment and operational efficiencies, has seen this decline starting
to reverse. However, there is much to be done from an infrastructure perspective
to meet the economys short- and longterm demand for freight transport.
During the year, we developed an integrated port and rail master plan
a development framework for the backbone of the rail and port freight
system in South Africa. The master plan identifies the current core system
and how this core will develop over time to meet future demand for freight
transport in the economy efficiently and effectively. Transnets
freight demand model, developed during 2006, provides a key input into
Freight forecasts predict that demand will continue to consolidate around
existing freight corridors. This is fortunate as it facilitates the construction
of a high-density core network that will lower the unit costs of transport.
The master plan adopts a corridor approach to infrastructure development.
This focus on the port and rail elements of the bulk freight supply chain
ensures integrated planning and sequencing of investments. It also supports
an overall capacity provision strategy that aims to maximise the utilisation
of existing infrastructure and to minimise infrastructure duplication.
The master plan provides the most useful framework around which other
participants in the freight system can align their plans.
The task of transforming a massive organisation with established cultures
such as Transnet can be daunting and, at times, seem insurmountable. It
requires commitment, resilience, and dedication from all stakeholders.
Fortunately, at Transnet I have experienced all these qualities from many
stakeholders. They are too numerous to mention them all here. Still, a
few, without whose support we would never have accomplished a fraction
of the things we set out to do in the beginning, are worth noting here.
Let me thank my extended Transnet family that is, the Groups
Executive Committee and their families. Our employees and their families
play an incredibly important role. Their contribution is deeply appreciated.
On behalf of my colleagues in the Group Executive Committee, let me thank
our Chairman, Mr Fred Phaswana, for his and for the entire Boards
continuing support for our transformation.
I would also like to extend my gratitude to Minister Alec Erwin, MP,
for support and that of his department , notably Ms Portia Molefe, the
Director-General at DPE, for Transnets transformation. Throughout
his tenure as our shareholder minister, he has been nothing but a true
believer in the transformation of this Company into a world-class freight
Let me also take the opportunity to thank Mr Yunus Carrim, MP, Chairman
of the Portfolio Committee on Public Enterprises, and the members of the
committee, for their continued support of our work and for constantly
playing a genuine role of being independent supporters of our transformation
My most sincere appreciation goes to organised labour and the members
of the SLF the joint initiative between my executive and labour
for their active participation in the work of this forum. Organised
labour is one of the key elements that make, and maintain, ours a progressive
Our customers are the only reason we are in business. Let me thank each
and every one of them. We trust that you are experiencing the positive
impact of the improvements we are making. Freight is a network business
and Transnets success depends, to a large extent, on its network
partners. For the future, it is our intention to strengthen our partnerships
to derive greater value from our freight logistics system.
Our financiers are, together with internally generated resources, funders
of our business. We appreciate your support and constructive engagement.
Finally, our hearts go out to the families of the 26 colleagues who lost
their lives on duty during the year. Our ongoing focus on safe operations
is, in part, designed to ensure that their loss is not in vain and that
the memory of our deceased colleagues is appropriately honoured through
a significant reduction, if not elimination, of fatalities.
The consistent improvement in the financial and operational performance
of the Company over the past three years provides clear evidence of the
appropriateness of the strategy. During this period we have seen Transnet
transform from a poorly-performing group of loosely related logistics
businesses into a tightly-focused business with a common vision. It is
a reflection of how far we have come that we are ready to present a single
Transnet to the market.
Since beginning the journey of transforming Transnet some three years
ago, the scale of the Companys investment programme has doubled
to todays R79 billion.
A growing Transnet is an integral part of the South African economy and
an important contributor to the 6% plus GDP target envisaged in AsgiSA.
"We are bullish about the Company and that it is growing."
The level of our investment programme tells the story about our own business
and our view about our countrys economy. Simply, we are bullish
about the Company and confident that it is growing (for the first time
in two decades) and that it is poised for further growth in coming years.
Group Chief Executive
21 June 2007