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Group Chief Executive's ReviewINTRODUCTION
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. Rebranding Transnet But first, some background 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 Transnet’s 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 approved. 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:
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:
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. Transnet’s new vision and mission This is being achieved through increasing our market share, improving productivity and profitability and by providing appropriate capacity to our customers ahead of demand. New values "We are reliable , trustworthy, responsive and safe." In brief, we would like our customers:
New tag line Conclusion on the rebranding STRATEGY IMPLEMENTATION AND PERFORMANCE REVIEWIntroduction 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 Company’s financial strength. The results so far provide telling evidence that:
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 Africa’s freight transport and logistics system.
Financials 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 Rail’s 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. Transnet’s 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. Operating context 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" STRATEGY REVIEWSTRATEGIC MANAGEMENT OF THE BALANCE SHEETIn 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 problem. 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 World’s 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 TSDBF’s 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 Officer’s 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 turnaround. 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).
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 Transnet’s shares. Consequently, there was a R2 billion reduction of Transnet’s 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 off. The disposals included all or some of the following key features:
During the year, the following entities were successfully sold:
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 ownership. 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 Transnet’s 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:
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 BUSINESSThis pillar of our strategy covers a range of programmes. I wish to focus on the business reengineering, capital investment; and other related initiatives. Vulindlela Now into its second year, this programme is designed to:
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 Vulindlela’s inception in August 2005. The Vulindlela initiative lies at the heart of Transnet’s turnaround strategy and is the core initiative to redirect and reengineer the business. Vulindlela is also making a strong contribution to Transnet’s other key strategic pillar, namely HR. Highlights from the rail freight programmes:
Highlights from the other programmes:
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 Transnet’s substantially improved financial and operational performance, and to address issues that might affect the speed at which we are achieving our targets. Capital investment programme 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 Africa’s freight logistics and, therefore, a critical factor in South Africa’s 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 cost. 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 Projects’s 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 issues. The successes of the programme have ensured that:
"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) Port-related projects (R28 billion) Pipelines-related projects (R10 billion) TBI (Transnet Business Intelligence)
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 GOVERNANCEOur 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 approach. 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. Transnet’s 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 strategy’s 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:
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 Chairman’s 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 Committee. 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:
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 Rail’s 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 DEVELOPMENTThis 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:
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 Transnet’s proposed restructuring and the disposal of its non-core assets (also refer to last year’s 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:
"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 managerial levels. During the year, Transnet initiated several new training programmes to augment existing initiatives. A few are worth mentioning:
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 Outreach programme. 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. Transnet’s involvement will continue until 2010 by which time Transnet will have sponsored 50 students. All these students will join the Transnet TOPP programme. We also support the Government-led Joint Initiative on Priority Skills Acquisition (Jipsa). On talent management, we have identified mission-critical positions and have developed a talent management policy and a leadership development programme. Change management is a cornerstone of any major corporate restructuring. Emphasis was placed on ensuring that top managers were aligned to Transnet’s 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 HIGHLIGHTSIntroduction "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. Freight Rail Achievements in the year include:
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 market. 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. Engineering Significant progress was made in this regard during the course of the year. Achievements in the year included:
National Ports Authority 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 division’s 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:
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. Port Terminals Following the resumption of operations, a string of loading performance records was achieved. Achievements in the year included:
Pipelines Its achievements during the year included:
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 country’s 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 Transnet’s 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. These included:
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 Government’s 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 Compact. "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. ECONOMIC REGULATIONTransnet 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 Pipelines – tariffs and the construction of the new multi-product
pipeline (NMPP) 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 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 fund’s 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 Ltd’s Board of Directors; and the Ministers of Public Enterprises and Finance. TSDBF 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 fund’s performance or whether the fund’s 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 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. TPF A new pensions dispensation 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, activities. In last year’s 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, football’s 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. LOOKING AHEADContainerised 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 country’s 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 Africa’s 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 Transnet’s 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 economy’s 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. Transnet’s freight demand model, developed during 2006, provides a key input into this process. 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. APPRECIATIONThe 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 Group’s 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 Board’s 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 Transnet’s 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 transport provider. 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 project. 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 economy. 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 Transnet’s 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. CONCLUSIONThe 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 Company’s investment programme has doubled to today’s 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 country’s 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.
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