The operating profit margin has increased to 14,8% from 14,3%, which can be attributed to the costsavings initiatives undertaken. Included in the profit before taxation, is an amount of R146 million relating to hedging gains on the funding of new locomotives, incurred prior to the adoption of hedge accounting.

Total freight transported was lower than expected and can be summarised as follows:

Coal and iron ore volumes were lost due to the unavailability of product from suppliers.

No growth in revenue was achieved in the passenger services. The national strike in the security sector at the beginning of the previous year impacted Freight Rail's services due to increased cable theft. The latter affected our ability to deliver safe services and affected the security of passengers, which discouraged the utilisation of train services.

The return on net assets before taxation was 10,1% compared to 11,5% in the previous year. This ratio decreased as expected as the result of the increased capital spend and depreciation and amortisation.

A transfer of 6 253 employees to Engineering during June 2006 contributed to the reduction in staff numbers. The revenue per employee increased and total costs excluding depreciation, and amortisation declined from R11 145 million in the previous year to R10 837 million, indicating a decline in real terms as a result of the strict management of costs and improved productivity.

Marketplace and customer management

The growth strategy was further refined during the year and has a renewed focus on key risks and opportunities that will, over time, rebuild trust, enhance credibility of the service offering and improve Freight Rail's market position. A strategic plan was developed to validate market growth aspirations. This will be further enhanced by the finalisation of the Rail Master Plan, which has a 20-year horizon.

A Customer Care Department was established to deal with customers' concerns and to proactively inform customers of operational incidents as a first step towards transforming the business into a more customer-focused organisation. The unreliability of rail services and limited capacity - posing risks to customers and the financial health of the Company - were rigorously managed through the commercial stream of the Vulindlela project.

Operations management

Freight Rail continued its main operational thrust of running a scheduled railway by means of an integrated train plan. Whilst ontime departures and arrivals continue to show marked improvement, they have not yet reached satisfactory levels. Poor equipment reliability, safety related incidents and inadequate operational planning continue to hamper progress in this regard.

• The coal export line was severely affected by the mines' periodic inability to produce coal and their resultant cancellations of freight volumes during the rainy season that occurred in the first quarter of the year. Derailments reduced markedly on the coal line as a result of investment in backlog maintenance, while other safety related incidents such as overhead rail hook-ups and cable theft have contributed to reduce capacity on some of the rail corridors across the country. The national strike in the security sector also adversely affected the delivery of volumes.
• During the year much effort was spent on in increasing installed capacity in the rail system. This will pave the way for a future sustainable growth path. There was marked success across all sectors. However, there were a number of factors, such as poor weather conditions, the short supply of wagons caused by a worldwide undersupply of wheel centres and an unreliable supply from the South African supplier as well as plant breakdowns and production problems with some customers.
• Increased domestic demand for steel and cement was accompanied by limited production capacity from local producers. The focus on supplying domestic markets resulted in increased imports and a reduction in rail traffic to Mozambique and Botswana. The local cement and steel industries are investing in production expansion projects that will bring about additional volumes on rail in 2008 and 2009.
• Chrome exports have increased due to a high demand by China for metallurgical chrome and a weakening rand. The shipping rates for bulk commodities increased significantly during the year, resulting in a significant swing to containerised chrome exports. New exporters entered the market during the year and Freight Rail is presently engaging customers to switch more volume from road to rail. Freight Rail has increased the payloads per train, increasing the export tempo of ferrochrome on the Maputo Corridor.
• The emergence of new entrants in the manganese market resulted in current market participants engaging in significant competitive rivalry for the additional capacity.
• The energy portfolio was negatively affected by shutdowns, off-spec products and the low global demand for export pitch coke and ammonium nitrate.
• The poor across-border turnaround times of wagons resulted in an embargo on sending Freight Rail wagons across the border. This, in turn, resulted in a reduction in transported fuel volumes. The business experienced a loss of copper volumes as delays caused by foreign partner railways have resulted in the non-placing of empties at loading points in DRC and Zambia. Domestic Maize volumes transported across the border have decreased as Zambia experienced better crops in 2006.

Disposals
The Blue Train will be sold to the private sector. Shosholoza Meyl (the inter-city passenger service) is to be transferred to the South African Rail and Commuter Corporation (SARCC) in terms of a decision by Government to consolidate passenger rail services. It is anticipated that the disposals will be completed this year.

Supply chain management and BBBEE

Freight Rail's supply chain management made significant inroads in achieving its objectives of cost-containment and good governance. Numerous initiatives, based on the Group Supply Management "flight plan" under the Vulindlela programme, were implemented at different stages during the year. This created the opportunity for cost reductions in procurement of more than R340 million and vastly improved the internal procurement processes in line with the Detailed Procurement Policy (DPP). However, as a significant proportion of these reductions affected heavy maintenance, capital expenditure and stock costs, the benefit to the 'bottom line' will only be achieved in future years.

Freight Rail remains committed to preferential procurement of goods and services under the newly adopted broad-based BEE Codes of Good Practice. During the year, 40% of the total procurement expenditure went to BEE suppliers. In terms of the Competitive Supplier Development Programme (CSDP) and through Freight Rail's capital budget, further opportunities will be created in the next year for local manufacturers to join the supply base, provided that they can supply manufactured goods at globallycompetitive prices.

ASSURING SOUND ACCOUNTABILITY AND GOVERNANCE

In line with Transnet's governance, risk and compliance policies, Freight Rail has established a process for governance and identifying, evaluating and managing significant risks that influence the attainment of its business objectives.

To this end, in addition to the oversight afforded by the Transnet Board of Directors and the various Board mandated committees, Freight Rail has established the following committees tasked with oversight and governance roles:

• Exco, which meets bimonthly, is chaired by the CEO and is responsible for approving strategy, capital investment plans, annual business plans and ensuring performance monitoring and delivery;
• Risk Committee, which meets quarterly, is chaired by the CEO and is responsible for all aspects of enterprise-wide risk management with a particular emphasis on safety;
• Operating Committee, which meets monthly, is chaired by the COO and is responsible for overseeing all rail related operating activities and is accountable for the safe operation of the railway;
• Investment Committee, which meets at least monthly, is chaired by the CFO and is responsible for recommending the five-year annual investment plans and for approving capital expenditure;
• Internal Control Steering Committee, which meets monthly, is chaired by the CFO and is responsible for ensuring that appropriate controls are established and operated. All reports of the internal and external auditors are considered at this committee and corrective action plans are monitored; and
• Acquisition Council, which meets monthly, is chaired by the CEO and is responsible for awarding all major contracts.

Strategic direction

Freight Rail aims to create a reliable and profitable business through the increase of rail volumes and freight traffic.

The business has identified the following five strategic initiatives, rooted in Transnet's four-point turnaround strategy, in order to achieve its long- and medium-term financial and operational goals.

Safety: Transform Freight Rail into a safe railway
The Vulindlela safety programme is at the core of Freight Rail's improvements in safety performance. This reengineering programme includes initiatives for the implementation of a safety management system based on best practice and ensures that safety structures are properly integrated into the business structures. It is the intention to attain world-class safety practices within five years.

Create capacity: Invest to maintain, replace and increase capacity
Capacity will be sustained and created through extensive investment in rolling stock and infrastructure. The backlog maintenance programme is aimed at restoring railway capacity while the transformation and reengineering initiative will further enhance capacity by improving operational efficiency and engendering a culture of continuous improvement. This programme aims to identify programmes that enable the entity to do more with less.

Scheduled freight railway: Implement efficiency improvements
The Vulindlela efficiency programmes aim to improve throughput, asset utilisation and productivity on dedicated corridors (coal, iron ore and initially the general freight NATCOR (Johannesburg to Durban) and CAPECOR (Johannesburg to Cape Town) corridors). These programmes are supported by process improvement in the National Operations Centre planning and monitoring processes.

Customer service delivery: Retain the desired customer base and improve service delivery
The Vulindlela efficiency programmes, contributing to customer service delivery, and the commercial programme - addressing yield management, pricing, volume growth, contracting and sales force training - aim to retain and grow the desired customer base.

Leadership and employee capability: Optimise human capital deployment and development
The enhancement of leadership and employee capability will be enhanced through Transnet initiatives such as performance management and reward implementation and, the roll-out of programmes by the Rail Academy. These programmes focus on critical operational grades with particular emphasis on crew resource management. Employee programmes will be augmented by extensive change leadership, business appreciation and transformation programmes that target all employees.

Freight Rail will continue to improve corporate governance by integrating risk management and governance processes into business practice and Internal controls.

Risk management

During the year processes were instituted to enable sound implementation of Enterprise-wide Risk Management (ERM). A sharper focus was placed on capacity building and skills enhancement so as to empower risk champions, line management and other employees in their risk management functions and responsibilities.

The key financial, operational and commercial risks, their root causes and associated impacts have been identified and evaluated. Controls and action plans have been developed to mitigate/treat root causes that lead to unacceptably high residual risks.

Whilst some progress has been made in the implementation and embedding of ERM there are still some notable challenges.

ENGAGING OUR STAKEHOLDERS FOR MUTUAL BENEFIT

Freight Rail recognises that a number of stakeholders are affected by operational performance. As such, the organisation is committed to embedding the appropriate accountability within its operational structures.

The Freight Rail Sustainability Steering Committee played a key role in mapping stakeholders and identifying the principal areas impacting stakeholders. Improved channels for engaging with internal and external stakeholders form part of this roadmap to embed organisational sustainability within Freight Rail.

DEVELOPING WORLD-CLASS INFRASTRUCTURE

Rail infrastructure

Freight Rail relies on its engineering capabilities for the provision, maintenance and timely replacement of infrastructure and rolling stock to run a scheduled railway. Ensuring reliability, affordability, availability and safety of the network assets remains a challenge. To address this challenge, the capital investment programme was accelerated during the year.

Capital investment
Capital spending for the year amounted to R7 387 million (including capitalised maintenance expenditure of R3 265 million), compared to the R3 809 million in the previous year.

The increase in capital expenditure targeted the under-investment of the past and addressed the contractual commitments on the export lines in terms of volume growth. Simultaneously, the reliability of the fleet, and investment to improve safety, remained a focus area. A major component of the capital plan related to the acceleration of heavy maintenance expenditure.

The Transnet Board approved the locomotive fleet renewal plan in principle in August 2006 to the value of R11 201 million (R2 659 million for upgrade programmes and R8 542 million for new locomotives).

The fleet renewal plan will achieve the following objectives:

• Address the under-investment of the past 15 years, which was aggravated by the lack of effective maintenance;
• Improve the efficiency and reliability of the rail transportation system;
• Contribute to the turnaround process;
• Increase traction capacity to meet the growth in rail transport demand;
• Provide traction flexibility on a non-homogeneous network; and
• Help modernise the fleet and retire ageing and maintenance hungry locomotives.

The planned capital expenditure for the next year includes:

Freight Rail has planned for the following major capital expenditure over the next five years:

Information and communications technology

Freight Rail's Chief Information Officer (CIO), operating under policies and procedures from Transnet, is responsible for all aspects relating to enterprise information technology and systems (IT&S). This encompasses application development and maintenance, software and hardware management and the setting of standards for technical and business architecture across the information integration domains.

The following key objectives, pursued by the CIO during the year, will continue into the next year:

• Optimising the use of the SAP application software to realise substantial value from Freight Rail's current and future investment in SAP. This includes the identification of specific areas of improvement across processes, people, governance and technology. Specific areas targeted during the year include the development of workflow and process automation of recording employees' time worked; the refinement of controls; the tracking of capital expenditure in the financial modules of SAP and the development of a customer relationship management (CRM) capability to provide a single view of the customer. The latter also improves the capability for logging all interactions with customers;
• Deploying IT to enable controlled time record keeping. This will provide a tool to monitor unauthorised leave and lost time while automating time calculations to ensure standardised policy application. It will also provide the capability to link overtime to productive work;
• Streamlining the IT architecture by replacing legacy applications where required. This includes the development of consignment life cycle management in SAP and the streamlining of management information; and
• Deploying IT to enable a safe and efficient railway through the integrated asset tracking programme. This encompasses all projects related to GPS, radio frequency identification (RFID) and on-board computers (OBC) to provide asset location and speed monitoring. It includes the deployment of handheld terminals and readers to enable yard optimisation.

CREATING A WORKPLACE WHERE OUR PEOPLE CAN EXCEL

People management

Freight Rail currently employs 24 811 permanent employees. This represents a reduction in staff numbers from 31 398 in March 2006, mainly as a result of the migration of major maintenance and other engineering responsibilities to Engineering.

The human capital strategy and focus is embedded in Transnet's four-point turnaround strategy and has had the following significant effects during the year:

• A critical skills framework was developed;
• Long hours for critical grades were reduced;
• Good corporate citizenship was further institutionalised through targeted training programmes;
• The ability to operate as a scheduled and stable railway was underscored by appropriate training initiatives;
• A talent management and skills retention framework was formalised; and
• Initiatives were introduced to ensure the availability of personnel within key organisational programmes such as Vulindlela.

Change, transformation and culture
The business simulation programme has been successfully implemented at senior management level. The goal of this programme is to support business reengineering processes by enabling employees to understand the total business and its interfaces, as well as the financial impact of their actions. Corporate governance, PFMA educational programmes containing procedure manuals and personal empowerment training programmes were also successfully rolled out.

Employment equity
The Group Employment Equity Plan was tabled at Group Exco level in March 2007. In the year ahead,

Freight Rail will align with Group numerical targets of:

• 71% black employees (at least 61% African);
• 17% female; and
• 3% people with disabilities.

Skills development
The current skills shortages have necessitated multiple strategies to acquire the relevant technical, operational and leadership skills. Freight Rail has embarked on a detailed skills planning and analysis programme to determine the skills priorities for 2006 to 2012.

The following key skills development initiatives were undertaken during the year:

• Mission-critical vacancies were filled across the organisation;
• A structured safety training programme was successfully rolled out; and
• Provisional accreditation was achieved for all training centres.

The integration of the current training centres into a Railway Academy has progressed well, and it is expected that this will fast-track the development of core skills in the organisation. The Railway Academy has entered into a partnership with the University of Pretoria to assist in the development of engineering skills to address rail specific challenges. Freight Rail's capacity building initiative for shop stewards and supervisory staff in partnership with the University of South Africa is also beginning to show results.

Altogether 2,2% of Freight Rail's labour cost went to the training of critical skills, with more than 5 000 employees being trained and an additional 1 301 employees being recruited into mission-critical positions. 608 Learnerships were completed during the year and a total of 311 bursaries have been offered to students in engineering and commercial disciplines.

Talent management
A retention strategy has been developed, approved and communicated to key stakeholders to ensure that an integrated system for identifying and retaining talent is established. This will further assist in rolling out a succession planning framework.

Performance and reward
Performance management contracts, supported by capacity building efforts, were implemented for the management cadre. The focus was mainly on securing management commitment to ensure that the Company secures its transformational and business goals.

Human resource enablement
Freight Rail embarked on numerous initiatives during the year to expand employee development, including:

• Introducing an electronic time and attendance system;
• Developing, web-based learning solutions;
• Revising recruitment and staffing policies and procedures;
• Initiating a safety management training programme; and
• Institutionalising leadership development programmes.

Employee relations
The employee relations climate is generally sound between Freight Rail management and its labour unions. Communication forums are established and enable regular interaction.

Management and unions that are party to the Transnet Bargaining Council concluded a Variation Agreement on the Basic Conditions of Employment Act. This allows for operational flexibility in a number of areas including daily and weekly rest periods, maximum shift lengths and limitations on working overtime. This agreement is valid for three years and will lapse on 31 March 2009.

Employee wellness and HIV/Aids

Freight Rail implements comprehensive programmes for occupational medical surveillance, lifestyle management, employee assistance and substance abuse. Education and awareness, counselling and medical treatment form a critical component of lifestyle management as a means of promoting healthy minds, healthy people, minimise chances for new HIV/Aids infections and improve the quality of the life of the infected.

Employee safety

Rail safety at Freight Rail has a direct impact on employees and the public. During this year, a journey towards the implementation of an integrated safety, health, environment and quality (SHEQ) management system was started.

Freight Rail contracted advisory firm, DuPont International, to assess and assist in addressing safety fundamentals. This initiative continues to focus on incorporating safety into all aspects of operation as well as changing cultural mindsets and behaviours towards the goal of improved safety performance. Training to inculcate a safety culture and build a safety conscious workforce was implemented to foster ownership and accountability in Freight Rail.

Particular attention is focused on strengthening the rail safety management system and ensuring that it adequately addresses the requirements of the South African National Standard 3000-1, on railway safety. A project plan was developed to address identified gaps and implementation is under way. Amongst others, the plan addresses occurrence management, contract and contractor management, human factors and auditing.

CARING FOR THE COMMUNITIES WHERE WE OPERATE

Corporate social investment (CSI)

In addition to the work of the Transnet Foundation, Freight Rail's continued refocus on community involvement resulted in the channelling of funds into two areas:

• Rail safety is a mandatory focus area and falls within the CSI Programme because of its link to communities located next to railway lines. Freight Rail spent R10,5 million on external rail safety initiatives in 2006; and
• HIV/Aids interventions accounted for approximately R6 million of Freight Rail's CSI expenditure in this year. Freight Rail supports the Deputy President's "Partnership against Aids", by running an annual partnership train which brings together HIV/Aids service organisation representatives, health care workers and people living with HIV/Aids. Freight Rail also collaborates with the Department of Health by running similar trains in observance of World Aids Day.

Community impact and public health and safety

Public health and safety is of paramount importance. Injuries and loss of life are never acceptable and Freight Rail is committed to reducing the number of accidents and fatalities in the year ahead. The public fatalities during the year declined by 13% compared to the previous year.

Level crossing incidents show a declining trend, in part as a consequence of the public awareness campaign undertaken in Freight Rail.

Management is deeply concerned by the above fatalities and each is investigated in depth. Accordingly, the dynamic safety plan is amended taking into account what we have learned and receives constant focus at the Group and Divisional Executive Committees.

MANAGING OUR ENVIRONMENT RESPONSIBLY

In managing the environmental impacts of its business activities, Freight Rail is guided by an environmental management system (EMS), which is in line with the ISO 14001 International Standard. The system enables Freight Rail to formulate appropriate policies and programmes as well as to set environmental targets and objectives while taking into account ever-changing legislative requirements, business operational requirements and functional processes.

Some of the achievements to date include the compilation of the EMS procedure manual; independent review of the EMS scope and documentation, updating of the Freight Rail Environmental Aspects Register, review of the environmental response and site rehabilitation guidelines, revision of the Internal Audit checklists and guidelines and assessment criteria for the sites earmarked for the scrapping of redundant rolling stock. Environmental awareness training was conducted at all levels at Freight Rail.

PROSPECTS

Committing to stakeholder value

The operation of a safe, scheduled and commercially sustainable freight railway remains Freight Rail's key objective.

To achieve this, the business is committed to addressing the needs of its customers, with dedicated teams being established to focus on improving customer relationships. Through this focus, Freight Rail anticipates increasing its market share and thereby achieving substantial revenue growth.

To ensure improved service reliability, planned capital expenditure has increased both for rolling stock and for infrastructure. This increase will address key priorities and will focus on scheduled repairs and maintenance planning.

Human capital plans are being reviewed to improve the skills base, scheduling systems and crew management to ensure that the business has the necessary competencies to achieve its growth objectives.

This will deliver the following results over the next five years:

• Transported volumes will increase substantially and rail's share of transportable GDP will increase accordingly;
• Financial returns will increase to more sustainable levels in line with the benefits of increased volumes and begin to track favourably with global railways;
• Freight Rail's service levels will be returned to appropriate standards; and
• Freight Rail will contribute positively to the efficiency of the logistics system of South Africa.

Capital expenditure in the past year increased to R7,3 billion, mainly to address underinvestment of the past	Freight Rail plans to spend more than R24 billion over the next five years on its general freight business	The total number of injuries and occupational diseases dropped 14% compared to last year