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TRANSNET Integrated Report 2018 1 10 Navigating this report Reporting formats 11 9 Icons key Strategic fundamentals 6 7 8 12 Contents Financial Operational Sound governance 5 15 17 18 sustainability excellence and ethics 12 4 13 16 Available in print Available online 14 About this report 2 3 20 21 format and full in PDF format 19 29 30 27 28 Capacity creation Human capital Constructive HTML report 22 25 26 Leadership perspective 6 and maintenance management stakeholder relations 24 31 Chairperson’s foreword 7 Integrated Integrated Annual Sustainability Operating 23 Report Report Financial Outcomes Division Executive summary 10 2018 2018 Statements Report Reports 32 Sustainable 2018 2018 2018 33 Market segment Organisational Developmental 35 Organisational overview 12 competitiveness readiness Outcomes 36 37 41 39 40 Creating value through the capitals 20 The 2018 The 2018 Annual Financial Statements 42 Sustainable Developmental Outcomes (SDOs) Integrated Report include reports of the directors and 38 Financial capital 24 43 is the Company’s independent auditors. 44 Manufactured capital 26 Investment Health Employment leveraged and safety primary report to 45 Human capital 28 46 all stakeholders. The 2018 Sustainability Outcomes 48 Intellectual capital 30 Report documents Transnet’s 47 49 Social and relationship capital 32 Skills Regional Community performance on the nine SDOs Natural capital 34 50 development integration development in greater detail. 51 53 54 55 56 Strategy and resource allocation 36 57 58 59 Strategic planning 37 Industrial Environmental Transformation capability building stewardship Forward-looking information 60 61 From MDS to Transnet 4.0 42 62 63 64 All references to forward-looking information and targets in 65 Managing our stakeholder relationships 48 The Capitals the 2018 reports are extracted from the 2019 Transnet 66 67 The Multi-stakeholder Perception Survey 50 Corporate Plan and approved by the Board of Directors. 68 Social and relationship 69 Addressing key stakeholder concerns 51 Financial capital Intellectual capital capital 71 Feedback on this report 72 73 Material aspects impacting our strategy 54 74 We welcome feedback on our 2018 Integrated Report. 75 Levels of accountability for determining material aspects 55 76 Manufactured capital Human capital Natural capital Please provide written feedback to Kilford Gondo at 77 Directors’ approval of material aspects 55 Kilford.Gondo@transnet.net. 79 78 The impact and relevance of material aspects 56 80 81 82 83 Opportunities and risks 58 Performance Key 85 84 Improvement on prior year Equivalent performance to Transnet’s top risks for 2018 59 Target achieved 87 performance prior year 88 Transnet’s risk control and assurance environment 66 90 89 The governance of risk 66 Decline on prior year 91 Target partially achieved Target not achieved 92 performance Our performance 72 94 Financial sustainability 73 95 Transnet 4.0 Strategy 96 Operating Divisions’ review 100 99 Expanding the scope of 100 98 97 Product and service Geographic Transnet’s manufacturing 101 Outlook 102 innovation expansion business Dedication 107 102 108 105 104 We were deeply saddened by the loss of fellow Board 106 103 Abridged governance 112 member and dear friend, Mr Gideon J Mahlalela who Ethical and effective leadership and corporate citizenship 113 Material clusters passed away on 29 March 2018. We are profoundly Build social trust through Ensure long-term Promote transformation Creating value through Transnet’s governance structure 116 grateful for his dedicated service on the Transnet Board, ethical leadership and financial stability and growth in the wider 109 Our control environment 133 corporate citizenship in a tough economy South African economy and will forever remember him for his patient 114 113 112 116 Regulatory compliance universe 136 resourcefulness and his unflinching commitment to the 117 110 organisation’s long-term well-being. Gideon was a 122 118 Unlock organisational Ensure customer- Anticipating the future founding member of the South African Railways 130 111 Annexures 138 and developing methods 132 129 125 121 120 119 value by attracting talent, centricity and build Association (SARA), and he was the first Swazi Chief 126 Annexure A: Governance terms of reference for of minimising the effects fostering innovation and partnerships for Executive Officer of the Swaziland Railway (SR), and a 133 of shocks and stresses 134 128 127 the Integrated Report 138 building unity sustainable growth of future events recipient of an Honorary Doctorate in Philosophy from 136 Annexure B: Remuneration report 139 138 the University of California. He was thus a pioneer at 139 140 Annexure C: Subsidiaries, associates and joint ventures 146 heart, a mentor in business, and a philosopher in spirit. 142 Annexure D: Material risk taxonomy 148 Strategic thrusts His passing was sudden and unexpected. Our thoughts 149 143 King IV references are with his family and friends. 151 148 146 Abbreviations and acronyms 150 We have included references to 144 King IV principles where appropriate In respectful memory of Gideon Mahlalela in this report. Glossary of terms 151 and our late colleagues: 145 Mr Edgar Masilela, 15 July 2017 Corporate information 152 P = Principle Mr Tshiamo Alfred Meku, 15 October 2017 During the reporting year, Transnet adhered to some of the King IV principles and recommendations as evidenced in the Mr Frederick Hermanus Matthysen, 18 October 2017 Integrated Report, Remuneration Report and the Sustainability Outcomes Report. At the time of publishing this report, Ms Thandeka Mzimela, 1 November 2017 the Company was attending to gaps identified through a King IV gap analysis performed during the 2018 financial year. Ms Senzekile Mase Mthethwa, 6 December 2017 152 Once complete, the outcomes – and appropriate steps taken to address the gaps through the applicable governance process – will be reported on the Company’s website (www.transnet.net/GAI), as part of the 2019 Integrated Reporting Suite.
2 About this report TRANSNET Integrated Report 2018 3 About this Figure 1 Transnet Group report Specialist Units Transnet Group Capital Reporting philosophy • • International Financial Reporting Standards (IFRS); The Companies Act, No 71 of 2008 (Companies Act); Transnet Property and approach • The Public Finance Management Act, No 1 of 1999 (PFMA); Transnet SOC Ltd (“Transnet” or “the Company”) has been an active • United Nations 2015 Sustainable Developmental Goals; participant in the International Integrated Reporting Council (IIRC) • The Greenhouse Gas Protocol Corporate Accounting and Pilot Programme since its inception and has followed the Reporting Standard prescribed by the Carbon Disclosure developments and application of the Integrated Reporting Project; Operating Divisions Framework. Our reporting is evolving as the Company’s strategic • AA1000 Stakeholder Engagement Standard; and focus, operational priorities and organisational thinking become • Broad-Based Black Economic Empowerment (B-BBEE) Freight Rail more integrated, thereby enabling us to remain strategically Codes of Good Practice. aligned with and responsive to stakeholders’ concerns. Engineering 138 Read more Governance terms of reference for the 2018 Integrated Report National Ports Authority Reporting boundary are contained in Annexure A. Port Terminals The 2018 Integrated Report covers the financial reporting period from 1 April 2017 to 31 March 2018. The boundary of Pipelines this report (Figure 1) encompasses the Transnet Group, its Statement of stakeholder Operating Divisions and Specialist Units. The boundary further extends to include factors that impact Transnet’s ability to commitment create value. We strive to communicate with our stakeholders regularly. Our core values – expressed in our Culture Charter – guide us in our Factors There were no significant changes in scope or aspect interactions with stakeholders. boundaries, save for the progress made during the year. Where impacting relevant, restatements or changes in measurement methods To meet stakeholder commitments, we continue to strive for: Transnet’s ability are disclosed in the annual financial statements. • An organisational culture that views change as an opportunity Employees to create value to improve quality in all we do; The Transnet Integrated Report is published annually and • A safe working environment, and an ‘iBELONG’ culture; Shareholder (DPE1) approved by the Board of Directors (Board). The previous Statement of Strategic • Customer-centric business innovations, and reliable service Customers Integrated Report was approved by the Transnet Board on Intent offerings presented to customers as ‘One Transnet’; Investors and 1 June 2017. • Fair, equitable and transparent supply chain tender processes; commercial Transnet’s business partners • Integrity, communication, diversity, continuous learning, context and operating Rating agencies environment Reporting frameworks accountability and excellence in everything we do; • Support for communities where we operate; and financial institutions Stakeholder concerns and guidelines • Collaborative relationships with policymakers and regulators; • Demonstrable sensitivity and care for the environment; and Suppliers and Material risks Primary framework • Superior returns to our investors as a reliable and credible service providers borrower which, albeit state-owned, issues debt on the This report was prepared according to the guidance of the strength of its financial position without any Government Regulators International Integrated Reporting Framework, as adopted guarantees. by the Transnet Board. Government Media and the general public Secondary frameworks, guidelines and standards Integrated approach to assurance The Board and management have applied Transnet’s Integrated This report – read together with the accompanying detailed Academia Assurance Plan to the integrated reporting process to enhance and research Annual Financial Statements and Sustainability Outcomes the value-creation narrative, and to provide an independent institutions Report – was further informed by: perspective on the transparency and accountability of our • The King IV Report on Corporate Governance for South NGOs2 disclosures. Our Integrated Assurance Plan encompasses the Africa (2016) (King IV); assurance provided by management, internal specialists, internal International • The Global Reporting Initiative (GRI-G4) – (General Standard bodies audit, external audit, external advisers and service providers. Disclosures); The Board serves as the last line of defence. Communities Read more Organised labour www Transnet GRI checklist online at www.transnet.net 1 Department of Public Enterprises 2 Non-Governmental Organisations
4 About this report continued TRANSNET Integrated Report 2018 5 Integrated Reporting Assurance framework the prevailing difficult economic conditions, Transnet will continue to Waste aggressively pursue specific available project funding areas that are Content Assurance providers Outcome Framework/Standard within the parameters of its funding strategy and continue to Our operations generate a variety of waste materials as optimise capital expenditure spend. by-products and we strive to implement the principles of responsible Annual Financial Statements • SizweNtsalubaGobodo • Qualified opinion • PFMA waste management, i.e. avoidance, reduction, recovery, reuse, (consolidated and summary) • Material findings on • Companies Act recycling and disposal, if no other use can be found. In accordance usefulness and reliability Further, the Board does not expect the actions by both rating • IFRS with the requirements of section 36 of the National Environmental of certain performance agencies against Transnet and the sovereign to negatively impact • Shareholder’s Compact the ability of the Company to access the debt capital markets as Management: Waste Act, No 59 of 2008, we continue to identify information contaminated areas in our operations using scientific methods and both rating agencies have assigned a stable outlook for the Integrated Report (in full) • Transnet Board • Directors’ approval • International Integrated Company. Transnet has managed to maintain an investment grade visual site assessments. Management plans are developed for areas • Audit Committee Reporting Framework stand-alone credit profile amidst a series of rating downgrades. contaminated by asbestos and hydrocarbon waste. • Remuneration, Social and Ethics Committee Pipeline spills present a challenge for the Company and surrounding Review of internal • Transnet Internal Audit (TIA) • Financial controls: • Committee of Sponsoring Integrating sustainability reporting communities, and we continue to educate property owners and contractors on safe and responsible work procedures; remedial controls and risk • National Occupational Safety Requires improvement Organisations The 2018 Integrated Report aims to communicate the full value of activities include revegetation of sites, excavation of contaminated management Association (NOSA) • Operational controls: • PFMA the Group and draws on the interdependencies between financial soil, monitoring of groundwater and backfilling of soil. • International Standards Requires improvement • NOSA standards and non-financial information. We have integrated performance Organisation (ISO) • Legislative assessment • ISO standards relating to information relating to Transnet’s commercial outcomes with that accreditation bodies • Functional risk management safety and environment of the nine Sustainable Developmental Outcomes (SDOs) in our Modal shift from road to rail • Legal firms and compliance maturity including ISO 9000 and P.2 discussion on value creation (p18) and our performance assessment ISO 14000 disclosures (p73). Transnet’s programme to accelerate the modal shift from road to rail • Legislative requirements is a flagship carbon mitigation programme for South Africa. Rail The Board has reviewed Transnet’s sustainability performance transport is three to four times more efficient than road transport, • Enterprise risk management disclosures in the 2018 Integrated Report for the year ended offering cleaner, safer, cheaper and reliable freight mobility through ISO 31000 standard 31 March 2018, and the external auditor’s assurance statement improved road safety, reduced road congestion and carbon BEE contributor level • TIA • Level confirmed as ‘Level 2’ • B-BBEE Act and Charters issued to the directors on the subject matters contained in the emissions, and ultimately a lower cost of doing business. • Beever Agency CC • Rail sub-sector scorecard online Sustainability Outcomes Report 2018 available at • Marine sub-sector scorecard www.transnet.net. Governance and ethics Corporate Governance • TIA • Maturity assessment: Fully • King IV Read more established • PFMA As a logistics state-owned company, our large infrastructure www Transnet Sustainability Outcomes Report online at • Assessment of controls: • Companies Act www.transnet.net development projects pose a risk in terms of ethical and transparent Requires improvement procurement practices and ‘rent-seeking’ behaviour. Our mandate relies on domestic and foreign investment and perceptions of Selected information in the • SizweNtsalubaGobodo • Conclusion: Selected • Transnet’s sustainability Transnet Sustainability sustainability information has reporting criteria Statement of precautionary anti-competitive behaviour and corruption negatively impact our reputation, brand and investment sentiment. Given the challenges Outcomes Report 2018 and been prepared in all material contained in summary form in respects in accordance with approach during the reporting period, we will continue to work towards greater transparency and accountability, enhancing our procurement this report Transnet’s reporting criteria. Human health and well-being practices and stakeholder relationships, and refining our Code of Ethics to ensure the protection of all stakeholder rights. Refining Our operating context is industrial- and infrastructure-driven, and our governance framework to accurately track and address ethical necessitates occupational training, as well as comprehensive Materiality in our reporting The directors have also assessed the going-concern ability of the Group as a result of the qualified audit opinion. policies and procedures to safeguard our employees, communities transgressions remains a priority for Transnet. The 2018 Integrated Report provides information that we consider within and around our operations and the public. to be of material significance in creating short-, medium- and long-term value. We have identified 24 material aspects for the Bilateral and syndicated loans amounting to R15,8 billion have a clause relating to a qualified audit opinion as an event of default. Directors’ approval 2018 reporting year and have organised these into six clusters. The qualification of Transnet’s Annual Financial Statements is an Balancing stakeholder interests The Board has applied its collective mind to ensure the integrity We are confident that the report provides information that is of event of default under these financing agreements. of the 2018 Integrated Report and any supplementary information material interest to all stakeholders wishing to make informed We recognise that our keystone expansion projects – such as our referenced in the report. The Board has considered the assessments of our performance and our ability to create and large-scale port infrastructure improvement project at the Port completeness of the material aspects addressed in the report, On declaration of the qualified opinion, the bilateral and sustain long-term value. of Durban – need to balance the economic benefits for the and the reliability of reported performance information presented, syndicated loan lenders have a right to accelerate their loans Shareholder Minister and the country with the social and based on the integrated assurance process followed. which then become due and payable. Read more environmental concerns raised by surrounding communities. 56 Adverse impacts on local communities include the possibility of The Board is satisfied that the 2018 Integrated Report provides The impact and relevance of material issues. The Board and management have engaged these lenders to share social and small business displacement and extensive waste a fair representation of the integrated performance of the 55 Process for identifying, validating and approving material aspects. the nature of the modification, root causes, remedial actions and generation during the construction phase. We continue to engage Company during the year. Further, it has concluded that the report timelines for remediation. The engagements took place in a project stakeholders to support the most reasonable, responsible is presented in accordance with the International Integrated positive environment, gaining confidence from the lenders that the and beneficial balance of outcomes for all concerned. Qualified opinion partnership with Transnet remains strong, against the backdrop Reporting Framework and aligns with the King IV guidelines. of the strong financial position and cash flow generating capability The report also contains Standard Disclosures from the GRI The external auditors issued a qualified opinion relating to the of Transnet. Sustainability Reporting Guidelines. completeness of the identification and reporting of irregular Environmental health expenditure, including a material uncertainty relating to the To date, half of the lenders granted waivers and/or reserved The 2018 Integrated Report was approved by the Board and signed Company’s going concern status in the year under review. rights to immediate acceleration to allow Transnet the Water on its behalf by: opportunity to implement remedial actions to improve the control Some of our operations are in water-stressed catchments with environment around the prevention and detection of irregular resultant risks, including water contamination and water supply Going-concern status expenditure.Transnet is confident that an agreement will be shortages. We continue to ensure that water use licences are The Board reviewed the Group’s performance for the year and reached with all affected lenders to the satisfaction of all parties. obtained timeously and are appropriate to the scale and nature of considered the robustness of budgets and business results, cash water use. Where water is required to reduce the environmental PS Molefe flow projections for the 15 months ending 30 June 2019, cost- A funding strategy has been developed to ensure that the Company impact of dust from our Saldanha iron ore terminal, a reverse Chairperson saving opportunities, the cost of capital projects and related is able to successfully fund its capital investment plan without osmosis plant has been constructed to limit the demand on breaching the set financial parameters. Taking into consideration municipal water by desalinating seawater for use in the terminal. 10 August 2018 optimisation opportunities, the funding plan and loan covenants. Johannesburg
6 Leadership perspective TRANSNET Integrated Report 2018 7 Chairperson’s foreword The current Board of Directors (Board) of Transnet SOC Ltd was appointed on 24 May 2018, approximately two months after the end of the year under review. Its appointment coincided with the new epoch defined by the President of the Republic of South Africa as the “New Dawn”. The New Dawn is characterised by a resolute determination to rid public institutions of all malfeasance, which set in over the past nine years of our democracy, accompanied by their “We have set what we believe to systemic destruction or weakening. Our task now is to rebuild be an ambitious but entirely achiev- our public institutions, restore the loss of their integrity and to able goal of restoring Transnet, and refocus them on their mandates. For the Board of Transnet, the its previously sound reputation, to strategic challenge flowing from the aforegoing vision relates Dr Popo Molefe its position as an integral asset of directly to the biggest logistics, transport and infrastructure Chairperson the people of South Africa.” company of the State of which the strategic mandate is to drive socio-economic development. The outcomes of its successful Mr Popo Molefe discharge of this task must be the stimulation of economic (Chairperson) growth, growth of other businesses, especially small and medium-sized ones, increased jobs and the reduction of poverty and inequalities. The Board considers itself privileged to have been appointed result in fruitless and wasteful expenditure, it is evident that the 3000 1 to the stewardship of the largest logistics, transport and corporate governance of the Company is inadequate and y x AXZZ_TDDE_222_1_0_89010230--A infrastructure company of the people of South Africa. The requires improvement, which enforces the dire need for Directors, without exception, appreciate the depth of strengthened controls, particularly in the procurement dedication required of them, together with the management environment. Since the appointment of the new Board we have collective and the more than 50 000 Transnet employees. undertaken the following steps: We also acknowledge the concomitant collaboration with our • Engaged certain forensic specialists to review the reports customers and service providers that is necessary to drive the prepared relating to the much-talked about 1 064 economic growth and sustainable development of Transnet’s locomotives contract, where Transnet has been accused of human capital, and that of society at large. mismanaging the supply-chain management process resulting in associated costs increasing from approximately B-0-11 Our first days in office coincided with sustained negative R38 billion to R54 billion. B-0-11 media coverage of the Company’s business dealings. At the • Formulated the key governance sub-committees of the Board. C-6_44 same time, the preparation of Transnet’s 2018 Integrated • Abolished the ‘Acquisitions and Disposals’ (ADC) sub- Report and Financial Statements were near completion. committee, as we do not believe the Board should be directly A According to King IV, the annual Integrated Report represents involved in procurement processes. 3889 the voice of the governing body. As Directors, we owe our B • Commenced interactions with key state institutions charged A-0-11 2567 duties to the legal entity that is Transnet SOC Ltd. In C with investigating “state capture”. acknowledging the diverse interests representing the • Reviewed the progress of the investigations instituted by Company, which include the interests of our Shareholder, our management, relating to payments made to companies employees, customers and communities, we are duty-bound to 657xd identified in various media reports. act in good faith, not only in signing off on the year’s performance but also in setting the direction and tone for The reporting period was further marked by a credit downgrade Transnet’s strategic aspirations going forward. 33ois of Transnet’s foreign and local currency ratings, due to the rating action on the sovereign, as Transnet is viewed to be Given the brief period available to us to examine, approve and B-0-11 C-6_44 closely linked to the Government. The downgrades precipitated sign off the Transnet 2018 integrated reporting suite, we have an increase in financing costs and a forced slowdown in capital relied heavily on the work done by Management and attempted expenditure, necessitating a need to supplement investments to interrogate and provide our own observations where we with capital raised through private-sector partnerships. 33ois could. The rating agencies have, however, noted significant growth potential for the country, even though they acknowledge that From the work of the various Board committees, it has become the new political administration will require time to improve apparent that certain irregularities derive from lapses in economic growth, accelerate employment and stabilise the financial discipline. While these irregularities do not necessarily fiscal position, given the country’s structural weaknesses. 1 https://www.youtube.com/watch?v=w1NxcRNW_Qk
8 Leadership perspective continued TRANSNET Integrated Report 2018 9 Together with management, we have set what we believe to be an As the Transnet Board, we are committed to improving Our sincere gratitude to the Minister of Public Enterprises, ambitious but entirely achievable goal of restoring the integrity coordination, oversight and sustainability of the business, by Mr Pravin Gordhan – who represents our Shareholder and the and reputation of Transnet. As a Board, with appropriately diverse enhancing internal governance oversight and supporting the people of South Africa – for his confidence in our ability to deliver skill-sets and depth of commercial experience befitting the Auditor-General to strengthen external audit processes. In this on our DPE mandate, for his encouragement, guidance and his task, we intend to ride the coat-tails of our President, who, in way, we hope to help restore public trust in Transnet as a SOC, a belief in the leadership to take Transnet forward. On behalf of the December 2017 began to usher in a new era of greater cooperation national infrastructure provider, a progressive business partner, Board of Directors, we pledge our unwavering support for his vision between the Government, business, labour and civil society, and and a national employer of choice. for our company. to foster greater inclusivity in South Africa’s policy environment, as evidenced by his success to date in his R1,2 trillion investment We will also improve our engagements and interaction with various Our deep appreciation to our regulators, including ministries with drive. His market-friendly approach and firm stance against stakeholders, customers, service providers and emerging business. which we work closely; as well as various committees in Parliament; corruption and maladministration is steadily building greater provincial governments; and municipalities that contribute their confidence among consumers, businesses and investors alike. In his Notwithstanding the various governance challenges experienced in oversight responsibilities and partnership commitments. To words, “a restoration of confidence is the quickest recent years, we are convinced that Transnet can be an extraordinary community partners across the country, we are privileged to serve and cheapest form of stimulus available, especially in light of our company that, given the opportunity, will grow and impact positively as the custodians of South Africa’s largest infrastructure state- fiscal constraints”. This is true at the macro-economic level for on the economy of our country. A valuable point of departure is owned company. We look forward to partnering with you in our our country, and at the micro-business level for Transnet. to restate Transnet’s core mandate, particularly as it facilitates various enabling projects. the broader economic and developmental goals of the country as At the heart of the business is our obligation to assist in lowering articulated by President Cyril Ramaphosa in his 2018 State of the the cost of doing business in South Africa, while ensuring Nation Address (SONA); and to express our own understanding of and commitment to the mandate bestowed on us as the new Board security of supply by providing appropriate port, rail and pipeline in steering the Company towards its vision. The excellent financial infrastructure. As a SOC, Transnet must deliver on national performance appears clearly in the Annual Financial Statements PS Molefe developmental goals, as they pertain to the transport and logistics and is further articulated in the Executive summary of the Group sector, ensuring that the country remains competitive on the Chairperson Chief Executive and Acting Chief Financial Officer. continent and globally. In many respects, our country is a driving force for the growth and expansion of the African continent, 10 August 2018 with infrastructure to match any first-world country. This said, Johannesburg the World Bank and International Finance Corporation (IFC) rank Condolences South Africa in 39th place in the world for ease of doing business. Regrettably, during the year five employees passed away in Cost is of concern, particularly when trading across borders. The our operations. On behalf of the Board of Directors, we wish to Company’s Transnet 4.0 strategy, formally set in motion during express our heartfelt condolences to their families and all who the 2018 financial year, is geared to accelerate efforts to extend were touched by their passing. The Company also lost a friend and the Company’s – and indeed South Africa’s – commercial footprint mentor in Gideon Mahlalela, whose passing two days before year- in the fast-growing regions of Africa, the Middle East and Asia end was sudden and unexpected. (AMEA), by offering affordable rail, port and pipeline infrastructure support to our cross-border neighbours. This vision proudly aligns We further wish to convey our sympathies to the families of the with the “Africa 2063” strategic framework for socio-economic 102 members of the public who lost their lives during the year in transformation of the continent over the next 50 years into a and around our operational activities. As the Board, we undertake uniquely African trade environment, which fosters growth and to review the nature and causality of all fatalities and do our best sustainable development for Africans, by Africans. to entrench Group-wide safety awareness. The founding principles of the Transnet 4.0 strategy further echo a key tenet of the President’s 2018 Address, in that our prosperity Appreciation as a nation depends on our ability to take full advantage of rapid technological change. The new Board is committed to transitioning We wish to acknowledge the ongoing efforts by all Transnet “The erosion of trust in SOCs and employees. As the Board, we appreciate that the 2018 reporting the business to adapt to global industry 4.0 trends, particularly in year was harrowing, given the pervasive and sustained media public institutions has negatively the ambitious goal of transitioning from our current second-party reports on State Capture, which cast a cloud over many SOCs, logistics provider (2PL) status to becoming a third-party logistics Transnet included. As disheartened as many might feel at this affected our social licence to provider (3PL) in the short to medium term, and ultimately striving for fourth-party logistics provider (4PL) status in the long term. time, we owe it to ourselves and our colleagues to remain strong and grounded. We also wish to thank the leadership of organised operate. Our challenge is to Ultimately, Transnet must progress with the times by becoming a digitally driven organisation, both from the perspective of driving labour for their guidance, leadership and willingness to share in the win back the trust of the public, Company’s long-term vision. efficiencies to lower business costs, and to innovate around new investors and Government. products and services. Thank you to our customers and commercial partners for your support and confidence in our abilities amid difficult economic and The only way to do this is to It is prudent that we first and foremost guard against the financial, operational conditions during the year. As the new Board, we look operational and governance challenges that have in recent years forward to learning more about our customer environment and to demonstrate unwavering both directly and indirectly impacted negatively on the overall performance of the economy and, consequently placed pressure finding innovative ways to improve Transnet’s service offerings to you. commitment to good corporate on the very fiscus we, as a SOC, serve to protect. governance.” Dr Popo Molefe Chairperson
10 Leadership perspective TRANSNET Integrated Report 2018 11 Transnet has initiated various geographic expansionary projects under a new subsidiary, Transnet International Holdings (TIH) Executive SOC Ltd, such as the Nigerian railway concession project worth approximately $2 billion; the approval of a private-sector participation investment proposal to operate three berths in summary the Port of Lamu, as per the LAPSSET Corridor Memorandum of Understanding (MOU) signed between South Africa and Kenya in 2016; and a tender awarded to the Transnet-Diaspora Infrastructure Development Group (DIDG) Consortium to raise finance for the rehabilitation and renewal of key equipment, systems and infrastructure for the National Railways of Zimbabwe. Revenue growth and profits have been erratic for many Other important developments relating to our advanced transport and logistics companies over the last 10 years, with manufacturing sector include the launch of the TransAfrica revenue increasing but profits not matching up to the rate of Locomotive during April 2017 and the prototyping of a fully Mr Siyabonga Gama revenue increases on average. Return on capital employed autonomous (self-drive) Special Inspection Device (SID) in Group Chief Executive (ROCE) and profits are relatively low for many companies in this collaboration with the Council for Scientific and Industrial sector compared to other industries, such as technology, Research (CSIR) to detect obstacles on rail ahead of travelling consumer non-durables and retail. trains. We are hopeful that the SID’s capabilities will revolutionise rail safety. Despite the challenges faced during the year, the Company has achieved unparalleled financial results for the year ended We are actively leveraging technological advancements to 31 March 2018. Revenue for the year increased by 11,3% to improve operational efficiencies. Technologies such as the R72,9 billion. Stringent cost-containment measures and working Internet of Things, Machine Learning and Artificial Intelligence capital management contained operating costs at R40,4 billion (AI) will provide valuable insights into improving operational (2017: R37,9 billion), a 6,5% increase, resulting in a R3,1 billion reliability and service delivery to customers; whereas blockchain saving against planned costs. As a result, earnings before technology will modernise legacy systems and offer new interest, taxation, depreciation and amortisation (EBITDA) – customer service platforms. The aCTES system – serving as an Mr Mohammed Mahomedy Transnet’s key measure of profitability – increased by 18% to industry-wide service platform – will help to generate relevant Acting Chief Financial Officer R32,5 billion (2017: R27,6 billion and 2016: R26,3 billion), with transportation and logistics data from multiple sources across the EBITDA margin increasing by 2,4% to 44,6%. Gearing at the entire transport eco-system, thereby radically enhancing our 43,4% and cash interest cover at 3,0 times were well within the customers’ experiences across the logistics value chain. approved financial parameters. Going forward, Transnet’s growth will rely on our ability to Revenue performance was underpinned by solid growth in diversify value-added services, and to harness some of the strategic rail sectors: megatrends shaping the global transport and logistics sector. • 6,1% increase in port containers This implies diversifying revenue streams to tap into logistics • Record general freight volumes of 90,8 mt, an increase of opportunities presented by rapidly developing economies, such as logistics advisory services, infrastructure development and Our point of departure draws from our view of long-term 3,1% from the prior year freight forwarding over large distances. Consolidation of the sustainability. As a SOC, we cannot defer our developmental – 6,5% growth in railed containers and automotive volumes logistics sector, where larger players acquire small or niche mandate. Hence, our sustainable developmental outcomes form – 17,5% growth in chrome players, is also a growing trend in the transport and logistics part of the essential blueprint for our new strategic direction. – 13,2% increase in manganese sector, in part due to companies’ reduced payloads, low This means we need to consider our local suppliers in our • Record of 77,0 mt export coal volumes (Richards Bay profitability levels and evolving customer preferences. In terms expansion aspirations, acknowledge the new ways in which many Container Terminals) of the latter, our own customer surveys reflect that we are still ‘new economy’ enterprises and youth entrepreneurs work so that slow to respond to their fast-changing requirements, which is a they benefit from our enterprise development programmes, Progress on major projects is also largely on track with 402 combined factor of our systems, customer support structures involve our communities in our move to ‘digitalisation’, and locomotives from the 1 064 locomotive programme having been and our organisational culture, all of which need to undergo a consider developing the technologies and skills we will need accepted into operations during the year, and 16 more delivered fundamental transformation. 30 years from now. and currently undergoing acceptance testing. Further, Transnet has commenced its manganese expansion project, which aims to expand the capacity for transporting manganese volumes beyond 5,5 million tonnes (mt). South Africa accounts for 75% of globally identified manganese reserves and 31% of manganese exports by value, making it a sustainable, lucrative supply market SI Gama to Europe and China. During the year, demand for manganese exceeded budget by a substantial 46,6%. “We are committed to Group Chief Executive R1,3 billion was invested in the NMPP project during the year. improving coordination, The coastal terminal (tight-line solution), inland terminal, 24” main pipeline and 16” inland pipelines have been fully oversight and sustainability commissioned and are operational, having transported more MS Mahomedy than 199,48 billion litres of diesel from Durban to the inland region since commissioning. Following the coastal terminal of the business, by Acting Chief Financial Officer commissioning in August 2017, the pipeline is now operating as a multi-product pipeline (various grades of diesel and petrol) enhancing internal 10 August 2018 Johannesburg functioning at full phase 1 flow rates, thereby securing fuel supply for the South African economy over the medium to long governance oversight” term. The inland terminal was commissioned and became fully operational in December 2017.
12 Organisational overview TRANSNET Integrated Report 2018 13 Employee profile Organisational x Total employees 55 666 y overview Black 73,9% Indian 3,4% Coloured 9,7% White 13% Total employees represented by collective bargaining as a % of total headcount 89,0% 1 People with disabilities 2,4% TRANS AFRICA LOCOMOTIVE/TRANSNET 3000 Our mandate Permanent employees 51 324 Assist in lowering the cost of doing business in South Africa Male 36 683 Female 14 641 Enable economic growth Ensure security of supply by providing appropriate port, rail Permanent employees represented by and pipeline infrastructure in a cost-effective and efficient collective bargaining as a % of total headcount 81,4% Our manner, within acceptable benchmarks Fuelling Africa’s vision growth and Non-permanent employees 4 342 development Governance context as the leading provider Transnet SOC Ltd is a public company (constituted in terms What we of innovative have to supply-chain solutions. of the Legal Succession to the South African Transport Integrated Supply-Chain Management Services Act, No 9 of 1989), with the South African deliver Government as the sole Shareholder. function Transnet is the owner of South Africa’s railway, ports and pipelines infrastructure. Optimises inbound supply-chain activities Our The Company’s Memorandum of Incorporation – approved Enables efficient and reliable outbound services to the mission by the Shareholder Minister on 25 June 2013 – aligns with end-customer Linking economies; the provisions of the Public Finance Management Act (PFMA), connecting people; the Companies Act and the National Ports Act, No 12 of 2005, As we enter the 4th Industrial Revolution, and growing Africa! as amended (the National Ports Act). opportunities for suppliers include: What we do As a state-owned company (SOC), the PFMA serves as • Internet-based service provider platform for suppliers Transnet’s primary legislation. working in the ‘Gig-economy’; Transnet signs an annual Shareholder’s Compact with the • Mentoring network of industry leaders to guide small, Government of South Africa, represented by the Minister of medium and micro-enterprises (SMMEs) in sector changes Public Enterprises. The Shareholder’s Compact mandates the due to digital trends; Our I believe in zero harm Company to deliver on numerous strategic deliverables, including • Transnet ‘Mega Hubs’ to support SMME suppliers; values I am, because of the customer sustainable economic, social and environmental outcomes. • Market access to SMMEs through revenue-sharing model; The Board directs the Company’s strategy in response to the and I deliver excellence, simply Statement of Strategic intent. • ‘Common purpose’ technology platforms for SMME I am trusted and ethical collaboration (tools and templates). What we stand for I care, I make a difference Broad-Based Black Economic As Transnet expands regionally, we will spearhead regional I am a team player Empowerment (B-BBEE) supply-chain opportunities for South African-based SMMEs Transnet’s B-BBEE verification covers six of the seven and expand Transnet’s Enterprise and Supplier Development elements of the Generic Transport Public Sector Scorecard Strategy to support regional supplier development in I innovate (excluding the ownership element). The Maritime, Property countries where we operate. Leadership I inspire and Rail Charters are also applied. brand attributes I put the customer first Transnet achieved the full points for enterprise development Enterprise and supplier development I know my business and socio-economic development for the 2018 financial year. (ESD) I am trusted The post-MDS Transnet 4.0 strategic blueprint will address How we I deliver and maximise the scores for employment equity, preferential • Guided by Government’s Competitive Supplier should lead I am ethical procurement and skills development. Development Programme I create value • Informed by the B-BBEE Codes of Good Practice Transnet Group’s B-BBEE performance per pillar • Aims to increase the competitiveness, capacity and Agile Admired Digital United for the 2018 review period capability of black-owned suppliers through financial Strategic and non-financial support Fit and Trusted, Evolve Together Element Actual score Target thrusts focused in a innovative South or die we succeed • Targeted ESD initiatives support localisation and volatile world African brand Equity ownership N/A N/A industrialisation, and provide opportunities for black people, youth, women, small businesses, people with Driven Impeccable Inventive Single-minded Management control 8,59 11 disabilities and people living in rural communities How we Efficient Innovative Customer- Tolerant of Employment equity 14,17 18 Adaptable Motivated by centric others’ ideas will deliver Skills development 19,56 25 Our integrated Enterprise and Supplier Development Strategy excellence Advanced Understand our impact Preferential procurement 28,51 33 supports the rise of young black entrepreneurs through the Enterprise development 15,00 15,00 various developmental levels – from high-school innovation Socio-economic development 5,0 5,0 programmes through business case development and Total 90,83 107 business incubation to our Black Industrialist Programme and B-BBEE Level 2 our regional and global exporting and trade programmes.
14 Organisational overview continued TRANSNET Integrated Report 2018 15 Operating context1 Customer profile Where we operate Figure 2 Large mining, shipping, manufacturing, agricultural, Five Operating Divisions spread throughout South Africa Freight Rail Engineering National Ports Authority Port Terminals Pipelines industrial, retail and energy contributors to the • Operates 30 400 km of rail • Provides advanced • Services eight • Provides cargo handling • Transports fuel from South African economy Four satellite offices in Lesotho, Tanzania, Namibia track across South Africa manufacturing, commercial seaports in services to a wide coastal refineries and and Swaziland • Transports bulk, maintenance and South Africa spectrum of customers, crude oil imports to break-bulk and refurbishment • Core functions include including shipping lines, the inland market containerised freight of rolling stock and the planning, provision, freight forwarders and • Transports gas from Specialist Units Three joint operating centres specialised equipment to maintenance and cargo owners Secunda to industrial in Mozambique, Botswana and Zimbabwe • Freight Rail network and rail services provide Freight Rail, the National improvement of port • Operates 16 terminals in users in Durban and Transnet Group CapitalTransnet Property strategic links between Ports Authority, Port infrastructure seven ports spread along Richards Bay mines, production hubs, Terminals and external • Provides marine-related the South African • The New Multi-Product distribution centres and clients services, port services coastline Pipeline (NMPP) Transnet Corporate Centre Satellite ports, and connect with • Houses Transnet’s and navigation aids to • Operations are enables the increase Johannesburg Research and offices cross-border railways of assist the navigation of divided into four major in liquid fuels volume the region Development (R&D) unit vessels within port limits business segments: throughput to meet Tanzania • Delivers customer-centric and along the coast containers, bulk, forecast demand Pipeline products and services as break-bulk and Namibia Beit Bridge Johannesburg – Durban a growing hub and automotive Swaziland systems integrator of rail in the AMEA region Lesotho LIMPOPO Rail corridors Total employees: 28 392 Total employees: 11 602 Total employees: 4 178 Total employees: 8 816 Total employees: 660 MPUMALANGA Permanent employees: Permanent employees: Permanent employees: Permanent employees: Permanent employees: Maputo 26 694 10 838 4 161 7 096 639 GAUTENG NORTH Fixed-term contract Fixed-term contract Fixed-term contract Fixed-term contract Fixed-term contract WEST employees: 1 698 employees: 764 employees: 17 employees: 1 720 employees: 21 Engineering Sishen Koedoespoort, Germiston, FREE Richards Bloemfontein, Durban, STATE KWAZULU- Bay Uitenhage, Salt River NATAL Durban NORTHERN CAPE Port Terminals EASTERN CAPE Richards Bay, Durban, East London, Ngqura, Port Elizabeth, Saldanha, Cape Town Saldanha East London 71% 29% 77% 23% 66% 34% 72% 28% 67% 33% Ngqura Male Female Male Female Male Female Male Female Male Female WESTERN CAPE Cape Town employees employees employees employees employees employees employees employees employees employees Port Elizabeth National Ports Authority Mossel Bay Richards Bay, Durban, East London, 2,7% 1,6% 1,9% 1,3% 2,4% Ngqura, Port Elizabeth, Mossel Bay, People with disabilities People with disabilities People with disabilities People with disabilities People with disabilities Saldanha, Cape Town 1 Operating context refers to Operating Divisions. 100 Read more Services provided Strategic context Outbound services (South African businesses moving Transnet is transitioning from the Market Demand Strategy products to international markets) and inbound services (MDS) – first implemented in 2012 – to a new blueprint for Freight Rail Engineering National Ports Authority Port Terminals Pipelines growth and diversification, the Transnet 4.0 Strategy (bringing products to South African markets) (Transnet 4.0). Commodities transported: mining exports, general freight Revenue Revenue Revenue Revenue Revenue and petroleum products The MDS has largely achieved its objective of closing the market demand capacity gap for freight logistics R43,7 billion R11,3 billion R11,7 billion R12,4 billion R4,5 billion General freight: containerised cargo, local manganese, infrastructure, with approximately R165,6 billion invested minerals, local coal, local iron ore, chrome and ferrochrome, in the previous six years. Transnet 4.0 provides a framework agricultural products, iron and steel, fertilisers, cement, for Transnet’s growth and diversification within the context fast-moving consumer goods, bulk liquids, wood and wood of the 4th Industrial Revolution. products, industrial chemicals, intermediate products and automotive products Main growth thrusts of Transnet 4.0 include: • Extending Transnet’s footprint in Africa, the Middle East Sub-saharan Africa’s estimated regional growth is 3,4% and South Asia; Petroleum products: crude oil, refined petroleum products, • Product and service innovation; and aviation turbine fuel and methane-rich gas products • Expanding Transnet’s advanced manufacturing business, with leading technologies to enhance new and existing products, and improve business processes.
16 Organisational overview continued TRANSNET Integrated Report 2018 17 Market context Financial context Operating structure Summary performance Office of the Group Chief Executive Global growth of 3,9% estimated for 2018, with 4,9% growth As a SOC, the financial strategy reflects the higher risk Group Internal Audit – Internal Audit 2018 2017 forecast for developing and emerging markets. profile of the business. To meet long-term market demand, Transnet invests for long-term growth prospects, but Group Company Secretariat – Governance Revenue R72,9 billion R65,5 billion Continued strong growth in emerging Asia and Europe, and considers short- to medium-term volatility in domestic and international markets. Transnet raises funds in the debt Group Strategy Strategy a modest upswing in commodity exports after three years Corporate and Public Affairs Operating expenses R40,4 billion R37,9 billion of weak performance. markets based on the strength of its financial position, Transnet International Holdings having raised funding without Government guarantees since Shareholder’s Compact Savings against The International Monetary Fund forecasts South Africa’s March 1999. In-house Consulting R3,1 billion R2,4 billion planned costs economy to grow by 1,5% in 2018, an improvement on the 1,3% growth rate of 2017. Business confidence improved Funded through reserves and borrowings with no subsidies Group Finance • Financial and capital planning EBITDA R32,5 billion R27,6 billion following a period of political uncertainty, with the growth or guarantees received from Government. • Treasury, funding and Management of critical investor relations rate set to keep improving beyond 2018. financial parameters, • Procurement Profit R4,9 billion R2,8 billion Remain within the medium-term target – Gearing 2,5 times. • Taxation Sub-saharan Africa’s estimated regional growth is 3,4%. • Income statement and statement Gearing 43,4% 44,2% Legacy Government-guaranteed debt amounts to of financial position • Capital assurance 3,0 times 2,9 times Still unclear whether projected improvements in GDP and R3 500 million comprising Eurorand bonds under the Euro business confidence will provide sufficient relief from the Medium-Term Note Programme maturing in 2028 (within loan (within loan Cash interest cover (R2 000 million) and 2029 (R1 500 million) respectively. Group Capital • Long-term planning covenant covenant Specialist Units effects of South Africa’s sovereign credit-rating downgrade • Capital business case support Group Capital in 2017. requirements) requirements Lead the execution of Transnet’s • Capital mega project execution capital expenditure programme, • Engineering and technical project support and engineering, • Capital project support Cash generated The new presidential dispensation should help buy growth R34,9 billion R31,0 billion in private consumption and fixed investment. Higher prices Socio-economic context procurement and construction management from operations for commodities will sustain growth in the mining sector. Borrowings raised R40,9 billion R17,0 billion Transnet’s strategic focus is guided by the Statement of Strategic Intent issued by the Minister of Public Enterprises Corporate Governance • Stakeholder relations The 4th Industrial Revolution ushers in a fusion of technologies • Risk Borrowings repaid R41,0 billion R24,9 billion and the Shareholder’s Compact, which stipulate medium- and Regulatory poised to disrupt every industry, with major economic and • Compliance technological ramifications and systemic transformation of term strategic objectives, including: Risk and compliance aligned • Legal Capital investment with legislative and regulatory • Security civil society, production, governance structures and human (expenditure for the R21,8 billion R21,4 billion – Reducing the total cost of logistics as a percentage requirements MDS period reaching identity. Transportation and communication costs are likely to of transportable gross domestic product (GDP); R165,6 billion) reduce, and logistics and global supply chains will become more Operating Divisions Group Operations • Rail operations National Ports Authority effective. The cost of trade is rapidly diminishing to drive new – Accelerating the modal shift by maximising the role Locomotives accepted • Port Terminal operations 402 452 markets and economic growth. of rail in the national transport task; Drive a Group-wide integrated • Port Authority operations into operations – Leveraging the private sector in the provision of both operational philosophy. The • Pipeline operations Port Terminals Chief Executives of the • Property management % of personnel costs Transnet’s primary focus remains volume growth of the core infrastructure and operations where required; 3,1% Engineering 2,9% Freight Rail Operating Divisions will report • TVCC and RMO invested in training Pipelines business, while seeking new growth paths to compensate for – Integrating South Africa with the region and the rest to this position low growth expectations and instability in traditional markets. of the world; and Disabling injury 0,73 0,69 Organic growth in the current freight transport and handling – Optimising the social and economic impact of all frequency rate (DIFR) divisions will account for the bulk of this growth as we interventions undertaken by the Company in the Business • Customer long-term contracts Transnet Property B-BBEE spend R37,0 billion Specialist Units improve connectivity, density and capacity of an increasingly achievement of these objectives. R25,8 billion Development • Product and service innovation integrated port, rail and pipeline network. • Commercial capability Support Transnet 4.0 by • Branding B-BBEE spend as % optimising and diversifying • Market intelligence of total measured 86,9% 103,1% Strategic private-sector partnerships in the freight logistics Transnet’s business portfolio • Procurement procurement spend sector will accelerate new business ventures and new revenue Endorsement of external charters and through growth in existing and growth. frameworks (not limited to) new markets R12,47 billion R12,2 billion (42,0% of (34,0% of Advanced • Locomotive and wagon Spend with black- Generic Transport Public Sector Charter Manufacturing design, manufacturing and sales total measured total measured owned enterprises Rail Charter • Maintenance of locomotives procurement procurement Regulatory context Four customer-facing businesses: and wagons spend) spend) Maritime Charter • Manufacturing • Research and development Property Charter • Maintenance and services • OEM partnerships The Company operates in compliance with 200 regulations. • Services development and sales R9,34 billion R4,6 billion • Supply management Tariffs charged by the National Ports Authority and Pipelines United Nations Global Compact (since 2012) • Trading (31,4% of (12,8% of Spend with black are determined by independent economic regulators, namely International Integrated Reporting Framework women-owned total measured total measured the Ports Regulator of South Africa (Ports Regulator) and the Information and • IT architecture enterprises procurement procurement National Energy Regulator of South Africa (Nersa) respectively. Communications • IT build application spend) spend) Technology (ICT) • IT infrastructure • Digital capability and The Railway Safety Regulator regulates the safety of the rail Membership of associations Transitioning Transnet from a solution delivery Transnet's B-BBEE level Level 2 Level 2 operations of the Company, issues safety permits (for a fee), (not limited to) company with high levels of operational autonomy to and conducts inspections and audits on the Company. Corporate social significantly higher levels of R219 million R234 million Transnet also operates within a policy context determined by integrated, Group-wide investment New Partnership for Africa’s Development (Nepad) orchestration the Department of Public Enterprises and the Department of Number of patients South African Railways Association Transport respectively. treated on board the 157 418 173 016 International Union of Railways Group Human Resources • Reward Specialist Units • Performance management Phelophepa trains Association of American Railroads Lead Group-wide performance • Talent management Railroad Association management, labour relations and • EVP Number of individuals corporate social investment • CSI benefiting from Union of African Railways 435 332 438 807 • Labour relations community outreach Maputo Corridor Logistics Initiatives services International Association of Marine Aids to Navigation and Lighthouse Authorities
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