Transnet back on track

The five-year corporate plan, including the Quantum Leap productivity drive, commits the state-owned enterprise to an ambitious growth agenda, which is anchored on the R93 billion infrastructure investment plan and a series of operational efficiency drives that will improve customer service and ensure financial sustainability in future. Communication sessions have been scheduled with all the employees countrywide.

In addition, the company has agreed in principle for the first time to all the key performance measures with its shareholder, the Department of Public Enterprises, and all its executives will have performance agreements aligned with shareholder expectations before the start of the financial year.

Productivity drive

"At the heart of our productivity initiative lies our aspiration to harness volume growth opportunities; achieve substantial improvements in customer service; and, critically, to considerably improve our productivity and efficiencies across the company. Whilst some of our operations are world-class, such as the pipeline and iron-ore line (which last December achieved a weekly tempo of 1-million tons), others are well below these levels, therefore we have identified key measures and interventions that will drive our efficiency and productivity to world-class benchmark standards", says Wells.

Other elements of the Quantum Leap drive include provision of appropriate capacity for growth, implementing effective cost controls and improvements in the company's safety record and environmental compliance as well as improved asset utilization.

Internally, the company has reshaped its work methods to drive the focus on executing these goals. For example, the company's operations committee's sole mandate has been revised to focus solely on customer service delivery and productivity and efficiency improvements.

Efficiency, productivity

On average, an improvement of 8.4% in efficiency and productivity levels has been built into the operational plans for the forthcoming financial year. These efficiencies relate to wagon and locomotive utilisation, improvement in rail departures and arrivals and the reduction in shipping delays and improved terminal operations as measured by gross crane moves per hour.

In most of these areas, the targeted efficiency improvements are in excess of 15%. An average volume growth of 10.3% - far in excess of the GDP growth - is also being targeted in the 2010/11 year. Volume growth opportunities will primarily be driven by increases in the general freight business of Transnet Freight Rail mainly manganese, domestic coal and magnetite as well as export iron ore and coal.

"A key objective is to alleviate the pressure on the road system and to bring back to rail the commodities and containers that are suitable for rail transport. Growing container volumes on rail is not an easy task, as experience has shown worldwide, but we are committed to significantly grow the market share of long haul container volumes,” adds Wells.

"The rationale behind the thrust is an expression of our collective frustration with incremental improvements in service delivery and productivity over the years and an aspiration for significant improvements in customer service, operational efficiency and in the safety and environmental compliance in the medium term".

Robust cash flows needed

This operational improvement will be achieved on the back of strong financial performance. Meaning robust cash flows and growth in profitability and the R93 billion investment whilst maintaining a strong balance sheet as measured by gearing peaking at 47%, a cash interest cover of at least at 3.0 times and a return on assets rising by 33% from the existing 6% to 8% in the medium term. These metrics are key to Transnet retaining its investment-grade credit rating status.

Human capital component

The operational improvement will also be supported by addressing its human capital requirements. It plans to increase the technical skills in the organisation substantially over the period through focused training and bursaries in specialist fields. "We will, as in the past, need the support and commitment of our employees in achieving the challenging targets and we are determined to maintaining our positive and constructive relationship with our recognised labour unions,” comnets Wells.

Annual overview

At the same briefing, Wells also gave a forecast of financial and operational performance for the year ending March 31 2010. "The business has emerged stronger from the recession of the past year and despite the loss of revenue resulting from the petroleum tariff reduction which negatively impacted the revenue by R1 billion, we are ahead of our budgets across the board save for the export coal business which is receiving high-level management attention.

"The financial performance of the company has been helped by aggressive cost containment measures implemented during the course of the year in response to the recession. This assisted us in not reducing personnel during 2009 and we were able to provide security of employment to our workforce.

Capital expenditure up

The company, which has invested R74 billion in the last five years on replacement and expansion projects, has increased its five-year capital expenditure programme from R80 billion to R93 billion mainly to accommodate new projects to support the planned volume growth.

The company has concluded its funding programme for the 2009/10 year successfully well ahead of time and, in keeping with the Board-approved funding strategy, it has already begun pre-funding activities for the 2010/11 year in order to mitigate liquidity risk in the debt capital markets.

The highlight of the funding strategy, which raised R17.9 billion in the current year from banks, development finance institutions, export credit agencies and tapping bonds which are part of the R30 billion domestic medium-term note programme, has been the successful establishment of the US$2 billion global medium-term note (GMTN) programme last month. Transnet is planning to tap the London-listed GMTN facility, which allows the company to issue euro and dollar bonds in the US and European debt capital markets, in the next financial year.

Acquisition of locomotives

The company hopes that the contract to acquire 100 locomotives from GE will result in a R335 million investment spinoff for Transnet Rail Engineering (TRE) together with significant transfer of skills to TRE and a further R300 million for other South African suppliers.

The tender is the first major one to be issued with an obligation to encourage localisation of supply and bolster skills transfer as part of the government's Competitive Supplier Development Programme (CSDP). The GE contract follows the conclusion of the execution of the contract to refurbish 50 ‘like new' locomotives where all engineering was carried out by TRE.

Transnet, which is leading the implementation of CSDP plans, intends to extend this initiative beyond locomotives to other major equipment purchases.

2010 forecast

Looking ahead, Wells identified the uncertainty around the application of economic regulation, notably the methodology of funding new infrastructure, as a key challenge for the company. For example, regulatory uncertainty has prevented the company from structuring an optimal funding solution for its fuel and gas pipeline division, Transnet Pipelines.

The board is satisfied that despite a number of acting positions, the executive team is functioning effectively, and the company is progressing well towards achieving its targets for the current year.