6
2 TRANSNET INTEGRATED REPORT 2016 1 TRANSNET INTEGRATED REPORT 2016 FREIGHT RAIL HIGHLIGHTS Despite the decline in the manganese and iron ore markets, manganese met export volumes of 7,2mt. The Container and Automotive business unit achieved record performance, with the Tutuka Containerised Coal team clearing 33 trains from the mines and offloading 33 trains at the terminal, against a budgeted train plan of 30 trains. Freight Rail achieved a record number of automotive units on rail, with a 9% year-on-year increase to 238 407 units. BUSINESS OVERVIEW Transnet Freight Rail’s (Freight Rail’s) rail network is the largest in Africa and the Middle East. Freight Rail is also the largest of the Transnet Operating Divisions. The division operates world-class, heavy-haul coal and iron ore export lines, and is developing the manganese export corridor to meet heavy-haul standards. Freight Rail also transports a broad range of bulk general freight commodities and containerised freight. Commodities are railed across approximately 20 500 kilometres (30 400 track kilometres) of rail network, of which approximately 1 500 kilometres comprise heavy-haul lines. The network includes 3 928 kilometres of branch lines that serve as strategic feeders to main lines. The network and rail service provide strategic links between ports and production hubs, and connect with the railways of the Southern African Development Community, thereby supporting regional integration. Freight Rail further provides the network for long-distance passenger rail services, as well as haulage capacity for other private passenger services. REGULATORY ENVIRONMENT Developments in rail policy and transport economic regulation could result in changes for the South African transport industry. The Department of Transport (DoT) has embarked on a process of consultation for the development of the Green Paper on National Rail Policy and the establishment of a Single Transport Economic Regulator (STER). The Minister of Transport has proposed legislation that limits goods vehicles with a gross vehicle mass exceeding 9 000 kilograms from operating on public roads during peak traffic hours. The development of this proposal – and its potential impact on the transport industry – will be closely monitored. Freight Rail will continue to engage stakeholders and conduct research to refine strategic positions on rail policy and economic regulation. PERFORMANCE CONTEXT The strategic advantage of rail lies in the movement of heavy haul, bulk and unitised commodities over long distances where flow densities provide economies of scale, thereby lowering unit costs. Transporting rail- friendly freight on rail rather than road reduces logistics costs, and impacts positively on the road network, whilst reducing transport sector carbon emissions for the country. Transnet’s focus in the rail sector has been on achieving increases in rail market share by stabilising and optimising existing flows, and targeting the migration of rail-friendly commodities from road to rail: that is, increasing freight volumes in line with capacity created through the Company’s Market Demand Strategy (MDS). The division continues to implement six core strategies to ensure delivery of the MDS: Driving operational efficiency and excellence; Ensuring capital investment to create and maintain capacity; Developing market segment competitiveness; Building operational readiness, with an emphasis on safet; Developing people through skills training and by promoting an organisational culture in which a commitment to excellence and innovation is rewarded; and Regional integration and the harnessing of cross- border opportunities. The 2016 operating context was characterised by lower than anticipated economic growth and significantly lower commodity prices, which negatively impacted customers’ operations and their demand for rail services. Further, the prolonged drought reduced the transportation of agricultural commodities, which together with weakened customer demand, adversely affected Freight Rail’s volume performance for the year. In light of muted economic growth – and the uncertain timing and rate of global economic recovery – Freight Rail has to revise the timing of strategic investments in rail. Albeit with a somewhat scaled-down approach, the objective for capacity creation will continue in the year ahead. A projected 287 locomotives are planned for delivery in the 2017 financial year as part of the 1 064 locomotive renewal programme for the general freight business. The revitalisation of the general freight system aims to create capacity for growth of general freight tonnages and encompasses the manufacture of locomotives, network upgrades, wagon builds, technology improvements and asset maintenance. Freight Rail remains steadfast in its goal of becoming a ‘Top 5’ rail operator globally. The migration of the rail business to an integrated logistics solutions provider is key to achieving this goal. The division will continue to develop skills to ensure the future availability of the appropriate balance of competencies to promote volume growth. Going forward, operational excellence and carefully managed labour costs will be essential characteristics of our business. OPERATIONAL PERFORMANCE Core initiatives for 2016 Investigate and realise diversified revenue opportunities. Continue to implement the ‘Road to Rail’ programme, supported by concentrated marketing efforts, a qualitative range of value-added services and a proficient sales force. Explore opportunities to create additional revenue from diversified portfolios, such as property. Pilot bimodal technologies to create seamless interfaces and to optimise the value chain. Grow cross-border volumes and develop Freight Rail’s Africa business, together with related consulting services. Promote operational readiness for the new loco deployment programme and refine the required operating models. Figure 1: Freight Rail network Rail Infrastructure • 30 400 km of track • 20 953 route km • Core network: 12 801 route km • Network electrification - 50kV AC (861km) - 25 kV AC (2 309km) - 3kV DC (4 935km) - Diesel (11 974km) • Axle loading - Main lines at 20t/axle - Ore line at 30t/axle - Coal line at 26t/axle Core network Closed lines Lifted lines Branch lines Sishen Saldanha Cape Town East London Port Elizabeth Mosselbaai Klipplaat Rosmead Port Alfred Cookhouse Noupoort Upington Kakamas Sakrivier Calvinia Hotazel Aliwal North Springfontein Hofmeyer Maclear Queenstown Blaney Umtata Port Shepstone Musina Durban Louis Trichardt Kimberley Steelpoort Komatipoort Phalaborwa Zebediela Vaalwater Lephalale Veertien Strome Warden Ladysmith Virginia Worcester Witbank Groenbult Polokwane Nakop Kroonstad Vryburg Knysna Koffiefontein Douglas De Aar Hutchinson Beaufort West Pudimoe Mafikeng Bethlehem Oudtshoorn Ermelo Belmont Alicedale Klerksdorp Kaapmuiden Harding Richards Bay Bloemfontein Pietermaritzburg Harrismith Modimolle Ngqura Porterville Prince Alfred Hamlet Vrede Marble Hall Franklin Makwassie Vermaas Ottosdal Vryheid Middelwit Nelspruit Vereeniging MOZAMBIQUE SWAZILAND BOTSWANA NAMIBIA LESOTHO

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Page 1: FREIGHT BOTSWANA MOZAMBIQUE RAIL · operational excellence and carefully managed labour costs will be essential characteristics of our business. OPERATIONAL PERFORMANCE Core initiatives

2TRANSNET INTEGRATED REPORT 20161 TRANSNET INTEGRATED REPORT 2016

FREIGHTRAIL

HIGHLIGHTS � Despite the decline in the manganese and iron ore

markets, manganese met export volumes of 7,2mt. � The Container and Automotive business unit achieved

record performance, with the Tutuka Containerised Coal team clearing 33 trains from the mines and offloading 33 trains at the terminal, against a budgeted train plan of 30 trains.

� Freight Rail achieved a record number of automotive units on rail, with a 9% year-on-year increase to 238 407 units.

BUSINESS OVERVIEWTransnet Freight Rail’s (Freight Rail’s) rail network is the largest in Africa and the Middle East. Freight Rail is also the largest of the Transnet Operating Divisions. The

division operates world-class, heavy-haul coal and iron ore export lines, and is developing the manganese export corridor to meet heavy-haul standards. Freight Rail also transports a broad range of bulk general freight commodities and containerised freight. Commodities are railed across approximately 20 500 kilometres (30 400 track kilometres) of rail network, of which approximately 1 500 kilometres comprise heavy-haul lines.

The network includes 3 928 kilometres of branch lines that serve as strategic feeders to main lines. The network and rail service provide strategic links between ports and production hubs, and connect with the railways of the Southern African Development Community, thereby supporting regional integration. Freight Rail further provides the network for long-distance passenger rail services, as well as haulage capacity for other private passenger services.

REGULATORY ENVIRONMENTDevelopments in rail policy and transport economic regulation could result in changes for the South African transport industry. The Department of Transport (DoT) has embarked on a process of consultation for the development of the Green Paper on National Rail Policy and the establishment of a Single Transport Economic Regulator (STER).

The Minister of Transport has proposed legislation that limits goods vehicles with a gross vehicle mass exceeding 9 000 kilograms from operating on public roads during peak traffic hours. The development of this proposal – and its potential impact on the transport industry – will be closely monitored.

Freight Rail will continue to engage stakeholders and conduct research to refine strategic positions on rail policy and economic regulation.

PERFORMANCE CONTEXTThe strategic advantage of rail lies in the movement of heavy haul, bulk and unitised commodities over long distances where flow densities provide economies of scale, thereby lowering unit costs. Transporting rail-friendly freight on rail rather than road reduces logistics costs, and impacts positively on the road network, whilst reducing transport sector carbon emissions for the country.

Transnet’s focus in the rail sector has been on achieving increases in rail market share by stabilising and optimising existing flows, and targeting the migration of rail-friendly commodities from road to rail: that is, increasing freight volumes in line with capacity created through the Company’s Market Demand Strategy (MDS).

The division continues to implement six core strategies to ensure delivery of the MDS:

� Driving operational efficiency and excellence; � Ensuring capital investment to create and

maintain capacity; � Developing market segment competitiveness; � Building operational readiness, with an emphasis

on safet; � Developing people through skills training and by

promoting an organisational culture in which a commitment to excellence and innovation is rewarded; and

� Regional integration and the harnessing of cross-border opportunities.

The 2016 operating context was characterised by lower than anticipated economic growth and significantly lower commodity prices, which negatively impacted customers’ operations and their demand for rail services. Further, the prolonged drought reduced the transportation of agricultural commodities, which together with weakened customer demand, adversely affected Freight Rail’s volume performance for the year.

In light of muted economic growth – and the uncertain timing and rate of global economic recovery – Freight Rail has to revise the timing of strategic investments in rail. Albeit with a somewhat scaled-down approach, the objective for capacity creation will continue in the year ahead. A projected 287 locomotives are planned for delivery in the 2017 financial year as part of the 1 064 locomotive renewal programme for the general freight business. The revitalisation of the general freight system aims to create capacity for growth of general freight tonnages and encompasses the manufacture of locomotives, network upgrades, wagon builds, technology improvements and asset maintenance.

Freight Rail remains steadfast in its goal of becoming a ‘Top 5’ rail operator globally. The migration of the rail business to an integrated logistics solutions provider is key to achieving this goal.

The division will continue to develop skills to ensure the future availability of the appropriate balance of competencies to promote volume growth. Going forward, operational excellence and carefully managed labour costs will be essential characteristics of our business.

OPERATIONAL PERFORMANCECore initiatives for 2016

� Investigate and realise diversified revenue opportunities. � Continue to implement the ‘Road to Rail’ programme,

supported by concentrated marketing efforts, a qualitative range of value-added services and a proficient sales force.

� Explore opportunities to create additional revenue from diversified portfolios, such as property.

� Pilot bimodal technologies to create seamless interfaces and to optimise the value chain.

� Grow cross-border volumes and develop Freight Rail’s Africa business, together with related consulting services.

� Promote operational readiness for the new loco deployment programme and refine the required operating models.

Figure 1: Freight Rail network

Rail Infrastructure• 30 400 km of track• 20 953 route km• Core network: 12 801 route km• Network electrification

- 50kV AC (861km)- 25 kV AC (2 309km)- 3kV DC (4 935km)- Diesel (11 974km)

• Axle loading- Main lines at 20t/axle- Ore line at 30t/axle

- Coal line at 26t/axle

Core network Closed lines Lifted lines Branch lines

Sishen

Saldanha

Cape Town

East London

Port ElizabethMosselbaai

Klipplaat

Rosmead

Port Alfred

Cookhouse

Noupoort

Upington

Kakamas

Sakrivier

Calvinia

Hotazel

Aliwal North

Springfontein

Hofmeyer

Maclear

Queenstown

Blaney

Umtata

Port Shepstone

Musina

Durban

Louis Trichardt

Kimberley

Steelpoort

Komatipoort

Phalaborwa

ZebedielaVaalwater

Lephalale

Veertien Strome

Warden

Ladysmith

Virginia

Worcester

Witbank

Groenbult

Polokwane

Nakop Kroonstad

Vryburg

Knysna

Koffiefontein

Douglas

De Aar

Hutchinson

Beaufort West

Pudimoe

Mafikeng

Bethlehem

Oudtshoorn

Ermelo

Belmont

Alicedale

Klerksdorp

Kaapmuiden

Harding

Richards BayBloemfontein

Pietermaritzburg

Harrismith

Modimolle

Ngqura

Porterville

Prince Alfred Hamlet

Vrede

Marble Hall

Franklin

Makwassie

Vermaas

Ottosdal

Vryheid

Middelwit

Nelspruit

Vereeniging

MOZAMBIQUE

SWAZILAND

BOTSWANA

NAMIBIA

LESOTHO

Rail Infrastructure• 30 400 km of track• 20 953 route km• Core network: 12 801 route km• Network electrification

- 50kV AC (861km)- 25 kV AC (2 309km)- 3kV DC (4 935km)- Diesel (11 974km)

• Axle loading- Main lines at 20t/axle- Ore line at 30t/axle

- Coal line at 26t/axle

Core network Closed lines Lifted lines Branch lines

Sishen

Saldanha

Cape Town

East London

Port ElizabethMosselbaai

Klipplaat

Rosmead

Port Alfred

Cookhouse

Noupoort

Upington

Kakamas

Sakrivier

Calvinia

Hotazel

Aliwal North

Springfontein

Hofmeyer

Maclear

Queenstown

Blaney

Umtata

Port Shepstone

Musina

Durban

Louis Trichardt

Kimberley

Steelpoort

Komatipoort

Phalaborwa

ZebedielaVaalwater

Lephalale

Veertien Strome

Warden

Ladysmith

Virginia

Worcester

Witbank

Groenbult

Polokwane

Nakop Kroonstad

Vryburg

Knysna

Koffiefontein

Douglas

De Aar

Hutchinson

Beaufort West

Pudimoe

Mafikeng

Bethlehem

Oudtshoorn

Ermelo

Belmont

Alicedale

Klerksdorp

Kaapmuiden

Harding

Richards BayBloemfontein

Pietermaritzburg

Harrismith

Modimolle

Ngqura

Porterville

Prince Alfred Hamlet

Vrede

Marble Hall

Franklin

Makwassie

Vermaas

Ottosdal

Vryheid

Middelwit

Nelspruit

Vereeniging

MOZAMBIQUE

SWAZILAND

BOTSWANA

NAMIBIA

LESOTHO

Page 2: FREIGHT BOTSWANA MOZAMBIQUE RAIL · operational excellence and carefully managed labour costs will be essential characteristics of our business. OPERATIONAL PERFORMANCE Core initiatives

4TRANSNET INTEGRATED REPORT 20163 TRANSNET INTEGRATED REPORT 2016

Freight Rail

� Optimise high yield flows through the Transnet Value Chain Coordinator (TVCC) across the Transnet Group and introduce the ‘channel management’ approach to optimise identified flows.

� Roll out the ‘Productivity 2020’ initiative and organisational redesign to support a more agile response to business needs.

� Address bottlenecks within the infrastructure network through the capacity deployment model.

� Roll out the ‘ICTM roadmap’, to incorporate key elements of a comprehensive value proposition,

including ‘Lead to Cash’ with an ITP interface, EDI, and track and trace.

� Roll out the capital investment programme to optimise volumes.

� Ensure strategic capital investment to optimise volumes; and revise the capital pipeline in anticipation of market recovery.

� Roll out the ‘Roadmap to Safety’ programme in the rail network and operations environments.

2015 2016 2016 2017Key performance area and indicator Unit of measure Actual Target Actual Target

Density

Northcor Tonkm/Routekm 1,56 2,00 1,3 1,3Capecor Tonkm/Routekm 4,13 4,60 3,7 3,2Southcor Tonkm/Routekm 3,59 2,90 3,5 2,7Natalcor Tonkm/Routekm 6,48 8,70 6,2 6,8RBaycor Tonkm/Routekm 41,13 44,00 40,2 42,1NWestcor Tonkm/Routekm 4,50 5,70 4,3 3,8Eastcor Tonkm/Routekm 3,22 4,10 2,8 3,2NEastcor Tonkm/Routekm 8,38 11,30 8,4 8,3SSaldanha Tonkm/Routekm 61,74 63,00 61,9 57.8Sentracor Tonkm/Routekm 4,90 6,30 5,0 4,9

Service delivery

On-time departure (average deviation from scheduled times)

General Freight Business minutes 79,33 202 (38) 188Export coal minutes (0,58) 75 (43) 60Export iron ore minutes (24,29) 60 (5) 60

On-time arrivals (average deviation from scheduled times)

General Freight Business minutes 200,8 241 87 224Export coal minutes 170 140 195 120Export iron ore minutes 57,1 200 147 195

Market segment competitiveness

Volume and revenue growth

Commodity classification

– General Freight Business mt 90,5 106,1 84,0 97,0– Export coal mt 76,3 77,0 72,1 75,8– Export iron ore mt 59,7 62,0 58,1 60,0Total volumes mt 226,6 245,1 214,2 232,8

Tariffs

Year-on-year weighted average R/ton change – GFB (%) % 3,0 3,0 0,83 3,04

Human capital

Employment equity % 84 84 85 84Training spend % of personnel cost 1,87 2,6 1,9 2,5Employee turnover % 5,00 4 5,2 5,0Employee headcount permanent 29 445 31 136 29 092 29 570

Risk, safety and health

Cost of risk % of revenue 4,8 5,5 5,7 5,5DIFR rate 0,85 1,10 0,9 1,1Number of safety incidents number 629,0 463,0 539,0 334,0Number of derailments – Mainline number 72,0 66,0 84,0 55,0Number of derailments – Shunting number 232,0 191,0 171,0 180,0

Overview of key performance indicators

Table 1: Overview of key performance indicators

2015 2016 2016 2017Key performance area and indicator Unit of measure Actual Target Actual Target

Financial sustainability

EBITDA margin % 43 45,6 41,9 52,9Operating profit margin % 24,6 26,2 12,4 28,4Gearing % 37,3 47,3 52,9 45,1Net debt to EBITDA times 2,89 2,9 4,6 2,6Return on average total assets – excluding CWIP % 8,3 9,1 3,3 7,6Asset turnover – excluding CWIP times 0,34 0,35 0,26 0,27Cash interest cover times 3,6 3,4 2,1 3,6

Capacity creation and maintenance

Capital expenditure R million 25 173 25 181 22 619 13 235

Operational excellence

Asset utilisation

General Freight Business Gtkm/Ntkm 1,43 1,7 1,70 1.70Export coal Gtkm/Ntkm 1,57 1,6 1,56 1.60Export iron ore Gtkm/Ntkm 1,38 1,4 1,38 1.40

Loco-utilisation

General Freight BusinessGTK’000/locomotive/month 5 448 6 123 5 097 5 637

Export coalGTK’000/locomotive/month 26 489 29 028 23 989 28 228

Export iron oreGTK’000/locomotive/month 58 827 56 815 57 920 56 815

Cycle time

Export coal hours 63,76 56 63,45 56Iron ore hours 84,79 76 90,14 76

Wagon turnaround time

GFB 10,60 10,0 11,75 10,10

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5 TRANSNET INTEGRATED REPORT 2016 6TRANSNET INTEGRATED REPORT 2016

Freight Rail

Financial performance review

Table 2: Financial performance review for the 2016 Financial Year

Year ended Year ended31 March 31 March

2016 2015 %Salient features R million R million change

Revenue 36 952 37 758 (2,1) – General freight 19 403 20 999 (7,6) – Export coal 10 757 10 578 1,7 – Export iron ore 5 616 5 250 7,0 – Other 1 176 931 26,3

Operating expenses (21 484) (21 517) (0,2) – Energy costs (4 336) (4 813) (9,9) – Maintenance (1 595) (1 173) 36,0 – Materials (795) (963) (17,4) – Personnel costs (11 949) (11 567) 3,3 – Other costs (2 809) (3 001) (6,4)

Profit from operations before depreciation, derecognition, amortisation and items listed below (EBITDA) 15 468 16 241 (4,8)Depreciation, derecognition and amortisation (10 874) (6 951) 56,4Profit from operations before items listed below 4 594 9 290 (50,5)Impairments and fair value adjustments (768) (536) 43,2Net finance costs (4 163) (2 811) 48,1Profit before taxation (337) 5 943 (105,7)Taxation 13 (1 685) (100,8)Profit after taxation (324) 4 258 (107,6)Total assets (excluding CWIP) R million 145 771 141 376 3,1

Profitability measuresEBITDA margin1 % 41,9 43,0 (1,1)Operating margin2 % 12,4 24,6 (12,2)Return on average total assets (excluding CWIP)3 % 3,2 8,3 (5,1)Asset turnover (excluding CWIP)4 times 0,26 0,34 (23,6)Capital investments5 R million 22 619 25 173 (10,1)Capitalised maintenance expenditure R million 7 103 7 631 (6,9)

EmployeesNumber of employees (permanent) number 29 092 29 445 (1,2)Revenue per employee R million 1,27 1,28 (0,8)

1 EBITDA expressed as a percentage of revenue.2 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of revenue.3 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of average total

assets excluding capital work in progress.4 Revenue divided by average total assets excluding capital work in progress.5 Actual capital expenditure (replacement + expansion) excluding borrowing costs and including capitalised finance leases.

PERFORMANCE COMMENTARYFinancial sustainability

� Revenue for the year decreased by 2,1% to R36 952 million (2015: R37 758 million). This is mainly attributable to the 5,4% volume decrease, while the average rand/ton increased by 3,4% to R168,74 (2015: R163,22). The average rand/ton increase was lower than the average CPI of 7% over the same reporting period in the previous year.

� Net operating expenses decreased by 0,2% to R21 484 million (2015: R21 517 million). This was achieved despite an average increase of 5,6% in personnel costs (excluding training). In line with the reduction in volumes, energy costs were lower compared to the prior year, while cost saving initiatives were implemented to reduce other costs.

� EBITDA margins declined by 1,1% to 41,9% (2015: 43,0%), while operating margins declined by 12,2% to 12,4% (2015: 24,6%). Deterioration in margins is attributable to a decline in revenue of 2,1%, as well as a significant increase in depreciation charge, which impacted negatively on operating margins. The year-on-year increase in depreciation charge is largely attributable to an increase in the asset base, subsequent to the revaluation of infrastructure assets to fair value. In view of lower than expected volume performance, Freight Rail implemented cost saving initiatives and reduced discretionary costs, which to some extent mitigated the negative impact of lower revenue on profitability margins.

� Financial gearing deteriorated to 52,9% (2015: 37,3%). The unfavourable performance on this metric is attributable to a 53% increase in borrowings to fund the capital investment programme on the back of a 9,2% reduction in reserves.

� In line with the decrease in revenue year-on-year, as well as an increase in value of the asset base, the asset turnover ratio deteriorated to 0,26 times (2015: 0,34 times).

� Return on average total assets (excluding CWIP) decreased to 3,3% (2015: 8,3%). The poor performance of this KPI is attributable to a decrease in operating profit on the back of a higher asset base, and a higher depreciation charge for the financial period.

� In line with the 53% increase in total long-term borrowings to R71 134 million (2015: R46 500 million), and a 4,8% decrease in EBITDA to R15 468 million (2015: R16 241 million), the net debt to EBITDA ratio increased to 4,6 times (2015: 2.9 times).

� Cash interest cover decreased to 2,1 times (2015: 3,6 times). The unfavourable performance of this ratio was mainly due to lower-than-planned cash generated from operations after working capital changes.

� Revenue per employee decreased by 0,8% to R1,27 million (2015: R1,28 million). The marginal

deterioration on this measure compared to the previous year was mainly due to the year-on-year revenue decrease of 2,1%, while permanent headcount remained relatively stable at 29 092 employees compared to 29 445 in the previous year.

Looking ahead � Accelerate diversified revenue opportunities, including

value-added services (clearing, last mile, warehousing), property, telecoms infrastructure surplus capacity and advertising.

� Optimise yield through a commodity mix. � Continue to optimise cash and working capital

management. � Implement initiatives to reshape the core of the

business through costs optimisation (both capital and operational costs) in view of persistent tough economic conditions.

Capacity creation and maintenance

� The continued drive to optimise capital expenditure in alignment with market demand is evidenced by the 10,2% saving on R22,6 billion capital spend compared to a budget of R25,2 billion. This also represents a 9,5% reduction in capital expenditure from the previous year. Of the capital amount spent, 38% was allocated to the acquisition of new locomotives, with 8% allocated to the maintenance of existing locomotives, 24% to the building, maintenance and upgrading of existing wagons, and 14% to infrastructure upgrades and maintenance.

� Two locomotive contracts were delivered in full, on time and within budget: 100 x 21Es from China South Rail (CSR) deployed to the export coal line, and 60 x Class 43Ds from General Electric (GE) deployed to the general freight business.

Export coal

� The total investment in infrastructure for the year amounted to R845 million.

� The export coal line expansion to 81mtpa was 70% complete at the end of March 2016. The Transnet portion of the project is on target for completion in the third quarter of 2017. The Eskom portion will be completed in 2020.

� Coal line expansion and sustaining programmes that have been completed, or are nearing completion, include: ú Locomotive turntable at Richards Bay; ú Ermelo security walling; ú Substation upgrades at Blackhill, Ogies,

Broodsnyersplaas, Hamelfontein and Rietvleirust, and a new substation at Blinkpan; and

ú The long loops at Saaiwater and Blackhill will be completed in the 2017 financial year.

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7 TRANSNET INTEGRATED REPORT 2016 8TRANSNET INTEGRATED REPORT 2016

Freight Rail

Export iron ore

� Total investment for the export iron ore corridor amounted to R505 million in 2016.

� Programmes completed, or nearing completion, include: ú The traction power upgrade to run full electric trains;

and ú The third tippler at the port.

General freight

� Total investment in general freight amounted to R3 351 million.

� Capital has been invested in assets to support general freight traffic growth, with the balance of 1 064 locomotives to be procured over the next three years. The amount spent on these locos in 2016 totalled R6 894 million. In addition, 2 100 new wagons were procured at a cost of R2 257 million.

� Progress on the execution of rail network capitalised maintenance for network renewal for 2016 includes: ú Rail replacement: 314km of new rail installed. ú Sleeper replacement: 404 176 sleepers installed. ú Ballast screening: 360km of ballast screened. ú Turnout replacement: 133 new turnouts installed. ú Formation, drainage, OHTE mast and foundation

rehabilitation. ú Replacement of catenary wire with tiger wire. ú Circuit breaker replacement. ú Replacement of a remote control system and train

detection system.

Looking ahead � In response to the market downturn, capital

expenditure for the year ahead will be reprioritised and Freight Rail will continue to implement planned optimisation initiatives.

� An investment of R13 235 million has been secured for capacity creation, infrastructure renewal and modernisation: ú On the export coal line, R309 million will be spent on

direct capacity expansion in 2017 and R316 million on infrastructure renewal capitalised operating expenditure. Most of the line and substation work will be completed, except for the Eskom power upgrades.

ú On the export iron ore line, R29 million will be spent on direct capacity expansion in 2017 and R116 million on infrastructure renewal capitalised operating expenditure. The major capacity expansion work for 60mtpa throughput has been completed.

ú Spending on the manganese export project is planned at R493 million. Phase 1 work will be completed in the 2017 calendar year.

ú Spending on the newly-approved Waterberg Stage 2 project is planned at R67 million. This is the beginning of the stepped capacity increase of coal exports from the Waterberg, from 6,12mtpa to 24mtpa.

ú General freight business infrastructure spending is planned at R1 655 million for the year ahead.

ú The division plans to deliver 287 locomotives of the 1 064 locomotive programme in the 2017 financial year.

ú Infrastructure upgrades will be prioritised to growth corridors.

� Investment in support of the Freight Rail Road-to-Rail Strategy: ú New bimodal technologies, offering ‘door-to-door’

service by integrating road and rail, will be rolled out on the Cape and KwaZulu-Natal corridors once negotiations are concluded with bidders.

ú The Tambo Springs and Pyramid intermodal hubs will be developed in the year ahead.

ú The division will invest in car wagons. � Implementation of major capital programmes (in

execution phase): ú The manganese project Phase 1 is at 80%

completion, while Phase 2 is at 16,4% completion.

Market segment competitiveness

� Freight Rail saw a reduction in total rail tonnage when compared to the previous year at 214,2mt (2015: 226,6mt).

� The impact of slow economic growth and the overall challenging macro-economic environment was particularly severe in a number of sectors of the economy, as evidenced by regressive performance in most Freight Rail businesses, with the exception of the Container and Automotive business unit.

� Coal volumes decreased by 5,5% to 72,1mt compared to the previous year (2015: 76,3mt). A telling effect of the market slump has been the impact on the ability of emerging miners to mine cost-effectively and remain sustainable. The main external contributing factor to export coal volumes being below target was the cancellation of orders from mines owing to challenging market conditions.

� During the year, the division’s iron ore and manganese business unit faced the challenge of managing the impact of the lowest commodity prices in 15 years.

The iron ore export line recorded a 2,8% deterioration in volume performance to 58,0mt (2015: 59,7mt). Despite the decline in the manganese and iron ore markets in 2016, manganese realised export volumes of 7,2mt.

� General freight recorded a reduction in growth of 7,2% to 84mt (2015: 90,5mt). The slowdown of the global economy constrained the domestic economy and particularly the demand for South Africa’s mining commodities.

� Container and automotive volumes increased by 4,2% to 14,9mt (2015: 14,3mt), evidencing continued success in growth of the market share arising from a focus on the ‘road-to-rail’ modal shift. Furthermore, in response to customers’ requirements for timeous delivery of time-sensitive import containers from the Port of Durban to the City Deep inland terminal, the average hours taken from vessel discharge to being stacked at the inland terminal improved by 13% to 86 hours (2015: 99 hours).

� Mineral mining and chrome volumes decreased by 1,4% to 20,7mt compared to the prior year (2015: 21,0mt). The reduction in volumes is mainly attributable to overall challenging market economic conditions affecting the demand for these commodities, with declining commodity prices for chrome, ferrochrome and magnetite continuing to exert pressure on costs.

� Steel and cement volumes decreased by 15,9% to 17,5mt from the prior year (2015: 20,8mt), mainly due to the slowdown in economic growth affecting customer demand. The global downturn resulted in an unfavourable financial position for many steel customers, with some filing for business rescue during the year. In addition, the lifting of provisional anti-dumping charges on foreign cement continues to reduce South African cement producers’ market share. Growth in the cement market is anticipated to remain static in the short term.

� The agriculture and bulk liquid portfolio decreased by 13,3% to 9,1mt (2015: 10,5mt). The severe drought significantly affected the agricultural sector, especially the maize rail export programme. However, the business unit maintained volume performance, with growth in the chemicals, FMCG and fuel sectors.

Enabling regional integration

Freight Rail is in the process of developing a regional integration strategy through the North-South Corridor Investment Project Initiative led by the NEPAD Business Foundation, and co-sponsored by the Division and Grindrod. The project set up a Joint Operating Centre in Bulawayo, which is operational and houses railway operators from Freight Rail, Zimbabwe operators, National Railway of

Zimbabwe (NRZ) and Beitbridge Bulawayo Railways (BBR), Zambia Railways Limited and La Société Nationale des Chemins de Fer du Congo (SNCC) from the DRC. The operators focus on integrating the planning and execution of cargo train operations between South Africa, Zimbabwe, Zambia and the DRC.

Through the Joint Operating Centre (resourced by all the railways on the corridor) located in Bulawayo, teams are developing the following project components:

� An integrated operational philosophy, managed through the Joint Operating Centre;

� A ‘one corridor’ investment plan; � Co-ordinated and agreed maintenance and safety

standards; and � A skills development plan across the corridor.

The outcome of such alignment by the operators and engineers will see a standardisation in operating procedures, as well as enhanced maintenance and safety standards between the four countries.

The role of the Joint Operating Centre in the joint planning and execution of cargo trains has also resulted in significant efficiency gains. The transit time for the of the trains has been reduced by half, from 14 days to seven days between Durban and Ndola.

Looking ahead � Freight Rail will pursue closer alignment with customers,

Engineering and Port Terminals to ensure optimal availability of resources and volume execution across the supply chain.

� In addition to a number of ‘Road-to-Rail’ initiatives being pursued by Freight Rail business units, opportunities are being explored in the fast moving consumer goods (FMCG) sector. Freight Rail will continue to work on key elements of the value proposition, such as smart security measures, distribution hubs, tailored products for FMCG sector, operational excellence, express train, on-time delivery and excellent customer service. The division will qualify and source the requisite investment required to support these initiatives.

� The division will continue to cement relationships and agreements with alliance partners and logistics service providers to support the Road-to-Rail strategy.

� Bimodal technologies will be piloted on Capecor and Natcor to grow volumes and market share on the corridors.

� The division will develop digital support and marketing tools, as well as logistics skills, to enhance customer value propositions.

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� The regional integration growth effort will be focused on three corridors: the North-South, East-West and the Maputo corridors. The strategy aims to promote aligned planning and investment in the revitalisation of Southern Africa Railways Association (SARA) infrastructure in support of growth and development of these corridors across the region. Transnet is a key role player in many such revitalisation programmes.

� From an operational perspective, focus will continue on the establishment of Joint Operations Committees – joint structures set up with all players in the supply chain (such as the various national rail operators, terminal operators and ports). The success of this approach has been most evident on the Maputo corridor, where lessons learnt are being applied to other corridors.

� The ramp-up of the Steel Hub in Gauteng will enhance cross-border traffic with steel customers between Johannesburg, Maputo and Zambia.

Operational excellence

Grow volumes and market share

� Freight Rail railed a total of 214,2mt against a target of 245,1mt, representing the achievement of 87,4% of target (and 12,4mt or a 5,5% reduction against 226,6mt in 2015) in an extremely challenging business environment.

� Performance on both the export coal and iron ore export heavy-haul corridors was also affected by the slowdown of the global economy. Buyers of mining commodities, particularly China, have been importing fewer tons from South Africa. In response to the sluggish economic outlook, domestic and global miners based in South Africa have started to defer investment plans by reducing capital expenditure and shelving mining projects.

Improve operational efficiency and service delivery

� Implementation of the ‘channel management’ approach commenced in November 2015 to improve customer service across the business through an improvement in KPIs, such as on-time departures, on-time arrivals and train utilisation.

� Overall operational efficiency performance (measured in net ton kilometre [NTK ’billion]) declined by 5,4% from the prior year.

� Rail network-related challenges, such as derailments, hook-ups, power failures, cable theft and asset vandalism, contributed to lower volumes railed as these incidents resulted in unscheduled maintenance and interventions leading to delays on the network.

� There were significant improvements in the general freight business, as well as in the export coal and export iron ore businesses with respect to on-time departures. This is the result of greater accountability and collaboration between corridor managers and teams, and improved compliance with the Integrated Train Plan (ITP) and collective focus on re-planning and dynamic ITP updating.

� While the general freight business reflected an improvement in on-time arrivals, the export coal and iron ore lines did not perform as well as anticipated.

� The export coal line was affected by Eskom power failures. Additional en-route delays owing to unscheduled maintenance and locomotive failures also contributed to the deviation.

� Export iron ore line performance was affected by derailments and yard blockages owing to tippler delays and loading challenges.

� General freight ‘on-time departures’ improved by 148%. This improvement can be attributed to an ongoing drive and strict management by the National Command Centre (NCC) to ensure that trains depart on time.

� ‘On-time arrivals’ for general freight reduced by 56,7% compared to the previous year. While the general freight business reflected an improvement in on-time arrivals, the export coal and iron ore lines did not perform as well as anticipated. The export coal line was affected by Eskom power failures, in addition to en-route delays owing to unscheduled maintenance and locomotive failures.

� General freight locomotive efficiency declined by 7,5% to 5,076 GTK/Loco/month (2015: 5,448). Locomotive efficiency (GTK) performance is directly influenced by volume performance: lower volumes result in lower GTK.

� Asset utilisation (GTK/NTK) declined marginally or remained stable between 2015 and 2016, mainly owing to fewer volumes railed as a result of sluggish economic growth. Specifically, the reduction for general freight was at 1,16% and export coal at 0,64% compared to the previous year, while export iron ore performance remained unchanged.

� An increase of 17,5% was recorded for general freight wagon turnaround time, mainly as a result of en-route delays.

Looking ahead � Freight Rail will continue to implement the locomotive

programme to improve operations and customer service.

� The division will continue to implement the channel management concept to improve train plan execution.

� Service design will be repositioned to improve the division’s response to new traffic and existing service code requests.

� A continued focus on a scheduled railway will enhance the on-time performance of wagons.

� The division will intensify its focus on yard countdown processes and tools.

� Lean Six Sigma initiatives will ensure continuous process improvements.

� Network maintenance will be intensified to increase the frequency of condition assessments and preventative maintenance to enable greater volume throughput on the network.

Human capital

� Freight Rail achieved a permanent headcount of 29 092 employees (target: 31 136).

� Black employees represented 85,3% of the total employee base (target: 84%).

� Female employees represented 27,8% of the total employee base (target: 37%).

� People with disabilities represented 2,8% of the total employee base (target: 3,0%).

� An automated ‘time and attendance’ solution was successfully deployed at Ermelo, with effect from 1 November 2015.

� Automated ‘personnel cost planning’ (PCP) and ‘compensation management’ solutions were developed and implemented.

� All management employees’ tertiary qualifications were verified by an external party, and the results were captured on SAP HCM.

� Continued transformation initiatives have enabled Freight Rail to sustain its Level 2 B-BBEE status and to enhance employment equity scores.

Organisational readiness

High-performance culture � Freight Rail achieved the highest Culture and

Engagement scores across the Transnet Group. Freight Rail achieved a Culture score of 4,03 (80,6%) compared to the overall Transnet score of 3,83 (76,6%) and an Employee Engagement score of 4,16 (83,3%) compared to Transnet’s overall score of 3,95 (79%). This achievement can be attributed to sustained efforts to implement the ‘iBelong’ programme through initiatives such as: ú The Rewards & Recognition programme; ú Inspirational Leadership programmes; ú Anti-bullying campaigns; and ú Diversity Management programmes.

� In keeping with our aspiration to be one of the Top 5 Railways in the world, Freight Rail achieved the prestigious Top Employer Accreditation in 2015.

Skills development � Training was delivered in line with the cost-saving

directive resulting in 1,9% actual labour costs achieved against a 2,3% target on training spend.

� Overall, 244 engineering bursaries were awarded against the budget of 391.

� Overall, 48 technician bursaries were awarded against a budget of 100.

� A total of 399 sector-specific training interventions were budgeted for, whereas 640 interventions were realised.

� The total training target for the year was exceeded by 55%: a target of 22 688 trainees against an achieved target of 34 943.

Table 3 shows the increase in the number of engineers and technologists on the engineering empowerment programme (EEP), while Table 4 reflects performance for youth employment and development.

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Table 3: Number of engineers, technologists on the engineering empowerment programme (EEP)

Actual Target ActualTraining area 2015 2016 2016

Technicians in training 113 100 48Engineers in training 213 391 344Young professionals in training 21 60 62

Table 4: Youth employment and development strategy

Actual Target ActualEmployment/Development 2015 2016 2016

Youth employed as % of total employees 48,8% n/a 44% ofpermanent

staffYouth developed as % of all employees trained 53,5% 52% 69,9%,

Health and safety

� A 14% improvement score was achieved for all safety incidents in the 2016 financial year.

� During the year, key recommendations were made to embed a sustainable safety culture through: ú Supervisory training, coaching and development

for safety-critical and safety-related grades; and ú Implementation of the Human Factor standard

(SANS 3000-4). � The division further embedded its safety culture

through the implementation of the Road Map to Safety (R2S) interventions, including: ú Competence management: trained supervisors,

simulation training for train crews and TCOs, continuation of on-the-job training for train drivers, introduction of continuous professional learning;

ú Rail hazard management: completion of risk assessments, implementation of Annual Safety Improvement Plan (ASIP); and

ú Process control: fault management, SAP asset configuration, SAP planning and supervision and compliance process improvement.

� Accident prevention training was improved through: ú Roll-out of OHSAS 18000-1 in CAB and Coal

business units to support the Integrated Management System;

ú Roll out of OHSAS 18000-1 Certification for IOM, SAC, MMC & ABL business units; and

ú Roll-out of an effective safety rewards and recognition programme.

Governance and ethics

Table 5: Freight Rail’s top 5 risks and key mitigating activities

Key risks Mitigation activities

Ensuring financial sustainability in the context of macro-economic challenges

� Assessing and monitoring foreign currency exposure within projects and implementing a capital scrubbing and optimisation process to prioritise capital and projects accordingly.

� Enhancing dispute resolution processes and monitoring cash flows on locomotive procurement.

Growing volumes within difficult market conditions

� Developing and stimulating business continuity plans for critical points of failure with key stakeholders.

� Validating and declaring ‘achievable’ volumes, and facilitating sign-off for traffic files with all key stakeholders.

� Fast-tracking and monetising Road-to-Rail opportunities in collaboration with customers, road hauliers and supply chain partners where appropriate.

� Deploying digital technologies and innovation to improve service reliability, responsiveness and customer service.

Uncertainty in the supply of Eskom energy

� Approving and implementing alternative power generation options. � Implementing ISO 50001 standard in Freight Rail. � Freight Rail’s Train Control Officer (TCO) support system will visually alert TCOs to the

risk of network overloading. A sub-meter energy management system will be introduced on the coal line.

Maintaining a competitive market position

� Growing the productivity edge through Lean Six Sigma and continuous improvement principles to reduce waste and variability.

� Executing projects on time and delivering enhanced value propositions to customers. � Managing operational excellence to world-class standards and ensuring superior quality

of service. � Building market reputation through reliable and efficient service delivery.

Building appropriate intellectual property for key rail products

� Enhancing research and development, and producing and patenting various concept designs, e.g., standard gauge bogies, a lightweight wagon for the African environment, a traction motor design scale prototype, an auxiliary power system concept design, etc.

� The Road-to-Rail strategy will develop a sustainable distribution hub and leverage digital value propositions for FMCG customers. It will further help to embed Order to Execution processes and the ‘channel management strategy’, while ensuring a dedicated taskforce is in place to capture opportunities.

� Digital customer offerings will increase the ease of doing business by piloting the CAB new-generation offering by May 2016, and integrating bulk volumes by end July 2016.

� Revenue diversification initiatives will optimise the property portfolio through value-added services (clearing, last mile, warehousing), telecoms infrastructure surplus capacity and advertising.

� A revamped sales and marketing organisation will facilitate training and development to up-skill the sales force to exploit the commercial opportunities of the Road-to-Rail initiative.

� Capital spending will be prioritised through the general freight business.

Looking ahead � Freight Rail will focus on the following key ‘iBelong’

initiatives in the year ahead: ú Diversity Dialogue sessions; ú Inspirational Leadership Development Programmes; ú Mainstreaming gender and disability issues

throughout the Human Capital value chain; ú Maintaining Freight Rail’s Top Employer

Accreditation; and ú Implementing wellness programmes to enhance

employee well-being. � The ‘Productivity 2020’ programmes will be rolled out

to promote improved productivity. The programmes will promote an enhanced crew output-based pay structure, driver multi-skilling, incentives for the sales force to encourage road-to-rail volume migration, customer service training and an operational performance framework to drive productive operational behaviour.

� A new Cloud Solution of the SAP Human Capital Management system will be implemented to improve overall talent management.

� Training and development initiatives will include: ú Rollout of the Apprentice Programme to develop

skills and leadership capabilities in bargaining unit structures;

ú The implementation of the Rail Operations Management Programme in conjunction with Glasgow Caledonian University and the University of Johannesburg; and

ú Customer service training programmes.

OPPORTUNITIES � Market opportunities are emerging for the transportation

of beneficiated products, containers, palletised products, as well as total logistics offerings. Freight Rail’s Road-to-Rail strategy targets significant growth in the Container and Automotive sector, supported by relevant technologies, customised value propositions and an evolving entrepreneurial sales culture.

� Investment in bimodal technologies will contribute to intermodal capability and corridor densification.

� The regional integration focus projects significant growth opportunities (volumes and revenue) for rail.

� Improved utilisation of underutilised assets will benefit key corridors and certain wagon types.

� Private sector participation (PSP) will expand opportunities in key corridors.

� The 1 064 locomotive rollout will contribute to improved operational efficiencies and customer experience.

� Strategic alliances and partnering with logistics service providers will facilitate opportunities to attract rail-friendly traffic back to rail.