Our performance and outlook Acting Group Chief Executive Review
I recently helped dock a ship liner via a series of cell phone conversations with our port team. The success of it was exhilarating and a moment of great pride as we docked the vessel two days before its due date. The exuberance was short lived as relief set in. As a result of our collective ‘can do’ attitude on that day, a major automotive client could meet its critical business objectives. Relief, however, turned to frustration given procedural red tape that could have delayed the process. I was attempting to help remotely execute what is standard procedure at our ports, the failure of which would have had catastrophic consequences for our customer, and by extension for us as well. I recall this incident here to emphasise the need for procedures and processes that are appropriately adaptable and reliable to support our business priorities with due urgency; and to remind our people to be personally inspired and accountable to achieve excellence in their daily tasks. We must put the customer’s priorities first, no matter what it takes.
2019 was a challenging year for me, personally and professionally, firstly, stepping into the position of Acting Group Chief Financial Officer, and then into the position of Acting Group Chief Executive. I am both humbled and inspired by the opportunity to serve our people as we change course, quite abruptly, from the accelerated capital investment approach of the seven-year Market Demand Strategy as well as the corrosive effects of ‘state capture’ on our business.
The task at hand requires that we first strengthen our internal controls, particularly as they relate to our procurement environment and investment activities; secondly, that we stabilise and restore our core operations; and thirdly, that we rectify the maintenance backlog and broader lack of coordination in our investments through a less capital-intensive approach to take full advantage of the Company’s recent expansion projects. A bold refocusing is critical to ensuring Transnet’s rail, ports and pipeline infrastructure operates at globally competitive standards. Transnet can capitalise on emerging opportunities but, only if the Company can significantly improve performance in its core business.
How we disappointed
During May 2019, I presented my views on the impact of the scourge of state capture on our business at the Zondo Commission of Inquiry1. Before addressing our performance context and results for the year, I would like to share my concluding thoughts on the matter, as stated by me, as well as other Transnet employees (past and present) and representatives of MNS Attorneys at the inquiry.
By all accounts, Transnet was successfully manipulated to benefit a small group of individuals and entities through the following modus operandi:
- Significant procurement transactions for goods and services were executed, requiring willing participants both internally and externally; and
- Local consulting firms were inserted by certain Transnet executives to identify commercial opportunities using Transnet’s supplier development mechanisms. In some instances, it transpired, companies were paid without having performed any work.
The incumbent Board of Directors and executive management have engaged in much debate and introspection around how this phenomenon took root, and the extent to which it had swept up willing enablers as it gained momentum. Following our own forensic investigations, and in collaboration with the Zondo Commission, Werksmans and MNS Attorneys, and various law-enforcement agencies, it is emerging that the large-scale corruption manifested due to considerable breaches of corporate governance and the manipulation of certain accountability processes and policies without due regard for the monumental risks and burdens placed on the organisation’s financial sustainability.
We have subsequently introduced measures to enable an immediate improvement in our procurement processes and controls, including:
- Bringing in enhanced Treasury risk management and oversight;
- Embedding financial and capital controls that should exist – and have in the past;
- Amending the Company’s delegation of authority to limit the authority of individuals in signing off on procurement transactions and capital decisions;
- Implementing end-to-end contracting systems;
- Significantly improving oversight and assurance processes; and
- Implementing a remedial plan to address:
- the prevention, identification and reporting of fruitless and wasteful expenditure;
- irregular expenditure that does not comply with operational policies;
- losses through criminal conduct; and
- the collection of all revenue.
Notwithstanding the flawed judgments of some of our people coming to light during the Zondo Commission, I sincerely believe that most of our 55 000-strong Transnet community are good, committed and passionate people who have given of themselves for the benefit of the organisation and all that it stands for. Transnet is a significant entity in the lives of South Africans and the local business community, and together, we remain committed to the organisation’s success and its developmental mandate.
The year in review
Economic overview and financial capital performance
South Africa’s economy has performed sluggishly during the financial year, contracting at times and showing signs of recovery at other times. There was a short-lived technical recession during the second quarter of the 2018 calendar year, with a growth of 1,4% in the fourth quarter, contributing to an overall growth rate of 0,8% for the year. The marginal growth was a result of a decline in activity in the agriculture, transport, and manufacturing industries, as well as reduced activity in Government sectors and trade. We saw energy prices fluctuating markedly in the second half of 2018, mainly reflecting supply factors, with sharp falls towards the end of the year. The market challenges are perhaps best exemplified by South Africa’s unemployment rate increasing to 27,5% at the end of the third quarter of 2018, averaging 25,71% from 2000 until 2019.
Regardless of the tough economic and operational contexts, the Company continued to achieve notable results, confirmed by increased EBITDA at 3,8% and a net profit of R6,0 billion for the year – a 24,7% increase on the prior year.
The Company’s financial capital outcomes for the year are outlined in more detail in the Group Chief Financial Officer’s review and in Our performance and outlook.
Continued investment in sustaining our manufactured capital
We continued to execute our asset investment programme, spending R17,9 billion, a 17,9% decrease from the previous year (2018: R21,8 billion). Our capital investment for the year ended 31 March 2019 represents R3,2 billion invested in the expansion of capacity, mainly on the integrated freight network, while R14,7 billion was invested to maintain capacity, mainly in the rail and ports divisions, taking the total investment for the past seven years to R183,5 billion.
More specifically, as at 31 March 2019, the cumulative expenditure incurred on the 1 064 locomotive contract amounted to R33,6 billion, with R3,9 billion invested in the current year. A total of 525 locomotives had been accepted into operations, with a further seven locomotives delivered and undergoing acceptance testing. Additionally, Freight Rail and Transnet Engineering embarked on a programme to build 318 CR13 wagons for the iron ore line, and 169 CR19 wagons for the General Freight Business. For the year ending 31 March 2019, a total of 393 wagons were manufactured, commissioned and accepted into operations by Freight Rail, resulting in a capital investment of R607 million.
We highlight other sustaining infrastructure investments on of this report here.
Commitment to our customers
To restore the credibility of our state-owned institutions, both in South Africa and internationally, we must stabilise and strengthen our operations to deliver sustained value. While our infrastructure provides the engine for economic growth, our customers fuel Transnet’s momentum forward. Our seventh consecutive annual customer satisfaction survey raised several concerns, including declining rail performance levels, poor port productivity, poor customer communications and a lack of integration on key customer touchpoints. Greater effort is required to satisfy our customer’s needs.
During the year, we hosted integrated customer and industry engagements to better understand their requirements and to discern where we are not measuring up. The engagements included customer breakfasts and customer steering committees; and specific forums, such as the NAAMSA Automotive Industry Supply Chain Forum and the Container Liner Operators Forum. Constructive outcomes of the proactive engagements included concluding long-term take-or-pay contracts with eight manganese clients, as well as signing an internal Transnet Customer Charter (in September 2018) to drive a customer-centric culture in the Company.
We detail some of our proud moments during the year, when we excelled beyond the basics here.
Safety and security performance in our operations
Safety and organisational well-being
It was gratifying to see that disabling injuries declined in our operations, with the Company’s disabling injury frequency rate (DIFR) decreasing from 0,73 in 2018 to 0,71. However, we still experienced an unacceptably high occurrence of safety incidents during the year, losing four colleagues and 134 members of the public to fatal accidents in and around our operations. As leadership, we are mindful of the inherent safety challenges in our operations and are determined to improve Transnet’s safety performance by implementing global-standard safety measures and initiatives. That said, employee safety and well-being are not simply the responsibility of management. It is imperative that all our people internalise a culture of self-preservation and safety consciousness, which, I believe, starts with self-confidence and pride in doing purposeful and productive work every day. It is also concerning to note that both our planned and unplanned absentee rates continued an upward trend from the prior year, with our overall unplanned leave cost to company at R614,3 million (2018: R585,1 million) and our planned sick leave cost at R454,8 million (2018: R439,7 million).
With the organisation’s painful governance failures coming to light, as well as the challenging working conditions I describe further on in this review – especially at our ports – it would be fair to assume that low employee morale was a major contributor to absenteeism. While we can empathise, we owe it to ourselves and our stakeholders to rebuild our collective confidence and to recommit to personal accountability and ethical business practices. Without these qualities we cannot be the company our customers, Shareholder and the people of South Africa need us to be. At the time of publishing this report, management had embarked on an employee engagement programme to determine and address main areas of concern as part of a remedial action plan. More on this further on in my review.
Security, theft and community unrests
As leadership, we are concerned about the frequency and severity of the impacts of security incidents and theft in our operations during the financial year, which included cable theft, derailments and community unrest, particularly on the Export Coal line. Overall, we experienced 65 running line derailments, and 153 shunting derailments.
Derailments, suspected cases of cable theft and vandalism, as well as incidents of coal, chrome and petrochemical spillages also caused significant environmental incidents. These incidents have ripple effects on our ability to deliver on planned volumes and to comply with environmental regulations. They further cause tensions with adjacent communities, incur high remedial costs and affect our reputation. Our divisional managers must create sufficient awareness of the integrated nature of our operations and the potential trade-offs of working in a highly industrialised operating environment. We cannot look at issues of security and theft as separate from commercial sustainability, stakeholder relations, environmental compliance and the reputational impacts they may have for us as a company.
Preserving our natural capital
To plan effectively for our future infrastructure requirements, it is critical that we consider the reliability of water access and future water quality in our national operations. According to the Department of Water and Sanitation, without intervention, South Africa faces a deficit of about 3 000 billion litres of water per year by 20302. With our national operational footprint, Transnet’s operations are particularly exposed to climate change impacts and water-access challenges. During the year, we participated in the Carbon Disclosure Project: Water and achieved a “C” score3, highlighting a critical need for the business to step up its water stewardship efforts. A Transnet-wide water strategy, which would consider water-saving mechanisms and alternative water sources, such as setting up desalination and recycling facilities, will be developed in the coming financial year.
With the introduction of carbon tax to South Africa in June 2019, businesses are encouraged to implement measures that will reduce greenhouse gas emissions, and to mitigate costs in the value chain. Transnet views the tax as an opportunity to motivate for, and to provide the solution of shifting more cargo from road to rail, especially for hauling large volumes of high-density freight over long distances. To this end, Freight Rail achieved a meaningful annual contribution to reduce carbon emissions in the transport sector through its ‘rail tonnage gains’ of 1 650 266 tonnes, with 110 078,8 tCO2e carbon emission savings.
More detail on our natural capital performance is reported in the operational performance.
How we will recover
In many respects, we should thank brave and pervasive journalism for lifting the lid on corruption in our Company and our wider social context in recent years. Judge Professor Mervyn King, Chairman of the IIRC Council4 suggests that we have entered a new age of immediacy in which society has ‘radical transparency’ at its fingertips through social media and will no longer accept wrongful acts committed by companies. As a SOC, with a national mandate to better the lives of all South Africans, we would do well to keep this top of mind.
For me, ‘radical transparency’ is about visibility and ‘radical authenticity’ – seeing it, and saying it as it is. My first months as Acting Group Chief Executive were concerned with understanding what our people really think and feel, where they need support, and what they need in their jobs to thrive. As the executive, we have been inspired by the notion of visible and accessible leadership, as demonstrated by the current Transnet Board of Directors and Shareholder. Accordingly, we embarked on a series of operational site visits and ‘walk-abouts’ at the ports, which culminated in a report on our findings to the Transnet Chairperson. We endeavoured to meet as many employees as possible. In a 72-hour period, we met approximately 2 500 people from Port Elizabeth, Durban and Cape Town. We met the 5am shift workers and appreciated their dedication to wake up three hours earlier to make their way to work on time. We met staff going off shift at 10pm and realised the challenge this posed to them spending quality time with their families. We were taken aback though at their claims that this was the first time that they had met any of the executives from Johannesburg. People shared with us their concerns about challenging working conditions, which included absent operational equipment, poor condition of assets, maintenance breakdowns, and facilities that require urgent attention. They showed us buildings with shattered windows, broken lights and cracked shower doors. Overall, we found marked differences between the quality of amenities between the ports, so much so that we could not believe we were in the same Transnet.
I took from this experience that the small stuff matters, and that we cannot expect our people to take pride in their work if Transnet as a company does not show pride in them first, by ensuring the most basic of dignified working conditions. Calls to ‘excellence’ and ‘customer centricity’ are meaningless if people feel unacknowledged, insecure and uncomfortable in their immediate surroundings. We also know that economically strapped people have few economic options and that corruption thrives upon weaknesses in key economic, political and social institutions.
As Acting Group Chief Executive, this may be my first and final public call to action. As such, I am appealing to divisional managers to mobilise and to provide lasting, implementable solutions to our teams on the ground. As the Executive Committee, we have activated teams to assist with the state of equipment and to address the maintenance backlog matters. Asset care should become part of our DNA. We have further, developed a 90-day remedial plan, a blueprint that addresses culture, values, efficiency and operational effectiveness, focusing on our most pressing challenges:
- Transnet has embarked on a programme to recover funds and finalise OEM contracts relating to the 1 064 programme, meeting with different OEMs on a bi-weekly basis:
- R618 million has been recovered from China South Rail, with a further R86 million being pursued;
- We are exploring legal opinion and processes to set aside interest rate swap transactions costing the organisation R400 million a year; and
- We have commenced a renegotiation with OEMs to align with Transnet’s requirements in the short, medium and long term.
- We are working to improve the role and function of Group forensics insofar as it relates to the collapse of governance and administrative functions within the organisation.
- With procurement challenges presenting both reputational and operational risks, we are mapping assurance activities and lines of assurance against each step in the procurement process.
- We are exploring various sustainable solutions to support Transnet Engineering to achieve financial sustainability, and resolving service level agreement terms between Engineering and Freight Rail.
- We are formulating a real estate strategy to address governance failings in our Property unit and to reduce revenue leakages and audit findings.
- We are working to align our digital strategy across all business units to create a ‘single-view’ perspective of all digital initiatives within Transnet.
- With the recent exposure of compromising conduct, characterised by employees circumventing internal controls, an ethical revival is required in the organisation. Accordingly, we are designing an ethics programme to support the behavioural change required within the Company to rebuild our corporate standing and reputation.
At the time of publishing this report, our executive and extended executive leadership structures are comprised of several interim executives, some of whom have been with Transnet for more than two decades. As such, they bring institutional knowledge and organisational experience, as well as fresh perspectives and objectivity to the business. I would like to commend them for taking full and primary accountability for stewarding the organisation through a challenging period while the process for recruiting permanent executive members is actively underway.
Every company on the planet experiences challenges. The companies that stand head and shoulders above the others are those that respond appropriately and decisively. It is time to take decisive action, and to act in the best interest of our customers, our company and our country.
I would like to express my heartfelt gratitude to each of our employees for their courage and steadfastness during the year. Together we must safeguard the three fundamentals of our business: our finances, our procurement processes and our operations. We, the people, are the business and it is up to us to take care of these fundamentals, each with personal accountability and pride. I look forward to a new chapter within Transnet, in which we can rebuild trust and pride – with each other, with our customers and with the people of South Africa.
Thank you to the Transnet Shareholder Minister, Mr Pravin Gordhan; the Transnet Chairperson, Dr Popo Molefe; the Board of Directors; the Acting Chief Financial Officer, Mr Mark Gregg-Macdonald; and the Transnet executives for your encouragement and guidance as I stepped into the role of Acting Group Chief Executive. With your support, I trust that I will be equal to the challenging yet aspirational task of shepherding Transnet in the interim as it rebuilds and repositions itself for growth.
|1||“a Commission of Inquiry to investigate allegations of state capture, corruption and fraud in the Public Sector including organs of state…”
|3||The main idea is that a company goes through four main steps starting with disclosure of their current position; moving to awareness which looks at whether a company is conscious of its environmental impact; to management, so if a company is managing these overall impacts and the risks and opportunities related to these; and finally leadership, which is a measure of whether a company is implementing best practices in this environmental realm. F: Failure to provide sufficient information, D: Disclosure, C: Awareness, B: Management, A: Leadership|
Acting Group Chief Executive
26 September 2019