delivering on our commitments

delivering on our commitments

Contents

T page 3 ransnet Annual Report 2005 Consolidated salient Strategic intent 1 features Group structure 2 Consolidated salient features 3 Consolidated performance indicators 4 page 8 Consolidated value added statement 5 Consolidated five-year review 6 Board of directors Glossary of terminology 7 Board of directors 8 Executive Committee 10 page 11 Chairman’s statement 11 Chairman’s statement Group Chief Executive’s statement 14 Sustainability report 21 Corporate governance 25 page 14 Operational report – Spoornet 30 Annual Report Operational report – National Ports Authority (NPA) 34 Group Chief Executive’s Operational report – South African Port Operations (SAPO) 38 statement Operational report – Petronet 42 Operational report – Transwerk 46 Operational report – South African Airways (SAA) 50 Chief Financial Officer’s report 54 Audit Committee approval 58 Contents to the annual financial statements 59 Photography courtesy of Peter Morey, www.transnet.co.za Geoff Brown, Spoornet, SAA, SAPO, Corporate information 142 05 NPA and Transwerk.

GRAPHICOR 32855 delivering on our commitments

delivering on our commitments

Contents

T page 3 ransnet Annual Report 2005 Consolidated salient Strategic intent 1 features Group structure 2 Consolidated salient features 3 Consolidated performance indicators 4 page 8 Consolidated value added statement 5 Consolidated five-year review 6 Board of directors Glossary of terminology 7 Board of directors 8 Executive Committee 10 page 11 Chairman’s statement 11 Chairman’s statement Group Chief Executive’s statement 14 Sustainability report 21 Corporate governance 25 page 14 Operational report – Spoornet 30 Annual Report Operational report – National Ports Authority (NPA) 34 Group Chief Executive’s Operational report – South African Port Operations (SAPO) 38 statement Operational report – Petronet 42 Operational report – Transwerk 46 Operational report – South African Airways (SAA) 50 Chief Financial Officer’s report 54 Audit Committee approval 58 Contents to the annual financial statements 59 Photography courtesy of Peter Morey, www.transnet.co.za Geoff Brown, Spoornet, SAA, SAPO, Corporate information 142 05 NPA and Transwerk.

GRAPHICOR 32855 Strategic intent

Transnet is committed to transparency, integrity, efficiency and competitiveness

Transnet Limited is a public company, wholly owned by the South African government, which operates and controls South Africa’s major transport infrastructure.

Even as it accelerates the pace of its transformation from a diversified conglomerate into a focused freight transport company, it will continue to be a significant player in the South African economy. The Group employs more than 70 000 people and has an asset base in excess of R70 billion.

Our aim is to be a cost-effective and efficient transport service provider. Working with our clients, we are building on existing corridors and clusters and exploiting the synergy between port and rail to tailor our solutions according to our customers’ needs.

www.transnet.co.za

Transnet Annual Report 2005 1 Group structure

Strategy To be a focused freight transport company

Structure Holding company

Core businesses Non-core businesses

Other non-core businesses

SA Airways (Pty) Ltd 98,2%

Investment Portfolio Transport Portfolio

Support businesses

2 Transnet Annual Report 2005 Consolidated salient features for the year ended 31 March 2005

2005 2004 % R million R million change

Turnover 46 259 43 637 6,0 EBITDA 8 972 7 442 20,6 Operating profit 5 818 187 >100 Net profit/(loss) for the year after taxation 6 810 (6 332) >100 Number of ordinary shares issued (millions) 14 710 14 710 Profit/(loss) per share (cents) 46,3 (43,0) Total assets 72 633 72 700 (0,1) Total debt 55 674 62 783 (11,3) Capital and reserves 16 959 9 917 71,0 Cash flow from operating activities before cash effects of derivative transactions 7 536 4 952 52,2 Capital expenditure (excluding intangibles) 5 575 7 820 (28,7) EBITDA margin (%) 19,4 17,1 Operating profit margin (%) 12,6 0,4 Net profit margin (%) 14,7 (14,5)

Refer glossary of terminology on page 7

Turnover EBITDA Operating profit 11 837 5 818 46 259 43 637 5 088 41 278 8 972 35 811 8 155 31 740 7 442 6 060 1 704 1 463 187

01 02 03 04 05 01 02 03 04 05 01 02 03 04 05

Transnet Annual Report 2005 3 Consolidated performance indicators

March March March March March 2005 2004 2003 2002 2001 R million R million R million R million R million

PROFITABILITY MEASURES Operating profit margin (%) 13 0,4 12 4 5 Net profit margin (%) 15 (15) (1) 10 10 Return on average total assets (%) 9 (9) (1) 5 6 Return on equity (%) 40 (64) (2) 16 17

SOLVENCY RATIOS Gearing ratio (%) 67 83 65 52 53 Total debt to total capital (%) 77 88 74 71 68 Interest cover (times) 2,2 0,1 1,9 0,3 0,9

CASH FLOW MEASURES Operating cash flow to total debt (%) 18 12 17 11 12

EXCHANGE RATES – ZAR to US$ – closing rate 6,21 6,61 8,06 11,38 8,03 – ZAR to US$ – average 6,56 7,15 9,53 9,64 7,33

Operating margins Return on average (%) total assets (%) 13 12 9 6 5 5 4 (1) 0 (9) 01 02 03 04 05 01 02 03 04 05

Interest cover Gearing (%) 2,2 83 1,9 67 65 53 52 0,9 0,3 0,1

01 02 03 04 05 01 02 03 04 05

4 Transnet Annual Report 2005 Consolidated value added statement for the year ended 31 March 2005

2005 2004 R million % R million %

Revenue 46 259 43 637 Cost of materials and services (22 848) (22 273) Net operating expenses excluding impairments (40 288) (39 229) Excluding: – Depreciation 2 390 2 536 – Amortisation 73 64 – Retirement benefit costs 1 469 1 681 – Salaries, wages and other benefits 13 508 12 675

Value added by operations 23 411 98 21 364 98 Income from investments 538 2 434 2 – Investment and other income 276 342 – Income from associates 262 92 – Fair value adjustments* – –

Value added/created 23 949 100 21 798 100 Applied as follows: Employees 14 977 62 14 356 66 – Salaries, wages and other benefits 13 508 12 675 – Retirement benefit costs 1 469 1 681 Providers of capital 2 567 11 2 220 10 – Net finance costs 2 588 2 211 – Minority interests (21) 9 Government 1 620 7 190 1 – South African normal taxation 1 635 190 – Secondary taxation on companies (15) – Re-invested to maintain and expand operations 4 785 20 5 032 23 – Depreciation, amortisation and impairment 2 616 6 821 – Deferred taxation 9 14 – Net profit/(loss)* 2 160 (1 803)

Value apportioned 23 949 100 21 798 100

* The above figures are disclosed net of the fair value adjustments. The comparative figures have been restated accordingly. 4 650 (4 529)

Value distribution 2005 2004 Re-invested to maintain Re-invested to maintain and expand operations and expand operations 20% 23%

Employees Employees 66% 62% Government 1% Government 7%

Providers Providers of capital of capital 11% 10%

Transnet Annual Report 2005 5 Consolidated five-year review

March March March March March 2005 2004 2003 2002 2001 R million R million R million R million R million

INCOME STATEMENT AND CASH FLOW Turnover 46 259 43 637 41 278 35 811 31 740 Operating profit 5 818 187 5 088 1 463 1 704 Net finance costs and fair value adjustments 2 062 6 740 9 711 (416) 2 125 Depreciation and amortisation 2 463 2 600 2 258 2 113 2 204 Impairment of assets 153 4 221 493 448 173 Profit/(loss) before taxation 8 156 (6 211) (625) 3 915 3 653 Taxation 1 629 204 16 466 260 Minority interest in income/(loss) (21) 9 (220) 12 106 Net profit/(loss) for the year 6 810 (6 332) (421) 3 437 3 287 EBITDA 8 972 7 442 11 837 6 060 8 155 Cash generated from operations 9 863 7 040 7 178 6 451 4 576

BALANCE SHEET Equity (including minority interests) 16 959 9 917 17 641 21 201 18 998 Non-current liabilities 30 710 32 217 32 669 29 695 19 571 Current liabilities 24 964 30 566 18 456 21 390 19 957 Total debt 55 674 62 783 51 125 51 085 39 528 EQUITY AND LIABILITIES 72 633 72 700 68 766 72 286 58 526 Non-current assets 55 282 57 156 54 883 43 702 42 018 Current assets 17 351 15 544 13 883 28 584 16 508 TOTAL ASSETS 72 633 72 700 68 766 72 286 58 526

Cash generated Net assets Capital from operations employed expenditure 9 863 10 601* 21 201 18 998 7 178 17 641 7 040 16 959 7 820* 6 451 5 575 4 576 9 917 4 122 2 677

01 02 03 04 05 01 02 03 04 05 01 02 03 04 05

* Includes significant investment in renewal of SA Airways (Pty) Ltd aircraft fleet

6 Transnet Annual Report 2005 Glossary of terminology

Current ratio Net assets Current assets divided by current liabilities. Total assets less total liabilities.

Debt Net profit/(loss) Interest-bearing borrowings, retirement benefit obligations, Profit or loss after taxation and minority interests. derivative financial liabilities, less short-term investments and net cash and cash equivalents. Net profit margin Net profit of loss expressed as a percentage of turnover. EBITDA Earnings (profit from operations before net finance costs, other Operating profit income and income from associates) before taxation, depreciation, Profit or loss from operations before net finance costs. amortisation and impairment. Operating profit margin EBITDA margin Profit or loss from operations before net finance costs expressed EBITDA expressed as a percentage of turnover. as a percentage of turnover.

Equity Return on average total assets Issued capital, reserves and minority interests. Net profit expressed as a percentage of average total assets.

Gearing Return on equity Debt expressed as a percentage of the sum of debt and equity. Net profit expressed as a percentage of equity (excluding minority interests) Headline earnings As defined in circular 7/2002 issued by the South African Total debt Institute of Chartered Accountants, separates from earnings all Current and non-current liabilities items of a capital nature. It is not necessarily a measure of sustainable earnings. Total debt to equity ratio Total debt expressed as a ratio to equity. Interest cover Profit or loss from operations before net finance costs, divided by net finance costs.

Transnet Annual Report 2005 7 Board of directors

Mr F T M Phaswana Ms M Ramos Dr I Abedian 60 46 49 BA (Hons), MA, BCom (Hons) Institute of Bankers Diploma (CAIB) BA (Hons) (Economics) University of (Energy Economics) (Institute of Bankers), BCom Cape Town, MA (Economics) (University of the Witwatersrand) University of Cape Town, PhD Chairman: Transnet Limited BCom Honours (Economics) (with a (Simon Fraser University in Canada) first class pass) (University of the Other directorships Witwatersrand), MSc degree in Chief Executive: Pan-African – Anglo American Corp. of SA Economics (University of London) Investment & Research Services – Anglo American Plc (Pty) Ltd – Deputy chairman and treasurer: Group Chief Executive: Transnet Inyathelo (The SA Institute for Limited Other directorships Advancement) – AFReC (Pty) Ltd – Naspers Ltd Other directorships – Chairman: PBS (Pty) Ltd – Chairman: Ethos Private – SA Airways (Pty) Ltd – DBSA Equity Ltd – Sanlam Ltd – Munich Reinsurance Company – Trustee: Transnet M-Cell Ltd Trust of Africa Ltd – Trustee: Transnet Second Defined Benefit Fund – Trustee: Transnet M-Cell Ltd Trust

Ms N N A Matyumza Mrs M A Moses Mr B T Ngcuka 42 40 51 BCom (University of Transkei), BA (University of Witwatersrand), BProc (University of Fort Hare), LLB BCompt (Hons) University of Public Relations Diploma (PRISA), (University of South Africa), MA Transkei, LLB (University of Natal), Management Advancement Pro- (International Relations) (Webster Passed Qualifying Exam of Public gramme (Wits Business School) University, Geneva, Switzerland) Accountants and Auditors Board Businesswoman Businessman General Manager: Eastern Region Eskom Distribution Other directorships Other directorships – Chairperson: Viamax (Pty) Ltd – Chairman: Amabubesi Other directorships – MTN Group Ltd – STRB Attorneys – Born Free Investment (Pty) Ltd – Mobile Telephone Networks – Chairman: V&A Waterfront – City Square Trading (Pty) Ltd Holdings (Pty) Ltd Holdings (Pty) Ltd – Deputy chairperson: Member of – MTN Intl. (Pty) Ltd – Trustee: Transnet Foundation Trust Council Medical Schemes – The PA Group Ltd – Chairman: City Couriers

8 Transnet Annual Report 2005 Prof G K Everingham Ms N B P Gcaba Dr S E Jonah KBE Mr P G Joubert 55 34 55 72 BCom (UPE), BCom Hons (UCT), BJuris (University of Fort Hare), LLB ACSM, MSc, DIC, DSc (hc) BA (Rhodes), DPWM (Rhodes), AMP MAS (Illinois), CA(SA) (University of Natal) (Harvard) Company Director and President: Professor of Accounting at UCT Partner at Spoor & Fisher Attorneys AngloGold Ashanti Director of Companies

Other directorships Other directorships Other directorships Other directorships – V&A Waterfront Holdings (Pty) Ltd – Chairperson: Transnet M-Cell – AngloGold Ashanti Ltd – BDFM Publishers (Pty) Ltd Ltd Trust – Commonwealth African Investment – Cycad Financial Holdings Ltd Fund (COMAFIN) (Zimbabwe) – Hudaco Industries Ltd – Equator Exploration Ltd – IMS Holdings (Pty) Ltd – Anglo American Corporation of SA – Munich Reinsurance Company of – Anglo American Platinum Africa Ltd Corporation Ltd (Amplats) – Sandvik (Pty) Ltd – Chairman: Transnet Second – SA Airways (Pty) Ltd Defined Benefit Fund – Protekon (Pty) Ltd – Ivanhoe Nickel and Platinum Ltd

Mr S Nicolaou Ms K C Ramon Mr C F Wells 40 38 55 Bachelor of Pharmacy (University of CA(SA), Senior Executive BCom (University of Cape Town), Witwatersrand), International Trade Programme graduate (Harvard CA(SA) (Institute of International Trade of Business School in conjunction with SA) Wits Business School) Chief Financial Officer: Transnet Limited Senior Executive: Strategic Chief Executive Officer: Development: Aspen Holding Ltd Johnnic Holdings

Other directorships Other directorships – Aspen Pharmacare Intl. (Pty) Ltd – Durban Add-Ventures Ltd – Garec Pharmaceuticals (Pty) Ltd – Gallagher Estate Holdings Ltd – Chairman: South African Express – Johnnic Communications Ltd Ms Z Stephen Airways (Pty) Ltd – Johnnic Properties Ltd 31 – National Health Laboratory BProc (University of DBN Westville), Services LLB (University of Natal), – Chairperson: Autopax Passenger Post Graduate Diploma in Corporate Services (Pty) Ltd Law (UNISA) – Tsogo Investment Holdings Ltd – Fabcos Investment Holdings Ltd Group Company Secretary: Transnet Limited

Transnet Annual Report 2005 9 Executive Committee

The Executive Committee takes responsibility for the day-to-day execution of the strategy and running of the Company.

Standing left to right Seated Mr P Maharaj (Group Executive: Strategy and Transformation) Mr S Gama (Chief Executive Officer: Spoornet) Mr K Phihlela (Chief Executive Officer: National Ports Authority) Ms B S Tshabalala (Treasurer) Mr C Wells (Chief Financial Officer) Ms M Ramos (Group Chief Executive) Mr T Morwe (Chief Executive Officer: South African Port Mr B Nomvete (Chief Information Officer) Operations) Mr L van Niekerk (Chief Operating Officer) Mr L R R Molotsane (Acting Chief Executive Officer: Transwerk) Mr C Möller (Chief Executive Officer: Petronet) Mr V Kahla (Group Executive: Legal and Risk)

10 Transnet Annual Report 2005 Chairman’s statement

Aligning skills and expertise towards achieving the overall objectives lies at the heart of the turnaround.

Fred Phaswana Chairman

Economic perspective The South African economy is experiencing one of the longest periods of expansion since World War II. Macroeconomic stability has seen moderate rises in inflation with interest rates at historic lows. Investment in both public and private sectors has accelerated, bringing a steady expansion in productive capacity. The economy has broken out of the 2,5% to 3% growth band, with growth of 3,7% in 2004 and 4,2% forecast for 2005.

While South Africa has benefited from strong foreign demand, global growth is expected to slow over the course of 2005 and 2006. A large current account deficit in the United States and a change in the relative value of the major currencies may precipitate a mild economic slowdown. However, a combination of strong demand from Asia for commodities, rapid economic integration and growth in our continent and a strong domestic economy, is expected to cushion the local economy.

The volatility in the price of crude oil has been characteristic of the year and the outlook for the foreseeable future indicates enduring higher prices. This will continue to have a significant impact on both our airline and rail businesses. Transformation Transformation entails the change of the complexion, shape, size and behaviour of our economy. Operating within this framework, we would also like to add employment equity, affirmative procurement and black economic empowerment into this mix.

We also believe, as suggested by Itumeleng Mahabane, last year’s Financial Journalist of the Year in South Africa, that the delivery of economic development is itself transformative and sometimes more important than the shape or make up of power structures.

The past year has seen the start of massive transformation at Transnet – from a diversified conglomerate into a freight transport company that focuses on the

Transnet Annual Report 2005 11 Chairman’s statement continued

The ultimate goal is to deal with the twin challenge of unemployment and poverty by improving the competitiveness of the economy and promoting higher levels of economic growth. bulk and manufacturing sectors. A journey of a thousand miles Corporate governance has begun with the first few steps. We will leverage our strength in The Minister of Public Enterprises, Mr Alec Erwin MP, appointed our rail, port and pipeline assets to contribute towards reducing the new Board on 27 August 2004. We have two executive and the costs of transport and logistics in the economy. The ultimate 11 non-executive directors charged with leading the Company goal is to deal with the twin challenge of unemployment and into the future in a sound, prudent and sustainable manner. The poverty by improving the competitiveness of the economy and Board is supported in the execution of its duties by three sub- promoting higher levels of economic growth. This is to be done committees covering remuneration, corporate governance and with the objective of Transnet getting appropriate market related nominations, as well as audit and risk issues. These structures are returns on its assets. also designed to enhance transparency and to prevent the repeat of Transnet’s history of lapses in these vital areas. The four-point turnaround strategy announced in August 2004 provides the framework for the transformation of Transnet. After The Board has clarified and agreed to its role as setting the transformation, our core operations will be in the port, rail and direction of the Company. The responsibility of implementing the pipeline businesses. strategy lies with the executive team. At the heart of holding the executive accountable is a practical measurement of performance. Considerable progress has been achieved. We have finalised A simple motto of “what is not measured does not get done” discussion on what is non-core, and statutory approval for the guides the performance management framework that is being put disposal of these assets has been provided. Two major issues have in place to drive change in the culture of the organisation. been resolved: the SAA hedge book and the embedded derivative liability arising from a US dollar-based iron ore contract between While the members of the Board have quickly achieved the Spoornet and one of our major clients. The book has been closed delicate balance between paying attention to strategy and being off, while the embedded derivative has been expunged after the seized with compliance issues, we will undertake an evaluation successful renegotiation of the agreement. of its performance over the next few months.

After months of consideration and in consultation with the An overarching ethics policy has been developed to act as the executive management, we have agreed to revise our turnaround lighthouse for our individual and collective behaviours in ensuring plan to address a gap in the strategy. This sees the consolidation that Transnet sets the benchmark in its business dealings. of two related areas; risk management and corporate governance and the addition of human capital development as the fourth pillar Black economic empowerment (BEE) of the four-point turnaround plan. This refinement takes into Transformation of our economy is a necessary precondition for true account the early gains recorded during the implementation of democracy. As a corporate citizen, especially one that is owned by the strategy. It is also informed by the realisation that the the state, it is imperative that we lead the way in contributing to transformation of Transnet will not succeed without people. Our this transformation. Providing economic opportunities to previously human capital is the cornerstone of the future of the Company. disadvantaged individuals and entities forms an integral part of Aligning skills and expertise towards achieving the overall our procurement practices. objectives lies at the heart of the turnaround. We will continue to explore innovative ways of supporting Results empowerment enterprises through procurement reforms currently The board is pleased with this year’s results which reflect the being undertaken. distance that has been travelled to date. We will also use our exit strategy from non-core businesses to While the progress is commendable, we have to keep in mind that advance other public policy goals including meaningful BEE in there is no quick fix to the challenges facing Transnet. This the next financial year. We fully support the BEE Code of Good transformation will take time and requires focus, energy, drive and Practice enacted during the period under review, and look forward commitment to ensure that its results are sustainable. to further refinement.

12 Transnet Annual Report 2005 Prospects To our Group Chief Executive, Ms Maria Ramos, we would like to commend her on her leadership, passion and energy. The The year ahead will see Transnet accelerating the pace of transformation of Transnet is a difficult and challenging task and transformation. A number of the non-core entities will be disposed there can be no better captain of the ship to sail through the of. The roll-out of our demanding infrastructure investment stormy seas. programme gets underway. We have concluded agreements with the iron ore sector, committing Transnet to substantially increase To the Board, my sincere appreciation for the manner in which its capacity. Within months, we will have concluded a similar they took to the task of providing the leadership and direction agreement with the coal industry. We have started the expansion necessary in taking forward the transformation of Transnet. of container handling capacity at our ports. For the first time in Their collective experience and wisdom has been invaluable. 30 years, South Africa will see work begin on the construction of Let me also take the opportunity of welcoming Mr Chris Wells, the a new multiproduct pipeline. Chief Financial Officer, as one of two executive directors on the Board, who joined us towards the end of the period under review. These are all exciting projects, but the need to focus on improving During the review period Ms Zola Stephen was appointed as the our core operations remains the key challenge. We have to improve Company Secretary. We welcome and wish her well in this role. the productivity at our ports, our trains need to run on schedule and our commitments to our customers have to be met. To Minister Alec Erwin MP, and his department, our heartfelt thanks for the vision and support that you have provided in A wise man once said: “When you stand at the bottom of the helping us to settle in and take your mandate forward. mountain and contemplate the journey ahead, remember that it is not the long walk that will kill you, but the grains of sand that Finally, and most importantly, I would like to thank our get into your shoes”. Ours is indeed a long journey that we have many clients and customers for their ongoing support and begun in earnest. Because of the critical role that Transnet plays understanding. We are here because of you. Our commitment to in the economy, there is no turning back. Our task is to stay work with you to provide cost-effective solutions for your transport focused on the task ahead and make sure that we deal with the needs is beginning to bear fruit. It is our intention to continuously grains of sand each step of the way. improve the service we provide.

Based on the team’s commitment, we are confident of a sustained improvement in performance, on both the financial and the non- financial bottom-line. Appreciation Fred Phaswana Chairman The operations of the transforming Transnet are diverse yet central to the functioning of the economy. In performing its role as the 30 June 2005 custodian of the core transport infrastructure, it is reliant on over 70 000 employees.

Accordingly, the Board wishes to express its gratitude to all our staff and management for their effort, commitment and loyalty, sometimes under trying circumstances.

Transnet Annual Report 2005 13 Group Chief Executive’s statement

What we have achieved is a platform on which to build the future of the Company.

Maria Ramos Group Chief Executive

Background The history of Transnet Limited will show 2004 as a defining year – one in which the destiny of the Company was shaped in a way that will resonate within the economy for the foreseeable future. The mandate from our shareholder dictated that our role is to reduce the cost of doing business, whilst achieving a market-related return on our investment, so that the competitiveness of the economy can be improved.

However, as could be seen from our dismal performance in the last reporting period, we could not fulfil this role unless there was a demonstrable corporate behavioural change. As in last year’s report, I intend to give a frank account of the progress we are making in tackling the challenges we identified in that report, the results of our intervention and the risks we face going forward.

To measure our progress, let us recap on where we were last year and where we are today: • The capital base had been halved by the R6,3 billion losses we incurred – our capital base has improved by R7,1 billion to R16,9 billion. • There were significant gaps in the financial management processes – we now have improved our financial management controls, appointed an experienced Chief Financial Officer for the Group and have instituted an enterprise-wide risk management focus. • There was non-compliance with the Public Finance Management Act (PFMA) – we have strengthened compliance with the appointment of the Group Executive: Legal and Risk and set up a risk sub-committee within the Group’s Executive Committee. • There were significant corporate governance lapses – our new Board has prioritised adherence to good corporate governance and institutionalised it through the establishment of a corporate governance sub-committee. A new compact with the shareholder is being negotiated. • Our debt levels were unsustainable – we have reduced our gearing substantially. • Our equipment and work methods were old and tired – we will invest R40 billion to replace and expand our asset base and we are re-engineering all our business processes.

14 Transnet Annual Report 2005 Maximising growth and competitiveness inherent in our economy.

• Related to the excessive diversification of the business, we had Board, employees, shareholder and other stakeholders, we are equally cumbersome executive management structures – not only focusing our energies and limited resources to transforming the do we have a new Executive Committee, we have also identified Company into a world-class publicly owned freight transport and agreed what our structure and focus will be in future. provider to the bulk and manufacturing sectors of the economy. • We had invested in a number of non-core assets that were a drain on our human and financial resources – we have now During the year under review, we created a post for a agreed a plan to exit non-core assets and to focus on our core Group executive responsible for transformation and strategy. businesses. • Our efforts to unlock efficiencies from the divisions were Transnet’s turnaround plan is neither easy nor a quick fix. It impacted by an oversized and costly head office – we have requires a sustained effort over a three to five-year period to redefined the size and skills profile of the head office and the produce the desired outcome. This first year of that long journey implementation of this rethink will reduce costs and enable the clearly indicates that the transformation has begun and important centre to drive efficiencies and to focus on our core businesses. milestones have been achieved. The results tabled in this report • Our balance sheet had been significantly weakened through show a vast improvement on the previous year. We have seen a SAA’s exposure to foreign exchange hedge risks and the real increase in total revenue and importantly, operating profits, embedded derivative liabilities arising from US dollar-based iron margins and cash flows from operations are significantly up on ore contracts Spoornet had entered into with two of our major last year’s numbers. clients – the hedge book has since been settled and the contract with the Sishen Iron Ore Company Ltd was successfully While the results achieved this year are pleasing, the road ahead renegotiated. Together with the improved profitability, this has is a challenging one. The turnaround of Transnet can only be significantly strengthened the balance sheet. successful if we can improve on these results in a sustained way over the long term. What we have achieved is a platform on which It is pleasing to report an increase in operating profit before to build the future of this Company. impairments and finance charges to R6 billion from R4,4 billion a year earlier. This 35% increase has resulted in operating Evaluation of the strategy margins of 12,9% compared with 10,1% in the previous reporting The strategy of Transnet was drawn up specifically to be simple period. This is the highest improvement in margins recorded by and practical with emphasis on implementation as a yardstick of the business in the past six years. success. Our goal remains to transform Transnet into a focused freight transport company. We plan to use our assets in the rail, However, the full improvement from last year is reflected in the ports and pipeline divisions to provide solutions to the bulk and increase in operating profit after impairments to R5,8 billion manufacturing sectors. Our aim is to be a cost-effective and compared with R187 million the previous year. efficient transport service provider. Working with our clients, we are building on existing corridors and clusters and exploiting the Indeed, as evidence of the effectiveness of the turnaround synergy between port and rail to tailor our solutions according to strategy, cash generated from operating activities before cash our customers’ needs. effects of derivative transactions, increased by R2,6 billion to R7,5 billion. Gearing improved from 83% to 67%. Accordingly, Our four-point turnaround strategy covered in last year’s annual the financial position of the Group has been strengthened report remains our road map. However, with guidance from our significantly. Board, we have adapted it and elevated human capital development as a critical element. Our revised four-point The strategy turnaround plan now seeks to: Transnet responded to the crisis it faced by adopting a four-point • re-direct the business; turnaround strategy. In essence, the strategy, which remains our • restructure our balance sheet; corporate compass, seeks to restore the financial sustainability of • implement and adopt strict corporate governance principles and the Company thus allowing it to invest in much needed economic adherence to a vigilant risk management process; and infrastructure. Through the strategy, which has the support of our • develop human capital.

Transnet Annual Report 2005 15 Group Chief Executive’s statement continued

Each of these pillars is programme driven with identified projects All other investments have been deemed “non-core” and that give rise to the overall implementation plan for the strategy. accordingly these interests in passenger transport, property holdings, telecommunications, road haulage, fleet management • Re-directing the business and other businesses will exit the Transnet Group. The exit will The key project that underpins this programme is the re-engineering range from a transfer of ownership directly to Government, to sale of the core business units to focus on efficiency, productivity, cost or closure. This will be done in a responsible and orderly manner effectiveness and growth. Corridor improvements, cluster and key as well as in consultation with all key stakeholders over the next client solutions with a focus on port-rail interfaces designed in 18 months ending September 2006. It is important to note that, collaboration with customers, have already been rolled out. subsequent to year-end we received ministerial authorisation in terms of the Public Finance Management Act for the exit strategy A five-year infrastructure investment plan of some R40 billion has relating to most of our non-core operations. been approved. This is focused on addressing the backlog in maintenance and upgrading and expanding our asset base to meet The implementation of this exit strategy will result in a reduction the capacity demands of our customers. in the Group’s borrowings. This reduction in borrowings will contribute to the attainment of our target gearing level of It is important that this investment in infrastructure is delivered. 50% to 55% (currently standing at 67%). Accordingly, significant management attention is being given to project management. Other elements of restructuring of the balance sheet include initiatives to deal with specific transactions that impact on the To ensure that implementation of this investment proceeds smoothly, subsequent to the year-end we appointed a Chief results of the Group. Some have already been completed. These Operating Officer for the Group – a newly created position. This role include the closure of the SAA hedge book, and the removal of the is also designed to coordinate the operations of the divisions and embedded derivative liability arising from a US dollar-based iron help increase efficiencies. ore contract. Two significant post-balance sheet events occurred. Firstly, agreement was reached to unwind the MTN structure, The corporate office in the Carlton Centre, Johannesburg is being subject to certain suspensive conditions. If this agreement is restructured to enhance accountability and operations and to implemented, it will result in a significant inflow of cash. further reduce costs. This review – which is also designed to right- Secondly, as reported in the previous year, as part of its size the head office and match its skills base to a transformed recapitalisation of SAA, Transnet injected R4 billion into SAA by Transnet – is due for completion in September 2005. way of an interest free compulsorily convertible subordinated loan. Subsequent to the year-end, based on the improved financial Head office restructuring is the start of a hard look at our cost position of SAA, it was agreed to convert R2,4 billion into ordinary structures and the way we do things throughout the business. shares and to repay R1,6 billion. The next phase in this programme will be about building the core businesses by re-engineering their processes to improve As previously reported, the Group has a significant exposure to efficiencies, profit and service delivery. In addition, we will be an unfunded liability (R4,8 billion as at 31 March 2005) in the putting in place capacity and better management systems to Transnet Second Defined Benefit Fund. Whilst this liability has handle the capital investment programme at head office. This been fully provided for, we are working on a sustainable funding effort will be driven by the Chief Operating Officer working with all solution as required in terms of the fund rules. the chief executive officers of the core divisions.

• Corporate governance and risk management • Restructuring the balance sheet Transparency in decision making and accountability for actions In order to focus on freight transport, Transnet will be made up of have become the bedrock of the transforming Transnet. We have its core divisions, Spoornet, Petronet, National Ports Authority and significantly streamlined decision making. We now have a fully South African Port Operations. These core operating divisions will functional Executive Committee. be supported by: • Transwerk – the heavy rail maintenance and refurbishment division; The Executive Committee, which takes responsibility for the day- • Protekon – the project management and engineering division; to-day execution of the strategy and management of the Company, and is supported by the Capital Investment, Risk, Asset and Liability • HSA – a specialist fuel procurement division. and Operations sub-committees.

During the year ahead, the structure of these support divisions To reverse the legacy of weak risk management, we upgraded and their relationship to the core operating divisions will be the Legal and Risks services function in the Group to the level of redefined. Group Executive.

16 Transnet Annual Report 2005 Similarly, we are focussing on implementing our financial strategy development of the human capital development strategy for including the strengthening of financial management and control. the Group. Not only are we institutionalising these control measures, we are also building strong and credible implementing teams. Not only did Transnet suffer from the neglect of capital investment, it also suffered from underinvestment in its key asset – its people. One of the key responsibilities of the Board and the executive team is to protect the shareholder’s business from significant and Similarly, we are concerned about the fact that transformation of inappropriate financial and business risks. In an enterprise as the Company has failed to permeate the skilled labour and middle wide ranging and as complex as Transnet, it is therefore management ranks. We are committed to more than meeting our imperative that appropriate risk management structures and employment equity targets, especially the recruitment and processes are in place, both at divisional and Group level. During advancement of talented young black women into the the period under review, we began to map out an enterprise wide organisation. risk management framework that will guide decision making and support management in executing their tasks. Our human capital development strategy focuses on: • organisational design and development to support the World class systems, procedures, money, equipment and implementation; strategies, on their own, are insufficient instruments to make • talent management, including recruitment, retention, career and great organisations work. It takes people and leadership. succession planning; • employment equity; We have spent considerable time during the review period building • training and development; a credible and strong team to lead the organisation’s day-to-day • performance management; and operations. We now have this in place. During this time, we • remuneration and reward systems. moved Mr Siyabonga Gama, the Chief Executive Officer of NPA, to lead Spoornet. Mr Gama was replaced at NPA by Mr Khomotso During the first half of the new financial year, we will recruit Phihlela, hitherto a Transnet Group executive. In addition, we a senior professional to spearhead this component of our strategy. made the following appointments: Mr Chris Wells as Chief Apart from just rejuvenating and shoring up the employment Financial Officer, Mr Louis van Niekerk as Chief Operating Officer, equity profile of our workforce, we also plan to forge long-term Mr Vuyo Kahla as Group Executive: Legal and Risk and “smart partnerships” with professional bodies and tertiary Mr Pradeep Maharaj as Group Executive: Strategy and institutions to achieve the goals of the strategy. Transformation. It has to be pointed out that this is a long-term project whose After briefly acting as Chief Financial Officer, pending the results will take time to become noticeable. So, in the short term, appointment of Mr Wells, Ms Swazi Tshabalala returned to her the gaps – such as racial and gender imbalances – will still be role as Group Treasurer. Mr Charl Möller and Mr Tau Morwe, with us. respectively Chief Executive Officers of Petronet and SAPO, continue in their present roles. Letter to society BEE and affirmative procurement In summary, the Group Executive Committee (see page 10) is We support the spirit and the letter of the Broad-based Black chaired by the Group Chief Executive, and is composed of the Economic Empowerment Act (BBEEA). During the period under following: the two Group Executives (Legal and Risk, and review, the Department of Trade and Industry published the Codes Transformation and Strategy); the Chief Financial Officer; the of Good Practice on BEE to build on the BBEEA. We support Treasurer; the Chief Operating Officer; and the Chief Executive these fully. Officers of the core businesses, namely SAPO, NPA, Petronet, Spoornet and Transwerk. Further, we believe that BEE is not only a socio-political imperative, but also an economic one. If properly implemented, it • Human capital development strategy can yield measurable results on the financial bottom line. At the heart of the turnaround plan for Transnet lies the need to align the skills and expertise of our workforce to achieving the We are committed to using our significant purchasing power to objectives of the Company. The real strength of the business lies promote the development of BEE firms and the growth of the not in its ability to invest in new cranes or trains, but rather in its small, micro and medium sized enterprises especially those ability to sweat those assets productively. That requires changes belonging to people from disadvantaged backgrounds. to the culture and behaviour of employees in a sustained and measurable way. A performance-driven culture that focuses on To ensure meaningful empowerment we are reviewing both our meeting customer needs in an ethical environment guides the procurement and BEE policy. This rethink is also designed to

Transnet Annual Report 2005 17 Group Chief Executive’s statement continued

fight the scourge of “fronting”. We will continue to blacklist the Reporting and information and unscrupulous individuals and firms found to be implicated in this. We are also using the review to turn up the heat on those corrupt communication technology employees within our ranks. We have embarked on a wide-ranging programme to improve the quality, consistency and timeliness of management reporting throughout Transnet. In addition, as mentioned in the Chief Related to our bid for an ethical procurement policy, we have now Financial Officer’s report, we are adopting International Financial agreed on a code of ethics for employees of the Group. Reporting Standards (IFRS) for the year ending 31 March 2006. This is a material project which, apart from bringing Transnet in Finally, during the review period, we spent R11,9 billion on line with international accounting standards, will be used to procurement. Of this amount 29% went to black economic improve the quality of measurement and information in the Group. empowerment firms. Of the R4,4 billion worth of contracts we awarded, as much as 40% went to BEE companies. Furthermore, we are reviewing the cost and effectiveness of our spending on information and communication technology. As part Corporate social investment of this process there is a project in place to: Transnet is also committed to a sustainable way of doing business. • improve the reporting systems; This commitment is covered in some detail in the Sustainability • embed the IFRS amendments into the systems; and report on page 21 and the operational reports commencing on • improve the measurement and control of operational processes page 30. We are also actively involved in our communities. This through implementing the full functionality of SAP software in occurs mainly through the work of the Transnet Foundation. In the all our core business units. period under review, the Foundation has consolidated its activities. It strengthened partnerships, integrated some of its functions to Highlights in core businesses improve their impacts and it enhanced its monitoring and evaluation Spoornet capacity, especially insofar as it relates to the Integrated Rural Spoornet has not seen any significant increase in the tonnage Development Strategy. transported in the year under review. This is reflected in the 6% increase in revenue, while the 61% increase in operating profits to During the review period, it invested some R71 million in health R841 million, excluding embedded derivatives, enabled a bottom care, youth sports, education, entrepreneurial development, and line near break-even position (2004: R220 million loss). safety initiatives. The Phelophepa train, which provides mobile health care to needy rural communities in eight provinces of our There are approximately 20 000 kilometres of rail track and the country (save for Gauteng), continues to be a runaway success in intention is to split this into the core network and the low and light our social responsibility programmes. density network. The low and light density network will be housed in a separate entity and made available to private sector operators. In the year ahead, the Foundation will undertake a major review of its activities in line with the transformation of Transnet Ltd. The objective of the restructuring is to increase capacity on the Crucially, the intent of the exercise is not to discontinue the work iron ore export channel to 41 million tons per annum, the coal of the foundation. In line with best practice, it will continue to export channel to 86 million tons per annum and the general operate as a non-profit organisation that is expertly run. freight lines to 160 million tons per annum over the next five years. An agreement with a major iron ore producer for the ramp Investor relations up in capacity has been reached and a similar agreement with the Besides regularly interacting with the media in various forums, we coal industry is being finalised. These contracts are on a “take or have demonstrated our commitment to transparency by organising pay” principle that allows for long-term planning of investments road shows to brief our bankers, bond holders and credit rating and provides certainty to the respective industries. agencies about our strategy. During the year under review, we organised one such round of interactions. We also use the A detailed analysis of corridor freight transport has been financial press to convey information to investors about our undertaken to identify key clusters and clients with rail friendly strategy and its implementation. freight that can be targeted to make up the 160 million tons per annum. Together with this analysis a market capture strategy per We actively participate in the CEO Forum that is convened by the cluster and or client has been drawn up. A start has been made to shareholder minister. Similarly, when required, we brief the run a scheduled freight train service that has seen noticeable portfolio committee on public enterprises on our plans and shifts in goods from road to rail. projects. On a regular basis, we further shed light on our projects by giving inputs to the Minister’s responses asked of him in Aligned with this is the refurbishment and renewal of the fleet parliament. At their request, we also assist members of parliament coupled with a human capital development strategy to meet with site visits to our operations. customer demands.

18 Transnet Annual Report 2005 National Ports Authority Petronet National Ports Authority continues to produce excellent results Our pipeline business, which continues to be led by with all indicators improving including a 10% increase in Mr Charl Möller as its Chief Executive Officer, has for the first operating profit. However, we anticipate certain challenges with time exceeded the R1 billion mark in revenue. A detailed project the imminent introduction of regulation in the port sector. to re-engineer the business has seen a 2% cost reduction in real terms to convey a litre of fuel over a kilometre in 2004 than was During the review period, parliament passed the National Ports the case five years ago. This project was done in anticipation of Act of 2005, confirming NPA as part of the Transnet family. imminent regulation in the sector and the overall Transnet Apart from reaffirming the soundness of our strategy, it also objective of reducing the cost of doing business. brings much needed certainty to our stakeholders. The key challenge for Petronet is the ageing and insufficient capacity of the current pipelines. Approval for the construction of Our ports have seen a declining number of vessel calls but an a new 16-inch multi-purpose pipeline between the coast and increase in the size of the vessels calling. As shipping costs Gauteng has been granted. It is anticipated that the new pipeline worldwide come under scrutiny, larger vessels carrying over will come into operation in 2010. The balance between the 12 000 twenty foot equivalent (TEU) containers will become the investment required for this project and tariff increases allowed over norm on major trade routes. The major shipping lines have the medium term by the Energy Regulator will have to be found. indicated that the current fleet of 4 500 to 6 500 TEU vessels will be redeployed to the secondary routes such as South Africa. Major subsidiary The current depth and length of our berths will not be adequate South African Airways for this size of vessel and work has begun to address this problem. The new management at SAA, led by Dr Khaya Ngqula, who joined the airline as Chief Executive Officer during the period The development of the Port of Ngqura (formerly Coega) will under review, has managed to stem the tide of static passenger continue to make up the bulk of the investment programme for numbers and massive losses. Overall passenger numbers have the next financial year. Work is under way together with South increased by 5% but yields have declined due to competition African Port Operations to develop an operational plan for the port especially by low cost carriers in the domestic market. SAA and a number of other initiatives are in progress. increased turnover by 7% to R17,4 billion and operating profit to R935 million (2004: R134 million). South African Port Operations The decision to retain SAPO, under the continued leadership of A comprehensive review of routes and cost structures has given Mr Tau Morwe, as a core division of Transnet has galvanised them rise to project Bambanani. The aim is to reduce costs by into achieving year-on-year improvement in results. Operating R1,6 billion over a three-year period. profits have increased by almost 54% to over R1 billion and cash flow improved significantly. Containers and vehicle volumes Approval has been granted for SAA to join the Star Alliance. continue to grow whereas bulk and break bulk cargoes handled This will offer SAA access to an increased global network of remain static. flights and destinations and will bring benefits from cost-sharing arrangements as well.

Collaboration with industry has seen substantial improvements at Apart from restoring the business to financial health, the the container terminals and has resulted in the waiver of the management of SAA and Transnet are also involved in another 100 US dollar surcharge imposed by shipping lines due to delays key project namely, the orderly exit of the airline. We expect to at the Durban container terminal since 2002. This has cost the make considerable progress in this regard in the year ahead. Joint South African economy an estimated R1 billion. Every target set working teams, supported by independent expert advisers, are by the collaborative advisory board has been met and exceeded involved in preparing SAA to be a standalone state-owned and continues to be improved upon. enterprise under the auspices of the Department of Public Enterprises. However, the container terminal at the Port of Cape Town has reached capacity and the Durban container terminal is fast Infrastructure plans reaching that point. Substantial investments to increase capacity The five-year R40 billion infrastructure plan for Transnet at Cape Town and the redevelopment of Pier 1 at the Port of announced by the Minister of Public Enterprises is a demanding Durban are under way to meet demand. Further expansions for programme designed to overcome the legacy of underinvestment container handling facilities at the Port of Durban and the in the port, rail and pipeline infrastructure of the country. The key development of the container terminal at the Port of Ngqura driver is the need to meet the existing demands of the economy operated by SAPO are designed to meet the demands of over the short term. Further work to plan for the long-term customers into the future. demands is underway.

Transnet Annual Report 2005 19 Group Chief Executive’s statement continued

The guiding factor in the ultimate investment in infrastructure still Appreciation remains sound economic returns premised on detailed feasibility I want to thank the Chairman, Mr Fred Phaswana and his Board studies and a bankable business case. The key criterion used to for their collective wisdom, experience and guidance in the guide decision making is the need for the internal rate of return exacting journey that we have embarked upon. I am grateful to of any project to exceed the weighted average cost of capital. the shareholder’s representative, Minister Alec Erwin MP, and his team for their support and for always challenging us to think Key projects that have been approved include: beyond the next 10 years. • expansion of the iron ore export channel that includes rail and port investments; Similarly, let me thank Mr Yunus Carrim MP, the chair of the • the Port of Durban 2005 project that includes the initial work Portfolio Committee on public enterprises, for his interest in our on the widening and deepening of the entrance channel, the business. His and the committee’s tough questions help focus our redevelopment of Pier 1 as a container handling facility and minds on this national asset. increased capacity at the car terminal; • the widening, deepening and equipping of the Cape Town The executive team is now in place and we have a wealth of container terminal; talent that gives me confidence for the task ahead. My heartfelt • the refurbishment and renewal of the general freight rolling appreciation for their unflinching effort in demanding stock; circumstances. • the continued development of the Port of Ngqura; and • the construction of the new multi-purpose pipeline. To all our staff, the results tabled are the collective efforts of each one of you. My sincere appreciation and gratitude goes out to you We are acutely aware of the challenges posed by such a in achieving the levels of service that we have. demanding programme especially from a capacity perspective. To deal with these concerns, we are establishing a dedicated team Finally, to our customers and clients, it has been a pleasure in the office of the Chief Operating Officer to co-ordinate, track serving you. We will endeavour to continuously improve on our and monitor implementation. Furthermore, we have made service in meeting your needs and expectations. implementation an explicit performance measure for senior management. They say that a journey of a thousand miles begins with one step. This is a tough and demanding journey. We have begun that Prospects journey and have made it through the first day. Many days lie The path we have chosen is not an easy one. We have deliberately ahead, each with new, exciting and, most certainly, daunting made the strategy a simple and practical one with the emphasis challenges. The key to our success is to remain focused. We will on implementation. The strategy belies the complex nature of that rely on each member of the team to support and help one another implementation and the time frames within which it can be to achieve our goals. achieved. We will act transparently and responsibly in fulfilling our mandate. We will take accountability for our actions.

Transnet contributes a critical element of the infrastructure backbone for the prosperity of the South African economy and its Maria Ramos ability to deal with the challenges of unemployment and poverty. Group Chief Executive We cannot fail in our mandate to focus our limited resources in pursuit of our objectives. 30 June 2005

The Board and the executive team are passionate about and committed to the transformation of Transnet from a conglomerate of disparate businesses into a focused freight transport company harnessing our interests in port, rail and pipelines to improve the competitiveness of our economy. Accordingly, we expect 2006 to be a further year of progress in implementing our turnaround strategy and improving our financial performance.

20 Transnet Annual Report 2005 Sustainability report

Introduction by the Chairman The shareholder Transnet Limited is responsible to its Shareholder, the Government To ensure that the Shareholder gets a fair return on its investment, of the Republic of South Africa, to maximise shareholder value. we have committed ourselves to, amongst others, restructuring the Bearing in mind that the Shareholder has invested in the Group as balance sheet, refocusing and re-engineering our business, a representative of the citizens of the Republic of South Africa, complying with sound principles of corporate governance and a as directors of the Group, we conduct our responsibilities to the vigilant risk management focus. We have set out in the corporate Group very conscious of this important fact and of the fiduciary governance report section of this annual report the steps that we duties we have to exercise. are taking to ensure that we comply with best practice corporate governance requirements. We have begun a process of ensuring that we do not only focus on the single bottom line. In order to execute our duty to reduce the Further, as indicated in the corporate governance report section of cost of doing business in South Africa on a sustainable basis, we this annual report, emphasis is placed on communication with the have decided that, for the first time, Transnet must properly embrace shareholder on the Group’s implementation of its turnaround the global move to the triple bottom line, which takes into account strategy and on our financial performance. the economic, environmental and social aspects of a company’s business. The King II Report on Corporate Governance states: Customers As can be seen from the rail/road split of bulk freight trans- “The economic aspect involves the well-known financial issues portation in South Africa, the rail share has over the years as well as the non-financial ones relevant to that company’s declined significantly due to poor customer service. business. The environmental aspects include the effect on the environment of the products or services produced by the company. We have set ourselves an objective to grow our market share The social aspects embrace values, ethics and the reciprocal through providing customer-focused freight solutions. It is for this relationships with stakeholders other than just the shareowners.” reason that considerable attention is given to, for example, ensuring that our train service operates on a scheduled basis and We decided that strict adherence to sound principles of corporate is therefore reliable. governance be given appropriate focus because we believe that the Group’s turnaround plan will not be sustainable without such focus. We have been entering into memoranda of understanding with The turnaround must indeed embrace, not only the interests of the certain customers as part of an effort to build sustainable shareholder, but also those of our customers, employees, suppliers, partnerships with our customers. We now strive to properly society and the community, and the environment. understand the business of our customers and their multi-year plans so as to ensure that we continue to build the capacity We reflect that we care for the communities we serve and live in necessary to facilitate the growth of their businesses. The through the many activities we carry out mainly under the auspices successful renegotiation of our contract with one of the of the Transnet Foundation. We are heartened by the difference subsidiaries of Kumba Resources, the Sishen Iron Ore Company that the Phelophepa train makes in the promotion of primary health (Pty) Ltd, in respect of the transportation and handling of their care in many disadvantaged communities. iron ore destined for export, itself reflects the kind of partnerships The memoranda of understanding which we have been entering that we are building with our customers. into with certain of our customers, together with the many interactions the Group Chief Executive and her team have been Employees having with customers, are giving rise to true partnerships which Our turnaround strategy will come to naught if our employees are we are committed to nurturing. not motivated to be conscientious executors of all that we have committed ourselves to. They are key to the success we seek We are determined to provide an appropriate return on the for the Company. It is for this reason that the strategy that was shareholder’s investment on a sustainable basis; make Transnet released at the Company’s annual general meeting last year has an employer of choice for our employees; demonstrate not just been revised specifically to give proper focus to human capital concern, but care for our communities; and make our customers management. feel that they are truly valued. We have no doubt that with such determination Transnet’s turnaround will be sustainable and We are engaged in the appointment and retention of talented beneficial to the South African economy. individuals, especially from historically disadvantaged backgrounds and redesigning our business processes to ensure that we utilise available human resources to their fullest potential. Transformation at all levels is accordingly critical to ensure that we are a sustainable business. The promotion of equity in our employment Fred Phaswana practices remains a focus. While we have made significant strides Chairman over the years on that front at executive and senior management

Transnet Annual Report 2005 21 Sustainability report continued

Table 1: Transnet Employee Demographics by occupational category, race and gender as at 31 March 2005

Asian (A) African (B) Coloured (C) Total (Black) White Total TOTAL

Occupational category M F M F M F M F M F M F M+F

Executive management 7 1 29 13 0 1 36 15 17 3 53 18 71 Senior management 49 8 123 63 19 5 191 76 180 27 371 103 474 Management 312 109 934 581 274 148 1 520 838 2 502 339 4 022 1 177 5 199

Sub-total 368 118 1 086 657 293 154 1 747 929 2 699 369 4 446 1 298 5 744

Non-managerial 1 587 606 30 663 6 391 4 844 1 536 37 094 8 533 17 254 3 014 54 348 11 547 65 895

Grand Total 1 955 724 31 749 7 048 5 137 1 690 38 841 9 462 19 953 3 383 58 794 12 845 71 639 level, we remain concerned at our slow pace of transformation at We have been concerned that targets set for Health, Safety and the the middle management level. Table 1 sets out the breakdown of Environment (“HSE”) are not stringent enough. Focus has now been employees of Transnet by occupational category, race and gender. given to setting appropriate standards and ensuring that progress is continually monitored and stringent action plans are put in place We are focusing on the recruitment of young talent and training where necessary. The Group HSE programmes are subjected to them to fill many critical positions, including those of train and independent external audits by the National Occupational Health crane drivers and train control officers. and Safety Association of South Africa (“NOSA”).

Whilst we are restructuring and transforming the Group in line with In the financial year under review, the Group registered 256 HSE the turnaround strategy, morale has in some places been low. In programmes of which 139 were audited and an overall NOSA these circumstances, emphasis has been placed on communication rating of 71,26% was achieved compared to 69% in the 2004 and transparency. The Group Chief Executive has communicated financial year. The Disabling Injury Frequency Rating was 1,60 compared to 1,98 in the 2004 financial year. with both organised labour and employees directly, through various media, on the case for our transformation and why we have no While the Group exceeded its target in reducing the number option but to implement the turnaround strategy if we are to of accidents that cause injuries, we remain concerned that succeed. Counselling services are also being provided to employees. 24 employee fatalities were suffered during the year, compared to 29 during 2004. We are well aware that, in order to transform this business and fairly reward achievers, we must focus on performance management. We We continue to motivate employees towards a focus on safety have adopted a new performance management system which through, amongst others, the annual Transnet Safety Competition. requires that we properly reward performers and implement proper HIV and AIDS processes with regards to non-performers. The high prevalence of HIV and AIDS in our country has required us to develop appropriate interventions to deal with the challenges Employee health and safety imposed by this pandemic. Transnet is committed to safeguarding the health and safety of its employees by ensuring compliance with all applicable laws, including the Occupational Health and Safety Act, 1993 (Act No. 85 of 1993) and with requirements of regulatory and governmental agencies.

22 Transnet Annual Report 2005 The Group’s Lifestyle Management Programme’s HIV and AIDS Environment component, covering both employees who are medically insured Environmental management, especially as regards energy and and those who are not, provides our strategic response to water conservation, remains a key challenge. Spoornet derailments managing the potential human and financial consequences of and the resultant spillage of diesel from some derailments, impact HIV and AIDS on the Group. The overall aim of this programme on the environment in ways we cannot accept. It is for this reason is to lessen the potential consequences of HIV and AIDS within that, as part of our operational risk management focus, we Transnet, its business units and subsidiaries, so as to ensure that are putting measures to properly manage our impact on the Transnet continues to remain economically sustainable. environment. We are pleased to report that, for the period under

The core elements of the programme encompass: review, no spillage incidents in respect of our pipeline operation, •Prevention strategies to minimise and prevent the number of Petronet, were recorded. new infections within the environment. These include awareness programmes, condom dispensing, HIV and AIDS education and Suppliers training for employees and management, voluntary counselling Affirmative procurement and testing campaigns; and We are required by the Constitution of the Republic of South • Ensuring that employees that are currently HIV positive remain Africa and the Preferential Procurement Policy Act to redress in active, productive employment through appropriate health inequities of the past by, amongst others, putting in place management, including the provision of anti-retroviral measures to facilitate the procuring of goods and services from medication to HIV positive employees and their dependants. persons from designated groups (Africans, Indians, Coloureds, Support and treatment is also made available for post-exposure women and people with disabilities) and businesses meeting prophylaxis relating to injury on duty and post-sexual trauma, standards of Black Economic Empowerment (“BEE”). prevention of mother-to-child transmission and the treatment of specific opportunistic infections. Transnet’s divisional tender boards awarded contracts to the value of R1,7 billion to BEE, amounting to 40% of awarded contracts Code of ethics in the Group. In respect of “discretionary” procurement spend, A Code of Ethics has been developed for the Group. This Code R3,4 billion went to BEE. provides principles and values that must guide employees in conducting the business of the Group and themselves. The Code Society and the community also provides for a Client-Supplier Code of Conduct, in terms of For the year under review, we have, through the Transnet which our trading partners are required to consent to being Foundation and other Transnet divisions, concentrated on a subjected to an agreed set of norms and standards for good process of continuous improvement in corporate social investment business practice. Our suppliers are further required to report all – strengthening partnerships, improving the integration of different attempted or actual fraudulent or corrupt activities and to consent functions necessary to support communities and raising the bar in to the disciplinary jurisdiction of Transnet and to their blacklisting, terms of monitoring and evaluation of our interventions, in in the event of a breach of the Code. A Fraud Tip-Off Line is particular with regard to our Integrated Rural Development provided for reporting breaches of the code and seeking guidance Strategy. The Foundations’ education portfolio has focused on on appropriate conduct. The Group has adopted a zero tolerance supporting educational infrastructure development, teaching position on breaches of the Code and, in accordance with the capacity development in maths, science and technology and early Code, a failure to report a breach of the Code is itself a violation childhood development in impoverished areas. of the Code.

Transnet Annual Report 2005 23 Sustainability report continued

National Ports Authority and South African Port Operations have Conclusion also given support for programmes for maritime education. The We have taken our first steps on triple bottom line reporting. Our Foundation has further supported the growth in cultural industries focus is on ensuring that sustainability is embedded as a strategic through sponsoring the Internal Choirs Competition, the North management instrument. Ours is to move beyond mere reporting, West Cultural Calabash Festival, the Women in Arts Festival and to ensuring that our managers and employees, on a day to day the Theatre Trucks Programme which provides a platform for basis, are conscious of their responsibilities to each other, the performing arts in many rural communities. Our primary health shareholder, our customers and suppliers, the communities we care interventions outlined below, truly make a difference to many serve or live in, safety and the environment. When our focus on communities. sustainability becomes our way of life, we will be satisfied that our turnaround will itself be sustainable. Transnet Phelophepa Health Care Train (“Phelophepa”) Phelophepa is an effective response to the primary health care needs of provinces like the Eastern Cape, Northern Cape, KwaZulu-Natal, North West, Mpumalanga, Free State and Western Cape. Phelophepa, supported by 16 contract staff members and 37 final year students in medical disciplines, concentrates in areas where there is mostly only one doctor for every 3 500 people or, in some instances, no health care at all.

In the year under review the following was achieved: • patients registered = 46 109 ; prescriptions issued = 20 553 • school children screened and educated in audiometry and health care = 31 558; school children exposed to eye care education and screening = 20 383; school children exposed to oral hygiene and dental care education = 65 607; community volunteers trained in basic health and hygiene = 899 • children screened for diabetes = 2 417; children and adults reached through counselling workshops = 25 825 • more than 1 million people were reached in the HIV and AIDS education programme in the Eastern Cape.

24 Transnet Annual Report 2005 Corporate governance

The Transnet Board of Directors (“the Board”) assumed office at Chief Executive exercises the powers delegated to her with the the Group’s annual general meeting on 27 August 2004 in members of the Executive Committee, (“Group Exco”). Group Exco circumstances where a number of regulatory compliance and in turn has the following sub-committees: Group Risk Management, risk management lapses had exposed Transnet’s poor commitment Asset and Liability Management, Group Operations and to sound corporate governance principles. Through the Transnet Capital Investment. four-point turnaround strategy, we are now refocusing the Company to adherence with sound principles of corporate In order to facilitate effective control, executive management governance and to a vigilant risk management approach. We have reporting is constantly modified to keep pace with, amongst taken a number of initiatives to ensure that we not only comply others, the requirements of the Board. The Board has unrestricted with the provisions of the King Report on Corporate Governance access to all Group information, records, documents and property (King II), but properly understand corporate governance as, to that it may need or request. All Board and committee mandates borrow from Deutsche Bank’s Beyond the Numbers, a component entitle Board members to take independent advice at the of equity risk. company’s expense should they require.

Analysts of corporate governance refer to the “four pillars of The roles and responsibility of the Chairman and the Group Chief corporate governance”, namely board independence, shareholder Executive are separate and distinct and their performance is treatment, information disclosure and corporate compensation. As assessed through a process facilitated by the Group Corporate we have sought to transform corporate governance at Transnet, we Governance and Nominations Committee and the Group have, as reflected in this report, taken proper account of, amongst Remuneration Committee. others, these pillars.

Directors Given that all the non-executive directors of Transnet who As indicated above, at the last annual general meeting all non- commenced the financial year under review with the Company executive directors of the previous Board retired from the Board. retired on 27 August 2004, we felt that we might not be able Following the resignation of Ms Sindi Mabaso as the Chief to do justice in any commentary on that board and have therefore Financial Officer, Ms Swazi Tshabalala was appointed to act in elected to focus on corporate governance since the new Board that capacity pending the appointment of a Chief Financial assumed office. Officer. Ms Tshabalala accordingly joined the Board as an Governance structure and executive director and resigned on 24 January 2005, when Mr Chris Wells joined Transnet as the Chief Financial Officer management systems and executive director. Transnet is incorporated in South Africa as a public company in accordance with the provisions of the Legal Succession to the The Board is satisfied that considerable thought was given to South African Transport Services Act, 9 of 1989. As a Schedule Board balance and composition when the shareholder appointed 2 public entity, it is subject to the provisions of the Public the new Board and believes that the current mix of knowledge Finance Management Act, 1 of 1999 (“the PFMA”), and the and skill meets the present needs and requirements of Transnet Public Audit Act, 25 of 2004. Limited. A summary curriculum vitae of each director of Transnet Limited is published on pages 8 and 9. The Board consists of 13 directors, two of whom are executive directors. The non-executive directors may, in the main, be The Board has subjected itself to a Board performance self regarded as independent directors (as defined in King II). assessment process facilitated by two independent advisors. Attention will be given to recommendations arising from such The general powers of the directors of Transnet Limited are assessment and to regular group corporate governance conferred in the Company’s articles of association. Further, the Board mandate which the Board adopted at its constitutive assessments. meeting on 22 October 2004, reserves certain powers to be exercised by the Board only. Induction On appointment, an induction programme designed to meet the Board accountability and delegated functions needs of each new director is implemented. The Group Company While retaining overall accountability and responsibility for Secretary manages the induction programme. On 21 and 22 ensuring that clear strategic direction is provided to the Group and October 2005 the Board members participated in such a subject to matters reserved to itself, the Board has delegated to programme. Directors are advised of the provisions of the PFMA the Group Chief Executive, with the power of sub-delegation, and other laws and regulations and the changing risks that may authority to run the day-to-day affairs of the Company. The Group affect the affairs of the Company.

Transnet Annual Report 2005 25 Corporate governance continued

Board meetings Prof Geoff Everingham, the Group Remuneration Committee The Board meets, at a minimum, once every quarter with an chaired by Dr Sam Jonah KBE, and the Corporate Governance and additional meeting to discuss strategy, the corporate business plan Nominations Committee chaired by Mr Fred Phaswana. Certain of and the annual budget. Three Board meetings were held by the new the functions of the Board are delegated to these committees in Board from 22 October 2004 to the end of the financial year under terms of written mandates which the Board approved at its review and details of individual attendances are set out below. constitutive meeting on 22 October 2005. These mandates set out, amongst others, these committees’ powers, functions, Schedule of Attendance at Board Meetings: responsibilities, reporting mechanisms and authority to act. Director Date 22 Oct 7 Dec 15 Feb The members of all these committees are non-executive directors and, in respect of the Group Audit Committee, all of them are Mr F T M Phaswana financially literate. Further, the Group Chief Executive, the Chief ✓✓✓ (Chairman) Financial Officer, the Group Executive: Legal and Risk, the ✓✓✓ Ms M Ramos external and internal auditors are required to attend meetings of ✓✓✓ Dr I Abedian the Group Audit Committee. Relevant members of the Group ✓✓✓ Prof G K Everingham Executive Committee are also required to attend, or attend by ✓✓✓ Ms N B P Gcaba invitation, meetings of the other committees. The chairman of ✓✓ Dr S E Jonah KBE A each of these committees reports at Board meetings on activities ✓✓✓ Mr P G Joubert of the committee. The membership of, and attendance to, ✓✓✓ Ms N N A Matyumza committees for the year under review since the appointment of the ✓✓✓ Mrs M A Moses Board was as follows: Mr B T Ngcuka ✓✓✓ ✓✓ Mr S Nicolaou A Schedule of Attendance at Group Audit Committee Meetings ✓✓✓ Ms K C Ramon of the Board: Ms B S Tshabalala * ✓ * ✓ Mr C F Wells * * Director ✓ = Present Date 1 Dec 7 Dec 18 Feb 11 Mar A= Apologies Prof G K Everingham *= Not a member (Chairman) ✓✓✓✓ Dr I Abedian ✓✓✓✓ Board committees Mr P G Joubert ✓✓✓✓ In order to ensure effective corporate governance and give proper Ms N N A Matyumza ✓✓✓ A attention to providing support and oversight to the turnaround Mr S Nicolaou ✓✓✓✓ strategy’s implementation, the Board decided to restructure its Ms K C Ramon ✓✓ A ✓ workings. The nine committees of the previous Board were reduced to three, namely, the Group Audit Committee (which ✓ = Present incorporates oversight for risk management), chaired by A= Apologies

26 Transnet Annual Report 2005 Schedule of Attendance at Group Remuneration Committee Group compliance; internal audit, (which is being outsourced to Meetings of the Board: ensure that more value is derived from this function); Group legal services and the Group company secretariat, which is responsible Director for sound corporate governance. In the divisions there are Date 8 Mar divisional risk committees.

Dr S E Jonah KBE (Chairman) ✓ Issues of risk management pertaining to the relevant business Dr I Abedian A units are dealt with in their respective operational reports Mr P G Joubert ✓ commencing on page 30. Mrs M A Moses ✓

✓ = Present Group Company Secretary A= Apologies In order to enable her to carry out her responsibilities, the Group Company Secretary is fully empowered by the Board and has Schedule of Attendance at Corporate Governance and adequate access to people and resources to fulfil this function. Nominations Committee Meetings of the Board: The Group Company Secretary provides an important support Director function to the Chairman and the Group Chief Executive. Date 4 Feb The Group Company Secretary is also a central source of ✓ Mr F T M Phaswana (Chairman) information and advice to the Board as a whole. The appointment ✓ Prof G K Everingham and removal of the Group Company Secretary is reserved for Board ✓ Ms N B P Gcaba decision-making. Mr B T Ngcuka A

✓ = Present Going concern A= Apologies In accordance with the requirements of the Companies Act, the Board considers the going concern concept in the context of its Risk management deliberations on the annual financial statements. The facts and The King Code of Corporate Practices and Conduct provides assumptions underlying the Board’s assessment are documented. guidelines relating to the management of risk and the The directors’ approval of the annual financial statements, responsibilities of the Board and the Audit Committee in that containing the going concern declaration is set out on page 61. regard. Sustainability Fundamental to the management of risk in Transnet is the The Group recognises its obligation to contribute to broader socio- establishment of an enterprise wide risk management focus. The economic goals and general social upliftment. This is done Board has ultimate responsibility for risk management and has primarily through the Transnet Foundation. Greater details on mandated the development of a Transnet specific enterprise wide Transnet’s sustainability activities are contained in the report risk management framework which will be adopted by the Board. commencing on page 21. The format of this report follows the Where appropriate, certain of the Board’s risk management Guidelines released by the Global Reporting Initiative, with functions have been delegated to the Group Audit Committee consideration given to Transnet’s relationship with various and to the Group Chief Executive, who in turn chairs the Risk stakeholders, including the shareholder, customers, employees, Management Committee. suppliers, society and the community, and the environment.

In order to ensure the strategic management of the Group’s Organisational integrity/ethical assets and liabilities, there is an Asset and Liability Management behaviour Committee, chaired by another executive director, the Chief The Group has approved a code of ethics which is referred to on Financial Officer. page 23 of the sustainability report.

The Group risk function is headed by the Group Executive: Legal Internal Audit and the Group Company Secretary assist in and Risk, who reports directly to the Group Chief Executive. The monitoring adherence to the Group’s values. function covers Group risk management (under three main streams – financial markets risks, operational risks and commercial risks);

Transnet Annual Report 2005 27 Corporate governance continued

Communication with the shareholder The Group appreciates the constructive relationship it has with Minister Alec Erwin MP, the shareholder representative (“the Minister”) and his department, the Department of Public Enterprises (“DPE”). Over and above the interactions which the Chairman, the Group Chief Executive and other Board members and officers of the Group have with the Minister and DPE in the normal course of carrying out the business of the Group, we appreciate the Minister’s establishment of a forum for regular formal interaction between the Minister and the chairmen and chief executives of state owned enterprises.

The Group takes seriously its statutory and regulatory obligations to properly inform the shareholder on the business of the Group. Remuneration The Board recognises that it is in the interest of all stakeholders to retain and motivate executives of the Group. Noting that the Group’s past practices in respect of performance management have not always properly rewarded good performance and taken appropriate action against poor performers, the Group Remuneration Committee (“Remco”) has given attention to, amongst others, the proper remuneration of executives and the introduction of an appropriate performance management system for the Group.

Fees for non-executive directors are recommended by Remco to the Board for further recommendation for the shareholder’s approval.

28 Transnet Annual Report 2005 page 30 Operational reports page 54 Chief Financial Officer’s report

Transnet Annual Report 2005 29 Operational report Spoornet

Spoornet focuses on the transportation of freight, containers and mainline passengers by rail.

Business overview The core competency of Spoornet is the movement of freight on rail. Spoornet is positioning to become a profitable and sustainable freight railway business that will help drive the competitiveness of the South African economy.

Spoornet has a 20 000 km rail network which represents 80% of Africa’s rail infrastructure. This extensive rail network connects the ports and hinterland of South Africa with the rail networks of the sub-Saharan region. Spoornet has a proud reputation for heavy haul leadership internationally as well as in Africa.

Overborder operations focus on the seamless movement of traffic across all rail corridors in the Southern African Development Community (SADC) while Spoornet International pursues opportunities beyond the borders of South Africa, primarily within SADC and the rest of the African sub-continent. Government is driving the strategy to reposition the passenger operations outside of Spoornet, thus enabling Spoornet to focus on freight operations and infrastructure. Performance highlights and operational achievements A number of performance highlights were recorded during the year:

30 Transnet Annual Report 2005 • During October 2004, the coal export line set a new weekly R668 million. The current year’s profit is primarily the record railing at a tempo of 74,42 million tons per annum. consequence of fair value gains resulting from the elimination of • In March 2005, the ore export line set a new weekly record by certain embedded derivatives totalling R3 473 million. The major transporting 622 740 tons of iron ore against the previous embedded derivative eliminated related to the Kumba Iron Ore record of 617 350 tons. contract, which was renegotiated into a rand-based railage • In co-operation with Transnet and other divisions, an agreement contract. If the impact of the embedded derivatives is excluded, was signed with Kumba Resources and other industry players to the current year loss is R21 million compared to a loss of increase the capacity of the ore export line to 41 million tons. R220 million in the prior year. The improvement is the result of • Spoornet successfully accommodated Sasol’s expanded Octene improved resource allocation, detailed revenue tracking and better II output. control over discretionary expenditure. • Coal export capacity was enhanced through the supply of 80 additional jumbo wagons to the coal line. This released Capital investment smaller wagons that were used to increase the railings to Majuba The following projects commenced during the 2005 financial year: Power Station relieving congestion on the road. • Wagon fleet renewal • Upgrade of 200 6E locomotives Financial overview • Replating of coal line jumbo wagons • Upgrade of 11E locomotives

2005 2004 The Transnet Board has approved R16 billion in capital R million R million expenditure as part of the initial investments required to ensure Turnover 14 171 13 422 Spoornet has the capacity to meet expected demand. Operating costs 12 927 12 427 Operating profit including Operational performance embedded derivatives 1 244 995 Spoornet’s main operational thrust is to run a scheduled railway. Operating profit excluding The key focus areas for the year under review were the elimination embedded derivatives 841 521 of unscheduled trains and the appropriate allocation of wagons to trains. The focus area for the 2006 financial year is the on-time Net asset value (including departure and arrival of trains. embedded derivatives) 8 907 5 455 Net asset value (excluding Safety, health and environment (SHE) embedded derivatives) 8 965 8 986 The National Railway Safety Regulator Act, 2002 (Act 16 of Profit/(loss) before tax 2002) requires each operator to be in possession of a safety (including embedded derivatives) 3 452 (668) permit in order to continue operations. Spoornet was granted a Loss before tax (excluding temporary safety permit on 27 August 2004, valid until 31 August embedded derivatives) (21) (220) 2005. Spoornet has successfully completed a safety management Average net assets system and has applied for a permanent safety permit. (excluding embedded derivatives) 8 976 8 986 Return on average net assets (%) Spoornet’s train operations safety performance for 2005 was (excluding embedded derivatives) (0,2) (2,4) nevertheless unsatisfactory with both the number of incidents and Number of employees 32 516 34 771 the costs thereof increasing against 2004. This is an area of Turnover per employee 0,44 0,39 ongoing management focus. Volume railed (tons million): Coal line 67 66 Spoornet has tested the hearing of employees and has addressed Iron ore line 28 27 the locomotive environment with its high ambient noise. To date General freight lines 86 83 4 000 special headsets have been issued to employees with a further 2 000 ordered. The estimated cost of this initiative is Capital expenditure split as follows: R56 million. Expansion 38 150 Replacement 1 307 1 340 No environmental complaints were registered against Spoornet by any government agency in respect of the 2005 financial year. During the year there were derailments with potentially significant Financial performance environmental degradation and the affected sites have since been Spoornet recorded a net profit of R3 452 million before tax for rehabilitated to the satisfaction of the appropriate regulatory the financial year, compared to the previous years’ loss of authorities.

Transnet Annual Report 2005 31 Operational report Spoornet continued

Human capital management Strategic objectives The employee complement decreased by 2 255 from 34 771 Spoornet is fully aligned with the Transnet four-point turnaround employees to 32 516 employees mainly through natural attrition plan. Spoornet’s statement of strategic intent in support of the and the retrenchment of 546 employees in February 2005. Transnet plan is “Spoornet will be a freight railway that satisfies the needs of our customers”. Spoornet had embarked on a comprehensive Diversity Management Programme since 2003 which continued into the This is a movement away from the desire to be an integrated year under review. Challenges to achieving employment equity freight logistics solution provider and represents a return to the include matching business optimisation requirements, decreasing roots of Spoornet. employee numbers and enhancing skill levels. Satisfactory progress has been made in addressing the overall demographics. Spoornet’s long-term strategic objectives to achieve its strategic The lifestyle management programme (LMP) was launched to intent are: address the impact of HIV/Aids within the Company. • to be a financially successful and sustainable business; • to be an efficient and safe railway; Corporate social investment • to serve customers through best practice processes and Spoornet’s Corporate Social Investment (CSI) focuses on HIV/Aids initiatives; and with 21 major flagship projects throughout the provinces. The aim • to develop leadership capability and invest in the growth of is to ensure development of the implementing organisation and employees. surrounding community and to guarantee the sustainability of projects. Spoornet spent R2,1 million on CSI projects for the year Summary of the capital expenditure programme over the next under review. five years:

Risk management Projects R million The major potential risks areas have been identified. A risk management framework together with appropriate processes is Shosholoza Meyl 254 being developed to manage and mitigate these risks. Coal export line 3 892 Ore export line 2 971

Spoornet management believes that good progress will have been General freight (including support services) 8 973 made in the elimination or mitigation of these risks by 2006 Total 16 090 financial year-end.

32 Transnet Annual Report 2005 Prospects Business development At the beginning of the 2006 financial year Spoornet prepared a In addition to the expansionary plans for both the coal and iron five-year strategic plan and a new corporate business plan for ore export lines, Eskom and Spoornet are investigating building a 2006. The core of this plan is aimed at stabilising the business, 67 km dedicated railway line from Ermelo to the Majuba Power achieving the growth strategy and redirecting the business by Station with an annual capacity of nine million tons. focusing on our core business of rail freight. Over the next five years, implementation of plans for major restructuring at Spoornet Spoornet, a major automotive manufacturer and other Transnet will positively impact the financial health of the business and also divisions are collaborating on a joint initiative to increase motor dramatically alter the South African rail industry. The established vehicle exports through the Durban harbour. presence of rail safety and economic regulators will oversee operator safety and pricing. A change leadership strategy will In the third quarter of the 2005 financial year, Spoornet underpin all operational interventions and is supported by a introduced a scheduled service of five container trains a day human capital development plan. between Durban and the City Deep terminal in Gauteng to demonstrate capacity and commitment and is confident of the Major capital expenditure over the next 12 months: take-up of this service in the new financial year.

Projects R million Conclusion Spoornet is committed to the transformation of the South African Wagon fleet renewal and modernisation rail industry and to the turnaround of the business. The rail for General Freight 550 industry does, and will in future, play a critical role in the Ore line: capacity expansion (29 mt to 41 mt) 332 economy of the country. The new strategic direction will ensure Coal line: capacity expansion (71 mt to 86 mt) 256 that the business, in co-operation with Transnet divisions, Upgrade 200 additional class 18E 1 locomotives contributes to lowering the cost of doing business and is relevant for general freight 200 in contributing to the competitiveness of South Africa’s emerging Ore line: sustain 05/06 to 09/10 108 economy. Building of 256 CCR11 jumbo coal wagons on the coal export line 71 Spoornet is confident of meeting the challenges of the future and Total 1 517 of being “At the heart of it all”.

The above table represents the major projects of the R2 587 million capital expenditure budget.

Transnet Annual Report 2005 33 Operational report National Ports Authority (NPA)

NPA provides port infrastructure and marine-related services and manages port activities in a landlord capacity at South Africa’s major ports.

Business overview The NPA is the custodian of the country’s primary trading hubs, managing the most vital conduits of the country’s imports and exports. Our business performance is therefore integral to the well-being of the South African economy.

NPA offers a combination of port facilities and services which complement each other. Each port has a natural hinterland with a defined market, which drives the nature of services, facilities and the types of cargo handled at each port. Hence, each port operates and develops its own specialised services, which supports a defined customer base.

The regulatory environment The adoption of the National Ports Bill by the National Assembly in Parliament (1 March 2005) is a milestone towards ensuring an effective regulatory framework for the ports sector. Performance highlights and operational achievements • Turnover increased 9,8% year-on-year • Turnover coupled with positive cost containment resulted in operating profit increasing 10,5% year-on-year • Capital expenditure of R1 012 million primarily on the Port of Ngqura and the Port of Durban • All ports operate at the highest level of the five Helmet Fire Programme

34 Transnet Annual Report 2005 • Four-star rating on NOSA external audit of the safety on the domestic market resulting in exports being depressed in management system the current financial year. There were negative effects from • All ports except for the Port of Mossel Bay have achieved derailments and other rail infrastructure problems. The ISO 14001 certification unfavourable weather patterns also negatively affected fruit • Human resources have been certified as ISO 9001 compliant exports. • Renegotiation of the disciplinary and grievance code enhancing accountability The sensitivity of the import/export scale continues to be carefully managed throughout the business operations. Each of Financial overview the ports continually assess the impacts of the macro-economic factors that drive the mechanics of managing the business. 2005 2004 R million R million Year under review NPA’s financial performance has exceeded expectations as stated Turnover 4 994 4 549 Operating profit 3 250 2 942 in the performance highlights. The sensitivity balance between Net asset value 10 536 7 215 imports and exports has been successfully managed and the Turnover per employee 1,46 1,28 flexibility in adapting to changes in the macro-economic Return on average net assets (%) 30 34 environment and consequently customer demands has delivered a Number of employees 3 419 3 544 pleasing financial performance for NPA. NPA’s cost-containment initiatives and streamlining of its business has played an integral Container (TEU million) role in driving operating profit. Imports 1,143 1,021 Exports 1,080 1,016 NPA has a good working relationship with labour and their unions Trans-shipments 0,482 0,411 which facilitates improved mediation. Bulk and Breakbulk (tons million) Imports 43,477 43,841 Exports 123,94 128,07 NPA’s customer relationship management remains a focal point in Trans-shipments 0,717 0,297 the business which is being driven at the top by the Group’s focus on “one seamless transport company”. This evolved interaction Capital expenditure split as follows: with business units in the Group is benefiting our customer base Expansion 993 1 152 by assisting in future planning and enhancing decision making Replacement 19 52 thereby improving service delivery. The “silo” mentality of the past Operational expenditure includes: has been put to bed and NPA understands its customers’ needs. Minor maintenance 64 53 Major overhauls/maintenance 10 10 Safety, health and environment (SHE) NPA is proud of its SHE achievements to date. Subsequent to the 2004 NOSA grading, NPA scooped ten prestigious awards from Operational performance NOSA, which recognises the quality of the ports safety, health and Revenue: Imports environmental systems. These awards have culminated from the Bulk and breakbulk revenue decreased year-on-year by 2%. considerable time and energy invested by NPA and affirms that The volumes imported were suppressed due to adverse crude oil the organisation has the best SHE systems in the various regions prices, which hit record levels during the current financial year. we operate in. This was further exacerbated by the restrictions on oil tankers due to the expansion at the oil jetties at the Port of Saldanha. In addition to the excellent ratings reported in the performance highlights and achievements, the environmental self-assessment Vehicle imports increased phenomenally year-on-year by 68%. programme (ESAP) audits were conducted in all ports based on The strengthening of the rand against the US dollar and the low interest rates have increased consumer spending. The knock-on the 16 principles of sustainable development as packaged by the effects of the increase in demand for commodities have impacted International Chamber of Commerce. The overall score was 3,5, NPA positively. which is a performance level of 88%.

Revenue: Exports NPA strives to continually enhance the current SHE performance Export revenue was negatively affected by the strengthening of levels and proactively pursue best practice to maintain the best the rand against the US dollar. Local manufacturers focused SHE systems in the regions we operate in.

Transnet Annual Report 2005 35 Operational report National Ports Authority (NPA) continued

Human capital management Macroeconomic factors Human capital management and development (HCMD) is one of • Globalisation and its effects in the South African context the key strategic drivers for running a successful world-class port • Technology advancements internationally authority. • The dynamics of the import/export scale play a vital role in the success of the business NPA’s succession and retention strategy has proven successful • The economic policies of the South African Government drives with 67% of the senior management vacancies being filled infrastructure development and initiatives undertaken by NPA through our succession planning pools. Through this strategy • Interest rate sensitivity, inflation and foreign exchange rate senior levels filled were four executive managers and one general fluctuations manager. Risk management NPA’s employment equity targets for the management cadre NPA has completed their enterprise wide risk management (inclusive of gender) have been achieved. The challenge going identification and assessment. The results have been incorporated forward, however, is in correcting the critical technical grades. into our corporate plans for 2006. All ports have been Arising from this short coming we have improved access to subjected to annual business continuity management (BCM) training resources and increased competence development audits to identify and prepare for disasters that threaten delivery initiatives. of service.

NPA’s HIV/Aids programme is on track with employees Management challenges participating in voluntary counselling and testing initiatives. Our We face the following challenges in driving the business over and awareness and educational campaigns are ongoing ensuring that above the exceptional performance achieved in the current NPA’s employees are provided with the support that this pandemic financial year: necessitates. • Removal of bottlenecks to growing imports and exports; • Meeting customer demands on current capacity constraints i.e. NPA’s remuneration and reward strategy is currently being there is increased pressure from shipping lines that are reviewed with a heightened focus on the reinforcement of a increasing the size of their container ships from 2 400 TEU’s culture of performance at all employee levels. As part of to 4 500 TEU’s; implementing a performance driven culture, we continued with • Achieving synergies and elimination of duplication of effort to the Inkanyezi Awards which identified and rewarded high contain costs; achievers in 2004, thereby encouraging employees to stretch • Achieving government’s objective of fostering economic themselves further in aspiring for recognition. development in the Eastern Cape by careful management of the development of the Port of Ngqura and addressing the need for NPA has participated in the “best company to work for” survey dedicated traffic for this port; conducted by the Financial Mail. This has provided us with an • Effective project management and delivery of infrastructure plans; opportunity to benchmark ourselves in the industry. We strive to • Collaboration with customers and stakeholders; be the “employer of choice”. • Effective utilisation of resources in multi-skilling; and • Succession and retention of skilled workforce. Corporate social investment (CSI) NPA’s CSI initiatives have targeted the communities close to each port’s operations. Our primary focus has been on education, the environment and HIV/Aids campaigns. This has resulted in a positive contribution to the wider South African community allowing mutual development of respectful and collaborative partnerships.

36 Transnet Annual Report 2005 Strategic objectives Prospects In line with Transnet’s four-point turnaround plan, NPA’s NPA had a good year and the milestones have been set in the contribution will be measured on the successful achievement of organisation to exceed the current performance levels at each of the following strategic objectives: its ports. • Continuing with the expansion of the capacity of the container handling facility at the Durban, Cape Town and Port Elizabeth NPA’s outlook for the next 12 months is driven by: ports; • Infrastructure deliverance, efficiency and management; and • Efficient operation of all ports; • Business growth with a focus on commodity clusters • Consolidate cargo handling in Durban, Cape Town; Port Elizabeth and East London ports; and The deliverables that will contribute towards achieving this • Creation of additional capacity in the Richards Bay and the outlook are: Saldanha Bay ports. • Finalising port master plans; • Achieving the capital expansion and development plan for Project management of NPA’s infrastructure development is 2006 which will realise enhanced infrastructure capacity; critical to delivering on the strategic objectives outlined above. • Working towards completion of the Port of Ngqura construction Port expansion will be based on the framework plans developed for and preparation for operations; the South African ports and aims to achieve a positive risk-reward • Increased collaboration within freight chains to facilitate relationship between the port authority and its terminal operators. logistics solutions for port users; • Contribute towards reducing the cost of doing business by Summary of the capital expenditure programme over the next five launching the B2B Portal to create a platform for customers to years: transact electronically with NPA including access to cargo and information flow; and Port R million • High levels of safety and security within the port environment by aligning with international standards as well as retaining Richards Bay 1 772 ISO accreditation. Durban 7 243

East London 858 Major capital expenditure over the next 12 months: Port Elizabeth (including Ngqura) 1 442

Cape Town 700 Port R million Saldanha Bay 2 342 All ports 1 053 Richards Bay 251 Durban 632 Total 15 410 East London 10 Port Elizabeth 15 Cape Town 69 Saldanha Bay 32 Ngqura 556 Marine Services (lighthouse and dredging) 85 Head office – National Project (IT and Security) 77

Total 1 727

Transnet Annual Report 2005 37 Operational report South African Port Operations (SAPO)

SAPO manages port terminal and cargo operations through a number of strategically segmented and commercially viable business units.

Business overview SAPO manages 13 cargo terminal operations which are situated across six South African ports.

SAPO is the dominant terminal operator in each of these ports and interfaces with road and rail transport to provide an efficient and reliable service to a wide spectrum of customers. The operations are divided into four sectors namely: container, dry bulk, breakbulk and automotive. Performance highlights and operational achievements • Turnover increased 15,5% year-on-year • Turnover coupled with positive cost containment resulted in profit from operations increasing 53,9% year-on-year (including embedded derivative) • SAPO along with key stakeholders was able to reduce congestion and eliminate the US$100 surcharge per container • Crane productivity has improved from 19% to 74% over a three- year period, beginning 2002 • SAPO won a gold award at the 2004 Logistics Achiever Awards • In a joint venture with the private sector, SAPO established a state-of-the-art citrus terminal that handles steri-fruit destined primarily for the Japanese market • The Durban car terminal maintained its top 100 company NOSCAR status for the second year in succession

38 Transnet Annual Report 2005 • The iron ore export channel achieved ISO 9002 accreditation. increased 43% year-on-year. The three car terminals (Durban, This is the first “ore channel” in the world to achieve such East London and Port Elizabeth) continue to provide excellent accreditation service levels. Financial overview Year under review SAPO’s financial performance is pleasing in light of the 2005 2004 implementation of Transnet’s four-point turnaround plan. Our R million R million performance highlights are illustrative of SAPO’s commitment to achieving improved financial performance. Turnover 3 405 2 949 Operating profit Turnover has been boosted by solid volume growth in the container (including embedded derivative) 1 048 681 and automotive sectors. The drive and ongoing focus by Operating profit management in achieving cost reduction through efficiency (excluding embedded derivative) 897 552 improvements has delivered a pleasing increase in profit from Profit before taxation 1 902 348 operations of 53,9%. The positive trend in cost containment, Net asset value 3 083 1 151 Turnover per employee 0,66 0,54 together with a reduction in the total number of employees was Return on average assets (%) achieved despite SAPO’s volume growth. (including embedded derivative) 58 24 Return on average assets (%) The embedded derivative liability of R1 039 million at 31 March (excluding embedded derivative) 41 39 2004, as a result of a service contract with one of our customers, Number of employees 5 196 5 464 was addressed in the current financial year. The contract was renegotiated from a US dollar to a rand denominated contract, Volumes handled: which removed the embedded derivative and increased the net Containers (TEU million) 2,8 2,5 asset value of SAPO. Dry bulk (tons million) 44 44 Breakbulk (tons million) 12 12 In line with Transnet’s four-point turnaround plan to increase Automotive (vehicles thousand units) 332 232 capacity across the Group, the R100 million expansion of the Capital expenditure split as follows: Durban car terminal was a highlight during the year. The Expansion 571 324 total parking bays were increased from 3 500 to 6 500 bays; with Replacement 14 61 a double carriageway bridge linking the parking garage directly to Operational expenditure includes: the quay side. The direct link reduces risk, improves vessel turn- Minor maintenance 26 26 around time and enables the terminal to load and discharge Major maintenance 74 76 vehicles 24 hours a day. The terminal is experiencing exponential growth. Barely a year after completion of the expansion, plans are Operational performance under way for the second phase of the expansion project. SAPO was under pressure to continuously create additional The capacity at the Durban container terminal has improved with capacity arising from the 12% growth in container volumes. the acquisition of three-post Panamax container cranes, which are Despite the historical delay in investment in equipment and each capable of loading/unloading 35 to 40 containers an hour. container stacking space, the terminals achieved satisfactory productivity levels. Three more cranes are presently being constructed in Durban. SAPO plans to commission these cranes during the 2006 Growth in certain break bulk commodities has been offset by a financial year. The improved crane concentration will enable general trend to containerisation coupled with increased private sector competition in this cargo segment. a higher crane ratio per vessel, resulting in quicker vessel turnaround. Dry bulk volume growth has been restricted by capacity constraints in both the logistics chain and SAPO terminals. These The development of a second container terminal in Durban is in volumes are expected to increase substantially in the coming years progress. as capacity expansion projects are completed. The R1 billion expansion project at the Saldanha iron ore terminal The increase in demand in the automotive sector had a is under way. Once completed the volume throughput will increase phenomenal impact on our vehicle units loaded, which to 42 millions tons per annum.

Transnet Annual Report 2005 39 Operational report South African Port Operations (SAPO) continued

Safety, health and environment (SHE) Corporate social investment (CSI) In keeping with international best practice, the ISO 14001 Total CSI spend for the 2005 financial year was R1 million in the Environmental Management System is presently being areas of maritime education, arts, culture and recreation, support implemented at all terminal operations. SAPO aims to of non-governmental organisations and support for victims of continuously improve and reduce the environmental impact from natural disasters. terminal operations. The bulk and multipurpose terminals in Saldanha have already been certified compliant. All terminals will Macroeconomic factors be compliant by the end of the 2006 financial year. • Global commodity trends impact the demand for products shipped through SAPO’s bulk terminals. The present outlook The ISO 9001 Quality Management System is currently being remains bullish in this sector and the exchange rate position implemented at all terminal operations. East London, Port does not materially impact this market. Elizabeth, Saldanha bulk terminal and the Durban car terminal • The lower interest rates increased demand for fully imported have been certified compliant and the balance will be compliant luxury vehicles. The car terminal export volumes are dependent before the end of the 2006 financial year. on the success of local manufacturing operations in securing export contracts. The benefits accruing from the “motor industry SAPO’s commitment to the implementation of these standards development programme” play an important role in their evidences management’s intention to continuously improve cargo success. handling processes. • The global trend towards containerisation, coupled with increased competition in the private sector increases pressure A comprehensive security strategy has been implemented at all on the break bulk volumes. terminal operations to attain a safe and hazard-free operating • The balance of imports versus exports in the container sector environment. All terminals are ISPS code compliant (International is impacted by exchange rate fluctuations. However, this has Standard Port Facility Security Code). a minor impact on overall container volumes as excess import containers results in empty containers being exported and Human capital management vice versa. Part of delivering on Transnet’s four-point turnaround plan, SAPO completed a review of the management structures. A competence Risk management audit was undertaken, which resulted in significant changes to The critical risks facing SAPO, in its attempt to deliver on the the structure to support the new strategic direction of SAPO. strategy, have been identified. Initiatives to eliminate or mitigate This rejuvenation process will continue during the 2006 financial these risks have been developed and are in the process of being year, with greater emphasis on the development of the required implemented. competencies to support the success of SAPO’s business operations. Business continuity and disaster recovery plans are adequate and regularly tested. Management has started the process of assessing the impact of the HIV/Aids pandemic on the business. Whilst a clear picture Management challenges of SAPO’s exposure has yet to emerge, the implementation of a The enterprise wide risk assessment has identified the challenges voluntary counselling and testing programme is ongoing and that management faces in their drive to contribute to the strategic has yielded results. An accelerated and focused approach is direction of Transnet. These challenges include: anticipated during the 2006 financial year, when SAPO expects • Alignment with internal and external stakeholders to have a better understanding of its prevalence rates. • Creation of capacity • International benchmarking of operations Labour relations are continually improving in SAPO. The • Skills development challenges associated with balancing the socio-economic needs of • Project management the unemployed and ongoing pressures of automation and flexible • Corporate governance labour practices continue. In order to effectively compete with the private sector, SAPO needs extensive engagement on these issues to forge ahead.

40 Transnet Annual Report 2005 Strategic objectives Prospects SAPO’s strategic intent is to create capacity before demand and The primary objectives for the coming year are: deliver improved productivity levels whilst containing costs to • to be benchmarked as an efficient and cost competitive an optimum level. In doing so we aim to fulfil our role in the operator; national economy of: • growing the business through diversified revenue streams; • stimulating economic growth; • creation of capacity ahead of demand; • facilitating trade through increased competitiveness; and • containment of costs per unit of volume to less than CPIX • eliminating waste and creation of predictability and reliability in increases; and the import/export supply chain. • human capital development and retention.

Financial health, international productivity benchmarking and Major capital expenditure over the next 12 months: development and retention of employees are key drivers for the business. Terminal R million

Summary of the capital expenditure programme for the next five Durban container 180 years: Durban multi purpose 70 Durban 2nd container 23

Terminal R million Richard’s Bay bulk 96 Richard’s Bay multi purpose 91 Durban container 895 Cape Town container 83 Durban multi purpose 192 Saldanha iron ore 211 Durban 2nd container 748 Other terminals 141 Richard’s Bay bulk 795 Total 895 Richard’s Bay multi purpose 274 Cape Town container 665 Saldanha multi purpose 422 SAPO is confident that the business is well positioned to meet Saldanha iron ore 412 growing demand. Continual improvement in efficiencies and Other terminals 686 operational integration will ensure that we contribute to a Total 5 089 reduction in logistics costs for both importers and exporters.

Transnet Annual Report 2005 41 Operational report Petronet

Petronet pumps and manages the storage of petroleum and gas products through its network of high-pressure, long distance pipelines.

Business overview Petronet is the custodian of the country’s strategic pipeline assets, servicing primarily two key industries (fuel and gas) by transporting petroleum and gas products over varying distances. Our business performance is therefore integral to the well-being of the South African economy.

The liquid fuel network traverses the provinces of KwaZulu-Natal, Free State, Gauteng, North West and Mpumalanga. The intake stations are the two Durban refineries, the crude refinery at Coalbrook (Natref) and the Sasol 2 and Sasol 3 synthetic fuel plants at Secunda. The network includes a tank farm with a capacity of 30 million litres at Tarlton.

The regulatory environment The appointment of a single energy regulator is imminent and heralds a new era for South Africa of commercial and technical regulation of the petroleum and gas pipelines. Performance highlights and operational achievements • Turnover exceeded the R1 billion mark for the first time in Petronet’s history achieving an increase of 11% year-on-year • Operating profit increased 14% year-on-year

42 Transnet Annual Report 2005 • Positive cost containment; cost to convey a litre of fuel over a attributed to an increased vigilance of servitude integrity distance of one kilometre was 2% lower than five years ago monitoring brought about by urban creep and risks associated with • Labour cost per litre conveyed decreased in real terms leading the transporting of valuable commodities. to a productivity improvement of 10% in real terms over the past 10 years. Year under review This was the first full year of operations since the termination of Financial overview the Sasol Supply Agreement in December 2003, which resulted in a fundamental change of the supply pattern of petroleum products 2005 2004 in the country. R million R million In support of Transnet’s four-point turnaround plan, particular Turnover 1 019 919 emphasis was placed on improved efficiencies and productivity, Profit before tax 333 239 mainly through our re-engineering project called SMART. The result Net asset value 2 405 1 722 of these actions were that the cost to convey a litre of fuel over a Turnover per employee 1,88 1,62 distance of one kilometre was 2% lower in 2004 in real terms than Return on average assets (%) 8,8 7,2 five years ago. Our labour cost per litre conveyed decreased in real Number of employees 542 568 terms leading to a productivity improvement of 10% in real terms Volumes transported: over the past ten years. These achievements bode well in Petronet’s Crude (billion litres) 4,96 5,54 drive in lowering the real cost of energy transportation in South Refined products (billion litres) 11,41 11,65 Africa and our preparations for future commercial regulation. Distribution (trillion litre kilometres) 5,99 5,99

Capital expenditure split as follows: Our improved financial performance as stated in the performance Expansion 38 10 highlights is testimony to Petronet’s commitment to achieving the Replacement 98 72 Group’s drive for improved financial performance and illustrates management’s drive to successfully manage Petronet’s changing Operational expenditure includes: business environment and to ensure long-term economic and 8 Minor maintenance 7 operational sustainability. Major maintenance 18 11 Safety, health and environment (SHE) Operational performance Petronet improved its international annual environmental rating through a combination of good operating practices and focused Total volumes transported decreased by 4,8% year-on-year. maintenance which culminated in no leaks or spillages being Petronet’s key distribution indicator of megalitre/km was however reported for the year. unchanged primarily due to the increase in volume of refined products transported from the coast. Although there was an Petronet maintained its impeccable record of having no employee increase in the volumes of refined products transported from the coast, it was nullified by a corresponding decrease in the volumes fatalities as a result of industrial accidents. However there was an of crude oil transported, resulting in an overall decrease of total unfortunate incident with the death of two contract workers whilst volumes transported. cleaning the tanks at our tank farm at Tarlton. We wish to again express our sincere condolences to the families of the two men who The multi-product pipeline out of Durban is oversubscribed and lost their lives. This incident emphasised the need for ongoing capacity had to be allocated to our customers on a fair and vigilance in Petronet’s activities and its associated activities. equitable basis and in an operationally feasible manner. This has resulted in the line operating close to 100% capacity throughout Petronet achieved a four star NOSA rating. This achievement is the year. This was one of the main challenges during the year, attributed to enhanced training, employee dedication and especially ahead of regulation. continuous business focus and improvement.

Petronet successfully worked with customers in achieving agreed Human capital management service delivery levels. Petronet has progressed with its business transformation initiatives, Project SMART, by retrenching 87 employees in In line with Transnet’s four-point turnaround plan, Petronet’s focus March 2005. This has addressed the skills-mix gaps as identified on maintenance of ageing assets resulted in an increase in by benchmarking initiatives and Petronet’s business requirements. maintenance costs by 38% year-on-year. This increase is also The impetus in the re-engineering and transformation process

Transnet Annual Report 2005 43 Operational report Petronet continued

has led to a significant change in Petronet’s human capital levels. The structure also incorporated facilitation of cross risk management philosophy and practices following from the management between the three levels as well. A risk register has Transnet’s four point turnaround plan. Employees in key positions been established and risks are identified, assessed, mitigated and have been identified and this has led to the drafting of a plan for monitored continuously. Petronet’s succession and retention strategy. Management challenges Best practices in human capital training and development will be • Preparing for regulation harnessed to ensure that Petronet’s benchmark of 550 employees • Successfully implementing the IFRS and SMART projects will be appropriately skilled to meet imperative business needs for • Grow the non-regulated side of the business the years ahead. • Management of risks

Petronet continues its action plan against the HIV/Aids pandemic. Strategic objectives Currently 60% of all employees have participated in the process The appointment of a single energy regulator NERSA (National and know their status. The prevalence rate for Petronet is 4%. Energy Regulator of South Africa) is imminent and during 2005 Petronet will be ensuring that it meets all commercial and technical Lost man hours for the year was 1,14%, which is below our target regulatory requirements. Substantial progress was made in 2004 to limit. This is commendable during a year filled with change prepare Petronet for the challenges of the new era of commercial management and challenges of uncertainty and consolidation in and technical regulation of petroleum and gas pipelines. Petronet’s labour force. Assurance was also given to the shareholder that Petronet will Corporate social investment (CSI) continue to conform to all legislative requirements and uphold CSI projects in Petronet are managed through the Vusisizwe high corporate ethics. Development Trust (the Trust) and R1 million (2004: R1 million) was transferred to the Trust. The Trust’s projects encompass The realisation of strategic initiatives are supported by an health, HIV/Aids, education, environment and job creation. approved capital funding plan as part of Transnet’s overall These projects are undertaken in conjunction with the provincial investment plan amounting to R4,6 billion for the next five years. and local authorities along our pipeline routes. This will amongst other include the provision of the new multi- products pipeline, the refractionator to ensure petroleum product Macroeconomic factors specifications are met, increased gas pipeline capacity and The primary macroeconomic factor that affects Petronet is the meeting new business challenges. The challenge of the new multi- constant increase and ongoing fluctuations in the crude oil price products pipeline is to ensure that the deadline of 2010 is met and the rand/US dollar exchange rate which impacts on the basic and that Petronet’s client infrastructure up and down stream of fuel price thus creating a fluctuation in demand of products the pipeline is able to meet the new capacity. A further challenge flowing through the pipeline. is to ensure that current capacity is managed optimally and new solutions are found to manage the current supply dispensation and Risk management problems associated with it in a pro-active fashion. Petronet’s number one risk is that of pilferage and third party activity damaging our pipelines. Petronet has embarked on an Petronet will continue to redirect and re-engineer its business to awareness campaign of educating communities along the pipeline be an integral part of Transnet and provide shareholder value. route of the dangers of tampering with the petroleum pipelines. The completion of Project SMART will align skill requirements Education and communication will help Petronet and our and address business requirements. communities to avoid incidents similar to elsewhere in Africa where a 1 000 people have been killed in the past year due to Petronet’s capacity plan study indicates physical capacity tampering with the petroleum pipelines. constraints in the whole pipeline system by 2010 and capacity upgrades are planned to address these capacity needs. An The inherent risks of transporting petroleum products was additional 15 million litres will for example be made available for managed by constant focus and drive by the management team transportation between Sasolburg and Alrode through the de- resulting in no spillage incidents recorded for the year. bottlenecking project due for completion in October 2005. Ultimate capacity requirements will, however, only be addressed As part of Transnet’s four-point turnaround plan, Petronet focused by the construction of our new multi-products pipeline between on the establishment of a risk management structure to manage Durban and Gauteng at a cost of R3 billion. Petronet anticipates and cascade risks on the strategic, managerial and operational that this line will be completed in 2010.

44 Transnet Annual Report 2005 Summary of the capital expenditure programme over the next five Petronet is structured and manned in such a way that it can years: optimally manage its network and grow. Our skilled and dedicated workforce is ready to face the challenges and play the role Projects R million expected of Petronet by our stakeholders. Celebrating 40 years of pipeline excellence in the 2006 financial year will be a highlight New multi-products pipeline 2 980 and a tribute to the pioneers who envisaged the need for a Refractionator Project 100 pipeline and whose dreams we have realised and surpassed and Gas line de-bottlenecking (Lilly 2) 400 will keep improving on as part of a new and successful Transnet. Maputo/Gauteng pipeline 360

Telecontrol project 100 Major capital expenditure over the next 12 months: Terminalling and logistics 184

Gauteng/Beit Bridge pipeline 100 Projects R million Total 4 224 New multi-products pipeline 30 Refractionator 63 The increase in pipeline capacity will ensure that the economy of Telecontrol Phase 2 23 South Africa is not constrained and that the pivotal role Petronet Workshop/training centre 34 plays in the supply of fuel is realised and maintained. Intelligent pigging gas line 16 Alrode/Secunda manifold 27 The transportation of gas was put on a new growth cycle with the Modification to block valves 12 introduction of a new long-term contract. Future growth in this Inspection and refurbishment of DJP pipeline 11 sector is projected to an extent that will soon require more Total 216 investment in our gas pipeline system.

Petronet will continue to explore new business opportunities. This The above table represents the major projects of the R344 million will include the growth of the non-regulated side of the business capital expenditure budget. such as providing terminalling and logistics services for our clients as well as investigating transportation of other commodities by pipeline. Prospects In the coming year, emphasis will be placed on the cost structures within Petronet in order to optimise operations and realise further efficiencies with the ultimate aim of reducing the real cost of transporting fuels and hence reducing the cost of doing business in South Africa.

Transnet Annual Report 2005 45 Operational report Transwerk

Transwerk focuses on the refurbishment, conversion, upgrade and manufacturing of rail related rolling stock.

Business overview Transwerk services the railway rolling stock market, based in South Africa and is geographically spread across seven locations. Transwerk has eight product-focused business units providing services, ranging from refurbishment, conversions, and upgrades as well as manufacturing of rail related rolling stock.

Consequently, Transwerk is a decentralised and incentivised business with accountability and decision-making located at critical points. This approach to managing the business has promoted a culture of transparency, accountability, integrity, excellence and innovation dedicated to simplifying the operations of our customers, in line with commercial imperatives.

Transwerk’s overall objective is to enhance shareholder value through real growth in earnings as well as exceed the expectations of all its stakeholders. Performance highlights and operational achievements • Turnover increased by 18% year-on-year • Operating profit increased by 28% year-on-year • Design and implementation of a modular concept in the refurbishment and upgrading of Metro coaches • BEE spend increased by 689% since the 2001 financial year; R80 million was procured and this has grown to R631 million in the 2005 financial year

46 Transnet Annual Report 2005 • Staff complement increased by 12% year-on-year to meet as aesthetics are the hallmark of the new 10M5 (GOMOD) Metro increased demand. coaches. The prototypes as well as the industrialised product line were completed in accordance with strict principles in project Financial overview management. The 10M5 coaches will provide the SARCC with an evolutionary Metro coach that refurbishes and upgrades existing 2005 2004 coaches to high standards while increasing their life cycle. The R million R million improved turn around of repairs/upgrades from fit-off/fit-on components reduces the period that coaches stay out of traffic, Turnover 3 029 2 571 as well as a reduction in operating costs. Operating profit 413 322 Net asset value 1 199 768 Turnover per employee 0,45 0,42 Year under review Transwerk has reported a significant improvement in financial Return on average assets (%) 43,8% 50,8% Number of employees 6 797 6 064 performance as stated in the performance highlights.

Volumes handled (units): The 43,8% return on average assets is substantially higher than Wagons refurbished 6 830 8 402 the industry norm. The slight reduction year-on-year arises from 214 Wagons manufactured 160 the significant capital investment of R150 million in support of Coaches mainline vehicles future growth, which is in line with Transnet’s four-point turn- refurbished/upgraded 130 168 around plan. The capacity building is evidenced in the 12% Coaches suburban vehicles increase in the staff complement. refurbished/upgraded 397 291 Locomotives refurbished/upgraded 312 265 In the 2001 financial year, R650 million was procured in total, Traction motors refurbished/upgraded 2 133 1 267 and this has grown to R1 900 million in the 2005 financial year. Wheels refurbished/upgraded 65 877 61 492 Within this period support to BEE through procurement spend has Capital expenditure split as follows: increased from R80 million to R631 million. This has been Expansion 65 38 achieved largely through intensive engagements with our top Replacement 85 52 suppliers who have also taken up the challenge within the last four years. Transwerk now boasts that of its top five suppliers only Operational performance one, an overseas owned company, is not empowered. The increase in volumes is mainly attributed to customer demands To ensure that systems and processes comply with world-class as well as the establishment of new product lines to effectively standards a number of initiatives in support thereof were launched address client requirements. during the year. These include amongst others: • Enterprise wide risk management; Although wagon refurbishment volumes decreased by 19% year- • Installing formal project management; on-year, the work content increased significantly resulting in • Various training initiatives as well as a range of technical improved sales. Client budget constraints are the main reason training programmes; for the decrease in mainline coach repairs. • Quality management; and

Transwerk’s healthy operating performance stems from the • Various capacity building initiatives in creating centres of realisation of its strategy i.e. consolidating its competencies while excellence for various products. experiencing growth by leveraging capabilities into a pro-active total service. Safety, health and environment (SHE) The Transwerk SHE Corporate Standards was adopted on Operationally the focus has been and will continue to be on 1 April 2004. This is a major improvement as they complement instilling a culture of continuous dynamic reconfiguring of the the Transwerk environment more appropriately and ensure business, not only to provide a total service to customers, but to effective SHE management and loss control. The external audits ensure that the portfolio of product-focused business units are conducted resulted in an upgrade to a three Star NOSA Rating. sustainable and financially sound. The Transwerk environment is a highly technical one and the high Transwerk has over the past two years designed and implemented incident rate was concerning. Management has implemented a modular concept in the refurbishment and upgrading of Metro various initiatives which led to an improvement in the DIFR from coaches. Modern technology, equipment and ergonomics as well 2,31 in April 2004 to 2,10 in March 2005.

Transnet Annual Report 2005 47 Operational report Transwerk continued

Transwerk has approved a plan to have its seven sites ISO 14000 Corporate social investment (CSI) accredited. The eradication and rehabilitation of asbestos from its Transwerk’s CSI programme seeks to be active in the communities sites is a priority. It is managed on a project management basis. within the proximity of its operations. Two major community projects are: All sites within Transwerk have appointed persons with Certificate • Tshepo House for HIV/Aids patients; and of Competence as Engineer under the Occupational Health and • Kopano workshop for the physically challenged. Safety Act (Act No. 85 of 1993); General Machinery Regulations, regulation 2(1), to ensure that the business and its activities are In both projects Transwerk has leveraged its support by attracting compliant with the Act as well other relevant legislation. other contributors to the projects. Human capital management Risk management At Transwerk people are our greatest assets; it is their passion, Through the implementation of enterprise risk management dedication and resourcefulness that drive the success of the processes in Transwerk, critical risks impacting strategy and business. business objectives are identified on an on-going basis. On a bi-annual basis the risk management committees convene to Transwerk has set out to recruit, retain and develop the best reassess business risks and identify new ones. Actions to mitigate talent and skills through training, rewards and recognition the impact of the risks are put in place. initiatives. Enterprise risk management has been introduced in all structures A number of programmes within South Africa’s business schools of Transwerk, from executive management down to line personnel and universities have been established to foster and enhance inclusive of labour. Such measures are beneficial as risk is no Transwerk’s leadership and management skills. longer perceived as a “management problem” anymore but a collective effort in the business. In order for Transwerk to address its challenge of ensuring the availability of critical skills, an internal student bursary scheme In order to comply with any legislative requirements, Transwerk is in place. This scheme addresses amongst others, the keeps abreast of new trends and emerging practices in risk apprenticeship and technical training. There has been a management and is aligning itself with the new risk management significant intake of students in the 2005 financial year. framework introduced by Transnet. This additional capacity helps develop skills for Transwerk and contributes to the broader South African economy. Management challenges • Meeting growing demand from Spoornet and the SARCC A new remuneration strategy and evaluation system has been • Investment in infrastructure development and equipment established. The primary objective is to provide Transwerk with a • Training and recruitment of critical skills and retention thereof system that will enable it to attract, retain and appropriately • Transformation of the organisation to reflect the demographics of reward its employees. our democracy

The gain sharing scheme for junior employees has played a pivotal role in improving productivity and profitability of the business.

Transwerk has a comprehensive Lifestyle Management Programme for all its employees to manage incidences of HIV/Aids. During the year the lifestyle management and voluntary counselling and testing (VCT) programmes were successfully rolled out; 61% of the total workforce trained and 40% of the employees participated in the VCT programme, reflecting a tremendous success of the HIV/Aids awareness campaign.

48 Transnet Annual Report 2005 Strategic objectives Prospects In June 2005, Transwerk embarked on a two day strategic As freight in the main dominates its revenue in Southern Africa, breakaway session. The objective of the strategic session was to Transwerk is well placed in its product portfolio to benefit from engage discussion and debate with the relevant stakeholders as to sales emanating from the current growth, fuelled by the expansion the future role of Transwerk to align with Transnet’s four-point from mining activity. turnaround plan. Major capital expenditure over the next 12 months: Major capital expenditure planned over the next five years: Projects (Major) R million Projects R million GOMOD facility 11 New machinery and equipment 840 Upgrade Bays 6 and 7 10 Upgrade facilities 115 Power supply 9 Machinery upgrade 500 Upgrade perway 7 GOMOD set-up 35 Laser cutter 6 Data enhancement 30 Cannon box Centre of Excellence 4 Wheel lathes 130 Chopper facility 3 Perway upgrade 50 Portal lathe upgrade 2

Total 1 700 Total 52

The business environment over the next five years is expected to The above table represents the major projects of the R181 million grow strongly in the locomotive and wagon manufacture areas as capital expenditure budget. capacity for iron ore, coal and general freight continue to expand. This coupled with the passenger/commuter increases as forecasted by the SARCC as a result of the 2010 World Cup, places Transwerk in a favourable position. Transwerk has conducted successful business in Africa over the last 15 years and these endeavours will continue with greater effort.

Transnet Annual Report 2005 49 Operational report South African Airways (SAA)

South African Airways (SAA) is Africa’s leading airline, servicing more than 20 destinations across the continent, carrying passengers and freight to 40 cities in more than 30 countries on six continents. Highlights • Net profit for the year increased to R966 million • Business Class lie-flat seat voted best in the world •Twelve international awards of excellence received Economic environment In the calendar year 2004, the global economy experienced mixed performance with strong growth, at 4,4%, in the US economy. However, results were muted in Europe with growth at less than 2%. The Japanese economy continued to attempt to shake off its deflationary spiral. Strong performance in China and India, both of which are experiencing high single digit growth rates, is creating a worldwide impact. China and India are also experiencing strong air travel market growth.

The domestic macroeconomic fundamentals remain favourable for many sectors of the South African economy. The strong rand and low inflation have allowed the South African Reserve Bank to substantially ease its monetary policy stance, and these factors have continued to hold true in the first half of the calendar year 2005. This, and renewed confidence in the economy, translated into an unprecedented boom in the financial, retail and property sectors. Spill-over effects have also been felt in the travel and tourism industries as more South Africans can afford domestic and international holidays.

50 Transnet Annual Report 2005 However, the twin factors of unstable oil prices and a volatile Bambanani is to ensure a reduction of R1,6 billion in operating currency market are expected to continue impacting negatively on costs over the next three years. A new era of profitability will be the SA economy and SAA’s performance. achieved by new sales and marketing strategies.

The new Board and management team have stabilised the The clients gained and retained from these new strategies will Company within a short period of time. However, they continue experience substantially improved service. SAA’s staff is to work tirelessly to ensure that achievements are sustainable undergoing a new and rigorous customer service training process. and that there is focus on increasing efficiencies and bringing the Those who fly most frequently and especially those in the volatile cost base under control. One of the key pillars of the SAA premium segments will realise that for the most attentive, most turn-around strategy (Bambanani Programme) is people and it comfortable and for the most competitively priced flights, SAA is aims to improve the quality of the staff’s skill base to ensure that the airline of choice. SAA maintains a positive growth trajectory. While SAA has won numerous awards recently for the quality Financial overview and innovation of our product and customer service, we recognise the need to continually improve on this to maintain a competitive 2005 2004 edge. R million R million The comprehensive turnaround strategy SAA launched early in Turnover 17 442 16 339 November 2004 will ensure the long-term health and success of Operating profit before impairments 935 134 the airline. Net profit/(loss) 966 (8 610) Net asset value 2 228 (2 697) Financial performance Turnover per employee 1,5 1,30 South African Airways realigned its structures, improved customer Number of employees 11 601 12 556 services, controlled costs and enhanced operating efficiencies, all key deliverables of the “People, Patronage, Profit” strategy. The Passengers uplifted (million) 6,8 6,5 impact of this is already seen in revenue increasing 7% while Cargo (thousand tons) 176 166 enhanced efficiencies saw operating costs inch up by only 1,9%. Capital expenditure split as follows: Expansion 1 799 – South African Airways Group performed very well despite the rand Replacement 55 4 706 strengthening 14% from R7,15 per US$1 to an average of R6,56 per US$1 during the year. In addition, the average oil price increased 42% during the year ended 31 March 2005. The new strategy In November 2004, the Board of Directors approved a new The operating profit from airline operations before impairments, corporate strategy based on three pillars – “People, Patronage and improved from R134 million in 2004 to R935 million for the year Profit” – to return the airline to profitability by improving customer under review. service, implementing a cost reduction programme, re-aligning the skills of the staff to the needs of the business and implementing SAA achieved a pleasing turnaround in performance with a net strict corporate governance principles, including a robust profit after tax of R966 million for the year ended 31 March 2005 enterprise risk management framework. The new strategy aims to (2004: loss of R8 610 million). achieve the following outcomes for each of the three pillars: • People: to develop and nurture world-class talent by improving Recapitalisation training and performance management and to source best talent During the year, Transnet Limited provided South African Airways from the market when the need arises; with a R4 billion loan to restore SAA to technical solvency. • Patronage: to provide a seamless travel experience to The Board of South African Airways, subsequent to year-end, customers by providing superior quality service; and has agreed with Transnet Limited that SAA will issue R2,4 billion • Profit: to provide sustainable return on capital to our ordinary shares of R1 each to Transnet Limited to strengthen shareholders. the SAA Group balance sheet. The subscription price debt of R2,4 billion will be settled by way of set off of the loan and the The new strategy is being implemented through a programme remaining R1,6 billion will be repaid to Transnet Limited as soon called “Bambanani”. Bambanani is a Zulu term which means as practicable. Transnet Limited has agreed to provide credit “holding hands and working together”. The primary objective of facilities to SAA of R1,5 billion.

Transnet Annual Report 2005 51 Operational report South African Airways (SAA) continued

Star Alliance Improved service By 2006, South African Airways will be a full member of the Star To give a better flying experience to premium class passengers – Alliance – an important development in growing our market. This and increase competitiveness – SAA introduced lie-flat seats on follows SAA signing a memorandum of understanding with Star long-haul flights. In 2004, Skytrax which conducts the world’s Alliance on 12 December 2004. largest passenger surveys gave SAA the award for the Best Business Class lie-flat seat in the world. SAA also upgraded and Membership of the Star Alliance will offer South African Airways expanded the comfort of South African Airways lounges in the access to 152 countries, 834 airports, 15 166 daily departures, African market to further enhance the product offering. 14 787 code-share flights, access to global frequent-flyer programmes and joint purchasing and cost-saving initiatives. The new leadership team SAA will bring to the Star Alliance their expertise on the African A strong new executive team was appointed in April 2005 continent. including Mr Dan Moeti as the Chief Risk Officer and Mr Kyrl Acton as the Chief Operating Officer. The fleet The current fleet renewal programme, which was initiated in The executive team are spearheading improvements including the 2002, has been completed – the last of the 26 orders of the ongoing fleet renewal programme, expanding the network through Airbus fleet placed in 2002 was received on 30 June 2005. alliances and strategic partnerships and developing new markets, as well as enhancing the frequent flyer programme, “Voyager”. The new fleet has enabled South African Airways to retire its entire fleet of B747 classic aircraft, the youngest of which was Transformation and staff development more than 23 years old and the oldest in excess of 30 years. Transformation is reflected in the overall demographic profile of the staff and in SAA complying with various employment equity In pursuit of making SAA one of the safest and most modern and black economic empowerment strategies. The leadership of airlines in the world, it has phased out all the 15 B737-200Adv the organisation embodies the spirit and the fact of this positive aircraft which were in excess of 23 years old and replaced them change with 77% of the leadership being black and a male to with 11 A319-100 aircraft. female ratio of 56:44.

52 Transnet Annual Report 2005 Africa strategy Corporate governance As the leading airline in Africa, SAA’s intent is to bring the world SAA are enhancing the corporate governance process in line with to Africa and take Africa to the world. international best practice, the Public Finance Management Act and King II Code of Corporate Governance Practices. During the South African Airways’ contribution to the success of the New year under review, changes were made to the composition of the Partnership for Africa’s Development is embodied in the Africa Board with four new non-executive directors being appointed. growth strategy. Significant areas of Africa are still not served by reliable and efficient services, and this creates considerable In August 2004, Mr Andre Viljoen resigned as the Chief Executive opportunities for South African Airways to penetrate those markets Officer of South African Airways and as an executive director on and develop improved cargo and passenger carrying ratios on the the Board. Dr Khayakhulu Ngqula succeeded him as Chief continent. This, in turn, will boost Africa’s capacity to become Executive Officer and executive director on the South African globally competitive and to sell its products on world markets. Airways Board.

Open skies policies on the continent will ensure that the African renaissance will become a reality.

Expansion plans for the African route network include broadening the flight network to new destinations. South African Airways will focus on expanding its presence in the Southern African Development Community, in particular to Mozambique, Madagascar, Angola and Zambia. In Central Africa, the markets receiving the most attention include the Democratic Republic of Congo, Cameroon and Chad. Markets in Tanzania, Uganda, Nigeria and Ghana are also a key focus.

Shortly SAA will move out of the Transnet family and become a separate business. South African Airways, as the national carrier, has a tremendous responsibility to the people of this country, and the continent, to run this flagship as a healthy, profitable national asset and to retain its status as an internationally acclaimed airline. The sight of SAA livery, anywhere in the world, should bring a smile of pride to all Africans and a sense of admiration from every traveller and aviation industry expert.

Transnet Annual Report 2005 53 Chief Financial Officer’s report

Cash flow from operating activities before cash effects of derivative transactions increased by R2,6 billion to R7,5 billion. Chris Wells Chief Financial Officer

Group operating performance Group turnover has increased by R2,6 billion to R46,3 billion in 2005, an increase of 6,0%.

The most significant contributors to the increase by segment are as follows:

2005 2004 Variance % Segment R million R million R million increase

Rail 19 563 18 176 1 387 7,6 Maritime 8 400 7 512 888 11,8 Aviation 18 175 17 106 1 069 6,2

The turnover in the rail sector increased by 7,6% despite being negatively impacted by continued competition from road, delays in capital upgrade programmes and numerous derailments that occurred during the year.

The maritime segment delivered a strong performance and increased turnover by 11,8% with the buoyant economic conditions leading to higher demand for imported goods, particularly vehicles.

Whilst the aviation segment increased turnover by 6,2% it was adversely affected by the strengthening exchange rate and the competition in the domestic market.

Group operating expenses increased by 2,7% to R40,3 billion, which reflects some progress in the Group’s cost reduction programme. A major re-engineering of the Group’s operating processes is underway targeting cost reductions, efficiency and service delivery.

As a consequence of the above, net operating margins increased to 12,9% resulting in a 35% increase in profit from operations to R6,0 billion (2004: R4,4 billion). Operating margins increased in all the core business units.

54 Transnet Annual Report 2005 Impairments of assets showed a significant decrease from the The taxation charge for the Group has been raised at the prior year. The prior year impairment of assets related mainly to statutory rate of 30% at 31 March 2005. The effective tax SAA aircraft. rate (after adjusting for fair value adjustments) is 46%. This has been influenced by disallowable items and the non- Net finance costs have increased by R377 million to R2,6 billion recognition of deferred taxation on temporary differences as as a result of increased borrowings. Borrowings increased primarily these would result in a deferred taxation asset being due to the issue of the T018 bonds totalling R6 billion. recognised.

The interest cover of 2,2 times, whilst much improved, is still well The unrecognised temporary differences resulted in a deferred below our medium term target. taxation asset of R4,4 billion (2004: R6,3 billion) which has not been recognised. The Group has previously not recognised this The Group’s borrowings, together with the associated interest rate asset due to the uncertainty of sufficient future taxable income exposures, are disclosed in Annexure A of this report. being generated.

The Group uses approved financial instruments, in particular Cash flow forward exchange contracts, cross-currency swaps, interest rate As an indication of the start of the Group’s turnaround, cash flow swaps, and jet fuel derivatives to hedge the financial risks from operating activities before the cash effects of derivative transactions increased by R2,6 billion to R7,5 billion. However, associated with underlying business activity. All derivative net cash generated from operating activities reduced by financial instruments including embedded derivatives have been R2,6 billion to R484 million mainly as a result of R6,0 billion recorded at fair value with the resulting gain or loss taken to the paid to unwind the SAA hedging positions. income statement.

In line with the Group’s capital investment plan, R1,9 billion was In the prior year the Group incurred significant fair value losses as spent on maintaining operations and R3,7 billion on expanding a result of the SAA hedge book and the embedded derivatives operations during the year. contained in two service contracts for the transport of commodity products by rail. Borrowings Total interest-bearing borrowings increased by R2,4 billion to In the current year the SAA hedge book has been unwound. R30,3 billion. This increase resulted from new borrowings of The financial effect of the hedge book this year is a R211 million R10 billion and repayments of R7,6 billion. profit compared to a R4,4 billion loss in the prior year.

Gearing at 67% (2004: 83%) reflects a substantial improvement In December 2004 one of the service contracts mentioned above over last year despite the payment of R6,0 billion during the with the Sishen Iron Ore Company (Pty) Ltd, has been year to settle the SAA hedge book. However, the Group’s gearing successfully renegotiated thus eliminating the Group’s exposure is significantly in excess of the targeted 50% – 55%. The to fluctuations of the rand/US dollar exchange rate and Group’s gearing will be substantially reduced through the international iron ore price. As a consequence the Group disinvestment from non-core businesses and improved derecognised the derivative liability of R3,9 billion associated operating cash flows. with this derivative instrument.

In the course of the Group’s business operations it is exposed to The other service contract, which still remains, has a derivative liquidity, credit, foreign exchange, commodity, interest rate and liability balance of R24 million at 31 March 2005. This contract price risk with respect to its borrowings. has also been successfully renegotiated with an effective date of 1 July 2005. A detailed analysis of all the Group’s borrowing and related exposures is contained in Annexure A. Included in derivative financial assets (current assets) is an investment in “C” class preference shares. The value of these The Group has adequate cash on hand and short and long-term preference shares moves in concert with movements in the MTN banking facilities to meet its short-term commitments. At the end Group Limited’s share price in terms of a gain share redemption of the financial year the Group had unused borrowing facilities of formula. The unrealised surplus on the fair valuation of these R30,2 billion of which R3,7 billion is available immediately as shares for the year ended 31 March 2005, was R932 million. short-term loans.

Transnet Annual Report 2005 55 Chief Financial Officer’s report continued

Treasury risk management Further information regarding the above, is contained in notes 21 and 29 of the annual financial statements. The Group has a centralised risk management and treasury function that manages the financial risks relating to the Group’s operations. The Group’s existing policies with respect to the Restructuring and closures One of the main initiatives underpinning the four-point turnaround hedging of foreign currency exposures and the management of strategy is the redirecting of the business and the consequent treasury risk are under review to ensure risks are identified and disposal of non-core businesses. managed in a structured, transparent and controlled manner.

In the current year under review the following business units have New governance structures were introduced during December ceased operations or were disposed of: 2004 to enhance the risk management process by the • B2B Africa Holdings (Pty) Ltd introduction of a Risk Management Committee and an Asset and • Virtual Care Liability Management Committee. These committees meet on a • Marine Data Systems (Pty) Ltd monthly basis and are responsible for monitoring and reporting all risks, including financial risk, to the Transnet Board of Directors. The following business units have been identified as non-core and Guarantees their disposal/transfer was approved by the shareholder subsequent to year-end: The various entities within the Group have issued guarantees to • freightdynamics third parties for various reasons amounting to R1,1 billion. The • Autopax Passenger Services (Pty) Ltd most significant of which relates to the M Cell promissory notes • Metrorail amounting to R1,8 billion. • Shosholoza Meyl • Transnet Housing The sole shareholder in Transnet Limited being the South African • Transnet Pension Fund Administrators Government has guaranteed the borrowings of the Group to the • V&A Waterfront Holdings (Pty) Ltd extent of R21,0 billion (2004: R19,0 billion). • Viamax (Pty) Ltd • Equity Aviation Services (Pty) Ltd Assets pledged in support of the secured loans and capitalised • VAE Perway (Pty) Ltd finance leases amount to R7,0 billion (2004: R4,4 billion). Financial reporting Capital expenditure Change in accounting policies Capital expenditure amounted to R5,6 billion (2004: R7,8 billion) These financial statements are prepared in accordance with South of which R3,7 billion was spent on expansion projects. African Statements of Generally Accepted Accounting Practice, the requirements of the Companies Act 1973 (as amended), the Capital expenditure plans for the core businesses over the next Public Finance Management Act 1999 (as amended) and the five years amount to R40,8 billion and relate mainly to the Public Audit Act 2004. These financial statements incorporate upgrading of rail and port infrastructure and building added accounting policies which are consistent with those of the capacity. previous financial year, with the exception of the following: • Amendments to AC116 (IAS19): Employee benefits; These capital commitments will be financed by the cash flow from • AC128 (IAS36): Impairment of assets; operations, together with borrowings. • AC129 (IAS38): Intangible assets; • AC140 (IFRS3): Business combinations; and Pension and post retirement benefits • AC501: Secondary taxation on companies. The Group provides various post retirement benefits to its active and retired employees including pension, post retirement health The amendments to AC116 allow the Group to recognise actuarial and other life benefits. gains and losses arising from defined post retirement benefit schemes directly in equity. Although the amendments to AC116 The unfunded status of the Group’s pension and medical plans are applicable to annual periods beginning on or after 1 January amounts to R7,6 billion, an increase of R1,2 billion compared to 2006 the Group has elected to early adopt the amendments and the prior year. Various initiatives are being explored to ensure that has applied them as from 1 April 2004. Comparative figures have this deficit is extinguished in accordance with the fund rules. been restated.

56 Transnet Annual Report 2005 The effects of the adoption of these standards have been Subsequent events disclosed on page 86 of this report. Unwinding of the MTN structure In line with our turnaround strategy, we have reached agreement International Financial Reporting Standards subject to the fulfilment of certain suspensive conditions on the The Group will implement International Financial Reporting early unwinding of the MTN structure entered into in the 2003 Standards (IFRS) and present its first annual financial statements financial year. under these standards for the year ending 31 March 2006. Accordingly the comparative figures for 2005 will be restated. Should this agreement be implemented, the “C” class preference shares (included in current derivative financial assets), will be It is expected that the adoption of these new standards will result sold, realising a significant amount of cash, the amount of which in an increase in the net assets of the Group, but a significant depends on the 20 day volume weighted average price of impact on the income statement of the Group is not anticipated. MTN shares prior to the agreement’s implementation date. In the announcement of the interim results for the six months ending 30 September 2005, which will be presented in terms SAA – Compulsorily Convertible Subordinated Loan (CCSL) of IFRS, the effects of these new accounting standards will be Agreement disclosed fully. In the prior year Transnet advanced R4,0 billion by way of a CCSL to cover SAA’s technical insolvency. Subsequently SAA Transnet Business Intelligence Project and Transnet have investigated various governance issues which The Group has embarked on a business intelligence project and have delayed the conversion of the loan to ordinary shares. an impact assessment of this project has been completed. After 31 March 2005, based on SAA’s improved financial position, the board of SAA and Transnet have agreed to convert R2,4 billion The purpose of the project is to: of the loan into ordinary shares and R1,6 billion will become • enable compliance with the IFRS reporting requirements; repayable to Transnet. • to significantly improve the quality of financial and non-financial reporting; and • to assist in the re-engineering of the core operational businesses through production of quality, timely information and enhanced control. Chris Wells Chief Financial Officer

30 June 2005

Transnet Annual Report 2005 57 Audit Committee approval

We are pleased to present our report for the financial year ended • made appropriate recommendations to the Board of Directors 31 March 2005 as recommended by the King II Report on regarding the corrective actions to be taken as a consequence Corporate Governance. of audit findings.

The Audit Committee of the Transnet Board of Directors is In the opinion of the audit committee, the internal controls of composed of six non-executive directors. The committee held the Group are, with the exception of certain weaknesses set out four scheduled meetings and six special audit committee meetings below, considered appropriate to: in the 2005 financial year. • meet the business objectives of the Group; • ensure the Group’s assets are safeguarded; and The Audit Committee reports that is has adopted appropriate • ensure that transactions undertaken are recorded in the Group’s formal terms of reference as its Audit Committee charter and records. has regulated its affairs in compliance with this charter, and has discharged all of its responsibilities as contained Where weaknesses in specific controls have been identified, therein. This process is supported by the audit sub-committees management has undertaken to implement the appropriate which are in place for all business units and subsidiaries. corrective action to mitigate the weaknesses identified. These sub-committees meet in terms of a formal mandate and Specifically, however, the controls in the Transnet Housing division deal with all issues arising at the business unit or subsidiary level. were unsatisfactory and have been for several years. In addition, These sub-committees then elevate any unresolved issues of certain internal controls in Spoornet did not operate effectively concern to the Transnet main Audit Committee. Internal and during the year. In both these cases, management has taken external auditors also elevate issues identified at the business appropriate action and audit procedures were extended. units and subsidiaries to the Transnet main Audit Committee. The Audit Committee has evaluated the annual report for the year In the conduct of its duties, the audit committee has, inter alia, ended 31 March 2005 and considers that it complies, in all performed the following activities: material respects, with the requirements of the Companies Act, • received and reviewed reports from both the internal and as amended, the Public Finance Management Act, the Public the joint external auditors concerning the effectiveness of the Audit Act and Statements of South African Generally Accepted Group’s internal control systems; Accounting Practice. The Audit Committee concurs that the • reviewed the reports of both internal and the joint external adoption of the going concern premise in framing the annual auditors detailing their concerns arising out of their audits and financial statements is appropriate. The Audit Committee has requested appropriate responses from management which will therefore recommended the adoption of this annual report by the result in their concerns being addressed; Board of Directors at their meeting on 30 June 2005. • considered the effectiveness on internal audit and the adherence of internal audit to its annual programme; • approved of the Group executive committee’s initiatives to develop an enterprise wide risk management focus for the Group; • reviewed and recommended for adoption by the Transnet Board such financial information that is publicly disclosed, which for Prof G K Everingham the year under review included: Chairperson: Transnet Audit Committee – the annual report for the year ended 31 March 2005; and – the interim results for the six month period ended 30 June 2005 30 September 2004. • considered the independence and objectivity of the joint external auditors and ensured that the scope of their additional services provided were not such that they could be seen to have impaired their independence; and

58 Transnet Annual Report 2005 Contents to the annual financial statements

Approval of the annual financial statements 61 Group Company Secretary certificate 61 Report of the independent auditors 62 Report of the directors 63 Accounting policies 71 Income statements 80 Balance sheets 81 Statements of recognised income and expenditure 82 Cash flow statements 83 Segmental analysis 84 Notes to the annual financial statements 86 Annexure A – Financial risk management 128 Annexure B – Property, plant and equipment 136 Annexure C – Investment in subsidiaries and associates 138

Transnet Annual Report 2005 59

Approval of the annual financial statements

The directors are required, by the Companies Act, the Public Finance Management Act and the Public Audit Act to prepare annual financial statements which fairly present the state of affairs of the Company and the Group as at the end of the financial year and the profit or loss of the Company and the Group for the year then ended. In preparing these annual financial statements, the directors are required to: • select suitable accounting policies and apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed; and •prepare the annual financial statements on the going concern basis unless it is inappropriate to presume that the Company and/or the Group will continue in business for the foreseeable future.

The directors of the Company are responsible for the maintenance of adequate accounting records and the preparation and integrity of the annual financial statements and related information. The annual financial statements have been prepared in accordance with Generally Accepted Accounting Practice. The external auditors, Deloitte & Touche and APF Inc, are responsible for independently auditing and reporting on the financial statements in conformity with South African Auditing Standards. Their unqualified report on the annual financial statements in terms of the Companies Act, Public Finance Management Act and Public Audit Act appears on page 62.

The directors have every reason to believe that the Company and Group have adequate resources in place to be able to continue in operation for the foreseeable future. Therefore the directors are satisfied that Transnet is a going concern and have continued to adopt the going concern concept in preparing the financial statements.

The Audit Committee has reviewed the effectiveness of the Group’s internal controls, and, except for those matters set out in the director’s report on page 63, considers the systems appropriate to the effective operation of its business. The Audit Committee has evaluated the Group’s annual financial statements and has recommended their approval to the Board of Directors. The Audit Committee’s approval is set out on page 58 of the annual report.

In preparing the annual financial statements and Group annual financial statements set out on pages 63 to 141, the Group has complied with South African Statements of Generally Accepted Accounting Practice and the Companies Act in South Africa. Except for the performance information required, the Group has complied with the reporting requirements of the Public Finance Management Act and the Public Audit Act and has used appropriate accounting policies supported by reasonable and prudent judgements and estimates. The directors are of the opinion that these annual financial statements fairly present the financial position of the Company and the Group at 31 March 2005, and the results of their operations and cash flow information for the year then ended.

M Ramos F T M Phaswana Group Chief Executive Chairman

30 June 2005 30 June 2005

Group Company Secretary certificate

I hereby certify that in terms of section 268G(d) of the Companies Act, 61 of 1973, to the best of my knowledge and belief, the Company has lodged with the Registrar of Companies all such returns for the year ended 31 March 2005 as are required of a public company in terms of this Act, and that all such returns are true, correct and up to date.

Z Stephen Group Company Secretary

Johannesburg 30 June 2005

Transnet Annual Report 2005 61 Report of the independent auditors

TO THE MINISTER OF PUBLIC ENTERPRISES

We have audited the annual financial statements of Transnet Limited and the Group set out on pages 63 to 141 for the year ended 31 March 2005. The annual financial statements of Transnet Limited and the Group are the responsibility of the accounting authority. Our responsibility is to express an opinion on these financial statements based on our audit. The performance information is the responsibility of the accounting authority. Our responsibility is to express an opinion on whether the performance information furnished in terms of sub-section 55(2)(a) of the Public Finance Management Act, 1 of 1999, as amended, is fair in all material respects and on a basis consistent with that of the preceding year.

Scope We conducted our audit in accordance with Statements of South African Auditing Standards issued by The South African Institute of Chartered Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. The audit was also planned and performed to obtain reasonable assurance that our duties in terms of sections 60 and 61 of the Public Finance Management Act, 1 of 1999, as amended, and sections 27 and 28 of the Public Audit Act, 25 of 2004, have been complied with.

An audit includes: • examining, on a test basis, evidence supporting the amounts and disclosures in the annual financial statements; • assessing the accounting principles used and significant estimates made by management; and • evaluating the overall financial statement presentation.

We believe that our audit provides a reasonable basis for our opinion.

Audit opinion In our opinion: • the financial statements fairly present, in all material aspects, the financial position of Transnet Limited and the Group at 31 March 2005, and the results of their operations and cash flows for the year then ended, in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner required by the Companies Act, 61 of 1973 in South Africa, the Public Finance Management Act, 1 of 1999, as amended, and the Public Audit Act, 25 of 2004.

Without qualifying our audit opinion, we draw your attention to: • the performance information as envisaged in sub-section 55(2)(a) of the Public Finance Management Act, 1 of 1999, as amended, and section 28(1)(c) of the Public Audit Act, 25 of 2004, has not been included in the annual financial statements and we are therefore unable to express an opinion; and • the transactions of Transnet Limited and the Group that had come to the auditor’s attention during the audit were in all material respects in accordance with the mandatory functions of Transnet Limited, as determined by law or otherwise, with the exception of the four matters, detailed in the directors’ report on pages 64 and 65. These four matters relate to investments in Spoornet Zambia branch and Allport Logistics Terminal Ltd; Reserve Bank approval for working capital in Air Tanzania Company Limited and Transnet Housing deposits.

Deloitte & Touche APF Inc. Registered Accountants and Auditors Registered Accountants and Auditors Chartered Accountants (SA) Chartered Accountants (SA)

Johannesburg 8 July 2005

62 Transnet Annual Report 2005 Report of the directors

The Directors have pleasure in presenting their report and the audited annual financial statements of Transnet Limited and the Group for the year ended 31 March 2005.

NATURE OF BUSINESS The Group operates businesses that provide transport and logistics services occupying a strategic position in the logistics and supply value chain of some of South Africa’s major industries. The Group operations span railways, road transport, commercial aviation, port operations and fuel pipeline networks.

Further details relating to the nature of the business and operations can be found in the core business units’ operational reports on pages 30 to 49.

REGISTRATION DETAILS Transnet Limited (“the Company”) is incorporated in South Africa. The Company’s registration number is 1990/000900/06. The registered office is 47th Floor, Carlton Centre, 150 Commissioner Street, Johannesburg, 2001.

SHAREHOLDER RESOLUTIONS Changes in Articles and Memorandum of Association The Articles were amended by the deletion of Article 67, which related to the resignation of directors on attaining the age of 70, and Article 76, which related to the appointment of alternate directors.

OWNERSHIP Transnet Limited is wholly-owned by the Government of the Republic of South Africa as represented by the Minister of Public Enterprises, Mr Alec Erwin MP, and his department.

SHARE CAPITAL There were no changes to either the authorised or issued share capital of the Company during the year ended 31 March 2005. Details of the authorised and issued share capital can be found in note 18 of the annual financial statements.

YEAR UNDER REVIEW The year under review is fully covered in the Chairman’s statement on page 11 and the Group Chief Executive’s statement on page 14.

GROUP FINANCIAL PERFORMANCE The financial performance of the Company, the Group and the business segments are contained in the Company and the Group consolidated annual financial statements set out on pages 63 to 141.

The review of the Group’s consolidated financial performance can be found in the Chief Financial Officer’s report on page 54.

DIVIDENDS There were no dividends declared for the current financial year (2004: R nil).

GOING CONCERN The directors confirm that they are satisfied that the Group has adequate resources to continue in business for the twelve month period from the date of this report.

For this reason they continue to adopt the going concern basis for preparing the financial statements, as confirmed in the directors’ approval of the annual financial statements on page 61.

BORROWING POWERS In terms of the Articles of Association, the Company has borrowing powers limited to those approved by the Company in a general meeting and subject to the Public Finance Management Act, 1 of 1999. This limitation shall be evidenced by means of a written certificate issued under the joint signatures of the Chairman, Group Chief Executive and the Chief Financial Officer.

In addition, the prior sanction of the Company in a general meeting shall be required for the exercise of borrowing powers in excess of any limitation previously stipulated by the Company in general meeting.

Transnet Annual Report 2005 63 Report of the directors continued

CAPITAL EXPENDITURE AND COMMITMENTS The capital commitments of the Company and the Group are set out in note 27 of the annual financial statements.

CHANGES IN ACCOUNTING POLICY The Group has adopted the following South African Statements of Generally Accepted Accounting Practice: • AC 116 (IAS19 revised 2005): Employee benefits (the amendments to the standard have been early adopted); • AC 128 (IAS36 revised 2004): Impairment of assets; • AC 129 (IAS38 revised 2004): Intangible assets; • AC 140 (IFRS3 revised 2004): Business combinations; and • AC 501: Accounting for secondary tax on companies.

In addition the South African Airways Share Incentive Trust has been consolidated for the first time in the current year. The comparative figures have been restated accordingly.

The effects of adopting the above statements and policies are disclosed on page 86 of the notes to the annual financial statements.

SUBSIDIARIES AND ASSOCIATES A detailed list of the subsidiaries and associates in the Group can be found in Annexure C on page 138.

The attributable interest of the Company in the aggregate income and losses of its subsidiaries after taxation for the year under review was as follows:

2005 2004 R million R million

Income 1 119 125 Losses 213 8 982

CORPORATE GOVERNANCE AND COMPLIANCE The Board complies with the code of corporate practice as set out in the King II Report on corporate governance in conjunction with the Public Finance Management Act (PFMA), 1 of 1999, as amended, the Public Audit Act, 25 of 2004, and the related Treasury Regulations. A detailed report can be found on page 25.

PUBLIC FINANCE MANAGEMENT ACT (PFMA) Transnet Limited has implemented governance structures and processes in compliance with the provisions of the PFMA. PFMA compliance is one of the key business issues that the Group manages and monitors. Sections 51 and 55 of the PFMA impose certain obligations on the Company. These obligations relate to the prevention, identification and reporting of all fruitless, wasteful and irregular expenditure, and the collection of all revenue.

In order to comply appropriately with these responsibilities, Transnet management has prepared a materiality framework which has been forwarded to the Minister of Public Enterprises for his review and approval. This has recently been received subject to certain conditions.

During the year under review Transnet has not fully complied with all the requirements of the PFMA, and a comprehensive report detailing all identified instances of non-compliance with the PFMA during the period 1 April 2003 to 31 March 2005, has been prepared and will be submitted to the Minister in due course. For reporting purposes the materiality limits of the delegated authority for each business unit were utilised, all of these being within the materiality limits set out in the framework referred to above.

The Board reports the following contraventions, which came to its attention in the current year. The transactions which gave rise to these contraventions occurred in prior years.

Investment in Spoornet Zambia The operation, maintenance and upgrade agreement was implemented on 3 December 2003 in the form of Spoornet Zambia – a branch of Transnet Limited. Authorisation was not obtained from the Executive Authority in terms of S54(2) of the PFMA.

64 Transnet Annual Report 2005 Investment in Allport Logistics Terminal Ltd National Ports Authority of South Africa (NPA), a division of Transnet Limited, has contravened section 54(2) of the Public Finance Management Act, 1 of 1999. Transnet, through its division NPA, does not have a signed shareholders’ agreement in respect of its participation in a port related joint venture in Ghana, which was a prerequisite of the Minister of Public Enterprises’ approval.

South African Airways contravention of Reserve Bank regulations South African Airways have contravened the South African Reserve Bank regulations through an investment in the working capital of Air Tanzania Company Limited.

Transnet Housing governance procedures Transnet Housing has for many years taken deposits from employees and utilised surplus funds therefrom to finance operations. This may potentially be in contravention of the Banks Act, 94 of 1990. Appropriate corrective action is in place.

The Board of Transnet is addressing the above matters and taking appropriate action.

SHAREHOLDER COMPACT In pursuance of its objective to promote good corporate governance in state-owned enterprises, the Government as sole shareholder and Transnet signed a Shareholder Performance Agreement (shareholder compact) in July 2001. An updated shareholder’s compact has been drafted and is currently undergoing discussion and review with the shareholder in order to achieve finalisation.

As the terms of the updated shareholder compact have not been finalised, performance information and other criteria normally reported as required by section 55(2) of the PFMA have not been reported.

REQUIREMENTS IN TERMS OF THE PROTOCOL ON CORPORATE GOVERNANCE FOR STATE-OWNED ENTERPRISES Introduction Transnet is required to adhere to a framework on corporate governance which governs state-owned enterprises and is outlined as follows:

Organisational structure The Group’s organisational structure is set out on page 2 of the annual report.

SIGNIFICANT EVENTS NOTIFIED TO THE EXECUTIVE AUTHORITY The following significant events were notified to the Executive Authority during the year under review:

Head office restructuring and disposal of certain non-core businesses The corporate plan containing the detailed plan to close or dispose of certain non-core business units as well as the intention to restructure the Transnet head office was forwarded to the Minister on 28 February 2005.

Judicial proceedings During the year under review, there were numerous judicial proceedings entered into with Transnet either as the plaintiff or the defendant. Where the outcome can be assessed with reasonable certainty, the financial statements include a best estimate of the expected liability arising from those judicial proceedings. Where the outcome is not certain and the case could have a material impact on the Company and the Group’s financial results, the details of the cases have been set out in note 28 dealing with the Company and the Group’s contingent liabilities.

Protocol for communication with the stakeholder The Group reports to Minister Alec Erwin MP, the Minister of Public Enterprises and has regular communication with him and his department.

POST-BALANCE SHEET EVENTS The following matters arose between 31 March 2005 and 30 June 2005:

Unwinding of the MTN structure Subsequent to year-end, in line with the Group turnaround strategy, we have reached agreement on the unwinding of the MTN structure entered into in the 2003 financial year, subject to certain suspensive conditions.

Transnet Annual Report 2005 65 Report of the directors continued

Capitalisation of loan to South African Airways (Pty) Ltd (SAA) During the current financial year Transnet advanced a R4 billion compulsory convertible subordinated loan (CCSL) to SAA.

Subsequent to the year-end the provisions of the loan have been reviewed in the light of SAA’s financial position and agreement has been reached with SAA that R2.4 billion of the loan is to be converted into 2.4 billion ordinary shares as soon as is practicable. The balance of R1.6 billion is to be repaid to Transnet out of existing cash flows.

Appointment of new executives post year-end Louis van Niekerk was appointed as Chief Operating Officer with effect from 1 May 2005.

GROUP EXECUTIVES Guaranteed remuneration A component of the compensation of the Group Chief Executive and members of the Group Executive Committee is in the form of guaranteed remuneration, which is reviewed on an annual basis with the adjustments being effected from 1 April each year. Adjustments are based on the achievement of predetermined key performance measures, which are set annually and reviewed through a process of performance evaluation.

Performance incentive bonus scheme The Group Chief Executive and members of the Group Executive Committee participate in a performance incentive bonus scheme, in terms of which specific financial and non-financial targets are set. These are reviewed annually and agreed upon individually before the start of the financial year or prior to the commencement of their contracts in respect of new appointees. The performance bonus is measured and calculated in terms of the above criteria. The Company’s external auditors review management’s assessment of the achievement of the determined financial targets and the final calculation of the performance incentive bonus payable. The bonuses so calculated are then reviewed and approved by the Group Remuneration Committee. Bonuses are only calculated and paid after the completion of the audit of the Group’s financial results.

Share options The executive directors of the Group do not participate in any share incentive schemes.

Service contracts Group Chief Executive The Group Chief Executive is on a three-year contract which expires on 31 October 2006. The contractual conditions of her service include a notice period of four months. The Group Chief Executive, on termination of service under any circumstances (with the exception of a breach of fiduciary duties), is entitled to a termination benefit equivalent to a year’s guaranteed remuneration. The following additional benefits are also applicable: • Performance bonus – 25% of guaranteed remuneration as at date of appointment and based on Company performance in achieving operational targets • Medical aid scheme benefits •Travel concessions

Other Group executives The following members of the Group Executive Committee were appointed during the current financial year: Name Position Date appointed

VD Kahla Group Executive – Legal and Risk 1 July 2004 P Maharaj Group Executive – Strategy and Transformation 1 July 2004 BS Tshabalala Treasurer 1 June 2004 CF Wells Chief Financial Officer 24 January 2005

66 Transnet Annual Report 2005 The following Group executives resigned during the current financial year.

Name Date resigned

Z Danana 30 September 2004 SN Mabaso 22 September 2004 MV Phiyega 31 January 2005

With the exception of the Chief Financial Officer, the Chief Operating Officer, the Group Executive – Legal and Risk and the Group Executive – Strategy and Transformation, the Group executives are on a five-year fixed term contract of employment and are on a notice period of three months. The Group Executives, on termination of service under any circumstances (with the exception of a breach of fiduciary duties), are entitled to a termination benefit equivalent to the residual portion of the fixed term contract.

The Company has granted an additional 25% of guaranteed remuneration, subject to the achievement of budgeted targets and the performance of the Company. The Chief Financial Officer and Group Executives are allowed to participate in the following Company benefits: •Transnet Retirement Fund; • Medical Aid Scheme; and •Travel concessions.

Remuneration Executive guaranteed remuneration Retirement fund Other Termination Months contribu- contri- benefits Other Name in office Salary tions butions paid payments 2005 2004 (if less than 12) R’000 R’000 R’000 R’000 R’000 R’000 R’000

Current executives VD Kahla 9 1 231 100 17 – 29 1 377 – P Maharaj 9 941 76 11 – 13 1 041 – LRR Molotsane 1 465 135 – – 64 1 664 1 584 B Nomvete 1 192 94 – – 27 1 313 834 K Phihlela 1 177 90 – – 15 1 282 796 M Ramos† 2 352 218 – – 29 2 599 1 014 CF Wells† 2 430 39 – – 2 471 – BS Tshabalala 10 1 162 71 – – 28 1 261 – S Gama 1 145 93 39 – 50 1 327 1 869 T Morwe 1 140 97 40 – 35 1 312 1 808 C Möller 1 077 130 44 – 28 1 279 1 765 Former executives Z Danana 6 547 53 – 2 619 36 3 255 1 227 SN Mabaso 6 767 62 – 2 773 12 3 614 1 713 ME Mkwanazi –––––– 4 385 D Mokgatle 10 1 672 113 35 – 23 1 843 1 360 MV Phiyega 10 1 203 76 – 4 006 37 5 322 1 587 Total 17 501 1 447 186 9 398 428 28 960 19 940

†Group executives who are members of the Board of Directors.

Transnet Annual Report 2005 67 Report of the directors continued

Performance bonus Name 2005 2004

ME Mkwanazi – 1 661 SN Mabaso – 934 Total –2 595

Note: 1 The bonuses paid relate to the previous financial year. To date, there have been no payments in respect of the year ended 31 March 2004. 2. The performance bonuses for the year ended 31 March 2005 will only be finalised after the approval of the audited annual financial statements.

NON-EXECUTIVE DIRECTORS Appointment and remuneration Non-executive directors, who in the main are independent directors, are appointed at the annual general meeting of the shareholder. The fees paid to non-executive directors vary based on their attendance at, and their appointments to, the various committees of the Transnet Board.

The schedule of attendance of non-executive directors to the various committees of the Transnet Board is contained in the corporate governance report as set out on page 25. Company

Disburse- Months Fees ments 2005 2004 Name in office R’000 R’000 R’000 R’000

Current Board members FTM Phaswana 7 508 – 508 – I Abedian 7 56 – 56 – GK Everingham 7 77 2 79 – NBP Gcaba 7 39 – 39 – SE Jonah KBE 7 31 – 31 – PG Joubert 7 64 – 64 – NNA Matyumza 7 48 – 48 – MA Moses 7 44 – 44 – S Nicolaou 7 52 – 52 – BT Ngcuka 7 40 – 40 – KC Ramon† 743–43 – Former Board members BA Khumalo 5 567 – 567 850 F Abrahams 5 100 – 100 206 GS Andrews 5 63 – 63 12 SK Bhattacharyya 5 38 – 38 38 SN Buthelezi 5 67 – 67 241 N Gomomo 5 132 – 132 374 FP Lembede 5 76 – 76 155 J Molobela 5 95 – 95 29 AMSS Mokgabudi 5 89 – 89 159 Y Muthien 5 71 – 71 158 HN Ndude 5 99 – 99 191 M Ramano 5 75 – 75 135 JH Rowlands 5 112 – 112 368 PA Thompson 5 71 12 83 134 Total 2 657 14 2 671 3 050

† Paid to Johnnic Holdings Ltd

The corporate governance report as set out on page 25 contains details of appointments and resignations of non- executive directors during the current financial year.

68 Transnet Annual Report 2005 SUBSIDIARY DIRECTORS Executive directors Retirement Perform- fund ance Gain on Months contribu- incentive share Name in office Salary tions bonus Other options 2005 2004 (if less than 12) R’000 R’000 R’000 R’000 R’000 R’000 R’000

SAA (Pty) Ltd AN Viljoen 5 1 181 – – 3 674 – 4 855 3 945 R Forson –––––– 1 632 O Mabandla 5 916 84 – 1 101 – 2 101 – T Ramano 1 489 137–––1 626 – K Ngqula 7 2 180 115–––2 295 – SAA City Centre (Pty) Ltd M Stoltzing 865 – – 49 – 914 1 618 SAA Technical (Pty) Ltd L Olitzki 734 56–––790 1 238 R Ramkissoon 9 916 84 – 1 483 – 2 483 550 B2B Africa Holdings (Pty) Ltd NN Shikwane 1 070 85 – 38 1 193 1 388 Viamax (Pty) Ltd N Hariparsad 720 – – 181 – 901 2 658 Autopax Passenger Services (Pty) Ltd MC Bester 951 – – 16 – 967 1 022 Protekon (Pty) Ltd CM Xaba 777 62 – 54 – 893 – Marine Data Systems (Pty) Ltd PFH Winterbach –––––– 2 438 A van den Berg –––––– 986 KH Burchell –––––– 647 SA Express Airways (Pty) Ltd BPB Dibate –––––– 128 S Mzimela 1 110 44–––1 154 – FJ Oberholzer 5 290 12–––302 – Air Chefs (Pty) Ltd B Fischer 1 049––––1 049 1 091 V Kona 835 65 – 63 – 963 – J van Jaarsveld 7 386 314 – 700 – 1 400 – Total 15 469 1 058 – 7 359 – 23 886 19 341

Transnet Annual Report 2005 69 Report of the directors continued

Non-executive directors Months Name in office Fees Other 2005 2004 (if less than 12) R’000 R’000 R’000 R’000

SAA (Pty) Ltd D Ncube – – – 688 D Konar – – – 77 AMSS Mokgabudi 5 208 – 208 167 AP Nkuna 300 – 300 150 MTK Moerane 7 510 – 510 150 R Doganis 530 – 530 261 CC Okeahalam 400 – 400 150 GJ Gerwel 7 250 – 250 – LM Mojela 7 150 – 150 – MV Moosa 7 150 – 150 – A Ngwezi 7 160 – 160 – M Ramos – – – – SA Express Airways (Pty) Ltd L Nyhonya 14 – 14 36 N Matyumza 10 3 – 3 – Autopax Passenger Services (Pty) Ltd F Lembede 7 78 2 80 – KC Ramon† 536–36 – B2B Africa Holdings (Pty) Ltd F Abrahams 7 45 – 45 41 CR Jardine – – – 71 JH Rowlands 6 111 – 111 48 Protekon (Pty) Ltd M Mohohlo 7 – – – 28 PG Joubert 5 8 – 8 – Viamax (Pty) Ltd J Giltrow 107 – 107 32 J Rowlands 6 134 – 134 7 M Moses 5 58 – 58 – Total 3 252 2 3 254 1 906

† Paid to Johnnic Holdings Ltd

GROUP COMPANY SECRETARY Zola Stephen Group Company Secretary’s physical and business address: 47th Floor, Carlton Centre 150 Commissioner Street Johannesburg 2001 PO Box 72501 Parkview 2122 South Africa Telephone +27 11 308 2424 Telefax +27 11 308 2430

70 Transnet Annual Report 2005 Accounting policies

BASIS OF PREPARATION The annual financial statements are prepared on the historical cost basis, except as modified by: • The revaluation of pipeline networks and port facilities; • Measurement at fair value of derivative financial instruments, available-for-sale and held for trading financial assets; and • The measurement at fair value of investment properties.

The financial statements have been prepared in accordance with South African Statements of Generally Accepted Accounting Practice. The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below and are consistent in all material respects with those applied in the previous year with the exception of the adoption during the year of: • AC116 (IAS19 revised 2004) – Employee Benefits (the amendment to this standard has been early adopted); • AC128 (IAS36 revised 2004) – Impairment of Assets; • AC129 (IAS38 revised 2004) – Intangible Assets; • AC140 (IFRS3 revised 2004) – Business Combinations; and • AC501 – Accounting for Secondary Taxation on Companies.

Furthermore, the Group has consolidated the South African Airways Share Incentive Trust with effect from 1 April 2004 and has restated the comparative figures accordingly.

PRESENTATION OF FINANCIAL STATEMENTS These financial statements are presented in South African rands since that is the currency in which the majority of the Group’s transactions are denominated.

BASIS OF CONSOLIDATION A subsidiary (including a special purpose entity) is a company in which the Group controls the composition of its Board of Directors, or has the power to govern the financial and operating policies of the investee enterprise so as to obtain benefits from its activities. Typically this will be where the Group holds more than 50% of the voting power.

The consolidated financial statements include the results of the Company and its subsidiaries, from the effective dates of acquisition to the effective dates of disposal. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs attributable to the acquisition. Identifiable assets acquired and liabilities, as well as contingent liabilities assumed in a business combination are measured initially at their fair values at acquisition date, irrespective of the extent of any minority interest.

Special purpose entities are consolidated when the substance of the relationship between the Group and the special purpose entity indicates that it is controlled by the Group.

All inter-company transactions and balances are eliminated on consolidation.

JOINT VENTURES A joint venture is an entity in which the Group holds an interest and which is jointly controlled by the Group and one or more other venturers under a contractual arrangement. The Group’s interest in a jointly controlled entity is accounted for by proportionate consolidation in the Group accounts from the effective date of acquisition until the effective date of disposal.

Where the Group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the Group’s interest in the joint venture, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred.

INVESTMENTS IN ASSOCIATES An associate is an enterprise over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. Investments in associates are equity accounted, in the consolidated financial statements, for the period in which the Group exercises significant influence. Significant influence is typically assumed in instances where the Group has an equity stake greater than 20% but less than 50% in a company. Equity accounted income represents the Group’s proportionate share of the profits of these companies and the share of taxation thereon, net of the Group’s proportionate share of inter-group profits. Losses incurred by associates (including impairment losses where such indications exist) are brought to account in the consolidated financial statements until the investment in such associates is written down to a nominal value. Thereafter, losses are accounted for only insofar as the Group is committed to providing financial support to such associates. The carrying amount of such investments is reduced to recognise any decline in the value of the investment.

Transnet Annual Report 2005 71 Accounting policies continued

The Group’s interest in an associate is carried in the balance sheet at an amount that reflects its share of the net asset value of the associate, plus goodwill, less an impairment loss, if applicable.

Where the Group transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associate, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred.

INTANGIBLE ASSETS Goodwill Goodwill arising on consolidation represents the future economic benefits arising from assets that are not capable of being individually identified and separately recognised.

Goodwill arising on the acquisition of subsidiaries and jointly controlled entities is presented separately as an asset on the balance sheet. Goodwill arising on the acquisition of an associate is included within the carrying amount of the associate.

Goodwill is tested annually for impairment as well as when there are indications of impairment and carried at cost less accumulated impairment losses. Goodwill is allocated to cash generating units for the purpose of impairment testing. Goodwill is tested for impairment by the end of the year in which an acquisition arises. The Group does not recognise the reversal of impairment losses for goodwill.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Negative goodwill Negative goodwill represents the excess of the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over the cost of the acquisition of the Group’s interest in subsidiaries, associates and jointly controlled entities.

Negative goodwill arising on acquisition will be credited to income on the date of acquisition, provided the negative goodwill is supported by the re-assessment of the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the cost of the business combination.

Software and licences Software and licences are carried at cost less accumulated amortisation and any impairment in value. Internally developed and packaged software and the direct costs associated with the development and installation thereof are capitalised and recognised as intangible assets. Software is amortised in full on a straight-line basis over three to five years from the date of being commissioned.

Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development, employee costs and an appropriate portion of relevant overheads.

Costs relating to the acquisition of licences are capitalised and amortised on a straight-line basis over three years or the licence’s useful life, whichever is shorter.

RESEARCH AND DEVELOPMENT Research costs are charged against operating income as incurred. Development costs are also charged against operating income as incurred, except where: • an asset is created that can be identified; • it is probable that the asset will generate future economic benefits; and • the development cost of the asset can be reliably measured; in which event the costs are capitalised. Development costs that have finite useful lives that have been capitalised are amortised on a straight-line basis over their useful lives.

Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost or revalued amounts, less accumulated depreciation and any impairment losses.

72 Transnet Annual Report 2005 Owned assets Property, plant and equipment in the categories of port facilities and pipeline networks are revalued annually. These assets are independently revalued every fifth year, with valuations in the intervening years being performed by the application of appropriate indices. Revaluation surpluses and deficits that arise are taken directly to the revaluation reserve.

Major improvements to property, plant and equipment are capitalised. Repairs and maintenance are expensed as and when incurred. Minor items of purchased property, plant and equipment are also recognised in the income statement as incurred.

Exchangeable units such as aircraft engines are classified as property, plant and equipment. Costs of repairing and exchanging such units are recognised in the income statement as incurred. Exchangeable units are held at cost less accumulated depreciation and any required impairment in value.

Depreciation Depreciation is provided on a straight-line basis over the estimated useful life of the asset. Land, commercial land and assets in the course of construction are not depreciated. All other property, plant and equipment, including capitalised leased assets, are depreciated on a straight-line basis over their estimated useful lives at the following rates:

Rate per annum % Aircraft 4 – 6 Buildings and structures 2 – 5 Machinery, equipment and furniture 6,67 – 50 Permanent way and works 1,05 – 5 Pipeline networks 1,05 – 33,3 Port facilities 1,05 – 10 Rolling stock and containers 2,5 – 10 Vehicles 10 – 20

Impairment of tangible and intangible assets (excluding goodwill) The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine if there is any indication of impairment, in which case their recoverable amounts are estimated. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.

Where the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Any excess of the impairment loss over the revaluation surplus is charged to profit or loss. A previously recognised impairment loss will be reversed if the recoverable amount increases as a result of a change in the estimates previously used to determine the recoverable amount, to an amount not higher than the carrying amount that would have resulted had no impairment loss been recognised. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

The recoverable amount is the higher of the fair value less cost to sell and the value-in-use. Fair value is determined by ascertaining the current market value of an asset and deducting any costs relating to the realisation of the asset. In assessing the value-in-use, the expected future cash flows from the asset are discounted to their net present values using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

For an asset whose cash flows are largely dependent on those of other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. The pre-tax discount rate applied varies from business unit to business unit and takes into account the specific risks attributable to that business unit. In addition, certain business units apply a discount rate that is reduced below normally acceptable commercial returns. This is applicable where the business unit undertakes services in keeping with the Government’s socio-economic responsibilities from which a commercial return cannot be earned.

INVESTMENT PROPERTIES Investment property, which is property held to earn rentals and/or for capital appreciation, is stated at its fair value at the balance sheet date. Gains and losses arising from changes in the fair value of investment property are included in the income statement for the period in which they arise.

Transnet Annual Report 2005 73 Accounting policies continued

LEASES Finance leases are leases where the Group assumes substantially all the risks and rewards incident to the ownership of the underlying assets. All other leases are operating leases. Leases that are classified as operating leases are not capitalised. Payments made under operating leases are recognised in the income statement on a straight-line basis over the period of the lease.

Group as lessor When assets are leased out under a finance lease, the present value of the lease payments is recognised as areceivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.

Assets leased to third parties under operating leases are included in property, plant and equipment in the balance sheet. They are depreciated over the expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income is recognised on a straight-line basis over the lease term.

Group as lessee Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and the reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Leased assets are depre- ciated over the shorter of the normal depreciation rates applicable to the class of asset into which the leased asset falls and the lease period and are carried at cost less accumulated depreciation and plus any impairment in value.

Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

Improvements in respect of leased premises are capitalised and amortised over the shorter of the remaining lease period or their economic lives.

Sale and leaseback Where a sale and leaseback agreement is classified as a finance lease, any excess of the sales proceeds over the carrying values is deferred and recognised in the income statement over the period of the lease.

Where a sale and leaseback agreement is classified as an operating lease, any excess or deficit of the sales proceeds over the carrying values of the assets sold is recognised in the income statement in the year in which it arises.

FOREIGN CURRENCIES Transactions and balances Transactions in foreign currencies are accounted for at rates ruling on transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated into South African currency at the rate of exchange ruling at the balance sheet date. In the case of aviation business units, the ruling rate of sales denominated in foreign currencies is taken as being the International Air Transport Association (IATA) five day average rate applicable to the transaction month.

Non-monetary items originally denominated in foreign currencies are carried at the exchange rates ruling at the original transaction date, except where the underlying asset or liability is carried at fair value denominated in the foreign currency, in which case the asset or liability is translated into South African rand at the exchange rate ruling when the fair value was determined.

All gains or losses arising on translation are recognised in the income statement and are classified as finance costs.

In order to hedge its exposure to foreign exchange risks, the Group enters into forward contracts. The accounting treatment for these is detailed under “Financial Instruments” below.

Foreign entities The financial statements of foreign entities are translated into South African rand as follows: • Assets and liabilities at rates of exchange ruling at balance sheet date; • Income and expenditure at weighted average rates; • Goodwill and fair value adjustments arising on acquisition at rates of exchange ruling at balance sheet date.

All resulting exchange differences are reflected as part of shareholders’ equity. On disposal, such translation differences are recognised in the income statement as part of the cumulative gain or loss on disposal.

74 Transnet Annual Report 2005 The financial statements of foreign entities that report in the currency of a hyper-inflationary economy are restated in terms of the measuring unit current at the balance sheet date before they are translated into the Group’s reporting currency.

Inventories Inventories are stated at the lower of cost and estimated net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less any costs of completion and disposal. Inventories are valued as follows: • Raw materials and consumable stores are stated at weighted average cost; and • Manufactured goods and work in progress are valued at raw material cost, plus direct labour cost, and an appropriate portion of related manufacturing overhead cost, based on normal capacity.

Write-downs to net realisable value and inventory losses are expensed in the period in which the write-downs and/or losses occur.

TAXATION Deferred taxation Deferred taxation is provided using the balance sheet liability method on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, except for differences relating to goodwill (negative goodwill), which is not deductible or taxable for taxation purposes, and the initial recognition of assets or liabilities (other than in a business combination), which affect neither accounting nor taxable profit or loss.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available, to be utilised against the associated unused tax losses and deductible temporary differences.

Deferred taxation is calculated using taxation rates that have been enacted or substantially enacted at the balance sheet date. Deferred tax is charged or credited in the income statement except where it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and in the same entity and the Group intends to settle its current tax assets and liabilities on a net basis.

Current tax The charge for current tax is the amount of income taxes payable in respect of the taxable profit for the current period. It is calculated using tax rates that have been enacted or substantially enacted by the balance sheet date.

Secondary tax on companies (STC) STC is provided in respect of the expected dividend payments net of dividends received or receivable and is recognised as a taxation charge in the year in which the dividend is declared.

FINANCIAL INSTRUMENTS Financial assets and financial liabilities are recognised on the balance sheet when the Group has become party to the contractual provisions of the instruments.

Financial instruments recognised on the balance sheet include: • Standalone derivative instruments • Embedded derivatives •Transnet bonds and other money market instruments • Cash and cash equivalents •Trade and other receivables •Trade and other payables • Investments, including subsidiaries and associates classified as available for sale • Borrowings

Measurement Financial instruments are initially measured at cost, which includes transaction costs. Subsequent to initial recognition these instruments are measured as set out below:

Recognition The Group recognises financial liabilities held for trading on the date it becomes party to the contractual provisions to purchase/sell the liabilities and applies trade date accounting for “regular way” purchases and sales.

Investments After initial recognition, investments, which include the Company’s listed investments in associates and subsidiaries and the Group’s market making portfolios in both bonds and money market instruments, which are

Transnet Annual Report 2005 75 Accounting policies continued

classified as held for trading, and available-for-sale, are measured at fair value. Fair value is the market value (listed investments) or either the market price of a substantially similar investment or the present value of expected future cash flows of the net asset base (unlisted investments). Gains or losses on investments held for trading are recognised in the income statement. Gains or losses on available-for-sale investments are recognised as a separate component of the Group’s equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in the income statement. The gains or losses arising from the application of the above policy, in respect of associates and subsidiaries, are reversed at a Group level where normal consolidation and equity accounting principles apply.

The Company’s investments in unlisted associates and subsidiaries are carried at cost less a provision for impairment where applicable.

Other long-term investments that are intended to be held to maturity are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium on acquisition over the period to maturity. For investments carried at amortised cost, gains and losses are recognised in profit or loss when the investments are derecognised or impaired, as well as through the amortisation process.

Cash and cash equivalents Cash and cash equivalents comprise cash at bank and on hand, and instruments which are readily convertible, within 90 days, to known amounts of cash and are subject to an insignificant risk of change in value. For the purposes of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts, all of which are available for use by the Group unless otherwise stated.

Trade and other receivables Trade and other receivables, which generally have 30 to 90 day terms, are recognised and carried at the original invoiced amount less an allowance for any estimated irrecoverable amounts.

Pre-delivery payments and other aircraft deposits Pre-delivery payments paid to the manufacturers of aircraft in terms of the contractual arrangements governing the purchase of aircraft are initially recognised as part of capital work in progress at the cost of the consideration delivered.

In the event that a decision is taken that it is likely that the underlying aircraft will not be purchased at the expected delivery date, but will be leased under an operating lease, then the related pre-delivery payments will be re-measured to the present value of the consideration expected to be received from the ultimate lessor. This consideration will, if it is denominated in foreign currency, be translated into the measurement currency by applying the ruling exchange rate at the reporting date.

In calculating the value of the future consideration receivable, any benefit or loss that will result as a consequence of the Group having secured the aircraft at the original contractual price as against the fair value of the aircraft at the date of delivery to the lessor, which is taken into consideration in the future operating lease payments, forms part of the consideration receivable. Any loss arising on re-measurement is classified as impairment.

Once the operating lease agreement related to the aircraft has been formally concluded, the receivable amount so arising is transferred from capital work in progress to refundable deposits.

Where an aircraft is delivered under short-term bridging finance, pending the finalisation of an operating lease, the related pre-delivery payments and the final instalment paid to the manufacturer are again re-measured at the present value of the expected consideration from the lessor in the same manner as outlined above. Under these circumstances the full consideration receivable is classified under refundable amounts.

Financial liabilities After initial recognition, financial liabilities other than trading liabilities and derivatives are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any transaction costs, and any discount or premium on settlement.

Financial liabilities held for trading purposes and derivative liabilities are measured at fair value and the resultant gains and losses are included in profit or loss.

76 Transnet Annual Report 2005 Trade and other payables Liabilities for trade and other amounts payable which are normally settled on 30 to 90 day terms are stated at nominal value.

Derivative financial instruments The Group uses derivative financial instruments which include forward exchange and currency option contracts, cross-currency and interest rate swaps, interest rate options and jet fuel derivatives. The Group analyses its portfolio of derivative financial instruments based on the existence and designation of economic hedging relationships as follows: • Fair value hedges, which hedge the Group’s exposure to changes in the fair value of the underlying assets or liabilities recognised on the Group’s balance sheet; • Cash flow hedges, which hedge the Group’s exposure to the variability of future cash flows occasioned by movements in exchange rates, interest rates and the price of jet fuel, where the underlying exposure has not been recognised as either an asset or a liability on the balance sheet, or as an item of income or expense in the income statement; and • Other derivatives held.

Cash flow hedges are only classified as cash flow hedges where the circumstances of the hedges meet the criteria for hedge accounting as contained in the South African Accounting Statement AC133 – Financial Instruments: Recognition and Measurement. The effective portion of the hedge is recognised in equity.

Where derivatives do not meet these criteria, they are classified as “other derivatives held” even though there may be an economic hedging relationship between the derivatives and the Group’s current or future exposures.

All derivative financial instruments are measured at fair value by marking the instruments to market at the financial year-end.

The gains or losses arising in respect of the derivative financial instruments in the categories of fair value hedges and other derivatives held are recognised immediately in the income statement.

The gains or losses arising in respect of the derivative financial instruments relating to future cash flow hedges are recognised directly in equity until the underlying exposure/transaction occurs, or until the future transaction is no longer expected to occur. Any asset or liability ultimately resulting from the conclusion of a hedged transaction is recognised, at the initial measurement of the hedged item, incorporating the cumulative gain or loss on the hedge from inception of the hedge to the time of the recognition of the transaction. Where the initial recognition of the hedged transaction results in either a profit or a loss effect, the gain or loss from the hedge is recognised in profit or loss in the same period that the underlying hedged transaction is recognised. Where the transaction is no longer expected to occur, the net cumulative gain or loss resulting from the hedge is recognised in profit or loss.

Derivatives embedded in other financial instruments or non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value with unrealised gains or losses reported in profit or loss.

The Group does not speculate in the trading of derivative instruments.

Impairment and non-collectability of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a financial asset or group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of the asset is determined and an impairment loss is recognised for the difference between the recoverable amount and the carrying amount as follows: • For financial assets held at either cost or amortised cost – the carrying amount of the asset is reduced to its discounted estimated recoverable amount, either directly or through the use of an allowance account, and the resulting loss is recognised in the income statement for the period; and • For financial assets at fair value – where a loss has been recognised directly in equity as a result of the write- down of the asset to recoverable amount, the cumulative net loss recognised in equity is transferred to the income statement for the period.

Offset Where a legally enforceable right of offset exists for recognised financial assets and liabilities, and there is an intention to settle the liability and realise the asset on a net basis, all related financial effects are offset.

Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Transnet Annual Report 2005 77 Accounting policies continued

PROVISIONS Provisions are recognised when the Group has a present obligation (legal or constructive), as a result of a past event, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

Provisions for restructuring costs are recognised when the Group has a detailed formal plan for the restructuring and the Group has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Restructuring provisions only include those direct expenditures which are necessarily entailed by the restructuring and not associated with the ongoing activities of the enterprise.

FREQUENT FLYER PROGRAMME A subsidiary of the Group manages a travel incentive programme (Voyager), whereby frequent travellers accumulate mileage credits that entitle them to free travel. The airline accrues the estimated incremental cost of providing free travel awards. The accrued incremental cost is included in current liabilities.

EMPLOYEE BENEFITS Pension benefits The Group operates two defined benefit funds and a defined contribution fund. The assets of each scheme are held separately from those of the Group and are administered by the schemes’ trustees. The funds are actuarially valued by professional independent consulting actuaries.

The Group’s contributions to the defined contribution fund are charged to the income statement during the year to which they relate.

The benefit costs and obligations under the defined benefit funds are determined separately for each fund using the projected unit credit method. The benefit costs are recognised in the income statement. Actuarial gains and losses are recognised in the period in which they occur in equity.

Past service cost is recognised immediately to the extent that the benefits are already vested, and are otherwise amortised on a straight-line basis over the average period until the amended benefits become vested.

When the benefits of a plan are improved, the portion of the increased benefit relating to past service by the employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefit becomes vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement.

The amount recognised in the balance sheet represents the present value of the defined benefit obligation reduced by the fair value of plan assets.

Post-retirement medical benefits Post-retirement medical benefits are provided by the Group to qualifying employees and pensioners. The medical benefit costs are determined through annual actuarial valuations by independent consulting actuaries using the projected unit credit method. Actuarial gains and losses are recognised in the period in which they occur in equity.

Short and long-term benefits The cost of all short-term employee benefits, such as salaries, bonuses, housing allowances, medical and other contributions is recognised during the period in which the employee renders the related service.

The Group’s net obligation in respect of long-term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method and is discounted to its present value and the fair value of any related assets is deducted.

Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it has demonstrated a commitment to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.

78 Transnet Annual Report 2005 Share-based payment transactions South African Airways (Pty) Limited (SAA), a subsidiary of Transnet Limited, operates via the South African Airways Share Incentive Scheme, three incentive schemes created for the benefit of the employees of SAA namely: • The FDC Share Scheme (for the flight deck crew members); • The Share Incentive Scheme (for certain management individuals in SAA only); and • The Employee Share Ownership Programme (allowed SAA employees who were employed by SAA on 1 April 1999 and who were still in the employment of SAA on 1 March 2001 to acquire shares in SAA).

Each of the above schemes operate as follows: The employee share incentive plan grants non-transferable options to employees. The Group uses the intrinsic value accounting method for share awards under which there is no charge to earnings for employee share option awards (because the exercise price equals the market value of the share on the date of grant). There is no dilutive effect of outstanding options as the exercise price of the options exceeds the most recent value of the shares.

REVENUE Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the Group and the amounts of revenue can be reliably measured. Revenue is net of value-added taxation.

Transportation and other related services Revenue from transportation and other related services is recognised by reference to the stage of completion of transactions at the balance sheet date.

Property services Revenue arising from the rental of property is recognised on an accrual basis in accordance with the substance of the relevant agreements.

Interest income Interest is recognised on a time proportion basis that takes into account the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group. All interest income is separately disclosed as part of other income in the income statement except for interest earned on the housing bond book, which is disclosed as part of turnover.

Dividend income Dividends are recognised when the Group’s right to receive payment is established and are included in other income, which is separately disclosed in the income statement.

BORROWING COSTS Borrowing costs are recognised in the income statement in the period in which they are incurred.

GOVERNMENT GRANTS Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all suspensive conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset on a straight- line basis.

SEGMENT REPORTING The Group conducts business in all aspects of transport and maritime operations, as well as related services. On the primary segment basis, the main business groupings of the Group are rail, maritime, pipeline, aviation, road and property. On the secondary segment basis, which is the reporting format by geographic analysis, the directors consider that there is only one material geographic segment, being the Republic of South Africa. Therefore it is not considered necessary to disclose secondary segments.

Transnet Annual Report 2005 79 Income statements for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million Notes R million R million

25 744 27 381 Turnover 1 46 259 43 637 (29 516) (23 061) Net operating expenses excluding impairments 2 (40 288) (39 229) Profit/(loss) from operations before net finance costs (3 772) 4 320 and impairment of assets 5 971 4 408 (694) (62) Impairment of assets 3 (153) (4 221) Profit/(loss) from operations (4 466) 4 258 before net finance costs 3 5 818 187 (1 760) (2 180) Net finance costs 4 (2 588) (2 211) Profit/(loss) before other income and (6 226) 2 078 fair value adjustments 3 230 (2 024) 852 379 Other income 5 276 342 (833) 3 559 Fair value adjustments 6 4 650 (4 529) (6 207) 6 016 Profit/(loss) before taxation 8 156 (6 211) (130) (1 433) Taxation 7 (1 629) (204) (6 337) 4 583 Profit/(loss) after taxation 6 527 (6 415) Income from associates 12 262 92 Minority interests 20 21 (9) Profit/(loss) for the year attributable (6 337) 4 583 to shareholder 6 810 (6 332)

2 573 5 262 Headline earnings/(loss) 32 7 127 (1 760)

80 Transnet Annual Report 2005 Balance sheets at 31 March 2005

Company Group 2004 2005 2005 2004 R million R million Notes R million R million

ASSETS Non-current assets 36 615 39 054 Property, plant and equipment 8 49 939 46 854 47 118 Intangible assets 9 125 14 3 241 2 720 Long-term loans and advances 10 2 717 3 241 2 555 274 Derivative financial assets 16 308 4 910 1 031 2 972 Investments in subsidiaries 11 – – 838 792 Investments in associates 12 1 242 1 019 244 314 Other investments 13 951 1 118 44 571 46 244 55 282 57 156 Current assets 922 1 213 Inventories 14 1 819 1 525 3 153 3 292 Trade and other receivables 15 6 622 7 359 512 417 Derivative financial assets 16 3 909 535 1 110 1 380 Short-term investments 13 2 445 1 566 1 468 1 996 Cash and cash equivalents 17 2 556 4 559 7 165 8 298 17 351 15 544 51 736 54 542 Total assets 72 633 72 700

EQUITY AND LIABILITIES Capital and reserves 14 710 14 710 Issued capital 18 14 710 14 710 (2 883) 1 859 Reserves 19 2 161 (4 904) 11 827 16 569 Shareholder’s interest 16 871 9 806 Minority interests 20 88 111 Non-current liabilities 6 405 7 548 Retirement benefit obligations 21 7 639 6 413 11 454 15 670 Long-term borrowings 22 21 689 18 309 6 668 515 Derivative financial liabilities 16 559 6 797 498 647 Long-term provisions 23 779 663 – – Deferred taxation 24 44 35 25 025 24 380 30 710 32 217 Current liabilities 5 304 4 447 Trade payables and accruals 25 12 379 12 568 7 392 5 600 Short-term borrowings 26 8 645 9 537 130 1 514 Taxation 1 545 164 1 439 551 Derivative financial liabilities 16 668 7 396 423 1 264 Short-term provisions 23 1 478 666 196 217 Bank overdraft 17 249 235 14 884 13 593 24 964 30 566 51 736 54 542 Total equity and liabilities 72 633 72 700

Transnet Annual Report 2005 81 Statements of recognised income and expenditure for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million Notes R million R million

510 1 067 Gains on revaluations 1 079 499 Gains on revaluation of investment 136 66 in the MTN Group Limited 19 78 124 239 652 Gains on revaluation of port facilities 19 652 240 135 349 Gains on revaluation of pipeline networks 19 349 135 – 1 Gains/(losses) on foreign currency translation 19 3 (81) – – (Losses)/gains on cash flow hedges 19 (51) 1 442 (3) 38 Net (decrease)/increase in other reserves 19 (2) 75 Actuarial (losses)/gains related to defined 2 850 (947) benefit post-retirement schemes 19 (947) 2 850 920 20 – Actuarial gain on the Transnet Pension Fund 29.1.2 20 920 – Actuarial (loss)/gain on the Transnet Second 2 263 (941) Defined Pension Fund 29.1.3 (941) 2 263 – Actuarial gain on the Transnet Top 28 – Management Pensions 29.1.4 – 28 – Actuarial (loss)/gain on the Transnet Workmen’s 14 (20) Compensation Act Pensioners 29.1.4 (20) 14 – Actuarial gain on the Transnet Black Widows 8 13 Pension Benefit 29.1.5 13 8 – Actuarial gain/(loss) on the Transnet (225) 22 SATS Pensioners medical benefits 29.2.1 22 (225) (158) (41) – Actuarial loss on the Transnet Employees 29.2.2 (41) (158) Effect of changes in accounting policies (4 241) – AC133 – Adjustment to opening retained income 19 – (4 290) (132) – – Impairment of debtors – (133) (194) – – Revaluation of funding bonds – (194) – – – Amortised cost of current liabilities – 1 (3 964) – –Valuation of embedded derivatives – (3 964) 49 – – Impairment of loans – – (1 901) – AC116 – Adjustment to opening reserves 19 – (1 901) IFRS3 – Adjustment to opening retained income – – – Derecognition of negative goodwill 19 173 – 244 – Restatement of retained income/pension funds 19 – 248 – – Restatement of prior year fair value adjustment 19 – (221) (2 541) 159 Net income/(expenditure) recognised directly to equity 255 (1 379) (6 337) 4 583 Profit/(loss) after taxation 6 789 (6 323) (8 878) 4 742 Total recognised income/(expenditure) for the year 7 044 (7 702) Attributable to: (8 878) 4 742 Equity holder of the parent 7 065 (7 711) – – Minority interests 20 (21) 9 (8 878) 4 742 7 044 (7 702)

82 Transnet Annual Report 2005 Cash flow statements for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million Notes R million R million

Cash flows from operating activities before cash effects 5 850 4 962 of derivative transactions 7 536 4 952 5 933 8 150 Cash generated from operations 31.1 9 863 7 040 1 382 (1 212) Changes in working capital 31.2 329 457 Cash generated from operations 7 315 6 938 after working capital changes 10 192 7 497 (1 864) (2 021) Interest paid (2 397) (2 361) 854 379 Investment income 276 346 – (49) Taxation paid 31.3 (239) (31) (455) (285) Settlement of retirement obligations (285) (499) – – Dividend paid to minorities (11) – (228) (1 108) Cash effects of derivative transactions (7 052) (1 839) 5 622 3 854 Cash flows from operating activities 484 3 113 (6 970) (5 641) Cash flows from investing activities (4 938) (5 468) (4 391) (3 866) Investment to maintain operations (2 017) (2 880) (890) (1 543) Replacements to property, plant and equipment (1 897) (5 232) (81) (16) Additions to intangible assets (17) (86) Proceeds on the disposal of property, 51 87 plant and equipment 237 449 13 – Proceeds on the disposal of intangible assets – 13 7 – Proceeds on the disposal of subsidiaries 31.4 – 7 (25) (1) Acquisition of associates (1) (26) 1 596 (2 419) Loans to subsidiaries and associates (8) 14 424 295 Net receipts of long-term loans and advances 298 412 603 (269) (Increase)/decrease in other investments (629) 1 569 (6 089) – SAA recapitalisation – – (2 579) (1 775) Investment to expand operations (2 921) (2 588) (2 579) (1 775) Expansions – property, plant and equipment (3 678) (2 588) – – Refunded pre-delivery payments on aircraft 757 –

1 783 2 294 Cash flows from financing activities 2 437 5 696 (2 676) 5 334 Net long-term borrowings raised/(repaid) 5 477 (486) 4 459 (3 040) Short-term loans (repaid)/raised (3 040) 6 182

Net (decrease)/increase in cash 435 507 and cash equivalents (2 017) 3 341 Cash and cash equivalents 837 1 272 at the beginning of the year 4 324 983 Cash and cash equivalents 1 272 1 779 at the end of the year 17 2 307 4 324

Transnet Annual Report 2005 83 Segmental analysis for the year ended 31 March 2005

Based on risk and returns the directors consider that the primary reporting format is by business segment. The Group is organised into different business units. These business units are the basis on which the Group reports its primary segment information. The secondary reporting format is by geographic analysis and directors consider that, with the exception of Aviation there is only one geographic segment being the Republic of South Africa.

Group Rail Maritime 2005 2004 2005 2004 2005 2004 R million R million R million R million R million R million

External turnover 46 259 43 637 16 784 15 770 8 025 7 158 Internal turnover 2 779 2 406 375 354 Total turnover 46 259 43 637 19 563 18 176 8 400 7 512 Net operating expenses (40 441) (43 450) (17 980) (17 754) (4 110) (4 216) Profit/(loss) from operations before net finance costs 5 818 187 1 583 422 4 290 3 296 Net finance cost (2 588) (2 211) (906) (804) (671) (916) Profit/(loss) before other income, fair value adjustments and income from associates 3 230 (2 024) 677 (382) 3 619 2 380 Other income 276 342 72 105 94 39 Fair value adjustments 4 650 (4 529) 3 026 (34) 881 (20) Profit/(loss) before taxation 8 156 (6 211) 3 775 (311) 4 594 2 399 Taxation (1 629) (204) – – – – Profit/(loss) after taxation 6 527 (6 415) 3 775 (311) 4 594 2 399 Income from associates 262 92 – – – – Minority interests 21 (9) – – – – Profit/(loss) for the year 6 810 (6 332) 3 775 (311) 4 594 2 399 Other information Operating assets 71 391 71 681 20 000 18 747 17 974 16 223 Investments in associates 1 242 1 019 – 21 10 22 Consolidated total assets 72 633 72 700 20 000 18 768 17 984 16 245 Operating liabilities 26 302 38 026 3 715 7 298 1 221 2 735 Capital expenditure 5 575* 7 820 1 492 1 580 1 598 1 589 Significant non-cash item: – Depreciation and amortisation 2 463 2 600 727 678 610 620

* Prior to set-off of pre-delivery payments refunded on SA Airways (Pty) Ltd aircraft amounting to R757 million.

84 Transnet Annual Report 2005 Pipeline Aviation Road Property Other operations** 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 R million R million R million R million R million R million R million R million R million R million

1 019 918 18 175 17 106 1 206 1 315 179 142 871 1 228 1 1 – – 520 523 90 95 (3 765) (3 379) 1 020 919 18 175 17 106 1 726 1 838 269 237 (2 894) (2 151) (437) (409) (17 196) (20 883) (1 513) (1 657) (204) (330) 999 1 799

583 510 979 (3 777) 213 181 65 (93) (1 895) (352) (286) (293) (541) (782) (96) (116) (11) (19) (77) 719

297 217 438 (4 559) 117 65 54 (112) (1 972) 367 36 22 219 138 16 20 20 25 (181) (7) – – 219 (4 488) – – – – 524 13 333 239 876 (8 909) 133 85 74 (87) (1 629) 373 – – (98) 39 (63) (45) – – (1 468) (198) 333 239 778 (8 870) 70 40 74 (87) (3 097) 175 – – – – – 6 – – 262 86 – – 43 10 (22) (18) – – – (1) 333 239 821 (8 860) 48 28 74 (87) (2 835) 260

3 957 3 573 15 702 17 854 1 759 1 623 971 860 11 028 12 801 – – – 1 – 2 6 5 1 226 968 3 957 3 573 15 702 17 855 1 759 1 625 977 865 12 254 13 769 386 160 9 222 15 423 446 447 118 127 11 194 11 836 136 83 1 849* 4 015 362 355 109 92 29 106

174 157 497 847 240 231 9 9 206 58

** Other operations incorporate all other business units plus Company/Group adjustments, reclassifications and eliminations.

Transnet Annual Report 2005 85 Notes to the annual financial statements for the year ended 31 March 2005

CHANGE IN ACCOUNTING POLICY The Group has fully adopted the following South African Statements of Generally Accepted Accounting Practice and amendments thereto: • AC116 (IAS19 revised 2004): Employee benefits (the amendment to this has been early adopted); • AC128 (IAS36 revised 2004): Impairment of assets; • AC129 (IAS38 revised 2004): Intangible assets; and • AC140 (IFRS3 revised 2004): Business combinations.

Furthermore, the Group has consolidated the South African Airways Share Incentive Trust with effect from 1 April 2004 and has restated the comparative figures accordingly.

The principal effects of this decision are discussed below:

AC116: Employee benefits The amendments to AC116 allow the Group to recognise actuarial gains and losses arising from defined post- retirement benefit schemes directly in equity. Previously the Group recognised actuarial gains and losses as income or expenses when the cumulative unrecognised actuarial gains or losses for each fund at the beginning of the year exceeded 10% of the greater of the defined benefit obligation and the fair value of the plan assets at the beginning of the year.

Although the amendments to AC116 are applicable to annual periods beginning on or after 1 January 2006, the Group has elected to early adopt the amendments and have applied them with effect from 1 April 2004. Comparatives have been restated for the effect of adopting the amendments.

AC128: Impairment of assets The adoption of AC128 has led to significant changes to the accounting policy pertaining to the frequency of impairment testing and the allocation of goodwill to cash generating units. This however has not resulted in adjustments to the opening accumulated loss or changes to what have ordinarily been recorded as impairments in prior years, in the current year.

AC128 requires the annual testing of the following assets for impairment, irrespective of whether there is any indication of impairment: • Goodwill acquired in a business combination; • Intangible assets with an indefinite useful life; and • Intangible assets not yet available for use.

The statement also requires that goodwill be allocated to the acquirer’s cash generating units that are expected to benefit from the synergies of the business combination, irrespective of whether other assets or liabilities of the acquiree are assigned to these units.

AC129: Intangible assets The adoption of AC129 has resulted in the Group ceasing annual goodwill amortisation and testing for impairment annually at the cash generating unit level (unless an event occurs during the year which requires the goodwill to be tested more frequently). The carrying amount of positive goodwill of R111 million was impaired in the current financial year.

Further, the carrying amount of negative goodwill that arose from either: •a business combination for which the agreement date was before 31 March 2004; or • an interest in a jointly controlled entity obtained before 31 March 2004 and accounted for by applying proportionate consolidation, was derecognised at 1 April 2004, with a corresponding adjustment to the opening accumulated loss. The carrying amount of the negative goodwill of R173 million arising on the reacquisition of 20% of SAA (Pty) Ltd was written back to accumulated loss.

AC140: Business combinations AC140 applies to accounting for business combinations for which the agreement date is on or after 31 March 2004. The effect of the adoption of AC140 upon the Group’s accounting policies will impact the recognition of restructuring provisions arising upon an acquisition. The Group is now only permitted to recognise an existing liability contained in the acquiree’s financial statements on acquisition. Previously this type of restructuring provision could be recognised by the acquirer regardless of whether the acquiree had recognised this type of liability or not. The restructuring provision of R2 million (2004: R1 million) arose from the costs of internal restructuring and not from a business combination.

Upon acquisition the Group initially measures the identifiable assets and liabilities acquired at their fair values as at the acquisition date hence causing any minority interest in the acquiree to be stated at the minority’s proportions of the net fair values of those items. There were no business combinations entered into in the current financial year.

86 Transnet Annual Report 2005 CHANGE IN ACCOUNTING POLICY (continued) Company Group 2004 2005 2005 2004 R million R million R million R million

The effect of the adoption of the amendments to AC116 on opening accumulated loss, reserves and current year profit is summarised as follows: Actuarial (losses)/gains in equity 949 (947) Gross (947) 949 – – Taxation – – – – Minority interest – – 949 (947) Net effect (947) 949 Impact on opening accumulated loss 244 – Gross – 248 – – Taxation – – – – Minority interest – – 244 – Net effect – 248 The effect of the adoption of AC129 on opening accumulated loss and current year profit is summarised as follows: Negative goodwill – – Gross 173 – – – Taxation – – – – Minority interest – – – – Net effect on opening accumulated loss 173 – Positive goodwill – – Gross (111) – – – Taxation – – – – Minority interest – – – – Net effect on current year profit (111) – The effect of the consolidation of the South African Airways Share Incentive Trust on current year profits is as below: Impact on current year profit – – Gross (28) – – – Taxation – – – – Minority interest – – – – Net effect (28) – Other restatement Restatement of prior year fair value adjustment – – Gross – (221) – – Taxation – – – – Minority interest – – – – Net effect – (221)

25 744 27 381 1. TURNOVER 46 259 43 637 Included in turnover is a contractual payment from Government via the South African Railway Commuter Corporation (SARCC) of R1 312 million (2004: R1 262 million). This payment is applied in the operation of the commuter rail network operated by Metrorail.

Transnet Annual Report 2005 87 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

2. NET OPERATING EXPENSES EXCLUDING IMPAIRMENTS 123 105 Accommodation and refreshments 577 693 1 526 1 620 Depreciation (refer note 3) 2 390 2 536 561 509 Electronic data costs 1 030 1 221 1 967 2 158 Energy costs 5 711 4 947 343 170 Health and sanitation 229 399 Impairment provision for loss making subsidiaries and associates 8 096 612 (refer note 3) 197 1 136 152 Insurance 309 304 826 989 Maintenance 309 313 Managerial and technical consulting fees 318 283 (refer note 3) 419 289 2 489 2 809 Material costs 4 180 3 863 – – Navigation, landing and parking fees 957 888 Net amortisation of intangible assets 82 54 (refer note 3) 73 64 1 287 1 175 Operating leases (refer note 3) 2 869 3 089 Passenger handling, rescheduling and – – airline costs 1 337 1 288 9 150 9 843 Personnel costs 13 508 12 675 1 504 1 189 Post-retirement benefit costs 1 469 1 681 76 65 Printing and stationery 125 154 (Profit)/loss on disposal of property, plant and 131 5 equipment (refer note 3) (33) 408 Profit on disposal of intangible assets (13) – (refer note 3) – (13) 139 78 Promotions and advertising 567 849 442 492 Security 590 524 332 259 Telecommunications 349 428 104 105 Transport 663 676 (103) 389 Other 2 463 1 952

29 516 23 061 40 288 39 229

3. PROFIT/(LOSS) FROM OPERATIONS BEFORE NET FINANCE COSTS is stated after taking into account the following amounts: 43 56 Auditors’ remuneration 94 55 38 55 Group auditors 83 45

33 38 Audit fees 55 38 – 4 Fees for other services 7 1 2 1 Expenses 2 3 3 12 Underprovision prior year 19 3 5 1 Other auditors 11 10 4 – Audit fees – prior year underprovision 11 8 1 1 Fees for other services – 2

88 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

3. PROFIT/(LOSS) FROM OPERATIONS BEFORE NET FINANCE COSTS (continued) 82 54 Amortisation of intangible assets (refer note 9) 73 64 – – Goodwill – 5 – – Released negative goodwill – (57) 82 54 Software and licences 73 116 1 526 1 620 Depreciation 2 390 2 536 1 345 1 403 Depreciation – Owned assets at historic cost 2 147 2 012 – – Aircraft 499 438 110 123 Land, buildings and structures 135 121 236 258 Machinery, equipment and furniture 298 278 158 163 Permanent way and works 163 158 96 105 Pipeline networks 105 96 264 279 Port facilities 279 264 404 403 Rolling stock and containers 404 405 77 72 Vehicles 264 252 201 217 Depreciation – Owned assets revalued portion 217 201 46 56 Pipeline networks 56 46 155 161 Port facilities 161 155 (20) – Depreciation – Leased assets 26 323 (28) – Rolling stock – including change in estimate – (27) 8 – Aircraft 26 350

318 283 Managerial and technical consulting fees 419 289 1 287 1 175 Operating lease charges 2 869 3 089 1 1 Aircraft 1 499 1 645 413 158 Land, buildings and structures 240 476 873 1 016 Other 1 130 968 (Profit)/loss on disposal of property, plant 131 5 and equipment (33) 408 (13) – Profit on disposal of intangible assets – (13) Impairment provision for loss making 8 096 612 subsidiaries and associates 197 1 694 62 Impairment of assets 153 4 221 – – Intangible assets 115 12 694 62 Property, plant and equipment 38 4 027 – – Trade and other receivables – 182 70 65 Research and development costs 66 76 Directors’ emoluments (full details are 26 32 disclosed in the directors’ report) 59 29 16 7 Executive directors 31 19 3 3 Non-executive directors 6 2 7 22 Senior executives 22 8

Transnet Annual Report 2005 89 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

4. NET FINANCE COSTS (277) (29) Net foreign exchange gains/(losses) on translation 3 (323) 173 188 Discounts on bonds amortised 188 173 1 864 2 021 Interest paid 2 397 2 361 1 760 2 180 2 588 2 211

5. OTHER INCOME Loss on sale of interests in subsidiaries and (2) – associates – (7) – – Profit on sale of unlisted investments – 2 1 5 Dividends received 3 1 677 228 Interest received from subsidiaries – – 102 146 Interest received from other investments 273 272 74 – Profit on sale of treasury investments – 74 852 379 276 342

6. FAIR VALUE ADJUSTMENTS (1 722) 3 621 Derivative fair value adjustments 3 894 (6 210) Revaluation of investment arising from disposal – – of the MTN Group Limited shares 932 1 835 Reversal of guarantee provision for zero coupon 1 043 – promissory notes – – (93) – Forward exchange cover cost – (93) (61) (62) Other fair value adjustments (176) (61) (833) 3 559 4 650 (4 529) Reconciliation of fair value adjustments to note 16 (833) 3 559 Balance per above 4 650 (4 529) – 554 Embedded derivative recognised in revenue 554 – 61 178 Treasury bonds 178 61 – (6) Other fair value adjustments – – (772) 4 285 Fair value adjustments per note 16 5 382 (4 468)

7. TAXATION South African normal taxation 130 1 451 – Current year 1 511 190 – – – Prior year 124 – Deferred taxation – – – Current year 9 14 Secondary taxation on companies – – – Current year 3 – – (18) – Prior year (18) – 130 1 433 1 629 204

90 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

7. TAXATION (continued) % % Reconciliation of rate of taxation % % 30,00 30,00 Standard rate – South African normal taxation 30,00 30,00 (32,09) (6,18) Adjust for differences and assessed loss (10,03) (33,33) (24,48) 7,60 Permanent differences 8,51 18,35 – (0,30) Secondary tax on companies (0,18) – (19,10) (14,63) Deferred taxation not provided (21,68) (63,37) – 1,15 Change in rate 1,85 – 11,49 – Assessed loss utilised (0,02) 11,69 – – Adjustment to prior year current taxation charge 1,49 –

(2,09) 23,82 Effective tax rate 19,97 (3,33) – – The Group has estimated tax losses of 10 745 9 250

8. PROPERTY, PLANT AND EQUIPMENT (refer Annexure B) 36 615 39 054 Net book value 49 939 46 854 59 437 64 004 Gross carrying value 82 322 76 717 (22 822) (24 950) Accumulated depreciation and impairment (32 383) (29 863) Historical cost 34 982 37 581 Gross carrying value 55 899 52 262 50 50 – Aircraft 14 933 11 401 7 090 7 134 – Land, buildings and structures 7 925 7 798 3 786 3 826 – Machinery, equipment and furniture 4 347 4 403 6 985 7 096 – Permanent way and works 7 096 6 985 9 766 10 798 – Rolling stock and containers 10 826 9 793 1 152 1 123 – Vehicles 2 611 2 511 6 153 7 554 – Capital work in progress 8 161 9 371 (10 433) (11 064) Accumulated depreciation (15 100) (13 946) (50) (50) – Aircraft (3 140) (2 664) (918) (994) – Land, buildings and structures (1 099) (979) (2 220) (2 243) – Machinery, equipment and furniture (2 546) (2 560) (2 024) (2 191) – Permanent way and works (2 191) (2 024) (4 324) (4 725) – Rolling stock and containers (4 745) (4 345) (897) (861) – Vehicles (1 379) (1 374) (450) (867) Accumulated impairment (4 264) (3 978) – – – Aircraft (3 380) (3 522) (200) (289) – Land, buildings and structures (291) (200) (250) – – Machinery, equipment and furniture (9) (251) – – – Vehicles (6) (5) – (578) – Capital work in progress (578) –

24 099 25 650 Historical net book value 36 535 34 338

Transnet Annual Report 2005 91 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

8. PROPERTY, PLANT AND EQUIPMENT (continued) Revaluation 24 455 26 423 Gross carrying value 26 423 24 455 7 306 7 940 – Pipeline networks 7 940 7 306 17 149 18 483 – Port facilities 18 483 17 149 (11 184) (12 587) Accumulated depreciation (12 587) (11 184) (4 350) (4 737) – Pipeline networks (4 737) (4 350) (6 834) (7 850) – Port facilities (7 850) (6 834) (755) (432) Accumulated impairment (432) (755) (318) – – Pipeline networks – (318) (437) (432) – Port facilities (432) (437)

12 516 13 404 Revalued net book value 13 404 12 516 36 615 39 054 Net carrying value 49 939 46 854 Property, plant and equipment is stated at historical cost except for pipeline networks and port facilities, which are stated at revalued amounts. During the year under review the directors revalued certain categories of property, plant and equipment on the basis of depreciated replacement cost/modern equivalent asset value. Where the revaluation resulted in a carrying value greater than the expected recoverable amount, the recoverable amount was impaired to the expected value in use. Aircraft Aircraft in use were impaired to the higher of their value in use and recoverable amount. Included in aircraft are capitalised leased assets – – with a net carrying value of 6 173 4 297 These capitalised aircraft are encumbered as security for the repayment of lease commitments (refer notes 22 and 27.3). Land, buildings and structures A register of land, buildings and structures is open for inspection at the registered office of the Company. Rolling stock Included in rolling stock are locomotives that were leased and leased back. The locomotives are leased to a third party, refurbished and then leased to a financier who in turn leases the assets back to the Company. This has been treated as a structured loan. The loan is secured by virtue of the lease agreements and a collateral covering bond over the refurbished locomotives. The book value of the refurbished locomotives which are so encumbered amounts to R879 million. Included in rolling stock assets are capitalised 518 493 leased assets with a carrying value of 493 518 These assets were part of a sale and lease back arrangement giving rise to a finance lease entered into in 1997. The present value of the lease commitments has been settled in full.

92 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

8. PROPERTY, PLANT AND EQUIPMENT (continued) Pipeline networks The Group’s policy is to perform a revaluation of its pipeline networks every five years and an internal index revaluation in the intervening years. The last external revaluation was performed in the financial year ended 31 March 2001, by Arthur D Little Inc., an independent firm of professional valuers. An internal revaluation was performed in the current year using indices relevant to the pipeline industry. This revaluation resulted in a net increase of R349 million (2004: R135 million) to the carrying value of the Company’s and the Group’s pipeline networks, which has been adjusted accordingly. Port facilities The property, plant and equipment owned by South African Port Operations and National Ports Authority was valued during the year ended 31 March 2003 by SAFX Marine Services, a firm of independent professional valuers. The valuation methodologies employed in the valuation were MEA, which was used for obtaining fair market values for non-specialised assets, and the depreciated replacement cost which was used for specialised assets where market values were not easily obtainable. This revaluation resulted in a net increase of R652 million (2004: R245 million) to the carrying value of the Company’s and the Group’s port facilities, which has been adjusted accordingly. The historic carrying values of these assets amount to: 2 241 2 113 Pipeline networks 2 113 2 241 6 612 5 635 Port facilities 5 635 6 612 Investment property (included in land, buildings and structures) – – Fair value at the beginning of the year 30 32 – 4 Increase/(decrease) in fair value during the year 7 (2) – 4 Fair value at the end of the year 37 30

The fair value of the Group’s investment property at 31 March 2005 was arrived at on the basis of valuations carried out at that date by Propnet’s valuers. The valuations, which conform to the Property Valuers Profession Act (Act 47 of 2000), were arrived at by capitalising the first year’s normalised net operating income by a market derived capitalisation rate. The property rental income earned by the Group from its investment property, all of which is leased out under operating leases, amounted to R5 million (2004: R6 million). Direct operating expenses arising on the investment property in the period amounted to R1 million (2004: R2 million).

Transnet Annual Report 2005 93 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

9. INTANGIBLE ASSETS 47 118 Net intangible assets 125 14 189 408 Cost 668 161 (142) (290) Accumulated amortisation and impairment (543) (147) Finite life intangible assets 47 118 Software and licences: Net carrying value 125 76 189 408 Cost 504 284 108 189 Balance at the beginning of the year 284 199 81 16 Additions 17 86 – 205 Transfers in from property, plant and equipment 205 – – (2) Disposals (2) (1) (142) (290) Accumulated amortisation and impairment (379) (208) (60) (142) Balance at the beginning of the year (208) (81) – – Impairment (4) (12) – 2 Disposals 2 1 – (96) Transfers in from property, plant and equipment (96) – (82) (54) Amortisation (73) (116)

Indefinite life intangible assets – – Positive goodwill: Net carrying value – 111 – – Cost/carrying value 111 164 – – Accumulated amortisation and impairment (111) (53) – – Balance at the beginning of the year – (48) – – Impairment (111) – – – Amortisation – (5)

– – Negative goodwill – (173) – – Cost – (287) – – Balance at the beginning of the year (173) (287) Adoption of IFRS3 (AC140) – – – Business combinations 173 – – – Accumulated amortisation – 114 – – Balance at the beginning of the year – 57 Amortisation – 57 Adoption of IFRS3 (AC140) – – – Business combinations – –

47 118 Net intangible assets 125 14 As of 1 April 2004, software and licences were assessed as having a finite life and are amortised under the straight-line method over a period of 3 to 5 years. As of 1 April 2004, positive goodwill was no longer amortised and was annually tested for impairment (refer to discussion below). The opening accumulated amortisation balance was set off against the gross carrying value as at 1 April 2004. Patents and trademarks represent intangible assets purchased through the effect of a business combination. The useful lives of these intangible assets were estimated as having indefinite lives and the cost method was utilised for their measurement. As at 31 March 2005, these intangible assets were tested for impairment (refer to discussion below).

94 Transnet Annual Report 2005 9. INTANGIBLE ASSETS (continued) The negative goodwill arising on the acquisition of 20% of SA Airways (Pty) Ltd was written off against the opening accumulated reserves reducing the balance as at 1 April 2004 to R nil. The opening accumulated amortisation balance was set off against the gross carrying value as at 1 April 2004. Impairment testing of indefinite life positive goodwill and patents and trademarks The opening balance of goodwill acquired through business combinations was allocated to the following cash generating units for impairment testing as at 1 April 2004: R million SA Express Airways (Pty) Ltd 14 Air Chefs (Pty) Ltd 12 Air Tanzania Company Ltd 85 111

The above cash generating units sustained losses and as a result the goodwill relating to their acquisition is considered to be impaired. The impairment is recorded in the current year. Note that the comparatives have been restated.

Company Group 2004 2005 2005 2004 R million R million R million R million

10. LONG-TERM LOANS AND ADVANCES 3 241 2 720 Comprising 2 717 3 241 3 734 3 241 Balance at the beginning of the year 3 241 3 810 512 633 Advances 633 436 (783) (856) Repayments (859) (783) – (151) Impairment (151) – (222) (147) Less: Short-term portion (147) (222) 9 5 Directors’ and managers’ loans 4 9 12 9 Balance at the beginning of the year 9 12 1 1 Advances 1 1 (4) (5) Repayments (6) (4) 3 183 2 636 Employee housing and other loans 2 634 3 037 3 658 3 183 Balance at the beginning of the year 3 037 3 632 511 441 Advances 440 391 – (120) Impairment (120) – (764) (721) Repayments (576) (764) 3 405 2 783 2 781 3 259 Short-term portion transferred to trade (222) (147) and other receivables (refer note 15) (147) (222) 49 79 Other loans and advances 79 195 49 110 Advances 110 195 – (31) Impairments (31) –

3 241 2 720 2 717 3 241

Transnet Annual Report 2005 95 Notes to the annual financial statements continued for the year ended 31 March 2005

10. LONG-TERM LOANS AND ADVANCES (continued) Included in directors’ and managers’ loans are the following: Capitalised Closing Closing TOTAL Opening interest/ balance balance balance advances Repaid housing vehicles 2005 2004 R’000 R’000 R’000 R’000 R’000 R’000 R’000

Mr SS Ntsaluba* 751 122 – 853 20 873 751 Ms M Ramos 549 – (128) – 421 421 549 Ms SN Mabaso 352 – (352) – – – 352 Ms NV Phiyega** 1 386 160 (269) 1 223 54 1 277 1 386

3 038 282 (749) 2 076 495 2 571 3 038

These loans are secured and bear variable interest that is linked to prime. The current rates are 7,9% for motor vehicles and 10,0% to 11,5% for housing loans. Repayment terms vary between 3 and 5 years for motor vehicles and up to a maximum of 25 years for housing loans. Housing loans are secured by first mortgage bonds over the related property and other guarantees. * Past director ** Past executive

Company Group 2004 2005 2005 2004 R million R million R million R million

11. INVESTMENTS IN SUBSIDIARIES (refer Annexure C) 8 936 8 936 Shares at cost – – 1 755 4 176 Amounts owing by subsidiaries (net) – 141 10 691 13 112 – 141 Provision for impairment and losses (9 660) (10 140) (refer Annexure C) – (141) 1 031 2 972 – – For a detailed breakdown of investments in subsidiaries refer to Annexure C. Loans to subsidiaries that have been subordinated in respect of these subsidiaries amount to R3 188 million (2004: R438 million). In addition, the Company has issued letters of support to the following subsidiaries: – SA Airways (Pty) Ltd – SA Express Airways (Pty) Ltd – B2B Africa Holdings (Pty) Ltd – Autopax Passenger Services (Pty) Ltd – Marine Data Systems (Pty) Ltd The financial support available in terms of these letters is as follows: – SA Airways (Pty) Ltd 1 500 1 500 – SA Express Airways (Pty) Ltd 700 400 – B2B Africa Holdings (Pty) Ltd 150 100 – Autopax Passenger Services (Pty) Ltd 109 6 – Marine Data Systems (Pty) Ltd 250 – 2 709 2 006 In addition, subsequent to year-end, Transnet has agreed to provide support to a maximum of R1 600 million to SA Airways (Pty) Ltd in the event that liabilities exceed assets fairly valued. The support is until the shares in SA Airways (Pty) Ltd are transferred to Government.

96 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

12. INVESTMENTS IN ASSOCIATES (refer Annexure C) 838 792 Comprising 1 242 1 019 703 703 Shares at cost 704 704 135 133 Loans 133 125 – – Share of post-acquisition reserves 450 190 – (44) Impairment (45) –

210 210 Investment in arivia.kom (Pty) Ltd 203 185 210 210 Shares at cost 210 210 – – Share of post-acquisition reserves (7) (25) – – Balance at the beginning of the year (25) (34) – – Current year equity earnings 18 9

424 424 Investment in V&A Waterfront Holdings (Pty) Ltd 811 611 424 424 Shares at cost 424 424 – – Share of post-acquisition reserves 387 187 – – Balance at the beginning of the year 187 (2) – – Current year equity earnings 200 70 – – Other reserve movements – 119

69 35 Minor associates 105 98 69 69 Shares at cost 70 70 – – Share of post-acquisition reserves 70 28 – – Balance at the beginning of the year 28 20 – – Current year equity earnings 44 13 – – Dividends received (2) – – – Other reserve movements – (5) – (34) Impairment (35) –

703 669 1 119 894

135 123 Loans 123 125 136 135 Balance at the beginning of the year 125 140 (1) (2) Advances/(repayments) 8 (15) – (10) Impairment (10) –

838 792 1 242 1 019 Directors’ valuation of unlisted investments 1 029 1 242 in associates 1 242 1 019 Total income from associates amounted to 262 92

Transnet Annual Report 2005 97 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

13. OTHER INVESTMENTS 220 290 Listed investments at market value 313 241 24 24 Unlisted investments 104 118 – – Defeasance deposit 534 759 Short-term investments including market 1 110 1 380 making positions 2 445 1 566 1 354 1 694 Total investments 3 396 2 684 Less: Short-term investments including market 1 110 1 380 making positions disclosed as current assets 2 445 1 566 244 314 951 1 118 24 24 Directors’ valuation of unlisted investments 104 118 A register of all listed investments is open for inspection at the registered office of the Company.

14. INVENTORIES At weighted average cost 189 177 Raw materials 183 197 405 474 Maintenance material 474 405 28 49 Consumables 227 178 96 120 Finished goods 125 99 718 820 1 009 879 At net realisable value – 98 Raw materials 98 – 37 36 Maintenance material 416 214 66 87 Consumables 95 283 14 21 Finished goods 21 14 117 242 630 511 87 151 Work in progress 180 135 922 1 213 1 819 1 525

15. TRADE AND OTHER RECEIVABLES 2 360 2 554 Trade receivables 4 149 4 101 571 591 Prepayments and other amounts receivable 2 326 3 036 Short-term portion of loans and advances 222 147 (refer note 10) 147 222 3 153 3 292 6 622 7 359

The pre-delivery payments (PDPs) made to secure the manufacture and delivery of three A319-100 aircraft (2004: eleven) have been disclosed as a short-term receivables as the Company has entered into operating leases for these aircraft. The short-term monetary receivables represent the present value of the expected future proceeds to be received from the lessor when the aircraft is delivered. R236 million (2004: R1 267 million) of the refundable deposit arising from the A319-100 aircraft forms security for the loans granted to finance the payment of PDPs.

98 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

16. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES Both the Company and the Group use approved financial instruments, in particular forward exchange contracts, cross-currency swaps, interest rate swaps and jet fuel derivatives to hedge the financial risks associated with underlying business activities. All derivative financial instruments have been recorded at fair value with the resulting gain or loss taken to income statement. 3 067 691 Derivative financial assets 4 217 5 445 3 466 3 067 Opening balance 5 445 3 608 2 12 Adjustment to opening balance 13 2 (30) 88 Income statement charge 1 272 2 206 (371) (2 476) Derivatives raised and settled (2 513) (371) 8 107 1 066 Derivative financial liabilities 1 227 14 193 5 045 8 107 Opening balance 14 193 8 275 3 966 – Adjustment to opening balance – 3 966 742 (4 197) Income statement charge (4 110) 6 674 (1 646) (2 844) Derivatives raised and settled (8 856) (3 276) – – Recognised in equity – (1 446)

(772) 4 285 Net income statement charge (refer note 6) 5 382 (4 468) Comprise the following financial instruments 2 555 274 Non-current assets 308 4 910 202 48 Forward exchange contracts 47 3 014 2 286 181 Cross currency swaps and options 217 2 153 84 44 Interest rate swaps and options 44 117 – – Jet fuel derivatives – (2 729) – – C-class preference shares* – 2 355 (17) 1 Other – – 512 417 Current assets 3 909 535 151 90 Forward exchange contracts 91 135 308 304 Cross currency swaps and options 308 – 33 23 Interest rate swaps and options 23 – – – Jet fuel derivatives 199 400 – – C-class preference shares* 3 287 – 20 – Other 1 –

Transnet Annual Report 2005 99 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

16. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES (continued) (6 668) (515) Non-current liabilities (559) (6 797) (145) (108) Forward exchange contracts (152) (258) (1 547) (343) Cross currency swaps and options (343) (3 124) (60) – Interest rate swaps and options – (60) – – Jet fuel derivatives – 522 (3 877) (9) Embedded derivatives (9) (3 877) (1 039) (55) Other (55) – (1 439) (551) Current liabilities (668) (7 396) (268) (122) Forward exchange contracts (191) (266) (1 496) (407) Cross currency swaps and options (455) (1 387) (24) – Interest rate swaps and options – (24) – – Jet fuel derivatives – (5 024) (695) (22) Embedded derivatives (22) (695) 1 044 – Other – – In the previous year Transnet recognised a liability of R4 532 million for embedded derivatives arising on two major customer contracts. The contracts were service related contracts to handle and transport iron ore products by rail. The contracts constituted hybrid contracts under AC133, containing embedded derivatives, as the tariffs charged under the contracts were linked to the US dollar iron ore price. Transnet renegotiated the terms of one of the contracts resulting in the move to a rand-based contract and hence reversed the previously recognised embedded instrument. A total amount of R4 326 million pertaining to the opening liability has been reversed to fair value adjustments in the current year. A further R1 669 million has been reversed which relates to the net movement in the liability until December 2004. The net impact of the re-negotiation of the contract on the current year results is a credit of R5 995 million. The one contract which still remains a hybrid under AC133 has a derivative liability balance of R24 million.

* Includes the Group’s asset being an investment in C class preference shares via Newshelf 697 (Pty) Ltd. The shares were subscribed to at a cost of R1 511 million as part of the sale process surrounding the 309 million MTN Group Ltd shares. The value of these preference shares moves in concert with movements in the MTN Group Ltd’s share price in terms of a gain share redemption formula. The shares have been valued by a professional valuer. The profit on fair valuation is disclosed under note 6. The preference shares are redeemable at Transnet Ltd’s option at any time between 2006 and 2008.

Company Group 2004 2005 2005 2004 R million R million R million R million

17. CASH AND CASH EQUIVALENTS 1 468 1 996 Cash and cash equivalents 2 556 4 559 (196) (217) Bank overdraft (249) (235) 1 272 1 779 2 307 4 324

18. ISSUED CAPITAL Authorised 30 000 000 000 ordinary par value shares 30 000 30 000 of R1 each 30 000 30 000 Issued 14 709 986 310 ordinary par value shares 14 710 14 710 of R1 each 14 710 14 710 The unissued share capital is under the control of the South African Government, the sole shareholder of the Company.

100 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

19. RESERVES 5 361 6 428 Revaluation reserves 6 547 5 468 4 176 4 828 Revaluation of port facilities 4 828 4 176 3 937 4 176 Balance at the beginning of the year 4 176 3 936 239 652 Revaluation during the current year 652 240 1 006 1 355 Revaluation of pipeline networks 1 355 1 006 871 1 006 Balance at the beginning of the year 1 006 871 135 349 Revaluation during the current year 349 135 MTN Group Ltd – revaluation of investment 179 245 to market value 245 167 43 179 Balance at the beginning of the year 167 43 136 66 Revaluation during the current year 78 124 V&A Waterfront Holdings (Pty) Ltd fair value – – adjustment 119 119 – 1 Foreign currency translation reserve (82) (85) Actuarial gains on post-retirement 949 2 defined benefit schemes 2 949 – 949 Balance at the beginning of the year 949 – (1 901) – Adjustment to opening reserves – (1 901) 2 850 (947) (Reversed)/arising during the current year (947) 2 850 1 084 1 122 Other reserves 1 163 1 216 – – Cash flow hedges – 51 – – Balance at the beginning of the year 51 (1 391) – – Fair value increase – 1 442 – – Other movement (51) – – 38 Other transfers 65 67 839 839 Profit on sale of interest in SAA (Pty) Ltd 853 853 Share of pension fund surplus (retained for 245 245 application against pensioners) 245 245 (10 277) (5 694) Accumulated loss for the year (5 469) (12 452) 57 (10 277) Balance at the beginning of the year (12 452) (1 862) 244 – AC116 – Employee benefits – 248 – – AC140 – Business combinations 173 – (4 241) – AC133 – Financial instruments – (4 290) ––Restatement of prior year fair value adjustment – (221) – – Net transfers – 5 (6 337) 4 583 Profit/(loss) for the year 6 810 (6 332)

(2 883) 1 859 2 161 (4 904)

Transnet Annual Report 2005 101 Notes to the annual financial statements continued for the year ended 31 March 2005

19. RESERVES (continued) Reconciliations of movement in capital and reserves at 31 March 2005 Attributable to equity holders of the parent Foreign Re- currency Actuarial Accumu- valua- trans- gains lated Issued tion lation and (loss)/ capital reserves reserve losses Other profit Total R million R million R million R million R million R million R million

GROUP Balances at 31 March 2003 14 710 4 969 1 – (301) (1 862) 17 517 Restatement of pension funds – – – (1 901) – 248 (1 653) Restatement of prior year fair value adjustment –––––(221) (221) Total recognised income and expenditure – 499 (81) 2 850 1 517 (10 622) (5 837) Transfer (to)/from accumulated loss – – (5) – – 5 – Balances at 31 March 2004 14 710 5 468 (85) 949 1 216 (12 452) 9 806 Restatement of negative goodwill –––––173173 Total recognised income and expenditure – 1 079 3 (947) (53) 6 810 6 892 Balances at 31 March 2005 14 710 6 547 (82) 2 1 163 (5 469) 16 871 COMPANY Balances at 31 March 2003 14 710 4 851 – – 1 087 57 20 705 Restatement of pension funds – – – (1 901) – 244 (1 657) Total recognised income and expenditure – 510 – 2 850 (3) (10 578) (7 221) Balances at 31 March 2004 14 710 5 361 – 949 1 084 (10 277) 11 827 Total recognised income and expenditure – 1 067 1 (947) 38 4 583 4 742 Balances at 31 March 2005 14 710 6 428 1 2 1 122 (5 694) 16 569

102 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

20. MINORITY INTERESTS Balance at the beginning of the year 111 124 Transfer (to)/from the income statement (21) 9 Dividends paid to minorities (11) – Minorities purchased – (22) Adjustment to minorities 9 – 88 111

21. RETIREMENT BENEFIT OBLIGATIONS 6 405 7 548 Comprising: 7 639 6 413 7 193 6 405 Balance at the beginning of the year 6 413 7 249 1 901 (36) Effects of adoption of amendments to AC116 – 1 901 (2 850) 947 Actuarial losses/(gains) 947 (2 850) 616 517 Current year provision 564 612 (455) (285) Settlement during the year (285) (499) 165 101 Transnet Pension Fund (refer note 29.1.2) 132 165 Transnet Second Defined Benefit Fund 3 439 4 750 (refer note 29.1.3) 4 750 3 439 99 99 Top Management (refer note 29.1.4) 99 99 Workmen’s Compensation Act Pensioners 204 224 (refer note 29.1.4) 224 204 9 (8) Black Widows’ Pensions (refer note 29.1.5) (8) 9 – – Flight Deck Crew (refer note 29.1.6) 5 5 SATS Pensioners’ post-retirement medical 1 751 1 629 benefits (refer note 29.2.1) 1 629 1 751 Transnet employees post-retirement medical 738 753 benefits (refer note 29.2.2) 808 741 6 405 7 548 7 639 6 413 Prior year balances have been restated for the effect of adopting the amendments to AC116, which permits the recognition of the accumulated actuarial (gains)/losses as at period end to be recorded directly to equity.

22. LONG-TERM BORROWINGS (refer Annexure A) 11 454 15 670 Comprising: 21 689 18 309 Total long-term borrowings at the beginning of 14 502 12 686 the year 21 686 20 177 208 6 529 Raised 10 035 6 238 (2 264) (1 007) Repaid (4 370) (5 436) 240 (58) Foreign exchange movement (137) 707 (1 232) (2 480) Current portion repayable within 1 year (5 525) (3 377)

Transnet Annual Report 2005 103 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

22. LONG-TERM BORROWINGS (refer Annexure A) (continued) Unsecured liabilities 10 242 16 552 Rand denominated 16 587 10 271 11 668 17 668 Bonds at nominal value 17 668 11 668 (1 480) (1 160) Unamortised discounts (1 160) (1 480) 10 188 16 508 Bonds at carrying value 16 508 10 188 54 44 Other unsecured liabilities 79 83 952 83 Unsecured foreign currency denominated 117 959

1 492 1 515 Secured loans and capitalised leases 8 624 8 715 878 1 070 Rand denominated 4 756 2 834 614 445 Foreign currency denominated 3 868 5 881 – – Promissory notes 1 886 1 741 – – Rand denominated 1 886 1 741

12 686 18 150 Total long-term borrowings 27 214 21 686

Current portion of long-term borrowings redeemable within one year transferred to short-term borrowings (1 232) (2 480) (refer note 26) (5 525) (3 377) 11 454 15 670 21 689 18 309

The rand denominated unsecured local bonds are redeemable between 2006 and 2014 and bear interest between 10,39% and 14,90% (refer Annexure A). Rand denominated unsecured eurorand bonds bear interest between 13,87% and 15,09% and are repayable in 2028 and 2029 (refer Annexure A).

Foreign currency unsecured loans are denominated in Japanese yen and United States dollars. The yen loan bears interest at 3% and is repayable in March 2009. The unsecured US dollar loan bears interest at 6% and has no fixed terms of repayment.

Rand denominated capitalised finance lease liabilities bear interest at rates ranging between 9% and 14% with all rates linked to prime. These liabilities are repayable over periods between 2007 and 2017.

Foreign currency denominated capitalised finance lease liabilities bear interest between 2% and 6% and are repayable between 2005 and 2016.

The promissory notes are zero coupon notes and bear interest at JIBAR plus 40 basis points. They are redeemable at the Company’s discretion between 2006 and 2008.

104 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

22. LONG-TERM BORROWINGS (refer Annexure A) (continued) The Company has guaranteed the repayment of these promissory notes and the fair value of this guarantee is included in derivative liabilities (refer note 16).

Assets pledged in support of the secured loans and capitalised finance leases are in the category of aircraft.

– – The book value of these assets amount to 6 173 4 297

The South African Government has guaranteed repayment of R21 billion (2004: R19 billion) in loans.

23. PROVISIONS 498 647 Comprising: 779 663 906 921 Total provisions at the beginning of the year 1 329 1 126 383 1 578 Additional provision 1 745 649 (368) (588) Provisions released/utilised (817) (446) (423) (1 264) Short-term provisions classified as current liabilities (1 478) (666)

113 96 Third party claims 97 113 169 113 Balance at the beginning of the year 113 173 66 213 Additional provision 216 66 (122) (230) Provisions released/utilised (232) (126)

3 3 Freight insurance 3 3 3 3 Balance at the beginning of the year 3 3 – 8 Additional provisions 8 – – (8) Utilised during the year (8) –

19 82 Customer claims 87 19 11 19 Balance at the beginning of the year 19 19 20 128 Additional provisions 137 12 (12) (65) Utilised during the year (69) (12)

704 782 Leave pay 1 031 925 621 704 Balance at the beginning of the year 925 828 264 352 Additional provisions 423 351 (181) (274) Utilised during the year (317) (254)

39 83 Provision for onerous contracts 125 39 89 39 Balance at the beginning of the year 39 89 – 51 Additional provisions 93 – (50) (7) Utilised during the year (7) (50)

Transnet Annual Report 2005 105 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

23. PROVISIONS (continued) 38 93 Environmental rehabilitation 93 38 10 38 Balance at the beginning of the year 38 10 29 55 Additional provisions 55 29 (1) – Utilised during the year – (1)

– 274 Incentive bonuses 302 – – – Balance at the beginning of the year – – – 274 Additional provisions 302 – – – Utilised during the year – –

1 492 Restructuring 504 1 1 1 Balance at the beginning of the year 1 1 – 492 Additional provisions 508 – – (1) Utilised during the year (5) –

4 6 Other 15 191 2 4 Balance at the beginning of the year 191 3 4 5 Additional provisions 3 191 (2) (3) Utilised during the year (179) (3)

921 1 911 Total provisions 2 257 1 329

Less: Short-term provisions classified as 423 1 264 current liabilities 1 478 666 112 94 Third party claims 95 112 3 3 Freight insurance 3 3 19 57 Customer claims 61 19 288 323 Leave pay 449 396 – 18 Onerous contracts 60 – – 274 Incentive bonuses 302 – 1 489 Restructuring 495 1 – 6 Other 13 135

498 647 Total long-term provisions 779 663

Third party claims The provision represents the best estimate of known third party claims together with an allowance for claims incurred but not yet reported based on historical experience.

Freight insurance The provision for excess claims for the transportation of goods. Costs relating to the settlement of claims are expected to be paid out in the following year.

106 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

23. PROVISIONS (continued) Customer claims Provision for claims made by customers in respect claims arising from non-performance of contracts or damage to goods in transit. Costs relating to the settlement of claims are expected to be paid out in the following year.

Leave pay Provision for unutilised leave at year-end. The leave is expected to be taken over the next two financial years.

Onerous contracts Provision for the maintenance and repairs of buildings and structures in terms of a lease agreement.

Environmental rehabilitation Provision for environmental clean-up costs in terms of legislative requirements.

Incentive bonuses Provision for incentive bonuses in terms of employment contracts.

Restructuring Provision for restructuring costs in terms of strategic plans.

24. DEFERRED TAXATION – – Comprising: (44) (35) – – Balance at the beginning of the year (35) 79 – – Income statement charge (refer note 7) (9) (14) – – Other – (100)

Analysis of major categories of temporary differences

5 968 5 124 – Deferred tax asset 8 680 9 439 2 666 2 997 Provisions 3 457 2 944 – – Estimated tax losses 3 116 2 775 61 – Lump sum pension fund contributions – 61 – – Forward sales liability 943 838 167 – Doubtful debts – 225 – – Fair value adjustment 35 – 37 39 Income received in advance 162 108 636 666 Capitalised lease liability 707 653 994 1 316 Impairment of investments* – 54 – – Section 24I foreign exchange adjustment – 273 1 407 104 Derivatives 84 1 444 – – Maintenance reserve payments 151 – – 2 Other 25 64

Transnet Annual Report 2005 107 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

24. DEFERRED TAXATION (continued) 3 166 3 126 – Deferred tax liability 4 312 3 152 52 43 Deferred expenditure 86 111 3 017 2 998 Property, plant and equipment 4 113 2 930 – 19 Future expenditure allowance 47 10 – – Retention debtors – 5 97 51 Undrawn funds 51 96 – 15 Doubtful debts 15 – 2 802 1 998 Net deferred tax asset 4 368 6 287 (2 802) (1 998) Deferred tax asset not raised (4 412) (6 322) – – Deferred tax liability (44) (35) Estimated taxation losses available for set-off – – against future taxable income (refer note 7) 10 745 9 250

* Deferred tax asset calculated at the capital gains tax rate. The utilisation of this portion of the deferred tax asset will depend on whether the Company makes capital gains in the future. The Company and the Group have not raised deferred taxation assets in the current year. The probability of there being sufficient taxable profits against which the deferred tax assets can be utilised is uncertain due to the fact that it is too early to predict with sufficient probability the profitable outcome of the Group’s restructuring initiatives.

25. TRADE PAYABLES AND ACCRUALS 641 1 118 Trade payables 2 047 2 107 4 663 3 329 Accruals 10 332 10 461 – – Forward sales liability* 2 803 2 792 1 936 1 328 Accrued expenditure 4 969 4 273 25 20 Deposits received 5 17 22 20 Deferred income 55 72 ––Frequent flyer rewards programme 147 136 796 838 Interest 896 809 786 165 Personnel costs 330 1 151 608 641 Public creditors 718 650 319 151 Revenue received in advance 221 373 171 166 SARS – value added tax 188 188

5 304 4 447 12 379 12 568

* This balance represents the unrealised income from tickets sold but not yet flown. The above balance includes the value of coupons sold by SAA, which will be flown and claimed in future periods by code-share and inter-line partners.

108 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

26. SHORT-TERM BORROWINGS Current portion of long-term interest-bearing 1 232 2 480 borrowings (refer note 22) 5 525 3 377 6 160 3 120 Other short-term borrowings 3 120 6 160 7 392 5 600 8 645 9 537 Other short-term borrowings relate to the market making portfolio and comprises the Group’s position on bonds and other financial instruments.

27. COMMITMENTS 27.1 Capital commitments 76 19 Contracted for in US dollars 19 4 989 226 23 Contracted for in euros 23 226 17 11 Contracted for in British pounds 11 17 22 – Other foreign currencies – 22 1 496 637 Contracted for in SA rands 1 383 1 581 1 837 690 Total capital commitments contracted for 1 436 6 835 22 922 42 447 Authorised by the directors but not yet contracted for 48 192 23 195 24 759 43 137 49 628 30 030 Total capital commitments are expected to be incurred as follows: 5 385 5 177 Within one year 5 858 7 564 19 374 37 960 After one year, but not more than five years 43 770 22 466 24 759 43 137 49 628 30 030 These capital commitments will be financed by the net cash flow from operations, capital market borrowings, joint ventures with strategic equity partners, through project finance and the use of operating leases. These commitments relate to the following divisions and subsidiaries: 14 531 16 090 Spoornet 16 090 14 531 907 5 089 South African Port Operations 5 089 907 3 764 4 224 Petronet 4 224 3 764 4 782 15 410 National Port Authority 15 410 4 782 150 1 700 Transwerk 1 700 150 455 430 Transtel 430 455 128 194 Propnet 194 128 42 – Holding Company/Group services – 42 SA Airways (Pty) Ltd 4 680 4 913 Protekon (Pty) Ltd 69 8 B2B Africa Holdings (Pty) Ltd – 3 Viamax (Pty) Ltd 1 682 347 SA Express Airways (Pty) Ltd 60 – 24 759 43 137 49 628 30 030

Transnet Annual Report 2005 109 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

27. COMMITMENTS (continued) 27.2 Operating lease commitments Future minimum rentals under non-cancellable leases are as follows: Aircraft – 1 Within one year 1 812 1 513 2 – After one year, but not more than five years 6 860 6 316 – – More than five years 4 025 4 293 2 1 12 697 12 122 Land, buildings and structures 78 368 Within one year 382 88 281 903 After one year, but not more than five years 932 292 113 108 More than five years 109 118 472 1 379 1 423 498 Machinery, equipment, furniture and motor vehicles 56 85 Within one year 120 66 121 371 After one year, but not more than five years 384 129 13 3 More than five years 3 14 190 459 507 209 Security and maintenance contracts 698 550 Within one year 550 698 1 121 737 After one year, but not more than five years 737 1 121 1 91 More than five years 91 1 1 820 1 378 1 378 1 820 Other 46 46 Within one year 46 62 179 39 After one year, but not more than five years 39 181 1 – More than five years – 1 226 85 85 244

27.3 Finance lease commitments The Group has leases classified as finance leases principally for aircraft.

Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows:

Aircraft, machinery, equipment and furniture 60 71 Within one year 357 294 76 – After one year, but not more than five years 428 603 – – More than five years – – 136 71 Total minimum lease payments 785 897 (10) (5) Amount representing finance charges (158) (173) 126 66 Present value of minimum lease payments 627 724

110 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

27. COMMITMENTS (continued) 27.4 Lease rentals receivable Future minimum rentals under operating leases are as follows: Property 338 419 Within one year 424 338 959 2 233 After one year, but not more than five years 2 241 957 268 282 More than five years 292 268 1 565 2 934 Present value of minimum lease payments 2 957 1 563 Machinery, equipment and furniture 131 72 Within one year 72 131 553 45 After one year, but not more than five years 45 553 – 44 More than five years 44 – 684 161 Present value of minimum lease payments 161 684

28. CONTINGENT LIABILITIES Cameroon (Camair) A US$55,5 million claim was filed against Transnet Limited following Transnet’s termination of a contract with the above entity relating to the maintenance of Camair aircraft. The Arbitration Tribunal of the International Chamber of Commerce (ICC) awarded Camair US$8,4 million. However, following the High Court of Justice, Queens Bench Division Commercial Court’s review of that award, the parties decided to settle this matter for US$26 million during the year under review. 367 ––367 Sun Air (Pty) Ltd The liquidators of Sun Air (Pty) Ltd and a previous shareholder instituted legal proceedings against SA Airways (Pty) Ltd for certain alleged conduct by SA Airways (Pty) Ltd. The maximum liability in this respect is estimated at R275 million. – – 275 275 Nationwide (Pty) Ltd The Competition Commission is acting against SA Airways (Pty) Ltd regarding a Nationwide (Pty) Ltd complaint. The maximum penalty that SA Airways (Pty) Ltd could be fined is up to 10% of the preceding year’s total revenue.

Transnet Annual Report 2005 111 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million R million R million

28. CONTINGENT LIABILITIES (continued) Comair Limited The Competition Commission is acting against SA Airways (Pty) Ltd regarding a Comair Limited complaint. The maximum penalty that SA Airways (Pty) Ltd could be fined is up to 10% of the preceding year’s total revenue.

Code share agreement and fuel levies The Competition Commission is investigating SA Airways (Pty) Ltd’s code share agreements and fuel levies. The maximum penalty that SA Airways (Pty) Ltd could be fined is up to 10% of the preceding year’s total revenue on each matter.

SARCC Pursuant to an action by Metrorail requiring SARCC to pay an outstanding management fee, SARCC lodged a counter claim for R96 million. The counter claim against Transnet was dismissed. However, a facilitator was appointed to assist the parties in devising a formula to compute the penalties. The formula has been tabled for comment by the parties. 96 ––96 Grinaker LTA and others The members of a joint venture between Grinaker LTA, Interbeton and Bafokeng Civil Works that was appointed by NPA to construct a quay wall at the Durban Port brought action against Transnet for damages. They allege that Transnet delayed clearing the seabed and, as a result, construction was delayed and they allegedly suffered damages. 83 54 54 83 SAA Pilots The Group has a contingent liability in respect of an agreement reached with the pilots in terms of which the Group has accepted liability for the difference between the total cost of employment and the total amount to be paid by the pension fund. The liability is only due if pilots lose their licences on account of disability. The liability is estimated at – –5050 Rolling Stock The future lease commitments in respect of rolling stock assets have been paid in full to an intermediary lessee. This amount has been deposited with an AAA-rated international institution for the redemption of the lease obligations. These obligations are guaranteed by the Company. No loss is expected to materialise in respect of this guarantee. 1 809 842 842 1 809

112 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

28. CONTINGENT LIABILITIES (continued) Afro-Comp International (Pty) Limited This is a claim against NPA, a division of Transnet Limited, pertaining to an awarded contract for a computer software system. Transnet requested Afro-Comp International (Pty) Ltd to provide security for costs over a year ago. Following Afro-Comp International (Pty) Ltd’s failure to provide the requested security for costs, the matter has been dormant for more than a year. As a result the probability of success of the claim is considered remote. 98 ––98 Maruba SCA The matter arises from a claim by Maruba against alleged negligence on the part of NPA to furnish information consistently to vessels, the MV Decurion and the MV Giovanna. The matter was settled out of court for US$1 million in the current financial year. 71 ––71 Zaire Railway Lines (“SNCC”) A letter of demand was received from SNCC. SNCC are claiming for the reimbursement of an over payment made to Spoornet on a loan agreement arising from the foreign exchange rates used in translating the amounts repaid by SNCC. – 47 47 – Transnet Pension Fund Following a class action claim brought by certain pensioners against the Transnet Pension Fund (TPF), the TPF in turn brought a conditional claim against Transnet Limited. Transnet’s counsel has advised that the prospect of success in the claim against Transnet is remote. – ––– Other Various other contingent liabilities estimated where no material losses are expected to materialise from these contingencies 206 64 122 264 Various guarantees issued in the normal course 1 040 621 of business 1 130 1 453

29. RETIREMENT BENEFIT OBLIGATION The Group offers pension benefits through two defined benefit pension funds and one defined contribution fund. The Group also offers post-retirement medical benefits to its employees. Specific retirement benefits are offered to top management and under the Workmen’s Compensation Act. The following sections summarise the relevant components of the different pension benefits and post-retirement medical benefits: 29.1 Pension benefits Transnet has three pension funds, namely Transnet Retirement Fund, Transnet Pension Fund and Transnet Second Defined Benefit Fund. Except for the Transnet Retirement Fund, the actuarial valuations for the funds are performed annually. 29.1.1 Transnet Retirement Fund The fund was structured as a defined contribution fund from 1 December 2000. All employees of Transnet Limited are eligible members of the fund. There were 64 803 members (2004: 66 255) at 31 March 2005. Actuarial valuations are done at intervals not exceeding three years to determine the financial position. An actuarial valuation was performed as at 31 March 2004. The actuaries were satisfied with the status of the members’ credit account then. The Group’s contributions for the period to 31 March 2005 amounted to R908 million (2004: R731 million). 29.1.2 Transnet Pension Fund The fund is a closed defined benefit pension fund. Members are current employees of Transnet who elected to remain as members of the fund at 1 November 2000 and pensioner members who retired subsequent to that date. There were 9 217 members (2004: 10 316) at 31 March 2005. An actuarial valuation was done based on the projected unit credit method. The principal actuarial assumptions used were as follows:

Transnet Annual Report 2005 113 Notes to the annual financial statements continued for the year ended 31 March 2005

Group 2005 2004

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1 Pension benefits (continued) 29.1.2 Transnet Pension Fund (continued) Discount rate 8,50% 9,75% Salary increases Inflation 4,00% 5,25% Promotional 5,50% 1,50% Pension increases First three years 2,00% 2,00% After three years 2,00% 2,00%

The results of the actuarial valuation are as follows: Benefit liability R million R million Present value of obligation (4 950) (4 199) Fair value of plan assets 4 818 4 034 Net liability per the balance sheet (132) (165) Charge to the income statement Expected return on assets 388 318 Service cost (132) (148) Interest cost (402) (419) (146) (249) Charge to the statement of recognised income and expense Actuarial gains 20 920

The cumulative actuarial losses recognised in equity at 31 March 2005 are R271 million (2004: R291 million).

Movements in the net liability recognised in the balance sheet Opening net liability (165) (991) Expense as above (146) (249) Actuarial gains recognised in equity 20 920 Contributions paid 159 155 Closing net liability (132) (165)

Reconciliation of movement in benefit liability Opening benefit liability (4 199) (4 111) Service cost (132) (148) Interest cost (402) (419) Actuarial (losses)/gains (491) 317 Benefits paid 274 162 Closing benefit liability (4 950) (4 199)

114 Transnet Annual Report 2005 Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1 Pension benefits (continued) 29.1.2 Transnet Pension Fund (continued) Reconciliation of movement in fair value of plan assets Opening fair value of plan assets 4 034 3 119 Expected return 388 319 Actuarial gains 511 603 Contributions by employer charged to the income statement 92 91 Contributions by members 67 64 Benefits paid (274) (162) Closing fair value of plan assets 4 818 4 034

The major categories of plan assets as a percentage of total plan assets are: Equity 54% 57% Property 8% 8% Bonds 19% 21% Foreign equity 9% 6% Unlisted companies 4% 3% Cash 12% 7% Other (6%) (2%) Total 100% 100%

Summary of actuarial valuation results for past periods: 2005 2004 2003 2002 2001 Present value of obligation (4 950) (4 199) (4 111) (2 983) (2 708) Fair value of plan assets 4 818 4 034 3 120 3 228 2 860 (Deficit)/surplus (132) (165) (991) 245 152 Experience adjustments on plan liabilities – –––– Experience adjustments on plan assets – ––––

The estimated contributions by both employer and members for the year beginning 1 April 2005 are R167 million.

Transnet Annual Report 2005 115 Notes to the annual financial statements continued for the year ended 31 March 2005

Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1.3 Transnet Second Defined Benefit Fund The fund was established on 1 November 2000 for the benefit of the retired members and qualifying beneficiaries. There were 45 075 members (2004: 48 068) at 31 March 2005. This figure excludes widows and children of pensioners. The all inclusive membership is 87 236 (2004: 90 798) at 31 March 2005. The actuarial valuation was based on the projected unit credit method. The principal actuarial assumptions used are as follows:

Discount rate Period to May 2005 7,59% 10,75% Next five years – 10,25% Remaining years thereafter 6,77% 9,75% Pension increases 2,00% 2,00%

The results of the actuarial valuation are as follows:

Benefit liability Present value of obligation (20 839) (18 463) Fair value of plan assets 16 089 15 024 Liability recognised in the balance sheet (4 750) (3 439) Charge to the income statement Interest charge (1 984) (2 058) Return on plan assets 1 614 1 483 (370) (575) Charge to the statement of recognised income and expense Actuarial (loss)/gain (941) 2 263

The cumulative actuarial gains recognised in equity at 31 March 2005 are R575 million (2004: R1 516 million).

Movements in the net liability recognised in the balance sheet Opening net liability (3 439) (5 127) Expense as above (370) (575) Actuarial (loss)/gain recognised in equity (941) 2 263 Closing net liability (4 750) (3 439) Reconciliation of movement in benefit liability Opening benefit liability (18 463) (18 370) Interest cost (1 984) (2 058) Actuarial losses (2 754) (432) Benefits paid 2 362 2 397 Closing benefit liability (20 839) (18 463) Reconciliation of movement in fair value of plan assets Opening fair value of plan assets 15 024 13 243 Expected return 1 614 1 483 Actuarial gains 1 813 2 695 Benefits paid (2 362) (2 397) Closing fair value of plan assets 16 089 15 024

116 Transnet Annual Report 2005 Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1.3 Transnet Second Defined Benefit Fund (continued) The major categories of plan assets as a percentage of total plan assets are: Equity 34% 30% Property 12% 12% Bonds 9% 22% Foreign equity 7% 10% MCell 22% 16% Cash and net current assets 16% 10% Total assets at market value 100% 100%

Summary of actuarial valuation results for past periods:

2005 2004 2003 2002 2001 Present value of obligation (20 839) (18 463) (18 521) (18 992) (20 140) Fair value of plan assets 16 089 15 024 13 239 16 048 16 502 Deficit (4 750) (3 439) (5 282) (2 944) (3 638) Experience adjustments on plan liabilities – –––– Experience adjustments on plan assets – ––––

29.1.4 Top Management pensions and Workmen’s Compensation Act pensioners These are additional benefits to top up pensions received to eliminate the effects of any early retirement penalties applied under the Group’s existing pension fund schemes to top management. There were 530 members (2004: 499) at 31 March 2005.

The Workmen’s Compensation Act benefit relates to the pension benefits that the Company pays to current and former employees who were disabled whilst in service prior to the corporatisation of Transnet in 1990. There were 1 925 members (2004: 2 098) at 31 March 2005.

Actuarial valuations for both benefits were performed to determine the present value of the obligations. Similar valuations were done at the previous balance sheet date. The projected unit credit method was used to value the obligations. There are no plan assets held to fund these obligations.

The following summarises the components of expense and liability recognised in the financial statements together with the assumptions adopted:

Top management benefit The principal assumptions in determining the benefits are as follows: Discount rate 8,50% 9,75% Salaries increase: Inflation 4,00% 5,25% Promotion 6,75% 5,50% Pension increase 2,00% 2,00%

Transnet Annual Report 2005 117 Notes to the annual financial statements continued for the year ended 31 March 2005

Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1.4 Top Management pensions and Workmen’s Compensation Act pensioners (continued) Benefit liability Present value of obligations (99) (99) Liability recognised in the balance sheet (99) (99) Income statement charge Interest cost (9) (13) (9) (13) Charge to the statement of recognised income and expense Actuarial gain – 28

The cumulative actuarial gain recognised in equity at 31 March 2005 is R18 million (2004: R18 million).

Reconciliation of movement in benefit liability Opening benefit liability (99) (123) Expense as above (9) (13) Actuarial gains – 28 Benefits paid 9 9 Closing benefit liability (99) (99)

2005 2004 2003 2002 2001 Present value of obligation (99) (99) (123) (93) (105) Fair value of plan assets – –––– Deficit (99) (99) (123) (93) (105) Experience adjustments on plan liabilities – ––––

The estimated contribution for the year beginning 1 April 2005 is R9 million.

Workmen’s Compensation Act pensioners The principal assumption in determining the benefits are as follows: Discount rate 8,50% 9,75% Pension increase 4,00% 5,25%

Benefit liability Present value of obligations (224) (204) Fair value of plan assets – – Liability recognised in the balance sheet (224) (204)

118 Transnet Annual Report 2005 Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1.4 Top Management pensions and Workmen’s Compensation Act pensioners (continued) Income statement charge Interest cost (19) (22) (19) (22) Charge to the statement of recognised income and expense Actuarial (loss)/gain (20) 14

The cumulative actuarial gains recognised in equity at 31 March 2005 are R7 million (2004: R27 million).

Reconciliation of movement in benefit liability Opening benefit liability (204) (211) Expense as above (19) (22) Actuarial (losses)/gains (20) 14 Benefits paid 19 15 Closing benefit liability (224) (204)

2005 2004 2003 2002 2001 Present value of obligation (224) (204) (211) (211) (131) Fair value of plan assets – –––– Deficit (224) (204) (211) (211) (131) Experience adjustments on plan liabilities –––––

The estimated contribution for the year beginning 1 April 2005 is R19 million.

29.1.5 Black Widows’ Pension Benefit The benefit relates to pensions that the Group has voluntarily elected to make payable to the widows of black pensioners who retired from Transnet during the period 16 December 1974 to 1 April 1986 and who subsequently died prior to 1 November 2000 and whose spouses are currently not entitled to a spouse’s pension from either the Transnet Pension Fund or the Transnet Second Defined Benefit Fund.

A liability was recognised for the first time in 2003. An actuarial valuation was performed as at the 31 March 2005 to determine the present value of the obligation based on the number of 3 417 approved black widows and an actuarially valued entitlement of R23 000 per pensioner to fund a monthly pension of R206 per month.

Benefit liability Present value of obligation (75) (64) Fair value of plan assets 83 55 Net asset/(liability) recognised in the balance sheet 8 (9)

Transnet Annual Report 2005 119 Notes to the annual financial statements continued for the year ended 31 March 2005

Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1.5 Black Widows’ Pension Benefit (continued) Charge to the income statement Return on asset 5 9 Interest cost (6) (6) (1) 3 Charge to the statement of recognised income and expense Actuarial gains 13 8

The cumulative actuarial gains recognised in equity at 31 March 2005 are R21 million (2004: R8 million).

Reconciliation of movement in benefit liability Opening benefit liability (64) – Interest cost (6) – Actuarial losses (19) – Contributions by employer 4 – Benefits paid 10 – Closing benefit liability (75) –

Reconciliation of movement in fair value of plan assets Opening fair value of plan assets 55 – Return on assets 5 – Actuarial gains 29 – Contributions by employer 4 – Benefits paid (10) – Closing fair value of plan assets 83 –

2005 2004 2003 2002 2001 Present value of obligation (75) (64) – – – Fair value of plan assets 83 55––– Surplus/(deficit) 8 (9) – – –

Experience adjustments on plan liabilities – –––– Experience adjustments on plan assets – ––––

No actuarial valuations were performed for this fund in previous financial years. Hence no comparative data for the reconciliation of the movements in the liability and fair value of the plan assets have been reported.

The estimated contribution for the year beginning 1 April 2005 is R10 million.

120 Transnet Annual Report 2005 Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.1.6 Flight Deck Crew (FDC) The liability relates to additional benefits to members of FDC, who are employees of SAA (Pty) Ltd. These additional pension benefits are required to equate to the increases that would have been applied to the total cost of employment for the years commencing 16 March 1999 to 16 March 2000. This liability was recognised for the first time in 2003.

Benefit liability Opening benefit liability (5) (49) Settlement during the year – 44 Closing benefit liability (5) (5)

29.2 Post-retirement medical benefits SATS Pensioners’ post-retirement medical benefits Pensioners include retired employees and the widow(er)s of employees and the retired employees of the former South African Transport Services (SATS). The liability is in respect of pensioners who have elected to belong to the Transnet in-house medical scheme, Transmed, whose membership is voluntary.

A medical aid benefit liability was created at the corporatisation of Transnet. With effect from 1 April 2000 the liability has been actuarially valued on an annual basis. Actual benefits contributed on behalf of the pensioners are settled against the provision.

Transnet employees post-retirement medical benefits This includes the current and past employees of Transnet who are members of Transnet’s in-house medical aid, Transmed Medical Fund. Membership is voluntary.

Transnet currently subsidises members at a flat contribution of R213 per month per member.

To enable the Company to fully provide for such post-retirement medical liabilities, since April 2000 actuarial valuations are obtained annually. There are no assets held to fund the obligation.

Analysis of benefit expense The following table summarises the components of net benefit expense recognised in both the income statement and balance sheet as at 31 March 2005 for both SATS pensioners and Transnet employees.

29.2.1 SATS pensioners Discount rate 8,50% 9,00% The projected unit credit method has been used for the purposes of determining the actuarial valuation.

Benefit liability Present value of obligations (1 629) (1 751) Liability recognised in the balance sheet (1 629) (1 751)

Transnet Annual Report 2005 121 Notes to the annual financial statements continued for the year ended 31 March 2005

Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.2 Post-retirement medical benefits (continued) 29.2.1 SATS pensioners (continued) Charge to the income statement Interest cost (152) (197) (152) (197) Charge to the statement of recognised income and expense Actuarial gain/(loss) 22 (225)

The cumulative actuarial gains recognised in equity at 31 March 2005 is R338 million (2004: R360 million).

Reconciliation of movement in benefit liability Opening benefit liability (1 751) (1 715) Interest cost (152) (197) Member/company contributions 252 386 Actuarial gain/(loss) 22 (225) Closing benefit liability (1 629) (1 751)

Transnet currently subsidises members at a flat contribution of R213 per month per member, the medical inflation has no impact on the aggregate current service cost, interest cost and the benefit liability, however the assumed discount rate has an impact. The impact of varying the assumed discount rate of 8,5% on the present value of the obligation is as follows:

Discount rate 7,50% 9,50% Present value of the obligation as at 31 March 2005 1 737 1 532

Summary of actuarial valuation results for past periods:

2005 2004 2003 2002 2001 Benefit liability (1 629) (1 751) (1 715) (2 914) (3 433) Deficit (1 629) (1 751) (1 715) (2 914) (3 433) Experience adjustments on plan liabilities – ––––

The estimated contribution for the year beginning 1 April 2005 is R235 million.

29.2.2 Transnet employees Discount rate 8,50% 9,00% The projected unit credit method has been used for the purposes of determining the actuarial valuation.

Benefit liability Present value of obligations (808) (741) Fair value of plan assets – – Liability recognised in the balance sheet (808) (741) Charge to the Income Statement Current service cost (12) (12) Interest on accrued liability (62) (65) (74) (77)

122 Transnet Annual Report 2005 Group 2005 2004 R million R million

29. RETIREMENT BENEFIT OBLIGATION (continued) 29.2 Post-retirement medical benefits (continued) 29.2.2 Transnet employees (continued) Charge to the statement of recognised income and expense Actuarial loss (41) (158) The cumulative actuarial losses recognised in equity at 31 March 2005 amount to R10 million (2004: gains of R31 million). Reconciliation of movement in benefit liability Opening benefit liability (741) (545) Service cost (12) (12) Interest cost (62) (65) Actuarial losses (41) (158) Benefits paid 48 39 Closing benefit liability (808) (741) Transnet currently subsidises members at a flat contribution of R213 per month per member, the medical inflation has no impact on the aggregate current service cost, interest cost and the benefit liability, however the assumed discount rate has an impact. The impact of varying the assumed discount rate of 8,5% on the above mentioned balances is as follows:

Discount rate 7,50% 9,50% Present value of the obligation as at 31 March 2005 904 726 Summary of actuarial valuation results for past periods:

2005 2004 2003 2002 2001 Benefit liability (808) (741) (545) (519) (747) Deficit (808) (741) (545) (519) (747) Experience adjustments on plan liabilities – –––– The estimated contribution for the year beginning 1 April 2005 is R49 million.

30. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

The following related parties have been identified:

The South African Government and all entities controlled by it, subsidiaries, directors and associates. Related-party transactions are concluded on an arm’s length basis. Details of material transactions and outstanding balances are dealt with as follows:

Shareholder The sole shareholder is the South African Government. The Company is not required to disclose the details of transactions with State controlled entities in terms of the South African Statement of Generally Accepted Accounting Practice, AC126, Related Parties.

Transnet Annual Report 2005 123 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million Note R million R million

30. RELATED PARTY TRANSACTIONS (continued) Subsidiaries Details of investments in subsidiaries are disclosed in note 11 and Annexure C. Directors The directors’ names are disclosed on page 8 whilst their emoluments are disclosed in the directors’ report. The directors’ loans are disclosed in note 10. R1,95 million (2004: R1,30 million) was paid for services rendered by KPMG Inc, a company in which one of the directors has an interest. Associates Details of income from associates and investments in associates are disclosed in the income statement and in note 12. Transnet Pension Fund The Transnet Pension Fund has made payments to the Transnet Pension Fund Administrators to the value of R76 million (2004: R73 million).

31. CASH FLOW INFORMATION 5 933 8 150 31.1 Cash generated from operations 9 863 7 040 (6 207) 6 016 Profit/(loss) before taxation 8 156 (6 211) 1 864 2 021 Interest paid 2 397 2 361 (854) (379) Investment income (276) (346)

11 130 492 Elimination of non-cash items (414) 11 236 1 608 1 674 – Depreciation and amortisation 2 463 2 600 860 517 – Increase in provision for retirement obligation 564 860 8 096 612 – Impairment of investments 197 1 – – – Impairment of intangible assets 115 12 – Mark to market of foreign exchange cover in – 2 operating costs (37) – 694 62 – Impairment of property, plant and equipment 38 4 027 – – – Profit revaluation of investments (1) – – – – Impairment of trade and other receivables – 182 (5) 841 – Increase/(decrease) in short-term provisions 812 123 22 149 – Movement in long-term provision 116 83 2 – – Loss on sale of subsidiaries 31.4 – 7 – (58) – Unrealised foreign translation gains (137) – (438) (3 559) – Derivative fair value adjustment (4 650) 2 773 – (Profit)/loss on disposal of property, plant and 131 5 equipment (33) 408 173 188 – Amortisation of discount on bonds 188 173 (13) – – Profit on sale of intangible assets – (13) ––– Reversal of deferred cash flow hedges to income statement (51) – – – – Adjustment/write down of minorities 9 – – (4) – Fair value adjustment of investment property (7) – – 63 – Other non-cash items – –

124 Transnet Annual Report 2005 Company Group 2004 2005 2005 2004 R million R million R million R million

31. CASH FLOW INFORMATION (continued) 1 382 (1 212) 31.2 Changes in working capital 329 457 (129) (291) Increase in inventories (294) (155) 391 (64) Decrease/(increase) in receivables 812 (617) 1 120 (857) Increase/(decrease) in payables (189) 1 229 31.3 Taxation paid Balance at the beginning of the year – (130) – normal taxation (net) (164) (5) Taxation as per income statements (130) (1 433) – normal taxation (1 620) (190) Balance at the end of the year 130 1 514 – normal taxation (net) 1 545 164 – (49) (239) (31) 31.4 Disposal and acquisition of subsidiaries and associates Included in the proceeds on disposal is all of the Group’s shareholding in Fleetcall (Pty) Ltd, disposed of in the previous year.

The fair value of the assets and liabilities disposed of are the following:

1 – Cash and cash equivalents – 1 2 – Accounts receivable and prepayments – 2 11 – Property, plant and equipment – 11 (4) – Trade payables and provisions – (4) (1) – Short-term loans – (1) 9 – Net asset value – 9 9 – Cost of disposal – 9 9 – Loans made to investees – 9 7 – Sale price: made up as follows – 2 7 – – Proceeds – 7 – – – Post-acquisition reserves – (5)

(2) – Loss on disposal of investments in subsidiaries – (7)

Transnet Annual Report 2005 125 Notes to the annual financial statements continued for the year ended 31 March 2005

Company Group 2004 2005 2005 2004 R million R million Notes R million R million

32. HEADLINE EARNINGS/(LOSS) (6 337) 4 583 Profit/(loss) for the year 6 810 (6 332) – – Amortisation of goodwill (refer note 3) – (52) (Profit)/loss on disposal of property, plant and 131 5 equipment (refer note 2) (33) 408 (13) – Profit on disposal of intangible assets (refer note 2) – (13) Loss on sale of interests in subsidiaries and 2 – associates (refer note 5) – 7 694 62 Impairment of assets (refer note 3) 153 4 221 Impairment provision for loss making 8 096 612 subsidiaries and associates (refer note 3) 197 1 2 573 5 262 Headline earnings/(loss) 7 127 (1 760)

126 Transnet Annual Report 2005 page 128 Annexure A – Financial risk management page 136 Annexure B – Property, plant and equipment page 138 Annexure C – Investment in subsidiaries and associates

Transnet Annual Report 2005 127 Annexure A for the year ended 31 March 2005

INTRODUCTION The Group has a centralised risk management and treasury function that manages the financial risks relating to the Group’s operations in close consultation with the respective business units. The Group’s liquidity, credit, foreign exchange, commodity, interest rate and price risks are being monitored continually. All approved policies for managing these risks are currently under review.

RISK PROFILE In the course of the Group’s business operations it is exposed to liquidity, credit, foreign exchange, commodity, interest rate, and price risk. The risk management policy of the Group relating to each of these risks is discussed under headings below.

FINANCIAL RISK MANAGEMENT New governance structures were introduced during December 2004 to enhance the risk management process by introducing an EXCO Risk Management Committee and EXCO Asset and Liability Management Committee. Both committees meet on a monthly basis and are responsible for monitoring and reporting all financial risk exposures to the Transnet Board of Directors.

FUNDING ACTIVITIES Rand interest rate risk The challenge is to manage the Group’s average interest rates on fixed interest rate rand bonds in such a manner that they follow the long-term rand interest rate trend as closely as possible during the downward phase of the interest rate cycle and to keep the Group’s effective interest rate below the average market rate during the upward phase of interest cycles.

TRANSNET RAND BONDS Domestic rand bonds Transnet Limited issues domestic bonds listed on the Bond Exchange of South Africa. The following rand bonds, excluding market-making positions, which are separately analysed, were in issue at 31 March 2005:

2005 2004 Effective Coupon yield to Nominal Nominal Redemption rate redemption Fair value value Fair value value Bond date % % R million R million R million R million

T004* 1/Apr/2008 7,50 14,90 4 568 4 662 4 310 4 662 T011* 1/Apr/2010 16,50 14,89 1 751 1 325 1 721 1 325 T017* 15/Mar/2006 12,00 12,35 2 275 2 181 2 309 2 181 T018* 15/Jul/2014 10,75 10,39 6 794 6 000 –– A 15 388 14 168 8 340 8 168

* These domestic rand bonds are for both Company and Group as no bonds were issued at Group level

Transnet Limited does not make a market in the T018 bond. EuroRand Bonds The following EuroRand Bonds were in issue at 31 March 2005:

2005 2004 Effective Coupon yield to Nominal Nominal Redemption rate redemption Fair value value Fair value value Bond date % % R million R million R million R million

Euro 42 18/Apr/2028 13,50 13,87 3 105 2 000 2 863 2 000 Euro 42A 30/Mar/2029 10,00 15,09 1 792 1 500 1 491 1 500 B 4 897 3 500 4 354 3 500

Group and Company bonds at nominal value (refer note 22) (A & B) 17 668 11 668

128 Transnet Annual Report 2005 OTHER RAND BORROWINGS

2005 2004 Fair Company Group Fair Company Group value nominal nominal value nominal nominal R million R million R million R million R million R million

Other rand denominated liabilities* –4479 –5483 Secured rand denominated capital finance leases* –1 070 4 756 – 878 2 834 Promissory notes ––1 886 ––1 741 Other short-term borrowings** 3 120 2 601 2 601 2 861 2 601 2 601 Coupon stock** –––3 299 3 299 3 299 Domestic rand loans 3 120 3 715 9 322 6 160 6 832 10 558

Total domestic borrowings 21 383 26 999 18 500 22 226

* Refer note 22 ** Disclosed as short-term borrowings (Note 26)

Transnet Limited was an issuer of commercial paper (trade named coupon stock) that was actively traded on the money market. The issue of this paper was stopped in June 2004 and a new commercial paper programme is under development.

Interest rate swaps with a notional value of R550 million (2004: R550 million) and with a positive fair value of R67 million (2004: R23 million positive) were open at 31 March 2005. During the financial year a gain of R28 million was recognised in the income statement comprising cash of R28 million. The swaps were done to switch part of the T004 borrowings from fixed to floating.

After accounting for the above interest rate swaps, the interest rate exposure on the long-term domestic borrowings as at 31 March 2005 was:

Total Floating Floating rate Fixed borrowings exposure exposure as borrowings R million R million % of total R million

31 March 2005 Company 17 622 562 3,19 17 060 Group 23 229 4 573 19,69 18 656

31 March 2004 Company 12 372 550 4,45 11 822 Group 15 869 1 412 8,90 14 457

DOMESTIC INVESTMENTS

2005 2004 Company Company Group Group Company Company Group Group Nominal Fair value Nominal Fair value Nominal Fair value Nominal Fair value R million R million R million R million R million R million R million R million

1 169 1 380 2 234 2 445 1 059 1 110 1 515 1 566

Transnet Annual Report 2005 129 Annexure A continued for the year ended 31 March 2005

FOREIGN CURRENCY EXPOSURES Currency risk arises from exposures to foreign currencies when the value of the rand changes in relation to these currencies. Forward exchange contracts and cross currency swaps were utilised to hedge foreign currency exposures against exchange rate fluctuations.

Details of significant foreign currency exposures in respect of borrowings at 31 March 2005 are as follows:

FORWARD EXCHANGE CONTRACTS USED AS HEDGES

Maturity Currency Fair date amount value 2006 2007 2008 2009 Description Ccy million R million R million R million R million R million

Company US dollars (6) – – – – – Japanese yen 1 515 (72) (17) (18) (18) (19) (72) (17) (18) (18) (19) Group US dollars (6) – – – – – Japanese yen 1 515 (72) (17) (18) (18) (19) (72) (17) (18) (18) (19)

FOREIGN CURRENCY EXPOSURES AND COVER

Total Exposures Investments borrowings for future Total Total and cash Uncovered (foreign currency) expenditure exposure cover allocated exposure Currency Ccy million Ccy million Ccy million Ccy million Ccy million Ccy million

Company US dollars 72 19 91 72 4 15 Euros – 23 23 –– 23 GBP – 11 11 –– 11 Japanese yen 1 419 – 1 419 1 419 – –

Total exposure in rands 528*

Group US dollars 622 19 641 72 23 546 Euros – 23 23 –7 16 GBP – 11 11 –2 9 Japanese yen 1 419 1 419 1 419 73 (73)

Total exposure in rands 3 985*

* Refer to liquidity risk below

130 Transnet Annual Report 2005 FOREIGN CURRENCY INTEREST RATE RISK Foreign currency interest rate swaps and cross currency swaps were utilised to hedge foreign currency interest rate risks.

The following were significant positions at 31 March 2005:

Notional Notional Fair amount Fair amount value Currency value Currency R million million R million million 2005 2005 2004 2004

Company Interest rate swaps US dollars – ––– Rand – – (84) 687

Cross currency swaps US dollar – rand (263) 78 (197) 204 Euro – rand ––(273) 105

Group Interest rate swaps US dollars –––– Rand – – (84) 687

Cross currency swaps US dollar – rand (263) 78 (1 517) 496 Euro – rand ––(273) 105

The foreign currency interest rate exposures after taking the interest rate and cross currency swaps into account on 31 March 2005 are presented in the table below:

Total Floating Fixed borrowings borrowings borrowings Currency R million R million R million

Company US dollars 445 221 224 Japanese yen 83 – 83 Total* 528 221 307 100% 42% 58% Group US dollars 3 902 3 527 375 Japanese yen 83 – 83 Total* 3 985 3 527 458 100% 89% 11%

* Refer to liquidity risk below

Transnet Annual Report 2005 131 Annexure A continued for the year ended 31 March 2005

FOREIGN CURRENCY INVESTMENTS At year-end the Group had foreign currency investments of R1 065 million (2004: R456 million). These amounts include the short-term portion of defeasance deposits. (Refer domestic investments above).

MARKET MAKING IN TRANSNET BONDS Transnet Limited makes a market in its own domestic bond issues, hence being the buyer and seller of last resort. Government, Public Corporation and Corporate bonds listed on the Bond Exchange of South Africa, domestic interest rate swaps, domestic money market instruments and buy and sell back financial instruments that are utilised to hedge the resulting interest rate and liquidity risks.

The resulting basis risk is computed on a rand per point per million basis expressed in terms of a weighted average T011 nominal exposure. On 31 March 2005 this exposure amounted to a net short nominal position of R1,6 million (2004: R1,4 million short).

The following significant positions were held at year-end.

2005 2004 Fair value Fair value R million R million

Short positions in listed bonds Bonds 2 016 1 704 Sell and buyback financial instruments 184 554 Short positions at all in price 2 200 2 258 less accrued interest 519 260 Short positions at clean price* 2 719 2 518

Long positions in listed bonds Bonds 461 23 Sell and buyback financial instruments 725 816 Long positions at all in price 1 186 839 less accrued interest 173 51 Long positions at clean price** 1 359 890

* The carrying value of the short position is R2 719 million (included in rand borrowings above) ** The carrying value of the long position is R1 359 million (included in domestic investments above)

No collateral was held against any market making positions at reporting date.

The market making risk profile at 31 March 2005, measured against a 1% movement in bond rates is reflected below.

Market making risk profile

100 93 273 80 72 562 60 52 904 40 34 273 20 16 646 0

’000 0 -20 (15 688) -40 (30 441) (44 280) -60 (57 227) (69 304) -80 M-0 M-80 M-60 M-40 M-20 M+20 M+40 M+60 M+80 M-100 M+100 Sensitivity analysis Market making

132 Transnet Annual Report 2005 LIQUIDITY RISK Liquidity risk is managed to ensure that the Group is able to meet its financial obligations as they fall due on a cost effective basis by utilising surplus cash and bank facilities, whilst still ensuring Transnet’s ability to attract funds over the long term. Market making in Transnet bonds is undertaken to enhance the tradability and hence minimise the liquidity risk within established cost and risk parameters.

The following is a summary of long-term on balance sheet borrowings by currency and redemption.

Total borrowings repayable during the financial year ended 31 March

Total borrowings Repayable during the financial year ended 31 March 2005 2006 2007 2008 2009 2010 onwards Currency R million R million R million R million R million R million

Company US dollars 445 259 39 41 42 64 Japanese yen 83 21 21 21 20 – Total foreign currencies 528 280 60 62 62 64 Total SA rand 17 622 2 200 161 172 4 043 11 046 Total interest- bearing borrowings 18 150 2 480 221 234 4 105 11 110 Current portion of borrowings (2 480) (2 480) –––– Total long-term interest- bearing borrowings 15 670 – 221 234 4 105 11 110

Redemption period as percentage of total (%) 100 –122671

Group US dollars 3 902 886 439 418 426 1 733 Japanese yen 83 21 21 21 20 – Total foreign currencies 3 985 907 460 439 446 1 733 Total SA rand 23 229 4 618 2 521 588 4 424 11 078 Total interest- bearing borrowings 27 214 5 525 2 981 1 027 4 870 12 811 Current portion of borrowings (5 525) (5 525) –––– Total long-term interest- bearing borrowings 21 689 –2 981 1 027 4 870 12 811 Redemption period as percentage of total (%) 100 –14522 59

Transnet Annual Report 2005 133 Annexure A continued for the year ended 31 March 2005

CREDIT RISK Financial assets that potentially subject the Group to concentrations of credit risk consists primarily of cash, short-term deposits, Government and public corporation bonds listed on the Bond Exchange of South Africa, the market value of derivatives and trade receivables. The Group’s exposures to credit risks in respect of all Treasury related transactions are confined to credible counterparties and are managed within Board approved credit limits. Trade receivables are presented net of provisions. Credit risks with respect to trade receivables are limited due to the large number of customers comprising the Group’s customer base and their dispersion across different industries and geographical areas. It is the policy of the Group to perform ongoing credit evaluations of the financial position of counterparties and appropriate security is obtained where necessary. The Group has no significant concentration of credit risk that has not been adequately provided for.

Below is a summary of all significant exposures, all within the approved limits, as at 31 March 2005.

2005 2004 R million R million

Credit risk (inclusive of marginal risk)** 3 350 6 237 Bond issuer risk** 811 421 Guarantees 3 016 1 465 Trade and other receivables* 6 622 7 359 13 799 15 482

* Refer note 15

** Definitions

•Credit risk Credit risk is the potential loss that may arise when a counterparty cannot fulfil its commitments in respect of a financial transaction.

• Marginal risk The risk that a counterparty is not in a position to fulfil its financial obligations according to the terms and conditions of the transaction and that the transaction has to be closed-out at a market value loss.

• Bond issuer risk The risk that an issuer of bonds will not be able to fulfil its financial obligations according to the terms of the bond issues.

The following diagrams reflect the distribution of credit risk, expressed in terms of long-term credit ratings, excluding guarantees and trade receivables. The non-rated banks are financial institutions primarily situated in Africa and Asia. These accounts are monitored on a daily basis to ensure that credit limits are not breached.

Credit risk exposure Transnet Limited Transnet Group Non-related Banks AAA Issuers 1,16% AAA Issuers 19,37% 28,07% AA Banks 43,37% AA- Issuers AA Banks 0,12% 43,74% AA- Issuers 0,17%

AA- Banks AA- Banks 28,38% 35,00% A Banks 0,61%

Rating definitions A Long-term rating with strong capacity for timely repayment AA Long-term rating with very strong capacity for timely repayment AAA Long-term rating with exceptionally strong capacity for timely repayment

134 Transnet Annual Report 2005 COMMODITY PRICE HEDGING The fuel price risk of SA Airways (Pty) Ltd is managed within a SA Airways (Pty) Ltd Board approved risk management framework to ensure that the Company is not adversely affected by increases in jet fuel prices.

The strategy to manage the risk as approved by the SA Airways (Pty) Ltd Board is to hedge up to 60% of the airline’s annual rolling consumption of jet fuel.

Jet fuel prices are hedged by means of vanilla derivative financial instruments, i.e. swaps and options. The underlying commodity to the derivative financial instruments used must be highly correlated to jet fuel.

The fair market value of all derivative financial instruments in respect of the SA Airways (Pty) Ltd jet fuel portfolio at year-end was positive by R199 million (Brent $53,4).

FAIR VALUE At 31 March 2005 and 2004 the carrying amounts of cash, short-term deposits, accounts receivable, accounts payable and short-term borrowings approximated their fair values due to the short-term maturities of these assets and liabilities. The fair values of bonds listed on the Bond Exchange of South Africa and those of derivative financial instruments have been based on mid-market values at the reporting date. The fair values represent an approximation, but these may differ from the values that will finally be realised.

CURRENCY CONVERSION The rates of exchange at 31 March 2005 used for conversion purposes were:

2005 2004

US dollar 6,2058 6,6108 Pound sterling 11,6201 11,9173 Japanese yen 17,1251 16,0525 Euro 8,0654 8,0413

Transnet Annual Report 2005 135 Annexure B for the year ended 31 March 2005

PROPERTY, PLANT AND EQUIPMENT Land, Machinery, buildings equipment and and Aircraft structures furniture R million R million R million

GROUP Opening net carrying value at 1 April 2003 6 811 6 659 1 508 Cost/fair value/revaluation 9 187 7 572 3 967 Accumulated depreciation (including impairment) (2 376) (913) (2 459) Prior year movements Additions 3 798 296 625 Disposals (1 273)(63) (55) Depreciation (788) (121) (278) Revaluation – – – Fair value adjustment – (2) – Impairment – cost/revaluation (3 333) (150) (208) Carrying value at 31 March 2004 5 215 6 619 1 592 Cost/fair value/revaluation 11 401 7 798 4 403 Accumulated depreciation (including impairment) (6 186) (1 179) (2 811) Current year movements Additions 843 171 354 Disposals (40) (43) (31) Depreciation (525) (135) (298) Revaluation – – – Fair value adjustment – 7 – Impairment – cost/revaluation 38 (73) (8) PDP’s transferred to receivables – – – Transferred to intangibles – – (109) Reclassifications/transfers 2 882 (11)292 Closing net carrying value at 31 March 2005 8 413 6 535 1 792 Cost/fair value/revaluation 14 933 7 925 4 347 Accumulated depreciation (including impairment) (6 520) (1 390) (2 555)

COMPANY Opening net carrying value at 1 April 2003 8 6 122 1 172 Cost/fair value/revaluation 50 6 987 3 318 Accumulated depreciation (including impairment) (42) (865) (2 146) Prior year movements Additions – 180 642 Disposals – (70) (54) Depreciation (8) (110) (236) Revaluation – – – Impairment – cost/revaluation – (150) (208) Carrying value at 31 March 2004 –5 972 1 316 Cost/fair value/revaluation 50 7 090 3 786 Accumulated depreciation (including impairment) (50) (1 118) (2 470) Current year movements Additions – 166 327 Disposals – (43) (31) Depreciation – (123) (258) Revaluation – – – Fair value adjustment – 4 – Impairment – cost/revaluation – (72) 3 Impairment transferred directly to equity – – – Transferred to intangibles – – (109) Reclassifications/transfers – (53) 335 Closing net carrying value at 31 March 2005 –5 851 1 583 Cost/fair value/revaluation 50 7 134 3 826 Accumulated depreciation (including impairment) (50) (1 283) (2 243)

136 Transnet Annual Report 2005 Permanent Rolling Capital way stock work and Pipeline Port and in works networks facilities containers Vehicles progress Total R million R million R million R million R million R million R million

4 977 2 764 9 695 5 102 1 070 8 140 46 726 6 849 6 972 16 578 9 073 2 399 8 140 70 737 (1 872) (4 208) (6 883) (3 971) (1 329) – (24 011)

196 199 372 799 377 1 158 7 820 (54) – 3 (75) (63) 73 (1 507) (158) (142) (419) (378) (252) – (2 536) – 135 245 – – – 380 ––––––(2) – (318) (18) – – – (4 027) 4 961 2 638 9 878 5 448 1 132 9 371 46 854 6 985 7 306 17 149 9 793 2 511 9 371 76 717 (2 024) (4 668) (7 271) (4 345) (1 379) – (29 863)

108 60 166 1 010 365 2 498 5 575 (1) – (9) (1) (76) (3) (204) (163) (161) (440) (404) (264) – (2 390) – 349 652 – – – 1 001 ––––––7 –5 6 – (6) – (38) –––––(757) (757) ––––––(109) – 312 (52) 28 75 (3 526) – 4 905 3 203 10 201 6 081 1 226 7 583 49 939 7 096 7 940 18 483 10 826 2 611 8 161 82 322 (2 191) (4 737) (8 282) (4 745) (1 385) (578) (32 383)

4 976 2 764 9 695 5 086 289 5 056 35 168 6 848 6 972 16 578 9 037 1 198 5 056 56 044 (1 872) (4 208) (6 883) (3 951) (909) – (20 876)

197 199 372 807 48 1 024 3 469 (54) – 3 (75) (5) 73 (182) (158) (142) (419) (376) (77) – (1 526) – 135 245 – – – 380 – (318) (18) – – – (694) 4 961 2 638 9 878 5 442 255 6 153 36 615 6 985 7 306 17 149 9 766 1 152 6 153 59 437 (2 024) (4 668) (7 271) (4 324) (897) – (22 822)

108 60 166 1 007 14 1 470 3 318 (1) – (8) (1) (5) (3) (92) (163) (161) (440) (403) (72) – (1 620) – 349 652 – – – 1 001 ––––––4 ––7 – – – (62) ––(1) – – – (1) ––––––(109) – 317 (53) 28 70 (644) – 4 905 3 203 10 201 6 073 262 6 976 39 054 7 096 7 940 18 483 10 798 1 123 7 554 64 004 (2 191) (4 737) (8 282) (4 725) (861) (578) (24 950)

Transnet Annual Report 2005 137 Annexure C for the year ended 31 March 2005

Shares issued Effective holding Voting power SUBSIDIARIES held 2005 2004 2005 Million % % %

SUBSIDIARIES HELD BY TRANSNET LOCAL SUBSIDIARIES Transport Logistics Viamax (Pty) Ltd 15 100 100 100 Marine Data Systems (Pty) Ltd* 80 80 80 Owner Driver Management (Pty) Ltd† 100 100 100 Southern African Airline Holdings (Pty) Ltd 100 100 100 South African Airways (Pty) Ltd 9 060 100** 95 95 Autopax Passenger Services (Pty) Ltd 20 100 100 100 Property Holdings Transhold Properties (Pty) Ltd 100 100 100 Esselen Park Developments (Pty) Ltd† 100 100 100 Transite Properties (Pty) Ltd† 100 100 100 Point Waterfront (Pty) Ltd† 51 51 51 Proptrade (Pty) Ltd 100 100 100 The Bay Waterfront (Pty) Ltd† 100 100 100 Construction Protekon (Pty) Ltd 100 100 100 IT Procurement B2B Africa Holdings (Pty) Ltd* 100 100 100 Marketing Transtrade (Pty) Ltd† 1 100 100 100 Rolling Stock Transwerk Foundries (Pty) Ltd 100 100 100 Transwerk Rollstock (Pty) Ltd† 100 100 100 Transwerk Traction (Pty) Ltd† 100 100 100 Insurance Captive Cells Spoornet Guard Risk 100 100 100 Freight Dynamics Guard Risk 100 100 100 FOREIGN SUBSIDIARIES Transport Logistics African Joint Air Services Ltd (Uganda) 57 57 57 Freight Logistics International (British Virgin Islands) 23 100 100 100 Translease International (Mauritius) 100 95 100 Spoornet Do Brazil (Brazil) 100 100 100

SUBSIDIARIES HELD BY OTHER SUBSIDIARIES Incorporated in the Republic of South Africa unless stated otherwise. Held within South African Airways (Pty) Ltd Air Chefs (Pty) Ltd 100 95 100 Air Chefs International (Pty) Ltd 100 95 100 SAA City Center (Pty) Ltd 2 100 100 100 SAA Technical (Pty) Ltd 160 100 95 100 International Aviation Personnel (Pty) Ltd 100 95 100 Air Tanzania Company Ltd (Tanzania) 49 49 >50 Held within Viamax (Pty) Ltd HSA Management Systems (Pty) Ltd 100 100 100 KNVL Zimbabwe (Pty) Ltd (Zimbabwe) 60 60 60 Viamax Fleet Solutions (Pty) Ltd 60 60 60 Viamax Logistics (Pty) Ltd* 100 100 100 Viamax Fleet Management (Pty) Ltd 100 100 100 Held within Southern African Airline Holdings (Pty) Ltd South African Express Airways (Pty) Ltd 57 100 100 100

* In the process of winding up ** Transnet holds 98,2% of SAA and the other 1,8% is held by the SAA Share Incentive Trust which was consolidated for the first time in the current year. Transnet effectively holds 100% of SAA † Dormant

138 Transnet Annual Report 2005 Interest of holding Interest of holding Impairment and Shares at cost company net profit/(loss) company indebtedness provision for losses 2005 2004 2005 2004 2005 2004 2005 2004 R million R million R million R million R million R million R million R million

15 15 108 94 472 447 – – – – (7) (90) 219 215 217 220 – – – – – – – – 58 58 (145) (107) 352 270 87 – 8 815 8 815 966 (8 720) 2 427 35 9 231 8 815 20 20 (11) (11) 82 103 18 –

– – (2) (15) 97 92 – – – – – – 10 9 10 10 – – – – – – – – – – – – – – – – – – 6 (1) 18 36 25 25 – – – – – – – –

– – 17 19 (279) (226) – –

– – (48) (14) 110 85 110 10

1 1 – – (1) (1) – – – – – – – – – – – – 8 – 121 141 27 141 – – – – – – – – – – – – – – – –

3 3 6 6 – – – – 1 1 2 3 – – – –

– – 1 3 382 383 382 383 23 23 5 (24) 166 166 33 – – – – – – – – 56 – – – – – – – – 8 936 8 936 906 (8 857) 4 176 1 755 10 140 9 660

Transnet Annual Report 2005 139 Annexure C continued for the year ended 31 March 2005

Shares at Effective holding cost 2005 2004 2005 2004 ASSOCIATES* Principal activity % % R million R million

Arivia.kom (Pty) Ltd IT service provider 32 32 210 210 VAE Perway (Pty) Ltd Refurbishment of Perway 35 35 6 6 Commercial Cold Storage (Ports) (Pty) Ltd Storage and bondage 30 30 – – Port Shepstone and Alfred County Railway Ltd Railway operator 28 28 – – Comazar (Pty) Ltd Transport logistics 32 32 13 13 V&A Waterfront Holdings Property development (Pty) Ltd and management 26 26 424 424

Mossel Bay Waterfront Property development Development (Pty) Ltd and management 15 15 2 2 Equity Aviation Services (Pty) Ltd Transport logistics 49 49 35 35 Cape Town Bulk Storage (Pty) Ltd Port operations 50 50 1 1 Durban Coal Terminal Ltd Port operations 50 50 – – Belldev Properties (Pty) Ltd Property development and management 50 50–– Railway Systems of Zambia (Zambia) Railway operator 19 19 – – AllPort Logistics Terminal Ltd (Ghana) Port operations 30 30 10 10 RainProp (Pty) Ltd Property development and management 20 20 2 2 703 703 HELD BY SUBSIDIARIES Various 1 1 704 704

Summarised financial information V&A Waterfront of significant associates Holdings (Pty) Ltd Arivia.kom (Pty) Ltd 2005 2004 2005 2004 R million R million R million R million

Financial position Assets 3 878 3 173 935 895 Liabilities 2 386 2 452 413 439

Results of operations Revenue 538 657 1 594 1 605 Profit before tax 602 383 90 74 Income tax credit/(expense) 176 (115) (26) (18) Net profit for the year 778 268 64 56

* Incorporated in the Republic of South Africa unless stated otherwise

140 Transnet Annual Report 2005 Interest of holding company Provision Share of post Indebtedness for losses acquisition reserves 2005 2004 2005 2004 2005 2004 R million R million R million R million R million R million

– – – – (7) (25)

– – – – 19 13

9 11 – – 14 12

2 2 – – – – 8 8 22 – – 9

– – – – 387 187

– – – – – –

114 114 12 – 36 (10)

– – – – 3 3 – – – – – –

– – – – – –

– – – – – –

– – 10 – – –

– – – – (2) 1 133 135 44 – 450 190 – (10) 1 – – – 133 125 45 – 450 190

Transnet Annual Report 2005 141 Corporate information for the year ended 31 March 2005

GROUP COMPANY SECRETARY Z Stephen

BUSINESS ADDRESS AND REGISTERED OFFICE 47th Floor, Carlton Centre 150 Commissioner Street Johannesburg 2001

PO Box 72501 Parkview 2122 South Africa Telephone +27 11 308 2424 Telefax +27 11 308 2430

AUDITORS Deloitte & Touche Deloitte & Touche Place The Woodlands Corner Woodlands and Kelvin Drives Woodmead 2199

Private Bag X6 Gallo Manor 2052 South Africa Telephone +27 11 806 5000 Telefax +27 11 806 5118

APF Incorporated Carlton Centre 150 Commissioner Street Johannesburg 2001

PO Box 260144 Excom 2023 South Africa Telephone +27 11 308 2540 Telefax +27 11 308 2543

COMPANY REGISTRATION NUMBER 1990/000900/06

142 Transnet Annual Report 2005 delivering on our commitments

delivering on our commitments

Contents

T page 3 ransnet Annual Report 2005 Consolidated salient Strategic intent 1 features Group structure 2 Consolidated salient features 3 Consolidated performance indicators 4 page 8 Consolidated value added statement 5 Consolidated five-year review 6 Board of directors Glossary of terminology 7 Board of directors 8 Executive Committee 10 page 11 Chairman’s statement 11 Chairman’s statement Group Chief Executive’s statement 14 Sustainability report 21 Corporate governance 25 page 14 Operational report – Spoornet 30 Annual Report Operational report – National Ports Authority (NPA) 34 Group Chief Executive’s Operational report – South African Port Operations (SAPO) 38 statement Operational report – Petronet 42 Operational report – Transwerk 46 Operational report – South African Airways (SAA) 50 Chief Financial Officer’s report 54 Audit Committee approval 58 Contents to the annual financial statements 59 Photography courtesy of Peter Morey, www.transnet.co.za Geoff Brown, Spoornet, SAA, SAPO, Corporate information 142 05 NPA and Transwerk.

GRAPHICOR 32855 delivering on our commitments

delivering on our commitments

Contents

T page 3 ransnet Annual Report 2005 Consolidated salient Strategic intent 1 features Group structure 2 Consolidated salient features 3 Consolidated performance indicators 4 page 8 Consolidated value added statement 5 Consolidated five-year review 6 Board of directors Glossary of terminology 7 Board of directors 8 Executive Committee 10 page 11 Chairman’s statement 11 Chairman’s statement Group Chief Executive’s statement 14 Sustainability report 21 Corporate governance 25 page 14 Operational report – Spoornet 30 Annual Report Operational report – National Ports Authority (NPA) 34 Group Chief Executive’s Operational report – South African Port Operations (SAPO) 38 statement Operational report – Petronet 42 Operational report – Transwerk 46 Operational report – South African Airways (SAA) 50 Chief Financial Officer’s report 54 Audit Committee approval 58 Contents to the annual financial statements 59 Photography courtesy of Peter Morey, www.transnet.co.za Geoff Brown, Spoornet, SAA, SAPO, Corporate information 142 05 NPA and Transwerk.

GRAPHICOR 32855