Freight Rail 2019 Transnet Freight Rail 2019 1

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Highlights The 2019 financial year was turbulent for Transnet Freight Rail (Freight Rail or TFR) as external and internal factors such as sluggish economic growth, unstable market conditions as well as operational and governance challenges impacted performance. These factors resulted in unsatisfactory performance as reflected by a 4,9% decline in volumes to 215,1 mt (2018: 226,3 mt). In spite of the challenges experienced by TFR, growth in several general freight businesses and increased rail capacity was accomplished, reflecting the drive to grow the general freight business in key sectors such as containers, automotive, agriculture and traditional mining. For instance:

• The Cato Ridge facility handled more TEUs in 2019 than in the prior year (15 049 TEUs vs 761 TEUs in 2018). These export containers are destined for the Port of Durban – contributing to the decongestion of the Bayhead Precinct and gate congestion at the Port of Durban. The equivalent road truck trips of the additional TEUs handled is comparable to 7 525 trips, based on an average of two TEUs per truck. • The Newcon terminal in Newcastle handled an additional 206 568 tonnes compared to prior year (13 830 tonnes vs 220 399 tonnes). • Toyota Export Shuttle volumes increased from the plant to the Port of Durban (33 082 units vs 26 139 units in 2018), also contributing to decongesting the City of Durban by reducing road truck activity. • Refrigerated cargo (reefer traffic) railed from Polokwane to the Port of Durban increased by 7% year on year to 3 994 TEUs (2018: 3 722 TEUs). • Timber tonnages improved by 3,44% to 2,39 mt (2018: 2,31 mt). • Manganese volumes grew by 2,19% to 14 mt (2018: 13,7 mt) exceeding the budget by 2,24%. This was the result of the implementation of an innovative rail solution that successfully tested and operationalised a 375-wagon manganese train. The production train has the most number of wagons in the world and surpasses our own 342-wagon iron ore export train. • Chrome volumes grew by 4,6% to 7,1 mt (2018: 6,7 mt). • Granite recorded growth of 8,2% to 48 957 tonnes (2018: 45 270 tonnes).

Freight Rail is consistent in its efforts to collaborate with and partner industry players so as to encourage participation as well as the creation of cost effective and innovative supply chain solutions for businesses across South African and the sub-Saharan region. During the 2019 financial year, Freight Rail achieved the following awards:

• Two awards from the 11th Transport Africa Awards – recognising blue chip mark of success for the African transport and infrastructure sector: –– Freight Company of the Year for Ceres Rail Development; and –– African Transport Operator of the Year for Postmasburg Manganese Common User Facility. • Three awards from the 30th Logistics Achiever Awards – recognising excellence and innovation in logistics and supply chain management that create market advantages for today and the future: –– Platinum Award for Maputo Corridor Optimisation. The strategy for the Maputo Corridor is to grow volumes in excess of 21 mt per annum; over the years, a significant growth of approximately 24% has been realised; –– Gold Award for Afrimat Iron Ore Loading Facility. Freight Rail in conjunction Afrimat commenced with the development of an iron ore load out facility in Sishen on the Lyleveld line to be used for loading ballast for the iron ore line. Benefits realised from the project include volume growth and job creation for approximately 18 people from the Sishen local community; and Transnet Freight Rail 2019 2

–– Bronze Award for Mandlazini Chrome Hub. The project created an off-site pre-assembly area and staging area away from the port to address congestion challenges and increase overall capacity for Transnet to export more chrome on rail and to service future global demand. The site was commissioned in 2017; it railed an impressive 39 150 tonnes by the end of March 2018. The 12 300 tonnes rail growth of chrome exports equates to 1 151 fewer truck loads on the road. • In June 2018, Transnet scooped the Premier Transport Project of the Year Award for the Saldanha Manganese off-loading facility that added additional stockpile capacity of 100 000 tonnes per annum at the Salkor Yard – adjacent to the Port of Saldanha. The facility became operational toward the end of the 2019 financial year. • For the fourth consecutive year, Freight Rail was certified as a Top Employer by the Top Employer Institute, a global authority on recognising excellence in people practices. • The Blue Train was the winner of the most luxurious train in Africa for the tenth consecutive year; and the three-time winner of the world’s most luxurious train at the World Travel Awards.

Business overview Freight Rail is the largest Operating Division of Transnet. The Division’s primary business is the operation of rail services for the transportation of commodities for export, regional and domestic markets. Freight Rail operates world-class heavy haul coal and iron ore export lines and is developing the manganese export corridor to heavy haul standards. The Division also transports a broad range of bulk general freight commodities and containerised freight. TFR maintains a complex rail network of approximately 31 000 track kilometres (20 911 route kilometres) over which commodities are railed.

The diverse rail network comprises ~1 500 km of heavy haul lines. The network also includes 3 928 km of branch lines that serve as feeders to main lines. The network and rail service provide strategic links between ports, terminals and production hubs, providing connectivity with the railways of the Southern African Development Community (SADC) to support regional integration. Infrastructure connectivity, coupled with close cooperation between Operating Divisions and collaboration with key customers, enables the delivery of freight volumes across value chains.

The Division provides the network for long-distance passenger rail services as well as haulage capacity for private passenger services. Freight Rail continues to operate the prestigious award-winning luxury Blue Train.

Freight Rail is conducting preparatory groundwork to embark on Transnet’s new strategic direction. We are in the early stages of formulating Transnet’s new partnership-driven growth and diversification strategy. Transnet’s strategic transition is progressing in phases, with the organisation principally concerned with preserving, repairing and strengthening its operational core by optimising and restoring its essential and vital operational capability. This initial phase of our strategic unfolding is being methodically executed over the next nine to 12 months, as we begin to define our medium- to longer-term strategic aspirations. The new strategy will be accompanied by a revitalised operating model which will bridge strategy and organisational design and will fundamentally transform the current structure and reconfigure the business portfolio. Transnet Freight Rail 2019 3

Where we operate

The network extends across South Africa and comprises the heavy haul coal and iron ore export lines, key national corridors over which general freight traffic flows and branch lines.

Musina MOZAMBIQUE Louis Trichardt

Lephalale Groenbult Phalaborwa Polokwane Vaalwater Zebediela

Middelwit Steelpoort BOTSWANA Modimolle Marble Hall Nelspruit Komatipoort Witbank

Maﬁkeng Kaapmuiden

Vermaas SWAZILAND Ermelo Ottosdal Vryburg Vereeniging NAMIBIA Hotazel Klerksdorp Pudimoe Makwassie Vrede Kroonstad Vryheid Nakop Sishen Warden Veertien Strome Upington Virginia Harrismith Bethlehem Key Kimberley Ladysmith Kakamas Douglas Bloemfontein Richards Bay Kofﬁefontein Core network Belmont LESOTHO Pietermaritzburg

Durban Closed lines Springfontein Franklin

Harding Aliwal North Sakrivier De Aar Port Shepstone Lifted lines Maclear Noupoort Calvinia Rosmead Hutchinson Umtata Branch lines Hofmeyer Queenstown

Beaufort West

Porterville Saldanha Cookhouse Klipplaat Blaney East London Prince Alfred Hamlet Alicedale Oudtshoorn Worcester Port Alfred Cape Town Ngqura Knysna Port Elizabeth Mosselbaai

Figure 1: Freight Rail network

Regulatory environment Freight Rail is accountable to all stakeholders under the applicable regulatory requirements and is committed to high standards of integrity. In view of the importance of complying with the ever-increasing regulatory universe, and the increased emphasis placed on the supervision thereof, Freight Rail continues to strive for effective management of regulatory risks.

A Draft White Paper on National Rail Policy has been released by the Department of Transport (DOT) and is currently under discussion. Several policy proposals in the Draft White Paper potentially pose significant risks to Freight Rail. Further engagement with the DOT will be sought to influence policy direction to mitigate risks.

Freight Rail is proactively responding to the envisaged Government policy change on separation of network infrastructure and operations, as well as the introduction of fair and competitive access to private train operators onto the network. These will be supported by the new strategic direction and operating model of the Organisation.

The fifth Draft Economic Regulation of Transport Bill is being considered by Government. It contains a number of postulations and provisions that pose risks to Freight Rail and Transnet SOC Ltd. Freight Rail continues to engage the DOT and Department of Public Enterprises on the Draft Bill to effect changes to the provisions of the Bill to minimise negative impacts on Transnet, while improving fair and balanced regulation of the South African transport sector. Transnet Freight Rail 2019 4

Strategic context

Freight Rail contributes to Transnet’s strategic objectives as contained in the Statement of Strategic Intent summarised in the table below: Strategic objective Contribution to strategic objective

Reduce the total cost of logistics as a percentage • Improving the reliability and predictability of rail services through continuous of transportable GDP improvements in service design, turnaround times and on-time departures and arrivals • Collaborating with industry to encourage participation in, and the creation of, cost-effective logistics solutions across supply chains

Effect and accelerate modal shift by maximising • Continue to develop and implement road-to-rail programmes that enable access to the role of rail in the national transport task rail for general freight volume growth • Initiative to grow container market share • Initiatives to grow automotive volumes

Leverage the private sector to provide both • Continue with the implementation of approved private sector participation infrastructure and operations where required projects: –– Tambo Springs Intermodal Terminal –– Botswana heavy-haul railway line –– Swaziland Rail Link

Integrate South Africa with the region and the • Collaborate with corridor joint operating centres to integrate service designs, plans rest of the world and schedules with cross-border railway partners, terminal operators and ports (Mozambique, Swaziland, Namibia, Botswana and Zimbabwe)

Optimise the social and economic impact of all • Improve capabilities and capacity building through learning and development for the interventions undertaken by the SOC in the local industry, SADC and other African countries achievement of these objectives • Create forums to manage communities around railway corridors and improve their lives by offering educational assistance, employment and career exhibitions • Continue with the corporate social investment initiatives, such as Phelophepa Healthcare Trains to improve the lives of the communities in which the organisation operates • Continuous engagement with labour organisations

Operational performance context Freight Rail is entrenching the Scheduled Railway philosophy to improve rail operations. This encompasses operating trains with a high degree of schedule adherence. The aim is to significantly improve operational efficiency and customer service delivery. The 2019 operational context was difficult and characterised by several challenges in the business environment that impacted demand certainty, planning and the mix of resources required for the efficient execution of trains, including the following: • Subdued economic conditions impacted negatively on customer demand and thus affected planning and resourcing. • The US-China trade war created uncertainty in the market and led to changes in trade patterns. • Socio-economic challenges (such as underemployment in the country and service delivery protests) spilled over into rail operations. • Local coal demand declined which negatively impacted the budgeted volumes. • The increased number of thefts, vandalism, sabotage and social unrest incidents affected the availability for the network and the quality of service to customers. • Operational and governance challenges, such as procurement processes, had a ripple effect on operations. Although remedial actions and internal controls have been developed, challenges have affected volume performance negatively due to lengthy time horizons to implement corrective actions. Transnet Freight Rail 2019 5

Overview of key performance indicators 2017 2018 2019 2019 2020 Key performance area and indicator Unit of measure Actual Actual Target Actual Target Financial sustainability EBITDA margin % 44,1 46,8 47,3 44,8 47,5 Operating profit margin % 22,8 27,6 29,3 24,8 28,8 Gearing % 34,6 52,2 51,5 56,8 51,9 Net debt to EBITDA times 4,0 3,4 3,3 3,8 3,3 Return on total average assets – excluding capital work-in-progress (CWIP) % 5,8 7,8 8,9 6,6 9,0 Asset turnover – excluding CWIP times 0,27 0,28 0,30 0,27 0,31 Cash interest cover times 2,7 2,9 2,8 2,5 2,8 Capacity creation and maintenance Capital expenditure R million 15 746 17 598 16 387 14 818 20 358

Operational excellence Asset utilisation General freight business Gtkm/Ntkm 1,62 1,40 1,39 1,40 1,41 Export coal Gtkm/Ntkm 1,55 1,26 1,26 1,26 1,25 Export iron ore Gtkm/Ntkm 1,38 1,20 1,20 1,20 1,20 Loco-utilisation# GTK’000/loco/ General freight business month 5 509 4 917 4 327 4 551 4 227 GTK’000/loco/ Export coal month 22 983 18 547 17 793 11 147 17 232 GTK’000/loco/ Export iron ore month 57 809 40 458 54 594 34 122 54 576 Cycle time Export coal hours 63 62,6 58,0 64,2 63,8 Iron ore hours 93 86,0 68,0 91,7 87,7 Export manganese hours 162 154,9 120,0 151,3 120,0 Wagon turnaround time General freight business days 10,1 10,0 8,5 9,6 7,9 Density General freight GTK/Routekm 5,50 5,15 5,86 4,87 5,74 Natcor GTK/Routekm 6,33 9,80 11,11 8,90 10,14 Capecor GTK/Routekm 3,77 5,97 6,09 5,77 6,93 Southcor GTK/Routekm 3,32 5,75 5,85 5,97 6,67 Service delivery On-time departure (average deviation from scheduled times) General freight business minutes (198) (182,1) 152 (35) 148 Export coal minutes (40) (58,6) 45 (58) 55 Export iron ore minutes (212) (205,4) 60 (47) 40 On-time arrivals (average deviation from scheduled times) General freight business minutes (62) (59,94) 180 96 165 Export coal minutes (83) (137,27) 90 17 185 Export iron ore minutes (191,76) (141,67) 190,0 9 80 Market segment competitiveness Volume and revenue growth

Commodity classification General freight business mt 88,1 90,77 104,2 84,69 96,6 Export coal mt 73,8 77,02 77,0 72,01 77,4 Export iron ore mt 57,2 58,52 60,0 58,43 60,0 Total volumes mt 219,1 226,3 241,2 215,1 234,0 Tariffs Year-on-year weighted average R/tonne change – General freight business % 1,19 9,38 5,42 (6,92) 5,06 1 Locomotive utilisation: A refinement of locomotive utilisation measures is underway during the 2019/20 financial year to incorporate the deployment and optimisation of new locomotives to general freight as well as export coal and iron ore line traffic flows. Transnet Freight Rail 2019 6

2017 2018 2019 2019 2020 Key performance area and indicator Unit of measure Actual Actual Target Actual Target

Sustainable developmental outcomes Human capital Employment equity % 87 87,9 88,0 88,8 90,0 % of personnel Training spend cost 1,9 2,1 3,08 2,97 2,01 Employee turnover % 4,9 5,0 5,0 3,7 5,0 Employee headcount permanent 27 679 26 694 28 673 26 312 28 673 Risk, safety and health Cost of risk % of revenue 5,8 5,8 5,5 6,2 6,2 DIFR rate 0,8 0,91 1,0 0,90 0,88 Number of safety incidents number 372 386 259 379 228 Number of derailments – mainline number 81 80 42 65 40 Number of derailments – shunting number 159 158 139 153 122

Financial performance review

Year ended Year ended 31 March 31 March 2019 2018 % Salient features R million R million change

Revenue 43 582 43 709 (0,3) – General freight 23 175 23 586 (1,7) – Export coal 11 935 12 022 (0,7) – Export iron ore 6 686 6 314 5,9 – Other 1 786 1 788 (0,0) Operating expenses (24 076) (23 236) 3.,6 – Energy costs (5 434) (4 991) 8,9 – Maintenance (1 856) (2 135) (13,1) – Materials (565) (500) 13,0 – Personnel costs (12 826) (12 573) 2,0 – Other (3 395) (3 037) 11,8

Profit from operations before depreciation, derecognition, amortisation and items listed below (EBITDA) 19 506 20 473 4,7 Depreciation, derecognition and amortisation (8 685) (8 402) 3,4 Profit from operations before items listed below 10 821 12 071 (10,4) Impairments and fair value adjustments (1 154) (676) 70,7 Net finance costs (5 782) (5 550) 4,2 Profit before taxation 3 885 5 861 (33,7) Total assets (excluding CWIP) R million 155 463 161 088 (3,5) Profitability measures EBITDA margin1 % 44,8 46,8 (2,0) Operating margin2 % 24,8 27,6 2,8 Return on average total assets (excluding CWIP)3 % 6,6 7,8 (1,2) Asset turnover (excluding CWIP)4 times 0,27 0,28 (3,6) Capital investments5 R million 14 818 17 598 (15,8) Employees Number of employees (permanent) number 26 312 26 694 (1,4) Revenue per employee R million 1,66 1,64 1,2

1 EBITDA expressed as a percentage of revenue. 2 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of revenue. 3 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of average total assets, excluding capital work in progress. 4 Revenue divided by average total assets, excluding capital work in progress. 5 Actual capital expenditure (replacement plus expansion), excluding borrowing costs and including capitalised finance leases. Transnet Freight Rail 2019 7

Performance commentary Cash interest cover Cash interest cover decreased to 2,4 times (2018: 2,9 times). The Financial sustainability reduction in the cash interest cover ratio was mainly due to a Revenue decrease in cash generated from operations after working capital changes, which was further exacerbated by a 4,5% increase in Revenue for the period under review decreased by 0,3% to finance costs. R43 582 million (2018: R43 709 million). This decline was mainly driven by a 4,9% decrease in volumes, resulting in an unfavourable Revenue per employee R2,1 billion volume variance. The variance was partially offset by an increase in average Rand/tonne (R196,55 in 2019 vs R186,75 in Revenue per employee improved by 1,2% to R1,66 million (2018: 2018), the net outcome of which was a favourable R1,9 billion R1,64 million). This measure improved despite a year-on-year price and mix variance. The average increase in Rand/tonne of revenue decrease of 0,3%. The improvement was chiefly due to a 5,2% was slightly higher than the average Production Price Index slight reduction in headcount from 26 694 in the 2018 financial (averaged 4,56% over the reporting period). The increase in the year to 26 312 for the year under review. average Rand/tonne performance indicator is mainly attributable to the prioritisation of high yield commodities in the mix. Looking ahead Operating expenses • Capital investment will be optimised across the system (locomotives, wagons, rail network and other safety and Operating expenses increased by 3,6% to R24 076 million compliance-related projects) and based on affordability and (2018: R23 236 million). Austerity measures fuelled significant achievement of key financial ratios. cost savings which were realised mainly in administration and • Improvement in general freight business volume performance is overheads costs. Cost savings mitigated the impact of increases in expected with the implementation of road-to-rail initiatives and certain operating expense items such as personnel, materials and volume recovery plans. fuel costs – which increased above inflation levels. Fuel costs • Implementation of initiatives to improve the operating ratio. increased by 18% from R2 037 million in 2018 to R2 408 million in • Freight Rail will continue with the drive to optimise operating the current year, mainly as a result of unbudgeted price escalations. expenses. The cost increase was further exacerbated by a Road Accident Fund rebate rejection of R189 million relating to claims dating back to the 2013 financial year that were disallowed by SARS. Capacity creation

EBITDA and operating margins Freight Rail invested R14 818 million in capital in the year under review against a budget of R16 387 million. The capital Driven by the decline in revenue, EBITDA margin decreased by expenditure budget allocation for infrastructure and locomotives 2% to 44,8% (2018: 46,8%). Also, operating margins decreased was not fully deployed during the financial year. Underspending on by 2,8% to 24,8% (2018: 27,6%), which is attributable to a 3,4% infrastructure was largely due to delays in procurement processes. increase in depreciation charges. Stringent cost-saving measures However, underspending on locomotives was as a result of slower aimed at reducing discretionary costs mitigated the negative than anticipated delivery of new locomotives due to a skills impact of lower revenue on the budgeted profitability margins. shortage of locomotive assembling technicians in the Durban Bayhead plan. Return on total average assets (excluding CWIP) The breakdown of the investment was as follows: Return on total average assets decreased to 6,6% (2018: 7,8%). The marginal decline in this measure is mainly attributable to a Budget Actual decrease in operating profit. The decline was slightly offset by the FY2018/19 FY2018/19 impact of a decrease in the asset base following the devaluation of Category R million R million infrastructure assets. Infrastructure 4 993 3 950 Gearing Locomotives 7 484 5 260 Financial gearing declined to 56,8% (2018: 52,2%). The deterioration Wagons 2 969 4 385 in the metric between the two comparative periods is attributable to changes in Freight Rail’s capital structure after a series of asset Other 941 1 223 devaluations during the 2019 financial year, the result of which was a Total 16 387 14 818 decrease in reserves. Total investment in infrastructure for the year amounted to Asset turnover (excluding CWIP) R3 950 million, of which: Asset turnover declined to 0,27 times (2018: 0,28 times) on the • R845 million was allocated to the export coal line; back of a decrease in revenue. The impact of flat revenue growth • R327 million was invested in fixed infrastructure for the export was slightly offset by a 3,9% decrease in total assets (excluding iron ore corridor; and CWIP). • R2 778 million was invested in the general freight business’s compliance and enabling works. Net debt to EBITDA Ongoing maintenance of rolling stock and railway infrastructure is Net debt to EBITDA declined to 3,8 times (2018: 3,4 times) required to maintain assets at an acceptable railway service as a result of an increase in total long-term borrowings to standard in order to achieve the required levels of reliability, R71 958 million (2018: R69 486 million) on the back of a decrease safety and availability. During the year under review, Freight Rail of 4,7% in EBITDA to R19 506 million (2018: R20 473 million). spent R8 054 million on capitalised maintenance (capex) as depicted in the following table. Transnet Freight Rail 2019 8

Budget Additional Revised Actual FY2018/19 budget budget FY2018/19 Category R million approved FY2018/19 R million

Infrastructure network 3 114 – 3 114 3 113 Locomotives 1 034 649 1 683 1 665 Wagons 1 934 1 365 3 299 3 276 Capitalised maintenance (locos, wagons and infrastructure) 6 082 2 014 8 096 8 054

An additional amount for capitalised rolling stock maintenance of Performance commentary R2 014 million (R1 365 million for wagons and R649 million for Operational performance for the year ended 31 March 2019 was locomotives) was approved to support the achievement of volume below expectations. Freight Rail railed a total of 215,1 mt in 2019 targets. This resulted in additional expenditure on rolling stock. representing a decline of 4,9% on prior year (2018: 226,3 mt) and a 10,1% shortfall against the projected budget of 241,2 mt. Looking ahead Export iron ore volumes marginally declined by 0,15% to 58,4 mt • Continuation of capital programmes, including expanding when compared to the prior year (2018: 58,5 mt) against a target capacity on the coal export line to 81 mt, doubling the Overvaal of 60 mt. The result was a shortfall of 2,6%. Export iron ore Tunnel and upgrading Waterberg to sustain and create capacity. volume performance was negatively affected by the Saldanha iron • Completion of the 1 064 Locomotives Programme by ore line closure due to bridge damage by an abnormal height road commissioning the remainder of the locomotives into service haulier, tippler challenges at the port and a high number of speed by 2022. restrictions – intended to mitigate safety incidents on the line. • Proceeding with the execution of the New-build Wagon Programme. Export coal volumes declined by 6,5% to 72 mt railed (2018: 77 • Executing the Rail Network Maintenance Strategy to ensure mt) against a target of 77 mt. Export coal volume performance was availability and reliability of infrastructure. negatively affected by a major incident on the Richards Bay coal export line (an apparent act of sabotage); operational challenges experienced by the mines; and Optimum Mine’s financial Operational management difficulties which led to the non-materialisation of planned The goal of Freight Rail operations management is to improve demand. The Turkish Lira crisis also had a negative impact on many volume growth, increase general freight market share and achieve developing countries’ currencies including South Africa as it led to regional integration. Several initiatives were implemented towards a slump in coal exports to Turkey. these ends during the financial year including: General freight tonnages reflected a decline of 6,7% to 84,69 mt • Back-of-port facilities projects such as the Maputo Corridor railed (2018: 90,77) against a target of 104,2 mt, translating into a optimisation and Mandlanzini Chrome Hub. shortfall of 18,7%. The shortfall was mainly due to domestic coal • New business development and back-to-rail initiatives to improve – mainly Eskom coal volumes - which declined by 21% to 15 mt general freight business. when compared to the prior year (2018: 19 mt); fuel and petroleum • Initiatives to raise customer satisfaction levels, such as the digital volumes declining by 22% to 1,03 mt (2018: 1,3 mt); grain transformation journey with customers, the introduction of the tonnages declining by 14% to 1,8 mt (2018: 2,1 mt). The mineral Customer Engagement Room and strategic dialogue sessions mining portfolio reflected a decline of 10% to 11,5 mt (2018: with key customers. 12,8mt) of which magnetite contributed significantly in declining • Deployment of technologies to support the business attracting by 9,6% to 8 mt (2018: 8,9 mt). Factors contributing to sub-par volumes and improving reliability and predictability, for instance, performance included: applying radio distributed power technologies on the iron ore line • Eskom’s operational and financial challenges and prolonged to operate a 342-wagon iron ore and 375-wagon manganese train contract negotiations contributing significantly to reduced to optimise tonnage delivery. Distributed power implies that domestic coal demand traction is distributed within the length of the train to facilitate • The US’s tariffs on steel imports from various countries the reduction of in-train forces. This eliminates the failure of including South Africa, which caused panic in the markets as well components and increases the fatigue life of the coupling system as reduced outputs for some commodities and wagon. Communication between locos is done via radio. • China’s stringent environmental policies coupled with reduced • Execution of the wagon-build programme in accordance with steel production negatively impacted commodity demand, market demand requirements. particularly low-grade steel input materials such as UG2, low • Implementation of continuous improvement processes to improve grade magnetite and iron ore efficiency and eliminate waste. • Changing climate conditions (such as extreme hot or cold • Supporting regional volume growth through close collaboration weather conditions, floods, delayed or prolonged seasons) had a with railways in neighbouring countries. negative impact on the agricultural sector. Adverse weather • Initiatives to improve diversified revenue generation, including conditions severely impacted supply and demand patterns value-added services such as freight clearing; last mile transport • Procurement process challenges experienced during the period of goods and warehousing; optimising the property portfolio; and under review had a negative impact on the infrastructure the sale of bandwidth within the telecoms infrastructure surplus maintenance plan. For example, the procurement of equipment capacity. required for maintenance was delayed as a result of the need to • Implementation of safety systems to enhance operations comply with the national drive for localisation – in an operational reliability and achieve best practice safety standards. environment where suppliers of most equipment and machinery Transnet Freight Rail 2019 9

are not available locally. Stringent measures and internal Locomotive utilisation controls to curb procurement transgressions had unintended consequences on the procurement process. These affected the General freight locomotive utilisation performance exceeded the availability and reliability of the network infrastructure – some annual target, however, performance was lower than the prior year. branch lines were closed due to unsafe conditions and affected Weaker performance was mainly due to lower volumes railed the grain sector (2019: 84,69 mt against 2018: 90,77 mt) and concurrent utilisation of new and less efficient old locomotives. The • A high number of speed restrictions were imposed on several simultaneous utilisation of locomotives is a common practice used lines including the Natal Corridor as a precautionary measure to to ensure that new locomotives are operating at acceptable avoid safety-related incidents reliability standards before retiring the older locomotives. • Security incidents at Sentrarand led to the need for manual interventions in train control, resulting in delayed cycle times Export coal locomotive utilisation was lower than the target for and loss of volumes the year as well as lower than prior year performance. The desired performance was not realised due to inefficiency of older Freight Rail transported 724 619 TEUs in key corridors when locomotives, the arrival of new locomotives which are still being compared to 740 000 TEUs transported in the prior year – commissioned and lower volumes railed on the line compared to excluding Eskom containers. The number of cars transported was the prior year. The utilisation of export coal locomotives will 35 214 units (2018: 43 820 units) for imports and 95 193 units improve when the new locomotives are fully commissioned and the (2018: 99 819 units) for exports. Efforts to further penetrate the older locomotives are retired or redeployed. container and automotive markets are being pursued, with particular emphasis on the optimisation of Natcor, the key corridor Export iron ore locomotive utilisation performance also declined between the Port of Durban and the Reef. relative to the prior year and the annual target was not achieved. As with general freight and export coal, the major reasons for the Looking ahead deviation against target and reduction on prior year performance • Implement the Natal Corridor optimisation programme. were the addition of locomotives to the fleet and concurrent • Continued development and implementation of road-to-rail running of old and new locomotives. programmes that enable general freight volume growth. • Implement new business development projects and refine Cycle times and wagon turnaround times operating models to cost-effectively accelerate road-to-rail The increase in the cycle time for export coal to 64,2 hours (2018: shift in general freight market sectors. 62,6 hours) and non-achievement of the target (58,0 hours) was • Continued development and deployment technologies to due to a deterioration in the quality of the network condition, support the business in attracting volumes. resulting in speed restrictions placed on the line. In addition, with • Improve operating models and practices for regional volume coal being sourced from mines located further away, the distance increase. of the loading sites was longer than in the prior year. This • Improve capabilities and capacity building through learning and increased the number of hours to complete the cycle. development for Freight Rail, local industry, SADC and African countries. The cycle time for the iron ore line of 91,7 hours in 2019 (2018: 86,0 hours) reflected an increase on the prior year, as well as • Entrench a customer-centric culture and improve the customer non-achievement of the 68,0 hours target for the year under experience journey. review. Several speed restrictions placed on the line and Saldanha tippler challenges affected performance negatively. Operational excellence Although the 120,0 hours target cycle time for export manganese Freight Rail continuously strives for operational excellence, was not achieved, an improvement from 154,9 hours in the prior however, most operational efficiency key performance indicators year to 151,3 in 2019 was realised. This can be attributed to the were negatively impacted by lower than planned volume implementation of continuous improvement initiatives to reduce performance and the reliability and availability of the network. A running times and to improve customer loading and port offloading decline in the quality of the network condition was partly operations. Significant improvement is however required to reach attributable to inadequate maintenance being implemented and the targets. speed restrictions being placed on the lines. Money was spent on hot spot areas because of increased theft, vandalism and sabotage General freight wagon turnaround time improved from 10 days in (such as the replacement of overhead traction equipment wires 2018 to 9,6 days in 2019. The deployment of the new dual voltage more than once due to criminal activities), which does not equate locomotives improved performance. However, the target of 8,5 to improving the total quality of the network. Several incidents of days was not achieved due to an increased number of speed social unrest frustrated maintenance during shutdown or planned restrictions placed on the Natal Corridor and other core general occupation. The following initiatives were implemented during the freight lines. year under review to improve operational efficiencies: • The National Command Centre and Satellite Operations Centres Density were integrated into the Operations Control Centre thus Density is a function of volumes transported over the rail route consolidating operations command and control across the three network. General freight volumes moved over the network were geographical regions to improve planning efficiency, utilisation, 84,69 mt which was lower than the prior year (2018: 90,77 mt); as productivity and density of rail channels. a result, the general freight business, Natcor and Capecor density • Continuous improvement processes were embedded to improve ratios were unfavourable when compared to the prior year. efficiency and eliminate waste. • The Productivity of Wagons Programme was rolled out to Southcor density improved relative to the prior year and target increase velocity and reduce dwell times of wagons. was also achieved. Implementation of longer manganese trains • Tactical volume plans for priority commodities were applied to increased manganese tonnages over the route and contributed to tightly manage execution across the system and supply chains. greater density in this corridor. • Digital applications to improve business process management were effected. Transnet Freight Rail 2019 10

On-time departures (OTD) and arrivals (OTA) Number of engineers and technicians on the EEPs The improvement of OTD performance indicates Freight Rail’s Actual Target Actual commitment to adhere to the Scheduled Railway philosophy. The Training area 2018 2019 2019 application of this philosophy contributed to the development and implementation of refined business rules during the period under Technicians in training 202 200 200 review. The discipline of the Scheduled Railway philosophy was Engineers in training 100 60 60 also demonstrated with greater focus being placed on consequence management for non-conformance to the Integrated Young professionals in Train Plan and supporting business rules. training 192 170 174

OTA performance continues to be a challenge due to inherent locomotive failures, interface challenges between the Passenger Youth employment and development strategy Railway Agency of South Africa and Freight Rail in metropolitan areas as well as the network condition (arising from the increased Employment/ Actual Target Actual incidents of theft, vandalism and social unrest) leading to speed development 2018 2019 2019 restrictions being placed to mitigate safety incidents. Youth employed as % of 39,9 No target 37,4 total employees Looking ahead Youth developed as % of 42,1 44,6 40,7 Freight Rail will improve operational efficiencies by: all employees trained (14 926) (14 136) • Reviewing and refining our operational philosophy and target setting, thus ensuring divisional accountability with respect to productivity and efficiency of all trains operated in a channel. Risk, health and safety • Deploying tools and technology to enhance decision-making Cost of risk – such as a capacity and simulation planning tool as well as execution monitoring and deviation management integrated The 2019 cost of risk was 6,2% compared to 5,8% achieved in the tools. prior year. The target of 5,5% was not achieved. A Saldanha bridge • Embedding continuous improvement processes to improve damage claim in November 2018 as well as a reduction in revenue efficiency and eliminate waste. contributed to the increased cost of risk. • Developing and deploying technologies to improve reliability and predictability – such as equipment to detect and prevent DIFR components failure before accidents occur, locomotive on-board Freight Rail achieved a DIFR of 0,90, which is lower than the global computers, train definition units and an integrated asset industry benchmark of 1,00. The performance was within the tracking management system. tolerance limit of 1,00 and a minor improvement from 0,91 in • Implementing Road Safety Programme interventions. 2018. • Implementing approved capital programmes to sustain and create capacity. Number of safety incidents The overall number of rail incidents decreased by 2% year on year. Sustainable developmental outcomes There were 379 incidents in 2019 compared to 385 in 2018. The tolerance limit of 259 was exceeded. Most incidents related to Human capital (employment and transformation) Signal Passed at Danger (SPADS) and shunting derailments. Both • Freight Rail ended the 2019 financial year with a permanent of these areas will receive closer focus in the year ahead. More headcount of 26 312 employees against a target of 28 673. The serious level 1 and 2 type incidents reduced by 36% due to below target headcount was due to lower than expected volume increased focus and management attention on safe operations. performance which limited opportunities for external employment. Number of mainline derailments • Freight Rail sustained employment equity performance with The number of mainline derailments decreased from 80 in 2018 to black employees representing 88,7% (target: 89%) of the total 65 in 2019. Although a 19% reduction was recorded, the number employee base thus improving on the previous year’s of incidents exceeded the tolerance target of 42 for 2019. performance (2018: 87,9%). Female employees represented 29% of the workforce and people with disabilities represented Number of shunting derailments 2,66% of the total employee base. • Training spend in 2019, at 2,03% of personnel cost, was lower The number of shunting derailments increased from 140 in 2018 than the prior year (2018: 2,1%) and below the target of 3,08% to 153 for 2019. The number of derailments exceeded the due to redirecting training to mission-critical jobs. tolerance limit of 139 that was set for the financial year. • Employee turnover remained relatively constant at 3,73%, with A total of 113 occurrences were predominantly caused by unsafe a slight decrease in the prior year’s actual of 4,98% due to a acts by employees and 58 shunting derailments were caused by decrease in resignations. unsafe conditions. The Annual Safety Improvement Plan will be reviewed to address inadequate behaviour challenges and Skills development strengthen compliance through supervision. Efforts to improve • Freight Rail continued to make excellent strides in skills safety performance will focus on filling vacancies and providing development with engineers and technicians participating in adequate resources for maintenance. Ongoing level-crossing engineering empowerment programmes (EEPs), and incidents are due to motor vehicle drivers not adhering to traffic performance for youth employment and development. The signs at level crossings. To this end, Freight Rail will continue progress of these programmes is summarised in the tables conducting awareness campaigns and implement the new Railway below and reflects the contribution of Freight Rail to key Safety Regulator requirements. Technological interventions will organisational and national objectives. also be considered to address this global challenge within the rail industry. Transnet Freight Rail 2019 11

Outreach programme Through the two Phelophepa Healthcare Trains, Freight Rail has provided primary healthcare services to rural communities along Transnet’s strategic rail corridors. During the financial year, Freight Rail was able to touch the lives of more than 557 885 people in eight of South Africa’s nine provinces (excluding Gauteng). Each Phelophepa train has 19 coaches and offers services through clinics for general health and education. Health services provided by Phelophepa relate to dental care, optometry, psychology and pharmacy. In addition, Phelophepa provides oncology services that include education, screening, diagnosis, early management and prevention of cancer. The education, screening and management of common chronic conditions, such as diabetes and hypertension are also included in the services provided.

The table below details the number of beneficiaries assisted and health services provided through the Phelophepa outreach programme: Number of beneficiaries Category impacted

Total patients reached on board 132 019 Total patients reached – outreach 452 866 Prescriptions/scripts 55 468 Eye Clinic – total patients 46 712 Eye Clinic – spectacles dispensed 54 243 Dental Clinic – total patients 24 264 Health Clinic – total patients 66 913 Edu-Clinic – number of trained community members 6 591 Students for experiential learning 2 500 Local labour 4 830 Key risks and mitigating activities Enterprise risk management practices ensure that Freight Rail identifies both strategic and operational risks, and implements measures to manage these risks and their impacts while simultaneously identifying and harnessing inherent opportunities. The top five risks were identified during the year under review with appropriate mitigating plans: Key risks Risk description

Financial sustainability risk • Freight Rail’s inability to generate sufficient cash to fund a capital programme and meet financial obligations

Operational efficiency and productivity • Inability to move available volume targets due to operational inefficiencies and productivity risk challenges

Regulatory risk • Commercial pricing risk (Competition Act, No 89 of 1998)

Safety risk • Inability to provide and sustain a safe operational working environment for TFR employees

Energy supply risk • Uncertainty regarding the supply of energy by municipality/Eskom

Opportunities • Assisting in reducing logistics costs by accelerating road-to-rail initiatives, thus ensuring the long-term competitiveness of the national freight system. • Collaborating with supply chain partners and the private sector to encourage participation and creation of cost-effective, rail-based, end-to-end logistics solutions such as intermodal terminals, common-user facilities and strategic hubs. • Optimising the capital portfolio to assure rail capacity and improve business performance through the execution of operational efficiency initiatives, such as the Productivity of Wagons Initiative, Operations Control Centre, Value Chain Integration Programme, etc. • Improvement of operating models and practices for regional volume increase in cooperation with regional partners. Transnet Freight Rail 2019 12

Abbreviations

CWIP Capital work in progress DIFR Disabling injury frequency rate DOT Department of Transport EBITDA Earnings before interest, tax, depreciation and amortisation Gtkm Gross tonne kilometre Mt Million tonnes Ntkm Net tonne kilometre SADC Southern African Development Community SARS South African Revenue Service SOC State-owned company TEU Twenty-foot equivalent unit