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Freight Rail 2018 TRANSNET Freight Rail 2
Highlights • Transnet Freight Rail has continued to actively seek opportunities to service existing customers and new customers, which has resulted in a 3,3% volume growth compared to 2,3% in the previous financial year. This was despite the subdued economic climate characterised by low GDP growth and lower than expected commodity prices. This commendable performance was accomplished through collaboration with customers and value chain partners as well as dedication and a continuous improvement culture embedded in accountability among employees. • Export coal line railed 77 mt against the target of 76 mt. This reflects a historic tonnage performance achievement for this corridor since its opening in 1977, and surpasses the record of 76,2 mt achieved in 2015. • General freight tonnages recorded 3,1% growth against the previous financial year (well above the national economic growth rate). This is evidence of the successful implementation of the road-to-rail strategy, which targets rail-friendly traffic in various market segments to grow rail volumes and market share. General freight commodities that contributed to this growth included the following: –– Non-ferrous metals achieved a 115% improvement, recording volumes of 2,8 mt against the target of 1,3 mt. –– The Manganese portfolio achieved a record throughput of 13,7 mt against a target of 11,1 mt. This represents an improvement of 23,7% against target and growth of 13,5% year on year (2017: 12,1 mt). –– The Containers and Automotive business unit exceeded the volume target of 9,0 mt by railing 9,8 mt, reflecting an improvement of 9,0% against target and growth of 7,4% year on year (2017: 9,2 mt). –– Improvements in containers moved on key national corridors resulted in growth of 6% year on year, from 698 000 TEUs in 2017 to 740 000 TEUs in 2018 (representing an additional 42 000 TEUs railed). –– The Agriculture and Bulk Liquids business unit reflected growth of 16,3% in the grain sector by transporting 2,1 mt of grain in 2018 (2017: 1,8 mt) against a target of 1,9 mt. • A total of 215 new general freight locomotives were deployed into operations. • The coveted awards and certifications that Freight Rail received during the 2018 financial year are in recognition of the development of innovative rail solutions, successful strategic partnerships and implementation of best practice. These include the following four Logistics Achiever Awards (this is the first time since 2002 that Freight Rail has been a recipient of these highly prestigious and important industry awards): –– Platinum awards: Saldanha Offloading Terminal: for the implementation of a logistics solution enabling the railing of manganese in skiptainers on the export iron ore line to facilitate transfer to the multi-purpose terminal at Saldanha for export. Ceres Rail Development: for reconstruction of the branch line in co-operation with a local private developer, the introduction of a new train service for containerised fruit exports to the Port of Cape Town and the launch of a steam train tourism venture. –– Gold Awards: Postmasburg manganese common user facility: for the development of a common user facility at Postmasburg to enable access to rail for emerging miners to cost effectively rail commodities to the port for export. ArcelorMittal South Africa Steel Hub: for a rail-based logistics solution partnership between ArcelorMittal, Barloworld Logistics and Freight Rail, based in Isando for the distribution of finished steel products. TRANSNET Freight Rail 3
• Top Employer accreditation for the third consecutive year, proof The table below details the beneficiaries assisted and health of collaborative efforts over the years to transform the services provided through the Phelophepa outreach programme: organisations culture. • The certificate of accreditation for Track Technology Management Number of in accordance with SANS-ISO/IEC 17025:2005. beneficiaries • The ISO 9001:2015 Quality Management Systems accreditation Category impacted certificate for Freight Rail’s Rehabilitation, Mmanagement and Emergencies unit. Total patients reached on board 420 000 • In September 2018, Transnet Freight Rail hosted the 11th Total patients reached – outreach 517 684 International Heavy Haul Association (IHHA) Conference, which was declared the most successful conference in the 40-year Prescriptions/scripts 61 078 history of IHHA, with a record of more than 1 200 delegates from Eye Clinic – total patients 51 262 over 39 countries across the world. Freight Rail’s General Manager: Capital Planning was elected the Global Chairperson Eye Clinic – spectacles dispensed 64 246 of the IHHA’s Board of Directors, the first South African to be Dental Clinic – total patients 22 768 elected to this position. IHHA has 10 member countries that transport bulk freight with heavy and long trains, and is focused Health Clinic – total patients 74 030 on promoting technical and operational excellence. Transnet is currently spearheading the development of a Global Heavy Haul Edu-Clinic – number of trained Railway Vision 2030-Under the 4th Industrial Revolution, with all community members 1 466 the other IHHA member countries. The outcome of this study will Students for experiential learning 2 500 be presented and discussed at the next IHHA Conference to be held in Norway, June 2019. Local labour 5 390 • Risk and safety management highlights for the year included: –– Successful certification according to the new, stringent By working with the National and District Department of Health, ISO 14001:2015 Environmental Management System, the programme has contributed to improving the quality of primary cementing the commitment to enhance Freight Rail’s healthcare and addressing the triple challenges of poverty, environmental and sustainability best practices. unemployment and inequality. From inception, the Phelophepa –– With Freight Rail’s development of a mobile risk app, the programme has brought highly sought after relief to more than organisation launched into the digital sphere of risk management 23 million people. Transnet offers the services as a responsible in line with the digital thrust of the Transnet 4.0 Strategy. The corporate citizen that cares for the communities in which the app facilitates the seamless process of undertaking risk Company operates. In every station temporary employment is assessments, resulting in improved risk-based decision-making offered to retired nursing staff and to local people for general in the operational areas and improved levels of safety. work services. Freight Rail also procures various supplies from –– The Business Continuity Institute recognised Freight Rail’s local businesses to boost the local economy. Business Management Framework, processes and resilience in ensuring successful recovery in the event of a business Phelophepa continues to make a modest contribution in offering interruption. experiential learning opportunities to healthcare students as –– The introduction of the Transnet Integrated Management part of their internship programme. Approach and the development of 18 related system procedures will ensure alignment of systems at Transnet level and improvement of operational efficiencies. Business overview –– The development of the risk management culture measuring Freight Rail is Transnet’s largest Operating Division and strives tools to transition from the risk management maturity index to be a ‘Top 5’ railway company globally by 2020. The division’s that is process driven to an enterprise approach that primary business is to provide rail transport of commodities for influences employee behaviour. the export, regional and domestic markets. Freight Rail operates –– The successful launch of the Rail Occurrence Investigation the world-class heavy haul coal and iron ore export lines and is Programme in partnership with the University of Pretoria. developing the manganese export corridor to heavy haul standards. Twenty employees completed the programme and graduated Freight Rail also transports a broad range of bulk general freight in May 2018. The objective of this programme is to create a commodities and containerised freight. The division maintains a team of qualified experts who will assist in establishing the complex rail network of approximately 31 000 track kilometres root causes of rail occurrences and thereby prevent injury, (20 900 route kilometres) over which commodities are railed. loss of life and damage to assets. • Outreach programme The diverse rail network comprises 1 500 kilometres heavy haul Through the two Phelophepa healthcare trains, Transnet has lines, and also includes 3 928 kilometres of branch lines that serve provided primary healthcare services to rural communities as feeders to main lines. The rail network service provides strategic along Transnet’s strategic rail corridors. In the last financial year, links between ports, terminals and production hubs providing Transnet was able to touch the lives of more than 400 000 people connectivity with Southern African railways to support regional in eight of South Africa’s nine provinces (excluding Gauteng). integration. Infrastructure connectivity, coupled with close Each Phelophepa train has 19 coaches and offers services co-operation with the other Operating Divisions and collaboration through the following clinics: general health and education, with key customers, enables the delivery of freight volumes across dental, eye, psychology and pharmacy. In addition, Phelophepa value chains. provides oncology services that include education, screening, diagnosis, early management and prevention of cancer conditions. Freight Rail is in transition from the final year of the seven-year The education, screening and management of common chronic Market Demand Strategy (MDS) to the Transnet 4.0 Strategy. This conditions, such as diabetes and hypertension, are also included new strategy will incorporate initiatives for improved operating in the services provided. models, geographic expansion, and market and customer TRANSNET Freight Rail 4
development. These are intended to be supported by digital The business units operate across geographical operating channels technologies that enable connectivity, visibility of data, assets and in an integrated network to improve train plan execution and visibility of information for heightened real-time decision-making. service delivery to customers across the value chain. Commodities Collaboration and strategic partnerships with customers and are transported across five operation channels, namely: logistics service providers are being harnessed to develop • Cape channel innovative integrated logistics solutions that generate improved • Coal channel supply chain value. • Natcor channel • Phala channel Freight Rail is a profitable and sustainable freight railway business, which contributes to the competitiveness of the South • Thaba channel African economy. The Operating Division provides rail services to customers in key market segments through six business units: Freight Rail also provides the network for long distance passenger rail services as well as haulage capacity for other private • Agriculture and Bulk Liquids passenger services. TFR continues to operate the prestigious • Coal luxury Blue Train. • Containers and Automotive • Iron Ore and Manganese • Steel and Cement • Mineral Mining and Chrome
Geographic spread 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 Freight Rail 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 TRANSNET Freight Rail 5
The Draft Single Transport Economic Regulation Bill (version 4) Regulatory environment presents serious challenges for Freight Rail and Port Terminals’ Freight Rail is accountable to all stakeholders under the applicable future commercial sustainability in their current formats. Transnet regulatory requirements and is committed to high standards of will therefore continue to request support from the DPE to lobby integrity. In view of the importance of complying with the ever- for more equitable economic regulations between the public increasing regulatory universe, and the increased emphasis placed entities and private sector companies that Transnet competes with on the supervision thereof, Freight Rail continues to strive for and, in particular, between Freight Rail’s economic regulation effective management of regulatory risks. versus the road freight industry’s self-regulation. A skewed system of regulation will clearly benefit road transport even further, and Ongoing transport economic regulation and rail policy developments preferably must be viewed in terms of a balanced modal approach could result in substantive changes for the South African transport that is in the national interest. industry. The Draft White Paper on National Rail Transport Policy has signalled that the Department of Transport (DOT) has a renewed focus on rolling out a high-performance standard gauge national Performance context network, and has proposed several changes to the rail institutional structure. These measures, should they become stated Government During the execution of the MDS, Freight Rail has sought to policy in the final gazetted White Paper on National Rail Transport create capacity in the land freight transport task to enable the Policy, will have a significant impact on Transnet, and could present transportation of greater tonnages. The year-on-year growth of significant implementation challenges. rail tonnages transported in the 2018 financial year, in excess ofGDP growth, reflects considerable success in the implementation Transnet will continue to work with the Department of Public ofthe strategy. Enterprises (DPE), DOT and other relevant departments to ensure that the potentially negative impacts of the rail policy on Transnet Improvements in tonnages railed, coupled with stringent cost are limited, and that the policy strives to support Freight Rail to management, contributed to a commendable financial strategically grow rail services in the country. performance.
The DOT recently released the Draft Road Freight Strategy for However, the 2018 operational context was difficult and engagement with critical stakeholders. This strategy could have a characterised by a number of challenges, including: considerable impact on Freight Rail, because it encourages the • The downgrade of South Africa by the ratings agencies; shift of freight from road to rail as the road situation could • Fluctuating and deteriorating commodity prices for chrome, become increasingly unsustainable over the medium to long term. iron ore and manganese; • Pollution management policies in China which affected some Transnet will continue to work with the DOT and the DPE to ensure coal and low-grade magnetite; that equitable outcomes are arrived at for the land freight • Incidents of community unrest impacting Freight Rail operations transport system as a result of fair policy choices being made in in certain areas; and these two policy documents. • Extreme weather conditions, including strong winds, heavy rainfalls and washaways.
Operational performance Overview of key performance indicators 2017 2018 2018 2019 Key performance area and indicator Unit of measure Actual Target Actual Target Financial sustainability
EBITDA margin % 44,1 46,9 46,8 47,3 Operating profit margin % 22,8 21,5 27,6 29,3 Gearing % 54,6 53,4 52,2 51,5 Net debt to EBITDA times 4,0 3,3 3,4 3,3 Return on average total assets – excluding CWIP % 5,8 6,7 7,8 8,9 Asset turnover – excluding CWIP times 0,27 0,31 0,28 0,30 Cash interest cover times 2,7 2,8 2,9 2,8
Capacity creation and maintenance
Capital expenditure R million 15 746 14 540 17 598 16 387
Operational excellence
Asset utilisation
General freight business Gtkm/Ntkm1 1,62 1,70 1,402 1,392 Export coal Gtkm/Ntkm1 1,55 1,60 1,262 1,262 Export iron ore Gtkm/Ntkm1 1,38 1,40 1,202 1,202
Loco-utilisation
General freight business GTK’000/loco/month 5 509 5 605 4 9172 4 3272 Export coal GTK’000/loco/month 22 983 22 388 18 5472 17 7932 Export iron ore GTK’000/loco/month 57 809 61 322 40 4582 54 5942 TRANSNET Freight Rail 6
2017 2018 2018 2019 Key performance area and indicator Unit of measure Actual Target Actual Target Cycle time
Export coal hours 63 56 62,6 58 Iron ore hours 93 76 86,0 68 Export manganese hours 162 156 154,9 120
Wagon turnaround time
General freight business 10,1 9,9 10,0 8,5
Density
General freight GTK/Routekm 5,50 6,14 5,152 5,862 Natcor GTK/Routekm 6,33 11,1 9,802 11,112 Capecor GTK/Routekm 3,77 5,98 5,972 6,092 Southcor GTK/Routekm 3,32 5,27 5,752 5,852
Service delivery On-time departure (average deviation from scheduled times) General freight business minutes (198) 163 (182,1) 152 Export coal minutes (40) 45 (58,6) 45 Export iron ore minutes (212) 60 (205,4) 60 On-time arrivals (average deviation from scheduled times) General freight business minutes (62) 185 (59,94) 180 Export coal minutes (83) 90 (137,27) 90 Export iron ore minutes (191,76) 190,0 (141,67) 190,0
Market segment competitiveness
Volume and revenue growth Commodity classification General freight business mt 88,1 98,0 90,77 104,2 Export coal mt 73,8 76,0 77,02 77,0 Export iron ore mt 57,2 60,0 58,52 60,0 Total volumes mt 219,1 234,0 226,3 241,2
Tariffs
Year-on-year weighted average R/ton change – General freight business % 1,19 3,10 9,38 5,42
Human capital
Employment equity % 87 88 87,9 88,0 Training spend % of personnel cost 1,9 2,7 2,1 3,08 Employee turnover % 4,9 5,0 5,0 5,0 Employee headcount permanent 27 679 29 223 26 694 28 673
Risk, safety and health
Cost of risk % of revenue 5,8 5,5 5,8 5,5 Disabling injury frequency rate rate 0,8 1,0 0,91 1,0 Number of safety incidents number 372 294 386 259 Number of derailments – Mainline number 81 48 80 42 Number of derailments – Shunting number 159 158 158 139
1 GTK in Transnet excludes the weight of the locomotive and is thus equivalent to the American TrailingTonKm. 2 The key performance indicators which include distance and mass in their calculations have been rebased, therefore, the 2018 actual cannot be compared to prior year actuals. The 2018 targets were determined before the rebase. The 2019 targets have also been rebased. TRANSNET Freight Rail 7
Financial sustainability Financial initiatives Initiatives implemented to achieve financial results included: • New business developments and back-to-rail initiatives to improve revenue performance; • Ongoing implementation of cost-containment initiatives (both capital and operational costs), given the persistently tough economic conditions; • Optimising yield through commodity mix; and • Exploiting revenue diversification opportunities by developing value-added services, optimising the property portfolio, telecoms infrastructure surplus capacity, and advertising.
Financial performance review Year ended Year ended 31 March 31 March 2018 2017 % Salient features R million R million change
Revenue 43 709 39 114 11,7 – General freight 23 586 20 834 13,2 – Export coal 12 022 11 430 5,2 – Export iron ore 6 314 5 838 8,1 – Other 1 788 1 012 76,7
Operating expenses (23 236) (21 851) 6,3 – Energy costs (4 991) (4 599) 8,5 – Maintenance (2 135) (2 473) (13,7) – Materials ( 500) ( 596) (16,0) – Personnel costs (12 573) (11 497) 9,4 – Other costs (3 037) (3 064) 0,9
Profit from operations before depreciation, derecognition, amortisation and items listed below (EBITDA) 20 473 17 263 18,6 Depreciation, derecognition and amortisation (8 402) (8 728) (3,7) Profit from operations before items listed below 12 071 8 535 41,4 Impairments and fair value adjustments (676) (1 298) (47,9) Net finance costs (5 534) (5 712) (3,1) Profit before taxation 5 861 1 525 284,3
Total assets (excluding CWIP) R million 161 088 148 548 8,4
Profitability measures EBITDA margin1 % 46,8 44,1 2,7 Operating margin2 % 27,6 21,8 5,8 Return on average total assets (excluding CWIP)3 % 7,8 5,8 2,0 Asset turnover (excluding CWIP)4 times 0,28 0,27 0,01 Capital investments5 R million 17 598 15 746 11,8 Capitalised maintenance expenditure R million 6 784 6 232 8,9
Employees Number of employees (permanent) number 26 694 27 678 (3,6) Revenue per employee Rand 1,64 1,41 15,9
1 EBITDA expressed as a percentage of revenue. 2 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of revenue. 3 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of average total assets excluding capital work in progress. 4 Revenue divided by average total assets excluding capital work in progress. 5 Actual capital expenditure (replacement + expansion) excluding borrowing costs and including capitalised finance leases. TRANSNET Freight Rail 8
Financial performance Revenue Revenue for the period under review increased by 11,7% to R43,7 billion (2017: R39,1 billion). This is mainly attributable to the 3,3% increase in volumes, complemented by a fair increase in the average R/ton (R186,75 in 2018 compared to R174,95 in 2017). The average 6,7% increase in R/ton was slightly higher than the average CPI (averaged 4,64% over the reporting period), which was mainly attributable to the prioritisation of a high yield commodity mix.
Operating expenses The year-on year-increase in operating expenses was 6,3%, with costs rising to R23 236 million (2017: R21 851 million). This was achieved despite some above-inflation increases in operating expenses such as fuel and electricity.
Freight Rail’s general cost-containment mindset and consequent actions resulted in significant savings in discretionary spend (i.e. consultancy costs, telecommunication costs, advertising and promotion costs, periodicals and printing costs, travel, accommodation and refreshments) as well as other operating expenses.
EBITDA and operating margins The EBITDA margin for the year increased to 46,8% (2017: 44,1%) while Freight Rail’s operating margin rose to 27,6% (2017: 21,8%), reflecting increases of 6,1% and 26,6% respectively. Improvement in these margins is attributable to a significant increase in revenue, while year-on-year operating costs increased to a much lesser extent. In addition, the reduction in depreciation charge following the continued review of useful life of Freight Rail assets impacted positively on the operating margin. In response to a lower-than- budgeted volume performance, Freight Rail continued to implement cost-savings initiatives and reduce discretionary costs, which to some extent mitigated the negative impact of lower revenue on the budgeted profitability margins.
Gearing Financial gearing improved to 52,2% (2017: 54,5%). The improvement of this metric over the two comparative periods is attributable to the slowdown in capital expenditure, resulting in lower long-term borrowings on the back of a 10,8% increase in reserves.
Asset turnover (excluding CWIP) Asset turnover increased to 0,28 times (2017: 0,27 times), despite an 8,4% increase in total assets (excluding capital work-in-progress or CWIP). This is due to the increase in revenue which was higher than the increase in asset base, resulting in a 6,2% improvement in the performance of this measure of asset productivity.
Return on average total assets (excluding CWIP) Return on average total assets increased to 7,8% (2017: 5,8%). Improved performance of this KPI is attributable to an increase in operating profit offsetting the impact of an increase in asset base.
Net debt to EBITDA As a result of a slight reduction in total long-term borrowings to R69 486 million (2017: R70 871 million) and an increase of 18,6% in EBITDA to R20 472 million (2017: 17 262 million), the net debt to EBITDA ratio improved to 3,4 times (2017: 4,2 times). TRANSNET Freight Rail 9
Cash interest cover • Additional work undertaken by original equipment manufacturers on the new locomotive programmes of R572 million against the budget. Cash interest cover increased to 2,9 times (2017: 2,7 times). The • A total of 450 new CR (general purpose mining commodities) and improved performance of this ratio was mainly due to an increase SCL (automotive) wagons for the general freight business as well in cash generated from operations after working capital changes, as 232 new CR13 wagons for the iron ore line were built, costing complementing the impact of a 3,1% decrease in finance costs. R889 million. While these were required and assisted in the improvements reflected, they were not originally budgeted for. Revenue per employee As part of the new locomotive programme, Freight Rail received Revenue per employee increased 15,9% to R1,64 million compared 1 036 locomotives (110 x 19E; 76 x 15E; 50 x 39 200; 203 x 43D; to prior year results (R1,41 million). The significant improvement 95 x 20E; 100 x 21E and 402 of the 1 064) as at 31 March 2018. on this measure was mainly attributable to the year-on-year An additional 216 locomotives are due to be delivered in the revenue increase of 11,7%, complemented by a decrease in next financial year. headcount of permanent employees from 27 678 in the prior year to 26 694 for the year under review. The significant reduction in Approximately 11 000 wagons have been received since the headcount was partly attributable to the impact of the voluntary inception of the MDS and 3 300 additional wagons are scheduled severance packages offered in the 2017/18 financial year as well to be received over the next five years. as natural attrition.
Export coal Looking ahead • The total investment in infrastructure for the year amounted As the business prepares to transition to the Transnet 4.0 Strategy, to R172 million, of which R113 million was for export coal from Freight Rail will strive to improve revenue and overall business Waterberg and R59 million was for the Coal 81 programme. performance by: • The export coal line expansion to 81 mtpa was 80,1% complete • Accelerating new business development and back-to-rail at 31 March 2018. initiatives to improve revenue performance; • Coal line expansion and sustaining programmes that have been • Implementing initiatives to reshape the core of the business completed, or are nearing completion, include the Coal 81 through cost optimisation of both capital and operational costs programme (nearing completion); Continuous Welded Rail in view of persistent tough economic conditions; Maintenance predictor; and the installation of the ‘On the Fly’ • Employing initiatives to optimise yield through commodity mix; system at the Ermelo Yard Balloon. • Optimising cash and working capital management; • The Waterberg programme is considering infrastructure • Implementing initiatives to improve diversified revenue development to facilitate export coal from Waterberg opportunities, including value–added services such as clearing (Lephalale area) to Richards Bay. last mile and warehousing, optimising the property portfolio, telecoms infrastructure surplus capacity, and advertising; and • Effecting product and market development for future Export iron ore positioning in the logistics markets. • Total fixed infrastructure investment for the export iron ore corridor amounted to R57 million in 2018. Capacity creation • The construction of the third tippler at the Port of Saldanha is under way and is due for completion in early 2020. Initiatives • The upgrading of power supply infrastructure on the ore line is in Continued implementation of approved capital programmes to progress. This involves upgrades to four Eskom substations as sustain and create capacity. Investment was made in key well as new distribution lines and related infrastructure. The programmes: work will be completed in early 2020. • Coal 81 mt expansion • The construction of a fourth manganese offloading facility at Saldanha will be completed in July 2018, with operations due to • Overvaal Tunnel doubling commence in August 2018. • Manganese expansion • New 1 064 locomotive acquisition, commissioning and deployment General freight • Wagon build in accordance with customer demand • Total investment in the general freight business’ compliance and • Infrastructure maintenance plan to assure volumes on identified enabling works amounted to R322 million in 2018. corridors • Significant works or programmes in progress include: –– Electrical upgrade works on Natcor; Performance commentary –– Roll out of electronic interlocking systems in Bellville; and –– Automating yard points countrywide. Freight Rail invested R17,6 billion in the year under review against the original budget of R14,5 billion. This original budget was Locomotives revised to include additional capex spend, which was primarily due to the following: • Transnet acquired 219 new locomotives (215 deployed to • Additional maintenance work on the wagon fleet (additional operations in the financial year) for the general freight business. spend of R1 085 million) and infrastructure (additional spend • R7,3 billion was spent on locomotive contracts for the period of R1 024 million) to ensure the availability and reliability of under review. the necessary rolling stock fleet and network to support the • In total R1,8 billion was spent during the 2018 financial year to achievement of volume targets while complying with safety maintain a fleet of 2 600 locomotives: standards. This was partially offset by underspending –– Minor overhaul programmes were performed on 169 R425 million on the locomotive maintenance programmes, locomotives (15E, 19E and 18E ) at R392,9 million; which was largely attributable to the introduction of the new –– 59 derailed locomotives were repaired at a cost of fleet and removal of the obsolete and unreliable older fleets. R208,5 million; TRANSNET Freight Rail 10
–– General overhaul maintenance programmes were performed is under way before retiring the older locomotives. This does on 34 diesel locomotives (35GM and GE, 36GM and GE class however result in a negative impact on locomotive utilisation locomotives) at R121,8 million; performance results. –– R53,3 million was spent on maintenance of coaches (Phelophepa 1 and 2 and The Blue Train); Freight Rail envisages an improvement in the targeted performance –– Planned and unplanned maintenance of R801 million was of locomotives in the future due to the gradual retirement of old spent on locomotives; locomotives from the system. Significant improvement of efficiencies will be realised over the next two to three years, –– The remaining R197 million was spent on maintenance and following the full deployment of the new 1 064 locomotives and repairs required due to incidents including pantograph as the old locomotives are retired. hook-ups; minor vandalism (cable theft): third-party claims; minor modifications; and minor component change-outs on Export coal achieved a historical record of 77 mt, exceeding volume various locomotives. projections. It is projected that similar coal tonnages will be railed Wagons in 2019. Additional and new locomotives are scheduled to be deployed, resulting in the 2019 target being lower than 2018 Transnet Freight Rail and Transnet Engineering embarked on a actual. The 2018 actual for locomotive utilisation cannot be programme to build the following wagons: compared to prior year actuals because the mass and distance • 2 500 coal containers to service Eskom power stations; measurements have been rebased. The locomotive efficiency will • 300 new CR-13/14 wagons for the iron ore business to service be improved in subsequent years as old locomotives are expected the shortfall caused by longer turnaround times on trains to be phased out. servicing junior miners that load ore using front-end loaders; • 86 new SCL wagons for the automotive business; and The export iron ore line locomotive utilisation was impacted by lower • 364 CR wagons to be used within the mining sectors to transport than projected tonnages recorded due to unforeseen customer ore from shafts to processing plants, and for servicing the cancellations; tippler off-loading challenges; and derailments. automotive market. The 2018 actual cannot be compared to the prior year actual due to the mass and distance calculations being rebased. A greater target For the 2018 financial year, 1 250 coal containers and 682 wagons has been set for 2019 to accommodate the new manganese service were built and received by Freight Rail resulting in a capital on the iron ore line, which will further improve locomotive utilisation investment of R1 billion. on this corridor. Cycle times and wagon turnaround times Looking ahead The improvement in the export coal cycle time from 63 hours • Continuation of capital programmes in progress, include the (2017) to 62,6 hours in 2018 is significant considering that coal Coal 81 mt expansion and the Overvaal Tunnel doubling. was sourced from much further (i.e. Waterberg). This longer • Wagon-build programme in accordance with market conditions distance also explains the deviation from the target of 56 hours. and validated customer demand. • Continue with the commissioning and deployment of the The actual cycle time for the iron ore line of 86,8 hours in 2018 remainder of the 1 064 new locomotives. reflected a significant improvement on prior year (2017: 93 hours). • Implement infrastructure maintenance plans to sustain volumes However, the 2018 target of reducing cycle time to 76 hours was on identified sections. not met. The performance for iron ore exceeded the target by a margin of 14,2%. Service disruptions as a result of derailments contributed to resources not being able to turn around as Operational excellence scheduled. This was exacerbated by tippler failures at the Port of Initiatives in 2018 Saldanha, as well as customer loading challenges that added to delays at both ends of the supply chain. The 2019 financial year will • Implement refining phases of the channel operations philosophy see heightened focus on continuous improvement and efficiency to improve end-to-end and pit-to-port flows of freight. initiatives to minimise disruptions throughout the channel. • Continuous improvement programmes to improve efficiencies and reduce waste. Export manganese • Deployment of On Board Computers (OBCs) on locomotives. Cycle time performance on the Port Elizabeth (PE) manganese • Automation of points in identified yards. corridor continued its performance trajectory from the previous • Concentrated monitoring of trains and deviation management. financial year, recording an improvement of 4,4% against the 2017 actual and 0,74% against the 2018 target. The inflow of 23E locomotive sets contributed to the more efficient turnaround of Performance commentary resources on the corridor. Further improvements are anticipated as Continuous improvement efforts on operational efficiencies have more 23E sets are allocated to this flow. Cycle time performance yielded positive results on operational excellence performance was enhanced by an improvement in the offloading performance of indicators. the offloading facilities in PE, which can be attributed to the implementation of Lean Six Sigma (LSS) turnaround time projects Locomotive utilisation at the PE bulk terminal and third-party offloader. An improvement on running delays as well as a reduction in speed restrictions The general freight locomotive utilisation performance was due to added to the lower target performance. lower than projected volumes being railed due to customer train cancellations as well as operational factors such as the poor General freight wagon turnaround did not achieve significant reliability and failure of older locomotives. New locomotives were improvement year on year and the target of 9,9 days was not met. commissioned into operation and were simultaneously operated The Productivity of Wagons programme for the improved along with older locomotives. The operation of both old and new management of wagons, which includes encouraging customers locomotives is a necessary practice to keep the system stable to load and offload according to service design times, aims to while the process of commissioning new rolling stock into service contribute to wagon turnaround time improvements. TRANSNET Freight Rail 11
Density • Implementing and building on integrated planning, maintenance and safety plans through joint operating centres with neighbouring Density is a function of volumes transported over the rail route countries. network. General freight volumes, although reflecting 3% growth on prior year, were below target due to economic, customer and operational factors. General freight volume performance hindered Performance commentary the achievement of the overall general freight density target. Freight Rail railed a total of 226,3 mt in 2018, representing growth Density performance on the key corridors was favourably impacted of 3,3% on prior year (2017: 219,1 mt). Despite good growth (above by the growth in numbers of containers transported on these national GDP growth), the actual fell short of the target by 7,7 mt. corridors. Container growth recorded was respectively: This was due to challenges experienced in the general freight and iron ore businesses. • NatCor – Additional 49 000 TEUs or 13% • CapeCor – Additional 18 000 TEUs or 39% Sound operational execution in alignment with ports and the • SouthCor – Additional 6 000 TEUs or 7% (includes TEUs through Richards Bay Coal Terminal (RBCT) contributed to an increase in terminals at Port Elizabeth and Ngqura) export coal volumes resulting in the target being exceeded, and a record historic annual tonnage of 77 mt being achieved. On-time Departures (OTD) and Arrivals (OTA) Freight Rail’s adherence to scheduled time performance, on a Iron ore export volumes fell short of the budget by 2,5%. Tonnages year-by-year basis continues to improve and reflects management’s of 58,5 mt were actualised against a target of 60 mt. The export commitment to improving the key metric as it directly impacts iron ore volume performance was impacted by a number of customer service. The improvement is a culmination of operational unfortunate incidents, poor weather conditions that affected the discipline; investment in new rolling stock and infrastructure; and quality of ore and hindered train plan execution, as well as tippler the desire to operate to a schedule by all stakeholders. challenges at the Port of Saldanha.
Worldwide Class I railways have adopted network velocity as a key General freight tonnages reflected growth on prior year. The operating metric that represents the outcome of cycle times, deployment of new locomotives for these services and the on-time adherence and efficiency improvements. Freight Rail has implementation of initiatives for a shift of freight traffic to rail also adopted this measure, which is a key driver of asset productivity began to show results. Record tonnages were achieved in the and improved customer service. It measures the speed of trains on transportation of manganese (with significant tonnages railed for the mainline and excludes yard dwell times. emerging miners through the common-user facilities at Postmasburg) and chrome for export. Improvements were noted in containers moved on key national corridors. Efforts to further penetrate the Looking ahead automotive market are also reflecting positive signs. Freight Rail will improve operational efficiencies by: General freight volumes were challenged by issues such as customer • Redesigning the operations philosophy, service execution across plant maintenance and breakdowns, as well as heavy rains that led to channels and creating value across Transnet’s Operating Divisions; rail network washaways, which took time to repair. Initiatives to • Developing and deploying technologies to improve reliability secure new rail-friendly volumes contributed to mitigating these and predictability; volume challenges. Less than planned tonnages of coal conveyed for • Embedding continuous improvement processes to improve domestic production, export through terminals other than RBCT and efficiency and eliminate waste; to Eskom power stations, as well as bulk liquids, chemicals and • Deploying commercial tools to enhance decision-making; cement, detracted from the general freight target achievement. • Implementing approved capital programmes to sustain and create capacity; and Freight Rail is placing significant focus on engaging and building relationships with customers and industry. Transnet hosts a series • Implementing safety systems to enhance operations reliability of discussions countrywide, urging conversations around the impact and achieve best practice safety standards. of the 4th Industrial Revolution on the freight logistics industry. Conversations address pertinent topics such as the digitisation in Market segment competitiveness logistics, connectivity and intelligent transport and logistics systems. Leadership summits feature global thought leaders as well Initiatives in 2018 as CEOs of more than 150 customers representing mining; A number of initiatives were pursued to improve volume growth agriculture; manufacturing and construction; petroleum; gas; and thus market segment competitiveness: chemical; Fast Moving Consumable Goods; and automotive sectors. • Developing and implementing marketing strategies, pricing and The first session was hosted by Freight Rail in Johannesburg. contracting models to grow identified customers in the general freight business segment; Freight Rail has also established a customer engagement room used • Developing common-user facilities to enable customers to to facilitate in-depth discussions with key customers towards access rail services; improving the overall customer experience of rail. Engagements with customers has led to the redesign of certain Commercial • Rolling out digital support tools, marketing tools, and logistics processes to improve alignment to customer expectations. skills to enhance customer value propositions, with a specific focus on container growth; • Implementing new operating models for terminals and Looking ahead repositioning identified terminals by awarding Terminal • New business development projects and refined operating Operator Licences; models to accelerate the road-to-rail shift in general freight • Deploying new car wagons to automotive flows and pursuing market sectors. opportunities with car manufacturers; • Develop and implement programmes that enable access to rail • Collaborating with Eskom to increase coal volumes from mines for general freight volumes. to power stations; • Develop and deploy technologies to support the business in • Continued development of bi-modal technologies; attracting volumes. TRANSNET Freight Rail 12
• Improve operating models and practices for regional volume Youth employment and development strategy increase. Employment/ Actual Target Actual • Entrench a customer-centric culture and improvements to the customer experience journey. development 2017 2018 2018 Youth employed as % Human capital of total employees 42,3 No target 39,9 Initiatives in 2018 Youth developed as % 45,1 44,6 42,1 of all employees trained (17 651) (14 926) • Embed the Productivity 2020 programme for improved employee productivity, utilisation and efficiency. • Develop and implement an operational performance framework Looking ahead to drive productive operational behaviour. • Implement the Time and Attendance System. Improve people skills capacity and capabilities through the • Develop skills and leadership capabilities through the Apprentice, establishment of a Rail Corporate University, Supervisory Rail Operations Management, Customer Service and Coaching and Development Programme, High Potential Programme and Mentorship programmes. performance management for bargaining unit employees. • Promote the development of skills and competencies in the infrastructure environment through the Engineer-in-Training, Health, safety and risk Technician-in-Training and Engineering Empowerment programmes. Initiatives for 2018
Performance commentary • Embed the Human Factor Management Standard (SANS 3000-4) • Implement OHSAS 18000-1 • Freight Rail ended the 2018 financial year with a permanent • Intensify Road Map to Safety initiatives headcount of 26 694 employees. The lower than targeted headcount of 29 223 was due to cost management measures, such as only filling critical operational vacancies and the exits Performance commentary of employees due to natural attrition and those who opted to take the voluntary severance package. Cost of risk • Freight Rail continued to maintain excellent employment equity The cost of risk remained constant at 5,8% and the target of 5,5% results with black employees representing 87,9 % (target: 88%) was not met. Extraordinary incidents of heavy storms and flooding of the total employee base, thus slightly exceeding the prior significantly contributed to an increased cost of risk (relative to year’s representation (2017: 87%). Female employees revenue), occurring on two occasions May and October 2017), both represented 29% and people with disabilities represented 2,7% in KwaZulu-Natal. The cost of risk is also impacted by the increased of the total employee base value of modernised assets. • Training spend in 2018 at 2,1% of personnel cost was higher than the prior year (2017: 1,9%) and below the target of 2,7% Disabling injuries frequency rate (DIFR) due to cost-containment measures with only essential Freight Rail achieved a DIFR of 0,91, which is better than the global functional, engineering and technical training being carried out. industry benchmark of 1. Although the performance was within the • Employee turnover remained relatively constant at 5% with a tolerance limit of 1 (one), the DIFR increase from 0,78 in 2017 to slight increase on the prior year’s actual of 4,9% due to the exit 0,91 in 2018 was due to the 294 and 334 disabling injuries of employees on the voluntary severance packages. experienced in the 2017 and 2018 financial years respectively.
Culture and employee engagement: During the 2018 financial year, Number of safety incidents various Culture Charter initiatives such as Diversity Dialogues and Employee Engagement sessions were conducted in response to the The overall number of rail incidents increased by 4% year on year. 2015/16 Culture Charter survey results. Furthermore, an Employee There were 386 incidents in 2018 compared to 272 in 2017. The Engagement Culture survey was conducted across the Group from tolerance limit of 294 was exceeded. The incidents related to 27 November 2017 to 28 February 2018. Freight Rail exceeded the ‘Signal Passed at Danger’ which is an area that will receive closer targeted 40%, with a participation rate of 41,9% (compared to the focus. Transnet average of 37,9%). Number of mainline derailments Skills development: Freight Rail continued to make excellent The number of mainline derailments decreased from 81 in 2017 to strides in skills development with the engineers and technicians on 80 in 2018. At 80, the number of incidents exceeded the tolerance the Engineering Empowerment programme (EEP), and performance target of 48 for 2018. for youth employment and development. The progress of these programmes is summarised in the tables below and reflects the contribution of Freight Rail to this key organisational and national Number of shunting derailments objective. The number of shunting derailments remained constant at 158 for 2017 and 2018. This performance is an achievement of the Number of engineers and technicians on the EEP tolerance limit that was set for the financial year. Actual Target Actual Training area 2017 2018 2018 Looking ahead Technicians in training 67 200 202 In the main, 191 occurrences were caused by unsafe acts of employees and 82 by unsafe conditions. The Annual Safety Engineers in training 266 100 100 Improvement Plan will be aligned to address inadequate behavioural Young professionals issues and strengthen compliance through supervision. The driving in training 139 194 192 force to improve safety performance will focus on filling vacancies and providing adequate resources for maintenance. TRANSNET Freight Rail 13
The significant number of level-crossing incidents is continuing due Freight Rail’s top 11 strategic risks and key to motor vehicle drivers not adhering to stop signs at level crossings. mitigating activities Freight Rail will continue to conduct awareness campaigns and implement the new Railway Safety Regulator requirements. Effective enterprise risk management (ERM) plays an essential role Technological interventions will also be considered to address this in ensuring the successful transformation of Transnet into a global challenge within the rail industry. focused, high-performance rail business. ERM is an integrated process of assessing and responding to all risks, including organisational, project or systemic risks that impact an Governance and ethics organisation’s ability to meet its objectives. Effective governance, ethics and enterprise risk management are critical in ensuring the successful transformation of a sustainable The top 11 risks are the most up-to-date identified risks, with rail business. appropriate mitigating plans, and are plotted in a risk matrix. Freight Rail’s top 11 risks are listed below, taking into account the inherent risk rating.
No. Risk description Key mitigating activities 1. Financial sustainability risk: Freight • Evaluate obsolete inventory (older than 18 months) for disposal Rail’s inability to generate sufficient • Implement the reverse logistics process cash to fund its capital programme • Continue efforts on effective working capital management (early collection of debtors and meet its financial obligations and negotiated payment of creditors) • Develop and implement new controls and procedures to benchmark prices • Implementation of real estate miscellaneous revenue strategy (including milestones) • Develop and implement a process and framework for take or pay, including the penalty clauses
2. Regulatory risk: Commercial Pricing • Full analysis of Freight Rail’s prices and pricing practices to be conducted Risk (Competition Act, No 89 of • Full implementation of customer survey results and recommendations 1998) • Test Freight Rail’s historical pricing practices and establish potential risk exposure for the Operating Division • Design and implement optimal pricing practices and structure • Establish business rules and processes to record all pricing-related correspondence and decisions • Evaluate the current repository and redesign to cater for all information requirements to satisfy competition-related requirements
3. Operational efficiency and • Implement the Operational Command Centre model focusing on centralised planning, productivity risk: Inability to achieve resourcing activities, updating processes and developing structures volume targets • Implement the Productivity of Wagons Programme • Integrate the capital operations expenditure business cases (rolling stock and infrastructure) • Allocate funding to the profitable flows to protect targeted volume performance • Develop an Integrated Train Plan consistent with the volume mix to achieve the proposed profitability levels • Monitor the implementation of the Integrated Management System (i.e. symposium, training, maintenance, inspection, task observation plan, speed monitoring, medical surveillance, audit schedule, management review, human factors management plan, incident investigation reports and action close out), and incorporation of safety performance targets • Proactively engage with key customers to decrease and manage customer train cancellations
4. Information and communications • Full implementation of the ICT roadmap technology (ICT) risk: Inability to • Rationalise the current systems available to reduce the duplication of systems support MDS volume growth with • Assess network capacity and provide connectivity (bandwidth) to enable access to the existing ICT assets business intelligence and analytics report • Create a fully funded research and development department in IT and identify opportunities for digitalisation
5. Safety risk: Inability to provide and • Implement and monitor the symposium, training, maintenance, inspection, task to sustain a safe operational observation, speed monitoring, medical surveillance, audit schedule and management working environment for employees review plans • Implement and monitor the Human Factors Management Plan in relation to the human factors in design, physical environmental factors, and the close out of Railway Safety Regulator audit findings related to human factors management • Incorporate safety performance targets in the Operating Division’s strategic performance objectives • Continue with the Road 2 Safety maintenance interventions plans TRANSNET Freight Rail 14
No. Risk description Key mitigating activities 6. People risk: Inability to mobilise • Customise health and wellness service offering to cater to the unique profile of the and engage employees to achieve Freight Rail employees the objectives of the Transnet 4.0 • Develop integrated systems for tracking and raising awareness on all available health Strategy and wellness service offerings • Develop and implement a Learning and Development Strategy • Develop and implement an Integrated Career Development programme • Implement inspirational leadership and iBELONG
7. Environmental risk: The effects of • Develop and implement Freight Rail’s Climate Change and Mitigation Strategy climate change on rail operations • Issue extreme weather conditions warnings to the business and monitor implementation and the impact of rail operations on of the Summer and Winter Preparedness Plans the environment • Determine the rehabilitation quantum for unused quarries and borrow-pits • Monitor compliance to regulatory requirements and the EMPs at high-risk leased facilities at Iron Ore and Manganese, Agriculture and Bulk Liquids, Coal, Mineral Mining and Chrome, Steel and Cement, and Container and Automotive • Continue ad hoc clean-up of resurfacing asbestos and use derelict mines as disposal/ landfill sites
8. Security risk: Impact of security- • Full implementation of the Security Strategy related incidents • Continuous identification of hot spot areas and allocation of resources • Engage the local government, community policing forum structures and other law enforcement agencies within the impacted areas • Procure the services of a service provider to be deployed in the identified high-risk areas when necessary • Continuous enforcement of the Legal Succession Act (arrests) and weekly analysis of crime trends • Install intrusion detection systems along the rails
9. Capital programme risk: Inability to • Integrate the Copex business cases (rolling stock and infrastructure) execute the entire capital • Revise the allocation of the R5,2 billion capitalised maintenance budget to wagons programme with R14,5 billion as per (R2,3 billion), locomotives (R1,5 billion) and infrastructure (R1,7 billion) to ensure the 2016/17 MDS targets – budget protection of profitable tonnages reduced due to economic downturn • Prioritise maintenance activities of high-risk areas and introduce train speed restrictions • Technology management laboratories to acquire the SANAS accreditation and develop and implement a quality assurance process for perway material, which will be based on the perway material specifications • Adopt integrated quality forum for different 1 064 locomotive programmes • Prioritise profit-yielding projects and safety and compliance business requirements
10. Contract management risk: • Review and ensure adherence to the Lease Management Framework Ineffective contract management • Renegotiate historical leases • Review/update annually and sign rates schedules by March of each year • Review business agreements every three years • Develop a regulatory universe applicable to each contract • Develop a risk register for each contract management process
11. Market growth risk: Inability to • Continue with the implementation and maintenance of the Consolidation of Hubs Strategy sustain and attract volumes (warehousing and other logistics services) • New business development to explore options for credit facilities and to assist customers during the on-boarding process, as and when required • Develop action plans to address deviations from the integrated pricing model and follow up on implementation thereof • Establish a Demand Management Committee, on a quarterly basis, for a more accurate forecast • Track and monitor customer service action plans, addressing the customer satisfaction survey results and complaints TRANSNET Freight Rail 15 TRANSNET Freight Rail 16
Opportunities
• Freight Rail will be investigating opportunities for private sector participation. These may include participation in: –– The development of common-user facilities; –– Logistics hubs and terminal development; –– Rail systems investment to build regional connectivity – SwaziRail Link, Botswana Link and Waterberg Heavy Haul expansion; –– Concession operations and rehabilitation of branch lines; and –– Bimodal technologies to grow volumes through intermodal solutions. • Back-to-rail projects for volume growth in various sectors. • Continuation with new business developments in the fruit and FMCG sectors. • Regional corridor development in co-operation with Transnet International Holdings. • Continued regional volume growth through close collaboration with neighbouring countries’ railways. • Building competitive supply chains enabled by 4th Industrial Revolution technologies with an immediate focus on the heavy haul lines. www.transnet.net