Freight Rail Also Commodity Prices, Which Negatively Impacted Customers’ Markets, Manganese Met Export Volumes of 7,2Mt

Musina

Louis Trichardt

Groenbult MOZAMBIQUE FREIGHT BOTSWANA Lephalale Polokwane Phalaborwa

Vaalwater Zebediela Steelpoort RAIL Middelwit Modimolle Marble Hall

Nelspruit Komatipoort Witbank

NAMIBIA Mafikeng Kaapmuiden

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

Koffiefontein The division continues to implement six core strategies Belmont LESOTHO Continue to implement the ‘Road to Rail’ programme, Pietermaritzburg to ensure delivery of the MDS: supported by concentrated marketing efforts, Franklin Durban Springfontein Driving operational efficiency and excellence; a qualitative range of value-added services and Harding De Aar Aliwal North Sakrivier Port Shepstone Ensuring capital investment to create and a proficient sales force. Maclear Noupoort Calvinia maintain capacity; Explore opportunities to create additional revenue Rosmead Rail Infrastructure Hutchinson Umtata Hofmeyer from diversified portfolios, such as property. Queenstown • 30 400 km of track Developing market segment competitiveness; • 20 953 route km Building operational readiness, with an emphasis Pilot bimodal technologies to create seamless Beaufort West • Core network: Porterville 12 801 route km on safet; interfaces and to optimise the value chain. Klipplaat Cookhouse Saldanha Blaney East London • Network electriﬁcation Prince Alfred Hamlet Alicedale Developing people through skills training and by Grow cross-border volumes and develop Freight Oudtshoorn - Coal line at 26t/axle Worcester Port Alfred - 50kV AC (861km) promoting an organisational culture in which a Rail’s Africa business, together with related Ngqura Cape Town - 25 kV AC (2 309km) Port Elizabeth Knysna - 3kV DC (4 935km) commitment to excellence and innovation is rewarded; consulting services. Mosselbaai - Diesel (11 974km) and Promote operational readiness for the new loco • Axle loading - Main lines at 20t/axle Regional integration and the harnessing of cross- deployment programme and refine the required Core network Closed lines Lifted lines Branch lines - Ore line at 30t/axle border opportunities. operating models.

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Optimise high yield flows through the Transnet Value including ‘Lead to Cash’ with an ITP interface, EDI, and 2015 2016 2016 2017 Chain Coordinator (TVCC) across the Transnet Group track and trace. Key performance area and indicator Unit of measure Actual Target Actual Target and introduce the ‘channel management’ approach to Roll out the capital investment programme to optimise optimise identified flows. volumes. Density Roll out the ‘Productivity 2020’ initiative and Ensure strategic capital investment to optimise Northcor Tonkm/Routekm 1,56 2,00 1,3 1,3 organisational redesign to support a more agile volumes; and revise the capital pipeline in anticipation Capecor Tonkm/Routekm 4,13 4,60 3,7 3,2 response to business needs. of market recovery. Southcor Tonkm/Routekm 3,59 2,90 3,5 2,7 Address bottlenecks within the infrastructure network Roll out the ‘Roadmap to Safety’ programme in the rail Natalcor Tonkm/Routekm 6,48 8,70 6,2 6,8 through the capacity deployment model. network and operations environments. RBaycor Tonkm/Routekm 41,13 44,00 40,2 42,1 Roll out the ‘ICTM roadmap’, to incorporate key NWestcor Tonkm/Routekm 4,50 5,70 4,3 3,8 elements of a comprehensive value proposition, Eastcor Tonkm/Routekm 3,22 4,10 2,8 3,2 NEastcor Tonkm/Routekm 8,38 11,30 8,4 8,3 SSaldanha Tonkm/Routekm 61,74 63,00 61,9 57.8 Overview of key performance indicators Sentracor Tonkm/Routekm 4,90 6,30 5,0 4,9

Service delivery Table 1: Overview of key performance indicators On-time departure (average deviation 2015 2016 2016 2017 from scheduled times) Key performance area and indicator Unit of measure Actual Target Actual Target General Freight Business minutes 79,33 202 (38) 188 Financial sustainability Export coal minutes (0,58) 75 (43) 60 EBITDA margin % 43 45,6 41,9 52,9 Export iron ore minutes (24,29) 60 (5) 60 Operating profit margin % 24,6 26,2 12,4 28,4 On-time arrivals (average deviation Gearing % 37,3 47,3 52,9 45,1 from scheduled times) Net debt to EBITDA times 2,89 2,9 4,6 2,6 Return on average total assets General Freight Business minutes 200,8 241 87 224 – excluding CWIP % 8,3 9,1 3,3 7,6 Export coal minutes 170 140 195 120 Asset turnover – excluding CWIP times 0,34 0,35 0,26 0,27 Export iron ore minutes 57,1 200 147 195 Cash interest cover times 3,6 3,4 2,1 3,6 Market segment competitiveness Capacity creation and maintenance Volume and revenue growth Capital expenditure R million 25 173 25 181 22 619 13 235 Commodity classification Operational excellence – General Freight Business mt 90,5 106,1 84,0 97,0 Asset utilisation – Export coal mt 76,3 77,0 72,1 75,8 – Export iron ore mt 59,7 62,0 58,1 60,0 General Freight Business Gtkm/Ntkm 1,43 1,7 1,70 1.70 Total volumes mt 226,6 245,1 214,2 232,8 Export coal Gtkm/Ntkm 1,57 1,6 1,56 1.60 Export iron ore Gtkm/Ntkm 1,38 1,4 1,38 1.40 Tariffs

Loco-utilisation Year-on-year weighted average R/ton change – GFB (%) % 3,0 3,0 0,83 3,04 GTK’000/locomotive/ General Freight Business month 5 448 6 123 5 097 5 637 Human capital GTK’000/locomotive/ Employment equity % 84 84 85 84 Export coal month 26 489 29 028 23 989 28 228 Training spend % of personnel cost 1,87 2,6 1,9 2,5 GTK’000/locomotive/ Export iron ore month 58 827 56 815 57 920 56 815 Employee turnover % 5,00 4 5,2 5,0 Employee headcount permanent 29 445 31 136 29 092 29 570 Cycle time Risk, safety and health Export coal hours 63,76 56 63,45 56 Iron ore hours 84,79 76 90,14 76 Cost of risk % of revenue 4,8 5,5 5,7 5,5 DIFR rate 0,85 1,10 0,9 1,1 Wagon turnaround time Number of safety incidents number 629,0 463,0 539,0 334,0 GFB 10,60 10,0 11,75 10,10 Number of derailments – Mainline number 72,0 66,0 84,0 55,0 Number of derailments – Shunting number 232,0 191,0 171,0 180,0

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Financial performance review PERFORMANCE COMMENTARY deterioration on this measure compared to the previous year was mainly due to the year-on-year revenue Financial sustainability Table 2: Financial performance review for the 2016 Financial Year decrease of 2,1%, while permanent headcount Revenue for the year decreased by 2,1% to remained relatively stable at 29 092 employees Year ended Year ended R36 952 million (2015: R37 758 million). This is mainly compared to 29 445 in the previous year. 31 March 31 March attributable to the 5,4% volume decrease, while the 2016 2015 % average rand/ton increased by 3,4% to R168,74 Looking ahead Salient features R million R million change (2015: R163,22). The average rand/ton increase was lower than the average CPI of 7% over the same Accelerate diversified revenue opportunities, including Revenue 36 952 37 758 (2,1) reporting period in the previous year. value-added services (clearing, last mile, warehousing), – General freight 19 403 20 999 (7,6) property, telecoms infrastructure surplus capacity Net operating expenses decreased by 0,2% to – Export coal 10 757 10 578 1,7 and advertising. R21 484 million (2015: R21 517 million). This was – Export iron ore 5 616 5 250 7,0 achieved despite an average increase of 5,6% in Optimise yield through a commodity mix. – Other 1 176 931 26,3 personnel costs (excluding training). In line with the Continue to optimise cash and working capital management. Operating expenses (21 484) (21 517) (0,2) reduction in volumes, energy costs were lower compared Implement initiatives to reshape the core of the – Energy costs (4 336) (4 813) (9,9) to the prior year, while cost saving initiatives were implemented to reduce other costs. business through costs optimisation (both capital – Maintenance (1 595) (1 173) 36,0 and operational costs) in view of persistent tough – Materials (795) (963) (17,4) EBITDA margins declined by 1,1% to 41,9% (2015: economic conditions. – Personnel costs (11 949) (11 567) 3,3 43,0%), while operating margins declined by 12,2% to 12,4% (2015: 24,6%). Deterioration in margins is – Other costs (2 809) (3 001) (6,4) attributable to a decline in revenue of 2,1%, as well as Capacity creation and maintenance Profit from operations before depreciation, derecognition, a significant increase in depreciation charge, which The continued drive to optimise capital expenditure amortisation and items listed below (EBITDA) 15 468 16 241 (4,8) impacted negatively on operating margins. The in alignment with market demand is evidenced by the Depreciation, derecognition and amortisation (10 874) (6 951) 56,4 year-on-year increase in depreciation charge is largely 10,2% saving on R22,6 billion capital spend compared to Profit from operations before items listed below 4 594 9 290 (50,5) attributable to an increase in the asset base, a budget of R25,2 billion. This also represents a 9,5% subsequent to the revaluation of infrastructure assets Impairments and fair value adjustments (768) (536) 43,2 reduction in capital expenditure from the previous year. to fair value. In view of lower than expected volume Net finance costs (4 163) (2 811) 48,1 Of the capital amount spent, 38% was allocated to the performance, Freight Rail implemented cost saving Profit before taxation (337) 5 943 (105,7) acquisition of new locomotives, with 8% allocated to initiatives and reduced discretionary costs, which to Taxation 13 (1 685) (100,8) the maintenance of existing locomotives, 24% to the some extent mitigated the negative impact of lower Profit after taxation (324) 4 258 (107,6) building, maintenance and upgrading of existing wagons, revenue on profitability margins. Total assets (excluding CWIP) R million 145 771 141 376 3,1 and 14% to infrastructure upgrades and maintenance. Financial gearing deteriorated to 52,9% (2015: 37,3%). Two locomotive contracts were delivered in full, on Profitability measures The unfavourable performance on this metric is time and within budget: 100 x 21Es from China South EBITDA margin1 % 41,9 43,0 (1,1) attributable to a 53% increase in borrowings to fund Rail (CSR) deployed to the export coal line, and 60 x Operating margin2 % 12,4 24,6 (12,2) the capital investment programme on the back of a Class 43Ds from General Electric (GE) deployed to the Return on average total assets (excluding CWIP)3 % 3,2 8,3 (5,1) 9,2% reduction in reserves. general freight business. Asset turnover (excluding CWIP)4 times 0,26 0,34 (23,6) In line with the decrease in revenue year-on-year, as Capital investments5 R million 22 619 25 173 (10,1) well as an increase in value of the asset base, the Export coal Capitalised maintenance expenditure R million 7 103 7 631 (6,9) asset turnover ratio deteriorated to 0,26 times (2015: 0,34 times). The total investment in infrastructure for the year Employees Return on average total assets (excluding CWIP) amounted to R845 million. Number of employees (permanent) number 29 092 29 445 (1,2) decreased to 3,3% (2015: 8,3%). The poor performance The export coal line expansion to 81mtpa was 70% Revenue per employee R million 1,27 1,28 (0,8) of this KPI is attributable to a decrease in operating complete at the end of March 2016. The Transnet 1 EBITDA expressed as a percentage of revenue. profit on the back of a higher asset base, and a higher portion of the project is on target for completion in 2 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of revenue. depreciation charge for the financial period. the third quarter of 2017. The Eskom portion will be 3 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of average total In line with the 53% increase in total long-term completed in 2020. assets excluding capital work in progress. borrowings to R71 134 million (2015: R46 500 million), Coal line expansion and sustaining programmes that 4 Revenue divided by average total assets excluding capital work in progress. and a 4,8% decrease in EBITDA to R15 468 million have been completed, or are nearing completion, include: 5 Actual capital expenditure (replacement + expansion) excluding borrowing costs and including capitalised finance leases. (2015: R16 241 million), the net debt to EBITDA ratio úú Locomotive turntable at Richards Bay; increased to 4,6 times (2015: 2.9 times). úú Ermelo security walling; Cash interest cover decreased to 2,1 times (2015: úú Substation upgrades at Blackhill, Ogies, 3,6 times). The unfavourable performance of this ratio Broodsnyersplaas, Hamelfontein and Rietvleirust, was mainly due to lower-than-planned cash generated and a new substation at Blinkpan; and from operations after working capital changes. úú The long loops at Saaiwater and Blackhill will be Revenue per employee decreased by 0,8% to completed in the 2017 financial year. R1,27 million (2015: R1,28 million). The marginal

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Export iron ore úú Spending on the manganese export project is The iron ore export line recorded a 2,8% deterioration Zimbabwe (NRZ) and Beitbridge Bulawayo Railways planned at R493 million. Phase 1 work will be in volume performance to 58,0mt (2015: 59,7mt). (BBR), Zambia Railways Limited and La Société Nationale Total investment for the export iron ore corridor completed in the 2017 calendar year. Despite the decline in the manganese and iron ore des Chemins de Fer du Congo (SNCC) from the DRC. The amounted to R505 million in 2016. úú Spending on the newly-approved Waterberg Stage 2 markets in 2016, manganese realised export volumes operators focus on integrating the planning and execution Programmes completed, or nearing completion, include: project is planned at R67 million. This is the of 7,2mt. of cargo train operations between South Africa, úú The traction power upgrade to run full electric trains; beginning of the stepped capacity increase of coal General freight recorded a reduction in growth of 7,2% Zimbabwe, Zambia and the DRC. and exports from the Waterberg, from 6,12mtpa to to 84mt (2015: 90,5mt). The slowdown of the global ú Through the Joint Operating Centre (resourced by all the ú The third tippler at the port. 24mtpa. economy constrained the domestic economy and railways on the corridor) located in Bulawayo, teams are úú General freight business infrastructure spending is particularly the demand for South Africa’s mining developing the following project components: General freight planned at R1 655 million for the year ahead. commodities. An integrated operational philosophy, managed Total investment in general freight amounted to úú The division plans to deliver 287 locomotives of the Container and automotive volumes increased by 4,2% through the Joint Operating Centre; R3 351 million. 1 064 locomotive programme in the 2017 financial to 14,9mt (2015: 14,3mt), evidencing continued success A ‘one corridor’ investment plan; Capital has been invested in assets to support general year. in growth of the market share arising from a focus on freight traffic growth, with the balance of 1 064 úú Infrastructure upgrades will be prioritised to growth the ‘road-to-rail’ modal shift. Furthermore, in response Co-ordinated and agreed maintenance and safety standards; and locomotives to be procured over the next three years. corridors. to customers’ requirements for timeous delivery of time-sensitive import containers from the Port of A skills development plan across the corridor. The amount spent on these locos in 2016 totalled Investment in support of the Freight Rail Road-to- Durban to the City Deep inland terminal, the average R6 894 million. In addition, 2 100 new wagons were Rail Strategy: The outcome of such alignment by the operators and procured at a cost of R2 257 million. hours taken from vessel discharge to being stacked úú New bimodal technologies, offering ‘door-to-door’ engineers will see a standardisation in operating Progress on the execution of rail network capitalised at the inland terminal improved by 13% to 86 hours service by integrating road and rail, will be rolled out procedures, as well as enhanced maintenance and safety maintenance for network renewal for 2016 includes: (2015: 99 hours). on the Cape and KwaZulu-Natal corridors once standards between the four countries. Mineral mining and chrome volumes decreased by 1,4% úú Rail replacement: 314km of new rail installed. negotiations are concluded with bidders. to 20,7mt compared to the prior year (2015: 21,0mt). úú Sleeper replacement: 404 176 sleepers installed. úú The Tambo Springs and Pyramid intermodal hubs will The role of the Joint Operating Centre in the joint planning The reduction in volumes is mainly attributable to úú Ballast screening: 360km of ballast screened. be developed in the year ahead. and execution of cargo trains has also resulted in significant overall challenging market economic conditions úú Turnout replacement: 133 new turnouts installed. úú The division will invest in car wagons. efficiency gains. The transit time for the of the trains has affecting the demand for these commodities, with been reduced by half, from 14 days to seven days úú Formation, drainage, OHTE mast and foundation Implementation of major capital programmes (in declining commodity prices for chrome, ferrochrome between Durban and Ndola. rehabilitation. execution phase): and magnetite continuing to exert pressure on costs. úú Replacement of catenary wire with tiger wire. úú The manganese project Phase 1 is at 80% Steel and cement volumes decreased by 15,9% to Looking ahead úú Circuit breaker replacement. completion, while Phase 2 is at 16,4% completion. 17,5mt from the prior year (2015: 20,8mt), mainly due úú Replacement of a remote control system and train to the slowdown in economic growth affecting customer Freight Rail will pursue closer alignment with customers, detection system. Market segment competitiveness demand. The global downturn resulted in an unfavourable Engineering and Port Terminals to ensure optimal financial position for many steel customers, with some availability of resources and volume execution across Freight Rail saw a reduction in total rail tonnage filing for business rescue during the year. In addition, the supply chain. Looking ahead when compared to the previous year at 214,2mt the lifting of provisional anti-dumping charges on In addition to a number of ‘Road-to-Rail’ initiatives (2015: 226,6mt). In response to the market downturn, capital foreign cement continues to reduce South African being pursued by Freight Rail business units, The impact of slow economic growth and the overall expenditure for the year ahead will be reprioritised cement producers’ market share. Growth in the cement opportunities are being explored in the fast moving challenging macro-economic environment was and Freight Rail will continue to implement planned market is anticipated to remain static in the short term. consumer goods (FMCG) sector. Freight Rail will optimisation initiatives. particularly severe in a number of sectors of the The agriculture and bulk liquid portfolio decreased by continue to work on key elements of the value economy, as evidenced by regressive performance in An investment of R13 235 million has been secured 13,3% to 9,1mt (2015: 10,5mt). The severe drought proposition, such as smart security measures, most Freight Rail businesses, with the exception of the for capacity creation, infrastructure renewal and significantly affected the agricultural sector, especially distribution hubs, tailored products for FMCG sector, Container and Automotive business unit. modernisation: the maize rail export programme. However, the operational excellence, express train, on-time delivery Coal volumes decreased by 5,5% to 72,1mt compared úú On the export coal line, R309 million will be spent on business unit maintained volume performance, with and excellent customer service. The division will to the previous year (2015: 76,3mt). A telling effect of qualify and source the requisite investment required direct capacity expansion in 2017 and R316 million growth in the chemicals, FMCG and fuel sectors. on infrastructure renewal capitalised operating the market slump has been the impact on the ability of to support these initiatives. expenditure. Most of the line and substation work emerging miners to mine cost-effectively and remain The division will continue to cement relationships Enabling regional integration will be completed, except for the Eskom power sustainable. The main external contributing factor to and agreements with alliance partners and logistics upgrades. export coal volumes being below target was the Freight Rail is in the process of developing a regional service providers to support the Road-to-Rail strategy. úú On the export iron ore line, R29 million will be cancellation of orders from mines owing to challenging integration strategy through the North-South Corridor Bimodal technologies will be piloted on Capecor and spent on direct capacity expansion in 2017 and market conditions. Investment Project Initiative led by the NEPAD Business Natcor to grow volumes and market share on the R116 million on infrastructure renewal capitalised During the year, the division’s iron ore and manganese Foundation, and co-sponsored by the Division and Grindrod. corridors. operating expenditure. The major capacity expansion business unit faced the challenge of managing the The project set up a Joint Operating Centre in Bulawayo, The division will develop digital support and marketing work for 60mtpa throughput has been completed. impact of the lowest commodity prices in 15 years. which is operational and houses railway operators from tools, as well as logistics skills, to enhance customer Freight Rail, Zimbabwe operators, National Railway of value propositions.

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The regional integration growth effort will be focused Rail network-related challenges, such as derailments, Looking ahead Organisational readiness on three corridors: the North-South, East-West and hook-ups, power failures, cable theft and asset Freight Rail will continue to implement the locomotive High-performance culture the Maputo corridors. The strategy aims to promote vandalism, contributed to lower volumes railed as programme to improve operations and customer aligned planning and investment in the revitalisation of these incidents resulted in unscheduled maintenance Freight Rail achieved the highest Culture and service. Southern Africa Railways Association (SARA) and interventions leading to delays on the network. Engagement scores across the Transnet Group. The division will continue to implement the channel infrastructure in support of growth and development There were significant improvements in the general Freight Rail achieved a Culture score of 4,03 (80,6%) management concept to improve train plan execution. of these corridors across the region. Transnet is a key freight business, as well as in the export coal and compared to the overall Transnet score of 3,83 Service design will be repositioned to improve the role player in many such revitalisation programmes. export iron ore businesses with respect to on-time (76,6%) and an Employee Engagement score of division’s response to new traffic and existing service From an operational perspective, focus will continue departures. This is the result of greater accountability 4,16 (83,3%) compared to Transnet’s overall score code requests. on the establishment of Joint Operations Committees and collaboration between corridor managers and of 3,95 (79%). This achievement can be attributed – joint structures set up with all players in the supply teams, and improved compliance with the Integrated A continued focus on a scheduled railway will enhance to sustained efforts to implement the ‘iBelong’ chain (such as the various national rail operators, Train Plan (ITP) and collective focus on re-planning and the on-time performance of wagons. programme through initiatives such as: terminal operators and ports). The success of this dynamic ITP updating. The division will intensify its focus on yard countdown úú The Rewards & Recognition programme; approach has been most evident on the Maputo While the general freight business reflected an processes and tools. úú Inspirational Leadership programmes; corridor, where lessons learnt are being applied to improvement in on-time arrivals, the export coal and Lean Six Sigma initiatives will ensure continuous úú Anti-bullying campaigns; and other corridors. iron ore lines did not perform as well as anticipated. process improvements. úú Diversity Management programmes. The ramp-up of the Steel Hub in Gauteng will enhance The export coal line was affected by Eskom power Network maintenance will be intensified to increase In keeping with our aspiration to be one of the Top 5 cross-border traffic with steel customers between failures. Additional en-route delays owing to unscheduled the frequency of condition assessments and Railways in the world, Freight Rail achieved the Johannesburg, Maputo and Zambia. maintenance and locomotive failures also contributed preventative maintenance to enable greater volume prestigious Top Employer Accreditation in 2015. to the deviation. throughput on the network. Operational excellence Export iron ore line performance was affected by Skills development derailments and yard blockages owing to tippler delays Human capital Grow volumes and market share Training was delivered in line with the cost-saving and loading challenges. Freight Rail railed a total of 214,2mt against a target Freight Rail achieved a permanent headcount of directive resulting in 1,9% actual labour costs General freight ‘on-time departures’ improved by 148%. of 245,1mt, representing the achievement of 87,4% of 29 092 employees (target: 31 136). achieved against a 2,3% target on training spend. This improvement can be attributed to an ongoing drive target (and 12,4mt or a 5,5% reduction against Black employees represented 85,3% of the total Overall, 244 engineering bursaries were awarded and strict management by the National Command 226,6mt in 2015) in an extremely challenging business employee base (target: 84%). against the budget of 391. Centre (NCC) to ensure that trains depart on time. environment. Female employees represented 27,8% of the total Overall, 48 technician bursaries were awarded ‘On-time arrivals’ for general freight reduced by 56,7% Performance on both the export coal and iron ore employee base (target: 37%). against a budget of 100. compared to the previous year. While the general export heavy-haul corridors was also affected by the People with disabilities represented 2,8% of the total freight business reflected an improvement in on-time A total of 399 sector-specific training interventions slowdown of the global economy. Buyers of mining employee base (target: 3,0%). arrivals, the export coal and iron ore lines did not were budgeted for, whereas 640 interventions commodities, particularly China, have been importing perform as well as anticipated. The export coal line An automated ‘time and attendance’ solution was were realised. fewer tons from South Africa. In response to the was affected by Eskom power failures, in addition to successfully deployed at Ermelo, with effect from The total training target for the year was exceeded by sluggish economic outlook, domestic and global miners en-route delays owing to unscheduled maintenance 1 November 2015. 55%: a target of 22 688 trainees against an achieved based in South Africa have started to defer investment and locomotive failures. Automated ‘personnel cost planning’ (PCP) and target of 34 943. plans by reducing capital expenditure and shelving General freight locomotive efficiency declined by 7,5% ‘compensation management’ solutions were developed mining projects. Table 3 shows the increase in the number of engineers to 5,076 GTK/Loco/month (2015: 5,448). Locomotive and implemented. and technologists on the engineering empowerment efficiency (GTK) performance is directly influenced by All management employees’ tertiary qualifications Improve operational efficiency and service delivery programme (EEP), while Table 4 reflects performance volume performance: lower volumes result in lower GTK. were verified by an external party, and the results for youth employment and development. Implementation of the ‘channel management’ approach Asset utilisation (GTK/NTK) declined marginally or were captured on SAP HCM. commenced in November 2015 to improve customer remained stable between 2015 and 2016, mainly Continued transformation initiatives have enabled service across the business through an improvement in owing to fewer volumes railed as a result of sluggish Freight Rail to sustain its Level 2 B-BBEE status and KPIs, such as on-time departures, on-time arrivals and economic growth. Specifically, the reduction for to enhance employment equity scores. train utilisation. general freight was at 1,16% and export coal at 0,64% Overall operational efficiency performance (measured compared to the previous year, while export iron ore in net ton kilometre [NTK ’billion]) declined by 5,4% performance remained unchanged. from the prior year. An increase of 17,5% was recorded for general freight wagon turnaround time, mainly as a result of en-route delays.

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Table 3: Number of engineers, technologists on the engineering empowerment programme (EEP) Governance and ethics Actual Target Actual Table 5: Freight Rail’s top 5 risks and key mitigating activities Training area 2015 2016 2016 Key risks Mitigation activities Technicians in training 113 100 48 Engineers in training 213 391 344 Ensuring financial sustainability Assessing and monitoring foreign currency exposure within projects and implementing a in the context of macro-economic capital scrubbing and optimisation process to prioritise capital and projects accordingly. Young professionals in training 21 60 62 challenges Enhancing dispute resolution processes and monitoring cash flows on locomotive procurement.

Growing volumes within difficult Developing and stimulating business continuity plans for critical points of failure with key Table 4: Youth employment and development strategy market conditions stakeholders. Validating and declaring ‘achievable’ volumes, and facilitating sign-off for traffic files with Actual Target Actual all key stakeholders. Employment/Development 2015 2016 2016 Fast-tracking and monetising Road-to-Rail opportunities in collaboration with customers, Youth employed as % of total employees 48,8% n/a 44% of road hauliers and supply chain partners where appropriate. permanent Deploying digital technologies and innovation to improve service reliability, staff responsiveness and customer service. Youth developed as % of all employees trained 53,5% 52% 69,9%, Uncertainty in the supply Approving and implementing alternative power generation options. of Eskom energy Implementing ISO 50001 standard in Freight Rail. Freight Rail’s Train Control Officer (TCO) support system will visually alert TCOs to the risk of network overloading. A sub-meter energy management system will be introduced Looking ahead Health and safety on the coal line.

Freight Rail will focus on the following key ‘iBelong’ A 14% improvement score was achieved for all safety Maintaining a competitive Growing the productivity edge through Lean Six Sigma and continuous improvement initiatives in the year ahead: incidents in the 2016 financial year. market position principles to reduce waste and variability. úú Diversity Dialogue sessions; During the year, key recommendations were made Executing projects on time and delivering enhanced value propositions to customers. úú Inspirational Leadership Development Programmes; to embed a sustainable safety culture through: Managing operational excellence to world-class standards and ensuring superior quality of service. úú Mainstreaming gender and disability issues úú Supervisory training, coaching and development throughout the Human Capital value chain; for safety-critical and safety-related grades; and Building market reputation through reliable and efficient service delivery. úú Maintaining Freight Rail’s Top Employer úú Implementation of the Human Factor standard Building appropriate intellectual Enhancing research and development, and producing and patenting various concept designs, Accreditation; and (SANS 3000-4). property for key rail products e.g., standard gauge bogies, a lightweight wagon for the African environment, a traction úú Implementing wellness programmes to enhance The division further embedded its safety culture motor design scale prototype, an auxiliary power system concept design, etc. employee well-being. through the implementation of the Road Map to Safety The ‘Productivity 2020’ programmes will be rolled out (R2S) interventions, including: to promote improved productivity. The programmes úú Competence management: trained supervisors, will promote an enhanced crew output-based pay simulation training for train crews and TCOs, OPPORTUNITIES continuation of on-the-job training for train drivers, structure, driver multi-skilling, incentives for the sales Market opportunities are emerging for the transportation The Road-to-Rail strategy will develop a sustainable introduction of continuous professional learning; force to encourage road-to-rail volume migration, of beneficiated products, containers, palletised products, distribution hub and leverage digital value propositions for customer service training and an operational úú Rail hazard management: completion of risk as well as total logistics offerings. Freight Rail’s Road-to-Rail FMCG customers. It will further help to embed Order to performance framework to drive productive assessments, implementation of Annual Safety strategy targets significant growth in the Container and Execution processes and the ‘channel management operational behaviour. Improvement Plan (ASIP); and Automotive sector, supported by relevant technologies, strategy’, while ensuring a dedicated taskforce is in place to A new Cloud Solution of the SAP Human Capital úú Process control: fault management, SAP asset customised value propositions and an evolving entrepreneurial capture opportunities. Management system will be implemented to improve configuration, SAP planning and supervision and sales culture. Digital customer offerings will increase the ease of doing overall talent management. compliance process improvement. Investment in bimodal technologies will contribute to business by piloting the CAB new-generation offering by Training and development initiatives will include: Accident prevention training was improved through: intermodal capability and corridor densification. May 2016, and integrating bulk volumes by end July 2016. úú Rollout of the Apprentice Programme to develop úú Roll-out of OHSAS 18000-1 in CAB and Coal The regional integration focus projects significant growth Revenue diversification initiatives will optimise the skills and leadership capabilities in bargaining unit business units to support the Integrated opportunities (volumes and revenue) for rail. property portfolio through value-added services (clearing, structures; Management System; Improved utilisation of underutilised assets will benefit key last mile, warehousing), telecoms infrastructure surplus corridors and certain wagon types. capacity and advertising. úú The implementation of the Rail Operations úú Roll out of OHSAS 18000-1 Certification for IOM, Management Programme in conjunction with Glasgow SAC, MMC & ABL business units; and Private sector participation (PSP) will expand opportunities A revamped sales and marketing organisation will facilitate in key corridors. training and development to up-skill the sales force to Caledonian University and the University of úú Roll-out of an effective safety rewards and The 1 064 locomotive rollout will contribute to improved exploit the commercial opportunities of the Road-to-Rail Johannesburg; and recognition programme. operational efficiencies and customer experience. initiative. úú Customer service training programmes. Strategic alliances and partnering with logistics service Capital spending will be prioritised through the general providers will facilitate opportunities to attract rail- freight business. friendly traffic back to rail.

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