Transnet Freight Rail

Transnet Freight Rail

Export coal operations.

	TRANSPORTS FREIGHT
	along approximately
	20 500 ROUTE KMS INCLUDING 1 500 KMS HEAVY HAUL LINES
	For export coal and export iron ore

Transnet Freight Rail (Freight Rail), the largest of Transnet’s Operating divisions, transports bulk and containerised freight along approximately 20 500 route kilometres of which 1 500 kilometres comprise heavy haul lines for export coal and export iron ore. Freight Rail supports the transport needs of most of the growing sectors of the economy and allocates capacity to prioritised commodities, thereby contributing to national objectives. Strategic advantage lies in the movement of heavy haul and bulk commodities over long distances, where flow densities provide economies of scale and lower unit costs.

The Export coal business focuses on conveying coal from the Mpumalanga coalfields to the Port of Richards Bay. The Export iron ore business operates the heavy haul line from mines in the Sishen area to the Port of Saldanha Bay. The General Freight operation comprises the transportation of freight on national main line corridors between economic hubs and ports. Intermodal traffic, forming part of the General Freight business, and operating as the Container and Automotive business, extends between main industrial hubs and ports or continue over-border.

			Highlights		Challenges
			• Efficiencies resulted from increasing train lengths to harness haulage capability. Freight Rail was operating several improved capacity trains on a weekly basis, including anaconda container trains, manganese trains and heavier coal trains by year-end. • Export coal tons per train delivered increased from 7 400 to 7 900. • Export iron ore: The implementation of new Class 15E locomotives and the implementation of the Concept 39 train plan continue to contribute to improvements in locomotive efficiencies and wagon turnaround time.		• Prolonged industrial strike action and subsequent slow recovery impeded operational efficiency despite specific actions to improve efficiencies and compensate for lost volumes. • The container business declined orders of 43 000 TEUs for the six months ending March 2011, as a result of the shortage of locomotives, network incidents and capacity constraints. • Heavy rainfalls in the Northern Cape in early 2011, washed away sections of lines in the Kamfersdam area, impeding plans to increase manganese volumes. This adversely affected turnaround times as trains had to be re-routed. • Delays in on-time arrivals due to transit incidents such as theft and locomotive failure.
			• The Container and Automotive business recorded its highest ever annual volumes of 627 825 TEUs during the year. In February 2011, a record 62 000 TEUs was transported nationally, which is the highest recorded monthly volume on rail. Market share improved to 34%, which could have been greater if operational capacity was available. • Domestic coal volumes increased 12% compared to the prior year. • For the 2010 FIFA Soccer World Cup, Freight Rail loaded and delivered a record 17,1 million litres jet fuel and 450 000 tons of cement for the stadiums. • Manganese volumes delivered improved by 32,9%. • Domestic iron ore performance was 0,8mt more than the prior year.		• Key commodities, such as rock phosphate and magnetite, performed below expectations due to the collapse of Brakspruit Bridge between Phalaborwa and Hoedspruit. A road-rail solution implemented during the bridge collapse ensured continued operations, although at lower levels. • Richards Bay Coal Terminal (RBCT) experienced tippler constraints due to scheduled and unscheduled maintenance, resulting in 73 train cancellations, affecting export coal volumes. • All freight volumes were adversely impacted by the strike. • Derailments on the main line resulted in losses of 3,1mt in export iron ore volumes. • Production problems experienced by key customers resulted in tonnage losses on the iron ore line.
			• Freight Rail took delivery of two new Model C30ACi locomotives from GE which are undergoing acceptance testing. GE will build the first 10 locomotives at its plants in the USA. The remaining 90 of the 100 new diesel Class 43 locomotives will be assembled by Rail Engineering at its manufacturing facility in Koedoespoort. • Transnet has acquired an additional 32 new Class 15E locomotives.		• Funding constraints continue to be the major challenge for the execution of the capital investment programme. • The General Freight business continues to experience challenges due to the shortage of locomotives. This is coupled with severe pressure from increasing market demand. • The infrastructure modernisation programme still needs to be defined and commissioned in the short term as major components on the network face obsolescence.
			• Revenue for the year was 8,6% higher compared to the prior year. • A marginal increase in General Freight volumes railed (1,6mt or 2,2% increase at higher revenue per ton as well as a change in commodity mix to higher revenue per unit commodities) resulted in a 12,3% increase in General Freight revenue. • Iron ore volumes increased by 1,5mt and Transnet is pursuing tariff adjustments in order to achieve a fair return on its heavy capital investment on the iron ore line.		• Export coal revenue remained stagnant compared to the prior year due to a lack of volume growth, resulting from industrial action in the first quarter as well as adverse weather conditions in the third and fourth quarters affecting the mining and railing of export coal. • Energy costs increased by 15,2%, mainly due to an increase in the fuel price and a significant increase in electricity tariffs. • Maintenance and materials costs increased by 16,0% mainly due to an increase in maintenance activity levels.
			• Of the 48 participants in the ‘Graduates in Training’ programme contracted for an 18 – 24-month period, 36 were successfully placed in permanent positions. • Of the 19 ‘people with disabilities’ given internship opportunities, 40% completed their training successfully. • The ‘Engineering Empowerment’ programme was successfully launched. • The ‘Management Development’ programme was successfully launched and piloted. Of the 12 candidates who attended the pilot programme, seven have already been appointed as operations trainee managers.		• Freight Rail training expenditure which was 2,2% in 2011 as a percentage of personnel costs is marginally below target.
			• A minimum 4-star NOSA rating target was set for all depots. Of the 46 depots audited, 23 achieved 4-star ratings or higher. All the Container and Automotive business depots achieved the target. • Incidents relating to hook-ups reduced by 12% due to various governance structures being implemented, including: a regional Hook-Up Committee, the National Steering Committee, and emergency repair teams. • Centralised Train Control (CTC) failures have reduced by 25% due to the implementation of 11kV power supply upgrades in problem areas, the migration from the use of copper cable to fibre optic cable; and increased backup power supply.		• The greatest disappointment during the year was the poor safety performance that resulted in damage to key railway assets and injuries to our employees. Following an overall progressive safety performance improvement over the past five years (2006 – 2010) on all the measured safety incidents, Freight Rail only achieved a 12% reduction against the stretch target of 33% in 2011. Freight Rail regrets to report eight work-related employee fatalities during the year, including a single incident that claimed four lives.

• Market analysis

  THE AUTOMOTIVE INDUSTRY

  is gearing for an increase in manufacturing. This will have a positive influence in the Pretoria area for both containers and automotive units, which in turn requires a total review of inland rail terminal’s supply chain.

  Demand for Freight Rail services during the year was much higher than available capacity, partly due to markets and customers pursuing cost-effective transport solutions.

  The container industry for rail has shown a significant increase in mineral mining products being containerised for export. This is related to vessel turnaround efficiency, landside logistics, improved handling efficiency and greater global cognisance of environmental issues.

  Competitive environment

  Freight Rail’s competitive environment consists of domestic road haulers that erode rail’s natural markets in mining and heavy manufacturing industries; and international global supply chains competing in main export industries, which limit global demand for South African output.

  The road transport and logistics industry in South Africa has a few large businesses that dominate more than 80% of the market. The challenge for Freight Rail and rail operators globally, is to develop areas of competitive advantage, such as lower cost, higher efficiencies, reliability and service predictability.

  Customer profile

  Freight Rail’s customers for each business include (but are not limited to):

  •	The Export coal business: Anglo Coal, BHP Billiton, Exxaro, Xstrata, and other emerging mining houses.
  •	The Export iron ore business: The two main customers are Kumba and Assmang. Freight Rail is assessing capacity to serve emerging miners in the year ahead.
  •	The General Freight operation: ArcelorMittal SA, Eskom, Assmang Ltd, Samancor Manganese Ltd, PPC Cement (Pty) Ltd, Foskor Ltd, Afrisam SA (Pty) Ltd, Sasol, Highveld Steel & Vanadium and Samancor Chrome Ltd.
  •	Intermodal traffic, which forms part of the General Freight business, and operating as the Container and Automotive business: Maersk, MSC, Cargo Movers, SACD and Grindrod. Future growth will be leveraged through the development of the domestic intermodal strategy.

  
  

• Performance indicators

  				2010 Actual		2011 Target		2011 Actual		2012 Target
  	Operational efficiency
  	GFB
  	– Locomotive efficiency(a)	GTK 000/locomotive/month		5 239		5 337		5 121		5 400
  	– Wagon turnaround time	days		14,0		12,2		12,6		11,0
  	Export coal
  	– Locomotive efficiency(b)	GTK 000/locomotive/month		14 173		15 755		13 505		24 700
  	– Wagon cycle time	hours		69		65		72		58
  	Export iron ore
  	– Locomotive efficiency	GTK 000/locomotive/month		38 310		43 650		38 866		45 600
  	– Wagon cycle time	hours		85		80		85		76
  	Security incidents	number		3 974		3 299		3 711		2 969
  	Value of loss	R million		53,9		50,5		67,1		53,7
  	Customer focus
  	On-time departures (deviations from schedule)
  	– GFB	minutes		165		184		350		175
  	– Export coal	minutes		289		149		234		142
  	– Export iron ore	minutes		121		94		161		89
  	On-time arrivals (deviations from schedule)
  	– GFB	minutes		265		238		434		227
  	– Export coal	minutes		309		248		468		282
  	– Export iron ore	minutes		190		160		285		152
  	Volume
  	GFB	mt		72,1		76,0		73,7		84,4
  	GFB (excluding containers)	mt.km		35 545,8		39 141		36 974		ns
  	GFB containers % market share(c)	%		30,9		33,0		34,0		38,0
  	Export coal	mt		61,8		65,0		62,2		70,0
  		mt.km		37 812		39 100		36 914		41 300
  	Export iron ore	mt		44,7		48,0		46,2		51,6
  		mt.km		38 865		43 277		40 088		44 660
  	Infrastructure
  	Capital investment(d)	R million		9 726		11 612		12 542		14 693
  	Percentage local sourcing	%		91		77		74		87
  	BBBEE procurement	%		56		70		75		75
  	Financial value creation
  	EBITDA margin(e)	%		35,5		34,4		36,0		38,9
  	Return on average total assets (excluding CWIP)(f)	%		8,9		8,0		7,7		10,0
  	Human capital
  	Number of employees	number		22 571		24 300		23 665		25 900
  	Training spend (% of personnel costs)	%		2,0		2,7		2,2		2,0
  	Employment equity	%		76,0		77,0		77,6		78,0
  	Employee turnover	%		7,2		5,0		5,1		4,0
  	Absenteeism	%		4,7		3,8		6,3		3,3
  	Safety, health and environment
  	DIFR	rate		0,94		0,94		1,22		0,88
  	Safety incidents	number		1 014		815		558
  	Employee fatalities	number		5		zt		8		zt
  	Public fatalities	number		161		zt		138		zt
  	Major environmental incidents (level 1)	number		nil		nil		nil		nil
  	Employees registered on HIV/Aids
  	programme	number		526		ns		609		ns
  	Energy use/carbon footprint
  	– Reduced fuel consumption	mega litre		195 856		180 325		156 149		180 200
  	– Reduced electricity consumption	MWh		2 358		2 311		1 299		1 802
  	Waste
  	– Reduction in waste generation	tons		nr		ns		38 068		30 000

  
  

  (a)	Excluding B-fleet and shunting locomotives.
  (b)	General freight locomotives on export coal line excluded from 2012.
  (c)	Rail containers expressed as a percentage of railable maritime import and export containers.
  (d)	Excluding the capitalisation of borrowing costs and including the capitalisation of finance leases.
  (e)	EBITDA expressed as a percentage of revenue.
  (f)	Profit from operations before impairment of assets, fair value adjustments, dividends received, net finance costs and taxation expressed as a percentage of average total assets excluding capital work in progress.
  ns	not set.
  zt	zero tolerance.
  nr	not reported.

  
  

• Financial and operational performance

  	Salient features			Year ended 31 March 2011 R million		Year ended 31 March 2010 R million		% change
  	Revenue			22 607		20 825		8,6
  	– General freight			13 364		11 903		12,3
  	– Export coal			5 632		5 624		0,1
  	– Export iron ore			2 669		2 216		20,4
  	– Other			942		1 082		(12,9)
  	– Operating expenses			(14 463)		(13 431)		7,7
  	– Energy costs			(2 533)		(2 198)		15,2
  	– Maintenance			(2 949)		(2 532)		16,5
  	– Materials			(436)		(386)		13,0
  	– Personnel costs			(6 555)		(6 214)		5,5
  	– Other costs			(1 990)		(2 101)		(5,3)
  	Profit from operations before depreciation and amortisation and items listed below (EBITDA)			8 144		7 394		10,1
  	Depreciation and amortisation			(4 602)		(3 910)		17,7
  	Profit from operations before the items listed below			3 542		3 484		1,7
  	Impairments and fair value adjustments			(181)		(382)		(52,6)
  	Dividend received			12
  	Net finance costs			(1 448)		(1 186)		22,0
  	Profit before taxation			1 925		1 916		0,5
  	Total assets (excluding CWIP)	R million		50 681		41 568		21,9
  	Profitability measures
  	EBITDA margin*	%		36,0		35,5		0,5
  	Operating margin**	%		15,7		16,7		(1,0)
  	Return on average total assets (excluding CWIP)***	%		7,7		8,9		(1,2)
  	Asset turnover (excluding CWIP)****	times		0,49		0,53		(7,5)
  	Capital investments^	R million		12 542		9 726		29,0
  	Capitalised maintenance expenditure	R million		4 024		3 941		2,1
  	Employees
  	Number of employees number			23 665		22 571		4,8
  	Revenue per employee	Rand		0,96		0,92		4,3

  
  

  *	EBITDA expressed as a percentage of revenue.
  **	Profit from operations before impairment of assets, fair value adjustments, dividends received, net finance costs and taxation expressed as a percentage of revenue.
  ***	Profit from operations before impairment of assets, fair value adjustments, dividends received, net finance costs and taxation expressed as a percentage of average total assets excluding capital work in progress.
  ****	Revenue divided by average total assets excluding capital work in progress.
  ^	Actual capital expenditure (replacement + expansion) excluding borrowing costs and including capitalised finance leases.

  
  

  GENERAL FREIGHT

  Growth of 2,2% to 73,7mt.

  CITY DEEP VOLUMES

  2010: 250 430 TEUs

  2011: 277 641 TEUs

  EXPORT COAL

  Increased by 0,4mt.

  EXPORT IRON ORE

  Increased by 1,5mt.

  Revenue

  Revenue increased by 8,6% to R22,6 billion compared to R20,8 billion in the prior year. The increase in revenue is attributable to an increase in volumes during the year, and an effective ‘yield and mix’ management programme despite a protracted industrial strike action during May 2010 as well as operational challenges.

  Export coal tariffs were increased in line with contractual commitments with customers to achieve a fair return on invested capital.

  General Freight business

  General Freight tonnage performance showed a modest growth of 2,2% to 73,7mt (2010: 72,1mt).

  The industrial strike action severely impacted service delivery, resulting in the loss of volumes. Incidents of crime and sabotage during the industrial strike action also challenged volume growth leading up to the 2010 FIFA Soccer World Cup. Freight Rail focused on the implementation of operational plans to recover volumes lost in the first quarter, however, recovery was disappointingly slow. Nevertheless, significant improvements were recorded in locomotive efficiencies and wagon turnaround in certain areas.

  As a result of the economic downturn in the prior year, Freight Rail ’parked’ a number of locomotives in anticipation of surplus capacity. An improvement in the economy and a consequential increase in operations required these locomotives to be returned to service. However, the time-lag required to return the locomotives to service hampered the weekly volume growth tempo. Freight Rail anticipates that all locomotives will be back in service by 2012.

  Volume growth was also adversely affected as Freight Rail prioritised the 2010 FIFA Soccer World Cup critical commodities such as transporting jet fuel to OR Tambo International Airport, coal to Eskom and the freighting of containers with critical commodities.

  Despite Eskom tonnages performing well during the year, with a record weekly throughput of 169 000 tons achieved for the Majuba Power Station coal flows, the domestic coal performance was 2,2mt below target.

  In addition, in terms of the agreement reached between Transnet and PRASA, and in the interest of supporting passenger rail services, Freight Rail provided locomotives to PRASA to accommodate increased passenger schedules whilst the latter’s locomotives were being maintained by Rail Engineering.

  Other key General Freight commodities, such as rock phosphate and magnetite, performed below target due to the collapse of the Brakspruit Bridge between Phalaborwa and Hoedspruit. Prior to the bridge collapse, both of these commodities were performing well. A road-rail solution implemented during the bridge collapse ensured continued operations, although at lower levels than the pre-collapse period (60% lower for magnetite and 32% for rock phosphate).

  Despite the disappointing performance of the General Freight business, some commodities, such as manganese, container and automotives registered a visible improvement in volume growth:

  •	Domestic iron ore performance was 1,2mt above target, 0,8mt more than the prior year.
  •	Manganese recorded a 32,9% improvement on delivered volumes, 1,6mt more than the prior year.
  •	The Container and Automotive business recorded its highest ever annual volumes of 627 825 TEUs during the year. In February 2011, a record 62 000 TEUs was transported nationally, which is the highest recorded monthly volume on rail. Market share improved to 34%, which could have been greater if operational capacity was available.
  •	City Deep capacity to handle 240 000 TEUs was exceeded and volumes handled at the terminal in 2011 was 277 641 TEUs against 250 430 TEUs achieved in 2010.
  •	Container volumes on rail increased by 13,2%, whilst automotive volumes increased by 29% in 2011.
  •	The Container business showed a marked improvement in cross-border traffic, as evidenced by increases of 25% for Zimbabwe and 21% for Botswana from 2010 to 2011.

  
  

  FREIGHT RAIL	51 547 LESS TRUCKS ON THE ROAD
  Many of the operations are in smaller municipalities and rural areas, leading to sustainable employment and economic stimulation in those areas.	resulting in a substantial CO2 emissions saving of 13 527 tons.

  Export Coal Line

  Export coal volumes increased by 0,6% to 62,2mt (2010: 61,8mt). This is a marginal improvement compared to the prior year, although still 2,8mt below the target of 65,0mt due to numerous factors, including:

  •	three major derailments during December 2010 and January 2011 which resulted in 223 train cancellations and 111 jumbo wagons being damaged;
  •	tippler constraints at Richards Bay Coal Terminal during October 2010 due to scheduled and unscheduled maintenance, which resulted in 73 train cancellations;
  •	adverse weather conditions during the third quarter of the year; and
  •	a loss of 3,1mt due to the extended period the export coal line was shut down due to delayed maintenance as a result of the industrial strike action.

  The tempo throughput improved by 6% during the year, when volume throughput is measured against the number of operating days:

  •	Number of operating days available to move volumes were 328 compared to the prior year’s 348.
  •	Trains per operating day increased from 23 to 25.
  •	Tons per train delivered increased from 7 400 to 7 900.

  The implementation of the ‘continuous improvement projects’ demonstrated that Freight Rail is able to achieve targeted efficiency levels, with 17,8mt, and 60-hour wagon turnaround time being achieved in the second quarter of 2011. However, sustaining these performance levels remained a challenge. Locomotive and infrastructure reliability did not yield the expected benefits, which also affected crew availability during the year. A 10,0% improvement is required to achieve the expected 58-hour turnaround time during 2012.

  Export Iron Ore Line

  Export iron ore volumes increased by 3,4% to 46,2mt (2010: 44,7mt), mainly due to an improvement in efficiencies, despite the loss of 3,1mt due to derailments during the year, capacity constraints at the mines which negatively impacted volume growth and the industrial strike action.

  However the Quantum Leap improvement initiatives resulted in the following successive weekly throughput records:

  •	1,024mt for the week ending 5 September.
  •	1,060mt for the week ending 26 September.
  •	1,070mt for the week ending 24 October.
  •	1,094mt for the week ending 2 January.

  The commissioning of new Class 15E locomotives and the implementation of the Concept 39 train plan continue to contribute to improvements in locomotive efficiencies and wagon turnaround time. In the year ahead, Freight Rail is implementing numerous action plans to increase efficiencies, including the use of technology to mitigate disruptions in throughput due to safety incidents.

  Operating expenses

  Operating expenses amounted to R14,5 billion, which is an increase of 7,7% on the prior year. Although the increase in operating expenses was generally contained to levels of inflation, there was a significant increase in the following cost categories:

  •	Energy costs increased by 15,2% mainly due to an increase in fuel prices resulting from a higher average oil price as well as a significant increase in electricity tariffs.
  •	Maintenance and material costs increased by 16,0% due mainly to an increase in maintenance activity levels for the current year compared to the prior year.

  The impact of these increases was offset by a cost reduction programme initiated during the year that resulted in other operating expense savings of 5,3% compared to the prior year.

  Profitability

  Freight Rail recorded an EBITDA of R8,1 billion, an increase of 10,1% compared to the prior year. EBITDA margin increased marginally to 36,0%, while the return on average total assets reduced from 8,9% in the prior year to 7,7% in the current year due to the increased investment in infrastructure.

• Capital investment

  Freight Rail’s capital investment of R12,5 billion for 2011, focused on increasing capacity, as well as maintaining and replacing infrastructure and rolling stock to meet customer demand for freight carriage more efficiently. Capital projects are aligned with business conditions, increasing available rolling stock allowance and restoring additional locomotives to service in order to meet future volume growth targets.

  Capital investment spend in 2011 and planned spending for the next five years are as follows.

  The actual spend of R12,5 billion in 2011 was divided between sustaining capital of R8,2 billion and expansion capital of R4,3 billion.

  		2011 Actual R million		Five-year planned spending R million
  	General Freight	5 758		39 009
  	Export coal	3 138		14 498
  	Export iron ore	3 646		10 196
  	Total*	12 542		63 703

  * Excluding capitalised borrowing costs and including capitalised finance leases.

  Sustaining and expanding operations

  FREIGHT RAIL’S CAPITAL EXPENDITURE PROGRAMME:

  R12,5 billion focused on increasing capacity, as well as maintaining and replacing infrastructure and rolling stock to meet customer demand for freight transport more efficiently.

  THE CAPACITY EXPANSION PROGRAMME

  is well underway and the acquisition programme of 110 new 19E locomotives is gaining momentum.

  General Freight business

  Ageing locomotives and the shortage of rolling stock continues to challenge the business. Although the 50 Class 39 diesel locomotives have been delivered and commissioned into service, General Freight remains pressurised by increased market demand.

  Delivery of the 100 Class 43 diesel electric locomotives has begun and will assist in improving availability and reliability of the General Freight business fleet and to increase capacity to 110mt over the next five years. For further detail refer to the Capital investment report.

  Freight Rail follows a strategy of standardising locomotive types to corridors. The planned augmentation of Class 34GE, Class 10E1 and Class 7E locomotives cascaded from the export lines in the short to medium term will provide much needed capacity.

  Strike-damaged locomotives and locomotives in the “parked” fleet have been repaired to create additional capacity in the General Freight business. Freight Rail has continued with various sustaining wagon projects that have created additional capacity for the General Freight business.

  The locomotive and wagon fleet plan has been updated to address growth requirements and the Shareholder mandate. Due to the additional capital required, alternative funding options in the form of private sector partnerships (PSPs) are requested, where specific wagon types are dedicated to a single client or PSP opportunities exist in specific growth sectors.

  Export Coal line

  Plans are in place to increase capacity to 81mt and together with sustaining capital investment is estimated to be R37 billion over the next 10 years. The acquisition of 110 new Class 19E locomotives, as set out in the Capital investment report, is gaining momentum and together with planned infrastructure upgrades will facilitate the planned expansion.

  Infrastructure network sustaining projects are on schedule. Formation rehabilitation, optic fibre cable replacements and signalling will be completed in 2012.

  A ‘Quantum Leap’ initiative was implemented during the year to accelerate improvements in the coal line’s performance, which realised the following:

  •	An improved railway planning system;
  •	Upgrades to 7E and 10E locomotives;
  •	Upgrades to sections of the railway line from 20 ton/axle to 26 ton/axle; and
  •	Acquiring 800 additional Jumbo wagons to commence the standardisation of the wagon fleet for operational simplicity and efficiency.

  The standardisation of jumbo wagon to the coal line facilitated the cascading of the “small” wagons to the General Freight business, thereby creating much needed capacity.

  Iron Ore line

  As set out in the Capital investment report the acquisition of 44 and 32 Class 15E locomotives will facilitate the increase in iron ore capacity to 61mt.

  Derailments during the year necessitated additional, yet unbudgeted, capital funding to implement initiatives to mitigate these and other similar incidents. Additional funding was required to repair and replace 128 derailed wagons (R175 million); implement various rail monitoring systems (R20 million); and accelerate the rail replacement programme to upgrade aged infrastructure.

  The strategic move towards standardising rolling stock to reduce operational costs will increase operational efficiency and allow diesel locomotives to be cascaded to the General Freight business, thereby providing capacity to meet volume commitments.

  The five-year capital investment plan

  Investment in the two export lines is primarily to increase capacity to meet customer demand. The export coal line and the export iron ore line will be increased to 81mt and 61mt respectively. Any further investment will be done in conjunction with the industry. Significant investment in the General Freight business is required to meet customer demand and productivity improvements.

• BBBEE performance

  The BBBEE performance for 2011 was 75% against a planned spend of 70%. Key factors contributing towards the successful achievement of the target included:

  BBBEE PROCUREMENT Target 2011: 70%. Actual spend: 75%.

  • Assisting suppliers to improve their BBBEE status by guiding them on procurement policies and procedures as well as the BBBEE ‘codes of good practice’; • Providing BBBEE information regarding requirements at Freight Rail supplier road-shows; • Sensitising Freight Rail line functions with regards to BBBEE when communicating with suppliers; and • Inserting relevant BBBEE clauses in tender documents.

  
  

• Safety performance

  Despite considerable efforts to improve safety, employee fatalities and derailments remain a major concern. Freight Rail regrets to report eight work-related employee fatalities during the financial year. Freight Rail conveys its deepest condolences to the families and friends of the employees who lost their lives on duty.

  Safety in operations is critical to efficient and reliable rail service delivery. Numerous safety programmes have been implemented over the past five years, resulting in improvements in various areas. Safety performance is, however, not yet at acceptable levels. Freight Rail will focus on the following safety imperatives going forward:

  •	Fostering a culture of compliance to standard operating procedures and tough consequence management for deviations;
  •	Embedding the safety management system (SMS) throughout the organisation to improve the overall safety performance;
  •	Improving effectiveness of the “5-S Programme” (supervision; speed; signals; substance abuse; sleepiness) to prevent incidents in a proactive manner;
  •	Reducing occupation health exposures and improving regulatory and legislative compliance; and
  •	Utilising technology to proactively detect possible points of failure and to counter human error.

  Freight Rail’s safety initiatives are specifically focused on reducing the number and severity of incidents that result in employee injuries, fatalities, and damage to rolling stock and infrastructure. Initiatives are integrated with operational delivery and guidelines to be implemented in the areas of technology, infrastructure, resource management and centralised train control management.

• Environmental management

  Freight Rail is committed to a responsible approach to handling environmental issues going forward, including:

  •	Considering environmental impacts at the planning, construction, operational and decommissioning stages of infrastructure and rolling stock;
  •	Rehabilitating historically contaminated areas;
  •	Undertaking environmental risk assessments to focus on root-causes of pollution and developing risk treatment plans to prevent and reduce product spillages in operational areas;
  •	Determining the carbon footprint of the business; and devising both adaptation and marketing strategies accordingly to leverage the inherent environmental friendliness of rail in terms of its lower cost of externalities; and
  •	Implementing the ‘Waste Management Policy Framework’ and waste management ‘hierarchy’, to prioritise the most critical waste management requirements.

  
  

  Contamination and pollution

  Freight Rail has introduced numerous initiatives to manage contamination and pollution at its operational sites. Key initiatives include:

  •	Developing programmes for hydrocarbon pollution elimination and asbestos management, and establishing committees to monitor outcomes for each programme.
  •	Implementing pollution-prevention risk treatment plans at individual depots to ensure that clean-up initiatives remain sustainable and pollution does not re-occur.
  •	Encouraging lessees to make financial contributions to the Rehabilitation Trust Fund through an accelerated lessee management programme.
  •	Rehabilitating historical asbestos contaminated sites and providing personal protective equipment, such as dust masks, to operational personnel deployed at hotspot asbestos risk areas.
  •	Continuously monitoring infrastructure in coastal areas and railway lines bordering pans and dams.

  
  

  Trains entering the Port of Ngqura

  Freight Rail reviews environmental aspects as part of the overall environmental management system (EMS). Aspects are communicated to line management to ensure environmental impacts are managed and pollution is minimised.

  Climate change

  It is estimated that Freight Rail’s growth of containers being transported on rail – as opposed to road – reduced the number of heavy haul vehicles on roads by 51 547 trucks. The environmental impact of this shift is substantial. Total savings, even with the increase in container movements on rail, compared to the initial road container movements, amount to an external cost saving of approximately R30 million, and CO₂ emissions savings of 13 527 tons.

  Waste management

  During the year, Freight Rail performed a full review of its Waste Management Policy Statement and Management Frameworks. Of significance is the commitment to the implementation of a waste ‘hierarchy’, underscored by the principles of ‘precautionary duty of care’ and ‘polluter pays’ when handling waste.

  Freight Rail is conducting a feasibility study for the development of a hazardous landfill site for disposing of asbestos waste using a ‘waste-by-rail’ model

• Human capital

  Freight Rail initiated the “1 800 Operators” recruitment campaign nationally to enhance the operational feeder channels, including the creation of 119 entry-level operations jobs for the Container and Automotive business. Many of Freight Rail’s operations are in smaller municipalities and rural areas, leading to economic stimulation in those areas. This is coupled with skills development programmes in operational and technical fields, and professional support to improve human capital development.

  Freight Rail recorded numerous achievements in the area of human capital during the year:

  •	The ’Graduates in Training’ programme resulted in 36 of the 48 participants attracted for an 18 – 24 month period being successfully placed in permanent positions in the organisation. The remaining 12 are still undergoing training.
  •	Of the 19 ‘people with disabilities’ who were given internships, 40% completed their training successfully whilst the remainder remain in training.
  •	The ‘Engineering Empowerment Programme’ was successfully launched and implemented, with the first intake of 10 depot engineers and five trainee depot engineers starting their programmes in December 2010.
  •	The ‘Management Development Programme’ was successfully launched and piloted. Of the 12 candidates who attended the pilot programme, seven have already been appointed as operations trainee managers.
  •	Of the 16 training initiatives planned for the year, nine were implemented successfully. These included: the ‘Accelerated Development Programme for Women’; the ‘Institute of Management Development Programme’; Phase 2 of the ‘First Line Management On-boarding Programme’; ‘Navigator Programme’; ‘Finance for Non-Financial Managers Programme’; and the ‘Executive Coaching International Management Programme’.

  Freight Rail achieved and exceeded the employment equity (EE) target of 77%, by giving preference to the recruitment of black, female and disabled job applicants. This was achieved by filling positions with suitably qualified candidates, using the broad guideline of 70% black, 30% white and 15% – 20% female candidates. This guideline, however, was not applied to positions where there is a critical scarcity of skills and where specific expertise or professional competencies were required.

  Freight Rail training spend was 2,2% in 2011 as a percentage of personnel costs. This is lower than the target of 2,7%. Compared to the national percentage benchmark of 5,0%, and a benchmark internationally of 10,0%, Freight Rail is not on par.

  In the year ahead, Freight Rail will continue to recruit new skills in fields such as econometrics, economic research and economic regulations to position the business strategically. Skills recruitment is facilitated in accordance with workforce plans.

• Governance

  Regulatory environment

  The rail policy and regulatory environment is dynamic at present, as various stakeholders, including Transnet and Freight Rail consider alternatives for rail reform. There are numerous initiatives underway within the Department of Transport (DoT) to facilitate rail reform. Cabinet has not formally adopted any of these proposals, all of which will potentially take several years to implement. It is, therefore, unlikely to affect Freight Rail’s business plan for at least the next two years. The key DoT initiatives encompass the following:

  •	The scope of the National Freight Logistics Strategy, 2005, Rail Review team, comprising Government, the Railway Safety Regulator, the Rail Road Association and Transnet, is focusing on revitalising branch lines, facilitating institutional arrangements and promoting economic regulation.
  •	The National Transport Master Plan, 2050, makes far-reaching policy proposals in respect of the following: vertical separation; high-speed rail; new rail links; access by private rail operators; introduction of rail economic regulation and rail gauge.
  •	The DoT recently appointed consultants to advise on a ‘National Rail Transport Policy’ and by mid-June 2011 had issued a green paper for public comment.
  •	The Minister of Transport recently announced the possibility of establishing a single transport economic regulator to regulate all transport modes.

  In addition to the DoT initiatives, Transnet commissioned a study to perform a transport economics analysis of South Africa’s freight rail challenges and to propose an optimal configuration of the freight rail system. The study, which will address rail reform challenges, will inform Transnet’s engagement with Government on rail reform. Further work beyond this study may also be required based on the engagement with government.

  Manganese stockpiles at the Port of Port Elizabeth.

  
  Top 10 risks and mitigating plans

  The table below outlines Freight Rail’s Top 10 risks and provides an overview of key mitigating plans. Each risk is cross-referenced in the tabled section titled “Strategy and implementation” that follows.

  		Risks	Mitigating plans		Area of strategic impact
  		Productivity efficiency risk: Inability to move planned volumes as a result of ageing rolling stock and infrastructure leading to a reduction in operating effectiveness and revenue loss.	• Integrating planning and deviation management to ensure co-ordinated business continuity practices. • Optimising network capacity and capability. • Implementing ‘Order to Execution’ processes. • Integrating rolling stock repair and maintenance plans with Rail Engineering fleet management activities. • Enhancing condition monitoring on rail tracks using stress monitoring devices. • Incorporating all occupations into the train plan (including trolleys) and implementing the occupations management process.		Volumes, operational efficiency, financial performance, safety and human capital.
  		Human capital risk (Competency): Lack of competent, willing and empowered management of the workforce leading to poor organisational performance.	• Institutionalising the principles of the Transnet Culture Charter throughout Freight Rail to create an empowered workforce. • Uplifting the skills of supervisors and operational employees. • Conducting performance reviews to identify competencies for optimal skills utilisation. • Implementing effective executive leadership and management programmes, supported by career and learning paths. • Implementing consequential management for non-adherence to human capital (HC) policies.		Volumes, operational efficiency, financial performance and human capital.
  		Commercial risk: The financial performance and going-concern status threat in respect of Transnet’s major third party provider of Information, Communication and Technology Systems.	• Escalating ICT performance issues to Group level, particularly to the Chief Information Officer and the Chief Risk Offer. • Appointing alternate ICT system suppliers. • Funding and constructing network elements. • Reviewing the ‘Transnet Service Provider Agreement’ and legal avenues to prevent confiscation of assets. • ‘Buying back’ selective infrastructure elements, eg transmission and radio.		Financial performance.
  		Industrial relations risk: The pressure in the industrial relations landscape resulting in strike action.	• Developing contingency plans to ensure business interruption is minimised. • Reviewing and improving the effectiveness of the Freight Rail Strike Contingency Plan. • Training and certifying management in operations to ensure leadership continuity in the event of a strike. • Building capacity in employee relations at all levels of management.		Volumes, operational efficiency, financial performance and human capital.
  		Market structure risk: Implementation of branch lines strategy in the absence of guiding policy reform.	• Conducting international benchmarking regarding granting of rights to third parties and associated legal implications. • Participating in the policy reform process and providing industry knowledge. • Developing response strategies for the impact of concessions on Freight Rail’s operations. • Resourcing Transnet to administer all processes in accordance with policy and regulations.		Financial performance.
  		Environment, safety and security risk (Health and safety): Non-compliance with safety and standard operating procedures (Train Working Rules) leading to safety incidents, fatalities business interruptions and poor customer service.	• Implementing initiatives to reduce safety incidents as well as the cost of retained losses from incidents. • Supporting employee safety behaviours through a reward and recognition programme. • Building safety capacity through integration of safety training and skills development. • Consolidating and integrating the safety programme, with emphasis on technology and culture change management initiatives. • Managing incident investigations through an independent structure to identify and mitigate root causes. • Implementing ‘root cause analysis’ training for safety practitioners and line managers. • Performing impact assessments on the infrastructure of longer and heavier trains.		Human capital, safety and environment and operational efficiency.
  		Revenue performance risk: Lack of correlation between costs and activities.	• Accelerating the wagon-scrapping programme. • Using scrap to reduce cost of wheels and other maintenance components. • Fast-tracking public-private partnerships (PPPs) for specialised wagon types. • Renegotiating prices/conditions with customers and seeking alternatives to reduce input prices.		Financial performance.
  		Environment, safety and security risk (Environment): The negative impact of railway operations on the environment leading to environmental degradation as well as the impact of the environment on railway operations.	• Completing the “Conduct Carbon Footprint” study and developing adaptation strategies for Freight Rail to cushion the effects of climatic change. • Continuing to implement the national asbestos and hydrocarbon clean-up programme. • Implementing projects to eliminate historical pollution and spillage. • Implementing the ballast waste management programme. • Implementing an accelerated lessee management programme. • Consistently monitoring infrastructure in coastal areas and railway lines bordering pans and dams.		Safety and environment.
  		Procurement and contract management risk: Non-adherence to contract lifecycle management process leading to negative publicity, exposure to fraudulent activities, and overspending.	• Ensuring proper implementation of contract lifecycle management (CLM) processes and tools within Freight Rail, from conception to procurement, to management handover of the contract. • Providing CLM Training to relevant employees. • Ensuring effective compliance monitoring of the CLM processes once implemented. • Reporting on compliance exceptions and investigating anomalies.		Financial performance, infrastructure and procurement.
  		Capital projects risk: Ineffective implementation and execution of capital projects.	• Incorporating risk management processes in all capital project processes. • Implementing and executing project lifecycle processes according to planned objectives, and approved time and budget requirements.		Volumes, financial performance, infrastructure, procurement and operational efficiency.

  
  

  Transnet Freight Rail personnel at the Manganese Terminal – Port Elizabeth.

  
  

• Strategic initiatives

  Overview

  In the year ahead Freight Rail will mobilise all resources to contribute to volume growth and greater tonnages transported efficiently by rail, rather than road, to reduce the cost of transport in the country. A key focus will be on service delivery to customers and to motivating employees to contribute meaningfully to the success and sustainability of the business.

  Freight Rail is targeting significant growth in the export coal and iron ore lines as well as in mining and heavy manufacturing commodities over the next five years. The potential general freight five-year volume target has been validated, and significant demand exists. This presents opportunities for future growth, which will be targeted in line with national objectives and particularly in those areas identified by the NGP. The aim is to achieve volume growth and increased market share whilst reducing the cost of externalities.

  To achieve this, focused business units will be created within Freight Rail to manage the strategic commodities more effectively on a customer and business sector basis, which will include the coal business (export and domestic), export iron ore and manganese business, container and automotive business, cement and steel business, mineral mining and chrome business as well as wagon load business (agriculture, steel and Africa).

  The Operating division will continue to focus on modernisation of the locomotive fleet to meet market demand. The five-year Capital Investment Programme will be reprioritised to address operational constraints, improve allocation to specific growth market segments, and to create capacity for junior miners.

  Strategy and implementation

  The tables below outline the business drivers and key initiatives for each strategic area and include management commitments and prospects for each area. Key risks are included and referenced to the ‘Top risks and mitigating plans’ table in the Governance section of this Operational review.

  		PRODUCTIVITY AND EFFICIENCY
  Business drivers and key initiatives		• Implementation of a revised integrated train plan for the General Freight business enabling volume growth. • Optimise capital and maintenance expenditure. • Optimise investment in rail to enable growth, capacity creation and to eliminate bottlenecks. • In co-operation with Transnet valuate opportunities for private sector participation to provide funding for major capital projects.
  Challenges going forward		• Key operational and technical positions cannot easily be filled due to skills shortages. • Safety and security incidents reduce the operational availability of key resources and hamper efficiency improvements. • Locomotive and infrastructure investment on the Export coal line is not yielding the expected benefits. A 10% improvement is required to achieve the expected 58-hour turnaround time. • Ageing rolling stock requires renewal.
  Key risks		Productivity efficiency risk. Human capital risk (Competency). Environment, safety and security risk. (Health and safety). Capital projects risk.
  Management commitments		• Locomotive and wagon operational efficiency improvements include:   – General freight locomotives – 5%;   – General freight wagons – 14,5%;   – Export coal locomotives – 45%;   – Export coal wagons – 23,5%;   – Export iron ore locomotives – 14,7%; and   – Export iron ore wagons – 11,8%.
  Prospects		• Revised service designs, a new train plan, capital and maintenance programme implementation, operational processes and improved operational discipline in execution will all contribute to better asset utilisation and operational efficiencies, ultimately paving the way to the operation of a scheduled railway since this is a network business all these factors must work in tandum to achieve these desired outcomes.

  
  

  		VOLUME GROWTH
  Business drivers and key initiatives		• Grow rail volumes in key general freight sectors. Commodity specific growth will focus on rock phosphate, chrome, manganese, magnetite, Eskom coal and fuel. • Grow container market share. • Focus on volume growth of Export coal and Export iron ore lines. • Increase rail market share and address the rail volume demand of domestic producers. • Create and allocate capacity to emerging miners.
  Challenges going forward		• Growing volumes in a capacity constrained environment. • Constrained resources, infrastructure unreliability and poor customer service pose challenges to the shift of traffic from road to rail. • The creation and allocation of capacity to emerging miners remains a challenge. • Challenges to the success of the container and automotive business include inland container and automotive terminal capacity (City Deep, Kaserne, and Pretoria); port rail handling and stack capability (Durban); train unreliability; network availability; locomotive shortage; and automotive wagon shortage.
  Key risks		Productivity efficiency risk. Human capital risk (Competency). Industrial relations risk. Capital projects risk.
  Management commitments		• Volume targets for 2012 include:   – 84,4mt in the General Freight business (including 4mt subject to Eskom volume ramp-up).   – 70mt Export coal.   – 51,6mt Export iron ore.
  Prospects		• Freight Rail expects to transport approximately 206mt of export and domestic commodities in 2012, with anticipated growth of approximately 252mt by 2016 with an associated investment in additional rolling stock. • The container import and export market holds potential for growth. The rail market-share target was reviewed to 50% for conversion of road to rail traffic. The domestic rail market will be led by the containerisation of Eskom coal as well as the development of the bi–modal strategy to convert road traffic to rail. • The imminent signing of the Toyota contract holds potential for both domestic and import/export flows, and for inland OEMs converting to rail, specifically Ford and Nissan. The Government’s Automotive Production and Development Programme will lead to an increase in automotive demand for rail. • Over-border volume growth is set to increase, with a focus on exports through Maputo and other cross-border rail traffic.

  
  

  		CAPITAL INVESTMENT
  Business drivers and key initiatives		• Commence the procurement process for the locomotive standardisation and replacement programme. • Commence the procurement process for the coal line expansion programme to 81mt. The programme has received PFMA approval. • Implement and execute Government mandate initiatives, including:   – Creating capacity for emerging miners;   – Identifying projects for private-sector partnership agreements to reduce the constraint on capital funding; and   – Focusing on integrated capital prioritisation. • Ensure capital optimisation through the implementation of the capital portfolio methodology.
  Challenges going forward		• The General Freight business continues to experience increased pressure on capacity due to its ageing locomotive, fleet and shortage of rolling stock. This is coupled with severe pressure from increasing market demand for locomotives.
  Key risks		Procurement and contract management risk. Capital projects risk.
  Management commitments		• A robust capital investment plan of R5,1 billion over five years has been developed to upgrade infrastructure to a condition where 81mt can be sustained on the coal line.
  Prospects		• The reprioritisation of the capital portfolio creates the opportunity to allocate potential savings to projects that are focused on capacity creation and safety. • The capital pipeline will be prioritised to ensure that the most critical projects are placed on the planning horizon and accelerated.

  
  

  		FINANCIAL SUSTAINABILITY
  Business drivers and key initiatives		• Ensure strategic cost optimisation, using cost categorisation and analysis to enhance focus and planning. • Align and implement pricing policies and governance methodologies. • Optimise working capital and cash requirements by improving cash forecasting techniques. • Optimise inventory levels to assist business activities in relation to capital expenditure and maintenance. • Implement an accounting system that will separate infrastructure from operations to enable a clear understanding of the related cost structures. • Implement a SAP-based asset stabilisation initiative.
  Challenges going forward		• Inaccurate cash flow management and forecasting could result in potential funding inefficiencies at a Transnet level.
  Key risks		Productivity efficiency risk. Human capital risk (Competency). Commercial risk. Industrial relations risk. Market structure risk. Revenue performance risk. Procurement and contract management risk. Capital projects risk.
  Management commitments		• Freight Rail’s planned capital investment for 2012 amounts to R14,7 billion and to R63,7 billion over the next five years (excluding capitalised borrowing costs).
  Prospects		• The target revenue for 2012 is R27,8 billion, an increase of 23,1% compared to the 2011 actual revenue of R22,6 billion. The revenue increase is mainly due to the planned volume growth and tariff increases (including tariff increases for the Export coal and Export iron ore customers).

  
  

  		HUMAN CAPITAL
  Business drivers and key initiatives		• Facilitate specialised training programmes to develop skills of engineers, technicians, artisans, depot and senior engineers, train control staff and train movement staff in line with NGP commitments. • Implement an enhanced train handling skills development initiative through simulation, task observation and on-the-job training. • Ensure appointments in pivotal roles in the container and automotive business in response to internal and external audits and compliance to Basic Conditions of Employment Act. • Revise and align the employment equity plan with the headcount management system.
  Challenges going forward		• There is a national skills shortage in the fields of engineering, technical and operational expertise. • The rapid behavioural culture change required to improve business performance remains a challenge.
  Key risks		Productivity efficiency risk. Human capital risk (Competency). Industrial relations risk. Environment, safety and security risk (Health and safety).
  Management commitments		• Facilitate specialised training programmes for engineers, technicians, artisans, depot and senior engineers, train control staff and train movement staff in line with NGP commitments: October 2011 – 2014. • Implement an enhanced train handling skills development initiative through simulation, task observation and on-the-job training: June 2011. • Perform workload analysis on selected safety critical positions: August 2011. • Revise wellness, and occupational health policies: September 2011.
  Prospects		• Employee numbers are anticipated to grow from 23 665 to approximately 25 900 in 2012 and 28 920 by 2016. Employment growth will be in the areas of train drivers, operational, technical and engineering positions required to meet freight volume growth and to comply with all relevant legislation. • At least 2% of personnel costs will be spent per annum on training and development of employees and building leadership competence.

  
  

  Operation in Saldanha.

  
  

  		SHEQ
  Business drivers and key initiatives		• Embed the safety management system (SMS) to improve the overall safety performance. • Assess environmental impacts at planning, construction, operational and decommissioning stages of infrastructure. • Prevent and reduce product spillages in operational areas and rehabilitate contaminated areas. • Ensure equipment, such as locomotives, wagons, storage areas, and maintenance depots are fit for use. • Determine the carbon footprint of the business, devising both adaptation and marketing strategies to leverage the benefits of rail in terms of its lower cost of externalities. • Implement EMS and achieve ISO Certification for identified piloted operational areas. • Implement a lessee management programme to manage lessee compliance with environmental standards, including a risk-based assessment of leased sites and the development of a pollution baseline. • Implement waste information systems and programmes. • Perform hydrocarbon pollution risk assessments countrywide and implement awareness sessions around hydrocarbon pollution.
  Challenges going forward		• It will take longer than anticipated to develop the SAP-based waste information system to accurately report on waste generated, recycled and reused. • A lack of capacity within maintenance challenges technical preventative measures to manage pollution from ageing locomotives. • Compliance process requirements (eg the public participation process) can delay the clean-up of asbestos contaminated areas. • Vandalism of fences required to protect non-operational quarries challenge safety.
  Key risks		Environment, safety and security risk (Health and safety). Environment, safety and security risk (Environment).
  Management commitments		• Reduce the number of overall environmental incidents: Target 60% on an annual basis. • Upgrade the locomotive fuel facility: Target 60% assessment completed for 2012. • Implement integrated environmental management in all operations: Target 100% of all operational areas to be audited. • Perform risk assessments and root-cause analysis and implement pollution (hydrocarbon and product spillages) preventative measures: Target 100% as per environmental management plan. • Implement an environmental management system: Target 100% ISO 14001 certification of piloted areas.
  Prospects		• The implementation of the funded country-wide asbestos and hydrocarbon pollution elimination programmes will reduce pollution and liability exposures. • The ’Accelerated Lessee Management Programme’ will help to embed environmental best practice into lessee agreements and guide the proper management of high risk lease sites. • ISO 14001 certified piloted areas will contribute significantly to customers’ confidence in Freight Rail’s environmental systems. • Commitments made in the Waste Management Policy Statement will be implemented, thereby reducing waste generation going forward.