Capital investment report€¦ · Transnet Port Terminals (Port Terminals) Port Terminals invested R866 million during the year with the majority of the investment targeted at the

Transnet SOC Ltd Integrated Annual Report 201196

Capital investment report


The principal objective of the TIP is to provide

Transnet with a 30-year framework for the planning

and development of its port, rail and pipeline

infrastructure, to ensure that adequate

infrastructure capacity is created ahead of demand.

The five-year Capital Investment Plan is reviewed

annually and interrogated through a robust process

to ensure alignment to the TIP requirements and

the strategic objectives of the Company as

reflected in the Compact with the Shareholder.

Capital investments: 2011

Capital investment for the year amounts to

R21,5 billion which is the most significant

investment in a financial year by the Company and

also represents a 16,6% increase in investment

compared to the prior year. This reflects the

Company’s commitment to providing a responsive

infrastructure that creates capacity ahead of

demand and satisfies the demands of a growing

economy.

Notwithstanding the challenges experienced during

the year to roll out the capital investment plans, the

spending for the year represents 94,2% of the

targeted spending.

As set out alongside, the investment of

approximately 58,3% by the rail sector supports

the required major upgrades as well as replacement

of existing assets. The New Multi-Product Pipeline

(NMPP) from Durban to Johannesburg is the second

largest investment, that ensures the security of

fuel supply to the inland market.

Transnet Infrastructure Plan: A framework for capacity planning and creation

Transnet is the key driver and enabler of South Africa’s transport logistics infrastructure and is one of the primary contributors in planning for South Africa’s future freight transport infrastructure capacity requirements. These plans are continuously updated to account for changes in market demand and are then incorporated into the Transnet Infrastructure Plan (TIP).

Capital investment report

Overview of major projects

Highlights of the Operating division projects are

set out below whilst more details on the mega

projects that are managed and executed by Capital

Projects, are set out in the section dealing with the

Transnet Freight Rail (Freight Rail)

The investment of R12,5 billion by Freight Rail

was made in the commodity export lines (coal and

iron ore) and in the general freight business which

constitutes 57,1% of the total revenue of Transnet.

The average age of the assets for General Freight

are well above benchmark standards and will

consequently remain a key component of the

investment plans going forward.

Major capital investments in the various projects

Capitalisation of infrastructure and wagon

maintenance/replacement

During the year 555km of rail and 292km of

sleepers were replaced and 528km of track were

screened, which resulted in the track life being

increased. Altogether 12 900 wagons underwent

major lifting programmes.

Upgrade of Class 6E1 locomotives to Class 18E

During the year 41 locomotives were upgraded.

These upgraded locomotives with higher

output have been successfully deployed on

various corridors in the general freight business

sector.

*Includes

intercompany

eliminations and

other adjustments.

Capital investments: 2011

(R billion)

Rail 12,5*

Ports 2,9

Pipelines 6,1

(%)

Rail 58,3*

Ports 13,5

Pipelines 28,2

Port of Richards Bay.

99

Capitalisation of locomotive maintenance

The implementation of improved monitoring

systems and focused control on locomotive

maintenance has resulted in timely locomotive

overhaul programmes which will improve reliability

and availability over the longer term.

General Freight volume expansion: CR 16 wagons

To meet business requirements, 354 CR16 wagons

have been deployed to the Port Elizabeth corridor

where these wagons are being used for the export

of manganese.

Yard safety automation

The aim of the project is to reduce the number of

derailments in Freight Rail shunting yards through

the automation of points and certain shunting

activities. The Ermelo, Bayhead and Beaconsfield

yards have already been completed.

Conversion of BA to C type wagons

During the year 410 wagons have been converted to

increase the capacity of these wagons from 48 tons

to 60 tons providing much needed additional

capacity for General Freight mining commodities.

Freight Rail plans on converting a further

380 wagons in the year ahead.

Train driver simulators

Of the planned 19 simulators, 18 have been

delivered and although some software/data must

still be installed, the simulators are in operation and

used for the training of train drivers.

Transnet Rail Engineering (Rail Engineering)

Rail Engineering’s investment of R532 million is

primarily executed to provide the maintenance

support and the building of rolling stock facilities

to harness volume growth of Freight Rail. Major

engineering projects include:

facilities on the Richards Bay Corridor to support

Freight Rail in ramping up coal export volumes

to 81mt.

project entailed the construction of maintenance

facilities at City Deep to perform minor

maintenance on locomotives before departure

without removing it from service. The project was

completed in March 2011.

Transnet National Ports Authority (National Ports Authority)

The major investment by National Ports Authority

for the year was in the container sector with an

amount of R1,1 billion invested in port

infrastructure for the anticipated growth in

containers at the Ports of Cape Town, Ngqura

and Durban.

Major infrastructure and equipment delivered in the

year include: three tugs (two in Durban and one in

Richards Bay), one dredger (the Isandlwana) and the

bulk liquid berth in Richards Bay.

Safety related investments at all ports, in line with

the International Ship and Port Security (ISPS) code,

were approximately R68 million and included the

provision of optic fibre cable, CCTV network and

port access controls.

Details of the investments in the different sectors

are reflected in the pie chart to the middle left.

Key projects completed

creating 1,25mt of capacity.

cubic metres of dredging capacity.

Transnet Port Terminals (Port Terminals)

Port Terminals invested R866 million during the

year with the majority of the investment targeted at

the container sector (Cape Town, Ngqura and

Durban) and the bulk sector (Richards Bay, Saldanha

and Agriport Durban). Details of projects concluded

and commenced during the year are as follows:

new conveyors and steel shed for soya bean meal

was installed and commissioned. The project

was successfully commissioned at a cost of

approximately R114 million, significantly below

budget. This new shed boosts the overall storage

capacity of the Agriport grain and soya bean meal

facilities.

quayside fleet commenced and an order was

placed for the replacement of the alumina berth

ship unloader (for key aluminium customer in

Richards Bay). This project is progressing well

with delivery and commissioning planned for

October 2012. An order was also planned in June

2011 for the supply of a replacement ship loader

for the export berth.

in the container terminals, specifically Durban

Container Terminal Pier 2 and Port Elizabeth

Container Terminal is underway.

Terminal have received a significant capital

injection of R52 million. This project is mid-way in

execution and will be completed in the year ahead.* Other includes

break-bulk,

automotives and

investments to

support all sectors

mentioned above

* Other includes

break-bulk, dry bulk,

automotives and

investments to

support all sectors

mentioned above

Freight Rail capital investment per sector (%)

Export coal 25,3%

Export iron ore 29,1%

General Freight 45,6%

National Ports Authority capital investment by sector (%)

Containers 55,4%

Liquid bulk 7,9%

Other* 36,7%

Port Terminals capital investment by sector (%)

Containers 50,6%

Bulk 45,2%

Other* 4,2%


Capital investment report (continued)

Key projects completed

capacity created.

Increase in capacity from 2,8mt to 4,8mt.

Transnet Pipelines (Pipelines)

After more than 45 years, the pipeline between

Durban and Johannesburg (DJP) is being replaced

with a new 24-inch diameter trunk line, the NMPP.

This pipeline with sufficient capacity for the future

is well in progress requiring major capital

investment as reflected in the R5,6 billion invested

during the year. The pipeline will be phased into

operation between early 2012 and the end of

2013 whilst further investments (additional

pumpstations) will be made in future years to create

more capacity.

The remaining portion of Pipelines’ investment

(R297 million) is on upgrades on other pipelines,

replacement of equipment and the safeguarding of

the operations and the overall security of the

pipeline network. Details are set out below:

was made on the telemechanical upgrades at the

various depots (7) and is closely aligned to the

completion of the various phases of the NMPP.

The projects are not yet complete and are

scheduled to be completed over the next two

financial years (four in 2012 and three in 2013).

Assets installed by these projects are in

operation.

currently in design stage and entails improving

the security infrastructure at all Pipelines’ sites

design has commenced and is expected to be

complete by the end of the 2012 year.

the Tarlton spill dam, emergency sirens, gas

supply to the refractionator, Ladysmith prover

and manifold correction have also been

completed and are operational.

other capital projects such as the DJP intelligent

pigging are in execution, and the business is

already realising the benefits of the investment.

For example the postponement of the down

rating of the DJP to 2013 as a result of the

information obtained through the intelligent

pigging exercise.

Transnet Foundation

The construction of the state-of-the art healthcare

train, the Phelophepa II has commenced at Rail

Engineering workshops in Salt River, Cape Town.

Transnet has to date invested R53 million in the

project. Six out of the 18 coaches have been

completed and the train is expected to be

operational during 2012. This project forms part of

the key focus areas of the Foundation strategy and

Transnet’s commitment to make a contribution to

healthcare in South Africa.

Port of Durban.

101

Iron ore line expansion – all phases up to 61mt (including locomotives)

The iron ore line is the main export channel for iron

ore from the mines in the Northern Cape to the Port

of Saldanha. Plans are in place to increase capacity

to 61mt. The expansion of the iron ore line is

progressing well. Capacity created to date is

approximately 61mt on the rail channel and 52mt

at the port.

The acquisition of 44 and 32 Class 15E locomotives

will facilitate the increase in iron ore capacity to

beyond 61mt. Of the 44 Class 15E ore line

locomotives 34 locomotives have been delivered to

date. Altogether 31 have been accepted into

operations with three locomotives undergoing

acceptance testing. The remaining locomotives are

planned for delivery in 2012.

Of the 32 Class 15E locomotives, 25 locomotives

are planned to be delivered in 2013 and seven

locomotives are planned for delivery in 2014.

During the year R3,0 billion was invested on iron ore

expansion projects and locomotives acquisitions,

with future investment expected to be R4,1 billion

over the next five years.

In addition the following have commenced or are in

progress:

South) to the main line is being constructed and

Progress on mega projects

A significant component of the investment plan is geared towards infrastructure, sustainability and

capacity creation to support volume growth for export iron ore, export coal, containers, manganese and

petroleum products (imported and piped). The projects undertaken require thorough studies, planning,

design and engineering before execution.

The table below reflects Transnet’s mega project portfolio:

Mega projects

Estimated total

costs (ETC)R million

2011R million

Spendingsince

inceptionto 2011

R million

Iron ore line capacity expansion to 41mt: Rail 4 105 424 2 700

Iron ore line capacity expansion to 41mt: Ports 1 264 32 1 187

Iron ore line capacity expansion to 47mt: Rail 3 190 866 2 592

Iron ore line capacity expansion to 47mt: Ports 1 225 157 879

Iron ore line capacity expansion to 61mt: Rail 3 722 1 437 1 834

Iron ore line capacity expansion to 61mt: Ports 567 79 333

Acquisition of 32 Class 15E locomotives for the iron ore line 2 000 268 268

Coal line expansion to beyond 63mt 3 824 414 831

Coal line expansion: Quantum Leap: Smaller projects to expedite creation of capacity

882 796 796

Coal line expansion to 81mt 5 100 174 174

Acquisition of 110 dual voltage locomotives for the coal line 3 405 925 2 116

Capitalisation of infrastructure maintenance 11 038# 1 265 3 236

Capitalisation of locomotive maintenance 8 885# 2 317 2 355

Capitalisation of wagon maintenance 8 700# 2 370 7 171

Acquisition of 100 new GE diesel electric locomotives 2 314 334 771

Construction of the Port of Ngqura 3 492 123 3 083

Ngqura Container Terminal 7 900* 461 4 842

Cape Town Container expansion 4 375* 741 2 697

Durban Harbour entrance channel widening and deepening 3 360 54 2 826

Reengineering of Durban Container Terminal 1 802 268 1 319

Reconstruction of sheet pile quay walls at Maydon Wharf 1 594 4 25

New Multi-Product Pipeline (NMPP)^ 23 407 5 612 11 588

# Future rolling five-year plan: 2012 – 2016

* ETC being revised

^ Investment in the NMPP represents a concentration risk to Transnet and the Company is exploring options to mitigate

the risk.



13km out of 32km of track installation has been

completed.

of port equipment has been successfully

implemented.

mooring hooks and boarding platforms to

facilitate staggered ship loading have been

completed.

upgrade, road over rail bridge and loops are

progressing well with certain components

already complete.

This is a cross-divisional project and the rail and

port divisions are major roleplayers in the

investments.

Cape Town Container Terminal

The expansion of Cape Town Container Terminal

aims at increasing capacity ultimately to 1,4 million

TEUs to address growth in demand for containers in

the Western Cape region.

The first reconfigured terminal area for refrigerated

containers has been completed. 440m of the 1 130m

long quay wall has been deepened to -15,5m chart

datum. Certain sections of the reconfigured

stacking area have been completed. The contract for

the acquisition of 32 rubber tyred gantry cranes

(RTGs) has been completed and the equipment has

been commissioned to service (28 at CTCT and 4 at

DCT Pier 1). Six of the eight ship-to-shore cranes are

in operation.

Capital invested in the Cape Town Container

Terminal in 2011 amounted to R741 million and

R2,7 billion since the expansion was undertaken.

Planned investment over the next five years in

Cape Town Container Terminal is R2,4 billion.

Ngqura Container Terminal

The Ngqura Container Terminal is a new facility

located at the Port of Ngqura and provides

additional container handling capacity to the ports

system in South Africa.

The terminal has handled 410 000 TEUs in the

current year. The option to dredge the full two

berths was approved in 2010 and the contractor

commenced work in February 2011. Ngqura

Container Terminal is behind schedule and the first

phase of the project is planned for completion by

February 2012. The dredging of the full two berths

will result in capacity of the terminal increasing to

800 000 TEUs.

Investment in the Ngqura Container Terminal

including the rail component amounted to

R461 million in 2011 and future investment in the

terminal over the next five years is planned to be

approximately R1,5 billion.

Reengineering of Durban Container Terminal

The Durban Container Terminal is one of the busiest

container facilities in Africa. The project to

reengineer the terminal through reconfiguration

and equipment replacement will result in 920 000

TEUs of additional capacity.

An amount of R268 million was invested during the

year and R247 million is planned to be spent over

the next three years.

Coal line expansion to 81mt

The coal line is the main export channel for coal and

starts from the mines in Mpumalanga and ends at

the Port of Richards Bay. Plans are in place to

increase capacity to 81mt and together with

Coal train at the Port of Richards Bay.

103

sustaining capital investment is estimated to be

R37 billion over the next 10 years.

The acquisition of 110 Class 19E dual voltage

locomotives will facilitate the planned expansion

of the coal line to 81mt. The locomotives in

combination with wagons and upgraded

infrastructure are expected to result in the

increased throughput of export coal on the

Richards Bay corridor. Of the 110 Class 19E dual

voltage locomotives, 58 locomotives have been

delivered to date (44 in 2011 and 14 in 2010).

48 locomotives have been accepted into

operations. The remaining 52 locomotives are

planned for delivery at four per month over the

next 13 months.

Investment over the next five years is planned

to be approximately R6,2 billion for the three

expansionary mega projects and new locomotives.

New Multi-Product Pipeline

This is a strategic investment to secure the supply

of petroleum products to the inland market over the

long term. The line will replace the old DJP which is

running at full capacity and nearing the end of its

design life.

Some of the benefits of the NMPP include (when

fully operational) an increase in capacity from

4,4 billion litres to 8,4 billion litres resulting in a

significant reduction in the number of tankers on

the road, and a cost-effective and efficient mode of

moving petroleum products in an environmentally

friendly manner.

The cost of the NMPP in the current year has

increased from R15,5 billion to R23,4 billion. This is

due to increases in the cost of terminals, pump-

stations and project management. The increase is

related to additional scope, schedule changes and

higher than initially budgeted for costs.

The Company is confident that the revised schedule

and costs will not be exceeded. Due to the strategic

nature of the project, the Company has established

the NMPP Governance Steering Committee to

oversee the project to conclusion with specific

focus on risk mitigation pertaining to reputational,

commissioning, governance, engineering,

construction and design, financial, legal and

regulatory aspects.

The NMPP construction is progressing according to

plan and the entire project is on track for

completion by December 2013.

Acquisition of 100 Class 43 new diesel electric mainline locomotives

Acquisition of locomotives is planned for the

General Freight business and will assist in

improving availability and reliability of the General

Freight business fleet and the entire project is

expected to support the increase in capacity to

110mt over the next five years.

Two locomotives were delivered in January 2011

and are undergoing acceptance testing.

Eight more locomotive sets have been shipped

from the USA in April 2011. The remaining

90 locomotives will be assembled at Rail

33 locomotives are planned to be delivered in

2012 and 65 are planned for delivery in 2013.

An amount of R334 million was invested in 2011

and R771 million since the project commenced.

R1,8 billion is planned to be invested in this project

over the next three years.

Manganese stockpiles at the Port of Port Elizabeth.



Transnet’s rolling Capital investment plan: 2012 – 2016

Transnet remains committed to provide responsive infrastructure that creates capacity ahead of demand

and that satisfies the demands of a growing economy as reflected in the TIP against the backdrop of

affordability. Consequently the rolling five-year plan has been increased by 18% to R110,6 billion

(excluding capitalised borrowing costs of R5,9 billion) to meet the required volume demand and to support

the growth initiatives embarked on.

Transnet’s five-year R110,6 billion Capital investment programme to increase the capacity and efficiency

of the freight system is not sufficient to meet the needs of customers and the economy. Private sector

participation is therefore critical to bridge the investment gap. Investment plans for a number of the key

projects, such as supporting Eskom’s rail migration plan and finalising the strategy for the export of

manganese will depend on Transnet being able to strike partnerships with the private sector.

Details of the Operating division targets and projections are set out below.

Target Projections Totalfive years

R million2012

R million2013

R million2014

R million2015

R million2016

R million

Freight Rail 14 693 13 521 13 301 11 564 10 624 63 703

Rail Engineering 445 364 290 250 230 1 579

National Ports Authority

2 444 3 281 7 032 5 157 5 319 23 233

Port Terminals 1 686 960 741 711 933 5 031

Pipelines 6 113 3 827 2 894 656 1 561 15 051

Specialist Units 478 443 350 365 362 1 998

Transnet Group* 25 859 22 396 24 608 18 703 19 029 110 595

Note: Investment Plan approved in February 2011.

* Excludes capitalised borrowing costs.

The majority of investments are for infrastructure

assets such as the pipelines, rail track, container

facilities and rolling stock.

Approximately 37% (R41,4 billion) of the five-year

Capital investment programme is allocated to

identified growth/expansion projects. Due to the

age of Transnet’s assets approximately 62%

(R67,6 billion) is planned to be invested in the

replacement of old/unreliable assets over the next

five years.

Replacement and expansionary investments(R billion )

Expansion (37%)*

Replacement (63%)

20162015201420132012

12

,1

13

,8

7,8

14

,6

9,7

14

,9

5,9

12

,8

5,9

13

,1

* 34% of expansionary projects will create additional

volumes, the other 3% will fulfil other strategic objectives

(social, human capital, efficiency improvement).

Commodity view of investment plans

Due to the generally long useful lives of Transnet’s

asset base, commodities that are sustainable over

the long term are a priority for any expansionary

investments that Transnet embarks upon and in

some cases 10 year and longer contracts are

entered into with clients on a ‘take or pay’ basis

before any investment can be made. The chart

below depicts Transnet’s investment over the next

five years in the major commodities.

Commodity view (%)

General Freight 35

Export coal 13

Export iron ore 9

Containers 14

Piped products 12

Break-bulk 2

Bulk 2

Other* 13

* Other includes investments that support commodities

that may span across the above sectors eg tugs and

dredges support all commodities transported.

105

*Includes the acquisition of the former Durban International Airport site.

Freight Rail

The five-year investment plan for each business segment in Freight Rail is depicted below:


R million2012

R million2013

R million2014

R million2015

R million2016

R million

General Freight business 7 657 7 668 9 160 7 620 6 904 39 009

Export coal line 3 554 3 208 2 722 2 638 2 375 14 498

Export iron ore line 3 482 2 645 1 418 1 306 1 345 10 196

Total 14 693 13 521 13 301 11 564 10 624 63 703

The investment in the two export lines is primarily to increase capacity to meet customer demands. The

coal line capacity will be increased to 81mt in 2014. Capacity on the iron ore line is planned to increase

from 47mt to 61mt over the next three years. The planned investment in the General Freight business is

necessary to progress with the strategy to improve the predictability and reliability of the service.

Rail Engineering

The five-year investment plan for Rail Engineering is shown below and it is mainly to replace equipment

required for the maintenance of rolling stock to agreed performance levels as well as additional equipment

to improve service delivery.


R million2012

R million2013

R million2014

R million2015

R million2016

R million

Total 445 364 290 250 230 1 579

FIVE-YEAR CAPITAL INVESTMENT PLAN PER MAJOR ASSET CLASS

RAILR million

Land, buildings and infrastructure

21 423

Machinery and equipment

1 944

Locomotives

23 121

Wagons

18 794

TOTAL

65 282

59%

PORTSR million

Land*, buildings and infrastructure

6 422


923

Port facilities

17 883

Floating craft

3 036

TOTAL

28 264

25%

PIPELINES AND OTHERR million

Pipeline networks

13 239

Buildings and structures

745


3 065

TOTAL

17 049

16%




The planned investment in each of the major commodity sectors in National Port Authority is set out below:


R million2012

R million2013

R million2014

R million2015

R million2016

R million

Containers 1 092 840 3 338 3 012 2 739 11 021

Dry bulk 56 7 5 – 50 118

Liquid bulk 335 449 433 344 280 1 841

Break-bulk 90 378 617 410 49 1 544

Automotive – – – 34 169 203

Non-commodity specific investments 871 1 607 2 639 1 357 2 032 8 506

Total 2 444 3 281 7 032 5 157 5 319 23 233

Port Terminals

Port Terminals’ major investment categories are set out below:


R million2012

R million2013

R million2014

R million2015

R million2016

R million

Containers 963 627 645 617 850 3 702

Bulk 577 248 20 13 13 871

Break-bulk 79 14 24 40 36 193

Other 66 71 52 41 34 265

Total 1 686 960 741 711 933 5 031

Pipelines

The major investment at Pipelines is the NMPP which will increase capacity and replace the existing DJP.

The five-year investment plan is presented below:


R million2012

R million2013

R million2014

R million2015

R million2016

R million

Total 6 113 3 827 2 894 656 1 561 15 051

Fleet plans

A comprehensive fleet plan, taking into account the asset replacement strategy and asset lifecycle

management has been developed by the Operating divisions. The table below shows a high level view of the

major new fleet assets that are planned to be acquired over the next five years. Acquisition of locomotives

for the coal and iron ore export lines will result in the existing diesel locomotives being cascaded to the

General Freight fleet.

Target Projections

Operating division Asset 2012 2013 2014 2015 2016

Freight Rail Locomotives* 86 110 64 40 40

Wagons 1 509 672 736 915 461


Tugs 1 2 4 3 1

Dredgers – – – – 1

Pilot boats 2 2 – – –

Port Terminals STS cranes* – 4 2 – 2

Straddles 28 – – 22 24

RMG cranes – 2 2 – –

* Currently being revised.

107

Affordability of the five-year Capital investment plan

The affordability of the investment plan over the

next two years is critical as cash from operations

together with funding from various external

sources will have to be utilised to fund all the

required investments. Funders in general require

that Transnet maintains certain thresholds in terms

of gearing and cash interest cover to safeguard

their own investment in Transnet. The chart below

shows the profile of gearing and cash interest cover

over the next five years based on the projects

included in the existing Capital investment plan.

Opportunities beyond the five-year Capital investment plan

Other development opportunities, as noted below,

are being explored. The costs of these are being

determined and may require alternative funding.

export market, estimated volume could be

between 80mt and 135mt;

capacity beyond 81mt;

capacity to 93mt to support the increase in

demand for export iron ore and manganese;

Container Terminal to create capacity of

1,2 million TEUs;

development into a dug-out port, to address

container capacity requirements up to 2040; and

volume increases in excess of the planned levels

for GFB.

Investment/cash interest cover

Cash interest cover (times)

Investment (R billion)

Minimum Board limit

20162015201420132012

3,2 3,33,4

3,9

4,8

3 times

25,9

22,424,6

18,719,0

Investment/gearing limit

Gearing (%)

Investment (R billion)

Maximum Board limit

20162015201420132012

46,8 46,8 46,4

37,7

50%

25,9

22,4

24,6

18,7 19,0

42,8

Durban Point Car Terminal.



Transnet Capital investment programme – Governance

The following diagram reflects the overall framework adopted during the portfolio balancing phase in

selecting projects that are included in the investment plan. The framework assists in ensuring alignment

across the Company to the key strategic objectives.

The CPMF requires that the capital spend (per

project) of Transnet be analysed against four major

areas in all Operating divisions.

2) Corridors in the network;

3) Asset types; and

4) Major commodities.

Policies and procedures

Transnet’s capital investment policies which are

currently been rolled out require that the projects

identified during the development of the

investment plan are tested through a robust “seven

step process” in arriving at a balanced portfolio

of projects. The different steps implemented are

as follows:

QUANTUM LEAP STRATEGY

Capital optimisation and

financial management

Reengineering, integration, productivity and efficiency.

Safety, risk and effective governance.

Human capital optimisation.

Commodity

focus

Corridor

focus

Infrastructure

focus

Additional volumes.

Improve operating efficiencies.

Revenue protection.

Safety optimisation/environmental improvement.

Optimise business enterprise offerings (IT).

Optimise social investments.

Optimise human resources.

Transnet’s strategy and strategic objectives are supported by investments across corridors, commodities and infrastructure assets.

identified, including non-accepted projects in the

past, suspended and existing projects as well as

feasibility studies to be undertaken;

relevant Operating division and Group categories

that support the strategic objectives at an

Operating division and Group level;

against predetermined criteria that includes non-

financial, financial and benefit analysis. Measures

that can be applied include net present value

(NPV), internal rate of return (IRR), payback

periods etc;

on the results from the evaluation step;

109

projects with due consideration for Transnet’s

strategic objectives and the availability of key

resources etc;

portfolio project mix with the greatest potential

to support the achievement of Transnet’s

strategic objectives and the greatest value

creation through the Capital Portfolio

Management Framework (CPMF); and

resources required to execute the selected

projects and the communication of the selected

portfolio to the relevant stakeholders.

Project lifecycle process (PLP)

The methodology adopted by Transnet to roll out its

mega and certain divisional executed capital

projects is contained in the Project Lifecycle

Process (PLP). This methodology entails the

conducting of front-end loading (FEL) studies at

various phases of the project lifecycle to achieve

reduction of risk and increasing certainty in line

with increasing investment. At the end of each

phase a gate review is done. Gate reviews are an

essential means of reviewing the project outcome

to date, confirming alignment with the project

objectives, reviewing the viability of the project and

granting necessary authorisation for the project to

be assessed for the next phase. During the gate

review, project cost estimates are firmed up to a

greater level of accuracy as a result of reducing risk

associated with the project. The FEL studies can be

classified as follows:

Development intended to enhance and improve

knowledge to inform Master Planning and

developing Framework Planning;

business concept is tested and a number of

options are generated to implement the

requirement;

are evaluated and a preferred option prioritised

and selected and the viability of the project is

more rigorously tested. Cost estimates at a 70%

accuracy level;

option is more fully defined and its viability

confirmed. Front-end engineering design

commences. The project to deliver the solution is

defined in terms of costs, schedule (level 1), scope

and other required disciplines – resulting in a

bankable business case being developed. Cost

estimates providing an 85% level of accuracy; and

design, contracting, construction management,

commissioning and handover is achieved.

Approval, monitoring and reporting

Capital projects follow a dual approval process.

Projects are approved in principle as part of the

Capital investment plan that is submitted to the

Board of Directors during the budget approval

process. Individual approval is thereafter required

for new projects before commencement. Depending

on the total cost of the project, approval is obtained

from the relevant governing body which may be the

Shareholder in certain cases.

The capital spending in all the areas of the portfolio

is monitored on a monthly basis to determine the

progress on the roll out of the investment plan and

to take appropriate steps where necessary.

Financial interim reviews are required to be

conducted half yearly on mega projects to assess

the viability of investment from approval up to when

the post-implementation review is conducted. Post-

implementation reviews are undertaken for certain

projects at least a year after the facility/asset has

been operating to test if the actual results match

the estimates included in the approved investment

proposal. It also tests whether the objectives of the

project have been met.

Environmental Management of the Investment Plan

Managing the environment responsibly, and caring

for the communities in which we operate, while

building and operating a world-class transport

infrastructure are key principles of our

sustainability framework and environmental

management principles. In support of the above,

Transnet is committed to ensuring compliance

with all legislation, including all environmental

legislation of the country. During the year

environmental risk audits and compliance audits

were conducted by the Department of

Environmental Affairs (DEA), Transnet Internal

Audit, as well as Group Compliance. The formal

reports from DEA are awaited.

The Environmental Impact Assessment (EIA)

regulations (National Environmental Management

Act) were amended and promulgated in July 2010.

The risk of not obtaining environmental

authorisations and other permits (such as

water use licences) for the infrastructure projects

as well as operational activities which are listed in

terms of the EIA regulations, within specific

timeframes, remains a risk to Transnet.

The good working relationship that has been

established with the DEA continued through

regular meetings and engagements. Together

with other state-owned companies, Transnet



Risks impacting the Capital investment programme

An investment plan of R110,6 billion over the next five years is susceptible to many risks. The key risks are

presented below together with mitigating actions. Continuous monitoring of the investment portfolio will

result in the table below being amended to address different risks that may arise during the course of the

roll out.

Risks Mitigating plans

Increase in the total cost of projects: Increases have a significant impact on the viability of the infrastructure facilities constructed. Pressure is also put on the cash flows and key financial ratios of the Company as more debt may need to be raised or cash needs to be generated from operations to fund the increase.

This risk is mitigated by the conducting of front-end loading (FEL) studies and the gateway review process conducted at the end of each FEL study which assists in firming up of cost estimates to a greater level of accuracy; Steering committees have been established to monitor performance of major projects.

Funding: The roll out of an investment plan of this magnitude and the current general sentiment in the capital markets might create challenges around funding. It may become difficult to procure and/or obtain funding at a reasonable cost.

Transnet has adopted a pre-funding strategy and is pursuing the participation of the private sector (PSPs) to fund some of the Company’s infrastructure. This will be a key focus area going forward.

Foreign exchange rate fluctuations: Locomotives, tugs and port handling equipment have a significant import component and is therefore subject to exchange rate fluctuation.

Transnet has a hedging strategy to cover exchange rate volatility.

Skills: Many of the projects in the investment portfolio require specialised engineering, procurement, contract and construction management skills which are in scarce supply.

The development of project structures with manning requirements, implementation of a scheme to retain skilled resources and to maintain partnerships with identified reputable managing contractors mitigates this risk.

Constructing in an operational area: With the exception of the Ngqura Port and Container Terminal most of our infrastructure investment rollout takes place in existing operational areas. Access to the work site by contractors may be affected as operations may require that the site is not readily available for development.

Proper planning for the release of the project site by operations is a mechanism to reduce risk.

continued to make contributions to the SOC Fund

that was established between the DEA and the

Department of Public Enterprises to build capacity of

the DEA in the field of environmental impact

management.

A water use licence (WUL) for the reverse osmosis

plant is awaited from the Department of Water

Affairs. The NMPP submitted WUL applications and

amendments to existing permits have been issued.

Through the Capital investment programme, several

opportunities were created for pursuing best

practice in the field of environmental management.

Several of the initiatives have been put in place to

either comply with conditions as set out in the

environmental authorisations or to ensure best

practice. Two examples are provided below:

system for monitoring and controlling rodents

inside an international Port of Call.

authorisation for the NMPP was that Transnet

had to develop a biodiversity offset for the

wetlands that were impacted by the construction

of Terminal 2 of the pipeline, and specifically

the habitat of the endangered giant bull frog

that would be impacted on by the location of

Terminal 2.

Sustainable development and environmental

criteria, as well as climate change considerations

have been incorporated into the Transnet

Infrastructure Plan.

111

Risks Mitigating plans

Condition of assets being refurbished: The assets being refurbished may be in a worse condition than initially expected which results in increased costs and a longer period that the asset is out of service.

Proper asset lifecycle management, major overhaul and service intervention plans to be put in place to address this risk.

Environmental impact assessment (EIA): These studies tend to run on for long periods affecting the project start date and hence its completion. The project could as a result of a drawn out EIA process commence later and cost more than anticipated and may not be ready in time to take up the increase in volume demand which will lead to bottlenecks in the logistics chain.

Greater engagement with Government and other stakeholders is being undertaken for a more effective EIA application process. The Transnet Infrastructure Plan (TIP) now provides a greater horizon for projects to be executed and should reduce pressure on tight timeframes for project development.

Returns/volumes not materialising: There is always a risk that the volumes anticipated when the project was motivated do not materialise. The Company could end up with semi-productive assets for which funding still has to be serviced and settled.

This risk is mitigated through a robust capital approval process before the commencement of projects (Divisional Investment Committees, Group Investment Committee, Executive Committee as well as the Board of Directors and Shareholder according to the delegations of authority and the Materiality and Significance Framework as agreed with the Shareholder). In some cases entering into ‘take or pay’ contracts with clients before the investment is made also mitigates this risk.

Safety on project sites. Safety is a key focus area for Transnet. Long-term injury-free hours is an indicator used to measure safety performance and a culture and awareness of safety are key behaviours management is trying to embed throughout the organisation.

Electricity: The impact of electricity, specifically load shedding will have major consequences for both Transnet who uses electricity extensively in all operations (rail, port and pipeline) and in the construction of assets and clients that utilise electricity in the mining and general production process.

Transnet will continue to engage with Eskom with regard to electricity infrastructure. Electricity initiatives throughout the organisation have been adopted so that consumption takes place at the most efficient levels.

Productivity linked to capacity: The capacity of certain facilities has been simulated at a defined level of productivity eg the capacity of the Ngqura Container Terminal is 750 000 TEUs per annum is based on a gross crane move per hour rate of 28. If this efficiency rate is not achieved in operations then the capacity of the terminal will be lower than the initial design which impacts on revenue and could result in bottlenecks.

Stronger first line management and performance and reward systems are being explored to address productivity.

Economic regulation: Two of Transnet’s divisions (National Ports Authority and Pipelines) are for the most part regulated in terms of the tariffs that can be charged to clients. Investing in an environment where planned returns can be reduced by changes in regulation and regulatory policies is challenging as funders for major bulk infrastructure require a fair return and security of their funds advanced to Transnet.

Transnet will continue engaging constructively with the Regulator to create an environment conducive for investment for the benefit of South Africa.

Documents

Capital investment report€¦ · Transnet Port Terminals (Port Terminals) Port Terminals invested R866 million during the year with the majority of the investment targeted at the