Transnet National Ports Authority Tariff Methodology: Position … · 2013. 3. 7. · offered by the Authority and annually publish a tariff book containing those tariffs. The Port

delivering freight reliably

Transnet National Ports Authority Tariff Methodology: Position Paper Ports Regulator: Road Shows March 2013

2 PAGE

“A system of ports, seamlessly integrated in the logistics network that is jointly and individually self-sustainable through delivery of high levels of service and increasing

efficiency for a growing customer base, enhancing South Africa’s global competitiveness and facilitating the expansion of the South African economy through

socially and environmentally sustainable port development”

White Paper on National Commercial Ports Policy, 6 March 2002

Vision for South African Ports

2

3 PAGE

TNPA Strategic Focus

“A Landlord Port Authority that manages, controls and administers the South African Port System on behalf of the State”

Infrastructure

Create and Manage

Infrastructure

capacity ahead of

demand

Integrated Port

System

To facilitate an

integrated logistics

chain that will

establish the port

system as an

integrated gateway

for trade

Operations

Improving port

efficiency through

increased

productivity and

operations

oversight

Driven by a 3-tier strategy

In support of meeting Shareholder’s objectives of improving

operating efficiencies, regional integration and optimising

investment in the port system

3

4 PAGE

Introduction

Objective and context of the session

• Regulatory framework does not set a tariff methodology • Tariff methodology will assist in the application of the regulatory

framework to determine revenue for the Authority’s which is fair and reasonable

• The tariff methodology should aim for simplicity, clarity and certainty

whilst being compliant to the Ports Act and Directives

• The agreed tariff methodology would be used by the Authority in its future tariff applications starting in Financial Year 2014/15.

4 Tariff methodology: Road show

5 PAGE

Legal Framework: Ports Act and Directives

Section 72. (1) (a) of the Ports Act, states that the Authority must, with the approval of the Ports Regulator, determine tariffs for services and facilities offered by the Authority and annually publish a tariff book containing those tariffs. The Port Directives were approved on 13 July 2009 (gazetted on 06 August 2009) and amended on 29 January 2010. In terms of the Port Directives, when considering the proposed tariffs for the Authority, the Regulator must ensure that such tariffs allow the Authority to:

• recover its investment of owning, managing, controlling and administering ports and of providing port services and facilities ;

• recover its costs of owning, managing, controlling and administering ports and of providing port services and facilities; and

• make a profit commensurate with the risk of owning, managing, controlling and administering ports and of providing port services and facilities.

Tariff methodology: Road show

6 PAGE

Key elements of the proposed tariff methodology

• TNPA proposes to retain the Revenue Requirement (RR) tariff methodology for future tariff applications.

• Revenue Requirement (RR) methodology ensures that the regulated institution Recovers its investments in port services and facilities Recovers its cost of operations Achieves a fair return on investment

• RR Methodology provides efficient price signals to market

participants and to consumers

• Promotes the regulatory independence and certainty with its full disclosure requirement.

• It is commonly used in other regulated industries


7 PAGE

Key elements of the proposed tariff methodology (Continued)

The Revenue Requirement (RR) calculation formula is as follows:


RAB × Cost of capital

+ Operating costs

+ Depreciation

+ Taxation expense

± Claw back

± Excessive tariff increase margin credit

+ Financing Factor

yyyyyyyyy

y

FWACCFETIMCCTDEWACCRAB )1()()(

revenues Allowed

11

8 PAGE

The Regulatory Asset Base (RAB)

• The Record of Decision (ROD) FY 2012/13 approves that the FY 2010/11 tariff decision establishes the Starting Regulatory Asset base (SRAB).

• The SRAB contained in the FY 2010/11 tariff decision did not include the Real Estate business of the Authority.

• The starting RAB for the Real Estate business comprising of assets rented out to external parties and Transnet divisions (TPT) should be valued as Investment Property in terms of IAS 40.

• The ROD for FY 2012/13 further approved that the Trended Original Cost (TOC) be used to roll forward the starting RAB.

• Authority proposes that this TOC be used to roll forward total RAB and not just the starting RAB.


9 PAGE

The Regulatory Asset Base (RAB) – Continued.

• The RAB will thus be trended to subsequent years using inflation indicators informed by the South African Reserve Bank.

• Annual Capital investment will be included and escalated by average inflation for year, using the monthly weighted average, and then added to the RAB

• Annual Depreciation will be deducted from RAB, this will be determined by recovery of asset over its remaining useful life

• Working Capital is calculated separately for each tariff application year based on the RR and included in the RAB


10 PAGE

Weighted Average Cost of Capital (WACC)

• The cost of capital represents the minimum return that the Authority must make on its investment in order to continue to attract capital.

• Allowed revenues must be sufficient to cover the company’s tax expenses, hence a

Vanilla WACC is to be determined and a separate allowance for tax expenses be provided.

Vanilla WACC = Kd x g + Ke (1-g)

• Kd – Cost of Debt is to be informed by the Transnet cost of funding • g – Gearing is reflective of the Authority’s historical capital structure. • Ke – Cost of Equity is to be informed by the Capital Asset Pricing Model (CAPM)


11 PAGE

Weighted Average Cost of Capital (WACC) – Contd.

• Capital Asset Pricing Model (CAPM)

• Rf - The risk free rate to be used is informed by the yield on a 20 year South African government bond, R186 10.5% 2026, as a proxy for the nominal risk- free rate.

• MRP - The premium demanded by investors for investing in the market. The TNPA

proposes using the Dimson Marsh Stanton (DMS) estimate of the arithmetic MRP measured against bonds for South Africa.

• - Beta measures TNPA’s exposure to market unavoidable (non-diversifiable) risk.

Page 11

MRPrk realfe , ,


12 PAGE

Weighted Average Cost of Capital (WACC) – Contd.

The process to be undertaken by the Authority in beta determination involves the following steps:

1. Identify a set of peer companies that are traded • The Authority is of the view that the JSE Top 40 companies are a good proxy in order to determine an appropriate asset beta.

2. Estimate the equity betas of the peer companies

• The equity beta data of the JSE Top 40 companies is obtained from Bloomberg

3. De-lever the equity beta

• The asset beta is derived by de-levering the equity beta of the JSE Top 40 companies

4. Re-lever the JSE Top 40 companies’ to derive asset beta

Page 12 Tariff methodology: Road show

13 PAGE

Expenses, Depreciation and Claw Back

13

• Expenses in any given tariff period are to be based on the best estimate of forecasted costs for the tariff period under review.

• Depreciation is to be calculated on a straight line basis over the expected useful service life of each of the assets.

• Taxation is that notional tax allowance which is a close approximation of the actual tax that the TNPA would have to pay, taking into account the tax shield provided by using the Vanilla WACC

• Claw Back is to ensure that TNPA does not gain or lose out from discrepancies between forecasts and actuals. This should be informed by the difference in revenues derived from the Actual audited financial statements and the respective ROD by Ports Regulator.


14 PAGE

Excessive Tariff Margin Credit (ETIMC)

• The Regulator introduced ETIMC in the ROD 2012/13 with an

opening balance of R900m.

• The function hereof is to avoid any future excessive annual tariff increase, as informed by TNPA’s investment drive (e.g. Durban Dig Out Port).


15 PAGE

Financing factor

• The F-factor caters for differences between the revenue adjustment

to meet debt obligation

• If the allowable revenue does not enable the Authority’s regulated business to operate, then additional revenue may be allowed.


16 PAGE

Transnet’s Market Demand Strategy (MDS)

R300bn capital investment programme;

Expanding rail, port and pipeline infrastructure;

Increase in capacity to meet market demand;

Continued financial stability and strength;

Significant productivity and operational efficiency improvements;

Shift from road to rail – reducing the cost of doing business and carbon emissions;

Enabling economic growth;

Job creation, skills development, localisation, empowerment and transformation opportunities;


17 PAGE

.... TNPA’s MDS Investment Program

19

1.3

7.7

18

2.3

7.9

17

1.9

6.3

16

2.2 4.2

15

2.1 3.3

14

2.5 2.8

13

1.5 0.8

12

0.7 1.0 replacement

expansion

Expansion vs. replacement (Rbn)

Province (Rbn)

1,750

xx Total

2,376 5,326 6,392 10,167 9,038 5,434

612859

740569 614

577

1 750

2 100

619 525 500568

1 022

2 295

567

689

2 471 2 592

3 518

5 455

4 6861 583

80

18/19

9,038

44

3,018

17/18

10,167

51

2,657

16/17

8,134

26

1,508

15/16

6,392

251

1,509

5,434

423

1,325

13/14

5,326

503

992

12/13 Bgt

2,376

258 436

133

11/12

1,750

85 406

14/15

Other (LNS, DRS and HQ)

Eastern Cape

Western Cape

R Bay

Durban

8,134

18 PAGE

The potential for South

Africa is massive…

Contribute to NGP aspirations: expected to create up to 588,000 job opportunities across the economy

Reduce the cost of doing business (0,5% of GDP)

Drive regional integration

Localisation programme supports local products and skills development

We can execute… Execution risks will be mitigated through robust implementation plans

In partnership with its stakeholders, Transnet can successfully realise the growth that MDS will bring to the country

It is financially sound Majority of the growth will be funded internally from operations

Gearing and cash interest cover will maintain investment grade credit rating

…as a top-tier logistics provider and SA’s employer of choice

Infrastructure development plans will create world class freight infrastructure

It will improve

Transnet's position…

MDS is key to South Africa’s growth strategy

19 PAGE

Multi-year tariff approach

19

• The Authority proposes to adopt multi-year tariff approach from FY’s 2014/15 to 2018/19 as it executes the MDS

• Multi-year approach will provides certainty to all stakeholders. reduced regulatory effort by all affected parties; providing certainty to funders of the Authority; allowing customers to plan their business accordingly during the control period.

• This multi-year is premised on agreement being reached on the

Tariff Methodology and amendment of Ports Act and Directives


20 PAGE

Post ROD FY 2012/13 requirements


Post ROD FY 12/13 requirement Tariff methodology

The Beta comparators used in the tariff determinations and the methodologies and formulas for their calculation, and or the accepted interim asset Beta

Section 5.6, Page 20

The valuation methodology for all assets procured and or constructed after the initial RAB was accepted

Section 4.2, page 14

The manner in which the expenses of the NPA are requested, monitored and assessed

Section 6 page 24

The treatment of tax in the methodology

Section 7 page 26

The possibility of multiple- year tariff approvals to ensure medium term certainty for all parties including NPA

Section 12 page 31

The specific form of weighted average cost of capital to be used if the outcome of the methodology process suggests that CAPM is appropriate for the long term

Section 5 page 17

Higher level of granularity of the NPA capex programme, in particular what the impact of individual projects shall be on throughput, efficiency, pricing, revenue and the demand case for such projects

Section 4.1.2 page 12

Review the NPA’s depreciation policies and their compliance to regulatory norms. The financial accounting policies may be correct, but in certain areas (depreciation included) Regulators require the information to be treated differently from what is in the reported financials


Clarity on the cash holdings and benefits resulting therefrom be articulated


21 PAGE

Conclusion

• Guidance and stakeholder’s inputs on the tariff methodology’s parameters is key to this process

• It is imperative that an agreement be reached between the Ports Regulator and the Authority on an appropriate tariff methodology

• Multi-year tariff framework will provide an element of certainty to all stakeholders

• The MDS will enable growth in key commodities and position SA as a leading logistics hub for sub-Saharan Africa.

• The Authority intends to utilise agreed tariff methodology in its future tariff applications starting in Financial Year 2014/15

22 PAGE

Questions

DISCUSSION


Documents

Transnet National Ports Authority Tariff Methodology: Position … · 2013. 3. 7. · offered by the Authority and annually publish a tariff book containing those tariffs. The Port