An introduction to Transnet

1
An introduction toTransnet

• 13 October 2004

2
Agenda

• Strategy
• Overview of key businesses
• Spoornet
• SAPO
• NPA
• Petronet
• SAA

3
Strategy
4
Delivering on our commitments

• The public sector discharges its
  responsibilities to our people as a critical
  player in the process of the growth,
  reconstruction and development of our country by
  reducing the cost of doing business in our
  country.

President Mbeki State of the Nation Address 21
May 2004
5
Why Port and Rail
6
Total throughput for 2003 in the South African
economy that required logistics intervention
745mt (1998 590mt)
2003 Manufacturing 20 of GDP _at_ constant 1995
prices
2003 Mining 6 of GDP _at_ constant 1995 prices
Key Sector Sub-Groups
Agriculture Grain, Vegetables, Fruit, etc
Mining Coal, Ferrous Metal, Nonferrous Metal, Non-metallic Minerals, Crude Petroleum
Manufacturing Heavy Light Chemicals, Fuel Petroleum Products, Fertilizer, Iron, Steel Metal, Machinery Equipment, Motor Vehicles, Parts Accessories, Scrap FMCG Beverages, Textiles Clothing, Wood -Products, Furniture, Paper -Products, Rubber, Plastic, Ceramics Glass,
330mt
370mt
45mt
2003 Agriculture 4 of GDP _at_ constant 1995
prices
7
The 745mt results in a total transport cost of
R135bn to the South African economy. The biggest
portion of this cost is attributable to long haul
road transport.
R0.3bn
R11bn
R11bn
R25bn
R50bn
R30bn
The challengeRail corridor R135/tonRoad
corridor R360/ton
8
The R135bn transport cost has an associated
logistics cost of R45bn, amounting to a total
logistics cost of R178bn (14.7 of GDP).
9
Understanding the Road / Rail trend over the past
decade
The last decade has seen growth in road traffic,
while rail traffic (excl. the export lines) has
declined
Data depicted on an index basis
10
The structure of the surface freight transport
market (2003 million tons)The normal macro
economic model is to transport corridor freight
on rail and rural freight on road. Structural
myopia caused an unhealthy situation in South
Africa.
Tonnage 1105mt (270)
Figure in brackets denotes average transport
distance
Road 920mt (200)
Rail 185mt (600)
Corridor 140mt (750) 13
Metropolitan 570mt (70) 52
Rural 210mt (190) 19
Corridor 45mt (670) 4
Metropolitan 10mt (100) 1
Rural 30mt (500) 3
Export lines 100mt (650) 9
Tonkm 296bn
Road 185bn
Rail 111bn
Corridor 105bn 35
Metropolitan 40bn 14
Rural 40bn 14
Corridor 30bn 10
Metropolitan 1bn 0
Rural 15bn 5
Export lines 65bn 22
Income R123bn
Road R111bn
Rail R12bn
Corridor R55bn 45
Metropolitan R29bn 24
Rural R27bn 22
Corridor R5.6bn 5
Metropolitan R0.5bn lt1
Rural R1.5bn 1
Export lines R4.5bn 4
11
There are significant shifts in the SA economy
that warrant a closer examination of the supply
chains necessary to support the economy.
SA needs to reduce logistics costs by one third
to sustain our competitiveness.
Beitbridge
Maputo
Gauteng
Richards Bay
Sishen
Durban
Saldanha
East London
Cape Town
Port Elizabeth
12
Aligning Strategic Focus with the Economy

• Micro-economic strategy
• Support SAs export-led growth strategy
• Reduce the cost of doing business
• SAs economy
• Mining (6) 49
• Manuf. (20) 45
• Agriculture (4) 6
• Why Strategic corridors?
• Majority of export/ import traffic (excl.
  containers) is typically bulk and heavy
  manufacturing on rail
• Majority of road haulage is for domestic
  distribution
• To support the export strategy and economic
  growth for current key sectors, connectivity
  between inland transportation systems and ports
  are critical
• Create efficient export systems
• for growing sectors

Production location of key sectors
Freight Typology Up to 70 of economy is bulk,
heavy-haul, long distance and low to medium value
traffic
Transnet Focus
Heavy Manufacturing zones
Mining zones

• Transnet Strategic Direction
• Focus on Rail and Ports (Operations
  Infrastructure)
• Focus on improving key corridors/ clusters

13
Strategic direction
14
The Role of Transnet

• Contribute to the sustainable economic
  development of South Africa by providing the best
  connected and efficient transport network run by
  world-class rail, pipeline and port operators

15
An Integrated Transport Strategy
Transnet provides efficient, integrated transport
services to the bulk and manufacturing sectors

• Ensure that Transnet provides an efficient
  transport platform that
• facilitates trade growth in SA
• Transnet is the custodian of Port, Rail and
  Pipeline Infrastructure
• Transnet serves specific industries to leverage
  its strength in assets
• Transnet collaborates with Customers to jointly
  design services and
• invest in areas that improves the performance
  of all parties

16
Transnet Business Portfolio
Transport Portfolio
Independent Regulators
17
Transnet into the future
Transport Portfolio
Transnet Infrastructure
Transnet Operations
Pipeline Infrastructure
Pipeline Operations
Rail Infrastructure
NPA
Rail Operations
SAPO
18
Implementation plan
19
Migration Path for Transnet Integrated,
Inter-modal Transport Solution
Deliver the Mandate
Implement New Business Model

• Operational integration with private sector (port
  and rail)
• Partnerships (local and global) established for
  growth

Building a Solid Foundation

• Operational synergy between SAPO, NPA
• Spoornet
• Restructured portfolio

• Operational efficiency
• Vertical separation
• Corporate office Restructuring
• Divestment

2004/05
2006/07
2005/06
20
Transnet Strategy
Effective Efficient National Logistics System
Financial Strategy

• Vertical Separation
• Infrastructure Planning
• Head Office Restructuring
• Divestment
• Operational Synergies

Strategic Corridors
Strategic Clusters
Change Management
Economic Growth
21
Critical element of implementation

• At the heart of the turn around plan is the
  operational efficiency of the core businesses.
  Without efficiency in the core operations,
  reducing supply chain costs and changing the road
  rail mix in transport will not occur.

22
Operational Themes
Operational Efficiency

• Nodal efficiency
• Increasing key Productivity indicators within
  the nodal points
• Safety and Risk compliance
• Efficient and streamlined operational processes
  

Infra-structure Development

• Create capacity before demand arises
• Implementation of CAPEX plans rolling 5 / 15
  year plans

Integration Interface

• Integration and optimisation of rail and port
  interfaces
• Reduction of total logistics costs
• Enhancing predictability and reliability

Customer Third Party Collaboration

• Strategic operational forums
• Supply chain competitiveness (time and cost)
• De-bottlenecking

23
Business Definition and Focus

• Portfolio Restructuring to establish Transport
  Co.
• Core business restructuring within Transport Co.
• SAPO / NPA (port operations and infrastructure)
  already separated
• Spoornet initiatives
• Spoornet accounting separation of infrastructure
  and operations to make costs visible and enable
  separate focus and reporting in progress
• Separation of high density and low and light
  density rail operations (within Spoornet) to
  enable different operating models

24
Investment for Efficiency Improvements

• Implementing Operational Improvement
• Systemic coordination and consolidation of
  investments
• Coordinate Divisional strategies along corridors
• Strategic focus
• Integrated investment models and plans
• Value analysis and value engineering
• Drive value improvement
• Structure organisation and set targets for new
  focus
• Inter-organisational measurement and
  accountability systems and processes
• Strategic operational forums (multi
  organisational)

• Support Required
• Supporting legislation and policy
• Partnerships for funding and efficiency
  improvement
• Private Sector Participation
• Customer / supplier / vendor initiatives
• Governance framework

• R 37.2 bn TIM focussed on SAPO
• NPA, Spoornet Petronet
• Backlog investments
• Expansions
• New developments (Coega)
• Efficiency improvements
• Capex Committee to monitor these
• processes

25
Collaboration, Partnering and Integration

• Collaboration initiatives and projects
• Interim Advisory Board to improve container
  supply chain efficiencies
• Analysis and prioritisation of key industries and
  customers to determine areas of biggest impact
  taking place in Spoornet (will result in similar
  projects to Thuthihlathi timber, and
  Masibambane - domestic coal)
• Petronet managing depots and terminals for
  customers
• Inter-divisional integration
• City Deep / corridor container performance
  improvement (SAPO / Spoornet)
• Various NPA / SAPO / Spoornet commodity /
  corridor based initiatives (e.g granite and
  ferros Richards Bay)
• Private sector participation
• SAPO business model incorporates PPPs to attract
  investments and
• improve efficiencies
• Selective introduction of PPPs in branch lines
• Commercial cold storage (SAPO)

26
Process Efficiencies, Systems and Technology

• New cranes in SAPO (twin lift capability)
  improved container handling efficiencies and
  throughput
• New locomotives with increased traction
  efficiency will
• Increase utilisation and reduce costs (e.g. fuel
  efficiency) and
• Enable implementation of additional technologies
  that will futher enhance efficiencies
• On-board signalling on new locomotives has major
  benefits in terms of
• Traffic density (number of trains on a line)
• Safety
• Changing of signal spacing on Sishen-Saldanha
  corridor will allow increased traffic density
• NPA modelling and simulation of ports and
  terminals (ITE / G2)
• improves investment decisions
• NPA strategic sourcing initiative
• Operational systems integration

27
Key businesses
28
Financials

• Spoornet

29
Positioning Statement

• Spoornet is "mission critical" to the economy of
  the country. Its service places it at the heart
  of it all. 

30
Spoornets Position within the World
In world terms, Spoornet is a smaller freight
based railway, seeking to leverage heavy haul
technology
Source www.nationmaster.com
31
Spoornets Position within Africa
However, Spoornet is a large railway business and
is the most significant player in Africa
Source www.nationmaster.com
32
Historical Background
1990
1986
1992
1994
1996
1998
2003
33
Key Statistics
34
Spoornet Strategic Direction
35
Strategic Programme of Action
Customer Orientation
36
(No Transcript)
37
Overview of South African Port Operations

• SAPO operates 13 terminals in 6 ports of SA
• Revenue - R3.2 billion in 2004/05 financial year
  and expected to grow by 9 p.a
• Staff complement 5570
• Total Assets Employed R3.3 billion

38
Services Offered

• Cargo handling
• Storage
• Logistics Management Solutions
• Warehousing and Distribution Management
• Steverdoring
• Rail/Port Interface
• Value Added Services

39
Market Profile

• Operates in 4 Sectors viz. Containers, Bulk,
  B/bulk and Cars
• Volumes handled for 2003/04 were
• Sector Performance Market share
• 3 Container terminals handled 2.5 million Teus
  100 market share
• 6 Break bulk terminals handled 13.3 million tons
  82 market share
• 2 Dry bulk terminals handled 44 million tons
  32 market share
• 2 Car terminals handled 220,000 units
  100 market share

40
Major Bulk Commodities Exported Through SA Ports
Port Major Bulk Commodities Volume million tons Source Approx. distance from source
Richards Bay Durban Port Elizabeth Cape Town Saldanha Coal and coke Wood Chips Rock Phosphate Chrome ore Steel Timber Chemicals Manganese Ore Prepared Fruit Iron ore 67 4.1 0.3 0.8 2.2 0.4 1.8 1.7 0.4 24.9 KZN/Mpumulanga Nelspruit Phalaborwa Rustenburg Middelburg Pinetown Secunda Meyerton Ceres Sishen 400 - 600km 585km 806km 721km 856km 30km 546km 569km 110km 993km
41
Vision
To be a leading provider of terminal services in
port operations
Mission

• To provide efficient terminal services to our
  customers, the standard of which exceeds
  expectations of all stakeholders. We will seek
  appropriate partnerships to ensure we grow our
  service offering and generate improved returns
  for our shareholder.

42
Strategic Objectives

• Diversify revenue streams by entering into
  strategic partnerships to exploit new business
  opportunities that grow our revenue base by 2007
  in real terms
• Understand customer requirements and translate
  these into consistent and personalised service
  offerings that exceed their expectations
• Anticipate market demand in order to timeously
  plan and create capacity in line with UNCTAD
  standards
• Maintain our market dominance, by ensuring we are
  benchmarked as an efficient and cost competitive
  operator, prior to the introduction of
  competition
• Reduce operating costs by 10 per unit of volume
  in the 2005/06 financial year
• Create a performance management culture that
  unleashes the potential of our employees through
  a multi-dimensional human capital recruitment and
  development programme  

43
What has been the focus?

• Splitting the company into two, namely, NPASA and
  SAPO
• Setting up systems, corporate office
  (infrastructure)
• Creating an independent sustainable SAPO
  culture

44
Focus Areas

• Upgrading terminal superstructure
• Business Ring Fencing
• Creating an e-business forum with clients
• Continuous Improvement
• SAPO Capacity Building Initiatives
• Shop Floor Development Program
• Women in Operations
• Freight Handling Learnership
• Tariff Reform

45
Way Forward through Strategic Alliances

• Lowering the cost and improving the service
• Reducing the burden on overstretched
  infrastructure
• Increasing total efficiencies by shifting to
  modes that have higher capacity
• Reduce cost and time and inconvenience
• Increased productivity and efficiency
• Improved energy consumption, air, and
  environmental quality

46
National Ports Authority
47
NPA Vision Mission

• Vision
• To be a transformed, collaborative port authority
  that leads economic growth in a world class port
  system.
• Mission
• To create and sustain world class freight and
  logistics solutions.

48
Strategic Objectives

• Value and wealth creation
• Optimising infrastructure and business processes
  to enhance logistics chains timeously
• Create winning customers and stakeholders through
  service excellence
• Inculcate behaviour embracing NPA core values
  and
• Develop peoples business skills and embed
  innovation as a core competence

49
NPA Business Overview

• Custodian of SAs 7 commercial ports.
• The NPA provides the following functions
• Landlord (infrastructure provider, management of
  port industrial complex)
• Maritime (marine, dredging, lighthouse )
• Control function (environment, IMO, ISPS, harbour
  master)
• Focus on functional efficiencies, systems
  structures
• Trade facilitation competitiveness.

50
Future Position Of SA Ports

• Playing a leading role in the SA economy
• Occupy a central role in integrated logistics
  chains
• Set, monitor sustain efficiency standards to
  meet/exceed customer expectations
• Play a key developmental role in furtherance of
  national regional objectives
• economic growth sustainability
• country competitiveness
• Broadening the economic base

51
Centrality of NPA in the Logistics Chain
NPA Terminal operators Shipping
agents Concessionaires Stevedores
Inbound Logistics
Outbound Logistics
52
Challenges

• Reduced tariff income vs. Increased Capital
  Investment
• R16.3b for the next 5 years
• Lowering Cost of doing business
• Whether the reduced cost trickles down to SA Inc.

53
Key Enablers

• Ring fencing of assets
• Corporatisation
• Funding plans
• Private sector participation
• Port Regulator

54
Petronet
55
Petronet

• OUR CORE BUSINESS
• Bulk transportation of energy (energy carrier)
  Range of petroleum products and gas
• HOW ?
• Through 3000km of high-pressure underground
  steel pipelines which we own, operate and
  maintain
• Of the 3000km
• 2500km for conveying petroleum products and
• 500km for transmission of gas to KwaZulu Natal
•           

3
PPT-0998
56
Pipeline network
6
PPT-1001
57
Activities

• Total products transported (2003/04)
• All liquid fuel products 17,2 billion liters
• Petrols and diesel 10,5 billion liters
• Avtur (jet fuel) 0,9 billion liters
• Crude oil 5,8 billion liters
• For perspective This equates to 285 000 road
  tankers per annum (refined products only)
  5500 road tanker per week _at_ 40m per tanker
  210km long train of tankers weekly or 30km
  long train daily
•           

10
PPT-1005
58
Petronet in perspective

• Petronet transports approximately 40 of the SA
  refined product fuel requirements and 100 of
  the Natref refinerys crude oil requirements
  (which is 21 of the total SA crude requirement)
• Approximately 80 of Johannesburg international
  airports requirements are supplied by Petronets
  Avtur pipeline from the Natref refinery and
  Durban
•           

11
PPT-1006
59
Clients

• Major international and local oil companies and
  government
• BP, CALTEX, SASOL OIL, SASOL GAS, SHELL, TOTAL
  and CEF
•           

14
PPT-1009
60
What costs do we add to price of fuel
COMPONENTS OF THE PUMP PRICE OF PETROL
BASED ON PETROL PRICE 93 - OCTANE (ULP) GAUTENG
454.00c/l (SEPTEMBER 2004)
Retail Margin 39.800 c/l 8.767
Wholesale Margin 37.268 c/l 8.209
Transport Cost 13.000 c/l 2.863 (Based on
Petronets Tariffs)
Slate Levy 1.000 c/l 0.220
Customs Excise 4.0 c/l 0.881
17
PPT-1012
61
Financials

• South African Airways

62

• Financial overview

63

Revenue by Route (FY2005F)
Intercontinental routes accounted for 60 of
passenger revenue.
Note Revenue is a forecast for FY2005, and
includes passenger and cargo revenue only Source
SAA Finance

64

Revenue by Sales Region
Roughly 50 of SAAs sales are generated outside
of South Africa.
Note Data is for FY2005YTD 48 of sales (i.e.
originating from outside RSA) are denominated in
foreign currency Source SAA Finance

65

Cost Overview
Fuel, labour and aircraft capital costs are the
three largest cost components, accounting for 51
of operating expenses.
Note Data is for FY2005F Roughly 50 of SAAs
costs are incurred in foreign currencies Source
SAA Finance

66

• Route structure

67
SAA Network Reach

• Serves 600 intercontinental destinations
• Serves 30 African destinations
• Serves 21 domestic destinations
• Offers 358 daily frequencies
• SAA has 9 route specific alliances

68
SAA network structure
Utilising alliances and code shares, SAA serves
over 600 destinations.
NewYork
Frankfurt
London
Atlanta
Dubai
Hong Kong
São Paulo
Johannesburg/Cape town
Sydney
Perth
69
SAA Route Network - Intercontinental (1Q2006)
Asia/Australia
Europe
Americas

• Mumbai 7
• Hong Kong 7
• Perth 4

• Paris - 7
• Frankfurt (JNB) - 7
• Frankfurt (CPT) - 3
• Milan - 3
• Zurich - 7
• London (JNB) - 14
• London (CPT) - 9

• Sao Paulo 7
• Atlanta 7
• New York - 7

Note Figures represent flights per week and
excludes code shares To be cancelled after
Southern summer due to poor profitability
70
SAA Route Network - Africa (1Q2006)
Eastern/Islands
Southern/Central
Western

• Nairobi - 9
• Dar-es-Salaam 7
• Mauritius 9
• Entebbe - 3
• Kigali - 1

• Luanda 3
• Kinshasa 3
• Blantyre 2
• Lilongwe 5
• Maputo 9
• Windhoek 17
• Lusaka 12
• Harare 13
• Victoria Falls - 11

• Dakar 7N/3S
• Cape Verde 7N/3S
• Lagos 4
• Accra/Abidjan 4

Note Figures represent flights per week and
excludes code shares
71
SAA Route Network - Domestic (1Q2006)
Daily flights
Route

• JNB CPT

• 22

• JNB DBN

• 16

• E. Cape

• 11

• Coastals

• 12

• JNB George

• 3

Note Coastals CPT-DBN, PLZ-CPT and PLZ-DBN
E. Cape JNB-PLZ and JNB-ELS
72

• Fleet structure

73
SAA Fleet Composition (by 2005)
A/C Type
Number

• A340-600

9

• A340-300e

6

• A340-200

6

• 747-400

8

• A319-100

11

• 737-800

21
61
Note All but 7 of SAAs aircraft are leased
Owned aircraft include A340-600 (6) and B747-400
(1)
74
Deliveries to date
A/C Type
Number
Delivery

• A340-600

7
Done

• A340-600

2
2005

• A340-300e

3
Done

• A340-300e

3
1Q2005

• A319-100

11
From 1 Sep 2004
26
75
SAAs new fleet benefits

• When fleet renewal is completed average fleet age
  will be 4 years
• The products and services will be world-class
• Lie-flat seats
• Premium service
• Cost efficiencies enormous
• Lower fuel consumption
• Fewer pilots (no flight engineer for long haul)
• Lower maintenance

76

• Personnel

77

SAA Employee Headcount
Technical staff, airport staff and cabin crew
account for 72 of SAAs employee headcount.
Note Headcount is for March 2004 Airport staff
includes international station staff Overhead
includes sales, marketing, finance, IT, HR and
executive management Source SAA HR

78

• Technical issues

79
Financial Lease

• Substantially all the risks and rewards
  associated with ownership of the asset are
  transferred from the lessor to the lessee
• Obligations under the finance lease agreement are
  capitalised onto the balance sheet
• Asset is depreciated over the remaining useful
  life
• Periodic lease payments applied to reducing
  capital portion of the lease liability and
  expensed as finance cost
• Finance lease is in substance a loan (with
  simultaneous purchase of asset)

80
Operating Lease

• Substantially all the risks and rewards are not
  transferred to the lessee (e.g. SAA)
• Lease payments are expensed as operating costs
• Asset is not on the balance sheet of the lessee
• An operating lease is in substance similar to a
  rental agreement

81
Hedging

• Financial term used to describe the process of
  covering financial exposures faced by a company
• Much the same as buying insurance to cover
  personal risk
• Financial exposures arise as a result of the
  ongoing activities of a company
• Nature of such risks foreign currency, interest
  rate, inflation, commodities (e.g. oil) any
  financial instrument whose price fluctuates and
  therefore whose value in the future cannot be
  known with certainty
• A market exists for insurance products to cover
  these risks e.g. forward exchange contracts
  (FECs), swaps, options, futures contracts, etc.
• An example would be where a South African company
  buys an asset whose price is in Euro, for
  delivery at a future date. The South African
  company can either carry the exposure, and at the
  future date sell Rand to buy enough Euro to pay
  for the asset. Alternatively, the South African
  company can choose to fix or cap the Rand price
  at which it needs to buy Euro in the future to
  pay for the asset.

82
SAA Hedges

• Hedging should in most instances be used by
  companies to cover their exposures and to create
  certainty. This is desirable as it makes robust
  and value creating decision making possible. It
  also makes long term decision making possible. So
  called derivatives, which is the term used to
  describe many of these hedging instruments used
  to achieve certainty in financial risk, are
  actually powerful tools used appropriately and
  responsibly
• Hedging should be in respect of all exposures in
  one particular financial risk area. For example,
  one should first offset foreign currency outflows
  against foreign currency inflows, with only the
  residual (net exposure) amount being considered
  for hedging unless there is market failure
• Deliberately hedging one side (inflow or outflow
  only) in the absence of market failure is not
  really hedging, but speculation, or taking a bet
• In the case of the hedging issue at SAA, the
  failure to assess the net exposures by looking at
  both inflows and outflows was at the heart of the
  problems they then faced in the future. Rather
  than hedging, they turned out to have taken a
  bet, which they subsequently lost
• As is normally the case in situations where
  companies lose a lot of money because of
  financial decisions, it is usually not the fault
  of the derivatives, but that of management

83
Investment Portfolio
Transnet
Metro rail
Autopax
Others
SAA/SAX
84
Financials

• Thank you