Shareholder Expectations

Description
Document tell shareholder expectations.

TRANSNET ANNUAL REPORT 2007 1
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FOUR-POINT
TURNAROUND
STRATEGY
• Implementation of risk
management strategy
• Sustainability value
measurement framework
• Contract lifecycle
management
• Corporate performance
reporting
• Safety
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• Skills audit and matching
• Recruitment and retention
• Capacity and skills
• Performance management
• Talent management
• Culture
• Strategic asset and liability
management
• Disposal of non-core
businesses
• Post-retirement funding
• Gearing and cash flow
management
• Cost of capital
• Efficiencies and
performance reliability
• Integration (port/rail
interface)
• Customer focus
• Infrastructure and
maintenance programme
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STRATEGY
Transnet is committed to enabling economic growth through providing
integrated, appropriate port, rail and pipeline infrastructure and
operations in a cost-effective and efficient manner and within acceptable
benchmark standards.
This commitment is consistent with Transnet’s shareholder’s expectation as
set out in, amongst others, the Shareholder Compact between Transnet and
the Government of the Republic of South Africa.
The Company continues to give meaning to its strategic intent through the
implementation of the four-point turnaround strategy.
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SHAREHOLDER EXPECTATIONS
STRATEGIC INTENT
2 TRANSNET ANNUAL REPORT 2007
Mossel Bay
Johannesburg
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Cape Town
Richards Bay
Durban
East London
Port Elizabeth
Saldanha
Sishen
Maputo
Ngqura
Ports and
Terminals
Pipelines
Rail
TRANSNET’S REACH
Operational reach
Capital expenditure by corridor
National Ports Authority
35
30
25
20
15
10
5
0
Sishen-Saldanha
Planned capital expenditure for the next five years
Gauteng – Cape Town Gauteng – PE, Ngqura, EL Gauteng – Durban Gauteng – Richards Bay Country-wide
Pipelines Other
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Freight Rail Rail Engineering Port Terminals
GROUP STRUCTURE
Transnet is the custodian of major rail, port and pipeline assets
in South Africa. With more than R77 billion in assets and employing
more than 48 000 people, it provides seamless and integrated bulk
freight services through five interdependent operating divisions
namely: Freight Rail, Rail Engineering, National Ports Authority,
Port Terminals and Pipelines.
Transnet Ltd’s only shareholder is the State.
Transnet Freight Rail (previously Spoornet) operates freight trains
serving customers in export mining (coal and iron ore), mining,
manufacturing, agriculture and forestry and containers and
automotive. It has a 22 247 km rail network, of which about
1 500 km are heavy haul lines. Its infrastructure represents about
80% of Africa’s rail infrastructure.
Transnet Rail Engineering (previously Transwerk) is responsible for
in-service and out-of-service maintenance, refurbishing, wreck
repair, conversions and upgrade of locomotives, wagons and
coaches, manufacture of new wagons, wheels, bogies and rolling
stock components. Rail Engineering has 150 depots and seven
factory centres countrywide.
Transnet National Ports Authority (previously National Ports
Authority) is responsible for the safe, efficient and effective
economic functioning of the national ports system which it manages,
controls and administers on behalf of the State. It manages the
seven ports within South Africa, namely: Saldanha Bay, Cape Town,
Mossel Bay, East London, Port Elizabeth, Durban and Richards Bay.
The Port of Ngqura, when operational, will become the eighth port
under National Ports Authority’s control.
Transnet Port Terminals (previously South African Port Operations)
is responsible for cargo handling and logistics management
solutions. Its port operations service customers across a broad
spectrum of the economy including the shipping industry, vehicle
manufacturers, agriculture sector, steel and mining industry.
The division operates 15 port terminals across six South African
ports.
Transnet Pipelines (previously Petronet), the pipeline operating
division of Transnet, will ensure the security of supply of critical
energy (in the form of petroleum products) through its network of
3 000 km of underground pipelines. It serves the South African oil
industry and operates throughout the eastern parts of South Africa,
along the Durban to Gauteng corridor, traversing five provinces:
KwaZulu-Natal, Free State, Gauteng, North West and Mpumalanga.
The above operating divisions are supported by Transnet Projects, Transnet Properties, Esselen Park
and Group Services.
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TRANSNET ANNUAL REPORT 2007 3
4 TRANSNET ANNUAL REPORT 2007
GROUP KEYPERFORMANCE INDICATORS
for the year ended 31 March 2007
Target Actual Target
2007 2007 2008
Total Group 12,7 8,4 13,0
Freight Rail 13,9 4,0 12,0
National Ports Authority 9,0 12,0 11,4
Port Terminals 12,0 14,0 15,0
Pipelines 6,3 15,0 17,0
Forecast performance
The Group is confident that it will be able
to improve performance in the year ahead.
The focus for the year ahead will be aimed
at achieving targeted revenue growth
fromincreased volumes transported.
Performance
The Group did not achieve its
revenue objective in the current year,
due mainly to the under-performance
at the Freight Rail operating division.
This division experienced capacity
constraints and derailments as well
as customer-related problems.
TOTAL REVENUE INCREASE (%)
Target Actual Target
2007 2007 2008
Total maintenance spend
compared to budget
– Freight Rail 3 890 5 495 5 247
% achieved 90 125 > 90
Forecast performance
The programme addressing the historical
under-maintenance of locomotives, wagons
and infrastructure, which was in its second
year during the year, will further address poor
reliability. This programme is expected to
come to an end during 2009, by which stage
a comprehensive preventative maintenance
plan, covering all aspects of the Freight Rail
fleet, will be implemented.
Performance
The Group exceeded its target and
continues to address backlog
maintenance in an effort to improve
poor reliability and availability of
rolling stock and consequently
improve customer service.
INFRASTRUCTURE INVESTMENTS
Target Actual Target
2007 2007 2008
Actual capital
expenditure compared
to budget (R million) 11 847 11 674 16 935
% achieved 90 99 > 90
Forecast performance
The target for the year is 42% higher than the
current year spend. The Group is confident that
the target will be achieved. A Capital Projects
operating division has been established to
drive and manage all infrastructure projects in
excess of R300 million. The focus of the
division will be to improve capital planning and
execution processes within the Group.
Performance
The Group exceeded its target and
demonstrates the commitment of the
Group to provide customer service,
address the investment backlog and
provide a stable platform to support
economic growth.
Target Actual Target
2007 2007 2008
EBITDA margin (%) 34,8 40,7 > 35*
Forecast performance
The Group adopted a medium-termtarget
of margins in excess of 35%.
Performance
The Group exceeded its target for the
year by 17%. All operating divisions
contributed to the Group’s
performance. Revenue growth (refer
above) and operating efficiencies
contributed to this performance.
CAPITAL AND FINANCIAL EFFICIENCY
Target Actual Target
2007 2007 2008
Cash interest cover (times) 5,4 5,4 > 5*
Forecast performance
The Group adopted a medium-term target
of greater than 5 times. However, in the year
ahead the capital expenditure programme
will make the target difficult to achieve.
Performance
The Group achieved its target and this
demonstrates the ability to generate
strong operational cash flows and
service its obligations.
* Medium-term targets
Target Actual Target
2007 2007 2008
Gearing ratio (%) 47,9 39,0 < 50*
Forecast performance
The Group adopted a medium-term target
of between 40% and 50%.
Performance
The Group exceeded its target and this
provides a stable platform fromwhich
to support the capital expenditure
programme. The improvement is due
mainly to the reduction in the post-
retirement benefit obligations of
the Group.
Target Actual Target
2007 2007 2008
Cash flow return on
investment (CFROI) (%) 5,8 6,8 > 6*
Forecast performance
The Group adopted a medium-term target
of greater than 6%. However, in the year ahead
the capital expenditure programme will make
the target difficult to achieve.
Performance
The Group exceeded its target
and demonstrated its ability to earn
an appropriate return on investment
capital.
Revenue –
continuing
operations
R28 214
million
8% change
CONSOLIDATED SALIENT FEATURES
for the year ended 31 March 2007
HIGHLIGHTS
14 000
12 000
10 000
8 000
6 000
4 000
2 000
0
03
Cash generated from operations
(R million)
04 05* 06* 07*
7

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Cash interest cover (times)
04 05* 06* 07*
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12 000
10 000
8 000
6 000
4 000
2 000
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Capital expenditure (R million)
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2007* 2006* %
R million R million change
Revenue 28 214 26 034 8,4
EBITDA 11 488 10 301 11,5
Operating profit 8 470 8 138 4,1
Profit for the year 6 322 4 828 30,9
Number of ordinary shares issued (millions) 12 661 14 710 (13,9)
Profit per share (cents) 49,9 32,8 52,1
Total assets 77 254 78 346 (1,4)
Total debt 39 821 48 820 (18,4)
Capital and reserves (including minorities) 37 433 29 526 26,8
Cash flows from operating activities 13 488 11 244 20,0
Capital expenditure (excluding intangibles) 11 674 6 601 76,9
EBITDA margin (%) 40,7 39,6 2,8
Refer glossary of terms on page 245
* Continuing operations
R11 488
million
EBITDA –
continuing
operations 12% change
TRANSNET ANNUAL REPORT 2007 5
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Gearing (%)
04 05* 06* 07*
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Return on average total assets (%)
04 05* 06* 07*
9
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Interest cover (times)
04 05* 06* 07*
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40 000
35 000
30 000
25 000
20 000
15 000
10 000
5 000
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Net assets employed (R million)
04 05* 06* 07*
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CONSOLIDATED PERFORMANCE INDICATORS
for the year ended 31 March 2007
R13 488
million
Cash flow
generated from
operations
March March March March March
2007* 2006* 2005* 2004 2003
PROFITABILITYMEASURES
EBITDA margin (%) 40,7 39,6 29,0 17,0 21,9
Return on average total assets (%) 11 10 7 7 9
SOLVENCYRATIOS
Gearing ratio (%) 39 46 61 83 65
Cash interest cover (times) 5,4 4,5 4,8 3,5 4,3
CASH FLOWMEASURES
Operating cash flow to total debt (%) 34 23 18 12 17
* Continuing operations
6 TRANSNET ANNUAL REPORT 2007
Gearing –
continuing
operations
39%
15% improvement
20% change
CONSOLIDATED FIVE-YEAR REVIEW
for the year ended 31 March 2007
Equity
attributable
to the
shareholder
R37 311
million
27% change
TRANSNET ANNUAL REPORT 2007 7
45 000
40 000
35 000
30 000
25 000
20 000
15 000
10 000
5 000
0
03
Revenue (R million)
04 05* 06* 07*
2
3

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9
12 000
10 000
8 000
6 000
4 000
2 000
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EBITDA (R million)
04 05* 06* 07*
8

2
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8 000
7 000
6 000
5 000
4 000
3 000
2 000
1 000
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03
Operating profit (R million)
04 05* 06* 07*
6

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6
1
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4
1
4
8

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3
88

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March March March March March
2007* 2006* 2005* 2004 2003
Restated Restated
R million R million R million R million R million
INCOME STATEMENT AND CASH FLOW
Revenue 28 214 26 034 25 260 43 637 41 278
EBITDA 11 488 10 301 7 333 7 442 9 037**
Depreciation and amortisation (3 018) (2 163) (1 857) (2 600) (2 258)
Operating profit 8 470 8 138 5 414 4 750 6 552**
Fair value adjustments 2 385 815 4 890 (4 529) (7 074)
Net finance costs (2 437) (2 406) (2 107) (2 211) (2 637)
Profit/(loss) before taxation 8 222 6 837 7 330 (6 211) (625)
Taxation (1 902) (2 042) (1 582) 204 16
Profit/(loss) for the year 6 322 4 828 5 810 (6 332) (421)
Cash generated from operations 13 488 11 244 10 089 7 040 7 178
BALANCE SHEET
Equity 37 433 29 526 21 559 9 917 17 641
Non-current liabilities 22 832 22 189 30 789 32 217 32 669
Current liabilities 16 989 26 631 25 228 30 566 18 456
Total debt 39 821 48 820 56 017 62 783 51 125
Equity and liabilities 77 254 78 346 77 576 72 700 68 766
Non-current assets 57 843 50 144 59 967 57 156 54 883
Current assets 19 411 28 202 17 609 15 544 13 883
Total assets 77 254 78 346 77 576 72 700 68 766
* Continuing operations
** Excluding R2,8 billion relating to the sale of MTN Group Ltd shares and the sale of Fleetcall.
Cash flow
return on
investment
(CFROI)
6,8 %
17% change
BOARD OF DIRECTORS
8 TRANSNET ANNUAL REPORT 2007
1. Mr FTM Phaswana (62)
Chairman
BA (Hons), BCom (Hons) (Energy
Economics), (RAU), MA (SA)
Other directorships and trusteeships
Chairman: Anglo American Corporation
of South Africa Ltd
Chairman: Ethos Private Equity Ltd
Chairman: Anglo Platinum Ltd
Anglo American Plc
Naspers Ltd
Media24 Ltd
Inyathelo Trust (The South African
Institute for Advancement)
2. Mr BT Ngcuka (53)
BProc (University of Fort Hare), LLB
(University of South Africa),
MA (International Relations)
(Webster University, Geneva, Switzerland)
Businessman
Other directorships and trusteeships
Chairman: Vuwa Investments (Pty) Ltd
Chairman: City Couriers (Pty) Ltd
Chairman: Top Fix Holdings Ltd
Chairman: Basil Read Holdings Ltd
Chairman: Transnet Foundation Trust
The PA Group Ltd
Growthpoint Properties Ltd
Mutual & Federal (Pty) Ltd
Sail Group Ltd
Rolfes Ltd
STRB Attorneys
Amadlelo Agri
3. Ms M Ramos (48)
Group Chief Executive
Institute of Bankers Diploma (CAIB)
(Institute of Bankers), BCom (Hons)
(Economics) (Wits), MSc in Economics
(University of London)
Other directorships and trusteeships
Sanlam Ltd
Remgro Ltd
Patron of Yabonga Children’s Project
4. Ms KC Ramon (40)
BCompt (Hons), CA(SA), Senior Executive
Programme Graduate
(Harvard Business School in conjunction
with Wits Business School)
Chief Financial Officer: Sasol Ltd
Other directorships
Sasol Ltd
5. Mr PG Joubert (74)
BA (Rhodes), DPWM (Rhodes), AMP
(Harvard)
Director of companies
Other directorships and trusteeships
Chairman: BDFM Publishers (Pty) Ltd
Chairman: Munich Reinsurance Company
of Africa Ltd
Chairman: Sandvik (Pty) Ltd
Sandvik Mining and Construction RSA
(Pty) Ltd
South African Airways (Pty) Ltd
Cycad Financial Holdings Ltd
IMS Holdings (Pty) Ltd
South African Brain Research Institute
Voest-Alpine Mining and Tunnelling
6. Dr I Abedian (51)
BA (Hons) (Economics) (University of Cape
Town), MA (Economics) (University of
Cape Town), PhD in Economics (Simon
Fraser University in Canada)
Founder and Chief Executive: Pan African
Capital Holdings (Pty) Ltd and Pan African
Investment and Research Services
Other directorships and trusteeships
AFReC (Pty) Ltd
Chairman: PBS (Pty) Ltd
Munich Reinsurance Company of Africa Ltd
Development Bank of Southern Africa
Clopique 98 (Pty) Ltd
Velvet Moon Stones (Pty) Ltd
IAMA Global Trade (Pty) Ltd
Transnet Second Defined Benefit Fund
7. Prof GK Everingham (57)
BCom (UPE), BCom (Hons) (UCT), MAS
(Illinois), CA(SA)
Professor of Accounting at UCT
Other directorships and trusteeships
Chairman: Diocesan College (Bishops)
Council
Chairman: Chris Barnard Fund
GK Everingham Investments (Pty) Ltd
8. Ms NBP Gcaba (36)
B Juris (University of Fort Hare), LLB
(University of Natal)
Partner at Spoor & Fisher Attorneys
Other directorships and trusteeships
Transnet Retirement Fund Property Trust
Transnet Second Defined Benefit Fund
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TRANSNET ANNUAL REPORT 2007 9
9. Ms Z Stephen (33)
Group Company Secretary
BProc (University of Durban-Westville)
LLB (University of Natal)
Post-graduate Diploma in Corporate Law
(Unisa)
10. Mr CF Wells (57)
Chief Financial Officer
BCom (University of Cape Town), CA(SA)
Other directorships and trusteeships
Chairman: Transnet Pension Fund
Sethani Ltd (section 21 Company)
Transpoint Properties (Pty) Ltd
11. Ms NR Ntshingila (43)
Diploma in Advertising – AAA School
of Advertising, BA (University of
Swaziland)
MBA – Morgan State University,
Maryland (USA)
Chief Executive Officer: Ogilvy – South
Africa
Other directorships and trusteeships
Chairman: Ogilvy PR
Chairman: Zoom
Ogilvy Africa
PWC CSI Board
Ntinta Investment
12. Dr ND Haste OBE (62)
OBE for Services to Civil Engineering
Chief Executive Officer: Aldar/Laing O’
Rourke JV
Chief Operating Officer: Laing O’ Rourke
Middle East
Other directorships and trusteeships
Al Naboodah Laing O’ Rourke
DLF-Laing O’ Rourke
13. Ms NNA Matyumza (44)
BCom (University of Transkei), BCompt
(Hons) (University of Transkei), LLB
(University of Natal)
General Manager: Eastern Region, Eskom
Distribution
Other directorships and trusteeships
Born Free Investments (Pty) Ltd
Ikusasalethu Investments
E-Valuations
South African Women’s Association (SAWA)
14. Dr SE Jonah KBE (57)
ACSM, MSc, DIC, DSc (hc) D Phil (Lc)
Chairman: Jonah Capital (Pty) Ltd
Other directorships and trusteeships
Anglo American Corporation
of South Africa Ltd
Copper Resources Corporation
Moto Goldmines Ltd
Standard Bank of South Africa
Chairman: Equator Exploration (Pty) Ltd
Chairman: Scharrig Mining Ltd
Co-Chairman: Uramin Resources Inc
Chairman: Transnet Second Defined
Benefit Fund
15. Mr S Nicolaou (42)
Bachelor of Pharmacy (University
of the Witwatersrand)
International Trade (Institute of
International Trade of SA)
Group Senior Executive: Strategy
and Trade Development: Aspen Pharmacare
Holdings Ltd
Other directorships and trusteeships
Chairman: South African Express Airways
(Pty) Ltd
Aspen Pharmacare International (Pty) Ltd
Garec Pharmaceuticals (Pty) Ltd
Merck Msizi Trust
Merck Msizi Advisory Board
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EXECUTIVE COMMITTEE
10 TRANSNET ANNUAL REPORT 2007
The Executive Committee
is mandated to execute the
Board-approved strategy.
1. Mr CA Möller (Chief Executive: Transnet Pipelines)
2. Mr T Morwe (Chief Executive: Transnet Port Terminals)
3. Mr R Vallihu (Chief Executive: Transnet Rail Engineering)
4. Mr KXT Socikwa (Head: Restructuring)*
5. Mr BJ Dludlu (General Manager: Corporate and Public Affairs)*
6. Mr KC Phihlela (Chief Executive: Transnet National Ports Authority)
7. Mr CF Wells (Chief Financial Officer)
* By invitation
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TRANSNET ANNUAL REPORT 2007 11
8. Mr L van Niekerk (Chief Operating Officer)
9. Mr P Maharaj (Group Executive: Human Resources)
10. Ms M Moses (Group Executive: Transnet Projects)
11. Ms VDunjwa (Chief Risk Officer)
12. Ms Z Stephen (Group Company Secretary)
13. Mr VD Kahla (Group Executive: Office of the Group
Chief Executive)
14. Ms M Ramos (Group Chief Executive)
15. Mr SI Gama (Chief Executive: Transnet Freight Rail)
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Cape Town container terminal’s capacity will increase to 2,6 million 20 foot equivalent units (TEUs) by 2011
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EXECUTIVE STATEMENTS
Chairman’s statement 12
Group Chief Executive’s review 20
Chief Financial Officer’s report 42
CHAIRMAN’S STATEMENT
INTRODUCTION
This is the third annual letter I am
writing as Chairman of this
Company, covering a year in which
Transnet’s transformation and
restructuring have reached
maturity. And it is an opportunity
for me to share our views on the
policy, regulatory and economic
developments that affect our
business, positively and
negatively, as well as our
assessment of how the Company
fares under such circumstances.
It gives me great pleasure indeed
to note that, whilst spelling out
the challenges facing the
business and its managers, these
reports have broadly been about
tracking the Company’s
remarkable journey of
transformation. Transnet is
transformed and is transforming.
Certainly, Transnet’s turnaround
into a world-class cost-effective
freight business continues to be
supported by buoyant economic
conditions. But that turnaround
has, more importantly, also been
due to a radical restructuring of
our operations and of our
Company’s finances, made
possible by the interconnection
of our interdependent operations.
Disposals of non-core assets have
freed management to focus on
those operations that are core as
well as helping us achieve a
necessary strengthening of our
balance sheet. But first, a look at
the economic environment in
which we are operating:
12 TRANSNET ANNUAL REPORT 2007
Fred Phaswana
Chairman
ECONOMIC OUTLOOK
South Africa’s economy registered
yet another strong performance
during the past year. Real gross
domestic product grew by 5% in
2006, broadly in line with the
growth rates of the preceding two
years. Average GDP growth of 5%
over three successive years was
last experienced more than a
quarter of a century ago and when
the economy was stimulated by a
narrow boom in gold prices. It is
clear that the economy has now
shifted to a new, broadly-based
growth trajectory. As the custodian
of the country’s integrated ports,
rail and pipeline networks, Transnet
plays a key role in supporting this
new economic path.
Robust economic performance over
the past three years has paved the
way for significant employment
gains. To cite but one industry
which is an important client of
Transnet, employment in motor
manufacturing surged to a 10-year
high in the third quarter of 2006 as
manufacturers increased their
production to meet higher local
and international demand.
The positive economic performance
can be attributed to a number of
factors including a favourable
international macro-economic
environment, a sharp recovery in
commodity prices since 2003 and
the growth-inducing benefits of a
stable domestic macro-economic
environment. But there is a flip
side. Increasing global competition,
rising interest rates, volatility in
commodity and oil prices
contributed to a challenging
operating environment for Transnet
and its customers in 2006. And,
perhaps most importantly, the
global shortage of project
management and engineering skills
remains a key problem faced by all
businesses. South Africa is not
alone in facing this problem – our
country’s industries are having to
compete with those of the rest of
the world for skills. Skills are
increasingly mobile, and
managements can ill afford to be
complacent over the issue.
Of significant concern to Transnet
itself has been the relatively poor
performance of exports. Once again
they fared badly against imports,
registering a growth of 5,5% this
past year against the 18,4%
recorded for imports. This
unbalanced growth has been mainly
attributable to the subdued
performance of the mining sector
in 2006, where production in most
sub-sectors declined in the first
half of the year and where exports
were, in some cases, restricted
by infrastructural capacity
constraints. This projected growth
in import and export volumes is
indicative of the capacity additions
that Transnet needs to plan for.
We at Transnet are responding by
ensuring that our own
infrastructure will be adequate to
deal with our clients’ likely
requirements. But I must
emphasise that expansion of our
infrastructure will be carried out
responsibly, ensuring that any
investment is financially sound
and sustainable.
The manufacturing sector continued
to display robust growth in 2006,
with exports of manufactured goods
rising by 4,4% in real terms. Higher
economic growth has increased the
demand for distribution and logistics
services. The transport, storage and
communications sector grew at 5,5%
in the first half of 2006, slightly
below the average annual growth
of 6,2% between 2001 and 2005.
Sustained growth in demand over
an extended period, without
concomitant increases in capacity,
has resulted in capacity constraints
in most parts of the freight logistics
system. As an example, container
volumes through the ports have
grown by an average rate of 11,7%
per annum over the past five years –
and are projected to continue to
grow at similar rates over the
medium term – increasing demands
on Transnet’s infrastructure.
Simply put, Transnet is faced with
the challenge of having to put in
place, and to finance, major
integrated expansions of its
operations over the next several
years. It can be done in a stable
regulatory environment in which
management’s attention is not
deflected from its proper role of
managing our operations. We shall
not expand in a disorganised
fashion – every single project will
be subject to rigorous technical and
financial criteria. We shall not
invest in projects that do not offer
appropriate returns. Transnet is,
and should remain, a business
founded on sound business
principles.
TRANSNET ANNUAL REPORT 2007 13
“Transnet is, and should
remain, a business
founded on sound
business principles”
CHAIRMAN’S STATEMENT continued
While a mild slowdown in global
growth is expected over the next two
years, South Africa’s medium-term
prospects are very promising.
Growth is forecast to average 5%
per annum over the next three years.
A more sustainable growth path is
expected to emerge, with
investment spending and exports
supplanting household consumption
as the main drivers of economic
growth. As this happens, greater
demands will be placed, for example,
on Transnet’s ability to handle goods
and transport them from and to the
ports. Investments in the energy,
telecommunications and transport
sectors will remove bottlenecks and
lower input costs for South African
manufacturers, thereby enhancing
their global competitiveness.
Export growth is expected to
strengthen from an annual average
of 1,1% between 2002 and 2004 to
6,7% over the next three years as
commodities and manufactured
exports respond to rising global
demand and as the competitiveness
of local businesses improves.
Transnet will play a key role in
supporting this growth through
complementary investments in
port, rail and pipeline capacity and
through improvements in service
delivery designed to provide
domestic firms with access to
integrated bulk transport systems.
High commodity prices and
improved macroeconomic policies
continue to support growth in sub-
Saharan Africa. The region’s GDP
expanded by an estimated 5,3% in
2006 (though some countries
performed markedly better than
others), marking the third
consecutive year that regional
growth has exceeded 5%. This
expansion has been broad-based,
with more than a third of the
region’s countries experiencing
growth rates in excess of 5%. The
high growth trend is forecast to
continue as buoyant domestic
demand is expected to spur growth
in the non-commodity sectors of
most countries. Regional economic
integration is a key focus area for
Government, and Transnet will
examine its potential role in
this regard.
FINANCIAL RESULTS
It is satisfying to report another year
of excellent results which underscore
the correctness of Transnet’s
strategy and its implementation.
Revenue increased by 8,4%,
reflecting strong volume growth in all
of our operating divisions with the
single exception of Freight Rail (refer
details in the Group Chief Executive’s
review on page 34). Operating profit
of R11,5 billion before depreciation
and amortisation was 11,5% higher
than in the preceding year. This was
achieved through significant
operating efficiency improvements
across the board, including and
particularly at Freight Rail, as a
result of the effective
implementation of the business
reengineering programme, Vulindlela.
The Vulindlela project is focused on
the reengineering of our business
processes needed to deliver better
customer service, productivity and
profitability improvements,
efficiency, synergies and cost
savings.
We are on the right track to
becoming a clearly focused
customer-oriented business.
The year’s profit from continuing
operations is R6,3 billion. I am
pleased that all of the financial
targets set out in the Corporate
Plan for the year and in the
Shareholder Compact were
achieved in aggregate. Accordingly,
the key financial ratios of margin,
gearing and cash interest cover all
showed improvement. Again, we are
on the right track to becoming a
Company whose finances are
appropriate and sustainable.
TRANSFORMATION
The past year has, once again, seen
remarkable progress in the
implementation of our
transformation strategy. To
Transnet, transformation means
several things. Firstly, it refers to
the structural transformation of the
business to focus on the
necessarily complementary core
areas of freight rail, ports and
pipelines. Secondly, it refers to
service delivery (in Transnet’s case,
the efficiency improvements and
capacity building that will enable it
to deliver appropriate cost-
effective services to its customers
and clients). Thirdly, it refers to the
wider socioeconomic
transformation projects being
pursued by our sole shareholder –
the Government of the Republic of
South Africa.
The structural transformation of
Transnet Ltd into a focused owner
and operator of ports, rail and
14 TRANSNET ANNUAL REPORT 2007
pipelines is in its final stages and
will be completed in the new year.
Now that we have completed the
transfer of SAA, the country’s
national airline, and Metrorail, the
city commuter rail business, to the
Departments of Public Enterprises
(DPE) and Transport (DoT),
respectively, and the sale of a
number of other businesses and
investments, notably the Victoria &
Alfred Waterfront (V&A), the
Company will focus in the new year
on disposing of the remaining –
though less-complex and smaller –
non-core businesses.
The executive is to be commended
for its achievements during the
year. They include:
• Another set of positive
financial results based on
increasing freight volumes,
results that reaffirm the
appropriateness of our
turnaround strategy and of its
benefits for our customers;
• Significant progress in
disposing of the non-core
portfolio. Importantly, the more
complex disposals have been
concluded;
• Implementation of the capital
investment programme.
The capital investment of
R11,7 billion was 77% greater
than that of the previous year
and was the largest investment
Transnet’s core businesses
have ever made in a single year.
A significant effort has gone
into establishing a delivery
capacity within the
organisation that can sustain
the high level of investment
required over the medium term;
• Embedding the operational
efficiency enhancement
measures across the business.
Executive management’s
determined focus on
operations continues to drive
our growing operational
efficiencies, which are
increasingly benefiting our
clients and customers
especially those of Freight
Rail’s operations;
• Purposeful roll-out of the
human resources strategy,
which is starting to bear fruit
across the board; and
• Renewed focus on risk
management, especially the
safety of the Company’s assets,
of its employees and of its
customers’ cargo. Performance
in all of these areas showed a
significant improvement
against last year and points to
the efficacy of our risk
management systems and
processes.
DISPOSALS
On the disposals front, it is
pleasing to note that the process of
exiting from the range of
investments that we viewed as non-
core was conducted in a manner
that was transparent, fair and
consultative.
The process allowed us to play
midwife to some of the most
imaginative and transformative
transactions in our country. The fact
that none of the transactions have
been credibly challenged testifies
to the rigour of the processes and is
a tribute to management. I also wish
to commend management and my
Board colleagues for their
exemplary conduct during the
disposal process, placing the
interests of the Company (and, by
extension, of the country) ahead of
their own personal and commercial
consideration. They operated
according to the highest standards
of corporate governance and ethics.
As the disposal strategy reaches
finality during the next year,
Transnet will be left with a group of
complementary core operations
that are central to its business.
STRATEGYREFINEMENT
The success in achieving the
financial turnaround of the
business, underpinning the
operational effectiveness, has
freed the executive to concentrate
on anchoring the remaining pillars
of the turnaround, most notably an
improvement in operational
performance and service delivery.
The results of this focus are
evident in the operational
performance of the business (refer
to the Group Chief Executive’s
review on page 24).
The four-point turnaround strategy
will continue to anchor and guide
the focus of the organisation over
the coming year. Additional
emphasis will be placed on
developing integrated transport
solutions for South Africa’s bulk
goods and manufacturing sectors
and on accelerating the
implementation of our human
resources strategy.
TRANSNET ANNUAL REPORT 2007 15
“It is satisfying to report
another year of excellent
results which underscore
the correctness of
Transnet’s strategy . . .”
CHAIRMAN’S STATEMENT continued
Coupled with the successful
resolution of the pension fund deficit
problem – relating to the Transnet
Second Defined Benefit Fund (refer
to the Group Chief Executive’s review
on page 37 and the Chief Financial
Officer’s report on page 45) – the
completion of the disposals
programme will mark the completion
of management’s dedicated efforts
to restructure the balance sheet.
From now on, the focus of our
attention will be on strategic
management of the balance sheet –
that is, ensuring that the balance
sheet remains sufficiently strong to
support the financing of our growth.
This is imperative as we continue to
implement the investment
programme.
In brief, the pillar in the four-point
turnaround strategy relating to the
balance sheet will henceforth
change to reflect this shift in focus
– from restructuring the balance
sheet to its strategic management.
To recap, the four-point turnaround
strategy will remain broadly the
same, save for the pillar of the
balance sheet. In future, our
corporate strategy of owning and
operating world-class ports, freight
rail and pipelines will henceforth
be based on the following:
• Redirecting and reengineering
the business;
• Strategic balance sheet
management;
• Improving our adherence to the
highest standards of corporate
governance and of vigilant risk
management; and
• Revitalising our human capital.
The shift towards strategic
management of our balance sheet
is crucial, especially as we continue
to implement the substantial
investment programme that will
require significantly increased
borrowings from the debt capital
market. Amongst other things, this
balance sheet strength allows us to
devote particular attention to
strengthening the individual
balance sheets of those divisions
that need more attention than
others. There is strength in unity.
As it is, Transnet receives no State
aid, even though the State is our
only shareholder – a fact that is
often poorly understood. Only
Metrorail, which was our passenger
rail operating division until its
transfer to the SARCC in March
2006, received a subsidy to enable
fares to be maintained at
affordable levels.
The key benefit of having the State
as the only shareholder is our
ability to take a necessarily long-
term view of investment decisions.
This chiefly explains our ability to
invest in large projects that have a
longer payback period than might
typically be acceptable in the
private-sector.
In other words, as would be the case
with a publicly-quoted company, we
have to fund our operations from a
combination of our own cash
resources and the debt capital
market. The effectiveness will
depend on the strength of our
balance sheet – a normal practice
in business.
Our shareholder Minister, Alec
Erwin, MP, regularly states that we
have to operate according to the
same disciplines as the private-
sector. Because we do not receive
any subsidies, we have to rely on
the strength of our balance sheet
to fund our expansion programmes.
Like private corporations, we
subject ourselves to the same
market and regulatory scrutiny and
receive ratings by the same credit
rating agencies.
Transnet must generate a rate of
return on its investments that
ensures the growth and
sustainability of the Company.
HUMAN CAPITAL
The Board is heartened by the
commitment and focus with which
the executive is moving in
implementing the human resources
strategy needed to sustain the
turnaround. This is particularly so
in an economic environment in
which technical skills are
particularly scarce. The investment
we make today in our people will
benefit not only Transnet but also
the rest of the country as the size
of the skills pool grows. This is why
the link with industry and
Government’s Joint Initiative on
Priority Skills Acquisition (JIPSA)
initiative is so vital. Great nations
and great organisations are
formed by skilled, energised and
creative people.
People perform better in a positive
work environment. That is why the
focus on defining, creating and
16 TRANSNET ANNUAL REPORT 2007
nurturing a new and appropriate
corporate culture at Transnet is
both timely and important. As
much of the work has been done
by the executive in aligning
systems, processes, structures,
policies and procedures, we would
expect that the coming year will
see added focus on the corporate
culture project of the human
resources strategy. This project is
part of a wider one that includes
agreeing a new and relevant vision
and mission for Transnet linked to
its transformation and which is
designed to culminate in the
process of rebranding Transnet to
communicate a new corporate
brand architecture built around
the philosophy of “One Company,
One Vision” (also refer to the
Group Chief Executive’s review
on page 22).
The rebranding project was based
on research commissioned among
various stakeholders on the equity
embedded in the old corporate
brand and on the most appropriate
brand strategy for communicating
the revitalised and transformed
Transnet.
Last year, I reported that we had
adjusted the levels and structure
of Transnet’s executive
remuneration to bring it in line
with that of executives serving in
companies of comparable size and
complexity. The stability in the
executive team partly testifies to
the efficacy of this process plus
the implementation of the new
long-term scheme both to
incentivise and retain talented
and high-performing
professionals.
We are pleased that the
modernisation of our remuneration
system has been achieved without
compromising our commitment to
our strong ethos of public service.
The year also saw the executive
making considerable progress in
formulating strategies to retain
talent and, importantly, in actively
managing the careers of our best
performers. The formulation of
succession plans for the key
leadership layers is an important
step in mitigating one of the
systemic risks that, unattended to,
might challenge the sustainability
of the turnaround.
SAFETYFOCUS
Safety has been an issue of
concern to us as a Board. During
the year, the Board agreed to set
up the Risk Committee to provide
dedicated focus to this vital area.
Prior to the new committee’s
establishment, risk formed part of
the mandate of the Board’s Audit
Committee. It was felt that, to give
due regard to the safety of our
operations – our employees, our
assets and customers’ freight – we
needed a new Committee which is
now being chaired by Mr Peter
Joubert (also refer to the
Corporate Governance report on
page 52). This committee will
provide a mechanism for
channelling the Board’s support for
management’s focus on safety.
The Board also welcomes the
executive’s renewed focus on the
issue of safety across the business
(refer to the Group Chief Executive’s
review on page 31). The importance
of safety in our operations cannot
be over-emphasised. It is everyone’s
business. Employees, management,
the Board and the unions have a
vested interest in the improvement
of safety.
ECONOMIC REGULATION
At the start of 2007, the National
Ports Act came into force with
serious implications for our
business. For some time, we have
been engaging with the shareholder
ministry over the problematic
aspects of the Act. Given the
urgency, we felt it appropriate to
set up an ad hoc committee of the
Board to structure our engagement
with the shareholder on the
worrying issues that have arisen
from the Act. I lead this committee,
which also includes our Group Chief
Executive, and I cannot overstate
Transnet’s concern that a
successful outcome of this
engagement be achieved.
It is against this background that
we feel it proper to engage
expeditiously with the shareholder,
the Department of Public
Enterprises, as well as with the
Department of Transport, which is
the policy department. While we are
concerned over the implications of
the Act, we remain optimistic that a
sense of urgency will characterise
our engagement and that a sensible
solution, that upholds the spirit of
the Act, will be found so that
TRANSNET ANNUAL REPORT 2007 17
“The investment we make
today in our people will
benefit not only Transnet
but also the rest of the
country as the size of the
skills pool grows.”
CHAIRMAN’S STATEMENT continued
Transnet can confidently proceed
with its investment plans.
Similarly, we are concerned at the
implications of the refusal by the
National Energy Regulator of South
Africa (NERSA), to approve our
application for a 5,6% pipeline tariff
increase for Pipelines. This matter is
being addressed through
appropriate forums with the
relevant authorities.
Transnet believes and supports the
role played by independent
regulators. Independent regulators –
adjudicating over the safety and the
economic spheres of enterprises –
have an important role in the smooth
functioning of a progressive
economy such as South Africa’s.
Accordingly, we welcome the
establishment – and, in certain
instances, the strengthening – of
the institutional framework
pertaining to our business. The
births of NERSA as well as that of
the Independent Ports Regulator
(as envisaged in the National Ports
Act) are welcome additions to our
regulatory environment. We shall
collaborate with both regulators to
ensure that Transnet continues to
serve its clients and the country as
a whole efficiently.
Following the end of the year, the
Government announced the
establishment of the Independent
Ports Regulator and named its
members led by its chair,
Ms Gloria Serobe.
We have already strengthened our
compliance capacity in most areas
of our business to facilitate this
interface; and we look forward to
building a healthy working
relationship with both regulators,
based on integrity and mutual
respect (also refer to the Group
Chief Executive’s review on page 37).
GOVERNANCE
As you read this report, this Board
will have been in office for almost
three years. For myself, and I am
sure I speak for all of my Board
colleagues, they have been three
stimulating, demanding and
challenging years. As a Board, we
have sought to ensure that our task
remains one of guidance, support,
oversight and direction for the
executive, which has to have enough
space to execute strategy on a daily
basis. Similarly, we have constantly
to strike the balance between
oversight and strategic
intervention. It pleases me that this
Board has largely succeeded in this
task throughout its life, even during
the crisis it inherited on its
formation. Members of the Board
meet with the rest of the executive
twice each year to review strategy
and business plans as well as to
contribute actively to the
formulation of the Corporate Plan
(business plan) ahead of its
submission to the shareholder
minister in February. These highly
interactive sessions have proved to
be an invaluable tool in the annual
business planning process.
The balance between guidance and
intervention is also reflected in the
number and composition of the
Board’s committees which remained
the same for most of the year and,
indeed, during the life of this Board.
Apart from the departure more
than a year ago of one of its
founding members – Ms Moira
Moses (to join the executive at
Transnet) – the composition of the
Board has also stayed the same.
On Ms Moses’s departure we further
reinforced the Board’s skills by
inviting Ms Nunu Ntshingila and
Dr Norman Haste OBE, to join our
Board as independent non-
executive Directors.
Local rules on Board direction are
silent on the tenure of Boards.
However, internationally, two terms
are deemed the acceptable norm.
Anything longer than that tends to
result in familiarity setting in, which
risks ending in denying good
companies the benefits of new
ideas that can be introduced by
fresh blood.
We have to thank the current
members of the Board for their
commitment, especially during the
initial critical months and years at
Transnet. The Company is fortunate
that it still enjoys the benefit of
their skills, time, wisdom, diligence
and dedication.
LOOKING AHEAD
The conclusion of the Shareholder
Compact – setting out key
performance indicators on financial
efficiency and income as well as,
developmental and infrastructure
investment targets – made our
work as a Company far easier than
might otherwise have been the
case. Together with the new Articles
of Association – which were also
approved during the year – such a
Compact is an important document
18 TRANSNET ANNUAL REPORT 2007
in the life of any world-class
company.
The past year’s progress in the
implementation of strategy is also
a reflection of the improving health
of relations between management
and the labour unions. The
investment in this relationship
epitomised by the Strategic
Leadership Forum, which is chaired
by our Group Chief Executive, is
beginning to be felt in the form of
the improved quality of the
relationship between these two
roleplayers.
PROSPECTS
Given Transnet’s focused strategy
and the commitment of the
executive and staff, I am confident
that the next year will be another
year of improved performance. The
three-year Corporate Plan (which is
updated and approved each
February) gives clarity on the
direction. The range of agreed key
performance measures in each
significant area of activity enables
progress to be measured timeously.
APPRECIATION
A collaborative working
relationship between all our
stakeholders – our employees, our
labour unions, Government and
executive management – is
required if the transformation of
Transnet into a world-class
business is to continue succeeding.
To this end, the Board wishes to
express its appreciation to all our
employees and management for
the commitment, loyalty and the
tenacity they have demonstrated.
As a Board, we would like to
commend Group Chief Executive,
Maria Ramos, and her Executive
Committee for their commitment,
diligence, hard work and energy in
doing what is best for the Company
and for its contribution to our
country. We are heartened that
Ms Ramos’s outstanding work is
being noticed by others, as seen in
her successive appearance on
Fortune magazine’s list of the
world’s most powerful
businesswomen – last year, she
climbed several places to rank 16th.
I also want to thank my colleagues
on the Board for their wise counsel
and active contribution to the
success of the transformation
project. Their commitment in
serving on the governance
structures of the Board not only
ensures compliance with corporate
governance requirements, but also
enhances the quality of decisions
taken. I have no doubt that their
collective wealth of knowledge and
experience will have an enormous
impact on the future of this
Company.
We appreciate the continued
support that Minister Erwin, MP,
is showing for our transformation
programme. His leadership –
exercised in various forums,
including the Chairmen’s and
CEOs’ Forum – is indispensable to
our work.
Our thanks go to Mr Yunus Carrim,
MP, the Chairman of the
Parliamentary Portfolio Committee
on Public Enterprises, and to his
colleagues on that committee for
their continued encouragement and
interest in our work.
In closing, I would like to thank
Transnet’s customers and suppliers
for their continued confidence,
support and understanding during
our transformation process. It is our
goal to improve our business and
service offerings so that we can
deliver steadily improving and
cost-effective freight services.
“I am confident that the
next year will be another
year of improved
performance.”
TRANSNET ANNUAL REPORT 2007 19
Fred Phaswana
Chairman
21 June 2007
INTRODUCTION
Before reviewing our performance
for the year ended 31 March 2007,
let me introduce you to the new
Transnet corporate identity, its
rationale and our new vision and
mission.
Rebranding Transnet
The current year marks the end of
the structural transformation of
Transnet from a diversified group
into a focused and integrated freight
transport company as envisioned in
our four-point turnaround strategy.
Consequently, to signal the re-
alignment of the business as
Transnet gears itself for sustained
growth in its new form, we have
rebranded from a multi-brand
organisation to a single, overarching
“monolithic” Transnet brand to align
our corporate identity with our
business strategy. The rebranding
underscores the fact that Transnet is
now an integrated freight transport
GROUP CHIEF EXECUTIVE’S REVIEW
20 TRANSNET ANNUAL REPORT 2007
company with five operating
divisions that necessarily
complement each other.
But first, some background
The name and the Company
“Transnet” came into existence in
1990 when the old South African
Transport Services (SATS) was
corporatised and renamed Transnet
Ltd. Although the name “Transnet”
has existed for only 17 years, the
organisation itself has existed for
TRANSNET ANNUAL REPORT 2007 21
Maria Ramos
Group Chief Executive
more than a century in one form or
another, under different names,
with different ownership and
reporting arrangements and with
different organisational structures.
Before 1990, the organisation
operated largely as a Government
department with no commercial
culture to speak of. As it evolved over
the years, the organisation assumed
different names, including South
African Transport Services (SATS)
and South African Railways and
Harbours (SAR&H). Due to the
diverse nature of its operations, it
could safely be said that SATS was
responsible for moving South Africa,
its people and its freight.
In August 2004, a new Board (still in
office today) took office and the
new management team tabled a
turnaround strategy, proposing a
fundamental restructuring. This
would see Transnet’s structure and
focus change over the next three
years from a diversified group into
a focused freight transport and
logistics business. This
transformation strategy, known
today as the four-point turnaround
strategy, was adopted by the Board
late in 2004 and endorsed by the
shareholder in 2005 when the
Corporate Plan was approved.
The focused implementation of this
strategy, which enjoys the support
of all our stakeholders, has seen all
non-core assets being sold to the
private sector or unbundled to the
State in the quest to build a
focused and integrated freight
transport and logistics business.
The new Transnet, as envisaged by
the four-point turnaround strategy,
is essentially driven by five
operating divisions that
complement each other. These are
supported by a number of
Company-wide specialist functions
such as Transnet Projects which
underpin the turnaround.
The conclusion of the structural
transformation prompted us to
rethink the Transnet brand, its
relationship with the sub-brands
and the appropriate architecture to
give content to the philosophy of
“One Company, One Vision”.
To guide and inform our decisions,
independent research was
commissioned to canvass the views
of various stakeholders, including
our customers and employees.
This emphatically concluded that:
• The name Transnet should be
retained and
• Transnet should refresh its
brand image to reflect:
– Customer focus;
– Reliability and flexibility;
– Cost-efficiency and
competitiveness;
– Transparency;
– Improved communication and
divisional alignment; and
– An integrated solution of
bulk freight transportation.
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
22 TRANSNET ANNUAL REPORT 2007
Inevitably, with a new focus, we had
to rethink our vision and mission.
Transnet’s new vision and mission
Transnet is a focused freight
transport company delivering
integrated, efficient, safe, reliable
and cost-effective services to
promote economic growth in
South Africa.
This is being achieved through
increasing our market share,
improving productivity and
profitability and by providing
appropriate capacity to our
customers ahead of demand.
New values
In line with our new vision and
mission as well as the new brand, we
have refined the values that underpin
our business and our brand. We trust
that in your dealings with us you will
experience this unity of purpose and
be convinced that we live our new
values and are loyal to our brand.
In brief, we would like our
customers:
• To prefer us because we are
reliable, trustworthy,
responsive and safe; and
because
• Our employees think and are
committed, safety-conscious,
accountable, ethical, disciplined,
and results-oriented.
New tag line
We have hitherto been using
“delivering on our commitments”
as a tag-line, accompanying the
corporate identity. This remains
Therefore, the rejuvenation of the
brand is designed to optimise the
equity embedded in the Transnet
brand so as to communicate with
brevity the revitalised Company, its
new corporate structure, its people
and our emerging service culture.
In addition, it will provide an
appropriate architecture to govern
the relationship between the
“mother brand” and the “sub-brands”.
Refreshing the brand also provides
an ideal opportunity to communicate
the repositioned Transnet – a
business-to-business player – and
will enable the entities we no longer
own to be positioned within the
strategies of new owners.
Following the monolithic brand
route, recommended by the
research we have done away with
the old semi-autonomous and
fragmented structure and replaced
it with a single, integrated one.
So, the new Transnet, which we
present to you, is made up of:
• Transnet Freight Rail (formerly
Spoornet);
• Transnet Rail Engineering
(formerly Transwerk);
• Transnet National Ports
Authority (formerly the NPA);
• Transnet Port Terminals
(formerly SAPO); and
• Transnet Pipelines (formerly
Petronet).
The new singular structure and
corporate identity is an optimal
platform to reinforce the “One
Company, One Vision” drive, and it
mirrors our new corporate culture.
relevant. But we wanted to
emphasise our commitment to
you, our stakeholders – our
customers, employees, shareholder,
the communities in which we operate
and our lenders. Accordingly, our
new tag line is “delivering on our
commitment to you”.
Conclusion on the rebranding
The rebranding signals the change
in the direction and focus of the
business, it communicates the
progress in its transformation and
it explains the essence of the new
Transnet. It is more than a name
change for our operating divisions.
STRATEGYIMPLEMENTATION AND
PERFORMANCE REVIEW
Introduction
At the start of this transformation
journey, we made it clear that it was
going to be a three- to five-year
journey. We are entering the third
course and we have the
capability to roll it out;
• The non-core portfolio has
largely been disposed of;
• A solid platform for growth is
in place; and
• We have a committed team to
sustain the strategy into the
future
Our financial and operating results
show that this is the second
consecutive year in which most of
our operating divisions delivered
revenue increases based on growth
in volumes. This is in line with our
strategy as well as with our
mandate to enable economic
growth through helping make the
economy competitive by optimising
South Africa’s freight transport and
logistics system.
“We are reliable,
trustworthy, responsive
and safe.”
TRANSNET ANNUAL REPORT 2007 23
year with a Company that is stable
and that has started investing in
creating appropriate infrastructure
capacity to ensure sustainable
growth.
Perhaps the best measure of the
progress we have made as we review
the third year of the journey of
Transnet is to retrace our steps. The
table below reflects the substantial
progress Transnet has made when
compared to 2004 in all the key
measures of performance and the
Company’s financial strength.
The results so far provide telling
evidence that:
• The financial turnaround is well
under way and succeeding;
• The operational turnaround is
progressing well and is
sustainable;
• The five-year capital
investment programme is on
Target
Improvement
(Shareholder
Actual Compact) Actual Actual Actual
Measures 2004 2007 2007 vs 2004 (%) vs target (%)
Operating profit (R billion) 4,8 7,0 8,5 77 21
EBITDA (%) 17,0 35,0 41 139 16
Cash interest cover (times) 3,5 5,4 5,4 54 –
Cash flow return on
investment (CFROI) (%) 4,0 5,8 6,8 70 17
Gearing (%) 83,0 48,0 39,0 53 19
Capital expenditure (R billion) 7,8 11,8 11,7 50 Achieved 99
(target > 90)
Shareholders’ equity (R billion) 9,9 – 37,4 278 –
Progress since 2004
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
24 TRANSNET ANNUAL REPORT 2007
Financials
It is really heartening to report that
the relentless application of our
approved strategy is reflected in
our financial statements for the
year. All operating divisions, with
the exception of Freight Rail, grew
volumes strongly, enabling revenues
to increase 8% to R28,2 billion.
Transnet kept the increase in
operating costs, at 6%, well below
that of revenue, enabling the
EBITDA (earnings before interest,
taxation, depreciation and
amortisation) margin to increase
to 40,7% (2006: 39,6%). This was
due to sustained productivity
improvements and cost-control.
In fact, adjusting for once-off
provisions for the ex-gratia
contribution to the TSDBF, TPF and
for Freight Rail restructuring, the
cost increase would have been only
3,8%.
Depreciation, however, showed a
substantial increase of 42% to
R3 billion as a result of the
combined impact of depreciation of
new capital plus that of Freight Rail’s
capitalised major maintenance.
This trend is expected to continue.
Therefore, the challenge is to ensure
that capital expenditure drives
planned volume increases and
productivity improvements.
There were many operational
challenges during the year, but the
business showed extreme resilience
in overcoming them. A few are
worth noting here: a ship loader
structure collapsed in Saldanha;
derailments (Basklook-Cordier/
Duiwelskloof, Camden-Ermelo,
Dassieshoogte and Ensel-Klipdrift);
rough seas experienced in March
2007 caused most ports to close
for more than five days; and
adverse weather conditions saw the
coal mines failing to produce and
supply the required volumes.
However, the ongoing
transformation to make the
business customer-oriented
ensured that Transnet was able to
meet its customers’ requirements
despite these challenges.
Given the scale of our five-year
capital expenditure programme, we
have paid special attention to cash
flow. Fortunately, this focus paid
off: the 20% increase in cash flows
from operations to R13,5 billion
reflects the emphasis we placed on
cash generation.
Transnet’s balance sheet continues
to strengthen as reflected by the
27% growth of the capital and
reserves of the Company and the
decrease in gearing to 39%, a 15%
improvement. This strength is
important as Transnet will be
accessing the debt capital markets
during 2007 and into the future as
it needs to secure cost-effective
funding of relatively long tenors to
assist in the financing of the capital
expenditure programme.
Operating context
It is hard to underestimate the
importance of transport to a
country’s economic and social
development. The efficient and
effective movement of goods and
people is one of the principal
economic inputs and plays a
significant role in the global
competitiveness of that country’s
economy.
As the custodian of ports, rail and
pipelines in South Africa, our
strategy is to ensure that we
operate these assets according to
world-class standards, thereby
enhancing the growth potential of
our economy.
It is this that contextualises the
framework in which Transnet
operates and this is captured in
our turnaround strategy which
drives the transformation of the
organisation from a diversified
group of loosely-connected
logistics businesses to a focused
port, rail and pipeline business
providing world-class, cost-
effective, appropriate and
integrated bulk freight transport
solutions to the South African
economy. This gives local firms
an important competitive
advantage in the global
marketplace.
“In the past year we
completed the
restructuring of
the balance sheet”
TRANSNET ANNUAL REPORT 2007 25
STRATEGYREVIEW
STRATEGIC MANAGEMENT OF THE
BALANCE SHEET
In the past year, we completed the
restructuring of the balance sheet.
The greatest progress took place in
two areas – in the disposal of the
non-core assets and in the
resolution of the pension fund
deficit problem.
We have now substantially
strengthened the position of the
Transnet Second Defined Benefit
Fund (TSDBF). In the past year, we
reported the sale of the entire
holding of 75 million shares in MTN,
the mobile phone group, belonging
to the TSDBF. These shares were
held in trust – through the M-Cell
Trust – for the beneficial interest
of the TSDBF members. They,
together with a further minority
stake belonging to Transnet Ltd,
were sold in the market through a
book-building exercise.
During the year, Transnet and its
three pension funds, the TSDBF,
Transnet Pension Fund (TPF) and
Transnet Retirement Fund (TRF), also
agreed to sell their interests in the
Victoria & Alfred Waterfront to the
London and Regional Consortium for
R7,04 billion. The transaction was
probably both the largest real estate
deal and property empowerment
deal in our country. It brought
together international investors
(Dubai World’s Isthitmar and London
& Regional) and local and black
investors (who now hold more than
25% of the shares in the new
company). It also saw black
employees being allocated
2%equity in the new company.
As the largest single shareholder in
V&A, the TSDBF (which held 44%)
was the main beneficiary of the
transaction. The disposal price was
significantly above the carrying
value in the respective funds’
balance sheets.
These two transactions, together
with the performance of the
equities market and interest rates
movements, bolstered the TSDBF’s
performance, taking it into an
actuarial surplus position of
R1,9 billion. An independent
actuarial valuation has confirmed
this surplus (refer to the Chief
Financial Officer’s report on
page 45).
The changes to the pension fund
rules that are dealt with later in this
report will bring our funds more in
line with global best practice.
Transnet played a vital strategic
leadership role in achieving the
TSDBF turnaround.
Of the vast and varied portfolio of
our non-core assets, the transfer
of SAA, the national airline, was by
far the largest and most complex.
Whilst risk and reward transferred
to the DPE, the new owner, on
Strategic intent
Four-point
turnaround
strategy
Redirecting and
reengineering the business
• Improving efficiencies and
effectiveness of the core
operating divisions
• Realising port-rail
synergies
• Improving customer focus
• Infrastructure and
maintenance programme
Strategic balance sheet
management
• Sell remaining non-core
portfolio and achieve a
better focus on core
operating divisions
• Appropriate return on
invested capital
• Post-retirement funding
• Optimise cash flow
management
• Cost of capital
• Strategic asset and
liability management
• Cost-effective funding
Develop human capital
• Revitalising human
resources by transforming
culture and behaviour of
staff
• Be a preferred and
sustainable employer
• Improve talent
management and
leadership development,
transformation
management as well as
performance and reward
management
Ensure corporate
governance and risk
management
• Ensure that the highest
standards of corporate
governance are adhered to
• Ensure that the Company’s
risk management,
especially the safety of all
its operations, is improved
Focused freight
transport company
Delivering
efficient and
competitive
services
Enabling
economic growth
31 March 2006, there were several
suspensive conditions that had to
be fulfilled by the end of the year.
They included the enactment of
the law setting up SAA as an
independent company,
International Air Services Council
approval, Air Services Licensing
Council approval, third-party
contractor approval and the listing
of SAA as a Schedule 2 public entity
in terms of the Public Finance
Management Act (PFMA).
We are pleased that all these
conditions were fulfilled within
the agreed time frames, and the
disposal of SAA was recorded in
our financial statements on 31 March
2007. Whilst SAA was sold for
R2 billion, no cash flowed as the
settlement was by means of a
share buy-back of Transnet’s shares.
Consequently, there was a R2 billion
reduction of Transnet’s share capital
at 31 March 2007. In summary, since
2004 Transnet has injected, out of its
own funds, R8,4 billion in cash which
has now been written off.
The disposals included all or some
of the following key features:
• The participation of black
investors;
• Setting up employee share
ownership;
• Due process was followed at
all times;
• A competitive public bidding
process was followed except in
instances where there were
explicit pre-emptive ownership
arrangements or the disposal/
sale was to the State;
• All were sold as going concerns
and at fair value;
• There were no job losses as a
result of the disposals (in fact,
management secured job
guarantees from the buyers);
• Conditions of service of the
transferring employees were
largely unchanged;
• Our employees (especially
management) were prohibited
from buying any of the
businesses being sold in
keeping with our strict conflict
of interests policy; and
• The integrity of the process
was never in doubt (none of the
disposals have been subject of
a credible litigation).
During the year, the following
entities were successfully sold:
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
26 TRANSNET ANNUAL REPORT 2007
Entity disposed Buyer Price
Transnet Pension Fund Metropolitan Life (including Kagiso Trust R20 million and R3 million,
Administrators (100% – Investments) and Fifth Quadrant respectively
administration and respectively
investment services)
Equity Aviation Services Equity Aviation Services (Pty) Ltd R70 million
(Pty) Ltd (49%) (plus an employee share scheme)
Transtel Telecom FSN Neotel (Pty) Ltd (formerly the Second R251 million (funded by issue
Metro assets Network Operator) of equity of 15% in Neotel (Pty) Ltd
via Transpoint Properties (Pty) Ltd)
VAE Perway (Pty) Ltd (35%) VAE GmbH R30 million
V&A Waterfront Holdings London & Regional Consortium R1,8 billion
(Pty) Ltd (26%)
South African Airways (Pty) Ltd Department of Public Enterprises R2 billion (no cash flow –
(100%) transaction effected by a share
buyback)
“The completion of the disposals
programme has released
resources – cash, time,
management and personnel –
to concentrate on our five core
operating divisions.”
TRANSNET ANNUAL REPORT 2007 27
The disposals enabled Transnet to
achieve its goal of concentrating its
energies on owning and operating
rail-freight, ports and pipelines,
while securing knowledgeable and
visionary buyers for the non-core
businesses. This will allow employees
to develop their careers under
focused and growth-oriented
ownership.
In the first half of the new year,
we shall accelerate the disposals
programme by selling or transferring
the remaining non-core entities.
The remaining programme includes
concluding talks with the preferred
bidder on the sale of
freightdynamics, our road haulier,
and restructuring the fuel and
container divisions of
freightdynamics.
Subsequent to the year-end, we
concluded an agreement with First
National Bank, providing for the
sale at fair value of Transnet’s
housing lending book to FNB for
about R1,4 billion. In terms of a
service level agreement, FNB will
continue to provide housing and
other loans to Transnet employees.
Not only does this release cash, but
it will provide employees with a
better and expanded service.
The process of selling arivia.kom(in
which we own 42% of the issued
shares) to the private sector and
outsourcing our IT services, is at an
advanced stage. The process to sell
The Blue Train to the private sector
has recently been launched.
Following the transfer of Metrorail
to the South African Rail Commuter
Corporation (SARCC), the utility
belonging to the Department of
Transport, plans are in place for
the transfer of Shosholoza Meyl,
the long-distance passenger rail
service, to the SARCC during the
course of the year.
South African Express Airways (Pty)
Ltd, our wholly-owned airline
subsidiary, is in the process of
being sold to the DPE, marking our
complete exit from civil aviation.
In my last review, I referred to our
plans to:
• Dispose of non-core properties
(including residential,
commercial and vacant land);
• Sell Subco (holder of the
preference share), a special-
purpose vehicle used to fund
the purchase of a minority
shareholding in MTN by its
management and black
employees; and,
• Agree the future of Autopax,
our passenger bus subsidiary.
Negotiations are at an advanced
stage for the sale of property to
Servcon, a company wholly owned
by the Department of Housing.
A strategy is in place to sell those
remaining properties we have
deemed non-core to our corporate
strategy and PFMA approval has
been received.
On 21 June 2007, Transnet accepted
an offer from Newshelf 664 (Pty)
Ltd for the redemption of the “C”
class preference share held by
Transnet in Newshelf 664 (Pty) Ltd.
The offer amounted to R5,8 billion.
The transaction is subject to
certain suspensive conditions.
The delay in moving Autopax out of
our stable was caused by the need
to explore various options
proposed by different
stakeholders, including our labour
unions. The DPE has now furnished
us with the mandate to proceed
with the disposal of Autopax.
The completion of the disposals
programme has released resources
– cash, time, management and
personnel – to concentrate on our
five core operating divisions.
As we accelerate the roll-out of our
investment programme, finding
an appropriate mix of funding
solutions will become a top priority.
This explains why the focus on
strategic management of the
balance sheet has assumed such
significance.
More precisely, this will entail
reducing the weighted average
cost of capital by reducing the
weighted average cost of debt;
improving the liquidity position;
implementing a robust cash-
management system; and
diversifying sources of funding.
REDIRECTING AND REENGINEERING
THE BUSINESS
This pillar of our strategy covers
a range of programmes. I wish to
focus on the business
reengineering, capital investment;
and other related initiatives.
Vulindlela
Readers of this report will now be
familiar with Vulindlela (a Zulu word
meaning “opening the way”). This is
the name of our reengineering
effort.
Now into its second year, this
programme is designed to:
• Optimise the performance of
Freight Rail’s coal, iron ore and
general freight businesses;
• Lift productivity and
profitability levels;
• Re-orient the business towards
its customers;
• Address safety problems;
• Cultivate and embed a culture
of planned maintenance;
• Improve operational
efficiencies and synergies
between our various operating
divisions;
• Optimise the performance of
the port system;
• Increase our market share; and
• Contain costs and simplify
systems.
One of the major achievements of
the programme during the year
was to roll it out across all the
operating divisions. Initially, the
focus had been on our rail freight
division.
In the year, priority programmes
contributed over R2 billion in
sustainable savings, bringing the
cumulative savings to almost
R2,5 billion since Vulindlela’s
inception in August 2005.
The Vulindlela initiative lies at the
heart of Transnet’s turnaround
strategy and is the core initiative
to redirect and reengineer the
business. Vulindlela is also
making a strong contribution to
Transnet’s other key strategic pillar,
namely HR.
Highlights from the rail freight
programmes:
• The Commercial redesign
programme, which focuses
on key customer account
management, has achieved
greater stability in priority
freight flows, consistently
meeting customer demands.
Consequently, delivered volume
tempo for the freight flows has
exceeded budgeted volume by
over three million tons across
these flows;
• Total general freight business
flow (an area with massive
growth potential, but which has
historically been neglected)
has now been stabilised with
substantial improvements
forecast for the future.
Operational improvements on
the KZN corridor programme
have increased the number of
trains per week by over 25%.
Lessons learned on the KZN
corridor are now being applied
at the Cape corridor as part of
the overall National Operating
Centre (NOC) programme;
• Since October 2006, the Iron
Ore Line programme has
consistently set new weekly
volume records, with an all-time
record of 705 kt/week achieved
early in December 2006. Since
the beginning of calendar year
2007, rail capacity has
exceeded mine supply;
• The Coal Line has sustained
volume improvements of
1,4 mt/week, translating into an
annual tempo of 72 million tons
for the third quarter of the year.
Volumes are now constrained by
the mines’ ability to supply coal.
This capacity increase has been
accompanied by a significantly
improved delivery record – net
cancellations have remained
below 3%, almost all arising
from delivery postponements
by customers. Consequently,
trains are being diverted to
other areas where they are
needed; and
• The Safety programme has
delivered savings of
R200 million on the previous
year’s figure through a
significant reduction in major
incidents. The overall
programme is, however,
performing below expectations,
which remains an area of major
concern and focus for us (also
refer to the Chairman’s
Statement on page 17 and the
Risk Management report on
page 56).
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
28 TRANSNET ANNUAL REPORT 2007
“During the year Vulindlela
contributed over R2 billion
in sustainable savings.”
TRANSNET ANNUAL REPORT 2007 29
Highlights from the other
programmes:
• The Rolling Stock Maintenance
programme has consistently
sustained its productivity
improvements in key focus
areas and the roll-out of this
ambitious programme’s
objectives is well under way at
all of our wagon and locomotive
depots. During the year, we
also completed the integration
of Freight Rail’s maintenance
into Rail Engineering, a task
that involved moving more than
6 000 employees;
• The Ports Optimisation
programme has consistently
achieved new monthly handling
records, with 186 000 TEUs for
November 2006 (significantly
above the November 2005
record of 158 000 TEUs).
Improved alignment between
Port Terminals and National
Ports Authority has played a
significant role in this
achievement and is central
to making our ports
internationally competitive; and
• The Procurement programme
has produced gains of more
than R500 million this year.
The programme continues to
concentrate on improving
operational alignment, with the
focus on managing drivers of
demand, volume forecasts and
lengthy technical evaluations.
Thus far, Transnet has benefited
from Vulindlela not only through
operational and financial
improvements, but also through
the mobilisation of people at all
levels of the organisation.
Looking forward to the coming year,
Vulindlela has plans to build upon
Transnet’s substantially improved
financial and operational
performance, and to address issues
that might affect the speed at
which we are achieving our targets.
Capital investment programme
The business logistics sector has
been characterised by rapid
innovation over several decades,
driven primarily by advances in
transport and in information and
communication technologies that
enable ever-deepening integration
and collaboration between supply
chain partners. The goal of these
innovations is to improve the
speed, reliability, flexibility and
responsiveness of supply chains
while at the same time reducing
overall supply chain costs.
In this regard the logistics sector
has experienced considerable
success. The first Annual State of
Logistics Survey (2004) noted that
over the past five decades,
developed economies had realised
a reduction in the cost of transport
as a percentage of GDP of
approximately 5% per decade and
almost three times as much in
inventory carrying costs.
Behind all this innovation, however,
still lies a physical chain that
determines what can be moved,
where and how. This physical chain is
therefore a key cost component, not
only for companies in terms of their
bottom-line but also for countries
and regions which want to compete
successfully for the limited and
fickle supply of investment and
development capital. As the
custodian of port, pipeline and rail
infrastructure in South Africa,
Transnet is a central enabler in
South Africa’s freight logistics and,
therefore, a critical factor in South
Africa’s growth agenda.
Transnet adopted a corridor
approach as the framework for
infrastructure investment. The
corridor approach provides support
for promoting concentration and
density within the freight system
and ensures alignment between rail
and port planning and investment.
Focusing investment around high
density corridors creates a high
density core for the bulk freight
transport system which will
contribute significantly to higher
service quality at lower cost.
More than a year ago, Transnet
Projects was set up to implement
major capital investment projects –
that is, those investments worth
more than R300 million. The
rationale for setting up a dedicated
unit was to free divisional
executives to concentrate on day-
to-day operations yet ensure that
the major projects are rolled out
on time, thereby creating capacity
for future growth. At the time, there
were seven major construction
projects. The unit, with some
2 000 employees (in Richards Bay,
Durban, Port Elizabeth, Cape Town,
Saldanha and Johannesburg),
incorporates Protekon, our former
project management subsidiary.
Over time, Transnet Projects’s
scope has been widened to include
smaller projects, special projects
(these currently include work on
the ship loader in Saldanha and on
the manganese facility in Port
Elizabeth) as well as on repairs,
maintenance and emergency issues.
The successes of the programme
have ensured that:
• We have hastened the pace of
implementing the investment
programme;
• Project conceptualisation,
planning and design are of the
highest quality;
• There is better co-ordination
of the planning of the major
capital projects in the Company;
• There is greater focus on
environmental issues
throughout the project life
cycle;
• There is adequate transparency
in the projects; and,
• Technological skills and
knowledge are being transferred
to local and young professionals
On an annual basis, the business
requirements are revisited and the
investment plan is updated to
ensure that we keep track of
changes in the economy as well as
customer requirements. Over the
next five years, the Company will
be investing R78,9 billion in the
replacement of assets and
expansion of activities in all the core
divisions. It should be noted that all
new projects are subject to the
successful completion of rigorous
feasibility studies which require
returns which exceed our cost of
capital and of obtaining necessary
environmental authorisations. The
areas of investment and the major
projects are as follows:
Rail-related projects (R38,9 billion)
The major capital investment
projects in the coal and iron ore
lines are to ensure sustainability
and to increase capacity. New
locomotives (110 dual voltage)
have also been included in the
plan for the coal line as well as
the proposed acquisition of
212 locomotives for the general
freight business of Freight Rail.
This will improve efficiencies and
service levels, specifically in the
general freight business.
Port-related projects (R28 billion)
To increase capacity at the ports,
several new projects are being
undertaken. They include the
widening and deepening of the
port entrance in Durban, the
construction of a new container
terminal at Ngqura, the expansion
of the Cape Town container
terminal as well as new equipment
to handle the projected increase in
volumes at all the major ports.
Several projects have also been
included to replace existing assets
in the ports which includes
equipment and facilities at Port
Elizabeth, Richards Bay, Durban
and Saldanha.
Pipelines-related projects
(R10 billion)
The major project is the new multi-
product pipeline (NMPP) from
Durban to Gauteng. This project will
create the capacity required from
2010 onwards. Due to the
substantial investment and the long
payback period of pipeline assets,
the affordability of the project is
dependent on a suitable tariff
structure. Other projects have also
been started to improve the
efficiencies of the existing
pipelines to ensure that sufficient
capacity is available until the
completion of the NMPP project.
TBI (Transnet Business
Intelligence)
The TBI programme supports
Transnet’s executive decisions
through providing accurate, relevant,
consistent and timely information,
and also in enhancing the control
environment in which we operate.
TBI is therefore aimed at:
• Aiding in the improvement
of corporate performance
management;
• Improving the processes and
systems that enable
information management; and
• Assisting Transnet to become
a world-class bulk freight
organisation through effective
use of technology, world-class
systems and processes.
A major TBI project for the year is
the roll-out of the key performance
indicator (KPI) process throughout
the business. This project has
identified the critical KPIs across
the business and will measure and
report these against international
benchmarks on an automated basis.
This will facilitate substantial
productivity and performance
improvements throughout the
Company.
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
30 TRANSNET ANNUAL REPORT 2007
“Over the next five years
the Company will be
investing R78,9 billion
in expansion and
replacement of assets.”
TRANSNET ANNUAL REPORT 2007 31
RISK MANAGEMENT AND
CORPORATE GOVERNANCE
Our approach to risk management
and corporate governance is
straightforward. We ensure
vigilance in dealing with risk and
that all our officers adhere to the
highest standards of corporate
ethics at all times. Ours is a zero-
tolerance approach.
In previous years we adopted and
implemented an extensive
enterprise-wide risk management
(ERM) framework that included the
establishment of risk structures to
reinforce the framework. Our focus
during the year was on formulating,
adopting and implementing
Company-wide safety, health,
environmental and quality (SHEQ)
risk-management policies together
with compliance.
Transnet’s SHEQ risk management
standards ensure a uniform
approach throughout the Company
that is in line with world-class
standards. This will be measured
against the ERM Framework and
best practice with the ultimate
objective of reducing incidents and
of minimising repeat mistakes.
While considerable progress has
been made in improving safety in all
our operations, we are saddened to
report the deaths of 26 employees
during the year. Our hearts go out
to their families and loved ones.
One death is too many.
We have reviewed our safety
procedures and have strengthened
our capacity in problematic areas.
Our safety strategy’s objective is
two-fold: first, to increase
accountability and to hold
accountable those responsible for
lapses in judgement; and second,
to openly recognise the positive
contribution being made by those
responsible for safety
improvements.
New measures include:
• Assessments of the
implementation of corrective
actions or plans that have been
recommended by the BOI;
• Continuous provision of
assurance on the effectiveness
of the safety and risk controls
by the compliance and Internal
Audit units; and
• Promoting incident-recall
sessions and information-
sharing meetings to inculcate a
culture of accountability for
safety in all spheres of the
business.
We are rolling out an extensive
safety awareness and training
campaign. The training covers
management and supervisory level.
Also, we increased the number of
permanent safety and risk officials
in the rail regions.
We welcome the strategic support
and guidance provided by the Board
through its newly established Risk
Committee (refer to the Chairman’s
Review on page 17). During the year,
we created a new position in the
Group Executive Committee for the
Chief Risk Officer. The post
highlights the significance we
attach to prudent risk management,
especially the safety of our people,
assets and customers’ cargo. It is
also designed to direct Company-
wide safety initiatives and give
safety the requisite attention by
our Executive Committee.
We have appointed a leading
international consultancy to assist
us in this area especially in our rail-
freight operations. This is a critical
factor in the continuing success of
our business.
Our internal control environment
is continuing to improve, supported
by the decision two years ago to
outsource our internal audit
function. Ernst & Young, our
internal auditors, are playing a
critical role in assisting
management to improve controls
and in investigations of allegations
of fraud, including those from tip-
offs received through our toll-free,
independently-managed anti-fraud
line.
The campaign against fraud
cannot be won by strict
enforcement of our anti-corruption
policies alone. It requires a
partnership approach. A corporate
neighbourhood watch that includes
our suppliers, customers and trade
unions acting in concert against
wrongdoing is needed. We
encourage our suppliers to uphold
integrity at all times and to report
any misconduct by any of our
employees.
The role and composition of the
Group Executive Committee
remained largely the same during
the year. Given the significance of
human capital in sustaining the
turnaround, we agreed to set up an
HR sub-committee to deal with
human resources matters prior to
their tabling in the wider monthly
meeting of the Executive Committee.
In the final quarter of the year,
I reorganised the executive team
to ensure that we could continue
to build on the successes of the
implementation of the strategy to
transform Transnet into a world-
class freight transport business.
The changes were informed by the
need to maintain our focus on
operations and on implementing
the capital investment programme
efficiently and effectively; the need
to build quality relationships with
our key clients and customers and
with other stakeholders, especially
regulators; the need to pay even
greater attention to safety and risk
management; and the necessity to
hasten the implementation of our
strategy to revitalise our human
resources.
In consultation with the Board,
I made the following changes:
• Mr Pradeep Maharaj, the Group
Executive: Strategy and
Transformation, assumed a
newly-created position of
Group Executive: Human
Resources;
• Mr Vuyo Kahla, the Group
Executive: Legal and Risk,
moved with his legal portfolio
to the Group Chief Executive’s
Office, taking on the new
position of Group Executive:
Office of the Chief Executive
to assist me in the day-to-day
running of the Office and in
stakeholder relations,
especially with key customers
and regulators;
• Ms Moira Moses, the GM:
Business Reengineering,
became Group Executive:
Transnet Projects, a newly
created post that she assumed
in March 2007; and
• A new post of Chief Risk Officer
was created. Ms Virginia
Dunjwa, the GM: Group Risk
Management, was appointed
on 1 June 2007 to the post.
To further drive cohesion, which is
important for providing integrated
services to our clients, we
integrated the next level of
executive leadership – that is, the
Divisional Executive Committees.
For example, Mr Siyabonga Gama,
the CE of Freight Rail, serves on the
Executive Committee of Rail
Engineering and Mr Richard Vallihu,
his counterpart in Rail Engineering,
sits on Freight Rail’s Executive.
Below this level of leadership, more
cross-functional and divisional
teams have been set up to ensure
that Transnet is more customer-
oriented and increasingly offering
more synergistic services to its
customers.
HUMAN CAPITAL DEVELOPMENT
This is the first full year in which
we implemented our human capital
development strategy since its
adoption by our Board. The
strategy, implemented by the Group
Executive Committee, is vital to
sustaining our turnaround strategy
in the years ahead. To recap, it
focuses on the following:
• Skills demand planning;
• Recruitment and retention;
• Capacity building and skills
development;
• Performance management;
• Talent management; and
• Culture.
Following the disposal of non-core
assets, the Company now has
48 578 permanent employees and
8 543 employees on fixed-term
contracts.
Although the year kicked off with
industrial action over Transnet’s
proposed restructuring and the
disposal of its non-core assets (also
refer to last year’s Annual Report
on www.transnet.net), the overall
employee relations climate
subsequently improved and is now
significantly more engaging, positive
and productive. The Company
currently enjoys a sound relationship
with its recognised trade unions.
During the year, Transnet made
significant strides in the effective
management of its human
resources. Achievements include:
• The management of talent
through the mapping of future
skills demand, priority technical
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
32 TRANSNET ANNUAL REPORT 2007
“Transnet is striving
towards a performance-
driven culture.”
TRANSNET ANNUAL REPORT 2007 33
skills planning and acquisition,
leadership development as well
as the priority skills required
for the Vulindlela reengineering
project;
• Laying the foundation for
sound performance and reward
principles and practices across
the business;
• Establishment of sound
employee relations across the
organisation;
• Concluding an agreement with
the unions on the principles
that guide the implementation
of the disposal of Transnet’s
non-core assets and facilitating
the employee aspects of all the
disposals;
• Increasing the efficiency of the
HR function through the
enablement of HR systems; and
• Focusing on change and
transformation to support the
Company’s four-point
turnaround strategy.
Transnet is striving towards a
performance-driven culture as one
of the outcomes of the turnaround
strategy. Our remuneration
philosophy is also focused on the
establishment of a performance
and reward culture in the Company.
Performance management has been
implemented for all non-bargaining
employees across the business. Part
of the performance management
roll-out included the design of
individual strategic performance
objectives (SPOs) that are aligned
with Company objectives. A
performance incentive scheme was
implemented for staff in the non-
bargaining unit as well as for those in
the bargaining unit category.
In support of skills development,
a strategy to ensure the future
availability of quality skills is being
implemented. Various initiatives
were launched to increase the
effectiveness of skills pipeline
development to increase numbers
of previously disadvantaged people
in technical, supervisory and
managerial levels.
During the year, Transnet initiated
several new training programmes to
augment existing initiatives. A few
are worth mentioning:
• At present, Transnet supports
175 bursars in various
engineering disciplines at
tertiary institutions. This is a
new initiative over and above
those undertaken by our
operating divisions;
• We are also supporting some
173 students at institutes of
technology. The plan is to
increase this number to 300;
and
• To address future needs of
artisans in our Company, we
have recruited 1 261
apprentices who are currently
undergoing training in different
trades. This is a five-year
project.
Apart from addressing Transnet-
specific skills challenges, Transnet
is also committed to tackling the
shortage of skills across the
country. We are working with other
organisations in addressing this
challenge. Together with Denel, the
State-owned arms manufacturer,
we are supporting 50 students who
have been enrolled in the Youth
Foundation and Schools Outreach
programme.
We are also active members of TOPP
(training outside public practice) and
its Thuthuka bursary programme. The
Transnet TOPP Programme, launched
in 1996, seeks to increase the
number of chartered accountants,
particularly from previously-
disadvantaged communities, in
South Africa. Trainee accountants
get the opportunity for on-the-job
training in Transnet and its operating
divisions, in order for them to qualify
subsequently as chartered
accountants.
The Transnet TOPP programme is
also a sponsor of the South African
Institute of Chartered Accountants
(SAICA) Thuthuka bursary
programme. At present, Transnet is
funding 20 accounting students
who are part of this scheme.
Transnet’s involvement will continue
until 2010 by which time Transnet
will have sponsored 50 students. All
these students will join the
Transnet TOPP programme.
We also support the Government-
led Joint Initiative on Priority Skills
Acquisition (Jipsa).
On talent management, we have
identified mission-critical positions
and have developed a talent
management policy and a leadership
development programme.
Change management is a
cornerstone of any major corporate
restructuring. Emphasis was placed
on ensuring that top managers were
aligned to Transnet’s turnaround
strategy, and on cascading this to
lower levels of management.
On its first anniversary, the
Strategic Leadership Forum (SLF),
has lived up to its mission of being
the centrepiece for high-level
consultation between the
leadership of trade unions and our
Executive Committee; the
participation of all its members has
significantly enriched the quality of
the engagement; and, it has been a
good consultative forum on the
implementation of our strategy.
OPERATING DIVISIONAL
HIGHLIGHTS
Introduction
This section will highlight some of
the major achievements of the five
operating divisions and identify our
key challenges. These are dealt with
in detail in the divisional reports in
the later sections of this Annual
Report.
All our operating divisions are
trending in the right direction with
volume increases driving growth in
revenue. Volume increases and
better asset utilisation are key to
achieving our goal of reducing the
transport-related costs of doing
business in our country.
Also, the past year showed the
distance we have travelled in
re-orienting our divisions towards
customers – the key stakeholder –
and in strengthening the resilience of
all our divisions to withstand critical
challenges including equipment
failures and exogenous factors such
as adverse weather conditions.
Freight Rail
This operating division, by far our
largest and most complex, is
showing pleasing progress. Its
performance during the year
showed that the focus of our efforts
– management, financial, people
resources and reengineering – are
starting to yield desired results.
Achievements in the year include:
• Productivity improvements
enabled the operating margin
to increase to 14,8% (2006:
14,3%);
• Operating profit increased 8%
to R2,2 billion in the year;
• Capital spending for the year
grew to R7,4 billion (including
capitalised maintenance
expenditure of R3,3 billion),
compared to the R3,8 billion
in the previous year;
• Revenue rose to R14,6 billion
(2006: R14,1 billion);
• Finalising the transfer of
6 253 maintenance employees
into Rail Engineering during
the year; and
• Completing the integration of
maintenance depots into Rail
Engineering. This programme,
which doubled the size of Rail
Engineering, yielded positive
results both in terms of
productivity improvements
and reliability of rolling stock.
Volumes transported did not meet
our expectations. This was due to
a range of factors. The coal export
line was severely affected by the
mines’ inability to produce coal
during the rainy season which was
particularly severe in the first
quarter of the year. Derailments
and other safety-related incidents
reduced capacity on the coal and
general freight business lines. The
national strike in the security
sector, which saw a rise in the
incidence of cable theft, also
adversely affected the delivery
of volumes.
Our focus remains on addressing
all the factors within our direct
control, which constrained the
growth in volumes and revenue in
this division. Improving the safety
of the railway and its operational
efficiency remain key initiatives of
the Vulindlela programme.
The priority is to increase volumes
in the general freight business of
Freight Rail where there are
significant opportunities.
Additionally, we are investing
heavily in maintenance, rolling
stock and infrastructure with the
objective of improving our service
offering to our customers and
taking advantage of the growth
opportunities in the market.
We expect the finalisation of the
transfer and sale of the two
remaining passenger rail services –
Shosholoza Meyl and The Blue Train,
respectively – to contribute
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
34 TRANSNET ANNUAL REPORT 2007
“All our operating divisions
are trending in the right
direction.”
TRANSNET ANNUAL REPORT 2007 35
towards improving productivity
further as management can now
focus on freight.
Rail Engineering
This division plays a vital support
role in the turnaround of Freight
Rail. During the year, the successful
integration of 6 253 rolling stock
maintenance employees from
Freight Rail into the organisation
was completed. The consolidation
of the rail maintenance function is a
key step in our plans to create,
cultivate and embed a culture of
planned maintenance in our
business, especially in the rail
operations.
Significant progress was made in
this regard during the course of
the year.
Achievements in the year included:
• Revenue increased by 90% to
R7,3 billion;
• Operating profit increased by
41% to R1 billion; and
• Reliability and availability of
rolling stock on the coal and
iron ore lines of Freight Rail
were significantly improved.
National Ports Authority
This division had another good year,
benefiting from strong volume
growth and economic expansion.
This was in spite of the fact that
the increase in capital investment –
from the previous period’s
R783 million to R1,1 billion – fell
short of what was planned due, in
part, to difficulties with obtaining
environmental impact assessment
(EIA) approvals (affecting the
expansion of the Cape Town
Container Terminal) and delays in
completing the first phase of the
Port of Ngqura.
The new National Ports Act came in
effect in December 2006 and
National Ports Authority is
investing time and resources into
dealing with this. An extensive
internal programme to reorganise
the division’s functions to comply
with the Act and its Regulations is
in place. Considerable progress was
made in this regard. Post-balance
sheet, the Government announced
the names of the members of the
Independent Ports Regulator under
the chairmanship of
businesswoman Ms Gloria Serobe.
We look forward to building a
healthy working relationship with
the Regulator.
Achievements in the year included:
• Revenue increased by
R669 million which includes an
average tariff increase of 1,3%
and a volume increase of
15,5%; and
• Operating profit increased by
R409 million or by 10% to
R4,5 billion.
Capital spending for the year
grew to R1 billion compared to
R783 million in the previous year.
This was considerably behind our
budgeted plans which were set back
by regulatory delays, relating to
the EIA challenges in the planned
expansion of the container terminal
in Cape Town and delays in
completing the first phase of the
Port of Ngqura.
The appointment during the year
of the General Manager responsible
for EIAs within Capital Projects
and the attention we are paying to
speeding up the approvals process
are expected to address these
challenges.
Port Terminals
This division achieved another set
of positive results. During the year,
it faced a number of challenges
including a major equipment failure
at Saldanha and a surge in
container volumes coinciding with
extremely bad weather conditions.
Following the resumption of
operations, a string of loading
performance records was achieved.
Achievements in the year included:
• Revenue increased by 14%
year-on-year;
• Operating profit improved year-
on-year by 48%, to R1,4 billion;
and
• The containment of cost
increases, in percentage terms,
has been brought to levels less
than the growth in revenue,
resulting in the operating
margin increasing from 26%
to 33%.
Pipelines
This division is continuing to
perform exceedingly well and is
poised for further growth in the
future especially rolling out the
“Bridging Plan” and other initiatives
to address capacity constraints
ahead of the commissioning of the
planned new multi-product
pipeline.
Its achievements during the year
included:
• Revenue increased by 15% to
R1,2 billion mainly due to
volume growth;
• Operating profit improved by
8% to R672 million; and
• Overall petroleum volume
throughput increased by 8,1%
and gas by 14,6%.
For the future, though, it is worth
pointing out that its prospects will
depend on the tariff determination
methodology that has still to be
announced by the regulator. This will
determine the prospects of success
in generating revenue sufficient to
cover the cost of capital required for
investment especially in the NMPP
which is vital for addressing the
country’s future petroleum needs.
For the new year, the budgeted
tariff of 5,6% was turned down. The
start of the NMPP is dependent on
the imminent licensing process and
appropriate tariff increases that
will confirm a fair return based on
Transnet’s weighted average cost
of capital being confirmed.
SUPPLYMANAGEMENT AND
BROAD-BASED BLACK ECONOMIC
EMPOWERMENT (BBBEE)
In undertaking the process of
disposing of our non-core assets, we
drew up a range of criteria that had
to be met by prospective buyers of
these entities. In addition to
technical expertise and price
(backed by guaranteed funding),
prospective acquirers were required
to include in their proposals
participation by broad-based black
economic empowerment partners as
defined in the Broad-Based Black
Economic Empowerment Act (and
subsequently amplified in various
codes of good practice of BEE). We
are pleased to report that all the
transactions we concluded and
those in which Transnet was a
majority shareholder – save for
those where there were pre-emptive
arrangements with existing
shareholders – resulted in
significant BEE participation or were
concluded with empowered parties.
These included:
• V&A Waterfront (Pty) Ltd –
more than 25%, including 2%
participation by black
employees of the company;
• TPFA – sold to empowerment
players Kagiso Trust
Investments, Metropolitan Life
and Fifth Quadrant; and
• Transtel’s FSN metro assets –
sold to Neotel (Pty) Ltd, an
empowered telecoms player.
Our biggest and real lever for
facilitating BEE comes not from
the disposals of non-core assets
but from our significant purchasing
power.
We have completed the overhaul
of our procurement system and
processes to make them more
efficient, transparent, ethical and
fair. We have significantly
streamlined the processes by
replacing tender boards with
acquisition councils. We have in
place an internal process that seeks
to ensure that we are meeting our
objectives of conducting fair and
transparent dealings with the public.
On strategic sourcing, we have set
internal targets of savings. We
saved R552 million during the past
year and are on track to meeting
our target without comprising the
quality of our services.
We are also working with the DPE
on helping local suppliers to
become globally competitive as
part of our support for the
Government’s Accelerated and
Shared Growth Initiative of SA
(AsgiSA).
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
36 TRANSNET ANNUAL REPORT 2007
“37% of operational
expenditure this year went
to companies owned or
controlled by black
entrepreneurs.”
TRANSNET ANNUAL REPORT 2007 37
All these initiatives should
considerably enhance our ability
to meet the developmental
expectations of our shareholder as
set out in the Shareholder Compact.
During the year, we spent
R10,6 billion on a range of services
in support of our operating
divisions. Of this, 37% went to
companies owned or controlled by
black entrepreneurs. These
amounts relate to operational
expenditure.
ECONOMIC REGULATION
Transnet operates in a highly-
regulated environment. The
regulation covers, amongst others,
an economic, safety, health,
environmental and labour focus.
The challenge posed particularly
by economic regulation requires
continual interaction with policy
makers especially in the light of the
developmental needs of our country.
National Ports Act
The commencement of the National
Ports Act in November 2006
ushered in a new regulatory regime
for Transnet’s port divisions,
bringing with it a range of
challenges. The legislation places
significant responsibilities on
National Ports Authority to ensure
the safe, efficient and effective
economic functioning of the
national ports system. It introduces
an independent ports regulator
which must oversee the
performance of the National Ports
Authority functions, approve its
tariffs and hear complaints and
appeals from port users. Transnet
has therefore embarked on a
programme to invest in new
systems and capacities within the
National Ports Authority to perform
the additional functions prescribed
by the legislation, and to prepare
for the wide-ranging ports
regulatory powers that the Act
creates. Due to the significance we
attach to our interaction with
regulators, we have set up a sub-
committee of the Group’s Executive
Committee, to oversee this
interface. We look forward to a
productive and sound working
relationship with the new
Independent Ports Regulator. We
are also confident that the
continuous engagement between
our Board and the shareholder over
some aspects of the Act will yield
satisfactory outcomes.
Pipelines – tariffs and the
construction of the new multi-
product pipeline (NMPP)
On 31 March 2007, Transnet was
informed that NERSA, the energy
regulator, had declined its
application for a 5,6% across the
board increase in tariffs for
Pipelines. The reasons were
supplied over a month later.
It has to be pointed out that, at the
time of compiling this report,
NERSA had yet to approve a formal
methodology for pipeline tariffs,
and that its process to do so was
only expected to be finalised during
the second half of 2007.
We are, however, engaging with the
relevant authorities through agreed
channels to bridge the differences
and ensure that an appropriate
tariff regime which will enable
Transnet to achieve a fair return
(that is, one greater than the
weighted average cost of capital)
on the planned investment would
be in place.
LETTER TO SOCIETY
A compassionate Company
Reforms for the benefit of the
members of the TSDBF and TPF
Pensioners and their dependants
are important stakeholders in any
company. At Transnet, we have
three pension funds – namely, the
Transnet Second Defined Benefit
Fund (TSDBF), Transnet Pension
Fund (TPF) and Transnet Retirement
Fund (TRF). The first two are
defined-benefit funds, while the
TRF is a defined-contribution fund.
I wish to take this opportunity
to outline the measures we, as a
Company, have taken with trustees
of these independent funds, to
enhance the welfare of their
members. I will only deal with the
defined-benefit funds – that is, the
TSDBF and the TPF.
These funds are audited by
independent auditors and assessed
by independent actuarial firms.
They have independent Boards of
Trustees, rules that govern a range
of matters (including benefits) and
investment committees that decide
each fund’s investment strategy.
Transnet cannot unilaterally change
any of the pension funds’ rules. Any
changes to the rules require the
approval of the respective Boards
of Trustees; Transnet Ltd’s Board of
Directors; and the Ministers of
Public Enterprises and Finance.
TSDBF
This fund, which is a closed (meaning
no new members are allowed)
pensioner-only fund, has been
restructured over the past two years
to resolve a number of problems
including a deficit of approximately
R5 billion. It is now in a financially
strong position – in fact, it now has
a surplus of R1,9 billion.
Its assets are now split into two
categories: the first comprises
assets invested to secure the
pension payments and the 2%
increase for the future. These are
mainly made up of a bond portfolio
so that asset cash flows
approximate forecast payments.
The second comprised the balance
of the assets that will be invested
in a balanced portfolio where any
surpluses will be available for
trustees to consider bonus
payments to pensioners.
One rule has given rise to a great
deal of concern to pensioners. This
relates to the scale of the increase
in benefits to which members are
entitled each year. This provides for
a guaranteed 2% increase each year
regardless of the fund’s
performance or whether the fund’s
financial health is such that it can
afford an increase of greater than
2%. This rule has been in existence
since the inception of the TSDBF
and arose long before 1990, in the
old SATS funds.
Accordingly, together with the
trustees, we have been working on
an initiative which will benefit the
pensioners of the TSDBF. I am
pleased to announce that in January
2007 we agreed rule amendments
that will provide Trustees with the
power to pay pensioners bonus
amounts. These will be in addition
to the guaranteed 2% per annum
increase that pensioners already
receive.
This is part of our bid to ensure
that the trustees are able to
supplement the pensioners’ current
pension benefits when the fund has
delivered strong returns (subject to
affordability).
Ex-gratia bonus for the members
of the TSDBF
In the interim, however, Transnet
understands fully the difficulties
faced by those pensioners who are
battling to meet their daily living
expenses as a result of the effects
of inflation, medical costs, fuel
price increases, etc. Therefore, to
assist these pensioners and their
beneficiaries, Transnet has funded
the payment of a once-off ex-gratia
bonus for the pensioners and
beneficiaries of the TSDBF. This
will also be paid to “previously
disadvantaged widows” (those
spouses of black pensioners who
retired from Transnet between
16 December 1974 and 1 April
1986 but who died prior to
1 November 2000 and whose
spouses are not entitled to a
spouse’s pension from the Transnet
funds). This bonus is from Transnet
and not from the TSDBF. It will cost
Transnet in the region of
R125 million.
In determining this bonus, the
plight of those pensioners with
long service (as these individuals
are unlikely to have significant
alternative retirement funding
income), those over the age of
65 years (it is unlikely they are in
a position to earn supplementary
income), and, for obvious reasons,
those with very low pensions, took
priority.
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
38 TRANSNET ANNUAL REPORT 2007
“We believe that our
business and the
communities in which
we operate are
interdependent.”
TRANSNET ANNUAL REPORT 2007 39
This payment is in addition to any
benefit currently being received
from the TSDBF, including the 2%
annual guaranteed increase.
TPF
This fund has also been restructured
and is now in a significant surplus
position. We are awaiting the
approval of various rule
amendments and the promulgation
of amendments to the Transnet
Pension Funds Act, 62 of 1990, in
order to implement the planned
reforms including the ability to pay
pension increases in excess of 2%,
subject to affordability.
A new pensions dispensation
The disposal of all the non-core
companies means that, amongst
other things, thousands of
employees leave our employ with
each disposal to become a new
owner’s employees. Ordinarily (and
this is the practice across the
globe), the employees have to
participate in the retirement
provision arrangements of their
new employer.
In discussions with us, the unions
requested that we create an
unprecedented regime which would
let employees of those entities
transferring to Government and/or
State-owned enterprise type
operations (eg Metrorail and SAA)
to remain members of the Transnet
pension funds.
This was a difficult request, but
we agreed to it. Consequently,
amendments to the existing
Transnet Pension Funds Act were
passed by Parliament and are
awaiting the required Presidential
approvals. In terms of the
amendments, the TPF and TRF will
become multi-employer funds.
In the case of the defined-benefit
fund, the TPF, the different
employers will be the guarantors
of the sub-fund applicable to their
employees.
In essence, this means the
transferring employees can stay as
members of the TPF and Transnet
Retirement Fund, though their new
employers will contribute to the
funds and take on all the
appropriate and applicable
obligations. This option (only
available to cases where the State
is the employer) means that the new
employer is the responsible party.
Corporate social investment
We believe that our business and
the communities in which we
operate are interdependent.
Accordingly, we cannot be
indifferent to the issues facing
the communities around us.
We are also aware that we cannot
solve all of the issues faced by
these important stakeholders.
However, the positive impact of our
interventions can be enhanced by a
careful selection of fewer, but not
insignificant, activities.
In last year’s Annual Report, I
reported on the process to re-
orient the work of the Transnet
Foundation strategically so as to
better align it with our new
corporate strategy and to maximise
the impact of our philanthropic
interventions. Considerable
progress was made during the year
to redefine the work of the
Foundation. Henceforth, it will
focus on three main areas: health,
education and the arts. Accordingly,
strategies are in place for the
Foundation to exit from a range of
projects that no longer have a
strategic fit. These include support
for the heritage activities, moral
regeneration and some provincial
cultural activities as well as
support for entrepreneurial
development initiatives.
On the health front, we are
delighted that prospects for the
second health train or Phelophepa
2 are brighter than ever before.
There are plans for the second train
to improve the delivery of mobile
healthcare services in primary
health (including HIV/Aids), dental
care, pharmacy and eye care. This is
based on the runaway success of
Phelophepa 1.
In education, the Foundation
continues to support the Transnet-
SAFA School of Excellence – a
soccer academy for young gifted
football-playing learners from
disadvantaged backgrounds and
neighbouring countries. The
founding partners – Transnet and
SAFA, football’s controlling body –
are working towards revamping this
initiative and placing it at the
centre of the preparations for the
2010 Soccer World Cup.
The re-orientation also entails a
reappraisal of the legal structure
of the Foundation with a view to
finding a more taxation-efficient
form without losing the benefit of
the wealth of insight, skills,
expertise and experience brought
to the Foundation by its various
trustees.
GROUP CHIEF EXECUTIVE’S REVIEWcontinued
LOOKING AHEAD
Containerised freight continues to
be the fastest growing segment of
the freight transport market both
internationally and domestically.
The increasing penetration of
containers into traditional bulk and
break-bulk cargo has seen the
importance of this segment grow
steadily over the past three
decades, and most global
manufacturing supply chains now
depend on the efficient and
effective handling and processing
of containers. Containerisation has
also been a significant enabler of
the global production system, which
is seeing the emergence of new
international trade corridors.
South Africa is well located in
relation to these new trade
corridors, especially the emerging
south-south trade routes, and this
creates significant advantages for
local manufacturers to participate
in global supply chains. To take
advantage of this highly significant
opportunity, Transnet has
developed a strategy for the
container market that is aimed at
reducing ocean freight costs and at
increasing the country’s maritime
connectivity with the rest of the
world, particularly Asia.
A key enabler of this strategy is an
integrated and complementary port
and rail system working in pursuit of
common goals.
The opening of the container
terminal at the port of Ngqura
provides Transnet with the
opportunity to look for an
international terminal operator
as a strategic partner to operate
this port.
Freight handling infrastructure is
a critical determinant of the
performance of the bulk freight
sector. In South Africa’s case, over
the past two decades there has been
too little investment in bulk freight
handling infrastructure.
Consequently, the overall
performance of the transport system
experienced a steady decline. The
focused implementation of
Transnet’s strategy over the past
three years, with its emphasis on
infrastructure investment and
operational efficiencies, has seen
this decline starting to reverse.
However, there is much to be done
from an infrastructure perspective to
meet the economy’s short- and long-
term demand for freight transport.
During the year, we developed an
integrated port and rail master plan
– a development framework for the
backbone of the rail and port
freight system in South Africa. The
master plan identifies the current
core system and how this core will
develop over time to meet future
demand for freight transport in
the economy efficiently and
effectively. Transnet’s freight
demand model, developed during
2006, provides a key input into
this process.
Freight forecasts predict that
demand will continue to consolidate
around existing freight corridors.
This will facilitate the construction
of a high-density core network that
will lower the unit costs of
transport. The master plan adopts a
corridor approach to infrastructure
development. This focus on the port
and rail elements of the bulk freight
supply chain ensures integrated
planning and sequencing of
investments. It also supports an
overall capacity provision strategy
that aims to maximise the
utilisation of existing infrastructure
and to minimise infrastructure
duplication. The master plan
provides the most useful framework
around which other participants in
the freight system can align their
plans.
APPRECIATION
The task of transforming a massive
organisation with established
cultures such as Transnet can be
daunting and, at times, seem
insurmountable. It requires
commitment, resilience, and
dedication from all stakeholders.
Fortunately, at Transnet I have
experienced all these qualities from
many stakeholders. They are too
numerous to mention them all here.
Still, a few, without whose support
we would never have accomplished
a fraction of the things we set out
to do in the beginning, are worth
noting here.
Let me thank my extended Transnet
family – that is, the Group’s
Executive Committee and their
families. Our employees and their
families play an incredibly
40 TRANSNET ANNUAL REPORT 2007
important role. Their contribution is
deeply appreciated.
On behalf of my colleagues in the
Group Executive Committee, let me
thank our Chairman, Mr Fred
Phaswana, for his and for the entire
Board’s continuing support for our
transformation.
I would also like to extend my
gratitude to Minister Alec Erwin,
MP, for support and that of his
department , notably Ms Portia
Molefe, the Director-General at
DPE, for Transnet’s transformation.
Throughout his tenure as our
shareholder minister, he has been
nothing but a true believer in the
transformation of this Company
into a world-class freight transport
provider.
Let me also take the opportunity to
thank Mr Yunus Carrim, MP, Chairman
of the Portfolio Committee on Public
Enterprises, and the members of the
committee, for their continued
support of our work and for
constantly playing a genuine role
of being independent supporters of
our transformation project.
My most sincere appreciation goes
to organised labour and the members
of the SLF – the joint initiative
between my executive and labour –
for their active participation in the
work of this forum. Organised labour
is one of the key elements that make,
and maintain, ours a progressive
economy.
Our customers are the only reason
we are in business. Let me thank
each and every one of them. We
trust that you are experiencing the
positive impact of the
improvements we are making.
Freight is a network business and
Transnet’s success depends, to a
large extent, on its network
partners. For the future, it is our
intention to strengthen our
partnerships to derive greater
value from our freight logistics
system.
Our financiers are, together with
internally generated resources,
funders of our business. We
appreciate your support and
constructive engagement.
Finally, our hearts go out to the
families of the 26 colleagues who
lost their lives on duty during the
year. Our ongoing focus on safe
operations is, in part, designed to
ensure that their loss is not in vain
and that the memory of our
deceased colleagues is
appropriately honoured through a
significant reduction, if not
elimination, of fatalities.
CONCLUSION
The consistent improvement in
the financial and operational
performance of the Company over
the past three years provides clear
evidence of the appropriateness of
the strategy. During this period we
have seen Transnet transform from
a poorly-performing group of
loosely related logistics businesses
into a tightly-focused business with
a common vision. It is a reflection
of how far we have come.
Since beginning the journey of
transforming Transnet some three
years ago, the scale of the
Company’s investment programme
has doubled to today’s R79 billion.
A growing Transnet is an integral
part of the South African economy
and an important contributor to the
6% plus GDP target envisaged in
AsgiSA.
The level of our investment
programme tells the story about
our own business and our view
about our country’s economy.
Simply, we are bullish about the
Company and confident that it is
growing (for the first time in two
decades) and that it is poised for
further growth in coming years.
TRANSNET ANNUAL REPORT 2007 41
Maria Ramos
Group Chief Executive
21 June 2007
“We are bullish about
the Company and that
it is growing.”
CHIEF FINANCIAL OFFICER’S REPORT
42 TRANSNET ANNUAL REPORT 2007
INTRODUCTION
The year ended 31 March 2007 was
extremely challenging for the
Group. Nevertheless, it was a very
successful year, as evidenced by
sustained financial performance,
significant progress in the disposal
of non-core businesses and
investments, a stronger balance
sheet and meeting all our
shareholder’s expectations as
outlined in the Shareholder
Compact (refer to the Report of
Directors on page 143).
These achievements provide the
appropriate platform for the
execution of the capital
expenditure programme that will
enable economic growth and
contribute to AsgiSA’s 6% GDP
growth target.
As we note the successes of the
turnaround strategy we also record
new challenges. This takes the form
of regulators that need to approve
Transnet’s tariff increases prior to
implementation. The impact of
regulated tariff increases is far-
reaching as it impacts capital
investment decisions.
GROUP OPERATING PERFORMANCE
– CONTINUING OPERATIONS
The positive economic environment
prevailing throughout the year, both
in South Africa and with our major
trading partners, enabled revenue
to grow 8% to R28,2 billion (2006:
R26,0 billion). This revenue growth
was based on an average price
increase of 4% coupled with
volume growth approximating 4%.
All operating divisions, with the
exception of Freight Rail, grew
volumes strongly. Freight Rail’s lack
of volume growth can be attributed
to capacity constraints, customer
Chris Wells
Chief Financial Officer
production problems and
derailments. The Group-wide
reengineering programme,
“Vulindlela”, was a priority for
Freight Rail where the focus is on
operational efficiency, planned
maintenance and the purchase of
new rolling stock. This programme
has made a significant contribution
to the operational improvements
which are evident throughout the
Group.
Many operational challenges were
faced during the year, including the
collapse of the ship loader structure
in Saldanha, rough seas experienced
in March 2007, which closed most
ports for five days and adverse
weather conditions preventing the
coal mines from producing the
required coal volumes. Despite
these issues, Transnet was able to
meet its customers’ requirements,
reflecting the continuing
transformation to becoming a
customer-focused business.
Earnings before interest, taxation,
depreciation and amortisation
(EBITDA) increased by 12% to
R11,5 billion (2006: R10,3 billion)
enabling the EBITDA margin to
increase to 40,7% (2006: 39,6%)
in the current year. This profit
increase is attributable to
productivity improvements and
cost-saving initiatives undertaken,
resulting in operating expenses
increasing by only 6,3% to
R16,7 billion (2006: R15,7 billion).
Included in operating expenses are
certain once-off costs, notably
R125 million for a bonus payout to
Transnet Second Defined Benefit
Fund members, a R100 million
additional contribution to the
Transnet Pension Fund and
R165 million in respect of
restructuring costs. Adjusting for
these costs, operating expenses
would have increased by only 3,8%,
well below the inflation rate.
Depreciation and amortisation
of assets for the year increased
by 39,5% to R3 billion (2006:
R2,1 billion). This increase is due
to the acceleration of the capital
expenditure programme and
commencement of depreciation on
capitalised maintenance in terms
of IFRS. Consequently the profit
from operations after depreciation
and amortisation reflected a
modest increase of 4,1% to
R8,4 billion (2006: R8,1 billion)
when compared to the prior year.
Fair value adjustments of R2,4 billion
(2006: R0,8 billion) enabled profit
from operations before finance costs
to increase by 15% to R10,7 billion
(2006: R9,2 billion). The fair value
adjustments derive mainly from the
investment in a “C” class preference
share and an increase in the carrying
value of investment properties.
The value of the “C” class preference
share moves in concert with the
MTN share price and increased by
R1,7 billion (2006: R500 million) to
R5,5 billion (2006: R3,8 billion).
The increase in the value of
investment properties amounted to
R490 million (2006: R372 million).
Finance costs remained at similar
levels to those of the prior year.
However, the Group’s weighted
average cost of debt (WACD) of
11,9% is very high due to legacy
debt. It is anticipated that the
WACD will decrease significantly as
new cost-effective borrowings are
raised.
The taxation charge for the year
amounted to R1,9 billion (2006:
R2,0 billion), comprising a current
taxation charge of R0,9 billion and a
deferred taxation charge of R1
billion. The effective taxation rate
for the Group is 22,93% (2006:
31,31%) for the year, which is below
the corporate taxation rate of 29%
due primarily to fair value gains
which are exempt from taxation.
Sensitivity analysis R million
Revenue (+1%) 301
Personnel costs (+1%) 111
Energy costs
(+US$1 in oil price) 14
Material (+1%) 20
This table illustrates the impact
of a 1% movement in various
elements and the consequent
impacts and should be read in
conjunction with the graphic
entitled ‘Operating costs’ . As can
be seen from the table above,
revenue growth is the key driver
for attaining improved results.
In this regard volume growth is
specifically targeted.
GROUP OPERATING PERFORMANCE
– DISCONTINUED OPERATIONS
In the prior year, the following
businesses were classified as non-
current assets held-for-sale and
reported as discontinued
operations, having met the criteria
as set out in IFRS 5 Non-current
Assets Held-for-Sale and
Discontinued Operations:
• South African Airways (Pty) Ltd
(SAA);
• V&A Waterfront Holdings (Pty)
Ltd;
• Autopax Passenger Services
(Pty) Ltd;
• freightdynamics;
TRANSNET ANNUAL REPORT 2007 43
Revenue contribution per operating division
15%
8%
51%
Freight Rail
National Ports Authority
Port Terminals
22%
4%
Pipelines
Other
Operating costs*
22%
15%
52%
Personnel and benefits
Energy
Operating leases
7%
Material costs
Maintenance costs
2%
* continuing businesses
Other
2%
CHIEF FINANCIAL OFFICER’S REPORT continued
• Viamax (Pty) Ltd;
• Equity Aviation (Pty) Ltd;
• VAE Perway (Pty) Ltd; and
• Freight Dynamics Guard Risk.
In addition to the above entities the
following businesses/investments
were classified as non-current
assets held-for-sale or reported
as discontinued operations in the
current year:
• Transnet Housing Loan Book;
• Shosholoza Meyl;
• Transnet Pension Fund
Administrators;
• Luxrail (Blue Train);
• Transtel DEVI assets; and
• arivia.kom.
These entities reported revenue of
R22 billion (2006: R22,2 billion) and
a net loss of R349 million (2006:
R47 million).
The Group profit from discontinued
operations of R1,1 billion (2006:
R102 million) comprises an
operating loss of R349 million
(2006: R47 million) and a profit
on disposal of operations of
R1,4 billion (2006: R149 million).
The most significant disposals
during the year were South African
Airways (SAA) and the Group’s
interest in V&A Waterfront
Holdings (Pty) Ltd (V&A). The
investment in V&A was sold for
R7 billion, of which Transnet’s 26%
share of the proceeds amounted to
R1,8 billion, and a Group profit on
sale of R711 million was
recognised.
The major business of the Group
that has been classified as a
discontinued operation is SAA.
Transnet and the South African
Government concluded a sale
agreement for the sale of SAA to
the Department of Public
Enterprises with risk and rewards
of ownership passing to the
Government on 31 March 2006.
The effective date of sale has been
recorded as 31 March 2007, being
the date on which all suspensive
conditions were fulfilled. The
R2 billion sale price of SAA was
discharged by means of a share
buy-back and the net impact
thereof on the Group was a
reduction in capital and reserves of
R1 billion. It should be noted that
Transnet had recapitalised SAA by
injecting R8,4 billion in cash over
the last three years, all of which has
been written-off.
South African Airways
Revenue increased by 6,8% to
R20,6 billion, which was negatively
impacted by low-cost carriers and
lower passenger yields. Revenue
includes an amount of R683 million
(2006: R1 billion), relating to the
release of prescribed ticket sales
to income, and fuel levies
amounting to R2,4 billion (2006:
R2,2 billion).
Net operating expenses excluding
depreciation and amortisation,
increased by 12,8% to
R20,5 billion, mainly as a result of
the increase in fuel prices which
showed an effective increase of
14,5% over the prior year. Aircraft
lease costs increased by 32,5% to
R2,5 billion (2006: R1,9 billion) as a
result of sale and leaseback
transactions entered into in March
2006 for two Airbus A340-600
aircraft as well as the introduction
of the MD 11 cargo aircraft in the
past year. An operating loss for the
year of R603 million has been
44 TRANSNET ANNUAL REPORT 2007
recorded (2006: profit of
R425 million).
GROUP FINANCIAL POSITION
TAXATION
The deferred taxation liability
increased from R52 million to
R1,7 billion in the year due to
increased temporary differences
as a result of the capital
expenditure programme and post-
retirement benefit obligations,
together with taxation on the
increased carrying value of
property, plant and equipment
recorded at fair values.
The Minister of Finance, in his
budget speech on 21 February
2007, noted that the regime
relating to the taxation
depreciation of fixed and
moveable assets will be reviewed
to ensure a greater degree of
consistency. Noting further that
one way of reducing the cost of
doing business in South Africa is to
improve the efficiency of transport
networks and ports, it was
proposed to reduce the taxation
depreciation periods for new rolling
stock from 14 years to five years,
and for new quay walls and other
port facilities to qualify for
deductions over 20 years rather
than non-depreciable for taxation
purposes.
The effective date of these
proposals, and the exact impact on
Transnet, will be confirmed when
the legislation is drafted, but the
proposals will have a positive
impact on Transnet’s cost of
funding and funding requirements
of its capital expenditure
programme.
EBITDA contribution
14%
9%
34%
Freight Rail
National Ports Authority
Port Terminals
43%
Pipelines
BORROWINGS
Whilst interest-bearing borrowings
increased by R3,3 billion in the year,
cash and cash equivalents
increased by R1,8 billion, resulting
in a net borrowing increase of
R1,5 billion. The increase in
borrowings was used to fund
capital expenditure, and in this
regard long-term loan facilities
of R3,3 billion were raised at very
competitive rates to fund the
acquisition of locomotives and
cranes. R1 billion had been drawn
down on these facilities at
31 March 2007.
The gearing ratio at year-end of
39% (2006: 46%) improved
significantly in the current year and
reflects the strength of Transnet’s
balance sheet. The Group is well-
positioned to fund the capital
expenditure programme cost-
effectively.
The Group has adequate cash on
hand and banking facilities to meet
its commitments. At the end of the
year Transnet had unused
borrowing facilities of R54 billion,
of which R5 billion is available
immediately as short-term loans.
A detailed analysis of all the
Group’s borrowings and related
exposures is contained in notes
25 and 30 and annexure A to the
annual financial statements.
In line with the strategic objective
of lowering the cost of doing
business in South Africa, Transnet
continues to play a pivotal role in
both the local and international
money and capital markets.
Subsequent to the year-end
Transnet appointed an arranger and
lead joint-managers to assist with
the implementation of a domestic
medium-term note programme
under which domestic market bonds
and commercial paper issuances
will take place. In addition, a multi-
sourced facility with the
appropriate export credit agencies
is being implemented to facilitate
cost-effective and flexible funding
for imported equipment.
PENSION AND POST-RETIREMENT
BENEFITS
The Group provides various post-
retirement benefits to its active
and retired employees, including
pension, post-retirement health
and other benefits.
The two defined-benefit funds,
namely the Transnet Second
Defined Benefit Fund (TSDBF) and
the Transnet Pension Fund (TPF),
are fully funded with actuarial
surpluses in excess of R1,9 billion
and R1,1 billion respectively, which
reflects a decrease in the post-
retirement benefit obligation for
these funds of R1,6 billion
compared to the prior year. Transnet
has not recognised any portion of
the surplus on these funds as the
fund rules at present do not allow
for the distribution of a surplus.
An ex-gratia once-off bonus
payment of R125 million for all
members of the TSDBF has been
provided for by Transnet. The
payment basis of the bonus will
include those pensioners with long
service (as these individuals are
unlikely to have significant
alternative retirement funding
income), pensioners that were
previously disadvantaged by the
rules of the fund and those
individuals who receive relatively
low pensions despite long service.
Transnet, together with the
Trustees of the TSDBF, has moved
a significant portion of the fund
assets from equities to cash and
bonds. The fund’s asset allocation is
now more appropriate for a closed
fund of this nature. Furthermore, a
cash flow matching programme will
be implemented during 2007.
The labour unions requested that
members of Transnet’s pension
funds could remain as members if
the entity that employs them
remains a State-owned entity
(principally to accommodate SAA
and Metrorail employees at this
stage). To accommodate this
requirement and certain other
amendments, the Transnet Pension
Fund Act was revised through a
Parliamentary process and is
awaiting presidential signature.
Accordingly, the TPF and the
Transnet Retirement Fund will
become multi-employer funds.
Dealing with the TPF specifically,
separate “sub-funds” boards of
trustees will be formed. The
utilisation of any surplus will
therefore need to be dealt with
separately by each sub-fund and
the trustees and Transnet will make
announcements in this regard in
due course.
The post-retirement benefit
obligation for the medical funds
has decreased by R330 million to
R2,1 billion (2006: R2,4 billion).
TRANSNET ANNUAL REPORT 2007 45
“Gearing improved to 39%
and cash generated from
operations improved by
20% to R13,5 billion.”
CHIEF FINANCIAL OFFICER’S REPORT continued
CASH FLOWS
Cash generated from operations
before working capital changes
increased by 20% to R13,5 billion
(2006: R11,2 billion) and net cash
generated from operating activities
increased by 51% to R8,9 billion.
These significant increases reflect
the Group’s ability to generate
strong cash flows.
Cash interest cover and CFROI
(cash flow return on investment –
a reflection of the ‘real’ returns
earned above inflation) are key
measures for the Group as they
reflect respectively the ability to
service borrowings and to earn an
appropriate return on investment.
Cash interest cover increased to
5,4 times (2006: 4,5 times) and
CFROI increased to 6,8% (2006:
5,8%). These measures demonstrate
that Transnet is comfortably able to
service its borrowings and is
achieving returns in excess of its
weighted average cost of capital.
CAPITAL EXPENDITURE
In light of historic under-spending,
as can be seen from the graphic
above entitled ‘Historic capital
expenditure’ , capital expenditure
plans for the continuing businesses
over the next five years amount to
R79 billion (2006: R65 billion) and
relate mainly to the upgrade and
expansion of rail, port facilities
and pipeline infrastructure.
Projects that allow for capacity
expansion included in the five-year
capital expenditure plan include:
• Ore line expansion to 47 million
tons;
• Coal line expansion to 86 million
tons;
• New locomotives for the coal line;
• New locomotives for general
freight;
• New container terminal at
Ngqura;
• Expansion at the Port of Durban;
• Expansion at the Port of Cape
Town; and
• New multi-product pipeline.
Capital commitments will be financed
by the cash from operations, together
with borrowings.
Significant progress has been
achieved in the roll-out of the capital
expenditure plan in the current year,
with contracts for new locomotives
and port equipment being concluded
with suppliers. An amount of
R11,7 billion (2006: R6,6 billion) has
been invested to expand and
maintain operations in the current
year, in line with the budget. The
expected spend for the forthcoming
year is estimated at R18 billion.
A new challenge that faces the capital
expenditure programme is the advent
of regulation. It is imperative that
appropriate tariff increases are
approved to enable a fair return on
the Company’s invested capital.
GUARANTEES
The Group has issued guarantees
to third parties amounting to
R5,7 billion, the most significant of
which relates to promissory notes
amounting to R2,2 billion in respect
of the Newshelf 697 structure. The
sole shareholder in Transnet Ltd,
namely the South African
Government, has guaranteed the
borrowings of the Group to the
extent of R19 billion (2006:
R19 billion). Assets pledged
46 TRANSNET ANNUAL REPORT 2007
in support of secured loans and
capitalised finance leases amount
to R1,4 billion (2006: R1 billion).
As mentioned above, Transnet
concluded a share sale agreement
for the sale of SAA to the State.
As part of this agreement, Transnet
provided certain last resort
guarantee facilities to SAA that
expired on 31 March 2007. However,
due to legislative delays in
obtaining a suitable Government
guarantee, the existing facility of
R1,5 billion will remain in place for
a short period until the replacement
guarantee is procured.
TREASURYRISK MANAGEMENT
The Group’s policies with respect
to the hedging of foreign currency
exposures and the management of
financial risk were approved by the
Board, and will continue to be
enhanced to ensure risks are
identified and managed in a
structured and controlled manner.
As mentioned above, the Group
entered into supplier agreements
for the purchase of locomotives and
port equipment. These contracts
were concluded with foreign
suppliers and consequently exposed
the Group to foreign exchange risk.
In accordance with the Board-
approved financial management risk
framework, the Group entered into
derivatives to hedge this exposure.
The Group consequently adopted
fair value hedge accounting in the
current year as allowed by IAS 39
Financial Instruments: Recognition
and Measurement.
Further details regarding these
exposures are contained in note
25
20
15
10
5
0
2008
Forecast capital expenditure
2009 2010 2011 2012
1
7
,
9
2
1
,
5
1
7
,
5
1
2
,
7
9
,
4
R

b
i
l
l
i
o
n
Capital expenditure for 2008
24%
19%
48%
Freight Rail
Rail Engineering
National Ports Authority
4%
Port Terminals
Pipelines
5%
12
10
8
6
4
2
0
00
Historic capital expenditure*
1
,
62
,
0
3
,
2
4
,
0
3
,
8
3
,
7
6
,
6
1
1
,
7
01 02 03 04 05 06 07
* Excluding SAA
R

b
i
l
l
i
o
n
14 and annexure A to the annual
financial statements.
GROUP ACCOUNTING POLICIES
The annual financial statements have
been prepared in accordance with
IFRS, the Companies Act 1973 (as
amended), the Public Audit Act 2004
and the Public Finance Management
Act 1999 (as amended). The results
are presented in terms of IFRS and
interpretations that are effective for
the year ended 31 March 2007.
Accounting policies used in the
annual financial statements are
compliant with IFRS and consistent
with those used in the annual
financial statements for 31 March
2006, except as listed below.
The financial effects of the changes
in accounting policies have not had
a significant impact on the financial
statements. Policy changes were
in response to the following
amendments to International
Accounting Standards and circulars
issued by SAICA and relate to:
• IAS 21 The effects of changes
in foreign exchange rates – Net
investment in a foreign
operation;
• IAS 39 Financial Instruments:
Recognition and measurement
– Fair value option;
• IAS 39 Financial Instruments:
Recognition and measurement
and IFRS 4 Financial guarantee
contracts;
• IFRIC 4 Determining whether an
arrangement contains a lease;
• Circular 1/2006Disclosures in
relation to deferred taxation; and
• Circular 9/2006 Transactions
giving rise to adjustments to
revenue/purchases.
RESTATEMENTS OF THE ANNUAL
FINANCIAL STATEMENTS
In the current year the Group
reviewed its application of IAS 40
Investment Property, which
requires the fair value of qualifying
property to be established and
disclosed in the financial
statements. In addition, the
application of the initial
recognition requirements of IAS 12
in relation to revaluation of assets
that are not subject to taxation
allowances was amended.
Further details are contained in
notes 10 and 37 to the annual
financial statements.
The changes in accounting policies
and other restatements had the
following impact on the financial
statements:
TRANSNET ANNUAL REPORT 2007 47
31 March 1 April
2006 2005
R million R million
INCOME STATEMENT
Profit for the year attributable to equity
holder, as previously reported 4 539
Net effect of restatements 359
IFRIC 4 adjustments 20
Increase in investment properties 339
Restated profit attributable to
equity holder 4 898
BALANCE SHEET
Equity attributable to shareholder,
as previously reported 27 593 21 018
Net effect of restatements 1 820 1 487
IFRIC 4 adjustments 16 (4)
Increase in investment properties 796 457
Deferred taxation adjustments 1 008 1 034
Restated equity attributable
to shareholder 29 413 22 505
“Significant progress has
been achieved in the roll-
out of the capital
expenditure plan in the
current year”
CHIEF FINANCIAL OFFICER’S REPORT continued
TRANSNET BUSINESS
INTELLIGENCE
Transnet Business Intelligence (TBI)
is a programme designed to create
cohesive information management
within the organisation through the
effective use of data that is
credible, accurate and timely. The
programme has, over the past year,
made great strides in improving
the credibility, relevance and
timeliness of financial information.
TBI comprises a suite of projects
focusing on critical areas throughout
the Company, including financial
reporting, risk measurement,
operational productivity
measurement, human resources and
the internal control environment.
A key objective of TBI is the
implementation and monitoring of
key performance indicators (KPIs)
throughout Transnet.
POST-BALANCE SHEET EVENTS
The following significant issues
occurred between 31 March 2007
and 21 June 2007:
Sale of “C” class preference share
in Newshelf 664 (Pty) Ltd
On 21 June 2007 Transnet Ltd
accepted an offer of R5,8 billion
from Newshelf 664 (Pty) Ltd,
subject to certain conditions, for
the redemption of the “C” class
preference share held by Transnet
Ltd in Newshelf 664 (Pty) Ltd.
In note 14 of the financial
statements, the investment in the
“C” class preference share in
Newshelf 664 (Pty) Ltd was valued
at R5,5 billion at 31 March 2007
(2006: R3,8 billion).
The fair value adjustment derived
from the investment in the “C” class
preference share for the year
amounted to R1,7 billion (2006:
R500 million). In addition, an
amount of R300 million will be
recognised in the income statement
in the year ending 31 March 2008.
Claim by Umthunzi Telecoms
Consortium (Pty) Ltd
On 11 April 2007 the Umthunzi
Telecoms Consortium (Pty) Ltd
instituted legal action in the
Transvaal Provincial Division of the
High Court against the Government
of the Republic of South Africa as
the First Defendant and Transnet
Ltd as Second Defendant claiming
the delivery of certain MTN Group
shares. The claim amounts to
approximately R2,2 billion. The
Directors have sought and obtained
advice from attorneys and counsel
and, based on that advice, believe
there is no legal basis for the claim
and that it is therefore unlikely to
succeed.
Sale of Viamax (Pty) Ltd
Transnet Ltd has concluded an
agreement in principle to sell
Viamax Holdings (Pty) Ltd, its fleet
management and leasing business,
to Bidvest Group Ltd, for
approximately R1 billion.
Sale of Transnet Housing Loan Book
The Transnet Housing Loan Book
has been sold to First National Bank
with effect from 1 April 2007 for
its fair value of approximately
R1,4 billion, subject to certain
suspensive conditions.
Sale of Transnet Pension Fund
Administrators
A sale agreement was concluded
between Transnet Ltd, Fifth
Quadrant Actuaries and
Consultants (Pty) Ltd and
Metropolitan Retirement Fund
Administrators (Pty) Ltd for the
sale of the Transnet Pension Fund
Administrator’s business for an
amount of R23 million with effect
from 1 April 2007.
Sale of VAE Perway (Pty) Ltd
A sale agreement was concluded
between Transnet and VAE GmbH
for the sale of VAE Perway (Pty) Ltd
for R30 million. The transaction has
an effective date of 16 April 2007.
freightdynamics
Transnet has entered into
negotiations for the sale of
freightdynamics. The sale of this
business will be subject to the
provisions of section 197 of the
Labour Relations Act and is
expected to be completed by
30 June 2007.
Transtel DEVI
Transnet Ltd is involved in
negotiations for the disposal of its
Transtel DEVI Assets.
PROSPECTS
The focus areas for the financial
strategy of the Group in the
forthcoming year are as follows:
• Strong control environment
with reliable, timely and
relevant information;
• Improved operational efficiency
by focusing on key performance
drivers/indicators and
improved margins;
• Drive volume growth and ensure
total revenue increase exceeds
cost increases;
• Capital investment programme
roll-out and ensuring the returns
achieved exceed WACC; and
• Implementation of the funding
plan that adequately addresses
the borrowing requirements of
the Group and reduces the
weighted average cost of debt.
48 TRANSNET ANNUAL REPORT 2007
Chris Wells
Chief Financial Officer
21 June 2007
TRANSNET ANNUAL REPORT 2007 49
VALUE ADDED STATEMENT
for the year ended 31 March 2007
2007 2006
Restated
Continuing operations R million % R million %
Revenue 28 214 26 034
Cost of materials and services (7 905) (6 909)
Net operating expenses excluding depreciation
and amortisation (16 726) (15 733)
Excluding – Post-retirement benefit obligation costs 973 1 054
– Personnel costs 7 848 7 770
Value added by operations 20 309 89 19 125 93
Other income 2 610 11 1 524 7
– Finance income 187 262
– Income from associates 2 33
– Dividend income 36 85
– Sale of interest in businesses – 329
– Fair value adjustments 2 385 815
Value added/created 22 919 100 20 649 100
Applied as follows:
Employees 8 821 39 8 824 43
– Personnel costs 7 848 7 770
– Post-retirement benefit obligation costs 973 1 054
Providers of capital 2 624 11 2 668 13
– Finance costs 2 624 2 668
Government 941 4 1 813 9
– South African taxation 934 1 806
– Foreign taxation 7 7
Re-invested to maintain and expand operations 10 533 46 7 344 35
– Depreciation, amortisation and impairment 3 250 2 287
– Deferred taxation 961 229
– Profit 6 322 4 828
Value apportioned 22 919 100 20 649 100
Value added 2007
46%
39%
11%
4%
Employees
Reinvested to maintain and
expand operations
Providers of capital
Government
Value added 2006
35%
43%
13%
9%
Employees
Providers of capital
Government
Reinvestment to maintain and
expand operations
Africa’s busiest port – 60% of South Africa’s container traffic goes through the port of Durban
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CORPORATE GOVERNANCE
Corporate governance report 50
Risk management report 56
CORPORATE GOVERNANCE
INTRODUCTION
2007 marks the end of the three-
year term in office of the Transnet
Board of Directors, reckoned from
27 August 2004.
One of the notable areas of
strength of this Board has been the
individual Directors’ ability to come
together and work as a focused
team in tackling the substantive
issues concerning the Company.
Apart from the work carried out in
the various Committees of the
Board as detailed below, ad hoc
Board Committees are constituted
whenever a need arises for the
Board to take lead in areas
affecting the Company’s strategic
focus. Where necessary, the Board
constitutes an ad hoc committee to
provide direction to the Company’s
management.
A new Board Committee, the Group
Risk Committee, was also formed
during the year. At its constitutive
meeting in October 2004, the Board
decided to assign risk management
oversight to the Group Audit
Committee. With the Enterprise-
Wide Risk Management Framework
of the Company having been
approved and increased attention
required for embedding a risk
management culture, it was
considered an appropriate time to
constitute this new committee
under the Chairmanship of Mr Peter
Joubert, an independent non-
executive Director to assist the
Board in exercising its risk
management oversight role.
Progress achieved in providing an
integrated risk management focus
to the Company is set out more fully
under the risk management section
contained on pages 56 to 59.
From the outset, the Board adopted
the approach that promotion of
principles of sound corporate
governance extends beyond some
mechanistic tick box exercises to
the substantive advancement of
unimpeachable corporate conduct.
Transnet complies with King II in all
aspects applicable to it, and King II
is the foundation for governance in
the Group.
During the year, an exercise was
carried out to measure Transnet
Ltd’s corporate governance
performance against the King II
Code on Corporate Governance
(King II) and the Deutsche Bank
Model (Beyond the Numbers,
Corporate Governance in South
Africa). (The DB Model)
The DB model provides an analysis
of corporate governance
performance using factors
considered to have the highest
potential to influence share price
movement and other international
corporate governance best
practices. As Transnet is not a listed
Company, some of the questions
included in the DB model do not,
however, apply to Transnet. This was
particularly evident in questions
relating to shareholder treatment
on issues such as ordinary share
voting rights, repricing of share
options and barriers to change in
control. The exercise revealed that,
in many respects, Transnet’s
corporate governance performance
complies with standards stricter
than those set out in King II.
BOARD OF DIRECTORS
Transnet has a unitary Board
structure with Directors assuming
complete responsibility for
providing effective control and
strategic direction to the Company.
The Company has separate and
distinct roles and responsibilities
for the Chairman of the Board and
the Group Chief Executive. The
Chairman is an independent non-
executive Director.
The Company’s Articles of
Association provide that the
Company’s Board shall consist of no
more than 18 Directors. The Board
currently comprises 14 Directors and
is satisfied that its size is sufficient
to enable it to fully and effectively
lead the organisation and fulfil the
obligations of the Board’s mandate.
The definition of independent
Director used in this Corporate
Governance Report is based on
international best practice
espoused in the DB Model, using a
set of 15 measures.
The majority of the Board members
are independent Directors. Apart
from the fact that the majority of
the Directors meet the set of
15 measures defining independence,
the Board places a great premium on
each Director’s ability to think
independently and strategically and
thereby add value to the Board’s
deliberations. This is one of the vital
attributes taken into account by the
Corporate Governance and
Nominations Committee when
making recommendations for the
appointment of Directors to the
Board.
50 TRANSNET ANNUAL REPORT 2007
All the current Directors of the
Company were appointed by the
Shareholder for a three-year term.
A total of 10 of the 12 non-
executive Directors were appointed
on 27 August 2004. This was an
extra-ordinary measure occasioned
by circumstances that then
prevailed.
During the year, Ms Nunu Ntshingila
and Dr Norman Haste, OBE, were
appointed as independent non-
executive Directors.
The basis for the appointment of
these two Directors included,
amongst others, the need for the
Board to infuse new Directors to
allow for proper transition and
succession planning.
In respect of each year of the
Directors’ three-year term, the
Directors have to submit
themselves for re-election at the
Company’s Annual General Meeting.
Six Board meetings took place
during the year. This includes two
two-day strategic workshops held
in August 2006 and February 2007.
As part of its ongoing induction and
first-hand experience of the
Company’s operations, the Board
conducts site visits to the
Company’s operations across the
country and holds some of its
meetings at these operational
sites. The operations visited during
the year included the ports of Port
Elizabeth and Ngqura.
As has become the custom, the
Board, once again conducted an
evaluation of its performance
facilitated by independent
advisors. These evaluations provide
an invaluable opportunity for the
Board to reflect on its processes
and structures and help determine
whether the Board and Committees
adequately fulfil their mandates.
The evaluation exercise also
included an evaluation of the roles
of the Chairman, the Group Chief
Executive and the Group Company
Secretary. The evaluation
culminates in the determination of
areas of improvement and action
plans to drive such improvement.
The Board evaluation report
prepared by the independent
advisors, together with action
plans, if any, is submitted to the
shareholder.
The Board holds some meetings in-
Committee, to allow non-executive
Directors to raise any issues not
appropriately raised in full Board
sessions in a session closed to
executives.
The Board has an approved mandate
which sets out its authority, powers
of delegation and terms of
reference. The Board directs and
controls the business of the Group.
With the exception of the matters
set out in the Board’s written
resolution, as matters reserved for
Board decision, the Board has
delegated the responsibility to run
the operations of the Company to
the Group Chief Executive.
The Board reserved matters
include, amongst others, the
following:
• Approval of strategy, business
plans, annual budgets, the
borrowing strategy and any
subsequent material changes in
strategic direction;
• Recommendation for the
shareholder’s approval of the
commencement or cessation of
a significant business activity;
• Appointment, removal or
replacement of the external
auditors of the Company;
• Approval of the rules and
amendments to pension and
provident funds having a
material effect on the actuarial
liabilities of those funds; and
• Appointment and removal of
the Group Company Secretary.
The Group Chief Executive is
authorised to sub-delegate the
powers delegated to her by the
Board as she thinks fit. The Group
Chief Executive submits
comprehensive reports to the
Board at its meetings. Further,
written Board updates are
circulated to the Directors in the
months where there are no Board
meetings scheduled.
The Transnet Board’s performance
has been exemplary with high
levels of participation by all Board
members as evidenced by the
Board evaluation reports
submitted to the shareholder.
During the year, two Directors
missed more than 25% of
meetings, as indicated in the Board
attendance schedule below.
Despite such absences occasioned
mostly by unforeseen
circumstances, these Directors
diligently participated in the work
of the Board and its Committees
throughout the year.
TRANSNET ANNUAL REPORT 2007 51
“Transnet complies with
King II in all aspects
applicable to it”
CORPORATE GOVERNANCE continued
Schedule of attendance at Board of Directors meetings
26 Apr 30 Jun 29 Aug 6 Oct 28 Nov 13 Feb
Director 2006 2006 2006 2006 2006 2006
Mr FTM Phaswana
(Chairman)
Ms M Ramos
Dr I Abedian A A
Prof GK Everingham
Ms NBP Gcaba
Dr ND Haste, OBE *
Dr SE Jonah, KBE A A A A
Mr PG Joubert
Ms NNA Matyumza
Mr BT Ngcuka A
Mr S Nicolaou
Ms N R Ntshingila *
Ms KC Ramon A
Mr CF Wells
= Present
A= Apologies
* = Not a member
The Board has delegated
responsibility for providing
assurance on the quality, integrity
and reliability of the Group’s risk
management to this committee.
The duties of this committee
include:
• Reviewing and assessing the
integrity of the risk control
processes and systems;
• Ensuring that the risk policies
are managed effectively and in
accordance with the Enterprise
Risk Management Framework
approved by the Board from
time to time;
• Ensuring effective
communication with the
Internal Auditors, the external
auditors, the Group Audit
Committee, the Board,
management, regulators and
supervisors on risk
management; and
• Contributing to a climate of
discipline and control which will
reduce the opportunity for fraud
and other operational losses.
Major risks across the business as
well as the embedding of the risk
management culture are standing
items on the committee’s agenda.
In line with the Board’s commitment
to ensure that the Group operates
in a safe environment, safety,
health, environment and quality
(SHEQ) and risk management form
part of the committee’s mandate. In
the event of a fatality in any of the
operating divisions, the Chief
52 TRANSNET ANNUAL REPORT 2007
BOARD COMMITTEES
The Board established four
Committees to assist it in
discharging its responsibilities,
namely the Group Risk, Group Audit,
Group Remuneration, and
Corporate Governance and
Nominations Committees.
Whilst the Board has delegated
certain of its functions to these
Committees, it remains fully
accountable for the proper
discharging of the responsibilities.
Minutes of committee meetings are
included in the Board papers
distributed prior to Board meetings
and the Chairmen of the respective
committees table their reports at
Board meetings.
Only non-executive Directors are
members of the committees of the
Board. The Group Chief Executive
and other members of executive
management whose presence is
required for such committees’
effective performance of their
responsibilities are invited to be
in attendance at committee
meetings.
Group Risk Committee
Members: Mr PG Joubert
(Chairman), Dr I Abedian,
Ms NNA Matyumza,
Prof GK Everingham and
Ms NR Ntshingila.
The committee held its constitutive
meeting on 30 January 2007.
Executives concerned and other
relevant executives of such
divisions appear before the Group
Risk Committee and the Board to
explain the cause and preventative
measures going forward.
The committee’s work programme
for the year includes holding
committee meetings at the
operating divisions to highlight the
Company’s focus on risk
management issues and observe
the level of implementation of the
risk management standards and
culture at the operations.
Schedule of attendance at Group
Risk Committee meetings:
1 January 2007 – 31 March 2007
30 Jan
Director 2007
Mr PG Joubert (Chairman)
Dr I Abedian
Prof GK Everingham
Ms NNA Matyumza
Ms NR Ntshingila A
= Present
A= Apologies
Group Audit Committee
Members: Prof GK Everingham
(Chairman), Dr I Abedian,
Mr PG Joubert, Ms KC Ramon and
Mr S Nicolaou
All the members of the Audit
Committee are non-executive
Directors and are financially
literate. With the constitution of
the Group Risk Committee,
Ms Matyumza resigned from the
Audit Committee with effect from
January 2007 and became a
member of the Group Risk
Committee.
The Audit Committee adds
significant value to the Board and
the Group by carrying out, amongst
others, the following functions:
• Assisting the Board in
discharging its duties relating
to the safeguarding of assets
and the evaluation of internal
control frameworks within the
Group;
• Reviewing and assessing the
integrity and effectiveness of
the accounting, financial,
compliance and other control
systems;
• Considering the internal and
external audit process and the
accounting principles and
policies;
• Strengthening the
independence of internal and
external audit functions to
ensure their effectiveness; and
• Ensuring compliance with all
applicable legal, regulatory and
accounting requirements.
Audit subcommittees have been
formed in all the major operating
divisions of the Company. The
Group Audit Committee considers
reports from these subcommittees
at its meetings. The minutes of the
subcommittee meetings as well as
matters that have not been
resolved within set timeframes by
the subcommittees are escalated
to the Group Audit Committee.
All non-audit services provided by
the external auditors and fees
payable in that regard are pre-
approved by the Audit Committee.
The Group Audit Committee meets
with the external and Internal
Auditors without the presence of
management to discuss issues that
they consider prudent to raise in
the absence of management.
The Audit Committee is satisfied
that the independence of the
internal and external auditors
has not been compromised in
any way.
TRANSNET ANNUAL REPORT 2007 53
Schedule of attendance at Audit Committee meetings
19 Apr 14 Jun 22 Nov 2 Feb
Director 2006 2006 2006 2007
Prof GK Everingham (Chairman)
Dr I Abedian A A
Ms NNA Matyumza *
Mr S Nicolaou A A
Mr PG Joubert
Ms KC Ramon A
= Present
A= Apologies
* = Not a member
“The Board established four
Committees to assist it in
discharging its responsibilities,
namely the Group Risk, Group
Audit, Group Remuneration,
and Corporate Governance
and Nominations Committees”
CORPORATE GOVERNANCE continued
Remuneration Committee
Members: Dr SE Jonah, KBE
(Chairman), Ms NBP Gcaba (Deputy
Chairman), Dr I Abedian,
Mr PG Joubert and Ms NR Ntshingila
The purpose of the Remuneration
Committee is, amongst others to,
carry out the following functions:
• Ensure that competitive reward
strategies and programmes are
in place to facilitate the
recruitment, motivation and
retention of high performance
staff at all levels in support of
realising corporate objectives
and to safeguard shareholder
interests;
• Review the design and
management of salary
structures, policies and
incentive schemes and to ensure
that they motivate sustained
high performance and are linked
to corporate performance;
• Develop and implement a policy
of remuneration philosophy for
disclosure to enable a
reasonable assessment of
reward practices and
governance processes to be
made by stakeholders; and
• Propose the level of non-
executive Directors’ fees to the
Board which, in its turn, makes
recommendations to the
shareholder.
All the members of the
Remuneration Committee are non-
executive Directors. Ms Gcaba was
appointed as the Deputy Chairman
and Ms Ntshingila as a committee
member with effect from 30 June
2006.
The Remuneration Committee
approved the remuneration
philosophy of the Company, which
includes long- and short-term
performance incentive schemes.
Further details on remuneration
information are disclosed in the
Report of Directors on pages 146
to 150.
Corporate Governance and
Nominations Committee
Members: Mr FTM Phaswana
(Chairman), Ms NBP Gcaba,
Prof GK Everingham and
Mr BT Ngcuka
The role of the committee is to
ensure that the Board’s
54 TRANSNET ANNUAL REPORT 2007
Schedule of attendance at Corporate Governance and Nominations
Committee meetings
11 Apr 28 Jun 15 Sep 27 Nov 29 Jan 29 Mar
Director 2006 2006 2006 2006 2006 2007
Mr F TM Phaswana
(Chairman)
Prof GK Everingham
Ms NBP Gcaba A
Mr BT Ngcuka A A
= Present
A = Apologies
composition and structure enables
it to fulfil its obligations as set out
in the Board mandate and to
advance and maintain the Group’s
corporate governance policies.
The committee is also responsible
for reviewing the succession plans
of the Board collectively, the
executive Directors and members
of the Group Executive Committee.
The committee ensures that the
performance of the Board and
committees is assessed annually
and determines the form of the
evaluation process and action plans
arising out of the evaluation report.
Schedule of attendance at Remuneration Committee meetings
13 Apr 3 Jul 7 Dec 26 Feb
Director 2006 2006 2006 2007
Dr SE Jonah (Chairman) A
Dr I Abedian
Mr PG Joubert
Ms NB P Ngcaba *
Ms NR Ntshingila * A A
= Present
A= Apologies
* = Not a member
SHAREHOLDER COMPACT
One of the highlights of the year,
from a corporate governance
perspective, was the signing of the
Shareholder Compact between
Transnet and Government.
The Shareholder Compact confirms
Transnet’s mandate, the strategic
objectives to be attained as well as
the key performance areas (KPAs)
and key performance indicators
(KPIs) to measure the Company’s
performance during the period of
the Shareholder Compact. The KPAs
include capital and financial
efficiency as well as infrastructure
investments. The targets set are
measured quarterly and are
reported quarterly to the
shareholder.
CODE OF ETHICS
The Board members and employees
of Transnet are subject to Codes of
Ethics for Directors and employees,
respectively.
The Transnet Code of Ethics provides
the basic principles that must guide
all employees and other stakeholders
in conducting business with the
Company.
It is a requirement that all Transnet
employees sign an acknowledgement
that they have read and understood
the contents of the code and that
contravention of the basic standards
set therein results in disciplinary
action, including dismissal. By
signing the code, employees further
consent to Transnet publishing any
contravention and alerting any
person who employs them, on their
departure from Transnet, of such
contravention.
During the year, the Internal
Auditors were tasked to follow up
and verify that the code has been
signed by all employees. In
instances where there has been
failure to comply, reports have
been submitted to the Group
Executive Committee as well as to
the Group Audit Committee.
The Company also put in place an
independently operated whistle-
blowing mechanism. Reports on
matters that have been reported
through this mechanism and the
progress of investigations in respect
of such matters are reported to the
Group Audit Committee by the
Internal Auditors. The Tip-Offs
Anonymous number used by the
Company for reporting of incidences
of fraud and corruption is
0800 003 056 or email address
[email protected].
Once the calls are received,
investigations are carried out by the
Company’s Internal Auditors.
Depending on the nature of
allegations, some matters have
been reported to the appropriate
law enforcement agencies, including
the South African Police Service and
the Directorate of Special
Operations (otherwise known as the
Scorpions). During the year,
disciplinary processes were
instituted against 58 employees in
the operating divisions, 36 of these
matters have been finalised. Of the
36 finalised disciplinary actions,
15 employees have been dismissed,
TRANSNET ANNUAL REPORT 2007 55
one demoted, 12 received final
written warnings and eight
employees resigned before
finalising any disciplinary action. In
addition to the disciplinary action
taken, Transnet laid criminal charges
against 25 employees, 22 of these
cases are currently pending in the
courts and three were found guilty.
Furthermore, civil action was
brought against three employees
and the matters are currently
pending finalisation.
Further, fraud awareness training
is under way throughout the
organisation to assist in curbing
incidents of fraud and encourage
the use of the fraud reporting line.
Ernst & Young, Transnet Internal
Auditors, recently issued their
report on the corporate governance
audit and have, amongst others,
indicated that “Agendas, minutes
and mandates were reviewed and
were found to be consistent and
effective … The Board Governance
Structures are consistent with the
requirements of the PFMA and King
II and with an organisation of this
size and complexity of Transnet.
Based on the audit these
governance structures are
operating effectively.” On the
management governance
structures, the Internal Auditors
have gone as far as stating, that
“The Internal Control Committee
represents leading practice.”
“One of the highlights of
the year, from a corporate
governance perspective,
was the signing of the
Shareholder Compact
between the Transnet
and Government”
RISK MANAGEMENT REPORT
56 TRANSNET ANNUAL REPORT 2007
implementation. This is to ensure
that
• Transnet’s risk universe is
properly surveyed;
• The Board and management have
an integrated view and focus on
the risks facing Transnet and on
the management or mitigation
thereof;
• The roles and responsibilities
of various risk management
structures are continually
reviewed to ensure that they
remain relevant to Transnet’s
risk management strategic
objectives; and
• There is risk management
performance measurement and
appropriate controls.
All risks are managed in a
structured and systematic way,
which is aligned to the ERM
Framework and corporate
governance responsibilities. ERM
is being embedded in the Group’s
business systems and processes,
to ensure that responses to risks
remain current and dynamic.
Through the application of the ERM
Framework Transnet:
• Aligns risk appetite and
strategy: Transnet management
considers the Group’s and
operating divisions’ risk
appetite, as determined by the
Board, in evaluating strategic
alternatives, setting related
objectives, and developing
mechanisms to manage related
risks.
• Enhances risk response
decisions: Management gains
the rigour to identify and
select, amongst alternatives,
risk responses – such as risk
avoidance, reduction, sharing,
and acceptance.
• Reduces operational surprises
and losses: Transnet gains
enhanced capability to identify
potential events and establish
responses, reducing surprises
and associated costs or losses.
• Identifies and manages
multiple and cross-enterprise
risks: Transnet identifies risks
and facilitates effective and
integrated responses to the
interrelated impacts.
• Seizes opportunities: By
considering a full range of
potential events, Transnet
management is positioned to
identify and proactively realise
or capitalise on opportunities.
• Improves deployment of
capital: Obtaining robust risk
information allows Transnet’s
management to assess overall
capital needs effectively and to
enhance capital allocation
decisions.
• Ensures compliance with laws,
rules and standards: Transnet
management ensures the
effective reporting of risks and
compliance with laws, rules and
standards and seeks to avoid
damage to Transnet’s
reputation and associated
consequences.
• Increases probability of
achieving objectives:
Management ensures that
Transnet’s performance and
profitability targets are
INTRODUCTION
The overall risk management
philosophy of Transnet is that it is
not in the business of proprietary
risk taking and will therefore, to the
extent possible, avoid undue risks.
However, given the nature of
Transnet’s business and its major
capital investment programme, it is
not always possible to avoid risk.
Transnet accepts, reduces or
transfers risks (particularly
financial risks) provided that the
residual exposure accepted is
within the risk appetite or tolerance
limits of Transnet as determined by
the Board of Directors from time to
time. Integral to Transnet’s risk
management philosophy and
process, is the Enterprise-wide Risk
Management (ERM) Framework
which was developed and approved
by the Transnet Board of Directors.
ERM FRAMEWORK
The ERM Framework follows a
holistic approach to risk and
opportunity and details a strategy
to achieve the overall Group
objectives. It is aligned to King II,
the committee of Sponsoring
Organisations of the Treadway
Commission (COSO), the PFMA and
other regulatory requirements. All
operating divisions are subject to
the framework.
The ERM Framework informs the
risk management process of
Transnet in respect of, amongst
others, the risk management
procedures and guidelines, the
determination of risk management
standards, corporate planning and
responsibility of the Group Risk
Management Committee, a
subcommittee of the Group
Executive Committee (Group Exco).
The Group Risk Management
Committee is chaired by the Group
Chief Executive to emphasise the
primacy we give to managing our
risk management responsibilities.
It comprises the Group Chief
Financial Officer, the Group Chief
Operating Officer, the Group
Executive: Office of the Group Chief
Executive, the Group Executive:
Human Resources, the Group
Treasurer and the Group Chief Risk
Officer as its members. The General
Managers: Group Risk Management
and Group Compliance are in
attendance.
Group Internal Control Committee
The Group Internal Control
Committee (ICC), a sub-committee
of the Transnet Executive
Committee and Audit Committee,
has been operating effectively
during the year. This committee,
chaired by the Group Chief
Financial Officer, together with the
Chief Operating Officer and the
Group Executive: Office of the Chief
Executive, monitors the
effectiveness of the financial
controls and facilitates the
enhancement of Transnet’s control
environment. The committee
ensures that the internal audit
function is aligned to the strategic
goals of Transnet. In doing this it
has developed a five-year internal
audit maturity model, with the
ultimate vision of achieving a
world-class internal control
environment. Significant work has
already been done in understanding
the components of the model and
aligning the approach to internal
audit with the longer-term vision;
this is evident from the
introduction of internal control
monitoring and control self
assessment.
The committee’s main
responsibilities are:
• Acting as a channel and
governance committee within
Transnet for all internal audit
reports, forensic reports and
related issues and other
reports relating to financial
improvement projects
undertaken to enhance
Transnet’s control environment;
• Ensuring that satisfactory
progress is being made to
address control-related issues.
In particular, the committee
considers the adequacy of
management’s action plans to
address control weaknesses,
the speed at which actions are
being implemented, whether or
not the appropriate results are
being achieved and whether or
not sufficient resources are
being allocated to achieve the
required results;
• Guiding and directing Internal
Audit through the development
of the one-year operational and
three-year strategic internal
audit plans which cover all
areas of focus including
internal audit, forensic as well
and enhancement activities;
and
TRANSNET ANNUAL REPORT 2007 57
achieved and prevents loss of
resources. Controls and risk
interventions are chosen on
the basis of increasing the
likelihood that business will fulfil
its intentions to stakeholders.
• Protects the Company’s
resources: Management is
focused on the protection of
the scarce resources of the
Company, be it capital, physical
assets, human assets, market
share, etc.
The ERM Framework is a dynamic
process which is reviewed on an
annual basis by the Board of
Directors or as the circumstances
dictate, in consultation with the
relevant stakeholders.
RISK GOVERNANCE STRUCTURES
Risk management is, as set out in
King II, COSO and the PFMA,
ultimately the responsibility of
the Board of Directors of Transnet.
Previously, the Group Audit
Committee had responsibility for
the Board’s governance oversight
of risk management in the Group.
However, when the Board approved
the ERM Framework it reviewed the
efficacy of this governance
arrangement and determined that
there be a separate Board
Committee focusing on risk
management, hence the newly
established Group Risk Committee
(Group RiskCo) chaired by non-
executive Director, Mr Peter Joubert.
Group Risk Management Committee
The strategic operational focus on
risk management is the
“All risks are managed in a
structured and systematic
approach”
RISK MANAGEMENT REPORT continued
58 TRANSNET ANNUAL REPORT 2007
• Reviewing the outcome of
PFMA compliance assessments
and managing compliance with
the Act.
The committee’s vision of achieving
a world-class internal control
environment is firmly entrenched
in Transnet’s four-point turnaround
strategy.
Asset and Liability Management
Committee
There is an Asset and Liability
Management Committee (ALCO)
chaired by the Group Chief Financial
Officer, whose members include the
Group Chief Executive, the Group
Chief Operating Officer, the Group
Treasurer, the Group Executive:
Human Resources, the Group
Executive: Office of the Group Chief
Executive, the Group Chief Risk
Officer, the General Manager: Group
Financial Planning and the General
Manager: Group Tax.
The purpose of ALCO is to ensure
that Transnet’s approach to asset
and liability management is always
governed by prudence, the
regulatory environment in which the
Company operates, global leading
practice and the competitive space
within which the Group operates.
ALCO is responsible for managing
financial risk. To ensure this, ALCO:
• Utilises a comprehensive risk
management process that
facilitates the effective
identification, measurement,
monitoring and control of
interest rate, foreign exchange,
price and liquidity risk
exposures within prudent
levels; and
• Ensures that appropriate asset
and liability management
frameworks, policies and
procedures are implemented
in the Group.
Group Risk Management structure
The Group Risk function, which is
headed by the Group Chief Risk
Officer and which includes,
amongst others, the General
Manager: Group Risk Management,
the General Manager: Group
Compliance, the Manager: Group
Operational Risks, the Manager:
Group SHEQ Risks, the Strategic
Specialist: Risk Financing and the
Head: Group Security, is tasked with
the day-to-day risk management
and corporate governance
responsibilities.
Divisional Risk Management
Committees
Operating divisions’ Risk
Management Committees are
chaired by the relevant Chief
Executives or Chief Executive
designates. The operating divisions’
Risk Management Committees are
responsible for, amongst others,
the following:
• Formulating, promoting and
reviewing the operating
divisions’ ERM and compliance
objectives, strategies and
policies, in alignment with
Group directives and
monitoring the ERM process
at strategic, management and
operational levels; and
• Ensuring the implementation of
risk management structures and
processes in line with the ERM
and compliance frameworks,
and to ensure optimal
effectiveness of the ERM and
compliance processes in the
operating divisions, including
the prudent management of the
operating divisions’ assets and
liabilities.
THE ERM PROCESS
A procedure manual was developed
and approved by the Group Risk
Management Committee to assist
in ensuring the successful
implementation and embedding
of ERM.
The ERM methodology of Transnet
consists of the following interrelated
components, which are derived from
ERM global leading practice:
• Risk governance;
• Risk identification;
• Risk assessment;
• Risk control and response;
• Risk monitoring and reporting;
and
• Performance measurement.
MAJOR RISKS
As described above, a risk
identification process is
undertaken by each operating
division and functional area on an
annual basis to assess the risks
that will impact on the business.
Some of the major risks currently
facing the Group include the
following:
• Regulatory risks;
• Risks relating to efficient asset
performance;
COMPLIANCE
During the previous year a Group
Compliance function was
established to assist management
to discharge their responsibilities
to comply with applicable laws,
rules and standards. The Board of
Directors approved the Group
Compliance Policy and the
compliance high-level standards,
included in the Group compliance
manual, which encapsulate
Transnet’s conceptual framework
for compliance. Group Compliance
has implemented a risk-based
approach to compliance risk
management which is intended to
encourage the development of a
fully effective compliance function
over a three-year planning period.
The compliance risk methodology
and risk models are aligned to the
ERM Framework and processes.
RISK-BASED INTERNAL AUDIT
Transnet Internal Audit is an
integral part of Transnet’s ERM
focus. A key focus of Internal Audit
is to assist management in
enhancing Transnet’s internal
control environment.
Internal Audit’s assurance coverage,
focuses on key business risks that
are critical to the achievement of
the corporate strategy; major
initiatives required to implement
the four-point turnaround strategy;
core controls to achieve key control
objectives from a financial,
compliance and operational
perspective. This includes the PFMA
and compliance with laws, rules and
standards.
CONCLUSION
The ERM strategies, processes,
frameworks and initiatives which
underpin the Risk Management Plan
have been set out above. As
indicated, in accordance with King
II, COSO and the PFMA, the Board of
Directors has ultimate
responsibility for ensuring that
there is a robust risk management
process at Transnet. In executing
this responsibility, the Board of
Directors continuously reviews the
Risk Management Plan to ensure
that it helps Transnet meet its
strategic objectives. Significant
progress has been made in
embedding a culture of risk
management throughout Transnet
over the last year.
TRANSNET ANNUAL REPORT 2007 59
• Human resources risks;
• Risk that current infrastructure
capacity does not meet
customer demands, taking into
account the country’s and
global economic growth;
• Under-investment in rolling
stock;
• The risk of events that result
in business interruption;
• Operational safety risk; and
• The risk of capital projects not
delivered on time.
BUSINESS CONTINUITY
MANAGEMENT
One of the past year’s Risk
Management Policy (RMP) key
focus areas was disaster recovery
and business continuity
management (BCM). This will
continue for the next year. The aim
is to extend the concept of crisis
management and emergency
planning into a full BCM system to
be applied throughout Transnet.
Working together with the
operating divisions, Transnet is, as
part of its operational risk
management focus, applying
appropriate plans for each of the
risk categories for use by the line
function areas. An enterprise risk-
based Operational Risk
Management Policy, as well as a
BCM Policy is applied across the
operating divisions and Group.
These policies are in accordance
with global leading practices. The
Company also has a global leading
practice BCM high level standard,
which provides guidance to the
operating divisions in
implementing the BCM Policy.
“Significant progress has
been made in embedding
a culture of risk
management throughout
Transnet over the last year”
Transnet Freight Rail has consistently set new records in coal delivery to the privately-owned Richards Bay coal terminal, thanks to the Vulindlela reengineering initiative
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SUSTAINABILITY
Sustainability report 60
SUSTAINABILITYREPORT
TOWARDS MATURITYOF THE
TRANSNET SUSTAINABILITY
PLATFORM
Embedding a culture of value
measurement
Transnet’s sustainability
performance is inextricably linked
to its corporate governance
practices. It is for this reason that
the Corporate Governance and
Nominations Committee of the
Transnet Board of Directors has
strategic oversight of the
sustainability focus of the Company.
Building on the foundation of the
previous year, the Sustainability
Platform project focused on
creating the Transnet Value
Measurement Framework (TVMF) to
strengthen the accountability chain
and to measure Transnet-specific
sustainability performance across
the business. This framework
recognises the Global Reporting
Initiative (GRI) Sustainability
Reporting Guidelines as a global
benchmark and also takes into
account the unique South African
business landscape.
Transnet is accountable to its
stakeholders for sustainable
decision-making processes, which
integrate principles of economic
prosperity, social equity and
environmental quality. To deliver
on this commitment, the Company
is embedding a culture of
sustainability by integrating
sustainability management into
its strategies, accounting and
reporting processes as well as in
its internal and external assurance
practices.
TRANSNETVALUE MEASUREMENT
FRAMEWORK
The seven principles of the TVMF
shown in the model above were
carefully selected to cover the
interests of Transnet’s diverse
stakeholders. It also provides the
outline for this sustainability
report and the operational reports.
60 TRANSNET ANNUAL REPORT 2007
Achieving
returns greater
than cost of
capital
Developing
world-class
infrastructure
Creating a
workplace where
our people can
excel
Caring for the
communities where
we operate
Managing our
environment
responsibly
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ENGAGING OUR
STAKEHOLDERS
FOR MUTUAL
BENEFIT
ABOUTTHIS REPORT
This Annual Report presents
Transnet’s operating and financial
performance for the year ending
31 March 2007. It integrates
sustainability outcomes of
interest to Transnet's
stakeholders as part of the main
report. These include broad
economic, social and
environmental performance and
overarching corporate governance
outcomes.
Whilst this sustainability report
presents a consolidated review of
value created for the Company’s
stakeholders, the operational
reports (pages 80 to 137) cover
the operation-specific
management and performance
disclosures for the main
operating divisions forming part
of the Company’s continuing
operations.
The report is aligned to the Global
Reporting Initiative (GRI) G3
Sustainability Reporting
Guidelines, which outline the
principles for defining report
content and ensure the quality of
reported information.
ASSURING SOUND ACCOUNTABILITYAND GOVERNANCE
Raising the bar on corporate governance
As part of the Company’s strategic objective of raising the bar on corporate governance, the Board adopted a holistic focus
on the sustainability of the Company, its accountability and governance. This focus is consistent with the requirements of
benchmarks such as the King II Code on Corporate Governance and the Global Reporting Initiative (GRI G3).
Our holistic approach to Board accountability
Board governance Executive management Strategy and Ethical culture
Giving an overview of Defining the purpose transformation Sharing the values by
the responsibilities and highlighting the Highlighting Transnet’s which Transnet operates
and fiduciary duties of challenges in managing actions to transform the disclosing our actions
the Board of Directors Transnet in a proper business into a focused to manage the fraud risk
in directing and and lawful way. freight transport to which the Company is
controlling the Company company. exposed.
in the pursuit of its
strategic objectives.
Enterprise risk Compliance Legal management Assurance management
management management Giving the context of Giving assurance through
Disclosing Transnet’s Acknowledging the laws, Transnet’s legal status disclosure of Transnet’s
risk management frame- rules and standards as a State-owned internal and external control
work which informs the governing our actions enterprise in South Africa. environment.
Company’s risk and disclosing Transnet’s
management process compliance to these and
and its implementation. to the requirements of
the Company’s
regulators and
supervisors.
Business intelligence Sustainability Platform Communication and Stakeholder engagement
Sharing information Reporting progress on reporting Acknowledging the
on Transnet’s business Transnet’s holistic Communicating Transnet’s Transnet stakeholders and
processes for collecting approach designed to performance in a clear disclosing the Company’s
and analysing business integrate sustainability and transparent way. actions to seek mutually
information in a credible issues into the way the beneficial relationships.
and consistent way. business operates.
Governance disclosure relating to the above framework is addressed in the Chairman’s statement, the Group Chief
Executive’s review, the Corporate Governance report and the Report of Directors that form part of this Annual Report.
TRANSNET ANNUAL REPORT 2007 61
‘Transnet is integrating
sustainability management
into its strategies . . .”
SUSTAINABILITYREPORT continued
62 TRANSNET ANNUAL REPORT 2007
TRANSNETVALUE MEASUREMENT FRAMEWORK Key stakeholders Interface with Transnet and
Sustainability principles The principal issues
aimed at creating identified as material Shareholder and other State-owned Regulators and other
stakeholder value concerns to stakeholders enterprises Governmental agencies
Assuring sound Board governance Transnet’s shareholder, the Government Compliance with all applicable
accountability Executive management of the Republic of South Africa, as laws, rules and standards and
and governance Strategy and transformation represented by the Minister of Public adherence to the requirements
Ethical culture Enterprises (the shareholder minister) of regulators and supervisors
Enterprise risk requires the Board and management of are central to Transnet’s broader
management the Company to carry out their duties and corporate governance and
Compliance management responsibilities in a manner that is enterprise risk management.
Legal management consistent with principles of sound
Assurance management corporate governance and a vigilant risk Guided by the Group Compliance
Business intelligence management focus. Manual and Policy, and high level
Sustainability platform standards, Transnet seeks to
Communication The Corporate Plan that the Company maintain a constructive and
Reporting provides to the shareholder minister transparent working relationship
prior to the commencement of each with all regulators and other
financial year includes a risk Government agencies.
management plan and fraud prevention
plan for the Company. To enrich such interactions with
the Regulators, a Public Policy
There are regular meetings with the and Regulation Unit has been
shareholder minister and officials of established in the Office of the
his department which are mutually Group Chief Executive.
enriching. The shareholder minister
is always available to engage with
the Transnet Board at its strategy
sessions and attends the Company’s
Annual General Meeting. Further, the
Chairman and the GCE are members of
the shareholder minister’s Chairmen
and Chief Executive Officers’ forum
which provides interaction on strategic
issues identified by the shareholder
minister and respective Chairmen and
CEOs of State-owned enterprises.
There are other forums of the
shareholder minister’s department that
cover issues such as finance, risk and
governance in which executives of
Transnet participate.
Through the Shareholder Compact the
Company and the shareholder minister
agree performance targets. In addition
there are quarterly, interim and annual
reports of the Company’s performance.
Achieving returns Financial management The shareholder seeks an appropriate In the Company’s everyday
greater than the Marketplace and return on investment. Key performance financial, marketplace and
cost of capital customer management indicators (KPIs) have been agreed upon supply management
Operations management with the shareholder and are contained compliance to amongst others,
Supply management in the Shareholder Compact, Target International Financial
and BBBEE values are set for each KPI and are Reporting Standards;
contained in the annual Corporate Plans. the Broad-Based Black
Economic Empowerment Act;
the Competition Act; and
the Auditing Profession Act
are central.
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ENGAGING OUR STAKEHOLDERS FOR MUTUAL BENEFIT
Delivering on our commitments in a transparent, inclusive and accountable way
Stakeholder engagement is central to the success of Transnet’s four-point turnaround strategy. The Company
continuously seeks to engage in collaborative working relationships with its diverse stakeholders. The Group
Executive: Office of the Group Chief Executive is responsible for coordinating engagements with key stakeholders.
During the year, an enterprise-wide process was launched through the Sustainability Platform to better understand
the needs and expectations of Transnet's stakeholders. The Company developed the Transnet Stakeholder Matrix
which maps its stakeholders and the issues material to them. It also guides the way forward in creating value
aligned to stakeholder needs and expectations:
TRANSNET ANNUAL REPORT 2007 63
Transnet’s response to their needs
Employees and The public, financiers
Customers Suppliers labour unions and media Communities
Continued growth of the To suppliers BBBEE Transnet’s people and The South African public, The business has an
Company’s market is governance, ethical conduct organised labour need to Transnet’s financiers, bond impact on the
inextricably linked to the and contract management be assured of the proper holders, credit rating communities where it
needs and expectations are key concerns. governance and ethical agencies and the media operates. Transnet
of its customers. To them, transformation and are particularly focused strives to demonstrate
improved service delivery Transnet communicates management of the on the Company’s ability to communities that
will be the key measure of with them on these issues business. to deliver on its the Company values
the success of Transnet’s through, amongst others: commitments as set out in principles of.
turnaround strategy. • The media; Value-adding communication its turnaround strategy. accountability.
• Transnet Acquisition tools used in the Company’s
Engaging customers to Council communication; daily interaction with its Transnet interacts with Transnet seeks
better understand their • BEE forums; people and their these stakeholders through: engagement with such
unique needs takes • Publications; representatives include: • Press conferences; communities through,
various forms, which include: • Site visits; and • Strategic Leadership • One-on-one interviews; amongst others:
• Meetings of the Group • Stakeholder engagement Forum meetings; • Roadshows; and • Partnerships; and
Chief Executive and other meetings. • Internet/intranet; • Media breakfasts. • Awareness
relevant Group Executive • Newsletters; and campaigns.
Committee members with • Letters from the GCE.
various customers;
• Operating divisions CEO
roadshows;
• Customer satisfaction
feedback/reports;
• Engagement meetings; and
• Fact sheets, pamphlets
and newsletters.
Through improving its The Company’s suppliers Solid financial performance, Transnet’s brand value is Mutually beneficial
operational efficiency expect procurement a stable marketplace and greatly determined by co-existence depends
Transnet seeks to provide systems that are ethical, operational efficiency public perception. The key on the Company’s
its customers with a efficient and transparent. create the foundation for to its success therefore business
reliable service and to At Transnet preferential a workplace where the lies firmly in its ability sustainability. Transnet
establish value creating procurement is a business Company balances to achieve sound financial will engage in
growth opportunities for imperative. performance and reward. returns, secure its market enterprise
its suppliers. It does this share, enhance operational development initiatives,
through sustainable efficiency improvements as part of its adoption
partnerships, memoranda and strengthen its supply of the BBBEE Codes of
of understanding and chain management. Good Practices.
leveraging economies
of scale.
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TRANSNETVALUE MEASUREMENT FRAMEWORK Key stakeholders Interface with Transnet and
Sustainability principles The principal issues
aimed at creating identified as material Shareholder and other State-owned
stakeholder value concerns to stakeholders enterprises Regulators and supervisors
Developing world-class Rail, port and pipeline Infrastructure investment is one of In its infrastructure
infrastructure infrastructure the KPIs identified in the Shareholder development, Transnet
Information and Compact. This translates into greater strives to comply with
communication emphasis on the implementation of a host of legislation and
technology Transnet’s major capital investment regulatory enhancements
programmes and maintenance plan. inclusive of environmental
Dashboard reports on progress with laws and other legislation.
major projects are presented to the
shareholder minister at the Chairmen’s
and CEOs’ forum meetings.
Creating a workplace People management In line with the shareholder’s policies, Transnet’s human capital
where our people Change, transformation Transnet seeks to create an organisation management is governed
can excel and culture that is reflective of the diversity of by compliance to amongst
Employment equity South African society and which others, the Occupational
Skills development contributes to maximising the human Health and Safety Act; the
Talent management resources potential of its people. Compensation for
Performance and reward Transnet shares and continues to Occupational Injuries and
Productivity and participate in the shareholder’s Diseases Act; the Basic
efficiency developmental initiatives such as the Conditions of Employment
Human resource Joint Initiative on Priority Skills Act; the Skills Development
enablement Acquisition (Jipsa) and the Act; the Employment Equity
Employee relations Accelerated and Shared Growth Act; the Labour Relations
Employee wellness and Initiative for South Africa (AsgiSA). Act; and the Promotion of
HIV/Aids Equality and Prevention of
Employee safety Transnet regards the acquisition Unfair Discrimination Act.
and retention of critical skills as
central to the success of the
turnaround strategy.
Caring for the Corporate social Apart from Transnet’s corporate social In its interactions with
communities where investment investment projects carried out society, Transnet seeks
we operate Community impact and through the Transnet Foundation and compliance with relevant
public health and safety the operating divisions, the Shareholder laws including the
Compact outlines the process to be Broad-Based Black
followed by the parties in setting Economic Empowerment
joint non-commercial developmental Act; and the Prevention
socio-economic objectives for of Illegal Eviction from
each year. and Unlawful Occupation
of Land Act.
Managing our Environmental Compliance with all legislation relating The Company strives to
environment management to the environmental impact of the ensure compliance with all
responsibly Environmental Company’s operations forms part of environmental legislation
performance the governance focus. which impacts on its port, rail
and pipeline operations eg:
National Environmental
Management Act and Marine
pollution legislation.
SUSTAINABILITYREPORT continued
64 TRANSNET ANNUAL REPORT 2007
Transnet’s response to their needs
Employees and The public, financiers
Customers Suppliers Labour Unions and media Communities
Delivering on its customer- Information and Through the Company’s As a State-owned enterprise Planning for the
oriented approach, Transnet communication enhanced infrastructure that is the custodian of implementation of
seeks to ensure that the infrastructure provides and skills development rail, port and pipeline Transnet’s
necessary infrastructure the vehicle for data programmes Transnet infrastructure of South infrastructure
capacity is delivered ahead integrity and embedding employees will be better Africa, Transnet is programme includes
of demand. There is of a control framework placed to deliver the committed to earning engagements with the
interaction with key within the Company’s operational efficiency returns that are communities closest to
customers on progress procurement and payment improvement to its commensurate with its the Company’s
with regard to processes. customers. infrastructure investments. operations to
implementation. understand any
environmental concerns
they may have on such
projects or any
perceptions on the
environmental impact
thereof and to address
them accordingly.
Transnet’s customers are Healthy relations between Transnet is dedicated to Transnet values the The extended families
constantly taking note of Transnet’s staff and the revitalising of its importance of the of Transnet’s
the Company’s ability to suppliers form the back- human capital, thus investment in a sound employees are
secure a stable marketplace bone of proficient service providing its people with working relationship with dependent not only
enabled by a suitably delivery. a sustainable business its employees and labour on the livelihood
skilled, motivated and and an employer of choice. unions. Organised labour provided by job
productive workforce. The Company constantly is an integral component security, but also on
seeks to establish of a well-managed and the extended roll-out
opportunities for career progressive organisation of its employee
advancement, and provides and the Company is wellness and HIV/Aids
bursaries and other skills dedicated to building its programmes.
development programmes working relationship
to its employees. based on mutual trust
and respect.
The safety of Transnet
employees is of The Company has also
paramount importance been extending bursaries
and stringent SHEQ to engineering students
management is central to ensure that it can draw
to the ERM framework. from an enlarged pool
for its critical skills
resource needs.
Prospective and current The economic development Transnet employees are The South African public’s To support the
customers also seek best of Transnet’s suppliers dependent on job security, perception of Transnet as communities impacted
practice in social conduct as well as their safety fair remuneration and a good corporate citizen is by Transnet operations,
when entering in a business management ability are career advancement largely influenced by its the Company is
relationship. key focus areas of the opportunities to fulfil their response to social issues. improving the
Company’s supply chain responsibilities to society. integration of
management. strategic CSI, as well
as rolling out a pro-
active safety
awareness campaign.
Best practice in In its relationship with its Being an employer of The perception of Transnet Transnet shares the
environmental management suppliers, Transnet can play choice also implies instilling as a good corporate citizen communities’
builds trust in the a crucial empowerment role a culture of accountability is further influenced by its responsibility for the
Company’s business in environmental awareness for the environment which responsible management environment which its
relationships. and conduct. the Company impacts on of environmental issues. operations affect.
through its operations.
TRANSNET ANNUAL REPORT 2007 65
SUSTAINABILITYREPORT continued
ACHIEVING RETURNS GREATER
THAN THE COST OF CAPITAL
Financial management
Transnet’s key role, namely to assist
in lowering the cost of doing
business in South Africa, whilst
providing cost-effective and
efficient port, rail and pipeline
infrastructure and operations,
remains a key pillar of
sustainability for the Company.
During the year, sustained financial
performance underpinned
Transnet’s transformation into a
more focused and a more efficient
freight business as outlined in the
Chief Financial Officer’s report
from page 42.
Marketplace and customer
management
During the year, management
focused on the delivery of a reliable
and efficient service to all Transnet
customers whilst increasing market
share. In line with Transnet’s
commitment to being a customer-
focused organisation, greater focus
is being given to customer
relationship management at Group
and operating division levels.
In the year ahead, Transnet will
build on this foundation of
improved efficiency. In addition,
targeted relationship building
initiatives will further enhance
customer satisfaction and
retention, and in so doing,
encourage positive market and
customer feedback.
In support of the national
imperative of promoting South
Africa as a favourable investment
destination, Transnet is placing
specific emphasis on ‘red carpet’
customer relations and conveying
the message of ‘value-based
business’ to ensure:
• That freight shifts from road
to rail;
• The lowering of the cost of
doing business; and
• The improvement of freight
transportation’s impact on the
environment.
Operations management
Central to Transnet’s turnaround
strategy is the redirection and
reengineering of the business
to improve efficiencies and
effectiveness of core operating
divisions.
The Vulindlela programme drives
sustainable improvements in
operational efficiency, cost savings
and customer service processes.
The initiative is also focused on
change management and developing
a performance culture.
Vulindlela comprises a number of
programmes across all divisions with
a major focus on Freight Rail. It has
played a fundamental role in
improving the alignment and
communication between different
functions and operational areas.
Strong programme management
offices established at Transnet
and within the operating divisions
ensure compliance with
comprehensively defined policies
and processes. The programme is
supported by strict corporate
governance, with the executives of
the Company being accountable for
regularly reviewing the programmes
to ensure sustainability and success.
Since its inception in August 2005,
Vulindlela has met its annual and
recurring financial targets and has
instilled continued improvement in
operational areas. Long-term
sustainability is ensured by
combining operational and
performance levers with
organisational health elements,
including human capital
development and performance
culture programmes. Priority
management skills are also being
rolled out through a structured
coaching and mentoring programme.
During the year, Vulindlela’s
positive financial contribution
accelerated sharply, with a
significant impact on Transnet’s
overall performance. Substantial
improvements in operational key
performance indicators (KPIs) are
evident in most areas where
Vulindlela priority programmes are
under way. Vulindlela has also made
a strong contribution to Transnet-
wide capability building
programmes as well as change
management and performance
culture initiatives.
In the year ahead, Vulindlela will
yield structured plans to build upon
and increase Transnet’s already
improved financial and operational
performance as well as
organisational health.
66 TRANSNET ANNUAL REPORT 2007
Supply management and BBBEE
Transnet supply management will,
through professional delivery of
services, play a pivotal role in the
economic growth of South Africa.
In addition to its day-to-day
operational expenditure, Transnet
faces a unique challenge in
disbursing a capital budget of
R78,9 billion over the next five
years on major and minor projects.
The major projects include
extensive upgrades to the port in
Durban and to rail lines.
To meet this and other management
challenges, Supply Management has
embarked on a journey to achieve
the following sustainable business
impacts:
• Fair and transparent dealings
with providers of goods and
services;
• The prevention of fruitless and
wasteful expenditure;
• Delivery of effective and
efficient supply management
processes;
• Sustainable cost savings; and
• The development of globally
competitive local suppliers.
To achieve these goals, Transnet
supply management will embark on
several value-driven initiatives:
Firstly, by focusing on strategic
sourcing (the analysis and purchase
of commodities aimed at reducing
the total cost of ownership) Transnet
can ensure the best overall supplier
transactions for goods and services.
The Company has set a three-year
savings target of R1,6 billion of
which it achieved R552 million in
the first year.
Secondly, in addition to securing
the best value from its suppliers,
the Company is setting up
mechanisms to improve supply
chain processes, particularly for
enabling the use and application
of contracts and preventing off-
contract purchases.
This necessitates that appropriate
controls and governance are
embedded in the business. Project
Shape Up guides the Company in
meeting its objectives of fair and
transparent dealings with the
public, as it ensures that basic and
fundamental processes are adhered
to. Transnet has aligned its policies
and procedures as far as possible
to meet rigid standards of
acceptable practices so as to
achieve and support all
Governmental initiatives and
compliance with for example the
PFMA, IFRS and supply
management leading practices.
Thirdly, Transnet will implement the
Competitive Supplier Development
Policy in conjunction with its
shareholder (the Department of
Public Enterprises) by structuring
a Supplier Development Plan (SDP).
The plan will consider opportunities
to develop globally competitive
local suppliers through various
strategic initiatives forming part
of Transnet’s support for the
Accelerated and Shared Growth
Initiative for South Africa (AsgiSA).
This is in addition to the Company’s
overall compliance with the
regulated requirements of BBBEE
and enterprise development.
Fourthly, central to meeting
Transnet’s strategic objectives
is the enablement of its people
through the standardisation of
roles and remuneration,
professional development, talent
TRANSNET ANNUAL REPORT 2007 67
management and succession
planning. A key initiative in
achieving this enablement is the
establishment of an e-learning
academy in partnership with two
professional institutes, namely
IPSA (Institute of Purchasing and
Supply of South Africa) and CIPS
(Chartered Institute of Purchasing
and Supply) of the United Kingdom.
Finally, Transnet is in the process
of implementing the new
measurement methodology
prescribed by the Department of
Trade and Industry (DTI) in terms of
its Code of Good Practice (CoGP)
500 on preferential procurement.
During the year Transnet has
obtained independent certificates
from verification agencies verifying
the BEE contribution levels of most
of its high-value suppliers. The full
roll-out of preferential procurement
measurement in terms of CoGP 500
will be in place by the end of the
next year.
During the year Transnet’s core
divisions spent R10,6 billion
externally with suppliers, of which
R3,9 billion went to broad-based
BEE companies, up R0,6 billion
from2006.
* Based on discretionary
procurement spend.
Discretionary spend refers
to the portion of total
procurement where the
Company has the option to
determine whether goods and
services can be procured from
a supplier. This figure is arrived
at after deducting non-
discretionary procurement eg
imports and other items
provided by monopoly suppliers
eg water, electricity, telephone.
2007 BEE procurement*
BEE procurement R3,9 billion
37%
63%
Non-BEE procurement R6,7 billion
SUSTAINABILITYREPORT continued
DEVELOPING WORLD-CLASS
INFRASTRUCTURE
The provision, maintenance and
replacement of world-class
infrastructure technology – both in
Transnet’s capital projects and in
terms of its information and
communications technology –
remain key enablers of the
business.
Rail, port and pipeline
infrastructure
In view of Transnet’s substantial
five-year capital investment plan,
the Board approved the
establishment of a central capital
projects team.
Transnet Projects is accountable to:
• Ensure the successful delivery
of Transnet’s infrastructure
programme of major projects;
• Implement a project
management approach
benchmarked to world best
practice to ensure that projects
are delivered on time, within
budget and meet business
specifications; and
• Ensure skills and technology
transfer within the Group.
With engineering skills at a premium
worldwide, Transnet has entered
into a partnership with a consortium
of engineering, procurement and
construction management
companies Hatch, Matt MacDonald
and Goba. Through this partnership,
Transnet is assured of access to a
requisite number of professional
engineers from local and
international bases.
In addition, Protekon, responsible
for rehabilitation, maintenance and
emergency projects, has been
merged with Transnet Projects to
optimise the utilisation of scarce
trained and experienced
engineering personnel within
the Company.
The Transnet Projects management
system controls all facets of major
projects during the prefeasibility,
feasibility and execution phases
and the system is regularly audited.
• A specialist unit has been
appointed to manage all
Environmental Impact
Assessments. This unit has also
established successful working
forums with stakeholders in
areas affected by the
investment programme;
• A financial evaluation unit has
also been established to ensure
that a detailed and consistent
financial evaluation procedure
is followed in any project
evaluation and to ensure the
commercial outcome of
investments and governing
contracts;
• Capital procurement
procedures that are aligned to
broader Transnet policies and
governance. A formal
preference system based on
the Department of Trade and
Industry’s BBBEE scorecard, has
been introduced as an element
of the tender adjudication
process. Similarly, where
applicable, commitments were
obtained from foreign suppliers
to adhere to the principles of
the National Industrial
Participation Programme;
• These supplier commitments
are sufficiently flexible to
support the objectives of the
Department of Public
Enterprises’s Competitive
Supplier Development
Programme, to which Transnet
has recently committed itself.
Construction contracts also
place emphasis on utilising
local labour; and
• The transfer of training and
technology skills is an
important objective for
Transnet. Instruction courses
covering a broad range of
project management topics are
offered and a number of
bursaries are already in effect
for the engineering and project
management disciplines.
The investment plan was
implemented at an accelerated rate
during the year. The new structure
added significant value in
enhancing corporate governance,
improving risk management and
increasing transparency in the
projects.
Enhanced maintenance
In addition to the provision of new
infrastructure across the rail, port
and pipeline network, high
performance service delivery also
relies strongly on maintenance of
the existing infrastructure.
68 TRANSNET ANNUAL REPORT 2007
Construction work
being performed at
Durban’s Pier 1
Container Terminal.
During the year the integration of
Freight Rail maintenance depots
into Rail Engineering, together with
the increase in financial resources
allocated to major maintenance
practices, has facilitated
improvements in the availability
and reliability of wagons and
locomotives.
Information and communications
technology
Group Information and
Communications Technology (ICT) is
focused on the development and
implementation of an enterprise-
wide ICT strategy. It aims to
institutionalise cost-effective
automation to ensure that the
Group’s operational delivery is
optimised.
During the year an increased focus
on the replacement of operational
systems resulted in the Company’s
ability to phase out legacy
technologies in a more timely and
efficient manner.
The Transnet Business Intelligence
Programme (TBI) is a key enabler in
realising stakeholder value. An
extensive set of KPIs was developed
and enabled in a fully-operational
executive dashboard across Transnet.
The focus in the year ahead is to
ensure the integrity of information
and to make information readily
available through focused
enablement projects.
In the coming year ICT will drive
the implementation of TBI into the
operating divisions. This is to
ensure that the programme forms
an integral part of organisational
business and management
processes.
Key programmes to ensure
sustainability include the institution
of a network project (Ubambano), a
governance framework, an
outsource programme and cost-
containment initiatives within
benchmarked criteria.
To date, ICT has been successful in
introducing cost-containment
interventions within the Company,
thereby reducing ICT costs by 26%
over the past two years. The
outsource programme has reached
the shortlist phase and will be
completed within the next year.
CREATING A WORKPLACE WHERE
OUR PEOPLE CAN EXCEL
Transnet employs 48 578 permanent
employees countrywide in its
continuing businesses. Management
personnel, professional specialists
and administrative staff make up
9% of the total staff complement,
whilst the remainder are bargaining
unit employees. There is a high level
of unionisation: 86% of employees
are members of four trade unions
operating at Transnet.
People management
In 2006, Transnet’s Board approved
a wide-ranging and far-reaching
human resources strategy and plan
to transform people management
systems, policies and processes in
all its operating divisions. Roll-out
of the strategy is well under way.
Change, transformation and culture
To ensure successful
implementation of the Company’s
turnaround strategy, a variety of
interventions have been
implemented to align all levels of
leadership with key aspects of the
strategy and to ensure leadership
participation. Leadership oriented
behavioural aspects required for
success have been identified and
agreed. Annual peer reviews with
senior managers will hold them
accountable for complying with this
behaviour. The Executive Committee
also developed a new cultural
architecture for Transnet, which will
be institutionalised through
extensive campaigns.
Employment equity
Transnet is firmly committed to
employment equity (EE) and
diversity and embraces EE as a
coherent and systematic approach
to redressing the imbalances of the
past. In line with the “One Company,
One Vision” philosophy, Transnet is
in the process of developing a
Group-wide EE plan that provides
an overarching framework for
implementing EE across the Group.
Moreover, it supports Transnet’s
four-point turnaround strategy and
its human resources strategy. The
focus is on promoting equal
opportunities and fair treatment
of employees through the
elimination of unfair discrimination
and the implementation of
affirmative action measures to
achieve equitable representation
across all occupational categories
and levels.
TRANSNET ANNUAL REPORT 2007 69
Permanent employees at Transnet – 2007
Freight Rail
National Ports Authority
51%
28%
Port Terminals
Pipelines
Corporate Centre
(including Transnet Projects)
Rail Engineering
10%
7%
1%
3%
8 000
7 000
6 000
5 000
4 000
3 000
2 000
1 000
0
2006 2007 2008
Capital expenditure
Freight Rail
Port Terminals
Rail Engineering
R

m
i
l
l
i
o
n
Pipelines
National Ports Authority
3

8
0
9
1
8
9
7
8
3
7
7
6
2
2
0
7

3
8
7
6
2
31

0
2
6
7

8
7
8
1

7
4
0
3

9
4
9
3

1
3
6
9
0
0
6
9
9
3
1
0
Permanent employees at Transnet – 2006
Freight Rail
National Ports Authority
66%
14%
Port Terminals
Pipelines
Corporate Centre
Rail Engineering
10%
7%
1%2%
SUSTAINABILITYREPORT continued
Transnet seeks to create an
organisation that reflects the
diversity of South African society
and that contributes to maximising
the human resources potential of
all its employees.
Transnet strives to provide
individuals with disabilities
opportunities to play a more
active role in society.
Skills development
During 2006, Transnet embarked
on a skills forecast process
through detailed workforce
planning to ensure the availability
of skills required for the
turnaround strategy. The outputs
of this process informed the
development of skills pipelines to
match supply with demand. Skills
will be sourced through internal
initiatives (including the
engineering graduate programme)
and external sources (schools,
universities, scholarships and
bursaries). The progress to date
in terms of the identified priority
skills for Transnet is as follows:
• In a joint venture between
Transnet and Denel, 50 students
enrolled in a Youth Foundation
and Schools Outreach
programme, focusing on
mathematics and science;
• Currently Transnet sponsors
176 bursars, in various
engineering disciplines at
higher-education institutions.
Included in this total the
Company enrolled 98 additional
bursars into the engineering
pipeline in 2007. This approach
would continue over the next
five years, ensuring a steady
outflow and absorption in
terms of engineering skills
required by the organisation;
• Transnet also sponsors
173 students at institutions
of technology. This enrolment
number for workplace-
integrated learning
opportunities will gradually
increase to reach a target of
300 learner technicians
qualifying per annum;
• To address the future need
for artisans in Transnet, a total
of 1 261 apprentices are
undergoing training in different
trades. These apprentices are
in various stages of training
(Phase 1, 2 and 3) spread over
a three-year period. Included
in this total, Transnet inducted
275 learners during the past
year and a further 250 will be
sourced during the current year.
This approach would continue
over the next five years to
ensure that the Company
secures the necessary skills
required; and
• Sequenced delivery plans in
respect of identified priority
skills in rail movement, marine
and port operations have been
developed.
70 TRANSNET ANNUAL REPORT 2007
Asian (A) African (B) Coloured (C) Total (Black) White Total Total
Employees F M F M F M F M F M F M F+M
Management 110 323 523 922 121 274 754 1 519 225 1 838 979 3 357 4 336
Non-managerial 182 1 061 4 380 22 419 710 3 205 5 272 26 685 1 282 11 003 6 554 37 688 44 242
Total – 2007 292 1 384 4 903 23 341 831 3 479 6 026 28 204 1 507 12 841 7 533 41 045 48 578
1% 3% 10% 48% 2% 7% 13% 58% 3% 26% 16% 84% 100%
Management 84 281 435 826 115 220 634 1 327 206 1 879 840 3 206 4 046
Non-managerial 211 1 100 3 640 22 114 702 3 163 4 553 26 377 1 375 11 142 5 928 37 519 43 447
Total – 2006 295 1 381 4 075 22 940 817 3 383 5 187 27 704 1 581 13 021 6 768 40 725 47 493
1% 3% 9% 48% 2% 7% 12% 58% 3% 27% 15% 85% 100%
F = Female M = Male
Nontsi Tshazi, the
first woman in Africa
to be appointed to
the position of
Harbour Master.
She replaces Dennis
Mqadi in this position
in East London.
Trainees on
Durban’s Pier 1.
The year ahead will see the
development of competency-based
career ladders for priority skills,
supported by customised capacity
building programmes.
During the year an extensive review
of the efficiency and effectiveness
of Transnet’s training centres was
conducted. The outcomes from
the review will guide a series of
interventions to optimise training
delivery in the year ahead.
Skills 2007 2006
development R million R million
Training,
bursaries
and grants 219 180
% of payroll costs 2,4 2,1
Transnet’s expenditure on skills
development compares favourably
with the average spend of South
African companies of 2,11% of
payroll costs (excluding skills levies).
Talent management
The Talent Management Programme
(TMP) aims to harness Transnet-
wide synergies by identifying the
best opportunities for key
employees and accelerating their
development through special
assignments, projects and
executive education.
The primary purpose of the TMP is
to link the needs and interests of
Transnet and its employees for
mutual benefit through effective
talent identification and
management, coupled with sound
workforce planning.
Performance and reward
Transnet strives towards a
performance driven culture. The
Company’s new remuneration
strategy is geared to this purpose
and is designed to attract, motivate
and retain the right people, using
an appropriate mix of financial and
non-financial rewards.
A new performance incentive
scheme was designed and
implemented for all employees.
Approximately 4 000 non-
bargaining unit employees were
trained on a new performance-
management system with the
majority having performance
agreements that form the basis for
performance reviews at the end of
the year. These will determine any
incentive bonus scheme payments.
The system will be further
entrenched in the year ahead.
The Group has adopted a ‘total
cost to company’ reward approach,
accompanied by a new contract of
employment and the standard-
isation of remuneration and
benefits for employees outside
the bargaining unit.
Human resources (HR) enablement
Overall HR practitioner competence
has been enhanced through change
management, capacity building and
performance management training
programmes, which will continue in
2007. New HR policies and
supporting standardised processes
and accountability matrices have
been developed. An education and
communication campaign will ensure
their successful implementation.
In 2007 an HR shared services centre
model will be initiated for high
volume transaction processing.
HR has also introduced a
measurement dashboard to track
monthly performance within a
range of indicators.
Employee relations
During the year, the most
contentious issue on the labour
relations agenda was the disposal
of Transnet’s non-core assets.
However, after numerous one-day
stoppages, management and
relevant trade unions concluded an
agreement to allow the disposals
to proceed without disputes.
Following the disposal process,
successful relationship-building
initiatives have included quarterly
union-management lekgotlas and
the establishment of a forum
comprised of Transnet and union
leaders to discuss progress against
the Company’s turnaround strategy.
During the year, additional employee
relations projects included the
restructuring of the social plan to
ensure more effective and efficient
management of redundancies as
well as the negotiation of a new
recognition agreement with
organised labour.
Employee wellness and HIV/Aids
The HIV/Aids epidemic is a major
challenge for South African
businesses. Transnet acknowledges
its leadership role in the prevention
of the disease and the treatment
and care of HIV/Aids infected
employees.
TRANSNET ANNUAL REPORT 2007 71
Race and gender profile
Asian male
3%
2%
Asian female
1%
48%
10%
7%
26%
3%
African male
African female
Coloured male
Coloured female
White male
White female
Female tug pilot
trainee.
SUSTAINABILITYREPORT continued
Transnet’s HIVprevalence rate was
estimated at 9,7%, in October 2006.
The estimate was based on an
impact analysis conducted by Old
Mutual Group Assurance,
specifically assessing the
risk/benefit costs of HIV and Aids
on death and disability. The
prevalence rate for the Group is
lower than expected when
compared to the South African
national average, but this may be
as a result of the ageing workforce
profile that currently exists within
the Group, as well as geographical
distribution. Currently,
846 employees are accessing
HIV/Aids benefits and have
enrolled for the disease
management programme.
In the next three years, Transnet
will focus on reducing the potential
human and financial impact of
HIV/Aids across the Group by:
• Intensifying preventative
strategies;
• Providing adequate and
appropriate treatment, care
and support for employees;
• Aligning and integrating the
HIV/Aids strategy with the
72 TRANSNET ANNUAL REPORT 2007
broader Transnet and HR
strategy; and
• Focusing on effective
governance and accountability,
using a monitoring and
evaluation framework.
Transnet’s leadership is committed
to manage the social, economic and
developmental consequences of
HIV/Aids proactively as illustrated
in the reality story below:
Facing the challenge
Port Terminals has taken a decisive
and leadership role in proactively
planning for the impact of the
HIV/Aids pandemic and, in doing
so, protecting its most valuable
resource – its people.
Making the commitment
To date, Port Terminals
has committed more than R3 million
to address employee healthcare
issues and earlier this year
conducted an analysis of its
requirements with the assistance
of occupational care specialists.
The analysis revealed key barriers
that could hamper the
implementation of a robust
HIV/Aids prevention and awareness
programme. Port Terminals
initiated its roll-out which included
voluntary counselling and testing
(VCT) as well as extensive
management education. The roll-
out also included the development
of a robust peer educator model to
extend the reach of VCT benefits to
as many employees as possible.
Consulting the stakeholders
Organised labour has supported
Port Terminals’s HIV/Aids
prevention and awareness
initiatives since inception and
management is currently assessing
ways of engaging all stakeholders
to further strengthen this
collaboration.
Taking action
In line with Port Terminals’s
commitment to addressing
HIV/Aids through a holistic wellness
strategy, 60% of management as
well as 80% of its executive
committee participated in medical
and physical assessments. VCT,
which is ongoing, is aimed at early
detection and referral for disease
management and also helps
identify and document risky
behaviours that, once recorded,
can inform improved planning.
Making progress
To date, approximately 4,2% of
employees have access to the
disease management programme.
In the year ahead, the programme
will be rolled out throughout the
Company, offering all employees
the opportunity to be physically
and medically assessed. Database
management will be a critical
success factor in tracking trends
to monitor new infections and
status conversions from negative
to positive.
REALITYSTORY: PORTTERMINALS LEADERSHIP TACKLES THE CHALLENGE OF HIV/AIDS
Employee safety
At Transnet the safety of employees
and the public (for more on public
safety refer page 76) has been, and
remains, at the heart of its
Enterprise-wide Risk Management
Framework. It provides Transnet with
the discipline and tools to master
risk. Ultimately, safety is the
Transnet Board’s responsibility.
Until recently this responsibility was
taken up by the Audit Committee.
Given the acute importance of
safety, the Board has set up the
Risk Committee during the year.
A new position, that of Chief Risk
Officer, has been created, to ensure
sharp focus on safety at the highest
level of the Company. Safety is now
firmly escalated to the Board and
Exco. Apart from calling executives
to account to Exco:
• Safety/toolbox talks, incident
recall sessions and information
sharing are being promoted to
inculcate a culture of
accountability for safety;
• There are follow-ups on
outstanding Board of Inquiry
(BOI) hearings and assessments
of the implementation of
corrective actions or plans that
have been recommended by the
BOI; and
• Group Compliance and Internal
Audit continuously provide
assurance on the effectiveness
of the safety and risk controls.
The responsibility for the roll-out of
safety management resides with
Group Safety, Health, Environment
and Quality (SHEQ) Risk
Management. This responsibility
extends to all Transnet employees,
including contractors, who play a
role in delivering on the
commitments set out in the Transnet
SHEQ Risk Management Policy.
During the year Transnet’s SHEQ
Risk Management Standards were
reviewed and updated in
accordance with the Enterprise-
wide Risk Management (ERM)
Framework to ensure that they are
current, adequate and effective.
With safety remaining a key
challenge within Transnet, the
safety management process has
TRANSNET ANNUAL REPORT 2007 73
been centred on issues of employee
accountability. These include
discipline and consequence
management for non-adherence
to operational and safety
requirements.
During the year specific emphasis
was placed on inculcating a culture
of accountability through the
Vulindlela reengineering
programme.
We are saddened to report
26 employee fatalities during the
year. A total o f 14 fatalities were
due to motor vehicle accidents and
12 were caused by operational
injuries. Refer to the graphic
entitled ‘Employee fatalities’ above.
Whereas the 2005 and 2006
numbers reflected fatalities across
the five core operating divisions,
2007 reported numbers include the
newly established Transnet Projects
(nine employees).
SHEQ performance Target Actual Actual Actual
Indicator 2008 2007 2006 2005
Cost of risk as %
of revenue (%) 2,38 2,66 3,20 4,00
DIFR (Disabling injury frequency rate) 1,20 1,30 1,40 1,60
National Occupational Safety
Association (NOSA) rating (%) 83 80 82 71
(Audited annual SHE performance achieved)
30
25
20
15
10
5
0
2005
Employee fatalities
2006 2007
1
5
1
5
2
6
SUSTAINABILITYREPORT continued
74 TRANSNET ANNUAL REPORT 2007
CARING FOR THE COMMUNITIES
WHERE WE OPERATE
Corporate social investment (CSI)
The Transnet Foundation seeks to
address diverse socio-economic
challenges in South Africa
recognising that dynamic and
innovative social contributions
are required to be effective and
sustainable. The foundation’s
organisational objectives therefore
include the maximising of its
investment in the Government-
defined target nodes by integrating
the focus and delivery of
programmes. It also contributes
towards holistic educational
development by improving the
standards and quality of education
in selected schools, as well as
providing sport development
interventions to help address
social ills.
The Transnet Foundation reasserts
its commitment to its business
goals and will continuously review
its objectives through internal and
external mechanisms. The
Foundation will also maintain
relationships with strategic
stakeholders whose partnerships
have, over the years, achieved high
sustainability impacts.
Transnet takes cognisance of the
South African Government’s key
focus areas – known as ‘presidential
nodes’ – as well as how these
integrate with the focus areas of
the Transnet Foundation. National
imperatives for infrastructure
development, capacity building, job
creation and HIV/Aids prevention,
intervention and rehabilitation, are
also critical. These activities are
central to the Transnet Foundation
Socio-Economic Development
Initiative (TSEDI). TSEDI endeavours
to optimise social and economic
benefits for communities that are
most in need of upliftment.
Other portfolios
In the past year the foundation has
made good progress in sports and
education by building schools and
providing the infrastructure to
deliver quality education to
learners. This portfolio has also
REALITYSTORY: SAFETYFIRST AT FREIGHT RAIL
according to their adherence to
the safety programme.
Taking action
Freight Rail has identified five
elements epitomising safety-
related behaviour. These have
been made the focus of its safety
awareness initiative. They are:
focus on speeding; sleepiness;
substance abuse; signals passed
at danger; and the importance of
supervision of pre-trip inspections.
Making progress
Freight Rail has put in place
comprehensive plans to address
safety together with checks and
balances.
family work to protect their own
safety and that of their colleagues.
This is to complement a major
capital expenditure programme
over the next five years to refurbish
ageing infrastructure. The safety
programme integrates all business
functions and is being driven under
the Transnet-wide reengineering
programme, Vulindlela.
Consulting the stakeholders
Employees are key stakeholders
and staff awareness is a key
element of Freight Rail’s safety
drive. Chief Executive, Siyabonga
Gama, has written to each Freight
Rail employee explaining the
rationale for the safety campaign
and that they will be rewarded
Facing the challenge
Improving safety is one of Freight
Rail’s major operational challenges.
As a result, the rail division has
identified the following tasks
relating to maintaining safety
standards:
• Ensuring that everyone in its
operations is committed to
enforcing agreed standards and
systems of safe operation
• Replacing defective
infrastructure and rolling stock
which contribute to Freight
Rail’s high incident rate .
Making the commitment
Freight Rail has integrated safety
into all aspects of its business and
all members of the Freight Rail
focused on the upgrading of
teacher skills, with emphasis on
mathematics, science and
technology. More than 10 rural and
farm schools across each province
have been earmarked for
development so as to overcome
their low pass rates, high crime
incidences and associated ills.
More than 750 000 learners at
school level and 10 000 learner-
athletes take part in the provincial
and national inter-schools sports
tournaments sponsored by Transnet
Foundation. 75 000 boys and girls
are being introduced to a wide
variety of sports codes.
Through the Entrepreneurial
Development portfolio Transnet’s
under-utilised containers were
donated to various communities to
provide offices for essential public
services such as pension pay outs,
social grant registration and other
pay out points. The containers are
now also being used as satellite
police stations and training centres.
In the healthcare portfolio, the
foundation expects to introduce
the second Phelophepa train in the
year ahead to improve the delivery
of mobile community healthcare
services. These services include
primary health (including HIV/Aids),
dental care, pharmacy and eye care.
During the past year the train has
facilitated the treatment of
45 000 patients in 36 weeks after
having visited four provinces.
The train is staffed by at least
20 professional service providers
and 37 students.
The arts and culture portfolio
continues to support the
development of sustainable
creative industries in South Africa.
During the year projects such as the
North West Cultural Calabash
Festival and the Women in Arts
Festival in Newtown were managed
as part of a commitment to the
development of small business and
the ongoing renewal of the
Johannesburg inner city. The use of
Transnet Theatre Trucks continues
to bring events to people in rural
communities who would not
ordinarily benefit from such events.
TRANSNET ANNUAL REPORT 2007 75
2007 2006
CSI spend per portfolio R million % R million %
Sport and education 20 33 8 25
Health – Phelophepa 18 30 10 30
Arts and culture 7 12 6 18
Women, youth and children
development 5 9 2 7
Entrepreneurial development 3 5 2 6
Discretionary 7 11 5 14
60 100 33 100
Transnet Foundation split of CSI spend
per portfolio for 2007
Arts and culture
33%
Health – Phelophepa
12%
30%
11%
9%
5%
Sport and education
Women, youth and children development
Discretionary
Entrepreneurial development
SUSTAINABILITYREPORT continued
Making the commitment
Since 1994 Phelophepa, Transnet’s
mobile health train, with its
18 permanent staff members and
many volunteers, has travelled
through out the country, especially
rural areas, braving storms, the
winter chill and the scorching
African sun, bringing much-needed
primary healthcare services to
needy fellow South Africans in
support of the South African
Government’s efforts to provide
primary healthcare for all.
Consulting stakeholders
Phelophepa’s success is due to its
ability to work with multi-sectoral
partners. The train is marketed
through community developers and
further education and training (FET)
institutions. Besides Transnet, the
initiative receives support from
external donors including Roche,
Colgate-Palmolive and Canon
Collins Trust, totalling around
R25 million during the year.
Taking action
The train has reached and provided
primary healthcare services to
more than two million people and
continues to instil a true sense of
pride in our country and its future,
empowering communities to be
custodians of their health and
holistic wellness.
When the train visited Douglas,
Modderrivier, Prieska and Jan
Kempdorp in the Northern Cape, its
team observed that people in the
areas needed more than the
treatment of ailments such as
muscular skeletal diseases,
hypertension, diabetes, flu and
STDs and that systematic
interventions were also required
to fight child malnutrition, women
abuse and teenage pregnancies.
Making progress
Keeping Phelophepa on track
requires dedication and
commitment. Everyone involved in
Phelophepa shares the vision of
providing quality healthcare
service to rural communities
in South Africa.
Community impact and public
health and safety
Transnet is acutely aware of the
impact of its extensive rail, ports
and pipeline operations on the
South African public and the
communities in which it operates.
The SHEQ standards developed
during the year lead the way for
the development and application
of SHEQ management systems
across the Group. They also extend
to community impacts as well as to
public health and safety.
Public safety is of paramount
concern for Transnet. Safe rail level
crossing by the public remains a
challenge and awareness raising
initiatives are ongoing. Level-
crossing incidents, as a major
contributor to public fatalities,
show a declining trend, in part as
a consequence of the public
awareness campaign undertaken
in Freight Rail.
76 TRANSNET ANNUAL REPORT 2007
250
200
150
100
50
0
2005
Public fatalities
2006 2007
2
1
4
1
8
8
1
6
7
Yet another patient being
treated aboard the Phelophepa
Health Train in one of its clinics.
REALITYSTORY: PHELOPHEPA HEALTH TRAIN
TRANSNET ANNUAL REPORT 2007 77
Facing the challenge
Dust generated by the iron ore
operations at the Port of Saldanha
has been a major challenge over the
years, mainly due to the nuisance
factor to the public. This has
resulted amongst other things in
the discolouration of paint on
several of the houses in the area,
as well as other property
surrounding the port.
Making the commitment
In 2006 Transnet, represented by its
Chief Operating Officer, Louis van
Niekerk, committed itself to
addressing these and other
environmental issues by means of an
agreement with communities around
the port. This voluntary agreement is
confirmation of Transnet’s
commitment to continual
improvement, responsible
environmental management and
concern for communities living near
its operations. So far, the Company
has allocated a budget of more than
R108 million towards a
comprehensive dust mitigation and
monitoring programme, which is
benchmarked against best practice
elsewhere in the world.
Consulting the stakeholders
The community of Blouwaterbaai,
a residential area near Transnet’s
operations in Saldanha, formed a
Dust Concern Group and Transnet
has been interacting with the
group over the past year to
monitor progress on the
implementation of the agreement.
A team of 40 local residents was
also employed to clean up the quay
as part of this project, thus
contributing to much needed job
creation in the area.
The Environmental Monitoring
Committee (EMC) for Phase 1B,
with representation from
community members, monitors the
implementation of the agreement.
Taking action
Transnet’s programmes to
mitigate dust include:
• Providing covers for conveyors,
which will be completed by end
of July 2007;
• Using environmentally non-
damaging chemicals to spray
the dust, thereby reducing the
use of water, which is a scarce
resource in that area, to
mitigate dust;
• Improving the design of road
surfaces is well under way, with
most of the roads to be tarred
by October 2007
• Investigation of alternative
water resources for dust
mitigation that has been
completed with a
recommendation for a reverse-
osmosis plant. An environmental
assessment process will soon
commence for this; and
• Upgrading of the tippler dust
plant number 1, has already
resulted in the reduction of
dust emission levels to far
below international standards.
Making progress
The following initiatives are in
place to manage future impacts
on the environment:
• The dust mitigation and
monitoring programme will
ensure, as far as possible, that
dust levels are reduced to
acceptable local and
international standards;
• An air quality management
strategy for the port is being
developed by the Council for
Scientific and Industrial
Research (CSIR). Monitoring
stations are located throughout
the Saldanha, Vredenburg and
Langebaan area to monitor dust
fallout. The community
provided input on the location
of these stations;
• Transnet does dust monitoring
(PM10) on a daily basis and
reports the outcomes monthly
to the community. Monitoring
stations and cameras have been
installed to assist with this.
Organisational reporting on
dust incidents is also done
monthly;
• An online moisture analyser has
been installed to indicate when
more water or chemicals should
be added to limit dust, resulting
in much-improved management
of the whole system; and
• Additional sprayers at conveyor
transfer points have also been
installed, reducing dust levels
even further.
Measures already implemented
have already shown major
improvements and the following dry
period (summer) will demonstrate
the effectiveness of the mitigation
measures put in place. Transnet will
report annually on progress with
the dust mitigation programme.
Dust covers are being put
into place at Saldanha’s
iron ore terminal.
REALITYSTORY: DUST MITIGATION AND MONITORING IN SALDANHA
SUSTAINABILITYREPORT continued
78 TRANSNET ANNUAL REPORT 2007
MANAGING OUR ENVIRONMENT
RESPONSIBLY
Transnet’s rail, ports and pipeline
operations have a potentially
adverse impact on the environment.
In line with its philosophy to deliver
responsibly on its commitments,
Transnet strives to minimise these
environmental impacts.
Transnet’s SHEQ Risk Management
Policy commits the Company to
providing efficient freight
transportation on a sustainable
basis that enhances the interests
of stakeholders, while improving
safety, health, environmental and
quality risk management. The
policy, therefore, governs
operational practices relating to
the management of environmental
risks and provides the basis for
implementing Company-wide
environmental management
systems.
All operating businesses uphold
the SHEQ Risk Management Policy,
which provides the framework for
leading practice and the
incremental accreditation into
integrated International Standards
Organisation (ISO) systems by 2010.
During the year, Transnet invested
considerable time and resources
to anticipating, preventing and
mitigating the effects of
operational impacts on the
environment.
The comprehensive SHEQ Risk
Management System Standard was
developed, incorporating the
requirements of the South African
Constitution and of the National
Environmental Management Act,
107 of 1998.
Facing the challenge
The busy ports of National Ports
Authority are vulnerable to an array
of potential disasters that could
have an adverse impact on
stakeholder safety and health as
well as on the ‘silent stakeholder’ –
the environment. National Ports
Authority ports are considered to be
environmentally sensitive areas and
are, therefore, constantly monitored
for potential disasters.
Making the commitment
Recognising the importance of
testing the port’s readiness and
responsiveness in case of an
emergency, the leadership at the
Port of Richards Bay and Joint Bunker
Services (JBS) terminal led an oil
pollution simulation exercise at Coal
Berth 209/301. Contingency teams
worked closely to simulate an oil spill
from the vessel ‘Ocean Confidence’ .
Consulting the stakeholders
All relevant role players were
commissioned – including Richards
Bay Coal Terminal, National Ports
Authority Environmental
Department, National Ports
Authority divers, Employee Care
Centre, Corporate Affairs
Department, South African
Maritime Safety Association, South
African Police Service and KwaZulu-
Natal Wildlife. Stakeholders were
alerted to the incident and were
asked to take the appropriate
action.
Taking action
The simulation exercise took place
on 28 September 2006 and lasted
an entire morning, with divers first
assessing the situation around the
vessel. The employee care centre
attended to an ‘affected’ fisherman
whilst the port’s environmental
department and KwaZulu-Natal
Wildlife attended to pelicans
covered in oil. National Ports
Authority’s Corporate Affairs
Department managed
communication and updated
members of the media on site.
Making progress
Simulation exercises such as this
are considered globally to be
valuable opportunities for
assessing the reaction, resources
and cooperation between impacted
stakeholders. The lessons learnt
from this exercise were vital in
equipping the port to attend to
future incidents and proved to
enhance the synergy between all
stakeholders present.
REALITYSTORY: DISASTER MANAGEMENT READINESS PUTTOTHE TEST
TRANSNET ANNUAL REPORT 2007 79
The standard focuses on five key
phases:
• Policy;
• Planning;
• Implementation and operation;
• Checking and corrective action;
and
• Management review.
During the year, Transnet focused
on integrating environmental
issues into the Company’s planning
processes to better engage and
communicate with impacted
communities. Specific emphasis
was placed on the creation of
environmental management capacity
in Transnet Projects to support major
projects. The Company started the
process of structured and
co-ordinated engagement with
Dust covers at
Saldanha prevent
dust pollution of
the environment.
Government on environmental
matters. This leads the way for
proactively building sustainable
stakeholder relations and
communication in the year ahead.
In line with Transnet’s commitment
to managing operational impacts on
the environment, the Company will
embark on the incremental
measurement of environmental
performance in the year ahead.
The Transnet Board committed R3 billion to expand the iron ore line capacity to 47 million tons per year
O
p
e
r
a
t
i
o
n
a
l

r
e
p
o
r
t
s
OPERATIONAL REPORTS
Transnet Freight Rail 80
Transnet Rail Engineering 94
Transnet National Ports Authority 106
Transnet Port Terminals 118
Transnet Pipelines 130
80 TRANSNET ANNUAL REPORT 2007
Transnet Freight Rail ordered 212 locomotives for its general freight business and 110 dual voltage locomotives for the coal line
Financial overview Year ended Year ended
31 March 31 March
2007 2006
Restated %
R million R million change
Salient features
Revenue 14 574 14 055 4
EBITDA 3 737 2 910 28
Depreciation and amortisation 1 704 839 103
Operating profit 2 160 2 006 8
Profit/(loss) before taxation 968 1 064 (9)
Net asset value 9 557 9 082 5
Managed assets 24 305 18 489 31
Profitability measures
Operating margin (%) 14,8 14,3 4
Return on net assets (%) 10,1 11,5 (12)
Return on managed assets (%) 8,9 10,8 (18)
Capital expenditure
Total 7 387 3 809 94
Employees
Number of employees 24 811 31 398 (21)
Revenue per employee 0,59 0,45 31
TRANSNET ANNUAL REPORT 2007 81
Revenue up
4% to
R14,6 billion
EBITDA up
28%
Five-year capital
expenditure plan
Freight Rail’s infrastructure represents approximately 80% of Africa’s rail network.
R34,8 billion
82 TRANSNET ANNUAL REPORT 2007
FREIGHT RAIL continued
BUSINESS OVERVIEW
The primary purpose of Transnet
Freight Rail’s (Freight Rail) is the
transportation of rail freight. The
division continues to operate the
long-distance passenger services
Shosholoza Meyl and the luxury Blue
Train. However, as the processes for
the divestment of such services are
well advanced, they have been
treated as discontinued operations
in terms of IFRS 5 in the financial
statements. Shosholoza Meyl is to
be consolidated with the commuter
passenger services of the South
African Railway Commuter
Corporation (SARCC), independent
of Transnet. Divestment of the
passenger assets will enable
Freight Rail to focus on its core
business of freight operations,
which currently account for
approximately 95% of its revenues.
Freight Rail has a 22 247 km route
rail network, of which some 1 500 km
comprises heavy haul lines. The
network connects the ports and
hinterland of South Africa as well as
the rail networks of the sub-Saharan
region. Freight Rail’s infrastructure
represents approximately 80%
of Africa’s rail infrastructure
Freight Rail’s customer segments
comprise:
• Mining: coal, iron ore,
manganese, granite, chrome
and non-ferrous metals;
• Manufacturing: chemicals, fuel
and petroleum, fertiliser,
cement and lime as well as iron
steel and scrap;
• Containers and automotive:
inter-modal wholesale and
industrial; and
• Agriculture and forestry: grain,
stock feed and milling, timber,
paper and publishing as well as
fast moving consumer goods.
Performance highlights
Management continued to focus
on reestablishing Freight Rail as
a world-class railway that is safe,
meets the needs of its customers
and makes an appropriate return
on invested capital.
Operational achievements during
the year include:
• For the first time, Freight Rail
transported all the coal and
iron ore produced;
• EBITDA increased by 28% to
R3 737 million (2006:
R2 910 million) based on
significant productivity
improvements and good cost
control. However, an increase
in depreciation of 103% to
R1 704 million (2006:
R839 million) as a result of
the ramp-up of the major
maintenance programme,
resulted in operating profit
increasing by only 8% to
R2 160 million (2006:
R2 006 million);
• Profit before taxation
decreased by 9% from
R1 064 million to R968 million
largely because of the
increased depreciation,
amortisation and finance costs
as a result of the increase in
capital expenditure;
• The operating margin improved
marginally from 14,3% to
14,8%;
• Stabilising the integration of
Freight Rail’s maintenance
depots into Rail Engineering.
This programme effectively
doubled the size of Rail
Engineering and has yielded
positive results both in terms
of productivity improvements
and of reliability of rolling
stock. Wagon liftings at the
combined Rail Engineering
increased from 12 000 per
annum to 20 000 over the past
year. Although output was
constrained by a shortage of
new wheel sets in the local
market, the lifting programme
made progress in focusing on
wagons that were significantly
overdue for major maintenance
interventions. This has had a
positive impact on the
availability and reliability of
the wagon fleet. The allocation
of an appropriate capital
expenditure budget to address
backlogs in maintenance on
locomotives has also resulted
in improved availability and
reliability of Freight Rail’s key
locomotive fleets;
• Managing a capital programme
of R7 387 million (2006:
R3 809 million), including
the major maintenance
programmes amounting to
R3 265 million. These
programmes were aimed at
expanding capacity as well as
addressing the historical
under-investment in
infrastructure and rolling stock;
KEYPERFORMANCE INDICATORS (KPIS) – FREIGHT RAIL
2006 2007 2007 2008 % change
Actual Target Actual Performance Target vs actual
Financial
Revenue (R million) 14 055 16 478 14 574 Not achieved 16 643 14
EBITDA (R million) 2 910 3 715 3 737 Achieved 4 509 20
Infrastructure
Capital expenditure (R million) 3 809 7 253 7 387 Achieved 7 878 7
Efficiency
Volume – iron ore (mt) 29,6 32,8 30,0 Not achieved 35,0 17
Volume – coal (mt) 68,7 74,0 67,0 Not achieved 72,0 7
Volume – general freight* (mt) 83,8 85,0 79,6 Not achieved 82,1 3
* General freight volumes are a combination of metric tons of bulk commodities transported plus the number of vehicles and containers transported.
The latter two are counted as one volume ton per unit transported irrespective of their actual mass.
TRANSNET ANNUAL REPORT 2007 83
• Establishing regional
management structures
equipped to manage railway
operations on a decentralised
basis. These structures have
begun to focus on the root
causes of ongoing safety issues
that jeopardise the smooth
running of Freight Rail’s
operations and on improving
service delivery;
• Commencing the programme
of rationalising holding stores
scattered throughout South
Africa. These efforts, aligned
with the ongoing streamlining
of the purchasing process,
should significantly reduce
stockholdings in future, yet
also improve the distribution
of critical infrastructure
components resulting in
improved infrastructure
maintenance practices;
• Initiated a fleet renewal strategy
aimed at repositioning the
general freight business as a
growth sector going forward as
well as strengthening other
aspects of the bulk freight
business through:
– The placing of an order for
32 additional new heavy haul
locomotives for the iron ore
line;
– Commenced a process to
procure 212 diesel
locomotives to overcome
capacity constraints in the
general freight business; and
– The placing of an order for
50 ‘like new’ refurbished
diesel locomotives.
These acquisitions are in
addition to the order for
110 heavy haul locomotives
placed in the prior year for
the coal business; and
• Increasing capacity on the coal
line to 78 mt per annum
(previously 72 mt per annum).
This capacity will be increased
to 82 mt per annum during 2008,
once the Jumbo coal wagons
currently on order from Rail
Engineering and the first new
heavy haul locomotives on order
from Mitsui are received. This
will be incrementally improved
in line with coal demand up to
92 mt. These capacity increases
will be based on coal customers
signing new long-term take-or-
pay contracts for the rail service.
ACHIEVING RETURNS GREATER
THAN THE COST OF CAPITAL
Financial management
Freight Rail is committed to being
a financially successful and
sustainable business. The
Improvement of business
profitability was, therefore, a
primary focus during the year.
Financial performance
Revenue increased to
R14 574 million from
R14 055 million in the previous
year. However, volumes transported
declined as set out below.
The operating profit margin has
increased to 14,8% from 14,3%,
which can be attributed to the cost-
savings initiatives undertaken.
Included in the profit before
taxation, is an amount of
R146 million relating to hedging
gains on the funding of new
locomotives, incurred prior to the
adoption of hedge accounting.
Total freight transported was lower
than expected and can be
summarised as follows:
Coal and iron ore volumes were lost
due to the unavailability of product
from suppliers.
No growth in revenue was achieved
in the passenger services. The
national strike in the security
sector at the beginning of the
previous year impacted Freight
Rail’s services due to increased
cable theft. The latter affected our
ability to deliver safe services and
affected the security of
passengers, which discouraged the
utilisation of train services.
The return on net assets before
taxation was 10,1% compared to
11,5% in the previous year. This ratio
decreased as expected as the result
of the increased capital spend and
depreciation and amortisation.
A transfer of 6 253 employees
to Rail Engineering during June
2006 contributed to the reduction
in staff numbers. The revenue per
employee increased and total costs
excluding depreciation, and
amortisation declined from
R11 145 million in the previous year
to R10 837 million, indicating a
decline in real terms as a result of
the strict management of costs and
improved productivity.
84 TRANSNET ANNUAL REPORT 2007
FREIGHT RAIL continued
Marketplace and customer
management
The growth strategy was further
refined during the year and has a
renewed focus on key risks and
opportunities that will, over time,
rebuild trust, enhance credibility
of the service offering and improve
Freight Rail’s market position.
A strategic plan was developed to
validate market growth aspirations.
This will be further enhanced by the
finalisation of the Rail Master Plan,
which has a 20-year horizon.
A Customer Care Department was
established to deal with customers’
concerns and to proactively inform
customers of operational incidents
as a first step towards
transforming the business into a
more customer-focused
organisation. The unreliability of
rail services and limited capacity –
posing risks to customers and the
financial health of the Company –
were rigorously managed through
the commercial stream of the
Vulindlela project.
Operations management
Freight Rail continued its main
operational thrust of running a
scheduled railway by means of an
integrated train plan. Whilst on-
time departures and arrivals
continue to show marked
improvement, they have not yet
reached satisfactory levels. Poor
equipment reliability, safety
related incidents and inadequate
operational planning continue to
hamper progress in this regard.
• The coal export line was
severely affected by the mines’
periodic inability to produce
coal and their resultant
cancellations of freight
volumes during the rainy
season that occurred in the
first quarter of the year.
Derailments reduced markedly
on the coal line as a result of
investment in backlog
maintenance, while other
safety related incidents such
as overhead rail hook-ups and
cable theft have contributed
to reduce capacity on some of
the rail corridors across the
country. The national strike
in the security sector also
adversely affected the delivery
of volumes.
• During the year much effort was
spent on in increasing installed
capacity in the rail system. This
will pave the way for a future
sustainable growth path. There
was marked success across all
sectors. However, there were a
number of factors, such as poor
weather conditions, the short
supply of wagons caused by a
worldwide undersupply of
wheel centres and an unreliable
supply from the South African
supplier as well as plant
breakdowns and production
problems with some customers.
• Increased domestic demand
for steel and cement was
accompanied by limited
production capacity from local
producers. The focus on
supplying domestic markets
resulted in increased imports
and a reduction in rail traffic
to Mozambique and Botswana.
The local cement and steel
industries are investing in
production expansion projects
that will bring about additional
volumes on rail in 2008 and
2009.
• Chrome exports have increased
due to a high demand by China
for metallurgical chrome and a
weakening rand. The shipping
rates for bulk commodities
increased significantly during
the year, resulting in a
significant swing to
containerised chrome exports.
New exporters entered the
market during the year and
Freight Rail is presently
engaging customers to switch
more volume from road to rail.
Freight Rail has increased the
payloads per train, increasing
the export tempo of
ferrochrome on the Maputo
Corridor.
• The emergence of new entrants
in the manganese market
resulted in current market
participants engaging in
significant competitive rivalry
for the additional capacity.
• The energy portfolio was
negatively affected by
shutdowns, off-spec products
and the low global demand for
export pitch coke and
ammonium nitrate.
• The poor across-border
turnaround times of wagons
resulted in an embargo on
sending Freight Rail wagons
across the border. This, in
turn, resulted in a reduction
in transported fuel volumes.
The business experienced a loss
of copper volumes as delays
TRANSNET ANNUAL REPORT 2007 85
2007 BEE procurement
BEE procurement R1 490 million
40%
60%
Non-BEE procurement R2 250 million
caused by foreign partner
railways have resulted in the
non-placing of empties at
loading points in DRC and
Zambia. Domestic Maize
volumes transported across
the border have decreased as
Zambia experienced better
crops in 2006.
Disposals
The Blue Train will be sold to the
private sector. Shosholoza Meyl
(the inter-city passenger service)
is to be transferred to the South
African Rail and Commuter
Corporation (SARCC) in terms of
a decision by Government to
consolidate passenger rail services.
It is anticipated that the disposals
will be completed this year.
Supply chain management and
BBBEE
Freight Rail’s supply chain
management made significant in-
roads in achieving its objectives
of cost-containment and good
governance. Numerous initiatives,
based on the Group Supply
Management “flight plan” under
the Vulindlela programme, were
implemented at different stages
during the year. This created the
opportunity for cost reductions
in procurement of more than
R340 million and vastly improved
the internal procurement processes
in line with the Detailed
Procurement Policy (DPP). However,
as a significant proportion of these
reductions affected heavy
maintenance, capital expenditure
and stock costs, the benefit to the
‘bottom line’ will only be achieved
in future years.
Freight Rail remains committed to
preferential procurement of goods
and services under the newly
adopted broad-based BEE Codes
of Good Practice. During the year,
40% of the total procurement
expenditure went to BEE suppliers.
In terms of the Competitive
Supplier Development Programme
(CSDP) and through Freight Rail’s
capital budget, further
opportunities will be created in
the next year for local
manufacturers to join the supply
base, provided that they can supply
manufactured goods at globally-
competitive prices.
ASSURING SOUND
ACCOUNTABILITYAND
GOVERNANCE
In line with Transnet’s governance,
risk and compliance policies,
Freight Rail has established a
process for governance and
identifying, evaluating and
managing significant risks that
influence the attainment of its
business objectives.
To this end, in addition to the
oversight afforded by the Transnet
Board of Directors and the various
Board mandated committees,
Freight Rail has established the
following committees tasked with
oversight and governance roles:
• Exco, which meets bimonthly, is
chaired by the CEO and is
responsible for approving
strategy, capital investment
plans, annual business plans
and ensuring performance
monitoring and delivery;
• Risk Committee, which meets
quarterly, is chaired by the CEO
and is responsible for all
aspects of enterprise-wide risk
management with a particular
emphasis on safety;
• Operating Committee, which
meets monthly, is chaired by
the COO and is responsible for
overseeing all rail related
operating activities and is
accountable for the safe
operation of the railway;
• Investment Committee, which
meets at least monthly, is
chaired by the CFO and is
responsible for recommending
the five-year annual investment
plans and for approving capital
expenditure;
• Internal Control Steering
Committee, which meets
monthly, is chaired by the CFO
and is responsible for ensuring
that appropriate controls are
established and operated. All
reports of the internal and
external auditors are
considered at this committee
and corrective action plans are
monitored; and
• Acquisition Council, which
meets monthly, is chaired by
the CEO and is responsible for
awarding all major contracts.
Strategic direction
Freight Rail aims to create a
reliable and profitable business
through the increase of rail volumes
and freight traffic.
The business has identified the
following five strategic initiatives,
rooted in Transnet’s four-point
turnaround strategy, in order to
achieve its long- and medium-term
financial and operational goals.
FREIGHT RAIL continued
86 TRANSNET ANNUAL REPORT 2007
Safety: Transform Freight Rail into
a safe railway
The Vulindlela safety programme
is at the core of Freight Rail’s
improvements in safety
performance. This reengineering
programme includes initiatives for
the implementation of a safety
management system based on best
practice and ensures that safety
structures are properly integrated
into the business structures. It is
the intention to attain world-class
safety practices within five years.
Create capacity: Invest to
maintain, replace and increase
capacity
Capacity will be sustained and
created through extensive
investment in rolling stock and
infrastructure. The backlog
maintenance programme is aimed at
restoring railway capacity while the
transformation and reengineering
initiative will further enhance
capacity by improving operational
efficiency and engendering a
culture of continuous improvement.
This programme aims to identify
programmes that enable the entity
to do more with less.
Scheduled freight railway:
Implement efficiency
improvements
The Vulindlela efficiency
programmes aim to improve
throughput, asset utilisation and
productivity on dedicated corridors
(coal, iron ore and initially the
general freight NATCOR
(Johannesburg to Durban) and
CAPECOR (Johannesburg to Cape
Town) corridors). These programmes
are supported by process
improvement in the National
Operations Centre planning and
monitoring processes.
Customer service delivery: Retain
the desired customer base and
improve service delivery
The Vulindlela efficiency
programmes, contributing to
customer service delivery, and the
commercial programme – addressing
yield management, pricing, volume
growth, contracting and sales force
training – aim to retain and grow the
desired customer base.
Leadership and employee
capability: Optimise human capital
deployment and development
The enhancement of leadership
and employee capability will be
enhanced through Transnet
initiatives such as performance
management and reward
implementation and, the roll-out of
programmes by the Rail Academy.
These programmes focus on critical
operational grades with particular
emphasis on crew resource
management. Employee
programmes will be augmented by
extensive change leadership,
business appreciation and
transformation programmes that
target all employees.
Freight Rail will continue to improve
corporate governance by
integrating risk management and
governance processes into business
practice and Internal controls.
Risk management
During the year processes were
instituted to enable sound
implementation of Enterprise-wide
Risk Management (ERM). A sharper
focus was placed on capacity
building and skills enhancement so
as to empower risk champions, line
management and other employees
in their risk management functions
and responsibilities.
The key financial, operational and
commercial risks, their root causes
and associated impacts have been
identified and evaluated. Controls
and action plans have been
developed to mitigate/treat root
causes that lead to unacceptably
high residual risks.
Whilst some progress has been
made in the implementation and
embedding of ERM there are still
some notable challenges.
TRANSNET ANNUAL REPORT 2007 87
Key risks at Freight Rail Freight Rail’s planned response
Operational safety Freight Rail acknowledges that incidents are preventable. It is therefore
implementing various initiatives to inculcate a world-class safety culture.
It continued implementation of the 5-S programme that closely monitors
supervision, speed, substance abuse, signal correction and sleepiness.
This forms a basis for determination of focused corrective actions and
implementation thereof.
Installing technological solutions such as ‘on-board computers’ (OBC) in
locomotives.
Installation of the signals passed at danger (SPAD) detection system is
under way.
Asset performance Improving the availability, reliability and utilisation of assets.
Eliminating the maintenance backlog through a planned maintenance regime.
Addressing technical obsolescence of assets through investment plans.
Conducting technical audits to assess the condition of assets.
Security, crime and sabotage Active participation in joint Government and SOE forums to fight crime.
due to cable theft Engaging relevant Government structures to reclassify cable theft crime
as a more serious offence.
Skills retention Roll-out of the Talent Management Framework.
Implementation of the performance and incentive scheme.
ENGAGING OUR STAKEHOLDERS
FOR MUTUAL BENEFIT
Freight Rail recognises that a
number of stakeholders
are affected by operational
performance. As such, the
organisation is committed to
embedding the appropriate
accountability within its
operational structures.
The Freight Rail Sustainability
Steering Committee played a key
role in mapping stakeholders and
identifying the principal areas
impacting stakeholders. Improved
channels for engaging with internal
and external stakeholders form
part of this roadmap to embed
organisational sustainability within
Freight Rail.
DEVELOPING WORLD-CLASS
INFRASTRUCTURE
Rail infrastructure
Freight Rail relies on its engineering
capabilities for the provision,
maintenance and timely
replacement of infrastructure and
rolling stock to run a scheduled
railway. Ensuring reliability,
affordability, availability and safety
of the network assets remains a
challenge. To address this challenge,
the capital investment programme
was accelerated during the year.
Capital investment
Capital spending for the year
amounted to R7 387 million
(including capitalised maintenance
expenditure of R3 265 million),
compared to the R3 809 million
in the previous year.
The increase in capital expenditure
targeted the under-investment of
the past and addressed the
contractual commitments on the
export lines in terms of volume
growth. Simultaneously, the
reliability of the fleet, and
investment to improve safety,
remained a focus area. A major
component of the capital plan
related to the acceleration of
heavy maintenance expenditure.
The Transnet Board approved the
locomotive fleet renewal plan in
principle in August 2006 to
the value of R11 201 million
(R2 659 million for upgrade
programmes and R8 542 million
for new locomotives).
8 000
7 000
6 000
5 000
4 000
3 000
2 000
1 000
0
2006
Capital expenditure
2007 2008
3

8
0
9
7

3
8
7
7

8
7
8
FREIGHT RAIL continued
88 TRANSNET ANNUAL REPORT 2007
The fleet renewal plan will achieve
the following objectives:
• Address the under-investment
of the past 15 years, which was
aggravated by the lack of
effective maintenance;
• Improve the efficiency and
reliability of the rail
transportation system;
• Contribute to the turnaround
process;
• Increase traction capacity to
meet the growth in rail
transport demand;
• Provide traction flexibility on a
non-homogeneous network; and
• Help modernise the fleet and
retire ageing and maintenance
hungry locomotives.
The planned capital expenditure for
the next year includes:
Functionality R million
Wagons 2 652
Locomotives 2 273
Infrastructure 1 667
Information systems
and technology 278
Transtel – communications 180
Train authorisations 164
Electrical 148
Plant and equipment 134
Property – buildings
and structures 113
Prefeasibility 63
Safety and security 58
Telecommunications 52
Technology 48
Other 48
Grand total 7 878
Freight Rail has planned for the
following major capital expenditure
over the next five years:
Business sector R million
General freight 24 603
Coal line 4 911
Ore line 3 764
Ngqura 753
Other 791
Grand total 34 822
Information and communications
technology
Freight Rail’s Chief Information
Officer (CIO), operating under
policies and procedures from
Transnet, is responsible for all
aspects relating to enterprise
information technology and systems
(IT&S). This encompasses
application development and
maintenance, software and
hardware management and the
setting of standards for technical
and business architecture across the
information integration domains.
The following key objectives,
pursued by the CIO during the year,
will continue into the next year:
• Optimising the use of the SAP
application software to realise
substantial value from Freight
Rail’s current and future
investment in SAP. This includes
the identification of specific
areas of improvement across
processes, people, governance
and technology. Specific areas
targeted during the year
include the development of
workflow and process
automation of recording
employees’ time worked; the
refinement of controls; the
tracking of capital expenditure
in the financial modules of SAP
and the development of a
customer relationship
management (CRM) capability
to provide a single view of the
customer. The latter also
improves the capability for
logging all interactions with
customers;
• Deploying IT to enable
controlled time record keeping.
This will provide a tool to
monitor unauthorised leave
and lost time while automating
time calculations to ensure
standardised policy
application. It will also provide
the capability to link overtime
to productive work;
• Streamlining the IT architecture
by replacing legacy
applications where required.
This includes the development
of consignment life cycle
management in SAP and the
streamlining of management
information; and
• Deploying IT to enable a safe
and efficient railway through
the integrated asset tracking
programme. This encompasses
all projects related to GPS,
radio frequency identification
(RFID) and on-board computers
(OBC) to provide asset location
and speed monitoring. It
includes the deployment of
handheld terminals and readers
to enable yard optimisation.
TRANSNET ANNUAL REPORT 2007 89
CREATING A WORKPLACE WHERE
OUR PEOPLE CAN EXCEL
People management
Freight Rail currently employs
24 811 permanent employees.
This represents a reduction in
staff numbers from 31 398 in
March 2006, mainly as a result of
the migration of major maintenance
and other engineering
responsibilities to Rail Engineering.
The human capital strategy and
focus is embedded in Transnet’s
four-point turnaround strategy and
has had the following significant
effects during the year:
• A critical skills framework was
developed;
• Long hours for critical grades
were reduced;
• Good corporate citizenship was
further institutionalised
through targeted training
programmes;
• The ability to operate as a
scheduled and stable railway
was underscored by
appropriate training initiatives;
• A talent management and skills
retention framework was
formalised; and
• Initiatives were introduced to
ensure the availability of
personnel within key
organisational programmes
such as Vulindlela.
Change, transformation and culture
The business simulation programme
has been successfully implemented
at senior management level. The
goal of this programme is to
support business reengineering
processes by enabling employees
to understand the total business
and its interfaces, as well as the
financial impact of their actions.
Corporate governance, PFMA
educational programmes containing
procedure manuals and personal
empowerment training programmes
were also successfully rolled out.
Employment equity
The Group Employment Equity Plan
was tabled at Group Exco level in
March 2007. In the year ahead,
Freight Rail will align with Group
numerical targets of:
• 71% black employees (at least
61% African);
• 17% female; and
• 3% people with disabilities.
Skills development
The current skills shortages have
necessitated multiple strategies
to acquire the relevant technical,
operational and leadership skills.
Freight Rail has embarked on a
detailed skills planning and analysis
programme to determine the skills
priorities for 2006 to 2012.
The following key skills
development initiatives were
undertaken during the year:
• Mission-critical vacancies were
filled across the organisation;
• A structured safety training
programme was successfully
rolled out; and
• Provisional accreditation was
achieved for all training centres.
Asian (A) African (B) Coloured (C) Black (A+B+C) White Total Total
Employees F M F M F M F M F M F M F+M
Management 28 94 212 408 46 100 286 602 103 774 389 1 376 1 765
Non-managerial 60 374 2 695 11 613 346 1 493 3 101 13 480 763 5 702 3 864 19 182 23 046
Total – 2007 88 468 2 907 12 021 392 1 593 3 387 14 082 866 6 476 4 253 20 558 24 811
0% 2% 12% 49% 2% 6% 14% 57% 3% 26% 17% 83% 100%
Management 26 116 206 425 53 115 285 656 113 935 398 1 591 1 989
Non-managerial 73 466 2 583 15 286 401 1 978 3 057 17 730 938 7 684 3 995 25 414 29 409
Total – 2006 99 582 2 789 15 711 454 2 093 3 342 18 386 1 051 8 619 4 393 27 005 31 398
0% 2% 9% 50% 2% 7% 11% 59% 3% 27% 14% 86% 100%
F = Female M = Male
FREIGHT RAIL continued
90 TRANSNET ANNUAL REPORT 2007
assist in rolling out a succession
planning framework.
Performance and reward
Performance management
contracts, supported by capacity
building efforts, were implemented
for the management cadre. The
focus was mainly on securing
management commitment to
ensure that the Company secures its
transformational and business goals.
Human resource enablement
Freight Rail embarked on numerous
initiatives during the year to
expand employee development,
including:
• Introducing an electronic time
and attendance system;
• Developing, web-based learning
solutions;
• Revising recruitment and
staffing policies and
procedures;
• Initiating a safety management
training programme; and
• Institutionalising leadership
development programmes.
Employee relations
The employee relations climate is
generally sound between Freight
Rail management and its labour
unions. Communication forums are
established and enable regular
interaction.
Management and unions that are
party to the Transnet Bargaining
Council concluded a Variation
Agreement on the Basic Conditions
of Employment Act. This allows for
operational flexibility in a number
The integration of the current
training centres into a Railway
Academy has progressed well, and it
is expected that this will fast-track
the development of core skills in the
organisation. The Railway Academy
has entered into a partnership with
the University of Pretoria to assist
in the development of engineering
skills to address rail specific
challenges. Freight Rail’s capacity
building initiative for shop stewards
and supervisory staff in partnership
with the University of South Africa
is also beginning to show results.
Altogether 2,2% of Freight Rail’s
labour cost went to the training
of critical skills, with more than
5 000 employees being trained and
an additional 1 301 employees
being recruited into mission-critical
positions. 608 Learnerships were
completed during the year and a
total of 311 bursaries have been
offered to students in engineering
and commercial disciplines.
Skills 2007 2006
development R million R million
Training,
bursaries and
grants 101 101
% of payroll
costs (%) 2,2 1,9
Talent management
A retention strategy has been
developed, approved and
communicated to key stakeholders
to ensure that an integrated system
for identifying and retaining talent
is established. This will further
of areas including daily and weekly
rest periods, maximum shift lengths
and limitations on working
overtime. This agreement is valid
for three years and will lapse on
31 March 2009.
Employee wellness and HIV/Aids
Freight Rail implements
comprehensive programmes for
occupational medical surveillance,
lifestyle management, employee
assistance and substance abuse.
Education and awareness,
counselling and medical treatment
form a critical component of
lifestyle management as a means
of promoting healthy minds,
healthy people, minimise chances
for new HIV/Aids infections and
improve the quality of the life of
the infected.
Employee safety
Rail safety at Freight Rail has a
direct impact on employees and the
public (for public safety refer page
91). During this year, a journey
towards the implementation of an
integrated safety, health,
environment and quality (SHEQ)
management system was started.
Freight Rail contracted advisory
firm, DuPont International, to
assess and assist in addressing
safety fundamentals. This initiative
continues to focus on incorporating
safety into all aspects of operation
as well as changing cultural
mindsets and behaviours towards
the goal of improved safety
performance. Training to inculcate
a safety culture and build a safety
TRANSNET ANNUAL REPORT 2007 91
SHEQ performance Target Actual Actual Actual
Indicator 2008 2007 2006 2005
Cost of risk as %
of revenue (%) 5,90 6,50 8,90 6,60
DIFR 1,20 1,56 1,50 2,30
NOSA rating (%) 80 75 70 69
Freight Rail employee fatalities
Fatalities on premises (suicide excluded) 2007 2006 2005
Injuries 5 4 5
Diseases – – –
Road traffic (public roads) 4 6 6
Total 9 10 11
conscious workforce was
implemented to foster ownership
and accountability in Freight Rail.
Particular attention is focused on
strengthening the rail safety
management system and ensuring
that it adequately addresses the
requirements of the South African
National Standard 3000-1, on
railway safety. A project plan was
developed to address identified
gaps and implementation is under
way. Amongst others, the plan
addresses occurrence management,
contract and contractor
management, human factors and
auditing.
CARING FOR THE COMMUNITIES
WHERE WE OPERATE
Corporate social investment (CSI)
In addition to the work of the
Transnet Foundation, Freight Rail’s
continued refocus on community
involvement resulted in the
channelling of funds into two areas:
• Rail safety is a mandatory focus
area and falls within the CSI
Programme because of its link
to communities located next to
railway lines. Freight Rail spent
R10,5 million on external rail
safety initiatives in 2006; and
• HIV/Aids interventions
accounted for approximately
R6 million of Freight Rail’s CSI
expenditure in this year. Freight
Rail supports the Deputy
President’s “Partnership against
Aids”, by running an annual
partnership train which brings
together HIV/Aids service
organisation representatives,
health care workers and people
living with HIV/Aids. Freight
Rail also collaborates with the
Department of Health by
running similar trains in
observance of World Aids Day.
Community impact and public
health and safety
Public health and safety is of
paramount importance. Injuries and
loss of life are never acceptable and
Freight Rail is committed to
reducing the number of accidents
and fatalities in the year ahead. The
public fatalities during the year
declined by 13% compared to the
previous year.
Level crossing incidents show a
declining trend, in part as a
consequence of the public
awareness campaign undertaken
in Freight Rail.
Public fatalities
2007 2006 2005
Fatalities
on premises
(criminal
activity and
suicide
excluded) 161 185 199
Road traffic
(public roads) – – 10
Total 161 185 209
Management is deeply concerned
by the above fatalities and each is
investigated in depth. Accordingly,
the dynamic safety plan is amended
taking into account what we have
learned and receives constant
focus at the Group and Divisional
Executive Committees.
FREIGHT RAIL continued
92 TRANSNET ANNUAL REPORT 2007
MANAGING OUR ENVIRONMENT
RESPONSIBLY
In managing the environmental
impacts of its business activities,
Freight Rail is guided by an
environmental management system
(EMS), which is in line with the ISO
14001 International Standard. The
system enables Freight Rail to
formulate appropriate policies
and programmes as well as to
set environmental targets and
objectives while taking into account
ever-changing legislative
requirements, business operational
requirements and functional
processes.
Some of the achievements to date
include the compilation of the
EMS procedure manual; independent
review of the EMS scope and
documentation, updating of the
Freight Rail Environmental Aspects
Register, review of the
environmental response and site
rehabilitation guidelines, revision of
the Internal Audit checklists and
guidelines and assessment criteria
for the sites earmarked for the
scrapping of redundant rolling stock.
Environmental awareness training
was conducted at all levels at
Freight Rail.
PROSPECTS
Committing to stakeholder value
The operation of a safe, scheduled
and commercially sustainable
freight railway remains Freight
Rail’s key objective.
To achieve this, the business is
committed to addressing the needs
of its customers, with dedicated
teams being established to focus on
improving customer relationships.
Through this focus, Freight Rail
anticipates increasing its market
share and thereby achieving
substantial revenue growth.
To ensure improved service
reliability, planned capital
expenditure has increased both for
rolling stock and for infrastructure.
This increase will address key
priorities and will focus on scheduled
repairs and maintenance planning.
Human capital plans are being
reviewed to improve the skills
base, scheduling systems and
crew management to ensure that
the business has the necessary
competencies to achieve its growth
objectives.
This will deliver the following
results over the next five years:
• Transported volumes will
increase substantially and rail’s
share of transportable GDP will
increase accordingly;
• Financial returns will increase
to more sustainable levels in
line with the benefits of
increased volumes and begin
to track favourably with global
railways;
• Freight Rail’s service levels will
be returned to appropriate
standards; and
• Freight Rail will contribute
positively to the efficiency
of the logistics system of
South Africa.
TRANSNET ANNUAL REPORT 2007 93
Capital expenditure in
the past year increased
to R7,3 billion, mainly to
address under-
investment of the past
The total number of
injuries and occupational
diseases dropped 14%
compared to last year
Freight Rail plans to
spend more than
R24 billion over the next
five years on its general
freight business
94 TRANSNET ANNUAL REPORT 2007
Rail Engineering’s Vandyksdrift wagon maintenance depot received the highest safety award for the eighth consecutive year
TRANSNET ANNUAL REPORT 2007 95
Revenue up
90% to
R7,3 billion
R4,1 billion
EBITDA up
47%
Five-year capital
expenditure plan
Technology is fundamental to Rail Engineering’s operations and productivity
Financial overview
Year ended Year ended
31 March 31 March
2007 2006 %
R million R million change
Salient features
Revenue 7 317 3 845 90
EBITDA 1 088 738 47
Depreciation and amortisation 114 66 73
Operating profit 944 671 41
Profit before taxation 893 676 32
Net asset value 2 007 1 390 44
Managed assets 1 346 901 49
Profitability measures
Operating margin (%) 12,9 17,4 (26)
Return on net assets (%) 44,5 48,6 (9)
Return on managed assets (%) 70,1 74,4 (6)
Capital expenditure
Total 623 189 230
Employees
Number of employees 13 729 6 418 114
Revenue per employee 0,53 0,60 (12)
96 TRANSNET ANNUAL REPORT 2007
RAIL ENGINEERING continued
BUSINESS OVERVIEW
Transnet Rail Engineering (Rail
Engineering) is an operating
division of Transnet specialising
in the maintenance, upgrading and
manufacture of wagons, coaches,
rolling stock components and
associated transport equipment
as well as in the maintenance and
upgrading of locomotives through
its 151 sites and six main centres
countrywide.
The number of employees within
Rail Engineering increased by
114% during the year due largely
to the integration of 6 253 Freight
Rail Rolling Maintenance employees
into the division. The staff
complement in March 2007 was
13 729.
Freight Rail and the South African
Railway Commuter Corporation
(SARCC) are Rail Engineering’s
main customers but products and
services are supplied to railways
in Africa and abroad.
Rail Engineering’s vision is to be a
world-class provider of quality,
cost effective total rail rolling
stock engineering.
Performance highlights
The following operational
highlights were recorded during
the year:
• Revenue increased by 90% to
R7 317 million.
• Operating profit increased by
41% to R944 million.
• Procurement from black
economic empowerment (BEE)
firms increased from
R729 million in the previous
year, to R995 million this year.
• Rail Engineering successfully
integrated the Freight Rail
maintenance operation into
the organisation.
• Reliability and availability of
rolling stock on the coal and
iron ore lines were significantly
improved.
• Rail Engineering continued to
develop the upgraded 10M5
commuter passenger train sets.
• The annual number of wagon
maintenance liftings increased
from 12 000 to 20 000.
ACHIEVING RETURNS GREATER
THAN THE COST OF CAPITAL
Financial performance
Revenue and production volumes
increased to 86% and 91%
respectively and as a result
revenue increased by 90% from
R3 845 million in the previous year
to R7 317 million. This increase was
partly due to Rail Engineering’s
integration of Transnet Freight and
Rail’s maintenance operation.
The operating profit increased by
41% from R671 million in the
previous year to R944 million,
which can be attributed to
improved internal controls, better
governance structures and various
cost-saving initiatives.
Utilisation of assets increased
during the year due to improvement
in controls over various processes.
In an effort to improve efficiency
and generate positive returns, all
maintenance depots will be
integrated from cost centres into
the various operational businesses.
Marketplace and customer
management
Rail Engineering is structured into
eight product-focused businesses
to better service its customers’
specific needs. The businesses are:
• Locomotive;
• Coach;
• Wagon building;
• Rail freight wagon refurbishing
(RFR);
• Rotating machines;
• Rolling stock equipment;
• Wheels; and
• Tarpaulins.
These businesses focus on market
requirements and opportunities,
including:
• Increasing manufacturing
capacity for the construction of
new wagons to serve the growth
in iron ore and coal volumes;
• Upgrading and manufacturing
locomotives to meet the higher
demand on tractive effort;
• Improving technology in
commuter train sets to raise
the level of passenger comfort
and safety;
• Establishing new partnerships
with local and international
original-equipment
manufacturers (OEMs) to
expand strategic capabilities in
diesel engine remanufacture,
bogies and locomotive
electrical control systems;
• Expanding logistic and support
services to serve the railway
KEYPERFORMANCE INDICATORS (KPIs) – RAIL ENGINEERING
2007 2007 2008 % change
Target Actual Performance Target vs actual
Financial
Revenue (R million) 5 241 7 317 Achieved 7 566 3
EBITDA (R million) 1 118 1 088 Not achieved 997 (9)
Infrastructure
Capital expenditure (R million) 375 623 Achieved 669 7
Efficiency
General freight (%) 37,3 48,0 Achieved 48,0 –
Locomotive reliability Coal (%) 28,3 43,0 Achieved 50,0 16
Iron ore (%) 18,5 57,0 Achieved 57,0 –
General freight (%) 82,2 85,0 Achieved 85 –
Locomotive availability Coal (%) 88,0 85,2 Not achieved 89 4
Iron ore (%) 81,1 85,9 Achieved 86 –
TRANSNET ANNUAL REPORT 2007 97
auxiliary equipment market in
Southern Africa; and
• Developing over-border
locomotive maintenance
facilities to assist neighbouring
rail operators.
During the year, Rail Engineering
doubled the output of new wagons
to 1 022 units and delivered the
new 10M5 commuter train sets.
The Company, moreover, integrated
Freight Rail’s entire locomotive,
wagon and coach maintenance
operations into its structure.
Customer alignment and
assessment through routine surveys
are ongoing. Where required, Rail
Engineering’s customer-service
employees are positioned in the
operational structure of Freight
Rail to gain a better understanding
of customer needs.
Operations management
Performance highlights for the
year include:
• Successfully integrating
Freight Rail’s maintenance
operation into Rail Engineering;
• Achieving a record production
of 1 022 new iron ore and coal
wagons;
• Upgrading 65 class 6E1 to class
18E locomotives;
• Upgrading 80-ton CR-S wagons
to 120-ton CR-14s;
• Completing a new octane tank
wagon design;
• Vandyksdrift wagon
maintenance depot received
the NOSCAR award (highest
safety award) for the eighth
consecutive year; and
• Launching the 10M5 commuter
train sets.
Supply management and BBBEE
The total procurement expenditure
for the year was R3 166 million for
Rail Engineering Centres, of which
R995 million (31%) was spent on
black empowered companies.
Businesses owned by black women
will be given more consideration
during the next year to meet the
newly gazetted BBBEE requirements.
The savings for the year as a result
of divisional initiatives amount to
R117 million, of which R69 million is
based on call-offs from long-term
contracts, whilst other procurement
activities yielded savings of
R48 million. In addition, numerous
contracts driven from the Vulindlela
procurement initiatives are
beginning to show tangible results,
which created the opportunity for
further cost reductions of
R56 million, the most notable
being savings on transport and
production material.
ENGAGING OUR STAKEHOLDERS
FOR MUTUAL BENEFIT
During the year Rail Engineering
continued to engage its key
stakeholders such as Freight Rail
and SARCC as well as
manufacturers and product
specialists across the globe. Rail
Engineering management is
committed to the continuous
improvement of the Company’s
ability to respond to different
economic, environmental needs,
while ensuring all stakeholders
benefit from engagement efforts.
ASSURING SOUND
ACCOUNTABILITYAND
GOVERNANCE
Rail Engineering is firmly
committed to corporate
governance and has adopted a
proactive approach to risk
management in line with the King II
Code of Corporate Governance, the
Companies Act and the Public
Finance Management Act.
During the year Rail Engineering
further embedded sound governance
principles within the organisation
by implementing local corporate
governance committees at all its
centres. Strong corporate
governance principles underscore
the implementation of Transnet’s
fraud prevention strategy.
Strategic direction
Rail Engineering supports Freight
Rail in the provision of a rolling-
stock equipment service. This
service is delivered through the
running of strategically positioned
depots and factories and the
alignment of service delivery
priorities with Freight Rail’s national
operations requirements. Rail
Engineering continuously strives
to improve and increase service
efficiency and rolling stock quality
in an effort to reduce the cost of
rail transport in South Africa.
Rail Engineering’s strategic
objectives include:
• Continuation of the principle of
product-focused businesses;
• Customer alignment –
Integrated planning between
2007 BEE procurement
BEE procurement R995 million
31%
69%
Non-BEE procurement R3 166 million
RAIL ENGINEERING continued
98 TRANSNET ANNUAL REPORT 2007
Freight Rail’s National
Operation Centre and Rail
Engineering – focus on critical
flows especially GFB and full
alignment with Freight Rail’s
rolling stock plans;
• Enhancement of strategic
capability and capacity
• Reengineering to improve
efficiencies through
implementation of effective
production control mechanisms,
and of a daily production
delivery report to manage the
output of rolling stock. It
includes modernising
equipment/infrastructure and
technology and lowering the
cost of production throughput
by making use of smarter
technology, leveraging core
competencies and use of
extended squad work to increase
the effect of skilled staff and the
transfer of technology and know-
how through OEM partnerships;
• The maintenance of quality
control and quality assurance
systems, non-conformance
reporting (NCR) software to
establish root causes of
failures and introduction of
timely corrective measures so
as to reduce costs and increase
product reliability;
• Improve supply management,
enter into strategic alliances
with key suppliers, update
procurement procedures; and
• Increase volumes through
optimising existing production
lines (eg increasing the
production rate on the wagon
build line in Bloemfontein to
1 500 units per year).
Transnet policy, complete job
evaluation programme, execute
the Skills Development and
Employment Equity Plans and
talent management for staff
development and retention.
Risk management
Rail Engineering is committed to
good corporate governance and
vigilant risk management through
the vigorous implementation of the
holistic and consistent ERM
Framework. During the year further
resources were provided to embed
and sustain the ERM culture
throughout Rail Engineering’s
operations, including the newly
integrated maintenance depots.
Risk assessment workshops have
been conducted at corporate
office, functional support services,
national, regional and local
businesses for identification of
risks and management thereof.
• Engineering/product
development – aiming at
expanding technology and
intellectual property subsisting
in the product range through:
– Product research;
– Developing new
specifications (product,
components and material);
– Product design and
development – eg the all new
11M metro trains;
– Processes documentation;
– Industrialisation of
production lines; and
– Update of product
handbooks, manuals and
catalogues;
• Restructure within locomotive,
RFR (wagon refurbishing) and
coach businesses to achieve
optimised integrated
maintenance for high
availability and reliability of
rolling stock and refine
business systems – ICT project
to convert maintenance depots
from cost centres to the Rail
Engineering business model;
• Reduction of the rolling stock
maintenance backlog;
• Development of BBBEE in
procurement;
• Capital investment in
infrastructure, equipment,
technology and systems
coupled with project
management to achieve
execution and completion of the
capital expenditure plans; and
• Develop human capital
(competency, skills training,
recruitment), harmonise the
human capital policies with
TRANSNET ANNUAL REPORT 2007 99
Key risks at Rail Engineering Rail Engineering’s planned response
Operational safety Enhancing discipline and consequence management.
Heightening senior management’s visibility and participation in SHEQ
campaigns
Training all employees in safety issues.
Performing regular audits and implementing recommendations.
Conducting major incidents investigations by senior management and
ensuring corrective action.
Maintenance regime (achievability Reviewing quality control system and ensuring non-conformance is
of availability and reliability targets) reported and corrective action promptly taken.
Improving relationships with main suppliers eg of critical components,
assets, equipment to ensure planned and unplanned maintenance is
achieved.
Ensuring adherence to maintenance plans.
Skills development and retention Implementing the Talent Management Framework to ensure critical skills
are managed on a sustainable basis.
Driving and managing performance culture by implementing an effective
performance management and incentive system.
Constant industry analysis to inform remuneration changes.
Maintaining the Student Bursary Scheme (SBS).
DEVELOPING WORLD-CLASS
INFRASTRUCTURE
Engineering infrastructure
Technology is fundamental to Rail
Engineering’s business. As such,
the Company establishes
relationships with original
equipment manufacturers and
railway engineering specialists
across the globe.
The integration of Freight Rail
Maintenance and Rail Engineering
further enhanced the engineering
capabilities of Rail Engineering as
the engineering fraternities of both
operating divisions have been
combined. This has resulted in a
stronger grouping that focuses
on enhancing reliability and
availability of Freight Rail’s rolling-
stock fleet.
New technologies are being
introduced to address
obsolescence in the rolling-stock
manufacturing and refurbishment
environment. These range from
technologies to replace single
components to major upgrades of
locomotives in collaboration with
original equipment manufacturers.
Because of new technologies used
in rolling-stock design, a Skills
Engineering department was
introduced to ensure that the latest
technical skills are integrated into
the curricula of the various trades.
Leading practices in engineering
are incorporated into Rail
Engineering’s growing product
portfolio. In addition to its own in-
house design office, which was also
enhanced by the integration with
Freight Rail Maintenance, Rail
Engineering has access to external
specialist design companies to
acquire the designs and know-how
for developing new rolling stock.
During the year the 10M5 trains
set, a ‘clear-the-deck’ (removing all
components and the superstructure
above the floor and replacing it
with new) upgrade of the 5M2A,
was introduced. It soon became the
norm for future suburban rolling
stock of the SARCC. These train
sets were launched in KwaZulu-
Natal and Gauteng during the year.
Rail Engineering has now
established three strategic sites
to produce the 10M5: Durban,
Koedoespoort and Salt River.
RAIL ENGINEERING continued
100 TRANSNET ANNUAL REPORT 2007
During the year, Rail Engineering
placed added emphasis on quality
to ensure sustainable reliability and
availability of Freight Rail rolling-
stock fleet. As a result, quality
management systems were
introduced in the maintenance
depots taken over from Freight Rail
on a pilot basis, with an emphasis
on product quality. The quality
management system will be rolled
out to remaining maintenance
depots during the coming year.
The local businesses within the
Rail Engineering workshops also
completed successful ISO
9001(2000) accreditation audits
during the last quarter of the year
to retain their accreditation.
Capital investment
Capital spending for the year
amounted to R623 million
compared to R189 million in the
previous year. This significant
increase in capital expenditure is
mainly attributable to the
integration with Freight Rail
Maintenance.
The capital expenditure for the
2008 includes:
Projects R million
Purchase of machinery
and equipment 355
Upgrade of facilities 210
Other projects 134
Total 699
Rail Engineering has planned for the
following capital expenditure over
the coming five years:
Projects R million
Purchase of machinery
and equipment 2 043
Upgrade of facilities 1 071
Other projects 967
Total 4 081
Information and communication
technology
Integration
During the year Rail Engineering ICT
played a significant role in the
rolling stock maintenance
integration project to migrate the
Freight Rail Maintenance systems
into Rail Engineering. The migration
involved SAP human resource and
logistics-finance systems, with the
integration team successfully
migrating the live Freight Rail SAP
ERP 2004 version system to the
Rail Engineering platform. This
resulted in an 88% productivity
increase among system users in
Rail Engineering. ICT costs in Rail
Engineering were 1,2% of Rail
Engineering’s total revenue of
R7,3 billion during the year, which is
still below the accepted benchmark
of 3% adopted by Transnet. Rail
Engineering yielded significant
benefits in leveraging economies of
scale for supporting the additional
users with minimum increase in ICT
resources. This has contributed to
Rail Engineering’s cost-containment
initiatives, in line with the priorities
set by Transnet Group ICT.
Migration
In March 2007 Rail Engineering ICT
successfully migrated the SAP
human resource and logistics-
700
600
500
400
300
200
100
0
2006
Capital expenditure
2007 2008
R

m
i
l
l
i
o
n
1
8
9
6
2
3
6
9
9
finance systems from the HP Dec
Tru64 platform to the IBM AIX
platform. This was a prerequisite
for the merger of various Rail
Engineering systems, referred
to internally as the “the big bang
project”. The new IBM platform
provides superior system
performance in terms of the
transaction processing speed to
support key business processes.
Performance has improved
significantly compared to task
execution timeframes prior to
the platform migration. Rail
Engineering has aligned its ICT
strategy with that of Transnet ICT
to standardise all SAP systems on
IBM platform/servers within the
Group.
Rail Engineering achieved success
in merging the Rail Engineering
Maintenance SAP systems (former
Freight Rail Maintenance systems)
into the Rail Engineering main SAP
systems. The new revenue-based
plant maintenance process model,
which uses a service order for the
sales process, was developed for
the maintenance depots.
General ICT
Rail Engineering ICT had a total
staff complement of 70 this year.
The internal ICT business of Rail
Engineering has attracted and
retained the requisite skills to
support all the ICT requirements
of the business, thereby eliminating
the need for external assistance.
TRANSNET ANNUAL REPORT 2007 101
CREATING A WORKPLACE WHERE
OUR PEOPLE CAN EXCEL
People management
The number of employees within
Rail Engineering increased by
114% during the year. This increase
was due to the integration of
6 253 Freight Rail rolling stock
maintenance employees into Rail
Engineering and the resulting
increase in business activity,
tabled as follows:
Rail Engineering will focus on the
following key human capital
challenges in the coming year:
• Developing core competencies
required to achieve Rail
Engineering business
objectives;
• Ensuring effective management
and retention of key talent;
• Developing leadership with
appropriate competencies and
values to drive Transnet’s
broader strategy and culture;
• Creating an enabling
environment that ensures
harmonious working
relationships through stable
employee relations and
employee wellbeing
interventions;
• Aligning and streamlining all
human capital policies,
processes, systems and
structures; and
• Developing capacity within Rail
Engineering to ensure full
integration and assimilation of
the Transnet culture.
Change, transformation and culture
The integration of Freight Rail
rolling stock maintenance
personnel and workshops was Rail
Engineering’s most significant
challenge during the year. This
process entailed the
synchronisation of systems and
the revision of conditions of
employment, policies and
processes between Rail
Engineering and Freight Rail
maintenance employees. As a
result of the implementation of
effective change management
procedures the integration process
proceeded with minimum
disruptions – both operationally
and from a labour relations
perspective.
Skills development
During the year Rail Engineering
placed a significant emphasis on
skills development, focusing on
critical technical skills. Student
numbers increased from 526 in
2006 to 986 at the end of March
2007. During the year, 214 students
completed their training as qualified
artisans and were deployed into the
various businesses within Rail
Engineering. The goal for the year
was to have trained a minimum of
1 000 Student Bursary Scheme
trainees, thereby contributing
Employment equity
Rail Engineering is committed to employment equity. As at 31 March 2007, black employees constituted 70% of
the Rail Engineering staff complement.
Asian (A) African (B) Coloured (C) Black (A+B+C) White Total Total
Employees F M F M F M F M F M F M F+M
Management 7 41 96 178 12 39 115 258 21 325 136 583 719
Non-managerial 24 206 935 6 922 147 986 1 106 8 114 258 3 532 1 364 11 646 13 010
Total – 2007 31 247 1 031 7 100 159 1 025 1 221 8 372 279 3 857 1 500 12 229 13 729
0% 2% 8% 52% 1% 7% 9% 61% 2% 28% 11% 89% 100%
Management 4 23 62 78 12 20 78 121 14 182 92 303 395
Non-managerial 4 113 425 2 989 68 415 497 3 517 129 1 880 626 5 397 6 023
Total – 2006 8 136 487 3 067 80 435 575 3 638 143 2 062 718 5 700 6 418
0% 2% 8% 48% 1% 7% 9% 57% 2% 32% 11% 89% 100%
F = Female M = Male
RAIL ENGINEERING continued
102 TRANSNET ANNUAL REPORT 2007
to the availability of critical skills
to meet future requirements. This
goal was exceeded by 200 students.
The training department is
currently assessing and recruiting
new students.
Skills 2007 2006
development R million R million
Training,
bursaries and
grants 46 25
% of payroll
costs (%) 2,0 2,4
Talent management
During the year Rail Engineering
launched its talent-management
programme. The programme aims
to manage and retain key talent
effectively. The Talent Framework
was developed and adopted by Rail
Engineering’s Executive Committee
(Exco). Additional capacity building
initiatives have provided all human
capital practitioners with the
capacity to manage this process.
As at 31 March 2007, 60% of all
managers have been trained. In the
year ahead, Rail Engineering will
conclude this training and aim to
establish talent forums throughout
Rail Engineering.
Performance management and
reward
Rail Engineering’s Performance
Management System was
successfully implemented during
the year. The system is geared to
enhance employee performance
and productivity. All non-bargaining
employees have received the
requisite training.
Managers have concluded their key
performance agreements and
strategic-performance objectives
(SPOs). Future challenges include
conducting the final performance
reviews and training all managers
and HR practitioners in handling
both poor and superior
performance.
The current Rail Engineering gain-
sharing incentive scheme for the
bargaining unit was extended to
the newly-integrated employees
(former Freight Rail) in October
2006. They received their first
gain-share payments in January
2007.
The scheme continues to play a
pivotal role in enhancing the
performance and productivity of
Rail Engineering employees.
Human resource enablement
Rail Engineering focused on the
development of its human capital
systems during the year to support
sound human capital decision
making. The development process
also included the redesign of Rail
Engineering’s organisational
structure to integrate with the
former Freight Rail maintenance
structures and alignment with the
two SAP payroll systems with
effect from 1 April 2007.
The challenge in the year ahead is
to implement the SAP time and
events module and other SAP CHR
related modules.
Employee relations
Several employee relation
initiatives were launched during
the year. The Transnet Exco
approved a number of HR policies.
A communication plan is in place
to roll out these policies in Rail
Engineering.
Training in disciplinary management
continued and approximately 70%
of Rail Engineering’s line managers
had received training by the end of
March 2007.
An extensive absenteeism
programme is under way to improve
the management and control of
employee absenteeism across Rail
Engineering.
Employee wellness and HIV/Aids
The SHEQ management system at
Rail Engineering also governs the
management of employee health.
Rail Engineering has a
comprehensive lifestyle
management programme (LMP) in
place, as well as voluntary HIV
counselling and testing (VCT)
programme to expand HIV/Aids
awareness and to support
employees infected with the
disease. During the year 80% of
the total workforce was trained in
HIV/Aids management and the
Transnet lifestyle management
programme (LMP), while 60% of
employees participated in the VCT
programme, reflecting the success
of the HIV/Aids campaign.
The number of employees
participating in the LMP increased
significantly in the year.
TRANSNET ANNUAL REPORT 2007 103
SHEQ performance Target Actual Actual Actual
Indicator 2008 2007 2006 2005
Cost of risk as %
of revenue (%) 1,20 1,31 1,20 1,62
DIFR 1,50 1,77 2,60 2,14
NOSA rating (%) 80 75 70 65
Rail Engineering employee
fatalities 2007 2006 2005
Fatalities on premises (suicide excluded)
Injuries 1 – –
Diseases – – –
Road traffic (public roads) 1 – –
Total 2 – –
Employee safety
Safety in the everyday operations
at Rail Engineering has a direct
impact on employees and the public
(for public safety refer below).
Safety is an integral part of the
overall SHEQ management system.
Strong focus is also given to
contractors’ adherence to health
and safety protocols.
The integration of Rail
Engineering’s maintenance depots
necessitated rigorous and
improved safety awareness and
competency levels. As a result
thereof Rail Engineering
maintained high safety
performance levels during the year.
Safety performance is constantly
monitored and managed with
employees receiving regular
training in operational health and
safety awareness and proficiency.
During the year specific emphasis
was also given to meeting the
requirement of the National
Railway Safety Regulator Act, 16 of
2002, and its regulations.
CARING FOR THE COMMUNITIES
WHERE WE OPERATE
Corporate social investment (CSI)
Rail Engineering has embarked on
strategic corporate social
investment programmes and
believes in making a positive
impact on the lives of communities
in its area of operation. The
Company is also committed to
the responsible management of
environmental and social impacts
resulting from its operational
activities. This includes partnering
with communities and other
development agencies to help
foster sustainable community
development.
During the year, Rail Engineering
allocated a portion of its CSI
budget to the maintenance of the
Transnet Foundation’s Phelophepa
healthcare train. This formed part
of Rail Engineering’s contribution
to the 16-coach train which delivers
comprehensive, affordable and
accessible healthcare to
communities with no health
services or with poor healthcare
infrastructure.
Rail Engineering also continued
to support the Saints wheelchair
basketball team, the Northern
Titans deaf cricket week, the Blue
Bulls Youth Club development
programme and the Tshwane Youth
Orchestra.
Rail Engineering has a moral and
legal duty to ensure the health and
safety of all employees. This
obligation also extends to the
health and safety of clients and the
communities in which they operate.
We are pleased to report that no
public fatalities have occurred as
a result of Rail Engineering’s
operations since 2001.
Community impact and public
health and safety
At Rail Engineering the health
and safety of clients and the
communities in which it operates
form part of broader risk
management. No public fatalities
have occurred as a result of
Rail Engineering’s operations
since 2001.
RAIL ENGINEERING continued
104 TRANSNET ANNUAL REPORT 2007
MANAGING OUR ENVIRONMENT
RESPONSIBLY
At Rail Engineering, focus on
environmental issues is an integral
part of overall SHEQ management.
During the year a concerted effort
to minimise its environmental
impact resulted in the further
rehabilitation of polluted sites and
the implementation of preventative
measures. Regular environmental
impact assessments (EIAs) are
being performed at all plants and
maintenance depots.
PROSPECTS
Committing to stakeholder value
Rail Engineering aims to develop a
South African rail industry in which
all supply chain participants – both
local and international – can
operate seamlessly and
synergistically, thereby culminating
in the formation of an effective and
efficient rail service to the benefit
of the overall economy.
In anticipation of the potential
build-up in transportation demand
ahead of 2010, Rail Engineering will
focus on the design and
development of the next generation
of electric commuter coaches and
will fast-track production capacity
and technology improvements in
the manufacture of 10M5
passenger coaches.
Skills training programmes,
particularly those relating to
technical competencies, will be
an important focus area for Rail
Engineering in the year ahead. This
will be coupled with specific OEM
partnerships to transfer skills and
technology for new rolling stock
projects.
Locomotive building capacity is
currently being expanded to
meet the growing demand and the
integration of Freight Rail’s
Auxiliary Equipment structure into
Rail Engineering is scheduled to
take place during 2007.
TRANSNET ANNUAL REPORT 2007 105
Smarter technology and
proper training help
reduce production costs
The wheel business is
one of the division’s
eight product-focused
businesses
106 TRANSNET ANNUAL REPORT 2007
Transnet National Ports Authority bought two tug boats for the Durban Port during the year
TRANSNET ANNUAL REPORT 2007 107
National Ports Authority plans to spend approximately R18,5 billion in the next five years upgrading infrastructure in the seven ports it manages
Revenue up
12% to
R6,1 billion
R18,5 billion
EBITDA up
9%
Five-year capital
expenditure plan
Financial overview March March
2007 2006 %
R million R million change
Salient features
Revenue 6 107 5 438 12
Depreciation and amortisation 418 439 (5)
EBITDA 4 627 4 242 9
Operating profit 4 484 4 075 10
Profit before taxation 4 346 3 732 16
Net asset value 17 484 14 627 20
Managed assets 17 976 15 693 15
Profitability measures
Operating margin (%) 73,4 74,9 (2)
Return on net assets (%) 24,9 25,5 (2)
Return on managed assets (%) 24,9 26 (4)
Capital expenditure
Total 1 026 783 31
Employees
Number of employees 3 251 3 236 0,4
Revenue per employee 1,88 1,68 12
BUSINESS OVERVIEW
Transnet National Ports Authority
(National Ports Authority) is
responsible for the safe, efficient
and effective economic functioning
of the national ports system which
it manages, controls and
administers on behalf of the South
African Government. National Ports
Authority’s core services as
stipulated in section 11 of the
National Ports Act, 12 of 2005, are:
• The planning, provision,
maintenance and improvement
of port infrastructure, including
breakwaters, seawalls,
channels, basins, quay walls,
jetties, roads, railways and the
infrastructure used for the
provision of water, lights,
power, sewerage and similar
services;
• The provision or coordination
of marine-related services
including pilotage, tug services
and berthing; and
• The provision of port services,
including the management of
port activities and the port
regulatory function at all South
African ports.
National Ports Authority provides
its services to port users. These
include terminal operators,
shipping lines, ship agents, cargo
owners and the clearing and
forwarding industry.
National Ports Authority owns and
manages the seven ports within
South Africa: Saldanha Bay, Cape
Town (including Port Nolloth), Mossel
Bay, East London, Port Elizabeth,
Durban and Richards Bay. The Port of
Ngqura, currently under construction,
is the eighth port under National
Ports Authority’s control.
The National Ports Act became
effective on 26 November 2006,
ushering in a new regulatory regime
for South Africa’s ports requiring
the National Ports Authority to
fulfil various statutory obligations
and to become subjected to
oversight by an independent ports
regulator. During the latter part of
the year leading into the new year,
National Ports Authority reviewed
its current processes and practices
in ensuring that the division is
compliant with the requirements
of the Act.
Performance highlights
Revenue increased by 12% to
R6 107 million, compared to
R5 438 million in the previous year.
Operating profit increased by
10%, to R4 484 million from
R4 075 million.
The following operational
achievements were recorded during
the year:
• The widening and deepening of
the Durban entrance channel
was approved and preparatory
works commenced;
The contract for the remaining
civil works required for the port
of Ngqura phase 1 was awarded,
and progress is on schedule for
completion by 2008;
• A capital-management projects
office was established;
• Specific targets and
measurements of vessel
changeover time were
instituted at the Durban
Container Terminal as part of
the Vulindlela programme;
• Leading-practice capital
management processes were
introduced to manage capital
projects effectively during the
execution of the capital plan;
• 14% growth in containers and
vehicles handled increasing by
25%;
• Customer service centres were
established at the ports of East
London and Cape Town;
• The first release of PortsOnline
was delivered to the ports of
Port Elizabeth, East London,
and Mossel Bay. These ports
are now able to submit cargo
documents electronically to
National Ports Authority;
• National Ports Authority
implemented key performance
indicators (KPIs) at all the ports;
• The Ports Act alignment
programme was initiated to
prepare and equip National
Ports Authority to meet the
promulgations of the Ports Act
and Ports Regulator;
• An employee wellbeing
programme was launched;
• The marine pilot training
programme was expanded and
now has 12 trainees;
• An agreement to sponsor a
chair (learnership) for port and
coastal engineering was
concluded with the University
of Stellenbosch;
• Increase in oil and gas activities
has resulted in oil rigs being
handled at the Port of Cape
Town;
• Implementation of human
capital development initiatives
in accordance with the Transnet
strategy;
• The Port of Durban has
contributed significantly
towards the achievement of
savings as per the Vulindlela
strategic sourcing initiative;
108 TRANSNET ANNUAL REPORT 2007
NATIONAL PORTS AUTHORITYcontinued
KEYPERFORMANCE INDICATORS (KPIs) – NATIONAL PORTS AUTHORITY
2007 2007 2008 % change
Target Actual Performance Target vs actual
Financial
Revenue (R million) 5 915 6 107 Achieved 6 881 13
EBITDA (R million) 4 383 4 627 Achieved 5 125 11
Infrastructure
Capital expenditure (R million) 1 964 1 026 Not achieved 3 949 285
Efficiency
Berth Occupancy (%) 58,9 66,0 Achieved 66,0 –
TRANSNET ANNUAL REPORT 2007 109
• A 99,97% availability of the
lighthouses was achieved
during the year, against a
recommended availability of
99,8% of lALA (International
Association of Marine Aids to
Navigation and Lighthouse
Authorities); and
• Light House Services (LHS)
signed a cooperation
agreement with Malawi, for the
provision of aids to navigation.
LHS was also contracted to
provide and install AtoN
equipment for the Moma Jetty
in Mozambique.
ACHIEVING RETURNS GREATER
THAN THE COST OF CAPITAL
Financial management
Financial performance
Revenue increased by R669 million
or 12%, which includes an average
tariff increase of 1,3% and a
volume increase of 15,5%. This is
mainly as a result of increased
volume activity amounting to
R539 million and increases of
R20 million in marine services
(pilotage, berthing, floating craft).
Operating cost before depreciation
and amortisation increased by
R283 million or 24%. These costs
include an additional research and
development cost of R35 million and
an additional cost of R26,5 million
for dredging maintenance.
Accounting for investment property
in terms of IAS 40 has contributed
R292 million to the year’s
operating profit.
Return on net asset value
decreased from 25,5% to 24,9%.
Marketplace and customer
management
Unlike most European ports, each
South African port has a natural
hinterland with a defined market
that largely determines the nature
and types of cargo handled.
The seven operating commercial
ports managed and controlled by
National Ports Authority on a
2 954 km coastline form an integral
part of South Africa’s transport
network. They are linked to the road
and rail systems that serve the
interior of the country and extend
beyond its borders. Road hauliers
operate between the South African
ports and into neighbouring African
countries, complementing the
regular rail services, while coastal
feeder services provide for
coastwise traffic.
In addition, National Ports
Authority is playing a pivotal role
in international trade through the
provision of suitable infrastructure
ahead of demand. National Ports
Authority held various marketing
and promotional activities for each
port and hosted international port
delegations mainly from the USA,
China, Korea and Europe. This
provides customers with access
to suitable foreign ports of final
destination. Through this
promotion National Ports Authority
has also instituted numerous ‘sister
port’ agreements, facilitating
information sharing between the
South African ports and other ports
worldwide.
Operations management
The National Ports Authority
operations plan outlines National
Ports Authority’s actions in the year
ahead to improve port operations
in the following areas.
• Operational efficiency: The
draft Terminal Operations
Agreement has been
completed. The document
contains efficiency measures
and facilitates the measuring
of operational efficiencies at
terminals as well as marine
services on a monthly basis.
• The five-year investment plan
has been updated. The revised
plan addresses operational
needs, the improvement and
replacement of obsolescent
equipment and infrastructure,
and the provision of additional
cargo handling capacity to
satisfy growing demands.
• Communication platform:
Publications, media briefings
and communications plans have
been initiated.
• Cargo and information flows:
A National Ports Authority web
portal has been developed to
facilitate a paperless port
environment.
• Customer service centres: The
design of customer service
centres for all ports has been
completed and implemented at
Durban, East London, Port
Elizabeth and Cape Town.
• Safety and security: Phase 1
of the upgrades has been
completed at all ports.
Supply management and BBBEE
National Ports Authority’s supply
management focuses on the
communication of the strategic
direction of procurement within
the organisation and ensures good
governance. It also institutionalises
the integration of efficient
sourcing activities to deliver
optimal supply chain value.
In line with supply management
policies formulated by Transnet in
the new Group policy framework,
National Ports Authority has
introduced changes to enhance
productivity within its procurement
processes. National Ports Authority
is currently implementing ISO
standards to support compliance,
establish contracts and service
level agreements to curtail
spending and enhance service
value. In this way National Ports
Authority is aligning all
procurement objectives with
Transnet’s strategy and timelines.
National Ports Authority
management is committed to
address operational challenges
proactively in the coming year.
These include the adherence to
proper procurement procedures
so as to foster a better culture of
compliance and to facilitate the
roll-out of standardised reporting
structures.
National Ports Authority has
successfully sustained its business
in view of radical social
transformation since 1994. Not
only has the Company reformed its
staffing profile in line with broad-
based black economic
empowerment (BBBEE), but it has
also restructured its business
processes to meet the challenges
of the 21st century with efficiency,
advanced technology and world-
class standards.
ASSURING SOUND
ACCOUNTABILITYAND
GOVERNANCE
National Ports Authority is
dedicated to sound corporate
governance compliant with the King
II Code of Corporate Governance,
the Companies Act and the Public
Finance Management Act (PFMA).
No contraventions of the PFMA
were reported to management
during the year.
Strategic direction
National Ports Authority’s strategic
objectives for the next year include:
• Maintaining and growing
national port infrastructure, by
expanding resource capacity to
harness domestic and
international trade growth
opportunities, while reducing
the costs of port management.
Strategic imperatives in
achieving this objective include:
– Optimising institutional
processes for effective
performance and delivery;
– Developing human capital
potential by initiating marine
operations learnerships,
implementing engineering
career ladders and
establishing the Port
Academy School of Ports;
– Increasing financial capacity
to afford and fund the capital
investment programme;
– Introducing a capital
management projects office;
– Implementing key
performance indicator (KPI)
management to measure
operational performance;
– Implementing an HIV/Aids
awareness programme;
– Preparing to fulfil the
National Ports Authority’s
functions as set out in the
National Ports Act, including
the introduction of new
systems for controlling port
services through agreements,
licences and permits, and for
managing port property;
– Preparing revised port rules
to be issued in terms of the
National Ports Act; and
– Preparation for economic
regulation of the ports by the
Ports Regulator.
• Enhancing National Ports
Authority’s market position as a
competitive international ports
management entity through
strategic value-add initiatives.
Strategic imperatives in this
regard include:
– Implementing National Ports
Authority’s portal,
PortsOnline;
– Refining customer delivery
and improving customer
satisfaction;
– Establishing customer service
centres at all ports; and
– Implementing a real estate
strategy.
Risk management
National Ports Authority’ risk
management process is aligned
with the ERM framework, which
provides for a holistic and
consistent approach to the
identification, assessment, control
and management of risks.
National Ports Authority thereby
seeks to manage all risks by
utilising opportunities to create
benefits while effectively managing
the potential downsides, therefore
ensuring that shareholder value is
enhanced.
NATIONAL PORTS AUTHORITYcontinued
110 TRANSNET ANNUAL REPORT 2007
2007 BEE procurement
BEE procurement R330 million
32%
68%
Non-BEE procurement R700 million
TRANSNET ANNUAL REPORT 2007 111
DEVELOPING WORLD-CLASS
INFRASTRUCTURE
Port infrastructure
National Ports Authority’s
performance is underpinned by
global trends and demands that
necessitate the continuous upgrade
and provision of infrastructure
capacity and increased performance
levels. World-class engineering
technology, provision, maintenance
and timely replacement enable this
service delivery.
Apart from the high standards set
for National Ports Authority’s
engineering technology, the
division places emphasis on
methodologies and goals for
measuring infrastructure
maintenance as set out in the
Infrastructure Maintenance Manual
(IMM). Maintenance programmes are
prepared and approved at port
level. Risk management focuses on
safety, infrastructure availability,
appearance, reliability, legal
requirements, life-span and cost.
Capital investment
Capital spending for the year
amounted to R1 026 million
compared to R783 million in the
previous year.
Whilst capital spending has
improved compared to the previous
year, the business experienced
several setbacks. These include
EIA challenges with regards to
expanding the container terminal
in Cape Town and delays in settling
dispute claims for the Port of
Ngqura.
The capital expenditure for the next
year includes:
Key risks at National
Ports Authority National Ports Authority’s planned response
Regulatory risk Alignment with the requirements of the National Ports Act through key
stakeholder engagement on policy matters.
Ensuring that National Ports Authority fulfils its function as a landlord.
Existing capacity constraints Providing port infrastructure capacity ahead of demand by delivering
capital projects on time.
Increase asset utilisation.
Measuring and monitoring the performance of port operators and service
providers to ensure an efficient and effective port system.
Operational safety Continuously review the standard operating procedures for relevance,
adequacy and effectiveness.
Implement business continuity management for emergencies and regular
testing of contingency plans.
Skills development and retention Ensure retention of critical skills such as procurement, project
management, commercial and engineering through the implementation
of the talent management framework.
Roll-out of training by the Port Academy.
ENGAGING OUR STAKEHOLDERS
FOR MUTUAL BENEFIT
In line with the greater demand
from stakeholders for corporate
accountability, National Ports
Authority honours its
responsibilities towards
individuals, the environment and
the communities within which it
operates.
As part of the Transnet Sustainability
Platform the National Ports
Authority Sustainability Steering
Committee plays a key role in
identifying both stakeholders and
principle-issue areas.
Understanding the expectations
of different stakeholders and
engaging with them through
regular, open communication and
consultation, remains the basis for
National Ports Authority’s decision-
making.
Projects R million
Widening and deepening of
Durban entrance channel 545
Pier 1 resurfacing and berth
deepening: Durban 412
Acquisition of Salisbury Island
for future port expansions 300
Y Site – Durban container
terminal 110
Purchase of two tugs: Durban 95
Construction of Port Ngqura 287
Operationalising of
Ngqura for containers 454
Expansion of Cape Town
container terminal 466
Saldanha IOT execution
Phase 1B expansion
(1 to 47 mtpa) 111
Security Phase 2: All ports 108
Other projects 1 061
Total 3 949
National Ports Authority has
planned for the following major
capital expenditure over the next
five years:
Port R million
Richards Bay 826
Durban 7 633
East London 40
Ngqura 4 679
Port Elizabeth 33
Mossel Bay 17
Cape Town 3 798
Saldanha Bay 260
Marine services 1 000
Other projects 249
Total 18 535
NATIONAL PORTS AUTHORITYCONTINUED
112 TRANSNET ANNUAL REPORT 2007
4 000
3 500
3 000
2 500
2 000
1 500
1 000
500
0
2006
Capital expenditure
2007 2008
7
8
3
1

0
2
6
3

9
4
9
Information and communications
technology
National Ports Authority has
instituted policies to govern logical
access, security, change control and
disaster recovery. During the year
National Ports Authority
participated in the Transnet
Business Intelligence (TBI) Project
aimed at defining a framework
whereby management could
significantly enhance the value of
information in the Transnet Group.
The goals for the next reporting
cycle include:
• Reconfiguring and integrating
ICT platforms by implementing
a web portal;
• Developing a seamless internal
infrastructure logistics
solution;
• Ensuring compliance with
safety, security and
environmental standards;
• Meeting PFMA and IFRS
reporting requirements;
• Centralising IT and IT
operations demand to optimise
economies of scale;
• Simplifying National Ports
Authority’s infrastructure and
adhering to Group hardware,
operating systems and
information standards to
reduce cost;
• Improving the productivity of
IT employees through the
reengineering of IT processes
and standards;
• Implementing a strategic
enterprise management module
at National Ports Authority in
line with National Ports
Authority’s strategic initiatives;
• Reviewing, designing,
implementing and enforcing an
effective National Ports
Authority IT sourcing strategy;
and
• Consolidating and sharing
information services across
operating divisions to better
manage risks and maximise
revenue opportunities.
CREATING A WORKPLACE WHERE
OUR PEOPLE CAN EXCEL
People management
Employee numbers decreased by
1% during the year. The total
staff complement amounts to
3 251 employees, excluding
contract workers.
Employment equity
National Ports Authority is
committed to employment equity.
In National Ports Authority,
employment equity does not happen
in isolation but is an integrated
activity and is implemented within
the Transnet HR strategy, with more
emphasis on talent management
and capacity development. The
framework to guide employment
practices is achieved through the
Employment Equity Act. In National
Ports Authority black employees
constitute 68% of the total staff
complement. National Ports
TRANSNET ANNUAL REPORT 2007 113
succession planning in the
infrastructure environment.
Skills 2007 2006
development R million R million
Training, bursaries
and grants 29 23
% of payroll costs (%) 3,7 3,4
Talent management
The roll-out of the Group human
resource strategy gained momentum
during the year, with talent
management initiatives forming the
foundation for targeted leadership
development programmes.
Performance and reward
National Ports Authority is
dedicated to developing a
performance management and
reward system that drives a high
performance culture; is aligned with
the current Transnet performance
and reward programme and,
handles non-compliance matters.
The system will assist in managing
poor performers and build a
sustainable organisational
performance culture.
To actualise this commitment, all
National Ports Authority employees
participate in biannual performance
discussions and non-performers
undergo a performance improvement
process for six months. In-house
training also plays a pivotal role in
improving employee performance.
Human resource enablement
In the year ahead renewed emphasis
will be placed on integrating the
SAP HR software, which forms the
backbone of National Ports
Authority’s human resource
management systems.
Employee relations
National Ports Authority leadership
is consciously aware of the risks
and disruption associated with
labour unrest. Every effort is made
to comply with the Labour
Relations Act and to open channels
for employee involvement in
decision making.
Asian (A) African (B) Coloured (C) Black (A+B+C) White Total Total
Employees F M F M F M F M F M F M F+M
Management 28 89 134 161 31 91 193 341 16 358 209 699 908
Non-managerial 38 107 228 939 102 260 368 1 306 85 584 453 1 890 2 343
Total – 2007 66 196 362 1 100 133 351 561 1 647 101 942 662 2 589 3 251
2% 6% 11% 34% 4% 11% 17% 51% 3% 29% 20% 80% 100%
Management 16 60 74 99 24 41 114 200 18 288 132 488 620
Non-managerial 90 160 222 950 140 312 452 1 422 143 599 595 2 021 2 616
Total – 2006 106 220 296 1 049 164 353 566 1 622 161 887 727 2 509 3 236
3% 7% 9% 33% 5% 11% 17% 51% 5% 27% 22% 78% 100%
F = Female M = Male
Authority’s female profile is 17%
with 59% of management cadre
represented by black managers of
whom 23% are women.
Skills development
Whilst the availability of critical
and scarce skills remains a
challenge for National Ports
Authority, the business has
improved trainee requirements and
is expanding the trainee pipeline.
Skills development remains a
strategic priority for the
organisation, with a focus on
building National Ports Authority’s
marine operations and engineering
capabilities. This is particularly
evident in the successful
implementation of the integrated
marine pilot training programme,
which is administered in
association with a Netherlands-
based partner institution, STC
(Shipping and Transport College).
The introduction of engineering
career ladders has resulted in a
targeted approach to both
employee development and
Employee wellness and HIV/Aids
National Ports Authority has a
comprehensive workplace health
programme in place, focusing on
occupational health and primary
healthcare. It also offers a service
to help employees manage personal
and work related problems that
could negatively impact their
performance.
Occupational health and primary
healthcare programme
The occupational health and primary
healthcare programme relates to
medical surveillance; appropriate
staff placement and, ongoing
maintenance of employee health.
Employee assistance programme
(EAP)
The employee assistance
programme (EAP) supports
employees with personal and work
related problems that adversely
affect their performance. The EAP
offers confidential services that
provide proactive and reactive
skills assistance for self-
management. Consultation is
provided to line management and
labour to assist in dealing with
troubled employees.
HIV/Aids management programme
The HIV/Aids Programme focuses
on HIVas a chronic condition. To
achieve lasting control over new
infections within the Company.
National Ports Authority is
implementing an Aids Management
System (AMS 16001), which
formalises activities to review
current practices. This system was
developed as a response to an
NATIONAL PORTS AUTHORITYcontinued
114 TRANSNET ANNUAL REPORT 2007
internationally recognised HIV
management standard and will
apply only to those HIV
determinants which the
organisation can control and
influence. With introduction of this
system, National Ports Authority
will be able to improve its
management of HIV-related risks as
well as improve sustainability and
business performance.
Employee safety
Safety at National Ports Authority
is governed by the SHEQ policy in
the interests of employees and the
public (for public safety refer
page 115).
National Ports Authority is in the
process of integrating SHEQ
management systems across the
various ports. These include: EMS
ISO 14001, OHSAS 18001 and
AMS 16001 and are aimed at
minimisation of risk impacts and
facilitation of the continual
improvement of performance
quality. Systems are continuously
monitored to facilitate proper
implementation and ongoing
improvement.
During the year, National Ports
Authority performed within set
SHEQ targets and was fully
compliant with the Safety Act. In
addition, National Ports Authority
received several Transnet Safety
Competition Awards as well as the
acclaimed NOSA platinum five-star
grading.
CARING FOR THE COMMUNITIES
WHERE WE OPERATE
Corporate social investment (CSI)
National Ports Authority embarked
on various social investment
initiatives within communities close
to each port, with a primary focus
on education, environmental
management and HIV/Aids.
Education
National Ports Authority’s
educational initiatives focus on
schools that offer maritime studies.
National Ports Authority’s
SHEQ performance Target Actual Actual Actual
Indicator 2008 2007 2006 2005
Cost of risk as %
of revenue (%) 1,50 1,66 1,90 1,89
DIFR 1,00 1,11 1,10 1,26
NOSA rating (%) 90 86 89 87
National Ports Authority
employee fatalities 2007 2006 2005
Fatalities on premises (suicide excluded)
Injuries 1 – 2
Diseases – – –
Road traffic (public roads) – – –
Total 1 – 2
TRANSNET ANNUAL REPORT 2007 115
Public fatalities
2007 2006 2005
Fatalities on
premises (criminal
activity and
suicide excluded) 3 1 1
Road traffic
(public roads) – – –
Total 3 1 1
MANAGING OUR ENVIRONMENT
RESPONSIBLY
Environmental management
All ports started developing and
implementing the Environmental
Management System (EMS ISO
14001) as early as 2002 and most
received certification by 2005.
The EIA process at National Ports
Authority forms an integral part of
any planned development with
specific emphasis on engagement
of interested and affected parties.
During the year, NPA supported
programmes linked to the National
Marine Week, allowing other
community-based organisations to
co-host programme events.
involvement ensures that
communities benefit by improving
levels of mathematics and science
for students and teachers.
HIV/Aids
National Ports Authority’s HIV/Aids
awareness initiatives support
community organisations that
provide services and care to
HIV/Aids infected community
members. During the year National
Ports Authority made a once-off
donation of five vehicles to
different communities. Non-
monetary assistance by
volunteering National Ports
Authority employees served these
organisations as part of the
corporate social investment
programme.
Community impact and public
health and safety
National Ports Authority
is consciously aware of the
importance of monitoring and
managing the impact of operations
on the communities in which it
operates. Public health and safety,
therefore, forms an integral part of
risk management.
NATIONAL PORTS AUTHORITYcontinued
116 TRANSNET ANNUAL REPORT 2007
PROSPECTS
Committing to stakeholder value
During the year, South Africa
experienced a business cycle
upswing. This trend is expected to
continue into the new year. National
Ports Authority expects that
performance in the containerised
cargo market (full import and
export) will grow by 8% in the
coming year, with the market for
empty containers growing at 15%.
These expectations are predicated
upon the following key assumptions:
• Continued positive economic
climate and a stable exchange
rate;
• The maintenance of real growth
in household consumption
expenditure of 6% well into
the next year;
• An achievement of bulk cargo
growth of 4%, mainly driven by
coal and iron ore exports; and
• An expected growth of more
than 10% in vehicle imports
and exports.
National Ports Authority expects
that business growth within the
port system will be attained
through improved collaboration
and planning of operations that are
focused on productivity monitoring
and performance measurement, as
agreed with other port users and
service providers within the port
system.
In the coming year, National Ports
Authority will focus on the
following initiatives to support the
above market opportunities:
• Rolling out specific targets and
measurements of vessel
changeover times to other
ports. These will be based on
results attained at the port of
Durban through the Vulindlela
initiative;
• Accelerating capital investment
in port infrastructure;
• Ensuring that National Ports
Authority fulfils its statutory
functions as landlord, master
planner, controller of port
navigation, and controller of
port services and port facilities;
• Implementing the ship repair
strategy;
• Developing marine operations
learnership and skills
programmes;
• Aligning National Ports
Authority’s business operations
to fulfil its functions set out in
the National Ports Act; and
• Preparing for economic
regulation.
TRANSNET ANNUAL REPORT 2007 117
National Ports Authority
owns and manages the
seven ports in South
Africa: Saldanha, Cape
Town, Mossel Bay, Port
Elizabeth, East London,
Durban and Richards Bay
118 TRANSNET ANNUAL REPORT 2007
Port Terminals handled a record 3,4 million TEUs (20 foot equivalent units) in the previous year – 13% higher than last year
TRANSNET ANNUAL REPORT 2007 119
Revenue up
14% to
R4,1 billion
EBITDA up
31%
Five-year capital
expenditure plan
Transnet Port Terminals doubled investment in capital equipment to R1,7 billion during the year
R9,5 billion
Financial overview
Year ended Year ended
31 March 31 March
2007 2006 %
R million R million change
Salient features
Revenue 4 098 3 585 14
EBITDA 1 561 1 193 31
Depreciation and amortisation 336 267 26
Operating profit 1 352 911 48
Profit before taxation 1 323 893 48
Net asset value 3 994 3 002 33
Managed assets 4 570 3 231 41
Profitability measures
Operating margin (%) 33,0 25,4 30
Return on net assets (%) 33,1 29,7 11
Return on managed assets (%) 29,6 28,2 5
Capital expenditure
Total 1 740 776 124
Employees
Number of employees 5 049 4 853 4
Revenue per employee 0,81 0,74 10
120 TRANSNET ANNUAL REPORT 2007
PORTTERMINALS continued
BUSINESS OVERVIEW
Transnet Port Terminals (Port
Terminals) manages 15 cargo
terminal operations, situated across
six South African ports. With a staff
complement of 5 049, Port
Terminals is the dominant terminal
operator in each of these ports
and interfaces with road and rail
transport to provide an efficient
and reliable service to a wide
spectrum of customers, including
shipping lines and cargo owners.
Port Terminals’s operations are
divided into four cargo sectors
namely: container, dry bulk, break-
bulk and automotive.
Performance highlights
The following operational
achievements were recorded
during the year:
• Durban Container Terminal
handled two million TEUs
(20 foot equivalent units),
compared to 1,7 million TEUs
in the previous year, an increase
of 18%;
• Port Terminals has made
significant progress in
developing a second container
terminal in Durban (Pier 1),
which commenced operations in
May 2007. The terminal will be
fully operational, with an annual
capacity of 720 000 TEUs
by December 2007;
• There has been a noticeable
improvement in safety
standards and working
procedures across all of Port
Terminals’s operations, with a
number of operations achieving
NOSCAR status and/or ISO
14001 compliance;
• Port Terminals’s intention to
provide customers with
improved operational
performance and to create
capacity ahead of demand was
evidenced by its investment in
capital equipment and projects
amounting to R1 740 million
(more than double that of the
previous year). Altogether 51%
of the investment was allocated
to expansion projects;
• Due to the continued growth in
container traffic, coupled with
unusual weather conditions,
Port Terminals experienced a
period of severe congestion at
the Durban container terminal.
The problem was satisfactorily
managed and the threat of a
congestion surcharge did not
materialise; and
• During September 2006, a
portion of the Saldanha ship
loader structure suffered
a structural failure that
resulted in export operations
being halted for a period of
19 days. The fact that the plant
was restored within a 19-day
period was a tremendous
achievement and this was
followed by record loading
performance to fully catch up
the backlog by December 2006.
ACHIEVING RETURNS GREATER
THAN THE COST OF CAPITAL
Financial management
Financial performance
Revenue increased by 14% year-
on-year. Profit before taxation
improved year-on-year by 48%. The
current year’s profit was positively
affected on by fair-value
adjustments (R135 million) arising
from forward exchange cover
purchased to meet foreign
commitments for the acquisition
of container handling equipment.
The containment of percentage
cost increases, to less than that of
revenue growth resulted in the
operating margin increasing from
25,4% to 33,0%, also impacted on
by the abovementioned adjustment.
Marketplace and customer
management
Port Terminals is committed to
becoming a customer-centric
organisation, with significant
progress having been made in
entrenching this new organisational
culture. A customer survey that
determines existing customer
perceptions has been completed
and the results indicate that a
customer-centric culture is vital
to the future of Port Terminals.
A customer segmentation process
has been completed, which
differentiates customers into
three distinct segments: strategic
KEYPERFORMANCE INDICATORS (KPIs) – PORTTERMINALS
2007 2007 2008 % change
Target Actual Performance Target vs actual
Financial
Revenue (R million) 4 052 4 098 Achieved 4 740 16
EBITDA (R million) 1 635 1 561 Not achieved 1 844 18
Infrastructure
Capital expenditure (R million) 1 415 1 740 Achieved 3 136 80
Efficiency
Moves per crane hour – Durban container terminal 20 17 Not achieved 22 29
– Cape Town container terminal 20 21 Achieved 20 –
Moves per ship hour – Durban container terminal 32 33 Achieved 35 6
– Cape Town container terminal 33 33 Achieved 33 –
Tons loaded per hour – Iron ore terminal 4 349 3 951 Not achieved 4 900 24
Tons loaded per hour – Richards Bay dry bulk terminal 817 711 Not achieved 750 5
Tons unloaded per hour – Richards Bay dry bulk terminal 508 502 Not achieved 525 5
TRANSNET ANNUAL REPORT 2007 121
customers, key customers and ad
hoc customers. Service offerings
are adapted to suit customer
needs. In addition, structures have
been implemented to provide
effective customer service both
from head office and the terminals.
Port Terminals has launched
customer engagement and change
management processes, based on
the input from strategic customers.
It is anticipated that these
processes will result in improved
service delivery to customers in
accordance with customer needs
and requirements.
A call centre has been implemented
and is processing 8 000 calls per
month.
Operations management
During the year, the container
sector handled 3,4 million TEUs
versus 3,0 million TEUs in the prior
year – a 13% increase. This
increase was achieved despite
the capacity and performance
challenges experienced during
the peak season.
The closure of Pier 1 container
terminal in Durban for the fast
track development of a fully-
fledged container terminal did not
have a negative impact on capacity
due to the use of the multi-product
berths to supplement the container
capacity in Durban. Pier 1 is now
functional.
The operations performance of all
container terminals showed marked
improvements with previous
records for “volumes handled per
day” being exceeded. The Vulindlela
project and operations training by
Sri Lankan trainers has contributed
to an improved performance at
Durban Container Terminal (DCT)
and has laid the foundation for
further productivity improvement
in the next year. The container
terminals in Port Elizabeth and
Cape Town experienced high growth
in reefer container volumes and
achieved an average handling
performance of 22 container moves
per gross crane hour.
The volume handled in the
automotive sector increased to
558 218 units, an 18% increase
compared to the previous year.
This was due to favourable market
conditions, with GDP growth and
relatively low interest rates creating
higher than expected demand for
lower- to middle-priced imported
vehicles – imports account for 68%
of the total volumes.
The Durban car terminal, which is
experiencing serious capacity
problems in accommodating the
increased volumes, retained its
five-star NOSCAR rating for the
sixth year in succession.
The effectiveness of the value-
added activities in the terminals
of Port Elizabeth and Durban is a
positive step towards the
achievement of an integrated
service offering to original
equipment manufacturers (OEMs).
The multi-purpose sector volumes
were 4% higher than the prior year
due to a general increase in demand
for imported commodities. Export
volumes experienced a small
decline, mainly due to a drop in the
export of steel products as a result
of the increased local consumption
thereof. The increase in volume
through the Richards Bay multi-
purpose terminal has assisted in
the achievement of a welcome
turnaround in the financial
performance of this terminal.
Bulk volumes were negatively
impacted on by a 25% reduction in
woodchip exports through Richards
Bay due to shortage of supply and
lower than expected magnetite
export volumes, also through
Richards Bay, due to difficulties in
securing sufficient rail transport
to the port. Despite the above, the
sector achieved a 2% growth in
volume. A significant portion of
the planned capital expenditure is
aimed at increasing the capacity
in this sector.
Supply management and BBBEE
Port Terminals abides by Transnet’s
BBBEE policy as outlined in
Transnet’s detailed procurement
procedures (DPP) and will comply
with the Department of Trade and
Industry (DTI) codes of good
practice 500 and 600 as well as
the DTI’s BEE scorecard. The
certification of BEE companies
will be done through credible
accreditation companies that
comply with the DTI’s codes of
good practice.
Port Terminals will also engage in
enterprise development initiatives
where emerging suppliers and black
emerging micro-enterprises (EMEs)
will be taken through a process of
skills transfer and development,
PORTTERMINALS continued
122 TRANSNET ANNUAL REPORT 2007
enabling them to participate in the
wider economic activity of the
country. Port Terminals’ supplier
management strategy also
includes annual awards for
suppliers that have shown
significant transformation. These
include black EMEs that have most
improved performance and
suppliers that have implemented
successful joint ventures and
strategic alliances.
During the year, Port Terminals
spent 44% of its total procurement
expenditure with BEE suppliers.
ASSURING SOUND
ACCOUNTABILITYAND
GOVERNANCE
In accordance with the King II Code
of Corporate Governance, the
Companies Act and the Public
Finance Management Act (PFMA),
Port Terminals adheres to good
corporate governance and risk
management as a key business
objective. As such Port Terminals
has established a business risk and
corporate governance portfolio
within the organisation, with an
executive level reporting
framework. Other key governance
structures include the
establishment of a Compliance
Officer function, Corporate
Governance and Policy Committee
and Risk Management Committees
at strategic and operational levels.
Port Terminals embarked on several
initiatives to enhance its corporate
governance premium. These
initiatives included:
• Implementing the Transnet
Fraud Prevention Plan;
as an efficient and cost
competitive operator; and
• Creating a performance
management culture and skills
base that enables the execution
of Port Terminals’ business
plan.
The Port Terminals management
team has developed clear
interventions that will deliver the
abovementioned objectives
and ensure that the business is
fully aligned to, and supports, the
overall vision and objectives of
Transnet as outlined in the
Corporate Plan.
Risk management
At Port Terminals an Enterprise-
wide Risk Management (ERM)
Framework has been adopted and
implemented at both strategic and
operational levels. The ERM
framework helps inculcate vigilant
risk management.
The risk methodology comprises
risk identification, assessment,
control and response, risk
governance and, monitoring and
reporting. The framework provides
discipline and structure for risk
management within Port Terminals
and aims to improve performance
measurement by monitoring key
risk indicators and managing risk
mitigation/treatment plans.
• Institutionalising fraud
prevention and corporate
governance training
programmes;
• Rolling-out the Company’s Code
of Ethics;
• Promoting the use of the Fraud
Hotline to employees, suppliers
and customers;
• Communicating key messages
to employees at an operational
level through industrial theatre;
and
• Developing a policy and
procedures manual.
No material corporate governance
breaches occurred. In all instances
where non-conformances have been
identified, appropriate
management action has been taken.
Strategic direction
Port Terminals’ strategic objectives
include:
• Entering into strategic
partnerships to exploit new
commercial opportunities that
grow the Port Terminals
revenue base;
• Understanding customer
requirements and translating
these into consistent and
personalised service offerings
that exceed customer
expectations;
• Creating capacity ahead of
demand;
• Containing increases in
operating costs per unit of
volume at less than the CPIX
cost increase;
• Maintaining Port Terminals’
market dominance by ensuring
the organisation is recognised
2007 BEE procurement
BEE procurement R710 million
44%
56%
Non-BEE procurement R910 million
TRANSNET ANNUAL REPORT 2007 123
Key risks at Port Terminals Port Terminals’ planned response
Existing capacity constraints Aligning capacity with customers’ needs and demands.
Creating capacity ahead of demand through timeous capital investment.
Optimising asset utilisation.
Regulatory risk Mitigating risks associated with the impact of the regulatory environment
on the commercial activities of Port Terminals through engagement with
key stakeholders.
Compliance with relevant laws, standards and rules.
Efficient service delivery Matching the productivity of all operations, measured in throughput units
per hour, with that of leading international terminal operators.
Integrating Transnet service offerings along mainstream corridors to unlock
the competitive advantage.
Investing in people, systems and equipment to ensure efficient service
delivery.
Ensuring that service levels exceed the expectations of customers.
Operational safety Creating and enforcing the culture of a safe working environment through
training, discipline and consequence management.
Pursuing ISO certification and rewarding excellent safety performance.
Human capital constraints Attracting and retaining employees with appropriate competencies and
a high-performance work ethic through appropriate remuneration and
incentive schemes.
Roll-out of the Talent Management Framework.
ENGAGING OUR STAKEHOLDERS
FOR MUTUAL BENEFIT
During the year the
Communications Committee played
a key role in identifying
stakeholders and principle issues,
as part of the roll-out of the Port
Terminals Sustainability Platform.
Port Terminals’ efforts have been
focused on improving employee
development, rallying strategic
stakeholders around the
organisation’s vision and promoting
customer centricity.
Improving the reputation of the
organisation through strategic
initiatives and corporate
communication has had a positive
affect on the supportive behaviour
of stakeholders, which has in turn
assisted in the achievement of
strategic objectives.
In the year ahead Port Terminals will
continue to strengthen
relationships with internal and
external stakeholders through
transparent communication.
DEVELOPING WORLD-CLASS
INFRASTRUCTURE
Port infrastructure
The planning and development of
port infrastructure is undertaken on
a coordinated basis across Transnet
to ensure that the capital
investment programme of divisions
such as Port Terminals, Freight Rail
and National Ports Authority is
aligned across the operations and
with the needs of the economy.
Economic growth forecasts,
coupled with the need to upgrade
existing infrastructure,
have necessitated an extensive
refurbishment, replacement and
expansion programme which is fully
budgeted for within the Transnet
Corporate Plan.
Capital investment
Capital spending for the year
amounted to R1 740 million
compared to R776 million in the
previous year.
PORTTERMINALS continued
124 TRANSNET ANNUAL REPORT 2007
3 500
3 000
2 500
2 000
1 500
1 000
500
0
2006
Capital expenditure
2007 2008
7
7
6
1

7
4
0
3

1
3
6
Significant areas of expenditure for
the year included:
• The replacement and expansion
of equipment capacity (cranes
and straddle carriers) at the
three existing container
terminals: R427 million;
• The construction of a new
container terminal in Durban
at Pier 1: R399 million;
• The refurbishment and
expansion of the iron ore
export facility at Saldanha Bay:
R372 million; and
• The refurbishment and
expansion of the Richards Bay
Bulk terminal: R209 million.
Port Terminals will implement a
robust capital expenditure
programme over the next five years
to ensure capacity is created ahead
of demand and that productivity is
improved.
The approved capital expenditure
for the next year is R3,1 billion:
Projects R million
New container
terminal at the
port of Ngqura 659
Saldanha iron ore
terminal expansion 544
New container
terminal at Durban’s
Pier 1 481
Cape Town container
capacity expansion 229
Richards Bay dry-bulk
terminal refurbishment
and upgrade 135
Refurbishment of
manganese export
facility – Port Elizabeth 120
Durban container
terminal 100
Other 868
Total 3 136
Port Terminals has planned for the
following major capital expenditure
over the next five years:
Projects R million
New container terminal
at the port of Ngqura 1 466
Saldanha iron ore
Terminal expansion 2 894
New container terminal
at Durban’s Pier 1 594
Cape Town container
capacity expansion 382
Richards Bay dry-bulk
terminal refurbishment
and upgrade 732
Refurbishment of
manganese export
facility – Port Elizabeth 295
Durban container
terminal 286
Port Elizabeth container
terminal – equipment
replacement 294
Other projects 2570
Total 9 513
TRANSNET ANNUAL REPORT 2007 125
Information and communications
technology
Port Terminals continues to
participate in the Transnet
programme to reengineer its
technology enablers and systems
as part of the broader three-year
business reengineering programme
within the Group. The two main
objectives from an information and
communications technology (ICT)
perspective are to reduce overall
ICT expenditure across the Group
and to align new investment in ICT
with leading practice.
Port Terminals’ information
technology landscape is largely
modernised and uncomplicated.
The interactive website
(www.saponet.com) launched in
2003, is widely used by industry
stakeholders for on-line container
track and trace, and records in
excess of 450 000 hits per month.
ICTchallenges at Port Terminals
include the need to further reduce
the amount of paper documentation
disadvantaged employees
constituted 77% of the Port
Terminals staff complement.
Skills development and talent
management
The high turnover rate within key
leadership positions coupled with
an ageing workforce required focus
to be directed at the need for skills
development and succession
planning during the year.
Emphasis was placed on developing
executive management and shop
floor competencies as well as
graduate placements, particularly
in the fields of engineering and
finance.
Operational and technical training
was also a key focus area for the
year. One of the key training
initiatives of the year was the
appointment of a Sri Lankan-based
training company, PMCS to assist
Port Terminals with operational
training at the Durban Container
Terminal. This is expected to result
required in the cargo import and
export industry through the use of
technology. A key focus is to simplify
documentation usage and to
provide an electronic interchange
between all parties. This will reduce
the effort of processing shipping
documentation as well as the overall
cost of doing business in the freight
transport sector.
CREATING A WORKPLACE WHERE
OUR PEOPLE CAN EXCEL
People management
Port Terminals’ staff complement
increased from 4 853 permanent
employees in 2006 to 5 049
permanent employees in 2007
Change, transformation and culture
The Transnet culture blueprint is
currently being developed and is
scheduled for implementation
during the course of the next year.
Employment equity
Port Terminals is committed to its
policy of employment equity. As at
March 2007, previously-
Asian (A) African (B) Coloured (C) Black (A+B+C) White Total Total
Employees F M F M F M F M F M F M F+M
Management 20 35 34 68 13 24 67 127 21 77 88 204 292
Non-managerial 48 352 352 2 448 94 397 494 3 197 119 947 613 4 144 4 757
Total – 2007 68 387 386 2 516 107 421 561 3 324 140 1 024 701 4 348 5 049
1% 8% 8% 50% 2% 8% 11% 66% 3% 20% 14% 86% 100%
Management 17 36 48 61 15 19 80 116 16 84 96 200 296
Non-managerial 33 345 254 2 481 69 412 356 3 238 106 857 462 4 095 4 557
Total – 2006 50 381 302 2 542 84 431 436 3 354 122 941 558 4 295 4 853
1% 8% 6% 52% 2% 9% 9% 69% 3% 19% 12% 88% 100%
F = Female M = Male
PORTTERMINALS continued
126 TRANSNET ANNUAL REPORT 2007
in improved container loading rates
in the future.
A framework has been developed
to facilitate the achievement of
skills development objectives.
One of the deliverables was the
implementation of a talent planning
programme, which involves the
identification of mission-critical
positions and the existing talent
within those positions. This has
resulted in the detection of gaps
in critical skills within the
organisation. The focus for the next
year will be the development of
mission critical talent to close these
critical skills gaps.
Skills 2007 2006
development R million R million
Training,
bursaries
and grants 38 21
% of payroll
costs (%) 2,9 1,8
The key resource challenges in the
coming year continue to be:
• The increase in skills gaps as a
result of changing technology
and work methods;
• The ‘high age’ profile within the
technical and operational
cadres; and
• The lack of specialist skills and
technical competence in critical
areas.
One of the techniques of
addressing the skills shortages
within Port Terminals is the
implementation of project teams
which focus on the filling of critical
vacancies within the organisation.
Performance and reward
Port Terminals is committed to fair
remuneration. Remuneration is
linked to performance appraisal,
thereby creating a workplace in
which employees can excel. During
the year, the new Transnet
performance Management Policy
was implemented. Career planning
will be one of the key focus areas
during the next reporting cycle and
a process is in place to ensure that
each employee has an individual
development plan.
Human resource enablement
Workplace design and human-
capital development have been
strong focus areas during the year.
Port Terminals is guided by its
legislative framework, including the
Basic Conditions of Employment
Act, the Occupational Health and
Safety Act and the Labour
Relations Act. The outputs of
the corporate organisation
development process include the
optimisation of structures, job
evaluation, a performance driven
remuneration model and business
process reengineering.
Employee relations
In addition to disciplinary,
grievance and dispute resolution
mechanisms already in place, the
division is close to finalising a
facilitated document on co-
operative relationships with labour.
Worker cooperatives are being
structured, which will assist with
additional or alternative human
resources during periods of high
volumes, additional demands or
industrial action.
The training of line management
on employee-relations skills and
practices are ongoing. This ensures
appropriate management of
disciplinary procedures and
grievances in the workplace.
Employee wellness and HIV/Aids
Employee wellness is a core
strategic focus at Port Terminals
and goes beyond legislative
compliance. The Port Terminals
health management programme has
resulted in mutual benefit for the
organisation and its stakeholders in
terms of the early detection of
health problems, prolonged work
life of employees and absenteeism
management.
Port Terminals has adopted a risk-
based approach to HIV/Aids
management. External experts have
been engaged to identify the
relevant risks and to recommend
appropriate actions.
The planned actions for the year
ahead are:
• Increasing the availability of
testing to promote the
awareness of each employee’s
HIV/Aids status;
• Encouraging employees to
enrol in Port Terminals disease-
management programme to
participate in antiretroviral
treatment; and
TRANSNET ANNUAL REPORT 2007 127
SHEQ performance Target Actual Actual Actual
Indicator 2008 2007 2006 2005
Cost of risk as %
of revenue (%) 2,20 2,70 1,30 1,35
DIFR 1,00 1,20 1,70 1,02
NOSA rating (%) 90 84 81 76
Port Terminals employee
fatalities 2007 2006 2005
Fatalities on premises (suicide excluded)
Injuries 5 4 2
Diseases – – –
Road traffic (public roads) – 1 –
Total 5 5 2
• Intensifying HIV/Aids-related
education and training
initiatives within Port Terminals.
Employee safety
Port safety at Port Terminals has a
direct impact on employees and the
public (for public safety refer
below) and management is
committed to the rigorous
implementation of an integrated
SHEQ management system. Steady
progress has been made towards
achieving ISO certification in all
terminals.
A comprehensive security strategy
has been implemented at all
terminals to attain a safe and
hazard-free operating environment.
All terminals are ISPS (International
Standard Port Facility Security)
code compliant.
Safety standards and associated
training in the workplace have
resulted in a workforce that is more
aware of safety issues and the
consequences of non-compliance.
Disabling injuries and fatalities are
an unacceptable occurrence and
SAPO is saddened by the incidents
that took place during the year. Port
Terminals is working towards zero
incidents.
CARING FOR THE COMMUNITIES
WHERE WE OPERATE
Corporate social investment (CSI)
Port Terminals strategically aligns
CSI initiatives with broad business
objectives. During the year our CSI
activities supported a key business
objective: further entrenching the
brand. This was achieved through
various CSI initiatives such as
entrepreneurial development,
poverty and hardship alleviation,
disaster relief, HIV/Aids
interventions and support for
artistic and cultural development.
Community impact and public
health and safety
Port Terminals operations handle
a wide range of commodities
including hazardous, toxic and
radioactive substances. The
process of loading and unloading
bulk products such as grain, iron
ore and woodchips all present their
own challenges from health and
environmental perspectives. Noise,
dust, general pollution and
vehicular traffic all impact on
surrounding communities.
Port Terminals is committed to
managing social impacts resulting
from its operations. This includes
the minimisation of noise during
operations, the reduction of dust
during discharge or loading and the
reduction of pollution. Legislative
compliance in itself results in the
reduction of social impact.
Port Terminals deems disabling
injuries and loss of life to be
unacceptable. As such the
organisation is committed to the
reduction of accidents and
fatalities impacting on the public.
Public fatalities
2007 2006 2005
Fatalities on premises
(criminal activity and
suicide excluded) 1 2 4
Road traffic (public roads) – – –
Total 1 2 4
PORTTERMINALS continued
128 TRANSNET ANNUAL REPORT 2007
MANAGING OUR ENVIRONMENT
RESPONSIBLY
Environmental management
Port Terminals has implemented the
NOSA Management System, the ISO
14001 Environmental Management
System and the ISO 9001 Quality
System. The process of system
certification is in progress and will
remain priority during the next year.
Port Terminals is committed to
further mitigating the negative
impact caused by the nature of
certain cargo types passing
through the operations. The
constant revision and refinement
of environmental management
practices includes plant design,
process reengineering, updated
technology and alignment with
leading practice.
Environmental impact assessments
(EIAs) are conducted in consultation
with all interested and affected
parties, including local communities
and municipalities, when new
developments are planned.
PROSPECTS
Committing to stakeholder value
Port Terminals’ approved five-year
capital expenditure plan provides
for the expansion of the capacity
of the Saldanha iron ore terminal
to 45 million tons and the
commencement of terminal
operations at the Port of Ngqura
(container, bulk and break-bulk)
by the end of 2008.
The accelerated construction of
the new container terminal at
Durban Pier 1, together with
capacity development at the
Durban container terminal is
expected to provide capacity for
container traffic in excess of
3,5 million TEUs through the port
of Durban.
Growth prospects remain strong.
Port Terminals expects that revenue
will double over the next five years.
The approved capital expenditure
programme is aligned with its
growth forecasts and management
is confident that the organisation
will satisfy customer expectations
going forward.
TRANSNET ANNUAL REPORT 2007 129
The iron ore terminal
at Saldanha is being
refurbished at a cost
of R372 million
130 TRANSNET ANNUAL REPORT 2007
Transnet is investing nearly R10 billion to build the new multi-product pipeline between Durban and Johannesburg
TRANSNET ANNUAL REPORT 2007 131
R10 billion
EBITDA up
8%
Five-year capital
expenditure plan
Pipelines’ network of pressure pipes pumps close to 17 billion litres of petroleum products and 14 million gigajoules of gas per year
Revenue up
15% to
R1,2 billion
Financial overview Year ended Year ended
31 March 31 March
2007 2006
Restated %
R million R million change
Salient features
Revenue 1 218 1 060 15
EBITDA 931 860 8
Depreciation and amortisation 259 237 9
Operating profit 672 623 8
Profit before taxation 444 372 19
Net asset value 2 509 2 200 14
Managed assets 4 068 3 409 19
Profitability measures
Operating margin (%) 55,1 59,0 (7)
Return on net assets (%) 17,7 17,0 4
Return on managed assets (%) 16,5 18,3 (10)
Capital expenditure
Total 310 220 41
Employees
Number of employees 483 448 8
Revenue per employee 2,52 2,37 6
132 TRANSNET ANNUAL REPORT 2007
PIPELINES continued
BUSINESS OVERVIEW
Transnet Pipelines (Pipelines), the
pipeline operating division of
Transnet, owns and operates South
Africa’s 3 000 km of strategic
petroleum and gas pipeline
infrastructure, traversing five
provinces. Pipelines plays an
important role in ensuring the
secure supply of petroleum
products in South Africa.
Performance highlights
Pipelines recorded the following
operational highlights during
the year:
• Revenue increased by 15% to
R1 218 million mainly due to
volume growth.
• Overall petroleum volume
throughput increased by 8,1%
and gas by 14,6%.
• Pipelines commenced the
feasibility study for the new
multi-product pipeline and
received Board approval to
commence with the project,
provided certain risk mitigation
conditions were met.
• Pipelines received its operating
licence for the pipeline network
and Tarlton from the National
Energy Regulator of South Africa
(NERSA).
ACHIEVING RETURNS GREATER
THAN THE COST OF CAPITAL
Financial management
Financial performance
Pipelines achieved revenue of
R1 218 million, indicating an overall
improvement of 15% compared to
the previous year. The improved
performance is mainly attributable
to volume-throughput increases.
A 2,5% increase in tariffs was
approved by DME in 2006.
Profit before taxation, therefore,
increased by R72 million to
R444 million mainly as a result of
the higher revenue results detailed
above.
Marketplace and customer
management
Pipelines’s clients consist of the
major oil companies operational in
South Africa: BP, Chevron, Engen,
Sasol Oil, Sasol Gas, Shell and Total
as well as the smaller local South
African Companies such as Vuyo
Petroleum. Products currently
transported by Pipelines include
gas, crude oil, aviation turbine fuel,
diesel and various grades of petrol.
Pipelines acknowledges its clients’
demanding service delivery
expectations. Safety, flexibility,
reliability and timeliness are critical
factors in their businesses. As such,
Pipelines continuously strives to
improve its service delivery to them.
For more than four decades,
Pipelines has fulfilled the strategic
role of providing the South African
oil industry with sufficient pipeline
capacity to meet the economy’s
petroleum product and gas
transportation requirements. It
currently transports approximately
17 billion litres of petroleum
products and 14 million gigajoules
of gas annually. The refined
products volumes conveyed
through Pipelines’s pipeline
network is greater than 50% of the
South African consumption.
Operations management
Pipelines has successfully adopted
and converted to the ‘clean-fuels’
specifications and the entire
system is now lead free. The
refractionator plant has been
completed and Pipelines will now
be able to reprocess the
intermixture it generates in its
multi-product system.
Because of market demand growth,
the pipeline capacity between
Durban and Gauteng needs to be
addressed until 2010, when the new
multi-product pipeline (NMPP)
project is due to be completed. As
such, Pipelines has formulated
appropriate activity plans that
include actions such as operational
optimisation, transporting diesel in
the crude line and the injection of
drag reducing agents to improve the
flow rates.
Pipelines’s key performance and
distribution indicator, ie
megalitre.km, showed an
improvement on the previous year.
This is mainly due to the increase in
volumes transported over the longer
distances (eg Durban to Gauteng).
Supply management and BBBEE
Pipelines’ procurement activities
are fully supportive and aligned to
Transnet Supply Management’s
“flight plan”. Strategic sourcing
initiatives were implemented
together with Supply Management,
which created the opportunity for
cost reductions in procurement of
more than R4,69 million. Pipelines
actively supports preferential
procurement, as is evident from the
fact that 54% of discretional spend
was placed with BEE suppliers.
KEYPERFORMANCE INDICATORS (KPIs) – PIPELINES
2007 2007 2008 % change
Target Actual Performance Target vs actual
Financial
Revenue (R million) 1 154 1 218 Achieved 1 376 13
EBITDA (R million) 860 931 Achieved 995 7
Infrastructure
Capital expenditure (R million) 226 310 Achieved 900 190
Efficiency
Total operating costs per Ml.km
of product conveyed (R) 43,46 38,63 Achieved 45,00 16
TRANSNET ANNUAL REPORT 2007 133
ASSURING SOUND
ACCOUNTABILITYAND
GOVERNANCE
Pipelines is committed to adhering
to sound corporate governance
principles of the King II Code of
Corporate Governance, the
Companies Act and the Public
Finance Management Act. Pipelines
takes a ‘zero-tolerance’ approach
to fraud and corruption and
subscribes to the Transnet Ethics
Policy.
Strategic direction
The strategic objectives of
Pipelines include:
• Optimally managing the
strategic pipeline capacity
owned and operated by
Pipelines.
• Planning, designing and
completing the NMPP project
by the third quarter of 2010.
• Managing the overall process
of regulation of gas and
petroleum pipelines and
participating in the
formalisation of additional
regulatory requirements.
• Successfully transforming the
organisation through the
Vulindlela project to ensure
the effective and efficient
management of human capital
to support a ‘new’ Pipelines
beyond the commissioning of
the NMPP.
• Ensuring a sustainable and
legally-compliant asset to
provide reliable and
environmentally-responsible
bulk transportation of
petroleum products.
• Ensuring that sustainable
business-support systems are
implemented and optimally
utilised.
Risk management
Pipelines subscribes to good
corporate governance and vigilant
risk management through the
vigorous implementation of the
holistic and consistent ERM
Framework. During the year
Pipelines committed the necessary
resources to embed and sustain the
ERM culture.
A strong emphasis on service
integration allowed Pipelines to
establish an appropriate resource
structure, with the appointment of
‘departmental risk champions’ for
full organisational representation
and support.
The key risks are set out below. It
should be noted that the tariff
increase application for a 5,6%
increase was rejected by NERSA.
This clearly poses a risk for the
NMPP Project. However, the
Company is engaging with the
relevant authorities to resolve
the issue.
Key risks at Pipelines Pipelines’s planned response
Regulatory risk – National Energy Continued engagement with
Regulator of South Africa (NERSA), relevant stakeholders such as
NERSA to ensure alignment and
compliance.
Environmental impact assessments Managing the environmental impact
(EIAs) assessment process of the NMPP
project.
Existing pipeline capacity Assessment and management
constraints of customers’ future needs and
demands.
Investment in NMPP capital project.
Rolling out the bridging plan and
other initiatives to address
capacity constraints until the NMPP
is commissioned.
Business interruption Ongoing review of BCM and disaster
recovery plans.
Regular testing of all contingency
plans including crisis management
and communication strategy.
2007 BEE procurement
BEE procurement R168 million
54%
46%
Non-BEE procurement R142 million
PIPELINES continued
134 TRANSNET ANNUAL REPORT 2007
ENGAGING OUR STAKEHOLDERS
FOR MUTUAL BENEFIT
Pipelines follows a business
approach that is transparent,
inclusive and accountable. Regular
communication with all stakeholders
forms the basis for this approach.
Given a positive and optimistic
forecast for the South African
economy, coupled with the potential
outcomes of AsgiSA’s accelerated
growth initiatives, Pipelines faces
several critical challenges in the
Petroleum industry.
Fuel facilitates economic growth
and at present there are logistical
and infrastructural constraints to
transporting adequate fuel to the
economic heartland of the country.
Pipelines’ NMPP, a R9,5 billion
investment to be commissioned in
2010, addresses this issue so as
not to constrain the economy.
Pipelines also participates in
various forums, together with other
stakeholders, to address multiple
constraints associated with the
petroleum supply chain.
A bridging plan is being developed
to address capacity constraints
expected until 2010, when the
NMPP will be commissioned. All
stakeholders are currently
committed to operationalising
the plan.
DEVELOPING WORLD-CLASS
INFRASTRUCTURE
Pipeline infrastructure
The Pipelines liquid fuels pipeline
network consists of four main lines,
comprising the multi-product
pipeline, the crude oil pipeline, the
gas pipeline and the jet-fuel
pipeline. The main lines cross five
provinces, namely: KwaZulu-Natal,
Free State, Gauteng, North West
and Mpumalanga. The intake
stations are based at the two
refineries in Durban (Sapref and
Enref); the crude refinery at
Coalbrook (Natref) and, the synfuel
plants at Secunda.
Pipelines is committed to providing
and maintaining the asset
infrastructure through engineering
excellence to enable the bulk
transportation of petroleum
products. To achieve this, Pipelines’s
head office, its 15 intake and delivery
depots and its three workshops are
continually geared towards providing
a ‘high integrity’ set of assets. This is
achieved by conforming to high
international pipeline maintenance
standards.
Capital investment
Capital spending for the year
amounted to R310 million
compared to R220 million in
the previous year. The capital
expenditure for the year focused
on the following projects:
• The NMPP project was initiated
to fulfil Pipelines’s mandate to
increase capacity to meet
economic demand.
• The intermixture refractionator
was initiated to meet the
requirements of ‘clean fuels’
legislation.
• The implementation of
telecontrol along the pipeline
network was accelerated.
• Inspections and integrity
assessments of the pipeline
network were performed to
ensure a sustainable and legally
compliant asset.
The budgeted capital expenditure
for the next year includes:
Projects R million
NMPP 612
Telecontrol phase II 45
Telecontrol phase III 33
NMPP bridging plan 20
Other projects 190
Total 900
1 000
900
800
700
600
500
400
300
200
100
0
2006
Capital expenditure
2007 2008
R

m
i
l
l
i
o
n
2
2
0
3
1
0
9
0
0
Pipelines has planned the following
major capital investments over the
next five years:
Projects R million
NMPP 9 312
Telecontrol phase II 45
Telecontrol phase III 84
NMPP bridging plan 92
Other projects 427
Total 9 960
Information and communication
technology
Pipelines is aligned to the Transnet
Business Intelligence [TBI] Project
and its standards and
requirements. There will be a
renewed quest for sound ICT
governance in 2007. In the year
ahead, Pipelines will focus on
formulating action plans to ensure
further system enhancements and
effective usage.
CREATING A WORKPLACE WHERE
OUR PEOPLE CAN EXCEL
People management
Our staff complement, excluding
fixed-term contractors, increased
from 448 to 483 during the year.
Change, transformation and culture
As human capital is one of the four
pillars of the Transnet four-point
turnaround strategy, Pipelines has
focused on the implementation of
leading practice human capital
frameworks and has implemented
all seven of the Transnet HR
strategic initiatives.
Employment equity
Pipelines achieved its Employment
Equity Plan and furthered the
advancement of women in the
business. As at February 2007, 71%
of the Pipelines staff complement
was black.
TRANSNET ANNUAL REPORT 2007 135
Asian (A) African (B) Coloured (C) Black (A+B+C) White Total Total
Employees F M F M F M F M F M F M F+M
Management 7 9 3 27 3 2 13 38 3 40 16 78 94
Non-managerial 6 15 68 193 7 5 81 213 10 85 91 298 389
Total – 2007 13 24 71 220 10 7 94 251 13 125 107 376 483
2% 5% 15% 46% 2% 1% 19% 52% 3% 26% 22% 78% 100%
Management 7 6 4 26 3 2 14 34 2 39 16 73 89
Non-managerial 6 14 57 181 6 4 69 199 10 81 79 280 359
Total – 2006 13 20 61 207 9 6 83 233 12 120 95 353 448
3% 4% 14% 46% 2% 1% 19% 51% 3% 27% 22% 78% 100%
Skills development
Pipelines renewed its focus on
building human capital capacity in
2006. Greater emphasis was placed
on retaining and expanding core
technical and operational
competencies as well as addressing
the skills gaps and competency
requirements in the business.
Skills 2007 2006
development R million R million
Training,
bursaries
and grants 5 7
% of payroll
costs (%) 4 6
Talent management
The ability to attract and retain the
right people with the appropriate
competencies forms an integral part
of our success. As such, considerable
human capital planning in 2006
resulted in employee talent being
appropriately harnessed and
managed.
Interventions already implemented
in support of the overall Transnet
initiatives include:
• Identifying mission-critical
positions and addressing
associated succession-planning
requirements; and
• Developing organisational
talent to ensure succession
plans are implemented on time.
Performance and reward
Pipelines management’s
performance is assessed annually
according to performance objectives
(SPOs) and key performance
indicators (KPIs). Incentive bonus
awards are allocated annually based
on the overall financial performance
of Pipelines. Junior personnel are
assessed according to an in-house
system based on key result areas
that align with Transnet’s
performance and reward policy.
Human resource enablement
Pipelines will focus on the following
key resource challenges in 2007:
• Building capacity and retaining
core technical and operational
skills;
• Managing talent through the
implementation of targeted
succession plans; and
• Sourcing the required skills in
anticipation of employee
growth needed beyond the
NMPP project.
Employee wellness and HIV/Aids
Pipelines implements a
comprehensive occupational
medical surveillance programme
which commences on recruitment
of employees and continues to risk-
based periodic medicals until exit
stage. This forms part of the
integrated SHEQ management
system at Pipelines. All operations
are assessed for potential health
exposures that could have an
adverse impact on human health.
All employees have access to the
lifestyle management programme.
The programme was utilised by
39 Pipelines employees in 2006.
Other employee wellbeing
programmes include the
educational assistance scheme
and the professional counselling
programme, which is outsourced.
Approximately 8% of Pipelines’
employees utilised this counselling
service during the year.
Employee safety
Pipelines operations could have
a direct impact on employee and
public safety (for public safety
refer page 136). Special attention
is paid to safety training to
empower employees and to
inculcate a safety culture within
our operations.
PIPELINES continued
136 TRANSNET ANNUAL REPORT 2007
During the year Pipelines focused
on reviewing and assessing the
relevance, adequacy and
effectiveness of existing SHEQ
management systems. This enabled
the operation to update existing
controls and in particular the
standard operating procedures
(SOPs).
In the coming year Pipelines will
concentrate on corrective efforts
to achieve desired SHEQ standards.
It aims to manage and operate all its
operations in accordance with
leading global practice such as ISO
9001, ISO 14001 and OHSAS18001
principles.
CARING FOR THE COMMUNITIES
WHERE WE OPERATE
Corporate social investment (CSI)
Pipelines participates in Transnet’s
CSI programme, which deals with
social investment in charitable
initiatives.
Community impact and public
health and safety
Public health and safety will always
be of paramount importance to
Pipelines and forms part of the
SHEQ management system. During
the year, the Servitude Awareness
Campaign promoted community
and landowner pipeline safety and
emergency awareness. Urban
expansion and community
development around the pipeline
are closely monitored to ensure
that the integrity of the servitude
is maintained.
During the year Pipelines recorded
a fatality related to an employee of
a previous security contractor who
was no longer contracted to
Pipelines. The deceased was on the
Jameson Park property without
authorisation.
MANAGING OUR ENVIRONMENT
RESPONSIBLY
Environmental management
Our technologically-advanced
integrity-management system
facilitates the internal and external
inspection of the pipeline. Frequent
patrols of the pipeline servitude
and the monitoring of services and
developments close to and within
the pipeline servitude are key
activities. Public awareness
campaigns as well as round-the
clock-monitoring of the network
and an effective emergency
responses plan enable quick and
efficient responses should pipeline
incidents occur.
Each depot, pump-station and
workshop has contingency plans in
place. Highly sophisticated spill
response equipment and extensive
disaster management expertise are
also available to handle potential
incidents.
Pipelines conducts environmental
impact assessments and consults
with all interested and affected
parties, including local communities
and municipalities, when new
developments are planned.
During the year, Pipelines
experienced no major pipeline
incidents that harmed the
environment.
SHEQ performance Target Actual Actual Actual
Indicator 2008 2007 2006 2005
Cost of risk as %
of revenue (%) 2,40 2,60 1,60 1,86
DIFR 1,00 1,24 1,00 1,29
NOSA rating (%) 88,5 85 85 80
PROSPECTS
Committing to stakeholder value
Pipelines will continue to focus on
the management of available
pipeline capacity so as to optimise
the cost-effective transport of
petroleum products to Gauteng.
The finalisation and commencement
of the NMPP is critically important
to meeting the increasing inland
demand for petroleum products.
The substantial R9,5 billion funding
required to construct the NMPP
between Durban and Gauteng will
require significant increases in
tariffs to make the project
economically viable.
It is essential that the required
tariffs be agreed with the National
Energy Regulator of South Africa so
as to achieve the revenue required
to cover the cost of capital on the
investment. Our prospects will be
directly affected by the tariff
determination methodology of the
National Energy Regulator of South
Africa which is still to be finalised.
Our ultimate goal is to be regarded
as both the pipeline service provider
of ‘first choice’ and the petroleum
products transporter of ‘last resort’
by all stakeholders, to the benefit of
the South African economy.
Public fatalities 2007 2006 2005
Fatalities on premises
(criminal activity and
suicide excluded) 1 – –
Road traffic (public roads) – – –
Total 1 – –
TRANSNET ANNUAL REPORT 2007 137
Pipelines operates South
Africa’s 3 000 km of
strategic petroleum and
gas pipeline network
Pipelines focuses on
skills development,
emphasising retention
of technical operational
talent
Construction of the new Ngqura Port, outside Port Elizabeth, with a two berth container terminal, is under way
F
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FINANCIAL STATEMENTS
Audit Committee report 138
Approval of the annual financial statements 139
Group Company Secretary certificate 139
Independent auditors’ report 140
Report of the Directors 141
Accounting policies 151
Income statements 166
Balance sheets 167
Statement of recognised income and expense 168
Cash flow statements 169
Segmental analysis 170
Notes and annexures to the annual financial
statements 172
AUDIT COMMITTEE REPORT
138 TRANSNET ANNUAL REPORT 2007
We are pleased to present our report for the financial year ended 31 March 2007 as recommended by the King II Report on Corporate
Governance and Regulation 27 of the Treasury Regulations.
The Audit Committee of the Transnet Board of Directors is composed of five independent non-executive Directors. The committee held
four scheduled meetings in the 2007 financial year.
The Audit Committee reports that it has adopted appropriate formal terms of reference as its Audit Committee Charter and has
regulated its affairs in compliance with this Charter, and has discharged all its responsibilities as contained therein. This process is
supported by the audit subcommittees which are in place for all operating divisions and subsidiaries. These subcommittees meet in
terms of a formal mandate and deal with all issues arising at the operating division or subsidiary level. These subcommittees then
elevate any unresolved issues of concern to the Transnet main Audit Committee and internal and external auditors, who also elevate
issues identified at the operating divisions and subsidiaries to the Transnet main Audit Committee.
In the conduct of its duties, the Audit Committee has, inter alia, performed the following activities:
• Received and reviewed reports from both internal audit and the external auditors concerning the effectiveness of the Group’s
internal control systems;
• Reviewed the reports of both internal and external auditors detailing their concerns arising out of their audits and requested
appropriate responses from management which will result in their concerns being addressed;
• Considered the effectiveness of internal audit, approved the one-year and three-year internal audit plans and monitored the
adherence of internal audit to its annual programme;
• Reviewed and recommended for adoption by the Transnet Board such financial information that is publicly disclosed, which for the
year included:
– the Annual Report for the year ended 31 March 2007; and
– the interim results for the six months ended 30 September 2006.
• Considered the independence and objectivity of the external auditors and ensured that the scope of their additional services
provided was not such that they could be seen to have impaired their independence; and
• Made appropriate recommendations to the Board of Directors regarding the corrective actions to be taken as a consequence of
audit findings.
In the opinion of the Audit Committee, the internal controls of the Group are considered appropriate to:
• Meet the business objectives of the Group;
• Ensure the Group’s assets are safeguarded; and
• Ensure that transactions undertaken are recorded in the Group’s accounting records.
Where weaknesses in specific controls have been identified, management has undertaken to implement the appropriate corrective
action to mitigate the weaknesses identified.
The Audit Committee has evaluated the Annual Report for the year ended 31 March 2007 and considers that it complies, in all material
respects, with the requirements of the Companies Act, 61 of 1973, as amended, the Public Finance Management Act, 1 of 1999, the
Public Audit Act, 25 of 2004, and International Financial Reporting Standards. The Audit Committee has therefore recommended the
adoption of this Annual Report by the Board of Directors at their meeting on 21 June 2007.
Prof GK Everingham
Chairman: Transnet Audit Committee
21 June 2007
Johannesburg
TRANSNET ANNUAL REPORT 2007 139
APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS
The Directors are required, by the Companies Act, the Public Finance Management Act and the Public Audit Act, to prepare annual
financial statements which fairly present the state of affairs of the Company and the Group as at the end of the financial year and the
profit or loss of the Company and the Group for the year then ended. In preparing these annual financial statements, the Directors are
required to:
• select suitable accounting policies and apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed; and
• prepare the annual financial statements on the going concern basis unless it is inappropriate to presume that the Company and/or
the Group will continue in business for the foreseeable future.
The Directors of the Company are responsible for the maintenance of adequate accounting records and the preparation and integrity
of the annual financial statements and related information. The annual financial statements have been prepared in accordance with
International Financial Reporting Standards. The external auditors, Deloitte & Touche, are responsible for independently auditing and
reporting on the financial statements in conformity with International Standards on Auditing. Their unqualified report on the annual
financial statements prepared in terms of the Companies Act, Public Finance Management Act and Public Audit Act appears on page 140.
The Directors have every reason to believe that the Company and Group have adequate resources in place to be able to continue in
operation for the foreseeable future. Therefore the Directors are satisfied that Transnet is a going concern and have continued to
adopt the going concern basis in preparing the financial statements.
The Audit Committee has reviewed the effectiveness of the Group's and Company’s internal controls and considers the systems
appropriate to the effective operation of its business. The Audit Committee has evaluated the Group's annual financial statements and
has recommended their approval to the Board of Directors. The Audit Committee's approval is set out on page 138 of the Annual Report.
In preparing the Company and Group annual financial statements set out on pages 141 to 244, the Company and the Group have
complied with International Financial Reporting Standards and the Companies Act in South Africa. The Group has complied with the
reporting requirements of the Public Finance Management Act and the Public Audit Act and has used appropriate accounting policies
supported by reasonable and prudent judgements and estimates. The Directors are of the opinion that these annual financial
statements fairly present the financial position of the Company and the Group at 31 March 2007, and the results of their operations
and cash flow information for the year then ended.
M Ramos FTM Phaswana
Group Chief Executive Chairman
21 June 2007 21 June 2007
Johannesburg Johannesburg
I hereby certify that in terms of section 268G(d) of the Companies Act, 61 of 1973, to the best of my knowledge and belief, the
Company has lodged with the Registrar of Companies all such returns for the year ended 31 March 2007 as are required of a public
company in terms of this Act, and all such returns are true, correct and up to date.
Z Stephen
Group Company Secretary
21 June 2007
Johannesburg
GROUP COMPANYSECRETARYCERTIFICATE
INDEPENDENT AUDITORS’ REPORTTO THE MINISTER
OF PUBLIC ENTERPRISES
140 TRANSNET ANNUAL REPORT 2007
INTRODUCTION
We have audited the accompanying financial statements of Transnet Ltd and the Group which comprise the Report of Directors, balance
sheets as at 31 March 2007, and the income statements, statements of recognised income and expense and cash flow statements for
the year then ended, and a summary of significant accounting policies and other explanatory notes. These financial statements are the
responsibility of Transnet’s accounting authority. Our responsibility is to express an opinion on these financial statements based on our
audit. The performance is the responsibility of the accounting authority. Our responsibility is to express an opinion on whether the
performance information is furnished in terms of subsection 55(2)(a) of the Public Finance Management Act, 1 of 1999, as amended,
is fair in all material respects and on a basis consistent with that of the preceding year.
ACCOUNTING AUTHORITY’S RESPONSIBILITYFOR THE FINANCIAL STATEMENTS
The Company’s accounting authority is responsible for the preparation and fair presentation of these financial statements in
accordance with International Financial Reporting Standards, and in the manner required by the Companies Act, 61 of 1973 of South
Africa, the Public Finance Management Act, 1 of 1999, as amended, and the Public Audit Act, 25 of 2004. This responsibility includes
designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that
are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies and making
accounting estimates that are reasonable in the circumstances.
AUDITORS’ RESPONSIBILITY
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with
International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit
to obtain reasonable assurance whether the financial statements are free from material misstatements.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
presentation of the financial statements. The audit was planned and performed to obtain reasonable assurance that our duties in terms
of section 27 and 28 of the Public Audit Act, 25 of 2004, have been complied with.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
AUDIT OPINION
In our opinion, the annual financial statements fairly present, in all material respects, the financial position of the Company and the
Group at 31 March 2007 and the results of their operations and cash flows for the year then ended in accordance with International
Financial Reporting Standards and in the manner required by the Companies Act, 61 of 1973 of South Africa, the Public Finance
Management Act, 1 of 1999, as amended, and the Public Audit Act, 25 of 2004.
In our opinion, the performance information presented on pages 143 and 144 of the Report of Directors presents fairly, in all material
respects, Transnet Ltd and the Group’s performance for the year ended 31 March 2007 against predetermined objectives and is, where
applicable, consistent with that of the preceding year.
The transactions of Transnet Ltd and the Group that had come to the auditors’ attention during the audit were in all material respects in
accordance with the mandatory functions of Transnet Ltd, as determined by law or otherwise.
Deloitte & Touche
Registered Auditors
Per T Kalan
Partner
21 June 2007
Deloitte Place
The Woodlands, 20 Woodlands Drive
Woodmead, 2199
A full list of partners and directors is available on request.
TRANSNET ANNUAL REPORT 2007 141
REPORT OF THE DIRECTORS
INTRODUCTION
The Board of Directors has pleasure in presenting its report and the audited financial statements of Transnet Ltd (the Company) and its
subsidiaries (the Group) for the year ended 31 March 2007.
OWNERSHIP
The Company is a State-owned enterprise (SOE), wholly owned by the Government of the Republic of South Africa, reporting to its
shareholder through the Department of Public Enterprises.
REGISTRATION DETAILS
The registration number of the Company is 1990/000900/06. The registered name and address of the Company are as follows:
Transnet Limited
47th Floor, Carlton Centre,
150 Commissioner Street,
Johannesburg,
2001
PRINCIPAL ACTIVITIES
The Company operates and controls South Africa’s major transport infrastructure. During the year, focus remained on transforming the
Company into an integrated and focused rail, port and pipeline business.
As part of the implementation of the approved four-point turnaround strategy, the Company continued to exit businesses that are not
its focus, including commercial aviation and passenger rail transportation.
Further details of the businesses and investments earmarked for disposal are reflected in annexures C and D to the annual financial
statements.
SHARE CAPITAL
There has been no change in the authorised share capital of the Company during the year.
The issued share capital of the Company has been reduced by 2 049 000 000 ordinary shares to 12 660 986 310 in the current year.
This reduction resulted from the sale of South African Airways (Pty) Ltd (SAA) to the South African Government and the purchase price
was settled through a buy-back of the Company’s shares.
Further details regarding the Company’s share capital are contained in note 21 to the annual financial statements.
Special resolutions
The following special resolutions were registered during the year:
Amendments to the Articles of Association
Special resolution 1
– The Company is allowed to buy back its shares in accordance with the provisions of section 85(1) of the Companies Act.
Special resolution 2
– A specific approval contemplated in section 85(2) of the Companies Act to acquire two billion and forty nine million ordinary shares
of the Company with a par value of one rand each from the Government of the Republic of South Africa (the Government), to be set
off against the purchase consideration payable by the Government to the Company in terms of the SAA sale of shares agreement
entered into between the Company and the Government on 12 June 2006.
Special resolution 3
– Cancellation of the shares as issued shares, acquired pursuant to special resolution 2 above, and restoring them to the status
of authorised shares.
REPORT OF THE DIRECTORS continued
142 TRANSNET ANNUAL REPORT 2007
SUBSIDIARIES AND ASSOCIATE COMPANIES
A share-sale agreement, subject to certain suspensive conditions, was concluded on 12 June 2006 for the disposal of South African
Airways (Pty) Ltd (SAA). The effective date on which risks and rewards of ownership passed to the Department of Public Enterprises
was 31 March 2006. As at 31 March 2007 all the substantive suspensive conditions that the sale was subject to, were either fulfilled or
waived and consequently the Company recorded the sale of SAA in its accounting records.
The sale price of R2 billion was discharged by a share buy-back and as a result Transnet’s net equity decreased by approximately
R1 billion.
As part of the sale agreement, Transnet provided certain last resort guarantee facilities to SAA that expired on 31 March 2007.
However, due to legislative delays in obtaining a suitable Government guarantee, the existing facility of R1,5 billion shall remain in place
for a short period until the replacement guarantee is procured.
The Group also disposed of its investment in V&A Waterfront Holdings (Pty) Ltd. The Company recognised a profit on the sale of
R1 230 million and the Group R711 million.
A detailed list of subsidiary and associate companies is contained in annexure D to the annual financial statements. The detailed
effects of businesses and investments that have been discontinued or classified as held-for-sale in terms of IFRS 5 are contained
in annexures C and D of the annual financial statements.
Changes in accounting policies
The accounting policies used in the preparation of the annual financial statements for the year ending 31 March 2007 are consistent
with IFRS and with those used in the prior year, except as disclosed in the accounting policies and note 37 to the annual financial
statements.
SUMMARYOF GROUP FINANCIAL PERFORMANCE
2007 2006 %
Continuing operations R million R million change
Revenue 28 214 26 034 8
EBITDA 11 488 10 301 12
Equity attributable to shareholder 37 311 29 413 27
Cash generated from operations before working capital changes 13 488 11 244 20
EBITDA margin (%) 40,7 39,6 3
Gearing (%) 39 46 (15)
DIVIDENDS
There were no dividends declared for the current year.
A dividend policy that is reviewed annually has been approved by the Board and the shareholder. The policy provides that dividends will
be declared to the shareholder in circumstances where cash cannot be effectively utilised in the business, provided that appropriate
gearing ratios are maintained.
Cash in the business will primarily address priorities in the strategic plan such as funding of the R78,9 billion investment plan over the
next five years.
BORROWINGS
The Company’s borrowing powers are limited to those approved by the Company in General Meeting and subject to the Public Finance
Management Act, 1 of 1999 (PFMA).
As at 31 March 2007, the Group’s borrowings amounted to R25 150 million, an increase of R3 293 million compared to the prior year.
This increase can be attributed to borrowings that were raised to fund the capital expenditure programme.
TRANSNET ANNUAL REPORT 2007 143
CAPITAL EXPENDITURE AND COMMITMENTS
The capital expenditure for the Group over the next five years amounts to R78,9 billion. The Group has spent approximately
of R11,7 billion in the current year and is expecting to spend R17,9 billion in the year ahead.
Further details regarding capital expenditure and commitments are contained in note 31 of the annual financial statements.
GOING CONCERN
The Directors are of the opinion that the business will be a going concern for the foreseeable future. In reaching this opinion, the
Directors considered the following factors:
• Transnet has adequate credit facilities from its lenders to fund its operations and meet its financial obligations in the normal
course of business for the foreseeable future;
• The operational and financial risks of the business have been significantly reduced;
• The previously reported deficit in the Second Defined Benefit Fund has now been eroded and the fund is in surplus;
• About 80% of the Transnet Group’s debt is guaranteed by the Government of the Republic of South Africa;
• The current strategy of Transnet focuses on rail, ports and pipelines and as part of this strategy, non-core businesses and assets
(some of which are underperforming) are being disposed of;
• The risks emanating from the recently promulgated National Ports Act, 2005, are manageable and will not impact the Group
negatively;
• The net worth of the Transnet Group has improved by 27% since March 2006;
• The gearing ratio shows continued improvement; and
• Cash flow forecasts indicate that the Group will have sufficient cash resources to meet its obligations as they fall due.
COMPLIANCE WITH LEGISLATION
The Directors believe that the Company has, during the year, complied, in all material respects, with all legislation and regulations
applicable to it, including without limitation, the Companies Act, 61 of 1973, as amended, the Public Finance Management Act,
1 of 1999, the Treasury Regulations and the Income Tax Act, 58 of 1962.
PUBLIC FINANCE MANAGEMENT ACT (PFMA)
Shareholder Compact – performance criteria
In pursuance of its objective to promote good corporate governance in State-owned enterprises, the Government, as sole shareholder,
and Transnet signed a Shareholder Performance Agreement (Shareholder Compact).
Performance information and other criteria, as required by section 55(2)(a) of the PFMA, have been outlined below in terms of the
Shareholder Compact.
Performance Key performance 2007 2007
area indicator (KPI)/measure Benchmark Target Actual Performance
Capital/financial efficiency** EBITDA margin (%)
#
> 35*** 34,8 40,7 Achieved
Cash interest cover (times)
#
> 5*** 5,4* 5,4 Achieved
Gearing ratio (%) – 2007 40 – 50*** 47,9 39,0 Achieved
– 2006 59,0 47,0 Achieved
CFROI (%) – 2007 > 6*** 5,8 6,8 Achieved
– 2006 4,1 5,8 Achieved
Infrastructure investment % of actual capital
expenditure compared
to budgeted expenditure – 2007 > 90% of R11 847 R11 674 99%
target million million Achieved
– 2006 100%
Achieved
% of total maintenance R3 890 R5 495 141%
spent compared to budget
#
> 90% of target million million Achieved
* Including sale of shares
** Discontinued businesses – SAA, freightdynamics, Viamax and Autopax
*** These benchmarks are the target of performance in the medium term (next three years)
# Key performance indicator not applicable in prior year.
REPORT OF THE DIRECTORS continued
144 TRANSNET ANNUAL REPORT 2007
Total revenue increase 2006 vs 2007 (core businesses)
Total core Rail National Ports Port
businesses Freight Rail Engineering Authority Terminals Pipelines
Tariff (%) Target 3,3 3,1 4,3 2,9 3,9 2,0
Actual 5,1 5,5 4,0 1,3 5,0 7,0
Result Achieved Achieved Not achieved Not achieved Achieved Achieved
Volume/ Target 11,5 10,9 28,6 3,7 8,8 6,8
activity (%) Actual 17,9 (1,1) 86,0 15,5 9,0 8,0
Result Achieved Not achieved Achieved Achieved Achieved Achieved
Total (%) – 2007 Target 15,2 14,3 34,1 6,7 13,0 8,9
Actual 19,0 3,7 90,3 12,3 14,3 14,9
Result Achieved Not achieved Achieved Achieved Achieved Achieved
Total (%) – 2006 Target 8,2 6,6 # 10,9 11,3 7,8
Actual 6,5 4,5 # 11,0 9,3 3,8
Result Not achieved Not achieved # Achieved Not achieved Not achieved
Total revenue = Internal and external revenues
# Key performance indicator not applicable in prior year
COMPLIANCE – PUBLIC FINANCE MANAGEMENT ACT
Continuing operations
Transnet Ltd has implemented governance structures and processes in compliance with the provisions of the PFMA. PFMA compliance
is one of the key business issues that the Group manages and monitors.
Current year accomplishments include the approval of a PFMA policy, the development of PFMA guides and training material and the
roll-out of PFMA training to all staff.
Sections 51 and 55 of the PFMA impose certain obligations on the Company and these relate to the prevention, identification and
reporting of all fruitless, wasteful and irregular expenditure and collection of all revenue. In order to comply with these obligations, the
Transnet Board of Directors has prepared a materiality framework which was approved by the Minister of Public Enterprises, subject
to certain conditions.
The Transnet Board of Directors is pleased to report that no contraventions of the PFMA, subject to the materiality framework, have
to be reported by the Board.
Discontinued operations
Listed below are certain PFMA contraventions which have been identified by the SAA Board of Directors and which will be reported
to the Minister of Public Enterprises:
Procurement system
Section 51(1)(a)(iii) of the PFMA requires the procurement system to be fair, equitable, transparent, competitive and cost-effective.
Substantial progress has been made in improving the procurement processes within SAA. However, there are legacy contracts and
arrangements approved long before the implementation of the enhanced procurement system, against which payments have been
made during the year. Accordingly SAA is unable to claim full compliance with section 51 of the PFMA.
Irregular, fruitless and wasteful expenditure
Sections 51 and 55 of the PFMA contain certain obligations for the company to comply with.
In the light of the internal control weaknesses, SAA is not confident that it is fully compliant with all the requirements of the PFMA
regarding the prevention and disclosure of irregular expenditure in terms of section 51(b)(ii) of the Act.
Shareholder Compact
For the year a Shareholder Compact, as required by Treasury Regulation 29, was not in place due to the impending unbundling of SAA
fromTransnet and the finalisation of SAA’s restructuring and corporate plan. In the absence of the Shareholder Compact, performance
information has not been included in the Annual Report as envisaged by section 55(2) of the PFMA.
Legislation
Section 51(1)(h) of the PFMA requires that SAA complies with the PFMA and any other legislation applicable to that company.
A monitoring plan, to monitor compliance with laws and regulations, has been approved and is currently being implemented.
TRANSNET ANNUAL REPORT 2007 145
Internal control
As a result of the onerous obligations of the PFMA and the failure to fully comply with all statutory prescripts of the PFMA, SAA is
also in breach of sections 51 and 57 relating to internal control.
TARIFF REGULATORS IMPACTING TRANSNET
National Ports Act, 12 of 2005 (the Act)
The Act came into effect on 26 November 2006 by Presidential proclamation in Government Gazette Number 2941.
In summary, the Act establishes the National Ports Authority Ltd (the Authority) as the landlord of South Africa’s ports, and establishes
an independent Ports Regulator with oversight powers. With effect from the aforementioned commencement of the Act, the National
Ports Authority of South Africa (a division of Transnet Ltd) is deemed to be ‘the Authority’ provided for in the Act and must perform the
functions of ‘the Authority’ contemplated in the Act.
The Act sets out three phases of corporate transition for the National Ports Authority of South Africa: firstly, in its current form, as a
division of Transnet Ltd; secondly as a wholly owned subsidiary company of Transnet Ltd and finally as a public company whose assets
are separate from those of Transnet Ltd.
On 13 November 2006 the Department of Transport published Draft Regulations to the Act (Draft Regulations) for public comment.
Transnet has raised concerns with certain aspects of the Act and the draft regulations in their current form. A Transnet Board ad hoc
committee, comprising Mr FTMPhaswana (Chairman), Dr SE Jonah, KBE, Dr I Abedian, Mr PG Joubert and the Group Chief Executive,
Ms M Ramos, has been formed to assist the Company to effectively deal with the challenges brought by the Act. The committee
continues to engage with the shareholder on these matters.
PETRONETTARIFF REGULATOR, THE NATIONAL ENERGYREGULATOR OF SOUTH AFRICA (NERSA)
On 30 March 2007 the Company was informed by NERSA that an application by Petronet for a tariff increase for next year had been
turned down. The Company is proactively engaging with the appropriate authorities to ensure that an appropriate tariff methodology
is put in place. Before approving the capital expenditure for the new multi-product pipeline, the Board must be satisfied that a return
greater than Transnet’s weighted cost of capital will likely be achieved.
JUDICIAL PROCEEDINGS
The annual financial statements include a best estimate of expected settlement for judicial proceedings entered into with Transnet
as either a defendant or plaintiff, where the outcome can be assessed with reasonable certainty, taking into account legal opinions
obtained for the Company.
The contingent liabilities of the Group have been disclosed in note 32 to the annual financial statements.
POST-BALANCE SHEET EVENTS
The following significant issues have occurred between 31 March 2007 and 21 June 2007:
Sale of “C” class preference share in Newshelf 664 (Pty) Ltd
On 21 June 2007 Transnet Ltd accepted an offer of R5,8 billion from Newshelf 664 (Pty) Ltd, subject to certain conditions, for the
redemption of the “C” class preference share held by Transnet Ltd in Newshelf 664 (Pty) Ltd.
Claim by Umthunzi Telecoms Consortium (Pty) Ltd
On 11 April 2007 the Umthunzi Telecoms Consortium (Pty) Ltd instituted legal action in the Transvaal Provincial Division of the High
Court against The Government of the Republic of South Africa as the first defendant and Transnet Ltd as second defendant claiming
the delivery of certain MTN Group shares. The claim amounts to approximately R2,2 billion. The Directors have sought and obtained
advice from attorneys and counsel and, based on that advice, believe there is no legal basis for the claim and it is therefore unlikely
to succeed.
Sale of Viamax (Pty) Ltd
Transnet Ltd has concluded an agreement in principle to sell Viamax Holdings (Pty) Ltd, its fleet management and leasing business, to
Bidvest Group Ltd, for approximately R1 billion.
Sale of Transnet Housing Loan Book
The Transnet Housing Loan Book has been sold to First National Bank with effect from 1 April 2007 for its fair value of approximately
R1,4 billion, subject to certain suspensive conditions.
REPORT OF THE DIRECTORS continued
146 TRANSNET ANNUAL REPORT 2007
Sale of Transnet Pension Fund Administrators
A sale agreement was concluded between Transnet Ltd, Fifth Quadrant Actuaries and Consultants (Pty) Ltd and Metropolitan
Retirement Fund Administrators (Pty) Ltd for the sale of the Transnet Pension Fund Administrator’s business for an amount of
R23 million with effect from 1 April 2007.
Sale of VAE Perway (Pty) Ltd
A sale agreement was concluded between Transnet Ltd and VAE GmbH for the sale of VAE Perway (Pty) Ltd for R30 million.
The effective date of the transaction is 16 April 2007.
freightdynamics
Transnet has entered into negotiations for the sale of freightdynamics. The sale of this business will be subject to the provisions
of section 197 of the Labour Relations Act and is expected to be completed by 30 June 2007.
Transtel DEVI
Transnet Ltd is involved in negotiations for the disposal of its Transtel DEVI assets.
AUDITORS
At the Annual General Meeting, held on 11 August 2006, Deloitte & Touche were reappointed as external auditors of the Company.
APF Chartered Accountants Inc., who had been joint auditors from March 1996 to 11 August 2006, were not reappointed in line with
the Board’s policy on rotation of auditors.
Deloitte & Touche was in turn required by the Company to subcontract a portion of the audit work to a black-owned firm of auditors.
A selection process overseen by the Group Audit Committee resulted in the appointment of Sizwe Ntsaluba VSP as the subcontracting
black-owned firm.
The business address of Deloitte & Touche is Deloitte Place, The Woodlands, 20 Woodlands Drive, Woodmead, 2199.
The Group internal audit is outsourced to Ernst & Young. Business address: Wanderers Office Park, 52 Corlett Drive, Illovo.
COMPANYSECRETARY
Transnet Ltd’s Group Company Secretary is Ms Zola Stephen, Business address: 47th Floor, Carlton Centre, 150 Commissioner Street,
Johannesburg, 2001.
DIRECTORS
Ms NR Ntshingila and Dr Norman Haste, OBE were appointed as non-executive Directors with effect from 23 May 2006.
The composition of the Board of Directors, with summary curriculum vitae of each Director, appears on pages 8 and 9.
The remuneration of the Directors is set out on pages 147 and 148.
REMUNERATION REPORT
The Remuneration Committee’s mandate includes reviewing the design and management of salary structures, policies and incentive
schemes and ensuring that they motivate sustained high performance and are linked to corporate performance.
During the year, the work of the committee included considering and approving, amongst others, the following matters:
• Long-term incentive scheme for 2007 to 2011;
• Short-term performance incentive scheme;
• Wage mandate for the bargaining unit;
• Management salary increases;
• Report on the Group Executive Committee members’ remuneration; and
• Report on the Group Chief Executive’s remuneration.
The Remuneration Committee also considers external market information for comparisons between reward structures and
remuneration levels applicable to Directors and executives of the Group and those applicable to counterparts in organisations
of similar size and complexity in comparable business sectors both in South Africa and, where appropriate, in other relevant countries.
During the year, the committee considered reports of two independent South African consultants specialising in remuneration.
The Company fully discloses all components of the Group Executive Committee members’ remuneration information.
The Group Chief Executive is invited to all committee meetings, but recuses herself when her own remuneration is discussed.
TRANSNET ANNUAL REPORT 2007 147
The members of the Remuneration Committee are all independent non-executive Directors: Dr SE Jonah, KBE (Chairman),
Ms NBP Gcaba (Deputy Chairman), Dr I Abedian, Ms NR Ntshingila and Mr PG Joubert.
Group Executive Committee members
With the exception of the Group Chief Executive, all senior executives of the Company are not employed on a fixed-term contract basis.
The Company therefore carries no liability on termination of employment of an executive.
Guaranteed remuneration
The Company carried out an exercise, with the assistance of consultants specialising in remuneration matters, to review salaries
of the Group Executive Committee members’ remuneration packages, taking into account the scope and nature of each member’s role,
the individual’s performance and experience, comparing with the median and upper quartile pay levels of South African companies.
Adjustments, approved by the Remuneration Committee, were effected to the individuals’ remuneration packages with effect from
1 April 2006.
Executive guaranteed remuneration
Post-
retirement
benefit fund Other Other Total
Salary contributions contributions payments 2007 2006
Name R thousand R thousand R thousand R thousand R thousand R thousand
M Ramos+ 4 616 436 – 4 5 056 4 009
CF Wells+ 3 172 326 – 3 3 501 2 600
SI Gama 3 142 238 45 11 3 436 2 346
VD Kahla 2 534 195 30 24 2 783 1 952
P Maharaj 2 629 202 36 6 2 873 1 880
CA Möller 1 892 209 45 6 2 152 1 544
LRR Molotsane* – – – – – 935
T Morwe 2 504 201 53 4 2 762 1 800
B Nomvete* – – – – – 4 501**
KC Phihlela 2 408 180 – 25 2 613 1 784
BS Tshabalala* – – – – – 1 262
R Vallihu 2 386 218 29 7 2 640 –
LL van Niekerk 3 388 311 – 5 3 704 2 824
Total 28 671 2 516 238 95 31 520 27 437
+ Group Executives who are members of the Board of Directors.
* Resigned.
** Termination benefits.
PERFORMANCE BONUS
The performance bonuses (excluded from guaranteed remuneration) reflected below are according to the principles of the approved
bonus scheme for 2007 and will be paid during the 2008 financial year.
2007 2006
Name R thousand R thousand
M Ramos 2 938 2 886
CF Wells 2 100 1 732
SI Gama 1 877 1 109
VD Kahla 1 570 1 282
P Maharaj 1 610 1 244
CA Möller 1 040 1 004
T Morwe 1 434 1 188
KC Phihlela 1 313 1 125
BS Tshabalala – 831
R Vallihu 1 479 –
LL van Niekerk 2 266 1 905
Total 17 627 14 306
REPORT OF THE DIRECTORS continued
148 TRANSNET ANNUAL REPORT 2007
Non-executive Directors
Non-executive Directors are appointed by the shareholder for a three-year term. The Articles of Association of the Company, however,
require that the Directors be submitted for reelection for each of the three years at the Company’s Annual General Meeting. Amongst
the issues considered by the shareholder prior to reelection is the individual Director’s performance.
The shareholder approves, in advance, the fees payable to non-executive Directors.
Fees paid to non-executive Directors vary based on their appointments to the various committees of the Transnet Board.
As part of non-executive Directors’ emoluments, the Directors of the Company are each entitled to annual international concession
tickets on South African Airways flights. The concession ticket benefit is valid for the Directors in office and must be used during the
year or the benefit is forfeited.
The figures on concession tickets benefit utilised in the year as well as UIF payments made by the Company are contained on the ‘Other
payments’ column in the table below.
Other Total
Fees payments 2007 2006
Name R thousand R thousand R thousand R thousand
Board members
FTM Phaswana (Chairman) 1 048 2 1 050 1 077
I Abedian 458 52 510 451
GK Everingham 544 49 593 543
NBP Gcaba 435 125 560 451
ND Haste OBE* 300 – 300 –
SE Jonah KBE 450 1 451 450
PG Joubert 487 1 488 537
NNA Matyumza 375 109 484 390
S Nicolaou 375 84 459 452
NR Ntshingila* 375 1 376 –
BT Ngcuka 395 47 442 439
KC Ramon 375 91 466 465
M Moses* – – – 46
Total 5 617 562 6 179 5 301
* In proportion to time spent.
TRANSNET ANNUAL REPORT 2007 149
Subsidiary Directors’ remuneration
Executive Directors
Post-
retirement
benefit fund Other Total
Salary contributions payments 2007 2006
Name R thousand R thousand R thousand R thousand R thousand
South African Airways (Pty) Ltd 6 090 1 474 2 777 10 341 12 900
G Griffiths * 2 175 – 110 2 285 –
O Mabandla – – – – 2 050
K Ngqula 3 570 1 430 – 5 000 6 850
T Ramano ** 345 44 2 667 3 056 4 000
SAA City Centre (Pty)Ltd 953 77 52 1 082 1 229
TJ Nzima 953 77 52 1 082 1 229
SAA Technical (Pty) Ltd 1 067 – 34 1 101 3 118
J Blake 1 067 – 34 1 101 1 535
R Ramkissoon – – – – 1 583
Airchefs (Pty) Ltd 766 88 240 1 094 1 938
B Fischer ** – – – – 251
VKona ** – – – – 220
J September 766 88 240 1 094 1 467
SA Express Airways (Pty) Ltd 1 659 – 1 641 3 300 1 675
S Mzimela 991 – 1 370 2 361 1 181
FJ Oberholzer ** – – – – 494
S Zulu * 668 – 271 939 –
Viamax (Pty) Ltd 778 126 608 1 512 959
N Hariparsad 778 126 608 1 512 959
Autopax Passenger Services (Pty) Ltd 1 596 138 352 2 086 1 003
MC Bester 1 596 138 352 2 086 1 003
Protekon (Pty) Ltd
#
– – – – 1 184
C Xaba – – – – 1 184
B2B Africa
#
– – – – 834
NN Shikwane – – – – 834
Total 12 909 1 903 5 704 20 516 24 840
* Appointed during the current financial year.
** Resigned during the current financial year.
# Decorporatised or in process of liquidation during the current financial year.
REPORT OF THE DIRECTORS continued
150 TRANSNET ANNUAL REPORT 2007
Non-executive Directors
Other Total
Fee payments 2007 2006
Name R thousand R thousand R thousand R thousand
South African Airways (Pty) Ltd Group 2 750 – 2 750 3 854
TJ Dikgale * 20 – 20 –
R Doganis – – – 505
F du Plessis * 75 – 75 –
G Gerwel 500 – 500 500
PG Joubert 300 – 300 250
KP Kalyan * 75 – 75 –
B Modise * 75 – 75 –
M Moerane ** 230 – 230 360
LM Mojela 400 – 400 350
MVMoosa ** 150 – 150 300
N Moyo * 75 – 75 –
A Ngwezi ** 310 – 310 310
P Nkuna ** 160 – 160 310
C Okeahalam ** 210 – 210 969
M Ramos **
@
– – – –
J Schrempp * 75 – 75 –
IAM Semenya * 20 – 20 –
M Whitehouse * 75 – 75 –
SA Express Airways (Pty) Ltd 320 – 320 300
C Christodoulou 20 – 20 –
P Maharaj *
@
– – – –
B Mohale 70 – 70 75
S Nicolaou 60 – 60 65
L Nyhonyha 70 – 70 75
K Phihlela **
@
– – – –
A Richman 55 – 55 55
M Vuso 45 – 45 30
Viamax (Pty) Ltd 160 – 160 234
J Giltrow – – – 26
F Leppan 76 – 76 82
M Moses – – – 68
SYU Nhlapo 84 – 84 58
Protekon (Pty) Ltd
#
– – – 10
PG Joubert – – – 10
Autopax Passenger Services (Pty) Ltd 21 18 39 96
VJack 21 18 39 22
VKahla
@
– – – –
P Maharaj
@
– – – –
KC Ramon – – – 74
Total 3 251 18 3 269 4 494
* Appointed during the current financial year
** Resigned during the current financial year
# Decorporatised or in process of liquidation during the current financial year
@ Shareholder representative of Transnet Ltd
TRANSNET ANNUAL REPORT 2007 151
ACCOUNTING POLICIES
Transnet Ltd (the Company) is a company domiciled in South Africa.
The consolidated financial statements for the year ended 31 March 2007 comprise the Company and its subsidiaries (together referred
to as the Group) and the Group’s interest in associates and joint ventures.
The financial statements were authorised for issue by the Directors on 21 June 2007.
STATEMENT OF COMPLIANCE
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs)
issued by the International Accounting Standards Board (IASB) and their Interpretations issued by the International Financial Reporting
Interpretations Committee (IFRIC).
CRITICAL JUDGEMENTS AND ESTIMATES MADE IN APPLYING THE ACCOUNTING POLICIES
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions
that affect the application of policies and reported amounts of equity, assets and liabilities, revenue and expenses.
The estimates and associated assumptions are based on historical experience and various other factors that are considered to be
reasonable under the circumstances. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the
revision affects both current and future periods.
Judgements made by management in the application of IFRS that have a significant effect on the financial statements and estimates
with a significant risk of material adjustment in the next year are discussed below.
Critical judgements made by the Transnet Board of Directors in applying accounting policies and key sources of estimation or
uncertainty are detailed below:
Property, plant and equipment
• Revaluation
– Port operating assets, pipeline networks and port infrastructure assets are carried at revalued amounts. Revaluations are
performed every five years and appropriate indices are applied in the intervening periods to ensure that the assets are carried
at fair value at the balance sheet date.
– The carrying amounts of the assets are disclosed in note 9.
Assumptions regarding impairment calculations on assets governed by IAS 36 Impairment of Assets
• Various assumptions are made regarding the discount rate applied and the estimation of future cash flows. These are as follows:
– Weighting of debt to equity in the weighted average cost of capital (WACC) calculation;
– A beta and risk premium considered appropriate by management to determine the WACC;
– Future cash flows were based on historic trends and operational plans determined by management; and
– Where the materialisation of cash flows was considered risky, the WACC was adjusted to reflect this.
• The total impairment recorded is disclosed in note 4.4.
Useful lives and residual values
• The useful lives of property, plant and equipment are reviewed at each balance sheet date. These useful lives are estimated
by management based on historic analysis and other available information.
• The residual values of property, plant and equipment are reviewed at each balance sheet date. The residual values are based on the
assessment of useful lives and other available information.
• The carrying amounts of the assets are disclosed in note 9.
Fair value assumptions – investment properties
• Experts are used to arrive at the fair value of investment properties. Assumptions used in these valuations are in line with the
Property Valuers Profession Act, 47 of 2000.
• The carrying amounts of the assets are disclosed in note 10.
Special purpose entities
Management has applied significant judgement in determining whether the substance of the relationship between the Group and
a special purpose entity indicates that the special purpose entity is controlled by the Group.
ACCOUNTING POLICIES continued
152 TRANSNET ANNUAL REPORT 2007
Valuation of the Subco derivative
The carrying value of the Subco derivative has been arrived at after utilising a model developed by an external valuer. Management
have further applied judgement to the valuation obtained, taking into account factors pertaining to the realisation of the asset. The fair
value of the derivative asset is disclosed in note 14 and the fair value adjustment on the derivative asset is disclosed in note 5.
Qualifying hedge relationships
As disclosed in note 14, the Group have fair value hedges in place. In designating financial instruments as qualifying hedge
relationships, the Group has determined that it expects the hedge to be highly effective over the life of the hedging instrument.
Post-retirement benefit obligations
Various assumptions have been applied by management and the actuaries in the calculation of the post-retirement benefit obligations.
The assumptions and their sensitivities are disclosed in note 33 to the annual financial statements. The carrying amounts of the
liabilities are disclosed in note 24.
Provisions
Various assumptions are applied in arriving at the carrying value of provisions that are recognised in terms of the requirements of
IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The carrying amounts of the liabilities are disclosed in note 26.
Management further relies on input from the Group’s lawyers in assessing the probability of matters of a contingent nature. Contingent
liabilities are disclosed in note 32.
SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The consolidated financial statements of the Group (financial statements) are presented in South African rands, rounded to the nearest
million.
The financial statements are prepared on the historical cost basis, except for the following assets and liabilities that are stated at their
fair value: unlisted investments, derivative financial instruments, financial instruments held for trading, financial instruments classified
as available-for-sale, investment properties and non-current assets, which are classified as held-for-sale. Certain classes of property,
plant and equipment are carried at revalued amounts.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements except
for the adoption of IFRIC 4 and Circular 9/2006, which have been adopted retrospectively from 1 April 2005.
The accounting policies have been applied consistently by Group entities.
CHANGE IN ACCOUNTING POLICY
The Group has adopted IFRIC 4 and SAICA Circular 9/2006, retrospectively from 1 April 2005. Impacts thereof are disclosed in note
37, “Changes in accounting policy and other restatements”.
IFRIC 4 Determining whether an arrangement contains a lease
IFRIC 4 provides guidance on determining whether arrangements (that do not take the legal form of a lease) are, or contain, leases.
Leases identified through the adoption of this interpretation have been recognised as leases in terms of IAS 17 Leases. The recognition
of such leases requires a retrospective adjustment to financial information, resulting in a favourable restatement to opening
distributable reserves of R16 million net of taxation at 31 March 2006.
SAICA Circular 9/2006 Transactions giving rise to adjustments to revenue/purchases
Cash discounts and rebates are required to be accounted for as an adjustment to revenue or the carrying value of inventory as the case
may be. Where extended payment terms are granted by the Group the effect of the time value of money is taken into account. The prior
year results of discontinued operations have been restated to include a reclassification of R295 million from revenue to net operating
expenses excluding impairment of assets and fair value adjustments.
BASIS OF CONSOLIDATION
Subsidiaries
Subsidiaries (including special purpose entities, such as trusts) are entities controlled by the Group. Control exists when the Group has
the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Typically, this will be where the Group has more than 50% of the voting power. In assessing control, potential voting rights that are
presently exercisable or convertible are taken into account. The consolidated financial statements include the results of the Company
and its subsidiaries, from the effective dates of acquisition to the effective dates of disposal.
The purchase method of accounting in terms of IFRS 3 Business Combinations is applied to account for the acquisition of subsidiaries.
The cost of an acquisition is measured as the fair value of the assets given up, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and
TRANSNET ANNUAL REPORT 2007 153
contingent liabilities assumed in a business combination are measured, initially, at their fair values at the acquisition date, irrespective
of the extent of any minority interest. Non-current assets acquired in a business combination that are classified as held-for-sale are
measured in accordance with IFRS 5 Non-current Assets Held-for-Sale and Discontinued Operations and are measured at the lower
of carrying value and fair value less costs to sell. The excess of the cost of acquisition over the fair value of the Group’s share of the
identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets acquired,
the difference is recognised directly in the income statement. The interest of the minority shareholders is stated at the minority’s
proportion of the fair value of the assets, liabilities and contingent liabilities recognised.
On subsequent disposal of a subsidiary, the profit or loss on disposal is the difference between the selling price and the lower of the
fair value and carrying value of the net assets and liabilities disposed of. On disposal, the amount attributed to goodwill is included in
the determination of the profit or loss on disposal.
Special purpose entities are consolidated when the substance of the relationship between the Group and the special purpose entity
indicates that it is controlled by the Group.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses
are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies of the Group.
Associates (equity accounted investees)
Associates are entities over which the Group is in a position to exercise significant influence, but not control or joint control of the
financial and operating policies. Investments in associates are equity accounted in the consolidated financial statements for the period
in which the Group exercises significant influence, except when the investment is classified as held-for-sale in accordance with IFRS 5
Non-current Assets Held-for-Sale and Discontinued Operations. In terms of IFRS 5, the investment in the associate will be recognised
and measured at the lower of carrying value and fair value, less costs to sell. Significant influence is presumed in instances where the
Group has an equity stake greater than 20% but less than 50% in an entity.
Equity accounted income represents the Group’s proportionate share of the post-acquisition profits of these entities and the share of
taxation thereon, net of the Group’s proportionate share of intergroup profits. Losses incurred by associates (including impairment losses
where such indications exist) are brought to account in the consolidated financial statements until the investment in such associates is
written down to a nominal value. Thereafter, losses are accounted for only insofar as the Group is committed to providing financial support
to such associates. The carrying amount of such investments is reduced to recognise any decline in the value of the investment.
Long-term loans to associates, which in fact are part of the long-term investment, are treated as a part of the investment in the associates.
The excess of cost of the acquisition over the fair value of the associate’s net assets is recorded as goodwill. Goodwill is included in the
carrying value of the investment and is assessed for impairment as part of the investment. If the cost of acquisition is less than the fair
value of the net assets acquired, the difference is recognised directly in the income statement.
The Group’s interest in an associate is carried in the balance sheet at an amount that reflects its share of the cost, post-acquisition
reserves, plus goodwill, less an impairment loss, if applicable.
Where the Group transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group’s
interest in the relevant associate, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred.
Joint ventures (equity accounted investees)
A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint
control, that is when strategic financial and operating policy decisions relating to the activities of the joint venture require the
unanimous consent of the parties sharing control.
Joint venture agreements that involve the establishment of a separate entity in which each venturer has an interest are referred to as
jointly controlled entities. The Group reports its interest in jointly controlled entities using the equity method except when the
investment is classified as held-for-sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held-for-Sale
and Discontinued Operations.
Equity accounted income represents the Group’s proportionate share of the post-acquisition profits of these entities and the share
of taxation thereon, net of the Group’s proportionate share of intergroup profits. Losses incurred by joint ventures (including
impairment losses where such indications exist) are brought to account in the consolidated financial statements until the investment
in such joint ventures is written down to a nominal value. Thereafter, losses are accounted for only insofar as the Group is committed
to providing financial support to such joint ventures. The carrying amount of such investments is reduced to recognise any decline in
the value of the investment.
ACCOUNTING POLICIES continued
154 TRANSNET ANNUAL REPORT 2007
The excess of cost of the acquisition over the fair value of the joint venture’s net assets is recorded as goodwill. Goodwill is included in
the carrying value of the investment and is assessed for impairment as part of the investment. If the cost of acquisition is less than the
fair value of the net assets acquired, the difference is recognised directly in the income statement.
Where the Group transacts with a joint venture of the Group, unrealised profits and losses are eliminated to the extent of the Group’s
interest in the relevant joint venture, except to the extent that unrealised losses provide evidence of an impairment of the asset transferred.
FOREIGN CURRENCY
Functional and presentation currencies
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (the functional currency). The consolidated financial statements are prepared in South African
rands, which is the Company’s functional currency and the Group’s presentation currency.
Foreign currency transactions
Transactions in currencies other than the entity’s functional currency are defined as foreign currency transactions. Transactions in
foreign currencies are translated at exchange rates ruling on transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated at the exchange
rates ruling at the original transaction date. Non-monetary assets and liabilities that are carried at fair value denominated in the
foreign currency are translated into the functional currency at the exchange rate ruling when the fair value was determined.
All gains or losses arising on translation are recognised in the income statement and are classified as finance costs.
Financial statements of foreign operations
The financial statements of foreign operations are translated into South African rands as follows:
• Assets and liabilities, at rates of foreign exchange ruling at the balance sheet date.
• Revenue and expenses at rates approximating the foreign exchange rates ruling at the dates of the transactions or appropriate
average rates.
• Goodwill and fair value adjustments arising on acquisition, at rates of foreign exchange ruling at balance sheet date.
• Equity at historical rates.
Any foreign exchange differences arising on translation are recognised as a separate component of equity. Exchange differences
arising from the translation of the net investment in foreign operations, and of related hedges are taken to the translation reserve.
On disposal, such translation differences are recognised in the income statement as part of the gain or loss on disposal.
REVENUE
Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the Group and the
amounts of revenue can be reliably measured. Revenue is net of value added taxation.
Transportation and other related services
Revenue from transportation and other related services is recognised by reference to the stage of completion of transactions at the
balance sheet date. The stage of completion is assessed by reference to surveys of work performed. No revenue is recognised if there
are significant uncertainties regarding recovery of the consideration due and associated costs.
Rental income
Revenue arising from the rental of property is recognised on an a straight-line basis over the term of the lease in accordance with the
substance of the relevant agreements. Lease incentives granted are recognised as an integral part of the total rental income.
Construction contracts
As soon as the outcome of a construction contract can be estimated reliably, contract revenue and expenses are recognised in profit or
loss in proportion to the stage of completion of the contract. Contract revenue includes the initial amount agreed in the contract plus
any variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and can
be measured reliably.
The stage of completion is assessed by reference to surveys of work performed. When the outcome of a construction contract can not
be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable in
the period in which they are incurred. An expected loss on a contract is recognised immediately in the income statement.
Dividend income
Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established which in the
case of quoted securities is usually the ex-dividend date.
TRANSNET ANNUAL REPORT 2007 155
Finance income
Finance income is accrued on a time basis, by reference to the principal outstanding and the effective interest rate applicable, which
is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the asset’s net
carrying amount.
Government grants
Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all
suspensive conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods
necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset,
the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the
relevant asset on a straight-line basis.
Transactions giving rise to adjustments to revenue/purchases
The Group accounts for cash discounts and rebates received (given) as follows:
• In the case of the Group as a purchaser, cash discounts and rebates received are estimated upfront and deducted from the cost of
inventories purchased, and
• In the case of the Group as a seller, cash discounts and rebates given are estimated upfront and deducted from the amount of
revenue recognised.
Where extended payment terms are granted by the Group, whether explicitly or implicitly, the effect of the time value of money is
taken into account irrespective of other factors such as the cash selling prices of the goods.
IMPAIRMENT OF ASSETS
The carrying amounts of the Group’s tangible and intangible assets with a definite life, other than financial assets, investment property,
non-current assets classified as held-for-sale, inventories and deferred taxation assets are reviewed at each balance sheet date to
determine if there is any indication of impairment. If such an indication exists, the recoverable amount of the asset is estimated to
determine the extent of the impairment loss (if any). Where an asset does not generate cash flows that are independent from other
assets, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. For goodwill and intangible
assets that have an indefinite useful life, the recoverable amount is estimated at each balance sheet date, and whenever there is an
indication that the asset may be impaired.
An impairment loss is recognised in the income statement whenever the carrying amount of an asset exceeds its recoverable amount,
unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill
allocated to cash-generating units (group of units) and then to reduce the carrying amount of the other assets in the unit (group of
units) on a pro rata basis.
Calculation of recoverable amount
The recoverable amount of an asset is the higher of the asset’s fair value less costs to sell and its value-in-use. Fair value less costs to
sell is determined by ascertaining the current market value of an asset and deducting any costs relating to the realisation of the asset.
In assessing the value-in-use, the expected future cash flows from the asset are discounted to their net present values using a pre-
taxation discount rate that reflects current market assessments of the time value of money and the risks specific to the asset and the
operating division to which that asset belongs. For an asset that does not generate largely independent cash flows, the recoverable
amount is determined for the cash-generating unit to which the asset belongs.
Reversals of impairment
An impairment loss in respect of goodwill is not reversed.
In respect of other assets, a previously recognised impairment loss is reversed if the recoverable amount increases as a result of a
change in the estimates previously used to determine the recoverable amount, to an amount not higher than the carrying amount that
would have resulted, net of depreciation or amortisation, had no impairment loss been recognised. A reversal of an impairment loss is
recognised as income immediately, if the impairment was recognised previously as an expense, unless the relevant asset is carried at
a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
BORROWING COSTS
Borrowing costs are recognised in the income statement in the period in which they are incurred.
NET FINANCING COSTS
Net financing costs comprise interest payable on borrowings calculated using the effective interest rate method, dividends on
redeemable preference shares, foreign exchange gains and losses, and gains and losses on derivative instruments that are recognised
in the income statement.
ACCOUNTING POLICIES continued
156 TRANSNET ANNUAL REPORT 2007
TAXATION
Income taxation on the profit or loss for the period comprises current and deferred taxation. Income taxation is recognised in the
income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current taxation
The charge for current taxation is the amount of income taxes payable in respect of the taxable profit for the current period and any
adjustment to taxation payable in respect of previous years. It is calculated using taxation rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred taxation
Deferred taxation is provided using the balance sheet method on all temporary differences arising between the carrying amounts of
assets and liabilities for financial reporting purposes and their taxation bases. The following temporary differences are not
provided for:
• the initial recognition of goodwill;
• the initial recognition of assets and liabilities (other than in a business combination), which affect neither accounting nor taxable
profit or loss; and
• differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The amount of deferred taxation provided is based on the expected manner of realisation or settlement of the carrying amount of
assets and liabilities and is calculated using the taxation rates that have been enacted or substantively enacted at the balance sheet
date. Deferred taxation is charged or credited in the income statement except where it relates to items charged or credited directly
to equity, in which case the deferred taxation is also dealt with in equity.
A deferred taxation asset is recognised to the extent that it is probable that future taxable profits will be available to be utilised
against the associated unused taxation losses and deductible temporary differences. Deferred taxation assets are reduced to the
extent that it is no longer probable that the related taxation benefit will be realised.
Deferred taxation liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and joint
ventures, except where the Group is able to control the timing of the reversal of the temporary differences and it is probable that it
will not reverse in the foreseeable future.
Deferred taxation assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the
Group has the legal right to and intends to settle its current taxation assets and liabilities on a net basis.
Secondary taxation on companies (STC)
STC is provided in respect of the expected dividend payments net of dividend assets and is recognised as a taxation charge in the year
in which the dividend is declared. STC credits on dividends received are recorded as deferred taxation assets in the period that they
arise limited to the reserves available for distribution.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, or revalued amounts, less accumulated depreciation where appropriate and any
accumulated impairment losses.
Recognition and measurement
Port operating assets, pipeline networks and port infrastructure assets are carried at revalued amounts. Revaluations are carried out
every five years and appropriate indices are applied in the intervening periods to ensure that the assets are carried at fair value at the
balance sheet date. Revaluation surpluses that arise are taken directly to the revaluation surplus in equity, except to the extent that
they reverse a revaluation decrease for the same asset previously recognised as an expense, in which case the surplus is credited to
the income statement to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation
of an asset is charged as an expense to the extent that it exceeds the balance, if any, held in the asset’s revaluation surplus relating
to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus
in the revaluation reserve is transferred to retained earnings.
Cost includes expenditure that is directly attributable to the acquisition of the asset.
Assets under construction, including capital work in progress, are stated at cost, less any impairment losses where the recoverable
amount of the asset is estimated to be lower than its carrying amount. The cost of self-constructed assets includes the cost of
materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site
on which they are located, and an appropriate proportion of production overheads.
Where components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items
of property, plant and equipment and depreciated separately over their respectful useful lives.
TRANSNET ANNUAL REPORT 2007 157
Spare parts, standby and servicing equipment held by the Group are classified as property, plant and equipment if they are expected
to be used in more than one period. If not, they are classified as inventory. Spare parts and servicing equipment that can be used only
in connection with a specific item of property, plant or equipment are also accounted for as property, plant and equipment.
Subsequent costs
The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item
when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost
of the item can be measured reliably. All other costs are recognised in the income statement as expenses as incurred.
Exchangeable units, such as aircraft engines, are classified as property, plant and equipment. Costs of major repairs and overhauls of
those units are capitalised as separate components.
Depreciation
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each component of an item
of property, plant and equipment. Land and assets in the course of construction are not depreciated. All other property, plant and
equipment, including capitalised leased assets, are depreciated on a straight-line basis over their estimated useful lives or the term of
the lease, if shorter. Major repairs and overhauls are depreciated over the remaining useful life of the related asset or to the date of the
next major repair or overhaul, whichever is shorter. Depreciation commences when the asset is available for its intended use by
management. The estimated useful lives for the current and comparative periods are as follows:
Years
Buildings and structures 10 – 50
– Buildings and structures components 5 – 25
Permanent way and works 3 – 95
Aircraft including components 8 – 15
Pipelines including network components 6 – 60
Port infrastructure 12 – 50
– Floating craft including components 10 – 20
– Port operating equipment including components 3 – 40
Rolling stock 30 – 60
– Rolling stock components 25 – 30
Containers 10 – 20
Motor vehicles 3 – 7
Machinery, equipment and furniture 3 – 50
The useful lives, depreciation method and the residual values of assets are reviewed and adjusted annually, if appropriate. Changes
resulting from this review are accounted for prospectively as changes in estimates. An asset’s carrying amount is written down
immediately to its recoverable amount if the asset’s carrying value exceeds its estimated recoverable amount (refer note 4.4).
INVESTMENT PROPERTIES
Investment properties are properties held to either earn rentals and/or for capital appreciation and are initially measured at cost,
including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value. Gains and losses arising
from changes in the fair value of investment properties are recognised in the income statement. Rental income from investment
properties is accounted for as described in “REVENUE” on page 154.
INTANGIBLE ASSETS AND GOODWILL
Software and licences
Software and licences are recognised and measured at cost less accumulated amortisation and any impairment losses.
Costs associated with researching or maintaining computer software programmes are recognised as an expense as incurred. Costs that are
directly associated with the development of identifiable software products controlled by the Group, and that will probably generate
economic benefits beyond one year, as well as for which the costs can be measured reliably, are recognised as intangible assets. Direct
costs include the software development employee costs and an appropriate portion of relevant overheads. Costs relating to the acquisition
of licences are capitalised and amortised on a straight-line basis when available for use in the manner intended by management.
Research and development
Research costs, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are recognised in the
income statement as incurred. Development costs, arising from the application of the research findings to a plan or design for the production
of new or substantially improved products and processes, are also recognised in the income statement as incurred, except where:
• an asset is created that can be identified;
• the development cost of the asset can be reliably measured;
ACCOUNTING POLICIES continued
158 TRANSNET ANNUAL REPORT 2007
• the development is evaluated as being technically or commercially feasible;
• the Group has sufficient resources to complete development; and
• the Group can demonstrate how the development will generate future economic benefits in which event the development costs are
capitalised. The expenditure capitalised includes the cost of materials, direct labour and an appropriate portion of overheads.
Capitalised development costs are stated at cost less accumulated amortisation and any accumulated impairment losses. Development
costs that have finite useful lives are amortised on a straight-line basis over their useful lives. Development costs with indefinite useful
lives are not amortised, but tested at each balance sheet date for impairment.
Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in
the specific asset to which it relates. All other expenditure is expensed as incurred.
Amortisation and impairment
Intangible assets with an indefinite useful life are tested for impairment at each balance sheet date. Amortisation is charged to the
income statement on a straight-line basis over the estimated useful lives of intangible assets, unless such lives are indefinite. Other
intangible assets are amortised from the date they are available for use. The estimated useful lives for the current and comparative
periods are as follows:
Software 5 years
Licences term of the licence
Positive goodwill
In respect of business combinations that have occurred since 1 April 2004, goodwill represents the excess of the cost of the
acquisition of interests in subsidiaries and associates over the net fair value of the identifiable assets, liabilities and contingent
liabilities at the date of acquisition.
Goodwill is stated at cost less accumulated impairment losses. Goodwill is tested annually for impairment as well as when there is an
indication of impairment. Goodwill is allocated to cash-generating units that are expected to benefit from the synergies of the
combination for the purposes of impairment testing (refer “IMPAIRMENT OF ASSETS” on page 155). Impairment losses recognised are
not subsequently reversed.
Goodwill arising on acquisition of an associate is included within the carrying amount of the investment in the associate. Goodwill
arising on the acquisition of subsidiaries and jointly controlled entities is presented separately on the balance sheet.
Gains and losses on the disposal of an entity include the carrying amount of goodwill attributable to the entity sold.
Negative goodwill
Negative goodwill represents the excess of the fair value of the identifiable assets and liabilities acquired over the cost of acquisition
of the Group’s interests in subsidiaries, associates or jointly controlled entities.
Negative goodwill arising on an acquisition is recognised directly in the income statement, provided that the negative goodwill is
supported by the reassessment of the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent
liabilities and the cost of the business combination.
FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are recognised on the balance sheet when the Group has become party to the contractual
provisions of the instruments.
Measurement
Financial instruments are initially recognised at fair value and transaction costs for a financial asset or financial liability that is not
carried at fair value through profit or loss. Subsequent to initial recognition these instruments are measured as set out below.
Recognition
The Group applies trade date accounting for “regular way” purchases and sales and settlement date accounting is applied to the
Transnet bonds. Financial instruments recognised on the balance sheet include:
TRANSNET ANNUAL REPORT 2007 159
Investments, including subsidiaries, jointly controlled entities and associates
After initial recognition, investments in the Group’s market-making portfolios in both bonds and money market instruments, which are
classified as held for trading, as well as those classified as available-for-sale, are measured at fair value. Fair value is the market value
(listed investments) of either the market price of a substantially similar investment or the present value of expected future cash flows
of the net asset base (unlisted investments). Gains or losses on investments held for trading are recognised in the income statement.
Gains or losses on available-for-sale investments are recognised as a separate component of the Group’s equity until the investment is
sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss
previously reported in equity is recognised in the income statement. Impairment losses on available-for-sale equity instruments that
are recognised in the income statement are not subsequently reversed.
In the Company’s financial statements, investments in unlisted subsidiaries, jointly controlled entities and associates are carried at
cost less accumulated impairment and losses where appropriate.
Other long-term investments that the Group is able to and intends to hold to maturity are subsequently measured at amortised cost
using the effective interest method less any impairment losses recorded to reflect irrecoverable amounts. Amortised cost is calculated
by taking into account any discount or premium on acquisition over the period to maturity. For investments carried at amortised cost,
gains and losses are recognised in profit or loss when the investments are derecognised or impaired, as well as through the
amortisation process.
Derivative instruments and hedging
The Group uses derivative financial instruments, which include futures, forward exchange and currency option contracts, cross currency
and interest rate swaps and interest rate options to hedge its exposures arising from operational, financing and investment activities.
In accordance with its Treasury policy, the Group does not speculate in the trading of derivative instruments.
Subsequent to initial recognition, derivative financial instruments are measured at fair value. The fair value changes are recognised
directly in the income statement (even if the derivative is designated as a hedging instrument refer below).
The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance
sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of the
forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.
The Group designates certain derivatives as hedges of the fair value of recognised assets or liabilities or firm commitments (fair value
hedges). At the inception of the hedge relationship, the relationship between the hedging instrument and the hedged item is
documented, along with its risk management objectives and its strategy for undertaking various hedge transactions. At the inception
of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in the hedging relationship is
highly effective in offsetting changes in fair values of cash flows of the hedged item.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement
immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.
Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising
from the hedged risk is amortised to the income statement from that date.
Derivatives embedded in other financial instruments or non-derivative host contracts are treated as separate derivatives when their
risks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value with
unrealised gains or losses reported in the income statement. The Group assesses whether an embedded derivative is required to be
separated from the host contract and accounted for as a derivative when the Group first becomes a party to the contract.
Subsequent reassessment is only performed by the Group if there is a change in the terms of the contract that significantly modifies
the cash flows that otherwise would be required under the contract.
Loans receivable
Loans receivable are measured at amortised cost, using the effective interest rate method, less any impairment recognised. Amortised
cost is calculated by taking into account any transaction costs, and any discount or premium on settlement.
Trade and other receivables
Trade and other receivables, which generally have 30 to 90-day terms, are recognised and carried at amortised cost using the effective
interest method. Allowances for irrecoverable amounts are recognised in the income statement when there is objective evidence that
the asset is impaired. The allowance is measured as the difference between the carrying amount and the present value of estimated
future cash flows discounted at the effective interest rate computed at initial recognition.
ACCOUNTING POLICIES continued
160 TRANSNET ANNUAL REPORT 2007
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on hand, and instruments which are readily convertible, within 90 days, to known
amounts of cash and are subject to an insignificant risk of change in value. Cash and cash equivalents are measured at amortised cost.
For the purposes of the consolidated cash flow statements, cash and cash equivalents include bank overdrafts.
Financial liabilities
After initial recognition, financial liabilities other than financial liabilities at fair value through profit or loss are subsequently measured
at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any transaction costs, and
any discount or premium on settlement.
Financial liabilities at fair value through profit or loss are measured at fair value and the resultant gains and losses are included in
profit or loss. Buybacks on bonds are recorded on a FIFO basis.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less related transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised
in the income statement over the period of the borrowings on an effective interest basis.
Trade payables and accruals
Liabilities for trade and other amounts payable which are settled within normal terms are stated at amortised cost.
Impairment of financial assets
An assessment is made at each balance sheet date to determine whether there is objective evidence that a financial asset or group
of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of the asset is determined and an
impairment loss is recognised for the difference between the recoverable amount and the carrying amount as follows:
• For financial assets held at amortised cost – the carrying amount of the asset is reduced to its discounted estimated recoverable
amount (present value of estimated future cash flows, discounted at the original effective interest rate), and the resulting loss is
recognised in the income statement for the period. Receivables with a short duration are not discounted.
• For available-for-sale financial assets – where a loss has been recognised directly in equity as a result of a previous downward fair
value adjustment, the cumulative net loss recognised in equity is transferred to the income statement for the period.
An impairment loss in respect of a held-to-maturity security or receivable carried at amortised cost is reversed if the subsequent
increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An
impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have
been determined if no impairment loss has been recognised.
An impairment loss in respect of an investment in an equity instrument classified as available-for-sale is not reversed through profit or
loss. An impairment loss in respect of a debt instrument classified as available-for-sale is reversed through profit and loss if its fair
value increases and the increase can be objectively related to an event occurring after the impairment loss was originally recognised in
profit or loss.
Offset
Where a legally enforceable right of offset exists for recognised financial assets and financial liabilities, and there is an intention to
settle the liability and realise the asset simultaneously, or settle on a net basis, all related financial effects are offset.
Financial liabilities and equity
Financial instruments issued by the Group are classified according to their substance and definitions of financial liabilities and equity.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Equity instruments are recorded at the value of the proceeds received, net of direct issue costs.
Derecognition
Financial assets (or a portion thereof) are derecognised when the Group’s rights to the cash flow expire or when the Group transfers
substantially all the risks and rewards related to the financial asset or when the entity loses control of the financial asset. On
derecognition, the difference between the carrying amount of the financial asset and proceeds receivable and any prior adjustment
to reflect fair value that had been reported in equity are included in the consolidated income statement.
Financial liabilities (or a portion thereof) are derecognised when the obligations specified in the contract are discharged, cancelled or
expired. On derecognition, the difference between the carrying value of the financial liability, including related unamortised costs, and
settlement amounts paid is included in the consolidated income statement.
TRANSNET ANNUAL REPORT 2007 161
Fair value methods and assumptions
The fair value of financial instruments traded in an active financial market is measured at the applicable quoted prices.
The fair value of financial instruments not traded in an active financial market, is determined using a variety of methods and
assumptions that are based on market conditions and risks existing at balance sheet date, including independent appraisals and
discounted cash flow methods.
The carrying amounts of financial assets and liabilities with a maturity of less than six months are assumed to approximate their fair value.
INVENTORIES
Inventories are stated at the lower of cost and estimated net realisable value. Net realisable value represents the estimated selling
price in the ordinary course of business, less all estimated costs of completion and selling.
Cost is determined as follows:
• Raw materials and consumable stores are stated at weighted average cost.
• Manufactured goods and work in progress are stated at weighted average cost valued at raw material cost, plus direct labour cost,
and an appropriate portion of related manufacturing overhead cost, based on normal capacity.
Write-downs to net realisable value and inventory losses are expensed in the period in which the write-downs or losses occur.
CONSTRUCTION WORK IN PROGRESS
Construction work in progress represents the gross unbilled amount expected to be collected from customers for contract work
performed to date. It is measured at cost plus profit recognised to date less progress billings and recognised losses. Cost includes all
expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract
activities based on normal operating capacity.
Construction work in progress is presented as part of trade and other receivables in the balance sheet. If payments received from
customers exceed the income recognised, then the difference is presented as deferred income in the balance sheet.
NON-CURRENT ASSETS CLASSIFIED AS HELD-FOR-SALE AND DISCONTINUED OPERATIONS
Non-current assets and disposal groups are classified as held-for-sale if their carrying amount will be recovered principally through
a sale transaction rather than continuing use. This condition is regarded as met only when the sale is highly probable and the asset
or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should
be expected to qualify for recognition as a completed sale within one year from the date of classification.
Immediately before classification as held-for-sale, the measurement of the assets (and all assets and liabilities in a disposal group) is
brought up-to-date in accordance with applicable IFRSs. Then, on initial classification as held-for-sale, non-current assets and disposal
groups are recognised at the lower of carrying amount and the fair value less costs to sell.
Impairment losses on initial classification as held-for-sale are included in the income statement, even when the assets have been
recorded at revalued amounts. The same applies to gains and losses on subsequent measurement. A gain or subsequent increase in fair
value less costs to sell may not exceed the cumulative impairment losses previously recognised in terms of IFRS 5 or IAS 36.
Non-current assets classified as held-for-sale are not depreciated or amortised whilst classified as such.
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area
of operations or is a subsidiary acquired exclusively with a view to resell.
Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held-for-
sale, if earlier. A disposal group that is to be abandoned may also qualify as a discontinued operation.
SHARE CAPITAL
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of taxation, from the
proceeds. Incremental costs directly attributable to the issue of new shares for the acquisition of a business are included in the cost
of a business acquisition.
When share capital is repurchased, the amount of the consideration paid, including directly attributable costs, is deducted from equity.
Repurchased shares are classified as treasury shares and presented as a deduction from the total equity until they are cancelled, re-
issued or disposed of.
Dividends are recognised as a liability in the period in which they are declared.
ACCOUNTING POLICIES continued
162 TRANSNET ANNUAL REPORT 2007
EMPLOYEE BENEFITS
The Group operates several defined benefit funds and a defined contribution fund. The assets of each scheme are held separately from
those of the Group and are administered by the schemes’ trustees. The defined benefit funds are actuarially valued for accounting
purposes by professional independent consulting actuaries on an annual basis.
Defined contribution fund
The Group’s contributions to the defined contribution fund are charged to the income statement during the period to which they relate.
Defined benefit funds
The benefit costs and obligations under the defined benefit funds are determined separately for each fund using the projected unit
credit method. The benefit costs are recognised in the income statement. All actuarial gains and losses are recognised in the period in
which they occur outside of the income statement, in the statement of recognised income and expenditure.
When the benefits of a plan are improved, the portion of the increased benefit relating to past service by the employees is recognised
as an expense in the income statement on a straight-line basis over the average period until the benefit becomes vested. To the extent
that the benefits vest immediately, the expense is recognised immediately in the income statement.
The post-retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as
adjusted for unrecognised past service cost and reduced by the fair value of plan assets. Any asset resulting from this calculation is limited
to the unrecognised past service cost plus the present value of available refunds and reductions in the future contributions to the plan.
Post-retirement medical benefits
Post-retirement medical benefits are provided by the Group to qualifying employees and pensioners. The medical benefit costs are
determined through annual actuarial valuations by independent consulting actuaries using the projected unit credit method. Actuarial
gains or losses are recognised in line with the policy described above.
Short- and long-term benefits
The cost of all short-term employee benefits, such as salaries, bonuses, housing allowances, medical and other contributions is
recognised during the period in which the employee renders the related service.
The Group’s net obligation in respect of long-term service benefits, other than pension plans and post-retirement medical benefits is
the amount of future benefit that employees have earned in return for their service in the current and prior periods.
Termination benefits
Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever
an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it has
demonstrated its commitment to either terminate the employment of current employees according to a detailed formal plan without
possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.
LEASES
Group as a lessee
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership, are classified as
finance leases. Finance lease liabilities and leased assets are capitalised at the inception of the lease at the lower of the fair value of
the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and
finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of
finance charges, are included in other long-term payables.
The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic
rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases
are depreciated over the shorter of the asset’s useful life and the lease term.
Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments
made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line
basis over the period of the lease. Benefits received as an incentive to enter into an operating lease are recorded on a straight-line
basis over the lease term.
Group as a lessor
When assets are leased out under a finance lease, the present value of the lease payments, as well as the initial direct costs, are
recognised as a lease receivable. The difference between the gross receivable and the present value of the receivable is recognised as
unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects
a constant periodic rate of return.
TRANSNET ANNUAL REPORT 2007 163
Assets leased to third parties under operating leases are included in property, plant and equipment in the balance sheet. They are
depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income (net
of any incentives given to the lessee) is recognised on a straight-line basis over the lease term.
Sale and leaseback
Where a sale and leaseback agreement is classified as a finance lease, any excess of the sale proceeds over the carrying values is
deferred and recognised in the income statement over the period of the lease.
Where a sale and leaseback agreement is classified as an operating lease and the transaction took place at fair value, any excess or
deficit of the sale proceeds over the carrying values of the assets sold is recognised in the income statement in the year in which it
arises. If the deficit is compensated for by future lease payments at below market price, the deficit is deferred and amortised in
proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the
excess over fair value shall be deferred and amortised over the period for which the asset is expected to be used.
Determining whether an arrangement contains a lease
The Group ensures that the following two requirements are met, in order for an arrangement transacted by the Group to be classified as
a lease in terms of IAS 17:
• Fulfilment of the arrangement is dependant on the use of an asset or assets, and this fact is not necessarily explicitly stated by the
contract but rather implied; and
• The arrangement conveys a right to use the asset, if one of the following conditions is met:
– The purchaser has the ability or right to operate the asset or direct others to operate the asset, (while obtaining or controlling
more than an insignificant amount of the output of the asset); or
– The purchaser has the ability or right to control physical access to the asset, (while obtaining more than an insignificant amount
of the output of the asset); or
– There is only a remote possibility that parties other than the purchaser will take more than an insignificant amount of the
output of the asset, and the price that the purchaser will pay is neither fixed per unit of output nor equal to the current market
price at the time of delivery.
The Group’s assessment of whether an arrangement contains a lease is made at the inception of the arrangement, with reassessment
occurring in the event of limited changes in circumstances as specified by IFRIC 4.
PROVISIONS
Provisions are recognised in the balance sheet when the Group has a present legal or constructive obligation, as a result of a past event,
and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable
estimate can be made of the amount of the obligation. If the effect is material, provisions are determined by discounting the expected
future cash flows at a pre-taxation rate that reflects current market assessments of the time value of money and, where appropriate,
the risks specific to the liability.
Warranties
A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty
data and a weighting of all possible outcomes against their associated probabilities.
Restructuring
A provision for restructuring costs is recognised when the Group has a detailed formal plan for the restructuring and the Group has
raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing
its main features to those affected by it. Restructuring provisions only include those direct expenditures which are necessarily entailed
by the restructuring and not associated with the ongoing activities of the entity. Future operating costs are not provided for.
Environmental rehabilitation
In accordance with the Group’s environmental policy and applicable legal requirements, a provision for environmental rehabilitation in
respect of clean-up costs is recognised when it meets the recognition requirements for provisions.
Onerous contracts
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than
the unavoidable cost of meeting its obligations under the contract.
Other provisions
Other provisions, for example, third-party claims, freight insurance, customer claims and leave pay provisions are recognised when they
meet the recognition requirements as per IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
ACCOUNTING POLICIES continued
164 TRANSNET ANNUAL REPORT 2007
Financial guarantees
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of the debt
instrument. The Group recognises financial guarantee contracts initially at fair value. Subsequently these are recognised at the higher of:
• the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and
• the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue.
SEGMENT REPORTING
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or
providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards
that are different from those of other segments.
The Group conducts business in all aspects of transport and maritime operations, as well as related services. On the primary segment
basis, the main business groupings of the Group are rail, maritime, pipeline, aviation, road and property.
On the secondary segment basis, which is the reporting format by geographic analysis, the Directors consider that there is only
one material geographic segment, being the Republic of South Africa. Therefore it is not considered necessary to disclose
secondary segments.
ACCOUNTING POLICIES RELATING TO DISCONTINUED OPERATIONS
Critical judgements and estimates made in applying the accounting policies
Critical judgements made by the Transnet Board of Directors in applying accounting policies and key sources of estimation uncertainty
are detailed below:
Accrual for Frequent Flyer Programme
The amount of the accrual to be raised as a liability for the Voyager miles that are expected to be redeemed is determined using various
assumptions concerning the future behaviour of Voyager members. Those include the following:
• The Voyager members will continue to prefer redemption of mileage in exchange for the free air ticket instead of other non-air
ticket rewards such as free car hire and free wine tours.
• The Voyager members who redeem miles in exchange for the other rewards will continue to be immaterial within the next
financial year.
• The Voyager rewards for free tickets are non-displacing to fare-paying passengers, and therefore the incremental costs method
is appropriate in estimating the Voyager liability.
• The Voyager members accumulate miles from various sources including frequent flying using South African Airways (Pty) Ltd and
from the use of Voyager participating partners. No distinction is made at redemption point between miles earned from frequent
flying and those earned from other sources.
The carrying amount of the accrual for the Voyager miles is disclosed in note 29.
Air traffic liability and revenue recognition
The air traffic liability balance represents the proceeds from tickets and airway bills sold but not yet utilised. The balance includes the
value of coupons sold by South African Airways (Pty) Ltd (SAA), which will be flown and claimed in future periods by code-share and
interline partners. The liability is of a short-term nature and is reflected as a current liability.
Due to system limitations affecting SAA’s ability to accurately compute the forward sales liability on a ticket for ticket basis,
management had in the past applied a conservative approach in accounting for tickets sold but not yet flown. Industry norms indicate
a non-utilisation rate of between 0% and 3%. Management’s estimates made around the expected percentage of tickets sold that will
not be flown was 2% for passenger tickets and 4% for industry.
Management has revised its assumptions and judgement regarding the period over which the unlisted air tickets and airway bills are
released to income from a three-year rolling period to eighteen months. In making its judgement, management has considered
the following:
• The successful implementation of a new sales-based revenue accounting system that makes it possible to accurately determine
what part of this liability could be taken to revenue each financial year.
• The terms and conditions of the air tickets as stipulated in the International Air Transport Association (IATA) air tickets rules. In
terms of the rules, an air ticket is valid for a period of 12 months from the date of purchase. If it is not utilised within this period it
expires.
• Interline settlement and rejections can, however, take longer than 12 months to be processed.
TRANSNET ANNUAL REPORT 2007 165
Significant accounting policies
Basis of preparation
Subsequent to the adoption of IFRS 5 Non-current Assets Held-for-Sale and Discontinued Operations on 1 April 2005, non-current
assets classified as held-for-sale and disposal groups are stated at the lower of their carrying amount and fair value less costs to sell.
Foreign currency
Foreign currency transactions
In the case of aviation operations, the ruling exchange rate for translation of sales denominated in foreign currencies is the
International Air Transport Association (IATA) five-day average rate applicable to the transaction month.
Financial instruments
Pre-delivery payments
Pre-delivery payments paid to the manufacturers of aircraft in terms of the contractual arrangements governing the purchase
of aircraft are initially recognised as part of capital work in progress at the cost of the consideration delivered.
In the event that a decision is taken that it is likely that the underlying aircraft will not be purchased at the expected delivery date, but
will be leased under an operating lease, then the related pre-delivery payments will be measured at the present value of the
consideration expected to be received from the ultimate lessor. This consideration will, if it is denominated in foreign currency, be
translated into the measurement currency by applying the ruling exchange rate at the reporting date.
In calculating the value of the future consideration receivable, any benefit or loss that will result as a consequence of the Group having
secured the aircraft at the original contractual price as against the fair value of the aircraft at the date of delivery to the lessor, which
is taken into consideration in the future operating lease payments, forms part of the consideration receivable. Any loss arising on re-
measurement is classified as impairment.
Once the operating lease agreement related to the aircraft has been formally concluded, the receivable amount so arising is transferred
from capital work in progress to refundable deposits.
Where an aircraft is delivered under short-term bridging finance, pending the finalisation of an operating lease, the related pre-delivery
payments and the final instalment paid to the manufacturer are again measured at the present value of the expected consideration
from the lessor in the same manner as outlined above. Under these circumstances the full consideration receivable is classified under
refundable deposits.
Trade payables and accruals
Included in other payables is an accrual relating to the Frequent Flyer Programme. A subsidiary of the Group manages a travel incentive
programme (Voyager) whereby frequent travellers accumulate mileage credits that entitle them to free travel. The airline accrues the
estimated incremental cost of providing free travel awards. The accrued incremental cost is included in current liabilities.
Employee benefits
Share-based payment transactions
South African Airways (Pty) Ltd (SAA), operates via the South African Airways Share Incentive Scheme, three incentive schemes
created for the benefit of the employees of SAA namely:
• The FDC Share Scheme (for the flight deck crew members);
• The Share Incentive Scheme (for certain management individuals in SAA only); and
• The Employee Share Ownership Programme (allowed SAA employees who were employed by SAA on 1 April 1999 and who were still
in the employment of SAA on 1 March 2001 to acquire shares in SAA).
Under the schemes, the employees are entitled to acquire the subsidiary’s shares at nominal or discounted prices and, subsequently,
have the option to sell those shares back to the trust, either at a predetermined price or at a price based on the fair value of the share
at the time of repurchase. Since the subsidiary is not listed and the employees can only realise their benefit by selling the shares to the
trust, the transaction is considered to be a cash-settled share-based payment.
The fair value of the amount payable to the employee is recognised as an employee expense with a corresponding increase in liabilities.
The fair value is initially measured at grant date and spread over the service period during which the employees become unconditionally
entitled to payment. The fair value of the grant is measured based on a formula/model, taking into account the terms and conditions
upon which the instruments were granted. The liability is measured at each balance sheet date until it is settled. Any changes in the fair
value of the liability are recognised as an employee cost.
INCOME STATEMENTS
for the year ended 31 March 2007
166 TRANSNET ANNUAL REPORT 2007
Continuing operations
25 174 26 890 Revenue 2 28 214 26 034
Net operating expenses excluding depreciation
(15 869) (16 196) and amortisation 3 (16 726) (15 733)
Profit from operations before depreciation,
9 305 10 694 amortisation and items listed below 11 488 10 301
(2 084) (2 958) Depreciation and amortisation 4.1 (3 018) (2 163)
7 221 7 736 Profit from operations before the items listed below 4.2 8 470 8 138
322 – Profit on sale of interest in businesses 4.3 – 329
(197) (80) Impairment of assets 4.4 (232) (124)
340 47 Dividends received 36 85
278 663 Fair value adjustments 5 2 385 815
7 964 8 366 Profit from operations before net finance costs 10 659 9 243
(2 485) (2 412) Finance costs 6 (2 624) (2 668)
302 225 Finance income 7 187 262
5 781 6 179 Profit before taxation 8 222 6 837
(1 964) (1 882) Taxation 8 (1 902) (2 042)
3 817 4 297 Profit after taxation 6 320 4 795
Income from associates 13 2 33
3 817 4 297 Profit for the year from continuing operations 6 322 4 828
Discontinued operations
Profit from discontinued operations, including profit on
212 997 disposal of discontinued operations and impairments 1 1 082 102
4 029 5 294 Profit for the year 7 404 4 930
Attributable to equity holder 7 387 4 898
Attributable to minority interests 23 17 32
3 835 3 846 Headline earnings 36 5 700 4 383
* Refer note 37 for details of the restatements to prior year results.
COMPANY GROUP
2006 2007 2007 2006
Restated* Restated*
R million R million Notes R million R million
TRANSNET ANNUAL REPORT 2007 167
ASSETS
Non-current assets
44 617 53 314 Property, plant and equipment 9 53 826 45 181
2 337 2 820 Investment properties 10 2 859 2 369
168 204 Intangible assets and goodwill 11 207 172
279 374 Investments in subsidiaries 12
81 28 Investments in associates and joint ventures 13 47 98
216 321 Derivative financial assets 14 321 217
2 022 123 Long-term loans and advances 15 123 2 019
29 328 Other investments and long-term financial assets 16 460 88
49 749 57 512 57 843 50 144
Current assets
1 348 1 750 Inventories 17 1 798 1 396
3 895 3 716 Trade and other receivables 18 3 992 4 149
88 192 Derivative financial assets 14 5 658 3 874
642 703 Other short-term investments 16 704 643
1 114 3 142 Cash and cash equivalents 19 3 347 1 400
3 336 2 821 Assets classified as held-for-sale 20 3 912 16 740
10 423 12 324 19 411 28 202
60 172 69 836 Total assets 77 254 78 346
EQUITYAND LIABILITIES
Capital and reserves
14 710 12 661 Issued capital 21 12 661 14 710
12 548 20 515 Reserves 22 24 650 14 703
27 258 33 176 Attributable to the equity holder 37 311 29 413
Minority interests 23 122 113
27 258 33 176 37 433 29 526
Non-current liabilities
4 348 2 422 Post-retirement benefit obligations 24 2 422 4 348
15 940 17 241 Long-term borrowings 25 17 535 16 534
370 240 Derivative financial liabilities 14 240 408
830 925 Long-term provisions 26 928 847
50 1 670 Deferred taxation liabilities 27 1 707 52
21 538 22 498 22 832 22 189
Current liabilities
4 977 5 709 Trade payables and accruals 29 5 875 5 207
3 212 5 201 Short-term borrowings 30 7 615 5 323
1 259 482 Current taxation liability 502 1 283
140 165 Derivative financial liabilities 14 165 153
1 664 2 367 Short-term provisions 26 2 376 1 699
32 25 Bank overdrafts 19 26 34
Liabilities directly associated with assets
92 213 classified as held-for-sale 20 430 12 932
11 376 14 162 16 989 26 631
60 172 69 836 Total equity and liabilities 77 254 78 346
* Refer note 37 for details of the restatements to prior year results.
COMPANY GROUP
2006 2007 2007 2006
Restated* Restated*
R million R million Notes R million R million
BALANCE SHEETS
as at 31 March 2007
STATEMENT OF RECOGNISED INCOME AND EXPENSE
for the year ended 31 March 2007
168 TRANSNET ANNUAL REPORT 2007
164 1 461 Net gains on revaluation reserves 1 384 198
233 1 621 Gains on revaluations 1 574 267
Net realisation of the surplus on the MTN shares
(245) – transferred to profit and loss 22 – (245)
Net realisation of the equity accounted non-distributable
– – reserve relating to V&A Waterfront Holdings (Pty) Ltd 22 (119) –
376 963 Net gain on revaluation of port facilities 22 963 376
102 658 Net gain on revaluation of pipeline networks 22 658 102
– – Gain on revaluation of other investments 22 72 34
(69) (160) Taxation effect of revalued items 22 (190) (69)
(1) – Net movement on foreign currency translation reserve 22 (36) 36
(30) (842) Net decrease in other reserves 22 (857) (73)
1 777 1 212 Net actuarial gains on post-retirement benefit obligations 1 212 1 774
Actuarial gains related to post-retirement
2 502 1 707 benefit obligations 22 1 707 2 499
22 (157) – Actuarial (loss)/gain on the Transnet Pension Fund 33.1.2 (167) 22
– Actuarial gain on the Transnet Second
2 644 1 646 Defined Pension Fund 33.1.3 1 646 2 644
– Actuarial gain/(loss) on the Transnet Top
(17) 4 Management Pensions 33.1.4 4 (17)
– Actuarial loss on the Transnet Workmen’s
(26) – Compensation Act Pensioners 33.1.4 – (26)
– Actuarial gain/(loss) on the Transnet Black
(5) 3 Widows’ Pension Benefit 33.1.5 3 (5)
– Actuarial gain/(loss) on the Transnet SATS
(82) 134 Pensioners medical benefits 33.2.1 134 (82)
– Actuarial gain/(loss) on the Transnet Employees
(34) 77 medical benefits 33.2.2 87 (37)
(725) (495) Taxation effect of net actuarial gains (495) (725)
1 910 1 831 Net income recognised directly in equity 1 703 1 935
30 842 Transferred to accumulated profit 857 75
4 029 5 294 Profit for the year 7 404 4 930
5 969 7 967 Total recognised income for the year 9 964 6 940
5 969 7 967 Attributable to equity holder 9 947 6 908
– – Attributable to minority interests 23 17 32
5 969 7 967 9 964 6 940
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million Notes R million R million
TRANSNET ANNUAL REPORT 2007 169
4 997 7 841 Cash flows from operating activities 8 851 5 865
9 742 11 651 Cash generated from operations 35.1 13 488 11 244
(184) 412 Changes in working capital 35.2 133 (418)
Cash generated from operations after working
9 558 12 063 capital changes 13 621 10 826
(2 246) (2 077) Finance costs 35.3 (2 791) (2 900)
352 225 Finance income 304 418
(2 041) (1 901) Taxation paid 35.4 (1 961) (2 106)
(362) (421) Settlement of post-retirement benefit obligations (453) (362)
(264) (48) Derivatives raised and settled 139 (4)
Dividends paid to minorities 35.5 (8) (7)
(3 634) (8 405) Cash flows from investing activities (10 755) (2 479)
(2 212) (5 228) Investment to maintain operations (7 257) (970)
(4 375) (7 907) Replacements to property, plant and equipment (8 176) (4 856)
(65) (6) Additions to intangible assets (108) (75)
– (1) Intercompany transfers of intangible assets – –
90 220 Proceeds on the disposal of property, plant and equipment 315 1 682
– 2 Proceeds on the disposal of intangible assets 3 –
(Cash)/overdraft disposed on the disposal of
106 – subsidiaries/divisions 35.6 (1 922) 106
– 1 854 Proceeds on the disposal of associates 1 854 –
449 – Proceeds on the sale of other investments – 567
340 47 Dividend income 36 85
(190) 59 Acquisition of subsidiary/division 35.7 – –
Settlement of net liability on disposal of the
(78) – business of Spoornet Zambia – (78)
– (4) Acquisition of associates (4) –
(8) 117 Net loans to subsidiaries and associates 4 6
796 525 Net receipts of long-term loans and advances 522 798
723 (134) Decrease/(increase) in other investments 219 795
(1 422) (3 177) Investment to expand operations (3 498) (1 509)
(1 422) (3 177) Expansions – property, plant and equipment (3 498) (1 745)
– – Refunded pre-delivery payments on aircraft – 236
(2 060) 2 599 Cash flows from financing activities 3 669 (4 001)
(2 060) 2 599 Borrowings raised/(repaid) 3 669 (4 001)
(697) 2 035 Net increase/(decrease) in cash and cash equivalents 1 765 (615)
1 779 1 082 Cash and cash equivalents at the beginning of the year 1 691 2 306
1 082 3 117 Total cash and cash equivalents at the end of the year 3 456 1 691
1 082 3 117 Cash and cash equivalents at the end of the year 19 3 321 1 366
– – Transferred to assets classified as held-for-sale 135 325
Cash flows from discontinued operations
(100) (39) Cash flows from operating activities 389 (3)
(2) 4 Cash flows from investing activities (284) 1 714
64 35 Cash flows from financing activities 706 (1 894)
(38) – Net increase/(decrease) in cash and cash equivalents 811 (183)
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million Notes R million R million
CASH FLOWSTATEMENTS
for the year ended 31 March 2007
SEGMENTAL ANALYSIS
for the year ended 31 March 2007
170 TRANSNET ANNUAL REPORT 2007
Based on risk and returns the Directors consider that the primary reporting format is by business segment. The Group is organised
into different operating divisions and subsidiaries. This is the basis on which the Group reports its primary segment information.
The secondary reporting format is by geographic analysis and the Directors consider that, with the exception of Aviation, there is only
one geographic segment, being the Republic of South Africa.
Group Rail Maritime
2007 2006 2007 2006 2007 2006
Restated Restated Restated
R million R million R million R million R million R million
External revenue 50 301 48 261 15 272 16 545 9 780 8 738
Internal revenue – – 6 941 3 391 424 2
Total segment revenue 50 301 48 261 22 213 19 936 10 204 8 740
Revenue for discontinued operations (22 087) (22 227) (323) (2 157) – –
Revenue for continuing operations 28 214 26 034 21 890 17 779 10 204 8 740
Net operating expenses for continuing operations
excluding depreciation and amortisation (16 726) (15 733) (17 065) (14 443) (4 016) (3 696)
Total net operating expenses (38 829) (36 900) (17 633) (16 864) (4 016) (3 696)
Discontinued operations 22 103 21 167 568 2 421 – –
Profit/(loss) from operations before depreciation and amortisation 11 488 10 301 4 825 3 336 6 188 5 044
Depreciation and amortisation for continuing operations (3 018) (2 163) (1 818) (1 017) (754) (706)
Total depreciation and amortisation (3 020) (3 240) (1 820) (1 017) (754) (706)
Discontinued operations 2 1 077 2 – – –
Profit/(loss) from operations before items listed below 8 470 8 138 3 007 2 319 5 434 4 338
Profit/(loss) on sale of interests in businesses and dividends received
for continuing operations 36 414 – (23) 2 –
Total profit/(loss) on sale of interests in businesses and dividends received 1 673 563 – (23) 2 –
Discontinued operations (1 637) (149) – – – –
(Impairments)/reversal of impairment of assets for continuing operations (232) (124) (42) (127) (26) (20)
Total (impairments)/reversal of impairment of assets (218) (77) (42) (127) (26) (20)
Discontinued operations (14) (47) – – – –
Fair value adjustments for continuing operations 2 385 815 117 42 425 278
Total fair value adjustments 2 454 1 089 117 43 425 278
Discontinued operations (69) (274) – (1) – –
Segment profit/(loss) from continuing operations before net finance costs 10 659 9 243 3 082 2 211 5 835 4 596
Finance costs for continuing operations (2 624) (2 668) (1 257) (971) (530) (546)
Total finance costs (3 062) (3 352) (1 257) (972) (530) (546)
Discontinued operations 438 684 – 1 – –
Finance income for continuing operations 187 262 14 22 365 184
Total finance income 304 418 14 80 365 184
Discontinued operations (117) (156) – (58) – –
Segment profit/(loss) before taxation from continuing operations 8 222 6 837 1 839 1 262 5 670 4 234
Taxation (1 902) (2 042) (626) (808) (1 681) (1 412)
Total taxation (2 203) (2 117) (626) (808) (1 681) (1 412)
Discontinued operations 301 75 – – – –
Segment profit/(loss) after taxation from continuing operations 6 320 4 795 1 213 454 3 989 2 822
Income from associates of continuing operations 2 33 – – – –
Total income from associates 4 285 – – – –
Discontinued operations (2) (252) – – – –
Profit/(loss) from continuing operations 6 322 4 828 1 213 454 3 989 2 822
Profit/(loss) from discontinued operations including profit
on disposal of discontinued operations and impairments 1 082 102 (247) (206) – –
Profit for the period 7 404 4 930 966 248 3 989 2 822
Minority interests (17) (32) – – – –
Segment profit/(loss) for the year attributable to equity holder 7 387 4 898 966 248 3 989 2 822
Other information***
Segment assets 77 106 76 966 30 499 23 759 26 102 22 655
Investments in associates 148 1 380 – – 2 4
Consolidated total assets 77 254 78 346 30 499 23 759 26 104 22 659
Segment liabilities 37 612 47 485 17 774 12 097 2 635 3 641
Income taxation liabilities 502 1 283 (142) 509 1 549 1 345
Deferred taxation liabilities 1 707 52 1 625 499 664 265
Consolidated total liabilities 39 821 48 820 19 257 13 105 4 848 5 251
Capital expenditure 11 674 6 601 8 010 4 003 2 875 1 569
* Other operations incorporates all other operating divisions and subsidiaries and Company/Group adjustments and reclassifications.
** Prior to set-off of pre-delivery payments refunded on South African Airways (Pty) Ltd aircraft amounting to R 236 million.
*** Including discontinued operations.
TRANSNET ANNUAL REPORT 2007 171
Other Intercompany
Pipeline Aviation Road Property operations* elimination
2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
Restated Restated Restated Restated Restated Restated
R million R million R million R million R million R million R million R million R million R million R million R million
1 216 1 058 21 960 19 936 1 112 1 009 165 215 796 760 – –
2 – – 361 477 621 90 75 2 047 2 530 (9 981) (6 980)
1 218 1 058 21 960 20 297 1 589 1 630 255 290 2 843 3 290 (9 981) (6 980)
– – (20 645) (19 329) (1 589) (1 604) – – (7) (34) 477 897
1 218 1 058 1 315 968 – 26 255 290 2 836 3 256 (9 504) (6 083)
(287) (198) (1 007) (661) – (20) (194) (176) (3 415) (2 938) 9 258 6 399
(287) (198) (21 518) (18 845) (1 258) (1 197) (194) (176) (3 395) (2 966) 9 472 7 042
– – 20 511 18 184 1 258 1 177 – – (20) 28 (214) (643)
931 860 308 307 – 6 61 114 (579) 318 (246) 316
(259) (237) (59) (50) – – (31) (27) (121) (126) 24 –
(259) (237) (803) (896) (245) (231) (31) (27) 868 (126) 24 –
– – 744 846 245 231 – – (989) – – –
672 623 249 257 – 6 30 87 (700) 192 (222) 316
– – – – – – (1) – 47 693 (12) (256)
– – – – – – (1) – 1 684 842 (12) (256)
– – – – – – – – (1 637) (149) – –
– – – (24) – (6) 1 (5) (165) 58 – –
– – 17 23 (1) (6) 1 (5) (167) 58 – –
– – (17) (47) 1 – – – 2 – – –
– – 3 38 – – 198 86 1 642 371 – –
– – 72 311 – – 198 86 1 642 371 – –
– – (69) (273) – – – – – – – –
672 623 252 271 – – 228 168 824 1 314 (234) 60
(301) (298) (88) (101) – (1) (10) – (4 987) (4 446) 4 549 3 695
(301) (298) (526) (782) (48) (48) (10) – (4 987) (4 446) 4 597 3 740
– – 438 681 48 47 – – – – (48) (45)
73 47 2 10 – 7 30 17 4 280 3 667 (4 577) (3 692)
73 47 130 147 8 12 30 17 4 281 3 671 (4 597) (3 740)
– – (128) (137) (8) (5) – – (1) (4) 20 48
444 372 166 180 – 6 248 185 117 535 (262) 63
(107) (161) – – – (3) (7) (102) 519 444 – –
(107) (161) (42) (12) (47) (66) (7) (102) 307 444 – –
– – 42 12 (47) 63 – – 212 – – –
337 211 166 180 – 3 241 83 636 979 (262) 63
– – – – – – – – 2 33 – –
– – – – – – – – 4 285 – –
– – – – – – – – (2) (252) – –
337 211 166 180 – 3 241 83 638 1 012 (262) 63
– – (876) 63 2 91 – – 2 442 (96) (235) 250
337 211 (710) 243 (2) 94 241 83 3 080 916 (497) 313
– – – – (17) (32) – – – – – –
337 211 (710) 243 (19) 62 241 83 3 080 916 (497) 313
4 555 3 793 916 14 589 1 744 1 877 1 757 1 607 15 567 15 042 (4 034) (6 356)
– – – – – – 3 4 143 1 372 – –
4 555 3 793 916 14 589 1 744 1 877 1 760 1 611 15 710 16 414 (4 034) (6 356)
1 423 1 502 1 077 13 667 840 979 (82) 39 16 804 17 842 (2 859) (2 282)
157 179 – – – – (14) 31 (1 048) (781) – –
466 (88) (9) – – – 86 81 (1 125) (705) – –
2 046 1 593 1 068 13 667 840 979 (10) 151 14 631 16 356 (2 859) (2 282)
310 220 341 438** 302 446 30 11 321 347 (515) (433)
Rail includes Freight Rail, Rail Engineering, Shosholoza Meyl, Luxrail and Metrorail.
Maritime includes National Ports Authority and Port Terminals.
Aviation includes South African Airways (Pty) Ltd and South African Express Airways (Pty) Ltd.
Road includes freightdynamics, Autopax Passenger Services (Pty) Ltd and Viamax (Pty) Ltd.
Property includes Transnet Properties, Transhold Properties (Pty) Ltd and Proptrade (Pty) Ltd.
NOTES TO THE ANNUAL FINANCIAL STATEMENTS
for the year ended 31 March 2007
172 TRANSNET ANNUAL REPORT 2007
1. DISCONTINUED OPERATIONS
The profit from discontinued operations, including
profit on disposal of discontinued operations
and impairments, comprises:
63 (76) (Loss)/profit from discontinued operations (refer below) (349) (47)
Profit on disposal of discontinued operations, net
149 1 073 of taxation 4.3 1 433 149
Impairments – Lower of carrying value and fair
– – value less costs to sell 4.4 (2) –
212 997 1 082 102
(Loss)/profit from discontinued operations
2 703 1 001 Revenue 2 22 087 22 227
Net operating expenses excluding depreciation
(2 657) (1 074) and amortisation 3 (22 103) (21 167)
(Loss)/profit from operations before depreciation
46 (73) and amortisation (16) 1 060
(32) (2) Depreciation and amortisation 4.1 (2) (1 077)
(Loss)/profit from operations before the items
14 (75) listed below 4.2 (18) (17)
– (1) Reversal of impairment/(impairment) of assets 4.4 16 47
– – Fair value adjustments 5 69 274
14 (76) Profit/(loss) from operations before net finance costs 67 304
(1) – Finance costs 6 (438) (684)
50 – Finance income 7 117 156
63 (76) (Loss)/profit before taxation (254) (224)
– – Taxation 8 (97) (75)
63 (76) (Loss)/profit after taxation (351) (299)
Income from associates 13 2 252
63 (76) (Loss)/profit for the year (349) (47)
Attributable to the shareholder (366) (79)
Attributable to minority interests 23 17 32
(For details of which entities are discontinued,
refer annexure C.)
2. REVENUE
25 724 26 606 Rendering of services 48 683 45 765
608 511 Rental income 844 951
304 236 Finance income from lending activities 236 304
188 538 Construction contracts (refer note 28) 538 188
14 – Notional revenue on embedded derivatives – 14
1 039 – Other – 1 039
27 877 27 891 50 301 48 261
(2 703) (1 001) Discontinued operations (22 087) (22 227)
25 174 26 890 Continuing operations 28 214 26 034
Other revenue in the prior year was a contractual payment from the South African Government through the South African Railway
Commuter Corporation (SARCC) of R1 039 million. This payment was applied in the operation of the commuter rail network operated
by Metrorail, which was disposed of at 26 December 2005.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million Notes R million R million
TRANSNET ANNUAL REPORT 2007 173
3. NET OPERATING EXPENSES EXCLUDING
DEPRECIATION AND AMORTISATION
113 99 Accommodation and refreshments 798 784
439 829 Electronic data costs 1 308 982
2 467 2 437 Energy costs 8 567 7 790
162 145 Health and sanitation 228 237
154 193 Insurance 315 297
890 576 Maintenance 769 633
Managerial and technical consulting
568 773 fees (refer note 4.2) 943 701
1 540 288 Material costs 2 008 2 742
– – Navigation, landing and parking fees 1 131 1 056
968 1 461 Operating lease charges (refer note 4.2) 3 872 3 168
– – Passenger handling, rescheduling and airline costs 1 718 1 525
9 062 7 979 Personnel costs 11 303 12 532
775 977 Post-retirement benefit obligation costs 1 285 1 027
60 49 Printing and stationery 93 127
(Profit)/loss on disposal of property, plant and
19 (6) equipment (refer note 4.2) (27) (267)
54 69 Promotions and advertising 540 745
470 268 Security 365 565
– – Share-based payments expense – 2
90 18 Telecommunications 48 133
11 45 Transport 744 184
684 1 070 Other 2 821 1 937
18 526 17 270 38 829 36 900
(2 657) (1 074) Discontinued operations (22 103) (21 167)
15 869 16 196 Continuing operations 16 726 15 733
4.1 DEPRECIATION AND AMORTISATION
2 065 2 879 Depreciation (refer annexure B) 2 939 3 187
1 825 2 580 Depreciation – Owned assets at historic cost 2 615 2 914
– – Aircraft 42 796
184 301 Land, buildings and structures 301 235
274 295 Machinery, equipment and furniture 295 315
134 242 Permanent way and works 240 133
141 120 Pipeline networks 119 141
349 409 Port facilities 405 349
696 1 188 Rolling stock and containers 1 188 698
47 25 Vehicles 25 247
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
174 TRANSNET ANNUAL REPORT 2007
4.1 DEPRECIATION AND AMORTISATION (continued)
Depreciation (refer annexure B) (continued)
240 244 Depreciation – Owned assets revalued portion 244 240
73 118 Pipeline networks 118 73
167 126 Port facilities 126 167
– 55 Depreciation – Leased assets 80 33
– 16 Rolling stock and containers 16 –
– 39 Machinery, equipment and furniture 39 –
– – Aircraft 25 33
(31) (2) Discontinued operations (2) (1 076)
2 034 2 877 Continuing operations 2 937 2 111
51 81 Amortisation of intangible assets (refer note 11) 81 53
(23) – Development – (23)
74 81 Software and licenses 81 76
(1) – Discontinued operations – (1)
50 81 Continuing operations 81 52
2 084 2 958 Total depreciation and amortisation 3 018 2 163
4.2 PROFIT FROM OPERATIONS BEFORE PROFIT OF SALE
OF INTEREST IN BUSINESSES, IMPAIRMENT OF ASSETS,
DIVIDENDS RECEIVED, FAIR VALUE ADJUSTMENTS AND
NET FINANCE COSTS
is stated after taking into account the following amounts:
Auditors’ remuneration
80 46 Group auditors 69 103
58 47 Audit fees 69 80
5 (8) Audit fees – prior year (overprovision)/underprovision (7) 5
15 4 Fees for other services 4 15
2 3 Expenses 3 3
(2) (1) Discontinued operations (22) (26)
78 45 Continuing operations 47 77
568 773 Managerial and technical consulting fees 943 701
(31) (8) Discontinued operations (176) (155)
537 765 Continuing operations 767 546
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 175
4.2 PROFIT FROM OPERATIONS BEFORE PROFIT OF SALE
OF INTEREST IN BUSINESSES, IMPAIRMENT OF ASSETS,
DIVIDENDS RECEIVED, FAIR VALUE ADJUSTMENTS AND
NET FINANCE COSTS (continued)
968 1 461 Operating lease charges 3 872 3 168
33 1 Aircraft 2 608 2 005
129 588 Land, buildings and structures 678 207
806 872 Other 586 956
(95) (62) Discontinued operations (2 779) (2 214)
873 1 399 Continuing operations 1 093 954
19 (6) (Profit)/loss on disposal of property, plant and equipment (27) (267)
4 (10) Discontinued operations 11 304
23 (16) Continuing operations (16) 37
15 68 Research and development costs 68 17
– – Discontinued operations (1) (2)
15 68 Continuing operations 67 15
Directors’ and executives’ emoluments (full details
47 56 are disclosed in the report of the Directors) 79 76
11 14 Executive Directors 34 36
5 6 Non-executive Directors 9 9
31 36 Senior executives 36 31
– Discontinued operations (20) (25)
47 56 Continuing operations 59 51
471 1 073 4.3 PROFIT ON DISPOSAL OF INTEREST IN BUSINESSES 1 433 478
– – Profit on sale of interest in South African Airways (Pty) Ltd* 938 –
– 1 230 Profit on sale of interest in V&A Waterfront Holdings (Pty) Ltd 711 –
(Loss)/profit on sale of interest in Equity
– 47 Aviation (Pty) Ltd (12) –
Capital gains taxation on disposal of interest in
V&A Waterfront Holdings (Pty) Ltd and Equity
– (204) Aviation (Pty) Ltd (204) –
67 – Profit on sale of interest in divisions and operations – 67
404 – Disposal of investment in MTN Group Ltd – 404
– – Other – 7
(149) (1 073) Discontinued operations (1 433) (149)
322 – Continuing operations – 329
4.4 IMPAIRMENT/(REVERSAL OF IMPAIRMENT) OF ASSETS
197 81 Impairment of assets 218 77
64 115 Property, plant and equipment 154 16
234 (154) Loss-making subsidiaries and associates – 141
(101) 120 Trade and other receivables and loans and advances 64 (80)
– (1) Discontinued operations – reversal 14 47
197 80 Continuing operations 232 124
* Excluding the effect of the share buy-back of R2 049 million (refer note 21). The total effect is a R1 011 million decrease in net equity.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
176 TRANSNET ANNUAL REPORT 2007
5. FAIR VALUE ADJUSTMENTS
(2) 44 Derivative fair value adjustments 245 271
– – Revaluation of C class preference shares (refer note 14) 1 713 500
373 483 Fair value adjustment of investment properties 490 372
(136) (86) Fair value adjustments to treasury bonds (86) (136)
– 233 Gains on hedging instruments 94 –
43 (11) Other fair value adjustments (2) 82
278 663 2 454 1 089
– – Discontinued operations (69) (274)
278 663 Continuing operations 2 385 815
Reconciliation of fair value adjustments to note 14
278 663 Fair value adjustments per above 2 454 1 089
14 – Embedded derivative recognised in revenue (refer note 2) – 14
Fair value adjustment of investment properties
(373) (483) (refer note 10) (490) (372)
136 86 Treasury bonds 86 136
(27) – Other fair value adjustments – (4)
28 266 Fair value adjustments 2 050 863
28 266 – Per note 14 1 981 863
– – – Per annexure C, note e 69 –
6. FINANCE COSTS
21 32 Net foreign exchange (gains)/losses on translation (32) 233
219 303 Discounts on bonds amortised 303 219
2 246 2 077 Interest cost 2 791 2 900
2 486 2 412 3 062 3 352
(1) – Discontinued operations (438) (684)
2 485 2 412 Continuing operations 2 624 2 668
7. FINANCE INCOME
276 160 Interest received from other investments 304 418
76 65 Interest received from subsidiaries – –
352 225 304 418
(50) – Discontinued operations (117) (156)
302 225 Continuing operations 187 262
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 177
8. TAXATION
South African normal taxation
1 688 971 – Current year 1 004 1 811
– – – Prior year 41 12
Deferred taxation (refer note 27 and annexure C, note n)
276 1 001 – Current year 1 034 287
(58) (36) – Prior year (36) (58)
Secondary taxation on companies
– – – Current year 3 –
Capital gains taxation
58 150 – Current year 150 58
Foreign taxation
– – – Current year 7 7
1 964 2 086 2 203 2 117
– (204) Discontinued operations (301) (75)
1 964 1 882 Continuing operations 1 902 2 042
% % Reconciliation of taxation rate % %
29,00 29,00 Standard rate – South African normal taxation 29,00 29,00
3,77 (0,73) Adjustment for differences (6,07) 2,31
3,77 (2,27) (Expenses)/income not included for taxation purposes (9,64) 3,73
0,96 2,03 Capital gains taxation 1,56 0,86
– – Secondary taxation on companies 0,03 –
– – Deferred taxation not provided 2,74 (1,60)
– – Assessed loss utilised (0,81) –
(0,96) (0,49) Adjustment to prior year deferred taxation charge (0,37) (0,86)
– – Adjustment to prior year current taxation charge 0,42 0,18
32,77 28,27 Effective rate of taxation 22,93 31,31
– 16,99 Discontinued operations 21,76 100,00
33,97 30,46 Continuing operations 23,13 29,87
R million R million R million R million
– – Total estimated taxation losses 552 12 380
– – Discontinued operations (95) (11 905)
– – Continuing operations 457 475
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
178 TRANSNET ANNUAL REPORT 2007
9. PROPERTY, PLANTAND EQUIPMENT(refer annexure B)
Property, plant and equipment is stated at historical
cost except for pipeline networks and port facilities,
which are stated at revalued amounts.
44 617 53 314 Net book value 53 826 45 181
70 456 80 952 Gross carrying value 82 039 71 505
(25 839) (27 638) Accumulated depreciation and impairment (28 213) (26 324)
Comprising:
Historical cost
42 135 49 050 Gross carrying value 50 192 43 184
26 26 – Aircraft 1 123 1 045
9 571 9 938 – Land, buildings and structures 9 958 9 575
3 857 3 482 – Machinery, equipment and furniture 3 533 3 914
7 672 7 935 – Permanent way and works 7 880 7 617
13 142 17 715 – Rolling stock and containers 17 715 13 142
458 578 – Motor vehicles 585 445
7 409 9 376 – Capital work in progress 9 398 7 446
(11 293) (11 817) Accumulated depreciation (12 371) (11 764)
(25) (25) – Aircraft (536) (469)
(1 446) (1 707) – Land, buildings and structures (1 709) (1 447)
(2 500) (1 953) – Machinery, equipment and furniture (1 991) (2 542)
(2 096) (2 315) – Permanent way and works (2 313) (2 096)
(4 836) (5 415) – Rolling stock and containers (5 415) (4 836)
(390) (402) – Motor vehicles (407) (374)
(562) (480) Accumulated impairment (506) (576)
(299) (121) – Land, buildings and structures (135) (300)
(27) (30) – Machinery, equipment and furniture (41) (39)
(54) (127) – Rolling stock and containers (127) (54)
– – – Motor vehicles (1) (1)
(182) (202) – Capital work in progress (202) (182)
Net book value of property, plant and equipment
30 280 36 753 stated at historical cost 37 315 30 844
Revaluation
28 321 31 902 Gross carrying value 31 847 28 321
9 335 10 377 – Pipeline networks 10 371 9 335
18 986 21 525 – Port facilities 21 476 18 986
(13 390) (14 737) Accumulated depreciation (14 732) (13 390)
(6 094) (6 649) – Pipeline networks (6 648) (6 094)
(7 296) (8 088) – Port facilities (8 084) (7 296)
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 179
9. PROPERTY, PLANTAND EQUIPMENT(refer annexure B)
(continued)
(594) (604) Accumulated impairment (604) (594)
(152) (153) – Pipeline networks (153) (152)
(442) (451) – Port facilities (451) (442)
Net book value of property, plant and equipment
14 337 16 561 stated at revalued amounts 16 511 14 337
44 617 53 314 Total net book value 53 826 45 181
Included in aircraft are capitalised leased assets
– – with a net carrying value of 9 4 706
These capitalised aircrafts are encumbered as security
for the repayment of lease commitments
(refer note 25 and 31.3).
Land, building and structures
A register of land, buildings and structures is open
for inspection at the Company.
Rolling stock
Included in rolling stock are locomotives that were
leased and leased back. The locomotives are leased to
a third party, refurbished and then leased to a financier
who in turn leases the assets back to the Company.
This has been treated as a structured loan. This loan is
secured by virtue of the lease agreements and collateral
covering bond over the refurbished locomotives.
The book value of the refurbished locomotives which
1 045 1 390 are so encumbered amounts to 1 390 1 045
Included in rolling stock assets are capitalised leased
420 405 assets with a carrying value of 405 420
These assets were part of a sale and lease back
arrangement giving rise to a finance lease entered into in
1997. The present value of the lease commitments has
been settled in full.
Pipeline networks
The Group’s policy is to perform a revaluation of its
pipeline networks every five years and an internal
index revaluation in the intervening years. An external
revaluation was performed in the previous year,
by Arthur D Little Inc, an independent firm of professional
valuers on the basis of the modern equivalent net
asset value. The current year’s revaluation resulted in a
net increase of R662 million (2006: R102 million) to the
carrying value of the Group’s pipeline networks, which has
been adjusted accordingly.
2 135 2 032 The historic carrying values of these assets amount to 2 032 2 135
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
180 TRANSNET ANNUAL REPORT 2007
9. PROPERTY, PLANTAND EQUIPMENT(refer annexure B)
(continued)
Port facilities
The Group’s policy is to perform a revaluation of its port
facilities every five years and an internal index revaluation
in the intervening years. The last external revaluation
was performed in the financial year ended 31 March 2003,
by Nedcor, Tirello and Arcus Engineering, a consortium of
professional valuers using the depreciated replacement
cost to the port industry. This valuation resulted in a net
increase of R1 072 million (2006: R383 million) to the
carrying value of the Group’ port facilities, which has been
adjusted accordingly.
6 964 7 614 The historic carrying values of these assets amount to 7 614 6 964
10. INVESTMENT PROPERTIES
1 964 2 337 Fair value at the beginning of the year 2 369 1 997
373 483 Increase in fair value during the year 490 372
2 337 2 820 Fair value at the end of the year 2 859 2 369
The fair value of the Group’s investment properties at
31 March 2007 was arrived at on the basis of valuations
carried out at that date by Propnet’s valuers.
The valuations, which conform to the Property Valuers
Profession Act, 47 of 2000, were arrived at by capitalising
the first year’s normalised net operating income at a
market derived capitalisation rate.
The gross property rental income earned by the
Group from its investment properties, all of which are
leased out under gross operating leases, amounted to
R387 million (2006: R343 million).
Direct operating expenses arising on the investment
properties during the year amounted to
R 169 million (2006: R150 million).
11. INTANGIBLE ASSETS AND GOODWILL
168 204 Intangible assets and goodwill 207 172
518 555 Cost 637 614
(350) (351) Accumulated amortisation and impairment (430) (442)
Comprising:
Finite life intangible assets
168 204 Software and licences: carrying value 207 172
518 555 Cost 623 600
456 518 Balance at the beginning of the year 600 586
65 6 Additions 6 75
(13) (45) Disposals (49) (15)
(4) (36) Transferred to assets classified as held-for-sale (36) (54)
8 102 Transfers in from property, plant and equipment 102 8
6 10 Transfers in from subsidiaries – –
(350) (351) Accumulated amortisation and impairment (416) (428)
(308) (350) Balance at the beginning of the year (428) (431)
13 44 Disposals 48 15
(51) (81) Amortisation (81) (53)
3 25 Transferred to assets classified as held-for-sale 25 45
(4) 20 Transfers in from property, plant and equipment 20 (4)
(3) (9) Transfers in from subsidiaries – –
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 181
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
11. INTANGIBLE ASSETS AND GOODWILL (continued)
Indefinite life intangible assets
– – Goodwill: carrying value – –
– – Cost 14 14
– – Balance at the beginning and end of the year 14 111
– – Transferred to assets classified as held-for-sale – (97)
– – Accumulated impairment (14) (14)
– – Balance at the beginning of the year (14) (111)
– – Transferred to assets classified as held-for-sale – 97
Software and licences are assessed as having a finite life
and are amortised on a straight-line basis over a
period of 3 to 5 years.
12. INVESTMENTS IN SUBSIDIARIES (refer annexure D)
2 846 87 Shares at cost
10 279 1 476 Net amounts owing by subsidiaries
13 125 1 563
(10 622) (1 189) Provision for accumulated impairment and losses
2 503 374
(2 224) – Transferred to assets classified as held-for-sale
279 374
Loans to subsidiaries that have been subordinated amount
to R508 million (2006: R501 million). In addition, the
Company has issued letters of support.
The financial support available in terms of these
letters is as follows:
421 336 – South African Express Airways (Pty) Ltd
80 69 – Autopax Passenger Services (Pty) Ltd
– 104 – Transhold Properties (Pty) Ltd
– 85 – Transwerk Foundries (Pty) Ltd
1 500 – – South African Airways (Pty) Ltd
2 001 594
13. INVESTMENTS IN ASSOCIATES AND JOINT
VENTURES (refer annexure D)
81 28 47 98
792 81 Balance at the beginning of the year 98 1 242
– 4 Acquisitions 4 –
– – Equity earnings 4 285
(6) 19 Advances/(repayments) of loans 19 (6)
(138) 2 Reversal of impairments/(current year impairments) – (141)
Transferred to assets classified as held-for-sale
(567) (78) (refer annexure C) (78) (1 282)
Directors’ valuation of unlisted investments in
125 47 associates and joint ventures (continuing operations) 47 125
Total income from associates and joint ventures
– – amounted to 4 285
– – Discontinued operations 2 252
– – Continuing operations 2 33
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
182 TRANSNET ANNUAL REPORT 2007
14. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES
Both the Company and the Group use approved financial
instruments, in particular forward exchange contracts,
cross-currency swaps, interest rate swaps and jet fuel
derivatives to hedge the financial risks associated
with underlying business activities. All derivative financial
instruments have been recorded at fair value with the
resulting gain or loss taken to the income statement.
304 513 Derivative financial assets 5 979 4 091
691 304 Opening balance 4 091 4 217
13 240 Income statement credit 1 954 786
(400) (31) Derivatives raised and settled (66) (732)
– – Transferred to assets classified as held-for-sale – (180)
510 405 Derivative financial liabilities 405 561
1 066 510 Opening balance 561 1 227
(15) (26) Income statement credit (27) (77)
(541) (79) Derivatives raised and settled (129) (589)
28 266 Net income statement credit (refer note 5) 1 981 863
Comprise the following financial instruments:
216 321 Non-current assets 321 217
38 166 Forward exchange contracts 166 38
147 147 Cross-currency swaps and options 147 147
31 8 Interest rate swaps and options 8 31
– – Other – 1
88 192 Current assets 5 658 3 874
18 84 Forward exchange contracts 84 18
49 58 Cross-currency swaps and options 58 62
21 16 Interest rate swaps and options 16 21
– – Jet fuel derivatives – 166
– – C class preference shares* 5 500 3 787
– 34 Other – –
– – Transferred to assets classified as held-for-sale – (180)
370 240 Non-current liabilities 240 408
89 45 Forward exchange contracts 45 127
281 195 Cross-currency swaps and options 195 281
140 165 Current liabilities 165 153
44 77 Forward exchange contracts 77 57
96 88 Cross-currency swaps and options 88 96
* Includes the Group’s asset being an investment in “C” class preference shares which is owned by Newshelf 697 (Pty) Ltd in Newshelf 664 (Pty) Ltd.
The share was subscribed for at a cost of R1 511 million as part of the sale process of the 309 million MTN Group Ltd shares. The value of these
preference shares moves in concert with movements in the MTN Group Ltd’s share price in terms of a gain share redemption formula. The share has
been valued by a professional valuer. The effects of the fair valuation are disclosed in note 5.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 183
14. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES
(continued)
Fair value hedges of firm commitments
During the current financial year the Group entered
into fair value hedges of the foreign exchange risk on firm
commitments of the Group to import items of equipment
(ie locomotives and port equipment). The Group is settling
the contract price of these items by making
pre-determined progress payments (in foreign currency)
to the relevant suppliers as specified milestones
are achieved.
At 31 March 2007, the Group held a series of forward
exchange contracts as hedging instruments for
this purpose. These hedges were assessed as
being effective.
The fair values of these forward exchange contracts
at 31 March 2007 are as follows:
– (36) Currency bought forward – Japanese yen (36) –
– 49 Currency bought forward – Euros 49 –
The net fair value gain recognised in the income
statement on these fair value hedges during the year
was R13 million. This net fair value gain comprised
a gain of R214 million on the firm commitments, and
a loss of R201 million on the forward exchange contracts.
The nominal values of these forward exchange contracts
at 31 March 2007 are as follows:
– 2 139 Currency bought forward – Japanese yen 2 139 –
– 501 Currency bought forward – Euros 501 –
– 2 640 2 640 –
million million million million
Currency bought forward
– 28 608 Japanese yen 28 608 –
– 56 Euros 56 –
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
184 TRANSNET ANNUAL REPORT 2007
15. LONG-TERM LOANS AND ADVANCES
2 022 123 123 2 019
2 720 2 022 Balance at the beginning of the year 2 019 2 717
134 772 Advances 772 152
(783) (1 297) Repayments (1 294) (803)
108 (95) (Impairment)/reversal of impairment (95) 110
– (1 258) Transferred to non-current assets classified as held-for-sale (1 258) –
Less: Short-term portion transferred to trade
(157) (21) and other receivables (21) (157)
Comprising:
4 1 Directors’ and managers’ loans 1 3
5 4 Balance at the beginning of the year 3 4
2 – Capitalised interest/advances – 2
(3) (3) Repayments (2) (3)
2 001 117 Employee housing and other loans 117 2 002
2 636 2 001 Balance at the beginning of the year 2 002 2 634
118 772 Advances 772 120
(674) (1 251) Repayments (1 252) (674)
74 (126) (Impairment)/reversal of impairment (126) 75
– (1 258) Transfers to non-current assets classified as held-for-sale (1 258) –
(153) (21) Less: Short-term portion (21) (153)
17 5 Other loans and advances 5 14
79 17 Balance at the beginning of the year 14 79
14 – Advances – 30
(106) (43) Repayments (40) (126)
34 31 Reversal of impairment 31 35
(4) – Less: Short-term portion – (4)
2 022 123 123 2 019
Included in Directors’ and managers’ loans are the following loans to senior executives:
Capitalised
Opening interest/ Total Total
balance advances Repaid 2007 2006
R thousand R thousand R thousand R thousand R thousand
Mr SI Gama 325 34 (41) 318 325
Mr CA Möller 369 33 (193) 209 369
Mr T Morwe 580 31 (385)* 226 580
Mr VD Kahla 304 – (304)** – 304
1 578 98 (923) 753 1 578
These loans are secured and bear variable interest that is linked to the prime interest rate. The current rates are 11% to 11,5% and
relate to housing loans.
Repayment terms vary and are up to a maximum of 20 years.
Housing loans are secured by first mortgage bonds over the related property and other guarantees.
* Included in repaid is R220 000 related to a car loan which has been transferred to an external institution.
** Included in repaid is R304 000 related to a car loan which has been transferred to an external institution.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 185
16. OTHER INVESTMENTS AND LONG-TERM
FINANCIAL ASSETS
– – Listed investments at market value 131 59
29 328 Other financial assets 329 29
– – Defeasance deposit – 485
29 328 460 573
– – Transferred to assets classified as held-for-sale – (485)
29 328 Total long-term investments and long-term financial assets 460 88
Short-term portion of other investments including
657 703 market making positions held-for-trading 704 1 650
(15) – Transferred to assets classified as held-for-sale – (1 007)
642 703 Total short-term investments 704 643
17. INVENTORIES
At weighted average cost
345 577 Raw materials 580 348
124 481 Maintenance material 521 832
60 85 Consumables 86 61
97 160 Finished goods 164 97
69 169 Work in progress* 169 88
(4) (272) Provision for stock obsolescence (272) (335)
691 1 200 1 248 1 091
At net realisable value
84 – Raw materials – 84
592 522 Maintenance material 522 592
113 25 Consumables 25 237
29 59 Finished goods 59 49
(159) (55) Provision for stock obsolescence (55) (188)
659 551 551 774
(2) (1) Transferred to assets classified as held-for-sale (1) (469)
1 348 1 750 1 798 1 396
* Included in work in progress are costs for construction
contracts in progress (refer note 28)
18. TRADE AND OTHER RECEIVABLES
2 933 2 953 Trade receivables** 3 170 4 824
926 759 Prepayments and other amounts receivable 818 2 208
157 180 Short-term portion of loans and advances 180 157
(121) (176) Transferred to assets classified as held-for-sale (176) (3 040)
3 895 3 716 3 992 4 149
** Included in trade receivables are amounts due from
customers in respect of construction contracts
(refer note 28).
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
186 TRANSNET ANNUAL REPORT 2007
19. CASH AND CASH EQUIVALENTS
1 114 3 142* Cash and cash equivalents 3 347* 1 732
– – Transferred to assets classified as held-for-sale – (332)
1 114 3 142 3 347 1 400
(32) (25) Bank overdrafts (26) (41)
– – Transferred to assets classified as held-for-sale – 7
(32) (25) (26) (34)
* Included in Group cash and cash equivalents and short-term
borrowings is cash of R1,7 billion held on behalf of South African
Airways (Pty) Ltd, which is not available for use by the Group.
20. ASSETS CLASSIFIED AS HELD-FOR-SALE AND
LIABILITIES DIRECTLYASSOCIATED WITH ASSETS
CLASSIFIED AS HELD-FOR-SALE (refer annexure C)
Non-current assets classified as held-for-sale
160 452 Property, plant and equipment 452 160
– 11 Intangible assets and goodwill 10 –
2 224 461 Investments in subsidiaries – –
567 84 Investments in associates and joint ventures 101 1 282
– 1 258 Loans and advances 1 258 –
15 – Other investments – 15
– 1 Inventories 1 –
– 176 Trade and other receivables 176 –
2 966 2 443 1 998 1 457
Effect of the sale of disposal groups
Assets classified as held-for-sale
– – Autopax Passenger Services (Pty) Ltd 75 103
371 341 freightdynamics 341 371
– – Freight Dynamics Guard Risk 21 17
– – South African Airways (Pty) Ltd – 13 673
– – Viamax (Pty) Ltd 1 328 1 192
(1) 37 Effect of intercompany eliminations and other adjustments 149 (73)
370 378 1 914 15 283
Total assets transferred to non-current assets
3 336 2 821 classified as held-for-sale 3 912 16 740
Liabilities directly associated with assets
classified as held-for-sale
– (68) Trade and other payables (68) –
– (17) Provisions (17) –
– (85) (85) –
Effect of the sale of disposal groups
– – Autopax Passenger Services (Pty) Ltd (124) (119)
(556) (626) freightdynamics (626) (556)
– – Freight Dynamics Guard Risk (8) (6)
– – South African Airways (Pty) Ltd – (14 888)
– – Viamax (Pty) Ltd (591) (599)
464 498 Effect of intercompany eliminations and other adjustments 1 004 3 236
(92) (128) (345) (12 932)
Total liabilities transferred to liabilities directly associated
(92) (213) with assets classified as held-for-sale (430) (12 932)
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 187
21. ISSUED CAPITAL
Authorised
30 000 30 000 30 000 000 000 ordinary par value shares of R1 each 30 000 30 000
Issued
12 660 986 310 ordinary par value shares of R1 each
14 710 12 661 (2006: 14 709 986 310) 12 661 14 710
During the year, the Company repurchased a total of
2 049 000 000 of its issued shares at par value of R1 each
as part of the sale of South African Airways (Pty) Ltd.
The unissued share capital is under the control of the
South African Government, the sole shareholder of
the Company.
22. RESERVES
5 702 7 163 Revaluation reserves 7 257 5 873
5 047 6 010 Revaluation of port facilities 6 010 5 047
4 671 5 047 Balance at the beginning of the year 5 047 4 671
383 1 072 Revaluation during the current year 1 072 383
(7) (109) Realised through disposal (109) (7)
1 318 1 976 Revaluation of pipeline networks 1 976 1 318
1 216 1 318 Balance at the beginning of the year 1 318 1 216
102 662 Revaluation during the current year 662 102
– (4) Realised through disposal (4) –
– – MTN Group Ltd – revaluation of investment to market value – –
245 – Balance at the beginning of the year – 245
149 – Revaluation during the current year – 149
Release of the surplus on the MTN shares to the
(394) – income statement – (394)
– – ALL Group Ltd – revaluation of investment to market value 124 52
– – Balance at the beginning of the year 52 18
– – Revaluation during the current year 72 34
– – V&A Waterfront Holdings (Pty) Ltd – fair value adjustment – 119
– – Balance at the beginning of the year 119 119
– – Realised through disposal (119) –
Deferred taxation impact of items relating to
(663) (823) revaluation reserves (853) (663)
– – Foreign currency translation reserve (8) 28
1 – Balance at the beginning of the year 28 (8)
(1) – Arising during the current year (36) 36
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
188 TRANSNET ANNUAL REPORT 2007
22. RESERVES (continued)
2 073 3 285 Net actuarial gains on post-retirement benefit obligations 3 282 2 070
2 918 4 625 Actuarial gains on post-retirement benefit obligations 4 622 2 915
416 2 918 Balance at the beginning of the year 2 915 416
2 502 1 707 Current year movement 1 725 2 499
– – Realised through disposal (18) _
(845) (1 340) Deferred taxation impact of net actuarial gains (1 340) (845)
1 092 250 Other reserves 249 1 106
8 5 Other transfers 4 8
839 – Profit on sale of interest in South African Airways (Pty) Ltd – 853
Share of pension fund surplus (retained for
245 245 application against pensioners) 245 245
3 681 9 817 Accumulated profit 13 870 5 626
(831) 3 681 Balance at the beginning of the year 5 626 200
(4) – IFRIC 4 adjustments – (4)
457 – Investment properties adjustments – 457
Transfers to accumulated profit on sale of interest
– 839 in South African Airways (Pty) Ltd 853 –
30 3 Other transfers to accumulated profit 4 75
4 029 5 294 Profit for the year attributable to equity holder 7 387 4 898
12 548 20 515 24 650 14 703
Reconciliations of movement in capital and reserves
Foreign
currency Actuarial
Issued Revaluation translation gains and Accumulated Minority
capital reserves reserve losses Other profit/(loss) interests Total
R million R million R million R million R million R million R million R million
GROUP
Restated balances at
1 April 2005 14 710 5 675 (8) 296 1 179 653 88 22 593
Opening balance as
previously reported 14 710 4 641 (8) 296 1 179 200 88 21 106
IFRIC 4 adjustments – – – – – (4) – (4)
Deferred taxation adjustments – 1 034 – – – – – 1 034
Investment properties
adjustments – – – – – 457 – 457
Total recognised income and
expense – 267 36 2 499 2 4 898 32 7 734
Opening balance as
previously reported – 267 36 2 499 2 4 539 32 7 375
IFRIC 4 adjustments – – – – – 20 – 20
Investment properties
adjustments – – – – – 339 – 339
Taxation effect of items
recorded in equity – (69) – (725) – – – (794)
Opening balance as
previously reported – (43) – (725) – – – (768)
Deferred taxation adjustments – (26) – – – – – (26)
Dividends paid – – – – – – (7) (7)
Transferred to accumulated profit – – – – (75) 75 – –
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 189
Foreign
currency Actuarial
Issued Revaluation translation gains and Accumulated Minority
capital reserves reserve losses Other profit/(loss) interests Total
R million R million R million R million R million R million R million R million
22. RESERVES (continued)
GROUP (continued)
Restated balances at
31 March 2006 14 710 5 873 28 2 070 1 106 5 626 113 29 526
Shares redeemed (2 049) – – – – – – (2 049)
Total recognised income
and expense – 1 574 (36) 1 707 – 7 387 17 10 649
Taxation effect of items
recorded in equity – (190) – (495) – – – (685)
Dividends paid – – – – – – (8) (8)
Transferred to accumulated
profit – – – – (857) 857 – –
Balances at 31 March 2007 12 661 7 257 (8) 3 282 249 13 870 122 37 433
COMPANY
Restated balances at
1 April 2005 14 710 5 538 1 296 1 122 (378) – 21 289
Opening balance as
previously reported 14 710 4 504 1 296 1 122 (831) – 19 802
IFRIC 4 adjustments – – – – – (4) – (4)
Deferred taxation adjustments – 1 034 – – – – – 1 034
Investment properties
adjustments – – – – – 457 – 457
Total recognised income
and expense – 233 (1) 2 502 – 4 029 – 6 763
Opening balance as
previously reported – 233 (1) 2 502 – 3 670 – 6 404
IFRIC 4 adjustments – – – – – 20 – 20
Investment properties
adjustments – – – – – 339 – 339
Taxation effect of items
recorded in equity – (69) – (725) – – – (794)
Opening balance as
previously reported – (43) – (725) – – – (768)
Deferred taxation adjustments – (26) – – – – – (26)
Transferred to accumulated
profit – – – – (30) 30 – –
Restated balances at
31 March 2006 14 710 5 702 – 2 073 1 092 3 681 27 258
Shares redeemed (2 049) – – – – – – (2 049)
Total recognised income
and expense – 1 621 – 1 707 – 5 294 – 8 622
Taxation effect of items
recorded in equity – (160) – (495) – – – (655)
Transferred to accumulated
profit – – – – (842) 842 – –
Balances at 31 March 2007 12 661 7 163 – 3 285 250 9 817 – 33 176
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
190 TRANSNET ANNUAL REPORT 2007
23. MINORITYINTERESTS
Balance at the beginning of the year 113 88
Total recognised income attributable to minorities 17 32
Dividends paid to minorities (8) (7)
Total minority interests directly associated with
assets and liabilities classified as held-for-sale 122 113
24. POST-RETIREMENT BENEFIT OBLIGATIONS
4 348 2 422 2 422 4 348
7 113 4 348 Balance at the beginning of the year 4 348 7 238
99 202 Current year provision 218 72
11 – Acquisition of Protekon business – –
(362) (421) Settlements during the year (419) (362)
(2 502) (1 707) Actuarial gains (1 725) (2 499)
Transferred to liabilities directly associated with
(11) – assets classified as held-for-sale – (101)
Comprising:
– – Transnet Pension Fund (refer note 33.1.2) – –
Transnet Second Defined Benefit Fund
1 628 – (refer note 33.1.3) – 1 628
116 113 Top Management Pensions (refer note 33.1.4) 113 116
Workmen’s Compensation Act pensioners
247 238 (refer note 33.1.4) 238 247
(1) (4) Black Widows’ Pensions (refer note 33.1.5) (4) (1)
Flight Deck Crew Pension Fund
– – (refer annexure C, note k.(i)) – 5
Flight Deck Crew Disability Benefit Fund
– – (refer annexure C, note k.(iv)) – 35
SATS pensioners’ post-retirement medical benefits
1 607 1 369 (refer note 33.2.1) 1 369 1 607
Transnet employees post-retirement medical benefits
762 706 (refer note 33.2.2) 706 812
Transferred to liabilities directly associated with assets
(11) – classified as held-for-sale – (101)
4 348 2 422 2 422 4 348
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 191
25. LONG-TERM BORROWINGS (refer annexure A)
15 940 17 241 17 535 16 534
18 234 16 089 Total long-term borrowings at the beginning of the year 19 352 27 297
477 1 041 Raised 1 222 858
(2 840) (149) Repaid (997) (4 778)
(1) 27 Foreign exchange movement 27 5
219 303 Discount on bonds amortised 303 219
16 089 17 311 19 907 23 601
Current portion of long-term borrowings redeemable
within one year transferred to short-term borrowings
(149) (70) (refer note 30) (2 372) (2 818)
Transferred to liabilities directly associated with
– – assets classified as held-for-sale – (4 249)
Comprising:
Unsecured liabilities
14 553 14 853 Rand denominated 14 853 14 553
15 486 15 486 Bonds at nominal value 15 486 15 486
(941) (638) Unamortised discounts (638) (941)
14 545 14 848 Bonds at carrying value 14 848 14 545
8 5 Other unsecured liabilities 5 8
57 44 Unsecured foreign currency denominated 44 61
1 479 2 414 Secured loans and capitalised leases 2 800 2 707
1 289 2 242 Rand denominated 2 623 4 769
190 172 Foreign currency denominated 177 2 187
Transferred to liabilities directly associated with
– – assets classified as held-for-sale – (4 249)
– – Rand denominated promissory notes 2 210 2 031
16 089 17 311 Total long-term borrowings 19 907 19 352
Current portion of long-term borrowings redeemable
within one year transferred to short-term borrowings
(149) (70) (refer note 30) (2 372) (2 818)
15 940 17 241 17 535 16 534
The rand denominated unsecured local bonds are redeemable between 1 April 2008 and 15 July 2014 and bear interest at rates ranging
between 7,5% and 16,5% (refer annexure A). Rand denominated unsecured Euro bonds bear interest between 10% and 13,5% and are
repayable in 2028 and 2029 (refer annexure A).
Foreign currency unsecured loans are denominated in Japanese yen. These loans bear interest at 3% and are repayable in March 2009.
Rand denominated capitalised finance lease liabilities bear interest at rates ranging between 11,25% and 12,05% with all rates linked
to prime. These liabilities are repayable over periods between 2007 and 2017.
Rand denominated domestic loans carry a weighted average cost of debt ranging between 8,5% and 15,33% with all rates linked
to prime. These liabilities are repayable over periods between 2011 and 2017.
Foreign currency secured loans are denominated in United States dollars and bear interest between 6,17% and 6,27% and are
repayable in November 2008 and November 2010.
Foreign currency denominated capitalised finance lease liabilities bear interest between 2% and 6% and are repayable between 2007
and 2016.
The promissory notes are zero coupon notes and bear interest at JIBAR plus 40 basis points. They are redeemable at the Company’s
discretion between 2007 and 2008.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
192 TRANSNET ANNUAL REPORT 2007
26. PROVISIONS
830 925 Comprising 928 847
2 163 2 494 Total provisions at the beginning of the year 2 546 2 794
1 814 2 820 Provisions made during the year and unwinding of discounts 2 822 2 227
(1 466) (2 005) Provisions released/utilised (2 047) (1 982)
(1 664) (2 367) Short-term provisions classified as current liabilities (2 376) (1 699)
Transferred to liabilities directly associated with assets
(17) (17) classified as held-for-sale (17) (493)
109 96 Third party claims 96 109
96 109 Balance at the beginning of the year 109 97
196 142 Provisions made during the year 142 196
(183) (155) Provisions released/utilised (155) (184)
36 60 Customer claims 60 36
82 36 Balance at the beginning of the year 36 87
13 31 Provisions made during the year 31 12
(59) (7) Utilised during the year (7) (63)
921 1 024 Leave pay 1 030 928
895 921 Balance at the beginning of the year 928 1 256
708 748 Provisions made during the year 748 977
(666) (630) Utilised during the year (631) (913)
Transferred to liabilities directly associated with
(16) (15) assets classified as held-for-sale (15) (392)
35 43 Onerous contracts 43 37
83 35 Balance at the beginning of the year 37 125
(14) 8 Provisions made during the year 6 (14)
(34) – Utilised during the year – (74)
252 297 Decommissioning liability 297 252
227 252 Balance at the beginning of the year 252 227
29 61 Provisions made during the year and unwinding of discounts 61 30
(4) (16) Utilised during the year (16) (5)
615 1 232 Incentive bonuses 1 232 643
274 615 Balance at the beginning of the year 643 302
753 1 183 Provisions made during the year 1 182 787
(412) (566) Utilised during the year (593) (440)
Transferred to liabilities directly associated with
– – assets classified as held-for-sale – (6)
462 237 Restructuring 237 471
492 462 Balance at the beginning of the year 471 504
64 90 Provisions made during the year 81 68
(94) (315) Utilised during the year (315) (101)
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 193
26. PROVISIONS (continued)
64 303 Other 309 70
14 64 Balance at the beginning of the year 70 196
65 557 Provisions made during the year 571 171
(14) (316) Utilised during the year (330) (202)
Transferred to liabilities directly associated with
(1) (2) assets classified as held-for-sale (2) (95)
2 494 3 292 Total provisions 3 304 2 546
1 664 2 367 Less: Short-term provisions classified as current liabilities 2 376 1 699
109 96 Third party claims 96 109
6 34 Customer claims 34 6
407 545 Leave pay 548 601
10 20 Onerous contracts 20 10
– 41 Decommissioning liability 41 –
615 1 102 Incentive bonuses 1 102 649
459 235 Restructuring 235 459
65 303 Other 309 157
Transferred to liabilities directly associated with
(7) (9) assets classified as held-for-sale (9) (292)
830 925 Total long-term provisions 928 847
Third-party claims
The provision represents the best estimate of known third party claims together with an allowance for claims incurred but not yet
reported based on historical experience.
Customer claims
Provision for claims made by customers arising from non-performance on contracts or damage to goods in transit. Settlement of claims
is expected in the following year.
Leave pay
This is a provision for unutilised leave at year-end. The leave is expected to be taken over the next two financial years and is calculated
based on employee total cost to company.
Onerous contracts
Provision for the maintenance and repairs of buildings and structures in terms of a lease agreement.
Decommissioning liability
Provision for the dismantling and removal of an asset as a result of the requirement to restore the site on which the asset is located.
The provision has been arrived at by discounting future cash flows.
Incentive bonuses
Provision for incentive bonuses in terms of the incentive bonus scheme.
Restructuring
Provision for restructuring costs in terms of strategic plans. The majority of this provision is expected to be settled in the next financial year.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
194 TRANSNET ANNUAL REPORT 2007
27. DEFERRED TAXATION LIABILITIES
50 1 670 Comprising 1 707 52
– 50 Balance at the beginning of the year 52 58
(962) – Opening balance restatements – (962)
218 965 Income statement charge (refer note 8) 970 229
794 655 Raised in reserves 685 794
50 1 670 Total deferred taxation liability 1 707 119
Transferred to liabilities directly associated with
– – assets classified as held-for-sale – (67)
Analysis of major categories of temporary differences
4 486 2 859 Deferred taxation assets 3 070 8 861
860 1 036 Provisions 1 074 1 450
– – Estimated taxation loss 148 3 590
1 261 702 Post-retirement benefit obligations 702 1 261
– – Forward sales liability – 491
21 7 Income received in advance 18 463
778 1 031 Capitalised lease liability 1 031 778
1 402 – Impairment of investments** – –
122 83 Derivatives 93 136
– – Maintenance reserve payments – 254
42 – Other 4 438
3 134 4 529 Deferred taxation liabilities 4 843 5 571
46 10 Deferred expenditure 14 66
3 009 4 409 Property, plant and equipment 4 713 5 406
16 16 Future expenditure allowance 25 36
15 – Undrawn funds – 15
48 35 Doubtful debts 35 –
– 59 Other 56 48
1 352 (1 670) Net deferred taxation (liability)/asset (1 773) 3 290
(1 402) – Deferred taxation assets not raised* (29) (3 409)
Transferred to liabilities directly associated with
– – assets classified as held-for-sale 95 67
(50) (1 670) Total deferred taxation liability (1 707) (52)
Estimated taxation losses available for off-set against
– – future taxable income (refer note 8) 552 12 380
* The subsidiaries have not raised deferred taxation assets in the current year. The probability of there being sufficient taxable profit against which
the deferred taxation asset can be utilised is uncertain.
** Deferred taxation asset calculated at the capital gains taxation rate. As the capital loss arising on the sale of South African Airways (Pty) Ltd to the
Government will not be available for set-off against capital gains realised on the sale of assets to non-Government third parties, the deferred asset
arising on the sale of South Africa Airways (Pty) Ltd has not been recognised.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 195
28. CONSTRUCTION CONTRACTS
Contracts in progress at the balance sheet date:
Construction costs incurred plus recognised
44 122 profits less losses to date 122 44
(10) (7) Less: Probable losses due to onerous contract* (7) (10)
34 115 115 34
Recognised and included in the financial statements:
Income statement
188 538 Contract revenue 538 188
Balance sheet
162 199 Amounts due from customers under construction contracts 199 162
12 1 Advances received 1 12
9 20 Retention debtors 20 9
11 13 Retention creditors 13 11
Contract revenue for coaches is recognised when the
completed stage has been signed off as proof of quality
satisfaction by the external debtor.
29. TRADE PAYABLES AND ACCRUALS**
776 1 277 Trade payables 1 259 1 323
4 265 4 500 Accruals 4 684 11 304
– – Forward sales liability*** – 2 139
2 005 2 011 Accrued expenditure 2 119 6 398
34 40 Deposits received 41 65
28 22 Deferred income 56 63
– – Frequent flyer rewards programme – 161
829 922 Interest 922 888
26 610 Personnel costs 614 67
803 525 Public creditors 528 828
161 50 Revenue received in advance 50 163
379 320 SARS – value added taxation 354 532
Transferred to liabilities directly associated with
(64) (68) assets classified as held-for-sale (68) (7 420)
4 977 5 709 5 875 5 207
* Relates to the contract for the upgrade and general overhaul of Class 9E electric locomotives between Alstom and Transwerk.
** Included in trade payables and accruals are amounts due to customers in respect of construction contracts (refer note 28).
*** This balance represents the unrealised income from tickets sold but not yet flown. The above balance includes the value of coupons sold by South
African Airways (Pty) Ltd, which will be flown and claimed in future periods by code-share and inter-line partners. Refer to the accounting policies
for details on the use of estimates.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
196 TRANSNET ANNUAL REPORT 2007
30. SHORT-TERM BORROWINGS (refer annexure A)
Current portion of long-term interest-bearing
149 70 borrowings (refer note 25) 2 372 2 818
3 063 5 131* Other short-term borrowings 5 243* 3 063
Transferred to liabilities directly associated with
– – assets classified as held-for-sale – (558)
3 212 5 201 7 615 5 323
Other short-term borrowings relate to the market making
portfolio and comprises the Group’s position on bonds and
other financial instruments.
* Included in other short-term borrowings and cash and cash
equivalents is cash of R1,7 billion held on behalf of South African
Airways (Pty) Ltd, which is not available for use by the Group.
31. COMMITMENTS
31.1 Capital commitments
154 489 Contracted for in US dollars 489 160
1 150 909 Contracted for in Japanese yen 909 1 150
988 1 545 Contracted for in euros 1 545 1 007
17 211 20 086 Contracted for in SA rands 20 086 17 722
27 7 Contracted for in various other currencies 7 27
19 530 23 036 Total capital commitments contracted for 23 036 20 066
45 711 55 153 Authorised by the Directors but not yet contracted for 55 950 48 352
65 241 78 189 78 986 68 418
Commitments directly associated with assets
(177) (205) classified as held-for-sale (804) (2 787)
65 064 77 984 78 182 65 631
Total capital commitments are expected to be incurred
as follows:
11 717 17 109 Within one year 17 906 12 929
53 524 61 080 After one year, but not more than five years 61 080 55 489
65 241 78 189 78 986 68 418
Commitments directly associated with assets classified
(177) (205) as held-for-sale (804) (2 787)
65 064 77 984 78 182 65 631
These capital commitments will be financed by the net
cash flow from operations, capital market borrowings,
through project finance and the use of operating leases.
31.2 Operating lease commitments
Future minimum rentals under non-cancellable leases
are as follows:
Aircraft
– 1 Within one year 33 2 057
– – After one year, but not more than five years 182 7 482
– – More than five years 50 4 269
– 1 265 13 808
Commitments directly associated with assets classified
– – as held-for-sale – (13 726)
– 1 265 82
Land, buildings and structures
111 45 Within one year 56 121
194 133 After one year, but not more than five years 168 221
336 291 More than five years 323 358
641 469 547 700
Commitments directly associated with assets classified
(9) (11) as held-for-sale (28) (24)
632 458 519 676
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 197
31. COMMITMENTS (continued)
31.2 Operating lease commitments (continued)
Machinery, equipment, furniture and motor vehicles
282 229 Within one year 256 287
540 201 After one year, but not more than five years 232 556
34 – More than five years – 34
856 430 488 877
Commitments directly associated with assets classified
(16) (24) as held-for-sale (82) (17)
840 406 406 860
Security and maintenance contracts
25 11 Within one year 11 26
27 2 After one year, but not more than five years 2 28
28 – More than five years – 29
80 13 13 83
Other
15 11 Within one year 11 38
7 16 After one year, but not more than five years 16 22
– 2 More than five years 2 –
22 29 29 60
Commitments directly associated with assets classified
– – as held-for-sale – (38)
22 29 29 22
31.3 Finance lease commitments
Future minimum lease payments under finance leases
together with the present value of the net minimum
lease payments are as follows:
Aircraft, machinery, equipment and furniture
23 27 Within one year 195 141
10 60 After one year, but not more than five years 257 434
– 177 More than five years 177 –
33 264 Total minimum lease payments 629 575
(4) (30) Amount representing finance charges (64) (34)
29 234 Present value of minimum lease payments 565 541
31.4 Lease rentals receivable
Future minimum rentals under operating leases
are as follows:
Property
99 575 Within one year 581 105
249 2 786 After one year, but not more than five years 2 826 257
234 4 478 More than five years 4 489 244
582 7 839 7 896 606
Other
46 65 Within one year 89 46
73 436 After one year, but not more than five years 436 73
11 810 More than five years 810 11
130 1 311 1 335 130
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
198 TRANSNET ANNUAL REPORT 2007
32. CONTINGENT LIABILITIES AND GUARANTEES
Continuing operations
Rolling stock
The future lease commitments in respect of rolling stock
assets have been paid in full to an intermediary lessee.
This amount has been deposited with an AAA-rated
international institution for the redemption of the lease
obligations. These obligations are guaranteed by the
Company. No loss is expected to materialise in respect of
1 671 – this guarantee. – 1 671
Other
Various contingent liabilities estimated where no material
68 – losses are expected to materialise. – 118
Discontinued operations
Sun Air (Pty) Ltd
The liquidators of Sun Air (Pty) Ltd and a previous
shareholder instituted legal proceeding against
South African Airways (Pty) Ltd (SAA) for certain
alleged conduct by SAA. The maximum liability in
this respect is estimated at R275 million. The matter
has been settled at R14 million in respect of the
liquidators’ claim. The claim of R178 million by a
person to whom the shareholder had ceded the claim,
– – is still pending. – 178
US Department of Justice – Antitrust Division inquiry
SAA received a subpoena from the US Department of
Justice (DoJ) – Antitrust Division to provide information
and documentation in respect of a price fixing inquiry in
progress within the United States. The allegation is that
SAA may have been involved in price fixing in respect of its
cargo operations in the US and the DoJ is investigating this
allegation in respect of several other airlines globally. SAA
is confident about its prospects of success in refuting the
allegations and has initiated the process of engaging with
the DoJ in regard to the subpoena. Price fixing is a criminal
offence in the United States and if found guilty, SAA’s
exposure may include a penalty of up to US$10 million
– – and possible civil claims which may arise from the matter. – 60
Other
There are numerous court cases in which SAA is a
defendant. SAA’s maximum exposure in this regard is
estimated at R50 million. – 50
547 – Various guarantees issued in the normal course of business – 4 016
33. POST-RETIREMENT BENEFIT OBLIGATIONS
The Group offers pension benefits through various defined
benefit pension funds and one defined contribution fund.
The Group also offers post-retirement medical benefits
to its employees. Specific retirement benefits are offered
to top management and under the Workmen’s Compensation
Act. The following sections summarise the relevant
components of the benefits and post-retirement medical
benefits:
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 199
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1 Pension benefits
Transnet has three pension funds, namely the Transnet Retirement Fund; Transnet Pension
Fund and Transnet Second Defined Benefit Fund. Except for the Transnet Retirement Fund,
the IAS 19 Employee Benefits actuarial valuations for the funds are performed annually.
The Transnet Pension Funds are governed by the Transnet Pension Fund Act, 62 of 1990.
With regard to the defined benefit funds, the expected return on plan assets has been
calculated based on market expectations at the beginning of the period for returns over the
entire life of the related obligation. The estimated return is determined in conjunction with
actuaries and market analysts based on the underlying asset base within each fund.
33.1.1 Transnet Retirement Fund
The fund was structured as a defined contribution fund from 1 November 2000.
All employees of Transnet Ltd are eligible members of the fund. There were 63 165
members at 31 March 2007 (2006: 63 967). Actuarial valuations are done at intervals not
exceeding three years to determine the financial position. An actuarial valuation was
performed as at 31 March 2004. The actuaries were satisfied with the status of the
member’s credit account then. The total contributions to this fund constitute member
contributions of R577 million (2006: R548 million) and Employer contributions of R578
million (2006: R862 million).
33.1.2 Transnet Pension Fund
The fund is a closed defined benefit pension fund. Members are current employees of
Transnet who elected to remain as members of the fund at 1 November 2000 and pensioner
members who retired subsequent to that date. There were 11 420 members and pensioners
(including South African Airways (Pty) Ltd and Metrorail members and pensioners) at
31 March 2007 (2006: 12 267). An actuarial valuation was done as at 31 March 2007 based
on the projected unit credit method. The principal actuarial assumptions used were as follows:
Discount rate (%) 7,75 7,50
Salary increases
– Inflation (%) 4,50 4,00
– Promotional (%) 1,50 1,50
Expected return on plan assets (%) 10,15 10,00
Pension increases (%) 2,00 2,00
The results of the actuarial valuation are as follows:
Benefit liability
Present value of obligation (4 456) (5 405)
Fair value of plan assets 5 610 5 568
Surplus 1 154 163
Unrecognised asset (1 154) (163)
Net liability per the balance sheet – –
The liability recognised for this fund relating to the Company amounts to R Nil. (2006: R Nil).
The surplus was not recognised as the rules of the fund do not provide for surpluses to
be distributed.
Credit/(charge) to the income statement
Expected return on assets 645 525
Current service cost (166) (151)
Interest cost (460) (419)
19 (45)
GROUP
2007 2006
Restated
R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
200 TRANSNET ANNUAL REPORT 2007
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1.2 Transnet Pension Fund (continued)
The credit to the income statement relating to the Company amounts to R20 million
(2006: R15 million charge).
Actual return on plan assets 1 844 1 654
Actuarial (loss)/gain recognised in statement of recognised income and expense (167) 22
– Actuarial gains 1 179 209
– Net asset not recognised (991) (163)
– Disposal of businesses (355) (24)
The actuarial (loss)/gain recognised in the statement of recognised income and expenditure
relating to the Company amounts to R157 million loss (2006: R22 million gain).
The cumulative actuarial losses recognised in equity (511) (344)
Disposal of businesses 2 –
(509) (344)
Movements in the net asset/(liability) recognised in the balance sheet
Opening net asset/(liability) 163 (132)
Income/(expense) as above 19 (45)
Actuarial gains recognised in equity 1 179 209
Disposal of businesses (355) (24)
Contributions paid 148 155
Surplus 1 154 163
Asset not recognised (1 154) (163)
Closing net liability – –
Reconciliation of movement in benefit liability
Opening benefit liability (5 405) (4 950)
Current service cost (166) (151)
Interest cost (460) (419)
Actuarial loss recognised in equity (20) (920)
Benefits paid 225 237
(5 826) (6 203)
Disposal of businesses 1 370 798
Closing benefit liability (4 456) (5 405)
Reconciliation of movement in fair value of plan assets
Opening fair value of plan assets 5 568 4 818
Expected return 645 525
Actuarial gains 1 199 1 129
Contributions by employer 86 87
Contributions by members 62 68
Benefits paid (225) (237)
7 335 6 390
Disposal of businesses (1 725) (822)
Closing fair value of plan assets 5 610 5 568
2007 2006 2005 2004 2003
Summary of actuarial valuation results R million R million R million R million R million
for past periods
Present value of defined benefit obligation (4 456) (5 405) (4 950) (4 199) (4 111)
Fair value of plan assets 5 610 5 568 4 818 4 034 3 120
Surplus/(deficit) 1 154 163 (132) (165) (991)
Asset not recognised (1 154) (163) – – –
Net liability – – (132) (165) (991)
The estimated contributions (based on current year contributions) by both employer and members for the year beginning
1 April 2007 amount to R148 million (2006: R155 million).
GROUP
2007 2006
Restated
R million R million
TRANSNET ANNUAL REPORT 2007 201
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1.2 Transnet Pension Fund (continued)
The major categories of plan assets as a % of total plan assets are:
Equity (%) 65 71
Property (%) 10 6
Bonds (%) 20 15
Cash (%) 5 8
Total (%) 100 100
33.1.3 Transnet Second Defined Benefit Fund
The fund was established on 1 November 2000 for the benefit of the retired members
and qualifying beneficiaries. There were 39 533 members at 31 March 2007 (2006: 42 629).
This excludes widows and children of pensioners. The all inclusive membership is 81 263
at 31 March 2007 (2006: 84 705). The entire obligation relates to Transnet Ltd.
The actuarial valuation was based on the projected unit method. The principal actuarial
assumptions used are as follows:
Discount rate (%) 7,30 – 8,91 6,52 – 7,52
Expected return on assets (%) 7,07 – 11,12 10,60
Pension increases (%) 2,00 2,00
The results of the actuarial valuation are as follows:
Benefit liability
Present value of obligation (19 548) (20 887)
Fair value of plan assets 21 477 19 259
Surplus/(deficit) 1 929 (1 628)
Unrecognised asset (1 929) –
Net liability per the balance sheet – (1 628)
(Charge)/credit to the income statement
Interest cost (1 496) (1 548)
Expected return on plan assets 1 478 1 591
(18) 43
Actual return on plan assets 4 490 5 490
Actuarial gain recognised in statement of recognised income and expense 1 646 2 644
– Actuarial gains 3 575 2 644
– Net asset not recognised (1 929) –
The cumulative actuarial gains recognised in equity 5 372 3 726
GROUP
2007 2006
Restated
R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
202 TRANSNET ANNUAL REPORT 2007
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1.3 Transnet Second Defined Benefit Fund (continued)
Movements in the net liability recognised in the balance sheet
Opening net liability (1 628) (4 315)
(Expense)/income as above (18) 43
Actuarial gain recognised in equity 3 575 2 644
Surplus/(deficit) 1 929 (1 628)
Asset not recognised (1 929) –
Net liability per balance sheet – (1 628)
In the current year, the surplus was not recognised as the rules of the fund
do not provide for surpluses to be distributed.
Reconciliation of movement in benefit liability
Opening benefit liability (20 887) (20 405)
Interest cost (1 496) (1 548)
Actuarial gain/(loss) 563 (1 255)
Benefits paid 2 272 2 321
Closing benefit liability (19 548) (20 887)
Reconciliation of movement in fair value of plan assets
Opening fair value of plan assets 19 259 16 090
Expected return 1 478 1 591
Actuarial gain 3 012 3 899
Benefits paid (2 272) (2 321)
Closing fair value of plan assets 21 477 19 259
The major categories of plan assets as a % of total plan assets are:
Equity (%) 35 34
Property (%) 1 12
Bonds (%) 57 12
Cash and net current assets (%) 7 42
Total assets at market value (%) 100 100
Summary of actuarial valuation results for past periods
2007 2006 2005 2004 2003
R million R million R million R million R million
Present value of defined benefit obligation (19 548) (20 887) (20 405) (18 463) (18 521)
Fair value of plan assets 21 477 19 259 16 090 15 024 13 239
Surplus/(deficit) 1 929 (1 628) (4 315) (3 439) (5 282)
GROUP
2007 2006
Restated
R million R million
TRANSNET ANNUAL REPORT 2007 203
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1.4 Top Management Pensions and Workmen’s Compensation Act pensioners
The Top Management Pensions are additional benefits to top up pensions received to eliminate
the effects of any early retirement and resignation penalties applied under the Group’s
existing pension fund schemes to management appointed prior to 1 April 1999. There were
530 members at 31 March 2007 (2006: 530). The entire obligation relates to Transnet Ltd.
The Workmen’s Compensation Act benefit relates to the pension benefits that the
Company pays to current and former employees who were disabled whilst in service
prior to the corporatisation of Transnet in 1990. There were 1 925 members at
31 March 2007 (2006: 1 925).
Actuarial valuations for both benefits were performed to determine the present value
of the obligations. Similar valuations were done at the previous balance sheet date.
The projected unit credit method was used to value the obligations. There are no plan
assets held to fund these obligations.
The following summarises the components of expense and liability recognised
in the financial statements together with the assumptions adopted.
Top Management Pension Fund
The principal assumptions in determining the benefits are as follows:
Discount rate (%) 7,75 7,50
Salary increases
Inflation (%) 4,75 4,50
Promotional (%) 1,50 1,50
Pension increase (%) 2,00 2,00
Benefit liability
Present value of obligations (113) (116)
Liability recognised in the balance sheet (113) (116)
Charge to the income statement
Interest cost (10) (8)
Current service cost (1) (1)
(11) (9)
Actuarial gain/(loss) recognised in the statement of recognised income and expense 4 (17)
The cumulative actuarial gains recognised in equity 5 1
Reconciliation of movement in benefit liability
Opening benefit liability (116) (99)
Expense as above (11) (9)
Actuarial gain/(loss) 4 (17)
Contributions paid 10 9
Benefit liability at year-end (113) (116)
Summary of actuarial valuation results for past periods
2007 2006 2005 2004 2003
R million R million R million R million R million
Present value of defined benefit obligation (113) (116) (99) (99) (123)
Deficit (113) (116) (99) (99) (123)
The estimated contribution (based on current year contribution) for the year beginning 1 April 2007 is R9 million (2006: R9 million).
GROUP
2007 2006
Restated
R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
204 TRANSNET ANNUAL REPORT 2007
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1.4 Top Management Pensions and Workmen’s Compensation Act pensioners (continued)
Workmen’s Compensation Act pensioners
The principal assumptions in determining the benefits are as follows:
Discount rate (%) 7,75 7,5
Pension increase (%) 4,75 4,5
Inflation rate (%) 4,75 4,5
Benefit liability
Present value of obligations (238) (247)
Liability recognised in the balance sheet (238) (247)
Charge to the income statement
Interest cost (18) (18)
(18) (18)
Actuarial loss recognised in statement of recognised income and expense – (26)
The cumulative actuarial losses recognised in equity (19) (19)
Reconciliation of movement in benefit liability
Opening benefit liability (247) (224)
Interest cost (18) (18)
Actuarial loss – (26)
Contributions paid 27 21
Benefit liability at year-end (238) (247)
Summary of actuarial valuation results for past periods
2007 2006 2005 2004 2003
R million R million R million R million R million
Present value of defined benefit obligation (238) (247) (224) (204) (211)
Deficit (238) (247) (224) (204) (211)
The estimated contribution (based on current year contribution) for the year beginning 1 April 2007 is R27 million (2006:
R21 million).
GROUP
2007 2006
Restated
R million R million
TRANSNET ANNUAL REPORT 2007 205
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1.5 Black Widows’ Pension Benefit
The benefit relates to pensions that the Group has voluntarily elected to make payable to the
widows of black pensioners who retired from Transnet during the period 16 December 1974
to 1 April 1986 and who subsequently died prior to 1 November 2000 and whose spouses are
currently not entitled to a spouse’s pension from either the Transnet Pension Fund or the
Transnet Second Defined Benefit Fund. The scheme is now closed and at 31 March 2007,
there were 3 045 widows belonging to this fund (2006: 3 240). The entire obligation relates
to Transnet Ltd.
The actuarial valuation was based on the projected unit credit method. The principal actuarial
assumptions used are as follows:
Discount rate (%) 7,75 7,5
Inflation rate (%) 4,75 4,5
Expected return on assets (%) 4,75 4,5
Pension increase (%) 2,00 2,00
Benefit liability
Present value of obligation (73) (78)
Fair value of plan assets 77 79
Asset recognised in balance sheet 4 1
Charge to the income statement
Expected return on assets 5 4
Interest cost (5) (6)
– (2)
Actual return on plan assets 7 5
Actuarial gain/(loss) recognised in the statement of recognised income and expense 3 (5)
The cumulative actuarial gains recognised in equity 19 16
Movements in the net asset recognised in the balance sheet
Opening net asset 1 8
Expense as above – (2)
Actuarial gain/(loss) recognised in equity 3 (5)
Closing net asset 4 1
Reconciliation of movement in benefit liability
Opening benefit liability (78) (75)
Interest cost (5) (6)
Actuarial gain 1 (6)
Benefits paid 9 9
Closing benefit liability (73) (78)
Reconciliation of movement in fair value of plan assets
Opening fair value of plan assets 79 83
Expected return on assets 5 4
Actuarial gains 2 1
Benefits paid (9) (9)
Closing fair value of plan assets 77 79
Summary of actuarial valuation results for past periods
2007 2006 2005 2004 2003
R million R million R million R million R million
Present value of defined benefit obligation (73) (78) (75) (64) –
Fair value of plan assets 77 79 83 55 –
Surplus/(deficit) 4 1 8 (9) –
No actuarial valuations were performed for this fund in the 2003 financial year. Hence no comparative data for the reconciliation
of the movements in the liability and fair value of the plan assets have been reported for this period.
The estimated contribution (based on current year contribution) for the year beginning 1 April 2007 is R Nil (2006: R Nil).
GROUP
2007 2006
Restated
R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
206 TRANSNET ANNUAL REPORT 2007
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.1.6 HIV/Aids benefits
The Transnet Group offers certain assistance to employees diagnosed with Aids. As this programme is in its infancy,
the related data is not sufficient to actuarially value any liability the Group may have in this regard.
33.2 Post-retirement medical benefits
SATS Pensioners’ post-retirement medical benefits
Pensioners are the retired employees of the former South African Transport Services (SATS) and their dependants.
The liability is in respect of these pensioners and their dependants who have elected to belong to the Transnet in-house
medical scheme, Transmed, whose membership is voluntary.
A post-retirement medical aid benefit liability was created at the corporatisation of Transnet. With effect from 1 April 2000,
the liability has been actuarially valued at each balance sheet date. Actual benefits contributed on behalf of the pensioners are
settled against the provision.
Transnet subsidises members at a flat contribution of R800 per month per principal pensioner member. The entire obligation
relates to Transnet Ltd.
Transnet employees post-retirement medical benefits
This includes the current and past employees of Transnet who are members of Transnet’s in-house medical aid, Transmed
Medical Fund. Membership is voluntary.
Transnet subsidises members at a flat contribution of R213 per month per member.
To enable the Company to fully provide for such post-retirement medical liabilities, since April 2000 actuarial valuations are
obtained annually. There are no assets held to fund the obligation.
Analysis of benefit expense
The following summarises the components of the net benefit expense recognised in both the income statement and balance
sheet as at 31 March 2007 for both SATS pensioners and Transnet Employees. The projected unit credit method has been used
for the purposes of determining the actuarial valuation for both the funds.
TRANSNET ANNUAL REPORT 2007 207
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.2.1 SATS pensioners
Discount rate (%) 7,75 7,50
Benefit liability
Present value of obligations (1 369) (1 607)
Liability recognised in the balance sheet (1 369) (1 607)
Charge to the income statement
Interest cost (117) (133)
(117) (133)
Actuarial gain/(loss) recognised in the statement of recognised income and expense 134 (82)
The cumulative actuarial losses recognised in equity (286) (420)
Reconciliation of movement in benefit liability
Opening benefit liability (1 607) (1 629)
Interest cost (117) (133)
Company contributions 221 237
Actuarial gain/(loss) 134 (82)
Closing benefit liability (1 369) (1 607)
Transnet subsidises members at a flat contribution of R800 per month per member.
The medical inflation rate has no impact on the aggregate current service cost and interest
cost and the benefit liability. However, the assumed discount rate has an impact.
The sensitivity of the obligation to a change in the assumed discount rate of 7,75% on
the present value of the obligation is as follows:
Closing benefit liability based on changes in discount rate:
6,75% (2006: 6,5%) (1 453) (1 714)
8,75% (2006: 8,5%) (1 296) (1 515)
Summary of actuarial valuation results for past periods
2007 2006 2005 2004 2003
R million R million R million R million R million
Benefit liability (1 369) (1 607) (1 629) (1 751) (1 715)
Deficit (1 369) (1 607) (1 629) (1 751) (1 715)
The estimated contribution (based on current year contribution) for the year beginning 1 April 2007 is R221 million
(2006: R237 million).
GROUP
2007 2006
Restated
R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
208 TRANSNET ANNUAL REPORT 2007
33. POST-RETIREMENT BENEFIT OBLIGATIONS (continued)
33.2.2 Transnet employees
Closing benefit liability based on changes in discount rate (%) 7,75 7,50
Benefit liability
Present value of obligations (720) (812)
Liability recognised in the balance sheet (720) (812)
The liability directly associated with assets classified as held-for-sale
is R14 million (2006: R61 million) for the Group and R11 million (2006: R11 million)
for the Company. The net liability for continuing operations is R706 million
(2006: R751 million) for the Group.
The liability recognised for this fund relating to the Company amounts to R 717 million
(2006: R762 million). The net liability for continuing operations is R706 million
(2006: R751 million) for the Company.
Charge to the income statement
Current service cost (14) (13)
Interest cost (63) (68)
(77) (81)
Charge to the income statement relating to the Company is R72 million (2006: R76 million)
Actuarial gain/(loss) recognised in the statement of recognised income and expense 87 (37)
The actuarial gain/(loss) recognised in the statement of recognised income and expense
relating to the Company amounts to R77 million gain (2006: R34 million loss).
The cumulative actuarial gains/(losses) recognised in equity 40 (47)
Reconciliation of movement in benefit liability
Opening benefit liability (812) (808)
Expense as above (77) (81)
Member and Company contributions 41 43
Actuarial gain/(loss) 87 (37)
Closing benefit liability (761) (883)
Disposal of businesses 41 71
Net benefit liability (720) (812)
Transnet subsidises members at a flat contribution of R213 per month per member.
The medical inflation rate has no impact on the aggregate current service cost and interest
cost and the benefit liability. However, the assumed discount rate has an impact. The
sensitivity of the obligation to a change in the assumed discount rate of 7,75% on the
present value of the obligation is as follows:
Closing benefit liability based on changes in discount rate:
6,75% (2006: 6,5%) (852) (998)
8,75% (2006: 8,5%) (686) (788)
Summary of actuarial valuation results for past periods
2007 2006 2005 2004 2003
R million R million R million R million R million
Benefit liability (720) (812) (808) (741) (545)
Deficit (720) (812) (808) (741) (545)
The estimated contribution (based on current year contribution) for the year beginning 1 April 2007 is R41 million (2006:
R43 million).
GROUP
2007 2006
Restated
R million R million
TRANSNET ANNUAL REPORT 2007 209
34. RELATED PARTYTRANSACTIONS
The Transnet Group is a Schedule 2 Public Entity in terms of the Public Finance Management Act (PFMA). It therefore has
a significant number of related parties including other State-owned entities, Government Departments and all other entities
within the national sphere of Government. The Group has utilised the database maintained by the National Treasury to identify
related parties. A list of all related parties is available at the National Treasury website at www.treasury.gov.za or at the
Company’s registered office.
South African Airways (Pty) Ltd and South African Express Airways (Pty) Ltd conduct a number of transactions via
intermediaries who act as agents. Services rendered by these companies to related parties are measured with reference to
their frequent flyer programme. These transactions are included in the disclosure of transactions below. Transactions between
related parties that are not reported in terms of these contracts are not disclosed as such.
In addition, the Company has a related party relationship with its subsidiaries (refer note 12). The Group and Company have
related party relationships with its associates (refer note 13) and with its Directors and senior executives (key management).
Unless otherwise disclosed, all transactions with the above related parties are concluded on an arm’s length basis.
Furthermore, neither the Group nor any of its related parties is obligated to procure from or render services to their
related parties.
Transactions with related entities
Services rendered to related parties comprise principally transportation (aviation, rail and road) services. Services purchased
from related parties comprised principally energy, telecommunications, information technology and property related services.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
The following is a summary of transactions with related
parties during the year and balances due at year-end
according to Transnet’s records:
Services rendered
539 872 Major public enterprises 1 045 692
84 71 Other public enterprises 370 270
1 429 864 National Government business enterprises 908 1 438
66 348 Associates 348 97
188 193 Subsidiaries – –
2 306 2 348 2 671 2 497
Services received
862 823 Major public enterprises 1 529 1 429
210 115 Other public enterprises 475 564
750 976 National Government business enterprises 983 755
475 354 Associates 357 748
2 958 284 Subsidiaries – –
5 255 2 552 3 344 3 496
Amount due from/(to)
(39) 307 Major public enterprises* 309 (36)
(3) 11 Other public enterprises 6 (16)
(5 830) (6 782) National Government business enterprises** (6 782) (5 830)
(41) (37) Associates (39) (35)
(142) 1 213 Subsidiaries – –
(6 055) (5 288) (6 506) (5 917)
During the year the Group expensed R3 million (2006: R16 million) in relation to bad debts on related parties and at year-end the Group
had a provision of R34 million (2006: R46 million) against bad debts in relation to related parties.
Transactions with key management personnel
Loans to key management are included in “Long-term loans and advances” (refer note 15).
Details of key management compensation are set out in the Report of Directors on page 147 to the annual financial statements.
None of key management has or had significant influence in any entity with whom the Group had significant transactions during the year.
During the year, South African Airways (Pty) Ltd was sold to the Department of Public Enterprise for an amount of R2 049 million,
which is not included in “other public enterprises” above.
* Includes a loan to Neotel (Pty) Ltd of R226 million.
** Includes R7 023 million relating to bonds issued to National Government business enterprises.
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
210 TRANSNET ANNUAL REPORT 2007
35. CASH FLOWINFORMATION
35.1 Cash generated from operations
5 844 6 103 Profit/(loss) before taxation 7 968 6 613
5 781 6 179 – Continuing operations 8 222 6 837
63 (76) – Discontinued operations (254) (224)
2 246 2 077 Finance costs (refer note 35.3) 2 791 2 900
(352) (225) Finance income (304) (418)
(340) (47) Dividend income (36) (85)
2 344 3 743 Elimination of non-cash items 3 069 2 234
2 116 2 960 – Depreciation and amortisation 3 020 3 240
– Increase in provision for post-retirement
99 202 benefit obligations 395 72
– (Reversal of impairment)/impairment of loss
234 (154) making subsidiaries and associates – 141
– Impairment/(reversal of impairment) of trade
(101) 120 and other receivables and loans and advances 64 (80)
64 115 – Impairment of property, plant and equipment 154 16
136 86 – Fair value adjustments of treasury bonds 86 136
331 692 – Movement in provisions 708 273
(41) (266) – Other fair value adjustments in the income statement (2 050) (818)
2 33 – Unrealised foreign exchange losses 356 45
19 (6) – (Profit)/loss on sale of property, plant and equipment (27) (267)
– (23) – Write-off of loan account (23)
82 – – Loss on disposal of the business of Spoornet Zambia – 82
(404) – – Profit on sale of other investments – (411)
219 303 – Discount on bonds amortised 303 219
– 164 – Provision for obsolescence 573 –
(373) (483) – Fair value adjustment of investment property (490) (372)
(39) – – Other non-cash items – (42)
9 742 11 651 13 488 11 244
35.2 Changes in working capital
(211) (425) Increase in inventories (885) (127)
(456) 193 (Increase)/decrease in receivables (335) (706)
483 644 Increase in payables 1 353 415
(184) 412 133 (418)
35.3 Finance costs
2 486 2 412 Total finance costs 3 062 3 352
(21) (32) Net foreign exchange (gains)/losses on translation 32 (233)
(219) (303) Discounts on bonds amortised (303) (219)
2 246 2 077 2 791 2 900
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 211
35. CASH FLOWINFORMATION (continued)
35.4 Taxation paid
Balance at the beginning of the year
(1 514) (1 259) – normal taxation (net) (1 320) (1 545)
Taxation as per income statement
(1 746) (1 121) – normal taxation (1 205) (1 881)
– – Taxation liabilities disposed 70 37
(40) (3) Acquired through business combination – –
Balance at the end of the year
1 259 482 – normal taxation (net) 494 1 283
(2 041) (1 901) (1 961) (2 106)
35.5 Dividends paid to minorities
– – Balance at the beginning of the year – –
– – Dividends paid to minorities (8) (7)
– – Balance at the end of the year – –
– – (8) (7)
35.6 Disposal of division/subsidiary
– – Property, plant and equipment 8 577 –
– – Intangible assets and goodwill 108 –
– – Derivative financial assets 47 –
– – Other investments 1 123 –
48 – Inventories 515 48
190 – Trade and other receivables 3 305 190
(106) – Cash and cash equivalents/(bank overdrafts) 1 922 (106)
– – Post-retirement benefit obligations (248) –
60 – Borrowings (5 903) 60
(69) – Provisions (518) (69)
(272) – Trade payables and accruals (7 831) (272)
– – Current taxation liability (70) –
(149) – Net asset value excluding consolidation adjustments 1 027 (149)
106 – (Cash)/overdraft disposed of (1 922) 106
35.7 Acquisition of division/subsidiary
23 3 Property, plant and equipment – –
3 – Intangible assets and goodwill – –
3 – Inventories – –
155 126 Trade and other receivables – –
(11) 81 Cash and cash equivalents/(bank overdrafts) – –
(11) – Post-retirement benefit obligations – –
383 – Borrowings – –
(45) (1) Provisions – –
(281) (184) Trade payables and accruals – –
(40) (3) Current taxation liability – –
179 22 Net asset value – –
179 22 Purchase price – –
11 (81) Cash/(overdraft) acquired – –
190 (59) Net cash/(overdraft) acquired – –
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
212 TRANSNET ANNUAL REPORT 2007
36. HEADLINE EARNINGS
4 029 5 294 Profit for the year attributable to equity holder 7 387 4 898
(Profit)/loss on disposal of property, plant
19 (6) and equipment (refer note 4.2) (27) (267)
(67) (1 277) Profit on sale of interests in businesses (refer note 4.3) (1 637) (67)
Fair value adjustments on investment properties
(373) (483) (refer note 5) (490) (372)
Impairment of property, plant and equipment
64 115 (refer note 4.4) 154 16
(Reversal of impairment)/impairment of loss making
234 (154) subsidiaries and associates (refer note 4.4) – 141
(Reversal of provision)/provision for losses on sale of
(79) – discontinued operations – restructuring costs – (79)
8 357 Taxation effects of the above 313 113
3 835 3 846 Headline earnings 5 700 4 383
37. CHANGE IN ACCOUNTING POLICYAND OTHER RESTATEMENTS
The Group fully adopted the following standards, amendments to standards, and circulars in the current financial year:
• IFRIC 4 Determining whether an arrangement contains a lease;
• IAS 39 Financial Instruments: Recognition and Measurement – Fair value option (Amendment to IAS 39 Fair Value
Adjustments);
• IAS 39 Financial Instruments: Recognition and Measurement – Financial Guarantee Contracts (Amendment to IAS 39
Financial Guarantee Contracts);
• IAS 21 The effects of changes in foreign exchange rates – Net investment in a foreign operation (Amendment to IAS 21
The effects of changes in foreign exchange rates);
• Circular 1/2006 Disclosures in relation to deferred taxation; and
• Circular 9/2006 Transactions giving rise to adjustments of revenue/purchases.
The principal effects of adopting the above are discussed below:
IFRIC 4 Determining whether an arrangement contains a lease
Although not a legal form of a lease, certain arrangements may contain a lease because the fulfilment of the arrangement
is economically dependent on the use of an asset and it is unlikely that any parties other than the Group will receive more than
an insignificant part of the output. The effect of adopting IFRIC 4 on the Group’s accounting policies has resulted in the
recognition of certain finance and operating leases in terms of IAS 17 Leases. The recognition of such leases has resulted
in a retrospective adjustment to the Group’s financial information.
Amendment to IAS 21 The effects of changes in foreign exchange rates – Net investment in a foreign operation
In terms of this amendment, the Group is required to recognise exchange differences that arise on a monetary item that forms
part of the Group’s net investment in a foreign operation, as a separate component of equity in the consolidated financial
statements. This has, however, not resulted in a change in current Group policies and practices and as such, no restatement has
been recognised in this regard.
Amendment to IAS 39 Financial instruments: Recognition and measurement – fair value option
This amendment was introduced to restrict the use of the option to designate any financial asset or financial liability to be
measured at fair value through profit and loss. The Group has elected to adopt the fair value option where designation
eliminates or significantly reduces an accounting mismatch, or where a group of financial assets, financial liabilities or both ,
is managed by the Group and its performance is evaluated on a fair value basis in accordance with the Group’s risk
management or investment strategy, and information about the group of assets/liabilities is provided internally on that basis
to the Group’s key management personnel.
This, however, has not resulted in an adjustment to the opening accumulated profit or in changes to what have ordinarily been
recorded as fair value adjustments in the prior years, or in the current year.
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 213
37. CHANGE IN ACCOUNTING POLICYAND OTHER RESTATEMENTS (continued)
Amendment to IAS 39 Financial instruments: Recognition and measurement – financial guarantee contracts
The effect of adopting this amendment on the Group’s accounting policies will impact the recognition of financial guarantee
liabilities in the Group’s financial information. These guarantees are initially to be recognised at fair value, and subsequently,
at the higher of the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and
the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue.
This amendment has not resulted in a restatement to the financial results.
Circular 1/2006 Disclosure in relation to deferred taxation
The Group has considered the manner in which an asset will be realised or a liability settled in order to determine the amount
of deferred taxation that should be recognised for that specific asset or liability. While applicable, this amendment has not
resulted in a restatement to the financial results.
Circular 9/2006 Transactions giving rise to adjustments of revenue/purchases
Cash discounts and rebates are required to be accounted for as an adjustment to revenue or the carrying value of inventory,
as the case may be. Where extended payment terms are granted by the Group, the effect of the time value of money is taken
into account. This change in accounting policy has been applied retrospectively.
This amendment has resulted in a reclassification between revenue and net operating expenses before depreciation and
amortisation of R295 million in discontinued operations for Group entities in the previous financial year.
IAS 12 Income taxes
The application of the initial recognition requirements of IAS 12 in relation to revaluation of assets that are not subject
to taxation allowances was amended. The effects of these adjustments are disclosed below.
IAS 40 Investment properties
Properties that meet the definition of investment properties per IAS 40 Investments Properties were reclassified from
property, plant and equipment to investment properties retrospectively. The carrying values of these properties have been
restated to fair value in accordance with IAS 40.
The impacts of the changes in accounting policies and other restatements are summarised below:
COMPANY GROUP
1 April 31 March 31 March 1 April
2005 2006 2006 2005
R million R million R million R million
INCOME STATEMENT
Profit for the year attributable to equity holder,
3 670 as previously reported 4 539
359 Net effect of restatements 359
25 IFRIC 4 adjustments 25
(5) – Deferred taxation impact (5)
398 Increase in investment properties 398
(59) – Deferred taxation impact (59)
4 029 Restated profit attributable to equity holder 4 898
BALANCE SHEET
Equity attributable to shareholder, as
19 802 25 438 previously reported 27 593 21 018
1 487 1 820 Net effect of restatements 1 820 1 487
(5) 20 IFRIC 4 adjustments 20 (5)
1 (4) – Deferred taxation impact (4) 1
530 928 Increase in investment properties 928 530
(73) (132) – Deferred taxation impact (132) (73)
1 034 1 008 Deferred taxation adjustments 1 008 1 034
21 289 27 258 Restated equity attributable to shareholder 29 413 22 505
NOTES TO THE ANNUAL FINANCIAL STATEMENTS continued
for the year ended 31 March 2007
214 TRANSNET ANNUAL REPORT 2007
37. CHANGE IN ACCOUNTING POLICYAND OTHER
RESTATEMENTS (continued)
The detailed impacts of the changes in accounting policies
and other restatements on the financial statements
are as follows:
INCOME STATEMENT
IFRIC 4 adjustments
Decrease in net operating costs excluding depreciation
39 and amortisation 39
(3) Increase in depreciation and amortisation (3)
(11) Increase in finance costs (11)
(5) Increase in taxation charge (5)
20 Increase in net profit 20
Investment properties adjustments
25 Decrease in depreciation and amortisation 25
373 Increase in fair value adjustments 373
(59) Increase in taxation charge (59)
339 Increase in net profit 339
BALANCE SHEET
IFRIC 4 adjustments
60 57 Cumulative increase in property, plant and equipment 57 60
Cumulative increase in other investments and other
– 28 financial assets 28 –
60 85 85 60
(4) 16 Cumulative increase/(decrease) in reserves 16 (4)
65 65 Cumulative increase in long-term borrowings 65 65
(1) 4 Cumulative increase/(decrease) in deferred taxation 4 (1)
60 85 85 60
COMPANY GROUP
1 April 2006 2006 1 April
2005 2005
R million R million R million R million
TRANSNET ANNUAL REPORT 2007 215
37. CHANGE IN ACCOUNTING POLICYAND OTHER
RESTATEMENTS (continued)
BALANCE SHEET (continued)
Investment properties adjustments
(1 434) (1 409) Cumulative decrease in property, plant and equipment (1 409) (1 434)
1 964 2 337 Cumulative increase in investment properties 2 337 1 964
530 928 928 530
457 796 Cumulative increase in reserves 796 457
73 132 Cumulative increase in deferred taxation 132 73
530 928 928 530
Deferred taxation adjustments
1 034 1 008 Cumulative increase in reserves 1 008 1 034
(1 034) (1 008) Cumulative decrease in deferred taxation (1 008) (1 034)
– – – –
STATEMENT OF RECOGNISED INCOME AND EXPENSE
Decrease in taxation of revalued property, plant
(26) and equipment (26)
359 Increase in profit for the year 359
333 Increase in total income recognised for the year 333
COMPANY GROUP
1 April 2006 2006 1 April
2005 2005
R million R million R million R million
ANNEXURE A
for the year ended 31 March 2007
216 TRANSNET ANNUAL REPORT 2007
INTRODUCTION
The Group has a centralised Treasury function and the Treasury performs a supporting role to Transnet divisions and subsidiaries, and
has a responsibility for the management of treasury and financial risks the Group is exposed to in pursuit of its business. Treasury is
also charged with ensuring that Transnet is optimally funded.
The Financial Risk Management Framework (FRM) of the Group was reviewed, substantially updated and approved by the Board over
the last twelve months to address the specific needs of the core divisions. The objectives of the FRM are to ensure that the financial,
operational, and strategic risks applicable to the funding, trading and investment activities are identified, monitored and appropriately
managed in the context of the Group enterprise wide risk management framework, Public Finance Management Act (PFMA) and other
applicable regulation.
RISK PHILOSOPHY
The long-term viability, continued success and reputation of Transnet are critically dependent on the credibility of risk management,
and the commitment in applying best practice in risk management. The risk management philosophy is underpinned by the Transnet
strategic objectives of focusing on lowering the costs of doing business in South Africa, and enabling economic growth through focused
port, rail, and pipeline businesses, in a manner that is consistent with the shareholder and stakeholder expectations.
RISK PROFILE
Financial risk assessment and analysis are disclosed on a monthly basis to the Group Asset and Liability Management Committee
(ALCO) and the Group Executive Committee (Exco). These committees are responsible for reporting financial risk exposures to the
Transnet Board of Directors on a bimonthly basis.
The Group’s business operations expose it to foreign currency, interest rate, liquidity, counterparty, commodity and price risk, which are
discussed under headings below.
FUNDING ACTIVITIES
The on balance sheet interest rate risk positions of the Group are reflected below.
Transnet rand bonds
Domestic Rand bonds
Transnet Ltd issues domestic bonds listed on the Bond Exchange of South Africa. The following rand bonds, excluding market-making
positions, which are separately analysed, were in issue at 31 March 2007:
Effective 2007 2006
Bond Redemption Coupon interest Fair Nominal Fair Nominal
date rate rate (nacs) value value value value
% % R million R million R million R million
T004* 1 April 2008 7,50 14,99 4 592 4 661 4 677 4 661
T011* 1 April 2010 16,50 13,21 1 608 1 325 1 728 1 325
T018* 15 July 2014 10,75 10,39 7 021 6 000 7 177 6 000
A 13 221 11 986 13 582 11 986
Euro rand bonds
Effective 2007 2006
Bond Redemption Coupon interest Fair Nominal Fair Nominal
date rate rate (naca) value value value value
% % R million R million R million R million
Euro 42* 18 April 2028 13,50 13,86 3 182 2 000 3 266 2 000
Euro 42A* 30 March 2029 10,00 15,09 1 854 1 500 1 897 1 500
B 5 036 3 500 5 163 3 500
Group and Company bonds at nominal value (refer note 25) A + B 15 486 15 486
* These domestic rand bonds and Eurorand bonds are for both Company and Group.
TRANSNET ANNUAL REPORT 2007 217
OTHER RAND BORROWINGS
2007 2006
Fair Company Group Fair Company Group
value nominal nominal value nominal nominal
R million R million R million R million R million R million
Other rand denominated** – 5 5 – 8 8
Secured rand denominated – 2 259 2 752 – 1 289 4 769
Long-term** – 2 242 2 623 – 1 289 4 769
Short-term* – 17 129 – – –
Promissory notes** – – 2 210 – – 2 031
Other short-term borrowings
fair valued* 1 492 1 417 1 417 1 889 1 618 1 618
Other short-term borrowings held
at amortised cost* – 1 611 1 611 – 174 174
Commercial paper* – 2 000 2 000 – 1 000 1 000
Domestic rand loans 1 492 7 292 9 995 1 889 4 089 9 600
Total domestic borrowings 22 778 25 481 19 575 25 086
** Refer note 25
* Refer note 30 (included in other short-term borrowings)
The rand secured loans are secured over aircraft and capitalised leasehold improvements.
Since the new commercial paper programme was launched during February 2006, the shareholder has approved the increasing of
the issue size from R2,5 billion to R5 billion. The issue is not guaranteed by the Government and is listed on the Bond Exchange of
South Africa (BESA). This programme is utilised to finance working capital requirements at a very reasonable cost for the Group.
Interest rate swaps with a notional value of R300 million (2006: R300 million) and with a positive fair value of R25 million
(2006: R52 million positive) were open at 31 March 2007. During the financial year a loss of R6 million was recognised in the income
statement comprising a realised gain (cash) of R21 million and an unrealised loss of R27 million. The interest rate swaps were entered
into to swap part of the T004 borrowings from fixed to floating and carry a fixed interest rate that is equal to the coupon payments
of the T004.
After accounting for the above interest rate swaps, the interest rate exposure on the long-term domestic borrowings as at
31 March 2007 was:
Total Floating Floating Fixed
borrowings exposure exposure as borrowings
R million R million % of total R million
2007
Group 23 426 6 725 28,71 16 701
Company 20 722 4 516 21,79 16 206
2006
Group 24 414 4 987 20,43 19 427
Company 18 905 710 3,78 18 195
INVESTMENTS
Investments are only allowed with international counterparties with a minimum international long-term credit rating of A- and domestic
counter parties with a minimum national long-term credit rating of A- (zaf) as rated by a recognised rating agency and approved by the
Board as an approved counterparty. In addition to this the counterparty must have a minimum short-term credit rating of A-1 (F1 zaf)
to qualify for cash type of investments.
ANNEXURE A continued
for the year ended 31 March 2007
218 TRANSNET ANNUAL REPORT 2007
2007 2006
Company Company Group Group Company Company Group Group
Nominal Fair value Nominal Fair value Nominal Fair value Nominal Fair value
R million R million R million R million R million R million R million R million
Domestic 691 703 691 704 591 657 1 202 1 269
Foreign – – 131 131 – – 874 926
The fair value of the Group’s investments at March 2007 comprise the following:
Domestic Foreign Total
Shares in listed companies – 131 131
Market making bonds 150 – 150
Short-term deposit 500 – 500
Carries and repurchases 52 – 52
Other 2 – 2
704 131 835
FOREIGN CURRENCYRISK
Currency risk (FX) exposures are inherent in operational maintenance and capital expenditure programmes. The preferred FX risk
mitigating strategy is to enter into rand-based financing and supplier contracts at an acceptable cost. If not achievable, all FX related
exposures are fully covered as soon as exposures are committed by means of vanilla type approved hedging instruments.
The accounting and the financial risk management implications are fully analysed before a hedging strategy is implemented.
Details of significant foreign currency exposures are reflected below. Fair value hedge accounting is applied to the majority of FX
related liabilities to minimise volatility in the Group’s income statement.
NOMINAL AMOUNTS, FAIR VALUES AND MATURITYPROFILES OF FORWARD EXCHANGE CONTRACTS AND CURRENCYOPTIONS
USED AS HEDGES
Total nominal
value 2007 2008 2009
million million million million
Group
Nominal
US dollars 17 17 – –
Japanese yen 29 378 2 840 9 581 16 957
Euro 145 90 34 21
Australian dollars 10 8 2 –
Total fair
value 2007 2008 2009
R million R million R million R million
Group
Fair value
US dollars (34) (34) – –
Japanese yen (83) (28) (39) (15)
Euro 81 53 16 11
Australian dollars 2 1 1 –
(34) (8) (22) (4)
* The Group amounts include amounts for a subsidiary, being nominal US dollars 8 million, and fair value (R33 million).
TRANSNET ANNUAL REPORT 2007 219
FOREIGN CURRENCYEXPOSURE AND COVER
2007 Exposures 2007
Total for future Total Total Uncovered
borrowings expenditure exposure cover exposure
foreign foreign foreign foreign foreign
Currency currency currency currency currency currency
million million million million million
Group
US dollars 25 36 61 41 20
Japanese yen 887 28 491 29 378 29 378 –
Euro – 152 152 145 7
Australian dollars – 10 10 10 –
Total exposure in rands 232 3 529 3 763 3 552 213
Company
US dollars 24 28 52 32 20
Japanese yen 887 28 491 29 378 29 378 –
Euro – 152 152 145 7
Australian dollars – 10 10 10 –
Total exposure in rands 227 3 471 3 698 3 486 212
FOREIGN CURRENCYINTEREST RATE RISK
Cross-currency interest rate swaps are utilised to hedge foreign currency interest rate risks. The full foreign exchange portfolio has
been swapped to a rand-based interest rate risk exposure. The Board has approved a targeted range of fixed interest rates that may
be managed to enable management to take advantage of interest rate cycles.
The following were significant positions at 31 March 2007:
Notional Notional
amount amount
Fair foreign Fair foreign
value currency value currency
R million million R million million
2007 2007 2006 2006
Group
Cross currency
US dollar (111) 24 (184) 30
Company
Cross currency
US dollar (111) 24 (184) 30
ANNEXURE A continued
for the year ended 31 March 2007
220 TRANSNET ANNUAL REPORT 2007
The foreign currency interest rate exposures after taking the interest rate and cross currency swaps into account on 31 March 2007
are presented in the table below:
Total Fixed
borrowings borrowings
Currency R million R million
Group
US dollar 177 177
Japanese yen 55 55
Long-term ** 44 44
Short-term* 11 11
Total 232 232
Company
US dollar 172 172
Japanese yen 55 55
Long-term** 44 44
Short-term* 11 11
Total 227 227
** Refer note 25
* Refer note 29 (included in other short-term borrowings)
MARKET MAKING IN TRANSNET BONDS
Transnet Ltd makes a market in the T004 and the T011 bond issues, with no market making on the T018 and two Eurorand issues.
The Group has adopted a policy that no market making will be done by Transnet on future bond issues.
Government, Public Corporations and Corporate bonds listed on the Bond Exchange of South Africa, domestic interest rate swaps,
domestic money market instruments and buy-and-sell-back financial instruments are utilised to hedge the resulting interest rate and
liquidity risks.
The resulting basis risk is computed on a rand per point per million basis expressed in terms of a weighted average T011 nominal
exposure. On 31 March 2007 this exposure amounted to a net short nominal position of R8,3 million (31 March 2006: R1,5 million short).
The following positions in local market bonds were held at year-end.
2007 2006
fair value fair value
R million R million
Short positions in listed bonds
Bonds at nominal value 1 294 1 420
Bonds at fair value 1 549 1 889
Long positions in listed bonds
Bonds at nominal value 140 261
Bonds at fair value 202 642
No collateral was held against any market making positions at reporting date.
LIQUIDITYRISK
Liquidity risk is managed to ensure that the Group is in a position to advance funds for capital expenditure, redeem and service loans in
money and capital markets, finance operational costs and generate cash for unanticipated financial commitments. Certain thresholds,
which are a combination of available cash and unutilised credit facilities are minimum requirements of the approved policy to ensure
effective liquidity risk management. The weighted average duration of money market investments may not exceed 180 days.
TRANSNET ANNUAL REPORT 2007 221
The following is a summary of long-term on balance sheet borrowings by currency and redemption:
Total
borrowings Repayable during the financial year ended 31 March
2007 2008 2009 2010 2011 2012 onwards
R million R million R million R million R million R million
Group
US dollars 177 48 53 37 39 –
Japanese yen 55 33 22 – – –
Total foreign currencies 232 81 75 37 39 –
Total SA rand 23 426 6 042 3 355 (532)* 1 624 12 937
Total interest-bearing borrowings 23 658 6 123 3 430 (495)* 1 663 12 937
Current portion of borrowings (6 123) (6 123) – – – –
Total long-term interest-bearing
borrowings 17 535 – 3 430 (495)* 1 663 12 937
Redemption period as % of total 100 – 20 (3) 9 74
Company
US dollars 172 45 51 37 39 –
Japanese yen 55 33 22 – – –
Total foreign currencies 227 78 73 37 39 –
Total SA rand 20 722 3 630 3 129 (571)* 1 597 12 937
Total interest-bearing borrowings 20 949 3 708 3 202 (534)* 1 636 12 937
Current Portion of borrowings (3 708) (3 708) – – – –
Total long-term interest-bearing
borrowings 17 241 – 3 202 (534)* 1 636 12 937
Redemption period as % of total 100 – 19 (3) 9 75
* The borrowings payable by the Company and Group in 2010 are shown as a receivable, because in that year draw-downs received on structured loans,
exceed repayments made on all other loans.
COUNTERPARTYRISK
The counterparty risk policy of the Group is aligned with the detailed requirements of the Treasury Regulations as referred
to in the PFMA;
– Selection of counterparties through credit risk analysis;
– Establishment of investment limits per institution;
– Establishment of investment limits per investment instrument;
– Monitoring of investments against limits;
– Reassessment of investment policies on a regular basis;
– Reassessment of counterparty credit risk based on credit ratings; and
– Assessment of investment instruments based on liquidity requirements.
Financial assets that potentially subject the Group to concentrations of credit risk consist primarily of cash, short-term deposits,
Government and public corporation bonds listed on the Bond Exchange of South Africa and the market value of derivatives and trade
receivables. The Group’s exposures to credit risk in respect of all Treasury related transactions are confined to credible counterparties
and are managed within Board approved credit limits. Limits are reviewed and approved by the Board on an annual basis. Trade
receivables are presented net of impairments. It is the Treasury’s policy to perform ongoing credit evaluations of the financial position
of its counterparties.
Below is a summary of significant exposures, all within the approved limits, as at 31 March 2007.
2007 2006
R million R million
Credit risk (inclusive of marginal risk)** 3 830 2 780
Bond issuer risk** 17 269
Guarantees 5 696 5 687
Trade and other receivables* 3 992 4 149
13 535 12 885
Note: Included in Guarantees (R5 696 million) is a US dollar guarantee of US dollars 2,6 million
* Refer note 18. Trade and other receivables are shown net of impairment losses.
**DEFINITIONS
• Credit risk
Credit risk is the potential loss that may arise when a counterparty cannot fulfil its commitments in respect of a financial
transaction.
• Marginal risk (price risk)
The risk that a transaction has to be closed-out at a market value loss as a result of the unfavourable movements in market rates.
• Bond issuer risk
The risk that an issuer of bonds will not be able to fulfil its financial obligations according to the terms of the bond issues.
The following diagram reflects the distribution of credit risk, expressed in terms of long-term credit ratings, excluding guarantees and
trade receivables. The non-rated banks are financial institutions situated in Africa. These accounts are monitored on a regular basis to
ensure that credit limits are not breached.
ANNEXURE A continued
for the year ended 31 March 2007
222 TRANSNET ANNUAL REPORT 2007
Transnet Ltd and Transnet Group
Risk per long-term rating
27,7%
0,13%
13,5%
26,3%
0,22%
32,15%
Unrated A+ AA
AA– AA+ AAA
TRANSNET ANNUAL REPORT 2007 223
COMMODITYPRICE HEDGING
Transnet Ltd has not made use of fuel hedging in the past. The latest Board approved Financial Risk Management Framework now
allows Treasury to hedge fuel risk exposures. The majority of fuel risk exposures are concentrated at Spoornet in respect of diesel
traction fuel.
FAIR VALUE
At 31 March 2007 and 2006 the carrying amounts of cash, short-term deposits, accounts receivable, accounts payable and short-term
borrowings approximated their fair values due to the short-term maturities of these assets and liabilities. The fair values of bonds
listed on the Bond Exchange of South Africa and those of derivative financial instruments have been based on market values at the
reporting date. The fair values represent an approximation as to the carrying value of these instruments at year-end, but these may
differ from the values that will finally be realised.
CURRENCYCONVERSION
The mid rates of exchange at 31 March 2007 used for conversion were:
2007 2006
US dollar 7,2160 6,3274
Pound sterling 14,1838 10,9708
Japanese yen 0,0614 0,0535
Euro 9,6132 7,5704
Australian dollar 5,8208 4,4785
ANNEXURE B
for the year ended 31 March 2007
224 TRANSNET ANNUAL REPORT 2007
PROPERTY, PLANT AND EQUIPMENT RECONCILIATION AT 31 MARCH 2007
Land, Machinery,
buildings and equipment
Aircraft structures and furniture
R million R million R million
GROUP
Restated balance at the beginning of the year
Historical cost and revaluation 1 045 9 575 3 914
Accumulated depreciation (469) (1 447) (2 542)
Accumulated impairment – (300) (39)
Restated opening net carrying value at 1 April 2006 576 7 828 1 333
Current year movements
Additions 78 267 682
Disposals – (33) (190)
Depreciation* (67) (280) (319)
Derecognition* – (21) (13)
Revaluation – – –
Impairment – historical cost and revaluation – (19) (5)
Transferred to intangibles, inventories and receivables – – (20)
Transfers to non-current assets classified as held-for-sale – (127) (126)
Reclassifications – – –
Transfer from capital work in progress to assets – 499 159
11 286 168
Closing carrying value at 31 March 2007 587 8 114 1 501
Made up as follows:
Historical cost and revaluation 1 123 9 958 3 533
Accumulated depreciation (536) (1 709) (1 991)
Accumulated impairment – (135) (41)
Carrying value at 31 March 2007 587 8 114 1 501
• Aggregated in note 4.1.
TRANSNET ANNUAL REPORT 2007 225
Permanent Rolling Capital
way and Pipeline Port stock and work in
works networks facilities containers Vehicles progress Total
R million R million R million R million R million R million R million
7 617 9 335 18 986 13 142 445 7 446 71 505
(2 096) (6 094) (7 296) (4 836) (374) – (25 154)
– (152) (442) (54) (1) (182) (1 170)
5 521 3 089 11 248 8 252 70 7 264 45 181
(48) (12) 48 513 1 9 568 11 097
(6) – (110) (56) (1) (10) (406)
(226) (237) (531) (839) (25) – (2 524)
(14) – – (365) – – (413)
– 662 1 072 – – – 1 734
– – (9) (73) – (20) (126)
– – – (142) – (103) (265)
– – (1) (198) – – (452)
52 – – 73 – (125) –
288 68 1 224 5 008 132 (7 378) –
46 481 1 693 3 921 107 1 932 8 645
5 567 3 570 12 941 12 173 177 9 196 53 826
7 880 10 371 21 476 17 715 585 9 398 82 039
(2 313) (6 648) (8 084) (5 415) (407) – (27 103)
– (153) (451) (127) (1) (202) (1 110)
5 567 3 570 12 941 12 173 177 9 196 53 826
ANNEXURE B continued
for the year ended 31 March 2007
226 TRANSNET ANNUAL REPORT 2007
PROPERTY, PLANT AND EQUIPMENT RECONCILIATION AT 31 MARCH 2007
Land, Machinery,
buildings and equipment
Aircraft structures and furniture
R million R million R million
COMPANY
Restated balance at the beginning of the year
Historical cost and revaluation 26 9 571 3 857
Accumulated depreciation (25) (1 446) (2 500)
Accumulated impairment – (299) (27)
Restated opening net carrying value at 1 April 2006 1 7 826 1 330
Current year movements
Additions – 254 681
Disposals – (33) (190)
Depreciation* – (280) (319)
Derecognition* – (21) (13)
Revaluation – – –
Impairment – historical cost and revaluation – (8) (5)
Transferred to intangibles, inventories and receivables – – (18)
Transfers to non-current assets classified as held-for-sale – (127) (126)
Reclassifications – – –
Transfer from capital work in progress to assets – 499 159
– 284 169
Closing carrying value at 31 March 2007 1 8 110 1 499
Made up as follows:
Historical cost and revaluation 26 9 938 3 482
Accumulated depreciation (25) (1 707) (1 953)
Accumulated impairment – (121) (30)
Carrying value at 31 March 2007 1 8 110 1 499
• Aggregated in note 4.1.
TRANSNET ANNUAL REPORT 2007 227
Permanent Rolling Capital
way and Pipeline Port stock and work in
works networks facilities containers Vehicles progress Total
R million R million R million R million R million R million R million
7 672 9 335 18 986 13 142 458 7 409 70 456
(2 096) (6 094) (7 296) (4 836) (390) – (24 683)
– (152) (442) (54) – (182) (1 156)
5 576 3 089 11 248 8 252 68 7 227 44 617
(48) (6) 97 517 1 9 580 11 076
(6) – (110) (56) (1) (10) (406)
(228) (238) (535) (839) (25) – (2 464)
(14) – – (365) – – (413)
– 662 1 072 – – – 1 734
– – (9) (73) – (20) (115)
– – – (142) – (103) (263)
– – (1) (198) – – (452)
52 – – 73 – (125) –
288 68 1 224 5 004 133 (7 375) –
44 486 1 738 3 921 108 1 947 8 697
5 620 3 575 12 986 12 173 176 9 174 53 314
7 935 10 377 21 525 17 715 578 9 376 80 952
(2 315) (6 649) (8 088) (5 415) (402) – (26 554)
– (153) (451) (127) – (202) (1 084)
5 620 3 575 12 986 12 173 176 9 174 53 314
ANNEXURE C
for the year ended 31 March 2007
228 TRANSNET ANNUAL REPORT 2007
DISPOSAL GROUPS CLASSIFIED AS HELD-FOR-SALE
COMPANY
A B C D E
=A+B =C+D
Intercompany
eliminations Non-current
freight- and other Disposal assets held-
dynamics† adjustments‡ groups for-sale Total
Notes R million R million R million R million R million
Assets classified as held-for-sale
Property, plant and equipment a 210 35 245 452 697
Intangible assets and goodwill b – – – 11 11
Investments in subsidiaries c 1 – 1 461 462
Investments in associates and joint ventures d – – – 84 84
Loans and advances f – – – 1 258 1 258
Inventories h 2 – 2 1 3
Trade and other receivables i 128 2 130 176 306
Cash and cash equivalents j – – – – –
Total 341 37 378 2 443 2 821
Liabilities directly associated with assets
classified as held-for-sale
Post-retirement benefit obligations k (11) – (11) – (11)
Borrowings l (368) 368 – – –
Derivative financial liabilities e – – – – –
Provisions m (25) – (25) (17) (42)
Deferred taxation liabilities n – – – – –
Trade and other payables o (95) 3 (92) (68) (160)
Current taxation liability p – – – – –
Bank overdraft q – – – – –
Group loans (127) 127 – – –
Total (626) 498 (128) (85) (213)
The above disposal groups form part of the overall restructuring plan of Transnet to dispose of its non-core entities. The process was
initiated once PFMA approval in terms of section 54 was obtained. It is management’s expectation that these disposal groups will be
disposed of within the next 12 months. These disposal groups will be disposed of to external third parties as part of a competitive
bidding process.
† Included in road segment.
‡ Included in the other segment.
TRANSNET ANNUAL REPORT 2007 229
GROUP
F G H I J K L M
=F+G+H+I+J =K+L
Viamax Autopax Freight Intercompany
(Pty) Ltd† Passenger Dynamics eliminations Non-current
excluding Services Guard freight- and other Disposal assets held-
HSA (Pty) Ltd† Risk‡ dynamics† adjustments‡ groups for-sale Total
R million R million R million R million R million R million R million R million
1 074 60 – 210 248 1 592 452 2 044
2 – – – – 2 10 12
– – – 1 (1) – – –
– – – – – – 101 101
– – – – – – 1 258 1 258
– 3 – 2 – 5 1 6
113 11 2 128 (74) 180 176 356
139 1 19 – (24) 135 – 135
1 328 75 21 341 149 1 914 1 998 3 912
– (3) – (11) – (14) – (14)
(50) (68) – (368) 486 – – –
– – – – – – – –
(5) (8) – (25) – (38) (17) (55)
(95) – – – – (95) – (95)
(72) (45) (7) (95) 13 (206) (68) (274)
(15) – (1) – 24 8 – 8
– – – – – – – –
(354) – – (127) 481 – – –
(591) (124) (8) (626) 1 004 (345) (85) (430)
ANNEXURE C continued
for the year ended 31 March 2007
230 TRANSNET ANNUAL REPORT 2007
NOTES TO DISPOSAL GROUPS CLASSIFIED AS HELD-FOR-SALE
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
a. PROPERTY, PLANT AND EQUIPMENT
– 408 Net carrying value at the beginning of the year 9 936 –
– 11 Additions 577 –
– (170) Disposals (244) –
– (2) Scrapping (70) –
– – Disposal of subsidiary/division (8 577) –
– – Impairment (28) –
– (2) Depreciation (2) –
408 452 Transferred from continuing operations (refer annexure B) 452 9 936
408 697 2 044 9 936
b. INTANGIBLE ASSETS AND GOODWILL
– 1 Net carrying value at the beginning of the year 9 –
– – Additions 102 –
– (1) Disposals (2) –
– – Disposal of subsidiary/division (108) –
1 11 Transferred from continuing operations (refer note 11) 11 9
1 11 12 9
c. INVESTMENTS IN SUBSIDIARIES (refer annexure D)
– 1 Shares at cost
– 511 Net amounts owing by subsidiaries
– 512
– (50) Provision for impairment and losses
– 462
2 224 – Transferred from continuing operations (refer note 12)
2 224 462
d. INVESTMENTS IN ASSOCIATES (refer annexure D)
– 567 Balance at the beginning of the year 1 282 –
– (447) Disposals (1 145) –
– (114) Transfers to other investments (114) –
567 78 Transferred from continuing operations (refer note 13) 78 1 282
567 84 101 1 282
1 480 108 Directors’ valuation 108 1 480
e. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES
– – Derivative financial assets – 180
– – Opening balance 180 –
– – Income statement credit 69 –
– – Derivatives raised and settled (202) –
– – Disposal of subsidiary/division (47) –
– – Transferred from continuing operations (refer note 14) – 180
f. LOANS AND ADVANCES
– – Balance at the beginning of the year – –
– 1 258 Transferred from continuing operations (refer note 15) 1 258 –
– 1 258 1 258 –
TRANSNET ANNUAL REPORT 2007 231
GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
15 – g. OTHER INVESTMENTS – 1 007
2 3 h. INVENTORIES 6 469
121 306 i. TRADE AND OTHER RECEIVABLES 356 3 040
– – j. CASH AND CASH EQUIVALENTS 135 332
k. POST-RETIREMENT BENEFIT OBLIGATIONS
– 11 Balance at the beginning of the year 101 –
– – Current year provision 177 –
– – Disposal of subsidiary/division (248) –
– – Settlements during the year (34) –
– – Actuarial losses 18 –
11 – Transferred from continuing operations (refer note 24) – 101
11 11 14 101
k.(i) Flight Deck Crew (FDC) Pension Fund
The liability relates to additional benefits to members
of the flight deck crew (FDC), who are employees of SAA.
These additional pension benefits are required to equate
to the increases that would have been applied to the total
cost of employment for the years commencing 16 March
1999 to 16 March 2000. This liability was recognised for
the first time in 2003.
Benefit liability
– – Opening benefit liability (5) (5)
– – Raised during the year – –
– – Settlement during the year – –
– – Closing benefit liability (5) (5)
– – Disposal of SAA 5 –
– – Net benefit liability – (5)
k.(ii) SAA (UK) Pension Fund
SAA operates the SAA (UK) Pension Scheme for employees
based in the United Kingdom. The scheme has defined
benefit (final salary) and defined contribution (money
purchase) sections. No person is eligible to participate in
the final salary section in respect of pensionable after
30 June 2003 unless they were already participating in the
final salary section at the date and their 63 birthday falls
before 1 June 2013.
Benefits for a final salary member are mainly calculated
on a formula of 1/60 x final salary x years of membership
of the final salary section. Final salary means the average
of the last three pensionable salaries preceding retirement
or date of leaving the scheme, if this is earlier. Pensionable
salary is defined as basic salary less the state lower earning
limit (with a pro rata adjustment for part timers) at the
beginning of each scheme year (1 July).
ANNEXURE C continued
for the year ended 31 March 2007
232 TRANSNET ANNUAL REPORT 2007
GROUP
2007 2006
Restated
R million R million
k.(ii) SAA (UK) Pension Fund (continued)
Benefits for a money purchase member are determined by the contributions paid into a
member’s pension account, the investment returns on those contributions and the cost
of purchasing an annuity at retirement.
The fund had 13 active members, 11 deferred members and 25 pensioners as at
31 March 2007 (2006: 16 active members and 21 pensioners).
Some members have entitlements in both the final salary section and the money
purchase sections.
The following only refers to the final salary section and specifically excludes all money
purchase assets and liabilities including annuities purchased at retirement in respect of
money purchase entitlements.
Actuarial valuation
Actuarial valuations are carried out, at intervals not exceeding three years, to determine
the financial position of the final salary section. The fund was valued using the projected
unit credit method as required by IAS 19 Employee Benefits in March 2007. The fund had
a surplus of R19,5 million at the date.
The employer’s pension contributions for the year to 31 March 2008 are expected to
amount to approximately R6,6 million (2006: R5 million). These exclude employer’s
pension contributions to the money purchase section, the Group Life premiums which
are paid by the employer.
The principal actuarial assumptions used were as follows:
Discount rate (%) 5,4 4,9
Expected return on assets (%) 6,4 5,9
Price inflation (%) 3,3 3,0
Expected rate of salary increases (%) 5,8 5,5
Pension increases in payment (%) 3,3 3,0
Pension increases during deferment (%) 3,3 3,0
The results of the actuarial valuation are as follows:
Benefit asset
Present value of obligation (68) (55)
Fair value of plan assets 87 58
Surplus 19 3
Unrecognised assets (19) (3)
Net liability per the balance sheet – –
The asset that has arisen in the current year, has not been recognised as it is not known
which party would eventually benefit from it.
TRANSNET ANNUAL REPORT 2007 233
GROUP
2007 2006
Restated
R million R million
k.(ii) SAA (UK) Pension Fund (continued)
Credit to the income statement
Interest cost (3) (3)
Current service cost (1) (1)
Exchange differences on foreign plans – 6
Expected return on assets 5 7
1 9
Actual return on plan assets 7 12
Actuarial gain recognised in the statement of recognised income and expenditure (7) –
The cumulative actuarial gains recognised in equity which has been disposed of 9 –
Movement in the net asset/(liability) recognised in the balance sheet
Opening net liability – (10)
Expenses as per above 1 9
Actuarial gains in equity 7 –
Contribution paid 7 4
Exchange difference 1 –
Surplus 16 3
Unrecognised asset (16) (3)
Closing net liability – –
Reconciliation of movement in benefit liability
Opening benefit liability (55) (58)
Current service cost (1) (1)
Interest cost (3) (3)
Actuarial gain/(loss) 5 (5)
Exchange differences on foreign plans (17) 11
Benefits paid 3 1
Closing benefit liability (68) (55)
Reconciliation of movement in fair value of plan assets
Opening fair value of plan assets 58 48
Expected return on assets 5 7
Contributions by employer 7 4
Actuarial gains 2 5
Exchange difference on foreign plans 18 (5)
Benefits paid (3) (1)
Closing fair value of plan assets 87 58
The major categories of plan assets as a % of total plan assets are:
Equity (%) 80 84
Debt instruments (%) 20 9
Other assets (%) – 7
100 100
ANNEXURE C continued
for the year ended 31 March 2007
234 TRANSNET ANNUAL REPORT 2007
GROUP
2007 2006
Restated
R million R million
k.(iii) SAA (German) Pension Fund
SAA operates a retirement plan for its German-based permanent employees. The scheme
is a defined benefit fund. The scheme consists of three groups which are entitled to
different benefits as follows:
Group 1: Those in the employment of SAA before 1976.
All employees who were members in this group have retired and the scheme has therefore
been closed with effect from March 2004.
Group 2: Those in the employment of SAA from April 1976 to December 1988.
Group 3: All new employees who joined SAA after 1 January 1988.
The benefits payable to groups 2 and 3 are determined with reference to the rules of the
scheme and are based on the % of the average salary for the last 12 months multiplied by
the number of years of pensionable service plus a cash lump sum. The retirement age for
all employees is 63 years.
SAA has taken an insurance policy to cover all the promised employment benefits, but
retains the legal obligation to pay further contributions if the insurer does not pay all
employee benefits relating to employee service in the current and prior periods.
The employer contributes 100% and the employee makes no contribution towards this
retirement plan.
The contributions for the year beginning 1 April 2007 are estimated at R2 million
(2006: R2 million).
Actuarial valuation
Actuarial valuations in terms of the rules of the scheme are done at intervals not exceeding
three years, to determine its financial position. The most recent actuarial valuation of plan
assets and the present value of the defined benefit obligation was carried out in April 2006
using the projected unit credit method.
The results of the actuarial valuation showed that the scheme was fully funded.
The principal actuarial assumptions used were as follows:
Discount rate (%) 4,5 5,1
Expected rate of salary increases (%) 2,0 2,0
Future pension increases (%) 4,5 3,0
TRANSNET ANNUAL REPORT 2007 235
GROUP
2007 2006
Restated
R million R million
k.(iii) SAA (German) Pension Fund (continued)
The results of the actuarial valuation are as follows:
Benefit (liability)/asset
Present value of obligation (175) (122)
Insurance policy (expected payout value) – 162
Net (under-insured)/over-insured balance not recognised (175) 40
Charge to the income statement
Current service costs (15) (2)
Interest costs (8) (6)
(23) (8)
Insurance policy (expected payout value)
The insurance policy payout values expected per category of employees determined by
Prorente, the re-insurer for the German scheme are R112 million at the end of March 2007
(2006: R162 million). This policy is taken out exclusively to fund the retirement benefit
obligations for SAA employees in Germany when they reach the retirement age of 63.
Reconciliation of movement in benefit liability
Opening benefit liability (122) (126)
Current service cost (15) (2)
Interest cost (8) (6)
Exchange difference on foreign plans (35) 8
Benefits paid 5 4
Closing benefit liability (175) (122)
Disposal of South African Airways (Pty) Ltd 175 –
Net benefit liability – (122)
k.(iv) Flight Deck Crew Disability Benefit Fund
SAA has an agreement with the Flight Deck Crew (FDC) members who are on permanent
employment to top up the disability benefits payable by the Transnet defined benefit
fund. In terms of the rules of the Transnet defined contribution fund all employees are
entitled to 75% of the members’ pensionable salary payable when a member becomes
disabled before the normal retirement age of 63. The agreement with FDC members is for
SAA to pay a further 25% in addition to what the member would receive from the pension
fund in the case of disability. The members or SAA make no additional contribution towards
these benefits, these benefits are therefore unfunded.
The actuarial valuation for this liability was performed for the first time in March 2007.
In terms of IAS 19 Employee Benefits the disability benefits should be recognised as part
of other long-term employee benefits. The benefit should be measured based on the same
principles applicable to a defined benefit fund. The actuarial valuation was performed
using the projected unit credit method.
The service costs and interest cost for 2008 are expected to amount to R4 million.
ANNEXURE C continued
for the year ended 31 March 2007
236 TRANSNET ANNUAL REPORT 2007
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
k.(iv) Flight Deck Crew Disability Benefit Fund (continued)
The principal actuarial assumptions used were as follows:
Discount rate (%) 8,40 7,75
Expected rate of salary increases (%) 7,78 6,99
Future pension increases (%) 5,68 4,89
The results of the actuarial valuation are as follows:
Closing benefit liability (35) (35)
Disposal of South African Airways (Pty) Ltd 35 –
Net benefit liability – (35)
Charge to the income statement
Current service cost (2) (4)
Interest cost (2) (7)
(4) (11)
Actuarial loss recognised in the statement of recognised
income and expenditure 4 –
The cumulative actuarial losses recognised in equity 4 –
Reconciliation of movement in benefit liability
Opening benefit liability (35) (24)
Current service cost (2) (4)
Interest cost (2) (7)
Actuarial loss 4 –
Closing benefit liability (35) (35)
This benefit liability is currently unfunded. SAA is in the
process of securing insurance cover which will be solely for
the funding of these benefit obligations as they become due.
l. BORROWINGS
– – Total long-term borrowings at the beginning of the year 4 807 –
– – Raised 1 786 –
– – Repaid (1 047) –
– – Foreign exchange movement 357 –
– – Disposal of subsidiary/division (5 903) –
– – Transferred from continuing operations – long-term
portion (refer note 25) – 4 249
– – Transferred from continuing operations – short-term
portion (refer note 30) – 558
– – – 4 807
TRANSNET ANNUAL REPORT 2007 237
COMPANY GROUP
2006 2007 2007 2006
Restated Restated
R million R million R million R million
m. PROVISIONS
– 17 Total provisions at the beginning of the year 493 –
– 15 Provisions made during the year 92 –
– (7) Provisions released/utilised (28) –
– – Disposal of subsidiary/division (519) –
17 17 Transferred from continuing operations (refer note 26) 17 493
17 42 55 493
n. DEFERRED TAXATION LIABILITIES
– – Opening balance 67 –
– – Movements for the year 28 –
– – Transferred from continuing operations – 67
– – Closing balance 95 67
64 160 o. TRADE PAYABLES AND ACCRUALS (refer note 29) 274 7 420
– – p. CURRENTTAXATION (ASSET)/LIABILITY (8) 37
– – q. BANK OVERDRAFT (refer note 19) – 7
Voting
Shares power
issued Effective holding held
SUBSIDIARIES 2007 2006 2007
Million % % %
SUBSIDIARIES HELD BYTRANSNET
LOCAL SUBSIDIARIES
Transport logistics
Viamax (Pty) Ltd ® 15 100 100 100
Marine Data Systems (Pty) Ltd † 80 80 80
Owner Driver Management (Pty) Ltd * 100 100 100
Southern African Airline Holdings (Pty) Ltd 100 100 100
South African Airways (Pty) Ltd
@
– 100** –
Autopax Passenger Services (Pty) Ltd ® 20 100 100 100
Property holdings
Transhold Properties (Pty) Ltd 100 100 100
Esselen Park Developments (Pty) Ltd † 100 100 100
Transite Properties (Pty) Ltd * 100 100 100
Point Waterfront (Pty) Ltd * 51 51 51
Proptrade (Pty) Ltd 100 100 100
The Bay Waterfront (Pty) Ltd * 100 100 100
Marine Growers (Pty) Ltd 100 100 100
Construction
Protekon (Pty) Ltd † 100 100 100
IT procurement
B2B Africa Holdings (Pty) Ltd † 100 100 100
Rolling stock and traction
Transwerk Foundries (Pty) Ltd 100 100 100
Insurance captive cells
Spoornet Guard Risk 100 100 100
Freight Dynamics Guard Risk ® 100 100 100
Social responsibility
Transnet Foundation Trust 100 100 100
Investment holdings
Newshelf 697 (Pty) Ltd 100 100 100
* Dormant and in the process of deregistration
** Transnet holds 98,2% of South African Airways (Pty) Ltd (SAA) and the other 1,8% is held by the SAA Share Incentive Trust which was consolidated
for the first time in the prior year. Transnet effectively holds 100% of SAA.
®
Subsidiaries classified as held-for-sale
# Dormant
† Dormant and in the process of winding up
^ In the process of deregistration
@
Sold
ANNEXURE D
for the year ended 31 March 2007
238 TRANSNET ANNUAL REPORT 2007
TRANSNET ANNUAL REPORT 2007 239
Interest of Holding Interest of Holding Accumulated
Company Company impairment
Shares at cost Net profit/(loss) Indebtedness and losses
2007 2006 2007 2006 2007 2006 2007 2006
R million R million R million R million R million R million R million R million
15 15 114 (127) 406 465 – –
– – – – 219 219 219 219
– – – – – – – –
58 58 120 124 336 401 339 459
– 2 726 (685) (44) – 8 226 – 9 231
20 20 (31) 12 69 60 49 58
– – 1 1 104 101 65 69
– – – – 10 10 10 10
– – – – – – – –
– – – – – – – –
– – 14 (2) (8) 23 25 25
– – – – – – – –
3 – (1) – – – – –
– – – (96) – – – –
– – – 3 127 126 127 126
– – 30 (15) 85 99 21 42
3 3 7 (1) – – – –
1 1 2 (1) – – – –
– – (16) 31 – – – –
– – 1 539 351 – – – –
Voting
Shares power
issued Effective holding held
SUBSIDIARIES 2007 2006 2007
Million % % %
FOREIGN SUBSIDIARIES
Transport Logistics
African Joint Air Services Ltd (Uganda) † 57 57 57
Freight Logistics International (British Virgin Islands) 23 100 100 100
Translease International (Mauritius) 100 100 100
Spoornet Do Brazil (Brazil) 100 100 100
Investments in subsidiaries classified as held-for-sale
SUBSIDIARIES HELD BYOTHER SUBSIDIARIES
Incorporated in the Republic of South Africa, unless stated otherwise
Held within South African Airways (Pty) Ltd
Airchefs (Pty) Ltd
@
– 100 –
Airchefs International (Pty) Ltd
@
– 100 –
SAA City Centre (Pty) Ltd
@
– 100 –
SAA Technical (Pty) Ltd
@
– 100 –
International Aviation Personnel (Pty) Ltd
@
– 100 –
Air Tanzania Company Ltd (Tanzania)
@
– 49 –
Held within Viamax (Pty) Ltd
HSA Management Systems (Pty) Ltd ® 100 100 100
Viamax Fleet Solutions (Pty) Ltd ® 60 60 60
Viamax Logistics (Pty) Ltd ® 100 100 100
Viamax Fleet Management (Pty) Ltd ® 100 100 100
Held within Southern African Airline Holdings (Pty) Ltd
South African Express Airways (Pty) Ltd 57 100 100 100
* Dormant and in the process of deregistration
** Transnet holds 98,2% of South African Airways (Pty) Ltd (SAA) and the other 1,8% is held by the SAA Share Incentive Trust which was consolidated
for the first time in the prior year. Transnet effectively holds 100% of SAA.
®
Subsidiaries classified as held-for-sale
# Dormant
† Dormant and in the process of winding up
^ In the process of deregistration
@
Sold
ANNEXURE D continued
for the year ended 31 March 2007
240 TRANSNET ANNUAL REPORT 2007
TRANSNET ANNUAL REPORT 2007 241
Interest of Holding Interest of Holding Accumulated
Company Company impairment
Shares at cost Net profit/(loss) Indebtedness and losses
2007 2006 2007 2006 2007 2006 2007 2006
R million R million R million R million R million R million R million R million
– – (2) – 384 383 384 383
23 23 8 (1) 219 166 – –
– – – – – – – –
– – – – – – – –
123 2 846 1 100 235 1 951 10 279 1 239 10 622
(36) (2 762) (85) 160 (475) (8 751) (49) (9 289)
87 84 1 015 395 1 476 1 528 1 189 1 333
ANNEXURE D continued
for the year ended 31 March 2007
242 TRANSNET ANNUAL REPORT 2007
Effective holding Shares at cost
2007 2006 2007 2006
ASSOCIATES AND JOINTVENTURES* Principal activity % % R million R million
Associates
arivia.kom (Pty) Ltd ® IT service provider 42 42 214 210
VAE Perway (Pty) Ltd ® Refurbishment of Perway 35 35 6 6
Commercial Cold Storage (Ports) (Pty) Ltd
1
Storage and bondage 30 30 – –
Port Shepstone & Alfred County Railway Ltd Railway operator 28 28 – –
Comazar (Pty) Ltd Transport logistics 32 32 13 13
V&A Waterfront Holdings (Pty) Ltd
@
Property development
and management – 26 – 424
Mossel Bay Waterfront Development (Pty) Ltd
#2
Property development
and management 15 15 2 2
Equity Aviation Services (Pty) Ltd
@XX
Transport logistics – 49 – 35
Cape Town Bulk Storage (Pty) Ltd Port operations 50 50 1 1
Belldev Properties (Pty) Ltd Property development
and management 50 50 – –
AllPort Logistic Terminal (Ghana) † Port operations – – – –
RainProp (Pty) Ltd
3
Property development
and management 20 20 2 2
Joint ventures
Transpoint Properties (Pty) Ltd Telecommunication 50 – – –
238 693
Investments in associates classified as held-for-sale (220) (465)
18 228
Summarised financial information of significant associates V&A Waterfront arivia.kom
Holdings (Pty) Ltd (Pty) Ltd.
2007 2006 2007 2006
R million R million R million R million
Financial position
Assets – 5 049 691 797
Liabilities – 2 613 285 394
Results of operations
Revenue – 792 1 356 1 480
Profit before taxation – 1 155 (29) 37
Income taxation (expense)/credit – (189) 12 (18)
Net profit for the year – 966 (7) 19
* Incorporated in the Republic of South Africa, unless stated otherwise
® Associates classified as held-for-sale
† Dormant and in the process of winding up
# Dormant
¥ Total impairment of R141 million (shares at cost: R136 million, post-acquisition reserves: R5 million)
@
Sold
XX Sold during the current year and consequently the loan has been included in other receivables
1
Year ends 30 September
2
Year ends 28 February
3
Year ends 30 June
TRANSNET ANNUAL REPORT 2007 243
Interest of Holding Accumulated Share of post-
Company impairment acquisition
indebtedness and losses reserves Total
2007 2006 2007 2006 2007 2006 2007 2006
R million R million R million R million R million R million R million R million
– – 141 139
¥
5 3 78 74
– – – – 17 17 23 23
1 3 – – 18 16 19 19
– 2 – – – – – 2
8 8 20 22 – – 1 (1)
– – – – – 639 – 1 063
– – 2 2 – – – –
– 114 – 12 – 59 – 196
– – – – 3 3 4 4
– – – – – – – –
– – – – – – – –
– – – – (2) (2) – –
23 – – – – – 23 –
32 127 163 175 41 735 148 1 380
– (114) (141) (12) (22) (715) (101) (1 282)
32 13 22 163 19 20 47 98
ANNEXURE E
for the year ended 31 March 2007
244 TRANSNET ANNUAL REPORT 2007
STANDARDS AND INTERPRETATIONS
At the date of authorisation of the financial statements, the following standards and interpretations were in issue but not yet effective:
Standards/interpretation Effective date
Revised IAS 23 Borrowing costs Annual periods commencing on or after 1 January 2009*
IFRS 7 Financial Instruments: Disclosures
(including amendments to IAS 1
Presentation of Financial Instruments:
Capital Disclosures) Annual periods commencing on or after 1 January 2007*
IFRS 8 Operating Segments Annual periods commencing on or after 1 January 2009*
IFRIC 8** Scope of IFRS 2 Annual periods commencing on or after 1 May 2006*
IFRIC 9** Reassessment of Embedded Derivatives Annual periods commencing on or after 1 June 2006*
IFRIC 10 Interim Financial Reporting and Impairment Annual periods commencing on or after 1 November 2006*
IFRIC 11** IFRS 2 Group and Treasury Share Transactions Annual periods commencing on or after 1 March 2007*
IFRIC 12** Service Concession Arrangements Annual periods commencing on or after 1 January 2008*
AC 503** Accounting for Black Economic Empowerment
(BEE) Transactions Annual periods commencing on or after 1 May 2006*
* All applicable standards will be adopted at their effective date or earlier, such as in the case of IAS 23.
** These accounting standards are not applicable to the business of the Group and will therefore have no impact on future financial statements.
The Directors are of the opinion that the application of the relevant standards and interpretations will be as follows:
IFRS 7
The disclosures provided in respect of financial instruments in the financial statements for the year ending 31 March 2008, as well as
comparative information, will be compliant with IFRS 7. The disclosure requirements of IFRS 7 require additional disclosure in respect
of the following:
• Information on credit risk (including but not limited to) disclosure of security or other credit enhancements, credit quality of assets
that have been renegotiated and age analysis of past due financial assets;
• Sensitivity analysis in terms of each type of market risk and their impact on profit and loss and equity;
• Disclosure of financial assets and liabilities per category as defined in IAS 39; and
• Capital objectives and policies.
IAS 23 Revised
IAS 23 will be early adopted in the financial reporting year ending 31 March 2008.
The Group will capitalise borrowing costs that are directly attributable to the acquisition, construction or production of qualifying
assets that commence on or after 1 April 2007. Currently these borrowing costs are expensed. Qualifying assets are assets that
necessarily take a substantial period of time to get ready for their intended use or sale.
The Group’s existing accounting policy on borrowing costs will change as a result of the adoption of the revised IAS 23. A preliminary
review of qualifying assets for which the acquisition, construction or production commenced on or after 1 April 2007 indicated that
amendment to the standard will impact the Group. Directors and management have not quantified the impact of this.
IFRS 8
IFRS 8 will be adopted by the Group for the first time for the financial reporting year ending 31 March 2010.
In terms of this IFRS, segment reporting will be based on the information that management uses internally for evaluating segment
performance and when deciding how to allocate resources to operating segments. Such information may be different from what is used
to prepare the income statement and balance sheet. Directors and management have not yet assessed the impact of the segmental
disclosures.
IFRIC 10
This standard prohibits the subsequent reversal of impairment losses recognised in interim reports relating to goodwill, and investments
in equity instruments classified as available-for-sale or financial assets carried at cost because fair value can not be reliably determined.
Directors and management have not yet assessed the impact on the financial results.
TRANSNET ANNUAL REPORT 2007 245
Current ratio
Current assets divided by current liabilities.
Debt
Interest-bearing borrowings, post-retirement benefit obligations, derivative financial liabilities, less short-term investments and net
cash and cash equivalents.
Earnings
Profit from operations before profit on sale of interest in businesses, impairment of assets, dividends received, fair value adjustments
and net finance costs plus other income and income from associates.
EBITDA
Earnings before impairment, taxation, depreciation and amortisation.
EBITDA margin
EBITDA expressed as a % of revenue.
Equity
Issued capital, reserves and minority interests.
Gearing
Debt expressed as a % of the sum of debt and equity.
Headline earnings
As defined in circular 7/2002, issued by the South African Institute of Chartered Accountants, separates from earnings all items
of a capital nature. It is not necessarily a measure of sustainable earnings.
Interest cover
Profit or loss from operations after depreciation and amortisation, divided by net finance costs.
Cash interest cover
Cash generated from operations before working capital changes, divided by net cash finance costs.
Managed assets
Total assets, excluding derivative financial assets, less current liabilities, exclusive of derivative financial liabilities.
Net assets
Total assets less total liabilities.
Profit/(loss)
Profit or loss after taxation and minority interests.
Operating profit
Profit or loss from operations before profit on sale of interest in businesses, impairment of assets, dividends received, fair value
adjustments and net finance costs.
Operating profit margin
Operating profit expressed as a % of revenue.
Return on managed assets
Operating profit expressed as a % of managed assets.
Return on average total assets
Operating profit expressed as a % of average total assets.
Return on net assets
Profit before taxation expressed as a % of net assets.
Total debt
Current and non-current liabilities
Total debt-to-equity ratio
Total debt expressed as a ratio to equity.
GLOSSARYOF TERMS
GLOBAL REPORTING INITIATIVE (GRI) CONTENT INDEX
GRI G3 Disclosure items
1. Strategy and analysis
1.1 – 1.2 Assuring sound accountability Board governance
and governance Executive management
Strategy and transformation
Enterprise risk
Compliance
Business intelligence
2. Organisational profile
2.1 – 2.8 Assuring sound accountability Executive management
and governance Strategy and transformation
3. Report parameters
Report scope/profile Assuring sound accountability Sustainability platform
3.1 – 3.6 and governance Communication and reporting
Explanation of process Assuring sound accountability Sustainability platform
3.7 – 3.11 and governance Communication and reporting
Reporting boundary Assuring sound accountability Sustainability platform
3.12 – 3.15 and governance Communication and reporting
GRI content index Assuring sound accountability Sustainability platform
3.16 and governance Communication and reporting
Assurance Assuring sound accountability Sustainability platform
3.17 and governance Communication and reporting
4. Governance, commitments and engagement
Governance Assuring sound accountability Board governance
4.1 – 4.10 and governance Executive management
Strategy and transformation
Enterprise risk
Compliance
Business intelligence
Commitments to external initiatives Assuring sound accountability Sustainability platform
4.11 – 4.13 and governance Communication and reporting
Stakeholder engagement Engaging our stakeholders for Sustainability platform
4.14 – 4.17 mutual benefit Communication and reporting
Economic performance indicators
Economic performance Achieving returns greater than Financial management
EC1 – EC4 the cost of capital Operations management
Market presence Achieving returns greater than Supply management
EC5 – EC7 the cost of capital BBBEE
Indirect economic impact Developing world-class Capital Investment
EC8 – EC9 infrastructure
246 TRANSNET ANNUAL REPORT 2007
Transnet sustainability principal issues Transnet sustainability principles
Transnet adopted an incremental approach to the GRI Sustainability Guidelines, which provides it with direction on
reporting principles, content and performance indicators. In embedding the GRI G3 reporting principles it
endeavours to ensure that its Annual Report provides a balanced and reasonable representation of its sustainability
performance, becomes comparable to those of other value based companies, and addresses issues of concern to its
array of stakeholders.
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TRANSNET ANNUAL REPORT 2007 247
Page reference where this item is addressed in this Annual Report
1 3 8 10 12 20 42 50 61 85 97 110 122 133 141
1 3 14 20 42
42 60 246
42 60 246
42 60 246
246
50 138
50 61 85 97 110 122 133 138
12 20 42 49 50 60 82 96 108 120 132 138 246
12 20 50 62 87 97 111 123 134 138 IBC
5 6 12 20 42 49 66 81 95 107 119 131 138
2 13 20 42 66 84 96 109 120 132
12 20 42 49 68 87 99 111 123 134
GLOBAL REPORTING INITIATIVE (GRI) CONTENT INDEX
continued
GRI G3 Disclosure items (continued)
Environmental performance
EN1 – EN28 Managing our environment Environmental management
responsibly Environmental performance
Labour practices and decent work
Employment Creating a workplace where People management
LA1 – LA3 our people can excel Change and transformation
Employment equity
Labour/management relations Creating a workplace where People management
LA4 – LA5 our people can excel Employee relations
Occupational health and safety Creating a workplace where Employee safety
LA6 – LA10 our people can excel Health, employee wellness
and HIV/Aids
Training and education Creating a workplace where People management
LA11 – LA13 our people can excel Capacity building – Skills
development
Diversity and opportunity Creating a workplace where People management
LA14 –LA15 our people can excel Change and transformation
Employment equity
Human rights
HR1 – HR10 Creating a workplace where People management
our people can excel Employee relations
Society
Community Caring for the communities Corporate social investment
SO1 where we operate
Corruption, public policy and Assuring sound accountability Ethics
anti-competitive behaviour and governance Enterprise risk
SO2 – SO6 Compliance
Product/service responsibility
Customer health and safety Caring for the communities Community impact and public
PR 1 – PR2 where we operate health and safety
Products/services, marketing Achieving returns greater Marketplace and customer
communication and customer than the cost of capital management
privacy
PR3 – PR9
248 TRANSNET ANNUAL REPORT 2007
Transnet sustainability principal issues Transnet sustainability principles
TRANSNET ANNUAL REPORT 2007 249
Page reference where this item is addressed in this Annual Report
18 30 56 78 92 104 115 128 136
16 32 69 89 101 112 125 135
17 33 71 90 102 113 126 135
17 28 56 73 90 103 114 127 135
16 33 71 90 102 113 126 135
17 33 70 89 101 113 125 134
16 33 71 90 102 113 126 135
39 74 91 103 115 127 136
23 55 61 86 98 110 122 133
17 28 56 76 91 103 115 127 136
20 66 84 96 109 120 132
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ABBREVIATIONS AND ACRONYMS
250 TRANSNET ANNUAL REPORT 2007
Aids Acquired immune deficiency syndrome
AMS 16001 Aids management system
AsgiSA Accelerated and Shared Growth
Initiative for South Africa
BBBEE Broad-based black economic
empowerment
BCM Business continuity management
BEE Black economic empowerment
BOI Board of Inquiry
CAPECOR Cape corridor
CEO Chief Executive Officer
CFO Chief Financial Officer
CIO Chief Information Officer
CIPS Chartered Institute of Purchasing and
Supply
CoGP Code of Good Practice
COO Chief Operating Officer
CRM Customer relationship management
CSDP Competitive Supplier Development
Programme
CSI Corporate social investment
DIFR Disabling injury frequency rate
DME Department of Minerals and Energy
DoT Department of Transport
DPE Department of Public Enterprises
DPP Detailed procurement policy/procedures
DRC Democratic Republic of Congo
DTI Department of Trade and Industry
EAP Employee assistance programme
EE Employment equity
EIA Environmental impact assessment
EMC Environmental Monitoring Committee
EME Emerging Micro Enterprises
EMS Environmental Management System
EPCM Engineering Procurement and
Construction Management
ERM Enterprise risk management
FET Further Education and Training
GAAP Generally Accepted Accounting Practice
GCE Group Chief Executive
GDP Gross domestic product
GFB General freight business
GRI Global Reporting Initiative
HIV Human immunodeficiency virus
HR Human resources
lALA International Association of Marine
Aids to Navigation and Lighthouse
Authorities
IAS International Accounting Standards
ICT Information and communication
technology
IFRS International Financial Reporting
Standards
IMM Infrastructure maintenance manual
IPSA Institute of Purchasing and Supply of
South Africa
ISO International Standards Organisation
ISPS International Standard Port Facility
Security
IT Information technology
IT&S Information technology and systems
JBS Joint Bunker Services
Jipsa Joint Initiative on Priority Skills
Acquisition
KPI Key performance indicator
LHS Lighthouse Services
LMP Lifestyle Management Programme
mt Million tons
NATCOR Natal corridor
NCR Non-conformance Reporting
NEMA National Environmental Management
Act
NERSA National Energy Regulator of South
Africa
NIPP National Industrial Participation
Programme
NMPP New multi-product pipeline
NOSA National Occupational Safety
Association
NOSCAR NOSA award – considered the ultimate
symbol of excellence
OBC On-board computers
OCIO Office of the Chief Information Officer
OEM Original equipment manufacturer
OHSAS 18001 An Occupational Health and Safety
Management System
OHSAS Act Occupational Health and Safety Act in
South Africa
PFMA Public Finance Management Act
RFID Radio Frequency Identification
SAP A business software solution
SARCC South African Railway Commuter
Corporation
SDP Supplier Development Plan
SHE Safety, health and environment
SHEQ Safety, health, environment and quality
SOE State-owned enterprise
SOP Standard operating procedure
SPAD Signals Passed At Danger
SPO Strategic performance objective
TBI Transnet Business Intelligence
TEU Twenty foot equivalent unit
TMP Talent Management Programme
TSEDI Transnet Foundation Socio-Economic
Development Initiative
TVMF Transnet Value Measurement
Framework
VCT Voluntary HIV counselling and testing

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