REPORT OF TE DIRECTORS - Transnet · and training commitments as dictated by the Supplier...

IntroductionThe Board of Directors is pleased to present its Integrated Report, in both printed and electronic formats, in line with the requirement of King III Code on Corporate Governance (King III) and the audited annual financial statements of Transnet SOC Ltd (Transnet or the Company) and its subsidiaries (the Group) for the year ended 31 March 2015.

Ownership and shareholder’s expectationsTransnet is a public company, wholly owned by the Government of the Republic of South Africa and is the custodian of the country’s rail, ports and pipelines. Transnet is responsible for enabling the competitiveness, growth and development of the South African economy through delivering reliable freight transport and handling services that satisfy customer demand.

As the custodian of ports, rail and pipelines, Transnet has a responsibility to ensure the optimal development of the national freight system. Furthermore, as a responsible corporate citizen and key implementing agent of the developmental state, Transnet is required to conduct its activities in a manner that optimises developmental outcomes such as job creation, skills development, economic transformation, regional integration, industrial capability building and energy efficiency.

Transnet’s Market Demand Strategy (MDS) has completed its third year of implementation. The MDS and its implementation plan are guided by the Statement of Strategic Intent issued by Minister of Public Enterprises, which defines the overarching objectives of the Company as follows:• Reduce the cost of logistics as a percentage of transportable GDP,• Effect and accelerate modal shift by maximising the role of rail in the national transport task,• Leverage the private sector in the provision of both infrastructure and operations where required,• Integrate South Africa with the region and the rest of the continent, and• Optimise sustainable economic, social and environmental outcomes of all activities undertaken by Transnet.

Board of DirectorsThe composition of the Board of Directors at 31 March 2015 is shown below:Executive directors: B Molefe (Group Chief Executive), A Singh (Group Chief Financial Officer).Independent non-executive directors: LC Mabaso (Chairperson), Y Forbes, N Moola, PEB Mathekga, GJ Mahlalela, ZA Nagdee, VM Nkonyane, MR Seleke, SD Shane, BG Stagman, PG Williams – appointments effective 11 December 2014.Ms NR Njeke resigned from the Board of Directors effective from 1 September 2014. On 10 December 2014, the following independent non-executive directors were retired from the Company: ME Mkwanazi, MA Fanucchi, HD Gazendam, IB Skosana and IM Sharma, ZE Tshabalala, NP Mnxasana and DLJ Tshepe. Summary curricula vitae of each director are set out on pages 50 and 53 of the 2015 Integrated Report.The following matters are covered in the Corporate Governance report included in the Integrated Report:• Board of Directors and Committees mandates, detailed on pages 190 to 198;• Board of Directors and Committees attendance, detailed on page 63; and• Board of Directors evaluation and performance, detailed on page 67.

Strategic overview Over the past three years of the implementation of the MDS, revenue and EBITDA have grown by an average annual rate of 10% and 11% respectively, while rail and container volumes have grown by an annual average rate of 4% and 2% respectively. Over this period, Transnet has invested R92,8 billion directed at maintaining and renewing the Group’s extensive infrastructure network and equipment fleet and at creating new capacity.

14 | Transnet Annual Financial Statements 2015

REPORT OF THE DIRECTORSfor the year ended 31 March 2015

This is by far the highest level of investment in the Group’s history and was achieved by diversifying funding sources both in the domestic and international markets, while minimising market, foreign exchange, interest rate, liquidity and refinancing risks. The funding plan was executed through reserves and borrowings and without receiving cash subsidies or guarantees from the Government.

The R336,6 billion investment programme which is the centrepiece of the strategy represents a significant stimulus to job creation, skills development, industrial capacity building, economic transformation and regional integration and is an important component of Government’s counter-cyclical approach to counter the effects of a weak global economy.

Over the past three years, Transnet has invested more than R2,2 billion in skills development. A key focus on engineering, technical and sector-specific skills has resulted in more than 3 000 artisans and 1 000 technicians entering training. Transnet awarded 492 engineering bursaries to undergraduate, masters and doctoral students. Sector specific skills development focussed on marine, rail, and cargo handling remains a key priority and more than 5 900 learners were taken on over the three-year period. This is in addition to the various management and leadership development programmes and courses which are made available to Transnet employees.

Transformation and development of the Group’s supplier base remains a key priority. In the past financial year Transnet recognised Broad-based Black Economic Empowerment (B-BBEE) spend of 105,1% of total measured procurement spend (TMPS) of R43,1 billion. Of this, R9,4 billion was spent on black-owned enterprises and R4,1 billion on black women-owned enterprises.

Transnet is committed to carrying out Enterprise Development initiatives as outlined in the Broad-Based Black Economic Empowerment (B-BBEE) Act. Enterprise Development interventions have the specific objective of assisting and accelerating the development, sustainability and ultimate financial and operational independence of small, medium and micro businesses as defined in accordance with the Department of Trade and Industry Codes. Transnet has spent R336,6 million or 6,4% of net profit after taxation (NPAT) on Enterprise Development as compared to 3,0% of NPAT as required by the B-BBEE Act. This has been spent on providing both financial and non-financial support to black owned Small-Micro and Medium Enterprises (SMME’s).

Transnet’s Supplier Development (SD) programme promotes skills development and the creation and preservation of jobs. It further encourages the transfer of intellectual property and the localisation of supply; and ultimately promotes industrialisation through contractually obligated supplier development plans. Since inception of the programme, total contract value to date amounts to R46,2 billion (2014: R29,4 billion). Supplier Development obligations concluded with suppliers amounts to R17,1 billion or 37,1% of contract value (2014: R10,9 billion or 37,2% of contract value). To date, R10,2 billion or 60,1% (2014: R5,9 billion or 54,3%) of these Supplier Development obligations have been met.

Transnet’s R50 billion contract for the building of 1 064 locomotives has stringent local content, skills development and training commitments as dictated by the Supplier Development programme. All the locomotives except 70 will be built at Transnet Engineering plants in Pretoria and Durban. The suppliers have to date complied with and exceeded the minimum local content criteria for rolling stock of 60% for electric locomotives and 55% for diesel locomotives. Transnet Engineering will share approximately 16% of the total build programme, about one third of which will be outsourced to emerging local engineering and manufacturing firms. This will enable Transnet Engineering to create export capability for locomotives and related products and support Transnet Engineering’s transformation into an Original Equipment Manufacturer (OEM) over time. In total, the localisation elements are expected to contribute over R90 billion to the South African economy.

Regional integration of the freight system is a strategic priority and the implementation of the Africa Strategy has gathered pace in recent years. Revenue from over border activities has grown from R2,1 billion in the first year of the MDS to about R2,9 billion in the 2015 financial year. This represents growth in over border activities from 4,2% of revenue in the 2013 financial year to 4,7% in 2015.

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The investment in port, rail and pipeline infrastructure and operations will radically improve the competitiveness and capacity of the national freight system. Key freight system objectives include a significant shift of long distance freight from road-to-rail, enhanced maritime connectivity, integration of the regional freight system and the creation of capacity ahead of demand. Transnet has made significant gains in these areas over the past three years and this trend is poised to accelerate as the investments made in recent years start to bear fruit.

Growth in rail market share and maritime connectivity, coupled with increased capacity is expected to catalyse a virtuous cycle of increasing freight systems competitiveness, thereby increasing economic growth and development. The MDS will position South Africa as a key logistics hub for the region and establish the country as a leading supplier of raw materials and value added products to global markets.

At the same time, a consistent focus on responsible corporate citizenship will ensure that the Group makes ever-increasing contributions to job creation, skills development, industrial capacity building, economic transformation and regional integration.

OutlookThe performance of the global economy has been mixed, but with a marked deterioration in sentiment about the global economic outlook. Forecasts for economic growth have fallen in the first quarter of 2015, as they have every year since 2011, as the much anticipated recovery fails to take hold. The world gross domestic product (GDP) estimate was revised downwards to 3,4% for 2014 and is forecast to grow by 3,5% for 2015.

Growth in sub-Saharan Africa is however expected to remain strong, estimated at 5,0% in 2014 and forecast to decline slightly to 4,5% in 2015 due to the combined effects of declining commodity prices and the epidemic in Ebola-affected countries. Growth will be driven by sustained infrastructure investment, buoyant service sectors and strong agricultural production, even as oil related activities provide less support. With the African continent accounting for close to 30% of South Africa’s merchandise exports, growth in the region will provide an important pillar for the manufacturing and logistics sectors.

South Africa’s economic performance was significantly impacted by strikes in 2014, which were concentrated in the mining and manufacturing sectors. South Africa’s GDP grew by 1,5% in 2014 and is forecast to grow by 2,0% in 2015 and 2,1% in 2016 respectively. The main drivers of improved growth are a return to normalcy and expectations of a pick-up in the global economy from its current lows.

Global trade has performed below expectations for a number of years and this has negatively impacted all segments of the shipping market. Global container volumes grew by an estimated 5,0% in 2014 and are forecast to grow by 5,5% in 2015 with the bulk of this driven by intra-Asian trade. For the domestic market a medium-term average annual growth rate of 4,2% per annum is anticipated after a number of years of very low growth.

The per capita rate of steel consumption among key developing economies relative to developed economies indicates that there is still significant potential growth for steel and steel input materials as countries industrialise and urbanise. World trade of iron ore grew by an estimated 8,4% in 2014. Over the medium term, world iron ore trade is projected to increase at an average annual rate of 3,6% to 2019. The South African market remains very cost-competitive with solid longer-term growth prospects.

Manganese ore consumption is projected to rise at an average annual rate of 4,3% between 2014 and 2019. Global production of manganese ore is also set to rise at 4,9% over the same period. South Africa, endowed with around 805 of global manganese reserves is set to emerge as a key export hub for manganese over the next few years, gaining market share from other international producers.

Concern about the effect of coal use on the environment has prompted many countries to enact measures to reduce the role of coal in the energy mix. While the growth in the world’s coal use is unlikely to be as rapid as other energy sources, it is still expected to play a large role in world electricity generation. Exports from South Africa are projected to increase at an average annual rate of 6,1% to 98mt in 2019.



Performance for the yearMarch March %

2015 2014 change

Revenue (R million) 61 152 56 606 8,0EBITDA (R million) 25 588 23 639 8,2EBITDA margin (%) 41,8 41,8 –Equity attributable to the equity holder (R million) 142 328 97 113 46,6Gearing (%) 40,0 45,9 (5,9)Capital investment 33 565 31 766 5,7Cash generated from operations after working capital changes (R million) 30 607 25 271 21,1Cash interest cover (times) 3,6 3,7 (2,7)

Detailed commentary on the performance for the year is contained in the 2015 Integrated Report on pages 98 to 102.

Shareholder’s Compact – performance criteriaThe Shareholder’s Compact Key Performance Indicators (KPI’s), which are revised annually by agreement between the Board and the Shareholder Representative, serve as the performance monitoring framework for the Company. Performance against the Shareholder’s Compact 2015 targets, is outlined below, as required by section 55(2) (a) of the PFMA. This performance information has been subjected to audit review and the Company’s auditors have reported their findings in their audit report.

The Company achieved an aggregate volume performance of 98,4%, despite low domestic and global economic growth challenges. Aggregate operational efficiency improved by 16.5% compared to the prior year’s 13,8% with the support of the Transnet value chain coordination (TVCC) initiatives, such as quick recoveries from on-route disruptions, regular customer liaison and improved integrated collaboration between operating divisions to address resource challenges. Measuring the company’s performance against the operational KPI targets of the Shareholder’s Compact Annexure B (including skills development KPIs in Annexure C); 60% of the targets for the 2015 financial year were fully achieved. The performance gap on operational KPIs is mainly attributed to 12 of 22 rail commodities that did not meet their individual budgeted volumes. While commodity by commodity analysis focuses attention on internal and external constraints and identifies required performance improvement interventions, it is important to note that in aggregate, Group weighted volume performance for total freight volumes on rail, ports and pipelines increased from the prior year’s 95,07% to 98,4% due to positive growth in export iron ore, export coal, total petroleum products, vehicles and break bulk.

Export coal and iron ore grew substantially by 12% and 10% respectively year-on-year to 76,3mt and 59,7mt. They also grew by 2% and 3% compared to budget. Product availability improved as key export iron ore customers recovered from the production constraints of prior year. Internal resource availability improved through sustained implementation of the capital. expenditure programme and the two commodities also benefitted from operational efficiency improvements supported by the TVCC initiatives. The protracted trend of declining international coal and export prices in 2015 is negatively affecting the outlook for 2016.

When all Shareholder’s Compact Annexures (i.e A, B, C, D, F and G) are considered, the achievement decreases to 58%. Annexure E is excluded from the analysis as it relates to compliance to the Significance and Materiality Framework in terms of section 55 (2) of the PFMA. Transnet notifies the Shareholder Representative where relevant upon acquisition or disposal of an asset that is at least equal to the materiality threshold. Detailed performance against all the other annexures is reported in the quarterly reports to the Shareholder Representative.

A total of 33% of the performance indicators in Annexure A were not well defined, specific and measurable. In addition, 29% of the timelines for delivery of targets were not specified. This was due to the requirements of the National Treasury FMPPI not being embedded into the current process for determining the key performance indicators and targets.

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The company has taken note of this shortcoming and will be engaging with the Department of Public Enterprises to ensure that these requirements are embedded into the targets and agreed with the Shareholder Representative.

Annexure A: Strategic deliverables

Key performance area Key performance indicatorDelivery timeline Actual

Transnet’s Sustainability Framework

• Economic dividends. March 2015 100%• Social dividends. March 2015 100%• Environmental dividends. March 2015 100%

Cost Logistics • Quantify Transnet’s contribution to the total cost of logistics as a percentage (%) of transportable GDP.

April 2014 100%

• 0,5% reduction in total cost of logistics by 2019 as per market demand.

April 2014 0%

Domestic Intermodal Solution

• Quantify and commit to model split target. April 2014

75%• Quantify the fixed infastructure capacity, operational

performance and financial performance of existence intermodal capacity.

April 2014

• Develop a long term intermodal/container strategy supported by an appropriate infrastructure and funding plan.

April 2014

NMPP Strategy and infrastructure plan

• Develop medium to long - term strategy and infrastructure plans to drive Transnet Pipeline’s market share.

April 2014 50%

Africa Business Development and Regional Intergration

• Develop a short, medium and long-term strategy to improve intra-Africa trade from a transport perspective.

April 2014 88%

• Promote regional connectivity through the integration of the freight rail and maritime infrastructure.

April 2014 31,25%

• Position Transnet Engineering to become the preferred supplier of rolling stock within the African market.

April 2014 45%

Private Sector Particitipation (PSP)

• Delivery of R2.5bn in PSP funding as per 2013 Corporate Plan.

Subject to PFMA Section 54 Approval

77%• Identify clear and sustainable opportunities for PSP. 100%• Identify and develop clear industry solutions within varoius

sectors supported by business cases for approval by the shareholder.

90%

• Develop defined timeline for implementation of identified PSP opportunities.

100%

• Concession of three branch lines as identified by Transnet and the Department.

Subject to PFMA approval

0%

Policy and Regulation • Full cooporation with the department to finalise joint positions on rail and maritime policy.

Ongoing N/A

• On-going compliance with policy and regulation. Ongoing N/AResearch and Development Excellence

• Establishment of R&D Centre of Excellence. April 2014 60%• Quantify how technology has been leveraged to reduced

capital outlay and reduce operating expenditure in all sphere of business.

June 2014 90%

• Quantify how technology has been leveraged to improve productivity in all spheres of business.

June 2014 78%

• Quantify how technology has been leveraged to improve and increase modal shift.

June 2014 91%

• Quantify how technology has been leveraged to increase market share.

June 2014 100%



Annexure B: Operational performanceTransnet Group

2015

Unit of Compact Key performance area Key performance indicator measure target Actual

Financial value creation Return on total average assets % ≥7,8 6,0Cash interest cover (a) times ≥3,2 3,6Gearing % ≤46,7 40,0Operating expenditure as a % of revenue % ≤55,6 58,2

Innovation Research and development cost R million ≥262 83,2

Safety DIFR (for all Transnet operating divisions) Total ratio ≤0,75 0,7Employee fatalities Number 0 4

Productivity Revenue per employee R million ≥0,98 1,1

(a) Subject to Minister of Finance approval to change the cash interest cover condition from 3,3 times to 3,2 times in regard to the foreign borrowing limit conditions.

Transnet Freight Rail

2015

Key performance Key performance Unit of Compactarea indicator measure target Actual

Financial Return on total average assets % ≥11,4 8,3

TariffsRevenue from tariff increases

– General freight business (GFB) % ≤8,7 3,0

Market share Volume Total volumes mt ≥228,4 226,6

Bulk – Export coal mt ≥75 76,3– Export iron ore mt ≥58,1 59,7– Export manganese (PE) mt ≥4,9 5,3– Export manganese (DBN) mt ≥1,2 0,9– Export coal non-RBCT mt ≥6,6 3,8– Eskom coal mt ≥11,5 13,4– Domestic coal mt ≥9,3 7,5– Chrome and ferrochrome mt ≥8,0 5,0– Domestic iron ore mt ≥8,3 7,6– Domestic manganese mt ≥1,9 2,1– Mineral mining mt ≥13,5 15,8– Other mt ≥1,1 1,8

Intermediate manufacturing and manufacturing– Agriculture mt ≥3,7 3,2– Bulk liquids mt ≥2,1 1,6– Iron and steel mt ≥0,6 0,4– Wood and wood products mt ≥2,1 2,5– Fertilisers mt ≥0,1 0,2– Industrial chemicals mt ≥1,2 1,2– Cement mt ≥7,7 7,4– Intermodal wholesale mt ≥10,5 8,9– FMCG long distance mt ≥0,8 0,6– Automotive mt ≥0,4 0,4

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Transnet Freight Rail (continued)

2015

Key performance Key performance Unit of Compactarea indicator measure target Actual

Productivity Asset utilisation Manganese Gtkm/Ntkm ≤1,5 1,6Steel and cement Gtkm/Ntkm ≤1,7 1,7Mineral mining and chrome Gtkm/Ntkm ≤1,7 1,6Container and automotive Gtkm/Ntkm ≤3,5 3,4Agriculture and bulk liquids Gtkm/Ntkm ≤2,1 2,1

Loco utilisation Export coal Gtkm/loco/m ≥26 868 26 489

Cycle time Export coal Hours ≤56 63,8Export iron ore Hours ≤76 84,8Manganese Hours ≤155,5 190,1

Wagon turnaround time GFB Days ≤10,3 10,6

Density Saldanha Tonkm/Routekm ≥58,1 61,7RBaycor Tonkm/Routekm ≥37,5 41,1Natalcor Tonkm/Routekm ≥7,0 6,5NEastcor Tonkm/Routekm ≥6,8 8,4Sentracor Tonkm/Routekm ≥5,0 4,9Capecor Tonkm/Routekm ≥4,0 4,1NWestcor Tonkm/Routekm ≥4,0 4,5Eastcor Tonkm/Routekm ≥3,0 3,2Southcor Tonkm/Routekm ≥2,9 3,6Northcor Tonkm/Routekm ≥1,7 1,6

Service On-time departure Export coal

Average deviationfrom schedulestimes (minutes)

≤90 0,6Export iron ore ≤60 (24,3)Export manganese ≤160 (75,4)Steel and cement ≤295 (73,6)Mineral mining and chrome ≤90 (41,4)Containers and automotive ≤300 93,9Agriculture and bulk liquids ≤200 132,8

On-time arrival Export coal

Average deviationfrom schedulestimes (minutes)

≤180 170,0Export iron ore ≤225 57,1Export manganese ≤200 183,2Steel and cement ≤325 269,0Mineral mining and chrome ≤140 179,8Containers and automotive ≤380 250,0Agriculture and bulk liquids ≤290 265,3



Transnet Engineering

2015

Key performance Unit of Compact area Key performance indicator measure target Actual

Financial External revenue R million 2 400 1 718

Innovation Research and development cost R million 150 93

Volume growth(a) Train cancellations due to traction GFB % ≤6 1,5Export Coal ≤6 3,8Export iron ore ≤6 0,1

Net volume lost due to traction(a) GFB mt ≤7 NR1

Export Coal ≤7 NR1

Export iron ore ≤7 NR1

Traction delays GFB ≤40 8Export Coal ≤40 12,5Export iron ore % ≤40 11,9

ProductivityLean Six Sigma Impact on business efficiency

Value add per employee R ≥450 000 429 000

Asset turnover Asset turnover Ratio ≥1,3 1,2

Number of defects per products

Number of defects per products Number ≤30 2,5

(a) Transnet should ensure not to lose volumes of more than 4mt, due to traction.NR1 = Not reported. No information available on TEMS System.

Transnet National Ports Authority

2015

Key performance Key performance Unit of Compact area indicator measure target Actual

Productivity Anchorage – Durban Hours ≤40 41– Cape Town ≤34 31– Port Elizabeth ≤30 37– Ngqura ≤45 32– Richards Bay ≤80 39

Ship turnaround time(a) Containers

– Durban Hours ≤57 51– Cape Town ≤30 27– Port Elizabeth ≤26 26– Port of East London ≤60 50– Richards Bay ≤109 78– Ngqura ≤45 34

Dry bulk

– Coal (RBCT) Hours ≤46 43– Iron ore (Saldanha) ≤54 46– Manganese (PE) ≤78 70

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Transnet National Ports Authority (continued)

2015


Productivity Berth occupancy – Durban % 70 – 80 77– Cape Town 60 – 70 45– Port Elizabeth 55 – 65 52– Ngqura 70 – 80 55

Berth utilisation – Durban % 70 – 80 70– Cape Town 50 – 60 62– Port Elizabeth 55 – 65 42– Ngqura 75 – 85 55

(a) Shipping delays to be quantified and reported on a quarterly basis.

Transnet Port Terminals

2015


Financial Return on total average assets % ≥8 7,9

Tariff increases Average tariff increase (containers) % ≤6 8,1

Productivity Dwell time DCT – Pier 1

– Imports Days ≤3 2,5– Exports Days ≤5 5,3– Transshipment(a) Days ≤10 8,4

DCT – Pier 2

– Imports Days ≤3 1,9– Exports Days ≤5 6,5– Transshipment Days ≤10 8,5

CTCT

– Imports Days ≤3 1,7– Exports Days ≤5 4,2– Transshipment Days ≤15 3,9

Moves per gross DCT – Pier 1 Moves/GCH ≥26 22,2crane hour(b) DCT – Pier 2 (prime

berths 203, 204) ≥28 24,0CTCT ≥32 31,8Ngqura ≥30 26,8



Transnet Port Terminals (continued)

2015


Service delivery Train turnaround time DCT – Pier 1 Hours ≤6 3,3DCT – Pier 2 Hours ≤6 3,3CTCT Hours ≤6 1,0Saldanha(c) Minutes ≤105 112,3Richards Bay Hours ≤12 7,9Port Elizabeth Hours ≤12 9,4

Truck turnaround time DCT – Pier 1 Minutes ≤35 43,8DCT – Pier 2 Minutes ≤35 51,6CTCT Minutes ≤35 17,3Ngqura Minutes ≤35 35,3Richards Bay Minutes ≤35 26,8

(a) Transnet Port Terminals shall not encourage transshipment dwell times of greater than five days. (b) Transnet Port Terminals shall report on moves/GCH for the Ports of Richards Bay and East London on a quarterly basis.(c) Rake process time inside tippler.

Transnet Pipelines

2015

Unit of CompactKey performance area Key performance indicator measure target Actual

Market share Petroleum volumes Billion litres ≥16,8 17,2

Service reliabilityOrdered versus delivered volumes (% of deliveries within 5% of order) % ≥95 100Planned versus actual delivery time (% of deliveries within two hours of plan) % ≥83 84

Operational efficiency Operating cost per Mℓ.km (Nominal R/Mℓ.km) Rand ≤129 120

Capacity utilisation DJP and NMPP – actual usage (Mℓ‑week) Ratio ≥113:152 115:152

Annexure C: Social impactKey performance indicator Unit of measure Target Actual

Training spend % of personnel costs ≥4.4 2,8Technician trainees Number of learners ≥363 563Engineering trainees Number of learners ≥220 254Artisan trainees Number of learners ≥605 613Sector specific trainees Number of learners ≥2176 3 320Jobs created (Transnet permanent employees) Number of jobs ≥4426 2 905Health( Teenage health project) Rm ≥13 13,90 Health( Phelophepha I and II ) Rm ≥93 105,72 Teacher and learner development Rm ≥15,6 12,00 Sports development Rm ≥35,9 32,40 Container assistance Rm ≥10,4 10,43 Transnet employee volunteer programme Rm ≥29,9 27,10

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Annexure D: Economic impactKey Performance Indicator Unit of Measure Target* Actual

Export promotion % of SD value ≥ 0,5 –Technology transfer/IP % of SD value ≥ 1 NRInvestment in plant % of SD value ≥ 1 10,13Local content % of total spend ≥ 75 94CSDP/SD value % of contract value subject to SD ≥ 37 37Jobs creation Number of jobs created TBA NRSkills development % of SD value ≥ 3 2BBBEE % of TMPS ≥ 60 105,05Black women owned % of TMPS ≥ 3 9,59Black owned % of TMPS ≥ 10 21,73Black youth owned % of TMPS ≥ 0,5 1,56QSE/EME % of TMPS ≥ 10 12People living with disability % of TMPS ≥ 0,25 0,18

* Without PPPFA exemption.NR Not reported.

Annexure F: Capital expenditureProjects which have reached the execution phase Estimated– Front End Loading (FEL) 4 total cost (Rm) Target1 Actual

1. Coal line expansion to 81mt 5 100 32% 35%2. Acquisition of 95 electric locomotives for GFB 2 662 85% 86%3. Acquisition of wagons for MDS2 15 115 100% 100%4. Ngqura Container Terminal Ph2A 1 099 100% 100%5. New Multi-Product Pipeline 23 400 100% 76%6. Reconstruction of sheetpile quaywalls at Maydon Wharf 1 594 15% 60%7. Straddle carrier replacement 1 835 10% 100%8. Acquisition of 465 diesel, 599 electric, 100 electric and

60 diesel locomotives 61 094 2% 37%9. Expansion of the ore line to 82,5mt2 9 500 FEL 3 FEL 2

10. Coal export line expansion to 97mtpa2 4 350 FEL 1 FEL 011. Manganese expansion (excluding rolling stock) to 16mt2 17 000 FEL 4 FEL 412. Swaziland rail link2 5 000 FEL 4 FEL 313. Waterberg expansion to 27mt2 5 090 FEL 4 FEL 314. Deepening of DCT berths2 6 000 FEL 4 FEL 315. Export iron ore line: Capitalisation of infrastructure wagon and

locomotive maintenance2 9 001 100% 100%16. Coal line: Capitalisation of infrastructure, wagon and locomotive

maintenance2 16 029 100% 100%17. General freight rolling stock capacity increase to support the Market

Demand Strategy – wagons upgrade2 15 115 100% 100%18. General freight business: Capitalisation of infrastructure, wagon and

locomotive maintenance2 50 056 100% 100%1 Estimated percentage of completion at year end.2 The estimated total costs are work in progress, subject to the finalisation of the budgeting process.



Annexure G: Energy efficiencyCompact

Electrical energy efficiency Measurement target Actual

Transnet Freight Rail – traction gtk/kWh 1,0% 4,7%Transnet Freight Rail – real estate kWh/m2 3,0% 5,8%Transnet Properties kWh 6,0% 0,8%Transnet Pipelines lkm/kWh 1,0% 5,2%Transnet Port Terminals ton/kWh 1,0% 8,4%Transnet National Ports Authority employee/kWh 2,0% 7,8%Transnet Engineering man-hour/kWh 2,5% 0,2%

Fuel energy efficiency Transnet Freight Rail – traction gtk/litre 1,0% 8,0%Transnet Port Terminals ton/litre 1,0% 10,2%Transnet Engineering man-hour/litre 2,5% 24,5%

Accounting policiesThe accounting policies applied in the preparation of the annual financial statements for the year ended 31 March 2015 are in accordance with IFRS and are consistent with those applied in the prior year except for the adoption of the revaluation policy for rail infrastructure assets as described on page 67.

Judgements made by management in the application of IFRS that have a significant impact on the annual financial statements are disclosed in the accompanying notes to the annual financial statements.

Share capitalThere has been no change in the authorised or issued share capital of the Company during the year. The issued share capital of the Company is 12 660 986 310 ordinary shares of R1 each. Further details pertaining to the Company’s share capital are contained in note 21 to the annual financial statements.

DividendsNo dividend was declared in the current year. The dividend policy is reviewed annually and approved by the Shareholder Representative in the annual general meeting. The main objective is to utilise cash to support the capital investment programme. The policy provides that dividends will be declared to the Shareholder Representative in circumstances where cash cannot be effectively utilised in the business; where retaining cash does not create shareholder value; and provided that appropriate gearing and cash interest cover ratios are maintained.

Divisions, subsidiaries and associate companiesThe Company intends to finalise the liquidation of Spoornet do Brasil Ltda (SdbL) during the course of the next financial year. A detailed list of subsidiaries and associate companies are contained in annexure D to the annual financial statements.

Revaluation of property, plant and equipment The accounting policies of the Company require rail infrastructure, port infrastructure assets, port operating assets and pipeline networks to be carried at revalued amounts. A full revaluation of these assets is conducted every three years, with an index revaluation being performed in the intervening years. During the current year, a full revaluation was performed by independent valuation experts on rail infrastructure and pipeline networks and an index valuation was applied for port infrastructure and port operating assets.

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Port facilities

The carrying value of port infrastructure was revalued by R4 442 million (2014: R6 838 million) and port operating assets were revalued by R177 million (2014: R945 million).

Pipeline networks

The carrying value of pipeline networks was revalued by R843 million (2014: R467 million).

Rail infrastructure

In the current financial year, the Group changed its accounting policy for rail infrastructure assets from the historical cost basis to the revaluation model in accordance with IAS 16 Property, Plant and Equipment in order to better reflect the value of these assets to the Group, the value being consumed through use and the future capital required to maintain or replace these assets going forward. The Group applied the depreciated optimised replacement cost and the discounted cash flow methods in assessing the fair value of the assets. Accordingly, the carrying value of rail infrastructure assets was revalued by R49,8 billion to R75,2 billion. Additional details are provided on page 84. The new policy was applied prospectively.

Capital expenditure and commitmentsThe Group’s capital investment for the year ended 31 March 2015 amounted to R33,6 billion (excluding capitalised borrowing costs). This represents a 5,7% increase from the prior year capital investment of R31,8 billion, mainly as a result of accelerating the locomotive, tugs and dredger acquisition programme. The capital investment for the year represents R14,5 billion invested in the expansion of infrastructure and equipment, while R19,1 billion was invested to maintain capacity in the rail and ports divisions.

Further details regarding capital expenditure and commitments are contained in note 30 of the annual financial statements.

FundingAs at 31 March 2015, the Company’s total borrowings amounted to R110,4 billion (2014: R90,4 billion), an increase of R20 billion compared to the prior year.

The following sources of funding were actively utilised in reaching the funding requirement of R23,8 billion for the year; Commercial Paper, inaugural TN30 and TN40 bonds, private placements and bilateral long-dated loans with an Export credit agent and a local life insurance company.

In spite of the additional funding raised, the gearing ratio reduced to 40,0 % compared to the 45,9% at 31 March 2014 mainly due to the first time revaluation of rail infrastructure assets. This level is still below the Group’s target range of 50,0%, reflecting the additional capacity available to fund future capital expenditure.

The funding requirement for the next 15 months to 30 June 2016 is R34,6 billion, including the cash buffer of R1 billion. Sufficient facilities are available to Transnet (detailed in the table below) thus enabling the Group to adequately diversify its funding and hence, limit its potential exposure to financial risk.

Sources of funding R billion

Cash on hand at 31 March 2015 6,3GMTN 7,0DMTN 9,3Other loans 7,0Committed facilities 5,0

Total 34,6



Credit rating

Transnet is officially rated by two credit rating agencies, namely, Standard and Poor’s (S&P) and Moody’s. During the year under review, both credit rating agencies, downgraded the sovereign rating. As an SOC, Transnet’s credit rating was affected and hence S&P changed the issuer credit rating to BBB- from BBB in line with the sovereign rating, the rating outlook is stable and the standalone credit profile remained unchanged at bbb+. Moody’s also changed the Transnet issuer rating to Baa1 from A3 with a negative outlook and standalone to baa1 from a3. Moody’s rating is still 2 notches above sub investment grade, whilst S&P is in the last bend before sub investment grade. Transnet’s credit rating is depicted below:

Long-term rating category Moody’s Standard & Poor’s

Foreign currency Baa1/Negative outlook BBB-/Stable outlookLocal currency Baa2/Negative outlook BBB-/Stable outlookNational rating A1.za/A2.za zaAA+/zaA-1

Post-retirement benefit obligationsBenefit funds

The Group provides various post-retirement benefits to its active and retired employees, including pension, post-retirement medical and other benefits. The two defined benefit funds, namely the Transnet Sub-fund of the Transport Pension Fund (TTPF) and the Transnet Second Defined Benefit Fund (TSDBF), are fully funded with actuarial surpluses of R3,1 billion (2014: R2,3 billion) and R3,5 billion (2014: R2,6 billion) respectively. 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 to the Group.

The Board of Trustees of the TTPF and TSDBF approved the payment of ad hoc bonuses to their beneficiaries, during the year and up until April 2015, amounting to R36 million and R320 million respectively. The total value of ad hoc bonuses paid by the TTPF and TSDBF to their beneficiaries amounts to R160 million and R2,2 billion respectively.

These payments continue to supplement the current statutory increase of the beneficiaries of the TTPF and TSDBF to provide pensioners with increases above CPI. In addition to the payments by the TTPF and TSDBF, Transnet has again made an ex gratia payment to its most disadvantaged pensioners of both the TTPF and TSDBF, amounting to R75 million in November 2014. The payment has been made in particular to those pensioners with very low pensions despite long service. This brings the total amount of ex gratia payments made by Transnet to beneficiaries of the defined benefit funds to R523 million.

SATS pensioners’ post-retirement medical benefit obligations

Transnet is committed to identifying a sustainable long-term solution for the provision of medical scheme benefits to SATS pensioners and their dependants.

The post-retirement medical benefit obligation is approximately R1 billion as at 31 March 2015 (2014: R1,2 billion).

Passenger Rail Agency of South Africa (PRASA)PRASA owed Transnet R1,8 billion at 31 March 2014 and repaid R1,3 billion during the 2015 financial year. Invoicing of R1,2 billion and the Board approved write-off of R641 million for the 2015 financial year resulted in the total amount owed by PRASA at 31 March 2015 to be R1,1 billion.

Transnet remains committed to working with PRASA in providing passenger rail services in South Africa.

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Compliance and legislationTo the best knowledge and belief of the Directors, the Company has, during the year, complied, in all material respects, with all legislation and regulations applicable to it, except as noted below.

PFMA compliance

Transnet has implemented and maintained sound governance structures and processes in compliance with the provisions of the PFMA. PFMA compliance is one of the key business issues that the Company manages and monitors. This monitoring function is achieved through the following:• an approved PFMA policy and guideline;• an automated reporting process on Cura system;• an accreditation process on the Delegation of Authority Framework, Procurement and PFMA Policy and

Procedures; • intensified PFMA training and awareness programme; • data analytics to detect/prevent potential PFMA violations; • integrated systems and processes; and • a materiality framework that has been established at Group-level with the support of the Shareholder

Representative and cascaded throughout the Company.

Sections 51 and 55 of the PFMA impose certain obligations on the Company relating to the prevention, identification and reporting of fruitless and wasteful expenditure; irregular expenditure; expenditure that does not comply with operational policies; losses through criminal conduct and the collection of all revenue. To comply with the PFMA’s obligations, the Board has a materiality framework, which was approved by the Minister of Public Enterprises, subject to certain conditions.

The Shareholder Representative has determined that the materiality limit for reporting in terms of sections 55(2)(b)(i), (ii) and (iii) of the PFMA is R25 million per transaction.

In terms of this materiality framework, the following item is reported as criminal conduct. This item occurred prior to 2013 and was detected by the Company’s internal processes. The Company is committed to handling alleged governance breaches in a firm and expeditious manner and accordingly commissioned an investigation which revealed that an employee fraudulently gave clients lower rates for the transportation of manganese. The losses arising from criminal conduct as contemplated by the PFMA (as amended) amount to R488 million. The employee was suspended during the investigation, and he later resigned. This matter has been reported to the South African Police Services commercial unit as well as the National Prosecuting Authority. The Board of Directors is confident that appropriate corrective action has been taken and that the irregularity is no longer in effect. In addition, the Board of Directors is satisfied that all reasonable steps have been taken to prevent further losses to the Company.

PFMA reporting in 2015

Category of reportable items R millionNumber of

items

Number of finalised

disciplinaries/criminal cases

Fruitless and wasteful expenditure*** 23,0 27* 24/7Losses through criminal conduct*** 519,3 26* 11/600Total irregular expenditure*** 32,2 31* 15/1

* Represents cumulative reportable items of the same nature.*** Refer to annexure E for further disclosure.

The above table also reflects the number of finalised disciplinary cases instituted against employees for non-compliance to the PFMA. However, it must also be noted that there are numerous other cases that are still



pending finalisation, and are tracked and will be reported in the annual financial statements for the year ending 31 March 2016.

Incidents with R nil values are not included in the reportable numbers, however, the related South African Police Services cases and disciplinary actions are included.

608 criminal cases have been lodged with South African Police Services and the bulk relates mainly to losses through criminal conduct.

PFMA reporting in 2014

Category of reportable items R millionNumber of

items

Number of finalised

disciplinaries/criminal cases

Fruitless and wasteful expenditure 13,0 32* 21/0

Losses through criminal conduct 39,9 54* 10/334

Non-collection of revenue*** 0,8 1 2/0

Total irregular expenditure 49,6** 18 7/0Less: Irregular expenditure condoned (6,8) (4) 0/0

Remaining irregular expenditure 42,8 14 7/0

* Represents cumulative reportable items of the same nature.** Includes an item under investigation pending finalisation.

*** Refer to annexure E for further disclosure.

334 criminal cases were lodged with South African Police Services and the bulk related to losses through criminal conduct.

Economic regulation and regulatory reformThe tariffs of two Operating divisions, namely Transnet Pipelines (Pipelines) and Transnet National Ports Authority (National Ports Authority) are regulated by independent regulators. The National Energy Regulator of South Africa (NERSA ) regulates the tariffs of the petroleum pipeline system, storage facility at Tarlton and gas transmission pipeline for Pipelines. The Ports Regulator regulates the tariffs charged by National Ports Authority.

With approximately 19,0% of Transnet’s revenue and 34,0% of its EBITDA impacted by economic regulation, unless the relationships with regulators are managed proactively and strategically their decisions could have a significant impact on investment decisions, investor confidence and ultimately on the execution of the MDS R336,6 billion capital investment plan.

Transnet believes that understanding regulatory issues in extreme detail is a prerequisite not only for anticipating risks and opportunities but also for building mutually beneficial relationships, based on trust and transparency, with the economic regulators. Significant progress has been made between Transnet and the Ports Regulator following recent engagements on the regulatory framework. In the coming months emphasis will be placed on finalising the pricing strategy which would achieve the spirit of the National Ports Act, No 12 of 2005 (Ports Act) whilst at the same time afford National Ports Authority and Transnet the ability to deliver on its MDS and maintain financial sustainability.

The potential for making decisions in determining and setting tariffs that may negatively impact the future sustainability of the MDS remains a key risk for Transnet given the capacity constraints faced by economic regulators, and limited recourse by the regulated entities in the absence of an appeal mechanism. Credible appeal mechanisms need to be put in place and attention needs to be paid to monitoring the performance and decisions of regulators in line with international best practice and benchmarks.

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Transnet Pipelines

Petroleum levy and corporatisation of Transnet Pipelines

One of the conditions of the levy, paragraph 6.1.5 of the Grant Funding Agreement, was that Transnet provide the Department of Energy (DoE) with explicit details on the progress in respect of the corporatisation of Pipelines in line with the directive of the Shareholder Representative. Transnet presented to the Department of Public Enterprises (DPE) a brief overview of the key issues that will arise with the corporatisation of Pipelines and highlighted areas for further investigation. On 5 February 2013, the former Chairperson of Transnet wrote to the former Shareholder Representative, requesting him to reconsider the corporatisation of Pipelines and rescind the previous decision as per the letter of 30 April 2010.

On 24 May 2013, the former Shareholder Representative responded to the former Chairperson of Transnet stating that he has written to the Ministers of Finance and Energy recommending that the condition for Pipelines to be corporatised be waived at this point in time. The former Shareholder Representative further pointed out that in the future there may be a government imperative which needs to be fulfilled and would necessitate the need for the corporatisation of Pipelines. Should this be the case, it may be necessary to resuscitate the issue of corporatisation. Transnet awaits the response from the Ministers of Finance and Energy through the office of the Shareholder Representative.

The potential corporatisation of Pipelines poses significant risks to Transnet, as it could have a material adverse impact on Transnet, both financially and strategically, and could constitute an event of default under some of Transnet’s funding agreements.

Tariffs

On 31 October 2014, Pipelines submitted its 2016 Petroleum Pipeline System Tariff Application to the NERSA. Pipelines filed for an allowable revenue requirement of R3 395 million for the 2016 tariff period, a 15,58% increase in allowable revenue from the 2015 allowable revenue of R2 938 million as set by NERSA.

On 12 March 2015, NERSA decided on Pipelines’ application for the period 01 April 2015 to 04 April 2016. NERSA increased Pipelines Allowable Revenue from R2 938 million in 2015 to R3 357 million (14,28%) for the 2016 financial year. All Pipelines financial year 2016 tariffs will be increased by 6,9% compared to the 2015 tariffs.

Transnet National Ports Authority

The potential corporatisation of Transnet National Ports Authority

The National Ports Act, No 12 of 2005 (Ports Act) provides for the corporatisation of the National Ports Authority. On 17 June 2008, the Government, through the President of the Republic of South Africa, informed Transnet in writing that it would not initiate the corporatisation process and that appropriate amendments to the Ports Act will be considered.

On 28 September 2012, at a National Ports Consultative Committee Meeting (NPCC) held in Cape Town between port stakeholders and the National Ports Authority, the issue of the National Ports Authority corporatisation was tabled. The consensus of the NPCC members, representing the Department of Public Enterprises (DPE), Department of Transport (DoT), Department of Trade and Industry (DTI), port users and the Ports Regulator, was that changes to the section 3(2) of the Ports Act and other relevant sections of the Ports Act be effected.

On 10 January 2013 correspondence was sent to the Shareholder Representative as a recommendation to take the process of legislative review forward in the least cumbersome way possible. To this end, Transnet recommended a one worded amendment to the Ports Act which would have the effect of giving the Shareholder Representative the discretion to corporatise instead of the current obligatory provision in section 3(2) which



mandates the Shareholder Representative to corporatise without any discretion in this regard. This can be done by substituting the word ‘must’ with the word ‘may’ in section 3(2) of the Ports Act.

On 10 June 2013, DoT informed Transnet of The National Ports Act Amendment Bill, 2013, which states that section 3 of the principal Act is hereby amended by the substitution of section 3(2) for the following:

‘As soon as this Act takes effect, the shareholding Minster [must] may ensure that the necessary steps are taken for the incorporation of the National Port Authority of South Africa as a company contemplated in subsection 3.’

Transnet awaits the finalisation of this amendment. Transnet is currently conducting a comprehensive review of all aspects of the Ports Act, to be presented to the DPE for discussions with the DoT.

The engagements between Transnet and DPE are aimed at ensuring that the appropriate amendments to the Ports Act are effected. The potential corporatisation of National Ports Authority poses significant risks to Transnet, as it could have a material adverse impact on the Company, both financially and strategically, and could trigger default clauses of Transnet’s funding agreements.

Tariffs

On 1 September 2014, National Ports Authority submitted its multi-year (2016 to 2018) tariff application and a Draft Tariff Book for 2016 to the Ports Regulator. The application was in accordance with the Ports Regulator’s approved multi-year tariff methodology of 31 July 2014.

National Ports Authority applied for revenue of R11 208 million comprising of marine business revenue of R8 759 million and real estate business revenue of R2 449 million for 2016. This translates into an average tariff adjustment of 9,47% for 2016, and indicative tariff adjustments of 15,91% for 2017 and 6,49% for 2018.

On 25 February 2015, the Regulator approved the National Ports Authority tariffs. The Ports Regulator’s 2016 Record of Decision (ROD) states the following:(1) The Ports Regulator has approved an overall increase in average tariffs of 4,8% for the 2016; (2) All cargo dues are to increase by 3,55% with the exception of dry bulk cargo dues for coal, iron ore and

manganese which are to increase by 6,0%; and (3) Marine services and related tariffs (sections 1-8 of the tariff book excluding section 7 that deals with

cargo dues) are to increase by 6,0%.

The reasons for the deviation in the average tariff determination between the tariff application of 9,47% and the tariff decision of 4,8% for 2016 are:(4) The Ports Regulator adjusted the volume forecast upwards to 4,3% compared to National Ports

Authority’s forecast of 2,8%;(5) The Ports Regulator applied the lower inflation rate of 4,8% compared to the application’s inflation rate of

5,7%;(6) Disallowance of capital expenditure related to the Ngqura manganese terminal; and(7) Exclusion of the financial impact of all bilateral contracts between the National Ports Authority and Port

Users (Sishen Iron Ore contracts).

In order to mitigate excessive tariff increases above inflation, the Ports Regulator utilised R150 million of the Excessive Tariff Increase Margin Credit (ETIMC) facility.

On 31 March 2015, the Regulator published the Tariff Strategy for the South African Ports System for comments with a deadline for comments of 31 May 2015. Transnet will provide comments to the above mentioned document.

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Freight Rail

The DoT Draft Green Paper on Rail Reform was issued to various stakeholders in April 2012 for comment. Transnet, supported by the DPE, presented its position to DoT and engagements are ongoing to ensure alignment before the Draft Green Paper is submitted to Cabinet.

DPE hosted numerous workshops with DoT and Transnet Freight Rail (Freight Rail) for information sharing and alignment. During these meetings, DoT acknowledged the value of the MDS and that the proposed rail policy should not undermine the MDS’s objectives, rather, that it should support or enhance the MDS, the rail policy needs to be explicit about short, medium and long-term interventions over a period of 30-40 years. DoT also acknowledged that the policy does not provide sufficient details, and is not explicit in other areas and that more analysis needs to be done in consultation with DPE/Freight Rail/National Treasury.

Following the meeting held on the 23 October 2014 between the Minsters of Transport and Public Enterprises, on 10 November 2014, Transnet’s chairperson sent a letter to the Minister of Public Enterprises providing further comments on the National Rail Policy and the Draft Bill on the Single Transport Economic Regulator.

On 10 March 2015, DPE provided Freight Rail with an update on the following:(1) The Interim Rail Economic Regulator (IRER) MOU has been signed by the Ministers of Transport and Public

Enterprises; and(2) The Situational Analysis Document on Transport Economic Regulation Bill is currently being reviewed by

DoT and DPE.

Judicial proceedingsThe annual financial statements include a best estimate of expected settlement costs for judicial proceedings entered into by Transnet, as either defendant or plaintiff, where the outcome can be assessed with reasonable certainty. These estimates take into account the legal opinions obtained for the Group. The contingent liabilities of the Group have been disclosed in note 31 to the annual financial statements.

Transnet Pensioner’s Class Action

In the 2014 financial year, Transnet received a Notice of Motion in terms of which two Transnet pensioners applied to the North Gauteng High Court to institute a class action against seven respondents, including Transnet. The applicants sought to institute action for the injection of monies into the Transnet Second defined Benefit Fund and the Transport Pension Fund: Transnet Sub-fund.

On 17 December 2014 the Supreme Court of Appeals issued an order dismissing Transnet’s (and the Pension Funds’) petition for special leave to appeal the certification of the class action, on the grounds that there are no prospects of success on appeal. Transnet took a decision not to appeal the certification any further, but to defend the action on the merits once instituted. The action has not been instituted yet.

Transnet remains confident, based on legal advice, that it will be able to successfully defend the class action.

Going concernThe successful execution of the MDS is critical to Transnet as it forms the basis of future growth for the Group and the South African economy. Consequently the successful execution of the funding strategy and the ability of the Group to meet its commitments to investors are of paramount importance.

Given the dynamic management reporting approach to achieve the agreed financial metrics and improve profitability based on operating and financial indicators, the Board of Directors are confident that the Group will be a going concern for the foreseeable future.



The Board of Directors, having considered all significant variables that may impact the Group’s cash flow requirements, are of the opinion that adequate funding is available. This, together with the fact that the underlying net worth of the Group has increased and is projected to continue to increase over the MDS period, supports the going-concern assumption as appropriate in the preparation of the Group results for the year ended 31 March 2015.

Remuneration Introduction

The remuneration report provides an overview of the Transnet remuneration philosophy and strategic intent and details of specific reward interventions that occurred during the 2015 reporting year for independent non-executive directors, members of the Group and operating divisional executive committees, managers and bargaining unit employees.

Terminology

For the purposes of this report:• The term executives refers to members of the Transnet Group Executive Committee and the operating

divisional executive committees (grade levels A and B),• Management refers to the rest of the management employees (grade levels C to F),• Bargaining unit employees refers to all employees whose conditions of employees are negotiated. This term

includes first line managers, specialists and technicians (grade level G refers to first line manager, specialist and technician and grade levels H to L to the rest of the bargaining unit employees), and

• Junior employees refer to bargaining unit employees on the grade levels below the first line managers, specialists and technicians.

Remuneration philosophy and strategy

Transnet is entering the fourth year of the MDS which entails the achievement of rigorous financial and operational performance objectives over a period of seven years. The successful execution of the MDS, not only serves the interest of Transnet, but will hugely impact the South African economy.

The Human Resources strategy, inclusive of the reward strategy, is designed to facilitate the achievement of the strategic objectives of the MDS. The Transnet remuneration philosophy and framework form an integrated part of the key deliverables of the human resources strategy and therefore the reward strategies remain focused on entrenching a performance driven culture.

The objective of the Transnet reward philosophy is to provide a framework for a fair and transparent reward dispensation that:• Supports the objectives of the business strategy;• Ensures the long-term sustainability of the business;• Ensures that all employees are paid a fair and competitive salary;• Aims to attract and retain valued employees; and• Ensures that employees are rewarded and recognised for high performance.

The remuneration philosophy for Transnet takes into account the different hierarchical levels informed by complexity, decision making and judgment.

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Transnet has clustered these hierarchical levels into three respective categories of employees, summarised as follows:• Executive and management levels;• First line managers, specialists and technicians (grade level G) form part of the bargaining unit;• Junior employees (grade levels H to L) form part of the bargaining unit.

The objective of the Transnet remuneration strategy is to:• Provide an integrated approach for remuneration management across Transnet that effectively attracts,

motivates, engages and retains the talent required to achieve Transnet’s business objectives;• Align remuneration practices with Transnet’s business strategy thereby ensuring that the remuneration

practices support the business objectives.• Inform remuneration decisions that will be made across Transnet to ensure:

– Remuneration related cost is contained; – Performance is recognised and rewarded; – Performance improvement is incentivised; – Changing business requirements can be accommodated; – Optimal return on expenditure is achieved; – Legal, ethical and best practice standards are adhered to; – The business remains sustainable over the long term; – Compliance with corporate governance and citizenship; and – Compliance with employment and taxation legislation.

The different reward elements are discussed in detail in the paragraphs below:

Guaranteed pay

Transnet remains committed to fair remuneration practices that support the business objectives and create a culture and environment for superior performance and facilitate employee development and retention of critical and key skills.

In general, Transnet strives to align guaranteed remuneration with the market median. The determination of individual remuneration levels is, however, strictly controlled across the business and subject to directives in this regard and also informed by the various collective agreements.

Annual salary increases are informed by an approved mandate obtained from the Remuneration, Social and Ethics Committee of the Board.

Annual increases for management levels are impacted by individual performance scores.

Increases for bargaining unit employees are determined by the outcome of the annual wage negotiation process. The 2015 financial year was the second and last year of the two year wage agreement that Transnet concluded with the recognised unions. Transnet will, in the 2016 financial year, engage labour to again negotiate a multi-year wage agreement to ensure stability in employee relations and a reduced risk of industrial action.

Transnet does not support interim/ad-hoc salary increases.

It is compulsory for all permanent employees to join the Transnet Retirement Fund, which provides for retirement funding, risk cover and a death benefit.

Bargaining unit employees, who opt to become a principal member of one of the Transnet recognised medical schemes, are eligible to receive a medical subsidy.



Variable pay

Transnet has implemented a short- and a long-term incentive scheme.

The short-term incentive scheme is applicable to all employees and is governed by detailed ground rules, annually approved by the Remuneration, Social and Ethics Committee of the Board. The long-term incentive scheme is applicable to executive and selected senior managers.

The objective of the incentive schemes is to encourage stretch performance and reward performance above target. Individual strategic objectives of management employees are derived from and aligned with key performance indicators as stated in the Shareholder’s Compact.

The detail of the short- and long-term incentive schemes are described in more detail below:

Short-term incentive scheme

The design of the short-term incentive scheme aims to drive the achievement of stretch business targets and to reward employees for this effort.

The bonus pool, funding the payment of the annual short-term incentive, is generated by the achievement of the Transnet “earnings before interest, taxation, depreciation and amortisation” (EBITDA) target. The pool is modified by a productivity measure relating to the key performance indicators as per the Shareholder’s Compact as well as the safety achievement. The non-achievement of productivity and safety targets can reduce the bonus pool with up to 50%.

Employees on management levels qualify for an annual short-term incentive payment provided that the business objectives have been achieved. Eligibility percentages are differentiated based on the grade level of the manager. Management has a higher component of at-risk pay (variable pay) which is dependent on the achievement of set business objectives. Individual bonus percentages are further modified with individual performance assessment ratings.

In addition to the annual component of the short-term incentive scheme, a gain share incentive scheme was implemented for bargaining unit employees. The objective of the gain share is to enhance line of sight between targets and actual performance as well as to ensure internal parity. This provided that the majority of bargaining unit employees could potentially earn:• An annual on-target bonus component, aimed at achieving performance targets with an on-target eligibility

of 10% for junior employees and 12% for first line managers, specialists and technicians; plus• A quarterly gain-share bonus component, which becomes accessible by exceeding the quarterly EBITDA and

relevant secondary measure targets. Employees have the opportunity to gain up to a maximum of 16% per annum when super stretch business targets are exceeded (120% of EBITDA).

The combined annual and gain share components of the short-term incentive scheme allows bargaining unit employees to earn up to a maximum of 26% of annual pensionable salary for junior employees and 28% of annual cost to company package for first line managers, specialists and technicians.

Long-term incentive scheme

Transnet has implemented a long-term incentive scheme. The objectives of the long-term incentive are to sustain the achievement of the Transnet strategy, to retain key talent who ensure the success of the growth strategy, to encourage stretch performance and reward performance above target.

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The long-term incentive is designed on a three year rolling basis to ensure sustained business performance and retention over the three year banking period. Participation in the scheme is informed by level of seniority in the organisation, individual performance as well as results from the talent management framework informs key talent who may participate in the long-term incentive scheme. Individual performance and talent ratings also impact on the vesting of the conditional award.

The long-term incentive scheme has specific clauses dealing with company performance over the banking period and to this effect a Group modifier has been introduced. Return on total average assets (ROTA) (excluding capital work in progress) is used as the Group LTI modifier.

Individual performance management

Transnet has implemented the balanced scorecard performance management methodology for the management category as well as for first line managers, specialists and technicians.

The annual company objectives as per the Shareholder’s Compact are translated into a corporate scorecard and then cascaded to all managers across Transnet. Performance in terms of the corporate as well as individual scorecards forms the basis for the determination of short-term incentive payments and annual increases.

Reward interventions during 2015

Integrated and standardised reward model for bargaining unit employees

Transnet has, since 2007, embarked with the design and implementation of an integrated and standardised reward model for all Transnet bargaining unit employees.

To date, Transnet has implemented four different reward agreements, each addressing a specific category of employees, summarised as follows:• The train movement agreement, implemented in October 2007;• The first line managers, specialists and technicians agreement, implemented in March 2008 and amended in

March 2013;• The artisan agreement, implemented in April 2008; and• The new reward agreement for the rest of the bargaining unit employees, not covered by the other three

reward agreements, implemented in March 2012.

The new reward agreement introduced, standardised grades for jobs/positions in the bargaining unit across Transnet as well as entry level pay points per grade level for permanent bargaining unit employees (except for Transnet Port Terminals and Transnet National Ports Authority). No agreement was, however, reached on pay scales, i.e. a maximum pay point per grade level was not agreed and thus there was also no agreement on the pay progression methodology to be followed in order to reach the maximum.

During the year, negotiations have progressed to the point where the labour representatives have circulated the draft agreement to their constituents for mandating. The draft agreement includes the maximum pay scales per grade level and performance management as a method for pay progression.



Career advancement for management

As a result of specific challenges experienced with the reward of the management cadre, Transnet is embarking on a reward solution for the management category.

The proposed solution is summarised as follows:• The implementation of a career path framework, differentiating between specialist, managerial and technical

categories of employment;• The introduction of an integrated competency and performance framework to provide for monetary

recognition based on individual growth, development and performance within a job; and• The introduction of specific measures to provide for increased flexibility in the reward approach, that will

continue to ensure sufficient control over the wage cost.

Collective agreement in respect of fixed-term contract employees

The Labour Relations Act (LRA) amendments have introduced fundamental changes to the future way of employing fixed-term contract employees, part-time employees and labour broker employees. The amendments aim to prevent abuse and discrimination of lower earning fixed-term contract employees and part-time employment contracts.

In terms of the amendments to the LRA, those employees earning below the BCEA earnings threshold of R205 433 per annum can only be engaged on a fixed-term contract or successive fixed-term contracts subject to specific employment conditions.

An employer who does not comply with the amendments, runs the risk that the employment of the fixed-term contract employee may be deemed to be of an indefinite basis, in which the event the provision of section 198B(8) may apply. This section provides that if a fixed-term contract is longer than three months, the employee must not be treated “less favourably” than an employee employed on a permanent basis, performing similar work, unless there is a “justifiable reason” for different treatment.

Transnet’s employment realities place the organisation at considerable risk in terms of compliance with the amendments and changes to the LRA. The LRA amendments, however, provided Transnet with an opportunity to conclude a collective agreement and section 198B (2) (c) provides that the provisions described above only apply to the extent that they are not varied in a collective agreement.

Transnet has concluded a collective agreement with labour during December 2014 on the terms and conditions of fixed-term contract employees across Transnet. The collective agreement varies the terms of the LRA amendments.

The signed collective agreement mitigates the impact of the law coming into effect and the cost impact associated with the amendments.

The terms of the collective agreement were implemented with effect from 1 January 2015.

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Remuneration for Group Executive Committee members

The guaranteed remuneration of the members of the Transnet Group Executive Committee was adjusted with an average of 6%, allocated based on individual performance rating and market comparison, effective 1 April 2014.

The table below depicts the guaranteed pay of the Group Executive Committee for the 2015 financial year.

Guaranteed pay of Transnet Group Executives

Post-retirement

benefit fund Other Other Total TotalExecutive Committee Salary contributions contributions payments 2015 2014member R000 R000 R000 R000 R000 R000

B Molefe* 6 115 561 – 2 6 678 6 421S Gama 4 632 330 – 97 5 059 4 800M Gregg-Macdonald 2 889 281 – 2 3 172 3 108CA Möller** 1 319 104 – 341 1 764 3 255T Morwe 3 571 255 6 164 3 996 3 722KC Phihlela 3 328 223 – 84 3 635 3 529A Singh* 4 005 389 – 2 4 396 4 322KXT Socikwa 3 721 340 – 174 4 235 3 995R Vallihu 3 656 289 – 169 4 114 3 880EAN Sishi 2 818 274 – 133 3 225 2 953DC Moephuli 2 715 288 – 2 3 005 2 835S Chetty 2 185 183 – 2 2 370 2 205NJ Mabandla*** 788 77 – 518 1 383 2 520RE Lepule 2 818 274 – 2 3 094 2 919MA Sukati 2 687 226 – 2 2 915 2 062MA Matooane (Dr) 2 363 251 – 30 2 644 523LMH Msagala**** 1 551 151 – 107 1 809 –ZE Lebelo**** 1 441 110 – 107 1 658 –N Silinga**** 1 431 120 – 68 1 619 –

54 033 4726 6 2 006 60 771 53 049

* Group Executives who are members of the Board of Directors.** Retired during the year.*** Resigned during the year.**** Appointed during the year.(Dr) Doctor.



Executive remuneration – variable

The members of the Transnet Group Executive Committee qualify for an annual short-term incentive payment provided that the strategic objectives, as agreed with the Shareholder Representative, have been achieved. Individual bonus percentages are further modified with individual performance assessment ratings.

The eligibility percentages linked to specific business performance achievement is indicated in the table below:

Employment category Grade level

Qualifying percentage

Threshold On-target Maximum

Group Executive Committee A 25% 50% 100%

Extended Executive Committee B 20% 40% 80%

Short– and long-term incentive payments

The short-term incentive payment for the 2015 financial year was based on the actual achievement of the annual EBITDA as well as the productivity and safety modifiers at Group and Operating division levels.

The highlights of the business results for the financial period are summarised as follows:• Revenue increased by 8,0% to R61,2 billion;• EBITDA increase by 8,2% to R25,6 billion;• Operating profit increase of 13,4% to R14,6 billion;• Capital investment for the year of R33,6 billion constituting an increase of 5,7% on the prior year;• Cash generated from operations increased by 13,5% to R27,3 billion; and • Gearing at 40,0% and cash interest cover at 3,6 times.

The 2012 conditional award in respect of the Transnet long-term incentive scheme vested at the end of the 2015 financial period. The value of the long-term incentive payment is impacted by the level of achievement of specific company and individual performance objectives.

The members of the Transnet Group Executive Committee were eligible for payment in respect of the long-term incentive scheme based on the ground rules of the scheme.

The payment of these vested amounts took place at the end of April 2015.

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The table below reflects the short– and long-term incentive payments for the Group Executives.

LTI LTI STI STI2015 2014 2015 2014

Transnet executive R000 R000 R000 R000

B Molefe* 6 835 – 1 551 2 952S Gama 5 194 2 653 1 153 2 259M Gregg-Macdonald 3 103 2 115 745 1 447CA Möller** 2 953 2 036 309 1 001T Morwe 3 769 1 964 901 1 297KC Phihlela 3 410 2 381 835 1 645A Singh* 4 505 2 857 1 021 1 989KXT Socikwa 4 158 2 716 976 1 880R Vallihu 4 040 2 199 874 1 781DC Moephuli 2 141 1 199 636 1 336S Chetty 1 567 893 735 1 045NJ Mabandla*** – – – 1 111RE Lepule – – 710 1 361EAN Sishi – – 702 1 353MA Sukati – – 708 1 013MA Matooane (Dr) – – 572 307LMH Msagala**** 1 709 – 644 –ZE Lebelo**** – – 567 –N Silinga**** 636 – 581 –

44 020 21 013 14 220 23 777

* Group Executives who are members of the Board of Directors.** Retired during the year.*** Resigned during the year.**** Appointed during the year.(Dr) Doctor.

Remuneration structure for independent non-executive directors

Independent non-executive directors are appointed by the Shareholder Representative for a three-year term. The Memorandum of Incorporation of the company, however, require that the independent non-executive directors be submitted for re-election for each of the three years at the Company’s annual general meeting.

Among the issues considered by the Shareholder Representative prior to re-election is the individual independent non-executive director’s performance. The new Transnet Board was appointed during December 2014.

The Shareholder Representative approves, in advance, the fees payable to independent non-executive directors. The independent non-executive directors are paid an annual retainer as well as an additional retainer fee for committee membership.

Fees paid to independent non-executive directors are differentiated based on their appointments to the various committees of the Board.



The table below depicts the actual remuneration for the Transnet independent non-executive directors for the financial year.

Other Total TotalFees payments 2015 2014

Independent non-executive directors R 000 R 000 R 000 R 000

LC Mabaso (Chairperson)1 337 1 338 –ME Mkwanazi (Chairperson)2 760 1 761 1 050NR Njeke3 274 – 274 630Y Forbes 691 – 691 653MA Fanucchi2 370 – 370 472NK Choubey4 – – – 98HD Gazendam2 702 – 702 634IB Skosana* 2 432 – 432 551N Moola 493 – 493 472IM Sharma2 434 – 434 551ZE Tshabalala2 456 – 456 574DLJ Tshepe2 493 – 493 630NP Mnxasana2 370 – 370 472PEB Mathekga1 123 – 123 –GJ Mahlalela1 123 – 123 –ZA Nagdee1 123 – 123 –VM Nkonyane1 144 – 144 –MR Seleke1 144 – 144 –SD Shane1 144 – 144 –BG Stagman1 144 – 144 –PG Williams1 123 – 123 –

6 880 2 6 882 6 787

* Director’s fees paid to Kapela Investment Holdings Proprietary Limited.1 Appointed during the year.2 Retired during the year.3 Resigned during the year.4 Resigned during the prior year.

Remuneration, Social and Ethics Committee of the BoardConsistent with the King III report and regulation 43 of the new Companies Act, the Board has established the Remuneration, Social and Ethics Committee to assist in discharging its responsibilities. The mandate outlining the authority delegated to it by the Board includes the purpose of the Remuneration, Social and Ethics Committee, composition, reporting responsibilities, terms of reference and the right of any member to seek and be provided with independent advice at the Company’s expense if such member considers that necessary for the effective execution of his/her fiduciary duties to the Company.

The Committee has an independent role, operating as an overseer and a maker of recommendations to the Board for its consideration and final approval. The Committee does not assume the functions of management, which remain the responsibility of the executive directors, officers and other members of senior management.

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REPORT OF TE DIRECTORS - Transnet · and training commitments as dictated by the Supplier...

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