Capital investment report

Transcription

1 Capital investment report 96 Transnet SOC Ltd Integrated Annual Report 2011

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3 Capital investment report Port of Richards Bay. Transnet Infrastructure Plan: A framework for capacity planning and creation Transnet is the key driver and enabler of South Africa s transport logistics infrastructure and is one of the primary contributors in planning for South Africa s future freight transport infrastructure capacity requirements. These plans are continuously updated to account for changes in market demand and are then incorporated into the Transnet Infrastructure Plan (TIP). Capital investments: 2011 (R billion) Rail 12,5* Ports 2,9 Pipelines 6,1 (%) Rail 58,3* Ports 13,5 Pipelines 28,2 *Includes intercompany eliminations and other adjustments. The principal objective of the TIP is to provide Transnet with a 30-year framework for the planning and development of its port, rail and pipeline infrastructure, to ensure that adequate infrastructure capacity is created ahead of demand. The five-year Capital Investment Plan is reviewed annually and interrogated through a robust process to ensure alignment to the TIP requirements and the strategic objectives of the Company as reflected in the Compact with the Shareholder. Capital investments: 2011 Capital investment for the year amounts to R21,5 billion which is the most significant investment in a financial year by the Company and also represents a 16,6% increase in investment compared to the prior year. This reflects the Company s commitment to providing a responsive infrastructure that creates capacity ahead of demand and satisfies the demands of a growing economy. Notwithstanding the challenges experienced during the year to roll out the capital investment plans, the spending for the year represents 94,2% of the targeted spending. As set out alongside, the investment of approximately 58,3% by the rail sector supports the required major upgrades as well as replacement of existing assets. The New Multi-Product Pipeline (NMPP) from Durban to Johannesburg is the second largest investment, that ensures the security of fuel supply to the inland market. Overview of major projects Highlights of the Operating division projects are set out below whilst more details on the mega projects that are managed and executed by Capital Projects, are set out in the section dealing with the Transnet Freight Rail (Freight Rail) The investment of R12,5 billion by Freight Rail was made in the commodity export lines (coal and iron ore) and in the general freight business which constitutes 57,1% of the total revenue of Transnet. The average age of the assets for General Freight are well above benchmark standards and will consequently remain a key component of the investment plans going forward. Major capital investments in the various projects Capitalisation of infrastructure and wagon maintenance/replacement During the year 555km of rail and 292km of sleepers were replaced and 528km of track were screened, which resulted in the track life being increased. Altogether wagons underwent major lifting programmes. Upgrade of Class 6E1 locomotives to Class 18E During the year 41 locomotives were upgraded. These upgraded locomotives with higher output have been successfully deployed on various corridors in the general freight business sector. 98 Transnet SOC Ltd Integrated Annual Report 2011

4 Freight Rail capital investment per sector (%) Export coal 25,3% Export iron ore 29,1% General Freight 45,6% National Ports Authority capital investment by sector (%) Containers 55,4% Liquid bulk 7,9% Other* 36,7% * Other includes break-bulk, dry bulk, automotives and investments to support all sectors mentioned above Port Terminals capital investment by sector (%) Containers 50,6% Bulk 45,2% Other* 4,2% * Other includes break-bulk, automotives and investments to support all sectors mentioned above Capitalisation of locomotive maintenance The implementation of improved monitoring systems and focused control on locomotive maintenance has resulted in timely locomotive overhaul programmes which will improve reliability and availability over the longer term. General Freight volume expansion: CR 16 wagons To meet business requirements, 354 CR16 wagons have been deployed to the Port Elizabeth corridor where these wagons are being used for the export of manganese. Yard safety automation The aim of the project is to reduce the number of derailments in Freight Rail shunting yards through the automation of points and certain shunting activities. The Ermelo, Bayhead and Beaconsfield yards have already been completed. Conversion of BA to C type wagons During the year 410 wagons have been converted to increase the capacity of these wagons from 48 tons to 60 tons providing much needed additional capacity for General Freight mining commodities. Freight Rail plans on converting a further 380 wagons in the year ahead. Train driver simulators Of the planned 19 simulators, 18 have been delivered and although some software/data must still be installed, the simulators are in operation and used for the training of train drivers. Transnet Rail Engineering (Rail Engineering) Rail Engineering s investment of R532 million is primarily executed to provide the maintenance support and the building of rolling stock facilities to harness volume growth of Freight Rail. Major engineering projects include: facilities on the Richards Bay Corridor to support Freight Rail in ramping up coal export volumes to 81mt. project entailed the construction of maintenance facilities at City Deep to perform minor maintenance on locomotives before departure without removing it from service. The project was completed in March Transnet National Ports Authority (National Ports Authority) The major investment by National Ports Authority for the year was in the container sector with an amount of R1,1 billion invested in port infrastructure for the anticipated growth in containers at the Ports of Cape Town, Ngqura and Durban. Major infrastructure and equipment delivered in the year include: three tugs (two in Durban and one in Richards Bay), one dredger (the Isandlwana) and the bulk liquid berth in Richards Bay. Safety related investments at all ports, in line with the International Ship and Port Security (ISPS) code, were approximately R68 million and included the provision of optic fibre cable, CCTV network and port access controls. Details of the investments in the different sectors are reflected in the pie chart to the middle left. Key projects completed creating 1,25mt of capacity. cubic metres of dredging capacity. Transnet Port Terminals (Port Terminals) Port Terminals invested R866 million during the year with the majority of the investment targeted at the container sector (Cape Town, Ngqura and Durban) and the bulk sector (Richards Bay, Saldanha and Agriport Durban). Details of projects concluded and commenced during the year are as follows: new conveyors and steel shed for soya bean meal was installed and commissioned. The project was successfully commissioned at a cost of approximately R114 million, significantly below budget. This new shed boosts the overall storage capacity of the Agriport grain and soya bean meal facilities. quayside fleet commenced and an order was placed for the replacement of the alumina berth ship unloader (for key aluminium customer in Richards Bay). This project is progressing well with delivery and commissioning planned for October An order was also planned in June 2011 for the supply of a replacement ship loader for the export berth. in the container terminals, specifically Durban Container Terminal Pier 2 and Port Elizabeth Container Terminal is underway. Terminal have received a significant capital injection of R52 million. This project is mid-way in execution and will be completed in the year ahead. 99

5 Capital investment report (continued) Key projects completed capacity created. Increase in capacity from 2,8mt to 4,8mt. Transnet Pipelines (Pipelines) After more than 45 years, the pipeline between Durban and Johannesburg (DJP) is being replaced with a new 24-inch diameter trunk line, the NMPP. This pipeline with sufficient capacity for the future is well in progress requiring major capital investment as reflected in the R5,6 billion invested during the year. The pipeline will be phased into operation between early 2012 and the end of 2013 whilst further investments (additional pumpstations) will be made in future years to create more capacity. The remaining portion of Pipelines investment (R297 million) is on upgrades on other pipelines, replacement of equipment and the safeguarding of the operations and the overall security of the pipeline network. Details are set out below: was made on the telemechanical upgrades at the various depots (7) and is closely aligned to the completion of the various phases of the NMPP. The projects are not yet complete and are scheduled to be completed over the next two financial years (four in 2012 and three in 2013). Assets installed by these projects are in operation. currently in design stage and entails improving the security infrastructure at all Pipelines sites design has commenced and is expected to be complete by the end of the 2012 year. the Tarlton spill dam, emergency sirens, gas supply to the refractionator, Ladysmith prover and manifold correction have also been completed and are operational. other capital projects such as the DJP intelligent pigging are in execution, and the business is already realising the benefits of the investment. For example the postponement of the down rating of the DJP to 2013 as a result of the information obtained through the intelligent pigging exercise. Transnet Foundation The construction of the state-of-the art healthcare train, the Phelophepa II has commenced at Rail Engineering workshops in Salt River, Cape Town. Transnet has to date invested R53 million in the project. Six out of the 18 coaches have been completed and the train is expected to be operational during This project forms part of the key focus areas of the Foundation strategy and Transnet s commitment to make a contribution to healthcare in South Africa. Port of Durban. 100 Transnet SOC Ltd Integrated Annual Report 2011

6 Progress on mega projects A significant component of the investment plan is geared towards infrastructure, sustainability and capacity creation to support volume growth for export iron ore, export coal, containers, manganese and petroleum products (imported and piped). The projects undertaken require thorough studies, planning, design and engineering before execution. The table below reflects Transnet s mega project portfolio: Spending Mega projects Estimated total costs (ETC) 2011 since inception to 2011 Iron ore line capacity expansion to 41mt: Rail Iron ore line capacity expansion to 41mt: Ports Iron ore line capacity expansion to 47mt: Rail Iron ore line capacity expansion to 47mt: Ports Iron ore line capacity expansion to 61mt: Rail Iron ore line capacity expansion to 61mt: Ports Acquisition of 32 Class 15E locomotives for the iron ore line Coal line expansion to beyond 63mt Coal line expansion: Quantum Leap: Smaller projects to expedite creation of capacity Coal line expansion to 81mt Acquisition of 110 dual voltage locomotives for the coal line Capitalisation of infrastructure maintenance # Capitalisation of locomotive maintenance 8 885# Capitalisation of wagon maintenance 8 700# Acquisition of 100 new GE diesel electric locomotives Construction of the Port of Ngqura Ngqura Container Terminal 7 900* Cape Town Container expansion 4 375* Durban Harbour entrance channel widening and deepening Reengineering of Durban Container Terminal Reconstruction of sheet pile quay walls at Maydon Wharf New Multi-Product Pipeline (NMPP)^ # Future rolling five-year plan: * ETC being revised ^ Investment in the NMPP represents a concentration risk to Transnet and the Company is exploring options to mitigate the risk. Iron ore line expansion all phases up to 61mt (including locomotives) The iron ore line is the main export channel for iron ore from the mines in the Northern Cape to the Port of Saldanha. Plans are in place to increase capacity to 61mt. The expansion of the iron ore line is progressing well. Capacity created to date is approximately 61mt on the rail channel and 52mt at the port. The acquisition of 44 and 32 Class 15E locomotives will facilitate the increase in iron ore capacity to beyond 61mt. Of the 44 Class 15E ore line locomotives 34 locomotives have been delivered to date. Altogether 31 have been accepted into operations with three locomotives undergoing acceptance testing. The remaining locomotives are planned for delivery in Of the 32 Class 15E locomotives, 25 locomotives are planned to be delivered in 2013 and seven locomotives are planned for delivery in During the year R3,0 billion was invested on iron ore expansion projects and locomotives acquisitions, with future investment expected to be R4,1 billion over the next five years. In addition the following have commenced or are in progress: South) to the main line is being constructed and 101

7 Capital investment report (continued) 13km out of 32km of track installation has been completed. of port equipment has been successfully implemented. mooring hooks and boarding platforms to facilitate staggered ship loading have been completed. upgrade, road over rail bridge and loops are progressing well with certain components already complete. This is a cross-divisional project and the rail and port divisions are major roleplayers in the investments. Cape Town Container Terminal The expansion of Cape Town Container Terminal aims at increasing capacity ultimately to 1,4 million TEUs to address growth in demand for containers in the Western Cape region. The first reconfigured terminal area for refrigerated containers has been completed. 440m of the 1 130m long quay wall has been deepened to -15,5m chart datum. Certain sections of the reconfigured stacking area have been completed. The contract for the acquisition of 32 rubber tyred gantry cranes (RTGs) has been completed and the equipment has been commissioned to service (28 at CTCT and 4 at DCT Pier 1). Six of the eight ship-to-shore cranes are in operation. Capital invested in the Cape Town Container Terminal in 2011 amounted to R741 million and R2,7 billion since the expansion was undertaken. Planned investment over the next five years in Cape Town Container Terminal is R2,4 billion. Ngqura Container Terminal The Ngqura Container Terminal is a new facility located at the Port of Ngqura and provides additional container handling capacity to the ports system in South Africa. The terminal has handled TEUs in the current year. The option to dredge the full two berths was approved in 2010 and the contractor commenced work in February Ngqura Container Terminal is behind schedule and the first phase of the project is planned for completion by February The dredging of the full two berths will result in capacity of the terminal increasing to TEUs. Investment in the Ngqura Container Terminal including the rail component amounted to R461 million in 2011 and future investment in the terminal over the next five years is planned to be approximately R1,5 billion. Reengineering of Durban Container Terminal The Durban Container Terminal is one of the busiest container facilities in Africa. The project to reengineer the terminal through reconfiguration and equipment replacement will result in TEUs of additional capacity. An amount of R268 million was invested during the year and R247 million is planned to be spent over the next three years. Coal line expansion to 81mt The coal line is the main export channel for coal and starts from the mines in Mpumalanga and ends at the Port of Richards Bay. Plans are in place to increase capacity to 81mt and together with Coal train at the Port of Richards Bay. 102 Transnet SOC Ltd Integrated Annual Report 2011

8 Manganese stockpiles at the Port of Port Elizabeth. sustaining capital investment is estimated to be R37 billion over the next 10 years. The acquisition of 110 Class 19E dual voltage locomotives will facilitate the planned expansion of the coal line to 81mt. The locomotives in combination with wagons and upgraded infrastructure are expected to result in the increased throughput of export coal on the Richards Bay corridor. Of the 110 Class 19E dual voltage locomotives, 58 locomotives have been delivered to date (44 in 2011 and 14 in 2010). 48 locomotives have been accepted into operations. The remaining 52 locomotives are planned for delivery at four per month over the next 13 months. Investment over the next five years is planned to be approximately R6,2 billion for the three expansionary mega projects and new locomotives. New Multi-Product Pipeline This is a strategic investment to secure the supply of petroleum products to the inland market over the long term. The line will replace the old DJP which is running at full capacity and nearing the end of its design life. Some of the benefits of the NMPP include (when fully operational) an increase in capacity from 4,4 billion litres to 8,4 billion litres resulting in a significant reduction in the number of tankers on the road, and a cost-effective and efficient mode of moving petroleum products in an environmentally friendly manner. The cost of the NMPP in the current year has increased from R15,5 billion to R23,4 billion. This is due to increases in the cost of terminals, pumpstations and project management. The increase is related to additional scope, schedule changes and higher than initially budgeted for costs. The Company is confident that the revised schedule and costs will not be exceeded. Due to the strategic nature of the project, the Company has established the NMPP Governance Steering Committee to oversee the project to conclusion with specific focus on risk mitigation pertaining to reputational, commissioning, governance, engineering, construction and design, financial, legal and regulatory aspects. The NMPP construction is progressing according to plan and the entire project is on track for completion by December Acquisition of 100 Class 43 new diesel electric mainline locomotives Acquisition of locomotives is planned for the General Freight business and will assist in improving availability and reliability of the General Freight business fleet and the entire project is expected to support the increase in capacity to 110mt over the next five years. Two locomotives were delivered in January 2011 and are undergoing acceptance testing. Eight more locomotive sets have been shipped from the USA in April The remaining 90 locomotives will be assembled at Rail 33 locomotives are planned to be delivered in 2012 and 65 are planned for delivery in An amount of R334 million was invested in 2011 and R771 million since the project commenced. R1,8 billion is planned to be invested in this project over the next three years. 103

9 Capital investment report (continued) Transnet s rolling Capital investment plan: Transnet remains committed to provide responsive infrastructure that creates capacity ahead of demand and that satisfies the demands of a growing economy as reflected in the TIP against the backdrop of affordability. Consequently the rolling five-year plan has been increased by 18% to R110,6 billion (excluding capitalised borrowing costs of R5,9 billion) to meet the required volume demand and to support the growth initiatives embarked on. Transnet s five-year R110,6 billion Capital investment programme to increase the capacity and efficiency of the freight system is not sufficient to meet the needs of customers and the economy. Private sector participation is therefore critical to bridge the investment gap. Investment plans for a number of the key projects, such as supporting Eskom s rail migration plan and finalising the strategy for the export of manganese will depend on Transnet being able to strike partnerships with the private sector. Details of the Operating division targets and projections are set out below. Target Projections Total five years Freight Rail Rail Engineering National Ports Authority Port Terminals Pipelines Specialist Units Transnet Group* Note: Investment Plan approved in February * Excludes capitalised borrowing costs. The majority of investments are for infrastructure assets such as the pipelines, rail track, container facilities and rolling stock. Approximately 37% (R41,4 billion) of the five-year Capital investment programme is allocated to identified growth/expansion projects. Due to the age of Transnet s assets approximately 62% (R67,6 billion) is planned to be invested in the replacement of old/unreliable assets over the next five years. Commodity view of investment plans Due to the generally long useful lives of Transnet s asset base, commodities that are sustainable over the long term are a priority for any expansionary investments that Transnet embarks upon and in some cases 10 year and longer contracts are entered into with clients on a take or pay basis before any investment can be made. The chart below depicts Transnet s investment over the next five years in the major commodities. Replacement and expansionary investments (R billion ) 12,1 13,8 14,6 14,9 12,8 13,1 Commodity view (%) 5,9 7,8 9,7 5, Expansion (37%)* Replacement (63%) * 34% of expansionary projects will create additional volumes, the other 3% will fulfil other strategic objectives (social, human capital, efficiency improvement). General Freight 35 Export coal 13 Export iron ore 9 Containers 14 Piped products 12 Break-bulk 2 Bulk 2 Other* Transnet SOC Ltd Integrated Annual Report 2011 * Other includes investments that support commodities that may span across the above sectors eg tugs and dredges support all commodities transported.

10 FIVE-YEAR CAPITAL INVESTMENT PLAN PER MAJOR ASSET CLASS RAIL PORTS PIPELINES AND OTHER Land, buildings and infrastructure Machinery and equipment Locomotives Wagons Land*, buildings and infrastructure Machinery and equipment 923 Port facilities Floating craft Pipeline networks Buildings and structures 745 Machinery and equipment TOTAL % TOTAL % TOTAL % *Includes the acquisition of the former Durban International Airport site. Freight Rail The five-year investment plan for each business segment in Freight Rail is depicted below: Target Projections Total five years General Freight business Export coal line Export iron ore line Total The investment in the two export lines is primarily to increase capacity to meet customer demands. The coal line capacity will be increased to 81mt in Capacity on the iron ore line is planned to increase from 47mt to 61mt over the next three years. The planned investment in the General Freight business is necessary to progress with the strategy to improve the predictability and reliability of the service. Rail Engineering The five-year investment plan for Rail Engineering is shown below and it is mainly to replace equipment required for the maintenance of rolling stock to agreed performance levels as well as additional equipment to improve service delivery. Target Projections Total five years Total

11 Capital investment report (continued) National Ports Authority The planned investment in each of the major commodity sectors in National Port Authority is set out below: Target Projections Total five years Containers Dry bulk Liquid bulk Break-bulk Automotive Non-commodity specific investments Total Port Terminals Port Terminals major investment categories are set out below: Target Projections Total five years Containers Bulk Break-bulk Other Total Pipelines The major investment at Pipelines is the NMPP which will increase capacity and replace the existing DJP. The five-year investment plan is presented below: Target Projections Total five years Total Fleet plans A comprehensive fleet plan, taking into account the asset replacement strategy and asset lifecycle management has been developed by the Operating divisions. The table below shows a high level view of the major new fleet assets that are planned to be acquired over the next five years. Acquisition of locomotives for the coal and iron ore export lines will result in the existing diesel locomotives being cascaded to the General Freight fleet. Target Projections Operating division Asset Freight Rail Locomotives* Wagons National Ports Tugs Authority Dredgers 1 Pilot boats 2 2 Port Terminals STS cranes* Straddles RMG cranes 2 2 * Currently being revised. 106 Transnet SOC Ltd Integrated Annual Report 2011

12 Durban Point Car Terminal. Affordability of the five-year Capital investment plan The affordability of the investment plan over the next two years is critical as cash from operations together with funding from various external sources will have to be utilised to fund all the required investments. Funders in general require that Transnet maintains certain thresholds in terms of gearing and cash interest cover to safeguard their own investment in Transnet. The chart below shows the profile of gearing and cash interest cover over the next five years based on the projects included in the existing Capital investment plan. Opportunities beyond the fiveyear Capital investment plan Other development opportunities, as noted below, are being explored. The costs of these are being determined and may require alternative funding. export market, estimated volume could be between 80mt and 135mt; capacity beyond 81mt; capacity to 93mt to support the increase in demand for export iron ore and manganese; Container Terminal to create capacity of 1,2 million TEUs; development into a dug-out port, to address container capacity requirements up to 2040; and volume increases in excess of the planned levels for GFB. Investment/cash interest cover 25,9 24,6 4,8 22,4 3,9 3,2 3,3 3,4 18,7 19,0 3 times Cash interest cover (times) Investment (R billion) Minimum Board limit Investment/gearing limit 50% 46,8 46,8 46,4 25,9 37,7 24,6 42,8 22,4 18,7 19, Gearing (%) Investment (R billion) Maximum Board limit 107

13 Capital investment report (continued) Transnet Capital investment programme Governance The following diagram reflects the overall framework adopted during the portfolio balancing phase in selecting projects that are included in the investment plan. The framework assists in ensuring alignment across the Company to the key strategic objectives. QUANTUM LEAP STRATEGY Capital optimisation and financial management Commodity focus Corridor focus Infrastructure focus Additional volumes. Reengineering, integration, productivity and efficiency. Improve operating efficiencies. Revenue protection. Safety optimisation/environmental improvement. Safety, risk and effective governance. Optimise business enterprise offerings (IT). Optimise social investments. Human capital optimisation. Optimise human resources. Transnet s strategy and strategic objectives are supported by investments across corridors, commodities and infrastructure assets. The CPMF requires that the capital spend (per project) of Transnet be analysed against four major areas in all Operating divisions. 2) Corridors in the network; 3) Asset types; and 4) Major commodities. Policies and procedures Transnet s capital investment policies which are currently been rolled out require that the projects identified during the development of the investment plan are tested through a robust seven step process in arriving at a balanced portfolio of projects. The different steps implemented are as follows: identified, including non-accepted projects in the past, suspended and existing projects as well as feasibility studies to be undertaken; relevant Operating division and Group categories that support the strategic objectives at an Operating division and Group level; against predetermined criteria that includes nonfinancial, financial and benefit analysis. Measures that can be applied include net present value (NPV), internal rate of return (IRR), payback periods etc; on the results from the evaluation step; 108 Transnet SOC Ltd Integrated Annual Report 2011

14 projects with due consideration for Transnet s strategic objectives and the availability of key resources etc; portfolio project mix with the greatest potential to support the achievement of Transnet s strategic objectives and the greatest value creation through the Capital Portfolio Management Framework (CPMF); and resources required to execute the selected projects and the communication of the selected portfolio to the relevant stakeholders. Project lifecycle process (PLP) The methodology adopted by Transnet to roll out its mega and certain divisional executed capital projects is contained in the Project Lifecycle Process (PLP). This methodology entails the conducting of front-end loading (FEL) studies at various phases of the project lifecycle to achieve reduction of risk and increasing certainty in line with increasing investment. At the end of each phase a gate review is done. Gate reviews are an essential means of reviewing the project outcome to date, confirming alignment with the project objectives, reviewing the viability of the project and granting necessary authorisation for the project to be assessed for the next phase. During the gate review, project cost estimates are firmed up to a greater level of accuracy as a result of reducing risk associated with the project. The FEL studies can be classified as follows: Development intended to enhance and improve knowledge to inform Master Planning and developing Framework Planning; business concept is tested and a number of options are generated to implement the requirement; are evaluated and a preferred option prioritised and selected and the viability of the project is more rigorously tested. Cost estimates at a 70% accuracy level; option is more fully defined and its viability confirmed. Front-end engineering design commences. The project to deliver the solution is defined in terms of costs, schedule (level 1), scope and other required disciplines resulting in a bankable business case being developed. Cost estimates providing an 85% level of accuracy; and design, contracting, construction management, commissioning and handover is achieved. Approval, monitoring and reporting Capital projects follow a dual approval process. Projects are approved in principle as part of the Capital investment plan that is submitted to the Board of Directors during the budget approval process. Individual approval is thereafter required for new projects before commencement. Depending on the total cost of the project, approval is obtained from the relevant governing body which may be the Shareholder in certain cases. The capital spending in all the areas of the portfolio is monitored on a monthly basis to determine the progress on the roll out of the investment plan and to take appropriate steps where necessary. Financial interim reviews are required to be conducted half yearly on mega projects to assess the viability of investment from approval up to when the post-implementation review is conducted. Postimplementation reviews are undertaken for certain projects at least a year after the facility/asset has been operating to test if the actual results match the estimates included in the approved investment proposal. It also tests whether the objectives of the project have been met. Environmental Management of the Investment Plan Managing the environment responsibly, and caring for the communities in which we operate, while building and operating a world-class transport infrastructure are key principles of our sustainability framework and environmental management principles. In support of the above, Transnet is committed to ensuring compliance with all legislation, including all environmental legislation of the country. During the year environmental risk audits and compliance audits were conducted by the Department of Environmental Affairs (DEA), Transnet Internal Audit, as well as Group Compliance. The formal reports from DEA are awaited. The Environmental Impact Assessment (EIA) regulations (National Environmental Management Act) were amended and promulgated in July The risk of not obtaining environmental authorisations and other permits (such as water use licences) for the infrastructure projects as well as operational activities which are listed in terms of the EIA regulations, within specific timeframes, remains a risk to Transnet. The good working relationship that has been established with the DEA continued through regular meetings and engagements. Together with other state-owned companies, Transnet 109

15 Capital investment report (continued) continued to make contributions to the SOC Fund that was established between the DEA and the Department of Public Enterprises to build capacity of the DEA in the field of environmental impact management. A water use licence (WUL) for the reverse osmosis plant is awaited from the Department of Water Affairs. The NMPP submitted WUL applications and amendments to existing permits have been issued. Through the Capital investment programme, several opportunities were created for pursuing best practice in the field of environmental management. Several of the initiatives have been put in place to either comply with conditions as set out in the environmental authorisations or to ensure best practice. Two examples are provided below: system for monitoring and controlling rodents inside an international Port of Call. authorisation for the NMPP was that Transnet had to develop a biodiversity offset for the wetlands that were impacted by the construction of Terminal 2 of the pipeline, and specifically the habitat of the endangered giant bull frog that would be impacted on by the location of Terminal 2. Sustainable development and environmental criteria, as well as climate change considerations have been incorporated into the Transnet Infrastructure Plan. Risks impacting the Capital investment programme An investment plan of R110,6 billion over the next five years is susceptible to many risks. The key risks are presented below together with mitigating actions. Continuous monitoring of the investment portfolio will result in the table below being amended to address different risks that may arise during the course of the roll out. Risks Increase in the total cost of projects: Increases have a significant impact on the viability of the infrastructure facilities constructed. Pressure is also put on the cash flows and key financial ratios of the Company as more debt may need to be raised or cash needs to be generated from operations to fund the increase. Mitigating plans This risk is mitigated by the conducting of front-end loading (FEL) studies and the gateway review process conducted at the end of each FEL study which assists in firming up of cost estimates to a greater level of accuracy; Steering committees have been established to monitor performance of major projects. Funding: The roll out of an investment plan of this magnitude and the current general sentiment in the capital markets might create challenges around funding. It may become difficult to procure and/or obtain funding at a reasonable cost. Transnet has adopted a pre-funding strategy and is pursuing the participation of the private sector (PSPs) to fund some of the Company s infrastructure. This will be a key focus area going forward. Foreign exchange rate fluctuations: Locomotives, tugs and port handling equipment have a significant import component and is therefore subject to exchange rate fluctuation. Transnet has a hedging strategy to cover exchange rate volatility. Skills: Many of the projects in the investment portfolio require specialised engineering, procurement, contract and construction management skills which are in scarce supply. The development of project structures with manning requirements, implementation of a scheme to retain skilled resources and to maintain partnerships with identified reputable managing contractors mitigates this risk. Constructing in an operational area: With the exception of the Ngqura Port and Container Terminal most of our infrastructure investment rollout takes place in existing operational areas. Access to the work site by contractors may be affected as operations may require that the site is not readily available for development. Proper planning for the release of the project site by operations is a mechanism to reduce risk. 110 Transnet SOC Ltd Integrated Annual Report 2011

16 Risks Condition of assets being refurbished: The assets being refurbished may be in a worse condition than initially expected which results in increased costs and a longer period that the asset is out of service. Mitigating plans Proper asset lifecycle management, major overhaul and service intervention plans to be put in place to address this risk. Environmental impact assessment (EIA): These studies tend to run on for long periods affecting the project start date and hence its completion. The project could as a result of a drawn out EIA process commence later and cost more than anticipated and may not be ready in time to take up the increase in volume demand which will lead to bottlenecks in the logistics chain. Greater engagement with Government and other stakeholders is being undertaken for a more effective EIA application process. The Transnet Infrastructure Plan (TIP) now provides a greater horizon for projects to be executed and should reduce pressure on tight timeframes for project development. Returns/volumes not materialising: There is always a risk that the volumes anticipated when the project was motivated do not materialise. The Company could end up with semi-productive assets for which funding still has to be serviced and settled. This risk is mitigated through a robust capital approval process before the commencement of projects (Divisional Investment Committees, Group Investment Committee, Executive Committee as well as the Board of Directors and Shareholder according to the delegations of authority and the Materiality and Significance Framework as agreed with the Shareholder). In some cases entering into take or pay contracts with clients before the investment is made also mitigates this risk. Safety on project sites. Safety is a key focus area for Transnet. Long-term injuryfree hours is an indicator used to measure safety performance and a culture and awareness of safety are key behaviours management is trying to embed throughout the organisation. Electricity: The impact of electricity, specifically load shedding will have major consequences for both Transnet who uses electricity extensively in all operations (rail, port and pipeline) and in the construction of assets and clients that utilise electricity in the mining and general production process. Transnet will continue to engage with Eskom with regard to electricity infrastructure. Electricity initiatives throughout the organisation have been adopted so that consumption takes place at the most efficient levels. Productivity linked to capacity: The capacity of certain facilities has been simulated at a defined level of productivity eg the capacity of the Ngqura Container Terminal is TEUs per annum is based on a gross crane move per hour rate of 28. If this efficiency rate is not achieved in operations then the capacity of the terminal will be lower than the initial design which impacts on revenue and could result in bottlenecks. Stronger first line management and performance and reward systems are being explored to address productivity. Economic regulation: Two of Transnet s divisions (National Ports Authority and Pipelines) are for the most part regulated in terms of the tariffs that can be charged to clients. Investing in an environment where planned returns can be reduced by changes in regulation and regulatory policies is challenging as funders for major bulk infrastructure require a fair return and security of their funds advanced to Transnet. Transnet will continue engaging constructively with the Regulator to create an environment conducive for investment for the benefit of South Africa. 111