Freight Rail 2018 · in an integrated network to improve train plan execution and service delivery...

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Freight Rail 2018

Highlights• Transnet Freight Rail has continued to actively seek

opportunities to service existing customers and new customers, which has resulted in a 3,3% volume growth compared to 2,3% in the previous financial year. This was despite the subdued economic climate characterised by low GDP growth and lower than expected commodity prices. This commendable performance was accomplished through collaboration with customers and value chain partners as well as dedication and a continuous improvement culture embedded in accountability among employees.

• Export coal line railed 77 mt against the target of 76 mt. This reflects a historic tonnage performance achievement for this corridor since its opening in 1977, and surpasses the record of 76,2 mt achieved in 2015.

• General freight tonnages recorded 3,1% growth against the previous financial year (well above the national economic growth rate). This is evidence of the successful implementation of the road-to-rail strategy, which targets rail-friendly traffic in various market segments to grow rail volumes and market share. General freight commodities that contributed to this growth included the following:

– Non-ferrous metals achieved a 115% improvement, recording volumes of 2,8 mt against the target of 1,3 mt.

– The Manganese portfolio achieved a record throughput of 13,7 mt against a target of 11,1 mt. This represents an improvement of 23,7% against target and growth of 13,5% year on year (2017: 12,1 mt).

– The Containers and Automotive business unit exceeded the volume target of 9,0 mt by railing 9,8 mt, reflecting an improvement of 9,0% against target and growth of 7,4% year on year (2017: 9,2 mt).

– Improvements in containers moved on key national corridors resulted in growth of 6% year on year, from 698 000 TEUs in 2017 to 740 000 TEUs in 2018 (representing an additional 42 000 TEUs railed).

– The Agriculture and Bulk Liquids business unit reflected growth of 16,3% in the grain sector by transporting 2,1 mt of grain in 2018 (2017: 1,8 mt) against a target of 1,9 mt.

• A total of 215 new general freight locomotives were deployed into operations.

• The coveted awards and certifications that Freight Rail received during the 2018 financial year are in recognition of the development of innovative rail solutions, successful strategic partnerships and implementation of best practice. These include the following four Logistics Achiever Awards (this is the first time since 2002 that Freight Rail has been a recipient of these highly prestigious and important industry awards):

– Platinum awards: � Saldanha Offloading Terminal: for the implementation of a

logistics solution enabling the railing of manganese in skiptainers on the export iron ore line to facilitate transfer to the multi-purpose terminal at Saldanha for export.

� Ceres Rail Development: for reconstruction of the branch line in co-operation with a local private developer, the introduction of a new train service for containerised fruit exports to the Port of Cape Town and the launch of a steam train tourism venture.

– Gold Awards: � Postmasburg manganese common user facility: for the

development of a common user facility at Postmasburg to enable access to rail for emerging miners to cost effectively rail commodities to the port for export.

� ArcelorMittal South Africa Steel Hub: for a rail-based logistics solution partnership between ArcelorMittal, Barloworld Logistics and Freight Rail, based in Isando for the distribution of finished steel products.

2TRANSNET Freight Rail

• Top Employer accreditation for the third consecutive year, proof of collaborative efforts over the years to transform the organisations culture.

• The certificate of accreditation for Track Technology Management in accordance with SANS-ISO/IEC 17025:2005.

• The ISO 9001:2015 Quality Management Systems accreditation certificate for Freight Rail’s Rehabilitation, Mmanagement and Emergencies unit.

• In September 2018, Transnet Freight Rail hosted the 11th International Heavy Haul Association (IHHA) Conference, which was declared the most successful conference in the 40-year history of IHHA, with a record of more than 1 200 delegates from over 39 countries across the world. Freight Rail’s General Manager: Capital Planning was elected the Global Chairperson of the IHHA’s Board of Directors, the first South African to be elected to this position. IHHA has 10 member countries that transport bulk freight with heavy and long trains, and is focused on promoting technical and operational excellence. Transnet is currently spearheading the development of a Global Heavy Haul Railway Vision 2030-Under the 4th Industrial Revolution, with all the other IHHA member countries. The outcome of this study will be presented and discussed at the next IHHA Conference to be held in Norway, June 2019.

• Risk and safety management highlights for the year included: – Successful certification according to the new, stringent

ISO 14001:2015 Environmental Management System, cementing the commitment to enhance Freight Rail’s environmental and sustainability best practices.

– With Freight Rail’s development of a mobile risk app, the organisation launched into the digital sphere of risk management in line with the digital thrust of the Transnet 4.0 Strategy. The app facilitates the seamless process of undertaking risk assessments, resulting in improved risk-based decision-making in the operational areas and improved levels of safety.

– The Business Continuity Institute recognised Freight Rail’s Business Management Framework, processes and resilience in ensuring successful recovery in the event of a business interruption.

– The introduction of the Transnet Integrated Management Approach and the development of 18 related system procedures will ensure alignment of systems at Transnet level and improvement of operational efficiencies.

– The development of the risk management culture measuring tools to transition from the risk management maturity index that is process driven to an enterprise approach that influences employee behaviour.

– The successful launch of the Rail Occurrence Investigation Programme in partnership with the University of Pretoria. Twenty employees completed the programme and graduated in May 2018. The objective of this programme is to create a team of qualified experts who will assist in establishing the root causes of rail occurrences and thereby prevent injury, loss of life and damage to assets.

• Outreach programmeThrough the two Phelophepa healthcare trains, Transnet has provided primary healthcare services to rural communities along Transnet’s strategic rail corridors. In the last financial year, Transnet was able to touch the lives of more than 400 000 people in eight of South Africa’s nine provinces (excluding Gauteng). Each Phelophepa train has 19 coaches and offers services through the following clinics: general health and education, dental, eye, psychology and pharmacy. In addition, Phelophepa provides oncology services that include education, screening, diagnosis, early management and prevention of cancer conditions. The education, screening and management of common chronic conditions, such as diabetes and hypertension, are also included in the services provided.

The table below details the beneficiaries assisted and health services provided through the Phelophepa outreach programme:

Category

Number of beneficiaries

impacted

Total patients reached on board 420 000

Total patients reached – outreach 517 684

Prescriptions/scripts 61 078

Eye Clinic – total patients 51 262

Eye Clinic – spectacles dispensed 64 246

Dental Clinic – total patients 22 768

Health Clinic – total patients 74 030

Edu-Clinic – number of trained community members 1 466

Students for experiential learning 2 500

Local labour 5 390

By working with the National and District Department of Health, the programme has contributed to improving the quality of primary healthcare and addressing the triple challenges of poverty, unemployment and inequality. From inception, the Phelophepa programme has brought highly sought after relief to more than 23 million people. Transnet offers the services as a responsible corporate citizen that cares for the communities in which the Company operates. In every station temporary employment is offered to retired nursing staff and to local people for general work services. Freight Rail also procures various supplies from local businesses to boost the local economy.

Phelophepa continues to make a modest contribution in offering experiential learning opportunities to healthcare students as part of their internship programme.

Business overviewFreight Rail is Transnet’s largest Operating Division and strives to be a ‘Top 5’ railway company globally by 2020. The division’s primary business is to provide rail transport of commodities for the export, regional and domestic markets. Freight Rail operates the world-class heavy haul coal and iron ore export lines and is developing the manganese export corridor to heavy haul standards. Freight Rail also transports a broad range of bulk general freight commodities and containerised freight. The division maintains a complex rail network of approximately 31 000 track kilometres (20 900 route kilometres) over which commodities are railed.

The diverse rail network comprises 1 500 kilometres heavy haul lines, and also includes 3 928 kilometres of branch lines that serve as feeders to main lines. The rail network service provides strategic links between ports, terminals and production hubs providing connectivity with Southern African railways to support regional integration. Infrastructure connectivity, coupled with close co-operation with the other Operating Divisions and collaboration with key customers, enables the delivery of freight volumes across value chains.

Freight Rail is in transition from the final year of the seven-year Market Demand Strategy (MDS) to the Transnet 4.0 Strategy. This new strategy will incorporate initiatives for improved operating models, geographic expansion, and market and customer


development. These are intended to be supported by digital technologies that enable connectivity, visibility of data, assets and visibility of information for heightened real-time decision-making. Collaboration and strategic partnerships with customers and logistics service providers are being harnessed to develop innovative integrated logistics solutions that generate improved supply chain value.

Freight Rail is a profitable and sustainable freight railway business, which contributes to the competitiveness of the South African economy. The Operating Division provides rail services to customers in key market segments through six business units: • Agriculture and Bulk Liquids• Coal• Containers and Automotive• Iron Ore and Manganese• Steel and Cement• Mineral Mining and Chrome

The business units operate across geographical operating channels in an integrated network to improve train plan execution and service delivery to customers across the value chain. Commodities are transported across five operation channels, namely:• Cape channel• Coal channel• Natcor channel• Phala channel• Thaba channel

Freight Rail also provides the network for long distance passenger rail services as well as haulage capacity for other private passenger services. TFR continues to operate the prestigious luxury Blue Train.

Geographic spreadThe network extends across South Africa and comprises the heavy haul coal and iron ore export lines, key national corridors over which general freight traffic flows and branch lines.

Freight Rail

Key

Core network

Closed lines

Lifted lines

Branch lines

BOTSWANA

MOZAMBIQUE

SWAZILAND

LESOTHO

NAMIBIA

Sishen

Saldanha

Cape Town

East London

Port ElizabethMosselbaai

Klipplaat

Rosmead

Port Alfred

Cookhouse

Noupoort

Upington

Kakamas

Sakrivier

Calvinia

Hotazel

Aliwal North

Springfontein

Hofmeyer

Maclear

Queenstown

Blaney

Umtata

Port Shepstone

Musina

Durban

Louis Trichardt

Kimberley

Steelpoort

Komatipoort

Phalaborwa

ZebedielaVaalwater

Lephalale

Veertien StromeWarden

Ladysmith

Virginia

Worcester

Witbank

Groenbult

Polokwane

Nakop

Vryburg

Knysna

KoffiefonteinDouglas

De Aar

Hutchinson

Beaufort West

Pudimoe

Mafikeng

Bethlehem

Oudtshoorn

Ermelo

Belmont

Alicedale

Klerksdorp

Kaapmuiden

Harding

Bloemfontein Richards Bay

Pietermaritzburg

Harrismith

Modimolle

Ngqura

Porterville

Prince Alfred Hamlet

Vrede

Marble Hall

Franklin

Makwassie

VermaasOttosdal

Vryheid

Middelwit

Nelspruit

Vereeniging

Kroonstad

Figure 1: Freight Rail network


Regulatory environmentFreight Rail is accountable to all stakeholders under the applicable regulatory requirements and is committed to high standards of integrity. In view of the importance of complying with the ever-increasing regulatory universe, and the increased emphasis placed on the supervision thereof, Freight Rail continues to strive for effective management of regulatory risks.

Ongoing transport economic regulation and rail policy developments could result in substantive changes for the South African transport industry. The Draft White Paper on National Rail Transport Policy has signalled that the Department of Transport (DOT) has a renewed focus on rolling out a high-performance standard gauge national network, and has proposed several changes to the rail institutional structure. These measures, should they become stated Government policy in the final gazetted White Paper on National Rail Transport Policy, will have a significant impact on Transnet, and could present significant implementation challenges.

Transnet will continue to work with the Department of Public Enterprises (DPE), DOT and other relevant departments to ensure that the potentially negative impacts of the rail policy on Transnet are limited, and that the policy strives to support Freight Rail to strategically grow rail services in the country.

The DOT recently released the Draft Road Freight Strategy for engagement with critical stakeholders. This strategy could have a considerable impact on Freight Rail, because it encourages the shift of freight from road to rail as the road situation could become increasingly unsustainable over the medium to long term.

Transnet will continue to work with the DOT and the DPE to ensure that equitable outcomes are arrived at for the land freight transport system as a result of fair policy choices being made in these two policy documents.

The Draft Single Transport Economic Regulation Bill (version 4) presents serious challenges for Freight Rail and Port Terminals’ future commercial sustainability in their current formats. Transnet will therefore continue to request support from the DPE to lobby for more equitable economic regulations between the public entities and private sector companies that Transnet competes with and, in particular, between Freight Rail’s economic regulation versus the road freight industry’s self-regulation. A skewed system of regulation will clearly benefit road transport even further, and preferably must be viewed in terms of a balanced modal approach that is in the national interest.

Performance contextDuring the execution of the MDS, Freight Rail has sought to create capacity in the land freight transport task to enable the transportation of greater tonnages. The year-on-year growth of rail tonnages transported in the 2018 financial year, in excess ofGDP growth, reflects considerable success in the implementation ofthe strategy.

Improvements in tonnages railed, coupled with stringent cost management, contributed to a commendable financial performance.

However, the 2018 operational context was difficult and characterised by a number of challenges, including:• The downgrade of South Africa by the ratings agencies;• Fluctuating and deteriorating commodity prices for chrome,

iron ore and manganese;• Pollution management policies in China which affected some

coal and low-grade magnetite;• Incidents of community unrest impacting Freight Rail operations

in certain areas; and• Extreme weather conditions, including strong winds, heavy

rainfalls and washaways.

Operational performanceOverview of key performance indicators

2017 2018 2018 2019Key performance area and indicator Unit of measure Actual Target Actual Target

Financial sustainability

EBITDA margin % 44,1 46,9 46,8 47,3Operating profit margin % 22,8 21,5 27,6 29,3Gearing % 54,6 53,4 52,2 51,5Net debt to EBITDA times 4,0 3,3 3,4 3,3Return on average total assets – excluding CWIP % 5,8 6,7 7,8 8,9Asset turnover – excluding CWIP times 0,27 0,31 0,28 0,30Cash interest cover times 2,7 2,8 2,9 2,8

Capacity creation and maintenance

Capital expenditure R million 15 746 14 540 17 598 16 387

Operational excellence

Asset utilisation

General freight business Gtkm/Ntkm1 1,62 1,70 1,402 1,392

Export coal Gtkm/Ntkm1 1,55 1,60 1,262 1,262

Export iron ore Gtkm/Ntkm1 1,38 1,40 1,202 1,202

Loco-utilisation

General freight business GTK’000/loco/month 5 509 5 605 4 9172 4 3272

Export coal GTK’000/loco/month 22 983 22 388 18 5472 17 7932

Export iron ore GTK’000/loco/month 57 809 61 322 40 4582 54 5942


2017 2018 2018 2019Key performance area and indicator Unit of measure Actual Target Actual Target

Cycle time

Export coal hours 63 56 62,6 58Iron ore hours 93 76 86,0 68Export manganese hours 162 156 154,9 120

Wagon turnaround time

General freight business 10,1 9,9 10,0 8,5

Density

General freight GTK/Routekm 5,50 6,14 5,152 5,862

Natcor GTK/Routekm 6,33 11,1 9,802 11,112

Capecor GTK/Routekm 3,77 5,98 5,972 6,092

Southcor GTK/Routekm 3,32 5,27 5,752 5,852

Service delivery

On-time departure (average deviation from scheduled times)General freight business minutes (198) 163 (182,1) 152Export coal minutes (40) 45 (58,6) 45Export iron ore minutes (212) 60 (205,4) 60

On-time arrivals (average deviation from scheduled times)General freight business minutes (62) 185 (59,94) 180Export coal minutes (83) 90 (137,27) 90Export iron ore minutes (191,76) 190,0 (141,67) 190,0

Market segment competitiveness

Volume and revenue growth

Commodity classificationGeneral freight business mt 88,1 98,0 90,77 104,2Export coal mt 73,8 76,0 77,02 77,0Export iron ore mt 57,2 60,0 58,52 60,0Total volumes mt 219,1 234,0 226,3 241,2

Tariffs

Year-on-year weighted average R/ton change – General freight business % 1,19 3,10 9,38 5,42

Human capital

Employment equity % 87 88 87,9 88,0Training spend % of personnel cost 1,9 2,7 2,1 3,08Employee turnover % 4,9 5,0 5,0 5,0Employee headcount permanent 27 679 29 223 26 694 28 673

Risk, safety and health

Cost of risk % of revenue 5,8 5,5 5,8 5,5Disabling injury frequency rate rate 0,8 1,0 0,91 1,0Number of safety incidents number 372 294 386 259Number of derailments – Mainline number 81 48 80 42Number of derailments – Shunting number 159 158 158 139

1 GTK in Transnet excludes the weight of the locomotive and is thus equivalent to the American TrailingTonKm.2 The key performance indicators which include distance and mass in their calculations have been rebased, therefore, the 2018 actual cannot be compared to prior

year actuals. The 2018 targets were determined before the rebase. The 2019 targets have also been rebased.


Financial sustainabilityFinancial initiativesInitiatives implemented to achieve financial results included:• New business developments and back-to-rail initiatives to improve revenue performance;• Ongoing implementation of cost-containment initiatives (both capital and operational costs),

given the persistently tough economic conditions;• Optimising yield through commodity mix; and• Exploiting revenue diversification opportunities by developing value-added services,

optimising the property portfolio, telecoms infrastructure surplus capacity, and advertising.

Financial performance reviewYear ended Year ended

31 March 31 March2018 2017 %

Salient features R million R million change

Revenue 43 709 39 114 11,7

– General freight 23 586 20 834 13,2– Export coal 12 022 11 430 5,2– Export iron ore 6 314 5 838 8,1– Other 1 788 1 012 76,7

Operating expenses (23 236) (21 851) 6,3

– Energy costs (4 991) (4 599) 8,5– Maintenance (2 135) (2 473) (13,7)– Materials ( 500) ( 596) (16,0)– Personnel costs (12 573) (11 497) 9,4– Other costs (3 037) (3 064) 0,9

Profit from operations before depreciation, derecognition, amortisation and items listed below (EBITDA) 20 473 17 263 18,6Depreciation, derecognition and amortisation (8 402) (8 728) (3,7)Profit from operations before items listed below 12 071 8 535 41,4Impairments and fair value adjustments (676) (1 298) (47,9)Net finance costs (5 534) (5 712) (3,1)Profit before taxation 5 861 1 525 284,3

Total assets (excluding CWIP) R million 161 088 148 548 8,4

Profitability measures EBITDA margin1 % 46,8 44,1 2,7 Operating margin2 % 27,6 21,8 5,8Return on average total assets (excluding CWIP)3 % 7,8 5,8 2,0Asset turnover (excluding CWIP)4 times 0,28 0,27 0,01Capital investments5 R million 17 598 15 746 11,8Capitalised maintenance expenditure R million 6 784 6 232 8,9

Employees Number of employees (permanent) number 26 694 27 678 (3,6)Revenue per employee Rand 1,64 1,41 15,9

1 EBITDA expressed as a percentage of revenue.2 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of revenue.3 Profit from operations before impairment of assets, fair value adjustments, net finance costs and taxation expressed as a percentage of average total assets

excluding capital work in progress.4 Revenue divided by average total assets excluding capital work in progress.5 Actual capital expenditure (replacement + expansion) excluding borrowing costs and including capitalised finance leases.


Financial performanceRevenueRevenue for the period under review increased by 11,7% to R43,7 billion (2017: R39,1 billion). This is mainly attributable to the 3,3% increase in volumes, complemented by a fair increase in the average R/ton (R186,75 in 2018 compared to R174,95 in 2017). The average 6,7% increase in R/ton was slightly higher than the average CPI (averaged 4,64% over the reporting period), which was mainly attributable to the prioritisation of a high yield commodity mix.

Operating expensesThe year-on year-increase in operating expenses was 6,3%, with costs rising to R23 236 million (2017: R21 851 million). This was achieved despite some above-inflation increases in operating expenses such as fuel and electricity.

Freight Rail’s general cost-containment mindset and consequent actions resulted in significant savings in discretionary spend (i.e. consultancy costs, telecommunication costs, advertising and promotion costs, periodicals and printing costs, travel, accommodation and refreshments) as well as other operating expenses.

EBITDA and operating marginsThe EBITDA margin for the year increased to 46,8% (2017: 44,1%) while Freight Rail’s operating margin rose to 27,6% (2017: 21,8%), reflecting increases of 6,1% and 26,6% respectively. Improvement in these margins is attributable to a significant increase in revenue, while year-on-year operating costs increased to a much lesser extent. In addition, the reduction in depreciation charge following the continued review of useful life of Freight Rail assets impacted positively on the operating margin. In response to a lower-than-budgeted volume performance, Freight Rail continued to implement cost-savings initiatives and reduce discretionary costs, which to some extent mitigated the negative impact of lower revenue on the budgeted profitability margins.

GearingFinancial gearing improved to 52,2% (2017: 54,5%). The improvement of this metric over the two comparative periods is attributable to the slowdown in capital expenditure, resulting in lower long-term borrowings on the back of a 10,8% increase in reserves.

Asset turnover (excluding CWIP)Asset turnover increased to 0,28 times (2017: 0,27 times), despite an 8,4% increase in total assets (excluding capital work-in-progress or CWIP). This is due to the increase in revenue which was higher than the increase in asset base, resulting in a 6,2% improvement in the performance of this measure of asset productivity.

Return on average total assets (excluding CWIP)Return on average total assets increased to 7,8% (2017: 5,8%). Improved performance of this KPI is attributable to an increase in operating profit offsetting the impact of an increase in asset base.

Net debt to EBITDAAs a result of a slight reduction in total long-term borrowings to R69 486 million (2017: R70 871 million) and an increase of 18,6% in EBITDA to R20 472 million (2017: 17 262 million), the net debt to EBITDA ratio improved to 3,4 times (2017: 4,2 times).


Cash interest coverCash interest cover increased to 2,9 times (2017: 2,7 times). The improved performance of this ratio was mainly due to an increase in cash generated from operations after working capital changes, complementing the impact of a 3,1% decrease in finance costs.

Revenue per employeeRevenue per employee increased 15,9% to R1,64 million compared to prior year results (R1,41 million). The significant improvement on this measure was mainly attributable to the year-on-year revenue increase of 11,7%, complemented by a decrease in headcount of permanent employees from 27 678 in the prior year to 26 694 for the year under review. The significant reduction in headcount was partly attributable to the impact of the voluntary severance packages offered in the 2017/18 financial year as well as natural attrition.

Looking aheadAs the business prepares to transition to the Transnet 4.0 Strategy, Freight Rail will strive to improve revenue and overall business performance by:• Accelerating new business development and back-to-rail

initiatives to improve revenue performance;• Implementing initiatives to reshape the core of the business

through cost optimisation of both capital and operational costs in view of persistent tough economic conditions;

• Employing initiatives to optimise yield through commodity mix;• Optimising cash and working capital management;• Implementing initiatives to improve diversified revenue

opportunities, including value–added services such as clearing last mile and warehousing, optimising the property portfolio, telecoms infrastructure surplus capacity, and advertising; and

• Effecting product and market development for future positioning in the logistics markets.

Capacity creationInitiativesContinued implementation of approved capital programmes to sustain and create capacity. Investment was made in key programmes:• Coal 81 mt expansion• Overvaal Tunnel doubling• Manganese expansion• New 1 064 locomotive acquisition, commissioning and

deployment• Wagon build in accordance with customer demand• Infrastructure maintenance plan to assure volumes on identified

corridors

Performance commentaryFreight Rail invested R17,6 billion in the year under review against the original budget of R14,5 billion. This original budget was revised to include additional capex spend, which was primarily due to the following:• Additional maintenance work on the wagon fleet (additional

spend of R1 085 million) and infrastructure (additional spend of R1 024 million) to ensure the availability and reliability of the necessary rolling stock fleet and network to support the achievement of volume targets while complying with safety standards. This was partially offset by underspending R425 million on the locomotive maintenance programmes, which was largely attributable to the introduction of the new fleet and removal of the obsolete and unreliable older fleets.

• Additional work undertaken by original equipment manufacturers on the new locomotive programmes of R572 million against the budget.

• A total of 450 new CR (general purpose mining commodities) and SCL (automotive) wagons for the general freight business as well as 232 new CR13 wagons for the iron ore line were built, costing R889 million. While these were required and assisted in the improvements reflected, they were not originally budgeted for.

As part of the new locomotive programme, Freight Rail received 1 036 locomotives (110 x 19E; 76 x 15E; 50 x 39 200; 203 x 43D; 95 x 20E; 100 x 21E and 402 of the 1 064) as at 31 March 2018. An additional 216 locomotives are due to be delivered in the next financial year.

Approximately 11 000 wagons have been received since the inception of the MDS and 3 300 additional wagons are scheduled to be received over the next five years.

Export coal• The total investment in infrastructure for the year amounted

to R172 million, of which R113 million was for export coal from Waterberg and R59 million was for the Coal 81 programme.

• The export coal line expansion to 81 mtpa was 80,1% complete at 31 March 2018.

• Coal line expansion and sustaining programmes that have been completed, or are nearing completion, include the Coal 81 programme (nearing completion); Continuous Welded Rail Maintenance predictor; and the installation of the ‘On the Fly’ system at the Ermelo Yard Balloon.

• The Waterberg programme is considering infrastructure development to facilitate export coal from Waterberg (Lephalale area) to Richards Bay.

Export iron ore• Total fixed infrastructure investment for the export iron ore

corridor amounted to R57 million in 2018.• The construction of the third tippler at the Port of Saldanha is

under way and is due for completion in early 2020.• The upgrading of power supply infrastructure on the ore line is in

progress. This involves upgrades to four Eskom substations as well as new distribution lines and related infrastructure. The work will be completed in early 2020.

• The construction of a fourth manganese offloading facility at Saldanha will be completed in July 2018, with operations due to commence in August 2018.

General freight• Total investment in the general freight business’ compliance and

enabling works amounted to R322 million in 2018.• Significant works or programmes in progress include:

– Electrical upgrade works on Natcor; – Roll out of electronic interlocking systems in Bellville; and – Automating yard points countrywide.

Locomotives• Transnet acquired 219 new locomotives (215 deployed to

operations in the financial year) for the general freight business.• R7,3 billion was spent on locomotive contracts for the period

under review.• In total R1,8 billion was spent during the 2018 financial year to

maintain a fleet of 2 600 locomotives: – Minor overhaul programmes were performed on 169

locomotives (15E, 19E and 18E ) at R392,9 million; – 59 derailed locomotives were repaired at a cost of

R208,5 million;


– General overhaul maintenance programmes were performed on 34 diesel locomotives (35GM and GE, 36GM and GE class locomotives) at R121,8 million;

– R53,3 million was spent on maintenance of coaches (Phelophepa 1 and 2 and The Blue Train);

– Planned and unplanned maintenance of R801 million was spent on locomotives;

– The remaining R197 million was spent on maintenance and repairs required due to incidents including pantograph hook-ups; minor vandalism (cable theft): third-party claims; minor modifications; and minor component change-outs on various locomotives.

WagonsTransnet Freight Rail and Transnet Engineering embarked on a programme to build the following wagons:• 2 500 coal containers to service Eskom power stations;• 300 new CR-13/14 wagons for the iron ore business to service

the shortfall caused by longer turnaround times on trains servicing junior miners that load ore using front-end loaders;

• 86 new SCL wagons for the automotive business; and• 364 CR wagons to be used within the mining sectors to transport

ore from shafts to processing plants, and for servicing the automotive market.

For the 2018 financial year, 1 250 coal containers and 682 wagons were built and received by Freight Rail resulting in a capital investment of R1 billion.

Looking ahead• Continuation of capital programmes in progress, include the

Coal 81 mt expansion and the Overvaal Tunnel doubling.• Wagon-build programme in accordance with market conditions

and validated customer demand.• Continue with the commissioning and deployment of the

remainder of the 1 064 new locomotives.• Implement infrastructure maintenance plans to sustain volumes

on identified sections.

Operational excellenceInitiatives in 2018• Implement refining phases of the channel operations philosophy

to improve end-to-end and pit-to-port flows of freight.• Continuous improvement programmes to improve efficiencies

and reduce waste.• Deployment of On Board Computers (OBCs) on locomotives.• Automation of points in identified yards.• Concentrated monitoring of trains and deviation management.

Performance commentaryContinuous improvement efforts on operational efficiencies have yielded positive results on operational excellence performance indicators.

Locomotive utilisationThe general freight locomotive utilisation performance was due to lower than projected volumes being railed due to customer train cancellations as well as operational factors such as the poor reliability and failure of older locomotives. New locomotives were commissioned into operation and were simultaneously operated along with older locomotives. The operation of both old and new locomotives is a necessary practice to keep the system stable while the process of commissioning new rolling stock into service

is under way before retiring the older locomotives. This does however result in a negative impact on locomotive utilisation performance results.

Freight Rail envisages an improvement in the targeted performance of locomotives in the future due to the gradual retirement of old locomotives from the system. Significant improvement of efficiencies will be realised over the next two to three years, following the full deployment of the new 1 064 locomotives and as the old locomotives are retired.

Export coal achieved a historical record of 77 mt, exceeding volume projections. It is projected that similar coal tonnages will be railed in 2019. Additional and new locomotives are scheduled to be deployed, resulting in the 2019 target being lower than 2018 actual. The 2018 actual for locomotive utilisation cannot be compared to prior year actuals because the mass and distance measurements have been rebased. The locomotive efficiency will be improved in subsequent years as old locomotives are expected to be phased out.

The export iron ore line locomotive utilisation was impacted by lower than projected tonnages recorded due to unforeseen customer cancellations; tippler off-loading challenges; and derailments. The 2018 actual cannot be compared to the prior year actual due to the mass and distance calculations being rebased. A greater target has been set for 2019 to accommodate the new manganese service on the iron ore line, which will further improve locomotive utilisation on this corridor.

Cycle times and wagon turnaround timesThe improvement in the export coal cycle time from 63 hours (2017) to 62,6 hours in 2018 is significant considering that coal was sourced from much further (i.e. Waterberg). This longer distance also explains the deviation from the target of 56 hours.

The actual cycle time for the iron ore line of 86,8 hours in 2018 reflected a significant improvement on prior year (2017: 93 hours). However, the 2018 target of reducing cycle time to 76 hours was not met. The performance for iron ore exceeded the target by a margin of 14,2%. Service disruptions as a result of derailments contributed to resources not being able to turn around as scheduled. This was exacerbated by tippler failures at the Port of Saldanha, as well as customer loading challenges that added to delays at both ends of the supply chain. The 2019 financial year will see heightened focus on continuous improvement and efficiency initiatives to minimise disruptions throughout the channel.

Export manganeseCycle time performance on the Port Elizabeth (PE) manganese corridor continued its performance trajectory from the previous financial year, recording an improvement of 4,4% against the 2017 actual and 0,74% against the 2018 target. The inflow of 23E locomotive sets contributed to the more efficient turnaround of resources on the corridor. Further improvements are anticipated as more 23E sets are allocated to this flow. Cycle time performance was enhanced by an improvement in the offloading performance of the offloading facilities in PE, which can be attributed to the implementation of Lean Six Sigma (LSS) turnaround time projects at the PE bulk terminal and third-party offloader. An improvement on running delays as well as a reduction in speed restrictions added to the lower target performance.

General freight wagon turnaround did not achieve significant improvement year on year and the target of 9,9 days was not met. The Productivity of Wagons programme for the improved management of wagons, which includes encouraging customers to load and offload according to service design times, aims to contribute to wagon turnaround time improvements.


DensityDensity is a function of volumes transported over the rail route network. General freight volumes, although reflecting 3% growth on prior year, were below target due to economic, customer and operational factors. General freight volume performance hindered the achievement of the overall general freight density target.

Density performance on the key corridors was favourably impacted by the growth in numbers of containers transported on these corridors. Container growth recorded was respectively:• NatCor – Additional 49 000 TEUs or 13%• CapeCor – Additional 18 000 TEUs or 39%• SouthCor – Additional 6 000 TEUs or 7% (includes TEUs through

terminals at Port Elizabeth and Ngqura)

On-time Departures (OTD) and Arrivals (OTA)Freight Rail’s adherence to scheduled time performance, on a year-by-year basis continues to improve and reflects management’s commitment to improving the key metric as it directly impacts customer service. The improvement is a culmination of operational discipline; investment in new rolling stock and infrastructure; and the desire to operate to a schedule by all stakeholders.

Worldwide Class I railways have adopted network velocity as a key operating metric that represents the outcome of cycle times, on-time adherence and efficiency improvements. Freight Rail has also adopted this measure, which is a key driver of asset productivity and improved customer service. It measures the speed of trains on the mainline and excludes yard dwell times.

Looking aheadFreight Rail will improve operational efficiencies by:• Redesigning the operations philosophy, service execution across

channels and creating value across Transnet’s Operating Divisions;• Developing and deploying technologies to improve reliability

and predictability;• Embedding continuous improvement processes to improve

efficiency and eliminate waste;• Deploying commercial tools to enhance decision-making;• Implementing approved capital programmes to sustain and

create capacity; and• Implementing safety systems to enhance operations reliability

and achieve best practice safety standards.

Market segment competitivenessInitiatives in 2018A number of initiatives were pursued to improve volume growth and thus market segment competitiveness:• Developing and implementing marketing strategies, pricing and

contracting models to grow identified customers in the general freight business segment;

• Developing common-user facilities to enable customers to access rail services;

• Rolling out digital support tools, marketing tools, and logistics skills to enhance customer value propositions, with a specific focus on container growth;

• Implementing new operating models for terminals and repositioning identified terminals by awarding Terminal Operator Licences;

• Deploying new car wagons to automotive flows and pursuing opportunities with car manufacturers;

• Collaborating with Eskom to increase coal volumes from mines to power stations;

• Continued development of bi-modal technologies;

• Implementing and building on integrated planning, maintenance and safety plans through joint operating centres with neighbouring countries.

Performance commentaryFreight Rail railed a total of 226,3 mt in 2018, representing growth of 3,3% on prior year (2017: 219,1 mt). Despite good growth (above national GDP growth), the actual fell short of the target by 7,7 mt. This was due to challenges experienced in the general freight and iron ore businesses.

Sound operational execution in alignment with ports and the Richards Bay Coal Terminal (RBCT) contributed to an increase in export coal volumes resulting in the target being exceeded, and a record historic annual tonnage of 77 mt being achieved.

Iron ore export volumes fell short of the budget by 2,5%. Tonnages of 58,5 mt were actualised against a target of 60 mt. The export iron ore volume performance was impacted by a number of unfortunate incidents, poor weather conditions that affected the quality of ore and hindered train plan execution, as well as tippler challenges at the Port of Saldanha.

General freight tonnages reflected growth on prior year. The deployment of new locomotives for these services and the implementation of initiatives for a shift of freight traffic to rail began to show results. Record tonnages were achieved in the transportation of manganese (with significant tonnages railed for emerging miners through the common-user facilities at Postmasburg) and chrome for export. Improvements were noted in containers moved on key national corridors. Efforts to further penetrate the automotive market are also reflecting positive signs.

General freight volumes were challenged by issues such as customer plant maintenance and breakdowns, as well as heavy rains that led to rail network washaways, which took time to repair. Initiatives to secure new rail-friendly volumes contributed to mitigating these volume challenges. Less than planned tonnages of coal conveyed for domestic production, export through terminals other than RBCT and to Eskom power stations, as well as bulk liquids, chemicals and cement, detracted from the general freight target achievement.

Freight Rail is placing significant focus on engaging and building relationships with customers and industry. Transnet hosts a series of discussions countrywide, urging conversations around the impact of the 4th Industrial Revolution on the freight logistics industry. Conversations address pertinent topics such as the digitisation in logistics, connectivity and intelligent transport and logistics systems. Leadership summits feature global thought leaders as well as CEOs of more than 150 customers representing mining; agriculture; manufacturing and construction; petroleum; gas; chemical; Fast Moving Consumable Goods; and automotive sectors. The first session was hosted by Freight Rail in Johannesburg.

Freight Rail has also established a customer engagement room used to facilitate in-depth discussions with key customers towards improving the overall customer experience of rail. Engagements with customers has led to the redesign of certain Commercial processes to improve alignment to customer expectations.

Looking ahead• New business development projects and refined operating

models to accelerate the road-to-rail shift in general freight market sectors.

• Develop and implement programmes that enable access to rail for general freight volumes.

• Develop and deploy technologies to support the business in attracting volumes.


Youth employment and development strategy

Employment/ Actual Target Actualdevelopment 2017 2018 2018

Youth employed as % of total employees 42,3 No target 39,9

Youth developed as % of all employees trained

45,1 44,6 42,1(17 651) (14 926)

Looking aheadImprove people skills capacity and capabilities through the establishment of a Rail Corporate University, Supervisory Development Programme, High Potential Programme and performance management for bargaining unit employees.

Health, safety and riskInitiatives for 2018• Embed the Human Factor Management Standard (SANS 3000-4)• Implement OHSAS 18000-1• Intensify Road Map to Safety initiatives

Performance commentaryCost of riskThe cost of risk remained constant at 5,8% and the target of 5,5% was not met. Extraordinary incidents of heavy storms and flooding significantly contributed to an increased cost of risk (relative to revenue), occurring on two occasions May and October 2017), both in KwaZulu-Natal. The cost of risk is also impacted by the increased value of modernised assets.

Disabling injuries frequency rate (DIFR)Freight Rail achieved a DIFR of 0,91, which is better than the global industry benchmark of 1. Although the performance was within the tolerance limit of 1 (one), the DIFR increase from 0,78 in 2017 to 0,91 in 2018 was due to the 294 and 334 disabling injuries experienced in the 2017 and 2018 financial years respectively.

Number of safety incidentsThe overall number of rail incidents increased by 4% year on year. There were 386 incidents in 2018 compared to 272 in 2017. The tolerance limit of 294 was exceeded. The incidents related to ‘Signal Passed at Danger’ which is an area that will receive closer focus.

Number of mainline derailmentsThe number of mainline derailments decreased from 81 in 2017 to 80 in 2018. At 80, the number of incidents exceeded the tolerance target of 48 for 2018.

Number of shunting derailmentsThe number of shunting derailments remained constant at 158 for 2017 and 2018. This performance is an achievement of the tolerance limit that was set for the financial year.

Looking aheadIn the main, 191 occurrences were caused by unsafe acts of employees and 82 by unsafe conditions. The Annual Safety Improvement Plan will be aligned to address inadequate behavioural issues and strengthen compliance through supervision. The driving force to improve safety performance will focus on filling vacancies and providing adequate resources for maintenance.

• Improve operating models and practices for regional volume increase.

• Entrench a customer-centric culture and improvements to the customer experience journey.

Human capitalInitiatives in 2018• Embed the Productivity 2020 programme for improved

employee productivity, utilisation and efficiency.• Develop and implement an operational performance framework

to drive productive operational behaviour.• Implement the Time and Attendance System.• Develop skills and leadership capabilities through the Apprentice,

Rail Operations Management, Customer Service and Coaching and Mentorship programmes.

• Promote the development of skills and competencies in the infrastructure environment through the Engineer-in-Training, Technician-in-Training and Engineering Empowerment programmes.

Performance commentary• Freight Rail ended the 2018 financial year with a permanent

headcount of 26 694 employees. The lower than targeted headcount of 29 223 was due to cost management measures, such as only filling critical operational vacancies and the exits of employees due to natural attrition and those who opted to take the voluntary severance package.

• Freight Rail continued to maintain excellent employment equity results with black employees representing 87,9 % (target: 88%) of the total employee base, thus slightly exceeding the prior year’s representation (2017: 87%). Female employees represented 29% and people with disabilities represented 2,7% of the total employee base

• Training spend in 2018 at 2,1% of personnel cost was higher than the prior year (2017: 1,9%) and below the target of 2,7% due to cost-containment measures with only essential functional, engineering and technical training being carried out.

• Employee turnover remained relatively constant at 5% with a slight increase on the prior year’s actual of 4,9% due to the exit of employees on the voluntary severance packages.

Culture and employee engagement: During the 2018 financial year, various Culture Charter initiatives such as Diversity Dialogues and Employee Engagement sessions were conducted in response to the 2015/16 Culture Charter survey results. Furthermore, an Employee Engagement Culture survey was conducted across the Group from 27 November 2017 to 28 February 2018. Freight Rail exceeded the targeted 40%, with a participation rate of 41,9% (compared to the Transnet average of 37,9%).

Skills development: Freight Rail continued to make excellent strides in skills development with the engineers and technicians on the Engineering Empowerment programme (EEP), and performance for youth employment and development. The progress of these programmes is summarised in the tables below and reflects the contribution of Freight Rail to this key organisational and national objective.

Number of engineers and technicians on the EEP

Actual Target ActualTraining area 2017 2018 2018

Technicians in training 67 200 202

Engineers in training 266 100 100

Young professionals in training 139 194 192


The significant number of level-crossing incidents is continuing due to motor vehicle drivers not adhering to stop signs at level crossings. Freight Rail will continue to conduct awareness campaigns and implement the new Railway Safety Regulator requirements. Technological interventions will also be considered to address this global challenge within the rail industry.

Governance and ethicsEffective governance, ethics and enterprise risk management are critical in ensuring the successful transformation of a sustainable rail business.

Freight Rail’s top 11 strategic risks and key mitigating activitiesEffective enterprise risk management (ERM) plays an essential role in ensuring the successful transformation of Transnet into a focused, high-performance rail business. ERM is an integrated process of assessing and responding to all risks, including organisational, project or systemic risks that impact an organisation’s ability to meet its objectives.

The top 11 risks are the most up-to-date identified risks, with appropriate mitigating plans, and are plotted in a risk matrix. Freight Rail’s top 11 risks are listed below, taking into account the inherent risk rating.

No. Risk description Key mitigating activities

1. Financial sustainability risk: Freight Rail’s inability to generate sufficient cash to fund its capital programme and meet its financial obligations

• Evaluate obsolete inventory (older than 18 months) for disposal• Implement the reverse logistics process• Continue efforts on effective working capital management (early collection of debtors

and negotiated payment of creditors)• Develop and implement new controls and procedures to benchmark prices• Implementation of real estate miscellaneous revenue strategy (including milestones)• Develop and implement a process and framework for take or pay, including the penalty

clauses

2. Regulatory risk: Commercial Pricing Risk (Competition Act, No 89 of 1998)

• Full analysis of Freight Rail’s prices and pricing practices to be conducted• Full implementation of customer survey results and recommendations• Test Freight Rail’s historical pricing practices and establish potential risk exposure for

the Operating Division• Design and implement optimal pricing practices and structure• Establish business rules and processes to record all pricing-related correspondence

and decisions• Evaluate the current repository and redesign to cater for all information requirements

to satisfy competition-related requirements

3. Operational efficiency and productivity risk: Inability to achieve volume targets

• Implement the Operational Command Centre model focusing on centralised planning, resourcing activities, updating processes and developing structures

• Implement the Productivity of Wagons Programme • Integrate the capital operations expenditure business cases (rolling stock and

infrastructure)• Allocate funding to the profitable flows to protect targeted volume performance• Develop an Integrated Train Plan consistent with the volume mix to achieve the proposed

profitability levels• Monitor the implementation of the Integrated Management System (i.e. symposium,

training, maintenance, inspection, task observation plan, speed monitoring, medical surveillance, audit schedule, management review, human factors management plan, incident investigation reports and action close out), and incorporation of safety performance targets

• Proactively engage with key customers to decrease and manage customer train cancellations

4. Information and communications technology (ICT) risk: Inability to support MDS volume growth with existing ICT assets

• Full implementation of the ICT roadmap• Rationalise the current systems available to reduce the duplication of systems• Assess network capacity and provide connectivity (bandwidth) to enable access to the

business intelligence and analytics report• Create a fully funded research and development department in IT and identify

opportunities for digitalisation

5. Safety risk: Inability to provide and to sustain a safe operational working environment for employees

• Implement and monitor the symposium, training, maintenance, inspection, task observation, speed monitoring, medical surveillance, audit schedule and management review plans

• Implement and monitor the Human Factors Management Plan in relation to the human factors in design, physical environmental factors, and the close out of Railway Safety Regulator audit findings related to human factors management

• Incorporate safety performance targets in the Operating Division’s strategic performance objectives

• Continue with the Road 2 Safety maintenance interventions plans


No. Risk description Key mitigating activities

6. People risk: Inability to mobilise and engage employees to achieve the objectives of the Transnet 4.0 Strategy

• Customise health and wellness service offering to cater to the unique profile of the Freight Rail employees

• Develop integrated systems for tracking and raising awareness on all available health and wellness service offerings

• Develop and implement a Learning and Development Strategy• Develop and implement an Integrated Career Development programme• Implement inspirational leadership and iBELONG

7. Environmental risk: The effects of climate change on rail operations and the impact of rail operations on the environment

• Develop and implement Freight Rail’s Climate Change and Mitigation Strategy• Issue extreme weather conditions warnings to the business and monitor implementation

of the Summer and Winter Preparedness Plans• Determine the rehabilitation quantum for unused quarries and borrow-pits• Monitor compliance to regulatory requirements and the EMPs at high-risk leased facilities

at Iron Ore and Manganese, Agriculture and Bulk Liquids, Coal, Mineral Mining and Chrome, Steel and Cement, and Container and Automotive

• Continue ad hoc clean-up of resurfacing asbestos and use derelict mines as disposal/landfill sites

8. Security risk: Impact of security-related incidents

• Full implementation of the Security Strategy• Continuous identification of hot spot areas and allocation of resources• Engage the local government, community policing forum structures and other law

enforcement agencies within the impacted areas• Procure the services of a service provider to be deployed in the identified high-risk areas

when necessary• Continuous enforcement of the Legal Succession Act (arrests) and weekly analysis of

crime trends• Install intrusion detection systems along the rails

9. Capital programme risk: Inability to execute the entire capital programme with R14,5 billion as per the 2016/17 MDS targets – budget reduced due to economic downturn

• Integrate the Copex business cases (rolling stock and infrastructure)• Revise the allocation of the R5,2 billion capitalised maintenance budget to wagons

(R2,3 billion), locomotives (R1,5 billion) and infrastructure (R1,7 billion) to ensure protection of profitable tonnages

• Prioritise maintenance activities of high-risk areas and introduce train speed restrictions• Technology management laboratories to acquire the SANAS accreditation and develop and

implement a quality assurance process for perway material, which will be based on the perway material specifications

• Adopt integrated quality forum for different 1 064 locomotive programmes• Prioritise profit-yielding projects and safety and compliance business requirements

10. Contract management risk: Ineffective contract management

• Review and ensure adherence to the Lease Management Framework• Renegotiate historical leases• Review/update annually and sign rates schedules by March of each year• Review business agreements every three years• Develop a regulatory universe applicable to each contract• Develop a risk register for each contract management process

11. Market growth risk: Inability to sustain and attract volumes

• Continue with the implementation and maintenance of the Consolidation of Hubs Strategy (warehousing and other logistics services)

• New business development to explore options for credit facilities and to assist customers during the on-boarding process, as and when required

• Develop action plans to address deviations from the integrated pricing model and follow up on implementation thereof

• Establish a Demand Management Committee, on a quarterly basis, for a more accurate forecast

• Track and monitor customer service action plans, addressing the customer satisfaction survey results and complaints


Opportunities

• Freight Rail will be investigating opportunities for private sector participation. These may include participation in:

– The development of common-user facilities; – Logistics hubs and terminal development; – Rail systems investment to build regional connectivity –

SwaziRail Link, Botswana Link and Waterberg Heavy Haul expansion;

– Concession operations and rehabilitation of branch lines; and – Bimodal technologies to grow volumes through intermodal

solutions.• Back-to-rail projects for volume growth in various sectors.• Continuation with new business developments in the fruit and

FMCG sectors.• Regional corridor development in co-operation with Transnet

International Holdings.• Continued regional volume growth through close collaboration

with neighbouring countries’ railways.• Building competitive supply chains enabled by 4th Industrial

Revolution technologies with an immediate focus on the heavy haul lines.


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Freight Rail 2018 · in an integrated network to improve train plan execution and service delivery...

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