Presented by: Ms Maria Ramos Parliamentary Portfolio Committee TRANSNET STRATEGY AND CHALLENGES 2003/2004 Presented by: Ms Maria Ramos Parliamentary Portfolio Committee Date: 19 November 2003 1 – CSM GCE20031107

AGENDA Background Transnet’s mandate Corporate strategy challenges Strategic objectives – “ 14 point plan” Financial plan Future challenges 2 – CSM GCE20031107

BACKGROUND Who we are: A group of companies Conducting business in the transport and logistics environment With a primary focus on; Transport infrastructure development Logistics solutions provision within the framework of State interests We seek to contribute positively to the lives of all South Africans particularly through trade facilitation Speaker Notes Maintain, retain and expand asset base and honour obligations Invest in the development of it’s own people, to be enabled to operate the transport networks now and in the future To contribute to Africa's development in areas of Transnet’s competencies Delivery of competitive, productive and commercially oriented operations To promote global competitiveness of our customers Ability to levy commercially acceptable prices for the services we render in compliance with government’s macro economic objectives 3 – CSM GCE20031107

TRANSNET’S MANDATE Focus Action Enhance Shareholder value: Improving cash from operations by reducing cost structures and increasing market share as well as efficient asset utilisation Supporting macro economic objectives Develop infrastructure: Integrating transport and logistics systems into a global network of services and products offerings Focus Investment on identified areas Restructure the business: Support and participate in Government’s growth strategy Alignment with strategic objectives of company Continue with transformation: Focus on rationalisation, revitalisation and renewal Ensure good corporate governance: Implementation of King II report Improving systems/reporting NO SPEAKER NOTES SEE SLIDE 4 – CSM GCE20031107

CORPORATE STRATEGY CHALLENGES (2003/04) Financial solvency and investment requirements Impact of restructuring, ongoing transformation and the changing regulatory landscape Human and organizational capital development Speaker Notes: Bullet 1 – Challenge is to proceed with the huge investment programme of R9,7bn and to keep critical ratios such as interest cover and gearing on acceptable levels. Bullet 2 – Impact of restructuring with specific reference to the policy environment e.g. NPA Bill, Pipeline Bill, Ports concessioning etc. Bullet 3 – Competencies to fulfill the focused integrated logistics role, focusing on leadership development and succession planning and retention of critical skills 5 – CSM GCE20031107

TRANSNET’S STRATEGIC OBJECTIVES 2003/2004 “14 POINT PLAN” Increase shareholder value Increase market share Improve profitability Enhance financial management and cost containment Improve customer satisfaction Develop an integrated transport and logistics strategy Improve image and reputation of Transnet Infrastructure development and maintenance Improve safety, security and environmental standards Improve Black Economic Empowerment Comply with Corporate Governance provisions Optimal people development and management Support and participate in Government’s socio-economic growth Implement the Lifestyle Management Programme (HIV/AIDS Management) Speaker Notes: This slide represents 14 key objectives and strategy themes that the company seek to achieve in this financial year. Execution and achievement is varied. Bullet 1 and 3 – Setting stretched targets to improve profitability and cash flow operations that will result in real returns of 5.5 % which is equal to the cost of capital. Start generating value to Shareholder. Bullet 2 – much focus is currently on maintaining market share, the challenge is achieving a balance between a productivity strategy [which focuses on maintenance and survival] and growth strategy [which is driven by the need to increase market share and revenue]. in a growth strategy we shall endeavor to add & retain high value customers . We shall focus on renewed efficiency and effectiveness. Internal transformation plays a vital role. Bullet 4– Focusing on major cost components resulting in saving of 12% against the budget (to date). Bullet 5 – Customer satisfaction albeit far from being satisfied has improved specifically in the Port operations and rail freight environment.most divisions engaged in structured Customer Relations Management –CRM initiatives. The need to understand the needs of our customers and endeavor to satisfy the needs remain paramount. Also important in this regard is the need to ensure that our pricing strategies are fair and allows our customers to be globally competitive Bullet 6 – Transnet vision requires a fundamental shift to two perspectives  integrated logistics across Transnet modes and  designing smarter supply chain and logistics solutions. Transnet is actually involved in developing a National Logistics Strategy. In this process there is very close collaboration with other national efforts such as the Inter-ministerial Integrated Logistics initiative Bullet 7 – Our reputation and image remains critical to achieve the goal of increasing customer and broader stakeholder value. Through various governance, regulatory and social processes we seek to maintain a good reputation by giving attention to sound business practices in environmental, safety and security, employment and community responsibility areas. We continuously seek to manage the company’s multi-brand strategy for the benefit of a focused and coordinated company image. Bullet 8 – Core projects focus on Spoornet rolling stock upgrade; Port infrastructure; Transtel SNO and SAA fleet plan. Bullet 9 – Although Transnet had passenger train derailments and accidents,we continue to put in place stringent standards and compliance measures to ensure safety risk. Bullet 10 – Transnet slightly below it’s target for % spend on BEE. The updating of Transnet’s procurement framework in line with Government’s Procurement policies and SOE’s will positively address this performance target. Bullet 11 – Report audit findings remain a challenge within Transnet and is being addressed by various governance frameworks and measurements. Bullet 12 – Transnet achieved it’s overall target of 48% and 75% respectively of black male and female representation senior management levels.another area that the company is doing well on is that of gender equity. The 3 leadership programmers are nearing conclusion of recognised tertiary institutions. Succession planning exercises took place with the Transnet Board of Directors, CEO’s and Group Executive of 7 divisions. Bullet 13 – The Transnet Foundation focused on various social investment programs. Remarkable progress and achievements are achieved in this area. Bullet 14 – Phase 1 of the programme has been completed, while phase 2 will be concluded before year end. The company’s lifestyle management programme is one of the successes that received national and international recognition. We believe that the programme contributes significantly towards managing risks posed by HIV & AIDS to our business 6 – CSM GCE20031107

BUDGET 2003/04 Speaker Notes: Finance cost in interest bearing debt of R32,6bn Retirement benefits of pensioners prior to 1990 7 – CSM GCE20031107

BUDGET : FUNDING 2003/04 Speaker Notes: 8 – CSM GCE20031107

PERFORMANCE TO DATE (Prelim. Oct’03) Speaker Notes: Revenue R2,4bn below budget (9%) Expenditure R3,0bn below budget (12%) Derivative losses R2,3bn 9 – CSM GCE20031107

SOLVENCY OF TRANSNET Solvency and credit profile of company is deteriorating Critical financial ratio’s are below minimum requirements Interest cover of 1,2 times compare to minimum requirement of 2 times (net profit before finance cost covers finance cost) Gearing (debt as % of capital employed) deteriorated from 58% (02/03) to 65% (03/04) Solvency could impact negatively on investment program (Business risk) Speaker Notes: - Current credit rating BBB+ - Need an interest cover of 3 times - Required gearing = 50% 10 – CSM GCE20031107

INVESTMENT REQUIREMENTS: (NEXT 5 YEARS) Speaker Notes: Investment in Ports (R13,3 bn), Rail (R14,1 bn), Aviation (R4,4 bn), Pipeline (R3,3 bn), Other businesses (R9,6 bn), Approximately 82% of investment is to replace assets and to maintain services. The remaining 18% is to increase capacity/expansion. 11 – CSM GCE20031107

POST RETIREMENT LIABILITIES R bn R bn Pension 4.9 5.5 Medical: SATS 1. 6 1.4 : Employees 0.7 0.7 Speaker Notes: Liabilities i.r.o pensioners before 1/4/1990. Possible solution is DPSA partnership. Closed/ ringfenced funds. A 1% change in interest rates (discount rate) will result in a increase/decrease of approximately R1,5bn on the Pension liability (R5,5bn) 12 – CSM GCE20031107

CAPITAL INADEQUACY DEBT VS EQUITY Speaker Notes: Company undercapitalised since company formation; challenge is to reduce interest bearing debt with approximately R15bn (or to increase equity.) Current gearing = 65% (debt) vs Target gearing of 50% 13 – CSM GCE20031107

TRANSNET CORE CHALLENGES Balance between profitability and socio-economic development imperatives of government Long term financial sustainability Customer focus to satisfy transport and logistic needs Strong code of ethics Efficient and effective organisation Restructuring to meet strategic objectives Speaker Notes: Bullet 1 – To support national transport objectives and economic growth of country as well as to increase value to the Shareholder (acceptable return on investment.) Bullet 2 – Challenge is to proceed with the long term investment plan of approximately R80bn (15 years) that is essential to improve the profitability of the company and to satisfy the needs of all stakeholders. Must improve the credit profile of Company. Bullet 3 – Focus is on: Commercial pricing Stakeholder satisfaction Delight the customer Bullet 4 – A code of ethics that is based on sound business principles that will govern behaviour. These business principles will be guided by good Corporate Governance practices as stipulated by King 2 and various legislation e.g. PFMA. Bullet 5 - To develop sound business strategies with subsequent organisational design and structure. Design appropriate business models, ensure adequate resources. Bullet 6 – The core objective of restructuring is to establish self-sustainable business units that will compete independently within their industries. 14 – CSM GCE20031107

THANK YOU!! 15 – CSM GCE20031107

QUESTIONS & ANSWERS 16 – CSM GCE20031107