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Transnet SOC Ltd Integrated Annual Report 201196
Capital investment report
Transnet SOC Ltd Integrated Annual Report 201198
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.
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 investment report
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 12 900 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.
*Includes
intercompany
eliminations and
other adjustments.
Capital investments: 2011
(R billion)
Rail 12,5*
Ports 2,9
Pipelines 6,1
(%)
Rail 58,3*
Ports 13,5
Pipelines 28,2
Port of Richards Bay.
99
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 2011.
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 2012. 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.* Other includes
break-bulk,
automotives and
investments to
support all sectors
mentioned above
* Other includes
break-bulk, dry bulk,
automotives and
investments to
support all sectors
mentioned above
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%
Port Terminals capital investment by sector (%)
Containers 50,6%
Bulk 45,2%
Other* 4,2%
Transnet SOC Ltd Integrated Annual Report 2011100
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 2012. 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.
101
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 2012.
Of the 32 Class 15E locomotives, 25 locomotives
are planned to be delivered in 2013 and seven
locomotives are planned for delivery in 2014.
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
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:
Mega projects
Estimated total
costs (ETC)R million
2011R million
Spendingsince
inceptionto 2011
R million
Iron ore line capacity expansion to 41mt: Rail 4 105 424 2 700
Iron ore line capacity expansion to 41mt: Ports 1 264 32 1 187
Iron ore line capacity expansion to 47mt: Rail 3 190 866 2 592
Iron ore line capacity expansion to 47mt: Ports 1 225 157 879
Iron ore line capacity expansion to 61mt: Rail 3 722 1 437 1 834
Iron ore line capacity expansion to 61mt: Ports 567 79 333
Acquisition of 32 Class 15E locomotives for the iron ore line 2 000 268 268
Coal line expansion to beyond 63mt 3 824 414 831
Coal line expansion: Quantum Leap: Smaller projects to expedite creation of capacity
882 796 796
Coal line expansion to 81mt 5 100 174 174
Acquisition of 110 dual voltage locomotives for the coal line 3 405 925 2 116
Capitalisation of infrastructure maintenance 11 038# 1 265 3 236
Capitalisation of locomotive maintenance 8 885# 2 317 2 355
Capitalisation of wagon maintenance 8 700# 2 370 7 171
Acquisition of 100 new GE diesel electric locomotives 2 314 334 771
Construction of the Port of Ngqura 3 492 123 3 083
Ngqura Container Terminal 7 900* 461 4 842
Cape Town Container expansion 4 375* 741 2 697
Durban Harbour entrance channel widening and deepening 3 360 54 2 826
Reengineering of Durban Container Terminal 1 802 268 1 319
Reconstruction of sheet pile quay walls at Maydon Wharf 1 594 4 25
New Multi-Product Pipeline (NMPP)^ 23 407 5 612 11 588
# Future rolling five-year plan: 2012 – 2016
* ETC being revised
^ Investment in the NMPP represents a concentration risk to Transnet and the Company is exploring options to mitigate
the risk.
Transnet SOC Ltd Integrated Annual Report 2011102
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 410 000 TEUs in the
current year. The option to dredge the full two
berths was approved in 2010 and the contractor
commenced work in February 2011. Ngqura
Container Terminal is behind schedule and the first
phase of the project is planned for completion by
February 2012. The dredging of the full two berths
will result in capacity of the terminal increasing to
800 000 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 920 000
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.
103
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, pump-
stations 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 2013.
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 2011. 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 2013.
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.
Manganese stockpiles at the Port of Port Elizabeth.
Transnet SOC Ltd Integrated Annual Report 2011104
Capital investment report (continued)
Transnet’s rolling Capital investment plan: 2012 – 2016
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 Totalfive years
R million2012
R million2013
R million2014
R million2015
R million2016
R million
Freight Rail 14 693 13 521 13 301 11 564 10 624 63 703
Rail Engineering 445 364 290 250 230 1 579
National Ports Authority
2 444 3 281 7 032 5 157 5 319 23 233
Port Terminals 1 686 960 741 711 933 5 031
Pipelines 6 113 3 827 2 894 656 1 561 15 051
Specialist Units 478 443 350 365 362 1 998
Transnet Group* 25 859 22 396 24 608 18 703 19 029 110 595
Note: Investment Plan approved in February 2011.
* 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.
Replacement and expansionary investments(R billion )
Expansion (37%)*
Replacement (63%)
20162015201420132012
12
,1
13
,8
7,8
14
,6
9,7
14
,9
5,9
12
,8
5,9
13
,1
* 34% of expansionary projects will create additional
volumes, the other 3% will fulfil other strategic objectives
(social, human capital, efficiency improvement).
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.
Commodity view (%)
General Freight 35
Export coal 13
Export iron ore 9
Containers 14
Piped products 12
Break-bulk 2
Bulk 2
Other* 13
* Other includes investments that support commodities
that may span across the above sectors eg tugs and
dredges support all commodities transported.
105
*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 Totalfive years
R million2012
R million2013
R million2014
R million2015
R million2016
R million
General Freight business 7 657 7 668 9 160 7 620 6 904 39 009
Export coal line 3 554 3 208 2 722 2 638 2 375 14 498
Export iron ore line 3 482 2 645 1 418 1 306 1 345 10 196
Total 14 693 13 521 13 301 11 564 10 624 63 703
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 2014. 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 Totalfive years
R million2012
R million2013
R million2014
R million2015
R million2016
R million
Total 445 364 290 250 230 1 579
FIVE-YEAR CAPITAL INVESTMENT PLAN PER MAJOR ASSET CLASS
RAILR million
Land, buildings and infrastructure
21 423
Machinery and equipment
1 944
Locomotives
23 121
Wagons
18 794
TOTAL
65 282
59%
PORTSR million
Land*, buildings and infrastructure
6 422
Machinery and equipment
923
Port facilities
17 883
Floating craft
3 036
TOTAL
28 264
25%
PIPELINES AND OTHERR million
Pipeline networks
13 239
Buildings and structures
745
Machinery and equipment
3 065
TOTAL
17 049
16%
Transnet SOC Ltd Integrated Annual Report 2011106
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 Totalfive years
R million2012
R million2013
R million2014
R million2015
R million2016
R million
Containers 1 092 840 3 338 3 012 2 739 11 021
Dry bulk 56 7 5 – 50 118
Liquid bulk 335 449 433 344 280 1 841
Break-bulk 90 378 617 410 49 1 544
Automotive – – – 34 169 203
Non-commodity specific investments 871 1 607 2 639 1 357 2 032 8 506
Total 2 444 3 281 7 032 5 157 5 319 23 233
Port Terminals
Port Terminals’ major investment categories are set out below:
Target Projections Totalfive years
R million2012
R million2013
R million2014
R million2015
R million2016
R million
Containers 963 627 645 617 850 3 702
Bulk 577 248 20 13 13 871
Break-bulk 79 14 24 40 36 193
Other 66 71 52 41 34 265
Total 1 686 960 741 711 933 5 031
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 Totalfive years
R million2012
R million2013
R million2014
R million2015
R million2016
R million
Total 6 113 3 827 2 894 656 1 561 15 051
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 2012 2013 2014 2015 2016
Freight Rail Locomotives* 86 110 64 40 40
Wagons 1 509 672 736 915 461
National Ports Authority
Tugs 1 2 4 3 1
Dredgers – – – – 1
Pilot boats 2 2 – – –
Port Terminals STS cranes* – 4 2 – 2
Straddles 28 – – 22 24
RMG cranes – 2 2 – –
* Currently being revised.
107
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 five-year 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
Cash interest cover (times)
Investment (R billion)
Minimum Board limit
20162015201420132012
3,2 3,33,4
3,9
4,8
3 times
25,9
22,424,6
18,719,0
Investment/gearing limit
Gearing (%)
Investment (R billion)
Maximum Board limit
20162015201420132012
46,8 46,8 46,4
37,7
50%
25,9
22,4
24,6
18,7 19,0
42,8
Durban Point Car Terminal.
Transnet SOC Ltd Integrated Annual Report 2011108
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.
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:
QUANTUM LEAP STRATEGY
Capital optimisation and
financial management
Reengineering, integration, productivity and efficiency.
Safety, risk and effective governance.
Human capital optimisation.
Commodity
focus
Corridor
focus
Infrastructure
focus
Additional volumes.
Improve operating efficiencies.
Revenue protection.
Safety optimisation/environmental improvement.
Optimise business enterprise offerings (IT).
Optimise social investments.
Optimise human resources.
Transnet’s strategy and strategic objectives are supported by investments across corridors, commodities and infrastructure assets.
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 non-
financial, 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;
109
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. Post-
implementation 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 2010.
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
Transnet SOC Ltd Integrated Annual Report 2011110
Capital investment report (continued)
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 Mitigating plans
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.
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.
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.
111
Risks Mitigating plans
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.
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 injury-free 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 750 000 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.
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