Building competitive rail - port solutions

www.pwc.com

Dr Andrew Shaw

Innovation in Transnet Conference

21 April 2016 Midrand

Driving Innovation in Transnet

www.pwc.co.za

1 International railways – Driving integration

Page 2

USA rail trendsUS railroads performed exceedingly well during the ‘renaissance’ of the 2000s. 70 % of domestically produced automobiles, 70 % of coal delivered to power plants, and 35 % of grain now moved by rail*.

Source: PwC – US Transportation & logistics sector trends, July 2014, *RAIL TRANSPORTATION Research Brief. Sustainability Accounting Standards Board, Sep 2014 Page 3

• Standardisation of container sizes,

• High terminal-handling efficiencies have leading to

faster loading times,

• Point-to-point distribution though working with road

freight providers,

• Boosting productivity of existing track, including

double-stacking containers, double track, and using

distributed power which enable longer trains and fuel

cost savings

• Intermodal freight now comprise 41 % of rail

revenue*, and has one of the best growth outlooks of

all rail categories.

• Economies of scale, rail market dominance and

highway congestion making rail intermodal likely to

take more share from trucking.

• Certain railroads such as BNSF and UNP tend to

benefit in this market from longer lengths of haul,

double-stacking and more track. Further growth can

be expected in cross-border intermodal container

traffic.

Efficiency initiatives

Intermodal Growth

PwC

Inland terminals as points of freight consolidation and transfer

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Source Interempresasus, 2010, China's Transportation System and Plans for the Future, USFHA, 2004, Rodrigue & Notteboom, 2012, Dry Ports in European and North American Intermodal Rail Systems

Europe China USA

Rail accessibility to gateway

seaports,

Inland terminals have evolved to

incorporate logistic zones,

Strong influence of EU policy for

rail integration and rail

deregulation,

Government often subsidises

inland terminals to attract industry

and improve rail modal share,

Point-to-point shuttle trains (40-95

TEU) dominate mainlines.

Strong container based export

demand through largest global

ports serving post-panamax

vessels,

Operated by a number of state

owned railway companies, at

national and smaller railways at

regional level,

Inland terminals located within

proximity o large industrial

centers.

Inland terminals often sited at

historic inland rail interchange

points,

Terminals have attracted third

party logistical, warehouses and

distribution centres,

Strongly driven by 8 large private

railroad companies,

Arrangements can include up to 4

parties between railroads &

shippers to improve service

offering to customers.

The ‘paperless’ railwayU.S. shippers are driving integration between truckers, smaller railroads and Class I's. The focus is on accountability, reliability, better customer service — integrated across a seamless supply chain and providing “real time” visibility

• More rail freight moves on predictable

schedules,

• Railways have had greater demand

for and ability to set and negotiate

rates and work with other parties

Customer

Technology

Rail

• Innovative real time Internet technologies,

• Supply chain integration technologies rapidly

improving,

• Technologies aligning more closely to internal

company value chains

• Smaller carriers and shippers are able to integrate

their disparate processes and create an efficient &

seamless transportation network

• Customers expect a lot more from

their LSPs & railways,

• Shippers and carriers find it easier to

integrate their disparate processes &

link seamlessly to others,

Seamless communication -between railways &

shippers/customers, often using open

platforms such as the Internet

Transportation management -rail and intermodal operations

solutions

Revenue accounting & revenue

share between multiple parties,

including customer service

applications for billing

Rail planning & equipment

management solutions,

Shipment tracking – via internet

interface that provides visibility,

enabling customers/LSP’s to manage

a rail shipment at any point in time,

as well as access and view all

shipments en route

Newer developments – Support

to signal & communication assets,

equipment repair billing and

inventory management.

Drivers for change What’s on offer

Source: PwC analysis and O'Reilly Jan 2004 “The Evolution of the Paperless Railroad”Page 7

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2Road versus rail competition in South Africa

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PwC

MDS Turnaround Driving Volumes Back to Rail

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• Forecast growth in freight on this corridor from 45 Bill Ton-km (2014) to 113 Bill Ton-km (2045) (Transnet Group Planning, 2015),

• Rail intermodal traffic has increased substantially (Transnet Group Planning, 2015):

- From 4 trains per day in 2011 to 24 trains per day in 2015,

- Average transit time reduced from 30 hours to 22 hours

Natcor/N3 Corridor

Source: Transnet MDS Strategy 2012

• Road continues to carry the majority of freight (approximately 78% in Ton Kilometres) on the N3/Natcor corridor.

• Transnet is targeting a shift in rail model share on the N3/Natcor from the current 22% to 39% over the next 30 years. This shift will represent approximately 60% of all rail addressable volumes (RAM) on the corridor.

PwC

South African Road Freight – What has changed?

Interlinks able to carry 40 and

20-foot container combinations and curtain-sides

provide a 30% volume uplift

Double lane – estimated travel time 8 hours

40-foot container maximum

Many sections single lane – estimated travel

time 18 hours

Toll cost – R 900 per one-way tripToll cost – R0

Simpler logistics requirements:

• Point to point,

• Largely non-containerised,

• Low prevalence of DC’s

• City Deep industrial dominance.

Complex logistics requirements:

• Point to multiple points,

• Containerised or de-consolidated cargo,

• High prevalence of DC’s & consolidation/de-

consolidation points spread across Gauteng.

2010s1980s

Page 8

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3The decision of which mode to use?

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PwC

Market sounding reflects responses of supply chain challenges with rail

Container

Vessel

Ship to

shoreTPT

stack

Rail

stack

Rail

haulage

Rail

stack

Truck

haulage

Distrib

utionRetail/

factory

De-

consolid

ation

DCTruck

haulage

Typical container import supply-chain

Stack time neutral but could

favour rail

Key area of lost time

Reliability of service

Customers don’t know where box is

Key area of lost time

Customer service poorCost of last-mile truck haulage

makes rail tariff uncompetitive

Not close enough to terminal

Cost of last-mile truck

haulage makes rail tariff

uncompetitive

Terminal not close enough to

final market

Space to build DC close to rail

terminal limited

Cost of last-mile truck

haulage makes rail

tariff uncompetitive

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PwC

The importance of rail terminal locations

• The market makes freight logistics decisions based on the relative competitiveness of the entire logistics supply chain. It does not tend to fragment these decisions into modal choices relating to specific elements of the supply chain,

• The fundamental question therefore becomes whether prospective supply chains including the terminal can become more competitive than the supply chains that exclude the terminal

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PwC

The competition is intense (an example*)…

Rail transport

Port terminal

Last Mile

De-stuffing

Port terminal

Road Transport

R 8 to 9,000/TEU

R 7 to 750/ Pallet

R 9 to R10,000/TEU

R 8 to 850/Pallet

16%

48%

36%

18%

41%

41%

*Based on an indicative 2015 example of consumer goods moved from Durban to Gauteng

Consolidated intermodal Direct Routing

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4Creating rail friendly solutions

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PwC

Build market share by integrating Transnet into the customer freight value chain

Create alignment between key value dimensions of strategic partners in the supply chain, including third party providers and at customer interfaces

Align pricing and service design to customer needs.

Look for opportunities to align rail network to the supply chain of customers,

Consider warehouse & inventory holding needs of customers,

Upstream and downstream integration with third party suppliers,

Consider outsourcing areas better achieved by others,

Alignment & integration between internal business functions,

Analytical capabilities to support supply chain risk & management functions,

Standardise & simplify internal processes and align to partners and customers.

Maximise rail asset utilisation

Maximise port asset utilization

Maximize terminal utilization

Maximise asset utilization of partners such as road haulers

Create KPI’s aligned to customer needs of the complete rail service offering

KPI’s are tracked and understood across Transnet functional departments

Align investment and operational improvements to customer needs, for example:

1.Reduce overall transit time, including time in terminal,

2.Improve security,

3.Improve customer interface,

4.Provide real-time track and trace.

Create mitigation processes to address disruptions,

Align disruption responses to performance management responses,

Align disruption mitigations to third party providers.

Customer Service

Supply Chain network design

Asset Utilisation

Performance management

Mitigation against disruption

1. Improve yield management

2. Competitively position price

3. Long terms contracts with partners

Adapted from: MITforum/PwC, PwC Supply Chain Strategies

2013, 10 minutes on strategic supply chain management

Page 19

PwC

Some ideas of possible actions to improve Transnet market share

15

Re-consider who your customer could be

Diversify pricing and service mix

Improve Transnet interfaces

Technology upgrade unlocks the introduction of new work practices, including

improved condition-based maintenance and delivery of the locomotive

deployment plan.

Reconsider how terminals are operated

Reconsider how and where terminals are operated

Consider outsourcing the terminal and customer interface,

Bring the customers to the terminals – Consider add-on-activities at

terminals such as stuffing, de-stuffing, warehousing, preferential access

to terminals by large adjoining customers,

Look for un-utilised sidings in Gauteng’s industrial areas and create a

potential dedicated rail warehouse model with just a few large

customers,

Create an easily accessible list of accredited last-mile road haulers.

1

3

4

2

Reconsider who owns the customer:

• LSPs may bring customers you don’t have,

• Wholesale or other models to sell capacity

Change the approach to pricing box moves, consider:

• Differential pricing and yield management,

• Long term contracts with Shipping lines and LSPs, and

• Consider incentivising freight forwarders to attract traffic to rail.

Improve the Durban Port–Rail interface and price the TFR-TPT interface to

attract customers to rail.

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