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Transnet PSP presentation

02 July 2015

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Workshop objectives

• Context of collaboration

• Snap-shot of Transnet

• What is Transnet’s PSP strategy

• Transnet PSP Portfolio

• Transnet PSP considerations

• Key success factors

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TRANSNET AUDITED RESULTS 2014

• Capital liquidity in the region will be a challenge • Regional growth has been downgraded and risks are rising • New investment landscape is pushing investment to lower risk

sectors and lower risk countries will outperform

After the commodity boom – defining Africa’s new growth path

As a country we are achieving the highest spend on economic infrastructure in 25 years

5 years to 2013: R1.02trillion (6.7%) 4 years to 2017: R1.08trillion (6.2%) 34% on Transport and Logistics (R339.2 bn) JP Landman

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Emerging markets: Who goes where? F’2015 Export Strength (right)

vs

Export Character (below)

Current Account Deficit

($bn)

Current Account Surplus

($bn)

Commodity Exporter

Brasil –89

Indonesia –24

South Africa –20 Colombia -16

Ukraine –9

Peru –9

Chile –5

Argentina –5

Saudi Arabia +120

Russia +54

UAE +22

Kuwait +16

Qatar +10

Venezuela +10

Manufactured Goods

Exporter

Turkey –46

Mexico -25

India –23

Poland –7

Egypt –4

Pakistan –3

Romania –1

China +197 Hungary +6

Taiwan +65 Slovenia 6€

South Korea +47 Greece +2€

Singapore +44 Slovakia 0€

Malaysia +18 Czech +0

Philippines +10

Vietnam +10

Thailand +10

Hong Kong +8

Bangladesh +0 Sources: Economist , 10.1.2015,

Trading Economics, HSBC

Nigeria

Angola

Algeria

Iran

Kazakhstan

Iraq Commodities – negative impact Dollar – negative impact

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Are blocs and $ GDP growth correlated?

South East

South West

North East

Chart

Source:

Emerging

Advisors

Group

Dollar GDP growth potential (index score)

North West

South Africa

Where we are

Where we want to be requires effective and efficient logistics

High growth

economies

Michael Power

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Our challenges are not unique

UK freight rail is a modern success (Chairman CILT Rail Freight Forum) • UK has realised a 70% increase in freight traffic and 50% increase in train length – resulting in a 76% decrease

in CO2 emissions and millions of lorry’s taken off the road. • It is a myth full train loads of bulk over long distances are necessary – Intermodal has doubled in the last 10

years and aggregate traffic is 17% of all freight • There is increasing movement of deep sea containers away from Ports; Tesco is utilising rail for distribution

and store deliveries

In comparison • European rail has not been successful and seen a 50% reduction in freight • Despite a standard ERTMS signalling system, 4 incompatible versions run across Europe. Varying and

prohibitive access charges remain a problem for cabotage operators

South African Story…..there are pro’s and con’s of having a single freight transport utility • Transnet will remain an integrated supplier of logistics and will invest billions of Rands into upgrading South African Rail

and Port systems • This does support and optimise a single set of standards, focused investment and strategic planning • Transnet is implementing leading technology and striving to achieve the best country outcome through seamless supply

chains and lower logistics costs

Some key challenges…… • Road and Rail are competing on commercial as well as structural terms (Public vs Private, volumes and distance ) • Rail investment will increase logistics costs if volume density is not achieved on Rail – pushed onto end user • Transnet is not well positioned to compete on the first and last mile, so must integrate with LSP’s to be successful. • Private Sector is better integrated with the market and largely controls the customer • Public Sector lacks customer focus and decision making is too slow

Take away: public private collaboration is critical for SA economic growth ‘ ‘ and the opportunities out way the challenges

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Transnet SOC Limited

• 16 Cargo Terminals operating across 7 SA ports

Supporting

• 8 Commercial ports along 2 798 km of coastline

• 20 500 km of railway track

• +200 million tons of freight

• General freight & 2 heavy haul export lines

• Support TFR for rolling stock and TPT for lifting equipment maintenance

• 18 billion litres of petroleum products and gas through 3 000 km of pipelines, mainly to Gauteng

• R300 billion of capital investments over 7 years

• CSI in Education, Health, Sport, Arts & Agriculture

Capital Projects Transnet

Foundation

Transnet Pipelines

(TPL)

Transnet Engineering

(TE)

Transnet Freight Rail

(TFR)

Transnet Port Terminals

(TPT)

Transnet National Ports

Authority (TNPA)

Pipelines Rail Ports

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Commodity split (%)

8%

Other

5%

4%

Iron Ore

Bulk 1%

Break-bulk GFB

Maritime Containers

6%

6%

Manganese Ore

14%

Export coal

43%

Piped products

12%

Transnet MDS targets R312bn investment

Transnet has embarked on a strategy to renew the Rail and Port infrastructure capability in the country and in so doing reduce cost of logistics as a % of transportable GDP and stimulate economic activity – encapsulated in the MDS

National Transnet Investment planning targets include 7yr (2021) 30yr (2044) Sustaining and renewal R159 bn - Expansion LTPF R396 bn R910bn unfunded/PSP requirement R243 bn -

Clear National requirement to ensure effective and efficient spend 1. Broaden the base of capital for infrastructure investment

2. Unlock Value through alternate procurement methodology

3. Increase Skills, focus, speed and capacity

4. Significantly impact developmental and social issues

5. Mitigate risk through transfer to lowest NPC

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Transnet PSP delivery is embedded in the Transnet Shareholder

Compact and Ministerial Statement of Strategic Intent

Transnet PSP strategy was initiated as a funding mechanism in support of the MDS corporate plan.

PSP strategy has evolved to incorporate the following broader objectives: • Leverage Private capital at a national level to broaden

available investment in infrastructure

• Expedite national infrastructure development through additional capacity, skills and procurement options in support of Transnet’s own initiatives

• Diversify and mitigate Transnet risk, especially in areas of: Market risk and EPC risk (on time and on budget projects)

• Achieve greater economic multipliers in the areas of social development, transformation and empowerment

Transnet Successes in this regard:

• PSP strategy embedded in Ministerial Statement of intent, shareholder compact and corporate plan

• Transnet PSP Policy approved in 2013 (2015 revision)

• Further PSP methodology and best practice governance developed in 2014/15

• Transnet PSP portfolio defined; over 30 opportunities under investigation, at value of over R110bn.

• PSP transactions progressing, with 4 projects scheduled for market offering in 2015/16

• The recent partnering of Transnet and DBSA for PSP project funding and preparation will add additional skills and capacity to expedite delivery.

Proposed Durban Dig-out Port: 2025

Durban Agri Port: 2015

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PSP Portfolio is segmented into key functional focus areas with number

of projects under consideration

Key PSP portfolio focus areas based on volume drivers

Key PSP projects progressed for active analysis or approval

i. Investment Property Portfolio

ii. LNG to Power and National Gas infrastructure

iii. Operation Phakisa

i. Waterberg Consolidation

ii. Funding for Heavy Haul coal link

iii. Manganese CUF in Mamatwan - Northern Cape

1. Bulk commodities (coal, iron ore and manganese)

i. Durban Dig Out Port (DDOP) – KZN

ii. Tambo Springs intermodal hub - Gauteng 2. Intermodal (focus on containers)

i. Branch lines – Northern Cape; Western Cape; KZN; Free State

ii. Specialised rolling stock

iii. Domestic bulk loading Terminals – Mpumalanga, Rustenberg 3. Rail (general freight services)

i. Agri-port Durban - KZN

ii. East London Grain Elevators – Eastern Cape

iii. Liquid Fuel Terminals – KZN and Gauteng 4. Ports (multi-purpose services)

i. Botswana – Waterberg link

ii. Maputo corridor and Port

iii. Regional intermodal hubs 5. Regional integration

6. Non-core but complementary to MDS

How we are responding to these challenges?

Improved Reporting transparency &

robustness

Enhanced PSP methodology &

Governance

A market win (An early adopter)

Robust engagement & discussion

• Practice notes • Transnet Policy • National Policy

• Reporting • Portfolio

management

• Stakeholder management internal & external

• 4 projects targeted for market bidding in 2015

1 2 3 4

Four focus areas established

Transnet PSP policy

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Life cycle Overview

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Project Selection

and Portfolio Development

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Business Case

Development

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Risk Transfer

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Public Sector Comparator

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Procurement and

Adjudication

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Contract Management

Outline of practice notes for PSP projects

Ministerial Framework on PSP (DPE and DOT aligned in their approach)

Other areas of PSP within SOE’s and Transport in general that will

leverage similar benefits to economic growth and

development

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Transnet success factors for PSP

1) Political Vision and Project Sponsorship is aligned and supports PSP project delivery

• Ministerial support embedded through Shareholder Compact and Corporate Plan • Close working relationship with DPE and DOT established on PSP development. • PFMA pre-notification being done with DPE to ensure early political alignment. • Key for early identification of Project Sponsors

2) Best practice methodology in place to ensure risk transfer to PSP and minimise retained/ residual Transnet risk • Transnet must consider long term impact of PSP portfolio on business sustainability • PSP projects are implemented either due to Transnet affordability constraints or enhanced value delivery over the

life-cycle of the project due to the inherent advantages of the private sector positioning. • Transnet will often have to be the “funder of last resort” or step in funder if the PSP fails. • What is the level of aggregated residual risk to Transnet across the PSP portfolio. • PSP methodology is challenging the traditional public procurement frameworks – this take time.

3) Private Sector project appetite will be determined by process integrity, certainty and transparency • Delivery interface with the market determines Private Sector confidence in the process. Transnet PSP projects will

compete for Private capital and capacity with other domestic and off-shore investment opportunities. • PSP methodology must ensure strong focus on transaction preparation prior to market engagement.

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Key Success factors to enable PSP transactions

Practical focus areas to expedite collaboration 1) Political Vision and Project Sponsorship (per asset class/ per project)

• Public commitment is evident in plenty NDP; PICC; SIP’s; Phakisa; Policy; Comments • Execution is further encumbered by perception of risk and confidence in process to achieve outcomes – IPP success • Private sector must also demonstrate vision and strategy – not just first mover advantage

2) Bankable and credit worthy project off-take

• Effective capital spend resulting in affordable services to the end user • Prioritisation of capital and projects based on economic impact – low hanging fruit • Need innovative ways to securitise projects through market off-take – distribution of market risk between pvt and public

3) Robust methodology and approval process

• Greater commercial and project discipline required

• Understanding of the public policy positions and constraints 4) Practical first steps – with a strategic goal in mind

• Practical debate between public and private as to what is not working

• At risk opportunities are plentiful (private sidings, interface agreements, capacity bookings)

• Industry coordination allows easier interface between public Monopoly and fragmented competitive market

• First mover relationship does not supersede requirement for open market bidding

Take away: PSP is a life-cycle transaction to provide a service at the lowest ’ NPC rather than buying an asset.

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Thank-you