Report on Issues Relating to the Potential Relocation of the Port Elizabeth Manganese Terminal and Tank Farm to the

Port of Ngqura

Compiled for the Port Elizabeth Regional Chamber of Commerce

Dr. Crispian Olver May 2008

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm i May 2008 _____________________________________________________________________ CONTENTS Tables ......................................................................................................................................... i Figures ....................................................................................................................................... ii Executive Summary.................................................................................................................. iii 1 Introduction....................................................................................................................... 1 2 Background to proposals for relocation and waterfront ................................................... 1 3 The Port Elizabeth Manganese Terminal.......................................................................... 2 4 The Port Elizabeth tank farm............................................................................................ 6 5 Environmental and health issues associated with manganese terminal and tank farm ..... 9 6 Legislative framework for ports in South Africa............................................................ 11 7 Restructuring within Transnet ........................................................................................ 12 8 Port Development Frameworks and port planning issues............................................... 15 9 The Coega IDZ and the Coega Development Corporation............................................. 20 10 Rail and freight planning issues...................................................................................... 23 11 Plans for the relocation of the manganese terminal to Ngqura ....................................... 25 12 The financial viability of relocating the manganese terminal......................................... 27 13 The Manganese industry in South Africa ....................................................................... 33 14 The future Manganese market ........................................................................................ 36 15 City plans for the development of a waterfront .............................................................. 38 16 Department of Public Enterprises Property Project ........................................................ 41 17 Valuation of the development of a Port Elizabeth waterfront ........................................ 42 18 Multiplier effects of a waterfront development .............................................................. 44 19 The Southernport Developments legal matter and its implications ................................ 46 20 Summary of the Pro’s and Con’s of relocation............................................................... 49 21 Suggested next steps ....................................................................................................... 51 22 References....................................................................................................................... 55

Tables Table 1: Volumes of ore exported through Port of Port Elizabeth, 1991/92 – 2006/07............ 4 Table 2: Projected volumes through Ngqura Port 2010 - 2050 ............................................... 16 Table 3: Summary of estimates of capex for relocation of manganese terminal..................... 28 Table 8: Estimate of total capital costs for upgrade to 6mtpa capacity ................................... 28 Table 4: Annual Capacity Demand and Supply for Port Elizabeth scenario........................... 30 Table 5: Annual Capacity Demand and Supply for Ngqura scenario...................................... 31 Table 6: Programme of capital expenditure for Ngqura and Port Elizabeth ........................... 31 Table 7: Financial viability of Ngqura and Port Elizabeth scenarios ...................................... 32 Table 9: World steel consumption and production by region.................................................. 36 Table 10: Growth rates and manganese content for different materials .................................. 37 Table 11: Current and future manganese ore exports.............................................................. 38 Table 12: Capitalised Property Income (in R’s billion)........................................................... 43 Table 13: Project Returns (in R’s billion) ............................................................................... 44 Table 14: Multipliers used for calculating economic impact of waterfront development....... 45 Table 15: Economic impact of a proposed waterfront development ....................................... 45 Table 16: Action plan and timeline for relocation to Ngqura.................................................. 52

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm ii May 2008 _____________________________________________________________________

Figures Figure 1: Aerial view of the Port Elizabeth manganese terminal and tank farm....................... 3 Figure 2: Port plan for first phase of Ngqura........................................................................... 17 Figure 3: 2050 scenario plan for Port of Ngqura..................................................................... 17 Figure 4: Current layout of Port of Port Elizabeth .................................................................. 18 Figure 5: Future plan for Port of Port Elizabeth with waterfront ............................................ 19 Figure 6: Port expansion plans for the Port of Port Elizabeth ................................................. 20 Figure 7: CDC plans for a ferro-metals cluster in Coega ........................................................ 22 Figure 8: Manganese ore rail line, Hotazel to Port Elizabeth.................................................. 23 Figure 9: Indicative schedule for trains on Hotazel - Port Elizabeth line................................ 24 Figure 10: Layout of manganese stockpile.............................................................................. 26 Figure 11: Schematic representation of manganese ore handling process .............................. 27 Figure 12: World Steel Demand 1945 – 2007......................................................................... 36 Figure 13: MBDA plan for area surrounding Port Elizabeth harbour ..................................... 40 Figure 14: Map of port showing Transnet land involved in Casino license application ......... 47

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm iii May 2008 _____________________________________________________________________ Executive Summary The Port Elizabeth Regional Chamber of Commerce and Industry (PERCCI) commissioned this report in order to analyse the pertinent issues relating to the relocation of the Port Elizabeth manganese ore terminal and tank farm. PERCCI views this relocation as a strategic intervention that will contribute to the overall development of the Ngqura port and the Coega Industrial Development Zone (IDZ), while at the same time enabling a waterfront development to the south of Port Elizabeth harbour. This will unlock the enormous development potential of this land, and significantly boost tourism and job creation in the region. The proposal for the development of a waterfront to the southern side of Port Elizabeth harbour has been the subject of many proposals and discussions over the years. It was mooted by the Burggraaf Committee in 1985 in their investigation into the potential for greater public use of South Africa’s harbours. It was subsequently taken up by Portnet in the 1990’s as a possible income generator to fund the Coega harbour development. More recently, it became the centre piece of the 2020 Vision that was championed by the Nelson Mandela Bay Metropolitan Municipality (NMBM) and the Mandela Bay Development Agency (MBDA). The MBDA prepared a " Master Plan" known as the Strategic Spatial and Implementation Framework (SSIF), which includes a waterfront development on the site of the manganese terminal and tank farm, and a linkage between the CBD and the waterfront. Various port plans have been drawn up by Transnet for Port Elizabeth harbour, some of which include the status quo, and some of which include the relocation of the manganese terminal and tank farm, and a port plan that dedicates the southern side of the port to a waterfront development and the fishing industry. The Department of Public Enterprises (DPE) has championed the use of strategic land adjacent to ports, and has done many of the feasibility studies that are used to motivate for the relocation.

The legal framework for the management of ports in South Africa is created by the National Ports Act, promulgated in 2005. Amongst others, the legislation provides for Port Developments Frameworks to be gazetted, which set out a long term plan for the use and functions of particular ports. The legislation also places a legal obligation on the National Ports Authority (NPA) to ensure that port services are provided equitably to users of the ports. It creates the legal basis for private operators and investors to take responsibility for operating port facilities, which could include the private operation of a manganese terminal. The case for relocating the tank farm once the leases expire in 2014 is overwhelming. There are very serious environmental and safety hazards associated with the current facility, and the costs of addressing these in the current location are prohibitive. The tank farm is inefficiently designed, out of date and beyond its safe lifespan. The oil industry is ready to plan and undertake relocation at their own cost, and this will not impact on Transnet’s balance sheet. They have various workable alternatives to consider, and the supply of petroleum products will not be compromised by relocation in 2014. Retaining the facility on the site opens both Transnet and the oil industry to serious risks of litigation, and exposes the CBD and city population to serious hazards. The relocation of the tank farm should also not be linked to the fate of the manganese terminal, as relocation is warranted in its own right. The Port Elizabeth manganese terminal is antiquated, and poses some serious environmental hazards. It has a capacity to handle 3,6 mtpa of manganese ore, and this capacity is currently being upgraded to 4,2 mtpa. There is a maximum capacity of 6 mtpa due to limitations on the

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm iv May 2008 _____________________________________________________________________ ore berth, and in terms of the original permit. Any growth in manganese ore export beyond this limit will require relocation to Ngqura or another port. The key issue in evaluating the financial viability of the relocation of the manganese terminal is the projected volumes of ore that will be processed by the terminal. The report analyses the manganese industry in South Africa, whose resources are estimated to be approximately 80 percent of total world manganese resources. However, South Africa produces less manganese ore than many other countries, partly due to its higher cost structure and long lines of transportation. The manganese industry in South Africa is dominated by Samancor and Assmang, but a number of new entrants to the market are pushing for increases in export volumes through Port Elizabeth. The overall outlook for manganese demand is good. Manganese is essential in steelmaking and demand for manganese has been rising faster than steel production in recent years. Steel demand is predicted to exceed 6% per annum for the next few years. Specific manganese consumption is growing again, and manganese intensive steel grades will grow faster than average. Non steel applications for manganese are also facing good growth prospects. In general, this means that there are limited downside risks for the next ten to fifteen years. Over the next few years local manganese players plan to increase their exports to 11mtpa, which is well in excess of the available capacity in Port Elizabeth. In order to expand the manganese ore export capacity, significant investments will be needed in upgrading the rail link from Kimberly to Ngqura, in rolling stock, and in the ore terminal. These investments will be needed regardless of whether the terminal remains in Port Elizabeth, or is relocated to Ngqura. The bulk of these costs relate to the rail upgrade and rolling stock. Transnet is currently finalising a feasibility study into the relocation of the Port Elizabeth manganese terminal. This was triggered by an earlier investigation done by DPE, which looked into the financial analysis of the relocation of the manganese terminal. Only the results of this earlier DPE study are available for analysis. The DPE study showed that, if Critical Infrastructure Funding was made available for Ngqura, there was not a significant difference from a commercial point of view between relocating to Ngqura and upgrading the facilities in the current location. A significant increase in the current tariffs was required in order to fund the investments in either scenario, and the industry has raised concerns that these tariffs will render South African exports uncompetitive. The key strategic difference between the two scenarios is that PE cannot realistically expand beyond 6 million tons per annum, making this a hard capacity constraint. The pro’s and con’s of the two scenarios are summarised below: Retention at Port Elizabeth The benefits of retaining the facilities in their current location are that this is business as usual, and no additional effort is required. There are limited capex requirements, and it is generally considered a ‘safe’ option. The risks associated with retention include the adverse environmental, safety and quality of life implications for the city and its population, and the fact that capacity expansion beyond 6mtpa is not possible in Port Elizabeth. The retention will also have the effect of freezing out the new players in the manganese industry, and compromise transformation initiatives in this regard. Ultimately the retention in Port Elizabeth will place a limit on the growth of the manganese ore export market. Relocation to Ngqura The benefits of relocating the terminal to Ngqura include significant economic and enterprise level benefits, and the overall catalytic effect that this will have on development in both Port

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm v May 2008 _____________________________________________________________________ Elizabeth and Ngqura. Ngqura is clearly also a more appropriate location for both the manganese terminal and tank farm. The risks associated with the relocation are that it requires complex integrated planning, and significant capital investment, which are subject to uncertainties about the future market for manganese ore. In addition there are property market risks associated with a very substantial waterfront development, although these will largely be borne by the private sector.

The poor condition of the current manganese ore export terminal is a major issue. The projected increase in manganese ore volumes for export and beneficiation suggests that government and Transnet should be planning on a more ambitious scale. The additional capex that will be required from the NPA and Spoornet for the relocation strategy is sufficiently compensated by the tariff increases paid by the manganese industry, and the net income derived from the released land. While this was estimated to be approximately R4 billion, the Southernport Developments arbitration will have resulted in this amount being reduced. There is also the issue of Transnet not wishing to engage in the property development business. Nevertheless with some careful planning and structuring it should be possible to Transnet to extract a significant portion of this value from a development. The overall benefits of enabling a waterfront development include the direct capital investment, accelerated growth in regional GDP, increased tourism, and the creation of both direct and indirect jobs. The combined tax revenue to Government from such a development further reinforces the economic returns to be derived from the relocation strategy. From the perspective of central government, any grant-based capital subsidy that may be required to place any single SOE in an equivalent economic position is therefore economically justified. The report concludes by exploring the actions and steps that will be required to facilitate the relocation and waterfront development. In order to effect a relocation by 2014, it will be necessary to carefully coordinate a number of complex decision making processes. The institutional arrangements that will be required to coordinate this are analysed.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 1 May 2008 _____________________________________________________________________

1 Introduction The Port Elizabeth Regional Chamber of Commerce and Industry (PERCCI) has undertaken a strategic project to promote the transfer of the existing tank farm and manganese ore terminal from Port Elizabeth Harbour to the Coega IDZ. This will release the existing land, which is occupied by the tank farm and manganese terminal, for commercial development. This project is seen as strategic because it will unlock significant development potential, and massively stimulate the local economy for many decades to come. The relocation of the tank farm and manganese terminal, and the consequent redevelopment of the land as a waterfront, has enormous potential to:

• Boost employment, trade and investment within the NMBM area and adjacent regions.

• Build and enhance the tertiary sector within the region, including tourism and leisure. • Enhance the value of current land assets along the foreshore and adjacent land

holdings, thereby improving municipal rates and taxes and contributing to the municipality’s capacity.

• Enhance municipal infrastructure and the overall efficiency of the city. • Enhance the quality of life of Port Elizabeth’s citizens and improve environmental

quality. • Enhance the Port-City interface and create access for citizens to the unique character

and value of the port as a public asset. All major stakeholders in Port Elizabeth recognise the constraints imposed by the present location of the manganese ore handling facility and oil tank farm to unlocking the development potential of this land. The relocation will also have a positive economic impact on the Port of Ngqura, and the land released by this relocation will have considerably more value through an alternative use as a waterfront development. The purpose of this report is to investigate the issues relating to the relocation of the manganese terminal and tank farm, and in particular issues that will impact on the overall technical and financial viability of the relocation. The report also explores ways in which to release prime property for a mixed use waterfront development, thereby transforming the PE foreshore.

2 Background to proposals for relocation and waterfront The proposal for the development of a waterfront to the southern side of the Port Elizabeth harbour has been around for many years, and has been the dream of many planners within the municipality and the port. In 1985, the then Minister of Transport and Environmental Affairs established an inter-departmental commission of inquiry, known as the Burggraaf Committee, for the purposes of determining the potential for greater public use of South Africa’s harbours. It reported in 1987 that SATS (the predecessor of Transnet) should release land for leisure, recreational, commercial and residential purposes. The report identified the area around King’s Beach as developable, and suggested that a working harbour could be maintained in conjunction with a mixed use area, focussing on tourism, commercial and residential development. In the 1990’s, planners within Portnet and planners working on the Coega IDZ concept identified the development of a Port Elizabeth waterfront as a possible offset to the costs of building a deep water harbour at Ngqura. The proposal included relocating the Port Elizabeth

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 2 May 2008 _____________________________________________________________________ harbour's tanker berth and tank farm and manganese terminal facilities to Coega at a cost of R300-million, a move that would also boost the Coega project's industrial and commercial base and release prime land for the Port Elizabeth Waterfront development. Portnet MD at the time, Rob Childs, indicated that if the Ngqura project went ahead, they would seek to broaden the base of the project by spending an additional R300-million to move the tanker berth and tank farm and manganese terminal from Port Elizabeth to Ngqura. This would create critical mass at Coega and ensure Portnet was not reliant on only one "tenant". In support of the rationale, it was stated that "We would, of course, have to recoup the R300-mllion. By moving the berth, tank farm and terminal, we would not only get rid of an eyesore, but create a Waterfront on the 50ha of prime land which would be released on the Port Elizabeth harbour site." Portnet had developed plans for what it called the Algoa Marina, a waterfront development including commercial, residential, recreational and marina elements. However, these plans had not been developed in a holistic manner, taking account of the inner city development requirements. This project was taken up the previous Mayor of the metropolitan council, Cllr Nceba Faku, who championed an ambitious plan, known as Vision 2020, for the Metropole. Vision 2020 packaged together a number of inner city redevelopment projects with plans to grow the regional economy, boost tourism and create jobs. It included projects such as the Statue of Freedom, the Motherwell Urban Renewal Programme, the Port Elizabeth Harbour re-development and the relocation of the highways in Port Elizabeth. In 2002, the city council commissioned a number of planning studies including a Vision for the Inner City and The Downtown Study which focussed on the Central Business District. Amongst others these studies recommended that the city establish a development agency to champion the key projects identified by the city. The Mandela Bay Development Agency (MBDA) was accordingly established in 2004, and has operated within an inner city “Mandate Area” which covers approximately 1039 hectares. The MBDA commissioned a master plan for the 1039ha Mandate Area, and appointed a consortium including GAPP Architects, KPMG, Metroplan and Urban Dynamics to undertake market research to find out where investment gaps existed in Port Elizabeth’s property market. The master plan identified development potential and proposed a number of large capital projects such as a convention centre. The MBDA has championed these projects in order to revitalise Port Elizabeth’s deteriorating central business district and inner city. These projects have included the development of the southern part of Port Elizabeth’s harbour and the inner city’s Central Hill, Baakens River and Richmond Hill districts. The MBDA’s efforts have been directed to unlocking the southern part of the harbour for non-industrial development, and they have commissioned a number of studies and plans which will be reviewed in this report. These efforts have been given a significant boost through the work of the DPE, which established a property project to facilitate the strategic use of non-core land owned by SOE’s and promote the strategic development of land adjacent to inner cities and ports.

3 The Port Elizabeth Manganese Terminal The manganese ore terminal and storage facility at Port Elizabeth are the property of Transnet National Ports Authority (NPA), and they are operated by Transnet Port Terminals (previously known as South African Port Operations or SAPO). Together with the tank farm, they are situated on Erf 578 to the south of the harbour. The manganese terminal lease

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 3 May 2008 _____________________________________________________________________ provides for renewal terms of 3 years, and it currently expires in March 2009. There is storage capacity for 460 000 tons of ore on site, and a capacity to process up to 3,6 mtpa. This is currently being upgraded to a capacity of 4,2 mtpa at a cost of R770m, although the cost of this may be closer to R1b by the time the upgraded is completed. The upgrade is planned for completion by August 2009. Transnet Capital Projects has indicated tha,t with optimisation of the mechanical handling, this upgrade should allow capacity to be increased to 6mtpa. Manganese ore produced by Assmang and Samancor in the Northern Cape is transported by private rail to Hotazel where the wagons are transferred to the Hotazel-Port Elizabeth railway line. The railing takes approximately 30 hours for the +/- 1100km distance from the mines to the Port Elizabeth harbour. At the harbour, the train is split up into 25 or 50 wagon units and shunted into the terminal marshalling yard. Here various wagon loads are split up per grade and shunted to the wagon tippler where the ore is channelled to the storage bins or directly to the ship by means of conveyor belts. There is no current provision for or serious future consideration of facilities to accommodate the new players in the manganese industry. The layout of the manganese terminal, storage facilities and the adjacent tank farm are shown in the following picture. Figure 1: Aerial view of the Port Elizabeth manganese terminal and tank farm

The port facilities consist of a two-line interconnecting conveyor belt system. From the tippler, the ore is carried either by one or both lines to the storage bins where it is deposited by means of one or two stacker-reclaimers, or directly to the vessel. There are four bins with a total capacity of 460 000 tons. When required for loading, the reclaimers are positioned alongside the required grades and the ore is extracted from the bins back onto the conveyor belts to the outloaders for shipping.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 4 May 2008 _____________________________________________________________________ The manganese terminal and facilities are regarded by the industry as antiquated and even potentially a safety hazard, and they are in serious need of upgrading or replacement. The maximum handing capacity of the terminal at the moment is 3,6 mtpa, and it is already running at about this quantity. The amount of ore processed through the port over the last 16 years has shown a slow and steady growth, but recent global demand has pushed the current facilities to their maximum capacity. Table 1: Volumes of ore exported through Port of Port Elizabeth, 1991/92 – 2006/07

Transnet financial year Ore processed through port in tons

% increase on previous year

1991/92 1 440 006 - 1992/93 1 382 549 - 4.0% 1993/94 1 180 475 - 14.6% 1994/95 1 393 607 18.1% 1995/96 1 762 943 26.5% 1996/97 1 432 403 - 18.7% 1997/98 1 966 789 37.3% 1998/99 1 645 672 - 16.3%

1999/2000 1 596 630 - 3.0% 2000/01 1 745 848 9.3% 2001/02 1 283 348 - 26.5% 2002/03 1 560 146 21.6% 2003/04 2 016 077 29.2% 2004/05 2 705 662 34.2% 2005/06 2 027 357 - 25.1% 2006/07 2 852 982 40.7%

Source: NPA These figures show some year on year fluctuation, but in general a steady trend of approximately 1,5 mtpa up to 2003, after which volumes seem to have increased to a new level of about 2,5 mtpa. The current level of demand will clearly create a further new equilibrium level. Transnet has already taken a decision to make some limited upgrades to the facility in order to create a capacity of 4,2 million tons. It is deemed possible to further increase capacity in the current location up to a maximum capacity of 6 million tons, mainly through optimising mechanical handling. Transnet has indicated that the original permit for the ore terminal permitted a maximum capacity of 6 mtpa, and that in their opinion a new EIA for upgrades to this level is therefore not necessary. This will need to looked at more carefully in the light of the new EIA regulations, as any increase in ore volumes through the port will have deleterious environmental effects, especially in terms of dust. If the upgrade requires an EIA, it will prove problematic due to stakeholder opposition. Upgrades beyond 6 million tons will not be feasible in the current location, as this is the absolute maximum capacity of the ore berth, as well as the upper limit of the existing permit. It is highly unlikely that Transnet would get approval for an EIA for increases in volumes above this amount, even if the berth capacity could be increased. It may be possible to export some limited additional quantities through Durban and Richards Bay ports (a figure of 300 000t though Durban was quoted by Transnet). This could create a maximum possible ceiling of 8 mtpa total ore exports, beyond which relocation to Ngqura or another port will be the only option.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 5 May 2008 _____________________________________________________________________ The NPA engages with Samancor and Assmang in a systematic way to plan future export volumes. They establish 6 year forecasts, which are used as the basis for planning. These forecasts are revised every three years. Transnet has indicated that the current contracts with exporters expire in 2008, and that these contracts are all under renegotiation. The NPA locks exporters into agreements based on these forecasts, with penalties for under-performance against forecast. It is notable that there is no recognition of the news players in the industry. The tariffs for the import and export of manganese through the harbour are set out in the Tariff Book published by the NPA. For manganese ore, these are set at R11.93 for both import and export of break bulk, and at R45.47 for the import and R5.67 for the export of dry bulk in the 2007/08 financial year. The revenues from these tariffs cover the operating costs of the terminal, but they do not cover the capital costs of the terminal, as these were written off many years ago. The tariffs also cover accruals for the future provision of new facilities. NPA has indicated that the manganese terminal is not a high revenue earner for them, especially compared to the adjacent tank farm, and they acknowledge that alternative land uses can produce far higher returns. Transnet and the industry use total channel tariffs as a basis for their negotations – these include tariffs for rail, terminal and port fees. From 1st April 2008 these have been increased to R220 per ton. Transnet has indicated to the industry that these tariffs will increase to R250 per ton to accommodate the upgrade to 4,2mtpa in Port Elizabeth. They estimate that these tariffs will need to increase further to R300 per ton for an upgrade to 6mt in Port Elizabeth. Transnet’s estimates of the tariffs to accommodate the Ngqura relocation are R380 per ton. Transnet has not been transparent about how these fees are calculated, and they seem excessive based the studies described in this document. McClintock and Skinner, based on their revised estimated of the rail and terminal costs, have indicated that in their view a more realistic tariff is R195 per ton for the total channel cost. The key issue for Transnet is whether the relocation of the manganese terminal to Ngqura is commercially viable, as it has implications for the Transnet balance sheet, and will impact on the financials of SAPO, NPA and Spoornet. There are high level capital expenditure estimates available for a relocated facility at Ngqura, which will be explored in further detail later in this document. The NPA has indicated that, in their opinion, there are a number of obstacles to relocating the manganese terminal to Ngqura, which are:

• The volumes of ore processed through the terminal do not yet justify relocation, and relocation should only be considered once predictable ore exports greater than 6 million tons per annum can be expected.

• Even at these volumes the move remains questionable financially, as there is a very limited ability within the manganese industry to accept higher tariffs. NPA estimates a funding gap of between R1b and R2b after factoring in some modest tariff increases.

• There is limited berth capacity at Ngqura, with the aluminium smelter taking up two additional berths. Consequently a manganese terminal will require the expansion of the port, will further capital costs.

• The rail link to Ngqura is also not adequate for moving the manganese ore to the port, and will to be upgraded, further adding to the costs.

• There is a concern that the location of the manganese terminal at Ngqura will lead to contamination of the aluminium smelter, and that the location of these facilities in the same port is not possible.

However, NPA also acknowledge that they face real problems in accommodating the new manganese exporters who are coming on stream, and that the NPA is under a legislative

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 6 May 2008 _____________________________________________________________________ obligation to provide services to these new players. They are also aware of the resistance from many role players to the current location of the facility, and are concerned that an EIA for an extensive upgrade in the PE harbour will be extremely difficult to negotiate.The NPA concerns will be addressed systematically later in the document, but a summary response to these issues is:

• Regarding the volumes of ore, if the new players are taken into account, then the 6 mtpa cut-off point has already been reached.

• Significant cost reductions can be obtained if a phased export facility based on the operations in Durban is constructed. Private operators have already made proposals for this, and are prepared to take the financial risk.

• The investment by Alcan appears to be no longer on the cards, and even if the investment goes ahead, there are ways in which to stagger the investment process so that new berth capacity can be constructed at a later date.

• The costs of upgrading the rail link will need to be incurred regardless of whether the ore is exported via Port Elizabeth or Ngqura. This is not a significant factor in choosing between the two scenarios.

• There is no evidence that contamination of the aluminium smelter is a risk, and the dust from the new ore terminal will be minimised with state of the art dust control measures.

4 The Port Elizabeth tank farm The Port Elizabeth tank farm is located on Erf 578, which is leased from NPA in terms of various lease agreements with the oil companies. These leases were concluded for periods of 20 years, and will expire on or before February 2014. The tank farm consists of 56 storage tanks with an average size of 1,5 to 1,6 million litres. There are two tanks with a capacity of 6 million litres, and one tank with a capacity of 13 million litres. The average height of the tanks is 16m. There are also two 1000m3 LPG gas spheres, which have been recently recommissioned by Easigas and Afrox. The fuel products stored at the tank farm are diesel (AGO), unleaded petrol (ULP95), jet fuel, illuminating paraffin, heavy fuel oil, feedstock and Aldorax. It is estimated that there is a total throughput of fuels within the tank farm in excess of 300 000 cmpa, which are transported out of the terminal by road and rail, and by pipeline to the airport. The tanker berth which serves the tank farm was constructed between 1936 and 1938, and the first fuel storage tanks were completed in 1939. In 1953 the berthing facilities were extended together with further fuel storage areas. There is a jet fuel pipeline which runs up to the airport from the tank farm. It is 4 inches in diameter and 5 km long, and pumps fuel approximately 8 hrs a day. The fuel line runs from the pump station at the North West corner of the tank farm, skirts the western boundary of the tank farm, and runs up the Baakens River valley to the airport. There are safety concerns with the jet fuel pipeline, and it has apparently failed the recent seismic tests. This pipeline is the one element of the tank farm that is not easily relocated to Ngqura, and a special solution will need to be found for it. The core elements of the system are the tanker berth for jet fuel, storage tanks, a pumping station, and fire control equipment. It is possible that jet fuel could be trucked or transported by rail from storage facilities at Ngqura, although there are dangers associated with the movement of such large quantities of fuel through an urban area.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 7 May 2008 _____________________________________________________________________ The tank farm was previously divided up into segments each with their own storage facilities for different petroleum companies. Increasingly, the companies have shared storage capacity and load ramps, and they are now clustered into two groups. Shell and BP share facilities, and process about 800 000 litres per day of all fuel products. Engen, Caltex / Chevron and Total share facilities, and process about 1 million litres of all fuel products per day. There is approximately 21 days of stock available across all the fuel products – this is not deemed sufficient in the current context of fuel shortages and the impact on the economy. Other tank farms have a greater level of cooperation between the companies. For example, in Walvis Bay there is one operating company for the tank farm that manages it on behalf of all the petroleum industry. The most successful of the tank farms is the one in Mossel Bay, which runs at a profit. It is managed by 4 staff, and is supplied by PetroSA. It has a quick replenishment time and high volumes, which drives its profitability. The common-user tank farm concept has proposed in the original feasibility studies for a relocated facility at Coega, which is why a relatively small footprint is still shown in the CDC plans. By comparison the Port Elizabeth tank farm is run quite inefficiently. Shell has 12 staff, Caltex 26 and Total 5, which together with contractors makes for a total staff compliment of approximately 50 people. The use of storage space at the tank farm is also highly inefficient. The local engineers estimate that if an integrated approach to storage was adopted, the total number of tanks required to store the same volumes of fuel would be approximately 18, broken down as follows:

• Diesel 3 tanks • ULP95 4 tanks • Jet fuel 3 tanks • Illuminating paraffin 2 tanks • Heavy fuel oil 3 tanks • Feedstock & Aldorax 3 tanks

The lifespan of a fuel storage tank is estimated to be 35 years in the current environment. The marine environment is associated with much higher levels of corrosion, and this is exacerbated by the ship fed nature of the fuel, which inevitably includes some sea water. The first tanks were built in 1939, and they vary in dates, with the last tanks built in 1963. This means that the current life of the tanks is 45 years and older. The tanks are built with steel plate that varies in thickness from 10mm at the base of the tank to 6mm at the upper rim. Corrosion on the lower plates down to 6 to 8mm is highly likely in some instances, and this poses a serious threat of rupture. The tanks have a bund wall and floor as a secondary containment mechanism in the case of leakage. The SABS standard requires that this secondary containment is impervious and has the capacity to take the full volume of the tank plus 10%. However, most of the bund floors in Port Elizabeth are built with paving stones, and are not impervious. As a consequence, both the primary and secondary containment mechanisms for the tank farm do not meet modern safety and environmental standards. The end result of leakage will be that the fuel ends up in the harbour. The integrity of the tanker berth lines is also suspect. There are two lines of 250mm diameter stretching for approximately 1,5 km to the tank farm. The condition of these lines could be poor. A CIPS test of pipeline integrity has been done recently, but the results are not known.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 8 May 2008 _____________________________________________________________________ Another area of concern is the integrity of the tank farm fire control systems. These are salt water based, and were installed by the predecessor of the Central Energy Fund over 20 years ago. The condition of the fire system is suspect. There has been extensive pollution arising from the tank farm over the years. This includes the following instances:

• The now disused pipeline from the tank farm to the bunkers was corroded and there are a number of points of leakage.

• Previously the sludge from the tanks was simply buried in holes in the ground dug next to the manholes. This practice was quite widespread. The sludge is from leaded fuel, and has a high heavy metals content.

• The load ramps for the tank farm are heavy spill areas, and there have been numerous incidents over the years.

• There are 5 to 6 sites of leakage on the Shell site alone, and probably similar amounts of leakage on the other sites.

It appears that historical estimates of leakage are also routinely underreported. This is partly due to fluctuations in the volume of the oil due to temperature changes – a 1O change in temperature can result in a 10 000 litre difference in volume, making losses as measured by the level in the tank very difficult to estimate. The tank farm leases specify that the improvement to the site will become the property of Transnet once the lease is terminated. Currently the lease for Total is set to expire in 2012, and the lease for the rest of the companies is set to expire in 2014. The industry has been informed by NPA that the lease is not renewable, and they have accordingly been considering their options for relocating. The oil industry has a policy of “product stewardship”, in terms of which they take responsibility for the environmental rehabilitation costs associated with the industry. The industry has therefore committed itself to the environmental rehabilitation of the tank farm on expiry of the lease. The experience of “greening” the Cape Town tank farm has demonstrated some of the difficulties associated with such rehabilitation, including the constant fight against the ingress of water during rehabilitation operations. It has been estimated that the costs in Port Elizabeth could be between 10 and 20 times the cost of the Cape Town rehabilitation. Estimates of the rehabilitation cost vary widely between R500m and R1billion. Kante and Templar consulting engineers have done a preliminary design and costing of a new tank farm on behalf of the industry. As a general guideline, it costs approximately R1 per litre of storage capacity to build a new tank farm. A cost estimate of R550 m was communicated in 2005, although it is not clear how accurate this is. The main issue is that the costs of relocation will be borne by the industry, and a new tank farm will be privately owned and operated. The relocation of the tank farm therefore has no implications for the Transnet balance sheet. The industry understands and accepts storage costs as an essential part of doing business, and has built these into the overall cost structure for petroleum. The industry norm for storage and handling costs is 0.4c per litre. This rate is meant to include provision for capital costs and depreciation, although industry players have indicated that in their view the capital element of this is understated.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 9 May 2008 _____________________________________________________________________ The oil industry has established a relocation forum, which brings together the different companies. The forum is chaired by Mr Nic Titus from Engen, and it plays a facilitatory role with respect to decision making regarding the relocation. One alternative that has been considered by the industry is to do deliveries of fuel from East London, which has some spare storage capacity, and from Mossel Bay, where additional storage capacity can be easily built. However this is not optimal in terms of safety with the volumes of fuel on the road. Theoretically, there is no additional cost associated with this approach, due to compensation levies for inter-zonal transport, although there have been some difficulties associated with accessing this levy in recent years, which may be exacerbated by steadily rising fuel prices. Land for the construction of a new tank farm has been earmarked at Coega, although the distance of 22 km outside Port Elizabeth is not considered optimal. The industry looked at plans to locate the tank farm further inland outside the NPA and CDC areas, but the longer pipelines, booster pumps and additional servitudes made this option unviable. The recent announcement by PetroSA regarding plans to build a refinery on CDC land is significant, as there will inevitably be storage requirements that can be pooled with the industry’s needs. The main issue for the industry is to have adequate advance notice in order to plan for the relocation, and they would like to receive a firm decision from Transnet in this regard. The CDC has already developed plans to provide supporting infrastructure and utility services including electricity, but are concerned about the lack of an integrated approach to planning. There is certain key infrastructure that will need to be provided by NPA, including the liquid fuels berth and pipeline. NPA will need to have a project plan for this, which is coordinated with the project plan for the lessees on the construction of the tank farm, as well as with the plans of CDC, Sasol and PetroSA. The industry has indicated that these complexities mean that, if a new tank farm must be ready by 2014 to coincide with the expiry of the lease, the latest date for an investment decision on the new tank farm is 2009. However, a number of prior agreements will need to be put into place, so an in principle decision to relocate must be taken this year.

5 Environmental and health issues associated with the manganese terminal and tank farm

The environmental issues associated with the current tank farm and manganese terminal and storage facility have been documented in a study undertaken by Enviros Consulting in 2005. A State of the Environment study was commissioned by the MBDA as part of the Statue of Freedom initiative, and it highlighted the main environmental concerns associated with the current facilities. The environmental issues identified in the above report on the tank farm were largely confirmed by the Enviros study. In particular they highlighted the following major spills:

• Next to Tank 32 a spill of 30m3 of 93 octane unleaded fuel. • Tank 5 a spill of 8 m3 of JET A1 due to overfilling of tanks, also resulting in some

damage to the tanks. • Next to Tank 30, a spill of 5000 litres of White Spirit due to pipe corrosion. • Next to the LPG spheres, a seepage of various products including diesel, mogas and

White Spirit amounting to 3000 litres. • Product was also found to be leaking under the jetty at the fishing boat bunkering

jetty.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 10 May 2008 _____________________________________________________________________ There have also been a large number of minor spills approximating 100 litres each, in areas such as the road loading gantry, the rail tank car loading gantry, the inlet discharge manifold number 1 and 2, the boiler house and next to the LPG spheres. The tank farm site and associated facilities are therefore quite considerably polluted. The site runoff currently drains into an underground drainage system, and flows into the harbour via a drain in the southern most part of the harbour. There is also a bund drainage berm and wetland to the south of the tank farm which collects waste water flowing from west to east. The ground water is also very shallow, and it is likely that contamination will remain on the site for considerable periods of time. The Enviros study noted that the tank farm site is in a sensitive location next to the CBD, and therefore that safety controls and emergency procedures need to be stringently adhered to. They recommend that the 1999 UK Control of Major Accident Hazards regulations should apply, and that an independent review and update of the risks associated with the installation should be undertaken. In particular they recommend a review of the external and internal emergency procedures, site security and the potential threat of terrorism, access and proximity control, and ongoing monitoring arrangements. To date these recommendations have not been acted upon, and the failure to do so opens the NPA and the oil companies to litigation. The main environmental hazard associated with the manganese terminal is a significant dust problem, which affects the general public in the direction of the prevailing winds (Summerstrand and suburbs). Particulate air pollution from manganese ore is now associated with a range of effects on health, including effects on respiratory, neurological and cardio-vascular systems. A wide range of medical research backs up these findings, and the research has been documented as part of this study. The WHO has issued guideline values which recognise an exposure limit of 0.15 micrograms per m3 averaged out over a year. The Medical Officer of Health carried out monitoring of the dust in the period 1985 to 1993, and concluded that the dust fall out from the operations was not significant. However, the standards that were being used at the time did not take account of the large body of research on the matter which has become available in the last decade. A spot sample of the dust from the ore terminal was analysed as part of the Enviros study, and it found the presence of trace elements including chromium, copper, nickel, lead, selenium, thallium and zinc. The report recommended that a proper system of monitoring be put in place, so that public health concerns can be allayed. The Enviros report concluded that contamination of the site by the tank farm and manganese terminal probably includes:

• Hydro-carbon contamination, including poly-aromatic hydrocarbons, of soil at the tank farm, with free product layers on the local water table, dissolved and emulsified hydrocarbons in the groundwater, a smear zone through tidal action, and the escape of volatile gases.

• Heavy metal contamination from the manganese ore storage facilities, which, while relatively immobile and low risk, will require physical isolation and coverage with clean material.

• Contamination of estuarine silts from both the above sources and discharged ballast. The Enviros report makes various recommendations regarding remediation of the site, which will involve quite extensive operations to deal with contaminated soil and groundwater. They indicate that an integrated approach to the whole site should be followed in order to reduce

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 11 May 2008 _____________________________________________________________________ costs. They also recommend a thorough risk based site assessment. The decommissioning process should be very carefully carried out, and a phased clean up run in parallel with the overall design and construction of the development. Lastly they recommend a careful system of validation monitoring in order to ensure that the risks arsing from residual contamination have been adequately addressed.

6 Legislative framework for ports in South Africa The new framework for the management of ports in South Africa is created by the National Ports Act, promulgated in 2005. In terms of the Act all the ports and their associated assets are transferred from the National Ports Authority of South Africa, a division of Transnet, to a newly created subsidiary company of Transnet known as the National Ports Authority (Pty) Ltd. This newly created subsidiary has its own Board and decision making structures, and is governed by its own legislation. In practice the NPA is the same organisation, although governed by a different legislative framework. The aim of the legislation was to update the regulatory framework for ports in South Africa, and create a clear delimitation of authority between the NPA, the Transport Minister and the Public Enterprises Minister. The Act aims to promote the development of an effective and productive South African ports industry. It also sets out to enhance transparency in the management of ports, and separate port operations from the landlord function within ports. Lastly the Act aims to facilitate private sector involvement and participation in port activities, which could be significant for the future operation of a manganese terminal at Ngqura. The main functions of the newly mandated National Ports Authority set out in the legislation are to own and manage ports to ensure their efficient and economic functioning. The Act specifies that the NPA must plan, provide, maintain and improve port infrastructure. It must also control land use within ports, and has the power to lease land under conditions that it may determine. The NPA must prepare a port development framework plan for each port, which must reflect the NPA’s policy for port development and land use within the port. The NPA is obliged to facilitate the building and exploitation of the infrastructure of ports, and regulate and control development within ports, in accordance with approved port development framework plans. The legislation places a number of obligations on the NPA which are significant for the purposes of this study. Firstly, it requires the NPA to remain financially autonomous, which means that the NPA will seek to ensure that new investment decisions are commercially viable. The Act also requires the NPA to ensure that port users have efficient access to the port system, and it must satisfy all reasonable demands for port services and facilities. In terms of port decisions, the Act requires the NPA to look at biophysical, social and economic issues in an integrated way in making decisions regarding port development and operations. The decision making authority in NPA is the Board, and amongst others the Board must approve all port reform measures, including concession agreements, and it must approve the sale, acquisition and long-term lease of property in ports. The Act specifically indicates that the NPA can encourage and facilitate private sector investments and participation in the provision of port services and facilities. This would allow, for example, a privately operated manganese terminal to be built at Ngqura. The Act provides for agreements with the private sector regarding port operations and services. The NPA can enter into agreements with private companies in order to design, construct, rehabilitate, develop, finance, maintain or operate a port terminal or port facility. These

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 12 May 2008 _____________________________________________________________________ agreements with private operators must allow the NPA to monitor and review performance with the operation of the terminal or facility. The agreements must also be awarded through a “procedure that is fair, equitable, transparent, competitive and cost-effective”. The Act provides for licenses to be issued by the NPA for private operators, and the terms and conditions of the license to be set out in the license. However Transnet are not obliged to bring in private port operators. In discussion with Transnet Capital Projects, it was clearly indicated that Transnet would not favour a privately operated ore terminal. The NPA is given the power to change the use to which immovable property may be put in order to improve the efficiency and effectiveness of the operations of the port, and it can direct the lessees and lawful occupiers of the property to alter the use to a new use. If the terms of a long-term lease which existed before this Act are substantially prejudicial to the operation of a port, the Authority can also direct that the applicable terms be renegotiated in order to remove the prejudice. These clauses may be significant if NPA needs to exit any arrangements relating the current tank farm and manganese terminal in Port Elizabeth. The Act includes provisions to boost the cooperation between NPA, municipalities and other government agencies (this would include, for example, the CDC). It obliges all organs of state to work together to ensure the effective management of all ports. It obliges the National Ports Authority to conclude a memorandum of understanding with the relevant organs of state to give effect to this co-operation, and it provides for the Minister to then publish this memorandum in the government gazette. The Act establishes a procedure for amending the boundaries of ports, which may be important for a potential waterfront development to the south of the PE harbour, as the port boundaries will undoubtedly need to be amended. The Minister of Transport can review, vary or extend the boundaries of ports after consulting the NPA and obtaining Cabinet approval. The Minister must consult with the municipality concerned if the amendment affects the municipal boundaries. The Minister is also obliged to follow an open and transparent process, which must include a viability study, and a strategic environmental impact assessment. There are implications of these provisions for Ngqura, where the NPA may require additional land currently owned by the CDC. The Act also establishes an independent ports regulatory body, known as the Ports Regulator, which exercises economic regulation of the ports system in line with government’s strategic objectives. The Ports Regulator is intended to promote equity of access to ports and their facilities and services. It can hear appeals and complaints and investigate complaints. It must also consider proposed tariffs of the Authority. This mechanism for approving tariffs will be important for the establishment of a new manganese terminal at Ngqura. Concerns have been raised regarding the ability of such a regulator to seriously challenge the current practices of Transnet.

7 Restructuring within Transnet The central decision maker with regard to the relocation of the manganese terminal and tank farm is Transnet, and it important to reflect briefly on some of the developments within Transnet, as this has implications for the outcome of a decision on relocation. Transnet has recently been through a major process of restructuring, designed to refocus the company on its core business of freight logistics. The main pillars of the Transnet corporate strategy have been stated as:

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 13 May 2008 _____________________________________________________________________

• Redirecting the business; • Restructuring the balance sheet; • Improving risk management and adherence to high standards of corporate

governance; and • Revitalising human capital.

Transnet intends playing a major role in enabling the economy to grow at 6%, in line with Government’s Accelerated and Shared Growth Initiative of SA (ASGISA). All the Transnet assets or businesses that do not support the strategy of building a world-class freight transport company are being sold, either to Government or the private sector. Transnet’s core or continuing businesses have been defined as:

• Transnet Freight Rail (previously known as Spoornet), the freight rail division; • Transnet National Ports Authority (NPA), which fulfils the landlord function for

South Africa’s port system; • Transnet Port Terminals (previously known as South African Port Operations or

SAPO), which operates the nation’s leading ports; • Transnet Pipelines (previously known as Petronet), the fuel and gas pipeline business;

Transnet Rail Engineering (previously known as Transwerk), the rolling stock maintenance division.

Transnet has undertaken a far-reaching business reengineering programme to build Transnet’s core business units into efficient, profitable and customer-oriented entities. The reengineering programme focused on unlocking synergies and improving interfaces between rail and ports, thereby growing Transnet’s market share and profitability. The programme is known as Vulindlela, and will run over several years. Vulindlela has consolidated all of Transnet’s internal reengineering and efficiency improvement initiatives, and has been focused on:

• The optimisation of Transnet Freight Rail’s iron ore line, the general freight business and the coal line;

• Improving maintenance practices and culture; • Containing costs, simplifying processes and improving service delivery; • Upgraded procurement processes; • Improving safety; and • Attention to Transnet Freight Rail’s National Operating Centre, which is focusing on

the scheduling of trains. Most of these initiatives have been concentrated in Transnet Freight Rail, because turning around the freight rail division is seen as key to Transnet’s future. Reengineering operations is also key to Transnet’s ability to make major infrastructure investments over the next five years. A major capital investment programme has been developed by Transnet in support of the broader economic growth that is expected to continue over the medium term. Transnet plans to commit R64,5 billion over the next five years to a capital expenditure programme. This programme is intended to address the significant investment backlog within Transnet, and lay the foundation in port, rail and pipeline capacity for future growth over the medium term. To ensure effective management and better coordination of this plan, Transnet has set up a central capital projects team within the Corporate Centre. This team oversees all capital projects above R300 million. The Capital Projects team is key to any investment decision relating to the relocation of the manganese terminal to the Port of Ngqura.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 14 May 2008 _____________________________________________________________________ Centralising the major capital projects is designed to free up divisional managers to concentrate on managing their units, preventing cost and schedule overruns, and ensuring skills and technology transfers as a result of pairing experienced project professionals with less experienced ones. The major capital expenditure projects over the next five years include: Transnet Freight Rail (R31,5 billion)

• Iron ore corridor expansion (rail and Saldanha infrastructure); • Richards Bay coal line and infrastructure expansion; • Refurbishment/maintenance programme; and • General freight fleet renewal and upgrade programmes. • Transnet Rail Engineering (R2,6 billion) • Upgrade of equipment and facilities.

NPA (R18,6 billion)

• Completion of the Port of Ngqura; • Container terminal expansion – Cape Town and Durban; and • Durban port entrance channel project to enable growth and servicing of larger ships.

Transnet Port Terminals (R6,3 billion)

• Container terminals expansion – Durban, Cape Town and Ngqura; • Multi-purpose terminal expansion – Durban; • Iron ore terminal expansion; and • Richards Bay dry bulk terminal.

Transnet Pipelines (R4,9 billion)

• New multi-product pipeline; • Upgrade of the gas pipeline; and • Terminalling and logistics.

The costs of upgrading the manganese export facilities – both rail and ore terminal - need to be seen within the context of the overall capital expenditure programme. On the positive side, such upgrades fit within the overall vision and programme of Transnet, provided that Transnet can be convinced that they are integral to growing the South African manganese ore export market, and that they are commercially viable. It is useful to emphasize these broader strategies and objectives in opening up discussions with Transnet on this subject. Transnet NPA is a key player in the decision to relocate the manganese ore terminal, and it is important to note that this strategic division has itself been undergoing significant restructuring. NPA views its strategic objectives as growing a national port infrastructure by harnessing the opportunities of increased growth in international trade, while reducing the costs of port infrastructure management. It aims to position NPA as a competitive international ports management entity. In achieving this it will ensure that the respective coastal regions are assured of both bulk and general cargo port handling facilities. NPA is committed to creating capacity to meet current and future customer demand, and, applied to the manganese ore market, this means that NPA should be planning proactively to meet future demand. As will be demonstrated later, this has significant implications for the relocation strategy.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 15 May 2008 _____________________________________________________________________ 8 Port Development Frameworks and port planning issues As indicated in the review of the new ports legislation, the NPA is required to prepare a port development framework for each port. Ideally this should be done in a consultative manner, including affected parties such as the NMBM and the CDC. The framework must reflect the NPA’s policy for port development and land use within the port. The framework then sets the context for all future work on port infrastructure and development. To date there have been no such frameworks published for either Port Elizabeth or Ngqura. A draft national ports plan was prepared by the Department of Transport and submitted to the Minister of Public Enterprises in 2006, but this plan has not been formally approved or published. Phase 1 of the Ports Master Plan, which details the strategy for each port, is being finalised by Transnet. The port planners within Transnet indicate that the port plans are at the moment being treated as flexible planning instruments, and that it may be premature, at least in the case of Port Elizabeth and Ngqura, to publish finished port plans. What is on the table at the moment are different options for development, rather than definitive port plans. Stakeholders have also indicated that in their opinion the current scenarios are not integrated plans, and they do not take account of local and regional imperatives. There should be a process of stakeholder involvement in the finalisation of the port plans. The main tasks of the national port planning process are to define the overall national economic objectives and their impact on the ports, and from there to define the responsibilities of the NPA. The port planning process enables Transnet and NPA to prepare a broad national traffic forecast, to assign traffic to individual ports, and thus enable NPA to prepare individual port plans and consequent investment plans. The port planners see a fourfold role for the port:

• To serve the international trading needs of the hinterland of the port. • To generate trade and regional development. • To capture an increasing share of international maritime traffic. • To capture an increasing share of distant hinterland traffic.

The Transnet port planners have made a number of presentations on port plans for Port Elizabeth and Ngqura over the last 2 years, and the following information has been gleaned from these presentations. It is important to understand the South African ports system as a complementary coupling of old and new ports in three regional nodes:

• Cape Town and Saldanha in the West • Port Elizabeth and Ngqura in the Centre • Durban and Richards Bay in the East.

These regional nodes service a global east – west flow of traffic, as well as the Gauteng and African hinterland. To a certain extent these regional nodes can be seen as competing for the hinterland traffic, but there is also a move towards a more rational distribution of port infrastructure, and a balanced inland transport corridor routing. Importantly within each regional node there is move towards a rational distribution of port functions. The older ports, located within cities, face serious constraints in terms of the movement of goods, as well as the environmental effects of heavy industry and certain cargo. There are also strong pressures from the cities for a more people friendly port – city interface, such as waterfront developments and access corridors. Port planners and managers tend to view these activities as interfering with port activities, and consider them as a serous constraint on the ports – however these views are portrayed as outdated by city planners and no longer appropriate in a changing global context.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 16 May 2008 _____________________________________________________________________ Nevertheless the logic appears to suggest that the older city ports should be defined as “clean” ports, with a focus on fishing, foodstuffs, car terminals and waterfront developments, while the containers, break-bulk, dry bulk and liquid bulk are channelled through the newer “industrial” ports. However, local circumstances vary quite considerably, and there will be some residual industrial activities in each of the old ports for many years to come. The port of Ngqura is newest of all the ports, and is still under construction. The NPA is charged with developing the port to support new deep draft container traffic, as well as supporting industries that could locate at Coega. It will take over container, dry bulk and break bulk traffic from the Port of Port Elizabeth. The first phase of development comprises two dry bulk berths, two container berths and one bulk liquid berth. The dredged depth in the entrance channel and at the bulk liquid berth is 18 m, and alongside the inner berths 16.5 m. The harbour is designed to cater for future expansion depending on the increase in maritime traffic. In terms of the planning for the ports of Ngqura and Port Elizabeth, it is envisaged by the port planners that the containers, break-bulk, dry bulk and liquid bulk will largely move to Ngqura. The following projections of volumes through Ngqura have been used to inform port plans: Table 2: Projected volumes through Ngqura Port 2010 - 2050 2010 2020 2050 Containers (TEU) 428 000 999 069 4 312 047 Break-bulk (million tons) - 0.51 0.92 Dry bulk (million tons) 2.70 6.75 13.58 Liquid bulk (million tons) 1.10 1.25 1.69 Vehicles (units) - - - Source: Transnet NPA Based on these projections the port planners have prepared an indicative port plan for the first phase of Ngqura, which allocates 382 ha for containers, 526 ha for break-bulk, 448 ha for dry bulk, and 433 ha for liquid bulk. These volume projections do not include volumes arising from new manganese players, the ferro-manganese plants, the steel plant, the crude oil refinery and the Coega Power Station with an associated LNG Terminal. The port plan contains 7 berths, which may already prove to be inadequate to accommodate the above activities.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 17 May 2008 _____________________________________________________________________ Figure 2: Port plan for first phase of Ngqura

Figure 3: 2050 scenario plan for Port of Ngqura

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 18 May 2008 _____________________________________________________________________ There are certain constraints that have arisen as a result of the Coega Aluminium Smelter (CAS) project, which has required two berths to be dedicated exclusively for its purposes. However latest developments bring into question the viability of this investment proceeding. The port managers have indicated that four berths will need to be assigned for containers, two for the CAS project and one for liquid bulk. This means that dry bulk and break-bulk will have to move through Port Elizabeth in the immediate term, and that these can only move over to Ngqura once the next phase has been completed. However the CDC has questioned this approach, indicating that in their opinion manganese ore exports can be commenced over the berth allocated for CAS, and switched if CAS does recommence later. The future expansion plans for Ngqura are shown in Figure 3, which gives an indication of how the port layout might look in 2050. Port expansion occurs in two directions - digging out berths inland of the current port (for which one of harbour walls was already built during construction) and adding additional container terminals to the west of the port. Importantly, these plans do indicate that if the CAS project goes ahead, accommodating the manganese ore export terminal will require an expansion of the current Ngqura port. If a phased approach as set out above is taken, revenue can be generated for a number of years to help improve the economics. Such a paradigm shift time towards enabling the relocation is now required. The plans for Port Elizabeth use as their departure point the current port layout, which is described in Figure 4. The main features of the current layout are well known, with containers and motor vehicles occupying the large No. 1 quay on the northern side of the port, break-bulk on the smaller No. 2 and 3 quays, ship repair and fishing on the western side of the port, and to the south in the yacht basin, the tank farm, the manganese terminal and the oil terminal. Figure 4: Current layout of Port of Port Elizabeth

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 19 May 2008 _____________________________________________________________________ Various scenarios have been drawn up by the port planners for Port Elizabeth, some of which include the status quo. The status quo option is based on retention of the manganese terminal and tank farm for the foreseeable future, largely because the current volumes of manganese through the port do not justify the investment in a new terminal. As will be shown later, the breakeven point in terms of volumes of manganese that justifies relocation is approximately 7 mtpa. However, some of the scenarios contemplated by the port planners include a relocation of the manganese terminal and tank farm, and a port plan that dedicates the southern side of the port to a waterfront development and the fishing industry. This plan is set out in figure 5 below. In the port planning process, there are also options that have been developed for the expansion of the Port Elizabeth harbour in a northwards direction. Such an expansion would be necessitated by an increase in movement of motor vehicles, which cannot be directed through the industrial port of Ngqura, as well as the retention and growth of a significant proportion of the container traffic. This does not seem to be a likely scenario at the moment, since the logic of building Ngqura was that it would accommodate the new deep water container vessels, and it requires the container traffic to be redirected through it to justify the investment in the port. However, this expansion scenario is included, because it remains an option to be considered. It is also significant in that it indicates that the port planners’ views on expansion are that it should take place in a northerly direction, and that the southern portion of the port can be used as a “softer” port – city interface. Figure 5: Future plan for Port of Port Elizabeth with waterfront

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 20 May 2008 _____________________________________________________________________ Figure 6: Port expansion plans for the Port of Port Elizabeth

9 The Coega IDZ and the Coega Development Corporation The Coega Industrial Development Zone (IDZ) is one of the incentive zones in South Africa for new industrial investments, and it is managed by the Coega Development Corporation (CDC) which is in charge of the IDZ, its infrastructure and the recruitment of investors. The logic behind the IDZ is that Coega is strategically located mid-way between the world’s major trade and supply zones. The new deep water port can accommodate the large container vessels that are the future of containerisation. Coega is equidistant from the main sources of the raw materials in the east and west, in addition to having access to South Africa’s mineral wealth. The IDZ covers 11 000 hectares of land adjacent to the Port of Ngqura, and is a phased development around industry clusters. The Coega IDZ aims to attract foreign and local investment in export orientated manufacturing industries. More recently a strong in-country demand has been recognised and the focus now includes local, regional and national industries. It has Custom Secure Areas dedicated for export oriented manufacturing companies located in the IDZ. The key priority investment sectors currently pursued by the CDC are in the following sectors:

• Metallurgical industries, including ferro-chrome, stainless steel, iron and steel slabs, and aluminium beneficiation

• Textiles, including industries related to flax, wool, mohair and agro-processing • Automotive industries such as automotive components and Original Equipment

Manufacturers • Services such as Financial Shared Services Centres and Call Centres • Chemicals such as Petrochemicals and Chlorine

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 21 May 2008 _____________________________________________________________________

• Alternative Energy Sources such as LNG • Crude oil refining.

One of the CDC’s main services is infrastructure provision, which is done in three phases or “tiers” – bulk services for the different industrial sectors (1st Tier), secondary distribution of services up to the site boundaries (2nd Tier) and finally site services (3rd Tier) for specific investor requirements. The first infrastructure investments in the Coega IDZ are focusing on areas where the first investors are locating. Zones 1 – 5 have been identified to locate the following activities:

• Zone 1: light electronics and commercial • Zone 2: automotive • Zone 3: textiles, agri – processing • Zone 4: academic and training, services • Zone 5: heavy to medium manufacturing.

The CDC is promoting Light Metals and Ferrous-metals Clusters, and as part of this are in advanced negotiations with Alcan/Rio Tinto regarding the construction of the CAS project, and are in negotiations with a number of manganese producers about the construction of manganese smelters in Coega. The logic of the cluster approach is based on South Africa’s reserves of platinum group metals, manganese ores, chrome ores, titanium minerals, alumino silicates, iron ore, vanadium and vermiculite. The country is also rich in antimony, fluorspar and phosphate rock. In addition to the prolific mineral reserves, the country has a high level of technical and production expertise, as well as top research and exploration capacity. South Africa is the world’s largest platinum producer, producing 73 percent of world’s platinum output. South Africa is also the world’s largest producer of chromium and vanadium ores and the leading supplier of the alloys. The country has primary processing facilities for carbon steel, stainless steel, ferro-alloys and aluminium industries, in addition to gold and platinum. The CDC is of the view that these attributes make Coega a preferred location status for the establishment of beneficiation plants and related downstream industries. The CDC has consequently drawn up plans for the potential layout of some of the ferrous metals industrial activities in Coega, including the establishment of a manganese terminal. These plans have not been finalised or agreed to by NPA, but they are useful guides in terms of future thinking on this subject. The plans are described in figure 7 below. It is important to note that the manganese stockpile location shown on the map is not preferred by Transnet, and both CDC and Transnet are now planning for location on the floodplain. The establishment of Light Metals and Ferrous-metals Clusters will require a significant upgrading of the current rail connection from the hinterland to Coega. Currently, there is a single line linking Coega to the interior, with a limited number of loops that delay the transport of raw materials and goods to the port. The CDC has been engaging with Transnet regarding upgrading of the railway line between Port Elizabeth and Northern Cape, which has the main reserves of iron ore, manganese ore, limestone and dolomite. With the upgrade, the line will be able to carry 33 mtpa of iron ore and 7mtpa of manganese ore a year. In addition, the container traffic to and from Gauteng will increase with the completion of the container terminal in 2009/9 taking away further rail slots which would have been available for the transport of manganese ore and other raw materials. These upgrades of capacity on the line will be crucial for reaching the volumes of manganese ore that will make a relocation of the manganese terminal viable and for accommodating the other raw materials required to make Coega viable.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 22 May 2008 _____________________________________________________________________ Figure 7: CDC plans for a ferro-metals cluster in Coega

Source: CDC, 2006 The other major challenge facing the CDC is power supply. South Africa’s competitive edge in terms of low energy costs and reliable supply has been recently eroded, and the CDC is engaging with Eskom, the NMBM and other players to facilitate some large-scale investments in power generation at Coega in order to ensure that the supply of power keeps up with demand. Fail-safe ring feeds have been provided in the Coega IDZ to ensure continuity of power supply. The other major development at Coega, with implications for the relocation of the tank farm, is the plan by PetroSA to construct a new crude oil refinery at Coega. Coega has been chosen as the site for the proposed new refinery after a thorough and independent screening of five potential locations around South Africa. Design of the refinery is well-advanced, and the company is in discussions with several local and international parties who have expressed interest in possible financial and operating partnerships. Once the technical specifications and commercial aspects of the project have been clarified, the final investment decision will be made around 2010. The refinery is expected to produce about 250,000 barrels of fuel a day, and will come on stream in 2014-2015. However, the refinery will be configured such that a doubling of capacity can be accommodated. The presence of a refinery at Coega will necessitate fuel storage facilities, and plans in this regard have already been drawn up by the CDC. This will render the Port Elizabeth tank farm largely redundant, and will speed up a decision regarding the construction of a new fuel storage facility at Coega.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 23 May 2008 _____________________________________________________________________ 10 Rail and freight planning issues The freight rail and rolling stock costs are by far the most significant cost component of any increase in ore export capacity. These costs will be incurred regardless of whether the ore export terminal is located at Port Elizabeth or Ngqura. Currently, there is a single line linking Hotazel to Port Elizabeth, with a limited number of loops that delay the transport of raw materials and goods to the port. The configuration of the rail line from Hotazel to Port Elizabeth is shown schematically in Figure 8 below. Figure 8: Manganese ore rail line, Hotazel to Port Elizabeth

Hotazel

Sishen

Beaconsfield (Kimberly)

De Aar

CoegaPort Elizabeth

Saldanha Bay

66km 18mtpa

289 km 24mtpa to Posmasburgthen 30mtpa

230 km 44mtpa

3kv DC line with 10E1s

25kv AC line with 7E1s

500 km 32mtpa

22km

Approx. 1800km 39mtpa

Maximum capacities on line shown in red The line from Hotazel to the main interchange at Beaconsfield in Kimberly is approximately 355km long, and is a 3kv Direct Currrent line. The locomotives that service this line are 10E1s. There is an estimated maximum capacity on this line of 18mtpa from Hotazel to Sishen, 24mtpa from Sishen to Posmasburg, and 30mtpa from Posmasburg to Beaconsfield. At Beaconsfield the wagon trains need to change locomotives, because the approximately 750 km rail line from Beaconsfield to Port Elizabeth is a 25kv Alternating Current line, serviced by 7E1 locomotives. The estimated maximum capacities on this line are 44mtpa from Beaconsfield to De Aar, and 32mtpa from De Aar to Ngqura. In future it is planned to use 19E locomotives on this line, which means that an additional locomotive will be required per wagon train due to the lower mass of the locomotive (100t vs 120t). The wagons travel at approximately 70 to 80 km/hr, although this is reduced to 45km/hr due to the stops on the route. There is currently a 90 hr turnaround time for the locomotives and wagon trains (i.e. loading at Hotazel, travel down to Port Elizabeth, unloading, return to

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 24 May 2008 _____________________________________________________________________ Hotazel). This turnaround can easily increase to 120 hrs with changeovers and staff problems. An indicative schedule for trains on the Hotazel – Port Elizabeth line is shown in Figure 9 below. Increasing the frequency of trains increases the number of passing stops and hence increases the turnaround time for the trains. Figure 9: Indicative schedule for trains on Hotazel - Port Elizabeth line

Loading in Hotazel

Unloading in Port Elizabeth

Passing stops approx 20 min

Turnaround time approx 90hrs

Each train carries a payload of 6 552t on a 20t per axle load (this can be increased to 7 384t with a 22t per axle load). In order to increase capacity to 6mtpa, assuming 312 train operating days per annum, approximately 3 trains will need to run per day i.e. a train will need to leave the mine every 8 hrs. Based on a 90 hr turnaround, it is estimated that a total of 11 train sets will be required using a 20 ton axle load, or 9,75 train sets using a 22 ton axle load. In all, it is estimated that 6,6 new train sets will be needed in order to increase manganese ore capacity from 2,4mtpa to 6mtpa. Each new train set is made up of locomotives (5 needed at a cost of approximately R35m each) and wagons (104 wagons are needed per train at a cost of approximately R900 000 each). A new train set is therefore estimated to cost approximately R269m. The total cost of additional rolling stock to expand capacity to 6mtpa is therefore estimated to be R1,8b. The main constraint on the line is dictated by the number of passing loops that can be used by the wagon trains. There are a large number of passing loops, but only a limited number of these are of sufficient length that can be used for manganese ore, due to the length of the trains. Transnet uses 104 wagons of 9,83m each for manganese ore (by contrast containers are transported in trains of 47 to 63 wagons). This length of the trains means that only 14 passing loops can be used between Beaconsfield and De Aar. The challenge is how to increase capacity on the line at the lowest cost.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 25 May 2008 _____________________________________________________________________ Transnet Freight Rail has indicated that approximately 120 km of new line will need to be constructed, at a cost of approximately R1,5b, in order to extend the passing loops. McClintock and Skinner have indicated that a far more limited programme of extension can create an additional 9 passing loops on the line to De Aar, which is deemed sufficient. The engineers have identified a parallel 48kg/m line running from Beaconsfield to De Aar without electrification, which can be used for the construction of additional passing loops. In all they estimate that only an additional 12km of line is required, at a cost R180m (approximately R15m/km). Transnet’s main challenge with this more limited extension will be the consequent complexity of managing the train schedules. On the De Aar – Port Elizabeth line it is not possible to extend the passing loops due to the topography. There are also 16 tunnels on this line. The maximum feasible capacity on the Beaconsfield - Ngqura line for the transport of manganese ore is estimated at 10mtpa. This is based on an assumption of 4 trains running in each direction at any one time, with a 22t axle load, and operating for 336 days in the year. Any increase in capacity beyond this will require a new line. The construction of a new line has been considered by Transnet, and some detailed planning has also been done by CDC. The plan is to connect Posmasburg to De Aar, bypassing Beaconsfield, then route it via Drennen to Ngqura. The upgraged line is planned to have a total capacity of 33mtpa, with 21mtpa dedicated for iron ore and 12mtpa of manganese ore. It will be possible to use diesel electric engines to a maximum capacity of 20mtpa, and thereafter switch pure electric locomotives due to rising diesel costs and the higher operating efficiencies. The cost of an entirely new line from Beaconsfield to Ngqura was estimated at R10,5b in 2005, although Transnet has also quoted much higher figures of R35b. In any event such an investment by Transnet is not likely in the near future, nor it is necessary in order to effect the relocation of the manganese terminal. Assmang has indicated a number of options other than Ngqura for consideration in moving manganese ore to port, including Namibia, Maputo and Saldanha. Samancor has indicated a strong preference for Saldanha as the future location of the manganese ore terminal. Despite the approximately 600km additional distance, the Sishen Saldanha line is a heavy ore line, with a capacity of 39 to 40mtpa, and it is planned to increase this to 42mtpa, and then 65mtpa. The cost of operating the line, taking capital into account, is approximately 1c/t/km. The tariffs charged on the line by contrast are 4,5c/t/km. Nevertheless Samancor indicates that the Saldanha line operating costs are a third of the costs on the Port Elizabeth line. Samancor quoted tariffs of R80/t on the Saldanha line vs. R280/t on the Port Elizabeth line. This is driven in part by electricity costs on the Port Elizabeth line, which are three times the costs on the Saldanha line.

11 Plans for the relocation of the manganese terminal to Ngqura Transnet Capital Projects is in the process of completing the feasibility study for the relocation of the manganese ore terminal to Ngqura. The concept and pre-feasibility have been completed, and the full feasibility, led by Mr Neville Eves, in under internal review. This feasibility has been based on a configuration that locates the stockpile, marshalling yard and tippler at the Brickfields site on the Ngqura floodplain. Detailed plans for this were not available from Transnet. As a reference point, an earlier layout produced by Hatch in 2005, has been reproduced below. In the Hatch report, they raised various options for a combined

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 26 May 2008 _____________________________________________________________________ manganese and iron ore stockpile and terminal. The option reproduced below is for manganese alone. Figure 10: Layout of manganese stockpile

Source: Hatch, 2005 A conveyor system is planned to extend down the eastern side of the Ngqura river, with a new berth located on the east bank. The ore berth that is located on the finger jetty has been scheduled for Alcan, which has an 18 month option on this location. In Transnet’s view this effectively blocks the eastern side of the Ngqura port. An eastern location for the mechanical handling of the ore is preferred, as this also avoids conveyors crossing each other on the western side of the port. The feasibility study has integrated a number of new technologies into the ore handling process. Pipe conveyors have been proposed to improve dust suppression. Each of the transition points where the direction and velocity of the ore movement change have been enclosed. The rail linkage is via Grassridge station at Ngqura, which is planned as an intermodal facility. The rail line will run down from Grassridge station into the port, and a back shunt spur will be built into the marshalling yard. Again no detailed plans are available for the rail link and terminal. An overall schematic representation of the process of ore handling, drawn from the 2005 Hatch report, is reproduced below.

Manganese 1 Tipplers 2 Stackers 1 Reclaimers 0 Stacker/Reclaimers 2 Stockpiles (300 000 t each)

250

1000

01

02 03

04

05

T

T

T

T

T

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 27 May 2008 _____________________________________________________________________ Figure 11: Schematic representation of manganese ore handling process

Source: Hatch, 2005 Rennies Bidvest are interested in undertaking a privately built and operated manganese ore terminal, and have prepared detailed proposals in this regard. Their plans are for a much lower cost and simpler model for operation, which is based on the existing handling of manganese ore in the Port of Durban. Included in their proposal are the use of standard container cranes and standard bottom opening containers, with some modifications to suit the manganese ore. They also propose to use standard trucks and trailers. The Rennies Bidvest proposal also takes a phased approach to the development of the terminal, initially using the so called bulk liquid berth for manganese exports, and then moving to a new berth one volumes have built up. This significantly lowers the capital costs of the project. However Transnet has indicated little interest in such a proposal, preferring to extract value from the entire value chain rather than breaking up the different components.

12 The financial viability of relocating the manganese terminal There are two available sources of data for estimates of the cost of relocating the manganese terminal to Ngqura (these are in addition to the private initiative which would use a much lower Capex based on a phased approach). A pre-feasibility study was undertaken by Hatch into the relocation of the manganese ore export terminal to the Port of Ngqura, with a final report produced in 2005. The other source of data was subsequent estimates made by SAPO in 2006 of the cost of relocation. The capex projections of the two sources are significantly different. The differences between the two data sources are summarised below:

Flow Diagram Coega PFS

18/03/2005 Rev 1

Export Local

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 28 May 2008 _____________________________________________________________________ Table 3: Summary of estimates of capex for relocation of manganese terminal

Source: Hatch & SAPO The costs in the Hatch Report, which are given in 2003 Rands, have been escalated at 6% per annum to 2006 Rands for purposes of comparison with the SAPO estimates. There are also differences in the planned capacity of the facilities, with the Hatch Report based on a capacity up to 6 million tons per annum, and the SAPO estimates based on a capacity up to 8 million tons per annum. The Hatch Report does not include estimates for bulk services. The SAPO estimates include estimates for bulk services such as civils and electrical capex required to service the SAPO operations. There are additional costs associated with increasing capacity to export manganese ore, notably the cost of rail upgrades on the Beaconsfield – De Aar line, as well as increases required in the rolling stock. Transnet has given a high level estimate of the total relocation costs as being approximately R8b. This estimate seems unduly high. If we take the SAPO 2006 estimates for relocation of the manganese terminal, adjusted to 2008 Rands, and add to this the costs of extending the passing loops on the Beaconsfield – De Aar line, as well the rolling stock costs estimated earlier, we arrive at a total estimated capital cost of R6,3b. As indicated earlier, it will be possible to achieve significant saving on the upgrades to the rail line, but it does not appear as if Transnet has factored these in. Table 4: Estimate of total capital costs for upgrade to 6mtpa capacity

Capital item Estimated cost (R) Manganese handling R 1,800,000 Berth R 280,000 In-port rail R 280,000 Bulk services R 665,000 Rail to Kimberly R 1,500,000 Rolling stock R 1,780,000 TOTAL R 6,305,000

The rail and rolling stock costs will be incurred regardless whether the ore terminal is located at Port Elizabeth or Ngqura. For the purposes of comparing the Port Elizabeth and Ngqura scenarios, these costs will not be taken into account. In order to determine the financial viability of relocating the manganese terminal, the DPE, in conjunction with a stakeholder group that included the various Transnet divisions, developed a model for analysing the viability of the manganese ore terminal relocation. This model did not include the rail upgrades and freight tariffs, as these are incurred in either scenario. The modelling therefore focused only on the ore terminal and the tariffs associated with ore

SAPO Estimate Hatch Report Difference Capex ItemManganese handling SAPO 1,592,700 1,242,230 350,470 Berth NPA 250,000 449,489 -199,489 In-port rail Spoornet 249,600 95,281 154,319 Bulk services (civils and electrical) NPA 592,200 - 592,200 Total 2,684,500 1,787,000 897,500

Responsible Transnet Entity

Rand Value (2006 real R'000s)

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 29 May 2008 _____________________________________________________________________ handling. Two scenarios were developed by the stakeholder group in order to evaluate the impact of the relocation. Scenario 1 was premised on retaining the manganese terminal and oil terminal at their present locations, and involved upgrading, renewing and expanding the manganese terminal and oil tank farm at their current locations in order to meet future capacity requirements. The capital outlay to achieve this was to be more gradual than in Scenario 2, as existing equipment can be phased out and replaced as required and the existing stockpile can expand incrementally. Scenario 2 was premised on relocating the manganese terminal and oil terminal to the NPA site in Ngqura. New facilities will be constructed for the manganese terminal and oil terminal at Ngqura, which will share rail and road linkages. The existing liquid bulk berth at Ngqura will be used for the oil terminal, although the costs of the oil terminal are not included in the model, as they do not impact on the Transnet balance sheet. A third scenario was also considered, which was to relocate the manganese and oil terminals to Ngqura with the manganese stockpile sited on the IDZ land adjacent to the port. This scenario was considered a subset of the broader “Relocate” scenario. It now transpires that this is Transnet’s preferred scenario. The data available for comparison purposes was not adequate to model Scenario 3, and the view was that this can be quantified within a detailed site selection study. The team estimated that the NPA site would likely be the preferred location given cost efficiencies, but it appears that the team did not consider the cost efficiencies arising from a common stockpile area approach linked with the steel and ferro-alloy plants in the IDZ. In building the model, a number of assumptions have been used that should be mentioned. Capex expenditure has been staggered to match supply with demand projections as closely as possible. Since Ngqura will be closed to operations during the physical construction period, the existing facilities will remain located at Port Elizabeth between 2010 and 2012. The revenue during this period is treated as common to both scenarios. A discount or ‘hurdle’ rate of 12% was chosen, based on the Transnet enterprise-level WACC at the time. The modellers noted that the project is arguably riskier than Transnet Group operations and may require a higher discount rate. Transnet Capital Projects has indicated the role of Transnet as a public sector agency is not to take on more riskier projects, and that their developmental role would be expressed rather in increases to the amortisation period of the capital. The team chose to use the more conservative “SAPO” capital estimates, which provide a stiffer financial hurdle for comparison purposes. These capex figures will need to be re-examined and consensus reached with SAPO for a more conclusive set of findings. The model is based on a number of assumptions which are described below:

• Price changes and cost changes have each been put at 6%, and are therefore consistent with each other.

• The base operating cost that is used is R10 per ton. • The manganese volume compound annual growth rates (CAGR) were derived from

the absolute volume projections provided by the stakeholder work groups. The values used in the model are:

2008-2011: 6.5% 2012-2020: 5.0% 2021-2030: 4.9%

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 30 May 2008 _____________________________________________________________________

• The project valuation period starts in December 2009 (which was the projected start of the capex for Ngqura) and ends in December 2029.

• The total capex requirements are R1,592,700,000 for Ngqura, and R1,032,100,000 for Port Elizabeth.

A schedule of capital payments was developed based on the two capital investment scenarios highlighted below. Table 5: Annual Capacity Demand and Supply for Port Elizabeth scenario

The capex for equipment upgrades at Port Elizabeth was scheduled in order to increase PE’s handling capacity from 3.6 million tons in 2006 to 5 million tons by 2011, and then to 8 million tons by 2016. The earlier scheduling of the second capex requirement is partly due to the antiquated nature of the Port Elizabeth facilities, which require earlier replacement. The way in which supply capacity from these investments keeps pace with demand is demonstrated in table 4 above. After the initial capex for Ngqura spent in the period 2010 to 2012, the port will be able to handle 5 million metric tons of manganese. Further upgrades in 2020 will increase Ngqura’s handling capacity to 8 million tons. The way in which supply capacity from the Ngqura investments keeps pace with demand is demonstrated in the following table.

0

1

2

3

4

5

6

7

8

9

10

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

0

1

2

3

4

5

6

7

8

9

10

Volume (million tons)

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 31 May 2008 _____________________________________________________________________ Table 6: Annual Capacity Demand and Supply for Ngqura scenario

In all, the capex requirement in real 2006 Rands for the “relocation” of manganese ore handling facilities to Ngqura is R560.6 million greater than that required to provide capacity upgrades to the existing Port Elizabeth operation. Table 7: Programme of capital expenditure for Ngqura and Port Elizabeth

Ngqura Capex PE Capex Variance Year Real 2006 Nominal Real 2006 Nominal Real 2006

2007 R50,000,000 *1 2010 R206,700,000 R260,953,988 R399,600,000 R504,485,793 2011 R645,000,000 R863,155,498 2012 R246,000,000 R348,955,702 2013 2014 2015 R632,500,000 R1,068,595,442 2020 R 495,000,000 R 1,119,147,458 2029 Total R1,592,700,000 R1,032,100,0000 R560,600,000 *1. It is important to note that the costs of the upgrade at Port Elizabeth exclude an amount of R50 million which was being spent at the time in limited upgrading. This was treated as a sunk cost and was not included in the project valuation comparison. This programme of capital expenditure for the two scenarios is summarised in table 7 above. The model uses three scenarios for the base selling price per ton of manganese, namely R16, R33 and R53 per ton. Holding all other variables constant and varying the base selling price and CIF status, the model generates the IRR and NPV values set out in table 7 below.

0

1

2

3

4

5

6

7

8

9

10

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

0

1

2

3

4

5

6

7

8

9

10

Volume (million tons)

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 32 May 2008 _____________________________________________________________________ Table 8: Financial viability of Ngqura and Port Elizabeth scenarios

Ngqura Port Elizabeth

CIF Off CIF On CIF Off

Base Selling Price

IRR NPV IRR NPV IRR NPV R16 n/a (R

650,422,101) n/a (R 386,639,764) n/a (R

380,999,862) R33 14.52% R 169,124,212 19.36% R 378,059,373 20,56% R 390,096,038

R53 26.29% R 989,970,292 35.17% R1,185,318,753 41.28% R1,194,176,947

A key issue for the model was whether the project would be part financed through the Critical Infrastructure Fund. The model assumed that the Critical Infrastructure Fund would not be available for the upgrades at Port Elizabeth. It modelled two scenarios for Ngqura, with the CIF on and off. The CIP is intended to support the competitiveness of South African industries by lowering business costs and risks. It provides targeted financial support for physical infrastructure that will leverage strategic investment with positive impact on the economy. The CIP is a non-refundable, cash grant that is available to approved beneficiaries upon the completion of agreed milestones. The scheme covers between 10% and 30% of the total cost of development costs of the qualifying infrastructure. A point scoring system is used to determine the percentage covered. The infrastructure for which funds are required is deemed to be “critical” if the investment would not take place without the infrastructure, and without the CIP funding contribution, or if the investment and infrastructure projects can go ahead without the CIP contribution, it can be proved that it would be of a smaller scale, or lower quality, or would be established at a later stage than the period when it is needed. Antoinette Baepi from the Department of Trade and Industry has confirmed that the project meets the CIF criteria, but they will need to see the business plan and feasibility study first before making a final decision on qualification. The main findings that have emerged from the modelling of the different scenarios are as follows:

• The estimated current base selling price of R16 per ton escalated at 6% per annum generates a negative IRR and NPV at both Ngqura and PE (with the requisite capacity increases).

• The breakeven point for both Ngqura (with CIF on) and PE is a base selling price of roughly R25 per ton.

• This represents a 56% increase on the current selling price, and it is not clear whether the industry will be able to absorb this charge.

• The NPV variance between Ngqura and PE of about R200 million, with CIF off for Ngqura, may not be considered that significant by Transnet decision makers.

• To ensure that PE and Ngqura generate a similar project return (IRR, NPV), Ngqura must enjoy an allocation of grant capital from the CIF (or equivalent).

• The key strategic difference between the two scenarios (with CIF on for Ngqura) is that PE cannot realistically expand beyond 8 million tons per annum (in fact this limit

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 33 May 2008 _____________________________________________________________________

is 6 million tons, as discussed earlier), implying a hard capacity constraint from 2029 onwards.

The conclusions that can be derived from the above capital cost estimates and modelling are extremely significant in terms of a decision regarding the relocation or retention of the manganese terminal. The capital costs, operating costs and associated tariff increases arising from upgrading or relocating the manganese terminal are a small component of the total channel costs that Transnet has quoted to the industry, and are not the main driver of the cost increases. By far the largest part of any cost increases is driven by rail upgrades between Ngqura and the hinterland – these costs will be incurred regardless of whether the manganese terminal is located in Port Elizabeth or Ngqura. If the Critical Infrastructure Fund is able to provide a subsidy for the relocation of the manganese terminal, there is not much difference between the two scenarios from a commercial point of view. As discussed earlier, Transnet Capital Projects is in the process of evaluating these findings and building their own evaluative model to test the assumptions and results. Strategically, the decision to relocate the manganese ore terminal is therefore, in reality, a decision about whether to invest in greater capacity to export manganese ore, or whether to stay locked within a maximum capacity 6 to 8mtpa. The answer to this question lies in an analysis of the global manganese ore market, to which we now turn.

13 The Manganese industry in South Africa Manganese (Mn) is a critical component in the steel making process. It scavenges impurities such as oxygen, sulphur and other elements as well as adding toughness, hardness and abrasion resistance to steel in the form of an alloying component. Approximately 90% of the manganese consumed in the world is used in manganese ferro-alloys as well as manganese metal in the production of iron and steel. Manganese metal is also used in the production of non-ferrous products such as aluminium alloys. There are currently no known effective substitutes for manganese in the steel making industry. South Africa has more than 80% of the world’s manganese ore reserves, although it produces only about 20 percent of the world’s manganese ore per year. The two major producers of manganese in South Africa are Samancor Manganese and Assmang (Associated Manganese Mines of South Africa), although there are a number of smaller producers such as Metmin and National Manganese Mines, and new entrants to the market such as Kalahari Resources and the Renova Group (UMK). The most important deposits of manganese in South Africa are located in the Northern Cape province. These deposits occur in a zone extending northwards over a distance of 150 km, from just south of Postmasburg to as far as the Wessels and Black Rock mines north of Hotazel. This Kalahari field is the most extensive and contains South Africa’s major deposits of metallurgical grade ore. The manganese ores of the Kalahari Manganese Field are contained within sediments of the Hotazel Formation of the Griqualand West Sequence, a subdivision of the Proterozoic Transvaal Supergroup. The combined high metal content and low impurities of many of the ores make this an exceptional smelting ore. In the North-West province, deposits formed through the weathering of dolomite are found scattered across an area extending from west of Krugersdorp to the Botswana border. South Africa’s resources are estimated to be approximately 4000 Mt, which means that it holds more than 80 percent of world manganese resources, followed by Russia at 560 Mt and

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 34 May 2008 _____________________________________________________________________ Gabon at 150 Mt. However, South Africa produces less manganese ore than these two countries, partly due to its higher cost structure and long lines of transportation. The top three exporters of manganese ore are Gabon, Australia and South Africa, and the world export market is dominated by four companies - Samancor, Assmang, CVRD and Eramet – which between them account for approximately 45 percent of the export market. China possesses negligible ore resources, less than 5 percent of the world resources. It has low grade carbonate ore, carrying less than 30 percent manganese. However, it is a dominant beneficiator of manganese. South Africa’s exports of manganese consist of unbeneficiated ore, which makes up 55 percent by mass, while alloys account for the balance. Many alloy plants exist in the world. China, with many small producers poses a commercial threat to the global alloy market due to uneconomic overproduction of manganese alloys. However, China also provides South Africa with the opportunity for long-term ore sales growth. A Department of Minerals and Energy (DME) review of manganese production in 2005 showed that there had been a small and steady decline (0.89 percent per annum) in the production of manganese over the last two decades. This can be explained by the sensitivity of the industry to prevailing market prices and the uncompetitive cost structure of South African manganese production. The DME review showed that the production decline was primarily in the export market for manganese ore, which has been diminishing at a rate of 2.72 percent per annum. The local market on the other hand has been steadily growing at a rate of 1.68 percent per annum. This was a result of the drive to locally beneficiate as much as possible before exporting, and hence the increased production of added value products such as ferro-manganese and other manganese alloys for both local and export purposes. The average export price in dollars increased at a rate of 2.28 percent per annum, which demonstrates a large degree of price stability. However, in rand terms, revenues have fluctuated widely, and shown a growth of 11.14 percent per annum for exports over the period of 20 years. The companies engaged in the production and export of manganese ore are briefly reviewed below. Assmang is one of the two major player in the South African market, and is an unlisted investment of African Rainbow Minerals (ARM). Assmang mines manganese and iron ores in the Northern Cape province and chrome ore at Dwarsrivier in the Mpumalanga Province. Most of the Group's production is exported to the Far East, Europe and the United States of America. The balance of production is sold locally, principally manganese ore to the Cato Ridge Works, where it is used in the production of manganese alloys. Assmang mines roughly 2.5 million tons of ore per year and has plans to build that up to 3.5 million tons per year by 2013/2014. Jan Steenkamp, CEO of Assmang, indicated that they have commissioned Hatch to do a detailed market study, and the results show a projected volume of SA manganese ore exports of 12 to 16 million tons by 2014. In their opinion the PE harbour is not a long term solution, and the options that they are considering are Ngqura and Saldanha. They have requested Transnet to do a detailed feasibility study on the two options. Samancor Manganese is the other major player in South Africa. It is jointly owned by BHP Billiton and Anglo American. BHP Billiton owns 60% of Samancor Manganese while Anglo American owns the 40% balance. The company is the world’s largest integrated producer by sales of manganese ore and alloys. It has recently announced that it is in the process of pooling its manganese resources in the Northern Cape province with those resources recently

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 35 May 2008 _____________________________________________________________________ awarded to a group of empowerment companies, including Pitsa ya Setshaba. It appears that Samancor Manganese is using access to its existing infrastructure to encourage empowerment firms, some of which are currently in joint ventures with new industry players, to cooperate with it. Philip Hechter, the COO of Samancor Manganese, has a slightly more bearish view of future manganese ore prospects for South Africa. He is partly informed by Samancor’s operations in Australia, where they are mining on an island with a direct transfer to the port terminal, no rail costs, and all the infrastructure operated by themselves. In his view SA is not sufficiently competitive to achieve the export numbers offered by Assmang. In his view a new manganese facility capable of processing 8mtpa will be needed around 2015, and volumes of 12mtpa will only be achieved around 2020 or beyond. Samancor favours Saldanha as a location for the new export terminal, because of the capacity of the heavy ore line, the lower electricity costs, and an overall estimate of operating costs being a third of those in moving ore through Ngqura. South Africa’s manganese industry has been experiencing some dramatic shifts this year with potential changes of ownership in the sector. The first development was the award of prospecting licenses to empowerment firms, which dismayed Samancor and ARM who were confident of winning them. A more concerning development for the established players was the arrival of the Russian firm, the Renova Group, in the industry. According to press reports, after signing up empowerment companies in joint ventures through a company called United Manganese of Kalahari (UMK), the Renova Group hoped to spend at least $1bn building mines and a 300,000 ton/year ferro-manganese smelter at Coega. The announcement of the investment was made soon after the Russian president, Vladimir Putin had undertaken a state visit to South Africa. The Renova Group is a 51% controlling party in a joint venture with empowerment player Pitsa ya Setshaba. UMK/Renova has indicated that they will be ready to move between 1 and 1,5 million tons of manganese ore down to Port Elizabeth in 9 to 12 months, and that they require the ore terminal capacity to be upgraded to accept this. However, doubts have been raised regarding Renova’s ability to acquire the necessary infrastructure, water, and staff as rapidly as they require to deliver on this announcement. The other new player is Kalahari Resources, a black owned company which has co-invested with the IDC in Kgalakgadi Manganese, which in turn is forming a R4,2b partnership with Arcelor-Mittal. They have indicated that they wish to export 1,7 million tons of ore per annum. They will be ready for full production in 2011, although they will produce about two thirds of this amount in 2010. An additional 700 000t of ore will be moved to their planned smelter at Coega, and they will export 300 000t of alloy in addition to the ore. Kalahari Resources are extremely concerned at the lack of additional capacity at the manganese ore terminal. There is some concern amongst the established players that the manganese market could be destabilised as a result of these developments. As stated earlier, about 80% of the world’s manganese reserves are found in southern Africa. If these reserves are exploited in an uncoordinated manner it could result in oversupply of the global markets, and a consequent drop in manganese prices and profits.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 36 May 2008 _____________________________________________________________________ 14 The future Manganese market The future of the manganese market is largely driven by the steel market, since 95% of manganese is used in world steel production. This is good news for manganese, since the long term prospects for steel are extremely encouraging. World steel output has increased at more than double the rate of industrial production, and demand for Mn alloys has risen faster still in recent years. The global trends for steel have been summarised by Hatch Beddows in the following diagram. Focusing on the years since 1945, they describe three distinct phases of growth in world steel demand. The first phase was principally driven by the industrialisation of western economies, and this levelled off in the second phase, covering the period 1973 to 1992, partly due to oil price shocks to the international economy. The third phase shows an exponential increase in demand, and it is still at an early stage of the phase. It is driven by the massive growth being experienced by China and other Asian economies. Figure 12: World Steel Demand 1945 – 2007

Source: Hatch Beddows 2005 Already Asia accounts for over half of world steel consumption, with China alone consuming over one-third. Asia also dominates world steel production, with China being the largest producer country. Table 9: World steel consumption and production by region Region World steel consumption

by region World steel production by

region Asia 53% 52% Europe 16% 18% North America 14% 11% CIS countries 5% 10% South America 3% 4% Africa, M.East and Turkey 9% 5% Source: Hatch Beddows, 2005

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 37 May 2008 _____________________________________________________________________ Hatch Beddows point to a clear correlation between growth in industrial production and steel consumption. They note that the rate of growth in global industrial production over the next five years is forecast to be faster than the average of the last decade. There is also a close relationship between average income levels and finished steel consumption per capita, and as average incomes rise, steel consumption per capita tends to increase. This allows future levels of demand for steel from particularly the Asian economies to be predicted using steel intensity curves, based on the amount of steel consumed per capita and GDP for economies at similar levels of industrialisation. China’s steel intensity curve will only reach a peak in 2015, and will start to decline thereafter. However India’s steel intensity curve is still at a much earlier level of development, and will peak well after 2020. The long term prospects for growth driven by Asia are therefore very good. Based on these predictive models, the long term outlook for steel demand is good, with Hatch Beddows predicting an increase of global demand from 1135 Mt in 2006 to 1660 Mt in 2016. This is an annual growth rate of 3,9%. Laplace Conseil predict even stronger growth for steel, with growth in steel demand to exceed 6% per annum for many years to come. Two thirds of the demand for steel in 2016 will be from Asia. Within this overall positive outlook for steel, the growth rates predicted for manganese are better still. There is predicted to be a faster growth in demand for Mn alloys. The volume and type of Mn alloys used in steelmaking is driven by factors such as steel product chemistry, the steelmaking process and practice, and manganese alloy costs. Manganese intensive steel is predicted to grow faster than ordinary low carbon steel, as is demonstrated by these differential growth rates predicted for different materials. Table 10: Growth rates and manganese content for different materials Material Growth per annum Manganese contentCarbon steel 6,0% 0,5% Construction steel 7,6% 1,0% Stainless steel (other series) 8,0% 1,0% HSLA 12,0% 1,5% High Mn non-magnetic steel 6,5% 11% Hadfield steel 8,0% 13% Stainless steel (series 200) 12,0% 12% Source: Laplace Conseil 2007 Based on these figures, manganese consumption is predicted to double by 2015. The future patterns of steel production will be determined by a number of factors, including distribution of steel demand shifting increasingly to the east, the costs of iron and steelmaking, and the available supplies of raw materials and energy. Changes in the steel industry that may impact on production patterns include de-integration of steelmaking and rolling, consolidation of ownership and control in the industry, and the backward integration by steelmakers into raw materials. There are also the impact of environmental controls and government industrial policies, and the introduction of leading-edge technology in iron and steelmaking, cast and rolling. The future patterns of manganese demand growth will reflect the location decisions for increased steel production and new capacity. The Pacific basin will continue to steadily expand its share of production capacity, while the Atlantic basin will contract. De-integration in the steel industry also means where steel is wanted is not necessarily where it will be made.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 38 May 2008 _____________________________________________________________________ The overall outlook for manganese demand is good. Manganese is essential in steelmaking and demand for manganese has been rising faster than steel production in recent years. Prospects for strong growth in steel demand point to the potential for strong growth in manganese alloys demand. Steel demand is predicted to exceed 6% per annum for the next few years by Laplace Conseil. As they point out, specific manganese consumption is growing again, and manganese intensive steel grades will grow faster than average. Non steel applications for manganese are also facing good growth prospects. In general, this means that there are limited downside risks for the next ten to fifteen years. In terms of pricing, this growth is being reflected in recent price increases for manganese ore and alloy. Global supply is currently limited, and this has enabled BHP Billiton to boost manganese ore prices by 310% to Japanese buyers for fiscal 2008. Imported manganese ore prices in India have recorded an increase of 170 percent over the price prevailing last year. However, these price increases need to be offset against major energy and freight price increases. The other feature of the industry is the low barriers to entry for new market players, and this will prevent sustained price increases. There are also ample mineral resources to develop in line with demand. Arising from discussion with the various players in the South African manganese industry, it has been possible to build up a picture of medium term demand for the export of manganese ore. The following table summarises the current and anticipated future exports of ore. The future projections are medium term i.e. within the next 3 to 5 years, and different companies use different dates within that time frame. Table 11: Current and future manganese ore exports

Company Current exports (mtpa) Future exports (mtpa) Assmang 1,8 3,5 Samancor 1,2 3,0 UMK Renova - 1,8 Asian Minerals - 1,0 Kalahari Resources - 1,7 TOTAL 3,0 11,0 Transnet have indicated some scepticism regarding the new players ability to deliver on these projections. They are only prepared to consider customers with a high potential for future business, who have signed letters of intent with Transnet. The new players, on the other hand, see Transnet’s hawkish views as a cover for collusion between the two main players and Transnet. Their view is that there is common interest between Transnet and the main players to keep that new players out by limiting export capacity, and prolonging the use of outdated facilities. Regardless of the interpretation of the situation, it is clear that global market conditions and local initiatives both point to the need to think far more ambitiously about South Africa’s manganese ore export capacity.

15 City plans for the development of a waterfront The Nelson Mandela Bay Metropolitan Municipality (NMBM) has adopted a pro-active approach to the development of the metropolitan area, and sees the city as the economic driver of the entire Eastern Cape Province (contributing almost half of the total provincial GDP). The previous city council adopted an ambitious plan, known as Vision 2020, for the Metropole. Vision 2020 includes a number of major developmental projects that aim to regenerate the city and create jobs and economic growth. The projects included the development of an ICC, the now largely defunct Statue of Freedom, an Auto Park at

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 39 May 2008 _____________________________________________________________________ Uitenhage, the Coega IDZ, the MURP Small Business Incubator, the Red Location Museum, the Beachfront Development, the Motherwell Urban Renewal Programme, the Port Elizabeth Harbour re-development and the 2010 Soccer Stadium. A central focus of these projects was redevelopment of the inner city of Port Elizabeth, which was seen as a focal point for all the other developments. The city viewed the inner city as the most accessible place in the urban system for most people, and the location that offers the most opportunities for economic growth. In 2002, a number of planning studies were undertaken for the Metro including a Vision for the Inner City and The Downtown Study which focussed on the Central Business District. A major recommendation of those studies was the establishment of a Development Agency to implement a number of the projects identified at that time. The Metropolitan Council established the Mandela Bay Development Agency (MBDA) in 2004, and assigned it a “Mandate Area” which covers approximately 1039 hectares of land comprising the old Port Elizabeth CBD, the waterfront area of the existing harbour, North End, and other central area suburbs. This area has subsequently been enlarged with the addition of the Motherwell Urban Renewal Programme. The main task of the MBDA is to facilitate the revitalisation of the geographic Mandate Area. The MBDA aims to coordinate and implement existing and new projects within the Mandate Area and facilitate private sector investment. As a first step, the MBDA prepared a “Master Plan" for the mandate area known as the Strategic Spatial and Implementation Framework(SSIF). The aim of the SSIF was to establish a guide for development within the Mandate Area and to link this to specific projects for redevelopment and new development within the Mandate Area. The team for the SSIF was led by GAPP Architects, and included KPMG, Metroplan, Urban Economics, Urban Dynamics, Stewart Scott Transport Engineers and PD Naidoo Engineers. The SSIF is not a legally promulgated Spatial Development Plan, but rather a "spatial guideline document" identifying projects within the Mandate Area which can be earmarked for development and spatially locating those projects. As part of the process of preparing the SSIF, various studies and reports were prepared, including a market analysis, traffic and transport studies, a vision and concept for the Mandate Area, the Strategic Spatial Framework, the identification of a number of priority projects, and a 5 year implementation plan. As part of the market analysis, different sectors such as leisure & entertainment, retail, residential, and office development were studied, and the potential for development in each sector analysed. The priority projects that were identified by the MBDA have been categorised according to the different levels of input required from the MBDA, and the categories used are "Design and Deliver", "Plan and Promote", "Illustrate and Facilitate" and "Integrate and Coordinate". Of particular relevance to the southern port area are the proposals for the Statue of Freedom, the Kings Beach Events Space, the International Convention Centre, the development of a Waterfront, the Kings Beach Development Project and the Lower Baakens Valley Development. Projects that could also have an impact are the development of the Transport Network (including the possible demolition of the freeway) and the Public Transport Interchange. In addition, the establishment of an Urban Development Zone, including an Income Tax Incentive Scheme, will act as a catalyst to development in the area.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 40 May 2008 _____________________________________________________________________ Figure 13: MBDA plan for area surrounding Port Elizabeth harbour

The MBDA plans for the port area are best summarised in figure 13 above, which indicates the potential location of the Statue of Freedom adjacent to the harbour, the King’s Beach events space, and most significantly, an extensive waterfront development to the south of the harbour. The intention is to develop a marina that will serve as a buffer for non-core port activities, which will include a residential zone. The part of the port covered in the MBDA’s master plan is planned to be leased for commercial development, with an integrated harbour/commercial approach. The area within the immediate port boundary is to be earmarked for port related industries, such as a marina, office space, tourism, leisure and entertainment facilities (including hotels), a passenger terminal and related industries. The newly established port security measures will also be applied in a non-intrusive manner. The MBDA has indicated the Master Plan and plans for the Port Elizabeth Harbour were the result of extensive consultation, and that some minor aspects still need to be resolved with Transnet and the NPA. Discussions were held with NPA and Transnet Capital Projects in an effort to integrate the two master plans, and they started to find common ground regarding the future of the southern part of the port. However, 34 hectares of the port is the subject of a legal dispute, which will be discussed later. Effectively this process of consultation and engagement between the MBDA and the NPA / Transnet regarding the harbour development was terminated as a result of the litigation undertaken by Southern Ports.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 41 May 2008 _____________________________________________________________________ 16 Department of Public Enterprises Property Project SOE’s including Transnet are regulated through the DPE which acts as their shareholder on behalf of government. SOE’s are divesting themselves of assets and enterprises that are no longer integral to their business operations, as part of efforts to ensure that SOE’s become more focused. The DPE has established a Joint Projects Facility, to, amongst others, identify optimal ways to dispose of non-core property and to manage the disposal process. The objectives of DPE’s Property Project are to:

• Unlock the value of underutilised and underperforming state owned land assets to reduce costs and inefficiencies;

• Optimise SOE returns and maximise developmental impact; • Focus on strategic land holdings adjacent to ports and logistic hubs, critical to urban

and industrial growth for the nation; • Facilitate coordination and decision making processes within and between

government spheres, agencies and departments; • Expedite the disposal of non-core property; and • Enhance transformation of the property sector.

Non-core properties have been identified by the SOE’s and classified as commercial or non-commercial portfolios. The properties have been further classified as properties for sale, housing, disposal to government departments and development, indicating optimum disposal options. The DPE’s Property Project team has identified vacant or undeveloped land of a strategic nature around ports or CBDs for public development. They have noted that urban development around the Port Elizabeth harbour is constrained by the location of the manganese terminal, oil terminal and oil tank farm, and they recognise that these are located on potentially prime real estate. The Minister of Public Enterprises has indicated that the relocation of the manganese ore terminal to Ngqura would be in line with the broader national strategy to relocate dirty industries outside of cities to outlying industrial ports. Once the port of Ngqura becomes operational, it would provide an opportunity for the relocation, at the same time as enhancing the minerals cluster at Ngqura and freeing up land for alternative use in PE harbour. The DPE’s Property Project team has studied the economic multipliers of a proposed waterfront development, and they believe that the opportunity costs associated with the current location of these facilities are significant. The team has initiated a cost-benefit analysis of the relocation, which has been done in conjunction with the Transnet Capital Projects Unit. This analysis has been suspended pending the outcome of the Southern Ports litigation. A key task will be to re-establish this process now that the arbitrator has made a ruling in this case. The DPE sees its role as facilitating development in support of urban regeneration and broader social and economic development. The DPE has indicated that strategic non-core SOE landholdings in Port Elizabeth have the potential to play a catalytic role in job creation, tourism development, urban development and property sector transformation. They also recognise that these properties require significant investment or enablement before the property can be taken to market. Included in this enablement process are tasks such as environmental rehabilitation, rezoning, securing of development rights and substantial infrastructure investment. The SOE’s do not have the mandate or appetite to undertake property development, and accordingly the DPE is exploring appropriate institutional mechanisms to facilitate this.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 42 May 2008 _____________________________________________________________________ Properties for sale will be put out to an open and competitive tender process that aims to promote transformation of the property sector. As part of the disposal process for SOE properties, the DPE has developed a set of Broad Based Black Economic Empowerment Guidelines. The guidelines are based on the DTI Codes of Good Practice and the Property Sector Charter. Any enterprise bidding for SOE property will need a BEE verification certificate from an accredited BEE verification agency. The department has set a minimum target of 70% of all asset disposals by value by each SOE to entities with a BEE status of at least Level 4, i.e. entities with scorecard points equal to and above 65%. The Department and Minister of Public Enterprises appear to be key allies in the process of unlocking value in the properties around the Port of Port Elizabeth, although they will need to be convinced that the project is commercially viable, and will not create a negative effect in terms of Transnet’s financial viability.

17 Valuation of the development of a Port Elizabeth waterfront In 2006, the DPE undertook an exercise to calculate the Net Property Return for a waterfront development in Port Elizabeth, in order to arrive at a value for the land currently occupied by the manganese terminal and tank farm. This was an extremely significant exercise, in that it was able for the first time to provide a basis for calculating the value of the development proposals put forward. Francois Viruly, a well known property economist in South Africa, undertook the modelling work for this exercise. The study area comprises the triangular waterfront site which is the current location of the oil tank farm and manganese dry bulk storage facility, and the extension of the Port Elizabeth CBD to the waterfront on Spoornet land that currently is used for rail facilities to the manganese terminal and tank farm. The Humewood site owned by Transnet was included in the calculations because of its contiguous nature. The feasibility study was based on the GAPP conceptual urban design proposals that were prepared for the MBDA, and which have been described earlier. The feasibility is based on the highest and best use Open Market Value (OMV) of the property. It includes the sale value of all residential units and the capitalised market value of income producing commercial uses. The proposed development consists of a number of precincts:

• An up-market waterfront development which will act as a catalyst for tourism and enhance land values.

• A commercial node which will serve as a modern extension of the City based on local market demand.

• The Humewood site has a proposed use of lower middle income housing, with 3 640 units of 60m² having a sales value from R350 000.

The methodology followed in this exercise is to determine the highest and best use Open Market Value (“OMV”) of the property, based on the conceptual model provided by GAPP architects. The OMV less the development costs is then taken as the Residual Land Value (“RLV”). RLV less the existing land value gives the net benefit or loss position from undertaking the proposed development. This feasibility exercise has excluded the costs of environmental rehabilitation, and of the railway relocation. To the extent that these costs are borne by Transnet they would need to be deducted from the final RLV. The cost estimates are based on QS rates, and include minimal demolition costs and the costs of a beach clean up, valued at R50/m2.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 43 May 2008 _____________________________________________________________________ The feasibility was based on current market conditions and timing. The project was assessed at the end of a hypothetical 18 month period, and the final result was discounted back 18 months to derive a project NPV. The costs of the development were based on a current fixed cost basis with an 18 month construction period. The residential sales were based on an assumption of a full sell-out at current market prices escalated over 18 months. The rentals were based on current net market rentals escalated over 18 months. The project management team costs were not included in the project feasibility, and would be an additional cost that needs to be factored in to the final valuation. In determining the overall project costs, the cost of the infrastructure was modelled separately from the building construction costs, and two models were used, namely the land model and the building model. The infrastructure costs are in aggregate R580m, and are based on QS estimates for projects with a similar scope and costs. The costs consists of professional fees, township and plan approval costs, a developer’s fee, contingencies and sundries. The construction costs are in aggregate R8.3bn, and are based on average bulk building costs of R5,862/m2. Different costs were applied to different land uses, and the costs consist of professional fees, developer’s profit, marketing and promotion, and contingencies and sundries. In calculating the revenue side of the model, it has been assumed that prices and rates will be based on value extraction, with a premium related to the site. A substantial marketing budget has also been assumed, contributing to the prices obtained. The prices and rates have been projected for completion in 18 months, and are based on freehold ownership and current design. The sale prices include VAT, while the rentals exclude VAT. The up-market residential prices were based on similar projects nationally. The retail rentals assumed boutique type stores and restaurants. For industrial rentals, the model factored in a retail component. Residential sales were based on R5000 /m2 for “social” housing, R8 000 /m2 for the middle market, and R15 000 /m2 for up-market units. The hotel feasibility was based on R460 for limited service facilities, and R1,150 for up-market facilities. Based on these assumptions, the following project revenue estimates were calculated: Table 12: Capitalised Property Income (in R’s billion)

2.942

7.227

1.122

1.472

1.213

13.976

0 2 4 6 8 10 12 14 16

Total

Hotel

Fishing

Office

Retail

Residential and Parking

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 44 May 2008 _____________________________________________________________________ Taking a total capitalised property income of R13.976 b, the net proposed project return was calculated by subtracting the above infrastructure and development costs, as well as applying a discount of R0.74b. Table 13: Project Returns (in R’s billion)

This model therefore came up with a residual land value for the properties that were modelled of R4,3 billion, and a net project return of R4,1 billion. It is important to note that these values do not reflect the sale price of the undeveloped land, but the final value obtained after the development and the attendant risks of committing the development capital to this project. Given Transnet’s stated intention not to engage in the property development business, it is unlikely that this value would accrue to them in its entirety. However, there are various ways in which a property development of this scale could be structured in order to allow Transnet to participate in the upside of such development, without playing the role of a developer.

18 Multiplier effects of a waterfront development As part of its investigations into the relocation of the manganese terminal and tank farm, the DPE commissioned a study into the economic impact of a major waterfront development and extension to the CBD area in Port Elizabeth. The work was undertaken by Grant Thornton in 2006, and the results were presented to Transnet and the stakeholder group in Port Elizabeth. The study investigated two major areas of impact, namely construction and operations. All values used in the calculation are in 2006 Rands. The development is assumed to happen from 2014 to around 2030. The authors found it too difficult to judge development speed and take up 15 – 24 years hence, and have based their calculations on the first full year that the development is fully operational. The authors have assumed that the waterfront development will take place in a staggered fashion over a number of years, in the period 2014 – 2030. The full impact of a developed and operational waterfront will only happen in about 2030. From 2016, some smaller annual impacts will occur and will build up to the calculated annual impact over time.

8.312

13.976

4.346

4.128

0.58

0.218

0.74

0 2 4 6 8 10 12 14 16

Total Revenue

Building Development

Land Development

Discount

NPV: RLV

Existing land value

Net Project return

RLV = Residual Land Value

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 45 May 2008 _____________________________________________________________________ The impact of the development on GDP and jobs is calculated using multipliers applied to direct spend. The authors have chosen the multipliers on the basis of an analysis of the national accounts and the local economic conditions. Table 14: Multipliers used for calculating economic impact of waterfront development Eastern Cape Nelson Mandela Metro

Sector GDP Multiplier Jobs Multiplier (jobs per R1m)

GDP Multiplier Jobs Multiplier (jobs per R1m)

Construction 1.42 8.36 1.34 6.89

Trade, catering & wholesale

1.41 6.20 1.33 5.16

Office Industries 1.41 3.96 1.33 3.37

Fishing 1.41 4.36 1.33 3.69

Source: Grant Thornton, 2006 The direct expenditure on the development is calculated by examining the construction and capital spend, the related expenditure, the sales prices of residential units, and the capital expenditure of foreigners and others travelling to Port Elizabeth to purchase, supervise developments and furnish units. The operations spending includes the following amounts:

• Turnover of businesses – fishing, office, retail; • Spending at hotels; • Hotel visitor expenditure in the rest of the Metro and surrounding areas; • Levies at residential developments; • Household expenditure of residents.

By applying the multipliers to their estimates of expenditure, Grant Thornton have derived the economic impacts summarised in the following table. Table 15: Economic impact of a proposed waterfront development

Eastern Cape Nelson Mandela Metro

GDP Rm Jobs GDP Rm Jobs

Taxes Rm

Construction impact (2014 -2030)

19,473 112,314 18,313 92586 3186

Operations impact in 2030

38,744 143,063 36,487 119943 8438

Tourism Operations Impact

5,576 24,503 5,251 20393

Source: Grant Thornton, 2006

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 46 May 2008 _____________________________________________________________________ The results show that over the whole construction period, a total of R12,7 billion will be directly spent in Port Elizabeth resulting in a total contribution to GGP of R17,1 billion. The direct capital expenditure will support 87 780 annual jobs in Port Elizabeth over the construction period. During the construction period, in total salaries of R389 million will be paid in Port Elizabeth, with R70 million in personal taxes being paid on these salaries. Companies are projected to generate R1,8 billion in profits and pay R531 million in corporate tax. The full operational impact is realised from about 2030, although there is also significant annual impact building up from 2014. At full operation, the development will generate R27,5 billion in direct expenditure per annum, which will have a direct and indirect contribution of R36,5 billion to the GGP of Port Elizabeth. The direct expenditure will support 119 943 jobs per annum in the Metro. At full operation, salaries of R5,7 billion will be paid annually, with R1,1 billion in personal taxes being paid on these salaries. Companies are projected to generate R3,6 billion in profits per annum, and pay R1 billion in corporate tax. The scale of the project is significant. If Port Elizabeth’s GDP grows at 6% annually, in 2030 the waterfront and related developments will make up 32% of the GGP of Port Elizabeth, and 49% of jobs in the Metro. The development is projected to attract an additional 46 000 foreign and 220 000 domestic tourists to Port Elizabeth and surrounding areas annually in 2030. These impact figures confirm the strategic importance of the waterfront development, and underline the critical importance of unlocking the land to the southern side of the port.

19 The Southernport Developments legal matter and its implications A significant portion of the Transnet land to the south and west of the port of Port Elizabeth has been the subject of a legal dispute between Transnet and Southernport Developments (Pty) Ltd. This dispute has quite significant implications for the potential relocation of the manganese terminal and tank farm, in that it has committed Transnet to certain undertakings, at the same time as limiting their rights over a significant portion of land adjacent to the port. The claim by Southernport Developments (Pty) Ltd. stems from the unsuccessful bid in 2000 by Tsogo Sun for a casino licence. As part of the preparations for the casino bid, Tsogo Sun Ebhayi (Pty) Ltd (the legal predecessor of Southernport Developments (Pty)Ltd) sought to have access to Transnet land around the port for an ambitious casino and waterfront development. A contract was concluded with Transnet on 7 December 1998 that gave Tsogo Sun the rights to develop and operate a temporary casino on Portion 'C' (portion of Erf 1051) marked in purple on the map below, and subsequently a casino, a hotel and ancillary and retail facilities on Portion 'A' (portions of Erf 577 & 578) marked in green on the map below. They also acquired rights to Portion ‘B’ marked in yellow on the map for a subsequent waterfront development. The extent of the land in question is portion 'A' approximately 10,7340 ha, portion 'B' approximately 22,2869 ha and portion 'C' approximately 2,4230 ha.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 47 May 2008 _____________________________________________________________________ Figure 14: Map of port showing Transnet land involved in Casino license application

The original agreement with Transnet was subject to a suspensive condition that Tsogo Sun Ebhayi be granted a casino licence in terms of the Eastern Cape Gambling Act. The application for a casino license was unsuccessful, and on 10 February 2000, a second agreement, which the parties described as a bridging agreement, was concluded. It provided for the conclusion, in due course, of a definitive agreement. In terms of the second agreement, Tsogo Sun Ebhayi was granted an option to lease the properties identified in the first agreement or agreed portions thereof on terms and conditions to be negotiated between the parties in good faith. The second agreement also provided for the referral of any dispute to arbitration in the event of the parties being unable to reach agreement on any of the terms and conditions. A consideration of R300,000 was paid to Transnet for making the land available for the purpose contemplated in the Memorandum of Understanding. The initial Contract contemplated a long term lease including a purchase option at open market value for the purpose of developing and operating a casino, a hotel and ancillary entertainment and retail facilities. The bridging Memorandum of Understanding contemplated a lease of the Property or the agreed portions thereof on such terms and conditions as may be negotiated between the parties in good-faith and approved by each parties' Board of Directors. Tsogo Sun Ebhayi (Pty) Ltd was subsequently sold by Tsogo Sun to investors including Mr. Charles Erasmus, and the name was changed to Southernport Developments (Pty) Ltd. At this point Transnet refused to enter into good faith negotiations with Southernport Development, and attempted to extract themselves from the lease agreement. Southernport Developments subsequently instituted an action in the High Court ( Johannesburg) for an order requiring that Transnet enter into good faith negotiations with them regarding the terms and conditions of an agreement of lease. They also sought an order requiring that any dispute between the parties be referred to arbitration in accordance with the second agreement. Transnet disputed the claim, and this was upheld in the high court.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 48 May 2008 _____________________________________________________________________ The matter was then taken to the Supreme Court, where Transnet argued that there was no agreement regarding the essential terms of a lease agreement and that in any event the second agreement was an unenforceable preliminary agreement. On 29 September 2004 the Supreme Court upheld an appeal by Southernport Developments, and agreed that the contract it had concluded with Transnet was enforceable. The Supreme Court held that the arbitration provision in the agreement rendered the second agreement sufficiently certain and enforceable. After various failed attempts on the part of Southernport Developments to conclude a lease agreement, the terms of the lease agreement have been subjected to an arbitration process, in terms of which the exact terms of the lease will be determined by the arbitrator. This will be a very significant precedent, in that Transnet management and Board will for the first time have terms imposed on them, rather than negotiating such terms themselves. Transnet has lifted the matter up under the direct management of the Transnet Executive Group Legal, and imposed a moratorium on all discussions and communications relating to the waterfront development, or the relocation of the manganese terminal and tank farm. Even simple requests for information from SAPO have been referred to head office, and it is not possible to get any formal engagement with Transnet officials regarding these matters. In the arbitration process Southernport Developments have sought to obtain the following terms for a lease agreement:

• Transnet to remove the manganese ore terminal and tank farm from Properties A and B at their own cost, and undertake the necessary environmental rehabilitation of the site.

• Transnet to undertake the construction of the platform and the sea defences at their own cost.

• Southernport Developments to be granted beneficial occupation of Properties A, B and C.

• Southernport Developments to be entitled to develop and sub-let the properties for office accommodation, retail businesses, restaurants, hotels, casinos, tourism, entertainment, residential accommodation, and other uses related to a waterfront type development.

• The lease rental to be negotiated between the parties, or submitted to arbitration and determined on the market value of the properties.

• Southernport Developments to have a pre-emptive right of purchase over the properties.

In defending its case with the arbitrator, Transnet has argued that the current tank farm and manganese terminal are core to its operations, and that it has no intention of moving them. Transnet management have gone on oath in this regard, and this therefore constitutes a very serious obstacle in terms of reopening discussions on this matter. The arbitrator has subsequently made an award, but this has not yet been made an order of court, and therefore remains confidential. The terms of the lease agreement apparently include full development rights i.e. commercial zoning for Erf 577, the portions of Erf 578 not occupied by the manganese terminal and tank farm, and the Moreton Bay site owned by Propnet, which was given in lieu of Portion C which Transnet argued was core property. The portions of Erf 578, amounting to 18,5 ha, are to be leased to Southernport Developments for a period of 60 years. Southernport Developments has the right to purchase the Moreton Bay site of 4,6 ha and Erf 577 of 10,8 ha. The existing operations of the tank farm and manganese terminal are to be ring fenced, and a 5m high wall constructed around these facilities.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 49 May 2008 _____________________________________________________________________ Southernport Developments has indicated their intention to proceed with the development despite the existing facilities remaining in place. Their plans include a marina development on Erf 578, with access through to the harbour at a point to the east of the manganese terminal. While there will be substantial logistical difficulties associated with such a development, it will increase the pressure for the ultimate relocation of the manganese terminal and tank farm, and assist to raise the land value for the properties on which these facilities are located, thus making a relocation more financially attractive to Transnet. On the positive side the lease value of the land will also provide Transnet with an additional and potentially lucrative revenue stream. However the rights secured by Southern Ports to land adjoining the manganese terminal and tank farm will effectively reduce the land area from which it could derive returns from a property development, and hence the returns that Transnet could anticipate if it were to develop the site in an unencumbered manner. The calculation of residual land value of a waterfront development will need to take this into account. However the legal dispute and settlement have probably done more damage than good to the overall case for relocation. The developments have resulted in a hardening of position by Transnet management, and a stance against relocation to which they have committed themselves in court. Transnet and its various divisions have also reverted to a very hierarchical, non-communicative and disengaged stance, which may take many years to reverse.

20 Summary of the Pro’s and Con’s of relocation The various studies described above have enabled decision makers and role players to take much more informed decisions regarding proposals for the relocation of the manganese terminal and tank farm, and to weigh up different options. They have also highlighted very clearly the risks associated with the two facilities in their current location. The case for relocating the tank farm once the leases expire in 2014 is overwhelming. There are very serious environmental and safety hazards associated with the current facility, and the costs of addressing these in the current location are prohibitive. The tank farm is inefficiently designed, out of date and beyond its safe lifespan. The oil industry is ready to plan and undertake relocation at their own cost, and this will not impact on Transnet’s balance sheet. They have various workable alternatives to consider, and the supply of petroleum products will not be compromised by a relocation in 2014. Retaining the facility on the site opens both Transnet and the oil industry to serious risks of litigation, and exposes the CBD and city population to serious hazards. The relocation of the tank farm should also not be linked to the fate of the manganese terminal, as relocation in warranted in its own right. In terms of the manganese terminal, the issue is more complex. The poor condition of the current manganese ore export terminal is a major issue. The projected increase in manganese ore volumes for export and beneficiation suggests that government and Transnet should be planning on a more ambitious scale. The two scenarios that were modelled for the relocation of the manganese terminal produced an interesting result. They demonstrated that Transnet will be in roughly the same position in either scenario provided there is a grant-based capital subsidy on its gross R1.6 billion capital expenditure. Ore handling charges have to be increased by 56% (from the current R16 to R25 per ton) in either the relocation or the retention strategy. This is an interesting outcome, as the tariff increases have been raised by NPA as the main reason that they are unable to relocate.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 50 May 2008 _____________________________________________________________________ Transnet has indicated that the overall capital costs of relocating the manganese terminal to the port of Ngqura are in the region of R8b. The analysis in this paper has indicated that this estimate is probably on the high side, and it is possible to achieve a higher ore export capacity with a more limited capital expenditure. Nevertheless the bulk of the capital costs that will be incurred by Transnet are related to the upgrading of the rail line between Ngqura and Beaconsfield (Kimberly), as well as increases in the rolling stock. These costs will be incurred regardless of whether the manganese terminal is located at Port Elizabeth or Ngqura, and they are related to the overall expansion of export capacity that is required to meet global demand. It is important to note that the additional capex that will be required from Transnet for the relocation strategy is offset by the net income derived from the released land. While the Residual Land Value was estimated to be approximately R4 billion, the Southernport Developments arbitration will have resulted in a portion of this amount not being to their benefit. There is also the issue of Transnet not wishing to engage in the property development business. Nevertheless with some careful planning and structuring, it should be possible to Transnet to extract a significant portion of this value from a development. The combined tax revenue to Government from a development further reinforces the economic returns to be derived from the relocation strategy. From the perspective of central government, any grant-based capital subsidy that may be required to place any single SOE in an equivalent economic position is therefore economically justified. The overall benefits of enabling a waterfront development include the direct capital investment, accelerated growth in regional GDP, increased tourism and the creation of both direct and indirect jobs. In summary, the pro’s and con’s of the two strategies are set out below. Retention at Port Elizabeth The benefits of retaining the facilities in their current location are that this is business as usual, and no additional effort is required. There are limited capex requirements, and it is generally considered a ‘safe’ option. The risks associated with retention include the adverse environmental, safety and quality of life implications for the city and its population, and the fact that capacity expansion beyond 6mtpa is not possible in Port Elizabeth. Any investment in short term upgrades in the current location will potentially be wasted when demand beyond 6mtpa triggers a relocation to Ngqura. Relocation to Ngqura The benefits of relocating the terminal to Ngqura include significant economic and enterprise level benefits, and the overall catalytic effect that this will have on development in both Port Elizabeth and Ngqura. Ngqura is clearly also a more appropriate location for both the manganese terminal and tank farm. The long term growth of manganese ore exports will be better accommodated in this location, as there is growth potential beyond 6mtpa, and the only hard constraint is the limitation of rail capacity to 10mtpa. The risks associated with the relocation are that it requires complex integrated planning, and significant capital investment, which are subject to uncertainties about the future market for manganese ore. There are also the property market risks associated with a very substantial waterfront development, although these will be predominantly borne by the private sector. It is important to note that there are some key project risks associated with the relocation scenario. These include the manganese demand projections. The financial model has demonstrated that a modest reduction in the CAGR for manganese ore will result in a

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 51 May 2008 _____________________________________________________________________ significant reduction in absolute volumes and therefore of revenue to Transnet. The tariff increases that will be required to cover the upgrades and relocation costs across the whole channel will be significant, and the overall impact of this on the South African industry’s competitiveness must still be determined. There are also risks associated with the capex projections, underlined by the wide variability between the SAPO estimates and the Hatch estimates. Even though the model used the more conservative (higher) capex estimates, this variability indicates that there may still be a margin of error in the estimates. There are also quite significant risks on the property development side. The net returns from the released property will depend on the market dynamics when the property is offered to developers.

21 Suggested next steps The ultimate decision maker in relation to the relocation of the manganese terminal and tank farm is the Transnet Board and senior management. While the shareholder, as represented by the DPE may be in favour of a relocation, they will not override a Transnet decision made on sound business grounds. Transnet itself is not impervious to broader economic arguments, but these will always be considered peripheral to the main financial issues around the business case. There are a number of factors that will have an impact on Transnet’s consideration of the business case for relocation:

• The future market for export of manganese ore, and the views of the industry on the future export volumes;

• The ability of the market to absorb the tariff increases and remain competitive internationally;

• The cost reductions to be derived from private sector proposals to build and operate a manganese terminal themselves;

• The availability of the Critical Infrastructure Grant for the purposes of funding the relocation; and

• The constraints placed by the NMBM and other stakeholders on expansion plans for the terminal in the current location.

The new legislation governing ports makes explicit reference to options for the private sector to build and operate ports facilities such as a manganese terminal. It is feasible that the manganese industry, which has a better understanding of the long term market and its risks, will be willing to invest in a new terminal at Ngqura, particularly if Critical Infrastructure Funds are available to facilitate this. The proposal by Rennies Bidvest shows significant cost reductions, and it would be extremely useful to benchmark the Transnet proposals against this. This will require Transnet to be transparent regarding the manner in which their capital costs and tariff calculations are derived. A dialogue with the manganese industry on these issues is recommended in order to develop proposals that can be taken up with Transnet. The full environmental and safety risks associated with the current facilities have not been taken into account by Transnet decision makers, and these should be brought to their attention as a matter of urgency. In addition, the broader public in the Port Elizabeth area should be made aware of the risks that they and the city face, so that their rights as citizens can be properly taken into account by decision makers in Transnet. However, the central task will be persuading Transnet to move beyond the current standoff with Southernport Developments, and to re-engage their consideration of the business case for

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 52 May 2008 _____________________________________________________________________ the relocation. It is extremely important that Transnet take account of the risks of remaining in the current location, and the benefits of a relocation both to Transnet and the city as a whole. A sober reconsideration of the business case, supported by background work on the above factors, will significantly improve the prospects for a positive decision from Transnet. Once a decision is made, even in principle, there will be a quite different set of challenges, with a large amount of complexity requiring integration of different decision making processes. PERCCI will need to re-evaluate its role in this situation, and seek to play a supportive role that is able to steer an ambitious undertaking such as this through to a successful conclusion. Assuming that an in principle decision from the Transnet Board is possible by the middle of 2008, the timeframes for the relocation and waterfront development will probably allow for a coordinated relocation of the tank farm and manganese terminal by 2014, and the development of a waterfront and related facilities thereafter. A rough estimate of the timeframes is described below. Table 16: Action plan and timeline for relocation to Ngqura Activity Location Duration Start Date End Date In-principle agreement by Transnet Board

Ngqura 1 years June 2008 June 2008

Engineering feasibility Ngqura 1.5 years June 2009 December 2009 Environmental Impact Assessment

Ngqura 2 years December 2009

December 2011

Physical construction of materials handling equipment

Ngqura 3 years December 2011

December 2014

Rehabilitation and scrapping PE 1 year December 2014

December 2015

Bulk infrastructure PE 1 year December 2015

December 2016

Development land sales PE ongoing January 2017 2030 There are a large number of complex issues that will require specific attention and clarification as part of the programme to unlock the development potential of the land on which the tank farm and manganese terminal are located. These include the sequencing of development efforts, the integration of the development into the City grid, issues relating to water edge control and operating berths, the establishment of appropriate institutional arrangements such as a Development Agency or appointment of developers to undertake the project. PERCCI members will be able to play a crucial role in facilitating and enabling different issues. It is envisaged that a coordination mechanism or steering committee will be required to bring together the different stakeholders in such a project, including the various Transnet divisions, government departments, municipality, MBDA, private sector stakeholders such as the oil and manganese industries etc. Various task teams will be required to address specific issues. Serious consideration should be given to establishing a project management support facility, to enable a development of this scale to take place. The relocation will need to be carefully timed and integrated with other constraints. The continued operation of both facilities is required, and alternative facilities need to be

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 53 May 2008 _____________________________________________________________________ developed at Ngqura prior to any decommissioning at Port Elisabeth. The provision of an alternative location requires the necessary supporting transport infrastructure such as rail (ore) and piped (fuel) connectivity to Ngqura. A larger capacity ore terminal relocated to Ngqura justifies increased exports, which in turn require upgraded rail capacity from Sishen. There are also some serious challenges related to the environmental issues. The tank farm and ore terminal have undoubtedly had a detrimental environmental impact, the remediation of which will increase the development cost of the land. The higher the cost of restoration, the greater the argument can be made for retaining the status quo. The least cost but most appropriate solution to the site will need to be explored, which could include options such as surfacing the site or excavating approximately 2m of the affected upper surface. A solution will need to be found for the supply of jet fuel to the airport, either through retention of the existing pipeline and supporting facilities, or through arrangements to move the fuel from Ngqura to the airport. The development of the waterfront and the relocation of existing facilities will also necessitate the removal of existing rail capacity in order to integrate the property into the City grid. The rail infrastructure is considered a barrier to the expansion of the CBD and access to the sea, and it is highly desirable that the existing rail infrastructure is uplifted back to the station area. Once the facilities are operational in Coega, the main line services will eventually terminate at Coega and not at Port Elizabeth. The uplifting of the rail infrastructure will be a complex task in its own right There are some complex issues relating to water edge control that are common to most waterfront developments, and will require careful management. The control and operation of the existing berths is essential, and this function will not be relinquished by the NPA. The use of land in the immediate vicinity of the water edge would consequently be under leasehold. The ISPS code and requirements for limited access into the port area will need to be addressed. Amongst others, the area shared for recreational use would need to be separated from the operational Port in order not to compromise general security access to the Port. Public access to the water edge would also need to be regulated subject to port usage. The way that this has been done at the Cape Town V&A Waterfront should be studied. The establishment of a passenger terminal on the southern aspect of the port also needs to be considered. The berths could be used as a passenger terminal, but access would need to be limited during port operations. This will need careful consideration in conjunction with the NPA, Transnet and DPE, who need to be convinced that a balanced approach, allocating tourism related land use in defined areas, is in the national interest. The separation of Port and waterfront functions will also need careful planning. The Port precinct cannot be easily segregated into Port and waterfront sections, as the Port functions as a single entity. The contiguous functions should be planned not to compromise each other. This will include planning for access routes, the securing of the water edge, and managed berthing arrangements. The institutional arrangements for a waterfront development will need to be designed in ways that recognise the risks and contributions of different stakeholders, and which give Transnet a sufficient stake in the development without compromising their stated intention not to be involved in the property development business. Given the outcome of the Southernport Developments case, it may be necessary to include the developer holding the rights in the

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 54 May 2008 _____________________________________________________________________ waterfront proposal. There may be legal claims arising from the previous litigation that have to be addressed as part of this process. Conceptualising and designing the right development vehicle for the task will be an interesting challenge. A Special Purpose Vehicle (SPV) should probably be established for this purpose. Some issues that should be considered as part of this process are:

• A partnership between public and private sectors in undertaking the development. The landowner could commit land and the private sector could commit development expertise and funding.;

• The SPV will need focussed management and a specific development mandate encompassed in a project charter as the result of an initiating Memorandum of Understanding and Heads of Agreement;

• The role of the Metro and MBDA in such a development will be important, and the entity may need to consider including the MBDA in order to best coordinate and manage the development;

• Even if the city is not directly involved in the SPV, it would be advisable to set up a special task team to coordinate interaction between land owner and local authority (why shouldn’t the city be involved as is done in ports of Rotterdam and Antwerp?); and

• Land available for development would need to be identified and committed with a view to disposal for waterfront development so as to encourage private ownership and development investment. The return for land to Transnet may need to be in the form of deferred compensation.

A project of this scale will clearly require a Project Sponsor to facilitate and drive the project, especially in its early stages. It is not clear at this point in time who the appropriate sponsor for such a project would be, but there are different possible candidates in both the public and private sectors. Some of the early tasks that would need to be undertaken by a Project Sponsor are the securing of project seed capital, facilitating the commitment of the land for the waterfront, and developing the mandate or charter for the SPV. It would also be necessary to appoint a Project Manager to initiate and manage the project.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 55 May 2008 _____________________________________________________________________

22 References Bonga, M. W., “An Overview of the South African Iron, Manganese and Steel Industry During the Period 1984-2003”, Department of Minerals and Energy, 2005. Coega Development Corporation, “Presentation on relocation of manganese terminal”, made to stakeholder working group, September 2005. Department of Environmental Affairs and Tourism, “Regulations issued in terms of National Environmental Management Act, 1998”, 21st April 2006. Department of Public Enterprises, “Integrated Feasibility Report On Proposed NMMM Port Property Development And Relocation of Bulk Handling Facilities to Port of Ngqura”, presentation made to PE task team, March 2006. Department of Public Enterprises website www.dpe.gov.za visited on 08.03.08 Department of Trade and Industry, “Critical Infrastructure Programme (CIP) Operating Guidelines”, December 2006. Du Plooy, A.P., 2002, Geochemistry and mineralogy of supergene altered manganese ore below the Kalahari unconformity in the Kalahari manganese field, Northern Cape Province, South Africa. M.Sc. dissertation (unpubl.), Rand Afrikaans University, P.O. Box 524, Auckland Park, 2006. Enviros Consulting Limited / PD Naidoo and Associates, “Statue of Freedom and Surrounds: State of the Environment Report”, August 2005. Erwin, A., Minister of Public Enterprises, Speech to Port Elizabeth Property Investors’ Conference, 24th August 2006. Fowkes, K. and Hobbs, D., Hatch Beddows, “Trends shaping the future of the steel industry - Implications for manganese”, address to 2007 International Manganese Institute Annual Conference, 19th June 2007. Grant Thornton, “Economic Impact Assessment of a Waterfront Development in Port Elizabeth”, report prepared for the Department of Public Enterprises, 2006 Hatch, “Pre-feasibility study for relocation of manganese ore export terminal to the Port of Ngqura”, final report 2005. KPMG, on behalf of Mandela Bay Development Agency. “Strategic Spatial and Implementation Framework, Tourism market assessment”, 2005. KPMG, on behalf of Mandela Bay Development Agency, “High-level analysis for the development of hotels in the Mandela Bay region”, 2005. Kuiper, M. D., Arbitrator, “Amended procedural directions. In the arbitration between Southernport Developments (Pty) Ltd and Transnet Limited”, April 2007 Laplace Conseil, “Steel and Manganese Prospects to 2012”, address to 2007 International Manganese Institute Annual Conference, Vienna, June 17-19, 2007.

Report on Relocation of Port Elizabeth Manganese Terminal and Tank Farm 56 May 2008 _____________________________________________________________________ Mandela Bay Development Agency, “Facilitating Opportunities for Redevelopment and Inner City Renewal : Work of the Mandela Bay Development Agency”, presentation made on 9 September 2005 Mandela Bay Development Agency, “MBDA Land and Development Strategy”, Presentation to NMMM Business Unit Managers, 4 April 2006 Mandela Bay Development Agency, “Strategic Spatial and implementation Framework for the mandate area”, 2005 McClintock, A., McClintock and Skinner Inc., personal communication, March 2008 National Assembly, Question No. 962 “King’s Beach PE Property Question for Written Reply”, Internal PQ Paper: NA No. 24 – 2006 dated 18 August 2006 National Ports Authority of South Africa, Tariff Book April 2007 – March 2008, 2007 Republic of South Africa, Act No. 12 of 2005: National Ports Act, 2005. Supreme Court of Appeal 40/03, “Southernport Developments (Pty) Ltd v Transnet Ltd”, Hearing date: 16 August 2004 Judgment date: 29 September 2004 Urban-econ for Mandela Bay Development Agency, “Strategic Spatial and Implementation Framework: Market Research Report”, October 2005 US EPA Website, Manganese Compounds, Hazard Summary-Created in April 1992; Revised in January 2000 Viruly Consulting (Pty) Ltd., “Property Feasibility Report for the Proposed Development of State Owned Enterprises’ Land Located in Port Elizabeth”, February 2006.