Despite the current economic climate, Transnet, the largest and most crucial part of the freight logistics chain that delivers goods to each and every South African, has managed to post positive results that provide a solid base for future growth under CEO Siyabonga Gama.
“In these times of economic uncertainty, we did release a pleasing set of results,” Transnet CEO, Siyabonga Gama tells Enterprise Africa.
Speaking of the yearly results for the period ending March 31st2016 which were released in June, Gama was happy but indicated that there is still much room for improvement. The company registered a 1.7% increase in revenue to R62.2 billion, an EBITDA growth of 2.6% to R26.3 billion, an increase in cash generated by operations of 1.7% to R27.7 billion, an increase of operational efficiency of 15.9%, and a host of other pleasing results.
“We would like to grow much more,” he says. “Most of our business is very much dependent on GDP growth in the country so we did make some progress in terms of our road to rail initiatives where we grew quite nicely but a lot of the sectors in this country are depressed. If you look at our steel and cement business, they went backwards; coal did not really grow.”
Encouragingly, Transnet’s Market Demand Strategy (MDS) continued through 2015 despite the economic turbulence and spending as part of the capital investment program (which was initiated in 2012 to expand rail, port and pipeline infrastructure) hit R29.6 billion for the year taking total spending to R124 billion. With a further spend of R340 billion expected in the next decade, the MDS figures will likely reach an unprecedented half a trillion Rand investment in total.
“We have committed a lot of capital already to our MDS across various projects which are at various stages of completion. What we try and do with the MDS is validate the demand and we are now redirecting our investments to those areas that we believe have the potential for future growth opportunities. If you look at areas like the FMCG market and general freight, that is where we want to invest more as that is where road has a huge percentage of the market and we would like to attack that,” explains Gama.
One of the main goals of the MDS is to move a large percentage of freight from road to rail. The government says that it expects by 2019, Transnet Freight Rail (TFR) will increase its market share of container traffic from the current 79% to 92%. TFR is the biggest heavy haul freight rail company outside of the United States, excluding India, that is not a company but a Government Department.
The investment into 1319 new locomotives and around 2100 wagons has stimulated some success in Transnet’s push to move freight from road to rail and the project is beginning to yield positive results.
“I think that has been one of our saving graces,” says Gama. “We remain constant in rail. Even though containers in maritime were down by a couple of percentage points, actual railable containers were up some 5% and that gives you a measure of that fact that our penetration into the market continues. This was despite the fact that for most of last year the price of diesel was very low meaning that trucks could compete with us, even on price, but we continued to improve. As the price of crude goes up, which it has, we can fast-track and differentiate our growth in those particular areas.”
Of course, with all of the success of 2015 that was reflected in the results, there were challenges that had to be addressed. Because of the economic uncertainty, there was a need to implement some cost-containment measures and this focus on fine details offered up a saving of R6.6 billion against planned costs. Because of this success, Gama says that the cost-containment measures will not need to remain in place for the long-term.
“Through those measures, we were saying that we need to reshape the core of Transnet and that was largely just for last year – you cannot sustain cost-containment for long periods of time. I’m always looking at the revenues and looking for where we can grow because, ultimately, what we need to focus on is our growth trajectory going forward,” the CEO says.
In June, another indicator that the growth trajectory will remain stable came from international ratings agency, Standard & Poor’s who confirmed that Transnet remains a resilient and attractive investment of choice. The ratings agency said while the macro-economic outlook remained negative, Transnet continued to perform despite a subdued and challenging economic environment.
“We regularly talk to the ratings agencies about our own rating as a stand-alone entity and, in terms of local currency, we are rated very highly at BBB+. With long-term foreign currency we are a BBB- and so it’s very important to us in terms of the price of credit as if your credit profile deteriorates then we will pay more and looking at our exposure, one percentage point on R155 billion borrowing is not a small amount,” states Gama.
AFRICAN SUCCESS
Like many of South Africa’s SOCs and big private companies, Transnet has realised the importance of growing its reach across the border into Africa. Continental development has been a long-term aim for the company and for the year ending March 31strevenue from cross-border activities increased from R1.5 billion to R2.8 billion.
“Our African business is going to grow in importance because a lot of our neighbours are growing at a faster GDP rate than South Africa,” says Gama. “In terms of trade on our continent, we have to look at all of the missing links, all of the infrastructure finance, rolling stock finance so that we can improve and increase intra-African trade.”
An important deal on the continent was concluded in June when Transnet Engineering handed over the last batch of passenger coaches it had developed for Botswana Railways. Transnet and Botswana Railways signed a contract last year for the design and manufacture of 37 passenger coaches that would form part of a system running between Lobatse and Gaborone.
“It was a very successful partnership and we were able to complete in record time – Botswana wanted us to complete the project in time for their anniversary of independence. We built the coaches in two of our factories, in Cape Town and Pretoria, and we are very happy with the outcome having delivered all of the coaches,” says Gama and he is hopeful that this project can act as a showpiece for other potential customers in Africa.
“It also showcases our engineering expertise and our advanced manufacturing capabilities. We are now an OEM for coaches; they were our own design and the coaches are something to marvel at.
“There’s always been a historical rail between Transnet and Botswana Railway and it has largely been with freight cars where we have delivered more than 500. However, this was our first foray into passenger rail in Botswana.
“We are emboldened by this and we are hopeful that other countries will follow in the correct tradition behind Botswana. They can see what we’ve done in Botswana and realise that these are some of the best passenger coaches you can get on the continent,” he says.
A LASTING SOCIAL IMPACT
Obviously, the release of the financial results will spark the interest of numbers people and the accountants but there is also a social element to take from all the figures – a human component that is vitally important to a group that employs more than 60,000 people
Transnet, as part of its capital investment programme, works towards the goals of the country which include various aspects of BBBEE, transformation, enterprise and supplier development (especially the localisation andindustrialisation of key industries in which it operates), job creation, promotion of small business and skills development.
Overall, Transnet spent 3.6% of its total labour cost on training, and R248 million on sustainable community development programmes, during the period under review and plans to spend a further R7.6 billion on training throughout the MDS period.
“With sustainable community programmes, we run a health train called the Phelophepa. It goes to rural communities and under-serviced areas, looking at things like dentistry, optometry, high blood pressure, diabetes and a whole range of ailments and, as health is such an important issue in this country, we will continue to spend R160-170 million per annum,” says Gama.
“We spend this money because we want to, not because we have to,” he adds. “We want to positively impact communities and we have to give something back – it’s not just a marketing spend, there’s a big social economic impact from the money we spend. We are assisting people in rural areas with development programmes and we’re assisting people who otherwise would not have access to services – it’s philanthropy with a purpose.”
And during a period of unstable, unpredictable and uncertain economic times, does the macro-situation pose a threat to this type of investment?
“This spending will continue regardless,” says Gama. “Part of what we do is investing in the training and development of people even though many of them will never work for Transnet. For example, we train around 3000 engineering technicians of which we will only need around 1000. Transnet has a developmental agenda to impact the economy so what we do is create skills for the economy rather than just for ourselves.
“As we develop these people and upskill them, they are able to go and develop and run small businesses and this creates jobs through a multiplier effect.”
STRONG HUMAN CAPITAL
In recent months, there has been something of a shake-up of the top brass at Transnet. Gama was appointed as CEO, following a 12-month period as Acting CEO, in April and since then there have been a number of senior appointments to bring a new drive for advancement.
In February, Gama unveiled 10-year Transnet veteran Garry Pita as Group CFO. In May, Transnet announced the appointment of Khomotso Phihlela as Group Executive for Research & Development, the first time that the company had appointed a dedicated executive at that level of seniority to drive innovation across its businesses. Also in May, Makano Mosidi was appointed CIO after a successful career with Dimension Data, IBM, Ernst & Young and Accenture among others. In June, Molatwane Likhethe was named as Transnet’s Head of Communications after 12 years with the company. In July, Gert de Beer was named as Chief Business Development Officer and Mike Fanucchi as Group Executive: Commercial Sales and Marketing as the company looks to intensify its efforts to diversify sources of revenue, boost performance and enhance customer satisfaction.
“We are diversifying our sources of revenue so sometimes you need a new strategy to deal with particular markets,” Gama explains. “I’ve created a top team of nine people that report to me and in terms of strategy and direction we want to move; it’s inevitable that there would be changes. We have very good leadership depth in the company and from time to time you need a change so that people understand that the pace has changed and bring about a sense of urgency and agility – we need to be able to read the market very quickly in these uncertain times.”
With regards to his own position, Gama seems to have taken to the role quickly and in a very positive way since being officially named CEO in April. When he was announced, Department for Public Enterprises Minister, Lynne Brown talked up Gama’s experience as a driver behind his selection.
“Mr Gama spent the past 14 years in various executive positions at Transnet and his extensive experience in transport logistics and infrastructure as well as his commitment to transformation has been key considerations in confirming the appointment,” she said.
The CEO says that holding the position as Acting CEO helped him adapt to the needs of the role and now he is solely focussed on driving the business forward and constantly achieving positive results.
“I have enjoyed everything so far. The challenges are slightly different now because of the economic uncertainly but we are responding to that – it’s so far so good, there’s never a dull moment here. I’ve been around here for quite some time and the good thing is, I had a chance to acclimatise to the position. We’ll take things one term at a time. I have a five-year term and I want to make sure at the end of the term, the company is in a better place,” he concludes.