Infrastructure investment and performance in freight logistics in South Africa

1. Infrastructure investment and performance in freight logistics in South Africa Trade Logistics Conference 2010 World Bank Group Regional Trade Corridors – Washington, DC 7th JUNE 2010 Dr. Andrew Shaw Deputy Director General: Transport Department of Public Enterprises

2. Contents • The changing South African logistics environment and the need for improved service quality and a shift in policy The changing face of logistics • Transnet as a state owned enterprise’s drive to invest in rail and port infrastructure ahead of demand and to improve rail and port operational performance Managing state ownership - infrastructure and operations • The National Corridor performance monitoring (NCPM) project Monitoring logistics performance at a corridor level

3. Contents • The changing South African logistics environment and the need for improved service quality and a shift in policy The changing face of logistics • Transnet as a state owned enterprise’s drive to invest in rail and port infrastructure ahead of demand and to improve rail and port operational performance Managing state ownership - infrastructure and operations • The National Corridor performance monitoring (NCPM) project Monitoring logistics performance at a corridor level South Africa is constrained by a geographical disadvantage in trade. In addition because mining, manufacturing and agriculture are often located some distance from ports logistics costs are high, some 16% of GDP, in comparison to countries such as India(6.2%) and the USA(9.4%). The South African logistics sector is constrained by a lack of competition and until recently by poor and declining quality of infrastructure. Lack of capacity in port and rail infrastructure constrained growth in the period prior to the current recession.

4. Gaps exist in assets necessary to maximise the economies of scale of container traffic Gaps exist in collaboration, integration and flexibility of the services provided by alliance partners Flexible and reliable supply chains that are adaptable to market growth Flexible, time-sensitive, demand-driven and reliable supply chains High value High value Type ofgoods Type of goods Low cost supply chains with continuous replenishment strategies Low cost and high volume supply chain strategies Low value Low value Basic Integrated Supply chain Basic Integrated Gaps exist in the integration of supply chains for low value commodities Gaps exist in the operation and management of cost effective bulk services Supply Chain South African supply chains are growing more complex 2003 – SA size 31% 26% eg Containers eg Automotive 32% 11% eg Mining eg Steel

5. Institutional clarity required in the freight logistics system – National Freight Logistics Strategy (2005) Future strategy of the freight logistics system Policy Safety, security & environment regulation Economic regulation Infrastructure Function Operations Enabling environment in the national interest Independence Transparency Level playing fields Government penalties and incentives Government-owned & strategically managed User pays Differentiated social pricing Ring-fenced More than one operator Principle Integrated national logistics policy environment Clear rules of access and pricing Separation of infrastructure and operations Sustained competition Clarity on rules of engagement Sustained re-investment BEE & private sector participation Risk sharing Infrastructure aligned to customer need Raise funds from capital markets Improved efficiency levels Lower price Improved customer focus Greater accessibility Potential impact Institutional type Government Sector regulator Reporting to Parliament through Minister Regulators and Government Ring-fenced infrastructure providers Operators

6. Primary product exports continue to dominate SA tradeThe cost of logistics in SA is 16% of GDP making it considerable cost driver to national competitiveness Primary products as a percentage of total exports Source: OECD 2003

7. High freight costs and customs delay reduce Africa’s trade competitiveness Source : Economic Commission for Africa (2002)

8. South Africa’s dominant corridors are Gauteng to Durban, Cape Town, Biet Bridge and Maputo The export rail lines from Sishen to Saldanha and Gauteng/Mumpumalanga to Richards Bay are movers of significant volume but relatively low value Gauteng – Beitbridge 11.4 mill tons 6% rail freight 40% growth to 2020 Gauteng - Beitbridge Beitbridge Gauteng – Walvis Bay Gauteng – Walvis Bay 10.6 mill tons 36% rail freight 38% growth to 2020 Walvis Bay Lobatse Maputo Gauteng Gauteng - Maputo Gauteng – Maputo 16.4 mill tons 26% rail freight 40% growth to 2020 Sishen – Saldanha (2003) Gauteng – Walvis Bay 27 mill tons 100% rail freight Sishen Richards Bay Durban Gauteng – Cape Town Gauteng – Cape Town 35.9 mill tons 10% import export 1% rail freight 40% growth to 2020 Gauteng – RB 91 mill tons 81% rail freight 86% import export Gauteng – Richards Bay (2003) Saldanha East London Gauteng – Durban Gauteng – Durban 43.3 mill tons 16% import export 20% rail freight 38% growth to 2020 Port Elizabeth Cape Town Gauteng – Port Elizabeth Gauteng – PE 5.1 mill tons 36% import export 10% rail freight 39% growth to 2020 Gauteng – East London Gauteng – EL 6.9 mill tons 10% import export 1% rail freight 31% growth to 2020 Notes on assumptions: All figures established for 2006 Line thickness used to illustrate actual volume Based on Transnet volumes and estimates of road freight tonnages from traffic counts Corridors include traffic using routes alongside the dominant corridor routes Import & exports derived from port statistics and outcomes of the MOTE economic model Rail corridors of more than 2 million tons have been included in the analysis Source: DoT Freight Logistics Study and Transnet (2006)

9. Road freight remains the backbone of the freight network

10. Growth in road and rail freight Source: The Fourth State of Logistics Survey 2007, CSIR

11. Contents • The changing South African logistics environment and the need for improved service quality and a shift in policy The changing face of logistics • Transnet as a state owned enterprise’s drive to invest in rail and port infrastructure ahead of demand and to improve rail and port operational performance Managing state ownership - infrastructure and operations • The National Corridor performance monitoring (NCPM) project Monitoring logistics performance at a corridor level Transnet is a 100% state owned entity responsible for rail, port and pipeline infrastructure and operations. The focus since 2003 has been to improve Transnet’s balance sheet and invest in assets as the lack of port, rail and pipeline infrastructure has constraining growth. In 2007 the National Ports Act was promulgated to create competition for port operations. Transnet has traditionally been a poor performer in this area. Rail competition has been initiated at a branchline level but there is yet to be a clear policy pronouncement on rail competition on the primary network. How Transnet is structured as a state owned enterprise needs now to be reconsidered in light of these policy shifts.

12. Transnet infrastructure development to enhance logistics competitiveness • Investment based on national forecasts per cargo category : containers, automotive, major break bulk and dry bulk export commodities • Provide port and rail infrastructure ahead of demand • Provide capacity through operational efficiencies before infrastructure provision • Focus on point to point services to increase efficiency • Alignment with national road planning

13. 2005/06 – 2009/10 Capital investment spend

14. Transnet’s 5 year expenditure plans Transnet’s five year expenditure of R84 billion is part of the long-term integrated Port and Rail Development Plan, aligned to a corridor focused growth strategy • Majority of demand is rail friendly • Natcor, CapeCo, Ore Line, Coal Line and Port Elizabeth to Hotazel line will require capacity improvements (balance of the network has capacity for at least 10 years) • Complementary ports system to provide a range of facilities to meet local and hinterland requirements • Rail linkages between adjacent ports and Gauteng Road & rail volume 2006 2006 2026 2026 16.4 16.4 46.1 46.1 • Other Maputo national/countrywide R0.2b - General Freight investments • General Freight R25.6b • Rail Engineering R2.3b • Other R2.2b 14.3 14.3 33.4 33.4 • Coal Expansion R6.6b • Dry bulk terminal R1.6bn Sishen • Multi - purpose Richards terminal R0.6b Bay • Other R0.8b 43.3 43.3 109.3 109.3 Durban Saldanha • Container terminals • Ore Line R3.6bn East London R7.2b • Island View and Agriport R0.7b 72.7 72.7 171.5 171.5 Port • Maydon Wharf R1.6b • Automotive R0.3b Elizabeth • Container terminal R3.8b • General Freight R0.9b • MPT refurbishment • NMPP R13.5bn Cape Town R0.3b 12.0 12.0 29.4 29.4 • Other R4.6b • Other R0.5b • Ngqura construction R0.7b and container terminal R5.1b • General Freight R1.0b • Manganese R0.5b • Automotive R0.2b • Other R0.9b Source: Transnet Freight Demand Model

15. Five-Year Capital Investment: Expansion versus Replacement • Transnet is committed to both sustaining the current infrastructure • and to expanding the business: • R39bn (37%) will be spent on the expansion of services • R41.5bn (63%) will be spent on maintaining infrastructure • Since the beginning of the capital investment plan 21 major projects have been launched, including expanding port infrastructure, providing new or rehabilitated rail infrastructure, rolling stock, new container terminals

16. Rail Planning Principles Port Planning Principles • Align port developments and rail corridor developments • Separate metro trains from freight lines (dedicated freight lines) • Promote a hub to hub operating philosophy and enhanced operational efficiency • Provide improved inter-modal infrastructure • Maximize on advantages of network standardization • Separation of core and branchline network • Improved operational efficiencies leading to optimised infrastructure investments • Enhanced Port specialisation: • High–value, cleaner commodities at Cape Town, Port Elizabeth & Durban, • High volume commodities at Richards Bay, Ngqura & Saldanha. Link with dedicated heavy haul rail • Improve sustainability & environmental responsibility • Complement new port expansion with commercial development of obsolete port property

17. Shareholder Compact Targets – Transnet Group The Department of Public Enterprise and Transnet enter into an annual Shareholder Compact. The purpose is to confirm mandate and strategic objectives. In addition it includes Key Performance Indicators to measure performance. Developed as a driver for Transnet’s “quantum leap” strategy for improving operational performance FINANCIAL VALUE CREATION: OPEX as a % OF revenue (%) ≤ 60 Return on average total assets (%) ≥ 8 Cash interest cover (times) ≥ 3.2 Gearing ≤ 46 INFRASTRUCTURE AND MAINTENANCE: Capital expenditure (% of Rm Budget) ≥ 90 Maintenance cost (% of Rm Budget) ≥ 90 HUMAN CAPITAL Training spend (% of personnel costs) 3-4 SAFETY Disabling Injury Frequency Rate – (DIFR Safety Index) ≤0.85

18. Shareholder Compact targets – Transnet Freight Rail SERVICE RELIABILITY - Average deviation from scheduled times (minutes) On-time departure - Export Coal ≤ 150 - Export Iron Ore ≤ 95 - GFB ≤ 185 On time arrival - Export Coal ≤ 250 - Export Iron Ore ≤ 160 - GFB ≤ 240 LOCO UTILISATION (Gross.ton.km/loco/month) - Export Coal ≥ 16 200 - Export Iron Ore ≥ 44 800 - GFB (mainline locos) ≥ 5 300 MARKET SHARE Volume growth - Export Coal (ton.km) (%) ≥ 8.5 - Export Iron Ore (ton.km) (%) ≥ 10.5 - Containers (TEU’s) (% of railable maritime containers) ≥ 33 - GFB (excluding containers) (ton(%) ≥ 15 Average revenue per unit increases (ton.km) (%) - Export Coal ≤ 3.4 - Export Iron Ore (ton.km) ≤ 13.5 - GFB (excluding containers) ≤ 7.3

19. Shareholder Compact targets – Transnet Freight Rail SAFETY DIFR (safety index) ≤0.80 SERVICE RELIABILITY Loco availability (%) ≥88.5 Loco reliability (faults/million/km) ≤30.5 Wagon availability (%) ≥94.5 Wagon reliability (faults/million/km) ≤0.50 WAGON UTILISATION INDEX Wagon cycle time (Hours) - Export Coal ≤ 66 - Export Iron Ore ≤ 81 Wagon turnaround (GFB) (Days) ≤ 12

20. Shareholder Compact targets – Transnet National Ports Authority • PRODUCTIVITY • Volume per hour • Containers (TEUs per STAT Hour) • Durban ≥ 28 • Cape Town ≥ 16 • Port Elizabeth ≥ 33 • Dry bulk (Tons per STAT Hour) • - Coal (RBCT) ≥ 1 600 • - Iron Ore (Saldanha) ≥ 2 800 • SERVICE RELIABILITY • Ship Turnaround Time • - Durban (Containers) (Hours) ≤ 45 Shipping Delays (average time when ship is delayed) Port of Durban (Hours) Tugs ≤ 2.4 Pilots Pilots ≤ 2.3 SAFETY DIFR (Safety index) ≤1.0

21. Shareholder Compact targets – Transnet Port Terminals TARIFF INCREASES Average tariff increase (all commodities) ≤ 6 PRODUCTIVITY Moves per gross crane hour (Number of moves) - CTCT ≥ 24 - DCT ≥ 26 - Pier 1 ≥ 26 Tons loaded per hour Saldanha Iron Ore Terminal (Tons/hour) ≥ 7 100 SERVICE RELIABILITY Truck turnaround time (Minutes) - DCT ≤ 35 - Pier 1 ≤ 35 SAFETY DIFR ≤0.70

22. Contents • The changing South African logistics environment and the need for improved service quality and a shift in policy The changing face of logistics • Transnet as a state owned enterprise’s drive to invest in rail and port infrastructure ahead of demand and to improve rail and port operational performance Managing state ownership - infrastructure and operations • The National Corridor performance monitoring (NCPM) project Monitoring logistics performance at a corridor level The South African Government has initiated the NCPM project through three ministries, Public Enterprises, Transport and Trade and Industry. The focus of the project is to work with both public sector players such as Transnet and the National Roads Agency and large private sector players and industry associations to setup a performance database for each of the major corridors in South Africa. The objective is to use the data to inform; infrastructure investment, private operator efficiency, non-transport supply chain efficiency and the levels of efficiency within various supply chain sectors, such as mining, manufacturing, petrochemical, agriculture, etc.

23. Throughput Lead Times Logistics Cost National Corridor Performance Monitoring (NCPM) DoT, DTI, DMR, DAFF, Transnet, SANRAL etc Shippers, 3PLs, 4PLs, Shipping lines

24. Corridor performance monitoring at three levels

25. Customer Service Service perspective Infrastructure perspective Logistics Cost Performance Optimisation Competitive Logistics Modal split Policy perspective NCPM - Key Performance Drivers KPI KPI KPI KPI KPI Capacity Utilisation KPI KPI Capacity Productivity KPI KPI KPI KPI KPI Capacity Efficiency KPI KPI KPI KPI KPI KPI KPI KPI KPI KPI KPI KPI KPI KPI KPI

26. NCPM – Application to Richards Bay Coal Line

27. Sishen to Saldanha - Iron Ore Corridor: KPIs (1 of 3)

28. Sishen to Saldanha - Iron Ore Corridor: KPIs (2 of 3)

29. Sishen to Saldanha - Iron Ore Corridor: KPIs (3 of 3)

30. Conclusion • There is a need to focus on stronger integration between South Africa and global supply chains. In addition SA needs to improve levels of efficiency and reduce cost in the supply chain in order to sustain national competitiveness. • Infrastructure and service levels should to be world-class in order to provide cost effective and efficient logistics solutions. Lack of infrastructure should not constrain growth. • The role of rail needs to be enhanced and developed as a credible alterative to road. Levels of efficiency need to improve. • Transnet has a strong focus on infrastructure development and is focusing on improving service level efficiencies. The next step is to consider Transnet’s structure within a changing logistics environment and the role of state ownership in complex network industries such as transport. Multiple competing operators will improve efficiency and drive down cost.