Submission to: Portfolio Committee on Transport

26 February 2003

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Presented by Transnet Chairman: Dr. B A KhumaloGroup Chief Executive: Mr. M E Mkwanazi

SUBMISSION FRAMEWORKION

• Purpose of Submission

• What is Transnet Limited?

• Transnet’s strategic direction

• Shareholder expectations: Dual mandate

• Key objectives of the Bill

• NPA Bill: Key strategic thrust for Transnet

• Transfer of ports land and other rights and obligations to the National Ports Authority

• Financial and Business implications for Transnet Limited

• Effect on Transnet Business Units’ operations

• Impact on the economy

• Conclusion

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PURPOSE OF SUBMISSION

• To express Transnet’s position on the NPA Bill 2003

• To indicate the strategic business and financial implications of the NPA Bill on Transnet and its Business Units and its impact on the long term viability and even solvency of the Transnet Group

• Impact on the economy - RSA, SADC, NEPAD

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TRANSNET’S STRATEGIC DIRECTION

MISSION

A transport and logistics service company that focuses on the efficient, timeous and cost-effective movement and handling of goods,

people and information

VISION

Africa’s Undisputed World Champion in transport and

logistics solutions

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SHAREHOLDER EXPECTATIONS: DUAL MANDATE

Integrating its transport systems into the global logistics network

Good Corporate Governance : Implementation of King II report

Enhance Shareholder value :

Infrastructure Development :

Business Restructuring :

Continuous Transformation :

Support and participate in Government’s economic growth strategy

Improving cash from operations and efficient asset utilisation

Focus on Rationalisation Revitalisation and Renewal

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KEY OBJECTIVES OF THE BILL

Transnet supports the underlying principles of this Bill which are to:

• Promote and improve efficiency and performance in the management and operations of ports; and

• Strengthen the State’s capacity to

separate operations from the landlord function within the ports;

encourage employee participation in order to motivate management and workers; and

to facilitate the transfer of technology, information systems and managerial expertise through private sector involvement and participation.

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NPA BILL: KEY STRATEGIC THRUST FOR TRANSNET

HOWEVER:

• Incorporation and positioning of NPA in terms of the Bill

• Financial and Business implications for Transnet Limited

• Effect on Transnet’s Business Units operations

• Impact on the economy

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TRANSFER OF PORTS LAND AND OTHER RIGHTS AND OBLIGATIONS TO THE NATIONAL PORTS AUTHORITY (SECTION 27)

• In terms of the Bill the incorporated Authority will acquire the Transnet’s NPA division as a going concern

• The Bill is not clear on the nature of acquisition as it does not use the words “sale” or “buy”, but “acquire”. Does not address the question of compensation.

• The Bill does not make provision for an interim period during which NPA will form part of Transnet whilst the White Paper on National Commercial Ports Policy contemplated such an interim phase. (page 14 of GG no. 23715 d 8/8/2002)

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FINANCIAL AND BUSINESS IMPLICATIONS FOR TRANSNET LIMITED

• Operating profit will be reduced by 59% (R2.7 billion).

• The retained profit of Transnet also deteriorate from a profit to a loss of more than R1.3 billion.

• Cash generated by operating activities decreases by 48% (R3.1 billion).

• Profitability of the company will be reduced substantially.

Operating margins will decrease substantially (with 50%).

Interest cover drop below the absolute minimum levels (below 1 times)

On the assumption that all current assets and liabilities of NPA will be transferred.

Effect on Transnet income statement and cash flow

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FINANCIAL AND BUSINESS IMPLICATIONS FOR TRANSNET LIMITED

• The implementation of the Bill would adversely impact Transnet’s positioning including its financial profile

• Lower Credit Rating would be devastating and can make it very costly and even impossible to borrow funds

• It would create liquidity and other business risks, including the risk of a deemed default in terms of Transnet’s loan covenants

• It would have a serious risk on the solvency of Transnet

• Impact on investment capacity (balance sheet) of Transnet

Serious strategic threat to the viability of Transnet

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IMPACT ON THE ECONOMY

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• Development of the trade gateway to Africa (NEPAD)

• Development of an integrated national and regional intermodal transport system into the global logistics network and consequences for international trade and tourism

• Driving force to place the RSA economy on a higher growth path that promotes exports and investment

Negative impact on the economy - timing of transfer

EFFECT ON TRANSNET BUSINESS UNITS’ OPERATIONS

• Transfer of Ports land and other rights and obligations [section 27 (2)]: Is there any consideration payable?

• Definition of port facilities? Does it include Rail and Pipeline facilities? [section 11(b)]

• Business implications of transferring all infrastructure inside the port boundary to the NPA? [section 11(d)]

• The Bill gives NPA protection regarding servitudes but is silent regarding Transnet’s position [section 27(8)] (for example Petronet’s pipelines)

• Deemed licences period of 6 months. This period of 6 months may not be sufficient for Transnet in light of the implications mentioned above [section 43]

• Cost implications for operating licenses are unclear [section 3]

• Timing of incorporation of and transfer to NPA [section 27]

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Key uncertainties

CONCLUSION

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• Transnet is of the view that the NPA must remain part of Transnet at least in the short to medium term as the transfer of NPA business unit out of Transnet can weaken the solvency and viability of the company and will have a profound adverse effect on the economy

• The transfer should take place in line with the restructuring plan of Transnet