[miningmx.com] — MELIA Castilla, an upmarket hotel in Madrid’s business district, is perhaps an odd place to be meeting Brian Molefe, CEO of Transnet State Owned Company (SOC) since March. Certainly, it’s a far cry from places such as the Northern Transvaal Regional Development Forum where Molefe, now 44, started his career some 20 years ago.
But this is very much part of the territory now. Afterall, how Transnet goes about its business is watched with eager intensity in places as far flung as Asia and Europe as well as in South Africa where the transport utility is viewed a kingpin in economic growth.
Madrid is the venue of an international coal conference dominated by merchants who’s driving concern seems to be whether South Africa can help plug the growing deficit between supply and demand of the fuel. It is unseasonally warm in Madrid, yet northern Europe is nearing a winter meterologists say will be long and bitter. They need coal.
Earlier, Molefe had been spotted by Finweek at a pre-conference drinks event chatting, in a casual golf shirt, with Fikile Magubane, South Africa’s ambassador to Spain. Agreeing slightly reluctantly to an interview, we now meet in the top floor pad all gold embossed finishes. A few hours later, Molefe is talking up Transnet to conference delegates.
He tells them the company will surprise the market by testing 71 million tonnes (Mt) of coal exports this calendar year. But delegates Finweek spoke to were disappointed. For them, Transnet can’t get big enough, quickly enough. “We all know the story,’ says Stephen Doyle, an analyst at US-based Doyle Trading Consultants. “South Africa will export whatever coal Transnet allows it to’.
Transnet is the kind of company Molefe may have wished to deconstruct while CEO of the Public Investment Corproration (PIC), the state asset management company he led for seven years. It’s monolithic, riven with legacy issues, and throughout the suspension last year of Siyabonga Gama, CEO of Transnet’s most important division, Transnet Freight Rail (TFR), was fossilised in a political cataclysm that extended to government’s highest reaches.
“Up until the time Siya came back, the organisation was in near paralysis,’ is how Molefe explains Gama’s enforced sabbatical following findings by an independent panel that he was implicated in tender irregularities. Gama’s explanation of these dark times is that the knives were out. “The feeling was that anybody near the old CEO had to go,’ he says in one of several interviews Finweek conducted with Transnet directors. “It was like a regime change.’
Draughts of change were already chilling the corridors of Transnet’s Parktown offices before Molefe arrived. In fact, shortly before his appointment, from among some 63 applicants, Transnet’s board was re-moulded by 11 new appointments. Molefe’s first actions, however, were with his direct reports. ‘I told them to go out there and work and if they made any mistakes, well that’s okay. If you’re not making mistakes, you’re probably not working.’
Trying to instill momentum into a firm where velocity is its key business imperative has been the irony of Molefe’s initial challenge. He has a five-year contract and the first eight months has shown some uplifting signs. TFR in particular has shone. It delivered record weekly coal volumes to Richards Bay Coal Terminal (RBCT) in September and has lifted annualised deliveries to the terminal to 64Mt when earlier in the year it was 58Mt. Certain simple yet logical decisions stand out such as incentivising train drivers on volume and timeous delivery rather than the previous system of hours worked, a mechanism Molefe says simply rewarded trains to take as long as possible.
Elsewhere in the business, Molefe has shown the ability to be decisive. GM of Transnet’s commercial activities, Divyesh Kalan, says Molefe’s single best leadership quality is implementation. “Things are getting signed off quicker. He’s also making his managers more accountable,’ he says.
“He’s been a breath of fresh air,’ says Gama. For instance, some R1.3bn in capital was brought forward to pay for new equipment for the under-performing Durban Container Terminal’s Pier 2, says Gama. It was part of a R6.1bn worth of capex previously earmarked for the end of Transnet’s R110bn, five-year capital programme. But no matter. Problem solved.
Molefe’s management strategy is becoming widely known. He has sought to remove acting positions, making permanent appointments, and while managers have been exhorted to emerge from their shells, even if they make mistakes, their actions are kept on a short leash. There are 100-day targets and quarterly management meetings so that managers can give account of themselves. “Every 50 days, there’s an executive committee meeting with divisional CEOs and COOs. We all sit in the same room and talk about targets,’ says Molefe. That way there are no surprises if someone doesn’t get a bonus. “They know it from the first quarter when they’re not making targets,’ he says.
MONSTER
Transnet is a monster of a company. Apart from TFR, which also transports iron ore, automotive parts and other general freight such as fruit, there’s the National Ports Authority which helps handle some 188Mt of cargo and 1,300 vessels a year. It in turn links with another division, Port Terminals which alone employs 15,000 employees which with 150 depots and seven factories, maintains diesel and electric locomotives.
“For me, the PIC removed the fear of scale,’ says Molefe of the expanse of the Transnet task, including the 55,000 employees under its wing. “I took the PIC from managing R300bn in assets to R900bn. Transnet doesn’t have this scale of asset, but the scale of souls under Molefe’s watch is something to which he’s unaccustomed. Molefe acknowledges this but adds: “You just learn to remember principles are the same whether it’s 10 people of 55,000; R10bn or R100bn, the principles are the same’.
Molefe’s been wiley too. In the wake of a fatal accident, he personally attended the funeral, driving out to Middleburg to meet the grieving family. “People will get to know about that; even among 55,000,’ he says. Meanwhile, on a completely separate note, he has promised to reward out-performance with an enormous braai for employees, or by “slaying some beasts’, as he terms it.
Molefe and his team of directors, many of them newly appointed, have also embraced perhaps Transnet’s Achilles heal, its breadth and heft, in an attempt to turn weakness into strength. This is why Molefe baulked at suggestions Transnet should be demerged into separate operating units.
The call came from within Government. Molefe, however, was ably supported by Malusi Gigaba, public enterprises minister. The two have each others’ backs in a sense. Molefe will run the business; Gigaba will do the politics is how Molefe explains it. Says Kalan: “They have got political alignment. I think this has been crucial.’ As a result, Gigaba hit back at the demerger calls from among Government while Transnet has embraced its size almost as a brand signature. Its in-house magazine is called simply “One’.
Of course, hearing Molefe claim he’s protected from “the politics’ should not persuade for a moment his appointment hasn’t the weft of politics running through it. Afterall, this is a company where the Government is the sole shareholder. For his part, Molefe has been described as closely aligned with South African president Jacob Zuma, a view bolstered by the return of Gama, and media speculation suggesting that Molefe helped smooth a uranium mine deal while at the PIC for the politically-connected Gupta family.
Says Molefe on Gama’s deftly quiet return: “He’s made mistakes and learned from them. Siya is a good railways man and his performance bears testimony to this’. He adds that the appeal into Gama’s dismissal from TFR found no wrong-doing and therefore his reappointment could be supported by the board. For his part, Gama describes the affair, somewhat eccentrically, as if he were an iron in a fire from which he has emerged, newly shaped.
In any event, Molefe intends to use Transnet’s market share, or monopoly status, to drive inter-group synergies, and extract good tariffs. The latter is much to the chagrin of some coal producers, including John Wallington, CEO of Coal of Africa who complained coal line tariffs from Limpopo province to Maputo were twice the cost of Richards Bay’s line. “What do you expect,’ says Molefe. “We quadrupled performance. You’ve got to pay for that’. He also adds that Maputo is a more expensive port than Richards Bay.
The container business has grabbed market share off road transportation and intends to take more while the engineering business, once know as TransWerk, is building locomotives for Tanzania and the Congo. As for criticisms that the Durban port is ripping off customers and using the funds to cross-subsidise unprofitable parts of the group, Molefe is contemptuous. “You just can’t compare us to Rotterdam which has subsidies and is owned by local government (and doesn’t pay tax). We have to raise our own capital and don’t get subsidisation from government.’
SELF SUFFICIENT
Unlike some other state owned companies, Transnet isn’t a drag on the fiscus; in fact, recent talk is that an unconstrained capital budget of as much as R300bn could be funded internally. Cannon Asset Management scores Transnet highly on its internal rating system, although it doesn’t follow the company per se.
“What was interesting about the company’s recent interim results announcement was that it grew the revenue line,’ says Andrew Dittberner, a senior investment manager at Cannon Asset Management. “Quite often, new CEOs grow the bottom line by cutting costs, but Transnet is actually growing, although capex was down,’ he adds.
There’s still R33bn in capex to find, but its highly unlikely Transnet will exceed its threshold 50% gearing to achieve it. Molefe thinks gearing will stay on target at about 46% and with the prospect of improved cash generation, keeping to that gearing level will mean in excess of R33bn could be raised. “This isn’t a company that is a leach on the taxpayer,’ says Dittberner.
The key, however, is TFR. It’s the beating heart of Transnet’s business having comprised just over half of total revenue in the six months to end-September. That’s why, perhaps, past sins have been glosed over in respect of Gama in favour of getting the company back on its feet.
Gama is an engaging individual; clearly committed to the task of shifting goods from origin to port. Explaining the recent turnaround in TFR’s performance on the coal line, he unveils the company’s “Operation Shape Shift’. In essence, the shift is in operating flexibly in an effort to reach demanding goals set for 2015/16 of which coal freight from the Ermelo depot in Mpumalanga province must reach 81Mt a year (Mtpa) from a current 74Mtpa capacity. Iron ore capacity has to be at 80.7Mtpa from 56Mtpa.
Against this, there’s the notable disadvantage of under-investment in TFR infrastructure. Molefe concedes that capital expenditure currently is a little like “running to stand still’. The global benchmark for companies like TFR is that 10% of all track has to be upgraded on a continuous basis, whereas TFR only upgrades about 1% of its track. Again, international benchmarks dictate that 20% of all maintenance should be reactive, 80% planned whereas TFR has that ratio the other way round.
Three years ago, TFR had 2,200 locomotives some of which were more than 40 years old. “You can’t get more out of them,’ says Gama. As a result, TFR’s team decided to retire 700 locomotives. With less capital equipment, TFR has to become more efficient: “We’re now in the business of time compression,’ says Gama. “We’ve got to find the minutes before we find the hours.’
Central to TFR’s efficiency strategy is to have shorter loading times at the sidings. This is where the trains stop to take material from the coal producers. Larger, well capitalised coal companies use rapid loading equipment; the smaller players – many in the empowerment bracket that TFR is interested in promoting – use slower, front-end loaders. (Incidentally, some coal suppliers also include farmers who supplement their agribusiness with a couple of wagons of coal, just as they used to mine diamonds).
One idea is for small operators to make use of newly installed rapid loading equipment on a concession basis. This would help with TFR’s delivery regimen and provide it with annuity revenue. The same model of operating under a TFR controlled concession has been suggested for improved or new branch lines to sidings. It isn’t glamorous. TFR’s business is a nuts and bolts activity, groundwork for pragmatists of the can-do persuasion.
Says Bevan Jones, GM of commodity trader London Commodity Broker’s Johannesburg office: “TFR has been making good time because it’s been using the fast loaders at sidings while probably ignoring the smaller guys. But now I think they want to put the onus back on industry, put the ball in its court in order to improve efficiencies. They’re tired of all the criticism they’re getting’.
Generally speaking, however, private sector participation is not a strategic thrust of Transnet. Says Gama: “We’d prefer the private sector invested in the real economy rather than infrastructure,’ says Gama. It’s a view informed by disappointment. There’s always lots of talk about the Public Private Partnership, but when the capital figures get firmed up, the private sector backs quietly away, says Gama.
If there’s a small crumb of comfort for Molefe, ahead of a massive turnaround task, it’s that Transnet’s problems have a global echo. Australia, for instance, is hoping to add an impressive 500mt of rail and port capacity by 2020, yet there’s evidence the ambition might not be matched by performance.
Quoting an e-mail from a friend visiting Queensland’s Gladstone port, which exports 19% of Australia’s coal, Doyle Trading Consultants described worries with which South African coal industry participants will be familiar.
“I’m in Gladstone, in the back of a mini-bus, on my way to the middle of nowhere . again. This is pretty much an infrastructure tour. My sense so far is that there is zero chance they will be able to supply the volumes of coal needed by India and China over the next 5 to 10 years.’
– The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.
