ANNUAL FINANCIAL STATEMENTS

Transcription

1 ANNUAL FINANCIAL STATEMENTS 2015 VOLUME 2 ANNUAL FINANCIAL STATEMENTS

2 INTEGRATED REPORT ANNUAL FINANCIAL STATEMENTS SUSTAINABILITY REPORT CONTENTS Performance highlights 1 Approval of the annual financial statements 2 Group company secretary certificate 3 Independent auditor s report 4 Audit Committee report 8 Report of the Directors 14 Accounting policies 44 Annual financial statements Income statements 70 Statements of comprehensive income 71 Disclosure of components of other comprehensive income 72 Statements of financial position 73 Statements of changes in equity 74 Statements of cash flows 75 Segmental report 76 Notes to the annual financial statements 78 Annexure A 122 Annexure B 140 Annexure C 142 Annexure D 144 Annexure E 148 Annexure F 150 Annexure G 151 Abbreviations and acronyms 157 Glossary of terms 158 Corporate information 159 Transnet s reporting for 2015 consists of three reports INTEGRATED REPORT 2015 VOLUME 1 ANNUAL FINANCIAL STATEMENTS 2015 VOLUME 2 SUSTAINABILITY REPORT 2015 VOLUME 3 Volume 1 The Integrated Report 2015 is the Company s primary report to all stakeholders. Volume 2 The Annual Financial Statements 2015 include reports of the independent auditors and directors. Volume 3 The Sustainability Report 2015 documents Transnet s sustainability performance. Throughout the reports, readers are referred to places where they can find more detail on particular topics, using these pointers IR > AFS > SR > Refer to Volume 1 for more information Refer to Volume 2 for more information Refer to Volume 3 for more information Forward-looking information All references to forward-looking information and targets in the 2015 reports are extracted from the 2016 Transnet Corporate Plan approved by the Board of Directors. PERFORMANCE HIGHLIGHTS Revenue increased by 8,0% to R61,2 billion. EBITDA increased by 8,2% to R25,6 billion. Capital investment increased by 5,7% to R33,6 billion. Cash generated from operations after working capital changes increased by 21,1% to R30,6 billion. Gearing of 40,0 % and cash interest cover at 3,6 times. Overall growth in real volumes of 7,7% to 226,6mt , , REVENUE (R MILLION) 41,1 41,9 12,7% Maximum 50,0 44,6 3,7 Minimum 3, , GEARING (%) 45,9 40,0 3, EBITDA (R MILLION) ,9% 11,8% CAPITAL INVESTMENT (R MILLION) 23,8% Transnet s Integrated Report 2015, Annual Financial Statements 2015 and Sustainability Report 2015 are available in PDF on and via this QR code on mobile devices. Feedback on the reports is encouraged CASH INTEREST COVER (TIMES) B-BBEE SPEND AS PER DTI CODES (R MILLION) 1

3 APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS Directors responsibilities The Board of Directors is required, by the Companies Act, No 71 of 2008 of South Africa (Companies Act), and the Public Finance Management Act No 1, 1999, of South Africa (PFMA), to prepare annual financial statements which fairly present the state of affairs of Transnet SOC Ltd (Transnet or the Company) and its subsidiaries (the Group) as at the end of the financial year, the profit or loss and cash flows of the Company and the Group for the financial year then ended. In preparing these annual financial statements, the directors are required to: Select suitable accounting policies and apply them consistently; Make judgements and estimates that are reasonable and prudent; State whether applicable accounting standards have been followed; and Prepare the annual financial statements on the going-concern basis unless it is inappropriate to presume that the Company and/or the Group will continue in business for the foreseeable future. The Board of Directors of the Company is responsible for the maintenance of adequate accounting records, maintenance of appropriate systems of internal control as well as the preparation and integrity of the annual financial statements and related information. Directors statements The Audit Committee has evaluated the Company and Group annual financial statements and has recommended their approval to the Board of Directors. In preparing the Company and Group annual financial statements, the Company and the Group have complied with International Financial Reporting Standards (IFRS) and the Companies Act. In addition, the Group has complied with the reporting requirements of the PFMA, except as set out in the Report of the Directors on pages 28 to 30. The Group has used appropriate accounting policies supported by reasonable and prudent judgments and estimates. Judgements and estimates made in the application of IFRS, that have a significant impact on the annual financial statements are disclosed in the notes to the annual financial statements. The Board of Directors have every reason to believe that the Company and Group have adequate resources and facilities in place to be able to continue in operation for the foreseeable future. Therefore, the Board of Directors is satisfied that Transnet is a going concern and have continued to adopt the going-concern basis in preparing the annual financial statements. The external auditors, SizweNtsalubaGobodo, are responsible for independently auditing and reporting on the annual financial statements in conformity with International Standards on Auditing. Their unmodified audit report on the annual financial statements, prepared in terms of the Public Audit Act of South Africa, Act No 25 of 2004 (PAA), appears on pages 4 to 7. The internal audit activities are in accordance with the preapproved internal audit plan. The internal audit plan is reviewed and approved by the Audit Committee annually. Transnet internal audit has executed the internal audit plan during the year and has provided assurance to the Board of Directors as to the state of the internal controls of the Company. Their assessment of the internal controls of the Company is included in the Audit Committee Report. The Audit Committee has reviewed the effectiveness of the Company s internal controls and considers the systems appropriate for the effective operation of the Company. The Board of Directors is of the opinion that the Company and the Group have complied with applicable laws and regulations except as disclosed in the Report of the Directors as set out on pages 28 to 30. The Board of Directors is of the opinion that these annual financial statements fairly present the financial position of the Company and the Group as at 31 March 2015, and the results of their operations and cash flow information for the year then ended. The annual financial statements have been prepared under the supervision of the Group Chief Executive. LC Mabaso B Molefe A Singh Chairperson Group Chief Executive Group Chief Financial Officer 1 June 2015 Johannesburg GROUP COMPANY SECRETARY CERTIFICATE I hereby certify that in terms of section 88(2)(e) of the Companies Act, the Company has filed with the Companies and Intellectual Property Commission all such returns and notices, as required in terms of this Act, and that all such returns are true, correct and up to date. However, the Company has been unable to file the latest CoR44 Form due to administrative delays. ANC Ceba Group Company Secretary 1 June 2015 Johannesburg 2 Transnet Annual Financial Statements

4 INDEPENDENT AUDITOR S REPORT TO PARLIAMENT ON TRANSNET SOC LTD Report on the consolidated financial statements Introduction We have audited the consolidated and separate annual financial statements of Transnet SOC Ltd and its subsidiaries as set out on pages 44 to 156, which comprise the consolidated and separate statements of financial position as at 31 March 2015, the consolidated and separate statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and the notes, comprising a summary of significant accounting policies and other explanatory information. The accounting authority s responsibility for the consolidated financial statements The Board of Directors which constitutes the accounting authority is responsible for the preparation and fair presentation of these consolidated and separate annual financial statements in accordance with International Financial Reporting Standards and the requirements of the Public Finance Management Act (PFMA) of South Africa, Act No 1 of 1999 and the Companies Act of South Africa (Companies Act), Act No 71 of 2008 and for such internal control as the accounting authority determines is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated and separate annual financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated and separate annual financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated and separate annual financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated and separate annual financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated and separate annual financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated and separate annual financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated and separate annual financial statements present fairly, in all material respects, the financial position of Transnet SOC Ltd and its subsidiaries as at 31 March 2015, and their financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the PFMA and the Companies Act. Other reports as required by the Companies Act As part of our audit of the consolidated and separate annual financial statements for the year ended 31 March 2015, we have read the Report of the Directors and the Audit Committee Report for the purpose of identifying whether there are material inconsistencies between these reports and the audited annual financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between the reports and the audited annual financial statements. However, we have not audited these reports and accordingly we do not express an opinion on these reports. Report on other legal and regulatory requirements In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the Auditing Profession Act (APA), we report that we have identified an unlawful act committed by a person responsible for the management of Transnet SOC Ltd which constitutes a reportable irregularity in terms of the APA and have reported the matter to the Independent Regulatory Board for Auditors. The matters pertaining to the reportable irregularity has been described in note 36 to the consolidated and separate annual financial statements. In accordance with the Public Audit Act of South Africa, 2004 (Act No. 25 of 2004) and the General Notice issued in terms thereof, we have a responsibility to report findings on the reported performance information against predetermined objectives for the selected objectives, compliance with laws and regulations and internal control. We performed tests to identify reportable findings as described under each subheading but not to gather evidence to express assurance on these matters. Accordingly, we do not express an opinion or conclusion on these matters. Predetermined objectives We performed procedures to obtain evidence about the usefulness and reliability of the information in the Shareholder s Compact Performance Criteria (Performance Information) in the Report of the Directors of Transnet SOC Ltd as set out on pages 17 to 25 of the annual financial statements for the year ended 31 March 2015: Annexure A: Strategic deliverables on page 18; Annexure B: Operational performance on pages 19 to 23; Annexure C: Social impact on page 23; Annexure D: Economic impact on page 24; Annexure F: Capital expenditure on page 24; and Annexure G: Energy efficiency on page 25. We evaluated the reported performance information against the overall criteria of usefulness and reliability. We evaluated the usefulness of the reported performance information to determine whether it was presented in accordance with the National Treasury s annual reporting principles and whether the reported performance was consistent with the planned objectives. We further performed tests to determine whether indicators and targets were well defined, verifiable, specific, measurable, time bound and relevant, as required by the National Treasury s Framework for managing programme performance information (FMPPI). We assessed the reliability of the reported performance information to determine whether it was valid, accurate and complete. 4 Transnet Annual Financial Statements

5 INDEPENDENT AUDITOR S REPORT TO PARLIAMENT ON TRANSNET SOC LTD The material findings in respect of the selected objectives are as follows: Usefulness of reported performance information Strategic deliverables Annexure A of the Shareholder s Compact Performance indicators or measures must be well defined by having clear data definitions so that data can be collected consistently and is easy to understand and use. A total of 33% of the performance indicators in this annexure were not well defined, specific and measurable. The period or deadline for delivery of targets must be specified. A total of 29% of the targets were not time bound. This was due to the requirements of the National Treasury FMPPI not being embedded into the current process for determining the key performance indicators and targets. Reliability of reported performance information We did not identify any material findings on the reliability of the reported performance information for the following objectives: Annexure A: Strategic deliverables; Annexure B: Operational performance; Annexure C: Social impact; Annexure D: Economic impact; Annexure F: Capital expenditure; and Annexure G: Energy efficiency. Internal control We considered internal control relevant to our audit of the financial statements, annual performance report and compliance with legislation. The matters reported below are limited to the significant internal control deficiencies that resulted in the findings on non-compliance with legislation included in this report. Financial and performance management The matters identified and reported under the compliance with laws and regulations section above have arisen due to non-adherence with operational policies in the expenditure, procurement and contract management processes. The controls over these areas have continually been improved since these matters occurred. Other reports Investigations During the financial year under review, Transnet SOC Ltd initiated investigations into alleged irregularities or fraud. No material findings, other than those disclosed in Annexure E and note 36 of the annual financial statements, were identified relating to investigations during the year. At the reporting date, certain investigations are still on-going. Agreed-upon procedure engagements An agreed upon procedures engagement was performed on the National Treasury consolidation template. The report covered the period from 1 April 2014 to 31 March Additional matter Although we identified no material findings on the reliability of the reported performance information for the selected objectives, we draw attention to the following matter below: Achievement of planned targets Refer to the information in the Shareholder s Compact Performance Criteria (Performance Information) in the Report of the Directors of Transnet SOC Ltd as set out on pages 17 to 25 of the annual report for information on the achievement of the planned targets for the year. This information should be considered in the context of the material findings on the usefulness of the reported performance information for the selected objectives reported in the Strategic deliverables Annexure A of the Shareholder s Compact paragraph in this report. Compliance with legislation We performed procedures to obtain evidence that the entity had complied with legislation regarding financial matters, financial management and other related matters. Our findings on material non-compliance with specific matters in key applicable legislation, as set out in the General Notice issued in terms of the PAA, are as follows: SizweNtsalubaGobodo Inc. Per Collins Mashishi CA (SA) Director Registered Auditor 20 Morris Street East Woodmead Johannesburg 1 June 2015 Expenditure management As disclosed in Annexure E of the annual financial statements, the accounting authority did not take adequate steps to prevent irregular expenditure, fruitless and wasteful expenditure and losses through criminal conduct, as required by section 51(1)(b)(ii) of the PFMA in respect of the items detailed in that annexure. 6 Transnet Annual Financial Statements

6 AUDIT COMMITTEE REPORT As required by the PFMA, the Audit Committee report is prepared as prescribed by section 27 of the Treasury Regulations and in line with the recommendations of the third King Report on Corporate Governance for South Africa and its Code of Governance Principles (King III). The Audit Committee performs its duties in accordance with the PFMA and in terms of section 94(7) of the Companies Act. The terms of reference are set out in the Audit Committee mandate, which is approved by the Board of Directors and is continuously reviewed and updated for changes in legislation, business circumstances and corporate governance practices. The Audit Committee confirms that it has complied with its statutory obligations and discharged its duties in accordance with the mandate. The role of the Audit Committee is defined in its mandate and cover, amongst others, the following key aspects: To assist the Board of Directors in discharging its duties relating to the safeguarding of assets and the evaluation of internal control frameworks within Transnet; To review and assess the integrity and effectiveness of the accounting, financial, compliance and other control systems; To consider the internal and external audit processes and the accounting principles and policies; To strengthen the independence of the internal and external audit functions to ensure their effectiveness; To ensure effective communication between the internal auditors, the external auditors, the Board of Directors, management and regulators; To ensure compliance and adherence to applicable legal, regulatory and accounting requirements through an independent review; To contribute to a climate of discipline and control which will reduce the opportunity for fraud; and To assist the Board of Directors in discharging its duties as pertains to ICT Governance. Composition and meetings of the Audit Committee The Audit Committee comprises independent non-executive directors who are duly elected by the Shareholder Representative at the annual general meeting in line with legislative requirements. A total of five (three scheduled, one induction and one special) meetings were held during the year under review and all quorum requirements were accordingly met. The meetings and attendance records are reflected in the table below. Date of Date of 19 May 14 August 20 October 4 February 5 March Name of member appointment resignation * 2015** Prior Audit Committee members Mr IB Skosana (Chairperson) Mr MA Fanucchi Ms NR Njeke Ms ZE Tshabalala Ms NP Mnxasana 25 January July July November January December 2014 ü ü ü 10 December 2014 ü A ü 1 September 2014 ü ü N/A 10 December 2014 A ü A 10 December 2014 ü ü ü N/A Date of Date of 19 May 14 August 20 October 4 February 5 March Name of member appointment resignation * 2015** Current Audit Committee members Mr BG Stagman (Chairperson) Mr GJ Mahlalela Ms PEB Mathekga Mr PG Williams ü Attended. A Absent. N/A Not an Audit Committee member. * Induction meeting. ** Special meeting. 11 December December 2014 ü ü N/A 11 December 2014 ü ü 11 December 2014 ü ü Mr BG Stagman was elected as Chairperson on 27 January The qualifications and experience of the members are detailed in the abridged governance and assurance section in the 2015 Integrated Report. The Chairperson of the Audit Committee has been appointed as a member of the Risk Committee to ensure alignment between these functions. The Group Chief Executive, the Group Chief Financial Officer, the Chief Audit Executive and other key executive management are required to attend meetings of the Audit Committee. In addition, the representatives from the Office of the Auditor-General of South Africa, Transnet internal audit function together with the external auditors have a standing invitation to attend all Committee meetings. The Transnet internal auditors, the external auditors and management are afforded individual closed sessions with the Audit Committee. Summary of the main activities undertaken by the Audit Committee during the year In line with the PFMA, the Companies Act and King III, the Audit Committee executed the following activities during the year: External audit Reviewed and approved the Group external audit plan, with specific reference to the terms of engagement thereof, the proposed audit scope and approach to Transnet s risk activities, the effectiveness of the audit and the audit fee. Considered with management the quality and effectiveness of the external audit process, areas of special concern, the procedures being developed to monitor and contain risks in those areas, and the audit approach for those areas. Approved the guidelines for using the external auditors for non-audit work, pre-approve all the agreements for non-audit services, annually assess the work done to ensure that the independence of the external auditors is retained and ensure full disclosure of these services in the Integrated Report. Reviewed, with management, reports and letters received from the external auditors concerning deviations from, and weaknesses in, accounting and operational controls, and ensure that management takes prompt action and that issues are satisfactorily resolved. Monitored the relationship between the external auditors and management. Met with external auditors without management being present. ü ü 8 Transnet Annual Financial Statements

7 AUDIT COMMITTEE REPORT Reviewed significant differences of opinion between the external auditors and management on the application of International Financial Reporting Standards (IFRS) and any other applicable accounting standard. Noted the independence of the external auditors. Considered and approved any significant changes proposed in accounting policy, the external audit fee and budgeted audit fee. Reviewed significant differences of opinion between the external auditors and management on the application of the framework for performance information as issued by the National Treasury. Ensured that there is a process in place for the Committee to be informed of reportable irregularities identified and reported by the external auditor. Advised the Board of Directors of potential risks in irregular and fruitless and wasteful expenditure emanating from procurement practices. Internal audit Provided oversight, evaluated and approved the following Transnet internal audit planning documentation: The rolling 3-year strategic risk- based internal audit plan; The internal audit operational plan for the first year of the rolling plan; and Any other audit plans including the scope of each audit in the annual internal audit plan. Reviewed and approved the internal audit mandate annually, which should formally define the purpose, authority and responsibility of the internal audit function. Assessed the performance of the Chief Audit Executive and internal audit function. Ensured that the Chief Audit Executive reports functionally to the Audit Committee. Ensured that the internal auditors report at all of the Committee s meetings. Met with the internal auditors without management being present. Reviewed written reports furnished quarterly and annually by Transnet internal audit detailing the adequacy and overall effectiveness of internal control system, the scope and depth of audit coverage and audit recommendations. Obtained assurance from management that internal audit findings are addressed. Reviewed significant differences of opinion between management and the internal audit function. Evaluated the independence and effectiveness of the internal audit function and ensured that the function is adequately resourced and has appropriate standing within Transnet. Reviewed forensic investigation reports and ascertained the implementation of appropriate corrective action. Risk management Received a report from the Chairperson of the Risk Committee in instances where there are any matters which have implications on Transnet s system of internal control. Obtained comfort from the Risk Committee regarding Transnet s processes for identifying, managing and reporting on risk. Provided oversight on financial reporting risks, internal financial controls, fraud and information technology (IT) risks, as they relate to financial reporting. Provided oversight of financial and IT controls. Considered whether there are any matters arising from the review of internal controls and the reports of internal and external auditors which require the attention of the Risk Management Committee of the Group Executive Committee and/or the Risk Committee. Compliance Reviewed the Group Compliance plan, with specific reference to the procedures for identifying regulatory risks and controlling their impact on Transnet as well as ensuring that Transnet policy complies with relevant regulatory and legal requirements. Monitored compliance with the applicable compliance laws, rules and standards and reviewed all reports detailing the extent of compliance. Considered reports and letters received from relevant regulatory authorities or supervisors and management s responses thereto, where they concern matters of compliance and the duties and responsibilities of the Board of Directors of Transnet and/or its subsidiaries and associated companies. Requested and considered reports by executive management on measures implemented to ensure adherence with applicable compliance laws, rules and standards. Reviewed the compliance policy developed and implemented by management. Considered adherence to applicable non-binding rules, codes and standards, if adherence thereto would result in good governance and practice. Engaged regulators to influence the drafting of legislation and/or obtain regulatory certainty relating to critical regulatory requirements impacting Transnet s operations. Training and awareness session provided to the Executive Committee and the Board of Directors with regards to Transnet s regulatory requirements and associated obligations and keeping governance/risk committee members abreast of regulatory developments. Ethics Reviewed the process for handling anonymous calls from the fraud hotline. Reviewed internal audit reports on ethics management. Considered Transnet s systems to monitor compliance with and enforcement of the Code of Ethics. Other matters Reviewed reports from management regarding Transnet s ability to continue as a going concern and recommended to the Board of Directors that Transnet continues to adopt the going-concern basis in preparing the annual financial statements. Provided assistance to the Board of Directors in discharging its duties relating to Transnet s system of internal controls, risk management, compliance and information and communication technology (ICT) governance. Reviewed and monitored Transnet s compliance with all applicable legislation and regulations, including without limitation, the Companies Act, PFMA, Treasury Regulations and the Income Tax Act No 58 of 1962, as amended. Reviewed management s reports on items of fruitless, wasteful and irregular expenditure as well as losses through criminal conduct in terms of the PFMA. Reviewed and recommended the Transnet Treasury Financial Risk Management Framework including treasury activities and the risk management strategies to the Board of Directors for approval. Reviewed the materiality framework. Reviewed and recommended the annual borrowing plan to the Board of Directors for approval. Reviewed and recommended the Financial and Funding Plan for Reviewed and proposed changes to the Delegation of Authority Framework. 10 Transnet Annual Financial Statements

8 AUDIT COMMITTEE REPORT Annual evaluation by the Audit Committee As required by the Companies Act, PFMA and King III, the Audit Committee has performed an annual assessment and evaluation of Transnet s system of internal controls together with the effectiveness of the finance function, including the competency of the Group Chief Financial Officer. The results are presented below. Assessment of the internal control environment Based on the engagement with external and internal auditors, together with the review of their reports, the Audit Committee s overall assessment of Transnet s internal control environment is presented in the table below Risk and control Key financial processes Key operational processes component Adequacy Effectiveness Adequacy Effectiveness Governance Satisfactory Satisfactory Satisfactory Requires improvement People Satisfactory Satisfactory Satisfactory Requires improvement Methods and practices Satisfactory Satisfactory Satisfactory Requires improvement Overall assessment Satisfactory Satisfactory Satisfactory Requires improvement Assessment of the finance function and competence of the Group Chief Financial Officer The Audit Committee is satisfied with: The expertise and adequacy of the resources within the finance function of Transnet. The experience of the senior members of management responsible for the finance function. The expertise and experience of the Group Chief Financial Officer is appropriate to meet the responsibilities commensurate with the position. Recommendation of the annual financial statements The Audit Committee has evaluated the annual financial statements and is of the view that they comply, in all material respects, with the requirements of the PFMA and in the manner required by the Companies Act. The Audit Committee is further satisfied that the annual financial statements have been prepared in accordance with IFRS and that the adoption of the going-concern basis is appropriate. The Audit Committee is of the opinion that the annual financial statements fairly present the financial position of Transnet as at 31 March 2015, and the results of their operations and cash flow information for the year then ended and has therefore recommended the adoption of these annual financial statements by the Board of Directors Risk and control Key financial processes Key operational processes component Adequacy Effectiveness Adequacy Effectiveness Governance Satisfactory Satisfactory Satisfactory Requires improvement People Satisfactory Satisfactory Satisfactory Requires improvement Methods and practices Satisfactory Satisfactory Requires improvement Requires improvement Mr BG Stagman Chairperson of the Audit Committee 1 June 2015 Johannesburg Overall assessment Satisfactory Satisfactory Satisfactory Requires improvement The Audit Committee is of the view that the system of internal controls of Transnet are appropriate in terms of: Meeting the strategic objectives of Transnet; Evaluating and mitigating the key risks facing Transnet; Ensuring compliance with applicable laws and regulations; Ensuring that Transnet s assets are safeguarded; and Ensuring that transactions undertaken are correctly recorded in Transnet s accounting records. The Audit Committee s opinion is that there were no material breakdowns in internal control, including operational controls, financial controls and maintenance of effective control systems during the 2015 financial year. 12 Transnet Annual Financial Statements

9 REPORT OF THE DIRECTORS Introduction The Board of Directors is pleased to present its Integrated Report, in both printed and electronic formats, in line with the requirements of the King III Code on Corporate Governance (King III) and the audited annual financial statements of Transnet SOC Ltd (Transnet or the Company) and its subsidiaries (the Group) for the year ended 31 March Ownership and Shareholder s expectations Transnet is a public company, wholly owned by the Government of the Republic of South Africa and is the custodian of the country s rail, ports and pipelines. Transnet is responsible for enabling the competitiveness, growth and development of the South African economy through delivering reliable freight transport and handling services that satisfy customer demand. As the custodian of ports, rail and pipelines, Transnet has a responsibility to ensure the optimal development of the national freight system. Furthermore, as a responsible corporate citizen and key implementing agent of the developmental state, Transnet is required to conduct its activities in a manner that optimises developmental outcomes such as job creation, skills development, economic transformation, regional integration, industrial capability building and energy efficiency. Transnet s Market Demand Strategy (MDS) has completed its third year of implementation. The MDS and its implementation plan are guided by the Statement of Strategic Intent issued by the Minister of Public Enterprises, which defines the overarching objectives of the Company as follows: Reduce the cost of logistics as a percentage of transportable GDP; Effect and accelerate modal shift by maximising the role of rail in the national transport task; Leverage the private sector in the provision of both infrastructure and operations where required; Integrate South Africa with the region and the rest of the continent; and Optimise sustainable economic, social and environmental outcomes of all activities undertaken by Transnet. Board of Directors The composition of the Board of Directors at 31 March 2015 is shown below: Executive directors: B Molefe (Group Chief Executive), A Singh (Group Chief Financial Officer). Independent non-executive directors: LC Mabaso* (Chairperson), Y Forbes, N Moola, PEB Mathekga*, GJ Mahlalela*, ZA Nagdee*, VM Nkonyane*, MR Seleke*, SD Shane*, BG Stagman*, PG Williams*. *Appointments effective 11 December Ms NR Njeke resigned from the Board of Directors effective from 1 September On 10 December 2014, the following independent non-executive directors resigned from the Company: ME Mkwanazi, MA Fanucchi, HD Gazendam, IB Skosana, IM Sharma, ZE Tshabalala, NP Mnxasana and DLJ Tshepe. Summary curricula vitae of each director are set out on pages 24 and 25 of the 2015 Integrated Report. The following matters are covered in the Corporate Governance report included in the Integrated Report: Board of Directors and Committees mandates, detailed on pages 190 to 198; Board of Directors and Committees attendance, detailed on page 32; and Board of Directors evaluation and performance, detailed on page 28. Strategic overview Over the past three years of the implementation of the MDS, revenue and EBITDA have grown by an average annual rate of 10% and 11% respectively, while rail and container volumes have grown by an annual average rate of 4% and 2% respectively. Over this period, Transnet has invested R92,8 billion directed at maintaining 14 Transnet Annual Financial Statements 2015 and renewing the Group s extensive infrastructure network and equipment fleet and at creating new capacity. This is by far the highest level of investment in the Group s history and was achieved by diversifying funding sources both in the domestic and international markets, while minimising market, foreign exchange, interest rate, liquidity and refinancing risks. The funding plan was executed through reserves and borrowings and without receiving cash subsidies or guarantees from the Government. The R336,6 billion investment programme which is the centrepiece of the strategy represents a significant stimulus to job creation, skills development, industrial capacity building, economic transformation and regional integration and is an important component of Government s counter-cyclical approach to counter the effects of a weak global economy. Over the past three years, Transnet has invested more than R2,2 billion in skills development. A key focus on engineering, technical and sector-specific skills has resulted in more than artisans and technicians entering training. Transnet awarded 492 engineering bursaries to undergraduate, masters and doctoral students. Sector specific skills development focussed on marine, rail, and cargo handling remains a key priority and more than learners were taken on over the three-year period. This is in addition to the various management and leadership development programmes and courses which are made available to Transnet employees. Transformation and development of the Group s supplier base remains a key priority. In the past financial year Transnet recognised Broad-based Black Economic Empowerment (B-BBEE) spend of 105,1% of total measured procurement spend (TMPS) of R43,1 billion. Of this, R9,4 billion was spent on black-owned enterprises and R4,1 billion on black women-owned enterprises. Transnet is committed to carrying out Enterprise Development initiatives as outlined in the Broad-Based Black Economic Empowerment (B-BBEE) Act. Enterprise Development interventions have the specific objective of assisting and accelerating the development, sustainability and ultimate financial and operational independence of small, medium and micro businesses as defined in accordance with the Department of Trade and Industry Codes. Transnet has spent R336,6 million or 6,3% of net profit after taxation (NPAT) on Enterprise Development as compared to 3,0% of NPAT as required by the B-BBEE Act. This has been spent on providing both financial and non-financial support to black owned Small-Micro and Medium Enterprises (SMME s). Transnet s Supplier Development (SD) programme promotes skills development and the creation and preservation of jobs. It further encourages the transfer of intellectual property and the localisation of supply; and ultimately promotes industrialisation through contractually obligated supplier development plans. Since inception of the programme, total contract value to date amounts to R46,2 billion (2014: R29,4 billion). Supplier Development obligations concluded with suppliers amounts to R17,1 billion or 37,1% of contract value (2014: R10,9 billion or 37,2% of contract value). To date, R10,2 billion or 60,1% (2014: R5,9 billion or 54,3%) of these Supplier Development obligations have been met. Transnet s R50 billion contract for the building of locomotives has stringent local content, skills development and training commitments as dictated by the SD programme. All the locomotives except 70 will be built at Transnet Engineering plants in Pretoria and Durban. The suppliers have to date complied with and exceeded the minimum local content criteria for rolling stock of 60% for electric locomotives and 55% for diesel locomotives. Transnet Engineering will share approximately 16% of the total build programme, about one third of which will be outsourced to emerging local engineering and manufacturing firms. This will enable Transnet Engineering to create export capability for locomotives and related products and support Transnet Engineering s transformation into an Original Equipment Manufacturer (OEM) over time. In total, the localisation elements are expected to contribute over R90 billion to the South African economy. Regional integration of the freight system is a strategic priority and the implementation of the Africa Strategy has gathered pace in recent years. Revenue from over border activities has grown from R2,1 billion in the first year of the MDS to about R2,9 billion in the 2015 financial year. This represents growth in over border activities from 4,2% of revenue in the 2013 financial year to 4,7% in

10 REPORT OF THE DIRECTORS The investment in port, rail and pipeline infrastructure and operations will radically improve the competitiveness and capacity of the national freight system. Key freight system objectives include a significant shift of long distance freight from road-to-rail, enhanced maritime connectivity, integration of the regional freight system and the creation of capacity ahead of demand. Transnet has made significant gains in these areas over the past three years and this trend is poised to accelerate as the investments made in recent years start to bear fruit. Growth in rail market share and maritime connectivity, coupled with increased capacity is expected to catalyse a virtuous cycle of increasing freight systems competitiveness, thereby increasing economic growth and development. The MDS will position South Africa as a key logistics hub for the region and establish the country as a leading supplier of raw materials and value added products to global markets. At the same time, a consistent focus on responsible corporate citizenship will ensure that the Group makes ever-increasing contributions to job creation, skills development, industrial capacity building, economic transformation and regional integration. Outlook The performance of the global economy has been mixed, but with a marked deterioration in sentiment about the global economic outlook. Forecasts for economic growth have fallen in the first quarter of 2015, as they have every year since 2011, as the much anticipated recovery fails to take hold. The world gross domestic product (GDP) estimate was revised downwards to 3,4% for 2014 and is forecast to grow by 3,5% for Growth in sub-saharan Africa is however expected to remain strong, estimated at 5,0% in 2014 and forecast to decline slightly to 4,5% in 2015 due to the combined effects of declining commodity prices and the epidemic in Ebola-affected countries. Growth will be driven by sustained infrastructure investment, buoyant service sectors and strong agricultural production, even as oil related activities provide less support. With the African continent accounting for close to 30% of South Africa s merchandise exports, growth in the region will provide an important pillar for the manufacturing and logistics sectors. South Africa s economic performance was significantly impacted by strikes in 2014, which were concentrated in the mining and manufacturing sectors. South Africa s GDP grew by 1,5% in 2014 and is forecast to grow by 2% in 2015 and 2,1% in 2016 respectively. The main drivers of improved growth are a return to normality and expectations of a pick-up in the global economy from its current lows. Global trade has performed below expectations for a number of years and this has negatively impacted all segments of the shipping market. Global container volumes grew by an estimated 5,0% in 2014 and are forecast to grow by 5,5% in 2015 with the bulk of this driven by intra-asian trade. For the domestic market a mediumterm average annual growth rate of 4,2% per annum is anticipated after a number of years of very low growth. The per capita rate of steel consumption among key developing economies relative to developed economies indicates that there is still significant potential growth for steel and steel input materials as countries industrialise and urbanise. World trade of iron ore grew by an estimated 8,4% in Over the medium term, world iron ore trade is projected to increase at an average annual rate of 3,6% to The South African market remains very cost-competitive with solid longer-term growth prospects. Manganese ore consumption is projected to rise at an average annual rate of 4,3% between 2014 and Global production of manganese ore is also set to rise at 4,9% over the same period. South Africa, endowed with around 80% of global manganese reserves is set to emerge as a key export hub for manganese over the next few years, gaining market share from other international producers. Concern about the effect of coal use on the environment has prompted many countries to enact measures to reduce the role of coal in the energy mix. While the growth in the world s coal use is unlikely to be as rapid as other energy sources, it is still expected to play a large role in world electricity generation. Exports from South Africa are projected to increase at an average annual rate of 6,1% to 98mt in Transnet Annual Financial Statements 2015 Performance for the year March March % change Revenue () ,0 EBITDA () ,2 EBITDA margin (%) 41,8 41,8 Equity attributable to the equity holder () ,6 Gearing (%) 40,0 45,9 (5,9) Capital investment () ,7 Cash generated from operations after working capital changes () ,1 Cash interest cover (times) 3,6 3,7 (2,7) Detailed commentary on the performance for the year is contained in the 2015 Integrated Report on pages 94 to 98. Shareholder s Compact performance criteria The Shareholder s Compact Key Performance Indicators (KPI s), which are revised annually by agreement between the Board and the Shareholder Representative, serve as the performance monitoring framework for the Company. Performance against the Shareholder s Compact 2015 targets, is outlined below, as required by section 55(2) (a) of the PFMA. This performance information has been subjected to audit review and the Company s auditors have reported their findings in their audit report. The Company achieved an aggregate volume performance of 98,4%, despite low domestic and global economic growth challenges. Aggregate operational efficiency improved by 16,6% compared to the prior year s 13,8% with the support of the Transnet value chain co-ordinator (TVCC) initiatives, such as quick recoveries from on-route disruptions, regular customer liaison and improved integrated collaboration between operating divisions to address resource challenges. Measuring the company s performance against the operational KPI targets of the Shareholder s Compact Annexure B (including skills development KPIs in Annexure C); 60% of the targets for the 2015 financial year were fully achieved. The performance gap on operational KPIs is mainly attributed to 12 of 22 rail commodities that did not meet their individual budgeted volumes. While commodity by commodity analysis focuses attention on internal and external constraints and identifies required performance improvement interventions, it is important to note that in aggregate, Group weighted volume performance for total freight volumes on rail, ports and pipelines increased from the prior year s 95,1% to 98,4% due to positive growth in export iron ore, export coal, total petroleum products, vehicles and break bulk. Export coal and iron ore grew substantially by 12% and 10% respectively year-on-year to 76,3mt and 59,7mt. They also grew by 2% and 3% compared to budget. Product availability improved as key export iron ore customers recovered from the production constraints of prior year. Internal resource availability improved through sustained implementation of the capital expenditure programme and the two commodities also benefitted from operational efficiency improvements supported by the TVCC initiatives. The protracted trend of declining international coal and export prices in 2015 is negatively affecting the outlook for When all Shareholder s Compact Annexures (i.e A, B, C, D, F and G) are considered, the achievement decreases to 58%. Annexure E is excluded from the analysis as it relates to compliance to the Significance and Materiality Framework in terms of section 55 (2) of the PFMA. Transnet notifies the Shareholder Representative where relevant upon acquisition or disposal of an asset that is at least equal to the materiality threshold. Detailed performance against all the other annexures is reported in the quarterly reports to the Shareholder Representative. A total of 33% of the performance indicators in Annexure A were not well defined, specific and measurable. In addition, 29% of the timelines for delivery of targets were not specified. This was due to the requirements of the National Treasury FMPPI not being embedded into the current process for determining the key performance indicators and targets. 17