Transnet National Ports Authority Tariff Methodology: Position Paper Ports Regulator: Road Shows March 2013 delivering freight reliably
Vision for South African Ports A system of ports, seamlessly integrated in the logistics network that is jointly and individually self-sustainable through delivery of high levels of service and increasing efficiency for a growing customer base, enhancing South Africa s global competitiveness and facilitating the expansion of the South African economy through socially and environmentally sustainable port development White Paper on National Commercial Ports Policy, 6 March 2002 2 2
TNPA Strategic Focus A Landlord Port Authority that manages, controls and administers the South African Port System on behalf of the State Driven by a 3-tier strategy Infrastructure Create and Manage Infrastructure capacity ahead of demand Operations Improving port efficiency through increased productivity and operations oversight Integrated Port System To facilitate an integrated logistics chain that will establish the port system as an integrated gateway for trade In support of meeting Shareholder s objectives of improving operating efficiencies, regional integration and optimising investment in the port system 3 3
Introduction Objective and context of the session Regulatory framework does not set a tariff methodology Tariff methodology will assist in the application of the regulatory framework to determine revenue for the Authority s which is fair and reasonable The tariff methodology should aim for simplicity, clarity and certainty whilst being compliant to the Ports Act and Directives The agreed tariff methodology would be used by the Authority in its future tariff applications starting in Financial Year 2014/15. 4 4
Legal Framework: Ports Act and Directives Section 72. (1) (a) of the Ports Act, states that the Authority must, with the approval of the Ports Regulator, determine tariffs for services and facilities offered by the Authority and annually publish a tariff book containing those tariffs. The Port Directives were approved on 13 July 2009 (gazetted on 06 August 2009) and amended on 29 January 2010. In terms of the Port Directives, when considering the proposed tariffs for the Authority, the Regulator must ensure that such tariffs allow the Authority to: recover its investment of owning, managing, controlling and administering ports and of providing port services and facilities ; recover its costs of owning, managing, controlling and administering ports and of providing port services and facilities; and make a profit commensurate with the risk of owning, managing, controlling and administering ports and of providing port services and facilities. 5
Key elements of the proposed tariff methodology TNPA proposes to retain the Revenue Requirement (RR) tariff methodology for future tariff applications. Revenue Requirement (RR) methodology ensures that the regulated institution Recovers its investments in port services and facilities Recovers its cost of operations Achieves a fair return on investment RR Methodology provides efficient price signals to market participants and to consumers Promotes the regulatory independence and certainty with its full disclosure requirement. It is commonly used in other regulated industries 6 6
Key elements of the proposed tariff methodology (Continued) The Revenue Requirement (RR) calculation formula is as follows: RAB Cost of capital + Operating costs + Depreciation + Taxation expense ± Claw back ± Excessive tariff increase margin credit + Financing Factor Allowed revenues y RAB y WACC y E y D y T y ( ) C y ( ) ETIMC F y 1 (1 WACC y 1 ) F y 7 7
The Regulatory Asset Base (RAB) The Record of Decision (ROD) FY 2012/13 approves that the FY 2010/11 tariff decision establishes the Starting Regulatory Asset base (SRAB). The SRAB contained in the FY 2010/11 tariff decision did not include the Real Estate business of the Authority. The starting RAB for the Real Estate business comprising of assets rented out to external parties and Transnet divisions (TPT) should be valued as Investment Property in terms of IAS 40. The ROD for FY 2012/13 further approved that the Trended Original Cost (TOC) be used to roll forward the starting RAB. Authority proposes that this TOC be used to roll forward total RAB and not just the starting RAB. 8 8
The Regulatory Asset Base (RAB) Continued. The RAB will thus be trended to subsequent years using inflation indicators informed by the South African Reserve Bank. Annual Capital investment will be included and escalated by average inflation for year, using the monthly weighted average, and then added to the RAB Annual Depreciation will be deducted from RAB, this will be determined by recovery of asset over its remaining useful life Working Capital is calculated separately for each tariff application year based on the RR and included in the RAB 9 9
Weighted Average Cost of Capital (WACC) The cost of capital represents the minimum return that the Authority must make on its investment in order to continue to attract capital. Allowed revenues must be sufficient to cover the company s tax expenses, hence a Vanilla WACC is to be determined and a separate allowance for tax expenses be provided. Vanilla WACC = Kd x g + Ke (1-g) Kd Cost of Debt is to be informed by the Transnet cost of funding g Gearing is reflective of the Authority s historical capital structure. Ke Cost of Equity is to be informed by the Capital Asset Pricing Model (CAPM) 10 10
Weighted Average Cost of Capital (WACC) Contd. Capital Asset Pricing Model (CAPM) k e r MRP f, real, Rf - The risk free rate to be used is informed by the yield on a 20 year South African government bond, R186 10.5% 2026, as a proxy for the nominal riskfree rate. MRP - The premium demanded by investors for investing in the market. The TNPA proposes using the Dimson Marsh Stanton (DMS) estimate of the arithmetic MRP measured against bonds for South Africa. - Beta measures TNPA s exposure to market unavoidable (non-diversifiable) risk. Page 11 11
Weighted Average Cost of Capital (WACC) Contd. The process to be undertaken by the Authority in beta determination involves the following steps: 1. Identify a set of peer companies that are traded The Authority is of the view that the JSE Top 40 companies are a good proxy in order to determine an appropriate asset beta. 2. Estimate the equity betas of the peer companies The equity beta data of the JSE Top 40 companies is obtained from Bloomberg 3. De-lever the equity beta The asset beta is derived by de-levering the equity beta of the JSE Top 40 companies 4. Re-lever the JSE Top 40 companies to derive asset beta Page 12 12
Expenses, Depreciation and Claw Back Expenses in any given tariff period are to be based on the best estimate of forecasted costs for the tariff period under review. Depreciation is to be calculated on a straight line basis over the expected useful service life of each of the assets. Taxation is that notional tax allowance which is a close approximation of the actual tax that the TNPA would have to pay, taking into account the tax shield provided by using the Vanilla WACC Claw Back is to ensure that TNPA does not gain or lose out from discrepancies between forecasts and actuals. This should be informed by the difference in revenues derived from the Actual audited financial statements and the respective ROD by Ports Regulator. 13 13
Excessive Tariff Margin Credit (ETIMC) The Regulator introduced ETIMC in the ROD 2012/13 with an opening balance of R900m. The function hereof is to avoid any future excessive annual tariff increase, as informed by TNPA s investment drive (e.g. Durban Dig Out Port). 14 14
Financing factor The F-factor caters for differences between the revenue adjustment to meet debt obligation If the allowable revenue does not enable the Authority s regulated business to operate, then additional revenue may be allowed. 15 15
Transnet s Market Demand Strategy (MDS) R300bn capital investment programme; Expanding rail, port and pipeline infrastructure; Increase in capacity to meet market demand; Continued financial stability and strength; Significant productivity and operational efficiency improvements; Shift from road to rail reducing the cost of doing business and carbon emissions; Enabling economic growth; Job creation, skills development, localisation, empowerment and transformation opportunities; 16
... TNPA s MDS Investment Program xx Total 1,750 2,376 5,326 5,434 6,392 8,134 10,167 9,038 Expansion vs. replacement (Rbn) 1.0 0.7 0.8 1.5 2.8 2.5 3.3 2.1 4.2 2.2 6.3 1.9 7.9 2.3 7.7 1.3 expansion replacement 12 13 14 15 16 17 18 19 10,167 Province (Rbn) 8,134 4 686 9,038 1 583 Durban R Bay Western Cape Eastern Cape Other (LNS, DRS and HQ) 6,392 2 295 5,326 5,434 2 471 2 592 3 518 5 455 1 022 1 750 2 100 1,750 80 567 612 85 406 2,376 689 133 859 258 436 619 525 500 740 569 614 992 1,325 1,509 503 423 251 568 577 1,508 26 2,657 51 3,018 44 11/12 12/13 Bgt 13/14 14/15 15/16 16/17 17/18 18/19 17
MDS is key to South Africa s growth strategy The potential for South Africa is massive It is financially sound We can execute It will improve Transnet's position Contribute to NGP aspirations: expected to create up to 588,000 job opportunities across the economy Reduce the cost of doing business (0,5% of GDP) Drive regional integration Localisation programme supports local products and skills development Majority of the growth will be funded internally from operations Gearing and cash interest cover will maintain investment grade credit rating Execution risks will be mitigated through robust implementation plans In partnership with its stakeholders, Transnet can successfully realise the growth that MDS will bring to the country as a top-tier logistics provider and SA s employer of choice Infrastructure development plans will create world class freight infrastructure 18
Multi-year tariff approach The Authority proposes to adopt multi-year tariff approach from FY s 2014/15 to 2018/19 as it executes the MDS Multi-year approach will provides certainty to all stakeholders. reduced regulatory effort by all affected parties; providing certainty to funders of the Authority; allowing customers to plan their business accordingly during the control period. This multi-year is premised on agreement being reached on the Tariff Methodology and amendment of Ports Act and Directives 19 19
Post ROD FY 2012/13 requirements Post ROD FY 12/13 requirement The Beta comparators used in the tariff determinations and the methodologies and formulas for their calculation, and or the accepted interim asset Beta The valuation methodology for all assets procured and or constructed after the initial RAB was accepted Tariff methodology Section 5.6, Page 20 Section 4.2, page 14 The manner in which the expenses of the NPA are requested, monitored and assessed Section 6 page 24 The treatment of tax in the methodology Section 7 page 26 The possibility of multiple- year tariff approvals to ensure medium term certainty for all parties including NPA The specific form of weighted average cost of capital to be used if the outcome of the methodology process suggests that CAPM is appropriate for the long term Higher level of granularity of the NPA capex programme, in particular what the impact of individual projects shall be on throughput, efficiency, pricing, revenue and the demand case for such projects Review the NPA s depreciation policies and their compliance to regulatory norms. The financial accounting policies may be correct, but in certain areas (depreciation included) Regulators require the information to be treated differently from what is in the reported financials Section 12 page 31 Section 5 page 17 Section 4.1.2 page 12 Section 4.2.3 page 15 Clarity on the cash holdings and benefits resulting therefrom be articulated Section 4.1.3 page 13 20 20
Conclusion Guidance and stakeholder s inputs on the tariff methodology s parameters is key to this process It is imperative that an agreement be reached between the Ports Regulator and the Authority on an appropriate tariff methodology Multi-year tariff framework will provide an element of certainty to all stakeholders The MDS will enable growth in key commodities and position SA as a leading logistics hub for sub-saharan Africa. The Authority intends to utilise agreed tariff methodology in its future tariff applications starting in Financial Year 2014/15 21
Questions DISCUSSION 22 22