1 Spoornet Rail Freight Challenges Positioning for Growth and Prosperity Siyabonga Gama Chief Executive, Spoornet Global Rail Freight Conference 22-24.

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SpoornetSpoornet Rail Freight Challenges Rail Freight Challenges

Positioning for Growth and ProsperityPositioning for Growth and Prosperity

Siyabonga GamaChief Executive, Spoornet

Global Rail Freight Conference22-24 March 2007

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Non-core portfolioNon-core portfolio

TRANSNET COMPANY TRANSNET COMPANY Structure Structure

Enabling economicgrowth

Enabling economicgrowth

Focused freight transport company

Delivering effective and competitive

services

SpoornetSpoornet

RAILRAIL

TranswerkTranswerk

PORTSPORTS

National Ports

Authority

National Ports

Authority

SA Port Operations

SA Port Operations

PetronetPetronet

PIPELINEPIPELINE

Operational divisions(continued businesses)Operational divisions

(continued businesses)

• SAA• Viamax• V & A Waterfront• Autopax• Metrorail• freightdynamics• Equity Aviation• VAE Perway

• SAA• Viamax• V & A Waterfront• Autopax• Metrorail• freightdynamics• Equity Aviation• VAE Perway

Discontinued businesses

Other to be sold• Propnet – non-core

portfolio• Housing assets• SA Express• “C” class preference

shares

• Propnet – non-core portfolio

• Housing assets• SA Express• “C” class preference

shares

StrategyStrategy

Transnet StructureTransnet Structure

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Spoornet NetworkSpoornet Network

Sishen

Saldanha

Cape Town

EastLondon

Port Elizabeth

Durban

Richards Bay

Messina

Pretoria

Kimberley

Low Density

No Service Lines

High Density

Light Density

Bloemfontein

Johannesburg

Spoornet is the

largest division of

Transnet with a

focus on the

transportation of

freight.

Spoornet is the

largest division of

Transnet with a

focus on the

transportation of

freight.

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Facts about Spoornet Facts about Spoornet

● Moves 17% of the nations freight annually

70mt of export coal on the heavy-haul Ermelo – Richards Bay line

32mt of export iron ore on the heavy haul Sishen - Saldanha line

80mt of general freight across various freight corridors

● 30% of the core network carries 95% of freight volumes

● 3 million inter-city passengers annually

● Annual revenues of over R14billion (US$2.2bn)

● R7 billion in annual capital investment over the next 5 years

● Total assets of R24 billion ( ’03/07) up from 18.4bn (’03/06)

● 25 068 employees system wide (from 33 450 in March 2006)

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Spoornet StatisticsSpoornet Statistics

● Freight Wagons 93 700 (active)● Locomotives 2 157 (active)● Track km 30 400 km● Route km 20 298 km● Freight volumes 182 mV (2005/06)

● Passenger Coaches 1 227 (active)● Long distance Passengers 3.15 million (2006/05)● Blue Train occupancy 164 trips, 90%

● Turnover R14.3 billion (2005/06)● Employees 25 068 (Dec. 2006)

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Spoornet : Density over the networkSpoornet : Density over the network

Touwsrivier

Mid Ilovo

Plaston

Kelso

Eshowe

Utrecht

Hawerklip

Naboomspruit

Middelwit

Vierfontein

Sishen

Saldanha

Cape Town

East London

Port Elizabeth

Mosselbaai

Bredasdorp

ProtemStrandSimonstad

StellenboschFranschhoek

Bitterfontein

Porterville

Atlantis

Prins AlfredHamlet

Riversdale

Knysna

Calitzdorp

George

Ladysmith

AvontuurPatensie

Klipplaat

Oudtshoorn

Rosmead

Kirkwood

Alexandria

Cookhouse

Somerset East

Noupoort

De Aar

Prieska

Upington

Kakamas

Naroegas

Worcester

Sakrivier

CalviniaHutchinson

Kootjieskolk

Beaufort West

Belmont

Douglas

Hotazel

Warrenton

Pudimoe Makwassie

Mafekeng

Ottosdal

Vermaas

Schweizer-Reneke

KlerksdorpOrkney

Coligny

Bultfontein

Whites

Westleigh

Bloemfontein

Aliwal North

Sannaspos

Dreunberg

Springfontein

Koffiefontein

Hofmeyer

Schombee

JamestownBarkley East

Maclear

Tarkastad QamataQueenstown

Blaney

Bethulie

Seymour

Umtata

FortBeaufort

Amabele

Maseru

Marquard

Ladybrand

Bethlehem

Wolwehoek

Lichtenburg

Warden

Harrismith

Bergville

Kokstad

Matatiele

Harding

Port Shepstone

Durban

Kranskop

RichmondUnderberg

Stanger

NkwaliniRichards Bay

Vryheid

Hlobane

Moorleigh

Ladysmith

Roossenekal

Steelpoort

Graskop

Machadodorp

Belfast

Lothair

Komatiepoort

Baberton

Phalaborwa

Messina

Louis Trichardt

Soekmekaar

ZebedielaVaalwater

Nylstroom

Johannesburg

PretoriaOlifantsfontein

Ellisras

Northam

CharlestownVrede

Potchestroom

Empangeni

Donnybrook

Greytown

Franklin

Kimberley

Marble Hall

Standerton

Bethal

Gelukpos

Simuma

Mandonela

Winburg

Theunisen

ChroomvalleiDrummondlea

VirginiaGlen H

HowickHilton

Copperton

Cullinan

Rayton

Uitenhage

Klawer

New Castle

Glencoe

Kakamas

Naroegas

Worcester

Sakrivier

CalviniaHutchinson

Kootjieskolk

Beaufort West

Belmont

Douglas

Hotazel

Warrenton

Pudimoe Makwassie

Mafekeng

Ottosdal

Vermaas

Schweizer-Reneke

KlerksdorpOrkney

Coligny

Bultfontein

Whites

Westleigh

Bloemfontein

Aliwal North

Sannaspos

Dreunberg

Springfontein

Koffiefontein

Hofmeyer

Schombee

JamestownBarkley East

Maclear

Tarkastad QamataQueenstown

Blaney

Bethulie

Seymour

Umtata

FortBeaufort

Amabele

Maseru

Marquard

Ladybrand

Bethlehem

Wolwehoek

Lichtenburg

Warden

Harrismith

Bergville

Kokstad

Matatiele

Harding

Port Shepstone

Durban

Kranskop

RichmondUnderberg

Stanger

NkwaliniRichards Bay

Vryheid

Hlobane

Moorleigh

Ladysmith

Roossenekal

Steelpoort

Graskop

Machadodorp

Belfast

Lothair

Komatiepoort

Baberton

Phalaborwa

Messina

Louis Trichardt

Soekmekaar

ZebedielaVaalwater

Nylstroom

Johannesburg

PretoriaOlifantsfontein

Ellisras

Northam

CharlestownVrede

Potchestroom

Empangeni

Donnybrook

Greytown

Franklin

Kimberley

Marble Hall

Standerton

Bethal

Gelukpos

Simuma

Mandonela

Winburg

Theunisen

ChroomvalleiDrummondlea

VirginiaGlen H

HowickHilton

Copperton

Cullinan

Rayton

Uitenhage

Klawer

New Castle

Glencoe

High Density Lines (<3m nt/a)High Density Lines (3 -7m nt/a)High Density Lines (7 -10m nt/a)High Density Lines (10 -20m nt/a)High Density Lines (20 -30m nt/a)High Density Lines (>30m nt/a)Low Density Lines (Open)No Significant Service LinesPicked up Lines

Port Alfred

Iron ore exports > 30mt

Coal exports> 70mt

General Freight > 80mt

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General Freight: Portfolio Mix (Rbn)General Freight: Portfolio Mix (Rbn)

Coal & Containers

generate highest

revenues.

70% of other revenue

is from mining/ bulk

related freight.

CoalCoal

Containers

Other

Iron oreGrain

Ma

ng

an

es

e

Pet

role

um

Cem

ent

Chrome

PhosphateFerrochrome

Lime

Steel

Timber

R1,8bnR1,8bn

R1,1bn

R1,6bn

The portfolio mix is representative of most freight railways

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Locomotive Age ProfileLocomotive Age Profile

● The average age of the total fleet is 30 years compared to 12 years US Class One

● Last batch purchased more than 12 years ago ● Ageing fleet characterised by high maintenance costs, very low

reliability and availability and high number of safety related incidents

● Aggravated by lack of effective maintenance over a long period

Fleet Age - All Locomotives

-

50

100

150

200

2501 2 3 4 5 6 7 8 9

10

11

12

13

14

15 16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

Age (Years)

No o

f Locom

oti

ves

Average

No of Locos

30 y

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Wagon Fleet Age ProfileWagon Fleet Age Profile

● The average age of the General Freight wagon fleet is 34 years ● Limited investment in wagons over the past 12 years (excl. coal & ore)● Capital investment for wagon fleet modernisation behind schedule● Availability of wagons is not achieving desired percentage and is

deteriorating ● Lack of effective maintenance over a long period, leading to current

backlog

Replace with equivalent wagon graph

Wagon Fleet Age distribution

0

2000

4000

6000

8000

10000

12000

14000

16000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

Age (Years)

Qu

anti

ty W

ago

ns

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Where have we come from?Where have we come from?

● South Africa● Spoornet

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South Africa: Economic OutlookSouth Africa: Economic Outlook

● Export performance expected to improve

high commodity prices

increased profitability of a broader range of manufactured goods

● Growth in imports likely to remain high due to continued strong domestic demand

● Inflation projected to remain well within the target range

● Outlook for achieving 6% GDP growth by 2010 is bright

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Issues that being addressed in South AfricaIssues that being addressed in South Africa

● Globalization

● Regional role

● Increase/enhance competitiveness Reduce cost of doing business Job creation and poverty alleviation

● Streamline/improve the national logistics infrastructure

● Transformation & BBBEE

● Understand the interaction between the 1st and 2nd economies

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Structure of the South African EconomyStructure of the South African Economy

330mt

370mt

45mt

2004Manufacturing =

18% of GDP

2004Mining = 7% of GDP

2004Agriculture =

6% of GDP @

The total throughput in the South African economy that requires logistics intervention amounts to 830mt (transportable GDP)

MiningMining

49%49%

Agricultu

re

6%

ManufacturingManufacturing45%45%

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Spoornet’s Strategic IntentSpoornet’s Strategic Intent

● Enables Economic Growth● Facilitates Trade Growth by

increasing South Africa’s competitiveness● Reduces logistics costs by transferring traffic from

road to rail● Develops Skills

Spoornet is a Freight Railway

that satisfies

the needs of our Customers

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Spoornet Strategic Rail Track MapSpoornet Strategic Rail Track Map

2012DesiredFuture

SPOORNET

Current State of

SPOORNET

Stabilise andRe-engineer the

Business

ImproveOperationalEfficiency &

Customer Service

ImproveBusiness

Performance

Volume &Market Share

Growth Sustainable BusinessPosition in

Rail Industry

Investigate Vertical Integration

vs. Vertical Separation

Regain CredibilityStrategic

Investment

Divestment ofNon-Core

Non-FreightBusiness Activities

2005 2007 2008 2009 2012

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Spoornet ObjectivesSpoornet Objectives

Leadership & Employee Capability

Optimise human capital deployment and development

Customer ServiceDelivery

Retain the desired customer base and

improve service delivery

Scheduled Freight Railway

Implement efficiency improvements

Create CapacityInvest to maintain,

replace and increase capacity

• Improve Corporate Governance• Change Leadership• Focus on high growth, high yield General Freight in key corridors

SafetyTransform Spoornet into a

safe railway

44

11

2255

33

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RestructuringRestructuringCapital Capital InvestmentInvestment

Operational Operational EfficiencyEfficiency

Spoornet : Levers for GrowthSpoornet : Levers for Growth

PeoplePeopleMarketing / Marketing / PricingPricing

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Spoornet: Projected Volumes (mV) 2007-2012Spoornet: Projected Volumes (mV) 2007-2012

0

50

100

150

200

250

300

68 72 74 77 81 86

31 35 42 44 44 47Coal

Iron OreGeneral Freight 79 82 89 95 102 105

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Growth focus: Market share capture

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Spoornet’s Service OfferingsSpoornet’s Service Offerings

Blockload Intermodal

Fixed origin and destination point with

high level of empty returns, and focused

asset utilization

Heavy Haul

Terminal-to-terminal blockloads

with priority path status

Purpose-built bulk conveyor belts

Less than Blockload

Varying OD’s, many operational moves,

poor asset utilisation

Fixed schedule service Charter service Consolidation service

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Spoornet Market StrategySpoornet Market Strategy

Market DefenseStrong relationships with

base-load industries through:•dedicated service

and tight integration with •their production processes

Market DefenseStrong relationships with

base-load industries through:•dedicated service

and tight integration with •their production processes

Market Captureof Bulk freight through:

Efficiency improvementstranslated into a competitive

service offering

Market Captureof Bulk freight through:

Efficiency improvementstranslated into a competitive

service offering

Market Attractionthrough Rail and Road

partnerships to service theneeds of growing, non-bulk

sectors of the economy via intermodal solutions

Market Attractionthrough Rail and Road

partnerships to service theneeds of growing, non-bulk

sectors of the economy via intermodal solutions

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Efficiency focus for RailEfficiency focus for Rail

Focus AreaOptimal planning and execution of resources

Increase locomotive reliability

Quality and cost of service delivery

Asset utilisation and efficiency

Ring-fence rolling stock fleets and reduce cycle time

Reduction in safety and security incidents

Streamlined customer interface

Execution of Backlog Maintenance, Capital Programme and improved maintenance practices

Labour Productivity and Change Management

Mea

sure

s

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Spoornet Capital InvestmentsSpoornet Capital Investments

Key Projects•Coal & Ore line expansions

•Locomotive Renewal Programme

o 110 AC/DC for Coal line

o 212 Diesel-electric

o 163 AC/DC for General Freight

General Freighto Rolling stock fleet renewal &

modernization

o Train authorisation systems

o Infrastructure electrical systems

o Relocation of CTC offices

o Optic fibre cabling

o Upgrade & sustain rail infrastructure:

R4bn p.a. over next 5 years

R34bn (US$5bn) Investment over next 5 years

US$1.3bn invested in 2006

● Rolling Stock Maintenance

& BacklogReliabilityStabilisationFleet Rightsizing & StandardisationUpgrades

● ExpansionMajuba Power StationCoal and Iron Ore Export lines

● Rail Master Planning: future

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The Competitive Challenge for South AfricaThe Competitive Challenge for South Africa

SA is essentially a bulk net exporter:

equidistant from all the main global markets

Global trade routes

SA trade routes

14k km12k km

10k km

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Influenced by global logistics trends…Influenced by global logistics trends…

● Sourcing of product is a global game

● Choice is influenced by agility and cost of the total supply chain

● Balance of power shifting to carriers

● Focus on Intermodalism and Integration

● Pressure on developing countries to reduce the cost of doing business

● Global Revival of Rail

Rail is catalyst in positioning emerging economies

Infrastructure investment critical

Regulation of modal competition

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Global Customer Requirements for RailGlobal Customer Requirements for Rail

● Heightened pressure for world-class competitiveness

● Efficient rail is a competitive advantage for customers to get product to market – 5 “R’s” of Rail:

Right Place

Right Time

Right Quantity

Right Cost

Right Condition

Rail is an integral part of the total supply chain,

rail operators need to think outside the ‘rail’ box

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Rail in the Customers’ Supply ChainRail in the Customers’ Supply Chain

● For Customers the world is flat in terms of supply and demand

● Rail is the critical link between supply and demand ● Rail is part of a production system

Each component needs to focus on product delivery Each component needs to perform based on quality

standards Each component needs to invest in technology to improve If the production line fails the factory stops

Supply Chains are global production lines

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Future OutlookFuture Outlook

● Volume based growth strategy & philosophy

● Capital investments to capture market

growth (10% of GFB to 22% over 5 years)

● Investments in sustaining growth

● Sharper focus on customer service

Reduce switching cost from road to rail

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Thank YouThank You