Presented by Mr. Francois Meyer, General Manager Long-Term Planning, Transnet SOC Ltd during the Roads and Economy Transport Forum held on 14 February 2019.

1. Mr. Francois Meyer
General Manager Long Term Planning
Transnet SOC Ltd
February 2019

3. 2Strictly private and confidential
The Investment Logic
Invest (all working assets) Receive Returns
Grow, Sweat and Maintain
AssetsRail System
Invest Receive Returns
Grow, Sweat and Maintain
AssetsRoad System
Consequential Costs & Returns
Own Others
Cross-subsidies
Consequential Costs & Returns
Infrastructure (partial)
Infrastructure (partial)Cross-subsidies
If we were to consider investing in transport infrastructure as a collective
(SA Incorporated), we would probably invest differently.

4. 3Strictly private and confidential
Problem Statement
Those who invest are not necessarily reaping the rewards.
Capital investment decision-making processes seldom cater for “goodwill” or
benefits to others.
The impacts on “society” are difficult to quantify and require intuitive assessments –
something that is not tolerated well in corporate environments.
The transport sector is particularly afflicted by the inability to balance individual
business objectives with external costs and benefits.
We all want to see the “Cost of Logistics” to decrease.
Do we know the real costs?

5. 4Strictly private and confidential
Business Cases – evolution
• Big decisions to invest in Transport Infrastructure were made in the 60’s to 80’s
with very little scientific or business case backing.
• These investments turned out to pay handsomely for the investors and SA inc.
• Examples: Coal Line and Sishen-Saldanha
• Today these business cases would fail our Capital Investment Committee.
• Were investors in the past just lucky?
• Or did they possess good intuition that we have somehow lost?

6. 5Strictly private and confidential
Business Cases – evolution
• As investors we have become much better informed about the viability of
business cases.
• Forecasting methods have improved significantly
• The full spectrum of risks and financial modelling have become more
sophisticated.
• We are demanding more from our business cases.
The intuitive judgements of the past has made way for scientific fact…
.. Or has it?

8. 7Strictly private and confidential
A case for Road to Rail
Taking some traffic off Road and putting it on
Rail is a good example of a misaligned business
case.
Transnet has done extensive modelling on the
potential for road traffic to convert to rail.
Challenges with inter-modalism and operational
performance apart, the opportunities are real.
But the business cases don’t support the
investments.
The commodities most likely to be taken on to
road also fall into the category of “loss makers”
for the business and even with economies of
scale are likely to remain there.
Transnet Group
PBIT
Topline
Revenue
EBITDA
Total
Assets
PBT
PAT
384,801
85,048
4,304
35,830
19,051
6,386
TFR
Transnet Today
Loss Makers
3,367ABL
CAB
SAM
Total
Revenue
2,814
2,588
8,769
All figures in R Billions
5,324
23,528EBITDA
Total
Assets
PBIT
Topline
Revenue
PBT
PAT
198,066
49,740
14,197
7,458

9. 8Strictly private and confidential
What is wrong with the business case?
• Infrastructure
• Equipment
• Skills
• Processes
• Profits
• Growth
• Fulfillment of
mandates
Investments BenefitsCost of Operations
• Processes
• People
• Maintenance
• Input costs
• Externalities
• Costs to Society
• Lost opportunities
Consequences & Hidden Costs
Measured in the
business case
“Aware” but
not measured

10. 9Strictly private and confidential
Transport sector: Investments, beneficiaries and hidden costs are misaligned
• Infrastructure
• Equipment
• Skills
• Processes
• Profits
• Growth
• Fulfillment of
mandates
Investments BenefitsCost of Operations
• Processes
• People
• Maintenance
• Input costs
• Externalities
• Costs to Society
• Lost opportunities
Consequences & Hidden Costs
Measured in the
business case
“Aware” but
not paid for
• Both Road and Rail are not paying for
Consequential and Hidden Costs
• In addition, Road is not paying the full
infrastructure investment and maintenance costs
• As a result, investment decisions are not
considering the full picture and the shift to rail is
simply not viable (for the investors).
• For society there is a huge potential benefit but
remains impossible to achieve.

12. 11Strictly private and confidential
Cost of Externalities – How much is it really?
Externality costs arise as a result of operations or economic activity outside of the financial
boundaries of the organisation. These costs are typically a burden or “tax” to the broader
environment or society but not directly paid for by the originator of the costs.
Since SA is a transportation hungry country, the burden to the economy is significant and
understanding the true cost of each mode should be considered by transport planners and
policy-makers alike.
Six types of externality costs were identified and analysed**:
(c/ton km) SA road SA Rail EU road rate EU rail rate
Accidents 4,92367 0,38704 6 0,124
Congestion 1,92251 – 2.5 –
Emissions 4,64538 0,77795 2,549 0,603
Landway 1,00315 0,10406 n/a n/a
Noise 1,88278 0,01883 0,43 0,2
Policing 0,25814 – 0,31 –
**Sources: GAIN (Prof J Havenga and Z Simpson); References from A Jorgenson

13. 12Strictly private and confidential
Transport components on Durban - Gauteng
-
2
4
6
8
10
12
Billions
Contribution to fixed infrastructure Transport costs
*Source: GAIN Group
2017 Volumes (Rand billions)
Only 11% of road transport costs
contribute to fixed infrastructure
There is an 89% under-recovery of infrastructure costs by road haulage.
These costs are borne by other road users and the tax payer.

14. 13Strictly private and confidential
Transport components on Cape Town - Gauteng
-
2
4
6
8
10
12
14
16
Billions
Contribution to fixed infrastructure Transport costs
Only 9% of road transport costs
contribute to fixed infrastructure
*Source: GAIN Group
2017 Volumes (Rand billions)
There is an 91% under-recovery of infrastructure costs by road haulage.
These costs are borne by other road users and the tax payer.

15. 14Strictly private and confidential
What if we were to pay our externality costs?
1.03
0.46
0.15
0.01
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Road Rail
Cape Town - Gauteng
Rate per tonkm Externality per tonkm
0.95
0.51
0.15
0.01
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Road Rail
Durban - Gauteng
Rate per tonkm Externality per tonkm
Externality cost per mode is equivalent to 15% of road costs, and 3% of rail charge.
Costs would need to increase by those % respectively if externality costs were internalised
*Source: GAIN Group

16. 15Strictly private and confidential
What if there is a shift from road to rail?
TonKm (Bn) Externality Costs (Rb)
No change Road 12 203 70.6% 1786
Rail 5 076 29.4% 65
LTPF shift Road 10 293 59.6% 1506
Rail 6 985 40.4% 89
Potential Savings 255
Using a realistic (conservative) forecast of mostly general freight that would be better suited to rail, we
modelled the impact on externality costs.
If there is a shift of about 10% of volumes from road to rail, society would see a R255bn benefit.
Unfortunately this benefit cannot be used in the business case because the benefits will not accrue on the
Transnet income statement.

17. 16Strictly private and confidential
Why are we are not making the shift?
• Incomplete Business Cases: not accounting for all the costs and consequences
• You get what you measure: Bottom-line driven executives and shareholders
measure and drive certain behaviours
• Externality costs are difficult to quantify and agree on
• Perceptions and Ignorance: “Its not my problem”
• Political: “Doing the popular thing is better than doing the right thing”
• Policy: Reluctance to regulate. Already over-regulated and taxed? How best to
regulate?
It is a bit like climate change – most believe that it’s a real problem but we don’t
have the means to address it individually.

18. 17Strictly private and confidential
What can be done?
• Create awareness: The better decision makers are informed, the better
decisions they will make.
• Lobby for change in regulations and controls: The transport sector needs to be
equalized somewhat. Regulations need to be consistent, easy to implement and
maintain.
• Be careful with tax and tolls and mechanisms with a low return and high
administrative loss component. It can be counter-productive.
• Influence public and customer perceptions.
• Collaborate: Logistics Players, Customers and Society can work together
• Road and Rail (not Road vs Rail)

19. THANK YOU