TRANSNET 1064 (Making Sense of It) Part 2

This post is long but I can assure you as the reader you will find the post worth reading.

Background

The South African media consistently refer to an amount of R38.6bn when publishing articles related to the 1064 locomotive transaction. This is the amount contained in the Transnet business case which was used to obtain the green light internally to proceed with the acquisition of the 1064 locomotives.

The media continuously imply that there is little to no justification for the increase in the cost of the 1064 locomotive acquisition from R38.6bn to R54bn. Taking the information in Part 1 of this post and applying some common sense and rudimentary mathematics it becomes apparent how the facts have been skewed by the Media to meet an agenda only they know.

Purpose of this document

The purpose of this document is to critically evaluate the assumptions used to derive the R38.6bn contained in the Transnet business case model (“the model”).

Where the assumptions used are deemed to be unreasonable, updated assumptions will be used and the resulting cost of the 1064 will be included in this document.

The end result will be compared to the R54bn quoted in the media as being the revised acquisition cost for the 1064 locomotives.

Overview of the business case model

The business case model is a comprehensive model that addresses the following key areas:

• Incremental revenue generated by the acquisition of the locomotives.
• Capital expenditure related to the 1064 locomotives.
• Maintenance costs as well as the associated costs saved by replacing the ageing fleet.
• Fuel and electricity costs as well as the associated costs saved by replacing the ageing fleet, and
• Associated incremental tax expense and wear and tear allowances.
The only area of relevance to this document is the capital expenditure and as such no further consideration has been given to the other areas listed above.

Assumptions used
Foreign exchange rates (“Forex rates”)

The forex rates used in the model may have been reasonable at the time it was developed, retrospectively however the appear to be very conservative as can be seen in the graph below.

Link to Forex Rate Chart: https://db.tt/CZZUEPARyi

 

Delivery schedule

The original delivery schedule as contained in the original model is significantly different to the actual deliveries being made to Transnet. The table below sets out the various delivery schedules assumed in the updated model. Transnet had only taken delivery of 35 diesel and 54 electric locomotives as at 31 March 2016 and this has been taken into account in the two revised delivery schedules.

Link to Delivery Schedule Chart: https://db.tt/roAsSXKFmX

 

Price per locomotive

The base price per locomotive in the model were sourced from “Expert Interviews”. The parameters used to derive these prices are not described.

These parameters include the following, amongst others:

• The number of locomotives per OEM as this will affect the capex amount recovered per locomotive as well as the level of economies of scale that would be achieved,
• The contracting currency as this will determine how the OEMs will hedge their foreign currency exposure (if any) which will form part of the price, and
• The localisation content requirement as this will impact the currency structure of the OEMs’ manufacturing cost which will affect the pricing.
Although the reasonability of the base price per locomotive is uncertain it remains unchanged in all three scenarios.

Results

The resulting cash flows under each scenario are shown below:

Link to Results Schedule : https://db.tt/PDld6omOb2

Conclusion

By updating the foreign exchange rates as well as delivery schedules to reflect actual historical data for the time elapsed, the acquisition cost of the 1064 transaction is between R55.6bn and R57.0bn. As such the R54bn being quoted in the media as the acquisition cost can be seen as reasonable

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