Transnet’s Financial Crisis: a Time of Serious Reckoning
Taylorail is a multi-disciplined Rail Consultancy business focussing on Private Sector Participation in the South African rail industry.
Over the past few decades, South Africa has experienced a significant decline in the efficacy of its SOE’s, resulting in a strong trend of de-industrialization, with primary capacities being stunted by poor governance, corruption, political over reach and questionable strategic direction from South Africa’s economic driving forces. This is guided by draconian, Marxist political imperatives that places ideology over basic needs and requirements of the populace, the result of which has resulted in key utilities of industrial value simply collapsing (such as Eskom and Transnet), leading to the quiet exodus of value-adding, value-exporting industrial activities and entities. This is evident through delistings from the Johannesburg Stock Exchange, with an average of 25 delistings per year (14 delistings occurred between January and June, 2023 partially offset by only 2 new listings).
Key to this is Transnet, the state-owned South African freight logistics giant, which is facing a severe financial crisis that threatens not only its own survival but also the well-being of the country’s economy. The entity, which plays a crucial role in providing our Mining, Manufacturing and Agricultural industries with access to the international market, is in dire need of a significant capital injection to address a range of pressing issues.
An avenue for this recapitalisation is the Private Sector, which been treated as an unwanted dinner guest through this decline, a position that the Government will have to reconsider in its current, self-imposed position. There are options of international assistance, however this comes at varying risk to our sovereignty that need to (and can) be avoided at all costs.
Transnet’s Self Destruction
Transnet has been grappling with a multitude of problems, and the situation has reached a critical point. Falling freight rail volumes, a general state of disrepair in rail infrastructure, ongoing theft, and vandalism have severely hampered its operations. In the 2022-2023 financial year, Transnet recorded an alarming loss of R5.7 billion. Further to this, there is a significant backlog in maintenance expenditure, to the tune of an estimated R120 billion according to the African Rail Industry Association.
Transnet’s outgoing Leadership are quick to point to elements beyond their control in the failing operations, such as a dearth of locomotives, infrastructure theft and vandalism and diminishing infrastructure quality. Whilst these are mitigating factors, the reality is there is a fundamental lack of infrastructure management (operational maintenance etc) capability, coupled with a departure from basic rail fundamentals of operation. This results in a decreased overall line speed, a decreased turnaround time, and ultimately a decreased amount of volume that can be moved per unit of rolling stock (creating an artificial deficit). A decreased volume means that your fixed costs are distributed over a declining revenue stream, making each ton more expensive, which becomes increasingly difficult to recover from the client – known as the “death spiral”.
To quote a good friend, “achieving capacity entails managing your minutes”, reducing an 81 million ton per annum coal line down to a granular detail and questioning every deviation, every delay and every missed slot. Ensuring that every opportunity of efficiency is validated, implemented and improved upon. It is precisely through this level of management that the Coal Line reached its 77 million tons per annum in 2017 (during the height of Zuma’s years). Whilst technology exists for this level of management to be much better controlled and implemented, Transnet has been reluctant to explore these opportunities as it exposes the level of ineptitude in real-time. This has resulted in Transnet leaning on manual train authorizations and manual deviation management – an impossible scenario.
The Urgent Capital Requirement
Transnet has urgently appealed to the National Treasury for a capital injection to the tune of R50 billion. This request is in addition to a plea for the government to take over a substantial portion of Transnet’s staggering R130 billion debt burden. The company is seeking a R47 billion equity injection and R61 billion in debt relief as part of its turnaround plan. With current constraints in Treasury, as well as Treasury advising most departments to cut budgets for next year, it is unlikely treasury will provide this support.
Economists have sounded the alarm, highlighting that the underperformance of Transnet’s logistics infrastructure, which includes an extensive railway network and critical ports, could cost the South African economy dearly. Estimates suggest that it could potentially affect a significant % of the country’s GDP, with ongoing job losses and significant economic losses on a daily basis. An example of this is the impact of rail to some of South Africa’s largest companies who heavily rely on rail, such as Sasol (who contribute a massive 4.7% to South Africa’s GDP), Arcelor Mittal South Africa (1.3% of SA’s GDP and supports up to 10% of SA’s GDP through its business), Ford South Africa (±1.5% of SA’s GDP), the Forestry Sector () – bearing in mind that these are all classified as General Freight and not considered Strategic according to Transnet, who have chosen to focus on mineral flows (coal, iron, manganese, chrome etc).
The Duality of Transnet’s Mandate
Transnet is beholden to its mandate, which includes both a profit imperative, as well as a developmental imperative. One might argue that, with its focus on minerals, and current financial constraints, it’s missed the mark on both mandates.
The importance of this duality is material, and points to the role that the Government plays in South Africa’s Economic Development. South Africa’s rail network is the 9th largest in the world (some might argue that its too large), yet it’s the only major network that enjoys no support from its National Government. A recent study undertaken by the African Rail Industry Association has identified the quantum of support that major nations provide for their respective rail industries (including BRICS nations, as well as SADC and European nations). All networks enjoy a capital support from their respective governments to ensure that operability of the networks. This capital is used to ensure a developmental mandate is possible, and freight rates are not prohibitive. Furthermore, these Governments actively identify key industries of socio-economic importance (that may provide rural employment or support sections of the economy that are otherwise neglected) and support these industries through direct subsidies to their freight charges – an example of this is the Russia’s support of its Timber Industry through rail subsidies, ensuring that it’s position on the international market is competitive and secure (thereby protecting employment in this critical industry) – a rural job is a lot hard to replace once its gone.
If we once again revert back to South Africa, there is no direct Government Support for Rail’s developmental mandate. In truth, our Road Network is supported to the tune of R85 billion rand per year in subsidies, effectively subsidising the trucking industry – supporting South Africa’s Rail to Road migration. Should this not be reversed, our roads will continue to suffer under heavy, rail-relevant loads and require the continued funding.
Whilst we are moving toward a period of Private Sector Participation in South Africa’s rail industry, we need to be completely clear on South Africa’s bigger picture, and understand Rail’s role to play in the development of South Africa, and how the State has an opportunity to leverage the Private Sector as implementing agencies of the State’s national developmental objectives. Examples exist across the world of how Governments have successfully implemented large PPP and PSP projects, by leveraging its position with Private Sector in executing developmental mandates. The structuring of these deals are essential to realise this value, for the Private Sector as well as the populace that these initiatives serve. It is now that Government needs to take cognisance of the role that it has played in the collapse of our SOE’s as well as be strategic about its role that it needs to play in once again rebuilding our SOE’s for the benefit of South Africa’s national strategic objectives.
Governments role it has played, and needs to play
Political Overreach is something often referred to in the corridors of the various State Departments, especially when it comes to managing the recent rot in the leadership of our State Owned Entities. One must remember that both Portia Derby as well as the leadership of the Electricity Utility where hand-picked by its shareholder – the Department of Public Enterpise. One would think if DPE can giveth, DPE should be able to taketh away, however through years mismanagement, breaking of debt covenants, allegations of ghost trains and missed volumes, missed commodity booms and the associated disinvestments, these SOE leadership positions were held in an almost sacred, impervious position, with the Shareholder simply accepting (almost promoting) the ineptitude of its choices and the associated damage to the National Economy and potential erosion of National Sovereignty.
The Path to Recovery
Despite the grim situation, there is hope for recovery. Many believe that with the departure of what has been described as “toxic leadership” and the exodus of key executives, Transnet is now presented with an opportunity for revival. Much emphasis has been placed on the National Logistics Crisis Committee (NLCC) which consist of Government bodies, as well as members from the Private Sector (many of whom are ex-Transnet, coming from better years). This NLCC has taken a hands-on approach on the interventions needed, to bring management back into the minute.
The Structural Reform that is underway should be designed in a manner that prioritises Private Investment into both Infrastructure and Operations – especially given the Governments massive fiscal constraints. Government should identify that it holds a strategic opportunity to leverage its position, and create an environment where the Private Sector become agents of implementation of the National Strategic Objective. It is exceptionally important to clarify that this is not privatisation. This is Private Participation – and this is the only option to turnaround our logistics network and retain our sovereignty. The Government cannot simply turn its pockets out considering what is at risk.
But what if we don’t get this right?
If we don’t get the following months right, either the National network continues to decline, commodity prices drop and businesses close because the international price of their exported goods simply cannot support a non-rail based logistics solution (trucking). This is already happening with mining houses announcing job cuts and potential closures.
Another potential outcome is in the form of an international bailout (similar to what has been announced with the World Bank and Eskom this week). A bailout by the World Bank would come with strong restrictions placed on the Government for these funds.
China has also put forward its bailout option, which would effectively be the wholesale transaction of our Port, Rail and Pipeline operations to the Chinese – dubbed the Martial Plan tabled by Transnet’s shareholder in October, 2023.
With the exception of Tanzania and Zambia’s TAZARA rail infrastructure, China’s modus operandi for African Infrastructure development is to ensure that all aspects of the project are undertaken by its various government agencies, from feasibility, design, funding and construction which results in an extremely expensive end-product of incompatible quality. This end product is often difficult to operate at any commercially viable level considering the conditions of the financing, leading to a default and transfer of ownership of the infrastructure to the Peoples Republic of China. This default position has been reached in Kenya, Sri Lanka and other countries in the Developing World, and a road we may already be on considering our Locomotive impasse.
Conclusion
Transnet’s current crisis is a matter of National and Regional concern. Addressing its financial woes is not merely about saving a state-owned enterprise; it is about safeguarding the South African economy. Structural Reform to promote Private Sector Investment without fear or favour, Government finally taking a Strategic position, and a comprehensive turnaround plan are imperative to prevent further economic deterioration and job losses. The fate of Transnet is intertwined with the prosperity of South Africa, the urgency of the situation cannot be overstated, at the risk of South Africa becoming yet another bead on a long String of Pearls of spectacular Government Failures that will impact SA for future generations.
