Why Transnet needs a government bailout

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JIMMY MOYAHA: Transnet has asked the South African government for yet another bailout. The current Transnet board and current management team have outlined that this bailout is necessary if the entity is to get back to a profitable state. If they’re able to turn around the business, that assistance from the government is absolutely crucial.

Read: Transnet bailout: Govt equity injection crucial for turnaround plan

I’m joined on the line by group chief officer of strategy and planning at Transnet, Andrew Shaw. Good evening, Andrew. Thanks so much for taking the time. There were a couple of things mentioned in the statement and in the turnaround strategy, as well as in the plans and the requests. What wasn’t mentioned is exactly how much the group is looking for. How much of a bailout are we talking about this time round?

ANDREW SHAW: Good evening, Jimmy. Thanks very much for having me on the show. Look, I’m not in a position to divulge that. I think it’s a discussion between National Treasury and ourselves. It’s probably better to speak to the chief financial officer about how that is structured. So not from my side. I wouldn’t be able to give you an exact figure.

JIMMY MOYAHA: All right, that’s fine. We will get into some of the other figures. The debt burden that we are dealing with in regard to Transnet is sitting at about R134 billion at the moment, so we can assume that that is a rough figure that we can work from as well.

What happens if we get a no? What happens if National Treasury says we’ve got no budget for the bailout? The board has outlined that assistance in whatever shape or form is essential for this turnaround strategy. Does that mean that you then have to re-look at the entire strategy? Does it mean the strategy goes out of the window? Does it mean the board resigns? Has there been a plan for the finance minister saying no?

ANDREW SHAW: I think our challenge is that we have requested an equity contribution on the basis that our finance and depreciation costs are so high that that really debilitates us from an operating perspective in terms of delivering the volumes that we need to, given the state of the network of infrastructure, also our rail and port equipment. So that’s really the reason for the equity request.

Read: Transnet swings to R5.7bn loss on lower rail freight volumes

We would need to get some incoming funds on the basis of the requirement of this year. As you know, there is a bullet payment during November and we need to cover that – and that’s critical.

What we have put forward and what was mentioned today is that a recovery strategy has been put forward with two scenarios that focus on being able to deliver what we would call the doable amount, which is 154 million tonnes, and then a stretch target to try and reach a bigger amount than that.

On that basis, within the next financial year, we would hope very much to return to profitability, and we’ve forecasted those numbers up to the end of 24/25 to reach a situation where we return to sustainability.

But we still have this inherited debt burden that we are struggling with.

JIMMY MOYAHA: Alongside the debt burden there are other concerns around the leadership of Transnet. Transnet is currently without a CEO, without a CFO and without a CEO for Transnet Freight Rail. The question then is, is this the right time for the business to be creating more divisions, because there’s mention that part of the strategy is to split TFR, that’s Transnet Freight Rail, into two divisions – being the infrastructure maintenance and the other division? Is this a feasible structure at the moment, considering that there’s a lack of leadership within the business?

ANDREW SHAW: Look, those are policy directors. So this is not something that is new to the strategy. This has been an ongoing agreed outcome for some period of time. It comes from the policy ministry, which is the Department of Transport, but it’s been a policy change that we’ve been expecting for more than a decade.

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And there’s a commitment that the president has held us to, and that is to have the separation complete by the end of this month. In other words the infrastructure manager would be separated from the operations part of the rail business, and then by April next year [the commitment] to open up some of the slots that we’re not using. So these could be called train paths from origin to destination, allowing the private sector to take some of those over.

So really at an operating level [it is to] begin the process of competition and allow more than just Transnet Freight Rail to operate on the network. This is not something that we’ve come up with on our own. The benefit that it does have is that it draws in additional revenue streams. So the more private sector operators use the system, the more we get track-access charges, which would come back to Transnet as a whole.

Read:
Transnet opens up freight rail network to private operators [Apr 2022]
Transnet Freight Rail deems first stage of slot sales successful [Dec 2022]

It has a double whammy, I suppose, for the economy. It has the benefit of bringing competition in, but it also has the benefit of increasing the revenue base for Transnet Freight Rail at a network level, at an infrastructure level.

JIMMY MOYAHA: Andrew, it’s all nice and well to look at these things from a possibilities point of view, but realistically Transnet has tried for the first time to launch a privatisation initiative by privatising two corridors and that has fallen flat before it even got off the ground.

And the other initiatives that the business intends to put in place, things around rolling out R85 billion to spend over the next five years and all of that – how feasible are these things because, if we look at the current state of what’s been happening, this hasn’t worked out.

I’ll give another example. There are plans to sell about R50 billion of non-core assets in an effort to finance some of the infrastructure developments and so on. Should those proceeds not be used to pay down debt instead, given that the business is not in a healthy enough position?

ANDREW SHAW: Look, the challenge that we face – or let’s call it the opportunity that we face – is that there’s huge demand for Transnet Freight Rail services, and in fact also for port services. We foresee that there’s another 50 million tonnes of traffic that we’re not moving that we could be moving, and that’s if we go right up to our 200 million tonne opportunity. So this is a huge sort of underutilised business that could really be taking advantage of that.

Read: Transnet southern rail corridor upgrade taking shape

And so what we see is that if we can bring the network up to a reasonable operating standard – in other words by ensuring that we can deliver services to both our own freight rail division and to private operators, we would be able to generate huge returns from that. That’s really the basis for us seeking private-sector assistance and entry to PSP [private sector participation] type initiatives, which draw or crowd sector [inaudible].

JIMMY MOYAHA: Sorry, Andrew, I think we are struggling to keep you on the line. But while we still have you, I appreciate that you’re mentioning the opportunities that the business has in front of it.

But if we look at Transnet’s track record – and of course this is not a reflection on your performance as the incoming board or as the new board, but rather the historical performance of the business – we have to look at that because over the last five years the business’s revenues have come down by 5.4% on average while the expenses in that same time have increased by 11.1%. That has resulted in earnings before interest and tax coming down by almost 30%, and borrowings increasing by almost R7 billion.

The question is very simple. What incentive does the government then have at this point to bail out Transnet, given that it hasn’t received a return on investment in the last five years – and it’s unlikely that it will receive one in the short to medium term? Why would the government not just put its money elsewhere? Again, not a reflection on your current board, but rather on the past performances that we’ve seen.

ANDREW SHAW: Look, I understand exactly where you’re coming from. I suppose the key thing about Transnet is that it’s a key conduit for delivery of logistics products [not only] to our export markets, but also our domestic markets. It’s a key element of the economy. So allowing Transnet to reduce its volume of exported tonnages or domestic tonnages has a very negative impact, particularly on the mining commodities, but also in respect of manufactured products like automotives, etc.

So there’s a real need to restructure this business in such a way that it can operate and deliver much greater tonnages that are more aligned to the growth in the economy.

And in order to do that we are seeking this assistance in a way to reposition Transnet and particularly the freight rail division, which would be separated in the way that I’ve indicated.

Take into account that by improving the network condition and allowing multiple operators you could drive up the volume of traffic by in the region of 350 million tonnes – which is more than double the volume we achieved towards the end of the last financial year. That estimate is not our estimate. That’s a Department of Logistics at Stellenbosch University estimate. You could [then] be much more effective in supporting the economy and also draw in the revenue base of 350 million tonnes. So the opportunity is huge in respect of what Transnet could be, as opposed to what it is now.

JIMMY MOYAHA: Absolutely. But also part of the problem is that over the years Transnet has, instead of utilising that opportunity, gone and reduced the amount of production that it gets out.

Read: SA’s DBSA helps Transnet prepare for private partners

Andrew, we are running out of time, and I want to get this question through before I let you go. Where do we stand on the CRRC [Chinese Railway Rolling Stock Corporation] contract? That is the Chinese locomotive company’s contract. How does that fit into the turnaround strategy because it feels for shareholders – and by shareholders I mean the South African people looking into this deal – that has been a core reason why Transnet has been unable to deliver. We’ve been held hostage basically by one government contract when Transnet has over an 18-month period been able to declare force majeure six times.

Why has that not been done on this particular contract if we have a problem with it? And where does the current strategy see that contract, because that is going to continue to affect output if we don’t have locomotives?

ANDREW SHAW: Look, I don’t want to go into all the history, but I think if your listeners are willing to go back to the days of the Zondo Commission, it’s really all there in the public space around what happened in respect to the CRRC contract, and why there was then a follow-on legal dispute with them.

We would still like to resolve that and the government has been assisting us, but it’s been very slow to get to the point where we actually have CRRC on board. We would continue to pursue that outcome.

Our second outcome is to procure a step in OEM [original equipment manufacturer]. Now that’s not an ideal outcome because that OEM would not be the CRRC original product manufacturer. That would be another OEM to help us get these locomotives back into service. We have within our own division, and with the support of local industry, also re-engineered some of the spare parts that we require. So it’s not that we are completely reliant on CRRC, but that’s not a bad solution to the problem. The solution to the problem really lies in actually being able to bring these train sets back into operation in a fully usable form. And so that’s what we continue to pursue.

JIMMY MOYAHA: That’s all we have time for, Andrew. Thanks so much for your time. That was Andrew Shaw, a group chief officer of strategy and planning at Transnet, giving us some thoughts around the latest bailout that they’ve requested from the South African government.