Transnet biggest challenge as the company moves towards privatisation

The mismanagement of a company, the mismanagement of a company’s finances, and poor decision making are still three of the most common root causes of financial distress.

While significant focus is being given to loadshedding and the Global Supply Chain Crisis as external root causes of financial distress. Turnaround professionals are all to familiar with dealing with the challenges of the most common causes of distress. After the leadership of the company is replaced – which is often an inevitability – the new executives need to deal with the series of fires that stemmed from the poor decision making that led the company into financial distress in the first place.

This is a situation that Transnet will now have to deal with as the company plans one of the biggest privatisation deals that the country has seen in the democratic era. In a bid to support emerging manganese miners, Transnet increased the transport allocation of these miners by 2 million tons (encouraging them to increase their productivity). To accommodate this, the company decreased the transport allocation given to larger manganese miners by the same amount.

While the decision to support smaller miners was admirable, will this decision prove to be a millstone around the company’s neck as Transnet approaches a tense period of contract renegotiations?

Concerns about changing rules

“When you think about large investments you make in a mining company, it’s always a concern when the rules change without consultation, or without time to prepare for what that change actually looks like,” South32 CEO, Graham Kerr, said in an interview with News24.

Transnet last year resolved to double the railing capacity for emerging manganese miners to 4 million tonnes per annum. The extra tonnages will be taken from existing railing allocation being used by major miners, reducing their lot from 14 million tonnes to 12 million tonnes. How will this impact major manganese miners?

“For us to maintain production levels, we’d have to shift those volumes to road, which is much more expensive and not ideal, just given the number of trucks on the roads and all of the issues that go with that. And so, all of the majors are confronted with that issue,” said South32 COO Noel Pillay, adding that the group is now exploring various routes, through Saldanha, Lüderitz, Walvis Bay and others, so as not to burden the traditional road route to Gqeberha with additional trucks.

MECA 2 expiration

The News24 article points out that the reallocation comes as Transnet’s railing contract with industry, known as the Manganese Export Capacity Allocation Agreement (MECA 2), expires at the end of March. MECA 3 is now up for negotiation, the outcome of which will inform whether investment decisions are taken or not.

There is no expectation that the allocation awarded to emerging miners can be clawed back. “The new MECA 3 contract starts with all of the majors having a negative 15% rate allocation. The negotiation starts there,” Pillay said.

Kerr said South32 was supportive of emerging miners being developed and helped to grow, “we’re just hoping it’s not [at the expense] of our business and our potential investments in South Africa,” he said.

The article adds that the outcome of the new contract negotiations would help inform South32 on whether or not to double the size of South32’s Wessels underground manganese mine.

Such an expansion would include an investment in expanding the railroad.

“Depending on how this contract negotiation pans out, we’ll have to make a decision,” said Kerr. “Because the economics shift radically if all new material is on the road, and you have to take some of the material that was on the rail and put it on the road.”

The reallocation will be of little concern if Transnet follows through with plans to expand capacity on the line.

Motivation for calls to sack Derby

The News24 article points out that, while there has been talk of major miners partnering with Transnet to help fund such an expansion, Kerr said South32 would now be wary of doing so. “When you unilaterally go and change the rules, that sort of undermines confidence,” he said.

Speaking to the Business Times earlier this month, Transnet’s Group CEO, Portia Derby, claimed the move to reallocate capacity to emerging miners was the real reason behind Minerals Council South Africa’s call to the Transnet board to have her and the CEO of Transnet Freight Rail, Sizakele Mzimela, replaced – as contained in a letter leaked to the press.

Kerr said such allegations are “a bit of a smokescreen” given that Transnet clearly has operational issues in other parts of the business, cutting across all commodities.

Pillay said it was not only the council which has voiced concern about Transnet’s leadership, noting that members of Parliament – including ANC MPs – hauled Derby over the coals last week for the parastatal’s dysfunction.

“So, the issues are real, and it’s purely [about] performance,” he said.

With Transnet’s troubles estimated to cost the economy R1 billion a day, the mining industry is hopeful that recently established joint structures between the council and Transnet will help to arrest rail’s operational decline.

Tough decisions ahead

The focal point of the MECA 3 negotiations must be that while emerging miners do need additional support, it cannot come at the expense of established miners who already make significant contributions to the South African economy.

Transnet is in a precarious position. If the company is privatising, it will not have the cushion of having Government support when it hits turbulent times. What does this mean? It means that industry was forced into an alliance with Transnet much like the country is forced to rely on Eskom for electricity. One would assume that privatisation comes with increased opportunities for other rail operators to use the infrastructure. This then opens the door for industry to choose which operator they use. Now, more than ever, Transnet needs industry on its side.

For mining companies, shifting volumes to road will mean that there will be increased costs which would impact the company. This may turn into another challenge that, if not managed appropriately, can place companies into financial distress.