Founder: Turnaround Talk
While not a candidate for business rescue, at the moment, there is no denying that Transnet desperately needs a well-thought-out business turnaround plan that will help the utility return to basics and effectively offer the only service that the company is responsible for. The first important step towards this was the appointment of a new board, which includes mining executives (who come with tons of industry experience) and logistics experts. Both parties are well-versed in what needs to change within the company.
Once the experts who are tasked with implementing a business turnaround plan start looking at the root causes of the company’s challenges, they are faced with a situation that is not unlike an onion; you begin to peel away layers and layers of challenges before you get to the core of the problem.
This is the result of decades of patronage and rewarding inefficiency instead of punishing it.
The recently announced departures from the utility point to the fact that getting rid of underperforming executives will play a significant role in the utility’s turnaround. But what comes next?
Mass exodus
The News24 article points out that, following late-night crises meetings on 4 October, Transnet Freight Rail (TFR) CEO, Sizakele Mzimela, announced her resignation on 5 October in an internal letter sent to TFR’s 26,000 employees.
Her resignation, as well as that of Transnet CEO Portia Derby and CFO Nonkululeko Dlamini, is just weeks after Public Enterprises Minister Pravin Gordhan tasked the new Transnet board with a sweeping review of the logistics parastatal, including an assessment of the skills and competency of executive management.
The article adds that the developments come as Transnet’s financial and operational performance continues to decline. The deteriorating railing performance has been of particular concern, as mining companies have struggled to get product to the ports, rendering them unable to take advantage of sky-high commodity prices.
According to some estimates, the logistics crisis is now costing the economy as much as load shedding, at around R1 billion per day. Cobus van Vuuren, general secretary of the United National Transport Union (UNTU), said it was “no surprise” that Mzimela and others had resigned. Whether this marked a turning point for the organisation would depend on who was appointed in their place.
Mzimela, who spoke at a mining industry event just hours after her resignation was announced, highlighted a number of issues affecting Transnet’s railing performance.
Image By: Richards Bay Coal Terminal
The article points out that this includes underinvestment in the rail infrastructure and a shortage of spare parts. The shortage follows an inability to procure spares from the China Railway Rolling Stock Corporation which needs to resolve issues with the South African Revenue Services and the Reserve Bank after it was implicated in state capture, having paid billions in kickbacks to Gupta companies as part of a locomotives supply deal with Transnet.
The article adds that, speaking at the mining indaba prior to Mzimela’s resignation, Head of the Project Management Office in the Presidency, Rudi Dicks, said the locos were not the only issue, noting that Transnet was railing more volumes in 2017 when it did not even have any CRRC locos. There is a range of options and different interventions can be devised depending on the situation, he said.
“I think that’s the weakness. Transnet should have looked at a range of options and selected the best one while trying to negotiate with [CRRC] around those spare parts,” he said. “Certainly, I think we could have moved much faster, much quicker. And we could have looked at alternatives to get the volumes going.”
Once the management challenge has been addressed, how does the new Transnet Board go about addressing operational challenges?
Time to break it up
An article by Moneyweb points out that, in July, it was announced that Philippines-based International Container Terminal Services (ICTS) had been chosen as the preferred bidder for a 25-year concession to run the Durban Container Terminal, which handles about half of SA’s total port traffic.
It’s no small problem it has to solve. According to the United Nations Conference on Trade and Development (Unctad), the average waiting time for dry bulk carriers in South Africa was 146 hours (3 days) in the first half of 2022, against 18 hours in France and 20 hours in Indonesia.
The article adds that the solution for both ports and rail is more competition, according to industry observers.
Investment, concessions, unbundling
“As a country we need huge investment into the national track infrastructure and quickly, otherwise we’re not going to see efficiencies in our network or efficiencies in our train operations that are going to result in sustainable rail operations in South Africa into the future,” Mesela Kope-Nhlapo, CEO of Aria told Moneyweb. Aria represents a range of private rail equipment manufacturers and operators.
“The answer lies in multiple private sector investment[s] through concessions on the infrastructure. Private third-party access to, and participation in, the freight rail network’s performance is crucial to South Africa’s economy and the continued growth of our industry.”
The Moneyweb article points out that, Andrew Pike, Head of Ports, Transport and Logistics at Bowmans Law, agrees that unbundling of some of the different Transnet business units is clearly the way to go.
“New management comes in without changing anything else is like rearranging the chairs on the Titanic. Portia was defeated because the job was just too big for her. Although these businesses are run as separate divisions, there is still a top-down command and control approach. Each unit needs to be cut loose and given a measure of autonomy to manage themselves in the best possible way. Maybe what’s needed is partial privatisation in one division, though this may not be suitable in another. But unless we get private sector expertise and capital in, we are going to see a continuation of the same problems we have witnessed over the last decade or more,” Pike told Moneyweb.
Transnet operates six corridors, including the ore line, Cape Corridor, North Corridor and Central Corridor, each of which could be concessioned to private operators. It also operates the key SA ports: Cape Town, Durban, Ngqura, Gqeberha (Port Elizabeth), Richards Bay and Saldanha.
No time to waste for Transnet
Pike added that the fall-off in rail through Richards Bay Coal Terminal is a total disaster in the middle of a commodities boom.
“The piecemeal approach to concessioning is not the most efficient way of doing it. Why aren’t they privatising all key corridors in one go? It takes a long time to get a concession from Request for Proposal to concession award, and we frankly don’t have time to wait to see how the first one works out before we start on the second,” Pike told News24.
The Moneyweb article points out that, in January, Transnet called for interested parties to bid for a 20-year operating lease with TFR for the operation and maintenance of the 670km Container Corridor between Gauteng and Durban. According to those close to the process, the response has been underwhelming, in part due to the fact that the lease operator will have to invest about R5 billion in facilities upgrades and take over TFR’s staff of about 3 500. Transnet will have to move far more aggressively, with better terms for concessionaires, if Gordhan’s proposed turnaround plan is going to work.
Image By: X and UNCTAD
The next actions of Transnet will be the most important
There is a Chinese proverb which states that the fish rots from the head down.
Urgent intervention is needed to resolve the logistics crisis. This is not a time for words and months of inaction. While the Board must apply a measured approach when it comes to their actions, they need to act decisively, quickly, and with a specific goal in mind. This needs to be aligned and is probably one of the biggest conversations that is happening at Board level.
Second, the musical chairs of executives – while necessary at the moment – cannot continue indefinitely. News24 published an article last week which points out that the Chairperson of the Industrial Development Corporation has been in the role for eight years (since 2015) and that this stability has benefited the company immensely. During this period, Eskom churned through six board chairpersons. If the new Transnet board wants to move on from the Portia Derby era, it needs to do so swiftly with stability in mind.
Finally, and unfortunately, the Transnet board – and the public – need to realise that Transnet’s challenges will only disappear over time. This is very much a Rome was not built in a day situation. However, when managing expectations, the Board will have to be clear in their communication, and they will have to show some semblance of value. The left hand has to know what the right hand is doing.
