Founder: Turnaround Talk
South Africa’s State-Owned Enterprises have faced major financial and operational challenges over the past 10 years. It therefore came as no surprise when a number of these entities reported that they needed major cash injections in order to ensure their survival. In a nutshell, they were financially distressed.
Government and industry experts were then tasked with finding the best way to address these challenges. The privatisation option was mentioned on a number of occasions. However, this quickly became a pariah as it would not serve the needs of the public.
However, it seems as if we have gone beyond the point of no return and that privatisation is the only option for some. Transnet’s challenges have been discussed at length as is the important role that it plays in driving the South African economy.
Earlier today, it was announced that the proposed bailout of the company had failed and that it would now embark on the biggest privatisation that South Africa has seen since 1997.
Government blindsided
It seems as if Government was blindsided by the move. As discussed, privatisation is an emotive topic that is seen as an absolute last resort. It seems as if Transnet made this decision without consulting Government.
The News24 article points out that, what made it more surprising was that it represented a sudden change of tack by the Transnet leadership.
Less than a year ago, the same executives had stifled the first attempt by the Ramaphosa administration to introduce rail reform and allow third parties access to the lines. In this instance, against all advice, Transnet set such restrictive terms for bidders that, in the end, only one operator was successful.
What changed?
Pittance for billions
The article points out that the biggest change in circumstances was that in October last year, Transnet had asked the National Treasury for a massive bailout, believed to have been around R40 billion. Instead, the company got R5.8 billion, a small drop of what it needs to restore dilapidated and plundered infrastructure and fix locomotives that have been standing idle without spare parts for years.
The alternative – to borrow its way out of trouble – was also not available. Transnet already has R108 billion of debt on its balance sheet. In December, it breached its debt covenants with lenders because it failed to earn enough revenue in the first six months of the financial year to provide the cash interest cover that lenders require.
The article adds that some of this was very short-term debt and included a R12 billion bridge facility that had to be repaid at the start of 2023. To cover this, Transnet initiated a new dollar-denominated five-year note programme in January, from which it raised $1 billion immediately.
The article points out that, while Transnet has claimed the interest in the bond to be a vote of confidence by investors, credit analyst at Nedbank CIB, Jones Gondo, says at 8.25%, the offer was very attractive, and the quantum was small potatoes for big US investors, who were therefore willing to take the risk. But the domestic market is much more reluctant to take on Transnet debt. Says Gondo:
The only reason to go to the international market is when you don’t have support in your domestic market, either in volume or price. Soon, they will have to come to the domestic market and persuade us of its turnaround story. Right now, the market is not 100% buying it.
Photo By: Transnet
Gondo describes the five-year dollar bond as a “stop-gap measure” and not an appropriate instrument to raise funding for the long-run, chunky investments Transnet needs to make.
The capital requirements are enormous. Transnet’s head of strategy, Ntokozo Hadebe, said last week that R111 billion of capital investment was needed for Transnet Freight Rail (TFR) alone over the next five years. The division’s corporate plan envisages that only R30 billion in capital investment is likely.
Slow going
The article points out that in 2021 Transnet moved 2.6 million tons less container traffic than it did in 2017. In 2022, these numbers will have fallen further after the floods in KwaZulu-Natal in April destroyed the port and rail infrastructure, which is still not fully restored.
Hadebe, speaking at the Treasury webinar, said that TFR was in a bind. While it needed to add capacity to the system, which has choked mining exports and trade, it cannot fund the investment. But neither is it easy to put together viable business cases to attract private sector investors. Said Hadebe:
We are more than happy to co-fund with clients, but it requires such significant amounts upfront that recovering it from the tariff is not possible.
It was this set of circumstances that led Transnet to spring the “request for qualifications” (RFQ) on the market.
The article adds that the RFQ, which is not binding, is an opportunity for companies to express interest in the proposal and motivate inclusion in the next phase. The successful bidder must invest R5.5 billion in infrastructure and rolling stock and be prepared to take on the TFR staff – around 3 400 employees – through a personnel agreement. It would also have to secure the line from theft, which the RFQ says is subject to 143 incidents a month and would be responsible for maintaining the track and the full suite of services associated with that.
This is a big ask, and it would likely require a large global firm with the capacity to invest without a return for many years into the future.
So, while it is clear that TFR was compelled to take radical action as it cannot trade its way into sustainability, the question to be asked now is whether the move to concession the container corridor is a good one.
The article points out that rail logistics expert, Professor Jan Havenga, from the industrial engineering department of Stellenbosch University, has been extremely distressed over the country’s falling freight rail capacity and the under-investment in the system. While not the ideal solution, a long-term concession would bring in the capital investment that could restore failing infrastructure.
“There are positives and negatives. On the positive side, it is very simple. Transnet hasn’t got the money to fix that corridor. And SA needs that corridor desperately. Fixing it will reduce logistics costs and take the stress off the roads. This is our most important export and import corridor. It will have a huge positive impact on our country to get the private sector involved,” says Havenga.
The negative side of the proposal, says Havenga, is that it’s not clear how it fits into an overall rail strategy, which badly needs well-thought-out reform. One pressing reason is that the network is just too big, and some of the unsustainable branch lines – built to service farmers back in the apartheid days – should be closed.
The article adds that a second pressing reason is that the rail system, which links supply chains in the country’s five main cities, should be considered an integrated whole.
“There is an obvious network that connects the major supply chains. This should be kept together as an integrated system, in the same way that the national roads – managed by the SA National Roads Agency (Sanral) – are part of one network. We need to keep those pieces together, and I’m a little bit uneasy about that,” he says.
Photo By: News24
Integrated system
The article points out that many in business and government share the concern about how the concession will fit into the big picture of an integrated transport network. For instance, the Presidency’s project management office, which has been working closely with Transnet, was as surprised as everyone else. The unit had been trying to steer TFR into more meaningful third-party access, which is the newly approved national rail policy model that would enable competition on freight lines for the first time ever.
The biggest commercial users of the container corridor – represented by the SA Freight Forwarders Association – are also worried about what the concession will mean for competition. The CEO of the association, Juanita Maree, says:
We don’t want to go from a public monopoly to a private monopoly. I’m very opposed to that. Unless you have a competent and independent regulator working across a multi-nodal model, you will create a monopoly.
The article adds that Maree is also concerned that the proposal came out of the blue and did not involve any consultation with stakeholders.
“Why do it hush-hush? Why not get all the clever people together and say: how do we deliver a solution? Ten years from now, we might have created a monster. There could be huge unintended consequences,” she says.
Trade union concerns
The article points out that trade unions are also concerned. The secretary-general of the SA Transport and Allied Workers’ Union (Satawu), Jack Mazibuko, says there is “no way” the union will support the proposal. Workers in the public sector earn significantly more than their equivalents in the private sector and retrenchment is not even a remote possibility. Bonginkosi Mabaso, TFR’s head commercial officer, says that it’s early days to make definitive statements on the proposal or provide too much detail on how it might as TFR want to use the RFQ to gauge what the market can offer.
Speaking at the Treasury webinar last week, Mabaso said: “At this stage, we are open to proposals that will come from prospective partners, and a lot of it will be informed by the business cases that can be built by prospective bidders. I don’t want people to go away with the impression that we are literally handing over the keys to someone who will dictate to us. It will be a partnership, and we do have sight of the risk of creating a monopoly.”
The article adds that Havenga says he is less concerned than business about the dangers of monopoly pricing. The national rail policy, which is yet to be turned into law, will see the establishment of a regulator that will set pricing, he says, although this is several years away.
What everyone does agree, though, is that TFR’s performance is a dead weight on the economy. After much resistance, the Transnet and TFR leadership have finally taken that on board as well, and agree that the state alone cannot turn the company around.
The article points out that it is the first step that is always the most important in finding a solution. By taking it, TFR has launched SA’s troubled state-owned enterprises into an era of new possibility.
