Transnet is still losing money — its recovery is set for the long haul

2 Sep 2024

Transnet reported a financial loss of R7.3bn during the year ended March 2024. However, the transport group forecasts a profit of R1bn next year if the private sector responds to its call for help.

Transnet’s financial and operational situation is still heading in the wrong direction, with the state-owned transport group reporting billions of rands more in losses and underperformance of its logistics operations to the detriment of SA’s economy.

Transnet reported a financial loss of R7.3-billion during the year ended March 2024 — a much bigger loss than the R5.1-billion it pencilled in during the corresponding period in 2023. It also marks the second successive year that Transnet has lost money.

Transnet’s new management and board say a recovery is taking shape at the company, which suffered from the effects of State Capture and years of underinvestment in its crucial infrastructure. However, the recovery is yet to be reflected in Transnet’s numbers, with its freight rail and port operations still a mess.

Transnet is still unable to fulfil its most basic mandate of helping exporters rail their goods to market or importers land goods at the ports, all of which constrains economic growth. During the year ended 31 March 2024, Transnet moved 151.7Mt of goods through its rail network, representing a 1.5% increase from the 149.5Mt moved in the previous year.

Missed targets

The rail volumes achieved (151.7Mt) are below the targets contained in the state-owned enterprise’s (SOE) logistics recovery plan. The plan commits the SOE to achieving 154.4Mt in the 2023/24 financial year. The rail volumes achieved were 1.8% lower than the target, something that Transnet blames on cable theft, derailments, and rail network challenges. The recovery plan has also committed Transnet to increase rail volumes to 193Mt by year-end 2024/25.

Read more: Transnet’s turnaround plan is premised on securing a R100bn ‘capital injection’ from government

Another big problem area for Transnet is its ports, which are inefficient and handle fewer containers than the targets contained in the recovery plan. Transnet handled 4.15 million TEUs (20-foot equivalent units, a measure of trade volumes at container ports) at its port network across South Africa, which was 2.9% more than the previous year. The number of TEUs moved through its ports was 1.8% lower than the target (4.23 million TEUs) in the recovery plan.

Read more: Abysmal ranking of Transnet ports underscores long haul to fix key logistics operations and infrastructure

Transnet’s operations are a crucial cog in South Africa’s economy. They are responsible for moving most of the iron ore and coal produced in the country and then taken around the world. Transnet also has a major role in transporting freight and fuel around the country and helping importers land their goods at ports. When Transnet isn’t operating properly, many businesses and South African exports come to a standstill.

‘Legacy issues’

At a results presentation on Monday, 2 September, Transnet board chair Andile Sangqu said the company’s financial loss would have been better if the board and management were not distracted by “legacy issues”.

Its rail and port operations are still hampered by the shortages of locomotives (the heavy haul ones that are supposed to pull the coal and iron ore wagons), equipment breakdowns because of the maintenance backlog, increased crime, and the effect of vandalism on critical equipment and infrastructure.

Harming Transnet’s money-making potential during the reporting period is that the SOE also had to make provision for a potential settlement in a court dispute between it, Sasol, and TotalEnergies. A high court recently ordered Transnet to pay more than R9-billion to Sasol and TotalEnergies, relating to the alleged overcharging of pipeline tariffs by Transnet over several years. Transnet is appealing against the court order but, in the interim, it was forced to increase a provision in its books by R4.8-billion.

Debt

Then there are debt woes at Transnet. It carries a smothering debt of R137.7-billion in its financial books (increased from R130.1-billion in 2023), which includes, among others, short-term (R62.5-billion) and long-term borrowings (R71.5-billion). Transnet can pay the debt when it becomes due — as seen in the company making debt payments of R31.4-billion during the latest reporting period. But the chances of it defaulting on debt repayments are increasing.

Underscoring this is its rolling cash interest cover, which is sitting at 1.9 times, a decline from 2.1 times a year ago. The interest cover measures the ability of a company to pay interest that is due on outstanding debt. A decline in the interest cover — as has happened in Transnet’s case — means the SOE is burdened by debt expenses, making its ability to meet interest payments questionable.

Some of Transnet’s lenders require it to have a cash interest cover of at least 2.5 times. The SOE cannot comply with this requirement (agreed with lenders) because its cover profile is 1.9 times, thus forcing it to inform its lenders and ask them for a pardon.

The only way that Transnet can get out of its financial quagmire is for it to reform its logistics operations. On rail for example, if Transnet substantially increases volumes, it can generate more money.

New Transnet CEO Michelle Phillips is under pressure to lift rail volumes closer to 200Mt, which was last achieved in 2019. Asked if Phillips believes that the 200Mt target, which is part of her performance agreement with the government, is achievable, she agreed.

“If you ask me if it’s doable this year, I’m going to say to you, not without help. We need a lot of help,” Phillips said during the results presentation.

The recovery plan is largely predicated on Transnet embracing the private sector. Transnet wants to partner with private sector players by auctioning rail slots, allowing such players to use their skills to run trains/railway lines for a set period.

Transnet has already started this process, but it is facing hiccups including a disagreement on tariffs that the private sector will pay to use the SOE’s infrastructure and the sudden realisation that Transnet’s infrastructure is in serious need of upgrades.

Phillips said volumes could be increased by Transnet doing deals with original-equipment manufacturers to return locomotives to service that have been idle for a protracted period, and agreeing with private sector players to also pour in money to upgrade and secure the rail infrastructure.

If Transnet gets this right, the SOE said it might generate a profit of R1-billion in the current financial year, which ends in March 2025. DM

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Business Maverick

Missed targets

‘Legacy issues’

Debt