Can the private sector save South Africa’s Transnet?
South African president, Cyril Ramaphosa, met with board members of state logistics company, Transnet, in late March. According to a press release from his office, the president ‘has directed Transnet to implement reforms swiftly and completely turn around the crisis is South Africa’s logistics system’. The problem with this directive is that it makes the cause of the problem – Transnet itself – largely responsible for the solution. But the parastatal has a poor recent track record in this regard.
The obvious solution is greater participation by the private sector through some combination of concessions (including port terminals and bulk mineral export lines), the auctioning of freight rail slots on existing routes or even full privatisation of parts of the system. President Ramaphosa promised, in his 2022 State of the Nation Address, that 16 freight rail slots would be auctioned to private sector operators on viable routes, mostly between Gauteng and Durban or Cape Town.
But the conditions imposed on bidders were described by observers as ‘onerous‘. Particularly problematic was the lifespan of each contract – a mere two years – despite each requiring considerable capital investment. Private sector commentators suggested that a contact period of between 10 and 20 years would be more appropriate. In the event, 90 interested parties attended the tender briefing in April last year but only 19 went on to the expression of interest stage and only one slot was awarded, for a minor route (agricultural bulk commodities on the Kroonstad to East London line).
Mesela Kope-Nhlapo, CEO of the African Rail Industry Association, commented that this was a clear sign that ‘Transnet is still ideologically opposed to meaningful private sector participation’. In its attempts to elicit private sector participation, Transnet says it is not privatising its operations but merely seeking private sector ‘partners’. The word ‘privatisation’ is a red flag both within some parts of the ruling African National Congress and more particularly its trade union allies. Transnet’s unwillingness to play a cooperative game with the private sector is the factor that President Ramaphosa is going to have to overcome.
There is no doubt that Transnet is in grave distress, a situation that is imposing a large cost on the economy and may threaten fiscal stability. S&P Global Ratings raised the parastatal’s risk assessment from ‘significant’ to ‘aggressive’ in January. Transnet’s total debt – ZAR108.24 billion – is only about a quarter of that owed by electricity parastatal Eskom but the transport utility’s capacity to pay down what it owes is much more limited and falling.
For the six months to September 2022, Transnet’s revenue was R36.1 billion exactly equal to its debt service payments for the same period. If these figures can be trusted, they indicate that the parastatal is on a financial knife edge. But Transnet is a secretive organisation characterised by a marked lack of transparency. Its valuation of its capital assets, mostly rail track and rolling stock, were recently described as ‘suspicious’. Indeed, it is difficult to reconcile the increase in the claimed value of the parastatal’s assets (456 percent since 2005) with its poor track record in capital expenditure and an increase in income of only 170 percent over the same period.
Since the Covid-19 lockdown, Transnet’s container freight business appears to have all but collapsed. The prime Johannesburg-Durban freight corridor handled 107 trains per day at its peak. The figure now is reported to be less than 10 and national rail freight volumes are said to be at the lowest levels since the Second World War.
The fact is that there has been a massive switch from rail to road over the last three decades and that this appears to have accelerated since Covid-19. This is precisely the opposite of the government’s policy ambition, in place ever since the industry was deregulated in 1989. At that time, rail carried 89 percent of freight moved in South Africa. Today the figure is perhaps 20 percent and is on a downward trajectory.
Declining exports are also being experienced on the two dedicated bulk mineral lines which account for 65 percent of Transnet Freight Rail’s revenue. The Sishen Saldanha line has held reasonably steady, with a 2022 decline in iron ore volumes caused mostly by industrial action. The dedicated coal line between Witbank and Richards Bay is however a different matter.
The export projection for 2023, based on January and February figures, suggest that volumes will drop to 40 million tonnes this year, down from 50 million tonnes in 2022. This is only two-thirds of Transnet’s own target (60 million tonnes per annum), far less than the line’s design capacity (72 million tonnes) and less than half the 90 million tonne capacity of the private-sector run Richards Bay Coal terminal.
Transnet attributes performance problems to cable theft and a shortage of locomotives. The locomotive issue is a real one with 300 sitting idle thanks to a tax dispute with supplier, Chinese state-owned CRRC, which is withholding spare parts. But other observers point to falling levels of capital investment, down from ZAR33 billion in 2015 to ZAR13 billion in 2022. Questions are also asked about operational efficiencies within an organisation gutted by ‘state capture’. The Zondo Commission Report found that racketeering in procurement, between 2009 and 2018, cost Transnet ZAR41.2 billion.
Earlier this year, Transnet issued a Request for Qualifications for a 20-year concession on South Africa’s premier trade route, the Johannesburg-Durban container line. Transnet management told parliament that the project required an investment of ZAR5.5 billion and the tender document specifies that the concessionaire will be required to guarantee the jobs of more than 3 000 Transnet employees who currently work on the line.
A genuine concession on this route, which carries some 60 percent of the container traffic emerging South Africa, would be a game changer. The question is how willing Transnet is to surrender control. Some observers have pointed out that the standard length of similar concessions in other countries is 30-years.
Political will is going to be the key ingredient. President Ramaphosa expects his initiative to produce a ‘Roadmap’ for Transnet, which is reminiscent of the Roadmap produced for Eskom in 2019. The Eskom initiative failed to avert the present load-shedding crisis. There are reasons to doubt that the Transnet exercise will be much more successful.
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