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There’s been improvement in operations, but the elephant in the room is its R130bn debt, costing R1bn a month in interest. From Moneyweb.

Implementing rail reform and fixing its balance sheet while achieving a market-friendly tariff that will reduce the cost of logistics is the tough task facing Transnet. Image: Esa Alexander/Reuters

Under Transnet’s proposed new tariff regime, it will cost 2.5 times more to use rail than a truck from Cape Town to Johannesburg.

If the same methodology were applied to roads, trucks would pay about R17 500 in statutory charges – fuel levies, tolls, and licence fees. That’s clearly unsustainable, as customers have repeatedly told the state-owned rail and logistics provider.

Read: Transnet’s plan to attract rail investment misses the mark

With debt now more than R130 billion, this tariff is deemed necessary for Transnet to trade its way out of its financial hole without relying on government support, infrastructure investment by the private sector, or a state plan for dealing with debt incurred as a result of state capture.

Most of this debt is owed to the banks, which earn close to R1 billion a month on interest. That’s a cost ultimately borne by the SA taxpayer.

The proposed tariff is a clear sign that Transnet, and by implication, the government, is finally abandoning its core mandate of reducing the total cost of logistics as a percentage of transportable GDP.

State capture cost

A calculation by University of Stellenbosch professor of logistics Jan Havenga estimates the cost of state capture at Transnet at about R60 billion, equivalent to half its total debt.

That means state capture alone is costing it about R500 million in interest a month.

The Zondo Commission of Inquiry into state capture pored over mountains of evidence, including corruption involved in the purchase of nearly 200 locomotives, the many meetings between former CEO Brian Molefe and the Guptas, the ferrying of suitcases stuffed with cash in fulfilment of corrupt tenders and the sidelining of people at Transnet who might have intercepted them.

Paul Holden of Shadow World Investigations provided evidence that the Guptas and their collaborators in Transnet had engineered irregular tenders worth around R41.2 billion for the ultimate benefit of the Guptas. 

With the passage of time, that figure is now closer to R60 billion.

Point of failure

“There’s no doubt that we are seeing improvements at Transnet in terms of better security of infrastructure, new management and a clear roadmap that will allow competition,” says Havenga.

“All of those achievements by government in 2023 deserve praise and encouragement. But they will not solve the problem. Everything is now at the point of potential failure unless government steps up and figures out a way to restructure Transnet, agree on the correct modality for investing in rail, and solve Transnet’s debt crisis.”

The stakes could not be higher, adds Havenga. Hundreds of billions of rands in potential investment and thousands of jobs will be lost unless these problems are fixed.

Read: Transnet not out of the woods yet, but making real progress – Sangqu

The interim rail regulator will get feedback from potential private sector entrants to the rail network over the coming weeks, when it will no doubt hear exactly what is wrong with Transnet’s proposed ‘Network Statement’ and the access fee. And what is wrong is not something that Transnet can fix. It is up to the shareholder, the government, to do that.

Solving the debt

Havenga agrees with the trade unions that government will have to assume the state capture debt of around R60 billion. That cannot be allowed to continue searing a hole in its balance sheet that will take decades to pay off – even under the most optimistic circumstances.

Even then, Havenga believes the rail network will need a R20 billion subsidy a year to allow rail to compete with road, which is also subsidised.

With these two elements in place, the remainder of the debt (about R70 billion) will have to be restructured using development bank finance that is repayable at low interest rates over 30 or more years.

Read: Transnet boss Michelle Phillips expects revenue to surprise on the upside

Then, Transnet has a fighting chance of trading its way back to solvency and opening its infrastructure to competitors under conditions that are favourable to all.

National Treasury agreed to a R47 billion loan guarantee to Transnet in December 2023, subject to conditionalities, which allowed it to pay down some maturing debts and conduct urgent maintenance. That’s nowhere near enough to solve the longer-term issues, including the estimated R200 billion in backlogged infrastructure spend required to restore the railway network to world standards, according to David Taylor of Taylorail.

Unbundling rail ownership

One proposed reform introduced under the recently published Network Statement requires unbundling rail network ownership from infrastructure management, as envisaged in the White Paper on National Rail Policy. 

This is similar to how the South African National Roads Agency (Sanral) operates – with the state owning the public roads, the private sector maintaining and collecting tolls on key routes, and customers (drivers) providing their own vehicles.

The extent of the maintenance required will only become visible once a complete and independent technical assessment of the entire Transnet rail network is done. But the evidence so far paints a horrendous picture of long-term neglect. 

In the case of rail, the government is Transnet’s shareholder, while Transnet owns and operates the rail (and port) network, sets the tariff, and provides the rolling stock – a closed-loop system that breeds inefficiencies.

Private rail operators have been banging on Transnet’s door for years, trying to get access to its rail network. Earlier this year, an interim infrastructure manager was appointed, bringing rail competition a step closer. 

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The African Rail Industry Association (Aria), representing several private rail operators, welcomed the appointment of the interim infrastructure manager but cautioned that we are still a long way from agreeing the rules of play. The body wants rail reform to conform with the National Rail Policy and warns against attempting to repeat earlier failures to attract private investment into the rail sector.

“The initial attempt involved onerous conditions that simply are untenable for the private sector,” says Aria CEO Mesela Kope-Nhlapo.

“The insistence that all private sector parties adhere to the Transnet Bargaining Council is uncompetitive. Transnet cannot use its dominant position to force private operators into their labour agreements. The Bargaining Council requirement is a deal-breaker for the private sector,” she adds.

Recovery plan

Transnet launched a recovery plan in October 2023 aimed at accelerating private sector investment and, not long after, announced Philippines-based International Container Terminal Services Inc (ICTSI) as the preferred bidder for the upgrade and management of Pier 2 at the Durban Container Terminal.

That was ultimately challenged by losing bidder Maersk, which contests ICTSI’s financial soundness. ICTSI is poised to be awarded a 25-year concession to run the container terminal as part of a 50-50 joint venture with Transnet. 

This was to be the model for future such private-public partnerships and is already tangled in legal shoals.

Speaking at the PSG conference at Sun City last week, Transnet chair Andile Sangqu pointed to some successes emerging from the business-government collaboration (the Joint Steering Oversight Committee or JSOC) in fixing problems at the logistics operator, including the supply of drones and 24/7 security on key rail corridors and the loan of seven cranes to the port of Cape Town over the festive period. 

Read: How business has helped pull SA back from the brink

There’s no doubt that operational improvements are beginning to show in terms of reduced vessel backlogs at ports and improved tonnages shipped by rail. The tough task that lies ahead is to implement railway reform as intended by the National Rail Policy, fix Transnet’s balance sheet, and achieve a market-friendly tariff that will reduce the cost of logistics. 

“The national railway and ports system is in dire need of investment – that neither government nor Transnet can provide – so the proper implementation of the envisaged policy instruments will remove the roadblocks to private sector capital currently posed by the perpetuation of a re-branded monopolistic structure of a state-owned railway system,” says Havenga.