Harare — Transnet, a pipeline, rail, and port enterprise owned by the South African government, is asking Treasury for more than U.S.$5,2 million (R100 billion) over the course of the next two years, according to Engineering News. The U.S.$5,2 million comprises a proposal that the Treasury assume responsibility for at least U.S.$3 billion (R61 billion) of its debt and give U.S.$2 billion (R47 billion) in equity in the form of a subordinated loan, that in the event that performance goals are met, can be converted to equity.
In order to put the business on a sustainable path for the medium to long term, the turnaround depends on both the debt reduction and the equity infusion, used to fund projects that would increase revenue. A portion of the equity funding is urgently needed including U.S.$156 million (R3,4 billion) needed before the financial year ends in March 2024.
Allotments to Transnet were absent from the government's medium-term spending strategy, which was presented in the February 2023 budget. With the Treasury ordering all ministries to reduce their 2024 - 2025 budgets, the fiscal framework is already severely strained. Upon the presentation of the medium-term budget policy statement on November 1, 2023, some modifications to the in-year allocations are also anticipated.
Transnet was found to be seriously troubled during the past year, both financially and operationally. Reduced freight volumes have been the main cause of revenue declines, while costs have increased. It violated its debt covenants during 2022 and 2023, making its debt more costly, and it is unable to pay off its debt. There has been widespread vandalism, infrastructure theft, and persistent under-investment in capital equipment and maintenance.
The newly expanded board was requested by Public Enterprises Minister Pravin Gordhan in September 2023, to promptly draft a recovery strategy and assess the performance of the management team. As a result, Ali Motala, the head of the Northern Corridor coal line, and Sizakele Mzimela, the CEO of Transnet Freight Rail (TFR), as well as Group CEO Portia Derby, resigned.
Cabinet will soon consider the National Logistics Crisis Committee's Freight Logistics Roadmap, which is mostly consistent with the turnaround plan. Although the board's turnaround plan goes into greater depth about the immediate interventions and investments needed in each of Transnet's divisions, particularly its train routes, the roadmap covers the more comprehensive long-term restructuring of the rail system. This suggests that Transnet needs debt relief immediately. One option is to move U.S.$3 billion (R61 billion) to the government's own balance sheet. The plan also suggests that Transnet's U.S.$7 billion (R135 billion) in debt be assumed entirely by the government in exchange for an annual dividend distribution, or that Transnet's debt be serviced entirely by the government for an estimated U.S.$680 million (R13 billion) annually.
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The turnaround plan also suggests "structural transactions" that are "more cash generative" as a means of revenue generation for Transnet in lieu of the bailout. However, it points out that these deals often take 24 to 36 months to finalise, meaning Transnet would need bridging funding from the government in the interim.
Earlier, major coal exporters in South Africa were asked to contribute hundreds of millions of rand to assist Transnet in resolving a logistics crisis stemming from a dispute with a Chinese locomotive supplier, China Railway Rolling Stock Corporation (CRRC).
The coal industry has asked for a total payment of almost U.S.$73 million (R1.4 billion). With this transaction, Transnet hopes to pay off its outstanding obligation to CRRC and release the locomotives that were held back. The Chinese corporation is accused of corruption and state capture, which is related to the conflict with CRRC. Lack of replacement components has negatively impacted Transnet's rail performance, which has led to a notable drop in the company's capacity for transporting coal. Several mining companies had agreed to help in theory, but they had not yet been requested to actually transfer the monies.
