Transnet in trouble

Transnet is spending R1 billion a month paying off the interest on its debt as the utility continues to struggle with its enormous debt pile.

Transnet CEO Michelle Phillips provided details about their financial challenge during the latest guest on PSG’s Think Big webinar series.

Phillips said South Africa’s second-largest state-owned enterprise (SOE), Transnet, has seen its profits decline from R5 billion in 2019 to a net loss of R5.7 billion in 2023. It has a staggering debt burden of R120 billion. 

The utility’s logistics failures and poor financial health have placed immense pressure on the South African economy.

A study by the GAIN Group found that Transnet’s failures cost the country an estimated R1 billion a day in economic output, equivalent to 4.9% of annual GDP or R353 billion.

In an effort to turn the utility around, the government awarded Transnet a R47 billion guarantee structure in the 2024 Budget. 

Phillips, who was appointed CEO last year as part of the utility’s turnaround plan, emphasised that this was not a loan. 

“In my tenure at Transnet, we have always been very clear that we will not approach the government for a bailout to ensure that we are never a drain on the fiscus,” she said.

However, Phillips reiterated that the R47 billion is a guarantee which will merely allow Transnet to borrow more money.

Additional borrowing will add to the debt already on the balance sheet – most of which stems from the state capture years – and is likely to hamstring recovery efforts. 

“Our interest is upwards of R1 billion a month. It’s very difficult to run a business like that. You are essentially paying your bond with your credit card,” Phillips said. 

From an operations perspective, the success of the recovery plan is also closely linked to the R47 billion guarantee through a set of specific conditions. 

“The Freight Logistics roadmap is very specific on things expected by cabinet from Transnet going forward,” she said. “Some were included as part of the government guarantee conditions.”

She said that one of those guarantee conditions was the corporatisation of the Transnet National Ports Authority (TNPA), which she says is expected to be in place by April 2025. 

Transnet is also busy separating Transnet Freight Rail (TFR) into Infrastructure Management and Freight and Rail.

Phillips attributed Transnet’s current challenges to a lack of maintaining infrastructure, failure to invest or underinvest in necessary infrastructure, and a lack of focus on generating revenue.

However, she said that lots of work is being done as part of the recovery plan to get Transnet out of the “debt trap it finds itself in”. 

According to Phillips, the SOE is working with the government on significant financial modelling in terms of optimising the balance sheet.

“We are also trying to renegotiate a lot of our debt and get into longer-term debt that is cheaper so we don’t have this constant obligation to redeem,” she said.

In addition, Phillips said the well-publicised opening of the rail network to third parties is moving ahead. 

“We’re very pleased with the level of interaction from other stakeholders within the industry. We believe that applications for access to the network should start around September or October of this year,” she said. 

Transnet is also considering renting its “B Fleet” to private sector operators as a short-term solution to bring more operators online. 

Phillips explained that Transnet is “too big to fail” and that the new leadership team, the board, organised labour, Transnet customers and private sector partners have rallied together and have been working since October 2023 on an 18-month recovery plan. 

The plan follows the 2023 formation of the National Logistics Crisis Committee, Chaired by President Cyril Ramaphosa, and the adoption of the Freight Logistics Roadmap in December 2023. 

“We’ve completed the first six months of that recovery plan and have seen the stabilisation – and some turnaround – in both our operations and financials,” she said.