From R5 billion profit to R7 billion loss in six years

Transnet is in deep financial trouble, with the company swinging from a R5 billion profit in 2019 to a R7.3 billion loss in the 2024 financial year.

This is a result of the company’s poor performance and a driver of its continued struggles, with Transnet unable to invest in much-needed infrastructure upgrades to boost its operational capacity. 

Transnet operates a nationwide freight rail network of approximately 21,000 route kilometres, with access to seven port terminals. 

Given South Africa’s commodity-rich economy, there are excellent origin/destination pairs, with mines on one end and ports to the rest of the world on the other.

Despite this, Transnet’s latest results showed the company has a long way to go before its turnaround is complete.  Its finances continued to deteriorate, with its loss widening from R5.1 billion in 2023 to R7.3 billion for the 2024 financial year. 

Some of this loss can be attributed to the company being ordered to pay Sasol and TotalEnergies R6.2 billion in damages relating to an oil-pipeline contract from 1991. 

Transnet has raised R9.3 billion in provisions to cover the claim, interest owed on the amount and legal fees. The company appealed the ruling in July. 

While this is a one-off event, Transnet’s poor operational performance remains a feature of the company a year into its turnaround strategy. 

Its freight-rail business – the largest operating unit accounting for 44% of revenue – delivered 151.7 million tons of cargo during the period, up 1.5% from the prior year. 

Pipeline volumes fell 2%, while port-container movements improved 2.9%. 

The company continued to be plagued by high levels of cable theft and vandalism across its railway network. Recently, community unrest has also disrupted operations. 

Chairman Andile Sangqu said the company also struggled with strained relations with some of its most important customers, following years of inefficient operations, which the company was working hard to reset.

Sangqu also noted the company faced a leadership vacuum following the resignation of the former CEO, CFO, and chief executive of Transnet Freight Rail.

Its financial situation has become so dire that the Auditor General said, “material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern.”

Transnet’s collapse since 2019 has severely impacted South Africa’s economy, with some estimating it cost the country R353 billion in lost economic activity in 2023. 

Between 2009 and 2016, rail accounted for approximately 26% to 27% of total road and rail payload. This percentage has been in steady decline, reaching a low of 15% in 2022 and 16% last year. 

In South Africa, freight rail has predominantly focused on bulk commodities like coal and iron ore and some manufacturing payload, making it critical for economic activity. 

However, most of this freight has shifted to road transport as commodity exporters look for alternative ways to get their products to market. 

Stats SA’s Land Transport Survey shows that, in 2023, South African roads transported 217.5 million tonnes more freight than they did on average between 2012 and 2019, while the rail network transported 56.2 million tonnes less.

This has resulted in Transnet Freight Rail (TFR) coming under immense financial pressure, with R14.2 billion less income generated by rail transport in 2023 than an average year between 2012 and 2019. 

TFR is vital for Transnet, accounting for around 44% of the company’s total revenue. Its collapse has begun to impact other areas of the business as exporters look to ports outside of South Africa to get their products to market. 

The decline of this business can be seen in the graphs below, courtesy of the Bureau for Economic Research. 

Turnaround gaining traction

In October 2023, Transnet’s board approved a recovery plan for the business, proposing significant changes at the company over the following 18 months.

The first six months of the plan, which ran until the end of the 2024 financial year, aimed to improve volumes handled at South Africa’s ports and transported via its rail network.

Improving Transnet’s performance is vital to reinvigorating South Africa’s economy, with Coronation’s Humaira Surve saying it would reduce inflation and make exports more competitive. 

Rail transport consumes a quarter of the fuel used by road transportation, making it particularly attractive for transporting commodities and other goods over long distances. 

By removing heavy freight from roads, traffic volumes would be substantially reduced, as would the damage and cost to maintain the road network. 

Increased rail usage in South Africa would also make roads safer for all users and lower the cost of consumer goods through lower transport costs.

However, the main benefit would come from significantly increased commodity exports, which would boost economic growth and enhance the country’s foreign exchange earnings. 

Turning Transnet around requires billions of rands, which is something the company does not have. 

Over the past decade, the company has racked up a massive R226.5 billion in debt. This means the company cannot use its balance sheet to fund its turnaround plan. 

Transnet has a significant problem with ageing and deteriorating infrastructure, which needs to be replaced or repaired to make its operations more efficient. 

The company has turned to outside sources for funding, receiving an R5 billion loan from the New Development Bank and an R47 billion bailout from the government, which was announced last year. 

While this cash is desperately needed, it is only a drop in the ocean. Transnet’s five-year capital investment plan requires R152.8 billion. It is unclear where this money will come from. 

The company has made significant progress in clearing up delays at the country’s major ports, but its rail network remains a major problem. 

CEO Michelle Phillips told PSG’s Think Big series that Transnet’s initial 18-month recovery plan still has 12 months to go.

“We’ve seen the stabilisation and, in fact, some turnaround in our operations and in our financials. We’ve seen the positive impact of the kind of work that we’ve been doing.”

The next “phase” of the turnaround will run until the end of the 2024/25 financial year.

“So, we’ve got a transformation leg together with a recovery leg. It’s not an easy place to be,” Phillips said.

“There is a lot of work to be done, and we are by no means out of the woods, but we are certainly beginning to see some green shoots.” 

“While we are seeing some green shoots from the implementations of the plan so far, we acknowledge there is still some way to go before we can comfortably say the worst is behind us,” Sangqu said in the company’s annual report.

Sangqu said the company’s most significant problems are its over geared balance sheet, underinvestment in rail infrastructure, ageing equipment, rampant theft, and damage to infrastructure.