Transnet back on track

One year into its turnaround, Transnet has made significant progress, but the utility is still hampered by ongoing challenges, including financial constraints and legal troubles.

Transnet is a year into the turnaround strategy it announced in October 2023 to overhaul its rail and port services and tackle the impact of years of mismanagement, theft and vandalism.

Rail inefficiencies caused by Transnet’s decline have cost South Africa’s economy dearly, with some estimates placing the financial cost at more than R400 billion in 2022.

This is why Transnet embarked on a new path at the end of last year – its board was overhauled, the CEO replaced, and a new 18-month recovery plan was created.

Transnet told Daily Investor that its leadership remains cautiously optimistic about the progress achieved under this plan. 

“We have seen encouraging developments, particularly in areas like operational efficiency, strategic collaborations, and financial discipline,” the utility said. 

For example, Transnet has entered into partnerships with key industry stakeholders, and private sector participants have started to materialise and deliver value to the utility’s operations.

Transnet said this has led to improved operational capacity and stability in critical sectors like mineral and bulk cargo transport.

The utility highlighted the implementation of its locomotive restoration programme by contracting with Original Equipment Manufacturers (OEMs) as one of the significant milestones achieved. 

“It is envisaged that this programme will enhance rolling stock availability through addressing the issue of long-standing and underutilised assets,” the utility said. 

“Additionally, steps taken to streamline costs and improve revenue collection have led to a more stable financial outlook.” 

“These interventions have been crucial in setting Transnet on a path to recovery and growth.”

However, Transnet said its leadership recognises that while these early successes are important, the journey is far from complete. 

“The long-term sustainability of the business will depend on the consistent execution of our strategic initiatives, ongoing collaboration with the private sector, and the ability to adapt to evolving market conditions,” it said. 

“Transnet remains focused on driving meaningful results that will not only stabilise the business but also position it as a competitive logistics services provider and sustainable entity into the future.”

Several experts have shared this sentiment, applauding Transnet’s turnaround efforts to date but emphasising the need for urgent reform.

Expectations for Transnet to turn itself around have also been heightened by Eskom’s remarkably improved performance over the past year.

Investec chief economist Annabel Bishop recently said the government’s 3.3% GDP growth goal for 2025 would require substantially faster repair and infrastructure building at Transnet than the enterprise is currently signalling.

She said rail and port constraints are currently key in limiting South Africa’s GDP growth.

Transnet told Daily Investor that it is facing several critical challenges as it implements its turnaround strategy, and these challenges span operational, financial, and external domains.

The first challenge Transnet identified was its operational performance and capacity.

“One of the most pressing challenges is improving the performance of our key infrastructure, particularly rail and port services,” the utility said. 

“Ensuring the consistent availability and maintenance of locomotives, wagons, and other critical assets has been a major focus.” 

However, this task is made significantly more difficult by security incidents, including cable theft and vandalism, which continue to disrupt operations and negatively impact service delivery. 

Furthermore, Transnet explained that ageing infrastructure in both the rail and port systems has led to bottlenecks and inefficiencies. 

“Substantial infrastructure investment and modernisation to restore and improve capacity is required, which is difficult to motivate given Transnet’s difficult financial position.”

This leads to Transnet’s second big challenge – its severe financial constraints. 

“Transnet’s financial health and the impact of our debt burden remains a key area of concern,” the utility said. 

“The organisation is facing constrained cash flow due to underperformance in freight volumes in rail and ports, and revenue generation across other divisions such as property.”

In September this year, Bloomberg reported that Transnet had breached its loan covenants for a second year running as the utility’s debt burden continues to grow.

Transnet CEO Michelle Phillips told PSG earlier this year that the utility is spending R1 billion a month paying off the interest.

The utility’s loans increased to R138 billion in the year through March from R130 billion the year before.

Finance costs, at R15.1 billion, were almost equal to its capital investment of R16.7 billion — which was less than half of what Transnet spent 10 years ago.

Transnet told Daily Investor that an inability to serve industry demand in key export markets, combined with operational disruptions, has affected its ability to generate sufficient income to fund capital expenditure projects. 

In addition, the utility faces rising operational costs, including fuel and maintenance, which place further pressure on its financial stability. 

“There continues to be under-investment in key infrastructure as a result,” Transnet explained. 

“Securing access to capital for investment in critical infrastructure and modernisation remains a priority, and we are actively engaging with both public and private stakeholders to secure the necessary funding.”

The third challenge Transnet identified was a variety of external and environmental factors. 

“Transnet’s recovery efforts are also being impacted by a range of external challenges, including the broader macroeconomic environment,” the utility said. 

“Global inflation, low economic growth, and the longstanding aftershocks of the Covid-19 pandemic continue to suppress some demand in key industries.” 

“Electrical supply challenges, particularly in our more remote rail operations, where electricity supply and relatively poor infrastructure quality (e.g., substations) cause disruptions which directly impact productivity and throughput.” 

In addition, the utility said it remains on the alert for inclement weather, particularly natural disasters like the floods in KwaZulu-Natal in 2022. 

Another threat Transnet identified was cyberattacks. “As the business adopts new technologies and digitalises, threats such as cyberattacks, which have caused significant disruptions in the past, continue to pose a potential threat to operational stability,” it said. 

Transnet also pointed to litigation as a hurdle the utility must overcome. Transnet is currently involved in several lawsuits that have a significant impact on the organisation’s financial performance and operations. 

For example, APM Terminals recently challenged the selection of selected international terminal operator, International Container Terminal Services Inc. (ICTSI), as the Preferred Bidder for a 25-year joint venture with Transnet Port Terminals (TPT) to develop and upgrade the terminal. 

APM Terminals has alleged irregularities in the process of awarding the contract. 

The KwaZulu-Natal High Court recently interdicted Transnet from concluding the terms of its contract with ICTSI pending a judicial review of the transaction.