Transnet looks to avoid Eskom-sized crisis

Transnet is making progress with its turnaround plan as its port efficiency shows signs of improvement and its rail performance improves, taking more freight off the roads. 

The decline of Transnet has been well-documented, with the crisis at the ports and rail operator becoming a significant drag on economic growth. 

Transnet has a freight rail network of around 21,000 kilometres and manages seven port terminals. 

Given that South Africa’s economy is heavily reliant on imports and exports, it is one of the country’s most important companies. 

It is made even more important because most of South Africa’s economic activity occurs in the interior of the country, in Gauteng and the surrounding areas. 

Furthermore, much of the country’s mines, vital for foreign exchange earnings, are situated in the northern areas of South Africa, far from any major port. 

Historically, Transnet has efficiently transported goods across its origin-destination pairs, with its rail corridors ensuring South Africa’s exports remain competitive globally and transporting imports to Gauteng. 

However, in recent years, the company has collapsed, with its ports ranked among the most inefficient in the world and its rail network plagued by vandalism and theft. 

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. 

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 business areas as exporters look to ports outside of South Africa to get their products to market. 

This has resulted in poor financial performance, with the Auditor-General raising concerns about the company’s viability. 

It said that “material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern.”

In its latest annual results, Transnet’s loss widened to R7.3 billion from R5.1 billion in the previous year. This compares to a profit of R5 billion just seven years ago. 

The turnaround

There are green shoots at Transnet, showing that the turnaround plan implemented by its new management team under CEO Michelle Philips is bearing fruit. 

Nedbank economist Isaac Matshego said the data indicates port efficiency, measured by the number of containers handled, has halted its decline and is beginning to improve. 

This is crucial for the broader economy, ensuring exports remain competitive and supply chains are not disrupted. 

Transnet has been steadily investing in repairing its ageing equipment at its ports and, in some cases, replacing it entirely to boost efficiency. 

In terms of its rail network, Matshego said it is encouraging that road freight has begun to decline, as this indicates its rail performance is improving. 

Importantly, it shows that companies, particularly miners, are beginning to trust Transnet to efficiently transport their goods to ports. 

Matshego also explained that many miners in South Africa export bulk commodities such as iron ore and coal, which cannot be transported via road in an economically viable manner. 

With commodity prices coming down and remaining flat, more expensive road transport cannot be used to avoid Transnet’s network. 

Apart from the obvious benefits to economic growth, there are immense benefits in terms of improved road safety and less pressure on SANRAL’s network. 

In response to questions, Transnet told Daily Investor that its management team is optimistic about the progress achieved under its turnaround plan. 

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

“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 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.”

“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.”

Transnet’s encouraging performance so far in 2024 can be seen in the graphs below.