One of South Africa’s most important state-owned enterprises burning cash

Despite a recent R51 billion government guarantee facility and years of government bailouts, Transnet is still burning cash and will continue to do so for the foreseeable future.

Rating agency S&P recently downgraded its long-term issuer credit ratings on Transnet to B+ from BB-.

This was due to the utility’s slow progress in improving its operational and financial performance, and its reliance on state support to meet liquidity needs.

“In our view, the company’s strained liquidity buffer reflects an insufficient revenue base relative to Transnet’s high fixed cost structure, substantial capex requirements, and significant debt obligations,” the agency said.

Simply put, Transnet is stuck between a rock and a hard place—it needs to improve its operational performance to enhance its financial health, but doing so requires significant expenditures that negatively impact its financial health.

Transport Minister Barbara Creecy recently explained that Transnet is stuck in a vicious cycle that costs the country billions annually.

Its collapse has been ongoing for years, as the utility has struggled to improve its operational and financial problems.

As a result, South African companies have begun to reduce their reliance on the utility by transporting their goods via road rather than rail and using ports outside the country to export their goods.

This forms the basis of Transnet’s vicious cycle – the operator’s financial struggles mean it cannot afford to invest in improving its rail network, which pushes customers away, decreasing Transnet’s revenue, and further worsening its financial position.

S&P said Transnet is “burning cash” while its operational performance is not improving fast enough to support this expenditure.

The agency explained that Transnet’s expenditure remains high, given the utility’s structurally high cash uses due to its persistently high debt levels and, therefore, high interest payments.

Transnet burning cash

The agency forecasts that Transnet will generate adjusted annual funds from operations of R8 billion to R14 billion over the 2025 and 2026 fiscal years. 

At the same time, it stated that Transnet’s substantial annual capital expenditure (CAPEX) needs, estimated at R25 billion annually, are critical to the company’s operational recovery and cannot be meaningfully reduced without adverse consequences. 

“Therefore, in our view, Transnet is now exposed to greater negative free cash flows relative to previous years,” the agency said. 

“In turn, this further constrains the company’s ability to service debt (principal and interest, excluding government support) and severely undermines its stand-alone deleveraging capacity at a time when its debt servicing burden remains exceptionally high.” 

S&P said this also makes Transnet dependent on state support, in the form of guarantees, to address its refinancing needs. 

“Under our base case, we forecast that the free cash flow deficit will only begin to moderate in fiscal 2027, contingent upon a continued sequential improvement in volumes, although at a slower pace than management plans,” the agency said.

Overall, S&P expects Transnet to burn cash until at least 2028, given the utility’s high and critical capex needs.

Business Leadership South Africa CEO Busi Mavuso said S&P’s downgrade is not just a reflection of Transnet’s financial distress.

She said it is a damning indictment of years of failed leadership, union militancy and a government that continues to bail out state-owned enterprises without demanding fundamental reform.

“When a company burns through R13.5 billion annually in negative free cash flow while its workers receive 6% pay increases – double the inflation rate – we are witnessing a textbook example of unsustainable economics enabled by government guarantees,” she said.

Mavuso said that, compared to Eskom, Transnet is seemingly resisting change and moving too slowly. “The solution is not more bailouts or government guarantees,” she added. 

“It’s time for National Treasury to attach strict conditions to any future support – conditions that enable the private sector competition that Transnet desperately needs.” 

“The recent progress in separating rail infrastructure from operations, driven by Operation Vulindlela, is a start, but we need to move much faster.”

Specifically, Mavuso called for private sector partnerships in ports and rail concessions to be accelerated.

Creecy recently said that Transnet’s current focus on getting third-party operators to use its network will go a long way toward ensuring it is in a healthy and sustainable financial position.

“I think the vision is that Transnet, in the longer term, should be an infrastructure provider,” she explained. 

“Transnet Freight will still exist, but there will be other freight operators, and Transnet would be making its revenue from these different freight operators that would be operating on their network.”

However, she said this vision would take time to realise, as approving third-party operators is a years-long process.