Time to let go of Transnet

From a R5 billion profit in 2022 to a R5.7 billion loss to date in 2023; with myriad challenges on its plate, Transnet could well have reached the final inflection point, says CHRIS HATTINGH.

The longer government continues to bail out Transnet’s non-performance, and the longer various barriers against private sector participation and investments are maintained, the more the South African economy, businesses, and citizens will suffer the negative consequences.

According to the National Treasury, “Inefficiencies of the Transnet freight rail network pose a significant risk to the South African economy and require urgent intervention.” In terms of raw rail volumes for the first quarter of the financial year in question, these were 18.2% behind target. Container volumes handled by ports were 2.2% lower than budgeted.

 Speaking after the release of the latest results, the Minister of Public Enterprises, Pravin Gordhan, said: “Transnet’s leadership must internalise the gravity of the situation and the extensive repercussions of persistent underperformance.” With 1 September as his starting mark, the minister gave the Transnet board three weeks to produce a turnaround plan. “The challenges we’ve noted, especially those related to ghost trains, infrastructure theft, and derailments, are not just operational setbacks. They threaten the trust our citizens place in our institutions and the stability of our economic environment,” added Gordhan.

While the minister’s strong words will gratify some, it is difficult to believe that this time will be different from all the others that have come before. Indeed, that the minister feels it appropriate to give the board such a deadline points to one of the fundamental problems afflicting Transnet and, indeed, all other state-owned entities (SOEs). Political pressure and interference (whether of an outright or more subtle nature) have systematically undermined these entities’ ability and freedom of discretion to make those kinds of decisions that might well have fixed at least some of their problems and placed them on a better footing.

Of course, political pressures and interference can manifest in decidedly negative consequences. As covered in meticulous detail by the Zondo Commission, political pressure and especially cadre deployment – a core pillar of the governing African National Congress’s ideology of the National Democratic Revolution – have hollowed out the capacities and capabilities of most of the country’s SOEs. To think that somehow this time things will be different, even though the same core ideas and policies remain in place, requires perhaps a bit too much wishful thinking.

Early in September, the GAIN Group released a study in which it investigated the state of Transnet. According to the group’s study, inefficiencies at the SOE are costing the economy R1 billion a day. This massive loss is caused mostly by lost sales of coal and iron ore. While the country should have exported more than 75 million tonnes of coal in 2022, only 54 million tonnes were moved.

Dr Zane Simpson, a director at GAIN Group, indicated that in 2022 Transnet’s travails cost the economy R411 billion. For 2023, an economic loss of around R353 billion is likely. In the wider context of near-zero growth (GDP recorded a 0.6% quarter-on-quarter increase for Q2 2023), such losses could scarcely have come at a worse time. Numerous job opportunities will have been lost. Furthermore, the hit to the fiscus, tax revenues, and government spending in the future will be substantial.

Transnet’s debt picture is incredibly concerning. Long-term borrowing at R92.3 billion and short-term borrowing at R36.3 billion are no measly amounts on which Transnet must try to get a handle. Globally, commodity prices are not nearly as elevated as a year ago. The upshot of this scenario is that even in the best case – where Transnet sorts out its equipment, operational, and security issues within the short-term – it will not necessarily profit from moving more volumes into and through the ports. 

A better-performing Transnet will always be a welcome change from what has become the norm over the last few years. In terms of both job creation and economic activity, the country sorely needs functional rail networks and ports. But the task appears too large to leave to Transnet – and the current government – alone. The reforms of Transnet might well be coming, but South Africa simply cannot afford to continue to see its growth potential held hostage by the wrong ideology and policies. Resources and time can be invested in improving Transnet’s performance, but at the same time government must remove the barriers that prevent private sector investment and competition from forming. Failing that, business must decide at which point it wants to work with government, or move past it.