Transnet, a government-owned pipeline, rail, and port enterprise in South Africa, is seeking financial assistance from the Treasury to the tune of over $5.2 billion. The company’s proposal includes the Treasury assuming responsibility for a significant portion of its debt and providing an equity injection in the form of a subordinated loan. This funding is crucial for Transnet to implement its turnaround plan and ensure sustainability in the medium to long term.
The turnaround plan relies on both debt reduction and equity infusion to fund revenue-generating projects. A portion of the equity funding, amounting to $156 million, is urgently needed before the end of the financial year in March 2024.
Unfortunately, the government’s medium-term spending strategy did not include any allocations for Transnet. With the Treasury asking all ministries to reduce their budgets, the fiscal framework is already strained. Modifications to in-year allocations are expected following the presentation of the medium-term budget policy statement in November 2023.
Transnet has faced significant challenges both financially and operationally in the past year. Declining freight volumes and increased costs have contributed to revenue declines. The company has also violated its debt covenants, making its debt more expensive and unmanageable. Ongoing vandalism, infrastructure theft, and insufficient investment in capital equipment and maintenance have further exacerbated the situation.
In response to these challenges, Public Enterprises Minister Pravin Gordhan requested the newly expanded board to draft a recovery strategy and assess the management team’s performance. This led to the resignation of key executives, including the head of the Northern Corridor coal line and the CEO of Transnet Freight Rail.
The National Logistics Crisis Committee’s Freight Logistics Roadmap, which aligns with Transnet’s turnaround plan, will soon be considered by the Cabinet. While the board’s plan focuses on immediate interventions and investments in Transnet’s divisions, the roadmap addresses the long-term restructuring of the rail system. Immediate debt relief is essential for Transnet, and one option is to transfer $3 billion to the government’s balance sheet. The plan also suggests that the government takes full responsibility for Transnet’s $7 billion debt, either through annual dividend distribution or servicing the debt entirely.
The turnaround plan also highlights the potential for “structural transactions” that generate more cash for Transnet, thereby reducing its reliance on a bailout. However, it acknowledges that these transactions can take up to 24 to 36 months to materialize, necessitating bridging funding from the government in the interim.
In another development, Transnet has sought assistance from major coal exporters in resolving a logistics crisis caused by a dispute with Chinese locomotive supplier, China Railway Rolling Stock Corporation (CRRC). Coal industry players have been asked to contribute approximately $73 million to help pay off Transnet’s outstanding obligation to CRRC. The dispute with CRRC is linked to allegations of corruption and state capture. Lack of replacement components has significantly affected Transnet’s rail performance and its capacity to transport coal. Although mining companies have expressed willingness to assist, they have not yet been formally requested to transfer the funds.
As Transnet faces these challenges, urgent financial support from the government is necessary to facilitate its turnaround and ensure the smooth functioning of South Africa’s crucial transportation infrastructure.
