Is Transnet the next Eskom?

State-owned logistics company is lurching from crisis to crisis at enormous cost to the economy and huge frustration to hamstrung mining giants

If Eskom is the beating heart of the SA economy, then Transnet is the spine. And that’s a deeply concerning thought considering both are in a perilous state.

Eskom has been on life support in the form of government bailouts for years now. Not very long ago, Transnet was a rose among the thorns that are SA’s parastatals. It is one of the few state-owned entities to have generated a profit — R3.9bn in the year ended March 2020, though that was a 34% slide from 2019 — and it was voted top employer three years in a row.

But 20 months after a new and hopefully incorruptible CEO was installed at the firm, the state-owned logistics company appears to be spiralling as it lurches from crisis to crisis — and at enormous cost to the SA economy.

Poor rail performance is a prominent issue.

Thungela Resources, a major coal exporter that demerged from Anglo American in June, saw its share price fall this week when it reduced its production targets in response to the poor rail performance. Thungela and most other big coal miners are stuck. Their export coal has always moved through Richards Bay Coal Terminal (RBCT) by rail.

A major export earner for SA, coal through RBCT is likely to be closer to 60-million tonnes this year, compared with 71-million tonnes last year, sources say. Despite record high coal prices, there is little to no spare allocation at other ports.

At this rate, one coal miner says, mines are likely to start shutting over the rail issues within the next six months.

The problems extend to other key export commodities and the mining sector estimates the rail issues have already caused it to lose R30bn in foreign sales.

Recently Andre Joubert, CEO of the ferrous metals division at African Rainbow Minerals, said Transnet’s performance was making SA miners uncompetitive. On iron ore alone, rail and port issues and the resultant inefficiencies cause the industry to lose about R5bn a year, he said.

Industry sources say chrome exports are likely to halve this year, from 12-million to 6-million tonnes.

While manganese trade is doing well, with 21-million tonnes exported in 2021, Joubert said only 16-million tonnes was exported using rail. The balance was moved by about 400 trucks, each carrying 35 tonnes, per day.

Players in SA’s agricultural industry have also raised the alarm over the state of Transnet operations as time-sensitive exports like citrus have been through crippling delays at ports this season.

Security issues, especially rampant copper cable theft, are among the reasons behind Transnet’s poor availability of locomotives. While some critics are dismissive of this, suggesting it is nothing new, Transnet says it’s so bad that it’s seriously considering reverting to dirty, pricey diesel locomotives.

But theft is by no means the only problem. Speaking at an industry event earlier this month, Transnet CEO Portia Derby said the company faces myriad challenges, including inefficiencies, which are causing it to lose market share across the board.

Poor maintenance is a notable problem, while many of Transnet’s troubles relate to procurement, she said, adding that the challenge of procuring quickly and competitively in the state is “really huge”.

While Transnet has introduced a new procurement policy to streamline the process internally, approvals are still needed from the Treasury and can be particularly challenging when something is designated.

For example, “track rails are not manufactured in SA and yet there is a designation that says we must buy them in SA. Now, you cannot imagine the time it takes to argue about that,” Derby said.

Steve Harris, general secretary of the United National Transport Union (Untu), says a legacy of state capture is also to blame, with an estimated R215bn lost to corrupt activities, which ought to have been invested in infrastructure.

The legacy of state capture continues to haunt the parastatal, which, along with the Special Investigating Unit, has dragged a handful of original equipment manufacturers to court over R54bn in illegal, Gupta-linked tenders for more than 1,000 locomotives. As the relationship soured, the China Railway Rolling Stock Corporation (CRRC) in particular has stopped producing locomotives for Transnet and refused to supply it with key components.

OPERATIONAL ISSUES

While efforts to clear the rot are commendable, one frustrated Transnet customer says it has resulted in crippling operational issues and should have been handled better. “They are also rigging the tenders for equipment for hospitals. So should we stop all those? Emergency equipment like ventilators so that people die? You use the legal system, but you don’t disrupt operations.”

While Derby warned that Transnet’s high levels of debt need to be managed, she said the company in fact has an “amazing” balance sheet.

Clearer insights into Transnet’s finances will be seen in its financial statements for the year ended March 2021, which are yet to be released as the company awaits final feedback on irregular expenditure from the Treasury and the auditorgeneral.

Those results are, however, outdated before they have been released because of a series of unfortunate events beyond March this year, including the July riots, a cyberattack on Transnet’s IT systems and, most recently, fires at two Transnet port terminals.

If the latest round of wage negotiations (with a starting offer of 0%) is anything to go by, the company is almost certainly in financial distress, says Harris.

Untu worries that an ongoing retrenchment process may also be costly for the company and in a statement said Derby had “lost the plot” by granting voluntary severance packages to all of almost 2,919 Transnet employees who applied, and in so doing losing critical skills.

One of Untu’s biggest gripes, Harris says, is that Derby and her executives cost the company an additional R65m a year but “we haven’t seen the actual contribution of those executives”.

The DA’s spokesperson on public enterprises, Ghaleb Cachalia, says while the government has the sense to deploy an independent CEO to Eskom, at Transnet the appointment of Derby —a former director-general of public enterprises — is just another example of cadre deployment.

Joachim Vermooten, an independent analyst, says Derby and her team should be afforded space and time. Transnet has a considerable skills base and expertise and remains among the world leaders in bulk freight transport, he said. Added to that, Derby and her executive team (and Andrew Shaw, head of strategy and planning, in particular) are “formidable people” in that segment.

There are glimmers of hope. Transnet has proposed partnering with the private sector on a number of fronts — from rail to ports and more. But progress on this is moving too slowly as billions of rand in export earnings are left on the table.

While some private sector players seem keen to participate, others have expressed reluctance.

Cachalia says there is no clarity on how this is intended to work. “We just have bland statements to the effect,” he says. “I’d like to know which private sector company is interested in coming on board and on what terms … We are not privy to any of this in any way whatsoever.”

Derby, however, said engagements are ongoing and she hoped Transnet will be able to put some clear plans forward during the course of 2022.

Among other things, she has made good progress on making the National Port Authority a subsidiary of Transnet. Plans are also progressing to build a mega-terminal at Richards Bay, while the Durban port master plan remains critical for it to reclaim its position as the hub port for Sub-Saharan Africa.

Turning the sprawling parastatal around is a daunting task. As another disgruntled Transnet customer says: “When the nose of a plane goes down, it’s difficult to lift it up again. And Transnet’s nose is down.”

The company’s progress in the coming months will be a critical indication as to whether Transnet can indeed change its worrying trajectory.