In the wake of South Africa’s enduring energy crisis, a new threat looms as state-owned Transnet SOC Ltd., vital for the nation’s logistics, faces a deepening meltdown. Mismanagement, underinvestment, and corruption have crippled the operator, causing traffic chaos and pushing up costs for exporters. The company, drowning in debt, seeks a massive bailout. Rail inefficiencies cost the economy billions, and a turnaround plan involving private partnerships and improved governance is underway, but the road to recovery for Transnet appears long and challenging.
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How Rail and Port Chaos Add to South Africa’s Woes: QuickTake
By Mike Cohen and Paul Burkhardt
(Bloomberg) —
For more than 15 years, South Africa has endured crippling blackouts as a result of dysfunction at Eskom Holdings SOC Ltd., the utility that supplies more than 90% of the nation’s electricity. Now government data shows the damage is being eclipsed by the impact of a deepening meltdown at the state-owned operator of freight rail, ports and fuel-pipelines. Transnet SOC Ltd. has been hobbled by years of mismanagement, underinvestment and corruption. Many mining companies and other exporters have resorted to using to trucks to get their goods to port, which has pushed up their costs, wrecked the roads and caused massive traffic jams. Yields on Transnet’s bonds plunged at the start of December when the National Treasury announced it would provide the company with 47 billion rand ($2.5 billion) in debt guarantees. But fixing the business won’t be a quick or easy process.
1. Why does Transnet play such a key role in the economy?
With roots dating back to the late 1850s, the company established a monopoly over the rail and port system as inland discoveries of gold, diamonds and other minerals bolstered demand for transport services. Its rail network spans 20,000 kilometers (12,427 miles), and is used to move coal to ports in the east of the country, and iron ore and manganese to harbors in the west. It also plays a key role in getting corn and other agricultural goods to local and international markets, and manufactured imports to warehouses and stores. It runs the country’s eight commercial harbors, including one at Durban on the east coast that handles more than 40% of port traffic. Its pipeline network, which traverses five of the nine provinces, transport an average of 16 billion liters (4.2 billion gallons) of liquid fuel and more than 450 million cubic meters (15.9 billion cubic feet) of gas each year.
2. What’s behind its problems?
Transnet’s woes date back to 2009, when Jacob Zuma was named South Africa’s president and its senior management was overhauled, according to a judicial commission that spent four years probing state corruption during his almost nine-year rule. Some senior executives and members of the board were found to have engaged in “extensive wrongdoing,” signing irregular contracts worth a total of 41.2 billion rand. Members of the Gupta family, who were friends with Zuma and in business with one of his sons, were among the main beneficiaries, paying bribes and kickbacks to secure deals, according to the panel. All those implicated denied wrongdoing. The purchase of as many as 1,064 locomotives from Chinese suppliers was among the questionable transactions. Many of those are sitting idle because spare parts aren’t available, constraining Transnet’s capacity.
3. How did things get so bad?
The rail business has continued to be plagued by theft and vandalism since Zuma was forced from office in 2018, while extreme weather damaged equipment at the Durban port. The company’s decline has accelerated since 2020 as its operations were hit by the global pandemic, a strike and equipment breakdowns. Portia Derby, who was appointed as CEO in 2020, quit in October along with several other senior executives after failing to orchestrate a turnaround. The government and Transnet have both pledged to stem the deterioration of the company’s operational and financial performance.
4. What are Transnet’s finances like?
The company is in dire straits. It has lost a total of 9.8 billion rand since the pandemic struck in 2020 and has accumulated 130 billion rand of debt. Its depleted coffers have left it unable to maintain and upgrade its equipment. The volume of coal it rails has fallen to the lowest level since 1993 and of iron ore to a decade-low. South Africa’s container ports rank among the continent’s least efficient and some shipments are being diverted to Maputo in Mozambique and Walvis Bay in Namibia. Transnet sought a state bailout of about 100 billion rand over the next two years. On Dec. 1, the Treasury agreed to provide it with 47 billion rand in guarantees, but with just under half of that made immediately available. Part of the money it will be able to raise will go toward paying off maturing debt.
5. What’s been the impact on the economy?
Rail inefficiencies cost South Africa’s economy 411 billion rand last year, according to the National Treasury, eclipsing a 300 billion-rand setback caused by rolling blackouts. While power outages are expected to ease next year, logistics challenges are set to remain a serious constraint on output, and are pushing up the cost of living and doing business, according to the central bank. The nation’s minerals council estimates that mining exports fell 50 billion rand short of target last year due to the rail crisis. Coal producer Thungela Resources Ltd., petrochemicals giant Sasol Ltd. and retailer Woolworths Holdings Ltd. are among a slew of companies that have complained about Transnet’s shoddy services. The bottlenecks at South Africa’s ports prompted MSC Mediterranean Shipping Co. to impose a congestion surcharge of $210 per 20-foot container of dry cargo it handles, while A.P. Moller-Maersk A/S dumped Cape Town as a stop on one of its Asia shipping routes.
6. What does the turnaround plan entail?
The presidency said it will enlist private companies to help it fix Transnet, giving them access to its tracks and offering them the right to operate routes and ports. The outright privatization of its assets isn’t on the agenda. The company is expected to bring in partners to help run container terminals in Durban and at the southern port of Ngqura. The government is also pushing law-enforcement agencies to reduce the cable theft that’s idled some of its rail lines. Transnet said its priorities include appointing new key executives, cutting costs and improving the management of its assets and infrastructure. Andile Sangqu, Transnet’s chairman, has warned that fixing the company will take time, because it can take as long as 18 months for it to access some of the equipment it needs.
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