The good news is that state-owned transport group Transnet managed to eke out a profit even though its operations were severely disrupted by the April floods in parts of KwaZulu-Natal and the Eastern Cape. 

As investors and lenders doffed their working caps  for the year and left for their various holiday destinations, Transnet released its financial results on Thursday, 22 December 2022, which showed that the company recorded a profit of R159-million during the six months to the end of September 2022. The floods occurred during this period, damaging Transnet’s railway lines, especially the Container Corridor, which is a key economic node to move freight between Gauteng and Durban.

Financial losses have become a permanent fixture in the state-owned entity (SOE) universe. And when companies in this universe generate a profit, it becomes an event. 

Transnet was able to post a profit because it managed to free itself from debt repayments that were soon due to its lenders by deferring them to a later stage. It also deferred tax payments worth R271-million. These factors allowed Transnet the space to enjoy the revenue it generated from its freight, rail and logistics operations without shelling out large amounts to service debt obligations and pay the taxman. 

Now for the bad news. A further look at Transnet’s latest results shows how the company is battling to reform its operations, especially its rail network.

Transnet’s operations are a crucial cog in South Africa’s economy. They are responsible for moving most of the iron ore and coal that is produced in the country and then taken around the world. Transnet also has a major role in carrying freight and fuel around the country and helping importers land their goods at ports. When Transnet isn’t operating properly, many businesses and South Africa’s exports come to a standstill.

But exporters are facing major problems in railing their goods to market and this can be seen at Transnet Freight Rail, the largest division at Transnet which generates most (45%) of the R36.1-billion in revenue at the SOE. 

Transnet Freight Rail’s revenue, which is generated from the contracts it mainly has with the mining sector, fell by 5.5% to R18.7-billion during the six months to the end of September 2022 compared with the same period in 2021. Meanwhile, most of Transnet’s divisions (including ports and pipelines) grew their revenue. 

Transnet Freight Rail remained in a mess, with volumes continuing to decline, indicating that the SOE is transporting fewer goods via rail. Beyond mining goods, this division also rails steel, cement, agricultural products and bulk liquids. Total volumes fell by 9.2% to 81.5 million tons (mt) compared with 89.8 mt in 2021. There is so much to blame here: Transnet’s poor management of rail systems (hundreds of its locomotives, the heavy-haul ones that are supposed to pull the coal and iron ore wagons, stood idle), rail infrastructure being hit by floods, cable theft and vandalism. Volume declines were broadly seen in the mining sector, with exported iron ore (down 1.4% to 28.3 mt) and coal (down 10.3% to 26.2 mt). This is a declining trend that has been playing out for many years. 

For instance, Transnet moved 56 mt of coal in 1996 on the coal rail line to the Richards Bay Coal Terminal. Coal volumes peaked in 2017 at 76 mt but fell to 72 mt in 2020. In 2021, volumes were down again to 58 mt and the mining sector is pencilling in a further decline to at least 49 mt in 2022. The mining sector has put the cost at R50-billion in lost export opportunities over this year so far alone. 

To fix this problem, Transnet has a much-vaunted plan to bring private-sector operators to access its railway lines, run trains independently, and invest in its rail network. But the plan flopped recently because Transnet struggled to convince the private sector to participate in the auction of its available rail slots.  

Read in Daily Maverick: “How President Ramaphosa’s plan to fix South Africa’s rail network has derailed”

Debt problems

Beyond operational problems, Transnet’s financial woes are also daunting. While much of the attention is on Eskom’s debt problems, Transnet has its own. It carries a debt of R127.6-billion in its financial books, consisting of short-term (R59.8-billion) and long-term borrowings (R67.8-billion). Transnet can pay the debt when it becomes due – as seen in the company making debt payments worth R31.4-billion during the latest reporting period. 

But the chances of it defaulting on debt repayments are increasing. For instance, Transnet recently came close to defaulting on a 10-year foreign currency debt of $1-billion, which was due to be paid on 26 July 2022. A default on this debt would have pushed other lenders to call for immediate loan repayments. But it managed to avoid a default scenario at the 11th hour, raising a loan of $1.5-billion, helping to pay the loan that matured. Essentially it raised more debt to pay existing debt.

Underscoring Transnet’s heightened debt-default risk is its rolling cash interest cover, which is sitting at 2.1 times, a decline from 2.6 times a year ago. The interest cover measures the ability of a company to pay interest that is due on outstanding debt. And a decline in the interest cover – as has happened in Transnet’s case – means the SOE is burdened by debt expenses and its ability to meet interest payments might be questionable.

Some of Transnet’s lenders, which have given the company R52.4-billion in 11 outstanding loans, require it to have a cash interest cover of at least 2.5 times. The SOE cannot comply with this requirement (agreed with lenders) because its cover profile is 2.1 times, thus forcing it to inform its lenders and ask them for a pardon. 

Transnet’s ability to pay debt will be tested in February 2023. It is facing two bond/debt repayments, worth a combined R1.1-billion, that are due on 7 and 13 February. Transnet can either pay this debt or refinance it, which will be costly because interest rates are set to continue rising. DM/BM