Government throws a R47-billion support package to get Transnet back on track
It’s not an immediate cash injection or bailout. But the government has given Transnet a guarantee facility that the state-owned transport group can use to raise new debt with banks or settle existing debt obligations.
Finance Minister Enoch Godongwana has caved into the request by Transnet for financial assistance as he unveiled a support package worth R47-billion for the struggling state-owned transport group.
The financial assistance of R47-billion to Transnet has been described by Godongwana and the National Treasury as a “guarantee facility”, which will help the company deal with immediate debt obligations and support its logistics turnaround plan.
It’s not an immediate cash injection or bailout. Guarantees are given by the Treasury to state-owned enterprises (SOEs) to help them raise new debt with banks and other funders or settle existing debt obligations, especially when they soon come for repayment. SOEs would then use the guarantees awarded by the government to secure new debt or roll over immediate repayments to a later date. If SOEs fail to pay back debt when it’s due (or default), then the government or taxpayers would be on the hook for payments.
Transnet has a lot of debt due soon and will likely use the newly awarded guarantee from the Treasury (worth R47-billion) to settle debt or extend repayments to a later date.
Transnet has another portion of debt worth almost R10-billion that has to be repaid by the end of December, with another R40-billion due over the next three years. Transnet recently told Daily Maverick that it plans to ask lenders for a reprieve on the debt due at the end of December by negotiating a later repayment date.
Read more in Daily Maverick: Transnet seeks further reprieve from R10bn debt repayment as December deadline looms
With debt of R135-billion and financial losses running into billions of rands, Transnet is increasingly at risk of defaulting on debt repayments. And because of its financial crisis, lenders are wary of providing more money to Transnet to fund its operations.
Out of the R47-billion guarantee facility, Transnet will draw down an initial amount of R22.8-billion “to deal with immediate liquidity matters such as settling maturity debt”, the Treasury said in a statement issued on Friday 1 December.
The Treasury said it had decided not to provide Transnet with an equity or cash injection at this point because the budget for 2023/24 was closed.
U-turn on Transnet, financial support
The latest financial support for Transnet from the Treasury is a U-turn on the approach taken by Godongwana on SOEs. When Godongwana unveiled the Medium-Term Budget Policy Statement on 1 November, he repeated the need to show ailing SOEs “tough love”, saying the era of continuously providing them bailouts for survival will come to an end — especially SOEs that do not show demonstrable evidence of reforms in their operations.
On Transnet, Godongwana made it clear that he would not even discuss a bailout for the SOE unless it bought into and implemented the government’s new roadmap to transform South Africa’s logistics sector.
Read more in Daily Maverick : MTBPS: Godongwana repeats tough love message to SOEs about bailout requests
Godongwana might have reconsidered his approach and became sympathetic to Transnet because its board recently unveiled a plan to reform its logistics operations.
Last month, the board of Transnet unveiled a turnaround plan that requires financial assistance of more than R100-billion from the Treasury, which consists of a R47-billion equity injection and the government taking over R61-billion of the SOE’s debt — similar to the debt relief measure offered to Eskom. The turnaround plan is premised on Transnet embracing the private sector as a partner for delivery in its rail and port operations and restructuring its balance sheet by settling smothering debt, with help from the government.
Read more in Daily Maverick: Transnet’s turnaround plan is premised on securing a R100bn ‘capital injection’ from government
The Treasury said that given the seriousness of challenges faced by Transnet, it had decided to grant the guarantee facility.
Transnet’s rail network is a crucial cog in South Africa’s economy, responsible for moving to markets most of the iron ore and coal that is produced in the country. However, Transnet trains are often delayed or don’t move at all due to poor management of rail systems, cable theft and vandalism.
Mergence Markets has calculated that the decline Transnet’s rail volumes, SA has lost out on exports worth a cumulative R200-billion.
Ports run by Transnet are equally in a mess and are ranked among the world’s worst as they are miles behind in terms of efficiency, container loading and waiting times.
Since Godongwana presented the 2023/4 Budget in February, South Africa’s economic fortunes have turned for the worse, with Eskom blackouts surpassing those of 2022, trains and ports operated by Transnet continuing to be unreliable and commodity prices tumbling. Because of these factors, the government unveiled a bigger-than-expected budget deficit this year, as its revenue from tax collections (especially from mining companies) is declining while state expenditure is rising.
Read more in Daily Maverick: More tax to come, but no SOE bailouts, as Godongwana juggles public finances to extend R350 grant
Godongwana believes getting Transnet working again — especially its rail operations — would be a key intervention to grow the economy and boost tax revenue.
The Treasury said the guarantee facility to Transnet will come with strict conditions, including the SOE exploring further “the divestment of non-core assets, reduction of the current cost structure, alternative funding models for infrastructure and maintenance requirements. The latter includes but is not limited to project finance, third party access, concessions, and joint ventures”.
Gavin Kelly, the CEO of the Road Freight Association (RFA), has raised doubts about the ability of the government’s latest support to Transnet reforming its operations.
“Whilst this is heartening, Transnet has received allocations and presumably bailouts from Treasury before — and the question still remains whether the management, operational foresight and control that was required for many years, will now come into play. It has not done so before — so the question is whether this will ‘suddenly’ now happen — or are we to see a similar experience as happened with South African Airways, where countless “bailouts” occurred without the desired result,” said Kelly.
He said the RFA is aware that there are both infrastructure and equipment interventions that require capital, but “it remains convinced that an attitudinal and management change is required within Transnet, as well as the core supportive SOEs that are in the logistics supply chain”. DM