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SOE MOTION

Transnet turnaround looks promising, but set to be a long haul

Transnet turnaround looks promising, but set to be a long haul
Illustrative image | Transnet group CEO Michelle Phillips. (Photo: LinkedIn) | A Transnet logo at the Port of Durban. (Photo: Waldo Swiegers / Bloomberg via Getty Images)

The state-owned transport group has seen a slight improvement in the volume of goods it rails to market and containers that are moved through its ports. However, the improvements fall short of the targets contained in Transnet’s recovery plan.

Transnet is starting to gain some benefits from the reform measures it implemented in recent months — though a turnaround is far off as its logistics operations are still underperforming.

The state-owned transport group is seeing early benefits in its rail network, which has been unreliable for industry as seen in the lower volumes of goods it has railed over the past four years. Volumes have continuously declined from a peak of more than 200 million tonnes (Mt) a year in 2019 owing to mismanagement of the rail system, vandalism and the theft of copper cables.

Transnet, whose financial year for 2023/24 ended last month, has unveiled preliminary and unaudited data about the performance of its logistics operations. New Transnet group CEO Michelle Phillips said the data showed positive developments, indicating the state-owned enterprise (SOE) was starting to recover, albeit at a glacial pace. 

During its 2023/24 financial year, Transnet moved 151.7Mt of goods through its rail network, which represents a 1.5% increase from the 149.45Mt moved during the previous year. 

“The preliminary data indicates that Transnet has been able to increase its revenue, it has been able to reduce its operating costs, and we have also been able to drive up volumes. A lot of improvement came during the second half of the year,” Phillips said on Friday during a press briefing — her first since she was appointed to the Transnet top job in February by Public Enterprises Minister Pravin Gordhan.

Read more in Daily Maverick: All you need to know about Michelle Phillips, Transnet’s eighth CEO in 23 years

Without offering actual numbers, Transnet, which usually generates revenue of more than R60-billion a year, said it expected its revenue to increase by as much as 12% for the 2023/24 financial year. 

“We have had to improve on our equipment and rolling stock availability to be able to achieve an improvement. We have been able to achieve a return to service of an increased number of locomotives and we have seen the delivery of some equipment at the ports,” Phillips said.

However, the rail volumes (151.7Mt) achieved during Transnet’s financial year are below the targets contained in the SOE’s logistics recovery plan. The plan commits the SOE to achieving 154.4Mt in the 2023/24 financial year. The rail volumes achieved in 2023/24 were 1.8% lower than the target, largely due to derailments on its coal line to Richards Bay. The recovery plan has also committed Transnet to increase rail volumes to 193Mt by year-end 2024/25.

Read more in Daily Maverick: Transnet’s turnaround plan is premised on securing a R100bn ‘capital injection’ from government

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

The recovery plan is largely predicated on Transnet embracing the private sector. Transnet has ruled out the privatisation of the rail network, but it wants to partner with private sector players by auctioning rail slots, allowing such players to use their skills to run trains/railway lines for a set period, while also pouring in money to upgrade and secure the rail infrastructure. Transnet has already started this process. 

Read more in Daily Maverick: Transnet reveals details of plan to rope in private sector to fix its rail network

Snags in Transnet’s port operations 

A big problem area for Transnet is its ports, which are inefficient and handle fewer containers than the targets contained in the recovery plan. Transnet handled 4.15 million TEUs (20-foot equivalent units, a measure of trade volumes at container ports) at its port network across South Africa in 2023/24, which was 2.2% more than the previous year. 

The number of TEUs moved through its ports was 1.8% lower than the target (4.23 million TEUs) in the recovery plan. As in its rail operations, Transnet is trying to embrace private sector players to run its ports while fixing them. Transnet recently granted a 25-year contract to Philippines-based International Container Terminal Services Inc (ICTSI) to run and upgrade the Pier 2 container terminal at the Durban port. 

Read more in Daily Maverick: Philippine logistics firm to the rescue: Transnet embraces private sector as partner for delivery

However, the contract award hit a snag as APM Terminals — a division of AP Moller-Maersk that also bid for the contract and lost — is challenging the legality of the ICTSI contract award in court. It wants an interdict to prevent the deal between ICTSI and Transnet from going ahead.

Transnet is sticking behind ICTSI, with Transnet board chair Andile Sangqu saying it would be up to the court to decide whether claims by APM Terminals were valid and whether the SOE made an error in its contract award.

APM Terminals argued that ICTSI had not met the criteria outlined in Transnet’s bid, mainly its ability to meet and carry out the financial and investment requirements needed to run the Pier 2 container terminal at the Durban port over 25 years. 

Phillips said, “A specific criterion they referred to is a financial criterion that speaks to what we call a ‘sovereignty ratio’. They questioned whether they [ICTSI] are able to meet requirements financially, or satisfy the financial requirements of the bid.” 

An independent due diligence, conducted by Transnet, had shown that ICTSI had the wherewithal to deliver on the contract, Phillips said. 

“In the due diligence exercise, the main objective was to establish whether the bidder had the financial capability to meet the financial requirements of the bid. We reported the due diligence exercise was concluded successfully, which means the outcome of the exercise was that the bidder we have identified does have the financial capability to meet the obligations in respect of the bid,” she said. 

Transnet recently announced that a similar contract bid would be run at a Cape Town terminal. DM

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