Transnet will forgo almost R26bn in profit and cash flows over 25 years in exchange for a tie-up with a Philippines-based private partner, laying bare the tough trade-offs involved in achieving operational efficiency and increasing capacity in one of its most important terminals.
Former Transnet CEO Portia Derby in memorandums presented to the board, then led by Popo Molefe, made the business case for introducing private sector players to shore up the terminal performance.
In the document, dated August 2022, Derby also made a case for the group relinquishing the management of the terminal to International Container Terminal Services (ICTSI), the private sector partner whose R11bn bid is being challenged by the losing bidder in court.
Derby’s memorandum to the board says Transnet will forgo R68.8bn in nominal net profit before tax that could have been earned with the business being run as part of Transnet Port Terminals.
“This gap will be filled by Transnet’s share of profits of the [special purpose vehicle], a total nominal amount of R42.25bn over the 25-year period. This creates a nominal opportunity cost of R26.55bn, with a present value of R4.26bn,”
Free cash flows of R57.44bn will be forgone, with a present value of R6.92bn. “These forgone free cash flows are replaced by dividends received by Transnet with a total nominal value of R30.84bn. A nominal opportunity cost of R26.6bn with a present value of R2.28bn is experienced. This will be sufficiently covered by the purchase price of the shares.”
Derby said the private sector partner had to agree and commit to improve present operational capacity from 2.1-million 20-foot equivalent units (TEUs) to 2.8-million TEUs at the latest by four calendar years from the date that the private sector partner is issued shares in the special purpose vehicle.
DCT2 has underperformed for years and the deal promises to bring global expertise and best practices, potentially boosting the terminal’s efficiency and capacity. Transnet has said ICTSI has promised to inject R9.4bn in the contract period.
“In addition, the transaction will provide significant revenue to Transnet, which it intends to use to settle its debt or to invest in projects that will yield returns equal to or exceed the returns of DCT2,” according to the Transnet affidavit opposing a challenge by the losing bidder, Maersk’s APM Terminals. “A governance structure whereby Transnet retains both shareholder and board control, but allocates responsibility to the private sector partner for operational matters, is not commercially feasible.”
Transnet eventually chose ICTSI as preferred private sector partner. The freight and logistics company is set to pocket $618m from ICTSI, should the legal challenge launched by losing bidder APM Terminals fail.
Opportunity costs
ICTSI says in its affidavit opposing the APM bid that the legal challenge delayed it paying Transnet $618m for about half of DCT2. “Reserving this capital for imminent investment has significant opportunity costs for ICTSI as it is unable to allocate these funds to other opportunities or investments. ICTSI is facing considerable cost of funds amounting to $3m per month, and it faces these costs for every month which it must keep the funds available for this project.
“As such a further six-month delay would result in a direct cost of ICTSI of R360m on top of the significant opportunity costs which it incurs while these funds are held available for Transnet and not able to be applied to other projects and opportunities. Implementing this DCT2 project will be an enormous undertaking. Immediately upon the receipt of the ‘preferred bidder’ acknowledgment, ICTSI identified/appointed an experienced CEO to head up the [new company] and assigned a professional implementation team.”
The board minutes of a special meeting held on August 9 2022 show that former Transnet board member and chair of the board risk committee Gratitude Ramphaka was the sole dissenting voice at the meeting. She felt that private participation was not needed as the terminal performed well before without private sector participation. It was a bad idea for Transnet to relinquish management and operation control of the terminal to private players, she said.
Ramphaka said Transnet was giving up value on the asset by “assuming that the [private sector partner] transaction would bring operational efficiencies”.
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