There’s stiff competition for the state-owned enterprise (SOE) wooden spoon story of the year. As my generator cranks on again in the background, Eskom’s death spiral is never far from contention.
Not to be outdone, the Post Office managed to take eight months to send a package “back to sender” in a test by news website Mybroadband. And in a stunning volte-face Sanral, in its infinite wisdom, decided to award a rerun of several important, valuable road tenders to Chinese bidders, spoiling department of trade, industry & competition minister Ebrahim Patel’s local “is lekker” (master)plan. And SAA is still stuck in the departure lounge after a key member of the Takatso consortium, Gidon Novick, quit.
It’s a crowded space, but the most worrying story this year for the moribund SA economy and vast swathes of business has been watching the train wreck that is Transnet Freight Rail (TFR) trying to open to third parties, per the government’s transport policy.
You see, rail monopolies are impossible to bypass for some industries. Ask Sappi, Kumba or Thungela. When TFR fails there’s no backup generator that can be installed. No private track to bypass the state-owned incumbent. And our roads are already at or near capacity — the ones that haven’t fallen apart anyway.
Jan Havenga, who worked for Transnet for two decades during the ’80s and ’90s and is now a professor of logistics at Stellenbosch University and the man credited with helping design large parts of our opening up policy, says Transnet shaves a staggering 4% off GDP annually given its current collapse amid strong commodity prices.
I have written at length about Transnet’s balance sheet being as flimsy as Jacob Zuma’s medical parole excuses. But don’t fear because the clever chaps and their advisers at Transnet HQ have devised a plan.
A wandering albatross dropped a request for a proposal document on my balcony for a sale and leaseback scheme of 6,530 CR13/14 wagons for 25 years, dated November 26.
Several rubs
This new strategy is designed to raise R6bn in immediate cash flow at a rough cost per wagon of R1m each. The closing date for the tender is end-January next year. Everything is urgent when you’re in as deep a financial hole as TFR.
But here’s the rub, in fact several rubs, with the scheme. Take the timber industry or the agri grain industry. Transnet has told its customers it no longer has the budget to maintain the wagons. The industry bodies said, OK, fine, then we will bring in private operators to run our service for us, under the government’s new policy. And TFR said no, sorry, can’t do that. When the wagons go, we’re going to park them. But what you can do is buy the wagons from us.
One has to understand that the nature of these industries is all about tonnes to the mill. With timber, for example, if Mondi or Sappi don’t get a certain percentage of the raw fibre supply into those mills in Richards Bay they are wiped out. They simply can’t get enough trucks through the door. They can’t reach critical mass. They can’t continue to operate at below critical mass because they aren’t absorbing fixed costs.
These guys are farmers, not rail operators, but TFR is holding them over a barrel. It gets far worse too. TFR is not providing a performance guarantee to these industrial customers for what are 40-year-old wagons, meaning if they break down the customer must pay for the repairs. In addition, Transnet is not providing a maintenance plan for the wagons, leaving customers to fend for themselves.
The theory behind the strategy is that because the lender, or the leasing company, will have recourse to the asset, which is the wagon, it is funding that can be raised easier than pure debt on the Transnet balance sheet.
Slow poison
This works in places such as the US because you’ve got a handful of extensive class one railroads and about 20 tier two railroads. These are blue chip listed entities that you can bank every day of your life. The leasing companies have redeployment flexibility on these assets, whereas somebody who acquires R6bn of TFR wagon assets has just one counterparty — Transnet. And Transnet is refusing to open up the bulk lines. The leasing company doesn’t have redeployment opportunities outside Transnet. So that this funding is backed by a wagon makes it irrelevant. It is in effect scrap value.
But now Transnet is saddled with a lease obligation. And regardless of how much volume it moves it’s going to have to pay the lease, month after month. Doing this deal is slow poison to its free cash generation out of those bulk services. And that’s if they can find somebody to do it.
All of this smacks of abuse of a monopolistic position as well. But we know the competition authorities handle SOEs with kid gloves, so whoever designed this strategy clearly isn’t worried about raising any flags.
Consider that we have more than 700 SOEs with about R1.23-trillion in assets, and taxpayers lost R180bn in the last financial year by allowing government to mismanage them. That is a -14.6% return on equity. You get the feeling this Transnet board won’t be around this time next year.
• Avery, a financial journalist and broadcaster, produces BDTV’s Business Watch. Contact him at badger@businesslive.co.za.
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