HILARY JOFFE: Mix of hope and despair for Transnet

Last year was the one in which Eskom turned around and the economy started to benefit from opening up the energy market. This year was meant to be one in which Transnet started to recover and SA’s rail network was opened up to private players. But the year has opened with a mix of hope and despair after the release of the final network statement on Christmas Eve and Transnet’s interim results on New Year’s Eve.

Hope, because the network statement is a first crucial step on a journey that will see the end of Transnet’s rail monopoly, bringing new private sector operators onto the tracks. Despair, because the latest results show that while Transnet’s rail and port operations have stabilised they are still far from meeting the targets of the state-owned company’s own recovery plan, never mind the targets it needs to achieve to support SA’s economic and export revival.

That is despite huge joint efforts by business, the government and Transnet itself. Transnet’s volumes are looking hardly better than last year’s. And the disruptions caused by the protests in Mozambique have put added pressure on a logistics system that is already not coping, given that Maputo is now SA’s third-largest export port.

All of which means fixing Transnet’s existing rail network is still the urgent priority — we aren’t even getting to the longer-term structural reforms yet that the government’s freight logistics road map envisages to transform the industry. And while the network statement opens the way for private (“third party”) train operators to come onto the network as early as April, that is unlikely to lift rail volumes much as long as the rail infrastructure itself is such a mess. That makes it ever more essential that reform goes further to open up the track infrastructure itself, concessioning it out to private players. But that could take time and SA doesn’t have time. So the question this year will be how to bridge the gap and get the recovery under way.

Transnet CEO Michelle Phillips said at the release of the group’s 2024 annual results in September that Transnet Freight Rail’s target was, realistically, 170-million tonnes, up from 156Mt the previous year, but she had set a stretch target of 193Mt and hoped the group would turn to profitability this year. But the first-half results suggest freight rail will rail 160Mt, at best, for full-year 2025. And the group will struggle to get out of its loss-making position. As it is, it had to go back to its lenders yet again to ask for a waiver, after interest costs on its R136bn of debt consumed more than half the cash it generated in the first half, triggering an event of (potential) default.

So the group has no money. It has upped its capital spending lately. But it doesn’t have anything like the cash the newly created Transnet Rail Infrastructure Manager estimates is needed just to do the maintenance to restore SA’s ailing infrastructure to a state that would give new third party operators a decent chance of delivering more efficient services. Operators such as Traxtion and Grindrod could probably source the “kit” — locomotives and wagons — to put onto the network by April. But will they want to take up those slots?

The final, revised network statement offers more viable tariffs than Transnet’s first try. But with the network infrastructure in its current state, would they get the returns that would make it worthwhile for them and their funders? The infrastructure includes the tracks themselves as well as the signalling and electrification, all of which are in a poor state. That’s not the only reason Transnet’s trains don’t run on time, if at all. But it’s a big one.

The newly created Transnet Rail Infrastructure Manager will own the network and be responsible for selling slots on it to private operators. It estimates R65bn must be spent over the next five years just on maintenance, if capacity is to be increased to 250Mt — the “SA Inc” target transport minister Barbara Creecy has set. Actually increasing the capacity will require far more.

Who is going to pay? The infrastructure manager talks about a “multifunding strategy” that includes private funding. But private investors are unlikely to hand over cash unless they have a stake in the project that will give them returns. Nor will they necessarily trust that Transnet can do the procurement cost effectively, or has the required expertise to deliver quality infrastructure quickly.

The investment in infrastructure will also have to be recouped from users and the big exporters are likewise likely to push back against paying higher rail tariffs to Transnet so that it can upgrade the infrastructure itself. Those exporters, particularly the coal and iron ore miners that are Transnet’s largest customers by volume, will want to control or at least have meaningful stakes in the infrastructure upgrade and capacity expansion on the dedicated coal and iron ore lines.

They arguably should have operated those lines in the first place — just as mining groups such as BHP and Rio do in countries such as Australia. They have the balance sheets. They certainly have the incentive, given that they have had to slash production and jobs because Transnet can’t rail their output to market. And a better rail network would open up so much more potential for SA’s mining industry.

It is clear, though, that lifting the efficiency and capacity of SA’s rail network to levels that would support higher rates of investment and growth will require concessioning out the network infrastructure itself to new players, not just selling slots on the network. The problem is that will take time. Meanwhile, exporters continue to lose credibility and market share. SA continues to lose exports and investment. And the clock is ticking for the government of national unity, which won’t survive if it can’t deliver a stronger economy and more jobs.

An interim solution will have to be found to fund Transnet to fast-track maintaining and refurbishing the rail network to improve efficiency. The Treasury won’t give Transnet a bailout, but it will grant infrastructure loans, with strict conditions, through its budget facility for infrastructure (BFI). Transnet has applied to the bid window and that may help crowd in some private sector funders. But the condition will doubtless be that concessions must follow.

SA’s logistics landscape needs to change fundamentally. The government has committed to this in its road map. But the window to set that change in motion may only be open for another year or two.

• Joffe is editor-at-large.