EDITORIAL: Strategic bet or financial blunder?

Transnet’s decision to hand over the management of one of its most important terminals in Durban to the Philippines-based International Container Terminal Services Inc (ICTSI) for 25 years is a high-stakes gamble.

Former CEO Portia Derby’s pitch to the board highlighted the potential for operational improvements and increased capacity. But the financial trade-offs are significant. 

Transnet will miss out on R68.8bn in nominal net profit before tax over the contract period, compared with the R42.25bn it expects to gain from its share in the special purpose vehicle. This results in a nominal trade-off cost of R26.5bn, with a present value of R4.26bn.

Similarly, Transnet will lose out on R57.4bn over the contract period, with the present value of R6.92bn. These would be replaced by dividends totalling R30.8bn, leading to a nominal opportunity cost of R26.6bn and a present value of R2.28bn.

Overall, the combined opportunity cost over the entire contract period is about R26bn, while the immediate trade-off cost, after accounting for the R11bn price tag for ICTSI to run and manage the terminal, is R180m.

The deal, announced a year ago with a flourish can be traced to President Cyril Ramaphosa’s broader agenda to push through structural reforms and revive the economy, which suffered under the disastrous stewardship of his predecessor, Jacob Zuma.

Under the transaction, ICTSI, a R140bn-plus global port operator straddling six continents, will expand and manage Pier 2 of the Durban port, Africa’s largest harbour that handles nearly half of SA’s port traffic.

Poor performance

The deal, if consummated, would be the first port privatisation of Transnet, which has faced criticism for the poor performance of its ports in terms of efficiency and reliability. A study of container port performance ranked Durban and Cape Town in the bottom 10 of the worst-performing ports in the world, with the latter ranked the lowest of the 405 ports surveyed.

The deal promises to bring global expertise and best practices from ICTSI, potentially boosting the terminal’s efficiency and capacity from 2-million to 2.8-million 20-foot equivalent units (TEUs), a measure of trade volumes at container ports.

There is a chance the transaction will help restore SA’s image as a reliable trading partner and boost our competitiveness in the global market.

The financial sacrifices of the deal remain substantial. Critics might argue that Transnet could have retained these earnings by managing the terminal itself, thereby avoiding the financial trade-offs associated with the tie-up.

Still, the perspective overlooks the economic spill-over benefits, some of which may not flow directly to Transnet, but rather slot into the broader narrative to put millions of South Africans into jobs.

For one thing, operational improvements and increased throughput can reduce congestion and improve the flow of goods, restoring SA as a reliable trading partner and making it a more attractive destination for international shipping lines.

For another, improved trade efficiency can stimulate both exports and imports, reinvigorating the economy that has hardly grown for more than a decade and creating much-needed jobs for millions of South Africans lining up every month for the R370 grant introduced at the height of the pandemic.

Debt pile

In addition, the partnership will inject R9.4bn investment over the contract period to revamp terminal facilities. Readers of this newspaper know Transnet is choking under a R130bn debt pile, which incurs about R1bn a month in interest payments.

Transnet’s lopsided capital structure forced it to tap the Treasury for a bailout last year, which was granted in the form of a R47bn debt guarantee. It is in no position to pump money into the Pier 2 terminal, the largest in the Durban port.

It is also worth mentioning that improved supply chain efficiency can benefit the fiscus, businesses and consumers, leading to higher tax receipts, lower prices and higher profitability for companies.

For ICTSI, the bid being challenged in court by Maersk’s APM on grounds that it failed the solvency test, the pressure to make good on its promises would be enormous. Given its track record, handling nearly 13-million TEUs annually, and its extensive operations across 19 countries on six continents, it does not have the luxury of low expectations.

Transnet’s tie-up with ICTSI is a bold move with high stakes. The outcome will determine whether this is a stroke of genius or a costly blunder. The financial sacrifices are clear, but the potential operational gains and economic spillover benefits could justify the risk.