Transnet has released details of an ambitious recovery plan that forecasts an increase in revenue from R78bn to R91bn, a surge in earnings to R37bn, and the reversal of a R5.7bn net loss into a R5.1bn profit in the next two years. It also plans to ramp up capital investments on the rail network, rolling stock and port equipment from R17.9bn to R28.2bn by 2025.
But for this to happen it needs a R100bn bailout from the government. Its financial support package request to the Treasury includes a R47bn equity injection or a subordinated loan that could be converted into equity if the company demonstrates progress in turning its operations around. An immediate cash injection of R3.4bn is required before March next year.
It has also requested that R61bn of its R130bn debt be absorbed by the Treasury, similar to the debt relief offered to Eskom. In February, finance minister Enoch Godongwana allocated Transnet R5.8bn to purchase spare parts for locomotives and fix infrastructure damaged by floods.
However, there were no further allocations to the company in the medium-term expenditure framework — the government's three-year spending plan — and it's not clear if plans will be adjusted to account for the bailout request when Godongwana unveils the medium-term budget policy statement on Wednesday.
Transnet has breached debt covenants and its debt service costs of R13bn per annum mean it does not have the capacity to borrow from the markets going forward.
The plan’s objective is to improve the availability and reliability of critical equipment as well as enhance the quality of assets
— Transnet chair Andile Sangqu
“If the government does not agree to the funding, we will not be able to deliver on the turnaround plan,” chair Andile Sangqu said at a presentation of the recovery plan as the board marked 100 days in office.
Public enterprises minister Pravin Gordhan directed the board to produce a turnaround plan containing details of how operational performance would be improved and firm timelines. He gave the directive at the release of Transnet's results early last month when the ports and rail entity posted a R5.7bn loss.
Shortly after this group CEO Portia Derby announced her resignation, alongside group CFO Nonkululeko Dlamini. Transnet Freight Rail (TFR) CEO Siza Mzimela resigned a week later. Dlamini has moved to Telkom, while Derby and Mzimela leave at the end of this month.
The Transnet board is now pinning its hopes on the government agreeing to the bailout to enable it to execute the turnaround plan.
It promises significant improvements in the performance of the business through sweating the assets and spending more on maintenance. This will result in a significant increase in volumes railed by TFR, especially on the busy iron ore and coal corridors, and an improved performance at the ports. TFR has struggled to meet its targets for bulk commodities corridors, with coal volumes hitting a 30-year low in 2022 at a time of strong commodity prices.
Rail volumes declined from 226Mt in 2017/18 to 149Mt in 2022/23. Port volumes decreased over the same period from 4.6-million units to just over 4-million. Pipeline volumes decreased marginally.
The effects of the weak operational performance translated into a reduction in total revenue from R72.8bn to R68.8bn. But while revenue declined, operating expenses steadily increased from R40.3bn to R45.9bn.
Ebitda as a percentage of revenue shrank from 45% to 33% over this period. Total borrowings increased from R122bn to R130bn.
Presenting parts of the recovery plan, acting group CEO Michelle Phillips said it would be implemented in phases of six, 12 and 18 months, focusing on the recovery of volumes, effective allocation of existing equipment and optimisation of rolling stock assets.
With the past six months' volumes already at 76Mt, Transnet has committed to delivering a minimum of 154.4Mt by the end of the 2023/24 financial year. Should it get the requested cash injection from government, and fully implement the turnaround plan, volumes could top 170Mt by 2023/24 and be ramped up to 193Mt in 2024/25.
“All that our customers require is that we are very clear about what we want to achieve, what our plans are, who’s going to do what, and what the timelines are. We put a number of 170Mt. That is a steep target,” she said.
Sangqu said the primary focus of the plan was “tactical initiatives” to drive volume recovery and enhance rail and port operation.
“The plan’s objective is to improve the availability and reliability of critical equipment as well as enhance the quality of assets. This must be seen in the context of the constraints that exist with respect to the current quality and availability of moving assets, such as rolling stock, port and marine equipment, as well as fixed infrastructure assets,” he said.
The board and Transnet's top management have painted revenue and earnings growth scenarios based on full implementation of the plan and state support. If volumes increase to 154Mt in March 2024, revenue will improve to R78.3bn, with a R4.3bn loss. Should Transnet deliver 170Mt by March 2024, it will translate into revenue of R82.6bn and a marginal loss of R1.5bn.
In the event that volumes peak at 193Mt, revenue will increase to R91.5bn in 2025, resulting in a net profit of R5.1bn
The recovery plan comes as government is rolling out reforms that will break Transnet's monopoly and introduce private operators in rail and ports.
Transnet Freight Rail is being separated into the Transnet Freight Rail Operating Company (TFROC) and Transnet Rail Infrastructure Manager (TRIM). Sangqu said TRIM would focus on protecting and restoring rail network capacity for commercially viable high volumes to assist TFROC in delivering the highest tonnage for the components of the plan.
“The rail reform programme remains on track and is a critical part of the plan. TRIM is in place and commercial, and personal separation will be completed by the end of October 2023, and third-party access will be opened by April 2024,” he added.
Transnet's lack of investment in its assets, backlog in maintenance, and the unavailability of parts owing to the unresolved Chinese locomotives tender have contributed to its lagging performance.
Andrew Shaw, group chief strategy officer, said the company has R15bn in maturing debt in this financial year, and another R12bn next year.
He said they were comfortable they could deal with the debt that matures on November 6, given the facilities they have and options with lenders. “I think we will have to engage with the government further on how to deal with requirements for the new financial year.”
Analyst Peter Attard Montalto of Krutham said the government has little option but to step in with financial support.
“Creditors know that ultimately the Treasury will stand behind Transnet debts. Any bailout will only be dealt with by very severe conditionality on not only operational issues (like the plan mentions) but also key structural reform conditions.
“The sheer unsustainability of the entity is evident in the plan under all scenarios — including breaching loan covenants — so it is somewhat moot which one happens; all reinforcing that a bailout is clearly going to end up happening.”
