The recent meeting of the Brics (Brazil, Russia, India, China and South Africa) group of nations and announcement of Transnet’s annual financial results have brought to the stage two issues that need interrogation around effective infrastructure investment planning and the short- and long-term pathways embedded in the decisions being made.
The Brics meeting not only explored a deepening of the “global south” sovereign relationships and co-operation but also interrogated the role of New Development Bank (NDB) in providing cheaper forms of locally-denominated streams of funding; this only a week before Transnet released a mixed set of results which highlighted the need for a more structured pathway for investment planning for the integrated transport utility.
NDB was formed in 2014 to support the development imperatives of the Brics group through sustainable funding. In August the NDB issued its debut rand denominated three- and five-year bonds for R1.5bn, making it the highest rated issuer in the South African bond market since 2015.
Vice-president and CFO Leslie Maasdorp said: “NDB is seeking to increase its presence in the local capital markets of its member countries, to fund its robust portfolio of local currency loans. The proceeds will be used to fund infrastructure and sustainable development projects in South Africa and the successful outcome sets the benchmark for future issuances by NDB.”
NDB now offers alternative forms of locally-denominated funding for which the cost of debt repayment would be protected from a weakening currency. This offers an opportunity for the likes of Transnet to diversify away from the traditional Bretton Woods institutions towards the Brics-enabled NDB for cheaper and hedged funding in its borrowing programme.
Transnet reported improvements in major parts of its capital structure, including a 43% decline in the level of borrowing (gearing). Net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) also saw a decline to 4.98 times while four out of the six operating divisions saw positive growth in their revenue line.
On the negative side, once again four out of six of the operating divisions showed weaker capital expenditure numbers compared to the year before and four out of six showed weaker Ebitda numbers from the year before, while depreciation derecognition and amortisation and impairment grew in the financial year under consideration by 8.4% and 42.3% respectively.
When you double click on the numbers that show a deterioration, there is a connection to sustainable investment planning and the lack thereof.
Given that Transnet has to report annually yet is exposed to an infrastructure investment profile that tends to be more long-term in its nature, there is an inherent need for all the stakeholders to align on what short- and long-term investment programmes need to look like for Transnet to remain financially sustainable and play the economic enablement and development roles it should in the South African economy.
Transport infrastructure continues to be a vital social and economic asset, influencing trade flows and industrial formation. However, there is an embedded contradiction in how to plan and finance such an investment. Decision-making related to the allocation of funds in reconstruction, modernisation, construction and/or rehabilitation of transport infrastructure is a top issue for all transport networks and especially for networks of developing countries.
Low level of investments in the past led to a decreasing quality of transport infrastructure and a need for consideration of all combinations of transport infrastructure rehabilitation and modernisation alternatives, which had made the problem complex.
In defining the short-term investment pathway, inspiration can be found in the research by Dragana Macura and others in their 2011 research paper “A Model for Prioritization of Rail Infrastructure Projects Using ANP”, in which they explore a model for defining the priority of projects for investment in railway infrastructure using multi-criteria analytic network process to define where, in the short term, investment ought to be channelled to optimise a rail network.
These findings are important for Transnet Freight Rail to consider while reconsidering its position on the back of the challenges regarding availability of rolling stock that have largely led to its weak performance.
The finalisation of an appropriate transport funding model will play a pivotal role in addressing the intractable challenge of funding our transport system in a sustainable manner
On the long end of rail infrastructure railway investment planning, Milana Kosijer and others proposed an investment decision method, called the theory of fuzzy VIKOR sets, for instances where there are heterogeneous and conflicting criteria for investment.
A clear process of demand modelling, development of an integrated urban mobility pricing strategy and sensitivity analysis, evaluation of alternatives (economic, fiscal, financial, and so on) all have to inform the investment choice ensuring that investment planning is not only in response to crises that have emerged in the rail and transport industries.
The minister of transport, in presenting the 2022 White Paper on the National Rail Policy, argued that the paper “presents a multi-decade vision of how South Africa’s rail sector should evolve and is expected to provide policy certainty and enable investment and private sector participation, with the key thrust to introduce third party access on the rail network, drive efficiencies and improve competitiveness. The finalisation of an appropriate transport funding model will play a pivotal role in addressing the intractable challenge of funding our transport system in a sustainable manner.”
Important in this is the emphasis on the time frames required for sustainable investment as well as the funding frameworks that need to support that.
NDB and a reconsidered two-pronged investment pathway framework will lead us one step closer in ensuring that Transnet is able to realise its developmental and economic enablement mandate while remaining financially sustainable.
• Skenjana is an independent economist and chief consultant for economic and policy research for Transnet
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