Transnet is spending R1 billion every month to service the interest on its enormous pile of debt.
This is according to Transnet CEO Michelle Phillips, who recently spoke about the company’s financial challenges on PSG’s Big Think webinar series.
In dire straits
Transnet, South Africa’s national rail and port company, has seen a monumental fall from grace in recent years.
The country’s second-largest state-owned entity (SOE) posted a profit of R5 billion in 2019, but this has since plummeted to a R5.7 billion loss by the end of 2023.
The poor track record means that the rail company accumulated a debt burden of R120 billion, and R1 billion is now spent every month on just the interest payments for this debt.
The SOE’s pitfalls had a damaging effect on the economy, as its port and rail services are meant to be the primary means by which all goods are moved in and out of the country.
One such example is South Africa’s automotive industry, which produces thousands of cars for export from factories located in Gauteng, KwaZulu-Natal, and the Eastern Cape.
The lack of functioning railways means that companies like Ford are now resorting to heavy trucks to move their completed models to the coast for export, which is vastly more expensive and time-consuming and leads to long-term damage to the nation’s highways.
Issues like these apply to just about every business in South Africa, and a study by the GAIN Group estimated that Transnet’s shortcomings are costing South Africa nearly R1 billion every day through lost economic output.
Over the course of a year, this lost revenue will add up to around R353 billion, or 4.9% of the country’s GDP.
To help Transnet get back on its feet, the government has awarded the SOE a R47-billion guarantee structure in the 2024 national budget.
Phillips, who was appointed CEO last year as part of the rail company’s turnaround plan, was quick to clarify that this fund is not a bailout.
“In my tenure at Transnet, we have always been very clear that we will not approach the government for a bailout to ensure that we are never a drain on the fiscus,” she said.
Instead, the R47 billion is a guarantee that will allow the SOE to borrow more money.
This will add to Transnet’s already massive debt obligations, most of which were accumulated during the state capture years, according to Daily Investor.
There are conditions attached to the new budget, including the privatisation of the Transnet National Ports Authority, which should be completed by April 2025.
The company is also separating its Transnet Freight Rail into Infrastructure Management and Freight and Rail divisions.
The SOE’s failures are attributed to a lack of maintenance and investment towards its infrastructure, and an operating strategy not optimized for revenue generation.
Transnet is working with the government to rebalance its finances, including a longer-term debt strategy with cheaper payments so that it no longer has to allocate R1 billion on interest every month.
In addition, third parties are starting to be allowed access to the state-monopolized rail network, which should alleviate the pressure on Transnet’s performance.
Another proposed solution is that Transnet will start renting its “B Fleet” to private sector operators as a short-term solution to bring more actors to the transport sector.
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