Transnet’s turnaround plan needs R122bn

That’s just for the next five years – and it also needs more rolling stock and security teams to tackle vandalism and theft.

Transnet needs R122 billion over the next five years to turn around its waning fortunes, according to a Freight Logistics Roadmap issued in October by the Department of Transport. Of this, 19% will need to be spent on expansion and the rest on sustaining existing operations.

This is no trifling matter. Transnet’s dismal performance will likely cost the country 5% in lost GDP in 2023, translating to about R1 billion a day.

Transnet is an “uncompetitively positioned, ineffectively equipped, operationally inefficient railway that has lost its ability to both dominate local logistics and mobility markets, and to support global exports” according to the National Rail Policy White Paper.

It’s a brutally honest assessment of Transnet’s current condition, though how to navigate out of this mess will be hotly debated in the coming weeks.

We know that government does not have the funds to reboot Transnet, which means the private sector is the only remaining option. The roadmap details the litany of problems facing the logistics producer, and boldly sets out a path for recovery, including opening the door to competition and private sector investment.

The devil is in the detail. For example, the roadmap envisages creating infrastructure managers (IMs) for rail, operating independent of Transnet and responsible for maintenance, renewal and development of the network. The IMs will have independence in train path allocation, as well as freedom to set fees for use of the infrastructure.

To that end Transnet announced on 1 November that it has split Transnet Freight Rail (TFR) into two entities:

• Transnet Freight Rail Operating Company (TFROC); and
• Transnet Railway Infrastructure Manager (TRIM).

TRIM would initially be an operating division of Transnet, transitioning to a Transnet subsidiary within six months – which is in itself loaded with potential conflicts.

The roadmap envisages creating other private sector infrastructure managers as well, though the document is not explicit about how this will be done.

Ports

Similarly, the National Ports Authority (NPA) aims to improve performance and promote competition, while remaining landlord and owner of all port infrastructure. The ports authority, too, will remain part of Transnet.

In most countries, port authorities are owned either by the host city or the national tax authority. Tax authorities have a vested interest in seeing increased taxes and excise duties and are less concerned about ownership. In SA, government has decided to vest ownership in the Port Authority within Transnet, and not as an independent entity. It’s not hard to understand why: government needs the safety of TNPA’s balance sheet to stave off a financial crisis.

Transport experts have pointed to the flaws in the roadmap, chief among them being the conflation of the roles on IM and landlord in the rail sector. This will mean that Transnet will be both player and referee in the awarding of future railway transactions or concessions.

While the performance of South Africa’s ports has improved in recent years, the container terminals (in which Transnet currently has a monopoly) at the ports of Durban and Ngqura were ranked 365th and 361st respectively out of 370 ports worldwide by the World Bank in 2022.

“As a result of the inefficiency of these terminals, cargo is increasingly being diverted to the Ports of Maputo and Luanda, resulting in a permanent loss of export traffic for South Africa,” says the roadmap.

In July it was announced that Philippines-based International Container Terminal Services (ICTSI) had been chosen as the preferred bidder for a 25-year concession to run the Durban Container Terminal, which handles about half of SA’s total port traffic. Already, there are reports of a labour go-slow at the port which has prolonged the ship offloading times to more than 20 days. This will not have gone unnoticed by ICTSI as it considers its options.

The concession is seen by many in labour as privatisation by stealth. This will no doubt feature prominently in ICTSI’s technical due diligence and whether these factors, including the obligation to take over about 3 500 Transnet staff, will prompt a renegotiation of the price or terms of engagement.

For many, a preferable model to follow is that of Sanral as custodian of the important road routes in SA.

Sanral oversees major road concessions such as the N3 between Johannesburg and Durban. The N3 is privately run and successfully carrying much more traffic than originally envisaged (ironically due to the messes at Transnet).

Source: Department of Transport’s Freight Logistics Roadmap

Railway freight

The roadmap shows that Transnet’s railway freight volumes have fallen from 226 million tonnes (Mt) in 2017/18 to just 149.5 Mt in 2022/23.

The general freight volumes, meaning the non-mining volumes, have dropped to a level last seen after the Second World War when the railway relied on steam locomotives and didn’t have access to modern telecommunications technologies.

Since 2010 South Africa has forfeited an estimated $26.7 billion (R488 billion at current exchange rates) in iron ore and coal export trade.

This meant that SA, and not for the first time, forfeited much of the recent commodities boom due to its inability to ship sufficient volumes to port.

Among the reasons cited by Transnet for this poor performance are under-investment in the network, theft and vandalism, lack of available rolling stock and poor maintenance of existing equipment, as well as operational inefficiencies within Transnet – for example, the number of manual train authorisations has increased five-fold to 250 000 since 2018.

An OECD comparison of countries operating “regulatory assets” found a common denominator among state-owned companies that act as infrastructure managers – “savings” are manifested in a slowly deteriorating condition of the infrastructure. Lack of infrastructure renewal can lead to a graveyard spiral requiring every greater spending on maintenance. This deferred cost is ultimately transferred to the next generation of users or taxpayers.

Transport experts argue that while the roadmap offers a detailed and honest summary of the problems facing Transnet, the solution involves massive private sector involvement. For that, they will want to control the assets that they will be required to manage.

As things stand in the current version of the Freight Logistics Roadmap, they are expected to invest directly into Transnet – for many, a likely deal breaker.