OPINION | Transnet risks being the next Eskom, and it’s running out of time to be saved | Fin24

Mesela Nhlapo.

The current Transnet leadership finds itself in a difficult position, facing problems largely not of their making. But they are running out of time to implement solutions and need to move fast. South Africa has seen this before with Eskom, writes Mesela Nhlapo.

Transnet’s annual results, which were announced last week, cannot hide the fact the South African rail industry is in trouble, with massive maintenance backlogs threatening the sustainability of the rail parastatal.

While Transnet reported a profit of R5 billion, up from a loss of R8 billion in the 2021 financial year, the results include a revaluation of the company’s Investment Property portfolio of R10 billion. If this accounting adjustment is removed, it would effectively mean Transnet declared a deep trading loss of approximately R5 billion in the 2022 financial year.

Transnet could meet its key debt covenants of cash interest cover and its gearing ratio due to a large increase in creditors of R3 billion at March 2022 and due to the revaluation of Property, Plant and Equipment up by R13.2 billion and Investment Properties up by R10 billion.

What the trading loss and the tight debt covenants mean is that Transnet is facing severe cash constraints now and into the foreseeable future.

ARIA is concerned about the massive cutbacks in essential maintenance by Transnet Freight Rail (TFR) over the last ten years. In 2012, TFR spent R3.4 billion in maintenance expenditure, in 2022 TFR spent R2.7 billion or R750 million less. To put this into perspective, over the same period the salary bill has increased by R6.1 billion to R13.6 billion and the workforce has decreased by approximately 3 800 people.

ARIA’s analysis shows that over the last decade there has been an accumulated backlog of maintenance expenditure of at least R27 billion. The nature of maintenance in infrastructure and operations is such that if you don’t spend a rand on maintenance today, that infrastructure degrades exponentially, to the point where that rand becomes R5 in a few years’ time.

A further analysis of TFR’s disclosed operational KPIs also indicate an infrastructure that is failing. The gross tons per kilometre metric for the General Freight Business (GFB) sector of TFR (measuring how effectively each locomotive is used) reduced each year from 2017 to 2021. That means that in 2021 TFR is moving 33% less tonnage with the same number of locomotives as it did in 2017. As there is a minimum of 1 500 locomotives allocated to the GFB sector in Transnet this translates to approximately 500 locomotives worth of inefficiency.

The tight cash position means that the maintenance backlog is unlikely to be addressed any time soon, further perpetuating the problem of not having the cash to pay for maintenance.

MultiRail

A decade ago, Transnet was running an internationally respected dynamic network planning system called MultiRail. This was inexplicably cancelled around 2010 and since then the network planning has been run manually on spreadsheets. Every time a train fails or is delayed the spreadsheets have to be manually updated. This results in suboptimal decisions, wastes time, opens the system up to manipulation and, most importantly, delays trains.

ARIA understands that there are now hundreds of active locomotives standing for 24 hours every day across the SA railway network. In addition to this, Transnet disclosed that it has 300 locomotives waiting for maintenance interventions.

In light of the above ARIA cannot see the justification to raise a further R44 billion in debt to buy more locomotives and wagons as has been budgeted for and set out in the Transnet Integrated Report.

I have some sympathy for the position that the current Transnet leadership finds itself in. These problems were largely not of their making. What concerns me now, however, is that we are running out of time to implement solutions and they need to move fast. South Africa has seen this before with Eskom.

ARIA’s solutions

ARIA’s proposals to improve the Transnet position are:

• Reintroduce a dynamic network planning system immediately and improve the efficiency of the trains across the network instead of buying more trains;
• Secure funding to reintroduce the 300 stabled locomotives into service as this is a small fraction of the cost to build new ones;
• Concession out the railway infrastructure of the heavily loss-making lines such as the Container Corridor to the private sector securing investment to address the backlog maintenance, to upgrade signalling and improve the efficiency such that the business case for private operators is strong;
• Implement the National Rail Policy and work with the government through the IRERC and private sector to introduce a third-party access framework which will result in a massive investment by the private sector into new trains (at no risk to Transnet) which will generate a material new income stream in access fees; and
• Request government to drop the fuel levy from the diesel price so that rail does not cross-subsidise road.

At the SA Heavy Haul Conference, Prof. Jan Havenga from Stellenbosch University presented that the cost of Transnet’s inability to meet the requirements of the SA Economy equates to R385 billion which is approximately 10% of national GDP costing tens of thousands of jobs. The National Rail Policy provides a credible blueprint for the future of our industry. The private sector is ready to respond as we have seen it respond to the countries power needs. 

Mesela Nhlapo is chief executive officer at the African Rail Industry Association. Views are her own.