Public Enterprises reports on Transnet

…..article dated october 15 2020…..

Parliament hears latest on Transnet transformation 

Minister of Public Enterprises, Pravin Gordhan, was able to report on some discipline at Transnet during a recent parliamentary briefing, some progress regarding new appointments and a return to some degree of fiscal discipline.

He introduced new CEO, Ms Portia Derby, new board chairman Popo Molefe and a whole host of new divisional heads to MPs whose enthusiasm, he said, brought a refreshing change to this portion of his public enterprises portfolio.     The Minister also told members that a relatively new Transnet board, now in place for over year, was at last starting to tackle a number of the governance issues that had been plaguing the rail freight and port utility for years.

Catch up

Minister Gordhan said Transnet had also taken steps to undertake a recovery of the funds “lost in previous years”, at the same time admitting whilst a lot more still had to be done the SIU were now actively involving in helping to trace the paths of criminal behaviour and tracking down the culprits.

He referred specifically to the “pursuit of those who were responsible for various forms of corruption, those involved in the locomotive deal and the many other dubious transactions during the long period of state capture.”   Meanwhile, with Covid 19, it had been a difficult trading period for Transnet operations, he reported.

Hold up at ports

It was more than evident from the Public Enterprises briefing where Transnet’s problems currently lie, Minister Gordhan telling MPs that freight rail was the largest contributor to revenue at 51% followed by port terminals who contributed only 16%, yet three quarters of his report back surrounded problems at ports.

He said that during lockdown essential items had been allowed through to combat the immediate effects of the pandemic.   Secondly, there regulations had been eased to allow for bad weather conditions in the West Coast in Saldanha Bay and in Cape Town where he named the importance of speeding up fruit and citrus exports to reduce pressure on the agricultural sector.

SA Rail

On freight rail, he said that Transnet was bound to experience a drop in volumes as a result of mining decline and that this fact was coupled with a global drop in demand for commodities due to the impact of Covid 19 worldwide. The failure of the national fuel pipeline was an added disaster, the Minister said,  but added that it “was good to see that the Hawks were starting to make arrests of the saboteurs”.

On investigations, Transnet now has apparently a law firm appointed to deal with the offences it was reported by Ms Derby, the new CEO of Transnet, and the whole of Transnet had as their main concern the elimination of fruitless and wasteful expenditure.

“Much more work is needed to deal with corruption, but we cannot be so overburdened with controls to the extent that we are unable to move”, Portia Derby concluded.

The numbers

Nonkululeko Dlamini, Group Chief Financial Officer, talked of the Transnet financial performance during the six months of lockdown stating that the borrowing programme was of primary concern in order to ensure that operations were funded properly to ensure better returns.

Personnel costs remain the largest portion of overheads at the utility. These contributed to 57% of the total costs and Transnet currently had assets to the value of R35bn to run the business.

Dlamini said that continually rising electricity costs were one of the main operational concerns but with the utility now categorised as an essential service, Transnet had been able continued to operate the container terminal (assumed to be Durban) with a full staff compliment and also able to operate the auto sector on a close to normal basis and which represented 50% of its activity.

He told members of the public enterprises committee that petroleum volumes had obviously impacted on turnover during lockdown and that “the main revenue line had been operating at 60% but with an increase in activity as of July when it rose to 84%”. He told MPs that Transnet was “banking all the savings on operating costs and that the reduction in the bank interest rate had impacted positively in the management of costs.”

Bigger picture

Andrew Shaw, the new strategy appointment at Transnet, said that 2019 had seen most economies worldwide faring well but not so in the case of South Africa.  With the current GDP forecast at some 8%, South Africa is now faced with one of the worst recessionary environments since the 1930’s.   Export performance had declined as a consequence of the inability of supply chains to deliver into the global market, he noted.

Growth should slowly increase as the effects of the pandemic lessened, effects such as the dramatic impact of the reduction in usage in crude and liquid oil.   Prices in this sphere remained unstable, he said, and it seems this would continue.   He added that slow recovery would come through in the case of  thermal coal supplies where there had beena sustained use of thermal coal in South Africa’s traditional export markets of India, Pakistan and Indonesia.  Whilst the price might suffer from small reductions, demand would remain stable, he said.

Commodities

South Africa was very well positioned as a manganese exporter, Shaw said.  Prices had sustained themselves and projections going forward indicated that China’s demand will be flat, with stable prices. The pressure will be on Transnet to make sure it can meet demand in terms of its ability to export as much manganese as markets could absorb.

Refined fuels had shown sharp downturn in 2020, Shaw reported, “together  with a massive reduction of billions of litres in fuel moved.”  Whilst there had been a fairly strong upward trajectory for jet fuel it might take some time for the aviation market to recover from the industry paralysis experienced.  He noted in conclusion that Transnet may face a downturn in future years on refined fuel transit as the move from fossil fuels gained momentum.

Central Africa

Yolisa Kani, business development, Transnet, said that Transnet’s strategy now had special focus on the SADC market, but operational constraints still remained in the freight logistics area where participant countries had in general poor lead times with their deliveries, extreme delays being encountered.  The impact of this was severe for small trucking businesses.

Kani noted that with lack of technology to handling freight along trade routes, as well as the necessary tools to follow health guidelines, even top players had been hit hard with current conditions in cross border trade. Companies’ credit metrics were likely to deteriorate further, she said, triggering downgrades. Several freight and logistics investments have been placed on hold indefinitely because of national budget restraints, she concluded.

Copper theft

Sizakele Mzimela, head of freight rail, said that Transnet was dealing with a similar challenge faced by PRASA in that the significant increase of cable theft affected signalling systems.  This disrupted  freight traffic movements with goods failing to arrive on time in order to meet port schedules.   Currently Transnet experimenting with drones and helicopters in order to respond with speed when theft was reported from the  various “hotspots”.

Mzimela told parliamentarians that Transnet was now using diesel locomotives in many locations  instead of electric meaning that there was also a process underway of removing overhead cabling to allow the diesel locos to run.

“Transnet”, he said “is initiating work streams with PRASA to jointly find solutions along the lines of swopping diesel for electric and had also deployed additional security personnel in the guarding and protection of assets.”

“There is also a three-year plan”, Mzimela said, “to develop a form of technology to transfer operations from copper cabling to a type of cabling that is less prone to theft”.  This would also assist in safeguarding containers used by the automotive industry, he said.

Rising costs

Ms Mzimela said that one of the key focus areas for Transnet was to drive “a cost compression programme for commerce and industry”.  Most export customers, she said, are not having to compete for new markets so much as competing with other international exporters.

She said that Transnet had undertaken initiatives to reduce its fixed costs generally and was also looking to reduce its unit cost of the various operations. This was a problem area, she said, since local exports are ‘one directional’, making the Transnet price less competitive compared with other transit operators.

She reminded MPs that Transnet had no monopoly over the movement of goods and their market share currently was between 52% and 54%.  They were in competition with road transport, who could draw on additional volumes from many areas to reduce the unit cost of road movements.

Round up

Final issues discussed with MPs and the Public Enterprises Committee were Transnet’s emphasis on  partnerships with technical and vocational education; training colleges; local universities and research institutes in order to increase the engineering skills pool for the future.

On legal matters, it was stated by the Transnet legal team that Transnet had engaged with Sasol and Total to assess the possibility of settling the long-standing litigation matters between them and that Transnet was engaging with the Department of Transport regarding “the extraordinary fees being paid to the Railway Safety Regulator, which were outside the realm of reality”.

Economic Regulation of Transport Bill plans for future – ParlyReportSA

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