Derby punts Transnet dividend payouts and zero-based budgeting

More than just a turnaround plan, Transnet’s new boss Portia Derby is charting a dramatic new direction for the state-owned freight logistics and ports giant that includes paying dividends to government and implementing zero-based budgeting.

Preliminary details on the latest changes planned for Transnet, following its entanglement in state capture, were revealed by the group’s new executive leadership during Transnet’s full-year financial results presentation on Friday.

The overhaul – which includes a new group structure, recently announced lifestyle audits for executives and the board, and moves to lure significant private sector investment into SA’s rail and port network – has the backing of Public Enterprises Minister Pravin Gordhan.

Stressing that Transnet is profit-making and continues to meet its borrowing obligations without government guarantees, Derby declared: “Soon we will be paying out dividends to our shareholder – government.”

Transnet delivered a R3.9 billion net profit for its financial year to March 31, 2020. However, this was significantly down (34.9%) on the prior financial year due to South Africa going back into recession last year. The group reported a 1.3% increase in revenue to R75.1 billion, with cash generated from operations increasing by 2.1% to R35.9 billion.

Read: Transnet posts revenue increase, profit

Speaking during the webcast presentation, Gordhan said: “As the state, we are looking forward to Transnet paying dividends as it begins to move to better [financial] health.”

From a corporate governance side, the minister also cited the group’s recent implementation of lifestyle audits for executives and its board.

“The lifestyle audit at Transnet is precedent-setting as far as state-owned enterprises [SOEs] are concerned,” said Gordhan.

“The changes at Transnet are also aligned with the president’s economic recovery plan,” he added.

“Within a year, we are expecting to see a significant difference at Transnet, particularly around the cost of doing business in SA …

“Zero-based budgeting is another area where Transnet is leading.”

Gordhan’s comments around zero-based budgeting within SOEs represents further backing of the concept, which has been intensely pushed for by Finance Minister Tito Mboweni within government in recent months to try to bring SA’s debt under control.

The economic fallout from the global Covid-19 pandemic and lockdowns has also taken a major toll on government revenue and on the revenues of SOEs like Transnet and Airports Company SA.

Read:

Mboweni: Close the hippo’s mouth or face Argentina-like debt crisis

Zero-based budgeting: SOEs in the firing line

Mboweni is set to reveal more detail on National Treasury’s zero-based budgeting plans and government’s latest financial position during the medium-term budget speech on Wednesday (October 28).

Zero-based budgeting is when all spending in budgets must be justified for each new period; the process starts from a “zero base”, with every function within an organisation re-evaluated based on needs and costs.

“Zero-based budgeting is tough,” said Derby.

“For Transnet, it’s going to take a few years to get to closure around this … Every single aspect of spend needs to be evaluated.”

She noted: “Transnet [has] never done this as far as I am aware … I can’t say currently how much savings we are going to make, but I am also wary of saying it will be cost cuts especially around infrastructure [investment].”

Nonkululeko Dlamini, Transnet’s new CFO, said more detail will be revealed by February next year when the group’s new corporate plan is expected to be finalised and released.

Procurement renegotiations

She said procurement renegotiations are part of the plan, with the upshot being price improvements or cost cuts.

Meanwhile, Derby has sent the strongest signal yet since taking over as CEO in February that Transnet is looking also overhaul its concession model to unlock greater private sector participation and investment in SA’s ports and rail freight infrastructure.

She said Transnet is rethinking its concession model in order to ‘crowd-in’ more private sector investment, in line with government’s infrastructure-focused economic recovery plan.

Read: Infrastructure a key part of economic recovery plan – Ramaphosa

“We aim to bring in private sector operators on our [rail] branch lines and are looking at multi-users,” she noted. “There are ‘back of port’ opportunities for the private sector within our port terminals too,” she added.

Questioned by Moneyweb for more detail on the plan during the presentation on Friday, Derby said Transnet’s new corporate strategy is still being finalised and needs to go to the board for approval regarding opportunities for the private sector.

“We definitely intend bringing in private sector participation on our 8 000km of branch [rail freight] lines,” she said. “There are economic opportunities on the branch lines and this is a priority for us.”

President presents SA’s economic recovery plan – watch the archived livestream and read the president’s full speech here.