Private rail operators question Transnet ‘profit’

Private rail operators have raised questions about the maintenance backlog at Transnet and the sustainability of the state-owned entity’s reported profit of R5 billion, up from a loss of R8 billion in 2021 financial year.

The 2022 profit figure relies on a revaluation of the company’s investment property portfolio of R10 billion. This is an accounting adjustment – not a cash flow item – that rescues Transnet from another probable loss (which is evident if the adjustment is ignored), according to an analysis by the African Rail Industry Association (Aria).

Transnet released its 2022 results in July, showing a nearly 2% increase in revenue to R68.5 billion, and a 20.5% increase in Ebitda (earnings before interest, taxation, depreciation and amortisation) to R23.4 billion. The group also reported a profit of R5 billion, reversing the R8.7 billion loss reported in 2021.

Aria says this enabled Transnet to meet its key debt covenants of cash interest cover and its gearing ratio. The group is required to remain below a 50% debt-to-equity ratio (2022 actual: 45.5%).

This was achieved by:

• A large increase in creditors of R3 billion at March 2022 (mainly due to accrual of expenditure), and
• The revaluation of Property, Plant and Equipment by R13.2 billion and investment properties by R10 billion.

Perhaps even more concerning is the maintenance backlog accumulating at Transnet – nearly R27 billion over the last 10 years, according to Aria.

Transnet questions Aria’s motives

Asked to respond to the analysis, Transnet said the figures presented by Aria are incorrect and misleading.

“We also question the motive behind their assertions. Aria represents mainly private sector suppliers and a handful of private rail operators who do not utilise the Transnet system,” the state-owned ports and logistics company says in a statement.

“Transnet is a member of the Southern African Railways Association (SARA), which is an association of railway companies in The Southern African Development Community. This association represents the interest of railway companies from Angola, Botswana, Democratic Republic of Congo, Swaziland, Mozambique, Namibia, South Africa, Tanzania, Zambia and Zimbabwe and facilitates trade in the region.”

Maintenance

Aria’s analysis shows that in 2012, Transnet spent R3.4 billion on maintenance, a figure that dropped to less than R1.2 billion in 2015. By 2022 it was up to R2.7 billion, but this is roughly half of what it should have spent if we take 2012 as the benchmark and inflate the figure for the time value of money. This is reflected in the following table.

By Aria’s analysis, Transnet’s maintenance backlog totals roughly R27 billion over 10 years.

This creates problems of a different kind, says Aria CEO Mesela Nhlapo.

“Planned maintenance deferred means that R1 not spent today results in an exponential deterioration in the state of infrastructure, which effectively means it will have to spend R5 in future to maintain a piece of infrastructure just because it was not addressed timeously.

“This also means that the infrastructure backlog since 2012 is much higher than R27 billion,” she adds.

“What is not disclosed in the Transnet annual result is the state of its infrastructure, or Track Quality Index (TQI), which would tell us the extent of maintenance backlogs.”

An analysis of Transnet’s annual results show gross tonnes per kilometre for the General Freight Business (GFB) declining each year from 2017 to 2021.

Aria says this means that in 2021 the Transnet Freight Rail (TFR) unit moved 33% less tonnage than it did with the same number of locomotives in 2017.

“There are a minimum of 1 500 locomotives allocated to the GFB sector in Transnet [and] this translates to approximately 500 locomotives worth of inefficiency,” says a report by Aria.

“The tight cash position means that the maintenance backlog is unlikely to be addressed anytime in the near future, further perpetuating the problem of not having the cash to pay for maintenance.”

It adds that hundreds of active locomotives are standing for 24 hours every day across the SA railway network. “In addition to this Transnet disclosed that it has 300 locomotives standing waiting for maintenance interventions,” it says.

“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.”

Among the proposed solutions to Transnet’s financial and operational difficulties, Aria recommends:

• Reintroducing a dynamic network planning system immediately and improving the efficiency of the trains across the network instead of buying more trains;
• Securing funding to reintroduce the 300 stabled locomotives into service, as this is much cheaper than building new ones;
• Concession out loss-making lines such as the Container Corridor to the private sector, using the proceeds to address backlogged maintenance;
• Implement the National Rail Policy and introduce the Third Party Access framework, which will result in a massive investment by the private sector into new trains (at no risk to Transnet) and generate a material new income stream in access fees; and
• Ask government to drop the fuel levy from the diesel price so that rail does not cross-subsidise road.

Announcing its 2022 results last month, Transnet outlined some of the difficulties it faced entering the new (2023) financial year. Floods in Kwazulu-Natal and theft and vandalism of infrastructure are among the key challenges, along with a less than optimum maintenance turnaround.

It seems to be taking the threat of theft and vandalism seriously: it has launched a pilot project with the army to better protect infrastructure, and is also partnering with customers to improve security on key corridors.