Transnet ratchets up a comprehensive loss of R18.4bn

Transnet received a qualified audit report for the financial year ended March 31, 2020.

Finance costs are R11.3 billion (2018: R11.6 billion), irregular expenditure is R10 billion (2018: R18.5 billion), loss on ‘revaluations’ is R31.1 billion (2018: R26 billion), and the comprehensive loss for the year is R18.4 billion (2019: R12 billion).

The spiralling comprehensive loss, which knocked reserves down from R136 billion in 2019 to R117.6 billion, should be a major concern. It puts the profit for the year of R3.9 billion (2019: R6 billion) into perspective.

A new board has been appointed, and will remain committed to fixing the basics over the next two years. However, if the new board doesn’t manage to put an immediate stop to sabotage, theft, and irregular expenditure, a back-of-a-matchbox calculation indicates that the reserves could be wiped out in seven years.

Revenue

Revenue increased to R72.4 billion (2019: R71.5 billion), and arises mainly from rail freight, engineering, ports, pipelines (petroleum products and gas), and lease income.

The Passenger Rail Agency of South Africa (Prasa), a major debtor which was placed under administration on December 9, 2019, had a history of late and non-payment. As a result, R411.9 million (2019: nil) was not recognised in accordance with IFRS 15 (revenue from contracts with customers).

Loss on revaluations reserves of R31.1 billion

The loss on revaluations reserves includes a loss on the revaluation of port facilities of R16.6 billion (2018: R3.6 billion) and a loss on the revaluation of rail infrastructure of R14.9 billion (2018: R23.2 billion). The notes to the annual financial statements refer to this as a ‘devaluation’, but provide no explanation for the devaluation. A ‘tax effect’ of R8.7 billon has been calculated on the revalued items. Does this include the tax effect of items scrapped or stolen?

Recently-appointed group CEO Portia Derby acknowledges the sabotage that has occurred in her review: “Further, the systemic neglect and sabotage of key infrastructure assets remains a significant area of concern for the business.…”

It is surprising that the loss due to sabotage, theft and destruction has not been disclosed in the annual financial statements.

What was the cost of sabotage, theft, and wanton destruction railway lines and carriages? What percentage of assets were sabotaged and stolen? Is the sabotage and theft accounted for in the “loss on revaluation?” If so, is this not a misnomer?

Read: Derby punts Transnet dividend payouts and zero-based budgeting

Fruitless, wasteful and irregular expenditure

The total amount of irregular expenditure as at March 31 is R114.3 billion (2019: R104.4 billion).

The major portion of reported irregular expenditure relates to contracts that were entered into in prior years.

The procurement control environment has been improved and it is anticipated that there will be no new incidences of non-compliance.

Fruitless and wasteful expenditure, which is mainly due to poor contract management, cable theft and general theft, amounted to R108 million (2019: R484 million).

External auditors SNG (SizweNtsalubaGobodo) Grant Thornton Inc issued a qualified audit report on the basis of Transnet not having adequate systems in place to identify and account for all irregular expenses. The auditors were unable to determine the full extent of the understatement of irregular expenditure for the prior year.

Borrowings and trade payables

R million	2020	2019
Long-term borrowings	116.5	115.2
Short-term borrowings	16.8	12.5
Total borrowings	133.3	127.7
Trade payables	19.1	19.5
	152.4	147.2

Cash flow

Transnet had a positive cash flow of R100 million at the end of the financial year, increasing the total cash and cash equivalents to R4.3 billion (2019: R4.2 billion)

The borrowings raised of R11.4 billion in 2020 excludes deferred interest of R453 million (2019: R702 million), and for the prior year also excludes the IFRS 16 lease liability transitional adjustment of R777 million.

Group executive committee and director emoluments

R’000	Salary	Other	2020	2019
MM Buthelezi				17.2
EAN Sishi	4.5	3.2	7.7	5.0
M Mahomedy	6.8	5.4	12.2	4.5
R Nair				13.4
Other*	11.3	8.6	19.9	40.1
Sub-total	57.3	4.8	62.1	33.3
Total	68.6	13.4	82.0	73.4
Number of executives			21	21

* Includes retirement benefit contributions, other contributions and other payments.

External audit report

Key audit issues included the revaluation of infrastructure and operating assets, irregular expenditure and fruitless and wasteful expenditure, procurement and contract management, consequence management, and internal control deficiencies.

The auditors reported a reportable irregularity under the Accounting Professions Act to the Independent regulatory Board for Auditors (Irba). Transnet had not put in place a Risk Management Compliance Framework, approved by the board, and submitted to the JSE.

In Transnet’s attempt to show a reformed image, and window-gloss its performance, has it not transgressed the line of openness and transparency?

Optimistic expectations cannot wipe out real losses and continuing sabotage, theft and destruction of railway carriages and rails.