Pressure builds on Treasury to bail out Transnet
Futuregrowth says government guarantees will deepen the SOE’s debt woes in the long term
Futuregrowth Asset Management, one of SA’s biggest institutional bond investors, says taxpayers taking over Transnet debt or a capital injection are the most logical ways to free the company from its R130bn debt pile, which incurs more than R1bn a month in interest payments.
Pressure is building on the Treasury to bail out the company, whose sprawling logistics infrastructure spanning railway lines, ports and terminals makes it a systemic risk to the ailing economy. Ratings agency Fitch on Friday said it expects Pretoria to give Transnet R50bn over the next two fiscal years in either capital injection or a debt transfer.
The money manager, which has about R200bn in fixed-income assets, told Business Day that government guarantees will not solve Transnet’s financial and operational challenges and might make its turnaround blueprint unfeasible.
“The proposed guarantee will require Transnet to take on additional debt, placing further pressure on its debt service costs, which now exceed R1bn per month. In our view, a debt takeover or a capital injection is needed to reduce Transnet’s gearing, which is unsustainable given its current operations and cash flows, and will reduce debt service costs,” Lindani Vezi, investment analyst at Futuregrowth said.
“This will enable Transnet to focus on its turnaround strategy on a more sustainable balance sheet. Over and above the capital injection, we need to see robust oversight to ensure that we do not see a repeat of the actions that got Transnet here in the first place.”
Transnet’s financial and operational problems have put finance minister Enoch Godongwana in a difficult position because bailing it out would be at odds with his fiscal consolidation agenda and at the same time would jack up the public debt burden. On the other hand, letting the parastatal slide further would have negative consequences for the economy as it would eat into tax revenue from Transnet’s customers and undermine the competitiveness and growth potential of the country.
One of the main features of Transnet’s turnaround plan outlined three months ago is for its biggest division, Transnet Freight Rail (TFR), to ramp up volumes to 170-million tonnes in 2023/24 and to 193-million in 2024/25.
The success of the plan is anchored on possible shareholder support. Transnet, which recently reported a R1.6bn loss in the six months to end-September 2023, has asked the government for a R47bn equity injection or loan and for taxpayers to take over R61bn of its debt.
Transnet’s acting management is under pressure to effect a quick turnaround of SA’s failing port and rail network after the Treasury in November yielded to pressure for a bailout, providing a R47bn guarantee that will make it easier for Transnet to borrow and go to the market for capital.
Vezi said that while the guarantee announced two months ago may provide Transnet with the ability to access the debt capital market, which has seen reduced appetite for state-owned enterprises (SOEs) largely due to their financial and operational challenges, it will only deepen the entity’s financial woes in the long term.
“We feel it is imperative for government and investors to learn from the case of Eskom, where it was allowed to continue to raise funding under the guarantee to levels that were clearly unsustainable and which has resulted in ongoing demands on the fiscus,” Vesi said.
The financial and operational hardships of Transnet have affected the economy, hurting both exporters and importers as some of the country’s key ports face a congestion crisis.
Mining companies, particularly coal miners, have borne the brunt of the freight and rail company’s ineptitude.
Coal mining bosses, through the Richards Bay Coal Terminal (RBCT) have stepped in to assist Transnet by providing financial assistance to procure locomotive spare parts, namely batteries and compressors.
The lack of parts has hamstrung the performance of the rail, ports and pipelines operator over the past few years, costing the economy billions of rand and thousands of jobs.
The spares are anticipated to arrive in the first half of 2024. Transnet is expected to reimburse the industry through a mechanism agreed on by the parties.
RBCT is owned by more than 13 coal mining houses, including subsidiaries of Glencore, South32, Sasol, Seriti, African Rainbow Minerals Coal and Exxaro Resources. It was established in 1976 with an original annual capacity of 12-million tonnes and has expanded into an advanced 24-hour operation with a design capacity of more than 70-million tonnes a year.
Jason Tuvey, deputy chief emerging-markets economist at Capital Economics, said Godongwana is keen to avoid a repeat of the situation at Eskom, which was provided with numerous cash injections from the government without any noticeable improvement in its operations and financial position.
“Of course, Transnet’s financial troubles are on a smaller scale to those at Eskom, whose debts have been taken on to the sovereign balance sheet. Transnet’s debt amounts to R130bn, compared with Eskom’s debt pile of R424bn,” Tuvey said.
“Even so, Transnet’s importance to the wider economy means that officials may feel that they have little option but to step in. Providing financial support to Transnet and/or taking on a portion of its debt at the same time that fiscal policy is likely to become less restrictive ahead of this year’s election will only make the job of placing SA’s public finances on a sustainable footing even harder.”
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