JASON SWARTZ: What will MTBPS tell us about Operation Vulindlela?

With the government of national unity’s (GNU’s) first medium-term budget policy statement (MTBPS) coming up on Wednesday, questions continue to be raised about the funding requirements of key state-owned enterprises (SOEs) as economic levers for the fiscus. Following its ferocious decline over the last decade, Transnet remains chief among these.

Transnet’s government guarantee facility of R47bn is due to run out in 2025. Whether or not the Treasury announces another capital injection either in the MTBPS or in next year’s budget is a highly contentious debate. But while speculation builds around this, it remains vitally important that Transnet finds a funding solution soon that relieves stress on its balance sheet and ultimately supports its strategy to improve rolling stock, secure the safety of the rail network and sustain operations.

Creating a competitive and efficient freight logistics system is an important concern of Operation Vulindlela, which, after being established in October 2020, has made a name for itself as a delivery unit that is well positioned to accelerate the implementation of much-needed reforms such as these in SA. Previous attempts at implementing reform have produced mixed outcomes at best, and as a result we have had to live through an extended period of acutely constrained growth.

With that in mind, a natural question is why this time would be any different, especially in the case of Transnet as a critical economic lever in most urgent need of reform. And, is Operation Vulindlela set to become the saviour to lift us out of the doldrums of the woeful economic growth we’ve experienced over the past decade?

Previous attempts at reform have either lacked government buy-in, collided with state capture or had severe co-ordination challenges, resulting in complex plans and scope creep. This time around, Operation Vulindlela was set up directly under the presidency and so is driven by President Cyril Ramaphosa’s office in conjunction with the Treasury. This means when a problem exists concerning a necessary reform intervention, it can quickly be escalated.

As an example, the president provided strong political cover for the recently signed Energy Regulation Act (ERA), which was signed into law in August. This bill is critical in its role to transform the energy market into a more competitive entity.

The second key difference is that Operation Vulindlela is less aspirational in the breadth of reform, rather focusing only on a few key supply-side interventions to drive higher growth. These objectives are to stabilise the supply of electricity, create a competitive and efficient freight logistics system, reduce the cost and improve the quality of digital communication, ensure a stable, high-quality supply of water and reform the visa regime to facilitate skilled immigration and support tourism.

We are also seeing stronger collaboration between the delivery unit and various stakeholders, such as ministers, departments and entities that are collectively taking ownership to drive reforms. Within the context of the GNU, collaboration should naturally be a less challenging endeavour and allow for better effects from the decision to implementation.

However, the second question is more difficult to answer. Will the planned interventions from Operation Vulindlela lift SA’s long-term growth rate from the 1%-1.5% range to the 2%-3% range? While we do think that is very possible, we will need to continue to see reform momentum in certain key areas to achieve the desired growth.

One of these key areas is undoubtedly logistics. As a pressing concern for Operation Vulindlela, a National Logistics Crisis Committee was set up to implement a recovery plan at Transnet. This included establishing a freight logistics roadmap, which aims to address the serious challenges of a derelict rail system. The payload for rail freight transportation has plummeted from its highs 10 years ago, and while it has stabilised we’ve seen limited improvement despite the operational turnaround plan.

Remarkably, while Transnet has sufficient locomotives, the state of the railway remains poor, and thus speed limits have had to be reduced due to signal challenges, theft and vandalism, which has severely affected payload and also led to derailments in some instances.

Admittedly, policy reform progress in logistics has been too slow. An important intervention is enabling open access to the freight logistics network and introducing private sector participation in container terminals. Additional hurdles include finalising segmentation between the infrastructure and operations entities, as well as repricing the proposed tariff for the private sector, as the current unattractive tariff incorporates the sunk cost of Transnet’s unsustainable debt burden.

Now that the first phase of Operation Vulindlela — focusing largely on regulatory interventions — is complete, the next phase needs to embrace private participation and investment as a prime concern. SA’s gross fixed capital formation has been structurally trending lower for decades, while private investment spending is significantly lower than its peak in 2008/2009, and current private sector capital expenditure intentions are also at low levels.

Some policy work has begun though, for example the private sector partnership (PSP) framework, approved by the cabinet in 2023, which provides a model to enable effective private-sector investment and participation in the SA rail sector. However, the government needs to do more to incentivise and enable corporates to confidently increase private investment, specifically in infrastructure.

A durable GNU is strategically important to Operation Vulindlela being effective. Currently there is broad alignment in both the ANC and DA that the implementation of structural reforms will support economic recovery.

Another challenge that needs to be avoided is hollowing out any skills in the unit itself. Recently Nomvuyo Guma, the co-head of Operation Vulindlela and chief director for microeconomic policy at the Treasury, left the unit. Rudi Dicks, who currently heads up the project management office of the presidency and drives Operation Vulindlela, needs to be retained for the foreseeable future to ensure continuity, bulking up capacity and technical expertise, whether internally or from external advisory services.

Fortunately, it appears that Operation Vulindlela is drawing on outside expertise from the private sector to provide support to fast-track implementation of reforms — a positive sign. The ability to identify and plan policy, drive execution and track performance is non-negotiable for a reform implementation team which, if successful, could save SA from drifting into economic stagnation.

MTBPS developments concerning Transnet will be an important bellwether of how private and public sector collaboration drives this success. While Operational Vulindlela continues to boldly push ahead with effectively implementing growth enhancing reforms, it remains to be seen if the Treasury maintains its commitment to a tough-love approach.

Failing to do so would not support Transnet’s ability to turn around and would be a huge disappointment given the spirit of private-public stakeholder partnerships as a critical component in driving Operation Vulindlela forward.

• Swartz is portfolio manager at Old Mutual Investment Group.