subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now
A container terminal at Durban in KwaZulu-Natal. File photo: PAUL WEINBERG/GALLO IMAGES
A container terminal at Durban in KwaZulu-Natal. File photo: PAUL WEINBERG/GALLO IMAGES

SA needs the implementation of successful public-private partnerships at its ports urgently, as inefficiencies are strangling whole sectors of the economy and dampening private sector investment. Transnet also needs billions to upgrade core infrastructure, which it can access only by working in concert with the private sector.

To their credit, the government and Transnet laudably recognised this imperative and embarked on a world-class process to select a private sector partner for the management of Container Terminal Pier 2 at the Durban harbour. 

In 2024, after a rigorous tender process, a contract was awarded to our multinational company, International Container Terminal Services Inc (ICTSI), to run the Durban Container Terminal Pier 2. ICTSI is a specialist company that runs port operations across 32 ports in 19 countries. It operates in some of the world’s largest and most dynamic economies, including China, Brazil, Indonesia, the Philippines, Argentina and Australia as well in smaller, complex jurisdictions such as Madagascar and the Democratic Republic of Congo.

ICTSI won the bid, offering R11bn to upgrade the terminal — more than 20% more than the next bidder in the process. But the implementation of this decision is now on pause after it was delayed by a court case hinging on a minor technicality. Losing bidder Maersk is disingenuously arguing that ICTSI did not deserve to win due to the manner in which ICTSI calculated its solvency ratio. ICTSI used a perfectly acceptable calculation and disputes Maersk’s claims. But it is absurd that an entire tender is on hold over a single metric.

No serious financial analyst relies on a single metric to evaluate the financial strength of company. Transnet’s documentation did not specifically define the components of the prescribed solvency ratio equation. ICTSI used market capitalisation, a measure of how shareholders and the market value a company, to calculate the solvency ratio, which was also disclosed and explained in ICTSI’s bidding documents. Transnet’s auditors reviewed and accepted this measure during the bidding process, and it was accepted again on external review.

The same calculation can be used to calculate solvency under the SA Companies Act — showing that it is not an unusual way to calculate solvency but one that finds support in SA business law. But Maersk has now convinced the court that there is enough uncertainty regarding this singular metric that the whole contract should be paused and reviewed. This move was carefully designed to mislead. To a lay person in SA, this sounds like not only did ICTSI lie about its solvency, but that it did not pass the one and only qualifying criteria, and that Transnet’s processes were not up to scrutiny.

Nothing could be further from the truth. As any financial analyst, accountant or auditor would tell you, a solvency metric can only tell you so much. Looking only at such a narrow metric ignores the broader picture of a company’s finances. The very basic calculation of solvency, the metric Maersk is using to undermine the implementation of the partnership, is the equity-to-assets ratio.

Durban was once Africa’s best performing harbour, but serious and immediate action is needed for it to catch up to the other harbours on the continent that have since surpassed it.

Maersk asserts that the ratio can only ever be computed as the book value of equity divided by the value of assets; though the resulting number is just one indicator of a company’s ability to service its obligations. A financial analyst, accountant or auditor would then use this as a jumping off point to find further context within a business’ financial statements, management accounts and operational information.  

The above formula has obvious flaws. The book value of equity consists of issued share capital at book value, which will not reflect the true value those shares now hold to the investing public. This is especially true for an established and actively traded publicly listed company such as ICTSI. ICTSI’s issued share capital is $40m, whereas ICTSI’s current market capitalisation on the open market is close to $13.7bn.  

Using the Maersk logic, very few listed blue-chip companies in SA or globally would be seen as solvent, including banks and insurance companies that are regulated by strict solvency measures. Equity can also include retained earnings: profits a company holds over for various reasons instead of paying out to shareholders. But ICTSI has a policy of declaring dividends to shareholders and has declared growing dividends every year since 2003. ICTSI’s earnings before tax, interest and depreciation amounted to $1.32bn in the first nine months of its 2024/25 financial year. 

Using the book value of equity from the balance sheet does not give insight into a company’s ability to generate sufficient cash flows to service debt. A healthy operational model will mean a company may be generating adequate cash flow to cover debt payments, even in times of expansion where more debt is acquired.

In ICTSI’s view there are also other ways to calculate this ratio to address some of the shortcomings with using the basic formula. Using a formula with market capitalisation (in other words, the value of the company’s issued shares on the open market) gives a view of the company’s future earnings potential, which can indirectly signal its ability to meet long-term obligations. Investors’ perceptions, as reflected in market capitalisation, will indicate the confidence in the company’s ability to generate future cash flows, a critical component of long-term solvency. 

This is the formula that ICTSI used during the bidding process, which was transparently explained to Transnet. Transnet’s auditors accepted this — because it is a standard measure of solvency. The bulk of the tender, including the solvency measure, qualified ICTSI to take part in the bidding process.  

It benefits nobody to delay the private-public partnership at the Durban port on the basis of a single metric taken out of context. ICTSI’s accepted bid to be the private partner at the Durban port is meant to increase efficiency and transparency at the terminal and begin to restore SA’s competitiveness as a global trade partner.

ICTSI is excited about the opportunities in SA. Durban was once Africa’s best performing harbour, but serious and immediate action is needed for it to catch up to the other harbours on the continent that have since surpassed it. Every day that the contract is paused is a day of lost economic potential for SA. 

• Madsen is regional head for Europe, the Middle East & Africa for ICTSI.   

subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now

Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.