Gama says Transnet is strong enough to withstand a downgrade
Gama says Transnet is strong enough to withstand a downgrade

There is an intriguing discrepancy between Transnet CEO Siyabonga Gama’s view on SA’s prospects, and government’s rosier outlook.

Gama, speaking to the Financial Mail at the Africa CEO Forum in Geneva last month, believes times are going to be tougher than suggested by the 1.4% growth projected by national treasury for this year. It’ll be better than last year, he said — but not by much.

"For 2017, we are going to experience growth of 0.7%, because I know the fundamentals. We’re in that space, we know more things that will happen before they happen and much earlier than people experience them," said Gama.

His argument is that because Transnet is in the business of moving goods around the country, building infrastructure and working on the ground, it gains more acute insight into the real economy.

The good news is that Gama believes SA will have growth of 1.3% by 2018 and may hit the 3% mark by 2019 and after.

There’s a caveat: his projection was made before last week’s downgrade to junk status — a move that all economists expect will shave a few points off the country’s GDP.

The downgrade hurt Transnet more than most companies, as the ratings agencies then downgraded state companies automatically. However, Gama said that Transnet is strong enough to withstand any downgrade.

"The economy from 2019 will rise and it is an opportune time for everybody to make the kind of investments that are required for an economy that is going to become better."

Perhaps, but the immediate problem is that a downgrade makes it more expensive for Transnet to take out debt to finance its R273bn, seven-year building programme.

Considering that state companies are due to spend R443bn over the next three years (74% of it by Transnet and Eskom), the higher interest rates it will have to pay to lenders could curtail its lending appetite.

But Gama said people shouldn’t panic: "A lot of people begin to think that if the economy is down, it will always be like this. Economies are cyclical in nature."

Despite his low-growth projections, Gama took aim at business, saying the private sector is "myopic" and reluctant to embrace risk. "We are not taking adequate risk ... to take advantage of higher returns and opportunity when the economy rises."

However, this comes at a time when state-owned companies are likely to face increased pressure from the ANC to spend. This past weekend, Jeff Radebe said institutions such as Transnet could drive "radical economic transformation" by using their buying power.

But Gama suggested that any spending would take place only within strict parameters, as "the fundamentals within Transnet itself need to remain intact".

That means it plans to keep its debt-to-equity ratio below 60%, and its ratio of free cash flow to debt at about 12%-16%.

Still, the ANC’s talk of "radical economic transformation" has raised fears in some quarters of an increase in tenders being lavished on politically connected individuals.

Already, there have been questions over Transnet’s tenders. For one thing, former public protector Thuli Madonsela red-flagged Transnet contracts that may have benefited allies of the Gupta family.

Last year, investigative journalism centre amaBhungane also reported that Homix, a company with apparently just a letterbox and few staff, made millions on alleged kickbacks from companies doing business with Transnet. Telecoms operator Neotel was alleged to have paid Homix in the tens of millions to close Transnet deals worth R2bn.

Gama dismissed much of this as "perceptions and sentiment", without much basis.

In the standing committee on public accounts, parliamentarians also flagged "irregular spending" at Transnet.

Gama said there is no cause for concern about "irregular spending" in its accounts.

"There’s been a huge improvement and there is a residual of R20.6m that could be classified as irregular or fruitless and wasteful expenditure out of a spend of more than R48bn," he said.

However, parliament had also raised R229.8m in "irregular expenditure", a concern that Gama said has now disappeared.

"[This related to] foreign entities that did business with Transnet and they do not have tax certificates. That is because [the SA Revenue Service] does not issue tax certificates to these entities because their jurisdiction is outside of SA," he said.

But as the country enters a dangerous new era of political pressure on state entities with capital, Gama will need to keep a closer eye than ever on Transnet’s coffers.

 

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