South Africa’s state-run transport and logistics company is in charge of a $23bn investment programme and has plans for continental expansion, but it’s been slow to splash the cash and now has been hit by allegations of corrupt deals
Transnet in a tangle Allegations of corruption sur face as the state-run company targets a continental expansion
In recent years Transnet has portrayed itself as the backbone of South Africa’s infrastructure development. Largely unfettered by the governance issues that have mired other stateowned companies, such as South African Airways and beleaguered power utility Eskom, the staterun transport company looked to be a model of competence until recent opposition claims about contracting improprieties. It is overseeing a R300bn ($23bn) series of investments designed to upgrade the country’s infrastructure and enable economic growth and job creation. The Market Demand Strategy is a seven-year investment strategy announced in 2012, its declared aim to expand rail, port and pipeline infrastructure to meet market demand for greater capacity. Five years into it, Siyabonga Gama, the company’s group chief executive officer (CEO), gives a progress report : “We have done quite well in terms of investments in the pipeline, on rail and also in the ports,” he tells The Africa Report. Transnet’s balance sheet is relatively strong. In its latest financial statement for the six months to September 2016, it had cash of R9.6bn ($743m) and had repaid
R17bn of borrowings, secured R16.9bn of committed facilities with financial institutions and raised R11.8bn without government guarantees. But its income statement reveals some weakness. In the six months to September, revenue increased just 1.2% to R32.6bn as rail volumes dropped. Signs of strain are there, and Transnet’s spending on infrastructure development has fallen sharply. In the September 2016 statement capital investment amounted to R9.4bn – a 41.4% decline year-on-year from the same period in 2015. The company invested just R2.3bn on the expansion of infrastructure and equipment, and R7.1bn to maintain capacity in its rail and ports divisions. It has spent just R133bn on the Market Demand Strategy since it was conceived five years ago.
DRAGGED INTO THE NET
To make matters worse, the company’s attempts to insulate itself from the broader malaise of poor governance, corruption and South Africa’s economic slump are starting to fall apart. As South Africa slid deeper into recession, it appears that the country’s economic and political problems may seriously impinge on Transnet’s ability to meet its investment goals. The Strategy was announced under former chief executive officer Brian Molefe, who is now at the very centre of ‘state capture’ revelations, a web of corruption uncovered by former public protector Thuli Madonsela that connects President Jacob Zuma with the Gupta family of businessmen. Among the projects Molefe announced was a R50bn order for more than 1,000 locomotives in deals with China North Rail and China South Rail (now CRRC), General Electric and Bombardier,
some of which fall squarely into the state capture quagmire. On 9 June the opposition party Economic Freedom Fighters (EFF) released leaked documents showing that Transnet lost R17bn in corrupt overpayments during the procurement of 1,064 locomotives. At a press conference, leader Julius Malema named finance minister (and former public enterprises minister) Malusi Gigaba and Molefe as among those involved. Until then, Transnet had prided itself on being profitable and able to raise funding itself without the backing of government guarantees. But investors are now changing their minds about the company. In May, Transnet’s R200m bond auction received just two bids totalling R40m. In the three auctions that have been held since the dismissal of respected finance minister Pravin Gordhan in March, which rocked investor confidence, Transnet has raised just R55m of an expected R600m. Finance minister Gigaba warned last month that the government’s planned expenditure may not be affordable if there is a further decline in gross domestic product and revenue, although he did not specify if this was at central government level or through its parastatals like Transnet. Yet, in the alternative universe that is state-owned entities, one would be hard pressed to see any of these remarkable developments acknowledged in any big way.
PLAYING IT DOWN
This, for example, is Transnet’s recent cursory response to the EFF’S claims of procurement irregularities: “Transnet has noted recent reports around the integrity of its procurement processes, particularly on its locomotive acquisition programme, which is the cornerstone of its infrastructure investment programme – the Market Demand Strategy. We are confident that our procurement processes have sufficient checks and balances to guarantee integrity. These include oversight at various governance levels.” The company’s own directors have nevertheless set up a special committee “to review the company’s processes” and will “pronounce once this process is concluded,” the statement says. Sifting through Trans net’ s financials and other public documents, there is very little information on the headwinds, and certainly no concern around the political storm. There is, however, some disquietude about general economic conditions and the effect of the recent commodities slump. The message is that Transnet’s infrastructure development goals, aimed at pulling up South Africa’s economy, remain on track, although there are clear signs that progress has slowed. Gama acknowledges the difficult trading conditions but remains optimistic about Transnet’s infrastructure development plans. “I think from a Transnet perspective in terms of South Africa’s wider investment and industrial is at ion goals, we have […] a countercyclical investment strategy that tries to lift the sovereign by [strengthening] the logistics backbone of the country,” says the CEO. These investments, he says, will stimulate economic growth, “and in fact, when we have depressed markets, it helps South Africa [avoid] a depression [and] continue to create some jobs, albeit not at the level that we wanted them to be created, and generally improve the standard of living.”
SHIFT FROM ROAD TO RAIL
Spending on rail accounts for about 70% of the company’s investment strategy, according to Gama, and Transnet has focused on “creating new railway lines, upgrading the existing branch network, and improving infrastructure”. The company is trying to shift commodity transport back from road to rail. It wants to enter into new markets “where there were a lot of commodities that were being handled by road,” but where transit was not really a big player, “especially containers and automotive”, Gama says. It was reported as recently as November that Transnet had set aside R20bn for acquisitions in new areas including freight forwarding and shipbroking and to buy assets such as liquid-bulk facilities and inland terminals. Gama said at the time that Transnet was even looking at India and the Middle East, although its focus would largely be on the African continent. Transnet is currently active in neighbouring countries including Swaziland, Mozambique, Zimbabwe, Botswana, Namibia, Swaziland, L e sotho and the Democratic Republic of Congo. The company is looking to enter several new markets soon. Gama says they will be countries “where we can have the possibility to invest in infrastructure, look at port concessions, look at rail upgrades as well as look at pipeline opportunities”. Nigeria, Kenya, Tanzania, Zambia, Senegal, Togo and Benin are countries the company is eyeing. In November Gama said as much as 25% of revenue could come from outside South Africa over the next five to six years. A few months down the line, this seems unlikely given current conditions.
Upgrades to the flagship port of Durban, including deepening berths, are a key part of Transnet’s Market Demand Strategy KEVIN SUTHERLAND/BLOOMBERG VIA GETTY IMAGES