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

The Africa Report - - CONTENTS - By Marcia Klein in Cape Town and Mark An­der­son in Durban

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.


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.


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.”


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

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