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By Ciaran Ryan

Moneyweb: Journalist & Host of Moneyweb Crypto Podcast

Here’s what needs to happen after the night of long knives at Transnet

Transnet 'going off the rails'? Ditch the cadres, rehire experts squeezed out of the company, and get the private sector in.

The exit of Transnet CEO Portia Derby and Transnet Freight Rail CEO Sizakele Mzimela is a signal that even its shareholder, the government, is unable to stomach the port and rail operator’s mortal threat to national wellbeing.

Group CFO Nonkululeko Dlamini packed her things and left in September, on her way to a new position as CFO at Telkom, in which the state is a major shareholder.

ALSO READ: Transnet CEO Portia Derby and CFO Nonkululeko Dlamini resign

Transnet: Inability to get product to port to impact on GDP

It is reckoned that Transnet’s inability to get product to port will lop 5% off GDP in 2023, on top of the 10% deduction from national growth last year.

The first inkling of mutiny from customers came late last year when Minerals Council SA called for heads to roll at Transnet, as SA squandered close to R400 billion due to inefficiencies that handicapped commodity producers in the midst of unprecedented demand.

ALSO READ: Transnet’s radical board shake-up aimed at fixing rail and ports

R5bn profit turned into R5.7bn loss

The raw numbers are disconcerting. A R5 billion profit in 2022 was turned into a R5.7 billion loss in 2023. Over the last three years, the net cumulative losses are R9.4 billion, and R461 million over the last five years.

That’s not accounting for a maintenance backlog estimated by the African Rail Industry Association (Aria) at around R27 billion over the decade to 2022.

This cannot go on without continuous backstopping by National Treasury (in other words, taxpayers) and it’s now fairly clear that the Medium Term Budget coming up in November will detail just how serious the country’s state-owned company problem is.

It’s unlikely Finance Minister Enoch Godongwana will proclaim the national democratic revolution and its cadre deployment policy a failure, but we don’t need him to tell us that.

That same policy, superintended for much of the time by Public Enterprises Minister Pravin Gordhan, squandered R60 billion in bailouts for SAA, then chaired by the feckless Dudu Myeni.

Last week’s events at Transnet are evidence that commercial realities eventually expose the grime of ineptitude.

ALSO READ: Gordhan ‘confident’ in Transnet board amid calls for change in leadership

Matter of national shame

It’s wrong to pin the blame for all this on Portia Derby and her team, as they inherited a porridge of a business from generations of predecessors.

Yet it remains a matter of national shame that SA’s general freight volumes have now dropped to about 50 million tons a year, a level last seen in World War II. In contrast, India’s freight volumes exploded 370% over the last 20 years.

The 2023 Transnet annual report shows it met just a quarter of its key performance indicators, something that prompted Gordhan to appoint nine new board members in July, with Minerals Council vice-president Andile Sangqu assuming the post of Transnet chair.

Transnet crisis committee

The first public signs of disquiet came in December last year when a leaked letter from the Minerals Council, addressed to then Transnet chair Popo Molefe, called for the removal of Derby and Mzimela.

Out of this came the National Logistics Crisis Committee (NLCC) set up by President Cyril Ramaphosa with Business for South Africa to address key bottlenecks and inefficiencies.

In September this year, it was the turn of the Durban Chamber of Commerce and Industry to call for the removal of top management at Transnet.

“They have proven time and time again they are incompetent. Transnet requires an executive team that is suitable, accountable, transparent,” wrote chamber CEO Palesa Phili in a letter to Gordhan.

“Businesses are collapsing and losing revenue daily due to the port challenges.”

According to Professor Jan Havenga, Stellenbosch University professor of logistics, the NLCC process worked well in identifying the critical problem areas, but faced pushback from within Transnet from some executives concerned at outside interference on their turf.

Havenga says he sensed the “same hesitancy” to cooperate from those who have now resigned.

“That made things difficult. Minister Gordhan appointed a highly competent board in July, under the leadership of Andile Sangqu as chair. He also issued them with clear instructions on 1 September to ‘test’ management and produce a turnaround plan. I’m quite sure that subsequent internal events made it quite clear that these people cannot remain. Furthermore, the people appointed to act in their positions are highly competent individuals.

“We need to give Russel Baatjies [TFR’s newly appointed acting CEO] our full support. He’s an accomplished individual with a great track record. Government often upset me, but in this case, I celebrate the fact that President Ramaphosa and Minister Gordhan are taking this seriously. I’m hopeful.”

ALSO READ: Business’s fraying patience with Transnet

Time to break it up

In July it was announced that Philippines-based International Container Terminal Services (ICTS) had been chosen as the preferred bidder for a 25-year concession to run the Durban Container Terminal, which handles about half of SA’s total port traffic.

It’s no small problem it has to solve. According to Unctad (United Nations Conference on Trade and Development), the average waiting time for dry bulk carriers in SA was 146 hours in the first half of 2022, against 18 hours in France and 20 hours in Indonesia.

The solution for both ports and rail is more competition, according to industry observers.

Investment, concessions, unbundling

“As a country we need huge investment into the national track infrastructure and quickly, otherwise we’re not going to see efficiencies in our network or efficiencies in our train operations that are going to result in sustainable rail operations in South Africa into the future,” says Mesela Kope-Nhlapo, CEO of Aria, which represents a range of private rail equipment manufacturers and operators.

“The answer lies in multiple private sector investment[s] through concessions on the infrastructure.

“Private third-party access to, and participation in, the freight rail network’s performance is crucial to South Africa’s economy and the continued growth of our industry.”

Andrew Pike, head of ports, transport and logistics at Bowmans Law, agrees that unbundling of some of the different Transnet business units is clearly the way to go.

“New management comes in without changing anything else is like rearranging the chairs on the Titanic. Portia was defeated because the job was just too big for her. Although these businesses are run as separate divisions, there is still a top-down command and control approach.

“Each unit needs to be cut loose and given a measure of autonomy to manage themselves in the best possible way,” says Pike.

“Maybe what’s needed is partial privatisation in one division, though this may not be suitable in another. But unless we get private sector expertise and capital in, we are going to see a continuation of the same problems we have witnessed over the last decade or more.”

Transnet operates six corridors, including the ore line, Cape Corridor, North Corridor and Central Corridor, each of which could be concessioned to private operators. It also operates the key SA ports: Cape Town, Durban, Ngqura, Port Elizabeth, Richards Bay and Saldanha.

No time to waste

“The fall-off in rail through Richards Bay Coal Terminal is a total disaster in the middle of a commodities boom,” says Pike.

“The piecemeal approach concessioning is not the most efficient way of doing it. Why aren’t they privatising all key corridors in one go? It takes a long time to get a concession from Request for Proposal to concession award, and we frankly don’t have time to wait to see how the first one works out before we start on the second.”

In January, Transnet called for interested parties to bid for a 20-year operating lease with TFR for the operation and maintenance of the 670km Container Corridor between Gauteng and Durban. According to those close to the process, the response has been underwhelming, in part due to the fact that the lease operator will have to invest about R5 billion in facilities upgrades and take over TFR’s staff of about 3 500.

Transnet will have to move far more aggressively, with better terms for concessionaires, if Gordhan’s proposed turnaround plan is going to work.

This article is republished from Moneyweb under a Creative Commons licence. Read the original article.