Transnet reports R5bn profit, reaches ‘the curvy part of the hockey stick’

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RYK VAN NIEKERK: Transnet announced financial results for its fiscal year to the end of March 2022 this afternoon. I just want to mention first that the financial statements are unqualified, which means that the Auditor-General thinks they are an accurate reflection of the group’s financial position. The Auditor-General qualified the company’s four previous set of financial statements due to, among other things, irregular expenditure related to state capture.

In the [2022] financial year Transnet’s turnover rose by nearly 2% to R69 billion. The group earned a profit of R5 billion following a loss of almost R9 billion in the previous financial year.

Joining me now is Portia Derby. She’s the chief executive of Transnet. Portia, thank you so much for your time. Congratulations on achieving an unqualified or a clean audit, and also for the operational turnaround at Transnet, where you actually made a decent profit of R5 billion. Have things now stabilised at Transnet?

PORTIA DERBY: Ryk, thank you very much and good afternoon to your listeners. I think, more than stabilisation, let’s say we think we are getting to the point where we’ve reached the bottom and we are on the turning side of the hockey stick. Yes, let me put it that way because, as we indicated in the presentation, we definitely still have a ways to go when it comes to revenue.

RYK VAN NIEKERK: You made a profit of R5 billion, and are you going to declare a dividend to government?

PORTIA DERBY: No, because, as we’ve been at great pains to say, that’s an accounting profit. We don’t have cash yet.

We’ve been at great pains, even talking to our own workers, and saying, look, it’s an improvement and at least it helps us deal with the gearing, but until we get cash and real hard cash, we are still in a bit of a tight spot going forward.

But as soon as the situation changes I think we will continue, because it is important – as a company owned by a government. And in any case, not only government, like all privately-owned companies shareholders are supposed to make something out of your existence.

RYK VAN NIEKERK: I think, to put it differently, you don’t require a bailout, however?

PORTIA DERBY: No, no, no. Ryk, I don’t [subscribe] to that notion of bailouts. In fact, I started reading a De Villiers report which came out in 1987, when the Nat [Nationalist]  government decided that they would stop funding rail and we looked at the losses that Transnet, their predecessor, SATS, had made at the time, which was like R1.5 billion then. And then you follow the trail – nobody’s ever recapitalised it. Remember, in 1985 we had a debt standstill in South Africa. So for me, the issue on government is that you cannot – and this is by and large the same challenge with Eskom – say to a company, ‘We set you free, go into the world’, and then we also give you responsibilities, without ensuring that you are properly capitalised. So you almost make a travesty of the idea that you’re supposed to be providing riding least-cost logistics.

If I may, Ryk, look at how the Germans are providing quite subtle support for their exports. From 2020 to 2029, the German government is giving Deutsche Bahn – and it’s a grant – €63 billion, which is supposed to refurbish and enhance their rail system. Now Deutsche Bahn is the same as us. It is a state-owned entity. It has some other shareholders in it. But fundamentally, if you have a company which is supposed to be driving German exports, that means with that much government support it is able to provide low-cost logistic services.

So I wouldn’t call it a bailout, but it’s how currently things stand.

The only conversation we have in the government is in as far as required by the National Rail White Paper, that paper clearly states that infrastructure should be funded by government.

So we are talking about funding infrastructure. But there’s no other money that we require from government.

RYK VAN NIEKERK: I like your notion that Transnet has reached the curvy part of the hockey stick. What are your current priorities now, because there are some scars from state capture? There’s a trust deficit, I think, from many South Africans toward Transnet. So what do you believe your core challenges will be and your core priorities in the new financial year?

PORTIA DERBY: I’ll answer you in two ways. One, we put in the presentation what we regard as [the risk] that we face, and then I’ll come to having raised these risks, what are the priorities that we think are absolutely crucial to help deal with the risks? This issue of liquidity – and liquidity is, when all is said and done, cash in the bank – is crucial. And that means that we have to drive revenue. We’ve done, we think, as much as we can possibly do really on the cost side. If you go beyond this, you start destroying the business, actually, if you drive [that]. So we think we are on top of the costs. We could get more savings, but they are marginal relative to the benefit we would get if we drove the growth of revenue.

We’ve also indicated the issue of fuel and electricity prices as a percentage of our total costs. In the next financial year both are around 7% of total costs, so they’re not inconsequential and not unsubstantial.

Security. We’ll repeat that forever, because the security’s impact [is] not only on TFR [Transnet Freight Rail] – and TFR is our biggest revenue earner, way over 50% as well as on the pipeline. As you heard, that pipeline is where we then carry the biggest environmental liability because of the hazardous impact, or the impact of petrol products and the risk to life and the environment.

And then lastly this issue of global warming, and the impact on infrastructure. We have had to incur close on R6 billion – about R5.5 billion – expenditure to fix the rail as well as the port in Durban as a result of the floods. That was not anticipated at all. It is crucial that we fix that.

So what are the three areas that we are focusing on in this financial year? Simply because of the size of TFR, is the issue of security, as we’ve indicated, working with government, but also asking some really important questions about how much of the security we should self-provide and how much should come from the private sector. We have to answer that question.

Secondly, we need additional funding from government to be able to fix the infrastructure to the level that we indicate. Now we’ve indicated that we are going to tier our rail system. We’ll have Tier A, Tier B, and Tier C. On all of that we’ll have to agree with the regulator. It reduces the amount of money that you have to spend, by and large, because on C you don’t spend the same amount as on A, but it locks in the expenditure that we must …. continue to have a real safety licence ……

And then lastly, we have to get additional traction power, which is additional locomotives. That’s an area that we’re pushing hard as we get into August; it is urgent that we find additional traction power. But as we ……we couldn’t go into the market to buy additional locos [locomotives] until we understood that on the legal process, having set aside the 1 064 [locomotive supply] contract, that we would be safe to start a new procurement process.

RYK VAN NIEKERK: Yes, the locomotives are a big challenge for Transnet, but you said earlier that you will release a tender for additional locomotives at the end of July. Are you still on track to do that?

PORTIA DERBY: No, we’re not going to make July. We are now looking at the middle of August. We finished all of the work that we needed to do – business cases, figuring out the type of procurement – because what we then have to do is a short-term procurement exercise that deals with the immediate crisis that we have, and then a longer-term exercise which would enable us to ensure that we, first of all, [can] do the thing that we’ve always wanted, [which] was standardise our fleet, reduce the number of loco types, which would then help us reduce the cost of inventory. And this time in the procurement we are going to be asking a lot more for common parts between all of the locomotives, so they can be easier to maintain and service as well. So that is ready. We should finish all of the governance by late/middle August.

RYK VAN NIEKERK: One of the key concerns about Transnet currently is efficiencies. We have a coal sector as well as an iron-ore sector, which are totally dependent on Transnet to move their product. The more Transnet can move, the more they can export, and the more they can export the more money they make, and the more tax they pay. There’s a big knock-on effect of increased exports of these commodities. The key here is for Transnet to be able to move more product. What are your strategies to try and improve on those efficiencies?

PORTIA DERBY: Well, unfortunately, Ryk, until we get the additional traction power, we are putting as much money as we possibly can into maintenance of track so that we can remove speed restrictions. Transnet Engineering has done quite a lot of work [in] reverse engineering. So for example [for] traction motors, we were dependent, we were waiting for the Chinese to supply us and they refused to give us the parts. But we’ve reverse-engineered that. But we can’t reverse-engineer every part in the loco because, first of all, it’s expensive, and it’s time-consuming. So the procurement of spares and parts is a big priority, as well as the locos. Until we get the traction power we’ll really struggle.

What we did try do last year is [that] the mining sector said to us they could procure for us, on our behalf, to circumvent the Chinese who were clear that they weren’t supplying us. And so we said, fine, we made arrangements and they tried, and the Chinese quickly got to hear that they were procuring for us and they blocked it.

So it’s really a difficult situation, and that’s why getting to a point where our legal strategy lines up with the procurements is absolutely crucial.

RYK VAN NIEKERK: So when do you think you will be able to get those locomotives and get efficiencies improving?

PORTIA DERBY: As I say, every day we are working, we’re doing all kinds of things. Like on the North-East corridor yesterday we ran for the first time a full [train] of 130 wagons of chrome, I think it was. So we are doing a lot of these things, but frankly until we get additional locos – on the additional locos, remember, the original tender was for 1 064 locos, and we got only 587 or so. So that gap is a gap that still continues to exist.

We will drive the revenue ….. we have got to get to a point where we’ve got stronger revenues than is currently the case. Third-party access means bringing in the private sector to operate some of the corridors that we think they might be able to operate more efficiently than we [can].

RYK VAN NIEKERK: Portia, we’ll have to leave it there. Thank you. That was Portia Derby, the chief executive of Transnet.

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