Transnet: South Africa’s bigger problem than load-shedding – Alexander Parker

In the midst of South Africa’s well-documented energy crisis, a more pressing and intricate predicament remains largely overlooked: the unraveling of its logistics network. Alexander Parker delves into the staggering disarray plaguing Transnet, the state-owned rail and port operator, as chronic underinvestment, mismanagement, and corruption persist. Amidst mounting concerns about the economy and job losses in key sectors like mining, the need for swift political intervention looms larger than ever.

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South Africa Has a Bigger Problem Than Loadshedding: Alexander Parker

By Alexander Parker

 South Africa is famous for its tortured road to democracy, its world-beating rugby team, its wine and its cultural diversity — but in business and finance circles, the country’s inability to generate enough electricity is seen as its magnum opus. That would be a mistake, though, because the country has a more serious and knotty problem: the collapse of its logistics network.

Snowballing problems at Transnet, the state-owned passenger and freight rail, ports and fuel-pipeline operator, will be more harmful to South Africa and the region in the long-run than the energy crisis. Despite the shocking performance of Eskom, the state-owned power utility, which has left the country reeling from daily hours-long blackouts all year, fixing the railways is more urgent.

To be fair “loadshedding,” Eskom’s word for power cuts, has declined dramatically in the past month, but not because there has been any meaningful reform at Eskom itself. There hasn’t been. Instead, the improvement is due to a hurried repair to a damaged Eskom-owned power station that leaves it unable meet the government’s own emissions standards. It is also due to businesses and wealthier homeowners adapting to the crisis: There’s been a the rapid rollout of rooftop solar in private residences and businesses in response to the blackouts.

But the mass transport of bulk ore, coal and freight cannot be easily sidestepped by rail customers, and fixing it requires real reform and political will.

Transnet is in a truly shambolic state. Declining performance of the ports and rails has been a function of underinvestment and incompetent management for decades, compounded by rampant corruption, crime and gangsterism. The logistics operator has gone further off the rails since its “shareholder,” the Department of Public Enterprises, appointed an inexperienced chief executive officer and board in 2020.

According to a turnaround “roadmap” commissioned by Operation Vulindlela (“clear the path” in isiZulu), the fast-track reform program of the Presidency and the National Treasury, general freight tonnage at Transnet peaked in 1983, and is now operating at about 30% of that.

The only “workaround” for the shipping of ore, coal, containerized freight and vehicles to the ports is by truck. And so the number of heavy trucks registered in the country has risen 72% since 2007.

The collapse of freight rail in South Africa has hit commodities exporters hard. Mining accounts for 7.5% of South Africa’s gross domestic product and employs almost half a million, according to the Minerals Council, a body representing miners. The ruling African National Congress and labor unions in the mining sector have a long and intertwined history stretching back to before the apartheid era, so jobs in mining are politically very sensitive. (President Cyril Ramaphosa was the founding general secretary of the National Union of Mineworkers in the early 1980s.) Mines are highly exposed to any problems at Transnet, as the country’s rail monopoly ships their products.

Speaking in 2022, Roger Baxter, then-CEO of the Minerals Council, estimated that “without logistics constraints, mining could have added another 50,000 jobs and increased the tax take for 2021 by about 27 billion rand” ($1.4 billion) in 2021. He said the problems had cost the industry 50 billion rand that year alone. Business Day (where I am editor-in-chief) reported that Transnet’s underperformance cost South Africa’s largest iron producer, Kumba Iron Ore, 10 billion rand in earnings for the year to December 2022, contributed to a profit slump of 55% and led to the company deferring 2 billion rand of capital expenditure. In the past six weeks, mining companies Seriti Resources Holdings Ltd. and Glencore Plc have both announced they are seeking hundreds of redundancies in South Africa. Last week, Sibanye Stillwater Ltd. said it will enter talks with unions over possible restructuring at South African mines that could affect more than 4,000 jobs.

In South Africa, what hurts the mines hurts the Treasury. On Nov. 1, the finance minister will release a medium-term budget statement. He will likely announce a big undershoot on the February budget — by as much as 50 billion rand — and Transnet’s failings are a significant cause. The Treasury is right to worry. There’s 516 billion rand of maturing domestic and foreign loans over the next three years. “At the current run rate, it is likely to exceed 600 billion rand, or 8.5% of GDP, in 2023/2024,” the Financial Mail reported.

This has raised questions about the affordability of some social interventions, such as the Social Relief of Distress Grant, which began in Covid and it still distributed. Yet with youth unemployment hovering at almost 64%, there is little political appetite to scrap it.

All of this explains the sudden political interest in Transnet. The Operation Vulindlela turnaround plan requires the Treasury to take on about half of Transnet’s 130 billion-rand debt and to inject a further 47 billion rand for infrastructure renewal, a bitter pill for Finance Minister Enoch Godongwana, who has been trying to keep a lid on public finances. The details are not yet out and the plan has not been approved, but if accepted, the minister’s price will undoubtedly be tight conditionality and sweeping liberalization of access to the logistics network.

The roadmap is a good plan, outlining how the state-owned monopoly will open freight corridors to private operators, all managed by an independent regulator in the Department of Transport. But there are rocks on the track: The plan has to get through the cabinet, where many will rail against the “privatization” of freight rail; the roadmap’s timelines are in the realm of fantasy; and the state’s capacity to modernize and regulate a vast and complex logistics network is doubtful.

The problem for the ANC is that a rational and fast approach to fixing Transnet can’t be done in a timeframe that will save mining jobs before elections next year. However, this should not deter the government. If the ANC remains in power after 2024, inaction now will hurt them badly in the future more than loadshedding has done in 2023.

Transnet represents a bigger problem than anyone realized, but it should also be easier to fix than Eskom. That makes it the lower-hanging fruit. Yet it requires political will to make progress. With anti-capital sentiment strong in the cabinet and in the ANC, and with vested interests throughout Transnet, it’s not going to be straightforward.

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