R47 billion guarantee for Transnet not a silver bullet

Treasury announced an R47 billion guarantee facility for Transnet in support of its recovery plan and to alleviate immediate financial pressures.

The R47 billion guarantee facility Transnet received from the National Treasury is not a silver bullet. It will help to ease the pressure, but it is not the jab in the arm that Transnet needs and it also does not improve the company’s long-term financial viability.

Transnet is a salient role player in the South African economy, but the state-owned enterprise (SOE) faces serious financial distress. While Treasury’s latest move to help Transnet manage its immediate debt obligations will not unsettle the fiscus, it highlights the company’s financial distress, Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

It also suggests that further financial support may be forthcoming in the 2024 Budget after Finance Minister Enoch Godongwana failed to provide clarity on how the government intends to deal with Transnet’s financial predicament in his MTBPS in November.

Godongwana simply stated that “the National Treasury is working with Transnet and the Department of Public Enterprises to ensure that Transnet can meet its immediate debt obligations”. Transnet asked the Treasury for financial assistance of about R108 billion, consisting of a R47 billion equity injection and R61 billion in debt relief, similar in vein to the Eskom support package, Van der Linde says.

After Eskom, Transnet presents the next big risk to economic growth owing to its size and strategic importance, he says. “The embattled SOE will more than likely receive additional government support over the near term, further compromising the fiscus.”

Inefficiency undermines the SA economy

He warns that corruption and mismanagement aside, inefficiencies in the largely government-owned network industries seriously undermine the South African economy. “Eskom’s woes mean the utility cannot sufficiently power the economy, while Transnet’s ordeals restrict businesses’ ability to move goods to and through the country’s borders efficiently.”

The result, he says, is higher costs of doing business and diminished competitiveness, while the fiscus is drained.

“With most of the country’s mines engaged in load curtailments (constraining production and implying that the salient mining industry is unable to expand), Transnet’s underperformance arguably has more direct and tangible financial implications due to the negative impact on corporate earnings and the tax derived from exports.”

Van der Linde says the government is reactively plugging the gaps, now trying to fix the country’s logistic backlogs while load shedding persists. “Like Eskom, Transnet is too big to fail and like Eskom, it too requires a substantial government bailout.”

Oxford Economics Africa flagged concerns with the 2023 MTBPS from the outset and specifically pointed out the significant fiscal slippage relative to the 2023 Budget forecasts, a lack of clarity around the Transnet situation, and how additional financial support together with the SOE’s operational woes will lead to further fiscal slippage.

Van der Linde says Transnet received financial support from the Treasury in the past, yet both its operations and finances still worsened. “Stronger private sector participation is needed, accompanied by swift structural changes.”

The logistics sector needs comprehensive reform

Lisette IJssel de Schepper, senior economist at the Bureau for Economic Research (BER) says Treasury stressed that the guarantee is subject to strict conditions.

“As in the MTBPS, Treasury emphasized that the logistics sector needs a comprehensive reform and that Transnet should explore other initiatives to regain its financial viability.”

Reform in the ailing logistics sector is desperately needed, with South Africa’s biggest steel producer ArcelorMittal SA arguing just last week that, among other challenges, inefficiencies at Transnet are going to result in the company mothballing two long steel units, which may affect up to 3 500 jobs.

De Schepper says this is because using trucks instead of rail to get raw materials to their plants comes at an additional cost and is less efficient with plants designed to receive iron ore and coking coal via rail.

Beyond the struggles with South Africa’s rail network, the congestion at local seaports is also starting to hurt more. She says this is evident in the Absa PMI showing that manufacturers not only see a dip in exports in November (which, to be fair, could be due to a variety of factors), but several respondents also explicitly mentioned port disruption as delaying receipt of imported inputs, echoing concerns expressed by Volkswagen last month about the country’s challenging business conditions.

“Delays and companies sometimes having to resort to more expensive air freight push up the costs of production and could also have negative consequences for factories’ production capabilities down the line. Indeed, logistical challenges were also flagged by naamsa in its commentary on the vehicle sales data for November.”