Transnet racks up R14.5bn irregular expenditure for 2021

Transnet, with total assets of R335.8 billion (2020: R338.3 billion), operates an extensive rail infrastructure and provides freight services, operates a 3 114-km high-pressure petroleum and gas pipeline network, and manages eight commercial seaports – Richards Bay, Durban, East London, Ngqura, Port Elizabeth, Mossel Bay, Cape Town and Saldanha.

Transnet was scarred by state capture, and was not spared Covid-19’s negative impact.

Its various operations have also suffered “security incidents”, “incidents of community unrest”, and “theft, vandalism, sabotage to assets and equipment as well as operational disruptions”.

Irregular expenditure

The Auditor-General (AG) handed down a qualified audit report for the third year running, on the basis of irregular expenditure not being fully and accurately recorded, and payments made in contravention of supply chain management requirements.

Irregular expenditure incurred in 2021 was R14.1 billion (2020: R8.4 billion).

The AG was “unable to determine the full extent of the understatement of irregular expenditure stated at R104 billion” (2020: R131 billion).

Transnet has embarked on a clean-up plan, is revamping systems, including taking appropriate action against implicated individuals, and “disciplinary actions taken against certain former senior executives” has resulted in dismissals. These cases have been reported to law enforcement agencies.

Financial health and sustainability

Transnet’s cash interest cover of 2.0 times is in breach of certain loan covenants. All required default waivers were secured by August 12, 2021.

Transnet did not reply to Moneyweb’s question in regard to whether it has sufficient cash flow to meet medium-term requirements.

Financial liabilities

The short-term borrowings bear interest at rates between 2.27% and 11.8%.

Short-term borrowings in 2021 include an amount of R30.7 billion in long-term borrowings that were reclassified as short-term borrowings due to a cash interest cover breach at year-end. Transnet successfully secured waivers from all the lenders affected by these covenant breaches.

Foreign currency secured loans are denominated in US dollars, bear interest at 2.75% and are repayable on June 12, 2030.

Transnet did not reply Moneyweb’s questions asking for a split of the domestic and US dollar-denominated loans, whether the interest rate of 2.75% on the US dollar loans is fixed or variable, and the amount of loans granted by state-owned entities, if any.

Impairments to assets

Transnet did not reply to Moneyweb’s questions in regard to the note on impairments, which states: “Impairment of non-financial assets mainly arose at Freight Rail relating to locomotives and wagons due to the suspension of the 1 064 OEM [original equipment manufacturer] contracts that have resulted in vandalised locomotives not being able to be repaired, derailments and the impact of the physical verification and useful life assessments.”

Moneyweb asked how the suspension of the contracts prevented repairs to locomotives, whether the “1 064 locomotives” had been vandalised and, if this is so, why they were not operational.

Moneyweb also asked for the reason for the impairment of port facilities of R1.8 billion, as the explanation given in the note is not clear: “An assessment of capital work in progress (CWIP), at the ports also resulted in impairments of non-financial assets”.

Performance of major operating divisions

Transnet issued reports for each division:

• Transnet Port Terminals: Revenue for the year decreased to R13.1 billion (2020: R13.8 billion). Profit before tax for the year declined to R1.3 billion (2020: R3.9 billion).
• Transnet Engineering: Revenue decreased to R8.2 billion (2020: R11.9 billion). The loss before tax increased to R3.4 billion (2020: R1.8 billion).
• Freight Rail: Revenue for the year decreased to R39.4 billion (2020: R44.6 billion). The profit before tax of R2.1 billion in 2020 declined to a loss of R92 million in 2021. There were a number of “security incidents” and “incidents of community unrest” that caused damage to the network and rolling stock assets.
• Transnet Pipelines: Revenue decreased to R4.9 billion (2020: R5.7 billion). The loss before taxation was R4 billion (2020: R1.6 billion profit). An amount of R4.4 billion has been provided for litigious claims. Pipelines is responsible for any environmental contamination resulting from “spillage” where thefts take place.

Judicial proceedings

• 1 064 locomotives: On March 9, 2021, Transnet and the Special Investigating Unit (SIU) launched a review application in the high court in regard to the locomotive supply agreements concluded with China South Rail, China North Rail, Bombardier Transport and General Electric. Transnet seeks to retain possession of the locomotives and to receive compensation for overpayments.
• Transnet submitted a revised settlement proposal to the Competition Commission in regard to the finding of excessive pricing and exclusionary conduct/preferential treatment.
• Transnet and the Special Investigations Unit (SIU) successfully launched proceedings against Herbert Msagala, a former group executive of Transnet. The SIU special tribunal ordered Msagala to pay back R26.4 million to Transnet. Msagala was dismissed in July 2020.
• Total SA and Sasol Oil v Transnet Pipelines: Total has claimed compensation for damages of R430 million, and Sasol of R1.1 billion, in regard to a tariff dispute. The matter is ongoing.
• Special Tribunal Hearings will take place from November 15 to 19 in regard to SIU v Pro Serve Consulting and Four Others and SIU and Transnet v CRRC E-Loco Supply. The amounts involved amount to just over R4 billion.

Transnet is in a tight financial squeeze and is heavily dependent on external funders to provide capital to service loans and capital commitments.

Transnet had not responded by the time of publishing despite questions having been sent on Thursday, November 4, 2021.

By Barbara Curson

This article first appeared on Moneyweb and was republished with permission. Read the original article here.