Has Transnet botched the ‘privatisation’ of the Durban container terminal?

The legal challenge by losing bidder APM Terminals against Transnet’s decision to award a 25-year contract to manage and develop the Durban Pier 2 Terminal to Philippines-based competitor, International Container Terminal Services Incorporated (ICTSI), has delayed the planned revitalisation of the port and cost the fiscus billions of rands in tax revenue.

The public sector partnership (PSP) contract, awarded in July 2023, allows ICTSI to acquire 49% of the port company for a total investment over 25 years of about R11 billion.

This capital investment – amounting to no more than a few months’ interest on Transnet’s galloping debt – would go a long way to restoring Durban’s vaunted status as Africa’s premier port.

APM Terminals, part of Danish shipping company AP Moller-Maersk, wants the contract with ICTSI set aside on the grounds that it was littered with irregularities.

What was intended as a red-carpet deal that would usher in more such PSPs and billions of rands in private sector investment is now mired in legal and accounting arguments.

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Ill-conceived

The deal was ill-conceived from the start, not least because Transnet insisted on retaining 51% of the shares in the new port management company, leaving the winning bidder with a minority interest. This required an exemption from the Public Finance Management Act (PFMA), which is, in any event, at risk of being revoked by a government gingerly eyeing its labour flank.

One of the conditions for National Treasury’s R47 billion guarantee in December 2023, which has kept Transnet afloat thus far, is that it concludes the PSP deal without delay.

The terminal itself remains the property of the state. Then there’s a convoluted labour broking agreement where the terminal’s roughly 3 000 employees remain employees of Transnet via a professional services agreement. This thwarts any attempt by the winning bidder to impose its own labour standards under the contract and hobbles the prospects of a business turnaround.

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Then there’s the debt …

There’s also the looming debt mountain of about R150 billion, almost half of it from state capture.

This is from a RMB note about Transnet’s 2024 financial results last week: “Finance costs, at R15.1 billion, were almost equal to capital investment of R16.7 billion … which was less than half of what Transnet spent 10 years ago.”

Also from RMB: “The rising cost of servicing debt has reduced the measure of cash interest cover – the amount of interest expenses a company can pay from earnings – to below the minimum of 2.5x required by loan covenants, Transnet said.”

Transnet needs to attract private investment, and fast, to restore some dignity to its ageing infrastructure.

The court challenge in Durban does not help Transnet’s turnaround plans. No matter how the court decides, future PSPs will be scrutinised by potential investors with suspicion. It’s doubtful many will be willing to help pay down the state capture debt bill of about R70 billion, which puts pressure on government to bite the bullet and assume this dead weight on its own balance sheet. To do otherwise will force private investors to charge tariffs that the market simply cannot bear.

ALSO READ: It will take months to clear Durban port backlog

Solvency ratio

A key objection raised by APM Terminals is Transnet’s insistence that all bidders satisfy a minimum solvency ratio of 0.4.

ICTSI only managed a solvency ratio of 0.24 when applying the same measure used by other bidders. Transnet allowed the winning bidder to use market capitalisation (rather than balance sheet valuations of total equity) to calculate its solvency ratio, which enabled it to clear this hurdle with ease. APM argues that Transnet should have disqualified ICTSI from the get-go.

Transnet attorneys ENSafrica, based on an opinion from expert advisors, cautioned that using market capitalisation in the calculation of solvency was unacceptable.

APM wants an interdict to stop the contracts being finalised, arguing that if allowed to proceed any further, the courts are unlikely to sanction “unscrambling the egg” due to the amounts of money already sunk by the parties and the need to protect the public interest.

Transnet counters that granting the interdict will be a disaster for the country and delay the goal of achieving a functioning port for years.

It allowed ICTSI to use a different metric to compute its solvency, but this was not material to the final decision. ICTSI’s bid of more than R11 billion was about R2 billion more than APM’s.

ICTSI plans to spend about R1.5 billion on port infrastructure, and the amount will rise to around R9.4 billion over 25 years.

With previous Transnet tenders – such as the request for qualification (RFQ) for the container corridor between Johannesburg and Durban, as well as the Ngqura container terminal in the Eastern Cape – being cancelled, maybe it’s time for Transnet’s private sector transactions to be managed by its new shareholder ministry, the Department of Transport, with transactional support from National Treasury.

This article was republished from Moneyweb. Read the original here.