New Development Bank’s R5bn loan won’t rescue Transnet from its debt spiral

Last week the New Development Bank (NDB) inked a R5 billion loan agreement with Transnet that will support the modernisation and improvement of South Africa’s freight rail sector.

That’s equivalent to about four months of interest payments on Transnet’s R130 billion debt – half of it the result of state capture.

This new loan is on top of the $1 billion (R17.8 billion) facility agreed with the African Development Bank (ADB) in July as part of the first phase of a R153 billion capital investment programme over five years intended to address critical segments of the transport value chain.

In late 2023, National Treasury extended a R47 billion guarantee facility intended to support Transnet’s business recovery plan, including settling its immediate debt obligations. That guarantee also gave comfort to the two development banks that their funds were safe.

The two development bank loans, totalling about R23 billion, fall outside the current year’s financial period but will be loaded onto an already distended balance sheet, groaning from decades of abuse and vandalism.

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Debt spiral

Will these loans cure Transnet’s debt problem? And how much will actually go to fixing the rail network?

“It is much of a muchness,” says Jan Havenga, logistics professor at the University of Stellenbosch. “The current management team is doing their best. But fundamentally they don’t need more debt. They need help.

“R5 billion is a few months of interest payment. Whether you use it to pay interest and then have a bit more cash flow for maintenance or whether you use it for maintenance and use cash flow to pay interest is the same thing.”

Industry analysts point out that Transnet is in a debt spiral without a serious plan to get out of it. The only solution is to grow revenues and reduce costs, starting with the staff headcount.

The debt problem won’t go away until Transnet is restructured, government assumes the state capture debt that accumulated under its watch, and the private sector is allowed to create businesses using publicly-funded infrastructure.

“Transnet must be fundamentally restructured so that businesses are created in which the private sector can invest and agencies established such as a rail infrastructure agency and port authority where government can do its job,” says Havenga.

“Once properly constituted a large chunk of basically state capture debt will have to be written off. Everything else is just beating around the bush. It is time that the problem is addressed and solved.

“And I say it with respect. I’m a great fan of Michelle [Phillips, Transnet CEO]. She’s doing her best. But my advice to her would now be to prepare for this restructuring. And my advice to the shareholder, the Department of Transport, the Presidency and National Treasury that helped to create this mess, is to do their jobs and fix it.”

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Some improvements

Transnet has reported operational improvements, notably clearing the backlog at key ports and increasing freight volumes to around 170 million tonnes (Mt) from 151 Mt two years ago. However, this is still a long way from the target of 200-220 Mt for commercial viability.

Another metric of improvement is the 20% reduction in derailments in 2024, a major cause of disruption on key rail corridors. 

This is still nowhere near where Transnet needs to be, but Kumba Iron Ore will no doubt be pleased with the halving in derailments so far this year to three (from six in 2023) on the Ore Corridor between Sishen in the Northern Cape and Saldanha Bay in the Western Cape.

Kumba, like other bulk commodity exporters using the rail network, has started to partner with Transnet to solve critical rail bottlenecks.

Transnet Freight Rail (TFR) CEO Russell Baatjies recently told the SA Heavy Haul Association conference in Johannesburg that the freight operator was meeting less than half its annual maintenance investment requirement. The maintenance requirement in 2023 was R10.5 billion, of which just R4.4 billion was invested. The maintenance requirement has doubled since 2018, the result of inflation and aggravating factors such as theft. Last year, TFR spent more than R800 million replacing stolen and vandalised equipment. 

The 20% reduction in derailments in 2024 was not the result of infrastructure improvement, but luck. 

Commenting on the NDB loan last week, Phillips said it would accelerate the implementation of the Recovery Plan and economic reforms. “The modernisation programme will enhance our operational capabilities and contribution to the growth and competitiveness of the economy.”

ALSO READ: New Transnet CEO confident on meeting recovery plan targets

‘Promising first step’

One group that is eagerly awaiting a competitive rail environment is the African Rail Industry Association (Aria). CEO Mesela Kope-Nhlapo hopes other financial institutions take note and start opening their chequebooks to support Transnet’s recovery plan.

“We estimate that about R150 billion is required to fully restore and enhance our rail network to meet the demands of a modern economy. The loan secured by Transnet is a promising first step in this direction.”

It’s unknown exactly how the money will be deployed, but industry analysts hope it will go to the renewal of rail network infrastructure, locomotive overhauls, wagon fleet modernisation, and signalling systems.

Meanwhile, we await a signal from Transnet’s shareholder on how it intends to fix not just the rail network but also the balance sheet. On this singular issue depends the tariff that private sector operators consider commercially attractive, but that depends on the government taking over the state capture debt.

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