New Transnet CEO confident on meeting recovery plan targets

New Transnet CEO, Michelle Phillips, is confident that the state-owned enterprise will meet its recovery plan targets although it is spending R1 billion per month to service its debts.

Transnet’s profits declined from R5 billion in 2019 to a net loss of R5.7 billion in 2023 and it carries a staggering debt burden of R120 billion. The combined effect of Transnet’s failure has placed immense pressure on the South African economy, but Phillips is confident that the recovery plan is on track for Transnet to meet its 170 million tonne target by the end of its financial year.

Phillips was speaking at the latest PSG Think Big webinar on what it will take to turn the state-owned enterprise (SOE) around and effectively pull South Africa back from the brink of a logistics blackout.

“Transnet is too big to fail,” she said. The new leadership team, the board, organised labour, Transnet customers and private sector partners have rallied together and have been working since October 2023 on an 18-month recovery plan.

The plan was created after the formation of the National Logistics Crisis Committee, chaired by President Cyril Ramaphosa last year and the adoption of the Freight Logistics Roadmap in December. “We completed the first six months of the recovery plan and have seen the stabilisation – and some turnaround – in both our operations and financials,” she says.

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R47 billion was a guarantee from government, not a bail-out

Government awarded Transnet a R47 billion guarantee last year as part of its involvement and commitment to the recovery and transformation of the SOE. Phillips, who is now serving her 25th year at Transnet, emphasises that this was not a loan.

“In my tenure at Transnet, we were always very clear that we will not approach government for a bailout to ensure that we are never a drain on the fiscus, The R47 billion is a guarantee which will merely allow Transnet to borrow more money.”

Phillips points out that Transnet’s interest on its debt is upwards of R1 billion a month. “It is very difficult to run a business like that. You are essentially paying your bond with your credit card.”

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What caused Transnet to go so far off the rails?

Phillips says Transnet’s current challenges are due to a lack of maintaining infrastructure, failure to invest or under-investment in necessary infrastructure and not focusing on generating revenue.

“However, lots of work is being done as part of the recovery plan to get Transnet out of the debt trap it finds itself in. Transnet is working with government on significant financial modelling in terms of optimising the balance sheet. We are also trying to renegotiate a lot of our debt and get into longer-term debt that is cheaper so we do not have this constant obligation to redeem.”

The success of the recovery plan is also closely linked to the R47 billion guarantee by way of a set of specific conditions. “The Freight Logistics roadmap is very specific on things cabinet expects from Transnet. Some of those were included as part of the government guarantee conditions.”

Phillips points out that one of those guarantee conditions was the corporatisation of the Transnet National Ports Authority (TNPA), which she says is expected to be in place by April 2025. Transnet is also currently busy with the separation of Transnet Freight Rail (TFR) into Infrastructure Management and Freight and Rail.

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Opening of rail network to third parties

The opening of the rail network to third parties is also moving ahead. “We are very pleased with the level of interaction from other stakeholders within the industry. We believe that applications for access to the network should start around September or October of this year.”

She adds that Transnet is also looking at the option of renting out its “B Fleet” to private sector operators as a short-term way to get more operators online. Conversations with the market highlighted that while there is major interest, getting long-term agreements in place and ordering equipment will take some time.

Although the private sector’s appetite to get involved has been what Phillips describes as “overwhelming”, she emphasises that investors must see movement. “The challenge is that a balance must be struck between process flexibility to encourage investment and the rigorous governance associated with SOE procurement and partnerships.”

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Challenge to keep rail network secure

Phillips refers to the recent security tender process which made news headlines. “Sometimes stakeholders do not understand that those are the processes that we have to follow due to the overwhelming interest in becoming involved in our business.”

She also notes that the security of rail networks is critical to achieving success and reaching Transnet’s targets. “We must focus on being able to move the commodities as promised to our customers. We spend a large amount of money on securing our networks as South Africa does not have sufficient national resources to do so.

“If we focus on getting vandalism and theft under control, we will have fewer interruptions on the network and should be in a good position to get the 170 million tonne volumes in and to be able to break even by the end of this financial year.”