Transnet inefficiencies costing South Africa R1 billion a day

A study by the GAIN Group says inefficiencies at Transnet are costing the economy R1 billion a day, most of this coming from lost sales of coal and iron ore.

“This means that the economic growth of 0.5% expected for 2023 could have been 10 times higher at 5.4%,” says the report. “The nearly 5% GDP loss is catastrophic and could have been even worse at higher commodity prices.”

Export coal prices declined from a high of $296 a ton in June 2022 and $98/t in June 2023.

The GAIN Group study comes just days after Transnet announced a R5.7 billion loss for the year to March 2023, reversing the R5 billion profit for the previous year. The logistics operator blamed lower rail volumes due to operational ineffectiveness and flooding in KwaZulu-Natal.

Public enterprises minister Pravin Gordhan issued a stern statement on Friday calling for “urgent and corrective action”, particularly within the Transnet Freight Rail (TFR) division.

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This follows a radical shake-up at board level in July, with nine new appointments. Minerals Council vice-president Andile Sangqu has been appointed as chair, a move seen as shifting Transnet closer to its most important client, the mining sector.

“Transnet is at an inflection point. The deterioration in its operational and financial performance will be stopped. Nothing will be allowed to get in the way of the effective implementation of a radical plan – with some changes being evident in the short term and others taking longer, given the complexity of the entity,” says a statement issued by the Department of Public Enterprises on Friday.

ALSO READ: Transnet’s radical board shake-up aimed at fixing rail and ports

Gordhan has directed the board to address 11 areas of key concern, including radical improvements in operational performance, identify the reasons why management staff are unable to meet performance targets, develop a system of accountability within the organisation, address excessive costs and conduct a review of executive management “with a view to establishing whether persons with the right skills are optimally utilised to deliver on the mandate”.

Stellenbosch University professor of logistics Jan Havenga, who is also a director of GAIN Group, describes Gordhan’s statement as virtually unprecedented in its tone.

“It’s refreshing to see a minister talk so directly about the problems facing Transnet and demand accountability and action in the way that he has,” says Havenga.

The breaking down

Breaking down the losses to the economy, GAIN Group director Dr Zane Simpson says Transnet’s inability to rail sufficient volumes of commodities to ports cost the economy R411 billion in 2022, adding that an economic loss of around R353 billion is likely for 2023.

Most of this loss is from just two commodities – coal and iron ore.

“We exported 54 million tons [mt] of coal in 2022, when we should have exported 75 mt. In other words, we exported a little over two-thirds of what we should have,” Simpson tells Moneyweb.

“The cost to the economy would have been worse had it not been for a major drop in the price of coal,” he adds.

Rail inefficiencies cost R88 billion in lost forex receipts from coal in 2022, and a further R174 billion in foregone economic activity in the coal sector. Lost coal sales due to Transnet inefficiencies amounted to 22mt in 2022, a figure that will rise to about 30mt in 2023, according to research by GAIN Group.

Iron ore suffered a direct forex loss of R18 billion due to lost export sales, a figure that balloons to R54 billion when the broader impact on the iron ore mining sector is considered.

ALSO READ: Transnet swings to R5.7bn loss on lower rail freight volumes

Transnet’s inability to meet the demand for export rail volumes meant exports had to ship by road, representing a further cost of R95 billion to the economy in over-payment for transport.

Of this R95 billion loss, R29 billion came from minerals and R66 billion from general freight and containers.

The latest Transnet results show little benefit from the much-vaunted co-operative forums comprising the Minerals Council of SA, mining houses and Transnet, which were formed to iron out operational inefficiencies and improve throughput.

Sadly, the expected improvement did not materialise, says Havenga.

Roadmap

“There was resistance from within Transnet to having outside people advise them on ways to improve performance. Fortunately, I expect the performance at Transnet to improve from hereon as President Cyril Ramaphosa addressed the crisis at Transnet in this year’s state of the nation address and responded to the calls from business for a National Logistics Crisis Committee [NLCC],” he says.

“A roadmap has been developed to find a way out of the crisis, and the president is briefed regularly on the progress being made.”

Transnet needs to run more trains, optimise the ports, and implement the president’s roadmap. “I am optimistic that these interventions, which are steadily gaining traction, will yield positive results by next year,” adds Havenga.

This article is republished from Moneyweb under a Creative Commons licence. Read the original article here.