Transnet’s privatisation of Durban container port needs a do-over

The plan to hand over management of the Durban Container Terminal Pier 2 to Philippines-based International Container Terminal Services Incorporated (ICTSI) has hit its first snag.

The Durban High Court last week issued an interim interdict that prevents port owner Transnet from negotiating, concluding and implementing the contract with ICTSI, following a legal challenge by losing bidder APM Terminals, owned by Danish shipping company AP Moller-Maersk.

Given the potential for contracts of this nature to be contested, Transnet should have anticipated such a challenge. 

APM says the award of the tender to ICTSI was riddled with irregularities, not least because the winner was assisted over the finish line by a concession that allowed it to fudge its proof of solvency – Transnet allowed ICTSI to use market capitalisation rather than balance sheet equity to prove solvency, painting a flattering portrait of its financial muscle. No other bidder was granted this concession and one has to wonder why.

The court case now moves to the second and crucial part, where APM is asking the court to set aside Transnet’s decision to award the contract to ICTSI in its entirety.

Should the court agree, Transnet will be forced back to the drawing board – and that may be a good thing, according to some in the logistics sector.

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

Deal’s main criticism

One of the deal’s main criticisms is that Transnet retains 51% ownership of the port, leaving the operator with a minority stake. The port operator also has no say in who to hire and fire – Transnet retains that right through a labour broking agreement.

The Competition Commission (CompCom) recently greenlighted the deal with ICTSI on condition that no workers are retrenched for three years. The port operator would, therefore, be saddled with payroll for 3 000 workers and limited scope to trim this should it deem it necessary.

The CompCom’s ruling is in line with SA labour legislation, but with the staff remaining Transnet employees as the result of the convoluted professional services agreement that Transnet required, there is little to no chance of any staff ever being made redundant. No concession is made for the port operator to address the issue of labour productivity.

The competition authority’s decision is in any event moot, having been superseded by the Durban High Court’s interim interdict.

Transnet says it will abide by the court’s decision “as part of building public trust in the organisation’s governance and procurement processes as well as to further expedite conclusion of the matter”.

ALSO READ: International Container Terminal Services Incorporated

‘Real restructuring problem is not being addressed’

“Durban Pier 2 is our most important container terminal, but it represents a small part of the overall problem when we are talking about Transnet,” says Jan Havenga, logistic professor at Stellenbosch University and advisor to the National Logistics Crisis Committee (NLCC).

“The real restructuring problem is not being addressed. Transnet is composed of eight port authorities and more than 20 terminals, all owned and managed by Transnet, which also owns the railways and the trains. Nowhere else in the world does this happen.”

There’s been no proper financial model done either in Transnet or government to quantify the extent of the problem Transnet is facing, adds Havenga.

“There’s been no portfolio analysis done on the component parts of Transnet, so if we ask what percentage of Transnet’s overall income, debt and value comes from Pier 2, we cannot get a clear answer.

“If this was a private company with shareholders about to embark on a massive restructuring, you would have to do a thorough analysis of the problem you are trying to solve, and then work [out] how best to solve it.

“This is no criticism of new CEO Michelle Phillips and Transnet Freight Rail’s new CEO Russell Baatjies, both of whom have done excellent work in trying to fix the problems at Transnet with very limited resources. The problem is that government is approaching the restructuring of Transnet in a piecemeal fashion.”

ALSO READ: How to fix Transnet’s ports in the interest of economic growth

Competition frameworks

The Durban High Court’s decision raises significant procedural issues, says Jacob van Rensburg, head of research and development at the Southern African Association of Freight Forwarders (Saaff). “Saaff sees this as a crucial opportunity to revamp and fortify the frameworks for private sector investment and inter-port competition, which can revolutionise our ports.”

The association advocates establishing inter-port and intra-port competition frameworks.

By stimulating competition among terminals and between ports, operational efficiencies can be improved, costs reduced, and service standards elevated across the board.

This would mean a model where different operators manage different terminals within the same port or where different ports compete for the same cargo.

“Based on global best practices and accompanying international literature on container terminal operations, these enhancements will reduce dwell times, alleviate congestion, improve port efficiency, and ensure South Africa’s ports can meet international standards,” says Van Rensburg.

ALSO READ: Transnet next in line for privatisation push? Third party access to be finalised soon

‘Tailor-made for failure’

The container port deal was conceived during the tenure of previous Transnet CEO Portia Derby and appears tailor-made for failure, according to some.

The thinking at the time was that Transnet could be both referee and player in its own restructuring.

Despite being capital-constrained, Transnet wants to retain monopolistic control of its container terminal business.

Added to this is Transnet’s resistance to granting the Transnet National Ports Authority (TNPA) full independence, as is the practice globally. Despite the corporatisation of TNPA, Transnet remains in control of this crucial regulatory body and could use that control against its competitors.

Also unclear is how Transnet will deal with its R150 billion debt, which costs more than R15 billion a year. This rising cost of servicing debt has pushed its cash interest cover – the amount of interest expenses a company can pay from earnings – below the 2.5 times minimum required by its loan covenants.

The court challenge in Durban may be a good opportunity for the Department of Transport and its minister, Barbara Creecy, to relook at the entire Transnet portfolio and decide how much of its debt it is willing to assume on the state balance sheet. That will clear the path for a more orderly and successful privatisation drive rather than the disjointed approach we have seen so far.

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