Transnet is falling well below its target of shifting 200 million to 220 million tonnes of freight a year, at which point — it is estimated — it will begin to make a meaningful contribution to the economy. Its current target is 170 million tonnes a year. Photo: (Karel Prinsloo/Bloomberg)
The auditor general has confirmed doubts about public logistics company Transnet’s ability to remain a going concern, saying its reliance on expensive debt for operating cash was unsustainable.
In a presentation to the standing committee on public accounts (Scopa) on Wednesday, the Auditor General of South Africa noted that the utility’s net cash inflows for the year from operating activities was R14 billion, compared with R22 billion in the 2023 financial year.
“This can be improved if an improvement in the operations takes place,” the auditor general commented.
But as matters stand, Transnet is falling well below its target of shifting 200 million to 220 million tonnes of freight a year, at which point — it is estimated — it will begin to make a meaningful contribution to the economy. Its current target is 170 million tonnes a year.
In the past financial year, volumes increased 1.5% to 151 million tonnes, compared with the previous year, and revenue was up 12%, according to results released on Tuesday.
The company posted a loss of R7.3 billion for the financial year, worse than the loss of R5.7 billion for 2023.
But the auditor general’s office told Scopa this improvement in volume was more likely the result of fortuitous factors beyond the company’s control, rather than an early indication that a recovery plan still in its infancy was working. It was only implemented in the last quarter of the year.
“The one percent increase in the volumes noted above was mainly due to the fact that in the prior year, the flood damages negatively affected operations, whereas the event did not occur in the current year, therefore, the impact of the turnaround strategy cannot be ascertained at this point.”
The auditor general noted that the company’s debt of R137 billion imposes interest repayments of R14 billion a year, which leaves it with limited funds to tackle a growing infrastructure maintenance backlog.
“This impacts on Transnet’s ability to fulfil its mandate and poses a risk on going concern.”
The shortage of operating cash has forced the company to refinance loan and bond maturities. But the auditor general warned that borrowing more money and restructuring existing debt could not resolve the utility’s funding problems, saying only greater operational efficiency could.
“This funding model is unsustainable, particularly if there is no immediate and significant
improvement in operational performance to enable Transnet to generate sufficient internal cash flows to service its debt without resorting to further borrowing,” the auditor general warned.
“This is a cause for concern because if the guarantee facility is exhausted and Transnet is unable to secure funding for refinancing, it might default on its debt repayments. Such a default could have severe consequences.”
Transnet, one of the state-owned entities bled dry by years of state capture compounded by theft and vandalism of infrastructure, last week signed a R5 billion loan with the New Development Bank, the multilateral development bank established by the Brics nations, to support the modernisation of the freight logistics sector.
But the auditor general cautioned that Transnet’s liabilities exceeded its assets by R61 billion, which suggests that it may not be able to pay its short-term debts as they become due and payable.
The picture was complicated further by the fact that the logistics group failed to meet loan covenants on cash interest in the past financial year. It subsequently obtained waivers from lenders but should it fail to meet the conditions of these waivers, faced an increased risk of a cross default if lenders called on their debt.
Lenders may also simply become wary of granting the company further reprieves or impose firmer conditions, the auditor-general cautioned.
“Furthermore, the lenders have been providing the waivers for an extended period of time and there is an increased risk that they will call on their debt or impose stricter conditions should the current position not improve.”
The company is due to hold discussions with Standard Bank, the China Development Bank and Deutsche Bank, among others, on revising loan conditions.
Onerous loan obligations limited spending on infrastructure maintenance, which came to just under R3.5 billion in 2024.
The auditor general noted that this made for a maintenance backlog of R6.05 billion compared to the planned required maintenance of R10.5 billion and “a cumulative backlog maintenance of R26.5 billion” that arose as a result of funding constraints, as well as theft and vandalism.
Transnet’s management has communicated that it has put in place plans to address this backlog from 2030.
The auditor general called on the management team to improve planning and make sure better feasibility studies are performed given that the company lost R165 million in the last three financial years as a result of projects being scrapped.
“There is inefficient use of economic resources as the entity did not derive any value from the costs incurred. There is a need for management to enhance their planning and feasibility studies to ensure economic use of resources for achievement of mandate.”
Finally, the auditor general found that the internal financial control environment at Transnet had not improved in recent years because management had failed to prevent or detect material misstatements in the material submitted.
Adverse audit findings were recurring, which showed that management’s audit action plan was not working.
“There is reliance on the audit process to produce credible financial statements and this is not sustainable,” the auditor general concluded.