/ 2 September 2024

Transnet reports R7.3 billion loss amid Natref litigation and operational ‘challenges’

Transnet

Transnet recorded a hefty R7.3 billion loss in 2023/24, more than half of it due to Total and Sasol’s multi-billion rand third-party National Petroleum Refiners of South Africa (Natref) fuel line related claims, which are the subject of a protracted high court battle.

Despite incurring a loss 43.4% more than the R5.7 billion loss in 2022/3, the state-owned rail, port and pipeline company invested significantly in new infrastructure, improved its operational performance, and grew its rail and port cargo volumes, Transnet executives said at a media briefing on its financial results on Monday.

While the challenges facing the logistics group have been “years in the making”, its recovery plan, implemented in October 2023, is starting to bear fruit, chairperson Andile Sanqu said. The plan has proposed interventions to turn around the business over a six, 12 and 18 month period.

“When we met about a year ago to table the annual results for the 2022/23 financial year, we outlined to you the crisis facing the organisation,” Sanqu said.

He said Transnet had been plagued by severe operational and financial underperformance which had also “dampened” the country’s economic performance, adding: “It was clear that urgent intervention was required to arrest the decline in performance and stabilise operations.”

The latest annual results indicated  that there have been “some marginal improvements in performance” which have resulted in a slight improvement in the loss position compared to last year, Sanqu said.

However, this was negatively affected by the R4.7 billion accounting provision the company had to make for the Natref matter involving Total and Sasol’s dispute about historical tariffs charged under an apartheid-era agreement that is currently before the court. 

Transnet chief executive Michelle Phillips said Transnet Freight Rail’s rail volumes, which account for 44% of revenue, increased 1.5% to 151.17 million tonnes from 149.5 million tonnes in 2022/23, slightly short of the 154 million tonne target set in the recovery plan, while port cargo volumes grew 2.9% to 4.152 million twenty-foot equivalent units.

Despite achieving revenue of R39 billion, Transnet Freight Rail continued to face “significant challenges including locomotive shortages, persistent issues with infrastructure, vandalism and theft.”

“Security incidents have risen by 5.4% in the period under review. Cable theft made up 57% of the incidents experienced, resulting in theft of over 1000 kilometres of cable. The financial effect is quite extensive,” Phillips said.

“We see an impact of R4.2 billion, exceeding last year’s 3.7 billion rand loss, the revenue losses from disruptions reached 2.1 billion, while security costs amount to 1.9 billion.”

The company also incurred expenses of R162 million to replace damaged rail infrastructure. Phillips said the liberalisation of the rail and port industries is underway. 

“The introduction of third party access will allow the private sector train operating companies to operate on our rail network, fostering healthy competition and driving efficiency and service improvements. We are also seeing an expansion of private terminal operators into services such as containers, which were previously managed exclusively by Transnet,” she said.

“These changes are designed to modernise the sector and increase private sector participation, ensuring that Transnet remains competitive in a rapidly evolving environment.”

Strategic initiatives include the development of a coastal accumulation facility and import terminal at Durban. 

“The import terminal is for us to provide storage facilities for new entrants and previously disadvantaged South Africans, so that they can enter the market and move product within the country,” Phillips said.

“We are also working on a new jet fuel pipeline, which we call PL6, which is intended to move jet fuel to OR Tambo, and then also our private sector participation venture with Vopak terminals in the establishment and construction of the LNG terminal at Richards Bay.”

She said Transnet is also repurposing its Lily Pipeline that is currently used to transport methane rich gas, to move natural gas in support of the transition to cleaner fuels.

Transnet Group chief financial officer Nosipho Maphumulo said the company reported 12 % growth in revenue to R76.7 billion while net operating expenditure grew by 19.2% to R54.7 billion, mainly due to the impact of third-party claims in litigation, increased personnel, security, energy (including electricity for rail), material and maintenance costs.  

However, without the Natref litigation costs expenditure would have grown by 8.8% compared to 4.3% in 2022/23. Earnings before interest, taxes, depreciation and amortisation decreased 3,6% to R22 billion.

She said the company’s debt balance was R137 billion up from R130 067 in the previous financial year.  

“Regrettably, we are rated below investment grade (with international rating agencies Moody’s and S&P Global), and with the improvements, with the recovery plan, we do envisage that we as Transnet, would be able to improve our credit rating on a sustainable basis in the future,” Maphumulo said.

She said the company had received an unqualified audit report from the auditor general and there had been “substantial improvement” in irregular, fruitless and wasteful expenditure, with the number of incidents reported dropped to 1 763 in 2023/24 from 2 801 in 2022/3 and 3 869 in R2021/22.

“In 2021 irregular expenditure was just under R4 billion. And as at the end of 2024 we had reduced that number to be below R2 billion. So, we continue our efforts in this regard to make sure that we run a clean organisation,” she said.

The business was “steadily and surely” getting to a point where the availability of critical equipment and supplies for rail and ports as well as its pipeline division was improving with orders of scores of equipment including rubber tyred gantry cranes, straddles, ship to shore cranes, haulers, helicopters and tugboats on order for commissioning between 2024 and 2026.

Maphumulo said there were three pillars to optimising the business’s balance sheet which included its own efforts driven by the recovery plan and working together with its lenders and shareholders to find innovative solutions.  

“The last one, not the least, is cost reduction and efficiency. We continue with our efforts to reduce our cost to serve as Transnet. And if we reduce our cost to serve, we move more volumes, we do lots of self-help, and we dispose of lots of non-core items in our business there is no reason why Transnet will not return a profit,” She said.

“We’ve set ourselves a target of R1 billion by the end of the 2024 financial year. It’s not going to be easy, but if we all work together, all the Transnet employees, our customers, our service providers, our lenders, all our stakeholders, I have no doubt in my mind that we will be able to return Transnet to its glory days. We’ll be able to return Transnet, at least in this year, to profitability.”