The time has come for the government to restructure the board and management of transport parastatal Transnet, writes Zukile Nomvete
When Transnet, the government transport parastatal, announced and published its audited financial results for the year ended March 31 1999, it blamed its poor performance on the pension fund liability.
To quote from their overview: “The R1,4- billion post-retirement benefit costs for pensioners resulted in the company showing a R426-million loss against the R278-million profit achieved 12 months earlier.” This is very far from the truth.
What has to be borne in mind is that Transnet has been paying the R1,4-billion post-retirement costs since inception. The same applies to the additional benefit cost of its employees, which has remained unchanged in the past two financial years at R445-million.
In other words, management knew at the beginning of the year that these costs needed to factor into the planning and budgeting process. Despite these cumbersome liabilities, the company was in the position to post a record profit in the 1997/1998 financial year of R278-million.
Analysts might wonder how this was possible; the answer lies in the 1997/1998 annual report. There was greater focus on business and less on politics and the management team, especially in middle management, which had greater resolve, confidence and commitment to the leadership and future of the company.
That was before the onset of the exodus of competent management cadre, both black and white. Why? Because money was lavishly spent carrying politicians on the Blue Train and huge events organised for naming of aircrafts in Port Elizabeth and Pietersburg; alleged abuses of the Voyager Miles frequent flyer programme, and so forth.
Such practices even banana republics of yesteryear would envy.
In the same vein, it is reported that Spoornet lost 28% market share! Spend R70- million refurbishing the Blue Train then sell it!
Let us picture a scenario where a listed company with a R21-billion turnover turns around a net loss of R170-million to post a profit of R278-million, that is a 263% turnaround in 12 months. The shareholders have every reason to believe that this is a watershed achievement and the company has turned the corner.
Nevertheless, if the company reverses those gains within a 12-month period to post a massive loss of R426-million, with no logical and sound reason, what would the shareholders do?
On to substantive issues. In the directors’ report for the 1997/1998 financial year we are made to believe that the “first wave of transformation, that is the appointment of new and additional executive directors and the challenges that are facing them, is under way”.
The report continues and informs us that the company, in 1998, was in the second wave of transformation which “places a strong emphasis on performance of individual businesses and those responsible for managing them. Transnet therefore introduced the balanced scorecard as a performance management system.
“The second wave focuses less on people and `political’ issues and more on re- engineering and restructuring of businesses to ensure growth in operating profit.”
Although there is an improvement (10,1%) in the turnover compared to the previous financial year (7,6%), ironically the same cannot be said for the operating profit. The previous year’s 12,9% improvement has been dismally eroded by a negative 27,5% decline. A 40,4% erosion!
Executive director of finance Gloria Serobe referred to the 1997/1998 financial year as “a watershed and turnaround year in the history of Transnet Limited”. All because “strict financial discipline and focus on working capital management has resulted in improvement in operating margins and return on assets, despite the deteriorating exchange rates and the cost of retrenchment programmes”.
The same retrenchment costs (R400-million) are now the further cause for this year’s decline in pre-tax profits, according to Transnet managing director Saki Macozoma. I guess the difference is the decline in the operating profit due to costs that have skyrocketed because of mismanagement.
In his 1997/1998 financial report, the managing director says: “Our major aim has been to defend value and market share, and to retain the strategic initiative.”
He continues to make what have proven to be empty promises: “The fruits of such a pragmatic approach will become obvious in the 1998/1999 financial year.” Well, we all know that the fruits have been rotten to the tune of R704-million.
After all the flowery words and expressions contained in the directors’ report, let us reflect on the current results against the vision and targets/commitments undertaken by Transnet in the 1997/1998 annual report.
Perhaps the board of directors also have a balanced scorecard performance agreement with the shareholder, in this instance the state.
l Operating profit dropped by a massive R947-million (27,5 %) compared to the previous financial year.
l Operating costs increased by a whopping R3,1-billion (17%).
This is the highest operating costs increase in the history of the company since 1990. This is occurring against promises in the last year from Transnet that “management will continue its diligent drive to contain and where possible reduce costs [sic], accelerate transformation and improve customer focus”.
In a response to Ann Crotty of Business Report last month, Macozoma would have us believe the R300-million would have been saved if he had not hired consultants. Can he elaborate further as to what value has been created by these consultants and what has been the increase, if any, year on year in paying consultants?
One can guess that is the price you pay when you hire spin doctors to improve your image and ignore your company’s entire communications department and the agency that has its corporate account.
A case in point is the appointment of David Barritt to do public relations for Macozoma and minister Stella Sigcau. How many more such “consultants” have had a slice of the R300-million cake?
If Macozoma is quick to shun creative accounting, can he inform us if the “profit” of South African Airways had nothing to do with: sale of obsolete stock, outsourcing of the duty free programme, aircraft sale and leaseback, rollover of accounts payable at the end of the financial year without creating the necessary provisions and the allocation of payment within the forward sales accounts?
Perhaps the revenue was actually from ticket sales realised from “bums-on-seats” sold.
Macozoma and his management team cannot hide behind the pension fund smokescreen this time around. We all agree that the pension fund liability is a burden to the company. That is no excuse for mismanaging an important asset such as Transnet.
Macozoma and his management team failed dismally to meet the targets they had set themselves.
The time has come for the government to restructure the board and management of Transnet.
Some of the directors have been overseeing the demise of Transnet since 1990 and it’s time they go.
Zukile Nomvete is former chief executive of South African Airways
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