Transnet’s announcement this week that it plans to spend R80-billion on infrastructure over the next 15 years coincided with the release of its best financial results to date — raising the question of whether the state utility is now ripe for privatisation.
The group reported a sharp rise in operating profit to R5,1-billion for the 2002/03 financial year from R1,5-billion a year ago.
Turnover rose to R41,3-billion from R35,8-billion last year, while profit before financial costs amounted to R7,9-billion from R4,7-billion.
The main contributors to the operational profit were Transnet’s core businesses, the National Ports Authority , Spoornet, Petronet, South African Port Operations and South African Airways (SAA).
SAA was Transnet’s greatest asset, posting operating profit of R545-million from a loss of R834-million the previous financial year.
Yet the airline was also the corporation’s greatest liability, because of its currency-related losses of R6-billion as a result of a hedging programme gone wrong.
The rand’s unexpected strength, while benefiting Transnet’s operational costs, resulted in a R5,4-billion unrealised hedging loss which negatively affected the group’s overall results — turning it into a R421-million loss. Last year the group made a R3,4-billion net profit, of which R2-billion was the result of hedging.
Transnet chairperson Bongani Khumalo said South African Airways had posted “a significant operating profit excluding currency losses” for the first time since its incorporation in 1989.
The group improved cash flow from its operating activities by 123% to R5,3-billion from R2,4-billion, largely as a result of improved operational profitability and better working capital management.
“The group has focused and decisive leadership and is pursuing its clearly articulated and strategic goals with vigour and determination, and is succeeding in its business transformation by containing costs and improving efficiencies despite its ageing equipment and infrastructure backlog,” he said.
It is with this in mind that Transnet is embarking on a significant capital expenditure programme.
Speaking to the Mail & Guardian, Tony Twine, senior economist at Econometrix in Johannesburg, said that now might be the right time to revisit the privatisation debate, particularly in view of SAA’s position of strength.
However, Twine also noted that since the September 11 2001 attacks on New York, airlines had performed poorly, while the global economy had also slowed down significantly.
Finding an international assessment of a South African parastatal is tricky, as credit ratings in these cases are based on guarantees of the government owners of such utilities.
International credit rating agency Moody’s ratings of Transnet are based on the “unconditional and irrevocable guarantee” of the government.
Owned 100% by the state, Transnet is involved in most aspects of transportation in South Africa. More than half of the group’s revenues and two-thirds of its operating income are derived from effective, if not legal, monopolies, partly offsetting the cyclical nature of most of Transnet’s operations, Moody’s noted in its last assessment undertaken in July.
The agency expected Transnet’s capital requirements to remain high and continue to be funded from disposal proceeds and future debt issuance, so that its financial leverage would decline only gradually.
However Moody’s noted that in 2001 management was able to restructure its pension obligations, resulting in a considerable improvement to the group’s capital structure.
“Because of its ownership by the state and its importance to the South African economy, Transnet is likely to remain closely associated with the state.
“However, we believe that the South African government may seek to further restructure the group’s portfolio and potentially reduce its ownership in Transnet and its businesses over time, through a partial privatisation of the company or some of its parts or a refinancing of Transnet’s current debt.”
Moody’s also noted that its rating outlook for the foreign-currency debt ratings of Transnet had recently been changed to positive from stable, while the outlook for the domestic currency debt rating remained stable. Both assessments followed the same rating outlooks assigned to the guarantor, the Republic of South Africa.
Moody’s currently assigns ratings to nearly 40 state-owned quasi-corporate entities (SQEs) in Europe. An SQE is an entity that is owned — usually 100% — by a sovereign state and which carries out a utility-related or infrastructural activity that might alternatively be performed by an industrial corporation.
Such activities can include rail services, electric and gas utilities, air traffic control, postal services, public broadcasting, and real estate management.
While some ratings have been set at the level of the respective sovereign issuer, others have been set closer to the level of the underlying credit quality of the SQE itself.
“In assigning a rating to an SQE, we consider various issues relating to the entity’s linkage with the state, notably its legal status, ownership status, the legal basis for government support, government statements of such support, and the entity’s strategic importance to the country”, a recent research note from Moody’s said.
Transnet group chief executive Mafika Mkwanazi said the main focus of the group’s capital expenditure programme was on the purchase of new aircraft and locomotives, the upgrading of infrastructure such as pipelines, the expansion of capacity of freight at harbours and the purchase of telecommunication infrastructure in preparation for the second fixed-line telephone operator.
“This capital expenditure programme, together with our concentration on optimal productivity and improved financial results, will position the group as a world class operator,” he added.
This may be what the government is waiting for before embarking on big-scale privatisation.