/ 1 December 2023

Treasury grants Transnet R47 billion support package

Transnet

Treasury has agreed to grant beleaguered state ports and rail company Transnet a R47 billion guarantee facility, effective immediately.

The guarantee facility will be used to support Transnet’s recovery plan, including meeting its immediate debt obligations, according to a joint statement by the treasury and the department of public enterprises. Transnet will use R22.8 billion of the amount to deal with immediate liquidity matters, such as settling maturity debt.

The intervention comes in the wake of a costly backlog in its port and railway infrastructure nationwide, which has wreaked havoc on businesses. 

Transnet’s risk to South Africa’s economy has become even more acute in recent months, with a number of companies flagging logistical constraints as part of the reason for their poor performance this year. This week, Steel giant ArcelorMittal South Africa announced that it had decided to wind down its long steel business — citing, among other things — high logistics costs.

“Transnet plays a central role in the South African economy and the government’s goal of inclusive growth,” Friday’s joint statement read.

“However, the entity has suffered significant operational, financial and governance challenges in recent times and is struggling to fulfil this strategic role. 

“In recognition of the seriousness of these challenges, the national treasury and the department of public enterprises have been working with Transnet to find a solution to the company’s immediate and longer-term problems, and the decision to grant the guarantee facility is a result of these discussions.”

Many had hoped that Finance Minister Enoch Godongwana would signal a Transnet bailout in his medium-term budget speech last month. Transnet has asked the treasury for more than R100 billion, as it buckles under its R130 billion debt, according to news reports. The state-owned entity’s debt has hamstrung its ability to invest in its turnaround.

Though Godongwana did not dismiss the idea of a bailout, he did suggest that any support from the treasury would come with strict conditions.

“No modern economy can thrive and grow new industries if rail lines are beset by delays and ports are unable to efficiently handle incoming and outgoing cargo,” the minister said during a press briefing ahead of last month’s speech.

“Transnet’s performance has been underwhelming and its operations have been strained by a worsening financial state.”

He further noted that Transnet had approached the treasury “with an invoice”. “So, we made the point which I want to emphasise, one of the lessons that we have learned so far on the bailouts is, when people give us an invoice, a bailout means they must sort things out. On the basis of trust, we give money,” Godongwana added

Friday’s statement noted that the government has not considered an equity injection, given that the budget for the 2023-2024 financial year is closed. However, the state is confident that the R47 billion guarantee facility alongside swift implementation of the Transnet Recovery Plan will be sufficient to resolve the parastatal’s challenges, it added.

The treasury and the department of public enterprises will agree to a guarantee framework, which will include strict conditions to be continually reviewed and amended when necessary. Any further drawdowns will be subject to Transnet meeting these conditions.

“Minister Godongwana is positive that the necessary reforms needed to put Transnet back on track can be achieved if the entity commits to meeting the strict conditionalities attached to the guarantee and quickly implementing the reforms informed by the National Logistics Crisis Committee,” the statement said.

“Minister Pravin Gordhan highlighted the fact that Transnet is critical to the South African economy. A well-functioning logistics company is particularly important given the geographical distribution of economic activity in the country, our reliance on commodity and other exports, as well as our distance from key export markets.”

The guarantee framework agreement must be concluded between the treasury, the department of public enterprises and Transnet within 14 days of the activation of the guarantee. This, the statement notes, is aimed at ensuring any fiscal risks are mitigated and that the conditions of the facility are fully agreed to by all parties.

The treasury will continue to work with Transnet to pursue other initiatives to revive its operations and financial viability, according to the statement.

Meanwhile, Transnet will explore avenues through which to divest from its non-core assets, reduce its cost structure and find alternative funding models for infrastructure and maintenance requirements. “The latter includes, but is not limited to, project finance, third party access, concessions and joint ventures.”