The spectacular collapse from R5 billion profit to R6 billion loss in five years

South Africa’s second-largest state-owned enterprise (SOE), Transnet, has collapsed from posting a R5 billion profit in 2019 to a net loss of R5.7 billion in 2023. It also has over R120 billion in debt.

This is a result of the company’s poor performance and a driver of its continued struggles, with Transnet unable to invest in much-needed infrastructure upgrades to boost its operational capacity.

Its collapse has severely impacted South Africa’s economic performance, with estimates placing the cost of Transnet’s poor performance on the economy at R353 billion in 2023.

This is despite Transnet’s significant competitive advantage over its global peers. Its business is dominated by bulk commodity exports, which are very lucrative and have good margins.

Analyst at Coronation, Humaira Surve, outlined in a recent research note how Transnet has collapsed and why South Africans can be optimistic about its turnaround.

Returning Transnet to its full capacity would significantly boost South Africa’s economy, reduce inflation, and positively impact the environment.

Rail transport consumes a quarter of the fuel used by road transportation, making it particularly attractive for transporting commodities and other goods over long distances.

By removing heavy freight from roads, traffic volumes would be substantially reduced, as would the damage and cost to maintain the road network.

From a social perspective, increased rail usage in South Africa would make our roads safer for all users and lower the cost of consumer goods through lower transport costs.

However, the main benefit would come from significantly increased commodity exports, which would boost economic growth and enhance the country’s foreign exchange earnings.

A lot of negative impact was felt by the collapse of Transnet due to the sharp decline in commodity exports.

Transnet operates a nationwide freight rail network of approximately 21,000 route kilometres, with access to seven port terminals.

Given South Africa’s commodity-rich economy, we have excellent origin/destination pairs, with mines on one end and ports to the rest of the world on the other, Surve said.

However, based on the Draft Transnet Network Statement released in March this year, which provides a comprehensive overview of the rail network’s condition, there is a mammoth task ahead for this potential to be realised.

Transnet needs to stop the rampant theft and vandalism of rail infrastructure, repair ageing infrastructure and potentially increase the length of sidings to allow longer trains to operate.

Vandalism of infrastructure, in particular, is a major concern for Transnet. For example, over half of all substations on its most important line connecting Durban to Gauteng were offline.

This means that electric locomotives, which are extremely cost-effective, cannot run on half of the corridor, which requires the use of diesel locomotives on the affected sections.

Further, the theft of signalling systems has led to manual authorisations and speed restrictions being implemented, creating excess expense and reducing network capacity.

Surve said Transnet will have to end the destruction of signalling and substations to achieve a fluid network.

Deteriorating infrastructure is another major concern for the utility, resulting in speed restrictions and sections of the line being inoperable for 12 hours a day. Some parts of the country’s rail network even have obsolete equipment.

The poor management of infrastructure has been compounded by severe weather events, which have severely limited the usage of the Durban-Gauteng corridor in particular.

Transnet’s disastrous financial situation also means the utility cannot invest in upgrading its infrastructure, ensuring it remains inefficient for years to come.

Relatively short rail sidings – a section of spare track allowing one track to pass another – restrict train length on several lines.

Increasing train length is one way to lower the cost per car, as adding cars to a locomotive is a cheaper way to increase capacity than adding locomotives.

If investments are made to extend sidings, Transnet could run longer trains and reduce the locomotive cost per carload of freight.

• By Shaun Jacobs

• This article was first published on Daily Investor and has been republished with permission. Read the original here.

source:The spectacular collapse from R5 billion profit to R6 billion loss in five years – BusinessTech