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Futuregrowth investment analyst Lindani Vezi said Transnet faces massive problems within its governance that can be linked to its operational failures.
In 2018, following the state capture era, which affected several state-owned enterprises (SOEs), Department of Public Enterprises Minister Pravin Gordhan appointed a new Transnet board.
The new board was tasked with tackling years of alleged corruption and driving investments and operational stability across the Transnet value chain.
However, in the years since, this board and its mandate have steadily deteriorated and now face significant challenges.
Vezi highlighted five operational challenges at Transnet and evolving governance weaknesses.
1. Turnover
The board of directors at Transnet has experienced significant turnover in the past few years, with several independent non-executive directors resigning or retiring without being replaced.
Today, Transnet’s board comprises only eight members: the six remaining non-executive directors appointed in 2018 and the two executive directors (the CEO and CFO).
“A company of the size and complexity of Transnet needs a larger board with a broader array and depth of skills than it currently has,” said Vezi.
“That these key positions remain unfilled at this moment in Transnet’s history, and with the significant operational challenges it faces, disturbs us as investors in Transnet, together with its implications on the broader South African economy.”
Transnet CEO Portia Derby and President Cyril Ramaphosa. Source: GCIS2. Term expiry
The six remaining non-executive directors’ terms will also expire in May 2024. “This creates a real risk of a sudden and immediate loss of continuity and institutional knowledge in a year.”
In addition, Vezi said the drawn-out process of appointing SOE directors could prove catastrophic for Transnet.
“The challenges it faces are significant and require the attention of an engaged, informed, experienced and skilled board,” he said.
3. Skills shortage
Vezi said the reduced board size means three key sub-committees within the board lack critical skills and expertise, referring to the Audit Committee, the Finance and Investment Committee and the Risk Committee.
For example, the Audit Committee membership does not include a non-executive director with a finance or accounting qualification.
This is the Transnet sub-committee currently engaged with the external auditors in finalising the SOE’s annual financial statements.
Furthermore, the execution of Transnet’s much-needed R99 billion capital expenditure programme over five years is overseen by the Finance and Investment Committee.
“This committee lacks critical strategy and finance experience and will thus cause further delays, placing more pressure on the under-maintained infrastructure,” warned Vezi.
“Considering the glaring skills mismatch evident in the three sub-committees’ membership, we question the level of due diligence and oversight provided by these sub-committees.”
Source: Shutterstock/Peter Titmuss4. Communication
Transnet recently reconstituted these three sub-committees to align them to their terms of reference and ensure they are staffed with the required three members.
However, according to Vezi, this was not communicated to the investor community in line with the JSE’s Debt Listing Requirements (DLRs).
These requirements obligate Transnet to issue a SENS announcement “without delay but no later than the end of the business day following the decision or receipt of notice detailing the change”.
“Transnet only issued a SENS announcement on 6 June, which we understand is more than two months after the most recent Board appointments, which were announced on 11 January 2023 and 14 March 2023, respectively,” said Vezi.
This delay brings into question the effective date of these changes and whether any decisions that these sub-committees may have made during this time were made by a sub-committee that may not have been appropriately constituted.
5. Deteriorating performance
Vezi said the gradual decline of Transnet’s board has occurred over the same time as an “observable deterioration in Transnet’s financial and operational performance”.
In the past five years, Transnet’s revenues, profitability and cash flow have reduced – and, for the first time in years, Transnet has required shareholder support through a R5.8 billion bailout.
Transnet Freight and Rail also continue to experience a shortage of locomotives, persistent cable theft and underinvestment in infrastructure.
“All of these remain significant headwinds facing Transnet and need urgent resolution to ensure that Transnet returns to stand-alone sustainability and our economy starts to recover and grow,” said Vezi.
“At present, Transnet Freight and Rail volumes are at 10-year lows, with South Africa missing out on the recent commodity boom, a lost opportunity that has severely dented our economy and growth prospects.”
*Headline image source: VladanRadulovicjhb/Shutterstock
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