Transnet Freight Rail to split, recovery plan outlined

South African logistics operator Transnet Freight Rail (TFR) will split into two new divisions — Transnet Freight Rail Operating Company (TFROC) and Transnet Rail Infrastructure Management (TRIM) — as part of the group's recovery plan, chairperson Andile Sangqu announced in The Board's First 100 Days press conference today.

"TRIM will focus on protecting and restoring rail network capacity for commercially viable, high-volume traffic to assist TFROC in delivering the highest possible tonnage," Sangqu said. The commercial and personnel separation of the two units will be completed by the end of October and "third-party access" will be open by April 2024.

Transnet forecasts 170mn t of rail volume across all commodities during the 2023-24 financial year beginning in March, 15.6mn t higher than the 154.4mn t that the firm has committed to transporting. And Transnet forecasts a 13.4mn t drop in volumes to 141mn t if no action is taken.

The North Corridor — the key coal export route — is forecast to transport 57.2mn t during fiscal year 2023-24 if the 154.4mn t total committed volume is achieved and 66.95mn t if 170mn t is achieved, TFR's acting chief executive, Russell Baatjies, said.

Transnet Group chief executive Portia Derby and TFR head Sizakele Mzimela each stepped down from the beleaguered firm in early October.

Between 1 March and 23 October, Transnet sent an average of 906,000t of coal per week by rail to Richards Bay Coal Terminal, equating to an annualised pace of 47.1mn t. This represents a 10.1mn t gap in Transnet's 57.2mn t forecast.

"170mn t is a very, very steep target," acting group chief executive Michelle Phillips said. "We believe it is a do-able number [and] if we achieve this number, it will probably be the first time in a 10-year period that Transnet is able to achieve in the second half of the year more than what it achieved in the first half of the year. Should we end up with the 170mn t, in the year 2024-25, Transnet would be set up quite well to end that financial year [at] 193mn t."

Despite presenting its turnaround plan and posting ambitious rail volume targets, few concrete measures were outlined as to how Transnet will improve performance on the rail corridor.

A shortage of locomotives and train parts, as well as cable theft on the rail lines, are key factors behind poor rail performance in recent years.

"The [China Railway Rolling Stock Corporation] CRRC matter is still ongoing," Sangqu said. "It has not been resolved yet. The execution of our recovery plan is not dependent on whether or not we receive those outstanding locomotives from CRRC."

"Transnet does not have a demand problem," Phillips said. "We are sitting with huge stockpiles at the mines and these need to be moved as a matter of urgency to the ports so that they can be exported."

Financial losses ahead

Higher operating expenses and deteriorating revenues have hit Transnet's financial position. Transnet's earnings before interest, taxes, depreciation and amortisation (ebitda) fell to 23bn rand from R32.5bn over the past five years. Revenues between financial years 2017-23 fell to R68.9bn from R72.9bn, while operating expenses climbed to R45.9bn from R40.4bn.

"This business requires government support, and we are hopeful that [the government] will come to our assistance," Phillips said. "We've had several conversations with the National Treasury regarding some of the constraints that are placed on us by the Public Finance Management Act. There is no attempt at all to privatise our operations. We are bringing in the private sector on various models. We are not disposing of all assets, however we require the private sector for funding to improve on skills to assist our people, to further improve production within our organisation."

Transnet has held discussions with coal mining firms in recent months about a scheme in which the industry would help fund Transnet's improved services and recoup their costs by way of subsequent rail tariff rebates, sources said.

"When we meet our customers' expectations, we expect that our revenue improves," Phillips said. "There will be a certain repricing of tariffs because we cannot continue to be operating flows in a loss-making state."

"In the current financial year, we need to spend a total capital of R17.9bn, and if we want to push to the 170mn t, then we need a slightly higher capital investment of R20bn," Hlengiwe Makhathini, acting group chief financial officer, said. "At 154mn t, we'll get just less than a 2pc return on invested capital and just under 3pc if we are able to achieve [the 170mn t] target."

By Evan Millard