Transnet, with total assets of R335.8 billion (2020: R338.3 billion), operates extensive rail infrastructure and provides cargo services, operates a 3,114 km high-pressure gas and gas pipeline network and manages eight seaports commercial: Richards Bay, Durban, East London, Ngqura, Port Elizabeth, Mossel Bay, Cape Town and Saldanha.
Transnet was marked by state capture and was not spared the negative impact of Covid-19.
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Its various operations have also suffered from “security incidents”, “community disturbance incidents” and “theft, vandalism, sabotage of assets and equipment, as well as operational disruptions.”
The Auditor General (GA) issued a qualified audit report for the third consecutive year, on the basis that irregular expenses were not fully and accurately recorded, and payments were made in contravention of supply chain management requirements. supply.
Irregular spending incurred in 2021 was R14.1 billion (2020: R8.4 billion).
The AG was “unable to determine the full extent of the underestimation of reported irregular spending at R104 billion” (2020: R131 billion).
Transnet has embarked on a clean-up plan, is revamping systems, including taking appropriate action against those involved, and “disciplinary measures taken against certain former top executives” have resulted in layoffs. These cases have been reported to law enforcement agencies.
Financial health and sustainability
Transnet’s 2.0x cash interest coverage violates certain loan covenants. All required default exemptions were obtained before August 12, 2021.
|The cash flow statement indicates the dependence on loans (Rm)
|Cash flows generated by operations||27 150||36 101|
|Changes in working capital||-2 701||-2 703|
|Lower financial costs||-11 072||-10 955|
|13 377||22 443|
|Less: taxes, post-retirement fund benefits, derivatives||-1 530||-675|
|More financial income||256||171|
|12 103||21 939|
|Less investment to maintain operations||-12 205||-15 315|
|Less investment to expand operations||-3 140||-4 807|
|-3 242||1 817|
|Loans repaid||-17 932||-13 058|
|-21 174||-11 241|
|New loans raised||18 086||11 341|
|Cash and cash equivalents at the beginning of the year||4 256||4 156|
|Cash and cash equivalents at the end of the year||1168||4 256|
Financial costs comprise 40.78% of the cash flow from operations; therefore, rising financial costs will exacerbate cash flow problems.
|% of financial costs / cash flows generated by operations||40.78||30.35|
|% maintain and expand operations / cash flows generated from operations||56.52||55.74|
Transnet did not respond to Moneyweb’s question as to whether it has sufficient cash flow to meet requirements in the medium term.
|Long term loans||77 626||115 821|
|short term loans||51515||17 577|
|Total loans||129 141||133 398|
|Trade creditors and accruals||16 465||19 121|
|Total financial liabilities||145 606||152 519|
Short-term loans accrue interest at rates between 2.27% and 11.8%.
Short-term loans in 2021 include an amount of R30.7 billion in long-term loans that were reclassified as short-term loans due to a default on cash interest coverage at the end of the year. Transnet obtained exemptions from all the lenders affected by these breaches of the agreement.
Loans guaranteed in foreign currency are denominated in US dollars, bear interest at 2.75% and are repayable on June 12, 2030.
Transnet did not respond to Moneyweb’s questions requesting a division of domestic and US dollar-denominated loans, whether the interest rate of 2.75% on US dollar loans is fixed or variable, and the amount of loans granted by state entities, if any.
Transnet did not respond to Moneyweb’s questions regarding the impairment note, which reads: “Impairment of non-financial assets arose primarily at Freight Rail in relation to locomotives and wagons due to suspension of OEM 1 064 [original equipment manufacturer] contracts that have resulted in wrecked locomotives that cannot be repaired, derailments and the impact of physical verification and life evaluations ”.
Moneyweb asked how the suspension of the contracts prevented the repair of locomotives, if the “1064 locomotives” had been vandalized and were therefore not operational.
Moneyweb also asked about the reason for the deterioration of the R1.8 billion port facilities, as the explanation given in the note is not clear: “An assessment of capital work in progress (CWIP), in ports also resulted in impairments of -financial assets “.
Performance of the main operating divisions
Transnet issued reports for each division:
- Transnet port terminals: Revenues for the year decreased to R13.1 billion (2020: R13.8 billion). The profit before tax for the year was reduced to R1.3 billion (2020: R3.9 billion).
- Transnet Engineering: Revenues decreased to R8.2 billion (2020: R11.9 billion). Loss before tax increased to R3.4 billion (2020: R1.8 billion).
- Rail Transportation: Revenues for the year decreased to R39.4 billion (2020: R44.6 billion). The pre-tax profit of R2.1 billion in 2020 was reduced to a loss of R92 million in 2021. There were a series of “security incidents” and “community disturbance incidents” that caused damage to the network and assets of the rolling material.
- Transnet Pipelines: Revenues decreased to R4.9 billion (2020: R5.7 billion). The loss before tax was R4 billion (2020: R1.6 billion profit). An amount of R4.4 billion has been provided for disputed claims. Ductos is responsible for any environmental contamination resulting from “spills” where thefts occur.
- 1064 locomotives: On March 9, 2021, Transnet and the Special Investigation Unit (SIU) filed a request for review in the high court regarding the locomotive supply agreements concluded with China South Rail, China North Rail, Bombardier Transport and General Electric. Transnet seeks to retain possession of the locomotives and receive compensation for overpayments.
- Transnet submitted a revised settlement proposal to the Competition Commission regarding the finding of excessive prices and exclusionary behavior / preferential treatment.
- Transnet and the Special Investigations Unit (SIU) successfully initiated proceedings against Herbert Msagala, a former Transnet group executive. The SIU special court ordered Msagala to return R26.4 million to Transnet. Msagala was fired in July 2020.
- Total SA and Sasol Oil v. Transnet Pipelines: Total has claimed damages of R430 million, and Sasol of R1.1 billion, in respect of a tariff dispute. The matter is ongoing.
- The Special Court Hearings will be held November 15-19 regarding SIU v. Pro Serve Consulting and Four Others and SIU and Transnet v CRRC E-Loco Supply. The amounts involved amount to just over R4 billion.
Transnet is in a difficult financial situation and relies heavily on external funders to provide capital for loan servicing and capital commitments.
Transnet had not responded at time of publication despite questions being posted on Thursday, November 4, 2021.