Transnet optimistic about future

[Steve Appleton]

From Business Day, 3 November 2011, http://www.businessday.co.za/Articles/C ... ?id=157695

Transnet optimistic about future
Published: 2011/11/03 07:41:03 AM

Despite decades of underinvestment and a railway network that has slowly shrunk, Transnet CEO Brian Molefe says there are reasons to be positive. The days when state freight logistics group Transnet was a “burden” on the SA economy are a thing of the past.

Transnet released its interim results for the year to September, reporting 20% higher revenue and a 25% jump in operating profit. It also reported improvements in efficiency and productivity across most its freight rail and port operations. This comes off a low base, though, judging by the criticism from various industrial sectors.

Ailing transport infrastructure has stifled economic growth, and inefficient rail and port operations managed by Transnet have been blamed for inefficient transportation. (See Cover Story.)

Since taking over, Molefe has tried to keep a tighter rein . He has introduced quarterly performance appraisals. Every 100 days, his executive team’s productivity levels are assessed. This system has filtered down through the organisation, putting Transnet’s infamous inefficiency under the spotlight.

Volumes in Transnet’s general freight, iron ore, coal and maritime containers have improved. On-time arrivals and departures have also increased, though off a very low base.

Transnet’s end game is reliable freight transportation. Targeted improvements in efficiency have become its most important benchmark, says Molefe.

He says tariffs, though high, are a secondary concern. Private operators have often complained about high port tariffs. Molefe says the group intends to undertake its own study to compare SA’s port tariffs to those of other global ports.

Unlike international ports like Rotterdam, SA ports pay tax, are not subsidised, and have to cover their own capital expenditure.

Government’s intention is to concession off secondary freight railway lines to the private sector. The department of transport has indicated that private participation will be a critical strategy for the expansion and upgrade of the country’s transport infrastructure.

A transport green paper to be released before the end of the year is expected to flesh out how more than one operator could be introduced to the rail sector.

Molefe, however, is wary of too much private-sector participation. “It is possible for us to deliver efficient rail, even as a state-owned entity. I don’t buy the dogmatic argument that the private sector can do it better,” he says.

Transnet has voiced strong opposition to proposals mooted earlier this year by government that its rail infrastructure assets be stripped out and put into another company.

Government has not yet indicated exactly what policy it will pursue. Deputy transport minister Jeremy Cronin has said splitting Transnet does have disadvantages, and government would consider the extent of private participation carefully.

However, Cronin has also said that Transnet’s intention to introduce private- sector participation to its secondary lines might not be sufficient. He has said it might not be viable for companies to invest in just parts of the network, and the group might have to open up main lines.

Molefe disagrees. Private-sector participation, he says, can be extended to Transnet’s “noncore” activities. Main lines, however, should be left to Transnet to operate.

The organisation, he says, can “rise to the occasion”. Higher volumes of coal transported by Transnet to the Richards Bay Coal Terminal confirm that operations are improving, Molefe says.

In addition to bulk commodities like coal and iron ore, the University of Johannesburg’s Prof Vaughan Mostert says, Transnet should give adequate attention to smaller branch lines.

Many small towns in SA have stations that are not currently operated. Were government to stipulate that petrol and diesel be transported by rail to remote stations, it would boost the sector. This would add to the cost of moving petrol, but would make a line available for other goods at almost no cost.

Mostert says reviving this low-level activity is critical to increasing movement on rail.

Another rail expert who declined to be named, however, is sceptical of Transnet’s strategy to concession branch lines to the private sector. It is unrealistic to expect companies to pay for investment in railway lines while the state retains ownership, he believes.

Vandalism on non-operating branch lines, coupled with decades of underinvestment, has left them in a dilapidated condition. Investors may be less willing to invest in an ageing network than government may think.

Even on functioning lines, higher volumes are dependent on more investment. But despite Transnet’s planned expenditure programme, capital spending fell 6,9% in the interim period. The group spent R9,5bn, compared to R10,2bn in the previous comparable period. Molefe says it is still on track to spend R25,8bn for the year to March 2012.

Transnet intends to invest R110bn over the next five years. Of this, it still needs to borrow R33bn. Molefe says it has also brought forward R6,1bn worth of capex in a bid to make rail and port services more efficient. This spending is budgeted for the next two years, despite previously being earmarked for the end of its five-year plan.

This includes spending R3,6bn on the procurement of 95 electric locomotives and 43 diesel locomotives, R1,1bn to increase the Eastern Cape port of Ngqura’s capacity from 250000 twenty- foot equivalent units (TEUs) to 2m TEUs and R1,3bn for equipment and new infrastructure at Durban Container Terminal’s Pier Two.

To improve Pier Two’s turnaround time, Transnet will purchase seven ship- to-shore cranes that will be introduced from October 2012. The productivity of Pier Two dropped by 9,3% in the six months to September 2011, compared with the same period in 2010.

Molefe says that by the end of the year, Transnet will also have announced the terms of its purchase of the old Durban airport. Though a price has not been set, Transnet has budgeted R1,5bn for the site’s purchase from the Airports Company SA.

The site’s transformation into a manmade port (which would involve building a link to the sea) will depend on whether economic growth can justify the expenditure on it. It is expected to be completed only in 2040. Transnet has suggested it may work with a private partner to finance and construct the port, a project expected to cost about R30bn to develop.

Transnet will also take delivery of 86 new locomotives and 1509 new wagons in the current financial year as part of its fleet renewal programme. The programme extends to 2016, and will replace ageing infrastructure .

For the year to September, Transnet’s revenue rose 20,3% to R22,4bn, compared to R18,7bn during the comparable period last year. Operating profit rose 25,2% to R5,1bn.

Higher profits, however, will not be a benchmark for the group’s success. If government intends to achieve its objective of moving freight from road to rail, the logistics group has to do a lot more. Despite Molefe’s position, facilitating private-sector involvement will likely have to form at least part of its strategy.