Transnet resilient through 2020 despite lower volumes moved

Transnet's earnings before interest, tax, depreciation and amortisation fell 33.7 percent to R17.1 billion in the nine months to December 31 after its operations were hard hit by Covid- 19 related lockdowns.

The transport utility, which last week launched a court review of tenders to acquire 1 064 locomotives for R54.4 billion, one of the largest single procurement events undertaken by a stateowned company, said the lockdown in March 2020 had severely constrained demand for port, pipeline, and rail freight services.

Transnet, however, said that it had remained resilient. The group generated more than R18.6 billion cash flows from its operations as at December 31, sufficiently funding finance costs and working capital, and netting R4.3 billion from operating activities to fund the capital investment programme.

Revenue fell 13.7 percent to R49.3 billion on lower volumes. Operating expenditure increased by 2.7 percent to R32.2 billion. Cost-containment initiatives limited this increase, despite unexpected Covid-19 related expenses of R218 million, and a R594.5 million provision for rehabilitation of pipeline spill sites following theft incidents.

Volumes transported in South Africa to end-November 2020 were 12.8 percent lower than the previous year and the corresponding income 11 percent lower, with the most impact being in containers, automotive, mining minerals and petroleum.

In addition, the rail network and operations continued to experience high incidences of cable theft, power failures, vandalism, adverse weather conditions and deteriorating infrastructure conditions. Pipeline volumes were 30.9 percent lower than the prior year at 9.3 billion litres. Container volumes were 14.9 percent lower.

For the year ending March 31, 2020, Transnet expected to report revenue of 11 to 15 percent less than that reported for the previous year, mainly driven by a decline in volumes in the same range. Lower volumes, unplanned Covid-19 costs and pipeline incidents were expected to result in a decline in earnings before interest and tax of 65 to 95 percent.

The utility and Special Investigating Unit (SIU) have launched an application in the high court to review and determine a just remedy on four contracts concluded by Transnet in 2014 with Original Equipment Manufacturers (OEMs) to acquire 1 064 locomotives. The financial outlook excluded any possible impact of the legal action regarding the locomotive contracts.

The court action seeks to rectify contract tenders that also allegedly formed part of the state capture by the Gupta family.

According to previous media reports the Guptas allegedly worked with China South Rail, now called CRRC E-Loco Supply (CSR), which pledged R9 billion in kickbacks to the Guptas. The contracts were also with Bombardier Transportation (BT) South Africa, China North Rail, now called CNR Rolling Stock SA and General Electric S Technologies (GE).

Transnet and the SIU said in their court papers that the procurement was based on a flawed market demand strategy and that the laws, government instructions and Transnet policy were deliberately ignored.

In December 2018, Transnet invited the four OEMs to agree to enter into negotiations for a remedy, but agreements were unable to be reached with three OEMs and the remedy with GE required supplementation.

The key argument in the court application was that the OEMs were not entitled to benefit from locomotive supply agreements awarded to them in an irregular manner.

“It is argued that given the nature of the kickback agreements concluded by the parent company of CSR and CNR, they cannot claim to be innocent.

The factual basis is established in the affidavit that neither can the other two OEMs, BT and GE, claim that they did not or could not reasonably have known that the procurement process and subsequent contracts were irregular and unlawful,” a statement read.