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Transnet to shrink rail network

9th February 2023

By: Bloomberg

  

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State-owned logistics company Transnet plans to shrink the 20 000 km freight rail network it operates by at least 35% as it focuses on delivering more profitable cargo loads.

Transnet, which also runs the nation’s main ports and pipelines, has been hobbled by a shortage of locomotive parts, the theft of cables used to operate its electric trains and inefficiencies that have arisen due to it being a monopoly. The problems have impacted the main line that takes coal from mines in the eastern Mpumalanga province to port.

“At this point we can’t justify operating something which actually causes us to make a loss and so that’s why there’s this revision of certain flows across the network,” Portia Derby, Transnet’s chief executive officer, said in an interview in Cape Town this week.

South Africa’s freight rail system and harbors were established after the discovery of diamonds in 1867, and the assets were eventually folded into Transnet, according to the company’s website. Like century-old state power utility, Eskom Holdings, it has periodically had excess capacity and became a price-taker over time, Derby said.

Transnet’s rail tariffs are based on weight, meaning it generates less revenue from carrying loads of lighter products such as timber or sugar than from ferrying coal or ore, but that doesn’t reduce the required number of trains and maintenance. The government will take a final decision on closing or outsourcing lines.

“We can operate more effectively with a slightly smaller network,” said Andrew Shaw, Transnet’s chief strategy and planning officer. “It still serves the economic interest of the country and it still allows additional operators.”

If implemented, Transnet’s new strategy would make more locomotives available to move coal on its North Corridor route. Disruptions on the line resulted in exports from the Richards Bay Coal Terminal on the east coast falling to a three-decade low in 2022. The pace of deliveries has slowed further since the start of the year, according to two people familiar with the information, who spoke on condition of anonymity.

Derby declined to comment on how much coal has been delivered, but said that 164 locomotives in one of its fleets were out of service during the current financial year, up 23% from the previous year, due a lack of spare parts.

“That can’t improve until we solve the problem with the Chinese,” she said, adding that resolving the train shortage was Transnet’s top priority.

The company last month said reticence by a local unit of supplier China Railway Rolling Stock Corp. to engage with tax authorities and the South African Reserve Bank was delaying the finalization of an agreement that would unblock delivery of the parts. It has subsequently issued a request for proposals to other manufacturers to fix the idle trains.

In January, Transnet initiated a new $6 billion bond sale program in its first foray into international capital markets in more than a decade. Moody’s Investors Service lifted the outlook on all the company’s debt to stable from negative after it successfully priced an initial five-year $1 billion bond.

Raising the new debt “buys us five years of peace and quiet, at least on that dimension,” Derby said. “It doesn’t take away from the fact that the financing pressures, the need to generate revenue from our operations and hence the thing of stopping loss-making flows is absolutely crucial for us to start putting to bed some of our old debt.”

Edited by Bloomberg

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