Transnet, South Africa’s state-owned goods transport and logistics company, faced the difficult task of recovering from the state-capture era in 2018. In an effort to restore transparency, accountability, and efficiency within the organisation, Public Enterprises Minister Pravin Gordhan appointed a new Transnet board. This new board, comprised of 12 independent non-executive directors and two executive directors, was charged with combating years of alleged corruption, driving investments, and ensuring operational stability throughout Transnet’s value chain.
However, over the next five years, Transnet faced significant operational challenges, and its governance structure revealed concerning weaknesses. Several issues deserve our attention:
To begin with, six of the original twelve independent non-executive directors have resigned or retired, leaving critical vacancies on the board. Four of these positions have been vacant for over a year. Transnet’s board currently consists of only eight members: the six remaining non-executive directors appointed in 2018, as well as the CEO and CFO. Given Transnet’s size and complexity, it is clear that a larger board with a more diverse skill set is required for effective governance.
It is critical that the shareholder, represented by the minister, fill these vacancies as soon as possible with qualified individuals who possess the necessary skills, ethics, and suitability. The existence of unfilled key positions, particularly at this critical juncture in Transnet’s history and given the significant operational challenges it faces, concerns investors and has broader implications for the South African economy.
Furthermore, the terms of the remaining six non-executive directors will expire in May 2024. This raises the prospect of a year’s worth of abrupt loss of continuity and institutional knowledge. The lengthy process of appointing directors for state-owned companies (SOCs) may harm Transnet, as the organisation requires the attention of an engaged, informed, experienced, and skilled board. The recent appointment of the SABC board exemplifies the length of time required to assemble a SOC board, which has a negative impact on the entity’s sustainability.
Furthermore, as a result of the board’s reduction in size, Transnet’s board committees have critical skill gaps. For example, the Audit Committee is currently working on finalising the annual financial statements and lacks a non-executive director with a finance/accounting qualification. The Finance and Investment Committee, which is in charge of overseeing Transnet’s R99 billion capital expenditure programme, also lacks the necessary strategy and finance experience, causing further delays and adding to the already stressed infrastructure. The obvious skill gap in the committee membership raises concerns about the level of due diligence and oversight provided by these subcommittees.
Another source of concern is a lack of market communication about changes in Transnet’s board subcommittees. Although these committees were recently reconstituted and staffed with the required three members to align with their terms of reference, the investor community was not properly informed, as required by the JSE Debt Listing Requirements (JSE DLRs). Transnet issued a SENS announcement on June 6, more than two months after the most recent board appointments were announced on January 11, 2023, and March 14, 2023, raising questions about the effectiveness of these changes and the decision-making process during this time.
Transnet’s financial and operational performance have both declined at the same time. The reduction in board size and the resulting governance flaws have occurred concurrently with financial covenant breaches, reduced revenues, profitability, and cash flow. Transnet has required an R5.8 billion bailout from the shareholder for the first time in years, as announced by the Minister of Finance in the October 2022 Medium-Term Budget. On the operational front, Transnet Freight and Rail is still dealing with locomotive shortages, persistent cable theft, and infrastructure underinvestment.
These issues are significant impediments to Transnet’s return to self-sufficiency and the recovery and growth of the South African economy. Transnet Freight and Rail volumes are currently at a decade low, robbing South Africa of the recent commodity boom and stifling economic development.
Looking ahead, Transnet must raise R7 billion in the debt capital market to refinance maturing bonds. When evaluating the investment case, investors will undoubtedly consider the additional uncertainty caused by the diminished board and governance deficiencies. Without prompt correction of operational and governance flaws, the number of investors willing to fund Transnet may decline, increasing its funding costs and potentially necessitating additional support, such as a government guarantee, to ensure a successful refinance.
These implications are significant, and Transnet and its shareholders must address them as soon as possible.
The governance flaws at Transnet raise concerns about the Department of Public Enterprises (DPE), which is in charge of oversight. Despite the DPE’s SOC Governance Assurance programme, which has 25 employees and an R60.6 million budget allocation for the fiscal year (with R31.6 million allocated to employee compensation), basic governance issues appear to have been overlooked and not addressed in a timely manner.
It is critical to recognise the broader implications of Transnet’s challenges. Transnet’s return to operational and financial sustainability is critical to our economy. Failure to meet this target will put additional strain on our transport infrastructure, exacerbate logistics inefficiencies, raise business costs, fuel persistent inflation, and stymie economic growth. As we approach 2024, we expect Minister Gordhan and his team at the DPE to address these critical issues as soon as possible.
Main Image: IOL