‘Transnet has turned the corner’ as recovery gathers pace

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JEREMY MAGGS: Transnet today is reporting a return to profit for the year, with revenue rising, freight rail volumes improving and signs of recovery across parts of the port network.

But the R4.6 billion headline profit does include a substantial once-off gain from the Durban Gateway Terminal (DGT) transaction. Rail volumes do remain well below historic levels. Debt and financing pressures remain significant, and the company is still dependent on government guarantees.

Read: Transnet returns to profitability but long road to recovery remains

So let’s pull all of this together. Joining me is Transnet group chief executive Michelle Phillips. Michelle, welcome to you. Can you genuinely say that Transnet has turned a corner or have you simply stopped getting worse?

MICHELLE PHILLIPS: Certainly, Transnet has turned the corner. Of course, the job is not done, we still have a lot to do, but I can say with confidence that Transnet has certainly turned the corner.

The numbers speak for itself in respect of volumes and what we’ve done over this past period, but also in respect of our revenue numbers and our profit.

JEREMY MAGGS: Rail volumes, Michelle, are improving, but they are still below 2021 levels. When does recovery do you think become a real success here?

MICHELLE PHILLIPS: The recovery becomes a real success when we continue to get to the targets that we have set for ourselves. The 180 million tonne is quite critical – the number that Transnet needs to move.

The reason for that is because that’s when we actually start making money out of the movement of volumes. Of course, revenue continues to increase.

However, up until such time, you will see the reason why we have to continue with our private sector participation projects, because that obviously supports us while we are trying to get the business into a most sustainable, position.

JEREMY MAGGS: One hundred and eighty million, though, is still a stretch. How confident are you and where do the risks still remain?

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MICHELLE PHILLIPS: Jeremy, we’ve done quite a bit of work this past year on the rehabilitation of the network. We will talk about the R23 billion that we’ve invested, particularly in the corridors, and we continue to do that work.

We have found that, as soon as we’ve completed these annual shuts, we see the volumes again moving in the right direction.

Of course, we continue to be plagued by theft and vandalism, incidents of sabotage, criminals trying to destroy our network.

But for the most part, I have to say, the almost 50 000 Transnetters are working very hard to not only protect the network, to rehabilitate it, and to make sure that we move those volumes.

JEREMY MAGGS: Let me pick up on theft and vandalism then, as you raise it. Still costing, Michelle Phillips, Transnet more than R1.7 billion, why is such a basic threat proving so difficult to beat.

MICHELLE PHILLIPS: We run quite an extensive network. The rail network is over 30 000 kilometres; it covers the length and breadth of the country. So it’s quite an expansive and big network that we have to cover. That being said, we make use of private security companies.

But we do have a country issue when it comes to crime, and it’s something that I think we all need to work together to try and address.

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We spend quite a lot of money on securing this network, and I think we see the improvements, but certainly still a lot of work to be done to ensure that we stop this kind of behaviour because more than Transnet, it impacts the livelihoods of ordinary people of the country.

JEREMY MAGGS: Talking about bad behaviour. Almost R4 billion in reported irregular expenditure. More than 200 fraud investigations are still active. Michelle, why should South Africans believe the culture at Transnet has really changed?

MICHELLE PHILLIPS: I think that, if you speak to our customers, you speak to our service providers, you will hear that people are beginning to feel the difference. But I think more than that, you talk about the irregular expenditure, now we have to take this in context.

The irregular expenditure that you speak about relates to multiyear transactions that we pick up in the reporting financial year. Now, we have seen, again, quite a reduction, in fact, in the irregular expenditure that we pick up in the current year.

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The more than R3 billion of irregular expenditure comes from previous years, but we still have to deal with it, and you report it in the year in which you pick it up. Right now, Transnet is already all the way back into 2010 in terms of identification of irregular expenditure.

That being said, as an organisation, we are continuing to put controls in place so that we do not incur further irregular expenditure.

For this year itself, the irregular expenditure is sitting [at] R300 million, it’s still a lot, but when you compare it to where we’ve come from, in the billions of rands, I think there’s been quite a bit of progress on the Transnet side.

JEREMY MAGGS: You talk about your customers feeling the difference. Are they actually experiencing a better service or is the improvement that you’re outlining to me still mainly visible in your own numbers?

MICHELLE PHILLIPS: I think the customers are absolutely feeling the difference. Transnet has really opened itself up a lot more to the engagement and the collaboration with our customers. We talk to them every day, all the time. We have a number of, in fact, customer-led solutions that we are continuing to implement in our business.

I think on the whole, as far as even the culture within the organisation itself, there is a lot more understanding of the customer needs and the customer requirements, and the importance of meeting and exceeding the customer expectations.

JEREMY MAGGS: In that respect, you also say that ports are improving, yet reported container volumes have actually fallen. How do you reconcile that?

MICHELLE PHILLIPS: Okay, so the number we need to take in context – overall, in the system, the container numbers have not fallen. You must take into account that we have closed the DGT transaction.

Now, for revenue purposes, you’ll see that we report a TPT (Transnet Port Terminals) number, which is the operator number, and that number looks like there’s been a reduction, but in fact, it is not.

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Overall in the system, including the DGT number, we have actually increased container volumes from 2025 by 7%. So overall we see container TEUs (twenty-foot equivalent unit) moving upwards and we believe it will continue to move upwards.

But compared to the prior year, the container volumes have actually increased by 7%. However, for revenue purposes we use the operator number. But for the system, we use the number as contained by the Port Authority in their numbers, and that number is 4.580 million TEUs. So 7% is a huge improvement from the previous financial year.

JEREMY MAGGS: Having said that, the operating costs up nearly 11%. Are costs undermining the recovery?

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MICHELLE PHILLIPS: Also, some once-offs, you recall that – I suppose for the first three years, certainly – we’ve had provisions that we’ve had to provide for the Natref (National Petroleum Refiners of South Africa) settlement that we entered into last year with Sasol and TotalEnergies.

Now, whilst we released the provision in the previous financial year, in this financial year, we’ve had to pay the actual settlement, so real cash actually leaving the business. That R5 billion, thereabouts, I think is probably the largest contributor to the cost.

Read: Can SA finally deliver a credible rail recovery?

So it’s not something that we will see moving forward. We have saved quite a bit in operating expenditure, but of course, the one source had to be dealt with, and that was part of the reason why the operating expenditure increased by that number.

JEREMY MAGGS: Just a final question. Transnet is pinning a lot of its hope on private sector partners coming in. Is that because it’s the best model or because Transnet can no longer fix the system alone?

MICHELLE PHILLIPS: We’ve rolled out our reinvent for growth strategy. In addition to that, government itself has approved the freight logistics roadmap.

We understand that if Transnet were to do this on its own, we probably would not extract the value that we would want for the country. Therefore, it is important that we partner.

We partner because there are capital resources in the private sector. There are skills in the private sector, there is automation, digitisation solutions that they can bring into our business.

That’s why we partner, it is a deliberate strategy of ours that we employ in order to improve not only the Transnet business, but the contribution that Transnet is able to make to the country.

So it’s a deliberate strategy and this is what the private sector does. I don’t think that there’s anything wrong with government partnering with the private sector in order to ensure that it extracts the best value for the country, ultimately.

JEREMY MAGGS: Michelle Phillips is the group chief executive at Transnet.

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