Global Courant
Transnet, the South African state-owned freight transport and logistics company, faced the difficult task of recovering from the era of state takeover in 2018. new Transnet sign. This new board, consisting of 12 independent non-executive directors and two executive directors, was tasked with fighting years of alleged corruption, driving investment and ensuring operational stability throughout Transnet’s value chain.
Over the next five years, however, Transnet faced significant operational challenges, and its governance structure revealed weaknesses. Several matters deserve our attention:
To begin with, six of the original twelve independent non-executive directors have resigned or retired, creating critical board vacancies. Four of these vacancies have been vacant for more than a year. Transnet’s board of directors currently consists of only eight members: the six remaining non-executive directors appointed in 2018, as well as the CEO and CFO. Given the size and complexity of Transnet, it is clear that a larger board with more diverse skills is required for effective governance.
It is critical that the shareholder, represented by the Minister, fills these vacancies as soon as possible with qualified individuals who have the necessary skills, ethics and aptitude. The existence of unfilled key positions, particularly at this critical time in Transnet’s history and given the significant operational challenges it faces, is of concern to investors and has wider implications for the South African economy.
In addition, the terms of the remaining six non-executive directors will expire in May 2024. This offers the prospect of an abrupt loss of continuity and institutional knowledge for a year. The lengthy process of appointing directors for state-owned enterprises (SOCs) can harm Transnet, as the organization requires the attention of a committed, informed, experienced and competent board of directors. The recent appointment of the SABC board is an example of the time it takes to assemble a SOC board negatively impacting the sustainability of the entity.
In addition, due to the downsizing of the board, Transnet’s board committees have critical skills gaps. For example, the Audit Committee is currently finalizing the annual accounts and there is a lack of a non-executive director with a financial/accounting qualification. The Finance and Investment Committee, responsible for overseeing Transnet’s R99 billion investment program, also lacks the necessary strategy and financial experience, causing further delays and adding to the already strained infrastructure. The apparent skill gap in 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. While these committees were recently reconstituted and staffed with the required three members to meet their terms of reference, the investor community was not well informed as required by the JSE Debt Listing Requirements (JSE DLRs). Transnet made 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 declined at the same time. The reduction in board size and resulting governance deficiencies have coincided with financial covenant violations, reduced revenues, profitability and cash flow. Transnet has demanded a R5.8 billion shareholder bailout for the first time in years as announced by the Finance Minister in the October 2022 Medium Term Budget. and underinvestment in infrastructure.
These issues are major obstacles to Transnet’s return to self-sufficiency and the recovery and growth of the South African economy. Transnet Freight and Rail transport volumes are currently at a ten-year low, robbing South Africa of its recent commodity boom and stifling economic development.
Looking ahead, Transnet needs to raise R7 billion from the debt capital market to refinance maturing bonds. When evaluating the investment case, investors will no doubt consider the additional uncertainty created by the reduced governance and governance deficiencies. Without immediate correction of operational and governance deficiencies, the number of investors willing to finance Transnet could decline, increasing financing costs and possibly requiring additional support, such as a government guarantee, to ensure a successful refinancing.
These implications are significant and Transnet and its shareholders must address them as soon as possible.
Transnet’s administrative shortcomings are a matter of concern to the Department of Public Enterprises (DPE), which is responsible for oversight. Despite the DPE’s SOC Governance Assurance program, which has 25 employees and a budget allocation of R60.6 million for the fiscal year (of which R31.6 million is allocated to employee compensation), basic governance issues seem to have been overlooked seen and not addressed in a timely manner.
It is critical to recognize 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 stress on our transportation infrastructure, exacerbate logistical inefficiencies, increase operating costs, fuel persistent inflation and hinder 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
