May 31, 2012

Transnet warns of risks in massive investment programme

Written by  John Batwell, Regional editor
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TRANSNET CEO Mr Brian Molefe has warned the South African government of several risks that could hamper the group's Rand 300bn investment programme, which forms the core of the government's infrastructure development plan.

Molefe told Parliament's portfolio committee on economic development of some threats to Transnet's ambitious plans: regulatory risks, such as the threat from the government that its rail assets will be split; the euro-zone crisis; possible capacity problems; and the possibility that freight volumes will not reach the level required to fund its expansion.

Molefe has been outspoken in his opposition to a Department of Transport plan for rail reform, which proposes that Transnet be stripped of its rail infrastructure assets and become an operator competing with private sector companies. The plan was first mooted in 2005 as part of the transport master plan but never implemented. It resurfaced late last year and is now under discussion.

The idea has been welcomed by the private sector as opening the way to competition in the rail sector. But Mr Molefe said such a policy would reduce Transnet's asset base, thereby reducing its ability to borrow and risking a default with existing lenders. Transnet was contracted to a 50% gearing rate in its borrowing arrangements. If the asset base was reduced, the gearing would change and Transnet would be forced to re-negotiate terms with lenders. This would constitute a default, he stated.

"If you change the asset base, the gearing changes and if global market conditions change and we borrow more expensively than we would otherwise, then gearing projections will change. Everything has been put into our asset base as a fixed asset. So if ...... you take it to another entity, then you take it out of Transnet."

Based on current projections, Transnet's gearing ratio would peak at 47% in 2013-14 and 2014-15 before declining again. At present, it is 41%. The euro-zone crisis also posed a risk to Transnet's infrastructure plan, Rand 200bn of which was to be funded from increased revenue, Mr Molefe said.

"If there is less demand for commodities, we won't generate the volumes and revenues required. In that case we will have to moderate our expectations and the programme would have to be revised."

Transnet's funding plan is based on a 178% increase in revenue over the seven-year period, from Rand 46bn in 2011-12 to Rand 128bn in 2018-19. The increased revenue was based on higher volumes and only "moderate" increases in tariffs, he said. If the company was unable to achieve the desired volumes, due to global conditions and macroeconomic shocks or capacity problems, the investment programme would be jeopardised.

Revenue growth was based on a 44% increase in coal volumes; a 57% escalation in iron-ore and a 113% rise in general freight. Restructuring the general freight business to be more customer oriented was one of the key priorities if volumes were to be achieved, Molefe said.

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