Executive Oversight at Transnet Derailed?
- 15 June 2023
- 2 min read
In 2018, emerging from the state capture era, and in an attempt to clean up and set Transnet on a new path of sustainability and better governance, the Department of Public Enterprises (DPE) Minister Pravin Gordhan appointed an entirely new Transnet board, comprising of twelve independent non-executive directors and two executive directors. The new board was tasked with tackling years of alleged corruption as well driving investments and operational stability across the Transnet value chain.
Author: Lindani Vezi | Listed Credit: Investment Analyst | Published: June 2023
Over the ensuing five years we have observed significant operational challenges at Transnet and evolving governance weaknesses, which are of concern:
1. Of the twelve independent non-executive directors, six have subsequently resigned or retired without being replaced. Alarmingly, four of these vacancies have been open for more than a year. As of today, Transnet’s board comprises only eight members: the six remaining non-executive directors that were appointed in 2018 and the two executive directors (the CEO and CFO).
Our view is that a company of the size and complexity of Transnet needs a larger board, with a broader array and depth of skills than it currently has. We believe that the shareholder (as represented by the Minister) should be speedily filling the vacancies with appropriately qualified, skilled, ethical and suitable people. That these key positions remain unfilled at this moment in Transnet’s history, and with the significant operational challenges it faces, disturbs us as investors in Transnet, together with its implications on the broader South African economy.
2. The terms of the remaining six non-executive directors will all expire in May 2024. This creates a real risk of a sudden and immediate loss of continuity and institutional knowledge in a year’s time. In addition, the protracted process of appointing State-Owned Company (SOC) directors could prove catastrophic for Transnet: the challenges it faces are significant and require the attention of an engaged, informed, experienced and skilled board. The appointment of the South African Broadcasting Corporation board is a recent lived experience on how long it may take to appoint an SOC board, and the negative impact this has on the sustainability of the entity.
3. We are also concerned that the reduced board size has left Transnet with three key sub-committees (viz. the Audit Committee, the Finance and Investment Committee and the Risk Committee) with critical skills missing.
As an example, the Audit Committee membership does not include a non-executive director with a finance/accounting qualification. This is the Audit Committee currently engaged with the external auditors in finalising the annual financial statements. Furthermore, the execution of Transnet’s much needed R99 billion capital expenditure programme (over 5 years) is overseen by the Finance and Investment Committee which lacks critical strategy and finance experience and will thus cause further delays, placing more pressure on the under-maintained infrastructure. Considering the glaring skills mismatch evident in the three sub-committees’ membership, we question the level of due diligence and oversight provided by these sub-committees.
4. Whilst Transnet has recently reconstituted its board sub-committees (viz. the Audit Committee, the Finance and Investment Committee and the Risk Committee) to align them to their terms of reference and ensure they are staffed with the required three members, this was not communicated to the investor community in line with the JSE Debt Listing Requirements (JSE DLRs). The JSE DLRs obligate Transnet to issue a SENS announcement “without delay but no later than the end of the business day following the decision or receipt of notice detailing the change” . Transnet only issued a SENS announcement on 6 June, which we understand is more than two months after the most recent Board appointments, which were announced on 11 January 2023 and
14 March 2023 respectively. The delay in the publication of the SENS announcement leads us to question the effective date of these changes, and whether any decisions that may have been made by these sub-committees during this time, were made by a sub-committee that may not have been appropriately constituted.
5. The gradual reduction in the board size over the past five years, coupled with the skills mismatch to provide oversight, has occurred over the same time as an observable deterioration in Transnet’s financial and operational performance. Financial covenants are being breached, revenues, profitability and cashflow is reduced – and, for the first time in years, Transnet has required shareholder support in the form of a R5.8 billion bailout provided in the October 2022 Medium-Term Budget, as announced by the Minister of Finance. On the operational front, Transnet Freight and Rail continues to experience a shortage of locomotives, persistent cable theft and underinvestment in infrastructure. All of these remain significant headwinds facing Transnet and need urgent resolution to ensure that Transnet returns to stand-alone sustainability and our economy starts to recover and grow. At present, Transnet Freight and Rail volumes are at 10-year lows, with South Africa missing out on the recent commodity boom, a lost opportunity that has severely dented our economy and growth prospects.
What does this portend?
Later this year, Transnet will be looking to raise R7 billion in the debt capital market when it refinances some maturing bonds. The investor community will surely consider the additional uncertainty introduced by the depleted board and resultant governance shortfalls in assessing the investment case. If the operational and governance shortfalls are not addressed with urgency, we believe the number of investors willing to extend funding to Transnet will likely reduce, Transnet’s cost of funding may continue to increase, and additional support (including a possible government guarantee) may become a necessity in order to ensure a successful refinance. These are significant implications that we expect Transnet and its shareholder would be anxious to avoid.
The governance shortfalls observed at Transnet further bring into question the nature of governance oversight performed by the DPE as the shareholder responsible for oversight at Transnet. We believe that the DPE has an SOC Governance Assurance programme, staffed by 25 employees and a total budget allocation in this fiscal year of R60.6 million (R31.6 million allocated to compensation of employees), yet they have seemingly failed to identify and address basic governance issues timeously.
Why is this important in the broader context?
Our economy depends on Transnet returning to standalone operational and financial sustainability. Failure to do so will place more pressure on our road infrastructure and increase logistics inefficiencies. This will translate into higher costs of doing business, persistent inflation and flatlined economic growth. In looking ahead to 2024, we hope that Minister Gordhan and his team at the DPE will move with considerable urgency in addressing these critical issues.
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[1] Source: Transnet 2022/23 Corporate Plan
[3] Source: JSE Debt Listing Requirements - Section 6.39
[4] Source: Report of the Portfolio Committee on Public Enterprises on Budget Vote 10, Dated 22 May 2023
