By Andrew Pike, Head of Ports, Rail and Logistics and Lena Mangondo, Executive, Bowmans
Cabinet has just announced that Transnet National Port Authority (TNPA), the landlord port authority for South Africa’s eight ports, is to be corporatised as soon as possible. What this means is that TNPA will be removed as an operating division from the stable of Transnet SOC Ltd and will become a stand-alone state-owned corporation, completely independent of Transnet. Arguably, this is the biggest single port structural reform initiative since the passing of the National Ports Act (NPA) in 2005.
This action is not happening before time: The NPA itself envisaged Transnet being corporatised in a two-stage process, which was supposed to commence “as soon as this Act takes effect”. In other words, this reform has been delayed by over 20 years. What was envisaged in the NPA was that TNPA would initially become a subsidiary of Transnet and only later might become a state-owned corporation, completely independent of Transnet. This was the scenario painted by the President in 2021, but it appears that a decision has been taken to bypass the first step and simply move TNPA right out of Transnet’s influence. This is a welcome move and makes complete sense.
There are some compelling reasons for this initiative, chief among them being the critical need for TNPA’s operational independence. Currently, the biggest single terminal operator in South Africa is Transnet Port Terminals (TPT), a sister operating division of TNPA, which also sits within Transnet. This structural arrangement has long undermined market confidence: TNPA, which is responsible for awarding concessions and other port agreements, is completely conflicted when considering any tender for a port concession in which TPT is one of the bidders.
Similarly, TNPA is also (at least theoretically) required by the NPA to regulate terminal operator tariffs, yet would face an obvious conflict of interest if required to regulate TPT tariffs. By moving TNPA out of Transnet, this reform decisively resolves the “player–referee” conundrum that has raised suspicion amongst some sector participants. TNPA will now be positioned to operate as a truly independent authority, capable of awarding concessions and overseeing port operations on a level playing field where all market participants – including TPT – are treated equally. (Tariffs will in any event probably be regulated separately by the new single Transport Economic Regulator.) This structural separation is essential to instilling market confidence and ensuring that private sector operators can compete for port opportunities confident that the process is fair and free from institutional bias.
One of the other challenges within the incumbent structure is that TNPA, which is understood to be a profitable business, has to share its revenue with the wider Transnet Group. This effective cross-subsidisation has constrained TNPA’s cash flow and limited its ability to apply revenue exclusively to port upgrades and other initiatives that enhance the port system. As a stand-alone SOC, TNPA will benefit from greater transparency over its revenue streams and will be able to invest directly in much-needed port infrastructure. Equally important, this financial independence will support the move toward cost-reflective port user charges, ensuring that tariffs are set based on the actual costs of providing port services rather than cross-subsidising other business units within the Transnet Group.
The separation of TNPA is subject to several principles set by Cabinet, which include fair compensation for Transnet, long-term financial sustainability, fair allocation of liabilities between the Transnet Group and TNPA, protection of employees and customers, keeping strategic state ownership and control of national ports infrastructure and better investment capability and infrastructure development.
Cabinet has recommended that, as part of the reform, TNPA should partner with a Development Funding Institute (DFI). Once again, this will be significant. There are huge cash demands on the Transnet Group generally and TNPA in particular. For instance, TNPA has a planned berth deepening project in Durban which will require massive investment. Bringing in an equity partner will help TNPA to raise necessary funding for its various port projects around the country. A DFI should also be able to raise funds for TNPA at far more attractive interest rates. Further benefits of a DFI shareholder would include strong governance structures and project management skills.
Overall, the initiative is both welcome and exciting, but the implementation is not going to happen overnight. Leaving aside the valuation of the business and agreement on how Transnet will be compensated, one must bear in mind that all port agreements, whilst notionally with TNPA, are legally with Transnet. Accordingly, if TNPA is to continue as the Regulator and Landlord Port Authority, all of those agreements have to be transferred with the assets and rest of the business from Transnet to TNPA. This will, of course, require the agreement of counterparties, including for instance, funders who have concluded funding agreements with Transnet. These funders will want to ensure that such reform and the introduction of a DFI will not trigger any negative loan covenants and that both Transnet and TNPA will be capable of meeting their loan repayment obligations under the financing agreements. Lessons can be learnt in respect of the recent restructure of Eskom Holdings and the National Transmission Company.
Concessionaires will be looking closely at TNPA to determine whether it can meet potential obligations under existing port agreements which are currently carried by Transnet. It is no secret that the latter itself carries significant debt, so one might expect a review of Transnet’s financing agreements for disposal, change-of-control and negative-pledge provisions, followed by requests for lender consents or waivers and a renegotiation of the guarantee terms. There will of course be a number of other issues to address, including the employee transfer process.
None of this is insuperable but will all take time. It is difficult to predict how soon this will happen, but the Minister of Transport, Ms Barbara Creecy, told the Parliamentary Portfolio Committee, which sat recently, that she expected implementation to commence before year end, but to run into the new year.
The reform aligns with other major reforms taking place in the logistics sector, such as the unbundling of Transnet Freight Rail in order to create Transnet Rail Infrastructure Manager as a more independent regulator of the rail network and a separate Transnet Freight Rail Operating Company. All of this aligns with Government’s policy to invite greater private sector participation, but not to sell off the family’s silver by disposing of the infrastructure itself. This remains with Government.
Although reform is taking time, it now appears to have reached the stage where one can describe it as irreversible. This bodes well for the economy going forward.