The legal challenge filed by Transnet's losing bidder, APM Terminals, undermines the progressive reform process for Public Sector Participation. The concession, which aims to manage and develop the Durban Pier 2 Terminal, was questionably awarded to a competitor based in the Philippines, International Container Terminal Services Incorporated. This dubious award delays the port's planned revitalization and costs the government billions in taxes. Therefore, the crucial question for an interested citizen is whether Transnet can effectively implement logistics reforms in South Africa without endangering public finances.
Unfortunately, in South Africa, each SOE behaves like a spoiled child with a large Father Christmas pocket. The National Treasury recently granted an R47 billion guarantee facility to Transnet despite its lack of a compelling and credible economic and/or financial justification. The National Treasury has focused its efforts on several guarantee debt relief agreements resulting from reckless structural transactions carried out by Eskom's energy sector and Transnet's logistics sector over the last ten years. The ICTSI case appears to be a throbbing experiment in Transnet's reckless and predictable behaviour. The complaint by APM Terminals relates to the unfair application of Transnet's 0.4 solvency ratio requirement. Surprisingly, ICTSI got a clandestine exemption, unlike other bidders. When using the same measure as the other bidders, ICTSI only achieved a solvency ratio of 0.24.
Transnet's bid compliance numbers deliberately included the critical solvency ratio, a crucial indicator of business health. In structural transactions, this is often used alongside the liquidity ratio. Prospective business lenders use a solvency ratio to evaluate a company's ability to meet its long-term debt obligations. As a measure of a company's financial health, a solvency ratio establishes whether its cash flow is adequate to cover its long-term liabilities. An unfavourable ratio indicates that the company is likely to default on its debt obligations. Therefore, the liquidity ratio serves as a gauge for determining whether a debtor can pay off their short-term debt with the cash on hand or if they will need to raise additional funds to cover the balance.
Transnet's ICTSI crisis illustrates inconsistencies in governance that negatively affect sovereign solvency. The underlying reason for these ratios is that PSP's goal is to attract capital to close the critical funding gap for infrastructure. The debt-to-GDP ratio for South Africa shows that the nation is experiencing financial difficulties. Considering the factors that lead to debt distress, South Africans will be fortunate if their country is not classified as having substantive debt distress. Literature suggests several factors that contribute to understanding sovereign debt distress. Weaknesses in solvency metrics are critical, especially for the capital structuring of infrastructure projects. Deficits in liquidity metrics, like short-term external debt and external debt servicing, are examples of this faintness in public and external debt. Further indicators of a nation's willingness to pay include its ratio of exports to foreign reserves, political unpredictability, and institutional incoherence, to name a few. Macroeconomic factors like real growth, inflation, and exchange rates are crucial because they reflect both willingness and ability to pay.
It is evident from this alleged Transnet experiment that PPP arrangements within SOEs will face challenges due to a lack of transparency in concessionaire selection and a lack of understanding of concession agreements and PPP applications. The solvency ratio provides the most accurate measure of bidders' financial health. The inconsistent numbers for the solvency ratio under dispute, however, reveal Transnet's heinous qualities of poor risk management, unfair resource allocation, and poor procurement practices. Any PPP transaction must consider the relationship between cash flow and debt, macroeconomic policy, social imperatives, and firm-specific factors when explaining the capital structure of mega projects. Any responsible and concerned citizen is justified to ask themselves, "Are SA SOEs ready to navigate this Public Sector Participation?" Before the project begins and the 25-year contract is signed, the ICTSI legal dispute has already adversely affected the fiscus and tax revenue. Is Transnet ready to work with the private sector, and deliver its mandate as a developmental but sustainable instrument to South Africans?
It is undeniable that private-sector participation is critical to South Africa's infrastructure funding deficit. This entails accepting commitments for development, operations, and support with the primary risk to the project transferred to the competent partner – as evidenced by the ICTSI dispute, Transnet's risk profundity is questionable. Where risk is aptly managed, this also rewards cost-cutting and quality improvement during the concession period.
However, PPPs ostensibly and tacitly can potentially transfer legislative hegemony from elected legislators to designated, less accountable private participants. The economic logic of concessions assumed that they would improve transport and logistics operations and simplify government oversight of state-owned enterprises. Concessions or PPPs are not structured heedlessly; the complexity of legitimizing the mode of delivery demonstrates the causal impact of privatization. In PPP projects, government credit risk occurs regularly due to political instability and fiscal constraints. Government credit risk may be significant, but it is constantly influenced by other uncertain factors such as inequitable transaction costs, information asymmetry, public opposition, government opportunism, moral hazard, the cleverness of the private sector, and legislative changes or absences. Even when the government may provide an initial capital contribution or grant a subsidy to the project, the protection of sovereign credit risk and political risk is crucial for project lenders. Low revenue bases, high public debt levels, and constrained budgets pose challenges for African nations, SA included.
It may be time for Transnet's private-sector transactions – such as the request for qualification (RFQ) for the container corridor between Johannesburg and Durban, as well as the Ngqura container terminal in the Eastern Cape – to evaluate its expertise regarding PPPs and concessions in line with its mandate as South Africa's SOE. PPP frameworks need to be re-evaluated by the National Treasury to incorporate social imperatives while eliminating cumbersome characteristics to maximize agility and efficiency.
It cannot be emphasized enough that logistics and mining are critical economic drivers in South Africa. Thus, the responsible line Ministry must provide Transnet with the appropriate expertise to prevent ineptitude from impeding and suffocating cargo transportation.
