Investors say South Africa’s ports need private investment to break inefficiency logjam

The country’s ports have lagged behind African peers such as Lagos and Dar es Salaam. Cargo volumes were steadily falling even before the Covid-19 pandemic. A World Bank report in 2021 put the port of Cape Town at 347 out of 351 in terms of global container port performance, lower than any other on the continent.

All of South Africa’s container ports, including Durban, Gqeberha and Ngqura, were near the bottom of the World Bank ranking. Cargo ships entering Cape Town currently have to wait for up to 14 days to berth.

Key to hopes of progress in the overhaul of state-owned Transnet, which is a port landlord as well as having a monopoly on South Africa’s railway infrastructure and freight services. President Cyril Ramaphosa in June 2021 announced Transnet reform in a bid to improve efficiency.

The overhaul seeks to encourage private investment and establish the Transnet National Ports Authority (TNPA), as a separate operating company. The hope is that this will enable the reinvestment of port revenues into port infrastructure.

“We anticipate that a clear separation will improve efficiencies,” says Seelan Gobalsamy, CEO of South African chemicals and explosives company Omnia. More initiatives will be needed if the plan is to succeed, he says. Partnerships between Transnet Port Terminals (TPT) and the private sector should be considered as this will stimulate infrastructure investment, skills development and economic growth, he adds.

Omnia, which supplies explosives to miners and fertilisers for agriculture and operates in 25 countries globally, has reduced the amount of fertiliser imports coming through South Africa’s sea ports, and increased reliance on rail, air freight and truck freight. “Lack of infrastructure investment and maintenance seems to be a large contributor to port inefficiencies,” Gobalsamy says. Road congestion at port precincts compounds the problems, he adds.

A taskforce over the last two years has been trying to find ways to reduce congestion at Durban, which handles 60% of the country’s imports. It’s “encouraging” that port authorities have demonstrated intent to strengthen oversight of the performance, Gobalsamy says. The master plan for Durban, which will seek potential private investments of R100b ($6.5b ) over the next ten years, is “a leap in the right direction.”

Outer port container storage hubs, such as Cato Ridge will improve the truck management at the port, and a rail shuttle service between Cato Ridge and Durban port will help alleviate congestion. Overall, Gobalsamy says, “we would like to see greater commitment towards increasing rail container volumes.”

Perfect Storm

The functional and legal separation of the port authority from Transnet’s terminal operations is “a necessary prerequisite to creating a level and more competitive playing field among private terminal operators,” says Ed Stumpf, investment director at African Infrastructure Investment Managers (AIIM) in Cape Town. But major investment in the ports will take time and should be complemented by smaller-scale, efficiency-oriented investments to address bottlenecks in hinterland logistics corridors, he says.

Back of port capacity needs to be supported by rail to alleviate road congestion into and out of the ports, Stumpf argues. “This will enable reinvestment of port revenues into port infrastructure – creating a level of self-sufficiency needed to address issues around underinvestment.”

Stumpf traces the poor performance to a shortfall in public investment. “Ports require high amounts of investment to maintain a strong operational capacity,” he says. “In South Africa, ports are over reliant on public spending.”

But fiscal pressures and a long list of competing priorities have meant that ports have been neglected. Aging infrastructure has not been attended to and supporting infrastructure, like road and rail, has also suffered, Stumpf says. That has created capacity bottlenecks at multiple stages of regional logistics value chains.

The situation has been compounded by a range of factors that have created something like a perfect storm. Covid-19 disrupted supply chains globally, and 2021 saw shortages of containers and staff, civil unrest and a cyber-attack on the port of Durban.

Transnet and state capture

Transnet is seeking to address the challenges from a position of weakness. In November, Moody’s ratings service downgraded Transnet’s corporate family rating to Ba3 from Ba2. As well as a worsening financial position, the downgrade reflects corporate governance weaknesses which have not been sufficiently addressed by management and the government, Moody’s says. These include “repeated delays in publishing audited financial statements, its inability to obtain unqualified audit opinions and recurring breaches of debt covenants.”

Transnet has breached timeframe for publication of audited financials for two years in a row, and auditors have given qualified opinions for four straight years. At least the problems are out in the open: the first part of the report on state capture by Chief Justice Raymond Zondo took PricewaterhouseCoopers (PwC)  to task for wrongly issuing unqualified audit opinions at South African Airways (SAA).

The first part of the Zondo report found “a scarcely believable picture of rampant corruption” at Transnet, as well as at Eskom and SAA. President Ramaphosa has praised Transnet for its work in trying to reverse the damage of state capture and put the company on a new footing. The Transnet management team that took over in 2020, led by CEO Portia Derby, has strengthened internal controls and oversight processes, Moody’s says.

Yet the company is subject to oversight of the national treasury and the auditor general, whose decision-making processes are “lengthy and outside of the company’s control.”

Trading Potential

Theft of cables and other capacity constraints due to underinvested infrastructure have stopped Transnet from fully benefitting from the recovery in commodity prices and increased demand for rail and shipping capacity, Moody’s says. The department of economic development and tourism has said that all sectors are being affected by the ongoing delays at Cape Town, with the fruit, wine and frozen fish industries worst hit. South Africa’s Citrus Growers’ Association has said that Transnet is “perhaps the biggest threat to the country’s citrus industry”.

Vulnerability to cyber-attack is yet another weakness. In July 2021, a cyber-attack ground the ports to a standstill and affected movement of goods across all modes of transport. Port workers were only able to process about three containers per hour and Transnet declared force majeure. Gavin Kelly, CEO of the country’s Road Freight Association, has pointed to the need to devise an alternative system, even a manual one, to keep freight moving if there is a recurrence.

Better port efficiency can have a “profound impact” on South Africa’s trading potential and boost the economy, primarily through lowering the costs of goods, says Vuyo Ntoi, joint managing director at AIIM. Doubling the efficiency of a port equates to halving the distance between South Africa’s key trading partners and a 10% fall in the cost of transport could increase trade by close to a quarter, he argues. Exports would become cheaper and more competitive, which could help awaken a flagging manufacturing sector, prompting foreign investment and employment, he says. Better ports also lower the cost of imports, including inputs and machinery required to make export products, Ntoi adds.

AIIM has South African toll road investments which stand to benefit if the ports can be turned around.  South Africa is a crucial gateway in the supply chain of many of its neighbouring countries Stumpf says. AIIM has stakes in the Bakwena and TRAC toll roads which run towards neighbouring countries, including landlocked Botswana. Better regional economic integration and port efficiency would lift toll-road traffic,  Stumpf says.

Energy transition

Energy transition becomes even harder if the ports aren’t working. Liquefied natural gas (LNG) will need to be part of the solution as South Africa seeks to reduce reliance on coal. Capacity at South African ports “needs to improve and increase”, says Shirley Webber,  head of coverage for natural resources and energy at Absa in Johannesburg.

Storage capabilities need to be improved if LNG is to be used as a transition fuel, she says. Older oil refineries are being upgraded for cleaner fuels, and some could be converted into import terminals. That alone won’t create enough capacity, Webber says: terminal storage tanks will be needed at ports.

Better ports would also ease the adoption of renewable power sources. AIIM has a range of solar and wind construction projects, and these have not been delayed by factors which can be traced to port backlogs, Ntoi says. The projects were designed by contractors who were aware of the port constraints, he adds.

Ntoi says there is a likelihood that, as more renewable energy projects are built, import constraints will be faced. “It is therefore critical that the efficiency of South African ports is improved,” he says. AIIM is in the process of implementing transactions in the ports logistics space, he adds, without elaborating. Overall, Ntoi remains positive that progress can be made. “The private and public sector working in unison can accelerate progress and eliminate past errors.”