Transnet Expansion Plan Belies Funding Woes
BMI View: Projects continue to emerge from Transnet's expansive capital expenditure plans, which are set to provide massive opportunities in South Africa's construction market. That said, the plans hinge on Transnet's ability to secure financing. Whilst the company has considerable cash assets, at least ZAR87bn will need to be raised from external sources - of which currently only ZAR3.6bn has been raised this year, leaving a substantial funding gap.
A ZAR2.3bn ( US$23 1mn ) project to upgrade an existing railway running between the manganese-rich Northern Cape province to the Port of Ngqura, in the Eastern Cape, has been given the go-ahead as Transnet group continue their ambitious ZAR300bn (US$30.1bn) capital expenditure (capex) plan. The news comes off the back of the announcement that Transnet has bought the land for a proposed new dug-out port in Durban, and will now seek private investment to develop and operate the new Durban terminal and develop the existing terminal at the site as part of a ZAR37bn (US$4bn) plan scheduled for completion by 2050.
The new rail corridor will stretch 1,003km and will involve upgrading existing lines, in order to connect the extensive manganese mining complex near Hotazel in Northern Cape province with the Indian Ocean at Ngqura. At present, Transnet Freight Rail (TFR) is able to haul around 5.5 million tonnes a year on the existing line, but hope to raise that amount to 12 million tonnes a year by mid-2017. In tandem with this rail corridor, portside investments will be made to relocate of the existing Port Elizabeth manganese terminal to an enlarged facility at the Coega Industrial Development Zone (IDZ), which is situated alongside the Port of Ngqura.
Capital Expenditure On A Grand Scale
The corridor project is but one component of a larger ZAR200bn TFR capex programme, representing two-thirds of the Transnet group's ZAR300bn plan to modernise and expand its rail, ports and pipelines businesses. Whilst not guaranteed due to financial uncertainties, should the planned projects be fully realised, Transnet's expansion will present a huge opportunity for the country's infrastructure sector. Over Transnet's investment period up to 2042, the rail sector will receive the bulk of the funds, followed by the port sector. Whilst the majority of the rail sector's budget will go on rolling stock, the investment period is front-loaded with infrastructure spending, making the next seven years a boom time for rail infrastructure in South Africa.
The plan also details how the Port of Durban will also be a key target of investment over the coming seven years, but it will also receive sustained attention over the whole of Transnet's investment period, taking ZAR118bn of the ZAR186bn planned for investment in ports up to 2042.
|ZAR300bn Planned Investment Over Next 7 years|
|Transnet 7 year investment plan, ZARbn (LHS) and Long-Term Investments Sector Breakdown, 2010-2042 (RHS)|
Transnet's ambitious expansion plans will be funded through internal investment, debt raised in global markets and through the involvement of the private sector. Over the next seven years, ZAR113bn will be funded by the company's working capital, leaving a further ZAR87bn to be sourced from external sources. However, when recently trying to raise ZAR750mn in the local bond market, Transnet only managed ZAR122mn and therefore did not go through with the sale. It offered to pay a 100 to 110 basis points premium over similar-maturity government debt (using a 2035 bond as a benchmark). A number of factors led to this, but it is indicative of the problems that the company has faced when trying to raise capital in the past ( see 'Chinese Money To Improve Rail Capacity', 04 April).
In the latest instance of hardship raising capital, the company went to the market against a backdrop of a weaker rand, labour unrest in the mining sector, lower than expected growth of 0.9% for the first quarter, and a sell-off of local bonds by foreign investors. Whilst we believe that Transnet has the cash assets and alternative funding sources, such as the Chinese, to weather this disappointment, we highlight that projects may be delayed in light of the fact that the company is attempting to raise almost ZAR16bn this year, of which only ZAR3.6bn has been raised so far. With a view to securing these alternative sources of funding, Transnet has announced it wishes to raise its foreign debt levels from US$2bn to US$6bn.
|Cost Of Debt Increasing|
|South Africa ZAR 2026 Government Bond Yield %|
Whilst BMI has noted that borrowing costs across much of sub-Saharan Africa are at extremely attractive rates, we note that costs in South Africa are higher, with yields on the South African ZAR 2026 bond reversing trend and heading up over 100 basis points in the last month. This could make the challenge Transnet faces in raising funds in the debt market when it potentially goes to market again -after other business environment conditions have improved - even greater.