Transnet Ltd. Business Information, Profile, and History

History of Transnet Ltd.

On April 1, 1990, South African Transport Services echoed the country's changing political environment by altering its own status; in contrast to its status as a government-run enterprise, which it had enjoyed for the previous 82 years, it was now a public company called Transnet Ltd. No longer a state-supported service unconcerned with economic gains, Transnet consequently joined the ranks of other profit-seeking corporations. Since that time, the company has been expected to produce dividends for its only shareholder, the government. It is also subject to the auditing other private-sector businesses undergo, and it pays taxes on its profits.

Transnet is a holding company for five operating subsidiaries covering South Africa's public road and rail transport, its shipping, and its oil pipelines. One of Transnet's subsidiaries is the highly respected South African Airways Ltd. (SAA), whose service and aircraft maintenance has earned it a spot among the world's top twenty air carriers.

The discovery of diamonds in the late nineteenth century in South Africa's Cape Colony and gold on the Transvaal's Witwatersrand brought thousands of would-be millionaires to both treasure troves. Impatient prospectors who were already in the country came to the diggings via the fastest mode of transportation possible--the railroads that originated in the country's four colonies. Others from further away traveled across the seas, disembarking from sailing ships operated by the fledgling colonial shipping services. By the time laws for the Union of South Africa were laid down at the National Convention in 1908, the country's four transportation services had gained such economic importance that their ownership formed a central part of the discussion.

Debate at the National Convention centered on the issue of merging the providers of transportation service and the important question of whether these valuable assets should enter the future Union of South Africa as part of the private-sector business community, or whether they should be operated by the country's new government. There was no doubt that business ownership carried distinct advantages. Profit, of course, was the most obvious; a private-sector business, able to set its own tariff rates, was bound to produce profits that would only benefit the government, which could collect a substantial portion of the company's earnings in taxes. In addition, company owners would be able to take profits and reinvest them to strengthen cash reserves, or use them as needed for working capital. In government circles, such money would trickle into parliamentary coffers.

Profit was not the only benefit that would come from private ownership of transportation. Another advantage was a company's ability to finance expensive railway construction and maintenance far more easily than any government could, simply by borrowing the necessary money against equity. Nevertheless, while acknowledging these practical advantages, the new South African government did not feel comfortable handing the great responsibility of transport to a private company. Fearing that any one owner might grow to wield too much power, it was decided that the rail and shipping services would be operated by the government under the Ministry of Transport.

The South Africa Act of 1909 charted the way for the government's transport division so precisely that its course survived, with minor tinkerings, for the next 60 years. When South African Railways and Harbours, the predecessor of South African Transport Services, opened its doors in 1910, its mission was firmly stated its prerogatives and limitations were to fit precisely into the political and economic goals of the Union of South Africa, which were declared the same year.

South African Railways and Harbours, the South Africa Act specified, was to be run on business principles that made railroads and shipping--now designated as a joint, nonprofit function of government--each responsible for their own finances. The challenge of this paradox was to find a way to maintain a healthy budget while providing service attractive to a broad customer base, an especially tall order for the railways, since locomotives and other necessary rolling stock were expensive items. Rail expansion and maintenance would also present financial difficulties. Miles of track agile enough to span South Africa's sprawling mountain ranges, deep fertile valleys, and scrub-covered desert dustbowls, yet sturdy enough to stand up to climatic conditions that could range from arid dryness to raging black floods, seemed nearly impossible.

Though the answer to the puzzle lay in setting realistic tariff rates for freight and cargo, the South Africa Act neither guided railway and harbor finance managers nor gave them the authority to use their own judgement. Instead, the possibility of having to raise tariffs was grudgingly permitted when absolutely unavoidable. The rate problem was also dealt with by the formation of the Rates Equalization Fund, a store of money set aside from railway and harbor revenue to make up any appreciable deficits. As an alternative, the act sanctioned cross-subsidization, a system that enabled railways to charge high rates for high-value traffic, thereby subsidizing below-cost charges for low-rated traffic. These two measures, however, did little to ensure financial security; in years to come, the organization's capital debt soared, reaching £253 million by 1949 and £617 million by 1959, just a few years before South Africa's independence from Britain brought a currency change from the British pound to the rand.

The South Africa Act also directed the railways to help open the interior of the country to agricultural and industrial development by providing transportation affordable to all customers. The railway's customer base encompassed a broad demographic range with two widely different poles. At one end of the scale there were wealthy white passengers, industrial freight customers, and farmers dealing in livestock, agricultural crops, fertilizers, and machinery. At the other end were blacks living in rural areas far from existing rail services who were unable to pay for more than the most basic transport. In addition, complications arose from racial segregation, which stated firmly that black and white South Africans could not ride in the same coaches, eat the same food, or use the same lavatory facilities.

The burden of providing inexpensive transportation for the poor was eased somewhat in 1912, when buses and trucks were first used to bring passengers and freight to train depots and carry them for short distances in areas where there were no railroad tracks. This inexpensive mode of travel became popular immediately and was soon rendered indispensable for carrying seasonal harvest goods as well as livestock and other year-round cargo.

By 1929 astute entrepreneurs were well aware that road transportation was an economic gold mine. They began to enthusiastically compete with the railways for agricultural and industrial contracts. No less shrewd, the South African government protected its position as the country's major carrier by passing the Motor Carrier Transportation Act in 1930. According to railway sources, the act was not intended to preserve the government monopoly, but merely to make both of its services complementary by specifying that public road transportation be used only for short distances and longer journeys be made by rail. This edict applied to all racial groups.

Such liberality was noticeably absent in the job sector, for apartheid--South Africa's system of enforced racial inequality that denies political rights to the country's black majority--was being enforced in the legally mandated practice known as job reservation. Originally a policy of the South African mining industry in the late nineteenth century, job reservation entailed holding certain jobs and grades of employment for whites and soon spread to other industries. In 1898, due to the efforts of then South African President Paul Kruger, the practice could be applied in the transportation industry under the Transvaal Boilers and Machinery Act, which ensured that no black employee could become a locomotive driver. (This ruling was underlined in 1956, when the Industrial Conciliation Act further empowered the Minister of Labor to reserve work for specific racial groups.)

Still, despite a low employment ceiling limiting blacks to jobs in the unskilled labor ranks, working for the South African Railway was not without advantages; being a function of the government, the organization was guaranteed not to lay workers off even in times of economic depression. When labor shortages made workers a valuable commodity whatever the color of their skin, black employees even found limited opportunities for advancement. In 1952, for example, South African Railways personnel officers were amazed to find, after experimenting, that 'colored' (mulatto) employees who were trained as booking clerks were just as efficient as whites. The tendency to limit nonwhites' promotability, however, slowly permeated the rail services, until eventually such employees were stationed only at depots serving their own racial group, whether it was Asian, Indian, Bantu, or 'colored.'

Despite various refinements to the South Africa Act over the years, financial losses soared by the 1970s. The root of the deficit apparently lay in the passenger services, which had always been divided into main line and commuter routes. Problems with the main line trains were minimal; they were used specifically for longer journeys. Offering accommodation ranging from the prudently economical third class to the ultra-luxurious Blue Train, which travels majestically between Johannesburg and Cape Town, main line trains had always been profitable. Commuter trains, however, faced a more dire financial picture. Serving the black, Indian, and 'colored' townships surrounding the cities, they had always operated at a loss, partly because the Railways' fare-setting policy was based on a non-profit-making philosophy. South African Railways officials saw their traditional policy as a government-inspired exercise in social service to the community, but wondered ruefully why even low fares were not helping them to beat escalating competition.

Part of the reason was the risk involved in traveling on commuter trains. Always packed with straphangers, they were ideal hunting grounds for vicious street gangs who prowled the coaches, stealing and murdering in spite of the ever-present railway police. The dangers involved in riding on the trains made passengers far more willing to pool their fare money to flag down 'pirate taxis'--cabs operated by black drivers without government operating licenses--than to risk their lives on the trains.

By 1979, despite the cross-subsidization that had traditionally covered losses on commuter trains, the service was operating at an annual loss of R 148 million. A R 50 million state grant of loan capital partly alleviated the shortage, and a R 55 million loan interest exemption on capital expenditures for passenger services also helped. The South African Railways administration now realized that cross-subsidization would have to be scrapped and a substitute found if the service was to ever break even. For any alternate plan to be effective, however, each service would have to become fully responsible for its own financial operation.

In order for each transportation service to achieve financial independence, management had to be more in tune with passengers' and freight customers' needs. Accordingly, South African Railways added a marketing division to the nine departments already in existence. The new section brought employment opportunities to nearly 100 people; however, South African Railways executives found the number of workers in this and all other departments so low at the middle and upper management level that they immediately provided scholarships for academic study at universities both in South Africa and overseas.

Despite a staff increase from 264,973 to 266,703 in 1979 alone, personnel problems were also appearing at lower levels. Increasingly loud protests over meager pay and scarce opportunities in the black community outside the railway hierarchy sent shock waves throughout the organization. As a result, the long-held principle of job reservation started to crumble. Blacks began to be accepted for vocational training and even found greater opportunities in graded posts previously reserved for whites.

The tariff structure also needed extensive revision. Having streamlined their freight services with the most modern and economical containerization systems available, South African Railways executives replaced their iron-clad tariff policies with flexible contractual rates for carrying specific loads in large quantities. Energetic application of these measures brought both positive and negative results; though revenues for the 1979-80 financial year reached R 3.76 billion, representing a 15.5 percent increase over 1978-79, expenditures for research, modernization, and purchases rose by more than 21.5 percent, leaving South African Railways with a deficit of R 67.2 billion.

The decade of the 1980s proved to be tumultuous from the very beginning. In 1981, the year South African Transport Services--the umbrella company for South African Railways--changed its name to Transnet Ltd., the world-wide energy crisis hit, and torrential floods caused track wash-aways and imperiled the export fruit harvest. Lines were replaced as soon as possible, but the cost of clean-up operations showed up in year-end financial figures, which listed expenditures of R 4.5 billion on revenues of R 4.51.

As the 1980s wore on, international antiapartheid protests and tensions inside South Africa heightened. By 1986 many nations had instituted economic sanctions, which caused 225 overseas companies to leave South Africa by the end of 1987. Though sanctions affected all of the country's transportation divisions, South African Airways suffered the most damage. The air carrier had enjoyed a peaceful domestic monopoly since its formation in 1934, despite the fact that North African countries prohibited its use of their airspace after 1963. SAA was therefore forced to fly to the Cape Verde Islands for refueling, adding almost two hours to each long journey. The airline was also required to develop outstanding mechanical and technical backup services that kept all aircraft in top condition.

As international airlines withdrew from South Africa in preparation for sanctions and the financial exchange rate fell, SAA's revenues sank in response; 1985 alone saw a 30 percent negative growth rate, even though 1984 had brought an operating profit of US$89.9 million.

Transnet instituted a thorough investigation of all of its operations in 1986. The general consensus of opinion, shared by financial analysts appointed by the government, was that the reforms instituted during the 1970s must follow through to commercialization of all services; that the lingering cross-subsidization problem still needed a practical solution; and that freight and containerization procedures must be even more energetically marketed to bring them to their highest profit potential.

Organizational reconstruction began in 1987. In contrast to the rambling, ten-section company it had been in the past, Transnet emerged from its chrysalis as a streamlined holding company with five financially independent operating subsidiaries. The largest of these is Spoornet, the railroad company, some of whose 109,000 employees used their new hub-and-spoke system of major dispatch centers to transport a total of 173 million tons of freight during 1990 and 1991. Next in the subsidiary line is Portnet, which administers eight ports, the busiest of which are Durban and Cape Town. The shipper handled the cargo of 14,000 ships during the 1990-91 financial year. Petronet, the third subsidiary, owns approximately 3,000 kilometers of pipelines carrying petroleum products to 12 delivery points throughout the country. Autonet is Transnet's road transport division; in order to promote more efficient administration, its operations are divided into passenger and freight services, each of which takes responsibility for its own marketing. Transnet's fifth transport subsidiary is the well-run South African Airways.

Business units formed in the early 1990s to provide support were Protekon, offering construction and modernization for all transport units; Transtel, whose 3,500-strong staff handles all communications and telecommunications functions; Transwerk, an engineering business unit focusing on rebuilding and modernization of rolling stock; and Propnet, Transnet's real estate company. A labor council was also established at this time to serve as a bargaining unit for South Africa's trade unions. The cost of these changes was immediately registered in Transnet's financial statements; though income rose 9.7 percent because of a rate increase, a 12 percent rise in expenditures brought the surplus down to R 4 million, from R 184 million just one year earlier.

By 1990 restructuring was complete, and the strategic planning role of Transnet had been taken over by a new subsidiary called Viamax Logistics, Ltd. Specific goals on the Viamax agenda included improving the efficiency of warehouse operation and distribution.

The new Transnet group, responsible to its lone shareholder, the South African government, opened officially in February of 1990. The first annual report, covering the financial year 1990-91, proved that the decision to commercialize the company was a wise one: net profit reached R 515 million.

Still, pressing issues remained for Transnet Ltd. in the 1990s. Commuter trains had become even more dangerous; violence reached a murderous height when more than 130 people were killed on the trains between January and May of 1992. However, as President F. W. de Klerk was taking steps to dismantle South Africa's apartheid government and sanctions were lifted, Transnet's chances for continued prosperity were good.

Principal Subsidiaries: Spoornet; Portnet; Petronet; Autonet; South African Airways; Viamax Logistics, Ltd.