The decision by ratings agency S&P Global to downgrade State-owned enterprise (SOE) Transnet’s credit rating was disappointing news for those in business eager to see the utility performing better, Business Leadership South Africa CEO Busisiwe Mavuso has said.

“This downgrade is not just a reflection of Transnet's financial distress [but] it is a damning indictment of years of failed leadership, union militancy and a government that continues to bail out SOEs without demanding fundamental reform,” she said in her latest weekly newsletter, on July 21.

She noted S&P’s perception that Transnet was “burning cash” without the prospect of turning around its operating performance and that Transnet Freight Rail will fail to reach its volume targets.

“The business has high fixed costs, major capital expenditure requirements and significant debt. S&P’s downgrade reflects its concern that its ability to service that debt is weakening,” she said.

S&P downgraded several aspects of Transnet’s credit profile on July 21, signalling increased concern over the SOE’s financial health.

The global issuer rating, along with its long-term local and foreign currency credit ratings, was lowered from BB- to B+, which places Transnet deeper into speculative-grade territory, indicating that it is increasingly vulnerable to adverse conditions and less likely to meet its long-term debt obligations without difficulty.

The standalone credit profile, which reflects the company’s financial viability without factoring in government support, was cut from b to ccc+, a significant drop that suggests Transnet is now seen as highly vulnerable and reliant on favourable circumstances to avoid default.

On the national scale, S&P downgraded Transnet’s rating from zaAA-/zaA-1+ to zaA/zaA-1, indicating a weaker position relative to other South African entities, both in terms of long- and short-term creditworthiness.

These changes reflect the agency’s assessment that structural weaknesses in Transnet’s business model persist and will take time to address, while the company’s capital structure is currently unsustainable without major intervention or reform.

Overall, the outlook remains stable, which means S&P does not expect further immediate changes to the ratings, but the downgrade overall highlights S&P's assessment that Transnet is "entirely dependent on State support" and that it faces "sizable negative free operating cash flow".

Despite the downgrade, Transnet CEO Michelle Phillips said the board was of the opinion that the strides made, to date, to improve Transnet’s operational and financial challenges, had set the company on the right trajectory.

“This will enable Transnet to deleverage its balance sheet and focus on optimising its capital investment programme to restore the network. The government guarantees will be deployed to ensure that the appropriate level of liquidity is maintained to service all Transnet’s obligations,” she said.

However, Mavuso was critical of the government guarantees.

“When a company burns through R13.5-billion annually in negative free cash flow, while its workers receive 6% pay increases at double the inflation rate, we are witnessing a textbook example of unsustainable economics enabled by government guarantees,” she said.

She added that S&P had simply called out what has become clear to many, which is that Transnet is seemingly resisting change and moving too slowly. Meanwhile, by comparison, fellow SOE Eskom has been able to stabilise its operating performance and is pushing forward with deep and fundamental reforms.

“The solution is not more bailouts or government guarantees. It's time for National Treasury to attach strict conditions to any future support – conditions that enable the private sector competition that Transnet desperately needs.

“The recent progress in separating rail infrastructure from operations, driven by Operation Vulindlela, is a start, but we need to move much faster,” Mavuso said.

She asserted that private sector partnerships in ports and rail concessions needed to be accelerated.

“Companies are ready to invest in our logistics infrastructure, but they need certainty that political interference and Transnet’s resistance won't undermine their investments,” she said.

Mavuso pointed out that fixing the logistics crisis was one of the focal points of the business-government partnership. Through the National Logistics Crisis Committee there has been some progress, such as ports reducing backlogs and key rail corridors seeing some volume improvements, but the fundamental issues remain and the pace of reform has slowed instead of accelerating.

“When business met with a senior government delegation led by President [Cyril] Ramaphosa in January, there was a strong commitment to accelerating reform to deliver economic growth. When the logistics workstreams fell behind on key targets, we met again in May and agreed to a focused three-month sprint to catch up. That sprint needs additional impetus,” Mavuso said.

She opined that there were critical structural reforms that needed to be advanced, particularly enabling third-party participation in rail and ports and operationalising the economic regulator that will regulate the logistics system for all.

“Also, as S&P makes clear, there is an urgent need to improve the operational performance of Transnet, from improving security to ensuring the availability of rolling stock, to fixing infrastructure.

“The plans to do all this through a partnership between the public and private sectors are in place, but either through intransigence or coordination failures, we haven’t been able to implement them,” she said.

Mavuso said the S&P decision should be a wake-up call that, if Transnet was going in the wrong direction, urgent action was needed.

“Transnet cannot continue as if it is business as usual and . . . Ramaphosa needs to act to get the agreed reforms implemented fast,” she said.

“Our immediate and ongoing focus includes actively implementing the focused interventions to enhance our operational and financial performance,” Phillips assured.

ROAD ACCIDENT FUND

Mavuso also welcomed the decisive action taken by Transport Minister Barbara Creecy in disbanding the Road Accident Fund (RAF) board.

“This bold step represents the kind of leadership we desperately need to confront institutional dysfunction head-on. The RAF serves a critical function as our safety net against the devastating financial impact of road accidents, yet its track record of mismanagement has become a national embarrassment.

“With the Special Investigating Unit now conducting a broader investigation at [Creecy’s] request, we have an opportunity to root out the rot that has spawned endless litigation and operational chaos. South Africa deserves an RAF that operates with transparency, maintains clean books and delivers efficient service to those who need it most,” Mavuso said.

She said this same no-nonsense approach needed to be extended to other State insurance entities that continued to fail in their mandates.

“The Unemployment Insurance Fund (UIF) and Compensation Fund have become synonymous with bureaucratic incompetence and public frustration. When Business Unity South Africa called for the UIF to be placed under administration late last year, it was because workers were being denied timely access to benefits they had rightfully earned.

“Similarly, the Compensation Fund's failure to adequately support workers suffering from occupational injuries, illnesses, or workplace fatalities represents a betrayal of our most vulnerable citizens. While Labour Minister Nomakhosazana Meth has initiated necessary leadership changes, these institutions remain far from delivering the world-class service standards our people deserve,” Mavuso said.

She added that every successful reform sent a powerful signal that South Africa was serious about creating institutions that served with integrity, efficiency, and accountability.

“The private sector stands ready to support this transformation, but government must lead with the courage to make hard decisions and the commitment to see them through. All South Africans depend on getting this right,” Mavuso said.