MONEYWEB / 23 AUGUST 2018 - 0059 / BARBARA CURSON
The Transnet 2018 annual report shows the group to be in a precarious position, despite its press release dated August 20 proclaiming a sterling set of results.
Transnet is limping along with inadequate internal control systems, scanty record keeping, and no proper procurement systems. Nor does it have appropriate risk management activities to prevent irregular expenditure or properly monitor supply chain management.
Despite serious setbacks, Transnet remains profitable and might well have merged with SAA by now if both were commercial ventures. Photographer: Dean Hutton/Bloomberg
The external auditors, SizweNtsalubaGobodo, further identified a number of reportable irregularities.
These include material misstatements in the annual performance report in regard to reported performance information, operational excellence, and socio-economic development outcomes. There was also a lack of appropriate audit evidence to verify performance achievements.
Irregular expenditure for the year amounted to R8.1 billion. Of particular concern is that the external auditors could not obtain sufficient evidence to ascertain whether this amount was “complete or accurate”. Fruitless and wasteful expenditure for the year amounted to R23.5 million (2017: R22 million). Total losses through criminal conduct for the year amounted to R59.1 million (2017 – R43.1 million).
The external auditors also found that goods, works and services were not always procured through a procurement process that is “fair, equitable, transparent and competitive” as is required by the Public Finance Management Act (PFMA). Similar non-compliance was also reported in the prior year.
The qualified audit report places bilateral and syndicated loans amounting to R15.8 billion at risk of being withdrawn. This has raised a material uncertainty in regard to whether Transnet is at risk for not meeting the going concern test.
The board of directors, who had not approved the financial reports prior to submission as is required, were given a damning report: “The accounting authority did not always provide effective leadership based on good governance, and protecting and enhancing the best interests of the entity as they did not always exercise oversight responsibility regarding the prevention, identification and reporting of irregular expenditure, performance and compliance with related internal controls.”
The new audit committee, appointed in June, has acknowledged “lapses in financial discipline”, that overall corporate governance is inadequate, and that there are ineffective supply chain controls.
During the financial year under review, Transnet initiated investigations into alleged irregularities or potential fraud. At the reporting date, certain investigations are still ongoing. The material findings that were identified relating to those investigations completed during the year include:
– In the Transnet Property Eastern Region, a senior official approved lease agreements without following formal lease application processes.
– Investigations were instituted into the alleged procurement-related irregularities on the acquisition of the 1 064 locomotives.
According to a Transnet media statement issued on August 16, letters of intention to place on precautionary suspension were served on Transnet group chief executive Siyabonga Gama, engineering chief executive Thamsanqa Jiyane and executive manager Lindiwe Mdletshe. Possible acts of misconduct against these three have been revealed in reports drawn up by Werksmans Attorneys, Mncedisi Ndlovu & Sedumedi Attorneys and Fundudzi Forensic Investigators. Written submissions on why they should not be suspended had to be made by August 20.
Despite these serious setbacks, Transnet remains a profitable business. With some ferocious pruning and cutting, it could be turned into a star. Revenue for the year increased to R72.9 billion (2017 – R65.5 billion), and profit for the year increased to R4.9 billion (2017 – R2.8 billion).
Total borrowings are R122.6 billion (R124.8 billion), and in terms of my calculations, the gearing ratio is 59.7% (2017 – 76.8%). It is to be noted that Transnet has calculated the gearing to be 43.4%. The percentage of total borrowings to equity remains high at 78.1% (2017 – 86.3%). Borrowings of R40.9 billion (2017 – R17.0 billion) were raised during the year, which boosted the end of year cash flow to R4.4 billion (2017 – R6.4 billion).
Taking cognisance of the paucity of competent state-owned enterprise boards, this surely raises the possibility of SAA being merged into Transnet. Had these two companies been commercial ventures, I have no doubt that they would have been merged via a reverse takeover, to utilise SAA’s assessed loss. (Transnet purchases all the shares in SAA, SAA then purchases the business operations of Transnet). There is an anti-avoidance section contained in the Income Tax Act to overcome, but, with some thought, this barrier could possibly be mounted.
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