Transnet gets R30bn loan from Chinese bank

From Business Dale Live

TRANSNET broke new ground on Thursday when it became the first state-owned company to secure significant financing from China. It signed a R30bn loan agreement over 15 years with the China Development Bank to fund its locomotive build programme.

Transnet has embarked on its biggest recapitalisation to date which includes a R50bn programme to procure 1,064 locomotives. China plays a large role elsewhere on the continent in financing infrastructure and for many years has attempted to secure similar arrangements in SA.

Acting group CE Siyabonga Gama hailed the loan as “a significant milestone” in the company’s funding strategy and said 92% of the funding for the locomotive procurement was now secured. While he could not disclose the terms of the financing, “it is in line with our weighted average cost of capital”, he said.

“It is a very good deal … and we are very happy that it keeps our costs in check,” he said. By accessing Chinese state finance, Transnet was able to preserve its domestic credit lines. Transnet will draw on the first tranche of the loan — R18bn — immediately.

Public Enterprises Minister Lynne Brown said the loan was “a new day” in Transnet’s history.

“This state-owned company is starting an association with the China Development Bank, which I am sure will open the door for other state-owned companies to emulate,” she said.

While the China Development Bank and its Exim Bank have in the past negotiated with SA state-owned companies, no significant deal had been struck.

JP Morgan’s head of global corporate banking in sub-Saharan Africa, Marc Hussey, who advised on the deal, said having long-term funding was “a testament to Transnet’s credit strength”.

“The China Development Bank is a great opportunity for Transnet and other state companies to diversify their means of getting capital,” Mr Hussey said.

The loan agreement follows the signing of a $5bn memorandum of understanding by President Jacob Zuma and his Chinese counterpart President Xi Jinping in December last year.

In 2012 China North Rail and China South Rail were chosen as two of four successful bidders to make the locomotives. China North Rail and China South Rail have since merged into one firm. The other two successful bidders were General Electric and Bombardier.

Martyn Davies, CEO of Frontier Advisory, which advises on SA-China trade matters, said the China Development Bank loan to Transnet had been secured because there was “a greater alignment of interests” than in past initiatives.

This included the fact that the loan would fund the activities of Chinese state-owned companies.

Mr Davies said future investments from China “would depend on the extent to which SA is prepared to sell equity in state-owned companies. Chinese money will be readily available for this”.

Mr Gama said the production of the diesel and electric locomotives would be subject to stringent localisation standards and underpinned by job creation and skills development.

Local engineering companies — some of which had pinned their survival to the project — lost out in the bidding for the primary contracts and then were shut out when Transnet obliged the winning bidders to partner with Transnet Rail Engineering.

Mr Gama said local firms would get a slice of the action as Transnet Rail Engineering plans to outsource 84% of the work to local companies.

“We are trying to make sure that SA Inc gains competitive advantage and economies of scale through this programme,” he said. “We want to be able to supply rolling stock for the continent of Africa.”

The locomotive manufacturing process would create 55,000 jobs while the broader market demand strategy would lead to the creation of 288,000 jobs, Mr Gama said.

Ms Brown said her department would monitor compliance with local content rules. In terms of the contracting, 60% of the electric locomotives must be manufactured locally, while 55% of the diesel locomotives must have local content.

Ms Brown said she urged Transnet to “ensure compliance with localisation and job creation deliverables. As shareholder, I will expect regular updates of how the South African economy has benefited….”

Department of Public Enterprise director-general Matsietsi Mokholo, said the department was formalising similar models for state-owned enterprises to access funding through institutions such as the Brazil, Russia, India, China and SA (Brics) Development Bank.

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