BUSISIWE MAVUSO: Comair downed by competition, but no such pressure on Transnet

POSTED ON: June 14, 2022 IN by Admin
economic economic

By Busiswe Mavuso

Comair’s demise after more than six decades of operation reflects the harshness of the competitive nature of the free market.

Two events last week affecting our transport logistics framework shine a harsh light on the differences between a largely liberalised market and another controlled by a state-owned monopoly — Comair’s liquidation and Transnet’s credit ratings being placed on review for a downgrade by ratings agency Moody’s.

The main difference lies in the consequences. For shareholders of Comair these are financially devastating, as their investments will probably be written off in full. This is the worst outcome for investors who risk their capital in a company, but that risk is one all investors take and balance against the potential returns they could make.

Comair’s demise after more than six decades of operation reflects the harshness of the competitive nature of the free market. But those competitive forces mean the other consequences, such as disruption of travel plans, the loss of jobs and the fact that the 40% share of the market that Comair held is no longer functioning, will be temporary. That gap left in the market will quickly pull in competitor operators, creating new jobs. Where entrepreneurs see opportunity they will invest, fully aware of the risks.

However, the direct consequences of Transnet’s sorry operational and financial condition are not limited to a fraction of the population as is Comair’s liquidation, but extend to the entire population as it is a state-owned monopoly. Its debt is at R129bn and its net loss in the six months to end-September 2021 was R78m, after it lost R3.4bn in the prior comparable period. The financial distress of its balance sheet is often forgotten in the context of its operational crisis.

The state is the sole shareholder, and in the end the government in the form of taxpayers underwrites all Transnet debt. As we have seen with state-owned entities, nobody will lose their jobs but the entity will keep operating inefficiently and keep over-charging for its services as customers have little to no choice, and keep undermining economic growth. This was highlighted recently when mining companies reported that they were unable to export all the coal they mined because Transnet had been unable to get it onto its railway system, causing them to lose out on booming prices internationally.

The inefficiencies of our rail and ports systems, which Transnet monopolises, have been a handbrake on our economic growth for decades. In the World Bank’s ranking of global container ports, Durban and Cape Town are ranked 364th and 365th, behind all other sub-Saharan ports except Luanda.

Comair, by contrast, has been operating in SA since 1946, employing people and paying taxes. The main reasons for its liquidation were being forced to shut operations during the Covid crisis and a disastrous deal in ordering eight Boeing 737s and paying a $45m deposit, with one being delivered just before the planes were grounded following fatal crashes.

Ironically, Comair also had to write off a bad debt of R790m from SAA, which was fully state-owned when the debt was ratcheted up. Comair’s total debt when it went into business rescue in 2020 stood at R3.4bn. Despite SAA not having a monopoly over SA’s air flight industry, its state-owned status gave it numerous competitive advantages, including that the only reason it was still operating was because of multiple bailouts from the SA taxpayer totalling about R57bn.

And it didn’t play fair, having faced numerous charges of anticompetitive practices over the years and being found guilty most times. The money it owed to Comair was part of a Competition Commission settlement for an SAA incentive scheme for travel agents in the early 2000s, which were found to penalise Comair.

In a further irony, SAA is now best positioned to move into the space vacated by Comair’s departure from the market, should the Takatso Consortium’s acquisition of a 51% stake get finalised. Others may well compete with it, which would be healthy and is something our open skies competitive market encourages.

However, the SA rail system faces no such competition. It is encouraging that Transnet’s total monopoly is being slightly lifted as part of its overall restructuring process, with private sector partners being invited to invest in the Durban and Ngqura container terminals, while third-party operators are being allowed limited access to its freight rail network. It is also looking to bring in private sector participation for its planned R127bn infrastructure upgrade and development programme over the next five years, designed to expand its capacity.

The establishment of an independent National Ports Authority, separating the roles of the infrastructure owner (Transnet National Ports Authority) and the terminal operator (Transnet Port Terminals) will also improve efficiencies. One can’t help feeling, however, that this is finger-in-dyke stuff, and the private sector should be brought in on a much wider scale. Competition forces efficiency into markets, boosts productivity and benefits consumers with lower prices. We desperately need that in our freight transport system so that it becomes an enabler of economic growth — as it is supposed to be — rather than the drag on economic activity it now is.

• Mavuso is CEO of Business Leadership SA. This article first appeared in Business Day.

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