The Ports Regulator of South Africa (PRSA) and Transnet National Ports Authority (TNPA) are heading for a showdown over the methodology used to determine the port authority’s asset base.
Whilst TNPA maintains it has an asset valued at around R83 billion, calculations using the methodology prescribed by the PRSA show it to be only R38.1 billion. This has huge implications for the port authority as a lower asset base means less revenue is required to operate the asset. Should the PRSA figure be used, TNPA’s required revenue is reduced by at least half. According to TNPA chief financial officer Mohammed Abdul, this would put the financial sustainability of the port system at severe risk.
Speaking to FTW on the sidelines of a PRSA roadshow in Cape Town on TNPA’s annual tariff increase request recently, he said attempts were being made to resolve the current impasse and move the discussion forward.
“The Regulator issued a record of decision at the end of March this year on the methodology for the valuation of the Authority’s Regulatory Asset Base (RAB) to be implemented with this tariff application,” he said. “Having evaluated the new methodology and compared the outcome with that of the current methodology it would not be sustainable.” Abdul said TNPA feasibly could not operate a sustainable business using an asset value of only R38.1 billion. He said it reduced the Authority’s calculated opening RAB value at 1 April 2019 by approximately R45 billion from R83.5 billion to R38.1 billion.
This in turn reduced the calculated allowable revenue attributable to RAB by R3.8 billion or 46% from R8.2 billion to R4.4 billion for the next financial year and every year thereafter. Mahesh Fakir, CEO of the PRSA, said the aim of the new methodology was never intended to reduce the RAB, but to introduce transparency into the process determining TNPA’s asset value. With TNPA having proposed a weighted average tariff increase of 4.21% which will be made up of a tariff increase of 8% on marine charges (shipping lines) and an average increase of 2.74% in cargo dues, Fakir said he was concerned that this had all been calculated off an RAB valuation using the old regulatory asset base methodology instead of the new method as per the record of decision in March. He said several requests for documentation showcasing how the new methodology would negatively impact the authority, as well as reasoning as to why the old methodology had been applied, had been ignored. According to industry experts the valuation of the RAB has been a contested issue ever since TNPA several years ago unilaterally revalued its assets from around R12 billion to closer to R45 billion. While few recall the exact dates and numbers, the issue of the RAB has been questionable ever since. It was with this in mind, said Fakir, that the asset valuation had to be addressed. “It is essential that it is done in a transparent and accountable manner as these have been lacking in this process completely.” Fakir said after several requests to TNPA for their input into the matter had been ignored, he had met with the Transnet board to ensure there was a clear understanding that the Authority was compelled to use the new methodology or then supply reasons why it was not doing so which could then be used to come to some sort of a solution. This, he said, had again been ignored. The issue raises serious questions over TNPA’s tariff application because as it stands, for all intents and purposes, it is non-compliant. According to industry consultant Dave Watts, the presence of the Transnet CEO Siyabonga Gama at the Durban show and his appeal there to both industry and the Regulator to allow the use of the previous asset valuation methodology underlines the seriousness of this issue to the Transnet group as a whole. According to Mike Walwyn, chairman of the Cape Port Liaison Forum, the inflated asset base is problematic. Watts agreed saying all of TNPA’s previous submissions had been based on an asset base that appeared to be substantially inflated and that the “value” of many assets installed sometimes decades ago and long since fully depreciated had been used in arriving at the original inflated asset value when the Regulator had commenced oversight and public oversight of tariff applications had begun. “TNPA’s reliance on this inflated value over the last decade must have resulted in materially higher revenue than otherwise would be the case and also a reliance by the group on what had become a cash cow,” he said. “The Authority’s application for a 4.2% acrossthe-board increase would at first glance appear reasonable considering some of the levels of past applications and the 18.57% increase indicated as possible for 2020/21. With the Regulator expected to deliver a record of decision on the tariff increase by December 1, Watts and Walwyn said how the matter would be resolved in time for that was anybody’s guess. Abdul told FTW TNPA remained committed to reducing tariffs and the cost of doing business in the country, but it could not afford the proposed valuation approach and could not accept it at all as it would render the Authority financially unstable, but they were open to negotiation with the Regulator. “Clearly we have to meet with the Regulator and negotiate a way forward. The valuation approach must also be discussed with port users before moving to implementation,” he said.
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All of TNPA's previous submissions were based on an asset base that appeared to be substantially inflated. – Dave Watts
