The reform agenda: energy, Logistics and Governance at the Forefront

Historically, credit investors have been cautious about SOE turnaround stories due to a pattern of unfulfilled reform promises and ongoing operational difficulties. Today, comprehensive reforms targeting the energy sector, logistics infrastructure, and governance structures address some fundamental challenges that have long hindered SOE performance. These reforms are influencing credit risk, funding costs, and investor confidence against the backdrop of persistent operational inefficiencies, debt vulnerability, and governance deficits across public institutions.

Energy Sector: A Landmark Transformation

A landmark in the energy sector's reform was the Electricity Regulation Amendment Act, which took effect in January 2025 and represents a significant step towards liberalising South Africa's electricity market. The Act provides for creating an independent transmission system operator within five years and establishes a framework for competitive wholesale and retail electricity trading. This unbundling of Eskom into generation, transmission, and distribution entities enables private-sector involvement and accelerates renewable energy rollout.

While Eskom's unbundling is progressing gradually, the National Transmission Company of South Africa currently serves as the interim operator. These changes are expected to allow Eskom to concentrate on its transmission and distribution responsibilities, supported by more predictable revenue streams regulated by the National Energy Regulator. Certain regulatory details, such as the precise definitions of reticulation and distribution power systems, still need to be fully implemented and will come into effect over time.

Substantial investment commitments are supporting the transformation. Enforcement of a R940bn three-year investment plan, including R375bn for SOEs, further solidifies this trajectory. Global partners such as the World Bank have pledged additional commitments, including a $500m credit guarantee toward a $25bn transmission build-out, an essential step in unlocking future renewable potential and stabilising the grid.

  • The REIPPPP remains a central pillar of reform, adding over 6 200 MW of clean energy via 123 projects. This initiative has reduced emissions and, importantly, enhanced credit dynamics for participating firms and financiers.
  • Eskom, benefiting from a R254bn debt relief package in 2023, is now trading more favourably - S&P has upgraded its outlook to "positive" and affirmed a national scale rating of zaBBB+. Eskom's Energy Availability Factor climbed to 62% by mid-2024 (and EAF at December 2024 at 62.7%), significantly reducing load shedding and supporting economic growth.

Logistics Sector: Revival in Play

Transnet has made strides in logistics by restructuring its rail operations and corporatising the Transnet National Ports Authority. Transnet's Recovery Plan, introduced in late 2023, focuses on fleet renewal, network refurbishment, and granting third-party access to rail and ports. Introducing third-party access to rail infrastructure is essential to encourage competition and address chronic underinvestment, with analysts estimating that logistic underperformance previously curtailed GDP growth by as much as 3% annually.

However, some industry participants have expressed concerns about restrictive contract terms and limited transparency, which may discourage private investment and slow the benefits of reform. Despite these challenges, ongoing consultations and the Freight Logistics Roadmap are moving the sector towards greater openness, with plans to finalise operational models for rail separation in 2025. Public-private partnerships in port operations, such as those in Durban, also contribute to modernising infrastructure and improving efficiency, although the full scale of transformation is still emerging.

By its 2024 year-end, Transnet’s debt approached R138bn. The company continues to depend heavily on government support to maintain solvency and investor confidence. In 2023, Transnet was granted a R47bn government guarantee facility, followed by an additional R51bn guarantee package in 2025. These support measures are aimed at underpinning its capital investment programme and ensuring it can meet its debt obligations, highlighting the significant scale of state support required.

Importantly, this government backing has also enabled Transnet to attract investors even for unguaranteed debt instruments. In early 2025 and mid-2025, Transnet privately placed several unguaranteed zero-coupon commercial paper notes and a longer-term notes, reflecting improving investor confidence. This demonstrates that while Transnet remains reliant on government support, the support measures have helped it access capital markets beyond guaranteed debt.

While promising, Transnet remains under pressure. Credit rating agencies have placed it on negative watch due to sustained free cash flow deficits and undetermined freight volume recovery. It handled 151.7 million metric tons of cargo in FY2024, with a modest goal of reaching 170 million MT in FY2025. However, systemic risks, weak governance, and outdated infrastructure could jeopardise this progress.

Governance: Complex but Critical to Success

Governance remains a complex and critical area. Before Parliament, the National State Enterprises Bill seeks to formalise governance processes, including board appointments and oversight mechanisms. While this legislation addresses longstanding governance weaknesses, it has faced significant criticism from various stakeholders. Concerns include the potential for increased complexity, inadequate resolution of accountability issues, and gaps in tackling political interference and financial controls. Additionally, there is concern that the Bill could undermine compliance with the Public Finance Management Act (PFMA), weakening established financial oversight and fiscal discipline within state-owned enterprises.

Governance reforms now accompany financial support packages for Eskom and Transnet. Unbundling mandates, independent board composition, and bidding transparency reshape perceptions of public entities as credible issuers. The effectiveness of the Bill and its role within the broader SOE legislative framework remain uncertain. Meanwhile, many SOEs struggle with high debt levels, underinvestment, and skills shortages.

Investment Outlook and Opportunities

For institutional investors, South Africa's reform agenda present the prospect of stronger credit fundamentals for SOEs and corporate issuers alike, and should present new investment opportunities, especially in infrastructure and green financing. Several factors drive these improvements:

  • Revenue diversification is becoming more prominent as SOEs explore new business models, such as Eskom's focus on transmission services and fees from independent power producers.
  • Operational resilience is being enhanced through targeted investments in maintenance, security, and technology, as demonstrated by Transnet's upgraded rail lines and more efficient port operations.
  • There is also a clear effort to reduce reliance on government support by developing off-balance sheet financing structures and leveraging public-private partnerships.
  • Furthermore, despite their complexities, ongoing governance reviews and reforms aim to improve transparency and accountability, thereby mitigating risks for investors.

Challenges and Risks

While encouraging progress has been made in key areas, substantial challenges and risks remain that could affect the pace and success of South Africa’s reform agenda. The speed of reform implementation is critical, especially in infrastructure development and regulatory clarity. Constraints such as the readiness of private investors, restrictive access terms in the rail sector, unresolved regulatory issues in energy, and a phased approach to market liberalisation may delay the full realisation of anticipated benefits.

Execution risks persist, including potential delays in renewable energy transmission deployment and the need for local governance reforms to overcome political instability—particularly in light of the 2024 coalition government. South Africa’s high public debt level, currently at 77% of GDP, limits fiscal space for extended bailouts of state-owned enterprises (SOEs) or municipalities. Moreover, external shocks such as currency depreciation and global supply chain disruptions add further pressure.

Political changes and the lingering effects of past governance failures continue to threaten reform continuity and SOE performance. Realising the sector’s opportunities will require vigilant monitoring of reform progress, careful regulatory oversight, and prudent risk management throughout implementation.

Overall, the evidence to date suggests that South Africa’s reform agenda is laying the foundation for a more resilient and investable SOE sector. However, this transformation remains a work in progress, with its ultimate success dependent on sustained commitment to structural change, transparent governance, and effective resolution of operational challenges.

Disclaimer:

Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). No action should be taken on the basis of this information without first seeking independent professional advice.

The information contained herein is provided for general information purposes only. The information and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions and views expressed in this document may be changed without notice at any time after publication and are, unless otherwise stated, those of the author and all rights are reserved. The information contained herein may contain proprietary information. The content of any document released or posted by Prescient is for information purposes only and is protected by copy right laws. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information, visit www.prescient.co.za.