News / Analysis: On the wrong track – Transnet's rail freight reform

Photo: © Oppermana | Dreamstime.com

Transnet’s rail reform proposal is on the right track, but in its current form it likely won’t reach its intended destination.  

Background  

South Africa has long struggled with archaic supply chain operations that have meant delays, backlogs and congestion across its ports and rail network are a daily experience for shippers and forwarders, and which is largely attributed to failings at the government-owned port, rail and pipeline company Transnet, which has neglected investment into South African transport infrastructure for well over a decade.  

Add weather events such as high winds or other hiccups and what could be slight supply chain ripples can very quickly send South Africa’s ports and rails into complete disarray. It is widely said that the country is at ‘crisis point’.  

There seems little doubt to most South Africa logistics players that private investment is what is most needed to bring its logistics infrastructure up to par, but the source of this investment is yet to be established and remains hugely dependent on how the government designs its structural reform.  

One of the main areas of contention for private investors is that they will essentially be putting their money into undoing years of the state-owned enterprise’s mis-steps, rather than investing in a competitive pioneering project. 

The backlog of infrastructure and rolling stock maintenance, estimated at around R200bn ($11bn), is “a major concern”, according to David Taylor, a South African rail specialist and CEO of transport consultancy company TayloRail.  

“The government should take on historic debt linked to state capture,” he said.  

First termed by the World Bank, “state capture” is a type of systemic political corruption in which individuals and/or private interests influence a state’s decision-making processes to their own advantage. Transnet and South African power company and compatriot state-owned enterprise Eskom are often cited as prime examples of how state capture works.  

Nonetheless, last month Transnet finally started turning the cogs on the reformation of its 21,200km rail network by releasing a proposed roadmap of how it plans to embrace the private sector as a partner. 

“Long overdue,” said the South African Freight Forwarders’ Assocation (SAAFF).  

The draft network statement contains rules, timelines, procedures, charging principles and terms and conditions governing the use of the railway infrastructure by train operating companies (TOCs). It also details Transnet’s operational corridors and service level agreements between the infrastructure manager and the TOCs. 

But the proposal has been greeted with an apathetic response from those in the transport sector, some arguing that it is too little too late from Transnet. 

Investment  

Transnet aims to raise capital by selling rail slots on its network to private sector TOCs, allowing them to introduce their locomotives, wagons and operations, independently rail goods to markets and move traffic off the overburdened road network and onto rail. 

One of the main shortcomings of the proposal, however, is a failure to make the investment opportunity attractive to these private sector players, with the level of risk versus reward it presents. 

The African Rail Industry Association (ARIA) chairman, James Holley, says: “In the general freight market, it is likely that private sector investment into trains will be significantly undermined by the operating risks and inefficiencies that result from poor track condition.”  

And Mr Taylor adds: “The network statement transfers historic inefficiencies, lack of maintenance and debt associated with state-capture corruption over to TOCs through this pricing methodology – this is incorrect.” 

When investment is put into a project, someone needs to decide where it is spent. This is the role of the infrastructure manager. Transnet has declared itself as the initial IM, with the chance that this role could be transferred to a concessionaire/investor in the infrastructure, should that be concessioned. 

The infrastructure manager will set procedures, rules, deadlines and contractual arrangements for private sector players accessing the rail infrastructure, as well as ensure adherence to network-wide parameters set in place by the transport economic regulator and rail safety regulator 

However, this creates further risk; the investor will have little jurisdiction over how the infrastructure is maintained, operated and expanded. 

“This essentially passes most of the risk over the investor, who ultimately remains a financial contributor, while control of the infrastructure, or ability to influence return on investment, remains with the public sector,” Mr Taylor tells The Loadstar.  

And the public sector has a notoriously bad track record in this respect, he adds.  

And as well as the high-risk/low-reward set up the draft network proposes, Mr Taylor points out that the high access rates outlined in the draft reduces the number of companies that could afford a rail service, further limiting revenue.  

“At the prescribed access fees in the network statement, this is not considered viable,” he says. 

Theft 

Another major flaw in the proposal was the omission of the key pain point that plagues the rail network: infrastructure theft and vandalism.  An astonishing average of 172 metres of cable is stolen from the South African rail network every hour of every day. 

“This is a monumental issue that the government provides no plan to address,” Mr Taylor notes. 

Transnet acknowledges: “The rail infrastructure is significantly impacted by theft and vandalism and ageing infrastructure.” 

And while it adds: “The IM continues to implement interventions to prevent and address these security threats with a key focus on improvement of infrastructure resilience”, this offers no concrete solution, nor outlines an investment allocation into combatting the issue.  

Still time to change? 

However, Transnet’s draft network statement remains just that, a draft. At least it gives South Africa’s transport and logistics stakeholders an opportunity to express their thoughts, ideas and concerns to the company. 

The Interim Rail Economic Regulatory Capacity (IRERC) called for written comments on the draft  statement with a deadline of 19 April, and is also conducting ‘information gathering sessions’ in Johannesburg, Durban and Cape Town to obtain stakeholders’ views. 

“Public consultation is an essential step before taking any administrative decision. All sector regulators in South Africa are required to engage in public consultation as per their respective legislation and regulations… While the IRERC is not a regulator, it aims to follow best practice in developing recommendations for the ministers of transport and public enterprises,” says the Department of Transport.  

The IRERC estimates the feedback process will take up to three months to complete, after which the ministers will consider its recommendations and make final decisions. The IREC recommended that Transnet should publish the final network statement within 30 days of receiving the decisions from the ministers on IRERC recommendations. 

Transnet says: “In the 2024/25 financial year, the network statement will be finalised, and it is expected that the process for third party access will then commence in the second half of the year.” 

If, that is, there is any demand from third parties.