Private sector help needed for another South African crisis
The government has said that a transformation of the country’s rail is urgently needed if South Africa wants to stand a chance of being an attractive investment destination – with rail inefficiencies souring investment appetite and costing the economy billions.
The South African government will need substantial investment to recapacite the country’s rail networks and spark economic recovery—but it cannot foot the bill on its own.
Like the crisis seen in electricity, the government is looking to the private sector for help and is thus looking to capitalise on various policy reforms.
“To drive inclusive growth, we need an efficient freight rail network… we will continue with reforms to transform South Africa’s freight logistics system,” said President Cyril Ramaphosa at the Opening of Parliament on 18 July.
The reform plans are encapsulated in a 124-page Roadmap for the Freight Logistics System in South Africa, which sets out timelines for everything from setting up an independent rail regulator to allowing private companies to access rail lines and offering rights to operate rail routes to private companies.
These moves have been welcomed by many in the sector, including James Holley, CEO of Africa’s largest private rail operator, Traxtion.
Holley said that South Africa has seen “giant leaps in the right direction when it comes to the implementation of government’s rail reform agenda.”
“I believe when this is rolled out, we’re going to see a boom in the rail industry itself – but to me, the primary driver of urgency is the levering impact it will have on growth in the upstream economy,” the CEO told the Business Times.
“[Rail inefficiencies] are having a bigger impact on our economy than the power blackouts had over the last number of years,” he added.
The call for reform
South Africa has the most extensive rail infrastructure in Africa, which has long been controlled by a government monopoly.
It is a key means of transporting commodities; however, since 2017, exports have consistently dropped due to operational deficiencies and underinvestment in railway infrastructure.
The reasons vary, but they result from years of compounding mismanagement, underinvestment, theft and vandalism of infrastructure, and corruption—among other factors.
According to National Treasury estimates, these inefficiencies cost the South African economy R411 billion in 2022, with rail (both freight and passenger) declines remaining a severe constraint in domestic and regional trade.
At the beginning of this year, the Department of Transport’s (DoT’s) deputy director-general, Rirhandzu Mashava, said that South Africa’s railway has been unable to handle increasing cargo movement demand, resulting in expensive transport costs for businesses.
According to Mashava, around a third of long-distance freight has moved from rail to roads within five years, with businesses increasingly relying on trucks to transport their cargo nationwide.
Currently, 87% of freight is moved by truck, causing increased congestion and road infrastructure damage – costing the economy an estimated R1 billion a day, said the DoT deputy director-general.
The push for Rail Reforms
The inefficiencies in government monopolies like logistics and energy has meant that the African National Congress has been forced into backtracking on one of its core tenets — that state companies and investment will lead economic growth — and instead rely on the private sector to help arrest the decline of services.
“The move now is to what we call ‘open-access’, where the state maintains control over the infrastructure – the state continues to operate its trains…but the private sector is invited to take up the latent slots on the network,” Holley explained to EWN.
Very broadly, the recent consequential government policies for rail seek to:
- National Rail Policy: Aims to transform the rail sector by ending government monopoly and promoting competition to enhance efficiency and investment.
- Freight Logistics Road Map: Details strategies (including PSP) for optimising freight logistics, improving infrastructure, and streamlining operations to boost economic growth (an estimated R150 billion needed).
- Private Sector Participation Framework: Encourages private investment in rail infrastructure and operations, facilitating partnerships and concessions to modernize the rail system.
A policy implementation that has been of particular attention has been the vertical separation of Transnet Freight Rail (TFR) into an infrastructure manager and a train operating company, which Holley describes as “a very big step in the right direction”.
The Statement delineates the requirements and application process for private train operator companies (TOCs) to access Transnet’s rail network overseen by Transnet’s Infrastructure Manager (IM).
The Statement delineates the requirements and application process for private train operator companies (TOCs) to access Transnet’s rail network overseen by Transnet’s Infrastructure Manager (IM). It also sets out the functions and powers of the IM.
“Ultimately, the Statement represents a crucial step forward for the rail industry (and commodity providers reliant on rail services), which has been monopolised by Transnet, now opening the door to private investment,” explained Cliffe Dekker Hofmeyr’s Vivien Chaplin and Gabby Wesson.
It “also presents a means for Transnet to reduce its vast debt, increase the freight volumes in the network, which have been at a decline due to Transnet’s underperformance, and ultimately improve the economy,” they added.
The CEO is confident that raising the necessary capital will be manageable due to the feasibility of bulk freight rail in South Africa and predicts that the country will have privately operated trains within the next six to nine months – if the access fee proposals are amended.
“Substantial consultations and amendments are needed to appease industry stakeholders before the privatisation of the rail sector can be effectively implemented, particularly to account for the negatively received minimum access fee,” said Chaplin and Wesson.
The DoT is expected to establish a Private Sector Participation (PSP) unit to identify and prioritise projects and develop an implementation plan to facilitate PSP initiatives after seeing the opportunities that emerged from similar initiatives in the electricity sector.
Read: The end of load shedding in South Africa is close – with a very big catch
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