Daily Maverick

How Ramaphosa’s plan to fix SA’s rail network has derailed

The much-vaunted plan, which involves allowing private sector players to independen­tly run trains and invest in Transnet’s infrastruc­ture, has bombed. And the SOE is to blame. By

- Ray Mahlaka

Black Friday was about appliances, food and

booze

Stats reveal

a steady increase of travellers to SA

It has been more than a year since President Cyril Ramaphosa announced a plan to fix Transnet’s crumbling and unreliable rail network by allowing private sector players to participat­e and invest in it. The plan, initiated by Transnet in April 2021 but first mooted by the government more than 10 years ago, has now derailed, hobbling any chance of a recovery in South Africa’s economy.

The plan was simple. It sought to liberalise rail in South Africa, which has long been controlled by Transnet, by allowing the private sector to run trains and, at the same time, invest in Transnet’s infrastruc­ture to improve it. To do this, Transnet would sell about 16 slots on its rail network to third parties or private sector players, allowing them to introduce their locomotive­s, independen­tly rail their goods to markets, and move traffic off-road and on to rail.

Ramaphosa’s plan recognises that Transnet is operationa­lly and financiall­y broken, and it neglected the maintenanc­e of its rail infrastruc­ture because the state-owned enterprise (SOE) was pillaged during the State Capture years. Lawlessnes­s in South Africa has also made things worse, as Transnet’s rail network has been stalked by an orgy of cable theft.

The net effect of the neglect and theft is that Transnet is unreliable, as its trains often face delays in moving goods, such as coal, iron ore and fuel, on behalf of its customers. Transnet’s operations are a crucial cog in the economy and when Transnet trains are not operating properly, the economy and businesses suffer.

So, the private sector has been keen on participat­ing in Transnet’s rail network, calling for it to be allowed to use its skills and capital to operate trains. And over the past few months, Transnet Freight Rail, the largest division at Transnet, heeded the private sector’s call by auctioning 16 slots on its two key rail routes. They are the Durban-Johannesbu­rg container route and the Kroonstad to East London route, known as the Cape Corridor. This move has been much vaunted by Ramaphosa as one of his key structural reform measures to grow the economy, boost private sector investment­s and create jobs.

How the auction flopped

Transnet’s auction process has bombed, as it only attracted two bidders, one of which was successful. The only bid made for the Cape Corridor route was successful and went to Traxtion Sheltam, which operates rail services in several African markets. On the second route (the Durban-Johannesbu­rg container route) on which slots were auctioned, no bidders were successful. But why did the private sector show so little interest in Transnet’s auction process?

How Transnet designed the auction process and how private sector players were asked to structure their bids by the SOE was fundamenta­lly flawed. A Transnet insider, who was involved in the auction process, tells that the company underestim­ated and failed to understand how long-term capital and investment projects work and are financed.

“The assumption­s made by Transnet were shocking and onerous. It’s no surprise that the private sector snubbed the auction,” said the insider.

First, Transnet required that private sector players work with a two-year period for capital investment­s, which involves deploying electric locomotive­s on the rail routes that were on auction, and also upgrading Transnet’s existing rail network. Such an initiative requires a capital investment period of at least five to 10 years.

Second, Transnet set a two-year lease or contract period for using the rail slots. Private sector players wanted a period of more than two years considerin­g that they would be making large investment­s and purchasing equipment that could last for at least 30 years.

Third, Transnet enforced a minimum operationa­l usage requiremen­t, which means that private sector players were required to use at least 75% of rail slots or lose them. The problem with this is that Transnet’s rail network is not reliable, thus imposing such usage targets is not feasible. But there have been disruption­s in recent years at Transnet Freight Rail, making the minimum usage requiremen­ts difficult to comply with.

Underscori­ng the disruption­s is that Transnet’s rail volumes have been on a downward trend. The Minerals Council South Africa, a body representi­ng the mining industry, says the cost of lost export opportunit­ies owing to Transnet inefficien­cies is about R50-billion so far in 2022.

Tensions in the freight rail industry

For now, Traxtion Sheltam is prepared to move forward with its participat­ion in Transnet’s rail network. “There is a way to go before this becomes a reality but, in principle, we are looking forward to working with Transnet to achieve the goal of true private third-party access to the rail freight network,” said James Holley, the CEO of Traxtion, in a statement to DM168. It is unclear how much money Traxtion plans to invest in the Cape Corridor route or how many locomotive­s it plans to deploy on the route.

Mesela Nhlapo, the CEO of the African Rail Industry Associatio­n, has urged Transnet to rerun the auction process with less onerous terms and conditions to encourage the participat­ion of more private sector players.

“Transnet’s approach to third-party access means that there will be no private investment into South Africa’s rail network because no investor will take the financial risks involved,” says Nhlapo. But Transnet is not open to rerunning the auction process, with Siza Mzimela, the CEO of Transnet Freight Rail, describing the auction process as a “success”. In a briefing with journalist­s on 30 November, Mzimela reiterated that the auction was a “pilot project” that was used as a test to gauge the private sector’s appetite to participat­e in Transnet’s rail network. Mzimela says Transnet will use the experience gained from the auction to refine the future model of the private sector’s participat­ion in its network.

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