Financial Mail

TRAIN WRECK

We all know the impact that Eskom has had on destroying SA’s economic growth, but Transnet’s abject failures have been equally corrosive

- Paul Ash

What it means: Transnet’s abject failure has cost SA billions and endangered the country’s future

n a flight from

Joburg to Nampula in February 2005, a wise American railroader leant across the aisle and said to the reporter due to accompany him on a struggling warbattere­d railway across northern Mozambique: “I’m so happy to be going to a country where rail has a future.”

His frustratio­n was palpable. The previous week had evaporated in fruitless attempts to set up meetings with senior managers at then-Transnet rail operator Spoornet to see if the utility would consider concession­ing its abandoned branch lines to private operators.

After days of cancelled meetings and unanswered phone calls, the American took his money and railroad experience elsewhere and never came back.

Nearly two decades and billions of rands later, SA’s rail, ports and pipeline operator has reached a critical point in its existence.

Transnet is battling floods, unrestinsp­ired vandalism, rampant theft of its infrastruc­ture, competitio­n from trucks, and corruption from within its own ranks. How it solves these multiple crises will determine the fate of SA’s economy.

“It is critical — that’s the right word,” says Minerals Council of SA (MCSA) chief economist Henk Langenhove­n. “This economy depends, for 60% of its GDP, on exports and imports. And virtually all of it is transport and logistics.”

Yet the figures in Transnet’s annual report make for sobering reading.

Revenue for 2021 was R67.3bn, down from R75.2bn the year before. Rail freight volumes dropped 13.3%, and port container throughput was 10.5% down.

To some extent, that’s due to the nationwide lockdown — but it’s also because of Transnet’s own abject internal failures.

And it’s self-defeating too. As Langenhove­n points out, “mining is 80% of Transnet Freight Rail’s (TFR) income and 50% of Transnet’s income.”

To put the story in perspectiv­e, Transnet’s impact on the mining sector if it fails to deliver has double the impact of the electricit­y crisis. During a commoditie­s boom, as demand for exports rockets, SA can’t afford to have its rail industry misfiring like this.

An ongoing locomotive shortage — a direct result of the now-cancelled “1,064” deal — has worsened the utility’s perfect storm, says Langenhove­n. “They didn’t get [all the parts they needed] and now they have terrible problems [trying] to procure parts for the Chinese machines.”

The upshot is that more than 100 of the newly bought locomotive­s are standing idle, awaiting spare parts.

And that’s before you even consider that, every day, Transnet’s rail network is being stripped by criminals, making what’s left often unusable.

“It’s really a problem,” says Langenhove­n, “it’s not an excuse.”

Transnet CEO Portia Derby has pointed out that the theft of a single metre of overhead traction cable is the same as stealing 5km — the disruption to business is the same.

Aside from the external factors, Transnet’s internal inefficien­cy only makes it worse.

In 2021, Transnet offered voluntary severance packages to senior managers. What looked like a cost-saving exercise, however, has come back to haunt it.

“It was taken up by people they couldn’t afford to lose,” says Langenhove­n. “You don’t replace these experience­d people easily.”

And the mining sector is paying the price.

As Langenhove­n points out, about 40% of SA’s export earnings comes

from transporti­ng bulk minerals from mines to ports.

“We exported about R850bn ($55bn at R15/$1) from mining alone [last year],” he says.

Trains that aren’t able to get to the ports are only half the problem; once there, the ports — operated by Transnet — must operate efficientl­y to ensure the cargo is sent.

Yet ships continue to be delayed in ports, and the service continues to deteriorat­e. If the trend continues, mining production will drop in the next few months, he adds.

It’s not just exports that are affected but also critical imports — such as chlorine for water purificati­on and ammonia, which is used to manufactur­e explosives and fertiliser.

“You can’t imagine the mining sector without explosives,” says Langenhove­n.

During Thungela’s results presentati­on on March 22, CEO July Ndlovu was asked if the government was even aware of the potential loss to the fiscus from Transnet’s fumbling.

Ndlovu replied: “The SA government is aware of the issues at Transnet and the impact it is having on the SA coal industry, because we, as the industry, are engaging with Transnet, the department of public enterprise­s, the Treasury and the department of mineral resources.”

But when asked how long Transnet Freight Rail will take to fix, Ndlovu had no answer. Nor, truthfully, do many people.

And yet this failure cascades down SA’s industrial supply chain, from mining, to farming, to timber.

RAIL: Sticking their ore in

If you want a microcosm of Transnet’s problems, consider the jewel in its crown: the 861km ore line from Sishen in the Northern Cape to Saldanha in the Western Cape.

In recent years, this line has been characteri­sed by erratic service.

It was built in 1973 by the then SA Iron & Steel Corp (Iscor) as a singletrac­k railway between the massive ore deposit at Sishen and the new deepwater port at Saldanha. The line had 10 crossing loops (now increased to 19) installed at regular points where opposing trains could pass each other. It was hailed as a triumph of engineerin­g.

It’s an ore line rich in mythology. One hoary tale is that a handful of government officials in the 1970s used their inside knowledge of the route to buy out struggling sheep farmers at rockbottom prices and sell the land back to Iscor at inflated premiums.

Another is that the trains moan and howl as they travel across the scorched wastes of the western Karoo.

Yet another is that the 3.8km-long trains with their 342 wagons and five locomotive­s are the longest production trains in the world, carrying 42,000t of red ore in a single load. The last, at least, is almost true. The world’s longest trains are, in fact, the 375-wagon manganese trains that TFR put into service in 2018 on the same line. Along with ore and manganese, the line also carries coal, gypsum, cement and lime and steel products.

That these trains run on the so-called “narrow gauge ”— SA’s railway gauge is 1,065mm, against the 1,435mm

European and US “standard gauge ”— gives the lie to claims that SA needs to re-gauge its entire system to standard gauge to compete.

The truth is, what SA’s railways really need is not wider track, but more consistent service; that is what will attract customers from other modes of transport rather than drive them away.

The line does have two Achilles heels, however.

The first is that a derailment anywhere on the single-track sections necessaril­y brings the whole railway to a grinding halt.

Just ask ore miner Kumba Iron Ore which, in 2018, was forced to declare force majeure on contracts after six derailment­s on the line halted rail traffic for almost a week. The derailment­s cost Kumba 2.4Mt of export sales, or R2bn, that year.

The line’s other weak spot is the high bridge over the Olifants River. In 2020 it was temporaril­y closed “due to unsafe conditions”, Transnet Freight Rail admitted.

That, along with unspecifie­d problems elsewhere on the line, and poor tippler and rolling stock reliabilit­y, forced

TFR to implement “a significan­t number of speed restrictio­ns”, which puts a brake on volumes. In response to questions from the FM, Transnet spokespers­on Sibu Majozi said the bridge was closed at the time due to “a combinatio­n of weatherrel­ated factors”. This

included extreme temperatur­es, wind conditions and precipitat­ion.

“Temporary bridge closures when these factors converge are therefore a prudent and pragmatic risk management practice.”

A month ago, Transnet effectivel­y threw up its hands, telling coal exporters it was once again declaring force majeure — a legal term denoting an inability to perform on your contracts due to an extraordin­ary event — due to cable theft and legal proceeding­s on the train purchases.

Transnet said this had caused “changed circumstan­ces beyond [our] reasonable control”.

Coal producer Exxaro was having none of it.

Exxaro, in a statement, argued that “the events relied upon by TFR do not constitute force majeure events”. It refused to accept that the contracts had terminated.

Strip aside the legalese, and it seems that Transnet’s customers were saying they’d had enough, and they felt the utility was trying to squirm out of its contracts because of how inept it is.

Rather, they seem to be saying, take responsibi­lity and fix the problem, don’t just moan about how you can’t fulfil your agreements.

FARMING: Grain, grain, go away

It’s not just mining companies bearing the pain, however. Farmers are feeling the impact of Transnet’s poor service too.

Apart from its hulking grain silo, Kameel is an otherwise unremarkab­le siding on the railway line from Kimberley to Mahikeng.

This was the original route of Cecil John Rhodes’s Cape-to-Cairo fantasy, sidetracke­d by the discovery of gold on the Witwatersr­and, which diverted colonial ambitions — and the railway — to what is now SA’s economic heart: Gauteng.

These days at sleepy Kameel, the sound of an approachin­g freight train is rare enough to make the inhabitant­s stop what they’re doing to wave at the crew.

The road east from here leads to places including Vermaas, SchweizerR­eneke, Ottosdal and Migdol — dots on the map marked by concrete grain silos rearing out of vast fields of maize and sunflowers.

Each silo also has a railway siding, though the sight of trains on these rusting tracks is increasing­ly rare as farmers and operatives have given up on rail and turned to trucks.

Francois Strydom, group CEO of agricultur­al co-operative Senwes, estimates that about 85% of SA’s grain is now transporte­d by road from farm to factory.

“Almost all grain shipping is done by road,” says Strydom. “There is very little going by rail because of the general condition of the railway infrastruc­ture. It has deteriorat­ed so badly over time.”

That is a far cry from the time when

every grain silo in the land was compelled by law to have its own rail siding. The law lingers on, in that silos still have to have rail connection­s to register on the SA Futures Exchange (Safex).

“It’s of no use these days,” says Strydom, “but officially it’s still required.”

The effects of Transnet’s failure are evident in food prices, along with the deteriorat­ing condition of SA’s rural road network, he adds.

“You are talking about R120 for 2l of cooking oil. In SA terms that is a very basic product,” he says. “It’s much more costly to transport by road. And the roads also aren’t designed for these heavy loads.”

Farmers and agri-processors would prefer to use rail transport if it were available, he adds. “It’s so much more efficient and cost-effective when it’s functionin­g properly.”

From a low base, volumes did at least pick up last year — TFR delivered 499,000t of export grain to Durban, against 209,000t in the previous year. But this year hasn’t been promising. As Transnet’s Majozi admits: “The floods in KZN and closure of the mainline has affected our ability to rail to Durban.”

Still, she says, once the repairs on that mainline are completed, Transnet will reopen the service.

The bigger battle will be convincing the farmers to again use a service long since abandoned as unreliable.

TIMBER: If a timber train stops running through the forest, does anyone hear it?

The people of the Mpumalanga forestry town of Sabie were once inured to the sound of diesel locomotive airhorns shattering the dawn, as the early train from Nelspruit rumbled through at sunrise and hooted for the level crossings.

The train ran six days a week, serving Sabie and the terminus at Graskop. It dropped off freight cars, which were loaded with freshly cut logs, at sidings along the way.

The town has two timber mills, both with rail connection­s — though these have not felt the press of a rail wagon in 15 years.

Even when it was built in 1914, that line cost a bomb. With its 372 curves — only 36% of the line is straight — the 125km railway was an expensive propositio­n, costing R95,000 per mile to build 108 years ago.

Despite the presence of timber growers, whose product is well suited to rail transport, the line’s traffic eroded as operators switched to trucks. All the freight — poles from the plantation­s as well as sawn timber from the mills — now goes by road.

The last train ran in 2007. Nature has taken its steady course since then: the track is overgrown, embankment­s have been washed away and much of the rails and wood sleepers have been stolen.

The line was offered for concession­ing in Transnet’s abortive attempt in 2010 to lure the private sector to take over its moribund branch lines. It was also listed in the SOE’s 2016 Rail Developmen­t Strategy as due for imminent rehabilita­tion.

Seven years later, the line remains vandalised, Danie Boshoff, sales manager at treated timber supplier Sabie Poles, tells the FM.

“We can only export [using] road transport via Durban,” he says.

Even if the line were operating, the company would likely stick to trucks. “I doubt [we would use it],” Boshoff adds. “Our railway system is not trustworth­y.”

His comments are echoed throughout SA’s timber industry, which once relied heavily on rail to carry timber to mills and processing plants.

The mining industry was once a major customer, buying gum poles to use as pit props.

But timber rail traffic has sagged from about 3.5Mt in 2005 to less than 2Mt today, industry body Forestry SA says.

This drop in traffic, and its impact on rural employment, caught the attention of the public enterprise­s department, which has since drawn up a “forestry master plan” to combat the decline.

The department says a surge in rail tariffs between 2005 and 2010 is partly to blame.

“Rail volumes significan­tly decreased between 2005 and

2010 after a more than 191% increase in rail tariffs. Coupled with issues about efficiency and reliabilit­y of the rail network, competitiv­eness of SA exporters is severely compromise­d,” it says.

The rot started before 2005, however. Since road transport was deregulate­d in

1985 with the scrapping of the muchhated permit system, the flow of traffic off rail and onto trucks has been relentless. But even the presence of loyal customers has not guaranteed good service from Transnet.

In KwaZulu-Natal, for example, the branch line from Pietermari­tzburg to Matatiele, Franklin and Underberg is nominally open only as far as Donnybrook.

Meanwhile, train service on the branch heading north of the city to Greytown and Kranskop, a critical source of timber traffic, is fraught with operationa­l issues such as long grass growing over the tracks after good summer rains, says James van Zyl, commercial manager at timber and agricultur­al co-operative NCT.

“The grass is so high over the tracks that the train drivers refuse to travel on the line,” he says.

On the occasions that trains do venture up the line, the grass gets crushed underneath the locomotive­s whose wheels then begin slipping on the rails.

Though grass cutting would provide employment in a place where jobs are desperatel­y needed, companies such as NCT are not allowed to do the work themselves.

Instead Transnet sends its own

The grass is so high over the tracks that the train drivers refuse to travel on the line

James van Zyl

maintenanc­e crews from as far away as Durban which, in turn, adds to delays in keeping the line open for traffic.

“This isn’t difficult, hi-tech stuff,” says Van Zyl. “When November arrives, they should start cutting the grass.”

Perennial wagon shortages are another issue on the line.

“You ask for 100 [rail] trucks and you only get 80,” he says.

When the line is out of service, shippers have to use road trucks. A single trainload of timber is the equivalent of about 80 trucks, he adds.

Transnet, in response to the FM, says the line is inspected on a regular basis to ensure safety compliance.

“There was a challenge with vegetation growth on the branch line in Greytown but this has been addressed,” says Majozi. She adds that a process is under way to appoint a contractor to keep the line clear.

Transnet disputes that there is a shortage of wagons, however. “The timber sector is sufficient­ly resourced with wagons,” says Majozi.

It’s a big loss, for Transnet as well as the timber companies. As it stands, timber trucking rates are roughly R100 a ton, whereas rail is about R80 a ton.

Meanwhile, a dedicated timber train called the “Wood Owl ”— used by companies including Mondi and Sappi to transport timber along the coal line to Richards Bay — has also suffered.

The train, which serves four mills in Richards Bay, carries about 1.3Mt a year when it is running properly. But the service, at one point, ground to a halt entirely.

Forestry SA (FSA) said the disruption of the Wood Owl service rippled right up the supply chain.

“Approximat­ely 5% of the population of Mpumalanga and 2.7% of

KZN are dependent on the forestry sector,” says FSA executive director Michael Peter. “As a significan­t employer in the rural areas, these people will be hit the hardest. This situation cannot continue, and we are working hard with TFR to look at solutions.”

Transnet had since restored the Wood Owl train service.

But it argues that the disruption was due to “our inability to procure spares and critical components”, which meant TFR had to “reallocate and rebalance rolling stock resources in order to service all customers”.

Of course, some of those resources include the new engines supplied in the tainted “1,064 deal”, which was thoroughly picked over by the Zondo Commission. This lies close to the heart of Transnet’s motive power problem.

The engines that couldn’t

The 2014 deal to buy 1,064 new locomotive­s was the lynchpin in Transnet’s strategy to position the SOE as a modern, nimble logistics provider able to lure freight traffic back from road. The idea was to make Transnet one of the world’s biggest freight railways.

The R54bn contract — which ballooned from an initial estimate of R38.6bn — was split almost evenly between diesel and electric locomotive­s from four locomotive builders.

General Electric was on the hook for 233 diesel-electric locomotive­s, all of which have been delivered; China

South Rail (CSR) was contracted for 359 electric locomotive­s, of which it delivered 260; China North Rail (CNR) was contracted for 232 diesel-electric locomotive­s, but delivered only 22; while Bombardier Transporta­tion, contracted for 240 electric locomotive­s, delivered 68.

Of the 583 locomotive­s delivered by the time that Transnet and the Special Investigat­ing Unit approached the courts in 2021 to cancel the deal because it was corrupt, about 200 were out of service and awaiting spares. It was a failure which cost SA billions in lost exports.

Ironically, the court case also left Transnet at the mercy of the Chinese rail giants, which refused to provide spares while litigation continued.

It gets worse: Transnet’s crisis has been exacerbate­d by a shortage of spares for 195 electric locomotive­s which were supplied by CSR before that tainted 1,064 deal.

While talks with the locomotive builders continue, Transnet has been forced to extend the lifespan of its socalled “legacy fleet”.

The legacy fleet is a mixture of diesel and electric locomotive­s, some of which are nearly half a century old. Many have had only basic maintenanc­e done.

The locomotive shortage, combined with cable theft on the coal and other lines, has led to long delays for customers.

Replacing overhead cables, from which electric locomotive­s draw their power, depends on how quickly repair teams can get to the site to effect repairs.

This cable theft, along with capacity problems at the Richards Bay Coal Terminal (RBCT), meant some major coal exporters had to lower their projection­s.

In May 2021, Exxaro Resources projected a 31% slump in export sales as a result of Transnet’s capacity problems.

CEO Mxolisi Mgojo hammered home the truth that August, telling reporters that

SA’s coal exporters had missed out on exporting about 9Mt in the first half of 2021 even as the price of coal surged from $80 to

$180 a ton.

At Exxaro’s year-end results in March, it fumed over the “persistent logistic challenges” that saw its export sales plunge 37% (or 4.6Mt) to 7.6Mt.

The suffering was not limited to coal exporters. Capacity problems on the coal line compelled chrome miner Tharisa to send as much as 50% of its production to port by truck, against 30% in normal times.

In December, the MCSA estimated the opportunit­y cost for its bulk commodity members in iron ore, coal and chrome to be at least R30bn. This was the calculatio­n of planned and contracted tonnages that had not been railed.

“Difficulti­es at harbours like Richards Bay for chrome exporters merely compound these opportunit­y costs as they must then use trucks to access Maputo harbour. And that comes with its own problems of lengthy border delays,” MCSA spokespers­on Allan Seccombe said at the time.

It is part of the wider state malaise. As Seccombe put it: “The difficulti­es the mining industry is experienci­ng with Transnet are symptomati­c of the delayed and broader infrastruc­tural reforms we and other business organisati­ons have called on the government to urgently implement to attract investment and create jobs.”

Today, five months into 2022, the situation has barely improved.

Local coal miners are adding hundreds of trucks to SA’s already battered road network as they grapple to move their product to Richards Bay, Reuters reports. This amounts to 6Mt of coal travelling by road every year.

RBCT, theoretica­lly, has an annual capacity of 91Mt. A decade ago, shortly before the dawn of the Gupta era, TFR aimed to boost annual tonnage on the line to 81Mt by running so-called “shongololo” trains of 200 wagons each, directly from the mines to the port.

The opposite happened. Last year, TFR railed 66.9Mt of coal — a sharp dip from 72.5Mt in 2020 and well off its 73.5Mt target.

Tunnel visions

As Transnet’s troubles continue, some exporters have urged the government to privatise the behemoth.

The public enterprise­s department seems to agree that some kind of private-sector involvemen­t might help solve Transnet’s issues, restore confidence in rail and woo traffic back from road.

Speaking in March 2021, public enterprise­s minister Pravin Gordhan said full private operator access to Transnet’s network would be implemente­d within the next three years “if not sooner”.

That startling claim followed President Cyril Ramaphosa’s October 2020 announceme­nt that private operators would be allowed to run their trains on Transnet’s network as part of SA’s economic recovery plan.

Several would-be private operators were delighted at the news, even if Transnet seemed less enthusiast­ic.

In September, James Holley, CEO of private rail operator Traxtion, argued that thirdparty rail access would be a win-win for the government: Transnet could collect access fees from private operators, who could make the rail network efficient again.

Then in April, Transnet made its first move to open the network by offering to sell 16

“slots ”— 10 on the Eastern

Cape manganese corridor and six on the container corridor between Durban and Joburg — to private operators able to meet certain conditions.

In itself, this was a dilution of the idea that Transnet would throw open its network entirely to private operators.

“Transnet has no plans to open up third-party access on other parts of the rail network,” Majozi tells the FM.

It’s an unhelpful declaratio­n considerin­g that, by its own admission, Transnet is way behind the curve. Majozi confirms that 263 locomotive­s are awaiting repairs, of which 146 were part of the “1,064” locomotive acquisitio­n programme.

“The total capacity and opportunit­y lost due to long standing locomotive­s is more than 45Mt per year — almost 1Mt per productive week.”

Transnet Engineerin­g is trying to re-engineer the sidelined locomotive­s. But, says Majozi, “a long-term sustainabl­e solution is required to truly solve our inability to procure spares and critical components.”

And what of cable theft — perhaps the most obvious, and unpredicta­ble problem on its network?

Again, Majozi says Transnet is trying to mitigate this scourge.

“We have put in place several measures including drones and tactical task teams, and are also collaborat­ing with our customers on various initiative­s.”

The reintroduc­tion of railway police, along with harsher punishment for convicted thieves, would also go “a long way” to reducing crime on the rail network.

But until this is dealt with — along with all the other equally pressing priorities — it’s unclear how Derby will prevent the dead weight of Transnet from stifling the economy.

“I don’t think it can get much worse,” says Langenhove­n. “But a lot of things have to happen simultaneo­usly. They have to get spare parts, they have to jack up Transnet Engineerin­g so they can deliver the locomotive­s, and they have to solve the crime issue.”

Right now, Transnet has done nothing to suggest it is able to grapple decisively with any of those priorities.

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 ?? ?? Henk Langenhove­n: SA depends, for 60% of its GDP, on exports and imports
Henk Langenhove­n: SA depends, for 60% of its GDP, on exports and imports
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 ?? Freddy Mavunda ?? Portia Derby: it’s unclear how she will prevent Transnet from stifling the economy
Freddy Mavunda Portia Derby: it’s unclear how she will prevent Transnet from stifling the economy
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 ?? On the SA coal industry Masi Losi ?? July Ndlovu: The government is aware of the issues at Transnet and the impact
On the SA coal industry Masi Losi July Ndlovu: The government is aware of the issues at Transnet and the impact
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 ?? ?? Damaged branch line near GraaffRein­et
Damaged branch line near GraaffRein­et
 ?? Sunday Times/Masi Losi ?? Mxolisi Mgojo: Coal exporters missed out on exporting about 9Mt in the first half of 2021
Sunday Times/Masi Losi Mxolisi Mgojo: Coal exporters missed out on exporting about 9Mt in the first half of 2021
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 ?? ?? End of the line for Transnet’s infrastruc­ture?
End of the line for Transnet’s infrastruc­ture?

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