Transforming South Africa's rail network

South Africa’s crucial rail network has been a binding constraint on the country’s ability to support the economic activity needed to support its development goals. Transnet – which owns and oversees operations and management of the rail infrastructure – grapples with financial constraints that hinder the maintenance of infrastructure and the rollout of new projects. This situation is painfully evident in the marked decrease in freight movement from production centres to ports.

As noted above, the implications of this decline go beyond logistics and also impact the broader economy.

Plans for a substantial infrastructure rollout 

Government has recognised the need to address this, with plans for a substantial infrastructure rollout that can be conducted through state-owned enterprises (SOEs) and municipalities. Unfortunately, because of their financial positions, National Treasury support through infrastructure grants, budget facilities and guarantees will be required.

Bringing in the private sector as a partner to invest capital and improve on operational inefficiencies seems an obvious solution and has proven to be a successful model in the past, through successfully implemented build-operate-transfer contracts in water, roads and rail public-private partnerships, which come with Government support structures.

A “promising” shift in the rail sector

The current financial landscape requires a re-evaluation of this model, as the government can no longer afford to shoulder the increasing liabilities. To alleviate this, private investment and participation have been under discussion for several years. For this to happen, the regulatory framework must be adjusted to ensure that private sector participation is encouraged and regulated in an enabling way.  Key reforms have already been established and are being implemented, signalling a “promising” shift in the rail sector.

The establishment of the National Rail Policy and the Economic Regulation of Transport Bill, which aims to separate rail operations from infrastructure, is seen as a necessary step to attract private sector investment and enable third-party access and corridor concessions. If these are structured and implemented correctly, freight and cargo owners will manage their rail logistics more efficiently and cost-effectively.

While the reforms are promising, some stumbling blocks remain. Foremost among these is the unpredictability of tariffs and the unilateral nature of penalties (assuming applicants already own or will lease rolling stock). The final Network Statement, which outlines the operational framework for railway infrastructure and management of third-party access to the rail network, was released in December. It initially excited the market with approved tariffs applicable until the end of March. However, tariffs submitted to the Independent Rail Economic Regulator (IRERC) for the year beginning 1 April appear to be significantly higher, and if approved, could reverse this positive sentiment.

Despite receiving 98 applications for third-party access, the unpredictability of tariffs may deter operators and investors from participating.

Private sector needs assurances

In conclusion, there are promising moves on the reform front that will hopefully unlock private sector involvement in solving South Africa’s logistics challenges. Provided the private sector receives the assurances it needs to commit investments over the long term, there’s no reason why the rail sector shouldn’t be able to provide the economy with a significant boost.