Founder: Turnaround Talk
At the height of the financial performance of SOEs coming under intense scrutiny, which was perpetuated by South African Airways being placed into business rescue, various high-profile economists and South Africa’s top business rescue practitioners made it clear that economic growth in South Africa depends on the steady supply of electricity and the ability to get commodities to port for exporting.
A lot has happened since 2020 when SAA was placed into business rescue. Eskom’s ability to keep the lights on has been severely compromised. The newly appointed Electricity Minister is even urging South Africans to donate braai coals to Eskom during winter to ensure that the lights stay on…I kid you not! The utility once again asked Government for a bailout. Government agreed to this but not before they let Eskom know that the nature of the relationship between the parties must change.
Regarding Transnet, when it became apparent that Government would not be as sympathetic to its bailout request, the rail agency made the bold move of announcing massive privatization plans. While this was a step in the right direction, many experts warned that the hard work has only just begun. An article by Moneyweb points out that the Africa Rail Industry Association (Aria) warns that it’s time to stop talking about policy and get the private sector involved.
Once a symbol of national pride
The article points out that South Africa’s 21 000km rail network used to be a matter of national pride, accounting for some 80% of Africa’s total network.
This massively over-specced network needs to be pruned to no more than 5 500km and operated with the kind of financing and efficiency that the private sector, operating alongside Transnet, can bring, according to Aria.
The article adds that decades of poor management, underinvestment and theft has transformed this once great national asset into a national crisis, chopping 2% off annual GDP and another 4% in missed opportunities, according to Stellenbosch University logistics professor Jan Havenga.
A series of mistakes
The Moneyweb article points out that the 21 000km rail network is the product of a series of mistakes going back 165 years, including selecting the wrong gauge for optimal efficiency and repeated violations of political promises to run the network on business rather than political principles.
It was the latter expedience that won the day, so farmers demanded – and got – rail sidings built at public expense to the farm gate.
For reasons such as this we have a legacy rail network of 21 000km that provide thieves with ample pickings. Transnet reports that 1 500km of cable was stolen over the last five years, at a cost of R4.1 billion.
Pressure on roads
The article adds that some 87% of all freight in the country is moved by road, when much of this – particularly commodities and palletised goods – should by shipped by rail.
Speaking at a recent Aria media presentation, Havenga estimated that 28% of domestic mining produce, 20% of manufactured goods and 28% of palletised goods currently travelling on roads could be shifted to rail.
The article points out that Aria chair James Holley outlined the deteriorating performance of Transnet: in 2018 it moved 226 million tonnes (Mt), falling to 173 Mt in 2022. This is likely to fall to 155-160 Mt for the latest financial year to March 2023, representing a 29% decline in five years.
Havenga previously pointed out that SA’s general freight volumes have dropped to levels last seen during World War II – roughly 50 Mt a year.
In the last 20 years, while India’s freight volumes increased 370%, SA’s actually declined. Last year the coal line hit its lowest volumes since 1993, while iron ore exports are at their lowest since 2010.
“The implications for the future of the country are significant and we seem to be approaching a critical inflection point with regards to our railways. If we don’t change direction quickly the ramifications for our industry are very concerning, but perhaps more so are the consequences for the upstream economy,” says Holley.
The article adds that progress in fixing the rail network has been debated ad nauseum for the last 14 years, yet there seems very little action in implementing a rail policy that has already been gazetted.
“Why then do we still debate policy?” asks Holley. “The time surely to debate policy was when the green paper and white paper were released for comment. We took 14 years to develop a progressive policy that can ignite the South African economy. Now is the time to implement the policy and no longer to debate it.”
The national road network is now feeling the pressure of Transnet’s poor performance.
Rail renaissance
The article points out that cabinet approved the white paper on the National Rail Policy on 23 March, which creates policy certainty and opens space for private sector investment into railways.
“The role of the private sector in bringing about the rail renaissance in SA cannot be over-emphasised,” said Transport Minister Sindisiwe Chikunga in a statement issued last week.
The article adds that the National Rail Policy envisages a rail network open to a raft of technologies that could increase axle loads, speeds and train lengths for both passenger and freight.
The policy anticipates the formation of a Transport Economic Regulator to issue regulations for a more efficient rail sector, and a forum for cooperation between private sector and state-owned entities (SOEs).
The Moneyweb article points out that one of the key reforms is the devolution of the Passenger Rail Agency of South Africa (Prasa) into the larger metros, with private sector participation.
Cape Town and Johannesburg are reportedly on board with this policy as a way to the reignite interest in passenger rail to reduce strain from taxis on city roads.
“While we cannot fool ourselves that there is a long road ahead of us, the fact that Prasa is on track to spend its capex budget for the first time since 2016 needs be recognised, and just might represent the first real signs of progress in passenger rail that we have seen for some time,” says Holley.
Money
The article adds that track infrastructure investment is possibly the most difficult problem to solve. Aria previously estimated track maintenance underspend over the last decade to be around R26.8 billion and that R100 billion needs to be spent to restore the track integrity.
Earlier this year Transnet said it required R111 billion in capex to restore operations, but that this would still leave it with a funding shortfall of R80 billion.
Havenga reckons it will take R60 billion to restore the integrity of the 5 500km “core” track, where strongest demand for freight transport exists.
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The article points out that the three potential sources of capital for this are Transnet, government and the private sector.
Transnet’s ability to raise further capital will likely be limited in light of its inability to reach its cash-to-interest cover ratio of 2.5 on some of its debt, as announced by Finance Minister Enoch Godongwana earlier this year.
National Treasury, already under huge budgetary strain, is also unlikely to be a source of large-scale funds to rehabilitate the rail network, which means the private sector will be the most obvious source.
Private sector
The Moneyweb article adds that Transnet has called for proposals from the private sector to solve the infrastructure backlogs on the Container Corridor through a proposed 20-year operating lease.
Aria believes this could, if poorly implemented, result in a private sector monopoly replacing a public one.
It wants government to exercise oversight until the Transport Economic Regulator is in place to ensure fair play that benefits the country as a whole.
“We expect that we are at a juncture where decisions like the rationalisation of our core network will soon be considered,” says Holley.
“Is it better to have a smaller, well-capitalised and high-performing railway network than the vast network that we have today?
“These decisions need to be made with careful consideration and in the context of the realities of our current situation.”
Where do we go from here?
There is a growing rhetoric on social media that the root cause of South Africa’s current economic and unemployment crisis is the inability of politicians to formulate and roll out key infrastructure projects. Medupi and Kusile are prime examples of this.
However, the future profitability of South African companies are at stake, there are growing reports of significant demand for South African coal in Europe as the continent adjusts to life without Russia’s gas pipeline. Yet, we cannot get coal to port, be it by rail or by road.
We need to bring the old engineers out of retirement to act as consultants. We cannot rely on Government to resolve the rail crisis. Privatisation means that the collective monetary power of the mining industry as well as some of the well-financed role players in the agricultural sector need to dig deep into their pockets and fund a national revival.
