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How President Ramaphosa’s plan to fix South Africa’s rail network has derailed

How President Ramaphosa’s plan to fix South Africa’s rail network has derailed
Iron ore sits in freight trucks before shipping by rail at the Sishen open cast mine, operated by Kumba Iron Ore Ltd., an iron ore-producing unit of Anglo American Plc, in Shishen, South Africa, on Wednesday, Aug. 24, 2011. Kumba Iron Ore Ltd. may decide on the next stage of its Sishen-Saldanha expansion in 2014, the company said in a presentation on its website today. Photographer: Nadine Hutton/Bloomberg via Getty Images
Ray Mahlaka
By Ray Mahlaka
5 Dec 2022
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The much-vaunted plan, which involves allowing private sector players to independently run trains and invest in Transnet’s infrastructure, has bombed. And the state-owned enterprise is to blame.

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 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. 

(Photo: Nadine Hutton / Bloomberg via Getty Images)





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How the auction flopped


Transnet’s auction process has bombed, as it only attracted two bidders, one of which was successful. The only bid 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, said 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. 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”. 

During 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. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.

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