PRIVATE RAIL OPERATORS CAN INJECT BILLIONS INTO THE ECONOMY

By Mesela Nhlapo, CEO of the African Rail Industry Association (ARIA)

Rail transport is cheap, efficient, fast and clean. However, less than 20% of all freight in South Africa travels by rail. African Rail Industry Association (ARIA) CEO Mesela Nhlapo makes a case for allowing third-party access to the country’s rail network as a matter of urgency.

Just 17% of all freight in South Africa is carried by rail, which means our roads are clogged with heavy trucks emitting toxic gasses, ruining the road infrastructure and integrity, and making life very difficult for ordinary commuters.

It does not have to be this way. Rail is the obvious and logical choice to relieve the pressure on our road system, maintain a significant infrastructure, and create many, much-needed employment opportunities.

Rail is cheaper, cleaner and more efficient than road transport and will become even more critical in a postCovid world as cargo can be shipped in a sanitised, minimal-contact environment. However, the key to rail becoming a significant player in the South African economic space is third party access to the infrastructure currently wholly owned by Transnet.

Transnet moved 215 million tonnes in 2019, down 5% from 2018, with vandalism often paralysing the country’s electric fleet. ARIA’s research shows that 190 million tons of intercity freight and 20 million tons of bulk commodities currently move by road every year. Of this, around 58 million tonnes could move to rail almost immediately. The sectors that would benefit include agricultural commodities, metals and minerals, cars, containers, hazardous chemicals and liquid bulk.

It is vitally important that the public and industry understand that third-party access is not privatisation. On the contrary, it allows private operators to use South Africa’s rail network at a fee, which would grow the rail freight business exponentially.

This would not diminish Transnet’s existing flows at all but would bring significant additional volumes, such as increased containerised cargo, agricultural and forestry products and hazardous chemicals, to rail. As a result, it has the potential to strengthen Transnet’s financial position considerably and add value to the country’s economy.

Multiple operators will generate additional revenues for Transnet that could be invested back to build our rail network into a source of global competitive advantage by reducing the cost of logistics for exporters and producers alike, while enhancing the road-to-rail strategy. In addition, our local supply base within the manufacturing environment could see a turnaround as demand starts to increase for rolling stock.

Early projections by ARIA suggest that additional parties using the rail network will create numerous upstream jobs by enabling the industry to become internationally competitive. Similarly, rail corridors into Africa would create cost-effective gateways to take South African goods into these markets.

Allowing third-party access to our rail system is in line with President Cyril Ramaphosa’s Economic Reconstruction and Recovery Plan, announced in October 2020, which aims to supplement Transnet’s capacity, migrate freight volumes from the road to rail and stimulate broader economic growth.

The government’s proposed structural reforms to the rail sector, which will see private rail operators operating on the country’s core rail network, will breathe new life into an industry that is under severe pressure.

Importantly, no new regulation is required to enable third-party access. Regional trading partners have already moved to this model, supporting interoperability and regional trade for pan-African operations. The value of this move to the Government and Transnet would be significant. Right now, we have a massive network with an excess capacity that could unlock substantial incremental cash flows through access fees from private operators. In addition, the existing infrastructure requires no extra state investment, as track maintenance costs should be largely fixed costs.

An estimated R45 billion in rolling stock alone would be needed to service this volume requirement, which would provide a massive boost to the local rail manufacturing industry, with significant locomotive and wagon build programmes on the cards. Unlocking this capacity would also grow the rail services segment, finance markets and the advisory market, as specialist advisors would be required across the supply chain.

South Africa’s current unemployment rate of 34.4% (Stats SA second-quarter survey) imposes significant pressure on taxpayers and the country’s budget. However, the rail sector is ready to reduce these numbers in the coming year when third-party access is available and implemented in the freight rail sector.

Opening the rail network to thirdparty operators is not only entirely achievable in 2021. However, it would provide a multi-billion rand boost to the country’s economy over the next five years, potentially generating thousands of jobs and driving massive economic benefits.

Concurrently, state-owned rail operator Transnet would benefit through access fees without necessarily competing with private rail operators who would target volumes not currently moved on rail.

A healthy balance sheet for Transnet can significantly improve South Africa’s overall credit rating and reduce the cost at which we borrow money as a nation. The knock-on effect of this is a less burdened taxpayer, more disposable income, and tremendous economic growth at a time that our country desperately needs it.

Freight rail is a key driver of a nation’s logistics performance, which drives more incredible economic performance. Germany, which scores the highest on the World Bank’s Logistics Performance Indicator, has opened its rail network to private rail operators. The entry of these operators onto the state network resulted in the creation of hundreds of SMEs for the provision of infrastructure interlinked to freight rail operations.

McKinsey research suggests that SMEs represent more than 98% of South African businesses and employ 50-60% of the country’s workforce. So we have a real opportunity for SMEs to get involved in specialised technological services or innovations – often jobs that never existed in rail before.

We can’t afford to rely on one or two players to support the potential growth of our rail industry. So we must bring in private operators as soon as possible to make the most of this incredible asset we have for the benefit of the sector, industry in general, and the entire country.

At ARIA, we’re busy engaging government to restart an overdue conversation about railway infrastructure. Without an efficient rail network, industries will incur higher costs, which would raise the prices of a larger share of consumer goods. We represent a range of rail industry stakeholders, including original equipment manufacturers, rail component manufacturers, operators and services companies.

It is time to get all stakeholders around the table to get our rail industry driving our economy forward. It is a conversation we cannot afford to delay.