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Post: There is no turning back: Private Sector Participation in State Owned Enterprises

Michael Peter, Ian Bird, Francois Oberholzer

South Africa is a Transport Intensive Economy, due to the geographical spread of the country and the distances between production areas and markets. A study ranked the transport & logistics sector the second least competitive out of South Africa’s 16 Economic Industries in 2012.

The efficiency of State-Owned Enterprises (SOE) has shown a steady decline in recent years, with Transnet Freight Rail (TFR) seeing a 20% decline in volume since 2019.  Due to the inability of Transnet in 2021/22 to meet targets on its rail network serving bulk minerals, the sector incurred an estimated R35 billion opportunity cost, while the coal sector incurred a R16 billion opportunity cost. This translates to a R14.3 billion tax loss to Government.  These impacts have been calculated by the Minerals Council of SA.

Railways has a rich heritage in the country, with the first trains running in Cape Town in the 1860’s. South Africa currently has 36 000 km of installed tracks, constituting 80% of the tracks on the continent, worth R1.5 trillion. Although freight volumes have increased in recent decades, driven by increases in bulk flows (iron ore and coal), general freight has decreased since 1973 and the majority of railway lines in the country operate at around 30% capacity. This excess capacity presents a tremendous opportunity to Transnet to turn this dire situation around.

There is room for private rail operators to use this excess capacity and pay toll or ‘access fees’ when utilising the network. International precedent shows that the infrastructure owner can increase their cashflow through such access fees by up to 30%.

Regional trading partners, including countries such as Zambia and Tanzania,have embraced the third-party access model, which supports interoperability and regional trade for pan-African operations.

Light at the end of the tunnel

The National Rail Policy (NRP) was launched by the Department of Transport (DoT) on the 2nd of June and creates space for third-party access on our networks in a competitive, inclusive and open manner.

Third-party access describes a relationship in which private sector freight operators deploy and operate their own rolling stock on state-owned rail infrastructure, while paying access fees to the infrastructure owner.

The infrastructure owner ensures that the quality and condition of the infrastructure is maintained to standard that is safe for operating.

The essence of the NRP is sound, creating the space for private operators to compete with state-owned operators on an even playing field. This includes:

  • Every open line whether classified as core, non-core, branch line, or shared freight and commuter line, shall be subject to third party access managed by an Infrastructure Manager (IM) appointed by the Infrastructure Owner of that open line;
  • No IM may refuse or prefer access for a train operator;
  • Access fees and terms of business shall be published in the public domain;
  • In negotiating network access agreements the IMs may not discriminate unfairly between the proposed rail operations and the pre-existing rail operations of Transnet Freight Rail or other Train Operator.

Transnet, however, operates under the Department of Public Enterprises, and presently has a different perspective on third-party access and Public Private Partnerships. TFR has the monopoly on the majority of the rail network, and the change in policy direction is the first step towards liberalisation of the Rail Sector. TFR are currently the dominant operator and want to retain Grandfather rights on all current slots operated by TFR, which is in contrast to the NRP.  In addition, and although TFR has made certain slots available to the market for private operation, this initiative does not meet the very urgent requirements of Industries that are in distress owing to poor rail service.

Those Industries, timber amongst them, that are desirous of migrating their cargo from road to rail for a number of business reasons, and to increase their output, are certainly in favour of the immediate implementation of the NRP.

This contrasting position can however be resolved through interventions by the Public Private Growth Initiative (PPGI) and Operation Vulindlela.

The PPGI builds co-operation and collaboration between the private sector and government towards the stimulation of inclusive growth, while Operation Vulindlela is a “Delivery unit”, supported by Cabinet and the President to accelerate implementation of priority structural reforms. One of the five desired outcomes of operation Vulindlela is to ensure competitive and efficient freight transport.

Where to next?

With this backdrop, where does this leave the timber industry which has suffered a decline in rail transport services over the years?

The Industry moved 3.5 million tons per annum by rail in 2005. This figure has halved to just under 1.8 million tons per annum at present. In February this year, rail customers in the Timber Industry, that are heavily dependent on rail, were informed that they will not be receiving any service for a period of five weeks, leaving them in a desperate situation.

This was brought about by rolling stock constraints (locomotive availability, wagon reliability), operational constraints (communication and planning, siding leases, lack of telemetry devices) and infrastructure constraints (security, theft and vandalism).

Coupled to this was a boom in commodity prices that resulted in an increased demand for transport to the ports, and specifically on those lines where timber is traditionally transported by rail.

To make matters worse, TFR is faced with a major skills shortage, following voluntary retrenchments last year. The third-party access highlighted in the NRP offers industries an opportunity to take back a fair amount of control in their logistics chains. Transnet will be benefit in the form of access fees and raised maintenance revenue.

As a result, several mills in the Richards Mill complex who are dependent on rail, transported on Transnet’s Coal Line, to deliver timber sourced from the Highveld area around Mkondo (Piet Retief) have been left in a non-viable position, unable to compete in the international marketplace.

Forestry South Africa, together with the African Rail Industry Association and with support from the PPGI, has taken the initiative to engage with TFR to introduce a third-party access model on the Coal Line through a phased approach.

The first phase of the initiative proposes the introduction of leased (private) locomotives under the current service model (with TFR remaining the operating company), while the ownership and maintenance of the wagons remain with TFR.

The second phase envisages that the leasing of locomotives will continue, but for the timber industry to procure the wagons in line with TFR objectives of sale of wagons, and thereafter taking over the maintence of such wagons. TFR will remain the operating company.

The planned third phase is to appoint a independent train operating company (TOC) with their own locomotives and train crew, and where the TOC will lease the wagons from the procurement entity.

We believe that this ground-breaking proposal will secure the viability of the mills in the Richards Bay complex and serves as a template for further third-party access models.

It would significantly decrease operational costs through increased efficiencies. Transnet and the DoT on the other hand will stand to benefit through the release of locomotives that can be made available to competing freight flows (Coal), and it would significantly decrease the number of trucks on the roads.

By: Francois Oberholzer
FSA Director: Operations & Ian Bird, Logistics Lead, PPGI

Source: FSA Magazine – Forestry in Focus

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  • Bell
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  • Foresta Timber & Board
  • FSC
  • Hin-Tech Manufacturing
  • Husqvarna
  • John Deere
  • Khulani Timbers
  • Kwamahlati Training Services
  • LESH
  • Loadtech Load Cells
  • Logmech
  • Merensky
  • Mondi
  • Those who grow alone, die alone: why transformation is strategic for the MTO Group
  • NCT
  • Pangolin
  • Patula Risk
  • Ponsse
  • Rance Timbers
  • Sabie Poles
  • SAFCOL
  • Sappi
  • Saw Specialists
  • SAWPA
  • SSA
  • Stihl
  • Sunshine Seedling Services
  • Treated Timber Products
  • TWK
  • UCL Sawmill
  • Wood-Mizer
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There is no turning back: Private Sector Participation in State Owned Enterprises

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