It is easy to forget what rail reform is for. It is not about operators growing our fleets, infrastructure spending or rolling stock manufacture. It is about creating a logistics system that drives general economic growth by bringing down the cost of doing business, and increasing the competitiveness of the SA economy. That is the only test that matters.
Cost-effective logistics should be the guiding objective for every decision in our rail policy because the entire economy depends on it. Rail is a network industry. It connects the upstream economy to global markets and supply chains. If the rail system is inefficient, constrained or, most importantly, not cost-effective, upstream economic growth slows. Investment stalls. Jobs disappear. And with about 8.2-million South Africans already unemployed, that is a consequence we cannot afford to get wrong.
The time of rail reform is on us, and to the government’s credit the foundational thinking is sound. Separating Transnet’s infrastructure owner, infrastructure manager and train operating company functions, as set out in the 2021 National Rail Policy, is a positive step. The establishment of an economic regulator with statutory powers, as outlined in the Regulation of Transport Bill, is equally important.
The introduction of third-party access, allowing private operators to supplement Transnet’s existing train capacity, is a step in the right direction. So too are private sector participation (PSP) projects aimed at uplifting the condition of our base infrastructure. Together, these reforms are designed to solve the twin problems of insufficient train capacity and poor quality infrastructure.
Keeping costs down by design
Railways are a highly capital-intensive industry with assets that have long, useful lives. To meet economic demand I estimate that SA must move from 160-million to 250-million tonnes of freight, and that will require about R300bn in track infrastructure and train investment.
However, if we are serious about lowering the cost of rail logistics as we move to implementation, there are some realities that need to be addressed. First, rail is a fixed-cost business. Doing more with less has always been at the centre of all successful railways. That means efficiency is everything. Simply put, a train set completing eight train trips in a month instead of six means a 33% jump in revenue. This cannot be achieved without high-quality track, signalling and scheduling infrastructure. The national network is in poor condition and with the fiscal constraints the country faces the PSP projects are our only route to efficiency.
Second, the PSPs will earn their income from access fees paid by train operating companies using the infrastructure. Access fees are a function of required return on capital and network operating costs. Investments in infrastructure need to be fit for purpose. At the same time, network operating costs need to be efficient. If either is not the case access fees must increase. If access fees increase, rail becomes unaffordable and volumes will never come.
Third, highly capital-intensive industries are extremely sensitive to the cost of capital. The cost of capital is a function of risk. The more policy and regulatory uncertainty debt and equity investors face, the more expensive the capital becomes. It is vital to design access agreements and concession terms that actively reduce risk for investors and lenders.
Focusing on cost-effectiveness
The rail industry directly employs about 100,000 people. But the wider economy employs 16-million, and it depends on the cost efficiency of transport to survive and grow. If we design reform around the needs of the 100,000, we risk undermining the livelihoods of millions of other South Africans. If we design a system that is too expensive to build, too risky to operate, or too rigid to grow, we do not hurt rail. We hurt the economy.
Every request for proposals, each tariff application, every regulation, every reform decision, should be measured by one yardstick: will this help us deliver more cost-effective logistics? That is the only way to build an economy that works for every South African.
• Holley is CEO of Traxtion.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.