"We are promoting greater private sector participation in rail, including through granting third- party access to the core rail network and the revitalisation of branch lines. We will establish a single economic regulator in transport as a matter of urgency to promote competition and efficiency." - President Cyril Ramaphosa Open Access is seen as an international ideal for most, but not all rail networks around the world. This structure can be an efficient setup as the freight tonnage is driven through efficiencies of the private sector, the State maintains control of the infrastructure of strategic importance, and (especially in South Africa where the word ‘privatization’ is quite taboo), nothing is strictly privatized. Up until now, both passenger and freight rail have been monopolized in South Africa under the State-Owned Entity Transnet SOC. This environment has seen road usage flourish at the expense of rail, which has declined to 12% market share in 2019. Transnet, recently mired in maladministration and corruption, presides over Africa’s largest rail network, by far, with some world-class route densities and legacy infrastructure. Although there are variances, the basic, simplified relationships allowing third-party access are as follows: the State owns and maintains rail infrastructure in a network and act in a similar manner as a landlord. Through an independent Transport Regulator, Operators apply to access and cross the infrastructure with their own rolling stock carrying their own, or their clients freight. This ‘access’ permission comes at a fee, which is accrued through a number of difference structures, the most common being a ‘wheelage rate’ where the operator will pay an accepted, market related rate which is calculated as a price per ton-kilometer for freight, i.e. a rand value for moving one ton of freight over one kilometer. This revenue will then be paid to the infrastructure owner/manager to be used to renew existing track, and extend existing services and networks. Reactions to the recent announcement have been varied. The rail sector rejoices, a sentiment not necessarily shared amongst all stakeholders. In a recent debate between the Chief Executive of the RailRoad Association, Ms. Mesela Nhlapo and Jack Mazibuko, the Secretary General of the South African Transport and Allied Workers Union (SATAWU), Mazibuko expressed concern of entities profiteering on rail, which is used as a means of transport by economically disadvantaged South Africa’s as their daily commute. Whilst Mr. Mazibuko is correct in his sentiment that private companies are primarily driven by shareholder value, this will translate into a the imperative of a going concern in an open market, where commuters and freight owners reward operators with their business. If an operation cannot offer a certain accepted level of service, the operators either improve their offering or cease to exist. In contrast, a government entity will continue with their taxman-funded bare minimum – with very little utility transferred to the community at large, and little ramification for non-delivery. The impact of the recent announcement on Private Operators addresses a major barrier to entry, identified by Jamie Holley in his recent address at the African Rail 2020 virtual conference titled “Overcoming barriers of entry preventing emergence of new entrants” namely Regulated Restriction on access to the core infrastructure. Allowing access will encourage private operators to address opportunities in the freight and passenger markets, committing capital and investment into moveable assets to be deployed on South Africa’s infrastructure, translating to an increase in service levels offered to passengers and freight-owners, as well offering an alternative revenue stream to South Africa’s State-Owned rail infrastructure owner. An exceptional example of this is Traxtion Sheltam’s recent commitment of R1bn in investment third party access pending entering into agreement with the State. In most cases, freight is generally considered more profitable for a rail entity to operate compared to a passenger service, as the distances are generally long, volumes are high and time (therefore speed) is not an imperative. Should a private operator want to enter into the passenger space, alternative costing models will need to be considered. In Europe, these perceived ‘unprofitable’ (but socially important) routes are identified by the Regulator, and offered in an open market as a Public Service Obligation (PSO) contract. In this arrangement, the government commits to subsidize an operation to a certain level, and, at the same time, implement onerous penalties should certain benchmarks not be achieved (currently PRASA is heavily subsidized without the penalties). If an operator meets these benchmarks the contract is seen as a success, furthermore the contracts are set up in a way that should the operators exceed these basic benchmarks, there is significant upside, encouraging an exemplary service. Exactly how South Africa negotiates third-party passenger transport is not yet clear. Finally, with a more vibrant rail sector, the rail industry is a fantastic employer and skills developer. Furthermore, an increase in the level of service offered to freight owners leads to a decrease in logistics costs, not only increasing existing margins on products and services but increasing the viability of markets, industries, and opportunities. The rail sector is therefore a driver of both primary and secondary jobs. As a cornerstone of an Economic Recovery Plan, revitalizing the rail sector has the ability of a knock on, multiplier effect. Including the private rail in South Africa’s transport mix, not only aligns South Africa with International Best Practice, but encourages investment in a sector that greatly benefits the South African economy as a whole. This is a great opportunity for South Africa to roll up her sleeves and get to work. |