A roadmap drawn up by a committee advising the Presidency on ending the logistics crisis recommends the complete dismantling of Transnet’s monopoly on rail and ports.
The 123-page document, which Business Times has seen, proposes the introduction of private players to operate alongside Transnet on all its freight rail lines — including on the lucrative coal and iron ore routes.
It urges a speedy separation of the infrastructure business from Transnet Freight Rail (TFR) operations to create an independent infrastructure manager to manage the entry of private players and undertake maintenance of the rail network. It also proposes closing 6,500km of unviable short lines that account for 35% of the rail network but carry only 1% of the freight.
Presidency spokesperson Vincent Magwenya said on Friday that the draft roadmap was before the cabinet and was expected to be approved in November. “It is important for us to work with speed, given the challenges we face in the freight logistics sector.”
Fixing Transnet has become a top priority for the government. A national logistics crisis committee set up by President Cyril Ramaphosa has been dissecting the company’s weaknesses and proposing urgent interventions. The deterioration of the freight rail network has harmed economic growth, costing miners billions in lost export sales and the fiscus lost revenue.
Inefficient ports have also been flagged as a major cost to the economy. The roadmap suggests speeding up the separation of port ownership from operations and introducing more private operators at key container terminals.
Transnet stakeholders, including miners, business groups and organised labour, have been calling for urgent intervention by the government to address the logistics crisis.
The company swung to a R5.7bn loss last month. TFR was the worst hit, recording a reduction in volumes from 173Mt to 149Mt. Public enterprises minister Pravin Gordhan instructed the Transnet board to formulate a plan to radically transform the operational performance of each business, restructure the company and undertake a review of the executive management “with a view to establishing whether persons with the right skills are optimally used to deliver on the mandate”.
Embattled group CEO Portia Derby, TFR CEO Siza Mzimela and group CFO Nonkululeko Dlamini all succumbed to pressure and resigned shortly after Gordhan made the call.
Poor maintenance, cable theft and vandalism have been cited as contributing to the weak performance. However, Derby’s decision to offer voluntary severance packages to skilled and experienced personnel in 2021 resulted in Transnet losing engineers, financial managers, project management specialists and up to 200 train drivers, as well as crane and lift operators and artisans.
A number of mining companies have begun retrenchment processes, blaming rail weaknesses and a depressed economy.
The roadmap cited the inability to export goods via rail as “the most severe constraint on economic growth after the electricity supply shortfall”.
“Since 2010, South Africa has forfeited an estimated $26.7bn [R506bn] in iron ore and coal export trade.”
Some bulk commodity miners have expressed an interest in running their own rail operations on the network, especially on the iron ore and coal lines, but this has previously been rebuffed by Transnet, which has made capacity available only on the troubled container corridor.
However, the roadmap now suggests that concessioning the 861km iron ore line between Sishen and the port of Saldanha, or the coal line, would not lead to a fragmentation of the rail network since these lines are largely self-contained. It would also create an additional income stream for Transnet, which is sitting with a R130bn debt pile.
“Such a concession, which could be pursued through a joint venture model, would have the benefit of providing much-needed capital for Transnet upfront in addition to dividend payments as a shareholder while enabling improvements in operational performance.”
The reforms contained in the roadmap would require significant changes to Transnet’s structure and operating model
According to a timeline contained in the roadmap, Transnet should open requests for access to the freight rail network by April next year, allocate capacity on the network by July and publish a timetable.
By the end of this month, the infrastructure manager should have been established as an operating division within Transnet. In November, Transnet should publish a network statement containing the criteria for allocating rail capacity, access charges, general rules, deadlines and procedures. By March next year, it must have worked out the amount the infrastructure manager will charge TFR to access the network through a transparent transfer pricing regime that does not disadvantage private operators.
Also in March, the infrastructure manager must become a full subsidiary of Transnet with its own board. It will morph into an independent state-owned entity in future, managing freight rail access for all players and maintaining the network.
Almost similar deadlines are set for the planned separation of port ownership and operations. Last week, Gordhan announced the appointment of the inaugural board of directors of the Transnet National Ports Authority (TNPA), with plans to make it a separate state-owned entity in future.
By April Transnet should have concluded a deal with and introduced a private sector partner for the Ngqura Container Terminal. In July Transnet announced International Container Terminal Services Inc, headquartered in the Philippines, as the preferred partner for a 25-year venture to manage Durban Container Terminal Pier 2. The roadmap says this partnership agreement must be completed by December.
“Greater private sector involvement in operations will be sought through leases and concessions.”
Transnet Port Terminals (TPT) owns 97% of container terminals and controls the trade in vehicles, iron ore and manganese.
Drafters of the roadmap said Transnet’s role as both owner and operator of ports and the rail network worsened inefficiencies and harmed the economy.
“An underlying cause of weak port performance is the [lack of] independence between TPT, TFR and TNPA. The result is that the costs of inefficiency can be passed on to customers. TNPA is unlikely to play an effective role as an independent ports authority in terms of penalising TPT for not meeting service standards because [the two] are currently divisions of the same company and report to the same board.”
The roadmap proposes that the department of public enterprises, the National Treasury and the department of transport oversee the process of designing terms and conditions for the concessioning of lines and future participation of private sector participants in the rail network. An attempt by Transnet in 2022 to sell 16 slots on its Cape and container corridors failed, with only one applicant successfully bidding to operate on the Cape corridor between Kroonstad and East London. Industry players were critical of the process designed by Transnet, especially the two-year contracts offered, which were regarded as too short to ensure returns on capital investments.
The drafters said additional oversight was needed during the design phase to ensure that public sector participation transactions are structured in a way that is consistent with the objectives of the national rail policy and supported by the state as a shareholder.
They warned that the reforms contained in the roadmap would require significant changes to Transnet’s structure and operating model — including a revision of the company’s shareholder compact which sets out its mandate.
“Transnet’s priority is to restructure the rail network to create a financially viable core network and to enable open access to this network. This entails a transformation of the rail sector from one of the oldest monopolies in the country into a multi-company sector, as is the case in most countries.
“The industry architecture will encompass multiple railways, train operating companies, rolling stock leasing companies, infrastructure maintenance, construction companies and accredited institutions. This represents a significant restructuring of the rail sector and a repositioning of Transnet within that sector.”
At a briefing on Monday, Rudi Dicks, head of the project management office in the Presidency, insisted this was not privatisation of a strategic asset as the infrastructure would remain in public ownership. He said the state was facilitating fair competition in the logistics sector.
“If you want competition, you cannot have TFR running infrastructure and introducing competition. That is not levelling the playing field. So separate it and allow TFR to compete on the rail network,” Dicks said.
Saul Musker, director for strategy and delivery support in the project management office, said this was not a win-or-lose situation for Transnet or private operators because the unserved market for rail in South Africa was enormous and could be grown further.
“If last year Transnet carried about 150Mt on the network, you could easily, based on the amount of rail-friendly freight, grow that to 300Mt if the system was working efficiently. Now you have private operators who are able to do that, who are able to make those investments and who are able to capture that market,” he said.
— Additional reporting by Dineo Faku
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