James Holley, CEO of Traxtion, Africa's largest private rail operator, says he believes it's all systems go for opening up South Africa's rail network to private operators.
“We've had a couple of giant leaps in the right direction when it comes to the implementation of government's rail reform agenda.”
Key policy frameworks have been put in place, including a national rail policy, a freight logistics road map and a private sector participation framework for rail.
“All of those are saying more or less the same thing around how rail reform should be implemented. First, the opening up of the national network to private operators to take up the significant latent capacity we have on the huge freight rail network in South Africa.”
There's a freight market in South Africa of around 120Mt that wants to go from road to rail, mostly ore, “which is simply not moving because we don't have the rail capacity”.
Research has shown that the impact of not moving these rail volumes is around 4.5% of GDP.
Second is to engage the private sector to improve the condition of rail infrastructure through a policy of concessioning the lines to private sector investors.
The first major policy implementation has been the vertical separation of Transnet Freight Rail (TFR) into an infrastructure manager and a train operating company, “a very big step in the right direction”.
Another major step has been the release of the draft network statement by Transnet setting out the terms and conditions for private operators to utilise the network on a fair and equitable basis between them and TFR.
In countries across the world where open access has been successfully rolled out the common denominator is having a very strong regulator in place, says Holley, who runs trains in eight African countries.
With the establishment of an interim regulator the department of transport has taken “a big step in the right direction”, he says.
The Economic Rail Regulator is currently running the process of obtaining commentary from industry on Transnet's draft network statement.
It is to Transnet's credit that they have handed the process of finalising the terms and conditions of access to the interim regulator, Holley says.
“The fact that the terms and conditions of access have been handed over to the regulator as an independent body is a very positive move for the future success of rail reform in South Africa, and follows international good practice.”
He discounts ideological resistance from elements of government stalling the process. There's a recognition that it needs to happen as quickly as possible to save the South African economy, he says.
“I believe when this is rolled out we're going to see a boom in the rail industry itself. But to me the primary driver of urgency is the levering impact it will have on growth in the upstream economy. We have to see this coming into the South African economy as fast as possible. Rail is existential for a number of industries, employing 16m people, and potentially hugely beneficial for other industries.”
Meanwhile, however, the high access tariffs proposed in Transnet's draft network statement will make it impossible for operators to present rates to their customers that are feasible, he says.
I believe when this is rolled out we're going to see a boom in the rail industry itself
The interim regulator needs to be given the chance to go back and review the tariff and terms and conditions of access, which is what they've now begun doing.
“The interim regulator has highly experienced and independent individuals who really understand rail freight. We've got a lot of confidence in their ability to understand the complexities of what's needed.”
Transnet under its new leadership deserves praise for getting the network statement out, and industry for the speed with which they reviewed it, says Holley, who is chair of the African Rail Industry Association (Aria).
The deadline for written submissions was last Monday. After public hearings in Cape Town and eThekwini, the regulator will release an updated network statement.
“We're looking at the fourth quarter of this year for the network statement with terms and conditions of access to be finalised and the first applications for slots by the private sector. We should see the first orders [for trains] being placed at the end of this year and the first train capacity of real consequence 24 months after that.”
He's optimistic the process won't be delayed. There's nothing that needs to go through parliament and no further approvals are needed, he says.
“What we need now is for the regulatory process to run and the access agreement to be entered into with the private sector and Transnet. And then we need significant capital to be raised and orders to be placed.”
He expects the first investments will be in the bulk rail sectors which move mostly coal, iron ore and chrome.
That's where there's a big difference in price between rail and road rates, road being three or four times more expensive. “So because operators can price for a level of inefficiency in operations you can increase tariffs in spite of the rail network being in such poor condition.”
And two-thirds of rail volume is in the bulk sector. “That's why I'm very confident there's going to be a boom in the rail industry, because of the large volumes of bulk freight that are moved in South Africa.”
He believes the necessary capital will be raised without too much difficulty because those business cases are feasible.
“Of course, we'll need to see the terms and conditions of access first before we can confirm the business cases, but I have a high degree of confidence in the feasibility of bulk freight rail in South Africa.”
In the general freight sector there's a very high level of competition between road and rail, so rail doesn't enjoy price benefits over road in the general freight market.
“So for investments to happen into new train capacity for the general freight market you'll need to see a very high degree of train efficiency, which means having very high quality track infrastructure, which needs significant investment.”
The freight logistics road map talks about concessioning to help “utilise” the necessary private funding.
“That's going to take a while”, says Holley. “You're looking at R150bn of investment that's needed into the national rail infrastructure.”
With the reform process firmly on track, he believes there'll be “a lot of appetite from infrastructure funds, commercial lenders and development finance institutions”.
