Working on the railroad: Authorities aim to improve freight distribution by creating new links

In the past decade, South Africa’s roads have come to dominate the land transport sector. However, if the government’s plans come to fruition, the country is set for a rail revival in the next two decades. Government entities concerned with rail travel, including the freight logistics company Transnet Freight Rail and the Passenger Rail Agency of South Africa (PRASA) have articulated ambitious plans to raise rail usage and lessen the dependence on roads.

Looking Back

There is certainly plenty of scope for new investment and activity in the transport sector. Tshepo Lucky Montana, the group CEO of PRASA, told OBG, “South Africa had the capacity to design, manufacture and maintain trains back in the 1960s and 1970s, but that capacity has been lost over three decades of underinvestment in passenger and freight railways. On the passenger side, for example, the last time we bought new trains was in 1996, so there has been no meaningful investment. This has resulted in a rail system that is unable to meet customer expectations, has obsolete technology, is unreliable and, most importantly, has put a lot of pressure on the road network.”

Rail VS. Road

It is clear that the rail network has played second fiddle to road transportation over the past decade. In 2010 rail accounted for a modest 11.2% of the 1.63bn tonnes of freight carried by land, according to the State of Logistics Survey carried out by the Council for Scientific and Industrial Research. The road network absorbed the remaining 88.8% of land freight. This dynamic is considered unsustainable in the longer term and as such, the government has embarked on a strategy to rectify it with a R300bn ($36.6bn) expansion programme by Transnet. This will include R205bn ($25bn) worth of investments in the country’s rail network. In the first quarter of 2013, rail was playing a larger role, carrying 17.4m tonnes of freight, or 31% of the 56.7m tonnes transported over land in the first three months of the year, according to Statistics South Africa.

Transnet believes this investment will transform export capacities, particularly in the minerals sector. The company has articulated a market strategy that will include increasing coal-export capacity to 98m tonnes per year by 2019, a 44% increase in seven years, and a figure that is above the current capacity of the Richards Bay Coal Terminal Port, which is 91m tonnes per year. In the fiscal year 2012/13, Transnet expects to carry 75m tonnes of coal.

Ironed-Out Aims

In addition, Transnet has ambitious plans for iron ore, which include increasing exports by 57% to 83m tonnes per year within the same timeframe. As well as bolstering exports, domestic supplies of key minerals are also expected to rise. Coal supplies to the electricity generation company Eskom are expected to increase by 305% to 29.6m tonnes per year by 2019.

Transnet’s aggressive expansion in minerals and general freight will be supported by a R4bn ($488m) investment in rolling stock. This includes a tender for 1000 locomotives. In October 2012 the company announced that it had signed an agreement for the purchase of 95 electric diesel locomotives from the Chinese company CSR Zhuzhou Electric Locomotive in a deal estimated to be in the region of R2.6bn ($317m). The trains will be delivered in December 2013 and September 2014. In a joint venture between CSR and South African consortium Matsetse Basadi, most of the cars will be manufactured locally, though the first 10 are due to be made in CSR’s factories in China.

Taking Risks

While this plan is bold, it is also something of a gamble. The expansion strategy will largely be self-funded, with approximately 70%, or R200bn ($24.4bn), of the capital investment programme being met by operating cash flow. The remaining 30% is due to be raised through a number of financing options, including bonds, bank loans, export credit agency capital, foreign direct investment, global medium-term notes and commercial paper. The ability of the company to fulfil its expansion plans and meet repayments will be dependent on tariffs that cannot escalate more than 2% above inflation annually, according to regulations implemented by the government.

As such, Transnet will need to grow its volumes substantially to meet further growth targets. Jackie Walters, the head professor in the Department of Transport and Supply Chain Management at the University of Johannesburg, told OBG, “Transnet is investing R300bn ($36.6bn) but I’m not convinced that they will get enough traffic to justify the investment.” One potential solution, which has been used in the past, would be to mandate rail for the transport of freight in the mining sector. However, Walters argues that this would be counter-productive for economic growth. “If rail services cannot match the cost of roads, it is going to be inflationary,” he told OBG.

Head To Head

The key to Transnet’s success, therefore, is likely to be its level of competitiveness in terms of reliability, delivery time and cost. Road transport has widely been considered a more cost-effective means of freight transportation, but with taxes and additional fees on road vehicles increasing, this is beginning to change.

In light of a fuel increase of R0.32 ($0.04) per litre for petrol and R0.33 ($0.04) per litre for diesel in early August 2013, several logistics firms are suggesting that road freight is becoming less competitive. This latest increase, the fifth in 2013, came on top of an earlier rise of R0.81 ($0.10) and R0.58 ($0.07) per litre for petrol and diesel in early March 2013.

In March 2013 Hennie Heymans, the managing director of logistics giant DHL Express told Day, a local newspaper, that logistics costs in South Africa are now three to nine times higher than in European countries. Penny Henley, the logistics manager at Blue Strata Trading, told the same paper that “the differentiator between road and rail is starting to narrow considerably, as the fuel price continues to escalate and it is becoming harder to justify the differential in price between the two.”

Another critical concern for the efficacy of Transnet’s plan is the rail network itself. South Africa’s rails operate on a narrow gauge, which means that operators cannot benefit from the most powerful and efficient rolling stock on the market. For example, in April 2011, Dave van der Meulen, owner of Railway Corporate Strategy CC, noted in a conference in Johannesburg that South Africa’s existing network would be unable to operate the leading stock in the field, such as the container double-stacking application (which operates at a load of 32.4 tonnes per axle) or the high-speed inter-city application (operating at 350-380 km per hour). The speed and load limitations of South Africa’s network moving forward is likely to damage the competitiveness of rail freight and passenger services. Nonetheless, Transnet announced in 2010 its decision to move forward with the narrow-gauge network in the medium term.

At the same time, progress has been made towards realising a high-speed rail system in the country. A number of international investors have expressed interest in the project, the latest of which, Japan, has already completed a preliminary feasibility study. China, France, Germany and South Korea have also shown interest in the estimated $18bn initiative.

Adding Power

Alongside developments in the freight rail sector, PRASA is working on a substantial overhaul of rail passenger services in the country. The company has set a target of investing R123bn ($15bn) in 7224 electrical multiple units in the 20 years from 2015 to 2035. In December 2012 the Gibela Rail Transportation Consortium, consisting of the French firm Alstom and its local partner, Actom, won a R51bn ($6.2bn) contract to provide 3600 vehicles between 2015 and 2025, as well as managing maintenance and technical support between 2015 and 2033. The contract is expected to produce 8088 direct jobs and help PRASA address its dated rolling stock for Metrorail operations in Gauteng, Durban, Western Cape and Eastern Cape, approximately 90% of which dates back to the late 1950s.

PRASA recognises that there are significant challenges to placing rail at the heart of public transport services, including the need for connectivity between urban, suburban and inter-city services.

“We will have a lot of challenges, but we are already seeing encouraging trends, partly because of the establishment of the Gautrain [a mass rapid transit railway system] and partly because of our own interventions and upgrades in Gauteng, Western Cape and KwaZulu-Natal, to attract car users off the road and onto rail,” Montana told OBG. “However, looking at the performance of the rail system in the major centres of the country, we find that despite the upgrades we are not seeing benefits in terms of journey times, so its very important we address that. The cost factor is also an issue. It must be cheaper to use rail than operate a car.” Clearly, South Africa still has a long way to go to make rail services more competitive.