Keeping up the momentum: Continued spending on infrastructure is in the pipeline as the government looks to tackle various issues

Talk to a South African about the country’s transport infrastructure and you are likely to elicit complaints and hand-wringing over road delays, ageing railway cars, congested ports and rising fees at the airports. If something is not done about it soon, the popular sentiment goes, competition from other nations in Africa could cost the country investment and jobs. Talk to almost any other African, however, and you will hear a different story: in comparison to everywhere else on the continent, transport in South Africa is a breeze.

There are truths in both perspectives. South Africa’s infrastructure is both enviable and ageing. Unlike many sub-Saharan countries it has a functioning railway network, for example. However, rail is losing traffic to roads, which means more stress on them, shortening their lifespans. Upgrades are necessary for most categories of public infrastructure. The current shortcomings endanger economic growth, as well as the country’s goal of creating jobs.

On the bright side, the airports are routinely praised as the best in Africa, and there is no shortage of capacity after a round of upgrades in advance of the 2010 World Cup. The ports function, and what South Africans consider a peak-hour traffic jam is a breezy Sunday drive for residents of metropolises such as Lagos or Cairo.

NOW IS THE TIME: However, with pressure mounting on President Jacob Zuma’s government to address some long-standing complaints, it appears that the time to spend money on infrastructure is now. The World Cup building drive left the country with a sense of confidence that the various government agencies involved, some of which have suffered from leadership struggles and heavy debt in the past, can do the job.

Timing is an important part of the story: South Africa wants to move on this national imperative fast, and for several reasons. Generic ones include factors such as the prudent management of existing assets. The South African Institution of Civil Engineering (SAICE) pointed out in the “SAICE Infrastructure Report Card for South Africa 2011” that road maintenance needed now but delayed for five years would cost six to 18 times more. That is a general rule in most countries, as is the notion that spending on infrastructure now pays off in the future by creating jobs and helping to fuel growth. SAICE gave the country’s overall infrastructure, including that for transport, a C- grade in 2011, up from D+ in 2006 when it initiated the exercise.

“South Africa’s engagement in the global economy is constrained by its infrastructural capabilities,” reads the SAICE report. “The challenges posed in this document are no less acute because they are chronic, but they can be overcome given the same dedication and ingenuity applied to the challenge of the World Cup.”

CHALLENGERS: A reason for swift action that is specific to South Africa, however, is that its infrastructure has been a comparative advantage over the years in an African context, and it does not want to lose that edge. The country likes to market itself to investors as the “Gateway to Africa”. That means sending exports elsewhere on the continent through its ports and roads, but also placing a regional headquarters in the country or building an export-oriented factory.

If South Africa does nothing, other countries could challenge its status as the premier location in sub-Saharan Africa for foreign investors looking for a regional base. This concern is particularly acute for labour-intensive activities such as manufacturing. Although in many African countries the ports and roads are simply not good enough to move goods, there are regional successes stories. South African retailer Shoprite has opened up across the continent, and rivals have followed suit. Building infrastructure to help them expand is perceived as a wise investment (see analysis).

TOP PRIORITY: In his State of the Nation address in February 2012, President Zuma said infrastructure would be among the government’s top priorities in 2012 and highlighted five priority projects, all of which included rail improvements. The Presidential Infrastructure Coordinating Commission has been tasked with smoothing the building process and eliminating the communication problems that often arise when multiple agencies collaborate. The commission has proposed a bill to facilitate infrastructure development. This would, among other things, centralise procurement to speed up the process.

SIZE & SCOPE: South Africa has 747,000 km of roads, with responsibility for them shared by the national government, provincial authorities and municipalities. According to SAICE there are 185,000 km of provincial roads, with the municipal total at 66,000 km.

The 20,500-km rail network is managed by Transnet, a parastatal agency with a brief that also includes ports, pipelines and other aspects of public infrastructure. Deregulation of long-haul transport in 1988 resulted in an escalation in road traffic that has not abated. Transnet is working on a plan to overhaul the rail system and recapture some of that cargo traffic (see analysis). Its comprehensive plans will represent the biggest and perhaps most important infrastructure development programme in the near future. This is viewed as a key ingredient to solving unemployment, the country’s self-diagnosed principal problem. If rail transport can stimulate manufacturing activity, the thinking goes, the factory jobs will follow.

South Africa’s nine major commercial airfields are managed by Airports Company South Africa (ACSA). Upgrades ahead of the World Cup have left this market with soaring costs as ACSA seeks to recoup its investment, and an excess of capacity, particularly at Durban, where King Shaka International Airport can handle some 18m passengers a year but is seeing less than one-third of that number at present. Battles between ACSA and regulators over tariff increases have landed in court in recent times, and the hike for 2011 – a jump of some 70% – was the first in several years. The country has eight commercial ports, also under the authority of Transnet divisions, called the Transnet National Ports Authority and the Transnet Ports Terminal. The newest addition, at Ngqura, is situated close to Coega Industrial Development Zone.

GOVERNMENT APPROACH: Part of the challenge of revitalising infrastructure comes from the rules governing the agencies in charge. The agencies that own and manage infrastructure, such as ACSA and Transnet, are self-funding organisations that do not receive allocations from the national budget. In many countries infrastructure is built in anticipation of demand, but in South Africa things are different, as few agencies can afford to pay in advance for assets that are expensive, take years to plan and build, and even longer to profit from. In the case of the recent airport expansion, for example, ACSA was not permitted to raise tariffs to pay for the upgrades until they were finished. That has meant higher annual increases, said Jackie Walters, a professor of transportation logistics at the University of Johannesburg. Had the firm been allowed to raise fees during building, it could have afforded more gradual increases that would have been less of a shock to those who will be paying now and in the near future.

TRANSNET: For Transnet, the next infrastructure parastatal to start spending, estimated cash on hand at the end of fiscal year 2011 was R10.9bn ($1.3bn). Projected funding requirements were R12.9bn ($1.6bn) for fiscal year 2012, although that may rise as improvement and expansion plans are refined. Around R7.65bn ($936m) was expected to be sourced from development banks, conventional banks, and other lending options domestically and on the international market, while the rest is anticipated to come from bond issues. In 2011 capital expenditure on rail, ports and pipelines was R21.5bn ($2.6bn). For the five-year period from 2006 to 2011 it was R86.8bn ($10.6bn), a record total.

Transnet’s major rail upgrade plan had called for R110.6bn ($13.5bn) in spending for the following five-year period, but in February 2012 an expansion was announced that extended the plan to seven years and raised expenditure to R300bn ($36.7bn). Transnet had previously acknowledged that the original amount was not going to be enough to address all rail-related issues.

Transnet is coming off a decade of change. In recent years it has grappled with debt and a sprawling range of activities. Restructuring in the 2000s removed responsibility for state-owned enterprises such as the firm’s own pension fund, South African Airlines and passenger rail services. The idea is for Transnet to focus on its central mission of moving freight, be it via rail, port or pipeline. The firm has gone through several leadership changes in recent years too, and the current CEO, Brian Molefe, began in the role in February 2011.

EARNINGS: Transnet has managed to increase its earnings in recent years. In 2011 earnings before interest, taxes, depreciation and amortisation (EBITDA) came in at some R15.8bn ($1.9bn), above the target of R15.1bn ($1.8bn). The total was 9.7% higher than the R14.4bn ($1.8bn) in 2010, and the biggest increase since 2008, when EBITDA surged by 19.6% to R12.8bn ($1.6bn) from R10.7bn ($1.3bn) the previous year.

Railways now compete with trucks for freight business, but until the late 1980s long-distance freight moved solely by rail, thanks to legislation giving it monopoly status. Freight was deregulated in 1988, and road transport is now the preferred option because it has been cheaper and more direct than Transnet’s rail service as the firm evolved from an inefficient state organisation into a competitive, market-oriented one.

Transnet’s 20,500-km rail network includes 12,800 km of core railways, 7300 km of branch lines and 1500 km of export-oriented routes, such as those from Gauteng, the province which accounts for the majority of the country’s GDP, to ports. According to the company, 182.1m tonnes of freight were transported in 2011. Several branch lines have been closed in recent years, in particular ones on which security is a problem – copper wires are a target for thieves – and most of the closed lines would require not just renovation but rebuilding if they are to be revived.

Transnet missed some key productivity targets in 2011 despite its earnings surprise. The target for general freight (shipments excluding mined ore) was 76m tonnes, but the company managed only 73.7m. It cited a May 2011 work stoppage as a prime factor. The total was up from 72.1m tonnes in 2010, but lower than 2009’s 78.4m. The target for 2016 is 110.7m tonnes.

PASSENGERS: Passenger rail services are handled by the Passenger Rail Agency of South Africa (PRASA). Volume in 2011 was about 2.2m passenger trips daily, including local and regional routes. One of the biggest developments in Gauteng Province has been the introduction of the Gautrain, a high-speed rail service to three main points: Johannesburg, Pretoria (the route includes several stops in each city) and OR Tambo International Airport, which serves both. “Trains can be competitive against low-cost airlines if they are fast enough and if the prices are sufficiently low, which is feasible,” Lucky Montana, the CEO of PRASA, told OBG.

Gautrain service began in 2010 and by November 2011 had carried 3.3m passengers, according to province officials. Travel time between Johannesburg and Pretoria is generally faster than going by car. As of early 2012 the line did not extend into central Johannesburg but only to its northern suburbs. Once it is extended to Park Station, in the central business district, it is expected to carry 100,000 passengers daily.

ON THE ROAD: The state-level agency in charge of the road network is the South African National Roads Agency Limited (SANRAL). It was created in 1998, when it inherited 7200 km of assets, and has more than doubled that total since. SANRAL’s expansion plans see the total growing to around 20,000 km. SANRAL estimates that its assets are worth at least R30bn ($3.7bn). However, the agency needs more capital to keep up – it is facing a R50bn ($6.1bn) backlog in repairs needed on major arteries, and has an annual maintenance budget of R12bn ($1.5bn) to work with. SANRAL’s sources of income include budget allocations, private sector borrowing and bonds.

DATA GAPS: At the sub-sovereign level, however, there is less clarity about what exists and what is to come. A 2007 survey by the Department of Transportation on road conditions revealed that, particularly at the municipal level, authorities simply do not have a clear inventory. Information on road condition is available for just 4% of municipal roads. Of the municipalities that responded to the survey, only 36% reported having a systematic approach to road management. This is not the only area in which South Africa’s public sector lacks awareness of what exists in the country. In the education sector, for example, the government’s estimate of the number of privately owned post-secondary school training institutes is between 8000 and 12,000. For the engineers of SAICE, this lack of a clear inventory underscores the shortage of expertise at the government level. “South Africa has, as a proportion of population, up to 20 times fewer engineers than Australia, the US, Western Europe, and even India or China,” said the SAICE infrastructure report card.

TOLL ROADS: Though attention in early 2012 was focused on rail, the popular issue in the sector for the year is likely to be toll roads. SANRAL’s plan includes additional tolls on roads in Gauteng Province, and it sold R20bn ($2.4bn) in bonds in 2008 on expectations of repaying the debt with income from these charges.

The populist argument against tolls is that given the lack of public transport options, it is unfair to make commuting even more expensive for workers. “These tolls will have a particularly devastating effect on workers who have no alternative but to drive to work because of the lack of a proper public transport system,” said the Congress of South African Trade Unions. “They will lead to big price increases in the shops to cover the increased cost of transporting goods, and some companies may even be forced out of business and will have to retrench workers.” The bulk of unionised employees, however, travel in “taxis”, privately owned 16-seat minibuses that are ubiquitous across Africa. South Africa has an estimated 150,000 of these vehicles, which collectively carry around 15m passengers daily and bring in revenues of some R16.5bn ($2bn) a year.

Efforts to implement a bus rapid transit system in Johannesburg have met with delays and strong opposition from the entrenched interests of the taxi services. The system will cover a total of 340 km in and around the city once it is fully operational, which is expected to be in around three to five years’ time. A similar system is in the midst of implementation in Cape Town, and has met with less resistance there.

Opposition to the tolls plan came from more voices than simply those of the unions, however. The consumer commissioner, Mamodupi Mohlala, said the terms and conditions of usage for toll roads violated the spirit of the Consumer Protection Act. Other bodies, such as the Road Freight Association and the South Africa Vehicle Rental Leasing Association, publicly opposed the plan as well. Criticism was also directed at the plan for enforcement – the creation of a police unit to patrol freeways, at an estimated cost of R80m ($9.8m) a year. Opponents proposed an added fuel tax in lieu of tolls, or funding the roads from state coffers.

In late February 2012 the government confirmed that tolling would start on April 30, 2012 despite opposition. The rates, however, have been reduced, with light vehicles to be charged R0.30 ($0.037) per km, down from the originally proposed R0.495 ($0.061) per km. The toll will be capped at a monthly maximum of R550 ($67) per vehicle, and taxis and other forms of public transport will be exempt from the toll.

AIR: Unlike other aspects of transport infrastructure, there is no shortage of capacity for air travel. After the building boom in anticipation of the World Cup there is, instead, excess capacity. Around 90% of the 34m passengers transiting through airports in South Africa on an annual basis go through either the Johannesburg, Cape Town or Durban airports. Those outside the nine main facilities owned by ACSA are handled by local government or private sector interests. SAICE valued the replacement cost of ACSA’s infrastructure at R25bn ($3.1bn). Capital expenditure was more than R15bn ($1.8bn) from 2005 to 2010. Almost half of that total – R6.8bn ($832m) – went on building King Shaka International Airport in Durban, which has far more capacity than it needed as of 2012.

Part of the rationale for building it was air cargo. With an international high-speed broadband cable landing at Durban, plus its busy port, the idea has been to make it a hub for industry and freight. However, air cargo from Durban will have to compete with other transport options – with South Africa a net importer, there are containers and planes coming in full and leaving with spare capacity, so supply-and-demand factors will make it hard for Durban’s airport to compete.

Now that the capacity exists, ACSA has been raising tariffs to pay for it. The International Air Transport Association has pushed for a review of the approach to air infrastructure, citing a plan to raise taxes by 129% between 2010 and 2015, and fees for air traffic and navigation services by 71%. Despite the hikes, tariffs remain a concern for ACSA, according to Bongani Maseko, its acting managing director. “Tariffs are an issue in South Africa, which has led to a difference between the return on assets and the cost of capital, prompting a hunt for expansion opportunities abroad.”

AIRLINES: The national airline, South African Airways, owns the domestic budget airline Mango, and also coordinates schedules with two other budget carriers, Airlink and South African Express, which act as feeder networks. Comair is a British Airways franchise with a similar relationship to Kulula, a domestic budget carrier. 1Time is a budget airline offering domestic services and some international routes to other African countries, including Kenya, Tanzania and Zambia.

The South African National Taxi Council (Santaco), which represents taxi operators, has said it intends to start up its own ultra-low-cost airline to serve passengers who would otherwise take long-haul taxi journeys, aiming for those who work in a major city and often take weekend trips home to brings goods to their families. Santaco has so far made only one flight, from Johannesburg’s secondary airport, Lanseria Airport, to Bhisho, a town in Eastern Cape Province that has been the source of many migrant workers. Its strategy is to partner with a charter company that would provide the aviation services. Regular flights are not yet a reality and may not become one, but Santaco’s plan has highlighted a market segment that is not served at present but has significant potential if the costs can be kept low enough. “There is a huge market there for the airline that can manage it,” Walters of the University of Johannesburg told OBG. That would mean offering cheap cargo space as well as affordable tickets.

PORTS: The port at Durban is the country’s largest, handling around 60% of traffic. South Africa’s sea ports have the same problem with high costs as its airports, but suffer from congestion instead of overcapacity. A 2007 study sponsored by the automotive industry found that the Durban port was the world’s most expensive to ship through. A study by the Ports Regulator of South Africa in 2011 determined that Transnet’s National Ports Authority charges a container vessel some $182,000 to dock at Durban, a figure that is more than double the $86,000 average at the world’s leading 100 ports. Firms are responding to the cost by looking elsewhere – glossy paper manufacturer Sappi, for example, is considering using the port in Maputo, in neighbouring Mozambique, to ship production from its facility at Nelspruit, east of Johannesburg. “Low productivity, currency volatility and high usage costs – especially for ports and rail – are among the main challenges,” Denzil Nair, the CEO of logistics The regulator’s 2010 study found that cranes at Durban move an average of 23 of containers an hour, compared with 94 in Antwerp, Belgium. Delays have been the norm and capacity has been stretched since October 2006. The regulator’s duties include approving port fees, and Transnet had sought an 18% increase for the financial year 2011/12. It got a 2.8% boost instead, Transnet said in February 2012.

Transnet’s capital expenditure plan calls for R31bn ($3.8bn) in spending over the next five years, which would expand capacity at the container terminals by almost one-third, and would include six new cranes for Durban. The operator and regulator have also agreed to a plan to reduce port charges by some R1bn ($122m), President Zuma announced in February 2012.

OUTLOOK: South Africa retains a can-do spirit left over from the FIFA World Cup building boom, and the air segment in particular is in a strong position compared to the country’s neighbours. “Airport infrastructure, while costly, is top-notch, and positions South Africa to be the continent’s aviation benchmark for the coming years,” Simon Newton-Smith, the South Africa general manager for Virgin Atlantic, told OBG.

Challenges for the future include the high usage costs incurred through operator fees. However, attention paid at the highest levels, as seen by President Zuma’s focus on infrastructure, is buttressed by support from the private sector, leaving few obstacles to the government’s plan save for its own implementation issues.