Increasing connections: Moves towards diversifying options and lessening reliance on roads

Home to the most developed transport network and logistics industry on the continent, South Africa ranks highest in Africa and among the best in its income group globally on a number of indices. Nevertheless, in the coming years, the government will have to deal with a host of major issues, including trade barriers, congestion and the resulting need to raise funds for infrastructure development, if the country is to retain its position at the top.

Economic Contribution

The transport sector remains a key component of economic development and growth in South Africa. In the final quarter of 2012, transport, storage and communications contributed 8.3% to nominal GDP, growing by 4.6% to R68bn ($8.29bn), according to Statistics South Africa.

The year 2012 was generally a positive one for players involved in the sector. The Johannesburg Stock Exchange’s industrial transport index gained 52.6% over the course of the year, after a loss of 2% in 2011. The main companies in the index are Grindrod, a freight carrier; Imperial Group, a logistics and supply chain firm; Super Group, a supply chain management company; and Trencor, which manages, owns and leases marine cargo containers.

Momentum

Visitor and trade growth also point to continued strong demand for transport and logistics services. In 2012 the value of exports rose by 8.8% to R717bn ($87.4bn), according to the South African Revenue Service (SARS). Imports also saw strong growth, increasing from R675.4bn ($82.3bn) in 2011 to R832.5bn ($101.5bn) in 2012. Such trends will support both carriers and infrastructure operators. At the same time, visitor numbers to and within South Africa have been moving in the right direction. According to Statistics South Africa, tourist numbers reached 4.4m in the first six months of 2012, a rise of 10.5% and well above the global trend of 5% growth. On certain routes, there is even more demand. China, for example, became one of South Africa’s top five source markets for tourists for the first time, with growth in visitor numbers of 68.4% in the first half of 2012, compared to the same period the previous year (see Tourism chapter).

Gaining Entry

Such trends suggest strong demand drivers for the transport industry, a situation that should be augmented by South Africa’s position as a gateway to Africa for both goods and visitors. However, despite attempts to build a strong regional trade community through the Southern African Development Community, impediments to the growth of regional logistics and transport services to and from South Africa remain substantial. Jackie Walters, head of the Department of Transport and Supply Chain Management at the University of Johannesburg, told OBG, “Border costs and cross-border activities are a big issue.” In 2013 South Africa ranked 115th out of 185 economies in trading across borders, according to the World Bank’s “2013 Doing Business” report. While this showed an improvement of 30 places from 2012, the ranking is well below the country’s overall economic placement of 39th.

South Africa suffers by comparison with member countries of the OECD in terms of the time and cost of importing and exporting. According to the World Bank, it takes 16 days and $1620 to export a container from South Africa, compared to an OECD average of 10 days and $1028. Similarly, the time to import is 13 days more than the OECD average, at a total of 23 days in South Africa, while the cost is almost $900 more per container, at some $1940.

Passenger journeys by road & rail, 2012-13 TRADE BARRIERS: The government is working to reduce the barriers to efficient trade and transportation. One of the major efforts to expedite the process of trading across borders is the Customs Modernisation Programme, which was started in 2009. Run by SARS, the programme aims to speed up the process of clearance through borders by increasing the efficiency of documentation delivery and processing. This has included the centralisation of document processing and the introduction of an electronic case management system. The government is currently working on an accreditation system for logistics firms and freight handlers to ensure the screening of materials and the speedy and efficient transport of goods across South African borders. SARS has set the target of accrediting the 20% of importers and exporters that account for 80% of goods coming in and out of the country. The department would then concentrate on interventions on the remaining goods entering the country.

One of the biggest challenges in terms of time and cost impediments for freight carriers transporting goods to and from South Africa is Customs intervention. According to Dave Perumal, the Customs and regulatory affairs manager at DHL, a Global Express Association study indicated that South Africa has an intervention and/or hold rate of 29% compared to 9% in Namibia and 6% in the US.

As such, only 70% of cargo entering the country gets delivered efficiently. Perumal told OBG, “I would measure efficiency by the number of interventions. From a business and procedure perspective, it’s quite high. In terms of its impact, it has the potential to be sizeable, but pre-clearance capability allows the express operator to work around this challenge. Our business works on just-in-time cargo. If we can’t deliver 30% of our cargo on time, it has huge financial implications for our business and even greater implications for our customers.” The government’s attempts to reduce interventions and create an efficient accreditation system could therefore have an important knock-on effect on the logistics industry.

Moving Up

South Africa is already moving in the right direction. According to the World Bank’s Logistics Performance Index, South Africa ranked 23rd out of 155 economies in 2012, up from 28th in 2010. It ranked highest on tracking and tracing (16th) and lowest on Customs (26th). Overall, the country is steadily improving the environment for freight carriers and the industry is recording healthy growth. According to Statistics South Africa, the volume of freight goods, or payload, transported in 2012 rose by 1.9% to 693.7m tonnes, while total income in the sector increased by 6.7% to R94.6bn ($11.5bn). Passenger transport services also exhibited strong growth. The number of passengers expanded by 4.6% to 854.4m, while the income for passenger services increased by 12.7% to R9.4bn ($1.1bn).

Roads

Given these trends, and the general rise in demand for services, there is likely to be growing pressure on the country’s transport infrastructure in the coming years. Indeed, South Africa’s land transport network has been experiencing an increasing burden over the past decade. Land freight expanded by 47.3% from 2003 to 2010, according to the “State of Logistics Survey” carried out by the Council for Scientific and Industrial Research. In 2010, roads accounted for 88.9% of land freight, while the remaining 11.1% was transported by rail. In terms of volumes, freight carried by road totalled 484.05m tonnes in 2012, according to Statistics South Africa. With further growth expected over the next two decades, lessening the burden on roads will be crucial.

Walters told OBG, “If you look at the JohannesburgDurban corridor, containerised movement will more than double over the next 18 to 20 years. We need to get some of this onto the rails. It cannot all go on the roads.” Progress is already being made; in the first quarter of 2013 roads handled 69% of freight movements (39.3m tonnes), while rail carried 31% (17.4m tonnes), according to Statistics South Africa.

To this end, Transnet, the government-owned logistics and infrastructure company, has embarked on an ambitious R300bn ($36.57bn) programme to rehabilitate and develop the rail network (see analysis). While this should help ease the burden on roads, the government is also working on the maintenance Passenger traffic at ACSA airports, fiscal YTD March 2012 and development of roads, as they remain the preferred choice for freight carriers.

Therefore, substantial investment will be required to ensure capacity requirements are met and the state of roads does not have a negative impact on travel times. According to the South African National Roads Agency (SANRAL), the national road network has a good rating and more than meets the international norm designated by the Institute of Civil Engineers that only 10% of roads be in poor condition.

Volumes

Nevertheless, the country’s extensive road network, and in particular secondary roads, is bearing growth in potentially unsustainable volumes. According to the “State of Logistics Survey 2011”, freight volumes on rural roads were up by 39.4% to 431m tonnes between 2003 and 2010. Metropolitan roads saw an increase of 37.8%, while corridor roads saw a rise of 53.9% in the same period. According to Walters, “The secondary roads are the issue and how they manage the upgrade. It’s both a funding and a capacity issue. Many of the provincial roads are already taking much more cargo than they should be. In short, the road budget has not kept up with the road-building programme.”

SANRAL

Is responsible for maintaining the 19,700 km of national roads (and approximately 3500 km of provincial roads), while provincial governments maintain their own local roads. SANRAL receives funding from the Treasury, but the issue of financing the development and upgrade of the country’s existing road network remains an emotive issue.

As the public-private partnership (PPP) model is not in extensive use, SANRAL has had to enter the debt market in order to fund expansion programmes on a number of occasions. The government has also turned to tolling as a means of raising revenue to meet debt obligations for infrastructure development and expansion. However, this strategy has hit a wave of public opposition.

Easing Movement

The Gauteng Freeway Improvement Project, which will add another 561 km of upgraded and newly constructed roads in Gauteng, is a good example of this. According to SANRAL, the project will widen the freeway to at least four lanes in both directions, ease congestion, generate around R29bn ($3.54bn) for the economy and create 30,000 direct jobs. However, opponents have raised concerns about the inefficiencies of its e-toll plan and poor consultation with the public about the use of tolling, which has generated significant resistance.

Wayne Duvenage, the chairperson of the Opposition to Urban Tolling Alliance (OUTA), told OBG, “I believe they are going to have to re-look at the entire funding mechanism. Lower tariffs will merely exacerbate and prolong the capital repayment process. They are trying to introduce a system that has been rejected by society.” According to Duvenage, the toll collection administration and operations costs amount to almost the same as the capital plus interest on the costs of constructing the road. The electronic toll collections tender is valued at R8.4bn ($1bn) for first five-year period of the first phase of 185 km. The estimated toll collection costs over 20 years in present terms is R32bn ($3.9bn), while the road construction capital cost plus interest amounts to R37bn ($4.5bn), making the system irrational and too costly, according to Duvenage.

Tough Sell

With opposition widespread and a court case pending, implementation of the scheme is yet to take effect. As of October 2012, the government had reduced the basic toll charge that it sought to levy to R0.30 ($0.04) per km .

The OUTA estimates that there are 3.5m cars in Gauteng province and that 2.5m use the freeway. Of this total, approximately 900,000 to 1m cars are daily commuters on the highway. According to Duvenage, “The average car rental bill in Gauteng will be an extra 8% to 10%. There will be extra costs to government fleets, municipalities, freight forwarders and any organisation with fleets.” The alliance has opened a court case against the project, which was referred to the Supreme Court of Appeal in Bloemfontein, to be heard later in 2013.

Paying The Toll

For its part, SANRAL has argued that such tolling is necessary to fund road infrastructure moving forward and that opposition to the proposals is damaging the viability of the agency itself and of future PPP models. Further, there are arguments that the costs would not be as extensive as the opposition claims. The South African Government News Agency reported in early August 2013 that only a fraction of drivers will pay the maximum monthly cost of R450 ($55) for using the road, with the majority of users paying only R100 ($12) per month. The findings were based on actual data from SANRAL’s toll collection system and were collected over a two-month period. Vusi Mona, the firm’s head of communications, said, “Of the 2.5m vehicles checked in this manner, only 4700 will pay the capped R450 ($55) a month. ... If you are one of those paying the maximum amount, you will have travelled Land freight transport income, Nov-Jan 2011/12-12/13 through 301 gantries and done an average of 2760 km during the month on the e-tolled roads.”

SANRAL has been able to determine what motorists will pay monthly using plate recognition: 82.83% will pay less than R100 ($12); 10.10% will pay R101-200 ($12.13-24.38); 1.82% will pay R201-300 ($24. 50-36.57); and 0.59% will pay R301-450 ($36.69-54.85).

Taking A Toll

Meanwhile, the delay has squeezed the company’s cash flow. News analysis website Techcentral reported that in late June 2013 the company had debt totalling R65bn ($7.9bn), including interest, and that it had borrowed R20bn ($2.4bn) from local and international investors to cover the cost of the project. Furthermore, as of late July 2013, SANRAL’s delay in implementing the toll system was beginning to affect the trading of its bonds, which had come to a halt, according to Reuters.

Nazir Alli, the CEO of SANRAL, told OBG, “The holdup on tolling has hurt SANRAL, causing Moody’s to downgrade our credit rating twice, but this has not deterred investor confidence. We did require financial assistance from the National Treasury, however, which helped us maintain liquidity. SANRAL will begin tolling as soon as the bill goes through, which should be within the next few months.”

The government has provided SANRAL with R40bn ($4.87bn) in guarantees and exposure, which includes accrued interest of R19.4bn ($2.36bn). Further success in raising the funds for the debt will require more guarantees as well as the implementation of the toll, which is long overdue according to project plans.

As of August 2013 SANRAL, had approached several banks in the hopes of raising some R1.5bn ($182.85m) to service its debt to its subcontractors and suppliers. “We are reaching the stage, in the next three months, when it will become critical,” Alex van Niekerk, SANRAL’s toll and traffic manager, told local press in early August. The company has two portfolios: a non-toll portfolio that accounts for 84% of its roads and a toll portfolio which makes up the remaining 16% and includes the Gauteng project. As the toll portfolio is the smaller of the two, this has not yet affected SANRAL’s capacity to maintain other toll roads, according to Van Niekerk.

Ports

The development of infrastructure in the maritime sector could begin to progress along different lines. In December 2012 the minister of public enterprises, Malusi Gigaba, suggested that the planned R75bn ($9.1bn) Durban dig-out port (DDOP) be built using a PPP model. Gigaba called for a PPP plan with “real and meaningful partnerships between the public and private sectors in order to unlock their common balance sheets for the good of country and our economy”. Transnet received the land for the port, on the old airport site, from the Airports Company South Africa (ACSA) in December 2012. Transnet has said that the project is not included in its R300bn ($36.6bn) development budget and thus will require private funding to get off the ground.

Game Plan

DDOP will be developed in four phases from 2016 and will be capable of handling 9.6m twenty-foot equivalent units (TEUs) in 16 berths upon completion in 2037. An automotive terminal and liquid bulk-handling terminal will be added by 2050. As it is expected to take up to two years for the site to be designated as a harbour and transferred to the Transnet National Ports Authority, it will be some time before private sector proposals are accepted. Nonetheless, once under way, the port project will be a crucial development to address congestion at the existing Durban port and to meet growing demand over the next two decades. The new port will be the largest in the southern hemisphere and will have three times the capacity of the existing Durban facility once it is completed. The port itself is the busiest in South Africa, with 4000 commercial vessels moving through each year.

According to Transnet, container volume growth in South Africa is projected to grow from 4m TEUs in 2010 to 20m TEUs by 2040. In Durban, volumes are expected to increase from 2.5m TEUs to 12m TEUs over the same period. For the fiscal year 2011/12, Durban Harbour handled 78.1m tonnes of cargo, including hydrocarbons products and containers. Volumes for containers reached 2.7m TEUs. In the same year, the port of Richards Bay, containing a dry bulk, coal and multi-purpose terminal, handled the most cargo, at 89.2m tonnes.

High Prices

South Africa’s ports have struggled with high pricing and slow turnaround times. According to the Ports Regulator of South Africa’s “Global Port Pricing Comparator Study”, which was published in April 2012, total National Ports Authority costs at container ports in the country are 360% above the average in the rest of the world. The study indicated that while cargo owners faced fees 874% above the global average, vessel owners/operators incurred fees 26% below the global average. According to the study, container-handling charges in South Africa averaged $275,000 (for the unitary vessel used in the research) against a figure of $150,000 globally.

The report, which came after Transnet’s National Ports Authority’s application for an 11.91% tariff hike for the fiscal year 2011/12, found that Durban and Cape Town ranked as the first- and second-most expensive ports out of the international cities included in the Ports Regulator of South Africa’s research. “Rising tariffs, as with any other increasing costs in the supply chain, are bad for business if you are not getting improved productivity and turnaround times at the ports in turn. If costs go up somewhere in the supply chain, to maintain competitiveness, this must be offset by supply chain value benefits and at the moment, this is not the case,” Jonathan Horn, managing director of Maersk South Africa, told OBG.

Transnet has argued that it needs additional revenue to improve infrastructure and productivity at the nation’s ports. Sector news site Transport World Africa cited Transnet’s former acting CEO, Chris Wells, as saying that Durban had a productivity of 30 container shifts per hour while Cape Town and Ngqura had between 25 and 26 per hour. This compares to a productivity of 94 container shifts per hour in the Belgian Port of Antwerp.

Keeping Up

Bolstering productivity will be key if South Africa is to maintain its hold on containerised shipping to Southern and Central Africa. The official opening of Port Ngqura near Port Elizabeth in March 2012 was considered a central part of this strategy.

The deepest container terminal in sub-Saharan Africa and capable of handling the new generation of container ships, Port Ngqura should boost trade in the region by cutting the cost of doing business in South Africa through reduced shipping times and costs, according to President Jacob Zuma. Costs to develop the first phase of the port exceeded R10bn ($1.22bn), and it has a handling capacity of 700,000 TEUs per year in two berths. Transnet is expected to invest a further R3.2bn ($390m) in the second phase of the port development, constructing bulk cargohandling facilities and expanding the container terminal with an additional two berths.

Port Ngqura is also an important part of Transnet’s strategy as it has been integrated into the multibillion-dollar Coega Industrial Development Zone, an 11,000-ha site for heavy, medium and light industry. The integration of port and rail infrastructure into the country’s industrial development drive is seen as mutually beneficial as it should both boost transport revenue and support industrial growth.

Taking To The Skies

Given the significance of the South African tourism industry and its distance from key markets in Europe and Asia, the aviation sector remains crucial to the country’s economic success. For 2011/12, the three main airports – OR Tambo International Airport in Johannesburg, Cape Town International Airport in Cape Town and King Shaka International Airport in Durban – all experienced passenger growth. The main port of entry, OR Tambo International Airport, witnessed a rise of 1.9% in passenger numbers to just over 19m, while Cape Town, the second-busiest airport, experienced growth of 4.6% to reach 8.6m passengers, according to the ACSA, the owner and operator of the country’s nine main airports. King Shaka International Airport also saw an increase of 3.4%, bringing the total number of passengers using the facility to around 5.04m. Including the smaller national airports, total departures from ACSA’s airports were up 3% to approximately 17.9m for the 2012 financial year.

Despite its importance, a number of factors are hampering the industry at present, including a difficult international environment for business and leisure travel, a depressed local economy and domestic regulatory factors. As with other segments of the sector, the impact of the cost of infrastructure improvements on business and end-users has become a key concern for the airline industry. Large increases in tariffs have been enacted in recent years to cover the cost of previous development programme for the country’s airports (see analysis).

Flag Carrier

The national carrier, South African Airways (SAA), has sought to update its existing fleet in response to the difficulties it has experienced in the current environment. A new government guarantee is expected to help SAA buy new planes. Meanwhile, the closure of several low-cost carriers should offer SAA some respite on domestic routes in the short term as the supply of passenger seats comes more in line with demand. Nonetheless, new operators are already eyeing the market to compete with SAA’s subsidiary Mango and Comair in the low-cost segment. FastJet, a subsidiary of London-based Lonrho, has made its intentions to enter the South Quarterly freight transport by road and rail, 2012-13 African market clear, while the founders of 1Time, which ceased operating in late 2012, have created a new company, Skywise, and are hoping to open domestic and regional routes in 2013 (see analysis).

Internationally, SAA is looking to grow its African network, although the lack of liberalisation in the regional air market presents a significant hurdle to this. While ministers from 44 African countries agreed to implement an “open skies” policy for aviation in Yamoussoukro, Côte d'Ivoire, back in 1999, this has still not been realised. Indeed, South Africa itself does not have an open skies policy, and the prospect of the full liberalisation of the market remains a perennial debate. Although most commercial airlines are in favour of greater access and liberalisation, there are other concerns. Simon Newton-Smith, country manager for South Africa at Virgin Atlantic Airways, told OBG, “While more open skies treaties are something that should be universally encouraged, it is a complex debate, as there is potential downside in terms of extra capacity on already well-served routes. For example, if additional capacity is driven primarily by government-subsidised airlines that, in reality, are not required to make a profit, the result could quickly become counter-productive as airlines that have to operate profitably are squeezed out. The key to success is a level playing field for all carriers.”

Back On The Rails

While the country’s roads have been the main focus for the past 10 years, the government is still intent on realising its plans for a rail system. Freight logistics firm Transnet Freight Rail and the Passenger Rail Agency of South Africa (PRASA) have contributed by providing promising initiatives to boost rail usage, and private players are cooperating with government entities to create a viable plan to revive the segment (see analysis).

One promising development has been the interest shown by prospective international investors. France, Germany, China and South Korea have all signalled eagerness to get involved in a proposed high-speed rail project, which will connect Johannesburg and Durban. The new line would be the first phase of an $18bn project. Plans to build the JohanQuarterly freight transport income, 2012-13 nesburg-Durban very-high-speed (VHS) link were added into the Department of Transport’s master plan for a high-speed rail system months after the concept was initially proposed in early 2010.

Potential Partners

In January 2013 Japan also showed interest in helping cover the cost of the network. A preliminary study released in January showed that a VHS rail link covering the 600 km between the two cities would be able to carry about 17,000 passengers per day when fully operational in 2025, which would increase to between 33,000 and 38,000 daily by 2050. The study also stated the line would be able to move as much as 4.2m tonnes of freight annually. To realise the project South Africa would require technology and expertise from abroad and any partnerships would have to include a technology and skills transfer agreement, and have a visible impact on the local area and employment.

Chinese involvement in the sector also offers numerous benefits. Besides favourable cost considerations, China is working on its own VHS line and could therefore offer useful expertise. France-based Alstom is looking to get involved in the project as well, and with a 60% share in the international VHS market, it could bring much to the table.

Despite an eagerness on behalf of international firms to be involved, as well as the government’s own desire to get the ball rolling, questions still remain over whether the multibillion-dollar project will be profitable for the private sector if the government does not subsidise it. The country’s only current high-speed rail line, Gautrain, is subsidised by the state at a cost of R300m ($33.5m) per year due to passenger figures failing to meet expectations.

However, there is widespread agreement that such a rail link would help to greatly reduce both congestion and wear and tear on the overburdened roads. Another benefit would be a reduction in traffic accidents. Figures from the Ministry of Transport show that the cost of fatal road accidents to the economy in 2012 was $35bn, and during the five-week-long summer holiday nearly 1500 South Africans died as a result of traffic accidents. Concerns over profitability of new rail links will likely be allayed as the project begins to pick up speed. Those in favour will likely want to emphasise the value a VHS line would add to the country’s economy.

Outlook

The transport sector remains a crucial component of economic growth and benefits from a high level of development. However, the government still faces challenges as it seeks to ensure a robust network that will facilitate logistics and passenger growth. While both freight operators and passenger service operators have been experiencing respectable growth in the past year, the long-term success of such industries will be tied to the government’s ability to execute infrastructure projects. With uncertainty over the government’s ability to generate revenue in the roads sector to pay for infrastructure upgrades, confidence in the sector is likely to remain fragile in the foreseeable future.