With infrastructure spending on the rise, the sector is poised for expansion

South Africa is home to the farthest-reaching and highest-quality transport network on the African continent. For decades the country’s extensive road, air, rail and sea links have underpinned economic and social development not only in the domestic market, but through the region as a whole. In recent years the government has made a concerted effort to shore up South Africa’s infrastructure and connectivity, establishing a handful of large-scale, longterm capital investment programmes, including the 2012 National Infrastructure Plan (NIP), under which the state plans to spend R4.3trn ($407.2bn) on new and upgraded infrastructure across the transport, energy, water, sanitation, health and education sectors over a 15-year period.

Major transport projects expected to progress under the NIP include a R16.3bn ($1.54bn) initiative to revitalise the country’s rail network, a R15.2bn ($1.4bn) plan to update and expand provincial bus lines, and a variety of other initiatives in the areas of maritime, surface and air transport (see analysis). The NIP follows a five-year period during which state infrastructure spending in the nation topped R1trn ($94.7bn) in total, much of which was linked to an influx of projects in the run-up to the 2010 World Cup. However, the sector faces some challenges, including rigid labour policies that curtail growth prospects, as well as a skills shortage due to an inadequate education system.

Economic Impact

In 2013 the transport, storage and accommodation industry was valued at approximately R269bn ($25.4bn) in total, up from R258bn ($24.4bn) in 2012, according to figures from Statistics South Africa (Stats SA), the country’s data collection and publication agency.

As a percentage of the country’s total GDP, the sector saw a slight decline over the same period – from 8.2% in 2012 to 7.9% in 2013 – which can be attributed to the growth of the economy as a whole outpacing the expansion of the transport sector.

In general, demand for transport services of various types has increased across the board in recent years. In 2013 some 734.4m tonnes of freight was moved in South Africa, according to data from Stats SA, up from 693.5m tonnes in 2012, 691.7m tonnes in 2011 and 644.7m tonnes in 2010. Nearly 71% of the cargo moved in 2013 was transported on the country’s roads, with the remainder being moved primarily by rail. Similarly, in 2013 South Africans made approximately 868.2m journeys in total, up from 854.3m in 2012, 835.9m in 2011 and 817.1m in 2010, according to Stats SA data. Rail travel, including urban metro systems, accounted for 12-15% of passenger journeys in 2013.

Oversight

A variety of government and semi-public entities are involved in regulating the transport and logistics industries. The Department of Transport (DoT), for example, has a mandate to develop and implement policies aimed at maximising “the contribution of transport to the economic and social development goals of [the] country by providing fully integrated transport operations and infrastructure”. Under South Africa’s constitution the DoT shares authority for transport sector development with the regional transport departments in each of the country’s nine provinces.

The federal department’s portfolio includes international airports, national highways and roads, the maritime sector, and the Passenger Rail Agency of South Africa (PRASA). The nine provincial departments, meanwhile, oversee local provincial infrastructure and work with the DoT in the areas of public transport, traffic and licensing.

The Department of Public Enterprises (DPE), which manages a portfolio of publicly owned companies across a number of sectors, is also a major player in the transport sector. The DPE holds controlling shares in Transnet, a major freight infrastructure firm involved in rail transport, ports, and pipeline development and management; South African Airways (SAA), the country’s flag carrier; and South African Express Airways.

Other entities involved in the transport sector include the Tourism Department, which works alongside SAA on marketing South Africa as a tourist destination in international markets; and the South African Revenue Service, which oversees the nation’s Customs service. Although the private sector is a large source of funds for capital spending, with a number of independent power projects currently active, alternate financing for transport projects large and small include the state-owned Development Bank of Southern Africa (DBSA), the African Development Bank, a number of international organisations and foreign governments.

Policy Framework

Under the NIP, which was launched in 2012, the state plans to spend R4.3trn ($407bn) on new infrastructure and the expansion of existing networks through 2027. The plan is organised into 18 Strategic Integrated Projects (SIPs), which look to coordinate efforts to encourage growth both geographically and across sectors, and of which a substantial number are either focused directly on transport development or have large transport components. SIPs 1 through 5, for example, are focused primarily on the development of new transport networks and systems. A variety of rail investments will be made under SIP 1, which is aimed at unlocking mineral resources in Limpopo province. SIP 2, meanwhile, involves the strengthening of rail, port, road and air infrastructure between the major industrial and commercial centres of Gauteng and Durban. Similarly, SIP 3 involves the development of new transport capacity in KwaZulu-Natal; SIP 4 is aimed at accelerating investments in road and rail lines in North West Province; and SIP 5 is focused on strengthening maritime capacity in the Western and Northern Cape regions, which is expected to include rail and port expansions (see analysis).

The NIP is being carried out in conjunction with a variety of other federal and regional transport, infrastructure and economic development programmes. The DoT’s National Transport Master Plan (NTMP), which was launched in 2010, aims to serve as a blueprint for transport infrastructure development in South Africa through 2050. The initiative addresses potential long-term plans for freight and passenger services across all transport segments, including surface transport (road and rail), maritime and aviation. Additionally, the strategy includes components related to pipeline development, financing, fuel supply, environmental issues, and regulatory and legislative issues.

According to a 2012 draft version of the plan, the projects laid out in the NTMP are expected to cost R751.74bn ($71.2bn) through 2050, with the majority of this expenditure forecast to take place between 2015 and 2023. Additionally, 65% of the total expected expenditure earmarked under the plan is expected to go towards projects in Gauteng, KwaZulu-Natal and the Western Cape, the country’s three most populous provinces, while 43% of total NTMP expenditure is set to go to the rail segment, with passenger rail projects alone forecast to account for 25% of total spending under the plan. An additional 27% of expenditure is scheduled for road projects.

Both the NIP and the NTMP were developed in conjunction with South Africa’s top-level economic development plans, namely the National Development Plan (NDP) and the New Growth Path (NGP). Under the NDP, which was launched in August 2012, the development of “safe and affordable” public transport is considered to be a key means of addressing urban poverty. The main objective of the NGP, meanwhile, is to drive job creation across the country. According to the government, “central to the NGP is a massive investment in infrastructure as a critical driver of jobs across the economy”.

Most of South Africa’s provincial governments are implementing transport plans. In Gauteng, which is home to nearly 25% of the country’s population, the Gauteng Department of Roads and Transport launched the 25-year Gauteng Integrated Transport Master Plan in 2013 (see analysis). The number of development plans in place nationwide may represent a challenge moving forward, in terms of the complexity and the capacity of the project pipeline.

“The DoT has come up with a number of comprehensive pieces of legislation in recent years,” Laverne Dimitrov, a transport specialist at the DBSA, told OBG. “However, considering the high number of organisations involved in the sector, financing and implementation are potentially going to be major issues in the future.”

Roads

As with many African markets – and indeed many emerging markets in general – roads carry a large proportion of traffic, with upwards of nearly nine-tenths of goods and people moved along tarmac. “Altogether 89-90% of total freight and passenger traffic in South Africa moves by road,” said Dimitrov. “Rail and other forms of transport account for the remaining 10-11%. According to data from the South African National Roads Agency (SANRAL) – the parastatal agency charged with maintaining and developing the federal road and highway network – South Africa’s road network is the largest in Africa, covering some 747,000 km at the end of 2013. Roughly 154,000 km of the country’s roads were paved, while the remaining 453,000 were covered in gravel. SANRAL is responsible for 21,000 km of highways and major national roads, all of which are paved. Meanwhile, provincial governments control approximately 184,816 km of local roads, city governments are responsible for another 339,849 km of urban roads, and an estimated 140,000 km of roads are located on private property – primarily farms and other rural estates.

Rising levels of freight and passenger transport have caused the quality of South Africa’s road network to decline in recent years. Heavy vehicles account for a high percentage of traffic on many of the nation’s highways and urban roadways. The N3, for example, which connects Johannesburg with Durban, carries some 50m tonnes of freight traffic on an annual basis, according to SANRAL data. Consequently, the cost of maintaining, upgrading and expanding South Africa’s road network has jumped over the past decade.

To combat the increasing traffic, in recent years the government has also launched a handful of high-profile public transport projects, including the Gautrain, a rail and bus network that covers a large geographical area north of Johannesburg; and bus rapid-transit (BRT) systems in Gauteng and Cape Town, with more in the planning stages (see analysis). As of May 2014 BRT systems were up and running in Johannesburg and Cape Town, and were either under way or in the planning stages in most of South Africa’s other urban areas, including Durban, Pretoria, Rustenburg and Port Elizabeth. Additionally, the government has announced plans to roll-out BRT systems in Nelspruit, Bloemfontein, East London, Polokwane, Msunduzi, Ekurhuleni and George by 2018.

High Costs

SANRAL, which was established as an independent commercial company by parliamentary decree in April 1998, is responsible for developing and implementing national road policy. While SANRAL is tasked with maintaining the national road network, this has become increasingly challenging for the company due to financing issues.

The challenge of maintaining a road network is hardly unique to South Africa, however balancing cash flows with expenditure requirements has proven especially tricky for SANRAL. In its first decade of operations SANRAL’s activities were financed largely by annual budget allotments and government-led bond issues. In 2008 the firm applied for and received a credit rating from Moody’s Investors Services, thereby enabling it to issue its own bonds. The company’s first issuance, which took place in July 2008, was more than 50% oversubscribed. For the following three years monthly bond listings were a key component of SANRAL’s long-term financing plans, with most issuances substantially oversubscribed. By the end of 2013 the company had accrued a considerable amount of debt as a result of bonds issued to finance a handful of large-scale infrastructure projects. In 2003-04 SANRAL had debt of R5bn-6bn ($473.5m-568.3m); now that figure is at R37bn ($3.5bn). In September 2013 Moody’s downgraded SANRAL, citing a “deterioration in the company’s cash flows, which are necessary to meet its operating expenses and to service its very high debt levels acquired to fund the Gauteng Freeway Improvement Project (GFIP)”.

The GFIP, which has been under way since the late 2000s, was developed with the goal of ensuring that Gauteng’s freeway system and other road infrastructure expanded in line with population and economic growth in the province.

Under the initiative – the largest project SANRAL has undertaken – the agency planned to add 561 km of new roads to Gauteng, widen major freeways and create about 30,000 jobs. While GFIP was largely financed by debt issuance, it also includes an electronic tolling (e-toll) component, which has prompted considerable public outcry in South Africa.

In September 2011, for example, a SANRAL-led bond auction failed as a result of legal challenges to the agency’s e-tolling programme. By the time the GFIP’s e-tolling programme was launched in December 2013 – after years of delays – opposition to the plan was widespread. “Inter-city toll roads have been operating in South Africa for almost 30 years, and are accepted,” said Jackie Walters, a professor of transport and supply chain management at the University of Johannesburg. “But urban e-toll roads, which have the potential to be costly for many city dwellers, are broadly unpopular.”

Organisations like the Opposition to Urban Tolling Alliance, made up of travel, logistics and automobile associations, continued to file lawsuits and stage demonstrations against the system even after it was up and running. SANRAL, for its part, has maintained that while e-tolling is controversial, it is necessary to finance large-scale road development projects. In response to intense public outcry against e-tolls, Gauteng Premier David Makhura established a panel on July 17, 2014 to assess the social and economic impact of e-tolls. The review panel is intended to examine the economic and social impact of the GFIP and the electronic tolling system set up to fund it. The panel is expected to present its findings to the premier at the end of November 2014.

Since the start of the programme in December 2013, e-toll revenue collection rates have reportedly been slightly higher than expected, according to SANRAL. In mid-April 2014, for example, on the back of the launch of e-tolling, SANRAL successfully completed a bond issue worth R500m ($47.4m), which was the firm’s first debt auction since the failed listing in September 2011.

Rail

Taking into account the government’s plans to boost exports and trade, and the limited capacity of the road network, land freight transported by rail is expected to increase in the coming years. Rail transport levels remain relatively low as compared to the road segment. According to a survey published by the government-run Council for Scientific and Industrial Research (CSIR) in 2013, rail’s share of total freight transport as measured by tonnage declined from around 20% in 2003 to just over 10% in 2009, for example.

As of the end of 2012 this figure had risen to about 11.5%, according to CSIR data. On a tonne-km basis (a measure of the transport of one tonne over one km), meanwhile, some 29% of freight in South Africa was moved by rail, according to Stats SA data, with the remainder moved by road. This figure has remained relatively consistent over the past five years, though it had decreased considerably from about 45% in the early 2000s, for example, according to CSIR statistics.

Transnet Freight Rail (TFR), the rail arm of the state-owned logistics conglomerate Transnet, has recently rolled out a large-scale plan aiming to put rail at the centre of the freight transport industry for years to come. Certainly the need for it, given South Africa’s export mix, is clear. Several of the projects under this seven-year initiative, known as the Market Demand Strategy (MDS), are aimed at boosting commodities exports.

According to the Department of Mineral Resources, in 2013 South Africa exported minerals worth R384bn ($36.4bn), up 5.6% on the previous year. The nation is the world’s sixth-largest coal exporter, based on data from Bloomberg.

Under the MDS, TFR plans to increase freight rail volumes from about 200m tonnes in 2012 to 350m tonnes by 2019. Coal and other commodities will take up a substantial amount of this new capacity. Rail also figures prominently in a handful of the state’s other overarching economic development programmes, including the NIP (see analysis).

Under the state-owned PRASA, the country’s passenger rail services are also expected to grow considerably in the coming years. PRASA oversees and operates all facets of passenger rail transport in the country, including urban Metrorail services in Gauteng, Cape Town, Durban and the Eastern Cape; business express services between key urban centres; and mainline regional and inter-city services, which span the country (see analysis). Among other major developments currently under way, in 2010 the DoT announced a plan to build a very-high-speed rail link between Johannesburg and Durban. This project is part of the 2050 Transport Master Plan and has attracted a considerable amount of interest from international investors, though according to some local players it is widely regarded as an unnecessary expense. “This potential high-speed passenger rail project linking Johannesburg and Durban is costly and pointless,” Walters told OBG.

Aviation

Given how far South Africa is from its primary trade and tourism markets, maintaining and expanding the country’s air links with the rest of the world is considered to be a key government priority. The nation’s three largest airports – Johannesburg’s OR Tambo, Cape Town International (CTI) and Durban’s King Shaka International (KSI) – are key points of entry for visitors and investors not only to South Africa, but to the entire Southern Africa region. KSI opened its doors in May 2010, just in time for the World Cup later that year, and both OR Tambo and CTI were upgraded and expanded substantially in the run-up to the event.

In 2012-13 the three largest airports registered a slight decline in traffic, though overall visitor numbers have grown consistently in the years since passenger traffic dropped off in the wake of the 2007-08 international economic downturn. Some 18.6m passengers came through OR Tambo in 2012-13 (April through March), down from just over 19m in 2011-12, but up on 17.9m in 2008-09, for example. At CTI, meanwhile, total passengers reached 8.4m in 2012-13, down from 8.6m in 2011-12, but up from 7.8m in 2008-09. Similarly, 4.6m visitors came through King Shaka in 2012-13, down from over 5m in 2011-12, but up on 4.3m in 2008-09.

The decline in passenger traffic in 2012-13 as compared to the previous year can be attributed largely to the relatively poor health of the global airline market in recent years. According to Airports Company South Africa (ACSA), the state-owned firm that manages the country’s nine commercial airports, “an over-supply of seats in the past few years, coupled with high fuel prices, has placed huge pressure on airlines’ profitability”.

With this in mind, and considering forecasts that show minimal growth in the global airline industry through at least 2016, ACSA has cut back slightly on capital expenditure in recent years, particularly in infrastructure development and maintenance. That said, the airports operator is currently in the process of implementing a plan that will see it invest R39bn ($3.6bn) in maintaining the firm’s current asset base, updating technological capacity across South Africa’s airports, ensuring compliance with international best practice, and, in certain airports – particularly OR Tambo – expanding commercial facilities.

Indeed, OR Tambo is South Africa’s largest and busiest airport by a considerable degree. In 2012-13 it handled 8.27m international passengers, up from 8m in 2011-12 and 7.9m in 2010-11. Roughly 3.9m of South Africa’s 4.8m total international arrivals in 2012-13 came through the airport, and it also handled 80% of international departures. As a result of expansions made in the run-up to the 2010 World Cup, OR Tambo is currently capable of handling some 28m passengers in total. Despite this excess capacity, ACSA has announced a long-term plan to build a new midfield passenger terminal at the airport, though the project is on hold as a result of the challenging economic environment.

In order to finance the developments carried out prior to 2010, ACSA raised airport tariffs considerably in the years following the World Cup. Tariffs increased by 33% in 2010, for example, 34.8% in 2011 and 30.6% in 2012. While the annual jump in tariffs has dropped dramatically more recently – to 5.5% in 2013 and 5.6% in 2014 – these increases have pushed international and domestic flight prices up over the past five years.

Home Base

More than 40 airlines fly into OR Tambo, including carriers from the US, Europe, the Middle East and Asia, but South Africa is also home to a handful of airlines. SAA, the flag carrier, has faced a series of mounting challenges in recent years.

In 2013 the airline reported operating losses of R425m ($40.2m), which represents a 40% improvement on R705m ($66.7m) in losses in 2012. SAA reported a 14% increase in revenue in 2013, which can be attributed to an 8% increase in passengers and a 7% increase in airfares.

Over the past decade the state-owned firm has had to deal with numerous hurdles, including lossmaking subsidiaries, high senior management turnover rates and a weakening rand, all of which have been compounded by the challenging global air transport environment.

In an effort to update its ageing, fuel-inefficient fleet, in 2002 SAA ordered 20 new Airbus A320 aircraft, 10 of which had been delivered as of early 2014. The remaining 10 are expected to be delivered by 2017. A more recent tender for 10 new wide-body aircraft put forward by SAA in 2013 was subsequently rescinded after the DPE argued that the tender did not take into account the government’s industrialisation and economic development plans. As of July 2014 SAA had plans to put forth another order of 25-30 new aircraft at a cost of R50bn-60bn ($4.7bn-5.7bn). The company expects a final decision by December 2014.

“Many people think that SAA would be better off if it were privatised,” said Bridget Ssamula, the executive aviation sector lead in Africa at AECOM, a USbased architecture, design and engineering firm. “However, if a private firm took over the airline, all unprofitable routes would be shut down, which would likely have a negative impact on trade, investment and business activity. The solution is not to sell, but to capitalise the airline.” As of early 2014 SAA was negotiating with the Treasury over a major potential capital injection.

Low-Cost Carriers

In recent years the low-cost carrier segment in the country has grown rapidly, on the back of rising demand for air travel among South Africa’s growing middle-class population. Mango, for example, which was established as a subsidiary of SAA in 2006, provides budget services to a number of domestic destinations. Private sector competitors to Mango include Kulula, which is owned by Comair, and FlySafair, which commenced operations in October 2014 with Safair, a major local cargo and charter aviation company.

Additionally, two new low-cost operators are currently waiting for confirmation from the government to begin operations. 1time was originally established in 2004, went bankrupt in 2012 and is now being refurbished under new ownership. Skywise, meanwhile, is a new budget carrier that was established by the founders of 1time. “The one thing Africa is missing is a low-cost, pan-African airline. This requires agreements between government and national carriers, fostering a feed and de-feed service. While several of the operators have attempted to start low-cost airlines, some large African carriers will look to set up large foreign tie ups as well,” Paul Hurst, managing director at Solenta, told OBG.

By Sea

Developing South Africa’s ports is a key component of the government’s numerous ongoing development plans, particularly as it looks to improve not just domestic transit and trans-shipment activity but also to reduce costs and wait-times for importers and exporters.

The National Ports Authority (NPA) and a handful of related entities are responsible for managing and developing South Africa’s eight commercial ports. Containers and dry bulk cargo have accounted for the great majority of revenues – in excess of 80% – in recent years, according to data from the NPA.

South Africa’s largest ports are Durban, Ngqura, Port Elizabeth and Cape Town. Durban Port is by far the country’s largest, and is in fact the largest multicargo port in the Southern African Development Community area. In 2012-13 the port handled 70m tonnes of cargo and 2.7m twenty-foot equivalent units (TEUs). According to Transnet, this latter figure is expected to grow by 9m-12m TEUs by 2040. With this in mind, the firm is currently in the early stages of a major overhaul and expansion of the port in Durban (see analysis).

Top The Charts

South Africa’s strong position vis-à-vis transport infrastructure and logistics performance is reflected in its high rankings in a handful of major reports and surveys. In the World Bank’s 2014 Global Logistics Performance Index, for example, South Africa was the only African country in the top 60, ranking 34th in the world.

Similarly, in a late-2013 report released by PwC, the nation was named the best performer in Africa for trade facilitation logistics thanks to its well-developed financial, communications, legal and transport sectors, as well as an open trade policy and a comparatively strong domestic market.

Rankings aside, South Africa’s ongoing dominance in the areas of transport and logistics is by no means a foregone conclusion. Indeed, the country faces a variety of logistics-related hurdles, many of which can be linked to a legacy of underinvestment in most areas of the sector over the past three decades. Challenges to the ongoing development of the transport sector include rising levels of road congestion, outdated and slow Customs procedures at many points of entry and a lack of long-term infrastructure financing options.

However, these hurdles have not stopped logistics, transport and supply chain firms from posting solid growth in recent years. As of early May 2014, for example, the Johannesburg Stock Exchange’s transportation index was up 1.74% over the previous year, 32% over the previous two years and 91% over the previous three years.

The index is made up of a handful of logistics firms, including the Imperial Group, Value Group, Grindrod and the OneLogix Group. Other listed firms include Trencor, which is involved in marine services, and Super Group, a supply chain management firm. In addition to these local companies, most of the world’s largest multinational logistics players are active in South Africa, including DHL, FedEx, UPS and TNT Express. “The logistics business is extremely dynamic and competitive in South Africa,” Dave Perumal, the head of Customs and regulatory affairs at DHL South Africa, told OBG. “In recent years the regulatory environment has improved dramatically, which should have a positive impact on operators throughout the industry.”

Outlook

Challenges aside, the rapid pace of investment and development in recent years is widely considered to be a reflection of both the sector’s many strengths and its inherent long-term potential for continued growth. The industry’s long-term prospects are directly linked to the growth of trade and tourism in recent years. In 2013 South African exports were valued at R925.9bn ($87.7bn), up from R817.7bn ($77.4bn) in 2012. Imports, meanwhile, also jumped substantially, from R852.4bn ($80.7bn) to R995.8bn ($94.3bn) in the same period. In the first half of 2013 – the most recent period for which data was available at the time of publication – visitor numbers increased by 5.1% as compared to the same period the previous year.

Meanwhile, during the whole of 2012, approximately 9.2m international tourists visited South Africa, an increase of 10.2% over the previous year, according to data from the Tourism Department (see Tourism chapter). With these numbers in mind and in an effort to anticipate both future traffic flows and accommodate more visitors, most local and national transport and logistics players are looking forward to continued expansion in years to come.