South Africa's transport infrastructure receiving significant boost in investment

One of the world’s more open economies, South Africa’s commercial activity and economic performance is strongly linked to its ability to move goods into, within and out of its borders.

History

Evaluating the state and trajectory of South Africa’s transportation system and logistics capability is a matter of regional and historic perspective. In the World Bank’s 2014 Logistics Performance Index (LPI), South Africa’s ranking slipped to 34th out of 160 countries surveyed, a significant drop from the 23rd position held in 2012. In a continental context, South Africa placed ahead of its regional peers, with Egypt, the second-highest-rated African nation, coming in 28 places below at the 62nd position, and Nigeria, the continent’s largest economy and third placed African nation, coming in at 75th.

South Africa also ranks comfortably ahead of its BRICS counterparts Brazil (65th), Russia (90th) and India (54th), but behind China (28th). However, local firms reliant on imports or exports argue that a lack of investment in infrastructure, combined with bureaucratic inefficiencies and high user fees, have resulted in transportation presenting itself as a burdensome and increasingly expensive cost of doing business.

Of the six factors feeding into the overall LPI score, the World Bank assessed South Africa’s “infrastructure” to have dropped from 19th to 38th position since 2012, while “Customs” and “tracking and tracing” slipped from 26th to 42nd and from 16th to 41st, respectively. Another report from the World Bank estimates that container terminal handling tariffs at ports are some 360% above the global average.

South Africa’s logistics strength is also hampered by its geography, as some 35.6% of the country’s GDP is concentrated in the province of Gauteng, which lies 1400 metres above sea level and some 600 km from the nearest national port at Durban.

Shifting Focus 

In the build up to South Africa’s hosting of the 2010 FIFA World Cup, passenger transport infrastructure received a significant boost, including new airport terminals costing $1.5bn; an 80-km, $3.7bn high-speed commuter rail network in Gauteng; and new and expanded national freeways. However, upgrades to freight logistics in ports, railways and pipelines have been subject to delays and cost overruns. Despite these challenges, a number of major infrastructure projects that should expand both bulk and container capacity are finally pushing ahead thanks to increased public pressure and renewed government focus.

“The more recent infrastructure plans are solid, investments are breaking ground, and there is greater awareness on the part of the government that the private sector is needed,” Jackie Walters, head of the Department of Transport and Supply Chain Management at the University of Johannesburg, told OBG. “We have around two to three years before new capacity fills the missing gaps.” Much of the new spend is the result of the implementation of a 2012 development programme by Transnet, the state-owned enterprise that owns and operates all public non-passenger port and rail infrastructure. Transnet’s Market Demand Strategy (MDS) is a R300bn ($25.9bn) upgrade, expansion and modernisation project aimed at boosting intermodal capacity also involving public-private partnerships (PPPs).

Rail

With the primary demand centre of Gauteng situated 600 km from the nearest port, and the majority of export commodities, such as coal, iron ore and manganese, located within the interior, having an effective infrastructure network for freight is crucial.

While its rail network, at 21,000 km of railway, is the 14th-largest in the world, 95% of the route network was built before 1938, and the network has seen very little investment over the past 30 years. According to PwC, as of 2013 the average age of the rail fleet was 30-40 years old (with a maximum life span being 46 years) and 51% of the fleet was soon due for retirement. Improving the country’s rail network in an effort to shift container traffic away from travelling via road comprises a critical component of the MDS, with an estimated R200bn ($17.3bn) of the R300bn ($25.9bn) investment allocation going towards new railways, rolling stock and signalling equipment.

Moving Minerals

Much of the planned rail investment is focused on facilitating the transport of the country’s minerals. Coal constitutes South Africa’s top-earning commodity. It is relied upon for over 70% of the country’s energy needs, thereby consuming a large share of domestic coal production. Of the remaining production that is exported, around two-thirds is destined for Asia – namely China and India – with the rest going mainly to Europe. According to Customs data, coal exports hit 74.4m tonnes in 2014, a figure that analysts believe could have been higher had the capacity been available; the MDS aims to raise export capacity to 98m tonnes by 2019.

Coal mining has long been concentrated around the Highveld (inland plateau), where roughly 60% of known deposits are situated in and around the city of eMalahleni in Mpumalanga Province, followed by the Waterberg municipal district of Limpopo Province. As transporting coal efficiently from Waterberg to the Richard’s Bay Coal Terminal (RBCT) for export is not feasible due to a lack of rail connectivity, further mine expansions and greenfield investments will be dependent on the speed in which Transnet constructs a proposed R37bn ($3.2bn) rail line connecting the two sites, currently in the feasibility stage. The RBCT is the country’s lone coal export terminal facility and the single largest export coal terminal in the world. Running in parallel to plans for a new line connection to the Waterberg coal fields is a proposal to construct a link through Swaziland that would divert non-coal traffic currently travelling on the Mpumalanga-RBCT line, thus reducing congestion and eventually raising the coal-export corridor’s capacity to 120m tonnes.

Two other rail lines earmarked for ancillary expansion and capacity upgrades are the Sishen-Saldanha Bay ore export line and the Kimberley-Port Elizabeth general freight line that handles manganese mined in the Northern Cape. The Sishen-Saldanha Bay route is the only option at present for vessel-destined iron ore, and Transnet has committed to add capacity to both the rail line and the deepwater port.

Meanwhile, the government is heavily invested in growing the Coega Industrial Zone outside of Port Elizabeth, which is set to see the development of a ferro-manganese smelter. The area also hosts a deep-water port that would serve as an export terminal for manganese. According to the Chamber of Mines of South Africa and leading iron-ore and manganese producers, routing through Kimberley to get to Port Elizabeth is not optimal and expanding the Sishen-Saldanha Bay so that there is one single line handling both iron ore and manganese creates greater efficiency and presents advantages to be exploited.

“Manganese miners feel that with increasing margin pressure, they need to minimise rail costs by shipping via Saldhana, which is closer to their key mining areas. However, Transnet will counter that the iron-ore line is at capacity, and that producers can gain efficiencies by having separate dedicated lines for each commodity, as they require different train specifications and that this would also reduce contamination risks,” Andrew Shaw, PwC’s transport and logistics leader for South Africa, told OBG.

Made In South Africa 

Transnet is also looking to upgrade its rolling stock. In March 2014, the state-owned enterprise awarded a R50bn ($4.3bn) contract for the domestic production of 1064 locomotives to four international manufacturers. CSR Zhuzhou Electric Locomotive and Bombardier Transportation South Africa will supply 599 electric locomotives, while General Electric South Africa Technologies and CNR Rolling Stock South Africa will build and supply 465 diesel locomotives. This move is intended to position South Africa as the leading manufacturer of rolling stock for the continent.

“Historically, Transnet used to be a significant player globally when it came to building locomotives and wagons. Due to underinvestment, this stopped being the case and hopefully it can become a global leader once again,” said Walters. “Whether the cost of investment will be offset by increased rail freight volume remains to be seen, however, as the South African rail industry will only become a cost-effective alternative to road transport if the operational efficiencies of freight rail are increased to deliver a predictable and reliable service at lower total operating costs than competing road freight offerings.”

On The Road

Standing at 747,014 km of paved and unpaved road, South Africa’s road network is the longest in Africa. While 90% of the national network is considered in good to excellent condition, according to PwC, 78% is estimated to be older than its original 20-year design life. Normal wear and tear is further exacerbated by the fact that roads currently account for around 89% of the country’s freight movement. To help alleviate the burden on the overused road system, state-owned South African National Roads Agency (SANRAL) has built 88 km of new roads in the past five years, added lanes to existing highways and improved more than 3173 km of existing roads.

Paying The Price 

Around 16% of the national roads are toll roads, according to SANRAL’s 2014 annual report, with the toll income crucial for SANRAL’s financial health both as an operator and a borrower. However, the public agency has had to grapple with public opposition to the imposition of tolls on key routes such as the Gauteng Freeway Improvement Project. The introduction of electronic tolling (E-tolls) on roads around Johannesburg and Pretoria was subsequently delayed for more than two years until December 2013 at a loss of R200m ($17.3m) for every month that the tolling system was not in place.

The Democratic Alliance, the main opposition party, argues that most road users end up paying R400-800 ($34.60-69.10) per month on E-tolls; a sum that they say the average citizen cannot afford. The party, along with civil action groups and trade unions, has been advocating for drivers to boycott the system and avoid making payments.

Public Transport

To reduce the burden on the roads and provide a wider range of affordable options for residents, South Africa is also looking to expand public transport options. “By 2025 South Africa is expected to reach 75% urbanisation. World-class cities depend on rail as the backbone of intra-city transport, and we need to create a safe, modern and reliable passenger rail system so that even those who can afford to commute by car will opt to travel by train instead,” Piet Sebola, a strategic asset management executive at the Passenger Rail Agency of South Africa (PRASA), told OBG. PRASA, the state-owned entity responsible for most passenger rail in the country, is in the midst of rolling out an R123bn ($10.6bn) spending programme over 20 years that will go towards the modernisation of its signalling, electrical and railway infrastructure. Some R51bn ($4.4bn) will be allocated to a concession, led by France’s Alstom, that will locally manufacture 600 passenger trains and 3600 vehicles to be delivered between 2015 and 2025. “In tandem with modernising the rolling stock, we also need to make sure we have the infrastructure to respond to trains that can run at speeds of up to 120 km per hour,” said Sebola. “We are stipulating that the newly built trains must have at least 65% local content, and we see this as an opportunity to help re-industrialise a local rail industry with the view that once local requirements are met, we can start exporting trains across the continent with surplus production.” In all, PRASA trains carry around 2.2m commuters to and from work every day, and a Statistics South Africa survey revealed that the proportion of households using trains has increased from 5.8% in 2003 to 9.9% 2013. Studies find that the poorest of South Africans can end up spending up to 30% of their monthly disposable income on transportation, and according to Sebola, there is a social obligation on the part of PRASA to keep ticket prices below market value, as for the time being, their routes mostly serve those in the lower tier of the economic spectrum who cannot afford to pay full fares. The company, accordingly, is looking to alternative revenue streams – for example commercial and retail development around newly constructed and renovated passenger stations, and the sale of excess fibre-optic cable to telecoms companies – to help towards cross-subsidisation.

The Gautrain 

South Africa’s passenger transport sector has also been opened up to extensive private involvement. The Gautrain, for example, a rapid passenger rail network linking Pretoria, Johannesburg and OR Tambo Airport that began operations in June 2010, is considered to be the largest infrastructure PPP in Africa. The PPP consists of Gauteng Provincial Government and Bombela Concession Company, which has a 20-year concession agreement for construction, operation and maintenance. The system, which carries in excess of 62,000 passengers a day, is set to expand from Mamelodi to Soweto by 2020, adding 140 km of passenger rail to the province’s existing infrastructure.

BRT

In line with similar efforts from municipalities around the world, bus rapid transit (BRT) – a network of dedicated bus-only lanes on existing thoroughfares – is also being rolled out as an alternative for decreasing congestion and improving accessibility. Over the past decade 120 km of dedicated bus lanes, 58 BRT stations, over 350 bus stops and four BRT depots have been constructed in six cities. However, BRT has met with opposition from taxi drivers.

The word taxi in South Africa typically refers to a privately operated 15-seat minivan that picks up and drops off passengers along unofficial intra-city routes. According to Dipuo Peters, the minister of transport, 65% of South Africans (more than 30m people) rely on taxis for their primary transportation needs, whereas public buses account for only around 2m passengers a day. In light of the impact that the expansion of BRT systems are expected to have on taxis, metropolitan officials are working on ways to retrain taxi drivers to be employed as public bus drivers, and in some cases are working with taxi operators to become joint operators and shareholders in new public bus projects.

Maritime

South Africa’s ports have historically handled a large share of trade destined for and departing from the southern portion of the continent. Around 96% of South Africa’s exports leave the country via sea, and accordingly, the operating conditions and efficiency of its eight commercial ports are essential to the country’s trade activity. That said, under-investment in port expansion over the past three decades has resulted in capacity constraints, while other sub-Saharan African countries have been expanding their port facilities. This has prompted some importers and exporters located in the eastern part of South Africa to divert their traffic via Maputo Port in Mozambique, and those in the western part of the country to instead call on Walvis Bay in Namibia.

“Capacity constraints and delays in logistics remain a constraint to trade across Africa, but South Africa remains dominant from an African trade corridor perspective, as it consistently has volumes moving in both directions and is more reliable and efficient than many other parts of the continent” Andrew Shaw, a transport and logistics leader at PwC, told OBG. “If, as an example, I need to export copper from the Democratic Republic of Congo to Asia, there might be other African ports that are closer, but if I ship out via Durban, I can do so using trucks and containerised vessels that offer the opportunity bringing in consumer goods rather than ships and then trucks and that arrive empty.”

A Sea Change

Surrounded by water on three sides, South Africa is well positioned as a shipping hub, serving as a key port of call for goods crossing the globe east to west and vice versa. With access to the Atlantic, Indian and Pacific Ocean routes, the country is particularly suited to handling trans-shipments on the back of growing south-south trade. According to figures from Transnet, ships travelling between China and Brazil can do so in 22 days if they route via Durban compared to 27 days going through the Suez Canal.

Of South Africa’s eight primary ports, three ( Durban, Cape Town and Ngqura) handle mainly bulk commodities, while the remaining five concentrate on serving nearby industries. For example, Richards Bay in KwaZulu-Natal is the world’s largest bulk coal terminal; Mossel Bay in the Western Cape caters to the offshore oil industry; while Saldanha Bay, also in the Western Cape, acts as the main iron-ore and manganese export channel. Transnet Port Terminals is the operator for most terminals, and Transnet National Ports Authority (TNPA) is the landlord and regulator.

As part of its R300bn ($25.9bn) development strategy, Transnet is seeking to expand the capacity and improve the performance of its commodity and container terminals. Durban Port – which received 2.6m twenty-foot equivalent units (TEUs) in 2014, making it Africa’s largest and busiest port – is responsible for three out of every five containers entering or leaving the country. In light of container traffic growing 8% year-on-year, R2bn ($172.8m) will be allocated towards expanding the port’s maximum annual capacity from the existing 3.2m to 4.6m TEUs by 2018.

Transnet has also taken over a plot of land 11 km from the port that was previously occupied by the old Durban International Airport, which it will use towards the construction of a new dig-out port (DOP) expected to cost up to R100bn ($8.6bn). Upon final completion, the DOP is expected to have a 9.5m-TEU capacity, with various phases of development anticipated to run between 2019 and 2045.

Diversifying Services

As part of its National Development Plan, the government is also looking to foster a comprehensive maritime economy via a project titled Operation Phakisa (phakisa being the Sesotho word for speed) that aims to expand the sector’s focus beyond transport, into shipbuilding, repair and refurbishment; offshore oil and gas exploration; aquaculture; and marine protection services.

Besides Durban, the country’s other main ports are also earmarked for key improvements. Some R9.65bn ($833.8m) will go towards bolstering rig repair capacity at Saldanha Bay through an expended jetty. Plans are also afoot to convert the port to act as a full service facility for oil rigs operating off the west coast of Africa. In 2014 construction of a liquefied petroleum gas import and storage terminal, to be operated as a 30-year concession by Sunrise Energy and Ilitha Group Holdings, also began. Meanwhile, the Port of Ngqura, which began operations in 2009, is set to receive R30bn ($2.6bn) over the next seven years to pay for additional ship berths and equipment aimed at expanding capacity by 70.8% to 7.35m TEUs.

Tariffs

Tariffs constitute a significant source of funding for Transnet to finance the aforementioned projects, and for the 2015/16 tariff year the regulator has approved an increase in cargo dues of 3.55%, with the exception of dry bulk dues for coal, iron ore and manganese, and marine services and related tariffs, which are all set to increase by 6%. The Manufacturing Circle, an industry body that lobbies the government on matters affecting industrial competitiveness, has long contended that excessive tariffs have dramatically hampered manufacturers, citing a World Bank report that estimates that the TNPA charges a 360% premium over the global average for non-mineral exports. Jackie Walters, the head of the Department of Transport and Supply Chain Management at the University of Johannesburg, told OBG that the proportionately high tariffs have a lot do with inefficiencies, as “Transnet is cross-funding other parts of its operations that are less profitable, especially its general freight rail business.”

Outlook

Although South Africa’s transport infrastructure is among the best on the continent, lack of investment in recent years has led to high usage costs and bottlenecks. The government is seeking to address the situation through numerous projects that involve boosting capacity at the country’s ports and focusing on key public transport improvements.