Author: Thuletho Zwane
Publication: City Press

Private rail operators in South Africa have been given an opportunity for greater access to the country’s rail network, however, risks attached to negotiating access agreements with Transnet must still be addressed.

Industry insiders say finalising “opening access” to the core network will not only stimulate South Africa’s economic growth by leveraging off the benefits of expanded access to rail services, but will also create much needed employment.

In an interview with City Press, James Holley, the CEO of Traxtion – one of Africa’s largest private rail and train companies – said the benefits of “opening access” to Transnet will not only be the ability for the state-owned entity to generate a new revenue stream through “track access fees” but market entrance also means increased productivity, a growing customer base and much needed structural changes to the sector.

‘ABSOLUTE MONOPOLY’

Research shows that Transnet has enjoyed an “absolute monopoly” of the country’s transportation sector for the past 160 years. The SOE singularly owns and operates South Africa’s national freight rail network, eight commercial seaports, 16 port terminals and the multi-product hydrocarbon pipeline network of the country.

In recent years, the SOE – even though not of one of government’s worst performing entities – has experienced consecutive downgrades from Moody’s, Standard & Poor’s (S&P) and Fitch credit rating agencies.

Fitch has downgraded Transnet to ‘BB’ from ‘BB+ with a negative outlook. Moody’s confirmed Transnet’s Ba1 CFR also with a negative outlook. S&P projected that in 2021 Transnet’s revenue will drop by 10%, “followed by a modest recovery in 2022”. The credit ratings agency cited Covid-19 as a constraining factor to Transnet’s ability to generate revenue.

“Transnet’s liquidity remains less than adequate, in our view, and we believe there is a possibility it will breach financial and/or ratings-related covenants in the next six months,” said S&P.

Moody’s said their negative outlook reflected the downside risk from the economic uncertainty created by the pandemic, as well as the ensuing recessionary environment, which may have a worse effect on Transnet’s revenues and profitability.

According to Fitch, Transnet only operated at 60%-70% of its total capacity during the lockdown, negatively impacting revenue and earnings before interest, taxes, depreciation, and amortisation (Ebitda).

Fitch said Transnet’s rating at ‘BBB-’ was benefiting from its monopolistic position in rail, port and pipeline services, with a long-term contract base and business diversification underpinning operating cash flows.

STRUCTURAL WEAKNESSES

The rating agency added that structural weaknesses in the operating environment, expected negative free cash flow and funding needs due to capital expenditure were the reason for the negative outlook.

Holley told City Press that granting third-party access to the country’s core rail network within the next 12 months is a key element of the Economic Reconstruction and Recovery Plan presented by President Cyril Ramaphosa last October.

“Under this policy, private freight rail operators will be allowed to operate on the state-owned rail infrastructure alongside Transnet,” he said adding that the investment gap in rail infrastructure is something that can be filled by private rail operators. Under this policy, private freight rail operators will be allowed to operate on the state-owned rail infrastructure alongside Transnet James Holley, the CEO of Traxtion

Ramaphosa presented the country’s economic recovery plan at the joint sitting of parliament in October 2020 and said that network services such as rail, energy and telecommunications are at the heart of the South Africa’s economic recovery plans.

He said the Covid-19 crisis presented an opportunity to address long-term structural deficiencies in the economy. However, there were opportunities for the economy to go on a new growth path, create jobs and drive fundamental and lasting change.

He said South Africa’s growth story will rely on a massive investment in infrastructure, including in energy, telecommunications, ports and rail. It will be propelled by swift reforms to unleash latent potential, and supported by an efficient state that is committed to clean governance.

‘OPEN ACCESS’

Holley said “open access” has the potential to create thousands of jobs within the rail sector and upstream, driving massive economic benefits for companies that require additional rail capacity to transport their goods.

“Under this policy, private freight rail operators will be allowed to operate on state-owned rail infrastructure alongside Transnet and opening the rail network to third-party operators will unlock ‘billions’ of rands in industry investments almost immediately,” said Holley.

In response to President Cyril Ramaphosa’s announcement of change in policy, Traxtion committed an initial locomotive and wagon build programme of R1.5 billion. Holley added that Traxtion planned to invest a further R14 billion to R17 billion in locomotives and wagons over the next 5 years as part of carefully scaled rolling procurement programme.

However, these investments will only be ratified upon conclusion of the appropriate access rights with Transnet.

Holley said multiple operators will generate additional revenues for Transnet that could be invested back to build our rail network into a source of global competitive advantage, by reducing the cost of logistics for exporters and producers alike, as well as enhancing the road-torail strategy. In addition, our local supply base within the manufacturing environment could see a turnaround as demand starts to increase for rolling stock.

But Transnet still faces challenged before it can open its network and begin rolling out an access programme.

Pinsent Masons’ Reuben Cronjé and Aliyah Ince said private rail operators are likely to have to first navigate a competitive bidding process and then negotiate an access agreement with Transnet that addresses risks to the smooth running of their services on the lines.

They said the general basis for any rail access agreement is that Transnet will grant access to the network in exchange for a fee.

“As there is no rail sector regulator in South Africa who sets or approves tariffs, bidders will likely be required to propose a tariff and methodology for calculating their fee in their bids,” Ince said.

Adding that, in opening up the network, Transnet’s ultimate aim must be to monetise those parts of the railway network that lie idle when not being used by it.

Cronjé said as Transnet is a state-owned enterprise and subject to procurement laws regulating not only the acquisition of goods but also instances where it disposes or partially disposes of its assets, the process of making parts of the core railway network open is regulated, and Transnet will be required to design a process that complies with that part of its supply chain management policy regulating leases or partial disposals.