RYK VAN NIEKERK: Welcome to this Moneyweb Special Podcast. My name is Ryk van Niekerk, and today we will look at a significant development in the freight-transport sector, which has been flying a bit under the radar. It is the announcement made back in 2020 by the president to allow private-sector rail operators to use Transnet’s extensive rail network in South Africa. This was a significant structural reform, and it is probably on a par with the announcement that the private sector may generate up to 100 megawatts of electricity without a Nersa-issued licence.
James Holley is on the line. He’s the CEO of Traxtion, a private company offering rail-freight transport services in several African countries. He’s also the chairperson of the African Rail Industry Association, or Aria. James, thank you so much for joining me. This announcement was big in 2020, and it did receive some airtime at the time, but since then it has flown a bit under the radar. What has happened since 2020?
JAMES HOLLEY: Ryk, thanks very much. It’s a pleasure to talk to you. There have been quite a lot of developments actually from the time of the announcement in 2020. As Aria, we have formed a subcommittee of the board to look into the practical implementation of third-party access and, through that project, we have been engaging significantly with government at various levels on the implementation of the structural reform.
The buy-in from government has really been remarkable pretty much across the board in terms of driving the implementation of this reform. Operation Vulindlela has obviously been formed and been identified as a priority project. The last engagement we had is that they were targeting implementation of this reform around August this year.
Transnet has announced that it will complete an accounting exercise into the costing of its network, so that it can translate that into pricing for the slots on the network by the end of March. It has also said it will do a pilot project on third-party access by the end of 2022. That pilot project is, we believe, targeted for the container corridor which is the old Natcor line between Durban and Joburg. Transnet, also in its interim results presentation, announced that it would be doing this.
So I think there has been quite a lot of development. As you say, it might not have been quite as publicised as it could have been, but we certainly are heading in the right direction.
RYK VAN NIEKERK: So when will we see the first private-sector-owned locomotives and rolling stock on Transnet’s infrastructure?
JAMES HOLLEY: I really believe that it’ll happen this year. I do think that there’s really strong interest from government to implement it. It’s really low-hanging fruit, Ryk, because we’ve got such an extensive network in South Africa and the utilisation of that network is really low, which means that you can turn this huge network in South Africa into a revenue generator for Transnet. So it is something. From a network-capacity point of view, there’s no requirement on the fiscus to invest in it. And then through the association we’ve got Webber Wentzel on retainer, providing us with legal advice, and that legal advice has confirmed that no new regulation is needed in South Africa in order to implement this.
What that means is that it’s a reform that practically can be implemented really, really quickly, and what is required now is for private-sector operators such as ourselves to sign access agreements with Transnet and then to bring on trains.
Now, bringing on trains from a theoretical point of view can get going quickly. So, when you ask when the first trains will come, I do think you’ll probably see the first trains running in South Africa by the end of this year on the core network. The question is, when can you really do this at scale? That’s a slightly different proposition. That requires raising significant amounts of money, and that requires extensive locomotive and making … build programmes over the next couple of years.
It takes about 18 months to manufacture a locomotive. That gives you a sense of when we’ll see this policy starting to run out in scale in South Africa.
RYK VAN NIEKERK: Yes, it takes 18 months and it is also really expensive to manufacture a locomotive. How big is the private-rail industry in South Africa?
JAMES HOLLEY: Well, not very big, actually. When you think historically that South Africa, despite its enormous network, has about 36 000 kilometres of installed track; Transnet has between 21 000 and 23 000 routes kilometres.
About 85% of Africa’s track is in South Africa. Our network is, incredibly, almost the same size as Deutsche Bahn’s famous network in Germany.
Despite all of that, and with the first train having run in South Africa 160 years ago, the private sector has not accessed the core network, which means that private-sector rail operations in South Africa have been limited to private networks such as you find in the platinum belt and on the goldfields, shunting work, maintenance work, sub-component parts supply – but not the heavy mainline rail operations that you’ll see by private-sector companies in most other countries around the world.
With most of Africa’s rail track being focused in South Africa, and with the track networks being relatively limited outside South Africa, the private-rail industry for operators is not as well developed as you would think. We are a 35-year-old company. We operate in seven African countries, and outside Africa we do mainline rail operations. But this certainly is going to be a real landmark moment for the private sector in railways on the continent – and of course in South Africa.
RYK VAN NIEKERK: Could that then offer opportunities for international firms to invest in trains and locomotives to run on our network, as opposed to the local industry stepping up and taking on all the available capacity?
JAMES HOLLEY: I think it’ll be both, Ryk. I think that there’s such a big freight opportunity in South Africa to grow the rail freight industry. The Aria study came back with a number of about 58 million tonnes. Similar studies have been done by universities in South Africa that have come back with a number of about 73 million tonnes of freight that wants to move from road to rail – if the rail capacity exists.
To put that number into perspective, that would require, by our estimates, an investment of about R45 billion into locomotives and wagons, so we are talking about a massive freight body that wants to move across, and a huge investment in locomotives and wagons.
That’s before you unlock a potential structural bottleneck to growth in the South African economy, and unlock future freight-volume opportunities through economic growth.
So I think it’s going to be both. I think you’ll see private operators really taking the mantle and stepping up and taking up this opportunity. We most certainly have plans to do that, but I also think due to the extensive network that we have in South Africa and due to the relatively large freight opportunity, you’ll start seeing the internationals having a look and finding South Africa a much more interesting proposition than it has been for our history.
RYK VAN NIEKERK: Obviously this represents some discomfort for Transnet, because of the opportunities that are available – and, as you’ve just outlined, they are significant. Transnet’s inefficiencies and other problems have limited the organisation [from] actually offering the services it could. What is the attitude from Transnet towards this structural reform to allow private-sector trains on their railways.
JAMES HOLLEY: I think from what you can see in Transnet, there certainly seems to be a commitment to do this – the fact that they have said that they’re going to do a pilot project this year, the fact that they also have said that they’re on track to complete this study into the accounting separation of infrastructure and operations, the price, the slots for us as operators onto the line. So they do seem to be committed to doing it, which is really encouraging.
I think the fact that there’s a lot of pressure from government as well is also contributing to what should hopefully be the timely implementation of the strategy.
But we as the industry really think that Transnet is going to be the biggest winner of this policy shift. At the moment it has this massive network, and only a small percentage of the capacity of that network is being utilised. But Transnet is responsible for the maintenance of that whole network, and that maintenance obligation when you’re only using a small portion of its capacity is a huge financial burden on the organisation.
So when you turn this huge network from a financial drain into a revenue generator, you have the potential of turning Transnet’s financial performance really around and getting Transnet to motor financially. Of course, all of that revenue that is generated then from the access fees, or the toll fees from private operators like ourselves accessing the network, can be reinvested back into the backlog maintenance, [what] there is, on the network and improvements to the network. Then the success of this policy becomes self-fulfilling into the future.
Read more on Transnet here.
This huge network that we have in South Africa is a potentially massive competitive advantage for our national economy, and can really take hold.
RYK VAN NIEKERK: We’ve seen many news reports and very disturbing videos of massive destruction of Transnet’s infrastructure. Many railways and stations have been stolen. What is the condition of the freight-rail part of Transnet’s network?
JAMES HOLLEY: Remember that Transnet and Prasa’s networks were separated out into different entities, and Prasa is responsible for the inter-city Metro rail network, and Transnet is responsible for the freight network. Transnet’s network is really vast, at somewhere between 21 000 and 23 000 route kilometres. Prasa’s network is quite a lot smaller at between 2 500 and 3 000 kilometres. It’s the Prasa network that has been really, really badly vandalised, particularly during the Covid period when the trains came to a complete standstill. They’ve been trying to recover ever since in terms of replacing the overhead networks within Prasa.
The Transnet network is in a significantly better condition. There are problems at the moment, particularly with cable theft and some vandalism, but the Transnet network really is in a much better condition. When we compare the condition of the South African rail network to the networks where we operate successfully in Africa, the South African rail condition is still much, much better. It’s not to say that there isn’t some investment needed and some potential for growth into improvements in the future, but it certainly is in a condition that we would be comfortable, as an operator, to make a success in our operations.
RYK VAN NIEKERK: You don’t expect significant maintenance to be done before the private sector could start using the rails or the infrastructure?
JAMES HOLLEY: No, not at all. We’d be ready to operate on the condition of the network, as it is, tomorrow.
RYK VAN NIEKERK: Road transport is a big business and a big sector in South Africa. How will this affect road transport?
JAMES HOLLEY: Look, the implementation of this policy and the board programmes are going to be phased in over a number of years. So it’s not like there’s going to be a freight body that’s going to disappear from the South African industry overnight.
I also do think that the rail industry and the road industry operate hand-in-glove. There is freight that is well suited to rail, and there are freight bodies that are well suited to road. Even in the world’s most advanced economies with the most efficient rail systems in the world, the rail-freight market share is only around 40%. So trucking is still going to have a huge role to play in the South African economy.
I do think that in South Africa we have instances where we have freight that moves on road which we wouldn’t find in many other countries around the world. I think that there are freight bodies in South Africa that would most certainly move to [road] from rail. But I also genuinely believe that rail capacity has historically been a structural bottleneck to growth in the South African economy and that opening up extra rail capacity is going to unlock opportunities for growth in the South African economy, which is going to increase our freight markets and in turn create opportunities for both road and rail.
So I actually don’t think it’s going to have a hugely significant impact on the road-trucking industry per se, certainly not one that’s going to be felt immediately. I’m also really confident that you’re going to see extra freight bodies coming on, and stimulating the South African economy for the betterment of everybody.
RYK VAN NIEKERK: So the N3 between Joburg and Durban will remain a very, very busy highway, especially with thousands and thousands of trucks using it every day.
JAMES HOLLEY: Yes, absolutely. It’s going to remain extremely busy and it’ll remain an extremely important arch route for the freight movements in South Africa.
But at the same time, there is a huge amount of freight that consolidates in the south of Johannesburg and then is trucked. Those freight bodies that naturally consolidate are freight bodies that are very well suited to rail transport, though I think we will still see a lot of trucks on those roads. There’s absolutely no doubt. But I do think we’re going to see a lot more trains too.
RYK VAN NIEKERK: How much cheaper or more affordable is it to transport freight via rail [rather] than on the road?
JAMES HOLLEY: It really depends on what the freight body is, and what type of freight you’re moving. There are certain freight bodies that are well suited to road – and in that instance road will be cheaper; and there are freight bodies that are well suited to rail, and in those instances rail will be cheaper.
So it really depends on what you’re moving and how rail-centric that freight body is. But, as a general rule, if it’s a freight body that naturally consolidates, that’s a freight body that rail should be cheaper to move, and it should provide that important competitive advantage to our industry by providing a more efficient and cost-effective rail solution.
RYK VAN NIEKERK: Could you give us a few examples of what type of products would be better suited to be transported by rail?
JAMES HOLLEY: The first and obvious is bulk freight. We’ve seen that in South Africa with iron ore and coal moving almost exclusively on rail. So bulk freight is something that naturally is very well suited to rail.
In South Africa we do see a lot of bulk transport also happening on our roads. Those are freight bodies that are pretty well suited to rail, depending on where the origination is, where they’re going, and the distance of the movements. Container movements also are very well suited to rail, particularly container movements where freight consolidates, and the big ICDs [inland container depots], for example, that you see in the south of Joburg; that type of freight is well suited to moving on rail.
A lot of agricultural products, things like grains and timber and even sugar, are very well suited to rail. Automotive products, cars around the world, move extensively on rail. Then hazardous chemicals are very well suited, and liquid bulk is also very well suited to rail movements. So I think that in South Africa, in a global perspective we have a relatively small economy. We do have a pretty freight-centric economy and as a consequence there’s a large body of freight that moves in South Africa, which in turn creates this really interesting opportunity for the rail sector into the future.
RYK VAN NIEKERK: Our economy is also dependent on commodities, iron or coal, chrome and the like, and many of the operations in South Africa are limited, or the capacity is limited, because they can’t export these ore bodies efficiently and in certain quantities. Would this liberalisation of the railways offer them the opportunity to expand their operations and produce more?
JAMES HOLLEY: It’s really interesting, Ryk. If you look at the international precedents, in the time that in South Africa we’ve added 55 million tonnes of iron-ore export capacity, Australia’s added about 900 million tonnes of iron-ore export capacity. In the time in South Africa that we’ve added about 67 million tonnes of coal export capacity, it [Australia] has added about 350 million tonnes. They’ve done that in collaboration with the private sector, with the private sector also running trains.
I do think therefore that there is scope for potential collaboration to significantly enhance our commodity exports, but that’s going to be something that Transnet’s going to have to decide and drive into the future.
The freight bodies, as things stand, are really interesting across the board, whether we look at agricultural products, whether we look at containers, auto, hazchems – which are historically part of the general freight business in Transnet – or whether you look at coal and iron ore, there are interesting freight bodies and interesting freight opportunities across the board.
It’s now going to be up to government to decide and Transnet to decide how they go about implementing this. As the private sector we are really standing behind it and we are ready to move.
RYK VAN NIEKERK: James, thanks so much for your insights today. I think this is a significant development, and hopefully it can lead to accelerated economic growth – and hopefully not in the too distant future.
JAMES HOLLEY: Absolute pleasure. I really believe it will. At the end of the day the rail services that we provide are an enabler of the upstream economy, and I do think that we will see some new industries developing and growth in our industries as a consequence.
RYK VAN NIEKERK: That was James Holley, the CEO of Traxtion, a private company offering rail-freight transport services in several African countries. He’s also the chairperson of the African Rail Industry Association.