Transnet: Plans to perhap split Transnet to boost rail

[Steve Appleton]

From Business Day, 24 August 2011: http://www.businessday.co.za/articles/C ... ?id=151444

Plan to split Transnet to boost ailing rail sector

Acting deputy director-general for integrated transport planning says private companies have to help run the core railway network

LINDA ENSOR and NICKY SMITH
Published: 2011/08/24 06:35:07 AM

CAPE TOWN — State-owned port and freight rail company Transnet could be stripped of its rail infrastructure assets and become an operator competing with private-sector companies, if proposals to open the rail sector to private investors are adopted. This is the essence of a Department of Transport master plan, to be submitted to the National Planning Commission tomorrow. The plan must be adopted by the Cabinet before it can be implemented.

Transnet’s inefficient freight operations have been a bottleneck on the economy, constraining the growth of exports and accelerating the deterioration of SA’s road network as more and more freight has shifted from rail to road. SA’s rail infrastructure is ageing, it uses outdated technology, has insufficient capacity for the economy’s needs and is shunned by the private sector because of its lack of customer focus and inflexibility.

In terms of the department’s proposed plan, the parastatal’s infrastructure assets would be housed in a separate state-owned Rail Infrastructure Utility which would manage them on behalf of the government. A Transport Economic Regulator would level the playing fields between Transnet and other rail operators, facilitating competition. This proposal was originally part of the national freight logistics strategy adopted by the Cabinet in 2005 but has not been implemented. The strategy is now being reviewed and taken forward by the transport master plan which will cover all modes of transport. The far-reaching proposals signal the opening up the historically state-owned rail sector to private companies.

The department’s acting deputy director-general for integrated transport planning, Clement Manyungwana, told Parliament’s transport committee yesterday that private companies had to help run the core railway network. So far, three branch lines have been identified for private sector participation. A draft branch lines policy, which would see the secondary rail network being opened up to the private sector, is making its way to the Cabinet.

The move to split Transnet would also see the state playing an active role in facilitating investment in rail infrastructure and rolling stock.

Mr Manyungwana said SA’s investment requirements in the rail freight sector were far greater than Transnet’s balance sheet could bear. Transnet’s five-year investment of R110.6bn was not enough, he said. He linked the difficulties faced by rail freight to Transnet’s conflicting mandate: to improve its bottom line and also to play a developmental role in the economy. It was crucial to introduce a clear governance model for rail that was vertically separated and provided clarity on the roles of the government, agencies and parastatals, he said. Mr Manyungwana said the road freight sector moved 87% of SA’s freight, resulting in considerable congestion and causing serious deterioration of roads.

The shift from rail had been dramatic. In 2003, 720 million tonnes out of 900 million tonnes of surface freight transported in SA had been carried by road. By 2007, this had almost doubled to 1373 million tonnes of the 1578 million tonnes of surface freight moved.

Frustrated committee members from across the political spectrum complained yesterday that there had been enough talk on getting freight transport back to rail and it was time for action. Under the department’s delivery agreement with President Jacob Zuma , the 186 million tonnes of freight currently transported by rail would be increased to 250 million tonnes by the end of this year. The national transport master plan will also focus on unblocking the Johannesburg-Durban transport corridor.

Mr Manyungwana said the government wanted to make "big bang" interventions on this corridor. The interventions could include finding an alternative to the City Deep logistics hub in Johannesburg once it reached full capacity, digging out Durban port, and presenting a business case for intermodal hubs at Harrismith and Cato Ridge. They might also involve improving the connecting infrastructure between rail and other transport modes.

The department’s proposals include establishing an Integrated Transport Commission to coordinate, evaluate and approve transport plans and investments and ensure balanced spending across all modes. Mr Manyungwana said the economic effect on Transnet of removing its infrastructure assets had to be carefully considered as it had bonds and other financial obligations. Task teams would meet on September 28 to adopt a view to present to the ministers of transport, finance and public enterprises on the plan.

Mr Manyungwana said the separation of Transnet’s rail operations from infrastructure had been in limbo since 2005 because of "economic considerations" such as the large investment required, the weakness of Transnet’s balance sheet at the time and a lack of capacity within the state to effect the separation. The integration of private sector operators into the country’s rail network, if adopted, would be a phased process, Mr Manyungwana said.

Transnet spokesman Mboniso Sigonyela said the company "has ongoing engagements with government on a range of matters, including policy consideration. Should there be any structural changes, these will communicated accordingly."

[Aidan McCarthy]

Hi,

Interesting sounds like the UK railtrack model, which seems to have it's own issues. I wonder which are the three branch lines mentioned in the release?

[John Ashworth]

Also sounds a bit like the Australian model. I believe there the heritage rail operators have equal rights with the big commercial companies on the national network.

[Steve Appleton]

Lead editorial from Business Day, 25 August 2011. http://www.businessday.co.za/articles/C ... ?id=151579

EDITORIAL: Splitting Transnet is the way to go

SA must be one of the few countries in the world in which the largest portion of the state-owned transport infrastructure is controlled by departments other than the transport department

Published: 2011/08/25 07:30:01 AM

SA MUST be one of the few countries in the world in which the largest portion of the state-owned transport infrastructure is controlled by departments other than the transport department. The vast majority of our transport infrastructure is controlled by Transnet, which reports to a different ministry. The Department of Transport is, however, responsible for policy and planning.

This context sets the stage for some bruising internal battles over what should be done to solve SA’s transport issues. In a sense, the department’s detachment allows it a degree of independence of vision and, in the spirit of that sense of objective oversight, it has come up with a very good idea: Transnet should be responsible for maintaining the rail network, and private or quasi-private entitles should act as operators.

The reasoning behind this idea is pretty unimpeachable: the essence of SA’s rail network is that it is failing, and failing fast. The proportion of freight transport that travels by road has been increasing for years. The service levels of the rail division of Transnet are very poor and getting worse. The two, poor service levels and declining usage, have become a self-reinforcing cycle.

The rail division of Transnet is saved essentially by two railway lines — the coal line to Richard’s Bay and the iron-ore line to Saldhana. It’s easy to see why this is so. These are bulk transport lines with cap tive customers. Most others who do have an option have chosen to move their goods by truck, incredibly, even when it is more expensive to do so. The reliability, sophistication, time accuracy, service culture and general competitive attitude of logistics operators have left rail in the dust.

This is only one of Transnet’s problems; it also needs expensive upgrades to its lines and rolling stock. It’s conceivable that Transnet could manage part of this upgrade, but it probably will not be able to afford it in its totality, at least at the pace at which SA’s transport infrastructure needs to grow. Acting deputy director-general for integrated transport planning Clement Manyungwana says the investment requirements in the rail-freight sector are far greater than Transnet’s balance sheet can bear. Transnet’s five-year investment plan of R110,6bn is just not enough.

Hence, the department has come to the obvious and welcome idea to house Transnet’s infrastructure assets in a separate state-owned Rail Infrastructure Utility, which would manage them on behalf of the government. In addition, a Transport Economic Regulator would level the playing fields between Transnet and other rail operators, facilitating competition.

It is crucial that this regulator should operate effectively. One of the problems with infrastructure management is that the state entities that find themselves in an effective monopoly position end up making use of that position, not to reduce costs but to behave as a form of hidden taxation.

Port charges are a good example. It recently became clear that port charges in Durban are more than any other major dock in the world, and almost double the global average. Transnet has applied to increase fees for port services and facilities by 18% next year.

Faced with rising costs on the one hand and a need for increased spending on the other, the solution is obvious: increase competition and attract private investment.

Is the plan a pipe dream? The department’s plan seems to be at odds with other parts of government policy, and with Transnet’s own perceived interests. The fact that the plan has been gathering dust for more than five years may be instructive in itself.

Yet, the point is that this issue should not be a matter of ideological purity or departmental territoriality; it should be based on what is practically necessary.

The department’s notions come a lot closer to that principle than anything else we have heard so far.

[Steve Appleton]

Predictably, Transnet defends itself and warns aginst TFR being split up.

From Business Day, 26 August 2011. http://www.businessday.co.za/articles/C ... ?id=151759

Transnet chief says planned split ‘disastrous’.

CEO Brian Molefe yesterday voices his strong disapproval for a policy proposal that would cut its rail business in two.
by NICKY SMITH
Published: 2011/08/26 07:03:01 AM

TRANSNET group CEO Brian Molefe yesterday voiced his strong disapproval for a policy proposal that would cut its rail business in two, placing its infrastructure into a new state rail utility and opening the lines to private operators. He warned that such a split was a threat to Transnet’s ability to raise capital for its R110 bn capital expenditure programme.

The idea of the vertical separation of Transnet dates back to the 2005 National Freight Logistics Strategy. The proposal’s relevance to the logistics group six years later is under review by the departments of transport and public enterprises.

Splitting Transnet is a proposal "that requires debate", an emotional Mr Molefe told reporters at a briefing at Transnet’s headquarters. He said a split would be "disastrous" and the impression that Transnet was to be split up had to be challenged. "It is harmful to the perceptions of current and future investors in Transnet’s bonds," he said.

The freight company has a capital expenditure programme of R110.6 bn over the next five years. Of this R63.7 bn is earmarked for Transnet Freight Rail, its biggest division and most likely to be affected by any split. Mr Molefe said that in order to raise the capital required for its infrastructure upgrade, Transnet needed a strong balance sheet that could back its bond issue. "This kind of reporting scares bondholders," he said. The timing of the debate was "inappropriate" given the "transformative capital" that must still be invested in Transnet before a policy outcome such as a split could be contemplated as a desirable or necessary outcome for the country’s freight logistics needs, he said.

Transnet is planning to borrow R12.9 bn this financial year. According to its 2011 annual report Transnet has borrowings of R60 bn, R39.8 bn of which is made up of Transnet bonds and commercial paper. The company is racing to catch up with the underinvestment of the past two decades and trying to improve the service it offers to its customers who have migrated en masse to road transport.

"While superficially attractive, government-imposed rail open access had failed to accomplish all of the goals set for it anywhere in the world," Mr Molefe said commenting on the lessons learned through similar liberalisation exercises globally. Separating Transnet Freight Rail into two units and allowing private sector access to its network is a vision that is far more "radical" than the private sector participation being contemplated by Transnet on its branch lines, Mr Molefe said.

George Mahlalela, director-general in the Department of Transport, said yesterday that as part of the delivery agreement the infrastructure development cluster of state departments has with the president, there are plans to "ensure a significant shift of freight from road to rail". "However, any restructuring of current rail operations, whether pertaining to the Department of Transport, the Department of Public Enterprises or private operators, is a policy consideration that will be dealt with by Cabinet," Mr Mahlalela said.

Transnet was in "continuous discussions with both departments," Mr Molefe said. It was "part of a process on rail reform and other initiatives that have an impact on Transnet". "Economic theory recognises the importance of the public sector sometimes playing a monopoly role, especially where network infrastructure requires a total overhaul and a massive extension of capability," he said.

[Chris Janisch]

Perhaps they are scared of steam trains being allowed out on their "main lines" again, as would presumably be allowed under the rail regulator?

[Steve Appleton]

Fear Factor 10!!!
And, half the business ownership means half the bonuses.