Rechtsanwältin, Senior Associate
Out-Law Analysis | 22 Jun 2022 | 10:11 am | 5 min. read
South Africa’s Department of Transport has released a white paper on national rail policy identifying areas for investment and reform to improve the contribution of the railways to the economy.
The National Rail Policy White Paper (110 page / 5.51MB PDF) is intended to dovetail with existing policy such as the New Growth Path, the National Development Plan, and the Integrated Urban Development Framework. Its ultimate purpose is to chart an overarching trajectory for the future of the rail sector in South Africa, covering both freight and passenger rail.
The paper points out that rail has had a steadily decreasing market share over a number of decades, and a major focus is how to address the sector’s lack of competitiveness against other modes of transport and the poor intermodal linkages between rail and other forms of transport.
The government has identified required interventions at two levels. Firstly, it notes that there is a need for infrastructure investment as low investment and poor maintenance over many decades has caused the decline of line usage.
Secondly, enabling reforms should be implemented to address institutional and structural issues derived from the legacy of the rail sector as a monopolistic market. The white paper acknowledges that the former monopoly SOE Transnet, through Transnet Freight Rail (TFR), has in recent years narrowed its focus to protecting existing value and maintaining profitability, and has therefore not made efforts to expand its services or capabilities to meet potential market demand.
In light of these reforms, it is expected that investment opportunities will arise for the private sector. However, it is important to understand the form of such investments that the white paper will allow for, and in particular we have also considered whether private ownership of fixed rail infrastructure aligns with the paper.
The white paper has identified a number of factors behind the decline in the rail sector in recent years. Railways generally rely on outdated technologies for both fixed infrastructure and rolling stock, despite the fact that South Africa is a leader in innovative technologies such as coupling rail genetic technology which allows for much longer heavy haul trains to run. In the freight sector, this has resulted in unsafe conditions with higher derailment and poor stopping capability.
The effectiveness of TFR’s capitalised maintenance expenditure is questionable, with significant amounts being expended with very little improvement in the output potential of track and related infrastructure spend, thus failing to meet the potential market demand.
Branch line usage has dropped dramatically over the years as the road network in rural areas has improved together with the failure of initial attempts to revitalise branch lines through a concession approach.
Theft and vandalism, along with generally poor security along rail lines, reduces the ability of trains to operate, often leading to long delays due to the likes of signalling failures and track damage. This has escalated significantly during in the wake of the Covid-19 related lockdowns, making normal train services incredibly difficult to carry out.
In terms of rail infrastructure investment, the key policy driver is to focus new investments on high-performance standard gauge infrastructure combined with the modernisation of existing network capacity. The white paper recommends that investment planning be centralised to allow for more effective expenditure.
Branch lines that are identified as ‘strategic’ should receive direct investment to reopen or rehabilitate the line, or introduce private sector participation through concessions. The white paper also identifies the need for locally produced rolling stock which will service demand throughout Africa, as well as the use of private sector rolling stock leasing companies to meet further capacity requirements.
The key enabling interventions include: the restructuring of the rail sector through addressing the monopolistic nature of the market, and in particular though the promotion of private sector participation and investment; the establishment of an independent transport economic regulator which will promote non-discriminatory access to the rail infrastructure and facilities and transparent pricing, and the introduction of more effective cost recovery through closer alignment between user fees and costs; and through enhancing the role of the railway safety regulator in terms of oversight of registration and licensing.
In the freight sector in particular, market structure is again identified as a key area for policy intervention. The white paper says unbundling of vertical integration at TFR is an important imperative, although it only identifies possible alternatives for unbundling without committing to any particular option.
Rather, the issue of unbundling will be further explored by the transport economic regulator once operational, which will act as a kind of infrastructure manager. Introducing third-party access is also a key move in opening up the freight market, with access fees and terms to be published by TFR and appropriate oversight being exercised.
The white paper supports greater private sector participation (PSP) in various aspects of freight rail. The key driver of PSP in the freight rail sector is the liberalisation of rail network access, which has become necessary in the absence of TFR providing a service which can effectively realise the potential demand for freight rail. Access to the network includes core, non-core, branch line, or shared freight and commuter lines.
For open access to function properly, the white paper splits the role of an infrastructure manager from the infrastructure owner, the infrastructure manager being responsible for the care and maintenance of the line and to manage traffic, all on the basis of non-discriminatory access.
The policy statements in the freight rail sector also provide clear support for PSP from an investment perspective. The government said the Department of Transport would spearhead the development of a PSP framework for the rail industry, in recognition of the ‘important role’ which PSP can play in bridging investment and improving operational and managerial efficiency in the rail sector.
The role of the private sector in funding of freight infrastructure is noted, with the white paper specifically identifying that “the role of train operators is to invest in ‘above-rail’ capital assets such as rolling stock, based on sound business cases”.
The use of concessions is promoted, stating that in the case of strategic branch lines, where the government cannot afford to invest in the non-core network, they must be put out for concessioning.
Despite this, the white paper does not directly address the concept of private ownership of the rail network infrastructure, which it describes as ‘rail-and-below fixed infrastructure’.
In the section dealing with rail planning policy, the white paper emphasises the importance of publishing a National Rail Master Plan to guide investment and for rail investment to be guided by a ‘rail planning component’ within government.
There is no specific mention of whether rail infrastructure could be privately owned and funded, but the white paper says the lack of a co-ordinated national rail master plan has led to bottom-up investment decisions instead of “top-down planning for the national good”.
That said, in discussing freight rail investment, the white paper gives strong indications that investment in rail infrastructure is ultimately a government role and distinguishes this from the role of the private sector in funding non-fixed infrastructure.
The white paper suggests that government being responsible for fixed infrastructure investments is most appropriate due to the high costs and the importance of “well-planned and implemented projects”. However, government will leave train operators to fund their own rolling stock and the white paper says operators should invest in ‘above-rail’ capital intensive assets such as rolling stock.
The white paper does in a more general sense discuss the need for the private sector to contribute to funding of infrastructure, including that the Department of Transport will generally support the identification of funding in addition to that raised by Transnet. However, the white paper couches this in very cautious language, saying: “Government appreciates that, although PSP appears to be a ready funding source, the modalities of realising that potential are complex and delicate”.
While the new national rail policy does not strictly prohibit private ownership of rail-and-below infrastructure, there are indications in the white paper to limit private participation in rail sector investment to rolling stock, and to the extent that assisting with the rail-and-below investment is contemplated, this is secondary to the government as the ultimate investment driver.
Co-written by infrastructure law expert Reuben Cronjé of Pinsent Masons
23 Aug 2021
17 Nov 2020
Rechtsanwältin, Senior Associate