Transnet draft Network Statement

On Saturday the 16th of March Transnet released the draft Network Statement, two weeks ahead of schedule. The process of rail reform is well underway and the various organs of government should be applauded for this important reform.

This Network Statement lays out the methodology which allows the private sector to carry freight across Transnet’s track infrastructure, which will be held in a new company to be called TRIM. This reform unlocks billions in infrastructure spending as maintenance can now be funded and new locomotives built in South Africa. More importantly though, it unlocks billions in additional revenue for the mining houses as they will be able to move more of their product to port and for SARS as they tax the additional corporate profits that can be generated.

In its most recent financial presentation, Transnet highlighted that they had been unable to move half of the R70bn estimated rail revenue pot available in South Africa. This reform now opens the door to Grindrod (ClucasGray Future Titans Fund’s largest holding) as well as privately-owned train operators, Traxtion and SA Freight Logistics (SAFlog).

While this reform has significant positive implications for both the private sector and the South African fiscus, it must be noted that it will take some time for private operators to be in a position to take advantage of the reforms. Locomotives take a significant amount of money and time to procure although this could be done faster and cheaper if agreements can be reached on utilising Transnet’s idle fleet.

The concern around the draft paper is the proposed toll fee. Industry talk was for an amount of 8c/ton/km of net weight for bulk commodities while the draft published a rate of the 19.79c/ton/km gross weight (including wagon weight). This cost falls directly on the rail users and not the rail operators which is why the rail industry is unlikely to fight it and Transnet will likely add this access fee to the existing rail costs.

For example, the 580km coal line has a capacity of 81million tons but let’s use a more realistic medium-term utilisation rate of 70million tons. Keeping it simple and ignoring the wagon weight, the coal line could then generate R8bn in toll fees at the drafted toll fee rate. Industry estimates that the maintenance backlog on this coal line is R10bn. The drafted toll fee therefore enables a 15 month maintenance repayment operating on 70million tons. While extremely positive if this maintenance backlog could be corrected, the draft fee comes across as rather exorbitant given that rail users have already paid for this maintenance in the past but Transnet blew the funds on corrupt activities. The fee needs to be opposed and revisited before these draft numbers are legislated.

On the iron ore line the 860km at design capacity of 65million tons would bring TRIM R11bn in toll fees, again ignoring the wagon weight. Adding in all the various bulk commodity lines and container corridor it’s not impossible for TRIM to be earning R25 - R30bn in toll fees per year. Again, consider this fee against Transnet’s current revenue of R35bn and it is clear that it needs to be reconsidered.

There are so many positive impacts for South Africa once these reforms are brought to life - many hundreds of thousands of jobs can be added across South Africa, South African corporates can generate higher revenues, billions in taxes can be collected for the fiscus and trucks that currently clog and cause wear on the road networks can be shifted onto more optimal rail networks. Hopefully sanity will prevail in this drafting process and a sensible toll fee can then be legislated to enable these benefits to be realised over the coming years.