South African Freight Logistics Implementation: Transnet & Railroad Association briefing

Water and Sanitation

01 August 2007
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Meeting report

TRANSPORT PORTFOLIO COMMITTEE
02 August 2007

SOUTH AFRICAN FREIGHT LOGISTICS IMPLEMENTATION: TRANSNET & RAILROAD ASSOCIATION BRIEFING

Chairperson:
Mr J Cronin (ANC)

Documents handed out
Freight Logistic Challenges – by Maria Ramos, CEO of Transnet

Freight Logistics and Port Interfaces – by the Railroad Association of SA

SUMMARY
Transnet briefed the committee on freight logistic challenges. It assured the Committee that the balance sheet had improved vastly during the last three years, which meant that they were able to finance their investments. The fact that Transnet was state-owned did not mean that they were subsidised and they did not believe that they should be. Their focus was on the main lines and they were still holding talks with Government about the branch lines. The Committee expressed concern that Transnet policies and planning were largely profit driven with too little focus on social and human development. They would have to take this into account in their planning, but it was generally accepted that Transnet should not be required to take responsibility for functions that actually belonged to Government.

The Railroad Association focused on the advantages of rail for the purpose of transporting freight, and the problems faced by the rail industry due to lack of investment. They expressed a need for tougher regulations to encourage the use of rail. The Railroad Association called for active participation of the private sector and made proposals with regard to their involvement in the process.

MINUTES
Freight Logistics:Transnet Briefing

Ms Maria Ramos, CEO, Transnet,  said that the presentation would focus on policy issues, looking at how Transnet’s strategy fits into the policy content. She tabled the presentation document.

Ms Ramos noted that Transnet had managed to strengthen their balance sheet with quite an ambitious investment programme, which would be implemented over the next five years.

In respect of the movement of freight, she said that goods were mainly being moved in containers. Thus, the focus for the past three years had been mainly on how to increase reliability, flexibility and speed, and to ensure the lowest cost possible. She set out the key players in the areas of infrastructure and operations. Shipping lines generally did not receive much attention although they were very important in the logistics line.

In respect of her slide on policy, Ms Ramos explained that the policy issues had been raised by the Department of Transport (DOT) on the previous day. In addition the policy environment was constantly evolving. The policy proposals discussed had been put on the table a while back and to simply convert these to legislation now would result in legislation which was not appropriate to deal with the issues. It was important that policies should be dynamic to address an ever-changing environment.

Ms Ramos noted that the DOT  presentation had correctly reflected that the freight system in South Africa was inefficient. It was characterised by infrastructural shortfalls and mismatches. In addition the regulatory framework was unable to resolve problems in the industry. The regulatory framework that was coming into effect now was designed years ago and there was therefore a need to look at it afresh. Transnet had been very open regarding their ageing infrastructure, especially with regard to their rail assets. It was however also important for the other players to be equally frank.

One of the challenges identified had been the lack of alignment between the different transport sectors. As a result it was difficult to address problems, as there had historically been no institution which could integrate the interests of the sectors, leaving each to manage their own narrow interests. This phenomenon was however not limited to South Africa. Transnet had in the last three years attempted to promote such integration. They had owned assets across the key components of the logistics chain and had recognised that integration was the best way to extract value. In Europe one of the big players had now begun to acquire rolling stock assets, and Transnet's approach was in line with those practices.

Ms Ramos noted that one of the major challenges identified was the fact that there was information on the supply challenges, but no Freight Demand Model had been produced to show what happened to container traffic arriving in ports, and specifically where it moved to from there. Transnet, together with the University of Stellenbosch had developed a Freight Demand Model for South Africa. This could be used as a planning tool and could serve as a stress test to determine how to deal with freight logistical challenges. For instance, it would allow for forecasts when a port would run out of container capacity on the basis of a certain growth rate, and allow for better forward planning of what port to use when another ran out of space. 

Ms Ramos said that Transnet had done economic forecasts using the available data, which had been obtained from imports and exports that had passed through their ports and rail and also from the South African National Roads Agency Limited (SANRAL). Using input from industry analysts, customers and industry experts, they had managed to identify the 23 top commodities in South Africa, which made up 90% of freight by weight. Information was correlated to assist in determining the long term demands of ports.

South Africa was a transport-intensive economy, largely due to its long transport corridors, which meant high transport costs resulting from long distances between production and distribution points. It was determined that 8.3 million tons were moved along the Durban corridor by rail and 35 million tons by road. Using the growth assumption of 5%-6%, it was calculated that the volume of freight on this corridor would increase to 109 million by 2026. This figure excluded goods moved in containers. Unless a rail solution was achieved, it would be impossible to move these volumes. It was necessary to use this kind of planning to determine how the freight system would respond to customer demand.

The entire system must respond to the challenges, and it was stressed that Transnet was but one important player. The current lack of an inter-modal solution was a problem. Transnet had undertaken aggressive investment in rail to counteract the marked increase of heavy load vehicles on the roads. The use of rail for certain primary commodities would continue, but Transnet had to guard against becoming a two or three commodity business, since their focus should be on general freight. A rail solution could be possible in rural areas where infrastructure is already in place. Transnet was working on a branch line strategy with the Department.

There were indications that there would be significant growth in the demand for tonnages of freight shipped over the next 20 years by both road and rail, and these could only be met by inter-modal corridor solutions. .

Ms Ramos tabled a slide dealing with costs across the value chain. Shipping was not very well-understood. Ocean transport costs (beyond 11 000km) constituted 60% of the total transport cost. South Africa was the only country with Port Authority charges, but other countries had higher container handling charges, and the marine charges elsewhere were often borne by the Government and not the port.

Transnet had realised that it could no longer be "all things to all people". Their previous conglomerate status, including airlines, made it impossible to have a strategy on freight. However in the past three years, such freight strategies had been put in place and Transnet was more focused. The culture change allowed them to build capacity ahead of demand. It was calling for changes in legislation not to force people to use rail, but to stress that it was an important value decision based on the fact that rail was reliable, safe and trustworthy.

Ms Ramos tabled the financial figures, illustrating why Transnet had been able to make the necessary investments. In 2007 it had a profit of more than R8 billion. The balance sheet has improved, allowing them to finance their investments. Because Transnet was a state-owned enterprise their performance greatly benefited Government.

Ms Ramos noted that the Port and Rail Masterplan was informed by freight demand and developed through negotiations with the various stakeholders. Transnet was state-owned but this did not mean that they were subsidised, and It was also not Transnet’s view that they should receive any subsidies. It would be ridiculous to argue on the one had that Transnet should be listed and call also for them to deliver free service on the other.

Ms Ramos stressed that the focus of Transnet would be on the main lines, and that DOT was more interested in the branch lines. 45% of Transnet investments would be in rail, with the largest share being allocated to freight. Rolling stock belonging to Transnet had not been properly maintained for a number of years. Another large investment would be in ports. The projected expenditure over the next five years was tabled, and it was noted that the balance sheet must be able to sustain expenditure and show healthy trends to allow for borrowing. The funding requirements between 2007 and 2012 were set out. Although Transnet. could spend money needed for the necessary investments, they would need to generate the volumes for revenue to sustain the investment. This could be done by the increasing their customer base by improving efficiency and reliability.

Discussion
The Chairperson said that the Committee strongly supported the focus on freight, the importance of an integrated approach and the centrality of rail. He however wanted to know what the transformational agenda of Transnet was. He asked about their approach to energy issues. He noted that its philosophy seemed to be based on continuation of operations in the present geography, instead of attempting to change the geography. He noted that this would be a long term project. Whilst he conceded that this was also the role of government, and that Transnet's clients were largely corporate, he asked if it should be that only large corporates benefited from their services.

Ms Ramos explained that this was a very challenging issue. On the one hand Transnet provided transport services to existing clients in an increasingly competitive environment. The mining of iron ore had a very specific geographical location in SA, and so the same stretch of rail was being used for transporting mainly one commodity. The investment in that line was mostly benefiting two clients, as there was little else to transport on that line, and the rolling stock was built specifically for transport of iron ore. Secondly, Gauteng was the industrial heartland of South Africa, and so the bulk of imports were moved there, with the result that infrastructure had to be upgraded inland. What  arrived in Cape Town, by comparison, would usually remain in Cape Town.

Ms Ramos said that branch lines were key to provincial economic development programmes. Transnet was by no means withdrawing from branch lines entirely, and intend to remain involved in their infrastructure. Transnet also owned ports. If the anticipated growth happened, the ports were likely to run out of space for containers, and Transnet would have to seek additional land for expansion. A move of a port to Richard's Bay, for example, would mean a huge opportunity for development in that area. She noted that transformation could not be a static concept.

The Chairperson argued that although the Committee was aware of Transnet’s pressures from key industry players, there were also additional interests needing to be addressed.

Ms Ramos again said that the question of branch lines was very difficult to deal with. There were 26 000 km of branch lines with very little or no traffic. Rolling stock was very expensive to maintain. Rail was also not always the cheapest option. There were some lines which neither Transnet, the Department, the local authority nor a concessionary would be able to maintain, because the line simply did not service sufficient volumes. There were instances where road transport was cheaper or more desirable. 

An ANC member pointed out that the R78 billion to be invested did not include maintenance and upgrading of branch lines. Since branch lines were mainly found in rural areas, this meant that there was not allocation of investment to those areas. He asked what was Transnet’s proposed role in the rural areas.

Mr S Farrow (DA) referred to Transnet’s moral responsibility regarding branch lines, given that this had been excluded from Transnet’s main expenditure. The cost of maintaining branch lines was huge, but while these lines were left unused they were being vandalised. Memoranda of Understanding around branch lines all relied on the use of the main lines, over which Transnet had a monopoly, and if they refused to participate fully then the development of branch lines would not happen.

Ms Ramos responded that it was true that the R78 billion would not be invested in maintaining or upgrading many branch or rural lines. It would be used to purchase locomotives to be used in the general freight business. She agreed that the clients were not only the big corporations.

Mr Farrow asked if the introduction of competition would not lead to an increase in efficiency in rail, resulting in a shift from road transport of freight to rail.

The Chairperson said that some people believed that rail had lost freight to road due to Transnet’s monopoly. He believed that they did in fact have competition, but it was on roads. They should be faced with competition on rail. Road freight was massively subsidised. Before suggesting that roads were more competitive, external factors such as pollution, damage to roads and other factors must be taken into account. Perhaps a broader perspective was needed and perhaps the possibility of subsidies for branch lines. must be considered. The Committee was pleased that the areas were being discussed.

Ms Ramos responded that more debate was needed in this area. Transnet was not and should not be subsidised, as they provided a service to a sector which did not require subsidies. She did not agree that the loss of freight to roads could be dealt with by introducing competition on the rail, as the loss was not due to a monopoly situation. Rather, it was due to the historic fact that the rail had been inefficient. Transnet was now increasing efficiency by investing in assets and infrastructure in areas where the main volumes existed, and would also invest in certain branch lines which were linked to the main lines.

Mr Farrow asked if the introduction of competition would not encourage efficiency.

Ms Ramos said that the fact that an entity was state-owned did not necessarily meant that it was inefficient.

Mr Riad Khan, Head, National Freight Strategy, Department of Transport, argued that the view that policies should not be followed by reason of them being outdated was premature. There were instances when the introduction of competition was a good idea, while other times it did not solve the problem. This was not purely an ideological question. Many factors would need to be considered to determine what worked best.
Mr Khan argued that spatial development was not the role of Transnet, but of Government. These were issues that should be directed at the Departments of Trade and Industry and Transport.

With regard to the issue of branch lines he said that it was incorrect to look at what businesses already existed in an area in order to determine if it was viable to upgrade a branch line, since many businesses had in fact died due to the fact that the branch line was not working. He said it was the role of the state to fix the branch lines, because of their impact on the environment or the costs of repairing the road running next to the line. Transnet would also be able to operate on these lines. It was not practical to be a well-run private company in addition to being responsible for branch lines.

A member asked what the main causes were for the bottlenecks at the port loading and offloading points, and what was being done to address them.

Mr Farrow asked about the fact that the costs of shipping are higher, as South Africa had costs not associated with shipping in other countries. In addition he asked why there were ships left outside port, and if this was because the costs of offloading in the port were too high.

Ms Ramos explained that in the 1990’s the equipment for handling loads, and the containers were old. There had been no modern ship-to-shore cranes. These had only been acquired in the last 18 months and were able to move two containers at a time. Transnet had invested massively in equipment. There had been vast improvements at the Durban port. Transnet had worked closely with shipping lines and had held formalised meetings with them. In addition experienced operators had been brought in from Sri Lanka to provide training to Transnet operators. New benchmarks had been set, which resulted in ports being able to meet international standards. Delays may still happen through bad weather, or delays with the shipping companies themselves. Turnaround times had improved vastly especially in Durban, which was the busiest port. Every crane was linked to a computerised system. All persons on the ships knew their targets and would receive feedback as to whether these targets had been met by the time they left the ship. In regard to the costs she noted that the cost of $100 per container had been lifted two years ago.

The Chairperson said that although many issues had not been answered, it was important that they had begun grappling with them.

Railroad Association Briefing
Mr John Thompson, CEO of the Railroad Association, read through the presentation document titled ‘Freight Logistics and Port Interfaces’. He expressed concern that rail traffic was increasingly being forced to road due to customer dissatisfaction with the rail services. Once customers switched to road their entire logistics network changed and they were often reluctant to return to rail.

A key problem has been underinvestment in rail, which had in essence made it impossible for rail to provide low cost freight and passenger services to rural communities, agriculture and industry. Instead the focus had been on a bottom-line profit for the operator, without much consideration to the long term costs to the country. He suggested that a thorough assessment of the long-term transport requirements was needed,  taking into account sustainable development and external costs. It would be necessary for rail and road to achieve the best logistics balances. A study undertaken by the Railroad Association sought to identify cost-effective and appropriate transport modes for particular services and to appraise the effect of heavy road freight vehicles on provincial and urban residential roads

Mr Thompson said that when transport deregulation took place in the 1980’s Government freed the railway administration from its social responsibility obligations of providing low cost transport for agricultural products and to far flung rural communities. The road transport industry was almost completely unregulated.

There was a need to calculate the total cost of the unrestricted private road haulage. Mr Thompson highlighted the financial issues surrounding the use of rail and road. The general perception of the rail industry was negative, despite the fact that in many countries it was at the forefront of technological development and service provision.

Mr Thompson tabled the technical challenges and also suggested that there must be a move toward inter-modal cooperation. Public-private sector involvement in the creation of inter-modal exchange points should be encouraged by government investment in infrastructure creation. He suggested that private sidings should be removed until their possible future use had been investigated. Municipalities should be approached to ensure the protection of this infrastructure. There should be meaningful private sector participation in policy matters, operating issues and equipment designs. Open access on certain main line network portions was essential. Traffic which was found to be unprofitable could be outsourced to a third party operator.

In addition the Railroad Association suggested that a Road Safety Regulator be urgently established to control private road transport, as had been done with rail.

Discussion
The Chairperson said that many valid points had been raised in the presentation. The presenter had highlighted the advantages of rail and the problem of lack of investment in rail. He also agreed that there should be tougher regulation of roads to encourage the use of rail. The presenter had also argued for the active participation of and access to lines for the private sector.

Mr Farrow said asked if the Association was proposing that the focus be on opportunities in the existing infrastructure off the main line. This would be based on the assumption that the lines could sustain themselves because it was definitely too expensive for the private sector to maintain. The Department had already looked at five such cases. He asked if these had also been considered by the Railroad Association.

Mr Thompson replied that the idea was not new. Overseas branch lines had been run by private individuals, with the value, for instance, in Canada being $1 billion per annum. It would be necessary to level the playing field. If the State were to maintain roads, while private operators had to maintain rail lines, this would not be equitable, and the State must maintain both. It was necessary to do a cost benefit analysis, with all input costs factored in, on all modes of transport in order to determine their final costing.

Mr Thompson referred to the ‘old days’ when the railway station-master was one of the pillars of the community, knowing the business in the area as well as the needs of the individual farmers. That may not be the type of management needed for a national railway but it was needed on branch lines. Branch lines could not be run by people who knew nothing about the local communities.

The Chairperson explained that the Department was considering bringing in the municipalities to promote local economic development, which they recognised would only happen if devolution to the local authorities took place.

Mr Thompson argued that the Association's proposal went beyond what the Chairperson was suggesting. The Association proposed training villagers, which could result in the development of small warehouse projects all along these lines.

The Chairperson asked who would drive these.

Mr Allen Jorgensen, Media and Research Officer, Railroad Association, explained that this would be done by the local people who had knowledge of their communities. This had been proven in the USA on rail roads that had previously been thought to be uneconomical. It was also done successfully in Australia where community services operators would examine the viability of the operator’s business, and assess what it would cost to use different forms of transport.

Ms Ramos argued that branch lines should also be considered from a systems point of view. In Empangeni the timber lines linked up with the coal line. For many years the timber wagons were not properly maintained, which resulted in timber losing its profile on the journey. If incorrect loading resulted in electric overhead lines being damaged this would bring transport to a standstill. Issues must be looked at individually and separate responses developed to each issue.

Mr S Mshudulu (ANC) suggested that it was necessary to have a workshop on the National Freight Logistics Strategy.

Mr Khan agreed with Ms Ramos that this issue should not be oversimplified or dealt with in isolation. He referred to the Douglas-Belmont line which was facing possible closure due to safety considerations. Some lines were worth spending money on while others were simply not viable. There should not be a  romanticised notion of the revitalisation of all branch lines. Sometimes there were too few people still living at the end of these lines to justify running them.

Ms Khunou felt that all stakeholders should meet to determine which commodities could be transported by rail, road or via ports.

Mr G Schneeman (ANC) asked if the Department had done a study to determine which branch lines were viable.

Mr Jorgensen said that this had already been done five years ago, but there was some urgency to moving forward since in the meantime some of the lines were being vandalised.

Mr Khan said that there also needed to be consideration of who would pay for studies and revitalisation. There also needed to be consideration of what the situation would be if, for example, a substantial mineral deposit was found at the end of a line owned by a small operator, and what considerations would apply to buy-back of the land.

Ms Ramos agreed and indicated that this situation had already arisen, at huge cost to the operator.

The Chairperson felt that Mr Khan's statement that competition was not a priority was in fact not reflected in the Department's presentation. The Railroad Association had raised interesting points about how these issues were being dealt with in Canada and Australia. There were no quick solutions, and the Committee needed to undertake some further investigations, perhaps including the Kei Rail,  launched 18 months ago. . What worked for one line might not work for others.


Other Committee business
The Chairperson noted that the Committee would be briefed by the National Ports Authority and the Road Freight Association on 8 August  On 15 August there would be a briefing on the  General Laws Amendment Bill, focusing on governance of entities which fell under the budget of the Committee. The Committee would receive a briefing on Government's airlift strategy on 5 September and a discussion on transport policy issues on 12 September.

The Chairperson referred to the national convention dealing with oil spillages in ports and and said that the Committee should visit the port in Cape Town.

The meeting was adjourned.

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