Passenger Rail Agency of South Africa (PRASA) on implementation of its railway recapitalisation programme

Meeting report

The Chairperson remarked that she had returned from China, where they had had discussions with the Chinese Parliament on how to conduct oversight. The purpose of this meeting was to look at how funds made available to PRASA addressed the challenges that the country faced in terms of its railways.

PRASA Presentation
Mr Tshepo Lucky Montana, Group Chief Executive Officer, Passenger Rail Agency South Africa (PRASA), referred to the National Transport Survey. PRASA had not been able to meet the needs of the country in the past few years. PRASA would be unveiling its recapitalisation plan. This was a bold plan to turn around the railway. The fleet renewal programme presented a major opportunity for the country to create jobs and train new artisans. A lot of lines had been closed however there were a number of lines that were open especially in major metropolitan areas. He went on to outline the challenges of the railways. The railway infrastructure and technology had reached the end of its design lifespan. The system could not take South Africa to the new growth path. PRASA was currently managing the railway system in order to buy time. It was not a problem of mismanagement. The system could no longer cope with the demands of people. In addition there were poor levels of reliability and predictability. The chance of a train not making it to the next station was 100%. The other challenge that they faced was the high cost of maintenance as the cost of maintaining the system could no longer be justified and this did not contribute to an efficient rail system. The other problem was an inability to support economic development and there was a limited access to socio-economic opportunities for rural and urban poor.

The structure of the railway system was no longer viable. It could not generate the necessary resources to recapitalise itself. There were also challenges in terms of distance, low densities of people and moreover most of the people who used the service were low-income earners who earned on average R800-R1200 a month.

PRASA was focusing on a number of mandates in terms of their strategy, namely, to deliver on the legal mandate or operational effectiveness, unlock the value of assets, investing in new infrastructure to improve new capacity and to use modern technology. The total investment in the railways would be over R136 billion. Emphasis was made on replacing rather than refurbishing fleet. As from 2014/15 there would be elements of modern railways such as proper signage, modern stations, new depots, new modern commuter fleet, modern signaling and train control systems and integrated ticketing systems. There would also be high quality services as from 2014 in demonstration corridors such as Naledi-Johannesburg, Pretoria-Johannesburg, Khayelitsha-Cape Town, Umlazi-Durban-Kwa Mhashu, Mdantsane-East London and Bridge City-Durban.

The status quo of the existing rolling stock was presented to the Committee. Investment in new rail stock had been on a declining trend over the past three decades. The last new train sets were purchased in 1986. Currently PRASA had 4 638 coaches for Metrorail operations, 1 223 coaches and 124 locomotives for Shosholoza Meyl. Other trains were driven by technology from the 1950s. The average age of trains were 38 years but some of the fleet was over 50 years old. As such PRASA was running a fleet that was very old.

Metrorail trains failed in all respects such as mobility, security, safety and convenience with the exception of heating. At times in winter they did not switch on the heaters. For people it was a question of life and death. A number of them earned R40 a day. A car would be waiting for them at Park Station and if they missed that car, the car would take the next unemployed person. As such people were really affected by the lack of reliability. A snapshot was given on the feasibility study.

For Metrorail, PRASA required 7 224 new fleet and on average 360 coaches were supposed to be bought per year at a total of R123.5 billion over a 20 year period. PRASA would be able to create 65 000 new jobs and the long-term procurement would allow local capability to evolve above 65% of the value of a coach produced locally. However there was no need to procure high-speed train units because local stations were very close to each other. However for the intercity routes between Cape Town-Mthatha or Johannesburg-East London such high speed trains could be used. There was need to revisit the issue of the speed of trains on the long distance routes.

Capacity and frequency of the network needed to be increased as opposed to only buying new trains. A breakdown was given of the number of Electric Multiple Units that would be allocated per province. Gauteng would have 2 484 vehicles, 1 835 for the Western Cape, 936 for eThekwini, 228 for the Easter Cape and 228 and 1 512 for new corridors in the short term and new corridors in the medium to long term respectively.

Infrastructure interventions were envisaged at an estimated cost of R13.5 billion excluding new corridors. Intervention was needed to permit operation of new rolling stock and to obtain optimal use of it. R19. 5 billion had been allocated to PRASA for infrastructure development. A train control centre was being built in Kraaifontein, Cape Town that would enable PRASA to see all of the trains. This victory was not only for PRASA and the Committee but also for the whole of South Africa. From 2014 PRASA would be running a modern rail system.

In terms of the return on the investment that PRASA would make, for every R1 PRASA spent, it would get an average return of about R2.5. The main features of the procurement were noted such as the contract structure and size, period of rolling stock rollout and flexibility.

The benefits of the fleet renewal were: the introduction of modern railway technologies, enhanced safety, socio-economic benefits such as jobs, broad based empowerment and the creation of a new generation of railway workers. Other benefits would be the revitalization of the rail engineering industry. The new trains would be light as opposed to the current heavy trains so they were also beneficial from an energy point of view. There would also be economic benefits.

The steps that PRASA would take included the appointment of a Transaction Advisor for the programme to broadly offer advice in areas such as technology, infrastructure improvement, financing as well as legal and commercial aspects. PRASA was also finalising financial arrangements with the National Treasury. A market engagement was planned with BBBEE and with rolling stock manufacturers and financiers. The procurement documentation would also be finalised in preparation for the March RPF process. In conclusion a brief time line was given on the rolling stock programme. The budget approval was supposed to be concluded by the first quarter of 2012 and procurement preparation was supposed to be done between September 2011 to February 2012. Contract negotiations were projected to happen between January and April 2013 and the first test vehicles were supposed to be received early in 2015.

PRASA received applause from most of the Committee Members.

Discussion
The Chairperson said that the presentation was clear and it linked the strategy to the transformation agenda. It was possible for PRASA to operate at the same level as developed countries. One needed to determine how the African continent was supposed to benefit from South Africa. It was not supposed to be difficult for a person who lived in Zimbabwe to travel to South Africa within a short period of time. The transformation agenda was supposed to be led by the people who were charged with the responsibility to do so.

Mr S Farrow (DA) thanked PRASA for the excitement that they had given the Committee. He asked how PRASA intended to fix the problems that they currently faced such as the declining fare income and passenger trips, the R1 billion loss and R9.3 million in wasteful and fruitless expenditure. There was a need to reverse the problems that PRASA faced and win back the support of lost customers. He asked what was PRASA going to do to remarket and re-brand Metro Rail and Shosholoza Meyl. In addition, Transnet and PRASA were supposed to solve their issues and decide how best it was going to be for the country. Furthermore, investors wanted to know whether there was a sense of security in that the railway line that was going to be built would be a long-term project as opposed to short-term. There was a need to increase the local content. The operations were supposed to be home grown and home run and there was no need to take people from outside the country to run the industry. There was no need to look for technology in foreign countries like China because technology could be found in other countries. He suggested there was no need to establish another big factory because South Africa already had the infrastructure. He asked how PRASA intended to address the issue of rural people trying to get to urban areas.

The Chairperson highlighted that the Committee was dealing with the strategy and model as opposed to the issue of the technology. There was need to determine the strategy and model first and thereafter the issue of technology could be discussed. There was no commitment whatsoever to acquire technology from specific countries. Furthermore when the Committee invited Departments, the Committee would submit a list of issues that were supposed to be dealt with. PRASA was not to be expected to respond to issues that had not been included in the purpose of the meeting. In addition, the issues of marketing and winning back the customers were issues at a project level. They were operational issues that related to projects. There was no need to require the CEO to respond to a relationship that was not of his or the Departments own making. The relationship between PRASA and Transnet was established by Parliament, hence the Committee was supposed to address the issue. The problems between PRASA and Transnet were at a strategic level because the relationship between the two was an institutional arrangement.

Mr De Freitas (DA) thanked PRASA for the presentation. Developed countries were developed because of rail. As such there was need to integrate with South Africa's neighbours and the rest of the African continent. He asked if PRASA had considered the fact that there was supposed to be a new mindset, with the coming of the new equipment, in order to prevent disappointment from the current staff. He asked in which part of the country were the new generation coaches that were acquired in the 1980s. PRASA was asked whether they had considered Public-Private Partnerships (PPPs) and other partnerships in order to finance some of the projects. The Member asked what was meant by the terms "short term" and "long term" in respect of establishing new corridors. Furthermore, he asked from which source had PRASA compiled its information on the economic valuation on slide 27, why there was a limited number of suppliers, whether PRASA had looked at the existing rail infrastructure and whether the transaction advisor was a single person or a panel of experts.

Mr Montana responded that on the issue local capacity there were seven companies that were contracted and working for PRASA such as Transnet Rail Engineering, Union Carriage, three in Cape Town such as Commuter Transport Engineering (CTE) and GOLDEX, Rolling Stock Repair Services in East London, and NALEDI. The companies had enormous capacity. Furthermore there were a lot of plants. As such there was need to ensure that PRASA grew the plants and developed them. The companies were doing 190 coaches a year which was a large shortfall from the 700 coaches a year that PRASA targeted to refurbish. PRASA gave the companies time to do their work and PRASA did not apply penalties because the objective was to revive the rail industry. If PRASA had looked at the issue contractually they would have lost sight of the bigger picture that was to revive the industry. Over R 7 billion had been pumped into the projects over the past two years to ensure that the industry worked. PRASA had reached an agreement with Transnet that PRASA would drive one of Transnet's plant that serviced long distance trains and this would enable about 600 people to be employed. The R19.5 billion that had been allocated for the next three years was a reflection that PRASA was helping companies to do their work. PRASA had not put profit in front of them but they had focused on making sure that the industry worked. The contracts that PRASA had with the companies were not only about refurbishment but also about technical support. The demand for rail services in urban and rural areas was so huge but the supply was not able to meet the demand. However PRASA intended to address this issue.

On the income side, he said that the passenger railway operations would never make any profit and they had accepted that. PRASA was generating money through businesses that sold goods on their premises. Because people lived far away from cities PRASA would not be placing them in cities as such. The corridor approach was very important in order to create economic opportunities for people living along the corridor. He clarified that Transnet did not own 100% of the rail infrastructure. All commuter rail assets were under the control of PRASA. As such PRASA owned about 27% of the rail network in the urban-metropolitan areas. Transnet owned most of the freight rail on long distance routes. There were anomalies in the separation of Transnet and PRASA assets in 1989. However Transnet and PRASA had had good discussions and they had ironed out some of the issues.

He highlighted that there would be security on people's investments and government would provide certainty on this. In terms of increasing local content, the most that PRASA could do was about 65-70% and nothing beyond that as opposed to the 75-80% that was being advocated for by the industry. PRASA agreed that Shosholoza was not performing well. The on time performance was only 38%, the reliability of the service was very bad. However PRASA said that the service would be re-launched in 2012. Three issues needed to be addressed by PRASA with regards to Shosholoza before its re-launch. Transnet had dedicated a team to support PRASA in order to address the Shosholoza issue. The three issues were accessibility that was supposed to be prioritised, high speeds of about 160km/h on some of the long corridors and recapitalising locomotives by leasing them in the short term. In the short term PRASA was trying to address the availability of strengths. A 90-day programme had been initiated in order to address the availability of spares or components. For the first time in KZN, PRASA was running their trains with spare sets and there were no cancellations.

Mr Montana said that the issue of transforming employees was an important one. There were a number of employees who he had personally seen treating customers with no respect. Some of the PRASA regional offices such as in Gauteng were providing incentives for employees. Consequently some of the regions were exceeding their weekly and monthly targets because of the employee incentives. Engineers were excited about the new programme because they wanted to be part and parcel of history and advance their careers.

The trains bought in the 1980s were all said to be in Cape Town. There were eight trains with 12 coaches each and they operated from Khayelitsha and Philippi to Cape Town. The newly refurbished trains were spread all over KwaZulu Natal, Cape Town and Gauteng. PRASA was not limiting suppliers to only two. PRASA was going to go out on a request for proposals and issue a tender. About 12 companies were expected to bid for the tender. About four companies would be in China, four in Europe and two in Japan. The way PRASA was going to deal with the procurement process was very important. The question was whether they were going to take one tender at once or whether they were going to separate some of the components. PRASA had looked at the existing infrastructure such as the Haamanskraal line that they would begin to use in 2012. In addition R100 million had been put aside for the refurbishment of some of the Eastern Cape lines. A feasibility study had been done in order to revitalize the Botshabelo line in Free State. There was a lot of revitalization of the existing lines in order to support what PRASA had. However not all of the lines would be opened because some of the lines were uneconomical since they were built to support individual farmers.

The economic evaluation figures came from a feasibility study that was conducted by PRASA, National Treasury and the Department of Transport. The actual document would be posted on PRASA's website soon. On the financing side one of the issues that the feasibility study looked at was the private sector and it had concluded that it would be more expensive to finance the project privately. The term “short term” described a period between 12 and 36 months. A transaction advisor was first appointed through a competitive process to do a feasibility study. They came from a consortium of companies that brought in people with special skills. The transaction advisors would be doing three things for PRASA: help draft the specifications and the request for proposals, help in evaluating and offering PRASA professional advice and help to finalise the contracts and documentation. PRASA was not going to dictate the technology that was going to be used upfront. It was up to the companies to be innovative. If PRASA did its maintenance right and sequenced its strategies correctly there would be short-term benefits, whilst the long-term recapitalisation programme was being rolled out.

Mr Piet Sebola, General Manager, PRASA, responded that private finances were considered and the results were very clear in terms of the affordability and PRASA's ability to raise debt in the market. Realistically PRASA would have been able to raise very little in the market to finance the deal. In addition the deal was said to be extremely expensive from the private sector point of view and the private sector was not willing to take on the risks that were involved. A first generation economic impact assessment was conducted and a number of sources had been used such as StatsSA. The results would be released soon and this would enable the Committee to see how PRASA had arrived at the figures.

Mr J de Villiers, Department of Transport, responded that they followed Regulation 16 of the Public Finance Management Act that related to the life cycle of a project registered as a Public-Private Partnership. In addition there was also a steering committee that consisted of National Treasury, Department of Public Enterprises, Department of Trade and Industry, Department of Transport and the PPP Unit. The Minister was going to release the feasibility study document to Cabinet on the 3 November.

Mr Montana added that if a company failed to borrow on the strength of the balance sheet against their assets, the premium would be high if the company wanted to transfer the risks to the private sector.

Mr L Suka (ANC) said that the presentation by the CEO was a reflection of a bold plan. Mr Montana had not minced his words. PRASA and the Department of Transport were to implement the plan with speed. The Committee would embrace the three-year plan. The Committee needed to monitor the progress of the project and this would enable any problems to be raised in a timely way. There was a need to market the plan by using community radio stations so as to bring hope to people. In addition other departments were involved in the implementation of the plan and the country should know about PRASA’s plans.

Ms N Ngele (ANC) said there was no need for PRASA to market itself because people like her were willing to go back to using trains because of the modern technology that PRASA was offering. She asked whether the 65 000 jobs that had been mentioned, had already been created or whether they were still going to be created and whether it was possible that PRASA would be able to achieve its targets for 2014.

Ms M Mdaka (ANC) said that the presentation was nice. She liked the marketing plan because it took the Department to a higher level.

The Chairperson said that addressing social problems did not mean that PRASA was supposed to address the social problems that people faced at home. Women were victims of crimes such as sexual abuse in full view of other people especially when trains were full. In addition some people were paralyzed because they were thrown off moving trains. Countries at the international relations level supported one another. In the situation of South Africa there were scholarships for skills development pledged by the government of the People's Republic of China. In 2010 South Africa was made aware that they had under utilized the money granted to them because out of the R200 million pledged by China, South Africa had only used R30 million. She asked whether PRASA envisaged any skills shortages related to railway transportation and that would require South Africa to take advantage of opportunities being offered such as the Chinese one. She stressed that South Africa was not supposed to buy technology from other countries but they were supposed to develop their own technology.

Mr Montana responded that he would be traveling to China to make a follow up on the issue of the pledge that had been granted to South Africa. He had once visited some facilities in China where he saw how they had managed to close the gap in high-speed technology. A number of Chinese engineers were tasked with the role of developing Chinese technology. Ten years ago a trip from Beijing to Shanghai was an overnight trip but at present the trip took only four hours and this was the result of the Chinese developing their own technology. There were universities in China dedicated to railway technology and it was becoming an international trend. PRASA was running small schools which would enable engineering graduates from universities to become railway engineers as opposed to being just engineers in general. Artisans and drivers were also trained in this way. In the future, PRASA would recruit people straight from high school and give them bursaries as opposed to recruiting them after university. Furthermore, there was a,need for PRASA and Transnet to fund an internal technical school within one of the universities dedicated to improving railway technology. PRASA had a good relationship with two universities such as the University of Stellenbosch that was doing a good job in researching maintenance methods at their school of engineering. PRASA had not yet identified the people who were going to run the new programme but they were working on it. PRASA would be creating 5 000 jobs this year and they were separate from the 65 000 jobs which were related to the new rolling stock. He invited the Committee to do an oversight visit to see whether the issues that PRASA had committed itself to where happening. He was confident that they would achieve the 2014 targets because some of the projects such as signaling had already commenced. The targets were realistic and all that was needed was a dedicated team to achieve them.

The Chairperson said that the plan by PRASA addressed all the matters that the Committee had been concerned about.

The meeting was adjourned.