Economic Regulation of Transport Bill: public hearings day 3

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Transport

23 October 2020
Chairperson: Mr M Zwane (ANC)
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Meeting Summary

Video: Portfolio Committee on Transport, (National Assembly) 23 Oct 2020

The Committee received submissions on the Economic Regulation of Transport Bill from the Railroad Association, the Organisation for Undoing Tax Abuse, the Regulating Committee for the Airports Company and Air Traffic and Navigation Services Company, and the South African Association of Ship Operators and Agents. The meeting took place on a virtual platform.

The Railroad Association called for clarity on the division of regulating responsibilities between the proposed Regulator and the Competition Commission. The Regulator should adapt the Competition Commission’s methods and consult with regulated entities when setting fees. Private operators experienced excessive delays using rail, unpredictable fees (one company had been issued an excessive fee and then been given a 60 percent discount when they appealed) and unfair competition from Transnet. This was leading them to move their operations to road. The ERT Bill had the potential to make rail transport more competitive and bring the grain and timber industries back to rail.

Committee Members asked about the ideal system of consultation when setting fees, lamented the fact that so much transport had shifted to road, and inquired about the participation of local and historically disadvantaged businesses in the rail parts industry.

The Organisation for Undoing Tax Abuse said that the monopolisation of transport had created the necessity of the Bill. It had the potential to reduce the waste of taxpayers’ money that arose because of these monopolies and mismanagement and corruption associated with them. The Regulator should consult with the regulated entities in its application, develop a good relationship with law enforcement agencies and remain independent of the Department of Transport. Its price control power should not be limited to 10 percent of an entity’s annual turnover.

Committee Members enquired about the organisation’s views on the unbundling of Metrorail from Prasa, the possible structures of transparency and accountability of the Regulator, and its suggestions in place of the 10 percent turnover limit on price controls.

The Regulating Committee for the Airports Company and Air Traffic and Navigation Services Company was concerned about ensuring a smooth transition to the new Regulator and recommended that certain key sections of the Bill be deferred for five years. The conditions under which deviations from controlled prices would be permitted and the provisions for consultation with the aviation industry on price controls should be clarified.

The Committee asked for clarity on whether the Regulating Committee expected the aviation industry to be covered by the Bill and its specific fears related to the transition, and asked for suggestions on the consultation process for setting fees.

The South African Association of Ship Operators and Agents supported the Bill as a whole but did not support its application to the private sector, which it said was already adequately regulated through the Competition Commission. In its view, the proper targets of the Bill were state-sanctioned monopolies such as Transnet. It suggested that, given the complexity of the shipping industry, an expert should be seconded to assist the committee.

The Committee inquired about the Association’s views on the role of the Bill with regard to transformation and the application of the Bill to the private sector, questioned why it already seemed to doubt the capacity of the Regulator, and asked for suggestions about the tariff-setting consultation process.

Meeting report

The Chairperson said that Transnet and Sasol would be unable to present and the Committee would have to arrange a different time to hear from them. He accepted apologies from two Members. He invited the Railroad Association (RRA) to deliver their presentation.

RRA presentation

Ms Mesela Nhlapo, Chief Executive Officer (CEO), RRA, explained that RRA represented original equipment manufacturers (OEMs), rail operators and component manufacturers. RRA was broadly in support of the Economic Regulation of Transport (ERT) Bill. Its main concern was that the development of the National Transport Policy and the National Rail Policy were lagging behind the ERT Bill. Ideally, these should all be finalised together to ensure a coherent policy direction. The funding of the Regulator should be done in a way that did not prevent small and medium sized operators from participating in the market. The Regulator needed to be positioned in such a way that its functions did not overlap with those of the Competition Commission (CC). There needed to be clarity on the nature of the complaints that would be handled by each of these two bodies. Any regulated entity should be permitted to approach the Regulator to conduct a market inquiry and the entity should not be responsible for the cost of the inquiry if it was in the public interest. The Regulator should adapt the pricing methodologies of the CC and also consult with regulated entities when setting fees. The Bill should also provide for the participation of industry associations such as the RRA. A rail task team should be set up to promote the expansion of rail on the African continent. A survey of RRA members showed that private operators experienced excessive delays using rail, unpredictable fees (one company had been issued an excessive fee and then been given a 60 percent discount when they appealed) and unfair competition from Transnet. This was leading them to move their operations to road.

Ms Nhlapo discussed the potential impact of the ERT Bill on the economy as a whole. The strategy of placing the responsibility for transformation on state-owned enterprises (SOEs) and big contractors had not provided many opportunities. One problem was that big, capital-intensive contracts offered by the likes of Transnet were “as-and-when” contracts, which gave manufacturers no guarantees that their services would actually be required. More private sector competition in the rail sector would provide more business for manufacturers. The RRA had a good relationship with the Department of Trade, Industry and Competition (DTIC) and advocated ratification of the Luxembourg Rail Protocol for the rail sector. The ERT Bill had the potential to make rail transport more competitive and bring the grain and timber industries back from road to rail.

Discussion

Mr C Hunsinger (DA) asked Ms Nhlapo to expand on the role the Regulator might play in transformation and on the role it might play as an accessible adjudicator on matters related to state rail assets. What would be the ideal system of consultation with operators on the setting of fees? It was sad that so much freight had moved from rail to road. The current situation was just a reflection of the relative efficiency and effectiveness of rail and road. He asked if and how passenger and commuter rail could benefit from the intervention of the Regulator. Would commuter services also benefit from the involvement of the private sector?

Mr K Sithole (IFP) asked for clarity on the RRA’s general concerns about the process of the Bill and its general thinking about the relationship between the Regulator and the CC.

Mr P Mey (FF+) said that the country needed job creation. This would be achieved through the activities of big business. Small businesses should merge into bigger businesses. It was not the government’s responsibility to protect small businesses but to see the economy grow. Big businesses needed stability. He agreed on the need for a return to rail and hoped that one day he would be able to take a train from Cape Town to Egypt.

Ms M Ramadwa (ANC) asked how the RRA envisaged the composition of the proposed rail task team. She worried that ratifying the Luxembourg Rail Protocol would entail some form of economic colonisation. If one’s assets were being used in another country and one didn’t have a say on the legislation, didn’t that amount to a form of colonisation?

Mr T Mabhena (DA) asked how often situations like the one in which the operator had received a 60 percent discount arose. Had any reasons for the initial fee been given? He observed that the relationship of the Regulator and the CC had come up repeatedly and it was clearly something that the Committee would have to grapple with.

Mr L McDonald (ANC) said that the RRA had highlighted the serious problem of the monopoly of Transnet and the Passenger Rail Agency of South Africa (Prasa). He agreed that the Bill should look at rail freight in particular. He asked what percentage of railroad spares were provided by local companies and how many of these companies were black-owned.

Ms Nhlapo explained that the RRA was concerned about a complete transformation of the rail sector. The fact that the market was not open impeded transformation by preventing new businesses from entering it, and the Regulator could support transformation in this way. Rail was also cheaper and more environmentally friendly than road. In the current structure, fees were set in order to fund the Regulator, rather than being fair. The companies that were regulated and paying fees ought to have a say in determining reasonable fees, similar to the situation in electricity price regulation, since they would be impacted by the fees and the activities of the Regulator. A level of cooperation was required. The losses in the grain market were not confined to South Africa, but export activities had also moved to road and been taken over by other countries. The South African rail sector had a lot of potential. There were retired engineers who were eager to contribute. Perhaps a rail academy could be set up? Passenger rail in almost all countries was provided by the state. There might be something that could be learned from the success of the Gautrain public-private partnership and the service-level agreements in place with passenger rail operators in many European countries. There was a lot of overlap between the functions of the CC and the functions proposed for the Regulator, such as carrying out detailed market studies. She explained that the establishment of a Regulator was provided for in the draft National Rail Policy and perhaps policy should be streamlined. It was important for the private sector to work with the government. Job creation started with job retention, which was made difficult by “as-and-when” contracts. Furthermore, while big business was important, small and medium-sized businesses were the engine of innovation and should not be overlooked.

The task team envisaged by RRA would include the Department of Transport (DoT), the Department of Public Enterprises (DPE) and National Treasury (NT) as well as representatives from the private sector. The Luxembourg Rail Protocol was a legal instrument that was already being used in the aviation sector. It would give Transnet a legal guarantee to retrieve locomotives or rolling stock leased in other countries, and it would also reduce financing costs. To overcome the effects of colonisation in the African rail network, its own continental standards would have to be developed, incorporating applicable ideas from other regions. Companies generally did not ask questions when granted fee discounts and no reasons had been given in the particular case mentioned. She agreed that access to the rail network was largely monopolistic. The local content policy had some defects in implementation and there was not much local content verification. Prasa had not renewed its contract with the South African Bureau of Standards and it was clear that there was work to be done to ensure its participation in localisation efforts. In many cases, contracts were confidential and there had been communication problems with Chinese contractors, all of which hindered local content verification. Bombardier and General Electric did provide good assistance to local suppliers and the government was also supportive. Implementation of policy remained a challenge but the RRA wanted to cooperate.

Organisation for Undoing Tax Abuse (OUTA) presentation

Mr Matt Johnston, Parliamentary Engagement Manager, OUTA, said that OUTA welcomed the ERT Bill in the current economic context. There was a need to look at the monopolisation of transport that had created the necessity of the Bill. The effect of monopolisation was that procurement processes had been rigged in favour of private interests. Some of the transport-related matters that OUTA was concerned about were the transparency of toll road concession agreements issued by the South African National Roads Agency Ltd (SANRAL), the mismanagement of South African Airways (SAA), irregular procurement at Transnet and corruption at Prasa. The CC had recommended the unbundling of Metrorail from Prasa because it had been unable to provide a satisfactory level of service, leading to the torching of locomotives in city centres. With some changes, the Bill had the potential to reduce waste of taxpayers’ money through bailouts.

OUTA made comments on specific sections of the Bill. It recommended that benchmarks of regulated prices should be published annually. Section 4(2) should be changed to require consultation with regulated entities, not just the Minister and the Regulator, when applying the Bill. Sections 11(5), 14(4) and 15 were key, and OUTA supported the formalisation of the taxi industry. The Regulator should establish a good relationship with law enforcement agencies to combat the kind of toxic competition that was found at certain Gautrain stations. It was not clear why the power of the Regulator to impose price controls should be limited to 10 percent of a regulated entity’s annual turnover. The Regulator should be completely independent of the DoT from the outset as a check on ministerial power. OUTA did think it was fair that a regulated entity should bear the cost of research that it requested the Regulator to do. OUTA also requested clarity on how SANRAL would be regulated, given the heavy reliance of South Africans on road transport.

Discussion

Mr L Mangcu (ANC) asked OUTA for its view on Parliament’s consultation process on the ERT Bill, as very little input had been received from the users of public transport or the drivers who worked for e-hailing services. He also asked OUTA to expand on its views on access to information and the CC ruling on the unbundling of Metrorail from Prasa.

Mr Hunsinger asked if, given that the ERT Bill would in status be superior to any legislation that contradicted it, OUTA had any thoughts on how the structures of transparency and accountability for the Regulator might differ from the normal structures, including boards of directors and parliamentary oversight, that applied to SOEs.

Mr McDonald said that it was bold to attribute the torching of Metrorail trains to dissatisfaction with service levels. This didn’t account for the fact that not everyone wanted the trains to function, and it was possible that it was simply criminality carried out or sponsored by competing services. He also asked how OUTA expected the Gauteng Freeway Improvement Project (GFIP) to be funded if e-tolls were not charged.

Mr Sithole asked what OUTA suggested in place of a limit on price controls of 10 percent of annual turnover.

Mr Mey supported calls for Metrorail to be run by municipalities but asked what OUTA’s reasons were.

Mr Johnston said that OUTA was not entirely satisfied with the public participation process. Not enough was done to raise awareness of opportunities for public participation. For example, calls for comments might be published in the corner of a newspaper that most people did not read. The actual impact of public input was also not clear. It often happened that Bills were adopted without any of the changes that the public had asked for. OUTA was concerned that while the Regulator would have the power to demand information from regulated entities, the public did not. For example, toll road concessionaires refused to make the terms of their agreements with SANRAL available to the public. The recommended unbundling of Metrorail from Prasa was indicative of Prasa’s stranglehold over passenger rail services. There was no problem in principle with a centralised system but the Committee should consider the significance of the unbundling for the Bill.

OUTA had considered accountability structures for the Regulator. The Dullah Omar Foundation had held workshops with civil society and suggested overarching state-owned enterprises legislation that would change the way the public was represented at board level. This was very similar to the Government Shareholder Management Bill which had never materialised. He agreed that competitors could be responsible for the vandalism of trains, and this was a reason why it was important that the Regulator work closely with law enforcement. OUTA’s position was that the GFIP was already being paid for through taxes. The limit on price controls should be higher than 10 percent and contextually determined. If an entity had an absolute monopoly in a sector, they could charge any price, and a far higher percentage reduction could be justifiable. OUTA did not have an organisational position on the unbundling of Metrorail from Prasa. It was just something that the CC had recommended and it might well happen. It was not clear that management of passenger rail would necessarily be much better if it was done by municipalities.

Regulating Committee for the Airports Company of South Africa (ACSA) and Air Traffic and Navigation Services (ATNS) Company presentation

Ms Kenosi Selane, Chairperson, Regulating Committee for ACSA and ATNS, asked for the effect of Section 2(6) of the ERT Bill, which would delete Sections 5(e) and (f), 11, 12(2) to (12) and 14(2) to (4) of the Airports Company Act, to be delayed by five years, in order to provide for a smooth transition of regulatory activities from the Regulating Committee to the Regulator. These sections were key to the economic regulation of the aviation industry. For the same reason, she asked for Section 3(5), which would delete Sections 5(2)(e) and (f), 11, 11(2) to (12), and 13(2) to (4) of the Air Traffic and Navigation Services Act, to be deferred. The conditions under which deviations from controlled prices would be permitted and the provisions for consultation with the aviation industry on price controls should be clarified. Some projects in the aviation industry were extremely capital-intensive. The Bill should clearly state the period of validity of the tariffs set by the Regulator, and a one-year period would be impractically short.

Discussion

Mr Mangcu said that the presentation was difficult to follow and he was disappointed that it only contained complaints. He asked Ms Selane to clarify if the Regulating Committee expected the aviation industry to be excluded from the ERT Bill. He also asked her to clarify how the particular nature of procurement for capital projects in the aviation industry related to consultation in the context of the ERT Bill.

Mr Hunsinger asked Ms Selane to expand on any fears about future conflicts between the functions of the Regulating Committee and the Regulator. He asked about the Regulating Committee’s process of consultation with the industry on tariffs. Which stakeholders were included and how were objections and appeals handled?

Mr McDonald agreed that fees such as those for landing, navigation and parking of aircraft should not be changed without consultation with international airlines, as such changes could have a negative impact on passenger traffic to South Africa and hence on the fiscus. What did she suggest?

Ms Selane apologised for the lack of a slide presentation. It was her first time presenting to Parliament and she was unaware of the way things were normally run. The Regulating Committee was not complaining about the Bill and didn’t fear it. It was simply sharing its experience as the incumbent responsible for regulation of the aviation industry to ensure that the Bill was effective. She explained that ACSA and ATNS did very broad consultations with the airlines when planning capital expenditure. The users played a key role in determining whether a new runway or increased security, for example, were necessary. The Regulating Committee was involved in the consultation but not the procurement, which was carried out in accordance with the Public Finance Management Act (PFMA) and other relevant legislation. When determining fees and tariffs, they did very detailed consultations with airlines and they were working on improving consultation with passengers. The general public, as well as ACSA and ATNS, could bring objections and complaints to the Regulating Committee. ACSA and ATNS could not be allowed to change tariffs as and when they wanted to, and needed to be regulated in such a way that they were profitable while at the same time their services were affordable for consumers. She said that the current legislation did not provide for deviations from price controls, and the ERT Bill should provide guidelines for any deviations.

South African Association of Ship Operators and Agents (SAASOA) presentation

SAASOA was represented by Mr Tony Norton, an executive in the shipping, ports and logistics department of the law firm, ENSafrica. He said that SAASOA supported the ERT Bill. The logistics sector experienced some bottlenecks and there was currently no regulation of Transnet’s port terminals or freight rail. These monopolies could not be effectively regulated by the CC. SAASOA suggested that Section 4(1) could be clarified. Did it mean that the ERT Bill would apply to the National Ports Authority, for example, which was currently regulated by the Ports Regulator? SAASOA would support this but the Bill should name the entities it would apply to. The Bill should also apply to the South African Maritime Safety Authority (SAMTA). SAASOA did not support the idea that the Bill should apply to the private sector, as it was already adequately regulated through the CC. In its view, the proper targets of the Bill were state-sanctioned monopolies such as Transnet. Whether it was intentional that the definition of “facility” in the Bill excluded terminals, depots and loading appliances should be clarified. As the shipping industry was multifaceted and complex, an industry expert should be seconded to assist the CEO of the Board of the Regulator.

Discussion

Mr Mangcu asked about SAASOA’s views on transformation. Could and should the ERT Bill contribute to transformation? What changes to Section 4(1) did SAASOA suggest, and what specific concerns did it have regarding the regulation of private entities by the Minister of Transport? Was the position of SAASOA that the government should leave the private sector alone? In calling for an industry expert to advise the Regulator, SAASOA was already casting aspersions on its capacity.

Mr Hunsinger asked for specific examples of bottlenecks in the logistics sector and how the Regulator might alleviate them. The intention of the Bill was to regulate SOEs in a way that was similar to the way in which the CC regulated the private sector. There were currently tribunals associated with the various regulators of the individual parts of the logistics sector. What was the experience of SAASOA members with these tribunals, and what could the new Regulator do differently? Did SAASOA think that regulation, and tariff-setting in particular, should be a consultative process, as opposed to complaints and appeals being the only recourse for regulated entities?

Mr McDonald asked what percentage of SAASOA’s members were from historically disadvantaged communities.

Mr Norton said that the shipping industry was committed to transformation. The National Ports Authority was able to ensure that transformation took place in the industry through equity requirements for registration. There were certainly black-owned shipping and shipping agent businesses that were SAASOA members. SAASOA assumed that the intention of Section 4(1) was for entities currently regulated by the Minister of Transport to automatically be regulated in terms of the ERT Bill, but the wording did not quite capture this intention. SAASOA did not mean to cast aspersions on the capacity of the Regulator. However, different economic sectors had unique structures and specialised terminologies that were difficult for non-experts to understand and shipping was no exception. He confirmed that the view of SASSOA was that the private sector was adequately covered by the CC, which could easily deal with competition issues there but could not easily deal with state-sanctioned monopolies. If the Regulator developed the right expertise, however, there were potential benefits to having a single Regulator for the entire logistics sector.

The Chairperson thanked the presenters for their contributions.

The meeting was adjourned.

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