Enhancing South Africa’s export

competitiveness: Reform of the port and rail network*

* Duncan Pieterse, Andre Steenkamp, Martin Odendaal and Tom Farole

National Treasury | March 2016

Export performance is lagging behind peers

2

Commodity prices have masked export weakness Change in share of world exports 2011-2014

• Commodity price boom helped mask weak export competitiveness

• Most commodity exporters achieved nominal growth above 15%, while SA grew at 8%

• 15% decline in share of world exports since 2011

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Minerals - value Minerals - volume

Metal mfr - value Metal mfr - volume

Export sector highly concentrated in nature

3

Share of export value accounted for by top exporters Growth contribution by firm size and margins of exports

0.0

5.0

10.0

15.0

20.0

25.0

Top 1%- entry Bottom 80% - entry Top 1%- entry Bottom 80% - entry

Products Markets

Average growth contribution from new product and market entry: top 1% and bottom 80%

2005/06 - 2007/08 2009/10 - 2011/12

0102030405060708090

100

Brazil Chile Colombia Turkey South Africa

Perc

ent

top 1% top 5%

• Top 5% of exporters account for 90% of total exports (minerals and metals)

• Post-crisis, super exporters have achieved lowest growth

• Smaller exporters expanding both products and markets, particularly regionally

Addressing transport is critical to South Africa’s

export success

4

Cost to export a 20ft container (US$), 2015

Most problematic factors for exporting

• Global geography and inland concentration

• Reducing export costs / inland travel times

can dramatically boost exports

• Transnet (TNPA, TPT, TFR) and road

freight are crucial determinants

Cost breakdown for orange exporter in Western Cape

Transport intensity: Citrus exporter

5

R 7,840

R -1 507

R -1 455

R -4 217

R 661R 330

R 2 935

R 952

R 0

R 1,000

R 2,000

R 3,000

R 4,000

R 5,000

R 6,000

R 7,000

R 8,000

Export value (non-USA market)

Production cost Packaging cost Logistics Profit

Packhouse to port (SA)

Distribution costs (shipping + insurance)

Port costs

Access Constraints

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Capacity mismatch for heavy haul exports

• Mismatch between rail and port capacity for coal (coalex and RBCT), iron ore (orex and

Port of Saldanha Bay) and manganese

• Directly constrains the bulk mining sector and commodity exporters

Access constraints for smaller, traditional exporters

• Capacity constraints has forced smaller coal exporters to use smaller ports (Maputo) at

higher cost

Economics of rail and market failures restrict access to most non-commodity exporters

• Fragmented volume base of non-traditional exporters at odds with economics of rail

• Lack of information and coordination challenges of freight volumes across many firms and

sectors prevents the freight market working efficiently

How does one benefit opportunistically from the commodity price upswings or exchange rate

depreciation in an access constrained environment? (flat cost curve or excess capacity)

Pricing Constraints – rail

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• Bulk rail prices are internationally

competitive, but general freight is not

• Tariffs for iron ore lower than US, but GFB

tariffs are 4-7 times higher

• Rail prices are broadly competitive with

road

• This can vary significantly with commodity,

route, and type of service, in terms of length

and frequency.

• Pricing for Transnet’s unscheduled services

are substantially less competitive

Cost advantage of rail- over road-based supply chain (Rand/TEU)

Table 1: Company A’s rail versus road price comparison

Product Rail Road Origin

Coal R88.15/tonne R68.00/tonne Delmas, Mpumalanga

Lime/Dolomite R608.97/tonne R256.23/tonne Lime Acres, Northern Cape

Iron Ore R253.06/tonne R229.66/tonne Beeshoek, Postmasburg

Source: Industry interviews

Pricing Constraints - ports

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• Port costs are extremely high by international

standards (despite significant reductions)

• Cargo owners are subsidizing vessel owners

and tenants (60% to 35% over ten years)

• Import vs export cargo dues

• Container and automotive port charges much

higher than bulk commodities

• Required revenue remains the same (role of

revisiting regulatory asset base)

Total port costs including terminal handling charges for containers

Reliability constraints

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Reliability concerns can trump price advantages of rail

• Competence and quality of rail services are poorer than Australia, Canada, India, China,

Germany, the United States and Russia

• Operation of the (unregulated) intermodal terminals, port and inland, is the main problem

Congestion at the major ports

• Durban: average turnaround time is 3x higher that other large ports, crane performance is

well below international standards and truck turnaround is above the target of 35 minutes

Locomotive type

Corridor / Flow Key commodities Efficiency improvements

19E Export coal heavy haul line Coal Locomotive cycle time reduced from 58 to 48 hours

15E Export iron ore heavy haul line Iron ore Improved number of locomotives per 342 wagon train from 9 to 6 locomotives per train with better energy usage

43D Phalaborwa – Richards bay Magnetite, rock and phosphate

Wagon cycle time reduced from 84 to 56 hours

20E Hotazel – Port Elizabeth Manganese Wagon cycle time reduced from 90 to 65 hours

Efficiencies introduced since the start of the locomotive modernisation programme

Interface constraints

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Lack of effective intermodal operations

• South Africa’s dense corridors are ideal for intermodal transport – depends on rail service,

equipment (e.g. ship to shore cranes), terminals, last kilometre

• The capacity and operational constraint on the general freight rail corridors is not the

mainline track infrastructure but at the end terminals – port and inland container depots and

last kilometre

Barriers to regional rail

• Lack of capital investment and coordination issues leads to poor rail reliability

• Significant improvements have taken place over the past 2 to 3 years, with transit times

becoming more predictable and costs declining (JOC in Bulawayo)

Chronic underinvestment in the ports and rail network

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Recent history of underinvestment

• Deferred spending on maintenance and replacement of the rolling stock and signaling

equipment – decline in reliability and rapid loss of market share

Emphasis on maintenance versus expansion

• Assets are being refurbished and not replaced with higher performing ones – contributes to

the long-term decline in competitiveness of the rail system

• “Underinvestment” in rail and underinvestment in ports

Ambitious strategy to address underinvestment

• Market demand strategy (MDS) introduced in 2012

• Around R200 billion earmarked for rail infrastructure over 7-year period

Inadequate regulation for rail and ports

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Inadequate regulatory framework

• Fragmented approach to economic regulation of the transport sector

• Freight rail regulatory regime lacks most of the features of economies that achieve strong

rail performance

• The DoT aims to improve the regulation by establishing the STER

Failure to force transparency in cross-subsidisation

• Transnet’s centralised structure allows it to move funds between operating divisions

• Two types of cross subsidisation that takes place within Transnet

1. cross-subsidy within a vertically integrated entity – TFR heavy haul business and

general freight business (costs common to both?)

2. within a horizontally integrated entity – profitable TNPA and Pipelines divisions

and the rest of Transnet

• Regulatory weaknesses contribute to the persistence of opaque cross-subsidisation

Competitive road freight, but privileged regulatory

environment

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Road currently dominates the movement of domestic dry bulk freight

High levels of competition and a privileged regulatory environment

• Increased supply from new trucking companies caused road freight tariffs to fall

• Concern that the level of competition in the trucking industry is excessive and destructive

• High gross-vehicle-mass (GVM) limits (56 vs 40-44 in EU and 36 in US); overloading and

lack of enforcement; internalization of externality effects; and inadequate road infrastructure

charging erodes rails ability to compete with road

• Costs of overreliance on road freight borne by fiscus

Limited private sector participation

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Transnet’s approach to private sector participation

• There is currently very little private sector involvement in the port and rail network.

• Takes place mostly in areas where specialist private sector expertise is necessary or when

an investment cannot be funded by Transnet’s balance sheet (e.g. Operation Phakisa

investments at selected ports)

• RBCT is a good example of private sector involvement in port infrastructure and operation

Failure to secure private sector participation to maintain the branch line network

• Rail branch lines have been increasingly abandoned to improve the overall density of the

rail system.

• All previous attempts to interest the private sector to operate selected branch lines have

been unsuccessful.

Weak and patchy regional integration

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Trade policy barriers remain significant in regional trade

• Lack of harmonisation of standards and pricing across SADC - main constraint to regional

road freight transportation

• Illegal impounding and harassment by traffic officials

Table 1: Cross-border fees in SADC

Charges / Fees South Africa

Zimbabwe Zambia Malawi Mozambique Comments

CBP - Cross Border Permit $525 $150 $86.50 $27.00 $105.00 Annual Fee

TIP (Temporary Import Permit)

N/C N/C N/C $12.50 N/C On Entry

Customs Processing Fee N/C N/C $7.50 $12.50 $20.00 On Entry

Carbon Emission Tax N/C $90 $27.00 N/C N/C For 90 days

Transit Bond (RIT) $90 $75 $250.00 $150.00 $170.00 On Entry

Customs Weekend O/T Fee N/C N/C N/C $1.25 N/C Weekends and Public Holidays

Carrier License N/C N/C $80.00 N/C N/C Annual Fee per Company

Municipality Fee N/C N/C $50.00 N/C N/C On Entry

Insurance N/C $50 $50.00 $50.00 $75.00 per 30 days

NLB (New Limpopo Bridge) - Beitbridge only

N/A $54 N/A N/A N/A On Entry and Exit

Road Tolls - COMESA Vehicles

Toll Plaza Fees

$200 $10/100km

$15/100 km

$400.00 Mozambique / Zimbabwe is per return trip

Road Tolls - Mozambique Vehicles

N/A N/A $300.00 $28/100 km

N/A Zambia is per return trip

Source: FESARTA.

Border inspections contribute to

unnecessary delays

• The use of one-stop border posts

(OSBPs) remains in its infancy.

• Lack of coordination among

national (monopolistic) rail

systems in the region - lack of

reciprocal access rights and

failure to coordinate operational

planning.

Policy options based on international experience

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Institutional and regulatory reforms to promote competition and get the prices right

• Introduction of Single Transport Economic Regulator

• Pricing, access (branchlines), cross subsidies, service standards (port operations)

• Third party access and consolidation of volumes

• Vertical separation of freight rail (economics of density?) – concession?

• Corporitisation of TNPA and Pipelines?

Private sector participation to increase investment and improve service delivery

• Concessioning some branchlines to the private sector

• Opportunities in cross-border and multi-modal transport and consolidation and volumes

• Competition between terminal operators on cargo handling, towage, warehousing

• Concessioning selected ports very successful internationally (but access rules?)

Joint development of infrastructure projects of strategic importance

Policy options based on international experience

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Level the playing field between road and rail

Information and coordination to address market failures and improve access

• Facilitating information on freight flows and supporting operational solutions for freight

consolidation

Cooperation to improve intermodal, interregional and institutional interfaces

• Efficient intermodal terminals, with private sector participation

• Operational solutions (e.g. customs clearance at inland terminals)

• Improve institutional coordination (e.g. declaration of key nodes and classification of roads)

Thank you

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