Transnet’s final Network Statement published – Privatisation of the rail network will soon be a reality

Published on 20 December 2024, following the promulgation of the Economic Regulation of Transport Act (ERT Act), the final Network Statement sets out the practicalities for TOCs to use the South African rail network with its own customers, subject to governance by the ERT Act, and economic oversight by the Transport Economic Regulator (Economic Regulator).

As previously discussed in our article of Embracing privatisation of the rail industry in South Africa: Transnet’s Network Statement, the Network Statement, if implemented properly, presents a means to reduce Transnet’s debt, which reported a loss of R7,3 billion in its most recent financial year, improve the condition of South Africa’s rail network, efficiencies and connectivity, encourage both local and international investment and boost the South African economy, as it will benefit the larger supply chain reliant on rail and transport in general.

To date, there has been no economic regulation of the rail sector.

The regulatory structure is simple: TOCs, and Transnet are subject to an independent infrastructure manager (IM) who manages the network, and the Economic Regulator who sets access tariffs, on a transparent, equitable and non-discriminatory basis.

The coupling of the ERT Act, and the Network Statement, to give effect to South Africa’ Rail Policy for reform provides effective means to regulate access to South Africa’s rail network, and to eliminate Transnet’s historical monopoly. We have discussed the implications of the ERT Act in our article of The Promulgation of the Economic Regulation of Transport Act is a marked step towards rail reform and privatisation.

Access Tariff

The publication of the draft Network Statement in March 2024 drew substantial criticism regarding the affordability and nature of the access fee, initially contemplated as a singular amount applying across commodities and corridors. The final Network Statement’s tariff is decidedly more affordable.

In a departure from the proposed minimum access fee of 19,79 cents/gross ton per kilometre, the Network Statement has imposed a differentiated and multi-tiered access tariff regime, similar to international practice, with variations for commodities and corridors, and a two-part tariff based on (i) train kilometres and (ii) the gross ton per kilometre.

The access fee has been reduced significantly, which may be more attractive to the industry and which levels the playing field substantially. For example, the transport of Manganese Ore is subject to a minimum access fee of R650 per train kilometre, and 5.3 cents per gross ton per kilometre. Despite industry criticism and even criticism from Transnet’s Freight Rail Operator declaring the tariff based on gross ton per kilometre to be unaffordable, the gross ton per kilometre tariff has remained, which includes the weight of the train, rather than net weight. This has the potential to increase transport costs and costs across the supply chain.

However, it should also be remembered that the tariff structure must still go through a process of review, involving consultation by the public and industry stakeholders, and ultimate approval by the Regulator to determine the minimum access fees. Thereafter, the minimum access fee for the 2025/2026 financial year shall be implemented by 1 April 2025.

Notably, the tariff is also intended to be determined for a multi-year period. The review determination has been removed from the Network Statement, as this lies with the Economic Regulator.

How can TOCs access the rail network?

TOCs must go through a formal application and bid process, following which, an adjudication process will take place. Bidders are also required to pay a non-refundable application fee of R125,000. Again, in a welcome departure from the high costs proposed in the draft Network Statement, this has been reduced from R500,000.

The Network Statement includes a comprehensive step-by-step guide on the application process.

TOCs must meet minimum requirements to be eligible, including completing self-screening checklists, conducting site visits and providing undertakings to participate in the IM’s “Community and Social Development initiatives”, “Supplier Development Plans” and “Skills Development Plans”. TOCs are also assessed based on their legislative compliance and safety track record. Successful TOCs must submit a “Risk Analysis” of their intended operations and sign the TOC-IM Rail Access Agreement in respect of slot capacity and Transport Services, and Interface Agreement. Importantly, TOCs must have a “Railway Safety Regulator Rail Safety Permit” issued by the Railway Safety Regulator, submit an Annual Safety Improvement Plan and have a “License to Operate”.

The provisions of the License to Operate are not included in the Network Statement and implies there is an additional process to follow prior to access being granted. The basis for this is uncertain and will require clarification from Transnet, from which stakeholder engagement will likely follow.

It is also envisaged that TOCs enter into interface agreements with PRASA in the future, given the convergence with the passenger rail network.

Slots and Capacity Allocation

Capacity shall be allocated by the IM in a “fair, transparent and equitable manner” and based on the objectives to maximise Transnet’s rail network utilisation; enable growth objectives of critical strategic economic sectors; migrate traffic from road to rail; achieve full cost recovery; and inject infrastructure investment through access tariffs. Unfortunately, how the “fair, transparent and equitable manner” principle shall be implemented in practice remains to be seen as they are not given further context or detail.

Slots and capacity are to be specifically applied annually for by TOCs pursuant to the application process and will be subject to evaluation, consultation and review.

There are also penalties imposed for failure to comply with allocated slots, and the IM is also entitled to take away capacity not used at 75% over a three-month period and to allocate such capacity to the next ranked TOC based on the outcome of the evaluation of applications for capacity.

Conditions of the Network and Security issues

Two major industry concerns regarding the Network Statement and open access relate to the condition of the network, which requires significant investment, and security issues plaguing the network.

In a welcome departure from the draft Network Statement, “acts of theft” have been excluded as an event of Force Majeure. This effectively allowed any train to be cancelled due to “acts of theft” and Transnet’s (and the IM’s) obligations to be suspended.

However, access is provided to the network on an “as is”, or “voetstoots”, basis, meaning that no warranties are given in respect of the network’s fitness for purpose. Whilst expected at this grassroots stage, should the state of the rail network improve following investment by TOCs, industry stakeholders may look to Transnet to providing certain warranties or guarantees as to the network’s fitness and condition, providing a means to hold Transnet accountable.

Further, the minimum access fee is payable despite Force Majeure Events, or the TOC incurring “Declined Slots”, or cancelling slots. This presents challenges given the current condition of the rail network and persistent electricity supply challenges in South Africa, as major breakdowns or design flaws in machinery or equipment, or accidents in relation to or stoppages of the Transport Services, as well as shortages or delays, interruptions or failure in supply of electricity are Force Majeure Events.

The Rail Access Agreement imposes quite substantive duties on TOCs in respect of security measures, including the requirement to have their own security plans that cover cargo. This, in effect, may mean that non-compliance or inadequacies may result in breach of the Rail Access Agreement, which is a significant concern given the prevalent security issues in the rail network. No reciprocal obligations are imposed on the IM in terms of the Rail Access Agreement, and the Network Statement does not stipulate adequate measures to be taken by Transnet to address security concerns.

Whilst access is intended to start in April, due to the maintenance backlogs of the rail network, it is inevitable that this may be subject to delay.

Conclusion

In summary, Transnet’s final Network Statement, alongside the Economic Regulation of Transport Act, represents a significant step toward opening South Africa’s rail network to private operators and reforming South Africa’ rail sector.

By opening access to private operators, Transnet’s debt burden may be reduced, critical infrastructure investment may be introduced, and logistics efficiency can be improved. These changes have the potential to boost trade competitiveness, lower transport costs, and create jobs – key drivers of economic growth. However, successful implementation will essentially depend on addressing security risks, modernising infrastructure, and fostering investor confidence through transparent, equitable, and well-regulated market access. If implemented effectively, this reform could position rail as a catalyst for sustainable economic revitalisation in South Africa.