South Africa’s relatively high costs of logistics suggest that more freight should be carried on rail. Transnet’s plans to concession unprofitable railway lines is a right move in this regard, as it could open the way for more cost-effective, multimodal freight services.

The need to make South Africa more globally competitive in terms of international trade (exports) – by optimising the supply chain – continues to be a major topic at monthly meetings of the Transport Forum Special Interest Group (SIG).

One problem that sticks out a mile is the fact that 70% of the country’s industrial activity is still located in Gauteng whereas, ideally, it should be located closer to the country’s ports.

Another is that where long-distance transport is still required to transport commodities from inland locations to these ports, rail should be the preferred mode – provided it was cheaper than and as reliable as road transport. Sadly, the argument continues that, in many cases, rail is neither.

Transnet’s recent announcement that it wanted to concession the use of some 7 278 kilometres of unprofitable railroad (3 928km still operational) to the private sector has added a further dimension to the debate. Logistics companies, which have been keen for decades to offer customers cheaper but multimodal freight services, have expressed keen interest, but the unions are opposed to the move.

Recent sessions of the Transport SIG have produced some thought-provoking presentations on the issue of the costs of logistics, particularly those by Hans Ittman, executive director of the Council for Scientific and Industrial Research (CSIR) Built Environment; and Professor Johan du Plessis, chief executive officer of Logistics International. Both spoke at the University of Johannesburg in August.

Ittman supports the government’s desire to force more long-distance freight back onto rail. But he acknowledged that moving goods from point A to point B was faster by road, and concerns that rail was not always cheaper than road required further investigation.

Dealing with the state of logistics in South Africa, Ittman compared local trends with those in other countries. In doing so, he elaborated on the CSIR’s 6th annual “State of Logistics Survey” – released in March and sponsored by the Imperial Group – which covers 2008 statistics, and of which he is a co-author.

He said they were now working on the 2009 statistics.

Challenges

The good news Ittman presented was that supply chains in South Africa, serving some 100 000 outlets, were working fairly well.

They had received no reports of the 2010 Fifa Soccer World Cup having interrupted or interfered seriously with supply chain activities during the tournament, he added.

However, he made it clear that compared with other countries on the world’s Logistics Performance Index (LPI) for 2008, South Africa faced certain challenges, including the need to reduce its total logistics costs and, particularly, the road transport component of these costs.

South Africa was lying 28th out of 155 countries on the LPI with a score of 3.46, but was falling behind as this had decreased from 3.54 the year before while other countries were improving, Ittman said.

Total logistics cost comprising inventory carrying costs, managing, administration and profit, storage and ports, and transport for 2008 was R339 billion or 14.7% of gross domestic product. This compared with 11.6% for Brazil, a much larger country than South Africa.

However, transport costs constituted R171bn or 50.4% of South Africa’s total logistics costs. This transport cost translated into 15.7% of the country’s GDP, compared with the current 1.5% of Switzerland, 10.1% for the Netherlands (both smaller countries), and 9.4% for the United States (2009) and 18% for China (2008) – the latter two being larger countries than South Africa.

Ittman’s slides show that in terms of modal contributions to the total tonne/km for South Africa, that of road transport was the highest in the country (63%) – almost on par with that of Brazil (62%), but more than double that of the US ( 27%).

But the US and Brazil made more use of pipelines and waterways, with the US further putting no less than 41% of its freight on rail compared to South Africa’s 34% and Brazil’s 21%.

Quotes

Ittman opened his speech with two quotes from the most recent quarterly review of the Council of Supply Chain Management Professionals:

• “The US has a choice: invest now in infrastructure, or ignore it and watch our roads, bridges and ports become a roadblock to business success”;

• “With road congestion and high energy prices predicted to continue, railroads can expect more traffic to come their way.”

Many people will argue that these quotes will apply to South Africa as well, but pose a serious question: Can the country’s monopolistic railway utility, Transnet Freight Services, handle more traffic?

In his presentation, Ittman did not dwell on this question, except to say that South Africa’s main industrial hub was Gauteng, which relied on long-distance transport for exports. South Africa therefore required incentives to move industry closer to its ports, as was the case in countries such as Australia, where industrial activity was concentrated around its ports.

He called for projects to connect smaller inland South African agricultural, mining and industrial hubs in a more cost-effective manner with its ports.

Following up on that, Logistics International’s Du Plessis highlighted progress being made in the development and upgrading of port facilities, new railway lines and various opportunities in this regard, which could offer cost-savings in the logistics chain.

Concession

An interesting development on this is Transnet’s subsequent announcement that it wanted to concession the use of some 7 278km of unprofitable railroad (3 928km still operational) to the private sector – a move opposed by the South African Transport and Allied Workers Union (Satawu), but welcomed by 115 local entities and companies that have expressed a “non-binding” expression of interest (EOI) in this offer.

Aware of the union’s objection to any form of privatisation, Transnet intends to retain ownership of the physical infrastructure assets as well as the branch-line staff. It will restrict private participants to the operation and maintenance of the lines through the concession agreements.

Concessionaires will be entitled to operate passenger or freight services, or a combination of both, with Transnet providing rolling stock on lease.

It will use the information supplied in the EOI to draft a request for proposals (RFP), which will hopefully lead to a competitive bidding process.

Announced by way of an advertisement, no time frame has been provided for the issuance of the RFP documentation, which will be released in phases.

During the EOI phase, potential bidders will be provided with information about each branch-line opportunity, including the commodities involved, as well as the infrastructure assets and the operational characteristics of each line or cluster.

A list of rolling stock that Transnet was willing to consider leasing or selling to concessionaires would also be provided.

A senior executive has been appointed to oversee the process, and advisers are assisting with its implementation.

A non-compulsory industry briefing was scheduled for 27 September at Esselen Park in Gauteng.

Running amok

This is a move that could help reduce logistics costs, as the concessioning process could unlock the economic potential of lines that feed into the core network operated by Transnet Freight Rail.

But Satawu has objected to the move, saying it would be contrary to a “historic agreement” reached in 2001, that these lines would be retained under state ownership.

“At a time when our ANC is seriously debating expanding national ownership, Transnet is running amok with privatisation plans,” said Satawu general-secretary Zenzo Mahlangu in a statement.

Although the low-volume, multi-movement branch lines were not profitable by their very nature, they fed the rest of the network, and played an important developmental role in their own right.

Satawu has called on Minister of Public Enterprises Barbara Hogan to put a halt to the “maverick actions of Transnet management”, who was taking advantage of the leadership vacuum in the group.

Response from industry and organised agriculture has been that Satawu is completely unjustified in its opposition, as the plans could stimulate the economy and save jobs, if not create more jobs.

But Satawu is unwavering in its stance and has threatened to take to the streets for the second time this year after having secured a wage package for its members that is likely to increase the costs of logistics in South Africa.

In other words, the debate on logistics costs will rage on in times to come.

Udo Rypstra