Transnet rail monopoly coming to an end

South Africa has taken significant steps forward in its efforts to turn around its struggling logistics utility, with the recent signing of new legislation opening the sector up to private players.

Vivien Chaplin and Gaby Wesson of legal firm Cliffe Dekker Hofmeyr said signing the Economic Regulation of Transport (ERT) Act is a marked step towards rail reform and privatisation.

On 11 June 2024, President Cyril Ramaphosa signed this Act into law, marking a significant development in the economic regulation of transport and rail reform. 

The ERT Act introduces major changes to the transport sector by establishing the Transport Economic Regulator.

“It is intended that the Regulator will serve as a consolidated economic regulator for transport, in respect of road, rail, shipping, ports and aviation,” Chaplin and Wesson explained. 

“This streamlining of regulators, if implemented effectively, will help to make the transport system more efficient and cost-effective.”

However, they warned that the Act has a wide scope, and its implementation will not be without challenges.

The Minister of Transport may also extend the Act’s ambit to other public entities, markets, facilities or services, including, significantly, private entities, under certain conditions. 

“This provision is particularly relevant for sectors where private entities are sole providers of services and monopolies,” they said.

The ERT Act empowers the regulator to control prices across the transport sector.

It also introduces provisions governing third parties’ access to rail infrastructure, which is currently controlled by Transnet. This includes private sector players.

Chaplin and Wesson explained that the regulator would act similarly to the National Energy Regulator of South Africa (NERSA) by approving price tariffs for regulated entities like Transnet for using the infrastructure in those sectors.

“This aims to prevent monopolistic pricing by regulated entities and inefficiencies while also levelling the playing field,” they said. 

“Importantly, the regulator has the discretion to tailor the price controls in respect of each sector. The process entails the submission of tariff proposals by regulated entities for approval.” 

The regulator will approve or deny rates case-by-case with set requirements and considerations. However, capacity is not a rate determinant, unlike NERSA, for which this requirement has historically resulted in hiked-up tariffs. 

“Importantly, the regulator is also mandated to consult with industry players and the public regarding the proposed price tariffs before approval,” they said.

One of the most impactful developments of this new legislation is its provision for access to rail infrastructure, currently controlled by Transnet, through standard terms or bilateral agreements with “access seekers”. 

“This paves the way for privatisation of the rail sector, as it will entitle, inter alia, private sector players to access Transnet’s rail network, subject to an access agreement to be concluded with Transnet approved by the Regulator, and payment of an access fee.” 

In its draft Network Statement gazetted for public comment on 19 March 2024, Transnet proposed a minimum access fee of 19.79 cents/gross tonne per kilometre for the rail network. 

This has drawn significant criticism from rail industry roleplayers, as it is based on gross rather than net weight and may increase transport costs across the supply chain. In turn, this may result in increased resort to road transport. 

However, the regulator has the ultimate power under the Act to determine the minimum access fees, and therefore, this minimum access fee is subject to its approval and will hopefully be revised, taking into account industry and stakeholder feedback. 

“Ultimately, the principles in the Act, if implemented effectively, coupled with the increased regulatory oversight, and with due consideration to industry stakeholders, may assist in eliminating market abuse by monopolies and corruption, as well as increasing competition and transparency,” Chaplin and Wesson said.

“The Act is ambitious in its scope and represents a significant step towards achieving rail reform in South Africa.”

“The underlying principle of the rail reform is liberalisation and the opening of the door to private investment, which, if achieved, can reduce Transnet’s historic debt, increase freight volumes in the rail network, reduce transport costs for the public and ultimately expand and improve the economy.”