One thing that could triple South Africa’s economic growth

The efficient operation of South Africa’s extensive logistics network, which includes railways and ports, could boost the country’s economic growth from a meagre 1% per annum to 2.5% or 3%. 

Transnet’s rail performance has deteriorated significantly in recent years, and efforts to reform the sector are moving slowly.

This has been coupled with the inefficient operation of the country’s ports, preventing exports from reaching the market. 

This has resulted in many companies, particularly miners, finding alternatives to Transnet’s railways and ports to export their products. Many have shifted to road freight and ports outside of South Africa, particularly Maputo, in recent years. 

Between 2009 and 2016, rail accounted for approximately 26% to 27% of total road and rail payload. This percentage has been in steady decline, reaching a low of 15% in 2022 and 16% last year. 

In South Africa, freight rail has predominantly focused on bulk commodities like coal and iron ore and some manufacturing payload, making it critical for economic activity. 

Stats SA’s Land Transport Survey shows that, in 2023, South African roads transported 217.5 million tonnes more freight than they did on average between 2012 and 2019, while the rail network transported 56.2 million tonnes less.

The increased use of road freight to transport bulk commodities is extremely inefficient and costly for companies and a significant drawback to economic activity. 

A study by the GAIN Group showed that in 2023, Transnet’s inefficient operations cost the country around R353 billion in lost exports and economic activity. 

Jason Swartz, portfolio manager at Old Mutual, explained that if this crisis could be resolved in a similar fashion to load-shedding, South Africa’s economy would receive a substantial boost. 

He estimated that if Transnet operated efficiently, South Africa’s economic growth could triple from the paltry 1% expected this year to around 3% per annum in the coming years. 

Swartz explained that much focus has been placed on the country’s inability to export products, but the inefficient operation of the country’s railways and ports also significantly raises businesses’ input costs. 

It also limits consumer spending in extreme cases, and companies, particularly retailers, face backlogs on getting stock on shelves for sale. 

Transnet’s rail network is the largest lever that can be pulled to grow the local economy.

The graph below, courtesy of Swartz and Old Mutual, shows the declining use of South Africa’s rail network but encouragingly shows that the decline has been arrested. 

While Transnet is a major lever for economic growth, Swartz warned that reform in the logistics sector has moved incredibly slowly, and there are no concrete signs in the data of any improvement. 

He said it is vital that reform in the sector gains momentum and is given the same urgency as that of the electricity sector. 

The volume of freight transported via rail is stabilising but is not improving despite Transnet’s implementation of the stated turnaround plan. 

Various statements and frameworks outlined in public forums have not translated into concrete changes in the sector, with plans to open certain corridors to private companies plagued by delays. 

April 2025 is the deadline for Transnet Freight Rail (TFR) to be unbundled from the state-owned enterprise (SOE) and operate as a standalone entity. 

This would result in an effectively open market in South Africa’s railway sector, where TFR would be one entity competing with many to manage the country’s railways. 

However, even if this goes according to plan, Swartz warned that the access tariff charged on private companies operating some of Transnet’s railway corridors is too high. 

The current methodology to determine the access tariff includes the sunk cost of Transnet’s debt pile, which greatly inflates the tariff above normal operating costs. 

Swartz said Old Mutual would be closely watching reform in the logistics sector, given its potentially large impact on the local economy, but would wait to see any concrete evidence of improvement before changing its investment outlook. 

He also said that Transnet’s debt burden is so large that it would require another government bailout or perhaps have some of its operations directly subsidised by the state. 

The decline in rail volumes and the inefficient operation of South Africa’s ports have significantly impacted Transnet’s financial health. 

The company has collapsed from posting a R5 billion profit in 2019 to a net loss of R5.7 billion in 2023. South Africa’s second-largest SOE now has over R120 billion in debt. 

So far, the National Treasury has granted Transnet R47 billion in financing with strict conditions. However, much more is needed to halt the company’s collapse and allow it to invest in its assets and operate more effectively.