Make or break for SA’s rail sector
The rail sector in South Africa is at a breaking point and urgent action is required.
By Scott Edmundson
From a freight perspective, Transnet‘s incapacity to dispatch locomotives is at an all-time high. The National Logistics Crisis Committee estimates that the country’s macro logistics system loses circa ZAR1-billion a day.
New rail-related legislation
The Cape Town Convention (CTC) and the Luxembourg Rail Protocol (LRP) are likely the most important global legislative developments and international treaties in recent times in the rail sector.
The CTC was signed in Cape Town in 2001, and the LRP was adopted in 2007 and approved in June 2023 by Cabinet (SA) for ratification (following ratification by Luxembourg, Spain, Sweden, the EU, and Gabon).
The CTC and LRP, combined, aim to facilitate asset-based financing and leasing, expand financing opportunities, and reduce financing risk and cost, by enhancing legal predictability and creditor’s risk, particularly in the case of debtor’s insolvency.
It is intended to make rolling stock financing easier and cheaper for the private sector by creating a system for recognition, priorities, and enforcement of creditor and lessor rights, with such rights registered on an online international registry, administered in Luxembourg.
This means it is intended to be an overarching treaty that enjoys primacy over the contracting states’ domestic law so that when assets from or financed by, for example, international lenders and local funders, move across borders, the jurisdictional risk for those assets is reduced through the rights and remedies under the CTC and the LRP.
Establish international registry
Although good progress has been made, the LRP has some way to go in terms of its full implementation – completion of the formal ratification process in SA is required and a domestic law/Act is needed to ensure the LRP is enforceable as a matter of domestic law.
The administrators of the LRP also need to establish the international registry (the Rail Working Group is currently setting this up).
There are also certain challenges with the CTC as a matter of South African domestic law, ie:
- in certain limited circumstances, it may not currently enjoy primacy in the context of the Companies Act and business rescue;
- there are possible constitutional challenges depending on the insolvency declaration elected by SA when the LRP is ratified.
Liberalised rail market (Make or break for SA’s rail sector)
The current state of the South African rail market is dominated by Transnet. Envisaged in the future state of rail are multiple train operating companies, each with their respective customers, and all engaging with (i) an independent infrastructure manager to manage the network and (ii) an independent economic rail regulator to set track access tariffs on a transparent, equal and economically substantial basis. Ultimately, this is what the National Rail contemplates.
Local rail reform: policy momentum
After a century without coherent rail policy in SA, the White Paper on National Rail Policy was adopted by Cabinet in March 2022. It outlines a range of interventions aimed at restructuring the rail market, with short-, medium-, and long-term policy reforms. Key reforms include:
- third-party access, which opens the network to private operators in a competitive rail market,
- the establishment of the independent Economic Rail Regulator (TER), which will regulate the access regime, as well as set pricing, compliance requirements, and appropriate penalties, and
- the vertical separation of Transnet, which means its accounting systems will be separated, and from a practical perspective, it will be separated into operations on the one hand and infrastructure ownership management on the other.
The policy further contemplates the development of the Private Sector Participation Framework (spearheaded by the Department of Transport) and it alludes to the National Rail Master Plan, anchored in the National Transport Master Plan (2015).
The Government’s intention is to codify the policy through the Economic Regulation of Transport Act (the bill was prepared in 2020 and is currently with the National Assembly (TER Bill)) which will form the roadmap for rail reform, sector liberalisation, and economic regulation of transport.
Embedded in the National Rail Policy is the introduction of an independent Infrastructure Manager, with the following planned functions: to own and maintain the network to approved standards, to allocate and sell slots on the network to train operating companies at TER-approved prices, determine access fees and terms (network statement), negotiate platform access agreements, to hold the Railway Safety Regulator (RSR) network operator permits and to provide a traffic management function.
Key risks: economic vs political solution?
The rail reform roadmap is a much-needed, clear, sensible, and achievable economic solution (even though the timing seems optimistic), but the political risk lies in the possibility that the progress of the TER Bill through Parliament is delayed in a fractious political environment during an upcoming election year; in ill-conceived requirements and conditions for slot sales and third-party access; and protectionism of the status quo by impacted stakeholders.
Scott Edmundson is a Partner at Webber Wentzel
Webber Wentzel is a member of the Rail Working Group on the CTC and LRP, is a member of the Aviation Working Group, and is the only firm in Africa to be part of both working groups. The firm is also a member of the Legal Advisory Panel on the CTC, advising on matters of South African law and, again, the only firm in Africa to be invited to join the LAP.
Make or break for SA’s rail sector
WhyAfrica provides on the ground information and business intelligence about the sustainable utilisation and extraction of natural resources in Africa, and can assist your company through:
- WhyAfrica’s membership offers great business insights to you, your company, and clients.
- Amongst many other benefits, we will publish editorial content about you or your company on the WhyAfrica online platform and on all WhyAfrica’s social media pages – the annual fee is R6,500 and you can find out more or subscribe here: https://www.whyafrica.co.za/product/membership/
- WhyAfrica’s Road Trip takes place annually in July and August. During our Road Trip we aim to visit more than 30 project sites. Sponsoring the Road Trip, or to be a WhyAfrica member, gives you unparalleled insight into the business environment of the countries that we travel to and the project sites we visit.
- To be a member or sponsor allows you access to invaluable, on the ground, business intelligence and a great marketing opportunity for all companies doing business in Africa.
- The main aim of our Road Trips is to promote Africa as an investment destination and to showcase Africa’s greatest companies, and projects to our large global audience, which includes a list of potential investors, venture capitalists and serial entrepreneurs.
- To view the photos of this year’s Southern Africa Road Trip click on the gallery link or follow our Instagram account at why.africa https://www.whyafrica.co.za/road-trips/whyafrica-road-trips/.
- We publish daily online articles on our WhyAfrica platform and post them on social media every day. Our combined online reach is more than 45,000. In-article banner ads are highly successful advertising tools as is advertising space on our website.
- In addition to our bi-weekly newsletters, we publish two printed- and two interactive digital magazines per year. The printed magazines are distributed at major events and conferences throughout the year, and also on our WhyAfrica Road trips.
- Digital magazines are e-mailed to all our subscribers and shared on our social media platforms. A copy of the latest edition is automatically attached to all our outgoing e-mails.
- WhyAfrica magazines provide great marketing opportunities. There are also in-article and on-line advertising opportunities at exceptional rates. Contact me for more information on email@example.com or give me a call.
- To subscribe to WhyAfrica’s free newsletters and magazines click on the link and register: https://www.whyafrica.co.za/subscribe/
- 4. Partnerships
- Maximise your African exposure and link with our large business network through becoming one of only 10 WhyAfrica partners. We have only five prime partnership positions left for 2023, so contact me at firstname.lastname@example.org to get the best deal
Make or break for SA’s rail sector