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DERAILED

Transnet cancels contract allowing private sector player to operate railway line

Transnet's ambitious plan to invite private sector players to operate its railway lines has been derailed by a combination of flawed contract design and ongoing government reforms.
Transnet cancels contract allowing private sector player to operate railway line (Photo: Dean Hutton / Bloomberg via Getty Images)
Ray Mahlaka
By Ray Mahlaka
23 Oct 2023
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Transnet’s efforts to get private sector players to run its crucial railway lines have bombed further, with the state-owned transport group cancelling a contract awarded to one of only two companies that showed interest in partnering with it.  

Transnet Freight Rail, the largest division at Transnet in terms of revenue generation, announced on Monday that it had cancelled a conditional contract with Traxtion Sheltam, which emerged as a successful bidder in November 2022 to operate the Kroonstad to East London railway line.

The line, known as the Cape Corridor, is crucial for SA’s economy as it is the main line for manganese exports and agricultural commodities. Transnet said the cancellation of the contract was by mutual agreement with Traxtion Sheltam, which operates railway lines in several African countries.

It is a blow to the much-vaunted plan by the government for Transnet to embrace the private sector, which would be allowed to auction rail slots from the state-owned enterprise (SOE) and use its skills to run trains while also pouring in money to upgrade the rail infrastructure.  

Transnet’s process to auction 16 rail slots on its two key rail routes was doomed from the beginning. The two routes on which rail slots were auctioned are the Durban-Johannesburg container route and the Kroonstad-East London route. Transnet said this was a pilot phase that tested the appetite and willingness of the private sector to partner with the SOE.

By November 2022, Transnet had attracted only two bidders, one of which was successful. The only bid for the Cape Corridor route was successful and went to Traxtion Sheltam. On the second route (the Durban-Johannesburg container route) on which slots were auctioned, no bidders were successful. 

Challenging talks

On Monday, Transnet said after choosing Traxtion Sheltam as the preferred bidder, negotiations with the company to work out the mechanisms for its participation in the SOE’s railway lines proved challenging.

“The negotiation phase was protracted due to the inherent complexity of the contract negotiations, design of the required service, interface with municipal-owned rail network on the chosen customer access route, unpacking the impact of the Employers Association Bargaining Council, as well as the commercial reality of the service offering to the eventual customers,” Transnet said. These limitations would be addressed in Phase 2 of its initiative to partner with the private sector. 

Traxtion Sheltam told Daily Maverick that it will not comment on the matter further other than what Transnet has said in its media statement.

Ongoing work by the Presidency, government organs (mainly public enterprises, transport departments and the National Treasury) and the Transnet board to introduce reforms in the SOE’s operational affairs also made Traxtion Sheltam’s participation more difficult.  

The Presidency, working with organised business and logistics experts, has drafted a 124-page roadmap/logistics plan that sets out timelines for everything, including allowing private ­sector companies access to railway lines, setting up an independent manager of the rail network, rightsizing the network by closing down unprofitable lines and giving private operators concessions on ports and rail routes.

Read more about the plan here: How the Presidency aims to fix South Africa’s collapsing logistics sector 

The roadmap is set to be presented to the Cabinet for approval in early November. Transnet’s board is also working on a separate turnaround plan that will focus on the company’s operational and strategic affairs, and complement the Presidency’s roadmap.

Flawed contract design

However, market watchers had argued that Transnet’s design for how private sector players would participate in its rail network was fundamentally flawed, indicating that the SOE failed to understand how long-term capital and investment projects work and are financed. It was flawed for three reasons.  

First, Transnet required that private sector players work with a two-year period for capital investments, which involved deploying electric locomotives on the rail routes that were on auction and also upgrading Transnet’s existing rail network. Such an initiative requires a capital investment period of at least five to 10 years.

Second, Transnet set a two-year lease or contract period for using the rail slots. Private sector players wanted more than two years, considering that they would be making large investments and purchasing equipment that could last for at least 30 years.

Third, Transnet enforced a minimum operational usage requirement, which means that private sector players were required to use at least 75% of rail slots or lose them. The problem with this is that Transnet’s rail network is not reliable, thus imposing such usage targets is not feasible. There have been disruptions in recent years at Transnet Freight Rail, making the minimum usage requirements difficult to comply with. DM

Article updated to reflect Traxtion Sheltam's response to Daily Maverick's request for comment. 

Comments (10)

mally2 Oct 24, 2023, 09:58 AM

Is anyone really surprised that for the umpteenth time in decades Transnet has not lived up to its promises for a better future for the country's logistics system!!

Hilary Morris Oct 24, 2023, 10:01 AM

Ox wagons anyone?

johnpearce512@gmail.com Oct 24, 2023, 10:16 AM

I wouldn't trust the veracity of this article - it contains too many inaccuracies and over simplifications to be a basis for discussion. The timeframe given to Transnet to get these concessions to market is absolutely necessary - the country cannot afford to wait any longer. But with these timeframes, comes the risk that the contents of the tender (incl the terms) will be flawed. I think (its my opinion) that that's what happened here. From what I've seen in similar concessions - The two year period is normally an initial investment period to get the operation started, but definitely does not preclude the need for ongoing investment. As an operator, any useful lifetime value of assets at the end of the concession normally gets bought back by network owner (Transnet) or removed by the concessionaire (private sector operator). The operational period of only two years does not match any similar concessions I've come across and probably is a typo by the reporter. One can expect a 20 to 25 year concession to allow the operator to achieve a meaningful return on investment. The performance clauses (75% utilisation) are necessary and is the main reason why the concessions are being offered to the private sector. Transnet has done very poorly at achieving below 40%, creating the current need for road transport. The fact that these concessions are interlinked to existing networks/systems, however, is the complexity. This is where the private sector operator would need to be protected from "upstream" failures that prevent it from achieving its performance target. This is probably where the negotiations failed. Hopefully, the renewed tenders will include lessons learned from the November 2022 attempt ... and attract more than only 2 bids as a result.

D'Esprit Dan Oct 24, 2023, 02:32 PM

Hi John, the operational period is not a typo by the reporter - it is the first red flag that was raised last year and is why so many companies, local and foreign packed up their offers as soon as this was on the table. And let's say you invest your millions in buying excellent state of the art rolling stock, and two years later, Transnet says, thanks, but no thanks - yes, you've got the option to sell the stock, but guaranteed at a loss, given that you'll be selling to Transnet (with no money), or other utilities in the region (with even less money), or overseas as a knock-down rate. When this deal came out, it was roundly condemned as being unrealistic. And so it proves: rail operators are neither stupid nor sentimental and won't simply dig the ANC out of the hole that has seen rail volumes collapse to the level they were at at the end of the Second World War. Designed to fail, failure allows the can to be kicked down the road until the elections are over, by which time our economy and logistics infrastructure will be in even worse shape.

Karl Sittlinger Oct 24, 2023, 11:30 AM

Likely not enough bribes and kickbacks for ANC cadres involved.

Charles Thatcher Oct 24, 2023, 12:09 PM

The ANC are communists. They will carry on controlling all SOEs by central command structuring until the second coming, or till they're booted out. It's the only way they can suck the SA economy dry and continue with state cature.

Charles Thatcher Oct 24, 2023, 12:09 PM

The ANC are communists. They will carry on controlling all SOEs by central command structuring until the second coming, or till they're booted out. It's the only way they can suck the SA economy dry and continue with state cature.

Richard Baker Oct 24, 2023, 01:15 PM

And a founder of Sheltam was one Roy Puffett-doesn't get better than that! And he ran highly competent and successful rail-haulage operations for the mining industry and freight users in SA and countries to the north of us and the successor companies still do! ANC utterly useless!!

D'Esprit Dan Oct 24, 2023, 02:36 PM

“The negotiation phase was protracted due to the inherent complexity of the contract negotiations, design of the required service, interface with municipal-owned rail network on the chosen customer access route, unpacking the impact of the Employers Association Bargaining Council, as well as the commercial reality of the service offering to the eventual customers,” This is all you need to read as to why it failed - too many irrelevant entities to plead with and please.

Roger Sheppard Oct 24, 2023, 04:47 PM

DUH!!!

Johan Buys Oct 24, 2023, 08:16 PM

ok so let’s apply the same requirements that were put to private operators to Transnet. Easy game to simulate. Board and executive are fired for missing requirements.