Immediate actions needed to foster a more competitive rail industry

South Africa’s rail sector is faced with unprecedented challenges that threaten its operational viability and economic contribution, says law firm Webber Wentzel partner Scott Edmundson, who says the dire situation underscores the urgent need for transformative reforms to salvage and rejuvenate the sector.

Central to the crisis is State-owned Transnet's inability to dispatch sufficient available locomotives, to maintain its infrastructure and to operate its ports efficiently, leading to losses in the billions, as estimated by the National Logistics Crisis Committee (NLCC), he notes.

International treaties, such as the Cape Town Convention (CTC) and the recent Luxembourg Rail Protocol (LRP), represent opportunities to offer a framework for enhancing asset-based financing and leasing.

The CTC was signed in Cape Town in 2001, while the LRP was adopted internationally in 2007, and approved by Cabinet in June 2023 for ratification. Following ratification of the LRP by Luxembourg, Spain, Sweden, the European Union and Gabon, the LRP will come into force internationally in March 2024 – a significant event and milestone for the international rail industry.

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 a debtor’s insolvency.

Edmundson explains that it is intended to make rolling stock financing easier and cheaper 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 laws 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.”

Although good progress has been made, Edmundson notes the LRP has some way to go in terms of its full implementation in South Africa, such as the completion of the formal ratification process, as well as the promulgation of legislation, which is needed to ensure the LRP is enforceable as a matter of domestic law.

Internationally, the Rail Working Group is working to operationalise the international registry and to draft regulations governing the operations of the registry.

“By creating an international registry for recognising and enforcing creditor and lessor rights, these treaties aim to reduce financing costs and risks, thereby attracting private-sector and other forms of financing and investment into the rail sector,” Edmundson explains.

However, the journey towards full implementation and compliance in South Africa of the LRP faces some challenges, including possible conflicts with existing domestic laws.

The response to the challenges faced by the rail sector has included initiatives such as Operation Vulindlela and the establishment of the NLCC, spearheading the reform process.

These efforts have already yielded positive outcomes, such as the selection of an international terminal operator for Transnet’s Durban Pier 2, approval of the Freight Logistics Roadmap and adoption of the new National Rail Policy, which Edmundson says “indicates tangible progress towards addressing the sector’s immediate operational challenges and the laying of the groundwork for comprehensive policy and legislative reforms”.

“Internationally, the coming into force of the LRP heralds a new era for the global rail industry, with potential benefits extending beyond the reduction of direct financing costs. “The anticipated softening of Basel IV regulations and improved financial support offered by export credit agencies for railway rolling stock financing transactions underscore the far-reaching impact of these treaties,” he elaborates.

Such developments are poised to catalyse investment and innovation in the rail sector, offering a glimmer of hope for its resurgence in South Africa and beyond, he proposes.

Amid these advancements, Edmundson adds that the vision aligns with the goals in the National Rail Policy, which was adopted in March 2022, and which outlines a comprehensive strategy for rail market restructuring through initiatives such as third-party access and the establishment of an independent Economic Rail Regulator.

“The policy momentum gained from the White Paper on National Rail Policy and the pending Economic Regulation of Transport Act provides a clear roadmap for reform. These measures aim to liberalise the rail sector, paving the way for a dynamic, competitive and efficient rail market,” he says.

He adds that the anticipated reforms, including the vertical separation of Transnet and the introduction of an independent Economic Rail Regulator, signify a “monumental shift towards modernising South Africa’s rail infrastructure and operations”.

Despite the optimism surrounding these initiatives, the realisation of a fully liberalised and optimised rail sector remains a medium-term goal.

Immediate actions, such as enabling private third-party access to the rail network on a competitive, transparent and commercial basis through the oversight of the interim Economic Rail Regulator, are critical steps that can be taken to alleviate current constraints and foster a more vibrant and competitive rail industry.

These initial measures provide a practical framework for initiating much-needed early reforms while the country transitions to a liberalised, modern rail sector, Edmundson tells Engineering News.

Moreover, the political landscape, specifically, poses significant risks to the timely and effective implementation of rail reform, particularly in light of potential delays in the legislative process and resistance from stakeholders with “vested interests in maintaining the status quo”.

Thus, Edmundson says the challenge lies in navigating these political waters while ensuring that the reforms achieve their intended economic benefits “without succumbing to protectionist pressures”.