South Africa's state-owned railway Spoornet has embarked on a five-year programme to improve performance and profitability, which will help to support the government's Accelerated & Shared Growth Initiative. Chris Jackson asked Vice-President Molotwane Likhethe how this will be achieved

'OUR OBJECTIVE is to build a freight railway that meets the needs of our customers', said Siyabonga Gama on April 20. The Spoornet Chief Executive was addressing leading businessmen at the Eastern Cape Transport Summit, explaining why South Africa's state -owned railway is investing in growth and modernisation of its core network over the next five years.

By 2012 Gama expects Spoornet to be 'an enabler of economic growth, supporting international trade by improving South Africa's competitiveness'. He promised the businessmen improved operational efficiency that would reduce their logistics costs if they transferred more traffic from road to rail.

The need to reverse Spoornet's recent decline in market share was summed up in the title of Gama's address: 'Moving Back to Rail'. His aim is to increase rail's share of the South African transport and logistics market to 30%, which would grow the rail sector's annual turnover from R15bn to around R40bn.

Spoornet's Vice-President, Corporate Communications, Molatwane Likhethe explains that the railway's current objectives are an integral part of the new Strategic Direction agreed between the South African government and state-owned transport holding company Transnet. The overall vision has been endorsed by both the Department of Public Enterprises as the sole shareholder in Transnet and the Department of Transport in terms of the strategic policy framework.

Transnet's 'Strategic Intent' is to focus on key segments of the freight transport market by driving growth within its core freight business - 'which will entail operational synergies, increased customer focus and aggressive infrastructure development'.

According to Likhethe, Spoornet has already started to 'implement a number of actions during the 2005-06 financial year' which will contribute to its long-term vision. In order to be a financially successful and sustainable business, Spoornet needs to run 'an efficient and safe railway, serving its customers through best-practice processes and initiatives'. To achieve this will require investment in the growth of employees and the development of leadership capability.

To this end, Spoornet has established a Five-Point Turnaround Plan (box), which will be enhanced through an organisation-wide Change Leadership Programme. This will ensure that employees are committed to setting the business on the path to financial sustainability between now and 2012.

Transnet has recognised that turning the rail network around will require significant investment. In the national budget announced in February, the government allocated R35bn for capital projects on the railway over the next five years. Around 10% of this will go on 110 new electric locomotives ordered from Mitsui, Toshiba and Union Carriage & Wagon (RG 3.06 p113). Table I breaks down the remaining R31·5bn. Gama says R25·9bn will go on sustaining and renewing the existing network and R4·4bn on expansion projects.

Restructuring for credibility

Gama admitted in his address that Spoornet is faced with a significant challenge if it is to regain credibility in the marketplace, which he accepts was lost over the past five years as a result of declining performance.

Likhethe believes that 'the measures already being taken to improve operational efficiency and customer service will bring the much-needed improvement in credibility that will justify essential investment in the strategic corridors'. At the same time, he says, Spoornet is embarking on a restructuring process that will position the operator 'as a sustainable business in a reformed rail industry'.

In order to focus on the key corridors and core industry sectors, Spoornet is looking to identify and relinquish management responsibility for many marginal lines. The process for divestment of feeder routes is to be tested through five pilot projects, which will look at the opportunities for involving local and provincial governments as well as the private sector.

Likhethe's view is that the branch lines require a different focus from Spoornet's core freight business, with emphasis on regional and community development. He says that 'the question of branch line ownership is currently being reviewed by Spoornet and the government, in order to determine an optimal structure that will ensure the future of rail at a regional level, and drive the long-term growth of feeder traffic to the core freight network.'

Spoornet is therefore working on a Branch Line Due Diligence process, which begins with an assessment of the financial position of each route, in order to identify those which are commercially viable. The next step will be to look for suitable commercial opportunities on those lines, and develop a business model for local operation. This will include ways to consolidate freight loads for onward movement over the main line network. In specific cases, there may also be opportunities for conventional passenger traffic or tourist trains on certain routes.

Another early objective for the restructuring process is to focus Spoornet firmly on the freight market. Confirming that 'Transnet's strategic direction has a very clear freight focus which will ultimately require the divestment of passenger and tourist services from the current portfolio', Likhethe explains that 'the ownership, access and operations of these services are being investigated jointly with Transnet and the Department of Transport.' In the meantime, 'Spoornet will remain responsible for safe passenger operations, and passenger trains will retain priority status over freight traffic on the core network'.

Eventually the intention is to transfer responsibility for the Shosholoza Meyl long-distance passenger business to the Department of Transport, which plans to merge these operations with those of the South African Rail Commuter Corp. Spoornet is also looking to divest its prestigious Blue Train operation, which is focused primarily on the tourist market. Options are being explored for a transfer to the private sector, and for the possible involvement of the national tourism office in the process.

Infrastructure separation

The restructuring of the rail industry as outlined in the Draft National Freight Logistics Strategy is expected to 'change profoundly the landscape of the South African rail industry'. DoT proposes the creation of three separate 'Rail Infrastructure Entities' to manage the network, leaving Spoornet 'positioned as the primary main line freight operator in a competitive rail market'.

The divestment of regional and secondary routes will see the arrival of multiple operators complementary to Spoornet's role as main line operator.

DoT is in the process of developing a more detailed strategy for the rail sector, incorporating vertical separation, with input from Transnet, Spoornet and other interested parties. At this stage, Likhethe says, the final extent of the separation is not known. He emphasises that the overall objective of the changes is 'to improve the efficiency and competitiveness of the rail industry as a whole.'

DoT has already established a Rail Safety Regulator to oversee Spoornet and SARCC operations. With the advent of separation, the regulator will have a critical role to play in ensuring the safety of multiple operators on the national rail infrastructure. To ensure a fair and equitable relationship between all the new entities, DoT plans to put in place an economic regulator for the rail sector.

On the infrastructure side, the prospect of separation, and the challenge of addressing the maintenance backlog, has already led Transnet to set up a specialised capital project management division to assist Spoornet with upgrading of the national rail network. Likhethe explains that 'Spoornet's ambitious investment and expansion plans require greater capability in terms of engineering, maintenance and materials supply, bringing yet more organisations into the rail sector.'

Focus on key corridors

Spoornet sees its principal market as the long-haul freight corridors linking ports, industrial regions and metropolitan centres. Traffic flows include both raw materials for processing and finished goods to both domestic and international markets.

Many of South Africa's major transport corridors originated from the need to connect mining and heavy manufacturing centres with international markets. These businesses continue to dominate the country's export trade, putting pressure on the transport providers as their performance has a direct impact on the national economy.

As early as 1997, the Moving South Africa study suggested that by 2020 'overall freight flows are expected to continue to consolidate into a limited number of primary corridors representing nearly half of all total freight movements'. As part of the wider Transnet strategy, the government envisages that the majority of export and import traffic will move by rail, leaving road hauliers to focus on the short-haul distribution role.

The 2004 South African State of Logistics Survey found that between 1992 and 2003 rail managed to hold its own for the bulk coal and iron ore flows, but lost ground rapidly for general long-distance freight (Table II). Competitive road alternatives developed in many corridors after the deregulation of the transport market in the early 1990s, because these had greater volumes of high-value commodities where shipper satisfaction was adversely affected by the fall-off in the quality of rail operations.

The study emphasises that modal split is closely related to the commodities being moved. Mining and minerals currently contribute 6% to South Africa's national GDP, compared with 20% for manufacturing and 46% for agriculture. When focusing on 'transportable GDP', where transport plays a key role in generating economic value, the positions are reversed. Mining and mineral contributes 46%, and manufacturing 45%, but agriculture a mere 6%.

Whilst rail is most suitable for moving commodities in bulk, such as coal, minerals, metals and heavy manufactured products, these tend to be one-way flows, with specialised wagons returning empty in most instances. Bulk commodities are also highly sensitive to transport cost, because they are heavy but relatively low-value. Spoornet's existing traffic mix is shown in Table III.

Spoornet has been analysing developments in North America, where the Class I railroads have achieved very high efficiencies in bulk movements and are winning market share in the higher-value sectors such as light manufacturing and retail through intermodal partnerships with feeder railroads and road hauliers.

Spoornet is therefore developing strategies for its core network, based on:

  • highly efficient, cost-effective unit trains for bulk mineral flows;
  • longer trains on the main corridors, bringing economies of scale in operation, more efficient utilisation of locos and rolling stock and greater fuel efficiency;
  • uniform standards for wagons used on 'collection and distribution' traffic to and from feeder lines;
  • fewer origins and destination points, through collaboration with customers and incentivising them to consolidate smaller shipments;
  • developing intermodal services for key growth sectors such as automotive and chemicals.

Cross-border commitments

Over the past decade Spoornet has played a prominent role in the concessioning of railway operations in many African countries. In some cases it has been a partner in the concessionaire, and in others it has provided operational and commercial assistance. The railway has also leased locomotives and rolling stock to relieve hard-pressed and poorly-maintained fleets in a number of countries, for both 1067mm and 1000mm gauge operations.

Transnet's strategic objectives mean that Spoornet must now focus primarily on the domestic market, at least for the period up to 2012. An early result of this change of emphasis has been Spoornet's withdrawal from bidding for any new concessions, and there have been reports of uncertainties over its continued involvement with existing commitments.

Likhethe says 'Spoornet's new thrust will be Africa, but south of the Equator and without trying to be transcontinental'. He emphasises that 'Spoornet plays, and will continue to play, a leading role' in the development of rail as the key mode of transport across the SADC region, where the relationships are governed by agreements through the Southern African Railways Association.

'We have excellent relationships with our neighbouring railways', he insists. 'Over the past few months we have increased volumes to and from the SADC region significantly. Spoornet has various operational interchange agreements in place, and we have daily conference calls with our neighbours to manage the increased volumes and ensure efficient wagon turnaround.'

'Historic under-investment in rail has adversly affected the adequacy and efficiency of infrastructure to meet growing market demand and provide an efficient service.'

Siyabonga Gama

Chief Executive, Spoornet

Five-Point Turnaround Plan

  • Operating a scheduled railway
  • Customer service delivery
  • Creating capacity
  • Building employee and leadership capability
  • Safety

Table I. Spoornet's five-year capital plan, Rbn

Business area 2006-07 2007-08 2008-09 2009-10 2010-11 Total

Capitalised maintenance 2·7 1·5 1·5 1·2 1·2 8·1

Coal line 1·0 1·5 2·1 1·7 1·6 7·9

General freight business 2·4 2·6 2·3 1·8 1·8 10·8

Ore line 1·0 0·9 0·5 0·3 0·1 2·7

Group-related projects 0·1 0·1 0·1 0 0 0·4

Passenger Services 0·1 0 0·1 0·1 0 0·3

Transwerk 0·1 0·2 0·2 0·1 0·1 1·2

Total 7·3 7·0 6·8 5·4 5·0 31·5

Table II. Principal freight corridors in South Africa

Corridors Volume % growth million tonnes 1997 - 2003

Road Rail Road Rail

Gauteng - Richard's Bay - 74 - +11%

Sishen - Saldanha - 27 - +21%

Postmasburg - Gauteng - 8 - -6%

Postmasburg - Newcastle - 19 - 0%

Postmasburg - Eastern Cape - 2 - +9%

Thabazimbi - Newcastle - 1 - +10%

Gauteng - Durban 43·7 9·7 +21% -28%

Eastern corridors 23·2 14·1 +17% -6%

Northern corridors 29·5 3·2 +11% -31%

Gauteng - Cape Town 16·6 2·7 +29% 55%

Eastern/Southern Cape - Gauteng 9·1 0·7 -1% -33%

Coastal 11·1 1·3 -11% -28%

Western corridors 5·2 1·2 -15% 30%

Cape Town - Namibia 4·9 0 +12% -37%

Table III. Spoornet traffic by commodity sector

million tonnes 2003-04 2004-05 2005-06 2006-07*

Export coal 66 67 69 74

Export iron ore 27 28 30 33

General freight 83 82 80 86

Total 176 177 179 193

* 2006-07 is a budget projection; other figures are actual results

CAPTION: Upgrading of locos and rolling stock has enabled Spoornet to increase traffic on its Richards Bay coal line by 11% since 1997

Five-Point Turnaround Plan

  • Operating a scheduled railway
  • Customer service delivery
  • Creating capacity
  • Building employee and leadership capability
  • Safety

CAPTION: Spoornet expects to spend more than R250m on infrastructure maintenance in 2006-07, of which 40% will go on tamping and ballast renewal

CAPTION: Spoornet is spending R73m on the overhaul of critical components and rewiring of control systems on its Class 34, 35 and 37 diesel locos

CAPTION: Overhaul of the Class 9E electric locos forms a key element in a programe to boost capacity on the Sishen-Saldahas Orex corridor by 2010

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