Park Hyatt Hotel, 8 November 2000
It is a great pleasure and an honour to address the top customers of South Africa's national railway, Spoornet. It is best to understand Spoornet's future by locating the rail sector within the broader South African economy and then discussing the challenges facing this sector.
All things considered, Spoornet is essentially a freight business, transporting a variety of cargoes both within South Africa as well as carrying exports and imports to and from our country.
Historically, South Africa has been a major producer and exporter of primary commodities, particularly in the minerals sector. Although the economy is currently undergoing major structural change to shift production and exports from primary commodities to high value manufactured goods, minerals and ore remain an important dimension of the economy's production structure.
All over the world, as in South Africa, rail is the primary means of transporting bulk mineral commodities. Hence there is a direct link between the efficiency of rail - in terms of cost and service - and a country's competitiveness in this sector. The further impact of this sector on general economic development is also obvious.
Container freight in South Africa is growing rapidly as the economy diversifies away from primary commodities and towards the production of manufactured exports. While a large volume of containerised freight is transported by rail, the bulk of such freight is currently transported by road. The reasons for this are many, and there have been a number of unintended consequences, but the trend could be reversed through a transformed rail sector.
The increase in permitted Gross Vehicle Mass for trucks has served to divert a significant volume of freight from rail to road. This is exacerbated by a weak policing system, resulting in trucks exceeding the permitted masses. Moreover, there is evidence to suggest that road freight generates a range of externalities - including damage to roads, pollution, road congestion and even road accidents - for which the providers of this service do not bear the direct cost.
In the context of the broader South African economy rail currently plays a critical role in the transportation of bulk commodities. The critical challenge this sector faces in the future is to enhance the efficiency of rail transport as well as to become more competitive vis-à-vis road freight. The Department of Transport is currently coordinating a thorough assessment of the road/rail freight environment.
Spoornet is the largest division of Transnet. It comprises a general freight business ("GFB"), a heavy haul coal line ("COALlink"), a dedicated heavy haul iron ore line ("OREX"), an inter-city passenger service operation ("MLPS"), the Blue Train luxury train service ("LuxRail") and an operation which will address the issue of branch lines ("LinkRail"). In addition, Spoornet has a division, Rail & Terminal Services ("R&TS), which maintains and operates the working railway.
Spoornet has faced increasing competition in its general freight business as a result of the deregulation of road hauliers. This has resulted in GFB having a large negative cash flow. This has been mitigated by strong cash generation by COALlink and to a lesser degree by OREX.
The challenge therefore, is to reverse the large negative cash flow of GFB, while at the same time improving its efficiency, measured by the cost levied and service provided to its customers.
Halcrow, a firm of international repute specialising in the turn-around of state-owned railways, were appointed by government in March this year to provide advice on how GFB can accomplish a turn-around. Their brief was to identify measures that in their view would enhance the service GFB provides its customers while at the same time eliminating the losses it is currently incurring.
The Report was presented to me in October. It has also been presented to other relevant stakeholders. Despite recent reports that have made a piecemeal assessment of the Report, neither my Department nor government as a whole has adopted the Report in its present form. After all, consultant's reports merely provide us with material that needs discussion, evaluation and assessment prior to the adoption of plans for implementation.
A key challenge for government is to examine the recommendations against a socio-economic perspective in order to find ways to mitigate the impact of any or all the recommendations, including those that refer to direct job losses and closure of very low density lines.
While it is the responsibility of Spoornet's management to enhance the efficiency of the business, the challenge facing government is to definitively address the road - rail issue. Policy measures must be put in place to counteract the consequences of unregulated road haulage. This will serve to level the playing field which is currently tilted very heavily in favour of road transport.
Furthermore, government must take into account a considered view of the relationship between its rail network in rural areas in particular, the current and potential volume of traffic on underutilised lines, and the requirements and opportunities offered by the rural development strategy. Book-keeping economics in single sectors may at times be exaggerated at the expense of broader objectives that have a longer term economic impact. Whilst the current operation of some lines is problematic, we cannot take a mechanical and simplistic view as to what future requirements may be. It might not make sense, in other words, to cut and close now when the time may come when rail infrastructure would be needed in 20 or 30 years time in the same areas.
The transformation and restructuring of South Africa's rail sector, while it poses a range of challenges, also gives rise to a broad spectrum of opportunities for the South African economy.
An efficient railway service, with lower costs and better service to customers, will undoubtedly give a major boost to South Africa's export competitiveness. The South African government is of the view that the introduction of private sector operators into this sector will meet a range of government objectives including the inflow of foreign direct investment, technology and management expertise.
Rail is a strategic government asset, and we do not foresee the wholesale privatisation of rail as viable. Instead, private operators will have a significant role in South Africa's rail network by way of concessions and public-private partnerships and, in some instances, as strategic equity partners.
In addition to enhancing the efficiency of rail, the Foreign Direct Investment which such initiatives generate, will reduce government's indebtedness and hence reduce the cost of capital throughout the economy.
Government is also keenly aware of the need for revamping and stepping up the maintenance of key areas of rail infrastructure, not only in South Africa, but also in the region as a whole. In this regard, we are encouraged by developments within SADC, particularly in the transport sector. The growing integration of Southern Africa and the prospects for increases in easier two-way traffic of imports and exports poses enormous challenges on our rail and road sectors. These are opportunities that cannot be missed, and in many ways need to be tackled before rather than after the changes take place. Already recent announcements of increased investment in rail, port infrastructure and the consolidation of SDI plans throughout the region indicate that we are serious about developing this sector very energetically.
These are opportunities which government intends to exploit over the next four years in order to meet its macroeconomic objectives, as well as its objectives for the rail sector.
In sum, the critical issues that will influence the future of Spoornet, and this audience as its primary customers are:
These factors in turn do not interact in a vacuum. A holistic, longer term assessment of where the economy is going, where we want development to occur and how we wish to see communities empowered for growth and prosperity will influence the decisions we take. The changes that have already been brought within Spoornet are very encouraging and we believe that although much still needs to be done, we are well on our way down the path to a vibrant, successful and people-centred rail business and sector in South Africa and beyond our borders.
I thank you.