A Symbiotic or Non-Symbiotic Relationship?

Private sector involvement is vital to rail reform, but cooperation with the government is equally important. So says BONGANI MANKEWU, who recently presented a fascinating paper on this subject at the Transport Forum.

Transnet and the Passenger Rail Agency of South Africa’s (PRASA’s) pathetic ‘stability’ is impeding the logistics sector’s ability to grow sustainably in South Africa because of the entities’ monopolistic position. Likewise, effective and efficient logistics are required if the economy aims to play a significant role in international trade. The ability of railway transportation networks to transport natural resources is crucial to economic growth. In African economies, however, railway transportation accounts for only 20% of overall freight volumes according to Norbert Wagener. A dull agenda to attract capital and a depressed fiscal environment contribute to this problem. Furthermore, there is a strong correlation between transportation and logistics networks and social mobility, and – by extension – access to economic hubs.

Consequently, South Africa’s transportation and logistics system compromises economic progress and worsens social disparities created by apartheid. There should be applause for the attempts to consider potential reforms within the transportation and logistics systems. A roadmap for the South African freight logistics system was drafted as a result of this revolutionary thinking; railway and logistics stakeholders should support this noble initiative. Though these are the main industries that limited growth prospects, the larger reforms envisioned in the electricity, freight logistics, and other network industries must not result in the state’s hegemony being subjugated to the private sector in a society as unequal as South Africa.

The political leadership ought to embrace and practice the idea of nationhood throughout all spheres of society, as it is either non-existent or dispersed in South Africa. Dissolving the business and government trust deficit is necessary for the private sector to support the public sector honestly and effectively in carrying out its public service obligations. The state must remain a key participant in this reform process. Due to South Africa’s unique historical circumstances, industrialisation – the only viable solution to address inequality and create decent jobs – cannot be driven solely by the private sector.

Given the railroad reforms’ substantial economic impact, due diligence is necessary to ensure that industrial and macroeconomic policies are consistent. Due to South Africa’s inherent inequalities, misaligned macroeconomic decisions adversely impact the material conditions of a sizable portion of the population. Non-inflationary growth policies now dominate South Africa’s fiscal and monetary policies. These prioritise consumption over labour- and capital-intensive industrialisation in key sectors of the economy, including the government, financial sector, and households. Macroeconomic policies in general should be placed under the microscope, given the unfortunate state of the South African economy. Should macroeconomic policies emphasise aggregate demand “mass production”, to reduce unemployment, while implementing further measures to control inflation, or instead focus on aggregate supply “mass consumption” to maintain low inflation? Given the availability of commodities in South Africa, this reform process should make people think about the Phillips curve, which shows that unemployment and inflation have an inverse relationship – that is, lower unemployment is linked to higher inflation, and vice versa.

Though, ironically, the paralysis targeted Transnet’s internal procedures, the freight logistics system roadmap identified the variables affecting underperformance in the industry. Of the seven factors identified, only governance and regulation can be attributed to the entire crisis that bedevilled the railway ecosystem. The lack of foresight in diagnosing a system posing such a crisis to the economy can be directly linked to self-interest derived from a miscomprehension of the concept of nationhood.

In addition to inadequate regulation and governance, there are other significant bottlenecks keeping railway infrastructure that is financed through public-private partnerships (PPPs) unbankable. These factors include fiscal constraints; investability and bankability; information asymmetry; inequitable transaction costs, deteriorating industry confidence and standards; political volatility; and the degeneration of railway operators. Upon modelling the sampled railway ecosystem, the rest of the factors negate investability and bankability. In a hastily planned infrastructure project, investability and bankability are hence impossible, due to the incoherence of the system.

Information asymmetry and inequitable transaction costs within the South African railway ecosystem compromise the investability and bankability of PPP-financed railway infrastructure. This transfers the bargaining and opportunistic cost disposition of tangible common equity to the concession. The two root cause factors – information asymmetry and inequitable transaction costs – illuminate to the industry the need to review the standard contracts in contrast to their acceptable state in railway infrastructure financing.

Thus, the vested interests of the various stakeholders within the infrastructure financing ecosystem can be seen in the relationships between identified factors within the railway ecosystem. These vested interests exacerbate the negation of bankability and foster corruption, which erodes the principles of non-intervention and non-preference. Critical to any possible success of the logistics reforms (particularly railways) would be:

1) Institutionalisation of project preparation,

2) Re-evaluation of contract standards aligned to an effective regulation,

3) Regulation of the separation of power between principals (government) and agents (railway operators),

4) Regulation of a governance code of conduct that must be enforceable.

Bereft of these conditions, the practice weakens governance, institutions, and regulation, restricting state-owned railway companies’ ability to compete globally and attract investment. The two fundamental obstructions to the bankability of PPP-financed railway infrastructure projects are crucial to exploiting contemporary financial infrastructure systems when they are commissioned, deployed, and ultimately delivered and traded through markets. The primary conditions for adequate public sector participation in the infrastructure roll-out are:

1) Reviewing the mandate of the local development finance institutions,

2) Regulating transaction advisory firms/bodies through the PPP regulatory framework,

3) Establishing a drive to develop local engineering, procurement, and construction firms,

4)  Advancing local railway standards to be integrated with the global standards.

South Africa can take advantage of the direct involvement in the commercialisation of railway infrastructure delivery through these mechanisms and consistent re-evaluation of critical factors to attain infrastructure redevelopment objectives, obtain revenue, and have a major impact on the economy and society. Infrastructure delivery can be commercially exploited by easing investability and bankability through effective regulation of private participation in infrastructure and efficient governance in state-owned enterprises.

Infrastructure investment can be harnessed as an agenda for political hegemony, nation-building, and economic development as part of a framework for globalisation. To make this a reality in infrastructure delivery and financing, judicious, enlightened, and technocratic governance practices must be sacrosanct.

Through the proper structure of private sector participation, the government can positively impact productivity and export development, thus nurturing nascent entrepreneurs downstream of the value chain. The government can foster this process by promoting productivity and exports through the appropriate framework for private sector participation.

The transparent coordination of vital stakeholders, including the Transport Forum and ARIA – throughout all stages of this commendable reform process – is necessary to halt the bargaining and opportunistic costs inherent due to fragmentation and the lack of nationhood.