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FREIGHT RAIL REVIEWPERFORMANCE REVIEW OF REGULATORY REGIME
GOVERNING FREIGHT RAIL INVESTMENT AND PRICING DECISIONS – DRAFT FINDINGS
BASANI BALOYI, 18 FEBRUARY 2014
OUTLINE
• Background to the Research Project• Global Perspective
- Relative performance/common regulatory regime• South African Perspective
– Policy / Regulatory Regime / Transnet Strategy• Macro-Level study:
– Regulatory Regime: investment / competitiveness / pricing• Unpacking TFR’s pricing model• Micro-level Case Studies
– Regulatory Regime: Investment / Pricing / Access Rules (citrus, autos, and Coalex)
• Where are we now?• Conclusion
RESEARCH BACKGROUNDOBJECTIVES / KEY QUESTIONS / APPROACH
RESEARCH OBJECTIVES
• Review the performance of the current governance of freight rail, with respect to pricing and investment decisions and competitiveness of general freight
• Describe and analyse the outcomes of the regulatory process with reference to pricing, competitiveness and investment in the context of the economic and industrial policy objectives of government
RESEARCH QUESTIONS
• How has SA freight rail performed relative to other freight rail countries?
• What are the common features of a regulatory regime in freight rail and what of the common features does SA regulatory regime possess?
• How has the regulatory regime strategy aligned with economic and industrial policy objectives over time?
RESEARCH QUESTIONS (CONTD.)
• What are the outcomes of the regulatory regime at the macro and micro level measured against investment, pricing and competitiveness within the context of governments economic and industrial policy?
• Evaluate the performance of the regulatory regime in meeting economic and industrial policy objectives at the macro-monitoring level and at the micro-level ?
APPROACH
• Macro-level performance review relied on desktop research particularly Transnet’s annual Reports and stakeholder interviews with Transnet, DPE and DoT
• Micro-level performance review approach is case study based (citrus, coalex, and automotives) and relied on desk top research and interviews with sectors
GLOBAL PERSPECTIVEPERFORMANCE AND REGULATION
GLOBAL MAP
GLOBAL MAP: SIZE OF FREIGHT RAIL BUSINESS
Comparison of Freight Rail Performance
Train Performance Freight Performance
Country Train km (millions)
Tonne/km (millions)
Mt 10 year CARG %
Freight Tonne/km
US 794 4,495,196 1710 0.7 2,254,585
China 1824 4,198,054 2,562,635
Russia 1473 4,043,783 2,127,832
India 1022 1,445,869 922 6.6 625,723
Canada 115 646,824 310 0.8 254,069
SA 60 170,083 182.1 0.2 113,342
Australia 29 101,956 242 5.7 59,649
GLOBAL COMPARISON: FEATURES
Common Features of Regulated Freight Rail Network
• Regulatory Independence• Rules: pricing, investment, services, performance and
access• Monitoring at macro-level: assessing KPIs• Monitored at micro level: Dispute settlement process
designed for regulator to arbitrate complaints • Legislation that gives investigative, enforcement and
decision making powers to monitor performance, design rules and settle disputes.
GLOBAL CASES OF REGULATORY SYSTEMS
Country Ownership Structure Key Features of System
USA Private vertically integrated with four main rail companies
Minimal regulation to encourage commercial decisionsRegulates mergers and acquisition activity Minimal regulation on pricingInconsistent performance monitoringSettle disputes when there are complaints
Canada Private vertically integrated duopoly
Medium regulation but encourages commercial decisionsRegulates pricing, access, serviceSettle disputes when there are complaints
Australia vertically separated private and public
More regulation Regulates pricing, access, service, new investmentMonitors performanceSettles disputes when there are complaints
SOUTH AFRICAN PERSPECTIVEREGULATORY REGIME AND POLICY
SA REGULATORY REGIME: PERFORMANCE BASEDDoT• Develops Transport Policy• Exercises oversight on Safety Regulator• Oversight on Acts that feature rail, most notable ones are
Succession Act ‘89, Railway Purchase and Construction Acts (‘71, ‘75, ‘85)
DPE• Shareholder and quasi-regulator role• Empowered as shareholder by PFMA, Company’s Act, • Regulatory instruments: shareholder compact, revenue
projections and approval of corporate plans• Therefore performance based regulatory regime
SA REGULATORY REGIME INTERPRETATION OF OVERARCHING ECONOMIC AND INDUSTRIAL POLICY
Macroeconomic Policy
Microeconomic Policy
DOT DPE
Phase 1: 1980s-early 2000s
Privatisation Competitive logistics for exportables
Aim: seamless & competitive intermodal transport system, boost general freight
Investments, End competitive market, Interim economic regulator
Privatise to max shareholder value & operational eff
Phase 2: mid 2000s - present
Capex for jobs and growth
Competitive logistics for value added goodsSOE buying power for BEE & industrial development
Max SOE developmental impact through procurement & investment
Less B/S financing to boost investment, esp GFB intermodality
MDS, Gearing, Profitability,
Investment, Vol, Operational eff, service delivery
R 194.4 b
Quantum LeapGearing,
Profitability,Investment, VolOperational eff, Service delivery
R 54.6 b
TurnaroundGearing,
Profitability,Investment
Rev: Vol > Price
R 31.5 b
Financial Stability; Freight focus; Grp Target
GrowthGearing,
Profitability,Investment,
Operational eff, VolRev: Vol > Price
R 34.8 b
GROW BUSINESS: Investments, GFB volumes; integrated planning, Divisional Target
SHAREHOLDER COMPACT NEGOTIATED CORPORATE STRATEGY
TRANSNET (FREIGHT RAIL) STRATEGY
Financing StrategyNo govt guantree
Cash from operationsRest capital market
Key CorridorKey Commodity
Investments in GFB > Coalex and Orex
GFB Volumes growth
Operational Efficiencies
6 corridors selectedCommodities: mainly
bulk, agriculture (grain), automotives & containers
REGULATORY REGIME AT MACRO-LEVEL OUTCOMES AND EVALUATION: INVESTMENT, COMPETITIVENESS AND INVESTMENT
CORPORATE PLANS: INVESTMENT TARGETS
Turnaround Plan Growth Plan Quantum Leap MDS0
20
40
60
80
100
120
140
160
Coal lineOre lineGeneral FreightOther
R m
illio
n
Bulk have targeted GRB
ACTUAL INVESTMENTS
2009 2010 20110.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
General FreightCoalIron ore
R bn
Have targeted GFB; however mainly used for sustaining
investments
VOLUME: IRON ORE ON TARGET
2009 2010 2011 20120
10
20
30
40
50
60
TargetActual
VOLUME: COALEX NOT ON TARGET
2009 2010 2011 201240
50
60
70
80
TargetActual
VOLUME: GFB NOT ON TARGET AND NOT AMBITIOUS
2009 2010 2011 20120
10
20
30
40
50
60
70
80
90
100
TargetLogarithmic (Target)
SERVICE: WAGON TURN AROUND TIME IMPROVEMENT FOR GFB.
Actual Target Actual Target Actual Actual Target Target2010 2011 2012 2013 2014
0
2
4
6
8
10
12
14
16 GFB Coal Iron ore
days
SERVICE: LOCOMOTIVE EFFICIENCY STAGNANT FOR GFB
Actual Target Actual Target Actual Actual Target Target2010 2011 2012 2013 2014
0
10000
20000
30000
40000
50000
60000
GFBCoalIron ore
GTL 0
00/l
ocom
otive
/mon
th
TARIFF GROWTH HIGHER THAN VOLUMES GROWTH
2007 2009 2010
-10
-5
0
5
10
15
20
25
Volume growth Target Volume growth ActualTariff growth Target Tariff growth Actual
%
TFR’S RISING TARRIFFS FOR INVESTMENT
2008 2009 2010 2011 20120
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
RailRoad
Reve
nue
per t
onne
TARIFF - Revenue per tonne higher than road in 2011 and
2012
MACRO-LEVEL EVALUATION OF REGULATORY REGIME
• GFB volume sluggishness: Regulatory regime has met investment targets and efficiencies but not achieved increased volumes especially in GFB
• Constrained investment environment: biased towards private rate of returns not social rate of return since most investments are sustaining invests which maintains rather than grows current customer base
• Investment strategy vicious circle: increase prices to generate revenue for investment which hampers volume growth in GFB given its current lower service levels.
MACRO-LEVEL EVALUATION OF REGULATORY REGIME
• Regulatory regime constrained: monitoring macro-level performance through KPIs cannot unpack underlying dynamics that explain possible sluggishness in GFB
• Deeper inquiry required at micro level: to unpack the outcomes generated by TFR’s access, service and pricing regime to assess alignment with economic and industrial policy
UNPACKING TFRS PRICING MODEL
DIFFERENTIATED PRICING MODEL
Required Return Coalex Auto CitrusReturn on Asset BaseWACC (risk)DepreciationTaxExpensesCommodity profitabilityCross-subsidisation
ACCESS RULES
• Customer with direct account/key account with TFR
• Submit volume projections to TFR marketing/customer service
• TFR sector teams organise access by identifying slots for the year, negotiate contract and oversee service of contract
• Containers have third party access granted by logistics company with Key Accounts
BIGGER VOLUMES = BETTER PRICES = BETTER ACCESS
• MegaRail: minimum 30 loaded wagons, 5 days a week, annual contract
• Only once slots, locos, crews are allocated for MegaRail is the rest allocated for the pricier AccessRail and FlexiRail
• AccessRail: regular operation, operates trains from other train moves ending at hub
• FlexiRail: irregular, ad hoc for sudden unscheduled demand
Differentiated Pricing Volumes Access
COSTS DUE TO LACK OF STANDARDISATIONDifferentiated Pricing Network technology Costs
COSTS DUE TO COMPLEXITY OF GFB NETWORK
But how are overheads costs and depreciation distributed
across the network?
Differentiated Pricing Network technology Costs
REGULATORY REGIME AT MICRO-LEVEL OUTCOMES AND EVALUATION:TFRS INVESTMENT, PRICING AND ACCESS RULES USING 3 CASE STUDIES
CASE STUDY 1 : COALEXACCOUNTING FOR THE VOLUME GAP
COALEX: SNAPSHOT
Significance to economic and industrial policy• Coalex’s significance to economic/industrial policy is
broadening participation to BEE/junior miners
Market structure• Coal production highly concentrated with 5 producers
controlling 80 % of production based in Mpumalanga
• Monopsomy power
COALEX: SNAPSHOT (CONTD)
Network Access• 100% of mostly higher grade thermal coal is railed on
dedicated Rail line from hub (Ermelo) to Richards Bay Port Terminal using MegaRail Service Plan
• Dedicated line for coalex built in 1970s by Act
• 70 mpta allocated on an annual monthly weekly through contract
COALEX GAP: INVESTMENT DISPUTES
• Coalex line recipient of investments• Growth was facilitated through medium to long term contracts
10 years (ended in 2005) which helped TFR recover risk through guaranteed take or pay volumes
• 9 year dispute over TFR’s investments• Contestation: some majors argue constrained from maximising
port capacity as TFR is under-investing; TFR argues some majors cant fulfill orders due to underinvestment in coal mining
• Not resolving this is blocking potential access to the network if true that coal miners are structurally constrained from fulfilling orders
COALEX GAP: ACCESS DISPUTE
• On-going dispute between TFR and junior miners on the one side and major miners on the other about access onto the rail-port logistics system.
Juniors and TFR: majors blocking access to ports by not increasing Quattro allocation forcing juniors to sell to majors at lower than export price
Majors: juniors cannot even make up their current quota allocation of 4 Mt, we will increase capacity until rail capacity is increased
CASE STUDY 2 : CITRUSACCOUNTING FOR NO VOLUMES ON RAIL
CITRUS EXPORTS: SNAPSHOT
Significance to economic and industrial policy
• NGP targeted rural development and agricultural sector for labour intensive growth
• Industrial Policy targets regional industrialisation
CITRUS EXPORTS: SNAPSHOT
Market structure and dynamics
• Over 1000 citrus growers in Western and Eastern Cape and in Northern Region (Limpopo, Mpumalanga, Zimbabwe and Swaziland)
• Sector employs one statistic 100,000 workers another 400,000 workers
• Northern region produces 800,000 pallets annually
• Logistics cost for Northern region 60% of revenue about 25 % is land freight logistics
• 2005: 80% of Northern region volumes on rail 2013 5 %
CITRUS EXPORTS: INVESTMENT NEEDS
• Historically citrus transported on rail using O type wagons but market dynamics last 5 years moved to container– Need for more reefer containers as 80% of citrus exports
are transported via containers• Deregulation of transport and agricultural boards fragmented
export supply chain– Need for hub in Limpopo to centralise supply chain
CITRUS EXPORTS: INVESTMENT DISPUTE
• Transnet deems citrus not rail friendly due to seasonality and disinvests to focus on iron ore and coal
• Transnet removes citrus from network linking Northern region through Swazi loop to Richards Bay in favour of bulk commodities
• Currently 350 trucks transport citrus to Durban weekly
• Transnet promising investment since Quantum leap
• Industry argues meager investments in containers wasted due to failure of TFR to consult industry to customise containers
Letistele (Limpopo)
average cost per plt 28 standard (2010)
Average cost per plt 26 standard (2010)
Rail R 610 R 640
Road R 643 R 692
Difference R 33 R 52
CITRUS EXPORTS: PRICING DISPUTE
CASE STUDY 3 : AUTOQUASI-REGULATOR AND AUTOS ARRANGEMENTS
AUTO SECTOR: SNAPSHOT
Economic and Industrial Policy
• Sector has received industrial policy support since the 1960s due to linkages/spillovers, technology and employment
Network Access
• Containers and wagons use Durban Corridor from Roslyn recently Maputo
• 90 % CKD on rail containers and 10-30% CBU wagons
AUTO: POTENTIAL FOR INDUSTRIAL POLICY TO SHAPE OUTCOMES
Issues:• Rail investment was part of package attracting autos sector to Roslyn• Industry claims Transnet cannot live up to service agreement as it is
unreliable Solutions:• Industrial policy alignment introduced recent investments in
customised wagons through TFR-auto sector design partnership• Quasi-regulator has been recently involved in the sector through
newly est. SOC Automotive Competitive Forum to remove electricity and transport stumbling blocks with Ministerial support
• Projects are targeted towards wagons as containers are complex.
MICRO-LEVEL EVALUATION OF CASES
• Case studies reveal a range of on-going/unresolved disputes in the form of investment, pricing and access that are holding ransom the aim of economic and industrial policy to ensure a competitive and efficient logistics system
• Disputes within coalex in particular is preventing the possible shared use of that infra by other players within the sector or other sectors if investigations by a credible dispute settlement process reveal that certain coal miners cannot fulfill their orders
MICRO-LEVEL EVALUATION OF CASES
• The involvement of quasi-regulator in the auto sector in fast tracking improvements shows the need for a third party as it brings to question whether these arrangements are open to other sectors who have less organising power than autos
• Case studies also reveal that containers, which are most likely to contain value-added goods, are not well prioritised due to system of using unregulated third party accounts
HOW OTHER REGULATORS DEAL WITH DISPUTES?
Australian regulator handling of lack of access/new investment in citrus case solution• Infra owner responds to access seeker within 30 days with
indicative capacity assessment, negotiations for entry begins, if no capacity then infra owner must produce a work programme for expansion
• But 60 % of access seeker industry must sign a contractual agreement with infra owner that they will make use of new investment and that this will be fed into the tariff charged over a particular time frame with penalties for non-delivery
Does citrus have profitability for the tariff, could there be need for a subsidy?
Australia regulator handling of pricing disputes in containers• Regulator calculates reference pricing which is
implemented if investigation view as necessary or
• Negotiations take place within a regulator set max and min rate
• Pricing determined by regulator based on reasonableness & efficiency of network owner forecast, capital expenditure, maintenance & operating costs
HOW OTHER REGULATORS DEAL WITH DISPUTES?
Canadian regulator handling of the coalex-TFR slow contractual agreement• Complaints are forwarded to regulator for arbitration,
complainant has burden of proofCanadian regulator handling of complaints over poor service delivery• Contract must specify the service• If investigation finds breach of contract then application
of penalty
HOW OTHER REGULATORS DEAL WITH DISPUTES?
WHERE ARE WE NOW?
WHAT IS THE END GAME?
DoT- Regulator is NB: price and access- End Game: Privatisation of TFR- Process: White paper Rail Act STER
reporting to Parliament 10 yrs- Interrim process: Interrim regulator,
Rail policy Green Paper
DPE- Regulator is NB: price and access- End Game: No privatisation to align
with Presidence and govt policy- Process: Land Freight Policy creating
intermodal competitive neutrality Regulator
Industry- Regulator is NB: price and access- End Game: Privatisation but ensure at
least 2 companies to ensure competition – Autos; Coal we will run it like in Australia.
TFR- Regulator is NB: price and access- End Game: No privatisation to align with
Presidency and govt policy - Process: Land Policy Freight Policy
creating intermodal competitive neutrality regulator
All stakeholders agree regulator needed, but not how
CONCLUSION
Recap: Project Objectives• Reviews the performance of the current governance of
freight rail with respect to pricing and investment decisions and its impact on volumes and competitiveness of general freight
• Describe and analyse the outcomes of the regulatory process with reference to pricing, competitiveness and investment in the context of the economic and industrial policy objectives of government
Take-Away Points: Macro-level Analysis Revelation
• Macro-level analysis reveals GFB volume underperformance for much of the analysed period: – constrained investment environ sustaining and growing
current customer base rather than expanding and diversifying where possible• reliance on b/s financing means increased tariffs triggering
vicious circle of lower vols from GFB at current service levels– Focus is on key corridor and key commodities selected
based on revenues generated having implication for ‘new’ customer base
Take-Away Points: Micro-level AnalysisRevelations
• Unresolved disputes between TFR and vested interests are blocking possible access to the network for GFB - Major coal miners contract dispute- Major-Junior miners rail-port logistics dispute
• Allocation of resources and access benefits those currently served by network & at times aided by quasi-regulator- sectoral arrangements to serve industrial policy– Coal and autos wagons are served– Citrus not served
Take-Away Points: Micro-level AnalysisRevelations
• Unregulated third party logistics pricing makes containers uncompetitive at current service levels– Citrus
Take-Away: Economic Regulator Role• Economic regulator needed to resolve pricing, access and
investment disputes constraining GFB volumes• Given monopolistic structure regulatory regime should be based on:– Proactive performance monitoring– Reactive regulated arbitrage model encouraging
commercial decisions over pricing, access and new investment within set out parameters
– Complainant has burden of proof based on certain tests• Fast-track interim regulator before regulator is bound by possible
‘anti-competitive’ long-term contractual regimes• Should there be a formal process for quasi-regulator & sectoral
arrangements that include DTI and EDD for resource allocation towards key sectors, before the setting up of regulator?
THANK YOU
DISCUSSION