Economic Regulation of Transport Act ushers in a new era of rail and privatisation

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The Act introduces major changes to the transport sector by establishing the Transport Economic Regulator (Regulator), a crucial step in rail reform following the gazetting of the draft Network Statement by Transnet SOC Limited (Transnet) on 19 March 2024, which we previously discussed on 2 May 2024 here.

It is intended that the Regulator will serve as a consolidated economic regulator for transport, regarding road, rail, shipping, ports and aviation. Accordingly, the Act has amended the National Ports Act 12 of 2005, the Airports Company Act 44 of 1993, the Air Traffic and Navigation Services Company Act 45 of 1993, the National Land Transport Act 5 of 2009 and the South African National Roads Agency Limited and National Roads Act 7 of 1998.

If implemented effectively, This streamlining of regulators will help make the transport system more efficient and cost-effective. As previously noted in our article, the ambit of the Act is vast and its implementation will not be without its challenges.

The Minister of Transport may also extend the Act’s ambit to other public entities, markets, facilities or services, including, significantly, private entities, under certain conditions. This provision is particularly relevant for sectors where private entities are the sole providers of services and monopolies.

The key aspects of the Act are the empowerment of the Regulator to control prices across the transport sector and the introduction of provisions governing access to rail infrastructure (currently under the control of Transnet) by third parties, including private sector players.

Price regulation

The Regulator is envisaged to act similarly to the National Energy Regulator of South Africa (NERSA), and will approve price tariffs of regulated entities, such as Transnet, for use of the infrastructure in those sectors. This aims to prevent monopolistic pricing by regulated entities and inefficiencies, while also levelling the playing field. Importantly, the Regulator has the discretion to tailor the price controls with respect to each sector.

The process entails the submission of tariff proposals by regulated entities for approval. These proposals may be varied and approved with or without conditions, or denied and be subject to a request for a new pricing proposal by the Regulator.

In determining price controls, the Regulator must consider proposals on a case-by-case basis, with regard to the following factors:

• The regulated entity’s operating efficiency and effectiveness;
• The need for investment and security of supply in the regulated market
• The opportunity cost of capital, including the average rate of return on other similar domestic or international services
• The actual or forecast cost of debt
• Any reasonable cost differentials between the different types of facilities provided
• The likely effect of the proposed price control on the economy, employment, consumers and small or medium enterprises
• Any advantage or disadvantage an operator has due to state investments, transfers and legislation.

Notably, there is no mention of capacity as a rate determinant as historically applied by NERSA, which has resulted in hiked-up tariffs. Importantly, the Regulator is also mandated to consult with industry players and the public regarding the proposed price tariffs before approval.

Existing sector price regulations (and any new regulations published by the Regulator) will remain in force until the Regulator publishes a new price control. Unfortunately, there is no provision for an internal review of the price controls or a general period for which the price controls will remain in force.

However, the Regulator is still empowered to conduct an extraordinary review in terms of section 12 of the Act and to direct a price control reduction, in terms of section 21, pursuant to an investigation following a complaint. Additionally, the Act establishes the Transport Economic Council, as the primary adjudicative entity, to which “any person adversely affected” by a decision by the Regulator may apply for review of a price control determination.

Access to infrastructure One of the most impactful developments is that Chapter 2 of the Act provides for access to rail infrastructure, currently controlled by Transnet, by means of standard terms or bilateral agreements with “access seekers”. This paves the way for privatisation of the rail sector, as it will entitle, inter alia, private sector players to access Transnet’s rail network, subject to an access agreement to be concluded with Transnet approved by the Regulator, and payment of an access fee.

Minimum requirements must be met in terms of the access agreement before submission to the Regulator, and the conclusion of the access agreement is subject to a lengthy and detailed process, which may involve the Regulator seeking representations from all entities using the infrastructure. The Regulator will thereafter work with Transnet’s Infrastructure Manager in overseeing access to the rail network, in allocating slots and capacity.

In terms of its draft Network Statement gazetted for public comment on 19 March 2024, Transnet proposed a minimum access fee of 19,79 cents/gross ton per kilometre to the rail network. This has drawn significant negative attention in the rail industry as it is based on gross rather than net weight and may have the consequence of increasing transport costs across the supply chain. In turn, this may result in increased resort to road transport.

However, the Regulator has ultimate power in terms of the Act to determine the minimum access fees and therefore, this minimum access fee is subject to approval by the Regulator and will hopefully be revised, taking into account industry and stakeholder feedback. As in Transnet’s circumstances, many proposed price tariffs will likely be contested, which may delay the implementation thereof.

Ultimately, the principles in the Act, if implemented effectively, coupled with the increased regulatory oversight of the Regulator, and with due consideration to industry stakeholders, may assist in eliminating market abuse by monopolies and corruption, as well as increasing competition and transparency.

The Act is ambitious in its scope and represents a significant step towards achieving rail reform in South Africa, as it is one of three instruments outlining implementation of the reform, in addition to the National Rail Policy (adopted by Cabinet in 2022) and the Freight Logistics Roadmap. The underlying principle of the rail reform is liberalisation and the opening of the door to private investment, which if achieved, can reduce Transnet’s historic debt, increase freight volumes in the rail network, reduce transport costs for the public and ultimately expand and improve the economy.