The rail sector in South Africa is at a breaking point and urgent action is required. From a freight perspective, Transnet’s incapacity to dispatch locomotives is at an all-time high. The National Logistics Crisis Committee estimates that the country’s macro logistics system loses circa ZAR1 billion a day.

By Scott Edmundson, Partner at Webber Wentzel

New rail-related legislation

The Cape Town Convention (CTC) and the Luxembourg Rail Protocol (LRP) are likely the most important global legislative developments and international treaties in recent times in the rail sector. The CTC was signed in Cape Town in 2001, and the LRP was adopted in 2007 and approved in June 2023 by Cabinet (SA) for ratification (following ratification by Luxembourg, Spain, Sweden, the EU, and Gabon).

The CTC and LRP, combined, aim to facilitate asset-based financing and leasing, expand financing opportunities, and reduce financing risk and cost, by enhancing legal predictability and creditor’s risk, particularly in the case of debtor’s insolvency. It is intended to make rolling stock financing easier and cheaper for the private sector by creating a system for recognition, priorities, and enforcement of creditor and lessor rights, with such rights registered on an online international registry, administered in Luxembourg. This means it is intended to be an overarching treaty that enjoys primacy over the contracting states’ domestic law so that when assets from or financed by, for example, international lenders and local funders, move across borders, the jurisdictional risk for those assets is reduced through the rights and remedies under the CTC and the LRP.

Although good progress has been made, the LRP has some way to go in terms of its full implementation – completion of the formal ratification process in SA is required and a domestic law/Act is needed to ensure the LRP is enforceable as a matter of domestic law. The administrators of the LRP also need to establish the international registry (the Rail Working Group is currently setting this up).

There are also certain challenges with the CTC as a matter of South African domestic law, ie:

• in certain limited circumstances, it may not currently enjoy primacy in the context of the Companies Act and business rescue;
• there are possible constitutional challenges depending on the insolvency declaration elected by SA when the LRP is ratified.

Liberalised rail market

The current state of the South African rail market is dominated by Transnet. Envisaged in the future state of rail are multiple train operating companies, each with their respective customers, and all engaging with (i) an independent infrastructure manager to manage the network and (ii) an independent economic rail regulator to set track access tariffs on a transparent, equal and economically substantial basis. Ultimately, this is what the National Rail contemplates.

Local rail reform: policy momentum

After a century without coherent rail policy in SA, the White Paper on National Rail Policy was adopted by Cabinet in March 2022. It outlines a range of interventions aimed at restructuring the rail market, with short-, medium-, and long-term policy reforms. Key reforms include:

• third-party access, which opens the network to private operators in a competitive rail market,
• the establishment of the independent Economic Rail Regulator (TER), which will regulate the access regime, as well as set pricing, compliance requirements, and appropriate penalties, and
• the vertical separation of Transnet, which means its accounting systems will be separated, and from a practical perspective, it will be separated into operations on the one hand and infrastructure ownership management on the other.

The policy further contemplates the development of the Private Sector Participation Framework (spearheaded by the Department of Transport) and it alludes to the National Rail Master Plan, anchored in the National Transport Master Plan (2015).

The Government’s intention is to codify the policy through the Economic Regulation of Transport Act (the bill was prepared in 2020 and is currently with the National Assembly (TER Bill)) which will form the roadmap for rail reform, sector liberalisation, and economic regulation of transport.

Embedded in the National Rail Policy is the introduction of an independent Infrastructure Manager, with the following planned functions: to own and maintain the network to approved standards, to allocate and sell slots on the network to train operating companies at TER-approved prices, determine access fees and terms (network statement), negotiate platform access agreements, to hold the Railway Safety Regulator (RSR) network operator permits and to provide a traffic management function.

Key risks: economic vs political solution?

The rail reform roadmap is a much-needed, clear, sensible, and achievable economic solution (even though the timing seems optimistic), but the political risk lies in the possibility that the progress of the TER Bill through Parliament is delayed in a fractious political environment during an upcoming election year; in ill-conceived requirements and conditions for slot sales and third-party access; and protectionism of the status quo by impacted stakeholders.

Webber Wentzel is a member of the Rail Working Group on the CTC and LRP, is a member of the Aviation Working Group, and is the only firm in Africa to be part of both working groups. The firm is also a member of the Legal Advisory Panel on the CTC, advising on matters of South African law and, again, the only firm in Africa to be invited to join the LAP.