Why private sector partnership is the key to South Africa’s rail revival
Rail holds the key to unlocking the domestic economy and its growth potential. It’s time for the public and private sectors to get on the same track.
By Mpho Mutloane - Investment Principal at African Infrastructure Investment Managers
For decades, South Africa’s economic potential has proverbially been running on a single, overburdened track. Our national rail network, once the backbone of a thriving logistics sector and export activity, has faced severe operational and financial challenges, creating critical bottlenecks for the entire economy.
We have seen the impact first-hand: exports have been hobbled, mining companies operated below capacity and could not get their commodities to market and our roads choked with heavy-haul trucks. This is not just a logistics problem; it is a direct constraint on our national GDP growth and economic ambitions as a country.
However, a profound shift is underway.
The government’s decisive move towards rail reform, opening the sector to private sector participation, represents the most significant economic infrastructure opportunity in a generation. For us at AIIM, we are not just observers of this change; we are active and optimistic participants, ready to deploy capital and expertise to help rebuild this vital artery of our economy.
Learning from the past to power the future
The parallels with our energy sector are instructive. For years, Eskom’s monopoly meant that the private sector was largely side-lined. It took a severe crisis in the form of loadshedding to catalyse change, leading to what is now a highly successful Renewable Energy Independent Power Producer Procurement programme. This model in energy demonstrated that when the public and private sectors collaborate through well-structured partnerships, we can rapidly address critical infrastructure deficits. We see the same trajectory for rail.
Transnet, like Eskom, is a critical national institution, but it cannot shoulder the immense investment and operational burden alone. The state has recognised that to revitalise our rail infrastructure, the efficiency, funding and innovation of the private sector are not just beneficial — they are essential.
Our experience as long-term infrastructure investors has taught us that the Public-Private Partnership (PPP) model is a powerful tool for this. It allows the government to secure world-class infrastructure without an immediate, massive capital outlay. The return for the private sector providing the infrastructure is earned over the constructed asset’s life, either through availability payments from government or user payments, which is most likely in the case of rail infrastructure. In addition, the partnership transfers construction, operational and maintenance risks to the private partners who are best equipped to manage them. The result is infrastructure that is delivered on time, within budget and maintained to a high standard, with ownership ultimately reverting to the state in the case of BOTs.
A landscape of opportunity and challenge
The reform agenda is two-fold, targeting both freight and passenger rail. On the freight side, Transnet’s Rail Network Code (also known as the Network Statement) and the Private Sector Participation (PSP) initiatives for key commodity lines are a welcome start. Targeted commodity lines for these reforms include coal, primarily from Mpumalanga’s coalfields to Richards Bay in KwaZulu-Natal, and iron ore (running from the Northern Cape to the Western Cape). These reforms promise to unlock billions of rands in private investment, increase line capacity, and get our exports flowing efficiently again.
On the passenger side, the recent Request for Information (RFI) from The Department of Transport relating to the operations of Passenger Rail Agency of South Africa (Prasa) is an encouraging signal. A functional, reliable passenger rail system is not a luxury; it is an economic and social imperative that gets people to work affordably, minimising road congestion and lowering our collective carbon footprint.
Naturally, this transition is not without its challenges.
A significant hurdle is defining clear and equitable risk-sharing models. For private capital to flow with confidence, we need certainty on issues like access to rail land, minimum volume guarantees for nascent operations and mechanisms for state default. The existing PPP framework provides a solid foundation, but it needs to be adapted thoughtfully to the unique complexities of the rail sector.
In other words, to attract private money, the rules need to be clear and fair, especially if things go wrong. The current system of rules is a good start, but must be tailored for railways.
Furthermore, there remains a trust deficit and a degree of hesitation from some state-owned entities. The fear of “handing over the family silver” is understandable but misplaced. Our role is not to usurp, but to partner. We are not seeking to enrich ourselves at the national expense; we are here to enrich the lives of South Africans by building the infrastructure that drives inclusive economic growth. The success of our long-standing PPP portfolio — from government buildings) to renewable energy projects — is testament to this commitment.
AIIM is ready to partner for the long haul
At AIIM, our investment philosophy is built for this moment. We are not passive investors. We take a long-term, active approach, seeking to build market-leading platforms in partnership with expert operators. Our investments in The Logistics Group, African Ports & Corridors Holdings and Bulkstream (all operating across ports, logistics corridors, and rail-related services across South Africa, Tanzania, Zambia and Kenya) for instance, have given us deep insight into port operations and the critical need for efficient rail linkages. This experience is invaluable as we look to the rail sector.
We are not speculative investors; we seek long-term, annuity-driven returns. This means we invest in essential infrastructure assets that generate stable, predictable cash flows, allowing us to deliver consistent dividends to our investors over the long term.
To respond to emerging opportunities in freight and passenger rail, we have built dedicated internal capacity. We have teams focused on both freight and passenger rail, and we are actively pursuing a pipeline of investments. For instance, we are actively pursuing growth in the passenger rail sector through our participation, as part of a bidding consortium, in the ongoing RFP process for a new operator of the Gautrain system in Gauteng, South Africa.
Our commitment is underpinned by our focus on sustainability and impact investing. Rail is inherently a greener alternative to road transport. By investing in modern, efficient and potentially electric locomotives, we can contribute significantly to South Africa’s decarbonisation goals while creating sustainable jobs and uplifting the communities connected by these rail lines.
The road (or rail) ahead
The journey to a revitalised rail system requires patience. Reforms of this magnitude take time to bear fruit; international experience suggests a five-to-ten-year horizon for tangible volume and efficiency gains. But the direction of travel is clear, and the destination is worth the patience.
At AIIM We are not looking for a quick exit. We are built to be a patient partner to the government for 20, 25 years, or longer. We are ready to walk, jog, or run at the pace that government sets.
South Africa is on the cusp of an infrastructure renaissance. By embracing a true partnership model for rail, we can transform this critical sector from a bottleneck into a powerful engine for economic growth, job creation and a more sustainable future. The private sector is ready. We have the capital, the expertise, and the patience. Let us get to work.