THE STUDY ON GLOBAL COMPETITIVENESS BY REDUCING

TRANSPORT COSTS

PREPARED FOR THE DEPARTMENT OF TRANSPORT

BY LASHKA 166 (PTY) LTD t/a LASHKA CONSULTING

Contact: Mr. B Magqaza Tel: +27 (11) 051 5120 Cellular: +27 (83) 459 7265 Email: lashka166@gmail.com admin@lashkaconsulting.co.za

30 June 2018

1. Introduction

1.1. Background Since democracy, the South African economy has exhibited relatively modest economic growth, averaging 3.2% from 1994 until 2015 (World Bank, 2017). However, this growth in the economy has not managed to reverse the high levels of unemployment and poverty that have continued to fault the country’s developmental trajectory. The country requires economic growth that will reverse the vices of unemployment and poverty. Besides domestic bottlenecks such as labour disputes and ageing infrastructure, the country also needs to help firms build capacity to compete, identify and capture opportunities in global markets. Improving international trade is one of the key components towards economic growth and sustainable development. To play a major role in global trade, South Africa needs to enhance its global competiveness. The World Economic Forum (WEF) defines global competitiveness as the “set of institutions, policies and factors that determine the level of productivity in a country” (WEF, 2014: 4). The more productive and efficient a country’s firms are, the more likely it can improve its share of global trade. According to the 2016/17 edition of the Global Competiveness Report, South Africa is ranked 47 out of 138 countries in terms of competiveness, or an average rank of 48.2 between 2007 and 2017. The country scored 4.35 points out of 7 on the same report. The average score across the countries analysed between 2007 and 2015 was 4.38 points. Figure 1 below provides a picture of how the country has fared in terms of competitiveness in the past nine years. The trends show that there is considerable room for improvement in terms of South Africa’s global competitiveness and identifying and strengthening the enablers of a country’s competitiveness is key for improved trade performance and consequently sustainable growth. Figure 1: South Africa’s Competitiveness Index and Rank

Source: World Competiveness Report (2017)

1.2. Statement of the Problem One key component in the competitiveness debate is transportation services. Transport is a significant input and facilitator of trade and the movement of people. Transport services impacts on the costs of the inputs and intermediate goods used in the production of final goods and services in an economy. It also facilitates trade by moving final goods from their point of production to ports of entries and exits in countries, thus having a further impact on the final price of the good for exportation or importation. Therefore, the final price of goods and services can be relatively and unnecessarily higher if transport services in a country are costly due to it being inefficient and ineffective. Higher prices for final goods and services will negatively impact on a country’s competitiveness in global markets. According to Chasomeris (2011), recent international efforts to promote free trade and subsequently reduce barriers to trade have seen a gradual decrease in tariffs on traded goods. Given this trend, he argues that transport costs have become, by default, a barrier to trade if such costs are relatively higher. For goods to be globally competitive, transport services; including that of cost, quality and infrastructure, need to be efficient and effective. Transport and other costs of conducting business are therefore key factors in a country’s ability to participate fully in the world economy and engaging effectively in trade. High transport costs reduce foreign earnings from exports, increase the price of imports and subsequently drives up inflation. When import prices increase, there are also welfare loss implications on the country’s consumers. In order for South Africa to become and stay globally competitive, a competitive, effective and efficient transport system is pivotal. Therefore, a holistic and coherent approach is required to analyse the cost of transport in South Africa in order to determine whether such costs are impacting on the competiveness of the country globally. One needs to identify the cost drivers in each mode of transport and how such costs compare with the country’s competitors in the global market. In addition to such cost comparisons, the relatively efficiency of South Africa’s transport sector needs to be quantified, as inefficiency and poor service quality drives up the costs of transport in a country. 1.3. Objectives of the Study It is against this background that the Department of Transport (hereon the DoT or the Department) seeks to undertake a comprehensive analysis of transport costs in South Africa to ascertain their potential impact on the country’s global competitiveness. This includes an analysis of the passenger and freight components of all modes of transport i.e. road, rail, pipeline, maritime and aviation. These series of studies was meant to benchmark the operations of these sectors in terms of production and costs

against its competitors in order to make recommendations on how transport can be managed to enhance the country’s global competitiveness. These reports on each mode of transport were completed over a period of five years. This document serves as a consolidation of these five pieces of research. The specific objectives of the studies were: a) Identifying and computing transport costs (both domestic and international) with

the purpose of reducing them and rendering the SA economy more competitive b) Comparing the cost of transport in South Africa with those of other countries and

accounting for the difference in these costs. c) Comparing efficiency and productivity of transport in South Africa with those of

other countries d) Recommending viable methods/mechanisms/systems to reduce the transport costs

in order to boost the country’s competitiveness. 2. An Overview of the Transport Sector in South Africa This section provides a brief overview of the impact of the transport sector on the economy and economic growth and as well as a situational analysis of the different transport modes in South Africa. Understanding the role of transport in the South African economy is key in contextualising the problem statement and the need to reduce transport costs to facilitate greater trade and economic growth. 2.1. Economic Contribution of the Transport Sector The first panel in Figure 2 shows the direct role transportation services play in the economy. The share of the sector to GDP has gradually grown in the past two decades: from about 6% of GDP in 1993 to 8% in 2016 making it is the 5th largest sector in the economy. The second panel in Figure 2 shows that the growth of the transport sector has mimicked the trajectory of the wider economy very well. The sector suffered huge setbacks during the 2009 recession and only recovered slightly during the subsequent 2 years, before it witnessed a steady decline again.

Figure 2: Transport’s Contribution to the National Economy

Source: IHS Global Insight and Statistics South Africa While the analysis above shows only the direct production or value add that transportation services provide to the economy, one can argue that transport’s indirect role in facilitating trade and movement in the economy is of greater benefit than its direct contribution. Transport’s indirect role in the economy includes facilitating the movement of people and capital to places of work to aid production, facilitating the movement of intermediate (to facilitate the production of other goods) and final goods (to facilitate trade), promote tourism and to assist in fostering greater trade, improved business activity and innovation by providing people with the means to meet and discuss new ideas and agreements. Given this direct and indirect effect of transport in the economy, Han and Fang (2000) confirm that the full impact of transport’s role in the economy is difficult to fully determine. The author’s highlight four measures of transport’s contribution or importance to the economy, namely: • Transportation’s GDP (as described above) • Transportation’s final demand – The sum of all goods and services that is

delivered to final users for transportation services. This includes vehicle delivery, fuel delivery and high way construction (Han and Fang, 2000)

• Transportation related GDP – These are goods and services that are produced to generate or facilitate transport. This includes purchasing of motor-vehicles to satisfy a person’s need for transport

• Transportation-driven GDP – input used in the production of goods and services that indirectly support the production of transportation services. This would include, as an example, the labour required to produce steel that goes into the production of motor vehicles.

Han and Fang (2000) points out that the concept of transportation-driven GDP can also include “transportation services…used my other industries as input in their production, transportation-driven GDP and GDP driven by other social functions will

not be mutually exclusive” (Han and Fang, 2000: 25). While this report does not explicitly quantify the rather complex notion of transport’s direct and indirect role in the economy, the importance of transport in facilitating directly and indirectly economic activity in the country is fully emphasised. In this regard, the complex linkages of transport in the productive process of an economy can be hindered if transport services are inefficiently provided or, as a consequent of inefficiency, provided at higher costs. The transport sector also plays an important role in creating employment in the country: in 2013 it accounted for 4.7% of jobs in the country. This was up from 3.2% in 2001 (Figure 3), which suggests that the transport sector is growing. Figure 3: Employment in the Transport Sector

Agriculture, 5.2%

Mining, 4.3%

Manufacturing, 12.5%

Electricity, 0.8%

Construction, 5.2%

Trade, 17.4%

Transport, 4.7%

Finance, 17.1%

Community services, 23.0%

Households, 9.9%

Transport Employment Shares: 2013

Source: IHS Global Insight (2015)

2.2. Situational Analysis: Roads Transport South Africa has a very extensive road network (Figures 4 & 5). South Africa has the 10th Longest Total and 18th Longest Paved Road Network in the World. At 750 000km it is the shortest among South Africa’s BRICS counterparts and longer that all the SADC countries put together.

Figure 2: Road Network in South Africa

The road network falls under the three spheres of Government – (National, Provincial and Municipal). Of the 535 000 km proclaimed road network, 366 872 km is in non-urban areas and 168 000 km is in urban roads. The national road network extends

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some 21 946 km (i.e. 3%) while the provincial and local government network covers 273 000km (36%) and 323000km (43%) respectively. The rest (132000 km or 18%) is unproclaimed. Over time, the national and provincial spheres have experienced a significant expansion of their network. Between 2010 and 2016, national and provincial by 36% and 48%; while local government network has declined by 20%- most probably due to provinces taking over some of the local government network. Figure 3: Road Network in South Africa (2016)

Source: Own Calculations Besides bringing goods and services to customers, transport plays a crucial role in the economy as it brings people closer to their work places. In a modern society transport systems have to function effectively to take people to and from places of work timeously and with minimum costs. Higher than possible minimal costs of transporting people reduces the competitiveness of the economy because it indirectly increases the costs of production. As Mačiulis et al, (2008) notes, “high transport costs distort the distribution of labour resources in regions, thus negatively effecting the development of competitive services and production….” Higher transport costs for passengers also have a direct impact on the real incomes of society, and costs of doing business. South Africa’s land passenger transport modes can be divided in 4 categories: walking, private cars, public transport, and the “other”, e.g. cycling (see Figure 6). Minibuses dominate the public transport system, with a market share for 66%, followed by buses with a share of 21%, and trains accounting for the remaining 13%. In the country there are over 200000 minibuses making over 15 million-commuter trips per day. On the other hand, there are 19000 buses in the country making 9-million commuter trips per day. Trains make about 2 million commuter trips per day.

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Figure 6: Land Passenger Transport Modes

South Africa has relatively higher passenger transportation costs than many regions, thanks to the apartheid dual spatial geography that has remained largely intact. The apartheid geography allowed the elite class to live in well developed areas of the cities, closer to areas of work, while on the other side, the majority lived in poorer areas and far from places of work. The key driver to high passenger transportation costs are therefore the long commuting distances between places of work and residential areas for the large segment of the population. As passenger fares cover only 13% to 57% (depending on the mode) of the transportation operational costs, government subsidies play a key role in offsetting part of the operational costs. Public transport subsidies in South Africa are provided to compensate commuters for the long distances travelled to and from work, as a result of the spatial apartheid geography still obtaining to date. However, minibuses are largely excluded from direct government subsidies despite transporting 66% of the public. Direct operational subsidies fall disproportionately on buses and Gautrain (see Figure 13 below). Although one would argue that minibuses receive subsidies indirectly in the form of infrastructure investment in taxi ranks and the road network, it is important that operational subsidies should be allocated in accordance with the actual usage patterns instead of focusing on buses and trains, as commuters use taxis. Figure 7 Rand values of operating subsidies to various forms of public transport in various metros (Rands per passenger trip)

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2.3. Situational Analysis: Rail Transport The Department of Transport (DoT) and Department of Public Enterprises (DPE) manage the South African national rail network. DPE is in charge of Transnet freight rail, while DoT is in charge of the Passenger Rail Agency of South Africa (PRASA). South Africa boasts an extensive and intricate rail network by African standards (Figure 8). The country has 30 422 km of rail track and 20 101 km of rail route. The network consists of 12 800 km of core network, 7 300 km of branch lines, and 1 500 km of heavy haul rail. Of the 20 101 km of rail route, 60% is electrified and 40% runs on diesel. Transnet Freight Rail owns the rail route and has over 800 trains running daily in the domestic and cross border trade.

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Figure 8: Geographic Location of Railway Network

Source: CSIR (2014)

In South Africa, the freight transport market is highly competitive, especially with regard to surface transport. Rail freight faces stiff competition from road transport both domestically and from Southern African Development Community (SADC) countries, which rely on South African ports as a gateway to the global production networks. The two modes of transport (rail and road) often share the same corridors from ports to inland destinations. In South Africa, the rail market share is relatively small. In 2012, a total of 1 758 million tonnes of freight were transported inland, of which 88.5% (tonnage) was by road and 11.5% by rail. Similarly, 432 billion tonne-kilometre1 (tkm) goods were transported in 2012, of which 70% was by road and 30% by rail. Between Durban and Johannesburg, one of the busiest corridors in the country, rail retains a significant market share of about 20%. Recently, there seems to be a significant modal shift towards rail. This shift is due to government increasing investments in rail and making it a mode of choice for bulk freight. Figure 9 shows the shift towards freight rail since 2009. The fall in market share prior to 2009 was due to a lack of infrastructure maintenance (which affected rail capacity), an aging locomotive fleet and inadequate electricity supply.

1 Tonne-kilometre (tkm) is a unit of measure of freight transport which represents the transport of one tonne of goods by a given transport mode (road, rail, air, sea, pipeline etc.) over a distance of one

Figure 9: Rail Market Share (Tonnes and Tonne-Kilometres)

Source: CSIR (2013) 2.4. Situational Analysis: Pipeline Transport The pipeline system, which was commissioned for the first time half a century ago, transports gas, crude oil, aviation turbine fuel, diesel, alcohol and various grades of petrol. Compared to other surface transport modes, pipelines are often considered to be secure, reliable and environmentally friendly. Transnet is the principal custodian of South Africa’s pipeline system, which includes the petroleum and gas pipelines, and infrastructure comprising pump-stations, depots, a tank farm and workshops. The system employs almost 700 people2. The importance of this transport mode is often not recognised because pipelines are generally ‘invisible’ (Van der Berg and Mbara, UJ, 2006). The pipeline network spans five provinces: KwaZulu-Natal, Free State, North West, Mpumalanga and Gauteng (Figure 10). There are plans to include a connecting gas pipeline from Mozambique to Secunda and Richards Bay. Transnet Pipelines recently obtained permission from the National Energy Regulator of South Africa (NERSA) to construct and operate a new 60-cm petroleum products pipeline (704 km long) from Durban to Gauteng, as well as a 30-cm petroleum products pipeline (199 km long) from Maputo to Nelspruit. The Maputo–Nelspruit pipeline will be extended by 249 km to Kendal, to link up with the existing pipeline network (Pienaar, 2009). The new multi-product pipeline (NMPP) should eventually replace the aged Durban–Johannesburg pipeline, which was completed in 1965 and is nearing the end of its

2 http://www.transnetpipelines.net/head-office.aspx

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economically usable life. To date, the trunk line portion of the NMPP and pump-stations along the route have been completed. The pipeline will be upgraded in five phases up to 2032, with the first phase consisting of the completion of the coastal and inland terminals.3 Figure 10: The South African Pipeline Network

Source: http://tpl.uat.gwsoft.co.za/Data/Sites/1/files/nkpapprovedtplmap2012.pdf The 3 800 km pipeline network system transports over 450 million cubic metres of gases and 16 billion litres of liquid fuels. Just over two-fifths (42%) of the pipeline network transports refined products, while 30% transports oil (Figure 11).

3 http://www.transnet.net/AboutUs/Pages/Construction.aspx

SCHEMATIC MAP OF TPL INFRASTRUCTURE

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Figure 11: Breakdown of Pipeline Components - 2009

Source: Nation Master (2015) 2.5. Situational Analysis: Maritime Transport It is fair to say that the maritime sector in the economy epitomises the role of transport as an indirect yet pivotal contributor to economic activity and growth. In previous work undertaken by the Department (2011), it was acknowledged that the maritime sector in South Africa does not contribute directly towards GDP in the sense that the country does not operate any cargo shipping company but rather are provided with such services by offshore companies4. Shipbuilding as an industry is also very limited in the country (Department of Transport, 2011). The maritime transport sector in the country thus mostly comprises of cargo handling and marine services that are done at the country’s ports (Department of Transport, 2011). The issue of cargo handling is a key component in national and international trade in South Africa by being a pivotal service supporting freight movement, forwarding, consolidation, procurement, warehousing, packaging and procession and distribution of goods and services (National Department of Transport, 2011). In this regard, South Africa and her ports are the gateway of the rest of the world to Southern Africa and the Southern African Development Community (SADC) region. Table 1 shows the extent of cargo handled in South Africa’s ports in 2016 to illustrate the role played by ports in the trade of goods in the country and region. In 2016, over 17 billion tonnes of goods were handled at South African ports, with most of the goods being handled in the bulk ports of Richards Bay and Saldanha Bay.

4 Although it is acknowledged that Grindrod Ltd is a South African company that charters a large fleet of ships but through offshore subsidiaries.

Condensate)0.3%)

Gas)27.7%)

Oil)29.8%)

Refined)Products)42%)

Table 1: Summary of Cargo Handled at Ports in South Africa – 2016 (in metric tonnes)

Source: Transnet Port Authority (2016) Figure 12 illustrates the country’s seven main ports geographically and the major road and railways connecting these ports to the inland. The port of Ngqura is a newer port close to Port Elizabeth. It is clear from the figure that the seven main ports play a key role in bringing in goods to supply to South Africa and the general Southern African region. The extensive road and rail networks facilitate such movements of goods. This extensive transport network also services the production of goods within South Africa, be it for movement of intermediate or final goods across the country. In terms of the latter, final goods produced in South Africa for export are transported to the ports. Durban, Cape Town, Port Elizabeth and East London are considered multipurpose ports while Saldanha Bay and Richards Bay are considered as bulk ports (TIPS, 2014)

Figure 12: South Africa’s Main Ports

Source: City of Johannesburg Transnet, a state-owned corporation, is a primary player in the South African transport sector, particularly that of rail, pipeline and ports. Transnet National Port Authority, which is a subsidiary of Transnet, is mandated to manage all the ports in the country, as regulated by the National Ports Act of 2005. Transnet Port Authority plays a “landlord” function in the country’s ports and includes managing and investing in new and existing port infrastructure. Transnet Port Terminals manages port and cargo terminal operations. Via these two subsidiaries, Transnet holds a monopoly over the port operations in the country and, by extension, South Africa’s ports are a fully government owned enterprise. A study by the Trade and Industrial Policy Strategies (TIPS) (2014) argue that the monopoly ownership of the ports by government in the form of Transnet has contributed to higher port charges and lower levels of efficiency. This assertion will be empirically tested in this paper, as high port tariffs can decrease the

competitiveness of South Africa’s firms in the global market by increasing the price of intermediate imported goods and the price of South African exports globally. The South African government’s control over the country’s ports confirms the strategic importance of this key sector to the developmental goals of the country. Given this and that the current monopolistic setup can contribute to inefficient pricing in ports, the regulation of the Transnet subsidiaries becomes key. The National Port Act also established the National Ports Regulator. The regulator attempts to align the port system with government’s strategic goals while ensuring an efficient and equitable pricing framework for ports, amongst other functions. Transnet Port Authority needs to apply for port tariff increases to the Port Regulator for consideration. 2.6. Situational Analysis: Air Transport South Africa has the biggest airport network in Africa, in terms of the number of airports. The country has several international airports, with the major ones being OR Tambo international airport in Johannesburg (Ekurhuleni), Cape Town International Airport and King Shaka International Airport in Durban. There are also several major airports, chartering both international and national flights, in other major cities including Bloemfontein (Bram Fischer International Airport), East London and Port Elizabeth. Airports Company South Africa (ACSA) owns most of the major airports. Similar to Transnet, ACSA is also a publicly owned company. The company was established with the Airports Act of 1993 and is primarily in charge of managing nine of the country’s airports, namely:

• OR Tambo International Airport • Cape Town International Airport • King Shaka International Airport • Port Elizabeth International Airport • East London Airport • Bram Fischer International Airport • Upington International Airport • Kimberley Airport • George Airport

Figure 13 geographically illustrates the ACSA owned airports, as well other regional airports in the country.

Figure 13: Major airports in South Africa

Source: http://www.airportspotting.com/airports-south-africa/ Air travel plays a key role in the transportation of people and goods across large distances. In South Africa, air travel plays a larger role in passenger transport, as freight movement by air is rather expensive vis-à-vis more traditional freight transportation modes such as road and rail (Department of Transport). According to an Oxford Economics Study (2011), the aviation sector can be divided into three types. These are:

• Airlines • Ground-infrastructure • Aerospace manufacturing

The details of these three types of activity in South Africa are given in Table 2. The study also quantifies the economic impact of these three sectors in the country. In total (all three types of activities) contributed around R51 billion to the South African economy in 2011. This is the direct impact and does not include the indirect impact of air transport in facilitating trade and business development.

Table 2: Three Types of Activity in the Aviation Sector

Source: Oxford Economics (2011) Given the aim of this report, contextualising the productivity and efficiency of each of the three activities related to the aviation sector becomes important. The aerospace supply chain form part of the aviation sector but does not directly constitute air transport. Airlines are the actual carriers of both people and freight and are owned by both private and public companies. Their productivity and efficiency is key for their own operating profits and financial positions. Ground-based infrastructure includes the airport and related facilities that provide the “port” of departure and arrival for passengers and goods. In South Africa, this part is operated by ACSA (for major airports) and the efficiency of the infrastructure and services provided at this point can have a major impact on the overall efficiency and effectiveness of air transport in the country. Furthermore, fees and charges applied on airlines and passengers for the use

of these facilities can impact the cost of flying, if such charges are excessive and can impact on the country’s ability to facilitate business and trade. Therefore, this study looks at the ground-based infrastructure portion of the aviation sector. 3. Literature Review This section provides the theoretical underpinnings to the paper by explaining the role of transport in the competiveness of an economy and how saving on transport costs can have positive effects on trade and economic growth. 3.1. Conceptualising Global Competiveness and Transport One of the main objectives of the Department of Transport’s strategy is to enhance the global competitiveness of the South African goods through an efficient and robust transport system. In order for the country to tackle its economic challenges holistically, there is an urgent need for the nation to move towards a sustainable and competitive pathway. But from a conceptual perspective, what does it mean for a nation to be competitive and how can the transport sector assist achieve this goal? The World Economic Forum (WEF) has, for many years issued a World Competitive Report, which essentially defines competitiveness as “a set of institutions, policies, and factors that determine the level of productivity of a country…. (Schwab and Sala-i-Martin, 2012 p 4). This definition is based on the assumption that productivity will enhance a country’s competitive advantage. Purwanto et al (2016) modifies the WEF definition by noting that competitiveness is “the extent to which firms in a particular region can compete with those elsewhere. The critical factors for competitiveness are those that determine the level of productivity in a region in relation to others…” The core of this concept is that competitiveness is driven by productivity differences. Inbuilt in this definition also is the fact that local firms are the ones that compete with firms from other countries. Given these definitions, it is clear that a productive and efficient transport sector would likely contribute to the productivity of firms in the country and thus their overall competitiveness on the global trade arena. Scot (n.d.) defines a nation’s competitiveness as its “ability to produce, distribute and service goods in the international economy in competition with goods and services produced in other countries and to do so in a way that earns a rising living standard….” What is key in this last definition, and albeit for this study, is that competitiveness also hinges on the country’s ability to distribute goods better than other countries. This definition partly speaks to the ability of the transport system to efficiently move goods better than other countries. The OECD defines a nation’s competitiveness as the “degree to which, under open market conditions, a country can produce goods and services that meet the test of foreign competition while simultaneously maintaining and expanding domestic real income…”

There are two important insights that can be gleaned from all these definitions. First, it is the point that if goods from one country outcompete goods from other countries in international markets, this does not amount to saying a country has some competitive advantage over others, if this is not accompanied by an improvement in living standards. Second it is the point that a nation can achieve some competitive advantage through value addition, economies of scale and efficiency in their factors of production and other intermediate goods and services, such as transportation (Agbor and Taiwo, undated). The link between a nation’s competitiveness and transportation is well documented. In many ways transport plays a part in a nation’s productivity, value addition, economies of scale and efficiency (Baldwin and Dixon 2008). There are basically three avenues in which infrastructure (including transport infrastructure) affects the global competiveness of a country. First infrastructure enables business to generate additional productive capacity and reduce the costs of inputs. Secondly infrastructure increases the productivity of workers. Thirdly, infrastructure improves education and health outcomes: good health and education increases innovation capacity and productivity of workers. The WEF Global Competitiveness Index also emphasises that transport plays a crucial role in global competitiveness. Pillar 5 and 6 under “infrastructure determinants” of global competitiveness contains a number of transport related variables on the quality and availability/access of transport. The significance of transport infrastructure in influencing global competiveness is demonstrated in Gardiner et al (2004)’s triangle reproduced in Figure 14 below. In Figure 14 the outcome of global competitiveness is improved living conditions and quality of life (at the apex of triangle) i.e. the developmental social goals of improved economic growth. At the base of the pyramid are the factors that constitute competitiveness (i.e. environment, innovation, accessibility, skills inherent in the labour force, infrastructure and the social, economic and cultural structures). Of note to this study are the two critical factors: accessibility and infrastructure. The triangle implies that transportation influences a nation’s competitiveness (a) through facilitating accessibility of goods, markets or trading partners in general and (b) through an efficient (i.e. both technical and allocative efficiency), reliable and responsive transportation infrastructure. An efficient, reliable and responsive transport system reduces the transport costs, which enable the achievement of higher levels of productivity, employment and GDP, and ultimately quality livelihoods and standards of living. If the country is competitive, this will show through increased productivity and more people being employed and ultimately high levels of economic growth (GDP) (i.e. revealed competiveness indicators in the middle part of the pyramid above the key drivers of competitiveness.

Figure 14: The Significance of Transport Infrastructure in Influencing Global Competiveness

Source: Gardiner et al. (2004) From the foregoing discussions, it can be noted that an efficient transport system contributes to a country’s international competitiveness. Ensuring that the transport sector is productive and efficient ensures that transport costs are minimised in order to boost competitiveness. If transports costs are high, then the reduction of such costs and making the transport system as effective and efficient as possible, is the pathway to global competitiveness. 3.2. Key Drivers of Global Competitiveness: Some theoretical underpinnings Economic theory confirms that the international trade success of a country is a function of its competitiveness. Three strands of theories have sought to explain a country’s competitiveness. First, we have the macroeconomic perspective, which argues that the exchange rate is the single most important variable that drives a nation’s competitiveness. It argues that a nation’s competitiveness can be achieved by maintaining the external (i.e. current account equilibrium) balance and internal (i.e. low unemployment and acceptable rate of inflation) balance (Boltho 1996). The limitation of this theory especially for a country like South Africa is that it assumes factors of production are freely mobile, a far-fetched assumption for a developing country. The second approach is the international competition perspective, which

argues that competition is a determined by new commodities, new technology, new sources of supply and new types of organisation. In this approach a nation’s competitiveness is driven by internal factors such as technology, price and ability to deliver efficiently. The third and perhaps the most recognised models of competitiveness is the diamond model pioneered by Porter (1990). The diamond model provides an analytical framework and basic guidelines to the understanding of competitiveness. The model provides an interactive framework between different units of analysis in the form of corporates, industries, regions and nations. Porter’s model seeks to explain some apparent contradictions that were found in the traditional theories of competiveness. Traditional theories of competitiveness (e.g. Adam Smith’s theory of absolute advantage and Ricardo’s theory of comparative) considered labour, capital and natural resources as essential sources of national competitiveness. However, there have been several instances where countries have prospered without some of these factor endowments and some have suffered with an abundance of these factors. Porter’s single diamond model, as is often called, was based on the assumption that firm competitiveness can be extended to country competiveness. The model itself rests on the proposition that competiveness can be explained by both endogenous and exogenous factors. Endogenous factors include factor conditions, national strategy, structure and rivalry, related and supporting industries and demand conditions. Exogenous factors include government and random factors. Figure 15 reflects Porter’s diamond model with its four pillars. These pillars are considered endogenous i.e. under the country’s control. The first pillar is factor conditions, which are a source of a nation’s competitiveness. Factor conditions include human resources, physical resources, knowledge resources, capital resources and infrastructure. The second pillar is demand conditions that enhance a country’s international competitiveness. Demand conditions include the size of the home market or the sophistication of local consumers that forces domestic firms to continually innovate and upgrade, and thus become internationally competitive. The third pillar of global competitiveness is known as the “firm strategy, structure and rivalry”. The structure of industry encourages or discourages competition. Markets characterised by imperfections are less competitive compared to perfect competitive market structures. Similarly, the rivalry of firms in the domestic market pushes firms to be competitive and innovative, which further makes the industry and ultimately, the country, competitive. The last endogenous key pillar of a country’s international competitiveness is “related and support industries”. Porter argued that location matters in international competitiveness and some clustering of industries in advantageous locations leads to specialisations and thus global competitiveness. Outside the endogenous factors, the key driver of a nation’s competitiveness is government. Government can either promote or constrain a nation’s competiveness.

Bureaucratic delays, corruption, poor investment in infrastructure, among others, increase the costs of doing business. On the other hand, the government enhances a nation’s competitiveness in many ways, including investing in sound infrastructure (e.g. roads, airports, IT, energy), investing in education, innovation and even through prudent monetary and fiscal policies. Figure 15: Porter’s Diamond Model of Competitiveness

To sum up, Porter’s model has some particular relevance to this study because it provides an unambiguous link between transportation and a nation’s international competitiveness. Transport can be considered as a key enabler of the four pillars that promote international competitiveness in Porter’s model. Decisions taken by firms, factors of production and local consumers can be impacted on by transportation services. Directly, transportation can facilitate the growth of competitiveness via government investment, as per the exogenous factors of the model. 3.3. Transport and Global Competitiveness: A Review of Empirical Literature The present study commissioned by the Department of Transport seeks to understand how transport can be managed to enhance the country’s international competitiveness. The following section reviews past studies on the key determinants of a country’s competiveness and how transport costs can be reduced to enhance a nation’s global competitiveness. There is a growing consensus in literature that transport infrastructure and costs play a critical role in a nation’s competitiveness. The quality and availability of transport infrastructure is important in determining the attractiveness of a country. In fact, an efficient transport system ensures a smooth and efficient flow of people and goods within and outside the country. If the country’s

transportation system is inadequate, and does not distribute goods timeously and efficiently the country’s competitiveness will be compromised. A well-maintained and efficient transport network reduces the costs of doing business and thus contributes positively to a country’s competitiveness. In literature, a key role is given to what is often called “core infrastructure” i.e. infrastructure that enables economic activity. Such infrastructure includes roads, ports and railways (Aschauer 1989). Snieka and Bruneckiiene (2009) identified infrastructure (consisting of roads, air and water) as one of the factors that improves a nation’s competitiveness. They noted that poor or insufficient transportation infrastructure increases the costs of doing business. In the same breath, higher transportation costs compromises a nation’s international competitiveness by increasing the costs of doing business. Palei (2015) in a study for Russia found that the quality of roads, quality of railroad infrastructure, and quality of air transport infrastructure tends to improve a nation’s competitiveness. Several studies have found a direct and negative impact between transportation costs and the trade position of a country. Henderson et al (2001) found that doubling transport costs reduces trade volumes by almost 80 and reduces the import value of goods by three to five times. Transport costs are the most important barrier to trade (Molina, 2008) and are crucial to competitiveness (Hummels, 2007). Dunn et al. (1987) also identified transportation costs as a major determinant of interregional competition. The global rise in international trade is partly attributable to a decline in transportation costs (Hummels, 2007; Frantz and Taylor, 2003). Transport costs are higher in developing countries because of poor infrastructure and primitive distribution systems. As a result, goods from developing countries tend to be less competitive than goods from developed countries. Poor and unmaintained infrastructure prevents countries from participating fully in global production networks by making goods expensive, and therefore, the countries uncompetitive (Limao and Venables, 2001). Improving transport infrastructure can make a huge difference: “if a country improves its rail infrastructure from the median to the top 25th percentile, it would be equivalent to becoming 2 358 km closer to all its trading partners” Limao and Venables (2001: 459–460). Investing in new infrastructure, and in repair and maintenance, is a sure way of improving trade, competitiveness and incomes for developing countries (Martinez-Zaroso et al., 2003). Higher transport costs in developing countries can also be caused by other factors, including the lack of bargaining power (Sapir, 1983), the lower value-to-weight ratios of exports, and shipments that have excess capacity and move long distances (McFarland, 1985). Transport costs in Africa are much higher than in any other parts of the world. Transport costs in Francophone Africa are estimated to be up to six times higher than in Pakistan and 40% higher than in France (Rizet and Hine, 1993). Key factors behind Africa’s relatively higher transport costs include poor and unreliable infrastructure

(Perdersen, 2001), and low levels of competition between service providers (Limao and Venables, 2001). Using cross-country data, Limao and Venables (2001) concluded that trade in Africa is very sensitive to transport costs: a 10% increase in transport costs reduces trade by 25%. The types of goods traded, the intensity with which transportation services are used, and the choice of transport mode shape changes in transportation costs. Modal choice is very important in limiting transportation costs. Rail is the most economically efficient means of transporting large volumes of relatively low value goods and materials over land (Romero, 2014). Efficient rail transport is likely to deliver goods that are competitively priced. The efficiency of rail also depends on many other factors, for example, the degree of state intervention, the degree of subsidisation or taxation, managerial efficiency, and the institutional and regulatory environment within which the railway operates (Bougna and Crozet, 2013). Rail’s superior efficiency is demonstrated when other efficiency indicators are considered, for example, fuel economy and environmental impact. For policy makers, the theoretical models and empirical research confirms that the role of transport as an enabler of economic activity and global competitiveness. The literature review also confirms that the productivity and efficiency of transport sectors is key in contributing to the overall competitiveness of a country. As a significant input in to the production processes of many firms and a source for the movement of factors of production, quantifying the productivity and efficiency of a transport mode and the drivers of this inefficiency becomes important so that appropriate policies can be designed to improve the overall performance of the sector. Reducing transport costs to improve the global competitiveness of firms has received modest coverage in literature. Suggested strategies include improving efficiency, improving regulation and infrastructure, planning and consistently using the benchmarking tool. Enhanced productivity is a key factor in reducing the costs of transport. Channels for reducing transport costs include (Molina, 2008):

• Bilateral distance: A shorter distance between trading partners reduces transport costs, implying lower transportation and insurance costs.

• Infrastructure improvements: The better the quality of infrastructure, the lower the transport costs (as a result of reduced transport time and insurance).

• Political stability and enforcement of the law: The lower the security, the higher the insurance cost, which increases transport costs. Also, the lower the level of corruption, the lower the resource exploitation and financial loss and, thus, the lower the transport costs.

• Common bilateral ties: Common bilateral ties make the movement of goods cheaper. For example, neighbouring countries have customs agreements or transit rules that reduce the time taken to transport goods.

Improving efficiency is at the heart of strategies to reduce transport costs. Vertical separation of entities can increase efficiency and improve product competitiveness. Vertical separation is the opposite of integration: it means splitting tasks done by one company into separate entities, for example, one entity is responsible for railway operations and infrastructure, another for freight and another for passenger services, etc. Table 3 summarises the studies that examine the effects of vertical separation on competition. Table 3: Summary of Key Empirical Research Results Author(s) Countries

covered Effect of vertical separation

Effect on competition

Jensen and Stelling (2007)

Sweden Negative Positive

Friebek et al. (2010)

Europe Positively if properly phased

Positive if properly phased

Cantos et al. (2010)

Europe Positive Positive

Cantos (2011) Europe Not significant Positive Source: Author’s compilation 4. Understanding Transport Productivity and Cost Drivers This section provides the basis of understanding the factors that drive productivity in all four modes of transport. This also includes a discussion of the cost structure of each sector, including the components of the costs in each sector and what drives these costs. 4.1. The Determinants of Transport Costs Literature is abundantly clear that, although infrastructure investment is costly to begin with, the quality and efficiency of transport infrastructure has a significant impact on transport costs (Martínez-Zarzoso, et al, 2003). In other words, improving the quality and efficiency of transport infrastructure is the single most important way of reducing transport cost (Limao and Venables, 2001; Kurmanalieva, 2006; Shurenberg-Frosch, 2011; Combes and Lafourcade, 2004; Donaldson, Jinhage and Verhoogen; 2017). Limao and Venables (2001) observed that infrastructure accounts for 40% in the variation in predicted transport costs in landlocked areas and 60% in coastal areas. Similarly, Kurmanalieva (2006) also found that poor infrastructure has a strong negative impact on transport cost, (Shurenberg-Frosch, 2011). Using spending on roads, as a proxy for transport costs, Shurenberg-Frosch (2011) found that improved investments in infrastructure reduce transport costs by significant margins. Combes and Lafourcade (2004), using French regional data, show that transport

technology and infrastructure improvements were key variables behind transport cost decreases in France. Other determinants of transport costs include competitive behaviour among transporters, distance, time, distance, geography, fuel, and information and communications technology. Limao and Venables (2001) modelled the key drivers of transport costs as shown below:

𝑇𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡 𝑐𝑜𝑠𝑡𝑠= 𝑓 𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒,𝑔𝑒𝑜𝑔𝑟𝑎𝑝ℎ𝑦, 𝑖𝑛𝑓𝑟𝑎𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒, 𝑡𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦, 𝑓𝑢𝑒𝑙𝑠 𝑐𝑜𝑠𝑡𝑠… . .

Other empirical studies have confirmed the significance of the arguments listed in the model described above (in Limao and Venables, 2001)). Distance between collection and delivery points enters the transport function as a very strong argument in Limao and Venables, (2001) and many other studies. For instance, Martínez-Zarzoso, et al. (2003) found that road transport costs are a function of distance and the quality of infrastructure. Limao and Venables (2001) found that an extra 1000km distance raises transport costs seven times. Likewise, Kurmanalieva (2006) found that distance has a strong effect on transport costs: the shorter the distance, the lower is the transport costs. If distance matters in transport costs, it follows that building compact cities (in urban areas) is the best course of action. In rural setting, extending the road network may reduce transport costs. Transport costs are also influenced by the spatial geography of a place. Landlocked areas experience high transport costs relative to non-landlocked regions. In addition, to an increased availability and efficiency of the road network (measured as length of paved roads), Shurenberg-Frosch (2011) singles out population density as key in reducing road transport costs, while corruption, urbanisation and climate variables have the potential to prevent positive effects of roads on transport costs or even reverse them. Using Japanese data, Donaldson, Jinhage and Verhoogen (2017) and Limao and Venables (2001) add another set of transport costs determinants: competition among truckers, time, and information and communications technology. This set of drivers imply that transport costs can be reduced by removing barriers to competition, investing in good quality infrastructure network and incentivising the adoption of new technologies. The production of transport services depends on the inputs used (e.g. capital and labour), while the transport sector’s competitiveness depends on the quality/quantity of outputs and the costs of inputs. If a country’s labour or capital prices are higher than those of other countries, the final price of its goods or services will be uncompetitive.

Table 4 illustrates the primary cost drivers in the rail and pipeline transport industries. These are the maintenance of railway infrastructure, labour costs and fuel costs in railway transport, and labour and energy costs in pipeline transport. Table 4: The Primary Cost Drivers of Different Modes of Transport Mode Fixed/Capital Costs Operating Costs Rail or highway

Land, construction, rolling stock Maintenance, labour, fuel

Pipeline Land, construction Maintenance, energy Air Land, field and terminal, construction,

aircraft Maintenance, labour, fuel

Maritime Land for port terminals, cargo handling equipment, ships

Maintenance, labour, fuel

Source: Leinbach (2004) 4.2. Cost Drivers: Road Transport In South Africa, studies on the determinants of transport costs are rare. Perhaps one of the few, and very insightful study to assess the cost drivers of road (freight) transport is Havenga, et al (2014). Havenga et al has noted that one of the key cost driver for the road freight transport costs is fuel. Besides being the largest transport cost driver, fuel costs are very volatile. This volatility of fuel costs requires that South Africa seek more efficient methods of transportation. Figure 16 shows the drivers of road transport cost. In 2012 fuel costs accounted for a third of South Africa’s freight transport costs, and by 2014, this ratio had increased to 40%, thanks to fuel price inflation (Havenga & Simpson 2013). Figure 16: Cost Elements for Road Transport (Rand Billions)

Source: Havenga, (2017), Freight Transport Market Share, Convention 2017 Presentations, University of Stellenbosch

0

10

20

30

40

50

60

70

80

90

Fuel Driver's Wgaes Mantenance and Repairs

Depreciation Insurance Tyres Toll Fees Licences

2013 2014

Another road transport cost driver is the tolling of roads. Although tolls push up transport costs, they have a number of benefits, such as: generating revenue for the public budget; improving logistics efficiency; reducing negative externalities associated with carbon emissions (e.g. air pollution from road transport); and encouraging modal shift (from road to rail) the external costs of road vehicles. On the costs side literature is clear that tolls increase transportation costs, costs that are often passed to shippers and forwarders. In German, Kenny, (2017) notes that toll fees account for approximately 10% of road transport costs and hauliers pass on the majority of tolls to shippers and forwarders, resulting in net cost increases of between 2% to 5% for the trucking business. In South Africa toll fees are a small driver of road transport costs (Havenga, 2017). Out of the nine-road transport cost drivers, toll fees occupy the 8th position. In a nutshell, this section suggests that improving access and efficiency of the road network, building compact cities, eliminating corruption will not only reduce transport costs, but also will directly or indirectly contribute positively to the country’s global competitiveness. 4.3. Cost Drivers: Maritime Transport As discussed in Section 2.5, South Africa’s context of “maritime” transport is that of port management i.e. the effective and efficient way of moving cargo to and from ports. It does not include the use of ships and related maritime transport vessels for the transfer of people or goods across the world or within South Africa. Currently, South Africa does not play a major role in the operations of cargo carrying vessels or luxury cruise liners. This distinction is important since the costs that drive the operations of ships and the costs that drive the management of port infrastructure and services are very different. According to a study by the International Transport Forum (2014), port efficiency is a key driver of transport costs. For example, Blonigen and Wilson (2008) found that trade volume can increase b 32% of efficiency in ports doubled, while Wilmsmeier et al (2006) found that an improvement in port efficiency can decrease freight costs by 25.9%. Port efficiency can be measured from the production side and the cost side. In terms of the former, port productive efficiency is essentially how fast and efficient a port can process the cargo. Sánchez et al. (2003) empirically established that the efficiency of port infrastructure and operations affects transport costs. Martínez-Zarzoso et al. (2003) has also demonstrated that maritime transport costs increase when the cargo is not loaded at the most efficient port. Similarly, in a study of a cross section of Latin American economies, Micco and Perez (2002) found that port efficiency has a bearing on maritime costs. For example, an inefficient port increases cargo handling costs and

thus the final price of goods. Martínez-Zarzoso and Suárez-Burguet (2005) confirm that “improving port efficiency from the 25th to the 75th percentile reduces shipping costs by 12%...”. Figure 17 illustrates the port performance continuum, which simplifies the cargo handling process within a port from ship anchorage to the movement of the goods to the hinterland. As indicated in Figure 13, the port authority, in this case Transnet National Port Authority, controls the maritime operations that sees a ship anchor, await and move to a berthing slot. Inefficiency can arise if ships wait too long before berthing. Terminal operations occur when the cargo is moved from the moored ship. Terminal operations are the key driver of inefficiencies in a port, as various bottlenecks at this process can delay the movement of goods out of the port. Such inefficiencies can arise at crane performance (T1), where cranes are used to move cargo from ships to the storage yard (T2). The movement of goods to the yard can also result in delays due to inefficient processes, so to the movement of goods from the storage yards to trucks (T3). In South Africa, this component of the cargo movement process at ports is done by Transnet Port Terminals. Therefore, the performance of this subsidiary is key in facilitating the efficient movement of cargo in ports. Figure 17: Port Performance Continuum

Source: Rodrigues (2017) The processes described above have costs attached to it, as port authorities and terminal operators need the necessary manpower (labour), purchasing of equipment, maintenance of equipment and a range of other expenses required to run the process. According to Tsamboulas (2014), the main drivers of port costs are:

• Quays and berthing • Maritime access • Land • Superstructures such as cranes and terminals

• Land transport access • Other civil engineering factors • General equipment

The expenditures require for the investment in new and existing infrastructure and other related operating costs are funded by port tariffs and charges. Inefficient port operations can drive up the costs faced by ports consequently resulting in high tariffs being charged to port users. Inefficiencies in the cost side of port operations and increasing tariffs can have a significant impact on the final price of goods leaving (exports) or entering (imports) South Africa. According to the study by the International Transport Forum (2014), there are three main charges that occur at ports, in addition to several other charges:

• Terminal handling charges: these are charged by terminal operators (i.e. Transnet Port Terminals in the case of South African terminals) to recover the costs of loading and unloading containers.

• Cargo dues: the port authority charges these feeds to port users for the maintenance of infrastructure

• Port dues: Charges levied by the port authority to all ships entering the port. Productive and cost inefficiencies in South African ports relative to their international counterparts will likely make the costs of doing business in the country relatively more expensive. This can impact negatively on the relatively competitiveness of the country in international trade. Calculating the efficiency of South African ports is thus key in the analysis. While Transnet Port Terminals is a publically owned company that essentially holds a monopoly on terminal operations in the South African context, private companies undertake terminal operations around the world. These multi-national corporations operate several terminals in ports around the world, resulting in some ports having multiple terminal operators that have agreements with the port authorities. Given this arrangement, the efficiency of terminal operations is essentially the efficiency of these companies, including Transnet Port Terminals, in their business model, operations, cost structure and expenditure. 4.4. Cost Drivers: Air Transport Similarly to the discussion above on maritime transport, the aviation sector also has various components that one is required to contextualise in order to understand what exactly a country has control over in order to improve the efficiency and effectiveness of the sector. As discussed in Section 2 above, there are three different aspects to the aviation industry, namely: aerospace manufacturing, airlines and ground-based infrastructure. Aerospace manufacturing deals with the manufacturing of aircraft and

related facilities while airlines is the actual transportation of people and goods by air. In terms of the latter, this sector of aviation is denominated by private and public firms in the form of international airline companies. For this study, this factor of the air transportation will not be considered, as that would constitute a study on the operations of South African Airways, the national carrier, relatively to other private and public airline companies. The aim of this paper is on the effectiveness and efficiency of ground-based infrastructure i.e. the airports that facilitate the movement of people and goods by air. Inefficient airports can discourage air travel and have a negative impact on the productivity in the economy while high airport costs, driven by this efficiency, can increase the price of trade and tourism, amongst other factors. According to Tsamboulas (2014), the following factors contribute to airport infrastructure:

• Land • Terminal buildings • Other building and plants • Airfield

o Runway surface o Runway bases o Taxiways and aprons

• Access roads • Other fixed assets

Potter and Medeiros (n.d.) identified four types of costs categories associated with airport expenditures. These are:

• Inherent costs: costs associated with the nature and design of the airport and includes location, number of runways and the services it offers

• Structural costs: determined by the type of business the airport runs in terms of who it services (types of airlines) and operating model (use of internal staff vs. outsourcing)

• Systemic costs: the organisation, policies and infrastructure of the airport • Realised costs: costs associated with how well the airport is run in terms of its

operations and work practices 5. Methodology The nature and the context of the research question at hand will largely determine the methodology (ies) that will be used in this study. To reiterate, the discussions thus far confirmed the important role played by transport in facilitating the movement of people and goods within the economy.

Given this role in the economy, it is imperative that both the transport services are both effective and efficient in their operations. Therefore, the basis of this study is the efficiency of South Africa’s ports and airports and to benchmark South Africa’s performance in facilitating movements of people and goods in via air and maritime transport. This study proposes the use of two methods to determine how South Africa performs relative to its international counterparts, namely, descriptive benchmarking analysis and efficiency analysis. These methods are discussed in greater detail below. 5.1. Descriptive Analysis Descriptive analysis is a good method used to benchmark key variables of performance of countries or entities against their peers to ascertain overall trends and differences. Benchmarking using descriptive statistics is very popular in many studies used to compare performance or cost measures. Comparisons in this regard are important in understanding competitiveness by benchmarking performance and costs. For example, if one of South Africa’s trading partners transports relatively more goods or passengers by air, even though they have less developed infrastructure or a smaller aviation capacity, then that country would be relatively more efficient than South Africa. It is also a very easy method when comprehensive datasets are not available for key variables, making statistical and mathematical modelling difficult. In this study, key variables used to assess the performance and costs of aviation and maritime transport in South Africa will be benchmarked against her peer countries. The choice of these peer countries will depend on availability of data, but will include:

• Countries in the SADC region – where South Africa plays a key economic role and these countries depend on South Africa’s transport network for their imports and exports. Higher costs in South Africa are likely to affect these countries

• Countries in the BRICS grouping – With the formalisation of the Brazil, Russia, India, China and South Africa (BRICS) economic bloc, trade between these countries are likely to increase. Therefore, South Africa would have to improve its competitiveness against these countries and a relatively more efficient transport system will assist in this regard

• OECD countries – In spite of trade developments with other economic blocs,

South Africa still trades substantially with the European Union and the United States. These countries will also be included in the benchmarking analysis.

While the study tends to use countries within the groupings described above due to South Africa’s current or potentially future trading relationship with them, it is also

important to note that these countries also compete with South Africa on the global trade arena. If the measures of trade competitiveness and transport efficiency favours some, or most, of these countries relative to South Africa, then it is likely that these countries will outperform South Africa in terms of trading goods and services. All modes of transport were analysed relative to their production, cost and capacity as follows, but noting that data constraints resulted in some modes having relatively more variables for analysis than others:

• General indicators o Transport GVA o Transport costs o Cost of trade

• Output benchmarking o Total passengers moved by mode o Total goods moved by mode

• Input cost benchmarking o Cost of labour o Cost of borrowing o Tax comparisons o Cost of fuel

• Infrastructure capacity benchmarking o Extend of mode network o Quality of network

5.2. Efficiency Analysis – Production Function As mentioned above, benchmarking using descriptive statistics and indicators compare the extent or effectiveness of production in the aviation and maritime sector (the outputs) and the efficiency or the cost drivers (the inputs) against the country’s international counterparts. As a consequence, for a country’s transport service to be considered competitive, the production and costs of the service needs to be effective and efficient, respectively. More formally, competitiveness is defined as the “ability of a country to produce goods/services of an acceptable quality, at prices that are competitive (in the sense that it is “similar” to countries/businesses providing the same or similar products) by using the optimal levels of input resources”. Therefore, the issue of competitiveness has an “output” and an “input” dimension. In other words, a country is competitive if it produces goods and services at (consumer) acceptable levels (i.e. quality), which is on the output side, by using their inputs (labour, capital, resources) optimally and at lowest possible costs. Benchmarking using descriptive statistics cannot capture overall competiveness as well as account for country specific effects such as differences in population,

economic growth, land area and other determinants. Such analysis also cannot fully quantify the degree to which South Africa’s maritime and air transport is competitive i.e. how much more or less efficient the country is in operating these services. By quantifying the level of competiveness within a country, one can consequently quantify by how much South Africa can improve its efficiency to reach levels of best practicing countries. Efficiency analysis is one of the most common and widely accepted methods used to benchmark performance in terms of how countries use their inputs to produce outputs relative to their peers. These methods take into account the production or cost process of the industry or country and computes efficiency scores, which can be compared across countries in the sample. Methods used to measure efficiency include the statistically based stochastic frontier analysis (SFA) and linear programming methods such as the Data Envelopment Analysis and the Free Disposable Hull (FDH) method. Using these different techniques, one can calculate efficiency by comparing the outputs of a specific industry (in this maritime and air transport) and the inputs (labour, capital and resources) used to produce such outputs. Given a sample of countries, the SFA, DEA and FDH methods computes a “frontier” or the highest possible outputs (for example – number of passengers transported) that can be produced by a given set of inputs (for example – number of airports and the workers at such airports). The primary difference across these methods are the assumptions placed on the shape of this production possibility frontier (PPF) and the techniques used to compute the “frontier’. SFA uses statistical methods to compute the frontier while DEA and SFA uses mathematical liner programming to compute the frontier. On the shape of the frontier itself, SFA uses parameters to determine the shape while DEA imposes a convexity assumption on the frontier. Once these frontiers are determined by the specific method used, efficiency and performance of each country is determined by whether a country is producing below the frontier or at the frontier. Countries below the frontier are thus inefficient while countries that are on or close to the frontier are benchmarks of good performance and efficiency. Figure 17 illustrates this concept graphically using the SFA assumption on the frontier. Assuming there are three countries, namely, country A, country B and country C, all producing outputs with a set of inputs. The level of output is given on the y axis while the level of input(s) is given on the x axis. The PPF is thus the maximum attainable output with the level of inputs being used. Country B and C are operating on the PPF. Therefore, these countries cannot produce more than their current level of output with the inputs they are using, as they are fully efficient in their production process. Country B and country C are thus a benchmark of best practice or efficient production in this setting. Relative to these benchmarks of good performance, country A is thus inefficient as it is producing the same level of output as the benchmark of country B, but is using

more inputs. Country A can thus decrease its level of input use and still maintain the same level of output. The distance between country B and country A is the level to which country A is inefficient relative to the benchmark. This distance can be quantified in the form of the inefficiency score and allows one to determine by how much a country or a country can improve its efficiency. In terms of competitiveness, country B would be more competitive than country A, as the former is likely to face lower costs since it uses less resources to produce the same level of output as country B. Figure 18: The Concept of Productive Efficiency in the SFA Framework

While the PPF and analysis given in Figure 18 is determined using the SFA method, where the frontier is determined by statistical analysis, Figure 18 illustrate the same concept by using the DEA method. The DEA method does not use parameters to compute the shape of the PPF but rather uses the actual data points of the countries in the analysis to impose a PPF under the assumption that the PPF is convex, by using linear programming. In Figure 19, she same concept applies whereby countries, such as D, which are below the computed PPF are inefficient relative to their peers (B and E) on the frontier.

Figure 19: The Concept of Productive Efficiency in the DEA Framework

The choice using the SFA or DEA method depends on several factors, including the availability of data and the nature of the analysis at hand. While SFA is ideal in taking into consideration external factors, such as economic capacity and population, in the analysis to appropriately differentiate countries, the method requires more intensive and larger datasets. DEA on the other hand, can be used with smaller datasets. In this study, data availability is an issue; hence a combination of SFA and the DEA methods will be used. 5.3. Efficiency Analysis – Cost Function The description of the SFA and DEA methods above is on the production side. Essentially, efficiency is determined in a framework where countries or firms in an industry are using physical inputs (number of labourers at airports, number of airports) to produce outputs (passengers travelled, goods moved). Such an analysis will tell us if a country can produce more (move more goods or people) with its current resource endowment or if it can use fewer resources (save on resource use) given what it is producing. Such analysis is key in the global competitiveness debate, as an inefficient transport system can drive up the operating costs of firms and can impact negatively on their performance. However, it is also important to understand if both the maritime and the aviation sectors are operating at lowest possible costs i.e. if they are being cost efficient. Such an analysis also has huge bearings on the productivity and cost structure of firms using such transport networks as inputs into their production processes. A transport sector that is not cost efficient i.e. paying too much for its labour and capital, will

charge higher tariffs to people or firms using the services. This, in turn, will make the price of doing business in the country higher. The SFA method can also be used to derive a cost function to see whether countries (or airports or ports) are operating at minimum costs. This is illustrated in Figure 20. Figure 20: The Concept of Cost Efficiency in the SFA Framework

Source: Adapted from http://www.econlife.com/the-price-of-a-life/ The countries on the cost function (A, B, C, D and Z) are producing their output at the lowest possible costs and are therefore cost-efficient in their production processes, i.e. they are benchmarks for operating at minimum possible costs. Country X is cost-inefficient, as it produces the same level of outputs as country Z but at higher costs. Country Z is thus the benchmark for country X. As for the production function, the distance between country Z and country X is the level of inefficiency. This can be quantified and provides the degree to which country X needs to reduce its costs to become efficient or competitive with country Z. Cost-inefficient countries are not competitive relative to other countries because their higher costs make their prices relatively higher. South African goods and services that have transport as an input cost are likely to be more expensive than countries with lower transport costs. They will therefore be less competitive. 5.4. Data Envelopment Analysis to Air Transport and Data Constraints Both the SFA and DEA method will be used to estimate the productive and cost efficiency of South Africa’s transport modes were possible. The use of either method will depend on various factors, specifically the availability of data. In this regard, it is important to state, up front, that many of the variables required for efficiency analysis for the all modes are not readily available. Where data is available, it is only reported for a few countries, making analysis across the proposed SADC, BRICS and OECD countries impossible.

Given these constraints, the DEA method will be used to compute efficiency on the production side in instances where the sample size is limited. As DEA is not a statistical based method, one is relatively more flexible in terms of the sample size required to run such analysis. 5.5. Applying Efficiency Analysis to Each Mode 5.5.1. Maritime Transport An SFA cost function was estimated to measure the efficiency of terminal operations and was specified as follows:

𝑙𝑛𝐶!" ≥ 𝛽! + 𝛼!!

𝑙𝑛𝑦!"# + 𝛽!𝑙𝑛𝑤!"#!

+ 𝑣! − 𝑢!

Where terminal-operating costs (C) of a company (i) in a year (t) is determined by the outputs (m number of y outputs) of the transport system. In a cost function, the prices of inputs (n number of w input prices) are required. This estimation was undertaken for a sample of terminal operators in order to confirm how Transport Port Terminals, a government owned entity, performed with other terminal operators around the world. The dependent variable in the analysis is the operating expenditure of each terminal operator. The independent variables included the total terminal throughput in 20-foot equivalent units (TEUs) as the output variable, total salaries divided by total employees as the labour price variable and the total finance charges as a share of total fixed asset base as the capital price variable. The analysis was undertaken for seven companies over a 5-year period. 5.5.2. Rail Transport The described SFA method is ideal for identifying international benchmarks of effective rail and pipeline output, efficient use of rail and pipeline inputs, and cost-efficient rail and pipeline transport provision. To undertake the SFA method, a passenger rail, freight rail and pipeline production and cost function is first estimated. The following equation is used for this:

𝑙𝑛𝑦!" = 𝛽! + 𝛽!𝑙𝑛𝑥1!" + 𝛽!𝑙𝑛𝑥2!" + 𝑣!" − 𝑢!"

where y is the output of rail and pipeline transport given by: • millions of passengers transported by rail for country i in year t • millions of tonnes of goods carried by rail for country i in year t • volume of goods (oil, gas or refined products) transported by pipeline

in country i in year t.

The production of these outputs is dependent on the use of inputs, which includes:

• (for railway production) the total length of railway lines for country i in year t(x1) and total number of railway staff in country i in year t(x2)

• (for pipeline transport) the total length of pipeline for country i in year t(x1).

The analysis will quantify which countries in the sample are effectively and efficiently operating rail and pipeline transport, given the inputs used in the process. The most efficient countries will be identified (the benchmarks), and the inefficiency of other countries compared to these benchmarks will be quantified. This inefficiency is given by u. A country that uses its resources inefficiently to operate its transport industries will be uncompetitive, as it is using and paying more for its inputs, making its final transport costs higher. As mentioned earlier, a country’s transport system is driven by various factors, which include population, land area and GDP. For example, countries that cover larger geographic areas and have larger populations are likely to have more extensive railway networks, and more passengers and goods to be transported. It would be difficult to assess the efficiency or competitiveness of transport systems across countries with different characteristics. The SFA method allows for factors such as population, land area and GDP when determining rail and pipeline transport competitiveness. Ideally, South Africa’s rail and pipeline transport competitiveness should be compared against a sample that includes the other BRICS countries (Brazil, Russia, India, and China), Southern African Development Community (SADC) countries, other African countries and Organisation of Economic Cooperation and Development (OECD) countries. A country consistent analysis for all variables over a period was not possible because none of the datasets used in the project included all of the countries across a time series. Some variables included all or most of these countries, whereas others included only available countries. The passenger and freight rail benchmarking analyses (SFA) were done over two years (2009 and 2010) and five years (2009, 2010, 2011, 2012, 2013) respectively. These analyses were done for the BRICS, OECD and a sample of African countries (but not all the SACD countries). 5.5.3. Aviation Transport – DEA Analysis Data constraints on costs, inputs and outputs on aviation resulted in the use of the DEA method to analyse efficiency in this mode. This will be done using the following input/output framework:

• Aviation

o Outputs ▪ Number of passengers moved by air ▪ Number of goods moved by air ▪ Number of carriers landing

o Inputs ▪ Number of airports in the country ▪ Employees at the airports

5.5.4. General Transport Costs Assessing competitiveness from the production side identifies countries that have effective rail and pipeline transport systems, and that use their current resources efficiently. However, such analysis can only illustrate whether a country is using too many resources. It cannot determine whether such resources are too expensive. In order to assess the cost-efficiency or competitiveness of South Africa’s transport system relative to its global competitors, a transport cost function is estimated. The SFA technique is used to identify the benchmark countries with the most efficient transport costs (most competitive) and quantify by how much South Africa would have to reduce its transport costs to become competitive. The following equation is used to estimate transport cost function:

𝑙𝑛𝐶! ≥ 𝛽! + 𝛼!!

𝑙𝑛𝑦!! + 𝛽!𝑙𝑛𝑤!"!

+ 𝑣! − 𝑢!

where the transport costs (C) of a country (i) in a year is determined by the outputs (m number of y outputs) of the transport system. This includes outputs such as:

• millions of passengers transported by road, air and rail • millions of tonnes of goods transported by road, air and rail • volume of goods transported by pipeline in a year.

In a cost function, the prices of inputs (n number of w input prices) are required. This includes the price of fuel (diesel at the pump), price of capital (interest rates) and the price of labour (wage rate).

Countries with the lowest transport costs are thus the international benchmark for transport cost-efficiency. Countries that have higher transport costs than the cost-efficient countries are uncompetitive. This level of uncompetitiveness or cost-inefficiency is given by u and illustrates the degree to which a country needs to reduce its costs to become competitive. Factors such as population, land area and GDP will

be factored into the transport production analysis. The above cost function will take a translog form. 5.6. Data Sources and Data Constraints The data used in the descriptive benchmarking analysis was sourced primarily from National Master and the World Bank Database, unless otherwise stated. The data used in the efficiency analysis was sourced directly from ports and airports, using their annual reports and annual financial statements. It is important to emphasise that the initial intention of the paper was to undertake production and cost efficiency analysis for all modes of transport. However, due to the lack of readily available data, certain modes (pipeline) were excluded from the analysis while only limited analysis was possible for other modes 6. Analysis 5.1. Descriptive Analysis This study aims to assess the effectiveness and efficiency of South Africa’s transport modes relative to its main trading partners and international counterparts. The aim is to benchmark the costs of these transport modes against international counterparts. Transport is a key input in the final price of many goods and services. An effective and efficient transport sector would thus result in competitive prices of a country’s goods. Minimising or reducing transport costs to efficient but sustainable levels will benefit a country’s global competitiveness. Assessing the efficiency or competitiveness of a country’s transport services requires an analysis of the outputs and inputs used in the delivery of the service. Benchmarking such variables against international counterparts identifies international best practice and allows for a comparative analysis of South Africa’s performance. The analysis also highlights the aspects of each mode that are likely to contribute to higher relative transport prices, and thus to a general lack of competitiveness. It is important to note that simply benchmarking variables (through the use of indices, measurements etc.) across countries does not consider the factors that would result in variances across such variables. Therefore, each variable must be analysed in context. 5.1.1. General Variables The extent to which the transport sector contributes to the economy illustrates its importance in economic growth and job creation, and the role it plays in facilitating economic activity. A relatively productive transport sector is likely to lead to an

environment that is more conducive to the production of other goods and services. Figure 21 compares South Africa’s transport5 GVA (measured in US$) to that of other SADC countries. In absolute terms, South Africa has the highest transport GVA across the SADC region at US$31 billion. This is almost six times that of Angola, which has the second largest transport GVA and suggests that South Africa’s transport industry is the largest in the region. However, in per capita terms, the island nations of the Seychelles and Mauritius have higher per capita transport GVA levels. South Africa’s transport GVA per capita is around US$600 per person, which is only half that of the Seychelles. The per capita GVA gives a sense of the productivity of a sector, albeit a very crude measurement. This suggests that the transport sector in Mauritius and the Seychelles is relatively more productive. Figure 21: South Africa’s Transport GVA relative to SADC Countries (2012)

Source: Nation Master (2015) Figure 22 compares South Africa’s transport GVA to that of other African countries. Again, in absolute terms, South Africa’s transport sector is the largest. Only Libya has a higher transport per capita GVA than South Africa. South Africa’s transport industry is thus more productive than most African countries.

5 This includes land transport, air transport, supporting and auxiliary transport activities, and activities of travel agencies, post and telecommunications. Given the data constraints, telecommunications could not be extracted from the measurement.

31.39%

5.15%

0.81767% 0.84877% 0.14342%1.98%

0.29675% 0.98723% 1.34% 0.62799% 0.1121% 0.21173% 0.78723% 1.25%

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Lesotho% Madagascar% Malawi% MauriGus% Mozambique% Namibia% Seychelles% Swaziland% Zambia% Zimbabwe%

$"per"capita"

Billions"$"

Transport%GVA% Transport%GVA%per%capita%

Figure 22: South Africa’s Transport GVA relative to African Countries (2012)

Source: Nation Master (2015) South Africa may have the largest transport sector in Africa in absolute terms but not compared to other BRICS countries and most of the OECD countries (Figure 23 and Figure 24). Not only do these countries have higher transport GVA, but they also have a much higher transport GVA per capita, and so are much more productive. India’s transport GVA is almost four times that of South Africa, but its transport GVA per capita is much lower than South Africa’s. Compared to Brazil and the Russian Federation, both South Africa’s transport GVA and transport GVA per capita are much lower. Figure 23: South Africa’s Transport GVA relative to BRICS Countries (2012)

Source: Nation Master (2015) Note: No data is available for China in 2012 Although the size of South Africa’s transport sector compares well to many of the OECD countries, the sector is not as productive as the vast majority of these

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Algeria&

Benin&

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Transport&GVA& Transport&GVA&per&capita&

31.39%

157.09%

120.54%

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Transport%GVA% Transport%GVA%per%capita%

countries: only South Korea (Republic of Korea) has a lower transport GVA per capita than South Africa. Figure 24: South Africa’s Transport GVA relative to OECD Countries (2012)

Source: Nation Master (2015) Having benchmarked the productivity in South Africa’s transport sector against its main trading partners, the transport costs as a share of GDP are investigated. In theory, a relatively productive industry should be effective in its outputs and in its use of inputs. Efficient use of inputs would result in lower costs and benefits for “downstream” and other complementing industries. Figure 25 compares South Africa’s total transport costs (as a percentage of its GDP calculated in current US$) to those of other countries. Figure 25: Transport Costs as a Share of GDP (2012)

Source: Own Calculations from CSIR (2014) South Africa’s current transport costs are approximately 7.6% of its GDP. This is a higher percentage than Brazil, Japan, the United States and the United Kingdom and

31.39%124.98%

23.85% 42.56%128.66%

16.3% 19.95% 23.28% 2.52% 19.43%

183.05%240.14%

17.49% 9.14% 1.17% 13.66% 14.86%

177.07%

615%

5.32%98.36% 50.93% 12.41% 33.84% 42.6% 16.8% 4.07%

71.96% 98.04% 47.02% 48.74%107.8%

178.53%

929.19%

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2000%

4000%

6000%

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0%100%200%300%400%500%600%700%800%900%

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South%Africa%

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Denmark%

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New%Zealand%

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Transport%GVA% Transport%GVA%per%capita%

1.1%$ 2.0%$ 2.7%$ 3.4%$ 4.0%$ 4.3%$ 4.4%$ 4.4%$ 4.6%$ 4.9%$ 5.6%$ 6.1%$ 6.6%$ 7.6%$ 8.0%$ 9.0%$ 9.4%$ 9.8%$ 10.5%$12.7%$

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supports the transport productivity analysis, which shows that these countries have a higher transport GVA per capita than South Africa. Compared to South Africa, countries such as Angola, Botswana and Lesotho have a lower transport GVA per capita but higher transport costs. This indicates that factors other than the size or productivity of the sector affect the cost of transport. In general, countries with higher transport costs are likely to be less competitive. South Africa’s global competitiveness is also undermined by its relatively large logistics costs. Logistics costs are usually passed onto end users and thus making goods to the final consumers uncompetitive. Although the country fares relatively better than all its peers in BRICs in terms of logistics costs, South African products will find it difficult to compete with goods from the OECD countries as they have relatively lower logistics costs (see Figure 26). Figure 26: Logistics Costs as a % of GDP

Sources: Havenga, et al 2016 General transport costs are likely to have a negative impact on the overall productivity in the South African domestic market and will likely contribute to a lack of competitiveness. Apart from these indirect effects, South Africa is predominantly dependent on its port activities to drive imports and exports to and from the country. In this regard, high port costs, as argued thus far, can negatively impact on the final price of trade. Figure 27 compares the price of exporting and importing a single container per US dollar with other SADC countries. Compared to other SADC countries, South Africa’s export and import costs are relatively lower. This is likely due to many of these countries being landlocked and dependent on South Africa’s ports and transport network to transport its goods. This

6.1 7.3 7.7 7.9

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likely contributes to the relatively higher costs for Botswana, Swaziland and Zimbabwe, which are landlocked and have the port tariffs charged in South Africa embedded in their import and export costs. With that said, Mauritius, which has its own ports, experiences a lower export and import price compared to South Africa. This could suggest that the impact of higher port fees in South Africa has a bearing on its final price of imports and exports. Figure 27: Price of Exports and Imports per Container (US$) - SADC (2012)

Source: World Bank Database A better comparison of the price of imports and exports can be done when South Africa is compared to its BRICS counterparts, as per Figure 28. In this regard, Brazil and Russia experiences higher export and import costs compared to South Africa. This suggests that there are embedded inefficiencies in the export and import value chain in these countries. Figure 28: Price of Exports and Imports per Container (US$) - BRICS (2012)

Source: World Bank Database When South Africa is compared to the OECD countries, the inefficiencies in the country become more apparent. South Africa experiences the highest costs of imports and exports compared to all of the OECD countries analysed in Figure 29. This can be a huge concern, as higher prices for imports and exports can have a very negative impact on the economic growth in the country.

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Angola Botswana Congo,Dem.Rep.

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Figure 29: Price of Exports and Imports per Container (US$) - OECD (2012)

Source: World Bank Database 5.1.2. Output Analysis The competitiveness of a country’s transport system can be analysed by assessing the overall production of the system. A system’s competitiveness depends on the quality and effectiveness of its outputs and so, to be competitive globally, South Africa’s transport system needs to be effective and should produce at optimum levels. This section of the analysis benchmarks the outputs of South Africa’s rail and pipeline transport industries against those of other countries. The outputs of a transport system depend on various factors, including economic activity and population. For example, assuming populations have a similar usage of transport modes, a country with a larger population is likely to have more people using trains as a means of transport. To make meaningful comparisons between countries, the rail and pipeline outputs are compared to the sizes of the respective countries in terms of population, land area and GDP. Figure 30 compares the total number of rail passengers transported (in millions) with the total population (in millions) of selected African countries.

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Figure 30: Total Passengers Transported per Year and Total Population – Africa (2010)

Source: World Bank (2015) As Figure 30 shows, Egypt has the largest number of passengers transported by rail, followed by South Africa and Morocco. Egypt’s rail passenger volume is more than double that of South Africa and is partially explained by Egypt’s larger population. There appears to be a correlation between population size and rail passenger volume, although the composition of public transport usage across the various modes of transport is also an important factor. South Africa’s relatively more advanced road networks probably result in a greater private and public road transport usage. The Democratic Republic of Congo has extremely low passenger rail volumes compared to their population, which could be due to a smaller, less developed rail infrastructure network, or a focus on other forms of passenger transport. Figure 31 compares South Africa’s passenger rail volumes to three BRICS countries. Passenger volumes in Russia, China and India are significantly larger than in South Africa, indicating that rail is a primary means of public transport in these countries. However, population size is also likely to influence the number of rail passengers. All three countries have significantly larger populations than South Africa and so more people are likely to use trains. China may have a larger population than India, but India’s use of passenger rail transport is higher.

1045% 2100% 377% 37%

40837%

111% 47%4398%

114% 25% 0.3% 1493%

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eople'

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Figure 31: Total Passengers Transported per year and Total Population (2010)

Source: World Bank (2015) Note: No data is available for Brazil in 2012 Figure 32 compares South Africa’s passenger rail output to that of the OECD countries. Again, there appears to be a correlation between population size and passenger rail volume. The major outliers are Japan and the United States: although the population of the United States is much larger than that of Japan, the number of passengers transported by rail is much lower. This indicates different compositions of transport mode usage in these countries. Clearly, factors other than the size of the total population have an influence on the number of passengers that use rail transport. Figure 32: Total Passengers Transported per year and Total Population – OECD (2010)

Source: World Bank (2015) Freight rail is the other major output of the rail sector. Figure 33 shows the total volume of goods (in millions of tonnes transported per km) transported by rail in South Africa compared to selected African countries. The GDP of each country is shown to provide a context for the comparisons.

18865%

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18865%1500%10306%10493%2875% 840% 6553% 7405% 248% 3959%

86853%78582%

5398% 1678% 1986%44535.4%

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33027%345% 178% 15400%2674%15715%3718% 2291% 813%

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Figure 33: Total Goods Transported per year and GDP – Africa (2013)

Source: World Bank (2015) South Africa has the highest volume of goods transported by rail, about 15 times higher than Mauritania, which has the second highest volume of goods transported by rail. This is probably due to South Africa’s significantly higher GDP, as more goods are transported to support the higher level of economic activity. Egypt presents an interesting anomaly: a relatively low freight rail volume and a relatively high GDP and passenger rail volume. This indicates that rail is a key mode of public transport in Egypt, but not a key mode for the transport of goods. Compared to other BRIC nations, South Africa has lower rail freight volumes and a lower GDP (Figure 34). China and Russia have significantly high volumes of goods transported by rail. There appears to be a general correlation between the GDP and the volume of goods transported by rail, although the graph suggests that other factors have influenced the high volumes in Russia. Similar to Egypt in the previous graph, India appears to be more dependent on rail for public transport than for the transportation of goods.

1248% 674% 0.84% 1056.96% 159% 1592.136% 2613% 7535.7% 5976% 1193.4% 879% 862% 2024.481%

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Goods%Transported% Nominal%GDP%

Figure 34: Total Goods Transported per year and GDP – BRICS (2013)

Source: World Bank (2015) In the United States, freight rail is an important industry, transporting a high volume of goods (Figure 35). China and the United States are the two countries that transport the highest volumes of goods by rail. Rail and passenger outputs in Japan follow a similar trend to Egypt and India, i.e. rail is used for public transport rather than for the transportation of goods. In France and Germany, the low usage of rail to transport goods relative to their GDP may be due to the large number of navigable rivers in these countries. Figure 35: Total Goods Transported per year and GDP – OECD (2013)

Source: World Bank (2015)

113342%267700%

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South%Africa% Brazil% Russia% India% China%

Millions'to

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Goods%Transported% Nominal%GDP%

113342%59649.18%15142.7% 5220%

352535%

4032% 2086% 10587% 4807% 9470%31615.57821%105040.12%

408% 1099.233% 692% 20255% 10459% 14991% 69185% 13344% 189% 33256%7403.484%7262.1%4686.263%10343.746%10244%

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Millions'tonne'per'KM'

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Goods%Transported% Nominal%GDP%

The preceding analysis has provided a context for the relative use of rail transport in different countries. Countries with large rail outputs indicate that rail transport is a key input in the production of many goods and services. Therefore, an effective and efficient rail system would likely translate into greater overall efficiency and competitiveness. These countries are also likely to have greater economies of scale in their rail industry, given the sheer volume of rail outputs. Nevertheless, additional factors clearly play a role in determining the overall outputs (and inputs) in the rail sector. These factors need to be considered in order to accurately benchmark South Africa’s rail and pipeline sectors. Figure 36 looks at the capacity of South Africa’s air transport industry relative to its SADC counter parts by comparing the number of airports with the number of passengers travelled. South Africa has the highest number of airports in the regions and consequently results in the highest number of passengers travelled across these countries. Figure 36: Total Passengers Travelled by Air and Total Airports – SADC (2013)

As has been the common trend throughout, South Africa is dominant in the SADC region in terms of infrastructure capacity and transport output. Figure 37 now compares these factors amongst the BRICS countries. Compared to other BRIC countries, South Africa has one of the smallest numbers of airports and passengers travelled. In fact, India transports more passengers by air than South Africa, with fewer numbers of airports. It would be interesting to assess whether this improved efficiency in the case of India or whether the Indian airports are over capacity. A similar trend is visible with China. Brazil has a large number of airports but transports relatively fewer passengers. It is likely that freight movements play a bigger role in the Brazilian air transport sector.

020000004000000600000080000001000000012000000140000001600000018000000

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Angola Botswana Congo,Dem.Rep.

Madagascar Mauritius Mozambique Namibia Seychelles Zambia Zimbabwe SouthAfrica

TotalPassengersTravelledbyAir NumberofAirports

Figure 37: Total Passengers Travelled by Air and Total Airports – BRICS (2013)

Figure 38 now compares South Africa with OECD countries. The air capacity of the United States is very apparent across these countries. Figure 38: Total Passengers Travelled by Air and Total Airports – OECD (2013)

Figure 39 compares the container traffic handled in ports in the SADC region relative to GDP. Mauritius handles the most container traffic in the SADC region. There does not seem to be a correlation between containers handled and GDP, with South Africa having the largest economy in the SADC countries. Figure 39: Total Container Traffic and GDP – SADC (2011)

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Madagascar Mauritius Mozambique Namibia SouthAfrica

ContainerTraffic GDP

Figure 40 replicates the analysis for the BRICS countries. Compared to these countries, South African ports handled the least amount of containers compared to their BRICS counterparts. Figure 40: Total Container Traffic and GDP – BRICS (2011)

5.1.3. Input Analysis

In designing policies, strategies or programmes to make South African goods global competitive by reducing road transport costs, it is essential to isolate the key drivers of road transport costs via the inputs used in the transport production process. As many other countries, the three top drivers of road transport costs in South Africa are fuel, labour and quality of infrastructure, depending on mode 5.1.3.1. Fuel Costs Fuel costs are the main input in South Africa’s transport sector. As South Africa produces only a small amount of fuel and is a net importer of fuel, the fuel price is largely dependent on the world oil price and exchange rate fluctuations. The final fuel price for the rail sector is affected by several factors, including government taxes such as the fuel levy and the road accident fund levy (Figure 42). However, the main factors are exogenous. National tax policy results in an increase of approximately 20% in the basic fuel price.

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SouthAfrica Brazil RussianFederation India China

ContainerTraffic GDP

Figure 41: Components of the Final Fuel Price in the Rail Transport Industry

Source: CSIR (2014) As fuel is one of the primary inputs in transport, the South Africa’s fuel price, particularly diesel, will affect the final price and competitiveness of rail.

Figure 42: South Africa’s Diesel Price Compared to SADC Countries (US$) - 2012

Source: World Bank (2015) Note: No data is available for Zimbabwe and the Seychelles in 2012 Figure 42 shows that Malawi, with a final diesel price of approximately US$1.90 at the pump, has the highest diesel price in the SADC region. This is followed by the Democratic Republic of Congo and Zambia, at US$1.48. These three countries are landlocked, which suggests that transport costs are a driver of the high diesel prices. South Africa has the fourth highest diesel price in the region, at US$1.42 at the pump. This is the highest of the coastal countries and higher than some landlocked countries, including Botswana and Lesotho. Angola has the lowest fuel price in the region, as it produces a large amount of its own oil: the final diesel price in Angola is US$1 lower than in South Africa. This finding supports the analysis, which found that countries such as Angola and Botswana have lower transport costs than South Africa, despite South Africa’s transport sector being relatively more productive. Compared to other African countries, South Africa’s diesel price is one of the highest in the region: only five countries have a higher diesel price. Most of these are landlocked countries, which is the probable cause of their higher fuel prices.

0.42%

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Figure 43: South Africa’s Diesel Price Relative to African Countries (US$) - 2012

Source: World Bank (2015) Note: No data is available for Equatorial Guinea, Guinea-Bissau and the Gambia in 2012 The final diesel price is higher in South Africa than in the other BRICS countries: US$0.42 higher than both Brazil and Russia, and US$0.56 higher than India. As fuel, particularly diesel, is a key input in the railway industry, it is likely that South Africa has a higher final rail transport price than its BRICS partners. Figure 44: South Africa’s Fuel Price Compared to other BRICS Countries (US$)

Source: World Bank (2015) -

1.42%

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Cote%d'Ivoire%

DjibouM%

Egypt,%Arab%Rep.%

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Eritrea%

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GuineaSBissau%

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South%Africa% Brazil% China% India% Russian%Federa?on%

South Africa’s diesel price fares much better when compared to the OECD countries (Figure 45). Only Canada, Chile, Mexico, New Zealand and the United States have lower diesel prices than South Africa, while South Africa’s final diesel price is lower than most European countries. Norway has the highest diesel price of the OECD countries, followed by Turkey and the United Kingdom. Figure 45: South Africa’s Fuel Price Relative to OECD Countries (US$) – 2012

Source: World Bank (2015) 5.1.3.2. Labour Costs Labour costs are also an important contributor to transport costs. Labour costs account for 14% of road transport costs. Figure 45 compares South Africa’s minimum wages with those of her peers in the continent, BRICS and OECD countries. In this comparison, we use sectoral minimum wages and average nominal wages as proxies for labour costs. On average South Africa has higher sectoral minimum wages than most of its regional and BRICs peers. Regarding transport sector minimum wages in particular, South Africa has higher minimum wages that all of its BRICs and African counterparts, but below most of the OECD countries.

1.42%1.57%

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Figure 45: Level of Minimum Wages by PPP Rates

Source: Economists Dotcoza (2015) In terms of nominal wages Figure 46 shows that labour costs in South Africa are higher than all of her BRICs peers as well as other emerging market economies, but less than those in the developed countries. Assuming other factors are constant, South Africa’s relatively higher labour costs as portrayed in Figures 18 and 19 place South African products at a greater disadvantage when they enter and compete with products from the BRICs countries, emerging markets and from the rest of the African continent.

Figure 46: Nominal Wages in Emerging Markets (2013-2015 Averages, US$)

Sources: World Bank staff calculations based on International Labour Organization (2016) and World Bank (2017a)

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SA Gold miner SA Government

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Countries with relatively high labour costs are likely to have a higher final transport cost, making them uncompetitive. Figure 47 compares the unit labour costs of a sample of countries.6 Figure 47: Labour Costs across a Sample of Countries (2015)

Source: Trading Economics (2015)

6 The unit labour costs are an index relative to a base of 100, which is the global average labour cost.

77.9$

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As Figure 47 shows, South Africa has the highest relative labour costs of the sample countries, almost three times higher than the global benchmark, and so goods and services are relatively more expensive than in other countries. Labour-intensive industries in South Africa are not competitive globally. As labour is a key input in the rail industry, high labour costs are likely to result in a higher final price for rail transport. Figure 48 computes the relative percentage differences between South Africa’s labour cost index and that of other countries. South Africa’s labour cost is 161% higher than that of Brazil and 246% higher than China, both of which are BRICS trading partners. South Africa’s labour cost is 187% higher (almost double) than that of Mauritius, the only other African country in the sample. Labour costs in South Africa are over 200% higher than the majority of European Union countries, and the United States, United Kingdom and Australia (OECD countries). Labour costs are a key component in the production of rail services. It is clear that South Africa has higher labour costs than most countries, including BRICS and OECD countries. A higher labour cost can result in higher rail prices, which affects the overall competitiveness of South Africa’s rail sector as well as local industries that use rail transport as an input in production.

Figure 48 Differences in Labour Costs Relative to South Africa (2015)

Source: Own calculations using data from Trading Economics (2015)

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5.1.3.3. Capital Inputs The third major input into the production of transport is capital, which consists of key assets and the infrastructure required for rail and pipeline transport. The costs of investing in new infrastructure and maintaining existing infrastructure are a key determinant of the overall efficiency of rail and pipeline transport. If capital costs are higher in South Africa than in other countries, then overall transport prices are likely to be higher. When compared to other countries, South Africa’s road network compares favourably in terms of density (Figure 49). Within the BRICS countries, South Africa’s road network ranks second (similar to China) to India. Compared to the advanced economies, South Africa’s road network is far much denser than road networks of Australia, Canada, New Zealand and Germany, and lowers than that of UK and USA. However, when it comes to vehicles per 1000 population, South Africa surpasses only China and India, while most of the OECD countries have a denser vehicle population. Taken together these two density variables suggest that South Africa’s road network is relatively less congested compared to most of its trading partners. A congested road network undermines a country’s global competitiveness, as congestion is a key driver of freight costs. Figure 49: Road Network Density

Source: van Rensburg and S Krygsman (2015) Figure 50 compares the total extent of South Africa’s railway lines (in km) to that of a sample of African countries. The land area of the sample countries provides a context for these comparisons: a larger is more likely to have a greater railway network. However, various other factors that affect the total rail network in a country, including the extent of rail usage and strategic planning decisions of governments.

0100200300400500600700800900

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Figure 50: Total Extent of Railway Lines and Land Area – Africa (2012)

Source: World Bank (2015) South Africa has the largest railway network in the sample of African countries, which may explain the higher freight and passenger rail outputs. Egypt has the second largest network, which is passenger-centric. The link between land area and the extent of the rail network is apparent: large countries, such as the Sudan, Democratic Republic of the Congo and Algeria, have larger rail networks than smaller countries. In this case, South Africa appears to be an outlier as it has a large rail network relative to its land area. Other BRICS nations have a larger railway extent than South Africa (Figure 51). This is not surprising given their higher volumes of rail outputs. Russia has the largest rail network of the BRICS countries, which can be explained by its large land area. Figure 51: Total Extent of Railway Lines and Land Area – BRICS (2012)

Source: World Bank (2015) South Africa’s rail network compares well to the OECD countries. Only the United States, Canada, Mexico, France and Germany have a more extensive network. The

4691%

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correlation between land area and rail network is not as apparent here, as some smaller countries have extensive networks. Figure 52: Total Extent of Railway Lines and Land Area – OECD (2012)

Source: World Bank (2015) As shown in the previous analysis, an extensive rail network supports greater rail outputs and an effective service. However, the maintenance costs of a larger network are likely to be higher. Freight rail costs in particular are also likely to be higher if goods are transported over large distances. Rail density is thus an important consideration in terms of the overall cost of rail transport. The extent of pipelines was also analysed, comparing South Africa to its major trading partners in the SADC region (Figure 53), to other African countries (Figure 54), the other BRICS countries (Figure 55) and to the OECD countries (Figure 56). Figure 53: Total Pipeline Network – SADC (2009)

20500$

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Source: Nation Master (2015) South Africa has the largest pipeline network in the SADC region, almost three times larger than that of Angola, which has the second largest network. This implies that pipeline transport is more effective and prominent in South African than in other SACD countries. |The pipeline network in South Africa is not as large as in the oil-producing countries of Algeria, Egypt, Libya, Nigeria and Tunisia. The pipeline network in Algeria is by far the largest of the sampled African countries. Figure 54: Total Pipeline Network – Africa (2009)

Source: Nation Master (2015) Of the BRICS countries, Russia has the largest pipeline network (Figure 34), which is probably because of the need to transport natural gas, one of the country’s major exports. South Africa has the smallest pipeline network of the BRICS nations.

95999#

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Figure 55: Total Pipeline Network – BRICS (2009)

Source: Nation Master (2015) South Africa’s pipeline network is dwarfed compared to many OECD countries (Figure 56). The United States (which is excluded from this graph due to the sheer extent of its network) has the largest pipeline network, followed by Canada and Mexico. These networks are more than ten times the size of South Africa’s pipeline network. Figure 56: Total Pipeline Network – OECD (2009)

Source: Nation Master (2015)

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15324%11548%9607% 8629% 7661% 7218% 6739% 5722% 4924% 4423% 3534% 2949% 2756% 2537% 2260% 2178% 1925% 1795% 1649% 1273% 1260% 859% 798% 694% 155%

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This comparison suggests that countries invest strategically in a transport mode that is best suited for transporting key products/exports: countries that produce large amounts of natural gas (e.g. Russia) and oil (e.g. Nigeria) tend to have larger pipeline networks. As South Africa’s major exports are not suitable for transportation by pipeline, the country has a relatively small pipeline network. Pipeline transport is likely to be more effective and efficient in those countries in which pipelines are strategically important. 5.1.3.4. Infrastructure Quality Figure 57 below shows the global ranking of the quality of South Africa’s road network. Quality in this case is about the efficiency, safety and reliability of the roads infrastructure network. In 2017 the quality of the road network was ranked 37th out of 138 countries, a slight improvement from 43/139 in 2011. Although Figure 9 shows that there has been a slight improvement in the quality of the South African road network rankings relative to other countries, the country’s road network still requires improving on the efficiency and reliability. The road network has also been under immense pressure due to over-shifting of freight to road transport from rail. This has led to overuse of roads and under-utilisation of rail (Ghaderi et al. 2015). The traffic pressures on the road have resulted in the rapid degradation of the road network. The diminishing road network has also led to increased logistics costs and reduced economic efficiency. The deteriorating road network has been compounded by poor and infrequent maintenance. In the main, poor road conditions tend to increase the transport costs by pushing the following variable costs upwards: reducing the lifespan of trucks; diminishing the value of trucks; increasing the frequency and costs of maintenance; and fuel consumption. Costs are also increased due to higher vehicle maintenance and repairs, damage to cargo, greater fuel consumption, delays, and accelerated road and environmental damage. The CSIR measured the vehicle operating costs due to roughness of roads between 2009 and 2013. The study found that fuel consumption increased by 2%, tyre costs by just over 2%, and repair and maintenance costs by 10.6% (CSIR 2013 pp52-56.). Eventually such cost pressures find their way into every production system as owners and operators of the transport vehicles would seek to pass the greatest proportion of these additional costs to the end users of the freight carried, resulting in nation’s goods being global uncompetitive.

Figure 57: Global Ranking of the Quality of South Africa's Roads

Source: Adapted from World Economic Forum (2017) As noted above, the quality and condition of a country’s roads also have a bearing on its exports and global competitiveness. A poor road network places more pressure on transport costs by, among other things, reducing the lifespan of trucks; diminishing the value of trucks; increasing the frequency and costs of maintenance; and fuel consumption. At the end such cost pressures find their way into every production system as owners and operators of the transport vehicles pass the greatest proportion of these additional costs to the end users of the freight carried, resulting in nation’s goods being global uncompetitive. Figure 20 compares the quality of roads in South Africa with the quality of roads in the BRICS, SADC and two other giant economies of SSA: Kenya and Nigeria. The scores depicted in Figure 57 are derived from the 2017 World Economic Forum Global Competitive Index under the second pillar. Figure 57 suggests that South African roads rank higher than all of its BRICS and SADC (serve for Namibia) partners, as well as the two other giant African economies, Nigeria and Kenya.

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Source: Own Illustration based on World Economic Forum (2017) The implication of the above is that South African goods (and people) are relatively accessible when compared to other countries in the continent or within the BRICS grouping. Good quality roads facilitate faster freight and human movement. Quality roads also have significant direct and indirect positive effects on productivity, domestic and international trade and global competitiveness. Figure 59 and Figure 60 illustrates the global ranking of South Africa’s air and maritime infrastructure respectively. In 2017, South Africa’s air infrastructure ranked in the world top 20. Figure 59: Global Ranking of South Africa’s Air Infrastructure

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In 2017, South Africa’s port infrastructure quality ranked 37 out of 138 countries. This is an improvement from 2013, when it ranked 144. However, there was a decrease in the sample of the countries used in the analysis. South Africa’s port infrastructure does not fair as well compared to its airport infrastructure. Figure 60: Global Ranking of South Africa’s Maritime Infrastructure

5.2. Efficiency Analysis The descriptive analysis in Section 6.1 benchmarked the key outputs of South Africa’s railway and pipeline sectors against its main competitors (including SADC, BRICS and OECD countries) assessed whether South Africa was producing at levels comparable to its trading partners (while noting that such outputs differ because of population and country size), and compared South Africa’s input prices to those of its main trading partners. Although this analysis gives a sense of whether South Africa produces at acceptable levels and has higher inputs costs, it cannot determine the overall efficiency and competitiveness of the rail and pipeline industries. This is because, in the transport production process, outputs are affected by other factors (e.g. geography and socio-economic elements) and inputs are used in varying proportions. SFA is used to assess the competitiveness, or the efficiency, of rail and pipeline production. Relatively higher costs of inputs are not necessarily a bad thing. Higher costs can indicate a greater quality of a service, thus making the service overall efficient depending on its level of output. In other words, although costs are relatively higher, the transport mode is likely moving higher amounts of people or goods in an efficient and effective manner. This would result in transport having a positive impact on overall competiveness, as companies can get their goods faster or people can move to their places of work faster without delays.

5.2.1. Rail Passenger Analysis - SFA Competitiveness scores measure how efficiently each country operates its passenger rail service, given its use of key inputs such as labour and capital. These scores are objective, as they considered each country in terms of population, land area and economic activity. Table 5: Competitiveness Scores – Passenger Rail Transport (2009 and 2010)

Source: Own calculations

Rank Country+ Score Rank Country+ Score1 Japan 0.878 1 Japan 0.876

2 Korea 0.855 2 Korea 0.853

3 Egypt 0.794 3 Egypt 0.792

4 Israel 0.787 4 Israel 0.784

5 Denmark 0.777 5 Denmark 0.774

6 Netherlands 0.719 6 Netherlands 0.716

7 China 0.716 7 China 0.712

8 India 0.693 8 India 0.689

9 Morocco 0.651 9 Morocco 0.647

10 UnitedFKingdom 0.601 10 Switzerland 0.590

11 Switzerland 0.595 11 Belgium 0.508

12 Greece 0.526 12 Portugal 0.488

13 Belgium 0.513 13 Luxemborg 0.385

14 Portugal 0.493 14 Ireland 0.359

15 Luxemborg 0.390 15 SlovakFRepublic 0.352

16 Ireland 0.364 16 Austria 0.340

17 SlovakFRepublic 0.357 17 Sweden 0.336

18 Austria 0.345 18 South+Africa 0.31719 Sweden 0.342 19 Finland 0.310

20 South+Africa 0.322 20 Italy 0.288

21 Finland 0.315 21 Germany 0.236

22 Tunisia 0.298 22 Cameroon 0.236

23 Italy 0.294 23 Slovenia 0.198

24 Germany 0.241 24 Hungary 0.188

25 Cameroon 0.241 25 Norway 0.186

26 Slovenia 0.203 26 Estonia 0.176

27 Hungary 0.193 27 Spain 0.150

28 Norway 0.191 28 France 0.133

29 Spain 0.155 29 CzechFRepublic 0.130

30 France 0.137 30 Poland 0.113

31 CzechFRepublic 0.135 31 Russia 0.111

32 Turkey 0.123 32 Gabon 0.093

33 Poland 0.117 33 Chile 0.088

34 Russia 0.115 34 Algeria 0.075

35 Gabon 0.096 35 Australia 0.053

36 Chile 0.091 36 Mauritania 0.053

37 Algeria 0.078 37 Mozambique 0.046

38 Australia 0.056 38 Canada 0.014

39 Mauritania 0.055 39 UnitedFStates 0.007

40 Mozambique 0.048 40 Mexico 0.005

41 Canada 0.015 41 CongoFDem.FRep. 0.003

42 UnitedFStates 0.008 42 Swaziland 0.001

43 Mexico 0.005

44 CongoFDem.FRep. 0.003

45 Swaziland 0.001

2009 2010

Of the sample of countries, Japan was the most efficient producer of passenger rail services in 2009 and 2010, followed by South Korea and Egypt (Table 5). South Africa was ranked 20th in 2009 but improved to 18th in 2010. However, the number of sample countries was smaller in 2010, and South Africa’s efficiency score decreased from 0.322 in 2009 to 0.317 in 2010. This means that South Africa was using over 70% more resources than it should to produce its current outputs. In other words, South Africa could transport the same volume of passengers by rail using 70% less labour and capital. Therefore, to be efficient in operating its passenger rail services, South Africa would have to reduce the use of its labour and capital by 70%. Such a reduction is relative, i.e. it does not mean that South Africa is using more labour than Japan, but that South Africa uses more people relative to production. Japan uses labour more efficiently than South Africa. The competitiveness scores confirm most of the conclusions of the descriptive analysis. For example, two of the three countries with the highest scores are Japan, which has the highest passenger rail output in the OECD, and Egypt, which has the highest passenger rail output in Africa. These high output levels are likely to bring some economies of scale. Nevertheless, some countries have lower passenger rail volumes than South Africa but are more efficient, e.g. Morocco and Israel. South Africa is less efficient than China and India but more efficient than Russia, Canada and the United States in passenger rail. These latter countries have extensive railway networks that are used mainly for freight transport, and their relatively low passenger rail volumes are likely to result in a high level of idle resources (capital and labour). An inefficient passenger rail service is also driven by the inefficient use of labour, which implies that too many people are employed in the rail industry. This is exacerbated by the relatively high labour prices in the country. The use of labour in the rail industry needs to be relative to the growth in the demand for services and output. 5.2.2. Rail Freight Analysis - SFA The productive efficiency of the freight rail industry was computed for the five years from 2009 to 2013 (Table 6). China, Australia, Mauritania and Russia are the four most efficient countries, which confirm some of the trends in the descriptive analysis. China and Russia transport high volumes of goods via rail. Mauritania also transports a high volume of goods via rail, despite having a relatively small network, suggesting that it uses its capital and labour more efficiently than other countries. Although the United States transports high volumes of goods via rail, it is not as efficient as China or Russia.

In 2009, South Africa was ranked 12th for freight rail efficiency but fell to 14th in 2013 despite the decrease in sample size. South Africa’s very low efficiency score shows that it could transport the same volume of freight via rail using over 80% less resources. South Africa is the most inefficient of the BRICS nations, and third most efficient in Africa, but is much more efficient than many countries. These include Canada, Germany, Egypt, France and Japan, where passenger rail services are the primary rail output.

Table 6: Competitiveness Scores – Freight Rail Transport (2009–2013)

Source: Own calculations

Rank Country+ Score Rank Country+ Score Rank Country+ Score Rank Country+ Score Rank Country+ Score1 China 0.788 1 China 0.791 1 China 0.793 1 China 0.795 1 China 0.7982 Australia 0.767 2 Australia 0.770 2 Australia 0.773 2 Australia 0.775 2 Australia 0.7783 Mauritania 0.693 3 Mauritania 0.696 3 Mauritania 0.699 3 Mauritania 0.703 3 Mauritania 0.7064 Russia 0.509 4 Russia 0.514 4 Russia 0.519 4 Russia 0.523 4 Russia 0.5285 Estonia 0.461 5 Estonia 0.465 5 Estonia 0.470 5 Estonia 0.475 5 Sweden 0.4726 Brazil 0.258 6 Brazil 0.263 6 Brazil 0.268 6 Brazil 0.272 6 Netherlands 0.3397 India 0.202 7 Swaziland 0.243 7 Swaziland 0.248 7 Swaziland 0.253 7 Brazil 0.2778 Gabon 0.201 8 India 0.206 8 India 0.211 8 India 0.215 8 Swaziland 0.2579 UnitedFStates 0.197 9 Gabon 0.205 9 Gabon 0.210 9 Gabon 0.214 9 India 0.22010 SlovakFRepublic 0.154 10 UnitedFStates 0.202 10 UnitedFStates 0.206 10 UnitedFStates 0.211 10 Gabon 0.21911 Austria 0.149 11 SlovakFRepublic 0.158 11 SlovakFRepublic 0.162 11 SlovakFRepublic 0.166 11 UnitedFStates 0.21512 South+Africa 0.145 12 Austria 0.153 12 Austria 0.157 12 Austria 0.161 12 SlovakFRepublic 0.17013 Slovenia 0.136 13 South+Africa 0.148 13 South+Africa 0.152 13 South+Africa 0.156 13 Austria 0.16514 Canada 0.135 14 Slovenia 0.139 14 Slovenia 0.143 14 Slovenia 0.147 14 South+Africa 0.16015 Morocco 0.133 15 Canada 0.138 15 Canada 0.142 15 Canada 0.146 15 Slovenia 0.15116 Korea 0.122 16 Morocco 0.136 16 Morocco 0.140 16 Morocco 0.144 16 Canada 0.15017 Switzerland 0.118 17 Korea 0.125 17 Korea 0.129 17 Korea 0.132 17 Morocco 0.14718 Germany 0.081 18 Switzerland 0.121 18 Switzerland 0.125 18 Switzerland 0.128 18 Korea 0.13619 Luxemborg 0.078 19 Germany 0.084 19 Germany 0.087 19 Germany 0.090 19 Luxemborg 0.08920 Finland 0.066 20 Luxemborg 0.081 20 Luxemborg 0.084 20 Luxemborg 0.086 20 Mexico 0.08721 Cameroon 0.065 21 Finland 0.069 21 Mexico 0.082 21 Mexico 0.085 21 Cameroon 0.07522 Belgium 0.065 22 Cameroon 0.068 22 Finland 0.071 22 Finland 0.074 22 Belgium 0.07523 Israel 0.062 23 Belgium 0.068 23 Cameroon 0.070 23 Cameroon 0.073 23 Israel 0.07224 Poland 0.051 24 Israel 0.065 24 Belgium 0.070 24 Belgium 0.073 24 Botswana 0.05825 Botswana 0.050 25 Poland 0.053 25 Israel 0.067 25 Israel 0.070 25 Tunisia 0.05826 Tunisia 0.049 26 Botswana 0.052 26 Poland 0.056 26 Poland 0.058 26 CzechFRepublic 0.05127 CzechFRepublic 0.043 27 CzechFRepublic 0.045 27 Botswana 0.054 27 Botswana 0.056 27 Turkey 0.04728 Turkey 0.039 28 Chile 0.034 28 Tunisia 0.054 28 Tunisia 0.056 28 Chile 0.03829 Chile 0.032 29 Portugal 0.033 29 CzechFRepublic 0.047 29 CzechFRepublic 0.049 29 Portugal 0.03830 Portugal 0.031 30 Japan 0.031 30 UnitedFKingdom 0.044 30 Turkey 0.045 30 Japan 0.03631 Japan 0.030 31 France 0.022 31 Chile 0.035 31 Chile 0.037 31 France 0.02632 France 0.021 32 Egypt 0.018 32 Portugal 0.035 32 Portugal 0.036 32 Egypt 0.02133 Egypt 0.017 33 Mozambique 0.016 33 Japan 0.033 33 Japan 0.034 33 Mozambique 0.01934 Mozambique 0.015 34 Greece 0.016 34 France 0.023 34 France 0.025 34 Greece 0.01835 Greece 0.015 35 Italy 0.015 35 Egypt 0.019 35 Egypt 0.020 35 Italy 0.01836 Italy 0.014 36 Spain 0.015 36 Mozambique 0.017 36 Mozambique 0.018 36 Spain 0.01837 Spain 0.014 37 Algeria 0.013 37 Greece 0.017 37 Greece 0.017 37 Algeria 0.01538 Algeria 0.012 38 Hungary 0.007 38 Italy 0.016 38 Italy 0.017 38 Sudan 0.01039 Hungary 0.007 39 Ireland 0.003 39 Spain 0.016 39 Spain 0.017 39 Hungary 0.00940 Ireland 0.003 40 CongoFDem.FRep. 0.003 40 Algeria 0.013 40 Algeria 0.01441 CongoFDem.FRep. 0.002 41 Sudan 0.009 41 Sudan 0.010

42 Hungary 0.007 42 Hungary 0.00843 Ireland 0.003 43 Ireland 0.00344 CongoFDem.FRep. 0.003

20132009 2010 2011 2012

Labour use and costs appear to be the key drivers of inefficiencies in freight rail operations in South Africa. Improving efficiency in freight rail and decreasing transport costs will require addressing the high labour use and costs. The analysis confirms that South Africa’s current railway network is well maintained and sufficient for running its current passenger and goods volume. This makes the country more efficient than many others. However, the declining use of rail for both passenger and goods transport will result in underutilisation of the rail networks, which will drive inefficiencies. Policies need to be developed to promote greater use of rail for transporting both passengers and goods. Without comparing the cost effectiveness of rail to other modes of transport, the analysis suggests that increasing the use of rail will result in lower costs due to the effects of economies of scale. Figure 61 illustrates the trends of South Africa’s freight rail efficiency/competitiveness relative to countries in the main trading blocs. Overall, South Africa’s freight rail competitiveness has improved between 2009 and 2013. Much of this overall efficiency is driven by an improved competitiveness with the OECD countries. However, South Africa’s efficiencies have remained stagnant compared to African and BRICS nations. This is of major concern given the policies for improved trade with these nations. Figure 61: Trends in South Africa’s Freight Rail Competitiveness

Source: Own Calculations 5.2.3. Maritime Analysis - SFA A SFA cost function was estimated using data from seven terminal operators around the world, including Transnet Port Terminals. The aim of the analysis was to estimate whether Transnet Port Terminals, as the major (if not only) player in terminal operations in South Africa, is indeed cost inefficient, by how much and how does this compare to other terminal operators. Essentially, a SFA cost function estimation will estimate the amount by which Transnet Port Terminals can reduce its spending can

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still maintain its current operations outputs. A Cobb-Douglas cost function was estimated using panel data for seven companies over a five-year period. The results of the analysis are provided in Figure 62. Figure 62: SFA Cost Analysis – Maritime Transport

Compared to all other terminal operators in the analysis, Transnet Port Terminals is the most inefficient. With an efficient level given by a score of 1, Global Ports, a company based in Cyprus and operates terminals in Russia, is the most efficient with a score of 1.09. This essentially means that Global Ports can reduce its current spending by 9% and still maintain its current level of outputs i.e. it will still be able to handle its current level of container throughput but with less money spent. On the other hand, Transnet Port Terminals is the most inefficient terminal operator in the sample, with a score of 1.91. This means that Transnet Port Terminals can handle the same level of container throughput in its terminals with 90% less expenditure. In other words, Transnet is spending 90% too much on operations given the containers it handles. High spending driven by inefficiencies result in higher tariffs being charged to fund such spending. The results from this analysis confirm the discussions above that by being inefficient in spending; Transnet Port Terminals charges a higher tariff. It is worth pointing out that the other companies in the analysis are privately owned companies, while Transnet Port Terminals is state-owned and operates as a monopoly. Given this arrangement and the results of the analysis, it is likely that private companies tend to be relatively more efficient due to competition and the drive to maximise profits. Based on monopoly pricing models, monopolies can essentially set prices above its costs. In this case, if the company is already cost inefficient, then the tariff is likely higher due to a combination of inefficiencies and market power. However, it is likely that the former effect takes precedence, given the role of regulators in the country.

GlobalPorts,1.091419 HPHTrust,1.14413 PSA,1.156104 DPWorld,1.19273

HHLA,1.66146ICTSI,1.768318

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5.2.4. Aviation Analysis - DEA The common theme throughout the paper and the take away message from the analysis thus far is that the productivity and efficiency of a country’s transport sector contributes greatly to improving the competitiveness of its firms and the country in general. Thus far, descriptive analysis has compared and benchmarked South Africa’s output in the air transport sector in terms of total passengers and freight travelled compared to the capacity of the country in the form of the number of airports. However, these trends do not take into account the productive process of the airports and other factors such as the different scales of production faced across countries. Using the DEA analysis, this section quantified the efficiency of the productive process in South Africa’s airports compared to a set of other countries. The choice of countries here was determined by data availability and, unfortunately, could not include all of the SADC, BRICS and OECD countries. The results of this analysis are given in Figure 63. Figure 63: DEA Analysis – Air Transport

Based on the DEA analysis, Ireland and the Netherlands have the most efficient airports relative to other countries in the sample. South Africa ranks in the middle with an efficiency score of 32%, meaning that it can transport the same about of people and freight with 68% less inputs. It is likely that South Africa’s underutilisation of its air transport for freight movements is contributing to this score. Furthermore, it is also likely that South African airports use too much labour, which also increases the input inefficiency.

5.2.5. Overall Analysis -SFA The analysis in Section 5.2 assessed efficiency in terms of the use of inputs relative to outputs and did not consider the cost of inputs. Transport costs are a key factor in the final price of many goods and services. Therefore, SFA was used to assess whether South Africa’s current transport costs are too high relative to what the country is producing. This estimation compared a sample of mostly African and BRICS countries with the United States and Japan. The benchmark country (with the lowest relative costs) was identified, and then the inefficiency scores were computed, to establish the degree to which a country could reduce its current transport costs to improve its efficiencies (Figure 64). Figure 64: Transport Cost Inefficiency Scores

Source: Own calculations The efficiency of the estimated transport costs takes the current outputs of the transport industry and prices of inputs into consideration. The final costs are therefore relative to these factors. Countries with a large number of outputs or with lower input costs are likely to be more efficient in their transport costs. Of the sample countries, Botswana has the most efficient transport costs, which could be due to its lower fuel price and cost of labour. Nigeria has the highest cost inefficiency score, effectively spending 52 times more in providing transport services than it should. South Africa’s transport cost inefficiency score is 1.68, which means that South Africa spends 68% more than it should with its current outputs. In order for South Africa to become cost efficient, the country would have to reduce its total transport costs by 68%. The level of inefficiency indicates that South Africa’s final transport cost is higher than it should be.

1.06% 1.06% 1.06% 1.10% 1.10% 1.22% 1.23% 1.43% 1.44% 1.44% 1.53% 1.56% 1.68% 1.95% 1.95% 2.00% 2.14% 3.58%5.13% 5.21% 5.24% 5.66%

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7. Conclusions and Recommendations 7.1. Conclusion Transportation services contribute directly to economic growth and indirectly facilitate economic activity through the movement of goods and people in a country. As a key intermediate service and input into the production process, inefficient transport operations and subsequently high transport costs increases the price of final goods and services. For an economy that is looking to engage in global trade, this can result in exports being relatively more expensive compared to a country’s global competitors, while making imports more expensive for local producers. The DOT undertook a series of comprehensive studies that looked at the competitiveness of transport operations and costs in South Africa. The aim of these papers was to understand the costing structure and drivers in each transport mode and benchmark costs, production and efficiency of these sectors relative to the country’s global competitors. This analysis was conducted under the assertion that if the cost drivers are higher in South Africa relative to other countries and if other countries perform better and are more efficient in their transportation services, then it is likely that the price of goods and services become relatively more expensive in the global market. Therefore, it is key to determine how such costs can be reduced to improve global competitiveness. Further to this, the report is premised on the widely held view that competitiveness centres on productivity and efficiency. An efficiently produced good or service will be able to compete locally and globally. Transport costs play an important role in promoting the efficient production of goods and services, and hence the country’s global competiveness. Transport costs affect the distribution margins and prices of goods and services, as well as transaction costs and profitability for those who participate in trade. The key conclusions of the report per mode are as follows:

• High transport costs are driven by productive and cost inefficiencies, where more resources are being used than that which is required, resulting in higher expenditures and higher transport price (or tariffs).

• South Africa’s transport industry is more productive than that of most African countries. South Africa has one of the largest, road, rail and pipeline networks in Africa. Hence the country has higher freight and passenger outputs.

• South Africa’s transport cost inefficiency score of 1.68 shows that the country is spending 68% more on transport costs than it should, given its current

outputs. In other words, for the country to be cost efficient, it would have to reduce transport costs by 68%. With this level of inefficiency, South Africa’s final transport costs are higher than they should be. Labour and fuel are the main drivers of these high costs.

o Labour: Labour use and costs are the key drivers of inefficiencies in the country’s freight rail operations. South Africa’s labour costs are among the highest in the region and BRICS countries.

o Fuel: South Africa’s fuel prices are also among the highest in the region and BRICS countries. South Africa’s prices are higher than other coastal countries in the region and lower than only a few landlocked countries. The country’s diesel price fares much better when compared to the OECD countries.

• South Africa’s current transport network is well maintained and sufficient for

its current passenger and goods volumes, making the country more efficient than many others. However, the declining use of rail for both passenger and goods will result in an underutilisation of the rail networks, which will drive inefficiencies.

• The analysis of road transport costs and associated issues indicates that there is considerable scope for reduction of such costs. The key issues and causes of unnecessarily high transport costs are primarily linked to road infrastructure, government service delivery and lack of policies to promote an efficient and productive road transport sector. There should also be a strong focus on improving public transport systems and road safety.

• South Africa’s current railway network is well maintained and sufficient for

its current passenger and goods volumes, making the country more efficient than many others. However, the declining use of rail for both passenger and goods will result in an underutilization of the rail networks, which will drive inefficiencies. Without comparing the cost effectiveness of rail with other modes of transport, the analysis suggests that increasing the use of rail will likely result in lower costs due to the effects of economies of scale.

• The results confirm that South Africa (through its state-owned operators) is

relatively inefficient in its port and airport operations. This results in higher than required tariffs that can increase the cost of goods and services in the country. This is more apparent with regards to ports, as 90% of trade movement is done via this channel. The high tariffs on these transport modes are driven by a combination of inefficient spending and monopoly pricing power, with emphasise likely on the former effect, given the existence of regulators in the country.

7.2. Recommendations In general, transport costs can be reduced (hence increasing global competitiveness) by:

• Enhancing productivity • Improving efficiency • Planning and regulating • Investing in new infrastructure and innovative technologies • Maintaining infrastructure properly • Consistently using a benchmarking tool.

The following specific recommendations emanate from the study: 1. A complete integrated transport network at national and subnational levels should

be pursued to ensure high interoperability between different transport modes. This will also ensure demand for and efficiency of rail transport. The transport network should permit an efficient transfer between different transport modes. The development an interoperable multimodal transport network would benefit if the following stimulants are put in place:

• Financial support for investments in constructing and modernising terminals and for acquiring new equipment and technologies, including specialised carriages.

• Establishment of a multimodal transport unit in the DoT, to coordinate the efforts aimed at achieving an effective multimodal transport system.

• Incentives to develop passengers and goods transfer points. 2. A regulatory framework needs to be developed to regulate the road freight

industry. A platform is required whereby existing and new entrants into the road freight sector are registered. This will allow government to monitor and evaluate the sector and assist in the development of regulations and policies.

3. The DoT should regularly benchmark the performance and efficiency of different transport modes with a view to improving their competitiveness. Benchmarks pinpoint gaps in efficiency and performance and indicate overarching reasons for these gaps. Benchmarking plays a significant role in understanding where improvements can be made, and in identifying barriers to efficiency. Key efficiency benchmarking indicators should be developed through interviews and research, and should ideally include differences in asset utilisation and maintenance, funding, staff productivity, freight rates, and cost/revenue performance.

4. To enhance the global competiveness of South African products, the government

should incentivise and encourage investments in technologies that will lower maintenance costs and increase customer demand. Smart technologies will ensure effective maintenance of assets, better communication with customers, and automation of processes. This will attract more customers and improve the efficiency of the rail sector. In addition, efficiency should be improved by adopting computer control software and hardware for route optimisation, speed profiling to achieve fuel efficiency, and monitoring and controlling locomotive operations. Efficiency will also be increased through improved asset utilisation, i.e. proper planning to operate passenger trains at or near capacity, operating profitable routes, and closing underutilised tracks. Fuel efficiency needs to be improved for both passenger and freight rail by reducing idling through stop-start and other upgrades, and by providing engineers with training in advanced engine control systems that save fuel.

5. To reduce transport costs, the South African transport sectors need to improve

planning and continue to carry out proper maintenance of infrastructure. Reliable infrastructure increases the efficiency of transport modes and enhances their competitiveness.

6. To be competitive, South Africa should reduce transport costs by 68%. The key

intervention area is a reduction in fuel costs. The South transport sectors need to keep labour and fuel costs in check. The fuel tax and fuel levies should be reviewed with a view to reducing fuel costs, which is a major driver of rail transport costs.

7. There is a need to incentivise improvements in service quality for rail passengers,

and to make investments in smart technology to make rail modes of first choice for commuters/freight and fuel/gas transportation respectively. Existing strategies initiated by the DoT to make rail a mode of first choice for commuters and freight should be strengthened.

8. South Africa should increase its production of green energy, particularly

renewable energy, to achieve green connectivity, i.e. produce enough renewable energy to feed into the grid to offset the amount of electricity used by trains. Green connectivity has higher costs but is vital not only for the economy, but also for a cleaner local environment.

9. While private companies seem relatively more efficient than public enterprises,

the latter play a key developmental role in South Africa. Therefore, it is recommended that the operations of SOEs be reviewed, with an emphasis being placed on the efficiency of their operations.

10. During this review process, it is recommended that certain functions of the

operations of ports and airports be explored for possible privatisation

11. The regulator should explicitly consider wasteful expenditures and overall

inefficiencies embedded within the operations of both Transnet and ACSA when judging tariff applications.

References Cukrowski, J. and Fischer, M.M. (2000). Theory of Comparative Advantage: Do

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