The Institutional Prerequisite for Rail Reform in South Africa: A Credible Regulatory Capacity and Public Interest

By: David Taylor, CEO TAYLORAIL

It’s a familiar day in South Africa’s logistics environment. The lines of trucks at key border crossings and ports quietly grow with yet another load sliding into the eternal wait. Congestion in these ports now mean that truck owners turn their trucks in 7 days instead of one. That’s one invoice raised for transport costs instead of seven over that time.

The over-worked Truck drivers, far away from home, are serviced by an informal market of goods and services, driven by small-scale entrepreneurs. These lines of trucks, often over 20km long precede most points of entry and exit into South Africa, are utilised by the lucky ones, the commodities and points of economic output that can afford to move goods by truck to the international market, with a hope of making the next stack, or minimising demurrage, of selling our prized minerals to the international market and securing foreign income for our economy, for the companies that continue to provide jobs, supply contracts, economic return and much needed tax revenue.

At the quiet centre of South Africa’s economic entropy, fundamental challenges in its rail freight sector are wreaking havoc. The state-owned entity that both owns and operates the national rail network is plagued by its dual mandate – developmental and profit-generating, once justified as a means of coordinating infrastructure investment and service delivery, has, over time, produced systemic inefficiencies, declining freight volumes, and a near-total erosion of investor confidence.

Recent developments have further sharpened this picture. In June 2024, S&P Global downgraded Transnet’s credit rating, explicitly citing its inability to service its debt obligations. The message was unambiguous: without fundamental structural change, South Africa’s rail logistics cannot recover.

What has often been overlooked, however, is the institutional mechanism that makes reform possible. While significant attention has been given to infrastructure backlogs, operator inefficiencies, and capital constraints, the regulatory architecture has received comparatively little scrutiny.

No reform process in the rail sector can succeed without the creation of a credible, strong, judicially empowered and mandated, and independent regulator. In the absence of such an institution, private investment will remain limited, access conditions will continue to favour incumbents, and the broader economy will continue to absorb the costs of a failing system.

Re-evaluating the Legacy Structure

Historically, the South African rail model is characterised by vertical integration. Transnet not only managed the physical rail infrastructure but also operated the largest freight rail service. This structure was designed to maximise internal coordination, ensure uniform investment standards, and deliver public goods through a state-centric development framework. However, empirical evidence over the past three decades suggests that this structure has become a bottleneck to efficiency. Rail freight volumes have collapsed, modal shift to road has intensified, and key industries now routinely cite logistics failures as a threat to competitiveness.

This historic relationship has created the environment we are in today. Empowered more by its profit-generation mandate than its development, Transnet has continuously failed in its task of adequate maintenance of its prized asset – its infrastructure. This historic maintenance backlog was once an inconvenience passed from predecessor to successor, quietly building up into the operational hitman that is knocking Transnet’s door down today, with any new business to be introduced into the infrastructure immediately compromised by network inefficiencies of speed restrictions, derailment risk and capacity limitations due to Network condition.

The funding required to rectify this dire situation is simply not available from the Public Sector. Transnet’s own cash-flow is grossly inadequate considering its performance, likewise, National Treasury has, in no uncertain terms, stated that bailouts will not be forthcoming for the ailing entity. Any support from the Public Sector comes in the form of Government Guarantees over new debt – debt which is mostly taken up by interest obligations and payroll, effectively kicking the can down the road.

Out of existential crisis, many entities in the Private Sector have repeatedly raised hands to step in to alleviate the burden on Transnet, as the risk of rail performance is a risk of going concern for many entities (by entities, the obvious point is implied -Job Providers and GDP producers). This offer is often slapped away like a toddler protecting their favourite trainset.

Off-the-back-of National Treasury’s Guarantee Conditionalities, Transnet has undertaken certain activities of Reform. Vertical Separation of the entity into the Transnet Rail Infrastructure Manager (TRIM), and Transnet Freight Rail (TFR), on the face of it allows the independence of TRIM to engage with operating competitors of TFR to negotiate access to the Network in competition with the incumbent, likewise, the issuance of the Network Statement is a big step forward in laying out the Terms and Conditions of this access (the actual applicability of the Network Statement, however, is another story).

The sustainable, viable deployment of this reform will not be achieved without the oversight of a fundamental institutional capacity: a Transport Economic Regulator.

Whilst the National Rail Policy White Paper (2022) endorses third-party access and outlines a roadmap for market liberalisation, these objectives cannot be achieved without the parallel establishment of a credible regulatory institution. In theory, liberalisation might occur by decree. In practice, it only takes root through predictable, enforceable, and transparent institutional rules governed through an independent, judicially capable and mandated institutional capacity.

Regulation and the Role of the State

In economic theory, regulation serves to correct market failures and protect the public interest where natural monopolies exist. This is especially true in infrastructure sectors, where competition in the physical asset base is either undesirable or impractical. It would be irrational to build a second rail line next to an existing line for the sake of competition, rail infrastructure falls squarely within this category. However, recognising the need for regulation is only the starting point. The design, constituency and mandate of the regulator are equally important. In South Africa’s case, the Interim Rail Economic Regulatory Capacity (IRERC) was established as a transitional mechanism. Yet it lacks many of the features required for credibility. Its legal status is provisional, its decisions are not binding, and its funding arrangements leave it exposed to political and departmental influence.

These institutional weaknesses have real consequences. Without a regulator that can issue enforceable rulings, manage disputes between infrastructure managers and operators, and ensure compliance with access protocols, the liberalisation agenda remains aspirational. Prospective market entrants require not only legal certainty but also an impartial body to oversee competitive fairness. This is particularly important in an environment where the dominant operator has a long-standing tendency to defend market share through procedural obstacles and technical justifications.

Likewise, and perhaps most importantly, a Regulator comprised of credible, untainted, noteworthy, technically strong resources to ensure impartial direction is fundamental to obtain buy-in from the Private Sector in the reform process. Installing individuals into a regulatory capacity who do not fit this criteria raises a significant red flag on the horizon that many domestic and international parties who are constantly observing, waiting for the right moment to invest the 100’s of billions of Rand required to reinstate our Network.

A fully mandated regulator would not simply resolve disputes. It would also perform the broader function of defining the rules of the game. This includes setting guidelines for access charges, monitoring service performance, and providing independent assessments of network availability. Its work would form the institutional backbone of a liberalised rail market.

Public Interest and Economic Imperatives

Rail reform is fundamentally a question of national economic policy. An efficient and reliable freight rail network reduces the cost of doing business, supports export growth, alleviates pressure on road infrastructure and contributes to lower carbon emissions. Each of these outcomes serves the broader public interest. Private Sector participation in these Networks aims to install these efficiencies through the efficient allocation of Capital as a primary commercial objective.

At present, however, the institutional configuration of the rail sector serves primarily to protect the operational continuity of Transnet. While continuity is important, it must not come at the expense of reform. In recent years, the broader economic cost of logistics inefficiency has become increasingly visible. Port congestion has worsened, road corridors are degrading faster than budgets can repair them, and freight owners continually revise their outward projections, placing their bets on the tyred trucks rather than a functioning rail system.

The public interest is not synonymous with the survival of a single operator. Rather, it is tied to the functionality of the system as a whole. Ensuring that goods can move predictably and competitively across the country is a higher-order goal, keeping factories going in the supply of materials and moving output to domestic and international markets. Regulation, in this context, is not an administrative burden. It is a mechanism through which the economy secures returns from its logistics investments.

Furthermore, the lack of regulatory oversight has equity implications. Small and medium-sized producers, particularly those in rural or inland areas, often have no meaningful recourse when access to rail services is denied or priced beyond reach. A regulator with credible investigative and adjudicative capacity would create the possibility of procedural justice. In doing so, it would strengthen confidence in the state’s ability to mediate in the public interest.

Investment Climate and the Case for Institutional Certainty

One of the defining characteristics of modern infrastructure investment is the demand for predictability – especially in railways, where investment horizons are measured in decades. Investors are typically willing to accept a certain level of risk, but not uncertainty. In this regard, the absence of a competent and independent rail regulator who is visibly above reproach constitutes a major deterrent. Without clarity on how access will be granted, how pricing will be determined, or how disputes will be resolved, private capital has little incentive to commit, and will simply move to more certain markets.

While a number of reform projects have been initiated under terminal arrangements (the “Slot Sales” process, the Container Corridor Concession, the Durban Container Terminal PSP) these failed and stalled efforts underpin the obstacles in the way of unlocking a scalable investment environment. They highlight the flawed-by-design, broken rulebook and are not indicators of systemic change.

What the market requires is a standardised, enforceable access regime and PSP environment, administered by a trusted institution for the benefit of SA Inc, with oversight of a credible, ethical regulatory body. Without this, investment will continue to be selective, risk-averse, and limited in scope.

In jurisdictions where rail reform has succeeded, regulation has not been an afterthought. It has been foundational. The experience of liberalisation of the Single European Rail Area, for example, demonstrates the importance of regulatory authority in coordinating liberalisation while maintaining safety and continuity. Likewise, the Australian model shows how regulation can balance public and private interests over time, particularly when supported by statutory independence and parliamentary accountability.

South Africa’s reform strategy must take these lessons seriously. While local conditions will always necessitate adaptation, the institutional logic of regulation remains broadly consistent across contexts.

Debates and Dissenting Views

There is, of course, no shortage of cautionary voices. Some argue that South Africa’s rail system is too fragile to support immediate liberalisation. Others suggest that separating infrastructure and operations could destabilise Transnet’s already precarious financial position. These concerns are not without merit. Transition processes are rarely linear, and reform always entails some degree of disruption.

Nevertheless, the danger of inaction appears greater. Delaying reform in the hope that Transnet can recover its former capacity will undoubtedly deepen the crisis – with the only beneficiaries of this strategy being debt holders and Transnet employees. The issue is not whether reform should proceed, but how. A robust regulatory framework provides the structure within which this transition can be managed. It should allow for phased market entry and creates the conditions for new investment in both operations and track.

Where regulatory capacity is absent, reform tends to be co-opted by incumbents or discredited through uneven application. South Africa’s experience in other network industries, including electricity and telecommunications, offers multiple examples of this phenomenon.

Conclusion: Institutional Foundations for Economic Renewal

South Africa’s freight rail sector has reached an inflection point. The limitations of the existing model are increasingly apparent, both in operational terms and in the broader economic consequences of underperformance. While infrastructure upgrades and operator reform are undoubtedly necessary, they cannot succeed without a complementary transformation in regulatory architecture.

Establishing a strong, credible, independent, and judicially empowered rail regulator is not a technical fix. It is a strategic decision about the kind of logistics system South Africa absolutely needs to build. One possibility is a closed, state-centric system that continues to underperform and crowd out private participation. The other is a pluralist, rules-based market that serves the wider economy through competition, transparency, and most importantly, accountability.

The latter path depends not on any single institution, but on the institutional arrangements that govern the sector. If South Africa is to recover its freight rail capability, it must first recover its capacity to regulate in the public interest.

David Taylor is a rail industry specialist with extensive experience in driving structural reform within Southern and Eastern Africa’s freight rail sector. He has advised government, industry bodies, and private operators on policies, regulatory frameworks, and market access models designed to modernise the country’s rail system and unlock private sector participation. Through his work with various Public and Private Sector forums, he has contributed to the development of competitive access regimes, open-access operational frameworks, and industry-led recovery initiatives on key freight corridors. His expertise spans the design of rail access agreements, pilot projects and business models, capacity allocation mechanisms, and institutional reforms that align with international best practice, with a focus on ensuring that economic regulation supports efficiency, transparency, and long-term investment in critical transport infrastructure.