Priority 2 Delivering quality and climate-friendly infrastructure SOUTH AFRICA POLICY PACKAGE © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and any other information shown on any map in this work do not imply, on the part of the World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 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Priority 2 Delivering quality and climate-friendly infrastructure SOUTH AFRICA POLICY PACKAGE Contents Leveraging the private sector while building state delivery and regulatory capabilities 1 Electricity 2 Freight transport and logistics 2 The insupportable cost of the degradation of infrastructure networks 2 The causes underlying the infrastructure crisis 3 Three priorities for addressing the infrastructure crisis 4 Case 1: Accelerating reforms in the electricity sector 5 Priority 1: Encouraging innovative and efficient delivery mechanisms by opening markets 6 Action 1: Ensure the financial and operational sustainability of the National Transmission Company of South Africa 6 Action 2: Continue to encourage private investment in renewable energy projects to increase generation and reduce demand 7 Action 3: Establish a competitive wholesale electricity market 7 Priority 2: Broadening financing options to scale up investment 8 Action 4: Scale up private investments in transmission 8 sharing instruments Action 5: Diversify sources of financing with new risk-­ 8 Priority 3: Upgrading state capability to deliver, coordinate, and regulate 8 Action 6: Strengthen the capacity of the electricity market regulator 8 Action 7: Enhance Eskom’s governance, accountability, and investment management 9 Action 8: Boost competition in generation by horizontally unbundling Eskom’s generation assets 9 Action 9: Improve electricity distribution by municipalities and Eskom 10 Case 2: Igniting reforms in the freight transport and logistics sector 11 Priority 1: Encouraging innovative and efficient delivery mechanisms by opening markets 12 Action 1: Finalize the classification of railway lines to assess the potential for future ownership 12 Action 2: Initiate Transnet’s unbundling 13 Action 3: Provide nondiscriminatory access to railway infrastructure 13 Priority 2: Broadening financing options to scale up investment 13 Action 4: Improve Transnet liquidity and financial sustainability 13 private framework for allowing private sector participation in railway operations Action 5: Develop a public-­ 14 Priority 3: Upgrading state capability to deliver, coordinate, and regulate 14 Action 6: Implement the independent Transport Economic Regulator section of the Transport Bill 14 Notes 19 Figures 1 Declining public capital stock since 2000 2 i■ 2 Systematically low public investment relative to East Asia over the past two decades 3 3 An overarching framework for efficient delivery of quality, equitable, and climate-friendly infrastructure services 4 4 A menu of proposed actions to make the electricity market more efficient, climate-­ friendly, and equitable 7 5 A menu of proposed actions to make the transport and logistics sector more efficient, climate‑friendly, and equitable 12 6 The railways network by route classification 12 A1 Proposed split of infrastructure network and rail/port operations under the Cabinet’s December 2023 Roadmap for the freight and logistics sector 18 Tables A1 Ranking of measures through the “FIT” filter of feasibility, impact, and timing 16 ■ ii Priority 2: Delivering quality and climate-friendly infrastructure Leveraging the private sector while building state delivery and regulatory capabilities Infrastructure networks are crucial for economic been announced in Transnet in the freight trans- development, anchoring growth, and ensuring de- port sector. A strong signal has been sent that the cent living conditions. For each 1 percent increase country is moving away from the public-­ centered in infrastructure spending, a country’s output is ex- infrastructure delivery model that had prevailed pected to rise 1–2 percentage points, while poverty for decades. The shift is motivated primarily by the is substantially reduced.1 This connection, support- failure of the current model but also in part by the ed by both economic theory and empirical evidence, successes of the new strategy in the country’s tele- explains why countries give so much attention to communication and aviation sectors and the les- the coverage and quality of their infrastructure sons from international experience. services and why infrastructure is often among the This note proposes a comprehensive framework main priorities of development strategies. to support government efforts to provide quality For many years, South Africa was a top infra- and climate-­ friendly infrastructure. The framework structure performer. It provided reliable electrici- is built on three mutually reinforcing priorities: en- ty and improved water sources to almost 90% of hancing the adoption of new technologies, business its population, and residents and businesses could models, and efficiencies by opening markets; scal- count on a transport network with a road density ing up investments in infrastructure by diversifying higher than that of the United States and world-­ financing sources and leveraging additional private standard ports and airports. Fast forward to the financing; and upgrading state capacity to coor- present, and the situation has deteriorated dramat- dinate, regulate, and deliver (when needed) infra- ically. Electricity availability is sporadic, with out- structure services. This note applies the framework ages averaging 8–10 hours a day in 2023, at a cost to the electricity and the freight and logistics sec- of about 2% in GDP growth. Major bottlenecks in tors, but it could be extended to other infrastruc- railways and ports reduced the country’s export ture sectors (such as water and waste management) capacity by about 20% (equivalent to 5% of GDP). in a next step. Poor logistics cost the mineral sector an estimat- Implementing infrastructure reforms is a long-­ ed $275 million annually. And disruptions in water term endeavor requiring sustained effort and com- provision have become so frequent in many urban mitment to achieve comprehensive and systemic areas, including the Johannesburg-­ Pretoria area, changes. In the interim, focusing on key short-­ term that customers face days and even weeks without actions can build momentum and address some of water. the most pressing challenges, providing immediate The infrastructure crisis has provoked social and relief and laying the groundwork for broader re- political tensions, pushing South African policy- forms. To guide policymakers, a menu of actions makers to act. The electricity generation market and reforms is proposed, of which seven (three in has gradually been opened to private investors. The the electricity sector and four in the freight trans- unbundling of state-­ owned enterprises (SOEs) has port and logistics sector) are assessed here as the begun with Eskom in the electricity sector and has most technically and politically feasible, impactful, 1■ and timely over the next few months (see table A1 Figure 1  Declining public capital stock since 2000 in the annex): Constant 2011 US dollars (thousands) Electricity 1,000 1. Ensure the financial and operational sustain­ a­ bility of the National Transmission Company of Malaysia South Africa b  y adopting a new tariff meth- 750 odology, a comprehensive wheeling pricing framework,2 and a revised grid code to en- sure nondiscriminatory open access to the 500 transmission grid. South Africa 2. Scale up private investment in electricity trans­ mission projects  by setting clear and predict- 250 South Africa, able rules for independent investors and adjusted offering blended finance and risk-­ sharing instruments. 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2017 3. Improve electricity distribution b y scaling up performance-­ enhancing transfers from the Source: Authors using International Monetary Fund data. National Treasury to municipalities. https://www.imf.org/external/np/fad/publicinvestment/pdf​ /csupdate_aug19.pdf. Freight transport and logistics Note: The public stock, in constant 2011 US dollars, is adjust- 1. Initiate Transnet’s unbundling  by enacting the ed by assuming a 10% depreciation rate of the existing capital new draft Rail Bill that opens the sector to and a diversion of 10% of annual gross investment from its third-­party operators. intended allocation. 2. Provide nondiscriminatory access to railway in­ frastructure by establishing an Infrastructure Estimating the economic losses associated Manager for railways that is independent of with degradation of the public capital stock is not Transnet operations. straightforward as the impacts on businesses and 3. Develop a public-­private framework for allowing people take multiple forms and are not necessarily private sector participation in railway opera­ linear.3 However, extrapolating from the results of tions  on bulk mining corridors and feeder lines. recent cross-­country studies suggests that South 4. Implement the Economic Regulator section of Africa has lost an annual average of 2–3 percentage the Transport Bill  to strengthen regulation points of GDP growth over the past decade.4 of ports, trucking, railways, and intermodal Further insights can be obtained by examin- transport. ing the electricity, water, and transport sectors in greater detail. For electricity, the economic losses The insupportable cost of the have increased along with load-­ shedding, reaching degradation of infrastructure networks 2–3  percentage points of GDP in 2023 accord- The degradation of infrastructure services reflects ing to the Reserve Bank of South Africa and the years of neglect and underperforming policies. World Bank.5 The main adverse effects occur on Since the late 2010s, the value of the public capital the supply side, with higher production costs and stock­—­a proxy for infrastructure­—­has declined an temporary declines in output and working hours.6 estimated 20%, an unprecedented drop for a coun- These costs are greater for electricity-­ intensive try that has not been exposed to armed conflict sectors such as mining, manufacturing, and tele- or significant climate shocks (figure 1). South Afri- communications and for small and informal firms ca and Malaysia reported approximately the same that cannot afford to invest in off-­ grid solutions, stock of public capital in 2000, but South Africa’s is such as diesel generators and solar panels. Mis- three times lower today than Malaysia’s. management of Eskom, the SOE operating in this ■ 2 Priority 2: Delivering quality and climate-friendly infrastructure sector, has cost taxpayers about $15–$20  billion The causes underlying the infrastructure in the form of cash injections from the National crisis Treasury since 2009. Responding to the infrastructure crisis requires The economic cost of water shortages is im- identifying the root causes. Public investment aver- mense, since water is a vital factor of production aged just 2.9% of GDP in South Africa over 2000– in key sectors of the economy ranging from ag- 2017, which is 5–6 percentage points lower than in riculture to manufacturing and health. Recent successful East Asian economies and about 6 times droughts in the Western Cape and the Eastern lower than in China (figure 2). This chronic under- Cape provinces are estimated to have cost about investment reflects a set of underlying factors that 3.4% of provincial GDP and 0.3% of nation- need to be better understood to avoid repeating al GDP.7 As several officials have warned, these the same mistakes. Three primary root causes are costs could rise quickly as a water crisis is looming common across sectors: in the Johannesburg-­ Pretoria area due to invest- • Limited competition. Infrastructure sectors are ment delays (as in the case of the pipeline with dominated by SOEs with monopolistic power, Lesotho), damaged infrastructure, and excessive such as Eskom in electricity and Transnet in consumption. transport. Although this state delivery model Freight and logistic sector failures are estimat- worked well until the early 2000s, when they ed to have cost the South African economy about were used as a challenging mechanism of tar- $30 billion in 2023. Trade losses have affected ex- geted state interventions such as rapid elec- porting industries (such as mining), the government trification, the isolation from competition al- (through declining revenues), and customers (who lowed the SOEs to evolve dysfunctional and experience higher prices and long delays in receiv- ing products).8 Some customers switched to other Figure 2  Systematically low public investment modes of transport, such as trucking instead of rail, relative to East Asia over the past two decades or diverted their shipments to ports in other coun- Public investment, 2000–17 (percent of GDP) tries, such as Maputo and Beira in Mozambique. Road freight now handles nearly 90% of all freight 20 volumes, with severe negative effects, including 18.2 deteriorating road safety, rapidly worsening con- gestion in key urban areas, fast-­ rising road main- 15 tenance and upgrade costs on major arteries, and mounting carbon emissions. The crisis is regional as well as national, as South Africa’s freight networks 10 9.7 are used by neighboring countries. The infrastructure crisis has also dispropor- 6.4 tionately penalized the poorest segment of the 5 5.8 5.8 5.3 population and exacerbated inequalities, work- 3.2 2.9 2.6 ing through both consumption and income chan- nels. On the consumption side, poor customers 0 a ia m nd a ea ia a es are more exposed as they generally live in areas in di ric s es na in r la ay Ch In Ko Af n pp ai et al do Th Vi h of ili M where electricity and water shortages are more ut In Ph p. So Re pronounced, and they have fewer financial re- sources for accessing alternative, often more ex- Source: Authors using International Monetary Fund data. pensive infrastructure solutions. On the income https://www.imf.org/external/np/fad/publicinvestment/pdf​ side, businesses respond to the negative impacts /csupdate_aug19.pdf. by cutting jobs or working hours, especially in low-­ Note: The public stock is adjusted by assuming a 10% depre- skill occupations, resulting in lower incomes for ciation rate of the existing capital and a diversion of 10% of many poor people. annual gross investment from its intended allocation. Priority 2: Delivering quality and climate-friendly infrastructure 3■ noncommercially oriented services and ignore have been exacerbated by rising corruption (or technological and financial innovations, resulting state capture) and coordination failures with- in a deterioration of services to the detriment of in and across government levels and agencies. customers. Fragmentation of the institutional framework • Incomplete financing options. The public sector has diluted responsibilities and accountability. In has been the main (sometimes exclusive) source the electricity sector, it has become difficult to of infrastructure financing, through end-­ user distinguish the roles and responsibilities of the charges and transfers from the central gov- Department of Mineral Resources and Energy, ernment. Both mechanisms have deteriorated the Department of Public Enterprises, the Na- over time, as many end-­ users are not paying for tional Treasury, Eskom, and the municipalities. services, and the central government’s budget In the transport sector, in the absence of policy has not prioritized infrastructure in the context direction from the Department of Transport and of budget constraints. Contrary to the practice the Department of Public Enterprises, Transnet in many other countries, the private sector has has assumed the de facto roles of infrastruc- contributed only marginally to financing in the ture owner, manager, operator, regulator, and electricity, water, and transport sectors. policymaker, with devastating effects on the • Weak management by the state. Shortcomings costs and efficiency of logistics services.9 include poor design and implementation of in- The impacts of these three factors on the de- vestment projects; declining technical capabili- clining performance of South Africa’s infrastructure ties in policy setting, regulation, oversight, and sectors have increased. They have prevented the implementation; the exodus of highly skilled tal- sectors from adjusting to changes in the external ent; and lack of transparency. These challenges environment­ —­such as the increasing pace of inno- vation and the growing impact of climate change­ Figure 3  An overarching framework for efficient delivery of quality, —­that are reshaping the provision of infrastructure equitable, and climate-friendly infrastructure services services worldwide. The low-­ carbon transition is reorienting investments from high- to low-­ emission sources in the energy and transport sectors as in- dustries and consumers are compelled to become cleaner. Extreme climate events are revealing the Priority 1 Priority 2 vulnerability of infrastructure assets. South Af- Encouraging Broadening rica has declared a national state of emergency innovative and financing efficient delivery for drought three times in the last four years, and mechanisms options to Durban was devastated by major floods in 2020 by opening scale up investment and 2022.10 The list of disasters is long and will grow markets Objective longer since climate risks are projected to worsen. Deliver quality, equitable, and Three priorities for addressing the climate-friendly infrastructure infrastructure crisis To guide government efforts to address the infra- structure crisis and deal with the three underlying causes, this note proposes an overarching frame- work with three priorities (figure 3): Priority 3 1. Encourage more innovative and efficient deliv­ Upgrading state ery mechanisms by opening infrastructure sec­ capability to tors to greater competition. Competition will deliver, coordinate, incentivize incumbent operators to deliver and regulate better and cheaper products while allowing new firms to bring in updated technologies ■ 4 Priority 2: Delivering quality and climate-friendly infrastructure and competencies. Since many of these tech- poorest customers in remote areas. Further, nologies are developed elsewhere, barriers environmental considerations could require to entry against foreign direct investment government policy and regulatory interven- should be relaxed, while synergies are cul- tions, which will necessitate strengthening tivated with local industries and the labor institutional and legal frameworks, especially market. More innovative and efficient deliv- to address coordination failures, weak tech- ery mechanisms will be beneficial to domes- nical capabilities at national and local levels, tic customers, who will get better and more and deficiencies in public investment man- affordable infrastructure services, creating agement and procurement, including in SOEs. additional benefits for the economy. Pursuing these three priorities should improve 2. Broaden the sources of financing to scale up the quality and availability of infrastructure services investment t  o meet the substantial needs and bring substantial benefits to businesses and in infrastructure sectors, which could total households. However, some groups (such as some $100 billion over the next decade. With pub- fractions of SOE workers) may lose out because of lic borrowing and SOEs’ financial distress these reforms and might therefore resist change. both already high, the state cannot cover all But this is a false dilemma. Greater domestic com- these costs alone. Complementary options petition will yield positive results and welfare gains could include raising the tariffs for infrastruc- for most of the population. Meanwhile, short-­ term ture services and leveraging private financ- costs can be managed by preparing SOEs to com- ing sources. Considering the current level of pete with businesses at the forefront of global pro- tariffs and the low level of affordability for ductivity and by providing targeted support to af- most consumers, raising tariffs risks having fected workers and communities. only a marginal effect. The only realistic op- While each of these three priorities is important tion in South Africa, with its deep domestic individually, they make the greatest contribution to financial sector (large reserves accumulated the delivery of quality and climate-­ friendly infra- by pension funds and the robust appetite of structure services when approached together. For international institutional investors, including example, opening markets will require risk-­ sharing some development partners), is to attract and financing mechanisms to attract private operators leverage private sector financing. In the short and effective regulations to protect customers. term, the state will also need to address leg- In the following sections, the proposed guiding acy debt associated with state capture, theft, framework is applied to the electricity and trans- and vandalism, as well as unfunded social port sectors, with the objective of identifying a set mandates. of concrete actions. It can also be applied to other 3. Upgrade the state’s capability to coordinate, infrastructure sectors as well. regulate, and (when unavoidable) deliver infra­ structure services. Opening the infrastructure Case 1: Accelerating reforms in the sector to new (private) operators without electricity sector first establishing rules, regulations, and incen- Since the peak of the electricity crisis in 2023, tives could end up replacing dominant SOEs several reforms have been implemented along the with private operators with excessive market lines of the three priorities in the proposed frame- power that allows them to maximize profits work. A landmark reform is the Electricity Regula- at the expense of customers. Legal and insti- tion Amendment Act, which President Ramaphosa tutional frameworks must first be established signed into law in August 2024 and is expected to that would account for the targeted market be promulgated soon. Since the further opening of structure. In addition, the state may need to the power generation market and the removal in continue to deliver infrastructure services in 202of the threshold requirements for licensing of areas where attracting private sector opera- renewable energy projects that sell electricity di- tors might not be feasible, for example, for the rectly to private consumers (embedded generation), Priority 2: Delivering quality and climate-friendly infrastructure 5■ the number of registered private sector projects in (through Eskom) in generation. This could be renewable energy has increased fivefold (priority 1). achieved by consolidating several partial strategies The conditional debt relief provided to Eskom by and updating the 1998 White paper (the govern- the National Treasury and the development of pilot ment’s last comprehensive strategy statement).11 public-­ private partnership projects in transmission Doing this can help electricity market players (in- have expanded financing options (priority  2). And cluding Eskom) adjust during the transition. To better performance has been incentivized with- good effect, the government shared its vision for in Eskom though the conditions in the debt relief the telecommunication sector in the early 2000s package and in municipalities through the condi- and for the aviation sector in the 2010s.12 Agreeing tional write-­ offs of their arrears with Eskom (priority on a vision for the electricity section is likely to be 3). In total, more than 6 gigawatts (GW) of renew- slower and more contentious, however. able electricity generation by independent power Meanwhile, the government cannot afford stasis. producers has already been connected to the grid, This note proposes a menu of nine actions under with an additional 5 GW currently in execution. The the three pillars/priorities to guide the government private sector–led distributed energy capacity (pri- in accelerating reform in the short term (figure 4). marily rooftop solar) increased from about 2 GW in Three of the nine actions have been assessed as the 2023 to close to 5.7 GW in 2024, and another 7 GW most technically and politically feasible, impactful, is expected by 2030. Thanks to these efforts, which and timely as they do not require substantive were supported by a development policy loan, there changes to the legal framework. Ideally, the actions has been a continuing supply of electricity (with no would meet all three criteria, but trade-­offs are like- load shedding) since March 2024. ly to be necessary (see table A1 in the annex). These and other measures must now be consoli- dated to create an efficient and equitable electricity Priority 1: Encouraging innovative and efficient sector. Building on the results from power genera- delivery mechanisms by opening markets tion reforms, the government should shift its focus Opening the electricity market to new operators toward reducing the sector’s main bottlenecks and and breaking Eskom’s monopoly have already begun financial sustainability risks, namely transmission as private investors have entered the electricity and the distribution grid. For example, although the generation market. This has been most prominent number of renewable energy projects grew substan- in the renewable energy segment, which is espe- tially in late 2024, their scope is constrained by lim- cially conducive to the development of small, agile ited access to the grid and serious gaps in transmis- projects. The entry of more efficient firms increases sion infrastructure. The initial steps in unbundling contestability, incentivizing Eskom to improve its Eskom and amending the Electricity Regulation Act operations to protect its customer base. This line of must be accompanied by new regulations and price reforms could be accelerated by making it even eas- mechanisms to implement the law. The investments ier for new investors to enter the generation market needed in transmission infrastructure (up to $15 bil- and by also opening the sector to new investors in lion over the next five years) cannot be funded by electricity transmission. the state alone, given its tight budget constraints, while the domestic financial market’s interest is ■ Action 1: Ensure the financial and operational dulled by the risk associated with these projects. sustainability of the National Transmission Company Improvements in distribution by Eskom and munic- of South Africa ipalities, which share responsibility for distribution, are required to enable end-­ users to benefit from the Unbundling Eskom vertically into separate gener- reforms in electricity generation and transmission. ation, transmission, and distribution functions is To provide a sense of direction to the reforms, a key step in opening the electricity market. Fully the authorities ought to share their vision of how operationalizing the National Transmission Com- they want the electricity market to look in 5–10 pany of South Africa (NTCSA) is the most urgent years, including specifying the role of the state priority for achieving that goal. This will require ■ 6 Priority 2: Delivering quality and climate-friendly infrastructure friendly, and equitable Figure 4  A menu of proposed actions to make the electricity market more efficient, climate-­ Action 1: Ensure the financial and operational sustainability of the National Transmission Company of South Africa Priority 1: Encouraging innovative and efficient Action 2: Continue to encourage private investment in renewable energy projects delivery mechanisms by opening markets to increase generation and reduce demand Action 3: Establish a competitive wholesale electricity market Action 4: Scale up private investments in transmission Priority 2: Broadening financing options to scale up investment Action 5: Diversify sources of financing with new risk-sharing instruments Action 6: Strengthen the capacity of the electricity market regulator Priority 3: Upgrading state capability Action 7: Enhance Eskom’s governance, accountability, and investment management to deliver, coordinate, and regulate Action 8: Boost competition in electricity generation by horizontally unbundling Eskom’s generation assets Action 9: Improve electricity distribution by municipalities and Eskom ensuring NTCSA’s operational decision-­ making in- can encourage the development of renewable energy dependence from Eskom. The rules of the game projects to rapidly scale up generation capacity by: required for NTCSA’s financial sustainability should • Scaling up Eskom’s land leasing program for in­ be established upfront by the National Energy Reg- vestors, as the land is generally located close to ulator of South Africa (NERSA), including: transmission lines. • Adopting a new transmission tariff methodology, • Facilitating connection to the grid by redirecting  applicable to the NTCSA independently of Eskom, potential investors to areas with excess trans- to eliminate cross-­subsidization of tariff charges mission capacity (such as, Mpumalanga), improv- with generation or distribution activities.13 ing grid management by introducing digital plat- • Implementing a new wheeling-­ pricing framework forms to manage data and coordinate the flow of  that defines grid connection charges for the di- power across the national grid,14 and adopting a rect network connection capital requirements, new Grid Code (see action 1). network development charges to cover the net- Concurrently, investments in off-­ grid solutions work capacity required for wheeling, and use by businesses and households to reduce demand of grid charges to cover network operating and can be promoted by: maintenance costs. • Scaling up the subsidized credit scheme ( the • Updating the Grid Code, b  ased on the draft “bounce-­ back” scheme) for the purchase/lease Transmission Enabling Roadmap, to better define of solar equipment by small businesses and poor provisions required for integrating renewable households, which has had early positive results. energy projects into the grid­ —­from both public • Allowing residential investors to feed surplus and private sources. The new Code should allow power back to the grid b  y establishing time-­ of- some flexibility in redundancy levels to promote use criteria. Such an approach, authorized in a more economical use of the grid. pilot project in Cape Town, could be scaled up to other municipalities. ■ Action 2: Continue to encourage private investment in renewable energy projects to increase generation ■ Action 3: Establish a competitive wholesale and reduce demand electricity market Beyond digitalizing the Energy One-­ Stop Shop that The government has outlined its intention to allow was established as a single point of entry for all ener- consumers to choose their electricity supplier. The gy project applications in July 2023, the government transition to a competitive power market will be Priority 2: Delivering quality and climate-friendly infrastructure 7■ achieved through a stepwise approach that could in Nigeria and other countries, has the poten- start by: tial to optimize the use of public finance and • Establishing a multimarket trading platform, along concessional official finance by leveraging ad- with the necessary policies, rules, and regulations. ditional private capital from private financial • Adopting the Market Code for NTCSA,  which will markets. To mobilize private capital in support require establishing a Market Code Advisory of sustainable infrastructure development, the Committee and Market Surveillance Panel, with blended finance and risk-­ sharing platform could members appointed by NERSA. deploy a range of financial products, including equity, subordinated and mezzanine debt, and Priority 2: Broadening financing options to scale first losses and credit guarantees. up investment To compensate for years of underinvestment and Priority 3: Upgrading state capability to deliver, neglected maintenance and to finance the shift from coordinate, and regulate coal to renewables will cost around $47.2 billion over Although the government has not yet shared a uni- 2023–2027 and up to $250  billion by 2035.15 Be- term vision for the electricity sector, it is fied, long-­ cause of fiscal constraints at all levels of government clear that the state will continue to have two im- and financial disarray in Eskom, the state can no lon- portant roles in the sector. First, it will adopt and ger serve as the sole source of funding for the sector. coordinate policies and regulate the sector. Second, The private sector can be expected to step up, given it will complement the private sector by continuing the depth of the financial sector, and end-­ users should to deliver some services, especially in transmission be required to pay for their electricity consumption as and distribution, to ensure affordable electricity for specified by law (discussed later in action 9). all. To effectively fill these roles, the government needs to upgrade its capabilities. ■ Action 4: Scale up private investments in transmission ■ Action 6: Strengthen the capacity of the electricity To finance the additional 14,200 kilometers of market regulator high-voltage lines and 170 transformers re- extra-­ quired to enable the projected increase in new re- The opening of the electricity sector to private op- newable energy–based power generation capacity erators has heightened the importance of the reg- by 2032, the government will need to attract the ulator, NERSA. As the sector continues to evolve, support of the private sector by: NERSA’s role in market regulation, technical over- • Adopting a regulatory framework for an indepen­ sight, and tariff setting will become even more crit- dent private transmission model  following the ical. Once the Electricity Regulation Act Amend- model adopted in Kenya, which includes a long-­ ment is passed, NERSA will be responsible for term contract between a private transmission developing and implementing regulations that align company and the power company for investing with the evolving market structure of the energy in transmission lines.16 This approach is being sector and that promote transparency, competition, tested in two pilot projects, but there is an ur- and efficiency. gent need to adjust the legal framework to pro- The following steps can be taken to enhance vide greater predictability to private investors. NERSA’s capabilities: • Expanding technical and financial resources. The ■ Action 5: Diversify sources of financing with new government will need to allocate additional re- risk-­sharing instruments sources to NERSA so that it has the technical expertise and financial support needed to carry To catalyze more private financing for the energy out its expanded mandate effectively. This in- transition, the government could consider: cludes investing in modern regulatory tools, sharing plat­ • Creating a blended finance and risk-­ data analytic capabilities, and infrastructure. form. This method, which has been successful The UK Office of Gas and Electricity Markets ■ 8 Priority 2: Delivering quality and climate-friendly infrastructure has successfully implemented data-­ driven reg- mitigating the impact of load shedding in the short ulatory practices to improve market efficiency term. Eskom has also transitioned to a new senior and transparency. leadership that has committed to redoubling efforts • Providing comprehensive training and capacity to improve governance and financial and operation- building. NERSA needs training programs and al sustainability. capacity-­ building initiatives to equip staff with Short-­ term priorities for Eskom could focus on the skills to handle the complexities of market the following measures: regulation, technical oversight, and tariff setting. • Designing clear and transparent reporting and Sharing best practices from successful regula- monitoring mechanisms t  o strengthen account- tory bodies worldwide will be essential. The US ability and responsibilities across Eskom Group. Federal Energy Regulatory Commission offers This approach will also contribute to an envi- extensive training programs and workshops to ronment that is less susceptible to corruption, continually enhance the skills of its regulatory which is essential for long-­term success. staff. • Improving investment management, including • Establishing a performance benchmarking system. public procurement, to accelerate the construction NERSA needs a permanent performance bench- of new transmission lines. Over the past three marking system that enables it to monitor and years, Eskom has built an average of 125 kilome- enforce good behavior within the sector, espe- ters of new lines a year, whereas the objective cially for the distribution sector. This will help is to construct about 1,400 kilometers of new maintain accountability and ensure that all mar- lines a year until 2031. ket players adhere to high standards of gover- • Implementing key performance indicators in proj­ nance and operational efficiency. Spain’s Nation- ect design, procurement, and completion a  nd al Commission on Markets and Competition has sharing this information regularly with the public implemented a robust benchmarking system to in a readily accessible format. Such a permanent monitor and evaluate the performance of elec- performance benchmarking system for Eskom tricity distribution companies. would enable NERSA to monitor and enforce good behavior. This system would provide for ■ Action 7: Enhance Eskom’s governance, ongoing oversight and accountability, ensuring accountability, and investment management that Eskom adheres to high standards of gover- nance and operational efficiency. Even as the electricity market gradually opens to other operators, Eskom is expected to remain a ■ Action 8: Boost competition in generation by major player, especially in transmission and distribu- horizontally unbundling Eskom’s generation assets tion. To operate efficiently, Eskom must improve its balance sheet, which has severely deteriorated in A critical step in reforming South Africa’s energy recent years because of high operational expenses, sector is the horizontal unbundling of Eskom’s gen- excessive debt service payments, and below-­ cost eration assets by separating Eskom’s generation tariffs. Despite operational profits, net losses were operations into multiple, independently operated as large as R25 billion ($1.67 billion) in fiscal 2021 entities that compete with each other within a reg- and R12.3 billion ($821 million) in fiscal 2022, with ulated wholesale electricity market. Unbundling is total debt of R396 billion ($27.3 billion) at the end essential to reduce Eskom’s market power monop- of March 2022, which is about 8.6 percent of GDP. oly, enhance competition, and enable more efficient Meaningful efforts are under way to improve delivery of electricity by leveraging private sector Eskom’s efficiency, especially the conditional debt participation. relief plan that the National Treasury approved in Horizontal unbundling has proven effective in 2023 and Eskom’s updated Corporate Plan, which other countries, where it has driven operational includes internal measures to reduce unplanned efficiency, improved service reliability, and reduced outages through improved maintenance­ —­a key to costs by introducing competitive pressures. In the Priority 2: Delivering quality and climate-friendly infrastructure 9■ current structure, Eskom’s dominance in generation initial step could be for the authorities to conduct creates excessive market power that deters private an inventory of electricity distribution services investment and stifles innovation. A horizontally and create a dashboard to compare efficiency and unbundled generation sector would allow inde- service quality across distributors. Nigeria’s Power pendent generators, including private renewable Sector Recovery Program17 and Ghana’s Energy energy developers, to compete on a level playing Sector Recovery Program18 are examples of such field. To ensure transparency and equity in this government-­ initiated programs and could inspire environment, the government must implement ro- South African policymakers.19 In the short term, bust wholesale electricity market regulations that low-­ hanging fruit can be harvested by improving govern bidding processes, pricing mechanisms, municipalities’ performance in collecting revenue and grid access. These regulations would prevent from their customers.20 Higher revenue collection market abuse, safeguard affordability for consum- will allow municipalities to pay Eskom for its bulk-­ ers, and promote investments in clean energy. By supplied electricity, contributing to Eskom’s finan- shifting the capital and operational responsibility cial sustainability, and to finance maintenance and of generation to multiple entities, some of which investments in their own distribution networks. could be privately owned or public-­ private part- Municipalities’ performance could be further im- nerships, horizontal unbundling would also reduce proved by leveraging the transfers from the Na- the financial risks borne by the state. The following tional Treasury that account for the bulk of their step could advance the unbundling of electricity financing. The combination of the following mea- generation: sures could be considered: • Developing and implementing a detailed roadmap • Unbundling NEDCSA and defining distribution for splitting Eskom’s generation assets into multi­ roles. The government should prioritize splitting ple, independently managed entities, with clear the National Electricity Distribution Company timelines and legal frameworks. This unbundling of South Africa (NEDCSA) off from Eskom and will need to be aligned with a transparent and establishing it as a separate entity with clear well-­regulated wholesale electricity market, in- governance and operational independence. In cluding potential market trading, commercial, parallel, there is the need for a comprehensive and subsidy mechanisms to support Eskom’s leg- strategy to define and differentiate the roles and acy coal generation assets until their retirement, responsibilities of Eskom’s distribution company such as through contracts-­ for-difference. and of municipalities, ensuring clarity in their mandates. This strategy should explore whether ■ Action 9: Improve electricity distribution by a transition to regional distribution companies is municipalities and Eskom necessary to enhance efficiency and equity in service delivery. Once the strategy and the as- The electricity distribution subsector faces sever- sociated Roadmap are completed, reforms could al challenges and will require restructuring in the begin incrementally, guided by benchmarks and next few years. The restructuring is likely to be pro- performance metrics to ensure alignment with longed because of the number of players and the broader sectoral goals. rigidities in the legal and institutional frameworks. • Streamlining the contractual approach imple­ The distribution market is divided between Eskom mented in mid-­ 2023 between the National Trea­ and municipalities, with municipalities responsible sury and the municipalities that have accumulat­ for about 60% of electricity distribution. ed arrears with Eskom ( about US$3  billion as of As part of the unbundling of Eskom, the govern- the end of 2023). As part of this contract, the ment intends to reorganize the National Electricity National Treasury will clear the arrears of mu- Distribution Company of South Africa (NEDCSA). nicipalities that can demonstrate progress on However, some of the prerequisites are not yet a series of indicators. This initiative has been in place. For example, the government’s vision for accepted by about 60 municipalities, but the Eskom’s role in distribution remains unclear. An results have been mixed after the first year of ■ 10 Priority 2: Delivering quality and climate-friendly infrastructure implementation,21 largely because the conditions In December 2023, the Cabinet adopted a new imposed on municipalities are too numerous and Roadmap for transforming freight transport and too complex for their current capabilities. The logistics that offers a shared vision for the sector. National Treasury should streamline these con- Produced through an intensive consultation process ditions by rewarding municipalities that improve across government departments, labor unions, and their revenue collection and that pay Eskom fully other sector stakeholders, the Roadmap seeks to and on time.22 address the underlying causes of the crisis and ad- • Using conditional transfers from the National vocates for radical change in market structure. The Treasury to incentivize municipalities to perform authorities propose to reduce Transnet’s monopo- better. The rationale for such transfers, ex- listic powers by opening the market to new players. plained in policy note 4, is especially relevant for This could generate efficiency gains and fill part of the electricity sector. The central government the financing gap while strengthening state regula- budget for fiscal 2024/2025 includes grants for tory capabilities, which is especially important in an municipalities that install prepaid meters and open and competitive market.26 The ultimate objec- that use the revenues collected appropriately. tive of the Roadmap is to improve freight services Such transfers could be scaled up and linked to for customers, generating an increase in traffic and other performance indicators. in economic benefits for the country. • Improving local capabilities at the municipal level, Opening the market to competition will require  including the adoption of turnaround strategies the vertical and horizontal unbundling of railway by city councils that ring-­ fence the distribution and port infrastructure services under Transnet. of electricity revenues. For ports, the Roadmap aims to separate opera- • Adopting standards for municipal performance, tions and regulation. For rail, it proposes a verti-  which NERSA will apply, for renewing licenses cal separation between infrastructure services and and for approving new tariffs for electricity dis- network operations (see figure A1 in the annex). tribution services. This separation will enable increased private sec- tor participation in running trains and providing lo- Case 2: Igniting reforms in the freight gistics services, while the public sector will remain transport and logistics sector responsible for infrastructure through a dedicated Years of poor performance in the freight transport manager that will provide fair and nondiscriminato- and logistics sector culminated in crisis in 2023, ry infrastructure access to all operators. when the country lost about 20% of its export ca- The Roadmap provides a shared vision for the pacity as the railway network failed and port con- freight transport and logistics sector, but full im- gestion worsened. The South African rail system plementation is a long-­ term goal. Completing the performs far below international benchmarks. Ex- needed institutional and legal reforms and shifting cept for iron ore, the system moves too little traffic, the mindset of the main players will take time, and too slowly, and with low productivity. The container reforms could face resistance from groups that may terminal at the Port of Durban was ranked 365th lose out in the transition to a new market structure. out of 370 ports worldwide in 2022, and the ter- While the overall benefits to the country are clear, minal at the Port of Ngqura was ranked 361st.23 the restructuring of Transnet needs to be managed Underlying the deterioration in performance are carefully to prepare workers for the new market contradictory commercial, political, and social structure. mandates for the public sector logistics company Within the overarching framework of the three Transnet that are not supported by a clear and sus- priorities shown in figure 3, this note proposes a tainable financing strategy,24 as well as underinvest- menu of six actions to begin implementation of ment in the rail network and ports, ex- acerbated by the Roadmap (figure 5). The emphasis is on short-­ governance failures. This has created a vicious cycle term interventions to ease constraints and rapidly as lack of investment reduces efficiency, which in increase freight volumes, creating momentum for turn reduces revenue and investment.25 further reform. Four of the six actions have been Priority 2: Delivering quality and climate-friendly infrastructure 11 ■ Figure 5  A menu of proposed actions to make the transport and logistics sector more efficient, climate‑friendly, and equitable Action 1: Finalize the classification of railway lines to assess the potential for future ownership Priority 1: Encouraging innovative and efficient delivery mechanisms by opening markets Action 2: Initiate Transnet’s unbundling Action 3: Provide nondiscriminatory access to railway infrastructure Priority 2: Broadening financing Action 4: Improve Transnet liquidity and financial sustainability options to scale up investment Action 5: Develop a public-private framework for allowing private sector participation in railway operations Priority 3: Upgrading state capability Action 6: Implement the independent Transport Economic Regulator section of the Transport Bill to deliver, coordinate, and regulate assessed as the most technically and politically delivery mechanism. The task is to assess the high-­ feasible, impactful, and timely. Ideally, the actions traffic lines that are commercially viable and those would meet all three criteria, but trade-­offs are like- that would require subsidies to provincial govern- ly to be necessary (see table A1 in the annex). ments to serve local social priorities. The rail lines These short-­ term actions provide a useful and identified as commercially viable are candidates for pragmatic starting point. They will need to be private sector participation. This task requires: complemented by additional measures, including • Identifying which railway lines could be effectively reforms and investments in ports, to enhance the operated by entities other than Transnet b y differ- vertical efficiency (from firms to ports) and horizon- entiating four types of routes: bulk mineral cor- tal efficiency (across locations) of the entire trans- ridors, core railway network, feeder rail system, port system. and short lines (figure 6). For bulk mineral corri- dors, the transfer of operational responsibilities Priority 1: Encouraging innovative and efficient from Transnet to mining companies is proposed. delivery mechanisms by opening markets The core railway network would continue to The priority is to introduce contestability to the be managed by the proposed Infrastructure market by opening the sector to multiple operators. To move quickly in that direction, the authorities Figure 6  The railways network by route must identify which railway lines could be effec- classification tively operated by entities other than Transnet, adjust the legal framework accordingly, and avoid conflicts of interest between operations and infra- structure management. ■ Action 1: Finalize the classification of railway lines to assess the potential for future ownership Transnet inherited a network of railroads that is complex, extended, and multifunctional. Some lines, deemed to be commercially viable, were ded- icated to specific mining and industrial customers. Others were built with equity in mind, to unlock the economic potential of lagging areas. Like rail Bulk mineral corridors Feeder rail system reforms in North America and Europe, South Afri- Core rail network Short lines ca’s Roadmap proposes switching from a single op- erator to multiple operators within a disaggregated Source: Freight Logistics Roadmap, 2023. ■ 12 Priority 2: Delivering quality and climate-friendly infrastructure Manager, with fair access to all operators. For all commercial arrangements between the Infra- the feeder lines that serve specific customers, structure Manager and the rest of Transnet are such as automotive and dry bulk customers, conducted on an arms-­ related length or market-­ private partnerships are proposed. Man- public-­ basis, and establishing an independent board of agement of short lines could be determined by mainly nonexecutive directors. provincial or municipal governments. Priority 2: Broadening financing options to scale ■ Action 2: Initiate Transnet’s unbundling up investment Modernizing the freight transport network will South Africa needs to adjust its legal framework to cost hundreds of billions of dollars over the next transition from a public sector–led to an open deliv- decade. The state cannot shoulder this financial ery model in freight transport. Toward that end, the burden alone, given the constrained central gov- government could focus on the following measure: ernment budget and Transnet’s limited borrowing • Adopting the new draft Rail Bill that provides capacity. Longer-­term measures to consider include the legal basis for unbundling Transnet. The bill development of risk-­ sharing financial instruments is expected to be ready for public comment in to attract domestic and international financial in- December 2024 and presented to Parliament stitutions. In the meantime the government could by February 2025. Accelerating its enactment act on two short-­ term measures, one related to im- would send a strong signal to market players and proving Transnet’s financial position and one that make policy reversal more difficult. leverages private financing in line with the strategy of opening management of several railway lines to ■ Action 3: Provide nondiscriminatory access to the private sector. railway infrastructure ■ Action 4: Improve Transnet liquidity and financial Clarifying Transnet’s institutional roles and man- sustainability dates is urgent. The priority is distinguishing be- tween the functions of infrastructure provision, Strengthening Transnet’s financial position is im- which is the role of the public sector, and rail oper- portant for the sector’s performance. In fiscal ations, which should accommodate multiple actors 2023/2024, the company was unable to settle its access basis. This can be achieved in the on a fair-­ debt maturities of approximately R14 billion, forcing short-­term by: it to refinance with costly short-­ term borrowing. To • Establishing an Infrastructure Manager, who will avoid a possible default, Transnet received an ad- be responsible for the maintenance, renewal, and ditional government guarantee of R47  billion as a development of the infrastructure network. The financial rescue package in 2024. position requires organizational independence Several steps are needed to get Transnet back from Transnet operations (within a framework of onto a sustainable financial path, in close coordina- regulatory supervision) over decisions about ca- tion with the National Treasury: pacity; access to the rail network and train path • Classifying the debt stock by risk profile and iden­ allocation, including identifying and assessing tifying the debt accumulated because of state the availability and allocation of individual train capture or the diversion of resources. This effort routes; and infrastructure charges, including set- is in the initial stages of designing a strategy to ting and collecting access charges. Several sup- restructure short-­ term and high-­interest debt port measures are needed for the Infrastructure and exploring ways of attracting long-­ term insti- Manager to be effective: developing a code of tutional investors based on stable demand from conduct for the Infrastructure Manager’s staff Transnet customers. that clearly separates the responsibilities of the • Identifying a list of disposed noncore assets along Infrastructure Manager and Transnet, imple- with milestones and timelines of disposal. Noncore menting a transfer pricing regime to ensure that assets include fixed assets, such as land in prime Priority 2: Delivering quality and climate-friendly infrastructure 13 ■ locations, and movable assets that are not nec- core network but that are critical for complex essary to operating efficient logistics services. intermodal operations. As part of the conditions for bailout, the Na- tional Treasury has required Transnet to submit Priority 3: Upgrading state capability to deliver, by August 31, 2025, a list of disposed noncore coordinate, and regulate assets, along with milestones and timelines. Dis- In the Roadmap vision, even with the transfers of posing of noncore assets could ease short-­ term some lines to private operators, the state contin- cashflow problems but will not solve Transnet’s ues to play a key role in the freight transport and underlying financial problems. logistics sector. Transnet is expected to continue to manage many railway lines, while the Department ■ Action 5: Develop a public-­private framework of Transport will remain responsible for designing for allowing private sector participation in railway strategies and plans. To be effective, the manage- operations ment of both Transnet and the Department of Transport needs to be upgraded, including through Classifying railway lines (action 1) is an unproduc- the introduction of strong key performance indica- tive exercise if it does not translate quickly into tors and incentives. The government’s regulatory the transfers of some lines to third-­ party opera- capabilities also need to be strengthened in antici- tors. To promote the participation of the private pation of an open and competitive market. sector in the short term, two opportunities can be considered: ■ Action 6: Implement the independent Transport • Transferring the operational responsibilities of bulk Economic Regulator section of the Transport Bill mineral rail lines to large mining companies. These lines serve few customers and run freight trains The President has approved the Transport Bill, only from mines to ports. As Transnet’s main which will consolidate current regulatory agencies source of cashflow, revenue from these lines has in the transport and logistics sector (such as the cross-­ subsidized the other, non-­ cash-generating Ports Regulator, rail regulator, trucking regulator, rail lines. In keeping with the Roadmap, a trans- and intermodal regulator) into the position of in- action advisory service should be commissioned dependent Transport Economic Regulator (TER). to develop a mechanism that allows large mining Such approval is pivotal as it instills confidence customers to join in addressing the investment that the sector is based on fair, transparent, and backlog and restoring reliable services, with nondiscriminatory access for all parties. Among Transnet having a minority shareholding. The other roles, TER will regulate the pricing of access transaction needs to be structured on commer- to the network, which is critical to meaningful ver- cial terms that give the private sector confidence tical separation. The dominant operator and its that long-­ term contracts will be honored. external competitors need to face the same pric- • Establishing public-­ private partnerships for run­ ing schedule for access to infrastructure, which ning railways on feeder lines that serve clusters should be cost based and reflect a fair allocation of of diverse industries  whose products can be overhead costs. containerized or palletized. For example, BMW, The following steps are necessary to build TER’s Ford, and Toyota, with assembly facilities in the capabilities: Gauteng region, depend on a cheap, reliable, • Enhancing technical and financial resources. Ad- and functioning railway system to bring in inputs equate resources need to be allocated to TER and move finished products to ports. With net- to ensure that the regulator has the technical work rationalization, a public-­ private partnership expertise and financial support needed to carry strategy could help maintain the central contain- out its expanded mandate effectively. er corridor and associated port operations, as • Providing comprehensive training and capac­ well as the feeder lines that are not part of the ity building  to equip TER staff with the skills ■ 14 Priority 2: Delivering quality and climate-friendly infrastructure required to handle the complexities of market system will help maintain accountability and regulation, technical oversight, and tariff set- ensure that all market players adhere to high ting. Drawing on best practices from success- standards of governance and operational effi- ful regulatory bodies worldwide will be essen- ciency. Spain’s National Commission on Markets tial, including through exchange programs and and Competition has implemented this type of internships. robust bench- marking system to monitor and • Establishing a performance benchmarking sys­ evaluate the performance of electricity distribu- tem  to monitor and enforce good behavior. This tion companies. Priority 2: Delivering quality and climate-friendly infrastructure 15 ■ Annex table A1  Ranking of measures through the “FIT” filter of feasibility, impact, and timing Feasible Impactful Timely Total Accelerating reforms in the electricity sector Priority 1: Encouraging innovative and efficient delivery mechanisms by opening markets Action 1: Ensure the financial and 1. Adopting a new transmission tariff 3 3 3 9 operational sustainability of the methodology National Transmission Company of 2. Implementing a new wheeling framework South Africa 3. Updating the Grid Code Action 2: Continue to encourage 4. Scaling up Eskom’s land leasing program for 3 2 3 8 private investment in renewable investors energy projects 5. Facilitating connection to the grid 6. Scaling up the subsidized credit scheme 7. Allowing residential investors to feed surplus power back to the grid Action 3: Establish a competitive 8. Establishing a multimarket trading platform 3 3 2 8 wholesale electricity market 9. Adopting the Market Code for NTCSA Priority 2: Broadening financing options to scale up investment Action 4: Scale up private investments 10. Adopting a regulatory framework for an 3 3 3 9 in transmission independent private transmission model Action 5: Diversify sources of 11. Creating a blended finance and risk-sharing 2 2 2 6 financing with new risk-sharing platform instruments Priority 3: Upgrading state capability to deliver, coordinate, and regulate Action 6: Strengthen the capacity of 12. Expanding technical and financial resources 2 3 2 7 the electricity market regulator 13. Providing comprehensive training and capacity building 14. Establishing a performance benchmarking system Action 7: Enhance Eskom’s 15. Designing clear and transparent reporting and 2 3 2 7 governance, accountability, and monitoring mechanisms investment management 16. Improving investment management, including public procurement to accelerate the construction of new transmission lines 17. Implementing key performance indicators in project design, procurement, and finalization Action 8: Boost competition in 18. Developing and implementing a detailed generation by horizontally unbundling roadmap for splitting Eskom’s generation Eskom’s generation assets assets into multiple, independently managed entities, with clear timelines and legal frameworks Action 9: Improve electricity 19. Streamlining the contractual approach 3 3 2 8 distribution by municipalities implemented in mid-­ 2023 between the and Eskom National Treasury and the municipalities that have accumulated arrears with Eskom 20. Using conditional transfers by the National Treasury to incentivize municipalities to perform better 21. Improving local capabilities at the municipal level 22. Adopting standards for municipal performance ■ 16 Priority 2: Delivering quality and climate-friendly infrastructure Feasible Impactful Timely Total Igniting reforms in the freight transport and logistics sector Priority 1: Encouraging innovative and efficient delivery mechanisms by opening markets Action 1: Finalize the classification 23. Identifying which railway lines could be 2 2 3 7 of railway lines to assess future effectively operated by entities other than ownership Transnet Action 2: Initiate Transnet’s 24. 18. Adopting the new draft Rail Bill 3 3 2 8 unbundling Action 3: Provide nondiscriminatory 25. Establishing an Infrastructure Manager and 3 3 3 9 access to railway infrastructure issuing operating licenses to private train operators Priority 2: Broadening financing options to scale up investment Action 4: Improve Transnet liquidity 26. Classifying the existing debt stock by risk 2 2 2 6 and financial sustainability profile 27. Identifying a list of disposed noncore assets along with milestones and timelines of disposal 28. Completing the process for identifying critical investments for ports equipment and operational efficiency constraints and developing key performance indicators for ports Action 5: Develop a public-­private 29. Transferring the operational responsibilities 3 2 3 8 framework for allowing private sector of bulk mineral rail lines to large mining participation in railway operations companies 30. Establishing public-private partnerships for running railways on feeder lines Priority 3: Upgrading state capability to deliver, coordinate, and regulate Action 6: Implement the independent 31. Setting up a fully functional Independent 3 3 3 9 Economic Regulator section of the economic regulator in line with the bill Transport Bill 32. Completing the merger and integration of port regulator and interim rail regulator 33. Establishing a performance benchmarking system Source: Authors. Note: The scores range from 1 to 3, with 1 being the lowest. The actions with the highest score are highlighted in yellow. Priority 2: Delivering quality and climate-friendly infrastructure 17 ■ Annex figure A1  Proposed split of infrastructure network and rail/port operations under the Cabinet’s December 2023 Roadmap for the freight and logistics sector Reform policy and regulation: Rail freight Horizontal separation between locomotives and wagon fleets Vertical separation between infrastructure services and network operations Horizontal separation between terminals and operating slots Horizontal separation Freight operators between low- and high-density lines Moving freight and providing logistics services through system Infrastructure operations manager • Train operating company Creating capacity and maintaining • Logistics provider the infrastructure Infrastructure owner • Infrastructure The landlord Manager • Rail owner (infraBel, Network Rail, BNSF, NS) Source: Freight Logistics Roadmap, 2023. ■ 18 Priority 2: Delivering quality and climate-friendly infrastructure Notes 1. C. Calderón and L. Servén, 2014, “Infrastructure, March 2024, which in the absence of a strong regu- Growth, and Inequality: An Overview,” World Bank lator could not be contested. Policy Research Working Paper. 7034. https://ssrn​ 9. The impact of the weak management of the sector .com/abstract=2497234. These authors also pro- is also evident in the network statement and pro- vide a summary of the literature. posed tariffs of March 2024, which, in the absence 2. Wheeling pricing refers to charging for electricity of a strong regulator, could not be contested. transmission from one system to another. 10. The Day Zero drought cost the Western Cape over 3. The impact of declining infrastructure services can R5 billion and put under strain the water and sanita- take different forms depending on the type of serv- tion framework as the local authorities had to ration ice (for example, water is different from electricity or water services while having to invest in desalination, transport); the intensity of the failure (2 or 8 hours underground extraction from aquifers, and water of disruption do not have the same impact); the loca- reclamation/reuse. tion of the activity (urban or rural area); the sector of 11. Department of Minerals and Energy, 1998, activity (production processes differ in use of ener- “White Paper on the Energy Policy of the Repub- gy and water); and the income level of the customers .gov​ lic of South Africa,” December, https://www​ (not everyone is equally vulnerable). .za/sites/default/files/gcis_document/201409​ 4. C. Calderón and L. Servén, 2014, “Infrastructure, /whitepaperenergypolicy19980.pdf. Growth, and Inequality: An Overview,” World Bank 12. “White Paper on Telecommunications Policy.” Gov- Policy Research Working Paper. 7034. https://ssrn​ ernment Gazette 370 (March 1996) and “White .com/abstract=2497234. Paper on National Civil Aviation Policy” 2017. 5. South African Reserve Bank, June 2023, Occasional 13. As defined in the National Energy Regulator of South Bulletin of Economic Notes. OBEN/23/01. Africa’s consultation paper “Electricity Price Determi- 6. C. Calderón and L. Servén, 2014, “Infrastructure, nation Methodology (EPDM) Rules” issued in August Growth, and Inequality: An Overview,” World Bank 2023. https://businesstech.co.za/news/wp-content​ Policy Research Working Paper. 7034. https://ssrn​ /2023/08/Nersa-consultation-paper.pdf. /uploads​ .com/abstract=2497234. 14. The National Treasury, Department of Mineral Re- 7. For further details, see World Bank, 2022, South Africa: sources and Energy, and Independent Power Pro- .world​ Climate and Development Report. https://www​ ducers Office could consider the use of regional /south​ bank.org/en/news/infographic/2022/11/01​ incentives to realize the public good externalities -country-climate-and-development​ -Africa​ -report. associated with these projects for these provinces 8. J.H. Havenga, Z.P. Simpson, H. Neethling, A. De (supply increase, job creation, and other social tran- Bod, and S. Swarts, 2023, “The Macrologistics Ef- sition considerations). Such regional incentives could fect of a State-Owned Enterprise, Transnet, on the include reduced or preferential tariffs for infrastruc- South African Economy,” Journal of Transport and ture and access to land, blended concessional fi- Supply Chain Management, 17(0), a952. https://doi​ nancing, or even tax and tariff incentives. .org/10.4102/jtscm.v17i0.952. The impact of the 15. “Making Capital Work: Unlocking US$8.5 Billion for weak management of the sector is also evident in South Africa’s Just Energy Transition,” 2022, Presi- the network statement and proposed tariffs of dential Climate Transition Report (2022–2050). 19 ■ 16. A private transmission company has long-term con- 24. Commonly, when a subnational government is ex- tracts with Kenya Power to earn wheeling revenue pected to deliver on development objectives that are from electricity transmitted through its power lines. not commercially viable, adequate funding is provid- This company is investing $298  million in two pri- ed through subsidies. For example, in India an explicit vately owned power transmission lines—a first in subsidy that is calculated every year to allow Indian —­ Africa­ covering 237 kilometers. Railways to provide freight and passenger services to 17. https://www.psrp.org.ng/. low-economic-density areas, with the understand- 18. ht t p://energ ycom.gov.gh/public-notices/112​ ing that the subsidy allows mobilization of labor and -energy-sector-recovery-programme-esrp. makes it cheaper for firms to locate to these areas, a -­ 19. For example, in the municipality of Maluti-­ thereby creating jobs. In the case of Transnet, this Phofung, billing comes to only half the cost of bulk explicit subsidy arrangement is missing. purchases from Eskom. 25. Key aspects of the governance failures at Transnet 20. https://powermin.gov.in/en/content/overview-5. are detailed in the Judicial Commission of Inquiry 21. According to the National Treasury, as of March into State Capture Report, Part V, Volumes 1 and 2 31, 2024, none of the participating municipalities (https://www.justice.gov.za/commissions/STCC​ complied with all conditions, while only 26 reported .htm). A particular problem has been the electrified moderate compliance and 36 poor compliances. locomotive fleet procured from the China Railway 22. One challenge is that the Electricity Regulation Act Rolling Stock Corporation. Because of disputes over of 2006 prohibits restricting Eskom electricity sup- the procurement process, many of the locomotives plies to nonperforming municipalities. stand idle or have not even been delivered. 23. World Bank, 2022, World Bank Container Port Index. 26. Such change is not completely new for the trans- /en https://documents1.worldbank.org/curated​ port sector. Partnerships with the private sector /099051723134019182/pdf/P1758330d05f3607​ have been developed such as the Gautrain regional f09690076fedcf4e71a.pdf. rail service, bus rapid transit operations, private air- ports, and the Richards Bay Coal Terminal. ■ 20 Priority 2: Delivering quality and climate-friendly infrastructure