The role of infrastructure: Growing exports or collapsing our manufacturing sector

By Donald Mackay, founder and CEO of XA International Trade Advisors.

Please note that the views of individual authors do not necessarily represent the views of FairPlay.

This article is part of our 2022 Annual Report, which includes a FairPlay year in review, a 2023 forecast by the South African Poultry Association, an assessment of the state of infrastructure in South Africa by Donald MacKay and a profile on poultry farmer, Clive Tigere, and his new hatchery in Makhado.

Investors prefer to invest in countries that have working infrastructure because they are more competitive in those countries and the shareholders of companies are quite picky about competitiveness. So poor infrastructure equals poor levels of investment.

It is self-evident that in order to export, you need to have a way to get the stuff out of your country. The point where things leave the country is called a port and ours are broken. Our airports are okay, but our seaports, where the big volumes move, are not working very well. They’re also very expensive, both absolutely and also in relative terms to just about everyone else in the world.

But its not only the ports which need to function. The roads and railway lines also need to work, partly because they get the stuff to the ports, but also because sometimes things are exported by road or rail. These also are in bad shape.

All of this doesn’t address the most important part of our infrastructure. Energy. If you

don’t have energy then you can’t build or fix roads or ports and you can’t make anything competitively. Investors prefer to invest in countries that have working infrastructure because they are more competitive in those countries and the shareholders of companies are quite picky about competitiveness. So poor infrastructure equals poor levels of investment.

It’s not as if government has not spent a lot of money on Transnet, Eskom, Prasa, Portnet, municipalities and so on, its just that it got very little for the money spent. For example, Prasa bought 70 locomotives for R3.5bn and only received 13 of them, all of which were too tall to run on our railway lines. The multiplier effect says that for every Rand that government spends, it generates a multiple of that in economic activity. When the trains never run, then we have simply set fire to R3.5bn, which is all borrowed. This becomes an important issue, because when we set fire to the money, not only does the debt not disappear, but the economic activity which would have resulted in jobs being created and taxes being collected, to pay for this, also doesn’t occur, so other parts of the economy have to fund this. The only winner is the person who sold the matches, firelighters and braai to burn the money in.

So now we have R3.5bn in debt which attracts interest and as interest rates go up, so the size of the debt increases. Because we manage our money so shockingly, lenders keep charging us more and because we spend like a drunk man in a strip club, lenders, who are somewhat more conservative in their lending habits, want to charge us ever higher amounts of interest. Because of our profligate spending we have to keep replacing old loans with new ones and since we are viewed as degenerate wastrels, the new debt is more expensive than the old. Economists worry when this happens, because it is akin to paying off your home loan with your credit cards.

All of this brings us back to the question of infrastructure. We need to fix what we have and we have to build more and because we run a fiscal deficit (we spend more than we collect in taxes), it means we have to borrow the money from someone else and this is expensive. We also have a terrible multiplier effect when any money goes into government. So much is stolen and so little is done with it, that it is by no means clear if our infrastructure will be fixed no matter how much money is provided.

Poorly maintained, and rapidly disappearing infrastructure serves as a money-hungry monster roaming the economy, eating cash and poor people. But it’s much worse than a tax because at least some tax money ends up supporting poor people, but in this case, the money goes directly to the small number of wealthy people such as those selling the tyres when the pothole gives the truck a puncture.

According to Gavin Kelly, the Chief Executive of the Road Freight Association, “Where operators (transporters) may have got 50 000km out of a tyre in the past, this has dropped to 30 000km (all dependent on which routes are used and how fast these routes deteriorate (or are repaired).” That’s a 40% drop in tyre performance, which equals a 40% cost increase in tyre costs and tyres are the 3rd largest cost item when running a fleet of trucks.

Kelly further says “Poor roads also affect delivery times – which impacts on vehicles being able to perform viable transport to and from destinations (the search for paying “return loads” from the primary destination is a huge part of any operator’s life). In some cases, due to the nature of the loads, extra vehicles now ply the same route to ensure perishable goods (especially from the agricultural sector) are not left to rot due to misaligned / delayed logistical arrangements.

Where more vehicles are required to do the work of one, costs increase. Thus, the link is quite simple. Badly maintained roads are directly responsible for increases in our cost of logistics – as a country. This cost is borne by the consumer: it drives inflation, and it pushes our products into a tougher position when competing on the international market.”

The problem doesn’t stop here though. Because so much money got stolen from Transnet and so many dodgy and/or incompetent people are employed there, our rail network now doesn’t work. It’s more of a rail ‘notwork’ really. The mines use a lot of trains when they export ore. Or(e) – haha – they should be. But because the railway lines, stations, power cables, trains and everything else not nailed down, has been stolen, this is not really a viable at the scale it should be. So, the mines now put their ore onto trucks, but you need a lot of trucks to make up for one train (think of at least 1 truck for every train carriage). These trucks chow up the roads, because they are heavy, there are a lot of them, and our roads were mostly terribly built in the first place.

But the problem doesn’t end there. Durban port (for example) is not designed for so many trucks. It is expecting trains, but for every train it now needs to receive 30 trucks and these don’t drive in on the railway line. Predictably, replacing trains with trucks, means that the trucks take longer to get into and out of the port. This has become such a big problem, that some companies are flying their blueberries to Europe, at staggering cost, just to ensure they don’t lose their European clients to countries like Peru. So time-sensitive cargo is most severely impacted.

The African Rail Industry Association (ARIA) believes Transnet poses a sovereign risk to South Africa and they have good reason to believe this, a position supported by Dr Juanita Maree, the CEO of the South African Association of Freight Forwarders (SAAFF). Transnet’s response to the issues raised is predictably to avoid the issues raised, saying “ARIA did not represent railway operators, barring Traxtion, and it was strange for a small organisation with minor representation of suppliers of rail material to say it speaks on behalf of the rail industry.” Whether or not ARIA speaks for the industry, our rail ‘notwork’ is not working. That is the issue. It doesn’t matter how many times Transnet (Transnot?) says it is fixing the problem, the reality is that the problem remains unfixed and this has consequences. Already certain shipping lines don’t want to dock in Durban because it takes too long. Remember, that the cost of shipping cargo increases as more time is spent loading and unloading. If these delays become consistently too long then first the shipping line will charge more, but considerably more worrying, is that shipping lines will begin changing their sailing schedules to avoid our ports, a problem which is not easy to fix once it happens and not repaired by a state-owned shipping company. If you want the ships to spend time in our harbours, then we will have to pay more to compensate for the inefficiency of our sea ports.

According to the World Bank Container Port Performance Index (CPPI), for 2021, Durban, Cape Town and Ngqura were in the bottom ten ports out of the 370 worldwide ports. “South African ports are beset with operational inefficiencies. For example, at the start of this year, cargo ships entering Cape Town had to wait for up to two weeks to berth before customs and offloading could commence.

This is an untenable problem and it is not receiving the urgent attention it requires. Our domestic economy is collapsing, barely propped up by a mining sector which cannot achieve its potential and in attempting to do so, is doing incalculable damage to our roads. We have arrived at the terrible position of there being no good decisions any more. The lesser of two evils is after all, still evil.

It is absolutely essential that our ports be privatised soon and it seems as if the first tentative steps have been taken. The operators will apparently be appointed by February 2023. Our ports compete with every other port in the area and in the case of blueberries, even with Cape Town airport. But we also need internal competition between our ports, so that Gqberha becomes a viable alternative to Durban. Appoint the operators on merit and let them get on with the job of getting our ports working.

Image: Aerial photo of Cape Town port, courtesy of SkyPixels CC BY-SA.