scheduled, it is difficult to be cost competitive with road. **Low rail costs are achieved by the loss of service flexibility** **_._**

**Road costs** are mainly governed by variable costs rather than fixed costs, typically in the ratio 60:40. Both the cost and infrastructure aspects of road are more flexible than rail. Each truck is allowed a relatively small payload (max of 56 tons in South Africa) and operates as an independent unit. In order to reduce variable unit costs, it is important for trucks to pick up paying return loads, and trucks will often reposition and wait for a return load. Road transport is therefore a flexible and reliable door‐to‐door service, but often more expensive than a similar rail service. It has been shown that many customers are willing to pay more for predictability and faster door‐to‐door services.

Therefore, road provides a **flexible** system able to carry **small loads independently** , while rail operates from terminals and requires enough freight volume to make up a train.

# <u>Bulk rail prices are internationally competitive, but general freight is not</u>

South African tariffs compare relatively well with international prices. A recent survey of logistics professionals found that rail fees and charges are cheaper in South Africa compared to Australia, Canada, India and Russia (World Bank, 2014a). This is mainly due to highly competitive prices for the bulk coal and iron ore lines. Transnet offers customers on bulk export lines better prices because the long‐term nature of the contracts leads to lower fixed costs (through higher asset utilization) and provide a steady source of revenue which is important to issue debt in capital markets. General freight tariffs are substantially higher than those of the bulk coal and iron ore export lines.<sup>9</sup> The OECD estimated that freight tariffs per tonne/km at PPP exchange rates in 2005 were twice as high as in Russia, and almost three times as high as in the U.S. and Canada.<sup>10</sup>

# <u>And tariffs depend on whether the service is scheduled or unscheduled</u>

TFR’s pricing is not standard; the price negotiated depends on the volume, route and frequency. Therefore, low and infrequent loads can attract higher prices than the transport of the same good by a regular, high‐volume user. This means super‐exporters might be able to attract better rates, but for smaller firms the price gap between rail and road is likely to be much closer.

**Table 1: Company A’s rail versus road price comparison**

|**Product**|**Rail**|**Road**|**Origin**|
|---|---|---|---|
|**Coal**|R88.15/tonne|R68.00/tonne|Delmas, Mpumalanga|
|**Lime/Dolomite**|R608.97/tonne|R256.23/tonne|Lime Acres, Northern Cape|
|**Iron Ore**|R253.06/tonne|R229.66/tonne|Beeshoek, Postmasburg|

_Source: Industry interviews_ The difference between scheduled and unscheduled even affects bulk transport. Company specific information indicates that Transnet’s pricing for unscheduled bulk transport services can be higher than a road freight service, even though these are bulk commodities where companies have functional sidings. The experiences of these companies contradict the general perception that bulk rail freight is

> 9 Tariffs on the heavy‐haul lines are in the US$0.02‐0.03 / tonne km range, while general freight tariffs are around US$0.06 / tonne km. By comparison, road costs in Southern Africa are about US$2/km for a ‘superlink’. For full load of 34t this translates into US$ 0.06/tkm for a full return haul or almost US$0.12 for an empty return haul. Heavy haul rail is always empty on the return haul.

> 10 This is not adjusted for the size of total traffic on rail (i.e. differences in volume densities between these countries) or differences in rail gauge, both of which have a significant impact on rail tariffs.

_9_