volumes without guaranteed consistency of flow. This is fundamentally at odds with the economics of rail. Because rail costs are mainly governed by fixed costs, it is important to optimize equipment and infrastructure utilization to lower unit costs. Thus, pricing for smaller, inconsistent volumes is naturally substantially higher than for large, predictable volumes, where rail operators can enter into long‐term “take‐or‐pay” contracts.<sup>7</sup> In the past, when rail had an effective transport monopoly, smaller customers were served by private rail sidings. By shunting small numbers of wagons from marshalling yards, rail tariffs could be set on a “cost plus” basis. However, the advent competitive road freight transport, which has the flexibility to compete more effectively for smaller volume traffic, has resulted in a situation where individual small volume customers are almost never able to be served cost effectively by rail. Therefore, a rail service does not need to compete with those segments that are best served by road transport – it merely needs to capture all “rail friendly” freight that is currently using the road network.

But market failures come into play here. Many geographical areas have clusters of diverse economic activity that add up to significant volumes of export freight, most likely on a relatively consistent basis. This is especially significant where these different goods have similar logistics and handling characteristics. But spread across many firms, especially crossing over sectors, lack of information and other challenges inherent in coordination of these volumes prevents the freight market from working as efficiently as it could.

# _3.2 Pricing constraints_

Access is not unidimensional; it depends significantly on pricing. In this respect, both the rail freight network and the ports system have pricing systems in place that are not only costly for the average exporter but highly differential across users.

<u>Rail prices are broadly competitive with road, but general freight less so</u> The relative cost effectiveness of rail versus road can vary significantly depending on the commodity transported, the route and the length and frequency of the service (see Box 3). For certain types of freight transport, rail is cheaper than road: rail transport of large volumes of heavy goods based on long‐term fixed contracts can be 3 times cheaper per tonne‐kilometer than road. For low and variable volumes of general goods, the door‐to‐door transport by rail (which still includes a road transport element at both ends) can be more expensive than road. Average rail tariffs are 46 percent lower than road tariffs across a range of cargo products (Transnet, 2008a). This differential is driven mainly by export coal, export manganese and container tariffs, where rail is 67, 53, and 50 percent cheaper than road.<sup>8</sup> Transnet has a cost advantage in most commodities in key corridors at long distances. However, the cost advantage is often eroded or lost for shorter distances (e.g. Durban – Gauteng), for time sensitive products (e.g. food), and for different types of cargoes (e.g. breakbulk versus containers).

## **Box 3: Road versus rail: when is rail more competitive than road?**

**Rail costs** are mainly governed by fixed costs rather than variable costs, at a minimum ratio of 70:30 (see Havenga and Pienaar, 2012). To reduce unit costs, high volumes are required and it is necessary to achieve a high degree of asset utilization. This can best be done by operating fixed schedules between well‐equipped and efficient freight end terminals. It is not cost effective to reposition the wagons to pick up a return load from another location, but better to return <u>quickly to pick up a new load. Thus if rail services are not</u>

> 7 In a “take‐or‐pay” contract, the customer signs a long‐term contract guaranteeing specific volumes and pays the operator the agreed amount whether or not these volumes actually materialize. For the operator, they give up higher fees in return for certainty of the income stream (which is particularly important from a financing perspective); for the customer they give up some flexibility in return for guaranteed access at a competitive price.

> 8 Containers price per TEU based on NatCor (i.e. Gauteng – Durban)

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