How SA risks losing its Africa gateway status

South Africa desperately needs to lower its high supply chain costs, but many taxes, permit fees and new charges by government and other authorities on freight logistics companies are causing some to consider moving their operations cross-border and recruiting drivers there, writes UDO RYPSTRA.

Concern is increasing that South Africa is loosing its status as the freight logistics gateway to neighbouring and other sub-Saharan countries, especially among members of the local logistics industry who directly, and indirectly, employ hundreds of thousands of staff, including drivers.

The concern is escalating despite recent announcements by the Department of Trade and Industries (DTI), which owns rail and pipeline parastatal Transnet, as well as the Department of Transport (DoT), which owns the South African National Roads Agency Limited (Sanral), on multi-billion rand projects to upgrade the country’s rail and road transport systems.

This includes billions on new rolling stock and filling potholes, but until these upgrades come into full operation, South Africa will rely mainly on road freight transport operators and the existing fair-to-middling road infrastructure they are using.

As a result, South Africa’s gateway status is set to diminish, firstly as a result of its already high Cost of Living (CoL) index of 13,5% of GDP, which is set to increase even further in terms of the road freight logistics cost element. This, in turn, is as a result of increases in fuel price, new toll tariffs, labour strikes (for exorbitant wage increases), new vehicle taxes (including carbon emissions penalties), more and higher fuel levies and other operational costs.

Secondly, a dire shortage of local supply chain management skills is a growing threat, described in FOCUS and more lately as a “time bomb” by Imperial Holdings, the country’s leading logistics provider.

Thirdly, international logistics companies, including DHL and Imperial Logistics, are expanding their African presence using Morocco, Tunisia, Kenya (all DHL), Mauritius (by Indian operators) and Namibia (Imperial) as alternative hubs because they are more cost-efficient.

The recent seventh Annual State of Logistics survey found that South Africa’s CoL decreased by 1,2% between 2008 and 2009, from 14,7% to 13,5% of gross domestic product (GDP), whereas it should have been in the region of 12,5%, this in light of a severe decrease in interest rates over this period, as well as the sharp drop in the price of diesel. Since then, fuel prices have increased sharply.

Rail freight has been touted as a cheaper alternative to road freight and there is a cautious willingness of business to embrace it more than at present. Last year’s supplychainforesight industry research study, sponsored and initiated by Barloworld Logistics, found that 84% of companies in the FMCG sector moved less than 10% of their goods by rail, slightly more than the national figure of 80%. But it also found that if adequate rail capacity were available, this figure would increase to 39% and that 34% of the sector would move between 20-40% of goods by rail.

“For an industry that is critically dependent on its distribution network, it is of utmost importance that the road-versus-rail distribution picture becomes more equitable and cost-efficient,” was one comment. Even more so, focusing on the retail sector where the bulk of goods travel by road due to just-in-time stock requirements and the need to cut waste and stockouts, the survey found that 94% of the sector moved less than 10% of goods by rail.

However, the survey also found that despite the sector’s need for road transport capacity, it would still move significant portions of its transport needs to rail if capacity existed. “For example, currently only 3% of companies move between 11% and 30% of goods by rail; this figure would become 41% if capacity existed,” the report noted. “A multi-modal solution, combining road and rail transport, is clearly what the sector requires, but it is currently heavily reliant on an overloaded road transport sector on congested roads, which further complicates efficiencies and cost reduction efforts.”

At a recent meeting where the findings of the seventh Annual State of Logistics survey were shared with Business Unity South Africa (Busa), one point concerned the inefficiencies in South Africa’s logistics system, and the consistently high total cost of logistics continuing to negatively impact the country’s global competitiveness, particularly where neighbouring countries such as Namibia and Mozambique offer more efficient, cost-effective alternatives.

Said Abrie de Swardt, Imperial Logistics marketing director: “Our country must maintain its reputation as being Africa’s strategic business destination through consistent delivery of logistics-related benefits. If not addressed more effectively by business, the lack of South Africa’s skills base is a time bomb. We need to become more involved with the SETAs, industry bodies and academia.”

De Swardt said business was an important contributor to a more effective logistics system. “Policy and public investment can only take us so far. It is for people who operate logistics and supply chain systems to ensure that processes run smoothly.”

Having referred to the 13,5% logistics cost figure as “indicative of an underperforming logistics sector,” De Swardt said: “Business can fast-track infrastructure development through partnering with the public sector on developmental projects, financially and through providing intellectual capital. As infrastructure requires investment, so too do we need to invest in people to deliver heightened capacity on all fronts.”

Ruan Jordaan, Busa Trade and Economic Policy co-ordinator, noted that as the country continued to see higher demand for commodities such as base and precious metals, business should leverage the appropriate transportation mode, such as rail for coal and iron-ore. “Logistics and supply chain management are critical for our competitiveness, as bottlenecks and backlogs hamper economic growth and raise costs,” he said. The CoL of moving goods within South Africa is one thing. The CoL for moving goods to cross-border countries via SA is another.

The anomaly taking place now is that instead of waiting until rail is ready to take over freight from the road transport industry at lower cost, Government itself – through its agencies, and through maverick municipalities charging fleet operators for services not required – is bombarding the latter with so many taxes, levies, expensive permit requirements, and other new legal and unlawful requirements and bills, that road freight costs within South Africa must increase. This will result in severe consequences not only on local food, FMCG and other commodity prices, but on SA’s image as a transport gateway to the rest of Africa as well.

Further damaging SA’s gateway image are protracted labour disputes. The second phase of the Massachusetts Institute of Technology (MIT) Centre for Transportation and Logistics Global Risk Survey, which explores supply chain risk attitudes and supply chain risk management practices and was released recently, shows that the South African strike rate is 2,5 times higher than the world average. For example, the lengthy strike action immediately following the 2010 FIFA World Cup watered down the positive perceptions formed of South Africa. Within the supply chain context, the Transnet-related strike action by the South African Transport and Allied Workers’ Union and the United Transport and Allied Trade Union led to major companies being unable to supply customers. Some shipping lines were required to divert vessels from Durban, which resulted in the delay of imports and exports and, in some cases, cancelled orders.

The survey, a joint initiative by the Association for Operations Management of Southern Africa and Imperial Logistics, in collaboration with the MIT, also found that extended loss of electricity is a risk that is five times higher than the world average. Employee theft and executive misdeeds come in four times higher, and disease 2,3 times higher. Combine all the charges being levied on the road freight industry, and they can be regarded as revenue income streams, or regimes, with the latest, most objectionable, being the tariffs to be charged by the DoT’s lackey, Sanral, for the new e-toll system for Gauteng, but which are to be extended nationwide.

A public outcry, with about 3 000 objections, has been lodged against the proposed tariffs, which are 64 c/km for cars and up to seven times higher for trucks. According to various sources, objections have also come from municipalities who see their local road networks being damaged and want to toll parts of them as well; from ratepayers associations like that of Diepsloot, which has threatened to burn down the toll gantries; from Cosatu, the mother of all unions, about the severity of the tariff structures for ordinary workers; and the Road Freight Association (RFA), which is putting up a gallant fight to limit increases in the CoL to the bare minimum.

Service delivery is increasingly being seen not just as a municipal or informal township delivery issue, but also applying in the greater context to shaping a trade and operating environment to commerce and industry as well. Calling on government to come to the party to help reduce CoL, at a recent RFA members meeting the Road Freight Association’s (RFA) technical director Gavin Kelly said that if government did not do so, South Africa would “fall off the table” as a major trading partner. He said the road freight industry had no control over several CoL factors and that more needed to be done in terms of port and road network upgrades and faster customs clearing times to reduce border delays.

He bemoaned the steep increases in taxes and tariffs, especially toll tariffs, and that there was no clarity about other road freight threats such as the DoT’s Road Freight Strategy, which sought the reduction of axle loads, maximum axle loads on certain routes and moving freight from road to rail. The strategy had since been moved into a National Transport Master Plan and seemed to have “died”, he said.

A major concern of the RFA, Kelly said, was a decision in November last year by the Cross-Border Road Transport Agency (CBRTA) to raise its cross-border fees by between 600% and 1 000% without consultation with stakeholders. Kelly said the industry might have accepted an inflation-related increase of 5% to 6% for something it received no value for, and it had objected to the increases to both the CBRTA and the minister of Transport. However, the increases were gazetted on 31 March for implementation from 1 April.

The CBRTA had also started penalty fees for permits that had not been returned and had refused to renew permits unless outstanding fees were paid or guarantees for payment – some for over R200 000 – were provided, after having never done so before. Kelly said a decision was taken by RFA members last month to take the matter to court unless negotiations with the CBRTA on a compromise were successful. If not, operators would have to increase their fees.

“What has happened in terms of these huge increases in fees: we know of at least one operator who is deregistering operations in South Africa and moving them cross-border to start operating there. We know that this operator has a fleet of at least 80 combinations and probably employs in the region of 1 000 people.” Kelly said the loss of 1 000 employees compared with the 320 employees employed at the CBRTA. Other, smaller operators were considering the same option as they were now less competitive compared to other cross-border operators. Imagine the loss of jobs.

In addition, the road freight industry was unclear about implementation of the Administration and Adjudication of Road Transport Offences (Aarto) legislation and its points demerit system, to which the RFA had raised several objections as it was unfair to operators and drivers alike. It also did not punish cross-border operators and drivers as severely as their South African counterparts as the latter could pay fines instead of having their vehicles de-registered and driver licences revoked. It also could give rise to more corruption, as traffic officers could take “unroadworthy” vehicles off the road unless these officers were paid for turning a blind eye to offences.

Kelly believes Aarto and the PDS will only be implemented in August/September together with the e-toll and e-tag system, as the latter could not function without the former system from an e-toll fee collection and fines for non-payment point of view. He expects a lowering of the tariffs, but not an outright ban, as Cosatu has demanded in a lengthy objection paper to a special tariff revision task force.

The barrage of cost increases facing the road transport increases does not stop there. Last but not least is a decision by the Belfast municipality to charge operators for looking after their vehicles parked in well-lit areas while the driver is asleep. Kelly told his audience, amidst laughter, that the local fire department officials would place a fire extinguisher at one of the vehicle’s tyres and a blinking light at another. In the morning, they would ask the driver if he had felt safe during the night and if he did, ask him to sign a document to that effect. Next, the operator would receive a bill for R25 000 for safe-keeping services rendered, all to fund the local pothole eradication effort. According to Kelly, the officials could simply have asked the driver to move the vehicle to another, safer spot if the vehicle had been a potential danger.

The RFA is worried other municipalities will follow Belfast’s approach. Kelly said objections to this scheme had fallen on deaf ears, resulting in further legal consultations and possible court action by the RFA.

The fact is that all these, and other issues, will come up for debate at the RFA’s upcoming convention and the message is: if nothing is done, the CoL rate will continue spiralling and see an end to South Africa’s role as a gateway to Africa. And if the issue goes through municipal, provincial and parliamentary rooftops through exorbitant food and public transport price increases, we might well see the need for a new minister of Transport regime taking over after more riots that will definitely precede the next general elections.