By Vivien Chaplin
THE proposed Economic Regulation of Transport Bill (bill) is intended to streamline transport regulations and eliminate fragmented legislation by means of consolidating the economic regulation of transport (including road, rail, port and air) within a single framework.
According to the Department of Transport (DoT), the intention of the bill is to achieve an efficient and cost-effective transport system to support economic growth and meet the country's social goals by means of establishing a single Transport Economic Regulator (Regulator) across the above transport modes with extensive price control powers.
In the introduction to the bill, the government acknowledges that transportation comprises an unacceptably high proportion of logistics costs in South Africa, and that the South African institutional framework of transportation is dominated by large state-owned companies, who have a very high degree of market power over either the infrastructure or services.
The bill was first introduced on January 31, 2020, and was followed by consultations with direct and indirect stakeholders, including public consultations. This deliberation process ended on September 16, 2022. On December 7, 2023, the bill was sent to the National Council of Provinces (NCOP) and, thereafter, sent back to the National Assembly for further consolidation.
The Parliamentary Committee for Transport met on February 6 to discuss the NCOP amendments. It has been reported that the DoT has issued a request for quotations which will close at the end of March that seeks to appoint a service provider to review the legal reforms of the Regulator as outlined in the bill. The bill will be implemented in three phases.
The introduction of the bill intends to ensure the regulation of pricing for transport across highways, rail, ports and air as well as provide oversight in a manner similar to National Energy Regulator of South Africa that regulates electricity tariffs.
The bill has a vast and ambitious scope:
– The bill applies to all markets, entities, facilities or services in the transport sector which were subject to economic regulation in terms of current legislation. The Minister (of Transport) is also authorised to bring other private or public entities, markets, facilities or services on a case-by-case basis into the ambit of the Bill (or grant specific exemptions) as regulated entities, should certain conditions apply.
– The Regulator has the powers to regulate prices across the transport sector. Since a number of sectors (such as rail, ports and air) therein will be regulated, the Regulator has discretion to tailor the price-setting method used to the needs of each sector. In all cases, the goal of price regulation will be to ensure that normal levels of profit are achieved by regulated entities (taking into account sustainability and investment requirements) with the aim of avoiding monopolistic pricing and inefficiency.
Notably if a sector is already subject to price regulation, such price regulation will remain in force until the Regulator publishes a new price control. “Directed price control reductions” can also be used by the Regulator (for example, after a complaint and subsequent investigation) by means of issuing a directive as a punitive measure and is not part of the normal price control methodology. A directed price control reduction immediately returns benefits to consumers while penalising operators; and:
– The Regulator will be responsible for carrying out education, research, price control approval, access request approval, investigation of complaints and enforcement to determine price controls and related service standards, provide access to certain sectors, collect regulatory and industry information, and resolve disputes affecting all regulated entities and issue compliance notices or refer alleged offences in terms of the bill to the National Prosecuting Authority.
In this regard it should be noted that the bill grants the Regulator substantial powers in support of investigation, including the right to subpoena and the authority to enter and search under warrant, and makes provision for criminal and administrative sanctions. Criminal sanctions relate to offences, while the administrative sanction of a directed price control reduction relates to prohibited conduct by a regulated entity.
In aspects of the transport market where infrastructure cannot be feasibly duplicated by competitors, access to infrastructure is critical. Significantly, Chapter 2 of the bill introduces provisions governing access to rail infrastructure, currently controlled by Transnet by means of standard terms or bilateral agreements with customers over certain commodity lines. In addition, the proposed amendments to the National Ports Act seek to strengthen the governance of infrastructure access in the ports sector.
As well the establishment of the Regulator, the bill proposes the formation of the Transport Economic Council (also responsible to the Minister) as the primary adjudicative entity, which is intended to review decisions of the Regulator when an affected party applies for such a review, and review the decisions of regulated entities when a user of a facility or service provided or licensed by a regulated entity considers that its rights have been adversely affected.
The bill proposes and will require knock-on amendments to:
– The Air Traffic and Navigation Services Act Company Act, No 45 of 1993 (in relation to aviation charges) and the Airports Company Act, No 44 of 1993 (in relation to airport use charges by airports owned by the Airports Company of South Africa) by replacing the reference to the "regulating committee" which usually sets these charges;
– The National Ports Act, by replacing the role of the Ports Regulator with the Regulator.
– The National Land Transport Act, No 5 of 2009 and the South African National Roads Agency Limited and National Roads Act, No 7 of 1998 by referring to the Regulator's periodic review of the level of tolls imposed on highway use.
To date there has been no economic regulation of the rail sector. For this reason, Chapter 2, dealing exclusively with the proposed regulatory structure for the rail sector (including access to rail infrastructure), has been included in the bill and this will be a “game changer” for Transnet.
Given the inefficiencies and issues that have plagued the transport industry for years in South Africa, the bill, if implemented correctly, may assist to increase competition and transparency in the market, and eliminate market abuse by monopolies, and reduce maladministration and corruption.
In addition, streamlined regulations may benefit overall productivity and efficiency since aspects such as supply chain management and quick delivery of goods are overseen by a single economic regulator.
Coupled with the increase of regulatory oversight by the Regulator, consistent standards, which increase transparency may alleviate uncertainty in overall delivery. Fairly and competently regulating pricing could lead to a more level playing field for businesses within the transport sector.
By setting transparent pricing guidelines and ensuring fair access to infrastructure, the Regulator aims to promote healthy competition among industry players. Technically this could benefit businesses by fostering a more competitive marketplace and potentially driving down costs for consumers.
The establishment of the Regulator signals at least an in-principle commitment to improving and expanding South Africa's transport infrastructure. Businesses reliant on transportation networks stand to benefit from investments in the development of infrastructure which can lead to improved efficiency, reduced transportation costs, and increased connectivity, ultimately facilitating business growth and expansion opportunities.
However, the effective adoption of this legislation and the establishment of a "technically competent, independent and adequately resourced regulator", which is well placed to "improve economic outcomes in the transport sector" may present some challenges.
Corruption has been particularly rife in the rail sector, which was a focal point of state capture. The Regulator should consist of experienced experts from a variety of subsectors in the transport sector and identifying and appointing independent persons with this level of expertise and no affiliations to any industry group or business may be a challenge.
Furthermore, the government would need to ensure there is no political interference in the appointment of key personnel, because one can only imagine the immense opportunities for political lobbying and corruption this may present.
The government also needs to ensure the Regulator is adequately funded to be independent and fulfil its mandate which requires highly complex economic skills.
Ensuring compliance with the Regulator's guidelines and standards may also require businesses to invest in additional resources, such as technology and personnel, to meet regulatory obligations effectively.
It is possible that the Bill may impose an additional financial burden on the regulated entities, and this will further make it more difficult for regulated entities to reduce costs of doing business. Transnet has expressed a concern that in the case of the rail and the ports sector, any pass-through elements adding onto high cost will cause freight customers to choose a cheaper mode of transport, which will lead to the use of road transport.
Of course, Transnet's structure (of divisions rather than subsidiaries) and cross subsidisation between sectors within the Transnet group may also pose a challenge.
The different modes of transport require bespoke consideration and skills and the bill must provide additional clarity on how the different regulatory instruments of, inter alia, access, price and efficiencies will be applied across the different modes of transport and how it will achieve consistency, transparency, and equality in this regard.
Suitable benchmarks of regulated prices must be published in the annual reports of the Regulator as well as any circumstances that influence regulated prices in relation to such benchmarks. Preconditions for efficiency and cost-effectiveness (in Section 4(2)b of the bill), which allow the bill's ambit to be increased must be articulated, qualified and made less ambiguous in the definitions or publicly (transparently) be interpreted by the Regulator to ensure that this provision cannot be abused.
Several countries have successfully established a single regulator to oversee and govern aspects of the transportation industry as a whole and global trends. Globally, there's a growing interest in consolidating regulatory functions under a single entity although economic models may differ depending on the maturity of the markets and environment.
Vivien Chaplin is director in Corporate & Commercial practice and Head of the Mining & Minerals sector at Cliffe Dekker Hofmeyr.
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