#175 Prerequisites for customer-centric shifts from road to rail

MORE THAN ABOUT SPEED– “High-speed” rail in Africa is a key conversation for the movement of freight and passengers. Yet, when it reached the headlines and public discourse after President Cyril Ramaphosa mentioned it in his State of the Nation Address, the ambition was ridiculed. Largely because if the conversation does not start in 2019, by 2030 we’d still be wrapped up in a talk-show and “speed” would be a great source of global economic development and productivity (i.e. growth). The conversation about shifting from road-to-rail has long been on the table, mainstream since about 2012 or so. It’s slowly becoming an issue of national importance as the road freight industry starts showing its true nature when saturated. In a visit to Paris, I got a chance to reflect on how on earth did they do it, not for us to do the exact same thing. Rather, we start with the basics.

There is something quite interesting developing in the transport environment. First, it is the general acceptance that each transport mode has a unique role to play for the movement of goods. Second, officials are starting to ask if rail and road transport sectors are actually priced in the right manner. Most of the discussions about moving from road to rail are oriented around freight transport— which is fine. However, looking at the market more broadly, for the purpose of this blog, I’m more keen to argue that we should be focused on moving as much mobility reasonably possible from our roadways toward our railway networks. Of course, this will be a massive undertaking— but the rewards are rather surprising. 

Let’s consider the whole point behind government in the rail transportation industry:

“The general objective of governments with respect to the rail sector is to for the end-user prices to be at an efficient level (taking into account the price of substitute services) with an optimal level of service quality and variety, a high level of productive efficiency (and therefore a minimum level of subsidy), and an on-going efficient level of investment and innovation in the rail sector.”

OECD Report on the Structural Reforms in Rail Transport. 

A few things are important about this quote: 

  1. Customers who are keen to purchase rail transport services for freight or passenger movement need to be charged in a manner that is efficient and accounts for the price of substitutes. Here I must add that the price point for rail services should reflect a competitive value proposition to customers. In a sense that, they must have a tough time making a choice or choose rail transport off-the-bat for a trip that is offered by rail. 
  2. A basket of service quality and variety is quite key for consumer choice, but making sure that rail transport operators are deeply aligned with their customer base is at the heart of getting this right. Service quality will vary across segments and variety comes at a cost-revenue trade-off which can be tricky if the organisation is not designed to orientate itself with market developments. The point is that if Passenger Rail South Africa (PRASA) actually knew that its strength lies in how diverse it is, it would wake up from disaster mode and start focusing more on improving what matters most: service quality across the board.
  3. Highly productive entities do not only utilise their assets’ capacity (i.e. high load factors), they also maximise on their talent base (i.e. people) and their organisational processes and practices. Productive efficiency has a number of prerequisites, but when done right, subsidies would not necessarily be lower, but they would provide a decent value for both customers and regulators alike. What is meant by minimum is not necessarily “lowest” it implies a “least” cost framework wherein for the level of service required in the market x subsidy provides the greatest competitive value. Here we must “ignore the sunk costs” and focus on the long-term returns (direct or indirect). Transnet Ltd, the dominant high-capital rail, pipeline and ports freight logistics State Owned Enterprise, was focused on bulging a R 300bn capital expansion project called the Marked Demand Strategy during Brian Molefe’s time, but when Siyabonga Gama oriented the company toward a project based; customer oriented service entity; and leaned into efficiency in the current asset base rather than continuing with the supply expansion project. 
  4. Efficient levels of investment and innovation go hand in hand: increases in capital attraction tend to be associated with higher returns per unit, but it is subject to the rate at which innovation takes place. To accelerate capital attraction, investing in high quality, credible and diverse R&D will be expensive, but it would do the trick. Largely because R&D requires an adaptive, open-minded business, board, executive, leadership and staff in ways that goes beyond technological innovation. What is meant here is that innovation should stretch beyond the technical sphere, but also include the organisational, system and people dimensions which require new approaches to doing-business and getting things done. A big problem will be ensuring “efficiency” while being effective. It is very attractive to be efficient at something that is ineffective, hence the R&D element in a transport entity can serve as an overarching instrument for broad organisational reform. However, here is the thing about transport in SA: the dominant research is consolidated within a small sub-set of entities and focus areas. The Single Transport Economic Regulator is practically a host for independent regulatory assessments of transport infrastructure, systems, services and the associated entities. Transnet Ltd. is quite keen on industrial research with a focus on engineering and technology systems which enhance the efficiency of the business— this is a traditional view of what R&D is for. But in reality, the customer service interface and organisational behaviour are equally crucial for the SOE. Furthermore, PRASA’s new War Room model is barely customer or research centric at this phase. It is focused on catching up on the backlog of promises and performance targets in the passenger rail transport context, but seems to have a skeletal plan for Autopax’s (bus division) future. Taken further, Intersite (the property division) is gradually following international best practice in terms of Transit Oriented Development, but following the global narrative does not necessarily equate into an effective solution of domestic stations in townships and along their corridors. It seems to be operating on a tangent of its own in a few respects. These are all symptoms of a lack of genuine R&D harnessed, nurtured and developed in-house— instead the organisation is lagging behind across its passenger rail and bus divisions in both transit unit capacity, volumes and subsidy costs per unit: it is a crisis— no joke. 

While the whole point behind rail transport services from the eye of government is important, there are some valuable questions that need to be asked. One key point highlighted in National Treasury’s economic policy proposal related to the extent to which road transport is priced appropriately: 

“…heavy goods vehicles are effectively subsidized as they currently do not fully pay for the maintenance costs arising from the negative externalities that they impose on road infrastructure.”

— National Treasury, (2019). Toward an Economic Policy. 

It is implausible to truly estimate the cost and value proposition between these modes without accounting for the organisational dynamics aswell. Although the shift from road to rail is discussed as a policy priority, it will not apply to all commodities or trip purposes. Simultaneously, if a substitute mode is not priced appropriately one may argue that it is subsidised. But at the same time, if organisations responsible for an efficient and effective alternative are not putting a competitive value proposition on the table then it is great fortune that such an indirect subsidy exists. What should come first: imposing the true cost on road transport to finance rail transport’s capital needs; or reforming the organisation, talent, systems and practices? Either-way, the true value of rail transport in SA is largely under-valued with a tarnished reputation and seemingly deeper organisational issues which seem to again lean toward a focus on “technical excellence” but inhibiting “the focus on return on assets” recommended in the De Villiers report.

Lastly, with road transport’s service structure being highly competitive and easily customer-centric, will our rail economy realise the importance of meeting the customer’s needs with a competitive value proposition? I do not know, yet. The primary prerequisite, is knowing what the role of government is when it comes to participating in the rail transport market– truly hope this note helps.

Thank you for reading this weekend special. More to come.

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