South African railways getting back on track

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Suppliers of services and materials are expected to benefit from new rail projects in South Africa. 

Investments in South Africa’s rail services are set to pick up pace thanks to new orders in rolling stock and locomotives.

In early July, the Passenger Rail Agency of South Africa (PRASA) – the state-owned service provider – announced it had finalised the financial close of its R51bn ($4.8bn) contract with the Gibela Consortium, a venture majority-owned by France’s Alstom in conjunction with South African firms Ubumbano Rail and New Africa Rail. Under the deal concluded in April, 600 commuter trains are to be provided over the next 10 years, with 3600 cars replacing much of PRASA’s older rolling stock and expanding its fleet.

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Crucially for a country where the official unemployment rate is around 24%, the agreement stipulates 65% local labour participation. Under the agreement with the consortium, the initial 20 trains will be built in Alstom’s Lapa plant in Brazil, with the first train set to be delivered in the last quarter of 2015, entering into service in 2016. The 580-train balance of the order will be assembled at a new purpose-built facility in Dunnottar in Gauteng province.

There have been concerns that the cost of the project could rise due to the sharp depreciation of the rand. However, in the shorter term, Gibela will be responsible for hedging currency fluctuations at no cost to the South African agency for the first five years of the contract according to reports. After that period, the contract converts to a multi-currency arrangement and the Treasury will hedge the rand, mainly against the euro.

The agreement with Gibela represents only part of PRASA’s long-term plan to expand its fleet, with a total of just over 7200 new carriages to be added over the next 20 years. The acquisition programme is budgeted at $11.45bn at current prices.

Doors opening but mind the gap

The PRASA contract is not the only big-ticket rail deal sealed in South Africa in recent months. In March, state-owned rail and logistics firm Transnet signed a series of contracts for the supply of 1064 locomotives for its freight subsidiary. The contracts, which will total R50bn ($4.7bn), were struck with four suppliers, and all but 70 of the locomotives will be assembled domestically, with up to 60% of the input value coming from local suppliers.

The large-scale investments by rail operators offer significant opportunities for domestic firms. In late June, state-owned defence manufacturer Denel announced it had held talks with both Transnet and PRASA about cooperating on some of their projects, including the construction of body structures and interiors

While the local input requirements will have a direct impact on the economy, the sheer scale of the locomotive and rolling stock projects could stretch local suppliers’ ability to meet the requirements, possibly causing bottlenecks. There have already been flags waved signalling concerns that the supply sector may come up short.

In early July, China South Rail (CSR) had to deny reports in the local media that it was struggling to find suitable local parts and services suppliers to meet up to 60% domestic component of its contract to provide Transnet with locomotives. CSR has been contracted to provide 359 locomotives in a deal valued at $1.36bn. The company has said it has identified around 100 suppliers some of which have already been selected to provide services.

This article is re-published with permission from Frontier’s content partner, Oxford Business Group . 

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