Economic Regulation of Transport Bill: public hearings; Terms of Reference for Sub-Committee on Public Protector Report

Meeting report

Submission by Dr Sean Muller

Dr Muller said that he and his colleague, Prof Mike Muller, Visiting Adjunct Professor, School of Governance, University of the Witwatersrand, did not support the Economic Regulation of Transport Bill (ERT Bill), and he would therefore not comment on individual clauses. The five main reasons the Bill should be withdrawn were:

• The issues in the transport sector were not related to, nor would they be addressed through, price regulation. Some of the reasons for the failure of Metrorail, for example, were failing infrastructure, deteriorating rolling stock, rampant corruption and mismanagement, and poor commuter safety. None of these problems would be solved through price regulation, nor was it likely that private commuter rail operators could be profitable.
• As the shareholder of the state-owned enterprises (SOEs) that dominated the transport sector, the state already had the power to address pricing issues. It simply needed to find the political will to exercise this power. The success of a separate transport regulator would depend on the same political will.
• The proposed model of regulation had not worked in other sectors, such as energy and telecommunications, or in the transport sector of other countries. For example, Eskom and the National Energy Regulator of South Africa (NERSA) were currently involved in a court battle at the taxpayer’s expense that would have a negative outcome for the public, regardless of its outcome.
• The proposed model was costly, duplicated the functions of other bodies, and would require human capital that could be better utilised elsewhere. It had been estimated that it would cost up to R133m per year and require up to 145 highly qualified staff. As a developmental state, it was critical that South Africa distributed its resources optimally. It could not afford to waste scarce skills on a regulator that would draw scarce skills away from areas where they were really needed.
• Simpler models existed, such as the “regulation-by-contract” model that operated in the water sector, and the solution to most problems in the sector was better political and public management.

Dr Muller said that the current economic regulation model for SOEs had failed and should be reconsidered in its entirety. It was based on an ideological commitment to the outdated corporatise-and-regulate model, according to which the failures of the state were to be corrected by market and regulatory discipline, which was not supported by evidence. He did not rule out that an economic regulator for the transport sector might become appropriate at some point in the country’s development, but to introduce one now would be wasteful and might even make some problems worse.

Discussion

Mr L McDonald (ANC) asked whether Dr Muller would support the merger of Transnet and the Passenger Rail Agency of South Africa (Prasa) in order to allow one to cross-subsidise the other.

Mr K Sithole (IFP) asked why Dr Muller was calling for the privatisation of Metrorail. Could he expand on the terrible state of passenger rail, the failures of the current model of SOE regulation, and the financial and operational crises at Eskom.

Mr C Hunsinger (DA) asked for Dr Muller’s input on the frequently expressed view that the functions of the proposed Regulator would overlap with those of the Competition Commission (CC). What was his view on the positive role of the CC and its limitations as a justification for the introduction of an economic regulator of transport? How would a regulation-by-contract model facilitate greater participation in the transport sector? How should a balance between subsidy, fares and price stability in public transport, particularly commuter rail, be attained? Could Dr Muller comment on ways for a Regulator to improve competitiveness of import and export activity?

Mr M Chabangu (EFF) asked how SOEs could be made to serve their purpose of creating jobs and generating profit, instead of requiring bailouts from government. Was there anything wrong with controlling the price of port fees? Countries such as Malaysia and Singapore controlled these prices, and used the revenue generated in this way to create jobs and deliver services to their citizens.

Mr P Mey (FF+) wholeheartedly agreed with the content of Dr Muller’s presentation.

Ms M Ramadwa (ANC) asked how the failed model of SOE regulation could be changed. What could be done to make it succeed, specifically in the transport sector? What role could solar systems play in giving all South Africans access to energy?

Dr Muller’s response

Dr Muller doubted that a merger of Transnet and Prasa would be effective. Cross-subsidy could sometimes serve a legitimate purpose, but it could be inefficient. Direct funding was preferable from the point of view of transparency and accountability, and commuter and freight rail should probably remain independent. Making passenger rail sustainable would require clarity on its funding requirements, and fares would probably not be the most significant component of its funding. He clarified that he did call for the privatisation of Metrorail. The problems were not issues of competition, but issues of governance.

The CC had a positive impact, but it was clear that it could not intervene in areas where there was no competition, such as ports. Perhaps a model similar to the water sector, where prices were determined by government in consultation with stakeholders, could be adapted to determine port tariffs. High port tariffs were reducing competitiveness, but the question of introducing a regulator was moot, as the government already had the power to compel Transnet to lower the tariffs. There was nothing wrong with government controlling port tariffs.

Greater private sector participation in the economy could certainly be beneficial. However, public discussion on how to involve the private sector was often not consistent with the facts. In the energy sector, for instance, the common view that Eskom needed to be restructured to facilitate private participation ignored the fact that independent power producers were already selling power to Eskom.

The best way to ensure that SOEs served their purpose was competent staff and good management. Simple privatisation risked creating unaccountable private monopolies, nor was regulation a substitute for good management. He clarified that a completely different regulatory model was required at this stage, which used fewer resources with a greater focus on leveraging the power of the state over SOEs.

There were many positive aspects to solar energy, but it was not a solution to Eskom’s problems, and private sector competition might make them worse.

Submission by Mr Ofentse Mokwena

Mr Mokwena, Lecturer: Transport Economics, North-West University, said that with respect to the overall transport policy environment, the Bill leaned towards the regulation of national network industries, particularly rail, and did not seem to communicate with legislation related to minibus taxis, ride-hailing and buses. There was a need to clarify whether the Bill was aimed specifically at rail transport, the entire basket of strategic assets in the transport sector (including maritime, aviation, guided transport and roads), or the whole transport sector. His comments assumed that it would apply to private sector freight transport, as well as passenger transport.

The Bill should focus on regulating access to transport infrastructure including, for example, taxi ranks and interchanges. It should absorb more insight from the particularities of the South African context and devolve transport functions to municipalities. While the Bill was probably timely for strategic transport industries, it was potentially premature for the transport sector as a whole.

Mr Mokwena made specific comments on some definitions, Clauses 3 and 4 on the purposes of the Bill, Clause 11 on price regulation and Clause 38 on the functions of the Regulator.

(See presentation for detail on suggestions to specific clauses).

Discussion

Mr Chabangu asked how the Bill could be amended to address bus and taxi transport, which served the poorest and most vulnerable members of society. How could the Bill assist municipalities such as Mangaung, which did not have their own transport systems like the MyCiti and Rea Vaya buses in Johannesburg? How could it assist in the establishment of metropolitan police services?

Mr Hunsinger asked Mr Mokwena to clarify the sense in which the Bill might be premature for the broader transport sector. Was the public benefit of the Bill of substantial consideration, as opposed to the involvement of the state versus the private sector? What were his views on granting access to state infrastructure to private companies, and the general approach of separating infrastructure from operation, particularly in rail? Could he elaborate his point on Clause 11(3) about possible under-performance by regulated entities?

Mr I Seitlholo (DA) asked whether the Bill was really necessary, given Dr Muller’s presentation.

Mr Mokwena’s response

Mr Mokwena said the Bill could be connected to the work of provinces and municipalities by reinstating Chapter 2 Section 5 of the previous version of the Bill. Introducing new services like MyCiti buses took time and was politically risky, no matter how it was done. It required a transport authority to navigate the process. There was a lot of room for this in the current Bill. It was also plausible for the transit authority to absorbing law enforcement functions according the Road Traffic Management Corporation Act.

There were currently structural issues arising from the limits on access to the rail network. It was important to liberalise access to infrastructure to promote a growth trajectory. It was a problem for a monopoly to run an entire work stream. South Africa had high logistics costs, and there was also a disconnect between the country’s industrial and transportation objectives. The reason for applying the Bill to a narrower field such as rail at first was that the complexity of the problem it was trying to solve increased, the broader the scope was. A regulator to cover the transport sector as a whole would require significant research and engagement with a much broader array of stakeholders. The introduction of price caps in a sector might push entities to reduce their service levels deliberately as a way of increasing their margins.

He did not express a view on the necessity of the Bill, but there were high incentives for a Bill like this one, particularly in the rail sector, which would benefit greatly from policy certainty. For instance, the Luxembourg Rail Protocol would allow leasing companies to operate in the African market. There were risks, however, if the Bill was not focussed on the appropriate industries.

Free Market Foundation submission

Mr Gary Moore, Senior Researcher, Free Market Foundation (FMF), said that the Bill would impose undue restrictions on the transportation sector, and the view of the FMF was that it should be withdrawn in its entirety.

According the memorandum, the preconditions for efficiency and cost-effectiveness did not exist in the sector. The large SOEs that dominated the sector should be broken up and privatised. This would make price controls unnecessary. The 70% market control threshold above which the Minister could apply the Bill to any company was arbitrary. The condition in Clauses 4(4)(a) and 4(7) was empty, because all firms had at least some power to control market prices and perfect competition did not exist.

The criteria for defining an “essential facility” in Clause 4(4)(b) were vague.

Discussion

Mr Mey asked what the chances were that private companies would invest in transport, given that the SOEs in the sector were all bankrupt.

Mr Sithole asked Mr Moore to clarify the reason for calling for the withdrawal of the Bill.

Mr Hunsinger observed that the passenger rail sector was included in the ambit of the Bill, and that there was barely a single privatised passenger rail system anywhere in the world. Did the FMF think that passenger rail in South Africa should be privatised? Given that Transnet was the only freight rail operator in the country, should it be privatised? Would the FMF support the continuation of subsidies for passenger rail and bus services? What was the view of the FMF on the role of the CC and the potential of the Bill to fill the gap in the sector that was not covered by the CC?

Mr T Mabhena (DA) agreed that perfect competition did not exist. This had been one reason for the establishment of the CC. The 70% threshold represented the level of dominance which provided a reasonable motivation for intervention. He commented that during the lockdown, minibus taxis, which were not subsidised, had doubled fares in response to the directive to lower occupancy rates. The Department had not been able to do anything about this. Was it not possible that the Bill could have the positive effect of increasing the use of under-utilised infrastructure?

Mr Moore’s response

Mr Moore explained that the reason the Bill should be withdrawn was that it conferred various vague and undefined discretions on the Minister of Transport or the Regulator, and did not improve the economic situation in the transport sector. He agreed that it was challenging to regulate transportation, especially regarding prices. The rail infrastructure might remain in the hands of the state but there could be competing private rail operators. Subsidising one road transport service but not others led to inefficiency.

Many of the clauses in the Bill were similar to sections of the Competition Act, and the Bill seemed to be an unnecessary duplication of roles.

Public Protector’s report on Illegal vehicle conversions:  Sub-committee’s terms of reference

Adv Alma Nel, Committee Content Advisor, asked Mr Hunsinger to draft a paragraph to be added to the sub-committee’s terms of reference. She said that its work would be referred to as “oversight,” rather than an “investigation” or “inquiry,” as the latter two were normally referred to the Committee by the House and required much more complex administration. This would not prevent the sub-committee from looking into any matter falling under the terms of reference.

Mr Hunsinger agreed to draft a paragraph, and asked whether the sub-committee would still be able to conduct interviews, and if the interviews would have the same status that they would have in an investigation.

Adv Nel confirmed that the sub-committee would be able to issue subpoenas, summon witnesses and hear oral evidence.

The meeting was adjourned.