According to KPMG, the biggest hurdle to mining development in Africa is the cost of road, rail and port infrastructure, which it refers to as ‘problematically prohibitive’. Nosipho Damasane, CEO of Richards Bay Coal Terminal (RBCT), one of the world’s largest export coal terminals, is quoted in KPMG’s 2014 mining-infrastructure development supplement as saying that growth and progress can be fast-tracked through operational improvements to optimise the use of existing infrastructure.

‘Countries that have succeeded have done exactly what we are trying to do in South Africa [through the national infrastructure development plan], so infrastructure is the backbone of any country’s development,’ she says. Crucial to this, however, is a continued effort to improve, because waiting on infrastructure development is counter-productive and somewhat risky.

PwC, in its Africa Gearing Up report 2013, nominated SA as the continent’s top performer in terms of trade facilitation logistics, and hailed its transport infrastructure as among the best. ‘The air and rail networks are the largest on the continent, and the major roads are in good condition,’ it stated.

The report added, however, that the country’s rail network, which historically developed in support of the growth of the mining sector and other heavy industries, has been hindered by decades of under-investment. Fortunately, this is changing. According to PwC, the country invested more than $5 billion in its railways, between 2006 and 2011, with investments set to increase further in the coming years.

As the 14th longest rail network in the world, it represents around 80% of Africa’s total rail networks –connecting with other networks in the sub-Saharan region including Botswana, Mozambique, Namibia, Swaziland and Zimbabwe. Transnet is trying to ensure that its spend matches increasing demand, and is dedicated to its infrastructure investment programme, the Market Demand Strategy (MDS). Since 2012, the parastatal has spent more than R108.9 billion on infrastructure, spread across rail, ports and pipelines. Siyabonga Gama, acting group CEO, expects this figure to increase to R125 billion.

Transnet has also committed to further investments of between R340 billion and R380 billion over the next decade, perhaps even taking the MDS investment as high as R500 billion.

Despite a sharp downturn in global and domestic economic activity, Transnet says it will continue its infrastructure investment programme. Head of corporate communications Mboniso Sigonyela explains that a switch from road to rail will reduce costs, congestion and carbon emissions. ‘It will further mitigate the deterioration of the secondary road network. We’ll be creating capacity to meet growing demand while minimising the cost of doing business.’

Highlights of Transnet’s investment activities include 35 diesel locomotives delivered to Freight Rail; 66 electric locomotives accepted into the coal line; R131 million invested on engineering and construction planning for the rail and port for manganese expansion; R212 million invested in the expansion of the coal line, including upgrading yards, lines and electrical equipment; and R551 million invested in the new multi-product pipeline project.

Meanwhile, freight and logistics service provider Grindrod is pushing ahead with the expansion of its privately-owned coal terminal at Richards Bay. The firm said it would forge a partnership with Transnet to increase tonnage to 20 million in the second phase of development, at a cost of R2 billion. Grindrod has already significantly expanded its services, as well as the scale of its operations, in other areas too.

‘We have spent the last few years developing our rail capabilities and growing our capacity to participate in the growth in the Africa rail sector,’ according to James Holley, divisional CEO of Grindrod Rail. This included an upgrade of rail infrastructure for the Matola coal terminal in Mozambique.

Wickus Botha, Africa mining and metals leader at EY, says Transnet should be commended for the effort it has put into upgrading SA’s logistics and infrastructure network – in particular the coal line, which he believes is one of the most often cited constraints of the existing network. ‘Transnet has done a good job here,’ he says, also noting the substantial financial investment by the RBCT itself.

In the mining sector, the current focus is not on expansion but rather on optimising what is already in place, says Botha. ‘The volume of infrastructure is not increasing, although there is an expectation to look at quality improvements to existing infrastructure. There is probably sufficient infrastructure to meet the demands. We need quality improvements as opposed to quantity improvements.’

He also believes that something missing during the last boom was adequate infrastructure, which would have allowed the sector to better capitalise on it. However, he says, the current industry slowdown actually presents a good opportunity to ‘catch up’, and roll out the required infrastructure.

‘There aren’t a lot of mining companies looking for additional capacity right now,’ he says. ‘On a broad scale, the capacity and their needs are, with some exceptions, in balance.’ He cautions, however, that the current capacity won’t be sufficient when there’s an upturn in the market. ‘That’s why it’s important to continue pushing ahead with the upgrades of the Coega, Saldanha Bay and Richards Bay lines, because this will be needed.’

‘An investment in infrastructure will position us for the turn of the market in 2017 or so’

WICKUS BOTHA, AFRICA MINING AND METALS LEADER, EY

Coal, a key export commodity, is primarily railed to the port of Richards Bay from Mpumalanga’s 44 coal mines, via the Highveld and KwaZulu-Natal. Botha believes that while infrastructure outbound from the Mpumalanga area is adequate, the Waterberg and Limpopo regions – tipped to become SA’s next coal hubs after Mpumalanga and which hold around 40% of the country’s untapped coal resources – still need additional investment. However, he poses the question of which should come first – establishing mining companies or developing infrastructure, especially as transportation accounts for around 40% of coal mining costs.

‘If you could reduce the cost of transportation, that would serve as a big incentive for future expansion of coal in the new regions,’ he says.

Botha argues that there are many reasons to focus on infrastructure development, including diversifying the mining landscape away from a few very large companies, and opening up the market to smaller and mid-tier firms.

‘Logistics and infrastructure are a big cost. If we can lead with infrastructure, that makes the bankability of projects so much easier,’ he says. ‘An investment in infrastructure will help the current reorganisation of the industry and position us for the turn of the market in 2017 or so. That gives us two years, which isn’t a long time when you are talking about infrastructure.’

Botha is also confident that the markets will build up in time. ‘We must continue with investment now because when the commodity prices do strengthen, we’ll need the infrastructure in place,’ he says, adding that consideration should be given to development with a long-term view. ‘If you don’t spend it now, it will catch up.’

Botha argues that both the state and private sector have a role to play in taking responsibility for infrastructure development. ‘Government needs to think about the role they want to play in this space, and about the spectrum of where they can play,’ he says. ‘They can be a facilitator, an enabler, an investor or an active participant.’

Opportunities do exist for partnerships between the public and private sectors, he adds, though the question of who owns that infrastructure can then become an issue. ‘I think the bulk of infrastructure should be built and owned by government, and the ancillary, or last mile, should be owned by the private companies,’ he says.

KPMG believes that few mining companies have adequate balance sheets to financially support expensive infrastructure projects. ‘Coupled with increasing pressure from investors to deliver short-term returns, they are unlikely to take on this risk,’ the firm states on its blog. ‘Many African governments are also simply unable to fund this type of infrastructure cost, the development of which is so vital for economic prosperity.’ A new way of thinking and collaboration is required, the firm continued, adding that the co-operation of governments, financiers, producers, suppliers, labour and communities will be a prerequisite.

The private sector should also become more involved as it is able to make investment decisions faster and obtain finance much easier, says Botha. ‘Look at the telecoms industry or private sector education. If they allow the regulatory environment to say we will permit publicly owned or private companies to do the handling of the bulk infrastructure, the decision making is a lot quicker and they can source financing from very different places.’

KPMG is in agreement about the cost factor, arguing that decreasing the cost of infrastructure and operating costs presents another area of opportunity. ‘An obvious area is to spend adequate time on pre-construction engineering to avoid costly mistakes. This invariably requires a clear set of objectives and an execution strategy that displays an understanding of where risks lie and who takes ownership of managing these risks,’ it states.

However, says Botha, inadequate infrastructure and the need for ongoing investment is a challenge for most emerging markets, not just SA.

‘We have unique opportunities … to allow the private sector to start participating in the development, roll-out and ownership of infrastructure, because this will do a lot of things, including create jobs and reduce the social burden,’ he says.

‘It’s a one-plus-one effect. The focus has to be rolling out infrastructure even if it means government allows the private sector to play a more effective role.’

By Toni Muir
Image: Greatstock/Masterfile