Swartruggens, South Africa. Taken in November 2016. Hlulani ©

Effective freight transport planning could haul SA out of junk

On the macroeconomic front, SA is rated below the belt: trashy investment state. Traditional measures such as GDP purport a negative growth year on year. National Treasury’s outlook on our exchange rate is also indicative of where we are (R 14 to $ 1). Based on the June Quarterly Bulletin published by the South African Reserve Bank, a few notes on domestic economic activity are transport related.

Domestic production and consumption

Much of the discussions in the political front have reverberated the recent Junk-Status grading for international lending. Which is not good for mega project investments that are dependent on global funding. Much of the rapid transport systems were co-funded by a World Bank financing arm from 2010.

Public statements regarding SA’s recessionary state are misleading because economic growth measures are aggregate. In order to have an understanding of economic activity it’s appropriate to observe primary, secondary and tertiary sector factors. This approach is both practical and is consistent with the supply chain of making goods.

Sector specific changes

Contractions are sector specific and should be assessed by sector, not on the aggregate. As such more specific interventions can be articulated. Primary sectors, which follow global growth (+), commodity prices (+), domestic extraction (+ in platinum) and generally factor endowment advantages in SA (i.e. significant reserves). Although volatile, the primary sector is a key source of growth in GDP (14.9%).

Source: June Quarterly Bulletin

While in the secondary sector, largely manufacturing is contracting (-3.4) in Q1 2017,compared to 0.6% growth in Q1 2016. Tertiary and non-primary sector activity are the key (sudden) sources of contraction -2% and -2.3%, respectively. Such contractions are reinforced by higher inventories and lower sales at wholesale level particularly due to contracting consumer expenditure. In particular, real expenditure for households is contracting across all goods and services — red flagging the secondary and tertiary sector contractions. These are domestic issues, and transport and logistics costs are a crucial link between all sectors and services throughout the domestic production and consumption chain.

Source: June Quarterly Bulletin
Source: June Quarterly Bulletin

Transport in adding value to production activity

The transportation value chain is activity chain specific. This means that raw materials, or primary inputs to an activity are taken through various stages of development. In supply chain services this is referring to as a ‘value chain’. Every link is connected through a logistical activity — wherein transport is a component. Rail and road transport offer unique advantages that manufacturers pursue and leverage upon. The bulk nature of the primary sector is treated as advantageous to rail due to the high capacity and low unit costs. A disadvantage, for example, is the incompleteness of the service — no door to door type service at this time. Road transport has this completeness and relative reliability partly due to the oversupply and available road networks.

An illustration of the Freight Modal Split by Type of Activity Related to a Good Source: ‘South Africa’s domestic intermodal imperative’ by Jan Havenga et al. 2012

The mode is preferred for the tertiary and secondary sector as it offers a temporal access advantage although limited capacity and higher cost. The National Rail Policy Green Paper clearly indicates that a shift toward rail is crucial for economic development. The Africa Development Bank has pursued the issue with great detail arguing that capital investments in rail are synonymous with investing competitive advantage when market scales increase (i.e rise in incomes, population and aggregate consumption and saving). Meanwhile the trucking industry is attractively becoming autonomous and electrified at an increased rate. This may at some point justify dedicated trucking infrastructure if high-speed rail lines and corridors are not effectively developed — especially with respect to aviation. I will write about this issue in a different post.

The macroeconomy of logistics and transport

In the broader macroeconomic context, the key issues related to transport tend to be measured through logistics costs. One of the most consistent reporting tools have been provided by a cost model from Jan Havenga. Initially this was thorough the ‘State of Logistics Survey’; today the most recent publication is titled the Logistics Barometer. As a point of departure form a costing perspective is through these reports.

Rising logistics costs as percentage of GDP, while the transportable portion of GDP is on the rise. Source: Logistics Barometer 2016

Firstly, logistics costs are on the rise but seem to retain a relatively constant of GDP between 2010 and 2016 just above 10%. At a cost element level, the 20% higher cost of inventory in 2016 was anticipated and as such reflects the contraction seen in this quarter due to the lag effects at a macro level. Fuel costs are still a key cost component in moving goods and services; while being relatively volatile.

Source: Logistics Barometer 2016
Source: Logistics Barometer 2016

These issues combined in a contracting tertiary sector purport some complex system wide problems which transport economists should see as opportunities. Modular and aggregate reforms will bot be enough. Some of the most exciting developments in realising efficiencies require a shift from “growth” thinking toward a “development” oriented direction.

Essential industry shifts for long term development over growth

Here are some of my ideas on key shifts that should take place at strategic decision levels:

  • Leveraging on the digital revolution through establishing local logistics hubs that circulate and contain local and regionally manufactured goods. Many of these are referred to as Special Economic Zones, or Industrial Development Zones. At the heart of a strategic direction is to relax the assumption of slow growth and invest in high quality manufacturing skills, training, talent and production. This may encourage medium term capital costs with high welfare gains as skills and comparative advantage may improve.
  • Leveraging on the per-unit emission savings that are possible in the rail transport sector, while simultaneously reforming the carbon tax, road tolling and infrastructure tolling base to fund low carbon freight solutions. This is in order to swallow the unit emission costs of petroleum based transport. At the same time, the vocabulary of transport energy sources needs to be broadened beyond coal-based sources in SA today. At a macroeconomic cost level, part of the volatility and costs arise from fuel prices. They will not be low enough in the long term to pull SA out of a looming downward spiral — that is not only political.
  • Lastly transport planning approaches need to account, explicitly account for the value chain by mode, unit emissions and revenue per ton elements. Such that municipalities, entities and sectors are familiar with the long term operating profit potential in the advent of carbon footprint taxes, levies and other penalties related transport inefficiencies.

Our economy is not only slowing down due to external factors, there are a number of sunk-costs in the transport industry that are only going to provide long-term benefits. At the same time, I don’t believe growth is always a good thing — digging deeper comes at the cost of growth, with the benefit of development. Development in my view, contracts economies and makes it self sustainable in the long term. We need to develop the manufacturing industry, which is a core part of indistrailisation, and transport between primary, secondary and tertiary sectors will contribute to the unit-cost and value difference. Training innovative and highly skilled talent is however, the most important ingredient.