State-owned logistics company Transnet, which owns all commercial ports in South Africa and is the sole operator of the country’s container and automotive terminals, has naturally had a major influence over port operations and terminal handling charges. However, that role and dominance have often been criticised and are now the subject of an official investigation, with the Competition Commission to probe allegations of excessive pricing, as well as the possibility of exclusionary practices and preferential treatment for some customers.
Through its R340-billion to R380-billion Market Demand Strategy, Transnet’s economic contribution through the strengthening of the country’s railways, ports and pipelines infrastructure is often highlighted. But the competition investigation could also place the spotlight on the company’s more harmful impacts on the economy and economic development.

Transnet’s port charges have been criticised as being among the highest in the world, according to the Ports Regulator of South Africa’s (PRSA’s) Global Pricing Comparator Study for the South African Ports System for April 1, 2015. The regu- lator notes that Transnet’s container handling charges (per unitary sample vessel) in South Africa “remain more expensive than the global sample average”.

What’s at Issue?
The Competition Commission’s investigation to assess whether Transnet has contravened the Competition Act was announced in July and is expected to take two years.

Excessive pricing would be in contravention of Section 8(a) of the Competition Act, while exclusionary practices would be in contravention of Section 8(c).

Following the announcement of the investigation, the commission told the media that charges for terminal handling related to containers and automotive exports would be a focus point.

Transnet division Transnet National Ports Authority(TNPA) is mandated to control and manage all eight commercial ports – Durban, Richards Bay, East London, Ngqura, Port Elizabeth, Mossel Bay, Cape Town and Saldanha – on the 2 954 km South African coastline.

TNPA is also responsible for operating the ports and issuing licences and concessions to operate terminals at some of the ports.

Transnet Port Terminals operates 16 terminal operations located across seven ports, with operations divided into major market sectors, such as containers, bulk, break bulk and automotive, and organised into three geographical regions – the Eastern Cape, the Western Cape and KwaZulu-Natal.

“The . . . investigation emanates from information indicating that South African port charges are much higher than the global average and that Transnet is giving preferential treatment to certain customers, while others are excluded,” Competition Commission spokesperson Itumeleng Lesofe says, noting that the commission relied on publicly available information.

He explains that information also indicates that Transnet might have engaged in exclusionary conduct through “preferential berthing windows, capped export capacity, minimum export tonnage requirements and/or preferential lease agreements”.

“As part of the investigation, the commission needs to understand how prices are determined in this sector. Thus, all the relevant stakeholders should be consulted,” Lesofe tells Engineering News.

Competition law, specialist litigation and general regulation services provider Nortons Incorporated director Anthony Norton explains that excessive pricing and general exclusionary practices are regarded as abuse of dominance contraventions under the Competition Act.

For the commission to prove the contraventions, it would first have to demonstrate Transnet’s dominance in the ports sector. Norton believes that this will not be difficult to do, as Transnet – as far as the provision of port services is concerned – is a statutory monopoly.

“However, excessive pricing cases are quite technical, as they require a complex, but detailed, analysis of economic cost, which concerns the actual cost of providing the services in question,” Norton tells Engineering News.

Once the economic cost has been determined, it needs to be compared with the actual prices being charged to ascertain whether there is a significant differential between the prices and the economic costs.

Citing the judgement in the excessive pricing case involving petrochemicals major Sasol subsidiary Sasol Chemical Industries, Norton notes that a differential of 20% between economic cost and actual price will not necessarily be regarded as excessive. Judgment was passed on the case in July 2015, where it was determined that Sasol Chemical Industries’ prices were not excessive.

“Consequently, based on existing case law, the commission will need to do a very detailed analysis . . . and . . . show that there was a differential of more than 20%,” he says.

“With regard to the exclusionary conduct and preferential treatment, which could stem from excessive pricing, the commission will also have to prove that there are particular companies that are materially prejudiced by virtue of Transnet’s terminal handling charges/port charges, on the basis that they are being prevented from either expanding their businesses or entering particular markets as a consequence of these port charges,” he adds.

Actions, if any are to be taken against Transnet, will depend on the findings of the commission’s investigation. Once the commission has determined a violation of the Competition Act, the commission is required to refer the matter to the Competition Tribunal for adjudication.

If the tribunal finds any contraventions in terms the Act, Transnet, if determined to be dominant and proven to engage in excessive pricing and general exclusionary practices, could attract a penalty of up to 10% of its yearly turnover. The company could also be effectively ordered to change its pricing policy to charge nonexcessive prices, Norton says.

“This will be an intensive and prolonged investigation . . . depending on data,” Norton says, recognising that there are sometimes no quick solutions in these types of cases.

Economic Impact
However, given the fact that Transnet’s port calling charges have long been considered and cited by industry as a barrier to business, the investigation, even if it is protracted, appears justifiable. In fact, independent transport econo- mist Andrew Marsay argues that the current arrangements, if left unchecked, could have an increasingly adverse impact on the economy.

Transnet port operations, which fall under Transnet Port Terminals, have also been criti- cised for “inefficient container handling”, as well as uncompetitive ship waiting and turn- around times, which impacts on the cost of shipping, thereby slowing down the economy, he emphasises.

Despite attempts to improve efficiencies at the ports, Transnet – through retaining a monopolistic structure and a reluctance to change operator methods to address a changing market – is “acting as a barrier to national economic growth”, he argues.

“Transnet’s unwillingness to address these institutionally embedded inefficiencies is directly responsible for slower trade growth, slower economic and employment growth and, consequently, for a potential lowering of credit ratings,” Marsay avers.

Norton further believes that the commission’s investigation could suggest that, as a result of the potential differential prices that Transnet is offering certain companies, other companies are being prejudiced.

“As a consequence, these companies are being impeded from entering and from expanding into particular markets – this seems to be part of what the investigation is suggesting,” he says.

This could potentially impact on South Africa’s trade, Norton adds, suggesting that exporters and importers in the manufacturing and mining sectors could potentially be affected.

Marsay suggests, however, that a ports operator willing to adjust and accommodate its services to serve shipping companies – such as allowing for multiple port terminal handlers, similar to those at the Port of Singapore – will assist in lowering shipping rates and facilitate more rapid growth of trade. This will, subsequently, result in “faster growth” of both the national economy and of employment.

Institutional Problem
Marsay also points out that the National Ports Act intended to bring about a separation between TNPA and Transnet Port Terminals precisely to prevent abuse of its monopoly status. He therefore, questions whether Transnet is not resisting the changes called for in the Act in order to protect its ability to finance its investment programme across other sectors, particularly rail.

“Without the high-priced ports and terminals operated monopolistically in the interests of retaining a cash-rich ports sector, Transnet cannot sustain the Market Demand Strategy,” Marsay avers.

He points out that the June 2015 publication of Transnet’s public accounts and the accompanying notes acknowledge that “the potential corporatisation of TNPA poses significant risks to Transnet, as it could have a material adverse impact on the company financially and strategically, and could trigger default clauses on Transnet’s funding arrangements”.

While this relates more to TNPA than the terminals, Marsay believes that, by extension of argument, the monopoly position, particularly in the container and automotive section of ports operations, helps to bolster Transnet’s position and maintain the very cash-healthy position of the ports in its accounts, enabling it to invest more than would otherwise be possible. This also enables the group to invest more in rail projects that would not otherwise be able to attract funding.

“The Competition Commission’s investigation, therefore, is just tickling the tip of the iceberg of a more significant institutional problem, which should be investigated,” Marsay concludes.

Full Cooperation Transnet has committed to “cooperate fully with the investigation”.

It has also reiterated to Engineering News that it remains “comfortable and confident that its processes are fair . . . and in line with the relevant legal requirements”.

The PRSA also acknowledged the initiation of the complaint against Transnet in July, with PRSA CEO Mahesh Fakir issuing a statement saying that the regulator had been responsible for the approval of tariffs for TNPA for the past five years, with a zero per cent average increase in the 2016/17 financial year.

Fakir further emphasised in the statement that the regulator had, over the past few years, undertaken price benchmarking studies that assisted in benchmarking South African ports against a sample of global ports. While the studies assisted in providing guidelines, they were not the basis on which port tariffs were calculated, he added.

Other actions of the regulator include publishing a multiyear Tariff Methodology, as well as a Tariff Strategy, both applicable over the next ten years and which form the underlying basis for tariff determination.

Further, as the regulator has entered into a memorandum of agreement with the Competi- tion Commission, it will, “therefore, meet the commission to understand the nature and extent of the complaint initiated on port pricing, as well as to explain the processes of the ports regulator”.