Following the recent approval of private access to State-owned freight company Transnet’s freight rail network and the allocation of 41 routes to 11 train operating companies (TOCs), the country is embarking on its most ambitious rail reform in decades, says industry organisation African Rail Industry Association (ARIA).

However, ARIA CEO Mesela Nhlapo suggests that, amid this structural transformation, a critical question is whether this reform will translate into an opportunity for reindustrialisation.

“Localisation constitutes more than a mere procurement preference; the National Rail Policy of 2022 enshrines it as a deliberate strategy to build local manufacturing capacity, support the Steel Master Plan and develop an industrial base for an active export strategy,” explains Nhlapo.

Additionally, the policy explicitly mandates that State and private operators must procure supplies from South African manufacturers and positions localisation as both an economic and development instrument.

The positioning, says Nhlapo, responds directly to South Africa’s unemployment crisis with the unemployment rate, as of late 2025, sitting at 31.9%, with a youth unemployment rate of 62.4%.

Nhlapo states that these figures represent a socioeconomic emergency that threatens cohesion, pointing out that through the use of Okun’s Law – which demonstrates the inverse relationship between unemployment and GDP growth – the need for a localisation-focus approach in South Africa is justified.

As such, any rail reform that fails to integrate localisation imperatives will directly undermine the country’s capacity to address unemployment through GDP growth.

Further, South Africa’s rail manufacturing ecosystem has “already demonstrated its viability through strategic investments by global partners”, Nhlapo notes.

She highlights that projects such as rail transport company Alstom’s operations, which support over 9 000 jobs and contribute R3.9-billion to GDP, has a procurement profile of 79% from South African suppliers.

Similarly, rail transport consortium the Gibela Rail Consortium has exceeded 65% local-content requirements for its contract with State-owned entity Passenger Rail Agency of South Africa, having trained over 19 500 people.

“These achievements demonstrate that localisation proves not only feasible but economically productive. However, these investments carry a critical condition: sustained demand.”

Moreover, without a localisation mandate that guarantees procurement from local manufacturers, this manufacturing capacity will atrophy. Nhlapo states that, if South Africa abandons localisation, the country risks losing decades’ worth of investment in manufacturing capability and skills development.

Moreover, the net present value calculation for localisation favours domestic investment when incorporating multiplier effects.

“Research demonstrates that for every R1-billion spent on local rail manufacturing the economy gains between 3 000 and 4 000 direct and induced jobs,” Nhlapo points out.

Conversely, the opportunity cost of abstaining from localisation includes the collapse of component manufacturing capacity and the forfeiture of billions of rands in GDP contributions.

Nhlapo notes that critics will often argue that localisation increases costs, while protecting uncompetitive industries. She affirms that while localisation carries initial costs, these represent investments in industrial capacity rather than “deadweight loses”.

Additionally, when calculated over the asset’s lifecycle, localisation demonstrates positive returns through employment creation and tax generation.

She asserts that localisation aligns with government’s focus on long-term employment, while private business optimises short-term profitability. “Rail reform must balance these objectives by recognising that infrastructure investments create multiplier effects beyond immediate service delivery.”

To ensure that this spate of rail reform delivers inclusive growth, the legal framework governing TOCs must stipulate specific and binding obligations, including contracts mandating a 65% minimum local content for rolling stock and maintenance; skills transfer obligations mandating training programmes for South African employees; technology transfer agreements; and export commitments that leverage the African Union’s designation and positioning of South Africa as a regional hub.

Nhlapo adds that strategic coherence between the Department of Trade, Industry and Competition (dtic), the Department of Transport and National Treasury, remains both critical and constitutionally mandated.

“The dtic possess the authority to designate specific industries for local production. However, a gap currently exists in the Freight Logistics Roadmap and Transnet Network Statement regarding explicit localisation requirements,” she comments.

This omission represents a policy incoherence that demands rectification.

Further, national government’s localisation mandate is binding rather than aspirational, with the Freight Logistics Roadmap needing to incorporate these requirements explicitly, and the Transnet Network Statement expected to include localisation conditions for TOC access.

Nhlapo adds that South Africa’s localisation strategy serves as a direct contribution to the continental vision of a resilient and competitive Africa.

“The choice facing South Africa is stark. The country can localise to build resilience and competitiveness or abandon localisation and watch decades of investment evaporate.

“President Cyril Ramaphosa’s reindustrialisation vision and the Constitution’s socioeconomic commitments demand that rail reform serves South Africa’s long-term development. Decision-makers must now unite around shared priorities to build a resilient future where localisation serves as the engine of industrial renewal,” she concludes.