Consumers are paying the cost of logistics inefficiencies

Transport and logistics are the oil that keeps the South African economic machine running smoothly. When a machine is not lubricated, its parts experience friction and it eventually grinds to a halt.

The South African economic machine has seen its lubricant ravaged, reducing economic growth and job creation, and increasing the cost of moving goods and people.

There are two ways that transport and logistics have been negatively impacted. The first is a cyclical breakdown of relations that might be wage related or institutional setups that result in protest action, which Cape Town experienced recently. Due to increased risks most inbound and outbound business travel was cancelled, with costs to the economy.

Some retail stores ran out of food supplies and employees did not show up for work due to a lack of transport and safety concerns. Cape Town is still counting the cost, but the cost to the overall economy is unquantifiable. The real or perceived lack of safety for the rest of the country can prevent the growth of tourism over the long term, and along with that, jobs.     

In July, more than 20 trucks were burned in acts of criminality in KwaZulu-Natal, Mpumalanga and Limpopo, resulting in some logistics companies suspending their trucking operations, thus delaying the delivery of critical supplies.

In July 2021 key routes including the N3, N2, N12 and N4 experienced some form of blockage that disrupted the delivery of essential goods.

All these costly frictions on the economy will possibly never be quantifiable, but the results are visible in the high unemployment rate and the rising costs of goods.

The second way transport and logistics have been impacted is more fundamental and long term, particularly for the rail sector. This has been a constraint on the economic machine for many years but worsened after the Covid pandemic due to the destruction of railway infrastructure.

In 2012, rail accounted for 27% (204Mt) of total freight payloads of 767Mt. By the end of 2022, rail freight payloads had declined by 24% to 155Mt or 16% of the total 994Mt.

Total payloads increased by 30% over the period, which implies that as the capacity of state-owned Transnet to transport bulk goods declined the private sector stepped in and transported the goods by road. Consequently, road freight payloads rose by 30% from 563Mt in 2012 to 839Mt in 2022.

While rail freight volumes declined by 24% from 2012 to 2022, rail freight income rose by 17% from R29bn to R34bn. Road freight income grew 91% from R88bn to R167bn over the same period. As a share of total freight income, rail freight income declined from 25% to 17% while road freight revenue rose from 75% to 83%.  

However, this does not come without a cost. Given the decline in rail freight volumes, the increase in income could only come from a rise in prices. In simple terms, to get a 17% increase in income when volumes are down 24% could only be achieved with a 41% rise in rail freight prices.

Effectively, the reduced capacity and inefficient rail system became more expensive for those without an option to move their goods by road. For those that did turn to roads, the price increase was 42% over the same period due to increased demand.

All of these price increases end up being paid by the end consumer through inflation.

It appears there is some momentum from the government, working with the private sector, to fix the ailing rail system, but it is too slow.

Mhlanga is Chief Economist and Head of Research at RMB