Most African railways have suffered a strong decline during the last decades …
Railway transport is a mature industry in the developed world which is experiencing a remarkable comeback after a period of decline. The rediscovered allure of railways is underpinned by its capacity to move huge volumes of freight or passengers in an energy-efficient and environmentally-friendly way. Nevertheless in many countries railways are still struggling to transform themselves from subsidy-dependant legacy companies to more efficient commercial undertakings.
With a few exceptions (mainly in the RSA and Northern Africa), African railways clearly lag behind those of most other regions in the world. They have been affected by the same drawbacks and rigidities found elsewhere, aggravated by poor economic, technological and institutional conditions. The result has been neglected infrastructure, sometimes approaching a point of no return, and operations clearly below international standards. Concessions introduced in the 90s due to the impulse of the World Bank and other donors have halted the decline that threatened the disappearance of many lines but have produced mixed results: some failures, unstable equilibriums and few -if any- unquestioned successes.
… but opportunities for railway development exist
There are opportunities for railway development in Africa as a consequence of the following drivers:
- Growing urbanisation and industrialization will pose new transportation challenges that railways are well suited to handle.
- Africa will produce large volumes of goods such as bulk minerals and commodities that are natural markets for railways.
- The huge continental mass of Africa and the existence of many landlocked countries will encourage the development of high-capacity and efficient transport corridors.
- Higher sensitivity towards environmental and safety issues will generate a fertile context so that railways get public attention and social support.
Railways may play a relevant role in the reduction of extremely high external costs derived from the use of private vehicles, in a context of constant increases in motorisation. Urban development and railway industry may benefit from new developments.
There is a need to manage depression and hype …
There seem to be two contradictory opinions regarding the prospects of railways in Africa:
- One opinion concludes that the experience so far demonstrates that railways are a losing game. The number of operations funded by IFIs in Africa in recent years shows comparatively little investment in railways compared with in other infrastructure such as roads or energy. This could suggest that this has been the mainstream wisdom so far.
- Another current of thought sees railways as an indispensable tool to foster development and take full advantage of the continent’s natural wealth. Thus many African countries as well as regional groupings are currently engaged in drawing up new railway schemes and several foreign players have become very active in promoting, lobbying government and even investing in railways. High expectations for the sector, as well as a certain amount of hype, can currently be found in the offices of many African decision makers.
These contradictions should not provide the excuse for either inaction or irresponsible investment decisions. On the contrary, what is required is a clear understanding of the fundamentals of the rail business and its financing and the making of sound and unbiased assessments, especially at the stage of project identification and preparation. Unfortunately this process is hindered by a shortage of skills and familiarity with modern railways in many countries.
… understanding the fundamentals of rail economics and operations …
Some of the fundamentals of rail that need to be borne firmly in mind are:
- Rail freight transportation is typically competitive in mid to long distance transportation, but usually loses its attractiveness in shorter journeys.
- Rail requires high volumes to be feasible, and it is a business of high volumes but low margins.
- Road and railway transport are both competitors and complementary. Railways compete with road transport in the long haul but require it for the “last mile”.
- Railway infrastructure is rigid, expensive and always requires an operator.
- The performance of the operator is highly dependent on the conditions of the infrastructure and rolling stock, simultaneously
- Rail freight and rail passenger transportation are very different businesses
- Most rail projects around the world require high levels of subsidisation in the construction and/or operational phases to be sustainable. This subsidisation should reflect the economic, social and environmental benefits of railways compared with other transport modes.
- Including appropriate stakeholders in the concessionaire’s shareholding improves project performance in the case of PPPs
There is no single fit-for-all business model for railways. A large variety of railway business models can be found worldwide with various levels of integration/separation of infrastructure and operations, and with more or less private participation. Significantly, the bigger and apparently more efficient railways in Africa (e.g. RSA or Morocco) are public sector undertakings, which is not the mainstream pattern in the Americas or in Europe.
… so as to focus projects in Africa on what railways do best
Railways are not the sole solution to all transportation challenges. Projects should be concentrated in segments where railway effectively brings higher efficiency and lower costs than other modes: moving high volumes of persons or goods over a given distance. Accordingly the areas deemed to be most appropriate to railway projects in Africa are:
- Major African metropolises » Urban and suburban passenger railways.
- Densely-populated areas and corridors » High volumes for freight or passengers possible.
- Corridors from ports to inland markets » Freight trains moving containerised or bulk materials from/to ports along high distances.
- Major mining basins » Freight trains moving minerals and other raw materials to export ports.
Railway policy makers may have to bear in mind that new railway projects in Africa will only be sustainable provided that they are compatible with their natural markets. Strong and detailed feasibility analysis such as cost benefit analysis (CBA), economic impact analysis or social return on investment analysis needs to be part of the initial foundations for new developments.
Furthermore, any new railway project should be framed under an overall vision of the needs of the whole transport sector.
The analysis of selected African railways confirms the need for a new approach …
An assessment in depth of the situation in eight African countries has been made. These eight countries are Botswana, Cameroon, Kenya, Madagascar, Morocco, Senegal, Tanzania and Zambia, which represent a wide variety of backgrounds and experiences in railways. Most have experience with concessions, with differing results, but some (Botswana and Morocco) have maintained a public sector approach.
The most relevant conclusions from these visits are:
- In most countries concessions have proved rather unstable, to the point that two of them have been terminated after a very short time. Where concessions are still operational, they have experienced alterations that have signified major changes in their financial bases.
- Most concessions underestimated the amount of investment required and the sums committed have had a limited impact on improving railway performance. Financial packages associated with these concessions have proved to be insufficient.
- Railway concessionaires, most of them freight driven, have been burdened with obligations that coexist uncomfortably with their core business and expose them to major complexities, costs, risks and public scrutiny. Taking over a substantial share of state railways legacy and passenger service obligations is highlighted as a cumbersome burden for these operators.
- Most concessions require operators to be engaged to a greater or lesser degree in infrastructure renewal or maintenance. This means that most African concessions are a hybrid that requires operators to be involved to a certain level in civil works activities.
- The coexistence of passenger services with mostly freight-driven operators has been uncomfortable to the point that in some cases it has been the cause of litigation, major concession amendments and eventually service discontinuation.
- The competitive environment between railway and road transport modes has not been adequately addressed in most cases, either at planning stage, at implementation or at enforcement level. In too many cases the competitive/complementary aspects of road versus rail transport have not been adequately addressed.
- Most countries have reached the conclusion that railway management and financing have to be reviewed but are still struggling to define the financial models, most notably how infrastructure maintenance should be managed and funded.
- Most of the countries visited have significant new railway projects, aimed both at freight (mostly mining) and passenger segments. A variety of schemes at regional level have been drawn up as well. There is wide acceptance that PPPs should be explored to tap the huge amounts of funding that would be required but no new approaches have so far been identified.
- Finally, some countries seem to have opted for public sector railways with no intention to privatise them in the short-medium term: Morocco, Botswana and Zambia; the last of these after a disappointing experience with concession. These are also the countries in our sample with the greatest technical capacities in the public sector and with the most attractive business environments. This implies that well-funded and managed public railways may be a suitable option in some cases.
… and experiences from other countries may bring some lessons for African railways
Faced with similar challenges in terms of the financing and development of railways, experiences in other developing and emerging countries are particularly valuable on the following subjects:
- Countries that pioneered in railways concessions and where a longer perspective can be seen such as Argentina provide mixed results. While freight transport has burgeoned and proves to be profitable, long-distance passenger services have been discontinued as subsidies required were unsustainable. However, urban and suburban trains remain crucial to Buenos Aires mobility.
- The quality of the institutional environment is critical to ensuring that users benefit from private sector participation. In poor institutional environments, private operators may be more interested in courting regulators and politicians i.e. the source of subsidies, than in really engaging in the improvement of safety and service standards to users, since fares are a minor part of the operator’s revenues.
- Big and bureaucratic public railways may create highly professionalized spin-offs to provide flexible, credible and creditworthy instruments to deal with the private sector under a wide range of PPP deals. This is the case of IRFC and RVN in India. This type of approach merits the support from IFIs.
- Public railways such as Transnet and PRASA in the RSA may provide acceptable to good service delivery and sound financial performance under adequate institutional arrangements, and be capable to experience with rather big PPP deals such as the Gautrain.
- Although it is a politically sensible issue, the use of a share of fuel taxes to fund railway infrastructure is possible in emerging countries as Poland’s experience shows. This fund can eventually sustain the issuance of bonds to finance railway projects.
- The approval of a legal framework that neatly separates infrastructure, operation and regulations as is the case in the EU can be circumvented by Government and railway incumbents unless there is a clear political will to push forward with liberalization and integration of national networks.
- Partnerships between railways and logistics/transport operators have been successfully achieved in some of the leading railways in Europe and some examples already exist in Africa as well. The strong synergies obtained seem to favour these approaches.
- The decision to change gauge within a country has many implications that can hinder almost irreversibly the development of rail traffic as happens in some EU countries without standard gauge. Any new project that involves the introduction of a different gauge form the existing one in any network needs to be carefully assessed before any decision is taken, involving all stakeholders in the logistics chains and taking into consideration all the operational and day-to-day side-effects.
IFIS are decisive to infrastructure financing and should develop new policy approaches to railways
The activity and experiences of the most important international finance institutions have been assessed so as to identify their portfolio of financial products and their approach to railways. The main conclusions from this review are:
- Although much more funding has been devoted to other transport modes such as roads and ports, the active involvement of IFIs in the last few decades has deeply influenced railway development worldwide. Thanks to their expertise as well as their wide range of financial products, IFIs are in the best position to assist developing countries like those in Africa in setting up a viable model for their railways.
- The approach of IFIs in other continents and particularly from other resource-rich and low density regions such as Latin America, where there is also longer experience with PPPs, should be closely watched so as to learn from success and failures.
- One can conclude that most multilateral banks have a wide spectrum of products that can be useful to support railways development, from risk management products to loans, form multilateral guarantees to political risk insurance. Thus, improving railways finance seems not to be an issue of creating new particular financial instruments but to develop new policy approaches.
- Nevertheless project bonds are deemed to be one instrument that may have a great potential to finance railway infrastructure, although its introduction require rather mature and sophisticated financial markets that only a handful of African countries currently have.
From the lessons learnt, a set of policy options are recommended to favour a comeback of African railways founded on more solid grounds
From the experience after twenty years of railways reforms in Africa, ten major lessons have been selected which have been grouped in three areas of improvement:
Project identification and selection
- Railway financing should prioritise projects that focus on identified markets generating high volumes
- Freight railway projects should take into account the whole logistics chain
- A new approach to passenger services is required
- A systematic approach to maintenance is mandatory as the cornerstone of railway performance
- Larger financial packages and long-term involvement are required for railway projects
- Railways’ economic, social and environmental contributions should be monetised
- Novel approaches to railway concessions should be explored
Railway institutional framework
- Assessment, implementation and monitoring bodies with enhanced technical and business capabilities should be encouraged
- Public railway bodies should be corporatized and professionalized
- Larger railway markets in Africa should be promoted through increased cross-border cooperation
These lessons have implications at national level as well as at the level of multilateral financial institutions, particularly the AFDB which aims to become a key player in infrastructure finance in the continent, especially after the introduction of the Africa50 fund.
To address the issues raised, twelve policy options are proposed. Some of them aim to address one of the issues, while others are rather more transversal and impact on various issues. Again some of them are addressed to the national level (i.e. individual governments), some are addressed to the IFIs that are most active in Africa infrastructure financing and most policy options have implications for both levels.
Railways have a role to play in Africa but the mimicry of other wealthier or differing parts of the world should be avoided. Railways may make a comeback on the continent as is happening elsewhere. But this will have to be sustained on a more solid technical, business, institutional and financial basis than in the past. IFIs and particularly the AFDB may play a crucial guidance role, introducing new approaches through pilot experiences and funding this railway comeback.