Since the first railway concession in Africa in 1996 (Sitarail in Côte d’Ivoire and Burkina Faso), most of formerly state-owned railway companies in sub-Saharan Africa (SSA) outside South Africa have been transferred to private operators under various forms of concession contract. Today, more than 70% of rail activities in this region are in the hands of private operators (World Bank, 2010a). The World Bank Group has supported most concession processes through its International Development Agency (IDA) and/or its International Finance Corporation (IFC) (Table 1).
Since 1996, the IDA alone has provided more than USD 773 million to host governments via technical assistance, financing of labour retrenchments, and/or financing of railway infrastructure and rolling stock rehabilitation or maintenance. Additionally, the IDA is examining the potential financial support for restructuring existing rail concessions in West Africa (i.e., Sitarail and Transrail) and planned new concessions (i.e., Nigeria Rail Corporation – NRC, Chemin de fer Congo-Océan – CFCO).
The rationale behind the World Bank’s support of Railways in SSA
Well-performing and reliable railway operations are important for Africa’s transport systems and economies. In addition to dedicated mining railways, which are used to cheaply and reliably transport large volumes of export cargoes over long distances, general freight and passenger railways also play a key role in supporting economic growth. This is even truer for Africa’s land-locked countries, which are especially vulnerable to high transport costs.
Sitarail illustrates the positive impact that a wellrun railway can have on a landlocked country’s economy. It provides a competitive transport link between Burkina Faso and West Africa’s main port of Abidjan, and its estimated direct economic impact, comprising mostly fuel import and truck transport savings, is projected to top USD 280 million between 2008 and 2017 (World Bank, 2009a). More interestingly, 96%3 of this is likely to accrue to Burkina Faso, with 81% of this figure reflecting transport cost savings, contributing directly to its external trade competitiveness (Table 2).
According to the World Bank (2009b; 2010b), the main competitive advantages of rail over road transportation are higher transport capacity per dollar invested (50% lower cost per kilometre of rehabilitated rail track compared with a twolane road), higher durability (roads need complete rebuilding every 7 to 10 years, vs every 15 to 20 years for rail tracks), lower energy consumption and carbon footprint per ton transported (up to 75% and 85% less, respectively). Accordingly, the World Bank’s support of existing railway networks is often justified on economic grounds. Nevertheless, it must always be part of a well-crafted public private partnership to ensure maximum economic impact. Indeed, state-owned railways in SSA have often proven unable to benefit from IDA support because of a combination of poor governance and weak management skills.
Railway concessions: background and performance
The performance of railway concessions varies. On the one hand, concessions have translated into increased labour and asset productivity, higher market share for freight services, lower overall government subsidies, and improved financial viability. On the other hand, they have failed to deliver the level of private investment originally envisioned or the expected improvement in the quality of passenger services. Overall, the expectation that concessions would achieve long-term financial sustainability without the financial support of governments has not been realized. However, this realisation has not deterred the IDA from supporting existing and new concessions, although it has altered the IDA’s intervention framework.
The background to this is, first, serviceable freight markets were overestimated by both transaction advisors and governments. In most cases, traffic gains have been much lower than expected because road competition has been fiercer than planned. Host governments mostly did not understand the need to equalise rail/road competition, or were deterred from doing so by the pre-vailing political economy supporting the trucking sector. In SSA, governments have saddled concessionaires with both the cost of rail maintenance and rehabilitation, while they have not modified road user regulations and taxation, making road users shoulder no more than a mere portion of the cost of road maintenance.
Second, investment needs have been underestimated. Plans for infrastructure rehabilitation have usually focused only on the first five years of the concession, ignoring long-term needs, which have proven to be far greater than anticipated: during bidding, both governments and private operators have downplayed the state of rail infrastructure.
Third, concessions have been undercapitalised. The capital bases of concession companies have been too limited, in part to lower the risk perceptions of private investors. This caused many concessions to rapidly become cash strapped, as projected positive cash flows did not materialise and the long-term debt burden inherited from the on-lending of donors’ money became too burdensome.
Finally, expectations for passenger services have been unrealistic. In many cases, this has led to misunderstandings between governments, concessionaires and travellers. Since 1996, none of the privately operated passenger services have been financially viable. They have all been either indirectly subsidised by freight operations or directly subsidized by government treasuries. Although subsidisation is not rightfully problematic, the political cost and risk associated with badly crafted schemes cannot be underestimated; for example, the financial impact of unpaid passenger subsidies from the Government of Cameroon to Camrail between 1999 and 2008 and the financial impact of Senegal’s and Mali’s passenger service arrears on Transrail through to the end of 2010. Rail passenger services, while representing only 5-10% of total revenue, have caused most of the tensions between governments and concessionaires.
It has become clear that the markets served by rail concessions in SSA are too small to ensure the sustainability of rail businesses required to finance both rail infrastructure and rolling stock. As shown in Table 3, the average yearly revenue of most rail concessions in SSA is only USD 35 million, whereas each network is known to require rehabilitation investment far in excess of that amount (e.g. more than USD 200 million for Camrail and Transrail, according to their respective concessionaires) in the next 10 years. Consequently, most donors and policy makers now understand that rail operations, to yield positive economic returns to host governments, need continued financial support from them.
A new model for successful railway concessions
Concession contracts in Cameroon and Madagascar have been successfully restructured with the World Bank’s support to reflect the lessons learned since 1996. The pillars of this restructuring are private operators taking responsibility for financing rolling stock maintenance and renewal, shouldering only the cost of track maintenance; governments agreeing to finance track renewal subject to sharing profits; governments committing to finance infrastructure, partially securitized by an ‘infrastructure renewal fee’ paid by the concessionaire (which represents anywhere from 1 to 4% of annual revenues) into a secured account managed by it for the government; concession contracts stating upfront the estimated infrastructure amounts payable for at least 15 years, so governments grasp their net commitments (after the infrastructure renewal fee, profit sharing and other concession fees); instituting intermodal competition policies to rebalance road-rail competition (e.g. enforcing axle loading for trucks along competing corridors, road tolls, etc.); and separately accounting for passenger services, to reflect governments’ financial obligations to these.
While this approach is likely to ensure the success of railways in SSA, the success of concessions will ultimately be determined by governments offering private operators enticing financial prospects. However, the financial fundamentals that have driven private investment towards the railway sector are not likely to change soon.
Basis for World Bank support of Greenfield projects
While restructured, well-organised railways impact economically positively on national economies, the viability of non-mining Greenfield rail projects mostly remains doubtful in SSA. These projects are expensive – at least USD 2 million per kilometre of new track – (CIMA International, 2008) and take years to implement, with significant upfront financing and no return for many years. Accordingly, the private sector’s appetite for them is low, leaving public treasuries to finance them. Also, their returns tend to be inflated by over-optimistic volume projections, designed to compensate for the limited size of the markets to be served. These projections are usually based on a shift from road freight to rail that does not recognise road haulers’ competitive ability (as experienced by rail concessions over the last 13 years) and the political economy created by well-established and well-financed truck lobbies. Consequently, most non-mining Greenfield projects examined by the IDA do not meet the economic and financial criteria for support. This holds true for the proposed widening of existing rail lines from meter to standard gauge (1,435 meter), as less than 30% of the capacity of meter lines is currently used. Nevertheless, the World Bank is determined to continue to review proposed Greenfield projects, if only to share lessons learned with its clients and to reduce their risk for public finances.
The future role of the World Bank in SSA rail concessions
The restructuring model for rail concessions developed in 2005 with IDA assistance has paved the way for future World Bank interventions in the rail sector, as it offers proven solutions to the structural problems experienced by today’s general freight and passenger rail concessions. However, even this cannot compensate for the lack of proficient private operators with long-term commitment and industrial vision for African railways, and governance issues on the part of governments. Therefore, IDA assistance must support developing and implementing a long-term vision for the investment and policy balance required to achieve growth of countries’ transport subsectors. Also, since IDA lending is not the best instrument for long-term financial support (IDA projects usually last between five and seven years), substitution of its presence by the IFC, European Investment Bank, Development Financial Institution and/or private financing arms of bilateral or multilateral institutions – using limited shareholdings – should be explored. This is currently being done for the Kenya-Uganda railway concession, where the IFC acts both as a minority shareholder and as a financier. Finally, the IDA can assist host governments to leverage bilateral investments from China or India by promoting institutional reforms that favour private operators becoming involved in designing, supervising and implementing these investments, thereby ensuring that best-value approaches are implemented.
References / Banque mondiale, 2009a. Economic Impact of Railways Systems in Sub-Saharan Africa: Estimation Model for the Projection of the Overall Economic Impact on African Economies, Africa Technical Transport Unit, Working Paper. / Banque mondiale, 2009b. Empirical Observations from Biding Documents, Working Papers. / World Bank, 2010a. World Data Bank, Database. / World Bank, 2010b. Off Track: Sub-Saharan African Railways, Africa Infrastructure Country Diagnostic, Background Paper n°17. / CIMA International, 2008. Étude de faisabilité des interconnections des réseaux ferroviaires des pays membres de la CEDEAO, Working Paper, March. / Pozzo di Borgo, P., 2010. Railways Concession in Sub Saharan Africa. Lessons Learned, Extract from Presentation to East Africa Community, Dar Es Salam, Tanzania, March.