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Railway Concession in : Lessons Learnt

Joan Miquel Vilardell Advanced Logistics Group, SAU TABLE OF CONTENTS

• Railway in Africa • Lessons learnt • Recommendations for improving rail infrastructure financing Railway in Africa

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 3 26-27 Novembre 2015 Railway in Africa is largely dominated by North Africa and RSA despite the concession process undertaken in Sub-Saharan Africa railways African railway network

Rabat GDP Surface Population 2 Africa: $ 2.182 bn Africa: 30,046 km Africa: 1,108 m North Africa (2013) (2013) African 40% 30% 40% 34% 23% 30% macro- 21% 28% Nouadhibou M’Haoudat 30% 30% 20% 18% 18% 17% 22% economic 18% 20% 20% 16% West Africa 11% indicators 10% 11% 10% 10% N’Djamena 10% 6% 4% 10% 5% per region 0% 0% 0%

Monrovia

Yaounde Central Muqdisho Africa Total railway lines Total passengers Total freight Bujumbura Africa: 82,000k km Africa: 500 m Africa: 290 m t (2007 est.) (2007 est.) (2007 est.) Dodoma 30% 26% 96.5% African 100,00% 70% 63% 20% 60% 75,00% Railways rating railway 20% 16% 50% 15% 1,15% Good SouthernLusaka 12% 40% 50,00% 26% Fair indicators 9% 0,92% 30% Africa 10% 0,60% Poor (excl. RSA) 25,00% 0,44% 20% per region 0,43% 6% 10% 3% 2% 1% Not classified 0% 0,00% 0% Petroria

Source: ALG based on PIDA, , AfDB and railway companies RSA

The overall quality of the infrastructure in SSA is poor, which hinders the correct performance of railway operations

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 4 26-27 Novembre 2015 Abidjan Snapshot of railway traffic in Sub-Saharan Africa

Freight traffic in some African railways Freight traffic in Africa in 2010 (share in %)

In M Tn TAZARA (Z) 0,5 (2010) -

RSZ 0,8 (2010) - Zambia 12% RVR (U) 0,7 (2012) - 9% TRL 0,3 (2011) - TAZARA (T) 0,6 (2011) - Tanzania TRANSRAIL 0,2 (2011) – /

Transnet 207.7 (2011) – RSA 79% CFM 3,1 (2013) – ONCF 36.9 (2012) – Madarail 0,4 (2013) – RVR (K) 1,3 (2012) – RSA North Africa SSA

Transgabonais 3,8 (2012) – Source: World Bank and SSATP, based on UIC data Sitarail 0,9 (2009) – Côte d’Ivoire Camrail 1,8 (2013) – Railways 2,0 (2009) – Botswana 0,0 2,0 4,0 6,0 8,0 10,0 12,0 Railways require high volumes to be profitable; little volumes found in most SSA Data source: Railway companies

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 5 26-27 Novembre 2015 Abidjan Africa contains large areas potentially suitable for new rail projects, mainly the big metropolis, the landlocked countries and the mining zones… Main drivers for railway development in Africa Areas with potential to host new rail projects

Increase in transport demand due to the New demand for transportation and better African economic growth infrastructure

Increase in global supply chains Need for better and more integrated competitiveness logistics

Increase in the number and size of large Need to provide new urban mass metropolitan areas in Africa transport systems

New mining developments producing Need to provide access to the sea with a high volumes level of capacity and reliability

Need to build high-capacity Existence of landlocked countries infrastructures capable of handling mining bulk volumes

… but several constraints, including the difficulties to finance the railway infrastructure, are currently hindering the development of these projects

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 6 26-27 Novembre 2015 Abidjan Sub-Saharan railways are affected by several issues that undermine their commercial opportunities while keeping private investors away

Governments have given absolute priority to road investment while neglecting railways

Railway infrastructure is inadequate for commercial exploitation

Rolling stock is inefficient

Human resources are not being renewed

Political conflicts and natural disasters have damaged the existing lines

Sub-Saharan Railways need a deep restructuring in order to become a competitive means of transportation

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 7 26-27 Novembre 2015 Abidjan If transportation forecasts for Africa are achieved, extra investments will be necessary to overcome the future infrastructure gaps

Forecasted Trade Volume (M Tons) Key year of gap SSA ARTIN corridor capacity 3.630 CAGR Dakar – Bamako 2020 +6.2% Abidjan – Ouagadougou 2030 CAGR 1.998 +5.5% Djibouti – Addis Ababa 2020 CAGR 1.175 Mombasa – Kapala 2020 +7.8% 513 …… x 11 corridors 2030/2040 2009 2020 2030 2040 Source: PIDA programme

All 11 cross-border railways Demand in 9 of 11 corridors All new ARTIN ports SSA concentrates the 6 out of 11 ARTIN railways need need expansion by 2030 or would exceed in 10 M tons will require rail vast majority of ARTIN physical expansion by 2020 2040 by 2040 connection gaps

New and existing railway infrastructure will require large financial resources

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 8 26-27 Novembre 2015 Abidjan Some of the countries might not be able to cope with the financing gap considering their current budgets and debts

Country 1 Country 2 Country 3

Financing gap allocated $5.96 Bn $4.00 Bn $0.98 Bn according to CAPEX

Financing gap. vs % National budget 33% 89% 41% National budget

Impact of financing Increase of government 28% 59% 48% gap in debt debt

Data source: ALG data

Private sector participation should be considered to provide finance, skills and incentives

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 9 26-27 Novembre 2015 Abidjan Lessons learnt

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 10 26-27 Novembre 2015 Abidjan The Consultant has visited 8 African countries from different backgrounds in order to assess current situation, opportunities and constraints Criteria for the choice of countries Selected countries and their railway companies

Morocco

1. Concessioned and non-concessioned railway systems ONCF

2. Geographical distribution among Africa regions Senegal Transrail PTB 3. Passenger transport and freight transport involved GCO SEFICS

4. Coastal countries and landlocked countries Kenya

RVR 5. Working concessions and cancelled concession Cameroon Tanzania TRC 6. Types of stakeholders in concession Camrail TAZARA

7. Single-country concession and multiple country concession Madagascar Madarail FCE Zambia

RSZ TAZARA Botswana

Most visited countries where actively engaged in railways BRC projects and in reforms in the railways sector

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 11 26-27 Novembre 2015 Abidjan The results of the country visits show different approaches to railways but also illustrate some lessons (1/2) Initial investment commitments and 1. Underperformance and instability of concessions financial packages in selected countries Length of Investment Investment initial • Most concessions have been awarded to holders who have not performed as railway under initial Country package expected, have become very instable, or both. concession package/route (USD m) • Need for multiple restructuring and amendments to stay operative. (Km) length (USD/Km) Senegal-Mali • This could suggest that the approach or the type of targeted operator were ill- 1,287 65 50,500 conceived. (Transrail)

Senegal 115 55 480,000 2. Underestimation of investment needs (GCO) • Most concessions have underestimated the amount of investment required and sums committed have had limited impact on improving railway performance. Cameroon 976 90 92,000 • Some recent railway packages being discussed are several times bigger than the Madagascar 685 49 71,500 initial ones proposed in the late 1990s or early 2000s. (North Line) • And even these ones may still underestimate the real magnitude of investment required. Kenya (RVR) 2,006 80 39,800

3. The competitive environment of railways has not been adequately Tanzania 2,600 84 32,300 addressed (TRL)

• It happens at planning stage, at implementation or at enforcement level. Zambia (RSZ) 1,200 14,8 12,333 • Some current road and rail schemes are being promoted simultaneously without full consideration of competition between both modes.

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 12 26-27 Novembre 2015 Abidjan The results of the country visits show different approaches to railways but also illustrate some lessons (2/2)

4. Operators burdened with public service obligations and 6. Widespread acceptance that the concession model has to be legacies from the past reformulated

• Railway concessionaires (most of them freight-driven) have been • Most countries with concessions have reached the conclusion that burdened with passenger obligations. infrastructure assets should be kept and managed by the public sector • These coexist uncomfortably with their core business and expose • But they are still struggling to define the financial models, and funding them to major complexities, costs, risks and scrutiny. sources for infrastructure maintenance • Moreover, they have been obliged to take over a substantial share of • Wide acceptance that PPPs should be explored to tap the huge amounts state railways legacy. of funding that would be required, but there is an overall lack of new ideas on how to proceed 5. Demarcation of responsibilities for infrastructure renewal or 7. Public sector provision still strong in most developed African maintenance is a source of instability countries

• Most concessions require operators to be engaged to a greater or • The public sector provision is not really challenged in some countries, lesser degree in infrastructure renewal or maintenance. following the corporatization and modernization of their national railways • This means that most African concessions involve a hybrid business • Others have lost confidence in the private sector model between vertically-integrated railways and segregated ones. • Countries with the most articulated public sector still rely on public • That leaves room for interpretations, disagreements and, eventually, provision termination. • But there is the risk of politically-endorsed projects with little economic and financial returns. Countries with a less-powerful public sector are more actively engaged in looking for private investment but there is still little experience and familiarity with railways so as to build robust business models

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 13 26-27 Novembre 2015 Abidjan Adequate financial provisions for maintenance is critical to sustain capacity and service reliability

Loss of capacity on African railways (% loss of original capacity)

95% 96% 90% 87% 86% 75% 77%

50% DRC, SNCC BR TRC NRZ Zambia, TAZARA , Tanzania, Botswana, , CEAR/CDN CFM-South Mozambique, , CFMa

Data source: ALG data

Lack of maintenance has been one of the main reasons why African railways have lost their original capacity

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 14 26-27 Novembre 2015 Abidjan Several countries have cancelled or amended their concessions to bring back infrastructure investment responsibility to governments

Cancelled and ongoing concessions in Africa Evolution of the concessions in some African countries

Algiers Tunis

Rabat Tripoli Current Year of Investment responsibility Concession performance Cairo concession OPS FIN Infrastructure Rolling Stock

Transrail Sitarail (Côte d’Ivoire, ) 1995 A C Public Private 2003 Nouakchott Camrail (Cameroon) 1999 B A Public Private Asmara Dakar Khartoum Bamako Niamey Banjul N’Djamena CEAR (Malawi) 2000 D D Private Private Bissau Ouagadougou Djibouti CBG Conakry Addis Ababa RSZ (Zambia) 2002 C C Private Private Abuja Freetown Rift Valley Rail Corporation Bangui KRC-URC Madarail (Madagascar) 2003 B C Public Private ACG 2006 Yaounde Sitarail Kampala Muqdisho Transrail (Senegal, Mali) 2003 C D Private Private SBK 1995 CTMB Libreville Kigali Nairobi Brazzaville Bujumbura TRC CCFB (Beira) (Mozambique) 2005 C D Private Private Camrail 2007 1999 Kinshasa Dodoma TransGabonais (Gabon) 2005 B C Public Private TransGabonais- Luanda SETRAG Nacala-CDN Nacala (Mozambique) 2005 C D Private Private 2005 2005 SNCC 2011 Lilongwe KRC-URC (Kenya-Uganda) 2006 C D Private Private Ongoing concession Harare Antananarivo TRC (Tanzania) 2007 D D Private Private Cancelled concession Windhoek Ongoing concession and Madarail SNCC (DR Congo) 2011 D D Public Private/Public cancelled concession RSZ Gaborone Petroria 2003 Railway not concessioned 2002 Maputo CEAR Ongoing Cancelled Private mining line 2000 Without railway services BBR CCFB 1999 2005 Source: SSATP, Framework for Improving Railway Sector Performance in Sub-Saharan However, the second generation concessions have the risk of being instable due to lack of common understanding on the scope of investment and maintenance, added to the lack of compliance from one side

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 15 26-27 Novembre 2015 Abidjan Recommendations for improving rail infrastructure financing

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 16 26-27 Novembre 2015 Abidjan 12 Recommendations arising from African and world experiences

1 Railway financing should prioritise projects that focus on identified markets generating high volumes: large Project mining areas, dense freight corridors, large metropolitan areas Identification 2 and selection Freight railway projects should take into account the whole logistics chain

3 A new approach to passenger services is required

4 A systematic approach to maintenance is mandatory as the cornerstone of railway performance

Railway 5 finance Larger financial packages and long-term involvement by states required for railway projects. Railway funds or other innovative financial sources may contribute to the viability of projects 6 Managing CAPEX is crucial to avoid further increases in viability gap; relaxing specifications, deferring electrification and upgrading of existing lines may reduce the investment needs by more than 25% without affecting the benefits from the line

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 17 26-27 Novembre 2015 Abidjan 12 Recommendations arising from African and world experiences

7 Railways’ economic, social and environmental contributions should be monetised, including coordinated Railway policies with road transportation finance 8 (continued) Novel approaches to railway concessions should be explored; private sector participation should be considered to provide finance, skills and incentives

9 It’s crucial to develop and effectively implement policies that shift traffic from road to rail

10 Assessment, implementation and monitoring bodies with enhanced technical and business capabilities Railway should be encouraged institutional 11 framework Public railway bodies should be corporatized and professionalized

12 Larger railway markets in Africa should be promoted through increased cross-border cooperation

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 18 26-27 Novembre 2015 Abidjan Any passenger services will need to be subsidised and this should be through separate financing schemes in each country

Operating expense / Operating Revenue 4,84

2,25

1,56 1,52 1,52 1,52 1,5 1,49 1,38 1,37 1,35 1,32 1,29 1,29 1,28 1,27 1,13

Source: Asian Development Bank – Private Sector Investment in Railways

Most rail passenger operators do not cover their operating expenses from fares

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 19 26-27 Novembre 2015 Abidjan Shifting from road to diesel railway may potentially reduce 75% of external costs. Further savings from electrification are relatively minor

External cost compared to road transportation (as % of road transportation)

100%

Potential Potential saving saving 75.4% 86.9%

Difference between diesel and electric 24.6% railway vs road 13.1% 11.5%

Road freight Rail Freight Diesel Rail Freight Electric

Air pollution Climate change Noise Up-and downstream Other impacts Accidents

Source: ALG based on European Commission study on transport external costs. Assumes part of electricity coming from green energy

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 20 26-27 Novembre 2015 Abidjan Private sector participation has been positive in several railways worldwide, usually under concession schemes • The Initial Concessioning Model used in Africa and Latin America, with the concessionaire responsible for infrastructure Initial African Evolved African New PPP investment, has not led to enough investment, especially in Concessions Concessions approach Initial Tanzania, infrastructure Initial Cameroon, Zambia, Madagascar, Amended Cameroon • The Evolved Concessioning Model is: Current Kenya, and Madagascar, Senegal Proposed model for Senegal • Public sector asset company owns the infrastructure - O&M concession landlord Rolling S. • Specialised civil works contractor builds infrastructure Rolling S. investment • Private sector manages freight operations and O&M

O&M • Critical issues to be considered in new PPP approaches: Infrastructure • Detailed technical studies, increased competitive tension and strengthening of construction supervision to be Infrastructure Investment considered • How should Infrastructure O&M be managed? Infrastructure • An independent regulator is needed ownership • Implementation of a railway fund to secure the viability gap Private sector Public sector financing

1st AfDB Transport Forum Railway Concession in Africa: Lessons Learnt 21 26-27 Novembre 2015 Abidjan Thank you!

Joan Miquel Vilardell jmvilardell@alg‐global.com www.alg‐global.com