African railway concessions, a step forward but not the whole answer

In most of the African interior, railways historically have been the key to economic development. They transported passengers and freight at a fraction of the time and cost of alternative methods, such as ox- or bullock wagons and head-loading and enabled agriculture and mining to be greatly expanded. For many years, rail maintained its dominant role because of the generally poor state of the roads, and even when motor transport became common, it provided only feeder services to the rail network. After the Second World War, road transport began to expand, and over the subsequent 40 years has been supported by governments directing most of their transport investment into road improvements in response to increases in motor vehicle ownership. This coincided with a general economic liberalisation, in which long-established parastatal trading organisations, with traditional relationships with rail, were replaced by smaller and more nimble trading groups. Rail was slow to respond, with few changes other than some reductions in the over-manning that resulted as traffic volumes declined. By the 1990s, many African railways were badly run-down, requiring substantial rehabilitation of both infrastructure and rolling stock. They carried very low volumes by world standards: a few had substantial mineral traffic, but most carried semi-bulk freight between the interior and the ports and vice versa; there were significant internal flows only on the southern African networks. In a number of countries, railways financed by under-resourced governments began considering concessions. This began in earnest in 1992 with the line between Abidjan and Ouagadougou (between Côte d'Ivoire and Burkina Faso), and by 2010, 14 systems in sub-Saharan Africa had been concessioned or contracted, and another four were at varying stages of progress. Arrangements  in three of the 14 networks have been cancelled (and subsequently revived with different operators), one has been badly affected by war, and one has suffered from natural disasters and long procedural delays. At the end of 2010, 11 had been operating for five years or more, but four of these had suffered a significant dislocation of some sort. Except for the railways immediately adjacent to South Africa (Botswana, Swaziland and, to  a limited extent, Namibia), those that have not been concessioned have continued to deteriorate over the past decade, and in a number of cases these declines will be terminal.

The rocky road to success

Concessions have not been without their problems. In some cases, there were very few bidders, with limited financial resources; governments have had to guarantee investments; and mobilising finance has been slow. Concessionaires have generally been unenthusiastic about running passenger services, which generate less revenue than freight, and tie-up scarce traction- power. Further, there have been disputes about the payment of Public Service Obligation (PSO) compensation by governments for nonprofitable services, and problems have arisen about the level of concession fees, the length of concessions, and staff redundancy payments. Nevertheless, the overall impact of concessioning has been positive, even where some expectations have not been met. Both labour and asset productivity have improved in most cases. In both Côte d'Ivoire/Burkina Faso (Sitarail) and Cameroon (Camrail), freight traffic increased by around 40% following concessioning; labour productivity on these two railways increased by over 50% (Figures 1 and 2). Active searching for new traffic by concessionaires and streamlined internal business practices have improved railway cost and pricing structures and lifted the level of service to users, following investment by donors and International Finance Institutions (IFI). Generally, concessionaires have complied with passenger service requirements, even where this has been operationally difficult for them, or where promised PSO payments have not been made. A key government objective has generally been to obtain finance (whether private or through IFIs) to rehabilitate and maintain track infrastructure, and most concession agreements clearly put this responsibility on the concessionaires. However, for most concessionaires, track rehabilitation, especially renewal, is a major expense that drains funds. This can be deferred (as in the past) at the cost of speed restrictions and derailments. Investment has largely been limited to the on-lending of IFI loans, in most cases to address maintenance and renewal backlogs and in many cases without which there would be no functioning railway. These can be characterised as a “once-off” investments to get the systems functioning again. Responsibility for the on-going rehabilitation and maintenance of tracks is rapidly emerging as a major issue. It is clear that classic concession schemes (i.e., those that require private operators to take on significant debt burden relative to revenue) in Africa are unlikely to be attractive to bidders other than those who can secure indirect financial benefits (e.g. by controlling a distribution chain, awarding rehabilitation contracts to themselves or supplying rail equipment). Experience has shown that for most concessions, both passenger services and track rehabilitation will need substantial public funding. However, if this is provided, governments will also need to strengthen their regulatory capacity to ensure compliance with concession conditions, and to ensure its impact on the rail sector is properly considered when policies in other sectors of the economy are being developed. So, are concessions a long-term solution, or are they merely short-term fixes that rely on investments from IFIs, which will prove to be unsustainable in the long term?

The challenge of passenger services and rail renewals

Few passenger train services in Africa are able to contribute to infrastructure costs, and even fewer can justify investment in rolling stock. Many are a hangover from previous times, and passengers would be economically and otherwise better served by a road-based system. There are no privately run high-quality passenger services. Some are well-managed, but only to minimise costs. Camrail is one of the better ones, although local newspapers often report complaints – while government is responsible for financing new rolling stock, 10 years after concession, they have just started doing this. As all concessionaires require locomotives that would be better employed hauling freight, most would willingly forego passenger services. If these are to be retained beyond the initial years of a concession, governments will need to develop a simple compensation scheme, with payments for these made on time and without fuss. Schemes should be easily auditable, and should be reviewed periodically, say every five years. If these are not introduced, passenger services will constantly be a contentious issue between governments and operators, diverting the focus of the concessionaire from improving freight services, which are far more economically important to countries. Few African rail systems can finance major infrastructure renewals. While most concessionaires pay concession fees, probably none could afford to if they were accruing funds for future renewals, and other than for mineral lines, a private rail concession capable of financing itself on a long-term basis is probably unachievable in much of Africa. With the traffic volumes typically carried on an African general freight railway, track structures  have lives of several decades. On a small system, track renewal is an irregular event required every 20 years or so. It is usually possible to defer renewals for several years beyond this, at the cost of deteriorating track conditions and reduced operating speeds. For any concessionaire uncertain of its long-term future, the safest strategy would be to undertake as little track renewal as possible, which for private operators is not viable in addition to concession fees. And raising debt finance for this (with its limited resale value) is almost impossible for small railways, which are usually financially ring-fenced from their shareholders. Thus, with almost all concessions, governments will likely need to contribute funds for major infrastructure maintenance. The 2008 restructuring of the Cameroon concession, with both parties contributing to infrastructure renewal rather only the concessionaire, is the most realistic model in the region for the long-term sustainability of rail networks. An option for governments might be to part-finance infrastructure renewal through a land transport renewal fund, which could be an extension of a road fund, both funded by road user charges and rail concession fees.

Enforcing reporting by regulating concessions

In theory, it is the issuing party's responsibility to monitor the requirements of a concession agreement. To this end, IFIs have funded the establishment of regulatory frameworks and agencies, but their implementation is very difficult. The first problem is getting competent staff. The second is that concessionaires know that in many countries they circumvent the authorities by dealing directly with the minister or president. So the prospects of implementing regulations are minimal. In practice, many concessionaires ignore many or all of their reporting obligations. Authorities are thus often ill-informed about the problems facing concessionaires and about the remedies being attempted. Therefore, their capacity needs to be strengthened. One option would be to specify annual independent financial and operational audits (to be undertaken by competent independent organisations) in concession contracts, financed by concession fees. However, in some cases, governments lack the will to administer concessions transparently.

Transparency and consistency – essential government values and behaviours

Many concessions have been prejudiced by government requirements. The existence of a politically and technically empowered oversight body could obviate much of this. Strategically, governments also need to develop stronger policies regarding infrastructure cost recovery, and overloading by road operators. The lower the road user charges, and the greater the degree of overloading permitted, the lower freight rates by both road and rail will be and the less funds will be available from concessionaires to maintain and upgrade railways. In spite of all these problems, well-run railways still offer the most economical solution to transporting non-time-sensitive general freight over distances of 500-800 kilometres, and over much shorter distances for bulk commodities. As such, their revival through concessioning is warranted whenever the business fundamentals are sound. Better solutions must also be devised to ensure that while governments benefit from the improved level of service, concessionaires' financial returns are high enough to attract broader and more competitive investor participation. Experience has shown that, for the traffic volumes typically carried on most African railways, few concessionaires are able to support passenger services, and they are generally not prepared to invest their own funds in major infrastructure renewals or upgrades. Politicians' expect concessions to transform run-down, under-engineered railways into modern, European-style operations. They rarely do this, but they do provide railways with the best opportunity of contributing to the economic development of countries, so long as governments financially support passenger services and major track maintenance and ensure compliance with contractual arrangements.

REFERENCES

World Bank, 2006. Review of Selected Railway Concessions in Sub-Saharan Africa, Economic and Sect or Work, Report.