Improving concession contracts in sub-Saharan Africa

Since 1968, the European Investment Bank (EIB) has conducted roughly a dozen lending operations in the rail sector during its successive mandates in sub-Saharan Africa – including four since 1995 (Table 1). The latter represent a total amount of EUR 101 million in signed loans and are managed by private companies under concessions to operate national lines – in Mozambique, Cameroon and Madagascar – or international lines, as is the case between Côte d'Ivoire and Burkina Faso and between Mozambique and Zimbabwe. The structure of the concessions that have been financed, and consequently the financing provided by EIB, has taken different forms for the four most recent operations. EIB – following its experience in Europe – has an open position in Africa concerning the arrangements of an operation, which can be entrusted either to the public sector, the private sector or come under a public-private partnership. EIB does, however, remain realistic in terms of the complex nature of arrangements that bring in the private sector. Rail transport would appear to be welladapted to the long distances and remote areas which characterize the African continent. However, the economy of the entire rail system can sometimes be precarious as a result of the lack of sufficient flows and the boom in road transport. The few lines that may be interesting to maintain from an economic perspective rely on dated infrastructure that is often in a bad state of repair.

Concessions have trouble breaking even

Few private companies are willing to bid for operating concessions, despite their economic potential. The latter generally have trouble tapping the funds required for operating alone, particularly for rolling stock. In this case, the conceding authority still has to bear the cost of infrastructure rehabilitation or urgent repair works (tracks and fixed equipment), which are consequently paid for with public money. The private concessionaire is rarely given the responsibility for infrastructure works; this is, however, the case for the line running between Beira au Mozambique, managed by Companhia dos Caminhos de Ferro da Beira. Once the initial financing stage for the investment has been completed, projects experience difficulties during the operating phase. The main reasons for this appear firstly to be linked to the fact that assets are overestimated when they are transferred and, secondly, to the instability of the regulatory framework. Certain lessons can be learned from the experience that has been built up and can help optimize the private sector's contribution to Africa's railways. Some clearly stem from public decision-making and structure the fundamental parameters of a railway project, independently of the choice over its management and financing method. The quality of project preparation, under the responsibility of the contracting authority, is crucial: economic justification, environmental and social management plan, and implementation of an equitable and transparent international bidding process. There is, in addition, the project's integration into the regional and  national transport development strategy. All these aspects are particularly important in order to ensure there is long-term political and social support and to obtain financing from international institutions. Public authorities also need to take several other aspects into account when setting up private sector participation. This involves being sure of the quality of the conceding authority; addressing the issue of whether or not to include infrastructure in rail services; assessing existing assets and guaranteeing the stability of the regulatory environment.

Quality of the conceding authority

In Africa, like everywhere else, a successful concession necessarily requires a strong conceding authority capable of successfully completing a complex project. This includes an international bidding process and a negotiation, the main issue being to share risks between the public and private sectors. This not only requires technical skills, but also governance that is autonomous, yet without being disconnected from the political context. Although the concession allows a considerable part of the technical risk to be transferred to the private sector, it is absolutely essential for the conceding authority to have sound knowledge of the issues at stake. Potential problems often lie in the details of contractual clauses. And yet the skills that the conceding authority most often lacks are not so much of a technical nature, they are more of a legal and financial nature. International financial institutions, thanks to their sound experience of the sector, have a role to play in ensuring there is a balance. They can provide relatively neutral external expertise, focusing exclusively on the project's success.

Combine or separate infrastructure and operating?

The principle of separating infrastructure and operating management for rail services set out in European legislation does not receive unanimous support. For example, the United States and Japan have made quite the opposite choice. The extent to which this principle can be adapted to a specific context must be taken into account, as well as how it can be articulated with the intervention of private players. From an economic perspective, it is also not an absolute necessity to fully cover the costs of a railway system with revenues. In some cases, it can be justified to support the rail transport mode, which is considered to be less-polluting. It is possible to offer profitability conditions that are acceptable to the rail service operator, once a fixed – and therefore eminently predictable – fee for the infrastructure charge has been paid. This option offers the private sector a turnkey scope for its operations; the public sector continues to be responsible for completing the charge with other resources in order to ensure the infrastructure operates. In other cases, particularly if there is a sizeable market for heavy mineral products, revenues from rail services may be high enough to fully cover predictable infrastructure expenditure. Whatever the case, a pragmatic approach is required. It should first be noted that even when several concessionaires use all or part of the same infrastructure, none of the cases observed in sub-Saharan Africa have given rise to direct competition between operators. The question of whether to separate or combine operating and infrastructure management is therefore not raised in terms of equitable access to the market, but simply in technical terms. The choice of separating or combining is consequently based on the parties' capacity to bear the technical and financial risk related to maintaining infrastructure at a sufficient level to allow an adequate and welldefined level of train services to be operated. They must also be able to manage the interfaces between fixed equipment and rolling stock. Finally, the contract that is established must contain provisions for extreme situations, such astraffic coming to a halt due to a natural disaster  (for example, a landslide, as was the case in Madagascar). Who is then responsible for the repairs and in what time frame? How is the rail service operator compensated? Everything may be clear in the contract, but experience has shown that there are not necessarily sufficient resources in place to allow essential action to be taken. Long-term support from financial institutions, coupled with technical assistance when required, can help provide a solution to these situations.

Assets often poorly assessed

Processes to make inventories or assess the value of existing assets have been inefficient in most of the cases observed. Yet any margin of uncertainty over the cost of repairing assets that fall within the scope of the concession risks encouraging candidates to undervalue the investment need. This can lead to considerably delays in works implementation  and the operating start-up phase and also have an impact on the quality of the service offered by the operator. To avoid this situation, the conceding authority can organize a detailed inventory prior to the bidding process, along with an independent technical and economic assessment. This would all be made available to candidates. Should it be observed at a later stage that something was left out or that there are discrepancies, their consequences would then be the responsibility of the conceding authority. In order to reduce this risk, lenders could request an independent audit of this inventory and all the assessments in general – as is often the case in Europe. These additional studies may lead to an extra cost and small delays in the preparation phase, but they do, however, have very considerable added value.

Stability of regulatory conditions

The regulatory conditions – price-setting, legal framework, public service obligations, framework for competition with road transport, etc. – are fundamental parameters that determine project profitability. In principle, the concessionaire has absolutely no control over them and is particularly vulnerable to the lack of control over road competition. It is logical for the private sector not to bear the risk in this situation, but it must be able to rely on coherent and continuous action on the part of its public partner. The private sector can adapt to all types of situation, but will only be able to make the right investment if the rules of the game do not change, or at least, if the method used to find solutions is clear, fair and realistic – and consequently tailored to the context. Given the extremely long duration of concessions, it would appear useful to have a conflict resolution mechanism included in contracts, as we can see for major public works contracts at the international level. The rail sector involves a long-term activity and has benefits in terms of impacts on the environment which deserve the full attention of donors. Both local players and foreign investors are fully aware of its strategic value: international links for landlocked countries, alternative to road transport, energy impact… Experience built up over the past fifteen years should make it possible to optimize concession models in order to give existing lines greater potential. At a time when the African continent is feeling the ripples of moderate economic optimism, new players are arriving en masse, particularly from India and China, which are major rail transport countries. This new offer comes with its challenges, but also with its opportunities, for example by raising the question of the appropriate technology. In this situation, the players in charge of designing and implementing projects should more than ever before bear in mind the need to respect the fundamental parameters of economic justification, environmental impact management and the need to set up an equitable and transparent international bidding process.