Mixed results for private sector participation in Africa's railways

In Africa, the first railway lines were created by private concessions. Apart from the ideological reasons behind them, the nationalizations of the 20th century came in response to the fall in the financial profitability of lines that had formerly been monopolies. They had to face increasing competition due to road improvements and the increased productivity of vehicles in terms of power and freight capacity. The African railway sector was obliged to move from a monopolistic situation to intermodal competition and focus on markets where it holds on to a comparative advantage. Over the past decades, several States have once again called on private companies to help them bring about this change, particularly in Latin America and sub-Saharan Africa. Learning lessons from these experiences helps give an insight into the potential and limits of this type of partnership. In Africa, rail transport generally has no comparative advantage over road transport for travellers. However, it can be significant for freight transported over several hundred kilometres. Savings on the main route offset the additional expenditure for terminal equipment and handling. This is the case for bulky goods which are not time-sensitive (cement, fertilizers, grains, etc.), oil products, container goods, especially when transported on block trains. There is a real – though generally small – environmental advantage brought about by energy efficiency. It is not well valued by the market and it is not enough to justify investments in modal transfer. The exception is electric traction when traffic density (ratio of tons-kilometres to network length) makes it possible to amortize its installation cost and when electricity generation emits low levels of greenhouse gases. Yet in the few African countries where this density is high – Egypt, Morocco, South Africa – the second condition is not met.

The diversity of African railways

African railway operation differs enormously in terms of network size, traffic and management. For example, South Africa's freight rail network – which has high traffic intensity, sound public management, and is profitable without State subsidies – has nothing in common with small lines in sub-Saharan Africa, which suffer from low traffic levels, insufficient modernization and poor management. This diversity means a case-by-case approach is required. For low traffic density lines, where it is difficult to make operation sustainable due to the high level of fixed costs, the only financially profitable projects are those that improve existing assets. In this case, the operator cannot bear the cost of investment in a new line; the investment priorities are consequently to upgrade tracks in order to secure freight traffic, to modernize and, sometimes, to increase the capacity of the rolling stock. In some cases, winning back the market would require investments in modernization that are too high to be economically justified and financially sustainable. The best thing to do in this case is to shut down the line. Ore transport constitutes a specific case. The high traffic density of an ore railway usually makes it possible to amortize the upfront investment. A private investment can consequently cover costs relating to the mine, the enrichment plant, the dedicated railway and the export port terminal. Indeed, the mining company seeks to control the allocation of the mining rent, from extraction to the final consignee.

What clients and States expect from private participation

Freight owners give utmost importance to the rail company's capacity to provide a service that is punctual, reliable, safe and client-oriented. Performance of private rail operators in sub-Saharan Africa is perceived by clients as being better than that of public bodies: they note a more commercial approach, in addition to a sharp rise in productivity (particularly in terms of staff and rolling stock). Through privatizing operation, African States seek to completely release themselves from financing investment and operation. This objective is not realistic for African railways with low traffic density; public financing for infrastructure investment continues to be required. However, by privatizing operation it is possible to reverse financial flows between the State and the operator: concession or affermage fees, along with taxes and duties paid, then exceed the amount of subsidies. When operation is privatized, the State should mainly expect management to be improved, greater professionalization and a normalization of relationships with the operator – rather than a provision of private capital which will remain limited by risks and moderate profitability.

The forms of private participation

As with other infrastructure, private participation in railways mainly takes the form of outsourcing, management contracts affermage and concession. Outsourcing is an interesting option for public rail companies that are used to directly handle maintenance through force account. Although outsourcing may be difficult in small markets where there is only room for one subcontractor and one principal (working on a regional basis does however extend the market), it provides an opportunity for small and medium-sized local companies, often staffed by former railroad men. On a slightly different note, Sitarail, which manages the Côte d'Ivoire- Burkina Faso line between Abidjan and Kaya, subcontracts passenger train commercialization to a domestic private operator. The Management contract has been tested in Africa's rail sector. There have been mixed results, especially when it simply comes to making staff available without financial incentive to perform. In highly unstable environments, however, it may be the only realistic method, for example in the Democratic Republic of Congo. It is customary for such contracts to be short-term, usually for five years; this duration is often too short to allow time for implementing major reforms and investments. Keeping operators over a long period would give public bodies easier access to long-term financing. With affermage, the lessee operates the investments financed by the public authority against a fee, whereas with a concession all the investment costs are borne by the operator. Full-fledged affermage or concession- type affermage are generally preferable: the responsibility for investments is shared between the public authority and the operator. They are based on a logic similar to that in road transport, whereby investment in infrastructure is public and the cost of its maintenance borne by the user (via fuel levies), while investment and operation of the rolling stock are private. Sitarail operates using this model, which was also selected for Cameroon's railways in 2008, following a period of full concession which did not prove to be sustainable over the long term. Concessions remain feasible for lines with very high traffic density.

The motives of private operators

In Africa, it is rare for private railway operators to be involved; one example would be the initial operation of the Nacala concession in Mozambique with the American Railroad Development Corporation; or, more recently, the involvement of Brazil's América Latina Logística in the Kenya-Uganda railway. Northern American private rail operators have shown a greater interest in Latin America concessions; European railways, for their part, remain relatively closed to the private sector, except in the United Kingdom. The involvement of rail operators from other continents took the limited form of technical assistance via engineering companies. However, the case of Rail India Technical and Economic Services – a subsidiary of India's railways – is worth noting. It is or was a shareholder in concessions in both Tanzania and Mozambique. Shareholding by major railway clients has proved more promising, whether they be logistics companies (Bolloré) or shippi ng companies (Maersk). Their interest in providing a service throughout the international transport chain lies in the fact that they can control the development of rents and increase their market share. This explains why “transfer pricing” (management fees, rebates) is more common than distribution of dividends.

Involment of national business remains low, with the exceptions of subcontracting and of rail concessions in Zambia and Kenya.

The success of privatization is not guaranteed. The first sponsors of the Dakar-Bamako and Kenya-Uganda concessions failed on all fronts: financing, management. The Djibouti- Ethiopia railway concession failed from the beginning due to the lack of cooperation between the conceding States, the inadequacy of the arrangement, the weaknesses of the candidates.

The risks at hand

The macroeconomic risk stems from the prevalence of fixed costs in rail expenditure and, therefore, lack of flexibility in case of economic turnaround, as well as the fact that income is denominated in local currency. The political risk relates to operating infrastructure with a long life span. In 1994, during the preparation of the Sitarail affermage no one could have foreseen that operation would come to a complete standstill for nine months in 2002 due to a civil war in Côte d'Ivoire. The regulatory risk, which characterizes the relationship between the State and the operator, can be small if transport tariffs are freely set. Binational concessions (Dakar-Bamako, Côte d'Ivoire-Burkina Faso, Kenya-Uganda, Mozambique-Malawi) allow both operating to be rationalized and economies of scale. But this entails an increase in transaction costs in order to implement common tax and customs systems, harmonized personnel management rules, etc. For their part, brownfield projects carry a technical risk which stems from the lack of visibility on the actual state of the transferred assets.

Sectoral policy and private participation

The role of the State is to organize the sector, direct (or indeed finance) infrastructure investments, ensure safety of rail services, prevent risk of abuse of dominant position, harmonize the terms of rail-road competition and mitigate the risks falling within its remit: political, macroeconomic, regulatory risks. The organizational models used in the rail sector are based on: integrated companies, either intra-modal monopolies or in competition with other rail companies on neighbouring routes, with or without network access to third-party operators (USA); separation of infrastructure and operation (Western Europe); total unbundling of functions (United Kingdom). Given the generally low levels of traffic and small size of companies – along with the high coordination costs when functions are separated – an integrated organization with access to third-party operators continues to be preferable in Africa. There are flaws in the harmonization of competition conditions between road transport, which mainly concerns the self-employed or very small enterprises, and railways, which belong to the formal sector. With the exception of ore transport (integrated into the ‘mining-export' industry), the State can transpose the road model to the rail sector, whereby investment in infrastructure is financed by taxes, maintenance costs are passed on to the user (generally via a road maintenance fund), with private and commercial operation. Finally, the State should avoid any bias in favour of road transport, for example in price structure for products such as fuel.