Railway privatization debuted in the late 1980s in the United Kingdom and quickly expanded into Latin America. But Sub-Saharan Africa’s (SSA) experience has proven particularly relevant to development practitioners because it has taken place in an extremely challenging market environment. Most of the formerly state-owned railway companies in SSA (outside South Africa) have now been transferred to private operators under various forms of concession contract, and today more than 70 percent of the rail networks in SSA are now in the hands of private operators.

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 landlocked countries, which are especially vulnerable to high transport costs.

The experience of Sitarail in Côte d’Ivoire/Burkina Faso illustrates the positive impact that a well-run 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 $280 million between 2008 and 2017. Almost all of this impact (96 percent) is likely to accrue to Burkina Faso, and is mostly attributable to transport cost savings.

What’s riding on these rails?

The global performance of railway concessions varies. On the one hand, concessions have resulted in increased labor 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. Why is this? Theories include:

1. Overestimation of the market

In most cases, traffic gains have been much lower than expected because road competition has been fiercer than anticipated. The KRC concession contract, for example, targeted four million tons of traffic between Mombasa and Nairobi, with financial sanctions if this was not achieved. In reality, traffic increased from 2.2 million to only 2.5 million tons until it became clear that the concession contract needed to be revised. Additional capital and investment debt was required to make the rail operations financially solvent.

Host governments often did not understand the need to equalize rail/road competition, or were deterred from doing so by the prevailing political economy supporting the trucking sector. In SSA, governments originally saddled concessionaires with the cost of rail maintenance and rehabilitation, while they proved unable to modify road user regulations and taxation, making truckers shoulder no more than a mere portion of the cost of road maintenance.

 

2. Underestimation of investment needs

Plans for infrastructure rehabilitation usually focused only on the first five years of the concession, ignoring long-term needs, which proved to be far greater than anticipated. This was often a result of a downplaying of the investment needs of existing rail infrastructure on the part of the governments and private operators during bidding.

3. Under-capitalization

The capital base of concession companies was often too limited, in part to lower the risk perceptions of potential private investors. This caused many concessions to rapidly become cash strapped, as projected positive cash flows did not materialize. The long-term debt burden inherited from the on-lending of donors’ money became too burdensome.

4. Unrealistic expectations of passenger services

Since 1996, none of the privately operated passenger services have ever achieved financial solvency. They have all been either indirectly subsidized by freight operations or directly subsidized by government treasuries. Although subsidization is not intrinsically problematic, analysts underestimated the political cost and risk associated with badly crafted passenger subsidy schemes. For example, the financial impact of unpaid passenger subsidies from the Government of Cameroon to Camrail between 1999 and 2008 all but wiped out the cumulative profits generated by freight services, while representing less than 15 percent of the rail operators’ revenues.

Markets served by rail concessions in SSA are usually too small to ensure the sustainability of rail businesses required to finance both rail infrastructure and rolling stock without heavy government subsidy. The average yearly revenue of most rail concessions in SSA is only $35 million, whereas each network requires rehabilitation investment far in excess of that amount (more than $200 million for Camrail and Transrail, according to their respective concessionaires) in the next 10 years (2010-2020).

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Model railroad

Concession contracts in Cameroon and Madagascar have been successfully restructured to reflect the lessons learned since the beginning of privatization in 1996. The pillars of this restructuring include:

  • 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 percent 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 (for example, enforcing axle loading for trucks along competing corridors, and road tolls); 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 rail businesses with enticing financial returns. However, the financial fundamentals that have driven private investment towards the railway sector are not likely to change soon.