Sarah Rundell reports on the state of Africa’s railway sector, the opportunities for investment and the conditions that must be met for the industry to receive the support that it needs.
A hundred years on from the first colonial railways opening up in Africa, the continent’s neglected rail network appears to be entering another heyday. Governments are throwing their weight behind ambitious new projects that promise to boost regional trade and integration, improve the environment and bring opportunities for global investors with demand for rail expertise, electricity and rolling stock.
Yet scratch beneath the surface and Africa’s next golden rail era may not be as easy to finance, or bring the rewards so often lauded, because many of the new lines aren’t economically viable: rail works best for bulk and high-volume freight, yet Africa’s new railways are being built without these traffic guarantees.
Unsurprisingly, China is leading the investment surge, rejuvenating tracks and building new ones the length and breadth of the continent in deals tied to Chinese contractors and rolling stock. It is behind new lines in Nigeria and a railway linking Mali and Senegal. China is building the new Mombasa-Nairobi track that will eventually extend into Uganda and other landlocked states, as well a new track that now links Addis Ababa, the capital of Ethiopia, with Djibouti. Elsewhere, China has just finished Addis Ababa’s flagship US$475mn metro system, built in a record three years. The country is also leading the initial port construction of one of Kenya’s most ambitious infrastructure builds that will involve rail links stretching to Ethiopia and Southern Sudan. The US$25.5bn Lamu Port South Sudan Ethiopia Transport (LAPSSET) Corridor involves building a port in Kenya’s northern town of Lamu that includes oil refining and export facilities. The aim is for new highways, railways and pipelines to feed the port from the whole of East Africa, providing an alternative gateway to Mombasa.
To a lesser extent, private equity is flowing into Africa’s rail network, with Citadel Capital of Egypt and Kenya’s Transcentury investing in upgrading the Rift Valley Railways line which links Mombasa with Kampala using US-made locomotives from General Electric. South Africa’s Transnet, state-owned operator of the country’s ports and rail network, is partway through a seven-year R300bn (US$33.82bn) investment surge, most of which is going to overhaul the railways using rolling stock from China as well as Bombardier Transportation and General Electric, in its bid to get freight off the roads.
The right conditions
Getting general freight off roads onto rail is essential to finance new lines. It is something that is beginning to happen under South Africa’s rejuvenated rail network, argues Terry Gale, chairman of South Africa’s Western Cape Exporters Club. “Transnet needs to embark on a massive marketing campaign to convince the industry of the reliability of rail. We are starting to see the auto industry use the rail network again,” he explains.
Yet rail networks will struggle to win the freight orders they need because transporting goods on Africa’s roads is still cheap, and accessing the road network is easier for many of Africa’s traders and manufacturers. “The traffic still isn’t there to service the debt and cover operating costs of railways,” argues South African transport economist Andrew Marsay. “If you invest without any return, someone is going to be left high and dry.” He believes low traffic volumes will ultimately leave many cash-strapped African governments having to subsidise and maintain their new railways, turning these much vaunted assets into liabilities: costing far more to keep going than any financial or economic return generated.
“Passenger traffic will provide a source of income, yet this will never be much because of the average income of many Africans,” adds Jef Vincent, chief underwriting officer at the African Trade Insurance Agency (ATI) which is working on various rail projects with its member countries in East Africa. “Much of China’s investment in Africa’s railways has been a geopolitical long-term play rather than looking at the economic viability of the project,” he says.
Even securing bulk commodity cargoes is challenging for Africa’s rail networks. Transnet secured a 10-year bulk take-or-pay contract with mining giant BHP Billiton for transporting coal to Richards Bay in KwaZulu Natal from where it travels onto European and Asian markets. The deal bought revenue certainty for Transnet’s capital investment programme and helped it raise funds in the capital markets. Other companies have had to be more innovative. In Mozambique, Brazilian miner Vale faced a problem of not having a high-volume rail corridor to export coal from its Tete Province mines, explains Marsay. The line to Beira was there but the port of Beira is too shallow. Vale created a series of commercial concessions involving a new rail link into Malawi from Tete, obtaining the concession to run and upgrade Malawi’s railway, and radically upgrading the old railway between Malawi and Nacala in northern Mozambique. “The innovative concession gives Malawi general freight capacity at cross-subsidised tariffs, piggy-backing on the viable high-volume coal line,” he says.
Despite an abundance of natural resources, governments will also struggle to persuade mining groups to invest in rail until the other elements vital to reliable rail networks, namely electricity, are in place. “The firm offtake agreements just aren’t there yet,” says Vincent. “When you add up all the different elements, railways amount to gigantic projects that require a fine co-ordination between ministries and governments.”
Tumbling commodity prices aren’t helping. The state of the Tanzania-Zambia Railway Authority, TAZARA, an important route for copper exports from Zambia and the Democratic Republic of Congo, Africa’s top copper producer, to Tanzania’s port Dar es Salaam is a case in point. China has provided loans to fund locomotives and rolling stock, but it won’t fix the problem of falling demand which has seen freight volumes plunge to less than 90,000 metric tonnes from about 630,000 metric tonnes a decade earlier. “There is very little freight and a big employee bill,” says Marsay. “Tanzania should sell the line to a private company and see what it can do with it.” The ATI advises Africa’s governments to carve their big rail projects into smaller, more manageable parts, each with its own economic justification that should include offtake agreements.
Private investment won’t flow into Nigeria’s decrepit rail network until government reform, believes Wale Shonibare, managing director of investment banking at United Capital in Lagos. So far, the only investment in Nigeria’s railways has come from China via conventional government-to-government contracts. “There is a consensus around the urgency to sort out the rail sector, but Nigeria’s only railway builder at the moment is the government, and that excludes the private sector,” he says. Nigeria’s rail sector has also been hampered by different governments using different rolling stock, he adds. Over the years, locomotives have come from GE, China and India, making it difficult for local engineers to become expert at maintaining the stock.
In one breakthrough passenger rail project, private operators built and designed South Africa’s 80km Gautrain that links Johannesburg with Pretoria and the airport, opened in time for the 2010 World Cup. “High-density urban rail networks can charge higher prices and the government’s subsidy is worth it for the benefits it brings a city,” says Marsay, referencing advantages such as improved living standards and the role city rail plays ushering in high-quality developments around stations.
But the challenge of bringing private investment into other African rail projects is compounded by few African governments being in a position to subsidise their railways, or underwrite the investment, in a way the private sector demands. “Building railways depends on government support but many governments are unable to give their backing to such costly projects,” says the ATI’s Vincent. Government support will be a key factor when it comes to developing the rail network behind the LAPSSET project. The Kenyan government is already committed to the Mombasa-Nairobi line and faces other pressing infrastructure needs such as energy, which could come before another rail link. A minimum ask on any project would be government guarantees, yet such guarantees are counted as government borrowing by the IMF. Many of the ATI’s members are close to their debt ceiling with the IMF and will want to avoid such a strategy, believes Vincent. The cost of borrowing has also jumped for many African borrowers just as economic growth slows; borrowing in dollars is more expensive since many local currencies are on the slide with the slump in commodity prices.
If the economics behind many of Africa’s rail projects don’t stack up and Africa’s governments lack the funds to give the sector the support it needs, today’s rail rejuvenation is in danger of going off-track.