Railways in Sub-Saharan Africa

An effective regional integration tool?

Presented by : Pierre Pozzo di Borgo, Principal Investment Officer

June 2013

2

Table of Contents

1. Key Facts and Market Size

2. Sector Challenges and Opportunities

3

1. Key Facts and Market SizeThe Positive(s) of Rail do not translate into financial solvency of railways on their

own

• Rail is still the most efficient transport mode for long haul freight (>500 km)• It generates a much lower set of externalities than road traffic do (accidents, pollution, etc.)• Reduces heavy vehicle traffic on roads, extending pavement life and reducing accidents• Reduced frequency of major maintenance operations compared with roads (20 years + versus 7 to

10 years)• However, rail business remains

a heavily subsidized business which,unlike roads, suffers from: a) largefixed costs, b) is operationally fragile, c) depends on reliable publicsubsidies, d) is often vertically integrated (infra + rolling stock), e) abides to stringentsafety and security regulations, and f) doesnot benefit from any “informality” status.

NO EXCEPTIONS!

There is no general freight and passenger system in the world is

financially solvent on its own.

Canadian and US freight systems are only solvent because they benefit from cross subsidies from very large mining or dedicated lines

The same applies to lines in RSA

4

1. Key Facts and Market SizeOutside of Southern Africa, most rail networks are stand alone. SA represent 85% of SSA rail

activities

Zim

babw

eGa

bon

Keny

aTa

nzan

ia (T

RC)

Nam

ibia

Cam

eroo

nSu

dan

Tanz

ania

/Zam

bia

(Taz

ara)

Moz

ambi

que

Bots

wan

aSw

azila

nd

Côte

d'Iv

oire

/Bur

kina

Fas

o (S

itara

il)Se

nega

l (SN

CS)

DR C

ongo

Zam

bia

(RSZ

)Se

nega

l/M

ali (

Tran

srai

l)Co

ngo

Gha

naM

ali (

RCFM

)Ug

anda

Ethi

opia

/Djib

outi

Beni

nM

alaw

iN

iger

iaM

adag

asca

r

-

0.5

1.0

1.5

2.0

2.5

Average rail transport volume in SSA from 2001-2005 in billion ton-kilometers (tkm)

Railway lines in SSA

Republic of South Africa: 106 billion tkmmore than 6 times (!) the rest of SSA combined

Cape Gauge

Meter Gauge

Standard Gauge

5

1. Key Facts and Market SizeEconomic benefits of well performing railways are especially potent for landlocked countries

• There are 51 railways operating in 36 countries in Africa.

• Sample of 21 railways (excluding SA) shows that economic benefits (US$3 billion over ten years) of railways are concentrated on transport costs savings because of their positive downward impact on truck tariffs.

• For railways that serve landlocked countries, transport cost savings are even more prominent (e.g., Sitarail US$400 million over ten years)

Economic Impact for Burkina Faso and Ivory Coast

96%

4%

Burkina Faso

Ivory Coast

Breakdown of the economic impact by categories

17%

81%

2%

Fuel savings Transport cost savings CO2 emission savings

Sitarail (Abidjan/Ouagadougou)

6

1. Key Facts and Market Size

However, economic benefits of railways are often curtailed by dysfunctional internat’l transit regimes

0 5 10 15 20 25 30 35 40

Loading Durban

Transit RSA - Durban

Border crossing Zimbabwe/RSA

Transit Zimbabwe

Border crossing Zambia/Zimbabwe

Transit Zambia

Border crossing DRC/Zambia

Kolwezi - Border DRC/Zambia

Days

Travel time (cumulative) Interchange/Loading/Customs clearance time (cumulative)

Rail freight transit time between Kolwezi (DRC) and Durban (RSA)

• Over reliance of most SSA countries fiscal resources on import duties create strong disincentives towards regional integration that is paramount to boosting private investment in trans border railways services.

7

1. Key Facts and Market Size

2. Sector Challenges and Opportunities

8

Many operators, but few are financially solvent which does limit PPP potential

• Concessions account for more than 45% of the total rail freight volume in SSA (excl. RSA)

-

20

40

60

80

100

120

Cam

rail

KRC-

URC

Sita

rail

SNCC

CFCO

Tran

srai

l

TRC

RSZ

Tran

sGab

onai

s

Taza

ra

Mad

arai

l

CCFB

(Bei

ra)

Nac

ala

CEAR NRC

-

500

1,000

1,500

2,000

2,500

In U

S$ M

illio

ns

In T

KM

Mill

ions

Traffic Revenues

Traffic and Revenues among different Operators, in millions of US$ and of ton-kilometers, 2008-2009

• Outside of South Africa, most rail operators suffer from low revenues that make debt financing of new rolling stock challenging and expansion or network or rehabilitation from private financiers impossible.

• Government’s financing of track renewal needs has picked up significantly. Support from the World Bank Group to this effort had reached cumulatively US$1 billion by early 2012 (1995-2012).

• Upgrade of existing tracks or build up of new ones are underway as part of mineral for infrastructure deals between host governments and China (e.g., Ethiopia, Nigeria, Ghana, Angola). Long term financial solvency of these deals has yet to be demonstrated.

• Large Green and Brownfield private mining railways infrastructure projects are in advance planning stages. They total US$55 billion in new track construction for Iron Ore alone. They are under threat because of the end of the commodity super cycle that underpins them.

2. Sector Challenges and Opportunities

Railway operator status

9

2. Sector Challenges and OpportunitiesSignificant ongoing infrastructure needs that will need to be financed from the public side mostly

• Concessions account for more than 45% of the total rail freight volume in SSA (excl. RSA)

• The railway sector in Sub-Saharan Africa continues to face numerous challenges, especially in terms of traffic, infrastructure (rolling stock replacement, ongoing maintenance and Capex, and institutional arrangements).

• Investment plans for infrastructure rehabilitation have proven to be much larger than anticipated as both Governments and private operators. At the concession bidding stage, such investments have often been downplayed, which has led to significant needs today. • According to a 2009 AICD (Africa Infrastructure, there is a backlog investment of possibly up to $3 billion, which could be spread over a 10-year period. The combined annual program would cost about $500 million for 10 years . This compared with an average of less than $100 million per year between 1995 and 2012 financed by Governments (Excluding Angola).

• These figures do not take into account urban railways and, most importantly, new general freight track expansion. Albeit they represent a small portion of what Governments spend on roads every year, Public Authorities have yet to demonstrate their political willingness to support on a grand scale rail infrastructure in SSA.

10

2. Sector Challenges and OpportunitiesRailway could play a strong role in regional integration if the right policies were

implemented

• Concessions account for more than 45% of the total rail freight volume in SSA (excl. RSA)

• Role of rail services in SSA could be much bigger if Governments can find a sustainable way to finance railways infrastructure while attracting private operators to finance their operations, maintenance and rolling stock.

• Cross border railways management presents specific challenges and solutions:

Challenge 1: Accounting of transfer of infrastructure or rolling stock assets from one country to another

Challenge 2: Dependence of landlocked countries from their neighbor’s investment – how do we lock the commitment of one country vis-à-vis the other?

Challenge 3: Synchronization of intermodal competition policies

Challenge 4: Synchronization of long haul passenger services and deficit payments

Solution: allow trans boundaries asset holding and rolling stock companies (public and/or private)

Solution: Regional approach to financing of rail Master Plans

Solution: Harmonization of technical and financial truck regulations and deregulation of international trucking markets

Solution: Implementation of publicly funded cross liability mechanisms