The new economic imperatives of African railways (1)

African governments have taken a renewed interest in railway infrastructure. While some of the new projects are still motivated by mine-to-port imperatives, others are aimed at moving passengers and freight. Additionally, the African Continental Free Trade Agreement (AfCFTA) has added greater impetus for more cross-border railway connections.

The African Integrated High-Speed Railway Network is one of a number of initiatives in this regard. While there has always been a desire to link Africa through railway infrastructure, implementation has been slow and, at best, half-hearted. That is primarily because of two reasons.

First, for many Africans, the railways conjure painful memories of colonialism. It was the railways after all that allowed competing western powers to subjugate Africa and exploit its resources. Second, they are expensive to build, maintain and run.

New railways in Kenya and Ethiopia have been operating at a loss, with little chance of paying back loans on time from continually elusive operational profits, for instance. Yet, there is a strong economic imperative behind investing in railway infrastructure.

Once constructed, railways can serve as a safe, reliable, and cheap mode of transport. It is also relatively green. Efficient railways keep cars off the roads and reduce traffic, noise pollution and greenhouse gas emissions.

A good rail network can help reduce road congestion and maintenance cost. According to the World Bank, this can add 20-40 percent in pure financial benefit to the concessionaire

Financing is now more readily available for railway projects, as governments, donors and financial institutions prioritise projects that can help meet their sustainability goals. Even so, the other cogent economic considerations for a railway project to become financially sound remain vital. High passenger volumes, market-based fares, flexible terms of the concession, significant government investment in the railway projects and the development of a logistics corridor are key requirements to make railways sustainable.

Read also: Can Nigeria stimulate economic growth through railways?

New African railway projects have been dogged by problems. They take too long to complete, run over budget and require constant repair and maintenance once completed. No surprise that most such projects continue to run at a loss, and are far from breaking even.

Railways have been blamed for contributing to the debt problems of countries like Kenya and Ethiopia that have borrowed primarily from Chinese state-owned financial institutions for their showcase railway projects like the Mombasa-Nairobi and Addis Ababa–Djibouti Standard Gauge Railways (SGRs). But it would be unfair to single out the Chinese.

Western banks are beginning to take interest in financing railway projects too. Deutsche Bank and Investec arranged €600m in financing for Ghana’s Western Railway line in June 2021, for instance.

In the article, we first assess the current state of African railways. Thereafter, we highlight ongoing new and proposed railway projects across the continent. Our focus is on the economic case for new and revamped old African railways, how to identify the potential winners and thereafter ensure their commercial viability and sustainability.

Economic viability assessment of new African railways

Since the end of colonialism, African railways entered an era of decay. With road transportation cheaper and offering last-mile connectivity, the incentives to maintain railways diminished. Few new rail tracks were added and the infrastructure that did exist was not maintained properly. With public finances under strain, governments eventually gave out railway concessions to private operators to run. The result was mixed.

In many cases, the new private operators failed to make the concessions profitable. The state was forced to step in to take back control. This time they got a better railway infrastructure in the buyout. In other cases, it was simply left to rot away. While there may be myriad factors behind the failure of private rail projects in Africa, lack of traffic volume is widely attributed to be the principal reason why many of the concessions faltered. Even when concessionaires were free to set their fares, there was simply not enough traffic to break-even. Requests for renegotiation of contracts often fell on deaf ears, as most African governments simply lacked the will or resources to take on greater financial burdens.

While some governments have continued to run creaky and often outdated rail infrastructure – some nearly a century old – there is now a new motivation for private investors to test the waters again. An ongoing global drive towards climate change mitigation makes African railways quite attractive. Railways are not as carbon-intensive as road transport. Besides, a good rail network can help reduce road congestion and maintenance costs. According to the World Bank, this can add 20-40 percent in pure financial benefit to the concessionaire.

An edited version of this article was first published by Nanyang Business School’s NTU-SBF Centre for African Studies, Singapore. References, figures and tables are in the original article.

See link viz: https://www.ntu.edu.sg/cas/news-events/news/details/the-new-economic-imperatives-of-african-railways