BusinessDay

The new economic imperatives of African railways (5)

As the world transitions towards greener energy sources and ramps up climate action, the economic payoff for transportation modes like railway is increasingly given wider scope. An African railway project that could barely break even and would be rejected outrightly hitherto may get the nod nowadays owing to its relatively positive SEE impact. Nonetheless, the viability and sustainability of a railway concession or system are greatly dependent on key economic imperatives, which SEE considerations largely complement. Passenger volumes must be high enough, for instance. Fares must be above marginal costs. Concessions have to be flexible and allow for periodic renegotiations. And governments must be willing to take on a greater financial burden, especially with respect to fixed costs.

If railways are well-run, they remain the better alternative for long-distance haulage, especially if lead times are not differential. Commuter railways are certainly greener than road alternatives. But the design must also take into cognizance some of the advantages of road transportation like last-mile connectivity, greater flexibility, and frequency that are not easily replicable by LRTs. I highlight how in the case of the Addis Ababa LRT, for instance, what should have been a panacea to traffic congestion on the roads has instead become a pain for commuters, who largely still prefer the buses.

Thus, to realise their full economic potential, African railways must be backed not only by strong governance, a sustainable financing mechanism, and creative market development, as the World Bank argues, but also by optimal economic decision-making at the outset of a railway project, before costs become entrenched and are not easily reversible, and by how the various activities from passenger services, infrastructure and maintenance, and rolling stock are modelled.

How much of the fixed cost burden is being carried by the sponsor government? Is ticket pricing market-based? Is traffic density high enough? Would a narrow gauge rail suffice? Is there a robust economic justification for a new SGR? These are some of the key questions to ask before deciding on a railway concession or financing. In this exposition of the African case thus far, I show how the answers to these questions might not be encouraging to a prospective investor, financier or concessionaire initially. But when analysed from a wider economic value perspective, especially with respect to their potential social, economic and environmental impacts, there might be more than a few attractive prospects.

Read also: The new economic imperatives of African railways (4)

For current and prospective investors, financiers, and concessionaires in new, legacy, and commuter African railways, I recommend the following:

· Economic viability should underpin railway investment decisions

African rail networks with a density of over a million traffic units are just about 6 to 8 out of about 32 existing SSA railways, with the others mostly under 500,000, based on data by the World Bank. Unsurprisingly, there is a long list of failed African railway concessions. True, the concessions faltered due to a broader set of reasons. But adequate passenger traffic and freight volume were the principal reasons why. In fact, when concessionaires were able to set market-based fares, they could still not break even owing to poor demand. Some of the cost burden could be mitigated or avoided if economic viability underpins the railway project or concession from the outset. For instance, many African governments like the idea of a new faster SGR when an old narrow gauge would do just fine for achieving the economic objectives.

· Monetize SEE benefits of railways in investment decision

Monetizing the SEE benefits of a railway allows for a more robust approach in deciding whether to invest or finance a project or concession. It certainly makes it easier to point out which of the stakeholders in a railway project or concession are better suited for which undertaking. Some previously unattractive railway concessions or projects might actually be found to be economically attractive in the aftermath. Considering the low traffic density of most African railways, a SEE impact analysis also makes writ large why governments should finance most or all of the fixed cost component, leaving the concessionaire to focus on passenger services and freight operations. More accommodative financing terms from IFIs and DFIs are also likely with a SEE approach.

· Adopt optimal railway business model and financial structuring approach

Railway infrastructure, operations, and passenger services require different financing approaches and expertise. Interested investors should hinge their capital allocation decisions on whether the business model of the railway concession or project is optimal with respect to the African market being considered. In most, a prospective concessionaire should not accept terms insisting it build new rail infrastructure, for instance. A financier should probably shun funding requests by a non-sovereign entity for railway infrastructure, maintenance, and the procurement of rolling stock. A concessionaire focused on just passenger and freight services is best for most African railways. Consequently, the concessionaire is likely to have positive cashflows on a sustained basis since the cost-heavy fixed components are borne by the sovereign. Financiers who optimize as such are also likely to earn positive returns.

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

Get real time updates directly on you device, subscribe now.