A closer look at the ‘African Rail Renaissance’
9 May 2017 - by Andrew Marsay
Google ‘African Rail Renaissance’ and you will read about ambitious new rail infrastructure projects in Ethiopia, Kenya, Uganda, Tanzania, and infrastructure renovations in South Africa, Ghana and Nigeria. Manufacturers in Europe, China, the USA and South Africa are lining up to supply rolling stock for these projects.
So surely the African Rail Renaissance is real? Or is it? As with many things, it all depends on your perspective. Railways are being built or renovated, and so rail construction companies are earning money. And where locomotives and other rolling stock are being supplied, train manufacturers are earning money.
But what about the underlying business case for all these investments? What is being moved? Who says the railways concerned will attract freight off the roads? Are governments willing to legislate that certain goods must go by rail – as Zambia is contemplating? What effect will this have on supply chains? And who are the operating companies of the railways concerned? Which, if any, are viable?
This line of questioning is not welcome in circles where big railway construction projects and rolling stock supply contracts are being considered. A colleague who visited Ethiopia a few years ago, and ventured to suggest that their rail investment programme would require a 90% share of the country’s freight to be on rail to be viable, was told the Government knew what it was doing.
High volume bulk mineral railways often do have the potential to be viable. But what of general freight railways? In a previous column, ‘A Closer look at Transnet – creating a more sustainable rail sector’, I noted that even Africa’s busiest general freight railway, Transnet’s Durban-Gauteng route, was viable only because of cross-subsidisation from South Africa’s excessively priced ports industry. This line carries about 15 mtpa. How then can general freight lines with much lower volumes be viable?
Notwithstanding this, much of the hype associated with the African Rail Renaissance is based on standard gauge general freight railway projects. If well run, these projects may well have the potential to offer better services than that on the Durban-Gauteng corridor. But, in order to attract the levels of freight needed to make the investments viable, they will need not only to offer reliable services, but also charge tariffs considerably lower than road transport. This almost certainly means that general freight railways will have to be subsidised.
Two questions follow from this: are governments in the various rail renaissance host countries aware of the commitment they are letting themselves in for? And will they be able to afford the subsidies?
A more fundamental question that this raises is: why it is so difficult to make rail businesses viable. Evidence from detailed transport cost studies in different parts of the world suggests that it is not simply a question of whether good operational management can be secured. Rather, it is that rail technology itself has inherently very different cost characteristics to those of road transport.
In these studies of the total national cost of transport, for road and rail modes, in Australia, New Zealand and Canada, (and supported by evidence from South Africa and the UK) it was discovered that, for rail, infrastructure accounts for up to 50% of the total long-term costs. In the case of road, by contrast, infrastructure costs are only 10-15% of total long-term costs. (See Figure 1).
What this means is that, for road transport, the vast majority of costs, nationally, are already borne by the operators, of whom there are a very large number - all competing with one another. In the case of rail, there will at best be a very small number of operators; sometimes, as in South Africa at present, only one.
The implication of this long-term cost structure is that in most situations only the highest volume railway businesses, with the very best commercial and institutional structures in place, stand any chance of being viable. Such railways do exist: the trans-continental rail businesses in North America are often viable. But their volumes are high and their business models highly commercialised.
Most railways in Africa, in contrast, do not have business cases to support the huge investments that are taking place. Explaining their decision to pull out of Kenya’s standard gauge railway project, the World Bank has noted: “Investment in standard gauge appears only to be justified if the new infrastructure could attract additional freight in the order of 20 to 55 million tonnes per year.”
There are exceptions: the TiZir mineral sands project in Senegal is one, (see Figure 2). Here, existing rail infrastructure has been upgraded and is used exclusively by the mining project to transport the very high value product from pit to port. The business case for the rail infrastructure investment is tied closely to that of the mining business that it serves, with costs managed accordingly.
All of this suggests that the supposed African Rail Renaissance is very largely about major investments being driven by project promoters with little concern for the long-term economic impact on the countries concerned.
Notwithstanding this, the appropriate advice in these circumstances is not to swing to an extreme view that all rail investments are uneconomic. Rather it is to urge caution and understand what the success and failure criteria for railway projects are.
Successful rail projects will include one or more of the following characteristics:
Apart from these circumstances, railway investments should only be considered where governments make life-long financial underwriting commitments.
*Note: Figure 1 was compiled by Marsay, drawing on these studies:
Andrew Marsay is a transport economist with some 40 years’ experience in the principles and practice involved in getting best value from transport infrastructure. His career-long commitment to seeing better infrastructure investment priorities is based on the understanding that good infrastructure investment decisions can provide the foundation for long-term economic growth. In contrast, even very large sums spent on infrastructure that is inappropriate to a nation’s circumstances, or delivered through inappropriate institutional forms, can result in huge waste of resources and damage a country’s economic growth prospects.