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The Fundamentals of Africa's Freight
Railways Are Sound...
So why would an investor be interested in Africa? As I have stated in the past, cost control is important but revenue is more important. If you look at the fundamentals of the markets for railways in Africa, this is a very interesting market, especially compared with the USA and Europe. (See Table A) In Southern Africa, the competition for the most part is trucks. In the USA, the competition is other railways. The Iowa Interstate is one of four railways from Chicago to Omaha. In Europe, everybody is competing with everybody. In the United Kingdom, it is basically a free-for-all with freight operators cannibalizing each others’ business and no one is making much money. In Africa, you can have a true franchise business, and that is what drives railway investment in Latin America, which I think has the most in common with Africa. There are cost and over-staffing problems and the infrastructure is not perfect (though I would argue that is better than what we have in Guatemala). However, I would rather have a cost problem than a revenue problem. The reason is that we as railway managers can control costs much more easily than we can control revenue. If the on-line steel mill goes out of business, there is no possibility of making money regardless of how efficient you are. |
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...Making Concessioning Preferable to Commercialization I would like to comment on the difference between commercialization and privatization. Commercialization is a good halfway measure toward optimizing the performance of railways (See Table B). The problem with commercialization, which I would define as any transaction where the government remains the dominant shareholder, is that you are only going halfway. A company that is controlled by a government entity is more responsible to politicians than customers and the real question is therefore, “Are you trying to create transportation or are you trying to serve a political agenda?” I would argue that it is better to create transportation than to serve a political agenda and I will leave it at that. |
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Structural Trends in Africa
Let’s get specific about the positive structural elements about railways in Africa. The railway competition in Africa for the most part is trucks and not other railways, and that is a positive. In many cases the economies are being restructured, which in the long run will make a bigger pie for the railways to compete with trucks for. On the cost side there is room for improvement; therefore, in general Africa is as good as an investment environment as one would find in the USA, Latin America, or any other place. There are negatives, as there are with any business. The primary negative is in the revenue area because it is very difficult to predict the revenue stream when the railway has been either not running or badly run in the past. Secondly, if Open Access is implemented in Africa, and to my knowledge there is not a lot of that going on, you can look forward to a low-margin business that will be very difficult to finance. In the cost area, it is very difficult to get financing in a developing country especially when there is only one railway and it has always been in government hands. What RDC has to do for the most part is to fund these projects with our own capital, which is OK up until the point where transactions become bigger than we can handle. We are always looking to attract third party financing but for the most part we have had to look to ourselves and our local equity partners to fund these projects. In general, there are many logistical and cultural gaps that make it extra difficult to do business in a foreign country. We feel we have to be flexible culturally in order to integrate ourselves with the local culture. There are five top managers at Central East African Railways, and I am proud to say that RDC has only two people in Africa and we do not intend to make significant increases in that staffing level. We believe that the resources are all here and it is just a question of organizing the work and making sure everyone has their roles defined and the necessary resources to support them in their jobs. The physical assets and human resources are here, and it is just a question of management. Finally, in Africa we do find ourselves competing with state-owned railways and in those circumstances, since we have less money than for example the government of France, we will probably elect not to compete if French railways decide they want to participate aggressively in transactions in Africa. |
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Structural
Considerations for Investors
What are the most important characteristics from an investor’s perspective? There are approximately six that I list in descending priority order with the most important element being a committed seller. We need to be convinced that the government is serious about concessioning as opposed to using potential investors as political stalking horses or free consultants. Second, we look for a transparent and disciplined concessioning process where, if we offer the best price or the best terms, we believe that there is a high likelihood that we will actually get the transaction. The third element is local partners. RDC has never done business in another country without local partners; it is extremely important to us and one of our core values. Fourth, we like to have management investment in the company, if not in the short term, in the long run. We believe that management having a financial stake in the success of the business is the best discipline we can have. Last but not least are the traditional railway skills – marketing and cost control. |
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