Henry Posner's remarks at AfricaRail 2005 - Financing the Nacala Corridor

SPEECH DIRECTORY:

Background on RDC

Investment Parameters

Case Study: Financing the Nacala Corridor

Structural Trends in African Privatizations

Case Study: Financing Ferrovias Guatemala

Structural Trends in Central America

Conclusions

Nacala Corridor Inspection Trip

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My agenda will be as follows: a brief background on Railroad Development Corporation (RDC); then we’ll talk about the Nacala Corridor with a lot of detail and compare that with Guatemala, which is another example of a rail concession; and finally draw some conclusions.

Background on RDC

RDC is a small company, privately held and based in Pittsburgh. We describe our business as Emerging Corridors in Emerging Markets, meaning that RDC does not just get involved with railways, but railways in conjunction with ports such as on the Nacala Corridor or, in the case of Guatemala, trying to develop the right-of-way for alternative uses like electricity distribution and other types of businesses. I would also like to highlight that everything RDC does is the result of Joint Ventures. In each of our businesses we have partners; we bring skills to the mix that complement our partners’ skills. So today I am not just discussing RDC, but the results of RDC with our partners.

Table A shows a broad overview, listing the countries and railways in which we are involved. There is a broad mix from the Iowa Interstate Railroad in the USA hauling 8.5 million tons in contrast to Guatemala which hauls 0.16 million tons. Interestingly enough, our biggest business is in Estonia in Europe where the railway annually hauls 42 million tons. I would like to add that RDC is the smallest shareholder in Estonian Railways. Generally speaking, the better the deal, everybody wants in, so our participation is relatively small.

Table A

Country	Entity	Length (km)	Employees	Tons Y. 2004 (in millions)
USA	Iowa Interstate	1,005	181	8.5
Argentina	ALL Central	5,350	1,012	3.4
Argentina	ALL Mesopotamica	2,740	313	1.4
Guatemala	Ferrovias Guatemala	322	115	0.16
Peru	Ferrocarril Central Andino	591	111	1.7
Malawi	Central East Africa Railways	797	487	0.3
Estonia	Eesti Raudtee	693	2,536	42.1
Mozambique	Nacala Corridor	872	227 Rail	0.3

The accomplishment that I am most proud of is that our railroad in the USA, the Iowa Interstate, won the Gold Harriman Award for Safety. I know that sometimes there is the tendency to think that capitalism equals cutting corners, but I can assure you that at RDC this is a matter of personal pride; we have built a safety culture. In the year 2003 we had No Injuries at all for the entire year on the Iowa Interstate, resulting in the Gold Award. This is the type of culture that we hope to spread to some of our other railways and we are in fact being successful in this.

RDC Investment Parameters

Concerning investments, RDC has learned over the years that there are several critical factors, especially involving railway concessions, that make or break whether one should be investing in a particular country. In descending priority they are:

A committed seller. This means a government that is serious about concessioning and not just going through the motions because someone has been awarded a consulting contract to float the idea of concessioning; there are plenty of those out there! We pride ourselves on our ability to avoid wasting our time in countries that are not serious.
Rational competition among bidders. As discussed yesterday, if we see the national railways of India or South Africa bidding against us, I confess to you that I do not have as much money as the Treasury of South Africa nor the Treasury of India. So we are not likely to be serious competitors; we tend to choose our battles; and we look at the competition before we take a serious look.
It is very important to have local partners. We know a lot about railways but we don’t know anything about Africa, Guatemala or Peru. Many of the things that we have been able to achieve have not been a result of what we’ve done, but rather the result of whom we’ve chosen to be affiliated with. Our local partners carry a lot of the load in most situations.
Yes, railway skills are important. At this point we have amassed quite a body of experience in some of the most difficult railways in the world, and we do bring value to the table in this regard.

CASE STUDY: Financing the Nacala Corridor

Let’s discuss the Nacala Corridor as a case study. In quite simple terms the Nacala Corridor consists of the Nacala Port in Mozambique, the Nacala Railway in Mozambique, and the railway in Malawi. For us this process began in 1996, beginning with the negotiation of a concession on the Mozambique side. Malawi subsequently decided that they needed to be proactive, and as a result they went ahead and concessioned Malawi Railways. This corridor was thus not concessioned as a package; each country did their own thing. We took it on faith that eventually we would be able to put the pieces together, but of course didn’t expect that it would take 5 years!

The Malawi concession occurred in 1999, but unfortunately we ended up with half of a railway for quite some time. We did not have operational or financial involvement on the Mozambique side, so we were effectively competing in Malawi with one hand tied behind our back. Compounding this was the cyclone in 2003 which took out, among other things, a bridge and because we did not have financing, there were no resources to fix the bridge. Finally, we did close on the Mozambique side in 2005, but by that time they were down to 4 locomotives! Can you imagine running half of a railway with 4 locomotives? This was the legacy of the delays of incomplete financing and many other factors. But the fact is that we took over this operation with only 4 locomotives.

The financial package consisted of 25% private equity (from RDC and our partners); 75% debt came from OPIC (U.S. Overseas Private Investment Corp.) after a 5-year search for financing and we are very much grateful to them. Also in the interim there was donor support due to the famine in addition to the cyclone; donors got involved with the Rivi Rivi Bridge project. But the most important thing is that in neither Malawi nor Mozambique did we go back to their governments to renegotiate the deal because we did not project or structure properly. Our standard is to honor our commitments. It took a long time, longer than it should have; but we did come through and honor our original commitment to both governments.

photo of completed Rivi Rivi Bridge, Malawi, Feb 05

Photo 1

Back to the donor role; Photo 1 is the nearly completed bridge at Rivi Rivi in February 2005 whose predecessor was taken out by Cyclone Delphina in 2003. In this particular case there was a mix of financing that went into this project, ranging from the railway company to USAID, the UK fund DFID and even the Malawi Army. Recall that this morning we heard the example of Gabon; when it’s everybody’s problem, everyone has to work on it. This project is one of the things that happened while we were waiting for the financing to close.

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