FINANCING THE NACALA CORRIDOR:  
First Private Sector Integration of Port and Rail

Structural Trends in African Privatizations

On a bigger picture, let’s look around Africa and see what the structural trends are in terms of how some of these concessions come together. Table B is probably an unfair exhibit because it was put together before India was selected for Tanzania among other things. However, there is a recurring theme. In most of the concessions in Africa, Spoornet or Spoornet through shareholding is participating in most of these deals. When I referred earlier to not wanting to compete with the government of South Africa or the government of India, this is one of the reasons why you’ll find RDC on the Nacala Corridor, but not bidding for some of these other projects.

Table B

At a structural level I think there has been a shift in Africa. Historically, financing came from the donors. The donors would hand out free locomotives or track rehabilitation programs or other things. Now that has shifted. Now there is an emerging cadre of private sector operators like Eitan Dvir and Eric Pfeifer. A number of private companies have emerged in various structures to compete for these options, and yet, we also have the emergence of Indian Railways as a competitor, etc. etc.  And there are still aid programs out there. So it is a very murky environment in terms of trying to decide who the competition is going to be.

But let me give you a stark example of why aid programs don’t work. Below are photos of donor locomotives taken “before” and “after”. Photo 2 is a sample of the locomotive fleet when they were first donated, and Photo 3 and Photo 4 are what they looked like a couple of years ago–every picture tells a story. It is not hard to see the result of what happens when you give someone something; if they don’t pay for it, they don’t respect it.

Africa is not the only place in the world where it is difficult to invest in and operate railways. A more difficult example, even by African standards, I believe is Ferrovias Guatemala. The national railway system was closed by the government in 1996 and then they went looking for the private sector to wave the magic wand and pay the premium for the privilege of putting this national railway back into operation. Well, they only got one bid and that was from RDC.

We were only willing to commit putting the northern part of the railway back into operation because the southern part was too far gone and we didn’t want to take the risk of doing the whole thing.  We made the commitment; got the concession for 50 years from the government; and began the rehabilitation work. Then in 1998 Hurricane Mitch struck. Recall that Cyclone Delphina happened to us in Africa; Hurricane Mitch happened to us in Guatemala. One of our friends said that disaster follows us “like tornadoes to a trailer park;” we seem to have the knack for getting into these projects just before natural disasters occur.

But in 1999 we actually got the railway running from Guatemala City to the Atlantic. However, it is also a fact that in 2005 we still have not been able to finance reopening the rest of the system. So if you think Africa is difficult, this is not the only difficult environment.

In the case of Ferrovias Guatemala there was no debt because the project was so risky and the assets were owned by the State. It wasn’t really possible to raise debt, so it was 100% private equity and basically quasi-equity like commercial paper, etc. Additionally, in Central America there are no Donors.

To make matters worse, after getting involved with the project, we were declared by the various financial institutions that fund infrastructure projects around the world to be an environmental problem. The reason that putting a railroad back into operation is considered an environmental problem is because while the railway was abandoned, people built houses, shops, etc. on the track (Photo 5). When we started running trains again, they had to move. So we were displacing an indigenous life form, which meant we were declared a “Category A Environmental Problem”. This means that the only way to get financing is to pay a consultant $100,000 to go out and interview these people and ask for their permission to finance the project. Talk about walking around with a gun pointed at your own head! This is why we had to do this on our own.

But the most important point is that we made a commitment and it turned out to be approximately ten times what we thought it was going to cost. It is extremely expensive, but we honored the commitment.

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