ALTERNATIVE MODELS FOR FREIGHT RAIL CONCESSIONS:
A Comparative Analysis

Africa Investment Forum - TransAfrica21
London   |   10 May 2001

Henry Posner III
Chairman

An alternative to Europe's Open Access model is the Exclusive Franchise model of the Americas, which is prevalent in both North and South America. This is primarily a freight model, which is relevant because North and South America have mainly freight railways -- as is the case in Africa.

After a brief overview of RDC and our operations, an analysis will follow of how the railway environment varies from continent to continent, especially at the institutional level; why railway restructuring has occurred around the world -- and the results; and finally, how market forces, rather than political forces, have ultimately carried the day.

Background on RDC - General

RDC is a railway investment and management company based in Pittsburgh, Pennsylvania.  Our focus is on “Emerging Corridors in Emerging Markets,” meaning railways plus ports, railways plus fiber optics as well as other businesses related to railways in developing countries. In all cases, RDC is part of joint ventures; we are also the only U.S. company investing in African railways.

Background on RDC - Businesses

Our flagship in the USA is the Iowa Interstate Railroad, which is very much in the tradition of Africa -- a single track, unsignalled, relatively light density, intercity railway that handles a broad commodity base ranging from containers to grain.

RDC was involved in the first railway privatization outside of the USA, in Argentina. We are one of the partners in both Buenos Aires al Pacifico and Ferrocarril Mesopotamico.

Ferrovias Guatemala is the first case of a completely abandoned national railway system that has been restored to operation with 100% private sector financing.

In Peru, RDC is also one of the partners in the Central Andino railway, the world's highest railway reaching a height of 3 miles.

In Malawi, RDC is one of the partners in Central East African Railways, which is the former Malawi Railways. In this case we will be integrating the Malawi railway with Mozambique and together this will form the Nacala Corridor, consisting of the railway in Malawi, the railway in northern Mozambique and the port of Nacala. This will be the first integration of a port and a railway under private sector management on the planet for general freight.  It is our expectation to include the Mozambique portions in late 2001.

In addition, RDC now has a presence in Europe. We are part of a consortium that signed the privatization agreement in April 2001 for Estonian Railways, which is the first railway of the former Soviet Republics to be privatized. This is a joint venture with Jarvis, the UK company, and Ed Burkhardt's U.S. company Rail World Inc., as well as Estonian investors.

The Railway Environment Varies from Continent to Continent

There are many dissimilarities from continent to continent and my focus will be on the "Orientation" line in the table above. The European railways are primarily passenger railways on which freight is more or less an afterthought, in contrast with North and South America and Southern Africa, where for the most part these are freight railways in which passenger service is secondary. There are many other differences such as gauge, distances, etc.; however, for the purpose of this discussion, Africa's focus on freight instead of passengers is the most important.

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...Especially at the Institutional Level

The institutional barriers to success for railways, meaning being able to interchange traffic and have a length-of-haul that is as long as possible in order to compete with trucks, covers a wide institutional range as well. In Europe there are many frontiers and the railways are in public hands, with the exception of the UK and shortly Estonia. However, in North America the ownership is almost 100% in private hands. Dealing with institutional barriers as fundamental as ownership is just as important as dealing with engineering problems when it comes to competing with trucks.

Railway Restructuring's Origins Range from Economic to Political...

There are two main reasons why railway restructuring has occurred:  (1) economic and (2) political. For example, in North America we restructured our railways because at one point (the lowest point) in the 1970s, one-third of our railway miles were in bankruptcy. Also there was an inability to raise capital because it was the private sector that was bankrupt. For that reason North America restructured its railways and deregulated, meaning: (1) shrink the network and (2) give railways the freedom to price competitively. Fortunately that worked.  In 1977 when I went to work for the railways, many of my friends thought that it was a "stupid thing to do" because there was no future in the rail industry.

In contrast, the main force driving the railway restructuring in Europe is not economic, but political -- the de-monopolization thrust. To a certain extent the activities in Europe have been driven by political dogma, i.e. the desire to dismantle state-owned enterprises. There was more consideration being given to taking things apart rather than building something.

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