A PARADOX OF FINANCING:  
Privatization of Parastatals by Parastatals

Question-and-Answer Session

You mentioned that there are three main companies involved in African rail privatizations — the first one being the South African government, the second being the French government and the third one being yourself.  If the government decided to restrict the process down to private venture companies, what is the main advantage to that?  They would obviously lose two of the key bidders in the process and I do think that by taking out those two bidders they are taking a risk that the privatization might fail.  What they are looking for is international finance and international expertise in the operation of the railways.  So I am unclear as to what would be the benefit of restricting it to private venture companies?
 
That is purely a policy decision for any country as to the type of investor that they are looking for.  I can only comment as to what our perspective is.  I believe that during my presentation I admitted that we have less money than the government of France and less money than the government of South Africa.  Earlier in the day it was discussed that there are few investors interested in Africa and I think that, at least partially, the answer is that a rational private investor will think twice when competing with a public investor.  I am not suggesting that individual countries should unilaterally restrict the type of investor they are looking for.  All I am saying is that the rational economic result of that is that people would think twice before they take on the government of France or the government of South Africa.

In Southern Africa there are many borders to cross between, for example, South Africa and Tanzania. Why wouldn’t it be beneficial to have a single operator on this corridor in order to provide a seamless service?

I think that is an excellent point.  Please note that the Nacala Corridor is an isolated railway that only goes between northern Mozambique and northern Malawi.  I think that you are exactly right to the extent that railways should strive to offer seamless service, which is a competitive advantage.  The only thing I would say is that in the USA we have 600 privately owned railways and they all successfully interchange traffic, which suggests that at some point railway systems become too big.  At some point there is a strategic advantage to being bigger, but at some point there is a strategic loss to being too big.  I think that probably the break point is where the customer starts to see a disadvantage from having only one railway company to deal with.  But you make a very good point and I think that’s an important thing for the audience to reflect on.

I feel that it is unfortunate that Mr. Posner used a public platform to criticize Spoornet and I would like to ask several questions. First question — if Spoornet were not doing what it is doing throughout Africa, who would? After all, it has been discussed that there are very few companies interested in rail privatization in Africa.

Let me answer that question in two parts. First of all I believe that if Spoornet had done what it said it was going to do 5 to 10 years ago, which is to take a serious look at privatization, what you would probably have is more than one railway company in South Africa.  If you look at what is happening with branch lines in South Africa, Spoornet’s policy seems to be to close and scrap branch lines as opposed to taking the chance that a private operator would succeed or fail.  This is also evident, I believe, in the scrapping program in which, as I understand it, freight wagons are not being sold even outside of South Africa; they are only being allowed to be scrapped.

With regard to who else might have done it, again, if there were several railway companies in South Africa, my guess is that one or more of them would be active in other countries.  But more to the point I think there have been other private sector operators that have taken a look around Africa and just never done anything because they saw who the competition was.  Those names include RailAmerica, Wisconsin Central and others.  I am sure there are more names but my memory fails at the moment.  What was the second question?

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The second question — was the Nacala Corridor put up for competitive tender or was it open to everybody?

The transaction in Mozambique began as a negotiated transaction well before the privatization of Malawi Railways and that began in the mid 1990s.  But as that evolved, Malawi decided to embark on their own privatization process.

The third question was that you had criticized Spoornet for being a parastatal but you also say that in the Nacala Corridor CFM is your partner which is also a State enterprise.

I think the difference is that CFM is basically holding the interests of the State as a passive investor.  CFM is not the operator but there is an important need to provide an economic interest to the people of Mozambique because we are, in effect, using their assets as the basis for the management and operation of the Nacala Corridor.  So to the extent that this becomes a gold mine we feel, and the government of Mozambique felt, that it was important that the State have a piece of the pie to the extent that there was a big payoff at the end.  This is a quite common model for privatization and is typical of what has been done, for example, in Latin America.

Your comments about Spoornet are unfortunate and I wish you had talked with us before you made your remarks. We are moving ahead with privatization in South Africa. And, outside of South Africa our participation is small – no more than 20% in other countries.

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Thank you. I can only say that we do have lots of contacts with Spoornet over the years and I hope that despite the comments that I have made, which I hope are not construed as an attack on Spoornet but rather an outsider’s opinion as to what an alternative strategy might be, that we would be welcome at some point to participate on the operation of light density lines in South Africa – for example, those that are currently closed or in danger of being scrapped.

One other interesting thing that I would like to point out is that like Spoornet, we are a minority partner in most of the transactions in which we are involved.  It is unusual to find us with ownership of more than 20%.  In the case of the Nacala Corridor our ownership is in the teens as a percent of the total capitalization, just like Spoornet.  By the way, the only railroad that we are a majority owner of is in Guatemala.  That’s because we couldn’t find any big partners who thought that taking over an abandoned national railway that could not be financed was a great business investment.

Isn’t political risk a major factor in your investment policy?

I would just like to reinforce one of the comments I made earlier which may have been misinterpreted. Political risk is not as significant as economic risk; that is the way we see the world. I think that if you look at what has happened to RDC in other countries, for example, where governments have changed. In two instances, the government changed and the new government approached us and said, “You did a privatization with the previous government so you must have done something illegal and we are going to investigate.”  Our response in both cases was, “Fine; you are welcome to investigate us.  In the meantime, we’re going to run the railroad.”  And in both cases, nothing else happened.

I think one of the securities that we see in doing business in a country like Mozambique is that Mozambique is not a rich country and does not have the resources to screw around with politics. Their future is based on economic development and that is the experience we have had there. Politics occurs everywhere but it is not the major risk as far as Railroad Development Corporation is concerned.

Thank you.

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