Infrastructure investment in the rail transport sector - can PPPs

deliver value?

The 2nd Botswana Coal and Energy Conference

Gaborone International Conference Centre, 16-17 April 2013

Andrew Marsay, Transport Consultant, Johnstaff, Southern Africa

What this talk is about . . .

• What Public Private Partnerships (PPPs)

are and what benefits they can bring to

the partners

• The key features of PPPs that lead to

such benefits

• A brief review of the application of PPPs

in some southern / east African rail

operating concessions

• Lessons regarding the applicability of

PPPs to projects that may support

minerals development

PPPs – the perception

vs. the facts . . .

What are PPPs - really?

• A contract between private supplier and public agent

• To deliver a project to serve the public (a road / building etc)

• Innovative funding options to facilitate project delivery

• Sharing of risk between public and private sectors

• Best for complex, high value projects, hence the publicity!

What are they used for?

• To increase speed and quality of procurement

• To reduce public sector financial exposure

• To circumvent public sector inertia or vested interests

• To ‘market test’ the value of a public product / service

• A niche in the infrastructure delivery environment

The procurement continuum

• Traditional procurement: public sector designs, procures

and manages the contract and provides the service

• Private sector designs and constructs (D&C), with public

sector role limited to the service provision

• Design, construct and maintain (DCM); public sector

responsible for non core services – various options

• Public Private Partnership; with the private sector

contracted to take ‘cradle to grave’ responsibility

The procurement continuum continued

• Sliding scale of public/private participation depending on the type of

project, client needs

What’s in it for governments?

• Offset of public borrowing needs; payment deferral until service

delivery; penalties for non-delivery

• Greater cost, time and quality certainty because of private finance

bank due diligence requirements

• Hence ability to align projects with the electoral cycle or to coincide

with events (e.g. as with South Africa’s 2010 World Cup!)

• Ability to deliver projects that may never have proceeded (e.g. toll

roads for freeway expansion + Gautrain in South Africa)

Public perspectives on PPP

• Initial perception of PPPs was of financial benefits accruing to the private sector at the expense of the taxpayer (the three little Ps!)

• The traditional perception has been that ‘public sector control’ is the only way to safeguard public benefit (Mozambique’s Sena Line?)

• Successful delivery of public infrastructure and services PPPs is changing such perceptions (South Africa’s Gautrain??)

• PPPs increasingly accepted as a means of bringing private sector efficiency to public facilities delivery

Do PPPs give value for money?

• The net cost to government by old fashioned public procurement methods can be cheaper – (on the assumption of most efficient public sector methods of providing a defined project output)

• But, taking account of the risks of cost and time overruns and whole life quality management, delivery by PPP offers more security of public value

• Nevertheless, in Australia, PPP is the construction industry’s least preferred procurement method - because they have to carry more risk, (but they usually deliver well!)

Evidence in Australia

• PPP’s on average have been 30% better in meeting project budget and

programme certainties

Evidence in the UK

• In 2009, over 65% of PPP projects on time and budget (vs. 30% in

1999)

[Opening the UK’s first High Speed Rail line]

Why the improvement?

• Rigour in aligning design to client

specification

• Hence clarity regarding outputs being

purchased

• Huge incentives to private sector for timely

delivery (and penalties if not!)

• Whole of life costing gives predictability to

public sector budgeting

Key characteristics of PPPs

• Technical innovations and whole life costing

• Rigorous project evaluation and robustness testing

• Focus on project delivery - to time and budget

• Move from construction focus to a service culture

• Spread / share capital costs and so relieve tax burden

Key benefits of PPPs . . .

• Efficiency and innovation – not cheap finance

• Quality outputs - specified by the public sector

• Linking public sector’s social and strategic aims with private sector

commercial expertise and funds

• As a result, PPPs usually offer greater certainty of cost and delivery

PPPs and African railway concessioning

experience . . .

• PPP based concessions now operate

the railways of many southern and east

African countries:

– Tanzania, Kenya, Mozambique, Zambia*,

Malawi and Zimbabwe (part of network)

• South Africa’s model is still a monopoly

state owned company (SOC), Transnet

– included here for comparison

• What follows is a review of experiences

in some of these countries, with some

lessons for rail PPPs in Africa

* Until September 2012

Kenya’s RVR concession . . .

• “With the failed RVR concession, the Kenya Railways Corp’ reverts

to the government, with a Sh1.9 billion loss to Govt”

[Daily Nation, Nairobi, August 2009]

• At the time RVR investors were ‘to be prosecuted’ by Govt of Kenya

for failing to bring forward promised investment

• New investor Citadel ‘awaits release of RVR funds’ (before releasing

own funds??); cost of rail to be ‘half that of road’ (mid/late 2012)

• Not clear whether a sound case for mode transfer has been made;

vital - because convenience not cost is the reason for using road

Tanzania’s TRL JV concession . . .

• Tanzanian cabinet granted permission on 12 March 2010 for Govt to

take back Tanzania Railways Limited (TRL) company, Rail India

Technical and Economic Services Ltd (Rites), cancelling 25-year

concession [The Citizen, Dar-es-Salaam, March 2010]

• “The joint venture with Rites has failed to make any mark in efforts to

improve rail services, with the foreign management spinning from one

crisis to another”

[Railways Africa, 22 March 2010]

• Little progress since then. Plans go on for a new line, despite limited

scope for general freight on rail. Better opportunity for rail is Chinese

plan to fund new bulks line to Mchuchuma / Liganga

Zambia’s RSZ concession . . .

• 2010: Zambian government urged to take over operations of RSZ,

because the investor NLPI Limited “has failed to operate the line”

[Ben Kapita, presidential special assistant for policy implementation]

• 2010: “RSZ is still investing in the rail line, locomotives, wagons

communications and security – but in proportion to the return which

can be generated

[RSZ CEO Benjamin Even]

• Latest: Volumes down from 1.3mt in 2004 to 0.8mt in 2010; slight

improvement thereafter; but, in September 2012, Government loses

patience and takes concession back – and commits public money

South Africa’s Transnet . . .

• Integrated institutional structure allows underwriting of bonds to fund

rail investment - based on high price ports. This is not sustainable

• Nevertheless, capital investment in general freight rail operations is

yielding results in terms of a slowly growing container market share

• But operational successes comes at a high cost to ‘SA (Pty) Ltd’

because the funding model allows economically untested projects

• Though bulk lines generate a margin, (unlike general freight) they do

not receive the priority needed to optimise their technical advantage

• Projects are committed to before anyone has

actually guaranteed to make use of the line; it is

simply assumed that road traffics will transfer

• Infrastructure costs are not thought through

properly; ‘they’ (not we) assumed to be funding

any heavy infrastructure upgrades required

• Contractual issues – no regulator / referee to

arbitrate when one or more party can’t deliver

• Failure to appreciate the economic reasons for

the long term competitiveness of road transport –

even for some long distance bulk materials

African rail concessions – generic lessons

PPPs in African rail funding

• Underestimation of infrastructure costs and overestimation of

operating revenue leaves one or both parties exposed

• When poor projects are chosen, neither the public nor the private

party can fill the revealed rail infrastructure funding gap

• The PPP method has too often been applied to rail projects that

have little demonstrable commercial value – hence many failures

• Lesson: apply all generic lessons AND test the intrinsic project value

before selecting the procurement / investment model

So what transport infrastructure

projects are fundable?

• Bulk rail: only where high volumes AND efficient operations can be

guaranteed. Botswana & Mozambique coal? DRC / Tanzania ores?

• Container rail: only if one is willing to adopt world best operational

practice and whatever institutional form it takes to yield results

• Urban rail: only where congestion and / or large passenger numbers

coincide with strong metropolitan economic growth pressures

• General freight: Technical and institutional optimisation of long distance

ROAD corridors will usually add most economic value

Yes: for very high bulk: > 30 mtpa –

here South Africa’s Sishen - Saldanha ore export

line (45 mtpa+)

Photo: courtesy Transnet

Maybe: high volume, double stack container rail,

with a highly commercial business model and low

operating costs - here in the USA

Sometimes: for rapidly growing, densifying, multi-

nodal metropolitan areas where urban efficiency gains

justify public funding - here Gautrain in South Africa

LANSERIA

Emerging corridor (rural)

Figure : Location of Main Development Nodes

Trips per

month

Cost per

tonne / km Main risks

Main

opportunities

Rail: [at, say 5mtpa and

with infrastructure costs

being paid for in the tariff]

1 $0.10

Mustering rolling

stock

Depot delays

Lower rates if

efficiency could

be achieved

Road: [no backhauls] 2 $0.12

Border crossing

delays

En route security

Fuel price

More trips per

month with

improved border

crossings

Quicker transit if

roads improved

Road: [with a backhaul

50% of the time] 2 $0.08

Road: [50% backhaul + a

realistic transit charge to

pay for infrastructure]

2 $0.09

Costs of road and rail on the 2,000 km North – South corridor

Surprisingly(??) not: general freight - even on

long distance corridors . . .

• A proper link between off-take commitments

and funding is established in advance – as,

e.g. in Richards Bay rail / port project (1972)

• An institutional and commercial necessity

exists for one or more local parties – not just

one of many globally attractive investments

• Built in robustness / redundancy of users;

i.e. the project will not fail if just one of the

off-takers / users goes out of business

• The capacity to implement and operate a

railway project actually exists; with all other

stakeholders also playing to their strengths

Mineral rail projects specifically – success factors

• Miners: need clients to whom they can commit over medium to long-term, as

well as affordable transport to accessible port capacity

• Rail operators: need long-term off-take agreements to be able to fund the very

high capacity systems which alone can yield low tariffs

• Port operators: negotiate with miners re access to existing capacity or defer to

new capacity providers

• Governments: can facilitate workable solutions by not insisting on short term

interests of state utilities – or economic aspirations better met by other modes

Other stakeholder roles clarified . . .

Conclusions re PPPs in rail

1.Where the intrinsic public value proposition (BCR) is poor and /

or the rail technology is being applied in a situation in which it

runs head to head with road, then no amount of PPP wizardry

will change a bad project into a good one!

2.Where the public value case is good and the rail technology is

being deployed in a context where rail is clearly the right

application - yet private funding is insufficient to capture all the

public value - then a PPP might well be the right solution.

Conclusions re PPPs in rail continued

3. Where the value proposition is good, the technology application is

appropriate, AND private funding is clearly sufficient, then a PPP is

not needed.

4. However, if a Government still wishes to share in the public value

creation – and the risk - it could still consider a PPP, although a

simple equity share might be a better option.