Infrastructure investment in the rail transport sector - can PPPs deliver value?


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Andrew Marsay, Transport Consultant, from Johnstaff has presented at the Botswana Coal and Energy Conference. If you would like more information about the conference, please visit the website:

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Infrastructure investment in the rail transport sector - can PPPs deliver value?

  1. 1. Infrastructure investment in the rail transport sector - can PPPsdeliver value?The 2nd Botswana Coal and Energy ConferenceGaborone International Conference Centre, 16-17 April 2013Andrew Marsay, Transport Consultant, Johnstaff, Southern Africa
  2. 2. What this talk is about . . .• What Public Private Partnerships (PPPs)are and what benefits they can bring tothe partners• The key features of PPPs that lead tosuch benefits• A brief review of the application of PPPsin some southern / east African railoperating concessions• Lessons regarding the applicability ofPPPs to projects that may supportminerals development
  3. 3. PPPs – the perception
  4. 4. vs. the facts . . .
  5. 5. 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!
  6. 6. 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
  7. 7. The procurement continuum• Traditional procurement: public sector designs, procuresand manages the contract and provides the service• Private sector designs and constructs (D&C), with publicsector role limited to the service provision• Design, construct and maintain (DCM); public sectorresponsible for non core services – various options• Public Private Partnership; with the private sectorcontracted to take ‘cradle to grave’ responsibility
  8. 8. The procurement continuum continued• Sliding scale of public/private participation depending on the type ofproject, client needs
  9. 9. What’s in it for governments?• Offset of public borrowing needs; payment deferral until servicedelivery; penalties for non-delivery• Greater cost, time and quality certainty because of private financebank due diligence requirements• Hence ability to align projects with the electoral cycle or to coincidewith events (e.g. as with South Africa’s 2010 World Cup!)• Ability to deliver projects that may never have proceeded (e.g. tollroads for freeway expansion + Gautrain in South Africa)
  10. 10. Public perspectives on PPP• Initial perception of PPPs was of financial benefits accruing to theprivate sector at the expense of the taxpayer (the three little Ps!)• The traditional perception has been that ‘public sector control’ is theonly way to safeguard public benefit (Mozambique’s Sena Line?)• Successful delivery of public infrastructure and services PPPs ischanging such perceptions (South Africa’s Gautrain??)• PPPs increasingly accepted as a means of bringing private sectorefficiency to public facilities delivery
  11. 11. Do PPPs give value for money?• The net cost to government by old fashioned publicprocurement methods can be cheaper – (on theassumption of most efficient public sector methodsof providing a defined project output)• But, taking account of the risks of cost and timeoverruns and whole life quality management,delivery by PPP offers more security of public value• Nevertheless, in Australia, PPP is the constructionindustry’s least preferred procurement method -because they have to carry more risk, (but theyusually deliver well!)
  12. 12. Evidence in Australia• PPP’s on average have been 30% better in meeting project budget andprogramme certainties
  13. 13. Evidence in the UK• In 2009, over 65% of PPP projects on time and budget (vs. 30% in1999)[Opening the UK’s first High Speed Rail line]
  14. 14. Why the improvement?• Rigour in aligning design to clientspecification• Hence clarity regarding outputs beingpurchased• Huge incentives to private sector for timelydelivery (and penalties if not!)• Whole of life costing gives predictability topublic sector budgeting
  15. 15. 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
  16. 16. 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 sectorcommercial expertise and funds• As a result, PPPs usually offer greater certainty of cost and delivery
  17. 17. PPPs and African railway concessioningexperience . . .• PPP based concessions now operatethe railways of many southern and eastAfrican countries:– Tanzania, Kenya, Mozambique, Zambia*,Malawi and Zimbabwe (part of network)• South Africa’s model is still a monopolystate owned company (SOC), Transnet– included here for comparison• What follows is a review of experiencesin some of these countries, with somelessons for rail PPPs in Africa* Until September 2012
  18. 18. Kenya’s RVR concession . . .• “With the failed RVR concession, the Kenya Railways Corp’ revertsto 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 Kenyafor failing to bring forward promised investment• New investor Citadel ‘awaits release of RVR funds’ (before releasingown 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
  19. 19. Tanzania’s TRL JV concession . . .• Tanzanian cabinet granted permission on 12 March 2010 for Govt totake back Tanzania Railways Limited (TRL) company, Rail IndiaTechnical and Economic Services Ltd (Rites), cancelling 25-yearconcession [The Citizen, Dar-es-Salaam, March 2010]• “The joint venture with Rites has failed to make any mark in efforts toimprove rail services, with the foreign management spinning from onecrisis to another”[Railways Africa, 22 March 2010]• Little progress since then. Plans go on for a new line, despite limitedscope for general freight on rail. Better opportunity for rail is Chineseplan to fund new bulks line to Mchuchuma / Liganga
  20. 20. 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, wagonscommunications and security – but in proportion to the return whichcan be generated[RSZ CEO Benjamin Even]• Latest: Volumes down from 1.3mt in 2004 to 0.8mt in 2010; slightimprovement thereafter; but, in September 2012, Government losespatience and takes concession back – and commits public money
  21. 21. South Africa’s Transnet . . .• Integrated institutional structure allows underwriting of bonds to fundrail investment - based on high price ports. This is not sustainable• Nevertheless, capital investment in general freight rail operations isyielding 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 donot receive the priority needed to optimise their technical advantage
  22. 22. • Projects are committed to before anyone hasactually guaranteed to make use of the line; it issimply assumed that road traffics will transfer• Infrastructure costs are not thought throughproperly; ‘they’ (not we) assumed to be fundingany heavy infrastructure upgrades required• Contractual issues – no regulator / referee toarbitrate when one or more party can’t deliver• Failure to appreciate the economic reasons forthe long term competitiveness of road transport –even for some long distance bulk materialsAfrican rail concessions – generic lessons
  23. 23. PPPs in African rail funding• Underestimation of infrastructure costs and overestimation ofoperating revenue leaves one or both parties exposed• When poor projects are chosen, neither the public nor the privateparty can fill the revealed rail infrastructure funding gap• The PPP method has too often been applied to rail projects thathave little demonstrable commercial value – hence many failures• Lesson: apply all generic lessons AND test the intrinsic project valuebefore selecting the procurement / investment model
  24. 24. So what transport infrastructureprojects are fundable?• Bulk rail: only where high volumes AND efficient operations can beguaranteed. Botswana & Mozambique coal? DRC / Tanzania ores?• Container rail: only if one is willing to adopt world best operationalpractice and whatever institutional form it takes to yield results• Urban rail: only where congestion and / or large passenger numberscoincide with strong metropolitan economic growth pressures• General freight: Technical and institutional optimisation of long distanceROAD corridors will usually add most economic value
  25. 25. Yes: for very high bulk: > 30 mtpa –here South Africa’s Sishen - Saldanha ore exportline (45 mtpa+)Photo: courtesy Transnet
  26. 26. Maybe: high volume, double stack container rail,with a highly commercial business model and lowoperating costs - here in the USA
  27. 27. Sometimes: for rapidly growing, densifying, multi-nodal metropolitan areas where urban efficiency gainsjustify public funding - here Gautrain in South AfricaLANSERIAEmerging corridor(rural)Figure : Location of Main Development Nodes
  28. 28. Trips permonthCost pertonne / kmMain risksMainopportunitiesRail: [at, say 5mtpa andwith infrastructure costsbeing paid for in the tariff]1 $0.10Mustering rollingstockDepot delaysLower rates ifefficiency couldbe achievedRoad: [no backhauls] 2 $0.12Border crossingdelaysEn route securityFuel priceMore trips permonth withimproved bordercrossingsQuicker transit ifroads improvedRoad: [with a backhaul50% of the time]2 $0.08Road: [50% backhaul + arealistic transit charge topay for infrastructure]2 $0.09Costs of road and rail on the 2,000 km North – South corridorSurprisingly(??) not: general freight - even onlong distance corridors . . .
  29. 29. • A proper link between off-take commitmentsand funding is established in advance – as,e.g. in Richards Bay rail / port project (1972)• An institutional and commercial necessityexists for one or more local parties – not justone of many globally attractive investments• Built in robustness / redundancy of users;i.e. the project will not fail if just one of theoff-takers / users goes out of business• The capacity to implement and operate arailway project actually exists; with all otherstakeholders also playing to their strengthsMineral rail projects specifically – success factors
  30. 30. • Miners: need clients to whom they can commit over medium to long-term, aswell as affordable transport to accessible port capacity• Rail operators: need long-term off-take agreements to be able to fund the veryhigh capacity systems which alone can yield low tariffs• Port operators: negotiate with miners re access to existing capacity or defer tonew capacity providers• Governments: can facilitate workable solutions by not insisting on short terminterests of state utilities – or economic aspirations better met by other modesOther stakeholder roles clarified . . .
  31. 31. Conclusions re PPPs in rail1.Where the intrinsic public value proposition (BCR) is poor and /or the rail technology is being applied in a situation in which itruns head to head with road, then no amount of PPP wizardrywill change a bad project into a good one!2.Where the public value case is good and the rail technology isbeing deployed in a context where rail is clearly the rightapplication - yet private funding is insufficient to capture all thepublic value - then a PPP might well be the right solution.
  32. 32. Conclusions re PPPs in rail continued3. Where the value proposition is good, the technology application isappropriate, AND private funding is clearly sufficient, then a PPP isnot needed.4. However, if a Government still wishes to share in the public valuecreation – and the risk - it could still consider a PPP, although asimple equity share might be a better option.