A Malawi Rail PPP case study

1. Malawi Railway Concessions
The first rail privatisation in Africa
Presenter: Mrs. Audrey Mwala
Director Project Finance & Risks Analysis
The Public Private Partnership Commission
Malawi.
Date : July 2015

2. Background
• The Malawi Railways was incorporate in
1907.
• Upon independence in 1964, Malawi,
inherited the network from the British
• Provide both Rail and Marine Services
• Between 1974 to 1979, Malawi worked
with the Canadian International
Development Agency (CIDA) to add 70
miles of new track from Salima to
Lilongwe
• It’s the principal route for imports and
exports for Malawi
• Played a very big role in opening of
manufacturing industries in Malawi
2/26/2016
Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi.
email:amwala@pppc.mw, Phone +265 888832393 2

3. The Infrastructure net
work
• A network of 797 km (495 mi)
from the Zambian border at Mchinji
to Makhanga
• At Nkaya it links with the Nacala
Corridor the port at Nacala on the
Indian Ocean
• In the north an extension from
Mchinji to Chipata in Zambia
opened in 2010
• There is a proposal to link up
TAZARA railway
2/26/2016
Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi.
email:amwala@pppc.mw, Phone +265 888832393 3

4. Rail Services
• Passenger and
• Freight transport
– Imports &
• Fuel
• Fertilizer
– Exports
• Tobacco
• Tea
• Sugar
• legumes
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
4

5. Marine services
• Passenger and
• Freight transport on Lake
Malawi
– Imports &
• Fuel
• Fertilizer
– Exports
• Tobacco
• Tea
• Sugar
• legumes
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
5

6. Performance prior to Concessioning
• MR goods traffic peaked in the 1970s, reaching annual
volumes of between 1.1 to 1.3 million tonnes,
• Contributed substantially to the economy of Malawi
• The 1980s witnessed a steep decline in overseas
import/export traffic due to:
– war and internal strife in Mozambique that affected access to
both the Nacala & Beira ports coupled with
– increasing competition from the road transport sector
• In the early 1980s, the southern rail route to the Beira
port suffered severe damages during war.
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
6

7. Effects of War in Mozambique
• From 1985 to around 1993, Nacala and Beira did
not carry Malawi traffic.
• Instead, Malawian traffic was transported by road
out of the country for ongoing transportation by
rail/road through South Africa and/or Dar-E-Salaam.
• The financial performance of Malawi Railways also
deteriorated correspondingly
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
7

8. Nacala Corridor reopened 1994
• The reopening of the Nacala Line for traffic was in
1994
• it now increased possibilities for Malawi Railways
business
• The Government of Malawi faced the challenge of
rebuilding traffic on the Malawi Railways and also
improving its performance.
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
8

9. Efforts to rebuild traffic
• Both goods and passenger
traffic had been severely
• affected.
• From the high levels of over
one million tonnes of goods
traffic in the 70s MR earned
only 280,000 tonnes of goods
traffic in the 90s
• From in excess of one million
passenger MR carried only
450,000 passengers in 1996-97.
• The Government of Malawi
faced the greatest challenge of
rebuilding traffic
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
9

10. Restructuring-Preparation for private
sector entry
• In 1994 Malawi Railways was restructured
• Separating the rail from Marine operations
• Two separate legal entities emerged;
– The Malawi Railways (1994)Ltd to focus on rail
operations and
– Malawi Lake Service (1994) to focus on marine
service
• Govt. developed a profit orientation policy
• Employee remuneration was improved
• Both entities were earmarked for private sector
involvement.
• The motivation was to leverage private sector
innovation, financing and efficiency
• To improve the deteriorating performance
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
10

11. The Railway concession
• The Malawi Railways was concessioned in 1999 to
Central East African Railways
• A consortium of American investors Railroad
Development Corporation and Mozambicans
investors
• It was a 25 year rolling concession
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
11

12. Salient features of the new concession
• Entry fees- Cear Paid $500,000 as entry fee for the right to provide rail service
• Assets ownership
• The Concessionaire purchased all the rolling stock. A purchase price for the
moveable assets,equivalent in Malawi kwacha to US $4,500,000
– The railway track remained with Government
• Concession fees- The higher of 5% A percentage share of gross revenue or
$500,000
• Passenger Service- CEAR to provide the service for 5 years. A PSO payments from
the Government to the concessionaire of US$150,000 for the first five years
• Subsiday-Government provided a subsidy for passenger service
• Rehabilitation - GOM undertook to carry out initial rehabilitation of the rail track
• Maintenance- CEAR was responsible for maintenance
• Locomotives- CEAR undertook to invest in more locomotives
• Fuel road levy- CEAR was exempted from paying a road levy on their fuel purchases
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
12

13. Performance of the
Concession
• Revenue, freight and passenger - Picked up for the first three
years but took a perpetual dive there after reported loses
• Rehabilitation -Government never rehabilitated the rail way,
• Maintenance-CEAR maintenance of the track was
substandard
• Maintenance- Locomotives were poorly maintained often
times through cannibalization of non- operation locomotives
• Fleet- Deteriorated in numbers and quality
• Concession fees - They struggled to pay concession fees
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
13

14. Challenges of the
concession
• Capital injection – undercapitalized
they failed to deliver on investment on
new locomotives, maintenance and
service provision
• Force Majeure-A bridge was washed
away.
• Shareholding-Shareholding of the
consortium changed several times
behind the back of the Malawi
Government. The RDC sold its shares to
VALE
• Government guarantee- Govt.
guaranteed a $30m CEAR loan from
OPEC for rehabilitation of the railway
line which never happened
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
14

15. Challenges of the concession
• Force Majeure-The contract was not very clear
on the responsibility of the parties
– The Rivirivi Bridge was damaged by Cyclone Delfina
in January 2003. It cut off the northern part of
Malawi for three years while trying to sort out who
is responsible and it reopened in 2005
• Risk Allocation- Government took more risks
than private sector
• Seamless operation challenges- Nacala Port and
Railway was concessioned to the same CEAR
consortium in January 2005
• Fuel levy refund- Required a fuel tax road levy
refund
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
15

16. Passenger Service Challenges
• Passenger service – poor
standards
• Required a subsidy
$150,000 per annum
• Frequency was reduced
from 3 round trips week
to 1
• Service was suspended in
2005
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
16

17. Remedial Action
• Remedial action-Contract was re-
negotiated in 2012 to rebalance the
risks and rewards
• A feasibility study was carried out in
2012
• The concession was renegotiated in
2013
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
17

18. Terms of the new the Rail
Concession
• The Rail BOT concession was revised to expire in 2045.
• Recapitalisation- The private sector party undertook to recapitalize the
business and revamp operations.
• Fees- They concession fees and structure was revised to a minimum
$1million per annum from $500,000
• Subsidy- The subsidy for passenger service was removed.
• Fuel road levy exemption- was removed
• Contract Monitoring- A transport sector regulator will be set in place.
• Technical monitoring- Operationalise of MR 94
• New investment- The rolling stock fleet numbers was agreed to be beefed
up and improved.
• Risk rebalance- The responsibility of rehabilitation of the track was shared
between Government and the concessionaire.
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
18

19. Risk Allocation
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
19
Risk Event Impact Private party Shared Risk Government Mitigation
Construction risk Medium Insurance
Operational risk High Insurance
Commercial risks Severe Marketing
Theft & pilfrage Medium Insurance
Political risks Medium Govt. refund to concessionaire
Cross border risks Severe Contract with Mozambique
Passenger service risk Severe Cross subsiday
Fire Catastrophic Anti-fire form
Risk of Staff Injury Severe T raining
Force Majeure Catastrophic Insurance
Financing Medium Low gearing , an existing asset
Exchange rate Medium Peg freight charges to dollar
Interest rate Low fixed interest
Concession fees default Medium Close monitoring
Regulatory Risk Medium Refund from Govt.
Residual Value risk severe Minimum mentenance standards.

20. Current status of
Concession
• Investment in fleet -They have procure 6
new passenger couches, $3million
• Rehabilitation and Maintenance Risks-
They have started rehabilitating the
southern part of the railway line- $250
million
• Concession fees -They have been able to
pay
• Monitoring-Annual monitoring reviews
• Service standards-Has improved for both
passenger and freight
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
20

21. Contract Monitoring Tool kit
•
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
21
1. Identify
Objective
2. Establish
Benchmark
3.
Implementation
4. Data collection
5. Data review,
variance analysis
6. Performance
Ranking
7. Corrective
Action
8. Re -
Assessment
9. Follow ups
10. Negotiation
& final action

22. Monitoring Benchmark
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
22
(0) Bench
mark
1. Poor
perfomance
2.
Acceptable
Perfomance
3.
Outstanding
perfomance

23. Score Sheet
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
23

24. Take Home
Lessons (1)
• Financial muscle- Government should be convinced of the
financial depth of the concessionaire to weather the storms of first
years of operations.
• Long haul- The first concessionaires were looking for quick wins,
Not prepared to sail through the long haul before they saw the
profits.
• Feasibility study- The first concession did not benefit from a prior
full feasibility study.
• Negotiation- Government was in a weak negotiating position, took
more risks.
• Contract monitoring –no robust monitoring framework
• Sector regulator- Lack of a transport sector regulator has been the
cause of poor maintenance.
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
24

25. Take Home Lessons (2)
• Risk allocation- Risks should be allocated to parties
best suited and able to practically manage them. –
maintenance is best placed with the operator
• Over commitment- Government should only
committee to what it can actually to achieve. It’s
better to push all the risks that Govt can’t manage
to private sector even if it means a reduction in
concession fees in return.
• Due to many demands on Governments purse they
often fail to perform their part of the contract.
2/26/2016
Presented by Mrs. Audrey Mwala, The
Public Private Partnership Commission,
Malawi. email:amwala@pppc.mw, Phone
25