East African rail: options for private sector participation

Out-Law Analysis | 11 Jan 2022 | 2:37 pm | 4 min. read

There are a number of models which East African governments could use to enable private sector participation in new and existing rail projects.

These range from the de-regulated contractual regimes such as the grant of concessions to rail operators, to more regulated environments such as open-access schemes with a state regulator responsible for setting tariffs and awarding access.

This article should be read in conjunction with our previous article, in which we discussed the extent of the investments made by East African governments in the rail sector, with varying degrees of success.

Mechanisms for private sector participation

Rail concessions

Under a rail concession the government collects a concession fee from a private rail operator in exchange for the right to operate the track. Not only do governments recoup some of the initial capital investment from the track, but there are wider economic benefits to the state through the increased collections of taxes, customs and excise as a result of greater volumes of cargo moving over these lines.

Concessioning out new, more lucrative standard gauge portions of the network may be appealing for East African Community (EAC) governments which find themselves unable to operate networks efficiently. The concession model is also a simple, primarily unregulated approach which does not require extensive legislative reform or the establishment of additional institutional oversight and regulation, as the terms applicable to the private party are set out through the concession agreement.

However, such an unregulated approach has its pitfalls, particularly in Africa, where the service delivery standard of the private sector is not actively monitored by a state railways authority. This has resulted in several failed concessions in the past 20 years.

This is not to say rail concessions could not be viable. However, before implementing this approach, governments should ensure a sufficiently attractive business case is established to attract private sector participation and competition to run the line; and proper monitoring and inspection rights are included in the concession agreement. There should also be adequate capacity within the monitoring bodies to prevent history repeating itself.

Open network access with continued state participation

A second option to consider is for the member states of the EAC to pursue more liberalised rail networks, including having open network access with licensed private operators entering into private freight transport arrangements and paying network access fees to the state as rail network owners.

Tanzania has made some movement in this direction, with Tanzania-Zambia Railway Authority (TAZARA) entering into an open network access agreement with Zambia Railways Ltd – although this is a government-to-government arrangement rather than private competition – and, separately, with the Zambian ‘open network’ private operator Calabash (for a period of one year).

However, legislation as it currently stands does not support a truly liberalised network, as demonstrated by the absence of an independent rail regulator across the various EAC member states.

Legislation such as the Tanzania Railways Act is premised on the state-owned railway company being the sole party with the right to use the rail network, and so access can only be granted through individual network access agreements. This does not accord with the concept of a liberalised regional network.

Accordingly, to properly realise this option, some degree of regulatory reform will be required. This would include the establishment of a state regulator responsible for setting tariffs and licensing the parties who are able to access the network.

Should a significant number of the inter-connecting regional lines come to fruition, it may even be suitable to establish an EAC-wide regulator. Individual member states would still own the network and would have to maintain it, but the right to operate locomotives on the network would need to be expanded to any party able to comply with safety and licensing requirements, with access to ‘blocks’ on the network being subject to competitive bidding.

Under this framework, the traditional state-owned rail operators may also continue to provide services. However, it is important that the rail regulator is seen as completely impartial, as the private sector may be reluctant to participate if state-owned services are given preferential treatment.

Fully unbundled competitive model

An even more regulated version of the liberalised rail network would be a fully unbundled approach, as was undertaken by the UK in the early 1990s. This involved the unbundling of British Rail and introducing competition at all levels of the rail sector.

UK reform of the rail sector has been relatively successful for freight, but there has been a lack of adequate incentives for the network owner to expand capacity, which has subsequently been addressed through the introduction of incentive payments based on traffic volumes.

Applying the unbundled model may prove difficult for EAC governments given the relative lack of maturity of their rail operations systems. Although privatising and selling off assets allows for government to recoup investment costs and alleviate ongoing maintenance and renewal obligations, this approach requires a highly skilled and well-resourced regulator with complete impartiality, coupled with constant monitoring of performance.

Achieving these sorts of reforms is a long-term process that requires policy consistency and dedicated effort from government. There may also be hesitancy and unwillingness to divest and privatise the entire sector, as wholesale privatisation remains a controversial move for governments.

Opening up opportunities

The East African rail sector in the last decade has been characterised by major investment, some significant missteps, and a wide array of potential forward paths.

Although there are significant challenges facing potential private investors in the region and the affordability and business case for inland rail extensions are ongoing challenges, the underlying policy and political imperatives to connect the EAC via rail remain in place.

The example set by Tanzania shows that lessons have been learned, and this potentially opens up opportunities for investors able to navigate the more difficult blockages in the market.

Co-written by Reuben Cronjé of Pinsent Masons