• Matias Guimaraes

An opportunity that many fail to see

I am currently investigating some companies involved in the industrial automation sector. In particular, I found an interesting company involved in the local railway and corporate railway transport industry. Since the growth opportunity in the country where the company is located has already been exploited, I tried to look around and found that Africa is the continent with the biggest potential for the railway industry.

WHY AFRICA?

Many think that all that exists in Africa is poverty, wars and riots, which investors naturally shy away from. But the reality is something much better. In all developing countries we can find fast growing industries, which offer great opportunities for foreign investors in various sectors, one of which is that of trains. Here below you can see only some of the many advantages of investing in railways in that continent:

· Growing urbanisation and industrialization will pose new transportation challenges that railways are well suited to handle; -> Demographic forecasts for the African countries suggest that population will increase by 70% by 2040 and the urban population will increase from 450 Million to 1 Billion.

· Africa produces large volumes of goods such as minerals and commodities that are natural markets for railways -> To take mining products to ports or industrial areas, rail provides costs per tonne well below road transport due to its better economies of scale;

· The huge continental mass of Africa and the existence of many landlocked countries will encourage development of high-capacity and efficient transport corridors -> Landlocked countries require specific connections to coastal areas to allow them to trade with countries outside Africa. Since distances are typically 500km or more, railway transport is a more efficient alternative to road transport;

· Some believe that the lower carbon footprint of railways will result in public support of railways and a tendency of foreign aid to pay for railways but personally I do not believe that this will be one of the main factors which will lead to the expansion of the railway business;

· Another crucial factor is the extremely high external costs associated with the ownership of a private vehicle.

· Given the steady increase in labour costs in the most industrialised regions of the continent, it is reasonable to believe that rural-urban migratio could occur soon. It's reasonable to believe that the increasing industrialisation of the continent will make infrastructure capable of transporting large volume goods such as containers, equipment, or cars necessary.

Economic theory and historical occurences tells us that a close relationship exists between economic development and increased flow of goods and people. Africa, in the last decade, has experienced economic growth well above the world’s average and this trend will continue in the future.

…BUT WHERE?

We think that the areas deemed to be most appropriate for railway projects in Africa are:

· Major African metropolitan areas -> Urban and suburban passenger railways.

· Densely populated areas and corridors -> High volumes for freight or passengers possible.

· Corridors from port to inland markets -> Freight trains moving containerised or bulk materials from/to ports over long distances

· Major mining basins -> Freight trains moving minerals and other raw materials to export ports

Railway policy makers may have to bear in mind that new railway projects in Africa will only be sustainable if they are compatible with their natural markets.


AND WHY RAILWAYS?

Railways have many advantages versus other means of transportation:

· Accidents: cost of accidents is 50 time less for rail than road traffic. Given the bad conditions of roads in Africa it is estimated by 2030 road traffic accidents in developing countries could be as high as deaths caused by AIDs;

· Congestion Costs: growth of urban agglomerations in Africa without effective mass transit systems could increase congestion costs exponentially. For example, in Cairo, congestion costs are responsible for 4-5% of GDP (2016), while efficient public transportation systems such as in Barcelona reduce those costs between 0.3-0.6% of GDP (2016);

· Railways are experiencing a recovery worldwide: thanks to the introduction of new technologies and more public awareness of environmental issues;

· Railway success depends on rail infrastructure and rolling stock simultaneously: given their adequate operational conditions and the necessity to rely on well trained staff at all levels, from management to operations;

· Subsidisation and economies of scale are key to the success of railway projects: this is because give that the railway industry normally generates low EBITDA margins, subsiding the construction and operation phase is more than likely to be necessary in order to guarantee sustainability of any railway project and this will produce more job opportunities for local people.


AND WHAT ABOUT THE PROBLEMS?

There seems to be some problems in the development of the railway in Africa:

· One opinion is based on the perception that rail transport is a losers' game. The number of operations funded by International Financial Institution’s (IFIs) in Africa, in recent years, shows relatively little investment in railways as compared to other infrastructure such as roads or energy;

· There is a lack of good understanding of the business. Many projects failed because most concessions underestimated the amount of investment required and contractors have been overburdened with obligations that they cannot deliver;

· Competitiveness between railway and road transport has not been adequately addressed in most cases;

· There is consequently a lack of good management and financials.

Private companies that want to dive into this sector, particularly in Africa, must keep in mind that some countries have adopted a public approach to their railway sector with no intention to privatize them in the short/mid-term; those countries are typically the most advanced in technical capacities and with the most attractive business environments.

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