Malawi Railway ConcessionsThe first rail privatisation in Africa

Presenter: Mrs. Audrey Mwala

Director Project Finance & Risks Analysis

The Public Private Partnership Commission

Malawi.

Date : July 2015

05/01/2023 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

Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

05/01/2023 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

Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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Rail Services

• Passenger and • Freight transport– Imports & • Fuel• Fertilizer

– Exports• Tobacco• Tea• Sugar• legumes

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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Marine services• Passenger and • Freight transport on Lake

Malawi– Imports &

• Fuel• Fertilizer

– Exports• Tobacco• Tea• Sugar• legumes

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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.

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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.

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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.

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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Risk AllocationRisk Event Impact Private party Shared Risk Government MitigationConstruction risk Medium InsuranceOperational risk High InsuranceCommercial risks Severe MarketingTheft & pilfrage Medium InsurancePolitical risks Medium Govt. refund to concessionaireCross border risks Severe Contract with MozambiquePassenger service risk Severe Cross subsidayFire Catastrophic Anti-fire formRisk of Staff Injury Severe T rainingForce Majeure Catastrophic InsuranceFinancing Medium Low gearing , an existing assetExchange rate Medium Peg freight charges to dollarInterest rate Low fixed interestConcession fees default Medium Close monitoringRegulatory Risk Medium Refund from Govt.Residual Value risk severe Minimum mentenance standards.

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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Contract Monitoring Tool kit

• 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

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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Monitoring Benchmark

(0) Bench mark

1. Poor perfomanc

e

2. Acceptable Perfomanc

e

3. Outstandin

g perfomanc

e

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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Score Sheet

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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.

05/01/2023 Presented by Mrs. Audrey Mwala, The Public Private Partnership Commission, Malawi. email:amwala@pppc.mw, Phone +265 888832393

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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.