First catch your Eland

Coal Transportation Africa Summit 19 - 20 May 2015

Indaba Hotel

‘First Catch your Eland’ - or . .

The San bushman’s wisdom on planning coal export railways

Andrew Marsay Transport Economist "Aligning financial cost with real economic value"

The theme of this talk . . .

• African economies face unparalleled opportunities to host inward investment in mining, agriculture and even industry

• Although funding is often a constraint, funding opportunities, or concessions, are frequently confused with viable projects

• This results in premature celebration of success or misguided views about what a fundable infrastructure project looks like!

• This talk aims to: define the problem, give examples of it, and draw lessons for better project structuring in order to avoid it


But first, what’s all this about an eland?

• The wisdom of the San bushmen caught the imagination of writer, Laurens van der Post

• Living so close to death, the San viewed immediate interests in the context of life’s bigger picture

• Just like us, they would dream about enjoying a good party!

• But, unlike us modern Africans, they could tell the difference between dreams and reality . . .

• Hence, ‘First catch your eland’ before calling everyone to party!

1. Defining the Problem


• ‘First night parties vs. whole life parties’ – the problem of IMPATIENCE – or, the inability to distinguish dreams & reality!

• ‘Following your heart vs. following your head’ – the problem of FEAR – or, balancing political security and economic viability

IMPATIENCE

• ‘We have the concession to develop a new bulk port; and agreement to traverse our neighbour’s railway network’

• ‘China is (was!!) growing at 8% p.a. so 100 million tonnes can be exported. India is on the way to China. We’re made!’

• ‘The consultants say it’s an ideal opportunity and, with basic technical testing, the big money will follow the current funds’

• ‘So, let’s call the general,form a working committee, appoint ourselves as Board members, agree the salaries, and PARTY!’

FEAR

• The way that countries decide on infrastructure solutions often reflects historical misperceptions - or bad experiences

• South Africa thinks that the 1986 De Villiers Report ‘caused dis-investment in rail’. Hence fear of under-investment in rail

• Zimbabwe: ‘BBR concession led to corporate profit, but ran down state infrastructure’. Hence new fear of rail concessions

• Botswana: ‘All our N-S rail transit trade was lost when SA went with the BBR route’. Hence fear of dependence on SA


2. Illustrating the Problem


• ‘From dashed dreams to delayed dreams?’ - Lessons about impatience from MOZAMBIQUE's coal export options saga

• ‘From daunting dreams to deliverable dreams?’ - Lessons about fear from BOTSWANA's coal export options problematique

MOZAMBIQUE 1: dashed dreams

• Original Sena Line upgrade not based on Tete coal resources, yet mining investors relied on its bulk coal export potential

• When the scale of the coal bonanza was realised, miners had to make new plans; Government knew they were in a corner!

• Many plans for new lines have been promoted and some even designed. Concession bonanza replaces coal bonanza!

• Many firms’ dreams of translating their coal holdings into profits have turned into commercial nightmares instead.


MOZAMBIQUE 2: delayed dreams?

• To stay or not to stay; that was the question! But, for those with big investments, a solution HAD to be developed. How?

• Vale runs bulk infrastructure in Brazil. But in Mozambique they realised they must build the institutional infrastructure!

• The first reality to face was that Beira could not support the volumes needed for viability; Nacala was the obvious port

• So, Vale has built partnerhsips with CFM,CEAR, Provincial and local communities for a delayed but viable bulk export dream


BOTSWANA 1: daunting dreams

• How do you value thermal coal that is over 1,000km from the coast? ‘It might as well be on the moon’; ‘It’s just dirt’

• But Botswana is planning for the day that its diamond wealth runs out; this means they must dream big dreams

• The last thing Botswana wants is to be dependent on its big neighbour whose track record does not commend trust

• So, Botswana is going with its Trans Kalahari Railway. Namibia agrees; geology supports it; so the daunting dream is feasible


Botswana 2: deliverable dreams?

• The CBA study has suggested that, at 50-60mtpa, a line could deliver an affordable tariff. Engineering is tough but feasible

• Agreement on all institutional aspects is imminent, if not complete. The door appears to be opening for a viable line

• But there are some questions: Have any miners committed their balance sheets? Can rapid ramp up to 50mt be achieved?

• To be deliverable there will need to be named stakeholders whose survival depends on the project going ahead. Who??


4. Lessons for better project structuring

• TECHNICAL VIABILITY - requires more than good engineering

• ECONOMIC VIABILITY - requires attributable assumptions

• INSTITUTIONAL VIABILITY – this may have to be created

• FUNDING VIABILITY – about appetite to manage the risks


TECHNICAL VIABILITY

• Technical viability without whole life stakeholders is no use

• Technical viability independent of markets is no use. (TKR?)

• Engineering design needs to be part of project structuring

• ‘Design to market’ principles will increase project deliverability


ECONOMIC VIABILITY

• Economic viability is a fluid concept; ‘if this – then that’

• The assumptions underlying the numbers are the real test

• Economic assumptions are ultimately a matter of commitment

• So the key question is: WHO is going to back the numbers?


INSTITUTIONAL VIABILITY

• Is there sufficient legal robustness to protect the contracts?

• Will the business model needed for economic viability fly?

• Do the stakeholders in the deal REALLY, REALLY need it?

• If not, there will be no incentive to overcome ‘showstoppers’


FUNDING VIABILITY

• Is there realistic hope of an affordable tariff being achieved?

• Can a revenue stream to cover whole life costs be achieved?

• Are there any collateral projects to mitigate export sales risk?

• Can exposure of private funding institutions be balanced?


SO, IN CONCLUSION . .

THEN, and only then . . .

ENJOY THE PARTY!

Business

First catch your Eland