Pricing the Promise

Pricing the Promise

IFC on how the vast development potential of the Trans-Gabon railroad can finally be realized
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© Antonin Borgeaud

Principal Investment Officer, Infrastructure & Natural Resources – Sub Saharan Africa,
IFC

If you build it, they will come. At least that was the idea when in the early 1970s Omar Bongo Ondmiba, Gabon’s president, outlined his vision of Gabon becoming an “African Rome” – driven in large part by the construction of a 400-mile railway, the Transgabonais, from the coastal capital Libreville through the country’s jungle interior to Franceville.

It hasn’t quite turned out that way. While economic growth has been strong in recent years, lifting the country above most of its African peers, Gabon’s economic potential is far from realized. The economy remains heavily dependent on oil (which poses significant risk given recent oil price declines), and a third of the population remain in poverty. Moreover, the Transgabonais railway has required subsidies from both the public and private sector over the years, and is still running at less than half capacity.

Oversupply

As a result, Gabon faces the opposite challenge posed by most shared use infrastructure: abundance rather than scarcity. With most shared infrastructure, the central question is how to divide up limited track capacity among users (while keeping it in good condition). In Gabon’s case, more than 90% of volume is mining traffic, and one company, Comilog, carries most of that. This company operates its own trains and pays an access fee to SETRAG, a subsidiary of Comilog that has a 30 year concession to operate the railway.

With the Transgabonais being under-utilized, the fees paid by Comilog mining and other users amount to less than what is needed to catch up on decades of deferred renewals and upgrades.

For the railroad to be financially sustainable, a revised pricing structure that involves the mining sector and Gabonese state paying the appropriate share for infrastructure maintenance and renewal costs is essential. This action must be accompanied, however, by a significant lowering of SETRAG operational costs so as to not deter the feasibility of other mining projects in Gabon that will require rail services.

Reliable cost data

Consequently, SETRAG’s concession contract is the subject of ongoing discussions with the government. A critical aspect will be obtaining reliable data on track maintenance costs through the establishment of relevant business units within SETRAG. This information will be then used to develop a new access fee formula which will be linked directly to the cost of track maintenance and upgrades, excluding what will be in effect a subsidy in the form of government financing of the rehabilitation of the rail platform and bridges.

This new tariff formula should ultimately be based on existing user volume agreements, producing a single ton kilometer access fee that will be applied to any third party user, with the caveat that it will establish a minimum payment for each reserved train slot (that is, the license allowing the holder to run a train on a specific section of track at a specific time). This approach should incentivize smaller mining companies to run joint trains in order to maximize load per slot.

Finally, the rights of any mining company that will participate in the financing of the track should be recognized, not through tariff discounts, but rather through the same rights usually afforded to other debt holders (i.e. commercial repayment of their financing).

In short, the envisioned overhauling the pricing regime for the Transgabonais should enable this majestic railroad, one of the largest in the world, to run at higher capacity and further drive Gabon’s growth.

About IFC and SETRAG:
In October 2013, SETRAG, a Comilog subsidiary whose parent group is ERAMET, mandated IFC as the lead arranger for raising the commercial debt needed for the company’s reform/investment plan. The mandate is underway and is expected to be completed before the end of 2015.

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