Demand For Intermodal And Urban Rail Coming To Fore

BMI View: Rail networks will be an outperforming sector within African infrastructure over the coming decade. This will be driven increasingly by the need to support connectivity, urbanisation and the growing consumer class within Sub-Saharan Africa's economies.

Rail infrastructure in Sub-Saharan Africa (SSA) is set to be a key area of opportunity over the coming decade. There will be increasing demand for both urban rail and mass transit systems, as well as efforts to boost connectivity and facilitate the movement of human capital and goods. These trends are already beginning to be represented in our Infrastructure Key Projects Database, and we expect structural changes in economic patterns in the region, such as urbanisation, rising incomes and a proliferating middle class, will support further investment in the sector.

There are over USD105bn worth of rail projects in SSA in BMI's Infrastructure Key Project Database, and the sector is attracting international interest, with the Chinese dominating among international contractors on the ground. This level of investment is the second highest globally when looking at the value of rail projects under development (in planning and under construction) as a percentage of GDP at around 6%, with Africa outpacing even the Asia-Pacific region, which has over USD1trn of projects in our projects database but only amounts to around 4% of GDP.

Huge Value In African Rail Development Plans
Value Of SSA Transport Projects Under Development & In Construction By Sub-Sector, USDmn (LHS) & Rail Projects Under Development As % Of GDP, by Region (RHS)

BMI View: Rail networks will be an outperforming sector within African infrastructure over the coming decade. This will be driven increasingly by the need to support connectivity, urbanisation and the growing consumer class within Sub-Saharan Africa's economies.

Rail infrastructure in Sub-Saharan Africa (SSA) is set to be a key area of opportunity over the coming decade. There will be increasing demand for both urban rail and mass transit systems, as well as efforts to boost connectivity and facilitate the movement of human capital and goods. These trends are already beginning to be represented in our Infrastructure Key Projects Database, and we expect structural changes in economic patterns in the region, such as urbanisation, rising incomes and a proliferating middle class, will support further investment in the sector.

Huge Value In African Rail Development Plans
Value Of SSA Transport Projects Under Development & In Construction By Sub-Sector, USDmn (LHS) & Rail Projects Under Development As % Of GDP, by Region (RHS)

There are over USD105bn worth of rail projects in SSA in BMI's Infrastructure Key Project Database, and the sector is attracting international interest, with the Chinese dominating among international contractors on the ground. This level of investment is the second highest globally when looking at the value of rail projects under development (in planning and under construction) as a percentage of GDP at around 6%, with Africa outpacing even the Asia-Pacific region, which has over USD1trn of projects in our projects database but only amounts to around 4% of GDP.

Sub-Saharan Africa's rail network, while woefully inadequate at present, is set to be the most active sub-sector in the region's transport development over the coming years. According to our Infrastructure Key Projects Database, a combined value of around USD50bn is being spent on airports and ports to connect Africa to the rest of the world. However, even greater investment is being directed towards boosting Africa's internal rail connections.

The rail projects range from South Africa's ambitious high-speed rail network to the rehabilitation of colonial tracks in Ethiopia, and are being undertaken across SSA; 24 countries have individual projects worth more than USD200mn in the pipeline.

While some of the projects may be too costly or technically challenging for small economies to tackle, the momentum in African rail development is clear. In May 2014 alone there have been three major developments in the sector:

  • The governments of Kenya and China signed a financing agreement for a railway project in Kenya. Phase one of the project will cover 609.3km from the port of Mombasa to Nairobi at a cost of USD3.6bn.

  • China Railway Construction's subsidiary China Civil Engineering Group signed a USD13.1bn framework contract with Nigeria's Federal Ministry of Transportation to build a high-speed coastal rail line between Calabar and Lagos.

  • Cameroon's government signed an agreement with Belgian firm Préfarail to build a tramway in the country's capital, Yaoundé. The construction of the country's first tramway, which will begin in 2015, is expected to cost XAF491bn (USD1bn) for the first 50km.

Observing the rail projects pipeline in Africa, we are noting an evolution from infrastructure investment being driven primarily to meet the needs of the mining sector to infrastructure built to meet the needs of an urbanising middle class.

Over the past decade the majority of railway projects that were built in the region have been developed as auxiliary infrastructure to support mining operations. Mining companies have invested heavily in rail infrastructure in countries such as Angola, Mozambique, Cameroon, South Africa and Malawi, to better connect the commodity producing regions to either processing plants or export terminals.

While we believe that some markets will continue to see rail projects developed to facilitate mining operations, we expect this resource driven trend to begin to fade. In light of BMI's below-consensus macro view on China, our Mining team's view is that mining companies' capital expenditure will be increasingly constrained ( see 'Rocky Road Ahead, Pockets Of Resilience', April 16). Mining projects are a long-term undertaking, and the recent rally in metal prices will not justify a reversal in the hard-line investment stance mining companies have taken. With a new generation of CEOs taking over the helm of many mining companies, the focus on cost-containment and capital efficiency will be a key theme of the mining industry in the coming years. As such, the added cost of developing infrastructure such as rail networks, which is necessary for many of the new mine developments in Sub-Saharan Africa, is making investments much less economically feasible.

Rail To Facilitate Africa
SSA Exports and Imports, USDbn (LHS) and SSA Population, mn (RHS)

New Trends To Drive Investment

In our view it will be vital for Africa's economies to invest in their rail networks over the coming decade if they are to fully realise their growth potential. BMI's Country Risk team has identified 10 economies that are set to enjoy considerable economic growth over the next decade and maintain that private consumption is - and will continue to be - a major driver of economic growth in most Sub-Saharan African countries ( see 'Consumption Growth Story Real, But Nuance Required', March 17). To better facilitate these trends in SSA economic development, we are seeing and expect to see two areas of rail infrastructure draw increasing levels of investment.

Firstly, Africa is investing heavily in its port infrastructure as the continent trades more with the rest of the world - especially Asia. BMI is forecasting marked increases in both African exports and imports over the next decade. To cope with this increased trading activity, we are seeing greater investment being directed to connecting to Africa's ports. This investment is taking two forms: connecting major urban hubs to better facilitate intra-regional trade, such as the recently announced coastal railway in Nigeria; or connecting to Africa's growing number of ports. We are seeing port infrastructure investments from Nigeria to Namibia and South Africa to Djibouti. Owing to inadequate road infrastructure, the majority of these ports will be linked to rail networks, connecting international markets to Africa's growing cities and middle classes. Pertinent examples of major port developments also including intermodal rail connections are Walvis Bay in Namibia and the new port to be developed in Bagamoyo, Tanzania.

The second trend we highlight in African rail infrastructure is that as part of Africa's economic growth potential, we expect more of the share of rail investment will also be directed towards urban rail projects in major cities. Population booms and rapid uncontrolled urbanisation have put major strain on many African cities' transport networks. Congestion is a major trade inhibitor and as such, public transportation projects are beginning to gain traction. For example, Lagos and Abuja in Nigeria, and Yaoundé and Douala in Cameroon, are developing light rail and tram networks. Other cities are developing rapid bus networks owing to the lower costs involved, but metro networks will have an important role to play, as we have seen in the rapidly developing Asian economies over the past decade.

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Related sectors of this article: Infrastructure, Transport Infrastructure, Companies - Infrastructure, Railways
Geography: Africa, Cameroon, Djibouti, Ethiopia, Kenya, Malawi, Mozambique, Namibia, Nigeria, Tanzania
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