Slide 1AGENDABackground on RDCBackground on RDC (cont.)Slide 5Case Study: Nacala CorridorTraffic BaseRDC Role: Operator, InvestorFinancingFinancing (cont.)Stakeholder Relationships“Locomotives with Incorrect Gauge”The Nacala Corridor in ContextThe Nacala Corridor in Context (cont.) Risk vs. RewardIndustry Structural Trends in AfricaIndustry Structural Trends in Africa (cont.)Industry Structural Trends in Africa (cont.) Aid ProgramsCONCLUSIONS (Macro)CONCLUSIONS (Specific to Africa)A Luta Continua!1 U.S./Sub-Saharan Africa Trade & Economic Cooperation Forum (AGOA Forum)Washington DC2 August 2010RDCRAILROADDEVELOPMENTCORPORATIONwww.RRDC.com Direct Investment in Rail in Africa― A Private Sector PerspectiveHENRY POSNER IIIChairman2AGENDABackground on RDCCase Study: Nacala CorridorIndustry Structural TrendsConclusions3Background on RDCPittsburgh-based, privately held railway investment and management companyFocus: Emerging Corridors in Emerging MarketsFinancial structure based on Joint Ventures4Background on RDC (cont.)Country Entity LengthKm (Miles)EmployeesTons Y. 2009(in millions)CURRENT:USA Iowa Interstate 954 (592) 206 11.7Argentina ALL Central 5,690 (3,535) 1,200 2.3Argentina ALL Mesopotamica 2,704 (1,680) 300 1.0Guatemala Ferrovias Guatemala 322 (200) 13 N/APeru Ferrocarril Central Andino 535 (332) 431 1.8PAST:Tons Last Yr of InvestmentMalawi Central East African Railways 797 (495) 417 0.22 (2008)Mozambique Nacala Corridor 873 (542)404 Rail209 Port0.2 Rail (2008)0.9 Port (2008)Estonia Eesti Raudtee 693 (431) 2,345 44.4 (2006)5The Fundamentals of the World’s Freight Railways on One PageUSA EuropeLatin America AfricaREVENUE: Competition Other RR Other RR Truck Truck Market Share Mature Mature Low Medium Traffic Base Mature Mature Expanding RevivingCOSTS: Infrastructure Good Excellent Fair Fair Rolling Stock Good Excellent Poor Fair Staffing Low High High High Railway Capital MarketsMature Emerging Emerging Minimal6Case Study: Nacala Corridor-First private sector integration of Ports & Railways7Traffic Base Highly diversified — carload freight, LCL freight, passengersMain imports — fuel, cooking oil, fertilizer, foodMain exports — tobacco, food8RDC Role: Operator, InvestorBegun 1996, with ERLMalawi concessioned 1999, but with incomplete financingCyclone damage in 2003 fixed in 2005 due to incomplete financingMozambique operational start-up January 2005RDC, ERL interests sold to local investors September 20089Financing-Financed between 1999 (Malawi—100% equity)…-… and 2005 (Mozambique—OPIC debt)-Equity—25%; debt—75% (plus donor support for famine relief)-No renegotiation of terms with governments10Financing (cont.)MILLENIUM CHALLENGEProject ineligible for financing – “not sponsored by public sector”After sale of RDC shares, Malawi has applied for funding!WORLD BANKNacala competes with Sena Line, generating conflict with World Bank & CFM (public sector shareholder)World Bank funding of Sena Line based on faulty due diligenceWorld Bank funding of consultant study to discredit Nacala Corridor11Stakeholder Relationships-Ongoing efforts by public sector to discredit privatization at the local level“Failure to fully staff all stations”“Failure to rehabilitate 77 km”“Failure to provide service on light density lines”“Failure to purchase locomotives with the correct gauge”12“Locomotives with Incorrect Gauge”Gauge – Convertible U6Bs Loading in Panama for Mozambique13The Nacala Corridor in ContextGUATEMALA NACALA CORRIDOR ESTONIATONS 2004157,000 300,000 Rail 42,000,000LINES OF BUSINESSAtlantic – Containers, Steel, SugarPacific – ?Electricity rights-of-way, etc. – ?Port & Rail Oil, Fertilizer, MetalsPURCHASE PRICE$0 + 10% of Revenue$7 million + $2 million/year + 5% of Revenue$60 million for 66%INITIAL FINANCINGRDCLocal Capital MarketsSDCNOPICCFMStrategic InvestorsInt’l Capital MarketsIFC14The Nacala Corridor in Context (cont.)Risk vs. RewardAnticipated Risk Actual Risk Mitigation RewardESTONIA Traffic ExpropriationPrivatization AgreementSaleGUATEMALA Traffic, Financing Expropriation CAFTA ArbitrationNACALA Traffic, Financing Traffic, Financing Capital Markets SaleUSA TrafficThreat of Expropriation (re-regulation)Capital MarketsValue Growth(NOTE: Public Sector = Primary Source of Risk!)15Industry Structural Trends in AfricaPositiveRevenue:African RR’s compete with trucks, not other RR’s, therefore margins higher.African RR’s have growing economies, market share upside.Costs:African RR cost structure presents much room for improvement.General:African RR’s are potentially as profitable as similar railways in USA.16Industry Structural Trends in Africa (cont.)NegativeRevenue:Revenue Risk due to lack of meaningful historic trends.Costs:Lack of local experience for debt financing.General:Logistical and Cultural gaps make opportunities difficult to identify and pursue.Competition in Africa is often public sector railways, such as Transnet (South Africa).17Industry Structural Trends in Africa (cont.) Aid Programs19942003200318CONCLUSIONS(Macro)Rail is a viable private sector business…as confirmed by value-driven expropriations!Shareholder Structure is best form of risk mitigation, not Business PlansRule of Law is a secondary defense and more important than Privatization Agreements19CONCLUSIONS (Specific to Africa)Public sector aid programs in past competed with private sector potentialToday’s competition is primarily between public sector investors & private sector investors (but aid programs still represent competition)20A Luta Continua!Vision, experience and commitment are not enough.Financial capacity is NOT the constraint.The public sector and multi-laterals need to be Part of the Solution, not the