www.pwc.co.za

Laying the foundations for growth – What is rail’s role in the big picture?

HEAVY HAUL RAIL AFRICA

19th March 2014

Dr Andrew Shaw

PwC

Table of Contents

1.  The link to Commodities 3

2.  Africa ‘Gearing Up’ 7

3.  A closer look at a few key African countries 15

4.  The future of ‘Heavy Haul’ rail 24

5.  Conclusion 27

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PwC

The link to Commodities

1 3

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Source: PwC Mine (2012) • The growing disconnect

Global commodity price & demand regaining strength

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2007 2008 2009 2010 2011 2012

Monthly average coal, copper, gold, iron ore commodity prices, HSBC Global Mining Index (2007 = 1)

Gold

Coal (Australian thermal)

Iron ore (CFR 63.5%)

Copper

Source: Bloomberg, The World Bank

(April)

Source: The World Bank, AME Outlook

Source: The World Bank, BP Statistical Review of World Energy June 2011

PwC

Capital expenditure up to $98 billion by the top 40 global miners

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5

10

15

20

25

Capital expenditures by commodity ($ billion)

2011 2010

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5

10

15

20

25

30

35

Capital expenditures by location ($ billion)

2011

Source: PwC Mine (2012) • The growing disconnect

Source: PwC Analysis

PwC

Iron ore leads the way = bulk of 2011’s EBIT gains

Source: PwC Analysis

-

20

40

60

80

100

120

Revenue by commodity ($ billion)

2011 2010

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10

20

30

40

50

60

70

EBIT by commodity ($ billion)

2011 2010

Source: PwC Mine (2012) • The growing disconnect

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Africa ‘Gearing Up’

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Africa gearing up

Africa is the next place-to-be for doing business The lions follow the tigers:

•  6 of the top ten fastest growing economies 2001-10 were in Africa

•  Between 2010 and 2016 it will be another 6

•  Africa is home to 1 billion people

•  By 2035, Africa’s labour force will be larger than China’s

Growing demand offers huge potential for T&L companies

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10 Countries in profile

10 most relevant economies for T&L due to:

•  Significantly high GDP

•  Strong growth expectations

•  Rich in natural resources

•  Natural exit to land-locked adjoining countries high transit traffic volumes

•  Potential gateways to the region

•  Rapidly improving transport infrastructure

Coverage of all major regions:

•  North Africa

•  Sub-Saharan Africa (east, west and southern regions)

DRC

Angola

South Africa

Mozam-bique

Tanzania

Kenya

Egypt Algeria

Nigeria

Ghana

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‘Sizing up’ the growth potential

The size of the bubbles represents the size of the economy (GDP 2012) Sources: World Bank, International Monetary Fund

Algeria US$ 209bn

Angola US$ 115bn

DRC US$ 17bn

Egypt US$ 257bn

Ghana US$ 40bn

Kenya US$ 41bn

Mozambique US$ 14bn

Nigeria US$ 270bn

South Africa US$ 384bn

Tanzania US$ 28bn

0

20

40

60

80

100

120

140

160

180

200

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% GDP annual growth estimates for the period 2012-2017 shown as a % for each country

Estim

ated

pop

ulat

ion

as a

t mid

Oct

ober

201

3 (M

illio

ns)

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Basis of the PwC “Africa Gearing Up” study

Use of leading independent economic consultants: Econometrix

The 5 –Pillar approach

1.  Demographics & resources

2.  Economics

3.  Business environment

4.  Trade & logistics

5.  Transport infrastructure

Interviews with executives operating in Africa & industry specialists

Investment potential assessments

11

"Attractive

#Average

#Unattractive

Strong Improvement Expected

Some Improvement Expected Stagnation / marginal change expected

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Current state

Demographic & Resources

Economics Business Environment

Trade & Logistics

Transport Infrastructure

Algeria

Angola

DRC

Egypt

Ghana

Kenya

Mozambique

Nigeria

South Africa

Tanzania

" # #Attractive Average Unattractive

"

  #  # "

    #  

 

# # #  

12

"

"#

#

"""""

"

"

"

""

""

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5 Years forward

Demographic & Resources

Economics Business Environment

Trade & Logistics

Transport Infrastructure

Expected Growth (GDP 2012-2017)

Algeria 3,6%

Angola 5,7%

DRC 8,6%

Egypt 3,4%

Ghana 5,9%

Kenya 6,2%

Mozambique 8,0%

Nigeria 6,8%

South Africa 3,0%

Tanzania 7,0%

Strong Improvement Expected

Stagnation / marginal change expected

" # #Attractive Average Unattractive

 

 

     

     

 

 

13 Some Improvement Expected

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The way Africa rolls Future growth & development will rely on quality & efficiency of its transport networks

Mining, oil & gas

Retail & Consumer

Agriculture

Manufacture

Improvement in rail and port infrastructure

Efficient, secure logistics & improvement in road, ports and air infrastructure and cold storage

Efficient low-cost logistics supporting fresh produce and rapid export

Efficient low-cost cross-border logistics aligned to growth in broader African economy

Logistics Requirements

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A closer look at a few key African countries

3 15

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Business Environment

•  3rd largest African economy. Oil accounts for 98% of revenue and a current account surplus,

•  Business environment rated weakest in SADC,

Trade and Logistics

•  Improvement in customs, although logistics performance remains weak,

•  Waiting times at Port of Luanda average 144 hours, and traffic frequently diverted to Walvis Bay. There are however considerable port expansion plans,

•  Road infrastructure dilapidated in the east, yet one of Africa’s largest investors in road infrastructure.

Rail Infrastructure

•  Rail rehabilitation has been ongoing since 2005, reconstructing 2,700 km of railway at a total cost of US$ 3.3 Bill.

Country Highlights - Angola

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Tanzania – a rapidly growing economy Liberalised trade regime and regional integration

Member of The East African Community (EAC) and The Southern African Development Community (SADC)

Fairly broad export base

Among the world’s fastest-growing economies over the medium term (6.6%-7.2% between 2012-17)

Challenging business environment

Unskilled local workforce is a major challenge – 80% of labour force employed in agricultural sector

Port of Dar es Salaam in competition with Mombasa to become gateway to East Africa:

-  Good performance of port KPIs, but high shipping costs

-  Due to be expanded

17 Africa gearing up

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Business Environment

•  7% average annual growth rate over last decade,

•  Improved trade integration, but corruption remains a concern.

Trade and Logistics

•  Diverse natural resources attracting investment,

•  Logistics Performance Index shows significant improvement over last few years,

•  Port of Dar es Salaam remains a bottleneck,

Rail Infrastructure

•  Infrastructure performs better than other African country’s but rail requires significant investment,

•  US$42 bill Chinese agreement to rehabilitate Tazara line.

•  US$5.1 bill plan for Dar es Salaam - Kigali/Musongati line

•  Mwambani (Tanga) port and rail project will create new link to Lake Victoria

Country Highlights - Tanzania

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Mozambique – a case in point How inadequate infrastructure can stall growth

Massive reserves of coal and natural gas that can’t get out

-  Potential to be world’s 3rd largest exporter of liquified natural gas

Estimate of $20-25 bn required for infrastructure

Major success stories:

•  Expansion of energy sector – capacity exported to South Africa

•  $2bn bid for railway and port developments in pipeline

•  Maputo Development Corridor

•  Major private sector improvements eg. Vale & Nacala Railway Corridor

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The weak institutional & business environment offers

massive potential for improvement.

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Business Environment

•  3rd poorest country in the world,

•  Limited by bribery, corruption, red tape & Government decision making takes long.

Trade and Logistics

•  Represents a natural entry point for its landlocked neighbors to the west but is frequently by-passed,

•  Narrow export base dominated by aluminum.

Infrastructure

•  Transport infrastructure investment of US$17 planned, mostly connecting mining and agricultural clusters to export ports. Projects hampered by implementation delays,

•  Significant need to upgrade and improve the rail network and connected ports.

•  Heavy haul access linked to appropriate ports is key to opening up Tete province.

Country Highlights – Mozambique

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Business Environment

•  Considered to have the largest endowments of minerals in Africa,

•  Weak business environment characterised by political turmoil.

Trade and Logistics

•  Logistics potential limited by lack of infrastructure,

•  Regulations and corruption in customs negatively impact trade and result in considerable delay,

Infrastructure

•  Port infrastructure is poor and goods often diverted to Point Noire in Congo.

•  Due to poor transport infrastructure country is poorly connected with much of the south focused on linkages to Zambia, & then on to SA or Tanzania.

•  Lobito to Kolwezi line & inland waterways would open up mineral export capability.

Country Highlights – Democratic Republic of Congo (DRC)

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Nigeria, Nigeria, Nigeria….. 10 out of 16 executives interviewed rate Nigeria

50% of population urbanised – attractive for retail/consumer sectors

Ranks world’s 4th fastest growing economy - oil exports & government stability

Already diversifying into agriculture (42% of GDP)

Ambitious plans by gov’t to expand infrastructure:

•  Roads carry more than 90% of passengers & freight

•  New deep sea port at Lekki planned to ease congestion

•  $2bn Rail rehabilitation to reconstruct 2000km

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Kenya - Entry point to East Africa Rising consumption and oil discoveries

Entry point to East African Community (EAC):

•  Port of Mombasa faces congestions due to high demand

•  Port of Lamu is one of the largest African port projects

•  Lamu planned to connect to South Sudan and Ethiopia via rail and road (LAPSET corridor)

Diversified economy:

-  Large agricultural sector – largest tea producer in Africa, largest exporter of flowers

-  Significant opportunity for growth in light manufacturing

-  Developed oil fields will change Kenya from a net oil importer to a net exporter of oil

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The Future of ‘Heavy-haul’ Rail

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Rail

Africa’s rail networks are generally in worse shape than its roads. In many countries, rail is in poor repair and out of date. Rail investments are set to increase in the coming years, but only South Africa has implemented a comprehensive rail investment strategy.

Getting Around Africa’s Markets

Regional integration with new rail lines … has started in southern and eastern Africa. South Africa is collaborating with Swaziland. In the East, Tanzania is working with neighbours Rwanda and Burundi on plans to link the gateway city of Dar es Salaam with Kigali in Rwanda and Musongati in Burundi. And Kenya is already connected to neighbouring Uganda via rail. But rail integration in the west is nearly nonexistent.

Trans-African corridors, gateways and infrastructure projects

PwC

Drivers for change in heavy-haul rail

•  Keep pace with demand, and align to the new commodity wave (post 2008 crisis),

•  Build more efficient supply chains, pit-to-port and port-to-market,

•  Improve the port rail interface,

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•  Enhanced train/line capacity:

•  Axle weight,

•  Train length,

•  Line capacity

•  All of these possibly impacted by gauge.

PwC

Conclusions

5 27

DRC

Angola

South Africa

Mozam-bique

Tanzania

Kenya

Egypt Algeria

Nigeria

Ghana

PwC

Conclusion

There is evidence of post 2008 global commodity price & demand strength in commodities

Ghana and Nigeria offer the greatest overall investment potential of the group PwC studied

Build more efficient rail supply chains. Need for greater rail capacity to address commodity growth requirements

Countries such as South Africa, Tanzania, Kenya, Angola, Mozambiquehave major new rail line plans

South Africa has implemented a comprehensive rail investment strategy

Rail integration in between African countries remains weak with integration in the west almost nonexistent

There are many operational challenges for railways in Africa with a number of concessions having being terminated

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Thank You …

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Andrew Shaw Associate Director