PPIAF Assistance in Swaziland July 2012 In 2002 PPIAF support was provided to the government of Swaziland to assess the regulatory, legal, and institutional framework necessary to concession Swaziland Railways. This helped the government achieve consensus on the concessioning of Swaziland Railways, and the government requested additional PPIAF support in 2005 for the preparation of a concession strategy and information memorandum in support of the concession. The government has yet to implement the concession action plan prepared as part of the second PPIAF activity. Technical Assistance for Swaziland s Rail Sector The Swaziland Railway Company was established in 1962 as a vertically integrated monopoly, and began operating in 1964 to transport iron ore to the port of Maputo in Mozambique. Over the years, the Swaziland Railways Company expanded its role from a largely domestic export carrier of iron ore, sugar, coal, and wood pulp, etc. to a significant transit carrier for goods destined to and from Zimbabwe, and the north/east southern Africa region. The railway was thus one of the key anchors to enhanced economic development in Swaziland and the southern Africa region. According to the 1962 Swaziland Railways Act, the Swaziland Railways Company was to meet all its costs without any government subsidies, and operate as a commercial profit enterprise. In 2001 the government of Swaziland conducted a rail sector restructuring study that found that the Swaziland Railway Company was operating at a financially break-even point, but was unable to finance any future significant capital expenditure from its own resources. The study recommended a unitary concession of the Swaziland Railways Company, but found that the legislative and regulatory framework in place was not supportive of a liberalized railways sector. Therefore, investor interest in the concession was unlikely in the absence of a secure enabling environment. It was in this context that the government of Swaziland approached PPIAF in 2002 under the realization that a key element of the successful implementation of private sector participation in the rail sector would be the establishment of an effective regulatory body to provide potential private investors with clear rules for the sector. Thus PPIAF assistance was requested to support the government to start progressive implementation of independent regulation in the railway sector through an assessment of the regulatory, legal, and institutional framework necessary to support a privatized railway company. The PPIAF-funded report prepared a new draft Swaziland Railway Act to try to improve the conditions for regulatory reform because it was acknowledged that the legal framework, via the 1962 Swaziland Railway Act, did not currently allow for the necessary reform included in the report. Thus any regulatory recommendations would be contingent on the passing of the proposed. Several recommendations were provided within the report on the role of a new independent regulator for the rail sector. The report recommended that the regulator s functions should include advising the Minister of Transport on policy matters, evaluating concession and performance agreements, regulating the railway industry in a transparent and impartial manner within the ambit of the national railway policy, promoting the use of railway as a transport mode, and monitoring and ensuring compliance with statutory requirements. The government of Swaziland, through the Ministry of Transport, would provide rail sector policy, and it would be the job of the regulator to implement this policy in a depoliticized environment. Finally, the report made preliminary recommendations on the potential concession of Swaziland Railways, which carried no domestic traffic and was therefore dependent on the other rail operator, Portos e Caminhos de Ferro de Moçambique (Mozambique Ports and Railways or CFM), which had access to CFM lines, and Spoornet (owner of rail rolling stock) for daily operations. Because of Swaziland Railway s relationship with Spoornet and CFM, the PPIAF report suggested that the government of Swaziland negotiate non-competitively with a consortium of Spoornet and CFM to concession the railway, as there was unlikely to be other interested bidders. 1
A stakeholders workshop was held on January 21, 2004 in Mbabane, Swaziland where stakeholders were allowed to comment on the findings and recommendations on the form and organization of the envisaged regulator. A steering group committee meeting and final workshop both took place in June 2004 to present the findings of the report and reach consensus on the report s recommendations. The report on rail regulation in Swaziland was widely circulated, and as a result consensus was achieved on the concessioning of Swaziland Railways. The government of Swaziland put forward significant effort and resources toward privatizing Swaziland Railways beginning with the shedding of non-core assets and rationalization of the workforce financed by the government. The government also put into place a national transport and privatization policy that supported the privatization of Swaziland Railways. As a result of these initiatives, the government of Swaziland requested additional PPIAF support in 2005 for the preparation of a concession strategy and concession documents in support of the potential privatization. Despite Swaziland Railways having performed creditably in consistently breaking even each year, virtually unheard of for a state-owned railway in Sub-Saharan Africa, its net profit of around $3.5 million in fiscal 2005 (following minor losses in prior years) was insufficient to allow for necessary investment in the railway infrastructure. This second activity presented a study on the development of a concession strategy for Swaziland Railways through a discussion of alternative privatization forms and strategies and an examination of the advantages and disadvantages of each strategy. Following a workshop held in Mbabane in February 2006, the government of Swaziland chose the line access regime as its preferred privatization option. The line access regime effectively delineated the railway business into three segments: infrastructure (tracks), management (track maintenance), and operations (providing transportation services). It was also agreed that Swaziland Railways would remain the railway infrastructure operator, and that freight and passenger services would be licensed out to private operators, with the private operators paying a track access fee to Swaziland Railways. Under this plan, it was envisaged that import-export services would also be licensed out in the future. The report suggested an implementation plan for the railways sector: 1. Pass the Draft Railway Act 2. Implement initiatives designed to enhance the railway sector's competitive position in Swaziland and southern Africa 3. Implement the line access regime and seek private sector operators 4. In the long term, continue to examine the possibility of a vertically integrated unitary concession (Swaziland Railways-Spoornet concession) As part of the final report, the consultants also prepared a model information memorandum and concession agreement for Swaziland Railways. The model information memorandum provided an overview of Swaziland's economic and investment environment, an overview of Swaziland Railways, its personnel, and its recent performance, Swaziland's privatization policy and objectives as it pertained to Swaziland Railways, and a review of core and non-core assets to be included or excluded from the concession. The model concession agreement, applicable to a vertically integrated unitary concession, defined the objectives and terms of the concession. Following the delivery of the final report, Swaziland Railways implemented a commercialization plan, recommended in the PPIAF report, designed to improve the company s balance sheet and make the railway attractive for potential concessioning. However, to date the government of Swaziland has not yet taken the decision to implement the line access regime recommended in the PPIAF report, but the government remains committed to improving the performance of the railways sector. In January 2012 Swaziland and South Africa announced the development of a new 146 kilometer railway line to be established between South Africa and Swaziland, to run from Lothair in Mpumalanga, South Africa to Sidvokodvo, Swaziland. The costs of the $2 billion project will be met by the governments of Swaziland and South Africa, and construction is slated to be completed in 2016. 2
Results of PPIAF s Activities in Swaziland s Rail Sector Outputs Plans/strategies prepared Policies prepared or legal or regulatory changes recommended Project cycle-related assistance Transaction support Workshops/seminars Study on the development of a concession strategy for Swaziland Railways, May 2006 Regulatory institutional framework study for Swaziland s railways sector, including draft Swaziland Railways Act, 2004 Model information memorandum and concession agreement for the concession of Swaziland Railways, May 2006 Stakeholder workshop in Mbabane to comment on the findings and recommendations of the draft report on economic, safety, and environmental regulation of the railways sector, and design options for a potential railways concession, January 21, 2004 Steering group meeting to present the findings of the draft final report, June 2004 Final workshop to present the findings of the report to industry stakeholders, June 2004 Stakeholders workshop to review shortlisted privatization strategies, February 2006 Stakeholders workshop to review the draft final report, March 2006 Plans/strategies adopted Outcomes Swaziland Railways implemented a commercialization plan designed to improve the company s balance sheet and make the railway attractive for potential concessioning, 2006 Policies adopted, legislation passed/amended, or regulations issued/revised Consensus achieved National transport and privatization policy to support the privatization of Swaziland Railways, 2004 Consensus achieved within government of Swaziland on the concessioning of Swaziland Railways, July 2004 Technical Assistance through the Sub-National Technical Assistance (SNTA) Program The government of Swaziland has worked with bilateral and multilateral donors since the 1980s to reform and build the capacity of the local government system. These efforts included the $29 million World Banksupported Swaziland Urban Development Project, which helped strengthen and clarify the roles and responsibilities of local governments. Completed in 2005, one of the project s key objectives was to assist the Mbabane and Manzini city councils and the Swaziland Water Services Corporation achieve creditworthy status. The cities of Mbabane and Manzini both received a long-term domestic credit rating 3
of A- following their participation in the project. Despite the investment-grade ratings, the credit assessments found both cities to be under considerable financial stress and lacking an investment plan to approach capital markets. In 2007 the government of Swaziland requested PPIAF assistance through its SNTA program to improve the creditworthiness of key sub-national entities and facilitate their entry into regional finance markets. This activity provided technical assistance to four municipalities Mbabane City Council, Manzini City Council, Matsapha Town Board, and Ezulweni Town Board and the Swaziland Water Services Corporation. The borrowing and institutional capacity of each sub-national entity was analyzed, including financial assessments to establish their capacity to absorb debt. SNTA also assisted the Matsapha Town Board and the Manzini City Council to prepare for and obtain long-term domestic credit ratings of BBB and A-, respectively. The evaluations indicated Matsapha had the financial and operational capacity to obtain market-based financing, and a commercial investment plan was developed. However uncertainty about future expansion of the town s jurisdiction made the city officials reluctant to borrow at the time of the activity. Turnaround strategies were developed to restructure the operations of Mbabane and Manzini City Councils and return the municipalities to an operational surplus. The charters were implemented by both municipalities; however, no additional steps were taken to approach commercial lending markets. Ezulweni s water infrastructure needs were identified as a priority in the activity s assessments. Specific advice on funding the capital required for meeting the water needs to stimulate development was provided to the Town Board. A joint meeting between the Ezulweni Town Board and the Swaziland Water Services Corporation was arranged to discuss financing the infrastructure through proposed tax increases. A memorandum of agreement between the Ezulweni Town Board and the Swaziland Water Services Corporation was signed in February 2009, but no further steps were taken. An analysis of the Swaziland Water Services Corporation found that while the utility could be rated as investment grade, it had very limited debt absorption capacity. A credit rating for the Ezulweni Town Board was funded by another SNTA activity, the South African Cities Network Borrowing Program, which occurred at the same time as the Swaziland activity. Ezulweni obtained a rating of BB+ and has not borrowed commercially to date. The activity concluded with a demand-side capacity building workshop on municipal creditworthiness and borrowing, held in Matsapha in November 2009. The workshop aimed to create a broader national awareness of municipal finance and was attended by key public and private sector stakeholders. A handbook on municipal creditworthiness was also prepared to provide guidance for municipalities seeking funds for capital infrastructure programs. Results of PPIAF s SNTA Program s Activities in Swaziland Outputs Analyses/assessments prepared Manzini City Council obtained a credit rating of A- from Global Credit Ratings, 2007 Matsapha Town Board obtained a long-term domestic credit rating of BBB from Global Credit Ratings, 2008 Plans/strategies prepared Mbabane City Council Turnaround Charter, 2008 Manzini City Council Turnaround Charter, 2008 Capital Investment Plan for Matsapha Town Board Funding the Capital Required for Meeting the Water Needs to Stimulate Development in the Ezulweni Town Board's Area of Jurisdiction, 2008 4
Project cycle-related assistance Transaction support Workshops/seminars Memorandum of Agreement between the Ezulweni Town Board and the Swaziland Water Services Corporation, 2009 Workshop on Municipal Creditworthiness & Borrowing, November 2009 Knowledge products disseminated Handbook for Municipalities: Creditworthiness, Credit Ratings and Borrowing to Fund Municipal Infrastructure, 2009 Institutions created/strengthened Plans/strategies adopted Outcomes Municipality of Mbabane, Municipality of Manzini, Municipality of Matsapha, Swaziland Water Services Corporation, and Ezulweni Town Board strengthened, 2009 Mbabane City Council Turnaround Charter, 2008 Manzini City Council Turnaround Charter 2008 5