Fastest railway in East Africa

A new railroad with high-speed trains is connecting the coast of Tanzania to the centre of the country. Attractive financing and a comprehensive sustainability and environmental agenda render the multi-billion dollar project a showcase to the entire continent. Here’s how.

A modern infrastructure is essential to developing economies and electric railways are often a preferred choice for sustainability reasons. They provide an affordable and reliable means of transport to promote trade. In Tanzania, the government has embarked on upgrading and extending the national rail network funded by the largest foreign currency financing ever raised in the country.

The government plans to develop a large-scale standard-gauge railway (SGR) that will ultimately connect Uganda, Rwanda, Burundi and the DRC to Tanzania, providing access with high-speed electric trains to the Indian Ocean for landlocked neighbours, stimulating regional trade and passenger travel and strengthening the economy. Construction of the first two lots connecting the commercial centre and port of Dar es Salaam with the administrative capital Dodoma at the centre has begun and is progressing well.

Financing and tendering for the first two lots are already in place, with Turkey’s Yapı Merkezi as EPC contractor and Standard Chartered Bank as global co-ordinator and lead arranger of a USD 1.46 billion term debt financing. The availability of attractive financing is one important aspect in selecting suppliers for international EPC projects. Choosing Sweden-based Bombardier as supplier of signaling equipment paved the way for financing by Sweden’s SEK, Swedish Export Credit Corporation, with cover by EKN, The Swedish Export Credit Agency.

“The high technical competence of Bombardier in combination with financing from EKN and SEK landed them the deal,” says Frederic Petersson, senior underwriter at EKN.

Nordic ECAs team up

The presence of a Danish supply chain allowed EKF, Denmark’s Export Credit Agency, to step in and cover an even bigger slice of the financing. Yoshi Ichikawa, Head of Europe of Structured Export Finance at Standard Chartered Bank, says the Nordic ECAs were critical to the project: “The involvement of two triple A-rated, high-quality ECAs is critical to delivering a competitively priced long-term financing of this kind. It was of paramount importance that the financing was both competitive and long term. Banks may have extended the loan without ECA cover, but the available liquidity, the tenor and the pricing would have been very different.” 

The financing includes ECA-backed tranches as well as commercial bank tranches from over 10 banks and development finance institutions like the Development Bank of Southern Africa (DBSA), the Trade and Development Bank (TDB) and the African Export-Import Bank (Afreximbank).

Financial complexities aside, the project offered an even bigger challenge in terms of securing sustainability of the new railway. Constructing a modern railway that passes near areas rich in biodiversity and home to several indigenous groups calls for a comprehensive analysis of all sustainability aspects involved.

“The variety of environmental and social aspects in Lots 1 and 2 was more of a challenge than the financial aspects,” Ichikawa admits.

In facing these challenges, cooperation is essential, notes Petersson at EKN: “Cooperating with EKF adds clout, since we share the same views on environmental and social issues and are able to exert a joint influence on project partners to live up to social and environmental targets.”

Comprehensive analysis 

Constructing a modern railway that runs through areas hosting unique wildlife and home to several indigenous groups calls for a comprehensive analysis of all sustainability aspects involved. Frida Arounsavath, Senior Sustainability Analyst at EKN, says financial backers play an important role by requiring the buyer to analyse, resolve and monitor sustainability issues. 

The new railway certainly affects people and ecosystems along the alignment in many ways, some potentially negative, others beneficial. The indigenous groups engaging in traditional cattle-farming, for example, must be able to cross the railway via tunnels or overpasses to access grazing areas and water the cattle, while villagers who are displaced or whose livelihood are affected have to be compensated for the loss of land or income and given support to build a new life. Risks and impacts on wildlife and habitats need to be addressed through a multi-pronged programme with protection and management of biodiversity-rich forests and wetlands.

While Tanzania has national legislation in place that cover these issues, EKN, EKF and SEK has required that the International Financial Corporation Performance Standards (IFCPS) are applied in this project. This requirement sets the bar somewhat higher in terms of environmental and social issues. The IFC PS is an international benchmark for identifying and managing environmental and social risk and has been adopted by many organisations as a key component of their environmental and social risk management.

Economic benefits and E&S mitigation

A structured and coordinated approach has been applied in this project:

“The financiers’ efforts at addressing sustainability issues at an early stage, pinpointing ownership issues and ensuring active stakeholder engagement are all aimed at reducing the risk of conflict and problems later during implementation,” Arounsavath says. “We identified discrepancies between national regulation and international standards early on, raised them in project meetings and have required a plan and resources to ensure that the plan is followed.”The transaction demonstrates that international investors are willing to finance well-structured projects, in Africa, which deliver both economic benefits and mitigation of E&S impact. However, the sustainability risks are challenging and it will continue to be important to secure that necessary actions are taken and risks mitigated in practical implementation over coming years.”