Too many expect to prosper by building their rail policy on the now sputtering resource super cycle. Tanzania is the latest with a Plan A flawed strategic assumption.
Tanzania ministries continue to articulate building their railway projects in the face of mounting evidence of fundamental market demand/supply changes you have read in my economic blog themes.
There appears to be little due diligence about the ore and coal based traffic railway mix they are using in searching for railway infrastructure investors.
The headline in Bulk Materials April news reports says “Tanzania seeks rail funding” The government of Tanzania has apparently appointed Rothschild to secure funding for its three planned new railways. Two of the three rail projects are designed to facilitate coal and iron ore exports.
This seems to ignore the changing market dynamics of a long term over supply for those commodities.
Tanzania planners do realize that they will require a large commercial loan investment scheme to finance their rail. The price tag at this conceptual level of planning is admitted to be a whopping estimated US$14 Billion. That is the equivalent of about three Panama Canal upgrade projects.
Today at a design level we can describe as a high level concept feasibility, the cost variability of their capital estimates could be only about 60% or so accurate. Sometimes more accurate. But unlikely. That suggests a critical need for more due diligence risk assessment.
Before investors write check for checks for such projects, they want a 15% of so level of feasibility confidence.
Here is what is missing.
There is no publicly available and transparent railway projected future Income Statement feasibility report. The ability of the proposed Tanzania railroad to pay all of its operating expenses from its future revenues and then have sufficient net earnings left to pay future bond interest and principle is a great unknown at this point.
Instead they have a nicely stated conceptual grad plan discussions available as a MARKET SUPPLY factor — yes. But so few financial and marketing details. Only the engineering capital cost number is out there. That suggests “risks”.
In North American terminology, maybe that is why the project term “scheme” is being used in some of the project promotion literature. The economic use of a project scheme wording suggests risk in the US use of the English language.
NEVERTHELESS… the published news reports suggest rumors that some lenders have been found and are willing to consider commercial loan terms of about 20 years for the Tanzania rail project. Have those investors done their due diligence on the ability of the bonds to be paid off if the super resource cycle of the past decade of China steel consumption shifts?
No one is publicly saying so far. At least not is reports that I globally scan.
The current economic assessments of global commodity consumption out towards 2025 by independant analysts like Citigroup and Goldman Sachs (see my previous reports) suggests a new Plan B set of assumptions should be considered before investing.
Comments by leading regional ministries do not suggest they are thinking that way yet. Instead, Transport Minister Samuel Sitta told some reporters that “We are in competition with the Port of Mombasa… so we need to be efficient.”
That is probably an understatement.
Fortunately, he can still get due diligence help before the project execution begins. A solid market assessment and projection of possible financial returns against that market DEMAND side could be done in about four months time.
To read the news report, go to: http://www.bulkmaterialsinternational.com/htm/n20150526.964554.htm Sent from my iPad