NIGERIAN RAILWAY CORPORATION SEEKS TO PRIVATIZE

UNCLAS SECTION 01 OF 04 ABUJA 001514

SIPDIS

STATE PASS DOT FOR SAMPLE

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ELTN NI
SUBJECT: NIGERIAN RAILWAY CORPORATION SEEKS TO PRIVATIZE
THROUGH 25-YEAR CONCESSIONS, BUT DIFFICULTIES ABOUND



1. (SBU) Begin summary. Economic officers met on July 5
with A.A. Abubakar, managing director of the state-owned
Nigeria Railway Corporation (NRC). Abubakar asserted that
the state of Nigeria's railways was rather good, and
improving. He sketched out the NRC's plan, to be introduced
later in 2005, to improve the national rail network through
the granting of 25-year concessions to private rail
operators. Abubakar, however, glossed over many of the
NRC's serious problems, including nearly no new track
construction since 1964; critical shortages of locomotives;
low numbers of trains, which often also run late and
unpredictably; and very large arrears - up to eight months
for employees and more than 20 months for retirees. The GON
says Nigeria's railway infrastructure has "deteriorated to a
point of operational irrelevance." This "total collapse" of
the NRC means the railway's concessionization plan will face
significant difficulties. End summary.


2. (SBU) Two embassy economic officers and a Lagos Consulate
political/economic officer met in Lagos on July 5 with A.A.
Abubakar, managing director of the Nigeria Railway
Corporation (NRC). The NRC is completely owned by the
Government of Nigeria (GON). Abubakar asserted that the
state of Nigeria's railways was rather good, and improving.
He said 70 percent of Nigeria's rail network is operational.
The NRC managing director explained that the non-operational
portion lies in the country's northeast and is being rebuilt
following heavy flooding in 2000 that washed away tracks
and, especially, crucial bridges. According to Abubakar,
the NRC finished in June 2005 the first stage of this
rehabilitation by replacing four major bridges. He added
that the next stage will consist of rebuilding operations
between Bauchi and Gombe States, which also are in the
northeast. Abubakar said when this second stage is
completed, Nigeria's entire rail network can be considered
operational. He also noted that if the money is available,
the GON will pay the cost of building a new standard-gauge
rail system for fast passenger trains. (Comment: The GON's
building a standard-gauge, fast-rail system for passengers
does not seem likely or realistic, given the NRC's current
state. Such a standard-gauge rail line would be
incompatible with the vast majority of the NRC's current
rail network, which consists of smaller, narrow-gauge
tracks. End comment.)


3. (SBU) According to Abubakar, the NRC operates select
passenger services during the week. Every Wednesday, a
passenger train runs from Port Harcourt to Kano; every
Friday a passenger train runs from Lagos to Kano; and a
daily passenger train operates from Kaduna to Minna. He
said the Lagos metropolitan area currently has four to eight
trains operating each morning and each evening to carry
commuters, and that freight trains depart Lagos to carry
bulk and agricultural products. (Comment: The regular
train runs Abubakar mentioned are numerically insignificant
for a country of Nigeria's population - approximately 150
million people. An official at the Kaduna Junction Station,
one of Nigeria's leading rail junctions, told Abuja economic
officer in June that, excluding oil shipments, not more than
four trains passed through Kaduna on most days. Also, even
if trains complete their scheduled run, they do not
necessarily do so on time. The spouse of one U.S. Mission
employee in mid-June 2005 boarded a passenger train in Lagos
for a scheduled two-and-a-half-day trip to Kano. The train
left Lagos almost 30 hours late, without explanation for the
delay, and reached Zungeru - slightly more than half the way
to Kano - in "Twilight Zone" fashion on the fourth night
following the originally scheduled departure from Lagos.
End comment.)


4. (U) Abubakar said the GON signed a contract in 1995 with
the China Civil Engineering Construction Corporation (CCECC)
to rehabilitate Nigeria's railway system and to provide
rolling stock. He noted, however, that the Nigerian
National Assembly has not funded this contract since 2000,
and thus "nothing has been happening in the last five
years." Abubakar emphasized that Nigeria's military regime,
and not the Obasanjo administration, signed this deal with
the CCECC.


5. (SBU) The NRC managing director said there "hasn't been
much investment" by the GON in Nigeria's railroads in the
past 20 to 30 years. He contended the NRC's recent success
has been in keeping the railroad running at all, even if at
a reduced capacity. Abubakar acknowledged, however, that
the costs of this reduced rail capacity included overcrowded
roads, as well as Nigerian highways damaged by heavy traffic
and excessive loads.

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The government details its concessionization plan
-------------- --------------


6. (U) Abubakar noted that President Obasanjo sponsored in
2004 a report on concessioning off railway operations for 25
years. Under this plan, Abubakar said, both the GON and its
private-sector partners will provide funds for five years to
cover the costs of rail network repairs and upgrades.
Private companies will then operate the NRC, and at the end
of the concession period, the management of the NRC will
revert to the GON.


7. (U) Abubakar explained that the NRC intends to offer
three concessions, for three separate rail networks: 1) the
"Western Railway, which covers Lagos, Kano, and northern
Nigeria via Kano; 2) the "Eastern Railway," which covers
Port Harcourt to Maiduguri and the country's north via
Kafanchan; and 3) the Itakpe-Ajaokuta-Warri route, which
remains under construction and which will connect the Itakpe
iron-ore field, the Ajaokuta steel mill, and Aladja port,
near Warri. Abubakar said the GON has an unspecified plan
to connect the Itakpe-Ajaokuta-Warri line, which is standard
gauge, to the narrow-gauge network covering the remainder of
Nigeria, and that the GON will bear the cost of this
linkage.


8. (SBU) The railroad official noted some of the NRC's
difficulties and ascribed these mainly to funding
shortfalls. He did not, however, express any expectation
that the GON would soon improve its financial support to the
NRC. Instead, he expressed his interest in having U.S.
companies compete to win an NRC operating concession.
Abubakar added there was so far no evidence of
concessionaires' interest except in operating the Ajoakuta
line. The ISPAT Group, an Indian company overseeing the
operations of the Ajaokuta steel mill, expressed this
interest.


9. (U) Abubakar said concession operators can import their
own locomotives and rolling stock, and that he is confident
the GON will not apply import tariffs to these items. He
explained that policymakers have not discussed waiving
tariffs but that the NRC will recommend the government do
so. Said Abubakar, "I'm sure the government will be willing
to do this," because Nigeria earlier granted its Chinese
partner a waiver for rolling stock it provided.


10. (U) According to Abubakar, the NRC will hold three
public conferences, in Lagos, Kaduna, and Port Harcourt, to
"sensitize" the Nigerian public to the concession plan and
provide details about it. (Begin comment: The first of
these conferences, the Bureau of Public Enterprises' (BPE)
"Workshop on the Reform, Restructuring, and Concessioning of
the Nigerian Railway Corporation," was held in Kaduna on
July 11-12, 2005. End comment.)


11. (U) Abubakar noted, however, that the National Assembly
still must approve funding in the 2005 budget to cover
termination payments required by planned job cuts in
preparation for concessionization. According to a July
press report, Obasanjo has approved a 50-percent cut in the
NRC's employees, from 14,000 to 7,000.


12. (U) The BPE says the concessionization process will
begin in August, while press reports note the NRC is
supposed to offer these concessions by the fourth quarter of

2005. The BPE also says the NRC will sell some of its non-
core assets, or non-operational assets, and use these
proceeds to pay NRC liabilities.


13. (SBU) The BPE additionally has publicized a
"privatization plan" for the Railway Property Company, Ltd.
(RPCL),an NRC subsidiary that manages the railroad's non-
operations land and landed property. This prospectus admits
the RPCL did not know, as of mid-2005, the number of its
employees, the level of the organization's "performance" or
its "current status," or its revenue or debt profiles. The
privatization plan says the RPCL either will be offered as a
concession, or its lands and properties will be sold at
market value.

--------------
An overview of Nigeria's rail system
--------------


14. (U) Nigeria's railroads employ the narrow-gauge system -
rails only three feet, six inches wide - as opposed to the
"standard gauge," as is found in the United States, of four
feet, eight and one-half inches. The disadvantages of
narrow-gauge systems are that they must carry lighter
cargoes, and that these trains are more likely to derail.
Nigeria's rail network includes almost no double track, and
a slow average train speed.


15. (U) Nigeria's rail network runs roughly diagonally from
the country's southwest, starting at Lagos, to Nguru in the
northeast, and from Port Harcourt in the southeast through
Kafanchan to Maiduguri, in Nigeria's far northeast.
According to the NRC, its track network consists of 4,332
track kilometers. The two north-south lines - Lagos to
Kano, and Port Harcourt to Maiduguri - are connected by a
179-km east-west line running from Kaduna to Kafanchan.
Apart from the Kafanchan-Maiduguri line, which was built
between 1954 and 1964, most of Nigeria's other rail lines
were constructed between 1898 and 1927. Few new rail lines
have been built in Nigeria since 1964 except for the 277-km
line under construction between Itakpe to Warri, via
Ajoakuta, which is more than 80 percent complete. Since
Nigeria's independence in 1960, the country's successive
governments have invested little in the country's rail
network.

--------------
The NRC has no shortage of problems
--------------


16. (SBU) A report prepared by a U.S. consulting company in
2005 for the U.S. Department of Transportation and the U.S.
Federal Railroad Administration had the following main
conclusions: the NRC's major problem is not a deficient
rail network, but rather its lack of usable and reliable
locomotives; the railroad's need for additional locomotives
and railcars is "critical and immediate"; and the NRC's
track infrastructure is in "relatively good condition."
This report followed field inspections of the NRC's western
main line in December 2003 and its eastern main line in
December 2004.


17. (SBU) A press report, however, noted that in March 2004,
Nigeria had only 35 operational locomotives. The U.S. DOT
study, meanwhile, found that only four of 50 Chinese-
supplied locomotives were available for service in December
2004, and that as of March 2005, fewer than 10 percent of
the NRC's freight locomotives were available for freight
runs.


18. (U) Potential NRC concessionaires would have to contend
with significant operational difficulties. The BPE says
Nigeria's "railway infrastructure and other assets have
deteriorated to a point of operational irrelevance and
economic unviability," while this "total collapse has badly
affected the movement of both passengers and freight." The
NRC notes the current freight environment in which it
operates has "virtually collapsed." As a result, the NRC
held only a 1.2-percent share of Nigeria's total freight
transportation market in 2004.


19. (SBU) The NRC has experienced a significant downturn in
its passenger volume. The national railroad carried 15.5
million passengers in 1994. This figure plummeted to
roughly 2 million passengers by 2001 - in a nation with, at
that time, a population of approximately 130 million.
(Begin comment: The 2005 U.S. DOT study concluded that rail
passenger service will remain unprofitable for the NRC. End
comment.) Complicating the NRC's movement of passengers and
freight is the vandalization of its signal communications
system through the theft of VHF signal masts' solar panels.


20. (U) GON officials demonstrated marked candor at the
public workshop on NRC concessioning held in Kaduna on July
11-12, 2005. Benjamin Dikki, BPE director of transport and
communications, termed the NRC "on the brink of collapse"
and "unable to maintain any reasonable level of service."
BPE Director General Irene Chigbue was even more direct,
citing the NRC's actual "collapse." She said, "When you add
the pitiful plight of the railways pensioners to this
gruesome reality, a more pathetic picture can hardly be
contemplated."


21. (SBU) The BPE says a portion of proceeds from the
proposed sale of NRC assets will be used to help pay off the
corporation's significant arrears in salaries and pensions.
For example, NRC employees at the Kaduna Junction Station
told Abuja economic officer in June 2005 they had not been
paid for eight months. Meanwhile, the Nigerian press
reported in March 2005 the NRC owed more than 15,000
retirees a total of roughly 4.5 billion naira (USD 34.35
million) in pension arrears, dating back to December 2002.
Another press report, from late July, noted the situation
was little changed, with arrears to retirees still exceeding
20 months.

--------------
Comment
--------------


22. (SBU) In his comments to economic officers, NRC Managing
Director A.A. Abubakar downplayed the severity of the
railroad's problems. These difficulties, however, could
deter all but the hardiest would-be concessionaires, who
almost certainly would have to make substantial investments
for five years before being permitted to start to recoup
their capital. Abubakar demonstrated considerable, and even
breezy, confidence about the feasibility of the NRC's
planned "privatization" through concessionization. He did
not, however, offer a substantive reply to economic
officers' questions about the NRC's arrears to employees and
retirees. Would-be concessionaires might hesitate to bid on
a concession before the NRC does a better job of explaining
its plans to pay these salary and pension arrears - and then
begins to do so. Otherwise, the NRC is offering potential
bidders little more than the opportunity to assume the NRC's
burden of inadequate maintenance, completely insufficient
investment, and high personnel costs.


23. (SBU) The frankness of BPE officials and of the BPE's
prospectus for the NRC is impressive. So is that of the
NRC's own prospectus, in acknowledging the railroad's
significant operational difficulties. Although it is not an
option, companies with the expertise to operate a concession
might instead prefer to buy a portion of the NRC's
operations - rather than have to work intimately with the
GON for the concession's first five years. At this point at
least, the GON's demand that concessionaires contribute what
likely will be considerable financial resources to
rebuilding the NRC probably will discourage bids on
concessions.


24. (SBU) While Nigeria's light-industrial sector and
agricultural sector are not demonstrating evidence of
reviving in the medium term, they will not be able to do so
without a functioning rail network. For this network to be
effective, it would have to enable these sectors to ship
their output, in bulk and at relatively low cost, within the
country, and possibly to ports for export. Nigeria's weak
rail network has considerable political implications; it
aggravates the country's poverty and adds to Nigeria's
political divide. This helps keep Nigeria's northern states
even poorer and more isolated than the rest of the country.

CAMPBELL