Can US$400m fresh capital revive NRZ?

THE National Railways of Zimbabwe (NRZ) has been operating below capacity for years largely because of an obsolete railway system, lack of capitalisation and skills flight among many other reasons. The parastatal has now partnered Transnet and Diaspora Infrastructure Development Group (DIDG) which will invest US$400 million after winning the NRZ recapitalisation tender. Zimbabwe Independent reporter Hazel Ndebele (HN) caught up with NRZ board chair Larry Mavima (LM) to speak about the deal and the parastatal’s turnaround strategy. Find excerpts of the interview below.

NRZ board chair Larry Mavhima

HN: NRZ has not been operating at full capacity for years. Can you summarise the challenges facing the parastatal?

LM: The reasons why NRZ has not been operating in full capacity for years are composed of different things. The first being lack of capital by the shareholder over a very long period of time. We have outdated equipment. For instance, wagons are supposed to last an average of about 40 years but all of our wagons except for the new ones that we acquired last year are way over 50 years. When you go to your locomotive or what we call tractive power, we haven’t had any new locomotives in the last 15 years and they are well over 25 years which they are designed to last. What we do is refurbish and overhaul these locomotives and wagons as and when we get funding from our own resources or from shareholders. The other challenge that the parastatal is facing is dwindling business, as you know that primarily NRZ was dependent on ZiscoSteel, Hwange Colliery and companies like Zimasco and ZimAlloys to transport their raw materials as well as their output/production. ZiscoSteel alone used to give NRZ in excess of 1 million tonnes per annum, which was bringing in coal from Hwange and taking out the finished product to their export markets. I am glad to see the revived efforts of Hwange Colliery that indicate that in the next year they will probably be pushing around 3 million tonnes of coal. As you know, the colliery has gone through some difficult times that at one point they almost shut down, that had a significant impact on the business relating to NRZ and same as Zimasco. However, I am happy that all these companies that I mentioned are showing an upward swing which will translate to an upward swing for NRZ business. The other challenge is the general low activity in the economy. Due to the decline in economic activity we do not have much to move locally. Last year our business was based on imports and that is grain, wheat and fuel, we also had a few exports here and there. We are bulk movers of commodities and if you do not have such to move within your country you have to base on imports.

HN: What vision do your board and management have for the NRZ?

LM: The vision since I got in as board chair is basically to transform NRZ into a modern, efficient and profitable railway system that competes well with not only other contiguous railway lines in other countries but also competes with the road network. It is very possible and feasible to compete with road network not only for transporting goods but also looking at the passenger side. In June this year we actually reintroduced passenger trains to different areas such as the Harare-Bulawayo route and the Harare-Mutare route. Once we become efficient and reliable then naturally we become competitive. There are other areas that may have to come into play; for instance, in terms of border clearance, railways is always faster than road because mostly goods are precleared from their country of origin, except once in a while when the train will be inspected by the Zimbabwe Revenue Authority but generally time spent at the border is less. It is also cheaper to transport bulk goods by train as it carries a huge load.

HN: What are the stages of the NRZ turn-around plan and how long will it take now that an investor has been found?

LM: The stages are varied; right now we have completed what I would consider the second most important stage. The first stage was being able to get the cabinet and government approval to go to tender under a new dispensation which is that the mode of financing could be either debt or debt equity. NRZ is a wholly owned government parastatal and this is the first time that government has allowed equity participation in a parastatal. We thank government for its wisdom to allow us to approach this tender in this manner which is a business approach really as opposed to the old approach that would just go for debt only. The second stage we managed to achieve was to float that tender to allow us to come up with a potential successful bidder which in this case is Diaspora Infrastructure Development Group (DIDG) which partnered South Africa’s Transnet. We are now moving to the third stage now which is the actual contract negotiation and clarification as well as signing of agreements. We are hoping that this process should take us about two to three weeks. After the contract is signed we will then go into the rollout phase which should give the investors the go-ahead to perform.

HN: How will the NRZ benefit from working with DIDG and Transnet which was recently awarded the US$400 million recapitalisation tender?

LM: NRZ does not have enough wagons and locomotives and therefore results in low volumes. Therefore, this partnership will result in an immediate increase of up to 2 million tonnes per year for NRZ and this is based on the business that Transnet already has and will now be carried by NRZ. We will request that our partners bring on board the necessary wagons and locomotives as well as attend to the permanent way or the main track where we have speed restrictions as they affect our efficiency to run a train within a specified period. There is the rollout plan which is very critical in the recapitalisation programme and naturally requires a joint effort of DIDG, Transnet and NRZ. NRZ knows the signalling and where exactly the problems which need to be fixed are while DIDG and Transnet has the expertise.

HN: How is the US$400 million going to be released and how will it be used?
LM: The US$400 million is not going to come as one big chunk. We actually have a three-year period where (in) the first year there will be US$159 million that will be spent on procurement of locomotives and rolling stock. We are talking of purchasing 24 mainline locomotives and13 shunt locomotives which are the small ones. We are also looking at about 1000 brand new wagons that will come in in the first year. There is also an amount of US$40 million that will be allocated towards fixing the permanent way by the removal of speed restriction areas. Whilst we are working on that we will be working on improving our signalling system so that we are able to control and monitor as they traverse. The second year will see another US$100 million going into fixing our infrastructure, information communication technology and further refurbishment of wagons and locomotives. To give you an idea, the railway business is very different from road business. If we place an order for a locomotive today, it will take 18 months before it gets here as they are manufactured as per order. Therefore, while we wait for our new ones to come we will refurbish the already existing ones which will take between three to six months or we will hire or lease. The rest of the money will go toward refurbishing our other infrastructure such as our buildings, workshops and so forth.

HN: Is this money enough to turn-around the NRZ or more funds will be needed? If more funds are needed, how does the NRZ board and management plan to raise the money?

LM: Definitely the US$400 million is not adequate to modernise the railway system. What this amount of money does is that is fixes the system to make it efficient and competitive but it does not necessarily modernise the railway system and it does not allow us to open new corridors. It is enough for the first phase of recapitalisation stage. The next phase will include opening up new corridors, for instance to create a new line that starts from Chinhoyi, going through to Kafue in Zambia. The total amount that is required to modernise NRZ is actually US$1,2 billion according to our estimates. On how we plan to raise the money is that we believe the investors have the capacity to raise that money at that particular point of time.

HN: How many new wagons and new locomotives has NRZ acquired so far and how many more are needed?

LM: We have managed to get 31 new wagons that came in last year. However, we have been refurbishing wagons at a rate of 50 wagons per month. We have not had any new locomotives and that is where our weakest link is at the moment to the extent that we are actually leasing some locomotives.

HN: NRZ used to carry an estimate of 18 million tonnes of goods per year, what tonnage does it carry now? How long do you think it will take for the company to ferry such volumes?

LM: Well, the system was designed to carry 18 million tonnes but there was never a time as far as my research is concerned that the NRZ carried that they reached that amount. The highest that was reached was 14 million tonnes. If the network is fixed we will reach up to 18 million tonnes per year. Unfortunately last year we carried 2,7 million tonnes but we are looking at improving our performance up to maybe 3,5 million tonnes. I am glad to point out actually that in the second quarter, NRZ actually posted a gross profit of US$246 000 since 2009. For the first time we turned around so we hope to improve on that. It does not mean that we are now profitable because we still have a whole lot more accumulated losses and even if we have a gross profit of US$246 000 the bottom line is that the net profit will be a loss. However, the fact that we have managed to turnaround helps to increase volumes and cost control. According to the projections that we had done when we did our feasibility studies from now to year six we are projecting that we should be between 6 and 8 million tonnes. From year seven up to year 10 we should be around 11 million tonnes.

HN: The NRZ has been struggling to pay its workers and owes them more than US$68 million in outstanding salaries. When does the parastatal expect this to improve?

LM: We expect this to improve in the short term. Warehousing of our debt by government has given us some breathing space. We are working on logistics and mechanisms of being able to clear or at least expunge a significant portion of what we owe. The warehousing of the debt by government has assumed it for a while but it does not mean that it has taken over the debt. Government has removed that liability from NRZ’s balance sheet to be able to lend us money which will be repaid in a period of 10 to 15 years. We urge our employees to remain patient and very soon we will be able to take care of what we owe them.

HN: When is the parastatal going to carry out the retrenchment exercise the board has been talking about and how many people are you looking at laying off?

LM: We are indeed actually overstaffed and are working aggressively to reduce the surplus staff but we are not going to rush the process .The staff-to-employee ratio is out of balance because we have low revenues what we call net tonne per kilometre compared to the number that is in our books.

However, at the same time we also have shortage of skills in high-technical areas that we need to run the NRZ efficiently. We have a very abnormal situation where in one area we are overstaffed and in the other area we need to hire, it is a very delicate balance that we have to achieve. If we spend US$6 million to computerise the entire NRZ system it means we will not need 500 people.

Transnet moves around 33 million tonnes per year and it has 30 000 people and we also need to have that sort of benchmark. Last year we moved 2,7 tonnes and yet we have 4 700 employees. If, for instance, we were aiming to move 3, 2 million tonnes per year then the number we would need to employ would be just above a thousand.

At the end of the day we need to run an efficient and profitable railway system that takes care of the needs of the economy, government and its citizens. We are very excited that things at NRZ are beginning to take shape now and therefore I want to thank my board for working tirelessly to get us where we are today.