Building capacity to help Africa trade better

Rail and road transportation and firm productivity: Evidence from Tanzania


Rail and road transportation and firm productivity: Evidence from Tanzania

Rail and road transportation and firm productivity: Evidence from Tanzania
Photo credit: Rob Beechey | World Bank

Modal choice between rail and road transportation

Rail transport generally has the advantage for large-volume long-haul freight operations. The literature generally shows that shipping distance, costs, and reliability are among the most important determinants of people’s modal choice among road, rail, air, and coastal shipping transport. However, there is little evidence in Africa, although the region historically possesses significant rail assets.

Currently, Africa’s rail transport faces intense competition against truck transportation. With firm-level data, this paper examines shippers’ modal choice in Tanzania. The traditional multinomial logit and McFadden’s choice models were estimated. The paper shows that rail prices and shipping distance and volume are important determinants of firms’ mode choice.

The analysis also finds that the firms’ modal choice depends on the type of transactions. Rail transport is more often used for international trading purposes. Exporters and importers are key customers for restoring rail freight operations. Rail operating speed does not seem to have an unambiguous effect on firms’ modal selection.

Recent developments in transport infrastructure in Tanzania

Tanzania is a large country with a land area of 885,800 km2, where more than 55 million people live. Intercity connectivity is critical for the economy. While Dar es Salaam is the primary city, with an estimated population of 5.4 million, other secondary cities are also growing, such as Mwanza, Arusha, Dodoma, Morogoro and Mbeya. Each city is estimated to have a population close to 500,000. A number of firms are located in secondary cities and other small towns. According to the Central Register of Establishments, about 45,000 enterprises were formally registered by 2010.

The firm concentration in Dar es Salaam seems to be accelerating. About 2,300 firms were newly created or formally registered in the three districts in Dar es Salaam in 2010 alone. Dar es Salaam accounts for about 25 percent of the total firms registered. Long distance transportation is of particular importance for firms located in inland areas to connect Dar es Salaam. Port access is also critical for many businesses that engage in international trading. Tanzania traditionally exports mining and agricultural products. The country also imports a lot of goods and equipment from abroad. The Port of Dar es Salaam is one of the largest hub ports in the region, which handled about 10.4 million tons in 2011, 13.1 million tons in 2013 and 15 million tons in 2015.

Tanzania has a relatively well developed road network composed of over 86,000 km of roads. The government spends approximately US$310 million for road development and maintenance every year. Regional and trunk roads managed by a national road agency, Tanzania National Roads Agency (TANROADS), are generally well-maintained. About 12,000 km of roads are paved, of which half or 55 percent are maintained in good or fair condition. On the other hand, most rural roads remain unpaved, and nearly 90 percent are in poor or very poor condition.

Rail transport has the general advantage of long-haul freight transport. Tanzania has about 3,557 km of rail lines, which are operated by two rail companies: Tanzania Railways Limited (TRL) and Tanzania Zambia Railway Authority (TAZARA). The TRL lines were constructed during the colonial era in the early 20th century. The current TRL was established as a parastatal company jointly owned by Reli Assets Holding Company (RAHCO) on behalf of the Government of Tanzania (49 percent) and an Indian private operator RITES (51 percent) in 2007. However, the anticipated increase in performance under RITES management did not materialize. Since the completion of negotiations in 2011, the company has fully been owned by the government.

The TRL network extends more than 2,500 km, connecting Dar es Salaam and large inland cities, such as Mwanza, Kigoma and Arusha. These inland areas are more than 1,000 km away from the coast. Historically, rail transport has been playing an important role to provide affordable access to the global market to Tanzania, which is a large country with a land area of about 900,000 km2.

TAZARA is another major binational rail network connecting Dar es Salaam to Mbeya and New Mposhi in Zambia. TAZARA extends 1,860 km, with 975 km in Tanzania and 885 km in Zambia. TAZARA is a statutory body jointly owned by the two governments on 50:50 basis. Other neighboring countries, such as Malawi and Southern Democratic Republic of Congo, which are practically landlocked in the region, are also benefiting from the TAZARA lines. The network is relatively new compared to the TRL lines. TAZARA was constructed in the 1970s. However, the rail infrastructure has already been in poor condition because of lack of proper maintenance. Recently, the two governments have agreed to take up responsibility of funding infrastructure maintenance, locomotives and wagons.

Given the deterioration of the service quality as well as the improvement of road infrastructure along the regional corridors, the current freight volume hauled by the TRL represents only 13 percent of the peak demand in the early 2000s. Similarly, the traffic on TAZARA is only about 15 percent of its peak demand during the early 1990s. Despite the deteriorated service quality, some businesses and shippers are still using rail transport, mainly because of low relative costs compared with road transport. Rail tariffs have increased in U.S. dollar terms in recent years but are still lower than truck road user costs in Tanzania, which are US$0.05 to US$0.12 per ton-km, depending on road surface and condition.

Firms located in inland areas of central and western Tanzania may have an incentive to rely on rail transportation because it is cheap despite distance. Based on the network analysis in which unit road user costs and average rail tariffs are assumed, transport costs of moving one ton of goods to Dar es Salaam are estimated at about US$91 per ton from Mwanza and US$95 per ton from Kigoma, respectively. Rail transport presumably has the advantage to connect those areas from the cost perspective.

The advantage of rail freight is considered to be attributed fundamentally to the fact that unit rail tariffs are often set lower when the shipping distance is longer. For instance, the TRL tariff for general goods is TSh1.5 million per large wagon for the first 100 km, which translates into about 61 U.S. cents per ton-km. But when the shipping distance is greater than 500 km, the tariff is TSh2.6 million per wagon, which is equivalent to about 11 U.S. cents per ton-km.

Such a pricing strategy is rational because loading and unloading goods from rail wagons incur significant fixed costs, especially when transported goods are uncontainerized bulk cargo. Waiting times that are required for each train to have sufficient wagons to carry may also add additional economic costs to shippers. Because of these fixed costs, short-haul rail shipping tends to be relatively expensive, and long-haul bulk shippers are more induced to use rail transportation. Although no detailed data are available, most rail cargo are large volumes, such as minerals, cement, agricultural products and fertilizer.

Rail transport and firm productivity

Railway transport generally has the advantage for large-volume, long-haul freight operations. Africa possesses significant railway assets. However, many rail lines are currently not operational because of the lack of maintenance.

This paper recasts light on the impact of rail transportation on firm productivity, using micro data collected in Tanzania. To avoid the endogeneity problem, the instrumental variable technique is used to estimate the impact of rail transport.

The paper shows that the overall impact of rail use on firm costs is significant despite that the rail unit rates are set lower when the shipping distance is longer. Rail transport is a cost-effective option for firms. However, the study finds that firms’ inventory is costly. This is a disadvantage of using rail transport. Rail operations are unreliable, adding more inventory costs to firms. This indicates the rail users’ sensitivity to prices as well as severity of modal competition against truck transportation.

The study also finds that firm location matters to the decision to use rail services. Proximity to rail infrastructure is important for firms to take advantage of rail benefits.

These working papers are a product of the Transport and ICT Global Practice Group at The World Bank. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors.


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