Railroad to growth: Evaluating the impact of investments in railroads on firm behaviour

In recent decades, some of the most costly and challenging transport projects undertaken in the African sub-continent have attempted to rebuild the region’s vast railway network. As the most cost-effective means of transport over long distances, rail was expected to bring a significant reduction in transport costs, increase the safety and reliability of transport services, and consequently, stimulate regional trade and economic growth. And yet, the evidence to justify these investments is still lacking.

The historical literature on the economic impact of colonial railway networks on trade, urbanization and economic growth has found mixed results. Moreover, there is still limited evidence available on the micro-level mechanisms through which investments in railways can affect economic activity today. As a result, governments and donors continue to struggle not only with how to prioritize investments across transport modes but also with how to best forecast demand for railway services so as to design optimal financial models that can ensure sustained improvements in rail. A micro-level analysis of the impact of railways on firm performance is therefore warranted, particularly in light of a recent World Bank internal (qualitative) policy review of two decades of investments in rehabilitating railways in Sub-Saharan Africa, which revealed that out of 15 railways supported by the organization, none appeared to have led to a sustained impact on economic activity.

This research project was designed to obtain original evidence on the impact of railways on firm performance, looking at the specific case of investments in rebuilding a railway in Southern Africa. Using original survey data from over 900 firms in South Africa and Mozambique, the study concluded that investments in rail had a negligible impact on the performance of firms in the region.

One of the potential reasons for the limited impact of rail on firm performance is the poor management of rail services in the form of uncompetitive pricing and discriminatory access to rail slots.

Overall, these findings suggest that further evaluations are needed to monitor railway investments and measure their actual impact on economic activity (relative to investments in alternative modes of transport), but they also emphasize the importance of securing adequate governance and management of rail services to maximize the impact of rail infrastructure on economic activity.