Rates of return for railway infrastructure investments in Africa

Internal Rate of Return (IRR), also known as Economic Internal Rate of Return (EIRR), is one of the economic appraisal methods for infrastructure projects which is widely used in Africa to indicate that the calculation includes externalities and to distinguish it from the financial internal rate of return (FIRR) which considers only costs and returns directly associated with the project. IRR is considered by the European Commission and by the World Bank for justification of capital investments, where values over 12% are normally accepted for developing countries (ECORYS, 2016; The Republic of Liberia, 2012). This report compares IRR values found for railway projects in Africa. IRRs estimated for rehabilitation projects averaged 12.2%, and 16.3% for new construction. All of the IRR estimates that the review found were pre-construction estimates. All projects included various externalities in their calculations (most often air pollution and road accidents), but none of them estimated impacts on GDP. IRR is well-established as a way of comparing independent projects, but the approach has some weaknesses. IRR may not always be calculated consistently: different projects may take different factors into account when calculating IRR, may assign different values to factors, or may use different approaches to dealing with externalities. Other economic indicators such as Net Present Value (NPV) may also be considered for project appraisal, but there is ongoing debate about which one of them should be preferred, as illustrated for instance by Tang and John Tang (2003). An unbiased approach was taken to identify a sufficient number of relevant studies. Given sufficient resources, such an approach would ideally seek to identify all relevant literature. However, because of the resource constraints of this review study, consideration was given to locating a sample of studies most pertinent to addressing the research question. This was achieved by carrying out a keyword search of titles and abstracts of studies via Internet search engines and accessing academic journal databases and the websites of specific organisations.