Financing Regional Passenger Rail in Poland: Lessons from the UK

1. Financing Regional Passenger Rail in Poland: Lessons from the UK Irene Walsh 31 March 2004

2. The economic dynamics of Polish rail • Poland’s transition to a market economy has led to: • Decline in passenger traffic • Collapse of the coal industry, the largest freight customer • Increase in PKP’s labor costs • In the last year before reform, financial losses exceeded USD 1 million per day

3. The Law on Commercialisation, Restructuring and Privatization of Polish State Railways enacted September 2000 Commercialization = transformation into the joint stock company PKP SA (December 2000) Restructuring = breakdown of PKP SA into subsidiaries Privatization = Selected subsidiaries commencing with LHS, SKM, WKD and PKP Cargo. PLK SA to remain in state ownership Subsidiaries PLK SA (infrastructure and access) PKP Cargo (freight operator) LHS (iron ore freight operator) SKM (Tri-cities metropolitan passenger network) WKD (Warsaw metropolitan passenger network) New inter-city express passenger operating company New slow-speed inter-urban passenger operating company New regional passenger operating companies contracted to the Voivodships The Reform Program

4. Conforming to EU Policy on Railways • Key principals: • Accounting (and institutional?) separation of infrastructure from operating functions • Independent regulator at national level • Access to infrastructure by railway enterprises of other member states on non-discriminatory terms • Cross subsidies from profitable services (freight and intercity passenger) to unprofitable services banned • Operating subsidies banned except for local passenger operations and infrastructure

5. The challenge for PKP • Redefining the State’s role from a direct provider of services to a strategic planner and regulator • Initiating competition • Facilitating decentralization to sub-national governments

6. Regional Passenger Operating Companies • The reform program • The State subsidy approach

7. Regional Passenger Operating Companies • Key elements of the reform program: • Debt funded labor restructuring to lower cost base • Decentralize operating subsidy regime by channelling payments through Voivodships • Privatize where possible, with SKM and WKD serving as test cases

8. Regional Passenger Operating Companies • Detail on State subsidy: • Voivodships to receive dedicated funds from State budget; aggregate amount determined annually • Individual Voivodship allocation determined by formula based on population, kilometres of active railway line, level of structural unemployment • Subsidy distributed by Voivodships to regional passenger operating companies as an offset to losses from unprofitable services

9. The UK experience • Overview of privatization program • Relevance to Poland’s Regional Passenger Operating Companies • Lessons learned

10. The UK experienceOverview of privatization program • Objectives: • Access to private investment and an ongoing investment program • A higher quality of service and better value for money for the public • Introduction of competition in the operating of services • Harnessing private sector management skills and entrepreneurial spirit

11. The UK experienceOverview of privatization program • Steps in the process: • Reorganization into infrastructure and operations • Sale of subsidiary businesses • Establishment of an independent regulator and a State body to act as strategic planner • For passenger rail: design of a franchise map, a track access regime, and a subsidy mechanism • Sale of the infrastructure company through IPO • Letting of operating franchises to private operators through a competition based on minimum subsidy requirement

12. The UK experienceOverview of privatization program • Post - privatization industry structure Strategic Rail Authority Direction & Guidance Sponsor/Liaison Department for Transport Rail Users Consultative Committee Franchise Payments Funds Monitoring Performance/ Consultation Fares Funds Office of the Rail Regulator Operating Licence Passenger Transport Executive Train Operating Companies Track Access Charges Network Rail Licence Regulation Lease Payments Network Rail Rolling Stock Companies Private Finance Freight Operating Companies Grants Freight Revenues

13. The UK experienceRelevance to Poland • Like Poland, UK privatization required a complex model: market share of rail is small, and high level of service provision is for social purposes • Like Poland, UK privatization program had a strong decentralizing element • Many of the UK passenger franchises have characteristics of Poland’s regional passenger operating companies • size • commuter usage • profitability • Like Poland, UK Government subsidy is still necessary to maintain service on many franchises

14. The UK experienceLessons learned • Public subsidy • Infrastructure investment and track access charging • Franchise structure • Performance regime

15. The UK experienceLessons learned : public subsidy • Transparent vs. “Opaque” : • A transparent subsidy regime is preferable. Tends to promote rational policy making that balances fiscal alternatives such as investment in rural vs. urban services or investment in road vs. rail. The UK passenger rail subsidy remains opaque. • Open-ended vs. fixed: • A fixed subsidy approach is a means of cost control and state fiscal “protection”. Moving to a fixed appropriation for uneconomic services will eliminate reliance on emergency measures which have had broader fiscal consequences. In the UK, Government is still the ultimate guarantor for the system overall.

16. The UK experienceLessons learned : infrastructure investment and track access charging • Asset valuation: • A robust asset valuation is the key to adequate track access charging. In the UK, the initial infrastructure valuation did not result in a sufficient income stream for the infrastructure company to maintain the network appropriately. • Pre-privatization upgrading: • Asset upgrading can improve the chances of attracting private interest in an operating franchise. • Ongoing renewals and future improvements: • An approach to financing future infrastructure investment must be carefully considered before operating franchises are tendered. In the UK, state subsidy for infrastructure continues to be necessary and is now funded through a sovereign-backed credit structure. • The prime users’ willingness to pay is the ultimate constraint

17. The UK experienceLessons learned : franchise structure • Optimal length for private franchises: • Some of the original UK franchises now believed too short to have been economically viable. Cost containment could not be achieved in the time frame and franchisees required additional public subsidy for survival. • Transfer of risk to private operators: • Exposing private franchisees to passenger fare revenue risk is easier in a dynamic Government subsidy system than in the fixed subsidy regime planned in Poland.

18. The UK experienceLessons learned : performance regime • Regime should be no more complex than necessary for purposes of: • Incentivization • Accountability

19. Positives: Market innovation and growth Private investment Invigorated financial and engineering markets Preparatory spin-offs of non-core businesses Overall: Key parts of the process were hurried It is difficult to create a “free market” in a natural monopoly Negatives: TOCs not capitalised to bear revenue risk Too many interfaces and constraints, undermining efficiency Insufficient understanding of costs and asset conditions (infrastructure) 100% privatised network operator Insufficient recognition that the rail network is dynamic and there is an ongoing state role Insufficient working practice reform The UK experienceLessons learned summary

20. Questions for Poland • Has labor restructuring been successful in generating the required cost savings? • Is the anticipated State subsidy level sufficient to preserve current passenger services? • Can EU structural funds contribute to the necessary infrastructure upgrade? • Do the Voivodships have sufficient administrative capacity to manage the subsidy program? • Will the private sector come?

21. ISPA funding • TENS corridor projects • Modernisation of the Berlin-Warsaw-Moscow corridor (E-20) • Minsk Mazowiecki to Teraspol • Rzepin to the German border • Poznan rail interchange yard • Wroclaw to the German border (E-30) • Warsaw to Dzialdowo (E-65)