Financing freight railways in developing countries Global Rail Freight Conference Sponsored by Indian Railways and UIC

1. Financing freight railways in developing countries Global Rail Freight Conference Sponsored by Indian Railways and UIC Paul Amos: Transport Advisor World Bank New Delhi, March 2007

2. Contents Financing sources for public railways Supply chain challenges Importance of private finance Project and governance risks Opportunities for private finance The World Bank and rail freight

3. First, a thank you for the invitation…. • To Indian Railways who, at this exciting time in that organization's own business development, are hosting this conference of high international significance to the future of railway freight; • To the International Union of Railways, for their continuing relationship with the World Bank and their world leadership of an industry that is vital to international economic development, poverty reduction and the world’s environment.

4. Rail freight demand is increasing strongly in most regions….. Source UIC Global freight task: 25 percent growth over five years (net tonne-km bill)

5. In most public railway systems, retained earnings have not provided sufficient funds for rail freight re-investment • In the best performing public rail freight systems, profits earned from freight are often implicitly used to cross–subsidize passenger services, for example: • direct transfer to passenger operating losses, and/or • indirect transfer through excessive track charges (implicit or explicit) • reinvestment of freight profits in infrastructure standards higher than would be required by rail freight services alone. • In medium performing systems freight surpluses are sometimes sufficient to reinvest in motive power and rollingstock but cannot contribute fully to infrastructure costs • In many systems, generally smaller railways with little base-load of bulk or transit freight, revenues do not cover their own ‘above rail’ costs and cannot cover reinvestment in the train operating assets

6. Public railway systems can in principle raise finance from a variety of other sources, for example… Budget sources Asset finance Direct Borrowing Private participation Corporate borrowing Joint-Ventures Deficit financing Export credit Revenue-backed borrowing Government loans/equity Concessions Leasing Project-specific borrowing Privatization of business units Government grants Availability contracts In practice, most publicly railway systems depend heavily on the budget sources, particularly those that have a big passenger role

7. The public sector’s ability and willingness to finance or guarantee investment in rail freight is likely to decline… • An increasing proportion of government expenditures is to meet higher health, education and social aspirations and expectations • Governments are increasingly questioning whether carrying goods is a core (or even an appropriate) Government role • Some governments are concerned whether state subsidies of public rail investment are competitively neutral vis a vis other modes: • …though heavy road haulage is also often subsidized by governments or other road users At the same time, there is a growing need for investment in rail freight to meet the challenges of serving global supply chains…

8. Supply chains are becoming more challenging… and competitive Rapid expansion of international trade, and particularly in Asia: many supply chains are now truly global Markets Global competition in product and service markets is driving higher standards and lower costs in logistics supplier markets Expectations Despite some industry concentration (e.g. ports) the freeing of transport markets is creating greater contestability in logistics services and sub-markets Competition All modes of transport are investing to obtain more efficient, usually larger units and improved traffic dispatching, monitoring and control capability Technology

9. more challenging supply chains….contd. Both standard and specialized containerization continues to grow , facilitating inter-modal transit and multi-modal allocation of traffic Inter-modality The expectation of perpetually cheap energy is waning due both to declining fossils fuel stocks and expectation of higher energy taxes in response to global warming Energy/climate Higher standards of security in freight transport are being sought in all modes Security Logistics services depend heavily on public infrastructure : capacity increments are not matching world freight volume growth Bottlenecks

10. Freight railway services will need to be able to offer supply chain managers, who owe railways no favours, ever improving value for money… Cost components Service attributes • Customer responsiveness • Geographic reach (= intermodal) • Delivery time • Reliability of delivery time • Frequency of delivery • Safety and security of goods • Protection of corporate image • Value-adding services • Transport & storage tariffs • Inventory holding costs • Product damage or deterioration • Pilferage losses • Insurance costs • Administration • Customs and other clearances • Informal payments for service

11. The success of rail freight as a business will depend on three Cs…. Commercial culture Competitive spirit Capital access • Lean decision structures • Rigorous management of internal and outsourced costs • Keen incentive mechanisms • A focus on customer service • High-order marketing skills • Pricing agility • Investment in physical assets that deliver high service standards • Investment in IT to monitor and control operations Private sector participation can make the rail industry more competitive, more commercial and provide new sources of capital !

12. The private sector is therefore a vital way of increasing the role of rail freight in global supply chains, not just for its finance • Private participation and finance can take many forms – including partnerships and ventures with the public sector - as shown later • But private finance is not a panacea for rail systems development: in many countries, rail networks will depend mainly on public investment for the foreseeable future • Private participation can help reduce (though is unlikely to end) the problem of politically driven internal cross-subsidies to passengers as it will require well built and repaired ‘ring-fences’ round invested businesses

13. Many governments are unlikely to privatize public railway networks for wider social or cultural or policy reasons • This is particularly true of networks with high proportion of passenger services • It is reinforced in: • large countries with remote rail connected regions • countries in which rail has features of natural monopoly in freight • typically larger countries with high rail distances • with heavy bulk traffic markets Track access rights can provide a route to private investment in freight while retaining the public railway network in public ownership and control.

14. Track access rights for freight train operators can in principle come in a variety of different forms…. • USA (approx 25% of US network is subject to ‘trackage rights’) Contractually agreed: specific access rights: • Canada (30km beyond company boundaries) • Mexico (specific lines to ports/cities to create competition)) Legally mandated: narrowly defined access rights • Most EU States, EU international, Australian State-owned railways* Legally mandated: general rights of access *Australian interstate rail is carried on vertically separated infrastructure managed by the Australian Rail Track Corporation

15. Private freight access on public rail networks will require a rigorous governance (legal and regulatory) framework if it is to be financeable.. 1. Laws and regulations on access to public rail systems 6. Agreements on rollingstock interchange and revenue division 2. Criteria and process for licensing new rail entities 7. Procedures for incorporating new operators fairly into timetable 3. System for safety accreditation and monitoring 8. Rules for sorting out operating priorities/conflicts between trains 4. Procedures for applying for capacity on public rail network 9.Institutions and procedures for regulatory review and compliance 5. Standard documentation for track (& facility) access contracts

16. Therefore, financing rail freight is not only about commercial risks but also the predictability and acceptability of governance risks Governance risks Commercial risks • Financing risks (e.g. currency risks) • Land acquisition: costs and time • Construction and/or rollingstock engineering risks • Residual asset risks • Safety risks • Market risks: • Volume of freight • Yield: revenue/tonne-km • Fair and transparent market access process (whether privatization or track access to private companies) • Legal enforcement of Agreements • Market and pricing freedoms • Adherence to agreed operating freedoms • Any government financial contribution is paid on time • Regulatory risks • Protection against expropriation

17. With good governance and regulatory structures there is a wide scope for private finance in railway freight transport

18. World Bank support for the railway industry is increasing (Annual lending for railways1999-2008 projected)

19. The World Bank is ready to extend its support of global rail freight development… • Investment support of public railways with strong freight business plans that will support trade and development in an economically and environmentally sustainable way; • Knowledge sharing and technical assistance to bring to bear best practice advice on railway policy, institutions, regulations, corporate restructuring and business strategy; • Advice on and support for structures that can increase private investment in freight railways (together with IFC and MIGA products); • Regional and corridor approaches to rail trade and transport facilitation.

20. Thank you for your attention Questions and comments to: pamos@worldbank.org The findings, interpretations and conclusions expressed herein are those of the author and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent