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

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 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

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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.

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Rail freight demand is increasing strongly in most regions…..

3500

3000

2500

2000
2000
1500 2005
1000

500 Source UIC

0
N/S Am As-Pac CIS Eur Afr

Global freight task: 25 percent growth over five years

(net tonne-km bill)

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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

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 Public railway systems can in principle raise finance from a variety
of other sources, for example…

Budget sources Direct Borrowing Private participation Asset finance

Corporate
Deficit financing Joint-Ventures Export credit
borrowing
Government Revenue-backed
Concessions Leasing
loans/equity borrowing
Government Project-specific Privatization of Availability
grants borrowing business units contracts

In practice, most publicly railway systems depend heavily on the budget sources,
particularly those that have a big passenger role

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 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…

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Supply chains are becoming more challenging… and
competitive

Rapid expansion of international trade, and particularly

Markets
in Asia: many supply chains are now truly global

Global competition in product and service markets is

driving higher standards and lower costs in logistics
Expectations supplier markets

Despite some industry concentration (e.g. ports) the

freeing of transport markets is creating greater
Competition contestability in logistics services and sub-markets

All modes of transport are investing to obtain more

Technology efficient, usually larger units and improved traffic
dispatching, monitoring and control capability

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more challenging supply chains….contd.

Both standard and specialized containerization continues

to grow , facilitating inter-modal transit and multi-modal
Inter-modality allocation of traffic

The expectation of perpetually cheap energy is waning

Energy/climate due both to declining fossils fuel stocks and expectation
of higher energy taxes in response to global warming

Higher standards of security in freight transport are being

Security sought in all modes

Logistics services depend heavily on public infrastructure

: capacity increments are not matching world freight
Bottlenecks volume growth

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Freight railway services will need to be able to offer supply chain
managers, who owe railways no favours, ever improving value for
money…

Service Cost
attributes components

•Customer responsiveness •Transport & storage tariffs

•Geographic reach (= intermodal)
•Delivery time
•Reliability of delivery time
•Frequency of delivery
•Safety and security of goods
•Protection of corporate image
•Value-adding services
•Inventory holding costs
•Product damage or deterioration
•Pilferage losses
•Insurance costs
•Administration
•Customs and other clearances
•Informal payments for service

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The success of rail freight as a business will depend on three Cs….

Competitive spirit Commercial culture Capital access

A focus on
customer service
High-order
marketing skills
Pricing agility
Lean decision Investment in
structures physical assets that
Rigorous management deliver high service
of internal and standards
outsourced costs
Keen incentive Investment in IT to
mechanisms monitor and control
operations

Private sector participation can make the rail

industry more competitive, more commercial and
provide new sources of capital !

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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

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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.

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Track access rights for freight train operators can in principle
come in a variety of different forms….

Contractually agreed: specific  USA (approx 25% of US network is

access rights: subject to ‘trackage rights’)

Canada (30km beyond company

Legally mandated: narrowly boundaries)
defined access rights Mexico (specific lines to ports/cities
to create competition))

Legally mandated: general  Most EU States, EU international,

rights of access Australian State-owned railways*

*Australian interstate rail is carried on vertically separated infrastructure managed by the Australian Rail Track Corporation

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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
5. Standard documentation for regulatory review and compliance
track (& facility) access contracts

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Therefore, financing rail freight is not only about commercial risks
but also the predictability and acceptability of governance risks

Commercial risks Governance 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

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

Functions Finance & build Operate & maintain Finance Operate freight
rail line rail line rollingstock train services
Structures
Rollingstock leasing/ Public Public Private Public (pays R/S
availability contracts hire prices to
private)
Freight train Public Public Private Private
operating company or
concession
Infrastructure build or Private Public (pays usage Public Public
renovate concession charges to private)
Infrastructure build & Private Private Public (pays Public
operate concession access charges to
private)
Integrated infra.and Private Private Private Private
train service company
or concession

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

500

400

300

200

100

0
1999 2001 2003 2005 2007

USD millions (3 yr moving average)

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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.

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 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

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