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RAILWAY FINANCE

Introduction
Since the mid 1990s, railways across the workd have "gone commercial", with various models of
privatisationandpublicprivatepartnerships(PPPs)orprivatefinanceinitiatives(PFIs).Thisisasimple
guidetohowanewrailwaymightbefinancedandareviewofthelimitationsofprivatisationandprivate
sectorparticipationintheownershipandoperationofrailwaysystems.Numbersaretakenfromknown
examplesbutareonlyforillustrationandshouldnotbeconsideredbinding.

Contents
How Much Does a Railway Cost? Published Railway Costs Government Participation Commercial
Participation Railways Making a Profit? Efficiency Maintenance Open Access New Project
FinancingMetroFinancingExampleHighSpeedLineFinanceExampleTheWayForward.

HowMuchDoesaRailwayCost?
A difficult question! This is a bit like asking how much does a car cost. It depends on whether you
wantaMercedesoraHonda,asportscarorapickup,acartodotheshoppinginortomovefurniture
with.Italsodependsonwhereyoubuyit.CarsarecheapintheUSbecausethereisahugemarket
andagoodeconomy.CarsareexpensiveinSingaporebecausemanyofthemareimportedandthereis
ahightaxationpenaltytocontroltrafficnumbers.CarsareexpensivetobuildinEuropebutcheapto
buildinIndiabecauseofthedifferencesinlabourcostsandlowerengineeringrequirements.
It is the same with railways. A single track freight line with a few locomotives and simple signalling,
runningacrossaflat,geologicallysound,sparselypopulatedlandscapeinadevelopingcountrymightbe
builtforaslittleasUS$2millionperkilometreincludingelectricalandmechanicalequipment.Adouble
track underground metro line in a densely populated city with difficult geological conditions, requiring
antiearthquakeconstructiontechniques,electrictraction,immunityfromtyphoonsandhighhumidity,
high technology specifications and high passenger capacity trains could cost US$ 200 million a
kilometre. One of the most expensive railways ever built was the Jubilee Line extension in London.
This cost US$ 330 million a kilometre because of difficult civil engineering, its large and finely built
stations and its additional safety equipment and its financing costs. You pays your money and you
takesyourchoice.

PublishedRailwayCosts
Here are some sample new railway project costs as published in the railway trade press. The prices
publishedbyoperatorsusuallyincludeallcivilandequipmentcosts,projectandfinancingcosts.

CompleteRailProjects

Railway>

Date

Typeof
System

Costperkm Distance Comments

Madrid
Albacete

2010

HighSpeed
line

9.57million 304kms

SeoulGimpo,
Korea

2010

Airportline

$98.1million 20.4kms

Yichang
Wanzhou,
China
HaikouSanya,

2011

2010

Mainline
HighSpeed

$9.1million

377kms

Surfacewith
278kmin
tunnelor
bridges

$10million

308kms

n/a

China

line
2011
2018

Copenhagen

NewMetro
line

$247.5million 16kms

All
underground

RollingStock

Costper
Vehicle

No.of
Supplier
Vehicles

DBSchenker
Dieselhydraulic
2010
Rail
1000kW10BB

1.92million

130

Voith

Warsaw
Metro

1.29million

35x6car

Siemens
Newagjv

Railway

Date TypeofTrain

2011 "Inspiro"EMUs

TCCDTurkey 2011

5MWElectric
Locomotives

$4.125million

80+
Hyundai
simulator Rotem

Railpool
LeasingCo.

2010

"Traxx"Electric
Locomotives

3.33million

36

Bombardier

SMART
California

2010 2carDMUs

$1.58million

36

Nippon
Sharyo

Cairometro

2010

Refurbishmentof
trains

40,598

468

Alstom

Israel

2011

Dieselelectric
locomotives

4.7million

15

Vossloh
Espania

1.4million

650

Alstom

Paris,France 2011 MI09EMUs

The rolling stock costs show how prices can vary with design requirements, number ordered and
location.Worldwide,newlocomotivepricesvarybetweenUS$2millionandUS$6million.LRVprices
are generally higher than EMU car prices because the vehicles are often articulated and consist of a
number of body sections. Also, bear in mind that published prices do not include the cost to the
purchaserofobtainingfinance,drawingupaspecificationandtenderingcosts.
It is interesting to note that regarding their Paris RER MI09
order for 650 vehicles, Alstom reported that the contract
(jointwithBombardier)wassignedinApril2009andthatthe
firstcarbodywentintothepaintshopinJanuary2010.They
saythatthefirstvehiclespentaboutfivemonthsbeingfitted
out and then went for car tests in August. The first 5car
trainset went for testing in early October 2010. It will take
from then until the end of 2011 to get the first train into
revenue service. So, it takes 16 months to build a train and
then 12 months to test it and get it carrying passengers.
Doesthatseemright?

InfrastructureCosts

Railway

Date

Equipment

Costper
km.

Length
(kms.)

Comments

Angola:Luanda
toMalanje

2010

Rehabilitation

$1.28million

470

Newdouble

RFFFrance

2010

trackline

35million

1.2kms

Crossrail,
London

2011

Newtwinbore
tunnels

69million

18kms

Tunnels
only

Bremmer,
Switzerland

2011 Newtwinbore
16
tunnels

109million

55kms

Spain

2011

Routedoubling
&Electrification

2.125million 26.4kms

Infrastructurecostsareimportantbutthedetailsvarywidely.However,somepatternsdoemergeand
giveanideaastothecurrentlypublishedmarketprices.

IndividualProjects

Railway

Date

Equipment

Cost

Features

Comments

Including
alterationsto
building

National
2010
ExpressUK

Driving
Simulator

Network
Rail&East 2011
Coast

Peterborough
2.5million
Station

Includingnew
Modernisation entrance&
faregates

Network
RailUK

2011

Marylebone
Station

4million

Roof
reglazing
2160sq/m

2011

ETCSon
trains

60million

Alstom
"Atlas"
system

2million/train

DB
Germany

1million

Includeshigh
2011 80kmofTest
ADIFSpain
344.5million speedtest
4.3million/km
2015 tracks
facility
Network
RailUK

2011

NewStation
atSouthend
Airport

12.5million

2platform
facility

Builtin23
months

Thislistoffersasampleofvariousindividualprojectstogiveanideaofmarketcosts.

GovernmentParticipation
Thereasonwhygovernmentsareforcedtoprovidepublicservicesisbecausetheprivatesectordoesn't
wantto.Theprivatesectordoesn'twanttobecausethere'snotenoughmoneytobemadefromthe
enterprise or because the commercial risks are too high really the same thing. In the case of
education, for example, it is a generally agreed social objective that everyone should have access to
affordableeducationbutaffordableeducationforeveryoneisnotcommerciallyviable.Thecostsofthe
infrastructureandoperationofaschoolarehighandmostordinarypeoplecouldnotaffordtopayforit
atacommercialrate.Thosewhocan,paysubstantialfeesandprivateschoolscanthusmakeaprofit.
Health care is another example where the public sector is forced to provide facilities to make hospital
servicesavailableforeveryone.Privatehealthcareisavailablebutitisexpensiveifyouhavetopayfor
it.Inmanycountries,employersarecoveringcostsbyprovidinghealthcareinsurance.
Thesamesituationexistsforrailways.Theinfrastructureisveryexpensive(aswecanseefromthe

abovetables)andtheamountofmoneyordinarypeopleareabletopayinfaresisnotenoughtorepay
the costs of building and maintaining the lines. In many cases, as discussed below, there isn't even
enoughmoneycomingfromfarestopayforthedaytodayoperatingcostslikeenergybillsandstaff
wages.Thegovernmentthereforehastocovertheshortfall.Theymustprovidetheinfrastructure,or
atleasthelptoprovideit,andsupporttheoperationsandmaintenancecosts.Thegovernmentpaysfor
thesecostsoutoftaxes.
In recent times, the desire for improved public infrastructure and facilities has clashed with the
willingnessofcitizenstopayhightaxes.Frequentstoriesofwasteandmisuseoftaxpayersmoneyby
governmentshavefuelledajustifiableresistancetopayingmoretaxesintoagovernment"blackhole"
which seems to have little real public accountability. The political result of this has been that
governmentshavenotincreasedtaxesforfearofalienatingtheirvotersandthushavenotbeenableto
improvepublicfacilitieslikehospital,schools,roadsandrailwaysduetotheshortageofcash.Insome
casestheyhavenotevenbeenabletomaintainthemtoareasonablestandard.

CommercialParticipation
In recent years, in attempts to overcome the perceived inefficiencies of public financial management,
governmentshaveturnedtotheprivatecommercialsectorforfinancing.Insomecases,government
ownedutilitieshavebeensoldtotheprivatesector,usuallyatveryattractivepricesinordertoattract
purchasers who may have to spend a lot of money restructuring the organisation to make it into a
profitablebusiness.Telecommunications,powersupplyandairlinesareallareaswhichgovernments
have sold into private ownership and which have eventually become profitable. Railways are more
difficult to sell since they have high infrastructure and maintenance costs and the income from
operationsisartificiallylow,becausefaresarepoliticallyrestrictedtolowlevelsorbecausetherailways
aresubjecttopoliticallyassistedcompetitionfromroadtransportation.
Someprogresshasbeenmadein"converting"publiclyownedrailwaycompaniestoprivateownership
but only by offering inducements, guarantees and/or financial subsidies to the new owners. This is
because the numbers simply do not stack up when it comes to return on investment. In fact, as
already mentioned, they rarely add up when it comes to just the cost of daytoday operations
comparedwiththemoneytakenatthefarebox.So,canarailwaymakeaprofit?Let'ssee.

RailwaysMakingAProfit?
Youoftenhearpeopletalkingofrailwaysmakingaprofit.Whattheyareactuallyreferringtoisthatthe
railwaytakesinmorefarerevenuethanitspendsonoperatingcosts.Peopleignorethevalueofthe
infrastructure, they ignore interest payments, they ignore repayment of loans and they forget future
renewals.Arailwaycompanymaychoosetoignorerenewalstoo,knowingthatthegovernmentwillbe
tooafraidpoliticallytoletthesystemcollapseforwantofnewtrainsorrebuilttrack.Governmentwill
thereforepayforthem.Evenso,inspiteofremovingtherenewalandfinancingcostsoftherailway,
fewrailwaysareabletocoveralltheiroperatingcostsfromfareboxrevenue.Herearesomepublished
examplesofthosewhodoanddon't:

Railway

RatioofRevenueto
OperatingCosts

KualaLumpurPUTRASystemMalaysia

40%

RATPParis

50%

SaoPauloMetroBrazil

70%

BNSFAurora(Chicago,Il.USA)

75%

KualaLumpurSTARElevatedMalaysia

90%

LondonUnderground

125%

SeoulMetroKorea

140%

MassRapidTransitSingapore

150%

SantiagoChile

160%

ManilaLine1Philippines

170%

ManchesterMetrolinkUK

190%

MassTransitRailwayHongKong

220%

In looking at this list, there are two features of those systems which cover their costs or better, i.e.
they provide a positive farebox ratio one over 100%. One is high patronage, the other is efficient
managementoftheoperation.Highpatronageisafeatureofmetroandsuburbansystems,whichis
whyIhaveusedthemasanexample.Mostmainlinepassengerrailwayswillneverperformtothese
financialstandards.Theyjustdon'thavethevolume.

Efficiency
Efficientmanagementisanimportantissuebutdon'tforgetthedefinitionoftheword"efficient".Many
peopledescribearailwayas"efficient"iftheyseethatthetrainsarecleanandruntotime.Yes,the
trains may be clean and they may run to time but it can cost an exorbitant amount of money to
achieve this. Japanese railways are offered as examples of "efficiency" but their cleanliness and
reliabilityarenotachievedwithouthugeamountsofmoneybeingspent.Thisisnotefficientinthetrue
senseoftheword."Efficient"reallymeans"costeffectiveuseofresources"andthisiswhytheprivate
sector can be helpful in running or maintaining a railway system. For some extraordinary reason,
governmentsallovertheworldseemunabletocontroltheirmanagementsothatpublicservicesare
runefficiently.That'swhytheprivatesectorcanbeusefulinimprovingefficiencyinrunningrailway
systems. An example of this efficiency is in the UK, where one metro system under public
managementemploys40personsperkilometreofrouteoperatedandanother,moreefficient,privately
operatedsystemusesonly16personsperkilometre.
Anotherpointisthattheefficiencyofanoperationcanbefinancially"loaded"tothepointwherethe
positivefareboxratioisonlyachievedbyareductionofstaffingandmaintenancewhich,inturn,leads
to a deterioration in reliability. This is seen in London, where the Underground system has achieved
spectacularcostsavingsinrecentyearsbutitsdelayrecoveryperformancehasslippedsharplydueto
reductionsinexperiencedstaff,intrainingandinmaintenance.ThePublic/PrivatePartnership(PPP)put
inplaceforthesystem'sinfrastructurerenewalandmaintenancedidimproveconditionssomewhat.So
far, there have been some visible improvements but the service still suffers too many interruptions.
ThenthePPPsystemcollapsedfinancially,havingbeensetuponveryshakyfinancialfoundations.
Inreality,themoneyavailablefromthefareboxonmanyrailwaysisrarelyenoughtocoverthecostof
operations, particularly for older systems which require a lot of maintenance or for rural lines serving
sparsely populated areas. In these cases, some sort of financial support is inevitable. The trick for
governmentsistomakesurethatthissupportisproperlymanaged,whichiswhytheUKhasadopteda
policyofofferingfranchisestorailwayoperatorsonthebasisofthelowestamountofsupportneeded.

Maintenance
Maintenancecostshavenowgonecommercial,alongwiththerestofrailwayfinancing.Fewpublished
prices exist to give an idea as to how much maintenance can cost. Often the details of individual
contractsaredeliberatelyobscuretopreservecommercialconfidentiality.Manycoveranextendedtime
and involve a degree of renewal as well as daytoday maintenance. Even railway companies which
havetriedtocomparemaintenancecostsamongsttheirpeershavenotbeenabletogetreliablelikefor
likefigures.Therearedoubtsaboutthevalidityofthosethatarepublished.

OpenAccess

Openaccessmeansgivinganysuitablyqualifiedrailwayoperatorthechancetoprovideaserviceover
anyone'sroute.Thereisalottobesaidforopenaccessintheoryitremovestheimageofmonopoly
whichrailwayshaveanditstimulatescompetition,whichshoulddrivedownpricesanddriveupservice,
reliabilityandcomfortstandards.Unfortunately,examplessofarseeninEuropearenotencouraging.
Some railway operators in the UK already provide two similar services between the same towns,
sometimes using different routes. There have been some successes but the confusion to the
passengershasbeenintryingtodeterminethecheapestfareormostdirectroute.Constantchanges
intariffsandtimingsandendlessrestrictionshavemadeitverydifficulttogetgoodinformation.
Afurtherdifficultywithopenaccessishowtodeterminetraintimings.Operatorswillusuallydetermine
whentheywishtorunaparticularserviceandthistimingwillprobablybedependentonconnections
with other trains. The route owner then has to decide how to allocate paths. In the UK, this has
resultedinaseriesofcomplicatednegotiations,shroudedincommercialstrategiesbytheoperatorsand
withtherailrouteprovidertryingtoshowfairnessaswellasobtainthebestcommercialreturnforthe
paths they sell. In some areas, the routes have reached capacity and the provider is being urged to
investininfrastructureimprovementstoproducemoretrainpaths.
IntheUK,chargesfortrainpathshavecomeinforsomecriticism,theoperatorscomplainingthatthey
are too high. Well, they would, wouldn't they? Whatever the truth of the matter, some operators
seem to be making a commercial success of their service, while others are struggling to make ends
meet.Inaddition,someoperatorshaveperformedverybadly,trainpunctualityhavingdeclinedsince
theprivatisationregimewasstartedafewyearsago.
Financially, it is a precarious business. The collapse (28 January 2011) in the UK of the Wrexham &
Shropshire Railway illustrates the problem very well. This is what they said when announcing their
closure,"Thisverydifficultdecisionhasbeentakenfollowingafullreviewofallpossiblealternatives,in
whichitwasconcludedthatthebusiness,whichoperateswithnopublicsubsidy,wouldnotprovidea
returnoninvestment."

NewProjectFinancing
Obtaining commercial capital for expensive infrastructure projects requires that the organisation
needing the money provides the investor with a reasonable rate of return on his investment. If the
purecommercialconsiderationsshowthatthisisnotlikely,theremustbesomesortofguaranteefor
theinvestor.Ifmoneyisborrowed,theguaranteemustprovidethattheinterestwillbepaidandthat
the amount borrowed will be repaid. Guarantees for public infrastructure projects usually have to be
providedbythegovernmentthesocalled"sovereignguarantee".
Onewaytogetaprojectinvolvedwithprivatefinanceistoreducethelevelofcapitalexpendituretobe
suppliedbythecommercialmarket.Thiswillrequirethegovernmenttopayforpartofthecostofthe
infrastructure.Thiscanmeanthatthegovernmentwill,say,payforthecostofcivilengineeringwork,
while the private sector funds the purchase of trains, signalling, control, fare collection, power supply
etc. the electrical and mechanical parts of the system. Put simply, it is treating the new railway
project like a new road project. The government builds the road but private industry supplies the
trucks,busesandcars.Foranewrailroute,howmuchthegovernmentwillpaydependsonthescope
andtypeofrailwaybeingbuilt.Let'sseehowthismightwork.

MetroFinancingExample
Let'sassumewearetryingtofinanceametrolineinalarge,developingbutfictitiouscapitalcityandwe
have prepared estimates for the number of passengers expected to use the system and the cost of
buildingthesystem.Supposewehavealinewhichismostlyelevatedonconcretestructuresandruns
for15kmsacrossthecity.ItmightcostUS$50millionakilometreincludingtrainsandallequipment
necessary to run the line power, signalling control, communications, fare collection, a maintenance
depot, stations and operating offices. It could add up to US$ 750 million. Let's assume we have
borrowedthemoneytopayforitandwehavegottopayinterestat10%perannum.That'sUS$75

millionayearininteresttopayatleastforthefirstfewyears.
Tocovertheinterestpaymentsweneedtosellticketslotsofthem.Well,wehavealarge,populated
cityinarapidlydevelopingcountryandourconsultantshavedonedetailedtrafficsurveys.Theytellus
we can expect an average of 150,000 passenger trips a day. This is equivalent to a mediumsized
metro or light rail system and would show a peak hour flow in the peak direction of about 18,000
20,000passengers.
Because this is public transit and we want to attract passengers and we want to keep them from
pollutingthecitywiththeircars,wekeepthefaresaslowaspossiblesoweexpectanaverageincome
ofUS$0.50pertrip.ThisisactuallylowfortheUSandEuropebutaboutrightforadevelopingcity.It
givesusanincomeofjustoverUS$27millionayear.Wellfolks,thisdoesn'tevencoverourinterest
payments.Andwehaven'tpaidforourpoweryet,noremployeestorunthesystem,norallowedfor
maintenancecosts,norasinkingfundforrenewals.Andwehaven'tfiguredouthowtopaybackthe
$750millionweborrowedinthefirstplace,whichthebankwantsbackin10yearsequivalentto$75
millionayear.
Hereisoursimplifiedannualincomeandexpendituresheet:

Item

Income/Year

Expenditure/Year

Fares

$27million

Operations

$25million

Maintenance

$20million

Renewals

$15million

Interest

$75million

Repayments

$75million

Total

$27million

$200million

So,inourexample,ourcostsarenearlyseventimesourincomeandourincomeestimatesarealready
very optimistic. Here, we are seeing income as 12.8% of expenditure. In most modern rail transit
projectstherealincome/expenditureratioisbetween5%and20%.Don'tforgetalsothattherewon't
beanyincomeforthethreetofouryears(orwhatever)ittakestobuildthesystem.

HighSpeedLineFinancingExample
Inconsideringcostsandrevenue,wecanlookalsoatahighspeedline.Inthisexample,theprojectis
a350kmlinewhichisexpectedtocostUS$17.5billiontobuildandequip.Dailytripsareexpectedto
be250,000,soeachtripmustgenerate$19.75justtocoverinterestpayments.Anadditional$75a
trip will be required to cover operating, energy and maintenance costs. So far no profit has been
included.Anairlinetickettocoverthesamedistanceisapproximatelythesamepricebutthetriptakes
onethirdofthetime.Thegovernmentwouldhavetofinancealargechunkoftheconstructioncosts
(theexpectationis50%)andtheywouldhavetoguaranteetherepaymentstolenders.Thehopeis
thatpropertydevelopmentintheareasaroundthestationsalongtheroutewillgeneratefinanceand
income to help fund the project. Property can be very profitable but it is also a very high risk
investment and it should be regarded as a long term investment. Only a few new railways have
generatedmuchadditionalincomethroughpropertydevelopment.

TheWayForwardBackwards?
Thelast15yearshaveshownthattheprivatisationoftherailwaysintheUKhasnotprovedtobethe
successthatpoliticianshopeditwouldbe.Ithasprovedexpensive,increasingrealcostsby50%pro
rataoverthoseofthenationalisedrailway.Peoplewillnoteasignificantincreaseintraffic65%onthe
MidlandMainLineforexamplebutitismoretodowithyearsofeconomicstability,risingoilpricesand

severeroadcongestionthananythingtherailwayshavemanagedtodo.Evenduringtherecentyears
ofrecession,railtravelintheUKhascontinuedtorise.Thisislargely,inmyview,afunctionofroad
congestion, increasing fuel prices, security delays at airports, a higher student population and yeild
managementtechniques.
Whatisneededisthereintegrationoftherailwaysothatthewheelrailinterfaceisrestored.There
aresignsofthishappeningintheUKbutit'sbeenalongtimecoming.Thenonsenseofmanagement
bycontract,whichonlyincreasesworkforlawyersandregulatoryconsultantsshouldbestopped.There
isalsostillahugebacklogoftrainingneededtobringtheoperationalexpertisebackintothebusiness.
Successionplanningneedstoberestoredsothatfuturegenerationscanrunabetterrailwaythanwe
havebeenallowedtodo.Intheend,it'sthepeopleatgroundlevelwhokeepthesystemgoing,inspite
oftheirmanagers.Ingeneral,theydeservebetter.
Sources:InternationalRailwayJournal,RailwayGazetteInternational,ModernRailways,RailwayAge,
MassTransit,AsiaRailConference1999.