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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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a thank you for the invitation«. poverty reduction and the world¶s environment. WORLD BANK 2 . To the International Union of Railways.First. are hosting this conference of high international significance to the future of railway freight. at this exciting time in that organization's own business development. for their continuing relationship with the World Bank and their world leadership of an industry that is vital to international economic development. To Indian Railways who.

Rail freight demand is increasing strongly in most regions«.ac E r Afr 5 Source UIC Global freight task: 25 percent growth over five years (net tonne-km bill) WORLD BANK 3 . 35 3 5 15 1 5 N/ Am As..

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. for example: direct transfer to passenger operating losses.In most public railway systems. generally smaller railways with little base-load of bulk or transit freight.  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. 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. revenues do not cover their own µabove rail¶ costs and cannot cover reinvestment in the train operating assets WORLD BANK 4 .

for example« Budget sources Direct Borrowing Corporate borrowing Revenue-backed borrowing Project-specific borrowing Private participation Asset finance Deficit financing Government loans/equity Government grants Joint-Ventures Concessions Privatization of business units Export credit Leasing Availability contracts In practice. particularly those that have a big passenger role WORLD BANK 5 .Public railway systems can in principle raise finance from a variety of other sources. most publicly railway systems depend heavily on the budget sources.

there is a growing need for investment in rail freight to meet the challenges of serving global supply chains« WORLD BANK 6 .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.

usually larger units and improved traffic dispatching.Supply chains are becoming more challenging« and competitive Rapid expansion of international trade.g. monitoring and control capability Markets Expectations Competition Technology WORLD BANK 7 . ports) the freeing of transport markets is creating greater contestability in logistics services and sub-markets All modes of transport are investing to obtain more efficient. and particularly 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 supplier markets Despite some industry concentration (e.

more challenging supply chains«. facilitating inter-modal transit and multi-modal allocation of traffic 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 Higher standards of security in freight transport are being sought in all modes Energy/climate Security Bottlenecks Logistics services depend heavily on public infrastructure : capacity increments are not matching world freight volume growth WORLD BANK 8 . Inter-modality Both standard and specialized containerization continues to grow .contd.

who owe railways no favours. ever improving value for money« 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 Cost components ‡Transport & storage tariffs ‡Inventory holding costs ‡Product damage or deterioration ‡Pilferage losses ‡Insurance costs ‡Administration ‡Customs and other clearances ‡Informal payments for service WORLD BANK 9 .Freight railway services will need to be able to offer supply chain managers.

Competitive spirit A focus on customer service High order marketing skills Pricing agility Commercial culture Lean decision structures Rigorous management of internal and outsourced costs Keen incentive mechanisms Capital access 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 ! WORLD BANK 10 .The success of rail freight as a business will depend on three Cs«.

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 . 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 µring-fences¶ round invested businesses WORLD BANK 11 .as shown later  But private finance is not a panacea for rail systems development: in many countries.

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. WORLD BANK 12 .

*Australian interstate rail is carried on vertically separated infrastructure managed by the Australian Rail Track Corporation WORLD BANK 13 .Track access rights for freight train operators can in principle come in a variety of different forms«. EU international. Contractually agreed: specific access rights: US network is subject to µtrackage rights¶) Canada (30km beyond company boundaries) Mexico (specific lines to ports/cities to create competition))  USA (approx 25% of Legally mandated: narrowly defined access rights Legally mandated: general rights of access Australian State-owned railways*  Most EU States.

. Rules for sorting out operating priorities conflicts between trains 9. Procedures for incorporating new operators fairly into timetable 8. Standard documentation for track (& facility) access contracts WORLD BANK 14 6. Criteria and process for licensing new rail entities . Laws and regulations on access to public rail systems 2.Private freight access on public rail networks will require a rigorous governance (legal and regulatory) framework if it is to be financeable.Institutions and procedures for regulatory review and compliance .. Procedures for applying for capacity on public rail network . Agreements on rollingstock interchange and revenue division 7. System for safety accreditation and monitoring 4.

Therefore. financing rail freight is not only about commercial risks but also the predictability and acceptability of 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 Governance risks ‡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 WORLD BANK 15 .

With good governance and regulatory structures there is a wide scope for private finance in railway freight transport Functions Finance & build Operate & maintain rail line rail line Finance rollingstock Operate freight train services Structures Rollingstock leasing availability contracts Freight train operating company or concession Infrastructure build or renovate concession Infrastructure build & operate concession Integrated infra.and train service company or concession Public Public Private Public Private Private Public Public (pays usage charges to private) Private Private Public Public (pays access charges to private) Private Public (pays R/S hire prices to private) Private Public Public Private Private Private WORLD BANK 16 .

World Bank support for the railway industry is increasing (Annual lending for railways 999 2008 projected) 00 00 00 200 00 0 999 D WORLD BANK 17 200 illio n s ( 200 yr 200 200 o in g a e ra g e ) .

institutions. regulations.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.  Advice on and support for structures that can increase private investment in freight railways (together with IFC and MIGA products).  Knowledge sharing and technical assistance to bring to bear best practice advice on railway policy. WORLD BANK 18 . corporate restructuring and business strategy.  Regional and corridor approaches to rail trade and transport facilitation.

org The findings.Thank you for your attention Questions and comments to: pamos@worldbank. interpretations and conclusions expressed herein are those of the author and do not necessarily reflect the views of the Board of xecutive Directors of the World Bank or the governments they represent WORLD BANK 19 .