World Bank Support for Developing Railways of the … · World Bank Support for Developing Railways of the World ... their government owners also shared the ... faced a cumulative

4 Japan Railway & Transport Review • June 1997

International Cooperation

Copyright © 1997 EJRCF. All rights reserved.

Special Feature

World Bank Supportfor Developing Railways of the World

Louis S. Thompson

Introduction

The World Bank considers transport in-frastructure and railways to be importantdrivers of economic development. In the50 years since the establishment of theBank, rail lending has amounted to aboutUS$15 billion covering most countries ofthe developing world. As a result, theBank's experience with, and perspectiveon, developing railways are unique.Lending to developing countries is inher-ently risky. Against this backdrop, theBank's transport portfolio has been rela-tively successful. However, within thetransport loans, railway lending has of-ten been problematic and, in 1982, theBank issued The Railways Problem(1), areport discussing the reasons for the lend-ing problems.The Report criticized the railways as con-servative, production-driven organiza-tions rooted in the past and reluctant toface the future. It also emphasized thatthe railways were only half the problem:their government owners also shared theblame for imposing politically-drivenburdens and for refusing to allow an ac-ceptable degree of managerial authority.The result of the railways' problem hasbeen broadly documented(2). During the1970s and 1980s, many railways experi-enced financial and operational crises.In the USA, 25% of the rail system wasbankrupt in the early 1970s. Resolutionof the crisis required creation of Conrail(later privatized), creation of Amtrak (stillin government hands at a total cost todate of US$25 billion) and thorough de-regulation of the transport industry. InJapan, the government ultimately reorga-nized the Japanese National Railways(JNR), which was losing US$15 billionper year and had a debt of US$250 bil-lion, into the current system of six pas-senger companies and one freightcompany. In Germany, the governmentfaced a cumulative loss of DM500 bil-

lion by the end of the century if actionwas not taken. In response, the oldDeutsche Bundesbahn (DB) was brokenup into infrastructure and operating com-panies (combined with the old DeutscheReichsbahn, together called DB AG),some of which are eventually to be priva-tized. In the UK, the government splitthe old British Railways (BR) into an in-frastructure company (Railtrack), threeequipment leasing companies (ROSCOs),four freight companies (all bought by oneventure) and 27 passenger operating fran-chise companies. Similar change has oc-curred in many developing countries(3).This article discusses the Bank's coop-erative role in supporting change and therelated costs of transition.

Need for Change

The Bank has long encouraged change.Some years after publishing the RailwaysProblem, the Bank revisited the issue and

found some change was occurring andthat a new set of tools was emerging foruse in supporting change(4). The primaryengines of change are globalization andmarketization. For transport, globaliza-tion means a country's inefficiencies canno longer be absorbed within its borders.If a country is to participate effectively inthe world economy, it must be able tomove goods rapidly and cheaply. If thecountry's transport network is inad-equate, the export potential will be re-duced, and the citizens will pay more forimports (or competing local goods) thannecessary; either way, the nation’s well-being is reduced. If local passenger travelis inefficient, citizens cannot participateeffectively in the educational and com-mercial activity needed to promote theirparticipation in the global economy.Recently, the World Trade Organizationhas completed a framework for openingup the world's economies to trade andtravel. However, within this framework,regional trade organizations may be even

Double-stacked container train of Canadian National Railways, privatized in 1995 (Canadian National)

5Japan Railway & Transport Review • June 1997Copyright © 1997 EJRCF. All rights reserved.

more important in influencing economicdevelopment and trade flows. The Euro-pean Union (EU) has created a borderlessmarket in which transport competitionwill be transformed. Since most of theCentral and Eastern European (CEE) coun-tries have borders with the EU (and mosthope to join the EU someday), they aredirectly affected by EU actions. Similarly,Mexico is now more directly linked tothe American and Canadian economiesthrough the North American Free TradeAgreement (NAFTA) to the point that theNational Railway of Mexico had to berestructured and privatized along theAmerican and Canadian models in orderfor Mexico to participate fully.Marketization means the enormous tran-sition from planned economies to mar-ket economies now underway in most ofthe former socialist countries. It is clearthat market forces lead to a very differ-ent economic structure and that the mar-ket-driven structure has profoundimplications for the transport system. TheBank has followed this transition care-fully(5). In summary, it appears thatplanned economies produced and con-sumed far larger amounts of basic prod-ucts (coal, steel, cement, electric power,etc.) per unit of economic activity thantheir market-oriented counterparts. Con-sequently, there was much larger demandfor low-cost, bulk transport (i.e. rail) inplanned economies. In addition, plannedeconomies focused on transport cost, butnever fully included total logistics costsin their transport decisions (againfavouring rail over truck). Finally, lowownership rates for private automobilesmeant that public transport played a dif-ferent and larger role in planned econo-mies.The outcome of the transition in trans-port has been startling. Figures 1, 2 and3 show that rail freight has fallen dramati-cally in the CEE countries, the Common-wealth of Independent States (CIS) andthe Baltic countries, while remaining

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Austria Finland France Sweden United Kingdom Germany USA:Class I Rwys

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Former Soviet Union Russia Ukraine Kazakhstan Belarus Estonia Latvia Lithuania

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20 Bulgaria Czechoslovakia East Germany (DR) Hungary Poland Romania Turkey Yugoslavia Slovenia

Figure 1a CEE and Turkey

Figure 2a CIS and Baltic Countries

Figure 3a Western European Countries and USA

Freight Trends (1988 Tonne-km = 100)

(1) 1988 baseline data estimated. Some data not available before 1991.(2) 1993 data aggregate of Slovakia and Czech Republic as provided by UIC(3) 1994 data as of 30 Sept. 1994(4) Germany as W. Germany only before 1994

BulgariaCzechoslovakia(2)

East Germany (DR)HungaryPolandRomaniaTurkeyYugoslaviaSlovenia

120

100

80

60

40

20

0

120

100

80

60

40

20

0

Former Soviet UnionRussia(1)

UkraineKazakhstan(3)

BelarusEstonia(1)

Latvia(1)

Lithuania(1)

140

120

100

80

60

40

20

0

AustriaFinlandFranceSwedenUnited KingdomGermany(4)

USA: Class I Rwys

1983

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1991

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1983

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1995




0

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Austria Finland France Sweden United Kingdom Germany

0

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40

Former Soviet Union Russia Ukraine Kazakhstan Belarus Estonia Latvia Lithuania

0

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60

80

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20

Bulgaria Czechoslovakia East Germany (DR) Hungary Poland Romania Turkey Yugoslavia Slovenia

relatively stable in the Western econo-mies and Turkey. While part of the freighttraffic loss is no doubt related to the re-duction in general activity, much of theloss is the result of economic restructur-ing, and most of the lost traffic will re-turn only slowly, if ever. Althoughpassenger traffic has shown slightly dif-ferent levels of change, the trend is thesame and the eventual outcome may beas large or even larger. In particular,when automobile ownership rates in-crease, the shift from public to privatetransport that prevails in market econo-mies is likely to occur with a correspond-ing reduction in rail passenger traffic.The process of replacing governmentregulation with market forces has notbeen confined to the former plannedeconomies. Deregulation has become aforce in most of the market economiesas well, which have discovered that gov-ernment interference incurs a high pricein the economic distortion that such in-tervention inevitably produces. For ex-ample, the American railway system wasnearly destroyed by perverse governmentregulation and promotional programmesfavouring trucks, automobiles and air-lines; the problem was only corrected bythe air, rail and trucking deregulation ofthe early 1980s. EU governments havegradually undertaken a similar deregula-tion of transport as the single market hasevolved.The process of change is not uniform inall countries. The starting point for eachcountry differs and the composition ofeach economy is unique; there is nosingle recipe for how the transport sec-tor, and the railways, must change. Bear-ing this in mind, all railways face a set ofcommon issues and challenges. Al-though the weight and mixture of the is-sues may vary, most will need to beaddressed as each country searches forthe railway reforms that best suit itsunique circumstances.

Figure 1b CEE and Turkey

Figure 2b CIS and Baltic Countries

Figure 3b Western European Countries and USA

Passenger Trends (1988 Passenger-km = 100)

(1) 1988 baseline data estimated(2) 1993 data aggregate of Slovakia and Czech Republic as provided by UIC(3) 1994 data as of 30 Sept. 1994(4) Germany as W. Germany only before 1994

BulgariaCzechoslovakia(2)

East Germany (DR)HungaryPolandRomaniaTurkeyYugoslaviaSlovenia

Former Soviet UnionRussia(1)

UkraineKazakhstan(3)

BelarusEstonia(1)

Latvia(1)

Lithuania(1)

AustriaFinlandFranceSwedenUnited KingdomGermany(4)

120

100

80

60

40

20

0

140

120

100

80

60

40

20

0

160

140

120

100

80

60

40

20

0

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995


Table 1 Railway Passenger Traffic and Income Ratios

Brazil: RFFSAJordanCanada: CNCanada: CPUSA: All Class IMexicoSouth AfricaKazakhstanZimbabweEstoniaSaudi ArabiaBrazil: FEPASALatviaRussiaLithuaniaMongoliaSloveniaChinaFinlandKenyaSwedenPolandUkraineCzech RepublicMoroccoSenegalTunisiaSyriaZambiaBelarusMaliBulgariaAustriaTanzaniaChileTurkeySudanRomaniaHungaryGermanyBelgiumMalaysiaAlgeriaCongo: CFCOCote d'IvoireNigeriaFranceIndiaSpainGhanaRepublic of KoreaIrelandItalyPortugalPakistanIndonesiaThailandNetherlandsGreeceBangladeshBurma (Myanmar)JapanEgyptCanada: Via RailUSA: Amtrak

0000059

1113141515161616171923242424252627293232323436393940424244444646474848505152525556616566696972737883848488909192

100100

70n/an/an/an/a46

1824748

107128108563864

2706187

17135

41968

14037834883227

307335

103244964392569

2241199260n/an/a19

12632

12118

11230015782255557

169401342

21123

426412

(1) Sum of passenger-km and tonne-km(2) Average passenger tariff = Passenger revenue/passenger-km(3) Average freight rate = Freight revenue/tonne-km

Ratio of averagepassenger tariff (2)

to average freight rate(3)

Passenger-kmas percentage of

total traffic units(1)Country

Railway Reforms

Railway reforms fall into three broad cat-egories: Separating railway from govern-ment and adoption by each party of arevised set of roles and responsibilities;Restructuring the railway to increase itsmarket focus while retaining thegovernment's role in supply of publicinfrastructure and support of social ser-vices, and; Rethinking the boundary be-tween public and private sectors indelivery of rail services.

Separating railway fromgovernmentThe most important cause of the railways’problem has been the confusion of rolesbetween government and railway. Gov-ernment agencies are always slow mov-ing, risk averse and concerned aboutaccountability, not results; they cannotreadily take rapid or risky decisions, norcan they rapidly change policies or re-source allocation decisions. By contrast,market enterprises must respond rapidlyto competitive forces, and they can takerisks. As a result, government ministries(and their railways) are severely handi-capped when they try to compete withprivate trucks, airlines and automobiles.Government control also means politi-cal interference. Politicians who allocatemoney for public railways expect that therailway will accommodate their politicalneeds, whether this entails suppressedtariffs, bloated labour forces, distortedinvestment decisions or (occasionally)even corruption in procurement. Noenterprise manager can be held fully ac-countable in this environment.Railway and government must thereforebe separated. Governments must setbroad transport sector plans and policiesfor ensuring that the appropriate infra-structure is in place and effectively oper-ated. Governments must also establishregulatory policies to ensure that the




market can determine the servicesneeded without undue monopoly power.Where there are truly social needs, suchas affordable transport for students andthe elderly, governments must identify theneeds and pay explicitly to efficient pro-viders. Table 1 shows that social servicescan be an important issue in some coun-tries; the social burden is high and theneed for explicit government support isgreat when railways carry mostly passen-gers and the passenger income is lowcompared to freight income.Many governments are also re-examin-ing the question of what level of govern-ment is best suited to make whichtransport decisions. The emerging con-sensus is that many of the traditionallynational transport decisions (for exampleurban transport) can best be exercised atthe local or regional level, which requiresa corresponding transfer of power andresources. Finally, of course, govern-ments must bear many of the transitioncosts for items such as excess debt, de-bilitated assets, surplus labour and envi-ronmental problems, which result fromtheir past sins.As the government role changes, railwaysare becoming commercial enterprises inwhich the state merely owns stock butdoes not attempt to exercise operatingcontrol or make day-to-day decisions.Although governments retain control overthe use or disposition of infrastructure,the enterprise (at least in principle) func-tions like a privately-owned corporation,making all normal operating and assetmanagement decisions. From this point,the enterprise evolves as market needsdictate.This organizational change is a goodstarting point. However, in practice, it isnot enough by itself, because the gov-ernment can still exercise strong informalpolitical and budgetary control. Separa-tion helps in providing a clearer under-standing of roles and responsibilities, butit is rarely enough.

Restructuring the railwayThere have been many government-owned railways that were explicitly com-mercial enterprises (for example the oldDB and BR) but that continued to havesevere problems in accommodating theirevolving transport markets. Although therailways' organization charts had roughlythe right boxes and titles, they continuedto be production driven and nationallyoriented. As customers gained morechoices and became more sophisticated,and as competitors (especially trucks)became more capable and aggressive, therailways fell even further behind despitetheir nominal independence.Examples of national responses to thisissue can be found in the USA, Canadaand Japan. These countries took theirrailways through deep restructuring,regulatory reform and refinancing, whichworked. These railways are in bettercondition (and pose less of a burden onthe national treasury) than ever before.A more interesting multi-national casecan be found in the EU which needed todeal with railways that were problemsboth within their national boundaries andeven more so within the broader com-mon market where all transport modesexcept railways had developed an inher-ently international perspective. The Eu-ropean Commission believed it wasimperative to break down the railways'

national fortress mentality so that the EUrailways would eventually be as interna-tionally competitive as trucks. The Com-mission also intended to clarify theconfusion between social and economicrailway functions in order to encouragebetter decisions in transport (and in or-der to prevent countries from continuingto subsidize railways in the commercialsphere in the guise of subsidizing theirsocial functions)(6).The Commission took three far-reachingsteps. The first required accounting sepa-ration of infrastructure costs so that thepublic role of infrastructure planning andprovision could be distinguished from thecommercial operating functions. The sec-ond required that certain internationaloperators be accorded non-discriminatoryaccess to the infrastructure of the nationalrailways. The third forbade payment ofgovernment subsidies to railways exceptfor certain social services (local rail pas-senger services and certain infrastructurefunctions), requiring an organizationalscheme ensuring that payments go onlyto the specified recipient.The emerging European Model has hada major impact on the way developingrailways, especially CEE and CIS rail-ways, look at themselves—and on theway their governments view them. Theidea of infrastructure separation is pow-erful because it furnishes a vehicle for

SJ’s X2000 express train ready for departure at Stockholm Central Station (EJRCF)


dealing with the question of unfair sup-port for highways compared to railways.If trucks are subsidized by not paying thefull costs of the highway infrastructure,the rail infrastructure should be subsi-dized as well—so long as it does not dis-cr iminate between nat ional andinternational users. In addition, infra-structure separation provides a way toreflect the value of the perceived envi-ronmental friendliness of rail. If govern-ments (as in Sweden) believe that use ofrail confers environmental benefits thatcannot be internalized in market deci-sions, they may subsidize rail infrastruc-ture costs accordingly(7).Infrastructure separation also leads to therealization that once infrastructure costsare separated and appropriately sup-ported by the public sector, the approachto provision of operating services can befundamentally altered. If external costsand subsidy policy are reflected in infra-structure costs, there remains only a lim-ited rationale for a public role inproviding rail freight or intercity passen-ger services. In fact, the decisions as towhich services should be supported can

has included outright sale of an opera-tion to the private sector (UK rail freightservices, and the entire New Zealand rail-way). In other cases, commercial railservices have been concessioned to theprivate sector with the infrastructure re-maining in public hands (accompanied,in some cases, with retention of certainsocial services in public hands). In fact,provision of services on most non-profit-able suburban, regional, and subwaylines can be concessioned or franchisedto the private sector if the public authori-ties are willing to pay the concessionaireor franchisee(9). The net result can be ahybrid that has the best of both worlds—the public sector manages policy formu-lation and economy-wide planning, theprivate sector exercises its strength indelivering services to customers.

Financing the transitionTransitions are costly because govern-ments have to pay to fix problems thatearlier policies created. As discussed, theJNR had debts of over US$250 billion thatclearly could not be repaid by the newly-formed JRs. Many developing railwayshave heavy debt burdens which must beresolved if new management is to be ableto concentrate on rail issues. Conrail inthe USA had infrastructure and opera-tional problems so debilitating that thegovernment spent US$8 billion to fixthem although this far exceeded the saleprice of US$2 billion. Commercial enti-ties cannot afford to pay costs they didnot generate and the only source of fi-nancing is government transitional assis-tance.The most expensive problem can be re-dundant labour. Government railwaystypically have labour forces that have notadjusted adequately to advances in tech-nology and changes in traffic. In gen-eral, this is because governments aresensitive to labour unions for politicalreasons, making railways unable to ad-just to market pressures to reduce labour

Tranz Rail’s express passenger train running through scenic Canterbury Plains, New Zealand. Tranz Rail,a consortium headed by US railway Wisconsin Central, took over the former state-owned rail network.

(Tranz Scenic)

be safely left to the market(8). Put anotherway, if the public role is adequately ex-pressed in the planning, provision andsupport of rail infrastructure, what elsedoes the public sector have to do?

Rethinking the public and privateboundariesThe answer is that when adequate infra-structure is properly supported by thepublic sector, much of the responsibilityfor delivering transport services can beshifted to the private sector. In fact, it ishard to argue that provision of transportservices by the public sector has any ad-vantage over the private sector.Faced with this conclusion, governmentsare increasing the role of the private sec-tor, beginning with transfer of non-railactivities (manufacturing) to it. This isusually accompanied by transfer of rail-way welfare activities (schools, hospitals,stores, etc.) to public authorities. In ad-dition, the railways can source serviceslike equipment and track maintenancefrom outside private enterprises.Next, responsibility for some rail servicescan be transferred. In some cases, this




costs. In the case of a railway with gov-ernment-owned infrastructure and pri-vate-sector operated services, somesurplus labour could be hidden in theinfrastructure (and supported by the pub-lic sector—which fiscal restraints aremaking even harder). However, the pri-vate operators are unable and unwillingto pay for more labour than they need,so governments must help adjust thelabour force size to the level that themarket can support. The good news isthat measures have been developed inthe USA, Japan, Argentina and Brazil forchanging labour force size—the badnews is that it is expensive. In general,labour redundancy schemes have re-quired payment of at least one-month'swages for each year of service as well asreasonably generous provisions for re-training and/or early retirement.

Actual Experience

There is a natural tendency to look aheadand be discouraged at how far there is togo. While this is natural, it is also fair toassess what has been accomplished. Infact, the picture is radically different fromthe Bank's perspective when the RailwaysProblem was published. By any reason-able measure, there has been realprogress.

Separating railway fromgovernmentMany railways are now separated, at leastin legal form, from their governments,except in China, India and some of theCEE countries and CIS. For example,there are no remaining market economiesin which the railway is a governmentministry, and the railway's status has al-ready changed, or is changing, in manyof the former planned economies. (Hun-gary, for example, has now constitutedits railway (MAV) as a joint stock com-pany.) The Chinese Ministry of Railways

is now examining how to carry out theseparation although, to be fair, it will bedifficult for the railway to take a radicallydifferent or faster course than the rest ofthe Chinese economy.There remain many countries wheregovernment's informal interference ispervasive and railway independence ismore real on paper than in practice.Many developing railways continue todeal with this problem and some, suchas those in Poland, Morocco and Thai-land, have secured agreements allowingthem to function more-or-less commer-cially, but with government support forsocial (so-called Public Service Obliga-tion, or PSO) services.

Railway restructuringWhere separation of railway from gov-ernment has proceeded, there has beena great deal of ferment in structure. Mostof the market oriented, developed rail-ways have adopted one or other formsof business organization with separateprofit centres. In some cases, as in BRbefore privatization, this took the formof several separate passenger businessesand a freight business. In others, such as

Express passenger train running on Polish state railways’ central trunk line linking Warsaw with Krakow/Katowice areas. The line was built in the 1970s to ease north-south freight movement, but could be convertedto a dedicated high-speed line in the future. (EJRCF)

Swedish State Railways, the current finan-cial and institutional separation is be-tween infrastructure (now calledBanverket) and the railway operation (SJ).Polish National Railways (PKP) has an-nounced a separation into infrastructure,passenger and freight businesses. DB AGis now implementing a separation involv-ing an infrastructure company and sepa-rate freight and passenger companies. Anumber of other railways (Slovenia andmany of the Scandinavian railways) haveundertaken similar separations and oth-ers, such as MAV, are considering the ap-proach.It is still too early to say with certaintyhow well infrastructure separation works,or where it is appropriate, especiallywhen the question is to go beyond a merefinancial separation (which is all that theEuropean Directive 91/440/EEC requires)and adopt actual institutional separation.Clearly, separation does not offer a cost-free panacea for railway ills. For onething, infrastructure separation imposessignificant costs in institutional complex-ity. Where the infrastructure remains inpublic hands while the operator is com-mercialized (for example, Banverket and


SJ in Sweden), or even privatized (Chilefreight rail concessionaire), there is a riskof a lack of understanding or coordina-tion between infrastructure maintenanceversus dispatching and operating priori-ties. In all cases, separation implies amuch more precise set of infrastructurepricing and access rules than have ex-isted in the past. The possibility certainlyexists that the costs of such complexityand reduced integration of operation andinfrastructure can be significant. On theother hand, there is no clearer exampleof failure than many of the old so-called"monolithic" railways, so the costs of ac-tual separation may well be more thancompensated for by clearer roles and in-creased market focus of the operatingcompanies.We can suggest at least a preliminary in-dicator of where infrastructure separationmight be worthwhile. Where the railwayis lightly used (Figure 4), just financialseparation may be useful (but if it is asingle-commodity railway, even that maybe unnecessary). As traffic density in-creases, and especially as traffic typesbecome more diverse, the potential ben-efits (and costs) of institutional separationbegin to increase. Other factors thatmight tip the balance towards separationinclude a desire to create or increasecompetition between different rail opera-tors (as in the EU policy), or a desire tofacilitate private sector involvement inrail services (UK, Germany and Italy, andmany developing countries now adopt-ing rail concessioning).

Increased private sectorinvolvementProbably the most startling railwaychange in recent years is the rapid growthin transferring operation of railway ser-vices to the private sector—a changewhich no seasoned observer would havedared to predict at the beginning of the1990s. Five of the six freight railways ofArgentina have been operating as con-

Figure 4 Railway Usage Worldwide

0.00 5.00 10.00 15.00 20.00 2530.00China

RussiaRepublic of Korea

JapanEgypt

UkraineKazakhstan

USA: All Class IIndia

BelarusNetherlands

LithuaniaLatvia

Canada: CNThailand

South AfricaItaly

BelgiumAustriaEstoniaPoland

RomaniaIndonesiaMorocco

Czech RepublicFrance

GermanyCanada: CP

BulgariaPortugalPakistanSloveniaSwedenJordan

BangladeshFinland

SpainMexico

MongoliaZimbabwe

HungaryTurkey

MalaysiaBrazil: FEPASA

TunisiaBrazil: RFFSA

Burma (Myanmar)Syria

AlgeriaIreland

TanzaniaZambiaGreece

MaliSaudi Arabia

Congo: CFCOSenegal

KenyaChile

Cote D'IvoireGhanaSudan

USA: AmtrakCanada Via Rail

Nigeria

Line Density (Thousands of traffic unit per kilometer of line)

29.74

14.15

9.15

4.784.694.684.594.544.45

4.114.07

3.823.56

3.062.99

2.642.542.532.532.39

2.212.142.011.911.891.801.791.72

1.551.541.501.391.32

1.151.14

0.940.830.780.760.710.690.640.620.620.590.55

0.390.240.230.100.03

3.513.463.383.333.30

3.12

21.08

13.2512.27

12.0211.95

10.94

7.946.26




0

0

0

0

0

0

0

0

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

on

0

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00

20

40

72

74

76

78

80

82

84

86

88

90

92

94

Roca

Mitre

Sarmiento

San Martin

Urquiza

Belgrano

0

000

000

000

000

000

000

000

000

000

000

97

4

97

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97

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97

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97

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98

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6

Urquiza

Belgrano

Broad Gauge

cessions for several years (only themeter-gauge Belgrano Line remains ingovernment hands and the governmenthas announced intentions to concessionit within the next year or so). The conces-sioned broad-gauge and Urquiza lineshave seen a growth of traffic back towardslevels of years ago (Figure 5). More star-tling, the suburban railways and theMetro of Buenos Aires have also beenconcessioned on the basis of minimumgovernment payment (negative conces-sion) with results in traffic growth andimproved service that are even greaterthan in the freight area (Figure 6). In theprocess, the US$800 million losses peryear of the old suburban services andMetro have been converted into aUS$100 million capital outlay, a resultwhich, in percentage terms, fully equalsthe JNR restructuring and privatization.Five of the six Brazilian national freightrailway concessions have been sold withthe sixth scheduled for sale in late springof this year. The total sale value was overUS$1.4 billion whereas the old nationalrailway (RFFSA) was losing aboutUS$500 million per year, so the positiveimpact on the national budget is substan-tial. Only the railway of Sao Paulo State(FEPASA) remains in government handsand its concessioning is under discussion.The government of Rio de Janeiro Stateis now concessioning the Rio suburbanservices and the Metro as was done inBuenos Aires.The Bolivian railway segments wereconcessioned in November 1995. Thebroad-gauge freight lines of the ChileanState Railway have been concessionedfor over a year, and the meter-gauge rail-way (Ferronor) was recently conces-sioned as well. Chile is now in theprocess of concessioning its railway in-frastructure as well as three passengeroperating companies. Mexico recentlycompleted the sale (for US$1.4 billion)of the first of its planned four rail con-cessions, and the others should follow in

Figure 6 Buenos Aires Suburban Railways Passengers

Figure 7 Freight on Abidjan-Ouagadougou Railway (Ivory Coast–Burkina Faso)

Figure 5 Freight on Argentine Freight Railways

UrquizaBelgranoBroad Gauge

Roca

Mitre

Sarmiento

San Martin

Urquiza

Belgrano

10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Fre

igh

t (m

illio

n t

on

ne-

km)

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

700

600

500

400

300

200

100

0

Fre

igh

t (m

illio

n t

on

ne-

km)

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Conc

essi

on

140

120

100

80

60

40

20

0

Pas

sen

ger

s (m

illio

n)

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994


the coming months. Colombia, Guate-mala and Peru have announced plans toconcession their railways. In fact, withina few years, there may be no significantrailways in Latin America (except Cuba)remaining in public operation, includingfreight and passenger operations.The concessioning process is not con-fined to Latin America. The railways ofIvory Coast and Burkina Faso (Figure 7)have been in concessioned operation for1.5 years, with traffic results similar toArgentina. The governments of Congo,Gabon, Cameroon, Zambia, Malawi, andSenegal/Mali (international operationsonly) have also agreed to concessionedoperations. In addition, Jordan is in theprocess of concessioning the Aqaba Rail-way Corp. Table 2 compares actual andpotential railway concessions for severalmeasures of size and effectiveness. Basedon the Argentine experience, many of theother potential concessions seem poten-tially successful.

Bank's role and cooperationwith other agenciesThe Bank has consistently supported theneed to separate railways from govern-ments and has argued that all railwaysneed to work with their governments toclarify the government's expectations(10).Early attempts to develop Strategic Plansfor railway restructuring (Poland, Argen-tina, Hungary, Morocco, Tanzania,Mexico, Thailand, to name a few) wereall supported by Bank lending. More re-cently, the Bank has been working inChina and India to encourage assessmentof restructuring options.These efforts have met with mixed suc-cess. While Strategic Plans and their re-lated Performance Agreements (orContract Plans) have helped railways andgovernment to discuss common issues,the parties have often been threatenedby the answers and, in many cases, ac-tion has been deferred or avoided. Whilesuch planning and role clarification is a

cessioning in the belief that, at least inmany developing countries where scarcepublic skills and resources are neededelsewhere, commercial railway opera-tions can best be provided by the privatesector. This has not implied privatizationin the American, Canadian, UK or NewZealand sense in which the ownershipof rail infrastructure was actually trans-ferred to the private sector; instead itimplies a better division of public versusprivate roles. The results are encourag-ing so far.Increasingly, World Bank assistance isbeing provided in cooperation with otheragencies, public and private, a trend theBank encourages. Many Strategic Planshave been financed with assistance frominternational aid agencies in the USA,Canada, France, Scandinavia, and Japan.Many of the projects would not havebeen possible without this assistance.Bank projects in the CEE and CIS coun-tries are often coordinated or co-financedwith loans from the European Bank forReconstruction and Development, theEuropean Investment Bank, and PHAREfunding. The Bank works with the AsianDevelopment Bank in Asia, and the In-ter-American Development Bank in LatinAmerica; the World Bank is always will-ing to be a member of a larger team whenthe task requires the resources of all.In a broader sense, the Bank has receivedvery valuable cooperation from the rail-

Express passenger train leaving Shanghai Station, one of the busiest stations in China (EJRCF)

necessary condition for change, it is evi-dently not a sufficient condition.The Bank has also been active in financ-ing plans for restructuring railways. ThePolish initiative has some of its roots inBank-financed studies and its implemen-tation will probably be assisted by futurelending. The Bank has also been in-volved in financing similar studies of re-structuring in several CEE countries,notably Hungary, Romania and Bulgaria,although implementation of theseprogrammes is not yet committed.The success of restructuring appears di-rectly related to a government's percep-tion of the seriousness of its railwayfinances and the need for an efficienttransport sector. Where the railway defi-cit is not seen as large, or where the im-portance of the railway in the transportsector is not great, restructuring can bedifficult.Bank support for concessioning has takenseveral forms, including financing of criti-cal rehabilitation before concessioning,identification and clean-up of environ-mental problems, labour redundancy andretraining programmes, and consultingassistance needed to prepare con-cessioning plans and market the conces-sions. In addition, the Bank's privatesector group, the International FinanceCorporation (IFC) has taken a role in sev-eral of the concessions. The Bank hasvigorously supported railway con-




(Italics indicates railway already concessioned or privatized)

Traffic unitsTonne-km Passenger-km Traffic units/km /employee(000,000) (000,000) Line km Employees (000) (000)

6,485 29,118 5,151 223 1,259 NCA 1,189 4,520 865 263 1,375 FEPSA 982 5,163 575 190 1,708 Ferrosur Roca 854 4,791 808 178 1,057 Bs. As. al Pacifico 2,029 5,493 1,079 369 1,880 Mesopotamico 620 2,751 524 225 1,183 Belgrano (not yet concessioned) 811 6,400 1,300 127 624

1,111 2,200 800 505 1,389

39,193 21,715 40,581 1,805 966 RFFSA: Nordeste 926 4,260 4,402 217 210 RFFSA: Centro-Leste 6,886 7,092 8,608 971 800 RFFSA: Sudeste 20,370 1,770 9,982 11,508 2,041 RFFSA: Sul 9,019 6,814 10,208 1,324 884 RFFSA: Tubarao 96 168 351 571 274 RFFSA: Oeste (Bauru) 1,916 1,611 2,655 1,189 722

FEPASA 6,520 1,100 4,929 15,319 1,546 497

CVRD: EFVM (1994) 7 50,137 898 4,991 55,832 10,045 CVRD: Carajas (1994) 7 37,500 1,175 1,814 31,915 20,673

697 3,698 5,255 188 133 Andina 322 114 2,082 2,443 209 203 Oriental 370 1,383 1,431 268 380

37,200 20,445 48,000 1,820 775 Northwest (estimate) 17,200 6,200 21,300 2,774 808 Northeast (estimate) 14,000 3,960 9,830 3,535 1,424 Southeast (estimate) 3,200 2,200 9,043 1,455 354 Chihuahua al Pacifico (estimate) 600 84 1,457 2,053 469 333 Short Lines 2,300 6,543 5,804 352 396

484 241 1,609 3,337 450 217 Southeastern 5 83 185 474 Central 209 49 509 507 Southern 269 110 915 414

28 240 640 430 420 624

80 72 480 2,300 317 66

Ivary Coast/Burkina Faso 417 163 1,155 1,823 502 318 Cameroon 592 450 1,006 3,853 1,036 270 Malawi 52 65 789 3,658 148 32 Gabon 295 98 683 1,893 575 208 Congo (Brazzaville) 339 421 510 4,989 1,490 152 Senegal/Mali (int'l only) 752 346 1,548 4,935 709 222 Zambia 1,025 241 1,273 8,544 995 148 Togo (mgt. contract) 19 9 532 800 53 35 RSA (Spoornet) 92,536 9,204 33,275 150,470 3,058 676

675 293 1,219 2,304 554

2,455 525 4,000 4,500 745 662

128,627 19,082 24,728 6,741 5,202

159,540 29,700 27,979 5,372 5,702

1. Concessioned between 1993 and 1995 (suburban passenger concessions not shown)2. Concessioned in June 19953. Privatized in 19874. Privatized in late 19955. Passenger traffic estimated6. RFFSA concessioning to be complete in 1996 or early 1997, except Nordeste7. CVRD (Parent company) to be privatized in 19978. Currently out of service

Table 2 Actual or Potential Freight Railway Concessions(1994 or latest available year)

ARGENTINA 1

CHILE FREIGHT (FEPASA) 2

BRAZIL (RFFSA) 6

BOLIVIA (1993)

MEXICO (FNM)

PERU (1994)

GUATEMALA (1994 estimate) 8

COSTA RICA (estimate 1988 data) 8

SUB-SAHARAN AFRICAN RAILWAYS

JORDAN

NEW ZEALAND 5

US: CONRAIL 3

CANADIAN NATIONAL 4


ways of the world, especially in Europe,including the UIC, and Japanese JRs. It hasbeen remarked that there are very few re-ally new ideas, but that it can be hard tosort the good ones from the bad. It hasbeen the willingness of colleagues to shareexperiences that has made the difference.Nor should we forget the increasingly im-portant contributions of the private sectorcompanies that are advising and investingin the rapidly growing process of railwayconcessioning; we must look to them toaccept more of the burden.

Conclusion

There is no more difficult area in publicreform than getting state-owned railwaysto adapt to an environment in which pub-lic resources are increasingly restrictedand in which the market, not the gov-ernment, makes the most decisions. It isa problem with which the governmentsof the USA, the UK, France, Germany andJapan (to name a few) struggled for manyyears without notable success. Problemsthat were so difficult for the open, mar-ket economies were even harder for gov-ernments of developing country. It wouldhave been easy to give up, and manyparties did so.However, in recent years, there is an in-creasing awareness that the cost of trans-port inefficiency can threaten theeconomy of a country, either through themacroeconomic burden of railway defi-cits or the imposed costs of uncom-petitive transport. Since change isimperative, governments and the privatesector have developed tools for railwayreform and have applied them success-fully. These tools are available to all, andthey work under the right circumstances.The World Bank is ready to cooperatewith both financial and technical assis-tance, and we count on the assistance ofall the other agencies involved in solv-ing the railways problem. �

(1) The Railways Problem, World Bank, Washing-

ton, DC, 1982.

(2) Y. Tanahashi, Reform of Railways in Japan, Dis-

cussion Paper INU99, World Bank, Washing-

ton, DC, 1992.

See also, K. Fukui, Japanese National Railways

Privatization Study: The Experience of Japan

and Lessons for Developing Countries, World

Bank, Washington, DC, 1992.

See also, White Paper: A Strategy for Revitaliz-

ing the Community's Railways, Commission of

the European Communities, Brussels, 1996.

(3) A number of these cases are documented in Ron

Kopicki and Louis S. Thompson, Best Methods

of Railway Restructuring and Privatization, CFS

Discussion Paper Series, 111, World Bank,

1995.

(4) Alice C. Galenson and Louis S. Thompson, The

Evolving of the World Bank's Railway Lending,

World Bank Discussion Papers, 172, 1994.

(5) Esra Bennathan, Julia Fraser and Louis S.

Thompson, What Determines demand for

Freight Transport? Policy, Research and Exter-

nal Affairs Working Paper Series 998, World


See also, Philip W. Blackshaw and Louis S.

Thompson, Railway Reform in the Central and

Eastern European Economies, Policy, Research

and External Affairs Working Paper, 1137, World


See also, Louis S. Thompson and Julia M. Fraser,

Command legacy will take time to overcome,

Rail Business Report 1996, Railway Gazette In-

ternational, London.

(6) European Directives 91/440, 95/18, and 95/19.

See also, White Paper: A Strategy for Revitaliz-

ing the Community's Railways, Commission of

the European Communities, Brussels, 1996.

(7) Railway’s environmental benefits are subject to

definition and qualification. See, for example,

Green Paper: Towards Fair and Efficient Pric-

ing in Transport, Commission of the European

Communities, 1995.

(8) Urban and regional transport remain exceptions

to this conclusion. It is explicitly provided in

Commission Decisions (and follows economic

logic) that there can be external costs and ben-

efits associated with urban and certain types of

rural passenger travel that cannot be adequately

included in infrastructure payments. This said,

it is usually a good idea to ensure that urban or

rural authorities value the external costs and

benefits highly enough that they are willing to

pay at least a share of the support needed.

(9) The terms concession, franchise, and manage-

ment contract can be difficult to distinguish. In

general, a rail concession is longer (at least 10

years, and normally 20 years or more) than a

franchise (5 to 7 years) or a management con-

tract (5 years or less). In addition, concessions

tend to leave more commercial risk in the hands

of the concessionaire, whereas governments

take more risk in franchising arrangements.

Governments take essentially all risks in man-

agement contracts, and they make most deci-

sions. This said, these are imprecise terms and

they are often used interchangeably. See,

Nicola L. Shaw, Kenneth M. Gwilliam and Louis

S. Thompson, Concessions in Transport, TWU

Papers, 27, World Bank, Washington, DC,

1996.

(10) Lee W.Huff and Louis S. Thompson, Techniques

for Railway Restructuring, Policy, Research and

External Affairs Working Paper Series No. 380,

World Bank, Washington, DC, 1990.

Louis S. Thompson

Mr Louis S. Thompson was born in Florida. After graduating with an MBA from Harvard University,

he worked as a consultant engineer and economist in Cambridge, MA, and Washington, DC. He

has also worked for a number of years at various posts within the US Department of Transporta-

tion. He has been Railway Adviser to the World Bank since 1986 where his responsibilities include

consultation about all the Bank's railway lending activities and developing reports and policy posi-

tions. He has published articles on railways statistics, restructuring and concessioning.

Documents

World Bank Support for Developing Railways of the … · World Bank Support for Developing Railways of the World ... their government owners also shared the ... faced a cumulative