Central Asia Railways

RAILWAYS IN THE BALKANS

Suggestions for a Bank strategy

Please refer to the annex, which is aimed to illustrate a proposal for trade facilitations. The annex includes also a description of the present situation of the service, of the Railway companies in the Balkan and of the investment programs under way.

FIRST DRAFT FOR BRAINSTORMING

1. There is an effective need for restructuring

Railways in the Balkans are in a bad shape: (i) the modification of the economic structure of the countries, the side effect of the war, and the competition of the road’s transport mode have produced a dramatic decrease of the railway traffic, (ii) the national railways companies are presently loosing money, (iii) infrastructure, rolling stock and equipments are obsolete and in urgent need of maintenance.

Everybody agrees that there is an urgent need for restructuring.

2. Restructuring. The stakeholders

Hereunder are described the different aspect of the Railways, the issues to take into account for restructuring, and the stakeholders involved in the matter.

2.1. National and Regional level 1. The Railways provide a service and are an essential tool in the hands of Ministries of Transport to establish and develop a transport policy. 2. The Railways are large, powerful companies, which trigger important investments and employ a large number of workforce, therefore labor unions, manufacturer’s and construction’s lobbies are interested in any restructuring process. 3. The Railway represents an important item of the state budget. The reduction of the expenditure for the railways is a priority for the Ministries of Finance. 4. In addition, in the particular case of the Balkans the very delicate problem of the recent division of the Region in several countries exists because it has introduced borders and solutions of continuity in the railway service (now operated by a patchwork of national Companies) along the main corridors. Therefore, any program for the improvement of the service (in term of quality, efficiency, efficacy) requires the agreement and the collaboration of the various custom and border police authorities and the collaboration of the National Railway Companies of the countries along the corridors.

2.2. EU, Greece and Turkey Balkans are politically part of Europe: -Romania and Bulgaria are about to enter EU -all the West Balkan Countries have expresses their wishes to enter EU and geographically: -corridors VI and X, linking Greece to the rest of EU, pass through cross the Balkans. Should Turkey join the EU, the function of link between two important parts of EU would be reinforced. Therefore, any program for improvement in the matter of railway should take into account the EU policy, and in particular: -the effort to balance the modal split in favor of Railways both for environmental reasons and for fighting traffic congestion -the orientation toward a completely interoperable single transport infrastructure (note 1) -the liberalization of the access to the railway network. In addition any choice program for improvement in the matter should take into account the Greece mobility policy (and in the future the Turkey) and Austria. (note 2)

2.3. Railway operators and freight forwarders Another element that should be taken into account is the marketing policy of the main National Railways of the EU countries, of the main private railways operators, and of the main freight forwarders. The ‘single transport infrastructure’ and the liberalization have triggered a number of new activities in the EU freight railway market (new private companies are operating in almost all of the EU countries, the national railways are associating to offer new products, etc.). We are still at an early stage and therefore we will see a number of those activities to fail or to radically change in the future. Anyhow, this reality has to be taken into account as an opportunity while designing solutions for the restructuring of the Railway services and of the railways companies in the Balkans.

3. Restructuring components

The more common components that constitute the restructuring of a railway are listed and described hereunder. They will be used in the paragraph 5, when proposing a restructuring strategy.

3.1. The ‘physical’ component. It addresses the ‘service’ aspect of the railway problem and is based on the assumption that the railway service results are poor because of bottlenecks, obsolete equipments, lack of electrification, maintenance backlog, etc. The more common version of this model limits the investments to the infrastructure. An example of this approach is the TIRS and the REBIS program. In addition to the construction or manufacturer’s lobbies, this component is usually supported by the Ministry of Transport, the National Company, and the labor union.. Unfortunately, the investments are often not justifiable. financially or economically. Moreover, investments often proved to be not able to really improve the service, in particular when they address only one aspect of the railway system (a significant example is the Tirana-Durres line, where the track has been rehabilitated but the commercial speed has not improved because of a poor signaling system). 3.2. The ‘downsizing’ component. This component consists in reducing the work force and/or the volume of the service (km of lines, trainkm). It is aimed to solve the ‘cost’ aspect of the railway problem reducing its size accordingly with the traffic reduction. An example of this approach is the Argentina Railways. The Ministries of Finance/Treasury usually strongly support this component. The opinion of the other stakeholders is usually more articulated and varies depending on the characteristic of the downsizing: -workforce downsizing. (i) Ministries of transport normally supports it, provided it does not cause excessive labor unrest, (ii) labor unions usually oppose it but accept to negotiate and usually agree in case the economic compensation is sufficiently substantial and in case of voluntary retrenchment, (iii) the National railways may support it in case the financial results are partly re-invested in wage increase. (Note 3). -network downsizing. Ministries of Transport, labor unions, local authorities, and public opinion usually oppose to this option. in countries where the railways plays an important role in the passenger service (Note 4 ).

The workforce downsizing yields invariably a good financial result even though not always as forecasted (Note 5) Network downsizing in Europe often proved to be a frustrating exercise.

3.4. The institutional component. The EU model, separation, financing of the infrastructure and Track Access Charges. The component is peculiar to the EU (or EU to-be, as the Balkans) Countries. It consist in the application of the well known EU model of separation of infrastructure and transport, aimed to opening the railway to competition between transport operators. It requires that the government decides upfront the level of financing of infrastructure (and therefore the level of indirect subsidies to the transport operators). According to this model, all the licensed railway operator can access the network upon payment of a fee (usually called Track Access Charge = TAC). The higher is the financing of the infrastructure granted by the State, the lower is the TAC for every operator. The decision about the financing of infrastructure and the level of TAC usually triggers long and painful debates between the Ministries of Finance/Treasury and Transport.

3.5. The institutional component. The EU model, Public Service Obligation contract and Regionalization As the above 3.4., this component is peculiar to the EU (or EU to-be, as the Balkans) Countries. It consists in the establishment of a commercial relationship between the railway operator and the public entity (usually Ministry of Transport). The railway operator is asked to provide non viable services (Public Service Obligation = PSO) and the State pays for them. As the above, this step requires that the Government decides upfront what services to pay for and at what prices. It triggers long and painful debates between Ministries of Finance/Treasury and Transport. In some cases the solution of the regionalization (decentralization to the Regions) has been adopted, which is the splitting of the national PSO contract in regional PSO contracts. The institutional regionalization could also be followed by the splitting of the railway company in regional branches for the production of the regional service.

3.6. The privatization. There are a number of privatization forms. The more common one used out of Europe is the concessioning of the National Company (and of its service) to private operators. In this form, both the service and the National Company become privatized, and there is not an intra-modal competition (the concessionaire usually wins exclusive rights) (Note 6). A softer form of privatization prevails in Europe, which actually does not imply the privatization of the National Company. This allows the private sector to enter the railway market. This form of soft-privatization is normally articulated in the following two complementary forms: -open access to private operators to the freight and medium - long distance passengers service. (Note 7) The open access does not necessarily imply that the National Company becomes privatized. It is in fact only aimed at assuring competition on the network. Of course the system puts the National Companies under pressure, and force them to change their market strategy. (Note 8) -concessioning of the regional and commuter services through international tender. According to the different local legislation and choices, the winner of the tender can be asked to provide its own rolling stock, and/or to hire the necessary employees among the employees of the National Company (Note 9). This operation does not imply that the National Company is going to be privatized, however it puts pressure on the National companies that need to change theirs marketing strategies if they want to win the tenders. Up to now, the only form of (partial) privatization of the National Companies in Europe (besides the British Rail and the Estonia Railway) has been the privatization of the subsidiary companies and of non-core businesses including the maintenance services. The operation usually yields significant results and anyhow facilitates the downsizing and the modernization of the national companies (Note 10). Many EU countries have declared their willingness to privatize the transport company and to maintain in the public ownership the infrastructure company (even though maintenance and some of the traffic control operation could be separated and privatized). Usually the Ministry of Finance supports the privatization of the National Company, while the Ministry of Transport sponsors the opening of the market to the private sector. Labor unions usually opposes to the privatization of the National Company and are critical toward the privatization of the market.

4. A possible strategy. Some proposals

4.1 Proposed Restructuring model: The EU model with modifications The close relationship with Europe makes inevitable the choice of the EU model (single infrastructure, TAC, liberalization of the transit). It is important for all the countries along the corridor to reach the same conclusion, otherwise the liberalization would only remain a theory. To apply the EU model, the Balkan countries should: -separate infrastructure and transport (already under process in Macedonia and Croatia), -establish the amount of the subsidy to infrastructure that the Country is willing to grant (par.3.4) and establish a TAC system. -establish a PSO system and sign the first PSO contract with the National Company (par. 3.5.) -regionalize the service (not in case of the smaller countries) (par 3.5.) While working to achieve these objectives, it is important that some elements of liberalization at least along the corridors be anticipated (see annex 1 and all the proposal about the possible WB activities). On the other hand, the West Balkan countries are not yet entering the EU and therefore they are not compelled to apply the EU directives in their whole, consequently the possibility to apply different solutions, as the concessioning (par 3.6) as far as they do not interfere with the substance of the EU policy in the matter (Note 11). Some line or part of service could therefore be concessioned through international bidding (Note 12).

To facilitate the process, in addition to the activities proposed in the above mentioned annex, the WB should: -guide and supervise the countries in the decision making in regard of the amount of subsidies for infrastructure (3.4) and PSO (3.5.), by organizing meetings and conferences on the matter, and/or training for functionaries of Railways, Ministries and Local Authorities; -guide and supervise the countries to establish a fair and (if possible) homogeneous TAC (3.4.) system along the corridor (2.2), by organizing international meetings with all the countries of the corridors, other EU Railways Companies, private railway operators and freight forwarders; -guide and supervise the Country (and eventually the Local Authorities) to launch tenders for the commuting services and to take the basic decision in regard of the ownership of rolling stock, and to make provisions to protect the National Company employees, etc. -guide and supervise the countries to identify the possible exceptions to the EU model (on a regional scale) with anticipation of TAC and PSO structure and maybe grant concessioning on secondary lines or commuter services (not still in EU)

TIP Restructuring WITH the Railways. The Railways Companies are powerful. They manage huge amount of money and employ huge amount of people. To have good results the railway Companies should be involved, both in the design of the future service, including the design of investments, and in the foundation of new companies. After all, a gradual privatization through the establishment of public-private companies is better than a stagnant situation.

TIP Address and solve the subsidies issues and the managerial freedom of the Railways. Often the poor financial and technical situation of the railways is due to lack of subsidies for the maintenance of the infrastructure, or to not compensated PSO, or to the imposition of excessive workforce. These issues should be clarified and pointed out before starting the restructuring. In fact, these issues would interfere with any future railway system, even the best designed and operated.

5.2 Meanwhile: reorganization of the National Company, downsizing and privatization On the basis of the EU model, the national Company will be separated in: -Infrastructure Company (public ownership of the assets with the possible option of the privatization of the company or of branches of it, see 3.6) -Transport Company (to be separated into branches and partly or wholly privatized depending on the market conditions, see 3.6) with the addition of: -non core business Companies (to be privatized, see 3.6).

The downsizing and the reorganization of the National Company should take into account the agreed separation and the decided extent of privatization of the National Company of the Country . It should be made primarily on the basis of the reorganization of the working rules and procedure and only secondarily on the basis of a downsizing of the network (see 3.2 and note 2).

To facilitate the process, the WB should: -guide and supervise the Countries in the decision making in regard of privatization, maybe by providing the Ministries with information about privatization examples in other countries than of Europe -guide and supervise the Companies to restructure the working procedures, maybe organizing training sessions within chosen more efficient public or private companies (North America for freight; Spain, France or Germany for passengers) -finance the workforce layoffs (as already in process in a number of Countries).

5.3. Meanwhile: innovation of the products

In the case of the Balkans, the innovation of the railway products should be set on a Regional scale and should be designed with the assistance of Greece and Austria (Note 13). The design of new products should take into account the physical investment that have been proposed for the Balkans (see the annex), mainly aimed to reduce the maintenance backlog or to fix the heavy damages due to the war. Other kind of investments are devoted to the reorganization of the custom procedure and to the cross- border infrastructures. As already pointed out (see 3.1), railway is a system and therefore any physical investments should be linked to a significant change of the performance of the service, including all the aspects (physical: infrastructure, signaling, equipments and rolling stock and soft: establishment of a new service, of a new timetable, of a new managerial solutions as a public-private company or a private company, etc.), otherwise the investment is likely to result in a waste of money.

To facilitate the process, the WB should: -guide and supervise the countries to identify new marketable international products, maybe with a TA project to finance a study that should identify the products, their possible revenues, their costs and all the investment and procedural reorganization involved, including the possibility of founding new companies to produce them.

TIP The two powerful Ministries of Transport and Finance should be given the opportunity of agreeing on the restructuring. One way is to use positive instead than negative concepts and to design the restructuring as the building of the future railway service and not as a destruction of the past service.

Note 1. The single transport infrastructure consists in a network not interrupted by national borders. The single infrastructure is meant to enhance the European single market and the abolition of the custom between EU countries. It is aimed to lift any obstacle and to assure a seamless railway service all over Europe.

Note 2. Greece is traditionally linked to the rest of the world by sea and by air. The railway transport in Greece is weak and mainly limited to domestic traffic. Notwithstanding, Greece would like to have an efficient railway link to the Balkans and to EU, both for passengers and for goods: -a well organized port-railway system would allow Greece to become the terminal for Macedonia and Serbia-Montenegro -a good service along the X corridor would avoid a double transshipment for goods between North Italy/Central Europe and Greece -Greece also wishes a viable passenger service along the X corridor. Because of the great distance (more than 1,200 km) between Greece and Austria, only a high speed service would really attract passengers (modern travelers usually accept a maximum of 3-5 hours on a daily train.For travel times exceeding that limit ,an airline alternative is preferred .The night train travel time limits normally accepted is 7-9 hours but night trains are preferred only when the tariffs are significantly lower than those of the airlines ). Austria, as others alpine countries, is fighting against the road congestion due to transit traffic. Therefore, is limiting the number of trucks allowed to cross the border. A quite ‘simple’ solution, since the RO-LA system, has proved to be excessively expensive.

Note 3. The work force downsizing should be made focalizing on the following : -work procedure reorganization, including revision of the safety rules (often found obsolete and work-force consuming), with a special attention to the avoidance of the risk of significant quality reduction . The number of crew on a passenger train, for example, is often excessive; -reorganization of the service. Restructuring of the timetable is an exercise that often yields significant results in term of workforce saving, without reducing the service offered to the clients. In regard to the freight the service can be reorganized increasing the number of wagons for every train; -application of new systems or technologies. The restructuring of the ticket sale system for example, does usually produce far more significant workforce reductions, than any reduction produced by the closure of a railway line. Another important source of workforce reduction is the banalization of the traffic control and procedure on secondary lines (shuttle train system or tramway system),

Note 4. The network downsizing is often a short-cut to avoid the activities mentioned at the note 2 above. Sometime the network downsizing is accepted when alternative credible services are provided for the passengers services (as the huge and modern bus station of Buenos Aires), or when the service on the line has been closed for long time (as in South-East Sardinia)

Note 5. Maybe because of a contemporary further decrease of traffic (maybe triggered by the reduction of quality service produced by a workforce downsizing not linked to a radical reorganization of the procedures), or because a substantial increase of the salary of the remaining workforce.

Note 6. In Europe this model has been applied only in Estonia. Also in Europe has been applied the very well known British solution by which the market has been liberalized and the National Company has been separated functionally and geographically and then privatized.

Note 7. Several small private freight companies are operating in Europe, offering low-cost, good-quality services on the more economically viable portions of the market (however most of these companies’ shareholders are other public companies or entities and therefore their real ‘private’ feature is questionable). Passengers private service are not significantly present.

Note 8. The National Companies are also reacting by asking Public Service Obligation compensations for freight and for some non viable long distance services (as the night services).

Note 9. Several European countries have already tendered some commuter services. Usually the National Company does not win the tender (for example, the commuter service of the Stockholm Region has been won by an outsider).

Note 10. It has to be observed that of course, the National Company must remain free to buy the services on the open market, otherwise the operation may result in a sort of counter-restructuring action that might assure monopolistic rights to a private company.

Note 11. An example of what should not be done, is the Draft Railway law of Macedonia which grants exclusive rights to the National Company (a first version was proposed with a 10 years grace, a successive version, after some comments from the WB has reduced it to 3 years). The said provision was intended in order to protect the National Company and maybe to maintain its value in the case a decision of selling it should be taken. Note 12. As an example, the line between Tirane and Durres could be separated by the rest of the Albanian network and concessioned, maybe with the clause of the open access for particular kind of freight services.

Note 13. By ‘product’ it is intended a train service from A to B, including timetable, kind of couches, related service or, in case of freight, timetable, kind of wagons, marshalling points, loading and reloading, etc. The design of a product should be linked to an evaluation of costs and revenues.

Washington, 2004-01-11 Luisa Velardi