Polish Railways—Towards Privatization

Feature Transition to Market Economy

Marcin Lipinski´

modern technologies, and management current subsidy level is much lower than General Economic Situation skills. Direct foreign investment has been in previous years. a major factor in the growth of the last Poland is a democratic, politically stable few years, amounting to $10 billion in Legal Framework of Railway country of 39 million people. Its rapid 1998 and is estimated to reach $20 Operation transition to a market economy and billion in 1999. This is good proof of favourable position at the centre of Europe investors’ growing confidence in Poland’s The legal framework for PKP’s operations is contributing to its business growth. It strong economic fundamentals. is regulated by the Law on State-owned has the largest economy in Central Europe There have also been important changes Enterprise Polish State Railways PKP, with a GDP in 1998 of $145 billion or in infrastructure. An appropriate legal adopted on 6 July 1995. PKP was classified $4000 per capita. Poland enjoys good framework was created to implement as a public transport company providing investment grade ratings from top agencies. national development programmes, services on a market basis, and obtaining The country became a member of the especially construction of motorways and subsidies from the state budget. OECD in November 1996 and joined modernization of some railway lines to The scope of PKP’s activities is described NATO in March 1999. Full EU member- support speeds of 160 km/h. by the law as follows: ship is expected by 2002. An Association Agreement has been • Transport of passengers and goods in The last 10 years have seen fundamental concluded with the EU and negotiations domestic and international traffic political and economic changes in Poland. to join the EU are in progress. Membership • Construction, modernization and In January 1990, radical reforms were of the OECD, NATO and the EU favour maintenance of railway lines launched to develop a market economy. steady economic growth and transformation • Provision of access to the network to Domestic demand was severely dampened of the country. third-party operators at the beginning of the transition, but the • Maintenance of network and rolling situation turned around in 1992 when the stock for reasons of national defence economy returned to growth. During the Changes in Railway Sector • Provision of an internal telecommu- last 5 years, the economy was probably nications network and other activities the fastest growing in Europe with a GDP The first proposals to privatize Polish State providing that they do not restrict the growth rate of 5% to 7% from 1994 to Railways (PKP) were voiced in 1991 when main business of the company 1998. Economic growth is likely to continue the Inter-Ministerial Commission for in 1999, albeit at a slightly slower pace; Restructuring PKP was established to PKP must maintain the railway lines to the forecast GDP growth is 4.5% with transform the railway sector. ensure reliable, regular, safe railway transport inflation dropping to 8%. Unemployment There are two reasons for restructuring while protecting the environment. It also peaked at 16% in 1993 and 1994 and PKP—the requirements of EU Directive has responsibilities to pay pensions to has dropped to about 10% in 1997 and 91/440/EEC, and the financial pressure railway employees and their families and 1998. caused by dramatic declines in passenger to support health care for railway workers. The private sector is the locomotive of and freight revenues. The company is responsible for managing economic growth. Over half (4500) of EU Directive 91/440/EEC does not actually its assets and can transfer or lease some more than 8400 state-owned enterprises apply to Poland because the country is of its assets to other business enterprises. were privatized and the private sector not yet an EU member state. However, However, the Minister of Transport may share of GDP increased from 30% in the aspiration to become a full member veto transfer of assets of national importance 1990 to 65% in 1998. The privatized as soon as possible is a strong stimulus as established by the Council of Ministers. companies include both industrial giants for adopting the necessary measures in PKP may transfer surplus facilities to the and small- and medium-sized businesses, advance of membership. The main points state, local authorities or other organizations. many of which were bought out by of this directive are separate accounting State subsidies to PKP are determined per employees. Privatization is also an important of infrastructure and train operations, and train-km by the annual national budget source of revenue for the state, bringing open access for third-party operators to to cover the difference between the in $2 billion in 1998. Up to 70% of state- the railway infrastructure. railway’s revenues and expenditures. owned assets will be privatized by 2001. The financial pressure results in government There is also a subsidy covering the costs Foreign investors played an important role subsidies to the railway amounting to for constructing new lines of national in the privatization, bringing both money, 13.7% of total revenues. However, the importance and closing unnecessary lines.

20 Japan Railway & Transport Review 21 • September 1999 Copyright © 1999 EJRCF. All rights reserved. Reproduction in whole or in part without permission is prohibited. The costs of maintaining lines not on the list of lines of national importance are Figure 1 PKP Employment borne by PKP. The company charges fees for access to 400 the railway lines. The fees are established 300 337,088 by the Minister of Transport after consul- 308,985 tation with PKP management and the Min- 276,125 261,057 200 248,759 240,635 233,025 226,368 217,962 ister of Finance in relation to the lines of Employees national importance. 100 The railway sector is also governed by 1990 1991 1992 1993 1994 1995 1996 1997 1998 the Railway Transport Law. This law regulates construction and management of railway lines and specifies the system of access fees and the responsibilities of the General Railway Inspectorate (the Figure 2 PKP Freight Traffic body certifying construction and operation 300 of railway lines and rolling stock). The law is consistent with the EU Directives, 250 281.7 especially the requirements for separation 200 227.8 225.3 223.5 227 201.6 214.2 214.7 206.3 of the infrastructure and train operations, 150 Tonne (million) and provision of open access for third-party 100 operators. 1990 1991 1992 1993 1994 1995 1996 1997 1998

Response to Falling Freight and Passenger Revenues

The financial situation of PKP has Figure 3 PKP Passenger Traffic deteriorated in recent years due mainly to decreases in coal transport, which 1000 constituted the major part of freight revenues, 800 600 785.5 resulting from lower industrial output, 650.2 548.1 539.9 400 493.7 restructuring of coal mines, the crisis in 465.1 433.1 416.6 400.8 Russia, and weak growth in Europe. 200 In response to falling revenues, PKP Passengers (million) 0 decided to: 1990 1991 1992 1993 1994 1995 1996 1997 1998 • Re-orientate its business towards a market economy • Act to increase revenues • Remain as an independent enterprise Figure 4 State and PKP Subsidies but subsidized by the national budget State subsidies • Re-organize transport on a contract PKP subsidies basis 2 1.82 20 1.55 15.13 16.22 • Privatize some units and create joint 13.47 1.5 17.59 11.59 15 14.27 ventures 8.33 9.23 1 1.23 1.29 6.73 10 0.89 0.5 0.77 5 The basic reasons for the restructuring 0.52 0.56 0 0.39 0 were to solve the financial problems, Percentage of PKP Budget catch up with international technology Percentage of Total State Budget 1990 1991 1992 1993 1994 1995 1996 1997 1998 standards, and play an integrated role in

the Pan-European Corridors plan (JRTR 14, • 88% of marshalling yards and 55% of also started on modernizing the Berlin– pp. 18–26). shunting yards Poznan–Warsaw–Minsk–Moscow line To achieve the above goals, PKP acted to • 30% of rolling stock maintenance using the company’s own financial adapt itself to a market economy and to workshops resources, state subsidies and loans from rationalize its management. The issues • 13% of electric and 35% of diesel the European Bank for Reconstruction and were complex and involved putting busi- locomotives Development (ERBD), the European ness on a commercial footing, rationaliz- • 17% of passenger carriages and 30% Investment Bank (EIB), and Phare, the EU ing employment, disposing of surplus of freight wagons initiative to provide financial assistance assets, establishing new business units, • 3624-km unprofitable lines to CEE countries. A new economic and and meeting the European standards. • 22% of level crossing operators financial system was introduced from January this year to create positive conditions for further changes, commercialization, First Restructuring (1991-96) Second Restructuring and privatization. PKP uses 105,000 hectares of land that it Restructuring began in 1991 in conjunc- The second stage of restructuring is cannot presently sell because the legal tion with the social and political changes. already quite advanced. ownership is unclear, but the government The main goal was to adapt PKP to a market Originally, the company had been divided recently agreed that PKP should be given economy by changing its management into four divisions based on its operations: the legal right to the land. Selling or leasing style, assets, employment structure, and passenger, freight, infrastructure, and this real estate, which is located in some finances. The first stage saw staff reductions traction and maintenance. The main purpose of the most attractive parts of Polish cities, and disposal of surplus assets. From 1990 of the next stage is to create a profitable would raise funds to finance railway to 1996, PKP eliminated 76 companies business based on three divisions. However, reconstruction. from its organizational structure, resulting the company still has to reconcile the in staff cuts of 65,000; a further 31,000 negative impact of the restructuring PKP staff were made redundant, leaving programme on the staff and social issues. Infrastructure a total of 241,000. The company is planning to purchase The reduction of assets was obtained by high-power locomotives and high-speed To upgrade the Polish railways to European liquidating: (250 km/h) passenger carriages. Work has standards in line with becoming a full EU member, the PKP management adopted Strategy 2015 that sets out the main future investment objectives for modernizing rolling stock and railway infrastructure to make PKP competitive in the domestic and international transport markets. The company played an active role in planning the four railway lines of the Pan- European Transport Network crossing Poland: • Helsinki–Tallinn–Riga–Kaunas–Warsaw • Berlin–Poznan–Warsaw–Minsk– Moscow–Novgorod • Berlin/Dresden–Wroclaw–L’vov–Kiev • Gdansk–Warsaw–Zilina/Breclav (Vienna)

Lines of national importance to be modernized have been selected as the basic PKP railway network (17,500 km) based Warsaw Central Station with Palace of Culture and Science in background (Y. Akiyama) on forecast demand, and another 3,700

22 Japan Railway & Transport Review 21 • September 1999 Copyright © 1999 EJRCF. All rights reserved. Reproduction in whole or in part without permission is prohibited. Figure 5 Railway Routes Through Poland Covered by AGC and AGTC km of lines will be rationalized either by KOPENHAVEN HELSINKI STOCKHOLM offering them to third-party operators, GDYNIA E 65 E 59 GDANSK or by closure, etc. SLUPSK BRANIEWO KOSZALIN ELBLA¸G SKANDAWA TRAKISZKI SWINOUJSCIE KOLOBRZEG TCZEW BOGACZEWO BIALOGARD A programme to modernize lines of MALBORK KORSZE SUWALKI international importance has been in SZCZECINEK ELK OLSZTYN SANKT PETERSBURG E 26 progress since 1994, but the scope SZCZECIN CHOJNICE ILAWA KUZNICA BIAL. STARGARD SZCZ. depends on available funds. For example, BRODNICA PILA BYDGOSZCZ BIALYSTOK ZUBKI BIAL. DZIALDOWO OSTROLE¸KA KRZYZ in 1998, it was estimated that a total of SIEMIANÓWKA TORUN LAPY 2.2 billion zloty (US$1 = 3.9 zloty) was GORZÓW WLKP. INOWROCLAW SIERPC BERLIN KOSTRZYN NASIELSK GNIEZNO MALKINIA needed to modernize lines of national E 20 RZEPIN CZEREMCHA POZNAN PLOCK TLUSZCZ KUNOWICE WRZESNIA BARLOGI KUTNO WARSZAWA importance but the state subsidies fell ZBA¸SZYNEK LOWICZ SIEDLCE MOSCOW GUBIN TERESPOL CZERWIENSK E 30 JAROCIN short of previous years. NOWA SÓL LESZNO MALASZEWICZE LUKÓW The shortfalls were covered by external ZARY LÓDZ KOLUSZKI C-E 20 DRESDEN ZAGAN GLOGÓW RUDNA OSTRÓW WLKP. FRANKFURT (M) ZD. WOLA DE¸BLIN WE¸GLINIEC C 65/1 sources from international financial IDZIKOWICE E 30 KE¸PNO LEGNICA ROGOWIEC PIOTRKÓW TRYB. RADOM LUBLIN ZGORZELEC REJOWIEC CHELM organizations, EU Phare assistance WROCLAW SKARZYSKO KAM ZAWIDÓW C 65/2 DOROHUSK KLUCZBORK funds, EU Cross Border Cooperation JELENIA GÓRA CZE¸STOCHOWA PRAHA C 59/1 C 65/3 KIELCE STANDOMIERZ WALBRZYCH OPOLE funds, and the EU Instrument for Structural STALOWA WOLA NYSA TARN. G ZWIERZYNIEC KLODZKO Policies for Pre-Accession (ISPA). The EU ZAWIERCIE HREBENNE K-RZYN KOZLE KATOWICE MIE¸DZYLESIE contributions to railway infrastructure TRZEBINIA TARNÓW PRZEWORSK PRAHA RYBNIK KRAKÓW CHALUPKI RZESZÓW projects are defined by a memorandum C 59/2 OSWIE¸CIM DE¸BICA MEDYKA PRAHA ZEBRZYDOWICE LVIV ZURAWICA

E 65 WIEN signed at the ministerial level by the E 59 JASLO E 30 BIELSKO B. ZAGÓRZ CHABÓWKA NOWY SA¸CZ ZWARDON SANOK candidate country and the European MUSZYNA KROSCIENKO ZAKOPANE Commission. The aid is spent on LUPKÓW

PRESOV modernizing railway border crossings C30/1 and railway lines of international importance AGC AGTC : Lines to be modernized : Lines to be modernized : Investment projects submitted for financing by ISPA in 2000 Ð 2001 located in the transport corridors crossing : Lines to be built (high speed) : Lines to be built Polish territory and included in the European Agreement on Main international Source: PKP Railway Lines (AGC) and European Agreement on Important International old facilities and equipment just to maintain Transport Network. The investment cost Combined Transport Lines and Related existing operational capacity. The general was assessed at 487 million euro. Like the Installations (AGTC). renovations include reinforcement of the Legnica–Wroclaw–Opole modernization, A good example of the need for bed, reconstruction of tracks, renovation the line standard is being upgraded to modernization is the Legnica–Wroclaw– and upgrading of over 40 engineering allow speeds of 160 km/h for passenger Opole line, which was heavily damaged structures, upgrading of the catenary traffic, 120 km/h for freight traffic, and in 1997 by serious floods. Most of the system and supports, changing of signals axle loads of 22.5 tonnes. By late 1998, infrastructure was flooded and some and telecommunications network, etc. in addition to track modernization and bridges were completely destroyed. In 1997 In November 1998, PKP submitted a electrification, 19 stations had been and 1998, PKP undertook emergency repairs proposal to the Committee of European modernized, 10 stations changed to totalling 167 million zloty (42 million Integration to co-finance modernization passenger stops, 14 passenger stops euro; US$1 = 0.96 euro) to restore traffic of the line. The European Commission modernized, and two stations closed. All in the south–west section, but the repairs agreed that the proposal met the priorities the railway crossings on the line were were insufficient. The EIB provided 13.6 for development of railway transport modernized, allowing speeds of 160 km/h million euro of this total with 6.4 million infrastructure and the total investment cost on three quarters of the line. The renovation euro of the remainder coming from PKP’s was assessed at 355.5 million euro. is to be completed by 2000. own resources, and 22 million euro from In 1993, PKP started modernizing the The modernization of PKP created an the national budget. western section of the 430-km Kunowice– infrastructure sector divided into 8 regional The very poor condition of the repaired Poznan–Warsaw line forming part of directorates that are responsible for 45 infrastructure requires replacement of corridor No. II in the Pan-European infrastructure workshops. The whole

Many European passenger services are unprofitable and some combined freight transport operations make losses too. EU regulations oblige the member states to provide citizens with the cheapest and most economic mode of transport. Consequently, many state and local authorities contract fully compensated Public Service Obligations (PSOs) with suburban railway services. The unprofitability of passenger transport in Poland explains why no other transport operator except PKP applied for a passenger transport license. However, there was wide interest in licenses for freight services. Since there is no need to own freight wagons or have a railway network to receive a license, entry by New PKP InterCity train running on newly upgraded tracks (Y. Akiyama) third parties into this market will certainly reduce PKP’s 90% share of the freight infrastructure sector is a separate To offset public criticism about closing market. But from the customers’ viewpoint, organization under the Directorate of unprofitable services, PKP has adopted this competition will improve services Railway Infrastructure in Warsaw and the plans to improve other services. These and cut tariffs. PKP management with totally separate include launching more comfortable In addition, Poland’s new administrative accounts within the PKP budget. The InterCity Plus trains with better on-board division into 16 districts will impact local infrastructure sector has units responsible service. There are plans to gradually transport routes because local governments for bridge construction, infrastructure introduce modern tilting trains running at will become responsible for deciding maintenance, railway telecommunication, 200 km/h and to standardize rolling stock what transport will be most suitable and power supplies and electric traction and station buildings. An automatic fare which company will provide the service. maintenance. collection system and computerized ticket This handover of some authority to local Future plans for restructuring the infra- sales are also urgent necessities. governments means that local governments structure sector envisage changing to a To diminish the adverse environmental will subsidize local passenger services— two-level management system by closing impact of road transport, the intermodal a good chance for local lines. the 8 regional directorates and signifi- system will be extended to heavy freight. Nevertheless, problems are expected cantly downsizing the workshops. Many independent operators are waiting between PKP and the local authorities for the total separation and privatization because the local authority is more of the railway infrastructure sector. After interested in the service contracts within Towards Full EU Membership the reforms, third-party operators will its region while the railway’s infrastructure contract access rights with the new is based on its own operation centres that Due to the government reforms of the infrastructure owner. So far, 12 companies do not match the local government regions. railway administration, pension, health- have been licensed to operate freight This explains why costs calculated by care, and education systems, there is still services but PKP is the only one also railway can differ from costs calculated no solution for financing unprofitable having a passenger service licence. by local authorities. passenger services. There are now no state This third-party licensing system brings At present, PKP management has two subsidies to cover losses from unprofitable Polish railway operations one step closer financial plans and budgets prepared by passenger traffic, but on the other hand, to compliance with EU Directive 91/440/ the General Directorate of Polish State PKP is no longer obliged to contract EEC, which also prohibits cross-subsidy Railways for this year. regional passenger services with local of unprofitable passenger services with In Plan 1, PKP will spin off its unprofitable authorities. freight revenues. passenger services into a joint stock

24 Japan Railway & Transport Review 21 • September 1999 Copyright © 1999 EJRCF. All rights reserved. Reproduction in whole or in part without permission is prohibited. company called Passenger Traffic and PKP will continue operation of the Recent News Conclusions profitable InterCity, EuroCity, and EuroNight services. On 7 July, the Economic Committee of Polish railway reform is not a concept In Plan 2, PKP will continue under its the Council of Ministers (KERM) accepted borne of a planned economy, and the existing structure and close the financial the main guidelines for PKP restructuring Polish government and PKP have taken year with a loss of 613 million zloty. and privatization submitted by the new extensive and valuable advice from Choosing the right variant is the subject Minister of Transport, Mr Tadeusz various countries, including Japan and of controversy. Syryjczyk, including legal ownership of the USA. At present, the restructuring plans assets, partial debt settlement, laying off Based on experiences worldwide, PKP is presented by the Parliament propose a 60,000 employees, dividing up the trying to demonstrate that the Polish holding structure for PKP. The passenger company, and almost complete government must accept responsibility for and infrastructure sectors would remain privatization. However, several points the infrastructure part of railway transport, under PKP management until were changed: while leaving day-to-day operations to privatization. However, the Ministry of 1. Instead of using World Bank credit, the PKP and other operators. Transport proposes separation of money for severance payments will Railways are clearly the transport mode infrastructure from operations. Three months come from long-term government of the future, but their successful devel- after privatization, a state organization bonds of 1 billion zloty (around US$ opment requires meeting a number of owning the infrastructure would be 264 million). important preconditions: created under the Minister of Transport. 2. Outstanding liabilities, amounting to First, the state as the basic legislator and The infrastructure would generate revenues 1 billion zloty will be converted into infrastructure owner must provide a by imposing access charges on railway shares in the privatized PKP. framework that optimizes the scope of operators. Passenger and freight services 3. The function of the Railway Regulator railway business. would be transferred to independent private who is responsible for establishing Second, the state must give operators true operators from PKP. The British system access charges, settling disputes between autonomy in the key sphere of operations. of Railtrack owning the rail infrastructure railway businesses, etc., will be taken Third, the state and local authorities must and operations provided by railway over by the Chief Railway Inspector. take responsibility for PSOs in the franchises is a good example. transport sector. The Polish Economic Committee of the In order to smoothly implement the program Finally, the state must accept its responsi- Council of Ministers and the government outlined above, the new management of bility for the railway infrastructure as part will tackle the restructuring legislation PKP was appointed from 1 August with of the Pan-European Transport Network. later this year and it should become law Mr Krzysztof Celinski (JRTR 8, pp. 10-14) If these preconditions are met, PKP can by the third quarter of FY 1999, so that as President. The change occurred do its best to provide service levels PKP can start commercial operations in following a proposal by the Prime Minister expected by customers. Many railway early 2000. and Minister of Finance, Mr Leszek reforms in Europe and elsewhere show However, the labour unions oppose Balcerowicz, due to concerns about the the feasibility of these aims. ■ separation of passenger services because deteriorating situation of PKP. they believe the local authorities and government will not find funds to subsidize unprofitable local lines. Whatever the case, the new law on PKP restructuring and privatization will create Marcin Lipinski´ a breakthrough in relations between the government and the railway, and the Mr Lipinski´ is Chief Specialist for Project International Financing in the Bureau of Investment and major burdens will be transferred to the Development of the Directorate of Railway Infrastructure of PKP. After graduating in 1995 with a Masters degree from the Warsaw School of Economics, he worked in the Railway Department in the government. Ministry of Transport and Maritime Economy until 1998.