Post on 17-Dec-2015
transcript
kpmg
KPMG Corporate Finance
Financing Regional Passenger Rail in Poland: Lessons from the UKIrene Walsh31 March 2004
kpmg 2KPMG Corporate Finance
The economic dynamics of Polish rail
Poland’s transition to a market economy has led to:
Decline in passenger traffic
Collapse of the coal industry, the largest freight customer
Increase in PKP’s labor costs
In the last year before reform, financial losses exceeded USD 1 million per day
kpmg 3KPMG Corporate Finance
The Reform Program
The Law on Commercialisation, Restructuring and Privatization of Polish State Railways enacted September 2000
Commercialization = transformation into the joint stock company PKP SA (December 2000)
Restructuring = breakdown of PKP SA into subsidiaries
Privatization = Selected subsidiaries commencing with LHS, SKM, WKD and PKP Cargo. PLK SA to remain in state ownership
Subsidiaries
PLK SA (infrastructure and access)
PKP Cargo (freight operator)
LHS (iron ore freight operator)
SKM (Tri-cities metropolitan passenger network)
WKD (Warsaw metropolitan passenger network)
New inter-city express passenger operating company
New slow-speed inter-urban passenger operating company
New regional passenger operating companies contracted to the Voivodships
kpmg 4KPMG Corporate Finance
Conforming to EU Policy on Railways
Key principals:
Accounting (and institutional?) separation of infrastructure from operating functions
Independent regulator at national level
Access to infrastructure by railway enterprises of other member states on non-discriminatory terms
Cross subsidies from profitable services (freight and intercity passenger) to unprofitable services banned
Operating subsidies banned except for local passenger operations and infrastructure
kpmg 5KPMG Corporate Finance
The challenge for PKP
Redefining the State’s role from a direct provider of services to a strategic planner and regulator
Initiating competition
Facilitating decentralization to sub-national governments
kpmg 6KPMG Corporate Finance
Regional Passenger Operating Companies
The reform program
The State subsidy approach
kpmg 7KPMG Corporate Finance
Regional Passenger Operating Companies
Key elements of the reform program:
Debt funded labor restructuring to lower cost base
Decentralize operating subsidy regime by channelling payments through Voivodships
Privatize where possible, with SKM and WKD serving as test cases
kpmg 8KPMG Corporate Finance
Regional Passenger Operating Companies
Detail on State subsidy:
Voivodships to receive dedicated funds from State budget; aggregate amount determined annually
Individual Voivodship allocation determined by formula based on population, kilometres of active railway line, level of structural unemployment
Subsidy distributed by Voivodships to regional passenger operating companies as an offset to losses from unprofitable services
kpmg 9KPMG Corporate Finance
The UK experience
Overview of privatization program
Relevance to Poland’s Regional Passenger Operating Companies
Lessons learned
kpmg 10KPMG Corporate Finance
The UK experienceOverview of privatization program
Objectives: Access to private investment and an ongoing investment
program
A higher quality of service and better value for money for the public
Introduction of competition in the operating of services
Harnessing private sector management skills and entrepreneurial spirit
kpmg 11KPMG Corporate Finance
The UK experienceOverview of privatization program
Steps in the process: Reorganization into infrastructure and operations
Sale of subsidiary businesses
Establishment of an independent regulator and a State body to act as strategic planner
For passenger rail: design of a franchise map, a track access regime, and a subsidy mechanism
Sale of the infrastructure company through IPO
Letting of operating franchises to private operators through a competition based on minimum subsidy requirement
kpmg 12KPMG Corporate Finance
The UK experienceOverview of privatization program
Post - privatization industry structure
Network Rail Licence Regulation
Department for Transport
Network Rail
Freight Operating Companies
Strategic Rail Authority
Passenger Transport Executive
Rolling Stock Companies
Train Operating Companies
Funds
Franchise Payments
Sponsor/Liaison
Lease PaymentsTrack Access
Charges
OperatingLicence
Monitoring Performance/ConsultationFares
GrantsFreight Revenues
Direction &
Guidance
Funds
Private Finance
Rail Users Consultative Committee
Office of the Rail Regulator
kpmg 13KPMG Corporate Finance
The UK experienceRelevance to Poland
Like Poland, UK privatization required a complex model: market share of rail is small, and high level of service provision is for social purposes
Like Poland, UK privatization program had a strong decentralizing element
Many of the UK passenger franchises have characteristics of Poland’s regional passenger operating companies
size
commuter usage
profitability
Like Poland, UK Government subsidy is still necessary to maintain service on many franchises
kpmg 14KPMG Corporate Finance
The UK experienceLessons learned
Public subsidy
Infrastructure investment and track access charging
Franchise structure
Performance regime
kpmg 15KPMG Corporate Finance
The UK experienceLessons learned : public subsidy
Transparent vs. “Opaque” : A transparent subsidy regime is preferable. Tends to promote rational
policy making that balances fiscal alternatives such as investment in rural vs. urban services or investment in road vs. rail. The UK passenger rail subsidy remains opaque.
Open-ended vs. fixed: A fixed subsidy approach is a means of cost control and state fiscal
“protection”. Moving to a fixed appropriation for uneconomic services will eliminate reliance on emergency measures which have had broader fiscal consequences. In the UK, Government is still the ultimate guarantor for the system overall.
kpmg 16KPMG Corporate Finance
The UK experienceLessons learned : infrastructure investment and track access charging
Asset valuation: A robust asset valuation is the key to adequate track access charging.
In the UK, the initial infrastructure valuation did not result in a sufficient income stream for the infrastructure company to maintain the network appropriately.
Pre-privatization upgrading: Asset upgrading can improve the chances of attracting private interest
in an operating franchise.
Ongoing renewals and future improvements: An approach to financing future infrastructure investment must be
carefully considered before operating franchises are tendered. In the UK, state subsidy for infrastructure continues to be necessary and is now funded through a sovereign-backed credit structure.
The prime users’ willingness to pay is the ultimate constraint
kpmg 17KPMG Corporate Finance
The UK experienceLessons learned : franchise structure
Optimal length for private franchises:
Some of the original UK franchises now believed too short to have been economically viable. Cost containment could not be achieved in the time frame and franchisees required additional public subsidy for survival.
Transfer of risk to private operators:
Exposing private franchisees to passenger fare revenue risk is easier in a dynamic Government subsidy system than in the fixed subsidy regime planned in Poland.
kpmg 18KPMG Corporate Finance
The UK experienceLessons learned : performance regime
Regime should be no more complex than necessary for purposes of:
Incentivization
Accountability
kpmg 19KPMG Corporate Finance
The UK experienceLessons learned summary
Positives:
Market innovation and growth
Private investment
Invigorated financial and engineering markets
Preparatory spin-offs of non-core businesses
Overall:
Key parts of the process were hurried
It is difficult to create a “free market” in a natural monopoly
Negatives: TOCs not capitalised to bear
revenue risk
Too many interfaces and constraints, undermining efficiency
Insufficient understanding of costs and asset conditions (infrastructure)
100% privatised network operator
Insufficient recognition that the rail network is dynamic and there is an ongoing state role
Insufficient working practice reform
kpmg 20KPMG Corporate Finance
Questions for Poland
Has labor restructuring been successful in generating the required cost savings?
Is the anticipated State subsidy level sufficient to preserve current passenger services?
Can EU structural funds contribute to the necessary infrastructure upgrade?
Do the Voivodships have sufficient administrative capacity to manage the subsidy program?
Will the private sector come?
kpmg 21KPMG Corporate Finance
ISPA funding
TENS corridor projects
Modernisation of the Berlin-Warsaw-Moscow corridor (E-20) – Minsk Mazowiecki to Teraspol
– Rzepin to the German border
– Poznan rail interchange yard
Wroclaw to the German border (E-30)
Warsaw to Dzialdowo (E-65)