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Contents

Financing sources for public railways

Supply chain challenges

Importance of private finance

Project and governance risks

Opportunities for private finance

The World Bank and rail freight

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First, a thank you for the invitation.

To Indian Railways who, at this exciting time in that organization's own

business development, are hosting this conference of high international

significance to the future of railway freight;

To the International Union of Railways, for their continuing relationship with

the World Bank and their world leadership of an industry that is vital to

international economic development, poverty reduction and the worlds

environment.

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Rail freight demand is increasing strongly in most regions..

5

1

15

5

3

35

N/ Am As- ac E r Afr

5

Global freight task: 25 percent growth over five years

(net tonne-km bill)

Source UIC

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In most public railway systems, retained earnings have notprovided sufficient funds for rail freight re investment

In the best performing public rail freight systems, profits earned from freight are

often implicitly used to crosssubsidize passenger services, for example:

direct transfer to passenger operating losses, and/or

indirect transfer through excessive track charges (implicit or explicit)reinvestment of freight profits in infrastructure standards higher than would berequired by rail freight services alone.

In medium performing systems freight surpluses are sometimes sufficient to reinvest

in motive power and rollingstock but cannot contribute fully to infrastructure costs

In many systems, generally smaller railways with little base-load of bulk or transit

freight, revenues do not cover their own above rail costs and cannot cover

reinvestment in the train operating assets

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Project-specific

borrowing

Revenue-backed

borrowing

Corporate

borrowingJoint-Ventures

Privatization of

business units

Concessions

Direct Borrowing Private participation Asset finance

Public railway systems can in principle raise finance from a varietyof other sources, for example

Government

grants

Government

loans/equity

Deficit financing

Budget sources

Export credit

Availability

contracts

Leasing

In practice, most publicly railway systems depend heavily on the budget sources,

particularly those that have a big passenger role

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The public sectors ability and willingness to finance or guarantee

investment in rail freight is likely to decline

An increasing proportion of government expenditures is to meet higher

health, education and social aspirations and expectations

Governments are increasingly questioning whether carrying goods is a

core (or even an appropriate) Government role

Some governments are concerned whether state subsidies of public rail

investment are competitively neutral vis a vis other modes:

though heavy road haulage is also often subsidized bygovernments or other road users

At the same time, there is a growing need for investment in rail freight to meet the

challenges of serving global supply chains

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Supply chains are becoming more challenging andcompetitive

Technology

Expectations

Markets

All modes of transport are investing to obtain moreefficient, usually larger units and improved trafficdispatching, monitoring and control capability

Global competition in product and service markets is

driving higher standards and lower costs in logisticssupplier markets

Rapid expansion of international trade, and particularlyin Asia: many supply chains are now truly global

CompetitionDespite some industry concentration (e.g. ports) thefreeing of transport markets is creating greatercontestability in logistics services and sub-markets

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more challenging supply chains.contd.

Security

Bottlenecks

Energy/climate

Higher standards of security in freight transport are beingsought in all modes

Logistics services depend heavily on public infrastructure: capacity increments are not matching world freightvolume growth

The expectation of perpetually cheap energy is waningdue both to declining fossils fuel stocks and expectationof higher energy taxes in response to global warming

Inter-modalityBoth standard and specialized containerization continuesto grow , facilitating inter-modal transit and multi-modalallocation of traffic

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Freight railway services will need to be able to offer supply chainmanagers, who owe railways no favours, ever improving value for

money

Customer responsivenessCustomer responsiveness

Geographic reach (= intermodal)Geographic reach (= intermodal)

Delivery timeDelivery time

Reliability of delivery timeReliability of delivery time

Frequency of deliveryFrequency of delivery

Safety and security of goodsSafety and security of goodsProtection of corporate imageProtection of corporate image

ValueValue adding servicesadding services

Transport & storage tariffsTransport & storage tariffs

Inventory holding costsInventory holding costs

Product damage or deteriorationProduct damage or deterioration

Pilferage lossesPilferage losses

Insurance costsInsurance costs

AdministrationAdministrationCustoms and other clearancesCustoms and other clearances

Informal payments for serviceInformal payments for service

Service

attributes

Cost

components

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The success of rail freight as a business will depend on three Cs.

Capital access

Investment in

physical assets that

deliver high service

standards

Investment in IT to

monitor and control

operations

Commercial culture

Lean decision

structures

Rigorous management

of internal andoutsourced costs

Keen incentive

mechanisms

Private sector participation can make the rail

industry more competitive, more commercial and

provide new sources of capital !

A focus on

customer service

High ordermarketing skills

Pricing agility

Competitive spirit

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The private sector is therefore a vital way of increasing the role ofrail freight in global supply chains, not just for its finance

Private participation and finance can take many forms including

partnerships and ventures with the public sector - as shown later

But private finance is not a panacea for rail systems development: in many

countries, rail networks will depend mainly on public investment for the

foreseeable future

Private participation can help reduce (though is unlikely to end) the problem

of politically driven internal cross-subsidies to passengers as it will require

well built and repaired ring-fences round invested businesses

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Many governments are unlikely to privatize public railwaynetworks for wider social or cultural or policy reasons

This is particularly true of networks with high proportion of passengerservices

It is reinforced in:

large countries with remote rail connected regions

countries in which rail has features of natural monopoly in freight

typically larger countries with high rail distances

with heavy bulk traffic markets

Track access rights can provide a route to private investment in freight

while retaining the public railway network in public ownership and control.

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Track access rights for freight train operators can in principlecome in a variety of different forms.

Legally mandated: narrowlydefined access rights

Legally mandated: general

rights of access

Contractually agreed: specificaccess rights:

Canada (30km beyond companyboundaries)

Mexico (specific lines to ports/citiesto create competition))

Most EUStates, EU international,Australian State-owned railways*

USA (approx 25% of USnetwork issubject to trackage rights)

*Australian interstate rail is carried on vertically separated infrastructure managed by the Australian Rail Track Corporation

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Private freight access on public rail networks will require a rigorousgovernance (legal and regulatory) framework if it is to be financeable..

. Laws and regulations on

access to public rail systems

2. Criteria and process for

licensing new rail entities

. System for safety

accreditation and monitoring

4. Procedures for applying for

capacity on public rail network

6. Agreements on rollingstock

interchange and revenue division

7. Procedures for incorporatingnew operators fairly into timetable

8. Rules for sorting out operating

priorities conflicts between trains

9.Institutions and procedures for

regulatory review and compliance. Standard documentation for

track (& facility) access contracts

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Therefore, financing rail freight is not only about commercial risks

but also the predictability and acceptability of governance risks

Commercial risksCommercial risks Governance risksGovernance risks

Financing risks (e.g. currency risks)Financing risks (e.g. currency risks)

Land acquisition: costs and timeLand acquisition: costs and timeConstruction and or rollingstockConstruction and or rollingstock

engineering risksengineering risks

Residual asset risksResidual asset risks

Safety risksSafety risks

Market risks:Market risks:

Volume of freightVolume of freight

Yield: revenue tonneYield: revenue tonne kmkm

Fair and transparent market accessFair and transparent market access

process (whether privatization or trackprocess (whether privatization or trackaccess to private companies)access to private companies)

Legal enforcement of AgreementsLegal enforcement of Agreements

Market and pricing freedomsMarket and pricing freedoms

Adherence to agreed operatingAdherence to agreed operating

freedomsfreedoms

Any government financialAny government financial

contribution is paid on timecontribution is paid on timeRegulatory risksRegulatory risks

Protection against expropriationProtection against expropriation

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With good governance and regulatory structures there is a wide scope forprivate finance in railway freight transport

Functions

Structures

Finance & build

rail line

Operate & maintain

rail line

Finance

rollingstock

Operate freight

train services

Rollingstock leasing

availability contractsPublic Public Private Public (pays R/S

hire prices to

private)

Freight trainoperating company or

concession

Public Public Private Private

Infrastructure build or

renovate concessionPrivate Public (pays usage

charges to private)

Public Public

Infrastructure build &

operate concessionPrivate Private Public (pays

access charges to

private)

Public

Integrated infra.and

train service company

or concession

Private Private Private Private

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World Bank support for the railway industry is increasing(Annual lending for railways 999 2008 projected)

0

0 0

2 0 0

0 0

0 0

0 0

9 9 9 2 0 0 2 0 0 2 0 0 2 0 0

D i l l io n s ( y r o in g a e ra g e)

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The World Bank is ready to extend its support of global rail freight

development

Investment support of public railways with strong freight business plans that

will support trade and development in an economically and environmentally

sustainable way;

Knowledge sharing and technical assistance to bring to bear best practice

advice on railway policy, institutions, regulations, corporate restructuring

and business strategy;

Advice on and support for structures that can increase private investment in

freight railways (together with IFC and MIGA products);

Regional and corridor approaches to rail trade and transport facilitation.

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Thank you for your attention

Questions and comments to:

pamos@worldbank.org

The findings, interpretations and conclusions expressed herein are those of the authorand do not necessarily reflect the views of the Board of xecutive Directors of theWorld Bank or the governments they represent