96229 Connections Transport & ICT Keys to Attracting Private Capital for Railway Development Martha Lawrence and Gerald Ollivier Two of the largest railway systems in the world—China’s and India’s—have intensified their focus on the private sector as an $150 billion per year indispensable source of capital to help them enlarge their rail capacity. They will find promising options if they recognize the common characteristics of successful efforts, both in their railways and elsewhere: profitability, manageable risks shared appropriately, and shared gains. Even unprofitable rail activities, such as commuter transit, can attract private Target railway investments capital if adequate public subsidies are in place. in China and India over coming years The Activity Must Yield Profits Investors will typically pay a premium to obtain management control of an enterprise because that Private sector investors want to make money. If the assures them that they have the right to manage activity is inherently profitable—rail car (wagon) the risks to their investment. operations in Russia, station development in the Hong Kong SAR metro, or freight transport in the United States—private investors will naturally be …and Appropriately Shared attracted to it. If the activity is not inherently profit- The public sector is typically best able to manage able, then private investment will hinge on suffi- risks such as those associated with land acquisition cient and reliable long-term government subsidies. and government actions, while the private sector usually excels at reducing risks through, for ex- Risks: Must Be Manageable… ample, marketing and customer relations. Success- ful collaborations between the public and private Private sector investors are willing to take risks if sectors share the risks so that the party best able they believe that to manage them has the responsibility and incen- tive to do so. • They can understand the risks; • The risks will be well managed; and • The returns will be sufficient. JANUARY 2015 NOTE 03 Gains Must Accrue to Both Parties For example, Vale S.A., one of the world’s largest metals and mining companies, pays fees to govern- If the participation of both the public and private sec- ments in Brazil, Malawi, and Mozambique for the right tors is to be sustainable, the activity must generate to operate railways in those countries for several de- value for both parties. The public sector may benefit cades and is responsible for supplying and maintain- from the private sector’s expertise, whether in market- ing the railway infrastructure and rolling stock. ing, cost efficiency, technological know-how, or finan- cial capacity. The private sector may benefit from the Leveraging railway assets public sector’s existing assets, knowledgeable staff, Railway right-of-way and real estate are assets that access to resources, or grant of an exclusive right to can be leased to or jointly developed with the private operate services. In any case, when the deal doesn’t sector. For example, through its subsidiary, RailTel, work well for both parties, it usually falls apart. Indian Railway sells access to telecom and other commercial customers over about 42,000 kilometers Successful International Experience of fiber optic cable running along its right-of-way. Successful private investment in railways has a long The Hong Kong SAR metro, MTR, leases retail and and broad history. Four avenues of private invest- advertising space within its stations, where it also de- ment have been especially important, separately or velops residential and commercial projects. In 2013, in some combination: (1) provision of specific rail these activities generated an operating profit of $1.1 assets and services, (2) public-private partnerships, billion, not counting the extra passenger traffic gen- (3) leveraging the commercial value of railway as- erated by the property development. Urban transit sets, and (4) financing railway companies. operators in China are exploring this financing model. Providing assets and services Financing railway companies In a number of countries, private business rents to Private investors buy bonds and equity shares in the railway some specific physical assets, such as railways when the underlying business is profitable. rolling stock, which saves the railway from having Examples include vertically integrated railways in to finance those assets itself. China, Japan, and North America and train opera- tors in Europe and Australia. For example, in 2003, Russia began allowing the private sector to rent freight wagons to the railway, In China, for example, Guangshen Railway profitably making it profitable through a change in tariff rules. carries passengers and freight between Guanzhou The new policy created a vibrant market in which and Hong Kong. Shares in the company were first list- the private sector provided $50 billion toward re- ed on the New York and Hong Kong stock exchanges placing the railway’s large stock of very old wag- in 1996, raising a net of CNY 4.2 billion ($526 million). ons; about 85 percent of freight wagons in Russia are now privately owned. Attracting Private Capital In addition, the private sector can sell services In sum, private investors in railways, as with any in- to the railway, such as track maintenance. In that vestment, seek a return that is commensurate with case, the investor deploys its own equipment and the associated risk. facilities, finances the working capital involved, and provides the labor. A variety of approaches to packaging railway as- sets, including those discussed here, can provide a Public-private partnerships (PPPs) return, mitigate risks, and thus attract private sec- In successful PPPs, the private sector makes money tor investment to the railway sector. by accomplishing the objectives of the public sec- For more information on this topic: tor. PPPs work best when outputs are clearly speci- http://documents.worldbank.org/curated/en/2014/08/20143729/ fied and monitored. private-capital-railway-development Connections is a series of concise knowledge notes from the World Bank Group’s Transport and, Information and Communication Technology (ICT) Global Practice. The series is available on the internal and external online platform of the World Bank Group. Connections discusses projects, experiences, and front-line developments in Transport and ICT. The series is produced by Nancy Vandycke, Shokraneh Minovi, Adam Diehl, peer-reviewed by experts of the Practice on a bi-weekly basis, and edited by Gregg Forte. For more information on Connections, and to read other notes in the series, please visit: http://www.worldbank.org/transport/connections JANUARY 2015 NOTE 03