Viewp oint fly;. No. 186 June 1 Nicola Ty1calz Private Participation in the Rail Sector Recent Trends 19566 The World Bank's The 1990s have marked the reemergence of pri- For these thirtv-seven projects, private compa- Private Participation in vate railway operation in developing countries nies committed to rehabilitating existing infra- Infrastructutre cPPI) after half a century of nationalization and public structure or building new systems, involving a Project Database covers private participation in sector management. Since private operators took total investment of more than US$14 billion over infrastructure in over freight transport on Argentina's Rosario to the life of the contracts (figure 2).2 The invest- developing countries. Bahia Blanca railwav line in 1991, private partic- ment involved in each project depends primar- The database records e details of all projects ipation in the sector has grown significantly. By ily on the type of contract (box 1), but also on newly owned or the end of 1997 the governments of fourteen the state of existing infrastructure and expected mpanged by pr vate developing countries had transferred varying traffic volumes. Another six rail projects reached the present in water, degrees of responsibility for railway operation to financial closure during the first half of 1998, and electricity, transport, the private sector. In these countries private com- the trend toward private contracting is expected telecommunications, panies entered into a total of thirty-seven new to continue. and natoral gas transmission and contracts for the operation and management of distribution. This Note railways in 1990-97 (figure 1). By contrast, only This Note uses the PPI Project Database to ana- focuses on rail projects five projects in just three developing countries lyze what has happened in the railway sector vvith private participation that roached financial reached financial closure during the six vears since 1990. The database reveals the following closure in 1990-97, before 1990.1 patterns: surveying regional trends, types of private participation, and project size. FIGURE 1 CUMULATIVE RAIL PROJECTS FIGURE 2 CUMULATIVE INVESTMENT IN WITH PRIVATE PARTICIPATION RAIL PROJECTS WITH PRIVATE IN DEVELOPING COUNTRIES, PARTICIPATION IN DEVELOPING 1990-97 COUNTRIES, 1990-97 1997 US$ billions 40 15 35 30 12 259 20 15 6 10 3 1990 1991 1992 1993 1994 1995 1996 1997 1990 1991 1992 1993 1994 1995 1996 1997 Source: PPI Project Database. Source: PPI Project Database. k2a The World Bank Group - Finance, Private Sector, and Infrastructure Network 2 Private Participation in the Rail Sector-Recent Trends Database coverage assuming significant investment risk. This * To be included, a project must have reached category includes build-transfer-operate, financial closure and directly or indirectly build-lease-transfer, and build-rehabilitate- serve the general public. operate-transfer contracts as applied to exist- * The sectors covered are energy, water, trans- ing facilities. port, and telecommunications. * Greenfieldprojects. A private entity or a public- • The transport sector includes the following private joint venture builds and operates a new subsectors: rail, roads, and ports. Rail facility. This category includes build-operate- includes the following segments: freight, transfer and build-operate-own contracts. intercity passenger, local passenger, and fixed * Divestitures. The state sells an equity stake to assets. private entities; this may or may not involve * Movable assets, incinerators and stand-alone private management. This category includes solid waste projects, and small projects such full and partial divestitures. as windmills are excluded. • The period covered is 1984-97. Definition of financial closure. For greenfield * The countries covered are developing coun- projects and for operations and maintenance tries, as defined and classified by the World contracts with major capital expenditure, Bank, in East Asia and the Pacific, Europe and financial closure is defined as the existence of Central Asia, Latin America and the a legally binding commitment of equity holders Caribbean, the Middle East and North Africa, or debt financiers to provide or mobilize fund- South Asia, and Sub-Saharan Africa. ing for the project. The funding must account for a significant part of the project cost, secur- Definition of private participation. The private ing the construction of the facility. For opera- company must assume operating risk during the tions and management projects, a lease operating period or assume development and agreement or a contract authorizing the com- operating risk during the contract period. In mencement of management service must exist. addition, the operator must consist of one or For divestitures, the equity holders must have a more corporate entities with significant private legally binding commitment to acquire the equity participation that are separate from any assets of the facility. government agency. Sources Project types - World Wide Web. * Operations and management contracts. The * Commercial databases. private entity takes over the management of a * Developers and sponsors. publicly owned enterprise for a given period. * Regulatory agencies. This category includes management contracts and leases. Contact. The database is maintained by the * Operations and management contracts with Private Participation in Infrastructure Group of major capital expenditure. The private entity the World Bank. For more information contact takes over the management of existing facil- Mina Salehi at 202 473 7157 or msalehi@ ties under a concession contract while also worldbank.org. The World Bank Group 3 TABLE 1 PRIVATE RAIL PROJECTS AND INVESTMENT IN DEVELOPING COUNTRIES BY TYPE OF PROJECT, 1990-97 • Operations and management contracts (man- U 1I- agement contracts, leases, and concessions) Type are more common than greenfield projects or divestitures. Operations and * Private participation is more common for management with major freight than for passenger services. capital expenditure 22 6,319 * Latin America has led the new wave of private Greenfield 6 7,399 railway projects. Operations and Operations and management management 5 0 contracts are most common Divestiture 4 699 Total 37 14,417 Concessions that are for managing and operat- ing existing railways and involve major capital Source, PPI Project Database. expenditure by private sponsors are the domi- nant form of contract for private participation in the rail sector, accounting for twenty-two of The greenfield projects are concentrated in thirty-seven projects (table 1). Another five oper- rapidly growing cities of East Asia, a regional ations and management contracts do not involve concentration that mirrors the pattern in gas. significant private investment. Divestitures and electricity, and water and sanitation. In all these greenfield projects are less common, accounting sectors private participation in Asia has typically for a total of ten projects.3 focused on increasing capacity in response to rapid urbanization and growing demand for Governments wanting to irmprove the effi- infrastructure setvices rather than improving the ciency of railway networks and reduce the bur- efficiency of existing public operators. den of subsidies have transferred management responsibility to the private sector. In some of Greenfield projects are distinct not only in loca- these countries underinvestment by the public tion, but also in subsectoral classification. All the operator had left railways in need of rehabili- greenfield projects are for metropolitan light or tation to meet expected demand. Governments 'heavv' rail systems rather than for long-distance were keen to transfer the risk of this investment freioht lines.4 The build-operate-transfer (BOT) to the private sector, and private sponsors were contracts in Asia account for half the passenger wxilling to assume the risk under credible con- and fixed asset projects (figure 3). tractual arrangements of sufficient duration- ten to fifteen years where the operator invested Divestitures account for only four railway pro- only in rolling stock, but up to ninety years jects and little private investment to date. There where the track required substantial restora- is no standard model for these privatizations, and tion. Concession contracts allow governments all four projects are quite distinct. They include to increase efficiency and investment while re- full and partial privatizations, aimed at either taining ownership of the rail infrastructure. transferring operation to a strategic investor Almost all the projects in Latin America are (Brazil and Chile) or raising revenue (China). concessions. Private participation is more common Numbering only six, greenfield contracts run a for freight distant second to operations and management contracts. But with each greenfield project Most of the railway projects are in countries with involving significant investment, they run slightly a long history of rail transport, often with early ahead of concessions in terms of investment. private involvement. Heavy financial losses and 4 Private Participation in the Rail Sector-Recent Trends FIGURE 3 PRIVATE RAIL PROJECTS IN DEVELOPING COUNTRIES BY TYPE, 1990-97 Freight and intercity passenger Freight and local Fixed assets, 5% passenger In 76 percent of projects the government trans- freight, and ferred the management of fixed assets and intercity passenger i rolling stock to the private sector as a vertically io l i v _integrated utility, introducing competition at the Freight bidding stage. Even as regional monopolies, 16% however, railways are not insulated from com- petition; both passenger and freight customers Fixed assets typically have alternatives. Some governments and freight have gone further, requiring concessionaires to 41% Fixed ase open their network to competing operators. local passenger 27% The historically dominant use of rail for freight transport partly explains the larger number of Source: PPI Project Database. freight than passenger projects awarded to the private sector. Freight only and freight and fixed assets account for 57 percent of all projects (table 2). The standard model for private participation TABLE 2 PRIVATE RAIL PROJECTS AND INVESTMENT IN in railways in Latin America involves separating DEVELOPING COUNTRIES BY SEGMENT, 1990-97 passenger and freight service, leaving long- distance passenger services with a public oper- ator. Bolivia is an exception. It awarded leases for the operation of both services on each of the - 8 I I I _ country's twro networks. In Africa two projects transferred responsibility for both freight and Fixed assets and freight 15 41 3,537 intercity passenger services to the private sector. Fixed assets and local passenger 10 27 8,847 The transport sector faces greater intermodal Freight 6 16 1,427 competition than other infrastructure sectors- Fixed assets, freight, and railways are one of several forms of land trans- portation-and this competition is especially intercity passenger 3 8 47 intense for passenger transport. Roads offer most Freight and intercity customers a less than fully priced alternative to passenger 2 5 560 rail travel, leaving most passenger railways Freight and local unable to compete without subsidies. To deal passenger 1 3 0 with this problem, passenger concessions in Total 37 100 14,411 Argentina were awarded on a least-subsidy basis. Source: PPI Project Database. East Asia and the Pacific has had less history of private investment in freight railways and less reliance on freight transport by major exporters. But with rapidly growing cities, manv Asian poor operating efficiency prompted govern- countries face a rising demand for intercity pas- ments to consider (or reconsider) private sector senger transport. To meet this demand and approaches. The deficiency in government improve passenger transport within their capital investment led to interest among freight cus- cities, Malaysia and Thailand turned to the private tomers in taking over the networks, and the sector, awarding contracts for the construction of potential for reliable revenue encouraged spon- new light rail systems. Five other passenger and sor support. fixed asset contracts were awarded for the oper- The World Bank Group 5 TABLE 3 PRIVATE RAIL PROJECTS AND INVESTMENT BY REGION, 1990-97 Investment ation of suburban railway networks and the (1997 US$ Bueno s ors metr o in Argentina. And in 1998 Region millions) private sponsors were awarded concessdion 1Ril the Rio de Janeiro metro and suburban passen- East Asia and the Pacific 7 7,959 ger services. Europe and Central Asia 1 0 Latin America has led the return Latin America and the Caribbean 26 6,458 to private railway projects Sub-Saharan Africa 3 0 Total 37 14,417 Latin America has clearly led the way in the revival of private participation in the rail sector.5 Source; PPI Project Database. Seven countries in the region have awarded a total of twenty-six contracts to private compa- nies, 81 percent of the sector total. Fewer con- TABLE 4 TOP FIVE DEVELOPING COUNTRIES BY tracts have been awarded in East Asia and the INVESTMENT IN PRIVATE RAIL PROJECTS, Pacific, although the size and nature of the pro- 1990-97 jects have meant slightly more private invest- ment (table 3). A few projects have reached Number of Investment financial closure in Sub-Saharan Africa and in Country projects (1997 US$ millions) Europe and Central Asia. South Asia and the Middle East and North Africa have not yet trans- Malaysia 4 5,098 ferred any railway operation to the private sec- Argentina 9 2,745 tor, but some countries are considering private Thailand 2 2,301 participation. Brazil 8 2,216 Mexico 2 1,302 Within each region, projects are further concen- trated in a few countries. The top five countries Source:PPI Project Database. ranked by investment in rail projects account for almost 95 percent of private investment in the sector and for 68 percent of the projects (table 4). Ranking countries by number of projects infrastructure sectors. Many Latin American gov- would replace Thailand and Mexico with Bolivia ernments have gained experience in concession- and Chile, with three projects each. ing through private participation in electricity, telecommunications, and water and sanitation Regions show continued trend (see Izaguirre 1998 on electricity, and Silva, to private participation Tynan, and Yilmaz 1998 on water and sanitation). The following regional review of concessions Most railway concessions in Latin America have under way signals an ongoing trend toward pri- been awarded to consortia of domestic compa- vate participation in the rail sector. While not nies, often in partnership with one experienced comprehensive, it illustrates the drivers under- international operator, and sponsored by a major pinning the trend. freight customer. The overseas arms of state rail- way companies have also taken an interest in Latin America and the Caribbean recent projects. Involving existing customers improves the operator's access to information on One reason for Latin America's dominance in expected demand changes and reduces the risk private railway projects is the region's positive to the sponsor by allowing investment to experience with private participation in other respond to these demand predictions. Sponsors 6 Private Participation in the Rail Sector-Recent Trends and operators of early concessions have capital- some African governments to consider private ized on their experience and taken a stake in participation to improve rail service and prevent later contracts. In the longer term, however, cus- further deterioration of railway infrastructure. tomer ownership may reduce the operator's Latin American contracts provide good models incentive to expand service for new users (see for countries with a similar history of private Campos and Cantos 1999). freight railways. Argentina started moving toward private con- Four railway projects in Africa have reached tracting in the late 1980s. It awarded contracts in financial closure since 1990, two with World the early 1990s, with contracts for five freight rail- Bank assistance-the Abidjan-Ouagadougou ways reaching financial closure in 1991-93. railway linking C6te d'Ivoire and Burkina Faso These routes have already achieved major gains and the Maputo Rail network in Mozambique.6 in productivity and revenue. Encouraged by the Cameroon and Gabon have started the bidding success of freight concessioning, Argentina has process for private concessions. contracted out the operation of suburban pas- senger rail and the subway in Buenos Aires, Among countries in the Middle East and North where again productivity has increased and sub- Africa, Jordan and Tunisia are considering pri- sidy costs have fallen. vate contracting. In Jordan negotiations for a concession to operate, manage, and extend the Argentina's freight and passenger concessions 283-kilometer Aqaba railway had reached an have faced challenges despite their general suc- advanced state by the end of 1998. cess. Initial demand projections proved too opti- mistic, and sponsors have been unable to fulfill Eastern Europe and Central Asia their investment commitments. Argentina's expe- rience highlights the importance of renegotiation The only country in Eastern Europe and Central or other adjustment mechanisms that allow con- Asia with private involvement in the railway sec- cessionaires to remain in business without the tor is the Czech Republic. In 1997 the Czech gov- government losing credibility (Thompson and ernment awarded regional railway leases to Budin 1998). private operators willing to maintain local ser- vices." Since then it has also privatized two pre- Concessioning started later in Brazil than in viously leased regional railway operations, with Argentina, but the outcome in traffic growth the goal to transfer loss-making routes to private and profitability in the two countries looks operators rather than to raise revenue. The likely to be similar. Sponsors in Argentina and Czech contracts have left ownership of fixed Brazil have committed to similar levels of assets with the government, but transferred all investment (see table 4). The Brazilian govern- rolling stock-freight and passenger-to a pri- ment recently awarded a concession for Fepasa, vate operator. the last of its seven regional railway networks, and one for the Rio de Janeiro metro. Bolivia, Asia Chile, Colombia, Guatemala, and Mexico have also awarded contracts to private sponsors and In East Asia and the Pacific two countries domi- operators. nate private involvement in the rail sector: Malaysia (four projects) and Thailand (two). Sub-Saharan Africa and the Middle East and Both countries have awarded greenfield con- North Africa tracts for new metropolitan light railway net- works. The only other Asian developing The experience with private rail contracts in economy with private investment is China, Latin America and elsewhere has encouraged where the government sold shares in the The World Bank Group 7 Guangshen Railway Company to raise capital benefits of splitting infrastructure provision without a transfer of control.8 No country in from service operation have driven many of the South Asia has yet awarded a private contract, reforms in OECD countries and may offer one but a light rail concession is under consideration solution to the access pricing issues faced when in India. vertically integrated companies are conces- sioned with open access requirements (van de In Malaysia and Thailand established property Velde 1999). development and construction companies were attracted by the potential increase in property Concessions have been more common than value from improving local transport facilities. other types of private participation, with most But the importance of property development to countries turning to the private sector to improve the success of projects has made financing dif- the management of loss-making railways and ficult, particularly with the recent financial cri- rehabilitate deteriorating infrastructure. This pat- sis drastically reducing property values. One tern looks set to continue. Improvements in per- project in Thailand, Hopewell's Bangkok formance in most of the projects in Latin America Elevated Road and Train System (BERTS), have encouraged governments in Sub-Saharan reached financial closure in 1990, but later suf- Africa and the Middle East and North Africa to fered financial problems and was officially ter- consider concessions for railway management, minated in 1998. To prevent the financial crisis operation, and rehabilitation. A few BOT pro- from undermining the country's second light rail jects in Asia have involved the private sector in project, the Thai govermment has provided soft financing and building new infrastructure, but loans to the sponsors. Two of Malaysia's three the financial crisis has made it difficult to gauge light rail systems have experienced financing their success. difficulties, and the already completed Star has reported revenue below expectations (Symon I Three were short-term leases for the operation of railwavs in 1998). The financial crisis is encouraging Asian Thailand that expired in 1991 and were not renewed. The other governments to look at using private participa- two vvere a nmnagement contract in Mexico and a BOT contract frthe FerrononLe railway in Brazil tion to improve the efficiency of existing assets Al investment figures are in 1997 L.S. dollars. rather than building new systems. 3 In the rail sector concessions range from leases sith little or no private investment to full French-style concessions; all leave own- Conclusion ership of fLxed assets with the public sector and transfer operat- ing risk and responsibility to the private sector. See Thompson and Budin 1998. Private participation in the railwav sector has Almost all the privately operated passenger railways in develop- increased ,.,l- during the 1990s. with - ing countries are urban railwav systems increased signirfcantly during the 1990s, with See Thomps<,n and Budin 1997 for more details on railvay con- fourteen developing countries reaching finan- cessioning in specific countries. cial closure on thirty-seven projects in 1990-97. s Because the NMaputo concession closed in 1998, it is not included in the figorcs and tables. Although this resurgence in private participa- 7 These small leases are recorded as one project in the PPI Project tion is still in its infancy, the experience in Latin Database. America highlights some lessons. For example. This follows the model for investment in the electricity sector. See the renegotiation of freight concessions in Izaguirre 1998. Argentina has revealed the importance of estab- lishing flexible contracts and setting clear rene- References gotiation or other adjustment mechanisms in advance. Developing countries can also learn Australia, Productivity Commission. 1999. "Annex E: Intemational from the experience of OECD countries with Railways" In "Program on Rail Reform'' Draft report. different models of private involvement, such vw-e.pc.gov.au/pcpubs reports.html]. and the United Camnpos. Jav'ierg and Pedro Cantos. 1999. 'Regolating Prisatized Rail as Japan, New Zealand, and the United Transport.' Policy Research Working Paper 2064. World Bank Kingdom (see Australia 1999). For example, the Institute. Washington, D.C. 8 Private Participation in the Rail Sector-Recent Trends Izaguirre, Ada Karina. 1998. 'Private Participation in the Electricity Sector-Recent Trends." Vtiewpont 154. XVorld Bank, Finance. Private Sector, and Infrastructure Network, Washington, D.C. Silva, Gisele, Nicola Tynan, and Yesim Yilmaz. 1998. Private Patnicipation in the NXXater and Sesverage Sector-Recent Trends." Viewpoint 157. World Bank, Finance, Private Sector, and InfrastrLIcture Netw ork, Washington, D.C. Svmon. Andrew. 1998. Crisis Takes Its Toll on Road and Rail" Finocial Times. September 14. Thompson, Lottis S., and Rarim-jacqucs Budin. 1997. 'Global Trend to Railway Concessions Delivering Positisve Results.' Viewpoint 134. 'VForld Bank, Finance. Private Sector, and Infrastructore Network, Washington. D.C. 1998. Railway Concessions: Progress to Date." Rtil Interoatiorial, no. 01/02: 60 73. General Proceedings of the \Marrakech Congress, October 6-10, 1997 van de Velde, Didier, ed. 1999. Changing Train.s RailwayRefortt and the Role oJ Coinpedtiotn-7he Experience of Six Countnes Oxford Studies in Transport Series. Aldershot, England: Ashgate. Nicola Tynan, George Mason University and Private Par-ticipation in Infrastructure Group Viewpoint is an open forum intended to encourage dissemination of and debate on ideas, innovations, and best practices for expanding the private sector. The views published in this series are those of the authors and should not be attributed to the World Bank or any of its affiliated organizations. Nor do any of the con- clusions represent official policy of the World Bank or of its Executive Directors or the countries they represent. To order additional copies please call 202458 1111 orcontact Suzanne Smith, editor, Room FltI K-208, The World Bank, 1818 H Street, NW, Washington, D.C. 20433, or Internet address ssmith7l worldbank.org. The series is also available on-line (www.worldbank. srg/htmn/fpd/eotes/). e Printed on recycled paper.