F+)3 6 v Viewpoint Note No. 134 December 1997 Global Trend to Railway Concessions Delivering Positive Results Louis S. Few railways have been truly privatized, be- Commission. The success of the early conces- Th7ompson and yond such recent examples as New Zealand, sions-and the lack of credible alternatives- Kanrm-Jacqiues Canadian National, East Japan, Conrail in the has caused a snowballing of such reforms in Budin United States, and the infrastructure and freight Latin America. Concessioning is also beginning services of the old British Rail. Instead, most in Africa and the Middle East and, tentatively, governments have preferred to concession in Asia. A similar process, based in part on (franchise) their railways. Why concessioning concessioning and franchising and in part on is usually preferred to privatization is not al- privatization, has also taken hold in the Euro- ways clear, but the main reason is probably pean Union. (Tables 1, 2, and 3 show basic that governments believe that concessioning railway indicators for actual and forthcoming offers them the best of both worlds: they re- concessions and privatizations, by region, ex- tain ultimate control over the infrastructure (at cluding Europe.) least in the political sense), while the private sector carries out the operating functions and Case studies competes for customers. There have been interesting pioneers in these Rail concessioning is not new. Many railways regions. The rail concessions in Argentina in- were originally built and operated as conces- volved several innovations: they were the first sions, and if not for the wave of public owner- negative concessions and they were the first to ship (especially strong in countries undergoing require concessionaires to share tracks. But the decolonialization) after World War II, many impact of complexity and lack of transparency would never have been publicly operated. in the initial bidding process is also instructive. Since then rail has performed badly, for two Brazil had the first concession for which the main reasons. First, governments have pro- World Bank directly funded severance payments. moted highways and air travel, often operated Chile introduced the first real separation of in- by the private sector. Second, and perhaps more frastructure and operations. Mexico achieved important, railways have become mired in poli- rapid implementation and emphasized foster- tics, often depriving them of adequate capital ing cross-border traffic. And C6te d'Ivoire and for investment and repairs, always lumbering Burkina Faso launched the first new rail con- them with a confused and contradictory set of cession in Africa and the first binational operat- objectives in competition with modes that had ing concession with the Abidjan-Ouagadougou a much clearer mission. The downward slide railway, which links their capital cities. of nationally owned railways has coincided with increasing globalization and tightening national Argentina finances. Governments can no longer afford bad rail services, and this has led to politically The concessioning strategy adopted by the Ar- painful measures to fix the problem. These gentine government was grounded in five ba- pressures prompted reform in the early 1990s sic principles: The railway deficit was no longer in Argentina and the United Kingdom and the sustainable. The monolithic federal railway was early steps toward reform by the European unsalvageable as an enterprise. Some freight "Rip The World Bank Group . Finance, Private Sector, and Infrastructure Network 2 Global Trend to Railway Concessions Delivering Positive Results TABLE I ACTUAL OR POTENTIAL RAILWAY CONCESSIONS IN LATIN AMERICA li894 or latest ova lIable ye I,.. Ill Ill III Arg.otinaa 7.037 9,118 5,151 242 1,366 NCA (1997) 1,741 4,520 855 385 2,013 FEPSA 982 5,163 575 100 1,708 Ferrosurfloca 854 4,791808 178 1,057 Es.As.alPacilic 2,029 5,49 1,879 369 1,880 Mesopotamico 820 2,751 524 2.25 1,183 Belgrono 6,400 1,300 624 Bolivia 3,261 5,255 133 2.082 2A43 .179 632 1,089 Brazil .RFFSAh (1996) 35,118 .715 28,401 1,805 966 Nardeste 674 ... 4,260 ... 4,402 .. 158 153.. Centro-Luste (C6'ntroAtlantico) 8,917 7,092 0 975 2,034 Sudeste(MRS Logistics) 18,580 ,710 5,528 1fL497 3,361 Sul (Sot Atlantico) 6,939 .81 10,208 1,018 680 Terezina Cristina 92 168 351 548 262 Oeste (Novoeste) 1,916 . .611. . 2,512.1,189 763.. .FEPASA .. ,520 1,100 4,929 15,319 .1,546 497 CYROC EFVM 50,137 898 4,991 55,832 10,045 L'arajas 37,500 .... .175 1,814 31,915 20,673 Chile Freight FEPASA't (1991) 200 475 1,718 Costa Rican 72 480 2,300 .317 .. .66 &,atwaIa"...... 430. 28 640 420 624 Mexico, FNM .. ,.u.. 175 37' 20,360 48,030 1,820 .Northwe$ta .17200 .200 21,300 2,174 808... Fortboast j.,000 Southeast' 32 . .. .200 9,043 . .1,455 354 Chihuahua alPac.600. .457 2,053 ... .469 Short lines 2,300 6,543 5,804 . 352 .erui 242... 1,609 3,337 450 . 217 Southeastern 83 185 474 Central 49 509 507 .Southern 269 915 414 Mote; covers primarily freight railways. Italic indicate that railway has been concessioced. I-ham means metric-ton4ilometers. P-km means passenger-kilomaters. Iii means Uaff Ic units, the sum of metric-ton-kilometers and passenger-kdoineters. Some employee totals do not add because they include central overhead employees not transferred fo the concessionaires. a. The Argentine concessions were completed between 1993 and 1995. Suhuxtan passenger concessions are not shown. b. The RFFSA concessionino was completed in 1996 end 1997. C. CVRO (parent company) was privatired in April1997; d. Concessioned in June1995 on the basis of 1996 data. 1. Currently Out of service. g.Data are estimated. SourceAnthors compila The World Bank Group 3 services were probably viable. The Buenos leaving the concessionaires with the commer- Aires suburban passenger services, though loss- cial risks and the responsibility for decisions making, were so important to the city's devel- on the timing of investments. opment that they had to be continued. And operating efficiency, particularly staffing lev- The level and timing of the investment pro- els, would have to be improved. gram are now being renegotiated. In freight the reason is that demand will not support the By mid-1990 the government and the World promised investment levels. By contrast, sub- Bank had agreed on a plan that called for re- urban passenger and metro demand is so much structuring the railway into several separate higher than expected that the government- freight and commuter rail networks, conces- specified capital program is proving inadequate, sioning these networks, rationalizing intercity so new provisions for investment muast be passenger services, establishing new rail regu- made. Although most of the freight concessions latory agencies, creating a metropolitan trans- appear stable, none is highly profitable, and port authority for Buenos Aires, revising some may even be in financial trouble. Traffic operatinig practices and rules, reducing the density on Argentina's freight railways is low, workforce and improving productivity, and dis- and success will be hard to come by. In addi- posing of redundant assets. tion, most intercity rail passenger services have been lost for good. That said, the freight con- Six freight packages were created for conces- cessions have made real gains in performance: sioning on thirty-year terms, with an optional a turnaround in traffic trends, a quadrupling ten-year extension. The concessionaires have of labor productivity, improvements in service exclusive use of the tracks but must grant ac- quality, reductions in prices, and a reduction cess to passenger operations in return for a in the public deficit of about US$600 million a compensatory track fee. Bids for the freight net- year (equal to about 0.5 percent of GDP). works were evaluated using the net present value of the canon to be paid to the govern- Brazil ment during the first fifteen years of the con- cession, the quality of business and investment Before reform in Brazil, there were four prin- plans, staffing levels, the proposed track ac- cipal railways-the national railway (RFFSA), cess fee for intercity trains, and the share of the railway of Sao Paulo State (FEPASA), and Argentine interest in the consortium. The the two railways owned by the Companhia do weighting used reflected the importance attrib- Vale do Rio Doce (CVRD)-totaling about uted to investment in the railways, but also 30,000 kilometers of track. RFFSA was the larg- political compromises on employment. est, accounting for about two-thirds of the track, rolling stock, and employees. Rail accounted The perceived lack of transparency in the for about 25 percent of freight movement (mea- freight concessioning led to a simpler process sured in metric tons per kilometer), but there for the suburban passenger concessions. Bid- were almost no intercity passenger services. ding documents defined the minimum service to be provided (seats per hour, frequency, travel Reform started with RFFSA. The government time, punctuality) and a required capital pro- considered many options before settling on the gram to make up for years of neglected main- concessioning of six exclusive regional systems, tenance. Maximum fares were established for a configuration that seemed optimal because standard service, with fare increases as a pre- of regional differences in geography, track mium for improved services. Bidding was on gauge, and rail traffic. Two other major con- the basis of lowest government pavment, al- siderations for the government as it assessed lowing the government to ensure that the bid- restructuring were employment and the con- ding process was direct and transparent, yet dition of track and rolling stock. 4 Global Trend to Railway Concessions Delivering Positive Results Big redundancies were inevitable and required the government's stipulated minimum price. careful handling to prevent their becoming an Concessionaires are required to make an up- obstacle to reform. The government developed front payment immediately after the auction a redundancy package and target employment and then a stream of predetermined payments levels reflecting an average reduction of about over the life of the concession. Once the RFFSA 40 percent. In addition to legally required sev- program began, the Brazilian government de- erance payments, the redundancy package in- cided to sell its equity in CVRD, which resulted cluded incentives for early retirement and in privatization of the two railways that CVRD voluntary separation, involuntary separation owned. The national government is also nego- grants for the remaining redundant staff, retrain- tiating with the government of Sao Paulo State ing programs aimed at regional employment op- on a concession for FEPASA similar to that for portunities, and job search and outplacement RFFSA. Rio de Janeiro State is concessioning assistance. On average, the total package corre- its suburban passenger services (Flumitrens) sponded to about twenty-one months of salary. and metro along lines similar to those used in The program was phased. Before concession- Buenos Aires. Sao Paulo is engaged in a simi- ing, it introduced the incentive schemes for early lar effort. In a few years Brazil will have no retirement and voluntary separation, with invol- railways left in public operation. untary separation possible, depending on the results. In the second phase, after concessioning, Initial indications are that the concessionaires RFFSA paid or will pay involuntary separation are rapidly developing their traffic base and grants to the remaining redundant staff not hired reducing costs. There is good reason to expect by the concessionaire. Compensation for any that results in Brazil should equal or even sur- additional employees laid off is the responsibil- pass those in Argentina. ity of the concessionaire. Because the initial em- ployment decision is out of the concessionaire's Chile hands (unlike in Argentina), it will be harder for the concessionaire to reach the most effi- For several reasons, particularly the continu- cient levels of employment. This fact undoubt- ing importance of passenger services, the Chil- edly was reflected in the auction prices. ean government rejected the Argentine approach. Instead it initially decided to con- The government also faced a maintenance cri- cession only the freight services on the broad- sis. Government investment in RFFSA had de- gauge network while keeping the infrastructure clined significantly in the previous few years, and passenger services in public hands. This and network quality suffered badly. By mid- concession, launched in 1995, was the first 1995 locomotive availability had fallen to less based on full infrastructure separation. than 50 percent, causing RFFSA to refuse traf- fic. In the first eight months of 1995 more than The freight concession (also called FEPASA) 200 accidents occurred, and the continued de- has faced a difficult battle in its first years of terioration of the roadbed meant further reduc- operation. It has had to stabilize traffic, learn tions in speed and service quality. The to live with its public sector infrastructure part- government was forced to undertake emer- ners, get locomotives back in service, and stand gency track repair and rolling stock renewal up to the challenge of trucks (not easy, since so that the new concessionaires could assume the average freight haul distance in Chile does the systems in operable condition (and meet not favor rail). Recent traffic trends suggest that the requirement to lower the accident rate in it will win the battle. the first five years of operation). The government, not fully satisfied with the All six concessions have been successfully auc- operations remaining in public hands, has com- tioned on the basis of the highest bid above mitted itself to concessioning the infrastructure The World Bank Group 5 TABLE 2 ACTUAL OR POTENTIAL RAILWAY CONCESSIONS AND PRIVATIZATIONS IN ASIA AND NORTH AMERICA (1994 or latest available year) III Il II ILII I,IIT" Canadian Nationala 159,540 29,700 27,979 5,372 5,702 NewZenandb (19965 326 525 A4 4S00 945 841 Pakistane 5939 16,385 8,775 116,026 2544 192 United Snes, COnrall . 1912 .-728 -;41 52;- NYotfCovers primariy fret railways.Itaics inicate thatrailway has been privatized. T-km means metric-ton-kilometers. P-kmnmeans passenger-kilometers. TU meanstffc Ienits,the sum ofmetric-ton-kilimetersand passenger-kilfmetersm a. Priteatid in late 1995. b. Passenger traffic estimated. c. Mst traffic is passenger. SourcerAuthors' compilations. in one piece and to concessioning the passen- soon, along with a series of short lines that, like ger operations in one intercity piece and two those in the United States, appear to have more suburban services. These concessions will be value as independent operations. complex and will take another year or so to show results. In addition, Chile recently conces- The Mexican government proceeded in a dif- sioned its meter-gauge railway (thie old ferent way than the others, adopting an approach Ferronorte, which had been operated separately that appears to be useful for governments want- from the broad-gauge railway) and the Arica- ing to move rapidly. It divided the railway (FNM) La Paz railway, one of the steepest and most into the four planned concessions, then con- difficult in the world. verted the concessions into stock companies with separate management teams. The govern- Mexico ment then sold a controlling interest in the stock by sealed bid (the remaining stock must be of- Mexico is in the unusual situation for a devel- fered on the stock exchange or purchased by oping country of sharing a border and a free the concessionaire at the original price). By sell- trade area (NAFTA) with an industrial country. ing stock rather than the concession, the gov- It has sliced up and concessioned its system in ernment was able to transfer a going concern, a way that maximizes opportunities for both in a process that can occur more smoothly and cross-border traffic and domestic flows. Mexico rapidly than a concession alone. And it was able divided the system into three major pieces and to influence FNM's actions before concessioning a terminal company serving the Federal Capital was finished. The concessioning was completed area that will be jointly owned by the three con- too recently to report results. cessionaires. The northeast concession, connect- ing to the United States at Nuevo Laredo, was C6te d'Ivoire and Burkina Faso sold first (for about USS1.4 billion), to a Mexi- can-U.S. consortium headed by a large Mexican The Abidjan-Ouagadougou railway links the transport company (TMM) and a U.S. regional capital cities of C6te d'Ivoire and Burkina Faso railway (the Kansas City Southern). The north- and has a history of binational ownership. Ad- western concession (Pacifico Norte) was recently vised in the later stages of the concessioning sold for USs524 million to a consortium of Mexi- by the World Bank, the governments jointly can industrial interests and the Union Pacific awarded a fifteen-year concession in 1994 to Railroad of the United States. The government SITARAIL, which began operations in August intends to market the southeastern concession 1995. SITARAIL is a consortium made up of a 6 Global Trend to Railway Concessions Delivering Positive Results mn eew sf 3 - c ic ee 1g te i 1ioai COledlvoraa tioknFalshipin lie 4n1viia7 nesmn Becauise o12t3 relti 2l 318cnesine Mw cn9eh oe 14i8ent 2 e South fricaaSp eorectorbu2sgnfian pulcowesip0 s lihdt own track1 30n 8 6qimetad6es Zamiape,i Blii, 1hie0ad2 oe1f h Ar-241r (thoug8,544 coc 91inar 1a8rcas NoteCovrs dma enytiefeight rancewayns. Itacsidce atwa ra encaespiondtod-k manis mpuown-kqipmaent)s. ! mhease lsanderlordmeoeps ra- meas taffc u insgewu t ring ponliticalbeliefn that hr uh ob in lofnneifatutrnetet mentsnu(15 percent areah),o railwaysaf( perfr- shuch SeTRvice evefnesthoughemnt the nesoar macen) and local prbivat ivstors (i 6 phercent). rora abnd ned allonproftitabes loal pasengrert ser- Thcess mjrtshrhleisislacosrim vices whenAI itsoo alovertespraiblway. min of international freighting teforacarders,upanntinterna-s tinalk mshrippn lince,sians SIvoiRAian inovestrrngmentsBcueo therelmanttively shoreht concesso phe- gohroup, t and int sernatina sraiw say ngicnseern nodctessonaiecsionair does not cowneroilling consutantfs.fo bthe conasortium approach, wth apr trstoc oother maequipent.Insted ton inaetional cotoln tategpb ic sevcsathaehloclde fro thn r- "ala adodcroations" were estab-ing gvaernsetosrebutesignifiat poublic owntership iser se-oow rc ndeupetnes once thliatihas bneen adoparted elsewhrect (forexi- rollingL'stc toymethe conctessionaieasso nres ample,tin Bolivia, charceie,csand some ofinthea A- s (threol:augh getheeonessoaired may peeurchase e~~~~gniefegtcnesos.I epnst t w qimn) hs adodcroa ee , . .,ligrngpliia.bleftattee,uhtteetinalofaceinrsucreinetn, X~~~~~~~~~~~~~~~ann th trac an eqimet All these rvthe t harifs hordr(1pecn) both.taloiobgte tovoern- terpenst,tatin makesrecisios oen inveqestment atent 1 publcen ah,riwysaf(e- sc services ate theug loca orontioalseedoanatiing goenent 'sadoa prequet. Inetwoudrun thes ser-et. aadndalupoitbelclpsegrsr viceobligatins underna sepalratelontact spgiecri-g STrAI'opymns,o the concessionar aosnton relin fype,ing thelsevice Charceistic and thme ofiacl tesy(threol:ausge fheeorelsoatred toy reeueshaon The World Bank Group 7 the railway, to be negotiated every three years; Lessons the debt service payment incurred by the land- lord corporations; and a lease fee for the use Rail concessions cannot be reduced to a simple of motive power and equipment. Most pay- recipe. But in defining a concession, all gov- ments are kept in an investment and renewal ernments have to specify many of the same fund to allow the landlord corporations to dimensions-the term, concessionaires' rights renew the equipment as necessary. Since the and obligations, investment responsibility, the concessionaire both selects the timing and level tariff regime, the bidding process, and preset of investment and pays the debt service, the rules for renegotiation. payment arrangements ensure that commercial incentives drive investment decisions. And be- Experience shows that, although all conces- cause the usage fee will be renegotiated every sions are different, there are several common three years, the concession will evolve with fault lines. First, the term of the concession the revenue streams and required investment must be consistent with the government's ob- levels. The payment arrangement represents a jectives for the balance between public and compromise, common in concession agree- private investment. In general, the private sec- ments, among three objectives: removing rail- tor will not finance assets whose service life is way operations and decisionmaking from the significantly longer than the term of the con- government realm; reducing uncertainty for in- cession. Second, public enterprises tend to lose vestors, who are reassured by a phased nego- interest in operations and maintenance as soon tiation; and maximizing government income as plans for concessioning are announced, so from the concession. once started, the concessioning process should be finished as quickly as possible. Third, rail- The concession agreement contains an impor- way concessioning has always lowered employ- tant-and controversial-feature. Most railways ment levels, so a responsible program for are concessioned on an exclusive basis, with dealing with redundant labor must be devel- perhaps some access rights for connecting rail- oped. Fourth, risks should be in the right place. ways to certain track segments, vital for creat- Retaining the environmental risks of cleaning ing competition in major markets (as in Mexico) up already polluted facilities is acceptable for or for noncompeting services (such as passen- government, but taking the commercial risk of ger services on freight tracks). The governments projecting demand and cost of operation is granted SITARAIL only a seven-year exclusiv- questionable. Fifth, concessions inherently re- ity period, after which SITARAIL must grant quire continuing government involvement in track access, for an agreed fee, to any third- regulating safety, monopolistic behavior, and party carrier they specify. This arrangement too compliance with the pricing and service re- was a clear compromise-between the govern- quirements of the concession. This does not ments' desire to reap the benefits of allowing necessarily mean creating an elaborate new competitive access to the tracks and the pri- regulatory mechanism, but the state cannot vate sector's preference for full control over walk away from its transport concessions once the tracks and over the market, to make fore- they are completed. casting revenues easier and earning adequate profits more feasible. Finally, defining how the "winner" will be se- lected is no trivial matter. Precision in procure- Although the SITARAIL concession has been ment would suggest that everything should be in place only two years, the initial results are defined perfectly and price alone should be encouraging. Much that SITARAIL has done the determining factor. But allowing the con- mirrors the actions of the Argentine conces- cessionaire maximum initiative argues for broad sionaires, and the results too are much the same performance specifications from government, as those in Argentina at this stage in the process. followed by flexible offers from the private 8 Global Trend to Railway Concessions Delivering Positive Results concessionaire. Even the issue of price needs on orders opening national networks to op- care. There can be a choice in the basis for erations by all qualified carriers. While Direc- award between, for example, maximum pay- tive 91-440 explicitly requires only that ment to government (or minimum payment by infrastructure accounts be separated from op- government) and minimum tariff. There can erations accounts, it implicitly requires that also be a choice between unrestricted bidding social passenger services, intercity passenger and prequalification followed by bids only from services, and freight services be accounted those judged fully qualified. There are no uni- separately to show that state subsidies are lim- versal answers to these questions. There are ited to social passenger services. The order has only informed choices, and calculated risks. launched a clear trend in the European Union toward institutional separation of infrastructure Each country has approached its problems from operations by creating a perception of slightly differently, providing different insights infrastructure as a state responsibility and op- into what can be achieved through concessions. erations (except for social services) as com- But a few common trends can be discerned. mercial. An eventual result of institutional Restructuring and substantial government invest- separation will be franchising or even privat- ment in the design of the concession pay off. If ization of most freight services and possibly allowed to, concessionaires can do exactly what intercity passenger services. British Rail has is expected-increase traffic, improve service, shown that total privatization is possible, and and enhance labor and asset efficiency. There Deutsche Bahn AG (Germany) and Ferrovie forum intended to is nothing magic about this, Concessions work dello Stato (Italy) have announced plans to encourage dissemina- because government interference is ended and privatize freight services as an initial step. Ro- tion of and debate on commercial management techniques are intro- mania is also considering privatizing freight id eas, inn ovations, an d best practices forex- duced and allowed to operate. services, though it has no plans to privatize panding the private infrastructure. sector. The views pub- A growing number of companies and consor- lished are those of the authors and should not iums are iterested i ivestig i railway con- The authors acknowledge the help of Nicola M. Shaw and Kenneth M. be attributed to the cessions-if the concessions are offered on Gwilliarn. For more detail on the general subject area, see Nicola M. World Bank or any of reasonable terms. In almost every concession Shaw, Kenneth M. Gwilliam, and Louis S. Thompson, Concessions in its affiliated organiza-Taspi (aeTU27 rlBakTaspt,We,anlLbn tions. Nor do any of the the new majority owners are local investors- DeTselopment DepartmertL 2l7 od ank, Transport, D.aCe1 and Urban conclusions represent thus, no `recolonialization" has occurred. In- official policy of the stead, the local owners have partnered with Louis S. Thompson (Itbompsonl@worldbank. World Bank or of its Executive Directors experienced foreign firms (Canadian, Chilean, org). Railways Adviser, and Karim-Jacques or the countries they French, Portuguese, and U.S.) holding only a Budin (kbudin@worldbank.org), Principal represent. minority share in the equity of the concession. Railway Specialist, Transport, Water. and To order additional Urban Services copies please call Experience also shows that both positive con- 202-458-1111 or contact cessions (where the concessionaire pays the Suzanne Smith, editor, Room F8P-188, government an agreed sum for the concession The World Bank, rights) and negative concessions (where the 1818 H Street, NW, government pays the concessionaire for oper- Washington, D.C. 20433, or Internet address ating and maintaining the property) are pos- ssmith7@worldbank.org. sible. So loss-making but socially necessary The series is also services can also be concessioned. available on-line (www.worldbank.org/ html/fpd/notes/ Looking ahead, perhaps the most important in- notelist.html). novation in railway organization over the next @ Printed on recycled few decades will result from the European paper Commission's Directive 91-440 and its follow-