RAILWAYS IN THE BALKANS

Suggestions for a Bank strategy

Please refer to the annex, which is aimed to illustrate a proposal for trade facilitations. The annex includes also a description of the present situation of the service, of the Railway companies in the Balkan and of the investment programs under way.

FIRST DRAFT FOR BRAINSTORMING

1. There is an effective need for restructuring

Railways in the Balkans are in a bad shape:

(i)the modification of the economic structure of the countries, the side effect of the war, and the competition of the road’s transport mode have produced a dramatic decrease of the railway traffic,

(ii)the national railways companies are presently loosing money,

(iii)infrastructure, rolling stock and equipments are obsolete and in urgent need of maintenance.

Everybody agrees that there is an urgent need for restructuring.

2. Restructuring. The stakeholders

Hereunder are described the different aspect of the Railways, the issues to take into account for restructuring, and the stakeholders involved in the matter.

2.1. National and Regional level

  1. The Railways provide a service and are an essential tool in the hands of Ministries of Transport to establish and develop a transport policy.
  2. The Railways are large, powerful companies, which trigger important investments and employ a large number of workforce, therefore labor unions, manufacturer’s and construction’s lobbies are interestedin any restructuring process.
  3. The Railway represents an important item of the state budget. The reduction of the expenditure for the railways is a priority for the Ministries of Finance.

4. In addition, in the particular case of the Balkans the very delicate problem of the recent division of the Region in several countries exists because ithas introduced borders and solutions of continuity inthe railway service (now operated by a patchwork of national Companies) along the main corridors. Therefore, any program for the improvement of the service (in term of quality, efficiency, efficacy) requires the agreement and the collaboration of the various custom and border policeauthorities and the collaboration of the National Railway Companies of the countries along the corridors.

2.2. EU, Greece and Turkey

Balkans are politically part of Europe:

-Romania and Bulgaria are about to enter EU

-all the West Balkan Countries have expresses their wishes to enter EU

and geographically:

-corridors VI and X, linking Greece to the rest of EU, pass through cross the Balkans. Should Turkey join the EU, the function of link between two important parts of EU would be reinforced.

Therefore, any program for improvement in the matter of railway should take into account the EU policy, and in particular:

-the effort to balance the modal split in favor of Railways both for environmental reasons and for fighting traffic congestion

-the orientation toward a completely interoperable single transport infrastructure (note 1)

-the liberalization of the access to the railway network.

In addition any choice program for improvement in the matter should take into account the Greece mobility policy (and in the future theTurkey) and Austria. (note 2)

2.3. Railway operators and freight forwarders

Another element that should be taken into account is the marketing policy of the main National Railways of the EU countries, of the main private railways operators, and of the main freight forwarders. The ‘single transport infrastructure’ and the liberalization have triggered a number of new activities in the EU freight railway market (new private companies are operating in almost all of the EU countries, the national railways are associating to offer new products, etc.). We are still at an early stage and therefore we will see a number of those activities to fail or to radically change in the future. Anyhow, this reality has to be taken into account as an opportunity while designing solutions for the restructuring of the Railway services and of the railways companies in the Balkans.

3. Restructuring components

The more common componentsthat constitute the restructuring of a railway are listed and described hereunder. They will be used in the paragraph 5, when proposing a restructuring strategy.

3.1. The ‘physical’ component. It addresses the ‘service’ aspect of the railway problem and is based on the assumption that the railway service results are poor because of bottlenecks, obsolete equipments, lack of electrification, maintenance backlog, etc. The more common version of this model limits the investments to the infrastructure. An example of this approach is the TIRS and the REBIS program.

In addition to the construction or manufacturer’s lobbies, this component is usually supported by the Ministry of Transport, the National Company, and the labor union.. Unfortunately, the investments are often not justifiable. financially or economically. Moreover, investments often proved to be not able to really improve the service, in particular when they address only one aspect of the railway system (a significantexample is the Tirana-Durres line, where the track has been rehabilitated but the commercial speed has not improved because of a poor signaling system).

3.2. The ‘downsizing’ component. This component consists in reducing the work force and/or the volume of the service (km of lines, trainkm). It is aimed to solve the ‘cost’ aspect of the railway problem reducing its size accordingly with the traffic reduction. An example of this approach is the Argentina Railways.

The Ministries of Finance/Treasury usually strongly support this component. The opinion of the other stakeholders is usually more articulated and varies depending on the characteristic of the downsizing:

-workforce downsizing. (i) Ministries of transport normally supports it, provided it does not cause excessive labor unrest, (ii) labor unions usually oppose it but accept to negotiate and usually agree in case the economic compensation is sufficiently substantial and in case of voluntary retrenchment, (iii) the National railways may support it in case the financial results are partly re-invested in wage increase. (Note 3).

-network downsizing. Ministries of Transport, labor unions, local authorities, and public opinion usually oppose to this option. in countries where the railways plays an important role in the passenger service (Note 4 ).

The workforce downsizing yields invariably a good financial result even though not always as forecasted (Note 5)

Network downsizing in Europe often proved to be a frustrating exercise.

3.4. The institutional component. The EU model, separation, financing of the infrastructure and Track Access Charges.

The component is peculiar to the EU (or EU to-be, as the Balkans) Countries. It consist in the application of the well known EU model of separation of infrastructure and transport, aimed to opening the railway to competition between transport operators. It requires that the government decides upfront the level of financing of infrastructure (and therefore the level of indirect subsidies to the transport operators). According tothis model, all the licensed railway operator can access the network upon payment of a fee (usually called Track Access Charge = TAC). The higher is the financing of the infrastructure granted by the State, the lower is the TAC for every operator. The decision about the financing of infrastructure and the level of TAC usually triggers long and painful debates between the Ministries of Finance/Treasury and Transport.

3.5. The institutional component. The EU model, Public Service Obligation contract and Regionalization

As the above 3.4., this component is peculiar to the EU (or EU to-be, as the Balkans) Countries. It consists in the establishment of a commercial relationship between the railway operator and the public entity (usually Ministry of Transport). The railway operator is asked to provide non viable services (Public Service Obligation = PSO) and the State pays for them. As the above, this step requires that the Government decides upfront what services to pay for and at what prices. It triggers long and painful debates between Ministries of Finance/Treasury and Transport. In some cases the solution of the regionalization (decentralization to the Regions) has been adopted, which is the splitting of the national PSO contract in regional PSO contracts. The institutional regionalization could also be followed by the splitting of the railway company in regional branches for the production of the regional service.

3.6. The privatization. There are a number of privatization forms. The more common one used out of Europe is the concessioningof the National Company (and of its service) to private operators. In this form, both the service and the National Company become privatized, and there is not an intra-modal competition (the concessionaire usually wins exclusive rights) (Note 6). A softer form of privatization prevails in Europe, which actually does not imply the privatization of the National Company. This allows the private sector to enter the railway market. This form of soft-privatization is normally articulated in the following two complementary forms:

-open access to private operators to the freight and medium - long distance passengers service. (Note 7) The open access does not necessarily imply that the National Company becomes privatized. It is in fact only aimed at assuring competition on the network. Of course the system puts the National Companies under pressure, and force them to change their market strategy. (Note 8)

-concessioning of the regional and commuter services through international tender. According to the different local legislation and choices, the winner of the tender can be asked to provide its own rolling stock, and/or to hire the necessaryemployees among the employees of the National Company (Note 9). This operation does not imply that the National Company is going tobe privatized, however it puts pressure on the National companies that need to change theirs marketing strategies if they want to win the tenders.

Up to now, the only form of (partial) privatization of the National Companies in Europe (besides the British Rail and the Estonia Railway) has been the privatization of the subsidiary companies and of non-core businesses including the maintenance services. The operation usually yields significant results and anyhow facilitates the downsizing and the modernization of the national companies (Note 10).

Many EU countries have declared their willingness to privatize the transport company and to maintain in the public ownership the infrastructure company (even though maintenance and some of the traffic control operation could be separated and privatized).

Usually the Ministry of Finance supports the privatization of the National Company, while the Ministry of Transport sponsors the opening of the market to the private sector. Labor unions usually opposes to the privatization of the National Company and are critical toward the privatization of the market.

4. A possible strategy. Some proposals

4.1 Proposed Restructuring model: TheEU model with modifications

The closerelationship with Europe makes inevitable the choice of the EU model (single infrastructure, TAC, liberalization of the transit). It is important for all the countries along the corridor to reach the same conclusion, otherwise the liberalization would only remain a theory. To apply the EU model, the Balkancountries should:

-separate infrastructure and transport (already under process in Macedonia and Croatia),

-establish the amount of the subsidy toinfrastructure thatthe Country is willing to grant (par.3.4) and establish a TAC system.

-establish a PSO system and sign the first PSO contract with the National Company (par. 3.5.)

-regionalize the service (not in case of the smaller countries) (par 3.5.)

While working to achieve these objectives, it is important that some elements of liberalization at least along the corridors be anticipated (see annex 1 and all the proposal about the possible WB activities).

On the other hand, the West Balkan countries are not yet entering theEU and therefore they are not compelled to apply the EU directives in their whole, consequently the possibility to applydifferent solutions, as the concessioning (par 3.6) as far as they do not interfere with the substance of the EU policy in the matter (Note 11). Some line or part of service could therefore be concessioned through international bidding (Note 12).

To facilitate the process, in addition to the activities proposed in the above mentioned annex, the WB should:

-guide and supervise the countries in the decision making in regard of the amount of subsidies for infrastructure (3.4) and PSO (3.5.), by organizing meetings and conferences on the matter, and/or training for functionaries of Railways, Ministries and Local Authorities;

-guide and supervise the countries to establish a fair and (if possible) homogeneous TAC (3.4.) system along the corridor (2.2), by organizing international meetings with all the countries of the corridors, other EU Railways Companies, private railway operators and freight forwarders;

-guide and supervise the Country (and eventually the Local Authorities) to launch tenders for the commuting services and to take the basic decision in regard of the ownership of rolling stock, and to make provisions to protect the National Company employees, etc.

-guide and supervisethe countries to identify the possible exceptions to the EU model (on a regional scale) with anticipation of TAC and PSO structure and maybe grant concessioning on secondary lines or commuter services (not still in EU)

TIP Restructuring WITH the Railways. The Railways Companies are powerful. They manage huge amount of money and employ huge amount of people. To have good results the railway Companies should be involved, both in the design of the future service, including the design of investments, and in the foundation of new companies. After all, a gradual privatization through the establishment of public-private companies is better than a stagnant situation.

TIPAddress and solve the subsidies issues and the managerial freedom of the Railways. Often the poor financial and technical situation of the railways is due to lack of subsidies for the maintenance of the infrastructure, or to not compensated PSO, or to the imposition of excessive workforce. These issues should be clarified and pointed out before starting the restructuring. In fact, these issues would interfere with any future railway system, even the best designed and operated.

5.2 Meanwhile: reorganization of the National Company, downsizing and privatization

On the basis of the EU model, the national Company will beseparated in:

-Infrastructure Company (public ownership of the assets with the possible option of the privatization of the company or of branches of it, see 3.6)

-Transport Company (to be separated into branches and partly or wholly privatized depending on the market conditions, see 3.6)

with the addition of:

-non core business Companies (to be privatized, see 3.6).

The downsizing and the reorganization of the National Company should take into account the agreed separation and the decided extentof privatization of the National Company of the Country . It should be made primarily on the basis of the reorganization of the working rules and procedure and only secondarily on the basis of a downsizing of the network (see 3.2 and note 2).

To facilitate the process, the WB should:

-guide and supervise the Countries in the decision making in regard of privatization, maybe by providing the Ministries with information about privatization examples in other countries than of Europe

-guide and supervisethe Companies to restructure the working procedures, maybe organizing training sessions within chosen more efficient public or private companies (North America for freight; Spain, France or Germany for passengers)

-finance the workforce layoffs (as already in process in a number of Countries).

5.3. Meanwhile: innovation of the products

In the case of the Balkans, the innovation of the railway products should be set on a Regional scale and should be designed with the assistance of Greece and Austria (Note 13). The design of new products should take into account the physical investment that have been proposed for the Balkans (see the annex), mainly aimed to reduce the maintenance backlog or to fix the heavy damages due to the war. Other kind of investments aredevoted to the reorganization of the custom procedure and to thecross-border infrastructures.

As already pointed out (see 3.1), railway is a system and therefore any physical investments should be linked to a significant change of the performance of the service, including all the aspects (physical: infrastructure, signaling, equipments and rolling stock and soft: establishment of a new service, of a new timetable, of a new managerial solutions as a public-private company or a private company, etc.), otherwise the investment is likely to result in a waste of money.

To facilitate the process, the WB should:

-guide and supervise the countries to identify new marketable international products, maybe with a TA project to finance a study that should identify the products, their possible revenues, their costs and all the investment and procedural reorganization involved, including the possibility of founding new companies to produce them.

TIPThe two powerful Ministries of Transport and Finance should be given the opportunity of agreeing on the restructuring. One way is to use positive instead thannegative concepts and to design the restructuring as the building of the future railway service and not as a destruction of the past service.

NOTES

Note 1. The single transport infrastructure consists in a network not interrupted by national borders. The single infrastructure is meant to enhance the European single market and the abolition of the custom between EU countries. It is aimed to lift any obstacle and to assure a seamless railway service all over Europe.

Note 2.Greece is traditionally linked to the rest of the world by sea and by air. The railway transport in Greece is weak and mainly limited to domestic traffic. Notwithstanding, Greece would like to have an efficient railway link to the Balkans and to EU, both for passengers and for goods:

-a well organized port-railway system would allow Greece to become the terminal for Macedonia and Serbia-Montenegro

-a good service along the X corridor would avoid a double transshipment for goods between North Italy/Central Europe and Greece

-Greece also wishes a viable passenger service along the X corridor. Because of the great distance (more than 1,200 km) between Greece and Austria, only a high speed service would really attract passengers (modern travelers usually accept a maximum of 3-5 hours on a daily train.For travel times exceeding that limit ,an airline alternative is preferred .The night train travel time limits normally accepted is 7-9 hours but night trains are preferred only when the tariffs are significantly lower than those of the airlines ).