Transport Economists Group

Wednesday 15 December 2004

European Railways
Their Finances and
State Funding
Emily Bulman and John Dodgson
www.nera.com/transport
How Markets Work

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Background

NERA Study: report published by European Commission

http://europa.eu.int/comm/transport/rail/research/studies_en.htm
or follow links from www.nera.com/transport

Scope: main state railway undertakings and infrastructure managers in

European Union of 2001 (as well as private sector railways in Great
Britain)
Norway, Switzerland
candidate countries (including all EU new members with railways)

Outputs:
Analysis of railway finances and state funding (2001)
Database of activities and finances, 1995 to 2001 (subsequently updated
by Community of European Railways)
Profiles of the railways in each country
Views expressed are our own

NERA Economic Consulting

Background

Study intended to help

European Commission monitor
railwaysprogress in reducing debt
and improving finances

And review public budget contributions made to railways

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Order of Presentation

General Developments

Policy context
Institutional restructuring
Operating performance
n

Railway Finances

Financial restructuring
Financial performance
n

State Funding

Forms of funding
Contributions
n

Conclusions

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General Developments

NERA Economic Consulting

General Developments
- Policy context

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Policy Context

Rail demand
fell sharply in
1980s

Governments delayed
restructuring and did
not increase
subsidies sufficiently
Debilitating
levels of
railway debt

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European Commission Policy

- Improving Rail Competitiveness

Vision: to revitalise the rail sector, and increase its market share

Mechanism: make railways operate on a commercial basis, thereby

improving their competitiveness

Institutional reforms:
n

Separation of infrastructure and operations

Separation of passenger and freight services

Harmonisation of standards; removal of barriers to entry

Liberalisation of freight services in 2007

Liberalisation of international passenger services

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European Commission Policy

- Financial Reforms
One-off alleviation of debt
n

Member States should reduce indebtedness of publicly owned railways to a

level that does not impede sound financial management
(Directive 91/440/EEC)

State aid
n

Permitted on an ongoing basis, BUT its purpose must be well defined and fit
certain criteria; move towards payment through contract

Transparent presentation of accounts

n

Separation of accounts for infrastructure, passenger services, freight services

(2001/12/EC)

Definition of track access charges (2001/14/EC)

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General Developments
- Institutional restructuring

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Institutional Restructuring Two Stages

1990 1991 1992 1993

1994

1995

Germany Netherlands
Britain
Sweden
(1994 - 97)

1998

2001

2002/3

Britain

Netherlands

Austria

Denmark

Finland

France

Sweden

(Norway)

Portugal

Spain

Major restructuring post 91/440

Creation of infrastructure
companies

(Switzerland)

Italy

Stage 2
n

Further piecemeal
restructuring

Second-round restructuring
in reformed railways (GB,
NL, SE)

First-round restructuring in
Spain; changes planned in
Greece

Relief of debt burden

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2000

1997

Stage 1

1999

1996

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Institutional Restructuring Different Models

Infrastructure vs. train operations

Passenger vs. freight

Separate divisions

BE, ES, GR, IE,

LU (+ CH)

Separate divisions

AT, BE, ES, FR,

IT, LU, PT (+ CH)

Holding company

DE, IT

Holding company

FI, (+NO)

Hybrid structure

AT, FR

International company
(Railion)

DE, DK, NL

Separate companies

DK, FI, GB, NL,

SE, PT (+ NO)

Separate company

GB, SE

No separation

IE, GR

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Institutional Restructuring Other Changes

Unbundling of ancillary activities

Separation and/or sale of peripheral businesses

Outsourcing of overhead/operational support activities

Private financing (equipment leasing, DB&M)

Transfer of equipment development to manufacturers

Managerial independence

Competition

Regional / local passenger tendering

International / domestic freight open access

Support services

Increased role of regional authorities (specification + funding)

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General Developments
- Operating performance

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Operating Performance Traffic and Revenues

Change:
Traffic units

Passenger km
Freight tonne km
Total traffic units

1990-95
GB
EU15
-12%
5%
-22%
3%
-15%
4%

Commercial
traffic
revenue

Passenger receipts
Freight receipts
Total

12%
-24%
-5%

Yield
revenue per
traffic unit

Passenger
Freight
Overall yield

6%
-26%
-9%

-5%
-50%
-17%
8%
-36%
-3%

1995-2001
GB
EU15
13%
33%
11%
55%
12%
40%
27%
-12%
13%
13%
-20%
1%

32%
26%
31%
-1%
-19%
-7%

Note: revenues and yields in real prices

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Operating Performance Costs (EU15)

Change:
Total railway staff

1990-95
-9%

1995-2001
-20%

Cost per employee

+1%

+1%

Total operating costs

+6%

-1%

Unit opera ting cost

-2%

-11%

+1%

+16%

(cost per traffic unit)

Viability ratio (revenue /
operating costs)

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Candidate Countries Operating Performance

120%

Traffic (train km)

EU
100%

Candidate Countries

80%

Train km declined by 12% from

1995 to 2001

Contrasts with EU railways, where

train km increased by 9 per cent

60%
1995 1996 1997 1998 1999 2000 2001

Employment per 000 Train km

0.8

Candidate Countries
0.6

Employment per unit output fell by

17 per cent from 1995 to 2001

But the fall was less than for the

EU15 (29%); and ratio is three times
higher than that for the EU15

0.4
0.2

EU

0
1995

1996

1997

1998

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1999

2000

2001

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Railway Finances

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Railway Finances
- Financial restructuring

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Railway Finances Types of Restructuring

Refinancing separate infrastructure and train operating companies

DK, FI, NL, SE, NO: infrastructure funded directly by government; train services operated
commercially
France: majority of debt transferred to newly established infrastructure manager
Britain: all entities, including infrastructure, as commercial companies
Portugal: as other countries, but CP debt above commercial levels

Creating special entities to finance infrastructure

Austria (SCHIG), Belgium (Financire TGV), Spain (GIF)

Relieving railway of historic debt

Germany, Italy, Luxembourg, France, Switzerland

All actions reduced debt initially, but debt increased again in some countries as
government under-funded capital requirements
Austria, Belgium, France, Germany, Britain

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Railway Finances
- Financial performance

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Railway Finances Increased Asset Intensity

Asset Intensity EU15

(total assets operating costs)
4
3.5

Caused by:
n

Catch-up of past under-investment

Growth in passenger traffic

New high-speed lines

Increased safety / environmental

regulations

Asset revaluation

3.3
2.9

1.9

0
1980

1990

1995

2001

Required additional capital funding of 23

billion for 1995-2001, compared to steady
state
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Railway Finances Debt and Interest Levels

1995

10%

Debt service
(right-hand scale)

2 .0

5%

1 .0

Debt/equity ratio
(left-hand scale)

Debt service as a % of operating costs

Debt/equity ratio

3 .0

0%

0 .0
1980

1990

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1993

1995

1996

1997

1998

1999

2000

2001

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Railway Finances Debt Levels

Low debt
(< 0.5 debt/equity)

Medium debt
(0.5 1.0 debt/equity)

DK, FI, NL, SE - low throughout period

IT, LU low after restructuring

AT, BE, DE debt restructured but risen again

Also CH and NO

Commercially sustainable debt = 1.0

High debt
(>1.0 debt/equity)

NERA Economic Consulting

GR (1.8), IE (4.5) no restructuring, debt rising

FR (4.8), PT (1.8), GB (1.8) debt restructured but risen again

ES (2.4) stable (GIF not included)

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Candidate Countries Financial Indicators

Candidate Countries

EU15

1995

2001

1995

2001

Asset intensity

3.0

2.2

3.3

3.5

Debt: equity
ratio

0.1

1.2

1.1

0.9

Debt service

1%

3%

5%

5%

Although the railways in candidate countries are less indebted than

in the EU, their debt levels have been rising sharply

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State Funding

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State Funding
- Forms of Funding

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Permitted State Aid

Public service obligations: passenger services paid by contract

Infrastructure: maintenance, renewals, enhancements

Specific operating costs: to compete on a level playing field with

commercial organisations

One-off alleviation of historic debt: (under Directive 91/440)

Restructuring: exceptional payments to reduce excess capacity

NOT:
Compensation for losses, freight, rolling stock, .(without prior approval)
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State Funding
- Funding Received

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State Funding vs Public Budget Contributions

We were asked to consider

Public Budget Contributions:
all forms of payment from government
to railways, including payments
under contract
(not necessarily state aid)

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Public Budget Contributions

Forms of Contribution

Form of Payment
PSO - passenger services
Freight / combined transport
Infrastructure maintenance and operations
Payments for capital investment
Staff and pension obligations
Debt service
Restructuring
Other
TOTAL

NERA Economic Consulting

EU15 2001
millions
%
11,541
275
8,689
9,657
2,690
1,617
1,036
2,783
38,288

30%
1%
23%
25%
7%
4%
3%
7%
100%

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Public Budget Contributions

Trends for EU Railways

Billion Euros (2001 prices)

Passenger services
Infrastructure (capital and ops)
All public budget contributions

40
30
20
10
0
1996

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1997

1998

1999

2000

2001

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Public Budget Contributions

Payments for PSO

Two scales: (passenger train km)

/ cents (passenger km)

15.0
12.5

per passenger km
( cents)

10.0

per passenger train

km ( )

GB 2003/04

7.5
5.0

2.5
0.0
GR PT SE NL FI ES FR CH IT GB BE DE AT NO IE DK LU

Note: 2001 figures

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Public Budget Contributions

Total PBC per Traffic Unit
30
25

Euro Cents

20
15

Financial and
miscellaneous payments
Payments for investment.
Payments for services and
maintenance

10

GB 2003/04
5
0

PT FI SE ES GB FR DE AT CH IT BE DK NL NO IE LU GR

Note: 2001 figures

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Public Budget Contributions Credit Ratings

Difference in
basis points

Example railway entities

Difference in
interest rate

Equivalent annual
PBC for SNCF

AAA

SNCF

90 bps
(0.9%)

160 M

AA+/AA/AA-

60-120

SNCB, NSB, DB, NS

A+/A/A-

90-170

Angel

170 bps
(1.7%)

300 M

BBB+/BBB/BBB-

120-220

First, Stagecoach, large

US railroad

BB+/BB/BB-

500-900

Connex, small
US railroad

B+/B/B-

1100-1300

Note: BB+ and below is non-investment grade debt

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Public Budget Contributions Return on Equity

Effective public
budget contribution

Estimated market
required return on
equity
Infrastructure (Railtrack)

Train Operations (GB/NL)

Combined

7.4 - 8.2 %
10.0 12.5 %

Compared to:
n

Commercial Return

8.5% = 11 billion

Government-funded
businesses
(required = 6-8%)

7% = 9 billion

c. 8.5%
n

Actual return achieved

(EU 15, 1995-2001)

Government cost of
equity

4% = 5 billion

- 2.9%

Two effects
Under-recording of PBCs
Distortion of competition in train
operations

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Conclusions

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Conclusions

Real progress has been made:

n

More EU railways now have sound finances

Public support is more clearly specified and transparent

Operating performance has improved: revenues increased, costs stable

But problems remain:

n

Persistence of large operating losses for some railways

Continued increase in capital investment, placing increasing demands on

finances

Institutional / financial difficulties in reformed railways (GB, NL, SE)

Member states need to develop capabilities to manage new structures

Large hidden support for state railways (credit support, no return on equity)

Industry fragmentation makes future monitoring of EU railways more difficult

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Thank you for your

attention
Report available at:
http://europa.eu.int/comm/transport/rail/research/studies_en.htm
or www.nera.com/transport
NERA Economic Consulting

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