european railways –their finances andstate funding

8/9/2019 European Railways –Their Finances andState Funding

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How Markets WorkSM

Transport Economists GroupWednesday 15 December 2004

European Railways Their Finances andState Funding

Emily Bulman and John Dodgsonwww.nera.com/transport

http://www.nera.com/transporthttp://www.nera.com/transport


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NERA Economic Consulting 2

Background

n NERA Study : report published by European Commission

http://europa.eu.int/comm/transport/rail/research/studies_en.ht m

or follow links from www.nera.com/transpor t

n 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)

n Outpu ts : 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 exp ressed are our o wn

http://europa.eu.int/comm/transport/rail/research/studies_en.htmhttp://www.nera.com/transporthttp://www.nera.com/transporthttp://europa.eu.int/comm/transport/rail/research/studies_en.htm


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Background

And rev iew pub l ic budge t con t r ibu t ions m ade to ra i lways

Study intended to helpEuropean Commission monitor

railways # progress in reducing debtand improving finances


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Order of Presentation

n 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


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General Developments- Policy context


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Policy Context

Rail demand

fell sharply in1980s

Governments delayed

restructuring and didnot increase

subsidies sufficiently

Debilitatinglevels of

railway debt

Rail demand

fell sharply in1980s

Governments delayed

restructuring and didnot increase

subsidies sufficiently

Debilitatinglevels of

railway debt


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European Commission Policy- Improving Rail Competitiveness

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

n Mechanism : make railways operate on a commercial basis, therebyimproving their competitiveness

Ins t i tu t io nal reform s :

n Separation of infrastructure and operations

n Separation of passenger and freight services

n Harmonisation of standards; removal of barriers to entry

n Liberalisation of freight services in 2007

n Liberalisation of international passenger services


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European Commission Policy- Financial Reforms

One-off a l leviat ion of debt

n Member States should reduce indebtedness of publicly owned railways to alevel 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 fitcertain criteria; move towards payment through contract

Transp arent presenta t ion of accoun ts

n Separation of accounts for infrastructure, passenger services, freight services(2001/12/EC)

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


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General Developments- Institutional restructuring


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Institutional Restructuring Two Stages

n Major restructuring post 91/440

n Creation of infrastructurecompanies

n Relief of debt burden

n Further piecemealrestructuring

n Second-round restructuringin reformed railways (GB,NL, SE)

n First-round restructuring inSpain; changes planned inGreece

1990 19921991 1993 20011994 1995 1998 1999 20001996 1997 2002/3

GermanyBritain(1994 - 97)

Netherlands

Sweden

Austria

Finland

(Norway)

Denmark

France

Portugal

(Switzerland) Britain Netherlands

Sweden

Spain

Stage 1 Stage 2

Italy


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Institutional Restructuring Different Models

GB, SESeparate companyDK, FI, GB, NL,SE, PT (+ NO)

Separate companies

IE, GRNo separation

DE, DK, NLInternational company(Railion)

AT, FRHybrid structure

FI, (+NO)Holding companyDE, ITHolding company

AT, BE, ES, FR,IT, LU, PT (+ CH)

Separate divisionsBE, ES, GR, IE,LU (+ CH)

Separate divisions

Passenger vs. freightInfrastructure vs. train operations


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Institutional Restructuring Other Changes

n 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

n Managerial independence

n Competition Regional / local passenger tendering

International / domestic freight open access Support services

n Increased role of regional authorities (specification + funding)


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General Developments- Operating performance


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Operating Performance T raffic and Revenues

Note: revenues and yields in real prices

Change: 1990-95 1995-2001EU15 GB EU15 GB

Passenger km 5% -12% 13% 33%Freight tonne km 3% -22% 11% 55%

Traffic units

Total traffic units 4% -15% 12% 40%Passenger receipts 12% -5% 27% 32%Freight receipts -24% -50% -12% 26%

Commercialtrafficrevenue Total -5% -17% 13% 31%

Passenger 6% 8% 13% -1%Freight -26% -36% -20% -19%

Yield revenue pertraffic unit Overall yield -9% -3% 1% -7%


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Operating Performance Costs (EU15)

Change: 1990-95Total railway staff -9% -20%

Cost per employee +1% +1%

Total operating costs +6% -1%

Unit opera ting cost

(cost per traffic unit)

-2% -11%

Viability ratio (revenue /

operating costs)

+1% +16%

1995-2001


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0

0.2

0.4

0.6

0.8

1

1995 1996 1997 1998 1999 2000 2001

Candidate Countries Operating Performance

Traffic (train km)

n Train km declined by 12% from1995 to 2001

n Contrasts with EU railways, where

train km increased by 9 per cent

Candidate Countries

EU

Employment per "000 Train km

n Employment per unit output fell by17 per cent from 1995 to 2001

n But the fall was less than for theEU15 (29%); and ratio is three timeshigher than that for the EU15

Candidate Countries

EU

60%

80%

100%

120%

1995 1996 1997 1998 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

n 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

n Creating special entities to finance infrastructure Austria (SCHIG), Belgium (Financi $ re TGV), Spain (GIF)

n Relieving railway of historic debt Germany, Italy, Luxembourg, France, Switzerland

è All actions reduced debt initially, but debt increased again in some countries asgovernment 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

Caused by:

n Catch-up of past under-investment

n Growth in passenger traffic

n New high-speed lines

n Increased safety / environmentalregulations

n Asset revaluation

1.9

2.9

3.3

3.5

0

1

2

3

4

1980 1990 1995 2001

Asset Intensity EU15(total assets ÷ operating costs)

è Required additional capital funding of # 23billion for 1995-2001, compared to $ steadystate %


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Railway Finances Debt and Interest Levels

0 .0

1 .0

2 .0

3 .0

1 9 8 0 1 9 9 0 1 9 9 3 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1

D e

b t / e q u

i t y r a

t i o

0 %

5 %

1 0 %D

e b t s er vi c

e a s a % of

o p er a

t i n g

c o s t s

Debt service(right-hand scale)

Debt/equity ratio(left-hand scale)

1995


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Railway Finances Debt Levels

n DK, FI, NL, SE - low throughout period

n IT, LU low after restructuring

n

AT, BE, DE

debt restructured but risen againn Also CH and NO

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

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

n ES (2.4) stable (GIF not included)

Low debt(< 0.5 debt/equity)

Medium debt(0.5 & 1.0 debt/equity)

High debt(>1.0 debt/equity)

Comm ercia l ly sus ta inable debt = 1 .0


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Candidate Countries Financial Indicators

1995 2001 1995 2001

Asset intensity 3.0 2.2 3.3 3.5

Debt: equityratio

0.1 1.2 1.1 0.9

Debt service 1% 3% 5% 5%

Candidate Countries EU15

è Altho ugh the ra ilways in cand idate cou ntr ies are less indebted thanin the EU, thei r debt levels h ave been r is ing sharply


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State Funding


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State Funding- Forms of Funding


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Permitted State Aid

n Pu b li c se rv i ce ob l igat i ons : passenger services paid by contract

n Infras t ructure : maintenance, renewals, enhancements

n Specif ic operat ing co sts : to compete on a level playing field withcommercial organisations

n One-off a l levia t ion of h is to r ic d ebt : (under Directive 91/440)

n Restructur ing : 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 paymentsunder contract

(not necessarily state aid)


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Public Budget ContributionsForms of Contribution

Form of Payment # millions %

PSO - passenger services 11,541 30%

Freight / combined transport 275 1%Infrastructure maintenance and operations 8,689 23%Payments for capital investment 9,657 25%Staff and pension obligations 2,690 7%Debt service 1,617 4%Restructuring 1,036 3%Other 2,783 7%TOTAL 38,288 100%

EU15 2001


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Public Budget Contributions Trends for EU Railways

0

10

20

30

40

1996 1997 1998 1999 2000 2001

B i l l i o n

E u r o s

( 2 0 0 1 p r i c e s

)

Passenger servicesInfrastructure (capital and ops)

All public budget contributions


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Public Budget Contributions Payments for PSO

0.0

2.5

5.0

7.5

10.0

12.5

15.0

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

T w o

s c a

l e s : (

( p a s s e n g e r

t r a

i n k m

)

/ c e n

t s ( p a s s e n g

e r

k m

) per passenger km( ( cents)

per passenger train

km ( (

)

Note: 2001 figures

GB 2003/04


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Public Budget ContributionsTotal PBC per Traffic Unit

Note: 2001 figures

0

5

10

15

20

25

30

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

E u r o

C e n

t s

Financial andmiscellaneous paymentsPayments for investment.

Payments for services andmaintenance

GB 2003/04


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Public Budget Contributions Credit Ratings

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

1100-1300B+/B/B-

Connex, small

US railroad

500-900BB+/BB/BB-

First, Stagecoach, largeUS railroad

120-220BBB+/BBB/BBB-

Angel90-170A+/A/A-

SNCB, NSB, DB, NS60-120AA+/AA/AA-

SNCF0AAA

Example railway entitiesDifference inbasis points

( 300 M170 bps(1.7%)

( 160 M90 bps(0.9%)

Equivalent annualPBC for SNCF

Difference ininterest rate


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Public Budget Contributions Return on Equity

- 2.9% Actual return achieved(EU 15, 1995-2001)

c. 8.5%Combined

10.0 12.5 %Train Operations (GB/NL)

7.4 - 8.2 %Infrastructure (Railtrack)

Estimated marketrequired return on

equity

Effective publicbudget contribution

è Two effects) Under-recording of PBCs) Distortion of competition in train

operations

Compared to:n Commercial Return

n Government-funded

businesses(required = 6-8%)

n Government cost ofequity

8.5% = ( 11 billion

7% = ( 9 billion

4% = ( 5 billion


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Conclusions


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Conclusions

Real progress has been made:

n More EU railways now have sound finances

n Public support is more clearly specified and transparent

n Operating performance has improved: revenues increased, costs stable

But problems remain:

n Persistence of large operating losses for some railways

n Continued increase in capital investment, placing increasing demands onfinances

n Institutional / financial difficulties in reformed railways (GB, NL, SE) Member states need to develop capabilities to manage new structures

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

n Industry fragmentation makes future monitoring of EU railways more difficult


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Thank you for yourattention

Report available at:http://europa.eu.int/comm/transport/rail/research/studies_en.ht m

or www.nera.com/transpor t
http://europa.eu.int/comm/transport/rail/research/studies_en.htmhttp://www.nera.com/transporthttp://www.nera.com/transporthttp://europa.eu.int/comm/transport/rail/research/studies_en.htm

european railways –their finances andstate funding

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