Should taxpayers fund private sidings?

IS SUBSIDISING private sidings to encourage rail freight an efficient use of taxpayers' money? Let's look at a typical story, based on our experience with several recent projects.

Within this article a private siding is defined as railway track owned by a business and used to dispatch or receive freight as part of its commercial activities. In Europe such sidings are usually connected directly to the national rail network.

A medium-sized timber mill in central Germany has acquired a new customer, a furniture manufacturer. The contract covers the supply of 110000 tonnes of planks a year for the next five years, with an option for a further five. The contract includes transport costs, but the supplier is free to choose road or rail.

The mill is connected to the rail network by a private siding, which has stood unused for the last decade. But the managing director has recently heard about grants for the refurbishment of private sidings (Table I).

Table I. Typical costings for reviving a private siding

He would need to spend €1m on the existing railway infrastructure, which equates to €80000/year for depreciation and capital costs. He also forecasts operating costs of €40000, mainly for staffing and maintenance. The lower costs of rail transport compared to road would save €82500 a year for the envisaged 110000 tonnes, but this would leave a gap of €37500 a year. He successfully applies for a one-off grant of €500000 towards the refurbishment of the siding, which brings the annual costs down to €80000 and means rail is now competitive with road.

Grant programmes

Switzerland, Austria and Germany have all established sophisticated grant programmes for private sidings. The Swiss Ministry of Transport began supporting the construction and refurbishment of private sidings in 1986, using money hypothecated from a petrol tax. Since then approximately €9m a year has been spent. In 1995 this model was taken up in Austria, where it has proved just as successful; 65 sidings were supported with €25m of grants in 1999 and 2000.

A special feature of the Austrian scheme is that sidings in other countries are funded if the traffic originates in or is destined for Austria. The initial programme expired last year, and a new scheme is currently under discussion.

Germany adopted the same approach in 2004, when €8m was earmarked for private sidings, and an annual amount of €32m is budgeted for 2005–09.

The three systems are very similar, with funding granted for the construction, extension and reactivation of private sidings to encourage the transfer of freight from road to rail. The grants restore competition between road and rail, bringing benefits in terms of both environment and safety.

The beneficiaries are required to transport a minimum tonnage over an agreed period of time, and certain other targets must be met (Table II). If the agreed volumes are not reached the money must be paid back, either partially or in full.

The timber supplier now faces another question. Soon after the approval of his grant he signs a contract with another furniture maker, which increases the rail volumes to 160000 tonnes/year. This means that the project would break even without public aid. He has to choose between paying back the grant, or not telling the authorities about the additional 50000 tonnes.

Table II. Grants available for private sidings

A good use of tax?

Economic analysis shows a favourable cost:benefit ratio for the Swiss, German and Austrian grant programmes. The exact ratio is critically dependent on the external costs imposed by each tonne transported by road or rail.

Numerous studies have attempted to analyse the external costs of transport, and the values used in this article are those assumed in the European Union's Marco Polo Programme for 2007: €0·035 per tonne-km on road and €0·015 per tonne-km on rail.

These figures are conservative compared with other studies which concluded that the externalities per road tonne-km exceed those of rail by up to €0·03, but they reflect a good compromise until a major external study supported by the European Commission's Directorate-General Environment is completed. The specific external factors taken into account are noise, pollutants and climate costs, as well as accidents, infrastructure and congestion.

Grants of about €15·5m have been approved in Germany since 2004, contributing to an annual shift from road to rail of about 3·1 million tonnes or 760 million tonne-km. This gives an average of €5 of public money per tonne or €20·39 per 1000 tonne-km.

Table III tries to assess whether the taxpayers' money has been spent wisely, using the average value of €20·39 and the maximum rate of €32 per 1000 tonne-km.

The €500000 grant to the wood supplier meant 33 million tonne-km per year went by rail rather than road, which gives a net social benefit of more than €2m until year 5 or a cost:benefit ratio of 1:5·18. Support per 1000 tonne-km/year works out at €15·15.

Thus we can say that taxpayers' money is being spent efficiently from a socio-economic point of view. Another major reason for supporting private sidings is the fact that most of the freight moved by the national rail operators originates at or is destined for a siding. About 70% of the 92million tonnes handled by Rail Cargo Austria in 2004 was loaded or unloaded at public or private sidings.

Table III. Cost:benefit ratios

[1] Benefits per year of switching 1000 tonne-km from road to rail if the difference in external costs is €0·02 per tonne-km (€0·035 on road compared to €0·015 on rail). A discount rate of 8% was applied.

[2] If transport ceases after 5 years.

[3] If transport ceases after 10 years.

Common problems

The €32m available in Germany each year has not been fully spent. Between September 2004 and the end of 2006 the total budget was €72m, out of which 26 private sidings were funded at a cost of €13·12m The unused €60m was diverted to subsidise intermodal transport, where the applications usually exceed the available budget.

Reasons for the low number of approved applications include

• inconsistent or incomplete paperwork;
• operational concepts and volumes not matching;
• unrealistic economic appraisals.

However, another problem is simply that there are not enough applications being submitted. The procedure is difficult for companies who are unused to compiling such documents. There is also the risk of having to pay back the grant if volumes decrease, leading to a degree of inflexibility. Sidings must be wholly-owned by the applicant, which is not always the case, and rail infrastructure projects can take a long time to complete. Another issue is the multiple interfaces between infrastructure managers, operators, local authorities, and grant authorities. And finally, some potential beneficiaries are simply unaware that the programmes exist.

Several practical problems also limit the number of applications. A lot of preparatory work is necessary, including market research, proof of access rights to the rail network, approved construction plans, letters of intent, extensive project descriptions and long-term contracts.

Another economic risk, not connected to the programme itself but contributing to the reluctance of companies to invest, is that private sidings may connect to branch lines. There is a latent risk that such routes could be downgraded by the infrastructure manager, making the operation of freight complicated or even impossible. In the worst case the line might even close. Another risk is that the operator serving the private siding might increase its charges, putting the investor in an uncomfortable position if no alternative operators are available.

The wood supplier was lucky in several areas. The managing director was aware of the scheme. The mill was adjacent to a railway with spare capacity. Last but not least it was possible to upgrade the existing private siding to meet the operational requirements. In addition, management was ready to take the risk that if no further volumes move by rail after year 5, the company would have to write off more than €400 000.

Despite the potential pitfalls, the availability of start-up infrastructure financing can be the decisive incentive for companies to shift from road to rail. Assistance with investment in sidings can be paired with other advantages such as exemptions from road vehicle tax, road tolls, environmental taxes and the higher weight limit on lorries for intermodal feeder services, producing an attractive package.

Freight policy

For some time it was not clear whether subsidising private sidings was in line with EU policy, but in 2004 the European Commission approved the German scheme, assessing it against legislation that provides specific exempt-ions for the financing of infrastructure. Given that competing modes, notably road, do not have similar infrastructure costs, the Commission considered that the grant schemes were compatible with proper functioning of the common market. Furthermore, the Commission believes that modal shift from road to rail is in the common interest.

The EU also wants non-discriminatory access to rail infrastructure, but while this is important when funding major freight terminals it is rather less relevant to private sidings. Typically the beneficiary is the only customer using the siding, and will grant access to one or more train operators as required.

Similar capital funding schemes are found in other countries. After a three-year gap the UK once again has a budget of around €30m a year for Freight Facilities Grants, payable in England and Wales by the Department for Transport and in Scotland by the Scottish Government. These are based on the environmental benefits attached to the transfer of freight from road to rail or water.

Most other European countries do not have explicit funding programmes, but in some countries informal procedures have been established. Sweden has no fixed criteria for supporting private sidings, arguing that the conditions vary greatly from one case to another. Infrastructure manager Banverket is authorised to use 1% of its annual investment budget for private sidings, amounting to about €7m a year, but in recent years this money has not been fully spent. Banverket would prefer not to have a fixed allocation, because the demand is not constant.

In the USA the potential of private sidings and short lines is well recognised and various financial aid programmes are available. The Federal Railroad Administration's Infrastructure Financing loan programme provides a $35bn fund in addition to state grants. Another source of financing, which would be worth considering in Europe, is a tax credit programme. This lets short lines reduce their federal income tax bill using a formula that relates directly to the number of track-km upgraded. An attractive element of this scheme is that any taxable entity that benefits - a shipper or track contractor - may take the tax credit. In Europe this could apply to the owner of the siding, the customers served, or the train operator for example. The credit could be based on the tonne-km using the siding.

In central and eastern European countries similar schemes could have a long-term effect on the sustainability of transport. A significant number of factories still have sidings, and although almost all are in poor condition only a limited amount of investment would be needed to restore them.

Political action is also needed to ensure new production and warehousing facilities are built with rail connections. Incorporating a siding at the planning phase typically only adds a marginal increase in the total project cost, whereas subsequent construction is very expensive, or even impossible.

When coupled with agreed transport volumes, financial support for private sidings clearly benefits society as well as the businesses served. With some imaginative thinking, the current funding mechanisms might be extended to provide even more incentives to bring a larger number of stakeholders into the railway business.

However, even the best private siding support programme can only be one of many elements in the political toolbox to support rail freight.

• CAPTION: Financial assistance for the renewal of private sidings is available in different forms in several European countries and the USA. Such aid also holds great potential for central and eastern European countries, where many industrial plants retain rail-connected sidings in need of refurbishment
• CAPTION: Despite the initial success of grant aid to revive private sidings in Austria and Switzerland, the number of applications for available grants remains low, partly because of the complex nature of the application process