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The challenge of spending wisely

01 Mar 2007

The European Union is making €14bn available for the new member states in Central and Eastern Europe to invest in rail up to 2013. With no comprehensive development plan to take advantage of this largesse, governments and railways need to take urgent action if the rail sector is to be revitalised effectively

IN THE SEVEN YEARS to 2013 the European Union has made no less than €14bn available to spend on the rail sector in the member states that have joined the EU since 2004.

Forming part of the Cohesion Policy for new member states, this funding covers the seven-year programme period that began on January 1. For a comparison of the scale, just €7bn has been made available in the budget for the Trans-European Transport Network programme across the 15 old member states. Here the governments and railways are eager to obtain a slice of the funds. But disbursing €14bn across the 10 new states with rail networks poses a major challenge to the European Commission, to the governments and to the railway companies involved.

The Commission thinks it is worth it. In the former centrally-planned economies of Central and Eastern Europe rail transport had a market share of about 45%. After years of decline, even today that share is still greater than 30% - double that achieved in Western Europe (Fig 1). Restoring this high market share, or at least preventing further decline, is a crucial element of EU policy. Greater use of rail is seen as essential to meet the goal of sustainable and efficient transport.

Historically, rail's important role in the CEE region supported an economic structure where the emphasis lay on heavy industry. At the same time, private car ownership was restricted. The huge rail freight and passenger volumes generated sufficient revenues to fund the maintenance of railway assets, and at the same time it was possible to use part of the freight revenues to subsidise passenger transport. During the 1960s and 1970s many governments invested heavily in their national railways and, remarkably, most railways were not dependent on operating subsidies from the state budget.

The situation changed dramatically after 1990, as both rail freight and passenger volumes halved. The decline of heavy industries and a rapid increase in ownership of private cars and lorries meant that the railways could no longer cover their operating costs from revenues.

It became necessary for the states to restructure their railways and contribute financial support, but many governments were either unable or unwilling to make up the shortfall. Fig 2 shows that the financial contribution to the rail sector by governments in the new member states remains low when compared to western Europe.

EU benefits and obligations

Membership of the EU was expected to bring strong and stable economic growth to the new member states. In fact, economic growth in the region is well above the EU average. Accession required the new states to make a significant contribution to the EU budget, but in return, through the Cohesion Policy, they receive strong financial support to stimulate their economies and integrate them into the Union.

Thanks to EU support and funding from national budgets, investment in transport infrastructure in the new member states represents at least 0·8% of GDP, which is the average for the whole EU. Preliminary estimates indicate that in 2007-13 transport infrastructure investment in Poland and Bulgaria will be around 0·8% to 1% of GNP, and in the Czech Republic and Hungary between 1·5% and 2%. However, this is still relatively low in relation to World Bank recommendations. The Bank's transport sector review notes that public investment in transport typically accounts for 2% to 2·5% of GDP, rising to 3·5% in countries where significant infrastructure modernisation is in hand.

The legal framework

EU membership is not just about money there is a legal framework too. EU policy is based on liberalisation of the rail sector and transforming the state-run railways into 'normal' businesses. To this effect the EU has developed a legal framework designed to make it possible for companies to compete on equal terms.

In particular, this framework requires governments to ensure that the rail sector in general is financially stable (Directive 91/440). Under Regulation 1191/69, governments must compensate companies for providing unremunerative public transport services by rail and other modes, while Directive 2001/12 requires governments to separate the responsibilities for railway infrastructure management from operations. Moreover, this framework imposes restrictions on state aid to companies, and obliges governments to ensure that operation of the rail network is financially balanced (Directive 2001/14). This last directive also covers the allocation of infrastructure capacity, levying of access fees and safety certification.

Governments in the new member states were not directly involved in drawing up this legal framework, as it was prepared before they joined the EU. However, its implementation was a condition for entry. So it is no surprise that the Commission's report on implementation of the First Railway Package published in May 2006 (RG 7.06 p371), found that the EU legal framework had been transposed into the legislation of the new states, but that it had not yet been adequately implemented. Either the governments had simply started later, they had less understanding of the framework, or possibly they were less motivated. Whatever the case, they were obliged to start allocating significant funds for the rail sector from their already stretched national budgets.

No comprehensive plan

During the pre-accession period, when governments in the CEE region were preparing the legal framework for their rail sectors, they received significant EU investment support to upgrade the corridors linking them with the rest of the EU. This support was disbursed by the EU at a time when plans for reform and development of the region's rail sector were still in discussion. As the support was limited to trans-European corridors, the absence of a comprehensive development plan did not form a practical obstacle. However, the situation changed when the countries became member states.

In 2006, when the allocation of funds for 2007-13 was being negotiated, the Commission underlined the need to give due priority to investment in sustainable transport. It also complained about the lack of a comprehensive development plan for the rail sector in the CEE region. At the same time CER stressed the need to establish financial stability in the region's rail businesses, and called for the allocation of sufficient resources for modernisation. Both the Commission and CER warned the various governments against neglecting their railways and repeating the mistakes made by the EU15 in the 1960s.

Revitalisation is essential

The new states had the advantage of well-developed rail networks and a high modal share, but the overcapacity which followed the loss of traffic after 1990 quickly turned into a financial burden for their governments. The result was that railways in the CEE region entered a downward spiral. The shortfall in revenues had to be compensated in part by increasing fares and tariffs. But this made rail less attractive for customers, leading to the loss of more market share and a further fall in revenues.

The vicious circle has to be broken, by finding a new balance between the level of state funding for the rail sector and pricing measures for other transport modes. Restructuring of the rail sector is essential to match capacity more closely to demand, which means reducing payrolls and possibly the size of some networks. Better productivity of staff and assets are essential ingredients of the formula.

In short, the rail sector in the new member states needs to be revitalised, and the EU policy on sustainable transport, with its legal framework and funds for investment support, provides very favourable conditions for this to happen.

Development plan

Previous EU support for rail investment was largely based on selecting projects that were considered to be essential anyway. Priority went on schemes to connect the new states with the rest of the EU, but there was no overall vision of the future, let alone a comprehensive list of investment projects and a strategy for bringing them about.

Rail remained uncertain about its role, and many railway businesses became financially unstable. Decisions on restructuring were postponed, and problems tended to be shunted to and fro between stakeholders, sometimes with acrimonious negotiations. All this led to long delays in starting work on the revitalisation that was so badly needed, and investment projects were held up.

The sector still needs urgently a comprehensive development plan, which would greatly facilitate the preparation of investment projects and guide the disbursement of available EU funding over the next few years. Such a plan would show the impact of individual investment proposals on the overall policy for developing rail transport, and could help ensure that the various proposals are approved swiftly.

Various governments and their railways are starting to think carefully about preparing development plans, and in some countries there seems to be a consensus on strategy and the level of funding needed, although nothing formal has been published. Others, however, continue to skirt around the hot issues where difficult decisions are needed.

The challenge for the stakeholders is to decide jointly on the features of the rail network they will need in the future, and feed this into a development plan. This plan would also show if national transport policies reflect EU policy for the rail sector, giving it adequate competitive edge and making it financially stable.

Specifically, the plan needs to indicate the capacity that rail services need to deliver and the level of funding needed for investment and operation. It should link decisions on technical parameters for national networks to the allocation of state funds for compensating the shortfall in revenues from track access charges, if such shortfalls are to be expected.

Even though 2013 may seem a long way away, preparation, appraisal and execution of infrastructure projects is by no means quick and easy. Delays in project delivery over the next seven years could lead to budgets remaining unused in the EU accounts. Some new member states may not fully benefit from their allocated level of investment support, and at worst, some net recipients could turn into net contributors to the EU budget.

  • To modernise its passenger fleet, Bulgarian operator BDZ has taken delivery of 25 Desiro diesel units from Siemens
  • Fig 1. Rail's share of the freight market has stabilised in the EU15 but continues to fall in the new member states
  • Elderly locomotive-hauled trains still work suburban services around Budapest. Modern rolling stock will be essential if rail is to defend its traditionally healthy market share in Eastern Europe
  • Fig 2. State contributions to rail funding in EU member states in 2004, measured as k per traffic unit (tonne-km + passenger-km)
  • The decline in traffic volumes during the 1990s left many railways in Eastern Europe with surplus infrastructure in poor condition
  •  Rail's market share of freight traffic in Eastern Europe continues at a high level despite the collapse of the former planned economies

Rolling stock renewal needs a clear focus

A substantial proportion the passenger fleet in the new member states is life-expired, but most railway undertakings can only afford to replace a proportion of their fleet. Without a proper development strategy, neither the government nor the railway will have a clear long-term vision as to how many trains will actually be needed or whether the investment will be financially justified.

If there is a comprehensive development plan in place, the railway would negotiate a proper passenger service contract, setting out the required level of train-km, the forecast revenues and an agreed payment. Using this basic schedule, the railway operator can determine its rolling stock requirements and focus its investment priorities more accurately.

It is easy to spot an unplanned project, which says that 'Railway X will buy Y trainsets', without demonstrating whether Y is the right number. A planned project would state that 'Railway Z will provide services in Region A offering B train-km a year at an (upgraded) quality level C.'

Le rail face aux défis des projets et des dépenses en Europe centrale et orientale

Pas moins de 14 milliards d'Euros jusqu'en 2013 sont disponibles pour l'investissement ferroviaire par les nouveaux états membres de l'Union européenne dans le cadre du Fond de cohésion, mais il n'y a pas de plan d'ensemble de développement pour tirer parti de cette largesse. Une action urgente des gouvernements et des chemins de fer est donc nécessaire si l'on veut que le secteur ferroviaire d'Europe centrale et orientale soit relancé. Ad Toet défend que les restructurations, les gains de productivité et des projets de développement forts sont les ingrédients essentiels d'une formule destinée à revigorer le monde ferroviaire et à avancer vers les objectifs de l'UE, objectifs d'efficacité et de transport dans le cadre du développement durable

Planungs- und Budget-Herausforderungen an die Bahnen in Mittel- und Osteuropa

Bis zu 14 Milliarden Euro aus dem Kohäsionsfonds stehen den neuen EU-Mitgliedsländern für Investitionen im Eisenbahnbereich bis 2013 zur Verfügung, aber es gibt keinen umfassenden Entwicklungsplan, welcher diese Grössenordnung zunutze macht. Dringende Massnahmen müssen daher von den Regierungen und den Bahnen ergriffen werden, wenn die Eisenbahn in Mittel- und Osteuropa revitalisiert werden soll. Ad Toet erklärt, dass Restrukturierung, Produktivitätsverbesserungen und ein starker Entwicklungsplan die Kernpunkte in der Formel sind zur Wiederbelebung der Eisenbahn und um den EU-Zielen von effizientem und nachhaltigem Verkehr zu entsprechen

El ferrocarril se enfrenta a desafíos logísticos y financieros en Europa Central y del Este

Los nuevos miembros de la Unión Europea disponen de nada menos que 14 000 millones de euros procedentes de los fondos de cohesión para invertir en el sector ferroviario hasta 2013, pero no existe un plan global de desarrollo para aprovechar esta generosa cantidad. Por lo tanto, es necesario que el gobierno y los responsables del ferrocarril tomen medidas urgentes si quieren revitalizar el sector ferroviario en Europa Central y del Este. Ad Toet afirma que la reestructuración, las mejoras en la productividad y un plan de desarrollo sólido son factores esenciales para revitalizar el sector del ferrocarril y cumplir los objetivos de la UE relativos a un transporte eficaz y sostenible