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WORLD BANK
Financing freight raiIways in deveIoping countries
GIobaI RaiI Freight Conference
Sponsored by Indian RaiIways and UIC
PauI Amos: Transport Advisor WorId Bank
New DeIhi, March 2007
WORLD BANK
Contents
Financing sources for pubIic raiIways
SuppIy chain chaIIenges
Importance of private finance
Project and governance risks
Opportunities for private finance
The WorId Bank and raiI freight
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WORLD BANK
First, a thank you for the invitation..
To ndian Railways who, at this exciting time in that organization's own
business development, are hosting this conference of high international
significance to the future of railway freight;
To the nternational Union of Railways, for their continuing relationship with
the World Bank and their world leadership of an industry that is vital to
international economic development, poverty reduction and the world's
environment.

WORLD BANK
RaiI freight demand is increasing strongIy in most regions...
0
500
1000
1500
2000
2500
3000
3500
N/S Am As-Pac CIS Eur Afr
2000
2005
lobal freight task: 25 percent growth over five years
(net tonne-km bill)
Source UC

WORLD BANK
In most pubIic raiIway systems, retained earnings have not
provided sufficient funds for raiI freight re-investment
n the best performing public rail freight systems, profits earned from freight are
often implicitly used to crosssubsidize passenger services, for example:
direct transfer to passenger operating losses, and/or
indirect transfer through excessive track charges (implicit or explicit)
reinvestment of freight profits in infrastructure standards higher than would be
required by rail freight services alone.
n medium performing systems freight surpluses are sometimes sufficient to reinvest
in motive power and rollingstock but cannot contribute fully to infrastructure costs
n many systems, generally smaller railways with little base-load of bulk or transit
freight, revenues do not cover their own 'above rail' costs and cannot cover
reinvestment in the train operating assets
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Project-specific
borrowing
Revenue-backed
borrowing
Corporate
borrowing
Joint-Ventures
Privatization of
business units
Concessions
Direct Borrowing Private participation Asset finance
PubIic raiIway systems can in principIe raise finance from a variety
of other sources, for exampIe.
overnment
grants
overnment
loans/equity
Deficit financing
Budget sources
Export credit
Availability
contracts
Leasing
In practice, most publicly railway systems depend heavily on the budget sources,
particularly those that have a big passenger role

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The pubIic sector's abiIity and wiIIingness to finance or guarantee
investment in raiI freight is IikeIy to decIine.
An increasing proportion of government expenditures is to meet higher
health, education and social aspirations and expectations
overnments are increasingly questioning whether carrying goods is a
core (or even an appropriate) overnment role
Some governments are concerned whether state subsidies of public rail
investment are competitively neutral vis a vis other modes:
.though heavy road haulage is also often subsidized by
governments or other road users
t the same time, there is a growing need for investment in rail freight to meet the
challenges of serving global supply chains.

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SuppIy chains are becoming more chaIIenging. and
competitive
Technology
Expectations
Markets
All modes of transport are investing to obtain more
efficient, usually larger units and improved traffic
dispatching, monitoring and control capability
Global competition in product and service markets is
driving higher standards and lower costs in logistics
supplier markets
Rapid expansion of international trade, and particularly
in Asia: many supply chains are now truly global
Competition
Despite some industry concentration (e.g. ports) the
freeing of transport markets is creating greater
contestability in logistics services and sub-markets

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more chaIIenging suppIy chains..contd.
$ecurity
Bottlenecks
Energy/climate
Higher standards of security in freight transport are being
sought in all modes
Logistics services depend heavily on public infrastructure
: capacity increments are not matching world freight
volume growth
The expectation of perpetually cheap energy is waning
due both to declining fossils fuel stocks and expectation
of higher energy taxes in response to global warming
Inter-modality
Both standard and specialized containerization continues
to grow , facilitating inter-modal transit and multi-modal
allocation of traffic

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Freight raiIway services wiII need to be abIe to offer suppIy chain
managers, who owe raiIways no favours, ever improving vaIue for
money.
W WCustomer responsiveness Customer responsiveness
W WGeographic reach (= intermodaI) Geographic reach (= intermodaI)
W WDeIivery time DeIivery time
W WReIiabiIity of deIivery time ReIiabiIity of deIivery time
W WFrequency of deIivery Frequency of deIivery
W WSafety and security of goods Safety and security of goods
W WProtection of corporate image Protection of corporate image
W WVaIue VaIue- -adding services adding services
W WTransport & storage tariffs Transport & storage tariffs
W WInventory hoIding costs Inventory hoIding costs
W WProduct damage or deterioration Product damage or deterioration
W WPiIferage Iosses PiIferage Iosses
W WInsurance costs Insurance costs
W WAdministration Administration
W WCustoms and other cIearances Customs and other cIearances
W WInformaI payments for service InformaI payments for service
Service
attributes
Cost
components
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The success of raiI freight as a business wiII depend on three Cs..
CapitaI access CapitaI access
Investment in
physicaI assets that
deIiver high service
standards
Investment in IT to
monitor and controI
operations
Investment in
physicaI assets that
deIiver high service
standards
Investment in IT to
monitor and controI
operations
CommerciaI cuIture CommerciaI cuIture
Lean decision
structures
Rigorous management
of internaI and
outsourced costs
Keen incentive
mechanisms
Lean decision
structures
Rigorous management
of internaI and
outsourced costs
Keen incentive
mechanisms
!rivate sector participation can make the rail
industry more competitive, more commercial and
provide new sources of capital !
!rivate sector participation can make the rail
industry more competitive, more commercial and
provide new sources of capital !
A focus on
customer service
High-order
marketing skiIIs
Pricing agiIity
A focus on
customer service
High-order
marketing skiIIs
Pricing agiIity
Competitive spirit Competitive spirit

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The private sector is therefore a vitaI way of increasing the roIe of
raiI freight in gIobaI suppIy chains, not just for its finance
Private participation and finance can take many forms including
partnerships and ventures with the public sector - as shown later
But private finance is not a panacea for rail systems development: in many
countries, rail networks will depend mainly on public investment for the
foreseeable future
Private participation can help reduce (though is unlikely to end) the problem
of politically driven internal cross-subsidies to passengers as it will require
well built and repaired 'ring-fences' round invested businesses
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Many governments are unIikeIy to privatize pubIic raiIway
networks for wider sociaI or cuIturaI or poIicy reasons
This is particularly true of networks with high proportion of passenger
services
t is reinforced in:
large countries with remote rail connected regions
countries in which rail has features of natural monopoly in freight
typically larger countries with high rail distances
with heavy bulk traffic markets
Track access rights can provide a route to private investment in freight
while retaining the public railway network in public ownership and control.

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Track access rights for freight train operators can in principIe
come in a variety of different forms..
Legally mandated: narrowly
defined access rights
Legally mandated: general
rights of access
Contractually agreed: specific
access rights:
Canada (30km beyond company
boundaries)
Mexico (specific lines to ports/cities
to create competition))
Most EU $tates, EU international,
Australian $tate-owned railways*
U$A (approx 25% of U$ network is
subject to 'trackage rights')
Australian interstate rail is carried on vertically separated infrastructure managed by the Australian Rail Track Corporation

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Private freight access on pubIic raiI networks wiII require a rigorous
governance (IegaI and reguIatory) framework if it is to be financeabIe..
1. Laws and reguIations on
access to pubIic raiI systems
2. Criteria and process for
Iicensing new raiI entities
3. System for safety
accreditation and monitoring
4. Procedures for appIying for
capacity on pubIic raiI network
6. Agreements on roIIingstock
interchange and revenue division
7. Procedures for incorporating
new operators fairIy into timetabIe
8. RuIes for sorting out operating
priorities/confIicts between trains
9.Institutions and procedures for
reguIatory review and compIiance
5. Standard documentation for
track (& faciIity) access contracts
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Therefore, financing raiI freight is not onIy about commerciaI risks
but aIso the predictabiIity and acceptabiIity of governance risks
CommerciaI risks CommerciaI risks Governance risks Governance risks
W WFinancing risks (e.g. currency risks) Financing risks (e.g. currency risks)
W WLand acquisition: costs and time Land acquisition: costs and time
W WConstruction and/or roIIingstock Construction and/or roIIingstock
engineering risks engineering risks
W WResiduaI asset risks ResiduaI asset risks
W WSafety risks Safety risks
W WMarket risks: Market risks:
VoIume of freight VoIume of freight
YieId: revenue/tonne YieId: revenue/tonne- -km km
W WFair and transparent market access Fair and transparent market access
process (whether privatization or track process (whether privatization or track
access to private companies) access to private companies)
W WLegaI enforcement of Agreements LegaI enforcement of Agreements
W WMarket and pricing freedoms Market and pricing freedoms
W WAdherence to agreed operating Adherence to agreed operating
freedoms freedoms
W WAny government financiaI Any government financiaI
contribution is paid on time contribution is paid on time
W WReguIatory risks ReguIatory risks
W WProtection against expropriation Protection against expropriation

WORLD BANK
With good governance and reguIatory structures there is a wide scope for
private finance in raiIway freight transport
unctions
Structures
Finance & buiId
raiI Iine
Operate & maintain
raiI Iine
Finance
roIIingstock
Operate freight
train services
RoIIingstock Ieasing/
avaiIabiIity contracts
Public Public Private Public (pays R/S
hire prices to
private)
Freight train
operating company or
concession
Public Public Private Private
Infrastructure buiId or
renovate concession
Private Public (pays usage
charges to private)
Public Public
Infrastructure buiId &
operate concession
Private Private Public (pays
access charges to
private)
Public
Integrated infra.and
train service company
or concession
Private Private Private Private

WORLD BANK
WorId Bank support for the raiIway industry is increasing
(AnnuaI Iending for raiIways1999-2008 projected)
0
100
200
300
400
500
1999 2001 2003 2005 2007
USD miIIions (3 yr moving average)

WORLD BANK
The WorId Bank is ready to extend its support of gIobaI raiI freight
deveIopment.
nvestment support of public railways with strong freight business plans that
will support trade and development in an economically and environmentally
sustainable way;
Knowledge sharing and technical assistance to bring to bear best practice
advice on railway policy, institutions, regulations, corporate restructuring
and business strategy;
Advice on and support for structures that can increase private investment in
freight railways (together with FC and MA products);
Regional and corridor approaches to rail trade and transport facilitation.

WORLD BANK
Thank you for your attention
Questions and comments to:
pamos@worIdbank.org
The findings, interpretations and concIusions expressed herein are those of the author
and do not necessariIy refIect the views of the Board of Executive Directors of the
WorId Bank or the governments they represent

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