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Railways, Finances and Franchises
The recent WCML franchise situation, and the ending of Sir Richard Branson's Virgin Trains 15 year tenure in favour of First Groups bid, has brought railway financing into focus.
The following article sheds some light on the complicated matter of railway financing.....
This article is reproduced with the kind permission of its author Piers Connor, and appears on the blog
Railway Technical Web Pages
Railway Finance
Introduction
Since the mid 1990s, railway across the workd have "gone commercial", with various models of privatisation and public-private partnerships (PPPs) or private finance initiatives (PFIs). This is a simple guide to how a new railway might be financed and a review of the limitations of privatisation and private sector participation in the ownership and operation of railway systems. Numbers are taken from known examples but are only for illustration and should not be considered binding.Contents
How Much Does a Railway Cost? - Published Railway Costs - Government Participation - Commercial Participation - Railways Making a Profit? - Efficiency- Maintenance - Open Access - New Project Financing- Metro Financing Example - High Speed Line Finance Example - The Way Forward.How Much Does a Railway Cost?
A difficult question! This is a bit like asking how much does a car cost. It depends on whether you want a Mercedes or a Honda, a sports car or a pick-up, a car to do the shopping in or to move furniture with. It also depends where you buy it. Cars are cheap in the US because there is a huge market and a good economy. Cars are expensive in Singapore because many of them are imported and there is a high taxation penalty to control traffic numbers. Cars are expensive to build in Europe but cheap to build in India because of the differences in labour costs and lower engineering requirements.It is the same with railways. A single track freight line with a few locomotives and simple signalling, running across a flat, geologically sound, sparsely populated landscape in a developing country might be built for as little as US$ 2 million per kilometre including electrical and mechanical equipment. A double track underground metro line in a densely populated city with difficult geological conditions, requiring anti-earthquake construction techniques, electric traction, immunity from typhoons and high humidity, high technology specifications and high passenger capacity trains could cost US$ 200 million a kilometre. One of the most expensive railways ever built was the Jubilee Line extension in London. This cost US$ 330 million a kilometre because of difficult civil engineering, its large and finely built stations and its additional safety equipment and its financing costs. You pays your money and you takes your choice.
Published Railway Costs
Here are some sample new railway project costs as published in the railway trade press. The prices published by operators usually include all civil and equipment costs, project and financing costs.Complete Rail Projects
| Railway> | Date | Type of System | Cost per km | Distance | Comments |
|---|---|---|---|---|---|
| Madrid - Albacete | 2010 | High Speed line | €9.57 million | 304 kms | |
| Seoul-Gimpo, Korea | 2010 | Airport line | $98.1 million | 20.4 kms | |
| Yichang-Wanzhou, China | 2011 | Main line | $9.1 million | 377 kms | Surface with 278km in tunnel or bridges |
| Haikou-Sanya, China | 2010 | High Speed line | $10 million | 308 kms | n/a |
| Copenhagen | 2011-2018 | New Metro line | $247.5million | 16 kms | All underground |
Rolling Stock
| Railway | Date | Type of Train | Cost per Vehicle | No. of Vehicles | Supplier |
|---|---|---|---|---|---|
| DB Schenker Rail | 2010 | Diesel-hydraulic 1000kW 10BB | €1.92million | 130 | Voith |
| Warsaw Metro | 2011 | "Inspiro" EMUs | €1.29million | 35x6-car | Siemens Newag jv |
| TCCD Turkey | 2011 | 5MW Electric Locomotives | $4.125million | 80 + simulator | Hyundai Rotem |
| Railpool Leasing Co. | 2010 | "Traxx" Electric Locomotives | €3.33million | 36 | Bombardier |
| SMART California | 2010 | 2-car DMUs | $1.58million | 36 | Nippon Sharyo |
| Cairo metro | 2010 | Refurbishment of trains | €40,598 | 468 | Alstom |
| Israel | 2011 | Diesel-electric locomotives | €4.7million | 15 | Vossloh Espania |
| Paris, France | 2011 | MI09 EMUs | €1.4million | 650 | Alstom |
It is interesting to note that regarding their Paris RER MI09 order for 650 vehicles, Alstom reported that the contract (joint with Bombardier) was signed in April 2009 and that the first car body went into the paint shop in January 2010. They say that the first vehicle spent about five months being fitted out and then went for car tests in August. The first 5-car trainset went for testing in early October 2010. It will take from then until the end of 2011 to get the first train into revenue service. So, it takes 16 months to build a train and then 12 months to test it and get it carrying passengers. Does that seem right?
Infrastructure Costs
| Railway | Date | Equipment | Cost per km. | Length (kms.) | Comments |
|---|---|---|---|---|---|
| Angola: Luanda to Malanje | 2010 | Rehabilitation | $1.28million | 470 | |
| RFF France | 2010 | New double-track line | €35million | 1.2kms | |
| Crossrail, London | 2011 | New twin bore tunnels | £69million | 18kms | Tunnels only |
| Bremmer, Switzerland | 2011-16 | New twin bore tunnels | €109million | 55kms | |
| Spain | 2011 | Route doubling & Electrification | €2.125million | 26.4kms |
Individual Projects
| Railway | Date | Equipment | Cost | Features | Comments |
|---|---|---|---|---|---|
| National Express UK | 2010 | Driving Simulator | £1million | Including alterations to building | |
| Network Rail & East Coast | 2011 | Peterborough Station | £2.5million | Modernisation | Including new entrance & faregates |
| Network Rail UK | 2011 | Marylebone Station | £4million | Roof reglazing 2160sq/m | |
| DB Germany | 2011 | ETCS on trains | €60million | Alstom "Atlas" system | €2million/train |
| ADIF Spain | 2011-2015 | 80km of Test tracks | €344.5million | Includes high speed test facility | €4.3million/km |
| Network Rail UK | 2011 | New Station at Southend Airport | £12.5million | 2-platform facility | Built in 23 months |
Government Participation
The reason why governments are forced to provide public services is because the private sector doesn't want to. The private sector doesn't want to because there's not enough money to be made from the enterprise or because the commercial risks are too high - really the same thing. In the case of education, for example, it is a generally agreed social objective that everyone should have access to affordable education but affordable education for everyone is not commercially viable. The costs of the infrastructure and operation of a school are high and a substantial number of ordinary people could not afford to pay for it at a commercial rate. Those who can, pay substantial fees and private schools make a profit. Health care is another example where the public sector is forced to provide facilities to make hospital services available for everyone. Private health care is available but it is expensive if you have to pay for it. In many countries, employers are covering costs by providing health care insurance.The same situation exists for railways. The infrastructure is very expensive (as we can see from the above tables) and the amount of money ordinary people are able to pay in fares is not enough to repay the costs of building and maintaining the lines. In many cases, as discussed below, there isn't even enough money coming from fares to pay for the day-to-day operating costs like energy bills and staff wages. The government therefore has to cover the shortfall. They must provide the infrastructure, or at least help to provide it, and support the operations and maintenance costs. The government pays for these costs out of taxes.
In recent times, the desire for improved public infrastructure and facilities has clashed with the willingness of citizens to pay high taxes. Frequent stories of waste and misuse of taxpayers money by governments have fuelled a justifiable resistance to paying more taxes into a government "black hole" which seems to have little real public accountability. The political result of this has been that governments have not increased taxes for fear of alienating their voters and thus have not been able to improve public facilities like hospital, schools, roads and railways due to the shortage of cash. In some cases they have not even been able to maintain them to a reasonable standard.
Commercial Participation
In recent years, in attempts to overcome the perceived inefficiencies of public financial management, governments have turned to the private commercial sector for financing. In some cases, government owned utilities have been sold to the private sector, usually at very attractive prices in order to attract purchasers who may have to spend a lot of money restructuring the organisation to make it into a profitable business. Telecommunications, power supply and airlines are all areas which governments have sold into private ownership and which have eventually become profitable. Railways are more difficult to sell since they have high infrastructure and maintenance costs and the income from operations is artificially low, because fares are politically restricted to low levels or because the railways are subject to politically assisted competition from road transportation.Some progress has been made in "converting" publicly owned railway companies to private ownership but only by offering inducements, guarantees and/or financial subsidies to the new owners. This is because the numbers simply do not stack up when it comes to return on investment. In fact, as already mentioned, they rarely add up when it comes to just the cost of day-to-day operations compared with the money taken at the farebox. So, can a railway make a profit? Let's see.
Railways Making A Profit?
You often hear people talking of railways making a profit. What they are actually referring to is that the railway takes in more fare revenue than it spends on operating costs. People ignore the value of the infrastructure, they ignore interest payments, they ignore repayment of loans and they forget future renewals. A railway company may choose to ignore renewals too, knowing that the government will be too afraid politically to let the system collapse for want of new trains or rebuilt track. Government will therefore pay for them. Even so, in spite of removing the renewal and financing costs of the railway, few railways are able to cover all their operating costs from farebox revenue. Here are some published examples of those who do and don't:| Railway | Ratio of Revenue to Operating Costs |
|---|---|
| Kuala Lumpur PUTRA System - Malaysia | 40% |
| RATP - Paris | 50% |
| Sao Paulo Metro - Brazil | 70% |
| BNSF Aurora (Chicago, Il. USA) | 75% |
| Kuala Lumpur STAR Elevated - Malaysia | 90% |
| London Underground | 125% |
| Seoul Metro - Korea | 140% |
| Mass Rapid Transit - Singapore | 150% |
| Santiago - Chile | 160% |
| Manila Line 1 - Philippines | 170% |
| Manchester Metrolink - UK | 190% |
| Mass Transit Railway - Hong Kong | 220% |
Efficiency
Efficient management is an important issue but don't forget the definition of the word "efficient". Many people describe a railway as "efficient" if they see that the trains are clean and run to time. Yes, the trains may be clean and they may run to time but it can cost an exorbitant amount of money to achieve this. Japanese railways are offered as examples of "efficiency" but their cleanliness and reliability are not achieved without huge amounts of money being spent. This is not efficient in the true sense of the word. "Efficient" really means "cost effective use of resources" and this is why the private sector can be helpful in running or maintaining a railway system. For some extraordinary reason, governments all over the world seem unable to control their management so that public services are run efficiently. That's why the private sector can be useful in improving efficiency in running railway systems. An example of this efficiency is in the UK, where one metro system under public management employs 40 persons per kilometre of route operated and another, more efficient, privately operated system uses only 16 persons per kilometre.Another point is that the efficiency of an operation can be financially "loaded" to the point where the positive farebox ratio is only achieved by a reduction of staffing and maintenance which, in turn, leads to a deterioration in reliability. This is seen in London, where the Underground system has achieved spectacular cost savings in recent years but its delay recovery performance has slipped sharply due to reductions in experienced staff, in training and in maintenance. The Public/Private Partnership (PPP) put in place for the system's infrastructure update and maintenance did improve conditions somewhat. So far, there have been some visible improvements but the service still suffers too many interruptions. However, the PPP system collapsed financially, having been set up on very shaky financial foundations.
In reality, the money available from the farebox on many railways is rarely enough to cover the cost of operations, particularly for older systems which require a lot of maintenance or for rural lines serving sparsely populated areas. In these cases, some sort of financial support is inevitable. The trick for governments is to make sure that this support is properly managed, which is why the UK has adopted a policy of offering franchises to railway operators on the basis of the lowest amount of support needed.
Maintenance
Maintenance costs have now gone commercial, along with the rest of railway financing. Few published prices exist to give an idea as to how much maintenance can cost. Often the details of individual contracts are deliberately obscure to preserve commercial confidentiality. Many cover an extended time and involve a degree of renewal as well as day-to-day maintenance. Even railway companies which have tried to compare maintenance costs amongst their peers have not been able to get reliable like for like figures.Open Access
Open access means giving any suitably qualified railway operator the chance to provide a service over anyone's route. There is a lot to be said for open access in theory - it removes the image of monopoly which railways have kept for too long and it stimulates competition, which should drive down prices and drive up service, reliability and comfort standards. Unfortunately, examples so far seen in Europe are not encouraging. Some railway operators in the UK already provide two similar services between the same towns, sometimes using different routes. There have been some successes but the confusion to the passengers has been in trying to determine the cheapest fare or most direct route. Constant changes in tariffs and timings and endless restrictions have made it very difficult to get good information.A further difficulty with open access is how to determine train timings. Operators will usually determine when they wish to run a particular service and this timing will probably be dependent on connections with other trains. The route owner then has to decide how to allocate paths. In the UK, this has resulted in a series of complicated negotiations, shrouded in commercial strategies by the operators and with the rail route provider trying to show fairness as well as obtain the best commercial return for the paths they sell. In some areas, the routes have reached capacity and the provider is being urged to invest in infrastructure improvements to produce more train paths.
In the UK, charges for train paths have come in for some criticism, the operators complaining that they are too high. Well, they would, wouldn't they? Whatever the truth of the matter, some operators seem to be making a commercial success of their service, while others are struggling to make ends meet. In addition, some operators have performed very badly, train punctuality having declined since the privatisation regime was started a few years ago.
Financially, it is a precarious business. The collapse (28 January 2011) in the UK of the Wrexham & Shropshire Railway illustrates the problem very well. This is what they said when announcing their closure, "This very difficult decision has been taken following a full review of all possible alternatives, in which it was concluded that the business, which operates with no public subsidy, would not provide a return on investment."
New Project Financing
Obtaining commercial capital for expensive infrastructure projects requires that the organisation needing the money provides the investor with a reasonable rate of return on his investment. If the pure commercial considerations show that this is not likely, there must be some sort of guarantee for the investor. If money is borrowed, the guarantee must provide that the interest will be paid and that the amount borrowed will be repaid. Guarantees for public infrastructure projects usually have to be provided by the government.One way to get a project involved with private finance is to reduce the level of capital expenditure to be supplied by the commercial market. This will require the government to pay for part of the cost of the infrastructure. This can mean that the government will, say, pay for the cost of civil engineering work, while the private sector funds the purchase of trains, signalling, control, fare collection, power supply etc. - the electrical and mechanical parts of the system. Put simply, it is treating the new railway project like a new road project. The government builds the road but private industry supplies the trucks, buses and cars. For a new rail route, how much the government will pay depends on the scope and type of railway being built. Let's see how this might work.
Metro Financing Example
Let's assume we are trying to finance a metro line in a large, developing but fictitious capital city and we have prepared estimates for the number of passengers expected to use the system and the cost of building the system. Suppose we have a line which is mostly elevated on concrete structures and runs for 15 kms across the city. It might cost US$ 50 million a kilometre including trains and all equipment necessary to run the line - power, signalling control, communications, fare collection, a maintenance depot, stations and operating offices. It could add up to US$ 750 million. Let's assume we have borrowed the money to pay for it and we have got to pay interest at 10% per annum. That's US$ 75 million a year in interest to pay - at least for the first few years.To cover the interest payments we need to sell tickets - lots of them. Well, we have a large, populated city in a rapidly developing country and our consultants have done detailed traffic surveys. They tell us we can expect an average of 150,000 passenger trips a day. This is equivalent to a medium-sized metro or light rail system and would show a peak hour flow in the peak direction of about 18,000 - 20,000 passengers.
Because this is public transit and we want to attract passengers and we want to keep them from polluting the city with their cars, we keep the fares as low as possible so we expect an average income of US$ 0.50 per trip. This is actually low for the US and Europe but about right for a developing city. It gives us an income of just over US$ 27 million a year. Well folks, this doesn't even cover our interest payments. And we haven't paid for our power yet, nor employees to run the system, nor allowed for maintenance costs, nor a sinking fund for renewals. And we haven't figured out how to pay back the $750 million we borrowed in the first place, which the bank wants back in 10 years - equivalent to $75 million a year.
Here is our simplified annual income and expenditure sheet:
| Item | Income/Year | Expenditure/Year |
|---|---|---|
| Fares | $27 million | |
| Operations | $25 million | |
| Maintenance | $20 million | |
| Renewals | $15 million | |
| Interest | $75 million | |
| Repayments | $75 million | |
| Total | $27 million | $200 million |
High Speed Line Financing Example
In considering costs and revenue, we can look also at a high speed line. In this example, the project is a 350 km line which is expected to cost US$ 17.5 billion to build and equip. Daily trips are expected to be 250,000, so each trip must generate $19.75 just to cover interest payments. An additional $75 a trip will be required to cover operating, energy and maintenance costs. So far no profit has been included. An airline ticket to cover the same distance is approximately the same price but the trip takes one third of the time. The government would have to finance a large chunk of the construction costs (the expectation is 50%) and they would have to guarantee the repayments to lenders. The hope is that property development in the areas around the stations along the route will generate finance and income to help fund the project. Property can be very profitable but it is also a very high risk investment and it should be regarded as a long term investment. Only a few new railways have generated much additional income through property development.The Way Forward - Backwards?
The last 15 years have shown that the privatisation of the railways in the UK has not proved to be the success that politicians hoped it would be. It has proved expensive, increasing real costs by 50% pro rata over those of the nationalised railway. People will note a significant increase in traffic - 65% on the Midland Main Line for example - but it is more to do with years of economic stability, rising oil prices and severe road congestion than anything the railways have managed to do. Even during the recent years of recession, rail travel in the UK has continued to rise. This is largely, in my view, a function of road congestion, a higher student population and yeild management techniques.What is needed is the re-integration of the railway so that the wheel rail interface is restored. There are signs of this happening in the UK but it's been a long time coming. The nonsense of management by contract, which only increases work for lawyers and regulatory consultants should be stopped. There is also a huge backlog of training needed to bring the operational expertise back into the business. Succession planning needs to be restored so that future generations can run a better railway than we have been allowed to do. In the end, it's the people at ground level who keep the system going, in spite of their managers. They deserve better.
Sources: International Railway Journal, Railway Gazette International, Modern Railways, Railway Age, Mass Transit, Asia Rail Conference 1999.
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