The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank
(ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the
accuracy of the data included in this paper and accepts no responsibility for any consequences of their
use. Terminology used may not necessarily be consistent with ADB official terms.

Project Financing and Sustainable

Development of Railway Infrastructure
Non-Revenue Funding of Railways in Europe

Dr. Heiner Bente

Bangkok, August 10th / 11th 2016

Thailand
Ministry of Finance

Management
Consultants

Europe is a largely saturated railway market in significant

contrast to Asia
Backbone speed network in Europe

Population
Europe:
Asia:

~ 500 m
> 3,500 m

Network size
Europe:
Asia:

210,000 km
~ 250,000 km

Dr. Heiner Bente / civity

GDP Growth
Europe:

1.8% 1.9%

Asia:

5.5% 5.6%

IMF: Asia is global growth

leader
2

Management
Consultants

Only targeted niche-dynamics in Europe amidst an overall

consolidation and rationalisation (I)
Network size 2005 2015 stagnant, rail passenger modal share 6.6%
Limited high-speed investments
Status quo network 11,000 km with growth 300 km / year
European Coherence high on agenda, ambitious expansion plans worth
300 500 billion

Current reality however far behind and observed policy shift away from high speed
Even less investments in freight-corridors

Dr. Heiner Bente / civity

Rail freight modal share 10.6% of tonne km and falling

One focus Port-Hinterland Connections with passenger / freight unbundling

Rail freight performance unsatisfactory, yet no turnaround on the horizon

Management
Consultants

Only targeted niche-dynamics in Europe amidst an overall

consolidation and rationalisation (II)
Pressing bottleneck issues with targeted capacity additions, saturation in core
sections

Network coverage Asia: > 10,000 inhabitants / track km

with room for more
Network coverage Europe: 1,000 2,000 inhabitants / track km
by and large stagnant

Dr. Heiner Bente / civity

Closing of strategic gaps, interconnectivity first underpinned by urbanisation

General decision background SOCIO-ECONOMIC benefit-to-cost ratio

Under-investment / maintenance backlogs are the BIG challenge in Europe

Management
Consultants

Non-revenue funding of railways is prominent in Europe (I)

Introduction Structural principles for the railway sector in Europe
Vertical separation of train operators from network infrastructure
(in various shapes)

Full institutional separation

Corporate holding structures
No cross-border infrastructure (national confines)

Limited cross-border policy coordination (major issue for freight)

Main
objective
competition

Open access in freight and commercial passenger services

Dr. Heiner Bente / civity

Market opening in subsidised passenger services (PSO) only

patchwork

Management
Consultants

Non-revenue funding of railways is prominent in Europe (II)

Structural principles for the railway sector in Europe
Track Access Charging (TAC) systems
Idea: marginal cost charging for highest socio-economic benefit
Reality: one slogan but very different results
Actual cost-recovery rate of infrastructure anywhere between 0% 100%
Direct link to infra-funding:

TAC = commercial revenue

Balance = government funding for residual infra-costs
Train operators feature in hybrid financial shapes
Dr. Heiner Bente / civity

Full commercial services (with tariff autonomy)

Subsidised Public Service Obligations (PSO, more regulated)

Management
Consultants

European railways are typically separated into train

operating companies and infrastructure managers
Scheme for illustration purposes
Train Operating
Company P&L
revenues
operation
cost

public funding
negotiated
contracts
franchise fees
Profit

Dr. Heiner Bente / civity

cost

railroad system goes to

train operations as well as
to infrastructure

Train operators' income

mainly consists of (fare)
revenues and public state
funding

contribution
to cover
infrastructure
cost
Infrastructure
Manager P&L
"user-fees"

Public funding for the

Track access fees are

public funding

contributed to the
infrastructure manager in
order to cover (parts of the)
infrastructure costs
Management
Consultants

Non-revenue funding is granted to both, infrastructure and

operations (I)
Infrastructure funding
Network infrastructure typically considered a public asset
Taxpayer infrastructure funding for OPEX and CAPEX, with socio-economic motivation
EU cost of road congestion (2050): 200 billion / year
CO2-emission: Road = 3.5 x Rail
Order of magnitude public funding 80 / inhabitant x year

OPEX typically via direct subsidy covering commercial losses

Recent shift from simple loss-coverage to funding contracts with covenants
Dr. Heiner Bente / civity

performance vis--vis train operators

asset value protection

efficiency objectives
multi-annual nature

Management
Consultants

Non-revenue funding is granted to both, infrastructure and

operations (II)
Infrastructure funding
Strengthened corporate governance attitude
value-for-money tests
benchmarking
Indirect OPEX-subsidy sometimes through shadow-operations i.e. off-balance sheet
costs, e.g.
legacy staff
pension fund obligations

Dr. Heiner Bente / civity

debt-service (bad banks)

Public Private Partnerships not prominent in Europe, main reasons
structurally unprofitable services
government ratings more favourable
risk allocation issues
9

Management
Consultants

Coverage of P&L-costs by user charges for railway

infrastructure in Europe varies widely
Coverage
in %
100
90
80
70
60
50
40
30

Dr. Heiner Bente / civity

20
10
0

NO SE NL

SI

SF

IT

BE PT AT CH SK UK RO CZ DE FR BG DK HU PL EE LT

LV

Source: ITF / OECD 2005

10

Management
Consultants

Non-revenue funding is granted to both, infrastructure and

operations
Passenger train operator funding
Train operator OPEX in PSO-segments (e.g. commuter trains) a massive part of the
financial equation

PSO-services typically dominant over commercial passenger segment

Cost coverage from fare-box revenues in 50% order of magnitude
Taxpayer i.e. non-revenue contribution accounts for the balance

Dr. Heiner Bente / civity

Market opening / competition has delivered tangible efficiency / performance gains

However, no turnaround from structural loss-making achievable through competition
alone

11

Management
Consultants

Commercial revenues cover 50% 60% of reported costs in

Europe
Cost and contribution of the EU rail sector (2012), excluding off-balance sheet items
in billion (2010)

10.7
36.4

35.0

20.0
75.7

Dr. Heiner Bente / civity

46.4

Costs
Infra costs (P&L only)

Operator costs

Other

Income
Subsidy

Freight revenue

Passenger revenue

Source: SDG analysis

12

Management
Consultants

In a sample of six European nations almost 40% of public

funds are off-balance sheet
Average 1995 2003
Network
size

Denmark

United
Kingdom
Germany

France

Average Annual
Public Funding1)

Country

000
trackmiles

Onbalnce
sheet
(US$ bn)

Offbalance
sheet
(US$ bn)

Germany

36,3

11,6

11,2

France

30,5

5,5

4,4

United
Kingdom

19,3

4,6

Spain

9,2

1,6

0,1

Denmark

2,1

0,9

Austria

4,7

1,9

0,1

102,1

26,1

15,8

Austria

Dr. Heiner Bente / civity

Spain

Total

1) Average of 1996-2006
Source: civity Management Consultants, Amtrak OIG

13

Management
Consultants

Related to network size, average annual subsidies

are much higher in Europe than in US-case
Public Budget Contributions to the Railroads
US$ 1995-2003, annual average1)
per train-mile

per main track-mile

SUI
NED
ITA
AUT
DEN

= 20,60

= 374

GER

GBR
Dr. Heiner Bente / civity

30

20

10

NEC3) 74 95
0

Infrastructure maintenance and operations

Staff and pension

obligations

SWE
14,4

Public Budget
Contributions
Public Service
Obligations (PSO) for
passenger services
and freight / combined
transport

Payments for capital

investments

FRA

18,5

EXTRACT AMTRAK OIG

200

Debt service
400

600

Restructuring

1) Price level of 2003; 1 = 1,13 US$ average annual exchange rate (EZB, 2003)
2) Passenger and freight trains
3) NEC only excluding debt services, white bar indicates if debt would be distributed proportionally to total cash flow;
Source: Amtrak OIG, civity Management Consultants

14

Management
Consultants

Throughout Europe reported profits are generated by far

bigger subsidies
Operating profit
2006, Train Operating Companies (TOCs)

EXTRACT AMTRAK OIG

US$
train-mile
10

6,27

4,10

1,94

1,28

0,62

15

14

0,46

2,45

23

24,12

10
20
30

24
32

Dr. Heiner Bente / civity

40

37

DEN

FRA

GER

ESP

GBR

AUT

Total public funding 1996-2006, annual averages1)

On- and off-balance sheet for entire railroad system
1) Price level of 2006; 1 = 1,26 US$ average annual exchange rate (EZB, 2006)

15

Management
Consultants

European non-revenue railway funding in a nutshell

Summary and conclusions
Saturated systems with high emphasis on maintenance
Sustained, yet modest passenger demand growth rail freight a headache
Political and public support for socio-economic advantages of the rail-mode
High resulting willingness of governments to subsidise rail infrastructure and
operations for service offering purposes
European railway system would not survive on a financial stand-alone basis
A reflection for Asia?

Dr. Heiner Bente / civity

Congestion and emissions external benefits of the rail mode

Far more growth potential than in saturated Europe
With hindsight: Be prepared for in-escapable and mounting renewal needs !
Set the policy framework for long-term funding schemes now !

16

Management
Consultants