The challenge of spending wisely

In the seven years to 2013, the European Union has made no less than €14 billion 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 €7 billion 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 €14 billion 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 percent. After years of decline, even today that share is still greater than 30 percent – double that achieved in Western Europe. 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. 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 percent 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 percent to one percent of GNP, and in the Czech Republic and Hungary between 1•5 percent and two percent. 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 two percent to 2•5 percent of GDP, rising to 3•5 percent 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 un-remunerative 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 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 that 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.