For discussion

LegCo Panel on Transport
Overseas Experience in the Privatisation of Railways

Purpose

This papers serves to provide Members with information on overseas experience in the privatisation of railways.

Background

2. At the last Panel meeting held on 25 June 1999, Members were briefed on the plan of the Government to privatise a substantial minority of MTRC shares through an Initial Public Offering.

3. At that meeting, Members requested the Administration to provide information on the approaches adopted by overseas governments in the privatisation of railways, covering, amongst other things, the regulatory regime and fare setting mechanism.

4. Our consultant has collected information on the privatisation experience of Argentina, Japan, the United Kingdom, Canada, the United States and New Zealand and has summarised the information in the form of case studies (see Annex). Each case study covers the following information :-

  1. basic data on the railway including length, patronage and revenue;

  2. reasons for privatisation;

  3. restructuring of business before and after privatisation;

  4. franchise period, if applicable;

  5. service standards and the essential elements of the regulatory regime; and

  6. fare determination mechanism.
5.The case studies are selected to demonstrate the full range of approaches which have been tried out by other places in the privatisation of railways.

Conclusion

6. In the last two decades, the tide of privatisation has swept across the continents and transformed many inefficient, loss-making state-owned railways. There is, however, no simple privatisation formula that is guaranteed to work in all cases. The methods and techniques of privatisation described in the case studies are not inherently good or bad by themselves, but were chosen to suit the objectives that the governments concerned were attempting to achieve. In drawing lessons from the overseas experience, we must pay due regard to the unique operational characteristics of MTRC and map out a privatisation plan that will best suit our intended purposes.

Advice Sought

7. Members are requested to note the approaches to privatisation of railways adopted by overseas governments as set out in the case studies.

Transport Bureau
July 1999

Annex

Argentina Commuter Systems and Subway (Buenos Aires Metro)

Railway Data
  • Restructuring and privatisation began in 1991 and completed in 1995.

  • The metro covers 37 km of railway lines while the suburban rail operations cover more than 800 km.

  • Approximately 212 million passengers were handled in 1993. In 1997, commuter concessions transported 459 million passengers and ran 148 million train-km.
Reasons for privatisation

  • Introduce private sector productivity and efficiency

  • Attract investment

  • Improve service/market responsiveness

  • Reduce financial drain on government
Restructuring of business before and after privatisation
  • Prior to restructuring, all freight, passenger, and commuter services were provided by the State-owned Ferrocarriles Argentinos (FA).

  • Restructuring created seven regional, vertically integrated franchises for commuter services, in addition to five freight concessions.

  • Metro service was included in one of the commuter concessions.

  • Central stations were retained by the government while other stations were included in the franchises.

  • The rolling stock is owned by the Government and leased to the franchisees. Franchisees who purchased their own rolling stock will be able to sold them to the Government for the residual value of the rolling stock on expiry of franchise.
Franchise period
  • Originally 10-year concessions for commuter services

  • Some concessions have been the subject of re-negotiation to allow fare increases to support financing of investment to meet unanticipated growth in passenger demand.
Service standard and regulatory regime

  • Minimum service levels are contractually defined in each concession contract.

  • The rail regulatory authority - the Comision Nacional Reguladora del Transporte (CNRT) - is part of the Secretaria de Transporte (the Secretary of Transport). The rail regulator is appointed by Presidential decree from nominations made by CNRT through the Secretaria de Transporte.

  • The primary function of CNRT is to deal with complaints.
Fare determination mechanism
  • Fares are determined by negotiations between individual concessionaires and the Secretaria de Transporte.

  • Fare increases are generally capped by inflation. A mechanism also exists for fare increase if service quality improves.

  • One concession has recently been successfully re-negotiated to raise fares and extend concession term in order to fund new investment needed to meet increased demand. Revenues from such fare increase have to be earmarked specifically for investment by the franchisee to improve passenger capacity.

Japan National Railways (JNR)

Railway Data

  • Japanese National Railways operated 21,200 km of rail lines out of a total of 26,700 km in the country. In addition to JNR, there were almost 100 other "private" railways in operation.

  • JNR handled 6,793 million passengers and 111 million tons of freight per annum.

  • In 1980, the year in which the decision to restructure JNR was made, revenues were US$23 billion but losses amounted to US$7.8 billion. Direct subsidies amounted to more than US$5.2 billion.
Reasons for privatisation

  • Introduce private sector efficiency and productivity

  • Re-deploy government assets

  • Reduce financial drain on government
Restructuring of business before and after privatisation
  • In 1987, JNR was split into seven passenger service companies and one freight company.

  • Since 1984, over 35 third-sectors (hybrids of private investors and financing by local authorities) have been formed to take over the operation of unprofitable rural lines.
Franchise period
  • Perpetual franchise.

  • Shares of the largest passenger service companies were offered to the public in 1993, 1996 and 1997. Plans are in progress for another offering of government shares of JR East to reduce government holdings from 37.5% to 12.5%.
Service standard and regulatory regime
  • The Railway Business Laws were restructured in 1987 and reduced regulatory requirements on both the restructured companies and the private railroads. The Ministry of Transport retains the overall regulatory function and authority.

  • Railroads must submit an operating plan (including schedules) to the Ministry of Transport for record. Prior to the deregulation, approval of those plans were required.
Fare determination mechanism
  • Fares must be approved in advance by the Ministry of Transport. Written notice of discounted fares and charges is considered adequate.

  • Fare increases have become far less frequent. Prior to privatisation, an annual fare increase was the norm, and JNR's fares were generally higher than those of competing private railway operators. The gap has now been narrowed because the privatised companies have introduced fewer fare increases. Between 1987 and 1991, the only general fare increase by the privatised companies was related to the imposition of a new consumption tax.

United Kingdom Passenger Franchises

Railway Data
  • The British rail network consists of approximately 16,700 route-km (passenger and freight).

  • In the year ending March 31, 1995, prior to most of the UK rail privatisation, British Rail handled 700 million passengers, generating 17,800 million passenger-miles.

  • Revenues were 6,200 million British pounds, of which one-third came from grants. Its operating profit was 600 million British pounds in 1995.

  • Passenger operations accounted for more than 90 percent of total revenues.
Reasons for privatisation

  • Introduce private sector productivity and efficiency

  • Attract investment

  • Improve service/market responsiveness

  • Reduce financial drain on government
Restructuring of business before and after privatisation
  • In 1993, the British Rail was split into more than 100 companies including an infrastructure company (Railtrack), 25 passenger services franchises, 6 freight companies (TOCs), 3 equipment leasing companies (ROSCOs), equipment maintenance companies and infrastructure maintenance companies.

  • Passenger services franchises only provide for the rights to operate commuter services. Ownership of railway assets (track, stations, facilities, rolling stock) was transferred to the other privatised companies (Railtrack, ROSCOs, equipment and infrastructure maintenance companies).
Franchise period
  • Passenger TOCs were originally granted 7-year operating franchises; some have been re-negotiated to 15-year franchises to encourage new investments by ROSCOs.

  • Railtrack owns the rail infrastructure, including major stations, in perpetuity. However, it requires a network license issued by the Secretary of State for Transport (SST), and the SST may terminate the franchise with 10 year notice, starting in April 2019 (i.e. the franchise period can be as short as 35 years) under any conditions.
Service standard and regulatory regime

  • The UK has an independent regulatory authority separate from the Ministry of Transport. The Director General of the regulatory authority is appointed by the Secretary of State for Transport.

  • The key functions of the Regulator are to grant licenses to operators, to supervise the granting of access rights (e.g., access agreements between Railtrack and freight and passenger concessionaires), and in general to act as a guardian of users' interests.

  • The service elements that are monitored are punctuality, reliability, and cleanliness of trains; security at stations; and quality and availability of information. Performance benchmarks are created before franchising by asking passengers what they consider to be the most important services.

  • Customer satisfaction surveys carried out by independent firms are conducted at least once every six months during franchising periods. Results are compared to the benchmark. If results are falling behind, TOCs must present an investment improvement plan.
Fare determination mechanism

  • Under the Railways Act, the Franchising Director has the power to include in a franchise agreement a provision to ensure that the level of fares is reasonable.

  • Fare increases are capped at inflation for the first 3 years, and inflation less 1 percent for the next 4 years.

  • Subsidy payments to TOCs are fixed by contract and decline 50-60 percent over the first 7 years.

Canadian National (CN)

Railway Data
  • CN is primarily a freight operator but it also accommodates operations of intercity passenger operators Amtrak and VIA Rail on its network and operates commuter services in Montreal and Toronto under contract.

  • As at end 1994, the last full year prior to the privatisation, CN operated a network of 29,600 km.

  • In 1994, CN generated 109,000 million revenue ton-miles of freight traffic. Revenues were US$3,100 million, with net income of US$288 million. Long-term debt was US$1,800 million compared to shareholder equity of US$1,900 million.
Reasons for privatisation

  • Re-deploy government assets

  • Improve service/market responsiveness
Restructuring of business before and after privatisation

  • CNR was privatised in November 1995, raising a total of C$2.6 billion for the Canadian Government and changed CN from a Crown Corporation to an investor-owned company.

  • As required by the CN Commercialization Act of July 13, 1995, there was a 15 percent limit on the ownership of CN's common shares by any holder alone or together with associates.

  • Government retained certain non-operating properties as part of the debt reduction agreement.
Franchise period
  • Perpetual franchise
Service standard and regulatory regime
  • No minimum service standards have been set for private freight operators.

  • No special regulatory framework has been devised for the privatisation exercise. The privatised services continue to be regulated by the Canadian Transport Authority which is a government agency.
Fare determination mechanism
  • Tariffs are controlled through open market competition.

  • The Canadian Government has the right to introduce competition through mandated access and/or inter-switching arrangements at locations where rates are found to be artificially high due to lack of competition. This is usually triggered only by complaint on part of shipper.

New Zealand Railways (NZR)

Railway Data

  • New Zealand Railways operated approximately 4,000 km of rail lines. With the exception of a few rail museums and tourist lines, NZR is the only rail operator in New Zealand

  • NZR handled 500,000 intercity rail passengers and 12,000,000 commuter passengers in Wellington and Auckland and 8.7 million tons of freight, generating 2,500 million net ton-km.

  • Revenues were approximately NZ$500 million in 1992, with an operating profit of NZ$40 million. Approximately 70% of revenues came from rail freight, 13% from ferry operations, and 11% from rail passenger (including the government funds paid under commercially negotiated contracts for operation of commuter services).
Reasons for privatisation
  • Introduce private sector productivity and efficiency

  • Re-deploy government assets

  • Reduce financial drain on government
Restructuring of business before and after privatisation

  • Restructuring began in 1982 when operations were transferred from a government department to a statutory corporation with commercial objectives.

  • Prior to the privatisation in 1992, the corporation disposed certain non-core businesses, such as bus operations.

  • Ownership of land was retained by the government and leased to the railway. The privatisation otherwise covered the entire vertically integrated railway.
Franchise period
  • Perpetual franchise

  • The lease term of the land is 40 years with a 40-year renewal option
Service standard and regulatory regime
  • No transport industry-specific legislation for freight rates or other aspects of a freight operator's business applies in New Zealand; inter-modal competition (i.e. trucks and ferry) is the primary means of regulation.

  • The privatised long distance passenger services receive no subsidy and are not regulated.

  • The passenger operations in Auckland and Wellington, though subsidized, are not regulated. They are governed through contract terms negotiated between the municipalities and the private operators.
Fare determination mechanism
  • Urban passenger services are provided through commercially negotiated contracts to local authorities. These contracts provide for payment to the rail operators for the railway services to cover the cost of providing the rail services in excess of income generated from fares, plus a reasonable profit margin.

MBTA Railway in the United States

Railway Data

  • Massachusetts Bay Transportation Authority (MBTA) is a public transportation authority that provides commuter rail service to Boston and over 100 surrounding municipalities.

  • In 1998, the MBTA rail handled 44 million passengers.

  • MBTA has purchased most of the infrastructure that commuter rail operates on from the private railways that previously operated the service. MBTA also owns the locomotives and rolling stock used to provide commuter rail service.
Reasons for contracting out service

  • Introduce private sector productivity and efficiency

  • Reduce financial drain on governments
Restructuring of business before and after contracting out
  • In the 1960s, in order to prevent the abandonment of commuter rail service, the predecessors of the MBTA provided subsidies to the private railways operating the services. Even with the subsidies, service deteriorated because the private railways were not willing to invest in the subsidized service. The MBTA changed the structure of its agreements to operating contracts where MBTA provided both capital and operating funds. Initially, these operating contracts were with the private railways that formerly provided the services. The contracts are now awarded through open bidding, and Amtrak, the quasi-government corporation which operates intercity rail passenger service in the United States, is the contract operator of MBTA's commuter rail service.

  • MBTA consolidated the two separate "North Side" and "South Side" commuter services (operated by different private railways) into a single operating contract allowing for consolidation of facilities.

  • MBTA has separated the provision of maintenance of equipment service for commuter rail from the operating contact. Franchise period

  • The franchise is for a term of three years, with two optional one-year extensions by the MBTA.
Service standard and regulatory regime
  • Schedule frequency specified in contract.

  • Key performance measures that trigger incentive payments or penalties include:

  • On-time performance

  • Percentage of required seats available

  • Presence of speed restrictions

  • Occurrences when equipment does not comply with the American Disabilities Act
Fare determination mechanism
  • Fares are set by the MBTA Board of Directors which is appointed by the state government of Massachusetts.