Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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Railway Reform: Toolkit for Improving Rail Sector Performance 8. Rail Sector Governance and Policy 8 Buying Services from Railways 8.1 Introduction Most governments want to retain influence over railway passenger services and fares. Chapter 6 argued that the best way to do this is by using a model in which governments use a contract to purchase the services and fare concessions they want, which this chapter will discuss in detail. First, it will introduce the public service obligation (PSO) concept, underlying the two primary contracts—PSO contracts (Section 8.3) and public services contracts (PSC) (Section 8.4). Second, the chapter will explore the possibility of introducing competitive bidding for such contracts (Section 8.5) and introduce (in Section 8.6) examples, which are also described in the Annexes. A Public Service Obligation is a requirement defined by government, which the railway would not assume if it were considering its own commercial interests. 8.2 Public Service Obligations A good working definition of public service obligations (PSOs) was developed by the European Commission for use in the European Union and is adapted here for more general application: “a requirement defined or determined by government, which the transport undertaking in question, if it were considering its own commercial interests, would not assume or would not assume to the same extent or under the same conditions, without reward.’ Government in this context refers to either the central or local government authority. Three main types of PSO apply to passenger railways. (Figure 8.1.) Public service obligations could include: (i) a specified service or group of services such as those on low-density branch lines, commuter services, or off-peak services at night or on Sundays, regardless of demand levels; (ii) a regulated noncommercial fare structure or restriction of fare increases below those recommended by railway management or at a lower rate than cost increases; (iii) offer- The World Bank Page 120
Railway Reform: Toolkit for Improving Rail Sector Performance 8. Buying Services from Railways ing concession fares to specified groups such as students, pensioners, military personnel, civil servants, the disabled, and so on. Around the world, many passenger railways face explicit service obligations established by government or imposed through regulatory intervention, but rarely reimbursed directly. In other cases, railway managers face similar unstated obligations that, if ignored, might prove career-limiting for them. Whether explicit or implicit, unfunded service obligations undermine railway management’s pursuit of commercial performance and their own commercial accountability. Typically, managers continue to fulfill the obligations and then try to recoup the costs at the end of the year from government by bundling service obligation costs with railways’ total annual losses, which are then covered by government. Unfunded obligations undermine government spending efficiency and effectiveness because there are no links between government objectives, actions, outcomes, and budget impacts. Instead, the costs of unfunded obligations are buried somewhere in the bottom line of deficit funding for the whole service package. By contrast, contracting for PSOs establishes a funding framework that reveals the costs of government-imposed obligations and allows the railway to treat both commercial activities and PSOs, on a commercial basis. A comparison of deficit funding of losses and PSO contractual arrangements is shown in Figure 8.2 8.3 Public Service Obligations Contracts Preparing a PSO contract requires identifying the public services obligations and then determining the principles of compensation. The PSOs that arise from explicit government direction should be the easiest to define. However, if obligations are not explicit, the railway must analyse its activities in detail to select the services and fares it would offer under circumstances of commercial freedom. Then it can present to government a list of services and fare differentials between actual and commercial cases. This gives government The World Bank Page 121
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Railway Reform: Toolkit for Improving Rail Sector Performance - ppiaf

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