Best Practices for Private Sector Investment in Railways - ppiaf

ASIAN DEVELOPMENT BANK
AND
THE WORLD BANK GROUP
CONTRACT NO. 7133241:
BEST PRACTICES FOR PRIVATE SECTOR
INVESTMENT IN RAILWAYS
FINAL REPORT
Prepared By:
TERA INTERNATIONAL GROUP, INC. (TERA)
107 E. HOLLY AVENUE, SUITE 12
STERLING, VIRGINIA 20164, U.S.A.
TELEPHONE: ++1-703-406-4400 FACSIMILE: ++1-703-406-1550
July 31, 2006
The views, interpretations, and conclusions expressed in this paper are those of the author and do not
necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or
the governments they represent, the World Bank or the Executive Directors or the governments they
represent.
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

TABLE OF CONTENTS
EXECUTIVE SUMMARY ................................................................................................................... vi
1 INTRODUCTION.....................................................................................................................1
1.1 OVERVIEW AND OBJECTIVES ..........................................................................................1
1.2 PUBLIC PRIVATE PARNERSHIPS (PPP) ...........................................................................1
1.3 PRIVATE PARTICIPATION IN INFRASTRUCTURE ............................................................3
1.4 TYPES OF PSP ...................................................................................................................4
1.5 POTENTIAL BENEFITS OF PSP.........................................................................................5
2 PSP TRENDS IN RAILWAYS..................................................................................................6
2.1 BACKGROUND ...................................................................................................................6
2.2 PRIVATE PARTICIPATION IN THE RAILWAY SECTOR – DEVELOPING NATIONS .........6
2.3 PRIVATE PARTICIPATION IN THE RAILWAY SECTOR – DEVELOPED NATIONS.........17
3 RAILWAYS OF ASIA: TYPICAL PSP TRANSACTIONS, PROBLEMS, AND SUCCESSES.28
3.1 CHARACTERISTICS OF ASIAN RAILWAYS.....................................................................28
3.2 DEMAND FOR RAILWAY TRANSPORT............................................................................32
3.3 PSP EXPERIENCE IN DMCS............................................................................................33
3.4 LESSONS LEARNED: PROBLEMS AND SUCCESSES...................................................57
3.5 PROSPECTS OF PSP IN DMCS OF ASIA........................................................................62
4 PROMOTING PSP IN THE RAILWAY SECTOR: POLICIES AND PLANNING,
REGULATORY, AND LEGAL FRAMEWORKS .....................................................................68
4.1 BACKGROUND .................................................................................................................68
4.2 RAILWAYS AND ECONOMIC DEVELOPMENT ................................................................69
4.3 KEY ISSUES AND WEAKNESSES IN RAILWAY SECTOR ..............................................70
4.4 BENEFITS OF PRIVATE PARTICIPATION IN THE RAILWAY SECTOR ...........................72
4.5 MAIN CONCERNS OF GOVERNMENTS .........................................................................74
4.6 SOME CONDITIONS FOR EFFECTIVE PUBLIC-PRIVATE COOPERATION ..................76
4.7 PLANNING AND PREPARATION FOR PPP IN THE RAILWAY SECTOR ........................78
4.8 THE REGULATORY FRAMEWORK..................................................................................88
4.9 LEGAL FRAMEWORK .......................................................................................................91
4.10 PROJECT RISKS...............................................................................................................95
5 ACTION PLAN CONSIDERATIONS .....................................................................................97
5.1 INTRODUCTION................................................................................................................97
5.2 IMPLEMENTATION STRATEGIES ....................................................................................98
5.3 ACTION PROGRAMS........................................................................................................99
APPENDIX 1: CONCEPTS AND DEFINITIONS OF PSP
APPENDIX 2: PSP EXPERIENCE IN INFRASTRUCTURE IN DEVELOPING NATIONS
APPENDIX 3: PRIVATE PARTICIPATION IN TRANSPORT PROJECTS IN ASIA, 1990-2004
APPENDIX 4: PRIVATE SECTOR PARTICIPATION IN THE MEXICAN RAILWAYS
APPENDIX 5: CONCESSIONING OF RAILWAYS IN ARGENTINA
APPENDIX 6: PRIVATIZATION AND DISCONTENT IN LATIN AMERICA
APPENDIX 7: CONCESSIONING OF RAILWAYS IN BRAZIL
APPENDIX 8: PRIVATIZATION OF ESTONIAN RAILWAYS
APPENDIX 9: ABIDJAN-OUAGADOUGOU RAILWAYS CONCESSION
APPENDIX 10: AUSTRALIA
APPENDIX 11: CANADA
APPENDIX 12: EUROPEAN UNION
APPENDIX 13: JAPAN
APPENDIX 14: UNITED STATES
APPENDIX 15: SELECTED DATA FOR WORLD RAILWAYS
APPENDIX 16: COMPARATIVE FIGURES
TERA INTERNATIONAL GROUP, INC. - i - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 17: CHECKLIST FOR INCORPORATION OF SOCIAL DIMENSIONS IN RAILWAY
PROJECTS WITH PRIVATE SECTOR PARTICIPATION
APPENDIX 18: SALIENT FEATURES OF A RAILWAY CONCESSION CONTRACT
APPENDIX 19: SAMPLE SECTIONS OF A MODEL RAILWAY PASSENGER CONCESSION
APPENDIX 20: REGIONAL WORKSHOP FINDINGS
TERA INTERNATIONAL GROUP, INC. - ii - PRIVATE SECTOR INVESTMENT IN RAILWAYS

ABBREVIATIONS
AAR
ACCC
ADB
ADTA
AOLS
APC
ARC
ARR
ARTC
ATSB
BR
BBR
BCDA
BERTS
BEV
BMCL
BMTSB
BNSF
BOO
BOOT
BOT
BR
BRS
BTO
BTSC
CAR
CATT
CLG
CN
COAG
CONCOR
CPR
CR
CTA
CVRD
DB AG
DfT
DMCs
DOT
DOTARS
DPRK
DRC
EA
EAP
EBA
ECA
EFC
EFE
EFVM
EIA
EIRR
EPIC
ERL
EU
American Association of Railroads (U.S.)
Australian Competition and Consumer Commission
Asian Development Bank
Advisory Technical Assistance
Assets Operation Liability System (PRC)
Australian Productivity Commission
Aqaba Railway Corporation (Jordan)
Alaska Railroad (U.S.)
Australian Rail Track Corporation
Australian Transport Safety Bureau
Bangladesh Railways
Beitbridge Bulawayo Railway (South Africa and Zimbabwe)
Bases Conversion Development Authority (Philippines)
Bangkok Elevated Road and Train System (Thailand)
Federal Railway Assets (Germany)
Bangkok Metro Co. Ltd. (Thailand)
Bangkok Mass Transit System Public Co. Ltd. (Thailand)
Burlington Northern and Santa Fe Railroad (U.S.)
Build Own Operate
Build Own Operate Transfer
Build Operate Transfer
British Rail
Baltic Railway Services (Estonia)
Build Transfer Operate
Bangkok Mass Transit Public Company Limited (Thailand)
Central Asian Republics
Corporation for Advanced Transport and Technology (Japan)
Company Limited by Guarantee (U.K.)
Canadian National Railway Company
Council of Australian Governments
Container Corporation of India Ltd.
Canadian Pacific Railway Company
China Railway
Canadian Transportation Agency
Companhia Vale de Rio Doce (Brazil)
Deutsche Bahn AG (Germany)
Department for Transport (U.K.)
Developing Member Countries
Department of Transportation (U.S.)
Department of Transportation and Regional Services (Australia)
Democratic People’s Republic of Korea
Democratic Republic of Congo
Executing Agency
East Asia and Pacific
Eisenbahn Bundesamt (Germany)
Europe and Central Asia
Estrada de Ferro Carajas (Brazil)
Empresa Ferrocarriles del Estado (Chile)
Estrada de Ferro Vitoria a Minas (Brazil)
Environmental Impact Assessment
Economic Internal Rate of Return
Etablissement Public Industriel et Commercial (France)
Express Rail Link (Malaysia)
European Union
TERA INTERNATIONAL GROUP, INC. - iii - PRIVATE SECTOR INVESTMENT IN RAILWAYS

EVR
FA
FA
FEPASA
FESAPA
FNM
FRA
FSU
FYP
GAO
GATS
GDP
GPPL
GTC
HSE
ICC
ICD
IFC
IMF
IPO
IR
IRFC
JNR
JNRSC
JPMC
JR
JRC
JRCC
JV
KCSR
KL
KLIA
KTZ
LAC
LRT
MOFTEC
MOR
MOT
MOTC
MOU
MRT
MRTA
MUCTC
NAFTA
NBIA
NPV
NRZ
NS
NSW
NTSB
OPRAF
ORR
PFIPA
PICKO
PKM
PNR
PPI
Eesti Raudtee (Estonia)
Ferrocarriles Argentinos (Argentina)
Fixed Assets
Ferrovias Paulistas Sociedade Anonima (Brazil)
Ferricarril del Pacifico (Brazil)
Ferrocariles Nacionales Mexicanos (Mexico)
Federal Railroad Administration (U.S.)
Former Soviet Union
Five Year Plan
Government Accounting Office (U.S.)
General Agreement on Trade in Service
Gross Domestic Product
Gurajat Pipavav Port Ltd. (India)
Grant Trunk Corporation (U.S.)
Health and Safety Executive (U.K.)
Interstate Commerce Commission (U.S.)
Inland container terminal
International Finance Corporation
International Monetary Fund
Initial Public Offering
Indian Railways
Indian Railways Financial Corporation
Japanese National Railway
Japan National Railway Settlement Corporation
Jordan Phosphate Mines Company
Japanese Railways
Jordan Rail Company
Japan Railway Construction Public Corporation
Joint Venture
Kansas City Southern Railway Co. (U.S.)
Kuala Lumpur (Malaysia)
Kuala Lumpur International Airport (Malaysia)
Kazakhstan State Railways
Latin America and the Caribbean
Light Rail Transit
Ministry of Trade and Economic Cooperation (PRC)
Ministry of Railways (India and PRC)
Ministry of Transport
Ministry of Transport and Communications
Memorandum of Understanding
Mass Rail Transit
Mass Rapid Transit Authority (Thailand)
Montreal Urban Community Transit Commission (Canada)
North American Free Trade Agreement
New Bangkok International Airport (Thailand)
Net Present Value
National Railway of Zimbabwe
Norfolk Southern Railway Co. (U.S.)
New South Wales Railway (U.K.)
National Transportation Safety Board (U.S.)
Office of Passenger Rail Franchising (U.K.)
Office of Rail Regulation (U.K.)
Private Finance Initiative Promotion Act (Japan)
Private Infrastructure Investment Center of Korea
Passenger Kilometers
Philippines National Railways
Private Participation in Infrastructure
TERA INTERNATIONAL GROUP, INC. - iv - PRIVATE SECTOR INVESTMENT IN RAILWAYS

PPP
PPTA
PR
PRC
PRCL
PSO
PSP
PTC
QR
RAC
RAF
RDC
RDF
RFF
ROSCOs
SATCC
SCFB
SCT
SEFICS
SHC
SICF
SIPF
SLR
SNCF
SOE
SOPAFER
SPNB
SPV
SRA
SRT
STB
SUR
SWOT
TA
TdP
TFM
TKM
TOC
TSI
TSI Act
TU
UIC
UNDP
UP
UP-SP
UR
USAID
WA
WTO
ZR
Public Private Partnership
Project Preparation Technical Assistance
Pakistan Railways
People’s Republic of China
Pipavav Rail Co. Ltd. (India)
Public Sector Obligation
Private Sector Participation
Public Transport Corporation (Australia)
Queensland Railway (Australia)
Rail Access Corporation (Australia)
Fegie des chemins de fer Abidjan-Niger (Ivory Coast and Niger)
Railroad Development Corporation (U.S.)
Railway Development Fund (Japan)
Reseau Ferre de France (France)
Rolling Stock Leasing Companies (U.K.)
Southern Africa Transport and Communications Commission
Societe des Chemins der fer du Burkina (Burkina Faso)
Specialized Container Transport Co. (Australia)
Societe d’Exploitation Ferroviarie des ICS (Senegal)
Shinkansen Holding Corporation (Japan)
Societe Ivoirienne des Chemins de fer (Ivory Coast)
Societe Ivoirienne de Partrimoine Ferroviaire (Ivory Coast)
Soo Line Railroad (U.S.)
Societe Nationale des Chemins de fer Francais (France)
State Owned Enterprise
Societe de Gestion du Partrimoine Ferroviaire du Burkina (Burkina
Faso)
Sharokan Prasana Negara Berhad (Malaysia)
Special Purpose Vehicles
State Rail Authority (Australia)
State Railway of Thailand
Surface Transportation Board (U.S.)
Soviet Union Railways
Strengths, Weakness, Opportunities, and Threats
Technical Assistance
Transportes del Pacifico S.A. (Brazil)
Transportation Ferroviara Mexicana (Mexico)
Ton kilometers
Train Operating Companies
Traffic stress index
Transport Safety Investigation Act (Australia)
Traffic Units
Union Internationale der Chemis Fer (France)
United Nations Development Programme
Union Pacific Railroad Co. (U.S.)
Union Pacific and Southern Pacific Railroads (U.S.)
Uganda Railways
U. S. Agency for International Development
Western Australia
World Trade Organization
Zonal Railways (India)
TERA INTERNATIONAL GROUP, INC. - v - PRIVATE SECTOR INVESTMENT IN RAILWAYS

EXECUTIVE SUMMARY
The Need for Private Sector Participation
1. This Report is about Private Sector Participation (PSP) in the Asian railways. Within the
macroeconomic perspective, developing nations face important structural challenges that must be
addressed if they are to maintain sustained economic growth, improve living standards, and
continue their pursuit of a greater role in the global economy. Two challenges broadly confronting
the developing nations in this respect are meeting the massive demand for infrastructure and
adapting the role of the state to the changing economic environment. Unless these challenges are
met, economic growth cannot be sustained for long.
2. Continued growth in demand for services, along with changing technology and regulatory
approaches, requires a shift from the public to the private sector in infrastructure ownership and
service delivery. 1 This does not mean, however, eventual elimination of the public sector in
financing infrastructure. “The key issue is not whether financing should be public or private, but how
the public and private sector share the risks and rewards in a way that works for both sides.” 2
3. The trend of PSP in infrastructure development that began in a few countries in the 1970s
and 1980s has gradually spread to other nations. Developing countries have been at the forefront
of this trend and are pioneering innovative approaches to provide infrastructure services by the
private sector. Now almost all developing countries have some private sector activity in
infrastructure development and many Governments have spelled out their policy and regulatory
frameworks. The private sector and Governments have been working together in projects that are
materially improving the provision of infrastructure and public services. In some countries,
Governments have gone further, beyond their usual tasks of policy formulation, streamlining of
administrative processes and creating a supportive legal environment. They have established
specialized units and devised suitable instruments to provide active support for private sector
activities in infrastructure investment and operation.
4. Governments worldwide have increasingly turned to the private sector for additional
resources, increased efficiency, and sustainable development in many fields, including transport
infrastructure and services. Following trends in other fields, private sector involvement in the
transport sector has now become quite common in many countries in Asia and elsewhere. To
facilitate private involvement, sector reforms have been initiated, albeit at a slow pace in many
Developing Member Countries (DMCs), and many Governments are also considering various other
steps. PSP is being increasingly sought in investment, management and expansion of public
transport systems; highways, urban rail systems, and new port and airport facilities are increasingly
being built and operated following various models of PSP.
Models of PSP in the Railway Sector
5. No two railway systems are alike. Railway operations and services vary from country to
country depending on the demand for services as well as the stage of development in other
transport modes. For example, railway services range from one percent passenger traffic (in the
U.S.) to over 90 percent passenger traffic (in several Asian countries, including Japan, Philippines,
Indonesia, and Sri Lanka). Further, railway passenger transport services range from having
insignificant suburban service (as in PRC) to as much as 90 percent (as in the Philippines).
Because of the widely varying demands for railway services and the divergence in operations, the
need for typical and specific solutions is obvious.
6. There are many varieties and degrees of PSP in railway infrastructure investment and
operations. And the conditions and approach used in each country is unique, reflecting local
circumstances. Figure 1 depicts a simplified range of PSP showing the main varieties and the
extent of participation of the private sector growing from low at left to high at right.
1
2
The World Bank,; Choices for Efficient Private Provision of Infrastructure in East Asia, 1997, p. v.
Asian Development Bank, Japan Bank for International Cooperation, and the World Bank; Connecting East Asia, A
New Framework for Infrastructure, 2005, p. xxx.
TERA INTERNATIONAL GROUP, INC. - vi - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 1: Extent of Participation by the Private Sector
Public Private Partnership
Woks & Services
Contracts
Management &
Maintenance
Contracts
Operation &
Maintenance
Concessions
Build Operate Transfer
Concessions
Full
Privatization
Low
High
7. Despite the wide variety of PSP, however, similarities, particularly in form, exist. PSP in
operations does not necessarily require ownership of assets. Also in many instances PSP can be in
partnership with the public sector. Such Public-Private Partnership arrangements exist in a variety
of forms in the railway sector from leasing non-core assets to jointly owned Build-Own-Operate
schemes and share holding in a formerly public railway operating entity.
Historical Perspective
8. The history of private participation in railway infrastructure development and operation is
quite old. PSP in the railway sector dates back to the 19 th Century when the private companies built
the American railroads under incentives provided by the U.S. Government such as land grants and
mining rights for below ground mineral resources. Similar PSP was also witnessed in many
European countries. The situation in many countries in Africa and Asia was not very different either.
For example, railways in the Indian subcontinent were first introduced in 1853 through private
initiatives. Many railways built in sub-Saharan Africa during the Colonial era in the second half of
the 19 th and early 20 th Century were financed by the private sector to bring the raw materials and
minerals from inland areas to the ports of exit for shipment to industrial centers in Europe and North
America. In China the initial development of railways was largely through private initiatives with
incentives from the Government in the form of concessions. However, at later dates, owing to
various reasons Governments nationalized many of the railway transport systems developed by the
private sector. 3
9. As the railway network expanded, capital intensity of the sector, high infrastructure costs,
indivisibility and externalities made rail transport a natural monopoly. Except in North America,
railways as public monopolies in many countries passed on under Government control.
Governments have viewed rail transport as public services to be provided at subsidized cost. The
social objectives underpinning the provision of some rail services, especially passenger services,
are in conflict with many of the reforms being implemented, particularly the application of
commercially oriented business practices. The desire of Governments to continue pursuing social
policies that were also politically acceptable was responsible for reluctance to reforms or reducing
Government control over railway operations.
10. The corollary of this lack of commercial focus was that railways generally failed to develop
an entrepreneurial culture with respect to management accountability for performance, assessing
and reacting to changes in market conditions, and in being innovative and seizing new opportunities.
These cultures can be slow to change, as evidenced by the hesitancy of national railway systems to
deal with the issues and uncertainties inherent in the reform process.
11. The continued presence of monopoly and absence of competition resulted in monopolyinduced
inefficiencies, low productivity and large deficits. Most railways in the world incurred
growing deficits during 1970s and 1980s. For instance, despite of significant Government subsidies,
the revenues earned by railways in Italy, France and Spain were only half of their operating costs.
In 1994, the total debt of Italian railway was almost 4.9 per cent of the country’s GDP. In early
1980s, Japan National Railways incurred a loss of US$10 billion to 15 billion per year. Continued
3
A.S.M. Abdul Quium; Private Sector Participation in the Transport Sector Trends, Issues and Institutions in the
Asia-Pacific Region, Transport and Communications Bulletin for Asia and the Pacific No. 72, 2003
TERA INTERNATIONAL GROUP, INC. - vii - PRIVATE SECTOR INVESTMENT IN RAILWAYS

financial losses over several years resulted in large debts. In 1985, the total debt of Japan National
Railways was around US$200 billion.
Recent Trends
12. More recently, there have been considerable attempts to reform state railway enterprises
operating on a noncommercial basis, carrying large debts, and providing a range of community
services funded by cross subsidies from more profitable services or through budgetary
appropriations. The first, on-going stage of the reform process has been to put these organizations
on a commercial footing through corporatization, which is still underway in some Asian countries.
13. A factor contributing to the restructuring process was a rapid change in customer demand
for higher quality service at lower price. This is especially true for freight customers, who with
liberalization and globalization face competition from their global counterparts and hence push for
lower transport costs. Competition from other modes of transport such as roads reduced the market
share of railways and pressured it to improve productivity through technological upgrading (e.g.
high speed passenger service and dedicated container trains).
14. In some cases, reform has entailed the separation of potentially competitive segments from
the natural monopoly elements (the above and below rail operations) with a view to encourage new
entry by private operators. In others, vertically integrated operations have been retained but with
streamlined administrations designed to cope with a more competitive environment. Similar to the
situation in other utility sectors in the developing world which grappled with poor performance in the
early 1990s, railroads, too, have been struggling with similar problems: a bloated labor force
resulting in low productivity, a poorly maintained infrastructure and equipment causing unreliable
service, and a bleak financial situation precluding introduction of new technologies and performing
routine maintenance and repair.
15. The 1990s have marked the reemergence of private railway operation in developing
countries after half a century of nationalization and public sector management. Governments
wanting to improve the efficiency of railway networks and reduce the burden of subsidies
transferred operations and in many cases investment to the private sector. In some of these
countries underinvestment by the public operator had left railways in need of rehabilitation to meet
expected demand.
16. In the 15-year period from 1990 to 2004, some 85 railway projects with private participation
reached financial closure in 28 developing countries with cumulative investment commitment of
US$27.8 billion. From a modest beginning of one railway project in 1990 and 1991 with private
participation, the number of such projects steadily increased to an average of 12 projects per year
during 1996-1999 (Figure 2). 4 Investment commitments increased from an average US$500 million
per year in 1990-1992, to a peak of US$5.9 billion in 1996. Since then PSP in railway projects
declined as a result of the Asian financial crisis. In 2002-2004, investments are back to the level of
the early 1990s.
17. More than 57 percent of PSP in the railway sector during the 1990-2004 period was in Latin
America, which was followed by East Asia and Pacific with 14 transactions or 16.5 percent of the
total (Table 1). The experience with private rail contracts in Latin America and elsewhere
encouraged some African and Former Soviet Union (FSU) Governments to consider private
participation to improve rail service and prevent further deterioration of railway infrastructure.
Among all regions, Latin America has clearly led the way in the revival of PSP in the rail sector.
4
By contrast, only five projects in just three developing countries reached financial closure during the six years before
1990. Of these 3 were short-term leases for the operation of railways in Thailand that expired in 1991 and were not
renewed. The other 2 were a management contract in Mexico and a BOT contract for the Ferronorte railway in Brazil.
TERA INTERNATIONAL GROUP, INC. - viii - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 2: Investment in Railway Sector in Asia and Developing Countries
Investment in Railway Sector
7000
6000
5000
4000
3000
2000
1000
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
US$ million
Developing Countries
Asian Countries
Table 1: Number of and Investment in Railway Projects with Private Participation by Region
Region
Railway Projects
Number Share of
Total (%)
Investment
(US$ million)
Share of
Total
Latin America and the Caribbean 49 57.6 16,228 58.3
Europe and Central Asia 7 8.2 299 1.1
Middle East and North Africa 1 1.2 182 0.7
Sub-Saharan Africa 13 15.3 519 1.9
East Asia and Pacific 14 16.5 10,530 37.8
South Asia 1 1.2 85 0.3
Total 85 100 27,843 100
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
Future Outlook
18. After pioneering the industrial revolution in many countries in the 19 th and early 20 th
centuries, and then seeing their existence threatened by stiff competition from other modes in the
late 20 th century, railways now have a chance to re-establish their relevance in this era of trade
liberalization. Indeed, the following five features speak in favor of a greater utilization of rail
transport in Asia: (i) twelve of the 30 landlocked countries of the world are located on the Asian
continent with the nearest ports often several thousands of kilometers away; (ii) the distances
linking the main origins and destinations, both domestically and internationally, are of a scale on
which railways find their maximum competitiveness and full economic justification; (iii) the
continuing surge in the volumes of goods and products being exchanged make rail transport a
necessary ingredient for economic development; (iv) with development there is increasing
emphasis on urbanization to improve the lives of peoples, where the railways are the only means
that can provide cost effective and safe mobility to large numbers of people in the mega cities of
Asia; and (v) rail is increasingly recognized as an energy-efficient, environmentally-friendly, and
safe mode of transport. Railways are important to Asian economies as perhaps in no other
continent.
19. State-owned railways in most countries are in deep financial trouble. DMCs are most
adversely affected because their economies are caught in a vicious cycle: the Government is
unable to support railway deficits, leading to the inability of the railways to maintain assets, which in
turn leads to deteriorating services and results in adverse impacts on the economy. The problems
have been exacerbated because with greater demand, changing technology, increasing complexity
for financing the infrastructure projects and the budgetary constraints, the public sector is no longer
able to discharge efficiently its role as a provider of infrastructure services.
20. Asian Governments have recognized that PSP including foreign investment is required to
supplement the public sector efforts. Various reforms have been made in infrastructure sectors, and
rules and procedures for investment have been liberalized in order to provide an enabling
TERA INTERNATIONAL GROUP, INC. - ix - PRIVATE SECTOR INVESTMENT IN RAILWAYS

environment conducive for PSP. The role of the Government has changed from ‘owner’ and ‘sole
provider’ to that of a ‘facilitator’ and ‘regulator’ to safeguard the interests of the vulnerable sections
of the community by an effective legal and institutional framework.
21. Governments have also been rightly worried about borrowing too much, because the build
up of debt imposes a burden on future generations to service the debt. In some literature on the
subject, it is indicated that PSP enables the Government to get around the budgetary constraints.
This statement may not be wholly correct. The private sector cannot provide something for nothing.
PSP sets up a future set of obligations to service the payments that are needed to honor the
contracts. Nevertheless, PSP is worthwhile because: (i) private sector management can bring in
experience in undertaking large scale capital projects; (ii) private sector can also provide a genuine
element of risk-taking rare in the public sector; and (iii) above all - although this is rarely said - the
private sector brings in people whose own money is at stake in the success of the venture.
Opportunities Ahead
22. The status as of the end of 2004 indicates that the pipeline of railway sector projects with
PSP in developing countries has considerably thinned out. The fragility of the railway pipeline of
projects and the decline in modal share of investment is a cause for concern, considering the large
investment needs of railways in developing countries to provide logistics support for economic
development and poverty reduction activities. Railway development around the world in the past
two centuries was made possible by Governments which provided appropriate incentives and risk
coverage to the private sector at terms that were comparatively more favorable than the alternative
investment opportunities. The large size of networks that were built through PSP is testimony to the
success of those efforts. It is imperative that Governments in developing countries create the
necessary conditions for private participation and offer products for investment in infrastructure,
services and management of operations that are attractive compared with other more attractive
opportunities for investment available to the private investor.
23. Although a good starting point, the level of PSP in the railway sector in Asia since 1990
cannot be reckoned as adequate considering the needs. In the last few years PRC alone has been
investing about US$7 billion to US$9 billion per year on railway development. In the next 15 years
to 2020, the investment needs are estimated between US$25 billion and US$40 billion per year.
Investment needs in other Asian countries for railway development, though not so large are also
significant. This level of investment is clearly beyond the capability of the state-owned railway
systems. Asian countries need to take new initiatives to diversify investment sources to meet the
needs of their railway systems.
24. Table 2 presents a summary of PSP prospects for DMCs. The need for capacity expansion
(new projects) as well as efficiency improvements under competitive market conditions is admitted
throughout the region. Some railways are relatively small with little traffic. As such they are more
suitable for a single concession transaction or partial divestiture through sale of stock to a strategic
private partner. Some railways are large and are more suitable for geographic and functional
unbundling and selective PSP through concessioning of particularly branch lines and strategic
partnership in public-private joint ventures or sale of shares for larger investments. The suitability of
each transaction must be carefully and objectively evaluated for fitness to the Government’s
objectives and private sector interest to accept an appropriate risk-reward mix.
Considerations for Asian Countries
25. Privatization policies and implementation measures must be well thought out considering all
possible impacts as well as the mitigation measures necessary. Given the vital role of railways in
Asia, Asian economies are as yet not mature enough to absorb the shocks of privatization that are
known to affect employment and the weaker sections of the society. It may be difficult to make
changes rapidly without the risk of severe social disruption, particularly where this involves
organizations divesting themselves of traditional social responsibilities that hamper their
commercial potential and responsiveness to consumers.
TERA INTERNATIONAL GROUP, INC. - x - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Table 2: Prospects for and Suitability of PSP in Asian Railways
Characterics Prospects for PSP Suitability of...
DMC
Need for Capacity
Expansion
Traffic Density
Employee
Productivity
(Tus/Employee)
Route Length
Labor Intensity
(Employees/Route
km)
Importance in GDP
Formation
Need for PSP in
Funding New
Projects
Need for PSP in
Funding -
Improvements in
Existing Assets
...Geographic
Unbundling
...Freight/
Passenger
Separation
Concessions
Partial Divestiture
to Strategic
Partners
PPP in BOO
Greenfield
Projects
Bangladesh L L VL L H VL Sm M M M H M L
Cambodia VL VL VL VL L L VSm Sm VL L H H VL
China VH VH M VH VH H VLg VLg VH VH VH (1) H VH
India H VH L VH VH H VLg VLg VH VH VH (1) H VH
Indonesia M L U L U VL M Sm M M H M L
Kazakhstan H H M H M VH VLg Lg VH VH VH H H
Kyrgyzstan L VL VL VL H M Sm Sm VL VL M L L
Malaysia L L L L L VL Sm Sm VL M H L M
Mongolia H M L L M VH VLg Lg VL M L VL H
Myanmar L L U L U L VSm VSm VL M U U U
Pakistan M M VL M H L Lg M M VH H H H
Philippines VL-L M VL VL L VL Sm M VL M VL VL L
Sri Lanka L M U L U VL Sm M VL H H M L
Tajikistan VL L VL VL M H VSm VSm VL VL M L L
Thailand M M U L U L M Sm M M H H L
Uzbekistan M M L L H H Sm Sm M H M M M
Vietnam L L VL L VH L M M L M H H M
VL = Very Low; L = Low; M = Moderate; H = High; VH = Very High; U = Unknown; Lg = Large; VLg = Very Large; Sm = Small; VSm = Very Small; (1)
Particularly for branch lines.
Source: Consultant
26. Governments can also take action prior to PSP transaction to reduce retrenchment and
soften the impact on workers. These measures include freezing new recruitment and hiring as long
as possible before privatization, reducing the size of the workforce through attrition as much as
possible before the enterprise is transferred to private ownership, and guaranteeing the
membership of workers in social security schemes or pension plans even if they lose their jobs. The
social costs of extensive job losses, while far from insignificant, can be lessened if carefully handled.
Well designed concessions of simple and smaller size rail networks or individual railway lines are
simpler to analyze for impacts, rather than whole networks.
Concessioning
27. One approach to increasing the role of the private sector is "concessioning". Concessions
involve continuing public ownership and oversight of infrastructure, but the transfer of operating
responsibility and the delivery of services to the private sector. The reasons for the preference for
concessioning over divestiture appear to be reluctance to loss of control over publicly-owned assets.
In some countries sale of infrastructure such as track, stations, and other fixed assets require
lengthy legislative action, even a Constitutional amendment. Another reason is concessions do not
require a large initial investment from the private sector operator. Concessioning can enable the
Government to retain ultimate control over the infrastructure while allowing the private sector to
operate the railways and compete for customers in the market. Concessions require continuing
Government involvement in regulating safety and monopolistic behavior, and in ensuring adherence
to the pricing and service requirements of the concession agreement.
Divestiture
28. Full divestiture in a fashion similar to U.K. and New Zealand is not a popular alternative for
most if not all DMCs. In many countries sale of the railway infrastructure entails a Constitutional
change since the public ownership of what was, and in many cases is still, considered a strategic
industry is being disposed. Furthermore, full divestiture without a thorough understanding and
establishment of the Government’s regulatory oversight functions carries substantial risks of market
failure with dire consequences as experienced in the U.K. In short, the process of creating the
necessary legal and regulatory framework is tedious, time consuming, and prone to missteps that
are costly.
29. Partial divestiture fashioned in a manner similar to Estonia where the Government
maintained a minority share in the new railway company is more suitable in many nations, provided
that an arms-length regulatory oversight for safety and monopolistic abuse at the minimum is
established and objective monitoring of performance against predefined clear targets is
implemented. An alternative to the Estonian experience where the sale was made to a strategic
partner, is the PRC model of divestiture through public listing of shares in the stock exchange. For
TERA INTERNATIONAL GROUP, INC. - xi - PRIVATE SECTOR INVESTMENT IN RAILWAYS

successful implementation of this strategy, however, the transaction should be large enough to bear
the legal and underwriting costs for preparation of the Prospectus, marketing to potential investors,
and other preparatory obligations.
30. Given the importance of railways in the Asian economies and the large extent to which
railways are intertwined in the social fabric in Asian countries, it is important that the modality of
private sector participation is given full consideration with the involvement of those affected – the
stakeholders. In Asia, where large regions are underdeveloped and poor, the basic issues are
access and providing the means for generating incomes for the poor through direct or indirect
employment. These aspects can best be fostered by the public sector.
TERA INTERNATIONAL GROUP, INC. - xii - PRIVATE SECTOR INVESTMENT IN RAILWAYS

1 INTRODUCTION
1.1 OVERVIEW AND OBJECTIVES
1. This Report is prepared by TERA International Group, Inc. (TERA) pursuant to the terms
and conditions of a Consulting Services Contract dated 25 March 2005 between The World Bank
Group and TERA for Best Practices for Private Sector Investment in Railways (Project). The
Executing Agency (EA) under the Contract is the Asian Development Bank (ADB).
2. The objectives of the Project are to:
♦ Increase awareness and inform Developing Member Country (DMC)
Governments and other stakeholders in Asia on how private sector
participation (PSP) can increasingly be used for railways;
♦ Explore the opportunities and options available; and
♦ Prepare best practice case studies and typical examples of private-public
transactions for railways.
3. To meet these objectives, this Report as well as the regional workshop organized by ADB in
Manila on 14-15 June 2006 (see Appendix 20 for a summary of findings of the workshop) are
focused on the following areas of interest:
♦ Reviewing global best practices and Asian experience on promoting PSP in
railways;
♦ Exploring opportunities and options, and assessing general feasibility, and
the prerequisites for increased PSP;
♦ Providing advice on the design and implementation of policy, regulatory, and
institutional reforms supporting or necessary for private sector involvement in
the railway sector;
♦ Describing the appropriate allocation of risks between the private and public
sectors;
♦ Describing specific cases, typical transactions and examples of good publicprivate
transactions for railways;
♦ Promoting and disseminating best practices to the public officials, private
sector companies, and other stakeholders; and
♦ Building a general consensus among DMCs on the need for and scope of
PSP in the railway sector.
4. In this Section 1 the types of PSP in the railway sector are described. The Section also
provides a comparative description of the benefits of PSP options, which are further described in
subsequent Sections. Section 2 of the Report provides an overview of PSP trends in infrastructure
in developed and developing countries with emphasis on experience in railways world wide and in
Asia. Section 3 provides a comparative analysis of railways in DMCs in Asia, and PSP experience
in 8 countries visited by the Consultant, and lessons learned. The Section also includes a
discussion on PSP prospects in the railways of DMCs. Section 4 provides a discussion on relevant
issues in promoting PSP in the railway sector, including policy and planning, regulatory, and legal
frameworks. Section 5 presents options for consideration in the preparation of an action plan for
PSP.
1.2 PUBLIC PRIVATE PARNERSHIPS (PPP)
5. PSP is a general term used to describe involvement of non-government entities in the
investment in and/or operation of productive facilities that create an economic output, i.e. goods or
services which have a market demand. The degree of involvement may range anywhere from
complete absence to full presence of the private sector. In the former case, investment in and
TERA INTERNATIONAL GROUP, INC. - 1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

operation of productive facilities are completely undertaken by the public sector entities operating
either as government departments as or under a ministry or as a State Owned Enterprise (SOE). In
this case there is no PSP. Full presence of the private sector, on the other hand, denotes
investment/operation under full ownership and control of private sector enterprises. This case
describes full PSP. 5
6. Numerous variations in between the two extremes exist where the public and private entities
collaborate in the investment and/or operation of productive facilities. These collaborative
arrangements are also referred as Public-Private Partnerships (PPP).
7. PPP constitutes a sustained collaborative effort between the public sector and private
enterprises to achieve a common objective such as a railway project while they pursue their own
individual interests. In a PPP each partner:
♦ shares in the design and operational scope of the project;
♦
contributes a portion of the financial, managerial, and technical resources
needed to execute and operate the project in accordance with each partner's
comparative advantage; and
♦ partially shoulders the risks associated with the project and obtains the
benefits that the project creates.
8. Thus PPP entails a joint alliance between the public and private sectors beyond the
traditional contractual relationship. PPP brings the best of each partner’s competencies to optimize
the achievement of the common objective. Given the mid- or long-term nature of that objective and
the transformation generated by the shift in roles, the joint alliance needs to be sustained over a
long period of time. The longer the nature of the objective, the larger are the uncertainties
associated with the project and the more critical and relevant is the risk-reward distribution among
the partners.
9. An increasing number of governments are seeking to encourage private investment in
infrastructure and stimulate economic activity by privatizing their national rail systems through sale
or by concession to qualified operators. In some situations, particularly in developing countries, the
participation of the private sector in a PPP is still viewed as a test of involvement on a stand alone
basis. It may be mentioned that no PPP can be successful without complete and unqualified
participation, performance of respective obligations, and cooperation by both public and private
entities. This is important for fostering a win-win situation for both the private and public entities
involved in the collaborative effort. This will be finally reflected as return on the investment for the
private partner, and a net benefit to the society and the economy as a whole through the
achievement of specific rail transport-related goals, such as the improvement of accessibility to lowcost
transport services or the reduction of transport costs. These interests are channeled through
the definition of risks. Thus, a clear assignment of risks and rewards is a precondition of the
successful implementation of a PPP initiative.
10. The history of private participation in infrastructure development is quite old. PSP in the
railway sector dates back to the 19 th Century when the private companies built the American
railroads under incentives provided by the U.S. Federal government such as land grants and mining
rights for below ground mineral resources. Similar PSP was also witnessed in many European
countries. The situation in many countries in Africa and Asia was not very different either. For
example, railways in the Indian subcontinent were first introduced in 1853 through private initiatives.
All railways built in sub-Saharan Africa during the Colonial era in the second half of the 19 th and
early 20 th Century were financed by the private sector to bring the raw materials and minerals from
inland areas to the ports of exit for shipment to industrial centers in Europe and North America. In
China the initial development of railways was largely through private initiatives with incentives from
5
An alternative term commonly used interchangeably with PSP is Public-Private Partnership (PPP). A partnership
between a public entity and a private company exists when the two join resources to produce goods or services which
have a market demand. Therefore, at the two extremes of PSP (none and full), there is no PPP. In other words, PPP as
a noun, denotes some presence of both the public and private sector in a partnership.
TERA INTERNATIONAL GROUP, INC. - 2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

the government in the form of concessions. However, at later dates, owing to various reasons
governments nationalized many of the railway transport systems developed by the private sector. 6
11. The trend of PSP in infrastructure development that began in a few countries in the 1970s
and 1980s has gradually spread to other nations. Developing countries have been at the forefront
of this trend and are pioneering innovative approaches to provide infrastructure services by the
private sector. Now almost all these countries have some private activity in infrastructure
development. Many governments in the Asia-Pacific region have spelled out their policy and
regulatory frameworks. The private sector and governments have been working together in projects
that are materially improving the provision of infrastructure and public services. In some countries,
governments have gone further, beyond their usual tasks of policy formulation, streamlining of
administrative processes and creating a supportive legal environment. They have established
specialized units and devised suitable instruments to provide active support for private sector
activities in infrastructure.
1.3 PRIVATE PARTICIPATION IN INFRASTRUCTURE
12. Developing nations face important structural challenges that must be addressed if they are
to maintain sustained economic growth, improve living standards, and continue their pursuit of a
greater role in the global economy. Two challenges broadly confronting the developing nations in
this respect are meeting the massive demand for infrastructure and adapting the role of the state to
the changing economic environment. Unless these challenges are met, economic growth cannot be
sustained for long.
13. Continued growth in demand for services, along with changing technology and regulatory
approaches, requires a shift from the public to the private sector in infrastructure ownership and
service delivery. 7 This does not mean, however, eventual elimination of the public sector in
financing infrastructure. “The key issue is not whether financing should be public or private, but how
the public and private sector share the risks and rewards in a way that works for both sides.” 8
14. Governments worldwide have increasingly turned to the private sector for additional
resources, increased efficiency, and sustainable development in many fields, including transport
infrastructure and services. Following trends in other fields, private sector involvement in the
transport sector has now become quite common in many countries in the Asia-Pacific region. To
facilitate private involvement, sector reforms have been initiated, albeit at a slow pace in many
DMCs, and many governments are also considering various other steps. PSP is being increasingly
sought in investment, management and expansion of public transport systems, highways, urban rail
systems and new port and airport facilities are increasingly being built following various models of
PSP.
15. In a typical private participation in infrastructure (PPI) 9 the private sector assumes operating
risk during the operating period or assumes development and operating risk during the contract
period. In addition, the operator must consist of one or more corporate entities with significant
private equity participation that are separate from any government agency. PPP is the umbrella
name given to a range of initiatives which involve the private sector in the development and/or
operation of public services.
16. PPI is a developing subject and it is indeed difficult to outline the numerous possibilities of
PPP. There are many forms and degrees of PPI investment and provision of operations and
services in the railway sector. These vary by structure and by scope within each form. Further,
these may depend on the country’s political situation, status of economic development,
socioeconomic conditions, competitive environment, legal and regulatory environment, and other
country and railway specific factors.
6
7
8
9
A.S.M. Abdul Quium; Private Sector Participation in the Transport Sector Trends, Issues and Institutions in the
Asia-Pacific Region, Transport and Communications Bulletin for Asia and the Pacific No. 72, 2003
The World Bank,; Choices for Efficient Private Provision of Infrastructure in East Asia, 1997, p. v.
Asian Development Bank, Japan Bank for International Cooperation, and the World Bank; Connecting East Asia, A
New Framework for Infrastructure, 2005, p. xxx.
PPI is focused on private sector investment in infrastructure, whereas PSP is a general term encompassing private
sector involvement in all economic sectors, including infrastructure. As such, PPI is a subset of PSP.
TERA INTERNATIONAL GROUP, INC. - 3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

17. No two railway systems are alike. Railway operations and services vary from country to
country depending on the demand for services as well as the development of other transport modes.
As for example, railway services range from one percent passenger traffic (in the U.S.) to over 90
percent passenger traffic (in several Asian countries, including Japan, Philippines, Indonesia, and
Sri Lanka). Further, the passenger services range from having insignificant suburban service (as in
China) to as much as 90 percent (as in the Philippines). Because of the widely varying demands for
railway services and the divergence in operations, the need for typical and specific solutions for
PPP is highlighted.
1.4 TYPES OF PSP
18. There are many varieties and degrees of PSP in railway infrastructure investment and
operations. And the conditions and approach used in each country is unique, reflecting local
circumstances. Figure 1.1 depicts a simplified range of PSP showing the main varieties and the
extent of participation of the private sector growing from low at left to high at right.
Figure 1.1: Extent of Participation of the Private Sector
Public Private Partnership
Woks & Services
Contracts
Management &
Maintenance
Contracts
Operation &
Maintenance
Concessions
Build Operate Transfer
Concessions
Full
Privatization
Low
High
19. Despite the wide variety of PSP, however, similarities, particularly in form, exist. Figure 1.2
presents a more detailed description of the different degrees of PSP ranging from full public sector
ownership and operation to complete private sector investment and operation. The figure
distinguishes the public versus private ownership of assets at the top and operations at the bottom
as measures to depict the full spectrum of PSP. Obviously, PSP in operations does not necessarily
require ownership of assets. Also in many instances PSP can be in partnership with the public
sector. As shown in the figure, such PPP arrangements exist in a variety of forms in the railway
sector from leasing non-core assets to jointly Build-Own-Operate schemes. Appendix 1 provides a
detailed description of each PSP type depicted in Figure 1.2 with specific examples from around the
world.
Figure 1.2: Privatization Continuum in Railways
Public Agency/SOE
Private Sector Company
Public
Ownership
Sale of Public
Assets
Private
Ownership
Government
Department
Performance
Contract
Leasing
Assets
Service and
Management
Contracts
Concessioning BTO Public-
Private JV
BOT/
BOOT
Public
Listing of
Shares
Sale of Noncore
Assets
BOO
Divestiture
Public Sector Operations
Private Sector
Operations
Public-Private
Partnership
Commercialization
TERA INTERNATIONAL GROUP, INC. - 4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

1.5 POTENTIAL BENEFITS OF PSP
20. The benefits of various PSP options are summarized in Table 1.1. The list is not exhaustive
and the actual situation may depend on various factors, including the stage of economic
development; socioeconomic conditions, cultural and political situations; state of development of
alternative transport modes; competitive environment; and the regulatory environment. These are
but some of the factors, and there may be many more specific to the railway system and the
country, and the stage of development of the private sector.
Service
Contracts
Promotes
competition
during bidding
for service
contracts
Government’s
risk is
relatively low
Contracts of
short or long
duration with
easy
retendering if
contractor
fails
Well tested
easy-toimolement
contractual
terms
Potential
starting point
for PSP
Can increase
focus on core
business
Potential for
efficiency
gains in the
area covered
by the
contract
Table 1.1: Potential Benefits of Various PSP Options
Management
Contracts
Lease Concession BOT/BOOT/BTO Divestiture
Full responsibility Full responsibility
Can increase
for operations, for operations,
Private sector
Can improve efficiency of asset
capital raising and capital raising
management of
service quality management and
investment
and investment
operations
utilization
assumed by private assumed by
sector
private sector
Reduced risk to
government
Potential first step
to concession
contract
Potential for setting
performance
standards with
incentives and
penalties
Allows introduction
of private sector
management skills.
Limited commercial
risk
Can revert to inhouse
management
or contract may be
retendered if
problems arise
Potential to
encourage
competition in
bidding
Reduced
government
commercial risk.
Guaranteed
collection of lease
revenue
Management
responsibility and
commercial risk
transferred to
private sector
Incentives for
contractor to
minimize costs,
provide reliable
services and
maximize revenue
collection
Increased
government
revenue
Relieves
government of
need to fund
investments
Full
responsibility for
operations,
capital raising
and investment
goes to private
sector
Encourages
potentially large
improvements in
operating
efficiency
Full private
sector incentives
Attractive to
private financial
institutions
Potentially large
improvements in
operating efficiency
of bulk assets
Full private sector
incentives in bulk
supply
Attractive to private
financial institutions
Mobilizes private
finance for new
investments
Addresses future
funding shortfalls
Full private
sector incentives
in bulk supply
Attractive to
private financial
institutions
Addresses any
funding shortfall
Could be
successful where
there is good
track record of
private sector
ownership
Mobilizes private
finance for key
investments
TERA INTERNATIONAL GROUP, INC. - 5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

2 PSP TRENDS IN RAILWAYS
2.1 BACKGROUND
21. This section summarizes the recent growth in PSP in the railway sector in developing
countries. It also provides an overview of PSP experience in developed nations. Appendix 2
includes a more complete discussion and analysis of PSP trends in infrastructure (energy,
telecommunications, transport, and water sectors) from 1990 to 2004 based on data reported in the
World Bank’s PPI Project Database. 10 A detailed list of PPI projects included in the World Bank’s
Database in the transport sector in Asia is provided in Appendix 3.
2.2 PRIVATE PARTICIPATION IN THE RAILWAY SECTOR – DEVELOPING NATIONS
22. With total investment of $369.6 billion and $270.9 billion, respectively, telecommunications
and energy sectors dominated PSP in infrastructure from 1990 to 2004. Transport sector is third
with $128.4 billion (16 percent of total), followed by water and sewer projects ($41.4 billion or 5
percent). Within the transport sector PPI investment in the railways amounted to $27.8 billion, which
constitutes 22 percent of transport sector projects or only 3.4 percent of all projects. There are
varied reasons which explain why railway PPI projects are fewer than other transport projects or
projects in other sectors. Geographic and functional unbundling in the railway sector is a
complicated task since joint facilities are used for different types of service (passenger, freight,
container) and the network is spatially interconnected, making separation difficult. Separation of
regulation from operations to an extent which satisfies private sector concerns is slow and in some
countries very difficult. The speed with which technological improvements are introduced is slower
than high-tech based telecommunications and other industries in which private sector involvement
is a pre-condition for successful introduction of innovation to maintain competitiveness. Scale of
operations and average size of investment is higher than most other industries, thus limiting the
number of potential private sector partners. Despite these factors limiting PSP in railways, the
sector has been actively engaged in encouraging private sector involvement with core operations in
a variety of forms.
23. The 1990s have marked the reemergence of private railway operation in developing
countries after half a century of nationalization and public sector management. Governments
wanting to improve the efficiency of railway networks and reduce the burden of subsidies
transferred operations and in many cases investment to the private sector. In some of these
countries underinvestment by the public operator had left railways in need of rehabilitation to meet
expected demand.
24. In 1990-2004, some 85 railway projects with private participation reached financial closure
in 28 developing countries with cumulative investment commitment of US$27.8 billion (Table 2.1).
From a modest beginning of one railway project in 1990 and 1991 with private participation, the
number of such projects steadily increased to an average of 12 projects per year during 1996-
1999. 11 Investment commitments increased from an average US$500 million per year in 1990-1992,
to a peak of US$5.9 billion in 1996. Since then PSP in railway projects declined. In 2002-2004,
investments are back to the level of the early 1990s (Figure 2.1).
10 http:/ppi.worldbank.org/
11
By contrast, only five projects in just three developing countries reached financial closure during the six years before
1990. Of these 3 were short-term leases for the operation of railways in Thailand that expired in 1991 and were not
renewed. The other 2 were a management contract in Mexico and a BOT contract for the Ferronorte railway in Brazil.
TERA INTERNATIONAL GROUP, INC. - 6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Table 2.1: Investment in Railway Projects with Private Participation by Year, 1990-2004 (US$ million)
Year
Rail Projects in Developing Countries Rail Projects in Asian Countries
Number Investment Number Investment
1990 1 632 1 632
1991 1 214 0 0
1992 3 815 0 0
1993 3 1,156 1 487
1994 4 577 0 0
1995 4 3,104 1 2,578
1996 12 5,936 2 2,685
1997 13 4,599 3 1,234
1998 11 3,281 0 0
1999 12 2,651 0 0
2000 9 1,144 1 184
2001 6 2,517 3 1,966
2002 2 190 1 85
2003 2 807 2 763
2004 3 220.7 0 0
Total 85 27,843 15 10,615
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
Figure 2.1: Investment in Railway Sector in Asia and Developing Countries
Investment in Railway Sector
7000
6000
US$ million
5000
4000
3000
2000
1000
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Developing Countries
Asian Countries
2.2.1 Investment in Railway Projects by PPI Type
25. In the railway sector, concessions were the most dominant form of private participation with
52 projects or 61 percent of the total reaching financial closure, representing investment
commitment of US$16.4 billion or 59 percent of the sector total (Table 2.2). Concessions were for
managing and operating existing railways and generally involved major capital expenditure by the
private operators. The private entity would usually take over the management of existing facilities
for a given period under a concession contract while also assuming significant investment risk.
Concession contracts allow governments to increase efficiency and investment while retaining
ownership of the rail infrastructure. In the rail sector concessions leave ownership of fixed assets
with the public sector and transfer operating risk and responsibility to the private sector.
TERA INTERNATIONAL GROUP, INC. - 7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Table 2.2: Investment in Railway Projects by Type of Private Participation in Developing
Countries and Asia, 1990-2004 (US$ million)
Rail Projects in Developing Rail Projects in Asian Asian Share
Countries
Countries
of
Type
Investment
Investment Developing
Number
Number
(Share %)
(Share %) Countries
Concessions 52 16,446 (59%) 0 0 0
Divestiture 10 1,060 (3.8%) 2 670 (6.3%) 63.2%
Greenfield 15 10,337 (37.2%) 12 9,944 (93.7%) 96.2%
Management
and Lease 8 0 0 0 0
Contract
Total 85
27,848
10,615
15
(100%)
(100%)
38.1%
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
26. Among regions there is significant variation in the type of private participation preferred in
the railway sector (Table 2.3). In the LAC region the dominant form of private participation was
concessions. Of the 49 railway projects in LAC that reached financial closure in 1990-2004, some
43 or 88 percent were concessions representing US$15.8 billion in investment commitments or 98
percent of the PSP investment in railways in the region.
Table 2.3: Number of Railway Projects and Investment in Developing Countries by
Region and Type of Participation (number and US$ million)
Type of Private Participation
Region (Number of Countries) Con Div Gre Man Total
Latin America and the No. 43 4 1 2 49
Caribbean (10) Inv 15,835 90 303 0 16,228
Europe and Central Asia No. 0 4 0 3 7
(2) Inv 0 299 0 0 299
Middle East and North No. 1 0 0 0 1
America (1) Inv. 182 0 0 0 182
Sub-Saharan Africa (11)
No. 8 0 2 2 12
Inv. 429 0 90 0 519
East Asia and Pacific(3)
No. 0 2 11 1 14
Inv. 0 670 9,859 0 10,530
South Asia (1)
No. 0 0 1 0 1
Inv. 0 0 85 0 85
No. 52 10 15 8 85
Total (28)
16,446 1,060 10,337 0 27,848
Inv.
(59%) (3.8%) (37.2%)
(100%)
Source: World Bank PPI Database. Con=concession, Div=divestiture, Gre=Greenfield, Man=management
and lease contracts; No.= number, Inv.=investment (US$ million). Total may not add due to projects with
unknown classification.
27. Numbering 15, greenfield railway projects run a distant second to concessions worldwide.
Each greenfield project involved significant investment. The total investment in greenfield railway
projects was US$10.3 billion. In the EAP region greenfield projects were more predominant
comprising 11 of the 14 projects that reached financial closure. Together, these projects
represented 93.6 percent of the investment commitments on railway projects with private
participation in the EAP region.
28. A majority of the greenfield projects were for metropolitan (urban) light or “heavy” rail
systems rather than for long-distance freight lines. The BOT contracts in Asia account for half the
passenger and fixed asset projects. Private participation in Asia typically focused on increasing
capacity in response to rapid urbanization and growing demand for infrastructure services rather
than improving the efficiency of existing public operators as in Latin America.
TERA INTERNATIONAL GROUP, INC. - 8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

29. Divestitures accounted for 10 railway projects with investment commitments of US$1.1
billion. Divestitures include full and partial privatizations aimed at either transferring operations to a
strategic investor (as was the case in Estonia and Chile) or raising revenue (as in China).
30. There were 8 management and lease contracts, 3 of which were in Europe; 2 each in LAC
and SSA, and 1 in EAP.
2.2.2 Segmentation in Railway PSP
31. During 1990-2004, some 15 rail projects with private participation reached financial closure
in four Asian countries (including China, Malaysia, and Thailand in the EAP region and India in the
SA region). By comparison, during the same period 188 toll road projects in ten Asian countries
reached financial closure, representing investment commitment of US$24.5 billion. China clearly
was the lead country in terms of both number of projects (107) and investment commitments
(US$14.4 billion). The other developing countries with large investment commitments were
Malaysia with 23 road projects and US$16.2 billion in investment, India – 35 road projects and
US$0.96 billion in investment commitment, and Philippines with 3 road projects and US$1.3 billion
in investment.
32. Within the transport sector, railroads present the most diverse product types for private
participation in investment. The 85 rail projects implemented during 1990-2004 in all countries are
categorized into 10 business segments. The number of projects and investment by segment are
summarized in Table 2.4.
Table 2.4: Number of Railway Projects and Investment with PSP by Segment, 1990-2004
Investment (US$ millions)
Railway Segment Number Government
Assets
Facilities Total
1. Fixed Assets (FA)
7
240
12 228
(8.2%)
(0.9%)
2. FA and Freight
28
9,350
1,670 7,680
(32.9%)
(33.6%)
3. FA and Intercity Passenger
2
19
1 18
(2.4%)
(0.1%)
4. FA and Urban Passenger
13
564 8,269
8,833
5.
FA, Freight and Intercity
Passenger.
6. Freight
7.
Freight and Intercity
Passenger
8. Freight and Urban Passenger
(15.3%)
13
(15.3%)
9
(10.6%)
4
(4.7%)
2
(2.4%)
3
(3.5%)
4
(4.7%)
223 2,136
2,540 1,462
575 25
(31.7%)
2,359
(8.5%)
4,002
(14.4%)
601
(2.2%)
0 0 0
9. Intercity Passenger
1 14
15
(0.1%)
10. Urban Passenger
262 2,163
2,425
(8.7%)
Total 85
5,848 21,995 27,843
(21%) (78%) (100%)
Source: World Bank PPI Database. . FA = fixed assets.. Total may not add due to projects with unknown
classification.
33. Railroad projects involving fixed assets and freight were the most frequent segment with 28
projects, or 33 percent, involving total investment of US$9.35 billion. These include 22 concessions,
of which 19 were in the LAC region, including 7 in Brazil, 5 in Argentina, and 2 each in Columbia
and Mexico (Appendix 3).
34. The second most favored segment was fixed assets and urban passenger with 13 projects
and US$8.8 billion in investment. These include 7 concessions in Latin America (5 in Argentina, 1 in
Brazil and 1 in Chile), with investment of US$4,503 million. The remaining 6 were greenfield
projects in East Asia (4 in Malaysia and 2 in Thailand), with investment of US$4,329 million.
TERA INTERNATIONAL GROUP, INC. - 9 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

35. For the fixed assets, freight and intercity passenger segment there were also 13 projects
with total investment of US$2,359 million. These include 6 concessions in Latin America (3 in Brazil,
2 in Bolivia, and 1 in Peru), with total investment of US$1,946 million.
36. The freight segment had 9 projects, including 5 concessions (with investment of US$3,486
million), 1 divestiture, and 1 management and lease contract, all in Latin America and the
Caribbean region.
37. Of all railroad projects with private investment those involving freight, either as stand alone
or in combination with fixed assets and/or intercity passenger and/or urban passenger accounted
for the largest number of projects, numbering 75 or 91 percent of the total. The historically dominant
use of rail for freight transport partly explains the larger number of freight than passenger projects
awarded to the private sector.
38. The experience with private participation in railroad infrastructure in developing countries
indicates that the freight segment is the most attractive. This conclusion is also supported by
experience in developed countries, notably in the United States and Canada where freight railroads
are owned and operated by the private sector.
39. In most concessions the government transferred the management of fixed assets and rolling
stock to the private sector as a vertically integrated utility, introducing competition at the bidding
stage. The standard model for private participation in railways in Latin America involves separating
passenger and freight service, leaving long distance passenger services with a public operator. The
unbundling of the national railways in LAC, particularly in Argentina, Brazil, and Mexico
considerably increased the number pf transactions in LAC.
40. The status as of the end of 2004 indicates that the pipeline of railway sector projects with
PSP in developing countries has considerably thinned out. During the peak years of private
participation in 1995-1999, an average of 288 infrastructure projects, with an average investment of
US$88.6 billion were implemented each year. In the same period, an average of 12 railway projects
(or 4.2 percent of all infrastructure projects) with average annual investment commitment of US$4.1
billion (or 4.6 percent of the total) reached financial closure. In comparison, in 2002-2004, the
number of railway projects reaching financial closure declined to 2 per year (or 1.6 percent of all
infrastructure projects) representing average investment commitment of about US$500 million (or
0.9 percent).
41. The fragility of the railway pipeline of PPI projects and the decline in modal share of
investment is indeed a cause for concern, considering the large investment needs of railways in
developing countries to provide logistics support for economic development and poverty reduction
activities. Railway development around the world in the past two centuries was made possible by
governments which provided appropriate incentives and risk coverage to the private sector at terms
that were comparatively more favorable than the alternative investment opportunities. The large
size of networks that were built through PSP is testimony to the success of those efforts. It is
imperative that governments in developing countries create the necessary conditions for private
participation and offer products for investment in infrastructure, services and management of
operations that are attractive compared with other more attractive opportunities for investment
available to the private investor.
2.2.3 Railway Projects with PPI by Region and Country
42. The following regional review of private participation in the rail sector illustrates the
worldwide trend. Since private operators took over freight transport on Argentina’s Rosario to Bahia
Blanca railway line in 1991, private participation in the railway sector has grown significantly. By the
end of 2004 the governments of 28 developing countries worldwide had involved the private sector
in varying degrees of responsibility for new construction, rehabilitation, and operation of railways. In
these countries private companies entered into a total of 85 new contracts for the operation and
management of the railways during the 15-year period from 1991 to 2004.
43. For these 85 railway projects representing investment commitments of more than US$27.8
billion, the private sector was involved for rehabilitating existing infrastructure or building new
TERA INTERNATIONAL GROUP, INC. - 10 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

systems and operating the facilities in accordance with the terms of the agreements. 12 The
investment in each project depends primarily on the type of contract, but also on the state of
existing infrastructure and expected traffic volumes.
44. The experience with private rail contracts in Latin America and elsewhere encouraged some
African and FSU governments to consider private participation to improve rail service and prevent
further deterioration of railway infrastructure. Among all regions, the LAC region has clearly led the
way in the revival of PSP in the rail sector. In 10 countries of the LAC region, a total of 49 railway
projects (57 percent of the sector total) involving private participation reached financial closure.
These projects represented investment commitments of US$16.2 billion or 58.3 percent of the total
(Table 2.5 and Figure 2.2).
Table 2.5: Number of and Investment in Railway Projects with Private Participation by Region
Region
Railway Projects
Number Share of
Total
Investment
(US$ million)
Share of
Total
Latin America and the Caribbean 49 57.6% 16,228 58.3%
Europe and Central Asia 7 8.2% 299 1.1%
Middle East and North Africa 1 1.2% 182 0.7%
Sub-Saharan Africa 13 15.3% 519 1.9%
East Asia and Pacific 14 16.5% 10,530 37.8%
South Asia 1 1.2% 85 0.3%
Total 85 100% 27,843 100%
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
Figure 2.2: Railway PPI Projects by Region
Number of Projects by Region
60
50
Number
40
30
20
10
0
Latin
America
Europe
Middle
East
Sub-
Saharan
Africa
East
Asia
South
Asia
Investment in Railway Projects
US$ Million
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Latin
America
Europe
Middle
East
Sub-
Saharan
Africa
East
Asia
South
Asia
12 The amount of total investment does not necessarily mean only private investment, but gives the total investment on the
projects from all sources.
TERA INTERNATIONAL GROUP, INC. - 11 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

45. In the EAP region, 14 railway projects reached financial closure with investment of US$10.5
billion or 38 percent of the sector total. The LAC and EAP regions taken together accounted for
96.1 percent of total investment in the sector in developing countries.
46. Within each region only a small number of countries accounted for most of the investment in
railway projects with private participation. The 6 countries attracting the most investment in projects
with private participation accounted for 57.6 percent of the total number of railway projects and 93
percent of investment (Table 2.6).
Table 2.6: Top Six Developing Countries by PSP in Railway Projects, 1990-2004
Country
Number of
Investment
Projects
(US$ million)
Brazil 14 6,122
Malaysia 8 5,687
Argentina 15 5,334
Mexico 6 3,929
Thailand 3 2,772
China 3 2,070
Total (Share of 6 Countries)
49
25,914
(57.6%)
(93%)
Total for All Developing Countries
85
27,843
(100%)
(100%)
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
2.2.3.1 Latin America and the Caribbean
47. One reason for Latin America’s dominance in private railway projects is the region’s positive
experience with private participation in other infrastructure sectors. Many Latin American
governments have gained experience in concessioning through private participation in electricity
and telecommunications. PPI was a key ingredient of the policy package for structural adjustment in
Latin America advocated in the 1980s by the U.S., the IMF, the World Bank (the Washington
Consensus), and other international organizations. The basic idea behind large scale divestitures of
SOEs in the 1980s and 1990s was to raise microeconomic efficiency at the same time of
macroeconomic reforms. 13
48. Most railway concessions in Latin America have been awarded to consortia of domestic
companies, often in partnership with one experienced international railway operator, generally from
the U.S.
49. Argentina. Argentina started moving toward private contracting in the late 1980s. It
awarded contracts in the early 1990s, with concessions for 5 freight railways reaching financial
closure in 1991–93. The freight packages were created for concessioning on 30-year terms, with an
optional 10-year extension. The concessionnaires have exclusive use of the tracks, although they
must grant access to passenger operations in return for a compensatory track usage fee. These
routes have achieved major gains in productivity and revenue.
50. Encouraged by the success of freight concessions, five more concessions covering fixed
assets and urban passenger transport were awarded for the operation of suburban railway
networks and the Buenos Aires metro. In the suburban networks also productivity increased and
subsidy costs have fallen.
51. The freight and passenger concessions in Argentina have faced challenges despite their
general success in improving productive efficiency. Initial demand projections proved too optimistic,
and sponsors have been unable to fulfill their investment commitments. Argentina’s experience
highlights the importance of renegotiation or other adjustment mechanisms that allow
concessionaires to remain in business without the government losing credibility.
52. The productive efficiency of the freight railway networks that are being operated by the
private consortia have increased. Urban railways have also shown improved performance and
13
Jorge Carrera, Daniele Checchi, Massimo Florio; Privatization Discontent and its Determinants: Evidence from
Latin America; World Bank, June 2004
TERA INTERNATIONAL GROUP, INC. - 12 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

educed levels of subsidy. However, some news reports have been critical of the private
management of the passenger and freight railway services. Because of cherry picking of the routes
for making the freight concessions attractive for the private sector, the network of railway lines
under effective operation has shrunk in almost all countries since privatization. In Argentina, parts
of the network excluded from the private concessions were either passed on to the regional
governments or were abandoned. In this manner the network is reported to have shrunk by more
than a third from the pre-privatization size of 35,000 km, and the number of employees reduced
from 95,000 to about 15,000. A brief note on the privatization of railways in Argentina is presented
in Appendix 5.
53. In the closing years of the nineties and early 2000s there has been social unrest in some
Latin American cities triggered by privatization of utilities, which shows that privatization is not just a
matter of attaining productive efficiency, and it has an important distributive (allocative) dimension.
These events impacted the ability of Latin American governments to continue privatization of
infrastructure and utilities and in recent years there has been a loss of momentum. Currently,
privatization is increasingly unpopular in Latin America, as several surveys have shown. 14 A brief
note based on a recently published research report on this matter is presented in Appendix 6.
54. Brazil. Concessioning of railroad operations started later in Brazil than in Argentina. In 1996,
the Brazilian government using the same approach as in Argentina, awarded freight concessions
for six exclusive regional railway systems because of the geographic situation, gauge differences
and traffic characteristics of each line. Another eight concessions were awarded in 1997 (3), 1998
(3) and 2000 (2) for regional railway networks including freight operation, intercity operation and Rio
de Janeiro and Salvador metros. A note on the privatization of railways in Brazil is in Appendix 7.
55. Chile. The southern part of the railway network in Chile was partly divested in 1995 to
Ferrocarril del Pacifico (FEPASA). FEPASA is owned by the Chilean State Railroad Company
Empresa Ferrocarriles del Estado (EFE), which retains 49 percent of the shares, and a consortium
Transportes del Pacifico S.A. (TdP) with 51 percent. FEPASA has been granted the right to operate
the freight services over EFE’s network. In 1997, IFC provided a loan of US$13.8 million and
syndication of another US$6 million to help FEPASA invest in rolling stock to improve operational
efficiency and offer reliable, efficient and competitively priced transportation for bulk goods.
56. In 1997, the 2,200 km north-south railroad in Northern Chile (Ferronor), extending from
LaCalera near Santiago to its northern terminus at Iquique, approximately 192 km south of Peru,
was fully divested to a consortium comprising U.S.-based RailAmerica 15 (55 percent stake) and its
Chilean partner Andres Pirozzli y Cia, Ltda. In 2004, RailAmerica sold its 55 percent stake in
Ferronor (purchased initially for $6.8 million) to its affiliate for US$18.1 million. The Chilean
government awarded, in 1997, a management contract for freight operations on Ferrocarrill de
Arica a La Paz.
57. Mexico. The railways were concessioned in a way that maximized the opportunity for cross
border traffic since Mexico is a member of North American Free Trade Area (NAFTA). Six
concessions were contracted for freight railroads. A brief presentation on the privatization of
railroads in Mexico is presented in Appendix 4.
58. Railway concessions have also been awarded in Bolivia, Colombia, Guatemala, Panama,
and Peru. As an exception, Bolivia awarded leases for the operation of both freight and passenger
services on each of the country’s two networks. In Jamaica the private sector participated in the
partial divestiture of fixed assets and intercity passenger services on one of the main railway routes.
2.2.3.2 Europe and Central Asia
59. In the ECA region, the private sector has participated in the railway sector in two countries -
the Czech Republic and Estonia. In the Czech Republic, three management and lease projects (two
in 1997, and one in 1998) and one divestiture (1998) reached financial closure. In Estonia, three
divestiture projects reached financial closure in 1999-2001.
14 Ibid.
15 RailAmerica, based in Boca Raton, Florida, is the world’s largest owner and operator of short line and regional railroads.
In 2004 it operated a diverse network of 49 rail properties and 20,700 km of track.
TERA INTERNATIONAL GROUP, INC. - 13 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

60. In 1997 the Czech government awarded regional railway leases to private operators willing
to maintain local freight and urban passenger services. Since then it has also privatized two
previously leased regional railway operations, with the goal to transfer loss-making routes to private
operators. The Czech contracts have left ownership of fixed assets with the government, but
transferred all rolling stock—freight and passenger—to a private operator.
61. Estonia. In Estonia, three projects reached financial closure, one each in 1999, 2000, and
2001, representing investment commitments of US$299 million. Two-thirds of the former stateowned
and operated railway system has been divested to the private sector. Baltic Rail Services
(BRS), 16 an associate company of US-based Rail World, Inc. and other investors purchased for
US$58 million a 66 percent interest in Eesti Raudtee (ER), an integrated rail infrastructure and
freight operator. The Estonian government continues to own the remaining 34 percent.
62. Privatization of the Estonian railways has transformed from a single operating division of the
former Soviet railway system to one of the most successful and profitable railways in Europe. The
simplicity of the network, the key role of the Ports of Tallinn and Muuga for Russia’s foreign trade,
high levels of transit traffic, and Russian resources boom were some factors contributing to the
railways’ success. This was made possible through the government’s initiative and clear-sighted
policy of first commercializing the railways, separating out the loss-making passenger services, and
privatizing the network.
63. Although the financial performance of ER was already improving before privatization, the
impact of private ownership and management has been considerable. The Company has
completely replaced the old Soviet era locomotive fleet with reconditioned U.S. locomotives.
Virtually all indicators of capacity, staff, and equipment utilization have improved significantly, as
has safety. The company had an operating ratio in FY2003 of around 65 percent, easily the best of
any national railway organization in Europe. A note on the privatization of the Estonian Railways is
presented in Appendix 8.
64. In late 2005 the Government enacted new rules which obligate ER to allow open access up
to 100% of its capacity. The majority owner BRS raised strong objections to this rule which it
considers as a serious infringement on its ability to run its own freight trains. BRS further claims that
most operators requesting access to track are ER’s customers, thus by providing access ER loses
its own freight business.
65. What was once applauded as a successful divestiture of the two-thirds of BR to a private
sector consortium (BRS) is now fast becoming a failure. In June 2005 a government minister
announced that the state would consider buying back the rail infrastructure from the privately
controlled company, while the CEO of ER accused the same minister of trying to renationalize the
enterprise. 17 A month later, a top government official indicated disappointment with how BRS has
been meeting its post-privatization commitments. Ganiger Invest of Estonia, one of the
shareholders of BRS, then announced its willingness to sell its share in BR. “One of the most
acerbic public-private confrontations in recent Baltic memory erupted in the waning days of
December [2006] as the government and the private owners of Eesti Raudtee (Estonian Railway)
exchanged bitter words, with the Cabinet going so far as to slap the company with a 1 million euro
penalty [for violation of post-privatization commitments].” 18 The company’s future ownership is still
undecided and the parties expressed an interest to negotiate rather than litigate their differences.
2.2.3.3 Middle East and North Africa
66. In Middle East and North Africa, the Hashemite Kingdom of Jordan is the only country with
private involvement in railway sector. Since the 1990s the Government has been attempting to
achieve greater macroeconomic growth and stability through reductions in the role of government in
the domestic economy. As part of this process, the Government instituted a privatization program in
16 BRS investors include RailWorld Estonia LLC, a subsidiary of RailWorld Inc. of U.S., (25.5 percent), UK-based
Emerging Europe Infrastructure Fund (25.5 percent), Pittsburgh-based rail operator Railroad Development Corporation
(RDC) with 5 percent and Estonian Ganiger Invest with 44 percent.
17 The Baltic Times, Issue # 463, June 29, 2005.
18 Ibid., Issue # 489, January 4, 2006.
TERA INTERNATIONAL GROUP, INC. - 14 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

1996 that is aimed at reducing the public stake in sectors dominated by SOEs. The Government
identified the railways as a potential sector for restructuring and PSP.
67. The Aqaba Railway Corporation (ARC), a public corporation established under the
provisions of the Aqaba Railway Law (1972), presently operates railway services for the transport of
phosphate rock from the mines to the port of Aqaba under contractual arrangements with the
Jordan Phosphate Mines Company (JPMC). In 2003, ARC has transported over 2.5 million tons of
phosphate. The decision to privatize the railway was made in 1996 when the Government realized
that the railway was providing poor and unreliable service to its one and only customer, the JPMC.
In 1997 a Technical and Financial Advisor assisted the Government in carrying out an extensive
diagnostic review of the railway, developing the privatization strategy and advising on the structure
of the privatization.
68. In July 1999 a consortium led by U.S.-based Wisconsin Central Transportation Company
and Raytheon Corporation initialed an agreement with the Government for a 25-year lease of the
ARC. However, before the new company, Jordan Rail Company (JRC) took delivery of the rail
operation, the Norwegian investors announced their withdrawal from the joint venture with the
JPMC, whose production output was to secure 40% of the transport quantities of JRC. Although an
amendment to the concession was singed in 2001 to accommodate these new circumstances,
JRC was unable to reach an agreement with the JPMC on transport charges and minimum
quantities of phosphate that would be transported by rail. Consequently, JRC was unable to begin
operations, as the company's commencement of operation was contingent upon signing the
transport contract. Unfortunately, the privatization did not go ahead.
69. Despite the setbacks in the concessioning process, the Government remains determined to
privatize the ARC. The Government recently received a bilateral grant under the U.S. Agency for
International Development (USAID) funded Economic Reform and Development Program for
Privatization Technical Assistance administered by the World Bank to support the hiring of a
financial advisor to assist in the privatization of ARC. The consulting assistance includes technical,
accounting, financial, investment banking, legal and environmental studies, and will recommend
restructuring and privatization options for ARC to design and implement the most effective
privatization option. As possible options the Government proposes to offer shareholding and
management control of ARC, in whole or in part (at least 51%), subject to the response of potential
investors/joint-venture partners. This step would be preceded by a preparatory stage to restructure
ARC into a public shareholding company with its shares completely owned by the Government
initially.
2.2.3.4 Sub-Saharan Africa
70. Thirteen railway projects in Africa reached financial closure in 1990-2004, two with World
Bank assistance—the Abidjan-Ouagadougou railway linking Côte d’Ivoire and Burkina Faso and the
Maputo Rail network in Mozambique.
71. In March 1993 the Governments of Côte d’Ivoire and Burkina Faso awarded the railway
concession for the Abidjan-Ouagadougou railway to Sitarail, a joint-stock company incorporated in
Côte d’Ivoire and owned by the two governments (15 percent each), the French Bollore Group (67
percent) and employees (3 percent). Sitarail is technically and financially responsible for: (a) the
operation of freight and passenger services, including all equipment maintenance; (b) the
maintenance of rail infrastructure and, in part, the renewal and adaptation of infrastructure; and (c)
the management of the real estate belonging to the railway.
72. The concession for the Abidjan-Ouagadougou railway is a "rolling concession" with an initial
duration of 15 years. At the end of the first 5-year period, and in 5-year intervals thereafter, the
concession can be extended by mutual agreement for additional 5-year periods, thus preserving the
15-year concession horizon over time. The consortium provides both freight and passenger
services and sets its own tariffs for both. The government of the Ivory Coast, however, maintains
control over the domestic oil transport tariff.
73. Sitarail does not own the rolling stock but pays annual lease fees (affermage) to the
governments (initially set at US$2 million per year for years 4 to 14). Also all capital investments for
infrastructure renewal and development are carried out by the two governments with Sitarail
TERA INTERNATIONAL GROUP, INC. - 15 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

earing responsibility for debt service, including principal and interest. Capital investments are
made on the basis of Sitarail’s application to the governments describing the need for and the
amount of investment.
74. The operational experience of the Abidjan-Ouagadougou Railway has been generally a
success story and offers an encouraging example. After nearly 20 years of decline, the Abidjan-
Ouagadougou railway is showing encouraging results. Sitarail succeeded in breathing fresh life into
the rail network. This has helped to revitalize the economies of both countries - Côte d’Ivoire and
Burkina Faso. A detailed note on the privatization of the Abidjan-Ouagadougou Railway is
presented in Appendix 9.
75. Other countries where the private sector has participated in the railway sector include award
of concessions in Cameroon, Gabon, Madagascar, Malawi, and Mozambique; Greenfield projects
in Tanzania and Zimbabwe; and management and lease contracts in Togo and the Democratic
Republic of Congo.
2.2.3.5 East Asia and the Pacific
76. In the EAP region two countries dominate private involvement in the rail sector: Malaysia
(four projects, two of which have been cancelled and the other two refinanced through government
assistance) and Thailand (two, both cancelled). Both countries have awarded greenfield contracts
for new metropolitan light railway networks. The only other Asian developing economy with private
investment is China, where the government sold shares in the Guangshen Railway Company to
raise capital without a transfer of control.
77. EAP had less history of private investment in freight railways and less reliance on freight
transport by major exporters. But with rapidly growing cities, many Asian countries face a rising
demand for intercity passenger transport. To meet this demand and improve passenger transport
within their capital cities, Malaysia and Thailand turned to the private sector, awarding contracts for
the construction of new light rail systems. In Malaysia and Thailand established property
development and construction companies were attracted by the potential increase in property value
from improving local transport facilities. But the importance of property development to the success
of projects has made financing difficult, particularly with the recent financial crisis drastically
reducing property values.
78. One project in Thailand, Hopewell’s Bangkok Elevated Road and Train System (BERTS),
reached financial closure in 1990, but later suffered financial problems and was officially terminated
in 1998. To prevent the financial crisis from undermining the country’s second light rail project, the
Thai government has provided soft loans to the sponsors.
79. Two of Malaysia’s three light rail systems have experienced financing difficulties, and the
already completed Star has reported revenue below expectations. The financial crisis is
encouraging Asian governments to look at using private participation to improve the efficiency of
existing assets rather than building new systems.
2.2.3.6 South Asia
80. In spite of the dominance of railways in transport sector in many countries in the region,
India is the only country where one greenfield project for fixed assets and freight operation reached
financial closure in 2002 on the basis of build, own, and operate (BOO). The sponsor of the project
is Pipavav Rail Corporation Ltd (PRCL), the first case of PPP in rail transportation. PRCL is a 50-50
joint venture between the state-owned Indian Railways (IR) and Gujarat Pipavav Port Ltd (GPPL)
that was set up to construct, maintain and operate the 270 km-long broad gauge railway line
connecting the Pipavav port in Gujarat to Surendranagar Junction on the Western Railway.
81. PRCL will be allowed to operate container trains carrying only export-import cargoes on 15
routes between the Pipavav port and several inland container depots, breaking the monopoly
enjoyed by IR’s formerly-owned Container Corporation of India Ltd (Concor) in this area. PRCL will
have to pay an annual license fee/royalty of 2 percent on its actual turnover to the IR for operating
the container trains. The license fee/royalty to be paid by PRCL will be over and above the haulage
charges it pays to the IR for using their infrastructure.
TERA INTERNATIONAL GROUP, INC. - 16 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

2.3 PRIVATE PARTICIPATION IN THE RAILWAY SECTOR – DEVELOPED NATIONS
82. Historically, railways in most countries were set up under private initiatives. These initiatives
were made possible because of support from the government in the form of allocation of land (as
the land grants in the U.S.), providing concessions that were commercially profitable (as
concessions to operate coal mines in China), financing of infrastructure, guarantee of a return on
the capital invested (as in India). 19 As the railway network expanded, capital intensity of the sector,
high infrastructure costs, indivisibility and externalities, made rail transport a natural monopoly.
Except in North America, railways as public monopolies in many countries passed on under
government control.
83. Governments have viewed rail transport as public services to be provided at subsidized cost.
The social objectives underpinning the provision of some rail services, especially passenger
services, are in conflict with many of the reforms being implemented, particularly the application of
commercially oriented business practices. The desire of governments to continue pursuing social
policies that were also politically acceptable was responsible for reluctance to reforms or reducing
government control over railway operations.
84. The corollary of this lack of commercial focus was that railways generally failed to develop
an entrepreneurial culture with respect to management accountability for performance, assessing
and reacting to changes in market conditions, and in terms of being innovative and seizing new
opportunities. These cultures can be slow to change, as evidenced by the hesitancy of national
railway systems to deal with the issues and uncertainties inherent in the reform process.
85. The continued presence of monopoly and absence of competition resulted in monopolyinduced
inefficiencies, low productivity and large deficits. Most railways in the world incurred
growing deficits during 1970s and 1980s. For instance, in spite of significant government subsidies,
the revenues earned by railways in Italy, France and Spain were only half of their operating costs.
In 1994, the total debt of Italian railway was almost 4.9 per cent of the country’s GDP. In early
1980s, Japan National Railways incurred a loss of U.S.$10 billion – 15 billion per year. Continued
financial losses over several years resulted in large debts. In 1985, the total debt of Japan National
Railways was around U.S.$200 billion.
86. More recently, there have been considerable attempts to reform state rail authorities
operating on a noncommercial basis, carrying large debts and providing a range of community
services funded by cross subsidies from more profitable services. The first, on-going stage of the
reform process has been to put these organizations on a commercial footing and remove those
regulations which guaranteed freight for rail.
87. Another factor that initiated the restructuring process was a rapid change in customer
demand for higher quality services at lower prices. This is especially true for freight customers, who
with liberalization and globalization face competition from their global counterparts and hence push
for lower transport costs. Competition from other modes of transport such as roads reduced the
market share of railways and pressured it to improve productivity through technological upgrading
(e.g. high speed passenger service and dedicated container trains).
88. In some cases, reform has entailed the separation of potentially competitive segments from
the natural monopoly elements (the above and below rail operations) with a view to encourage new
19 When railway building started in the 19th century it was not unusual for Governments to help the new means of
transportation on its feet in some way or another. This help came in different forms depending on the resources of the
State. The U.S. government gave the railroads incentives in the form of low-interest loans and offered generous federal
land grants. For the building of the transcontinental railroad in the U.S. the Union Pacific and Central Pacific railroads
were granted 400-foot rights-of-way plus ten square miles of land for every mile of track built, which was further
enlarged under the Pacific Railroad Act of 1864, to twenty miles of alternating sections on either side of the tracks with
full rights to all the minerals underneath the land. Other methods used included taking part by the State in the share
capital of a railroad, or even outright building of a line by the State, as was done in Virginia, Pennsylvania, and Georgia.
In the 1890s, a Treasury Grant helped build the West Highland Railway in a desolate area of western Scotland of U.K.
The construction of a railway was seen as a public work to lift that region out of its economic and social misery. France
used several methods of Government aid, including loans to private companies, taking part in the share capital,
guaranteeing a certain dividend on the shares or the interest on a loan, until in the late 1870s construction of lines was
undertaken directly by the State, while the operation was left in the hands of' existing companies or given over to a
State agency incorporated for the purpose.
TERA INTERNATIONAL GROUP, INC. - 17 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

entry by private operators. In others, vertically integrated operations have been retained but with
streamlined administrations designed to cope with a more competitive environment
89. In this section we have reviewed the development of railway private sector and competition
policy and regulation and its impact on the institutional and organizational structures in selected
developed countries. The countries covered in this review include Australia, Canada, France,
Germany, Japan, the United Kingdom, and the United States. This review also covers the EU,
which has provided significant initiatives in developing policy and restructuring for railways in its
member states towards more competition and PSP in railway operations.
2.3.1 Australia
90. A more detailed description of the Australian railway sector is included in Appendix 10. In
the early 1970s, all publicly accessible rail services in Australia were operated by government
agencies. To improve the efficiency of Australia's rail authorities, the Commonwealth Government
offered to take over all the state owned entities and create one national rail operator. This move
was only partially successful since all states did not agree to participate. In 1975, the Australian
National Railways Commission, replacing the Commonwealth Railways Commission, was
established. The Tasmanian, South Australian and Commonwealth governments entered into
agreements to transfer the Tasmanian and non-urban South Australian Railways to Australian
National Railways. In the early 1980s, a completely new standard gauge line was built from the
transcontinental line at Tarcoola to Alice Springs, replacing the former flood prone narrow gauge
line via Maree, and in 1982 the Adelaide-Port Pirie line was converted to standard gauge. This
allowed standard gauge operations between Perth and Adelaide and Sydney and Adelaide for the
first time.
91. In 1991 the former National Rail Corporation Ltd was established to provide interstate only
freight services over the tracks of the state systems. All governments have since agreed (to a
greater or lesser degree) to introduce competition to their rail activities. On 1 January 2000, under
the Inter-Government Agreement on Rail Operational Uniformity, a non-statutory body - the
Australian Rail Operations Unit was established for developing uniform standards and practices for
further improving efficiencies of the national and state owned rail networks.
92. The first private sector interstate freight rail service commenced in 1995. By 1996, up to four
rail operators were providing freight rail services between Melbourne, Adelaide and Perth. By 1997
a few private-sector organizations were operating services over the tracks of others. Each state has
worked towards providing third-party access to its tracks. The interstate standard-gauge third-party
access is regulated by Australian Rail Track Corporation (ARTC). It is now possible for a company,
which meets acceptable standards, to run train services on any government organization's tracks.
93. With the sale of Australian National Railways completed in November 1997, the track in
Tasmania and intrastate lines in South Australia were leased to the new owners. Thus ownership of
the mainline rail network in Australia had come full circle: from private ownership in the mid 1800s
through to government ownership and then to management by a private company at the turn of the
21st century. State governments still own some of the track, and branch lines, and retain ownership
of suburban train lines.
94. Rail services are affected directly by the competition policy in Australia. In 1995 each State
Government agreed with the Federal Government to implement a national competition policy under
the Council of Australian Governments (COAG) National Competition Policy Agreement. One
aspect requires access to essential infrastructure facilities that are important to competition in other
markets (intermediate inputs) and that would be difficult to replicate and are of national significance.
95. The Australian practice of allowing multiple private users access to track is based on the
principle that users of the infrastructure should not be at a disadvantage in relation to the
infrastructure provider, in other words there should be competitive neutrality. This is seen to require
a clear accounting separation for rail infrastructure, but not structural separation similar to the
British and Swedish lines.
96. Under the Competition Policy Reform Act 1995, competition with major business enterprises
of national significance was opened up by way of third party access. The current state of Australia’s
TERA INTERNATIONAL GROUP, INC. - 18 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

ail system largely reflects its development as a collection of separate networks with each state
government responsible for the ownership, operation and management of its rail network. Australia
also has a large and efficient private rail system connected to mining interests. A feature of recent
years has been the move away from operators staying within their home state's boundaries. An
overview of the operator listings at the national and state levels is summarized below.
97. Queens Land. QR is the largest state government owned rail operator and infrastructure
owner in terms of its route network with 9,000 km of track. It is the largest provider of freight
services. QR commenced its restructuring process in 1991, maintaining an integrated rail operation
but with distinct business entities responsible for specific functions. QR perceived net benefits in
vertical integration over separation arising from the close interdependence between infrastructure
and operations and the significant transaction costs associated with fragmentation of a rail system.
In 1995, QR was corporatized.
98. New South Wales (NSW). New South Wales has chosen to replace its integrated rail
operations with a segmented structure. In 1996, the vertically integrated monopoly, State Rail
Authority (SRA), was desegregated into four different business entities, with the primary objective
being the separation of the natural monopoly from the potentially competitive activities. The four
corporatized entities are:
♦ Freight Rail Corporation, a rail based freight transportation business;
♦
♦
♦
State Rail, which provides commuter transport as CityRail (Sydney metropolitan)
and CountryLink (non-metropolitan;
Rail Access Corporation (RAC), with responsibility to own, operate, maintain and
enhance rail infrastructure and to actively market access to those facilities by
existing and potential rail operators; and
Railway Services Authority, the railway engineering and maintenance group.
99. A major development in 2004 was the leasing by NSW of most non-urban track to the
federal government agency, Australian Rail Track Corporation
100. Victoria. Reform of Victoria’s rail network began in 1989 with the establishment of the
Public Transport Corporation (PTC) to operate urban train, tram and bus services and rural
passenger and freight services. Since 1992, various work-place reforms and efficiency-enhancing
measures have been taken to reduce the financial burden imposed by Victoria’s rail system. Some
of these measures included substantial reductions in staff, replacement of some uneconomic rural
rail lines with private bus services, contracting out selected maintenance activities and rural
passenger services to the private sector. As a result, Victoria’s railways have reduced their need for
government funding.
101. The sale of rail operations to private companies has seen Connex eventually operating the
entire Melbourne suburban passenger network. Freight services were provided by Freight Australia
until its 2004 acquisition by Pacific National, operating exclusively on broad gauge but also with
competition on the standard gauge network. The government retains ownership of the track and
right of way, though responsibility for access rests with the private operators (without their having
the power to reject competition).
102. Australia-National. Pacific National, the recently sold and previously government-owned
freight operator provides services in New South Wales, Victoria, and South Australia.
103. Western Australia (WA). Non-government operators include Australian Railroad Group and
Specialized Container Transport. The national passenger service is provided by Great Southern
Railway.
104. South Australia. The state government owns the urban passenger operator
(TransAdelaide). All freight is privately operated and track privately owned (Australia Railroad
Group). Government attempts to revive services in the southeast had by 2004 failed to attract an
operator despite assurances that broad gauge routes would be converted to standard.
TERA INTERNATIONAL GROUP, INC. - 19 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

105. Western Australia (WA). The state government owns the passenger operator, the Western
Australian Public Transport Authority. Interstate freight operations have been sold to Australian
Railroad Group. Pacific National also operates on the standard gauge. Track is leased to WestNet
Rail.
106. Northern Territory. A new line from Adelaide to Darwin has been built for AustralAsia
Railway Corporation, the government agency representing the three governments that contributed
funds for its construction and the ultimate owner of the track. A Build Own Operate Transfer (BOOT)
contract has been signed with Asia Pacific Transport, which is operating freight services via its
FreightLink Pty Ltd subsidiary. Passenger services are operated by Great Southern Railway.
107. Tasmania. The privately owned freight operator and track owner is Tasrail, which changed
ownership in early 2004.
108. The Australian experience provides examples of railway structures that are vertically
integrated and horizontally segmented (QR) and vertically separated and horizontally segmented
(by business activity) (NSW). QR is maintaining an integrated rail operation but with distinct
business entities responsible for specific functions. QR perceived net benefits in vertical integration
over separation arising from the close interdependence between infrastructure and operations and
the significant transaction costs associated with fragmentation of a rail system. Competitive access
to infrastructure can be attained under both structures.
2.3.2 Canada
109. A more detailed description of the Canadian railway sector is included in Appendix 11. The
railways have formed the backbone of the Canadian transportation system for well over a century.
Railway transportation continues to provide the most economical means of moving bulk
commodities such as grain, coal, potash and petrochemicals over vast distances.
110. The two principal carriers in Canada, the Canadian National Railway Company (CN) and the
Canadian Pacific Railway Company (CPR) own extensive domestic railway networks. CN is larger
of the two, with approximately 31,000 route-km of track (in Canada and the U.S.). CPR operates
over approximately 2 The majority of goods moved by rail between Canada and the U.S. are
exchanged between carriers in Chicago, before moving to a final destination. CN's recent purchase
of the Illinois Central Corporation resulted in the addition of about 5,000 route-km to its existing
network. This extended the company's direct physical reach into markets as far south as the Gulf of
Mexico.
111. In addition to the major railways, Canada is also home to some 51 smaller, regional carriers.
A few, like the Algoma Central Railway (owned by the Wisconsin Central Transportation
Corporation) and Ontario Northland have been in operation since the early 1900s. The majority,
however, are newly created shortline railways. These shortline railways provide very localized rail
service and are frequently partnered with major railways. Their emergence has come chiefly from
the rationalization of non-core branch line operations by both CN and CP. The operations of these
regional and shortline railways now extend to over 13,000 route-km of track.2,000 route-km of track
in Canada and the U.S. Together, these carriers control 72 percent of the national railway system.
112. The networks of both carriers extend into the United States. A chief feature of their
American networks is the access they provide to Chicago - the major railway hub of North America.
The majority of goods moved by rail between Canada and the U.S. are exchanged between carriers
in Chicago, before moving to a final destination. CN's recent purchase of the U.S. Illinois Central
Corporation resulted in the addition of about 5,000 route-km to its existing network. This extended
the company's direct physical reach into markets as far south as the Gulf of Mexico.
113. In addition to the major railways, Canada is also home to some 51 smaller, regional carriers.
A few, like the Algoma Central Railway (owned by the U.S. Wisconsin Central Transportation
Corporation) and Ontario Northland have been in operation since the early 1900s. The majority,
however, are newly created shortline railways. These shortline railways provide very localized rail
service and are frequently partnered with major railways. Their emergence has come chiefly from
the rationalization of non-core branch line operations by both CN and CP. The operations of these
regional and shortline railways now extend to over 13,000 route-km of track.
TERA INTERNATIONAL GROUP, INC. - 20 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

114. Canadian National. CN was owned by the Government from 1918 to its privatization in
1995. The CN Commercialization Act was enacted into law on 13 July 1995, and by 28 November
1995, the federal government had completed an initial public offering (IPO) and transferred all of its
shares to private investors. 20 Presently, it is the largest and only transcontinental railway in Canada.
It operates only freight services.
115. Canadian Pacific Railway (CPR). CPR was Canada's first transcontinental railway and for
many decades was the only practical means of long distance passenger transport in many regions
of Canada, and was instrumental in the settlement and development of western Canada. Its primary
passenger services were eliminated in October 1978 after being assumed by VIA Rail. Commuter
services provided by CPR in Montreal were transferred to Montreal Urban Community Transit
Commission (MUCTC) in 1982. Presently, CPR is primarily a freight railway.
116. VIA Rail. Intercity passenger rail services are provided by VIA Rail. It operates Canada’s
national passenger rail service on behalf of the Government of Canada connecting communities
across a 14,000 km network of lines owned by CN and CPR. VIA Rail was established as an
independent Crown Corporation in 1977 controlled and funded by the Government for providing
intercity passenger rail services that were earlier provided by CN and CPR.
117. Competitive Access Arrangements. The Canadian Transportation Agency (CTA) is the
principal agency for economic regulation of and competition in the railway sector. Within the basket
of competitive access mechanisms in the CTA, both interline switching provisions and the
competitive line rate (CLR) are designed to provide a shipper with access to a competing railway at
an interchange. Under interline switching, a shipper located on one railway is permitted to have its
traffic interchanged to another railway for the line haul when the point of origin of a movement of
traffic is within a radius of 30 km of an interchange. The CTA has the responsibility to determine
maximum rates charged for an interline switching move. Similar provisions apply to terminating
traffic. A shipper located on one rail line and beyond the 30 km interline switching limits can also
ask its local railway to establish a CLR for moving goods to a competing railway line. To use this
option, the shipper must have already reached an agreement with the competing railway before
requesting a CLR from the local railway.
2.3.3 European Union
118. A more detailed description of the EU railway sector is included in Appendix 12. The
Appendix also includes a description of the regulatory framework, institutional structure, and private
sector experience inf the railway sector in U.K., France, and Germany.
119. Recognizing the role of Europe’s railways to facilitate efficient trade in the single EU market
and to promote economic and social cohesion, the EU has provided guidance to the member states
through various directives to develop, extend and improve railway services in the member states.
The objective was to make rail an attractive form of transport that is responsive to market changes
or customer needs. In order to help EU’s railways to achieve this objective, various directives were
issued by the EU. The directives are grouped into three packages establishing the successive
phases of the reform and restructuring agenda for railways of the EU.
120. The first EU railway package consists of Directives 91/440EC of 29 July 1991 on the
development of the Community's railways, 95/18EC of 19 June 1995 on the licensing of railway
undertakings, and 95/19EC on the allocation of railway infrastructure capacity and the levying of
charges for the use of railway infrastructure and safety certification. These directives require the
member states to separate the management of railway infrastructure from the provision of railway
transport services. The idea behind the directives was for the track operator to charge the train
operator a transparent fee to run its trains over the network and allow anyone else to also run their
trains under the same conditions.
20 Before privatization CN divested itself during the late 1970s and throughout the 1980s of several non-rail transportation
activities such as trucking subsidiaries, a hotel chain (sold to CPR), real estate, and telecommunications companies.
The biggest telecommunications property was a company which was co-owned by CN and CP (CNCP
Telecommunications) which, upon its sale in the 1980s, was renamed Unitel (United Telecommunications) and upon
corporate affiliation with Rogers Communications, was renamed AT&T Canada.
TERA INTERNATIONAL GROUP, INC. - 21 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

121. The second rail package, consisting of four directives, aims at further progress in opening
the market initiated by the first rail package. Rail operations are to be run as companies to a greater
extent. The second package also makes it possible for foreign operators to manage domestic
freight traffic (i.e. removal of cabotage restrictions among EU members). The third rail package
contains proposals for four acts, which, among other things, aim to open up international rail
passenger traffic to competition no later than 1 January 2010. Rail companies fulfilling statutory
safety requirements and other technical and administrative requirements shall be given full access
to EU railway infrastructure, including cabotage movements. The third package also contains
proposals concerning the implementation of joint regulations for the authorization of locomotive and
train personnel in both passenger and freight traffic.
122. France. The state-owned French National Railways (Société Nationale des Chemins de fer
Français (SNCF)) is a part of the SNCF Group, 21 which includes over 640 affiliated companies.
SNCF was created in 1937 by the merger of the private companies that were concessionaires of
railways in France. 22 SNCF benefits from a high degree of independence in its transportation
activity although it is bound to comply with principles of public interest.
123. In February 1997 the French Government passed the railway Reform Law which created the
French Railways Infrastructure company (Réseau Ferré de France – RFF). Consequently, SNCF
remained in charge of railway operations while RFF assumed authority for investment in and
management and development of the national rail infrastructure. SNCF now pays track access
charges to RFF for the use of its infrastructure. Also in accordance with the Reform Law, the
management and maintenance of the railway infrastructure is undertaken by SNCF (for safety
considerations) under contract with and payment of maintenance charges by RFF. Therefore,
above rail operations and the maintenance of infrastructure remain in the control of SNCF.
124. A main feature of railway reform in France was the January 2002 transfer of organizational
powers from state to regional authorities with full responsibility for planning and financing local
passenger rail transport. Under this arrangement a series of agreements have been signed
between SNCF and 20 regional authorities. In the agreements, the services are defined by the
regional authorities and the corresponding financial contributions by regions to SNCF are added.
This leaves SNCF merely as a supplier of trains and staff, for which it retains its monopoly.
125. In comparison with the national railway, the urban and suburban railway services are more
open to competition and have more participants. In 90 percent of urban and suburban railways in
France, the transport system is granted to semi-private operators (20 percent) or private operators
(70 percent) through: (i) management contracts, where the private operator receives a
management fee; or (ii) contracts by virtue of which the private operator bears certain industrial
and/or operational risks; or (iii) concession contracts, where the private operator fully bears the
operation (and sometimes the construction) risks.
126. Germany. In December 1993, the Restructuring of Railway Act containing alterations to the
German Constitution was passed by the National Parliament. Under this Act, the former West
German Deutsche Bundesbahn, East German Deutsche Reichsbahn, and the Railway Property in
West Berlin were fused as the Federal Railway Assets. These were then divided into a public
section and a commercial section. The public section was divided into the Federal Railway Office
(Eisenbahn-Bundesamt - EBA), and the Office for Federal Railway Assets
(Bundeseisenbahnvermogen - BEV). The commercial section of the railway became Deutsche
Bahn AG (DB AG), charged with managing the railway industry according to good business
principles in line with German company law.
21 SNCF transportation business is largely passenger oriented. Revenues from passenger business account for about 60
percent of total SNCF revenues and freight about 11 percent. The remaining revenues are from providing infrastructure
related services and leveraging of SNCF assets and know-how.
22 The first French law to regulate the railways dates from 11 June 1842, under which the French state granted
concessions to private companies to develop and operate the railways. There were six major railway companies in
France in 1860, five in 1934 and, by 1937, only one remained. The private networks, all more or less in a difficult
financial situation, were nationalized in SNCF was created and was initially granted a 45-year concession. Originally, 51
per cent of SNCF’s share capital was held by the French state with the remainder being granted to the previous private
concessionaires who never effectively exercised their rights, and so from the date of nationalization, the French state
exercised full control over the sector.
TERA INTERNATIONAL GROUP, INC. - 22 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

127. EBA was created as an independent body under the Federal Ministry of Transport to
exercise the rights and duties of the with respect to the restructured railway industry. This office,
inter alia, deals with all matters of safety connected with infrastructure and, operation and rolling
stock; and with signaling regulations. It deals with the allocation of the funds assigned by the
federal government for investment in infrastructure. BEV deals with the non-operational railway
properties, the civil service personnel of the former state, and inherited debts. It is responsible for
the pensions of railway staff and administration of staff welfare programs.
128. DB AG was established as a joint stock company wholly owned by the Government. DB AG
manages the federal railway system and constructs railway lines under contract with the
Government. The infrastructure subsidiary of DB AG (DB Netz AG) manages the network on
commercial basis. To cover operation and maintenance costs and the depreciation payments, DB
Netz AG, imposes access charges (as per EU’s Directive 91/440) on users of the network, including
DB AG and other transport operators.
129. Another significant reform was the transfer, in January 1996, of railway passenger local
operations to the regional governments. The regionalization of these services is a crucial point in
the railway reform and shifts responsibility for both providing and financing such services to regional
governments, i.e., institutions demanding transport pay for it.
130. United Kingdom. The railway industry in the U.K. was reorganized in 1994. British Rail
(BR), which was a vertically integrated state owned railway company having statutory monopoly
over the carriage of passengers and goods by rail, was broken up into more than 100 separate
entities, all of which were privatized between 1995 and 1997. The Railways Act 1993 provided the
basis for the reorganization. The main objectives of the Act were: (i) to reduce the level of
government subsidies for rail transport over the long term; (ii) to open the transport sector to
competition to improve services, increase railway productivity, and reduce administrative
sluggishness; and (iii) to respond better to market needs, thereby meeting demand and improving
financial results. Reforms resulted in the separation of transport operation from railway
infrastructure, introduction of a franchise system to passenger rail transportation and privatization of
the freight rail transportation business and infrastructure. The reorganization resulted in the division
of BR into: (i) a new infrastructure manager – Railtrack that became the sole owner and manager
for the entire railway infrastructure including tracks, signaling, electrification, stations, depots and
shops; (ii) 25 train operating companies (TOCs) with franchises to run passenger operations; (iii)
Four freight train operators; (iv) three rolling stock leasing companies (ROSCOs); and more than 70
other companies connected with various aspects of railway engineering and operation. While the
train operating companies were franchises, freight business was completely privatized through the
establishment of private companies which bought operating licenses, own their own rolling stock,
and operate in an open environment.
131. There were flaws in the management of infrastructure by Railtrack, which caused three
serious train accidents. In order to maximize return to shareholders, Railtrack cut costs and tried to
get the most out of the assets with less regard for the consequences of deferred maintenance. The
resulting costs of replacing hundreds of kilometers of damaged track and compensation to train
operators for their damages exacerbated a brewing financial crisis. Railtrack declared bankruptcy
on 7 October 2001, and the Government placed it under Administration. In March 2002, Network
Rail, a not-for-profit company limited by guarantee (CLG) 23 was established. On 3 October 2002,
Network Rail acquired the shares of Railtrack for £ 510 million and took over the ownership and
management of the rail infrastructure. Network Rail, is a ‘not for profit distribution’ company.
132. Since 1994, when the reform program started, Britain’s rail industry has passed through a
troublesome phase. Privatization opened the way for new private investment in the railway and
encouraged train operators to adopt more customer focus. However, the division of BR into almost
100 independent entities replaced coordinated internal company relations with complex, formal, and
costly contractual relationships. The break-up resulted in a heavy, inefficient bureaucracy, an
opposition of interests and objectives, and a weakening of responsibilities among the many players.
Since each of these companies had distinct commercial interests to protect, in the final analysis it
23 As a CLG, Network Rail has no shareholders. It can not issue shares under the Companies Act 1985.
TERA INTERNATIONAL GROUP, INC. - 23 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

came out that market forces alone would not safeguard the greater social good and regulation was
essential to maintain the coherence and integrity of the national network and to protect consumer
interests.
133. The U.K. system has virtually no intra rail competition. It is a system of ‘horizontal
monopolies' based on either geographic considerations (passenger services) or product
considerations (freight services).
134. Japan. A more detailed description of the Japanese railway sector is included in Appendix
13. The state-owned Japanese National Railway (JNR) had been incurring losses since 1964. In
1986, its freight revenues covered only 68% of costs. In April 1987, under the Reform Law, the JNR
was statutorily disbanded and its assets, operations and liabilities were distributed among a number
of new companies, known as the Japan Railways Group. The dismemberment legislation provided
that JNR's passenger business, its infrastructure and its assets be distributed geographically
between six companies, three on Honshu island and one each on Hokkaido, Shikoku and Kyushu.
These companies were: (i) JR Hokkaido or Hokkaido Railway Company; (ii) JR Higashi Nihon or
East Japan Railway Company; (iii) JR Tokai or Central Japan Railway Company; (iv) JR Nishi
Nihon or West Japan Railway Company; (v) JR Shikoku or Shikoku Railway Company; and (vi) JR
Kyushu or Kyushu Railway Company. For freight transportation one nation-wide company - JR
Kamotsu or Japan Freight Railway Company was established. The six regional passenger JR
companies own and manage rail tracks and stations, offering passenger railway services in their
respective regions. JR Freight does not own any rail tracks but operates freight trains on tracks
owned by the six JR companies.
135. Privatization of the new JR group companies was the ultimate objective of JNR's
dismemberment. Initially, all companies remained in the public domain as joint stock companies
with the Government as the sole shareholder. Only the Hokkaido, Shikoku and Kyushu companies
started free of any inherited debt liabilities, but all three required subsidy for their current operations,
which was provided through government-established Management Stabilizing Funds. JR East was
fully privatized in 2003. About two-thirds of the shares of both JR West and JR Central are held by
the private sector and the remaining are still with the government. In addition, all shares of the other
four JR companies are still held by the Government’s JNR Settlement Corporation.
136. Heavy long-term investment needed for railways development coupled with slow generation
of revenues over a relatively long period of time have inhibited railway companies to self-finance
new lines. In Japan, initially, the national government had been using the general account
(budgetary funds) for the construction of railway projects. However, the absence of a funding
system independent of the budget was considered a major constraint on railway’s development. In
1991, following sale of the Shinkansen facilities to the operating JRs a Railway Development Fund
(RDF) was established by the National Government. 24 On 1 October 1997, RDF and the Japanese
Maritime Credit Corporation were merged to form a new public entity, the Corporation for Advanced
Transport & Technology (CATT). Presently this Corporation provides funding for construction of
Shinkansen lines and interest free loans to construct and improve arterial railways.
137. Investment on the development of new Shinkansen railway lines is shared by the National
Government, local governments and JR companies. The proportion of subsidies from the national
government is fixed, and the source of the subsidies is the profits on sales of the existing
Shinkansen lines and the public works project budget. Local governments bear expenditures
equivalent to approximately one-half of those of the National Government. After the line is opened,
JR companies pay access charges for track usage within the limits of their profit.
138. The three large JR companies which are in the business of passenger transportation are
carrying out profitable operations since the restructuring and privatization. It may be mentioned that
their operation is not encumbered by historical debt incurred for building much of the network,
including the Shinkansen lines. A significant feature of the railway companies in Japan is their
involvement in real estate development. As reflected in the financials of JR East, a third of the
revenues and about 50 percent of the profits are from the real estate business.
24 Role and Functions of Railway Development Fund, by Akio Ono, JR & TR, April 1997.
TERA INTERNATIONAL GROUP, INC. - 24 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

139. JR companies remain vertically integrated. The six passenger companies own and operate
the rail network. The only exception is JR Freight that operates freight trains on the meter gauge
network on the basis of access provided by the owning passenger companies.
140. The JNR experience has important lessons in the area of planning investment financing for
large scale railway projects over a period of time. One of the main causes of JNR’s failure was the
enormous debt resulting from huge amounts of money expended on new railway construction
projects. The servicing of the debt became a big problem because investments were not financed
by increasing fares. Instead of increasing fares in line with the price index, JNR was forced to keep
fares low as part of a national price control policy. As a result debt became unmanageable and the
interest payments alone ballooned out of proportion to the size of the total operation. This
emphasizes the overriding importance of establishing a practical scheme to raise long-term lowinterest
financing before railway construction is actually taken up.
141. United States. A more detailed description of the U.S, railway sector is included in
Appendix 14. The railroad industry in the United States is one of the largest in the world. Although it
does not move as many passengers per year as do many other countries, however it does move
more freight by rail than any other country, a staggering 2.673 trillion TKM and $40.5 billion in
revenues in 2004.
142. Since their creation in the mid-1800s, railroads in the U.S. have been privately owned - both
the infrastructure and operations of rolling stock. Two exceptions existed during this period. The
first is the Alaska Railroad (ARR), which was built for national defense purposes in the 1940s.
However, when it became a profitable railroad in the 1980s by moving large quantities of coal to
Alaskan ports for export to Asia, it was sold to the State of Alaska in 1985. The only other exception
is the quasi-government National Passenger Railroad Corporation - commonly known as Amtrak.
Amtrak is the only inter-city rail passenger entity in the U.S. Amtrak is funded by U.S. Congress in
the form of a subsidy. Amtrak owns tracks in the Northeast Corridor between Washington, D.C. and
Boston, Massachusetts, but pays user fees to operate over much of the United States on tracks
owned by the freight railroads.
143. The Federal Government basically governs intercity transportation, and state and local
governments govern urban intra-city transportation. The Federal Department of Transportation
(DOT) provides transportation-related services in the U.S. The Federal Railroad Administration
(FRA), a modal agency of DOT, was created by the Department of Transportation Act of 1966. The
purpose of FRA is to promulgate and enforce rail safety regulations; administer railroad assistance
programs; conduct research and development in support of improved railroad safety and national
rail transportation policy; provide for the rehabilitation of Northeast Corridor rail passenger service;
and consolidate government support of rail transportation activities. FRA is one of ten agencies
within the DOT concerned with intermodal transportation.
144. The Surface Transportation Board (STB) was created by the Interstate Commerce
Commission (ICC) Termination Act of 1995 as a successor agency to the ICC. The STB is an
economic regulatory agency that Congress charged with the fundamental missions of resolving
railroad rate and service disputes and reviewing proposed railroad mergers. The STB is
decisionally independent, although it is administratively affiliated with the DOT. The STB serves as
both an adjudicatory and a regulatory body. The agency has jurisdiction over railroad rate and
service issues and rail restructuring transactions (mergers, line sales, line construction, and line
abandonment); certain trucking company, moving van, and non-contiguous ocean shipping
company rate matters; certain intercity passenger bus company structure, financial, and operational
matters; and rates and services of certain pipelines not regulated by the Federal Energy Regulatory
Commission.
145. At the end of 2004, there were 549 private freight railroad companies operating on 227,433
route-km. These include seven Class 1 railroads: 25 Burlington Northern & Santa Fe Railway Co.
25 Freight railroad companies are classified by their level of operating revenues adjusted annually for inflation. For 2004,
(i) Class I railroads had operating revenues of U.S.$277.7 million or more; (ii) Class II railroads had operating revenues
of U.S.$ 22.2 million to U.S.$ 277.7 million; and (iii) Class III railroads had operating revenues of less than U.S.$ 22.2
million.
TERA INTERNATIONAL GROUP, INC. - 25 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

(BNSF), Union Pacific Railroad Co. (UP), CSX Transportation, Norfolk Southern (NS), Kansas City
Southern Railway Co. (KCSR), Grant Trunk Corporation (GTC, a subsidiary of Canadian National
Railway), and Soo Line Railroad Co. (SLR, a subsidiary of Canadian Pacific Railway). Besides the
seven Class 1 railroads there are 542 regional and short-line railroads which operate their own
railroad lines. The regional and short-line railroads are 96.5 percent private- and 3.5 percent publicowned.
Regional and short-line systems have been formed from a combination of historic holdings
and the pieces of the Class I system that was shed by the larger railroads. Many branch lines
operate effectively in conditions where the Class I railroads cannot. Short-line railways operate at
much slower speed - and thereby subject to less stringent Federal safety regulations as Class I
carriers. They use older equipment - oftentimes bought at reasonable prices from Class I railroads.
The regional and short-line systems take advantage of different labor cost structures, non-unionized
labor, different profitability targets and business models with innovative budgeting and financing
procedures, and may also receive some level of public funding support.
146. Regional and short-line systems play two critical roles in the U.S. freight-rail network. They
are important partners for the Class I railroads because they often provide the first and last service
miles in the collection and distribution of railcars. This arrangement allows the Class I railroads to
focus investment in higher-density, longer-distance line-haul business in key corridors. Regional
and short-line systems also ensure rail service for shippers along their lines who rely on rail to
move heavy or bulky commodities cost-effectively. Without regional and short-line rail service,
these shippers might close or relocate, taking jobs and tax revenue with them. Some of the larger
short-lines have been so successful in making a profit, that in recent years their expertise has been
sought by countries commercializing and privatizing their rail systems. A number of U.S. short-lines
have obtained long-term operating concessions in Argentina, Brazil, Guatemala, Malawi,
Mozambique, Estonia, Peru, Chile, Mexico, New Zealand, and Great Britain.
147. Organizationally, the U.S. railroads have continued the traditional structure that is vertically
integrated. Every railroad owns and controls its infrastructure as well as the trains operating on that
structure. The U.S. railroad companies see advantages in that mode of operation for increasing
productivity, reducing costs and being able to react in accordance with the demand for rail transport
in a competitive environment. Investment decisions that concern both operations and infrastructure,
such as those related to running heavier cars, longer trains, and capacity enhancement can be
made by a unified authority and in timely manner. In their view this arrangement provides the best
recipe for increasing profitability and increasing return on capital.
148. Following the passing of the Staggers Rail Act in 1980, almost 95 percent of the industry
was deregulated and ICC was eliminated in 1995. The Staggers Act gave railroads greater freedom
to market their services and to set rates. Railroads, for example, were allowed to enter into
contracts with shippers. In addition, the procedures governing the abandonment of uneconomical
lines were liberalized and, through various regulatory rulings, the creation of new short line railroads
were encouraged to operate over many of the light-density rail lines that might otherwise have been
abandoned. The key to economic health of the U.S. railroad industry lies with its legislatively
mandated deregulation. The industry aggressively adopted its provisions to nurture itself back to
profitability. With deregulation, the U.S. rail freight industry regained its competitive position in the
transport sector. Economic regulation of U.S. railroads is at a crossroad. The increasing
consolidation of the U.S. rail industry and railroad service failures at mergers have led some to
argue that a lack of competition in the industry is the problem and that increased regulatory
oversight over railroads is needed to protect shippers. Yet, others claim that the recent western
railroad problems were due to one-time merger effects or to long-term capacity constraints rather
than to a lack of competition and that railroad regulatory constraints should be kept to a minimum to
allow railroads to earn the profits they need to upgrade their infrastructure. The STB has begun
working towards a new regulatory framework based on a recent review of these issues.
149. The discussion in the paragraphs above shows that railway systems have gone for the
organizational structure that is considered best from the point of view of the country’s railway sector
and the national interest. Notably, most railway systems remain vertically integrated, which means
that the above rail operations and the infrastructure are managed and operated by the same entity.
The present status of organizational structures is illustrated in Figure 2.3.
TERA INTERNATIONAL GROUP, INC. - 26 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

150. With regard to the railways in DMCs when there is high density of traffic, the vertically
integrated system would be suitable. There are distinct advantages in the vertically integrated mode
of operation for increasing productivity, reducing cost and being able to react in accordance with the
demand for rail transport. Decisions related to enhancement of capacity or running of heavier and
longer trains may be taken in a coordinated way without having to rely on a separate authority that
has responsibility for infrastructure. The objectives of the infrastructure authority may be quite
different from those of the above rail operator.
Degree of
Privatization
Figure 2.3: Privatization and Unbundling
Private Firm
Unregulated
North America
(freight) and NZ
Privated Firm
Consession contract
Private Firm
Discretionary
Regulation
Public Enterprise
North
America
Elsewhere
Latin
America
and
Japan
Europe and Australia
Integrated
no access
Integrated
limited access
Separated
limited
access
Degree of Vertical Unbundling
Integrated
open
access
Separated
open
access
TERA INTERNATIONAL GROUP, INC. - 27 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

3 RAILWAYS OF ASIA: TYPICAL PSP TRANSACTIONS, PROBLEMS, AND SUCCESSES
3.1 CHARACTERISTICS OF ASIAN RAILWAYS
151. In order to provide a comparative analysis of Asian railways it is necessary to use a
common set of data applicable to as wide a range of railways as possible. The most recent year for
which this data set exists is 2003 and the only consistent data source that is available is the Union
Internationale des Chemis de Fer (UIC) annual publication on International Railway Statistics
2003 (UIC 2003). 26
152. Various indicators representing network density, traffic density, and operational efficiency
are provided in this section. For each indicator the entire range of values computed for railways
which provided data to UIC and included in UIC 2003 is presented in Appendix 15. As shown in the
Appendix, there are many countries in which the railway sector is relatively small with a route length
of less than 1,000 km. Based on the tabular data included in Appendix 15, a subset of visual
comparisons are included in Appendix 16 with the DMCs in Asia indicated in red for ready
reference. The subset includes all world railways to the extent data is available and the world
average where appropriate averages can be computed.
153. Great caution must be exercised in the use of comparative statistics. Every nation is
different with its own unique transport sector development history and evolution of socio-economic
and industrial activity. As a result, no two railways in the world are similar or reflect similar
conditions. Furthermore, the use of a data set for a specific year does not capture trends unique to
each country’s railway sector; it only provides a snapshot for a year. Another limitation is the
univariate nature of the comparison, i.e. one indicator at a time. This is a simplistic attempt to
characterize a highly complex industry which has been evolving as a result of multiple factors
affecting its assets and performance. Moreover, definitions for each data item may be widely
different from one country to the other. Last, but not least, the UIC data is collected from UIC
members only. Data for Australia, for example, is from Queensland Rail only. Data for most Latin
American counties is not reported by UIC since concessioning of the railways in these countries.
For these countries data available from other sources have been included to the extent possible.
Despite these limitations, UIC statistical data is the only source in the world, which includes the
largest number of countries.
3.1.1 Network Density
154. Route density in terms of route km per 1000 sq. km. of land area is generally high among
world railways in developed economies with the highest density values occurring in Western
Europe and Japan (Figure 16.1 in Appendix 16). The only Asian DMC with a higher route density
than the world average is Azerbaijan with 25.69 km per 1,000 sq.km. of land area. The lowest route
density among Asian DMCs is Mongolia (1.16 km per 1,000 sq.km.). Generally countries with a
large land mass, regardless of their level of development, score low densities. United States and
Canada, for example, have a density of less than the world average and Australia has the lowest
fourth. Densities are also low in India, PRC, and Kazakhstan, the largest DMCs in Asia in terms of
land mass. Despite their low density, however, these three DMCs dominate the railway network in
Asia with a total length of 137,338 km, accounting for more than 70 percent of the railway networks
among all DMCs in Asia.
155. Undoubtedly, the need to increase route density must be considered in conjunction with the
utilization of the existing network (i.e. traffic density) and the geographic distribution of economic
and industrial activity within the nation. Low network utilization implies a structural weakness in the
nation’s railway sector, which does not justify further investments in increasing the railway route
length. On the other hand, railway routes within the country are not typically distributed in a
homogeneous manner across regions. Concentration of economic and industrial activity in a few
areas of the nation implies a geographically unbalanced development potential, which can be
addressed through selected government policies to encourage economic dispersion such as
26 Published by the UIC Statistics Centre, Paris, May 2004. Since the writing of this Report the UIC published its annual
statistics for 2003.
TERA INTERNATIONAL GROUP, INC. - 28 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

special tax breaks, low cost loans, assistance with employee training, heavy public investment in
infrastructure to stimulate economic and commercial development, subsidies, and other measures.
PRC’s Western development strategy is a good example of a government’s initiative to overcome
the imbalance in the level of regional development between the coastal and inland areas. Capital
investment in new railway infrastructure to facilitate socioeconomic development in the lessdeveloped
but resource rich regions of a country would be justified as part of the government’s
macroeconomic development strategy. In many cases, however, these investments would not be
justified purely on commercial criteria since traffic during the initial years would not be large enough
for profitable operations. Under these circumstances the capital investment and coverage for
operating losses during the initial years of operation must be borne by the public sector.
156. In terms of route density expressed in relation to population, Figure 16.2 in Appendix 16
shows a comparison among countries. This indicator does not appear to relate to the country’s level
of economic development: there are as many developed and developing countries above as well as
below the world average. United Kingdom, Italy, and Japan, for example, have a higher than world
average route density in terms of area and a lower than world average route density in terms of
population.
157. In general, the value of the indicator tends to be lower than the world average for counties
which have both a high population and a high population density. In the case of the Former Soviet
Union (FSU) countries included in Figure 16.2 of Appendix 16 (Kazakhstan, Russia, and Ukraine),
the high route densities are due to the FSU policy of emphasizing rail transport and discouraging
road transport. 27 The indicator for Mongolia is high (0.72 route km per 1,000 people) not because
the railway network is well-developed (it is the third lowest in the world in terms of route km per
1000 sq.km.) but because of Mongolia’s low population.
158. DMCs from the Caucasus and Central Asia have higher route densities in terms of
population compared to South and East Asia. In the case of India and PRC, there is, on average,
about 60 meters and 50 meters of route length for 1000 people, respectively which is approximately
15 percent of the world average. This reflects the need for route length expansion particularly when
the indicator is compared with the utilization of the current network. It also reflects the relatively
small mobility. In PRC, for example, 17.67 billion passenger trips were taken by all modes of
transport in 2004 or an average of 13.6 trips per person for the whole year.
3.1.2 Traffic Volume and Density
159. Figures 16.3 and 16.4 of Appendix 16 show the freight traffic expressed in tons and ton
kilometers (TKM). Corresponding data for passengers and passenger kilometers (PKM),
respectively, are presented in Figures 16.5 and 16.6 of Appendix 16. Some railways such as United
States, Australia, Canada, South Africa, and Kazakhstan are heavily oriented towards freight
transport. On the other hand, Western European and Japanese railways are oriented towards
passenger transport. Some such as PRC, India, Russia, and Ukraine offer mixed freight and
passenger transport service.
160. In terms of freight tons (Figure 16.3 in Appendix 16) PRC has the highest traffic volume in
the world, surpassing the second-ranked U.S. Class I railways by 22 percent and the third-ranked
Russian railways by 72 percent. The three large railway networks among Asian DMCs (PRC, India,
and Kazakhstan) carried more than 2.7 billion tons of freight in 2003, accounting for 95 percent of
all Asian DMCs and 30 percent of all railways in the world. The other Asian DMCs had considerably
less traffic volume ranging from 557 thousand tons in the case of Cambodia to 51.4 million tons in
Uzbekistan.
161. In terms of TKM (Figure 16.4 in Appendix 16), China, India, and Kazakhstan again dominate
Asian DMCs with a combined volume of almost 2.15 trillion TKM representing 98 percent of the
total TKM for Asian DMCs and 28.5 percent of worldwide TKM. In 2003, PRC and India occupied
the third and fourth positions in the world TKM after U.S. and Russia. Kazakhstan was the eighth
largest in the world. PRC’s freight tons and TKM are more than 19 times the world average freight
27 In the FSU any movement of freight for a distance of 50 km or more had to be shipped by rail. This policy resulted in a
relatively large build up of railway networks in relation to population density.
TERA INTERNATIONAL GROUP, INC. - 29 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

tons and TKM. The other Asian DMCs have considerably low traffic volumes, mostly less than 8
million TKM.
162. With respect to passenger traffic, India and PRC also rank high: India is second worldwide
after Japan in terms of passengers and first in terms of PKM. More than 99 percent of all railway
passenger trips in Asian DMCs are made in India and China. This is despite the adverse effects of
travel in China due to SARS during the first half of 2003. These two countries accounted for about
one in four railway passengers in the world in 2003. Other Asian DMCs with relatively high volumes
of railway passenger trips include Indonesia (176 million), Pakistan (72.4 million), Bangkadesh
(43.4 million), Kazakhstan (17.7 million), Uzbekistan (16.5 million), and Vietnam (12.5 million). Most
of the remaining Asian DMCs had 10 million or less passenger trips.
163. In terms of PKM, India and China again dominated the world in 2003, occupying the first
and second place with 515.0 billion and 462.3 billion PKM, respectively. Intercity passenger traffic
in Japan is the third in the world with a PKM level approximately one-half of the second ranked
PRC. Almost 99 percent of aggregate PKM in Asian DMCs have been produced in India and PRC.
Approximately one PKM of every two worldwide is accounted by these two countries.
164. In terms of Traffic Units (TU) 28 , PRC is ranked No. 1 in the world (Figure 16.7 in Appendix
16) with 34.9 million TUs/route km, 63.9 percent higher than the second-ranked Russia and more
than 9 times the world average. India and Kazakhstan also rank high in the world (third and sixth,
respectively). Other Asian DMCs with TU values more than the world average are Uzbekistan,
Mongolia, and Azerbaijan. The lowest in Asia is Cambodia with 300 thousand TUs. Almost 97
percent of all Asian TUs is generated by PRC, India, and Kazakhstan. One of every three TUs
produced by the world railways is accounted for by these three countries which collectively have
only 13.5 percent of the world’s railway network length.
165. When the traffic density is combined with route density (Figures 16.1 and 16.7 in Appendix
16) a traffic stress index (TSI) on the network can be computed as a comparative value to reflect
the need for network expansion in relation to the “typical world railway”. For purposes of this
computation, TSI is defined as the “ratio of traffic density expressed in TUs/route km to the world
average TUs/route km” multiplied by the inverse of the “ratio of a country’s route density/1000 sq.
km. to the world average route density”. Comparative TSI values for 2003 are shown in Table 3.1
for selected countries.
166. It should be emphasized that TSI does not recognize geographic variation of network
density and traffic within a country since it assumes a uniform geographic distribution of these
values. It also does not distinguish between levels of efficiency in railway operations inherent in a
nation’s railway system. In this respect the ratio assumes the world average as a “normal operation”.
The world average of 1 indicates that the need to expand railway network length is relatively
“normal”, i.e. the network density is adequate to deliver the output. The lower the index the less is
the need to expand the rail network coverage. The reverse is true for index values higher than 1.
167. The relative need for network expansion is highest in PRC. The value of almost 35 means
that the pressure to expand network length in PRC is about 35 times higher than the average
pressure for same in the world. Other DMCs in Asia with a relatively high need to expand network
length are Mongolia (TSI value of 24) and Kazakhstan (15). Most other DMCs in Asia have values
of less than 10. The TSI for Bangladesh and Cambodia is less than 1 indicating a relatively low
need to expand the railway network in relation to the traffic volume.
28 Also known as Converted Ton Kilometers, Traffic Unit is the sum of TKM and PKM, representing a railway’s total output.
TERA INTERNATIONAL GROUP, INC. - 30 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Country
Km
Inverse
of Ratio
to World
Million
Ratio to
World
Azerbaijan 25.69 0.99 3.95 1.03 1.03
Bangladesh 21.93 1.16 1.83 0.48 0.56
Brazil 3.39 7.53 6.37 1.67 12.56
Cambodia 3.42 7.46 0.30 0.08 0.58
Canada 6.55 3.89 5.20 1.36 5.30
China 6.48 3.93 34.90 9.14 35.96
Czech Rep. 122.94 0.21 2.48 0.65 0.13
Denmark 53.57 0.48 3.21 0.84 0.40
France 53.21 0.48 4.06 1.06 0.51
Germany 103.29 0.25 3.98 1.04 0.26
India 21.23 1.20 13.75 3.60 4.33
Indonesia 3.56 7.15 2.99 0.78 5.60
Italy 55.38 0.46 4.26 1.11 0.51
Japan 55.05 0.46 13.14 3.44 1.59
Kazakhstan 5.10 5.00 11.50 3.01 15.05
Kyrgyzstan 2.17 11.73 1.41 0.37 4.34
Malaysia 5.07 5.03 1.89 0.50 2.49
Mongolia 1.16 22.07 4.16 1.09 24.02
Pakistan 10.11 2.52 3.58 0.94 2.37
Poland 64.97 0.39 3.37 0.88 0.35
Russia 5.01 5.09 21.29 5.57 28.37
South Korea 31.80 0.80 12.62 3.30 2.65
Spain 28.53 0.89 2.44 0.64 0.57
Tajikistan 4.39 5.81 1.84 0.48 2.80
U.K. 70.78 0.36 3.58 0.94 0.34
U.S.A. 25.47 1.00 9.75 2.55 2.55
Uzbekistan 9.96 2.56 5.00 1.31 3.35
Vietnam 8.15 3.13 2.61 0.68 2.14
WORLD AVERAGE 25.50 1.00 3.82 1.00 1.00
Source: Consultant
Table 3.1: Index of Traffic Stress on Network
Route km/1000 TU/Route km
Traffic
Stress
Index
3.1.3 Operational Efficiency
168. The UIC data presented in Appendix 15 allows a comparison of output to employment and
number of employees per route kilometer. These comparisons are provided in this section as broad
indicators of labor efficiency. Figure 16.8 in Appendix 16 shows comparative statistics in terms of
TUs/employee. With 1.44 million employees, PRC is approximately 60 percent above the world
average in employee productivity. Despite its high route density, CR’s employee output efficiency is
far below U.S., Canada, Australia, and South Africa. It is even below Kazakhstan. Considering that
CR is the largest railway in the world in terms of TUs, its lower rank in employee productivity is a
consequence of relatively high employment. This disadvantage is somewhat offset by the labor cost
difference between PRC and the developed nations. The other DMC railways show low employee
productivity ranging from 130,000 TUs/employee in Kyrgyz Republic to 590,000 TUs in India.
169. Figure 16.9 in Appendix 16 shows another indicator of employee productivity with even
more striking results. In terms of average number of employees per route km, CR holds the first
rank in the world with a value of 24, followed closely by India (23.3). Even the FSU railways
(Ukraine, Russia, Uzbekistan, Kyrgyz Republic, and Kazakhstan), which are still operating with a
slant on social responsibility, have lower average employment per route km. The figure shows that
the railways of developed economies in Western Europe and North America are lower than the
world average, with Canada and U.S. among the best performers in this respect as in the case of
TUs/employee illustrated in Figure 16.8 in Appendix 16. It should be emphasized that most railways
in developed countries do not provide support facilities for employee health, education, and welfare.
TERA INTERNATIONAL GROUP, INC. - 31 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Therefore, the employment data from these railways represent staffing for mainly core transport
operations.
170. An important observation from Figure 16.9 in Appendix 16 is that in railways with PSP or
under concession the number of employees/route km is substantially below the world average and
in railways operated by public agencies it is substantially higher. In PRC, for example, to reach
parity with the world average the employment level would be reduced by 72 percent. The
desirability and justification for this drastic reduction in employment is not debated here. Given the
Government’s overall goal of providing gainful employment to all citizens, it is reasonable that CR
would maintain higher than the world average employment. Any consequent disadvantage of this
social responsibility will have to be offset, however, through strengths in other areas such as lower
operating cost per TKM and PKM, higher infrastructure productivity, and better equipment utilization.
3.1.4 Economic Performance
171. One measure of economic performance is the extent of the railway’s contribution to the
national economy, i.e. the dependence of the economy to the railway. This measure is generally
expressed in terms of TUs per Dollar of GDP. This relationship is illustrated in Figure 16.10 of
Appendix 16. A compendium graph in Figure 16.11 in Appendix 16 shows the number of passenger
trips per person as an indication of the extent of the people’s dependence on the railway for
transport.
172. Generally the FSU nations show a greater economic dependence to the railway (expressed
in TKM/$ of GDP) than developed nations, which reflects their legacy of over-emphasis on railway
transport. The world average of 0.42 TKM/$ of GDP indicates a relatively low dependency of the
typical country on rail transport. Among the DMCs, Mongolia is highest in the world at 4.9 TKM/$ of
GDP, followed by Kazakhstan at 3.9 TKM/$ of GDP and Uzbekistan, sixth in the world, with 1.7
TKM/$ of GDP. The high figures for Central Asian DMCs reflect the FSU legacy of heavy reliance
on railways and their landlocked geography which places more emphasis on longer distance
transport in relation to coastal nations.
173. Other than the Caucasus and Central Asian DMCs and PRC, the dependence of the
national economy on railway transport is low in other Asian countries. When the TKM/$ of GDP is
compared with the railway network density (expressed in terms of route km/1000 sq. km. of land
area – see Figure 16.1 in Appendix 16), the pressure on some DMC railways to support the
national economy becomes more apparent. For example, the dependence of the PRC economy on
CR is 3 times the world average and yet the rail network density in PRC is one-fourth of the world
average (Figure 16.1 in Appendix 16). In other words, CR is contributing more to the GDP formation
with a much less network coverage than the world average.
174. In the case of Mongolia, the railway is contributing 11.7 times more than the world average
railway to the GDP formation with a railway network that is only one-twentieth of the world average.
In the case of Kazakhstan, the railway’s contribution to the GDP is 8.3 times the world average with
a network density of 4.5 percent of the world average.
3.2 DEMAND FOR RAILWAY TRANSPORT
175. The demand for rail transport among DMCs shows a large variance depending on the extent
of railway network coverage, its service and cost competitiveness, and other factors which affect
modal share. Transport sector data in most DMCs do not provide adequate coverage to estimate
the rail modal shares. For example, road transport statistics in many DMCs provide data on the
number of vehicles with limited or no information on tons or passengers carried and on TKM and
PKM produced by road vehicles.
176. In countries where transport data for different modes exist, modal share estimates lead to
misleading observations. For example, in PRC tons and TKM data are reported nationally for
different modes of transport. In 2005, the total freight transported amounted to 18.6 billion tons
broken down as follows: railways 2.7 billion or 14.5 percent; roads 13.4 billion tons or 72.2 percent;
TERA INTERNATIONAL GROUP, INC. - 32 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

and inland waterways and coastal shipping 2.2 billion tons or 11.8 percent. 29 In terms of TKM the
modal share is vastly different: railways 2.1 trillion TKM or 49.9 percent; roads 869 billion TKM or
20.9 percent; and inland waterways and coastal shipping 1.1 trillion TKM or 26.8 percent. At an
average length of haul of only 65 km the nature of road transport in PRC resembles local transport
operations as opposed to the longer average hauls in rail (770 km) and inland waterways and
coastal shipping (506 km). Similar differences are also observed in the modal share for passengers
and PKM. Comparison of modal shares in PRC will, therefore, have to be made carefully and
should consider the inherent differences in the types of service typically offered by each mode.
177. Rail transport demand is closely related to the economic activity of the nation. Table 3.2
shows projected rail traffic expressed in TUs for DMCs for 2006, 2010, and 2020. GDP growth rates
were assumed for each country for 2003-2006 based on ADB economic data. GDP growth rates for
2007-2010 and 2011-2020 are based on Consultant estimates. The growth elasticity of rail demand
is based on the relative dependence of the economy on rail transport. A value of 1 indicates unitary
elasticity, i.e. every percent change in the GDP will cause a change of the same rate in the demand
for rail transport. A value less than 1 indicates inelastic demand, i.e. the rate of change in demand
is less than the rate of change in GDP. Demand is elastic for elasticity coefficients of more than 1,
i.e. the rate of change in demand is more than the rate of change in GDP.
Table 3.2: Railway Traffic Projections for DMCs
Actual Traffic (2002) Current
GDP Growth (%)
Growth Projected Traffic (TU million)
DMC
PKM TKM GDP 2002
Elasticity
2003-2006 2007-2010 2011-2020
(million) (million) (million $)
of Rail
2006 2010 2020
Bangladesh 3,941 777 41,323 5.5 5.5 5.0 0.50 5,259 5,861 7,503
Cambodia 20 158 4,000 6.0 6.0 6.0 0.30 191 205 245
China 480,305 1,507,817 1,271,000 9.5 8.5 7.0 0.80 2,664,969 3,467,186 5,978,831
India 493,489 333,228 510,241 6.8 7.0 6.5 0.75 1,008,713 1,237,816 1,992,397
Indonesia 17,600 1,710 172,971 5.7 5.5 5.0 0.30 20,665 22,063 25,605
Kazakhstan 10,449 133,088 24,637 6.0 6.0 6.0 0.90 177,144 218,619 369,909
Kyrgyzstan 50 331 1,606 4.0 4.5 4.5 0.40 406 436 521
Malaysia 1,123 1,073 95,164 5.2 5.0 4.5 0.30 2,337 2,480 2,836
Mongolia 1,073 6,452 1,118 4.5 5.0 6.0 0.95 8,897 10,711 18,646
Myanmar 5,000 926 24,026 4.5 4.5 5.0 0.30 6,253 6,597 7,656
Pakistan 20,782 4,572 71,485 7.5 7.0 6.0 0.50 29,376 33,710 45,304
Philippines 1,632 0 77,954 4.7 4.5 4.0 0.20 1,694 1,756 1,901
Sri Lanka 3,430 88 16,544 4.0 4.0 5.0 0.20 3,632 3,750 4,142
Tajikistan 41 1,085 1,235 3.5 4.0 4.0 0.75 1,249 1,406 1,889
Thailand 18,077 4,046 126,770 4.5 4.0 4.0 0.50 24,182 26,175 31,907
Uzbekistan 2,163 18,428 9,688 5.5 5.5 5.0 0.85 24,720 29,677 44,997
Vietnam 3,426 2,000 35,058 7.6 7.5 7.0 0.60 6,485 7,734 11,670
Total 1,062,600 2,015,779 2,484,818 3,986,171 5,076,183 8,545,961
Source: Actual traffic from UIC 2002 database; GDP growth for 2003-2006 based on ADB, Asian Development Outlook 2005
Update and Country Economic Reviews; Other years Consultant estimate. Elasticity of rail demand estimated by Consultant
based on socioeconomic dependency to rail in each country.
178. In the case of DMCs no country has an elasticity coefficient of more than 1. The highest
values are for Mongolia (0.95) and Kazakhstan (0.90) where the economy’s dependence to rail
transport is relatively high. PRC, India, and Uzbekistan also have higher than average elasticity
values ranging from 0.75 to 0.85. In the mid-range are Bangladesh, Pakistan, Thailand, and
Vietnam with values between 0.5 and 0.6. The remaining DMCs are at the low end ranging from 0.2
to 0.4.
179. The three countries with large rail traffic (PRC, India, and Kazakhstan) accounted for 96.1
percent of TUs in the DMCs. Their share is projected to increase to 97 percent by 2010 and 97.6
percent by 2020.
3.3 PSP EXPERIENCE IN DMCs
180. With the exception of a few isolated transactions, PSP in Asian DMCs are largely limited to
contracting for supplies and services and small scale private sector operations. As part of the
Project, the Consultant visited eight countries to interview government and railway officials,
29 China Statistical Yearbook 2005; published by the China Statistics Press; Beijing: September 1, 2005 and Ministry of
Communications annual statistical summary booklet.
TERA INTERNATIONAL GROUP, INC. - 33 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

selected private operators, and other individuals and collect relevant data on the country’s PSP
experience. The countries visited for this purpose include Cambodia, PRC, India, Kazakhstan,
Malaysia, Pakistan, the Philippines, and Thailand. A question guide was prepared to gather
background information and for use in interviews. Following is an overview of each country’s
experience and plans for PSP in the railway sector.
3.3.1 Cambodia
3.3.1.1 Physical and Operational Characteristics
181. Royal Railway of Cambodia (RRC) operates as a department of the Ministry of Public Works
and Transport. The network consists of two main lines (Figure 3.1). The old line runs westwards
from Phnom Penh to Sisophon (339 km), and then to Poipet at the border with Thailand. Due to
internal unrest, service from Sisophon to Poipet was removed in the 1970s. The new line, opened
in 1969, links Phnom Penh with the country's only deep water port at Sihanoukville, 263 km distant.
182. Railway traffic in Cambodia has been experiencing a declining trend in recent years. Freight
traffic, after increasing from 169.7 thousand tons (36.1 million TKM) in 1997 to 557.3 thousand tons
(157.9 million TKM) in 2002, declined to 298.4 thousand tons (77.7 million TKM) in 2004.
Passenger traffic has declined from 530.5 thousand passengers (49.3 million PKM) in 1997 to 81.9
thousand passengers (10.4 million PKM) in 2004. Traffic so far in 2005 indicates a further decline in
both passenger and freight transport from 2004.
183. In parallel to the general trend in traffic, operating revenues have also declined to US$2.19
million in 2003. The railway has relatively small traffic along a short network with average length of
haul of approximately 250 km, which makes it difficult to compete with road transport. As a
consequence, the operating ratio has been consistently above 1, resulting in Government subsidies
to maintain its existence. Operating costs are high mainly because of the age of infrastructure and
rolling stock. Labor costs constitute approximately 16% of operating costs, which is considered
within the acceptable range among other railways in the world.
184. The Government’s annual subsidy of nearly U$1 million represents approximately 0.25 per
cent of the GDP. Compared to the massive subsidies provided by the Governments in Western
Europe which amounted to 2 per cent of GDP in France and Germany and as high as 4 per cent of
GDP in Italy, the Cambodian subsidy is relatively moderate. However, as a largely poor country
with limited financial resources and per capita GDP of slightly above $300, even a small subsidy to
the railway sector is a cause for concern and presents an opportunity for improvement of transport
efficiency and competitiveness through better management and effective market-based
performance.
3.3.1.2 ADB Assistance
185. For the railway to gain its viability and improve cost efficiency, infrastructure improvements
and PSP in railway operations are necessary. Recognizing this need, the Government requested
assistance from the ADB to undertake a Project Preparation Technical Assistance (PPTA) for
rehabilitation of RRC’s infrastructure and provide an Advisory TA (ADTA) for restructuring the
railway sector. Consultant selection process by ADB for both TA projects is currently underway and
consultants are expected to commence services in January 2006.
186. The objective of the PPTA is to advise and assist the Government with all aspects of
rehabilitation and reconstruction of the infrastructure on the two existing railway lines from Phnom
Penh to Poipet and from Phnom Penh to Sihanoukville. The objective of the ADTA is to advise and
assist the Government with all aspects of restructuring the railway sector and the successful
creation and launch of a PPP as the railway operator. It is envisioned that the Government will
maintain a minority share in the new partnership and the PPP will principally be responsible for
freight transport services. If desired by the Government, a separate agency may be established to
operate a small-scale railway passenger service.
TERA INTERNATIONAL GROUP, INC. - 34 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.1: Cambodian Railways
Source: Asian Development Bank
3.3.2 People’s Republic of China
3.3.2.1 Physical and Operational Characteristics
187. With a route length reaching 75,000 km by the end of 2005, China Railway (CR) is the
world’s second largest railway (after Russia) under one roof (Figure 3.2). In 2004, CR carried 2.18
billion tons of freight and 1.07 billion passengers, which put it in the first rank among the world’s
railways.
188. In PRC the railways are particularly important because they constitute the main form of bulk
transport of goods and large numbers of passengers at a price accessible to the majority of the
population. CR has made significant contribution to the continued rapid growth of the country’s
economy. CR, however, is facing competition from road transport and problems in financing the
maintenance and renewal of the infrastructure and rolling-stock.
189. CR has played a very important role in the development of the national economy and the
country's industrial revolution. China is vast in territory, unbalanced in distribution of resources and
industries, as well as huge in population. Therefore, the railway is crucial to the passenger and
freight transportation needs of the country. The railway will continue to be the mainstay of the
Chinese transport sector for a very long period of time. Given the importance of rail service, reform
must be carried out with great care to reduce the risk of disrupting services.
TERA INTERNATIONAL GROUP, INC. - 35 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.2: PRC Railways
Source: Sinomaps. Some lines are not shown.
190. One of the key determinants of PRC’s ability to continue its economic growth into the 21 st
century and to distribute the benefits of that growth to a broad spectrum of the population will be the
further development of its railroad system. A special problem for PRC has been the uneven
distribution of the benefits of rapid economic growth. Even though poverty has been remarkably
reduced overall, inequalities of income distribution both between the rich and the poor and between
urban and rural populations have been exacerbated by rapid economic growth. Typically, PRC’s
worsening pattern of income inequality has a strong geographic component in that the coastal
areas are increasingly growing richer while the vast interior regions and rural areas remain
relatively poor.
3.3.2.2 Government Policy
191. The Government’s policy on railway development is focused on (i) removing constraints and
expanding the system, (ii) encouraging construction of joint venture local railways to promote the
development of local economies, (iii) improving efficiency by using new technology and modern
management tools in planning and operation, (iv) reducing operating subsidies through appropriate
pricing and commercialization of services, (v) instituting institutional and structural reforms to
increase CR’s autonomy and accountability, and (vi) encouraging non-government investment in
infrastructure and related services.
192. The Government’s Tenth Five-Year Plan, 2001-2005 (FYP-10) identifies transportation,
including railway development, as a priority. The Plan envisages, among other goals, constructing
6,000 km of new lines, with the network length reaching a total of 75,000 route-km by 2005. . In
2004, the Government approved the Railway Development Plan for 2020 (2020 Plan) that will
expands the railway network to 100,000 km by 2020.
TERA INTERNATIONAL GROUP, INC. - 36 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

193. MOR is in a transition phase with improvements ranging from building transport capacity to
institutional development. The Government has broadly defined the framework of railway
restructuring including consideration for separating government functions from enterprise functions;
separating rail from non-rail functions; rationalizing staff in core transportation, spinning off
peripheral and non-core operations; and reforming the railway investment and financing system.
3.3.2.3 ADB Assistance
194. ADB's strategy for the railway sector focuses on (i) expanding the railway system by
constructing new lines in un-served areas that are less-developed and poor; (ii) modernizing and
increasing the capacity to improve transport efficiency on key routes of the national railway system;
(iii) commercializing railway operations to sustain efficient operations; and (iv) increasing railway
competitiveness in the transport sector through restructuring and reform.
195. Policy dialogue has been a major element of ADB assistance to the railway sector, and has
complemented ADB’s lending operations. Since 1989, ten Technical Assistance (TA) grants totaling
US$4.6 million have been provided for institutional development of local railways, tariff and
organizational studies for the Jing Ju railway, enhancing commercial and business operations,
marketing and business development, developing human resources, and improving systems of
financial management and accounting. Progress has been achieved as MOR has adopted a
structured approach to railway reform.
196. There is broad agreement on reforms in the transport sector for further railway development.
The reform agenda included in the 2020 Plan seeks to (i) study and learn from worldwide
experience; (ii) clearly identify core operations and separate core and non-core transportation
businesses; (iii) rationalize and reduce staff; (iv) reform the railway investment and financing
system; and (v) establish specialized transportation companies.
3.3.2.4 WTO Commitments
197. PRC's 11 December 2001 accession to World Trade Organization (WTO) membership
poses new challenges to the railway sector. The Government has committed to open the rail freight
transport services to foreign operators gradually. 30 Until December 11, 2007 foreign operators can
participate in the majority ownership of rail freight transport companies. After that date foreign
ownership can be as high as 100 percent.
198. The Government is committed to following WTO rules and to opening railway freight
markets and other services auxiliary to transport such as storage and warehousing, cargo handling,
cargo inspection, customs brokerage, and freight forwarding to foreign investors. ADB is currently
providing policy level advisory services to the MOR to analyze the commitments the PRC has made
under WTO in the railway and related sectors, and to review the regulations, domestic legal
systems, and laws on investment and nondiscrimination to enable service providers to identify
business opportunities.
199. Currently, railway transportation is one of the most tightly controlled sectors in the PRC. CR
has had a monopoly over the business for more than five decades. The accession to WTO is
expected to boost the reform process in the railway transport and economic system of the PRC,
especially quickening the pace of reforms in China’s railway enterprises. The Government is
currently considering alternative approaches to separation of government functions from enterprise
management and the realization of a commercialized operation. Following is a discussion of the
major issues facing the PRC railway sector.
30 Under the WTO rules, the General Agreement on Trade in Service (GATS) sets a common rule governing trade in
services among member countries. The agreement includes provisions on obligations, general principles, and
exceptions. GATS includes important obligations on monopoly regulation, franchises for service provision, national
treatment, market access and domestic regulation. Disclosure is a key principle of multilateral liberalization because it
makes it easier for service providers to access and compete in markets of WTO member countries. As part of the
agreed obligations for market liberalization, GATS stipulates that when market access is granted, the member countries
must treat foreign and local services and service providers equally within the commitment framework.
TERA INTERNATIONAL GROUP, INC. - 37 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

3.3.2.5 Railway Financing
200. Further elaboration of the FYP-10 has been prepared by MOR covering the period from
2003 to 2007 (Plan 2003-07). This document serves as a bridge between the 10 th and 11 th Fiveyear
development plans and provides insight on the mid-term financing needs for CR. For the 2003-
2007 period MOR estimates investment needs totaling US$ 56 billion (US$11.25 billion/year). More
recent estimates show that railway sector investments from 2006 to 2020 will reach US$250 billion
(US$16.7 billion/year).
201. Domestic Private Sector Financing. Recently MOR announced that the railway sector is
now opening up to domestic investors and operators. The announcement made on July 21, 2005
indicates that according to the principle of equal entry and fair treatment, the domestic private
capital shall be allowed to invest in whatever is allowed for foreign capital in such areas as rail
construction, operation and transportation equipment manufacturing. Private capital is encouraged
to invest in the construction of rail trunk lines, branch lines, local railways and bridges, tunnels and
ferry facilities thereof by way of buying shares or project financing in the form of cooperation and
co-management.
202. In rail freight operations, private domestic capital is allowed to participate in rail freight
operations in the form of joint ventures, cooperation and co-management arrangements or through
buying shares. Where conditions allow, it is allowed to establish rail freight operation enterprises
with the private capital holding the majority shares or solely owning the enterprise. But in case of
rail passenger operation companies established through public-private joint venture, the state
capital should hold the majority of shares. Besides, the private enterprise is allowed to loan/invest
and operate the luggage car of rail passenger trains, luggage and parcel special trains, and parcel
and postal trains.
203. Foreign Financing. In follow up of the commitments made during bilateral discussions
which culminated in PRC’s December 11, 2001 accession to the WTO, the MOR and the Ministry of
Trade and Economic Cooperation (MOFTEC, presently designated Ministry of Commerce) jointly
promulgated on August 29, 2000, the ‘Interim Regulations for Review, Approval and Administration
of Foreign Investment in Railway Freight Transportation Sector’ (MOR Provisional Regulations),
which addresses the issues of establishment, operation and supervision of joint venture rail
transport companies in PRC. The MOR Provisional Regulations lay down explicit provisions on
issues concerning access conditions, procedures, modes of examination and approval, as well as
management of foreign-invested railway transport enterprises. The MOR Provisional Regulations
provide the legal and regulatory framework for foreign businesses planning to enter the Chinese
market.
3.3.2.6 Legal and Regulatory Framework
204. On July 16, 2004 the State Council issued its Decision on Reforming the Investment System
(No. 20) and NDRC its Order No. 22 outlining Interim Measures for the Administration of Examining
and Approving Foreign Investment Projects. The reform aims to:
♦ Fully bring into play the basic role of the market in resource allocation,
separate government and enterprise functions, and reduce administrative
intervention;
♦ Establish the position of enterprises as investors whereby enterprises can
make their own decisions on investment and be responsible for their own
profits and losses, while banks can make their own decisions on loan
approval and bear the risks;
♦ Rationally define the functions of government investment and guide social
investment through the formulation of development plans and industrial
policies and the use of economic and legal means;
♦ Improve the decision-making rules and procedures for government-funded
projects, make investment decisions more scientific and democratic, and
establish a strict system of accountability for investment decisions.
TERA INTERNATIONAL GROUP, INC. - 38 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

205. The State Council’s Order No. 20 specifies that “Newly built railways (including
improvements of existing railway infrastructure) which traverse more than one province,
autonomous region or State-designated city or projects of 100 km or more in length shall be subject
to the approval of the investment department of the State Council, and other projects shall be
approved separately by the competent trade department of the State Council or the competent
investment department of the provincial governments according to the subordinated relations”.
206. As indicated by the above summary, PRC has recognized the need to substantially increase
PSP in the railway sector and has been taking the necessary legal and regulatory measures to
facilitate domestic and foreign private sector investment. There are currently individual investors
and foreign/domestic investor groups evaluating PSP options in container terminals, equipment
leasing, new line construction, and other railway sector investments.
3.3.3 India
3.3.3.1 Physical and Operational Characteristics
207. Indian Railways (IR) is a vertically integrated system. It is a multi-gauge system having
46,800 route Km of broad (1,676 mm) gauge, 13,300 Km of meter (1,000 mm) gauge and 3,100 km
of narrow (762/610 mm) gauge railways (Figure 3.3). The broad gauge network generates 99
percent of freight and 93 percent of passenger output. Besides providing freight, long and short
distance passenger services, IR also provides commuter services in three metropolitan areas.
208. IR is owned by the MOR, which has the overall responsibility for its management. A Railway
Board in the MOR headed by a Chairman, reports to the Minister and is responsible for formulation
of policies, strategies, regulation and operation of railways. An independent Chief Inspector of
Railway Safety who is located in another Ministry looks after the safety aspects. IR has its own
budget, distinct from the national budget, which is approved by the national parliament. Investment
plans need approval of the Planning Commission. Although MOR has nominal powers to make
changes in freight tariff and passenger fares, in practice these require approval at the highest
political level and are announced in the parliament. IR does not pay any taxes on profits or turnover.
209. The railway system is divided into zonal railways (ZRs), 16 in 2005, each headed by a
General Manager. The zonal railways are further divided into divisions (65). The assets of IR
including fixed assets and rolling stock (locomotives, freight wagons and passenger coaches) are
nominally allocated between ZRs and each is responsible for the upkeep of its respective assets
except for routine servicing of rolling stock. The General Managers are responsible for all
operational matters but all policy and most investment decisions are made by the MOR. Besides
carrying out the core business of rail transport, IR, also owns and manages activities such as
design and manufacture of rolling stock, overhaul and remanufacture of rolling stock, construction
projects, schools, technical institutes, housing, hospitals, hotels etc. IR supports a work force of
about 1.5 million. IR is essentially organized at all levels by functions (departments) and not by
businesses. Its employees are governed by central government rules for salary and other
conditions of service.
210. IR is also required to function as a commercial organization providing vital transport services
to support a growing economy and generate surpluses for its development and expansion. At the
same time it is perceived as an instrument for economic development and a provider of essential
social services. These multiple objectives, that often require conflicting strategies, have led to
confusion and prevented IR from achieving its commercial goals. For example, commercial
considerations would require IR to invest its limited resources in projects that would provide
additional capacity in corridors where traffic growth is anticipated and to upgrade service quality to
meet the challenge from competing modes. The social and political considerations, on the other
hand, cause IR to invest in projects that have social benefits but very low or negative financial
returns.
TERA INTERNATIONAL GROUP, INC. - 39 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.3: Indian Railways
Source: University of Texas Libraries
211. The railway is an important player in the economic development of the country for long
distance transport, especially bulk commodities and long distance movement of materials (average
lead about 700 Km). Railways also play an important role in providing mobility to the population and
integration of diverse communities. However, the modal share of railways in India for freight as well
as passengers has declined over the years (in terms of originating tons from 89 percent in 1950-51
to 30 percent in 2002 for freight and in terms of originating passengers from 80 percent in 1950-51
to 20 percent in 2002) in spite of the fact that the highway system is relatively less developed and
suffers from constraints of capacity as well quality of infrastructure. The continued decline in market
TERA INTERNATIONAL GROUP, INC. - 40 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Box 3.1: Indian Railways Financial Corporation (IRFC)
In 1986 the Indian Railways (IR) established the Indian Railway Financial Corporation Limited (IRFC) with the purpose
of raising financing from market sources, buying rolling stock, and leasing it to the IR to meet its requirements for
asset replacement and capacity expansion. This helped to bridge the financing gap following decline of the
government’s budgetary support and inability of IR to generate sufficient monetary resources from operations to
finance the necessary investments.
Since 1987, IRFC has been successfully meeting the requirements of IR for new acquisition and replacement of rolling
stock. It has been raising financing through the issuance of taxable and low interest tax-free bonds, long term loans
from banks and financial institutions and through external commercial borrowings. For the last several years IRFC has
been floating an average of IRs30 billion (US$666 million) worth of bonds every year. IRFC has top credit rating (AAA)
from domestic credit rating agencies and a sovereign rating from Standard and Poor’s, the international credit rating
agency.
With funding raised from market sources, IRFC bought rolling stock, including locomotives, coaches, and wagons
worth over IRs230 billion (US$5.1 billion) that were then leased to IR, for which IR pays lease charges to IRFC. This
helped to augment transportation capacity and increased the revenue of IR. However, in recent years, because of
substantial increase in the cost of servicing IRFC debt, IR is considering a ceiling on this kind of funding.
share of railways in freight transport is attributed to capacity constraints on its high density corridors
due to insufficient investment, indifferent quality of service in respect of speed and reliability of
transit time, lack of focus on less than train load traffic, inflexible tariff policies in face of growing
competition from deregulated trucking industry and general inability to meet competition from road
transport.
212. IR’s pricing policies are dictated by social and political considerations. It has continued to
operate passenger services at a loss and made good the deficits by raising freight tariff. This cross
subsidy has two negative effects. Firstly, it makes railway freight service price uncompetitive that
causes customers to use alternative modes. Secondly, by distorting the price of passenger services,
it generates additional demand. As IR strives to meet this demand, some times by diverting
capacity from profitable freight business, it makes more losses. This results in a vicious cycle of
“low fares-more demand-more capacity-greater losses” in passenger business. As a result IR is not
able to raise adequate internal resources to increase capacity and improve service quality but
makes large investments that serve social goals but cause operational losses. It does not have a
system of differential pricing for new lines.
3.3.3.2 Demand for Rail Transport and Investment Needs
213. The demand projections as per the draft corporate plan of IR estimate rail freight growth at
an annual average rate of 5.4 percent and more than doubling the 2004 output by year 2020. The
passenger traffic is projected to grow at 4.5 percent per year. A lower growth rate would possibly
materialize if IR rationalizes passenger fares to eliminate cross subsidy of passenger.
214. In the ten years until 2003-04 a total of US$21 billion was invested on IR. The average
investment was US$2.1 billion per year, though in the last year the investment made was a little
over US$3 billion.
215. Traditionally investments on IR were funded by the central government (budgetary support:
a loan in perpetuity on which railways pay a dividend of about 7%) and through internal accruals.
However, recent years saw scaling down of budgetary support from a peak of 75 percent in the
Fifth Year Plan to 23 percent in the 8 th FYP (1992-93 to 1996-97) and 34 percent in the Ninth FYP
(1997-98 to 2001-02). IR took to market borrowing from 1987-88 to part finance its capital needs. IR
is relying on market borrowings increasingly and over 30 percent of total investments made in
recent five years were with market borrowings. Market borrowings are made mainly through Indian
Railway Finance Corporation (IRFC) a wholly owned subsidiary of IR. IRFC procures rolling stock
with funds raised and the same are leased to IR for which IR makes lease payments. Currently the
lease payment is of the order of nine percent of working expenses (Box 3.1).
216. The government policy supports the development of railways in India. It has, in early 2005,
approved a project to set up dedicated rail freight corridors. These corridors would be designed for
significantly higher axle loads and shall be capable of operation of double stack container trains.
This would help increase capacity for freight as well as passenger services, improve service quality
TERA INTERNATIONAL GROUP, INC. - 41 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

and lower unit transport cost and meet the increasing demand for rail transport in the medium and
long term. The segregation of passenger and freight trains on busy corridors would eliminate the
drag on performance caused by mixed use of trains operating at different speeds. The existing
corridors would be improved to allow express train operation at 150 km/h speed.
217. The investment on the two dedicated corridors already identified (2,800 km) is estimated at
US$5 billion. It is expected that in the next 10 years, 3-4 other corridors would also be built, bringing
the total investment on freight corridors to US$15 billion. Other investments to expand, modernize
and improve the existing network for the next 10 years are estimated at US$20 billion. The
government is likely to encourage market borrowing and PSP to implement this investment program
since it may not be in a position to meet investment needs. It is anticipated that significant
investments would be made in the railways, especially the dedicated freight corridors, by the private
sector through the PPP route.
3.3.3.3 Private Sector Involvement in Railways
218. Railways in India after independence in 1947 have come under the government ownership,
wherein both provisioning of infrastructure and transport services is done by Zonal Railways (ZR),
which are independent legal entities under the Railways Act. Port Railways are an exception to this.
The ports built and operate these railway systems. At network interchange points the trains are
handed over/received to/from the concerned Zonal Railway. Prior to 1947 several models were in
existence. These included Government owned and operated by private sector, privately owned and
operated by government, pure government and pure private railways. In the last decade, a number
of initiatives have been taken to develop many different models of private/state government
participation in both provisioning of infrastructure and transport services.
219. Private sector has been largely associated in design, financing, construction and
maintenance of fixed infrastructure in railways. In recent times, in two projects operation is
being/proposed to be carried out by an agency other than the IR. Largest participation of private
sector is in the area of design, financing and construction. Construction activity in rail sector is
always done by private sector through contracts. However, now it is being done by award of large
EPC contracts with Construction Supervision Consultants supervising the construction work.
Design, build, finance, maintain and operate concessions are being given to fully private developers
or to Special Purpose Vehicles (SPV), which are joint ventures between the IR and private sector
strategic partners. Such concessions pass on all risks to developers including the demand risk. The
concession period is typically 33 years. Design, build, finance concessions are also being given in
which the demand risk remains with the IR. Such concessions are typically for 10- to 12-year
periods. The developer is selected through competitive bidding process and the bidding parameter
is the bi-yearly annuity payment. Projects typically involve construction of new railway lines and
gauge conversion from meter gauge to broad gauge and additional lines by way of double tracking
or building a 3 rd or a 4 th line. Private freight terminals are also permitted. Rolling stock is acquired
through leasing route. In container business Indian Government has announced a policy for
permitting private operators to operate private container trains, which involves acquisition of rolling
stock and construction and operation of quay-side and inland container depots (ICD). Such
permissions are given thorough a concession.
220. Main areas of the private sector involvement and investment in railway sector are indicated
in the following paragraphs.
(1) Fixed Infrastructure
221. Build Own and Transfer. This model of private investment allows private sector
participation in design, build and financing of the project. On completion of construction the project
is handed over to IR for operation and maintenance. The ownership of the assets continues with
the private developer. The MOR awards a concession for a period of 12 years. After termination of
the concession the assets are transferred to the concerned Zonal Railway. During the concession
period the private developer gets annuity payment twice a year. Selection of the developer is done
through competitive bidding. The construction risk gets transferred to the developer, while the
demand risk is with the IR. The developer has an incentive for completing the project early to start
getting the annuity payments. So far the IR completed following projects through this model:
TERA INTERNATIONAL GROUP, INC. - 42 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Box 3.2: The CONCOR Experience
In order to focus on and promote growth of multi-modal transport business, the Container
Corporation of India (CONCOR) was set up in 1988 as a wholly owned subsidiary of IR and it
commenced operations in November 1989. By early 2004, CONCOR had over fifty terminals all
over the country. The majority of terminals are rail served ICD and CFS that provide international
as well as domestic services, while a few are only road served or handle only domestic
containers. CONCOR provides regular container train services over several routes that connect
major production centers with ports and consumption centers. It runs about five pairs of container
trains daily between Delhi and ports at Mumbai. The strategy of CONCOR focusing exclusively on
container transport business has paid handsome dividends. The container transport business has
grown rapidly and annual growth has exceeded 15 percent in recent years. In the year 2002-03,
CONCOR handled 1.3 million TEUs (70 percent international and 30 percent domestic). About 70
percent of container transport was by rail and the rest by road. Government has sold 37 percent
of CONCOR’s equity to the public and its stock is listed on the stock market. It is one of the better
performing stocks in India. The management is answerable to company shareholders and its
success is measured by the market price of its equity.
CONCOR has been singularly successful in achieving rapid growth of containerized multi-modal
transport services, and improvement in service quality and profitability. This success arose from
empowerment of its management, intense management focus on multi modal transport,
commercial approach, sensitivity to customer needs, policy of outsourcing equipment and
services and incentives for staff and managers. The Board of Directors of CONCOR has
substantial financial authority and is empowered to take all operational and most investment
decisions without any reference to MOR.
♦
Viramgam-Mahesana Gauge Conversion – a 60-km long meter gauge to
broad gauge conversion project. The project cost was Rs.830 million. The
project was completed ahead of schedule.
♦ Pansukra-Kharagpur 3 rd Line – a 45-km long 3 rd line project. The project
cost is expected to be Rs.2 billion. The process for award of concession is
in progress.
222. Build Own Operate Transfer. Under this model of private sector participation, the private
sector is involved in design, construction, financing, maintenance and operation of the project. This
model is normally applied for new line and gauge conversion projects. The concessionaire is
generally a strategic partner that has substantial traffic of his own. In case of gauge conversion the
maintenance is normally done by IR under a contract. Operation in most of the cases is done by IR
under a contract. The following projects have been implemented under this model.
♦
♦
♦
Pipavav Railway Corporation Limited – a 270-km long gauge conversion
project with a new line of about 20 km. It provides rail connectivity to the
newly developed private port of Pipavav. A Joint Venture SPV with 50:50
partnership between the Private Port of Pipavav and Ministry of Railways
was awarded the concession. The project cost is Rs.3.73 billion. The
project is operational since April 2003. The project line mainly transports
containers.
Hasan Mangalore Rail Development Company Limited – a 191-km long
gauge conversion project. It provides rail connectivity to Mangalore Port.
The project cost is Rs.3.11 billion. A Joint Venture SPV having equity
participation by Government of Karnataka, Mangalore Port Trust, Mineral
Enterprise Private Limited, Kudre Mukh Iron-ore Company Limited are the
partners. The project line will mainly transport iron-ore for export and
containers
Kutch Railway Company Limited – a 301-km long gauge conversion project
between Gandhidham-Bhildi and Palanpur. It provides shorter broad gauge
TERA INTERNATIONAL GROUP, INC. - 43 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

ail connectivity to Kandla and Mundra Ports. The project cost is Rs.5.5
billion. The project scope is being further enhanced to include gauge
conversion of Bhildi-Samdari, a distance of 223 km. The total project cost
will increase to Rs.9 billion. A Joint Venture SPV having equity participation
by Rail Vikas Nigam Limited 31 , Government of Gujarat, Kandla Port Trust
and Gujarat Adani Port Limited.
♦ Haridaspur-Paradip New Line - an 82-km long new line project. It provides
shorter rail connectivity to Paradip Port for movement of iron-ore for export
and also for the steel plants at Paradip. The project cost is Rs.6 billion.
Equity partners in the Joint Venture SPV are Rail Vikas Nigam Limited,
Government of Orissa, Paradip Port Trust, Jindal Steel & Power, ESSEL
Mining & Industries Limited, and Rungta Mines Limited.
223. In addition the following SPVs are under formation.
♦
♦
♦
Bharuch-Samni-Dahej Gauge Conversion – a 62-km long project. The
Project cost is Rs.2 billion.
Surat-Hazira New Line – a 38-km long project. The project cost is Rs.1.15
billion.
Obulavaripalle-Krishnapatnam New Line – a 114-km long project. The
project cost is Rs.6 billion.
♦ Tuglakabad-Dadri New Line – a 36-km long project. The project cost is Rs.7
billion.
224. Private Railways: The private sector involvement under this model covers design,
construction, financing, maintenance and operation. The operation, if desired by the developer, can
be done by the IR under contract. The following projects have been implemented or under
implementation.
♦
♦
Adipur-Mundra New Line Project – a 60-km long new line project providing
rail connectivity to the private port of Mundra. The project cost is Rs.1.2
billion. The project concession was given to Gujarat Adani Port Limited.
Construction and maintenance including financing is done by the private
developer. Operation is being done by IR under a contract.
Bhadrak-Dhamra New Line Project – a 60-km long new line project
providing rail connectivity to the Private Port of Dhamra. The project cost is
Rs.1.2 billion. The project concession is given to Dhamra Port Company
Limited. All the activities including operation of trains will be done by the
private developer.
♦ Vallarpadam-Idapalli New Line Project – a 8.5-km long new line project
providing rail connectivity to the newly developed private container hub of
Vallarpadam. The project cost is Rs.2.4 billion. The financing, construction
will be done by the private developer.
(2) Private Freight Terminals
225. Under this policy the entire financing, construction and operation of Freight Terminal is done
by the private developer. A private terminal has been developed at Garhi Harsaru near Gurgaon by
Gateway Distri Park. Many more such terminals are in the offing.
(3) Private Warehouses at Railway Freight Terminal
226. Under this policy construction of private warehouses at existing railway freight terminals is
being encouraged. This helps provide storage and distribution facilities at the rail head and avoid
31 The Government of India established Rail Vikas Nigam Limited as a company under the MOR to promote Public Private
Partnerships in the railway sector.
TERA INTERNATIONAL GROUP, INC. - 44 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

double handling. One such warehouse has been constructed at Whitefield near Bangalore. About
18 more warehouses are in the pipeline.
(4) Rolling Stock
227. Rolling stock is being acquired by IR through leasing route from IRFC, BHEL and a number
of private companies, particularly cement Industry under the “Own Your Wagon Scheme”. Every
year investment to the tune of Rs.30 to 35 billion is being mobilized through this route.
(5) Private Container Trains
228. The MOR has announced a policy of permitting private container train operators for
movement of international container traffic. These operators will invest in container flats and
construction and operation of private quay-side and inland container depots. Even for running of
one train per day, it is expected that an investment of Rs.750 million will be made by each operator.
3.3.4 Kazakhstan
3.3.4.1 Physical and Operational Characteristics
229. The Kazakhstan State Railways (KTZ) network comprises most of the former Almaty,
Tselinnaya and West Kazakhstan railways of the former Soviet Union Railways (SZhD). In 1996-97
there was a series of reorganizations, with these three constituent railways shedding divisions in
order to create three new railways, making six, with limited independence. One of them was
subsequently re-absorbed, leaving five operating regions, which are no longer subdivided into
divisions, and have the status of state enterprises under the close supervision of KTZ.
230. There are several lengthy main lines traversing regions of low population (Figure 3.4). The
principal route is the 1,507 km Trans-Kazakhstan Railway running from Petropavlovsk on the
Trans-Siberian Railway through Kokchetav, Astana and Solonichki to the Karaganda coalfield. This
was later extended to Chu, on the Turkestan-Siberian route, and Lugovoy where it connects with
lines into Kyrgyzstan and Uzbekistan. The Turkestan-Siberian route runs 1,445 km from
Semipalatinsk via Aktogay and Zhangiz-Tobe to Almaty and Chu. From Aktogay the line to the
Chinese border at Druzhba now forms part of a through route from the Chinese capital Beijing to
Russia and western Europe. This, the Trans-Asian route, provides a Japan-Western Europe link
that is claimed to be 2,500 km shorter than the Trans-Siberian route.
231. A third main line in the west of the country links Tashkent, in Uzbekistan, with Orenburg in
Russia, via Aralsk, Kandagach and Aktyubinsk, a distance of 1,854 km. In 2002 it was agreed that
ownership of three lines totaling some 100 km within Kazakhstan, but operated by Uzbekistan
Railways for reasons dating back to the Soviet era, would be transferred to KTZ. The Kazakhstan
system has many long stretches of single track; over one third of the network is double track.
232. In early 2001 it was announced that the railways were to be restructured. A first step
towards this was the conversion of KTZ into a closed joint-stock company, ZAO KTZ, in March
2002, a move intended to improve management and accounting methods. It is intended that the
state will retain ownership of the railway's infrastructure and rolling stock. A passenger operating
company is to be formed, its service levels and fares determined by the government in return for
subsidy. Competition is foreseen in the freight sector, including provision for major industries and
shippers to run their own trains. A separate joint-stock company providing locomotive maintenance
services is to be established by 2006.
233. A wide-ranging restructuring program was initiated by a new Railway Transportation Law
enacted in 2001. 32 The 2001 program had three phases:
♦ Phase 1 Commercialization
♦ Phase 2 Competition
♦ Phase 3 Privatization (part)
32 Adapted from Paul Amos, Reform, Commercialization, and Private Sector Participation in Railways in Eastern
Europe and Central Asia; the World Bank Transport Papers-4, January 2005.
TERA INTERNATIONAL GROUP, INC. - 45 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.4: Kazakh Railway
Source: Asian Development Bank
234. During the last three years there has been significant progress in implementing the first
phase of this plan. All social and cultural activities had been divested by the end of 2003 and all
supporting activities (for example, track and rolling stock repair workshops, telecommunications,
security, etc.) have been created as separate companies. Passenger operations were set up as a
separate company under the Ministry of Transport and Communications (MOTC) in 2003. In
January 2004 the freight train operations and majority of freight wagons were transferred to the
newly-created State-owned freight operator. The locomotives were transferred to a separate
company (JSC Locomotiv).
235. In February 2004 the government passed Decree 145 which has re-confirmed the
importance of the wider objectives of competition and privatization. It sets out a comprehensive
framework and timetable for actions to be taken over the period 2004-2006. The reforms are being
rapidly implemented and the situation changes daily.
3.3.4.2 Organization and Management
236. The reforms are currently establishing separate roles between:
♦
♦
♦
The MOTC, which determines railway industry policy and approves access
for private Train Operating Companies (TOCs) wishing to use railway
infrastructure;
KTZ, which will in future be a publicly-owned railway infrastructure
company;
KTZ’s passenger business (JSC Passengers) and freight business (JSC
Kazzheldortrans), which will be commercially autonomous (though publicly
owned) TOCs; and
TERA INTERNATIONAL GROUP, INC. - 46 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

♦ The Regulator (the Anti-Monopoly Committee), which will approve the track
access regime and track charges on the basis of non-discrimination
between TOCs (whether public or private).
237. Much of this structure is already in place in an industry in which, only a few years ago, the
State Railway Company itself was effectively policy-maker, regulator, infrastructure owner and
exclusive operator of both passenger and freight trains on the public network.
238. KTZ’s freight operations are to be transferred into a new freight company, Kazzheldortrans,
which was formally registered in January 2004. However, during the Program period (2004-2006)
Kazzheldortrans will remain a subsidiary company of KTZ. The separation of corporate identity and
management is certainly a major step, but the retention of corporate linkage is, prima facie, a weak
point. It carries with it the danger that KTZ may show favor to its subsidiary freight company
compared to private freight operators, and thereby inhibit competition in the freight transport market.
However, such arrangements are not uncommon internationally. The great majority of EU railways
and some elsewhere, have also retained corporate links between infrastructure and train operating
companies, while at the same time promoting third party access.
3.3.4.3 Competition and Private Participation
239. The reform program aims at introducing or extending private participation and competition in
the industry in the following areas:
♦
♦
♦
♦
Freight train operations (through open track access): several licenses have
been issued and two new freight operators (Bogatyr Trans and Transcom)
have been accepted on KTZ’s network; these two coal companies are
operating some 6000 wagons.
Passenger train operations (through franchise competitions, assisted by
access to passenger rolling stock which will be owned by a special purpose
company and hired to winning bidders).
Railway security services (through privatization and competitive tendering).
Track repairs (through privatization of track repair units and competitive
tendering).
♦ Locomotive maintenance and repairs (through privatization of workshops
and competitive tendering).
♦ Freight and passenger wagon maintenance and repairs (through
privatization of workshops and competitive tendering).
♦
♦
♦
Locomotive and wagon ownership (private supply will be encouraged
through open access and non-exclusive haulage. This will also encourage a
competitive leasing market).
Short lines (through sale of such lines to their major users).
Rail container operations (through sale of 74 percent of shares in
Kaztranservice (which runs container trains): and sale of 67 percent of
Kedentranservice (which operates terminals) which should give private
operators equal access to container yards).
♦ On-board passenger train services (to be leased by competitive tender to
private sector)
240. In practice, it may not be practically possible to realize the level of PSP and competition
which is sought within the period specified (particularly in passenger train services). But the
commitment of the Program to both private involvement and competition is impressive.
241. JSC Locomotiv will hire locomotives (and drivers) to both the public and private train
operators who choose to use their services (the Company has no exclusive right of haulage and
TERA INTERNATIONAL GROUP, INC. - 47 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

any operator can procure their own equipment). The model of a separate locomotive company was
chosen:
♦
♦
to ensure non-discriminatory access to haulage by new entrant private
TOCs (he cost of locomotives is seen as an important barrier to new entry
which this approach is intended to reduce)
to ensure no compromise in safety in that the current systems of safety
management of the fleet and drivers should not be disrupted during the
transition;
♦ to alleviate the concern that if the fleet were to be divided the system would
lose flexibility and utilization;
3.3.4.4 Funding of Passenger Services
242. Only JSC Passenger Transport will receive subsidy from the central government budget. It
is intended that the suburban company will contract with and receive subsidies from relevant local
governments, or the local governments will be offered the rolling stock to run their own services.
Some local subsidies are already received for these services.
243. JSC Passenger Transport’s subsidies will be in the form of a PSO contract which will
identify the lines and services which the government is willing to finance. The remainder will be
funded by the Company. The company has a management costing model to identify broad costs by
route, locomotive type, etc.
244. Some progress is being made in transferring the public service obligation for passenger
service from KTZ to the Government. Of the 65 percent of passenger costs not covered by
passenger revenue, the Government has agreed to share the subsidy burden in 2005, on the basis
of 28 percent by government and 37 percent by KTZ, Ownership of the passenger service company
will be transferred in January 2005 from KTZ to MOTC with plans to franchise out the provision of
passenger services. Responsibility for funding passenger services, therefore, will be transferred
from KTZ to the Government. Subsequently, transit passenger services (for example, Tashkent to
Moscow) will be expected to pay their full cost. The Government will subsidize passenger services
between oblasts. Funding for passenger services within oblasts (i.e., commuter services) will be the
responsibility of the oblast.
3.3.5 Malaysia
245. Malaysia has four principal operators of railway facilities (Figure 3.5): one state-owned
company with mixed freight and passenger transport primarily in intercity service, one state-owned
company in urban transit in Kuala Lumpur; and two private companies operating light rail transport
in Kuala Lumpur. Following is a description of each company’s organization and operations.
3.3.5.1 Malayan Railway Company (KTM)
(1) Organization and Management
246. The railway's prime route is the 787 km main line from Singapore north through the capital,
Kuala Lumpur (KL), to Butterworth, one of Malaysia's principal sea ports on the west coast of the
peninsula. Short branches reach sea ports at Port Klang, Pasir Gudang and Tanjung Pelepas. The
other major route is the 528 km East Coast line running northwards from a junction with the
Singapore-Butterworth line at Gemas to Kota Bharu and Tumpat. Both lines link with the State
Railway of Thailand. At the beginning of 2003 KTM employed 5,024 staff.
247. The government has long been seeking to privatize KTM. Until 1992 KTM was operating as
a department of the Government. On August 1, 1992 it became a corporatized entity with a
mandate for privatization within 5 years. A contract was signed on July 1, 1997 with the Marak
Unggul consortium, comprising Renong, DRB-Hicom, and Bolton Properties to manage KTM
operations under contract until December 31, 2001. Discussions regarding full privatization
continued between the government and the Marak Unggul consortium, but an agreement could not
be reached. Therefore, on January 1, 2002 the Government took over the operations. KTM now
operates the trains, maintains track and rolling stock as an agency reporting to the Land Division of
TERA INTERNATIONAL GROUP, INC. - 48 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

the Ministry of Transport (MOT). The infrastructure is officially owned by Sharikan Prasarana
Negara Berhad (SPNB), which reports to the Ministry of Finance.
Figure 3.5: Railways of Malaysia
Source: University of Texas Libraries
(2) Passenger Operations
248. KTM operates both electric suburban services (branded 'Komuter') around the capital, Kuala
Lumpur, and long-distance trains. Suburban services operate on two electrified routes: Rawang-
Seremban and Sentul-Port Klang. These interchange with each other and with the Putra metro and
KLA Ekspres (airport express) service at Bandar Tasik Selatan. Long-distance travel soared
spectacularly in the 20 years to 1991, lifting the total annual PKM from 620 million to 1,850 million;
thereafter patronage began to fall. Following opening of the North-South Expressway (NSE) road in
1994, PKM declined to 1,348 million; in 2000, there was a further fall, to 1,240 million and to 1,152
million in 2005.
249. The stiff competition focused attention on the long-term need to reduce journey times
between Kuala Lumpur and Singapore. This is expected to be achieved by doubling and electrifying
the whole line for 160 km/h operation. In addition to ordinary train services, KTM operates day and
night Singapore-Kuala Lumpur and Kuala Lumpur-Butterworth express trains, and a single daily
express between Gemas and Tumpat on the East Coast line. In conjunction with the State Railway
of Thailand, KTM runs a daily International Express between Butterworth and Bangkok. All express
and night trains on the north-south main line are air conditioned. Intercity trains carry over 10,000
people daily, the KL-Singapore route being the busiest. Orient-Express Hotels of the U.K.,
operators of the Venice Simplon-Orient Express in Europe, runs a weekly luxury cruise train service,
the Eastern & Oriental Express, between Singapore, Kuala Lumpur and Bangkok.
TERA INTERNATIONAL GROUP, INC. - 49 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

(3) Freight Operations
250. Traffic has fallen slightly in recent years from 1,095 million TKM in 2001 to 1,018 million
TKM in 2004. Cement is the most important commodity carried, but fuel, gypsum and dolomite are
among other products handled. International traffic is exchanged with the Thai system. Container
traffic is a fast-growing business, with 16 daily trains operated in 2003. Begun in 1974, this has
become KTM's biggest freight earner. A significant component of the growth has been containers
from southern Thailand, which have a quicker haul across the border at Padang Besar to a
Malaysian port than to Bangkok. Around a quarter of southern Thailand's rubber exports are
shipped through Butterworth. In April 1999, KTM launched a twice-weekly container landbridge
service between Bangkok and Port Klang, providing a journey time of 60 hours.
251. The government has been promoting intermodal transport, and KTM formed a wholly owned
subsidiary in 1988, the Multimodal Freight Company, which has acquired 225 highway tractors and
1,300 trailers so as to offer door-to-door service. This operates from all major ports and the inland
container depots at Kuala Lumpur, Ipoh, Prai, Nilai and Padang Besar.
252. Improvement and expansion of rolling stock has been a recent KTM priority. Flatcar capacity
has been added regularly, bringing the total to 3,500 TEU in 2003. Structures have been modified
to gain clearance for 9 ft 6 in cube containers on certain routes.
(4) PSP Experience and Prospects
253. Other than a short period for management of KTM operations by the private sector, which is
viewed by the Government as a failure, KTM has been managed a public enterprise. The MOT is of
the opinion that the corporatized KTM did not properly work since its “Board failed to act in
consonance with public policy”. 33 With the exception of specific PPP transactions on specialized
operations such as container terminals the Government does not envision PSP in KTM’s operations.
3.3.5.2 Express Rail Link
254. In August 1997 Express Rail Link (ERL) was granted a 30-year government concession,
with a 30-year extension option, to design, finance, construct, manage, operate and maintain an
express rail system linking Kuala Lumpur Sentral at Brickfields and the city's new international
airport (KLIA) at Sepang, south of the capital. Land acquisition for the scheme was undertaken by
the Malaysian government. The concession contract places the traffic and inflation risk with the
concessionaire, but provides an automatic 5 percent per year increase in fares with adjustment in
tariff every five years.
255. After some delay due to regional financial difficulties, in October 1998 a DM1.3 billion
turnkey contract to build the system was placed with SYZ, a consortium led by the Transportation
Systems Group of Siemens AG, which owns a shareholding of 59 per cent, after a financing
package was secured from Germany. Construction work was undertaken by local consortium
partner Yeoh Tiong Lay Sdn Bhd (YTL). Operations commenced on 19 April 2002.
256. Shareholding in ERL, which was formally incorporated on 29 January 1996, is by Tabung
Haji Technologies (60 per cent) and YTL Corporation (40 per cent). Under a contract signed in
November 1999, a subsidiary company, ERL Maintenance Support Sdn Bhd (E-MAS), has been
established to operate and maintain the system for three years. At the start of operation in April
2002, E-MAS employed 327 staff.
257. ERL plans to operate two services: KLIA Express, a non-stop service linking KL Sentral and
KLIA, with a journey time of 28 minutes; and KLIA Transit, a commuter service linking the same two
points but with additional stops at three intermediate stations to interface traffic with KTM and other
passenger operators. KL CAT, which is located in the KL Sentral development, offers city centre
check-in and baggage transfer for departing passengers and a baggage check-out facility for
arriving passengers. A service frequency of 15 minutes is provided for 21 hours each day
258. For KLIA Transit, a half-hour frequency is offered, with a 36 minute journey time.
Interchange will be made at Bandar Tasik Selatan with KTM Komuter main line services and with
33 Consultant interview with Mr. K. Patmanathan, Principal Assistant Secretary (Rail) of MOT, Land Division; Kulala
Lumpur, October 17, 2005.
TERA INTERNATIONAL GROUP, INC. - 50 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

the STAR light rail system and with the Putrajaya Monorail at Putrajaya's Western Transport
Terminal. At KL Sentral, interchange will be made with KTM Komuter and main line services, the
Putra rapid transit system and KL Sentral Titiwangsa services.
259. The total cost for the project was RM 2.4 billion (US$650 million) with a debt/equity ratio of
80/20. Due to the Asian financial crisis, the Government assisted in renegotiating the project’s
financing by providing a 25 year loan with a 12-year grace period to the concessionaire. The
average cost of capital for the loan is said to be less than 3 percent per year. The company’s
current operating ratio is 0.5, indicating a good return and an ability to pay the principal and interest
on the loan when the grace period ends in 2015.
3.3.5.3 M Trans
260. M Trans, a private company which designs, plans, builds, and operates light rail transit
systems, was awarded a concession in 1995 to build and operate a 8.6-km long monorail system in
Kuala Lumpur. M Trans is also manufacturer of passenger cars, which allowed the company to
completely build and equip the monorail system by in-house talent and resources.
261. Due to the financial crisis M Trans was able to receive Government support under the same
terms and conditions as Express Rail Link described above. The monorail service commenced
operations in 2002.
3.3.5.4 Rapid KL
262. In 1994 a consortium headed by the Renong Group was awarded a 30 year BOT
concession with a renewal period of 30 years to finance, build, and operate the Putra rapid transit
system. The cost for land acquisition was provided by the Government. The project was completed
in 1999 and was operated by the concessionaire for 3 years until 2002. The private investor initially
agreed to financing terms (some with foreign lender to be paid in foreign exchange) which now
became too difficult to comply with under realistic projected cash flow assumptions. The
Government and the concessionaire agreed to cancel the BOT contract and let the Government
take over the ownership and operation of the project.
263. In 2002 SPNB of the Ministry of Finance issued a government bond with sovereign
guarantee for RM5 billion (US$1.3 billion) to retire Renong’s debt and take over the assets of Putra.
In January 2005 Rapid KL was established under the Ministry of Finance to operate the Putra line.
SPNB is officially the owner of assets and Rapid KL is the operator. Both are owned 100 percent by
the Government and report to the Ministry of Finance. Rapid KL is responsible for maintaining the
infrastructure and equipment and pays an asset usage charge to SPNB, which is currently at 12
percent of the company’s revenue. This charge is to increase in the future.
264. Rapid KL and SPNB are involved in another concession which failed: the Star Line which
was awarded to a U.K.-based investor/operator. The Star project went through the same problems
as the Putra Line and was taken over by the Government. Rapid KL is also operating two bus
companies. The company does not receive a subsidy and is currently incurring an operating loss of
RM3 million (US$0.8 million) per month on total revenue of RM23 million (US$6.13 million) and
expenses of RM26 million (US$6.93 million). In addition to paying a track access charge to SPNB,
Rapid KL is required to cover track maintenance costs from its revenue. It is not clear as to whether
clear guidelines and requirements are in place for minimum maintenance requirements with
appropriate independent monitoring to assure safe operations.
3.3.6 Pakistan
265. Pakistan Railways (PR) is an autonomous agency under the Ministry of Railways that
operates the rail network. The rail system is based on broad-gauge track except for the metergauge
Mirpur Khas-Indian border route and scattered narrow-gauge lines connecting to specific
industrial processing facilities (Figure 3.6). The rail system includes 11,515 kilometers (km) of track
and 7,791 km of routes, of which 7,346 km are 1,676 mm broad gauge and 544 km are electrified
(broad-gauge totals 10,960 track km), and 445 km of meter gauge (meter gauge track totals 555
km); 625 stations; and, 592 locomotives, 1,865 passenger coaches, and 21,812 freight wagons.
TERA INTERNATIONAL GROUP, INC. - 51 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.6: Pakistan Railway
Source: Asian Development Bank
266. During 1955-60, rail carried 42% of total passenger traffic and 73% of freight. Currently, rail
carries only 10% of the passenger traffic and 5% of freight, with roads handling nearly all of the
remainder. Rail’s declining share of traffic has been caused by deteriorating infrastructure,
TERA INTERNATIONAL GROUP, INC. - 52 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

outdated rolling stock, and an inefficient and large staff. Although truck and bus transport charges
are generally higher, the unreliability and inefficiencies of the rail network have led to a distinct
market preference away from rail to road.
267. The MOR is restructuring and implementing measures that will facilitate private sector
participation on various routes. However, the initial results of these efforts will not be known in the
immediate future. In the interim, MOR is in the process of rehabilitating track and other
infrastructure, and purchasing new locomotives and other rolling stock.
268. Some faltering steps were made towards privatization in the early 1990s. In 1992 it was
announced that as a first step the government proposed to franchise out the lines from Lahore to
Narowal and Faisalabad, and the Lodhran-Pakpattan route. Initial reports suggested that the
franchisees, which took over at the beginning of 1993, had raised income on the routes, but this
was due more to tighter security and control of ticketless travel than any immediate improvement to
the train services. Both original franchises were later terminated and readvertised, but government
approval for new leases was not immediately forthcoming.
269. In July 1997, disappointed by the lack of progress and the chaotic state of the railways, the
government instituted a radical shake-up. World Bank-inspired reforms would see the railways and
communications ministries merged into a single transport ministry, a rail regulatory authority set up,
and PR divided into three bodies responsible for freight, passengers and infrastructure. A fourth
business would manage railway-owned facilities such as schools and hospitals and would be
responsible for the disposal of non-core businesses. Within three years they would be privatized. A
task force was created to implement the restructuring plan, which was to include replacement of the
existing board of management. The plan also foresaw massive cuts in PR's 110,000-strong
workforce and the transfer of schools and hospitals for railway staff and their families to local
authorities.
270. The division of PR into four businesses took place in September 1998, when rolling stock
assets were divided between freight and passenger businesses. Management of the network,
including signaling and train control functions, is being handled by the infrastructure unit. Coinciding
with this restructuring was the creation of a new senior management board. Through the
Privatization Commission, the government plans to offer for sale or by concession its three core
businesses, freight, passenger and infrastructure, as well as non-core activities such as rolling
stock plants and sleeper manufacturing facilities and railway land and other property.
271. During the last five years the former Ministry of Railway and Communications was
reorganized by separating the railway into the new MOR. The Government with assistance from the
World Bank is now aiming at corporatizing the PR with autonomy to operate under market
conditions.
3.3.7 Philippines
272. The Philippine National Railway (PNR) is responsible for intercity passenger and freight
operations. Urban transit operations in Manila are provided by Mass Rail Transit (MRT) and Light
Rail Transit (LRT) administrations. PNR, MRT, and LRT all report to the Undersecretary for Rail in
the Ministry of Transport and Communications. They are all owned fully by the Government.
273. Much of the northern part of PNR’s network remains closed due to the poor condition of the
infrastructure (Figure 3.7). Operations are currently concentrated on the 478 km Southern line from
Manila to Legaspi City, on which major rehabilitation work was completed in 1995. Suburban trains
run south from Manila on this line as far as Carmona.
274. Intercity passenger traffic has suffered from the poor state of the system; the number of
journeys declined to less than 1,000 passengers per day on the only daily train service between
Manila and Legaspi. Long-distance passenger figures have continued to languish, but Manila
suburban services bounced back sharply after commencement of operations in MRT and LRT
projects. Passenger journeys in Manila now reach 400,000 per day.
275. With nearly half the system closed, freight traffic has been in decline for many years. Traffic
amounted to less than 5,000 tons in 2003. Since 1997 container services operated by the Manila
port authority have been run to a terminal near Santa Rosa (45 km).
TERA INTERNATIONAL GROUP, INC. - 53 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.7: Philippines Railway
Source: University of Texas Libraries
276. Plans to privatize PNR had been expected to be put before Congress in 1998 as a way of
arresting the deterioration of the network. Ownership of infrastructure was expected to remain with
the state, with private-sector concessionaires taking over operation, maintenance and upgrading of
the system. No progress with these plans had been reported until today.
277. The Government experimented with PSP through the BOT Law. The MOUs executed with a
few project proponents did not proceed to implementation, however, due to financing difficulties.
More recently, the Government adopted a new model to finance infrastructure investments through
public funds and concessioning operations (including investment in rolling stock) to the private
sector. A loan was secured from the Government of South Korea for US$50.4 million to implement
Phase 1 infrastructure rehabilitation from Caloocan to Alaban (34 km) south of Manila. Phase 2 is
expected to be financed also from the same source for the 26-km Alaban-Calamba section. One
condition of the loan is for the Government to franchise train operations upon completion of the
project to a private company under a competitively bid contract.
278. The Bases Conversion Development Authority (BCDA) is implementing the Manila North
project which includes infrastructure rehabilitation from Caloocan to the former Clark Air Base
utilizing the PNR right-of-way. The first phase of this project is funded through an export credit
facility from PRC in the amount of US$400 million.
TERA INTERNATIONAL GROUP, INC. - 54 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

3.3.8 Thailand
279. Rail transport operations in Thailand (Figure 3.8) are provided by the State Railways of
Thailand (SRT), a government entity; Bangkok Mass Transit System Public Co. Ltd. (BMTSB), a
private company operating the elevated SkyTrain; and Thailand Mass Rapid Transit Authority
(MRTA), a public agency operating the Bangkok underground under a PPP arrangement with
Bangkok Metro Public Co. Ltd. These operations are described below.
3.3.8.1 State Railway of Thailand (SRT)
(1) Organization and Management
280. The State Railway of Thailand (SRT) is a 106-year old public enterprise operating on a
network of 4,071 km meter gauge track. The entity reports to the Ministry of Transport and
Communications (MOTC).
(2) Operations
281. In 2003 SRT carried 54.13 million passengers and achieved 10,250 million PKM. The
corresponding traffic figures for 2004 are 50.87 million passengers and 9,332 million PKM. SRT
attributed this reduction to disruption caused by infrastructure rehabilitation and upgrading and to
timetable changes. In 2004 SRT’s freight traffic was 13.8 million tons and 4,097 million TKM,
reflecting an increase of 20 percent and 1.3 percent, respectively, from the previous year. The
improved performance in freight transport operations was due in part to increased cement traffic in
response to the demands of a growing construction industry, to landbridge maritime container traffic
from Port Klang and to increased domestic container shipments from Sa Kosi Narai, Surat Thani
and Tha Rua Noi terminals.
282. The railway’s share of passenger traffic in Bangkok is 16 percent, and nationally less than 7
percent. With respect to freight transport, the railway’s share is 1.8 percent with roads taking up 92
percent of the traffic and other modes (inland waterways and air) the remaining 6.2 percent. The
trend indicates a declining volume for passenger transport and increasing freight transport in the
future.
(3) PSP Experience
283. SRT invested more than THB 8 billion (US$195 million) on infrastructure rehabilitation
during the last three years and estimates investment needs of BHT 133 billion (US$3.24 billion) for
the next 6 years.
284. The Government’s broad PSP policy is for public investment in infrastructure and private
investment in rolling stock and operations. This policy, however, has not been widely implemented
yet at SRT. Other than small scale PSP in repair of bogies and provision of services on passenger
trains, train washing, and repair/upgrading of air conditioning equipment and a PPP in the Inland
Container Terminal (ICD) at Lat Krabang, SRT has not had PPP experience. The management of
SRT views private sector contracting for services as problematic because of the inability of the new
contractor to receive the know-how from the incumbent who lost the bid. 34 The ICD project,
however, is viewed as a successful partnership where investment was provided by SRT and
management by the private sector partners.
285. In January 2005, SRT started construction of the New Bangkok International Airport (NBIA)
Link as a fully public funded project. No decision is yet made as to whether PSP will be sought for
operation of the NBIA Link under a concession contract.
3.3.8.2 Bangkok SkyTrain
286. The SkyTrain is the first railway transit system in Bangkok. It is operated by Bangkok Mass
Transit System Public Company Limited (BTSC).The company was established in 1992 to help
alleviate Bangkok’s chronic traffic congestion and provide the city’s commuters with a fast, efficient
and affordable means of transportation. The SkyTrain commenced operations five years ago under
a 25-year BOT concession which has 15 years remaining. Maintenance is supported by Siemens
which is a partner in the concession.
34 Interview with Mr. Arak Ratboriharn, Chief Financial Officer of SRT; Bangkok, September 26, 2005.
TERA INTERNATIONAL GROUP, INC. - 55 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.8: Thailand Railway
Source: University of Texas Libraries
TERA INTERNATIONAL GROUP, INC. - 56 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

287. The right-of-way of the system is the median of the road network under the control of the
Bangkok Municipal Authority. The concession is operating successfully with a daily ridership of
400,000 and is in need of further expansion and feeder lines.
288. The Government recently announced its intention to buy back the concession from the
BTSC and operate the SkyTrain as a public agency under the MOTC. The price tag for the
transaction is estimated at THB 30 billion (US$732 million) which will be financed through an Initial
Public Offering (IPO) of shares. The nationalization plan envisages 75 percent ownership by the
Government and 25 percent by BTSC creditors (World Bank’s IFC and Germany’s Kfw).
3.3.8.3 Bangkok Subway
289. Bangkok Subway commenced operations in July 2004. The new system is owned by
Thailand's Mass Rapid Transit Authority (MRTA) and financed and operated by Bangkok Metro Co.
Ltd. (BMCL) under a concession agreement. The subway has been in the making for a decade, and
construction actually started before the overhead SkyTrain opened for business. The subway
consists of one line, which runs for a total of 21 km on a broadly north-south axis, allowing
interchange with the SkyTrain at three points along the way.
290. BMCL won a 25-year concession to operate the 20-kilometer subway in Bangkok, during
which it will pay at least THB 10.2 billion (US$249 million) to the government. More recent
estimates place the value of total payments to the Government at THB 25 billion (US$610 million).
BMCL, led by CH Karnchang PCL (H.CHK), has invested a total of nearly THB 20 billion (US$488
million) in the project. 35
291. In a recent development similar to the nationalization of the SkyTrain, the Government
announced its intention to buy back the concession from the BMCL and operate the subway as a
public agency under the MOTC-MRTA. The price tag for the transaction is estimated at THB 25
billion (US$610 million) which will be financed through an IPO of shares. The company announced
that it would accept a price of THB 35 billion (US$854 million). In a separate move, BMCL recently
announced that its long-delayed IPO will be offered in the first Quarter of 2006. 36 The company
expects to raise US$76 million from the IPO: US$73 million from public sale of shares and US$3
million from a private sale to its employees and directors and MRTA. The proceeds will be used to
buy five train sets from Siemens and repay debt.
3.4 LESSONS LEARNED: PROBLEMS AND SUCCESSES
292. Similar to the situation in other utility sectors in the developing world which grappled with
poor performance in the early 1990s, railroads, too, have been struggling with similar problems: a
bloated labor force resulting in low productivity, a poorly maintained infrastructure and equipment
causing unreliable service, and a bleak financial situation precluding introduction of new
technologies and performing routine maintenance and repair. Figure 3.9 is a simplified illustration
of the root causes and effects of the poor performance of public railways. Table 3.3 provides a
synopsis of selected issues and lessons learned from PSP transactions conducted during since
1990. Both the figure and the table are not intended to be comprehensive, but rather illustrative of
selected major issues and suggested ways to deal with them responsibly.
35 BMCL is 29.4 percent owned by construction contractor CH Karnchang , 14.5 percent by property firm Natural Park ,
19.7 percent by Bangkok Expressway and 9.9 percent by Krung Thai Bank. The remaining shares are held as treasury
stock for a pending IPO of 2.55 billion shares (21 percent) and private sale to employees and directors and MRTA (5.5
percent).
36 Reuters; Thai subway firm BMCL plans to list in Q1 2006; November 19, 2005.
TERA INTERNATIONAL GROUP, INC. - 57 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 3.9: Root Causes and Effects of Poor Perfromance of Public Railways
EFFECTS
Low efficiency and
productivity
Inadequate
revenues to cover
costs
Service
deterioration
Deteriorating
infrastructure
Loss of market
share
Poor
performance of
public railways
CAUSES
Bloated Labor force
Politically set tariffs
Railway staff
working as
public servants
Diminishing
public financial
support
Nontransparent
relationship
between
government and
railway
Source: Consultant
Table 3.3. Selected Lessons Learned and Good and Bad Practices
Problem/Issue Country: Description Reference Lessons Learned
Reduced access to
remote regions and
disadvantaging the poor
Argentina: After concessioning
route km decreased by more than
one-third
Section
Government must specify distributive goals to be achieved at the outset and be
2.2.3.1 and
prepared to pay for non-remunerative services through PSO agreements.
Appendix 5
Unprofitable passenger
services
Mexico: After concessioning
passenger train services have
deteriorated and altogether
disappeared on some lines
Appendix 4
Should the Government decide to continue with unprofitable passenger services
one of the following may be considered in the design of PSP: (i) offer passenger
service separately with award to the bidder which bids for the least subsidy to
continue operati
Inability to dispose rolling
stock
Brazil: All old rolling stock turned
over to the concessionaire for return
Appendix 7
at the end of the agreement 30-40
years hence
Brazil: Regulation sets product
Tariff hikes for passenger specific maximum prices to be
and freight service charged for transport services in the
contracts
Appendix 7
Change in laws is necessary allowing the Government to dispose old equipment
if the private company chooses not to use them.
Often prices do have to increase because tariffs have been kept well below
costs for many years, generating a substantial drain on the public purse and
diverting scarce resources from other vital areas of public expenditure. In fact,
the raison d’etre of
Project faces financial
difficulty due to lower
than expected traffic or
other external factors
Lengthy negotiation
process
Malaysia: Government assisted in
financing Express Rail Link and M
Trans
Ivory Coast-Burkina Faso:
Disclosed all conditions in the
bidding document
Section
3.3.5
Appendix 9
Government should be prepared to step in and assist if the financial viability of
the project is threatened due to reasons beyond the private company's control
(eg. Asian crisis). As a general rule, however, the Government should avoid
assuming commerrcia
Disclosing fully the "rules of the game" facilitates negotiations and clarifies
ambiguities which may cause disputes during implementation.
Labor redundancy
Many countries
Appendices
4,5,7,8
The private company should be provided the flexibility of selecting its staff from
the public entity. Government should be prepared to effectively deal with surplus
staff through: (i) training for reemployment elsewhere; (ii) retaining employees in
other
Investment needs are too
large to bear by one
private company
Estonia: Government is shareholder
Appendix 8
of the privatized railway
PRC: Shares of Guangshen
Section
Railway are listed in the stock
3.3.2.
exchanges
The Government should consider partial divestiture (Estonia), PPP with the
private companies (Ivory Coast and Burkina Faso), or IPO (PRC) to assist with
financing.
Separation of regulator
from the operator
Reform takes too long
Many countries
Many countries
Appendices
10 to 14
Appendices
10 to 15
Regulation and oversight must be kept as a public function with operations
transferred to the private sector. Under circumstances where there is a public
operator, the government’s regulatory functions must be separated from the
enterprise in order to ass
Gradualism in reform can be a merit if it reflects a well thought-out series of
steps towards an agreed outcome. Gradualism should not reflect a lack of clarity
in ultimate objectives or indecision.
Separation of
infrastructure from
operations
European Union
Section
2.3.3 and
Appendix
12
For small railways with low traffic density a preoccupation with structuring into
infrastructure and operating units appears to be a misplaced priority when
survival depends on a combination of aggressive cost-cutting, agile marketing,
and competition wit
Rail reform is a
continuous process
Social and political
interest in passenger
services
Adaptability to change
Inconsistent Government
policy
Source: Consultant
All countries
All countries
All countries
Estonia: After divestiture
Government enacted new
regulations establishing open Appendix 8
access, undercutting the company's
traffic
Government needs to establish mechanisms to ensure proper industry
governance and supervision, to review and approve challenging business plans,
monitor achievement and take action to hold management accountable for
performance.
In many countries, railway passenger transport is not independently
commercially viable. Provision of a comprehensive national passenger rail
service is an issue of public policy choice to be guided by budgetary constraints
and a clear and consistent guid
The objective of rail reform should not be to achieve a given end-state but to
create an industry which is itself capable of future adaptation to markets without
constant policy intervention.
Government must avoid change in policy which is inconsistent with previous
policy under which PSP was implemented.
TERA INTERNATIONAL GROUP, INC. - 58 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

293. In the early 1990s, essentially all railways in Latin America and Africa were government
owned and operated. Since then, the World Bank, Asian Development Bank, and other international
organizations have been helping to resuscitate dysfunctional railway systems in many developing
countries through introduction of structural reforms to attract increased PSP. Many developing
countries are benefiting from a vibrant and more competitive rail transportation, which is playing a
key role in bringing new opportunities to the developing world.
294. As detailed in Section 2, private participation in the railway sector increased significantly
during the 1990s, with 28 developing countries reaching financial closure on 85 projects from 1990
to 2004. Mainly due to geographic and functional unbundling of national railways in Latin America
(particularly in Argentina, Brazil, and Mexico) the number of concessions is higher than other types
of PSP, with most countries turning to the private sector to improve the management of loss-making
railways and rehabilitate deteriorating infrastructure. This pattern looks set to continue.
Improvements in performance in most of the projects in Latin America have encouraged
governments in Africa, the Middle East and the FSU to consider concessions for railway
management, operation, and rehabilitation.
295. The concessioning of Latin American freight railways is virtually complete (10 countries).
Railway operations in 11 countries in Sub-Saharan Africa have also been transferred to the private
sector. The results show increased productivity, lower transportation costs, and expanded access
to markets. However there have been some downside effects, particularly in reducing access to
remote and less developed regions. Following privatization, traffic on many railway lines was
concentrated on high-density traffic, with service discontinuance in unprofitable lines. This
sometimes led to the interruption of socially significant services. In Argentina, for example, the
network shrank by one-third. The inter-urban lines that did not turn out to be profitable were
dismantled, and a number of cities in the interior lost their rail connection to the capital, while
railway links between provincial capitals and passenger service to other countries disappeared. As
a result, a number of villages became ghost towns and regional economies sustained damage. 37
296. The experience with private participation in railroad infrastructure in developing countries
indicates that the freight segment is the most attractive. This conclusion is also supported by
experience in developed countries, notably in the United States and Canada where freight railroads
are owned and operated by the private sector.
297. In most concession contracts the government transferred the management of fixed assets
and rolling stock to the private sector as a vertically integrated utility, introducing competition at the
bidding stage. The standard model for PSP in railways in Latin America involves separating
passenger and freight service, leaving long distance passenger services with a public operator.
298. The status of railway PSP projects as of the end of 2004 indicates that the pipeline of
railway projects with private participation has considerably thinned out. The fragility of the railway
PPI projects pipeline and the decline in modal share of investment is indeed a cause for concern,
considering the large investment needs of railways in developing countries to provide logistics
support for economic development and poverty alleviation programs. Railway development around
the world in the late 19 th and 20 th Century was made possible by governments which provided
appropriate incentives and risk coverage to the private sector at terms that were comparatively
more favorable than the alternative investment opportunities. The large size of networks that were
built by the private sector is testimony to the success of those efforts. It is imperative that
governments in developing countries create the necessary conditions for private participation and
offer products for investment in infrastructure, services and management of operations that are
attractive compared with alternative investment opportunities.
299. Although PSP in infrastructure services has become the new belief since early 1990s, there
are concerns about the broader social implications. Although it improves productive efficiency,
privatization does not always result in improved allocative efficiency. There have been complaints,
37 A study by economists Daniel Azpiazu and Martín Schorr, at the Latin American Faculty of Social Sciences (FLACSO),
says ''the privatization of the railway system constitutes one of the biggest failures of the vast privatization program
undertaken by Argentina in the 1990s.'' (Marcela Valente, Argentina: Privatization of Trains Derailed; Inter Press
Service News Agency; 19 Sept 2005). http://www.ipsnews.net/interna.asp?idnews=24370
TERA INTERNATIONAL GROUP, INC. - 59 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

particularly with regard to the shutdown and deterioration of socially important services as a result
of economy measures taken in the course of privatization. In the absence of the government’s
recognition and agreement to financially support socially significant services, the private entity
operating under market conditions would discontinue unprofitable lines. The private sector should
not be expected to bear the burden of service continuance in unprofitable lines.
300. It is often argued that privatization leads to tariff hikes that make services unaffordable for
the poor. Often prices do have to increase substantially in the context of privatization. Where this
happens it is usually because tariffs have been kept well below costs for many years, generating a
substantial drain on the public purse and diverting scarce resources from other vital areas of public
expenditure. In fact, the raison d’etre of PSP in many countries is the chronically low fares and
tariffs, which inhibit the public entity’s ability to continue operations without massive subsidy from
the government.
301. The limited experience from Kuala Lumpur light rail urban transportation projects suggests
that ridership levels did not meet the expectations of the private operators and the projects faced
financial difficulties particularly in debt service due to the Asian financial crisis. The public sector
ultimately had to come forward in support of these projects. However, the project objectives have
been achieved to a large extent. Government’s willingness to renegotiate terms for distressed
projects is a constructive approach to move ahead in PPP, as opposed to public attempts to buy
back or nationalize successful concessions.
302. The experience with PSP in the railway sector provides the following lessons for
consideration by DMCs:
3.4.1 Bidding and Selection Process
303. In order to strengthen competition it is important to widen the effort to find potential
operators. It is beneficial to detail the future "rules of the game" of the concession (notably through
the draft concession agreement) before requesting bids. This would help in shortening the
negotiation process between proposals and the signature of the concession agreement. It is also
helpful to sort out implementation details for effective take-over of operations by the concessionaire.
3.4.2 Labor Redundancy
304. The participation of railway workers and their unions in the negotiation process at an early
stage eases the implementation of the staff reduction program that takes place at the beginning of
the concession. The government should not try to save money on the process of labor restructuring
and must be generous towards the workers, giving them more than the minimum entitlements
under the law.
305. As much information as possible must be made publicly available about the labor
restructuring process. Transparency is important from the political perspective as well as the
analytical one. The World Bank and ADB have experience and qualified staff to assist the
governments in planning, financing, and implementing effective surplus labor interventions tailor
made to the specific needs and requirements of the government and consistent with good
international practice.
3.4.3 Investment Financing Scheme
306. . When the concessionaire defines the investment program and bears the debt service cost,
an effective incentive to a commercial approach to investing is assured. This allows the government
to bear the borrowing risks since financial resources are mobilized by the public. This financing
scheme is a good compromise in the prevailing investor risk context in many countries including the
Philippines, Cambodia, Thailand, and Malaysia, particularly during times of financial uncertainty
when the private sector’s ability to raise funds for large investment projects is curtailed.
3.4.4 Separation of the Regulator from the Operator
307. Privatization is likely to succeed through a clear separation of sector regulation and
oversight from commercial operations. Regulation and oversight must be kept as a public function
with operations transferred to the private sector. Under circumstances where there is a public
operator, the government’s regulatory functions must be separated from the enterprise in order to
TERA INTERNATIONAL GROUP, INC. - 60 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

assure the private sector fair and equal treatment. In more complex conditions involving mixed
service, a clear-sighted policy of first commercializing the railways, separating out the loss-making
passenger services, and implementing separate PSP transactions for freight and passenger
operations should be followed. If loss-making services are to be continued for public benefit PSO
contracts must be executed with clear linkage between the private company output and government
payment.
3.4.5 Railway Reform is a Long-term Process
308. . Putting in place mutually supportive legislative, institutional and management structures to
deliver substantive change takes a great deal of time and effort. Gradualism in this process can be
a merit if it reflects a well thought-out series of steps towards an agreed outcome. However,
gradualism should not reflect a lack of clarity in ultimate objectives or indecision and delay.
3.4.6 Structural Change is Only a Means to an End
309. It is not sufficient to improve performance alone. Governments can create the structural
platform for improved industry performance but only managements can deliver it. Greater emphasis
needs to be given to investing in the actual process of business change, management, attraction of
new skills and experience from inside and outside the industry, creation of a commercial culture,
development of incentive-based pay structures and others depending on the country situation.
3.4.7 Separation of Infrastructure from Operations
310. Structural separation of railway infrastructure from rail operations cannot of itself improve
business performance. In fact, it may, in the short-term, impede it by becoming too narrow a focus
of reform and delaying the business culture and process changes, in both infrastructure and
operations, which will actually improve asset and labor utilization. If separation is favored it needs to
be followed closely by rigorous business plans in both infrastructure and train operating companies
to improve performance.
311. Because of the diversity of railway systems, one structural model is unlikely to be best fit for
all parts of it. In particular, for those railways which are very small with low traffic density a
preoccupation with structuring into very small infrastructure and operating units appears to be a
misplaced priority when survival depends on a combination of aggressive cost-cutting and agile
marketing.
3.4.8 Rail Reform is not a ‘Fire and Forget’ Process
312. Governments wish to retain ownership of large parts of the industry. But if they are to be
effective owners they need to establish their own mechanisms properly to ensure proper industry
governance and supervision, to review and approve challenging business plans, monitor
achievement and take action to hold management accountable for performance.
3.4.9 Passenger Transport Services
313. The most promising place to attract the private sector is in rail freight operations.
Governments in most countries are committed to ownership of the railway infrastructure network,
and also have a clear social and close political interest in passenger services.
314. For most railways in developing countries, railway reform should not necessarily mean
stand-alone profitability for each line of business. Railways having modest traffic intensity and a
high component of passenger service; will require substantial levels of public assistance for
investment and support of passenger services. In many countries, railway passenger transport is
not independently commercially viable in the sense that it is able to cover the full costs of
infrastructure and operations. Provision of a comprehensive national passenger rail service is an
issue of public policy choice to be guided by public finance constraints and a clear public policy.
3.4.10 Adaptability to Change
315. Markets themselves will not stand still. Competition from other modes will increase in all
transport markets. New transport needs will emerge with economic transition and development.
Railway reforms are, therefore, chasing a moving target. The objective of rail reform should not be
TERA INTERNATIONAL GROUP, INC. - 61 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

to achieve a given end-state but to create an industry which is itself capable of future adaptation to
markets without constant policy intervention.
3.4.11 Social Impact
316. Although privatization policy is believed to be socially beneficial, it faces increasing
opposition in several countries. Latin America, which has been in the forefront of privatization, at
the end of two decades is facing popular opposition to privatization. Popular surveys have revealed
a consistent picture of privatization discontent that points to a combination of perceived
distributional concerns.
317. Typically, privatizations focus only on the productive efficiency, whereas there is a lot of
redistribution involved in the process. The redistributive dimensions of the reform have been
recognized as the most important issue. The poor under privatization suffer the risk of being net
losers. The abolition of cross-subsidies in the tariff structure of railway passenger services (as in
other utilities) following privatization of the most competitive part (e.g. freight services) may
generate a tariff rebalancing that is unfavorable to users of the service at the lower end of the social
structure.
318. The Latin American experience shows another dimension of privatization discontent related
to excessive divestitures within short periods of time. Under these circumstances the long
developed habits of users of public services are suddenly disturbed, and even if the quality of
services may gradually improve, and prices decrease, the initial reaction of users to the sudden
developments may be negative.
319. If state-owned enterprises have generally underperformed in most countries and
privatization raises potential social concerns, what then is the way forward for bringing essential
infrastructure services to the world’s poor who still do not have access? The answer is probably not
to discard privatization, but rather to make privatization work for the poor. There is considerable
evidence that privatization creates substantial dividends. Private management of services often
leads to significant reductions in cost, particularly when competition is also introduced or when
there is at least effective regulatory control of monopolistic pricing practices.
320. Privatization opened up access to an important new source of capital. The total flow of
private capital to developing country infrastructure in 1990-2004 was nearly US$809 billion, or more
than three times the foreign development assistance to the infrastructure sectors over the same
period. It would clearly be a mistake for any country to overlook dividends of this magnitude. The
key question is how the benefits of privatization are distributed among different stakeholder groups
in society and whether they can ultimately be channeled toward the poor.
3.5 PROSPECTS OF PSP IN DMCs OF ASIA
321. After pioneering the industrial revolution in many countries in the 19 th and early 20 th
centuries, and then seeing their existence threatened by stiff competition from other modes in the
late 20 th century, railways now have a chance to re-establish their relevance in this era of trade
liberalization. Indeed, a number of features speak in favor of a greater utilization of rail transport in
Asia. Firstly, twelve of the 30 landlocked countries of the world are located on the Asian continent
with the nearest ports often several thousands of kilometers away; secondly, the distances linking
the main origins and destinations, both domestically and internationally, are of a scale on which
railways find their full economic justification; thirdly, the continuing surge in the volumes of goods
and products being exchanged make rail transport a necessary ingredient for economic
development; fourthly, with development there is increasing emphasis on urbanization to improve
the lives of peoples, where the railways are the only means that can provide cost effective and safe
mobility to large numbers of people in the mega cities of Asia; and lastly, rail is increasingly
recognized as an energy-efficient, environmentally-friendly, and safe mode of transport. Railways
are important to Asian economies as perhaps in no other continent.
322. State-owned railways in most countries are in deep financial trouble. DMCs are most
adversely affected because their economies are caught in a vicious cycle: the government is unable
to support railway deficits, leading to the inability of the railways to maintain assets, which in turn
leads to deteriorating services and results in adverse impacts on the economy. The problems have
TERA INTERNATIONAL GROUP, INC. - 62 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

een exacerbated because with greater demand, changing technology, increasing complexity for
financing the infrastructure projects and the budgetary constraints, the public sector is no longer
able to discharge efficiently its role as a provider of infrastructure services. Asian governments have
recognized that private sector participation including foreign investment is required to supplement
the public sector efforts. Various reforms have been made in infrastructure sectors, and rules and
procedures for investment have been liberalized in order to provide an enabling environment
conducive for private participation. The role of the government has changed from ‘owner’ and ‘sole
provider’ to that of a ‘facilitator’, and to safeguarding the interests of the vulnerable sections of the
community by an effective legal and institutional framework.
323. Governments have also been rightly worried about borrowing too much, because the build
up of debt imposes a burden on future generations to service the debt. In some literature on the
subject, it is indicated that PSP enables the government to get around the budgetary constraints.
This statement may not be wholly correct. PPPs cannot provide something for nothing. PPP also
sets up a future set of obligations to service the payments that are needed to honor the contracts.
Nevertheless, PPPs are worthwhile for the reasons that: (i) private sector management can bring in
experience in undertaking large scale capital projects; (ii) private sector can also provide a genuine
element of risk-taking rare in the public sector; and (iii) above all - although this is rarely said - the
private sector brings in people whose own money may be at stake in the success of the venture.
324. Although a good starting point, the level of PSP in the railway sector in Asia since 1990
cannot be reckoned as adequate considering the needs. In the last few years PRC alone has been
investing about US$7 billion to US$9 billion per year on railway development. In the next 15 years
to 2020, the investment needs are estimated between US$25 billion and US$40 billion per year.
Investment needs in other Asian countries for railway development, though not so large are also
significant. This level of investment is clearly beyond the capability of the state-owned railway
systems. Asian countries need to take new initiatives to diversify investment sources to meet the
needs of their railway systems.
325. Table 3.4 presents a summary of PSP prospects for DMCs. The need for capacity
expansion (new projects) as well as efficiency improvements under competitive market conditions is
admitted throughout the region. Some railways are relatively small with little traffic. As such they are
more suitable for a single concession transaction or partial divestiture through sale of stock to a
strategic private partner. Some railways are large and are more suitable for geographic and
functional unbundling and selective PSP through concessioning of particularly branch lines and
strategic partnership in public-private joint ventures or sale of shares for larger investments. The
suitability of each transaction must be carefully and objectively evaluated for fitness to the
Government’s objectives and private sector interest to accept an appropriate risk-reward mix.
Table 3.4: Prospects for and Suitability of PSP in Asian Railways
Characterics Prospects for PSP Suitability of...
DMC
Need for Capacity
Expansion
Traffic Density
Employee
Productivity
(Tus/Employee)
Route Length
Labor Intensity
(Employees/Route
km)
Importance in GDP
Formation
Need for PSP in
Funding New
Projects
Need for PSP in
Funding -
Improvements in
Existing Assets
...Geographic
Unbundling
...Freight/
Passenger
Separation
Concessions
Partial Divestiture
to Strategic
Partners
PPP in BOO
Greenfield
Projects
Bangladesh L L VL L H VL Sm M M M H M L
Cambodia VL VL VL VL L L VSm Sm VL L H H VL
China VH VH M VH VH H VLg VLg VH VH VH (1) H VH
India H VH L VH VH H VLg VLg VH VH VH (1) H VH
Indonesia M L U L U VL M Sm M M H M L
Kazakhstan H H M H M VH VLg Lg VH VH VH H H
Kyrgyzstan L VL VL VL H M Sm Sm VL VL M L L
Malaysia L L L L L VL Sm Sm VL M H L M
Mongolia H M L L M VH VLg Lg VL M L VL H
Myanmar L L U L U L VSm VSm VL M U U U
Pakistan M M VL M H L Lg M M VH H H H
Philippines VL-L M VL VL L VL Sm M VL M VL VL L
Sri Lanka L M U L U VL Sm M VL H H M L
Tajikistan VL L VL VL M H VSm VSm VL VL M L L
Thailand M M U L U L M Sm M M H H L
Uzbekistan M M L L H H Sm Sm M H M M M
Vietnam L L VL L VH L M M L M H H M
VL = Very Low; L = Low; M = Moderate; H = High; VH = Very High; U = Unknown; Lg = Large; VLg = Very Large; Sm = Small; VSm = Very Small; (1)
Particularly for branch lines.
Source: Consultant
TERA INTERNATIONAL GROUP, INC. - 63 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

3.5.1 Crucial Role of Rail Transport
326. Rail transport will continue to play a very important role in many countries such as PRC,
Kazakhstan, India, and smaller countries with substantial bulk freight movements. In PRC, the
railways transported approximately 2 trillion TKM of freight and 570 billion PKM in 2004. This
volume exceeded the traffic carried by all Class 1 railroads in the U.S. The density of rail traffic in
terms of TUs per km was about three times the density on the U.S. rail network.
327. Given the importance of railways in the Asian economies and the large extent to which
railways are intertwined in the social fabric in Asian countries, it is important that the modality of
private sector participation is given full consideration with the involvement of those affected – users
and employees. In Asia, where large regions are underdeveloped and poor, the basic issues are
access and providing the means for generating incomes for the poor through direct or indirect
employment. These aspects can best be fostered by the public sector.
3.5.2 Considerations for Asian Countries
328. Privatization policies and implementation measures must be well thought out considering all
possible impacts as well as the mitigation measures necessary. Given the vital role of railways in
Asia, Asian economies are as yet not mature enough to absorb the shocks of privatization that are
known to affect employment and the weaker sections of the society. It may be difficult to make
changes rapidly without the risk of severe social disruption, particularly where this involves
organizations divesting themselves of traditional social responsibilities that hamper their
commercial potential and responsiveness to consumers.
329. Governments can also take action prior to the privatization to reduce retrenchment and
soften the impact on workers. These measures include freezing new recruitment and hiring as long
as possible before privatization, reducing the size of the workforce through attrition as much as
possible before the enterprise is transferred to private ownership, and guaranteeing the
membership of workers in social security schemes or pension plans (their continued viability should
be ensured) even if they lose their jobs after privatization. The social costs of extensive job losses,
while far from insignificant, can be lessened if carefully handled. Well designed concessions of
simple and smaller size rail networks or individual railway lines are simpler to analyze for impacts,
rather than whole networks.
3.5.3 Concessioning
330. One approach to increasing the role of the private sector is "concessioning". Concessions
involve continuing public ownership and oversight of infrastructure, but the transfer of operating
responsibility and the delivery of services to the private sector. The reasons for the preference for
concessioning over divestiture appear to be that governments have been wary of what appears to
be total loss of control over publicly-owned assets. In some countries sale of infrastructure such as
track, stations, and other fixed assets require lengthy legislative action, even a constitutional
amendment. Concessioning, on the other hand, can enable the Government to retain ultimate
control over the infrastructure while allowing the private sector to operate the railways and compete
for customers in the market. Concessions require continuing Government involvement in regulating
safety and monopolistic behavior, and in ensuring adherence to the pricing and service
requirements of the concession.
331. Private sector participation through the highly flexible instrument of concessioning, appears
to offer a practical way of improving railway services with minimum financial burden on the state.
The concession contract should be designed such that the government achieves the following
objectives:
♦ To provide competitive, economical, high-quality service to support the
economic development of the country.
♦ To reduce, and preferably eliminate, subsidies.
♦ To maximize revenue received from the concession.
♦ To operate in a competitive environment and not exploit railway customers.
TERA INTERNATIONAL GROUP, INC. - 64 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

♦ To downsize the labor force in an orderly fashion with a minimum of hardship
and to provide the retrenched surplus staff fair severance compensation and
maximum assistance for securing alternative employment.
♦ To effectively monitor and regulate safety and environmental aspects.
3.5.3.1 Feasibility for PSP Modality
332. It is not always possible to achieve all of these objectives. A feasibility study often helps to
determine the extent to which the desired objectives can be achieved. It is generally possible,
however, for the government to arrive at an optimal design for a concession through careful review
of the possible financial and management options, thereby maximizing progress towards reaching
the desired objectives. Establishing a regulatory authority before the completion of the
concessioning process, with well-defined statutory powers, will go a long way towards ensuring that
safety and environmental aspects are monitored adequately.
3.5.3.2 Financial Viability
333. The financial viability of private sector projects should be of concern to the government. If a
project is found not to be financially viable, then its economic evaluation should be reviewed to
determine whether the investment is justified in terms of its expected benefits to the economy as a
whole. If such a project is not financially viable but found to be economically viable, various options
may be considered for improving the project’s financial rate of return. The acceptable financial rate
of return of a project is determined by taking into account three main factors: (i) the average cost of
borrowing; (ii) the risk premium associated with the type and scale of the project; and (iii) the rate of
return for similar projects in other countries competing for investor funds.
334. The governments may consider various possibilities to improve the rate of return to the
private investor. These measures may inter alia include:
♦
♦
Tax incentives. Projects with PSP may qualify for various tax incentives
offered by governments.
Revenue guarantee. Although it should be the intention of the government to
identify financially robust projects, it is possible that some of the projects could
have a level of risk that is unacceptable to the private sector. Greenfield
projects often fall into this category. For high-risk projects, the government may
provide revenue guarantees.
♦ Government support. Government support to a PPP project can be provided
in various forms and serves primarily to facilitate its financing. The instruments
and level of support provided depend on the risks involved for transfer to the
private sector and the financing requirements of the project once a risk
allocation structure has been established. These instruments do not, however,
include structures whereby the public sector is 100 percent responsible for
either funding or cost recovery. In the event the concessionaire is undertaking
rail transportation of goods and people in support of public policy for the larger
good of the country, which services it would not provide as a commercial for
profit entity, the government or the proponent public agency should
compensate the losses incurred by the operator.
3.5.3.3 Preparation of Concessions
335. It should be appreciated that a concession is a complex contract involving extensive
preparatory work. Each concession is unique and must be tailored to fit specific, well-defined
objectives, as well as to address perceived concerns of the government and other stakeholders.
Experience has shown that considerable external skills and support are invariably required for
requisite preparations, the bidding process, and implementation of the concession agreement. This
assistance is necessary to provide additional skills not normally available in the railway or the
government and to provide the additional capacity required to deal with bursts of specialized
activities for short periods in different stages of the concessioning process. The costs of such
external assistance are generally recovered through the economic benefits generated by
TERA INTERNATIONAL GROUP, INC. - 65 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

concession arrangements. Recent experience demonstrates that railway concessioning
successfully reduces the financial burden on the state while significantly improving traffic levels and
performance of the railway.
336. The concession period generally extends over a period of 25 to 50 years, reflecting the slow
build-up of the traffic volume and revenue stream related to it. Financing of a concession project is
secured by an appropriate equity/debt mix, defined in compliance with the assumed revenue
stream generating characteristics (including the expected governmental contribution) of the project
and the assessment of the risks associated with it. Under the usually applied scheme of private
funding, the exclusive source for repayment of equity and debt is the net operating revenue.
337. Projects undertaken through PPP schemes share characteristics that differentiate them from
traditional projects, including:
♦
♦
A primary asset, a railway line for instance, which is not the property of the
company (concessionaire), but rather of the State; hence, the real asset is not
liable for use as collateral. Consequently, other assets are used as collateral.
In general, the projects have no representative "history" to allow forecasting,
with a certain degree of confidence, of net cash flows of the project.
♦ In cases of projects of the greenfield type traffic statistics do not exist, thus
the evaluation of costs and cash flows requires a greater degree of
sophistication.
3.5.4 Divestiture
338. Full divestiture in a fashion similar to U.K. and New Zealand is not a popular alternative for
most if not all DMCs. In many countries sale of the railway infrastructure entails a Constitutional
change since the public ownership of what was, and in many cases is still, considered a strategic
industry has been confirmed in the Constitution. Furthermore, full divestiture without a thorough
understanding and establishment of the Government’s regulatory oversight functions carries
substantial risks of market failure with dire consequences as experienced in the U.K. In short, the
process of creating the necessary legal and regulatory framework is tedious, time consuming, and
prone to missteps that are costly.
339. Partial divestiture fashioned in a manner similar to Estonia where the Government
maintained a minority share in the new railway company is more suitable in many nations, provided
that an arms-length regulatory oversight for safety and monopolistic abuse at the minimum is
established and objective monitoring of performance against predefined clear targets is
implemented. An alternative to the Estonian experience where the sale was made to a strategic
partner, is the PRC model of divestiture through listing of shares. For successful implementation of
this strategy, the transaction should be large enough to bear the legal and underwriting costs for
preparation of the Prospectus, marketing to potential investors, and other expenses.
3.5.5 Bankable Projects
340. The selection of bankable projects is essential if PPP projects involving financing are to
become a success. 38 Bankability depends largely on the constraints and opportunities of both the
definition of the project and the environment in which the project is to be implemented. For example,
if the private sector has to fund development, land acquisition, and construction costs on the basis
that it has to take all the planning risks and can recover the investment only through tariffs even
though tariffs are capped and all projections indicate that traffic would be low, there will probably be
no project that is bankable. If, on the other hand, the public sector takes all the planning risks, pays
cost overruns and agrees to repay the private sector through a cost plus fee system, virtually all
projects may be considered bankable.
38
The International Project Finance Association (IPFA) defines project finance as the financing of long-term infrastructure,
industrial projects and public services based upon a non-recourse or limited recourse financial structure where project
debt and equity used to finance the project are paid back from the cash flow generated by the project. Project finance
involves the creation of a legally and economically independent project company financed with non-recourse debt (and
equity from one or more corporate sponsors) for the purpose of financing a single purpose, capital asset usually with a
limited life.
TERA INTERNATIONAL GROUP, INC. - 66 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

341. Bankability is therefore determined by how the project is defined (e.g. starts after land has
been acquired by public sector following the completion of the planning process) and the
constraints that are imposed, or the incentives that are provided. This means that many projects
could be made bankable if they are well defined and provide sufficient incentives.
342. The process of selecting bankable projects, therefore, comprises selecting projects that can
be given a serious chance of success by providing sufficient incentives through government support
and regulations while keeping these incentives within acceptable limits and in line with risk transfer
objectives.
3.5.6 Residual Public Risk
343. The private sector is often reluctant to bear some of the risks implied by the nature of
infrastructure projects. Due to the prolonged construction periods entailed by these projects,
investors in infrastructure generally confide their financial resources to host-countries over very long
periods, even decades. Unlike portfolio investments, investors lack the option of promptly
withdrawing their resources in the case of political instability or economic volatility.
344. Thus, infrastructure investors face not only business risks that are considered normal for
any investment, such as commercial and financial risks, but also risks that might be under the direct
control or influence of the governments of host-countries, and directly associated with policies
undertaken over extended periods of time.
3.5.7 Enhanced Private Sector Capacity
345. Transferring tasks previously carried out by the public sector to the private sector supposes
that it is capable of carrying them out correctly. If it is not, the question of how to organize the
development of the PPP policy must be asked and how to accompany it to enable a fabric of
companies and design offices to emerge, capable of taking on these new tasks without damaging
the quality of the projects or that of service to the user. This will depend on whether very large
projects are involved requiring a high level of technical skills and considerable financial capacity
(e.g. very large bridges or tunnels) or more routine tasks (rehabilitation, maintenance, operation)
which neither require heavy investment nor exceptional technical skills
346. There is the greatest advantage to be had in ensuring that prior consultation takes place
between the public authorities and professional representative organizations to examine how to
develop a successful PPP policy. It would even be desirable to plan regular meetings to establish
reports and together find ways of making improvements. These meetings could advantageously be
based on jointly financed audits. Such practices give full significance to the notion of partnership
and ensure projects their best chance of success.
347. The rate at which a PPP policy will be undertaken should be given full consideration. It is
necessary to plan how to progress in the development of the programs so that the contractors can
become familiar with and organize themselves to face new tasks. The first contracts could, for
example, only concern a small part of the network, before gradually extending to cover the entire
network. They may, at the beginning, be of the quantity-based type, and then become performancebased.
348. While PSP in transport infrastructure privatization and financing is growing in many
developing countries, public investment in transport will continue to be significant in developing
countries, where market size and risks are high and private financial markets are not well
established. More importantly, public investment in the transport sector will contribute considerably,
both directly and indirectly, to economic growth.
349. Many changes as a result of public sector restructuring brought about privatization. The
increased role granted to the private sector does not mean that the public sector will disappear. In
many ways its role is strengthened by the recognition of the importance of an independent regulator.
350. Many Asian countries, notably PRC and India, have initiated measures for fostering PSP in
the development of railway infrastructure and services. These efforts are bearing results in the
increase in private sector involvement in the railway sector. (May be expanded with materials from
visits).
TERA INTERNATIONAL GROUP, INC. - 67 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4 PROMOTING PSP IN THE RAILWAY SECTOR: POLICIES AND PLANNING,
REGULATORY, AND LEGAL FRAMEWORKS
4.1 BACKGROUND
4.1.1 Transport and Development
351. Transport is important for the development process in general and for the promotion of
national, regional and international trade in particular, which significantly contributes to the
eradication of poverty. Weak infrastructure and inappropriate policy environments lead to inefficient
transport services that result in high transport costs, which are a major impediment to trade
expansion, competitiveness, and hence sustainable development in developing countries. The
development of a coherent, national, regional and international transport network, combined with
efficient transport services, are essential for stimulating economic activity, opening up productive
areas and linking them to national, regional and international markets.
352. For these reasons governments accord high priority to the transport sector by formulating
and strengthening their policies to attract investment in infrastructure and related services. In this
context, private sector participation has an important role in improving the quality of transport
services.
4.1.2 Transport Policies
353. One of the key issues is overall national transport policy towards the railway sector. In some
countries the effective policy is focused on roads. Before any investment in railways is warranted, there needs
to be a strategy for the rail sector that includes the need for investment to improve operations and service
levels. There probably also needs to be a bias towards the railway in terms of developing a level playing field
where user costs and benefits are competitive with other modes over the distances and type of traffic
prevailing in the market. 39
354. To be effective, transport policies must satisfy three main requirements. First, they must
ensure that a continuing capability exists to support an improved material standard of living -- the
concept of economic and financial sustainability. Second, they must generate the greatest possible
improvement in the quality of life, not merely an increase in trade of goods -- the concept of
environmental and ecological sustainability. Third, the benefits that transport produces must be
shared equitably by all sections of the community -- the concept of social sustainability. Economic,
environmental and social sustainability are often mutually reinforcing. A policy for sustainable
transport is one that both identifies and implements win-win policy instruments and explicitly
confronts the trade-offs so that the balance is chosen rather than accidentally arrived at. It is a
policy of informed, conscious choices. 40
355. Emerging transport policies across countries reflect a substantial change in the role of
government, reducing its functions as supplier, but increasing its functions as regulator -- the
enabler of competition and the custodian of environmental and social interests.
4.1.3 Public Sector Control of Infrastructure
356. After World War I, infrastructure was mainly designed, constructed and financed from public
funds and prior to 1982 there was virtually no private financing of transport infrastructure in
developing or transition countries. Traditionally, infrastructure was the exclusive province of the
public sector, with large SOEs being responsible for investment and service delivery. Typically, the
SOE was a costly and inefficient provider of infrastructure in most developing countries. The trend
towards the liberalization and privatization of infrastructure operations that began in a few countries
in the 1970s and 1980s turned into a wave in the 1990s. Developing countries have been on the
crest of this wave, pioneering better approaches to providing infrastructure services. Market leaders
among emerging economies such as Argentina, Chile, and Hungary have gone further in privatizing
infrastructure than all but a few industrial countries. Simultaneously, initiatives aiming at outsourcing
maintenance activities to private firms are being implemented in Africa, Asia and to a larger extent
in Latin America.
39 Asian Development Bank; Energy, Transport and Water Division; Regional and Sustainable Development Department
40 http://www.ilo.org/public/english/dialogue/sector/techmeet/sdpt99/sdptr.htm#N_11_#N_11_
TERA INTERNATIONAL GROUP, INC. - 68 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4.1.4 Growth in Transport Demand
357. The growth in transport demand has outstripped governments’ capability to supply and
maintain infrastructure in the traditional “tax and spend” formula of past years. Estimates of
infrastructure investment requirements for East Asia alone were US$1,000 billion in the decade of
the 1990s, US$1,500 billion for the decade 1996 to 2005 and more than US$1,800 billion for the
next decade. The aggregation of government spending, international aid and official lending was
insufficient to meet the scale of demand.
4.1.5 Role of International Organizations
358. Encouraged by international organizations such as the World Bank and ADB, privatization
has been a major component of the economic reform programs pursued by many developing
countries over the past two decades. Privatization was predicted to promote more efficient
operations, increase investment and service coverage, and to reduce the financial burden on
government budgets. Accordingly there is a shift towards PSP in the provision of transport
infrastructure, but this has occurred at varying rates of penetration among various regions as well
as countries. The growth in the globalization of private investment funds and the recognition that
infrastructure is a worthwhile investment vehicle have enhanced PPP initiatives.
4.1.6 Development of Infrastructure
359. Transport infrastructure and particularly railway systems in most countries have evolved
through various stages of development. The changes on any particular railway system are typical to
that system and have to be viewed in the context of the national situation, covering various factors,
including the stage of economic development; socioeconomic, cultural, and political conditions;
state of development of alternative transport modes; competitive environment; and the regulatory
environment. These are but some of the factors, and there may be many more specific to the
railway system and the country.
4.2 RAILWAYS AND ECONOMIC DEVELOPMENT
4.2.1 Role of Railways
360. Rail remains unequalled in its ability to move large volumes of goods over long distances
cost-effectively, and produce high passenger volumes in small spaces. It is difficult to imagine many
large cities (Tokyo, New York, London, Shanghai, Mumbai, Moscow) being able to function without
suburban rail systems and metros. Railways have a comparative advantage over other transport
modes as far as environmental impact is concerned.
361. The rail mode is undergoing one of the most radical periods of change in recent decades.
Technological progress and its application to speed, safety and traffic management have created
new, highly efficient rail transport services. Rail operators are increasingly turning to information
technology (IT) to improve services and better exploit the existing infrastructure. Railways have a
highly regulated traffic process in which every movement is carefully planned and implemented. A
key to greater efficiency is the integration of traffic control systems. In order to realize the benefits
of new technologies large investments need to be made which cannot be fully afforded by public
agencies.
362. Railways have had a crucial impact on economic development in most countries. The
growth of road transport in the last few decades saw a diminishing role of the railways. However,
new challenges related to transport needs, logistics costs, energy, and environmental impacts are
creating conditions favorable for revival of rail. Rail transport will continue to play a very important
role in many countries such as China, India, and some smaller countries with substantial bulk
freight movements.
4.2.2 Characteristics of Rail Transport
363. Railway transportation like some other utilities (such as water supply, gas, electricity and
telecommunications) includes natural monopoly characteristics arising from pervasive economies of
scale and scope. These characteristics mean that competition is unlikely to develop, or if it
develops it will be uneconomic because of the duplication of assets. Although technological
advances and infrastructure access have reduced some of the natural monopoly characteristics,
TERA INTERNATIONAL GROUP, INC. - 69 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

permitting economic competition in service delivery, some natural monopoly features are still
retained. As a consequence, privatization of railways, in whole or in part, risks the introduction of
private-sector monopolies that will exploit their economic power in the market place, leading to
abnormal profits (high ‘producer surplus’) and reduced consumer welfare (low ‘consumer surplus’).
Under these conditions consumers suffer from no or a limited choice of goods and services and
face monopoly prices.
364. To prevent this result, governments need to develop strong regulatory capabilities so that
they can monitor the revenues and costs of production of the private entity and protect consumers
from monopoly exploitation. It is argued that privatization leads to greater incentives for managers
to pursue productive efficiency because of the superior principal-agent relationship in the private
sector compared to government. But at the same time, in the absence of the threat of competition,
managers could dissipate potential cost savings through padding their staffing, and raising their
own salaries. The results of privatization where private sector monopolies are created are, therefore,
uncertain and this is borne out by empirical studies that have demonstrated that the greatest cost
savings from privatization occur in competitive industries.
4.3 KEY ISSUES AND WEAKNESSES IN RAILWAY SECTOR
365. Some of the key issues and limitations of the railway sector dominated by the public sector
are identified below.
4.3.1 Clarity of Role
366. Government provision of railway transport services to the public has been found lacking in
many countries primarily because of the duplicity of roles in a government trying to be policy maker,
regulator and operator of services at the same time. 41 There are numerous examples of publicly
owned railway operating entities that experience rising costs and falling revenues. The consequent
pressure on public finances often lead to insufficient investment as public funds are used for
revenue support rather than capital expenditure resulting in deterioration in services as well as
increasing burden on government budgets. This may be for a number of reasons:
♦
♦
♦
♦
Lack of clarity in trying to act commercially while seeking social goals. In
many developed countries a distinction is already being drawn between
socially obligated services and commercial services. Similar initiatives are
yet to be taken in many developing countries.
Restrictions on management freedom caused by public service norms and
procedures; for example, staffing levels and pay scales may be determined
across sectors rather than by the market.
Constraints on financial autonomy and investment due to government
budgeting and annual appropriation processes.
Competition for resources from the core government functions relevant to
social welfare or other national priorities.
♦ Where the activity results in a financial surplus, cross subsidization of other
government activities rather than reinvestment in the production of
economic outputs.
367. Behind many of these issues is the reality that governments (particularly in developing
countries) have many policy objectives in transport. These may include economic, financial, social,
environmental, national defense, and others. These objectives often conflict, and their priority may
alter in response to political events. Also it is the governments’ prerogative to pursue any one or
more of these objectives. But these objectives can make it difficult for the government to achieve
financial solvency in the business, thereby affecting its sustainability.
41
Paul Amos, Public and Private Sector Roles in the Supply of Transport Infrastructure and Services; World Bank
Transport Paper, May 2004
TERA INTERNATIONAL GROUP, INC. - 70 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4.3.2 Reduced Technical and Allocative Efficiency
368. Direct government involvement in running rail transportation services may reduce both
technical and allocative efficiency. The closer government is to management, the more that
decisions which affect technical efficiency (for example, staffing or investment decisions) become
influenced by political patronage. In such a situation, managers cannot be held commercially
accountable and incentives for technical efficiency are further weakened. Allocative efficiency may
be adversely affected because prices may be set to reflect political objectives rather than costs.
4.3.3 Financial Inefficiencies and Constraints
369. Soft budget constraints, poor or inadequate cost information, and unfocused management
goals frequently lead to financial inefficiencies. Ineffectiveness in government spending is the result
of institutional failures, the most important of which is that decision makers have little incentive to
improve the efficiency of public service delivery. Despite the growing influence of the public sector
quality improvement movement, most government departments do not conduct rigorous cost
accounting or quality auditing.
370. The lack of accountability and efficiency leads to high public sector output costs.
Government agencies routinely enjoy soft-budget restraints; that is, they often receive additional
budget support. A vivid example of this is the case of Argentina Railways. Prior to reforms,
Argentina Railway’s total annual subsidy from the government equaled to 1 percent of the nation’s
gross domestic product.
371. Under present fiscal conditions most countries are unable to provide steady financing from
government budget sources. It is imperative that new sources of financing are developed. In the
face of continuing public budget constraints and inefficiencies, as well as a desire to involve all
stakeholders that can assist in the development process, it is expected that private participation in
the rail sector will be encouraged to meet the growing demand.
372. In many developing countries, railway monopolies are subject to a step-by-step erosion
because governments can no longer carry the increasing financial burdens from non-profitable,
state-owned activities. Restructuring including a role for the private sector is widely used to improve
the railways' market orientation, performance, and financial condition.
4.3.4 Quality of Service
373. Because government agencies often operate as monopolies, they have little reason to worry
about consumer demand or the quality of service. Without competition and choice, consumers have
few options other than to stop consumption, provide the service themselves, or move to different
jurisdictions.
374. The ongoing process of globalization has greatly expanded the scope for international trade
in goods and services, with consequent unprecedented demand for transport infrastructure and
services for the movement of goods and people both within and across national boundaries.
375. With economic development, customers’ expectations with regard to transportation services
are also rising. Besides, services need to be expanded to provide wider access to remote regions
that would help in the development of the poorest populations. The increasing level of urbanization
is also creating additional transport demand.
4.3.5 Lack of Commercial Management Experience
376. Railways in most developing countries have traditionally been centrally managed, combining
governmental functions (such as administration, management and planning) with production
functions (design, construction, maintenance, and operation). However, more recently and as in
other sectors of the economy, the paradigm shift towards a market economy has highlighted the
need for commercialization so as to be able to perform sustainable operations in a market
environment.
4.3.6 Lack of Competition
377. In thinking about how to improve the quality and cost-effectiveness of infrastructure, it is
important to return to the role that competition plays in the allocation of resources. Whether it is
TERA INTERNATIONAL GROUP, INC. - 71 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

etween two or more private firms or two public entities, competition creates incentives to provide
services at the lowest possible cost and highest possible quality. Work on contestable markets
shows that the near-term threat of entry creates powerful incentives for incumbent monopolists to
be more efficient. Competitive pressures will propel incumbents to innovate and adopt new
technologies. Competition can also reduce the need for regulation, because predatory pricing and
poor service will create opportunities for new firms to enter the market.
378. Deregulation and privatization were anticipated to alleviate such problems, with competition
and private ownership leading to lower costs and fares, higher productivity and service levels,
service innovation and greater levels of investment. Whether such benefits have been delivered is a
question fiercely contested by proponents and critics of deregulation.
379. Privatization is usually the most effective form of separation, with public interests protected
by competition and/or independent regulatory oversight and intervention if necessary to curb
monopolistic practices and preserve access and affordability of services to the poor. Where public
subsidy is necessary to enable the poor to enjoy a basic level of service in line with poverty
reduction policy, it is desirable for this to be explicit, rather than provided as generalized budget
support to the service provider. Such support mechanisms should be targeted, transparent and
preferably output based.
4.4 BENEFITS OF PRIVATE PARTICIPATION IN THE RAILWAY SECTOR
380. Potential benefits of private sector involvement in the provision and/or management of any
public infrastructure are widely acknowledged and sought for. Implementation of sound commercial
and accounting principles of market economy may lead in particular to more efficient design and
construction, cost savings and efficiency gains in project management, maintenance and operation,
and better evaluation and mitigation of all kinds of risks associated with the project. Part of
expected benefits could be achieved under public sector funding as well, especially if
implementation or operation is carried out under private sector management.
4.4.1 Sustainability
381. Barring a few exceptions, most countries today see private sector participation as the most
appropriate way to provide sustained efficient performance and continued financial viability of
railways. Privatization leads railways to fundamental rethinking of their business, which can lead to
substantial improvements in their efficiency and effectiveness. Financial market discipline is
enforced on the railways, which then act as monitoring agents with self-interest at stake.
Privatization is often long-term and, therefore, its positive effects are more permanent, whereas any
achievements under state ownership can be reversed quickly by policy makers.
4.4.2 Mobilizing Financial Resources
382. Private financing in infrastructure is often quoted as a "new" source of financing. There
should be no confusion however between the financial source of investment that could come from
the private sector in the form of debt or (to a lesser extent) equity and the source of revenue that
will eventually pay back the investment and must come from the taxpayer or the beneficiaries of the
railroad. However, private financing for railroad construction or rehabilitation and operation allows
mobilizing the resources and executing the relevant investments more rapidly because of the
incentive the private sector has to maximize the return on the investment. The risk of the public
sector is also diversified with private participation.
4.4.3 Increasing Operational Efficiency
383. The involvement of the private sector might be extended in certain circumstances, finance
provision and/or operation and management of some economically justified and financially viable
public infrastructure which otherwise could not be financed from public budgets, because of severe
and long lasting constraints, limiting the borrowing capacity of the public sector or because of other
priorities for public expenditure.
384. Concessioning of Argentine railways reduced federal subsidies from US$1.3 billion a year to
US$0.3 billion. Japanese Railways (JR) were losing US$5 billion every year before action was
taken to privatize. Following privatization they now realize net gains on the order of US$6 billion a
TERA INTERNATIONAL GROUP, INC. - 72 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

year. All state-owned railways that have been privatized have dramatically improved financial
performance immediately following privatization.
385. Improved performance was achieved through more efficient management and adoption of
modern technology for JR’s core business and through significant improvements in the
management of non-core assets. Reducing the crew from three people to one by electronic end-oftrain
detectors and reliable, continuous communication amongst train drivers and between train
drivers and the central dispatch is one instance of use of modern technology by private operators to
improve efficiency. Another is use of computer-assisted train dispatch systems. These systems
were installed in Argentina immediately after the takeover by the concessionaire. Similar
modernization was also applied in New Zealand and Brazil, and currently is being implemented in
Guatemala and Mexico. Modernization in these cases was aimed at improving efficiency, cutting
costs, and thereby generating positive financial returns.
4.4.4 Freeing Scarce Public Resources for Other Uses
386. Private participation in the financing of projects allows the spreading of the project cost for
the public over a longer period of time, commensurate with the benefits. This helps to free up public
funding for investments in other priority sectors such as expansion of social services for weaker
sections of the society.
387. The funds provided by private investors or raised from the financial market, could either
temporarily substitute or supplement budgetary financing. In the former case, the private capital will
be repaid (with appropriate return) and the debt will be serviced entirely from the public budget. In
the latter, the source of these payments is partially or exclusively the revenue generated by a given
infrastructure. Rights and undertakings of the parties involved have to be regulated by appropriate
agreements.
388. In circumstances in which private funding of infrastructure projects is sought, this is
competing with financing opportunities offered by other sectors of the economy at the same time.
389. On public financed projects, an initial investment is made by the public sector and recovered
by the community in form of the project benefits. On private financed projects the cost for the
community is incurred through payments to the private sector over the entire project operation
phase, either through regular payments from the government or through collection of tariff revenues
from users.
390. PPP involving private financing can also ease fiscal problems by moving infrastructure
projects off-budget during the years of construction. The potential for raising funds on both
domestic and international capital markets can be enhanced by implementing policy reforms that
create clear rules allowing investors to form reasonably firm expectations about the cash flow
generated from infrastructure operations.
4.4.5 Enhancing Capacity and Efficiency of Project Implementation
391. Supply can be made more efficient by involving the private sector in the design and
construction of infrastructure facilities even when they are owned and managed by the public sector.
Private sector skills can then be used to put the initial project together, assemble the necessary
partners to complete the scheme and manage procurement and operations. PPP is, therefore,
particularly appropriate when skills for project implementation under market conditions are scarce in
the public sector. The private sector usually has more flexible procurement rules than the public
sector, and this can speed up implementation.
392. By giving more flexibility in the mobilization of resources both in nature and planning,
contracting allows the delivery of more responsive services. In short, the advantages of private
involvement are an increase in efficiency in the provision of services, avoidance of political
interference in operations, and circumventing of public sector budget constraints.
393. Typical reasons for a greater efficiency of the private firms over public agencies are to be
found in:
TERA INTERNATIONAL GROUP, INC. - 73 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

♦
♦
Flexibility. The private sector has greater flexibility in adjusting its
resources (personnel, equipment, and materials) to a constantly changing
situation.
Comprehensive approach. When entrusted with a long-term contract and
a wider scope of work, private firms can balance expenditures over the
project life and make effective trade-offs between investment, maintenance
and operation costs subject to environmental, social and economic
considerations.
♦ Access to technology. Large firms are massively investing in research
and development and constantly improving the quality and efficiency of
construction techniques, processes and equipment.
394. It is not always possible to achieve all of the government’s objectives through PSP. A
feasibility study often helps to determine the extent to which the desired objectives can be achieved.
It is generally possible, however, for the government or the railway to arrive at an optimal design for
PSP through careful review of the possible financial and management options, thereby maximizing
progress towards reaching the desired objectives. Establishing a regulatory authority with welldefined
statutory powers will go a long way towards ensuring that safety, environmental, and other
public interest aspects are monitored adequately.
4.5 MAIN CONCERNS OF GOVERNMENTS
395. Experience has shown that it is advisable to assess government concerns about PSP and to
incorporate appropriate measures to address them early in the process. It is difficult, if not
impossible, to address such concerns after the conclusion of a PPP agreement. Following are
some of the concerns and possible approaches for the avoidance of subsequent problems:
4.5.1 Loss of Control over a Strategic Institution
396. In most countries, with the development of road transport, the strategic importance of
railways has diminished considerably. Specific conditions in the agreements that ensure priority to
designated traffic in periods of emergency (e.g., food grains during a famine) and government
permission for actions perceived to be against the national interest can address such concerns.
Joint venture partnerships, in which the government has a minority share and one or more seats on
the board of directors is another possible remedy.
4.5.2 Service Deterioration or Discontinuance
397. This problem is more likely to occur in services that are not remunerative (e.g., passenger
services). Provisions that specify the minimum services that will be provided and penalties for
failure to do so must be included in the contract with the private operator. For example, for
passenger trains, conditions for minimum service frequency, minimum on-time arrival and
maximum cancellation levels allowable might be specified. Payments tp the private operator must
be also specified based on actual cost of service provision.
4.5.3 Deterioration in the Quality of Infrastructure
398. The government is sometimes apprehensive that the private company might neglect the
rehabilitation of infrastructure. A possible measure for avoiding such a possibility is the
establishment of a dedicated depreciation fund to which the company contributes an agreed
amount annually for the exclusive purpose of rehabilitation and overhaul of infrastructure. Any
balance in the fund at the end of the contract period would revert back to the owner of the railway.
A similar fund could also be established for maintenance of infrastructure. In addition, the
agreement would stipulate the standards to which infrastructure is to be maintained throughout the
contract period and the required condition of infrastructure at the time of transfer back to the
government. Periodic inspection by an independent authority using an agreed method of evaluation
of condition (e.g., track recording car, defect detection methods, etc) can provide adequate
assurance that the quality of infrastructure will be maintained. Penalties for failure to adequately
maintain infrastructure should also be specified.
TERA INTERNATIONAL GROUP, INC. - 74 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4.5.4 High Cost of Transport and Monopoly Abuse
399. This concern applies where competition by another mode or route is absent. To guard
against monopoly abuse by the private company, the contract should permit access to another
operator, at predetermined fees for track use. Routes or commodities for which market competition
is inadequate may be identified and periodic review undertaken to check excess profits. It should be
emphasized, however, that incentives must be in place to reward improved efficiency and
performance.
4.5.5 Subsidy for Public Service Obligations (PSO)
400. Two approaches are available when a government wants the private company to provide
unremunerative services for social or political reasons:
♦ The government may want the private company to cross-subsidize
unprofitable services by earnings generated from profitable operations. This
method lacks transparency and is generally not desirable, but may be
considered when appropriate safeguards are in place.
♦ The government can enter into a separate agreement for the provision of
services suffering losses and PSO payments to the private company are
clearly identified. The contract is normally quite clear on the subsidy
payable by the government for public services at prices below cost and the
private company is provided a means for seeking redress should the
government fail to abide by the terms of the agreement. The World Bank’s
partial-risk guarantee facility (MIGA), for example, might be invoked in the
event that the government fails to pay the contracted subsidy.
4.5.6 Safety and Liability for Accidents
401. A regulatory authority or contractual obligations to monitor safety and environmental aspects
must be in place before the private company proceeds to operations. The private operator’s liability
for accidents must be clearly defined in the agreement and can be enforced through normal legal
processes. Enforcement of agreed standards for safety (and maintenance) can be ensured through
random checks by a regulatory authority and annual inspection by an independent expert. If
operations begin under a regime of regulation by contract, then provisions for an orderly transition
to an external regulatory body must be in place.
4.5.7 Traffic Growth beyond Projections and Windfall Profits
402. It is difficult, if not impossible, to project with any degree of accuracy the traffic volume that
will be carried over a comparatively long period. The growth of traffic will depend essentially on
economic development of the country and the region (market growth) and the competitiveness,
quality of service, and capacity offered by the railway (market share). The guaranteed fee that
would be payable irrespective of the traffic level actually carried could be fixed in relation to the
anticipated traffic levels on the basis of managerial and operational improvements expected as a
result of PSP. A provision for the payment of an additional fee, linked to traffic levels above the
anticipated level is a satisfactory mechanism to ensure that the government receives part of the
financial benefits from increased traffic on the railway.
4.5.8 Ability to Handle Staff Redundancy
403. Need for downsizing of staff is not unique to PSP and is dictated by the objective of attaining
viability. It is useful to downsize staff before PSP since the responsibility to address social and
equity issues related to layoffs should not be delegated to the private sector. The terms for
redundancy payments for additional staff reductions by the private company, in case it decides to
reduce staff even further, should be specified in the agreement to ensure that redundancy
payments are comparable to those paid earlier by the government.
4.5.9 Low Priority to Transport Business
404. A problem of low business priority given by a private company to transport services can
arise when the agreement permits the company to engage in activities other than rail transport on
TERA INTERNATIONAL GROUP, INC. - 75 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

leased land and facilities. For example, the company might engage in real estate development.
Should the activity become more profitable than rail transport, a problem of inattention to transport
services and market development could arise. Many concessions limit activities other than rail
transport to encourage the company to focus on transport business. Minimum rail transport services
that the company must provide should be specified in the agreement. Given its considerable
potential value, real estate development should be treated by the government as an asset to be
traded for the transport service required.
405. Alternatively, agreements could provide a vehicle for segregating management divisions
and providing incentives for optimal efficiency in each division, while instituting acceptable levels of
transparency in cross subsidy amongst the operations. Such arrangements could facilitate
compliance with the PSO.
4.5.10 Insolvency/Bankruptcy of the Private Company
406. This concern is addressed by a careful screening of prospective bidders so that only those
with good performance records, satisfactory financial resources, and credible business plans are
allowed to bid. A PPP could also help if the agreement has a provision for the government to take
over the management of the railway if the private partner is deemed to have not met specified
criteria. A mechanism for the timely, unbiased resolution of disputes is also needed.
4.5.11 Failure of the Company to Return Assets in Agreed Condition
407. This outcome is related to service agreements or concessions. An appropriate remedy
should be included in the agreement, along with a mechanism for quick resolution of disputes. The
usual legal remedies will be available to the government in case the private company fails to abide
by the terms of the agreement to return the assets in satisfactory condition at the termination of the
agreement. If more assurance that assets will be returned in good condition is required, the
agreement can stipulate that the company set up a facilities maintenance and replacement account.
If money placed in the account is used for the specified purposes, then the assets are likely to be
kept in satisfactory condition. If, however, the company fails to make full use of the funds and asset
condition deteriorates, then the government receives the unexpended funds in the account at the
termination date to pay for rehabilitation.
4.6 SOME CONDITIONS FOR EFFECTIVE PUBLIC-PRIVATE COOPERATION
4.6.1 Complexity of PPPs
408. Although public-private partnerships offer governments in developing countries important
means of expanding services and infrastructure and the private sector commercial opportunities to
expand their businesses, PPPs are complex arrangements and can create potential problems for
both the public and the private sectors if they are not properly designed and administered.
4.6.2 Labor Issues
409. Privatization in any form displaces public workers, thereby generating political opposition
among public officials, labor unions, and public employee associations. For example, following the
concessioning of Argentine Railways, employment declined from 94,800 in 1989 to approximately
17,000 in 1997. In the 20 years to May 1995 the level of employment in the national railway
company (RFFSA) in Brazil fell from 110,000 to 42,000, yet labor productivity remained low when
compared with North American standards and those of other Latin American concessioned railways.
Consequently, the Government decided on the concessioning of six exclusive regional systems.
The target employment levels that were developed were a 40 per cent reduction on average from
the levels immediately preceding concessioning. Chilean railway employment fell by 75 per cent
between 1973 and 1990. It was more than halved again in 1990-95 as a result of the privatization of
most of the system. In 1994, the Governments of Côte d'Ivoire and Burkina Faso jointly awarded a
15-year concession to SITARAIL to operate the Abidjan-Ouagadougou railway. During negotiations
on the terms of the concession it was agreed that SITARAIL would engage 1,815 of the 3,470
employees, choosing those it wished to hire.
410. The list of staff reductions can go on and on. It is indeed important that the PPP modality is
designed and implemented such that the labor issues are resolved with a human face, providing the
TERA INTERNATIONAL GROUP, INC. - 76 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

est possible terms for redundant employees. The government must show a genuine interest and
be proactive in resolving surplus labor issues.
4.6.3 Proper Design and Supervision
411. If PPPs are not well designed and supervised, their services can become more expensive
than those provided by government. Poorly designed and inadequately analyzed projects have
failed in both rich and poor countries. Corruption can undermine public trust in PPP if the
contracting process is not transparent and carefully supervised.
4.6.4 Competition
412. Lack of sufficient competition can turn PPP into private monopolies that operate no more
efficiently than the state owned enterprises. Overly restricting concessions or creating too many can
deprive PPP of economies of scale. If government regulation is too stringent it can lead to
deficiencies in service provision and if it is too lax it may not hold private service providers
sufficiently accountable.
4.6.5 Cost Comparisons
413. The cost of contract management under PPP arrangements can be substantial. In all cases,
governments must compare carefully the costs of contracting out in its various forms with the costs
of providing services directly. The involvement of the private sector in providing services that were
formerly free or that were subsidized by the government can increase their price and place poor
segments of the population at a significant disadvantage. Governments of jurisdictions with large
numbers of poor people must make adequate provision to serve those who may not be able to
afford them under private operation.
4.6.6 Legal and Regulatory Framework
414. Experience suggests that if PPP are to succeed, governments must: (i) enact adequate
legal reforms to allow the private sector to operate efficiently and effectively; (ii) develop and
enforce regulations that are clear and transparent to private investors; (iii) remove unnecessary
restrictions on the ability of private enterprises to compete in the market; (iv) allow for liquidation or
dissolution of existing state enterprises that cannot be commercialized or privatized; (v) expand
opportunities for local private enterprises to develop management capabilities; (vi) create incentives
and assurances to protect current state employees after the private operator takes over service
provision; and (vii) redefine the role of government from producing and delivering services directly
to facilitating and regulating private sector service provision.
415. From its extensive experience with PPP, the United Nations Development Programme
(UNDP) concludes that strong public sector leadership and political commitment are essential to the
success of PPP projects. PPP projects work best and are sustainable if they are mutually beneficial
to both public and private sector partners and if each can overcome adversarial posturing to build
mutual trust. It is important to develop a win-win situation for both the public and private partners.
4.6.7 Procurement Issues
416. The UNDP points out that the tendering, procurement and contracting procedures must be
financially and operationally sound, open, transparent, and fair. And that any departure from the
sealed-bid tender and contracting method will open the government to accusations of partiality or
corruption.
417. In addition, the procurement process should (i) state the desired end goal or output targets
of the agreement and minimize overly specific requirements, so that the private sector can innovate
and manage flexibly; (ii) ensure that the potential private sector partners can be adequately
compensated for or retain their intellectual property; (iii) include monitoring provisions of
performance measures by a third party or autonomous government agency; and (iv) make
provisions for renegotiating the terms of the agreement over time.
4.6.8 Developing Mutual Trust
418. Ultimately, the success of PPP depends not only on developing mutual trust between
government officials and private sector executives, but on building and maintaining public
TERA INTERNATIONAL GROUP, INC. - 77 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

confidence in the integrity of the partnership. Trust and confidence can be undermined when the
goals of the partners are ambiguous or when their objectives are unrealistic or in conflict.
Incompatible organizational systems and management practices can also weaken PPP, as can
reluctance on the part of governments or the public to allow private companies to obtain a fair
return on investment.
4.7 PLANNING AND PREPARATION FOR PPP IN THE RAILWAY SECTOR
419. PPP offers important means of expanding railway services and infrastructure and the private
sector commercial opportunities to expand their businesses. Unless the private partners see an
assured rate of return on investment commensurate with the risk level, which is more favorable
compared with other opportunities for investment, they will not be prepared to join in partnership. It
is, therefore, important that projects proposed for PPP are properly screened to ensure that the
project objectives and the expectations of the private partners are all satisfactorily achieved.
4.7.1 Laying the Ground Work for PPP
4.7.1.1 Performing a Diagnosis
420. Experience with PPP in the railway sector has shown that no ready-made solution exists
and that the strict duplication of a project between countries has little chance of success. A PPP
project can only produce efficiency gains and added value to the railway sector if it is designed in
accordance with the constraints and bottlenecks faced by the railway system, the country
framework and the capacity of the private sector. In other words, a PPP project should be carefully
tailored to its environment.
421. This section introduces the steps of the diagnosis required, on the basis of which the
railroad policy can be attuned to introduce PPP in a sound and efficient manner. The diagnosis
would allow concluding with the options where PPP can have an advantage and the constraints that
need to be removed to expand and implement those options.
4.7.1.2 Step 1: Conduct Strengths, Weaknesses, Opportunities, and Threats (SWOT)
Analysis
422. Performance of the transport sector is shaped, more particularly by cost structure (fixed,
variable and sunk costs), institutional arrangements (e.g., assignment of responsibilities, decision
flow), market structure (e.g., competition, barriers to entry), geographical features (land value and
land use), technology (know-how, economies of scale), and durability (of both infrastructure and
services). A SWOT analysis should be performed as a first step to clearly identify the strengths and
weaknesses of the country’s railway sector, and threats to its competitiveness and sustainability.
Opportunities to improve its competitiveness and continued existence must also be delineated so
that resources needed to support improvements in operation by the private sector are identified.
4.7.1.3 Step 2: Assess Capacity of the Private Sector
423. For private participation there has to be a private sector that is well developed and has the
capacity to take on the responsibilities of infrastructure development in partnership with the public
sector. The private sector can only bring added value to the railway system if it is sufficiently
developed and entrusted with services in conformance with its competence.
424. Contracting of local or international firms or a combination of both is to be considered. Local
contractors provide superior knowledge of the country and regional environment while international
firms can bring added value by a better capacity to handle larger projects, experience in new forms
of contractual arrangements, new technologies and stability for long term relationship. A suitable
and attractive environment will be conducive to attracting qualified international firms.
425. The diagnosis on the private sector should include the local contracting industry. If the local
industry does not have sufficient capacity to commit itself in a PPP, measures may be necessary to
assist its stakeholders to develop this capacity.
426. The capacity of private actors to become involved in the rail sector investment for
construction, rehabilitation, maintenance, operation and management must be associated with the
type of activities for which they are required. The first assessment to be made concerns the
TERA INTERNATIONAL GROUP, INC. - 78 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

complexity of the works (or activities) to be carried out. Once relevant categories have been worked
out, the availability of contractors with appropriate capacities in each of these categories can be
investigated.
4.7.1.4 Step 3: Assess Country Framework and Attractiveness for the Private Sector 42
427. The private sector cannot be forced to join a PPP. They will enter into partnership with the
public entities only if they consider that the project has a good chance of success and that their
interests will be preserved throughout their participation.
428. Criteria used by private firms to evaluate the country framework as a sound environment to
perform their services under a PPP scheme highly depend on the characteristics of the project and
on the firm's individual perception and requirements. Some criteria however are general enough to
apply to any private firm entering into partnership with the public sector in a given country.
4.7.1.5 Step 4: Delineate Political Room for Maneuver/Scope for Decision Making
429. If conducted in an efficient manner, the previous steps of the diagnosis should have allowed
the identification of areas with most potential for improvement. The decision-maker has to make
choices: there is scope for decision-making and feedback is necessary to confront the outcome of
the previous investigations with the initial framework of the railway system. Some of the issues to
be flagged include the following: (i) Political mandates are typically far shorter than the duration
required to assess the outcome of institutional reform and the benefits for long term development
programs; (ii) Introduction or restructuring of tariffs is sensitive. If not well designed and justified, it
could result in loss of political support, complains or even legal challenges; (iii) PPP policy usually
calls for restructuring of the existing railway that invariably implies reduction of the number of public
employees and/or transfer of some to the private sector. If not carefully planned and conducted in
conjunction with social measures, these programs can lead to opposition of railroad employees.
4.7.2 Removing Constraints with Long-Term Reform
430. Setting up a PPP policy requires redefining the role of government in the transport sector.
The changing focus in transport policy reduces the government's functions as supplier, but
increases its functions as regulator - the enabler of competition. This means that governments need
to create the proper institutional framework for competition, set economically efficient charges for
the use of publicly provided infrastructure, appraise the allocation of scarce public resources
carefully and increase community participation in decision making.
431. Constraints limiting private sector involvement can only be removed through long-term and
in-depth reforms. As an example, a contractual package comprising a long-term rehabilitation and
maintenance program on a large part of the rail network would not work in countries with only a few
private civil works companies characterized by low skill levels and limited financial liability. Long
term reform aiming at developing and structuring the railway construction industry would then be
required.
432. PPP options involving private financing are usually the most complex and the most
demanding of an adequate country framework. Before deciding on a specific option, it must be
borne in mind that a number of factors make transport infrastructure less amenable to private
financing than other types of infrastructure. Some of these are:
♦
♦
♦
PPP may not be politically acceptable where there is a perception of large,
uncompensated income transfers.
Where there are substantial externalities that cannot easily be addressed
by market-based instruments, there is greater likelihood of government
intervention.
When traffic flows are low, profitability from user charges is also likely to be
low.
42 This step is more applicable for foreign investment in a PPP transaction. However, even for indigenous firms, it is
important to assess the country framework to decide on whether to invest in their country or elsewhere.
TERA INTERNATIONAL GROUP, INC. - 79 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

♦ Some transport infrastructure is so intertwined with spatial planning that
governments are not willing to leave it entirely to the private sector.
4.7.3 Screening of Railway Sector Proposals for PPP
433. Three levels of screening are suggested to determine if a project may be suitable for PPP
with public sharing of cost and risk. 43
♦
♦
The first is in regard to basic objectives and these are necessary conditions
for proceeding. Projects proposed for PPP should meet the same criteria as
fully public ones. They should be economically justified; should improve
transport access and affordability to the poor; and should meet
environmental and other safeguards. Projects with wholly unrealistic aims,
involving the private sector assuming high risks for low rewards may defeat
the purpose of PPP. A PPP can never turn a poor investment into a good
one Private involvement should be properly structured to deliver risk
transfer and efficiency benefits.
The second level screening is a more practical one: if the proposed project
fails to meet most of the “practicality” screening factors, the chances of
successful implementation are low and of wasted effort high. For most
major transport projects PPP financing requires a sophisticated legal
enabling and enforcement environment. It also needs skilled legal and
financial advisors and, therefore, often involves high transaction costs.
Proponent government agencies must have the patience and perseverance
to drive the process over what might be several years’ preparation, and
need an ongoing capability to ensure the agreement is properly monitored.
A PPP also requires a willing private partner. It is prudent to do some early
market tests to establish whether there will be significant private sector
interest by credible participants. Up-front market fears of a tainted selection
process, or of weak regulation or of an inability to enforce concession
agreements, are danger signals which suggest that the institutional
environment needs strengthening before a PPP can be successful.
♦ The third level entails detailed financial due diligence by proponent
agencies when PPP proposals can be pre-qualified at the first two levels of
screening. PPP proposals should be expected to provide equivalent or
better value for money than a public sector project approach. The
incremental net benefits that may be obtained by the PPP should be
assessed against an appropriate distribution of risks. If too little risk is
transferred to the private sector, the likely costs to government will be
correspondingly higher. At the other extreme, if inappropriate risks are
transferred that the private sector cannot realistically manage or well
quantify, the financing costs will escalate, again increasing the costs relative
to the all public comparator. Value for money may be finally assessed only
when priced proposals are actually available.
434. In general, successful PPP or outsourcing requires the following:
♦ top management involvement and commitment to reengineering,
♦ focus on staff concerns and issues,
♦ specific service requirements in terms of outputs or outcomes,
♦ monitoring performance and fostering cooperative relationships,
♦ ensuring valid comparisons between in-house and outside proposals,
♦ fostering competitive markets, and
43 Ibid.,
TERA INTERNATIONAL GROUP, INC. - 80 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

♦ developing and maintaining the necessary skills for contracting out.
4.7.4 Key Considerations
4.7.4.1 Key Considerations for the Design of Public-Private Partnerships
435. Because PPP is always complex, experience is an important success factor. Most officials
who have been involved in the development of these types of project would recommend a step-bystep
approach, starting with less sophisticated options and progressing to more comprehensive
PPP schemes.
4.7.4.2 Tailoring Appropriate PPP
436. Reforms of the public sector towards a more commercial management of the existing
railway network or railway lines and the adjustment of the legal, economic and financial framework
gradually result in an environment suitable for PPP projects. Policy makers should design a
strategy that will identify which options will best respond to the policy objectives and the appropriate
timing to implement them.
4.7.4.3 No Two Projects are Similar
437. The differences in project fundamentals, country constraints and government objectives
prevent policy makers from opening a catalogue and choosing a ready-made solution to identify
which function could be entrusted to the private sector and which types of solution could be
implemented.
438. In fact, no two projects are identical and a solution, even with proven efficiency, cannot be
replicated mechanically. For any given environment, there is no single solution but a range of
possibilities from among which the decision-maker has to choose. Each PPP solution is too
complex and too unique to be characterized in one standard category (such as BOT, BTO, and
many others). To define clear-cut categories would always result in projects falling between two
categories as their characteristics apply to several categories. In other words, there are a large
number of solutions that may be possible rather than being described by specific categories.
4.7.5 Learning from Experience
439. Success stories of PPP may provide useful background for designing a PPP with the best
chance of success. It may be reiterated that a PPP can only be successful if the public authorities
play their role correctly. Inefficient organization in the management of the partnership can result in
substantial costs for the government, developers, consumers and private partners.
440. Besides the many examples of successful PPPs, some cases where difficulties have been
encountered should be kept in mind, as they illustrate the dangers to be avoided. A lot of
responsibility devolves on the public authorities, because even in cases where the responsibility for
any difficulty encountered is that of the operator, the public authorities will be held responsible by
the public who will criticize them for incompetence in conducting the PPP process and for lacking
vigilance in their choice of an operator or during contract negotiations.
4.7.6 Appraisal of PPP Projects
441. The factors suggested for due diligence of railway sector proposals for PPP are summarized
in Table 4.1. Management in both the public and private sectors is responsible for strategic
investment decision-making. It is vital that the project decision process is based upon rigorous
methodology for both the proposal and appraisal stages. The proper consideration of inputs to the
decision process is essential for a well reasoned and knowledgeable decision framework, in
particular, astute estimation of project risks, benefits and costs.
442. Similar to the requirements under public sector projects, projects with PPP must also satisfy
the rigorous requirements of project appraisal. These include: (i) Optimizing the economic impact –
it is imperative that the PPP projects are economically viable and contribute to the development of
the region and country concerned; (ii) the impact of the investment on the poor; (iii) Protecting the
environment: and preserving countries' natural assets for future generations; (iv) Ensuring public
participation: to ensure that the communities directly concerned by the project are properly informed
and participate in the decision-making process; (v) Managing land use and resettlement: it is
TERA INTERNATIONAL GROUP, INC. - 81 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

usually necessary to acquire large areas of land to build railways. Property transfer and
resettlement should be properly handled and managed by the public authorities; (vi) Ensuring the
application of railway safety considerations by the private sector. These issues are discussed in the
paragraphs below.
Table 4.1: Due Diligence Factors for PPP in Railway Infrastructure Proposals
Major Concerns
Due Diligence Factors
1. Project
Objectives
• Project meets overall tests of economic value
• Government has clearly articulated aims for deploying private
sector skills and capital
• Planned risk allocation realistically reflects ability to bear risk
• Access and affordability of services to the poor maintained or
increased
• Project meets the national (and multilateral financing agency)
requirements for environmental and other safeguards
2. Practicality • Adequate enabling legal and compliance environment
• Government willing to cede appropriate commercial controls
to private sector to achieve project objectives
• Credibility of cost recovery proposals through user fees/
budget contributions
• Strong administrative capacity by proponent government
agencies
• Government willingness to accept and recruit experienced
advisors as necessary
• Record of successful PPPs in the country in other sectors
• Record of successful PPPs in the sector in other countries
• Expectation of continuing commitment through changes of
government
• Record of fair and transparent procurement
• Existence of credible plans for regulatory arrangements
which will be adequate to protect the parties in their delivery
of proposed objectives
• Strong early private sector interest including likelihood of
financing at acceptable risk premiums
3. Value for
Money
• Net benefit compared to public sector approach
• Proposals are financially sustainable taking account of
sensitivity to assumptions (and possibility of renegotiation
where sensitivity to aggressive market or cost assumptions is
high)
• Impact on government capital expenditure and long-term
operating expenditure is realistic and sustainable, allowing for
contingent liabilities.
4.7.6.1 Economic Impacts of PPP Projects
443. In a context of widespread scarcity of public resources, it is essential to direct existing
resources towards projects with optimum impact in terms of economic development, improvement
of social condition and poverty reduction. Efficient tools now exist for evaluating this impact and
they should be used for any project to be developed in the railway sector.
444. A sustainable, well-functioning rail transport system is a crucial determinant of
competitiveness in domestic and foreign markets. Economic and financial sustainability requires
that resources be used efficiently and that assets be maintained properly. Social sustainability
requires that the benefits of improved transport be distributed and shared by various sections of the
community.
TERA INTERNATIONAL GROUP, INC. - 82 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

445. Economic and financial considerations have a pivotal role to play. Rigorous economic
appraisal of investment in infrastructure, appropriate price incentives for its efficient use, and
adequate financial and fiscal provisions for its maintenance remain crucial. The main purpose of
project economic analysis is to help design and select projects that contribute to the welfare of a
country. 44
446. Private participation in infrastructure finance is, of course, of great current political interest.
Many governments are still grossly over-optimistic about the extent to which they can obtain the
infrastructure development that they would like off-budget simply by opening the sector to
unsolicited private proposals. Initial experience has demonstrated the enormous difficulty of
internalizing a sufficiently large proportion of the benefits of economically viable railway
infrastructure facilities in order to make purely private developments commercially viable. Of course
that does not make PSP undesirable. But it does raise a new set of questions about the
identification and evaluation of the public sector contribution to PPP schemes, concentrating
particularly on the need to evaluate the external or off-route benefits which cannot be appropriated
by the private project investor, and relating the acceptable amount of public contribution to the
magnitude of those benefits. 45
4.7.6.2 Economic and Financial Evaluation
447. Economic Analysis. The economic analysis aims at identifying and comparing economic
and social benefits accruing to the economy as a whole, setting aside for example monetary
transfers between economic agents. The main purpose of project economic analysis is to help
design and select projects that contribute to the welfare of a country".
448. For economic analysis, various methods have been used to formulate the relation between
costs and benefits, including classical cost/benefit ratios, incremental cost/benefit ratios, net
present value and so on. Current practice among international financial institutions when making
decisions on loans is to analyze costs and benefits in terms of the economic internal rate of return
(EIRR) and Net Present Value (NPV).
449. The internal rate of return is a discount rate calculated so as to equalize the net present
value of cost with that of benefit, the standard criterion followed by the World Bank and ADB for
defining the level of EIRR that makes any given project viable. In practice, the minimum viable level
of EIRR will depend on the circumstances of each country at each chronological stage. In
developing countries generally, projects with an EIRR estimated in excess of 12 percent tend to
carry a high priority for realization. In the criteria followed by the World Bank and ADB, a positive
net present value would normally be required on the basis of a nationally accepted discount rate
(usually 12 percent is adopted), and an internal rate of return of 12 percent or more would normally
be required. The latter number tends to be focused on satisfying the “no white elephants” objective.
450. Financial Analysis. This consists of comparing revenue and expense streams (investment,
maintenance and operation costs) recorded by the concerned economic agents in each project
alternative (if relevant) and in working out the corresponding financial return ratios. Economic and
financial analyses are used to verify the economic and financial sustainability of the projects likely
to be implemented.
451. Traffic Forecasting. Traffic forecasting is a necessary step in any project appraisal,
whatever the implementation or institutional scheme. But some issues are more specific to PPPs
and will be developed below.
452. In an era of expanding PPP in the delivery of transport infrastructure and services the
importance of traffic forecasting in preparing and monitoring these partnerships needs to be fully
appreciated. Deficiencies in traffic forecasting often gives an opportunity to the private operators of
transport services to complain, soon after taking over a business, about over or underestimations of
traffic based on the initial information provided by governments. It tends to result in an excuse for
the private operators to try to renegotiate the contract to improve its terms. This has been
experienced in most concessions contracts awarded in Latin American countries in the 1990s. It is
44 Handbook on Economic Analysis of Investment Operations World Bank
45 Ken Gwilliam, Economic Adviser, Transport, Transport Project Appraisal at the World Bank; The World Bank.
TERA INTERNATIONAL GROUP, INC. - 83 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

quite common for both regulators and concessionaires or bidders to devote much more money to
the construction cost studies than to the traffic analysis.
453. Traffic volume forecasts are the most fundamental data in the analysis of railway projects
from the planning stage onward. They will influence many fundamental decisions on project
feasibility, design and management. The lack of focus on good traffic forecasting in the context of
the increased role of private operators and investors in the transport sector may be somewhat
counter-intuitive. Transport planners have a long tradition of concern for demand. The analysis of
demand has been at the core of the assessment of national or sectoral policy options, including the
introduction of new transport modes. But these concerns have generally been addressed through
more "macro" oriented modeling.
454. In the context of privatization, it is not easy to achieve convergence on the views of what a
good traffic forecast should be because both private sector and government have some interest in
“playing” strategically with the traffic forecast. Once the government has decided to rely on private
operators to provide transport services and infrastructures, mistakes in traffic forecasting will lead to
tougher negotiation with the private operators and increase the incentive operators have in
contesting regulatory decisions on the basis of the doubtful value of the supporting analysis. Even if
management instruments exist that allow the correction of forecasting mistakes, these corrections
are generally not challenge-free.
455. In most developing countries there is no or little tradition of payment of fair prices of tariffs
that reflect costs. In the context of privatization one of the changes often made by the private
operators is the introduction of cost-reflecting prices and a switch from taxpayers to users for the
responsibility of paying for the service. The introduction of efficient cost-based pricing policies can
result in significant trend changes. Since many planners rely on trends to forecast demand, this can
lead to significant over-estimation of demand. These aspects need to be fully considered.
456. The importance of serious cost-benefit analysis in projects with detailed analysis of
willingness to pay under various environments is emphasized. The problem with the pricing solution
is a political one in the context of privatization. There are many episodes in which tariff increases
have led to riots and regulators or politicians are thus reluctant to undertake pricing changes that
are too politically sensitive
4.7.6.3 Distributional Analysis
457. Distributional analysis is an interesting component of economic analysis, in order to
determine the respective share in the distribution of costs and benefits attributed to each of the
agents involved. By and large, transportation projects are generally assessed in terms of reducing
transport costs, improving efficiency, and promoting economic growth. The contribution of the
transport sector to poverty alleviation is seen, in general, as indirect and stemming from broadly
based economic development. Yet, most direct poverty-targeted interventions (schools, health
clinics, nutrition programs, and social services, to name a few) heavily depend on transport as a
vital and complementary input for their effective delivery.
458. With focus on poverty alleviation, the distributional impacts of projects are coming under
increasing scrutiny. There have been some attempts to devise more systematic analyses of the
distributional impacts of urban projects. For example, in an urban rail rehabilitation project in
Fortaleza, Brazil, which included some restructuring of bus routes to act as feeders to the rail
system and the introduction of multi-modal transferable ticketing arrangements, the impact of the
project on travel times and trip costs has been disaggregated very finely by zones with different
average income levels. As the zones are small and relatively homogeneous this allows the
distributional effects of projects to be much more clearly observed.
4.7.6.4 Impacts of PPP on the Poor
459. Following the terminology of the World Development Report 2000, the effects of transport
on the personal welfare of the poor can be examined in terms of three fundamental aspects:
economic opportunity, security, and empowerment:
TERA INTERNATIONAL GROUP, INC. - 84 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

♦
♦
Economic opportunity: adequate physical access to jobs, markets, schools,
and health clinics is an important determinant of an individual's ability to
earn money, and keep a lengthy, satisfying and productive life.
Security: seasonal transport service interruptions, common in many poor
rural areas regularly affected by severe weather conditions (such as
monsoon), often isolate a large population for long periods. These
interruptions affect the living standards of the affected population and their
vulnerability to factors such as famine, violence, etc. For instance, the
impact of famine can be substantially reduced if a country can move food
easily from areas with surplus to those with a deficit.
♦ Empowerment: geographic isolation can prevent poor people from
participating in social and political processes, or enjoying a fair treatment of
grievances or legal due processes.
460. The over-reaching concern with transport to address the needs of poor should be
establishing the conditions to support the lowest-cost/most-affordable transport services that will
provide adequate accessibility to an area. The private sector has a major role to play in meeting this
objective.
461. Transport problems and the needs of the poor are essentially about accessibility, a central
concept used in relating transport to the basic needs and well-being of the poor. Accessibility
typically focuses on the transport cost, availability and service reliability to travel for work or social
activities.
462. Indirect effects of infrastructure management schemes may help or harm different groups,
including the poor. The overarching objective leads to the need to consider the following key
dimensions/strategies:
♦
Poverty focus. In order to achieve a noticeable impact the requirements for
the selection of the investment likely will require being part of a network
connecting the poor areas to markets and other economic centers or social
services. In addition, it is important to evaluate the effects of the
arrangements for the interventions on local employment, as this is often a
mechanism for the reduction of poverty.
♦ Participatory emphasis. To ensure responsiveness to community needs and
the consideration of local solutions, a participatory approach must be
usually applied to the selection and design of the project's investments.
NGOs can also be involved in these activities and participate in project
monitoring and evaluation. Other stakeholders involved are government
agencies involved in development activities in the poor areas.
463. Beneficiary participation and a clear perception of the social impact of a project invigorate
the sustainability of PPP interventions by incorporating local priorities in project design.
Furthermore, the pro-poor design of those interventions, with low-cost investments and local microenterprise
activities, can help communities take ownership of the project and support the various
activities related to it.
464. It is increasingly recognized that people are the center of development, and that
development is for all people. It is important that the relevant aspects of social dimensions be
examined under the project to determine whether:
♦
♦
♦
economic growth is being achieved in the country with adequate attention
to equitable distribution of benefits;
enhanced opportunities are available to women and other targeted groups,
if any, including equitable access to project and program benefits; and
poverty-related issues are being addressed.
TERA INTERNATIONAL GROUP, INC. - 85 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

465. Based on the guidelines of the ADB for incorporation of social dimensions in railway projects,
a check list is presented in Appendix 17. 46
4.7.6.5 Environmental Impact of PPP Projects
466. Protecting the environment and taking sustainable development into account increasingly
feature among the main concerns of public authorities, particularly when dealing with the
development and management of transport infrastructure facilities.
467. In the case of PPP-type relationships, there are two reasons why the public authorities must
clarify the rules to be respected in this matter:
♦
The private operator will bear part of the environmental responsibility, which
is variable according to the specific characteristics of the PPP. It must
therefore know precisely what this responsibility involves.
♦ Even in the case of a PPP, part of the responsibility remains within the
public sector, which is mainly in charge of the preliminary studies. It is
essential that these studies be carried out so that any subsequent
difficulties may be avoided, as they may have serious consequences for the
operator.
468. The main environmental aspects to be considered in railway projects are guided by each
country’s legislative requirements, and in the case of assisted projects the guidelines of the
multilateral financing institutions are also required to be satisfied. In all cases an environmental
impact assessment (EIA) should be prepared. The EIA is the process of compiling, evaluating and
presenting all the significant environmental effects of a proposed project and the associated
development. The assessment is designed to help produce an environmentally sympathetic project
so that detection of potentially significant adverse environmental impacts leads to the identification
and incorporation of appropriate mitigation measures into the project’s design.
4.7.6.6 Public Participation
469. When designing a new infrastructure project, public participation is not only part of the
environmental procedures, but in fact an integral part of a PPP process as a whole. In such a
process, not only the project itself has to be accepted, as in a traditional procedure, but also the fact
that part of the public responsibility is transferred to the private sector. The possible approaches to
be used to involve the public can be broken down into the following levels of action:
♦
♦
♦
Information disclosure: Very early in the process, it is recommended to
disclose information, in summary form, to stimulate the population's
curiosity.
Consultation: Prior to every major decision, the public, NGOs and other
interested parties should be able to ask questions to those in charge of the
project and give their opinion on the different possible orientations.
Participation: In participation, the public may be invited to give its opinion
before a design decision. This includes considering alternative alignments
and determining solutions aimed at limiting or compensating negative
impacts.
♦ Negotiation: Negotiation is a form of participation that enables the
proponent and the public to arrive, jointly, if possible, at a solution. It is often
used to define compensation measures or for land acquisition purposes.
470. Depending on the type of project, the type of PPP and the stage of development, more or
less public information and consultation are under the responsibility of the private operator. In many
cases it is necessary for the operator to have strong support from the public authorities, because
they alone are legitimate in the eyes of the public.
46
Handbook for Incorporation of Social Dimensions in Projects; Asian Development Bank, May 1994.
TERA INTERNATIONAL GROUP, INC. - 86 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4.7.6.7 Indigenous People
471. Indigenous people or traditional populations require special attention in transport
infrastructure projects because they have limited ability to assert or defend their interests and rights
to land and other productive resources.
472. These people are sometimes defined in national legislation, or are identified by a close
attachment to ancestral territory, and often have a subsistence-oriented lifestyle. There is no clear
definition that fits all countries and regions. The important issue is to identify groups which have no
land property legislation and are particularly vulnerable to increased outside contact.
4.7.6.8 Resettlement
473. On account of the difficulties and pain caused by involuntary displacement of populations, it
should first be underlined that the desire to minimize the need for resettlement should be taken into
account during the examination of the various alternatives and that the cost of land acquisition and
resettlement should be taken into account in the overall cost of the project. The private operator
should be informed of the charges incumbent upon him. Another issue to be addressed in some
countries in Asia is undocumented settlers on railway right-of-way (for example in the Philippines,
Bangladesh, Cambodia). The private operator should not be expected to deal directly with these
settlers since the responsibility to provide appropriate shelter to all citizens rests with the
government.
4.7.6.9 Ensuring Railway Safety
474. When drawing up a PPP contract, the public authorities should determine how safety is to
be taken into account in the design, construction and operation of the railway.
4.7.7 Contract Award
475. Private participation in ground transportation infrastructure has generally taken place by
means of contracts with governments, with defined time periods, where the private sector has the
obligation to build and/or operate and/or a determined infrastructure in exchange for the right to
charge a tariff that remunerates the provision of such services and covers the investments allocated
to that end. Such an association contract (PPP contract) establishes the risks to be assumed by the
state and the private sector. The PPP is materialized through a policy of risks distribution to the
agent best prepared to assume them.
476. PPP involves a complex arrangement between the participating private sector
concessionaire (which is the most common form) and the proponent public agency. This
relationship is guided by the terms and conditions of the contract. For the success of this
partnership it is important that the contract is drawn up considering all relevant aspects as
summarized in the paragraphs below.
4.7.7.1 Contracting Process
477. The UNDP points out that the tendering, procurement and contracting procedures must be
financially and operationally sound, open, transparent, and fair. And that any departure from the
sealed-bid tender and contracting method will open the government to accusations of partiality or
corruption.
478. In addition, the procurement process should (i) state the desired end goal or output targets
of the agreement and minimize overly specific requirements, so that the private sector can innovate
and manage flexibly; (ii) ensure that the potential private sector partners can be adequately
compensated for or retain their intellectual property; (iii) include monitoring provisions of
performance measures by a third party or autonomous government agency; and (iv) make
provisions for renegotiating the terms of the agreement over time.
4.7.7.2 Describing the Scope of Work
479. The first stage of bidding is to identify the works to be performed, describe them precisely
and collect all information and data likely to be of use to the operator in performing his contract to
the best of his ability.
TERA INTERNATIONAL GROUP, INC. - 87 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4.7.7.3 Defining Expected Performance
480. PPP-type contracts give rise schematically to three types of requirements corresponding to
the different project stages: quality requirements for the construction, reconstruction and
rehabilitation phases; performance requirements throughout the maintenance and operation phase;
and hand-back requirements which concern returning the conceded facility to the conceding
authority on expiry of the concession contract. Measurable performance criteria for each phase
must be clearly specified.
4.7.7.4 Stimulating Contract Performance
481. The design of the contract should stimulate the operator to perform well. The fact that it is to
the operator's advantage to perform well is a powerful aid to respecting quality requirements (at the
construction stage) and performance requirements at the operation and maintenance stage.
Contracts that follow this objective can lead to major savings in supervision work. Their wording
may be more concise: it is unnecessary to go into detail concerning requirements which, if they are
not respected by the operator, will prove very costly. It is essential to take this principle into account
right from the PPP design stage
4.7.7.5 Performance Indicators for Operation
482. The requirements most frequently encountered in contracts include: quality of train services;
quality of information to users, some of which may have to be in real time, information related to
passenger fares and freight tariffs.
4.7.7.6 Contracts to be Equitable
483. By their nature, all contracts voluntarily entered into have to be perceived as mutually
beneficial. However, government contracts tend to include an unduly heavy dose of safety clauses,
which generally lead to bureaucratic delays and inefficiencies. Although such clauses may be
relevant in, for example, a building contract in which the end product is a clear and limited entity,
concessioning is an altogether different affair. The attempt here is to provide a challenge to the
entrepreneur to increase traffic, improve service levels, and ensure profitability in a market in which
many variables are outside the entrepreneur’s control. The contract should be framed in such a
manner that the concessionaire is encouraged to take reasonable risks in the hope of rewards,
rather than being discouraged from taking risks so that penalties are avoided. In short, positive
reinforcement techniques should be preferred and contracts should be equitable and not merely
safe.
484. Every contract is unique by itself, reflecting the political situation in the country, sector
situation, expectations of the service, financing and revenues including support from the
government, and dispute resolution mechanism, which are a few of the contract provisions. The
salient features of a railway concession contract are presented in Appendix 18, and the contents of
a sample model railway passenger concession are given in Appendix 19.
4.8 THE REGULATORY FRAMEWORK
485. The institutional endowment of an economy is now recognized to be a critical factor in the
economic success of the nation. The institutional endowment of a country includes formal
constraints - such as constitutions, laws and rules - and informal constraints, such as conventions,
customs and norms of behavior. Industrialized economies are composed of inter-related formal and
informal constraints on human behavior that are generally conducive to market transactions. The
efficiency and effectiveness of state regulation is an important part of this institutional structure.
486. Regulation is a broad term for institutional rules governing market economies, in which
governments intervene to modify the market to achieve socially desirable ends. Two broad
categories of regulation can be distinguished. First, economic regulation defines the market
environment within which industries operate and often establishes government agencies that
authorize particular business operations. Second, social regulation bounds the market, establishes
limits to competition, and provides social accountability for economic externalities created by the
forces of private competition. Privatization is often considered as a form of deregulation and it is
sometimes difficult to draw the line where deregulation ends and privatization starts.
TERA INTERNATIONAL GROUP, INC. - 88 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

487. The legal background and regulatory framework allowing provision of public services by
private companies and securing private finance of public infrastructure has to be created before
private funding is sought.
488. Once the PPP contract is signed, giving the private sector the responsibility for financing
and delivering the services, the public agency needs to make preparation for monitoring the
following:
♦ legal barriers inherited from past regulatory regimes that need to be sorted
out,
♦ privatized services are natural monopolies, which come with risks of abuse
of dominant position such as abusive pricing,
♦ safety cutbacks are likely to be an easy way to reduce costs.
489. These responsibilities are to be included in the mandate of the economic regulators. This is
not the only responsibility of these regulators. In addition, the government needs to monitor
compliance and enforce the contractual commitments, quality and service obligations of the private
operator.
4.8.1 Regulation Techniques
490. The most common regulation techniques to deter companies from charging elevated prices
are:
♦ Rate of Return Regulation - under this technique, the authority sets a fixed
rate of return on the assets so that the private company is able to charge a
price that is consistent with the objectives of the regulators. Prices for
services provided can be adjusted depending on the return on assets
realized by the company. Prices can only be increased/decreased if the
realized rate of return is lower/greater than the rate of return.
♦ Price Cap Regulation - this type of regulation has been increasingly applied
in regulated industries under the belief that it provides strong incentives for
the enterprise to be efficient. Under this technique, prices are yearly
adjusted according to inflation plus or minus a fixed amount that is not
related to the company returns. Price cap regulation does not indicate how
prices should be set for the first year of operation; it only establishes an
indicative rule of how these prices will change over time.
491. Price cap regulation has adopted as the preferred model in a growing number of developing
countries. In the Latin America and Caribbean region, a recent study for the World Bank indicated
that the price cap method for regulating prices and profits in the railway sector has been used in all
Latin American countries. 47
4.8.2 Regulatory Capacity and Governance in Developing Countries
492. Where the privatization in developing countries has been accompanied by the development
of dedicated regulatory offices, these have been, to varying degrees, independent from government
departments. However, experience in Western Europe, the U.S. and Australia indicates that these
regulatory offices will face a number of on-going difficulties arising from the inherent information
asymmetries that exist in a regulated environment. In practice, it is the firms not the regulators that
have direct access to the data on costs, revenues and assets and know their true cost of capital. In
effect, the job of the regulator is to provide the incentives for managers in regulated companies to
maximize effort and reduce costs, while protecting consumers. The regulator may also retain
powers to fine or in other ways penalize the firm for regulatory ‘cheating’. In Western Europe, the
U.S. and Australia such powers are used and regulated firms have redress through appeal against
regulatory decisions to the courts or to another body, such as the Competition Commission in the
U.K.
47 Railway tariff regulation by price cap has been used in PPP agreements in Argentina, Bolivia, Brazil, Chile, Columbia,
Ecuador, Mexico, Peru, and Venezuela.
TERA INTERNATIONAL GROUP, INC. - 89 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4.8.3 Technical Aspects of Regulation
493. Contracts may cover long periods during which, changes in the legislative and normative
context may occur. Changes may occur in social requirements resulting in pressure to change the
performance levels required by the contract. The two parties may finally agree that some of the
requirements of the contract are inappropriate.
494. A fundamental principle of PPP is that if these developments mean that the contract has to
be adapted and if this is prejudicial to the operator, such damage should be compensated for. The
role of the regulator is thus to be attentive to these changes, to inform the operator of them, and if
necessary, negotiate with him any modifications or adjustments to the contract.
495. The operator must report on his actions or make vital information available to the regulatory
body. This obligation has two objectives:
♦ to enable the regulatory body to ensure that the contract is correctly
performed and provide information for any adjustments which may prove
necessary;
♦ the obligation to report back or make information available should apply
both to works performed, the results of measures taken, accidents and the
circumstances in which they occurred, traffic restrictions, users' claims, etc.
496. Whereas in traditional schemes, the government collects complaints and claims from users
and decides what action to take, in PPP cases the operator should be directly confronted with
users' reactions and decide as often as possible on the measures to be taken when these claims
are justified. The role of the regulatory body is to ensure that the operator will make a reasonable
decision between the requirements of the public authorities as determined in the contract, those of
the users and the cost of corrective measures.
497. A long term financial relationship between public and private partners is a key parameter of
the PPP and induces the following constraints that are the main justification for setting up an
adequate regulation framework:
♦ When the private operator operates a natural monopoly, provisions should
be made to ensure that it does not abuse this dominant position.
♦ Rules regulating the PPP should take account of the inevitable changes
that will occur in the project environment.
498. In order to comply with their commitment to deliver services in the most efficient manner,
monopolies must carry forward an investment plan that is often agreed with the regulatory authority.
However, the implementation and financing of this investment plan is the sole responsibility of the
regulated company.
499. In the case of public infrastructure monopolies, and specifically in the case of railroads, the
primary real asset in general does not belong to the firm. This is the case under the PPP scheme,
where financing takes place under three conditions:
♦ Cash flows from the project should offer a return sufficiently attractive to risk
capital;
♦ The level of guarantees, collateral, and insurance should provide creditors
with confidence regarding the commitments and debts contracted;
♦ The capital structure of the project should be capable of separating the risks
of the project from the risk of the project promoters.
500. Private participation in infrastructure projects does not take place through a corporate
finance structure, but rather by means of Special Purpose Vehicles in which corporate capital
budgeting techniques are not directly applicable. In this case, project finance comes forth, and is
applied as a financial structuring technique to projects where, given the magnitude of investments
and the extension of capital recovery periods, promoters often cannot participate alone without
assuming unreasonable risks.
TERA INTERNATIONAL GROUP, INC. - 90 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

501. Economic development is related to a stable political environment, low corruption and
respect for law and order. When new regulatory offices are created they build on and complement
this wider institutional structure. By contrast to the situation in developed economies, the
institutional context of developing economies is often much less conducive to market transactions.
Regulatory rules and conventions are often weak and under-developed. Many developing
economies lack sound institutional structures to promote private entrepreneurship and competition,
leading to disappointing economic results even when policies that have ‘worked’ elsewhere, such
as privatization and market liberalization, are imported. Also, and on a more micro level, regulatory
regimes in developing countries can suffer from considerable management deficiencies. The other
main difficulties to be found in developing countries relate to expertise and governance problems.
502. If state regulation is to promote economic and social welfare, it needs to be both effective
and efficient: Effective in the sense of achieving its planned goals, and efficient in the sense of
achieving these goals at least cost, in terms of government administration costs and the costs
imposed on the economy for compliance with regulations. There is, therefore, a compelling case for
the systematic appraisal of the positive and negative impacts of any proposed regulatory change.
This appraisal should encompass the likely economic, environmental, social and distributional
consequences, thereby providing a comprehensive analysis of regulatory impacts on sustainable
development.
4.9 LEGAL FRAMEWORK
4.9.1 Objectives of Legal Framework for PPP
503. Comprehensive laws should be enacted to present explicit and concrete government
statements about pushing forward with PPP. These laws should include clear statements of
principle that are to be regarded as political commitments. Each provision of related specific laws
and regulations should be carefully examined in line with the principles and initial purposes of the
comprehensive laws. Some Asian countries (Japan, Korea, and the Philippines) have been in the
forefront of establishing an enabling legal and policy environment for private participation in
infrastructure. Salient features of the legal frameworks in these countries are described in the
paragraphs below. 48
4.9.1.1 Japan
504. In 1999, the Government of Japan enacted the Private Finance Initiative Promotion Act
(PFIPA), (Law No.117 of 30 July 1999), which established a private finance initiative scheme. This
scheme introduced formal arrangements whereby the application of private investment resources
were available to facilitate efficient and effective accumulation of social capital by inviting private
capital, management and technological know how to construct, maintain, administer and manage
public facilities. PFIPA has been attracting a lot of attention because PFIPA projects not only
provide public services more efficiently and effectively than can government and local public
agencies, they also make it possible to reduce project costs and provide higher quality public
services.
505. PFIPA projects are expected to fulfill the following criteria: (i) be public in nature; (ii) utilize
the capital, management power and technological capabilities of the private sector; (iii) be
conducted efficiently and effectively by respecting the independence and ingenuity of the private
sector; (iv) maintain fairness in selecting specific projects and private enterprises to undertake them;
(v) ensure transparency throughout the entire process, from the planning stage through to
completion; (vi) be objective in the evaluations made at each stage; (vii) clearly specify the contract
content, including the role and responsibility taken by those concerned, based on the agreement of
the public facility managers and the enterprises selected; and (viii) ensure the legal independence
of the enterprise or department involved in the project. 49 The process flow of a PFIPA project that
satisfies the above conditions is outlined in Figure 4.1.
48
Adapted from Fumiyo Harada Legal Framework for Private Participation in Infrastructure in the Selected East
Asian Countries; Comparative Study on Japan, Korea, and the Philippines, Development Bank of Japan
49 www.usajapan.org/PDF/private_finance_initiative.pdf
TERA INTERNATIONAL GROUP, INC. - 91 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Figure 4.1: Flow of a PFI Project
Clear role division and
responsibility sharing in accordance with
agreements, etc.
Government,
Local governing bodies, etc.
Private enterprises
Appropriate monitoring
of the service standard
Ensuring transparency of the
Project/enterprise
Provision of low-cost
high-quality public selection procedure
Citizens
Source: Japanese Cabinet Office
4.9.1.2 Republic of Korea
506. In 1999, the Private Participation in Infrastructure (PPI) Act was enacted that launched a
new PPI program in Korea. The principles in Korea’s PPI Act are quite similar to those of Japan’s
PFIPA Law. Korea particularly targets foreign investor involvement in its basic infrastructure and
has prepared incentives for it, whereas Japan’s law was designed to activate domestic investors.
Korea has amended its institutional framework for PSP, including drastic measures that have
greatly improved the investment climate for the implementation of large-scale projects. The PPI Act
established two separate bodies for implementing the intentions of the Act. The first body is a policy
making body called the Private Investment Project Committee led by the Minister for Planning and
Budget. As well as formulating major policies and enforcing decrees related to private sector
participation, the Committee also develops an annual plan that lists major projects targeted for
private sector investment, and proposed projects and their designated concessionaires that have
been approved according to defined criteria. The annual plan also details the investment,
management and operational requirements of each project and the government assistance
provided for the projects. The second body is the Private Infrastructure Investment Center of Korea
(PICKO), charged with promoting private participation. 50
507. Under the new PPI law, the Government can offer a wide range of incentives and take
various other measures in order to reduce the risks and uncertainties that may be associated with a
project. The reference range for determining the rate of return for PSP projects is 11 to 14 percent.
The rate of return for a particular project is determined through negotiations taking into account the
type of project and the level of risk. The incentives are offered in a way that can significantly
improve the financial viability of projects and reduce their implementation risks to make them
attractive for the private sector.
4.9.1.3 The Philippines
508. The Philippines’ BOT Law also aims to attract foreign investors and instructs the
government to provide “most appropriate incentives” to mobilize private resources for the purpose
of financing the construction, operation, and maintenance of infrastructure and development
projects normally financed and undertaken by the government. Fully utilizing foreign resources, the
government has used the BOT Law for numerous projects to address immediate needs in
infrastructure, especially in power generation.
509. Under the BOT Law, a private sector proponent is entitled to present an unsolicited proposal
to the government for the right to study in detail the feasibility of a project typically for one year. At
the end of the study period, the proponent would either offer the project under a BOT scheme with
specific conditions or reject it. A competitive bidding process would allow the government to test the
50 Transport and Communications Bulletin for Asia and the Pacific No. 72, 2003
TERA INTERNATIONAL GROUP, INC. - 92 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

attractiveness of the project to other investors which are willing to offer better terms. A number of
railway projects were initially placed under Memoranda of Understanding (MOU) between the
government and the private sector proponent under the BOT Law. After detailed study none of the
projects moved to implementation mainly due to difficulties to secure financing because of relatively
low traffic projections. The government recently determined that BOT schemes for railway financing
would not be attractive for PSP due to high initial capital requirements to build the infrastructure.
Bilateral loans were secured by the government for the Manila north and Manila south railway
projects from PRC and Korea, respectively where the government is financing the infrastructure
investment and in the case of the Manila south project, the private sector will be invited to
participate under a concession contract to finance the rolling stock and operate the line. The Manila
north project is being implemented by the Clark Base Development Commission.
4.9.2 Developing Legal Frameworks and Policies
510. Although some governments have provided policy and legal frameworks to promote private
sector involvement in infrastructure development, there are a large number of countries that need to
draft legal and policy frameworks. Based on the experience in some countries, some suggestions
are offered in the paragraphs below for preparing legal and policy frameworks for PSP in
infrastructure.
4.9.2.1 Integration of PSP with Existing Systems
511. The legal framework should clearly determine how to smoothly integrate PSP into the
existing systems. The provision of certain public services is generally subject to a special regulatory
regime that may consist of substantive rules, procedures, instruments, and institutions. For instance,
Japan’s PFIPA Law declares that state and local governments shall commit themselves to
removing or relaxing the regulations that prevent mobilization of the techniques and creativeness of
the private sector. The fundamental principles prescribe that relevant sector-specific laws and laws
for management of the public domain shall be removed or relaxed if such action is necessary to
promote the PFIPA projects. Korea’s PPI Act is clearer since it has overriding priority over related
laws: Korea’s PPI Act takes overriding precedence over other related laws with regard to private
investment projects.
4.9.2.2 Clarity of Criteria and Procedures
512. The legal framework should make a clear statement of the criteria and procedures in each
process. Japan’s PFIPA Law and the fundamental principles provide principles for the selection of
projects and contractors but do not provide actual procedures and measures, such as those that
could be used to determine the number and nature of projects or the rules for bidding for those
projects or scheduling their processes. Korea’s PPI Act and the Philippines’ BOT Law provide the
details of the processes and of the responsibility of each related authority in project selection and
contract bidding. The PPI Act outlines the project implementation procedures and prescribes time
limits on processes and instruction on how to submit proposals and modify them once they have
been approved. The BOT Law covers the inclusion of designated projects (“priority projects” in the
Act) in their development programs and how they are to be announced to the public.
4.9.2.3 Handling of Unsolicited Proposals
513. Governments should consider special procedures to handle unsolicited proposals that may
result from a private sector’s identification of an infrastructure need it can satisfy. Unsolicited
proposals may also facilitate innovative concepts in terms of technology, finance, and management.
Korea’s success in infrastructure development in recent years are largely because its PPI Act
includes provision for the acceptance of unsolicited projects and its Enforcement Decree of the PPI
Law provides details for the implementation of such projects. The Philippines’ revised BOT Law of
1994 (including the accompanying Implementing Rules and Regulations) included provisions for
unsolicited projects. In Japan, treatment of unsolicited proposals is only prescribed by the
fundamental principles (whereas Japan’s PFIPA Law is silent on this subject) that the government
shall endeavor to promote unsolicited proposals, and the projects of unsolicited proposals shall be
provided with incentives similar to those of solicited projects. Implementing agencies in many
countries lack experience in carrying out feasibility studies, and they often welcome unsolicited
proposals in which private sector entities have already done substantial preparatory work for them.
TERA INTERNATIONAL GROUP, INC. - 93 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

4.9.2.4 Clarifying Government’s Support for Projects
514. The general framework should clarify the government’s support for private participation in
infrastructure, specifying the areas in which it is applicable and the method by which it is to be
provided. The specific laws and regulations should list the available incentives with which the
private sector can consider feasibility. The Japanese PFIPA Law and the Fundamental Principles
indicate basic policies for measures on legal and regulatory regimes, taxation regime, and public
financial support that the state and local governments should follow.
515. Korea’s PPI Act illustrates concrete and detailed incentive measures for private investors,
including (i) acquisition of private land for the project by the government; (ii) revenue guarantee by
the government up to 90 percent of the projected revenues for solicited projects and 80 percent of
the projected revenues for unsolicited projects; (iii) bonus for early completion and lower
construction cost; (iv) various tax incentives offered by the government; (v) part coverage of foreign
exchange risk when foreign exchange rate fluctuations exceed 20 percent, through modifications of
tariff rates, government subsidies, adjustment of the concession period or other provisions; and (vi)
a buy-out option in the event of franchisee bankruptcy.
516. The Philippines’ BOT Law provides two major fiscal incentives—one under the Omnibus
Investment Code (for projects which cost more than Philippine Pesos 1.0 billion) and the other
regarding ODA funds and/or government appropriations (up to 50 percent for projects which would
have difficulty in collecting funds). It also allows local governments to provide additional tax
incentives, exemptions, or other relief. The incentives provided under the PPI Law also include
simplified rules and procedures for project selection, evaluation and approval.
4.9.2.5 Establishing Organizations for Promotion and Coordination
517. The establishment of effective organizations for the promotion and coordination is important
for the development of PSP markets and for the sharing of knowledge and techniques among
related parties. To address a traditional lack of capability in the public sector’s administration of
private sector investment in infrastructure a growing number of governments in Europe have
introduced PPP units responsible for supporting the process of planning and implementation of
partnerships.
518. In Asia only a small number of countries created dedicated PPP units. These countries
include Australia, Bangladesh, India (at the state or provincial level), Philippines and Republic of
Korea where private sector participation in infrastructure development has concentrated. These
units have been successful in playing a ‘catalytic’ role in promoting and implementing private
projects.
519. The Private Infrastructure Investment Center of Korea (PICKO) was established as a special
promotion organization. As a one-stop service center for PSP, PICKO benefits both the public and
the private sectors by supporting all the administrative procedures, from investment consulting
service to project proposal review, negotiation, and concession agreement conclusion. The
functions of PICKO are summarized in Box 4.1.
520. In the Philippines, the BOT Center (reorganized and converted to the Coordinating Council
for Private Sector Participation) was created in 1999 under the Coordinating Council for the
Philippine Assistance Program. It is designed to promote the country’s BOT programs and provide
training and expertise to implementing agencies, local governments, and the private sector.
TERA INTERNATIONAL GROUP, INC. - 94 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Box 4.1: Functions of PICKO
The goal of Korea’s PPI Law is to realize “value for money” by utilizing the private sector’s resources in
infrastructure, and accordingly, to reform the administrative structure, decrease the tax burden, and
upgrade the standard of public services. PICKO has been established as a special promotion organization
for PPI. The roles and functions of PICKO are as follows:
• Providing support in formulating policies and plans related to private investment projects—for
example, the PPI Act and its Enforcement Decree, PPI Annual Plan, Mid- to Long-term Plan for
Private Investment Projects.
• Developing new private investment projects, including conducting feasibility studies
• Providing support in formulating the instructions for private investment project proposals
• Reviewing and evaluating project proposals such as feasibility studies
• Providing administrative support in negotiations and concluding concession agreements
• Providing consulting services for domestic and international investors
• Sponsoring promotional activities such as PPI presentation meetings in Korea and abroad
• Operating educational programs for civil workers, financial institutions, related personnel from
private sectors, etc.
• Conducting studies to improve various policies related to private investment skills of the private
sector to promote construction, maintenance, and operation of public infrastructure for sound
national economic development.
521. Organizations for promotion and coordination of PSP activities are of major benefit to
foreign investors who are not familiar with local systems and languages. They also are useful for
accumulating institutional knowledge and experiences in PSP and contributing to the capacity
building of relevant authorities.
4.10 PROJECT RISKS
522. Under a traditional public sector scheme, the content, terms and conditions of the contracts
related to the relatively short duration construction are well defined. However, a concession
contract is drawn up with the aim of allocating many risks and defines each party’s relationship for a
very long duration. The definition of these risks and their clear allocation between the concession
awarding party and the concessionaire are in the heart of the partnership.
523. It is important to note that a concession is essentially a contractual vehicle through which
risks are taken by those who are best suited to do so. An entrepreneur concessionaire will be the
best suited to take commercial risks involved in satisfying today’s fast changing transportation
requirements. On the other hand, risks associated with government policy changes (e.g., currency
devaluation) are best left to the government. Risk should be appropriately apportioned in contracts
for concessions.
524. Table 4.2 provides a summary of the different types of risks associated with a railroad
project and indicates a possible allocation of these risks between the parties. Each of these risks
should be studied and analyzed. It is of fundamental importance for the success of the concession
that each risk is assessed and, where possible, a range of values defined on each risk and on
combinations of risks.
525. The construction (completion, quality and cost overrun) risk is generally assumed by the
concessionaire. If substantial changes to the specification of the project are requested by the
concession awarding party before or during construction it is appropriate that the latter bear these
risks either as direct contribution to their cost or reduction in annual affermage to pay for the
incremental cost.
526. For the allocation of financial risk, different approaches exist. In case the concession is
considered as an ordinary private commercial operation, and the bulk of the financial risk stems
from inflation, interest rate and/or exchange rate risk has to be borne by the concessionaire. Taking
into consideration the long duration of the contract and the eventual impact of these unforeseeable
factors on the revenue to be generated by the project, it is better to reach a binding agreement on
certain reference points and forecasts and include price escalation and a fair profit-sharing formula
in the contract.
TERA INTERNATIONAL GROUP, INC. - 95 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Table 4.2: Different Types of Risks in a Railway Project
Government
Type of
Description of Risk
/Proponent
Risk
Agency
Concessionaire
1. Political Risk
Expropriation of the company assets/operations
X
General Modification of the laws and tax system
x
Specific Modification of the laws and tax system
X
Political Events
X
Termination of the concession at the convenience of the Government X
Limitation of Currency Convertibility
X
Adverse Sovereign Action
X
2. Risks on Completion of Construction
Land Acquisition
X
Cost Overrun (excluding change of project by government)
X
Costs Overrun (change of project by government)
X
Increase of the financial costs
X
Schedule and Quality of Works X X
Administrative procedures delay time X X
Damages incurred by the works
X
Bankruptcy of the concessionaire company X X
3. Operation Risks
Impact on the Environment
X
Force Majeure X X
Technology risk
X
Costs overrun
X
Changes in Specifications by government
X
4. Commercial Risks
Traffic Shortfall X X
Price control policy (tariffs)
X
Other Revenues
X
Construction of competing facilities X X
5. Financial Risk
Inflation X X
Interest rate X X
Exchange Rate
X
6. Legal Risk
Permits and Licenses X X
Litigation X X
527. The legal and certain of the fiscal risks as well must be evaluated with particular care having
regard to the fact that one of the parties to the contract retains a large discretionary power.
Furthermore, in many countries the law is in transformation. For contractual purposes the existing
legal framework should be adopted. It is important that both legal and fiscal risks should be
identified and assessed with particular care.
TERA INTERNATIONAL GROUP, INC. - 96 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

5 ACTION PLAN CONSIDERATIONS
5.1 INTRODUCTION
528. This Section sets out a broad menu of options for the preparation of an Action Plan to
improve PSP in the provision of railway infrastructure and services by public and private sectors.
Implementing a particular approach successfully will often depend on supportive sector policies and
regulatory processes. The challenges facing developing countries are many and various. What may
be an acceptable policy in one country may be anathema in another for political, geographical or
historical reasons. Also railway transport may be serving different freight and passenger transport
needs and in different ways. Therefore, what may work in one institutional and market environment
may not work in another.
529. The Action Plan does not prescribe fixed solutions. It offers guidance in thinking about the
options available and the factors that are important in judging between them. It draws a basic
distinction between:
♦ railway services that serve the public or commercial customers directly, and
♦ railway infrastructure that is used by the transport service providers.
530. This distinction is reflected, for example, in the difference between railway infrastructure
provision and railway transportation services (including passengers and freight). In practice, some
of the entities involved in transport infrastructure and services comprise one vertically integrated
enterprise (Figure 5.1). Sometimes they are commonly owned but separately operated. Sometimes
they are both separately owned and operated (vertical separation). In some passenger and freight
operations are under one enterprise (horizontal integration) and in some they are separately owned
and managed (horizontal separation). Part of the challenge is to sort out which of these models
best suits the circumstances; then, what the roles of public and private sectors should be.
Figure 5.1: Four Structures for Railways
Vertical
Separation
Horizontal
Integration
France
France
Sweden
Sweden
PRC
Australia
(Western Australia)
Queensland, Tasmania
Germany
United Kingdom
Australia
(NSW, National)
U.S.
Canada
Australia
(Victoria, South Australia)
Horizontal
Separation
Vertical
Integration
Source: Adapted by Consultant from the Australian Productivity Commission
531. The Action Plan should include:
♦ A comprehensive evaluation of justifications and risks for the proposed
actions.
♦ A detailed schedule of activities and components to implement along with
their implementation timetable.
♦ Proposals for developing and strengthening institutional capabilities.
♦ Precise description of any additional survey/study deemed necessary.
TERA INTERNATIONAL GROUP, INC. - 97 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

♦ A cost estimate to implement the Action Plan.
532. PPP projects work best and are sustainable if they are mutually beneficial to both public and
private sector partners and if each can overcome adversarial posturing to build mutual trust. It is
important to develop a win-win situation for both the public and private partners.
533. Government and/or transport sector organizations should develop an Action Plan identifying
the steps to be taken to address the issues, indicating for each element of the plan:
♦ Who will be responsible for its implementation;
♦ The implementation timetable and method, as well as training needs; and
♦ The indicative cost estimate.
534. Every effort should be made to check the feasibility of the proposed actions with major
public and private stakeholders, to identify potential stumbling blocks and propose an approach to
deal with them. Participatory consultation with all stakeholders is necessary as early as possible. It
will be appropriate if the Action Plan identify a few critical measures that could be readily
implemented with a high impact.
535. Proposals to successfully implement recommended administrative and regulatory changes
should be spelled out in practical terms; including if need be the identification of draft new
legislation to be submitted for legislative approval. Action plans, budgets, timetables,
implementation methods, and corresponding training needs must be determined. Individual
objectives must be time-bound and linked to an agreed measurement process, with relevant
performance indicators, so that progress can be monitored and assessed during and after
implementation of recommended measures.
536. While designing the Action Plan advantage should be taken of experience gained in other
sectors and countries, in order to succeed governments must find alternative mechanisms unique
to their circumstances and be willing to accept PSP. They must choose appropriate projects that
are conducive to private sector management, and properly package the projects in order to avoid
disproportionate transaction costs. Strong public sector leadership and political commitment are
essential to the success of PPP projects.
537. If PPPs are not well designed and supervised, their services can become more expensive
than those provided by the government. Poorly designed and inadequately analyzed projects have
failed in both rich and poor countries. Corruption can undermine public trust in PPPs if the
contracting process is not transparent and carefully supervised.
5.2 IMPLEMENTATION STRATEGIES
538. Although PPPs offer the governments of developing countries important means of
expanding services and infrastructure and the private sector enhanced commercial opportunities to
expand their businesses, PPPs are complex arrangements and can create potential problems for
both the public and the private sectors if they are not properly designed and administered. The
following three considerations are important for successful implementation of PSP:
♦ Promote PPP. Given the budgetary constraints and the priority to increase
spending in social sectors, the government should proactively support all
necessary measures that foster PPP.
♦ Foster Fair and Healthy Competition. The private sector should be
developed as an engine of growth in railway transport. Governments must
ensure a level playing field among the players and stakeholders.
♦ Establish an Integrated Transport System. Because of scarcity of
investment resources and the need to provide resources for other priority
social services, it is imperative that governments encourage the players
and other stakeholders in the railway and other land transport services to
complement rather than compete with each other to ensure greater
efficiency in their operations. Intermodal and intramodal complementarity
should be promoted.
TERA INTERNATIONAL GROUP, INC. - 98 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

5.3 ACTION PROGRAMS
5.3.1 Legal Environment
539. In some countries legislation for enforcing private sector development existed for decades.
In others, particularly in the centrally controlled and planned economies private sector legislation is
yet to be enacted. Governments should forge partnerships with the private sector and other
stakeholders in policy formulation, reform and implementation.
540. In order for the privatization program to be successful, a number of changes to existing laws
may be required. Foremost is the need to create or improve the legal basis for independent
regulatory bodies in the railway sector. A number of other legal changes may be required as well.
These include laws pertaining to land acquisition and utilization, foreign investment and businesses,
competition, taxation, intellectual property rights, disposition of government surplus assets,
employment, environmental protection, private sector operations, company registration, commerce,
registration and trade in securities, foreign exchange, and others.
5.3.2 Establishing Regulatory Framework
541. For the implementation of the various measures for private investment in railway
infrastructures and railway transport services, an independent regulatory commission should be
established. Where this is not feasible at the outset, at the minimum independence of the regulator
from the service provider must be ensured.
542. Clear and transparent licensing and competition rules should be published. Judicial reforms
should be enacted to facilitate implementation of an affordable, transparent and predictable legal
system.
543. Currently, the roles of policy making, regulation and operation overlap in many sectors and
many state enterprises. Clear separation of policy making, regulation and operation is an essential
component of the reform program and a requirement for the development of transparent,
competitive markets. A program of regulatory reform is necessary, which includes specification of
individual regulatory bodies and definition of roles and responsibilities of these authorities. A
detailed assessment of the organizational structure of regulatory bodies and their reporting, funding
and staffing arrangements must be conducted. This will ensure that regulators operate on the basis
of consumer protection, promotion of competition, safety, efficiency, and environmental protection.
5.3.3 Social, Labor, and Environmental Concerns
544. Governments must recognize the social and labor issues associated with privatization. As a
result, all privatization proposals must include a discussion regarding treatment of social obligations
after privatization, and a discussion of the employment impacts of privatization. The government
must also evaluate the tariff and other social aspects of PSP and seek to balance these with the
privatization program. Programs which benefit state employees in the transition to privatization and
afterwards should be encouraged. These include early retirement packages and retraining
programs. The government should pursue a plan that minimizes the overall impact on social, labor
and environmental issues while still meeting the reform objectives of PPP.
5.3.4 Transport Security Program
545. The governments should adopt relevant land transport security measures being formulated
by the ASEAN. These measures are designed to prevent, mitigate and contain transport security
threats.
5.3.5 Public Information and Education
546. The privatization program should be accompanied by a dedicated public awareness
campaign that addresses key audiences and stakeholders in the process and responds to their
particular concerns. Key audiences include the SOE employees, investors, freight shippers,
passengers, the media, and the public at large. Efforts may include the establishment of an
interactive website, the publishing of a newsletter, and the holding of public seminars and forums.
These channels will seek to disseminate both general information on privatization and sectorspecific
details to the identified audiences.
TERA INTERNATIONAL GROUP, INC. - 99 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1:
CONCEPTS AND DEFINITIONS OF PSP
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
Appendix 1: Concepts and Definitions of PSP
1. Starting from the left of Figure 1.2, the following progressively increasing levels of PSP
are found in railways around the world:
1.1 Government Department
2. In this form of investment in and operation of railway facilities the private sector is
completely absent. The railway sector is entirely funded through annual appropriations from the
government’s budget and all freight and passenger transport services are performed by
government employees. The railway entity functions as a department of a government agency
such as the Ministry of Transport (MOT) or Ministry of Railway (MOR) or as a State Economic
Enterprise (SOE) reporting to a government agency.
3. Railways operating as a department of a government agency were (and still are) common
in centrally controlled socialist countries such as the Former Soviet Union (FSU) and the
Democratic People’s Republic of Korea (DPRK) where the absence of the private sector in the
economy precludes any form of PSP. In transition economies such as Central Asian Republics
(CAR) and People’s Republic of China (PRC), as well as in many Developing Member Countries
(DMCs) such as Pakistan, Sri Lanka, and Philippines with varying degrees of private sector
presence in economic activity, outsourcing for materials, parts, and supplies needed by the
railway is frequently stated as PSP. Procurement from the private sector, however, does not
typically include investment in and operation of productive railway facilities.
4. The importance of outsourcing by a government-owned and operated railway to the
private sector cannot be overstated. It provides significant benefits to the economy in terms of
increased efficiency and cost reduction. Technology improvements introduced by the private
supplier positively contributes to improvements in railway service quality and cost, which
ultimately benefit the users of the service (passengers and freight shippers).
5. An emerging practice gaining momentum among Government owned railways is
corporatization. Corporatization occurs when a government agency is transformed into a
company registered in the same manner as a private company, except all its shares are owned
by the Government. The corporatized railway is managed by a Board of Directors with executive
powers resting with the President generally appointed by the Board. The management is provided
some autonomy in its operations with “bottom-line” responsibility just as the management of a
private sector company. Corporatization is often the first step towards divestiture either by sale of
shares to the public or to strategic investors. Corporatization of railways has been implemented in
Malaysia, Russian Federation, and Romania to name a few examples. It is currently being
considered for implementation by Pakistan and Kazakhstan Railways, and others.
1.2 Government Department with Performance Contract
6. Performance contracts with the management of the government’s railway department or
the railway SOE are typically focused on output such as carrying a target quantity of freight
expressed in tons and/or ton-km (TKM). Usually without regard to economic efficiency,
performance contracts tend to perpetuate inefficiency and cost escalation without adding value to
the productive efficiency of operations or allocative efficiency of the economy. 1 Circuitous routing,
shipping the same commodity in both directions, and other types of transport service duplication
which were endemic in the FSU and other centrally controlled economies are typical examples of
inefficient operations in performance contracts.
7. Performance contracts without an obligation of the railway to achieve specific productive
efficiency targets are becoming rare. For example, the performance contract system, which was
established in early 1980s in China Railways (CR) soon showed its weaknesses. Subsequently,
the PRC MOR established a substantially improved variant of a performance contract known as
the Assets Operation Liability System (AOLS). Under the AOLS the management of CR commits
1
Productive efficiency refers to an input-output relationship between resources used (such as labor, tractive power,
fuel, etc.) and output generated (such as passenger-km, tons, ton-km, etc.). Allocative efficiency refers to the
relationship between resources allocated for production of an output and the net benefit attained by the society.
Maximizing efficiency in both instances aims at producing the maximum result with minimum resource.
TERA INTERNATIONAL GROUP, INC. - 1.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
to performance targets, which focus on profitability, return on fixed asset investment, and return
on equity.
1.3 Leasing Assets
8. A lease transfers the right to use a property for a defined period of time to the lessee, and
is combined with contractual rights. Leasing can be similar to contracting described below, but in
this case the lessee pays a fee for the use of the property. Leasing arrangements may be of two
types, leasing to the private sector or leasing from the private sector.
1.3.1 Leasing to the Private Sector
9. Railways typically own vast real estate assets in addition to extensive fleets of rolling
stock, motive power, construction and repair equipment, above ground infrastructure such as
track, catenary, signaling and telecommunications facilities, work shops and depots, warehouses,
office buildings, stations, schools, hospitals, and other assets. The right-of-way can be leased for
installation and operation of utility services such as pipelines, electrical lines, and fiber optic
cables for telecommunications. Non-operating land assets (plots other than the right-of-way) are
typically leased for residential and commercial development. Space in stations and other
buildings are frequently rented to retailers as kiosks and shops. All these forms of asset utilization
are undertaken through asset leases where the lessee is responsible for investment in property
development and management. In areas at or close to track where safety of train operations is a
concern (such as underground utilities at the right-of-way) lessee’s access for repair and
maintenance is forbidden in most cases.
10. An attractive asset base for many railways is real estate and other non-core assets, which
can be operated commercially. In a study for the Philippines National Railways (PNR), it was
estimated that if the approximately 50,000 pieces of PNR real estate assets were managed by
private sector property developers, the railway would generate an incremental annual net income
in excess of 550 million pesos, more than twice the amount the railway receives annually as
subsidy from the Philippines Government. 2
11. Railway land assets are particularly valuable for companies which need contiguous and
long tracts of land for installation of their utility network such as fiber optic cable (eg., Bangladesh,
Romania, U.S., and many other railways). Negotiating with one landlord rather than numerous
small landholders provides the company an efficient alternative to accumulate land under one
contract.
1.3.2 Leasing from the Private Sector
12. Major railway systems around the world are increasingly opting for leasing of rolling stock
and equipment in lieu of direct purchase. Leasing helps to obviate the need for investments on
assets; the investment saved can then be put to alternative productive use. Leasing also has the
advantage of improving the overall productivity and efficiency of assets. Leasing of rolling stock is
favored by major freight railroads in North America and is also being increasingly used by
Europe’s railways. In UK, passenger train services are operated by the train operating companies
under passenger franchises. However, in many cases the trains and/or rolling stock are owned by
private sector rolling stock companies, which lease the trains or rolling stock to the train operating
companies.
13. In North America, the railroads lease intermodal flat cars and special purpose wagons for
timber and automotive transport from Trailer Train Inc (TTX) of the U.S., a major player in the
leasing of freight wagons (Box 1.1).
2
Transportation and Economic Research Associates, Inc. (TERA); Technical Assistance Report on Restructuring
of Philippine National Railways; May 5, 1999, p.10.
TERA INTERNATIONAL GROUP, INC. - 1.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
Box 1.1: Trailer Train, Inc.
In the 1950s two US Class I railroads and one intermodal trucking company formed an independent corporation
designed to acquire and pool a fleet of intermodal flat cars that could be freely interchanged between the two
railroads, thereby forming a seamless transportation network, which did not rely on interchange of equipment and
the related record keeping, and costly reciprocal billing for usage of each others’ equipment. The membership of
this venture grew rapidly until virtually all of the Class I railroads in the US became shareholders of TTX. At one
time the participating railroads numbered 44 members, but have since dwindled to 9 as a result of mergers,
consolidations and closings.
Although the TTX is owned by 9 US and Canadian railroads, it is operated as a stand-alone corporation. The
company consolidates the purchasing power of all of the individual owners into a single leverage position. The fleet
is operated as a cooperative pool and each owner pays a leasing charge (comprising a per-day rate plus a per-mile
rate) for each car it uses. Non-owner railroads are charged the same rate as owners. TTX is solely responsible for
maintenance of the fleet with each railroad being compensated for any maintenance and repair it performs on a
TTX car. The car maintenance department of TTX has facilities located at most major railway yards and intermodal
ramps in the US and Canada as well as large contract repair, rebuild, and retrofit facilities throughout the US.
Routine maintenance of intermodal cars and prescribed maintenance to specialized intermodal appliances is done
right on the ramp tracks. Integrating the car maintenance into the intermodal ramp operation has resulted in an
exceptional fleet mechanical condition (as prescribed by the Federal Railway Administration) that allows trains
comprising intermodal equipment to operate at near passenger train speeds.
TTX has a proven history of profitable operations. TTX has diversified, on a smaller scale, to provide similar assets
and services to other railroad transportation industries such as automotive, forest product, and specialized
transportation equipment. The TTX has been a successful model of a private sector entity leasing equipment to the
railroads.
14. For the Burlington Northern and Santa Fe Railroad (BNSF), the locomotive lessor also
provides maintenance, and the railway pays by usage (unit of tractive effort or distance). Such
opportunities are particularly favorable for specialized or limited use equipment.
15. The Indian Railways (IR) has been leasing railway equipment from its subsidiary, the
Indian Railways Financial Corporation (IRFC), which was created for the purpose of raising
financing from market (largely private) sources by issuing bonds, buying operational equipment
and leasing it to IR.
16. In Europe and North America cross-border leasing of railway infrastructure and equipment
was introduced recently. In a cross-border leasing transaction, an investor -- in this case, a U.S.
company -- leases an asset from a foreign entity, which owns the asset. The owners immediately
lease back their asset from the U.S. company so that they still own and operate the asset. The
U.S. company, on the other hand, gains a tax benefit for writing off the up-front lease payment as
an expense. About 150 municipalities in Europe, including those in the Netherlands, Switzerland,
Austria, and France have offered cross-border leasing deals.
17. Cross border leases are particularly attractive to U.S. investors because the tax
advantages of leasing a huge fixed asset, which depreciates each year, more than offsets the
upfront fee. Under current US tax law, 99-year leases are treated as sale which gives the lease
holder the benefits of depreciation, while the lessor gets cash benefit for enabling the lease
holder to gain a tax benefit. German cities and towns have profited for at least 10 years from
complicated financing transactions known as cross-border leasing deals involving the leasing of
German assets, such as streetcars, purification plants, sewage systems, town halls, and school
buildings. But since the spring of 2003, the complicated transactions have come under increasing
public scrutiny with legal and ethical implications. 3
1.4 Service and Management Contracts
18. The first level of PSP in railway operations is in the form of contracting. There are two
forms of contracting: service and management. In these contracts there is an apportionment of
3
The Frankfurt city government, for example, had intended to lease its subway to a U.S. investor over 99 years for the
sum of US$2.7 billion. The U.S. investor's insistence upon secrecy was one of the factors that contributed to the
turning down of this deal. Opposition to the deal led to a public examination that ultimately led the city council to
reject the deal in October 2003. Cross-border leasing deals also failed in Stuttgart and Dresden, because the
citizens did not consent to lease the municipal facilities to a nameless investor.
TERA INTERNATIONAL GROUP, INC. - 1.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
roles, i.e., those of a client and contractor. Both forms of contracting allow the government to
maintain ownership of public facilities and control over public services. The government benefits
from private sector management and operation. The private sector derives revenue from
management fees or fees for services. Even if still publicly owned, the railway can contract or
outsource to the private sector for almost any activity.
19. Contracts are typically budgeted on an annual basis and their scope may extend up to 5
years. Based on past experience, contracting with the private sector: (i) increases efficiency; (ii)
decreases vulnerability to employee actions and contractor failures; (iii) provides protection
against monopolistic behavior of contractors or government agencies; (iv) provides dual
yardsticks for measuring and comparing performance; and (v) provides more substantive
knowledge and understanding of service delivery.
1.4.1 Service Contracts
20. Service contracts are usually executed for a relatively short period of 1-2 years and for a
limited scope. Under service contracts a government agency contracts with a private firm to
provide a specific service for a specified period of time. In some service contracts the private
sector invests in and owns the assets. Contracts in many passenger railway operations for
provision of on-board services in trains are a good example of this type of PSP. Other examples
include freight handling at railway owned stations and warehouses, and local drayage for pick up
and delivery of freight from/to shipper facilities.
21. Some contracted services cover a relatively small area or narrow scope, which do not
involve direct train operations. In some cases, however, core services are outsourced to the
private sector. One example of this practice is contracting out rolling stock maintenance to a
private contractor using the government’s workshop(s) and equipment.
1.4.2 Management Contracts
22. Governments are also using management contracts to provide services more efficiently
while maintaining ownership control. A management contract is an arrangement by which a
private company is entrusted with various types of tasks usually performed by the public authority.
In this form of PSP, a contractor takes over responsibility for operation and maintenance of a
service facility for a specified period of time with the freedom to make routine management
decisions.
23. The governments seek management contracts with the private sector in order to transfer
operational risk and improve the quality and efficiency of services. Management contracts may be
funded annually and may be extended for 5-year periods; the private contractor recruits staff,
manages facilities, and provides services. Management contracts can also (or only) focus on
operation management. 4
24. Management contracts range from what is essentially a form of technical assistance,
where the management contractor takes no financial risk, to more significant cases where
compensation is based, at least partly on results, including performance incentives. The
contractor assumes responsibility for operations and maintenance of a particular activity, or even
an entire railway. Competition arises from the possibility of several firms bidding for the contract.
25. Pakistan Railways (PR) contracts out ticket sales and inspection and on-board services
for two lines out of Lahore. The contractor pays a fixed rate to the railway and, therefore, has an
incentive to collect as much as possible. This arrangement has reduced the previously high level
of “ticketless” travel. Other contracted services in Pakistan include luggage handling and parcel
service.
26. In Japan, the Shinkansen (bullet train) right-of-way is maintained under contract with the
private sector, and the maintenance is done more efficiently than on the conventional lines. In
several U.S. railways, locomotives are maintained by private contractors at a lower cost than by
the railway itself. Also in the U.S. some railways contract out the operation of intermodal terminals
under competitively bid management contracts.
4
Nicola Tynan, Private Participation in the Rail Sector—Recent Trends, World Bank Note No. 186; June 1999.
TERA INTERNATIONAL GROUP, INC. - 1.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
27. Management contracts can also be used for freight and passenger transport operations
under the following conditions:
♦
♦
♦
The government wants to obtain the benefits of private management or
technology but the private sector considers the political, financial, technical, or
economic risks too high to own or invest in the system.
The government is reluctant to relinquish ownership due to the desire to
maintain control or unwillingness to implement needed reforms.
Continued government ownership provides access to low-cost funds (such as
tax-exempt or donor funds) or grants that otherwise would not be available to a
private company.
♦ The government has decided to privatize the railway, but due to the condition
of the state-owned railway a management contract is being used in an attempt
to improve its performance before privatization.
28. In Poland, the government used management contracts to privatize SOEs during the
1990s. Under the business contract arrangement, groups of Polish or foreign managers could
obtain the right to restructure and develop a state enterprise by submitting a business
reorganization plan and making a down payment (as collateral) equivalent to about 5 percent of
the value for which they estimate the enterprise can be sold after restructuring. The managers
receive shares in the SOE and could realize capital gains after the company is privatized. If the
restructured SOE could not be privatized, the managers would lose all or part of their collateral.
Management contracts have also been used to restructure SOEs that could not be immediately
privatized and for which there was no prospect for capital gains.
29. Despite their limited scope, Bangladesh Railway’s (BR) commercial passenger train
contracts are an example of contracted operations. These types of contracts can cover specific
trains or the entire operations of the railway. At the next level are leases (also known as
affermage), where the private contractor pays a guaranteed leasing fee and is responsible for
providing the service at its own risk. The short-lived 5-year performance-based management
contract of railway operations from Zambia north to the minerals belt of the Democratic Republic
of Congo (DRC) awarded to a consortium of Transurb and Transnet, both from South Africa is a
good example of contracted operations with the private sector bearing commercial risk.
Management contracts represent the first level of risk assumption by the private company since
the contractor generally assumes marketing and sales functions and contracts with the railway to
carry its business along a specific route within a time slot.
30. In 1985, the State Railways of Thailand (SRT) contracted with private operators for
provision of long-distance express passenger services on three lines, which were previously
unprofitable. By emphasizing service quality and efficiency the new operators were able to attract
long distance passengers. After two years of operation, all three lines were able to cover
operating costs and earn substantial profits. The contracts were canceled in 1991 and the
operations taken over by SRT, because SRT wanted to regain the profits for itself.
1.5 Concessioning
31. One of the most commonly used form of PSP by railways around the world, concessioning
involves a long-term contract (typically 20-30 years with options to extend) wherein the
government maintains ownership of track (and in some cases such as Brazil, the rolling stock)
and the private company has the right to operate trains and is responsible for maintaining track
and investing in other tangible assets. Concessions (also known as usufruct contracts) may cover
a part (as in Argentina and Brazil) or whole (as in Malawi) of the national railway network. A
concession implies a contractual right to operate a business. It does not transfer property rights to
the operator. Concessions have been used for PSP in the railway sector, particularly in Latin
America since early 1990s (Argentina, Brazil, Mexico, Bolivia, Chile, Peru, Colombia, and
Guatemala) and more recently Africa (Ivory Coast/Burkina Faso, Cameroon, Gabon, Malawi,
Democratic Republic of Congo, Togo, Senegal/Mali, Madagascar, Zambia, and Mozambique).
TERA INTERNATIONAL GROUP, INC. - 1.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
32. Concessions are a mechanism through which a government, while retaining the
ownership of a railway, transfers to a private concessionaire the operation of the entire railway, a
portion of the railway system, or a function of the railway for an extended period. The
concessionaire carries both the investment cost and commercial risks and is responsible for
financing rehabilitation or upgrading of old fixed assets and the acquisition of new fixed assets.
Normally, these new assets revert to the government at the end of the concession period.
33. The concessionaire pays a fee for the use of assets and makes a commitment to maintain
them. Normally the concessionaire has freedom to set tariffs and other commercial conditions.
The concessionaire often furnishes a performance bond to support a commitment for investment
and service as described in the concession contract.
34. One of the features of concessions is that the initial capital cost for taking over the
operation of the railway is much less than an outright purchase. This broadens the market for
PSP and enhances competition. Furthermore, implementation of the concession option is simpler
and takes much less time than the outright sale of the railway.
35. The conditions of the concession are described in a concession agreement or contract,
wherein the government’s or the landlord railway’s as well as the concessionaire’s specific rights
and responsibilities are defined, including the period of the concession, payment of concession
fee, and several other features, such as the objectives of the concession and the allocation of
risks.
36. An example is Ferrocarriles Argentinos, which was broken up into six cargo lines, as well
as separate suburban and metro passenger lines. Concessions of 30 years have been granted to
the cargo line operators, who are responsible for all maintenance and investment. Concessions
for the Buenos Aires commuter system were offered for 10 years (20 years for the segment which
includes the underground system), with interested consortia bidding for the lowest subsidy on
operations and investment.
37. Concessions may take various forms such as master concessions, wholesale
concessions, sub-concessions, and lines of business concessions. In the railway sector multiple
types of concessions could be used. A master concession would allow a private company to
operate the railway (including track, operation and maintenance, and freight and passenger
services). Sub-concessions could be for providing food and beverage services, workshops and
other support activities. A wholesale concession awards the right to operate all core and non-core
activities to one concessionaire who might in turn have the right to award sub-concessions. Lines
of business concessions are used when each individual activity operates under an individual
concession.
38. Considering the prevailing environment and the government’s objectives, a decision must
be made about the concessioning option considered most suitable. Some of the options that
could be considered include the following:
1.5.1 Vertically Integrated Concession
39. In a vertically integrated concession, almost all the railway functions are the responsibility
of a single concessionaire (Guatemala, Malawi, and Estonia). This option is particularly
appropriate for railways with comparatively small networks, especially if they require some initial
investment. The concessionaire may prefer to carry out various railway functions using the
services of a contractor rather than its staff. For example, track or locomotive maintenance might
be contracted out. The concessionaire has the full responsibility for rail operations and rail asset
maintenance and renewal, including all railway functions. When a vertically integrated concession
applies to the entire system, it is generally the government that enters into a concession
arrangement with the concessionaire. When only a branch line is involved, the railway itself might
enter into the arrangement with the concessionaire.
1.5.2 Functionally Separated Concession
40. The concession might be limited to one, two, or three of the four major railway functions
(train operations, track maintenance, equipment maintenance, and sales and marketing). A
possible choice is a concession covering functions other than infrastructure provision and
TERA INTERNATIONAL GROUP, INC. - 1.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
maintenance. The concessionaire maintains equipment, markets railway services, and operates
trains. The scope of a functionally separated concession ranges from assuming complete
responsibility for system infrastructure or complete responsibility for operations to assuming
responsibility for only a single service in a single area, such as passenger commuter services in a
particular city, or for a single rolling stock maintenance facility.
1.5.3 Concession for Specific Service
41. This type of concession may cover only one service (e.g., freight trains or container trains
or passenger trains) on the whole railway, or on only a part of the system. This option is suitable
for a railway that wants to provide freight and passenger services through separate arrangements.
For example, passenger services suffering losses can be operated through a government entity
or through a negative concession (payment of a subsidy to the concessionaire), and freight and
multimodal services can be operated through a concession under competitive conditions.
1.5.4 Joint Venture Concession
42. The joint venture concession is an option that pertains to the type of concessionaire. The
concessionaire could be a joint venture in which the private sector partner has at least a 51
percent share, with a minority share being retained by the public entity that owned and managed
the railway before the concession. A joint venture arrangement could also involve other
stakeholders, such as major customers and forwarding agents, as minority shareholders. The
senior private sector partner assumes managerial control of the concession and brings in an
agreed amount of investment to improve assets and operations. The public entity may not bring
any cash to the joint venture but may transfer equipment instead. This concession option enables
the public entity to participate in the management of the railway through its members on the
board of directors, and in case the concession is unsuccessful, the public entity is in a position to
quickly resume management of the railway. The participation of other stakeholders in the joint
venture arrangement would help the venture by bringing in a steady business and placing greater
emphasis on customer service.
1.5.5 Transborder Concession
43. In cases in which the viability of a railway depends on the performance of the whole
corridor spanning across an international border, a single transborder concession may be most
appropriate. The railway concession for Burkina Faso and Côte d’Ivoire is an example of a
transborder concession serving two countries. This concession was awarded to Sitarail, a
consortium of the Bollore group companies (private sector shareholder) holding 67 percent, two
governments (15 percent each), and railway staff (3 percent).
44. On a number of smaller railways there is insufficient volume to have an effective business
sector. For example Swiss Railway, a small railway in central Europe, has limited domestic
freight business but its future is in international business. Therefore, it has formed a partnership
(Cisalpino AG) with the neighboring Italian Railway in 1993. Another example is the CityNightLine
CNL AG which was originally established by Swiss, German, and Austrian national railways in
early 1990s, but is now wholly owned by the German Railway.
1.6 Build Transfer Operate (BTO)
45. This type of contract is the last stage of public ownership in the spectrum of PSP and is
commonly considered as another part of concession. It is generally applicable to greenfield
projects where the private sector assumes the construction risk and finances the investment until
completion of the construction works. At the completion and acceptance of the project by the
government, the short-term construction financing is replaced by a long-term debt instrument
(bank loan or bond) typically encumbering the asset value or revenue stream as collateral. Upon
completion of the financial arrangements, the concessionaire commences operation of the railway
under terms included in the concession contract.
46. BTO type agreements are useful in cases where permanent financing to replace the
construction loans is possible through a pledge of the asset (asset securitization) and the
government intends to own the asset at the completion of construction. Since ownership of the
asset will eventually be turned over to the government, the private sector can not be viewed as
TERA INTERNATIONAL GROUP, INC. - 1.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
the owner and, therefore, is unable to pledge the asset as collateral. Under these circumstances,
the ownership is transferred to the government upon completion of construction so that it can be
used as collateral for the permanent loan.
1.7 Public-Private Joint Venture
47. This type of PSP is the first stage of ownership of assets by the private sector. Similar to
concessions described above, the public-private company is established through a pledge of
assets by both partners for operation of a specific service or all train services along a segment or
on the entire network. It is also used in non-traffic operations. An example of this is the joint
venture company which was established between the former Adtranz of Germany (now a
subsidiary of the Canadian Bombardier) and Uganda Railways (UR) to own and operate the
locomotive workshop in Kampala. The initial joint venture agreement provided for 60 percent
ownership by Adtranz and 40 percent by the railway and stipulated that in case the neighboring
Kenya Railway and Tanzania Railway decide to join the venture each of the initial partners would
relinquish 10 percent of their shares to each new partner.
48. There are also instances where a public railway forms a joint venture specifically for the
purpose of gaining access to technology for its manufacturing operations. One example of this
practice is the joint venture between CR and the Union Switch and Signal Company of the U.S.,
which is now operating as Beijing CS Signal Controlling System Ltd., a subsidiary of Ansaldo
Signal of Italy.
49. More recently public participation in railway projects became a necessity due to the weak
financial performance of some concessions. For example, recognizing that the concessionaires
were not in a position to invest in line expansions, in May 2003 the MOT of Brazil announced a
rail revitalization plan intended to stimulate increased private investment by modifications to the
regulatory framework, and by restructuring concessions to permit government expenditure
alongside private investment in order to stimulate expansions. One such project was a rail cargo
bypass line (“rail beltway”) around the city of San Paulo with participation of the Federal
Government, State of San Paulo, and private sector concessionaires (MRS Logistica and
Ferroban). Similarly, the Nordeste concession is discussing a potential line extension
(“Transnordestina”) to involve governmental participation and concessionary funding from the
Brazilian Development Bank, BNDES. 5
1.8 Build Own Operate Transfer (BOOT) and Build Operate Transfer (BOT)
50. This type of agreement is applicable to new investments, where the private company
builds and retains ownership of the project throughout the concession period, which is generally
25 to 40 years with a renewal option. At the end of the concession period the ownership of the
infrastructure and all other improvements, as well as all rolling stock and other facilities revert to
the government. In this respect, the ownership of the assets by the private sector is not perpetual
but over a long period of time.
51. Governments in developed and developing economies use BOOT/BOT agreements in
which the private investors build infrastructure, operate the facilities for an agreed-upon period of
time to enable the companies to recoup their investment and a reasonable profit before the
ownership and control of the facilities are transferred to the public entity.
52. Under a BOOT/BOT, the responsibility of the investor is not limited to operation and
maintenance of the infrastructure but also comprises an initial construction, upgrading or major
railway rehabilitation component. Massive investment and consequent mobilization of private
funding sources is, therefore, required from the investor and is to be repaid from the revenue
collected from rail customers through tariffs. BOOT/BOT stresses the responsibility of the private
entity during construction and operation of the railroad and the handing over (transfer) of the
assets to the public entity at the end of the operation period. The high initial investment required
from the private sector and the consequent long concession period make the distribution of risk
between the parties a key element of success in such schemes. Many variations on this type of
5
Richard Sharp, Results of Railway Privatization in Latin America; Transport Papers TP-6, World Bank,
September 2005, p. 22.
TERA INTERNATIONAL GROUP, INC. - 1.8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
contract have been implemented with a consequently growing number of acronyms used to label
them.
53. In 2001, the Netherlands developed a BOT with a consortium led by Siemens Corporation
to design, build, finance and maintain the superstructure of a high-speed rail system that will run
from Amsterdam into Belgium. Financing for the project comes from the sponsors and from a 28-
year loan from the European Investment Bank.
54. The Beitbridge Bulawayo Railway (BBR) is another example of a BOT transaction from
Africa. The 345-km line is from Beitbridge, on the South African border on the Limpopo, to Henry
Junction, near Bulawayo, where it rejoins the main Zimbabwe railway system. BBR is a privatelyowned
Zimbabwe-registered railroad company with 85 percent of its shares owned by New
Limpopo Projects Investments (which also owns the Zambia concession) and 15 percent by the
National Railway of Zimbabwe (NRZ). The line opened in July 1999 after a reported investment of
US$85 million. 6
1.9 Public Listing of Shares
55. This type of PSP allows the public sector railway to issue and trade its shares in the stock
exchange(s). The private sector investors are typically shareholders with no involvement in the
day-to-day management of operations. In cases where the public sector entity holds a noncontrolling
minority share, the private investors would be able to control the board’s composition
and management of the company.
56. One example of the public listing of a railway’s shares is the Guangshen Railway of CR
(between Guangzhou and Shenzhen) which has ADR (American Depository Reserve) shares
listed in the American Stock Exchange (Amex).
1.10 Sale of Non-core Assets
57. Railways frequently sell their non-core assets such as surplus land and buildings. These
types of asset sale, however, do not constitute a significant contribution to improving the
efficiency of the railway’s operations through private sector operations. It is however, an option for
the governments to reduce the financial burden of railway subsidies.
1.11 Build Own Operate (BOO)
58. As opposed to the BOOT and BOT, the build own operate contract provides for perpetual
ownership of the asset by the private company. Similar to BOT and BOOT it is used for
construction and operation of new infrastructure.
1.12 Divestiture
59. Divestiture is the ultimate stage in PSP. It involves transferring to the private sector,
through a trade sale to a strategic investor or a public offering of shares on the stock market, the
ownership of existing assets and responsibility for future expansion. New Zealand is the only
example, which represents complete divestiture of railway assets and operations. A partial
divestiture example is U.K. where the infrastructure was privatized (Railtrack) 7 and passenger
and freight operations franchised.
60. A number of factors should be weighed when deciding whether divestiture should occur
through the stock market or through sale to a strategic investor. Investors make decisions based
on their assessment of risk and return in their customary line of business. A Morgan Stanley
analysis of financial performance in surface transportation in 2003 has shown that the average
return on capital for 44 publicly-listed transport sector companies in Europe, North America, and
Asia was 9 percent and the average cost of capital employed for the same companies was 6.5
percent, resulting in a spread of 2.5 percent. 8 The highest return and spread was observed in
6
7
8
Richard Bullock, Results of Railway Privatization in Africa; Transport Papers TP-8, World Bank, September 2005,
p. 17.
The subsequent failure of Railtrack to provide needed track maintenance has led the U.K. government to take back
the track from the private sector. The railway track in U.K. is currently under the control of Network Rail Ltd., a
government company, which took over the track in October 2002 from Railtrack.
Morgan Stanley Equity Research, Surface Transport: Global Insights; September 8, 2003.
TERA INTERNATIONAL GROUP, INC. - 1.9 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 1
non-asset intensive companies such as freight forwarders and logistics management firms (6.9
percent cost of capital and 14.1 percent return on employed capital, or a spread of 7.2 percent)
and the lowest was in asset intensive railways (5.6 percent cost of capital and 6.1 percent return
on employed capital, or a spread of 0.5 percent). 9
61. A strategic partner with a cost of capital and return of 5.6 percent and 6.1 percent,
respectively, would be satisfied with a spread of 0.5 percent in a mature market environment such
as North America or Japan, which carries relatively lower risk than DMCs. However, as risk
increases in DMCs the minimum spread required by the investor would also increase, which
results in projects becoming attractive with double-digit returns on owners’ equity.
62. There are a few examples of private ownership in railways, mostly in developed
economies. The freight railroads in both Canada and the U. S. are owned and operated by the
private sector. In the U.S., the more than 500 privately owned short-line railroads have
demonstrated that smaller entrepreneurs, unburdened by restrictive labor conditions, can
succeed by cutting costs and sustain their financial viability through aggressive marketing. In
Senegal, a private sector railway company, the Société d'Exploitation Ferroviaire des ICS
(SEFICS), was established to transport the raw materials and outputs of a fertilizer manufacturing
plant. In comparison to the state-owned railway, SEFICS has maintained higher technical and
financial standards of operation and maintenance, lower costs of transport, higher staff discipline
and accountability, and a better safety record.
9
The railways included in the Morgan Stanley analysis were Arriva and FirstGroup from U.K.; Central Japan Railway,
East Japan Railway, and West Japan Railway from Japan; Burlington Northern, CSX, Norfolk Southern, Kansas City
Southern, and Union Pacific from the U.S.; and Canadian Pacific and Canadian National from Canada.
TERA INTERNATIONAL GROUP, INC. - 1.10 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2:
PSP EXPERIENCE IN INFRASTRUCTURE IN
DEVELOPING NATIONS
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

Appendix 2: PSP Experience in Infrastructure in Developing Nations
APPENDIX 2
2.1 Background
1. This Appendix reviews the recent growth in PPI in developing countries and describes the
sectoral and geographical distribution of private investment in infrastructure. This review of
infrastructure projects with private participation is based on the World Bank’s PPI Project
Database current as of March 2006. 1
2. The PPI Project Database tracks information on more than 2,800 infrastructure projects
with private investment implemented in developing countries during 1990-2004. The Database
reports on developing countries that fall in the classification of low- and middle-income countries
as classified by the World Bank (Table 2.1). 2. The developing countries are grouped into six
regions: East Asia and Pacific (EAP), Europe and Central Asia (ECA), Latin America and
Caribbean (LAC), Middle East and North Africa (MENA), South Asia (SA), and Sub-Saharan
Africa (SSA). The project information and country classifications in the database are updated
annually. The latest update includes the year 2004. 3
3. The Database focuses on infrastructure with some monopoly characteristics, such as
energy, telecommunications, transport, and water and sewerage, which are called the primary
sectors. More competitive sectors such as airlines and gas production are not included. Projects
in the four primary sectors of infrastructure are further classified into subsectors and segments as
follows:
♦ Energy:
• electricity - generation, transmission, and distribution
• natural gas - transmission and distribution
♦ Telecommunications:
• fixed or mobile local telephony
• domestic long-distance telephony
• international long-distance telephony
♦ Transport:
• airports - runways and terminals
• railways - fixed assets, freight, intercity passenger, urban passenger,
and others
• toll roads - bridges, highways, and tunnels
• seaports - channel dredging and terminals
♦ Water:
• potable water - generation and distribution
• sewerage - collection and treatment
4. The database classifies infrastructure projects by the following types of private
participation: (i) concessions (or management and operation contracts with major private capital
expenditure); (ii) divestitures (full or partial), in which the state sells equity stake to private entities
(this may or may not involve private management); (iii) greenfield projects, in which a private
entity or a public-private joint venture builds and operates a new facility (this category includes
BOT, BOO, and other contracts); and (iv) management and lease contracts, in which a private
entity takes over the management of a state-owned enterprise for a fixed period while ownership
and investment decisions remain with the state.
1
2
3
http:/ppi.worldbank.org/
For the country income classification used in the 2004 update, see http://ppi.worldbank.org/wbclassification.asp
As of the writing of this DFR, the World Bank announced that the PPI Database has been updated to include 2004
transactions. The Bank’s PPI Database for 2005, however, is not yet accessible.
TERA INTERNATIONAL GROUP, INC. - 2.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Table 2.1: Developing Countries by Income
Low Income (61) Lower Middle Income (56) Upper Middle Income (37)
Afghanistan Albania American Samoa
Angola Algeria Antigua and Barbuda
Bangladesh Armenia Argentina
Benin Azerbaijan Barbados
Bhutan Belarus Belize
Burkina Faso Bolivia Botswana
Burundi Bosnia and Herzegovina Chile
Cambodia Brazil Costa Rica
Cameroon Bulgaria Croatia
Central African Republic Cape Verde Czech Republic
Chad China Dominica
Comoros Colombia Estonia
Congo, Dem. Rep Cuba Gabon
Congo, Rep. Djibouti Grenada
Cote d'Ivoire Dominican Republic Hungary
Equatorial Guinea Ecuador Latvia
Eritrea Egypt, Arab Rep. Lebanon
Ethiopia El Salvador Libya
Gambia, The Fiji Lithuania
Ghana Georgia Malaysia
Guinea Guatemala Mauritius
Guinea-Bissau Guyana Mayotte
Haiti Honduras Mexico
India Indonesia Northern Mariana Islands
Kenya Iran, Islamic Rep. Oman
Korea, Dem Rep. Iraq Palau
Kyrgyz Republic Jamaica Panama
Lao PDR Jordan Poland
Lesotho Kazakhstan Saudi Arabia
Liberia Kiribati Seychelles
Madagascar Macedonia, FYR Slovak Republic
Malawi Maldives St. Kitts and Nevis
Mali Marshall Islands St. Lucia
Mauritania Micronesia, Fed. Sts. St. Vincent and the Grenadines
Moldova Morocco Trinidad and Tobago
Mongolia Namibia Uruguay
Mozambique Paraguay Venezuela, RB
Myanmar
Peru
Nepal
Philippines
Nicaragua
Romania
Niger
Russian Federation
Nigeria
Samoa
Pakistan
Serbia and Montenegro
Papua New Guinea
South Africa
Rwanda
Sri Lanka
Sao Tome and Principe
Suriname
Senegal
Swaziland
Sierra Leone
Syrian Arab Republic
Solomon Islands
Thailand
Somalia
Tonga
Sudan
Tunisia
Tajikistan
Turkey
Tanzania
Turkmenistan
Timor-Leste
Ukraine
Togo
Vanuatu
Uganda
West Bank and Gaza
Uzbekistan
Vietnam
Yemen, Rep.
Zambia
Zimbabwe
Source: World Bank; Note: Income groups are based on World Bank classifications which are defined as follows:
Economies are divided according to 2003 GNI per capita, calculated using the World Bank Atlas method. The groups
are: low income, $765 or less; lower middle income, $766 - $3,035; upper middle income, $3,036 - $9,385; and
high income, $9,386 or more. Countries with PSP in railways are indicated by bold italics.
2.2 PPI in Developing Countries, 1990-2004
5. The 1990s saw a sharp decline in the level of donor support for infrastructure projects in
developing countries. Aggregate flows of aid for the infrastructure sector halved during the course
of the decade, to US$8 billion in 1999. This shift away from infrastructure projects reflected the
disappointment of donors with the performance of the infrastructure sector, which was often
TERA INTERNATIONAL GROUP, INC. - 2.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
inefficient, poorly managed, socially and environmentally damaging, and lacking a clear and
accountable process of governance to control corrupt practices.
6. In contrast to the decline in official aid, private capital flows for infrastructure increased
significantly during the 1990s, in response to the general trend towards privatization of
infrastructure in developing countries. According to the World Bank’s PPI database, during 1984-
1989, some 26 countries awarded 72 infrastructure projects with private participation totaling only
US$19 billion in investment commitments. In 1990-2004, some 138 low- and middle- income
developing countries opened up for private participation in all four primary sectors of
infrastructure. In these countries the operating risk for 2,846 infrastructure projects was
transferred to the private sector. These projects were implemented under schemes ranging from
management contracts to concessions, divestitures, and greenfield projects with cumulative
investment commitments 4 of more than US$809.7 billion.
7. The number of infrastructure projects with private participation, investment, and the
number of countries involved in these projects are summarized in Table 2.2 and depicted in
Figure 2.1. Annual investment commitments for infrastructure projects with private participation
grew steadily from US$18 billion in 1990 to a peak of US$114 billion in 1997. After 1997, annual
investments in infrastructure declined due to the Asian financial crisis, and by 2003 had returned
to a level similar to that in 1995. In 2004, some 134 projects were transacted (24 percent increase
from 2003) with a total investment of US$23.98 billion (approximately 50 percent less than 2003).
The average size of investments in 2004 ($179 million) is considerably less than 2003 ($456.6
million).
Table 2.2: Number of PPI Projects, Countries involved and Investment 1990-2004
Number of Investment in Investment in
Number of
Countries Government Assets Facilities (US$
Projects
with PPI (US$ million) 5 million) 6
Investment
Year
Total
Investment
(US$ million)
1990 61 20 4,789.3 8,197.6 12,986.9
1991 33 21 7,162.8 6,831.6 13,994.4
1992 85 33 8,034.2 13,630.1 21,664.3
1993 200 35 3,761.6 28,197.5 31,959.1
1994 243 51 8,890.5 28,647.4 37,537.9
1995 273 56 9,151.7 39,508.8 48,660.5
1996 308 60 16,987.6 54,586.1 71,573.7
1997 353 64 40,694.2 73,529.2 114,223.4
1998 277 64 44,624.1 55,718.8 100,342.9
1999 216 68 16,927.1 51,285.2 68,212.3
2000 221 62 25,735.0 62,018.9 87,753.9
2001 187 65 10,090.3 61,114.4 71,204.7
2002 147 45 13,594.8 42,740.2 56,335.0
2003 108 47 9,023.6 40,285.0 49,308.6
2004 134 43 9,418.4 13,996.2 23,981.5
Grand Total 2,846 228,885.2 580,287 809,739.0
Source: World Bank PPI Database. Total may not add due to unknown classification.
4
The PPI Project Database records total investment in infrastructure projects with private participation, not private
investment alone. All dollar amounts for 1990-1993 are in 2003 US dollars and for 2004 in current 2004 US dollars.
Nominal figures prior to 2003 have been deflated using the US consumer price index.
5 Resources the project company spends on acquiring government assets such as state owned enterprises, rights to
provide services, license fees, canon payments, etc.
6
Resources the project company spends on facilities, such as new facilities, and expansion or modernization of
existing facilities.
TERA INTERNATIONAL GROUP, INC. - 2.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Figure 2.1: PPI Projects in Developing Countries, 1990-2004
Investment
(Billion US$)
120
90
60
30
0
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
400
300
200
100
Number of
Projects
Total Investment (US$ Billion)
Number of Projects
8. Annual investment flows in 2001–2004 averaged US$50.21 billion. Though lower than in
the high activity period of 1997–1999, when investment flows averaged US$107 billion a year, the
investment was considerably higher than the average annual of US$23.5 billion in the first half of
the 1990s.
9. In 2004, some 43 developing countries implemented 108 new infrastructure projects with
private participation, under schemes ranging from management contracts to concessions,
divestitures, and greenfield BOT or BOO projects. Nevertheless, developing countries saw
investment commitments to infrastructure projects with private participation decline for the fourth
consecutive year, to just 21 percent of the 1997 peak. The number of projects also fell, to 38
percent of the 1997 peak of more than 350.
2.2.1 Trends by Primary Sector
2.2.1.1 Telecommunications and Energy
10. Private participation in infrastructure in developing countries has been concentrated in the
telecommunications sector, which accounted for 46 percent of the cumulative investment in 622
projects in 1990-2004 (Table 2.3 and Figure 2.2). Energy, which includes electricity and the
transmission and distribution of natural gas, attracted the second largest share of investment or
for 33.5 percent of the cumulative investment in 1,170 projects. Private participation in electricity
has increased as a result of technological developments that have reduced the minimum size of
efficient power plants. Much of the private investment in electricity has been in greenfield projects
with independent power producers implementing buy-operate-own or buy-operate-transfer
contracts.
Table 2.3: Number of PPI Projects and Investment by Primary Sector 1990-2004
Number of
Investment (Share of Total)
Primary Sector Projects Government
Sector
(Share %)
Facilities Total
Assets
Share %
Energy
1,170 84,051 186,267
(41.1%) (31%) (69%)
270,887 33.5%
Telecommunications
622 121,551 248,076
(21.9%) (32.9%) (67.1%)
369,627 45.6%
Transport
764 17,959 109,822
(26.8%) (14%) (86%)
127,781 15.8%
Water and Sewerage
290
5,325 36,119
(10.2%) (12.8%) (87.2%)
41,444 5.1%
Total
2846 228,886 580,284
(100%) (28.3%) (71.7%)
809,739 100%
Source: World Bank PPI Database. Total may not add due to unknown classification.
TERA INTERNATIONAL GROUP, INC. - 2.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Figure 2.2: Investment in Infrastructure Projects with Private Participation by Sector
US$ Million
150,000
100,000
50,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Investment Year
Energy Telecom Transport Water and Sewerage
2.2.1.2 Transport and Water and Sewerage
11. The private sector participated in 764 transport sector projects (26.8 percent of the total)
with US$127.8 billion in investment, which accounted for 15.8 percent of the total investments in
infrastructure during 1990-2004. Private participation in the water and sewerage sector has been
limited, accounting for 10 percent of the projects and 5 percent of cumulative investments over
the same period. The limited amount of private involvement in water utilities is likely to reflect the
inherent difficulties that face privatization in this sector, in terms of the technology of water
provision and the nature of the product, transaction costs, public aversion, and regulatory
weaknesses.
12. The average investment per project in the telecommunications sector (US$594 million)
was the highest of all sectors. This was followed by energy, transport and water and sewerage
sectors with average project investment of US$232 million, US$167 million, and US$143 million,
respectively.
13. In the telecommunications and energy sectors, approximately one-third of the investment
was on acquiring government assets such as state owned enterprises, rights to provide services,
license fees, canon payments, and the remaining two-thirds were on facilities, including building
new facilities and rehabilitation and modernization of existing facilities. In the transport and water
and sewerage sectors the investment on government assets was 13.8 percent and 12.9 percent,
respectively.
14. The private investment flows formed a substantial part of the total investment in
infrastructure in developing countries, amounting to 0.9 percent of their GDP in 2001–2004.
Considering that developing countries invest an average 4 percent of GDP in infrastructure, 7 the
private sector accounted for more than 22 percent of all investment in infrastructure in 2001–2004.
15. The experience with regard to private investment flows varied significantly across sectors.
Telecommunications, the sector most successful in attracting investment during the boom (1997),
was least affected by the subsequent decline. Conversely, the energy sector both benefited less
from the boom and suffered a larger decline, with investment flows in 2001–2004 returning to the
levels of the early 1990s. Transport and water and sewerage sectors saw not only the biggest
increases during the boom but also the largest subsequent declines.
2.2.2 Trends by Region and Country
16. Among the developing regions, LAC accounted for 45 percent of the cumulative
investment in infrastructure (Table 2.4 and Figure 2.3). In this region private participation in
infrastructure was often part of a broader macroeconomic restructuring program, aimed at
enhancing performance through private operation and competition and generating the financial
resources needed to improve service coverage and quality through tariff adjustments. Under this
approach divestitures and concessions of existing assets predominated, accounting for 70.5
percent of the cumulative investment in private infrastructure projects in LAC during the period. In
7
As estimated in the World Bank’s World Development Report 1994
TERA INTERNATIONAL GROUP, INC. - 2.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
more recent years, Latin America’s dominance of investment in infrastructure declined (from 85
percent in 1990 to 20 percent in 2004) as other regions opened their infrastructure sector to
private participation.
17. The EAP region has been the second largest recipient of private investment in
infrastructure. Over the period 1990-2004 it accounted for 24 percent of cumulative private
participation in infrastructure in developing countries. In contrast to LAC, the EAP region has
focused on the creation of new assets through greenfield projects, which accounted for 63
percent of the investment in EAP in 1990-2004. The Asian financial crisis of 1997-1998 saw the
region’s share in annual investment in infrastructure decline from 40 percent in 1996 to 11
percent in 1998, before recovering to 19 percent in 2004.
Table 2.4: Number of PPI Projects and Investment by Region and Primary Sector, 1990-2004
(US$ million)
Region and Primary
Investment in Gov’t Investment in
Number of Projects
Sector
Assets
Facilities
Total Investment
East Asia and Pacific
Energy 332 10,224.50 61,298.40 74,191.80
Telecom 66 20,084.40 33,158.70 53,243.10
Transport 250 6,328.50 40,321.30 47,988.00
Water and sewerage 88 615.1 14,696.80 15,783.00
Total 736 37,252.50 149,475.20 191,205.90
Europe and Central Asia
Energy 222 16,574.80 15,056.80 32,161.40
Telecom 218 23,866.10 55,034.40 79,240.50
Transport 46 103.7 4,615.90 5,369.60
Water and sewerage 50 531.7 2,795.70 3,337.50
Total 536 41,076.20 77,502.80 120,109.00
Latin America and the Caribbean
Energy 443 51,902.00 66,939.60 121,059.70
Telecom 130 52,589.40 118,800.60 171,499.20
Transport 339 9,847.30 54,046.80 65,238.00
Water and sewerage 128 3,818.90 15,646.40 20,641.10
Total 1040 118,157.60 255,433.30 378,438.00
Middle East and North Africa
Energy 23 2.9 11,791.80 13,542.70
Telecom 34 10,640.00 4,860.20 21,231.20
Transport 22 125 2,300.50 2,428.50
Water and sewerage 9 15.5 1,221.00 1,236.50
Total 88 10,783.40 20,173.50 38,438.90
South Asia
Energy 101 894 19,364.50 23,756.40
Telecom 53 6,190.80 15,245.30 22,343.60
Transport 58 106.3 3,008.90 3,790.80
Water and sewerage 1 0 216 216
Total 213 7,191.10 37,834.60 50,106.80
Sub-Saharan Africa
Energy 49 1,033.70 5,141.30 6,175.00
Telecom 121 3,322.30 18,401.30 22,069.90
Transport 49 492.4 2,256.50 2,966.00
Water and sewerage 14 157.6 72.2 229.8
Total 233 5,006.00 25,871.30 31,440.70
Grand Total 2,846 219,466.80 566,290.70 809,739.30
Source: World Bank PPI Database. Data for Investment in Government Assets and Investment in Facilities cover the
1990-2003 period. Total Investment includes 2004.
TERA INTERNATIONAL GROUP, INC. - 2.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Figure 2.3: Annual Investment in Infrastructure Projects with Private Participation by Region
120,000
100,000
US$ Million
80,000
60,000
40,000
20,000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Investment Year
East Asia and Pacific Europe & Central Asia Latin America Caribbean
Middle East & North Africa South Asia Sub-Saharan Africa
18. In all regions except EAP and SAR, the telecommunications sector attracted the most
investment followed by the energy, transport, and water and sewerage sectors. In EAP and SAR,
energy sector took the lead over telecommunications.
19. After the Asian financial crisis, investment flows declined in all regions. The fall in private
activity played out differently across the developing regions. The three regions that were most
active in the late 1990s also had the biggest declines. In EAP and LAC regions in 2001–04,
average annual investment flows receded to the levels of the early 1990s. The three other
regions were less affected both by the boom of the late 1990s and by the subsequent decline.
Annual investment flows to infrastructure in these regions remained at levels similar to those of
1996–2000. In the MENA region, the recovery was faster and investment flows reached a new
peak of US$7.5 billion in 2004, mainly due to the partial divestiture of Saudi Telecom. In LAC
private sector activity in 2004 declined for the sixth consecutive year. The reduced activity was
directed mainly to energy and transport sectors. In the three other developing regions private
activity was concentrated in the expansion of existing telecommunications operators.
20. The average size of involvement varied among regions from US$437 million in MENA to
US$135 million in SSA. The average for all developing countries was US$285 million.
21. Although private sector activity in infrastructure grew rapidly among developing countries,
and particularly in LAC and EAP, a small number of countries accounted for most of the
investment. The 10 countries attracting the most investment in projects with private participation
accounted for 67 percent of the cumulative investment in 1990-2004 and for 54 percent of the
projects. The leading Latin American economies were Brazil, Argentina, and Mexico. In Asia, the
main economies were China, Malaysia, India, the Philippines, Indonesia and Thailand (Table 2.5).
TERA INTERNATIONAL GROUP, INC. - 2.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Table 2.5: Top Ten Countries by Investment in Infrastructure with Private Participation
Country
Number Investment
Number of Projects
of US$ Share of Cancelled/Under Distress
Projects million Total
Brazil 278 157,879 19.5% 11 (4%)
Argentina 172 72,935 9.0% 35 (20%)
China 385 63,070 7.8% 12 (3%)
Mexico 145 61,452 7.6% 16 (11%)
Malaysia 76 37,905 4.7% 4 (5%)
India 141 37,281 4.6% 4 (3%)
Philippines 77 31,071 3.8% 5 (6%)
Indonesia 69 29,214 3.6% 10 (14%)
Thailand 79 24,967 3.1% 1 (1%)
Chile 103 23,451 2.9% 1 (1%)
Total 1,525 539,224 66.6% 99 (22%)
Total for all Developing
countries
2,846 809,739 100% 141 (5%)
Source: World Bank PPI Database
22. In 1990, the top 10 countries with private participation in infrastructure accounted for 98
percent of the investment. During the peak period of 1997-1999, more than 64 countries had
opened up for private participation in infrastructure. In 2004, the number of countries with PPI
projects declined to 43, and the top 10 countries accounted for 67 percent of the total investment.
Although private activity in infrastructure grew rapidly among developing countries, and
particularly in LAC and EAP, a small number of countries accounted for most of the investment.
23. About 27.6 percent of total investments were made in Asian developing countries
(excluding the Central Asian region). Among the top 10 developing countries, 6 are in Asia (PRC,
Malaysia, India, the Philippines, Indonesia, and Thailand, in that order according to the size of
investment), which attracted cumulative investment commitments of about US$224 billion. This is
about 92.6 per cent of total investments in all developing countries in Asia. The six Asian
countries attracted private sector investment in 827 projects in all infrastructure sectors. The
average size of investment per project was the lowest in PRC (US$164 million) and the highest in
Malaysia (US$499 million).
2.2.3 Investment in Infrastructure by Form of Private Participation
24. Greenfield projects were the most frequent form of PPI and accounted for 46 percent of
the total investment. Divestitures were the second most frequent with 40 percent of total
investment, followed by concessions and management and lease contracts (Table 2.6 and Figure
2.4).
Table 2.6: Investment in PPI Projects by Type of Private Participation
Type of Participation
Number of
Projects
Investment (US$
million)
Share of Total
Concessions 594 115,328 14.2%
Divestitures 632 323,834 40.0%
Greenfield Projects 1,488 369,416 45.6%
Management and Lease
Contracts
132 1,161 0.1%
Total 2,846 809,739 100%
Source: World Bank PPI Database
TERA INTERNATIONAL GROUP, INC. - 2.8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Figure 2.4: PPI by Trype of Project
Number of
Projects
2,000
1,500
1,000
500
0
Concession Divestiture Greenfield project Management and lease
contract
PPI Type
400,000
300,000
200,000
100,000
-
Investment
(US$ million)
Number of Projects
Total Investment (US$ million)
25. The form of PPI greatly varies by region and sector. In LAC and ECA, divestitures have
been the most frequent representing 50 percent of the investment in each region. In the other 4
regions greenfield projects are the most frequent. Among the primary sectors, greenfield projects
are the most frequent in the energy and telecommunications sectors. In the transport sector
concessions and greenfield projects are the most frequent.
2.3 Investment in Transport Sector
26. Of all infrastructure sectors, the products and markets of the transport industry are most
varied. There are several distinct transport products: road transport, maritime and inland
waterway transport, air transport, urban (mass and rapid) transport, railway intercity transport,
and many kinds of informal transport. They serve different freight and passenger transport needs
and in different ways. The transport challenges facing developing countries are many and various.
What may be an acceptable policy in one country may be anathema in another for political,
geographical, or historical reasons. And what may work in one institutional and market
environment may not work in another.
2.3.1 Transport PSP Projects in Developing Countries
27. In 1990-2004, some 70 developing countries had private sector activity in the transport
sector. A detailed list of these transactions is included in Appendix 3. As shown in the summary
Table 2.7, some 764 transport projects with PSP reached financial closure, involving investment
commitments of about US$128 billion.
28. During this period, investment in the transport sector was the highest in 1997 - US$19.52
billion, and with US$17.48 billion 1998 was second highest. In 2004, investment in the transport
sector declined to US$4.2 billion or about 22 percent of the peak period. In recent years the
number of transport projects and investments declined generally to the level of the early 1990s
(Figure 2.5). Some PSP deals, however, turned sour. Of the 764 projects, 46 representing 12
percent of investment to the sector, were either cancelled or under distress by 2004.
TERA INTERNATIONAL GROUP, INC. - 2.9 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Table 2.7: Investment in Transport Sector Projects with PSP in Developing Countries (US$ million)
Investment Year
Number of
Projects
Investment in
Government Assets
Investment in
Facilities
Total Investment
1990 35 209.3 7,405.2 7,614.5
1991 11 19.0 2,546.7 2,565.7
1992 22 232.8 3,423.6 3,656.4
1993 41 94.9 4,682.4 4,777.3
1994 69 226.1 7,194.6 7,420.7
1995 54 252.1 7,911.0 8,163.1
1996 80 2,923.8 12,770.9 15,694.7
1997 104 4,028.5 15,493.8 19,522.3
1998 97 4,174.9 13,309.5 17,484.4
1999 59 1,848.3 6,391.5 8,239.8
2000 63 1,834.3 7,251.5 9,085.8
2001 42 819.8 9,248.4 10,068.2
2002 25 209.2 4,553.4 4,762.6
2003 33 130.2 4,367.3 4,497.5
2004 29 955.7 3272.1 4,227.9
Total 764 17,958.9 109,821.9 127,780.9
Source: World Bank PPI Database
Figure 2.5: PSP in Transport Sector
No. of
Projects
150
100
50
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Investment Year
30,000
20,000
10,000
-
Investment
(US$ million)
Number of Projects
Total Investment (US$ million)
2.3.2 Transport Projects by Region and Type of PSP
29. Among the six regions, LAC and EAP regions were the most active for private
participation in the transport sector, representing 50 percent and 38 percent, respectively, of the
total investment (Table 2.8).
30. Concessions were the most frequent form of private participation in the transport sector,
representing 55 percent of the total projects and 56 percent of total investment (Figure 2.6). This
was followed by greenfield projects which represented 38.1 percent of total investment. Among
regions, concessions were the favored form of PPI in LAC, whereas in EAP both concessions
and greenfield projects were favored. The road sector accounted for the largest number of
concessions, accounting for 80 percent in EAP and 46 percent in LAC.
TERA INTERNATIONAL GROUP, INC. - 2.10 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Table 2.8: Number of and Investment in Transport Projects by Region and Type of Private
Participation, 1990-2004 (number and US$ million)
Region
Concession Divestiture Greenfield Management Total
No. Inv No. Inv No. Inv No. Inv No. Inv
East Asia 115 13,091 31 6,161 96 28,659 8 0.8 250 47,912
Europe 11 3,240 17 807 13 1,323 5 0 46 5,370
Latin America 242 49,500 8 254 70 13,599 19 50 339 63,403
Middle East 11 1,393 0 0 8 1,032 3 3 22 2,428
South Asia 17 1289 0 0 38 2,483 3 0 58 3,772
Sub-Saharan Africa 22 1,926 3 169 12 871 12 0 49 2,966
Grand Total 418 70439.4 59 7391 237 47967.1 50 53.8 764 127,781
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
Figure 2.6: Transport Projects by Region and Type
Number of Transport Projects
Number of Projects
350
300
250
200
150
100
50
0
East
Asia
Europe
Latin
America
Middle
East
South
Asia
Sub-
Saharan
Africa
Concession Divestiture Greenfield Management
Investment in Transport Projects
US$ Million
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
East
Asia
Europe
Latin
America
Middle
East
South
Asia
Sub-
Saharan
Africa
Concession Divestiture Greenfield Management
Source: Table 2-8.
2.3.3 Investment by Transport Sub-sector
31. The number of transport projects and cumulative investment by sub-sector during 1990-
2004 are given in Table 2.9 and depicted in Figure 2.7. The 764 transport projects included 369
toll roads with US$65 billion in investment representing 50.7 percent. Railroads came next with
US$27.6 billion in investment on 83 projects. Seaports (222 projects) and airports (91 projects)
represented 21.7 percent and 10 percent in investment. In comparison with toll roads, railways
were the less favorable destination for private investment.
TERA INTERNATIONAL GROUP, INC. - 2.11 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Table 2.9: Number of Transport Projects and Cumulative Investment by Sub-sector,
1990-2004
Number of
Investment (US$ million)
Subsector Projects
(Share %)
Government Assets
(Share %)
Facilities
(Share %)
Total (Share %, Average
Investment/Project)
91 4,768 8,386 13,154
Airports
11.9% 26.2% 7.6% (10.2%, 145)
83 5,848 21,995 27,843
Railroads
10.9% 32.2% 20.0% (21.7%, 335)
221 2,596 19,773 22,369
Seaports
28.9% 14.3% 17.9% (17.4%, 101)
369 4,958 60,092 65,050
Toll Roads
48.3% 27.3% 54.5% (50.7%, 176)
Total (Transport 764 18,170 110,245 128,415
Sector)
100% 100% 100% (100%, 168)
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
Figure 2.7: Number and Total Investment in Transport Sector PSP
Projects, 1990-2004
Number
of
Projects
400
200
0
Airports Railw ays Seaports Toll Roads
100,000
50,000
-
Investme
nt (US$
million)
Sub-Sector
Number of Projects
Total Investment
32. The average investment was highest for railway projects (US$331 million). In the roads
sector it averaged US$174 million per project or about 50 percent of the average for railroads. In
comparison with other infrastructure, rail projects require larger investments. Railroad projects
involved average investment of 21 percent on government assets, which was nearly three times
the average of 7.6 percent for road projects.
2.3.4 Investment in Transport Projects by Region
33. In all regions, the LAC region was able to attract the largest investment for transport
sector projects, which accounted for 51 percent of the total (Table 2.10). EAP was next with 38
percent of the total. The other 4 regions taken together accounted for only 11 percent of the total
investment. The LAC region also led other regions in investment in airport, railway, and road
subsectors, while EAP took the lead in seaports projects.
TERA INTERNATIONAL GROUP, INC. - 2.12 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
Table 2.10: Investment in Transport Projects with Private Participation by Region and
Sub-sector, 1990-2004
Region
Investment (US$ million) and Share of Total
Airports Railways Seaports Toll Roads Total
Latin America and 7,217 16,228 6,288 35,505 65,238
the Carribean
54.9% 58.3% 28.1% 54.6% 50.8%
Europe and Central 1,629 299 743 2,698 5,369
Asia
12.4% 1.1% 3.3% 4.1% 4.2%
883 182 1,363 2,428
Middle East and
North Africa
Sub-Saharan Africa
East Asia and Pacific
South Asia
Total
6.7% 0.7% 6.1%
0
1.9%
318 518.7 495.1 1,856 3,188
2.4% 1.9% 2.2% 2.9% 2.5%
2,982 10,530 11,534 23,575 48,620
22.7% 37.8% 51.6% 36.2% 37.9%
125 85 1,945 1414.9 3,570
1.0% 0.3% 8.7% 2.2% 2.8%
13,154 27,843 22,368 65,049 128,413
100% 100% 100% 100% 100%
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
34. The number of transport projects and investment with private participation by segment of
subsector is given in Appendix 3. The highway segment (including highways, and highways with
bridges and highways with tunnels comprised the largest number of projects – 373 (or 48.8
percent of the total), with investment of US$65 billion or 50.7 percent of the total for the transport
sector. The second most frequent segment was seaport terminals with 219 projects or 28.7
percent and total investment of US$22.4 billion or 17.4 percent.
35. PRC implemented the largest number of highway projects - 93 (or 24.9 percent) with
investment of US$22.6 billion, and Brazil was a distant second with 37 projects totaling US$11.9
billion in investment.
2.3.5 Investment in Transport Projects with PSP in Asia
36. In Asia, comprising EAP and SA regions, 8 thirteen developing countries implemented 308
projects in the transport sector with investment commitments of US$51.8 billion (Table 2.11). Two
countries, PRC and Malaysia, accounted for 75 percent of the total investment in the sector.
37. Of the 308 projects, 16 representing 9 percent of the investment in the sector were either
cancelled or distressed.
Table 2.11: Number of Transport Projects and Investment with PSP by Country in Asia, 1990-2004
Number of
Investment (US$ million)
Country Projects Government Assets Facilities Total
Bangladesh 2 0 0 0.0
Cambodia 4 0 198 198.0
China 150 5,298 18,580 23,878.5
India 51 501.9 2,601 3,102.6
Indonesia 24 388 3,136 3,523.7
Lao PDR 2 0 100 100.0
Malaysia 40 345 13,918 14,263.0
Myanmar 1 0 50 50.0
Pakistan 4 59 389 448.0
Philippines 9 100 2,325 2,425.0
Sri Lanka 1 0 240 240.0
Thailand 16 648 2,778 3,426.0
Vietnam 4 0 125 125.0
Total 308 7,340 44,440 51,780
Source: World Bank PPI Database. Total may not add due to projects with unknown classification.
8
There was no project with private participation in the transport sector in Central Asia.
TERA INTERNATIONAL GROUP, INC. - 2.13 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
38. PRC was the most successful country in Asia in attracting private participation in 150
transport projects or 48.7 percent of the total of 308 projects in Asia. In PRC, the transport sector
received the largest share of investment out of all four infrastructure sectors. Transport projects in
PRC represented investment commitments for US$23.9 billion or 46.1 percent of the total
investment of $49.8 billion in transport PPI in Asia.
39. Greenfield projects attracted the most investment representing 47 percent of total
investment of transport projects with private participation in PRC. Some of those deals, however,
turned sour. Of the 150 projects, 8 representing 6 percent of investment to the sector, were either
cancelled or under distress by 2004.
40. Malaysia was the second most successful country in Asia for attracting private
participation in transport sector. Forty projects with total investment of US$14.3 billion or 28.7
percent of the total saw financial closure. The transport sector received the largest share of
investment. Greenfield projects were the most frequent form of private participation representing
78 percent of the investment in the sector. Two urban railway transport projects were cancelled
and taken over by the government and two others were distressed as a result of the Asian
financial crisis. The government-arranged refinancing has removed the adverse financial
conditions and the two formerly distressed projects are now successfully operated by the private
sector.
41. The country-wise number of transport projects and investment by subsector in Asian
countries is given in Table 2.12. Toll road projects were the most frequent with 192 representing
62.33 percent of the total with investment representing 48.6 percent of the total in the sector. This
was followed by 81 seaport projects, 20 airport projects and 15 railroad projects.
Table 2.12: Number of Transport Projects and Investment with PSP in Asian Countries by Sub-sector
1990-2004
Transport Sub-sector
Country Airports Railways Seaports Toll Roads Total
No. Inv. No Inv. No Inv. No Inv. No Inv.
Bangladesh 0 0 0 0 0 0 2 0 2 0
Cambodia 2 185 0 0 0 0 2 13 4 198
China 11 1,677 3 2,070 29 5,774 107 14,358 150 23878.5
India 2 125 1 85 12 1,477 36 1415.9 51 3102.6
Indonesia 0 0 0 0 8 2,586 16 937.7 24 3523.7
Lao PDR 0 0 0 0 1 0 1 100 2 100
Malaysia 1 130 8 5,687 8 2,231 23 6,214 40 14262
Myanmar 0 0 0 0 1 50 0 0 1 50
Pakistan 0 0 0 0 4 448 0 0 4 448
Philippines 1 520 0 0 5 596 3 1,309 9 2425
Sri Lanka 0 0 0 0 1 240 0 0 1 240
Thailand 2 455 3 2,772 10 199 1 632 16 4058
Vietnam 1 15 0 0 2 100 1 10 4 125
Total 20 3,107 15 10,614 81 13,700 192 24,990 308 52,411
Share of Sub-sector - 5.93% 20.25% - 26.14% - 47.68% - 100%
in Asia
All Developing - 13,154 - 27,843 - 22,369 - 65,050 - 128,416
Countries
Share of Sub-sector - 10.2% - 21.7% - 17.4% - 50.7% - 100%
in all countries
Share of Asia in
Sub-sector
- 23.62% - 38.12% - 61.25% - 38.42% - 41%
Source: World Bank PPI Database. Inv. = Investment expressed in US$ million. Total may not add due to projects with
unknown classification.
42. The share of investment in toll roads in the transport sector in Asia was 47.7 percent,
lower than the 50.7 percent for all developing countries. For seaports the investment share of 26
percent in Asia was higher than the 17 percent for all developing countries. Railroads investment
in Asia comprised 20.3 percent of the sector compared with 21.7 percent for all developing
TERA INTERNATIONAL GROUP, INC. - 2.14 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 2
countries. Airports investment share of 5.9 percent in Asia, was lower than the10.2 percent for all
developing countries.
2.3.6 Transport Sector Projects by Type of PPI in Asia.
43. The number of transport projects in each sub-sector by type of private participation in EAP
and SA regions is given in Table 2.13. In EAP concessions and greenfield projects were clearly
more preferred than divestitures and management contracts. Of the total 251 transport projects,
the shares of these two types of PSP were 46 percent and 39 percent, respectively.
Table 2.13: Number of Transport Projects in Asia by Subsector and Type of Private Participation, 1990-2004
East Asia and Pacific
South Asia
Subsector
Concession Divestiture Greenfield Management Total Consession Divestiture Greenfield Management
Contract
Contract
Total
Airports 2 9 7 1 19 0 0 1 1 2
Railways 0 2 11 1 14 0 0 1 0 1
Seaports 22 2 35 5 64 5 0 12 0 17
Toll Roads 91 18 44 1 154 13 0 24 2 39
Total
115 97 18 38
31 8 251 0
46% 39% 31% 64%
3 59
Source: World Bank PPI Database
44. In SA, greenfield projects were the most frequent and accounted for 64 percent of all
projects in the region. Concessions came next with 31 percent of all projects.
TERA INTERNATIONAL GROUP, INC. - 2.15 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3:
PRIVATE PARTICIPATION IN TRANSPOT PROJECTS
IN ASIA, 1990-2004
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Appendix 3: Private Participation in Transport Projects in Asia, 1990-2004
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP Cambodia 2002 Koh Kong Bridge GP O TR B Li Yong Phat Region:
EAP China 1996 Anhui Expressway Company Limited D O TR BH Others SSA = Sub-Saharan Africa
EAP China 2000 Beijing - Jingtong Highway D O TR H Others ECA = Europe and Central Asia
EAP China 1992 Beijing-Zhuhai Expressway (Guangzhou-Zhuhai section) C O TR H New World Infrastructure MENA = Middle East and North Africa
EAP China 1997 Beiliu City Roadways C O TR H New World Infrastructure SA = South Asia
EAP China 1994 Boca Tigris Bridge GP O TR B Others LAC = Latin America and Caribbean
EAP China 1997 Cangwu County Roadway C O TR H New World Infrastructure EAP = East Asia and Pacific
EAP China 1997 Changsha Wujialing and Wuyilu Bridges C O TR B Cheung Kong Infrastructure Holdings Ltd Type of PPI:
EAP China 1997 Changsha-Yiyang Expressway C O TR H Road King Infrastructure GP = Greenfield Project
EAP China 1999 Changyong Expressway Co. D O TR H Others C = Concession
EAP China 1999 Chaoyanglu Bridge GP O TR B Road King Infrastructure D = Divestiture
EAP China 1997 Chengdu Ring Expressway (East Section) GP O TR H New World Infrastructure MLC = Management and Lease Contract
EAP China 1994 Chengdu-Mianyang Expressway GP O TR H New China Hong Kong Group Project Status:
EAP China 1997 Chongqing Road & Bridge Co. Ltd. D O TR BH Others O = Operational
EAP China 1996 Deqing Xijiang Bridge GP O TR B New World Infrastructure CO = Concluded
EAP China 1993 Foshan Guangzhou-Sanshui Expressway GP O TR H Road King Infrastructure UC = Under Construction
EAP China 2001 Fujian Expressway Development Co. Ltd. D O TR H Others D = Distressed
EAP China 1995 Fuyang - Luzhu Toll Road C O TR H Bridgecon Holdings CA = Cancelled
EAP China 1996 Gaoming Bridge C O TR B New World Infrastructure Sub-sector:
EAP China 1996 Greater Beijing Region Expressways C O TR H Others A = Airports
EAP China 1996 Guangdong Provincial Expressway Development Company, L D O TR H IJM Corporation Berhad RLW = Railroads
EAP China 2000 Guangxi Wuzhou Communications Co. Ltd. D O TR BH Others S = Seaports
EAP China 1990 Guangzhou City Northern Ring Road C O TR H New World Infrastructure TR = Toll Roads
EAP China 1996 Guangzhou Ring Road GP O TR H Cheung Kong Infrastructure Holdings Ltd Segment:
EAP China 1996 Guangzhou Ring Road GP O TR H Hopewell Holdings B = Bridge
EAP China 1996 Guangzhou Three Bridges GP CA TR B New World Infrastructure BH = Bridge and Highway
EAP China 1991 Guangzhou-Shenzhen Superhighway GP O TR H Hopewell Holdings H = Highway
EAP China 1992 Guangzhou-Zhuhai East-Line Expressway GP O TR H New World Infrastructure HT = Highway and Tunnel
EAP China 1996 Guilin City - Liang Jiang Airport Toll Road GP O TR H Bridgecon Holdings T = Tunnel
EAP China 1996 Guilin City - Liang Jiang Airport Toll Road GP O TR H Jasatera TR = Terminal
EAP China 1998 Hainan Expressway Co. D O TR H Others CD = Channel Dredging
EAP China 2000 Hefei - Yeji Highway C O TR H Road King Infrastructure CDT = Channel Dredging and Terminal
EAP China 1999 Huabei Expressway Co. D O TR H Others FAUP = Fixed Assets and Urban Passenger
EAP China 1995 Hui-Ao Roadway C O TR H New World Infrastructure UP = Urban Passenger
EAP China 1996 Jiangmen Road Network C O TR BH Cheung Kong Infrastructure Holdings Ltd FAFIP = Fixed Assets, Freight, and Intercity Passenger
EAP China 1997 Jiangsu Expressway Company Limited D O TR H IJM Corporation Berhad F = Freight
EAP China 2000 Jiangxi Ganyue Expressway Co. D O TR H Others FIP = Freight and Intercity Passenger
EAP China 1994 Jieyang Highway Network C CA TR H Others FAF = Fixed Assets and Freight
EAP China 1998 Jincheng - Jiaozuo Expressway GP CA TR H New World Infrastructure FUP = Freight and Urban Passenger
EAP China 1997 Laolong Bridge C O TR B Bridgecon Holdings IP = Intercity Passenger
EAP China 1994 Luoding-Chonghua Highway C O TR H Road King Infrastructure FA = Fixed Assets
EAP China 1996 Nanhai Road Network C CA TR H Others FAIP = Fixed Assets and Intercity Passenger
EAP China 1997 National Highway 107 (Zhumadian sections) C O TR H Cheung Kong Infrastructure Holdings Ltd RTR = Runway and Terminal
EAP China 1996 National Highway 108 C O TR H Road King Infrastructure R = Runway
TERA INTERNATIONAL GROUP, INC. - 3.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP China 1997 National Highway 108 - Taiyuan-Yuan Highway & Yuci City By C O TR H Road King Infrastructure Region:
EAP China 1997 National Highway 206 C O TR H Road King Infrastructure SSA = Sub-Saharan Africa
EAP China 1997 National Highway 307 C O TR H Road King Infrastructure ECA = Europe and Central Asia
EAP China 1997 National Highway 309 C O TR H Road King Infrastructure MENA = Middle East and North Africa
EAP China 1997 National Highway 311 and Provincial Highway 01 C O TR H Road King Infrastructure SA = South Asia
EAP China 1997 National Roadway No.105 (Lianping County North section) C CA TR H Others LAC = Latin America and Caribbean
EAP China 1999 Northeast Expressway Co. Ltd. D O TR H Others EAP = East Asia and Pacific
EAP China 2000 Panyu Beidou Bridge GP O TR B Cheung Kong Infrastructure Holdings Ltd Type of PPI:
EAP China 1997 Provincial Highway 104 C O TR H Road King Infrastructure GP = Greenfield Project
EAP China 1996 Provincial Highway 211 GP O TR H Road King Infrastructure C = Concession
EAP China 1994 Provincial Highway 268 C O TR H Road King Infrastructure D = Divestiture
EAP China 1997 Provincial Highway 307 C O TR BH Road King Infrastructure MLC = Management and Lease Contract
EAP China 1999 Provincial Highway Huanggu Route Xiaodian Fenhe Bridge C CA TR BH Others Project Status:
EAP China 1994 Qinglian Highway GP O TR H Pinetree Resorts Ptd. Ltd O = Operational
EAP China 1998 Qingzhou Min River Bridge & Airport Highway GP O TR BH Kumagai Gumi Co. Ltd CO = Concluded
EAP China 1997 Roadway No. 1906 (Qingcheng Section) GP O TR H New World Infrastructure UC = Under Construction
EAP China 1998 Roadway No. 1958 (Deqing Section) GP O TR H New World Infrastructure D = Distressed
EAP China 1997 Roadway No. 1959 (Qingxin Section) GP O TR H New World Infrastructure CA = Cancelled
EAP China 1995 Roadway No. 1960 (Sihui and Guangning sections) C O TR H New World Infrastructure Sub-sector:
EAP China 1998 Roadway No. 1962 (Gaoyao Section) C O TR H New World Infrastructure A = Airports
EAP China 1996 Roadway No. 1962 (Guangning Section) C O TR H New World Infrastructure RLW = Railroads
EAP China 1994 Roadway No. 1964 (Zhaojiang Section) C O TR H New World Infrastructure S = Seaports
EAP China 1997 Roadway No. 1967 (Xinxing section) C O TR H New World Infrastructure TR = Toll Roads
EAP China 1996 Roadway No. 1969 (Gaoyao Section) C O TR H New World Infrastructure Segment:
EAP China 1998 Roadway No. 309 (Changzhi Section) GP O TR H New World Infrastructure B = Bridge
EAP China 1994 Roadway No. 321 (Deqing Section) C O TR H New World Infrastructure BH = Bridge and Highway
EAP China 1994 Roadway No. 321 (Fengkai Section) C O TR H New World Infrastructure H = Highway
EAP China 1998 Roadway No. 321 (Gaoyao Section) C O TR H New World Infrastructure HT = Highway and Tunnel
EAP China 1997 Roadway No. 321 (Wuzhou Section) C O TR H New World Infrastructure T = Tunnel
EAP China 1993 Roadway No. 324 C O TR H New World Infrastructure TR = Terminal
EAP China 1997 Rongxian Roadways C O TR H New World Infrastructure CD = Channel Dredging
EAP China 1996 Shanghai Industrial Holdings Limited D O TR H Others CDT = Channel Dredging and Terminal
EAP China 1993 Shantou Bay Bridge GP O TR B Cheung Kong Infrastructure Holdings Ltd FAUP = Fixed Assets and Urban Passenger
EAP China 1993 Shantou Bay Bridge GP O TR B Guangzhou Investment Company Ltd. UP = Urban Passenger
EAP China 1998 Shanxi Taiyuan to Gujiao Roadway (Gujiao section) C O TR H New World Infrastructure FAFIP = Fixed Assets, Freight, and Intercity Passenger
EAP China 1998 Shanxi Taiyuan to Gujiao Roadway (Taiyuan section) C O TR H New World Infrastructure F = Freight
EAP China 1993 Shen-Shan Highway (Eastern Section) C O TR H Cheung Kong Infrastructure Holdings Ltd FIP = Freight and Intercity Passenger
EAP China 1996 Shenyang Changqing and Shenyang Gongnong Bridges C O TR B Cheung Kong Infrastructure Holdings Ltd FAF = Fixed Assets and Freight
EAP China 1997 Shenyang Da Ba Road C O TR H Cheung Kong Infrastructure Holdings Ltd FUP = Freight and Urban Passenger
EAP China 1996 Shenyang Shensu Expressway C O TR B Cheung Kong Infrastructure Holdings Ltd IP = Intercity Passenger
EAP China 1996 Shenzhen Airport-Heao Expressway, Eastern Section C O TR H Road King Infrastructure FA = Fixed Assets
EAP China 1997 Shenzhen Expressway Company Limited D O TR H Others FAIP = Fixed Assets and Intercity Passenger
EAP China 1994 Shenzhen Meilin-Guanlan Expressway GP CA TR H Road King Infrastructure RTR = Runway and Terminal
EAP China 1992 Shenzhen-Huizhou Expressway (Huizhou Section) C O TR H New World Infrastructure R = Runway
EAP China 1997 Shuangjin Roadway (Gaoyao Section) C O TR H New World Infrastructure
EAP China 1998 Shunde 105 Road C O TR H Hopewell Holdings
EAP China 1993 Shunde Road System C O TR H Hopewell Holdings
EAP China 1997 Sichuan Expressway Company Limited D CA TR H Others
TERA INTERNATIONAL GROUP, INC. - 3.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP China 1994 Suzhou-Shanghai Airport Highway C O TR H Road King Infrastructure Region:
EAP China 1998 Taiyuan - Changzhi Roadway (Changzhi Section) GP O TR H New World Infrastructure SSA = Sub-Saharan Africa
EAP China 1997 Tangjin Expressway (Tianjin North section) C O TR H New World Infrastructure ECA = Europe and Central Asia
EAP China 1997 Tangshan-Tangle Road C O TR H Cheung Kong Infrastructure Holdings Ltd MENA = Middle East and North Africa
EAP China 1998 Tianjin Youghe Bridge C O TR B New World Infrastructure SA = South Asia
EAP China 1996 Tonglu - Zhaiqi Toll Road GP O TR H FACB Bhd. LAC = Latin America and Caribbean
EAP China 1993 Wuhan Airport Expressway GP O TR H New World Infrastructure EAP = East Asia and Pacific
EAP China 1994 Wuhan Bridge Development C O TR B New World Infrastructure Type of PPI:
EAP China 1998 Wuhan Huangjin (Golden) Bridge C O TR B Cheung Kong Infrastructure Holdings Ltd GP = Greenfield Project
EAP China 1999 Xiamen Road & Bridge Co. D O TR BH Others C = Concession
EAP China 1997 Yan Bian Road Construction Co. Ltd. D O TR HT Others D = Divestiture
EAP China 1996 Yangzhong - Changjiang Bridge C O TR B Falcrest Pte. Ltd. MLC = Management and Lease Contract
EAP China 1996 Yangzhong - Changjiang Bridge C O TR B IJM Corporation Berhad Project Status:
EAP China 1996 Yangzhong - Changjiang Bridge C O TR B Southern Acids Bhd. O = Operational
EAP China 1997 Yichang Yiling-Yangtze Bridge C O TR B Cheung Kong Infrastructure Holdings Ltd CO = Concluded
EAP China 1996 Yulin City Ring Roads and Yulin-Gongguan Highway C O TR H Road King Infrastructure UC = Under Construction
EAP China 1997 Yulin to Shinan Roadways C O TR H New World Infrastructure D = Distressed
EAP China 1997 Zengcheng Lixin Road C O TR H Others CA = Cancelled
EAP China 1997 Zhejiang Expressway Company Limited D O TR H Others Sub-sector:
EAP China 1995 Zhongshan Dongfu Road & Bridge Co. C O TR H China Assets Holdings A = Airports
EAP China 1996 Zhongshan Nangang Road & Bridge Co. C O TR H China Assets Holdings RLW = Railroads
EAP Indonesia 1992 Cawang-Cibitung Toll Road C O TR H PT Citra Marga Nusaphala Persada S = Seaports
EAP Indonesia 1994 Cibitung Toll Road C O TR H PT Megapolis Manunggal TR = Toll Roads
EAP Indonesia 1992 Cibitung-Cikampek Toll Road C O TR H PT Bangun Tjipta Sarana Segment:
EAP Indonesia 1994 Harbour Road C O TR H PT Citra Lamtorogung Persada B = Bridge
EAP Indonesia 1994 Jakarta Inner Ring Road C O TR H PT Citra Lamtorogung Persada BH = Bridge and Highway
EAP Indonesia 1995 Jakarta Outer Ring Road (E2, E3 and N sections) C CA TR H PT Citra Bhakti Margatama Persada H = Highway
EAP Indonesia 1993 Jakarta Outer Ring Road (S and E1 sections) C CA TR H PT Marga Nurindo Bhakti HT = Highway and Tunnel
EAP Indonesia 1994 Kali Hurip Toll Road C O TR H PT Beston Pertiwi T = Tunnel
EAP Indonesia 1994 Karawaci Toll Road C O TR H PT Lippo Karawaci TR = Terminal
EAP Indonesia 1991 Karawang Timur Toll Road C O TR H PT Surya Cipta Swadaya CD = Channel Dredging
EAP Indonesia 1993 Kebon Jeruk-Tangerang Toll Road C O TR H PT Adhika Prakarsatama CDT = Channel Dredging and Terminal
EAP Indonesia 1990 Merak-Tangerang Toll Road C O TR H PT Marga Mandala Skati FAUP = Fixed Assets and Urban Passenger
EAP Indonesia 1995 Sentul Selatan Toll Road C O TR H PT Royal Sentul Highland UP = Urban Passenger
EAP Indonesia 1991 Surabaya-Gresik Toll Road C CA TR H PT Marga Bumi Matraraya FAFIP = Fixed Assets, Freight, and Intercity Passenger
EAP Indonesia 1994 Ujung Pandang Tahap I C O TR B PT Bosowa Marga Nusantara F = Freight
EAP Indonesia 1994 Ujung Pandang Tahap I C O TR H PT Bosowa Marga Nusantara FIP = Freight and Intercity Passenger
EAP Lao PDR 1997 Bokeo-Bohan Road GP CA TR H Others FAF = Fixed Assets and Freight
EAP Malaysia 2000 Ampang Elevated Highway GP O TR H Percon Sdn Bhd FUP = Freight and Urban Passenger
EAP Malaysia 2000 Ampang Elevated Highway GP O TR H Permodalan Nasional Berhad IP = Intercity Passenger
EAP Malaysia 1996 Damansara-Puchong Highway C O TR H Gamuda Berhad FA = Fixed Assets
EAP Malaysia 1996 Damansara-Puchong Highway C O TR H Irama Duta Sdn Bhd. FAIP = Fixed Assets and Intercity Passenger
EAP Malaysia 2000 East Coast Highway GP O TR H Malaysia Mining Corporation RTR = Runway and Terminal
EAP Malaysia 2000 East Coast Highway GP O TR H MTD Capital Bhd Group R = Runway
EAP Malaysia 2000 East Coast Highway GP O TR H United Engineers (Malaysia) Berhad
EAP Malaysia 2001 Ipoh-Lumut Expressway GP O TR H Malaysian Resources Corp. Bhd.
EAP Malaysia 1991 Jalan Cheras C CO TR H Metacorp
EAP Malaysia 1995 Jalan Pahang C O TR H Metacorp
TERA INTERNATIONAL GROUP, INC. - 3.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP Malaysia 1998 Kajang Ring Road C O TR H Barisan Minda Sdn. Bhd. Region:
EAP Malaysia 1998 Kajang Ring Road C O TR H Sungei Way Holdings Bhd. SSA = Sub-Saharan Africa
EAP Malaysia 2001 Kajang Road C O TR H Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (SILK) ECA = Europe and Central Asia
EAP Malaysia 1996 KLCC Elevated Highway GP O TR H Percon Sdn Bhd MENA = Middle East and North Africa
EAP Malaysia 1996 KLCC Elevated Highway GP O TR H Permodalan Nasional Berhad SA = South Asia
EAP Malaysia 2003 Kuala Lumpur - Putrajaya - KL International Airport Highway P GP UC TR H Anson Perdana Bhd LAC = Latin America and Caribbean
EAP Malaysia 2003 Kuala Lumpur - Putrajaya - KL International Airport Highway P GP UC TR H Hi-Summit Construction EAP = East Asia and Pacific
EAP Malaysia 2003 Kuala Lumpur - Putrajaya - KL International Airport Highway P GP UC TR H Maju Holdings Sdn Bdh Type of PPI:
EAP Malaysia 1995 Kuala Lumpur-Kajang Highway C O TR H Cerahsama Sdn Bhd GP = Greenfield Project
EAP Malaysia 1995 Kuala Lumpur-Kajang Highway C O TR H Europlex Sdn Bhd C = Concession
EAP Malaysia 1995 Kuala Lumpur-Kajang Highway C O TR H Grand Saga Sdn Bhd D = Divestiture
EAP Malaysia 1995 Kuala Lumpur-Kajang Highway C O TR H Kulim Enterprise Sdn Bhd MLC = Management and Lease Contract
EAP Malaysia 1995 Kuala Lumpur-Kajang Highway C O TR H Kumpulan Perangsang Bhd Project Status:
EAP Malaysia 1994 Kuala Lumpur-Karak Highway C O TR H Bintang Bestari Sdn Bhd O = Operational
EAP Malaysia 1994 Kuala Lumpur-Karak Highway C O TR H MTD Capital Bhd Group CO = Concluded
EAP Malaysia 1996 Kulim - Butterworth Highway GP O TR H Malaysia Mining Corporation UC = Under Construction
EAP Malaysia 1993 Malaysia-Singapore Second Crossing GP O TR BH United Engineers (Malaysia) Berhad D = Distressed
EAP Malaysia 1995 New East-West Link Expressway C O TR H Metacorp CA = Cancelled
EAP Malaysia 1995 New North Klang Straits Bypass GP O TR H Shapadu Holdings Sdn Bhd Sub-sector:
EAP Malaysia 1999 New Pantai Highway GP O TR H Berjaya Group A = Airports
EAP Malaysia 1994 North-South Expressway Central Link GP O TR H United Engineers (Malaysia) Berhad RLW = Railroads
EAP Malaysia 1993 Penang Toll Bridge MLC O TR B Mekar Idaman Sdn Bhd S = Seaports
EAP Malaysia 1994 Seremban-Port Dickson Highway C O TR H Mancon Bhd TR = Toll Roads
EAP Malaysia 1994 Seremban-Port Dickson Highway C O TR H Melewar Corporation Segment:
EAP Malaysia 1994 Shah Alam Expressway GP O TR H Arab Malaysian Berhad B = Bridge
EAP Malaysia 1994 Shah Alam Expressway GP O TR H Gamuda Berhad BH = Bridge and Highway
EAP Malaysia 1996 Sungei Besi toll road C O TR H HMS Resource Sdn Bhd H = Highway
EAP Malaysia 1996 Sungei Besi toll road C O TR H Road Builder (M) Holdings Sdn Bhd HT = Highway and Tunnel
EAP Malaysia 1998 West KL Toll Road GP O TR H Gamuda Berhad T = Tunnel
EAP Malaysia 1998 West KL Toll Road GP O TR H Kumpulan Pinang Holdings Sdn Bhd TR = Terminal
EAP Malaysia 1998 West KL Toll Road GP O TR H Mujur Minat Sdn Bhd CD = Channel Dredging
EAP Philippines 1995 Manila-Cavite tollway C O TR H Coastal Road Corporation CDT = Channel Dredging and Terminal
EAP Philippines 1995 Manila-Cavite tollway C O TR H Majlis Amanah Rakyat FAUP = Fixed Assets and Urban Passenger
EAP Philippines 1996 Metro Manila Skyway GP O TR H PT Citra Lamtorogung Persada UP = Urban Passenger
EAP Philippines 2001 North Luzon Expressway C O TR H First Philippine Infrastructure Development Corporation FAFIP = Fixed Assets, Freight, and Intercity Passenger
EAP Vietnam 2002 Ngang Pass Tunnel GP O TR B Song Da General Construction Company F = Freight
EAP Vietnam 2002 Ngang Pass Tunnel GP O TR HT Song Da General Construction Company FIP = Freight and Intercity Passenger
SA Bangladesh 1998 Jamuna Bridge MLC D TR B Abdul Monem FAF = Fixed Assets and Freight
SA Bangladesh 1998 Jamuna Bridge MLC D TR B Group Five FUP = Freight and Urban Passenger
SA Bangladesh 1998 Jamuna Bridge MLC D TR B Owen Williams International IP = Intercity Passenger
SA India 1997 2nd Narmada Bridge C O TR B ECC Construction Group FA = Fixed Assets
SA India 1997 2nd Narmada Bridge C O TR B Larsen & Toubro FAIP = Fixed Assets and Intercity Passenger
SA India 1999 Ahmedabad - Mehsana Road GP O TR H Infrastructure Leasing & Financial Services RTR = Runway and Terminal
SA India 1999 Ahmedabad - Mehsana Road GP O TR H Larsen & Toubro R = Runway
SA India 1998 Amravathi River Bridge GP O TR B East Coast Construction and Industries Pvt. Ltd.
SA India 1997 Chalthan ROB GP CO TR B Ashvika Construction
SA India 1998 Coimbatore Bypass C O TR H Larsen & Toubro
SA India 1998 Dahej Bridge GP CO TR B Rajkamal Builders
TERA INTERNATIONAL GROUP, INC. - 3.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
SA India 1998 Dahej Bridge GP CO TR B Vijay M. Mistry Construction Ltd. Region:
SA India 2003 Delhi-Gurgaon Expressway GP UC TR H Jaypee DSC Ventures Ltd. SSA = Sub-Saharan Africa
SA India 1998 Delhi-Noida Bridge Project GP O TR BH Infrastructure Leasing & Financial Services ECA = Europe and Central Asia
SA India 1998 Durg Bypass C O TR H Shakti kumar M.Sancheti Ltd MENA = Middle East and North Africa
SA India 2002 GMR Ankapalli-Tuni Expressways Private Limited GP O TR H GMR Group SA = South Asia
SA India 2002 GMR Ankapalli-Tuni Expressways Private Limited GP O TR H United Engineers (Malaysia) Berhad LAC = Latin America and Caribbean
SA India 2002 GMR Tambaram-Tindivanam Expressways Private Limited GP O TR H GMR Group EAP = East Asia and Pacific
SA India 2002 GMR Tambaram-Tindivanam Expressways Private Limited GP O TR H United Engineers (Malaysia) Berhad Type of PPI:
SA India 2003 Hoshangabad-Khandwa Road GP O TR BH M.S.K. Infrastructure and Toll Bridge P (I) Ltd GP = Greenfield Project
SA India 1998 Hubli-Dharwar Bypass C O TR H Bjarat Forge Ltd C = Concession
SA India 2003 Indore-Edlabad Road GP O TR BH VIVA Highways Private Ltd. D = Divestiture
SA India 1996 Karaunti Bridge GP CO TR B TCI Infrastructure Finance Ltd. MLC = Management and Lease Contract
SA India 1999 Khambatki Ghat Tunnel & Road GP O TR HT Ideal Road Builders Ltd Project Status:
SA India 1999 Kishangarh Bypass ROB GP CO TR B MSK Projects India Ltd. O = Operational
SA India 1999 Korttailaiyar River Bridges C O TR B Zoom Developers CO = Concluded
SA India 1999 Mahi River Bridge GP CO TR B Rajkamal Builders UC = Under Construction
SA India 1999 Mahi River Bridge GP CO TR B Vijay M. Mistry Construction Ltd. D = Distressed
SA India 1998 Nardhana ROB C O TR H Ajush Ajay Construction Pvt. Ltd CA = Cancelled
SA India 1999 Nasirabad ROB GP O TR B Ashoka Vastushilp Pvt. Ltd. Sub-sector:
SA India 1997 Pali Bypass GP O TR H Larsen & Toubro A = Airports
SA India 1997 Patalganga Bridge C O TR B Ideal Road Builders Ltd RLW = Railroads
SA India 1990 Rao-Pithanpur Toll Road C O TR BH Infrastructure Leasing & Financial Services S = Seaports
SA India 1990 Rao-Pithanpur Toll Road C O TR BH Madhya Pradesh Audyogik Kendra Vikas Nigam (Indore) Ltd TR = Toll Roads
SA India 2003 Rewa-Amarkantak Road GP UC TR BH Rewa Tollways Ltd. Segment:
SA India 2002 ROB Chhayapuri Vadodra GP O TR B Ranjit Construction Private Limited B = Bridge
SA India 2003 Satna-Umaria Road GP UC TR BH Rewa Tollways Ltd. BH = Bridge and Highway
SA India 1997 Six Bridges in Andhra Pradesh C O TR B P.S. Raj Industries H = Highway
SA India 2002 Tada Nellore & Vijaywada Nadigama Highway GP O TR H Others HT = Highway and Tunnel
SA India 1996 Thane Bhiwandi Bypass Road C O TR H Ideal Road Builders Ltd T = Tunnel
SA India 1996 Udaipur Bypass C O TR H Atlanta Infrastructure Ltd TR = Terminal
SA India 2003 Ujjain-Jhalawad Road GP O TR BH Agroh Infrastructure Developers Private Ltd CD = Channel Dredging
SA India 1999 Vadadora - Halol Toll Road GP O TR H Infrastructure Leasing & Financial Services CDT = Channel Dredging and Terminal
SA India 1999 Wainganga Bridge GP O TR B Jaiswal-Ashoka Infrastructure Pvt. Ltd. FAUP = Fixed Assets and Urban Passenger
SA India 1999 Watrak River Bridge Project GP O TR B Larsen & Toubro UP = Urban Passenger
EAP China 1994 Chiwan Kaifeng Container Terminal GP O S TR Chiwan Wharf Holdings Ltd. FAFIP = Fixed Assets, Freight, and Intercity Passenger
EAP China 1996 Dalian Container Terminal (DCT) GP O S TR PSA Corp F = Freight
EAP China 1998 Dalian Marine Tank Terminal GP O S TR Odfjell ASA FIP = Freight and Intercity Passenger
EAP China 1998 Fuzhou Daijiang Minjiang Terminals C O S TR PSA Corp FAF = Fixed Assets and Freight
EAP China 1999 Jinzhou Port Co. Ltd. D O S TR Others FUP = Freight and Urban Passenger
EAP China 1995 Lanshang port GP O S TR GATX Terminals Pte Ltd. IP = Intercity Passenger
EAP China 2001 Mawan Port GP O S TR China Merchant Holdings (International) Co Ltd FA = Fixed Assets
EAP China 1992 Nanhai Container Terminal C O S TR Hutchison Whampoa Ltd FAIP = Fixed Assets and Intercity Passenger
EAP China 1994 Ningbo - Van Ommeren Tank Terminal Ningbo (VOTTN) GP O S TR Helm AG RTR = Runway and Terminal
EAP China 1994 Ningbo - Van Ommeren Tank Terminal Ningbo (VOTTN) GP O S TR Koninklijke Van Ommeren N.V. R = Runway
EAP China 2000 Qingdao Qianwan Container Terminal Co. Ltd. GP O S TR AP Moller Maersk Group
EAP China 2000 Qingdao Qianwan Container Terminal Co. Ltd. GP O S TR China Ocean Shipping Company (COSCO)
EAP China 2000 Qingdao Qianwan Container Terminal Co. Ltd. GP O S TR P&O Ports
EAP China 1993 Shanghai Container Terminals (SCT) GP O S TR Hutchison Whampoa Ltd
TERA INTERNATIONAL GROUP, INC. - 3.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP China 2002 Shanghai Hudong Terminal Management Co. Ltd. MLC O S TR AP Moller - Maersk Group Region:
EAP China 2000 Shanghai Port Container Co. Ltd. D O S TR Others SSA = Sub-Saharan Africa
EAP China 2000 Shanghai Pudong International Container Terminals Ltd GP O S TR China Ocean Shipping Company (COSCO) ECA = Europe and Central Asia
EAP China 2000 Shanghai Pudong International Container Terminals Ltd GP O S TR Hutchison Whampoa Ltd MENA = Middle East and North Africa
EAP China 1994 Shantou Zhuchi Port GP O S TR Hutchison Whampoa Ltd SA = South Asia
EAP China 2002 Shekou Container Terminals - Phase II GP UC S TR China Merchant Holdings (International) Co Ltd LAC = Latin America and Caribbean
ECA Turkey 2000 Belde Port GP O S TR Arcas Group EAP = East Asia and Pacific
ECA Turkey 1999 Derince Port GP O S TR Enka Type of PPI:
ECA Turkey 1999 Derince Port GP O S TR P&O Ports GP = Greenfield Project
ECA Turkey 1996 Kumport - Istanbul GP O S TR Arcas Group C = Concession
SA India 2001 Chennai Port Container Terminal Expansion Project C O S CD Chettinad Group D = Divestiture
SA India 2001 Chennai Port Container Terminal Expansion Project C O S CD P&O Ports MLC = Management and Lease Contract
SA India 1999 Dahej Liquid Chemical Port GP O S TR Indian Petrochemical Corporation Limited Project Status:
SA India 2003 Haldia Dock Complex (4A Berth) GP O S TR ISP Singapore O = Operational
SA India 2003 Haldia Dock Complex (4A Berth) GP O S TR S.S. Global CO = Concluded
SA India 1997 Jawaharlal Nehru Port (NSICT) GP O S TR Konsortium Perkapalan Berhad UC = Under Construction
SA India 1997 Jawaharlal Nehru Port (NSICT) GP O S TR P&O Ports D = Distressed
SA India 1999 Kakinada Port C O S TR Larsen & Toubro CA = Cancelled
SA India 1999 Kakinada Port C O S TR Precious Shipping Ltd. Sub-sector:
SA India 1999 Kakinada Port C O S TR Stevedoring Services of America (SSA) Inc. A = Airports
SA India 2003 Mormugao Port GP UC S TR ABG Heavy Industries Ltd RLW = Railroads
SA India 1996 Mundra Port GP O S TR Gujarat Port Infrastructure Development Company Ltd. S = Seaports
SA India 1996 Mundra Port GP O S TR Others TR = Toll Roads
SA India 1996 Mundra Port GP O S TR P&O Ports Segment:
SA India 1999 Navlakhi Port - United Shippers GP O S TR United Shippers B = Bridge
SA India 1995 Pipavav Port GP O S TR PSA Corp BH = Bridge and Highway
SA India 1995 Pipavav Port GP O S TR Seaking Engineers Ltd. H = Highway
SA India 1998 Tuticorin Container Terminal GP O S TR PSA Corp HT = Highway and Tunnel
SA India 1998 Tuticorin Container Terminal GP O S TR South India Corporation T = Tunnel
SA India 2002 Visakhapatnam Port GP UC S CDT Dubai Port Authority TR = Terminal
SA India 2002 Visakhapatnam Port GP UC S CDT United Liner Agencies CD = Channel Dredging
SA Pakistan 1997 Karachi - International Container Terminal C O S TR American President Lines CDT = Channel Dredging and Terminal
SA Pakistan 1997 Karachi - International Container Terminal C O S TR International Container Terminal Services Inc. (ICTSI) FAUP = Fixed Assets and Urban Passenger
SA Pakistan 1995 Karachi - Premier Container Terminal GP O S TR Bahria Foundation UP = Urban Passenger
SA Pakistan 1995 Karachi - Premier Container Terminal GP O S TR Premier Mercantile Services (Pvt) Ltd FAFIP = Fixed Assets, Freight, and Intercity Passenger
SA Pakistan 1995 Port Mohammad bin Qasim - International Container Termina C O S TR Commonwealth Development Corporation F = Freight
SA Pakistan 1995 Port Mohammad bin Qasim - International Container Termina C O S TR P&O Ports FIP = Freight and Intercity Passenger
SA Pakistan 1995 Port Mohammed bin Qasim Liquid Bulk Terminal GP O S TR Engro Chemical Pakistan Ltd. FAF = Fixed Assets and Freight
SA Pakistan 1995 Port Mohammed bin Qasim Liquid Bulk Terminal GP O S TR Paktank International B.V. FUP = Freight and Urban Passenger
SA Sri Lanka 1999 Colombo Port C O S TR John Keels Holdings Ltd. IP = Intercity Passenger
SA Sri Lanka 1999 Colombo Port C O S TR P&O Ports FA = Fixed Assets
EAP Thailand 1990 Bangkok Elevated Road and Train System GP CA RLW FAUP Hopewell Holdings FAIP = Fixed Assets and Intercity Passenger
EAP Thailand 1990 Bangkok Elevated Road and Train System GP CA RLW H Hopewell Holdings RTR = Runway and Terminal
EAP China 2001 Beijing No. 5 Subway Co. GP O RLW UP SNC Lavalin R = Runway
EAP China 2001 China Railway Erju Co. Ltd. D O RLW FAFIP Others
EAP China 1996 Guangshen Railway Company Limited D O RLW FIP Others
EAP Malaysia 1997 Express Rail Link GP O RLW FAUP YTL Corporation
EAP Malaysia 1997 Keretapi Tanah Malayu MLC CO RLW FAFIP Bolton Properties
TERA INTERNATIONAL GROUP, INC. - 3.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP China 2002 Shekou Container Terminals - Phase II GP UC S TR Modern Terminals Ltd. Region:
EAP China 2002 Shekou Container Terminals - Phase II GP UC S TR P&O Ports SSA = Sub-Saharan Africa
EAP China 2002 Shekou Container Terminals - Phase II GP UC S TR Swire Pacific Ltd. ECA = Europe and Central Asia
EAP China 1991 Shekou Container Terminal C O S TR P&O Ports MENA = Middle East and North Africa
EAP China 1991 Shekou Container Terminal C O S TR Swire Pacific Ltd. SA = South Asia
EAP China 1998 Tianjin Port C O S TR New World Infrastructure LAC = Latin America and Caribbean
EAP China 1998 Tianjin Port C O S TR Sea-Land Orient Terminals Ltd EAP = East Asia and Pacific
EAP China 1996 Xiamen Haicang Port GP O S TR Hutchison Whampoa Ltd Type of PPI:
EAP China 1995 Xiamen Liquid Bulk Terminal GP O S TR Daxin Petroleum (China) Limited GP = Greenfield Project
EAP China 1995 Xiamen Liquid Bulk Terminal GP O S TR Paktank International B.V. C = Concession
EAP China 1996 Xiamen, Dongdu, Berths 12,13,14 C O S TR Fairyoung (Xiamen) Port Investments Ltd D = Divestiture
EAP China 1996 Xiamen, Dongdu, Berths 12,13,14 C O S TR New World Infrastructure MLC = Management and Lease Contract
EAP China 1994 Yantian International Container Terminals GP O S TR Hutchison Whampoa Ltd Project Status:
EAP China 2002 Yantian International Container Terminals Phase III GP UC S TR Hutchison Whampoa Ltd O = Operational
EAP China 1999 Zhapu Port Multi-Purpose Terminal GP O S TR China Infrastructure Group CO = Concluded
EAP China 1994 Zhuhai - Gaolan, Jiuzhou Ports C O S TR Hutchison Whampoa Ltd UC = Under Construction
EAP Indonesia 1995 Balikpapan Coal Terminal GP O S TR PT Dermaga Perkasa Pratama D = Distressed
EAP Indonesia 2002 Bojonegara Container Terminal GP UC S TR Hutchison Whampoa Ltd CA = Cancelled
EAP Indonesia 1997 Java International Terminals GP O S TR Hutchison Whampoa Ltd Sub-sector:
EAP Indonesia 1999 PT Jakarta International Container C O S TR Hutchison Whampoa Ltd A = Airports
EAP Indonesia 1995 Pulau Laut GP O S TR Consolidated Bulk Handling RLW = Railroads
EAP Indonesia 1995 Pulau Laut GP O S TR PT Swabara Bumi S = Seaports
EAP Indonesia 1995 Pulau Laut GP O S TR PT Tritamas Majutama TR = Toll Roads
EAP Indonesia 1999 Tanjung Perak Container Terminal C O S TR P&O Ports Segment:
EAP Indonesia 1995 Tanjung Priok Koja Container Terminal C O S TR PT Humpuss Terminal Petikemas B = Bridge
EAP Indonesia 2003 Terminal Petikemas Makassar (TPM) C O S TR Pelayaran Nusantara Meratus BH = Bridge and Highway
EAP Indonesia 2003 Terminal Petikemas Makassar (TPM) C O S TR Portek H = Highway
EAP Malaysia 1995 Johor Port C O S CDT Bank Simpanan Nasional Malaysia HT = Highway and Tunnel
EAP Malaysia 1995 Johor Port C O S CDT Permodalan Nasional Berhad T = Tunnel
EAP Malaysia 1995 Johor Port C O S CDT Seaport Terminal (Johore) Sdn Bhd TR = Terminal
EAP Malaysia 1997 Kerteh Liquid Bulk Terminal GP O S TR Dialog MCV Sdn Bhd CD = Channel Dredging
EAP Malaysia 1997 Kerteh Liquid Bulk Terminal GP O S TR GATX Terminals Pte Ltd. CDT = Channel Dredging and Terminal
EAP Malaysia 1992 Klang North Port C O S CDT Northport Corp. Bhd. FAUP = Fixed Assets and Urban Passenger
EAP Malaysia 1994 Klang Westport C O S CDT Hutchison Whampoa Ltd UP = Urban Passenger
EAP Malaysia 1994 Klang Westport C O S CDT Pembinaan Redzai Sdn Bhd FAFIP = Fixed Assets, Freight, and Intercity Passenger
EAP Malaysia 1997 Kuantan Port C O S CDT Damanjaya S/B F = Freight
EAP Malaysia 1997 Kuantan Port C O S CDT Pasdec Corporation S/B FIP = Freight and Intercity Passenger
EAP Malaysia 1997 Kuantan Port C O S CDT Road Builder (M) Holdings Sdn Bhd FAF = Fixed Assets and Freight
EAP Malaysia 1993 Lumut Port GP O S CDT Halim Rasip Holdings Sdn Bhd FUP = Freight and Urban Passenger
EAP Malaysia 1993 Lumut Port GP O S CDT Ipco International Ltd. IP = Intercity Passenger
EAP Malaysia 1993 Lumut Port GP O S CDT Perbadanan Kemajuan Negeri Perak FA = Fixed Assets
EAP Malaysia 2003 Sabah Ports C O S TR Suria Capital Holdings Bhd. FAIP = Fixed Assets and Intercity Passenger
EAP Malaysia 1995 Tanjung Pelepas Port GP O S TR Maersk RTR = Runway and Terminal
EAP Malaysia 1995 Tanjung Pelepas Port GP O S TR Seaport Terminal (Johore) Sdn Bhd R = Runway
EAP Myanmar 1996 Thilawa GP O S TR Hutchison Whampoa Ltd
EAP Philippines 1999 Bauan Terminal GP O S TR Bauan International Port, Inc. (BIPI)
EAP Philippines 1999 Bauan Terminal GP O S TR International Container Terminal Services Inc. (ICTSI)
EAP Philippines 2002 Eva Macapagal Super Terminal GP O S TR Asian Terminal, Inc.
TERA INTERNATIONAL GROUP, INC. - 3.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP Philippines 1993 Manila South Harbour C O S TR All Asia Capital Group Region:
EAP Philippines 1993 Manila South Harbour C O S TR Mitsui SSA = Sub-Saharan Africa
EAP Philippines 1993 Manila South Harbour C O S TR P&O Ports ECA = Europe and Central Asia
EAP Philippines 2001 Subic Bay Grain Terminal GP O S TR Mega Equipment International Corp. MENA = Middle East and North Africa
EAP Philippines 2000 Subic Bay Terminal C O S TR International Container Terminal Services Inc. (ICTSI) SA = South Asia
EAP Philippines 2000 Subic Bay Terminal C O S TR Royal Ports Services Inc. LAC = Latin America and Caribbean
EAP Thailand 1996 Laem Chabang Terminal B 5 C O S TR Laem Chabang International Terminal Co. Ltd. EAP = East Asia and Pacific
EAP Thailand 2003 Laem Chabang Terminal C3 C O S TR P&O Ports Type of PPI:
EAP Thailand 2000 Laem Chabang Terminal A1 GP O S TR Star Cruises GP = Greenfield Project
EAP Thailand 1999 Laem Chabang Terminal A2 GP O S TR Ban Saen Mahanakorn Ltd. C = Concession
EAP Thailand 1999 Laem Chabang Terminal A2 GP O S TR International Container Terminal Services Inc. (ICTSI) D = Divestiture
EAP Thailand 1993 Laem Chabang Terminal A4 C O S TR Aawthai Warehouses Co. Ltd MLC = Management and Lease Contract
EAP Thailand 1998 Laem Chabang Terminal A5 GP O S TR Banpu of Thailand Project Status:
EAP Thailand 1995 Laem Chabang Terminal B 1 C O S TR Laem Chabang International Terminal Co. Ltd. O = Operational
EAP Thailand 1993 Laem Chabang Terminal B 2 MLC O S TR Evergreen Terminals Corp. CO = Concluded
EAP Thailand 1993 Laem Chabang Terminal B 2 MLC O S TR Green Siam Co. UC = Under Construction
EAP Thailand 1990 Laem Chabang Terminal B 3 MLC O S TR Kamigumi Co. D = Distressed
EAP Thailand 1990 Laem Chabang Terminal B 3 MLC O S TR Marubeni Corp. CA = Cancelled
EAP Thailand 1990 Laem Chabang Terminal B 4 MLC O S TR Mitsui Sub-sector:
EAP Thailand 1990 Laem Chabang Terminal B 4 MLC O S TR Ngow Hock Group A = Airports
EAP Thailand 1990 Laem Chabang Terminal B 4 MLC O S TR NYK Line RLW = Railroads
EAP Thailand 1992 Map Ta Phut GP O S TR Paktank International B.V. S = Seaports
EAP Vietnam 1994 Phu My Port GP O S CDT Norsk Hydro TR = Toll Roads
EAP Vietnam 1994 Phu My Port GP O S CDT Southern Crop Production Association (SCPA) Segment:
EAP Vietnam 1997 Tan Thuan Dong container port GP O S TR Mitsui B = Bridge
EAP Vietnam 1997 Tan Thuan Dong container port GP O S TR Neptune Orient Lines BH = Bridge and Highway
EAP Malaysia 1997 Keretapi Tanah Malayu MLC CO RLW FAFIP Diversified Resources Bhd. H = Highway
EAP Malaysia 1997 Keretapi Tanah Malayu MLC CO RLW FAFIP Renong Berhad HT = Highway and Tunnel
EAP Malaysia 1997 KL People-Mover Rapid Transit GP O RLW FAUP Berjaya Group T = Tunnel
EAP Malaysia 2000 Kuala Lumpur Sentral Station GP O RLW FA Malaysian Resources Corp. Bhd. TR = Terminal
EAP Malaysia 2003 Penang Monorail System GP UC RLW FAUP Frazer Nash CD = Channel Dredging
EAP Malaysia 2003 Penang Monorail System GP UC RLW FAUP Malaysia Mining Corporation CDT = Channel Dredging and Terminal
EAP Malaysia 2003 Putrajaya Light Rail Transport Project GP UC RLW FAUP MTrans Holding Sdn Bhd FAUP = Fixed Assets and Urban Passenger
EAP Malaysia 1996 Ringan Automatik Sdn Bhd (PUTRA) GP O RLW FAF Renong Berhad UP = Urban Passenger
EAP Malaysia 1993 Sistem Transit Aliran Ringan Sdn Bhd (STAR-LRT) GP D RLW FAF Renong Berhad FAFIP = Fixed Assets, Freight, and Intercity Passenger
EAP Thailand 2001 Bangkok Metro GP O RLW UP Ch Karnchang Company Limited F = Freight
EAP Thailand 2001 Bangkok Metro GP O RLW UP Natural Park Plc FIP = Freight and Intercity Passenger
EAP Thailand 1995 Bangkok Transit System Corporation (BTSC) GP O RLW FAUP Tanayong Group FAF = Fixed Assets and Freight
EAP Cambodia 1995 Pochentong International Airport C O A RTR Muhibbah Engineering FUP = Freight and Urban Passenger
EAP Cambodia 1995 Pochentong International Airport C O A RTR Vinci IP = Intercity Passenger
EAP Cambodia 2001 Siam Reap Airport C O A RTR Muhibbah Engineering FA = Fixed Assets
EAP Cambodia 2001 Siam Reap Airport C O A RTR SUEZ FAIP = Fixed Assets and Intercity Passenger
EAP China 2000 Beijing International Airport D O A RTR Others RTR = Runway and Terminal
EAP China 1994 Fuzhou International Airport - Phase I GP O A R Daya Mitra Ekasejati R = Runway
EAP China 1994 Fuzhou International Airport - Phase II GP O A TR Hume Industries
EAP China 2002 Hainan Meilan Airport D O A TR Copenhagen Airports
EAP China 1998 Shanghai Hongqiao Airport D O A RTR Others
EAP China 1998 Shanghai Pudong Airport D O A RTR Others
TERA INTERNATIONAL GROUP, INC. - 3.8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
EAP China 1999 Shanghai-Pudong Airport Cargo Terminal GP O A TR JHJ International Forwarding Co. Ltd. Region:
EAP China 1999 Shanghai-Pudong Airport Cargo Terminal GP O A TR Lufthansa SSA = Sub-Saharan Africa
EAP China 1998 Shenzhen Airport D O A RTR Others ECA = Europe and Central Asia
EAP China 1999 Wuhan Airport D O A RTR New World Infrastructure MENA = Middle East and North Africa
EAP China 2001 Xiamen Airport Cargo Terminal GP O A TR China Airlines SA = South Asia
EAP China 2001 Xiamen Airport Cargo Terminal GP O A TR EVA Airways Corp. LAC = Latin America and Caribbean
EAP China 2001 Xiamen Airport Cargo Terminal GP O A TR Far East Air Transport EAP = East Asia and Pacific
EAP China 1996 Xiamen Airport Development Co. Ltd. D O A RTR Others Type of PPI:
EAP Lao PDR 2000 Vientiane Airport Terminal MLC O A TR JAL Trading GP = Greenfield Project
EAP Lao PDR 2000 Vientiane Airport Terminal MLC O A TR Tomen Corp. C = Concession
EAP Malaysia 1999 Malaysia Airports Holdings Bhd. D O A RTR Others D = Divestiture
EAP Philippines 2001 Ninoy Aquino International Airport Terminal 3 GP CA A TR Fraport AG MLC = Management and Lease Contract
EAP Thailand 1991 Sukhothai Airport GP O A RTR Bangkok Airways Project Status:
EAP Vietnam 1996 Ho Chi Minh City Airport Cargo Services GP O A TR Singapore Airport Terminal Service O = Operational
ECA Armenia 2001 Zvartnots International Airport C O A RTR Aeropuertos Argentina 2000 CO = Concluded
ECA Turkey 1996 Antalya Airport International Terminal GP O A TR Bayindir UC = Under Construction
ECA Turkey 1996 Antalya Airport International Terminal GP O A TR Flughafen Frankfurt D = Distressed
ECA Turkey 1997 Istanbul Ataturk Airport - International Terminal GP O A TR Akfen Engineering Consultancy CA = Cancelled
ECA Turkey 1997 Istanbul Ataturk Airport - International Terminal GP O A TR Flughafen Wien AG Sub-sector:
ECA Turkey 1997 Istanbul Ataturk Airport - International Terminal GP O A TR Tepe Construction A = Airports
SA India 1994 Cochin International Airport GP O A RTR Gulf based NRIs (non-resident indians) RLW = Railroads
SA India 2001 Delhi Airport Cargo Terminal MLC O A TR Cargo Service Center S = Seaports
EAP Cambodia 2004 Mondulkiri Province Toll Road GP UC TR H Sorla Investment Co. TR = Toll Roads
EAP China 2004 Guangzhou Baiyun Airport MLC O A TR Keppel Corporation Segment:
EAP China 2004 Yangkou Port GP UC S TR Paul Y.-ITC Construction Holdings B = Bridge
EAP China 2004 Yantian International Container Terminals Phase III GP UC S TR Hutchison Whampoa Ltd BH = Bridge and Highway
EAP China 2004 Yantian Westport Container Terminal C O S TR Hutchison Whampoa Ltd H = Highway
EAP Indonesia 2004 Magelang Toll Road GP UC TR H PT Merapi Internusa HT = Highway and Tunnel
EAP Thailand 2004 Airports of Thailand D O A RTR Others T = Tunnel
ECA Croatia 2004 Autocesta Zagreb-Macelj C UC TR H Walter Concession Holding TR = Terminal
ECA Turkey 2004 Esenboga Airport Terminal GP UC A TR Tepe-Akfen Ventures CD = Channel Dredging
LAC Chile 2004 Americo Vespucio Southern Section C UC TR H Grupo Acciona SA CDT = Channel Dredging and Terminal
LAC Chile 2004 Americo Vespucio Southern Section C UC TR H Necso FAUP = Fixed Assets and Urban Passenger
LAC Chile 2004 Americo Vespucio Southern Section C UC TR H Sacyr UP = Urban Passenger
LAC Chile 2004 Consorcio Puerto Arica (CPA) C O S TR Empresas Navieras FAFIP = Fixed Assets, Freight, and Intercity Passenger
LAC Chile 2004 Consorcio Puerto Arica (CPA) C O S TR Ransa F = Freight
LAC Chile 2004 Consorcio Puerto Arica (CPA) C O S TR Sudamericana Agencias Aereas y Maritimas (SAAM) FIP = Freight and Intercity Passenger
LAC Chile 2004 Consorcio Puerto Arica (CPA) C O S TR Ultramaar Group FAF = Fixed Assets and Freight
LAC Chile 2004 El-Salto Kennedy Toll Road GP UC TR HT ACS Group (Actividades de Construccion y Servicios) FUP = Freight and Urban Passenger
LAC Chile 2004 El-Salto Kennedy Toll Road GP UC TR HT Hochtief AG IP = Intercity Passenger
LAC Chile 2004 Northern Zone Rail Network C O RLW FAUP Grupo Comsa FA = Fixed Assets
LAC Colombia 2004 Bogota-Girardot Highway GP UC TR HT Alvarez y Collins SA FAIP = Fixed Assets and Intercity Passenger
LAC Colombia 2004 Bogota-Girardot Highway GP UC TR HT Gas Capital RTR = Runway and Terminal
LAC Colombia 2004 Bogota-Girardot Highway GP UC TR HT NMV S.A. R = Runway
LAC Colombia 2004 Bogota-Girardot Highway GP UC TR HT Vergel y Castellanos
LAC Colombia 2004 La Victoria-Cartago Highway GP UC TR H Agremezclas S.A.
LAC Colombia 2004 La Victoria-Cartago Highway GP UC TR H Conalvias
LAC Colombia 2004 La Victoria-Cartago Highway GP UC TR H Patria S.A.
TERA INTERNATIONAL GROUP, INC. - 3.9 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 3
Region
Country
Financial
Closure
Year
Project Name
Type of
PPI
Project
Status
Subsector
Segment Main Sponsors Legend
LAC Ecuador 2004 Esmeraldas Port C O S CDT Grupo Portuario SA Region:
LAC Ecuador 2004 Esmeraldas Port C O S CDT Hidalgo and Hidalgo SA SSA = Sub-Saharan Africa
LAC Mexico 2004 Tunel Sumergido de Coatzacoalcos GP UC TR T Consorcio Caabsa Constructora SA ECA = Europe and Central Asia
LAC Mexico 2004 Tunel Sumergido de Coatzacoalcos GP UC TR T Fomento de Construcciones y Contratas S.A. (FCC) MENA = Middle East and North Africa
LAC Mexico 2004 Tunel Sumergido de Coatzacoalcos GP UC TR T Obras Portuarias de Coatzacoalcos SA = South Asia
LAC Uruguay 2004 Nueva Palmira Port Terminal GP UC S TR Archer Daniels Midland LAC = Latin America and Caribbean
LAC Uruguay 2004 Nueva Palmira Port Terminal GP UC S TR Stellamaris Internacional EAP = East Asia and Pacific
LAC Venezuela 2004 Margarita General Santiago Marino International Airport C O A RTR Gestion de Ingenieria IDC SA Type of PPI:
LAC Venezuela 2004 Margarita General Santiago Marino International Airport C O A RTR Unique (Flughafen Zurich AG) GP = Greenfield Project
MENA Jordan 2004 Aqaba Container Terminal MLC O S TR AP Moller - Maersk Group C = Concession
MENA Lebanon 2004 Beirut Container Terminal MLC O S TR British Mersey Docks and Harbour Company D = Divestiture
MENA Lebanon 2004 Beirut Container Terminal MLC O S TR International Maritime Associates MLC = Management and Lease Contract
SAR Bangladesh 2004 Jamuna Bridge MLC O TR B Net One Ltd Project Status:
SAR Bangladesh 2004 Jamuna Bridge MLC O TR B Pt Jasa Marga O = Operational
SAR India 2004 Gateway Terminals India Private Limited (GTI) GP UC S TR AP Moller - Maersk Group CO = Concluded
SAR India 2004
Mumbai-Pune Expressway and Mumbai-Pune section of
C O TR H Ideal Road Builders Ltd
National Highway 4
UC = Under Construction
SSA Cameroon 2004 Douala Container Terminal MLC O S TR AP Moller - Maersk Group D = Distressed
SSA Mozambique 2004 Companhia Dos Caminhos De Ferro Da Beira (CCFB) C O RLW FAFIP Ircon International Limited CA = Cancelled
SSA Mozambique 2005 Companhia Dos Caminhos De Ferro Da Beira (CCFB) C O RLW FAFIP Rites Ltd. Sub-sector:
SSA Mozambique 2004 Corredor de Desenvolvimento do Norte C O RLW FIP Edlow Resources Limited A = Airports
SSA Mozambique 2004 Corredor de Desenvolvimento do Norte C O S TR Edlow Resources Limited RLW = Railroads
SSA Mozambique 2004 Corredor de Desenvolvimento do Norte C O RLW FIP Manica Africa (Pty) Ltd S = Seaports
SSA Mozambique 2004 Corredor de Desenvolvimento do Norte C O S TR Manica Africa (Pty) Ltd TR = Toll Roads
SSA Mozambique 2004 Corredor de Desenvolvimento do Norte C O RLW FIP Railroad Development Corporation Segment:
SSA Mozambique 2004 Corredor de Desenvolvimento do Norte C O S TR Railroad Development Corporation B = Bridge
SSA Mozambique 2004 Port of Quelimane C O S TR Cornelder B.V. BH = Bridge and Highway
Source: World Bank PPI Database, March 2006; http://ppi.worldbank.org/reports/customQueryAggregate.asp.
H = Highway
HT = Highway and Tunnel
T = Tunnel
TR = Terminal
CD = Channel Dredging
CDT = Channel Dredging and Terminal
FAUP = Fixed Assets and Urban Passenger
UP = Urban Passenger
FAFIP = Fixed Assets, Freight, and Intercity Passenger
F = Freight
FIP = Freight and Intercity Passenger
FAF = Fixed Assets and Freight
FUP = Freight and Urban Passenger
IP = Intercity Passenger
FA = Fixed Assets
FAIP = Fixed Assets and Intercity Passenger
RTR = Runway and Terminal
R = Runway
TERA INTERNATIONAL GROUP, INC. - 3.10 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 4:
PRIVATE SECTOR PARTICIPATION IN THE MEXICAN
RAILWAYS
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 4
Appendix 4: Private Sector Participation in the Mexican Railways
4.1 Background
1. In the early 1990s the predominantly state-owned Mexican railroad system consisted of
20,425 kilometers of 1.435-meter, standard-gauge line and 90 kilometers of 0.914-meter narrowgauge
line. About 70 percent of the total trackage was operated by the state-owned Mexican
National Railways (Ferrocarriles Nacionales Mexicanos--FNM), which carried some 80 percent of
total rail traffic. The second largest network, also state-owned, was the Pacific Railroad, linking
Nogales and Guadalajara. The three smaller government-owned lines were the Chihuahua to
Pacific Railroad, the Sonora to Baja California Railroad, and the United Railroads of the
Southeast.
2. Railroads were only lightly used by passengers in the early 1990s, accounting for just 2
percent of total intercity passenger travel. In 1992, FNM carried 49 million tons of freight,
representing 12 percent of all long-haul freight traffic in Mexico. Because of deterioration in rail
transportation services, with delays, spoilage, and loss of merchandise, Mexican companies
attempted whenever possible to bypass the rail system altogether by relying heavily on long-haul
trucks, which accounted for 88 percent of all overland cargo transportation in 1992.
3. Despite its abundant mileage and rolling stock, the Mexican railroad system was generally
considered to be antiquated and inefficient. In 1995 the Mexican Congress passed legislation
allowing private investment in railways under 50-year concessions. Private enterprises were
allowed to operate various portions of the rail network, provide train services, and operate
railroads and terminals.
4.2 Private Participation in Railroad Operation
4. In 1996, the Federal government sought to modernize the industrial infrastructure in
Mexico. Its first step was to privatize freight operations on the country's railroad network. Six
concessions for freight railroad operation (covering 15,816 km of the network) were awarded in
1997-1999, with two concessions awarded each year.
5. In 1997, the Northwest and Southeast freight railroads (with network of 8,029 km) were
concessioned to Grupo Ferroviario Mexicano (Ferromex-FXE. Also in 1997, a concession
contract for the Mexican Northeast freight railway (spread over 3,928 km of the network) was
awarded to Transportacion Ferroviara Mexicana (TFM). A large part of stock of TFM has been
bought by the U.S.-based Kansas City Southern Railway (KCS). This company has also been
involved in a legal action, as KCS is claiming for a tax devolution, valued in the amount of
Mexican Pesos 10 billion, resulting from an unclear condition in the sale of the Northeastern
Railway.
6. Since privatization, Mexican railways have invested more than US$1 billion in capital
improvements for increasing the efficiency of the railway network by improving and strengthening
track infrastructure, operating facilities, and modern rolling stock for facilitating heavy freight
operation. Both TFM and FXE are members of the American Association of Railroads (AAR) and
are governed by the association's rules and regulations.
4.3 Impacts and Lessons Learned
7. Railway Services. Since the 1930s, Mexican trains and rail tracks were property of the
government (as Ferrocarriles Nacionales de México, Mexican National Railways), and this
condition made passenger trains very popular. Passenger services were the priority instead of
freight services and travel between cities was reasonably priced. After privatization of rail freight
operations, and due to the pressures created by the North American Free Trade Agreement
TERA INTERNATIONAL GROUP, INC. - 4.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 4
(NAFTA), passenger train services have deteriorated and altogether disappeared on some lines.
Freight trains have considerably increased.
8. Labor Situation. Similar to the situation in most state-owned enterprises in developing
countries, privatization showed that the Mexican Railways were heavily overstaffed. The political
constraints on labor retrenchment caused a labor-intensive bias in the operation of the railroad,
inconsistent with the international trends and the pattern of technological change in the sector. An
important lesson from this process has been that obstacles to reform that seem disproportionate
from the political perspective can be overcome if the proper strategy is followed. The main
components of such strategy are:
• Inclusion of the labor union in the design of the restructuring process, as well as
a close and continuous communication with the workers.
• Political will on the side of the government to provide full support to the people in
charge of the privatization program.
• Appointment of few people with all the support to carry out the process, under
the guidance of an inter-ministerial committee.
• Willingness and capacity to bear the fiscal cost of the reform.
9. It is important that the government should not try to save money on this process and must
be generous towards the workers, giving them more than what they are entitled to obtain by law.
The Mexican Government did not establish any rules or clauses that force the concessionaries to
hire those who previously worked at the FNM with a minimum wage level and fringe benefits.
Basically, the process involved schemes of retirement with benefits above those established in
the labor contract, and to force concessionaries to provide technical personnel training. 1
10. Labor restructuring is expensive. About 23,000 workers, out of 43,000 originally working
for the company, were re-hired by the concessionaires. Those who stayed seem to be getting
higher wages on average, though the spread between skilled and unskilled salaries also widened.
In the Mexican case the financial cost of restructuring was estimated to reach up to 95 percent of
the total proceeds from the sale of the regional companies, without considering the fiscal burden
of the retirement plans.
11. The most important lesson learned was that more information should be made available
about the labor restructuring processes in order to learn from them subsequently. Transparency is
important from the political perspective as well as attracting serious investors.
1 Luis F. Lopéz-Calva, Private Participation In Infrastructure And Labor Issues: The Privatization Of Mexican
Railroads; El Colegio De México, November, 2001
TERA INTERNATIONAL GROUP, INC. - 4.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 5:
CONCESSIONING OF RAILWAYS IN ARGENTINA
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 5
Appendix 5: Concessioning of Railways in Argentina 1
1. The main catalyst for the restructuring and concessioning of state-owned railways in
Argentina was fiscal. The financial pressure on the national treasury imposed by public
enterprises led to the 1989 State Reform and Public Enterprise Restructuring Law, whose
objective was to revitalize the economy by encouraging the private sector operation of public
services. For railways, the government decided that private participation was to be implemented
by concessioning the freight and commuter networks that were originally owned as an integrated
network by the public enterprise, Ferrocarriles Argentinos (FA).
2. The freight network was partitioned into six sub-networks. Between 1990 and 1993, each
of the sub-networks was concessioned for a 30-year period with an optional 10-year extension to
private consortia through an auction. Concessions remained vertically integrated and each
operator had to undertake all of the activities involved in railroad operations, from the
improvement and maintenance of fixed facilities such as stations and tracks to the dispatching
and movement of trains as well as marketing and financial control. Concessionaires were free to
introduce new working practices but were expected to deliver on the investment commitments
made in the bids. They were also expected to hire FA employees, but only those considered
necessary. Labor redundancies were financed by the government (with the help of the World
Bank). Private operators were to pay the federal government a fee for the use of the rail
infrastructure as well as a lease for the use of the rolling stock, which remained in the ownership
of the state. Overall, the annual payment commitments to the government added up to US$140
million. The final main element of the reform was that although freight tariffs were deregulated,
operators would still need to file maximum rates for each commodity for approval by the
Secretary of Transport.
3. The winning bid was selected based on a complex set of weighted criteria. The largest
weight was assigned to the basic investment plan submitted by each bidder, followed by the
projected quality of operations and the number of FA staff to be hired by the private
concessionaire in its new operation. The points awarded for employment of FA personnel
reflected a political compromise and the limited amount of money available for redundancy
payments. On average, 82 percent of FA’s former employees were retained. Total investment
commitments added up to US$1.2 billion over 15 years. Table 5.1 summarizes the winning bids in
each freight sub-network. All concessions were won by consortia headed by Argentine investors
that included – mostly nominally – rail operators with foreign experience and committed
investments of US$1.2 billion over 15 years.
4. For passenger services, the restructuring was separated into inter-city and the suburban
traffic around Buenos Aires. Since most of the inter-city traffic was not commercially attractive to
the private sector, the federal government decided in 1992 to let the provinces decide if they
wanted to continue the services at their own expense. The only provinces that agreed to the
transfer were Buenos Aires, La Pampa, Tucumán, Córdoba, Salta, Río Negro and Chubut. The
transfers were done with concession agreements between the state and the provinces whereby
the state transferred the rolling stock and complementary equipment necessary to run the
services. The provinces agreed to subsidize these operations and run the services over the
network concessioned to the freight and metropolitan private operators, and to pay a fee to these
operators. Most of this traffic has in fact been abandoned now.
1
Adapted from Antonio Estache§, Marianela González and Lourdes Trujillo; What Does “Privatization” Do For
Efficiency? Evidence from Argentina and Brazil’s Railways; World Bank Efficiency Series Paper 2002/10.
TERA INTERNATIONAL GROUP, INC. - 5.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 5
Table 5.1: The New Players in Argentina's Railway Frieght Concessions
Line
Length
(kms)
San Martin 5,493
Concessionaire
Buenos Aires el
Pacifico (BAP)
Ferrocarril
No. of
Bidders
Takeover
Date
Payment to
Government
(US$ mill.)
Employees
Transferred (%
hired from FA)
Proposed
Investments
(US$ million
first 15 years)
2 Aug. 1993 36.4 2,271 (83%) 369
Urquiza 2,751 Mesopotarnico (MES) 1 Oct. 1993 2.8 1,255 (76%) 64
Rosario-
Bahia
Blanca
5,163
Ferroexpreso
Pampano (FEP)
2 Nov. 1991 48.4 1,500 (85%) 234
Roca 4,791 Ferrosur Roca (FER) 1 Mar. 1993 18 1,133 (86%) 173
Mitre 4,520
Nuevo Central
Argentino (NCA)
2 Dec. 1992 33.5 2,322 (78%) 386
Total 22,718 - - - 139.1 6,912 (82%) 1,226
Source: Estache, et. al., Op. Cit.
5. The Buenos Aires commuter services were separated in 1991 into seven vertically
integrated units which were actually transferred after an auction to private operators between
1994 and 1995. The concessions corresponded to the seven different lines and networks that had
existed prior to the creation of FA in the 1950s: Mitre, Sarmiento, Urquiza, Roca, San Martín,
Belgrano Norte and Belgrano Sur. The subway, consisting of five underground lines and a surface
light rail line, was placed in a bidding package together with the Urquiza line which shared the
same track gauge and was physically connected to the subway. As in the case of freight, the
government maintained ownership of the assets, and concessionaires were expected to operate,
maintain, comply with the service obligation spelled out in the contracts and carry out the
investment commitments made in the bids. The government set maximum fares subject to
automatic increases according to service quality and increases in the U.S. Consumer Price Index.
Non-achievement of quality of service levels resulted in financial penalties. The main differences
with the freight concessions were that there were no restrictions on reemployment or labor
practices, that investments were to be financed by the government and that the contracts were
shorter (10 years with an optional 10 year extension, except for the subway and the Urquiza line
where the contract is for 20 years). Also, some of the concessions involved subsidies to be paid
by the government.
6. Following an international competitive bidding process, concessionaires were selected on
the basis of a single parameter: the lowest subsidy requested by the concessionaire to operate
the line and undertake the specified investment and rehabilitation program.
7. Lowest subsidies were measured as the first ten-year present value of the annual subsidy
flow required to operate the line and undertake the investments, net of the annual flow of the fee
(or “canon”) offered to be paid for the use of fixed assets such as track and stations. The
characteristics of the successful bids for each railway concession package are summarized in
Table 5.2.
TERA INTERNATIONAL GROUP, INC. - 5.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 5
Line
Length
(kms)
Concessionaire
No. of
Bidders
Takeover
Date
Operating
Subsidy or
(Fee) (US$
million)
Belgrano
Norte
51.9 Ferrovias (FEV) 2 Apr. 1994 196.7 18.1 58.7
Belgrano
Sur
58.4 Metropolitano (FMB) 3 May, 1994 166.1 13.5 43.8
Roca 252.4 Metropolitano (TMR) 4 Jan. 1994 (70.0) 120.2 136
San Martin 55.4 Metropolitano (TMS) 4 Apr. 1994 (44.7) 54.9 62.7
Mitre 182.1
Trenes de Buenos Aires
(TBA)
3 May, 1995 84.1 57.7 221.2
Sarmiento 166.6
Trenes de Buenos Aires
(TBA)
3 May, 1995 (177.9) 93.6 193.2
Urquiza 25.6 Metrovias 3 Apr. 1994 101.7 24.8 37.8
Subway 44.1 Metrovias 3 Apr. 1994 (438.4) 151.5 399.2
Total 836.5 - - - (182) 534.3 1,152.6
Source: Estache, et. al., Op. Cit.
Table 5.2: The New Players in Argentina's Commuter Railway Concessions
Proposed Investments
(US$ million) Annual
Average and Year 1
8. The combined total government payment requested by the consortia to operate and
rehabilitate the systems over the duration of the concessions was about US$1 billion in nominal
terms, or US$630 million in present value (in 1992 US$). Most of this amount –which was below
the cost of running the system by FA – was intended for capital investment (about US$550
million), as opposed to government subsidies which mostly financed operational deficits before
privatization. The reduction of the operational costs was also based on a sensible staff reduction.
In 1991 there were 17,000 employees in the commuter rail services. The concessionaires,
altogether, for all the groups of suburban services, only requested 8,500. As for the regulatory
regime, it was driven by a cost plus model for both passengers and freight. There are some
trigger rules which drive incentives. The trigger rule is based on an agreed upon structure of cost.
The changes in cost over time are compensated through tariff increases or though equivalent
subsidies by the government. The main issue with the rule is that the incentives to minimize costs
are not very strong in this type of environment.
9. Within three years of the first contract, as early as 1995, the government started to face a
growing dilemma about whether it should renegotiate the railway concession contracts or enforce
them as written. Minor problems had arisen. Some consortia bidding for the freight concessions
had promised to hire large numbers of FA employees, since that was one of the criteria for the
final award. Once the consortia were awarded their concessions, however, some argued that they
could not meet their commitments because most FA employees were not qualified for the new
jobs. Similarly, immediately after the award of the urban commuter concessions, some of the
winners argued that there were ambiguities in the contracts that had to be resolved before they
could take over the lines. The main outstanding issue since then with the freight railways was that
if the government strictly enforced the contracts, it would force at least three of the five
concessions into bankruptcy. For the commuter railways, the main issue was excess demand for
the improved service and its impact on quality, and hence, on prospective riders. The
renegotiation process that started with the concessionaires in 1997 was partly concluded in 1999
just before the change of the administration. After the government change, the renegotiation issue
was reopened.
10. Overall, at the end of year 2001, in spite of the on-going renegotiation process, many
would argue that the reforms have been at least a qualified success on the basis of a comparison
of the perceived quality and level of service before and after the reform. Fiscal costs have
dropped—although they are becoming higher than expected because of the return of subsidies—
and output and quality have clearly improved. Commuter rail services duplicated their output
figures above expectations in just three years of private operation. Rail freight shipments have
more than doubled FA levels–although the macroeconomic crisis has slowed the growth rate and
outputs remain below the projections in the contract. Service quality has seen major
TERA INTERNATIONAL GROUP, INC. - 5.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 5
improvements as well. For shippers, savings on rail freight charges can reasonably be estimated
to be over US$70 million annually, to a large extent reflecting improvements in labor productivity
(from 0.1 to two million tons per worker) and in locomotive availability (from 50 percent to 80
percent). Commuter services enjoy greater frequency, fewer delays and cancellations, and
improving levels of comfort and attention to customer needs.
11. There are some concerns that for the rail system as a whole, the number of accidents has
increased in absolute terms since 1995. The main issue arising at this stage of the reform,
however, is the renegotiation of all contracts. With freight concessions, weak contractual
compliance reflects an incentive to over-optimize, which was built into the design of the auction
and resulted in unrealistic formal investment promises—quite different from those built into the
actual business plans of each bidder. Only one operator (NCA) achieved 50 percent of its
physical investment commitments, with the rest ranging between 10 percent and 39 percent. The
operators have been subject to about US$10 million in penalties, most of which are being
disputed in court and remain unpaid. Also, several of the freight and passenger concessionaires
defaulted on their canons. For passenger contracts, the investments to be carried out by the
government have been updated and reduced and tariff increases (by 60 percent over a six-year
horizon) have been secured to raise funds to compensate for the debt of the government to the
operators and to finance investment (managed through a trust fund). Changes in tariffs have
been contested by the users, but renegotiation with other concessionaires continues.
TERA INTERNATIONAL GROUP, INC. - 5.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 6:
PRIVATIZATION AND DISCONTENT IN LATIN AMERICA
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 6
6.1 Background
Appendix 6: Privatization and Discontent in Latin America
1. During the 1980s, privatization was a key ingredient of structural adjustment in Latin
America in the policy package advocated by the U.S., the IMF, the World Bank, and other
international organizations. The basic idea behind large scale divestitures of SOEs during the
1980s and a good part of the 1990s was to raise microeconomic efficiency at the same time of
macroeconomic reforms. However, since the late 1990s there has been social unrest in some
Latin American countries indicating that privatization is not just a matter of microeconomic
efficiency, and it has an important distributive dimension. 1
2. Because of the developing situation in the late 1990s there was loss of momentum to
continue privatization of infrastructure and utilities. Surveys have shown that privatization has
become unpopular in Latin America.
3. Although there is widespread public discontent, the privatization process has been
supported in academic circles. No other structural reform probably generates so much gap
between public perception, on the one hand, and theoretical and empirical opinions from
academia (including international organizations), on the other. A disconnect is obvious between
public perception and the justification and implementation of privatization schemes.
6.2 Privatization and Social Impact
4. Although privatization policy is believed to be socially beneficial, it faces increasing
opposition in several countries. Latin America, which has been in the forefront of privatization, at
the end of two decades is facing popular opposition to privatization. Public opinion surveys have
revealed a consistent picture of privatization discontent that points to a combination of perceived
distributional concerns.
5. In the early part of the current decade the supposed failure of privatization in Latin
America became the source of street riots, protest demonstrations, and adverse news coverage.
Riots in Arequipa, Peru, erupted in June 2002 following the announcement of a proposal to
privatize power plants, while Cochabamba, Bolivia witnessed a so-called water war in April 2000.
Anti-privatization protests also occurred in Ecuador and Paraguay. Water privatization in Lima
and Rio de Janeiro had to be cancelled owing to popular opposition.
6. These adverse opinions are not restricted to a handful of protesters. Opinion polls in 2000
showed that a clear majority disapprove the privatization process, a pattern that is uniform across
countries, age, gender and socioeconomic classes. The opinions appear to be becoming
increasingly adverse over time.
7. The results of Latinobarometer 2002, 2 showed that around 61 percent of those
interviewed disagree that privatization has been beneficial to the country, or 67 percent excluding
non respondents and those who ‘do not know’. The net disagreement (difference between those
who agree and those who do not agree) is 34 percent (see Table 6.1).
1 Jorge Carrera, Daniele Checchi, Massimo Florio, Privatization Discontent and its Determinants:
Evidence from Latin America, World Bank, June 2004.
2 A representative sample of 18,522 individuals in 17 countries were asked whether the privatization of
state companies has been beneficial to the country.
TERA INTERNATIONAL GROUP, INC. - 6.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

Table 6.1: Results of Privatization Survey – Latin America 2002
Item
No. of Share of Total No. of Valid Share of Total
Respondents (Percent) Responses (Percent)
Strongly Agree 1,573 8.49 1,573 9.37
Somewhat Agree 3,781 20.41 3,781 22.52
Somewhat
Disagree
6,993 37.76 6,993 41.65
Strongly Disagree 4,441 23.98 4,441 26.45
Do Not Know 1,271 6.86
Non Respondent 463 2.50
Total 18,522 100.00 16,788 100.00
Source: Jorge Carrera, et.al., Op. Cit.
APPENDIX 6
8. A new survey in 2003 showed even worsening perceptions, with a net disagreement
around 40 percent. The highest disagreement was in Argentina, around – 70 percent and the
lowest in Brazil – 20 percent. 3
6.3 Summary of Main Findings
9. The main findings of the surveys are summarized by country in Table 6.2. High probability
of disagreement with privatization is encountered when the respondent is poor, privatization was
large and involved a high proportion of public services as water and electricity, and the country
suffered adverse macroeconomic shocks and inequality of incomes. With more education the
discontent is seen to become more adverse.
10. While typically only the efficiency effect of privatization has been focused on, there is a lot
of redistribution involved in the process. The redistributive dimensions of the reform have been
recognized as the most important issue. The poor under privatization suffer the risk of being net
losers. The abolition of cross-subsidies in the tariff structure of railway passenger services (like
some utilities) following privatization of the most competitive part (e.g. freight services) may
generate a tariff rebalancing that is unfavorable to users of the service at the lower end of the
social structure.
11. Because of regressive welfare impact of privatization, in countries with high income
inequality, a large number of the respondents will be critical of the reform, support for privatization
will decrease with declining income or well-being of respondents, and the risk of privatization
discontent will increase.
12. The Latin American experience shows another dimension of privatization discontent
related to excessive divestitures within short periods of time. Under these circumstances the long
developed habits of users of public services are suddenly disturbed, and even if the quality of
services may gradually improve, and prices decrease, the initial reaction of users to the sudden
developments may be negative.
3 The Economist, 2003
TERA INTERNATIONAL GROUP, INC. - 6.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 6
Country
Strongly
Agree (%)
Somewhat
Agree (%)
Somewhat
Disagree (%)
Strongly
Disagree (%)
Do Not
Know (%)
Number of
Observations
% of
Observations
Argentina 1.75 11.94 38.81 45.16 2.34 1,198 6.63
Bolivia 4.64 19.38 53.91 18.16 3.91 1,228 6.80
Brazil 16.50 22.23 14.14 38.22 8.91 976 5.40
Colombia 4.34 18.39 38.77 25.85 12.66 1,153 6.38
Costa Rica 7.76 24.62 40.35 13.99 13.28 979 5.42
Chile 4.56 21.03 45.61 22.89 5.91 1,184 6.56
Ecuador 12.98 32.44 31.57 18.43 4.58 1,156 6.40
El Salvador 10.64 27.4 43.68 13.07 6.22 949 5.25
Guatemala 9.62 19.04 33.88 31.01 6.45 977 5.41
Honduras 15.03 21.02 38.17 19.70 6.09 985 5.45
Mexico 4.98 23.88 43.12 24.71 3.32 1,206 6.68
Nicaragua 16.53 14.72 35.18 27.02 6.55 992 5.49
Panama 16.14 15.21 33.20 27.75 7.71 973 5.39
Paraguay 2.68 15.89 48.49 26.42 6.52 598 3.31
Peru 5.04 27.88 45.59 12.26 9.24 1,191 6.60
Uruguay 3.67 11.94 37.34 34.78 12.28 1,173 6.50
Venezuela 14.11 26.64 35.58 18.93 4.73 1,141 6.32
Total 8.71 20.94 38.72 24.59 7.04 18,059 100.00
Source: Jorge Carrera, et. al., Op. Cit.
Table 6.2: Attitude Towards Privatization by Country (%) - Latin America 2002
13. Divestitures of state-owned enterprises in a country with poor growth or otherwise affected
by macroeconomic imbalances, with high inequality of incomes, where the divestiture process is
big and quick, and where there is substantial share of socially sensitive utilities and poor
liberalization, are at high risk of discontent.
6.4 Conclusion
14. The beneficial impacts of privatization of railroads for improving microeconomic efficiency
at the same time of macroeconomic reforms cannot be denied. In most countries private
operation of railway networks has improved productivity and system efficiency, the fiscal situation
of such railroads has also improved.
15. However, from the point of view of profitability of operations, no two railway networks or
lines of a network are alike. Cherry-picking of the more profitable railway lines for private sector
involvement has left significant lesser worked remaining parts of the networks in more dilapidated
condition than even before privatization. On many such lines, railway passenger operations have
ceased or have been greatly truncated. Many towns and villages, mostly in the less developed
and poor regions have suffered on this account and became ghost towns. In Argentina, after
identification of some 27,200 km of freight routes for concessioning, the remaining 8,000 km of
the cargo system — including approximately 5,000 km of meter gauge, 500 km of standard gauge,
and 2,500 km of broad gauge track, which were not considered economically viable and did not
have traffic of national significance, were offered to provincial governments in case they have
local significance. Those not accepted by the provinces were abandoned.
16. The situation has been somewhat identical to that following deregulation of the US
railroads, which led to large scale line and service closures following mergers. In countries with
high income inequality, because of the regressive impact of privatization the poor suffer a risk of
being net losers and therefore may be the main sufferers. It is therefore imperative that in the
design and implementation of PSP transactions in the railway sector (as in other utilities) the
distributional concerns are fully recognized and addressed in the policy framework and design of
the privatization schemes.
TERA INTERNATIONAL GROUP, INC. - 6.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 7:
CONCESSIONING OF RAILWAYS IN BRAZIL
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 7
Appendix 7: Concessioning of Railways in Brazil 1
1. The restructuring and concessioning of freight railways in Brazil was implemented in 1997
and involved four groups of players. The restructured company, Rede Ferroviária Federal,
Sociedade Anônima or RFFSA, was a government-owned rail corporation structured around six
regional divisions spread out over the country since 1957. A second public operator Ferrovias
Paulistas, Sociedade Anônima (FEPASA), created by the state of São Paulo in 1974, was later
included in the reform package as well. These two public operators provided rail transport
services to about 95 percent of the country’s freight shippers, whereas the third important
operator (and the largest in terms of output) at the beginning of the 1990s was the Companhia
Vale de Rio Doce (CVRD). CVRD was a huge, government-owned industrial holding that
managed two different, specialized railroads, EFVM (Estrada de Ferro Vitória a Minas) and EFC
(Estrada de Ferro Carajás), running from iron ore mining sites to the ports in the north and center
of the country. This company mostly attended its own traffic, which largely consisted of high
volumes of iron ore for export.
2. RFFSA and FEPASA were generally not doing well just before the beginning of the
privatization process. They were overstaffed and lack of investments had made important parts of
their infrastructure and rolling stock obsolete. Particularly in the case of RFFSA, poor
revenue/cost ratios demanded a continual support from public funds, which amounted on average
to more than US$250 million a year. It had a cost structure with a wage component of almost 75
percent of operating expenditures and where the debt burden rapidly rocketed out of control to
US$3 billion. Employment levels had been cut from about 125,000 in the mid 1980s to about
42,000 just before the privatization process started.
3. In view of the geographic characteristics of the country, the size and state of conservation
of the federal railway network, as well as the significant cross-regional differences in RFFSA
traffic, the government decided to reorganize the network and divide it into six vertically integrated
regional monopolies, to be joined later by FEPASA as a seventh region. The rail services would
be concessioned for 30 years by the Government’s national bank, BNDES. The first six
concessions – Nordeste, Centro-Leste, Sudeste, Sul, Teresa Cristina and Oeste – were awarded
between 1996 and 1997. The Malha Paulista (former FEPASA), was included in the privatization
program of RFFSA and its concession was carried out in November 1998, thereby concluding the
privatization process of former government owned rail operators. When CVRD was privatized in
June 1997 its two railroads (EFVM and EFC) were sold with it, but not concessioned in the same
way as the RFFSA network. These two railroads essentially now operate as internal departments
of CVRD, specializing in iron ore traffic, although they are obligated to carry traffic for other
shippers as well. The auction outcomes are summarized in Table 7.1.
Line
Length
(kms)
Centro-
Leste
7,080
Nordeste 4,534
Sudeste 1,674
Sul 6,586
Table 7.1: The New Players in Brazil's Railway Freight Concessions
Concessionaire
Ferr, Centro
Atlantica (FCA)
Co. Ferr. Nordeste
(CFN)
MRS Logistica
(MRS)
Ferrovia Sul
Atlantico (FSA)
Ferr. Novoeste
(FNV)
Ferr. Tereza Cristina
(FTC)
No. of
Bidders
Years 1-6 Years 7-30
2 Sept. 1996 316.9 7,900 (72%) 327.4 982.4
4 Jan. 1998 15.7 1,600 (50%) 18.4 49.2
3 Dec. 1996 888.9 6,600 (70%) 227.0 1,408.0
4 Mar. 1997 216.6 6,900 (72%) 276.0 1,083.0
Oexte 1,621
n.a. July, 1996 62.4 1,800 (74%) 89.0 270.0
Tereza
Cristina
164
1 Feb. 1997 18.5 250 (73%) 9.4 19.3
Panlista 4,236 Ferroban (FBN) 2 Jan. 1999 245.0 6,380 (46%) 304.8 588.2
Total 25,895 - - - 1,764.0 31,430 1,252.0 4,400.1
Source: Compiled from data available on RFFSA's website.
Takeover
Date
Payment to
Government
(US$ mill.)
Employees
Transferred
(% of before
transfer)
Investment
Commitments
1
The reform of passenger services in Brazil is mostly a subnational responsibility and followed a similar but slower
track.
TERA INTERNATIONAL GROUP, INC. - 7.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 7
4. Except in the case of CVRD, and with several minor amendments in the case of FEPASA,
the concessioning process of RFFSA consisted of a public competitive bidding process for the
operation and maintenance of each of the regional networks for a period of 30 years (renewable
for another 30 years at most, according to the Brazilian law) with the simultaneous leasing of
operational assets by RFFSA and the sale of some small, non-operational assets. Each auction
was won by the bidding consortium offering the highest price over the minimum price set by the
government—to be paid as a down payment of 10-30 percent of the minimum price and quarterly
installments for the rest. The government had to receive a total of about R$1,700 million for the
seven concessions, although only about R$400 million was paid in the first installments with the
rest due (after a one to three year grace period, depending on the concession) in 108 to 112
quarterly payments over the remaining life of the concession. The number of workers transferred
to the concessionaire was also specified in the bidding documents (the average reduction was 25
percent) and the remaining ones retired, were laid off or still work for RFFSA in non-operating
activities.
5. The main innovation of the Brazilian contracts is that they spell out two specific targets
about output and safety, in terms of minimum net ton-kilometers carried each year and maximum
number of accidents per train-kilometer during the first five years. They were set based on what
the Brazilian Transport Ministry thought to be reasonable based on international best practice and
already reflected in the minimum value assessed for the bids by the privatization agency. These
targets have been reviewed during the third concession year, establishing the new goals for the
next five-year period. The regulation sets product specific maximum prices to be charged for
transport services in the contracts. Ceilings varied according to the length of haul, type of product
and the geographic region served. These maximum prices are to be revised periodically to
correct them according to inflation. Rail’s share of the transport market increased by 4.5 percent
in 1997 and 13 percent in 1998.
6. Overall, the performance of the sector appears to have improved significantly since
privatization. Savings to the Federal Treasury arising from reduced operating subsidies and
concession contracts proceeds have been estimated at more than US$300 million a year.
Reductions in labor and financial costs enabled five out of the six former RFFSA companies to
cover their operating expenses as of 1999. Quality and level of services have improved and
explain why freight revenue started to increase since 1999 in spite of strong competition from
trucks and waterways. There are, however, significant issues. Safety targets have been a
problem for CFN and Novoeste in particular. Another issue is that the operators are not meeting
their investment commitments.
TERA INTERNATIONAL GROUP, INC. - 7.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 8:
PRIVATIZATION OF ESTONIAN RAILWAYS
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 8
Appendix 8: Privatization of Estonian Railways
8.1 Background
1. After 1940, the Estonian railways had become one of three operating divisions of the
Baltic Railway, one of the 32 regional railway administrations in the Former Soviet Union (FSU)
reporting to the Ministry of Railways (MPS) in Moscow. There were over 170 such divisions in the
FSU as a whole. Following Estonian independence what was previously simply an operating
division of a regional administration became in 1992 a national railway, Eesti Raudtee (ER). 1
2. As elsewhere in the region, traffic initially fell and by 1995 was at around half of the 1989
levels. Passenger traffic has continued to decline since. But as in the Russian Federation, for
which Estonia is a key transit route, traffic started increasing from the mid 1990s. By the year
2000 Estonia’s freight exceeded its 1989 levels.
8.2 Restructuring Prior to Privatization
3. In 1997 the state-owned enterprise ER was split into a number of new entities:
• the main company became a joint-stock company Eesti Raudtee AS operating
under companies law, responsible for the main international lines and freight
services using them;
• predominantly domestic passenger lines in the south and east of the country
were vested in a new passenger company, Edeleraudtee Ltd, which was then
privatized. Edelaraudtee also now offers some passenger services on ER’s
network under a service contract with the government for which it pays track
access fees to ER;
• international passenger services (to/from St Petersburg and Moscow) were
transferred to a train operating company, EVR Express; 51 percent of shares
were sold to investors and 49 percent were retained by EVR;
• commuter trains in the Tallinn area were also transferred to a suburban train
operating company, Electriraudtee Ltd., still publicly owned.
8.3 Privatization and Operations
4. In April 2000 the Estonian Privatization Agency announced the impending sale of 66
percent of the share capital of ER to a strategic investor through international competition.
Following a rather vexed competition in which an initial preferred bidder was unable to complete
the transaction, majority ownership was sold to the second preferred bidder, Baltic Rail Services
(BRS), in August 2001. This was the first privatization of a vertically integrated national railway in
Europe.
5. ER is an integrated rail infrastructure and freight operator. The company is owned 66
percent by BRS and 34 percent by the Republic of Estonia. BRS itself is owned by Ganiger Invest
of Estonia, RailWorld Estonia LLC (subsidiary of RailWorld of U.S.), Railroad Development Corp.
of U.S., and Emerging Europe Infrastructure Fund of U.K. The U.S. shareholders have extensive
experience in the railway industry internationally while the U.K. shareholder has been heavily
involved in rail infrastructure maintenance and renewal activities in the U.K. The Company has
Supervisory and Management Boards. The acquisition of ER by BRS was accomplished partly by
a loan from the International Finance Corporation (IFC). This loan was re-financed in 2003 and
the favorable terms on which it did so is possibly indicative of the rapid growth of market
confidence in the privatized company. According to the Company’s 2004 Annual Report, the
Company is considering an initial public offering.
1 by Paul Amos, Reform, Commercialization & Private Sector Participation in Railways in Eastern Europe &
Central Asia; World Bank TP # 4, Jan 2005 (File: Paul Amos TP4 Jan 2005)
TERA INTERNATIONAL GROUP, INC. - 8.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 8
6. In terms of competition, at the time of privatization of ER, there was already a significant
private freight train operation on ER’s tracks, carrying oil products between a Russian refinery
and the Port of Tallinn. This traffic continues to pay ER track access charges for its train paths. In
2003 third-party freight and passenger operators provided around 12 percent of ER’s revenue.
Although ER is a vertically integrated freight services and rail infrastructure company a condition
of sale is compliance with EU legislation including third party access conditions.
7. In late 2005 the Government enacted new rules which obligate ER to allow open access
up to 100% of its capacity. The majority owner BRS raised strong objections to this rule which it
considers as a serious infringement on its ability to run its own freight trains. BRS further claims
that most operators requesting access to track are ER’s customers, thus by providing access ER
loses its own freight business.
8. What was once applauded as a successful divestiture of the two-thirds of BR to a private
sector consortium (BRS) is now fast becoming a failure. In June 2005 a government minister
announced that the state would consider buying back the rail infrastructure from the privately
controlled company, while the CEO of ER accused the same minister of trying to renationalize the
enterprise. 2 A month later, a top government official indicated disappointment with how BRS has
been meeting its post-privatization commitments. Ganiger Invest of Estonia, one of the
shareholders of BRS, then announced its willingness to sell its share in BR. “One of the most
acerbic public-private confrontations in recent Baltic memory erupted in the waning days of
December [2006] as the government and the private owners of Eesti Raudtee (Estonian Railway)
exchanged bitter words, with the Cabinet going so far as to slap the company with a 1 million
euro penalty [for violation of post-privatization commitments].” 3 The company’s future ownership
is still undecided and the parties expressed an interest to negotiate rather than litigate their
differences.
9. Passenger Services. Edelaraudtee (south west passenger railway) and Elektriraudtee
(Tallinn suburban services) are provided with revenue support on the basis of agreements with
the Estonian Government which establish the conditions and rates of support. The total subsidy to
both companies was equivalent to about US$13 million in 2003. The Government has not been
prepared to subsidize rail services at any cost. It has allowed replacement of the most
uneconomic passenger services in the south west by buses.
10. Labor Adjustment. Estonian railways employed about 9,600 people in 1989. By 1998,
with gradual downsizing, plus the separation of passenger services, ER employed around 6,400
people. At the time of privatization in 2001 it employed around 4,255 staff. By January 2004 under
private ownership it had reduced to about 2,670 staff, a reduction by about a third. The period of
heavy reduction since 2001 also saw significant traffic growth and improved safety performance.
11. The major part of Estonian railways has been transformed from a single operating division
of the Soviet railway system to one of the most successful and profitable railways in Europe. The
simplicity of the network, the key role of the Port of Tallinn, high levels of transit traffic, and
Russian resources boom all contributed to the success. It was creditable that government
pursued a clear-sighted way in which it first commercialized the organization, separated out the
loss-making passenger services and put its faith in private ownership and operation.
12. Although the financial performance of ER was already improving before privatization, the
impact of private ownership and management has been considerable. The Company has
completely replaced the old Soviet era locomotive fleet with reconditioned U.S. locomotives.
Virtually all indicators of capacity, staff and equipment utilization have improved significantly, as
has safety. The company had an operating ratio in FY2003 of around 65 percent, easily the best
of any national railway organization in Europe.
2 The Baltic Times, Issue # 463, June 29, 2005.
3 Ibid., Issue # 489, January 4, 2006.
TERA INTERNATIONAL GROUP, INC. - 8.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 8
8.4 Lessons Learned
13. The first lesson is that reforming a complex industry is a long-term process: putting in
place mutually supportive legislative, institutional and management structures to deliver
substantive change takes a great deal of time and effort. Gradualism in this process can be a
merit if it reflects a well thought-out series of steps towards an agreed outcome. However,
gradualism should not reflect a lack of clarity in ultimate objectives or indecision and delay.
14. Structural change is only a means to an end. It is not sufficient to improve performance
alone. Governments can create the structural platform for improved industry performance but only
managements can deliver it. Greater emphasis needs to be given to investing in the actual
process of business change, management, attraction of new skills and experience from inside
and outside the industry, creation of a commercial culture, development of incentive-based pay
structures and others depending on the country situation.
15. Structural separation of railway infrastructure from rail operations cannot of itself improve
business performance. It may, in the short-term, impede it by becoming too narrow a focus of
reform and delaying the business culture and process changes, in both infrastructure and
operations, which will actually improve asset and labor utilization. If separation is favored it needs
to be followed closely by rigorous business plans in both infrastructure and train operating
companies to improve performance.
16. Because of the diversity of railway systems, one structural model is unlikely to best fit for
all parts of it. In particular, for those railways which are very small, low density operations a
preoccupation with structuring into very small infrastructure and operating units appears to be a
misplaced priority when survival depends on a combination of aggressive cost-cutting and agile
marketing.
17. Rail reform is not a ‘fire and forget’ process. Governments wish to retain ownership of
large parts of the industry. But if they are to be effective owners they need to establish their own
mechanisms properly to ensure proper industry governance and supervision, to agree to
challenging business plans, monitor achievement and take action to hold management
accountable for performance.
18. The most promising place to attract the private sector into core activity is in rail freight
operations. Governments in most ECA countries are committed to ownership of the railway
infrastructure network, and also have a clear social and close political interest in passenger
services.
19. For most railways in developing countries, railway reform should not necessarily mean
stand-alone profitability for each line of business. Railways having modest average traffic intensity
and a high component of passenger service will require substantial levels of budgetary support for
investment and support of passenger services. In many countries, railway passenger transport is
not independently commercially viable in the sense that it is able to cover the full costs of
infrastructure. Provision of a comprehensive national passenger rail service is an issue of public
policy choice to be guided by public finance constraint.
20. Both the Government and the private sector must maintain consistent views and
aspirations with respect to PPP after privatization. Inconsistent policies and monopolistic
practices often found after the transaction contract is executed result in disputes between the
public and private partners which cause further uncertainty and adversely affect the results of
privatization.
TERA INTERNATIONAL GROUP, INC. - 8.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 8
21. The railway privatization experience in Estonia started on a highly positive tone with good
results shortly after the sale of the majority shares to the private sector. The disputes emerging
after the sale are now threatening the viability of ER as a strategic entity producing benefits for all
Estonians. In the absence of a speedy resolution of these disputes, ER privatization will become
another failure, negatively affect the national economy, and discourage future privatization
initiatives in the railway sector.
TERA INTERNATIONAL GROUP, INC. - 8.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 9:
ABIDJAN-OUAGADOUGOU RAILWAY CONCESSION
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 9
Appendix 9: Abidjan-Ouagadougou Railway Concession
9.1 Background
1. The first railway concession awarded in West Africa was for the 1,180-km single track
meter gauge Abidjan-Ouagadougou Railway constructed between 1905 and 1954 connecting the
port of Abidjan in Côte d’Ivoire with Ouagadougou, the capital of Burkina Faso, extending to Kaya
(see Figure 9.1). Sitarail, the concessionaire, was set up in an attempt to reverse the decline of
the railways, after more than half a century of state management and operation. 1
2. From 1960 through 1989, the Abidjan-Ouagadougou railway was managed and operated
by a bi-national public enterprise, the Régie des chemins de fer Abidjan-Niger (the Abidjan-Niger
Railway Authority -RAN, jointly owned by Côte d’Ivoire and Burkina Faso (then Upper Volta). RAN
was operated successfully and was financially viable during the 1970s. 2 In 1978, traffic reached
its apogee with transportation of 900,000 tons of freight and more than 4 million passengers. Due
to the economic crises that hit both Côte d'Ivoire and Burkina Faso, decline of the railway traffic
started in 1979. This period was also characterized by significant new road construction resulting
in competition for rail transport. Railway income fell steadily and RAN, with its 5,200 employees
could not adapt to the situation.
Figure 9.1: Abidjan-Ouagadougou Railway
3. In 1989, for political reasons, RAN split into two separate state-owned companies, the
Société Ivoirienne des Chemins de fer (SICF) and the Société des Chemins de fer du Burkina
(SCFB). This separation exacerbated the inefficiencies in the provision of rail services and led to
more shifts of long distance traffic to road transport. In 1993, only 250,000 tons were carried on
the route and 75 percent of income generated was absorbed by employee wages. The financial
situation of SICF and SCFB deteriorated rapidly. The debt owed by the Abidjan-Ouagadougou
railway reached a critical level of ECU 150 million. It was an untenable situation, and neither state
had the resources to make the investments required to keep the two railways operating efficiently.
9.2 Private Participation in Railway Management and Operation
4. Concessioning. In July 1992, the Governments of Côte d’Ivoire and Burkina Faso
decided to reunify and privatize railway operations under a concession scheme. The World Bank
and other donors established a dialogue with the two governments on the design and the conduct
of the concessioning process. Following a call for bids, two offers were received, and in March
1 Abdel Aziz Thiam; Abidjan-Ouagadougou The story of a Railway Concession.
2 Brigitta Mitchell and Karim-Jacques Budin The Abidjan-Ouagadougou Railway Concession; World
Bank, http://www.worldbank.org/afr/findings/english/find140.htm
TERA INTERNATIONAL GROUP, INC. - 9.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 9
1993 the Governments of Côte d’Ivoire and Burkina awarded the railway concession to Sitarail, a
joint-stock company incorporated in Côte d’Ivoire. A strategic investor, SOFIB — controlled by
SAGA and SDV, the two main freight-forwarders active in the region, in association with an
Ivoirian investment group (SICC), Maersk (an international shipping line), railway engineering
consultants Sofrerail and Transurb-consult — held 51 percent of Sitarail’s equity. Other Sitarail
shareholders are the governments of Côte d’Ivoire and Burkina (15 percent each) and Sitarail
staff (3 percent). The shares of the two governments and employees are now maintained, while
the remaining 67 percent is owned by the companies associated with the French Bollore Group,
which also holds the container terminal concession in the Port of Abidjan.
5. Ownership of Infrastructure and Rolling Stock. The ownership of infrastructure and
rolling stock has been retained by the two governments. Two state-owned railway landlord
corporations, the Société Ivoirienne dePpatrimoine Ferroviaire (SIPF) and the Société de Gestion
du Patrimoine Ferroviaire du Burkina (SOPAFER) have been created. They administer railway
infrastructure on behalf of the states. They also hold full ownership of railway equipment
(locomotives, wagons, coaches, etc.) which they lease to Sitarail. The former railway companies
SICF and SCFB have been liquidated.
6. Rail infrastructure management. Sitarail is technically and financially responsible for
train dispatch and maintenance of infrastructure (track, structures, buildings, signaling, and
telecommunication equipment). Maintenance standards and methods are freely determined by
Sitarail, provided standards guarantee rail safety at the level generally accepted in the industry for
the type of traffic carried.
7. Motive power and rolling stock. At the beginning of the concession, Sitarail selected the
motive power and rolling stock from among the existing SICF and SCIB fleets. Sitarail leases this
equipment from the two rail landlord corporations who own it (affermage). Leased equipment is
being rehabilitated by Sitarail under debt financing mobilized by the rail landlord corporations; the
service of the debt is paid fully by Sitarail. New equipment can be bought and financed directly by
Sitarail or, at Sitarail’s request, bought by and leased from the rail landlord corporations. Sitarail
has directly bought four locomotives in 1996.
8. Infrastructure investment program. Infrastructure investment programs are prepared by
the concessionaire and submitted for technical and financial evaluation to the rail landlord
corporations. The states mobilize investment debt financing, but Sitarail bears the full cost of the
debt service through the third component of the concession fee. Investment contracts are
prepared and signed by the railway landlord corporations, who may also implement them.
However, at the request of the donor community financing the initial rehabilitation program,
implementation responsibility has been transferred fully to Sitarail.
9. Scope of the Concession and Regulatory Framework. Sitarail is technically and
financially responsible for (a) the operation of freight and passenger services, including all
equipment maintenance; (b) the maintenance of rail infrastructure and, in part, the renewal and
adaptation of infrastructure; and (c) the current management of the real estate belonging to the
railway domain.
10. While rail transport is still qualified in the concession agreement as a "public service
activity," the concession agreement makes a clear distinction between commercial services and
services operated under a Public Service Obligation (PSO) scheme. For commercial freight and
passenger services, Sitarail has the freedom to set service configuration and tariffs (except
domestic oil rates in the Ivory Coast, which are regulated by the Government), in accordance with
profitability criteria set by Sitarail. The concessionaire is simply required to keep the governments
informed of the criteria used for selecting services operated commercially. Tariffs freely set and
revised by Sitarail are applicable one month after their communication, for information, to the
governments, and fifteen days after they are publicized. Special contract rates may be negotiated
with shippers; these rates are not publicized.
TERA INTERNATIONAL GROUP, INC. - 9.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 9
11. Services operated under a specific PSO scheme can be run at the request of one or both
national governments or at the request of local governments under special contracts between the
authority requesting the service and Sitarail. Contracts have to specify the characteristics of the
service and the modalities of the financial compensation paid to Sitarail.
12. The concession agreement reserves the governments’ right to grant access to rail
infrastructure to third party operators after a seven-year exclusivity period. Third-party operators
would then pay an infrastructure access fee, to be negotiated between Sitarail and the operator
(or to be decided through arbitration, if the parties cannot agree on the fee).
13. Duration of the concession. The concession is a "rolling concession" with an initial
duration of 15 years. At the end of the first 5-year period, and in 5-year intervals thereafter, the
concession can be extended by mutual agreement for additional 5-year periods, thus preserving
the 15-year concession horizon over time.
14. Concession fee. Sitarail pays to the rail landlord corporations (representing the
governments) a concession fee composed of three parts: (a) a usage fee; (b) the rental fee for rail
equipment leased by the landlord corporations to Sitarail; and (c) the debt service on credits and
loans subscribed by the states or the landlord corporations for rehabilitation investments. The
"usage fee" is negotiated between the governments and Sitarail every three years. For the first
three years, the usage fee was as follows: no fee for the first year; 2 percent of Sitarail’s revenue
for the second year (half to be paid the second year, and half in the third year); and 4 percent of
the revenue for the third year. The equipment rental fee has been negotiated and is specified in
the concession agreement at an annual payment of US$2 million (indexed to inflation) for years 4
to 14.
15. Staff. The number of SICF and SCFB staff rehired by Sitarail at the beginning of the
concession (1,815 out of a total workforce of 3,470) was negotiated during the preparation of the
concession agreement. Individual staff was freely selected by Sitarail. The governments have
provided severance payments to redundant staff, in part through financing provided by the donor
community under sectoral and structural adjustment credits.
16. Control and dispute resolution. The rail landlord corporations carry out control of the
concession on behalf of the governments. The concession agreement stipulates that this control
should in no way curtail Sitarail’s management autonomy. Sitarail reports on its activity through
documents identified in the concession agreement (mainly annual accounts, annual report on
services operated under a PSO scheme, annual report on rail safety, environmental protection,
and application of the labor law). A monitoring committee comprised of representatives from the
two governments, the rail landlord corporations, and Sitarail examines all questions related to the
execution of the concession agreement. Disputes related to the concession agreement between
the governments and Sitarail are subject to amicable arbitration. If the arbitration is not successful,
the Ivoirian courts settle disputes
17. Sitarail began operations in August 1995, amidst serious problems of rolling stock
obsolescence and network deficiencies requiring heavy financial investment. A total of ECU 59
million was needed to rehabilitate existing, and acquire new rolling stock and to improve and
renew the fixed infrastructure. This investment was shared by Cote d'Ivoire - ECU 26 million,
Burkina Faso - ECU 19 million and Sitarail - ECU 13 million.
9.3 Operations by Sitarail
18. Operational Results. Sitarail increased its haulage capacity by buying new rolling stock,
implemented an emergency investment program that enabled some sections of track to be
renewed, and also reduced its workforce by 40 percent. During the first year of operation, it
carried 410,000 passengers and 485,000 tons of freight (an average of 110 trains a month),
which increased in the second financial year to 444,000 passengers and 744,109 tons of goods
(a monthly average of 140 trains). In 2001, traffic carried was 806,145 tons and 537.65 million net
TERA INTERNATIONAL GROUP, INC. - 9.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 9
ton-km (which was more than double of 230 million ton-km in 1994-1995, the last full year of
operation by SICF and SCFB). The turnover in the same year was EUR26.78 million. The quality
of service rendered to freight customers improved substantially. Passenger services were
restructured and loss-making services (national) were abandoned. The only passenger service
kept is the long distance international service between Abidjan and Ouagadougou, which has
reasonable prospects for financial profitability. In 2001, Sitarail carried 243,041 passengers and
93.01 million passenger-km. In September 2002 the traffic substantially declined following the
outbreak of civil war in Ivory Coast and the border was closed. This hardship remained until May
2003. The border closed again in November 2004 when fighting broke out.
9.4 Economic Impact of the Railway
19. The operational experience of the Abidjan-Ouagadougou Railway offers an encouraging
example. After nearly 20 years of decline, the Abidjan-Ouagadougou railway is enjoying a new
lease of life. Sitarail succeeded in breathing fresh life into the rail network. This has helped to
revitalize the economies of the two countries. Some of the specific impacts are as follows:
• Sitarail has paid a wage bill of more than ECU 8.5 million every year, which was
pumped into the local economies.
• It has settled its taxes and repaid outstanding debts.
• The railway renaissance has boosted the support enterprises that specialize in
repairing rolling stock. More of these have been set up and they are increasingly
diversifying into other specialized aspects of railway activity such as overhauling of
locomotives and lifting gear. Their expertise has also been extended in areas such
as accountancy, tax administration, and training.
• In Abidjan, the main centre of activity, and in Ouagadougou, a number of mediumsized
enterprises, many set up by former agents laid off by the railways, have
become involved in subcontracted works such as scrub clearing on the line, level
crossing manning and providing personnel for other railway operations. Other
enterprises, both local and foreign, have been given the task of restoring railway
installations.
• Overall, some 200 companies, with an annual turnover of almost ECU 3 million, in
both countries, are involved in the railway business. Other than highly specialized
replacement parts, that can only be procured abroad, Sitarail obtains its supplies (in
the total value of ECU 4.6 million) locally from contractors selected by tender.
20. The success of the Abidjan-Ouagadougou Railway is a source of inspiration for other
African states for encouraging private participation in their railway systems.
9.5 Lessons Learned
21. The first railway concession in Sub-Saharan Africa has provided lessons that are
summarized in the paragraphs below.
22. Bidding and selection process. In order to strengthen competition it is important to
widen the effort to find potential operators. It will be beneficial to detail the future "rules of the
game" of the concession (notably through the draft concession agreement) before requesting bids.
This would help in shortening the negotiation process between proposals and the signature of the
concession agreement, which in the present case involved two governments and two landlord
corporations with sometimes diverging interests. It is also helpful to sort out implementation
details for effective take-over of operations by the concessionaire. The participation of railway
workers’ unions in the negotiation process at an early stage eased the implementation of the
massive staff reduction program that took place at the beginning of the concession.
TERA INTERNATIONAL GROUP, INC. - 9.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 9
23. Investment financing scheme. The concessionaire defines the investment program and
bears its cost through debt service, which gives the incentive to a commercial approach to
investing; however, the concessionaire does not bear all the borrowing risks, because financial
resources are mainly mobilized by the two states. The financing scheme was a good compromise
in the prevailing investor risk context in Côte d’Ivoire and Burkina Faso.
24. Railway landlord corporations. The formula of railway landlord corporations followed
arrangements used in other sectors. In the first year of the concession there were
misunderstandings and conflicts between the corporations and the concessionaire about their
respective attributions. These conflicts seriously delayed the implementation of the rehabilitation
investment program. Experience indicates that involving railway landlord corporations may result
in difficulties in implementing the investment programs agreed under the concession agreement.
TERA INTERNATIONAL GROUP, INC. - 9.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10:
AUSTRALIA
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
10.1 Background
Appendix 10: Australia
1. Australia's first railways were built by state governments (synonymous with provinces in
other countries) independently from each other, over 150 years ago. Some were publicly provided,
however most were built by private organizations with government underwriting. In developing the
early railways, little consideration was given to how the various railways could operate together
as a national network. The various railways were developed as disjointed networks that focused
on linking the hinterland and areas of significant agricultural production with capital cities and
major ports. In the pre-1900 era of rail development, railways were built with different gauges to
serve local needs. 1
2. When it was necessary to connect Western Australia with South Australia by rail, the
Commonwealth government built the line across the Nullarbor Plain (as standard gauge but
isolated from that gauge elsewhere). As the tracks extended to state borders, there arose the
problem of the break of gauge. The Second World War showed the folly of a change of gauge
each time a border was reached. Post war efforts were slowly made to convert track (or provide
new track as between Albury and Melbourne) to standard gauge. It was only in 1995 that all state
capitals were directly connected by standard gauge, although they had been connected via
Broken Hill since 1970.
3. On 15 January 2004, the first train left Adelaide for the two-day trip to Darwin. It used a
north-south transcontinental rail link that had been the dream of many people since the mid 19th
century. The AustralAsia Railway had completed the final link in Australia's railway network and
created a new transport system for the export and import of goods between Australia and the
economies of Asia and beyond.
4. The Australian railway network of about 41,000 km comprises about 4,000 km of 1,600
mm gauge (mainly in Victoria), 19,000 km of 1,067 mm gauge (mainly in Queensland, Western
Australia and Tasmania) and 18,000 km of standard gauge (1,435 mm). A system map of the
railways in Australia is provided in Figure 10.1.
5. In the early 1970s, all publicly accessible rail services in Australia were operated by
government agencies. To improve the efficiency of Australia's rail authorities, the Commonwealth
Government offered to take over all the state owned entities and create one national rail operator.
This move was only partially successful since all states did not agree to participate. In 1975, the
Australian National Railways Commission, replacing the Commonwealth Railways Commission,
was established. The Tasmanian, South Australian and Commonwealth governments entered into
agreements to transfer the Tasmanian and non-urban South Australian Railways to Australian
National Railways. In the early 1980s, a completely new standard gauge line was built from the
transcontinental line at Tarcoola to Alice Springs, replacing the former flood prone narrow gauge
line via Maree, and in 1982 the Adelaide-Port Pirie line was converted to standard gauge. This
allowed standard gauge operations between Perth and Adelaide and Sydney and Adelaide for the
first time.
6. In 1991 the former National Rail Corporation Ltd was established to provide interstate only
freight services over the tracks of the state systems. All governments have since agreed (to a
greater or lesser degree) to introduce competition to their rail activities.
7. On 1 January 2000, under the Inter-Government Agreement on Rail Operational
Uniformity, a non-statutory body - the Australian Rail Operations Unit was established for
developing uniform standards and practices for further improving efficiencies of the national and
state owned rail networks.
1 Railways in Queensland, Tasmania and Western Australia were built on the 3’6” (1,067 mm) narrow gauge; Railways
in NSW were built on the 4’8½” (1,435 mm) standard gauge; and Railways in Victoria and South Australia were built
on the 5’3” (1,600 mm) broad gauge.
TERA INTERNATIONAL GROUP, INC. - 10.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
Figure 10.1: Railway Network of Australia
TERA INTERNATIONAL GROUP, INC. - 10.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
8. The first private sector interstate freight rail service commenced in 1995. By 1996, up to
four rail operators were providing freight rail services between Melbourne, Adelaide and Perth. By
1997 a few private-sector organizations were operating services over the tracks of others. Each
state has worked towards providing third-party access to its tracks. The interstate standard-gauge
third-party access was regulated by Australian Rail Track Corporation (ARTC). It is now possible
for a company, which meets acceptable standards, to run train services on any government
organization's tracks.
9. With the sale of Australian National Railways completed in November 1997, the track in
Tasmania and intrastate lines in South Australia were leased to the new owners. Thus ownership
of the mainline rail network in Australia had come full circle: from private ownership in the mid
1800s through to government ownership and then to management by a private company at the
turn of the 21st century. State governments still own some of the track, and branch lines, and
retain ownership of suburban train lines.
10.1.1 Policy and regulation
10. At the national level, in the Commonwealth or Federal Government, the Department of
Transportation and Regional Services (DOTARS) is responsible for providing transportation
systems that are safe, efficient, internationally competitive, sustainable and accessible. The
Government has laid down the policy, regulatory and legislative framework for the development of
railways in the country.
11. Safety Regulation. The Australian Transport Safety Bureau (ATSB) is an operationally
independent body within the Federal DOTARS and is Australia’s prime agency for transport safety
investigations. The bureau is entirely separate from transport regulators and service providers.
The ATSB’s objective is safe transport. Its mission is to maintain and improve transport safety and
public confidence through excellence in:
♦ Independent transport accident and incident investigation;
♦ Safety data analysis and research; and
♦ Safety communication and education.
12. The ATSB performs its functions in accordance with the provisions of the Transport Safety
Investigation Act 2003 (TSI Act). Section 7 of the TSI Act indicates that the object of the Act is to
improve transport safety through, among other things, independent investigations of transport
accidents and incidents and the making of safety action statements and recommendations that
draw on the results of those investigations. It is not the purpose of ATSB investigations to lay
blame or provide a means for determining liability.
13. The TSI Act 2003 provides a legislative basis for the ATSB to conduct rail safety
investigations on the Defined Interstate Rail Network. In addition to employing people with
extensive operational rail experience, the ATSB utilizes the safety investigation experience of its
aviation and marine investigators to undertake such investigations. The investigation role is linked
to the ATSB's objective of safe transport, focuses on national outcomes, and is independent of
industry and Governments' regulatory role.
14. Safety regulation and standards for the interstate network and the state owned networks
are also the responsibilities of the Federal and state governments. There is so far no national
safety regulator covering all rail systems in Australia, with responsibility of development and
enforcement of national regulation. Efforts to establish a national safety regime for bringing about
consistency in operating standards and procedures is continuing. This will also have implications
for accreditation of operators and owners of rail networks, monitoring, reporting and investigation
of safety performance, certification of equipment to interface with operational systems, and
production procedures to govern the day to day operations.
TERA INTERNATIONAL GROUP, INC. - 10.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
15. Economic Regulation. Rail services are affected directly by the competition policy in
Australia. In 1995 each State Government agreed with the Federal Government to implement a
national competition policy under the Council of Australian Governments (COAG) National
Competition Policy Agreement. One aspect requires access to essential infrastructure facilities
that are important to competition in other markets (intermediate inputs) and that would be difficult
to replicate and are of national significance.
16. Users of the infrastructure should not be at a disadvantage in relation to the infrastructure
provider, in other words there should be competitive neutrality. This is seen to require a clear
accounting separation for rail infrastructure, but not structural separation similar to the British and
Swedish lines.
10.1.2 Access regime
17. Under the Competition Policy Reform Act 1995, competition with major business
enterprises of national significance was opened up by way of third party access. The access
process is legislated under the Trade Practices Act 1974 – Access to Services (New Part IIIA of
the Trade Practices Act 1974).
18. The access regime operates in a way that will allow significant services to be 'declared' by
the relevant Minister after recommendations from the National Competition Council. The
declaration of a service means that it is considered that it will promote competition if third parties
have access. Additional factors which must be considered in relation to a declaration include that
a parallel infrastructure would be uneconomical to establish, that third party access will not cause
undue risk to health or safety and that access is not against the public interest.
19. Once a service is declared, parties are free to negotiate their own terms and conditions of
access. If there is a dispute, the matter can be referred to the Australian Competition and
Consumer Commission (ACCC) for determination. An alternative to this process of declaration is
for the service operator (owner of rail lines) to first approach the ACCC and establish, by way of
an access undertaking, the terms and conditions it would require of a third party applicant. If the
ACCC accepts the undertaking then Ministerial declaration is avoided.
20. Australian Rail Track Corporation (ARTC). In 1997, the ARTC was established as a
government business enterprise, as a result of the Commonwealth and State Governments
Intergovernmental Agreement 1997. The ARTC was to provide a 'one-stop shop' for rail operators
seeking access to the interstate standard gauge rail network between Brisbane and Perth.
ARTC’s shares are owned by the Commonwealth. It is responsible for negotiating new access to
the interstate national track between Brisbane and Perth. ARTC commenced operations in July
1998 with the following charter:
♦ Improve performance and efficiency of interstate rail infrastructure;
♦ Increase capacity utilization;
♦ Listen, understand and respond to the market;
♦ Operate on sound commercial principles; and
♦ Provide its shareholders with a sustainable return on capital invested.
21. ARTC's main business is managing interstate rail track, that is to say it operates rail lines
but does not operate trains. For the network under its management, ARTC is responsible for: (i)
selling access to train operators; (ii) developing new business; (iii) capital investment in the
corridors; (iv) management of the network; and (v) management of infrastructure maintenance.
22. ARTC currently has responsibility for the management of 5,861 route km of standard
gauge interstate track in South Australia, Victoria and Western Australia and New South Wales.
ARTC also manages the Hunter Valley Coal Rail network in New South Wales (311 km) and other
regional rail links in New South Wales (651 km). The remainder of the interstate rail network is
TERA INTERNATIONAL GROUP, INC. - 10.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
still controlled by the various government agencies. As for example, Brisbane to Queensland
Border (QR), Sydney Metropolitan Region (RailCorp), and Kalgoorlie to Perth (WestNet)
23. In pursuance of its business to operate railway lines, ARTC has provided the
Government’s Australian Competition and Consumer Commission (ACCC) an Undertaking that
sets out terms and conditions on which trains can access that part of the interstate rail lines in
Victoria, South Australia and part of Western Australia operated by ARTC. 2 An access undertaking
is a legally binding commitment, given by an owner of a nationally significant facility, such as rail
tracks, that sets the terms under which access to the facility will be granted. The ACCC assesses
the undertaking against the criteria set out in the Trade Practices Act 1974. These criteria impose
an obligation on the ACCC to ensure that the undertaking achieves an appropriate balance
between the interests of the infrastructure owner and access seekers and the public interest.
24. Clarifying the terms on which train operators can get access to the ARTC's network should
make the operation of interstate trains easier and more efficient. It reinforces the ARTC's role as a
‘one-stop-shop’ for train operators who operate interstate train services on the rail lines under its
management.
25. Access Charge. ARTC has provided reference track access pricing on its website for the
benefit of customers. The pricing is established route-wise and is applied in two parts. The first is
the variable price per 1000 gross TKM on different routes. The second part is the fixed price per
train, which ranges according to the type of the train based on maximum train speed and
maximum axle loading, and also varies by route.
26. Price Discrimination. It may be mentioned that in Australia, most rail systems practice
price discrimination when they set their prices for final services to customers. As a result some
traffic is more profitable than others. Observed discriminatory pricing structures could be
consistent with Ramsey pricing to achieve objectives such as net revenue targets and to fund
community service obligations. With the move to fostering competition in those parts of the
system where it is feasible, such as train operation, and to vertical separation, the question arises
as to whether price discrimination at the access level is feasible and desirable.
27. However, there are opinions that differential pricing at the access level may be difficult to
enforce. With the Ramsey solution applied at the final product stage, there is price discrimination
in the sense that different products will face different price/marginal cost ratios. Price
discrimination at the access level would have to be more overt, since different purchasers of the
same track service would face different prices. Thus, users of the same piece of track would face
different prices depending on what their service type/cargo is.
28. Operating Arrangements. Each state is dividing its passenger, freight and track
businesses into discrete operations, though the problem of freight trains getting equal rail access
at commuting times is yet to be addressed. There has been movement towards the
standardization of safe-working practices and radio systems. In 2004, the railways in Australia
were operating under the following types of arrangements:
♦ Railways that provided everything including track, locomotive, crew and wagons
(for example Queensland Rail (QR) and private mine-to-port railways);
♦ Railways that provided locomotive, crew and wagons but ran on another's track
(for example West Coast Railway);
2 The ARTC Undertaking provides a framework for the conduct of negotiations between ARTC and train service
operators who wish to obtain access to the network. Specifically, it covers the process of negotiation for access,
pricing principles, quality and performance indicators and a range of issues relating to management of the network. It
also includes an Indicative Access Agreement that forms a basis for an agreement between ARTC and an access
seeker. If there is no undertaking in place, access seekers have the option of seeking declaration of rail track
services. Declaration gives users the right to negotiate terms of access and if the negotiations prove unsuccessful,
the opportunity to have the ACCC arbitrate the access dispute.
TERA INTERNATIONAL GROUP, INC. - 10.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
♦ Operators that provided wagons but hired locomotives and crews and ran on
another's tracks (for example Specialized Container Transport (SCT)) 3 ; and
♦ Operators that provided locomotives and crews but hauled others' wagons over
another's tracks (operators providing terminal shunting only).
29. The current state of Australia’s rail system largely reflects its development as a collection
of separate networks with each state government responsible for the ownership, operation and
management of its rail network. Australia also has a large and efficient private rail system
connected to mining interests. A feature of recent years has been the move away from operators
staying within their home state's boundaries. An overview of the operator listings at the national
and state levels is summarized below.
30. Queens Land. QR is the largest state government owned rail operator and infrastructure
owner in terms of its route network with 9,000 km of track. It is the largest provider of freight
services. QR commenced its restructuring process in 1991, maintaining an integrated rail
operation but with distinct business entities responsible for specific functions. QR perceived net
benefits in vertical integration over separation arising from the close interdependence between
infrastructure and operations and the significant transaction costs associated with fragmentation
of a rail system. In 1995, QR was corporatized.
31. New South Wales (NSW). New South Wales has chosen to replace its integrated rail
operations with a segmented structure. In 1996, the vertically integrated monopoly, State Rail
Authority (SRA), was desegregated into four different business entities, with the primary objective
being the separation of the natural monopoly from the potentially competitive activities. The four
corporatized entities are:
♦ Freight Rail Corporation, a rail based freight transportation business;
♦ State Rail, which provides commuter transport as CityRail (Sydney metropolitan)
and CountryLink (non-metropolitan;
♦ Rail Access Corporation (RAC), with responsibility to own, operate, maintain and
enhance rail infrastructure and to actively market access to those facilities by
existing and potential rail operators; and
♦ Railway Services Authority, the railway engineering and maintenance group.
32. A major development in 2004 was the leasing by NSW of most non-urban track to the
federal government agency, Australian Rail Track Corporation
33. Victoria. Reform of Victoria’s rail network began in 1989 with the establishment of the
Public Transport Corporation (PTC) to operate urban train, tram and bus services and rural
passenger and freight services. Since 1992, various work-place reforms and efficiency-enhancing
measures have been taken to reduce the financial burden imposed by Victoria’s rail system.
Some of these measures included substantial reductions in staff, replacement of some
uneconomic rural rail lines with private bus services, contracting out selected maintenance
activities and rural passenger services to the private sector. As a result, Victoria’s railways have
reduced their need for government funding.
34. The sale of rail operations to private companies has seen Connex eventually operating
the entire Melbourne suburban passenger network. Freight services were provided by Freight
Australia until its 2004 acquisition by Pacific National, operating exclusively on broad gauge but
also with competition on the standard gauge network. The government retains ownership of the
3
SCT is Australia’s first and largest private freight train operator with the first train leaving Melbourne for Perth on 13
July, 1995. SCT are Australia’s largest Rail Van Freight operator. While most of the industry moved into Intermodal
terminals, SCT maintained its Van Freight handling concept in addition to Intermodal Container Parks to ensure it
was the only rail operator able to offer customers multi modal flexibility on rail.
TERA INTERNATIONAL GROUP, INC. - 10.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
track and right of way, though responsibility for access rests with the private operators (without
their having the power to reject competition).
35. Australia-National. Pacific National, the recently sold and previously government-owned
freight operator provides services in New South Wales, Victoria, and South Australia.
36. Western Australia (WA). Non-government operators include Australian Railroad Group
and Specialized Container Transport. The national passenger service is provided by Great
Southern Railway.
37. South Australia. The state government owns the urban passenger operator
(TransAdelaide). All freight is privately operated and track privately owned (Australia Railroad
Group). Government attempts to revive services in the southeast had by 2004 failed to attract an
operator despite assurances that broad gauge routes would be converted to standard.
38. Western Australia (WA). The state government owns the passenger operator, the
Western Australian Public Transport Authority. Interstate freight operations have been sold to
Australian Railroad Group. Pacific National also operates on the standard gauge. Track is leased
to WestNet Rail.
39. Northern Territory. A new line from Adelaide to Darwin has been built for AustralAsia
Railway Corporation, the government agency representing the three governments that
contributed funds for its construction and the ultimate owner of the track. A Build Own Operate
Transfer (BOOT) contract has been signed with Asia Pacific Transport, which is operating freight
services via its FreightLink Pty Ltd subsidiary. Passenger services are operated by Great
Southern Railway.
40. Tasmania. The privately owned freight operator and track owner is Tasrail, which changed
ownership in early 2004.
41. The Australian experience provides examples of railway structures that are vertically
integrated and horizontally segmented (QR) and vertically separated and horizontally segmented
(by business activity) (NSW). QR is maintaining an integrated rail operation but with distinct
business entities responsible for specific functions. QR perceived net benefits in vertical
integration over separation arising from the close interdependence between infrastructure and
operations and the significant transaction costs associated with fragmentation of a rail system.
Competitive access to infrastructure can be attained under both structures.
42. The main advantage of vertical separation lies in the fact that it results in the identification
of the contestable segment of the market and is, therefore, more likely to support competition
than the integrated model. In Australia there are examples of separation of infrastructure
ownership from rail services as well as of vertically integrated rail operations. These reforms are
recent and over time it will be possible to compare in practice the advantages and disadvantages
of the different approaches.
43. The Australian experience indicates that structural separation is not a panacea for the
problems facing railways. Indeed structural reform is likely to be only part of the solution to
improving the performance of rail and the efficiency of transport more generally. It is more
appropriate to view structural separation as part of a broader package of reforms.
44. Regulatory and structural reform, with the simultaneous development of a national access
regime for infrastructure is the major reform initiative to encourage competition in the Australian
rail industry.
45. Access provisions supported by legislation under the Trade Practices Act 1974, have
encouraged entry by private operators into the industry and the privatization initiatives by the
Federal Government are expected to accelerate this trend. However, the access regime is still
TERA INTERNATIONAL GROUP, INC. - 10.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 10
being understood by the rail and other industries. So far, it is the rail industry in Australia which
has made the most concerted attempt to use the formal access provisions.
46. Presently, in Australia, access negotiations would be different in the different jurisdictions.
The ARTC approach is to present a schedule of rates based on a two-part tariff; a fixed or flagfall
component specific to the line segments on which the train operates and a variable component
unique to each line segment and applied to the product of the gross tons of the train and the
distance. This approach is transparent and considered simple to understand as potential
operators can easily estimate their likely access charges before becoming involved in providing
the service.
47. In NSW, the access price is negotiated between the Railway Access Corporation (RAC)
and prospective rail operators. Essentially the relevant pricing principles involve determining a
particular price between a floor and a ceiling with an overriding condition that total RAC revenues
must not exceed the stand alone economic costs of the entire NSW rail network. Concern has
been raised about the complexity of the system. The Victorian Government is engaged in the
reform of the rail access regime. Legislation to implement the revised access regime was
introduced in the state legislature in May 2005.
48. The access regime and the ensuing competition in the Australian rail network have
resulted in average rail freight rates decreasing by about 30 percent during the 1990s. The
Australian Productivity Commission (APC) estimated an average annual total factor productivity
growth of 8 percent. However, as noted by APC it is not clear whether improvements in
productivity and lower rates resulted from the more commercial focus or from vertical separation.
49. Overall, Australia's rail regime is clearly in the midst of change, and as noted by the
Australian Productivity Commission several factors put Australian railways well behind North
American railways in terms of price, productivity, ability to sustain capital investment, and reliance
on government subsidies. In addition, the fact that the national open access regime is still in its
infancy further constrains assessments in its efficacy.
50. However, complex and inefficient regulation of the interstate track network are affecting
commercial viability. There are multiple authorities responsible for access and allocating train
schedules and investment. In addition, there are differing standards between states for train
lengths, axle mass limits, speeds, safety and other factors.
51. The Federal Government recognizes that progress towards seamless access, seamless
accreditation arrangements and clarification of regulator and industry roles has been slower than
expected. Although Commonwealth constitutional powers over interstate and international trade
and corporations would allow it to substantially regulate the industry through legislation, the
Federal Government has been reluctant to use its legislative powers and has pursued a
cooperative approach to reform with State and Territory governments and industry.
TERA INTERNATIONAL GROUP, INC. - 10.8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 11:
CANADA
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 11
11.1 Background and System
Appendix 11: Canada
1. The railways have formed the backbone of the Canadian transportation system for well
over a century. The Canadian railway system encompasses some 50,000 route-km of track
between the Atlantic and Pacific Oceans. Railway transportation continues to provide the most
economical means of moving bulk commodities such as grain, coal, potash and petrochemicals
over vast distances.
2. The two principal carriers in Canada, the Canadian National Railway Company (CN) and
the Canadian Pacific Railway Company (CPR), own extensive domestic railway networks. CN is
larger of the two, with approximately 31,000 route-km of track (in Canada and the U.S.). CPR
operates over approximately 22,000 route-km of track in Canada and the U.S. Together, these
carriers control 72 percent of the national railway system. A map of the national railway system is
at Figure 11.1.
3. The networks of both carriers extend into the United States. A chief feature of their
American networks is the access they provide to Chicago - the major railway hub of North
America. The majority of goods moved by rail between Canada and the U.S. are exchanged
between carriers in Chicago, before moving to a final destination. CN's recent purchase of the
Illinois Central Corporation resulted in the addition of about 5,000 route-km to its existing network.
This extended the company's direct physical reach into markets as far south as the Gulf of
Mexico.
4. In addition to the major railways, Canada is also home to some 51 smaller, regional
carriers. A few, like the Algoma Central Railway (owned by the Wisconsin Central Transportation
Corporation) and Ontario Northland have been in operation since the early 1900s. The majority,
however, are newly created shortline railways. These shortline railways provide very localized rail
service and are frequently partnered with major railways. Their emergence has come chiefly from
the rationalization of non-core branch line operations by both CN and CP. The operations of these
regional and shortline railways now extend to over 13,000 route-km of track.
5. In 2002, Canadian Railways transported about 277.2 million tons of freight with total
volume of 67.916 billion TKM, and 4.25 million passengers, with total transportation volume of
1.597 billion PKM.
6. Canadian National. CN was owned by the Government from 1918 to its privatization in
1995. The CN Commercialization Act was enacted into law on 13 July 1995, and by 28 November
1995, the federal government had completed an initial public offering (IPO) and transferred all of
its shares to private investors. 1 Presently, it is the largest and only transcontinental railway in
Canada. It operates only freight services.
7. CN’s 2 total revenues in 2004 were CDN$6.5 billion, of which 57 percent was from U.S.
domestic and cross-border traffic, 20 percent from international traffic, and 23 percent from
Canadian domestic traffic. CN operating ratio of 66.9 percent was one of the lowest operating
ratios among Class 1 railroads based on 2004 year-end results. CN had total staff of 22,470
people in Canada and the United States. CN operates in eight Canadian provinces and 16 U.S.
states.
1 Before privatization CN divested itself during the late 1970s and throughout the 1980s of several non-rail
transportation activities such as trucking subsidiaries, a hotel chain (sold to CPR), real estate, and
telecommunications companies. The biggest telecommunications property was a company which was co-owned by
CN and CP (CNCP Telecommunications) which, upon its sale in the 1980s, was renamed Unitel (United
Telecommunications) and upon corporate affiliation with Rogers Communications, was renamed AT&T Canada.
2 CN stocks are traded on the New York and Toronto stock exchanges.
TERA INTERNATIONAL GROUP, INC. - 11.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 11
Figure 11.1: Canadian Railway Network
TERA INTERNATIONAL GROUP, INC. - 11.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 11
8. Canadian Pacific Railway (CPR). CPR was Canada's first transcontinental railway and
for many decades was the only practical means of long distance passenger transport in many
regions of Canada, and was instrumental in the settlement and development of western Canada.
Its primary passenger services were eliminated in October 1978 after being assumed by VIA Rail.
Commuter services provided by CPR in Montreal were transferred to Montreal Urban Community
Transit Commission (MUCTC) in 1982. Presently, CPR is primarily a freight railway.
9. In 2004, CPR transported 2.7 million wagon loads and total traffic volume of 123.63 billion
TKM. Revenue was CDN$3.9 billion and expenses CDN$3.114 billion, with net revenue of
CDN$413 million. Both freight traffic and revenue have been increasing in recent years.
10. VIA Rail. Intercity passenger rail services are provided by VIA Rail. It operates Canada’s
national passenger rail service on behalf of the Government of Canada connecting communities
across a 14,000 km network of lines owned by CN and CPR. VIA Rail was established as an
independent Crown Corporation in 1977 controlled and funded by the Government for providing
intercity passenger rail services that were earlier provided by CN and CPR.
11. In 2003. VIA transported 3.789 million passengers with total traffic volume of 857 million
PKM. VIA has been incurring losses in operations. In 2003, its total revenue was CDN$250.3
million and operating expenses were CDN$431.4 million, with operating ratio of 173%.
Government funding on operating account was CDN$181.1 million or 21.1 cents per PKM. As an
independent federal Crown corporation mandated to operate as a business, VIA is hindered by
the fact that it was created by an Order–in-Council of the Privy Council, and not from an actual
legislation passed by Parliament. If VIA were enabled by actual legislation, the company could be
permitted to seek funding on the open money markets as other Crown corporations such as CN
have done in the past. It is largely for this reason that VIA continues to answer first to its political
masters, as opposed to the business decisions needed to ensure the viability of intercity
passenger rail service.
11.2 Policy and regulation
12. Transport Canada is the Federal department responsible for transport (including railways)
in Canada. Its stated mission is to develop and administer policies, regulations and services for
the best possible transport system for Canada and Canadians. The Department's role is to
develop up-to-date, relevant policies and legislation and to maintain the highest possible levels of
safety and security. An organization chart of Transport Canada is presented in Figure 11.2.
Through its attached bodies, Transport Canada provides safety and security and economic
regulation of railways in Canada.
13. Legislation. The Canada Transportation Act, 1996 (CTA) is the main legislation governing
general rail freight and passenger transportation in Canada. The emphasis of the CTA has been
on enhancing trade and the viability and competitiveness of the Canadian transport system,
reducing regulatory intervention and encouraging more innovative services. Further, with the
enactment of the CTA in 1996, the federal government did its part to ensure the preservation of
rail service wherever it can be continued on a commercial basis. The Act was in large measure
motivated by a desire to preserve as much rail infrastructure as possible, particularly by
encouraging the creation of shortline railways, without federal investment or subsidy.
14. Regulation of Safety and Security. As the regulator, Transport Canada continues to play
the leading role in overseeing safety in the rail transport industry. To this end, its stated mission is
to further advance the safety and security of an efficient, accessible and sustainable rail transport
system through: awareness and education; establishment and implementation of policies,
legislation and standards; and monitoring and enforcement.
TERA INTERNATIONAL GROUP, INC. - 11.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 11
Figure 11.2: Canada MOT Organization
Minister of Transport
Parliamentary
Secretary
Deputy Minister
ADM, Safety and Security
ADM, Programs and
Divestiture
ADM, Policy
ADM, Corporate Services
Director General,
Communications
RDG, Atlantic Region
RDG, Quebec Region
RDG, Ontario Region
RDG, Prairie and Northern
Region
RDG, Pacific Region
Departmental General
Counsel
15. The Railway Safety Act (RSA) came into force in 1989 to address the many changes that
had taken place in the rail transport industry. The 1999 amendments to the RSA have been made
to enhance further the legislation and to make the railway system even safer. These amendments
are designed to modernize fully the legislative and regulatory framework of Canada's rail
transport system. Railways are more responsible for managing their operations safely, while the
general public and interested parties have a greater say on issues of rail safety.
16. A key initiative is the establishment of the Railway Safety Consultative Committee (RSCC),
comprising Transport Canada, railway industry, labor and the Federation of Canadian
Municipalities. RSCC provides a continuing dialogue among all parties involved in rail transport
activities and this committee offers an excellent forum for discussion of ways to meet the
challenge of improving rail safety in Canada.
17. The Transportation Safety Board of Canada (TSB) is an independent agency created to
advance transportation safety through the investigation of occurrences in the marine, pipeline, rail
and air modes of transportation.
TERA INTERNATIONAL GROUP, INC. - 11.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 11
18. Economic Regulation. The Canadian Transportation Agency (CTA) requires a person
proposing to construct or operate a freight or passenger railway under federal jurisdiction to apply
for a certificate of fitness. CTA issues such certificates if it is satisfied that there will be adequate
third party liability insurance coverage for the proposed construction or operation. A railway under
the legislative authority of the Canadian Parliament is one that holds a valid certificate of fitness.
19. The rail line discontinuance procedures facilitated under the CTA have fostered the
creation of shortline rail operations on lines with low traffic density that otherwise would have
been abandoned under the National Transportation Act, 1987. 3 In addition to commercial sales,
the process has allowed provinces and communities to intervene in the public interest to acquire
uneconomic rail lines important to local economies as an alternative to road and highway
investment.
20. This policy has proved a major success. Since July 1996, some 8,900 km of low-density
rail lines have been transferred by CN and CPR to new owners while only 1,700 km have been
discontinued. Thus significant volumes of traffic that would have otherwise been converted to
road have been retained on rail. In addition, shortlines have been able to recapture traffic that,
over the years, had been lost to road.
21. The CTA was created in 1996 with the issuance of the Canada Transportation Act,
succeeding the National Transportation Agency. The Agency is a quasi-judicial tribunal of the
government of Canada that provides economic regulation over rail (as well as certain air and
maritime) operations. The Agency helps to ensure that all modes of federally regulated transport
are accessible to persons with disabilities.
22. The Agency, which is part of the Government of Canada, is a service-oriented
organization that administers the economic regulations of various modes of transportation under
federal jurisdiction, including the rail industry. Agency rail-related responsibilities touch all aspects
of the railway business including the delivery of certificates of fitness to railways, approvals for the
construction of new rail lines, setting of transportation rates when required to do so under
legislation or upon application, as well as resolving disputes between the railways and other
parties or between railways. Specifically, some of the main rail-related matters dealt with by the
Agency are:
♦ Issuing certificates of fitness when it is satisfied that a company proposing to
construct or operate a railway within the legislative authority of Parliament has
adequate liability insurance. The Agency may also vary existing certificates to
reflect changes in railway operations, or suspend or cancel a certificate.
♦ Dealing with rate and service complaints arising in the rail industry, as well as
disputes between railway companies and other parties over railway infrastructure
matters. It also processes applications for certificates of fitness for the proposed
construction and operation of railways, and approvals for railway line construction.
♦ Determining regulated railway inter-switching rates and the railway revenue caps
for the movement of western grain. The Agency also develops costing standards
and regulations; and audits railway companies' accounting and statisticsgenerating
systems, as required.
♦ Reacting to rail-related disputes brought before it by making formal rulings on
complaints or applications, referring the parties to a final offer or arbitration
3 Indeed a major problem of CNR was in the sheer number of low-volume branch railway lines which did not produce
sufficient traffic to pay for their operation. Without deregulation in the railway industry permitting abandonment or sale
of a railway line, or even the ability to set prices to match those of trucks, both CNR and CPR paid dearly for owning
these inefficient lines. One tactic that CNR perfected was to demarket a line by providing sufficiently poor service to
its few customers, that those customers would turn to trucks for improved service and lower costs. Once customers
ceased to exist on a small branch line, the federal government would permit the line's abandonment. Had
deregulation been in place several decades earlier, it is conceivable that many Canadian branch lines would have
been viable in the hands of short line operators.
TERA INTERNATIONAL GROUP, INC. - 11.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 11
process, or proposing and conducting mediation as a means of facilitating
mutually beneficial settlements.
23. The Agency’s Rail Complaints Directorate resolves rate and service complaints and
conducts investigations to help shippers obtain rail service or access to competing rail lines. In
most commercial situations, shippers and carriers negotiate freight rates and levels of service
themselves. When negotiations break down, a number of alternatives are available to shippers.
Part of the Agency's mandate is to help resolve disputes between shippers and rail carriers. The
Directorate investigates complaints related to interline switching, competitive line rates (CLR),
single line rates, joint rates, running rights, joint track usage, and level of service.
24. Competitive Access Arrangements. Within the basket of competitive access
mechanisms in the CTA, both interline switching provisions and the competitive line rate (CLR)
are designed to provide a shipper with access to a competing railway at an interchange. Under
interline switching, a shipper located on one railway is permitted to have its traffic interchanged to
another railway for the line haul when the point of origin of a movement of traffic is within a radius
of 30 km of an interchange. The CTA has the responsibility to determine maximum rates charged
for an interline switching move. Similar provisions apply to terminating traffic. Shippers have
consistently reported that the railways compete for interline switching traffic, and they regularly
use interline switching to obtain better routings for their traffic, or to obtain more competitive terms
and conditions.
25. A shipper located on one rail line and beyond the 30 km interline switching limits can ask
its local railway to establish a CLR for moving goods to a competing railway line. To use this
option, the shipper must have already reached an agreement with the competing railway before
requesting a CLR from the local railway. The CLR applies from the point of origin or destination to
the nearest interchange with the competing railway. If the parties cannot agree on a CLR, the
shipper can ask the CTA to set it according to legislated guidelines. Since the Canada
Transportation Act was passed in 1996, however, a shipper can only obtain an Agencyestablished
CLR by satisfying a “substantial commercial harm” test and the CTA-established rate
must be “commercially fair and reasonable to all parties.”
26. The two major Canadian carriers have shed thousands of miles of underperforming lines,
in the process spawning dozens of short lines, and aggressively reorienting traffic flows to take
advantage of increased hemispheric trade under the 1989 Canada-U.S. Free Trade Agreement
and 1994 enactment of the North American Free Trade Agreement (NAFTA). The growth of the
short line industry, which came belatedly to Canada, provides the opportunity to take advantage
of two very different models of railroad economics.
27. Unencumbered by restrictive work rules and with lower salary structures, short lines can
operate with much greater flexibility than their Class I counterparts, and provide service to on-line
customers far beyond the capability or typical practices of larger carriers. Class I railways, on the
other hand, have been freed to concentrate on high-volume, long haul business, relying heavily
on short lines for feeder service. Approximately 35 short lines have been formed since the
enactment of Canada Transportation Act, 1996, more than triple the number formed in the period
National Transportation Act, 1987 was in effect. They operate approximately 20 percent of
Canadian trackage and terminate or originate a comparable percentage of Canadian rail tonnage.
TERA INTERNATIONAL GROUP, INC. - 11.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12:
EUROPEAN UNION
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
12.1 Background
Appendix 12: European Union 1
1. The member states 2 of the EU have national railway systems with total operating length of
149,829 route km. In 2004, these railway systems carried 6,667 million passengers, 343.3 billion
PKM, 1,387 million freight tons, and 358.4 billion TKM. The railways in the EU member states
have historically been state run, monopolistic and in need of revitalization. The railway’s share of
the transportation market has been slipping. For freight it has fallen from 11 percent in 1990 to 7
percent in 2003. For passenger transport, the railway’s market share fell from 10 percent in 1970
to 6 percent in 2003. The decline of the rail industry across Europe has been mirrored by an
increase in congestion levels as road and air transport continue to grow. Aside from the delays
and pollution created by such congestion, the economic cost is also significant -approximately 1
percent of GDP of the EU each year according to EC figures.
2. Recognizing the role of Europe’s railways to facilitate efficient trade in the single EU
market and to promote economic and social cohesion, the EU has provided guidance to the
member states through various directives to develop, extend and improve railway services in the
member states. The objective was to make rail an attractive form of transport that is responsive to
market changes or customer needs. In order to help EU’s railways to achieve this objective,
various directives were issued by the EU. The directives are grouped into three packages
establishing the successive phases of the reform and restructuring agenda for railways of the EU.
3. In the 1996 White Paper 3 titled "A Strategy for Revitalizing the Community's Railways", the
European Union (EU) laid down a strategy to revitalize the Community's railways by creating a
sound financial basis, ensuring freedom of access to all traffic and public services and by
promoting the integration of national systems and social aspects.
12.2 EU Directives on Railways
4. EU’s First Rail Package. Directives 91/440EC of 29 July 1991 on the development of the
Community's railways (amended by 2001/12), 95/18EC of 19 June 1995 on the licensing of
railway undertakings (amended by 2001/13 of 26 February 2001) and 95/19EC (amended by
2001/14) on the allocation of railway infrastructure capacity and the levying of charges for the use
of railway infrastructure and safety certification are the first in a series designed to revitalize the
railways and take forward the creation of an integrated European railway area.
5. Directive 91/440 4 amended by 2001/12 required as follows: (i) to guarantee nondiscriminatory
access (open access) to the infrastructure through the separation of some
essential functions and/or the creation of a rail regulator, fulfilling the control and implementation
functions, as well as through the separation of profit and loss accounts and balance sheets; and
(ii) to ensure that separate profit and loss accounts and balance sheets are kept and published for
the business of provision of transport services and the business relating to the management of
railway infrastructure. It was left to the individual railway systems to separate operations either by
organizing distinct divisions within a single undertaking or by having a separate entity to manage
1 Although the EU does not comprise a single railway system, it is included in this Appendix because of the significant
work done by the EU for developing competition and PSP in Europe’s Railways.
2 The European Union comprises 25 member States, France, Germany, Italy, the Netherlands, Belgium, Luxembourg,
Ireland, the United Kingdom, Denmark, Greece, Portugal, Spain, Austria, Sweden, Finland (collectively known as EU-
15), and Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, and Slovenia
(known as EU-10).
3 EC Reference Com(96)421of 30 July 1996.
4 EU Directive 91/440 of 29 July 1991 had the objective of facilitating the adoption of the railways to the needs of the
single market and to increase their efficiency. This was to be achieved by: (i) ensuring the management
independence of railway undertakings; (ii) separating the management of railway operation and infrastructure from
the provision of railway transport services, including separation of accounts; (iii) improving the financial structure of
undertakings; and (iv) ensuring access to networks of member states of the EU. Directive 91/440 did not, of itself,
require that the railways be privatized; it was principally an accounting means of ensuring a level playing-field
between incumbent train operators and new companies entering the rail transport market.
TERA INTERNATIONAL GROUP, INC. - 12.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
infrastructure. Thus member states were required to separate 'the management of railway
operation and infrastructure from the provision of railway transport services, separation of
accounts being compulsory and organizational or institutional separation being optional, the idea
being that the track operator would charge the train operator a transparent fee to run its trains
over the network, and anyone else could also run trains under the same conditions (open access).
6. EU’s Second Rail Package. The second rail package, consisting of four directives, aims
to progress with the opening of the market initiated by the first rail package. Rail operations are to
be run as companies to a greater extent. Government tasks are to be managed by government
bodies and rail companies are to focus on business development and better service to customers.
7. The second package makes it possible for foreign operators to manage domestic freight
traffic and allows cabotage – loading and unloading in states where the rail company does not
have a registered office – in international traffic. The rules shall apply to the entire railway network.
To prevent the free market from compromising safety in the system, the package contains a rail
safety directive.
8. EU’s Third Rail Package. The third rail package contains proposals for four acts, which,
among other things, are to open up international rail passenger traffic to competition no later than
1 January 2010. Rail companies fulfilling statutory safety requirements and other technical and
administrative requirements shall be given full access to railway infrastructure. This free access
also allows for cabotage.
9. The third package also contains proposals concerning the implementation of joint
regulations for the authorization of locomotive and train personnel as regards both passenger and
freight traffic (e.g. licenses for engine drivers). The aim is to facilitate rail traffic between Member
States while retaining or even raising safety standards. This package includes proposed
regulations concerning the rights of passengers as well as minimum quality standards in
agreements between rail companies and freight customers.
10. Before a train operator can provide services for rail freight on any part of the European rail
network, it must have an operating license and a safety license, it must procure or arrange the
use of suitably-approved traction and wagons, recruit or hire drivers with the necessary skills and
qualifications and have negotiated access rights on the network concerned. For international
traffic, the operator must achieve the above for each part of the European network on which he
wishes to operate.
11. The new entrants are generally in the private sector, and so do not have unlimited funds to
go through the complicated processes required by some member states to be allowed to run on
their tracks. Track access charges vary between member states but there are examples of
charging structures which disadvantage new or small entrants, such as when a large lump sum is
payable for access to the network, plus a small charge for kilometers used. Clearly, with the same
lump sum charged to all operators, the need for a small operator to spread this over a small
number of service kilometers places him at a severe disadvantage compared with the larger
national rail operator.
12. Finally, obtaining access rights to a train path can be difficult where the infrastructure
manager, who usually allocates capacity, is owned by the same body as the national train
operator. Unless the infrastructure manager keeps confidential the applications of independent
operators, the national operator may be able to block access for its competitor or to take preemptive
marketing action. Most of the barriers to entry and operational constraints outlined
above are clearly the result of inadequate or incomplete implementation of the open access
directives. However, these barriers reflect the difficulties that may arise in the regulation of an
open access regime.
TERA INTERNATIONAL GROUP, INC. - 12.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
12.3 France
13. Background. The state-owned French National Railways (Société Nationale des
Chemins de fer Français (SNCF)) is a part of the SNCF Group, 5 which includes over 640 affiliated
companies. It is one of Europe's foremost land transportation groups. SNCF was created in 1937
by the merger of the private companies that were concessionaires of railways in France. SNCF is
also a public undertaking with an industrial and commercial purpose. In practice, SNCF benefits
from a high degree of independence in its transportation activity although it is bound to comply
with principles of public interest. SNCF may hold interests in other companies, incorporate
subsidiaries or form alliances, but only if these operations are directly or indirectly linked to its
main corporate purpose.
14. Legislation. In February 1997 6 the French Government passed the railway Reform Law
with the main objectives to:
♦ Provide for sustainable development of the sector;
♦ Separate responsibilities between railway operation and infrastructure
management in conformity with EU requirements under Directive No. 91/440/EEC
of 29 July 1991;
♦ Improve the financial situation of SNCF through debt management; and
♦ Prepare for the regionalization of public transport services.
15. Under arrangements to separate SNCF's operations from infrastructure management, the
government accepted future responsibility for infrastructure finance and part of SNCF's debt
linked to infrastructure investment and past infrastructure losses. The February 1997 legislation,
created the French Railways Infrastructure company (Réseau Ferré de France
(RFF)).Consequently, SNCF remained in charge of railway operations while RFF assumed
authority for investment in and management and development of the national rail infrastructure.
RFF took over SNCF assets, and in return SNCF was paid interest and redemption of debt in the
amount of EUR20.5 billion out of total debt of EUR30.3 billion. RFF now owns all rail
infrastructure as defined by EU rules. SNCF makes payment of track access charges to RFF for
the use of its infrastructure. Also in accordance with the Reform Law, the management and
maintenance of the railway infrastructure is undertaken by SNCF (for safety considerations)
under contract with and payment of maintenance charges by RFF. Therefore, above rail operation
and the maintenance of infrastructure remain in the control of SNCF. SNCF remains sole
manager of the network, having responsibility for allocating train paths and approving new
operators. SNCF's own trains will receive first priority for train paths.
16. RFF is a French government undertaking with an industrial and commercial purpose
(établissement public industriel et commercial-EPIC). Although RFF is a state-owned entity, its
accounting rules and management methods are similar to those of industrial and commercial
companies in France. It is managed by a board of 14 directors. The President of RFF is
nominated by the Government. RFF’s assigned role under the 1997 Law is: (i) to organize and
supervise the coherent and sustainable development of the national railway infrastructure; and (ii)
to hold the legal ownership of the infrastructure, which falls mostly in the public domain (including
the tracks, tunnels, bridges and other civil engineering assets structure, passenger and freight
5 SNCF transportation business is largely passenger oriented. Revenues from passenger business accounted for
about 60 percent of total SNCF revenues and freight about 11 percent. The remaining revenues were from providing
infrastructure related services and leveraging of SNCF assets and know-how.
6 The first French law to regulate the railways dates from 11 June 1842, under which the French state granted
concessions to private concessionaires to develop and operate the railways. There were six major railway companies
in France in 1860, five in 1934 and, by 1937, only one remained. The private networks, all more or less in a difficult
financial situation, were nationalized in 1937 (with effect from 1 January 1938), when the Société Nationale des
Chemins de fer Français (SNCF) was created and was initially granted a 45-year concession. Originally, 51 per cent
of SNCF’s share capital was held by the French state with the remainder being granted to the previous private
concessionaires who never effectively exercised their rights, and so from the date of nationalization, the French state
exercised full control over the sector.
TERA INTERNATIONAL GROUP, INC. - 12.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
platforms, traffic signals, security equipment and telecoms infrastructure, but excluding the
infrastructure linked to transport operation such as train stations, warehouses and train repair
stations).
Figure 12.1: French Railway Network
Source: SNCF and RFF
17. Regionalization. A main feature of railway reform in France was the January 2002
transfer of organizational powers from state to regional authorities with full responsibility for
planning and financing local passenger rail transport. Under this arrangement a series of
agreements have been signed between SNCF and 20 regional authorities. In the agreements, the
services are defined by the regional authorities and the corresponding financial contributions by
regions to SNCF are added. This leaves SNCF merely as a supplier of trains and staff, for which
it retains its monopoly.
18. The main aim of experimenting with the new policy was to: (i) precisely define the
contractual relationship between the regions and the French state and between the regions and
TERA INTERNATIONAL GROUP, INC. - 12.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
SNCF, identifying each party’s role and rights; and (ii) establish a new legal and financial structure
with a view to transferring the administration of regional transport from the French state to each
relevant region. The experiment was also designed to define the level of the Government’s
contribution to each region for the financing of the regional services.
19. It has been the experience that in comparison with the national railway, the urban and
suburban railway services are more open to competition and have more participants. The French
Law of 1982 (LOTI) grants to the cities (communes) or groups of cities forming an urban
community the right to organize urban public transport. In 90 percent of urban and suburban
railways in France, the transport system is granted to semi-private operators (20 percent) or
private operators (70 percent) through: (i) management contracts, where the private operator
receives a management fee; or (ii) contracts by virtue of which the private operator bears certain
industrial and/or operational risks; or (iii) concession contracts, where the private operator fully
bears the operation (and sometimes the construction) risks.
20. The French state contributes very heavily each year to SNCF's accounts. In 2003 it
contributed Euro 5,370 million, of which Euro 2,376 million went to the pension fund, allowing
staff to retire at 50 or 55. Euro 1,546 million was contributed to regional services, Euro 677 million
for debt servicing, Euro 618 million in investment grants and Euro 479 million for fares reductions
for certain categories.
21. Railway industry sources have expressed concern that in France, where the open access
directive has been implemented, SNCF is still involved in providing technical advice on the safety
cases of its prospective competitors. The industry feeling is that the regulations introduced in
France have been drafted in such a way as to make it virtually impossible for other operators to
receive approval. There have been examples of applications for equipment not manufactured in
France being turned down. Approval of GM-manufactured class 66 freight locomotives is proving
a time-consuming process, in comparison to experience in Germany, Belgium and the
Netherlands. Since almost all existing locomotives approved to operate in France are owned by
SNCF, who will not sell or lease even the oldest ones to a potential competitor, new entrants are
forced into expensive new orders from a French manufacturer. Several non-French operators
who sought to operate trains, even a few kilometers into France, have been rebuffed. Therefore,
there are doubts if France is complying with the spirit as well as the letter of the open access
legislation, to remove technical barriers, to allow much greater interoperability of locomotives as
well as access to depots, marshalling yards, terminals and ports.
22. Industry circle’s views are being expressed that France needs to have a rail regulator who
is truly independent of Government and SNCF/RFF and in which new entrants will have
confidence, as a way to get better service quality and more competitive prices leading to growth
in rail freight. Decline in rail freight transport in France, where SNCF is effectively a monopoly
carrier, has been one of the highest of any EU member state.
12.4 Germany
23. Background. After the reunification of the East and the West Germany the governmentowned
West German Railways (Deutsche Bundesbahn - DB) and the East German Railways
(Deutsche Reichsbahn - DR) continued operations provisionally. At that stage some 41,300 km
were under operation of both railway systems. In December 1993, the Restructuring of Railway
Act containing alterations to the German Constitution was passed by the National Parliament.
Under this Act, which came into force on 1 January 1994, the former West German Deutsche
Bundesbahn, East German Deutsche Reichsbahn, and the Railway Property in West Berlin were
fused as the Federal Railway Assets. These were then divided into a public section and a
commercial section. The public section was divided into the Federal Railway Office (Eisenbahn-
Bundesamt (EBA)), and the Office for Federal Railway Assets (Bundeseisenbahnvermogen
(BEV)). The commercial section of the railway became Deutsche Bahn AG (DB AG), charged with
managing the railway industry according to good business principles in line with German
company law.
TERA INTERNATIONAL GROUP, INC. - 12.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
24. The Federal Railway Office (EBA) was created as an independent body under the Federal
Ministry of Transport to exercise the rights and duties of the state other than those specifically
within the sphere of the Federal Ministry with respect to the restructured railway industry. This
office, inter alia, deals with all matters of safety connected with infrastructure and, operation and
rolling stock; and with all matters of approval and exemption under the EBA and the signaling
regulations. It deals with the allocation of the funds assigned by the federal government to the
EBA for investment in infrastructure (some DM 10 billion a year).
25. The Office for Federal Railway Assets (BEV) deals with the non-operational railway estate
(valued at about Euro 11 billion), the civil service personnel of the former state railways (who
could not because of their status pass under the control of a joint-stock company), and inherited
debts. It is responsible for the pensions of railway staff and operation of staff welfare schemes
(principally the provision of railway housing).
26. In January 1994, the German Railway Corporation (DB AG) was established as a joint
stock company wholly owned by the Government. DB AG was to manage the federal railway and
construct railway routes under contracts with the Government. The responsibility of the
Government was limited to transport administration, establishing investment plans and legislating
grant policies through the new Federal Railway Office established under the Ministry of Transport.
27. Among other reforms, significant measures were: (i) to operate DB AG on a commercial
basis; (ii) separate operation and infrastructure by splitting DB AG; (iii) assign infrastructure
responsibility to the Federal Government; and (iv) open the German rail network to third parties
against payment of access charges for track usage.
28. The infrastructure subsidiary of DB AG (DB Netz AG) manages the network on
commercial basis. To cover operation and maintenance costs and the depreciation payments, DB
Netz AG, imposes access charges (as per EU’s Directive 91/440) on users of the network,
including DB AG and other transport operators. 7 However, because of heavy investments in the
sector in the past, the track access charges are not sufficient to cover the annual depreciation
costs 8 in addition to the operation and maintenance costs. It is realized that increasing track
access charges may adversely affect the competitiveness of rail transport.
29. In 1999, DB AG was converted into a holding company, the Deutsche Bahn Gruppe
(German Railways Group), under which come five subsidiaries, each with its own bottom-line
responsibility. DB AG has three organizational levels. At the top of the pyramid comes the Group
Management. The middle level is made up of five Business Sectors: Infrastructure, Passenger
Traffic, Goods Traffic, Passenger Stations and Property. At the base level are the Business Units
that have the task of delivering the products for the Business Sectors. They are: Long Distance
Passenger Traffic, Regional Passenger Traffic, Urban Passenger Traffic, European Freight,
Regional Freight, Logistics, Stations and Construction & Repair.
30. Regionalization. Another significant reform was the transfer, in January 1996, of railway
passenger local operations to the regional governments. 9 The regionalization of these services is
a crucial point in the railway reform and shifts responsibility for both providing and financing such
services to regional governments, meaning that institutions demanding transport pay for it. This
was a significant shift from the pre-reform situation in which regional governments requested
suburban passenger rail services from the railway, but while the railway was obliged by law to
7 The track charges depend on the line including speed, signaling and communication equipment, economic
importance on one hand, and on the train weight, speed, special requirements regarding curved track and gradients
on the other hand. These basic prices can be modified according to special customer requirements (reliability, train
weight, etc.). The charges for stations depend mainly on usage frequency.
8 Depreciation has increased by 80% from 1994 to 2000. This huge increase occurred because the assets of DB and
DR were greatly undervalued by the 1994 reforms, so subsequent new investments have increased the early low
depreciation charges.
9 In accordance with the German Railway Act, railway passenger local transport covers the demand segment for
passenger transport in city and suburban areas and regions, where travel by a majority of the passengers does not
exceed 50 km or the one-way journey time is up to one hour.
TERA INTERNATIONAL GROUP, INC. - 12.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
provide these services, the regional governments were not responsible for paying for them. To
compensate for losses, the Federal Government granted special subsidies to the railway but
these subsidies did not cover the costs. Thus, regionalization would bring considerable financial
relief to DB AG. The German Regionalization Law allows regional governments and communities
to receive part of the fuel tax to finance the passenger local rail transport. 10
31. From 1 January 1996 responsibility for the support of local rail transport passed from the
federal government, which had been spending about DM 6 billion a year, to the states. These
received additional money to buy in from DB AG those loss-making services they or local
authorities deemed to be socially necessary, the support being based on the 1993-94 timetable's
service pattern. They decide which services are to be retained and how they are to be provided.
They can contract with DB AG to run them; they can negotiate with an existing independent
railway to provide a service, using the general right of access to the national infrastructure; they
can even buy the infrastructure involved for themselves; or they can buy a replacement road
service.
32. The Order for the Use of the Railway Infrastructure came into effect in December 1997.
The infrastructure operator must seek consensus agreement between the parties where there are
competing claims for paths but, if this cannot be achieved, the path is given to the party willing to
pay most for it. The fact that one of the parties may be a more valuable customer by reason of his
interest in other lines must play no role – this being to prevent the incumbent businesses of DB
AG from overwhelming smaller undertakings. Under normal circumstances the infrastructure
operator must not treat different applicants for the same line differently. To achieve pricing
transparency the framework permits rebates for bulk capacity purchase within certain limits.
33. Under the German Law, the Federal Government finances construction and replacement
of railway lines. 11 In addition, regional governments or third parties can promote investment and
the DB AG can also raise funds in the capital market to finance investment projects in which it is
interested. DB Netz, the infrastructure company, must bear the cost of operating and maintaining
the railway lines. In addition, in the case of investments made in pursuance of DB AG’s
commercial interest, DB Netz must pay annual depreciation costs for railway lines financed by the
Federal Government, meaning that the Federal Government finances the investments and bears
the interest. For all other investments, depreciation payments will be reduced or completely done
away with. DB Netz has to pay both depreciation and interest for investments financed from the
capital market.
34. Track Sharing. Reorganization of the German national railway system opened up the
network to third-party operators, including transit agencies that could offer more cost-effective
light rail services in outlying areas than previous heavy rail, locomotive-hauled consist service. Indepth
studies by the German Ministry of Railways on mixed use, including risk analyses, created
the technical basis for track sharing and led to a national policy that spells out conditions required
for this use of the railways. These institutional changes which created the environment for track
sharing in Germany were supported by a host of operational reforms and practices necessary to
make track sharing a reality.
35. Track sharing between widely varying types of passenger and freight trains in Germany
has enabled to expand rail transit quickly and cheaply, and to attract suburban populations out of
their cars. This was put into effect to counter growing vehicular congestion and its negative social
impacts. This initiative has been largely successful. Joint use of tracks, unrestricted by time of day,
has yielded positive results. The success of these operations and the benefits to the areas they
serve has compelled other urban areas to consider similar tram-train concepts in Europe, and
now in North America. Again, these prospective shared track or tram-train cities are of a size
10 German Railway Reform — Chances and Risks, by Heike Link; http://www.jrtr.net/jrtr02
11 According to the German constitution, highways and other trunk roads, the rail network and the main waterways are
owned by the Federal Government. The Government is responsible for financing investment in this infrastructure and
must bear—with the exception of railways—the operation and maintenance costs.
TERA INTERNATIONAL GROUP, INC. - 12.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
traditionally considered insufficient to support light rail independently. Track sharing can
significantly improve the rail transit sufficiency of these candidate light rail locations. Given the
often prohibitive expense of creating new rights-of-way and decreasing supply of surplus track
space, track sharing appears to be a cost effective alternative for improving metropolitan mobility.
Figure 12.2: German Railway Network
TERA INTERNATIONAL GROUP, INC. - 12.8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
36. DB AG the German national rail operator essentially remains vertically integrated in that
the infrastructure management is with one of the companies (DB Netz) within the DB Group. DB
AG is horizontally segregated at the middle-management level by business sector, i.e.,
infrastructure, passenger traffic, goods traffic, passenger stations and property. Since December
1997 open access is permitted on the DB network.
37. The German experience has demonstrated that it is technically feasible to commingle rail
transit and railroad trains of different weights, propulsion systems, and sizes in a manner that
satisfies public safety and risk standards. There have been no major train accidents attributable to
joint use over the last decade. This safety record is the result of rigorous safety analysis, train
protection systems, and vehicle re-engineering to reduce the probability of accidents and to limit
injuries.
38. In Germany, there are issues of confidentiality between the infrastructure manager, DB
Netz, and the national train operator DB Cargo/Railion and other operators. There are many
restrictive practices concerning fuel supply and traction current, access to ports and terminals,
and the regulator is not seen by the smaller operators as sufficiently independent.
12.5 United Kingdom
39. Background. The railway industry in the U.K. was reorganized in 1994. British Rail (BR),
which was a vertically integrated state owned railway company having statutory monopoly over
the carriage of passengers and goods by rail, was broken up into more than 100 separate entities,
all of which were privatized between 1995 and 1997. The Railways Act 1993 provided the basis
for the reorganization. The main objectives of this legislation were: (i) to reduce the level of
government subsidies for rail transport over the long term; (ii) to open the transport sector to
competition to improve services, increase railway productivity, and reduce administrative
sluggishness; and (iii) to respond better to market needs, thereby meeting demand and improving
financial results. Reforms resulted in the separation of transport operation from railway
infrastructure, introduction of franchise system to passenger rail transportation and privatization of
the freight rail transportation business.
40. The reorganization resulted in the division of BR in to: (i) a new infrastructure manager –
Railtrack that became the sole owner and manager for the entire railway infrastructure including
tracks, signaling, electrification, stations, depots and shops; (ii) 25 train operating companies
(TOCs) with franchises to run passenger operations; (iii) Four freight train operators; 12 (iv) three
rolling stock leasing companies (ROSCOs); and more than 70 other companies connected with
various aspects of railway engineering and operation. While the train operating companies were
franchises, freight business was completely privatized through the establishment of private
companies which bought operating licenses, own their own rolling stock, and operate in an open
environment.
41. Before 1 April 1994, the BR’s expenditure in excess of income was met by government
grants and borrowing from the National Loans Fund. In the post – Railway Act 1993 period,
arrangements for subsidizing the industry were radically altered. The railway industry was funded
by grants paid by Office of Passenger Rail Franchising (OPRAF) to the train operating companies
who in turn purchased services from other industry parties, including Railtrack and the rolling
stock companies. The proceeds from the sale of businesses (other than those from the sale of
Railtrack) were used to reduce the overall funding requirement for the industry as a whole.
However, as businesses were sold the impact of offsetting the grant requirement from the profits
of those businesses ceased.
42. The privatized railway industry in the U.K. is regulated by three autonomous bodies: the
Strategic Rail Authority (SRA), the Office of Rail Regulation (ORR) and HM Railway Inspectorate
12 The four freight companies are: English, Welsh & Scottish Railways (EWS); Freightliner; Direct Rail Services (DRS);
and Combined Transport Ltd. (CTL).
TERA INTERNATIONAL GROUP, INC. - 12.9 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
within the Health and Safety Executive (HSE). However, in July 2004 the government announced
that it was to dissolve the SRA, absorbing some of its functions within the Department for
Transport (DfT) and vesting others in Network Rail, the national rail infrastructure company. As of
the beginning of 2006, SRA ceased to exist and its functions are transferred to DfT. As part of the
same restructuring, responsibility for rail safety was moved from the Health & Safety Executive to
the Office of Rail Regulation.
Figure 12.3: Great Britain Railway Network
Source: Published by Barry S Doe FCILT, C.Math, MIMA I 25 Newmorton Road, Moordown, Bournemouth, Dorset BH9 3NU
TERA INTERNATIONAL GROUP, INC. - 12.10 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
43. DfT lets and manages passenger franchises, develops and sponsors major infrastructure
projects through Network Rail (formerly RailTrack), manages freight grants, sets and publishes
strategies, and is responsible for some aspects of consumer protection. In its role of securing the
development of the railway network, the DfT plays a key part in reviewing network utilization and
capacity, assessing how this is expected to change and identifying priorities for network
enhancement as part of the longer term process of investment planning.
44. Office of Rail Regulator (ORR). The Rail Regulator was an independent statutory office
established by the government under the Railways Act 1993. The Rail Regulator was an
individual office holder appointed by the Government under the provision of the Railway Act 1993
to promote certain "public interest" objectives set out in that statute through the exercise of
functions also set out in the same statute. The Rail Regulator was appointed by the Government,
and as a statutory office holder was independent of the Government. In July 2004, subsequent to
the Railways and Transport Safety Act 2003, the Office of Rail Regulation (ORR) was established
with its regulatory board replaced by the Rail Regulator. These changes took effect on 5 July
2004. 13
45. The ORR aims, through independent, fair and effective regulation, to achieve the
continuous improvement of a safe, well-maintained and efficient railway which meets the needs of
its users and to facilitate investment in capacity to satisfy the demands of growth in passenger
and freight traffic at the time it is needed. It regulates Network Rail's stewardship of the national
rail network infrastructure. The Rail Regulator’s role may be characterized as acting as the
independent economic regulator of the railway in the public interest.
46. The Secretary of State for Transport sets the overall policy for U.K.’s railways within a
wider transport context. It also provides directions and guidance to the ORR (under Section
4(5)(a) of the Railways Act 1993) and the rail division under DfT.
47. Rail passenger services in U.K. are provided through a system of franchises established
based on the lowest bid for subsidy in operating the services. Except for the competition at the
stage of bidding for the franchise there is no more competition in providing the service to the
customer. Because of the short term nature of the franchises the franchisees did little to
encourage investment.
48. Freight Services are in the hands of private sector companies who own wagons and
locomotives and use track access provided by Network Rail. There are some third party or ownaccount
operators running services under the provisions of the 1993 Railways Act.
49. Network Rail. The state-owned Railtrack was privatized in May 1996. Its sale on the
London Stock exchange was reckoned as a success at that time. However, as subsequent events
showed, there were flaws in the management of infrastructure by Railtrack, which caused three
serious train accidents. In order to maximize return to shareholders, Railtrack cut costs and tried
to get the most out of the assets with less regard for the consequences. The resulting costs of
replacing hundreds of kilometers of track and compensation to train operators exacerbated a
brewing financial crisis. Railtrack declared bankruptcy on 7 October 2001, and the Government
placed it under Administration. In March 2002, Network Rail, a not-for-profit company limited by
guarantee (CLG) 14 was established. 15 On 3 October 2002, Network Rail acquired the shares of
13 The ORR has a range of statutory powers under the Railways Act 1993, as amended by the Transport Act 2000. It
also has concurrent jurisdiction with the Office of Fair Trading, under the Competition Act 1998.
14 As a CLG, Network Rail has no shareholders because it must not issue shares under the Companies Act 1985.
15 Network Rail is not a shareholder company but has about 100 members drawn from a wide range of industry
partners, interested parties, and DfT. The members have no financial or economic interest in Network Rail and as
such no rights to a dividend, or any other form of payment. Through this arrangement no conflict is envisaged
between profit and safety, as any profits will be invested in the network. Management incentives are aligned with
safety, service quality and financial performance instead of share options and dividends. Network Rail functions as a
quasi subsidiary of the SRA. The Government through the support facilities in place, is providing security to the
providers of debt finance to Network Rail, and is acting as lender of last resort in the event of financial difficulties. In
doing so the Government is, via the SRA, a party bearing the risk.
TERA INTERNATIONAL GROUP, INC. - 12.11 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 12
Railtrack for £ 510 million, and took over the ownership and management of the rail infrastructure
from Railtrack. Network Rail, is a ‘not for profit distribution’ company. This is technically off the
U.K. Government balance sheet.
50. Network Rail owns about 16,000 miles of track, viaducts and tunnels, about 2,500 stations
and facilities of rolling stock inspection, which Railtrack did. Its main business is the management
of the allocation of train paths, the production of a train timetable, the management, maintenance
and renewal of the railway network including operating management, carrying out the project of
investment, the management and the lease of the 14 major stations, and the management of real
estate. Network Rail makes track access agreements with the train operating companies and gets
revenue in the form of access charges from the operating companies. 16
51. Since 1994, when the reform program started, Britain’s rail industry has passed through a
troublesome phase. Privatization opened the way for new private investment in the railway and
encouraged train operators (in particular) to adopt more customer focus. However, some aspects
of the privatization seemed to be flawed. The division of BR into almost 100 independent entities
or companies replaced coordinated internal company relations with complex, formal, and costly
contractual relationships. The break-up resulted in a heavy, inefficient bureaucracy, an opposition
of interests and objectives, and a weakening of responsibilities among the many players. Since
each of these companies had distinct commercial interests to protect, in the final analysis it came
out that market forces alone would not safeguard the greater social good and regulation was
essential to maintain the coherence and integrity of the national network and to protect consumer
interests.
52. The U.K. system has virtually no rail competition. It is a system of `horizontal monopolies'
based on either geographic considerations (passenger services) or product considerations
(freight services).
53. The reforms have not been particularly successful in attracting more freight to rail from
other modes of transport. Although rail freight traffic increased by 35 percent in recent years, it
represents just 5 percent of total freight traffic. Freight operations also continue to receive a £40
million annual grant to encourage environmental benefits associated with a modal shift from road
to rail.
54. The co-ordination difficulties of the vertical separation/horizontal franchise approach point
to the `double marginalization' problem, where two vertically separated monopolies are less
efficient in the choice of output bundles than one integrated monopoly. The industry itself has
figured this out, and the chairman of the Association of Train Operating Companies, Richard
Brown, said that track and trains should be reunited, because a unified structure allows train
operators to be in sole control of their performance. 17
16 Railtrack Annual Report and Accounts 2001.
17 The Economist, March 15, 2001.
TERA INTERNATIONAL GROUP, INC. - 12.12 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 13:
JAPAN
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 13
13.1 Background
Appendix 13: Japan
1. The state-owned Japanese National Railway (JNR) had been incurring losses since 1964.
In 1986, its freight revenues covered only 68% of the costs. In addition, JNR had been suffering
from excessive staffing and labor problems, including industrial action by employees. Based on
the recommendations of the Government’s 2nd Ad Hoc Commission on Administrative Reform, in
May 1986, the JNR Reform Law and the Law concerning Passenger Railway Companies and JR
Freight were enacted.
2. In April 1987, under the Reform Law, the JNR was statutorily disbanded and its assets,
operations and liabilities were distributed among a number of new companies, known as the
Japan Railways Group. The dismemberment legislation provided that JNR's passenger business,
its infrastructure and its assets on JNR's 1,067 mm gauge network be distributed geographically
between six companies, three on Honshu island and one each on Hokkaido, Shikoku and Kyushu.
These companies were: (i) JR Hokkaido or Hokkaido Railway Company; (ii) JR Higashi Nihon or
East Japan Railway Company; (iii) JR Tokai or Central Japan Railway Company; (iv) JR Nishi
Nihon or West Japan Railway Company; (v) JR Shikoku or Shikoku Railway Company; and (vi)
JR Kyushu or Kyushu Railway Company. For freight transportation one nation-wide company - JR
Kamotsu or Japan Freight Railway Company was established.
3. The six regional passenger JR companies own and manage rail tracks and stations,
offering passenger railway services in their respective regions. JR Freight does not own any rail
tracks but operates freight trains on tracks owned by the six JR companies. As at the end of 2001,
the six JR companies operated over a total of 20,051 route-km (Figure 13.1). This includes five
Shinkansen lines on standard gauge with a total of 2,050 km in operation. The conventional
railway lines of JR are on narrow-gauge.
4. In the pre-Reform Law period, the railway facilities were owned and operated by the same
entity in principle. The enactment of the Railway Business Enterprise Law allowed a railway
company to conform to any one of the following types: Type 1 company - which owns railway
infrastructure and operates trains as before; Type 2 company - which only operates trains; and
Type 3 company - which only owns infrastructure. Under this Law the six passenger JRs were set
up as Type 1 companies, and JR Freight as a Type 2 company. The Law allows operation and
ownership of railway infrastructure to be divided between Type 2 and Type 3 companies
respectively. The essential difference from the EU model is that in countries where ownership and
operation are separated, the railway infrastructure is owned by public bodies, which do not have
to refund construction costs. In Japan, however, Type 3 companies have to refund construction
costs with track use fees paid by Type 2 companies.
5. Consequent to implementation of the 1987 Reform Law, JNR’s long-term debt of JYen
37.1 trillion was supervised by the Japan National Railway Settlement Corporation (JNRSC), a
temporary holding company established for this purpose, which itself took on about 60% of the
total debt and was expected to liquidate this liability by selling JNR-owned real estate (JYen 7.7
trillion) and stocks (JYen 1.2 trillion). The remaining 40% of the long-term debt was allocated to
JR East, JR Central, and JR West, the three main-island passenger JRs. The three small-island
JRs were exempted from liability because their profitability was very uncertain due to the small
size of their markets and lower population density. By the sale of stock of the three main-island
JRs, JNRSC has paid back about JYen 3 trillion. However, due to the delay in sales of stock and
land in the 1990s, the JNR Settlement Corporation’s liabilities have been increasing because of
staggering interest payments of about JYen1 trillion annually. In 1998, JNRSC was reorganized
as a division of the Japan Railway Construction Public Corporation (JRCC), and named the
Japan Settlement Headquarters. There is little improvement in the debt situation; taxpayers will
have to shoulder debt of over JYen 24.0 trillion, which is to be repaid from the general account
budget over the next 60 years.
TERA INTERNATIONAL GROUP, INC. - 13.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 13
Figure 13.1: Japan Railway Network
Source: East JapanRailway Company
TERA INTERNATIONAL GROUP, INC. - 13.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 13
6. Privatization of the new JR group companies was the ultimate objective of JNR's
dismemberment. Initially, all companies remained in the public domain as joint stock companies
with the Government as the sole shareholder. Only the Hokkaido, Shikoku and Kyushu
companies started free of any inherited debt liabilities, but all three required subsidy for their
current operations, which was provided through government-established Management Stabilizing
Funds. JR East was fully privatized in 2003. About two-thirds of the shares of both JR West and
JR Central are held by the private sector and the remaining are still with the government. In
addition, all shares of the other four JR companies are still held by the Government’s JNR
Settlement Corporation.
13.2 Subsidy for Railway Operation
7. The three JR passenger companies, which are private companies, do not get any
government subsidies for their railway business. The remaining three JR passenger companies
(JR-Hokkaido, JR-Shikoku and JR-Kyushu), which are still state-owned and own a large number
of unprofitable lines running through under-populated areas, are supported by a JYen 1,300
billion Management Stabilization Fund. These companies operate the fund by appropriating the
interest earned to improve operating results.
8. Since 1984 over 35 local companies have been established to take over loss-making
JNR/JR rural lines. The new operators are known as third-sector companies, because they are a
hybrid of private and local community finance. Previously, Japanese railway business was
governed by two sets of statutes, one to regulate JNR and one covering other railways. This has
been superseded by new legislation covering all railway business. It has reduced the degree of
regulation, with provisos that railway safety and customer services are not impaired. A license is
required to run a railway business and railway facilities are subject to inspection. Furthermore,
fares and charges must be approved in advance by the Minister of Transport, although written
notice is considered adequate for discounted fares and charges. Finally, train schedules must be
submitted to the Ministry in advance of implementation
13.3 Railways Development
9. After JNR was restructured in to six companies, the three existing Shinkansen lines were
each operated by a separate company. The Tokaido line was operated by JR Central, the Sanyo
line by JR West and the Joetsu line by JR East, which also took on the operation of the Tohoku
line after it was completed in 1991. It was realized that widely varying traffic volumes on each of
these lines would result in a disadvantage for some JRs on profitability considerations. Therefore
under the reforms all existing Shinkansen facilities were transferred to the newly established
state-owned Shinkansen Holding Corporation (SHC). SHC owned all the Shinkansen facilities
and leased them to the JRs at rates appropriate to the actual transport volume and earning
capacity of the Shinkansen Line. This was done to equalize the financial bases of the JRs and the
user’s tariff burden. The Shinkansen portion of JNR’s debt was taken over by SHC.
10. However, listing of shares under the leasing system presented problems in terms of
protecting the investors and stabilization of the stock prices. Under the Shinkansen leasing
system the JRs were not allowed to depreciate leased assets. Further, because of the possibility
to adjust revenues between the three Shinkansen operating JRs, each was not independent of
the other, and assets and liabilities of the JRs after the expiration of the lease period were unclear.
It was decided to transfer ownership of the Shinkansen facilities to the operating JRs at a price
determined by the National Government. The purchase price of the Shinkansen lines was as
follows: JR East-JYen 4,056 million per km, JR West-JYen 1,759 million per km, and JR Central-
JYen 9,887 million per km. The average price of the three Shinkansen lines was JYen 5,000
million per km.
TERA INTERNATIONAL GROUP, INC. - 13.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 13
13.4 Investment in Railway Construction
11. Heavy long-term investment needed for railways development coupled with slow
generation of revenues over a relatively long period of time have inhibited railway companies to
self-finance new lines. In Japan, initially, the national government had been using the general
account (budgetary funds) for the construction of railway projects. However, the absence of a
funding system independent of the budget was considered a major constraint on railway’s
development. In 1991, following sale of the Shinkansen facilities to the operating JRs a Railway
Development Fund (RDF) was established by the National Government. 1
12. RDF provides funding for the construction of planned Shinkansen lines The construction
of these lines is undertaken by the Japan Railway Construction Public Corporation (JRCC). 2 RDF
is responsible for redemption of principal and interest on the long-term debt it inherited from SHC.
RDF also provides capital to railway companies in the form of subsidies, grants, interest free
loans and other support to help them improve railway facilities. There are three main sources of
revenue for RDF: (i) biannual payments by JRs for Shinkansen facilities transferred to them by
SHC spread over a period of 60 years; (ii) subsidies from the National Government for railway
development; and (iii) loans from government sources and financing institutions.
13. On 1 October 1997, RDF and the Japanese Maritime Credit Corporation were merged to
form a new public entity, the Corporation for Advanced Transport & Technology (CATT). Presently
this Corporation provides funding for construction of Shinkansen lines and interest free loans to
construct and improve arterial railways.
14. Investment on the development of new Shinkansen railway lines is shared by the National
Government, local governments and JR companies. The proportion of subsidies from the national
government is fixed, and the source of the subsidies is the profits on sales of the existing
Shinkansen lines and the public works project budget. Local governments bear expenditures
equivalent to approximately one-half of those of the National Government. After the line is opened,
JR companies pay access charges for track usage within the limits of their profit.
15. Investment for the development of arterial railways is shared by the national government,
local governments and railway companies, including JR companies. 3 The national government
and each of the local governments provide subsidies for constructing arterial railways equivalent
to 20% of the project costs (including costs of land, public works, railway facility, and equipment;
and expenses for opening new lines). For freight railway business, subsidies equivalent to 30% of
the project costs are provided solely by the national government.
1
2
3
Role and Functions of Railway Development Fund, by Akio Ono, JR & TR, April 1997.
The Japan Railway Construction Public Corporation (JRCC), was established in March 1964 under the Japan
Railway Construction Public Corporation Law to promote the construction of railway lines for improving the Japanese
railway networks and rectifying regional imbalances. It inherited the Shinkansen construction business, previously
undertaken by JNR. When the Nationwide Shinkansen Railway Development Law was enacted, the public
corporation built the first Shinkansen line in June 1970. In June 1972, it took on the building and improving of private
railway lines to meet the increased demand for commuter transportation in urban areas. The Railway Development
Fund was established in October 1991, for promoting the construction of projected Shinkansen lines. With interestfree
funding, the Corporation built key trunk lines and urban railway services, introduced double-tracks to decongest
services, and upgraded the specifications of existing railway lines. Following the enactment of the Law for Disposal
of Debts and Liabilities of the JNR Settlement Corporation in 1998, the JNR Settlement Corporation was dissolved in
October 1998, and its assets and liabilities were transferred to Japan Settlement Headquarters set up within JRCC.
Under this Law most long-term liabilities (JYen 20 trillion out of total debt of JYen 28 trillion) was transferred to the
National Government’s general account, to be shouldered by the taxpayers.
Government subsidies for arterial railways cover projects for increasing speeds on existing arterial railways
(including construction of new stations, improvement of stations, straightening of track alignment, electrification, and
improvement of crossing facilities), increasing the transport capacity (providing multiple tracks), adjusting passengeronly
lines for freight trains and improving freight terminals.
TERA INTERNATIONAL GROUP, INC. - 13.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 13
13.5 Experience with Railway Reform and Restructuring
16. The three large JR companies which are in the business of passenger transportation are
carrying out profitable operations since the restructuring and privatization. It may be mentioned
that their operation is not encumbered by historical debt incurred for building much of the network,
including the Shinkansen lines.
17. A significant feature of the railway companies in Japan is their involvement in real estate
development. As reflected in the financials of JR East, a third of the revenues and about 50
percent of the profits are from the real estate business.
18. JR companies remain vertically integrated. The six passenger companies own and
operate the rail network. The only exception is JR Freight that operates freight trains on the meter
gauge network on the basis of access provided by the owning passenger companies.
19. The JNR experience has important lessons in the area of planning investment financing
for large scale railway projects over a period of time. One of the main causes of JNR’s failure was
the enormous debt resulting from huge amounts of money expended on new railway construction
projects. The servicing of the debt became a big problem because investments were not financed
by increasing fares. Instead of increasing fares in line with the price index, JNR was forced to
keep fares low as part of a national price control policy. As a result debt became unmanageable
and the interest payments alone ballooned out of proportion to the size of the total operation. This
emphasizes the overriding importance of establishing a practical scheme to raise long-term lowinterest
financing before railway construction is actually taken up.
TERA INTERNATIONAL GROUP, INC. - 13.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14:
UNITED STATES
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14
Appendix 14: United States
14.1 Background and System
1. The railroad industry in the United States is one of the largest in the world (Figure 14.1).
Although it does not move as many passengers per year as do many other countries, however it
does move more freight by rail than any other country, a staggering 2.673 trillion TKM and $40.5
billion in revenues in 2004.
2. Since their creation in the 1800’s, railroads in the U.S. have been privately owned - both
the infrastructure and operations of rolling stock. Two exceptions existed during this period. The
first is the Alaska Railroad (ARR), 1 which was built for national defense purposes in the 1940s.
However, when it became a profitable railroad in the 1980s by moving large quantities of coal to
Alaskan ports for export to Asia from the interior of Alaska, it was sold to the State in 1985 for $25
million. 2
3. The only other exception is the quasi-government National Passenger Railroad
Corporation - commonly known as Amtrak. Amtrak is the only inter-city rail passenger entity in the
U.S., transporting some 22 million revenue passengers a year. Amtrak is funded by Congress in
the form of a subsidy. Amtrak owns trackage in the Northeast Corridor between Washington, D.C.
and Boston, Massachusetts, but pays user fees to operate over much of the United States on
trackage owned by the freight railroads.
14.2 Regulatory Control on U.S. Railroads
4. Federal Railroad Administration (FRA). The Federal Government basically governs
intercity transportation, and state and local governments govern urban intra-city transportation
(Figure 14.2). The Federal Department of Transportation (DOT) provides transportation-related
services in the U.S.. The FRA was created by the Department of Transportation Act of 1966. The
purpose of FRA is to: promulgate and enforce rail safety regulations; administer railroad
assistance programs; conduct research and development in support of improved railroad safety
and national rail transportation policy; provide for the rehabilitation of Northeast Corridor rail
passenger service; and consolidate government support of rail transportation activities. FRA is
one of ten agencies within the DOT concerned with intermodal transportation.
5. Within FRA, the Office of Safety promotes and regulates safety throughout the U.S.
railroad industry. FRA inspectors specialize in five safety disciplines and numerous grade
crossing and trespass-prevention initiatives: track, signal and train control, motive power and
equipment, operating practices, hazardous materials, and highway-rail grade crossing safety. The
Office trains and certifies State safety inspectors to enforce Federal rail safety regulations.
Central to the success of the rail safety effort is the ability to understand the nature of rail-related
accidents and to analyze trends in railroad safety. The Safety Law Division of the Office of Chief
Counsel develops and drafts the agency's safety regulations, assesses civil penalties for
violations of the rail safety statutes and FRA safety regulations, and provides other legal support
for FRA's safety program.
1
2
The ARR runs a single-track main line of 756 km from the ports of Seward on the Gulf of Alaska, and Whittier on
Prince William Sound, northward through Anchorage and Denali (formerly McKinley) National Park to Fairbanks, and
eastward to Eielson Air Force Base, with a branch to Palmer.
The AAR is a quasi-public corporation with a seven-member board of directors appointed by the Governor of Alaska.
Freight connections are made with the U.S. and Canadian rail systems to the south via Alaska Rail Marine Service
(rail wagons and loose-stowed freight on barges) weekly from Seattle and CN Rail's Aquatrain (rail wagons on
barges) from Prince Rupert. Recognizing the essential nature of the service to the state's inhabitants, the Federal
Railroad Administration has in recent years awarded grants to the railroad for trackwork to improve the performance
of the passenger operations, which operate at 50 km/h overall.
TERA INTERNATIONAL GROUP, INC. - 14.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14
TERA INTERNATIONAL GROUP, INC. - 14.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14
Figure 14.2: Rail Transport in the U.S.
DOT
STB
FRA
Other
Agencies
FTA
Freight Companies:
7 Class I (large)
34 Regional
507 +/- Local
Safety Oversight
Budget and safety oversight
Amtrak:
All Inter city Passenger
services
Funding
Safety Oversight
Technical Research
Track Access Charges
Suburban and Metro Operators
Track Access
Charges Operating
NTSB
AAR:
Policy Representation, Standards, Wagon Management and Settlements
Investigates
Accidents
TERA INTERNATIONAL GROUP, INC. - 14.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14
6. Surface Transportation Board. The Surface Transportation Board (STB) was created in
the Interstate Commerce Commission Termination Act of 1995 and is the successor agency to the
Interstate Commerce Commission (ICC). The STB is an economic regulatory agency that
Congress charged with the fundamental missions of resolving railroad rate and service disputes
and reviewing proposed railroad mergers. The STB is decisionally independent, although it is
administratively affiliated with the DOT.
7. The STB serves as both an adjudicatory and a regulatory body. The agency has
jurisdiction over railroad rate and service issues and rail restructuring transactions (mergers, line
sales, line construction, and line abandonment); certain trucking company, moving van, and noncontiguous
ocean shipping company rate matters; certain intercity passenger bus company
structure, financial, and operational matters; and rates and services of certain pipelines not
regulated by the Federal Energy Regulatory Commission.
8. National Transportation Safety Board (NTSB). 3 The National Transportation Safety
Board is an independent Federal agency charged by Congress with investigating every civil
aviation accident in the United States and significant accidents in the other modes of
transportation -- railroad, highway, marine and pipeline -- and issuing safety recommendations
aimed at preventing future accidents. With regard to railroads, NTSB determines the probable
cause of: railroad accidents involving passenger trains or any train accident that results in at least
one fatality or major property damage; as well as releases of hazardous materials in all forms of
transportation; and selected transportation accidents that involve problems of a recurring nature.
9. NTSB’s independence was guaranteed because it was set up as a permanent,
autonomous organization with a responsibility covering all transport accidents. Because of
NTSB’s independence, no one questions its impartiality and its recommendations have great
authority. Learning from the American experience, Sweden and Finland have set up accident
investigation boards to investigate accidents in every sector, not just transport. Canada, New
Zealand, the Netherlands, Australia and Indonesia, and many other countries, have set up multimodal
transport safety boards.
14.3 Amtrak (National Railroad Passenger Corporation)
10. In 1970, the U.S. Congress enacted the Rail Passenger Services Act, under which
Amtrak, 4 formally called the National Railroad Passenger Corporation, was created. The objective
was to relieve the freight railroads of the burden of money-losing passenger operations and to
preserve rail passenger service over a national system of Congressionally-designated routes.
Amtrak was created as a for profit corporation with most stocks held by the Federal Government.
It was also granted a monopoly to provide intercity rail transportation over its route system and
was to receive federal subsidies for the first few years, but then it was expected to make a profit.
Amtrak began passenger train services on 1 May 1971. Amtrak is the sole provider of intercity
passenger rail transportation. Amtrak operates on more than 37,000 route-km (22,000 route
miles). It owns 730 route miles, about 3 percent of the total nationwide, primarily between Boston
and Washington, DC, and in Michigan.
11. Before the creation of Amtrak, passenger service was provided by the nation’s freight
railroads. In return for government permission to exit the passenger business, freight railroads
donated intercity rail passenger equipment to Amtrak and helped capitalize Amtrak with significant
cash payments. The assistance freight railroads provided Amtrak to help it get started totaled
some U.S.$ 200 million (1971 dollars). With the prospect of relief from the hundreds of millions of
dollars in annual losses associated with passenger operations, freight railroads agreed to provide
Amtrak guaranteed priority access to the privately owned U.S. rail network, with Amtrak’s access
fee limited to the incremental costs (covering track maintenance, administration, and emergency
services) that freight railroads incur for passenger rail services.
3
4
http://www.ntsb.gov/Abt_NTSB/history.htm
Amtrak stands for the words ‘American’ and ‘Track’.
TERA INTERNATIONAL GROUP, INC. - 14.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14
12. Right from the beginning Amtrak has been operating at a loss. Its financial situation also
worsened steadily. In spite of this situation, the Federal government continued to provide
operating subsidies to Amtrak. After 1991, as the operating subsidies were reduced sharply,
Amtrak was verging on bankruptcy. In 2003, Congress appropriated U.S.$1.05 billion and
U.S.$1.2 billion in 2004. For 2005, Amtrak has requested U.S.$1.8 billion, whereas the
Government is prepared to support up to U.S.$1.4 billion if certain reforms are implemented. Most
notably restructuring Amtrak into three companies: a private passenger rail company that would
operate trains under contract to states and multi-state compacts; a private infrastructure company
that would maintain and operate the Northeast Corridor under contract to a multi-state compact,
and Amtrak, a government corporation that would retain the existing company's current right to
use the tracks of freight railroads.
13. Amtrak operates the only high-speed rail service in the U.S., between Washington D.C
and Boston (Acela Express) at a maximum speed of approximately 320 km/hr. Amtrak
inaugurated this service in December 2000.
14.4 The U.S. Freight Railroads
14. All freight railroads in the U.S. are owned and operated by private companies. At the end
of 2004, there were 549 private freight railroad companies operating on 227,433 route-km. These
include seven Class 1 railroads. 5 The seven Class I railroads are: The Burlington Northern &
Santa Fe Railway Co. (BNSF), Union Pacific Railroad Co. (UP), CSX Transportation, Norfolk
Southern Combined Railroad Subsidiaries (NS), Kansas City Southern Railway Co. (KCSR),
Grant Trunk Corporation (a subsidiary of Canadian National Railway), Soo Line Railroad Co.
(SLR a subsidiary of Canadian Pacific Railway). In 2004, Class I railroads operated 156,967
route-km and carried 1.844 billion tons of freight with total traffic volume of 2.67 trillion TKM,
which was the highest freight volume moved by rail amongst world railway systems. 6 Intercity rail
freight traffic has gradually increased, and at the end of 2004 rail’s market share in freight TKM
was 42 percent.
15. Besides the seven Class 1 railroads, there are 542 regional and short-line railroads which
operated approximately 70,461 route-km of their own railroad lines in 2004. The regional and
short-line railroads are 96.5 percent private- and 3.5 percent public-owned. They originate about
15 percent of national rail traffic but generate 8 percent of railroad revenue, despite operating
more than 30 percent of total system mileage. Regional and short-line systems have been formed
from a combination of historic holdings and the pieces of the Class I system that was shed by the
larger railroads. Many branch lines operate effectively in conditions where the Class I railroads
cannot. Short-line railways operate at much slower speed - and thereby subject to less stringent
Federal safety regulations as Class I carriers; using older equipment - oftentimes bought at
reasonable prices from Class I railroads. The regional and short-line systems take advantage of
different labor cost structures, non-unionized labor, different profitability targets and business
models with innovative budgeting and financing procedures, and may also receive some level of
public funding support.
16. Regional and short-line systems play two critical roles in the nation’s freight-rail network.
They are important partners for the Class I railroads because they often provide the first and last
service miles in the “door-to-door” collection and distribution of railcars. This arrangement allows
the Class I railroads to focus investment in higher-density, longer-distance line-haul business in
key corridors. Regional and short-line systems also ensure rail service for shippers along their
lines who rely on rail to move heavy or bulky commodities cost-effectively. Without regional and
short-line rail service, these shippers might close or relocate, taking jobs and tax revenue with
them. Some of the larger short-lines have been so successful in making a profit, that in recent
5 Freight railroad companies are classified by their level of operating revenues adjusted annually for inflation. For 2004,
(i) Class I railroads had operating revenues of U.S.$277.7 million or more; (ii) Class II railroads had operating
revenues of U.S.$ 22.2 million to U.S.$ 277.7 million; and (iii) Class III railroads had operating revenues of less than
U.S.$ 22.2 million.
6
Source: Association of American Railroads
TERA INTERNATIONAL GROUP, INC. - 14.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14
years their expertise has been sought by countries commercializing and privatizing their rail
systems. A number of U.S. short-lines have obtained long-term operating concessions in
Argentina, Brazil, Guatemala, Malawi, Mozambique, Estonia, Peru, Chile, Mexico, New Zealand,
and Great Britain. These short-lines most often carry specialized cargo or commodities from a
shipper or community for transfer on to a Class I line.
17. Organizationally, the U.S. railroads have continued the traditional structure that is
vertically integrated. Every railroad owns and controls its infrastructure as well as the trains
operating on that structure. The U.S. railroad companies see advantages in that mode of
operation for increasing productivity, reducing costs and being able to react in accordance with
the demand for rail transport in a competitive environment. Investment decisions that concern
both operations and infrastructure, such as those related to running heavier cars, longer trains,
and capacity enhancement can be made by a unified authority and in timely manner. In their view
this arrangement provides the best recipe for increasing profitability and increasing return on
capital.
14.5 Regulatory Framework
18. The U.S. rail freight industry has been through various phases in its existence of more
than 150 years. To counter monopolistic practices, railroads began to be regulated in the 1880s
with the creation of a government regulatory body, later called the Interstate Commerce
Commission (ICC). Over-regulation, shifting economic and social emphasis became acute in the
mid-1900s and caused the near collapse of a portion of the rail freight industry. The U.S. rail
industry found itself close to bankruptcy in the 1960s and 1970s.
19. Following the passing of the Staggers Rail Act in 1980, almost 95 percent of the industry
was deregulated, and the elimination of the ICC was called for (it was eliminated, but not until
1995). The Staggers Rail Act of 1980 gave railroads greater freedom to market their services and
to set rates. Railroads, for example, were allowed to enter into contracts with shippers. In addition,
the procedures governing the abandonment of uneconomical lines were liberalized and, through
various regulatory rulings, the ICC encouraged the creation of new short line railroads to operate
over many of the light-density rail lines that might otherwise have been abandoned. Because of
the Staggers Act and favorable work rule changes, the Class I carriers were able to rehabilitate
the U.S. rail system.
20. With deregulation having allowed rationalization of the rail freight system, the industry
could and has invested heavily in technology and system improvements and in research and
development. There has been phenomenal rationalization and improvements of motive power,
rolling stock, and infrastructure and management systems of the rail freight industry.
Improvements and advances such as 6000 horsepower locomotives using extremely fuel-efficient
and environmentally-friendly motive power; aluminum-bodied hopper cars that can carry up to 25
percent more cargo weight such as coal; double-stack container carriers; advances in traction
control; electronic braking; and, progression towards satellite-based tracking and control, when
taken together, provide the industry with substantially lower operating cost and the ability to
successfully compete with other modes of transportation, such as trucks. The industry has
redefined its role as a reliable and safe service provider.
21. Under deregulation, the rail freight industry was able to not only divest itself of unprofitable
lines, but also rationalize their respective systems. A key aspect of de-regulation has been the
phenomenal increase in the industry’s productivity.
22. The key to economic health of the U.S. railroad industry lies with its legislatively
determined deregulation. The industry aggressively adopted its provisions to nurture itself back to
profitability. With deregulation, the U.S. rail freight industry regained its competitive position in the
transport sector. To maintain economic momentum, the larger railroads started merging in the late
1980's.
TERA INTERNATIONAL GROUP, INC. - 14.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 14
14.6 Consolidation, Mergers, and their Impact
23. . Under deregulation since 1980, the Class 1 railroads have been aggressively
consolidating through mergers. The consolidation of the nation’s railroads has triggered concern
about competitive pricing of railroad services. Some shippers argue that with fewer railroads and
rail lines available, they may be “captive” to a single railroad that has little incentive to price its
services competitively. As a result, some states have requested, through the federal STB, that a
railroad allow its competitors to offer service over the railroad’s own lines. The railroads, for their
part, argue that they already price their services as close to cost as possible to compete with
trucking, and that competitive access requirements can “split” small markets into ever smaller
pieces that are even more difficult for them to serve cost-effectively.
24. The Federal government has been watching the aftermath of mergers very closely. After
the merger of the Union Pacific and the Southern Pacific (UP-SP) in 1996, rationalization of
management was undertaken. Unfortunately, reductions of middle management and supervisors
were not followed by systematic and/or procedural changes of operations. As a consequence, a
series of serious accidents occurred within the period of one year. Therefore, the FRA is focusing
intensely on safety procedures in place.
25. Greater concentration within the U.S. industry increased the number of shippers
dependent upon just one or two railroads that would be interested in legislative and regulatory
safeguards to prevent potential market power abuse by railroads. This diminishing degree of
intramodal rail competition also resulted in a loss of product and geographic competition in key
agricultural markets. More fundamentally, the increasing concentration of the U.S. railroad
industry reinforced the complaints of many shippers that the industry suffered from a fundamental
lack of competition. Some shippers have also attributed the recent service failures of the western
railroads to a fundamental lack of competition in the industry.
26. It appears that monopolistic behavior is generally creeping in to the U.S. railroads. The
shippers’ view of the railroad industry is summed up by the U.S. Government Accounting Office
(GAO): 7 “conditions in the railroad industry have changed greatly since 1980. Instead of needing
to rationalize excess capacity to attain profitability, railroads today are constrained in many cases
by insufficient capacity. Instead of improving profitability by increasing efficiency, the task for
railroads now is to improve profitability by enhancing the service provided to their customers.
Instead of customer service deteriorating because of the inability of railroads to adequately
maintain their physical infrastructure, many agricultural shippers complain that service has
deteriorated due to the lack of adequate inter-railroad (railroad-to-railroad) competition and
service disruptions resulting from railroad mergers. Instead of many Class I railroads facing
bankruptcy, Class I railroads today are financially viable and able to attract enough capital to pay
large market premiums for the acquisition of other railroad firms and to make large infrastructure
investments. Instead of effective inter-railroad competition (as well as competition from competing
transportation modes) protecting shippers from the market power of Class I railroads, many
shippers who rely on rail transportation have been left without effective inter-railroad competition
due to recent Class I railroad mergers. The increased geographic reach of the remaining Class I
railroads also has limited the effectiveness of product and geographic competition in constraining
railroad prices.”
27. Economic regulation of U.S. railroads is at a crossroad. The increasing consolidation of
the U.S. rail industry and railroad service failures at mergers have led some to argue that a lack
of competition in the industry is the problem and that increased regulatory oversight over railroads
is needed to protect shippers. Yet, others claim that the recent western railroad problems were
due to one-time merger effects or to long-term capacity constraints rather than to a lack of
competition and that railroad regulatory constraints should be kept to a minimum to allow
railroads to earn the profits they need to upgrade their infrastructure. The STB has begun working
towards a new regulatory framework based on a recent review of these issues.
7
Study undertaken by GAO at the behest of the U.S. Senate (GAO/RCED-99-93 Railroad Regulation)
TERA INTERNATIONAL GROUP, INC. - 14.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15:
SELECTED DATA FOR WORLD RAILWAYS
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Total Route
km
Electrified
Route km
Railway Owned
Total Track km
Passenger Cars
Railway
Owned
Passenger
Seats
Appedix 15: Selected Data for World Railways
Railway Owned
Freight Cars
Railway Owned
Freight Cars
Capacity Tons
Private Owned
Freight Cars
Private Owned
Freight Cars
Capacity Tons
Total
Employees
Passengers
(1000)
PKM (million) Tons (1000) TKM (million)
Gross Hauled
TKM for
Passenger
Trains (Million)
Argentina All 35,754 160 378,505 6,979 20,535 11,001
Bolivia FO SA and FCA SA 3,698 717 279 1,592 900
Brazil 12 Freight Railways 28,656 0 344,996 182,648
Canada VIA RAIL 12,955 - - 430 - - - - 3,051 3,789 1,379
Canada Freight Rails 47,446 147 - 474 - 82,796 32,414 166 1,433 280,572 311,371
Canada Total 60,401 147 - 904 - 82,796 - - - 35,465 3,955 2,812 280,572 311,371 4,274 606,036
Chile All 2,245 850 - - - - - 3,413 14,444 829 22,779 3,575 - -
Mexico All 26,656 100 37,200 23,700
Peru All 2,123 1,283 103 7,158 1,115
United States AAR Class 1 196,806 - - 467,063 44,791,342 - - 154,652 1,632,077 2,264,983 4,252,092
United States AMTRAK 36,491 - - 1,623 - 20,905 24,595 9,141
United States Total 233,297 - - 1,623 - 467,063 44,791,342 - - 175,557 24,595 9,141 1,632,077 2,264,983
Armenia ARM 711 - - - - 4,062 1,300 48 2,019 452 - -
Australia QR 9,474 1,900 10,134 680 - 11,016 - - - 13,927 47,265 1,347 156,450 41,314 3,375 72,757
Azerbaijan AZ 2,122 1,270 2,951 868 - 19,348 - - - 29,461 4,736 654 20,345 7,719 2,346 15,142
Bangladesh BRB 2,855 4,443 34,168 43,400 4,340 3,470 896
Cambodia CFRC 603 - - 20 1,700 231 13,046 - - 1,284 133 20 557 158 - -
China CR 60,446 18,060 129,643 38,972 - 503,868 30,409,000 - - 1,443,400 936,340 462,279 1,998,140 1,647,558 489,260 2,599,557
Georgia GR 1,565 1,565 1,872 975 50,001 12,682 886,882 517 33,295 16,876 2,136 401 14,883 5,065 1,798 9,436
India IR 63,122 16,272 - 40,458 3,840,731 204,125 9,977,269 - - 1,472,000 4,970,803 515,044 518,737 353,194 367,831 709,528
Indonesia 6,458 125 1,439 12,683 176,000 17,600 17,099 1,710
Japan JR 20,067 12,230 - 25,332 2,427,536 9,074 321,498 5,767 219,106 144,480 8,641,843 241,160 37,876 22,600 219,177 59,542
Kazakhstan KTZ 13,770 3,865 18,650 2,694 - 70,366 4,584,810 18,360 1,193,400 98,273 17,686 10,686 202,737 147,672 26,776 222,752
Kyrgyzstan KZD 417 0 421 2,616 4,672 629 50 4,223 540
Malaysia KTM 1,667 150 2,266 445 36,006 4,105 163,564 - - 5,024 28,087 1,931 4,608 1,224 3,388 2,747
Mongolia MTZ 1,810 290 - 2,462 159,156 14,464 3,981 1,073 11,637 6,452 2,077 11,462
Pakistan PR 7,791 305 11,515 1,843 - 23,722 - - - 86,153 72,397 22,306 6,180 5,605 - -
South Korea KORAIL 3,140 679 7,153 4,272 - 9,265 468,264 5,185 268,014 29,030 1,021,905 28,562 47,110 11,057 42,287 28,601
Tajikistan TDZ 617 - 680 291 - 1,760 - - - 5,056 555 50 11,747 1,087 151 1,950
Uzbekistan UTI 4,126 620 4,606 936 44,172 47,458 16,500 2,200 51,409 18,428 3,355 33,684
Vietnam DSVN 2,652 - 2,652 958 - 46,087 12,500 4,041 9,108 2,875 4,326 4,531
Albania HSh 447 - 447 76 - 824 - - - 2,248 2,068 105 43 31 156 69
Belarus BC 5,502 876 12,013 2,898 - 21,973 1,459,493 - - 76,615 141,568 13,308 105,935 38,402 20,958 72,687
Bosnia-Herzegowina ZBH 609 441 608 114 6,450 1,652 74,892 45 2,565 3,889 242 19 4,658 212
Bosnia-Herzegowina ZRS 424 338 448 134 6,942 2,525 117,719 - - 3,452 854 36 1,276 100
Bosnia-Herzegowina Total 1,033 779 1,056 248 13,392 4,177 192,611 45 2,565 7,341 1,096 55 5,934 312 310 580
Bulgaria BDZ 18,131 35,206 2,517 20,070 5,274
Bulgaria NRIC 4,318 2,847 7,269 1,705 78,444 13,946 809,975 3,313 178,902 16,269
Bulgaria Total 4,318 2,847 7,269 1,705 78,444 13,946 809,975 3,313 178,902 34,400 35,206 2,517 20,070 5,274 6,884 10,084
Croatia HZ 2,726 983 4,060 640 26,027 7,920 391,570 - - 14,905 35,980 1,163 13,284 2,745 2,784 5,363
FYROM CFARYM 699 233 925 139 7,602 2,431 - - - 3,656 901 92 2,390 373 237 660
Moldova CFM (E) 1,111 - 1,236 580 - 8,723 547,253 1,061 74,274 14,791 5,282 352 14,739 3,000 1,266 5,530
Romania SERVITRANS 137 8,965 - - 351 2,639 2,152
Romania CFR 10,939 3,929 20,365 3,629 261,269 60,729 5,744,418 14,612 689,054 77,776 94,780 8,497 68,698 14,647
Romania Total 10,939 3,929 20,365 3,629 261,269 60,866 5,753,383 14,612 689,054 78,127 94,780 8,497 71,337 16,799 21,065 33,283
Russia RZD 85,542 42,335 123,318 41,742 - 1,222,200 1,299,300 157,100 1,160,800 1,664,300 360,136 2,636,532
Serbia-Montenegro JZ 3,809 1,247 5,533 797 - 12,077 - - - 28,509 14,333 904 9,775 2,408 3,147 5,169
Turkey TCDD 8,697 1,752 10,984 1,294 108,118 16,070 624,405 771 39,820 34,526 76,993 5,878 15,755 8,612 7,135 16,733
Ukraine UZ 22,079 9,306 29,980 - - 171,584 11,476,970 35,337 - 371,648 523,096 50,544 392,592 193,141 91,294 318,208
Gross Hauled
TKM for Freight
Trains (Million)
TERA INTERNATIONAL GROUP, INC. - 15.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Total Route
km
Electrified
Route km
Railway Owned
Total Track km
Passenger Cars
Railway
Owned
Passenger
Seats
Railway Owned
Freight Cars
Railway Owned
Freight Cars
Capacity Tons
Private Owned
Freight Cars
Private Owned
Freight Cars
Capacity Tons
Total
Employees
Passengers
(1000)
PKM (million) Tons (1000) TKM (million)
Gross Hauled
TKM for
Passenger
Trains (Million)
Norway CARGONET AS 789 7,415 2,092 4,932
Norway JBV 4,077 2,518 4,329 231 18,281 3,489
Norway MTAS 80 13,400 3,781
Norway NSB AS 3,055 45,201 2,204 5,659
Norway Total 4,077 2,518 4,329 231 18,281 - - - - 7,413 45,201 2,204 20,815 5,873 5,659 4,932
Switzerland CFF/SBB/FFS 2,990 2,990 7,324 3,764 285,380 12,171 451,711 7,139 441,404 27,104 250,200 12,290 55,054 9,341 27,399 22,670
Austria GKB 97 - 97 21 - 76 - - - 415 4,092 116
Austria OBB 5,655 - 10,932 3,128 214,301 16,094 753,913 6,485 418,358 45,651 183,700 8,150 86,247 17,852
Austria SLB 35 35 38 26 - 139 4,150 184 241 7
Austria Total 5,787 35 11,067 3,175 214,301 16,170 753,913 6,485 418,358 46,205 191,942 8,450 86,488 17,859 26,861 41,233
Belgium SNCN/NMBS 3,521 2,927 6,210 3,358 288,146 14,616 789,434 5,485 322,236 41,894 168,363 8,265 66,938 8,306 24,968 19,209
Czech Rep. CD 9,501 2,943 16,187 5,085 334,322 35,615 1,771,402 9,891 494,550 78,575 171,984 6,483 92,082 17,069 18,327 34,025
Denmark BDK 2,273 624 3,240 1,538 97,260 - - - - 2,523
Denmark DSB 8,453 148,054 5,397
Denmark RAILION DK 665 7,355 1,888
Denmark Total 2,273 624 3,240 1,538 97,260 - - - - 11,641 148,054 5,397 7,355 1,888 - -
Estonia EVR 959 131 1,622 251 20,083 3,648 247,939 13,788 923,796 3,869 5,083 182 42,544 9,283 699 17,247
Finland RHK 5,851 2,400 8,707 1,060 68,991 11,324 501,362 303 122,756 125
Finland VR 11,115 59,909 3,338 43,503 10,047
Finland Total 5,851 2,400 8,707 1,060 68,991 11,324 501,362 303 122,756 11,240 59,909 3,338 43,503 10,047 9,305 20,931
France RFF 29,269 14,505 53,270 15,553 1,273,500 37,522 1,899,222 66,311 3,219,813 480
France SNCF 174,755 879,449 71,937 120,676 46,835
France Total 29,269 14,505 53,270 15,553 1,273,500 37,522 1,899,222 66,311 3,219,813 175,235 879,449 71,937 120,676 46,835 146,545 122,881
Germany DB AG 36,044 19,829 74,846 20,990 1,460,598 103,256 4,699,000 56,581 - 249,251 1,681,734 69,596 267,925 73,951 180,852 171,627
Greece OSE 2,414 83 2,822 457 25,123 3,473 136,226 - - 8,897 8,885 1,574 2,593 456
Hungary GySEV/ROEE 220 220 220 52 3,532 115 6,098 609 27,890 1,962 3,627 169 4,226 422
Hungary MAV Rt. 7,730 2,628 7,730 2,963 197,817 18,289 848,965 3,165 - 48,007 122,332 7,300 42,590 7,568
Hungary Total 7,950 2,848 7,950 3,015 201,349 18,404 855,063 3,774 27,890 49,969 125,959 7,469 46,816 7,990 15,097 16,190
Ireland CIE 1,919 52 1,919 405 24,826 1,574 43,659 37 703 5,833 35,558 1,601 2,251 398 2,678 1,750
Italy FNM 322 199 496 439 - 20 - - - 2,334 50,585 1,153 154 19
Italy FS 15,965 10,966 22,262 10,374 808,537 49,155 2,387,332 7,000 330,000 101,946 497,936 45,221 82,107 22,457
Italy RTC 98 1,891 456
Italy Total 16,287 11,165 22,758 10,813 808,537 49,175 2,387,332 7,000 330,000 104,378 548,521 46,374 84,152 22,932 59,731 30,215
Latvia LDZ 2,270 258 3,564 579 42,903 5,348 350,980 2,604 165,100 14,342 22,961 762 48,355 17,604 2,001 32,254
Lithuania LG 1,774 122 3,615 480 37,051 9,308 572,965 2,836 173,586 12,614 7,005 432 43,447 11,457 1,883 21,469
Luxembourg CFL 275 262 618 150 12,710 3,132 170,683 196 10,444 3,189 13,479 262 15,941 560 985 1,757
Netherlands NS N.V. (pass transp) 23,201 309,785 13,848
Netherlands ProRail (Infra mgr) 2,811 2,064 6,550 2,758 232,000 1,807 - - - 2,678
Netherlands ILION NL (Freight transp) 1,313 25,910 4,026
Netherlands Total 2,811 2,064 6,550 2,758 232,000 1,807 - - - 27,192 309,785 13,848 25,910 4,026 - 6,987
Poland PKP 19,900 12,035 37,889 8,818 602,189 79,679 4,231,129 31,306 - 138,230 283,249 19,643 161,751 47,394 41,674 98,233
Portugal CP (opertr) 5,143 132,911 3,339 10,158 2,442
Portugal REFER (infra mgr) 2,818 1,076 3,404 1,203 88,544 3,509 147,130 470 19,145 4,814
Portugal Total 2,818 1,076 3,404 1,203 88,544 3,509 147,130 470 19,145 9,957 132,911 3,339 10,158 2,442 6,178 4,220
Slovakia ZSR (infra mgr) 3,657 1,556 6,877 1,984 165,252 17,470 866,905 6,503 - 22,106
Slovakia ZSSK (oprtr) 19,456 51,274 2,316 50,564 10,117
Slovakia Total 3,657 1,556 6,877 1,984 165,252 17,470 866,905 6,503 - 41,562 51,274 2,316 50,564 10,117 7,056 19,957
Slovenia SZ 1,229 504 2,193 432 26,487 4,315 218,796 455 25,834 8,487 15,066 777 17,238 3,274 1,600 5,963
Spain EuskoTren 180 175 180 157 7,936 14 840 - - 952 18,156 272 154 14
Spain FEVE 1,194 317 1,269 236 - 992 43,010 - - 1,953 12,270 234 3,087 433
Spain FGC 45 45 94 238 11,898 180 6,165 - - 1,216 72,977 793 654 41
Spain RENFE 12,829 7,510 - 3,777 249,034 16,046 741,734 8,194 353,850 31,016 490,444 19,309 29,670 13,668
Spain Total 14,248 8,047 1,543 4,408 268,868 17,232 791,749 8,194 353,850 35,137 593,847 20,608 33,565 14,156 31,116 27,470
Sweden BV (infra mgr) 9,882 7,638 11,697 1,251 28,704 8,500 - - - 6,053
Sweden GREEN CARGO 3,512 42,800 12,829
Sweden SJ AB(pass oprtr) 3,524 61,167 6,621
Sweden Total 9,882 7,638 11,697 1,251 28,704 8,500 - - - 13,089 61,167 6,621 42,800 12,829 12,686 -
Gross Hauled
TKM for Freight
Trains (Million)
TERA INTERNATIONAL GROUP, INC. - 15.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Total Route
km
Electrified
Route km
Railway Owned
Total Track km
Passenger Cars
Railway
Owned
Passenger
Seats
Railway Owned
Freight Cars
Railway Owned
Freight Cars
Capacity Tons
Private Owned
Freight Cars
Private Owned
Freight Cars
Capacity Tons
Total
Employees
Passengers
(1000)
PKM (million) Tons (1000) TKM (million)
Gross Hauled
TKM for
Passenger
Trains (Million)
United Kingdom ATOC (total pass oprtr) 1,014,000 40,400
United Kingdom EURTOTUNNEL 58 58 116 254 - 609 - - - 3,309 - 497 - 924
United Kingdom Eurostar UK 18 - 1,500 6,300 -
United Kingdom NIR (N. Ireland) 340 - 480 76 - - - - - 788 6,900 233
United Kingdom Network Rail 16,652 5,167 30,763 -
United Kingdom TFO (total freig oprts) 88,900 18,900
United Kingdom Total 17,050 5,225 31,359 348 - 609 - - - 50,000 1,027,200 41,130 88,900 19,824 - -
Algeria SNTF 3,572 283 4,785 436 25,621 10,047 449,396 113 6,300 11,727 27,529 964 8,162 2,038 - -
Egypt ENR 5,150 65 9,525 3,864 - 11,592 - - - 91,380 451,049 40,837 11,903 4,188 - -
Iran RAI 6,152 148 7,266 1,256 58,998 16,549 927,682 897 - 14,305 16,112 9,314 28,797 18,048 9,555 33,144
Iraq IRR 2,339 - 2,268 301 15,640 12,258 - - - 8,456 1,243 571 5,227 1,683
Israel IsR 615 - 615 278 22,353 640 38,400 574 35,568 1,569 19,826 1,278 8,024 1,125 2,177 2,172
Jordan ARC 292 - 292 346 - - - 535 2,467 522 - 522
Morocco ONCFM 1,907 1,003 3,093 364 27,379 5,994 319,936 105 5,772 9,618 16,516 2,374 30,553 5,147 3,047 7,549
Saudi Arabia SRO 1,390 - 1,548 58 2,880 2,060 - - - 1,702 913 293 1,894 880 293 880
Syria CFS 1,550 - 1,550 479 30,930 - - - - 11,500 2,052 527 6,141 1,882 - -
Tunisia SNCFT 1,909 65 2,153 322 - 4,447 - - - 5,554 35,723 1,242 11,596 2,173 1,288 3,404
Benin OCBN 438 - 438 20 - 329 - - - 443 66 153 86 66 86
Cameroon CAMRAIL 988 - 988 65 4,262 1,160 58,240 145 7,250 2,568 1,109 319 1,831 1,089
Congo (Dem. Rep.) SNCC 4,499 858 3,641 255 7,384 3,880 134,243 934 42,496 14,421 385 142 1,042 445 251 852
Congo (Rep.) CFCO 1,026 - 1,026 - - - - 2,197 - 76 - 307 - -
Djibouti CDE 781 - 781 27 - 493 - - - 2,425 324 82 240 97
Gabon SETRAG 731 - 828 54 - 788 - - - 1,287 206 86 2,967 1,689 - -
Ghana GRC 977 - 1,007 157 - 2,340 85 1,870 242 139 528
Ivory Coast/Burkina Faso CIPF 639 - - 27 - 807 - - -
Ivory Coast/Burkina Faso SIPF 1,537
Ivory Coast/Burkina Faso SITARAIL 1,589 88 10 180 129
Ivory Coast/Burkina Faso Total 639 - - 27 - 807 - - - 3,126 88 10 180 129 15 139
Kenya KR 2,634 - 2,634 228 12,124 5,014 180,504 140 5,040 7,000 4,794 288 2,227 1,538 288 1,538
Mali RCFM 733 - 733 512 - - - 1,405 551 196 382 189 - -
Mozambique CFF 2,072 - - 170 - 4,301 - - - 6,512 2,659 138 4,103 808 - -
Nigeria NRC 3,505 - - - - 3,186 - - - - 1,622 973 56 39 - -
South Africa SPOORNET 20,041 8,432 30,488 1,820 85,403 114,135 5,593,025 - - 34,967 3,064 996 179,466 105,724 3,849 166,912
Sudan SRC 4,578 - 4,578 170 - 4,439 - - - 12,936 145 73 1,278 993 0 2,979
Tanzania TRC 2,600 - 2,600 - - - - 9,576 - 0 1,445 1,351 - -
Uganda URC 259 - 259 1,431 - - - 1,150 904 218 - -
Gross Hauled
TKM for Freight
Trains (Million)
TERA INTERNATIONAL GROUP, INC. - 15.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Gross Hauled
Tons of All
Trains/TU
Gross Hauled Tons
of Passenger
Trains/Passenger
Gross Hauled
Tons of Freight
Trains/Ton of
Freight
Passenger
Revenue (Million
$)
Freight Revenue
($ Million)
Infrastructure
Income (million
US$)
Gov't PSO
Payments and
Subsidies
(million US$)
Other Income
(million US$
Operating
Expenses
(million US$)
Operating
Income (million
US$)
Net Income
after Tax
(million US$)
Passenger
Revenue/PKM
(US$)
Argentina All
Bolivia FO SA and FCA SA
Brazil 12 Freight Railways
Canada VIA RAIL
Canada Freight Rails
Canada Total 1.93 1.9463
Chile All
Mexico All
Peru All
United States AAR Class 1 1.88 1.8773 35,413.26 0.00 0.00 1,164.49 31,439.86 36,639.63 2,682.61 0.016
United States AMTRAK 1,420.88 0.00 634.03 7.58 3,080.46 2,062.48 -1,285.71 0.155
United States Total 0.00 634.03 1,172.06 34,520.32 38,702.11 1,396.91
Armenia ARM
Australia QR 1.71 2.5056 1.7611 - - -
Azerbaijan AZ 1.81 3.5872 1.9617 7.58 89.67 - - - 0.012 0.012
Bangladesh BRB 91.77 71.41 -35.20
Cambodia CFRC 3.79 2.53 -1.26
China CR 1.23 1.0584 1.5778 - - - 0.013 0.009
Georgia GR 1.73 4.4838 1.8630
India IR 0.82 0.7142 2.0089 5,819.90 237.44 8,350.96 6,057.35 -2,293.61 0.016
Indonesia
Japan JR 0.23 0.9088 2.6346 34,570.84 1,208.69 150.30 4,406.61 33,733.47 40,335.17 1,991.75 0.143 0.053
Kazakhstan KTZ 1.41 2.5057 1.5084
Kyrgyzstan KZD
Malaysia KTM 0.87 1.7545 2.2443 31.58 26.52 12.63 13.89 108.62 84.62 -30.31 0.016 0.022
Mongolia MTZ 1.52 1.9357 1.7765
Pakistan PR 145.25 88.41 20.21 198.29 253.86 70.19 0.007 0.016
South Korea KORAIL 0.72 1.4805 2.5867 1,007.87 275.33 501.41 113.67 2,113.00 1,897.03 -291.75 0.035 0.025
Tajikistan TDZ 1.72 3.0200 1.7939
Uzbekistan UTI 1.63 1.5250 1.8279
Vietnam DSVN 0.66 1.0705 1.5760
Albania HSh 0.51 1.4857 2.2258 1.26 2.53 - 3.79 - 0.012 0.081
Belarus BC 1.41 1.5748 1.8928 140.19 525.41 37.89 589.82 703.49 175.56 0.011 0.014
Bosnia-Herzegowina ZBH 1.26 18.95 15.16 6.32 77.04 42.94 -34.10
Bosnia-Herzegowina ZRS 1.26 5.05 17.68 3.79 35.36 29.05 -6.32
Bosnia-Herzegowina Total 1.58 5.6364 1.8590 2.53 24.00 32.84 10.10 112.41 71.99 -40.42 0.046 0.077
Bulgaria BDZ 42.94 146.51 41.68 35.36 291.75 267.76 -21.47
Bulgaria NRIC 128.83 8.84 147.77 138.93 -2.53
Bulgaria Total 1.29 2.7350 1.9120 42.94 146.51 128.83 41.68 44.21 439.52 406.69 -24.00 0.017 0.028
Croatia HZ 1.37 2.3938 1.9537 46.73 93.46 116.20 92.20 49.26 526.67 397.85 -31.58 0.040 0.034
FYROM CFARYM 1.42 2.5761 1.7694 2.53 20.21 - 22.73 - 0.027 0.054
Moldova CFM (E) 1.65 3.5966 1.8433 - - -
Romania SERVITRANS 12.63 16.42 26.52 29.05 3.79
Romania CFR 366.27 540.56 281.65 45.47 66.94 1,422.14 1,299.63 -160.40
Romania Total 1.32 2.4791 1.9812 366.27 553.19 281.65 45.47 83.36 1,448.66 1,328.68 -156.61 0.043 0.033
Russia RZD 1.45 2.2924 1.5842
Serbia-Montenegro JZ 1.56 3.4812 2.1466 25.26 73.25 - 98.51 - 0.028 0.030
Turkey TCDD 1.15 1.2138 1.9430 74.52 150.30 109.88 361.22 943.46 697.18 -353.64 0.013 0.017
Ukraine UZ 1.31 1.8062 1.6475 262.70 1,659.58 - 1,922.29 - 0.005 0.009
Freight
Revenue/TKM
(US$)
TERA INTERNATIONAL GROUP, INC. - 15.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Gross Hauled
Tons of All
Trains/TU
Gross Hauled Tons
of Passenger
Trains/Passenger
Gross Hauled
Tons of Freight
Trains/Ton of
Freight
Passenger
Revenue (Million
$)
Freight Revenue
($ Million)
Infrastructure
Income (million
US$)
Gov't PSO
Payments and
Subsidies
(million US$)
Other Income
(million US$
Operating
Expenses
(million US$)
Operating
Income (million
US$)
Net Income
after Tax
(million US$)
Passenger
Revenue/PKM
(US$)
Norway CARGONET AS 2.36 2.3576 - 200.82 -
Norway JBV 15.16 3.79 107.36 752.75 127.56 -626.45
Norway MTAS
Norway NSB AS 2.5676 301.86 209.66 21.47 556.98 534.25 5.05 0.137
Norway Total 0.61 1,309.73 862.63 -621.40
Switzerland CFF/SBB/FFS 1.05 2.2294 2.4269 1,456.24 802.01 97.25 1,581.28 1,326.15 5,225.03 5,261.66 20.21 0.118 0.086
Austria GKB 3.79 1.26 - 5.05 -
Austria OBB 1,361.51 1,281.95 15.16 1,230.16 915.68 4,680.68 4,804.45 126.30
Austria SLB
Austria Total 1.57 3.1788 2.3088 1,365.30 1,283.21 15.16 1,230.16 915.68 4,680.68 4,809.50 126.30 0.162 0.072
Belgium SNCN/NMBS 1.16 3.0209 2.3127 1,226.37 473.63 856.31 1,539.60 4,165.37 4,046.65 -420.58 0.148 0.057
Czech Rep. CD 1.44 2.8269 1.9934 195.77 723.70 453.42 298.07 161.66 1,866.71 1,832.61 -36.63 0.030 0.042
Denmark BDK 146.51 66.94 515.30 213.45 -300.59
Denmark DSB 659.29 703.49 318.28 1,468.87 1,681.05 118.72
Denmark RAILION DK 95.99 - 95.99 -
Denmark Total 659.29 95.99 146.51 703.49 385.22 1,984.17 1,990.49 -181.87 0.122 0.051
Estonia EVR 1.82 3.8407 1.8579 - - -
Finland RHK 645.39 88.41 -545.62
Finland VR 375.11 447.10 101.04 899.26 924.52 6.32
Finland Total 1.56 2.7876 2.0833 375.11 447.10 0.00 0.00 101.04 1,544.65 1,012.93 -539.30 0.112 0.045
France RFF 2,673.77 1,763.15 1,260.47 6,020.72 5,697.39 -1,795.99
France SNCF 11,236.91 2,349.18 42.94 1,350.15 19,630.81 19,493.14 63.15
France Total 1.03 2.0371 2.6237 11,236.91 2,349.18 2,673.77 1,806.09 2,610.62 25,651.53 25,190.54 -1,732.84 0.156 0.050
Germany DB AG 1.20 2.5986 2.3208 14,091.29 13,645.45 659.29 14,010.46 41,834.35 42,406.49 -309.44 0.202 0.185
Greece OSE 74.52 25.26 7.58 519.09 107.36 -597.40 0.047 0.055
Hungary GySEV/ROEE 15.16 51.78 34.10 20.21 121.25 119.99 -1.26
Hungary MAV Rt. 181.87 397.85 15.16 385.22 223.55 1,365.30 1,204.90 -159.14
Hungary Total 1.05 2.0213 2.0263 197.03 449.63 49.26 385.22 243.76 1,486.55 1,324.89 -160.40 0.026 0.056
Ireland CIE 0.88 1.6727 4.3970 173.03 63.15 234.92 27.79 517.83 498.89 -24.00 0.108 0.159
Italy FNM 322.07 330.91 1.26
Italy FS 4,933.28 1,108.91 508.99 6,105.34 12,275.10 12,655.26 39.15
Italy RTC 20.21 1.26 21.47 21.47 0.00
Italy Total 0.44 1.2880 1.3176 4,933.28 1,129.12 0.00 508.99 6,106.61 12,618.63 13,007.64 40.42 0.106 0.049
Latvia LDZ 1.76 2.6260 1.8322 - - -
Lithuania LG 1.81 4.3588 1.8739 15.16 294.28 1.26 29.05 333.43 339.75 5.05 0.035 0.026
Luxembourg CFL 2.14 3.7595 3.1375 155.35 122.51 222.29 55.57 558.25 555.72 -3.79 0.593 0.219
Netherlands NS N.V. (pass transp) 1,789.67 1,657.06 3,374.74 2,715.45 102.30
Netherlands ProRail (Infra mgr) 154.09 1,036.92 103.57 1,155.65 1,294.58 8.84
Netherlands ILION NL (Freight tran 189.45 - 189.45 -
Netherlands Total 0.39 1.7355 1,789.67 189.45 154.09 1,036.92 1,760.62 4,530.38 4,199.48 111.14 0.129 0.047
Poland PKP 1.47 2.1216 2.0727 560.77 1,408.25 308.17 438.26 2,944.05 2,715.45 -612.56 0.029 0.030
Portugal CP (opertr) 184.40 78.31 29.05 22.73 526.67 314.49 -311.96
Portugal REFER (infra mgr) 79.57 171.77 335.96 252.60 -155.35
Portugal Total 0.73 1.8503 1.7281 184.40 78.31 79.57 29.05 194.50 862.63 567.09 -467.31 0.055 0.032
Slovakia ZSR (infra mgr) 319.54 73.25 164.19 538.04 555.72 -29.05
Slovakia ZSSK (oprtr) 79.57 482.47 132.62 42.94 813.37 736.33 -147.77
Slovakia Total 1.61 3.0466 1.9726 79.57 482.47 319.54 205.87 207.13 1,351.41 1,292.05 -176.82 0.034 0.048
Slovenia SZ 1.47 2.0592 1.8213 34.10 133.04 104.83 50.52 30.31 344.80 352.38 -15.16 0.044 0.041
Spain EuskoTren 87.15 21.47 -58.10 0.000
Spain FEVE 13.89 17.68 94.73 7.58 173.03 133.88 -15.16 0.059
Spain FGC 55.57 3.79 7.58 126.30 65.68 -63.15 0.070
Spain RENFE 1,276.89 423.11 1,294.58 468.57 3,413.89 3,463.15 49.26 0.066
Spain Total 0.79 1.5099 1.9405 1,346.36 444.58 0.00 1,389.30 483.73 3,800.37 3,684.17 -87.15 0.066 0.031
Sweden BV (infra mgr) - - -
Sweden GREEN CARGO
Sweden SJ AB(pass oprtr) 765.38 44.21 785.59 809.58 -13.89 0.116
Sweden Total 1.9160
Freight
Revenue/TKM
(US$)
TERA INTERNATIONAL GROUP, INC. - 15.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Gross Hauled
Tons of All
Trains/TU
Gross Hauled Tons
of Passenger
Trains/Passenger
Gross Hauled
Tons of Freight
Trains/Ton of
Freight
Passenger
Revenue (Million
$)
Freight Revenue
($ Million)
Infrastructure
Income (million
US$)
Gov't PSO
Payments and
Subsidies
(million US$)
Other Income
(million US$
Operating
Expenses
(million US$)
Operating
Income (million
US$)
Net Income
after Tax
(million US$)
Passenger
Revenue/PKM
(US$)
United Kingdom ATOC (total pass oprtr 6,990.71 - 6,990.71 - 0.173
United Kingdom EURTOTUNNEL 1,055.87 1,501.71 -3,384.84
United Kingdom Eurostar UK 34.10 - 34.10 -
United Kingdom NIR (N. Ireland) 30.31 - 30.31 -
United Kingdom Network Rail - - -
United Kingdom TFO (total freig oprts)
United Kingdom Total
Algeria SNTF 34.10 60.62 119.99 94.73 -112.41
Egypt ENR 84.62 34.10 - 118.72 - 0.002 0.008
Iran RAI 1.21 1.0259 1.8364 - - -
Iraq IRR - - -
Israel IsR 0.90 1.7034 1.9307 68.20 29.05 - 97.25 - 0.053 0.026
Jordan ARC 1.00 - - -
Morocco ONCFM 1.00 1.2835 1.4667 69.47 164.19 25.26 210.92 257.65 34.10 0.029 0.032
Saudi Arabia SRO 0.75 - - -
Syria CFS - - -
Tunisia SNCFT 1.00 1.0370 1.5665 29.05 46.73 13.89 - 89.67 -1.26 0.023 0.022
Benin OCBN 0.57 1.26 5.05 - 6.32 - 0.019 0.059
Cameroon CAMRAIL 10.10 66.94 8.84 3.79 83.36 89.67 1.26 0.032 0.061
Congo (Dem. Rep.) SNCC 1.45 1.7676 1.9146 3.79 36.63 5.05 102.30 45.47 -56.84 0.027 0.082
Congo (Rep.) CFCO - - -
Djibouti CDE
Gabon SETRAG - - -
Ghana GRC 1.61 1.6353 2.1818
Ivory Coast/Burkina Faso CIPF
Ivory Coast/Burkina Faso SIPF
Ivory Coast/Burkina Faso SITARAIL 5.05 - - - 0.039
Ivory Coast/Burkina Faso Total 1.00 1.5000 1.0775
Kenya KR 0.84 2.53 75.78 2.53 6.32 703.49 87.15 -778.44 0.009 0.049
Mali RCFM 6.32 10.10 1.26 22.73 17.68 -8.84 0.032 0.053
Mozambique CFF - - -
Nigeria NRC 1.26 1.26 17.68 1.26 22.73 21.47 -1.26 0.001 0.032
South Africa SPOORNET 1.56 3.8645 1.5788 47.99 1,716.42 83.36 1,688.63 1,847.77 60.62 0.048 0.016
Sudan SRC 2.79 3.0000 1.26 22.73 - 24.00 - 0.017 0.023
Tanzania TRC - -
Uganda URC 16.42 - 16.42 - 0.075
Freight
Revenue/TKM
(US$)
TERA INTERNATIONAL GROUP, INC. - 15.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Current GDP
2003 (million $)
Population Area (1000
2003 (million) sq km)
Total TUs
(Million)
TUs/
Employee
(Million)
Employees/
Route km
TKM/$1000 of
GDP
TUs/$ of GDP
Passenger Trips/
Person
Route km/1000
sqkm
TUs/Route km
(Million)
% PKM of TU
Gross Hauled
Tons/Route
Km (Million)
Argentina All 151,501 38.23 2,736.69 17,980 72.61 0.12 9.90 13.06 0.50 38.82
Bolivia FO SA and FCA SA 8,773 8.99 1,084.38 1,179 102.56 0.13 0.08 3.41 0.32 23.69
Brazil 12 Freight Railways 604,855 178.72 8,459.42 182,648 301.97 0.30 0.00 3.39 6.37 0.00
Canada
VIA RAIL
Canada
Freight Rails
Canada Total 979,764 31.90 9,220.97 314,183 8.86 0.59 317.80 0.32 0.12 6.55 5.20 0.90 10.03
Chile All 94,105 15.96 748.80 4,404 1.29 1.52 37.99 0.05 0.91 3.00 1.96 18.82
Mexico All 676,497 103.80 1,908.69 23,800 35.03 0.04 0.00 13.97 0.89 0.42
Peru All 68,395 27.55 1,280.00 1,218 16.30 0.02 0.05 1.66 0.57 8.46
United States AAR Class 1 2,264,983 14.65 0.79 194.13 21.61
United States AMTRAK 9,141 0.44 0.57 0.08
United States Total 11,667,515 293.51 9,158.96 2,274,124 12.95 0.75 194.13 0.19 0.08 25.47 9.75 0.40
Armenia ARM 3,549 3.05 28.20 500 0.12 5.71 127.36 0.14 0.43 25.21 0.70 9.60
Australia QR 631,256 20.12 7,682.30 42,661 3.06 1.47 65.45 0.07 2.35 1.23 4.50 3.16 7.68
Azerbaijan AZ 8,523 8.28 82.60 8,373 0.28 13.88 905.67 0.98 0.57 25.69 3.95 7.81 7.14
Bangladesh BRB 56,844 140.49 130.17 5,236 0.15 11.97 15.76 0.09 0.31 21.93 1.83 82.89
Cambodia CFRC 4,597 13.63 176.52 178 0.14 2.13 34.37 0.04 0.01 3.42 0.30 11.24
China CR 1,649,329 1,296.50 9,327.42 2,109,837 1.46 23.88 998.93 1.28 0.72 6.48 34.90 21.91 43.01
Georgia GR 5,091 4.52 69.49 5,466 0.32 10.78 994.89 1.07 0.47 22.52 3.49 7.34 6.03
India IR 691,876 1,079.72 2,973.19 868,238 0.59 23.32 510.49 1.25 4.60 21.23 13.75 59.32 11.24
Indonesia 257,641 217.59 1,811.57 19,310 6.64 0.07 0.81 3.56 2.99 91.14 0.00
Japan JR 4,623,398 127.76 364.50 263,760 1.83 7.20 4.89 0.06 67.64 55.05 13.14 91.43 2.97
Kazakhstan KTZ 40,743 14.96 2,699.70 158,358 1.61 7.14 3624.48 3.89 1.18 5.10 11.50 6.75 16.18
Kyrgyzstan KZD 2,205 5.10 191.80 590 0.13 11.20 244.90 0.27 0.12 2.17 1.41 8.47
Malaysia KTM 117,776 25.21 328.55 3,155 0.63 3.01 10.39 0.03 1.11 5.07 1.89 61.20 1.65
Mongolia MTZ 1,525 2.52 1,566.50 7,525 0.52 7.99 4230.82 4.93 1.58 1.16 4.16 14.26 6.33
Pakistan PR 96,115 152.06 770.88 27,911 0.32 11.06 58.32 0.29 0.48 10.11 3.58 79.92
South Korea KORAIL 679,674 48.14 98.73 39,619 1.36 9.25 16.27 0.06 21.23 31.80 12.62 72.09 9.11
Tajikistan TDZ 2,078 6.43 140.60 1,137 0.22 8.19 523.10 0.55 0.09 4.39 1.84 4.40 3.16
Uzbekistan UTI 11,960 25.93 414.24 20,628 0.43 11.50 1540.80 1.72 0.64 9.96 5.00 10.67 8.16
Vietnam DSVN 45,210 82.16 325.49 6,916 0.15 17.38 63.59 0.15 0.15 8.15 2.61 58.43 1.71
Albania HSh 7,590 3.19 27.40 136 0.06 5.03 4.08 0.02 0.65 16.31 0.30 77.21 0.15
Belarus BC 22,849 9.83 207.48 51,710 0.67 13.92 1680.69 2.26 14.40 26.52 9.40 25.74 13.21
Bosnia-Herzegowina ZBH
Bosnia-Herzegowina ZRS
Bosnia-Herzegowina Total 8,121 3.84 51.20 367 0.05 7.11 38.42 0.05 0.29 20.18 0.36 14.99 0.56
Bulgaria BDZ
Bulgaria NRIC
Bulgaria Total 24,131 7.78 110.63 7,791 0.23 7.97 218.56 0.32 4.53 39.03 1.80 32.31 2.34
Croatia HZ 34,200 4.51 55.92 3,908 0.26 5.47 80.26 0.11 7.98 48.75 1.43 29.76 1.97
FYROM CFARYM 5,246 2.06 25.43 465 0.13 5.23 71.10 0.09 0.44 27.49 0.67 19.78 0.94
Moldova CFM (E) 2,595 4.22 32.88 3,352 0.23 13.31 1156.07 1.29 1.25 33.79 3.02 10.50 4.98
Romania
SERVITRANS
Romania
CFR
Romania Total 73,167 21.86 229.87 25,296 0.32 7.14 229.60 0.35 4.34 47.59 2.31 33.59 3.04
Russia RZD 582,395 142.81 17,075.00 1,821,400 1.49 14.29 2857.68 3.13 9.10 5.01 21.29 8.63 30.82
Serbia-Montenegro JZ 23,996 8.15 102.00 3,312 0.12 7.48 100.35 0.14 1.76 37.34 0.87 27.29 1.36
Turkey TCDD 301,950 71.73 769.63 14,490 0.42 3.97 28.52 0.05 1.07 11.30 1.67 40.57 1.92
Ukraine UZ 65,149 48.01 579.35 243,685 0.66 16.83 2964.60 3.74 10.90 38.11 11.04 20.74 14.41
TERA INTERNATIONAL GROUP, INC. - 15.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Current GDP
2003 (million $)
Population Area (1000
2003 (million) sq km)
Total TUs
(Million)
TUs/
Employee
(Million)
Employees/
Route km
TKM/$1000 of
GDP
TUs/$ of GDP
Passenger Trips/
Person
Route km/1000
sqkm
TUs/Route km
(Million)
% PKM of TU
Norway
CARGONET AS
Norway
JBV
Norway
MTAS
Norway
NSB AS
Norway Total 250,168 4.58 306.25 8,077 1.09 1.82 23.47 0.03 9.87 13.31 1.98 27.29 1.2
Switzerland CFF/SBB/FFS 359,465 7.38 39.55 21,631 0.80 9.06 25.99 0.06 33.90 75.60 7.23 56.82 7.6
Austria
GKB
Austria
OBB
Austria
SLB
Austria Total 290,109 8.12 82.73 26,309 0.57 7.98 61.56 0.09 23.64 69.95 4.55 32.12 7.1
Belgium SNCN/NMBS 349,830 10.41 30.23 16,571 0.40 11.90 23.74 0.05 16.17 116.47 4.71 49.88 5.5
Czech Rep. CD 107,047 10.18 77.28 23,552 0.30 8.27 159.45 0.22 16.89 122.94 2.48 27.53 3.6
Denmark
BDK
Denmark
DSB
Denmark
RAILION DK
Denmark Total 243,043 5.40 42.43 7,285 0.63 5.12 7.77 0.03 27.42 53.57 3.21 74.08
Estonia EVR 10,808 1.35 42.39 9,465 2.45 4.03 858.90 0.88 3.77 22.62 9.87 1.92 18.0
Finland
RHK
Finland
VR
Finland Total 186,597 5.22 304.59 13,385 1.19 1.92 53.84 0.07 11.48 19.21 2.29 24.94 3.6
France
RFF
France
SNCF
France Total 1,719,873 59.76 550.10 118,772 0.68 5.99 27.23 0.07 14.72 53.21 4.06 60.57 4.2
Germany DB AG 2,714,418 82.63 348.95 143,547 0.58 6.92 27.24 0.05 20.35 103.29 3.98 48.48 4.8
Greece OSE 203,401 11.08 128.90 2,030 0.23 3.69 2.24 0.01 0.80 18.73 0.84 77.54
Hungary
GySEV/ROEE
Hungary
MAV Rt.
Hungary Total 99,712 10.07 92.10 15,459 0.31 6.29 80.13 0.16 12.51 86.32 1.94 48.31 2.0
Ireland CIE 183,560 4.02 68.89 1,999 0.34 3.04 2.17 0.01 8.85 27.86 1.04 80.09 0.9
Italy
FNM
Italy
FS
Italy
RTC
Italy Total 1,672,302 57.57 294.11 69,306 0.66 6.41 13.71 0.04 9.53 55.38 4.26 66.91 1.9
Latvia LDZ 13,629 2.30 62.05 18,366 1.28 6.32 1291.66 1.35 9.98 36.58 8.09 4.15 14.2
Lithuania LG 22,263 3.44 62.68 11,889 0.94 7.11 514.62 0.53 2.04 28.30 6.70 3.63 12.1
Luxembourg CFL 31,143 0.45 2.59 822 0.26 11.60 17.98 0.03 29.95 106.18 2.99 31.87 6.4
Netherlands NS N.V. (pass transp)
Netherlands ProRail (Infra mgr)
Netherlands ILION NL (Freight tran
Netherlands Total 577,260 16.25 33.88 17,874 0.66 9.67 6.97 0.03 19.06 82.97 6.36 77.48 2.5
Poland PKP 241,833 38.16 306.29 67,037 0.48 6.95 195.98 0.28 7.42 64.97 3.37 29.30 4.9
Portugal CP (opertr)
Portugal REFER (infra mgr)
Portugal Total 168,281 10.44 91.50 5,781 0.58 3.53 14.51 0.03 12.73 30.80 2.05 57.76 1.5
Slovakia
ZSR (infra mgr)
Slovakia
ZSSK (oprtr)
Slovakia Total 41,092 5.39 48.80 12,433 0.30 11.37 246.20 0.30 9.51 74.94 3.40 18.63 5.5
Slovenia SZ 32,182 2.00 20.12 4,051 0.48 6.91 101.73 0.13 7.53 61.08 3.30 19.18 4.9
Spain
EuskoTren
Spain
FEVE
Spain
FGC
Spain
RENFE
Spain Total 991,442 41.29 499.44 34,764 0.99 2.47 14.28 0.04 14.38 28.53 2.44 59.28 1.93
Sweden
BV (infra mgr)
Sweden
GREEN CARGO
Sweden
SJ AB(pass oprtr)
Sweden Total 346,404 8.99 411.62 19,450 1.49 1.32 37.03 0.06 6.80 24.01 1.97 34.04
Gross Hauled
Tons/Route
Km (Million)
TERA INTERNATIONAL GROUP, INC. - 15.8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 15
Country
Co.
Current GDP
2003 (million $)
Population Area (1000
2003 (million) sq km)
Total TUs
(Million)
TUs/
Employee
(Million)
Employees/
Route km
TKM/$1000 of
GDP
TUs/$ of GDP
Passenger Trips/
Person
Route km/1000
sqkm
TUs/Route km
(Million)
% PKM of TU
Gross Hauled
Tons/Route
Km (Million)
United Kingdom ATOC (total pass oprtr
United Kingdom EURTOTUNNEL
United Kingdom
Eurostar UK
United Kingdom NIR (N. Ireland)
United Kingdom
Network Rail
United Kingdom TFO (total freig oprts)
United Kingdom Total 2,410,898 59.41 240.88 60,954 1.22 2.93 8.22 0.03 17.29 70.78 3.58 67.48
Algeria SNTF 84,649 32.37 2,381.74 3,002 0.26 3.28 24.08 0.04 0.85 1.50 0.84 32.11
Egypt ENR 75,148 68.74 995.45 45,025 0.49 17.74 55.73 0.60 6.56 5.17 8.74 90.70
Iran RAI 162,709 66.93 1,636.20 27,362 1.91 2.33 110.92 0.17 0.24 3.76 4.45 34.04 5.39
Iraq IRR 11,800 25.26 437.37 2,254 0.27 3.62 142.63 0.19 0.05 5.35 0.96 25.33
Israel IsR 117,548 6.80 21.71 2,403 1.53 2.55 9.57 0.02 2.92 28.33 3.91 53.18 3.53
Jordan ARC 11,196 5.44 88.93 522 0.98 1.83 46.62 0.05 0.00 3.28 1.79 0.00 1.79
Morocco ONCFM 50,055 30.59 446.30 7,521 0.78 5.04 102.83 0.15 0.54 4.27 3.94 31.56 3.96
Saudi Arabia SRO 250,557 23.22 2,149.69 1,173 0.69 1.22 3.51 0.00 0.04 0.65 0.84 24.98 0.63
Syria CFS 23,133 17.59 183.78 2,409 0.21 7.42 81.36 0.10 0.12 8.43 1.55 21.88
Tunisia SNCFT 28,185 10.01 155.36 3,415 0.61 2.91 77.10 0.12 3.57 12.29 1.79 36.37 1.78
Benin OCBN 4,075 6.89 112.62 152 0.00 21.10 0.04 0.06 3.89 0.35 43.42 0.20
Cameroon CAMRAIL 14,733 16.40 465.40 1,408 0.55 2.60 73.92 0.10 0.07 2.12 1.43 22.66
Congo (Dem. Rep.) SNCC 6,571 54.78 2,267.05 587 0.04 3.21 67.72 0.09 0.01 1.98 0.13 24.19 0.19
Congo (Rep.) CFCO 4,384 3.86 341.50 383 0.17 2.14 70.03 0.09 3.00 0.37 19.84
Djibouti CDE 663 0.72 23.18 179 0.07 3.10 146.30 0.27 0.45 33.69 0.23 45.81
Gabon SETRAG 7,228 1.37 257.67 1,775 1.38 1.76 233.67 0.25 0.15 2.84 2.43 4.85
Ghana GRC 8,620 21.05 239.46 327 0.00 28.07 0.04 0.11 4.08 0.33 25.99 0.54
Ivory Coast/Burkina Faso CIPF
Ivory Coast/Burkina Faso SIPF
Ivory Coast/Burkina Faso SITARAIL
Ivory Coast/Burkina Faso Total 4,824 13.23 318.00 139 0.04 4.89 26.74 0.03 0.01 2.01 0.22 7.19 0.22
Kenya KR 15,600 32.45 569.14 1,826 0.26 2.66 98.59 0.12 0.15 4.63 0.69 15.77 0.58
Mali RCFM 4,863 11.94 1,220.19 385 0.27 1.92 38.86 0.08 0.05 0.60 0.53 50.91
Mozambique CFF 5,548 19.13 784.09 946 0.15 3.14 145.64 0.17 0.14 2.64 0.46 14.59
Nigeria NRC 72,106 139.82 910.77 1,012 0.54 0.01 0.01 3.85 0.29 96.15
South Africa SPOORNET 212,777 45.58 1,214.47 106,720 3.05 1.74 496.88 0.50 0.07 16.50 5.33 0.93 8.33
Sudan SRC 19,559 34.36 2,376.00 1,066 0.08 2.83 50.77 0.05 0.00 1.93 0.23 6.85 0.65
Tanzania TRC 10,851 36.57 883.59 1,351 0.14 3.68 124.50 0.12 2.94 0.52 0.00
Uganda URC 6,833 25.92 197.10 218 0.19 4.44 31.90 0.03 1.31 0.84 0.00
Source: UIC International Railway Statistics 2003, Paris 2004. Notes: Argentina: electrified route km as of 1 January 2003; traffic data from http://www.indec.gov.ar/ as reported by Ministerio de Planificación Federal, Inversión Pública y Servicios.
Secretaría de Transporte, Comisión Nacional de Regulación del Transporte (CNRT); Bolivia: Data from Superintendencia des Transportes (http://www.suptrans.gov.bo/public/LST_ESTFERROVIARIO_1_upLoad.xls) as reported by FO SA (Empresa
Ferroviaria Oriental) and FCA SA (Empresa Ferroviaria Andina); Brasil: data for 12 freight concessionaires from Ministerio dos Transportes (www.transportes.gov.br linked to http://www.antt.gov.br/relatorios/ferroviario/concessionarias2003/index.asp);
Chile: data from Instituto Nacional de Estadisticas, Anuario de Transporte y Comunicaciones 2003 as reported in
(http://www.ine.cl/ine/canales/chile_estadistico/estadisticas_economicas/transporte_y_comunicaciones/transporte_y_comunicaciones.php);
Mexico: Secretaria de Comunicaciones y Transportes (www.sct.gob.mx) Dirección General de Tarifas, Transporte Ferroviario y Multimodal; Peru: Ministerio de Transporte y Comunicaciones (www.mtc.gob.pe) citing Oficina General de Planificación y
Presupuesto - Dirección de Información de Gestión; Bangladesh: Data for 2004 reported in http://www.railway.gov.bd/rules.html. Exchange rate is 88 Taka/Euro or 69 Taka/USD. Cambodia: data provided by Royal Cambodia Railway. Data for
Indonesia from Jane's World Railways, 2005. PKM and TKM estimated by TERA; Kyrgyz Republic: Freight cars data from Jane's World Railways 2005. Passenger traffic is for 2002. United Kingdom: Employment data for 2000 from EU Transport
Statistics; Iraq: GDP from TERA International Group, Inc. Strategic Plan for Iraq Republic Railways; Development Plan, Sterling, Va, U.S,A., July 12, 2005; Table 2.2. Exchange rate used for conversion of financial data from Euro to US$ is 1.263 (as of
2003).
TERA INTERNATIONAL GROUP, INC. - 15.9 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16:
COMPARATIVE GRAPHS
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.1: Route km/1000 sq.km., 2003
Czech Rep.
Belgium
Luxembourg
Germany
Hungary
Netherlands
Switzerland
Slovakia
United Kingdom
Austria
Poland
Slovenia
Italy
Japan
Denmark
France
Croatia
Romania
Bulgaria
Ukraine
Serbia-Montenegro
Latvia
Moldova
Djibouti
South Korea
Portugal
Spain
Israel
Lithuania
Ireland
FYROM
Belarus
Azerbaijan
WORLD
United States
Armenia
Sweden
Estonia
Georgia
Bangladesh
India
Bosnia-
Finland
Greece
South Africa
Albania
Mexico
Norway
Argentina
Tunisia
Turkey
Pakistan
Uzbekistan
Syria
Vietnam
Canada
China
Iraq
Egypt
Kazakhstan
Malaysia
Russia
Kenya
Tajikistan
Morocco
Ghana
Benin
Nigeria
Iran
Indonesia
Cambodia
Bolivia
Brazil
Jordan
Congo (Rep.)
Chile
Tanzania
Gabon
Mozambique
Kyrgyzstan
Cameroon
Ivory
Congo (Dem. Rep.)
Sudan
Peru
Algeria
Uganda
Australia
Mongolia
Saudi Arabia
Mali
39.03
38.11
37.34
36.58
33.79
33.69
31.80
30.80
28.53
28.33
28.30
27.86
27.49
26.52
25.69
25.50
25.47
25.21
24.01
22.62
22.52
21.93
21.23
20.18
19.21
18.73
16.50
16.31
13.97
13.31
13.06
12.29
11.30
10.11
9.96
8.43
8.15
6.55
6.48
5.35
5.17
5.10
5.07
5.01
4.63
4.39
4.27
4.08
3.89
3.85
3.76
3.56
3.42
3.41
3.39
3.28
3.00
3.00
2.94
2.84
2.64
2.17
2.12
2.01
1.98
1.93
1.66
1.50
1.31
1.23
1.16
0.65
0.60
Route km
0 20 40 60 80 100 120 140
75.60
74.94
70.78
69.95
64.97
61.08
55.38
55.05
53.57
53.21
48.75
47.59
86.32
82.97
106.18
103.29
122.94
116.47
TERA INTERNATIONAL GROUP, INC. - 16.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.2: Route km/1000 people, 2003
Route km
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00
Canada
Finland
Sweden
Djibouti
Latvia
Argentina
Czech Rep.
Kazakhstan
Norway
United States
Hungary
Mongolia
Austria
Estonia
Slovakia
Slovenia
Luxembourg
Croatia
Russia
Belarus
Bulgaria
Gabon
Poland
Lithuania
Romania
France
Ireland
Australia
Serbia-Montenegro
Ukraine
South Africa
Germany
Denmark
Bolivia
Switzerland
Georgia
WORLD AVERAGE
Spain
FYROM
Belgium
United Kingdom
Italy
Portugal
Bosnia-Herzegowina
Congo (Rep.)
Moldova
Mexico
Azerbaijan
Armenia
Greece
Tunisia
Netherlands
Brazil
Uzbekistan
Japan
Chile
Albania
Sudan
Turkey
Algeria
Mozambique
Tajikistan
Iraq
Iran
Israel
Syria
Congo (Dem. Rep.)
Kyrgyzstan
Kenya
Peru
Egypt
Tanzania
Malaysia
South Korea
Benin
Morocco
Mali
Cameroon
Saudi Arabia
India
Jordan
Pakistan
Ivory Coast/Burkina Faso
China
Ghana
Cambodia
Vietnam
Indonesia
Nigeria
Bangladesh
Uganda
0.79
0.79
0.72
0.71
0.71
0.68
0.61
0.61
0.60
0.60
0.56
0.56
0.53
0.52
0.52
0.50
0.49
0.48
0.47
0.47
0.46
0.44
0.44
0.42
0.41
0.41
0.35
0.35
0.35
0.34
0.34
0.29
0.28
0.27
0.27
0.27
0.26
0.26
0.26
0.23
0.22
0.19
0.17
0.16
0.16
0.16
0.14
0.14
0.13
0.12
0.11
0.11
0.10
0.09
0.09
0.09
0.09
0.08
0.08
0.08
0.08
0.07
0.07
0.07
0.07
0.06
0.06
0.06
0.06
0.06
0.06
0.05
0.05
0.05
0.05
0.05
0.04
0.03
0.03
0.03
0.02
0.01
0.99
0.94
0.93
0.92
0.89
1.12
1.10
1.08
1.89
TERA INTERNATIONAL GROUP, INC. - 16.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.3: Freight Tons, 2003
Thousand Tons (Log Scale)
1 10 100 1,000 10,000 100,000 1,000,000 10,000,000
China
United States
Russia
India
Ukraine
Brazil
Canada
Canada
Germany
Kazakhstan
South Africa
Poland
Australia
France
Belarus
WORLD
Czech Rep.
United Kingdom
Austria
Italy
Romania
Belgium
Switzerland
Uzbekistan
Slovakia
Latvia
South Korea
Hungary
Finland
Lithuania
Sweden
Estonia
Japan
Mexico
Spain
Morocco
Iran
Netherlands
Chile
Norway
Argentina
Azerbaijan
Bulgaria
Slovenia
Indonesia
Luxembourg
Turkey
Georgia
Moldova
Croatia
Egypt
Tajikistan
Mongolia
Tunisia
Portugal
Serbia-Montenegro
Vietnam
Algeria
Israel
Denmark
Peru
Pakistan
Syria
Bosnia-
Iraq
Malaysia
Kyrgyzstan
Mozambique
Bangladesh
Gabon
Greece
Jordan
FYROM
Ireland
Kenya
Armenia
Saudi Arabia
Ghana
Cameroon
Bolivia
Tanzania
Sudan
Congo (Dem. Rep.)
Uganda
Cambodia
Mali
Djibouti
Ivory Coast/Burkina
Benin
Nigeria
Albania
56
43
1,998,140
1,632,077
1,160,800
518,737
392,592
344,996
280,572
280,572
267,925
202,737
179,466
161,751
156,450
120,676
105,935
103,880
92,082
88,900
86,488
84,152
71,337
66,938
55,054
51,409
50,564
48,355
47,110
46,816
43,503
43,447
42,800
42,544
37,876
37,200
33,565
30,553
28,797
25,910
22,779
20,815
20,535
20,345
20,070
17,238
17,099
15,941
15,755
14,883
14,739
13,284
11,903
11,747
11,637
11,596
10,158
9,775
9,108
8,162
8,024
7,355
7,158
6,180
6,141
5,934
5,227
4,608
4,223
4,103
3,470
2,967
2,593
2,467
2,390
2,251
2,227
2,019
1,894
1,870
1,831
1,592
1,445
1,278
1,042
904
557
382
240
180
153
TERA INTERNATIONAL GROUP, INC. - 16.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.4: TKM, 2003
Million (Log Scale)
1 10 100 1,000 10,000 100,000 1,000,000 10,000,000
United States
Russia
China
India
Canada
Ukraine
Brazil
Kazakhstan
South Africa
WORLD AVERAGE
Germany
Poland
France
Australia
Belarus
Mexico
Italy
Japan
United Kingdom
Uzbekistan
Iran
Austria
Latvia
Czech Rep.
Romania
Spain
Sweden
Lithuania
South Korea
Argentina
Slovakia
Finland
Switzerland
Estonia
Turkey
Belgium
Hungary
Azerbaijan
Mongolia
Norway
Pakistan
Bulgaria
Morocco
Georgia
Egypt
Netherlands
Chile
Slovenia
Moldova
Vietnam
Croatia
Portugal
Serbia-Montenegro
Tunisia
Algeria
Denmark
Syria
Indonesia
Gabon
Iraq
Kenya
Tanzania
Malaysia
Israel
Peru
Cameroon
Tajikistan
Sudan
Bolivia
Bangladesh
Saudi Arabia
Mozambique
Luxembourg
Kyrgyzstan
Jordan
Greece
Armenia
Congo (Dem. Rep.)
Ireland
FYROM
Bosnia-Herzegowina
Congo (Rep.)
Ghana
Uganda
Mali
Cambodia
Ivory Coast/Burkina Faso
Djibouti
Benin
Nigeria
Albania
39
31
353,194
311,371
193,141
182,648
147,672
105,724
83,765
73,951
47,394
46,835
41,314
38,402
23,700
22,932
22,600
19,824
18,428
18,048
17,859
17,604
17,069
16,799
14,156
12,829
11,457
11,057
11,001
10,117
10,047
9,341
9,283
8,612
8,306
7,990
7,719
6,452
5,873
5,605
5,274
5,147
5,065
4,188
4,026
3,575
3,274
3,000
2,875
2,745
2,442
2,408
2,173
2,038
1,888
1,882
1,710
1,689
1,683
1,538
1,351
1,224
1,125
1,115
1,089
1,087
993
900
896
880
808
560
540
522
456
452
445
398
373
312
307
242
218
189
158
129
97
86
2,264,983
1,664,300
1,647,558
TERA INTERNATIONAL GROUP, INC. - 16.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.5: Number of Passengers, 2003
Japan
India
Germany
Russia
United Kingdom
South Korea
China
France
Spain
Italy
Ukraine
Egypt
Argentina
WORLD AVERAGE
Netherlands
Poland
Switzerland
Austria
Indonesia
Czech Rep.
Belgium
Denmark
Belarus
Portugal
Hungary
Romania
Turkey
Pakistan
Sweden
Finland
Slovakia
Australia
Norway
Bangladesh
Croatia
Tunisia
Ireland
Bulgaria
Malaysia
Algeria
United States
Latvia
Israel
Kazakhstan
Morocco
Uzbekistan
Iran
Slovenia
Chile
Serbia-Montenegro
Luxembourg
Vietnam
Greece
Lithuania
Moldova
Estonia
Kenya
Azerbaijan
Mongolia
Canada
South Africa
Mozambique
Ghana
Georgia
Albania
Syria
Nigeria
Armenia
Peru
Iraq
Cameroon
Bosnia-Herzegowina
Saudi Arabia
FYROM
Bolivia
Kyrgyzstan
Tajikistan
Mali
Benin
Congo (Dem. Rep.)
Djibouti
Gabon
Sudan
Cambodia
Ivory Coast/Burkina Faso
Thousand Passengers (Log Scale)
1 10 100 1,000 10,000 100,000 1,000,000 10,000,000
8,641,843
4,970,803
1,681,734
1,299,300
1,027,200
1,021,905
936,340
879,449
593,847
548,521
523,096
451,049
378,505
310,474
309,785
283,249
250,200
191,942
176,000
171,984
168,363
148,054
141,568
132,911
125,959
94,780
76,993
72,397
61,167
59,909
51,274
47,265
45,201
43,400
35,980
35,723
35,558
35,206
28,087
27,529
24,595
22,961
19,826
17,686
16,516
16,500
16,112
15,066
14,444
14,333
13,479
12,500
8,885
7,005
5,282
5,083
4,794
4,736
3,981
3,955
3,064
2,659
2,340
2,136
2,068
2,052
1,622
1,300
1,283
1,243
1,109
1,096
913
901
717
629
555
551
443
385
324
206
145
133
88
TERA INTERNATIONAL GROUP, INC. - 16.5 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.6: Passenger Kilometers, 2003
Million PKM (Log Scale)
1 10 100 1,000 10,000 100,000 1,000,000
India
China
Japan
Russia
France
Germany
Ukraine
Italy
United Kingdom
Egypt
South Korea
WORLD AVERAGE
Pakistan
Spain
Poland
Indonesia
Netherlands
Belarus
Switzerland
Kazakhstan
Iran
United States
Romania
Austria
Belgium
Hungary
Argentina
Sweden
Czech Rep.
Turkey
Denmark
Bangladesh
Vietnam
Portugal
Finland
Canada
Bulgaria
Morocco
Slovakia
Norway
Uzbekistan
Malaysia
Ireland
Greece
Australia
Israel
Tunisia
Croatia
Mongolia
South Africa
Nigeria
Algeria
Serbia-Montenegro
Chile
Slovenia
Latvia
Azerbaijan
Iraq
Syria
Lithuania
Georgia
Moldova
Cameroon
Saudi Arabia
Kenya
Bolivia
Luxembourg
Mali
Estonia
Congo (Dem. Rep.)
Mozambique
Albania
Peru
Mexico
FYROM
Gabon
Ghana
Djibouti
Congo (Rep.)
Sudan
Benin
Bosnia-Herzegowina
Kyrgyzstan
Tajikistan
Armenia
Cambodia
Ivory Coast/Burkina Faso
10
20
515,044
462,279
241,160
157,100
71,937
69,596
50,544
46,374
41,130
40,837
28,562
23,144
22,306
20,608
19,643
17,600
13,848
13,308
12,290
10,686
9,314
9,141
8,497
8,450
8,265
7,469
6,979
6,621
6,483
5,878
5,397
4,340
4,041
3,339
3,338
2,812
2,517
2,374
2,316
2,204
2,200
1,931
1,601
1,574
1,347
1,278
1,242
1,163
1,073
996
973
964
904
829
777
762
654
571
527
432
401
352
319
293
288
279
262
196
182
142
138
105
103
100
92
86
85
82
76
73
66
55
50
50
48
TERA INTERNATIONAL GROUP, INC. - 16.6 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.7: TUs/Route km, 2003
China
Russia
India
Japan
South Korea
Kazakhstan
Ukraine
Estonia
United States
Belarus
Egypt
Latvia
Switzerland
Lithuania
Brazil
Netherlands
South Africa
Canada
Uzbekistan
Belgium
Austria
Australia
Iran
Italy
Mongolia
France
Germany
Azerbaijan
Morocco
Israel
WORLD AVERAGE
Pakistan
United Kingdom
Georgia
Slovakia
Poland
Slovenia
Denmark
Moldova
Indonesia
Luxembourg
Vietnam
Czech Rep.
Spain
Gabon
Romania
Finland
Portugal
Norway
Sweden
Chile
Hungary
Malaysia
Tajikistan
Bangladesh
Bulgaria
Tunisia
Jordan
Turkey
Syria
Croatia
Cameroon
Kyrgyzstan
Ireland
Iraq
Mexico
Serbia-Montenegro
Saudi Arabia
Uganda
Greece
Algeria
Armenia
Kenya
FYROM
Peru
Mali
Tanzania
Argentina
Mozambique
Congo (Rep.)
Bosnia-Herzegowina
Benin
Ghana
Bolivia
Albania
Cambodia
Nigeria
Sudan
Djibouti
Ivory Coast/Burkina
Congo (Dem. Rep.)
13.75
13.14
12.62
11.50
11.04
9.87
9.75
9.40
8.74
8.09
7.23
6.70
6.37
6.36
5.33
5.20
5.00
4.71
4.55
4.50
4.45
4.26
4.16
4.06
3.98
3.95
3.94
3.91
3.82
3.58
3.58
3.49
3.40
3.37
3.30
3.21
3.02
2.99
2.99
2.61
2.48
2.44
2.43
2.31
2.29
2.05
1.98
1.97
1.96
1.94
1.89
1.84
1.83
1.80
1.79
1.79
1.67
1.55
1.43
1.43
1.41
1.04
0.96
0.89
0.87
0.84
0.84
0.84
0.84
0.70
0.69
0.67
0.57
0.53
0.52
0.50
0.46
0.37
0.36
0.35
0.33
0.32
0.30
0.30
0.29
0.23
0.23
0.22
0.13
TUs (Million)
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00
21.29
34.90
TERA INTERNATIONAL GROUP, INC. - 16.7 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.8: TUs/ Employee, 2003
TU (Million)
0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00
United States
Canada
Australia
South Africa
Estonia
Iran
Japan
Kazakhstan
Israel
Russia
Sweden
China
Gabon
South Korea
Chile
Latvia
United Kingdom
Finland
Norway
Spain
Jordan
Lithuania
WORLD AVERAGE
Switzerland
Morocco
Saudi Arabia
France
Belarus
Italy
Netherlands
Ukraine
Malaysia
Denmark
Tunisia
India
Portugal
Germany
Austria
Cameroon
Mongolia
Egypt
Poland
Slovenia
Uzbekistan
Turkey
Belgium
Ireland
Pakistan
Georgia
Romania
Hungary
Czech Rep.
Slovakia
Azerbaijan
Mali
Iraq
Croatia
Kenya
Luxembourg
Algeria
Greece
Moldova
Bulgaria
Tajikistan
Syria
Uganda
Congo (Rep.)
Bangladesh
Vietnam
Mozambique
Tanzania
Cambodia
FYROM
Kyrgyzstan
Armenia
Serbia-Montenegro
Sudan
Djibouti
Albania
Bosnia-Herzegowina
Ivory Coast/Burkina Faso
Congo (Dem. Rep.)
3.06
3.05
2.45
1.91
1.83
1.61
1.53
1.49
1.49
1.46
1.38
1.36
1.29
1.28
1.22
1.19
1.09
0.99
0.98
0.94
0.91
0.80
0.78
0.69
0.68
0.67
0.66
0.66
0.66
0.63
0.63
0.61
0.59
0.58
0.58
0.57
0.55
0.52
0.49
0.48
0.48
0.43
0.42
0.40
0.34
0.32
0.32
0.32
0.31
0.30
0.30
0.28
0.27
0.27
0.26
0.26
0.26
0.26
0.23
0.23
0.23
0.22
0.21
0.19
0.17
0.15
0.15
0.15
0.14
0.14
0.13
0.13
0.12
0.12
0.08
0.07
0.06
0.05
0.04
0.04
8.86
12.95
TERA INTERNATIONAL GROUP, INC. - 16.8 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.9: Employees/Route km, 2003
Number of Employees
0.00 5.00 10.00 15.00 20.00 25.00 30.00
China
India
Egypt
Vietnam
Ukraine
Russia
Belarus
Azerbaijan
Moldova
Bangladesh
Belgium
Luxembourg
Uzbekistan
Slovakia
Kyrgyzstan
Pakistan
Georgia
Netherlands
South Korea
Switzerland
Czech Rep.
Tajikistan
Mongolia
Austria
Bulgaria
Serbia-Montenegro
Syria
Japan
Romania
Kazakhstan
Lithuania
Bosnia-Herzegowina
Poland
Germany
Slovenia
WORLD AVERAGE
Italy
Latvia
Hungary
France
Armenia
Croatia
FYROM
Denmark
Morocco
Albania
Ivory Coast/Burkina Faso
Uganda
Estonia
Turkey
Greece
Tanzania
Iraq
Portugal
Algeria
Congo (Dem. Rep.)
Mozambique
Djibouti
Ireland
Malaysia
United Kingdom
Tunisia
Sudan
Kenya
Cameroon
Israel
Spain
Iran
Congo (Rep.)
Cambodia
Finland
Mali
Jordan
Norway
Gabon
South Africa
Chile
Australia
Sweden
Saudi Arabia
United States
Canada
14.29
13.92
13.88
13.31
11.97
11.90
11.60
11.50
11.37
11.20
11.06
10.78
9.67
9.25
9.06
8.27
8.19
7.99
7.98
7.97
7.48
7.42
7.20
7.14
7.14
7.11
7.11
6.95
6.92
6.91
6.62
6.41
6.32
6.29
5.99
5.71
5.47
5.23
5.12
5.04
5.03
4.89
4.44
4.03
3.97
3.69
3.68
3.62
3.53
3.28
3.21
3.14
3.10
3.04
3.01
2.93
2.91
2.83
2.66
2.60
2.55
2.47
2.33
2.14
2.13
1.92
1.92
1.83
1.82
1.76
1.74
1.52
1.47
1.32
1.22
0.75
0.59
17.74
17.38
16.83
23.88
23.32
TERA INTERNATIONAL GROUP, INC. - 16.9 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.10: TUs/$ of GDP, 2003
Traffic Units
0 1 2 3 4 5
Mongolia
Kazakhstan
Ukraine
Russia
Belarus
Uzbekistan
Latvia
Moldova
China
India
Georgia
Azerbaijan
Estonia
Egypt
Tajikistan
Lithuania
South Africa
WORLD AVERAGE
Romania
Bulgaria
Canada
Slovakia
Brazil
Pakistan
Poland
Djibouti
Kyrgyzstan
Gabon
Czech Rep.
United States
Iraq
Mozambique
Iran
Hungary
Vietnam
Morocco
Armenia
Serbia-Montenegro
Bolivia
Slovenia
Tanzania
Tunisia
Argentina
Kenya
Croatia
Syria
Cameroon
Bangladesh
Austria
Congo (Dem. Rep.)
FYROM
Congo (Rep.)
Mali
Indonesia
Finland
France
Australia
Switzerland
South Korea
Japan
Sweden
Sudan
Germany
Turkey
Belgium
Chile
Jordan
Bosnia-Herzegowina
Italy
Cambodia
Ghana
Benin
Algeria
Mexico
Spain
Portugal
Norway
Uganda
Netherlands
Denmark
Ivory Coast/Burkina Faso
Malaysia
Luxembourg
United Kingdom
Israel
Albania
Peru
Nigeria
Ireland
Greece
Saudi Arabia
0.60
0.55
0.53
0.50
0.42
0.35
0.32
0.32
0.30
0.30
0.29
0.28
0.27
0.27
0.25
0.22
0.19
0.19
0.17
0.17
0.16
0.15
0.15
0.14
0.14
0.13
0.13
0.12
0.12
0.12
0.12
0.11
0.10
0.10
0.09
0.09
0.09
0.09
0.09
0.08
0.07
0.07
0.07
0.07
0.06
0.06
0.06
0.06
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.04
0.04
0.04
0.04
0.04
0.04
0.04
0.03
0.03
0.03
0.03
0.03
0.03
0.03
0.03
0.03
0.02
0.02
0.02
0.01
0.01
0.01
0.00
1.35
1.29
1.28
1.25
1.07
0.98
0.88
1.72
2.26
3.13
3.89
3.74
4.93
TERA INTERNATIONAL GROUP, INC. - 16.10 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.11: Passenger Trips/Person, 2003
Number of Trips
0 10 20 30 40 50 60 70 80
Japan
Switzerland
Luxembourg
Denmark
Austria
South Korea
Germany
Netherlands
United Kingdom
Czech Rep.
Belgium
France
Belarus
Spain
Portugal
Hungary
Finland
Ukraine
Latvia
Argentina
Norway
Italy
Slovakia
Russia
Ireland
Croatia
Slovenia
Poland
Sweden
Egypt
WOLD AVERAGE
India
Bulgaria
Romania
Estonia
Tunisia
Israel
Australia
Lithuania
Serbia-Montenegro
Mongolia
Moldova
Kazakhstan
Malaysia
Turkey
Chile
Algeria
Indonesia
Greece
China
Albania
Uzbekistan
Azerbaijan
Morocco
Pakistan
Georgia
Djibouti
FYROM
Armenia
Bangladesh
Bosnia-Herzegowina
Iran
Vietnam
Gabon
Kenya
Mozambique
Canada
Kyrgyzstan
Syria
Ghana
Tajikistan
United States
Bolivia
Cameroon
South Africa
Benin
Iraq
Peru
Mali
Saudi Arabia
Nigeria
Cambodia
Congo (Dem. Rep.)
Ivory Coast/Burkina
29.95
27.42
23.64
21.23
20.35
19.06
17.29
16.89
16.17
14.72
14.40
14.38
12.73
12.51
11.48
10.90
9.98
9.90
9.87
9.53
9.51
9.10
8.85
7.98
7.53
7.42
6.80
6.56
6.45
4.60
4.53
4.34
3.77
3.57
2.92
2.35
2.04
1.76
1.58
1.25
1.18
1.11
1.07
0.91
0.85
0.81
0.80
0.72
0.65
0.64
0.57
0.54
0.48
0.47
0.45
0.44
0.43
0.31
0.29
0.24
0.15
0.15
0.15
0.14
0.12
0.12
0.12
0.11
0.09
0.08
0.08
0.07
0.07
0.06
0.05
0.05
0.05
0.04
0.01
0.01
0.01
0.01
33.90
67.64
TERA INTERNATIONAL GROUP, INC. - 16.11 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.12: TKM/Route km, 2003
Thousand TKM
0 5,000 10,000 15,000 20,000 25,000 30,000
China
Russia
United States
Kazakhstan
Estonia
Ukraine
Latvia
Belarus
Lithuania
Brazil
India
South Africa
Canada
Uzbekistan
Australia
Azerbaijan
Mongolia
South Korea
Georgia
Switzerland
Austria
Iran
Slovakia
Moldova
Morocco
Slovenia
WORLD AVERAGE
Poland
Belgium
Gabon
Germany
Luxembourg
Israel
Czech Rep.
Jordan
Tajikistan
Finland
France
Chile
Romania
Norway
Netherlands
Italy
Sweden
Kyrgyzstan
Bulgaria
Syria
United Kingdom
Tunisia
Japan
Cameroon
Vietnam
Croatia
Hungary
Spain
Turkey
Mexico
Portugal
Uganda
Denmark
Egypt
Malaysia
Iraq
Pakistan
Armenia
Saudi Arabia
Serbia-Montenegro
Kenya
Algeria
FYROM
Peru
Tanzania
Mozambique
Bangladesh
Argentina
Bosnia-Herzegowina
Congo (Rep.)
Indonesia
Cambodia
Mali
Ghana
Bolivia
Sudan
Ireland
Ivory Coast/Burkina Faso
Benin
Greece
Djibouti
Congo (Dem. Rep.)
Albania
Nigeria
11,509
10,724
9,680
8,748
7,755
6,980
6,458
6,374
5,595
5,275
5,155
4,466
4,361
3,638
3,565
3,521
3,236
3,124
3,086
2,934
2,766
2,700
2,699
2,664
2,585
2,382
2,359
2,311
2,052
2,036
1,829
1,797
1,788
1,762
1,717
1,600
1,592
1,536
1,440
1,432
1,408
1,298
1,295
1,221
1,214
1,163
1,138
1,126
1,102
1,084
1,007
1,005
994
990
889
867
842
831
813
734
720
719
636
633
632
584
571
534
525
520
390
314
308
302
299
265
262
258
248
243
217
207
202
196
189
124
99
69
11
19,456
27,257
TERA INTERNATIONAL GROUP, INC. - 16.12 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.13: PKM/Route km
PKM (Thousand)
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Japan
South Korea
India
Egypt
China
Netherlands
Switzerland
Pakistan
Italy
Indonesia
France
Belarus
United Kingdom
Denmark
Belgium
Ukraine
Israel
Germany
Russia
Vietnam
Bangladesh
Iran
Austria
Spain
WORLD AVERAGE
Morocco
Portugal
Malaysia
Poland
Luxembourg
Hungary
Ireland
Romania
Kazakhstan
Czech Rep.
Turkey
Sweden
Greece
Tunisia
Slovakia
Slovenia
Mongolia
Bulgaria
Finland
Norway
Uzbekistan
Croatia
Chile
Syria
Latvia
Cameroon
Moldova
Azerbaijan
Nigeria
Algeria
Mali
Georgia
Iraq
Lithuania
Serbia-Montenegro
Albania
Saudi Arabia
Argentina
Estonia
Benin
Australia
FYROM
Kyrgyzstan
Gabon
Kenya
Djibouti
Ghana
Tajikistan
Bolivia
Congo (Rep.)
Armenia
Mozambique
Bosnia-
South Africa
Peru
Canada
United States
Cambodia
Congo (Dem. Rep.)
Sudan
Ivory Coast/Burkina
Mexico
2,863.0
2,847.3
2,725.3
2,457.8
2,418.8
2,412.3
2,374.4
2,347.3
2,289.2
2,078.0
1,930.9
1,836.5
1,523.8
1,520.1
1,514.0
1,460.2
1,446.4
1,313.0
1,244.9
1,184.9
1,158.4
987.1
952.7
939.5
834.3
776.8
776.0
682.3
675.9
670.0
652.0
650.6
633.3
632.2
592.8
582.9
570.5
540.6
533.2
426.6
369.3
340.0
335.7
322.9
316.8
308.2
277.6
269.9
267.4
256.2
244.1
243.5
237.3
234.9
210.8
195.2
189.8
150.7
142.2
131.6
119.9
117.6
109.3
105.0
87.0
81.0
75.6
74.1
67.5
66.6
53.2
49.7
48.5
46.6
39.2
33.2
31.6
15.9
15.6
3.8
4,926.4
4,110.4
8,159.5
7,929.5
7,647.8
9,096.2
12,017.7
TERA INTERNATIONAL GROUP, INC. - 16.13 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.14: Gross Hauled Tons/Route Km
Million Tons
0 10 20 30 40 50 60
China
Russia
South Korea
United States
Estonia
Ukraine
Kazakhstan
India
Belarus
Switzerland
Latvia
Japan
Lithuania
Belgium
Austria
Canada
Luxembourg
Germany
France
Uzbekistan
WORLD AVERAGE
South Africa
Azerbaijan
Australia
Mongolia
Slovakia
Georgia
Israel
Poland
Iran
Slovenia
Moldova
Morocco
Italy
Czech Rep.
Finland
Romania
Spain
Hungary
Bulgaria
Portugal
Malaysia
Tajikistan
Vietnam
Croatia
Turkey
Norway
Tunisia
Ireland
Serbia-Montenegro
FYROM
Bosnia-
Saudi Arabia
Kenya
Ghana
Sudan
Albania
Benin
Congo (Dem. Rep.)
Ivory Coast/Burkina
22.58
21.61
18.71
18.55
18.12
17.07
17.02
16.75
15.09
13.89
13.16
12.55
11.77
10.10
9.97
9.78
9.21
8.98
8.57
8.52
8.24
8.04
7.48
7.39
7.18
7.07
7.03
6.94
6.15
6.12
5.56
5.52
5.51
5.17
4.97
4.11
3.94
3.93
3.69
3.68
3.41
3.34
2.99
2.74
2.60
2.46
2.31
2.18
1.28
0.86
0.84
0.69
0.68
0.65
0.50
0.35
0.25
0.24
35.03
51.10
TERA INTERNATIONAL GROUP, INC. - 16.14 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.15: Gross Hauled Tons of Freight Trains/Ton of Freight
Ireland
Luxembourg
Sudan
Japan
France
South Korea
Sw itzerland
Norw ay
Germany
Belgium
Austria
Malaysia
Albania
Ghana
Serbia-Montenegro
Finland
Poland
Hungary
WORLD AVERAGE
India
Czech Rep.
Romania
Slovakia
Azerbaijan
Croatia
Canada
Turkey
Spain
Israel
Congo (Dem. Rep.)
Bulgaria
Belarus
United States
Lithuania
Georgia
Bosnia-
Estonia
Moldova
Iran
Latvia
Uzbekistan
Slovenia
Tajikistan
Mongolia
FYROM
Australia
Netherlands
Portugal
Ukraine
Russia
South Africa
China
Vietnam
Tunisia
Kazakhstan
Morocco
Italy
Hauled Tons per Freight Revenue Ton
2.63
2.62
2.59
2.43
2.36
2.32
2.31
2.31
2.24
2.23
2.18
2.15
2.08
2.07
2.03
2.02
2.01
1.99
1.98
1.97
1.96
1.95
1.95
1.94
1.94
1.93
1.91
1.91
1.89
1.88
1.87
1.86
1.86
1.86
1.84
1.84
1.83
1.83
1.82
1.79
1.78
1.77
1.76
1.74
1.73
1.65
1.58
1.58
1.58
1.58
1.57
1.51
1.47
1.32
3.14
3.00
4.40
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
TERA INTERNATIONAL GROUP, INC. - 16.15 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.16: Gross Hauled Tons of Passenger Trains/Passenger
Tons/Passenger
Bosnia-Herzegowina
Georgia
Lithuania
South Africa
Estonia
Luxembourg
Moldova
Azerbaijan
Serbia-Montenegro
Austria
Slovakia
Belgium
Tajikistan
Czech Rep.
Finland
Bulgaria
Latvia
Germany
FYROM
Norway
Kazakhstan
Australia
Romania
Croatia
WORLD AVERAGE
Russia
Switzerland
Poland
Slovenia
France
Hungary
Mongolia
Sweden
Portugal
Ukraine
Congo (Dem. Rep.)
Malaysia
Israel
Ireland
Ghana
Belarus
Uzbekistan
Spain
Ivory Coast/Burkina
Albania
South Korea
Italy
Morocco
Turkey
Vietnam
China
Tunisia
Iran
Japan
India
3.86
3.84
3.76
3.60
3.59
3.48
3.18
3.05
3.02
3.02
2.83
2.79
2.74
2.63
2.60
2.58
2.57
2.51
2.51
2.48
2.39
2.31
2.29
2.23
2.12
2.06
2.04
2.02
1.94
1.92
1.85
1.81
1.77
1.75
1.70
1.67
1.64
1.57
1.53
1.51
1.50
1.49
1.48
1.29
1.28
1.21
1.07
1.06
1.04
1.03
0.91
0.71
4.48
4.36
5.64
0 1 2 3 4 5 6
TERA INTERNATIONAL GROUP, INC. - 16.16 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.17: Gross Hauled Tons of All Trains/TU
Tons
Luxembourg
Sudan
Belgium
Austria
Norw ay
Serbia-
Germany
Bosnia-
Norw ay
Sw itzerland
France
Finland
Czech Rep.
Ireland
Bulgaria
Slovakia
Romania
Azerbaijan
Poland
Croatia
Georgia
Ghana
Moldova
Hungary
Lithuania
WORLD
Malaysia
Canada
FYROM
Estonia
Congo (Dem. Rep.)
Slovenia
Latvia
Tajikistan
Belarus
Israel
Mongolia
Portugal
Uzbekistan
South Korea
Australia
Spain
Ukraine
Albania
Turkey
Russia
South Africa
Kazakhstan
Iran
China
Morocco
Tunisia
Italy
Vietnam
India
Ivory
Japan
2.67
2.59
2.57
2.51
2.46
2.43
2.36
2.31
2.27
2.26
2.22
2.22
2.18
2.17
2.15
2.09
2.09
2.08
2.06
2.04
2.03
2.02
1.96
1.95
1.94
1.94
1.93
1.90
1.88
1.87
1.87
1.85
1.81
1.81
1.80
1.80
1.80
1.79
1.78
1.69
1.68
1.65
1.65
1.65
1.60
1.58
1.56
1.46
1.41
1.37
1.30
1.28
1.24
1.11
1.06
3.00
3.34
0 1 2 3 4
TERA INTERNATIONAL GROUP, INC. - 16.17 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.18: Freight Revenue/TKM, 2003
$/TKM
0.00 0.05 0.10 0.15 0.20 0.25
Luxembourg
Germany
Ireland
Switzerland
Congo (Dem. Rep.)
Albania
Bosnia-Herzegowina
Uganda
Austria
Cameroon
Benin
Belgium
Hungary
Greece
FYROM
Japan
Mali
Denmark
France
Kenya
Italy
WORLD AVERAGE
Slovakia
Netherlands
Finland
Czech Rep.
Slovenia
Ivory Coast/Burkina
Croatia
Romania
Nigeria
Portugal
Morocco
Spain
Serbia-Montenegro
Poland
Bulgaria
Israel
Lithuania
South Korea
Sudan
Malaysia
Tunisia
Turkey
India
South Africa
Pakistan
United States
Belarus
Azerbaijan
China
Ukraine
Egypt
0.086
0.082
0.081
0.077
0.075
0.072
0.061
0.059
0.057
0.056
0.055
0.054
0.053
0.053
0.051
0.050
0.049
0.049
0.048
0.048
0.047
0.045
0.042
0.041
0.039
0.034
0.033
0.032
0.032
0.032
0.031
0.030
0.030
0.028
0.026
0.026
0.025
0.023
0.022
0.022
0.017
0.016
0.016
0.016
0.016
0.014
0.012
0.010
0.009
0.008
0.159
0.185
0.219
TERA INTERNATIONAL GROUP, INC. - 16.18 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Luxembourg
Germany
United Kingdom
Austria
France
United States
Belgium
Japan
Norway
Netherlands
Denmark
Switzerland
Sweden
Finland
Ireland
Italy
WORLD AVERAGE
Spain
Portugal
Israel
South Africa
Greece
Bosnia-Herzegowina
Slovenia
Romania
Croatia
South Korea
Lithuania
Slovakia
Mali
Cameroon
Czech Rep.
Morocco
Poland
Serbia-Montenegro
FYROM
Congo (Dem. Rep.)
Hungary
Tunisia
Benin
Sudan
Bulgaria
Malays ia
China
Turkey
Albania
Azerbaijan
Belarus
Kenya
Pakistan
Ukraine
India
Egypt
Figure 16.19: Passenger Revenue/PKM
0.202
0.173
0.162
0.156
0.155
0.148
0.143
0.137
0.129
0.122
0.118
0.116
0.112
0.108
0.106
0.071
0.066
0.055
0.053
0.048
0.047
0.046
0.044
0.043
0.040
0.035
0.035
0.034
0.032
0.032
0.030
0.029
0.029
0.028
0.027
0.027
0.026
0.023
0.019
0.017
0.017
0.016
0.014
0.013
0.012
0.012
0.011
0.009
0.007
0.005
0.005
0.002
$/PKM
0.593
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
TERA INTERNATIONAL GROUP, INC. - 16.19 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 16
Figure 16.20: Operating Ratio
Operating Expense/Operating Revenue
Kenya
Greece
Congo (Dem. Rep.)
Bosnia-Herzegowina
Finland
Portugal
Norway
Cambodia
United States Amtrak
India
WORLD AVERAGE
Turkey
Croatia
Mali
Bangladesh
Malays ia
Algeria
Netherlands
Hungary
South Korea
Romania
Poland
Bulgaria
Nigeria
Denmark
Slovakia
Ireland
Spain
Belgium
Czech Rep.
France
Luxembourg
Switzerland
Germany
Lithuania
Slovenia
Austria
Sweden
Italy
Cameroon
South Africa
United States Class
Belarus
Japan
Morocco
Pakistan
China
1.56
1.52
1.52
1.52
1.50
1.49
1.38
1.37
1.35
1.32
1.29
1.29
1.28
1.27
1.13
1.12
1.11
1.09
1.08
1.08
1.06
1.05
1.05
1.04
1.03
1.03
1.02
1.02
1.00
0.99
0.99
0.98
0.98
0.97
0.97
0.97
0.93
0.91
0.86
0.84
0.84
0.82
0.78
0.74
2.25
4.84
8.07
0 1 2 3 4 5 6 7 8 9
TERA INTERNATIONAL GROUP, INC. - 16.20 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 17:
CHECKLIST FOR INCORPORATION OF SOCIAL
DIMENSIONS IN RAILWAY PROJECTS WITH PRIVATE
SECTOR PARTICIPATION
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 17
Checklist for Incorporation of Social Dimensions in Railway Projects with Private Sector
Participation 1
A. Topics to be Addressed in Social Analysis
1. Clientele Group(s)
• Identify the client populations which are expected to be served by the railway/rail transport
system that may be developed under the project.
• Identify the subgroups within the railway users (e.g., passengers, freight users, transport
operators, etc.)
• ⋅Prepare a socioeconomic profile for each subgroup. Among other aspects, each profile
should describe and quantify the population of each subgroup, differentiated by
occupations and income levels; and access to education, health and other services.
Determine if there are significant numbers of poor people who are expected to use the
railway/rail transport system.
2. Clientele Needs
• Assess the needs of the client groups for railways in relation to other needs (e.g.,
schools, roads, health facilities, etc.).
• ⋅Assess the needs of the users for components that may complement the initial project
proposal. For example, links to highways and waterways, etc.
3. Clientele Demands
• Describe the currently available transport options and services, and the extent to which
these are used and paid for by the user groups. Assess problems experienced in using
currently available transport options and services.
• ⋅Compare the cost and quality of currently available transport options and services with
the cost and quality of options and services which are expected to be provided under the
project. Determine the type of improvements which are preferred.
• Determine the willingness and ability of expected user subgroups to pay for
new/improved rail transport services (e.g., new or increased station fees, passenger fares,
freight charges).
4. Absorptive Capacity
• ⋅Assess the extent to which users will be expected to shift to the new and/or improved
railways/rail transport system (e.g., from another mode of transport), and their ability to
cope with the change.
5. Potential Adverse Impacts
• Identify group(s) which may be adversely affected by the project. These may include
groups who may be required to relocate (including squatters) because of right-of-way
acquisitions, or group(s) adversely affected by loss of income (e.g., coastal, road, river
transport operators, those affected by land depreciation, etc.), loss of traditional lands and
cultural property and possible exposure to health hazards (e.g., noise or air pollution, rail
traffic hazards, etc.).
• Prepare a socioeconomic profile for each group which would be adversely affected to
describe and quantify the impact(s) on the affected group.
• Identify and assess options for avoiding, mitigating or compensating groups which may be
adversely affected.
1 Adapted from Handbook for Incorporation of Social Dimensions in Projects, Asian Development Bank May 1994.
TERA INTERNATIONAL GROUP, INC. - 17.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 17
B. Topics to be Addressed in Project Design
1. Targeting
• If the project has potential for maximizing the access of poor people to services and
income-generating or income-enhancement opportunities as a result of the proposed
project, identify measures or processes which specify poverty reduction objectives.
• Identify target groups against poverty reduction criteria.
2. Participatory Development Processes
• Identify mechanisms for clients and potentially disadvantaged groups to participate during
project design and implementation. Obtain feedback through community dialogues, public
hearings, referendum, formation of multipartite negotiating or monitoring teams
concerning aspects that would affect them. Examples may include:
• the participation of adversely affected groups in determining compensation and/or
resettlement options; in assessing alternative livelihoods (e.g., for displaced river
transport operators or workers, etc.); and
• the participation of host communities in the siting and acquisition of rights-of-way;
in the maintenance of railway tracks in rural areas; in determining the level of
services necessary to accommodate the displaced population; etc.
3. Delivery Mechanisms
• Assess the experience and capability of the proponent agency to fulfill commitments
made with the adversely affected group(s).
• Assess the need for NGOs to assist as intermediaries with these group(s), define the
roles which the NGOs may perform and identify criteria for selecting NGOs or other
intermediaries which may be involved.
4. Benefit Monitoring and Evaluation
• Identify a few indicators of the achievement of the project output(s), purpose(s) and
goal(s) for each component or the project.
• Assess existing management information systems in terms of their adequacy to enable
the proponent agency to verify that the systems have been correctly installed and to
provide periodic follow up to verify the continued operation and use of the systems.
• Specify indicators to monitor and evaluate the delivery of benefits to the clientele groups
identified; and to identify adjustments required during implementation to meet the needs of
the groups more effectively.
TERA INTERNATIONAL GROUP, INC. - 17.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 18:
SALIENT FEATURES OF A RAILWAY
CONCESSION CONTRACT
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 18
Salient Features of a Railway Concession Contract 1
Background
1. The contract for a railway concession will be in force for an extended period and must,
therefore, be designed carefully so that various aspects of the working of the concession and the
concerns of all parties to the concession contract, as well as the concerns of labor and other
stakeholders, are addressed adequately. A good contract also conveys the objectives of the
concession in clear terms and reduces the potential for misunderstanding and later disputes
between the contracting parties. In the following paragraphs, some of the more important features
of a railway concession contract are discussed.
Important Features of a Railway Concession
2. Duration. The concession is granted for a fixed period, and at the end of the specified
term, most assets, including those financed by the concessionaire, as well as the right to carry
out the activity, return to the public entity or government. The duration of the contract is normally
related to the time the investors need to recoup their investment. It is recognized that it will not be
possible to depreciate fully all the investments made, especially those made towards the end of
the concession period. A provision could, therefore, be considered for a payment to be made by
the public authority to the concessionaire, on the basis of an independent evaluation, for assets
acquired during the term of the concession, which have a residual economic value. Such a
provision would be aimed at encouraging the concessionaire to make appropriate investments
throughout the period of the concession and to ensure that proper maintenance of facilities is
provided throughout. Provision for possible renewal of concession is sometimes made in the
agreement. The government generally reserves the right to terminate the contract with or without
cause before the end of the normal term, and the concessionaire is accorded protection of value
of investment in the event that the government exercises its right of termination.
3. Investments. Some investments that are considered essential for the provision of the
agreed level of service and need to be made initially will be clearly identified and will normally be
the responsibility of the concessionaire. The concessionaire will also be responsible for making
additional investments to enhance capacity and service quality to meet market needs and to bring
about operational improvements, including technological upgrading to reduce unit costs. The
investments required in the early part of the concession period are fairly precisely indicated.
However, it may not be possible to predict investments for the entire period of the concession and
later investments could be left to the discretion of the concessionaire. A periodic monitoring
process should be included in the contract allowing the parties to review progress in investments,
identify future needs, and agree on an investment schedule.
4. Legal ownership. The legal status of the assets provided by the concessionaire can vary.
Normally such assets will remain in the ownership of the private operator until their transfer to the
state or the railway at the end of the concession. Besides giving full control to the operator, this
arrangement facilitates the financing of the concession by making these assets available as
collateral. In some cases, however, assets built and financed by the concessionaire are owned by
the state as soon as they are built.
5. Scope of the concession. The scope of the concession needs to be defined. Will the
concession be for a fully integrated operation (a vertically integrated and horizontally integrated
concession that includes all railway functions, all parts of the railway network, and all services), or
will the concession be limited to one or two functions or to a single service or facility? The
concession could also extend beyond the limits of the railway system to encompass, for example,
1 Adapted from Railway Restructuring Workshop on Private Sector Participation in Railways sponsored by United
States Agency for International Development (USAID) and Southern Africa Transport and Communications
Commission (SATCC). April 1998.
TERA INTERNATIONAL GROUP, INC. - 18.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 18
an international railway corridor, in which case the concession would involve two or more railways
or government agencies.
6. Links between concession fee and traffic levels. The concession fee might consist of
two elements: a fixed base fee and an element related to the traffic level, but with a minimum
guaranteed fee. Such an arrangement is fair to both parties because it reduces the risk for the
concessionaire in the event that traffic increase is slower than anticipated. The government is
guaranteed a minimum fee related to the anticipated traffic volumes in the initial period of the
concession and enjoys additional benefits as the traffic grows in later years. The concessionaire
carries the normal business risk accompanying the base traffic level and absorbs the resultant
loss should the actual traffic be lower.
7. Minimum service levels. The minimum services to be provided by the concessionaire
should be defined. Penalties for failure to provide these minimum services should also be
specified. If it is an objective of the concession that service levels be improved in the future, such
targets should be identified in the agreement.
8. Use of employees of the railway. The concessionaire is generally given the freedom to
decide the number of employees it wants to hire. The concessionaire could be given the right to
choose employees from the ranks of the railway and to renegotiate the terms of employment and
work rules. It could also be indicated that a specified proportion, say 80 percent, of the total
employees of the concessionaire at any time during the initial few years of the concession must
be former railway employees.
9. Applicability of existing collective bargaining agreements. Applicability of existing
agreements is a matter that must be clarified. Will the concessionaire have the right to
renegotiate all such agreements? Moreover, there is a question about whether the concessionaire
will be liable for payments for the past service benefits, such as accrued vacation and sick leave
and pensions for the railway employees hired by the concessionaire.
10. Responsibility for the payment of severance pay to redundant staff. This
responsibility needs to be clearly defined. If the payment is to be made by the concessionaire, the
level of payment should be negotiated by the government or the public entity with the labor
unions and be specified in the concession agreement. The decision could be that the severance
pay will be financed by the government. Although the negotiation of the concession agreement
will normally, and desirably, be between the two parties to the agreement, the position of the
government or the railway on all labor matters should reflect discussions and agreements with the
railway labor unions. The concessionaire should never be surprised to learn after entering into a
concession arrangement that labor had no input or knowledge of the government’s or railway’s
positions on these matters.
11. Deregulation of tariffs. In an environment of sufficient competition, the freight tariff would
normally be completely deregulated and the concessionaire given full freedom. There may be a
requirement that the maximum tariff by commodity is filed with an appropriate government
authority. Under conditions of some degree of monopoly power (e.g., in the case of passenger
services), tariffs will need regulation and maximum fare and the proportion of accommodation in
lowest class could be specified. To ensure that competitive situations exist and that tariff
regulation is thereby rendered unnecessary, the government should make every effort to permit
competitive access. Competitive access is desirable regardless of whether concessions are
vertically integrated or functionally separated.
12. Transfer of assets and responsibility of rehabilitation and maintenance. The
concessionaire will receive from the public entity the fixed infrastructure of the railway. It may also
receive, under a separate agreement, a specified number of locomotives and rolling stock
generally adequate to meet the requirements of service. The concessionaire will be responsible
for maintaining infrastructure, equipment, and other assets in good working condition during the
concession period and for returning them to the government or public entity at the end of the
TERA INTERNATIONAL GROUP, INC. - 18.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 18
period of concession in satisfactory condition. It may be required to overhaul or rehabilitate some
or all such equipment or invest in new equipment to provide an improved level of service. It may
also be required to (1) construct new track to serve new customer requirements or (2) invest in
rehabilitation of track, signaling, communication equipment, and information systems or (3) both.
Requirements must be defined precisely. The criteria and the agency for determining the
condition of assets during and at the end of the concession should also be defined clearly to
avoid disputes. A provision in the contract should exist to enable the government to assess and
recover from the concessionaire the cost of repair of assets that might have been neglected in the
closing years of the concession.
13. Establishment of a depreciation fund for the overhaul and rehabilitation of assets.
The depreciation fund is an option for ensuring that the railway system is satisfactorily maintained
throughout the concession period. A specified amount could go into such a fund for exclusive use
for overhaul, rehabilitation, and rebuilding of assets, and any unused balance in the fund would
revert to the government or the public entity along with assets at the end of the concession. It
may be necessary to define clearly the normal maintenance activities to be performed by the
concessionaire that will not be funded by the depreciation fund.
14. Possible deterioration of assets. To preclude disputes, the bidders should be warned
that the condition of railway assets could deteriorate in the interval between the prebid inspection
and the commencement of the concession, and traffic levels could also change. These
possibilities should be taken into consideration and associated risks shouldered by the bidders in
the preparation of bids.
15. Minimum railway management and operational experience. The experience required
of concessionaire’s management staff should be specified. It could further be specified that if the
concessionaire does not have experience in railway management and operation, it must form a
joint venture with or contract the services of a party having such experience.
16. Business risks. These risks shall be assumed by the concessionaire, and no guarantees
for minimum traffic or revenue should be offered. However, the concessionaire will not be in a
position to carry any political risks, and in circumstances in which political commitment to
concessioning is perceived to be weak, the agreement should contain a provision that allows the
concessionaire to terminate it in the event of significant policy changes.
17. Incentives. A strong incentive for the concessionaire to exceed the agreed service
standards for passenger services is desirable. The concessionaire might, for example, be allowed
to increase maximum fares if all service standards (e.g., number of cars dispatched per day,
maximum proportion of delayed and cancelled trains, equipment availability, and failure rates) are
met or exceeded.
18. Inclusion of real estate in the concession. One option would be to exclude real estate
from the concession, except that the station buildings with commercial space would need to be
included. The property development rights at railway stations are normally very lucrative and
would enhance the concession’s value significantly if included.
19. Insurance liability. The insurance liability of the concessionaire needs to be defined.
20. Indexing mechanism. The indexing mechanism for tariffs and payments to be made by
the concessionaire should be stated in cases in which indexing is included in the contract.
21. Value of performance bond. The value of the performance bond to be provided by the
concessionaire could be related to such factors as the level of penalties that could be imposed for
failure to comply with agreed contract conditions and the value of investment required of the
concessionaire. The value could be reduced periodically (preferably every five years).
TERA INTERNATIONAL GROUP, INC. - 18.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 18
22. Terminating clauses. It is important to include in any concession contract terminating
clauses that permit an orderly end to the concession. The modalities of the transfer of assets and
rights for the operation of railway back to the government should be defined. It is also important
that conditions under which the contract will stand terminated before the expiry of the normal term
of the concession are defined clearly. Such conditions could include failure of the concessionaire
to make agreed investments in the stipulated period or its failure to meet the agreed service
requirements. Similarly, the concessionaire could have the option to terminate the contract under
specified conditions (e.g., government failure to honor its commitments).
TERA INTERNATIONAL GROUP, INC. - 18.4 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 19:
SAMPLE SECTIONS OF A MODEL RAILWAY
PASSENGER CONCESSION
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 19
Sample Sections of a Model Railway Passenger Concession 1
THIS AGREEMENT IS MADE BETWEEN:
The Minister responsible for railway of [State] (the GRANTOR); AND
The Railway Passenger Services Company to which the concession is granted (the
CONCESSIONAIRE);
jointly referred to as the PARTIES whose names, addresses and other particulars are specified in
Schedule 1 hereto;
AND CONSTITUTES THE ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE
GRANTOR AND THE CONCESSIONAIRE AND MERGES AND SUPERSEDES ALL PRIOR
AGREEMENTS, COMMITMENTS, REPRESENTATIONS, WRITINGS AND DISCUSSIONS
BETWEEN THEM.
Note:
1. The Model Passenger Concession, recognizes that the agreement is concluded between a
private entity and the Minister responsible for railway OR the state-owned railway company;
2. The regulations must empower the Minister responsible for railway, the state tender board
and the state-owned railway company to undertake procurement in respect of railway. The actual
agreement is signed by the Minister in the case of: (i) a concession requiring public funding; (ii) a
fully-integrated concession; and (iii) a concession for which the state-owned railway company is
bidding as part of a consortium. The agreement can be signed by the state-owned railway
company in all other instances.
3. Passenger concessions are most likely to take the form of publicly-funded negative
concessions. In most instances, therefore, the Minister responsible for railway will be the public
contracting entity.
1
Adapted from Model Railway Passenger Concession; United States Agency for International Development
(USAID) and Southern Africa Transport and Communications Commission (SATCC), April 11, 2001.
TERA INTERNATIONAL GROUP, INC. - 19.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 19
ARRANGEMENT OF SECTIONS
PART A
INTRODUCTORY PROVISIONS
PART A
INTRODUCTION
1. Definitions
2. The concession
3. Duration
4. Date of commencement
5. General powers of Grantor
6. General duties of Grantor
7. General powers of Concessionaire
8. General duties of Concessionaire
PART B
FINANCIAL ARRANGEMENTS
9. Concession fees
10. Performance Bond
11. Compensation for public service obligations
12. Passenger fares
13. Methods of payment
14. Penalties for late payment
15. Accounting methods
16. Financial year
PART C
PROVISION OF RAILWAY PASSENGER SERVICES
17. Railway passenger services
18. Access to railway infrastructure
19. Leasing of railway equipment
20. Sale of railway equipment
21. Service quality
22. Passenger counts
23. Publication of timetable
24. Disruptions to passenger services
25. Performance monitoring
26. Performance targets
27. Access to, provision and confidentiality of information
28. Annual report
PART D
PROVISION AND MANAGEMENT OF RAILWAY INFRASTRUCTURE AND EQUIPMENT
29. Depreciation Fund
30. Transfer of railway infrastructure
31. State-owned land
32. Undertaking to construct / rehabilitate railway infrastructure and equipment
33. Construction standards
34. Designs
35. Preparatory work
36. Time-schedule for completion of construction
37. Contract management
38. Certification of completion of construction / rehabilitation
39. Access agreements
40. Railway infrastructure and equipment management and investment diversification
plan
41. Lease agreements in respect of railway stations
42. Railway infrastructure and equipment maintenance plan
TERA INTERNATIONAL GROUP, INC. - 19.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 19
PART E
TERMINATION AND TRANSFER
43. Manner of termination
44. Circumstances which constitute default
45. Procedure to be followed in the case of default
46. Consequences of default
47. Circumstances which constitute force majeure
48. Procedure to be followed in the case of force majeure
49. Consequences of force majeure
50. Mutual termination
51. Transfer of leased railway equipment upon expiry
52. Effect of transfer
53. Cost of transfer
PART F
MISCELLANEOUS PROVISIONS
54. Warranties given by the Grantor
55. Warranties given by the Concessionaire
56. Subcontracting
57. Public liability insurance
58. Authorizations
59. Indemnities
60. Use of regional goods and services
61. Communication and notices
62. Delegation
63. Assignment
64. Invalidity
65. Non-waiver
66. Variation to agreement
67. Entire agreement
68. Re-negotiation
69. Dispute settlement
70. Governing law and jurisdiction
Schedule 1: Contact Particulars
Schedule 2: Long-Distance and commuter railway passenger services to be provided by the
Concessionaire
Schedule 3: Compensation for Public Service Obligations
Schedule 4: Fares Chargeable for Public Obligations
Schedule 5: Levels of Service
Schedule 6: Railway Infrastructure
Schedule 7: Existing Equipment
Schedule 8: Performance Targets
TERA INTERNATIONAL GROUP, INC. - 19.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 20:
FINDINGS OF REGIONAL WORKSHOP ON
PRIVATE SECTOR PARTICIPATION IN ASIAN
RAILWAYS
TERA INTERNATIONAL GROUP, INC.
PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 20
1. The following points pertaining to private sector participation in Asian railways were
preseted at the Regional Workshop held in Manila on 14-15 June 2006.
2. Developing nations face important structural challenges that must be addressed if they
are to maintain sustained economic growth, improve living standards, and continue their pursuit of
a greater role in the global economy. In many countries in Asia today, the interurban and intraurban
demand for passenger mobility and movement of freight has exceeded the capacity of the
road network as well as that of existing railway services. Many of the region's railways require
substantial investment to become viable entities and provide acceptable levels of services to
users. Participation by the private sector in both investment and management of the region's
railways is expected to increase the efficiency and quality of services, and mobilize urgently
needed capital for modernization and new services.
3. The Asian region's 3.2 billion people comprise over 70 percent of the developing world's
population. Almost two-thirds of the world's poor live in Asia and the Pacific. That is why ADB has
made poverty reduction its overarching objective. But the fight for poverty reduction is not only the
business of governments and multilateral development institutions. The private sector too has a
serious part to play. In particular, public and private partnerships for poverty reduction can provide
better access to basic services to the poor through infrastructure development.
4. Typically developing countries invest up to 7 percent of their GDP in infrastructure
development. Yet, the poor still have only limited access to basic services. The fact is the
resources required to improve and maintain infrastructure are enormous. Neither governments
alone nor governments with multilateral and bilateral assistance can finance these requirements
adequately. Private sector participation is essential.
5. Many governments are re-assessing their role in the provision of basic services. More and
more they see themselves today as facilitators and regulators rather than as providers. An
enabling environment of law and regulation, and a stable political and economic system that will
attract private entities to invest are two preconditions for increased PSP. Better administration and
greater transparency are essential requisites of government to attract private investment in
railways.
6. Governments should be constantly seeking to create investment opportunities for the
private sector. Privatization is one such route, though governments do of course have to plan the
associated design carefully so as to avoid the risk of monopoly.
7. How does the private sector contribute to poverty alleviation? It is not only through money
but also through expertise and management. Private firms create most jobs in the developing
world. The employment they provide offers a powerful path out of poverty. Countries with higher
shares of private investment grow faster, create more jobs, and do more to reduce poverty.
8. The private sector can also help reduce poverty by demonstrating social responsibility.
This is increasingly being explored as a way for the private sector to contribute to development.
9. Key issues and limitations of the typical government owned and operated railways
systems include the following:
1. Clarity of role
10. Government provision of railway transport services to the public has been found lacking in
many countries primarily because of the duplicity of roles, with government trying to be policy
maker, regulator and operator of services all at the same time. There are numerous examples of
publicly owned railway operating entities that experience rising costs and falling revenues. The
consequent pressure on public finances often leads to insufficient investment as public funds are
used for revenue support rather than capital expenditure. The result is deterioration in rail
TERA INTERNATIONAL GROUP, INC. - 20.1 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 20
infrastructure and services as well as increasing burden on government budgets. This may be for
a number of reasons:
(i) Lack of clarity in trying to act commercially while seeking social goals. In many
developed countries a distinction is already being drawn between socially
obligated services and commercial services. Similar initiatives are yet to be
taken in many developing countries.
(ii) Restrictions on management freedom caused by public service norms and
procedures; for example, staffing levels and pay scales are largely determined
by public policy rather than by the market.
(iii) Constraints on financial autonomy and investment due to government budgeting
and annual appropriation processes.
(iv) Competition for resources from the core government functions relevant to social
welfare or other national priorities.
(v) Where the activity results in a financial surplus, there is often cross subsidization
of other government activities rather than reinvestment in the production of
economic outputs.
11. Behind many of these issues is the reality that governments (particularly in developing
countries) have a plurality of policy objectives in transport. These may include economic, financial,
social, environmental, national defense, and others. These objectives often conflict with each
other. And their priority may alter in response to political events. It is the governments’ prerogative
to pursue any one or more of these objectives. But these objectives can make it difficult for
government owned and operated railways to achieve financial solvency and maintain
sustainability.
2. Reduced operational and allocative efficiency
12. Direct government involvement in running rail transportation services often reduces both
operational and allocative efficiency. The closer the government is to railway management, the
more the decisions which affect technical efficiency (for example, staffing or investment decisions)
becomes influenced by political considerations. In such a situation, managers cannot be held
commercially accountable and incentives for technical efficiency are further weakened. Allocative
efficiency may also be adversely affected as prices may reflect political objectives rather than
actual costs.
3. Financial inefficiencies and constraints
13. Soft budget constraints, poor or inadequate cost information, and unfocused management
goals frequently lead to financial inefficiencies. Ineffectiveness in government spending is the
result of institutional failures, the most important of which is that decision makers have little
incentive to improve the efficiency of railway services. Despite the growing influence of the public
sector quality improvement movement, most government departments do not conduct rigorous
cost accounting or quality auditing.
14. In many developing countries, railway monopolies are facing a step-by-step erosion
because governments can no longer carry the increasing financial burdens from non-profitable
state-owned enterprises. Restructuring, including a role for the private sector is a required focus
to improve the railways' market orientation, performance, and financial condition.
4. Quality of service
15. Because government agencies often operate as monopolies, they have little reason to
worry about consumer demand or the quality of service. Without competition and choice,
consumers have few options other than to stop consumption, provide the service themselves, or
move to different modes of transport.
TERA INTERNATIONAL GROUP, INC. - 20.2 - PRIVATE SECTOR INVESTMENT IN RAILWAYS

APPENDIX 20
5. Private Sector Participation
16. Potential benefits of private sector involvement in the provision and/or management of any
public infrastructure are widely acknowledged and sought for, particularly with respect to
improving quality of service. Implementation of sound commercial and accounting principles can
lead to cost savings and efficiency gains in project management, maintenance and operation, and
better evaluation and mitigation of various kinds of project risks. Major benefits of PSP are:
a. Sustainability
17. Barring a few exceptions, most countries today see private sector participation as the
most appropriate way to provide sustained efficient performance and continued financial viability
for railways. Privatization leads railways to fundamental rethinking of their business, which can
lead to substantial improvements in their efficiency and effectiveness. Through PSP, financial
market discipline is enforced on the railways, which then act as monitoring agents with selfinterest
at stake. PSP is often long-term and, therefore, its positive effects are more permanent,
whereas any achievements under state ownership can be reversed quickly by changes in policy.
b. Mobilizing financial resources
18. Private financing in infrastructure is often quoted as a "new" source of financing. There
should be no confusion, however, between the financial source of investment that could come
from the private sector in the form of debt or (to a lesser extent) equity and the source of revenue
that will eventually pay back the investment and must come from the taxpayer or the beneficiaries
of the railroad. However, private financing for railway construction and operation allows mobilizing
the resources and executing the needed investments more rapidly because of the incentive the
private sector has to maximize return on the investment. The risk of the public sector is also
diversified with private participation.
c. Increasing operational efficiency
19. The involvement of the private sector can be extended to finance provision, operation and
management of economically justified and financially viable public infrastructure that otherwise
could not be financed due to budgetary constraints and other priority demands on public
expenditure. Concessioning of railways in many countries has substantially reduced government
subsidies. Moreover, state-owned railways that have been concessioned or privatized have also
dramatically improved their financial performance following privatization.
d. Freeing scarce public resources for other uses
20. Private participation in the financing of railway projects allows spreading of the project cost.
This helps to free up public funding for investments for other priority sectors such as expansion of
social services. Private sector financing can also ease fiscal problems by moving infrastructure
projects off-budget during the years of construction. The potential for raising funds in both
domestic and international capital markets can be enhanced by implementing policy reforms that
create clear rules allowing investors to form reasonably firm expectations about the cash flow
generated from infrastructure operations.
e. Enhancing capacity and efficiency of project implementation
21. Project implementation can be made more efficient by involving the private sector in the
design and construction of infrastructure facilities even when they are owned and managed by
the public sector. Private sector skills can be used to put the initial project together, assemble the
necessary partners to complete the project and manage procurement and operations.
22. It is not always possible to achieve all of the government’s objectives through PSP.
Advisory services provided by multilateral banks such as ADB would be helpful to determine the
extent to which the desired objectives can be achieved through financing modalities. It is possible
for the government or the railway to arrive at an optimal design for PSP through careful review of
the possible financial and management options with technical assistance from ADB.
TERA INTERNATIONAL GROUP, INC. - 20.3 - PRIVATE SECTOR INVESTMENT IN RAILWAYS