Foreword

Railway lending has always been a challenge for the World Bank. One notable success story is the oft-cited loan to Japanese National Railways to support construction of the first leg of the Shinkansen (Tokyo to Osaka) as part of the 1964 Tokyo Olympics investments. However, the challenge continues because, perhaps more than with any other transport mode, railways do not readily yield to a standardized reform formula. Fortunately, the tools that have emerged from the many years of experience are flexible, and can be deployed to achieve a wide range of reform objectives. This toolkit should be a constant companion to those who want their nation’s railway sector to become an efficient link in a transport network that reinforces national economic growth.

In 1982, an initial comprehensive review of Bank railway lending, “The Railways Problem,” concluded that railways could play an important role in the transport sector of many countries. However, the report also found that during the years after World War II railways had “...become slow-moving public administrations, now requiring extensive structural change...” In most cases change had been slow, due in part to confusion about which functions should be managed by the state and which by the railways, and in part to the persistent delusion that investment alone would resolve all the problems.

In reality what was needed were changes in policies, organizational structures, and facilities (including disinvestments that respond to changing traffic levels). Due to the glacial pace of change, many railways remained bottlenecks to development and a drain on government finances. The report concluded that governments should: (i) remove restrictions on competing modes, tax them appropriately and limit subsidies to railways; (ii) shake up existing railway staff and bring in new management and marketing skills more appropriate to commercial operations; and (iii) ensure that investment projects aim to serve customer or operating needs so as not to become white elephants. The report argued that the World Bank should lend only to railways willing to embark on a thorough process of managerial and structural transformation.

Through the 1980s, despite the declared desire to press for railways restructuring and commercialization of services, World Bank lending continued to struggle with recalcitrant railways and governments. World Bank projects remained focused on investments to repair and rehabilitate facilities that had suffered more from mismanagement than overuse. Bank loans did include more requirements for change, and focused on restructuring; but clients tended to perform better on investment components than on reform. The momentum of change in the Bank sometimes seemed barely ahead of that of its railway clients.

In 1994, the Bank published an updated review of railway lending, “The Evolution of the World Bank’s Railway Lending.” This report concluded that railway lending had evolved from the earlier model of investment focus to a model that consistently tried to attack the underlying institutional weaknesses that had caused the railways (and prior railway loans) to fail. The report pointed out that rapidly accelerating global economic change, exemplified by the collapse of formerly socialist railways, was increasing focus on institutional failure as opposed to asset repair.

Supporting this analysis were two other reports aimed at defining specific actions and tools available for restructuring — “Techniques for Railway Restructuring” and “Options for Reshaping the Railway.” “Techniques for Railway Restructuring” outlined four general steps around which the restructuring effort could be organized: (i) a Strategic Plan that relates the restructured railway enterprise to the broader political, social, and economic context within which it will function and addresses major public policy options; (ii) a Contract Plan that defines specific commitments and obligations flowing from the Strategic Plan that government and the railway enterprise formally accept as their respective responsibilities; (iii) a railway Management Plan that establishes an organizational structure, functional responsibilities, and performance measures for effective internal management control, in light of the requirements imposed by the decision to operate as a commercial enterprise; and (iv) an “Enabling Actions” Plan to list necessary legislative, legal, and administrative changes to carry out planned restructuring. “Options for Reshaping the Railway” addressed issues involved in breaking up the historically monolithic railway institution, for example by creating tenant operators that paid for access, or even for infrastructure separation—an independent infrastructure agency and all operators pay for access.

The early 1990s saw the emergence of two additional and powerful forces supporting railway change. The first, the European Commission’s Directive 91/440, initiated a long process of separating railway infrastructure from operations and requiring all operators to pay non discriminatory access charges. The Commission’s objective was to end the “fortresses” of the national railways and open the transport market to competition, both in and eventually for provision of rail services. Despite many years of resisting this Directive and its follow-ons, the Commission has slowly forced the European Union (EU) railways into a mold of separated infrastructure with competition in freight and long-haul passenger markets and competition for suburban and regional passenger markets. During implementation of the change, the 10 former CEE railways have joined the EU and have been subjected to the Directive’s requirements: in addition, a number of railways adjacent to the EU (e.g., Russia) or influenced by EU policies (e.g., Chile) have implemented or considered their own forms of vertical separation.

The second major force was the expanding private sector role in railway services. At the beginning of the 1990s, the U.S. freight railways and the Canadian Pacific railway were the only privately owned and operated railways in the Americas. By the end of the 1990s, every significant freight railway in the Americas had been transferred to private operation, sometimes by privatization (Canadian National) but more commonly by concession (Argentina, Chile, Brazil, Mexico, Peru, Bolivia, Guatemala). In addition, the suburban railways in Argentina and in Rio de Janeiro had been concessioned, along with the Metros in Buenos Aires and Rio de Janeiro. The World Bank supported the concessioning process through lending for repair of assets that were derelict after years of neglect; more importantly, Bank lending supported labor force adaptation. A similar process was followed in many African countries, though progress has been slowed by weak and unstable governments, even civil war. The British Railways privatization initiated the infrastructure separation process and private sector privatization (freight) or franchising (passenger services) in the U.K., a process that has slowly spread to other parts of the EU.

More recently, the Bank has stressed the importance of sound governance and incentives structure to drive the railway to operate in a commercial fashion. These are “tools” that can apply in the full range of competitive and ownership options to improve the performance of the railway sector.

Taken together, these initiatives have set the stage for this tool kit. A universal railway reform solution doesn’t exist. Nevertheless, the reform options available have expanded considerably since 1990, and the experience gained since then is immensely valuable to tailor the options to fit diverse national needs. Few countries have experienced a reversal in the reform process, and most reforming countries have benefited significantly, albeit not without some problems along the way. The toolkit is a comprehensive guide to navigating the difficult, complex, and perpetually challenging process of reforming the railways.

    
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