Rail projects and PPPs

By David Baxter, Sr. Fellow – There is no doubt that rail transportation forms a very important role in economic growth and is an important force in the development of manufacturing and export economies. Many countries have expansive railway networks, which are critical transportation arteries for commerce as well as expanding populations that seek a reliable form of transportation that avoids typical urban congestion challenges. Even some emerging economies have expansive functioning railway networks that, although a legacy of their colonial past, offer the only effective way of moving millions of tons of freight as well as millions of passengers. I personally think that the economies of Southern Africa and India for example, would not have reached their current development levels if it were not for their colonial legacy railway networks. One could also not image the economies of the USA and Canada without the development of their Trans-Pacific railway networks.

However, one is faced with a reality today that is removed from a nostalgic myopic view of the glory days of rail in the Wild West and British Raj India. The reality is that many governments have under invested in their railways and not managed to keep up with increasing demand for their use. Infrastructure has been allowed to decay, and competition from other forms of transportation has resulted in a current need for improvement and expansion of railway infrastructure through additional investment. This requires investment in rail transportation, unfortunately exactly at a time where most governments are currently cash strapped. The need for an alternative source of railway investment is creating an investment opportunity that can be best served by private sector investors through PPPs.

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Partnerships with the private sector can bring opportunities for investment, operating efficiency, innovation, and modern and clean technology. PPP railway projects that seek opportunities to share resources, infrastructure (tracks), and ROWs can only result in improvements in services
 and an increase in much needed revenue for public partners and private investors.

When considering investing in PPPs for rail, one needs to clearly differentiate between the different types of railway models, operation modes, and transportation services that exist. These include nationally owned rail networks, regional and local government owned networks, and local networks. Longer distance rail networks that transport freight (raw materials and manufactured goods) tend to be commercial operations (private sector) in developed economies, while they are more likely to be state owned in the emerging economies. Passenger rail transportation networks tend to be focused on shorter distances, face competition from other transportation modes, and in many instances are operated by local governments (often through transportation authorities). It is also not uncommon for agreements to be reached that allow publically owned rail companies to operate their rolling stock on privately owned rail tracks (e.g. AMTRAK which runs on privately owned tracks) or vise versa, instances where privately owned rolling stock runs on publically owned tracks (e.g.such as in South Africa and India where private tourist companies operate on Transnet and Government of India tracks).

Due to the large amount of investment needed to design, build, fund, operate, and maintain railway networks, it seems that business partnerships between the public and private sector are unavoidable.

In many countries this path is possible and is encouraged. Unfortunately, in as many other countries there is still a long way to go before bureaucratic obstacles are removed that will allow rail PPPs to flourish. Obstacles include state monopolies (often inefficiently run), misguided perceptions of national strategic interest, political interference, strong trade union lobbies, and public stakeholder bodies that all have their reasons for opposing rail PPPs. Many misguided concerns are centered on the misperception that PPPs are privatization (divesture) actions, which is misguided. PPPs are not a process of privatization, they are the opposite and are fundamentally actions that seek to form partnerships between the public and private sector that are mutually beneficial.

For rail PPPs to be successful, it is important that a rail PPP enabling environment be created that fosters the formation of PPPs. This includes specific legislation that allows the private sector to have a role, that discourages state monopolistic activities, encourages the formation of independent rail regulators, demands transparent and competitive procurement processes, and which recognizes and rewards the innovations and expertise that the private sector can bring to the table. Countries that have achieved this goal tend to have competitive and efficient rail networks that serve their freight and passenger transportation needs well.

Note: For examples of Rail PPPs contracts related to freight networks, high-speed lines, as well as conventional lines it is recommended that the reader visit the following World Bank site:

http://ppp.worldbank.org/public-private-partnership/ppp-sector/transportation/railways/railway-concessions-and-bots/railway-concessions-and-bots

I am convinced that if governments wish to create a financially sustainable environment conducive to rail PPPs it is essential that they pursue a policy of railway reform that embraces policy change, develops investment plans that are attractive to the private sector, introduce best practices, embraces effective governance, and provides incentives to private sector partners who can improve services and infrastructure through improved performance.

If you have any comments – please feel free to respond to this post.

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