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Chapter VII. Transport Sector 20 Draft: January 7, 2001December 7, 2000
Public Expenditure in the Transport Sector
Introduction
The Czech Republic (CR) has made good progress in privatizing some transport operations, and now needs to concentrate on commercializing activities whichactivities, which will remain in the public sector and completing remaining privatization. CR published its transport policy in 1998 which1998, which commendably drew together different political views and sought to retain a significant role for the State[1]. However, CR is preparing to join the European Union (EU) where transport is overwhelmingly market oriented. This is going to put pressure on transport organizations, particularly Czech Railways (CD), to compete successfully or become increasingly marginalized. In addition, the public cost of supporting transport activities, more than two percent of GDP in the case of the railways, is becoming increasingly unaffordable. There is a widespread consensus in the EU, other countries and academia that most transport services are best performed by the private sector, with companies performing specific social services compensated by public service obligations (PSOs). The role of the Government in ex-socialist countries is thus reoriented from its former task of directly managing transport enterprises, to assuring that competition among private transport operators is fair protecting the public interest in safety, the environment and social working conditions.
Recommendations in this chapter include (a) restructuring the railways, including redrafting currently proposed railway legislation, (b) catching up with the maintenance backlog in roads, railways and public transport because of its high economic justification, (c) phasing railway and motorway corridor investments because of their lower economic justification, (d) reducing road costs by consolidating road maintenance districts and contracting out routine and periodic road maintenance, (e) increasing charges on heavy road vehicles so that they cover their road costs, (f) increasing public transport tariffs for railways, buses and urban transport to reduce uneconomic subsidies and generate funds for asset renewal, (g) expanding the parking program in Prague and considering introducing a system of congestion charges, (h) avoiding Government guarantees because they are scrutinized less carefully than the budget, (i) avoiding Government participation in financing or guaranteeing investments for CSA or at Prague Airport because these operations are profitable, and (j) increasing the use of, and reliance on, objective cost/benefit analysis for all investments, including rehabilitation and equipment renewal, taking into account external costs.
Undertaking the proposed reforms is estimated to reduce Government transport expenditures by roughly CZK12 billion per annum during the first five years. The main savings would come from reductions in railway and motorway corridor investments, reductions in railway operating costs as the restructuring program begins to take effect, and increases in road taxes on heavy vehicles. These would be partly offset by increases in road, railway and urban transport maintenance expenditures as the backlog begins to be addressed. In the second five years, annual savings should increase to the order of CZK33-46 billion per annum (1.9-2.6 percent of 1998 GDP) as the full effects of railway restructuring become evident, with the range determined by the speed with which rail freight and long-distance passenger services can be privatized. There will also be substantial benefits to CR from improving the quality of transport services, facilitating ‘just-in-time’ manufacturing and promoting the development of the service economy, and decreasing the cost of trade.
Transport Demand
Table 7.1 below presents the changed during the transition of the goods and passengers modes of transportation.
Table 7.1. Trends in Goods and Passenger Transport
(tkm or pkm billions)
(tkm or pkm billions)
1990 / 1998 / PercentcChange
Goods Transport
Rail / 41.14 / 18.76 / -54
Road / 16.80 / 33.91 / +102
Inland Water / 1.40 / 0.82 / -41
Air / 0.057 / 0.056 / -2
Oil Pipeline / - / 2.08 / -
Total Total / 59.397 / 55.63 / -6
Passenger Transport
Rail / 13.36 / 7.02 / -47
Automobile / 39.90 / 60.80 / +52
Bus / 12.34 / 8.68 / -30
Inland Water / 0.003 / 0.008 / +166
Air / 2.18 / 3.68 / +69
Total / 67.78 / 80.18 / +18
(Thousand passengers/workday)
Prague Public Transport (PPT)
(thousand passengers/workday) / 4,186 / 3,349 / -20
Source: Ministry of Transport and Municipality of Prague.
The reasons for these changes are structural and not expected to change: the decline of heavy industries, the emergence of a service economy and ‘just-in-time’ manufacturing which favor road transport, the explosive growth of the private automobile and aviation, and the reorientation of trade to the West. Consultants Halcrow forecast that CD’s freight traffic willwould grow 1.5 percent per annum and passenger traffic decline 1.2percent per annum, from 1998 to 2003.[2] Achieving this growth rates will very much depend on CD improving its customer orientation and restructuring as discussed below, and on its operational and infrastructure constraints such as network size, speeds and types of service offered. A further decline in rail transport is possible as CR approaches modal splits observed in other Western European countries (railways currently carry about 35 percent of freight and 9 percent of passengers). Conversely, automobile, truck and air traffic are expected to continue to grow rapidly, which will require careful planning for road investments and for measures to control the growth of congestion in Prague and other urban areas.
Railways
System and Efficiency
CD, a state owned company with Directors appointed by the Government, operates most of the railway system in CR. Infrastructure includes 9,430 of route-km in 1998, of which 1,940 km are double track and 2,984 km are electrified. CD’s system is too large for the volume of traffic it now carries. For example, CD’s principal source of revenue is freight traffic, of which it performed 1.12million ton-kilometers (tkm) per kilometer (km) of track in 1998, or about one-sixth the traffic density of the United States. CR has 120km of rail per square km, compared to 74 in Poland, 83 in Hungary or 59 in Slovenia. Much of the railway is also in poor condition because maintenance was deferred due to financial constraints. There are permanent or temporary speed restrictions on 1,152 km of track, traction and rolling stock is aging, and signallingsignaling and telecommunication need modernizing. CD estimates its maintenance backlog at CZK130billion. While CD’s system is too extensive, proposed corridor investments will cover part of the backlog, and there may be a political element in the estimate, the backlog is nonetheless substantial. Partly as a result, CD’s efficiency is low by international standards. Halcrow compared performance in 13 central and eastern European (CEEC) countries, and found that CD was worse than average in most measures of labor and capital productivity (total staff per gross tkm; wagons per freight tkm, passenger coaches per passenger-kilometer, pkm).
CD is particularly affected by high labor costs whichcosts, which accounted for 49 percent of operating costs in 1998. CD had 91,870 employees in 1998, and has succeeded in reducing their numbers by 14 percent since 1994. However, labor costs per worker increased 27 percent in real terms during this period while worker productivity per traffic unit (tkm+pkm) decreased by 5 percent. Income levels are expected to continue to rise in CR which would make high labor costs a more serious problem in the future. The CD trade unions are quite influential. For example, the Government and CD attempted to reduce rail lines by 30 percent through sale or abandonment in 1997, but this was unsuccessful because of trade union and community resistance.
Financial Performance
A review of CD’s financial performance during the years 1994–98 is shown in Annex 7.1. CD, like most of the railways in Central Europe, has a serious financial problem with operating ratios rising from 107 percent in 1994 to 115 percent in 1996 and falling to 107 percent in 1998. These ratios, however, do not reveal the full extent of the problem. There is a substantial maintenance backlog as discussed, and depreciation is also understated because fixed assets have not been revalued to allow for the effects of inflation. Freight services have been profitable since 1995 with annual profits as a percentage of revenue ranging from 16 percent in 1995 to 8 percent in 1998. However, CD suffers major losses from passenger services. Based on CD’s cost accounting, revenue collected from passengers in 1998 of CZK4.3 billion covered only about 27percent of the CZK15.7 billion cost of providing passenger services. The Government’s operating subsidy of CZK6.4 billion covers 41 percent of these losses, the profit from freight services covered about 10 percent, leaving an unfunded balance of 22percent or CZK3.4 billion. Losses have been running at about this level since 1995 even though passenger tariffs have increased in real terms by about 57 percent between 1994 and 1998 resulting in an increase in cost recovery from passengers from 22 percent in 1995 to 27 percent in 1998. Freight tariffs were also increased by 6 percent in real terms from CZK1.13 to CZK1.20 per tkm during this period.
In addition to the operating subsidy, the Government provided investment grants in 1998 of CZK10.9 billion. The Government’s total support for CD in 1998 is estimated at CZK28.4 billion[3]. The approved Transport Investment Plan calls for the Government to invest CZK15-17 billion per annum in CD in coming years, financed either by the budget or new loans as shown in Annex 6. In addition, CD cannot avoid replacing aging traction and rolling stock (TRS) or carrying out other maintenance at a cost of say CZK seven billion per annum. It is, therefore, likely that the Government will need to provide around CZK40 billion per annum in railway support in one form or another during the coming years. This amounts to more than two percent of 1998 GDP which does not appear sustainable.
It is recommended to improve CD’s financial and management accounting systems to provide a more objective assessment of CD’s financial position and monitor restructuring. The financial accounting system should be prepared promptly, provide details on cash flow, and be audited, all in accordance with international accounting standards. The management accounting system is necessary to establish realistic budgets, delegate authority and responsibility, and monitor results. It will also provide information for setting tariffs, allocating costs between freight and passengers services, quantifying the costs of unprofitable services and establishing on an objective basis for PSO payments to cover the cost of unprofitable but socially desirable services.
Since 1996, CD has been using loans to finance part of its capital investment program. As of December 31, 1998, these loans amounted to CZK20.0 billion with plans to borrow a further CZK28.0 billion over the following four years. Under current conditions, CD will not be in a position to meet the debt service on these loans as already in 1998 CD’s net internal cash generation after debt service was minus CZK1.1 billion. In effect, CD is using new loans to pay part of its current debt service. Further borrowing by CD under current conditions is inappropriate, as the Government will eventually be required to assume any new obligations. It would be better for the Government to borrow these funds directly to obtain a lower interest rate. CD’s current ratio (current assets divided by current liabilities) has fallen from 1.9 in 1994 to 0.6 in 1997 but increased to 0.9 in 1998. These low ratios reflect CD’s severe liquidity problem which was caused in part by delays in the payment of Government subsidies and grants. This has resulted in substantial additional costs to CD in the form of penalty interest charges and excess prices from contractors. Better coordination between the Government and CD on payments and commitments could eliminate this problem even at the current level of payments.
Passenger Service Subsidies
There is no economic rationale for controlling long-distance passenger fares or services for either rail or road transport in a market economy, i.e., there is sufficient competition from other transport modes to prevent monopoly abuses. Subsidies for suburban passenger services may be justified as a way to address motorization issues as discussed below, but it is recommended that this be done in the form of PSO payments provided by the concerned regional government-in-the-making which benefits from the service. Subsidies of national interest can continue to be paid by CR, e.g., for school children or disabled passengers. Government regulation of passenger services in a market economy need only be concerned with matters of safety, environment, and professional standards. It is, therefore, recommended to deregulate long-distance rail passenger tariffs and services to permit this line of CD business to be profitable, as occurs in other countries.
European Commission (EC) Directives
CD has been divided into separate divisions for infrastructure and operations, but there is a difference of opinion as to whether accounting separation has been achieved in accordance with the requirements of CD 91/440. The proposed Railway Law discussed below seeks to solve this. The other principle item of legislation which will affect CDlegislation, which will affect CD, is the limit on state aid, which needs to be addressed. CR is well advanced in complying with other EC railway requirements.
Restructuring Assessment
The growth in road competition and high labor costs suggest that CD’s financial position will continue to worsen in the absence of reform. The Government recognizes the need for change and has taken some measures to comply with EC directives. Some privatization had taken place in the areas of workshops, catering, sleeping car services, intermodal operations and regional branch lines, but there are few apparent benefits to date. The management of CD has little control over passenger fares or freight tariffs which are largely controlled by MoOT, or the extent of its system. There is little evidence that modern business management practices are being followed, and there is no clear contractual relationship between the Government and CD. As a consequence, there is little incentive within CD to improve its operational and financial performance, and thereby its competitiveness.
It is clear that strong remedial actions are required to prevent the further marginalization of CD as a transport mode, and to reduce the Government’s substantial financial burden. What is required is a clear vision of the future role of railways in CR and a plan of action for getting there. Competitive railways in other countries concentrate their activities on main trunk lines, block trains and long-distance services, all of which can be profitable. It is recommended to organize the railways into three profit centers: freight, long-distance passenger services, and suburban services, with a view to privatizing these businesses one wayone-way or the other in due course. This has been successfully done by outright sale in Japan, New Zealand and Great Britain, or by concessioning in Argentina and Brazil. With restructuring, both freight and long-distance passenger services should be profitable, including covering their track costs. Suburban services will require continued subsidies through PSO payments as discussed. Restructuring will require staff reductions, service reductions and line closures or offsetting PSO payments. These should be prepared in close consultation with those affected, with due consideration paid to adverse social impacts and safety nets, including the provision of satisfactory replacement bus transport where necessary to communities which lose rail service.