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Financing Regional Passenger Rail
in Poland: Lessons from the UK
Irene Walsh
31 March 2004
KPMG Corporate Finance
The economic dynamics of Polish rail
Poland’s transition to a market economy has led to:
 Decline in passenger traffic
 Collapse of the coal industry, the largest freight customer
 Increase in PKP’s labor costs
In the last year before reform, financial losses exceeded
USD 1 million per day
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The Reform Program
The Law on Commercialisation,
Restructuring and Privatization of
Polish State Railways enacted
September 2000

Subsidiaries

PLK SA (infrastructure and access)

PKP Cargo (freight operator)
Commercialization =
transformation into the joint stock
company PKP SA (December
2000)

LHS (iron ore freight operator)

SKM (Tri-cities metropolitan
passenger network)

WKD (Warsaw metropolitan
passenger network)

New inter-city express passenger
operating company

New slow-speed inter-urban
passenger operating company

New regional passenger operating
companies contracted to the
Voivodships
Restructuring = breakdown of
PKP SA into subsidiaries
Privatization = Selected
subsidiaries commencing with
LHS, SKM, WKD and PKP
Cargo. PLK SA to remain in state
ownership
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Conforming to EU Policy on Railways
Key principals:
 Accounting (and institutional?) separation of infrastructure from
operating functions
 Independent regulator at national level
 Access to infrastructure by railway enterprises of other member
states on non-discriminatory terms
 Cross subsidies from profitable services (freight and intercity
passenger) to unprofitable services banned
 Operating subsidies banned except for local passenger
operations and infrastructure
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The challenge for PKP
Redefining the State’s role from a direct provider of
services to a strategic planner and regulator
 Initiating competition
 Facilitating decentralization to sub-national governments
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Regional Passenger Operating
Companies
The reform program
The State subsidy approach
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Regional Passenger Operating
Companies
Key elements of the reform program:
 Debt funded labor restructuring to lower cost base
 Decentralize operating subsidy regime by channelling
payments through Voivodships
 Privatize where possible, with SKM and WKD serving as test
cases
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Regional Passenger Operating
Companies
Detail on State subsidy:
 Voivodships to receive dedicated funds from State budget;
aggregate amount determined annually
 Individual Voivodship allocation determined by formula based
on population, kilometres of active railway line, level of
structural unemployment
 Subsidy distributed by Voivodships to regional passenger
operating companies as an offset to losses from unprofitable
services
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The UK experience
Overview of privatization program
Relevance to Poland’s Regional Passenger Operating
Companies
Lessons learned
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The UK experience
Overview of privatization program
Objectives:
 Access to private investment and an ongoing investment
program
 A higher quality of service and better value for money for the
public
 Introduction of competition in the operating of services
 Harnessing private sector management skills and
entrepreneurial spirit
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The UK experience
Overview of privatization program
Steps in the process:
 Reorganization into infrastructure and operations
 Sale of subsidiary businesses
 Establishment of an independent regulator and a State body to
act as strategic planner
 For passenger rail: design of a franchise map, a track access
regime, and a subsidy mechanism
 Sale of the infrastructure company through IPO
 Letting of operating franchises to private operators through a
competition based on minimum subsidy requirement
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The UK experience
Overview of privatization program
Post - privatization industry structure
Direction &
Guidance
Strategic Rail Authority
Franchise
Payments
Department for Transport
Funds
Funds
Passenger Transport Executive
Fares
Sponsor/Liaison
Monitoring Performance/
Consultation
Train Operating Companies
Freight Revenues
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Operating
Licence
Office of the Rail Regulator
Track Access
Charges
Lease Payments
Rolling Stock Companies
Rail Users Consultative
Committee
Network Rail Licence Regulation
Network Rail
Private Finance
Grants
Freight Operating Companies
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The UK experience
Relevance to Poland
Like Poland, UK privatization required a complex model:
market share of rail is small, and high level of service provision
is for social purposes
Like Poland, UK privatization program had a strong
decentralizing element
Many of the UK passenger franchises have characteristics of
Poland’s regional passenger operating companies
 size
 commuter usage
 profitability
Like Poland, UK Government subsidy is still necessary to
maintain service on many franchises
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The UK experience
Lessons learned
Public subsidy
Infrastructure investment and track access charging
Franchise structure
Performance regime
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The UK experience
Lessons learned : public subsidy
Transparent vs. “Opaque” :
 A transparent subsidy regime is preferable. Tends to promote rational
policy making that balances fiscal alternatives such as investment in
rural vs. urban services or investment in road vs. rail. The UK
passenger rail subsidy remains opaque.
Open-ended vs. fixed:
 A fixed subsidy approach is a means of cost control and state fiscal
“protection”. Moving to a fixed appropriation for uneconomic services
will eliminate reliance on emergency measures which have had
broader fiscal consequences. In the UK, Government is still the ultimate
guarantor for the system overall.
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The UK experience
Lessons learned : infrastructure investment and track access
charging
Asset valuation:
 A robust asset valuation is the key to adequate track access charging.
In the UK, the initial infrastructure valuation did not result in a sufficient
income stream for the infrastructure company to maintain the network
appropriately.
Pre-privatization upgrading:
 Asset upgrading can improve the chances of attracting private interest
in an operating franchise.
Ongoing renewals and future improvements:
 An approach to financing future infrastructure investment must be
carefully considered before operating franchises are tendered. In the
UK, state subsidy for infrastructure continues to be necessary and is
now funded through a sovereign-backed credit structure.
The prime users’ willingness to pay is the ultimate constraint
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The UK experience
Lessons learned : franchise structure
Optimal length for private franchises:
 Some of the original UK franchises now believed too short to
have been economically viable. Cost containment could not be
achieved in the time frame and franchisees required additional
public subsidy for survival.
Transfer of risk to private operators:
 Exposing private franchisees to passenger fare revenue risk is
easier in a dynamic Government subsidy system than in the
fixed subsidy regime planned in Poland.
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The UK experience
Lessons learned : performance regime
Regime should be no more complex than necessary for
purposes of:
 Incentivization
 Accountability
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The UK experience
Lessons learned summary
Positives:
Negatives:
 Market innovation and growth
 TOCs not capitalised to bear
 Private investment
 Invigorated financial and
engineering markets
 Preparatory spin-offs of non-
core businesses
revenue risk
 Too many interfaces and
constraints, undermining
efficiency
 Insufficient understanding of
costs and asset conditions
(infrastructure)
 100% privatised network
Overall:
 Key parts of the process were
hurried
 It is difficult to create a “free
market” in a natural monopoly
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operator
 Insufficient recognition that the
rail network is dynamic and
there is an ongoing state role
 Insufficient working practice
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Questions for Poland
Has labor restructuring been successful in generating the
required cost savings?
Is the anticipated State subsidy level sufficient to
preserve current passenger services?
Can EU structural funds contribute to the necessary
infrastructure upgrade?
Do the Voivodships have sufficient administrative
capacity to manage the subsidy program?
Will the private sector come?
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ISPA funding
TENS corridor projects
 Modernisation of the Berlin-Warsaw-Moscow corridor (E-20)
– Minsk Mazowiecki to Teraspol
– Rzepin to the German border
– Poznan rail interchange yard
 Wroclaw to the German border (E-30)
 Warsaw to Dzialdowo (E-65)
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