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Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects (2015)

Chapter: Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches

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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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Suggested Citation:"Appendix D - Global Scan of Rail Industry Structures, Funding and Financing Approaches." National Academies of Sciences, Engineering, and Medicine. 2015. Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects. Washington, DC: The National Academies Press. doi: 10.17226/22149.
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136 A P P E N D I X D United Kingdom Rail Sector Context Until the mid-1990s, passenger and freight rail services in the UK were largely provided by British Railways (BR), a government-owned company that owned the rail infrastructure and operated passenger and freight services across Britain. Since then, BR has been dismantled and the industry restructured through the separation of infrastructure from operations (also known as “vertical separation”), as follows: • Railtrack—a newly created infrastructure company—was given ownership of track and station infrastructure and most train depots, becoming the regulated monopoly supplier of infrastructure services. Railtrack was privatized through an initial public offering (flota- tion) of shares, but went bankrupt and in 2002 and was replaced by Network Rail, a not- for-dividend private company that has no shareholders. Most of its borrowing is backed by a government guarantee.1 Network Rail recovers its costs mostly from track-access charges paid by passenger and freight rail operating companies, but also receives substantial direct capital grant payments from government. • Passenger rail services were privatized (1995–1997) and are mostly operated by private “Train Operating Companies” (TOC) under competitively tendered franchises granted by the central or local government. Passenger operators pay track-access charges to Network Rail. • Freight services were also privatized and are now operated by private “freight-operating com- panies” (FOC). Unlike passenger services, freight services are not operated under franchise agreements but on a competitive basis with open access to use rail infrastructure owned and managed by Network Rail. Freight operators generally pay only the marginal cost for access to infrastructure. Rail passenger and freight services share common tracks although there are some branch (short) lines used only for freight and some radial lines into major cities used only for passenger services. Freight services operate throughout the day but have lower priority access to the network than passenger services, which means they rarely gain access to congested commuter routes in peak Global Scan of Rail Industry Structures, Funding and Financing Approaches 1 Network Rail is supposed to operate as a commercial business and its managers are incentivised by bonuses rather than through normal commercial pressures. Unlike the US where train miles are dominated by freight, passenger traffic in the UK represents over 90% of train miles and total cost. The railroad therefore largely exists for passenger services, in sharp contrast to the US where freight services are far more significant in terms of use of the rail network.

Global Scan of Rail Industry Structures, Funding and Financing Approaches 137 hours. Access charges, rights and priorities are determined by the Office of Rail Regulation (ORR). The funding structure for the UK rail sector is presented in Figure D-1. Rail Infrastructure Context in the UK Network Rail bears the financial responsibility for maintaining infrastructure used by both freight and passenger operators. Network Rail receives revenues from track-access charges and also receives direct grants from the central government. Additional financing requirements— particularly for large capital projects—are met by debt raised on capital markets, multi-currency notes2 and commercial paper.3 So far, all of Network Rail’s debt has been subject to government guarantee, although it is the intention that Network Rail will in due course begin to borrow without guarantee. The government in general would prefer that Network Rail borrow directly (rather than for the government itself to borrow and lend to them), even though it pays around a half a percent more interest that way. This is for fiscal reasons (it avoids appearing to add to the level of official government debt). The funding structure for Network Rail now seems to work relatively well, even if it was not the original structure desired by the government. Source: Jeremy Drew Figure D-1. UK Rail funding structure. Infrastructure Privatization: UK Experience At privatization, the UK government had intended that investment in infrastructure would be funded from the (private) infrastructure company Railtrack. Investments would be funded from income from access charges and from debt raised on this reliable source of income. The intention was that investment in infrastructure would be funded without direct government support through the commercial incentives and regulation 2 Notes are bonds with maturity of less than 10 years when issued. 3 Commercial paper consists of unsecured notes issued by the company.

138 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Freight Context in the UK Rail freight in Britain is still mainly bulk traffic, especially imported coal from ports to power stations. Container traffic to and from the ports has grown over recent years to become as impor- tant as coal. Other traffic includes bulk items like building stone, and hazardous cargos including nuclear fuel. There are now six main freight-operating companies all providing services across Great Britain. The largest is the German-owned DB Schenker (UK), formerly the English, Welsh and Scottish (EWS) railway. As freight-operating companies compete with each other and with other modes, freight rates are not regulated. The profits of rail freight companies are, in general, modest, although some of the most efficient new entrants have Earnings before Income and Tax (EBIT) margins in excess of 15%, using mostly leased equipment. Private freight rail operating companies finance investments in much the same way as US freight companies—through equity and commercially available financial products. Rolling stock is typically leased from rolling stock leasing companies. Because freight operations are regarded as commercial, government support for rail freight operations is minimal compared to that for rail passenger services. The UK government gives three types of explicit financial support to freight rail, to encour- age modal shift (road to rail) and reduce road congestion and environmental impacts of traffic. Grants are available for construction of rail freight terminals, and operating support payments are made for carriage of freight that would otherwise be transported by road. Rail operators also pay lower taxes on diesel fuel than trucking firms, recognizing that road taxes are used partly to pay for road construction and maintenance. of Railtrack. Nearly all government support for passenger services would be channeled through revenue payments to private franchised passenger operators, with which government would have binding contracts. This was intended to ensure that investment choices would thereby be made mainly on the basis of market needs. In practice, Railtrack suffered gross mismanagement and it went into admin- istration (the UK equivalent of Chapter 11) after a serious accident and severe cost overruns on the West Coast modernization project. While Railtrack had made significant safety improvements, several catastrophic accidents and the cost overruns required a government bailout (as Railtrack was too big and too important to fail). Following the replacement of Railtrack by Network Rail in 2002, the government decided that a larger share of infrastructure costs should be financed through direct payments (grants) to Network Rail. These payments supplement financ- ing from revenue (mainly track access charges) and loans, thereby improving Network Rail’s ability to finance investment. As part of the regulatory review process to determine track access charges, the government now defines its required outputs from the infrastructure company and the funding it will pro- vide; these are taken into account by the Regulator in determining the level of track access charges.

Global Scan of Rail Industry Structures, Funding and Financing Approaches 139 Passenger Context in the UK Intercity and Commuter Rail in the UK In terms of contractual relationships and funding, there is no firm divide between regular intercity, high-speed or commuter services, which are sometimes combined in one route concession (with the same concession offering some slower services, with stops at multiple commuter stations, and faster services stopping only at larger towns and cities). For this reason, intercity, high-speed and commuter rail are addressed jointly here. Most passenger traffic in Britain is carried on intercity routes and on shorter distance com- muter services into London; there are also commuter routes into other main cities and other inter-urban and rural services. All track used by passenger services is owned by Network Rail apart from short sections in London owned by Transport for London (which manages all City of London transport services on behalf of the Mayor), the new high-speed line from London to Kent, the Heathrow branch line and some short “museum” lines. There are 19 passenger franchises (concessions) of which 16 are administered by the central government.4 The remaining three are administered and funded by devolved bodies because these bodies are considered to be better at managing the specific services in their areas.5 Most of these franchises operate services used for commuting and other trips into and around major cities. Passenger franchises are typically 5–15 years in length with varying degrees of revenue and cost risk taken by the private sector, as well as varying degrees of commercial freedom. Typically called Train Operating Companies or TOCs, they are chosen through a competitive process with the choice made mainly on the basis of minimum subsidy cost (or maximum payment) to pro- vide defined services. When franchises are let, bidders say how much subsidy they need to receive, or what premium they will pay, in each year of the franchise. They work this out by forecasting fares and other revenues, operating costs, Network Rail access charges, rolling stock leasing costs and profit. Network Rail access charges are set every five years by the regulator (the Office of Rail Regulation). TOCs are fully protected from these changes, so the level of subsidy or premium is reset after each access charge regulatory review. There are various requirements about the services that must be operated, the rolling stock that must be used, and maximum fares that can be charged (though not all fares are regulated). Most TOCs operate more than the required services and attempt to provide premium services at fares that are not regulated, sometimes using additional rolling stock. TOCs are mainly operated by private entities that borrow commercially, issue bonds, etc., on the open market but some are owned by other European state-owned railroad companies (e.g., SNCF). Rolling stock is typically leased from rolling stock leasing companies (ROSCOs). Three pri- vate ROSCOs were established as part of the UK rail privatization process of the late 1990s. The ROSCOs buy and maintain rolling stock, financing their acquisitions on the private markets. 4 Concessions let by the UK government are called franchises. 5 The three concessions administered and funded by devolved bodies are: Transport for Scotland, Transport for London and Merseytravel (Liverpool conurbation). All three operate mostly commuter services although Transport Scotland also operates regional services, and overnight sleepers to London.

140 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects They typically work with TOCs to provide the equipment needed to the level of specification and service standard the TOC requires (this includes premium equipment—not required by the franchise agreement but desired by the TOC as a means to increase its market share and profitability). A few new private passenger train operators operate entirely without subsidy and outside of franchise agreements. These include Hull Trains, Grand Central, and Heathrow Express, and the high-speed international operator Eurostar that runs between London and Europe. Hull Trains and Grand Central operate services over the East Coast Main line, using 125 mph diesel trains, competing with the franchised operator East Coast. Hull Trains has been operating since 2000 and has progressively improved and expanded its rolling stock. These are privately funded and, in the case of Hull Trains and Grand Central, pay only for the variable cost of infrastruc- ture as the policy is to encourage these open-access operators and they would not otherwise be profitable. Figure D-2 shows the sources of income for the “conventional” domestic passenger railroads (e.g., excluding the London-Paris/Brussels Eurostar service). The figure is an aggregate of all services, and there is wide variation across the network. High-Speed Rail in the UK The first (and only) dedicated high-speed rail link in the UK is High Speed One,7 the 109-km railway link between London and the Channel Tunnel (serving Eurostar). It serves international and domestic passenger services from London. It has been used for some international freight, although only on an experimental basis. High Speed One was developed as a PPP. While it is difficult to definitively subdivide the network, because virtually all services overlap, about 40% of the operating franchises are profitable after infrastructure grants and actually pay premiums to government, while the others rely mainly on government subsidy.6 There is a wide variation across the different routes. 6 UK Office of Rail Regulation, National Rail Trends Data Portal. Data from 2011–12. 7 Formerly the Channel Tunnel Rail Link. Source: Analysis of Great Britain industry financial information 2011-12, Office of Rail Regulation. Of the £4 billion in “Government Funding,” nearly all (£3.9 billion) consisted of funding of infrastructure. 58% 5% 5% 32% Passenger fares income Other income from passenger operating companies (car parking, property, catering etc) Other income Network Rail (stations, property etc) Government funding Figure D-2. Income for the passenger railroad (2011/12 £bn)— including infrastructure.

Global Scan of Rail Industry Structures, Funding and Financing Approaches 141 European Union (excl. UK) Rail Sector Context Until around 1990, almost all railroads in Europe were operated as government-owned monopolies. Until around 1960 they still expected to operate on a self-supporting basis, with passenger fares and freight tariffs set to offset costs and freight traffic cross-subsidizing at least some passenger services. This was true for each country. However, as competition emerged from road and air transport, railroads had difficulty financing capital investment and most began incurring operating losses. In 1991, the European Union (EU) introduced Directive 91/440, which began a move towards the separation of infrastructure from train operations activities (called “vertical separation” in the industry). The objective of this, and subsequent EU regulations, has been to increase effi- ciency, especially for cross-border rail services, by facilitating competition “above the rail” (e.g., for rail operations, not infrastructure) across multiple countries. Competing operators (public or private) are allowed open access to infrastructure in each country and are supposed to be given mandatory trackage rights. Initially this type of access was limited to freight, but it has now been extended to international passenger services and is planned for domestic passenger services. Few state-owned operating companies now have freight monopolies in their country, as they must compete with new entrants. There are more than 100 smaller railroad companies, some operating several hundred miles of track. These serve local needs and are mostly owned and financed by regional and local gov- ernments, which want to keep them open and under their control. Some are owned by private companies or even individuals. Rail Infrastructure Context in the EU Infrastructure, as a natural monopoly, is managed by a state-owned company in each EU country except the UK.8 Under EU rules, infrastructure must be managed by a body that is separate in its decision making from any operators. In practice, infrastructure can be managed by a subsidiary of a holding company that also owns operators (as in Germany), provided it has systems in place to ensure fair treatment of competing operators that buy access to the network. Implementation and impact of EU policies varies. Some countries have been slow to implement changes such as open access while some, especially Sweden, Germany and the UK, have made reforms even ahead of EU requirements. EU requirements have a major impact on the financing of railroads through laws and regu- lations. These include state aid rules, which prevent aid to potentially commercial operations (with some exceptions) to prevent subsidized, inefficient state operators from under-bidding and thereby undermining the viability of more efficient private enterprises. “Block Grants” are rare and generally contrary to EU law. Grants must be awarded to achieve specific objectives and, where possible, only after competition to ensure good value for money. While the EU encourages countries to levy charges for infrastructure access that reflect only the direct (variable) costs of infrastructure from operating a train, many countries, particularly in Eastern Europe, set higher charges to recover the fixed cost of operating, maintaining and investing in infrastructure. Notwithstanding the ability to set high access charges, many railroad networks in Eastern Europe continue to have trouble funding track maintenance. Traditional sources of funding for public investment in infrastructure were historically the central government and revenue from customers of the railroad. With vertical separation, 8 In some countries it is owned by the state and only managed by the company.

142 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects revenue from customers has been replaced by track-access charges paid by operators for access to the network. Figure D-3 illustrates the extent of the main rail network in Europe with high-speed (over 200 km/h or 125 mph colored). France, Italy, Germany and Spain have the most developed high-speed rail networks in Europe. A few high-speed lines in Germany are also used by freight traffic. Freight Context in the EU As commercial services, the general approach to the financing of freight rail services in Europe is that they must be financed from revenue. However, in some Western European countries, where passenger services are well supported by the government, freight pays lower track-access charges than passenger services and makes little or no contribution to the fixed cost of infrastructure. Freight rail operations (above the rail), at least in Western Europe, are normally provided on a commercial basis in a competitive and deregulated market. In most countries, competitor freight Source: http://en.wikipedia.org/wiki/High-speed_rail_in_Europe#mediaviewer/File:High_Speed_Railroad_Map_of_Europe_2013.svg Figure D-3. Rail network, Europe.

Global Scan of Rail Industry Structures, Funding and Financing Approaches 143 rail operators carry up to 55% of total freight rail traffic with the rest carried by the incumbent state-owned operator.9 The incumbent national operators still dominate carload traffic but com- petitors have strong positions in unit trains and bulk cargos. Since block trains (unit trains) and bulk cargos are often the most profitable segment, private competition often puts national car- riers under increased financial pressure. Government-owned freight rail companies in many countries, including France, Belgium and Switzerland, have been loss-making and have undergone restructuring. This has been supported by government aid but EU rules require that this be one-off (otherwise it would be anti-competitive as it would disadvantage competitors). However, some government-owned freight rail companies are still in difficulty. Compared with the US, freight rail in the EU has a much smaller share of total freight traffic. Railroads in Europe have a different role to that in the US. Within the EU, railroads carry 30 times the passenger-miles of the US but only one-seventh the freight ton-miles. There are several reasons. Freight ton-miles are lower in the EU in part because industry is still mostly organized within single countries equivalent in area to US states, with relatively short flows, although this is changing with the creation of the single market. Because it must also serve the passenger role, rail has also been less effective at servicing freight. On the other hand, many lines used by freight would not exist were it not for government funding to provide passenger services. Passenger Context in the EU Intercity and High-Speed Rail in the EU In most European countries other than the UK, Sweden, Germany and Italy, intercity pas- senger rail is still operated entirely by state-owned railroad companies, sometimes as a legal monopoly, although there is often competition for international services (for which open access is now mandatory under EU directives) and there is greater competition for regional and com- muter services. Increasingly, intercity passenger services (including high-speed rail) in Western Europe are operated on a purely commercial basis with no capital or operating subsidy “above the rail.” Revenues come primarily from passenger fares, and sophisticated market pricing is used, similar to yield management models used in the airline industry. Track infrastructure is still heavily subsidized through a publicly owned entity. Most new lines constructed in recent years in Europe have been high-speed lines built on high-value corridors (e.g., London–Paris/ Brussels, with 10 million passengers/year, 30 trains/day). High-speed trains often continue on upgraded conventional lines. Commuter Rail in the EU Most commuter and regional rail services in Northern Europe are now operated under some form of contract, increasingly by an operator that has won the contract through a competitive process. Subsidies for commuter and regional rail are mostly funded from general government rev- enues. Increasingly these are administered through regional or local governments. For instance, since 2001, the administrative regions of France have been authorized by the central government to manage their own railroad transport services. The administrative regions and the national railroad company agree on contracts stipulating that the national railroad company is required to provide services and the regions pay the company in return. Such contracts sometimes include small investments in local railroad infrastructure. 9 Report from the European Commission on monitoring development of the rail market, 2012. http://ec.europa.eu/transport/ modes/rail/market/doc/swd(2012)246_final-2_-_annex_to_the_report.pdf

144 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects Australian Rail Sector Context Prior to the 1970s, railroads in Australia were mostly owned and developed to serve the needs of a single state, as vertically integrated systems (with the state owning and operating both infra- structure and rolling stock). There were limited interconnections between railroads, and the various state systems even used different track gauges. In the 1960s, development of a national freight system began, including harmonization across gauges. From 1970, a standard gauge link allowed the same train to run from Perth to Sydney, and later standardization linked Melbourne and Brisbane. Isolated private railroads were also devel- oped to exploit large iron ore deposits in North Western Australia. State-owned rail infrastructure is open access by law. The interstate lines and connecting state networks now have complete vertical separation, with state ownership of rail infrastructure and open access to private operators based on published and regulated access charges.10 In limited instances, the state infrastructure systems were also privatized. For example, the public narrow-gauge lines in Western Australia were acquired by Aurizon,11 which must also allow open access. The Tasmanian Railway was concessioned from 1997 to 2009 and reintegrated in public hands in 2010 and has only one public operator at present. The primary rail systems are as follows: • The Australian Rail Track Corporation (ARTC), owned by the national government, owns, leases or has contracted to manage access to over 8,500 km of standard gauge track across the country. • The Queensland Rail (QR) narrow-gauge system is publicly owned by the State Government of Queensland and covers much of the network running north from Brisbane. • A number of privately owned lines but with fully open access. • A number of isolated, fully private and dedicated freight lines, largely catering to the resources sector with no requirement for open access. Rail Infrastructure Context in Australia The Australian Government (through the ARTC) plays a significant role in providing infra- structure funding for freight rail, unlike the United States where most rail infrastructure is pri- vately owned and maintained. ARTC’s mandate is “to increase the volume of freight carried by rail and to do so in a commercially sustainable way.”12 The ARTC network also provides access for interstate and intercity passenger rail services. ARTC publishes access charges for passenger and freight operators over its entire system. These access charges are filed with government (the owner) and are calculated per train-km and per gross tonne-km. They are differentiated by pas- senger versus freight, by type of passenger or freight traffic, and by specific lines within the network. ARTC’s access charge revenues cover recurrent expenses and allow some surplus for renewals and other works, but government funds most major investments and upgrades through general taxes.13 The ARTC funds infrastructure improvements, which will specifically benefit import and export freight, for example. In turn, the ARTC publishes access charges for passenger and freight operators over its entire system,14 which are calculated on a per-train-km and per gross tonne-km basis, and which differentiate by type of passenger or freight traffic, and by specific lines within the network. 10 Here state ownership includes ownership by individual Australian states, or by the national government. The Adelaide- Darwin railway line was built in a BOOT process and is in private management for the term of the agreement (till 2060). 11 Aurizon is the new name of the freight operator portion of Queensland Railways. Queensland Railway was reorganized with the state of Queensland keeping ownership and responsibility for rail infrastructure in Queensland and Aurizon offering rail operations services, which in some cases include operation and maintenance of infrastructure. 12 ARTC Annual Report 2012, page 3. 13 World Bank, “Railway Reform: Toolkit for Improving Rail Sector Performance,” June 2011. 14 The Australian Rail Track Corporation (ARTC), owned by the Commonwealth Government, owns, leases or has contracted for access to a national network of standard gauge lines spanning the continent from Perth to Brisbane (via Adelaide, Melbourne and Sydney) and from the North (Darwin) to a connection with the transcontinental line at Tarcoola.

Global Scan of Rail Industry Structures, Funding and Financing Approaches 145 Overall, through ownership of ARTC and through funding in the rail activities of the Nation Building Program (which covers all modes), the government has clearly defined the public interest needs for rail infrastructure capacity, and has moved to ensure that these needs are financed. ARTC’s revenues come primarily from track-access charges, as well as contract main- tenance activities for the Country Regional Network in New South Wales. The ARTC’s operat- ing revenues have typically fallen short of operating expenses, however, and over the 14-year period (financial years 1999 to 2012) accumulated operating losses have been AU$818 million (US$743 million). Over the same period, government grants and other support have totaled AU$1,020 million ($US926 million).15 The QR Network, a wholly owned subsidiary of QR, is responsible for providing, maintaining and managing access to, and operations on, the QR rail network. The QR Network is ring fenced from all operators and offers open access to all operators. Network access charges are based on per gross tonne-km and per trip along with a charge per tonne handled. Privately owned lines with fully open access include the narrow-gauge lines acquired by Aurizon in Western Australia, and the recently built “Northern Line” between Tarcoola and Darwin, which is now owned by Genesee and Wyoming. These lines publish minimum and maximum charges per gross tonne-km, with actual charges negotiated with each operator. The level of these charges is not public but is regulated by the states. Freight Rail Context in Australia Freight rail companies in Australia are largely self-financing and require no direct public fund- ing support. The completely market-driven, shipper-owned private freight railroads (infrastructure and operations) finance their infrastructure needs through commercially generated revenues and private finance without public intervention. Many of the dedicated rail lines in Western Australia serve companies operating in a largely booming world commodities market and have low production costs. These lines typically have no significant connections to the rest of the network and are effectively conveyor belts for the mining companies that own them. Approxi- mately 50% of Australia’s total rail tonnage is carried by these private, dedicated railroads owned by mining companies in Western Australia. The privatization of the freight operators running on publicly owned infrastructure has largely been successful, apparently generating sufficient internal financing for operating needs. This conclusion is supported by the fact that there has been continuing interest in mergers and acqui- sitions of the freight operators. There are now four major privately owned operators (Pacific National, Aurizon, Genesee & Wyoming Australia, and Qube Logistics) as well as a number of smaller, private tenant operators. The privately owned Western Australia lines and the Northern Line (Tarcoola to Darwin) publish minimum and maximum charges per gross tonne-km, with actual charges negotiated with each operator on a confidential basis. Passenger Context in Australia Intercity Passenger Rail in Australia Intercity passenger trains largely run on rail networks owned and maintained by public author- ities, with QR Network in the north-east of the country and ARTC maintaining the majority of 15 Australian Rail Track Corporation Ltd Annual Reports for 1999 through 2012.

146 Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects the networks used by intercity rail services. Passenger train operators pay track-access charges to QR Network, ARTC or other infrastructure-owners, as the case may be. There are three long-distance interstate trains in Australia. Two of these (The Ghan and Indian Pacific) operate without operating subsidy by a private company, Great Southern Railways, following privatization in 1998. A third line (The Overland) also operated by Great Southern Railways, operates a limited schedule with a subsidy from two state governments (Victoria and New South Wales). The remaining intercity trains are largely combined with commuter (intra-state) services, including the New South Wales CountryLink services, V-Line in Victoria, and various long-distance intercity and sleeper train services operated in Queensland. Passenger operations are all subsi- dized by the state governments. The busiest intercity corridor falls within the New South Wales CountryLink services, and it does cross state boundaries, linking the capital cities of each state (Melbourne—Sydney—Brisbane). However, the relatively short cross-border extensions link- ing with Brisbane and Melbourne are understood to be operated on a commercial basis and incremental revenue more than covers incremental costs. High-Speed Rail in Australia Like the US there have been a number of HSR programs proposed over the past 20 years in Australia, although none are currently being developed. In April 2013, the national government published the High-Speed Rail Phase 2 Report,16 which proposed that a dedicated HSR network be developed across approximately 1,750 km between Brisbane-Sydney-Canberra-Melbourne, at an estimated construction cost of AU$114 billion (US$105 billion) (2012 dollars). It is expected that the government will be required to cover the majority of upfront capital costs. Once in operation, it is believed that the HSR system may be capable of generating suffi- cient revenue from fare and other sources to meet its operational and asset renewal costs without being dependent on a government subsidy. 17 Commuter Rail in Australia All of Australia’s major cities have commuter rail systems (Sydney, Melbourne, Brisbane, Perth, and Adelaide). These operate over rail infrastructure networks owned and maintained by state-owned entities. In most cities, large sections are electrified with city center tunnels and underground stations. These operations are typically subsidized. In Sydney, for instance, fare revenues cover about one-third of total costs, including operations and maintenance; the balance is funded largely by government. Japanese Rail Sector Context Japan has the oldest and one of the largest and most well-established high-speed rail networks in the world (Shinkansen network), with over 2,600 km of track with maximum speeds of between 260 km/h and 300 km/h. Infrastructure Ownership Ownership of high-speed line infrastructure that existed before rail sector privatization (in 1987) rests with four Japan Railways (JR) passenger companies, fully private integrated opera- tions responsible for both railway operations and infrastructure management. 16 Australian Government, Department of Infrastructure and Transport, “High Speed Rail Study Phase 2 Report,” April 2013. http://www.infrastructure.gov.au/rail/trains/high_speed/ 17 Australian Government, Department of Infrastructure and Transport, “High Speed Rail Study Phase 2 Report,” April 2013. http://www.infrastructure.gov.au/rail/trains/high_speed/

Global Scan of Rail Industry Structures, Funding and Financing Approaches 147 New HSR infrastructure constructed following privatization is financed entirely by the gov- ernment and owned by the Japan Railway Construction, Transport and Technology Agency (JRTT), a subsidiary company of the national government. Passenger Rail Operations The private JR companies must pay a rental fee (similar to an access charge) for any new lines constructed by JRTT. The rental fees are fixed for 30 years and are calculated based on the antici- pated difference in profit the JR company will make from the existence of a high-speed line (in comparison to if there was no high-speed line). This approach is based on the policy that the national government should not threaten the JR companies’ profitability, particularly given the history of financial challenges faced by railway operating companies prior to privatization. Any construction and maintenance costs not covered by the rental fee are paid for by the national and local governments.18 Freight Rail Operations The Japan Freight Railway Company (JR Freight) was also created through privatization, at the same time as the passenger JR companies. It owns very little track of its own, and primarily uses and pays for access to track owned by JP passenger railway and other companies. 18 Yanase, Naoto. “Track Access Charges for Japanese Shinkansen,” 5 March 2012. Part of report by International Union of Railways (UIC), “Infracharges: UIC Study on railway infrastructure charges in Europe,” November 2012.

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TRB’s National Cooperative Rail Research Program (NCRRP) Report 1: Alternative Funding and Financing Mechanisms for Passenger and Freight Rail Projects identifies alternative funding and financing tools that can be used to realize passenger and freight rail project development, including capital investments, operations, and maintenance. The report summary is available online.

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