China : Managing the economic interfaces in multi-operator railway environments

37190 Transport Sector Unit, Infrastructure Department East Asia & Pacific Region The World Bank China: Managing the economic interfaces in multi-operator railway environments Review of international approaches prepared for the Ministry of Railways China June 2006  Abstract: A seminar held by the Chinese Ministry of Railways in September 2005 examined the policy environment that would need to be in place to attract private investment into China's medium and long-term railway development plan. Since then the Ministry has set up several joint ventures with provincial governments and other, non-governmental partners to finance specific new lines. This innovative approach creates a need to manage the economic interfaces when the activities of one railway enterprise have a direct economic impact on another. This paper summarizes, for the benefit of the Ministry of Railways, the approaches that have been adopted elsewhere in the world to address this need. It considers three main interfaces: track access, when the train services of one railway entity use the infrastructure owned by another such entity; vehicle interchange, when the train services of one entity use the vehicles owned by another; and revenue division, when commercial income must be divided because a freight consignment or passenger journey carried by one railway company is interchanged to the trains of another railway company for onward transport, but with a single customer paying for the whole journey. Acknowledgements: This report was prepared by Paul Amos, Transport Advisor of the World Bank, and Richard Bullock, railway financial specialist (consultant), under the management of Graham Smith, Transport Sector Coordinator in the World Bank Office, Beijing. Peer reviewers were Martha Lawrence and Vasile Olievschi. Xin Chen provided administrative assistance. The opinions expressed are solely those of the authors.  SUMMARY Background 1. An important seminar on railway investment and financing reform was held by the Ministry of Railways (MOR) in Beijing in September 2005. It highlighted the necessity for external finance in the implementation of the Medium and Long-term Development Plan, including the construction of high-speed dedicated passenger lines. Increasing attention is now being given to how China's joint-venture railway model might contribute to the achievement of the Plan. 2. By 2004 the joint-venture model had been used for some 27, mainly branch-line, projects. During 2005, 19 new joint-venture railways were created. There are plans for a further thirty. A process of restructuring and consolidation is also under way to strengthen the operational and financial capacity of the existing joint-venture railways. There are various types of joint-venture railway but the future cases are likely to be jointly-owned ventures between MOR, Provincial Governments, industrial enterprises and other investors. 3. Over the next few years a more extensive multi-operator railway environment will therefore emerge in China. As was identified at the 2005 Conference, fair and transparent rules for managing the economic relationships (or interfaces) between operators are critical to giving investors confidence in participating in China's rail industry, whether in joint-ventures or in other ways. Objective of paper 4. The objective of this paper is to summarise the approaches that have been adopted elsewhere in the world to manage the economic interfaces that are created when the activities of one railway entity have a direct economic impact on another railway entity. Three main interfaces are considered: Track access: when the train services of one railway entity use the infrastructure owned by another railway entity; Vehicle interchange: when the train services of one railway entity use the vehicles owned by another railway entity; Revenue Division: when commercial income must be divided because a freight consignment or passenger journey carried by one railway company is interchanged to the trains of another railway company for onward transport, but with a single customer payment for the whole journey. Multi-operator case-studies 5. There are many countries in the world where each of these interfaces occurs because there are many railway entities (the Report defines these cases as `multi-operator railway environments'). The Report draws upon examples from: rail freight services in the USA ,where there are over 550 railway entities; rail freight services in Mexico which has 4 main railways (plus some smaller railways); rail freight services in Canada which has 2 major rail freight companies (and a number of other railway entities); inter-state rail freight services in Australia which involves 5-6 railway entities. 1  domestic freight and passenger rail services in the United Kingdom (UK) which has over 30 railway entities; domestic freight and passenger rail services in Germany, which has around 260 railway entities licensed to use the public network; international passenger and freight rail services in the European Union (EU) between which some 120 different operating entities run international trains; international passenger and freight services between European countries as a whole (including EU and non-EU states, and some adjacent countries in North Africa and Middle-East). Track Access 6. Since the invention of railways there have been many situations in which the trains of one railway entity operated over the tracks of another railway entity and paid for that use of tracks. Today there are many examples where track access occurs. It generally occurs in one of three main institutional frameworks: countries in which negotiated rights of track access occur at specific locations through private agreement between different railway entities (e.g. USA, Canada); countries in which, in addition to some private agreements, there are some mandated rights of access defined in national laws, but where these rights are confined to narrowly defined locations and/or circumstances (e.g. in Canada, Mexico); countries where there are mandated rights of access which are much more widely defined, based on a precept of the general desirability of broadening access to public infrastructure (e.g. in the European Union and its member states and in Australia). 7. In Section 2, the Report summarizes the methods used in the different cases to establish train timetables, track access charges, procedures for when traffic is disrupted, and the allocation of liability for accidents. 8. Policy initiatives to encourage external investment in railways in China suggest that in the future there may be various new organization forms in the railway sector. They are likely to be established under a range of ownership structures. Such diversity will inevitably require policies, procedures, charging mechanisms and regulatory recourse for issues of track access. These will be required even if the scope of access is more narrowly delineated in terms of specific geographic or business areas. New entities may include, for example: vertically integrated joint venture railways having responsibility for both rail infrastructure and train operations in their region but which may nevertheless need to use the tracks of other railway companies in border areas in order to reach convenient handover or terminating stations; specialized Train Operating Companies such as container train companies or tourist passenger train companies, who would need to pay track access fees to the 14 regional railway administrations and any joint-venture railways over which they run; concession companies for providing new railway infrastructure, over which China Rail and others may operate train services in return for track access fees. 2  9. The circumstances in China are not appropriate for a system in which track access arrangements are all separately and privately negotiated, with minimal regulation, (as for example in the predominantly privately-owned and freight dominated network in the United States). This is because: the railway network in China is legally a public asset and many of the services that use it, such as passenger transport, are considered public services. The Government of China therefore has both a custodial role and a direct public policy interest in the terms and conditions of network use that can only be pursued through a fair and transparent articulation of the rights and obligations of the parties that use it; the financial strength and negotiating power of the 14 existing regional railways is likely to greatly eclipse that of any new railway entity contemplating establishing itself within their current territory or wishing to use their tracks. This inequality needs to be counter- balanced by legal rights and agreement frameworks that require compliance by the regional railways; MOR's policy objective is to encourage new sources of investment financing into the railway sector: investors will want to know the `rules of the game' in advance and not face the high risk and uncertainty of what they may be able to negotiate once they enter the industry. 10. This implies that whatever scope of track access is selected by China's rail policy makers (that is, whether access rights are narrowly or broadly specified) China should adopt a harmonized and regulated system of track access, based on defined procedures, standard forms of documentation, developed tariff structures and independent regulatory safeguards. The Report identifies eight key elements of a track access regime: laws and regulations setting out scope and conditions of access rights; a fair and economically rationally basis for establishing track access charges; a framework for licensing rail entities; a system of safety accreditation for rail entities, as a condition of licensing; a procedure for applying for capacity and incorporation into working timetables; standard documentation for track access agreement (and agreements covering other facilities such as shunting yards, stations, depots etc); rules for sorting out priorities between trains when traffic is disrupted; institutions and procedures for regulatory review and enforcement of rules. 11. The case studies from three continents give confidence that these track access `tools' have been successfully developed elsewhere and such experience may be useful in developing a China- specific approach. 12. The regulations covering access would need to be applied neutrally, irrespective of the ownership of any particular railway entity (whether Government, provincial government, city authority, private sector or joint-venture). They would also need to be transparent, so that external investors would be aware of their rights and obligations prior to industry entry. Similarly, there needs to be a strong independent regulatory role to oversee these rules and to ensure equal treatment of all parties. MOR is currently custodian of the 14 regional rail administrations, and therefore accountable for their economic results. It would have a conflict of interest in performing this role. 3  Vehicle Interchange 13. Section 3 of the Report describes approaches to rolllingstock interchange in the countries examined. Vehicles can and often are interchanged between neighboring railways by mutual arrangement. But interchange in larger multi-operator railway environments, such as in Europe, North America or Australia, is almost always controlled by an Association of operators. The Association sets minimum technical standards for interchanged rollingstock and it develops and maintains the Association's technical and commercial rules. 14. The Report notes that North American and Australian institutional frameworks for vehicle interchange are similar. In North America the key role is performed by the Association of American Railroads (AAR). The major Mexican and Canadian Railways are also members. AAR's main role is the setting of interchange standards relating to operations, safety, track and infrastructure, rolling stock and data systems. It also has a Quality Assurance certification role. It is responsible for all aspects of interline freight operation and accounting. In Australia the organization `Railways of Australia' performed some of these roles though it has now been superseded by the Australian Railway Association. 15. In Europe, the main industry association, the International Union of Railways (UIC), is the dominant standards setter. But it has a weaker role in managing the interfaces than AAR in North America. This is due to a combination of the international nature of European operations (vehicle interchange is mainly at international borders), the growing influence of European Union legislation on arrangements in member states, and the dominant role of Government-owned rail operators. European arrangements are underpinned or influenced by many international conventions and (in its member states) by European Union directives. 16. The Report highlights a clear difference in approach between North America, with its single industry association setting clear and unambiguous standards, compared to Europe with several standard-setting authorities. There is no doubt that the former is simpler, more flexible and adaptable to the market, and has provided better incentives for efficient use and development of the wagon fleet. 17. The situation in China is not complicated by the multiplicity of national jurisdictions (plus the supra-national jurisdiction of the European Union) as occurs in Europe. It is possible to envisage the creation of a body, which for convenience is referred to as an Association of Chinese Railways (ACR), which should bring together all railway entities that may wish to interchange rollingstock, or which are obliged to exchange rollingstock by law or regulation in the interests of customers. Such an Association would determine: which vehicles are eligible for interchange; the operational procedures to accept and maintain `guest' vehicles; and the way that revenue division is to be organized (dealt with in Section 4). To fulfill these functions it would be necessary for the Association to procure or develop (probably through a special-purpose subsidiary company) the information and communications technology necessary for efficient implementation 18. Vehicle eligibility requires a set of standards that define which wagons will be acceptable for interchange and the condition that they should be in to be accepted for interchange. This is conceptually different to what is allowed for operation by the national MOR vehicle design or condition standards. Standards for local operation on industrial railways and local railways 4  (which are conceptually equivalent to the North American short lines) may not need to be as high as those for mainline running on the main-line network. 19. Vehicles that are to be interchanged then need to be identified to show that they are eligible for interchange (e.g. by having a mark or identifier painted on their side). At the same time, a master list of vehicles eligible for interchange will need to be created. This will need to cover not only the vehicles belonging to the 14 regional administrations of MOR but also those belonging to the other operators. Such file would be held centrally by the Association but would need to be accessible by computer by all the member railways. 20. Operational procedures begin with a check that the vehicles arriving are eligible for interchange; this can be done by either physically checking the vehicle identification or by computerized checking of the train consist. The next step is to check that the vehicle is in acceptable physical condition. This can be done at an agreed location at, or near, the handover point. The AAR protocol described in the Report appears sufficient and could be simplified for, say, a regular consist of passenger vehicles moving over the same route. Any vehicle that is identified as having defects, either at handover or subsequently en-route, will require assessment as to whether it is safe to complete its journey. Vehicles that require immediate maintenance will then need to be repaired; a schedule of agreed charges will need to be developed so that the cost can be recovered without dispute. Such a schedule will also need to be maintained and developed by ACR. 21. Vehicle locations will also need to be reported so that charging for vehicles can be carried out automatically and efficiently. The major interchanging railways will thus need computerized vehicle location databases and on-line links to a central database administered by ACR. 22. Payments mechanisms in other regions suggest that standardized charging systems have some inherent weaknesses in a more commercial environment. Systems in which each railway entity sets a price on its wagons will better reflect the value of the wagon to it and the cost it incurs when it is being used. The Report also emphasizes the need for a settlements mechanism to handle both interchange charges and any rollingstock maintenance charges incurred by the `host' railway entity. In China's unitary railway market, with its good wagon tracking systems, there appears to be a clear case for a single Association which calculates the charges from a nationwide database (as in North America) and then distributes the settlements for checking and payment. Revenue Division 23. Section 4 of the Report deals with revenue sharing and settlement. Conventional practice in passenger operations is for the allocation of passenger fare revenue to the railway companies which should receive them to be made by the railway company that sells the ticket. By contrast, freight revenue is often allocated by the destination railway as total charges may not be known until delivery. The freight revenue allocation process involves an analysis of the charges on the consignment note. In most cases centralised charging makes these allocations automatically on the basis of splits agreed when the rates were negotiated between the railway entities concerned. 24. In order to do this efficiently, a clearing house is normally established