Innovative financing needed for rolling stock: major investment in rolling stock is needed if the failure of some central and eastern European railways is to be avoided

International Railway Journal, Dec, 2005

ABOUT 10 billion [euro] is needed for the renewal and modernisation of rolling stock in central and eastern European countries (CEEC) if the railways of those countries are not to grind to a halt by 2012. This stark picture has been painted by the Community of European Railways and Infrastructure Companies (CER), which also claims that almost the entire rolling stock base in CEECs is "virtually life-expired in technical terms".

The CER's special support member for CEECs, Mr Ad Toet, told the Central and Eastern European Rail Conference 2005, organised by Terrapinn in Budapest in September, that CEECs have insufficient financial strength or inadequate credit ratings to attract financing for rolling stock investments.

This is largely due to an historic burden of under-investment and also the prevailing practice of cross-subsidisation between freight and passenger operations, which undermines the competitive position of rail freight and financial stability in the railways of many of the new European Union (EU) member states.

While arguing that state support for rolling stock investment was needed in some form or another, Toet says there is also scope for attracting private sector funding through asset-secured finance schemes, or on the basis of sound Public Service Contracts.

The EU is developing a scheme to support rolling stock investment in new member states, based on contributing to the purchase of freight and passenger locomotives as long as the investments support interoperability or generate environmental benefits. Substantial capital grants are also foreseen for passenger rolling stock.

According to Toet, CEEC railways have only 290 locomotives between them that are less than 10 years old; 1912 aged between 10 and 20 years; and 10,262 that are 20 years or older. The situation is marginally better for emus and dmus with 233 less than 10 years old; 314 between 10 and 20 years; and 2958 that are 20 years or older. Equivalent figures for locomotive-hauled passenger coaches are 1219, 3829, and 8253; and for freight wagons, 4442, 74,664, and 165,401.

"If the investments planned do not take place, only rolling stock that today is less than 20 years old will still be in service in 2012. This means that traction units with an average age above 25 years would in 2012 have to perform on average 305,297km each year. This compares with 88,132km as the fleet average in the 15 western European member states of the EU," Toet said.

CEECs would need 740 new locomotives, 734 new emus/dmus, and 2017 new passenger coaches plus 2334 modernised locomotives, 1782 modernised emus/dmus, and 2532 modernised coaches to solve the problem. The total cost would be up to 10.6 billion [euro] including between 2 billion [euro] and 2.7 billion [euro] for new locomotives, and between 1.4 billion [euro] and 2 billion [euro] for modernised locomotives; 2.1 billion [euro] for new and 0.9 billion [euro] for modernised emus and dmus; and 2.2 billion [euro] for new and 0.7 billion [euro] for modernised coaches.

The CER's position on financing is that rolling stock cannot be funded by railways independently, neither on the strength of their balance sheets nor on expected future (free) cashflow or profitability. CER adds: "The rail operators in CEEC, which carry the historic burden of under-investment, need state/EU support for their investments in rolling stock with the objective of giving them, in the liberalised operating market, a credit standing which is acceptable to financial institutions."

Calling for innovative financing concepts for different categories of rolling stock, Toet says that multi-annual Public Service Contracts could form the basis for investments and private sector funding. Asset-secured financing (lease pools) would reduce the level of state aid required, and increase the leverage of public-sector funds.

Specialised lease pools could be set up for specific conditions, risk profiles, ownership structures, and public sector support to match specific categories of rolling stock or regional conditions.

Toet suggests that the purpose of EU investment support is to drive structural change in the railways of new member states in order to make them more competitive in the enlarged EU. The budget and duration would be finite and would offer only transitional support.

A condition of receipt of EU funding would be the implementation of EU legislation, for example, a valid and financially stable Public Service Contract in the case of rolling stock for regional passenger services.

Grants would be made to the owner of the rolling stock in support of an investment and as a proportion of the total investment. The owner would have to agree to a "lock-in" period, for example two-thirds of the depreciation period of the investment.

Eligibility for investment support for freight would be a subsidy on the extra costs of new locomotives in relation to interoperability; and, for passenger, the modernisation of rolling stock (possibly on a sale-and-lease-back basis), and new rolling stock based on the lock-in agreement.