For Information
LegCo Panel on Transport
Overseas Experience in the Privatization of Railways
PURPOSE
At the meeting held on 28 July 1999, Members were briefed on six case studies of privatized railways overseas. As requested by Members, our transport consultant has now prepared the paper at the Annex on the impact of privatization on the railways concerned in respect of financial performance, quality of service, safety, government subsidies, fare regulation and employment. The paper is based on various statistics and academic studies available to the consultant.
OBSERVATION
2. Although the six countries in which the privatized railways are located have different socio-economic backgrounds, privatization has generally brought about:-
- improvement in the financial performance, quality of service and safety of the railways;
- a reduction in government subsidies for them; and
- enhancement in their productivity.
ADVICE SOUGHT
3. Members are requested to note the information presented in the paper.
Transport Bureau
October 1999
Annex
Overseas Experience in the Privatization of Railways
The six case studies are:-
| Railway/Country | Franchise Coverage | Franchise Period | Year of Privatization
|
|---|
| Buenos Aires Commuter Rail and Metro /Argentina
| The franchisees were granted the right to operate the railway only
Ownership of the railway infrastructure and rolling stock remains with the Government
| Passenger Service: 10 years with an option to extend
Freight Service: 30 years with an option to extend
| 1991-1995
|
| Japan National Railways /Japan
| Both the operating right and the ownership of the railway infrastructure and rolling stock were transferred to the franchisees
| Perpetual
| 1987 - on-going
|
| British Railway Network /UK
| 25 passenger service franchises were granted the right to operate different sections of the network
Ownership of rolling stock was transferred to three private companies
Ownership of railway infrastructure was transferred to a private company
| 7 years for passenger service franchises
| 1993-1995
|
| Canadian National /Canada
| Both the operating right and the ownership of the railway infrastructure and rolling stock were transferred to the franchisee
| Perpetual
| 1995
|
| New Zealand Railways /New Zealand
| Both the operating right and the ownership of the railway infrastructure and rolling stock were transferred to the franchisee
| Perpetual
| 1993
|
| Massachusetts Bay Transportation Authority Railway (MBTA) /US
| The franchisee was granted the right to operate the railway only
Ownership of the railway infrastructure and rolling stock remains with Government (MBTA)
| 3 years, extendable for another two years
| 1964 (the year when MBTA was formed)
|
FINANCIAL PERFORMANCE
2. Privatization has generally brought about substantial improvement in the financial performance of these once government-owned railways:-
| Country | Pre-privatization | Post Privatization
|
|---|
| Buenos Aires Commuter Rail and Metro /Argentina
| Loss at US$829 million (1992)
| Figure Not Available
|
| Japan National Railways /Japan
| Loss at ￥ 1,850 billion (1985)
| Profits of ￥ 471 billion (1990)
|
| British Railway Network /UK
| Loss at ￡108 million after receiving government cash grants of ￡704 million (1994) | Profits of ￡1,100 million after receiving government cash grants of ￡1,400 million (1998)
|
| Canadian National /Canada
| Operating Profit of Cdn $235 million (1994)
| Operating Profit of Cdn $569 million (1998)
|
| New Zealand Railways /New Zealand
| Profits of NZ $33 million (1993)
| Profits of NZ $82 million (1998)
|
| Massachusetts Bay Transportation Authority Railway /US
| Two-thirds of operating costs funded by government subsidies
| No change
|
QUALITY OF SERVICE
3. In general, the quality of service has improved with privatization in all the six cases:-
- Buenos Aires Commuter Rail and Metro / Argentina
The quality of service has improved dramatically. Prior to privatization, the railway operations were plagued by a lack of investment and maintenance. The new private operators have made significant investments to improve the systems. For commuter rail, punctuality rose from 77 percent in 1993 to 96 percent in 1997. The number of cancelled and delayed trains dropped by 80 percent during the same period. For metro service, the duration of interrupted service and the number of interruptions per car-km declined by 37 percent and 62 percent respectively between 1993 and 1998.
- Japan National Railways / Japan
According to a study by T. Yamamoto1, increase in passenger volume ranged from by 2% to 6% between 1987 and 1989, far exceeding the growth rates achieved before privatization. This can be taken as an indication of the success of the privatized rail companies in attracting patronage by improving their services.
- British Railway Network / UK
The UK privatization has not been a complete success. Out of the 77 route groups, 37 route groups registered decline in reliability and 45 route groups recorded decline in punctuality in 1998. Of the 24 passenger service operators which conducted customer satisfaction surveys, over 20% showed consistent decline in the level of customer satisfaction. There were also over 1 million complaints from railway passengers in 1998. Critics have attributed such woeful performance to the fragmentation of the companies and lack of adequate preparation for privatization.
- Canadian National / Canada
The performance of the railway services has generally improved since privatization. Canadian National has undertaken different measures to improve its service quality and customer satisfaction. For example, the service redesign plan implemented since September 1998 has reduced the average delivery time by 24 hours.
- New Zealand Railways / New Zealand
Freight car loading time has reduced by almost 40 percent.
- Massachusetts Bay Transportation Authority Railway / US
The stipulation of minimum performance standards required of the franchisee has made it easier for the regulator to monitor the quality of the service for the purpose of ensuring that passengers' demands are met.
SAFETY PERFORMANCE
4. In all the overseas cases, with the exception of Argentina, the railway infrastructures were generally well maintained and safety was not a matter of concern prior to privatization. There is evidence that in some cases safety standards have improved after privatisation:-
- Buenos Aires Commuter Rail and Metro / Argentina
Higher investment, on technology in particular, and better maintenance have led to improved safety.
- Japan National Railways / Japan
According to the study by T. Yamamoto1, the number of railway accidents, especially those at crossing points which account for 90% of all accidents, has decreased since privatization.
- British Railway Network / UK
There is no evidence to prove that safety has improved or deteriorated since privatization. But the commuting public are worried about safety problems arising from the breaking up of the operation into several streams, each responsible for different aspects of the operation. When a safety problem arises, the different operators will tend to blame one another.
- Canadian National / Canada
- Canadian National remains one of the railroads in North America with the lowest ratio of train accidents per train-mile.
- New Zealand Railways / New Zealand
No concrete evidence to show if safety has changed since privatization.
- Massachusetts Bay Transportation Authority Railway / US
No concrete evidence to show if safety has changed since privatization.
SUBSIDIES
5. Generally, privatization is accompanied by a significant reduction in government subsidies to the privatized railways, with the notable exception of the UK case:
| Country | Amount of Subsidy Before Privatization | Amount of Subsidy After Privatization
|
|---|
| Buenos Aires Commuter Rail and Metro /Argentina
| US$ 829 million (1992)
| Under US$ 200 million (1995)
|
| Japan National Railways/Japan
| ￥ 600 billion (1985)
| ￥ 157 billion (1990)
|
| British Railway Network/UK
| ￡704 million (1994)
| ￡1,400 million (1998)
|
| Canadian National /Canada
| No subsidies
| No change
|
| New Zealand Railways /New Zealand
| For urban passenger services, local governments paid subsidies to cover the differences between the operating costs and fare revenue
| No change
|
| Massachusetts Bay Transportation Authority Railway /US
| Approximately two-thirds of operating budget funded by subsidies
| No change
|
FARE REGULATION
6. Generally, privatization is accompanied by liberalization of fare and other economic regulations:
| Country | Fare-setting Body & Fare Determination Mechanism | Legislature's Involvement
|
|---|
| Buenos Aires Commuter Rail and Metro /Argentina
| Fares are set by negotiations between franchisees and the Secretary of Transport.
Increases are generally capped at inflation, but there is a mechanism to allow increases in excess of inflation if service quality improves.
Secretary of Transport approves fare increases based on service performance of the franchisees.
| Approval by legislature is not required.
|
| Japan National Railways /Japan
| Prior to privatization, fare increases were the object of political maneuvering during Diet deliberations.
After privatization, the Ministry of Transport approves fare increases. For discounted fares, operators are required to give written notice only.
| Approval by legislature is not required.
|
| British Railway Network /UK
| The Franchising Director, an independent regulatory agency, regulates fares.
Fare increases are governed by the franchise agreement to ensure that the fare levels are reasonable.
In determining whether fares are reasonable, the Franchising Director applies the following two objectives:
a) passengers pay the right amount for service provided; and
b) the profit of the regulated companies is not affected by tightly constrained fare levels.
Fare increases are capped at inflation for the first 3 years and inflation less 1% for the following four years.
Franchisees are allowed to adjust fares for different classes of services so long as the average fare level remains the same.
| Approval by legislature is not required.
|
| Canadian National /Canada
| Regulation of freight rates relies principally on the competition between the two major railway companies.
| Approval by legislature is not required.
|
| New Zealand Railways /New Zealand
| Fare levels are negotiated between local governments and New Zealand Railways.
| Approval by legislature is not required.
|
| Massachusetts Bay Transportation Authority Railway /US
| Fares are set by the Board of Directors, who are appointed by the local authorities which provide subsidies to MBTA.
| Approval by legislature is not required.
|
IMPACT ON EMPLOYMENT
7. Privatization of railways has brought substantial enhancement in productivity to the formerly government-owned railways:
| Country | Number of Employees Before Privatization
| Number of Employees After Privatization
|
|---|
| Buenos Aires Commuter Rail and Metro /Argentina
| 12,600 (1993)
| 9,470 (1997)
(-25%)
|
| Japan National Railways /Japan
| 200,000 (1987)
| 185,000 (1997)
(-7.5%)
|
| British Railway Network /UK
| 128,000 (1994)
| 67,000 (1997)
(-48%)
|
| Canadian National /Canada
| 29,884 (1994)
| 21,514 (1998)
(-28%)
|
| New Zealand Railways /New Zealand
| 5,648 (1992)
| 4,698 (1998)
(-17%)
|
| Massachusetts Bay Transportation Authority Railway /US
| Impact of commercialization is not readily available as significant service expansions have clouded the impact of reduction in employment.
|
- End -
Mercer Management Consulting
October 1999
1 [The Political Economy of Privatization (London: Rontledge, 1993).]
