Railways need reimbursement agreements (column)

The Track Access Charges (TACs) are one of the most significant financial sources for infrastructure managers. However, they are not applicable to recovering the infrastructure investments costs. But, in some cases, they can be a basis for reimbursement agreements. Péter Rónai from the Hungarian State Railways provides some considerations about this issue.

The recast of the Fourth railway package (Recast) shows us an ideal world about the availability, operation and development of the railway network. According to the Recast, infrastructure managers (IMs) have a business plan that “shall be designed to ensure optimal and efficient use, provision and development on the infrastructure while ensuring financial balance and providing means for these objectives to be achieved.”

And from where does the money come to complete this task? It is also solved: “Member States shall ensure that, under normal business conditions and over a reasonable period which shall not exceed a period of five years, the profit and loss account of an infrastructure manager shall at least balance income from infrastructure charges, surpluses from other commercial activities, non-refundable income from private sources and State funding, on the one hand, including advance payments from the State, where appropriate, and infrastructure expenditure, on the other hand.”

Demand for investments

Having a solid financial background for the IMs, and fulfilling the needs of the market does not necessarily mean, that each infrastructure part, every equipment is kept in A-class condition. The Recast also requires an efficient attitude from the existing network: “Railway infrastructure is a natural monopoly, therefore it is necessary to provide infrastructure managers with incentives to reduce costs and to manage their infrastructure efficiently”.

Interestingly, if both the state and the IM fulfil its duties, there are still some cases, where local investment or development need arises. Even in the case of the best-financed IMs, there are infrastructure parts that were not in use in the past. There was a need for them for a while in the railway history, but 10-20-30 years before today this need vanished, and the infrastructure is left there. To keep a non-used infrastructure part in good condition is a waste of resources; therefore, IMs concentrate their efforts to the parts that are in continuous use. If the outdated, but an available infrastructure that is still part of the open-access railway network is discovered by new business opportunities, a re-adjusted usage may be necessary. In such cases licenses are expired, technical conditions are not appropriate, and sometimes the old infrastructure equipment does not correspond with the standards of today. All this means a necessity for investments for the benefits of one or only a few customers.

In some cases, additional volumes appear. This could be new freight on that station (e.g. where no containers were loaded previously, a container-handling company wants to settle), or extension in terms of availability (area of loading yards, storage tracks) or accessibility (shunting or loading during the night as well instead of daytime-only operation). In all these three cases, the potential (relatively minor) investment to the existing infrastructure or service facilities could attract more freight to the tracks.

Resources for investments

One could think that these are relatively small investments, so they should fit into the financial potential of the IMs or the multiannual contracts. Still, as the practice shows, there are important reasons, why a reimbursement agreement may help the situation.

  1. Cost items of the IMs (including maintenance, renewal, investments) are in many cases planned on the base-year principle: last (or last but one) year’s cost are modified by a set of multiplicators (like inflation ratio, GDP or exchange rate changes), and the actual year’s expenditures are calculated on this basis. If the infrastructure part was not in use, and practically no sources were submitted to it in the past years, this results in a zero-base for the actual year: in the planning procedure, there is simply no resource available in the actual year, because nothing was spent on that part in the last (base) years. This means, that investing in infrastructure parts, where there were no base costs in the past requires a withdrawal of sources from other parts that do have a base value. This problem arises both in existing but not used, and non-existing (new) investments.
  2. Uncertainty arises: in the case of every investment, a critical point is a real expedience in the future. For the IM there is a limited amount of information available that is delivered by the railway undertaking (RU) which sometimes also does not have more info. Considering the general uncertainties of the market, it is a risk, that the investment is done, and later not utilised by losing the assignment.

A reimbursement can help to minimise the risk on the side of the IM: if the whole logistic chain is involved in the business also for the pay-off of the rail infrastructure investment, there is a distribution of risks. If the development is done from the capital of the freight forwarders, and the IM is only obliged to reimburse it afterwards (from the income of the future), there is a minimised risk for the IM.

* * *

This means, that from the side of the business it seems rational to initiate infrastructure reimbursement agreements. And it happens as well in the real life: practice shows, that in cases where the IM is not really willing to make the investment (due to lack of capital, other duties or uncertainties of the business), sometimes freight forwarders, sometimes RUs initiate such a construction. Should IMs accept this? Under what conditions? The answers to these questions are the topic for the next columns.

Dr Péter Rónai,
Head of Directorate for Infrastructure Services,
MÁV Magyar Államvasutak Zrt. (Hungarian State Railways)

Are you interested to know more about reimbursement agreements and investments in rail infrastructure? Péter Rónai will deliver a presentation at the Track Access Charges Summit 2020 to take place on 21-22 April in Riga, Latvia. The programme is available on the event website.

Author: Mykola Zasiadko

Mykola Zasiadko is editor of online trade magazines RailTech.com and RailFreight.com.

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