Policy, planning, and regulation play critical roles in the railway sector. Following are some of the key issues that arise from the interface between the public and private sectors in railway concessions.
In situations of vertical integration, where the railway operator owns the track, operates the track, and operates trains on the track, monopoly pricing can restrict access to private operators. This challenge can be managed through regulation, by requiring the incumbent to allow third party access at set rates. Not as easy as it sounds perhaps, but getting it right allows for significant growth of private sector participation, increased competition, and resulting efficiency gains.
Where a railway is being operated by a private operator, the terms for competing access will need to be specifically addressed in the concession or operating agreement. Clear requirements are critical—especially those that stipulate whether the operator is required to provide access to third parties, on what terms, and whether its own operations can take priority.
These challenges increase where there is cross-border potential (a particular issue for landlocked countries that need transit services to sea ports). Without appropriate arrangements between governments that determine the rules and costs of access for foreign operators, goods will need to be transferred from one country’s train to the other’s at drastically increased cost and reduced efficiency. This has been a challenge within the European Union, resulting in significant regulation that limits discrimination in cross-border access to railway track.
An obvious but critical point: government must define a railway’s end-use during the conceptualization of new railways or the expansion of an existing one. This definition will affect specifications, which are often difficult to change once the railway has been built. For example, if government wants the railway to carry passengers, the track, route and station specifications will need to reflect this. In contrast, if the track is to be used for heavy minerals, it will need to be constructed to manage the load.
In determining capacity, governments need to predict future need and specify in the contract how to manage increases in demand.
Planning for future traffic loads is particularly important in the case of minerals transportation. Often, a dedicated track laid by a mining company is not designed to allow for increased loads from other mines or for passenger transport. If the government has envisaged shared use, then it will need to specify this before the track is laid.
If connectivity with neighboring countries is necessary, then compatible gauge must be used. Other technical standards, such as signaling and safety, should also be considered.
Change in government policy risk
Railways are highly sensitive to changes in government policy. Concession contracts must include robust change of law provisions and compensation mechanisms for the private investor who suffers as a result of government actions and policies that affect traffic. Examples of this could include construction of a parallel road, a new subsidy for bus routes, or a reduction in taxes for truck freight.
Public sector obligations
Contracts must also assure investors that pre-agreed government obligations will be met on time. Timely provision of land, access roads, and connectivity to other transport modes will significantly impact the viability of railways. This is also achieved through a robust compensation mechanism and/or other remedies.
Given the monopolistic nature of public sector involvement in railways, and railways’ important place in a nation’s infrastructure, they tend to be heavily regulated. From an investor’s perspective, it is important that such regulation is fair, transparent, and predictable. Investors will look for assurances that regulatory risk is mitigated. In particular, investors prefer to see an independent regulator—or at least one that is shielded from government interference.