China Transport Topics No.02 December 2011 66216 Governance and structure of the railway industry: three pillars Paul Amos and Richard Bullock World Bank Office, Beijing In China and in many other countries there is a compelling public interest in the railway industry. How do different countries try to pursue the public interest in railways? This paper finds common elements of governance and institutional structure in eight countries whose diverse railway industries collectively carry about two-thirds of all the railway traffic in the world outside China: Australia, Brazil, Canada, France, Germany, Japan, Russia and the USA. These common elements are: the existence of a Ministry of Transport with oversight and multi-modal transport policy responsibility; separation of government policy and regulatory functions from the commercial management of railway services; overwhelming preference for company structures (whether private or state-owned) to deliver railway services; multiple service providers; and divisional or institutional separation of freight from passenger services. China’s railway industry governance structure is not based on these elements. But changes in transport competition and in the scale of China’s railway industry, together with the desirability of a more coordinated national transport system, suggest that now there may be useful lessons for China from the international experience. The paper speculates on three common policy ‘pillars’ upon which China may wish to base alternatives for consideration. THE PUBLIC INTEREST IN RAILWAYS Germany, France, Japan, Russia, and the USA. Railways contribute both to economic growth These countries carry about two-thirds of the and social well-being. Rail freight services usually world’s total railway traffic outside China1. do the land-based ‘heavy lifting’ of national economies, giving producers in key industries Germany, France, Japan and Russia have, like access to high-capacity transport at a cost lower China, mixed-use railways. By contrast, than road transport. Passenger railways also Australia, Brazil, Canada and the USA have perform valuable economic and social roles in limited passenger train activity outside the cities dense inter-city corridors, and as part of well- and are predominantly freight carrying railways. integrated regional passenger transport systems The eight countries therefore have very diverse in densely populated areas. railway industries in terms of their railway markets, train operations, and ownership These roles could often only be transferred to characteristics. road transport at a higher cost in road infrastructure, traffic congestion, vehicle PUBLIC INTERESTS IN RAILWAY TRANSPORT emissions and traffic accidents. What then are the public interests in railway transport in these countries? Naturally, their In countries which have suitable corridors and policy-making bodies prioritize objectives markets to sustain it, the railway industry is a differently and use somewhat different matter of strong public interest. Public interests vocabularies. Some countries have explicit are what underpin public policies. This paper national transport strategies which formally summarizes public interests and public policies articulate government objectives across all for railways in eight geographically spread case- 1 study countries which have large railway Measured by the sum of passenger-km and tonne- industries, namely Australia, Brazil, Canada, km, International Union of Railways Statistics, 2010. modes; others are recorded on ministerial role of railway services provider. Three factors websites or in ministerial statements. To seem to have been influential in adopting this paraphrase, the common denominators of public principle. interest seem to be that railways should be efficient, market-responsive (provide good First, the concern that, without separation, service to their customers), publicly affordable policy-makers who are also accountable for the (not imposing an unsustainable burden on the commercial results of a services provider will be public purse), safe, and environmentally conflicted by public interest policies that may acceptable. make it harder to achieve their targets (such as reducing barriers to entry, or implementing Despite their very different railway industries, consumer protections). Second, there are big the eight countries pursue public interests in differences in the professional and institutional railway transport through public governance and skills necessary for formulating and analyzing institutional frameworks which have some public interests and public policies, as compared remarkably similar characteristics. to running a commercial enterprise. Third, separation allows more efficient forms of UNITARY TRANSPORT MINISTRY organization for the service delivery entities; this All eight countries have the equivalent of a brings us to the fourth common characteristic. transport ministry 2 at the central government level whose role is to develop and administer CORPORATE FORM policies to promote public interests across all Irrespective of ownership and structure, all but a transport modes (or at least all land-transport handful of several hundreds of railway service modes).. They seek to establish integrated providers in the eight countries are corporations national transport policies that transcend or or subsidiary companies of larger corporations. augment individual modal interests and they This is true when they are big or small, when provide oversight of the specific modal they are state-owned or privately-owned, when departments responsible for implementation. they are constituted under companies law or by special state-owned enterprise legislation, when TRANSPORT COORDINATION they receive no budgetary support or a lot of Governments of the eight countries are all budgetary support, and irrespective of whether seeking to attain transport systems that are they are freight, passenger or mixed railway more integrated than have typically been companies. delivered either by traditional public administration of individual transport modes or The main exception is in France where the by market forces. Integration is usually national operator SNCF is not a corporation but a interpreted as a ‘level playing field’ for ‘public sector commercial group’ operating competition between modes, a rational under its own legislation. Nevertheless it is allocation of public investment between strongly segmented, with separate management different modes, or better interchange facilities and accounting for each of five distinct divisions: between modes, or all three of these. Infrastructure; Urban/Regional passenger services; Long-distance and high–speed SEPARATION OF POLICY FROM DELIVERY passenger services; Freight and logistics services; All eight countries adopt the principle that public and Train station management and policy-making and regulatory oversight roles in development. the railway industry should be separate from the It is not surprising that corporatized entities are 2 In some cases the Ministry or Department includes favoured. In nearly all production and service other infrastructure sectors. industries, companies have proven historically to 2 be the most successful formula so far devised by passenger railway sector. Japan also has a main modern economies for running large commercial private freight train operating company using businesses in competitive markets, even when track access rights plus several smaller branch the companies remain owned by the state. line freight operators. Nevertheless, a state-owned corporation is not a guarantee of good management. Evidence The number and configuration of companies in suggests that state-owned corporations should each country has been heavily influenced by be reinforced with strong corporate governance: history, by geography, and most particularly by independent and qualified boards of directors; the nature and dispersal of their transport merit-based selection of managers; management markets (bigger and more diverse transport accountability for targets; management markets may, in principle, support more structures geared to markets and focused on companies). But policy choices have also been core functions; greater pricing freedom; important. In Australia, Canada, Germany, Russia effective accounting and auditing standards; and and the USA, active policy decisions favoring others 3 . Both privately and state-owned competition in the rail freight market underpin corporations in the eight countries demonstrate the existence of multiple rail freight operators. In many such features. the long-distance passenger rail sector, direct competition between railway companies has not MULTIPLE SERVICE DELIVERY PROVIDERS been prevalent in any of the countries. But some As noted above there are many hundreds of have separated regional passenger operations as railway transport service providers in the eight a matter of policy (Germany, Japan and Russia). countries. They include over 800 different entities providing rail freight services and over SEPARATION OF FREIGHT FROM PASSENGERS 130 providing rail passenger services. (These Another common characteristic is the separation numbers exclude purely metro rail systems.) between passenger rail and freight rail. In Even where there is a major public corporation Australia, Brazil, Canada, Japan and the United there are usually numerous specialist companies States, nearly all freight and passenger service is as well. offered by wholly separate companies. In Germany, Russia and France, freight and The largest number of service providers is in the passenger services are offered as separate USA which has 7 Class 1 railways (including subsidiaries (or in the case of France, separate Canadian rail companies operating under divisions) of a common holding group. negotiated track access agreements), 23 regional operators, 339 local (or short-line) operators and It was not always so; in all eight countries, the 194 switching and terminal operators. biggest national railway companies once jointly managed both passenger and freight transport The most diverse industry in the predominantly business. Because freight trains and passenger passenger railway countries is arguably Japan, trains run on the same tracks, railways where there are 6 main regionally-based service historically treated them as different parts of the providers (3 private and 3 state-owned) which same business. They saw this business as being succeeded Japanese National Railways, plus 21 to run trains. But mixed freight and passenger large and medium-sized mainly private (and a management became increasingly ineffective in few municipally) owned smaller companies a more competitive environment. The business operating mainly in the suburban or regional of a railway these days is to serve transport markets better than other transport suppliers. 3 A checklist of good practice is captured in the OECD Market needs differ for passenger and freight Guidelines on Corporate Governance of State-owned services even if their trains run on the same 3 Enterprises, 2005 . 3 tracks: different customers; different service especially in rail freight. needs; and different social roles. CHINA’S RAILWAYS Mixed structures also make it harder to separate The organization and structure of China’s railway the profitability of each market so making it industry is very different from the other eight harder to monitor performance. And when profit countries. This is despite the fact that the public in a more successful sector is automatically interests in transport are much the same in transferred to the lagging sector through a joint China as in case-study countries. China’s rail set of accounts, this dampens the incentive of sector governance and organisation, embodied the successful sector to keep on improving and in Article 3 of the 1991 Railway Law, differs from dilutes the need for the lagging sector to try the other countries: harder.  Ministry structures: in China, a Ministry of COMMON FEATURES: THE THREE PILLARS Railways (MOR) is the policy-making body It is evident then that the railway governance for railway transport, and not a Ministry of and industry structures contain three common Transport. policy principles, even though they differ  Transport co-ordination: China’s Ministry of substantially in most other respects. The figure Transport has no policy mandate for co- below illustrates these three ‘pillars’. ordinating railways with other modes.  Separation of policy from delivery: the All eight countries have tried to join-up MOR directly administers and is financially governance of the transport sector, or at least responsible for railway service delivery units, the land-transport sector, in a single ministry. the eighteen regional rail authorities (RRAs). All have separated the roles of policy-making  Corporate structure of service providers: and transport services delivery (in all modes, the RRA’s are sub-divisions of a ministry, not including railways). And all have seen a need to state-owned companies. independently regulate the industry (whether by  Multiple service delivery providers: despite ministry or agency). Naturally railway supply the huge size of China, MOR is the markets differ but they are all dominated by overwhelmingly dominant transport service entities that are corporations, and all have many provider throughout the mainland4. specialist suppliers and some competition,  Separation of freight and passenger service: MOR’s passenger and freight services are not separate entities; each of the eighteen 1. Joined-up 2.Separated 3.Regulated RRA’s operates both passenger and freight governance roles markets services through the same management structure and a shared resource base. Railway sector Economic and China’s model is therefore exceptional. It does safety policy-making regulation not have joined-up transport governance, it does Integrated not separate the roles of policy-making and transport Use of company governance in a Railway 4 structures Others include the Daqin and Shuohuang coal lines, unitary ministry services delivery and Guangshen Railway but most other train Pluralism, operators are confined to relatively minor industrial Specialization + and local lines In practice, China Rail carries around some Competition 99 percent of passenger-kms and 94 percent of freight tonne-km (2009 figures) 4 service delivery and it does not have the features km of some of the most modern and well-used of a regulated market but of an administered railway in the world, located in one of the industry. world’s biggest countries. There is no reason to suppose that one company needs to run it all or IS ANY OF THIS RELEVANT TO CHINA? one solution fits all parts of the country. To give This is a question for China to decide, but it may a hypothetical illustration of this point, if China be helpful to offer some personal observations Rail actually consisted of five regional companies as to reasons why China might wish to consider of roughly equal traffic task, each one would still alternatives. The reason cannot be that the appear on a list of the ten busiest railway current framework has not worked. In 1949, companies in the world5. And each would be big China had only 22,000 km of poorly maintained enough to create an internal structure with and war-damaged railway line, less than 1,000 freight and passenger divisions that would km were double-tracked and none was themselves be of world-class scale. electrified. Since then, MOR has transformed the railway sector into a vital element of China’s Third, since 1991 there has been massive national transport system and a key contributor investment in transport infrastructure in all to China’s extraordinary record of economic modes of transport but programs have been growth. Today, on 91,000 km of generally high- assembled from the individual plans of different quality network, China has by traffic volume the modal administrations, with little co-ordination world’s second busiest freight railway and and integration. If, in the future, China is to busiest passenger railway. Train services are run optimize the use of its existing infrastructure, with discipline and efficiency. All this has been and to allocate future public investment achieved, in recent years at least, largely through between different networks efficiently it needs a self-funding with limited budgetary support. coordinated National Transport Strategy. This MOR’s central role in driving and coordinating has been done in most of the eight case-study network development in recent years has been countries. It has proven to be a complex and pivotal. demanding task even though they have multi- modal Ministries of Transport to do it. It seems The reason for considering change is therefore wholly unrealistic to expect it can happen at all if not due to any lack of past achievements but such a huge and important transport sector as more about adapting to changing circumstances. railways is quite separate from the rest of transport. The biggest and most important change is that of market competition. Since the 1991 Railway Law, If China were to adopt the ‘three pillars’, while highway transport, inland shipping and airline still retaining the central role of the state in services have all improved and expanded their railway policy and network ownership, it might infrastructure and services by leaps and bounds. look something like this: Railway mode-share has generally declined. In all the other modes, railways are competing not  A Ministry of Transport responsible for against government departments but against general transport oversight, multi-modal companies. Is it time to establish railway service transport policies, transport integration and providers on a similar basis? public resource allocation between modal networks; A second factor is that China’s railway network is 5 now more amenable to alternative solutions. The only larger ones would be the Indian Railways When it was a sparse, patchy system of 20,000 Board, the Russian Railways Corporation, Burlington km the structural opportunities were limited. It Northern (USA), and Union Pacific (USA). is now headed towards a 2020 target of 120,000 5  A National Railway Administration (NRA) railway debt) would need careful investigation within that Ministry of Transport; the NRA by China’s specialists in government and would be responsible for railway policy and institutes. The authors believe that such a policy (possibly through specialist agencies) re-evaluation at this time would be well technical and safety regulation for all worthwhile. railways in China (as in the 1991 Law), but without the ownership or service delivery *************** role; Paul Amos is a transport strategy and  A specialist national network strategy and management consultant and previously the development unit within the NRA, to co- World Bank’s Transport Advisor. ordinate institutions and joint-ventures involved the delivery of the Mid to Long- Richard Bullock is a transport consultant Range Network Development Plan; specialising in railway business planning,  A number of large regionally-based financial modelling and project evaluation. autonomous railway companies operating under a special state-owned enterprise law, The authors have been involved in management or under company law; the shares in each and technical studies relating to more than 80 company would be owned by a ministry railway entities in 52 countries. responsible for public enterprises or other suitable ministry which would appoint their This note is part of the China Transport Note boards of directors and they would typically Series to share experience about the have separate operating divisions or transformation of the Chinese transport sector. subsidiaries for freight and passenger service; For comments, please contact John Scales  A number of specialist or separately branded (jscales@worldbank.org) or Gerald Ollivier inter-regional services run either as joint- (gollivier@worldbank.org), from the Beijing venture companies of the adjacent regional World Bank Office. companies, and/or through mutual track access rights granted between the regional Any findings, interpretations and conclusions companies to be able to use a neighbour’s expressed herein are those of the authors and do tracks, and/or as new independent not necessarily reflect the views of the World companies operating with track access rights Bank. Neither the World Bank nor the authors for an access fee which the NRA could guarantee the accuracy of any data or other regulate6 . information contained in this document and  A number of smaller railways, including accept no responsibility whatsoever for any those classified as local, industrial and consequence of their use. branch railways under the 1991 Law; but they could also include coal and other resource railways. Adopting a new, more diversified structure cannot be undertaken lightly. The best solution must reflect actual transport markets. The implementation details (including the nature of corporate structures and the allocation of 6 Track access by third-party train operating companies occurs to a lesser or greater degree in all eight countries reviewed. 6