June 01, 2015

Railway investors need nerves of steel

Written by 

THIS issue of IRJ contains a number of stories which highlight some of the challenges associated with investing in the construction of new lines or increasing
the capacity of existing ones.

Whether it is shifts in government policy or spending priorities, changes in demand, or fluctuations in commodity prices, all too often railways are not masters of their own destiny. Not all of these issues have remedies which railways can deploy, but there are some steps which can be taken to mitigate their effects.

 

One of the problems facing railways is that the long-term nature of railway projects does not sit well with the short-term vagaries of the market or politics. It is possible to slow down the pace of construction, as is happening in Brazil, and projects can be postponed, but investors need to be aware that it can take time to restart a project or even accelerate the pace of work, especially if engineers and construction workers have been laid off.

But some of the problems causing Brazil's railway expansion programme to falter are self-inflicted as they are a direct result of a change in government policy over concessioning new freight lines. The government's desire to break up the big railfreight monopolies and encourage competition between operators has clearly failed as there was little appetite for it.

Thankfully, the government has recognised this and will probably revert to the previous method of granting long concessions to a single operator on each line. The government is also having to find new ways to fund railways projects.

Spain is a good example of a country which has decided to press ahead with completing its high-speed rail network - already the largest in Europe - even though the economy has been in crisis since the property crash in 2008. Thankfully the economy is growing again and unemployment has started to fall. The Spanish government appears to recognise that major construction projects are an economic stimulus in themselves and completing the network will be a major benefit to Spain in helping to rebuild its economy.

There is another factor which needs to be recognised. The Spanish conventional rail network suffers from low line speeds and relatively long distances between cities which makes rail unattractive and uncompetitive with other modes. Spain therefore has little choice but to build new lines if wants to have a viable national rail network. If you are building new railways in the 21st century this means constructing them to the latest standards, which means high-speed for passenger and a relatively high axleload for freight.

This is the driver behind Turkey's ambitious new line construction plans. Indeed, an increasing number of governments around the world now recognise the value of having a modern railway as part of the national transport network. Ethiopia is a good example as we report this month. This land-locked African country, which only had one line linking the capital with neighbouring Djibouti on the Gulf of Aden, is now building a national system.

Nevertheless, there are still some politicians who are wedded to a 1960s outlook where the car is king and rail is of little relevance. Australia's prime minister,
Mr Tony Abbott, certainly appears to have this mindset.

While the federal government's 2015-16 budget will see increases in both road and rail infrastructure spending, the rate of increase for road is much greater than for rail. Although the federal government remains committed to rail projects already underway, it has failed to pledge any additional money. Of particular concern is the Inland Rail scheme which will create a new north-south corridor for freight between Queensland and Victoria bypassing the congested Sydney area. Here the government has re-pledged $A 300m ($US 240m) of existing funds and says it will commit money in future budgets without making any specific promises.

The situation for urban rail in Australia is dire, as the new federal budget will see funding slashed from $A 515m in 2014-15 to just $A 17m by 2018-19. To make matters worse, savings from a rail project in Sydney are being switched to road schemes. Perversely, the Abbot government says it will maintain funds set aside for a major road project in Melbourne in case the Victorian government decides to reverse its decision to cancel the project. This seems unlikely as Victoria plans to hand back the money it has already received from the federal government for the scheme.

Policies like these will simply fuel Australian's love affair with the car and lead to more congestion and pollution in the country's major cities. The federal government's standpoint on transport also flies in the face of experience on the ground. A case in point is the Gold Coast light rail line in Queensland which opened in July 2014 and carried its five-millionth passenger on May 6. The line is carrying an average of 17,800 trips a day, exceeding expectations.

This is certainly a subject worth debating at this month's UITP public transport congress in Milan. The UITP has had considerable success with its campaign to double the use of public transport, and the first results will be announced in Milan, but clearly there is a lot more work to do convince decision makers of the benefits of investing in rail.

David Briginshaw

David Briginshaw joined IRJ in 1982 as associate editor, and was appointed editor-in-chief in 2001. He has travelled the world extensively interviewing many of the CEOs and senior managers of the world's railways and transit systems which has given him an in-depth knowledge of the global railway industry.

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