rolling stock

"National and strategic assets." That’s how Howard Rosen, chairman of the Rail Working Group, describes the legacy of state-owned railways. "In the 20th century it was the most effective way of getting your troops to the battlefront. Historically, all over Europe they were very much national systems that were, in a way, strategically protecting that territory."

This legacy has, by and large, prevented the liberalisation of the market. The joint report, Private Financing of Rolling Stock: Market Analysis for Western and Eastern Europe, is an attempt to shine a light on just how centralised the situation is.

The study analysed 370 rolling stock procurement projects in 19 European countries from 2011-2013 costing on average €13.3bn per annum. It found that €11.645bn was directly or indirectly financed by governments, a figure that did not surprise Andreas Schwilling, a partner in the Transportation Competence Centre at Roland Berger.

"I had a feeling that private financing played a minor role in most European countries," he says. "It was a bottom-up project analysis."

West to East: the state of play

Schwilling and his colleagues looked at 84 projects in Germany, 74 in Poland, 39 in France, 37 in Italy, 22 in the UK, and 114 spread across the rest of Europe.

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By GlobalData

The first section, which focuses on Western Europe, shows that from 191 projects, 55 were related to private financing – either entirely or through joint ventures. Germany and the UK have the biggest share, representing 81% of aggregated private finance volume.

"What it shows us is that there is enormous potential for private finance in railways," explains Rosen. "It is just not being realised at the moment.

"There is no question that the UK is ahead of the game. While nobody would say that it is a perfect system, the UK Government has for the last 20 years accepted and understood that private capital has an essential role to play in the way that the railways operate. Perhaps in other countries that is not the case."

"What it shows us is that there is enormous potential for private finance in railways."

One stark example of this is in Eastern Europe in urban systems and light rail vehicles, where private cash is non-existent. From the Warsaw Metro to Ankara and Bucharest, public investment is king. Multiple unit purchases are also almost completely dominated by the state.

In Western countries, the situation is reversed, with the report finding that multiple units are the "most important single product category for private financing". The locomotive sector, at 35% of private, also bucks the trend. Nonetheless, urban systems have a similar public to private ratio to their Eastern counterparts.

"I think in Eastern Europe I probably could have guessed [the figures], says Rosen, "but in fact… It’s a harmonised Europe but in the wrong way."

He explains that countries in the east – perhaps with the exception of Turkey and the Czech Republic, who have 72% of aggregated private investment – are in desperate need of more investment. The research shows that out of 112 projects, just 12 can be classed as private-led.

A legacy of state ownership

These figures lay bare the role that the legacy of state ownership has had in influencing decisions, something that Rosen argues has acted as a handbrake on liberalisation. However, a global strain on public finances is starting to focus minds.

Rosen says: "At a time of austerity and agonising decisions that have to be made by governments, you have to ask, why [do governments have to finance it]? It doesn’t make sense. Let the private sector finance the rolling stock. If you build the roads it doesn’t mean you have to own every car. Why, therefore, do you have to own the rolling stock?"

There is clear link made by Rosen and Schwilling between more liberalisation and convincing investors to inject capital. "There is a good sign that in liberalised markets [such as the UK], the private investors do emerge," says Schwilling.

"As more liberalisation comes to railway markets we do expect private financing to take on a more important role. The liberalised rail freight market has seen much more private financing than, for instance, the non-liberalised long-distance high-speed traffic market."

For those wary of diminishing state influence, Rosen insists that increasing the private sector’s slice of the cake will benefit everybody in the long run. "You have to differentiate between deregulation and liberalisation," he says. "We are not advocating deregulation in that clearly the railways have to be properly regulated. The admission of the rolling stock to the market has to be properly regulated."

Liberalisation on the other hand is a "completely different story". "On that I think we are very clear that it makes enormous sense to lower the barriers to entry and allow more people to come into the market and be more innovative."

Additionally, with the era of austerity still biting at budgets, there is a concern that a lack of private cash could stunt growth. "I don’t think governments can just carry on throwing in cash," warns Rosen.

"The problem is if you restrict your investment to what is available rather than what is needed, then you potentially cut off something that is part of a sustainable growth agenda." The whole point of liberalisation, therefore, is to construct an "open, flexible and dynamic" market.

The Luxembourg Protocol: creating the right conditions

Presently, however, there is no international registry system for private investors’ security interests; something that has, to some degree, prevented people and institutions from entering the market.

The Luxembourg Protocol, part of the Cape Town Convention on International Interests in Mobile Equipment, is an attempt to change this. Adopted in 2007, it sets up a new legal framework to recognise and protect security interests of lenders, lessors and vendors. Rosen explains that if the creditor cannot rely on an "implicit or explicit guarantee from a government – which is itself a good credit – private sector funders … require security that credit provided through loans or leases will be repaid".

It applies to all rolling stock – from trams to high speed trains – but will only come into force once it has four ratifications. As of September 2015, it had been ratified by Luxembourg, and had signatures from Gabon, Switzerland, Germany, and Italy. In February, the UK also signed the protocol, signalling the start of a process of consultation on the various options that the UK Government may adopt when it comes to ratification.

"Once the first few states ratify the rail protocol we have 12 months to satisfy the regulator and open for business."

Once in force, it will also create the International Rail Registry, an entirely electronic operation accessible 24/7 on the Internet. Elizabeth Hirst, the registrar-designate, says it is there to record each international interest, such as a lease or security, over the specific items of rolling stock that it relates to.

"Once the first few states ratify the rail protocol we have 12 months to satisfy the regulator and open for business, so we are starting the background work now," she explains.

Speaking in the Uniform Commercial Code Law Journal in November 2015, Rosen noted that it will be "particularly helpful in respect of railway rolling stock which operates in more than one jurisdiction because it resolves the present cross-border legal issues, which arise in the case of security interests created under one law being challenged in the courts of another".

After taking inspiration from the International Registry for Aircraft Equipment, rolling stock will also be given a unique rail vehicle identification system number, which is never repeated or recycled. "This is just like cars, telephones, computers and aircraft," says Hirst. "A car has a number plate on display but it also has a chassis number."

Attracting the private sector

Rosen hopes that the protocol will convince those who up until now have been cautious to invest – allowing governments to turn their attention to financing infrastructure rather than rolling stock. "There are a lot of banks and financiers who have been wary of going into the market because they wondered how good their security would be," he says.

But, with the protocol making headway, railways experiencing a boom in passenger numbers and rolling stock viewed as a very stable asset class, it is anticipated that the situation will change.

For Schwilling, it is essential that "the whole thing is set up in a very transparent way so that the risk can be assessed properly", adding that the structuring of the deal is very important. He does nevertheless expect non-state investment to grow, although the actual percentage share will differ by country. He also says that while private investors do require a higher rate of return, he believes this can be "offset by the higher efficiency that private parties bring to the overall system".

The study has undeniably sparked a debate that will run and run. At the start, the question was: how much is financed by the private sector? Now that that has been answered attention turns to what is expected to be a period of further liberalisation. Only time will tell if it proves to be as popular and as successful as some anticipate.