Annex 3. Railways - connecting to Europe Transport Sector Review: Bosnia and Herzegovina - the road to Europe Transport Unit, Sustainable Development Department Europe and Central Asia Region May 2010 Document of the World Bank Table of Contents 1. Institutional framework for the railway sector ........................................................................................... 3 The European context .................................................................................................................................... 3 The regional context ...................................................................................................................................... 5 The national framework ................................................................................................................................. 7 Organizations in the sector .......................................................................................................................... 10 2. The railway sector in Bosnia and Herzegovina ....................................................................................... 14 The railway infrastructure ........................................................................................................................... 14 Proposed investments on the network .......................................................................................................... 15 Passenger traffic .......................................................................................................................................... 16 Freight traffic .............................................................................................................................................. 17 The composition of current traffic ............................................................................................................... 18 The projected demand for traffic ................................................................................................................. 19 3. Operating performance of the railways .................................................................................................... 20 Introduction ................................................................................................................................................. 20 Traffic density .............................................................................................................................................. 20 Labor Productivity ....................................................................................................................................... 20 Rolling stock condition ................................................................................................................................ 22 Locomotive productivity .............................................................................................................................. 22 Freight car productivity ............................................................................................................................... 23 Border crossings .......................................................................................................................................... 23 4. Financial performance of the railways ..................................................................................................... 24 ZFBH ........................................................................................................................................................... 24 ZRS .............................................................................................................................................................. 25 5. Conclusions and recommendations .......................................................................................................... 28 Strengthening the institutional framework ................................................................................................... 28 Improving operational and financial performance ...................................................................................... 29 Identifying selective investments .................................................................................................................. 30 Annex 3- 2 1. Institutional framework for the railway sector The European context 1.1 The institutional framework for the railway sector in the Western Balkans is defined by the European Union. In order to prepare for accession, countries are obliged to align domestic laws, rules and procedures to the body of community legislation in such a way that ensures that relevant European Union (EU) law is fully reflected within the domestic legal framework. The relevant community legislation is contained in the acquis communautaire, which is constantly evolving as it reflects the contents, principles and objectives of the treaties on which it is based. It summarizes the requirements in a number of chapters and contains all relevant directives, regulations and decisions, together with all principles of law and interpretations of the European Court of Justice, and all relevant declarations and resolutions of the Council of Ministers.1 In all areas, candidate countries must bring their institutions, management capacity and administrative and judicial systems up to EU standards, at both national and regional levels, as a prerequisite for membership of the EU. The transport chapter in the acquis also includes all international transport agreements to which the EU is a party, including the European Conference of Ministers of Transport (ECMT) acquis. 1.2 The requirements in the railway sector reflect the rail liberalization process initiated in the early 1990s. Since 1990, the EU has progressively established a large body of legislation to support and encourage the gradual opening of the rail market by regulating access to the infrastructure, improving interoperability on the European rail network, requiring the separation of infrastructure from transport operations, and introducing a common approach on rail safety. This body of legislation includes a diversity of acts, which are binding on all member, accession and applicant countries unless specific exceptions have been agreed to. The following box (Box 1) contains a summary of the key directives and the ‘railway packages,’ as well as the key mandatory requirements. 1 Since 1953, the Council of Ministers of ECMT, throughout conferences and working groups, have agreed on a series of recommendations relative to inland transport addressed to governments and transport undertakings. The core text of the ECMT acquis is resolution 2001/1, which makes a number of recommendations regarding interoperability, border crossings, market liberalization, including regulation, infrastructure charge and access, infrastructure and operation interface. Details can be found at http://www.internationaltransportforum.org/europe/acquis.htm. Annex 3- 3 Box 1. SUMMARY OF KEY EU DIRECTIVES IN RAILWAY SECTOR The European Commission initiated a revolution in the railway industry in Europe by adopting, in a step-by-step approach, a number of directives to amend the regulation of railway transport. By tradition, the national railway companies were, to a large extent, self regulated entities, playing simultaneously the roles of business units, state regulators and supervisory authorities. The new approach has fundamentally changed the rules of the game as the legal framework is now largely defined by European law. The turning point in the development of the railway sector in Europe was the adoption of Directive 91/440. It created a new legal framework ending the status of a railway as a state-owned monopoly and establishing a European railway market. New principles were established for the sector: (i) accounting separation between rail infrastructure and train operators; (ii) public money for one sector cannot be used to cross-subsidize the other; (iii) the railways must be managed on a commercial basis, driven by market demand, and independent from the state; and (iv) mandatory non-discrimination in access to railway infrastructure. The member states were also required to address the problem of the historical debt of the railway companies and to take all necessary measures to develop the national railway infrastructure. This directive was complemented in 1995 by Directive 95/18/EC on the licensing of railway undertakings and Directive 95/19/EC on the allocation of railway infrastructure capacity and the levying of charges. Based on the implementation of Directive 91/440, in 2001 the EC issued the First Railway Package to be implemented by the member states by March 15, 2003. The components of the First Railway Package were: (i) Directive 2001/12 amending Directive 91/440, (ii) Directive 2001/13 amending Directive 95/18, and (iii) Directive 2001/14 for infrastructure capacity allocation and charging, and safety certification. The First Railway Package was the first step in liberalizing the railway sector through the introduction of open access on the Trans- European Rail Freight Network (TERFN) (representing 50% of EU railway networks and 80% of traffic). A lack of interoperability was—and remains—a major constraint in implementing open access in Europe, with specific national norms for signaling, electrification, operation, etc. forming significant barriers to a seamless railway transport market. As a consequence, the EC acted to eliminate technical barriers by issuing Directive 96/48 for the interoperability on trans-European high speed rail system, and Directive 2001/16 for the interoperability on the trans-European conventional rail system. On January 23, 2002, the EC proposed the Second Railway Package to open both national and international freight services on the entire European network from January 1, 2007. The Second Railway Package also enhanced safety and interoperability, primarily by establishing the European Railway Agency (ERA) to oversee technical standards on these matters. The components of the Second Railway Package are: (i) Directive 2004/51 further amending Directive 91/440; (ii) Directive 2004/49—the safety directive; (iii) Directive 2004/50 amending interoperability Directives 96/48 and 2001/16; and (iv) Regulation 881/2004—the European Railway Agency. Full market liberalization for freight transport in Europe implemented since January 2007 was an important achievement of the railway reform in Europe. On October 23, 2007, the Third Railway Package was issued, having as its main goal the complete liberalization of the railway market by including regulation of passenger services in Europe. The Third Railway Package stipulates the obligation for opening the market of international passenger transport starting on January 1, 2010 (with exceptions for some member states until 2012) and the protection of the rights of rail passengers. The components of the Third Railway Package are: (i) Directive 2007/58 amending Directive 91/440 and Directive 2001/14; (ii) Regulation (EC) 1371/2007 on rail passenger’s rights and obligations; and (iii) Directive 2007/59 on the certification of train drivers operating locomotives and trains on the railway system in the Community. Annex 3- 4 The regional context 1.3 There have been several initiatives aimed at accelerating the pace of railway reforms in South East Europe. The South East Europe Transport Observatory (SEETO) has played an important role in coordinating railway policy reform in the region. SEETO is a regional transport organization established by the Memorandum of Understanding for the development of the Core Regional Transport Network (MoU) signed June 11, 2004 by the Governments of Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia (FYROM), Montenegro and Serbia and the United Nations Mission in Kosovo and the European Commission. SEETO’s objective is to promote cooperation on the development of the main and ancillary infrastructure of the multimodal South East Europe Core Regional Transport Network and to promote and enhance local capacity for the implementation of investment programs, management and data collection, and analysis on the Core Regional Transport Network. 1.4 An Addendum to the Memorandum of Understanding on the Development of the South East Europe Core Regional Transport Network was signed on December 4 2007. The Addendum aimed to enhance regional cooperation in the South East European Railway Transport Area,2 through, more specifically, improving rail market access, opening the national market, facilitating border crossings and ensuring a high level of technical interoperability between signatories. The Addendum serves as a guide to railway reform for signatories in the region, committing them to align their domestic railway legislation with relevant EU law. Signatory countries committed to adopting and implementing domestic legislation and restructuring their railway sector focus on: (i) institution building; (ii) separation, management independence and market orientation of railway undertakings; (iii) fair conditions for access, safety and interoperability; (iv) financial stability and transparent involvement of governments; (v) border crossings; and (vi) a social dimension. 1.5 There were further developments regarding the implementation of the MoU in 2008. During the Fourth Annual Meeting of Ministers on the Development of the South East Europe Core Regional Transport Network held on December 4 2008, participants also adopted the conclusions of the meeting on the implementation of the MoU, which now introduced regional coordination to jointly address the need for adequate and sustainable regional transport infrastructure.3 Furthermore, they adopted a timetable for implementation of the Addendum, recognizing that special attention is needed to ensure effective implementation. 1.6 The timetable breaks down implementation into six steps: (i) the adoption and implementation of the primary legislation; (ii) the adoption and implementation of the secondary legislation; (iii) the establishment of an appropriate budgetary and financial framework; (iv) the establishment of the necessary institutional and organizational arrangements; (v) the introduction of sufficient staff in office in number and competence; and (vi) requisite operational decisions issued and/or published. The detail reflecting 2 The Addendum can be found at: http://ec.europa.eu/transport/rail/doc/third_countries_2007_mou_seeto_addendum.pdf. 3 The text of the agreed document can be found at: http://ec.europa.eu/transport/rail/doc/2008_12_04_4th_meeting_conclusions.pdf. Annex 3- 5 recognition that previously legislation has been adopted but effective implementation has not followed—as one example the fact no participating SEETO country has more than one railway undertaking or any on-track competition. The time frame for implementation of the reform process is the end of 2010, as detailed in Box 2. Box 2. Timetable for implementing the reform process in FBH 1.7 The implementation timetable is very ambitious and unlikely to be attained. Most of the reforms have been scheduled to be completed over the period 2009-2010. Annex 3- 6 However, given the lack of progress in institutional reform in the railway sector so far in FBH, this is a very ambitious timetable. The realization of which is likely to have been made more difficult by recent exogenous events: the establishment of budgetary and financial stability by the end of 2010 is likely to be unattainable, given the significant drop in traffic and revenues in 2009, and the lack of preparatory work in many areas. Similarly, the resolution of the problem of the historic debt of the railways is likely to be very problematic, given that FBH is under an IMF Stand-by Agreement (SBA),4 which foresees important structural fiscal reforms and the containment of recurrent expenditure. 1.8 The EU has launched negotiations on a Western Balkan Transport Community Treaty. An initiative was launched on March 5, 2008 to accelerate EU pre- accession preparations with Western Balkan countries, including a proposed Western Balkan Transport Community Treaty.5 The proposed Transport Treaty aims to work towards an integrated market for road, rail, inland waterways, and maritime transport in the West Balkans region—the region includes Albania, Bosnia and Herzegovina, FYROM, Montenegro, Serbia, and Kosovo—and to align the relevant legislation in the Western Balkans with EU legislation. It is also expected to help accelerate the integration of transport systems and to harmonize rules on safety, environmental protection and services, as well as facilitating the expansion of the Trans-European transport network. The European Commission opened negotiations on the Transport Treaty on June 24, 2008. The national framework 1.9 The State Law on Railways of Bosnia and Herzegovina was adopted on June 30, 2005. This law regulated the overall structure and operation of railway transport in FBH, the conditions and manner of management of the railway infrastructure, conduct of rail transport, control, supervision, regulatory and appellate functions, as well as other issues relevant to the work and functioning of the rail transport system. It is consistent with the relevant EU directives, requiring the separation of transport services and infrastructure management, the obtaining of a license and a safety certificate to operate, and requires the establishment of a Railway Regulatory Board (RRB), and the introduction of track access charges for the infrastructure.6 However, whilst the law envisages one infrastructure manager, the reality is two infrastructure managers, for a network of just over 1,000 km in length – an expensive and inefficient outcome. 1.10 In addition, actual implementation of the initiatives required by the primary legislation is lagging. The RRB was formally established in 2008, but it has limited capacities. The function of the RRB as a National Safety Authority needs to be strengthened and depending on its eventual mission and organization. The estimation of infrastructure costs to facilitate the introduction of a track access regime remains in the 4 The IMF approved a US$1.57 billion 36 month SBA on July 8, 2009. 5 http://ec.europa.eu/enlargement/pdf/balkans_communication/western_balkans_communication_050308_en.p df. 6 The role of BHZJK is to verify technical standards of infrastructure, while the role of RRB is to guarantee on a fair basis that rules are applied and respected by all bodies concerned. The RRB is also in charge of supervising the separation of accounts between operations and infrastructure and between freight and passenger services. Annex 3- 7 preparation stage, the preparation of a harmonized network statement remains under preparation, despite the regional work funded by the European Union, and managed by SEETO, and the required work on train driver certification, interoperability and safety management systems, all remain at the preparation stage. In addition, an explicit public service obligation (PSO) measure has yet to be defined, let alone introduced. 1.11 In addition, much of the necessary secondary legislation remains to be amended/adopted. The Federation of Bosnia and Herzegovina (FBH) Railway Law issued in 2001 states that the railway system is operated by one railway company Zeljeznice Federacije Bosne i Hercegovine (ZFBH), the railway in the Federation of Bosnia and Herzegovina. ZFBH is both the infrastructure manager and railway operator and must be operated as a profitable business. Article 13 states that revenues from infrastructure must be kept separate from operations, without possible transfer. The network is open to other operators, provided that they provide traction, have a license, and pay a fee which is determined by Bosne i Hercegovine i Bosanskohercegovacke Zeljeznicke Javne Korporacije (BHZJK), the state-level coordinating body. Article 15 states that the Government of the FBH or Cantons must pay for non-profitable transport that may be imposed on ZFBH. 1.12 The Republika Srpska (RS) Railway Law issued in 2001 stated that the railway is operated by one company, Zeljeznice Republike Srpske (ZRS), but has now been amended. The 2001 Law states that ZRS is both the infrastructure manager and operator and the Law states that there is only one railway infrastructure manager. Certificates are delivered by the RS Ministry of Transport and Communications and the RS budget pays for infrastructure maintenance. A law amending the Railway Law of 2001 was adopted on June 4, 2008. One of the main changes is to Article 3, which has a new item stating that ZRS, as the infrastructure manager, shall be required to submit an application within five years to the RRB of FBH for the issue of a permit for management of infrastructure managements and safety certification, within a period of 5 years. Article 4 has been amended so that the duties of the railway transport operator and those of the infrastructure manager are clearly separated. Article 6 has been changed so that that the use of budget funds from the Government of RS shall be regulated by a contract signed between ZRS and the Government of RS. But actual implementation is yet to follow. 1.13 In addition, some overlapping competencies between state and entities remain. In Article 13, the law in the RS stipulates that the width of the track can be modified upon decision of RS level, an article which appears to conflict with the responsibilities accorded to BHZJK. Several points need carefully consideration to ensure conformity, for example, according to the state law, BHZJK is in charge of harmonizing technical specifications of the whole FBH network, whereas the entity laws state that the entities are themselves entirely responsible for all technical matters relating to their respective networks.7 7 The transposition of the interoperability directives, in particular Directive 2001/16/EC, modified by Directive 2004/50/EC, and the directive on safety, Directive 2004/49/EC would abolish technical divergences and maintain safety and interoperability in FBH. Licenses should be issued at the state level, at the level of the State Ministry of Communications and Transport or at the level of RRB, and should be aligned with the requirements of Directive 95/18/EC, as modified by Directives 2001/13/EC and 2004/49/EC. Annex 3- 8 1.14 Although the current railway legislation mandates the split between rail transport operations and infrastructure (management), this obligation has not been implemented in either entity. However, the separation of infrastructure and operations is in progress, and the separation of accounts for transport and infrastructure, albeit within the same railway company, can be considered a first step towards the full separation between operations and infrastructure. Despite the separation of accounts, fund transfers from operations to infrastructure still occur in both ZFBH and ZRS, suggesting that a more rigid application of the law is necessary. In addition, currently no policy on an infrastructure access charge regime has been prepared, and the fee to use the infrastructure remains subject to ad hoc agreements.8 1.15 There have been developments in the transposition of the requirements of the acquis, but overall progress remains disappointing. For example, legislation has been adopted regarding the engine drivers license system, and some legislation regarding the transport of dangerous goods by rail has been introduced, but the regulatory framework needs to be further strengthened. The following table highlights some key actions yet to be taken to ensure alignment with the acquis. Table 1. Outstanding actions to align domestic legislation with acquis as regards railways Theme Action Relevant directive National railways Establish national railway register. This implies that new regulatory provisions 2001/16/EC register need to be developed particularly on rules for access to railway infrastructure and the rules on the revenues and expenditures of railway undertakings. Separate accounting Ensure control and sustainability of separate accounting for transport operations 2001/12/EC, Art. 6 for operations and and infrastructure. infrastructure Function of While framework exists for infrastructure management, railway passenger transport 2001/14/EC infrastructure and freight transport, the role of the infrastructure manager as set in the directive is manager not in effect. Infrastructure Develop regulations to cover the complex issue of railway congestion; and rules 2001/14/EC Congestion and regarding traffic that needs to be accorded priority. Priority Traffic Railway Transport Need to establish a Railway Transport Unit that is responsible for regulation and 2001/14/EC Unit engineering as well as for supervision of railway activities and safety. Inter-operability and Adhere to all EU directives on inter-operability, especially railway safety including 2004/49/EC Safety monitoring systems, liabilities and fines in terms of safety violations and definition of traffic accidents. Transport of While some regulations have been put in place, the implementation, strengthening 1996/49/EC dangerous goods and development of these is necessary. 8 Both ZFBH and ZRS have been the recipients of technical assistance for railway restructuring. The consulting firm, KPMG, issued Final Reports for ZFBH and ZRS in December 2007, laying out the necessary changes in order to develop a contract between the railway operator and infrastructure manager, as well as criteria for asset separation, and the definition of the pricing principle and access charge model and its impact on financial performance. The consultants propose the restructuring of both ZFBH and ZRS such that there are two newly formed operations companies and two infrastructure manager companies. See KPMG, â€?Final Report (Railways FBH): Assistance with the restructuring of the Railways of the Federation of Bosnia and Herzegovina and Railways of Republic of Srpska,,â€? Sarajevo, December 5, 2007 and â€?Final Report (Railways RS): Assistance with the restructuring of the Railways of the Federation of Bosnia and Herzegovina and Railways of Republic of Srpska,,â€? Doboj, December 7, 2007. Annex 3- 9 Source: PCI (2007) Task A Final Report: Transport Sector Overview. Organizations in the sector 1.16 The railways in Bosnia and Herzegovina have a complex and Board of Directors costly structure, reflecting their BHZJK (12 members) difficult recent history. Prior to 1991, the railways in Bosnia and Management Board Herzegovina were a fully integrated BHZJK (3 members) part of the former Yugoslavian railways. When Bosnia and Herzegovina become independent in Deputy General Manager Deputy General Manager General Manager 1991, a new state railway company For Operations For Infrastructure was formed. Following the Dayton Peace Accords of 1995, the state Sector for financial Sector for Administration railway company was divided into Affairs Affairs Manager of the Sector Management of the Sector three regional state owned companies reflecting the ethnic divisions of the Sector for Operations Sector for Infrastructure country. In 2001, the FBH adopted a Manager of the Sector Manager of the Sector new railway law which merged the railway companies in the Croat and Figure 1: Organizational structure: BHZJK Bosnian parts of the country to create ZFBH. However, the railway in the RS, ZRS, remained separate. 1.17 The sector now includes two vertically integrated railway companies, and a state level coordinating body: ZFBH, ZRS, and BHZJK, the state-level coordinating body. The latter was established in 1998 to act as a coordinating and regulating body for railway transport between the two entities. Its objectives and responsibilities are regulated in the BHZJK Agreement, prepared by the Commission established under Annex 9 of the Dayton Peace Accords, but include that the purpose of the corporation is to establish institutionalized cooperation among the entities and to take whatever decisions are necessary to allow smooth, safe and regular inter-entity and international railway traffic. 1.18 BHZJK has never really been fully established. The organizational structure of BHZJK was defined in Article 4 of the Agreement and is represented in Figure 1. But to date, only limited progress has been made in the realization of the Agreement and the organizational structure therefore reflects the intention rather than the reality. Specific responsibilities of BHZJK are defined to include (i) allocating train-paths for inter-entity and international traffic; (ii) harmonizing signaling, safety and telecommunications systems throughout FBH; (iii) harmonizing and determining infrastructure access charges; (iv) selecting rehabilitation priorities; and (v) allocating and managing funds received from international donors. However, in practice, the activities of the Public Railway Corporation remain limited, as it is dependent for both resources and the agreement of the two railways to undertake any function, as BHZJK owns no assets and is financed entirely by funds provided by the entity railways (sixty (60) percent from ZFBH), and forty (40) percent from ZRS. Annex 3- 10 1.19 The primary function of BHZJK is to act as a conduit for international financial assistance (Article 3.5) and as the counterpart to the respective international institutions. This coordination is organized via the Project Implementation Unit (PIU) of the Corporation. The Agreement stipulates in Article 3.7 that the Corporation could also act by specific mandate as common agent and in its own right for all matters which could contribute to the development of the railway sector. However, the functions described in Articles 3.5 to 3.7 are subject to the approval of the entities or the railway companies and such a mandate has not been approved. BHZJK is also frequently mentioned as the sole management of the railway infrastructure, but there has been little substantive movement in this direction. 1.20 Zeljeznice Federacije Bosne i Hercegovine (ZFBH) is the railway operator in the Federation of Bosnia and Herzegovina. This company was established by the 2001 Law on Railways of the Federation of Bosnia and Herzegovina. The Law legalizes railway transport in the Federation, establishes ZFBH and regulates relations between ZFBH and BHZJK. Article 3 stipulates that ZFBH is the only manager of railway infrastructure in FBH as well as the railway operator of FBH. The objective of ZFBH is defined as the provision of internal and international railway transport, maintenance, modernization and building of railway infrastructure and activities of restoration of railway transport. The same law foresees the opening of the infrastructure, allowing approved operators access to the railway infrastructure provided that these operators accept designated railway routes and pay adequate infrastructure fees, and also establishes the principle of separated accounts for infrastructure and operations (Article 13). 1.21 The operational structure of ZFBH is presented in Figure 2Error! Reference source not found.. The railway company is at present one hundred percent owned by FBH. However, this structure is expected to change when the separation between operations and infrastructure management is fully achieved with the establishment of independent companies for each of the two activities. There is at present no indication as to when this separation is likely to be realized. ZFBH is managed by a General Director, assisted by a Deputy General Director and includes four Departments: railway operations, infrastructure, economic affairs and legal affairs. Each is then further subdivided into a number of Sectors with an operation/ function. Each of the Sectors is again subdivided into a number of functional Units. For example, Passenger & Freight Traffic is further divided into a passenger unit and a freight unit. Each Department also includes a “Traffic Business Areaâ€?, responsible for the day-by-day management and operations in their geographical area and has sections in Zenica, Sarajevo, Mostar, Tuzla and Bihac. Annex 3- 11 Figure 2. Simplified organizational structure: FBH railways Cabinet General Director PIU Deputy Internal Control Development General Director Internal revision & Investments Railway Railway Economic Legal Operator Infrastructure Affairs Affairs Director Director Deputy Deputy General Director General Director Deputy Director Deputy Director Planning, Analysis & Human resources / Marketing & Research Regulations Income distribution Legislative affairs Passenger & Freight Organization & Traffic Safety Financial affairs Assets / Traffic Legislative affairs Bookkeeping Electrical engineering General affairs Railway Traction Income Control Vehicle Maintenance Civil engineering & constructions Procurement & Sales Time table preparation Traffic Business Area Traffic Business Area Traffic Business Area (Service for legal and Traffic Business Area (Infrastructure services) (Economic affairs service) Human affairs) (transport services) Sources: ZFBH & Safege Consultants . 2007. "Report on Key issues and Policy Recommendations"; State Transport Policy and Strategy Study; EBRD. 1.22 Zeljeznice Republike Srpske (ZRS) is the railway in the Republika Srpska. The Law on Railways RS establishes the undertaking for railway transport “Republic of Srpska Railwaysâ€? (Zeljeznice Republike Srpske – ZRS) as a joint stock company with eighty (80) percent of the shares owned by the Republic of Srpska. According to the Law, ZRS is both the infrastructure manager and the transport operator. Even more explicitly, ZRS is recognized as the only infrastructure manager in the Republic of Srpska, with all resources to be provided from the budget of the Republic of Srpska (Article 6). More explicitly, the law specifies that ZRS is responsible for the following (Article 1): ï‚· The conditions and technical elements of construction, reconstruction and maintaining of railroads, railway facilities, devices and equipment included, as well as their control; ï‚· The conditions, which are to be met by railway vehicles, devices and equipment included, as well as their control; ï‚· The conditions of performing railway transport and organization of the transport of passengers and goods; and ï‚· The conditions, which are to be met by railway workers who are directly involved in performing railway transport; overall working hours and special safety measures, traffic safety and order of the railway, surveillance of the safe organizing of railway traffic, as well as certain issues of industrial and city railway and cable railway. 1.23 The law also foresees the opening of the infrastructure to private operators. Article 5 foresees access by private operators to the network via the issuing of operators’ Annex 3- 12 certificates that will regulate activities and rules on the use of railway infrastructure, activities performed by the Ministry of Traffic and Communications of the Republic of Srpska, guaranteeing free access to the railway network without discrimination (Article 9). 1.24 The organizational structure of ZRS, as established by the Railway Law of RS, is less complicated than the structure of ZFBH. The Company Management consists of a General Manager, seconded by four Executive Managers for, respectively, Infrastructure, Operations, Research and Development, and Administration and Financing. The Management of the Company is supervised by a Supervision Board that reports to the Assembly of the Company and is internally controlled via the Internal Control Unit. Each of the four Executive Managers supervises the related Department. The Infrastructure and Operations Departments are headed by an Executive Manager Deputy while the Research & Development and Administration & Finance Departments are managed by a Director, all reporting directly on day-by-day activities to the respective Executive Managers. Sources: ZRS & Safege Consultants. 2007. Report on Key issues and Policy Recommendations; State Transport Policy and Strategy Study;; EBRD. Figure 3. Organizational structure: Republic of Srpska railways 2006 Annex 3- 13 2. The railway sector in Bosnia and Herzegovina The railway infrastructure 2.1 The railway network in FBH extends for some 1,017 km. It is based on a standard gauge (1,435 mm) and the majority is single track (92 percent). After extensive rehabilitation, more than eighty-five (85) percent of the network is now classified as D4 in terms of UIC load categories, allowing maximum loads of 22.5 tons per axle, or 8.0 tons per linear meter. Around seventy-six (76) percent of the network is electrified with a mono- phase 25kV, 50Hz AC system. The only non-electrified part of the railway network is located in the north-eastern part of the country, around Tuzla, but it is important in traffic terms. All lines are single-track, except one section of 87 kilometers of Corridor Vc between Zenica and Doboj. Table 2. Network size and length of electrified line for ZFBH and ZRS (2008) ZFBH ZRS Total Length of track (km) 601 416.7 1,017.7 Electrified lines (%) 73 79 76 Double track lines (%) 27 21 24 Traffic units/track-km 1,592,346 959,923 1,333,399 Sources: ZFBH, ZRS, Federation Statistics Office. 2.2 The railway network comprises two main strategic lines, which are also the main railway lines for cargo (see Figure 4). The two include: (i) The North-South Bos.Samac-Doboj-Zenica-Sarajevo-Mostar-Capljina line located on Corridor Vc (which connects Budapest in Hungary to Ploce in Croatia); and (ii) the West-East Dobrjlin– Bos.Novi-Banja Luka-Doboj-Tuzla-Zvornik line which is the railway line parallel to Corridor X. The rehabilitation of the core railway network, in particular Pan European Corridor Vc and the east-west line parallel to Corridor X (and marked in blue in Figure 1) are deemed to be critical first steps. In 2005 the EBRD approved euro 70 million (US$102 million) for a program of track renewal on key sections of both corridors, together with rehabilitation of the station signaling system and purchase of track machinery. 2.3 The density of the railway network in FBH is one of the lowest in the region. The density of the railway network in FBH in terms of km of track per square km is one of the lowest in the region with just over 1,000 km of track in a land area of 51,000 square kilometers (see Figure 5). This contrasts poorly with nearly all the comparator countries, with a lower density measure than any other country in the region, excepting Albania. However such comparisons need to be interpreted with caution, given the different topography of the countries involved. Annex 3- 14 Figure 4. Main railway network lines in FBH Figure 5. Comparative railway network density (2007) Bosnia-Herzegovina Albania Bulgaria Serbia Romania Croatia France Poland Hungary Germany Czech Republic 0 20 40 60 80 100 120 140 Source: PCI (2007). 2.4 The overall condition of the railway network in FBH remains poor, with operational weaknesses reducing line capacity markedly. Despite extensive rehabilitation, overall operational speeds remain low, because of temporary speed restrictions, due to the condition of some tunnels (notably Tunnel Ivan south of Sarajevo where there is a speed restriction of 40 km/hr), poor track alignment (due to topography and gradient) and condition, and the number and functioning of crossings (On around 80 percent of the railway lines on Corridor Vc, train speed is limited to a range between 30 km/hr and 70 km/hr depending upon the conditions of the track). In addition, there are limitations in ballast in the curves, weak sleepers, and inadequate fastenings. Another significant problem is the length of the crossing sidings in stations (with a usable length of 570 meters) leading to restrictions on train length (550 meters) and train weight (1,500 tons). 2.5 Slow operational speeds, practices and poor signaling reduce line capacity markedly. A recent study9 reported weaknesses in the signaling system, and suggested that they are only of limited use in actual operations. In addition, drivers frequently pass red signals (SPAD - Signal Passed at Danger), a key safety statistic, requiring each train to be equipped with two drivers to ensure safety. The failings of the current signaling system apart from being a major safety concern, also leads to a marked reduction in line capacity. Another restriction on line capacity is the current practice of only conducting maintenance operations during daylight hours. This restriction, even on those lines where there is no nighttime traffic, significantly reduces operational capacity whilst the work is going on – but says more about the lack of flexibility of working practices. Proposed investments on the network 2.6 Priority should be given to improving the quality of service, increasing capacity rather than introducing higher line speeds. The proposed investments 9 DB International, Vienna Consult and viadonau (2008) Provision of Studies for Intermodal Transport in Bosnia and Herzegovina. A study funded by the European Union. Annex 3- 15 (summarized in Table 3) prioritize projects to rehabilitate track on the key lines to meet the 22.5 ton axle load, as required by the TER standards, improving signaling, and upgrading line speeds to 120 km per hr. A recent study10 noted that if this rehabilitation were implemented and current bottlenecks were addressed, then together with other necessary operational improvements (level crossings, signaling, and operational practices), then the capacity of the railway network would be sufficient to meet projected demand until 2030. Placing the emphasis on the capacity of the current network, primarily on the key lines on Corridor Vc, and the quality of service for existing customers, before ambitious and probably unviable projects to introduce even higher line speeds, or high speed passenger services. The latter seem difficult to defend given the current traffic mix on the railways. Table 3. Recommended railway investments 2010-2030 Project Cost (BAM Period Description Mill) Completing rehabilitation of southern Short - The line is completely electrified and connects to the line section of Corridor Vc between 76.2 Medium Metković - PloÄ?e in Croatia. The rehabilitation of the Sarajevo and Gabela (Croatian border) term. section ÄŒelebić – Mostar – ÄŒapljina – Croatian border is Total length covered by the project is part of the EIB-EBRD plan. The section Bradina – 73 km (100 km of the 173 km long line Konjic, part of this proposal, has a very complex set of is covered by the EBRD- EIB loan). tunnels and turns over a 25 km distance. Completing rehabilitation of northern 245.6 Medium – The medium term requirements to implement the project section of Corridor Vc between Samac Long includes completing the feasibility and technical studies and Sarajevo. Total length covered by term. and determining the further funding needs on the basis of the project is 235 km. the available EBRD- EIB loans. The project focuses the sections not covered prior by EBRD-EIB or other investments. Completing Rehabilitation of Sections 198.6 Medium – The medium term requirements to implement the project Novi Grad – Doboj and Doboj – Tuzla Long includes completing the feasibility and technical studies (Line parallel to Corridor X). Total term. and determine further funding arrangements on the basis length covered by the project is 190 of the available EBRD-EIB loans. The project focuses km: 125 km (section 1) + 65 km the sections not covered by the EBRD-EIB investment. (section 2). Rehabilitation and electrification of the 78.4 Long With the expected growth of river transport via Brcko railway line Brcko – Tuzla. Total term. port, Improved railway interconnectivity linking the port length covered by the project is 75 km. with the BiH railway network and Corridor Vc will create opportunities for intermodal transport linking river and railway. Source: PCI Intl. (2007). Passenger traffic 2.7 After being broadly static for a long time, railway passenger traffic has been increasing in recent years. Starting from a small base, passenger traffic in FBH as a whole, measured in passenger-km, increased by nearly thirty-seven (37) percent over the period 2005-08, as indicated in Figure 6. The growth in traffic was not distributed evenly across the entities, with passenger traffic in terms of passenger-km increasing by nearly seventy (70) percent in FBH, and just under fifteen (15) percent in the RS. The increase in the number of passengers over the same period was less marked (see Figure 7), increasing by approximately eight (8) percent in FBH, driven by an increase of fifty-three (53) percent in the FBH. Passenger numbers actually fell eleven (11) percent in the RS over the same period. 10 DB International, Vienna Consult and viadonau (2008) op cit. Annex 3- 16 Figure 6. Passenger traffic 2000-2008 (mill passenger-km) Figure 7. Passenger traffic 2000-2008 (000 passengers) 45 1200 1134 1093 40 39 39 40 38 38 35 36 36 34 34 1000 911 35 32 854 834 824 30 30 764 800 706 727 25 19 19 20 15 15 600 528 15 401 419 9 9 400 345 10 242 208 5 196 194 177 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 (passenger kms, mill.) ZFBiH (passenger kms, mill.) ZRS (passengers, 000') ZFBiH (passengers, 000') ZRS Sources: FBH and RS Statistical Yearbooks 2000-2008, UIC. Freight traffic 2.8 Freight traffic has also followed an upward trend, particularly in the FBH. The reopening of some of the heavy and extractive industries in Bosnia and Herzegovina since 2004, particularly in the FBH, has led to an increase in both tons and ton-km. The overall increase in FBH over the period 2005-2008 was eleven (11) percent in tons carried, and five and one-half (5.5) percent in ton-kms (see Figure 8 and Figure 9). Once again the growth was not distributed equally across the two entity railways, with growth restricted to ZFBH which reported an increase of over twenty-one (21) percent in tons carried and fifteen (15) percent in ton-kms, whilst ZRS reported a decline of just over five (5) percent in tons carried, and a decline of twelve (12) percent in ton-km. 2.9 Reliable figures on the traffic volumes carried by the railways are difficult to obtain. The numbers for both freight and passenger traffic have to be treated with a degree of caution, as a simple addition of traffic data from the two entity railway companies overestimates actual traffic. Both ZFBH and ZRS count traffic with an origin in one of the entities and a destination in the other in their respective figures. Traffic with an origin and destination in one of entities, where it crosses the other, is counted by the latter as transit traffic. This requires careful consideration in the appraisal of prospective investments. Figure 8. Freight traffic 2000-2008 (mill ton-km) Figure 9. Freight traffic 2000-2008 (000 tons) 1000 9000 8128 876 900 8000 800 762 6700 6560 6914 682 693 7000 700 6000 5300 5251 5212 5216 4965 600 4658 445 5000 4200 500 411 407 391 3775 400 361 4000 3356 3000 2612 300 212 177 170 200 140 162 132 2000 83 118 105 859 913 1027 1276 100 1000 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2000 2001 2002 2003 2004 2005 2006 2007 2008 (mill.ton-kms) ZFBiH (mill.ton-kms) ZRS (000 tons) ZFBiH (000 tons) ZRS Sources: FBH and RS Statistical Yearbooks 2000-2008, UIC. Annex 3- 17 2.10 In addition, the recent economic crisis has also had a negative impact on rail traffic throughout Europe, and FBH is no exception. Provisional data for the first half of 2009 reveal that freight traffic, measured in ton-km, was down by over forty (41.2) percent for ZFBH and by forty percent (40) percent for ZRS, although preliminary indications suggest a recovery in the second half of the year. This is similar to the over forty (40.6) percent decline suffered by Serbian Railways. Passenger traffic, measured in passenger- km, has also been affected by the crisis, falling by over seven (7.6) percent for ZBH and by nearly twenty-eight (27.8) percent by ZRS. Even with a recovery in the second half of 2009, freight and passenger traffic is likely to show a marked decline overall in 2009. The composition of current traffic 2.11 The commodity structure of freight traffic is dominated by bulk cargo. The main commodities include iron ore and bauxite, lignite, aluminum and hydrated alumina, coking coal and coke, and scrap. According to a recent study,11 major clients for both entities, as of 2006 include (i) Elektroprivreda with coal transported from the coal mines to coal-fired power stations, mainly in Tuzla and Kakanj; (ii) Mittal Prijedor export of iron ores; (iii) GIKIL Lukavac with imports of coking coal and export of coke; (iv) Birac Zvornik and hydrated alumina; (v) Mittal Zenica with scrap and metallurgical products; and Aluminj Mostar. The traffic volume of these clients represented over 80 percent of total railway traffic in FBH, which represents a relatively strong concentration on a few rail clients and a few commodities. 2.12 ZFBH freight traffic is characterized by significant volumes of heavy industrial commodities. In particular, precut (e.g., coal, metals) moving for short distances (average haul distance is forty-six km) compared to ZRS freight traffic which is internationally oriented (average haul distance is seventy-eight km). Before the war, the main customers of the ZFBH railway were the steel plant of Zeljezarera Zenica, the coal mines of the mid-Bosnian basin and the cookery of Lukavac. The future traffic trend of ZFBH therefore is highly dependent on the recovery of these main customers and other industrial actors. Before the war, main customers of the ZRS were coal mines and chemical industries near Tuzla. These industries have been adversely affected by the international economic downturn. 2.13 Passenger numbers reached 727,688 in 2008 on ZRS, while ZFBH transported 528,000 passengers—of which 463,000 were domestic passengers and 65,000 were international passengers. Of total passenger traffic in ZRS, 592,301 passengers used domestic services, 68,715 inter-entity services, and 126,672 international services. For ZRS, the average trip length per passenger averaged a mere 47 km in 2008, with an average of 39 km for entity traffic, 63 km for inter-entity or transit traffic, and 71 km for international traffic. The low average trip length helps explain low traffic volumes in terms of passenger km, which reached 37 million in 2008. 11 European Union, (2008) ‘Provision of Studies for Intermodal Transport in Bosnia and Herzegovina: Study for TER-Compatible Corridor Vc in Bosnia and Herzegovina,’ January 2008. Annex 3- 18 The projected demand for traffic 2.14 Freight traffic growth has been strong, at least in the Federation, and despite a sharp dip is expected to continue. The earlier paragraphs noted the strong growth in freight transport since 2005, albeit moderated by the sharp decline resulting from the economic crisis in the first half of 2009. Over the longer term, the projections suggest that freight traffic will continue its growth. One recent study12, admittedly from prior to the recent downturn, predicted that freight traffic growth in 2015 would be double 2006 volumes in the low scenario, and three times 2006 volumes in the optimistic scenario. An earlier study, prepared by Swede Rail and financed by the Swedish Government 13, projected a doubling of freight traffic over the period 2007 to 2015 for both companies. 2.15 Both of these projections are likely to be overly optimistic in the short to medium term. The FBH economy is estimated to have contracted by three (3) percent in 2009 and is projected to grow by a mere one-half of one percent (0.5%) in 2010, according to the IMF14 World Economic Outlook of October 2009. Actual freight traffic growth in the medium-term is likely to remain markedly lower than projected in these two studies. ZRS is now projecting that freight traffic will attain 5.31 million tons in 2011, compared to 5.32 million in 2007, suggesting that freight volumes will remain broadly static over this five year period. 2.16 Rail passenger traffic continues to face stiff competition from the road sector and is projected to decline in 2009. The density of the network, the topography of the country, and the operational speed and quality of service means that rail will continue to face strong competition from road transport in the transport of passengers. Passenger traffic on ZRS has been broadly stagnant since 2000 in terms of passenger kms, and has been declining year-on-year over the same period. The ZRS Business Plan for 2009-2011 projects that passenger traffic is expected to continue to decline to 416,250 in 2009, rising to a mere 424,616 by 2011, reflecting the expected effects of the international and regional economic downturn. 12 European Union, (2008) Ibid. 13 Swede Rail (2006), â€?Study on Railway Infrastructure Charges in Bosnia and Herzegovinaâ€?, Final Report, March 2006. 14 IMF (2009), World Economic Outlook, Washington DC. Annex 3- 19 3. Operating performance of the railways Introduction 3.1 Railways are a capital intensive mode of transport, characterized by high fixed cost and relatively low variable costs. They are cost efficient when the high fixed costs can be shared by a large volume of traffic and when good utilization is made of expensive assets. The railways in the Western Balkans region suffer from poor resource utilization, and the railways in Bosnia and Herzegovina are no exception to this general rule. This stems in part from historical reasons, as the railways were built to handle many times the level of traffic they carry currently (they currently handle about forty-three (43) percent of their 1990 level of freight for instance). They also inherited many more locomotives, wagons, coaches, and staff than needed. The major challenge that these railways face, and the BH railways are no exception, is to better match resource utilization to current and projected need. Traffic density 3.2 Freight traffic density in BH is relatively high compared to neighboring countries. Compared to other South East European countries, freight traffic density—at just under 1.3 million ton km per km of line—is high in BH. It is about the same level as in Romania and it is higher than in Bulgaria and Serbia, although lower than the EU (Table 4). However, passenger traffic density is very low in BH, reflecting the inherent unsuitability of the railway mode for short to medium length journeys in this type of typography. Passenger rail services are simply less attractive than alternative transport modes, such as buses. Table 4. Freight and passenger traffic density (2007, unless otherwise indicated) Freight traffic Passenger traffic density (000 ton Country density (000 pass. kms per km of km per km of line) lines) France 1,439 2,825 Germany 2,685 2,205 EU 1,806 1,806 Hungary 1,044 783 Poland 2,243 880 Croatia 1,313 592 Czech Republic 1,788 722 Serbia 1,112 200 Bosnia and Herzegovina (2008) 1,257 77 Bulgaria 1,171 602 Romania 1,265 697 Albania 125 121 Sources: UIC, ZRS, FBH Statistical Office. Labor Productivity 3.3 Labor productivity remains very low in Bosnian railways, suggesting the need for further staff reductions. The two railway companies (ZFBH and ZRS) are overstaffed —as of 2008, ZRS has 3,519 employees, of which 2,082 are in the infrastructure department with the remainder in the operations department, while ZFBH has 4,084 Annex 3- 20 employees, of which 1,904 are in infrastructure—levels that have remained broadly unchanged since 2004. The average of traffic units per employee is only 178,482 for FBH, considerably lower than many countries in South East Europe, with the exception of Albania—and markedly below the EU average of 683,260 (see Table 4). However, this represents an improvement over the labor productivity reported in the 2005 study,15 which noted productivity of 105,000 for ZFBH and 59,000 for ZRS—reflecting the growth in traffic. In addition, as the next section reveals, staff costs make up a substantial portion of total operating costs, and therefore are a key element in any attempt to improve the financial performance of the railways and move towards financial viability. Table 5. Railway labor productivity by country (2007, unless otherwise indicated) Country Traffic units Average Staff Traffic unit/staff France 125,734,000,000 165,810 758,302 Germany 165,753,000,000 231,000 717,545 EU 758,029,000,000 1,109,429 683,260 Poland 60,629,000,000 123,472 491,034 Czech Republic 23,827,000,000 55,155 432,001 Bulgaria 7,138,000,000 17,446 409,148 Croatia 5,185,000,000 13,503 383,989 Romania 20,888,000,000 66,139 315,820 Serbia 5,313,000,000 20,920 253,967 Hungary 10,478,000,000 46,000 227,783 Bosnia and Herzegovina (2008) 1,357,000,000 7,603 178,482 Albania 104,000,000 1,991 52,235 Sources: UIC, ZRS, FBH Statistical Office. 3.4 There is no clear indication of a clear commitment to address the overstaffing issue in the medium-term. For example, in the Business Plan 2009-2011, ZRS is projecting that operations department employees will decline from 1,437 in 2009 to 1,390 in 2011, while infrastructure department employees are projects to rise from 2,082 in 2009 to 2,123 in 2011. ZFBH was planning a three (3) percent reduction in staff each year from 200616, but this has not been implemented yet. A 2007 report17 has underlined a number of issues with overall staffing levels: in the case of both ZFBH and ZRS, the analysis of traffic volume indicates a strong productivity problem, which requires internal repositioning of employees and encouraging natural outflow, as well as increasing flexibility and revising working hours. The analysis suggests a need to adopt a long-term strategy for dealing with the productivity problem, to be implemented in defined stages. 3.5 Infrastructure maintenance remains problematic due to inadequate equipment. ZFBH are responsible for maintaining 601 km of main railway lines (out of which 441 km are electrified and 68 km are double track line). ZRS is responsible for maintaining 416 km of main railway lines (out of which 330 km are electrified and 24 km 15 World Bank (2005) Railway Reform in the Western Balkans, ECA Regional Papers. 16 PCI Intl, (2007) op cit. 17 KPMG, â€?Final Report (Railways FBH): Assistance with the restructuring of the Railways of the Federation of Bosnia and Herzegovina and Railways of Republic of Srpskaâ€?, Sarajevo, December 5, 2007 and â€?Final Report (Railways RS): Assistance with the restructuring of the Railways of the Federation of Bosnia and Herzegovina and Railways of Republic of Srpskaâ€?, Doboj, December 7, 2007. Annex 3- 21 are double track line section of the Corridor Vc Line). Vehicles and equipment for infrastructure maintenance owned by the two railways can only perform relatively small work projects (unscheduled repairs in case of emergency). All larger projects required are contracted out by bidding. Specialized vehicles for railway infrastructure maintenance are maintained in Workshop Blazuj (owned by ZFBH) or in a commercial workshop. At present, some of the necessary equipment to maintain the railway vehicles in line with the specifications is missing. Rolling stock condition 3.6 The condition of the rolling stock on both railways is generally poor. The locomotives, wagons, and passenger units of both railways have a high average age, with many awaiting rehabilitation after the end of the war. Both companies used locomotives to haul passenger services, even on some shorter routes, despite the higher costs of these operations, reflecting a lack of modern Diesel/Electric Multiple Units (DMU/EMU). There is a need for a coherent plan to replace life expired rolling stock, where justified by the economic and financial case. Locomotive productivity 3.7 The age and condition of the locomotive fleets is poor. One factor driving locomotive productivity is that the number of locomotives in operation is small relative to the total stock. In the case of ZRS, out of 83 locomotives, only 53 were operational in 2009, reflecting the age structure of locomotives—with over 22 locomotives exceeding 40 years, and 50 engines of between 31 and 40 years. Of the total number of operational locomotives owned by ZRS, 20 were electric class 441 locomotives, with the remainder being diesel, or dual traction (class 661). ZFBH has 97 pre-war locomotives (43 electric and 54 diesel), out of which 44 are actually operational. 3.8 Locomotive productivity, measured as traffic units per locomotive, stood at 7.1 million in 2008. This level of productivity is lower in FBH than in neighboring Serbia, the Czech Republic, Hungary, and Bulgaria, although higher than Romania and Albania (Table 6). Without passenger traffic, locomotive productivity per ton km would compare more favorably to other countries in the region, although it would still remain significantly below the EU average. Table 6. Locomotive productivity by country (2007, unless otherwise indicated) Ton Ton Country Traffic units Locomotives km/Locomotives km/Locomotives/Day France 125,734,000,000 4,289 29,315,458 80,316 Germany 165,753,000,000 4,128 22,047,723 60,405 Croatia 5,185,000,000 244 14,647,541 40,130 EU 758,029,000,000 26,387 14,362,603 39,350 Serbia 5,313,000,000 331 13,749,245 37,669 Poland 60,629,000,000 3,538 12,308,649 33,722 Czech Republic 23,827,000,000 1,952 8,694,672 23,821 Hungary 10,478,000,000 1,005 4,212,935 21,542 Bulgaria 7,138,000,000 602 7,830,565 21,454 Bosnia and Herzegovina (2008) 1,357,000,000 180 7,105, 556 19.467 Romania 20,888,000,000 1,961 6,869,454 18,820 Albania 104,000,000 57 929,825 2,547 Sources: UIC, ZRS, FBH Statistical Office. Annex 3- 22 Freight car productivity 3.9 There are over 4,000 freight wagons in total on the entity railways, but the condition of the fleet is poor. As of 2008 ZFBH had 2025 wagons, of which 118 were covered, 1,583 were high sided, and 155 flat bed wagons. However, this is the total fleet, in reality the age and condition of the fleet means that only a fraction is operational at any one time (currently about seventy (70) percent of that number). To try and improve fleet condition, ZFBH has plans to procure a further 2000 wagons. ZRS has slightly more wagons, at 2,571, out of which 1,169 are between 31 to 40 years old, 411 over 40 years old, and only 31 with less than 10 years of service. The size of the operational fleet in the RS is just over forty (40) percent of the total fleet (1,131 wagons). 3.10 Productivity in the car fleet is just below the regional average, but well below EU norms. There has also been limited investment in new stock in recent years, with ZRS limiting itself to the purchase of one locomotive in both 2006 and 2008, and the modernization of 80 freight wagons in 2006 and a further 20 in 2007. Figure 10. Freight car productivity by country (2007) Albania Romania Bulgaria Bosnia-Herzegovina Serbia Czech Republic Croatia Poland Hungary EU Germany France 0 2000 3000 1000 Daily ton kms per wagon 4000 Sources: UIC, ZRS, FBH Statistical Office. Border crossings 3.11 Formal requirements at the external and internal borders also impede efficient operations. At the borders entering and exiting FBH, the locomotive and driver is changed for every train, despite the fact that these lines used to be part of one system. This is also true for the very short distance between Capljina and Ploce. More inexplicably, the procedure is also practiced at the internal border between the two entities. The concomitant is an average 3-hour delay for freight trains at the national borders. Annex 3- 23 4. Financial performance of the railways ZFBH 4.1 In terms of financial performance, the two FBH railway companies are significant loss makers dependent on public subsidy. On ZFBH, operating expenses exceed revenue, even with the inclusion of the operating subsidy. Table 7 reveals that there has been a slight improvement in both the operating ratio and the working ratio in the last few years. 18 However the proportion of revenue necessary to cover expenses in the first six months of 2009 was over 130 percent, including operating subsidies. Without subsidy, it was over 160 percent. The working ratio displays a certain amount of volatility, but only in one year does total income, including subsidies, cover total operating expenses. Table 7. Financial performance of ZFBH operations (2005-2009 first half) BAM millions 2005 2006 2007 2008 2009 First six months TOTAL REVENUE 98.09 98.80 110.62 130.06 62.52 Passenger 3.94 4.43 6.24 2.99 3.42 Freight 65.16 65.56 71.34 90.79 33.68 Other 9.83 9.64 7.94 7.89 2.14 Operating Subsidies 19.17 19.17 25.10 28.40 11.64 Passenger 3.00 2.00 2.00 2.00 1.00 Infrastructure 16.17 17.17 23.10 25.90 10.64 TOTAL EXPENDITURE 162.64 174.48 151.10 173.68 81.86 Assets (material) 9.17 13.71 8.80 8.01 4.18 Fuel, electricity 10.58 9.22 9.05 11.78 4.81 Salaries and allowances 53.34 57.51 61.37 75.90 37.63 Outsourcing and other services 28.98 34.80 26.40 39.00 16.26 Depreciation 60.56 59.24 45.49 39.00 18.98 Non-operating expenses 0 0 0 0 0 NET INCOME With state contribution -64.55 -75.68 -40.49 -43.62 -19.35 Without state contribution -83.71 -94.84 -65.59 -72.02 -30.99 OPERATING RATIO With state contribution 1.66 1.77 1.37 1.34 1.31 Without state contribution 2.06 2.19 1.77 1.71 1.61 WORKING RATIO With state contribution 1.04 1.17 0.95 1.04 1.01 Without state contribution 1.29 1.45 1.24 1.32 1.24 Source: ZFBH. 18 The operating ratio is defined as the proportion of revenue necessary to cover expenses, including depreciation. The working ratio is defined as the total operating expenses, less depreciation and debt service, divided by revenues. Annex 3- 24 4.2 Labor costs represent a substantial and growing share of the cost structure for ZFBH. Labor costs increased by over forty (42.2) percent over the period 2005-2008, in contrast to revenues, excluding subsidy, which increased by twenty-nine (28.7) percent over the same period, primarily driven by the increase in freight traffic. Labor costs accounted for almost more than half of total operating costs and nearly three-quarters of total revenues in 2008, up from approximately one-third of total operating costs and sixty- eight (68) percent of total revenues in 2005. This increase seems hard to justify given the restrictive working practices, poor productivity, and a static number of employees. ZRS 4.3 ZRS is in a slightly better situation in terms of its operating ratio. On ZRS, revenues with subsidies broadly cover operating expenses, as revealed in Table 8. However, without subsidy, the proportion of revenue necessary to cover expenses in the first six months of 2009 was over 120 percent. The working ratio again displays a certain amount of volatility, but over the entire period, total income, including subsidies, covers total operating expenses. Freight generates more than 18 times more revenue than passenger services, with freight revenues reaching nearly BAM 37 million in 2008. Table 8. Financial performance of ZRS operations (2005-2009 first half) BAM millions 2005 2006 2007 2008 2009 First Six Months TOTAL REVENUE 73.69 74.83 75.29 83.10 46.97 Passenger 1.74 1.60 1.87 2.13 0.91 Freight 29.90 33.08 34.38 36.87 11.15 Other 13.75 13.40 11.56 11.61 4.39 Operating subsidies 28.30 26.76 27.49 32.49 15.26 Passenger 6.93 3.93 0.98 Infrastructure 20.55 28.55 14.28 TOTAL EXPENDITURE 75.39 90.51 89.08 97.67 46.65 Assets (material) 5.93 8.03 7.23 7.86 3.45 Fuel, electricity 6.19 5.83 4.88 5.06 1.54 Salaries and allowances 27.83 32.97 41.07 47.13 24.95 Outsourcing and other services 5.79 13.88 5.83 2.39 1.87 Depreciation 12.83 13.28 13.37 15.14 7.20 Non-operating expenses 16.84 16.52 16.70 20.09 7.63 NET INCOME With state contribution -1.70 -15.68 -13.79 -14.57 0.32 Without state contribution -30.00 -42.43 -41.28 -47.06 -14.94 OPERATING RATIO With state contribution 0.79 0.99 0.96 0.93 0.83 Without state contribution 1.29 1.54 1.51 1.53 1.23 WORKING RATIO With state contribution 0.62 0.81 0.78 0.75 0.68 Without state contribution 1.01 1.26 1.23 1.23 1.00 Source: ZRS. Annex 3- 25 4.4 Labor costs also represent a substantial and faster growing share of the cost structure for ZRS. Salary and allowance expenditures have increased in recent years, rising from BAM 27.8 million (US$20.6 million) in 2005 to BAM 47.1 million (US$35 million) in 2008. Labor costs increased by nearly seventy (69) percent over the period 2005-2008, in contrast to revenues, excluding subsidy, which increased by less than twelve (11.5) percent over the same period. This upward trend of expenditures over salaries continued in the first half of 2009. Comparing the first half of 2009 with the first half of 2008, the net income of ZRS, including subsidies, declined from BAM 9.4 million (US$7 million) to BAM 320,000 (US$290,600) reflecting steep declines in freight and passenger traffic. 4.5 The present and expected financial situation of both ZRS and ZFBH however suggests that the overall financial performance of both railway companies will not improve by 2015. It is important that this investment be targeted to the lines with highest demand. The discussion on capital planning process for railway operators applies equally to the infrastructure manager (s). The process for selecting investment projects should ensure that the investment fits with the infrastructure manager’s (s’) strategy and core operations, has a high economic and financial return, and is the most cost effective way to meet the investment need. The strict separation of accounts between operations and infrastructure management (as set out by EU Directive 2001/12) will also ensure that no transfer of public funds is allowed to be used for cross-subsidization. 4.6 There is a clear need to develop a system of infrastructure users’ charges, taking into consideration their impact on the activities and the operator’s needs. The infrastructure users’ charges have to cover the marginal costs engendered by their use, as well as making a contribution to the fixed costs of providing the infrastructure. Their basic quantities have to be uniform to all the users of the railway infrastructure. For the determination of the size and the mechanism of levying the infrastructure users’ charges it is necessary to consider: (i) the actual railway infrastructure expenditure of maintenance managers; (ii) the principles of levying railway charges and the exceptions of levying, as defined in the EU Directive 2001/14/EC; (iii) the possible concessions for the users of the railway infrastructure; and (iv) possible expenditure related to the compensation for costs not uncovered, like environmental safety, and costs related to accidents. A 2007 study provides details of an access charge model, contract models between the railway owners and infrastructure manager, and a specific access charge proposal for freight and passenger services, for the ZFBH and ZRS.19 Once again, little progress has been forthcoming. 4.7 The system of investment identification and prioritization is underdeveloped. The prepared list of priority projects is not always contributing to a comprehensive and integrated network development and although planned investments involve important capital investments, there is no prioritization that is in line with available financing resources. Generally, with revenues that cannot cover the operational services, major 19 KPMG, â€?Final Report (Railways FBH): Assistance with the restructuring of the Railways of the Federation of Bosnia and Herzegovina and Railways of Republic of Srpskaâ€?, Sarajevo, December 5, 2007 and â€?Final Report (Railways RS): Assistance with the restructuring of the Railways of the Federation of Bosnia and Herzegovina and Railways of Republic of Srpskaâ€?, Doboj, December 7, 2007. Annex 3- 26 investments in the sector have to be funded from the governments’ budgets and from participations and initiatives from international donors and IFIs. Annex 3- 27 5. Conclusions and recommendations 5.1 The review of the railway sector in FBH indicates that the railways continue to place a significant strain on the public budget, a strain that has increased as a result of the recent economic crisis. The FBH railways face high administrative and labor costs, poor productivity of staff and assets, an aging and declining asset base, and low traffic. In addition, they are likely to face strong competitive challenges in their commercially viable freight markets in the medium to longer term. The reform challenge is to transform the two railways into strong competitors in the time available before open access is a reality in the region. Despite the scale of the challenge that the railways face, progress has been disappointing. 5.2 While selective investments are necessary in the railways, no further substantial investment should be made until the necessary institutional reform has progressed. Before any substantial railway infrastructure investments, the following institutional and regulatory reforms should be introduced and effective: (i) clear separation between railway infrastructure management and operations and the complicated structure of infrastructure ownership and patronage is solved; (ii) establish fully compensatory PSO contracts for all the loss making passenger services the government wishes (and can afford) to buy; (iii) an access charge system for railway infrastructure use is defined and introduced; (iv) clear separation between freight and passenger operations with full transparency of accounting and without any cross- subsidies; and (v) the two railways prepare a business plan to improve their operational and financial performance. 5.3 This section presents the recommended reform steps, broadly delineated into the short, medium and long term steps, necessary to: (i) strengthen the institutional framework; (ii) improve operational and financial performance; and (iii) undertake selective investments. Strengthening the institutional framework In the short term: ï‚· Continue the harmonization of the necessary legislation with the requirements of the acquis communautaire, and streamline the current railway legislation, particularly regarding the competencies for harmonization of technical specifications of the FBH network; ï‚· Prepare a network statement for the FBH railways, consistent with the regional template; ï‚· Develop a system of railway infrastructure ‘user charges’, based on the regional template, and analyze the impact of those charges on the operators activities; ï‚· Prepare a Public Service Obligation methodology for introduction consistent with the track access regime; Annex 3- 28 ï‚· Implement the legal provisions on the split among the transport services and infrastructure and prohibit implicit cross-subsidy from operations to infrastructure accounts, and from freight to passenger transport; ï‚· Strengthen the role and functions of the current BH Railways Regulatory Body to allow it to take over responsibility for transport regulation, engineering and supervision of railways, and traffic safety of the BH railways network; ï‚· Establish an investment planning process that prioritizes projects according to financial rate of return. The limited funds available for investment, and investment choices should be traffic-driven and economically viable; and ï‚· Develop a National Railway Register. In the medium-term ï‚· Introduce a system of railway infrastructure â€?user chargesâ€?, based on the regional template; ï‚· Introduce a formal PSO methodology for the payment of subsidy for socially necessary passenger services; ï‚· Investigate whether the current BH Railways Regulatory Board can undertake the functions of monitoring the safety of the network and defining liabilities, fines in case of violations of traffic safety, and definitions of traffic accidents; ï‚· Enhance functions of the BH Railways Regulatory Body for issuing safety certificates and perform implementation control; and ï‚· Develop and align with EU the legislation for transport of dangerous goods via the railways network. In the long-term ï‚· Develop rules for access to railway infrastructure and rules on the incomes and expenditures of railway undertakings. Improving operational and financial performance In the short term: ï‚· Establish accounting to support profit centers. A critical step to implementing profit centers is to develop accounting information and analytical tools that provide information on a profit center basis; ï‚· Measure performance and provide incentives to staff. The railway’s Board of Directors should set goals for railway management, which in turn should set corresponding goals for staff that reflect the policy goals for the railway. These goals should include a combination of financial, safety, environmental and service quality/quantity measures. Annex 3- 29 ï‚· Institute marketing and service design. The FBH railways would benefit significantly from efforts to increase traffic. With marketing and service design, the railway seeks information about actual and potential customers to provide services that better meet the customers’ needs; ï‚· Improve governance. In FBH, national governments are the owners of railway stock and exercise supervisory control through boards of directors. This role should be used to encourage railway management to take up the strategy issues, discussed above, which are within the railway’s control: commercial management, boosting productivity, and integrating railway services; In the medium-term ï‚· Scrap excess rolling stock. Each railway should review and identify the non- functional rolling stock that could be cleared from its inventory and scrapped; ï‚· Implement staff reduction plan. The two railways should implement the staff reduction plan in the medium term to improve the financial and operating performance of the railways; ï‚· Reduce unprofitable lines. The procedures for closing unprofitable lines and services, where service specific subsidy is not forthcoming, should be started to close the line/service; ï‚· Privatize non-core activities. The railways should shed all non-core activities and focus on their core activities. ï‚· Close unviable stations. A similar process should be followed for all unviable stations on the network; and ï‚· Formalize the line of business separation for freight and passenger services. Commercial railways organize themselves in lines of business or profit centers, which focus on groups of customers external to the railway20 whose traffic has shared characteristics which cause it to benefit from being managed together. At a minimum, the railways should separate freight and passenger lines of business. Identifying selective investments In the short term ï‚· Undertake a realistic assessment of future rolling stock needs, and pros and cons of the different financing options to realize those needs; and 20 The profit center must have external customers. If the customers are all internal to the railways (e.g., the locomotive department), it is a cost center, not a profit center. Annex 3- 30 ï‚· Undertake a robust assessment of rehabilitation requirements on Corridor Vc. Commission consultants to undertake an objective analysis of the rehabilitation priorities on the southern section of Corridor Vc – at the level of pre-feasibility stage. In the medium term ï‚· Investigate the possibility of implementing completion of the rehabilitation of the southern section of Corridor Vc railway. Annex 3- 31