Innovative Financing Methods in the Rail Supply Industry

Alternative financing models in the rail supply industry

Building new railways can be very cost-intensive as recent projects illustrate. The Haramain High Speed Rail linking the two Saudi cities of Makkah and Madinah, for example, involves a budget of EUR 6.7 billion for railway systems and rolling stock only . But not only the construction of new railways, also the upgrade of already existing railways can occasion substantial costs: The programme for a replacement of all signalling on the entire Banedanmark railway network in Denmark assessed a total investment of EUR 2.5 billion for, amongst others, a full ERTMS level 2 implementation, a full CBTC-system, and countrywide coverage of GSM-R data system .

Large railway projects can very rarely be completely financed by private investors, because the financial expenditures and underlying uncertainties are high, whereas the expected revenues are relatively low. Therefore, governmental support is usually needed to realize these projects. But as government debt is increasing and/or already on very high levels in most parts of the world, financing for infrastructure projects like for railways is getting more difficult to obtain. This is aggravated by the fact that financing periods given by private investors have shortened since the financial crisis and that big global banks have become more restrictive in lending money due to new Basel 3 capital rules.

Simultaneously, the worldwide share of people living in cities will rise from an average of 51% in 2010 to over 80% by 2050 . This puts further pressure on city planners to improve or install mass transit systems that cope with the increasing number of commuters. Moreover, greater needs for mobility between economic centres, rising oil prices, and goals to decrease greenhouse gas emissions necessitate further investments in regional and long-distance rail services. It should be added that many rail systems already have to cope with an investment backlog: According to the World Economic Forum, global spending on basic infrastructure such as transport, power, water, and communications currently amounts to USD 2.7 trillion a year, although it should be at USD 3.7 trillion. Considering these developments and the status of public finance, conventional financing is increasingly stretched to its limits. As a result, alternative financing methods which help governments and rail transport companies to appoint their means in more efficient ways are called for.

Figure xx: Developments affecting rail financing

Conventional financing of rail projects

Railway systems can be divided into four main categories that differ from each other by their primary source of funding as well as the geographic focus of their operations.