ناصر جبرائیل اوغلی naser jebraeil oghli

حمل ونقل - بازرگانی - اقتصاد - بازاریابی - مطالب آزاد

Public Expenditure in the Transport Sector
نویسنده : ناصر - ساعت ٧:٤٠ ‎ب.ظ روز ۱۳۸۸/٦/٢۱
 

Public Expenditure in the Transport Sector

 

 

Introduction

 

The Czech Republic (CR) has made good progress in privatizing some transport operations, and now needs to concentrate on commercializing activities, which will remain in the public sector and completing remaining privatization. CR published its transport policy in 1998, which commendably drew together different political views and sought to retain a significant role for the State. However, CR is preparing to join the European Union (EU) where transport is overwhelmingly market oriented. This is going to put pressure on transport organizations, particularly Czech Railways (CD), to compete successfully or become increasingly marginalized. In addition, the public cost of supporting transport activities, more than two percent of GDP in the case of the railways, is becoming increasingly unaffordable. There is a widespread consensus in the EU, other countries and academia that most transport services are best performed by the private sector, with companies performing specific social services compensated by public service obligations (PSOs). The role of the Government in ex-socialist countries is thus reoriented from its former task of directly managing transport enterprises, to assuring that competition among private transport operators is fair protecting the public interest in safety, the environment and social working conditions.

 

Recommendations in this chapter include (a) restructuring the railways, including redrafting currently proposed railway legislation, (b) catching up with the maintenance backlog in roads, railways and public transport because of its high economic justification, (c) phasing railway and motorway corridor investments because of their lower economic justification, (d) reducing road costs by consolidating road maintenance districts and contracting out routine and periodic road maintenance, (e) increasing charges on heavy road vehicles so that they cover their road costs, (f) increasing public transport tariffs for railways, buses and urban transport to reduce uneconomic subsidies and generate funds for asset renewal, (g) expanding the parking program in Prague and considering introducing a system of congestion charges, (h) avoiding Government guarantees because they are scrutinized less carefully than the budget, (i) avoiding Government participation in financing or guaranteeing investments for CSA or at Prague Airport because these operations are profitable, and (j) increasing the use of, and reliance on, objective cost/benefit analysis for all investments, including rehabilitation and equipment renewal, taking into account external costs.

 

Undertaking the proposed reforms is estimated to reduce Government transport expenditures by roughly CZK12 billion per annum during the first five years. The main savings would come from reductions in railway and motorway corridor investments, reductions in railway operating costs as the restructuring program begins to take effect, and increases in road taxes on heavy vehicles. These would be partly offset by increases in road, railway and urban transport maintenance expenditures as the backlog begins to be addressed. In the second five years, annual savings should increase to the order of CZK33-46 billion per annum (1.9-2.6 percent of 1998 GDP) as the full effects of railway restructuring become evident, with the range determined by the speed with which rail freight and long-distance passenger services can be privatized. There will also be substantial benefits to CR from improving the quality of transport services, facilitating 'just-in-time' manufacturing and promoting the development of the service economy, and decreasing the cost of trade.

 

Transport Demand

 

Table 7.1 below presents the changed during the transition of the goods and passengers modes of transportation.

 

Table 7.1. Trends in Goods and Passenger Transport

 

(tkm or pkm billions)

 

1990 

1998 

Percent change

Goods Transport 

   

Rail 

41.14 

18.76 

-54 

Road 

16.80 

33.91 

+102 

Inland Water

1.40 

0.82 

-41 

Air 

0.057 

0.056 

-2 

Oil Pipeline 

- 

2.08 

- 

Total

59.397 

55.63 

-6 

    

Passenger Transport 

   

Rail 

13.36 

7.02 

-47 

Automobile 

39.90 

60.80 

+52 

Bus 

12.34 

8.68 

-30 

Inland Water 

0.003 

0.008 

+166 

Air 

2.18 

3.68 

+69 

Total 

67.78 

80.18 

+18

 

(Thousand passengers/workday)

Prague Public Transport (PPT)

4,186 

3,349 

-20 

Source: Ministry of Transport and Municipality of Prague.

 

The reasons for these changes are structural and not expected to change: the decline of heavy industries, the emergence of a service economy and 'just-in-time' manufacturing which favor road transport, the explosive growth of the private automobile and aviation, and the reorientation of trade to the West. Consultants Halcrow forecast that CD's freight traffic would grow 1.5 percent per annum and passenger traffic decline 1.2 percent per annum, from 1998 to 2003. Achieving this growth rates will very much depend on CD improving its customer orientation and restructuring as discussed below, and on its operational and infrastructure constraints such as network size, speeds and types of service offered. A further decline in rail transport is possible as CR approaches modal splits observed in other Western European countries (railways currently carry about 35 percent of freight and 9 percent of passengers). Conversely, automobile, truck and air traffic are expected to continue to grow rapidly, which will require careful planning for road investments and for measures to control the growth of congestion in Prague and other urban areas.

 

Railways

 

System and Efficiency

 

CD, a state owned company with Directors appointed by the Government, operates most of the railway system in CR. Infrastructure includes 9,430 of route-km in 1998, of which 1,940 km are double track and 2,984 km are electrified. CD's system is too large for the volume of traffic it now carries. For example, CD's principal source of revenue is freight traffic, of which it performed 1.12 million ton-kilometers (tkm) per kilometer (km) of track in 1998, or about one-sixth the traffic density of the United States. CR has 120 km of rail per square km, compared to 74 in Poland, 83 in Hungary or 59 in Slovenia. Much of the railway is also in poor condition because maintenance was deferred due to financial constraints. There are permanent or temporary speed restrictions on 1,152 km of track, traction and rolling stock is aging, and signaling and telecommunication need modernizing. CD estimates its maintenance backlog at CZK130 billion. While CD's system is too extensive, proposed corridor investments will cover part of the backlog, and there may be a political element in the estimate, the backlog is nonetheless substantial. Partly as a result, CD's efficiency is low by international standards. Halcrow compared performance in 13 central and eastern European (CEEC) countries, and found that CD was worse than average in most measures of labor and capital productivity (total staff per gross tkm; wagons per freight tkm, passenger coaches per passenger-kilometer, pkm).

 

CD is particularly affected by high labor costs, which accounted for 49 percent of operating costs in 1998. CD had 91,870 employees in 1998, and has succeeded in reducing their numbers by 14 percent since 1994. However, labor costs per worker increased 27 percent in real terms during this period while worker productivity per traffic unit (tkm+pkm) decreased by 5 percent. Income levels are expected to continue to rise in CR which would make high labor costs a more serious problem in the future. The CD trade unions are quite influential. For example, the Government and CD attempted to reduce rail lines by 30 percent through sale or abandonment in 1997, but this was unsuccessful because of trade union and community resistance.

 

Financial Performance

 

A review of CD's financial performance during the years 1994–98 is shown in Annex 7.1. CD, like most of the railways in Central Europe, has a serious financial problem with operating ratios rising from 107 percent in 1994 to 115 percent in 1996 and falling to 107 percent in 1998. These ratios, however, do not reveal the full extent of the problem. There is a substantial maintenance backlog as discussed, and depreciation is also understated because fixed assets have not been revalued to allow for the effects of inflation. Freight services have been profitable since 1995 with annual profits as a percentage of revenue ranging from 16 percent in 1995 to 8 percent in 1998. However, CD suffers major losses from passenger services. Based on CD's cost accounting, revenue collected from passengers in 1998 of CZK4.3 billion covered only about 27 percent of the CZK15.7 billion cost of providing passenger services. The Government's operating subsidy of CZK6.4 billion covers 41 percent of these losses, the profit from freight services covered about 10 percent, leaving an unfunded balance of 22 percent or CZK3.4 billion. Losses have been running at about this level since 1995 even though passenger tariffs have increased in real terms by about 57 percent between 1994 and 1998 resulting in an increase in cost recovery from passengers from 22 percent in 1995 to 27 percent in 1998. Freight tariffs were also increased by 6 percent in real terms from CZK1.13 to CZK1.20 per tkm during this period.

 

In addition to the operating subsidy, the Government provided investment grants in 1998 of CZK10.9 billion. The Government's total support for CD in 1998 is estimated at CZK28.4 billion. The approved Transport Investment Plan calls for the Government to invest CZK15-17 billion per annum in CD in coming years, financed either by the budget or new loans as shown in Annex 6. In addition, CD cannot avoid replacing aging traction and rolling stock (TRS) or carrying out other maintenance at a cost of say CZK seven billion per annum. It is, therefore, likely that the Government will need to provide around CZK40 billion per annum in railway support in one form or another during the coming years. This amounts to more than two percent of 1998 GDP which does not appear sustainable.

 

It is recommended to improve CD's financial and management accounting systems to provide a more objective assessment of CD's financial position and monitor restructuring. The financial accounting system should be prepared promptly, provide details on cash flow, and be audited, all in accordance with international accounting standards. The management accounting system is necessary to establish realistic budgets, delegate authority and responsibility, and monitor results. It will also provide information for setting tariffs, allocating costs between freight and passengers services, quantifying the costs of unprofitable services and establishing on an objective basis for PSO payments to cover the cost of unprofitable but socially desirable services.

 

Since 1996, CD has been using loans to finance part of its capital investment program. As of December 31, 1998, these loans amounted to CZK20.0 billion with plans to borrow a further CZK28.0 billion over the following four years. Under current conditions, CD will not be in a position to meet the debt service on these loans as already in 1998 CD's net internal cash generation after debt service was minus CZK1.1 billion. In effect, CD is using new loans to pay part of its current debt service. Further borrowing by CD under current conditions is inappropriate, as the Government will eventually be required to assume any new obligations. It would be better for the Government to borrow these funds directly to obtain a lower interest rate. CD's current ratio (current assets divided by current liabilities) has fallen from 1.9 in 1994 to 0.6 in 1997 but increased to 0.9 in 1998. These low ratios reflect CD's severe liquidity problem which was caused in part by delays in the payment of Government subsidies and grants. This has resulted in substantial additional costs to CD in the form of penalty interest charges and excess prices from contractors. Better coordination between the Government and CD on payments and commitments could eliminate this problem even at the current level of payments.

 

Passenger Service Subsidies

 

There is no economic rationale for controlling long-distance passenger fares or services for either rail or road transport in a market economy, i.e., there is sufficient competition from other transport modes to prevent monopoly abuses. Subsidies for suburban passenger services may be justified as a way to address motorization issues as discussed below, but it is recommended that this be done in the form of PSO payments provided by the concerned regional government-in-the-making which benefits from the service. Subsidies of national interest can continue to be paid by CR, e.g., for school children or disabled passengers. Government regulation of passenger services in a market economy need only be concerned with matters of safety, environment, and professional standards. It is, therefore, recommended to deregulate long-distance rail passenger tariffs and services to permit this line of CD business to be profitable, as occurs in other countries.

 

European Commission (EC) Directives

 

CD has been divided into separate divisions for infrastructure and operations, but there is a difference of opinion as to whether accounting separation has been achieved in accordance with the requirements of CD 91/440. The proposed Railway Law discussed below seeks to solve this. The other principle item of legislation, which will affect CD, is the limit on state aid, which needs to be addressed. CR is well advanced in complying with other EC railway requirements.

 

    Restructuring Assessment

 

The growth in road competition and high labor costs suggest that CD's financial position will continue to worsen in the absence of reform. The Government recognizes the need for change and has taken some measures to comply with EC directives. Some privatization had taken place in the areas of workshops, catering, sleeping car services, intermodal operations and regional branch lines, but there are few apparent benefits to date. The management of CD has little control over passenger fares or freight tariffs which are largely controlled by MoT, or the extent of its system. There is little evidence that modern business management practices are being followed, and there is no clear contractual relationship between the Government and CD. As a consequence, there is little incentive within CD to improve its operational and financial performance, and thereby its competitiveness.

 

It is clear that strong remedial actions are required to prevent the further marginalization of CD as a transport mode, and to reduce the Government's substantial financial burden. What is required is a clear vision of the future role of railways in CR and a plan of action for getting there. Competitive railways in other countries concentrate their activities on main trunk lines, block trains and long-distance services, all of which can be profitable. It is recommended to organize the railways into three profit centers: freight, long-distance passenger services, and suburban services, with a view to privatizing these businesses one-way or the other in due course. This has been successfully done by outright sale in Japan, New Zealand and Great Britain, or by concessioning in Argentina and Brazil. With restructuring, both freight and long-distance passenger services should be profitable, including covering their track costs. Suburban services will require continued subsidies through PSO payments as discussed. Restructuring will require staff reductions, service reductions and line closures or offsetting PSO payments. These should be prepared in close consultation with those affected, with due consideration paid to adverse social impacts and safety nets, including the provision of satisfactory replacement bus transport where necessary to communities which lose rail service.

 

Restructuring constraints and possibilities assessed by Halcrow in 1999. As discussed, the main constraints to restructuring CD are rising labor costs, the major maintenance backlog, limited funds for investment except in the TEN corridors, the slow pace of organizational reform and privatization to date, tariff controls, strong trade unions, low employee and capital productivity, the poor quality of regional services, and increasing road competition. CD is held responsible for achieving business targets, but in fact has only limited powers to do so. CD cannot appoint senior managers; change its organizational structure at a high level; decide annual operational or investment plans; prepare its own long-term plans, or establish its own pricing, leasing or procurement policies. Government also imposes some constraints on day-to-day operational management. This contradiction of responsibility without authority has undoubtedly contributed to the fact that there have been five Ministers of MTC and five managers of CD since 1993.

 

Restructuring CD requires a family of interrelated actions. In order to improve the productivity of human resources, address the real concerns of labor and secure the support of their trade unions, a combination of sensitive measures is required in the areas of personnel management including training and development, redundancy packages and resettlement. The accounting separation of infrastructure and operations needs to be completed. Separate market led businesses need to be established for freight, long-distance passengers and suburban passengers as discussed, and their managers adequately empowered. CD should prepare its own annual and operational budgets that support these accountabilities and relationships among the profit centers with a view to making decisions which achieve value for money. Long-term business plans are required. A management information system; resource and cost allocation system, and business evaluation and monitoring systems are needed to implement the process. The new powers and accountabilities between the Government and CD should also include a significant increase in CD's freedom to price its services. This will enable CD's marketing specialists to optimize revenue across market segments, and to review loss-making services for support by PSOs or abandonment.

 

Concerning investments, it is recognized that there will always be difficulties in financing all CD's needs from public sources. The Government should consider increasing CD's authority to divest non-core activities, dispose of surplus assets, and seek private funding. Procurement needs to be improved by divesting and outsourcing loss-making activities, involving the private sector in terminals and services, and contracting maintenance on a competitive basis. The quality of all services needs to be improved, partly through the improvement of business processes discussed above, but also through capacity and resource reviews, improved productivity and maintenance, and service and reliability reviews. In order to implement the above measures, CD's objectives, powers and public service contract need to be drawn together, and analysis and plans for the disposition of non-core and loss making activities prepared.

 

A strong program of downsizing and restructuring is recommended to address these issues which could be carried out in a period of two to five years. A process like this requires a 'champion' in the Government to push the reforms through. It may also be helpful to involve international advisors and financiers to draw on the experience of other countries and provide an objective frame of reference.

 

Economic Benefits of Restructuring

 

Halcrow estimates that CD operating costs could be reduced by 35 percent without privatization, a savings of around CZK10 billion per annum. If passenger tariffs were doubled to cover 56 percent of 1998 costs, this would yield an additional CZK3 billion per annum. The effect of higher passenger tariffs would be largely offset by improvements in passenger services. Most of these benefits would accrue to the Government in the form of a reduced need for subsidies. Following the privatization of both freight and long-distance passenger services, it should be possible to reduce Government contributions to CD to 0.5 percent of GDP based on experience in other countries. This is a potential savings of CZK30 billion per annum over anticipated expenditures if no restructuring takes place as discussed above.

 

Current Restructuring Proposal

 

MTC is preparing a proposal for a new Railway Law as summarized in Annex 2. Under the proposal, two publicly owned organizations would be created: a joint stock company for operations (CDjsc) and a state-owned infrastructure company (CDso). CDjsc would be publicly owned; receive a five-year operating concession; own rolling stock and related workshops and property, and assume related debt. CDso would be managed by a Board of Directors appointed by MTC which would prepare the budget and annual reports for approval by Government. MTC would determine railway tariffs. CDso would receive all infrastructure assets, including stations, and assume most railway debts. CDso would be responsible for social programs (labor reductions, line closures). Infrastructure, possibly including traffic management, would be provided by CDso to CDjsc by contract for a fee. Access to other operators would be provided by CDso on the basis of regulations set by the Rail Office in MTC. MTC would determine railway tariffs. A Transport Fund would be created as discussed below.

 

The current proposal should be assessed by how well it addresses the restructuring issues and reform objectives discussed above. While the proposal contains some positive elements, it falls short in several important areas:

 

  • First, all rail operations are kept together despite there vastly different financial characteristics, which risks continuing deficits and poor service particularly in the face of foreign competition. As discussed, it is recommended that there be separate companies for freight (which can be privatized quickly) and intercity passenger (which can also be privatized in the long term). It is suggested that the operational and financial responsibility for suburban operations be split up among the 14 Regions-in-the-making, although there can be a central Government share if desired and CD can be the contract operator.

 

  • It is not recommended to give CDjsc an exclusive five-year contract. It could make sense to give them a two year exclusive contract on infant industry grounds, but only if CD is carrying out a comprehensive restructuring program. This would last until CR joins the EU, following which open access will be required under the rules of CD 91/440.

 

  • Infrastructure needs to be clearly financially separated from any of the operators, and current practice is showing that Europe is likely to require institutional separation as well. This is the objective of the proposed Railway Law but may be difficult to achieve in practice. MTC will represent the owner of CDso, oversee CDjsc, prepare the rail infrastructure contract, and oversee the Rail Office. While a number of European countries are keeping the infrastructure organization in Government hands, it is also worth considering the Swedish model which shows that a separate infrastructure organization can be successfully created which avoids the traditional problems of direct Government management.

 

  • While some corridor investments are required, they are not the most efficient use of scarce resources given the need to invest for restructuring and catch up with the maintenance backlog.

 

As presently drafted, the Railway Law unfortunately falls short of today's best practice. In all likelihood it will delay reform because it does not address the underlying issues and yet will be thought of as a solution. There are examples of recent railway laws in other countries, including Romania, and (in last stages of passage) in Poland, which could be helpful as models. A major redrafting of the law is recommended.

 

Roads

 

System and Issues

 

CR has a large road network of 127,693 km, including 498 km of motorways and 2,655 km of European roads (Type E). The number of road vehicles has increased 44 percent in eight years to 4.58 million in 1998. This amounts to 435 vehicles per 1000 population, compared for example to 220 in Hungary and 230 in Poland, putting CR on the high end of European road vehicle densities. Average annual daily traffic (AADT) in 1995, the last data available, averaged 17,024 on motorways and 6,088 on primary roads. It is recommended that CR count traffic annually to complement the pavement condition surveys which is done on a continuous basis.

 

Roads are administered by the Roads and Motorways Directorate (RMD) under the responsibility of MTC. RMD currently constructs motorways and primary roads, while the construction of secondary and tertiary roads is the responsibility of 72 Road and Administration Units (SUS) corresponding to the number of counties in CR. RMD has about 1,500 employees and the SUSs about 10,000. Major road works are carried out by contract, while maintenance works are carried out by the SUSs by force account. Quarries and asphalt plants have been privatized. Experience in most countries shows that routine and periodic maintenance can be carried out at lower cost by contractors selected on a competitive basis rather than by force account. RMD reports that low labor costs (and possibly low depreciation charges) make force account works appear cheaper, and there is also force account maintenance is required by current law. However, it is recommended that these costs be reviewed. Seventy-two SUSs are too many for a country the size of CR, resulting in excessive personnel and inefficient use of equipment and workshops. It is understood that MTC and RMD are considering consolidating some or all of the SUSs into the 14 Regions-in-the-making, and the Bank supports this proposal.

 

The main issue affecting the road sector is the deteriorating condition of the road network due to lack of funds which appear to have been diverted to the construction of motorways. If maintenance and repairs are not performed in a timely manner, roads and bridges will have to be rehabilitated or reconstructed earlier than otherwise, increasing Government expenditures unnecessarily. Motorists also suffer high vehicle operating costs driving on roads in fair or poor condition. Catching up with this backlog has a higher economic priority than constructing most new roads. Funds for the maintenance and repair of roads declined by 61 percent in real terms from 1989 to about CZK5.0 billion in 1998. RMD estimated the backlog in road maintenance to be CZK20 billion as of 1998. The Bank recommends that the Government increase expenditures for the maintenance and repair of roads to about CZK10 billion per annum in 1998 prices, which would enable RMD to catch up with the backlog in 5-10 years. Funds can be found by phasing the motorway program.

 

Road Finances and Trust Fund Proposal

 

Road Expenditures are financed from the budget. Road users pay various taxes, including a fuel tax, vehicle taxes and motorway vignettes. CR collected CZK48 billion in excise taxes on fuel in 1999. Fuel tax rates are lower than neighboring countries, and some truckers choose to transit CR because of the low fuel prices. The EC will require CR to increase the current tax on diesel fuel by 15 percent to 0.245 ECU per liter. CR collected CZK5.7 billion in vehicle taxes in 1999, which are applied primarily to trucks. CR also collected CZK1.8 billion in motorway vignettes in 1999. At present, only annual vignettes are issued, with automobiles paying CZK800 per annum, ranging up to CZK8,000 per annum for trucks >12 tons. To comply with EC regulations, CR plans to issue vignettes for shorter periods, e.g. one week. MTC complains, with some justification, that the present budgetary system results in significant year-to-year fluctuations which makes it difficult to plan or pay contractors with multi-year contracts. The best way to address this issue is with multi-year Government budgets.

 

The present system calls for the following comments:

 

  • It is recommended to separate the present taxes into (a) road user charges which should be related to the cost of building and maintaining the roads; and (b) general taxes, principally the excise portion of the fuel tax.

 

  • Road user taxes, like the prices for all public infrastructure services, should be set to ensure (a) full cost recovery including external costs; (b) equity between modes: and (c) adequate protection for the environment.

 

  • Heavy trucks do not appear to be covering their road costs. It is recommended to increase annual vehicle taxes on heavy trucks (as well as the diesel tax) in order to cover the road damage which heavy trucks cause, and assure that transit traffic covers its road costs and that road/rail competition is carried out on a 'level playing field'.

 

  • There are sufficient capacity constraints in the road network to justify collecting tolls on motorways. However, motorway vignettes pose a dilemma. On the one hand they have been set relatively low so as not to discourage Czech users, which is commendable. On the other hand they need to be set high enough to pay off motorway loans and avoid subsidizing foreign users. Vignettes also undercharge frequent motorway users and discourage infrequent users.

 

  • A way needs to be found to address the road maintenance backlog, and it is recommended that RMD be given more responsibility to allocate funds between new construction and maintenance/rehabilitation using their pavement and bridge management systems.

 

  • A way needs to be found to charge for external costs, that is the costs which motorists do not pay for but impose on others, namely part of the cost of congestion and accidents, and environmental costs. The EC estimates that congestion costs EU member countries 2 percent of GDP (90 percent of congestion occurs in urban areas), accidents 1.5 percent of GDP, and pollution and noise 0.6 percent of GDP.

 

It is recommended that CR carry out a road user charges study to investigate these issues, and that CR adjust it's system of road taxes based on study recommendations. In the longer run, it could be warranted to establish an extra-budgetary fund for conserving the existing road network because the economic costs of not performing maintenance punctually are high and maintenance is easily overlooked at the political level as it is in most countries. If established, it is recommended that the fund be controlled by a Board with significant road user representation.

 

MTC proposed to establish a Transport Fund (TF) in early 2000 as described in Annex 3. As originally proposed, the TF would be an extra-budgetary fund controlled by a Board which is overseen by MTC. It would finance the maintenance and investment costs of public transport infrastructure, including roads, railways, combined and inland water transport. The TF be fed by 40 percent of the fuel tax, all vehicle taxes and motorway vignettes, and the sale of railway property. The TF could borrow, and unused funds would be carried over from year to year.

 

As a general rule, extra-budgetary funds are undesirable because they reduce the Government's control over public expenditures. In particular, extra-budgetary funds should not be used to finance investments, which should compete as part of the normal budgetary process. As proposed, the TF could result in cross subsidization between transport modes, distorting their respective costs and tariff structures. It is important that each transport mode face its real costs so that it can specialize in the traffics where it has a comparative advantage, thereby reducing the total cost of transport in CR.

 

Road Safety

 

Road safety is a problem in CR as it is in most of the countries in the region. Road fatalities increased from 810 in 1988 to 1,204 in 1998. However, at 2.7 fatalities per 10,000 vehicles, CR is below the EU average (3.36) although above the United States (2.08). While studies are not available for CR, the cost of accidents, based on the 'willingness to pay' method, is estimated to be 1.5 percent of GDP in EU countries, 1.6 percent in Poland and1.7 percent in the United States, a significant economic loss. The responsibility for improving road safety rests with MTC, which is implementing an accident reduction program. CR reduced the speed limit in urban areas from 60 to 50 kph in 1997, resulting in a 20 percent reduction in accidents. Insurance is compulsory, an accident reporting system is in place and being improved to EC standard, and a points system for traffic violations has been introduced. The EC recommends a 120 kph speed limit on highways, compared to CRs present limit of 130 kph. There is certainly no justification, particularly given the 14 year average age of automobiles, to increase the limit to 150 kph as has been proposed by some parties.

 

Road Transport

 

Road freight transport is deregulated, and there were 34,388 firms employing 141,000 people in 1997, the latest data available. 280,600 trucks were registered in 1998, around 40 percent of which were over ten years old and 53 percent of Eastern European origin (mostly LIAZ). There are considerable differences between the markets for international and domestic transport. The international market is relatively large, with 16,500 trucks registered in 1998. International truck transport is controlled by bilateral agreements which limit the number of trips CR haulers can make. There are also global permits which are controlled by the number of super green permissions given by the European Council of Ministers of Transport. Although road freight traffic as a whole is growing rapidly, international haulers lost market share in the early 1990s due to foreign competition. Average international tariffs were about CZK30 per km in 1997, falling to CZK21-26 in 2000 due to increasing competition. Czech haulers typically perform 130,000-150,000 km per year at an average cost of CZK24 per km, some 15 percent less than the EC average. Domestic truck transport is highly competitive, profits are low and there is significant excess capacity particularly following the recent recession. Most domestic trucks are of older Eastern European origin. Typical tariffs are CZK/km18-24. Domestic truck operators operate somewhere between 20-65,000 km per annum, at a cost of CZK/km17-23.

 

In 1997, buses accounted for only 8 percent of passenger movements in CR compared to 20 percent in 1990, and this trend will probably continue in the future as automobile competition increases. There were 763,305 buses and mini-buses registered in CR in 1998. Seventy-one percent of inter-city buses are Karosa vehicles, and 46 percent are over ten years of age. Domestic inter-city bus operations are dominated by the large ex-state owned road transport operators (CSAD organizations). The regular bus market is highly competitive with contracts for the operation of bus routes tendered every six months on the basis of cost per km. Regular bus operations are not profitable, and operators frequently lack funds for vehicle replacement which the Government has been subsidizing in recent years (CZK75 million in 2000). However, there is no economic rationale for subsidizing buses because it encourages the continuation of excess capacity, and it is also against EC regulations. There are also a substantial number of informal domestic and international bus companies which are not subsidized. Informal international firms compete with air and rail, which many Czechs cannot afford, while informal domestic firms offer more frequency and similar journey times as rail, albeit at somewhat higher fares.

 

Road transport operators will be affected by the EU accession. The most significant impact will be the required replacement or overhaul of trucks to meet emission requirements; vehicles will also have to be fitted with speed limitation devices. Another requirement will be to increase the current tax on diesel fuel by 15 percent as discussed. Access to the profession legislation will require international operators to make financial deposits. CR has already introduced EC regulations on maximum driving hours, but it appears that a number of drivers exceed the specified hours. CR is quite advanced in passing legislation to comply with these requirements. EU accession will also eliminate border crossings with the EU; CR border crossings delay trucks an average of four hours. The costs of compliance will fall largely on domestic operators (vehicle replacement) while international transport (increased market access) and Government (increased tax revenues) will be the primary beneficiaries. Consultants Halcrow estimate the net present value of these requirements are positive for CR.

 

Inland Waterway Transport

 

Inland water transport accounts for only 4 percent of international movements, concentrated on the Vltava river north of Prague primarily to and from Germany. Traffic fell 62 percent from 1995 to 1.7 million tons in 1998 (Table 1). Traffic may well continue to fall in the future due to the decline in heavy industries and increasing competition from rail and road transport. International market access is limited by bilateral agreements with Germany and the Netherlands covering the number of trips and minimum prices. There are about 500 private companies and nine public harbors in CR. The largest inland water transport company (CSPL) accounts for 90 percent of the market. Czech operators handle 90 percent of international traffic to/from Germany, in part because domestic operators continue to operate in low water levels during the summer months. The fleet totaled 568 vessels in 1998 with an average age of 25-30 years, and vessel replacement is difficult because of low profits. Domestic transport is unregulated. EC legislation is not expected to have any significant effect on the industry. The main area where it might have had an impact was a scrapping subsidy which was recently abolished. It's replacement with an 'old for new' scheme is not likely to have much effect in CR because there is significant excess vessel capacity.

 

Aviation

 

International air transport is provided by state owned Czech Airlines (CSA) and domestic air transport (mostly Ostrava – Prague) by three small carriers. CSA handles most traffic to and from the Czech Republic, carrying 2.0 million passengers in 1999 (double what it carried in 1993). CSA primarily serves destinations within Europe, but 8 percent of its flights serve destinations in the Middle and Far East. CSA operates a fleet of 25 Airbus and Boeing aircraft whose average age is four years, and has recently phased out its older Tupolev aircraft. Although fares, entry and exit are based on IATA accords, CSA operates primarily in markets with high regulated fares and restrictive entry practices in accordance with bilateral agreements, which although relaxed in recent years still heavily restrict competition. Aircraft load factors and labor productivity have increased in recent years, and CSA now makes a small profit (CZK89 million in 1997). However, Halcrow estimates that CSA's labor efficiency is one-third below, and its aircraft utilization 10-15 percent below, that of typical Western European operators. CSA's average fare is about US$0.12 per passenger-kilometer, about one-third higher than in the United States, a penalty to Czech airline passengers. There appears to be significant room for efficiency gains. For example, Halcrow estimates that improvements in labor efficiency could lead to a reduction of about 900 staff, saving some US$10 million per annum, which can be passed on to consumers.

 

Implementation of the European Common Aviation Area is expected to put CSA under significant competitive pressure, which is happening to some extent already. Although British Midland withdrew from the Prague market when the Czech authorities declined to permit it to operate additional flights, discount carrier 'Go' (using Stansted airport) is increasing it's U.K. flight to twice a day. CSA is now seeking to join one of the regional alliances with the objective of expanding Prague's role as an airline hub, following an unsuccessful joint-venture with Air France which CR severed due to CSA's losses. A successful alliance may require CSA to operate more as a feeder service to another long-distance carrier. The Government wants to privatize CSA to bring in additional capital after joining one of the alliances, which is commendable provided a sound regulatory regime is established. Under any scenario, it is recommended that CSA continue to improve its efficiency recognizing the increase competitive pressures which a single market will bring. It is in CR's interest to support the deregulation of airlines which is now occurring in Europe and which has already brought substantial benefits in North America.

 

CR is well advanced in complying with EC requirements. Noise regulations will require CSA to replace two ATR-72 aircraft, and will limit the aircraft of Eastern European countries which can serve Prague. CR is already a member of Eurocontrol, and CSA does not receive Government subsidies except for recent aircraft lease guarantees. It is recommended that the Government decline further guarantees, which will increase CSA's borrowing costs somewhat, as is also required by Eurocontrol regulations. CR expects to join the Joint Aviation Authority shortly, and already complies with EC technical and safety procedures. A new independent body will need to be set up to allocate slots at Prague Ruzyne Airport. The ground handling services of existing companies will also need to be separated.

 

CR has 13 international and 72 domestic airports which handled 5.0 million passengers in 1999. This is excessive for CR's size and traffic volume, and it is suggested that CR (i) investigate reducing the number of airports, and (ii) shift the financial responsibility for most airports to the 14 regions-in-the-making. International movements account for about 95 percent of all passenger movements in CR. The four main international airports are operated by the Czech Airports Authority (CAA), a self-financing autonomous operating company. Prague Ruzyne airport handled 4.8 million passengers in 1999, and traffic has been growing 1215 percent per annum in recent years. CAA estimates it currently has a capacity of 6.4 million passengers and plans the construction of a third terminal. To date, CAA has been able to fund the bulk of its infrastructure projects through loans repaid from operating profits from user fees and airport concessions, a commendable approach. There is no reason for the Government to participate in the financing future improvements at Prague Airport.

 

Prague Urban Transport

 

System

 

Prague is transport intensive, performing 15.4 billion road vehicle kilometers in 1998. Public transport is carried out by the municipal-owned Prague Public Transport Company (PPT) which carried 1.05 billion passengers in 1998 (60 percent of intra-urban weekday passengers), and also by the suburban trains of CD. Road transport increased by 111 percent and PPT transport declined by 20 percent from 1990 to 1998. PPT operates 50 km of metro lines, 136 km of tram lines and 760 km of bus routes. Average commercial speeds were 17.7 kilometers per hour (kph) for trams and 24.3 kph for buses in 1998. Public transport services and tariffs are managed and coordinated by a municipally owned transport association (ROPID). ROPID makes contracts with PPT, CD and private bus providers, and proposes timetables and tariffs for approval by the Municipality. Monthly passes can be used on any transport mode, and the Municipality compensates CD about CZK40 million. The Municipality is proposing that surrounding jurisdictions join ROPID, which is commendable.

 

PPT Finances

 

A summary of PPT's financial accounts for the years 1996–1998 are shown in Annex 7.4. PPT had an operating ratio of 100 percent during this period as the Municipality met it obligations and provided an operating subsidy to cover the full deficit each year. As in the case of CD, the accounts understate the deficit as, due to a shortage of funds, PPT has built up a substantial maintenance backlog. In addition, the charge for depreciation is inadequate as fixed assets have not been revalued to allow for inflation which has averaged about 10 percent per annum in recent years. There has been a modest real increase in revenue from passengers in recent years, from 25 percent of operating costs in 1996 to 27 percent in 1997. This cost recovery rate is low in comparison with other European cities, which are mostly in the 40-50 percent range. Wages and depreciation increased 7 percent in real terms between 1996 and 1998, but all other costs decreased including vehicle repairs by 13 percent and fuel by 17 percent resulting in an overall decrease in costs of 3 percent. The decline in vehicle repair expenditures confirms that maintenance has been postponed. While workers wages have increased in real terms, the level of service as measured by the number of passengers carried and vehicle/km has decreased by about 1 percent.

 

During the three years 1996-1998, PPT's capital investment program totaled about CZK11.5 billion. This level of investment, which included an expansion of the metro system, exceeded the depreciation charges by about 150 percent. Internal cash generation of CZK3.5 billion financed about 30 percent of the program. The Municipality's investment grants for three years of CZK5.9 billion financed a further 52 percent and the balance of 18 percent was financed by Government grants of CZK2.1 billion. In view of the substantial amount of internal cash generation used to finance investments, consideration should be given as to whether it would be more economic to cut back on new investments and use the funds to address the maintenance backlog.

 

The Municipality's financial support for PPT averaged CZK7.3 billion per annum during 1996-1998 consisting of CZK5.3 billion in operating subsidies and CZK2.0 billion in investment grants. The Municipality's support for PTT accounted for 32 percent of its budget in 1998, while other transport expenditures accounted for 13 percent. However, these funds are not sufficient to meet PPT"s requirements and it appears that the Municipality is unable to provide additional funds. To enable the Municipality and PPT to have an objective assessment of the current financial position of PPT, and assess the profitability of services, it is also recommended that PPT's financial and management information systems be improved and international accounting standards adopted.

 

Motorization Issues

 

The Municipality of Prague's transport policy focuses on reducing road congestion which is an increasingly severe problem. Prague had 513 automobiles per 1,000 persons in 1998, more than the 400-500 observed in most Western European countries and approaching the 600 seen in the United States. The EC estimates that the externalities of road transport (the costs of congestion, accidents, pollution and noise which road users impose on others) amount to 4.1 percent of GDP in EU countries. An EC study group estimates, assuming already mandated reductions in vehicle emissions, that European urban automobile drivers would typically need to increase the price they pay for transport services by around 30 percent to cover these external costs. The Municipality combats congestion by subsidizing public transport, expanding the metro, constructing a ring road, creating a pedestrian zone in the city center, implementing a parking program, and traffic engineering measures including traffic actuated signals which give priority to trams.

 

The World Bank recently reviewed world experience with motorization issues. The study found that peoples requirements for living and working space are so varied and so frequently changing that the only way to meet them efficiently is through open markets for land, housing and transport that convey as accurately as possible the real costs (including externalities) of each. As urban space becomes congested, the best way to maximize the benefit it yields to society is to introduce time-varying charges for its use. There are now proven techniques, of different degrees of sophistication, for doing this at reasonable cost. These efficiency-inducing charges can generate rapidly rising revenues due to the difficulty of expanding road space in congested areas. One high-priority use of these revenues is for public investment to help fill the backlog of inadequate infrastructure and services in deteriorated urban areas. The development, maintenance updating and enforcement of a unique structure plan for a metropolitan area, using open participative processes and including all jurisdictions, are the key to rational development of transport and urban land markets more generally. Costs to society from road traffic accidents and pollution should be fully recovered from drivers, using combinations of targeted taxes, charges and fines that convey to them as closely as possible the marginal social costs of their activity, and therefore provide common incentive to reduce these negative side-effects of transport. Public transport services have a critical role to play in enabling cities to offer living choices that suit more people, and they should be fostered by encouraging more competition and innovation and assigning them street use privileges. Company financial subsidies should not be needed, with the possible exception of major new infrastructure, with grant of development rights for some contiguous lands then being the most promising formula.

 

The Municipality may wish to consider the following proposals to address motorization issues in the light of these findings:

 

  • PT's cost recovery rate of is a low 27 percent (the same as CD's passenger cost recovery rate). However, studies in several countries show that the cross-elasticity of demand between automobiles and public transport is very low, and indeed the main effect of low public transport fares is likely to be to encourage decentralization and urban sprawl. It is, therefore, recommended that the Municipality increase PPT's cost recovery rate over a three to five year period to 40-50 percent, close to the average of other EU countries. Continued subsidization of public transport is justified on 'second best' grounds because road users do not yet cover their external costs.

 

  • It is recommended that public subsidies for bus renewal be dropped in favor of PSO payments which include sufficient funds for equipment replacement.

 

  • Prague should find ways to charge motorists for their external costs. A parking program, already initiated by the Municipality, is the most practical method in the short run. The responsibility for parking, including enforcement, could be centralized in a single agency, and include existing designated spaces, reserved permit spaces and illegal parking. Coverage areas should be expanded. Additional parking garages and park-and-ride facilities should be built (possibly by concession), and tariffs coordinated with on-street parking and set so as to discourage commuters. Enforcement of illegal parking can be improved.

 

  • It is recommended that Prague investigate other methods of charging for external costs. Electronic road pricing (ERP) technologies are now well developed, and investment costs are falling. In Singapore, where the system has been installed since 1998, investment costs were less than CZK7,500 per vehicle, and traffic flows smoothly. Norway has successfully introduced congestion charging in several cities with a significant improvement in traffic flows. It is recognized that congestion charging will depend largely on its political acceptability. This can be made more acceptable by designating revenues for urban transport improvements. It will also be easier to adopt in Prague where 60 percent of passengers still use public transport.

 

  • Public transport can be further improved. Prague's system of concessioning bus routes by competitive tender is commendable, and should be extended. It is recommended that the Municipality and ROPID explore ways to increase PPT's productivity and ensure that their services are adjusted in line with demand. It is recommended that the use of cost/benefit analysis be expanded in order to prioritize all investments including equipment replacement.

 

  • Prioritization of traffic signals, done for trams since 1993, should be extended to cover buses, and consideration given to creating a network of bus lanes. An urban traffic control system could be used to optimize signal phases in real time over a specified area, extending the system of 117 traffic signals in Prague which are already traffic-actuated.

 

Expenditure Review

 

It is recommended that public investments and expenditures be assessed according to how well they address the transport issues discussed above. It is particularly important that investment decisions be driven by economic criteria if one wants to avoid the pitfalls which bedeviled centrally planned economies, and more recently a number of East-Asian economies. In the case of publicly owned infrastructure (roads, railways), it is the role of the State to make investment decisions and be responsible for the consequences. Other investment decisions, mainly for transport vehicles and equipment (trucks, locomotives, aircraft, barges) should be driven by the commercial decisions of corporate managers operating in a competitive market. Extraneous considerations, such as the desire to protect the railway, inland water transport or national airline, should not affect the decision making. Otherwise none of these transport operators will have a fair chance to become internationally competitive. Transport investments are also not a good way to generate employment because most are capital intensive.

 

Public investments should be determined by cost/benefit assessment, the preparation of a realistic financing plan, the judgment that the investment cannot be undertaken by the private sector, or as part of an agreed PSO for a specific social service. Transport professionals in CR are knowledgeable about doing cost/benefit studies, and these are carried out for major investments. However, they do not always appear to be done objectively, possibly because the concerned transport organization has a vested interest in the outcome. It is recommended that: (a) the Government insist on objective cost/benefit analyses and base their investment decisions on economic criteria; (b) cost/benefit analysis be carried out for rehabilitation works and equipment replacement which is expected to show that these have a higher economic priority than most new investments; (c) an incremental cost/benefit analysis be included, particularly for railway/motorway corridors, to determine whether most of benefits can be achieved at a lower investment cost; and (d) the benefit/cost analysis include an assessment of external costs, which should help put discussions with environmental groups on a more factual basis. Restructuring railways as proposed will also provide managers with the incentive to seek the most value for money.

 

CR is preparing to join the EU, and the expenditure program discussed below is largely oriented towards improving the trans-European network (TEN) corridors which account for 56 percent of expenditures in 2000. The EC Accession Committee recommended that accession countries spend 1.2 percent of GDP in developing transport infrastructure, and this recommendation was increased to 2.0 percent by the 1997 Pan-European Conference increased to 2.0 percent. CR actually spent 1.2 percent in 1999 (Annex 4). However, (a) there is a substantial road and rail maintenance backlog which needs to be addressed, (b) road transit traffic (heavy trucks) is unprofitable at present; and (c) while rail freight transit is marginally profitable, the railway as a whole suffers severe losses. It appears that transport and other interests in CR are taking advantage of the EC recommendations to promote corridor investments. While corridor investments have a role to play, it is recommended that the investment and expenditure program be rebalanced to take other investment priorities into account.

 

MTC's approved 2000 budget is summarized in Annex 5, and the approved 2000-2010 Transport Investment Program in Annex 6. In 2000, CR plans to spend CZK27.5 billion (4.4 percent of the budget) on transport, including CZK15.4 billion on road and rail investments in the TEN corridors and related accession activities, CZK8.0 billion on operating subsidies mostly for railways, and CZK4.1 billion for all other transport activities. CR plans to invest CZK773 billion in transport during 2000-2010, including CZK480 billion in roads, CZK211 billion in railways, CZK43 billion in urban public transport, and CZK25 billion in other modes.

 

Railway investments concentrate on the two TEN corridors (CZK45.3 billion) plus two other corridors of national interest (CZK65.4 billion). The lines would be modernized and speeds increased to 160 kph (minimum 100 kph), double track and electrified throughout, and tunnels enlarged. Financing would come from the State budget or by borrowing (see Table 7.2).

 

 

  

Cost 

Proposed 

  

Remaining 

 

Length (km) 

(US$ million) 

Construction 

1998 Traffic (000) 

Cost/km 

Corridor 

Total 

To Do 

Total 

To Do 

Period 

net tons 

Passengers 

(US$ million) 

         

I. (E55, E40, E61)

392.5 

254.6 

1,040 

680 

1993 - 2002 

7,409 

8,882 

2.6 

II. (E65)

296.7 

226.5 

700 

530 

1997 - 2005 

12,639 

3,356 

2.4 

Total 

689.2 

481.10 

1,740 

1,210 

    

Source: Ministry of Transport, 2000 – 2010 Investment Program.

 

MoT estimates that the internal rate of return for each of these investments is 12 percent. However, it is not clear that such a high level of investment in these corridors is justified by traffic levels. One rule of thumb is that diesel traction is justified on lines carrying up to 10,000 tons of freight traffic and electric traction above. One indication is that Halcrow estimates that the TEN railway infrastructure program in CR has a benefit cost ratio of only 0.7:1. The benefit cost ratio for the other two corridors is likely to be lower even though lower design standards (single track) is proposed in some sections; CD is presently carrying out feasibility studies. All corridor investments risk to be poorly utilized unless complementary investments are made in traction and rolling stock, which is not included in the investment plans. It is recommended that CR investigate scaling back these corridor investments in favor of undertaking investments needed to restructure CD and catch up with its maintenance backlog.

 

Proposed road investments concentrate on the construction of 1,413 km of motorways and expressways (see Table 7.3).

 

Table 7.3. Proposed Investments in Motorways and Expressways

 

Motorway (D) / 

 

Cost (1999) 

Proposed 

Average Daily Traffic 

 

Remaining 

Expressway (R) 

Length (km) 

(US$ millions at 1999) 

Construction 

 

Estimated 

Cost/km 

Section

Total 

Remains 

Total 

Remains 

Period 

1995 

2000 

(US$ million)

D1 

69 

68 

495 

487 

2000 – 2011 

13000-36000 

15000-41000 

7.1 

D3 

184 

183 

1,327 

1,320 

2002 – 2013 

5000-16000 

6000-18000 

7.2 

D5 

21 

20 

250 

240 

1999 – 2007 

6000-19000 

7000-21000 

12.2 

D8 

70 

62 

778

695 

1999 – 2009 

6000-12000 

7000-14000 

11.2 

D11 

114 

114 

835 

834 

2000 – 2011 

7000-12000 

10000-14000 

7.3 

D47 

79 

78 

1,063 

1,051 

1999 – 2011 

6000-14000 

7000-16000 

13.4 

R1 

57 

56 

1,097 

1,071 

1999 – 2012 

8000-17000 

9000-20000 

19.1 

R4 

48 

47 

190 

190 

2000 – 2009

2000-17000 

2300-20000 

4.0 

R6 

142 

135 

704 

668 

1999 – 2016 

5000-12000 

6000-14000 

4.9 

R7 

67 

65 

288 

280 

1999 – 2014 

4000-15000 

5000-17000 

4.3 

R35 

234 

216 

1,124 

1,040 

1999 – 2017 

5000-20000 

6000-23000 

4.8 

R43 

70 

70 

357 

357 

2006 – 2015 

4000-11000 

5000-13000

5.1 

R48 

76 

74 

290 

284 

2000 – 2012 

6000-14000 

7000-16000 

3.8 

R49 

62 

62 

517 

517 

2010 – 2021 

1000-12000 

1200-14000 

8.3 

R52 

17 

17 

46 

46 

2010 – 2018 

4000-7000 

5000-10000 

2.7 

R55 

104 

103 

740 

729 

2000 – 2015 

6000-22000 

7000-25000 

7.1 

Total 

1,413 

1,371 

10,099

9,806 

    

Source: Ministry of Transport, 2000 – 2010 Investment Program.

 

CR's "motorway density" is significantly below Western Europe when measured against population or surface area. However, income levels in CR are also lower. The proposed construction of 525 km of motorways in ten years is more than 20 times the rate at which the wealthier Western European countries are adding to their own motorway networks at present. It is also important to catch up with the road maintenance backlog as discussed. As a rule of thumb, the construction of a four-lane motorway is economically justified when it is forecast to carry around 15,000 vehicles per day (vpd; less in flat terrain, more in mountainous terrain); expressways require less traffic. Halcrow estimated that the aggregate TEN road corridor program has a benefit-cost ratio of 1.3:1, which is satisfactory. However, some of the roads in the 2000-2010 program carry less traffic than appears needed to justify the investment. It is, therefore, recommended that the program be reviewed with a view to including more staged improvements and rehabilitation of existing roads, and to increase the maintenance budget with freed up funds.

 

The Program includes CZK5.0 billion to lower the draft in sections of the Elbe and Labe rivers to 2.2 m. However, only 1.45 million tons of international traffic was transported by inland waterways in 1998, and traffic is declining. It is also understood that Czech operators continue operating during the dry season. If this investment cost is recovered from traffic which continues at the 1998 level for 20 years, it would amount to CZK172 per ton not including interest or maintenance expenses. It is recommended to review the economics of this investment.

 

It is recommended that that the Government not subsidize the renewal of urban and suburban bus fleets as proposed in the Program as discussed. Similarly, combined transport investments (particularly RoLa) should be made by the private sector on a commercial basis, rather than by Government.

 

The 2000 Budget notes that the Government has given US$2.20 billion in guarantees for transport loans, of which US$953 million were drawn down by end-1999. Guarantees are an indirect form of subsidy which is subject to less review than a budget expenditure, and should be discouraged. The Government has given guarantees for US$286 million for aircraft purchases and leases, and US$276 million for the Prague Airport Terminal. There is no economic reason to subsidize these activities which are inherently profitable, and they should be financed by the organizations concerned as discussed. The Government has also given US$ 1.12 billion in guarantees for CD, but will almost certainly have to assume these loans in the light of its financial situation; guarantees for airports and CSA are less likely to be called. It is recommended to restructure the railways as discussed to reduce the need for future guarantees.

 

Budget Implications of Proposed Reforms

 

The budgetary implications of the restructuring and reform proposals in this report are summarized in Table 7.4. The figures are illustrative orders of magnitude, which should be made more precise by the organizations concerned. Budgetary savings (or additional expenditures) represent changes relative to the 2000 budget and/or proposed 2000-2010 Investment Program. The results are summarized in the second paragraph of this chapter.

 

Table 7.4. Illustrative Impact of Proposed Reforms on Public Expenditures

(Positive numbers are savings; negative numbers are additional expenditures)

  

Savings in Government Expenditures

(CZK billions p.a.) 

 
 

 

Proposal 

 

2001-2005 

 

2006-2010 

 

Comment 

Rail 

Restructuring Investments 

-2 

 

Redundancy payments, improvements in MIS and accounting systems, organizational changes, a few selected investments.

 

Operating Costs 

5 

10 

35 percent reduction. 

 

Double passenger tariffs in stages 

1.5 

3 

 
 

Catch up with maintenance backlog  

-7 

-7 

Substantial operational, passenger benefits. 

 

Reduce Corridor Investments

5 

11 

Assume 1/3 reduction of Program in 2001-2005, and 50 percent reduction in 2006-2010. 

 

Subtotal 

2.5 

17-30 

Following privatization of freight and long-distance passenger services, total Government contributions should be reduced to 0.5 percent of GDP, a savings of CZK30 billion.

Roads 

Contract routine and periodic maintenance; consolidate SUSs 

1 

1 

Assume 20 percent saving in road budget excluding investments. 

 

Catch up with maintenance backlog; establish extra-budgetary road maintenance fund

-5 

-5 

Significant road user benefits; rehabilitation/reconstruction postponed.  

 

Reduce motorway/expressway Program  

7 

13 

Assume 25 percent reduction. 

 

Subtotal 

3 

9 

 

Road Transport 

Increase taxes on heavy trucks, diesel fuel 

5 

5 

 

Aviation 

Avoid Government participation in financing Prague Airport or guarantees for CSA aircraft

1 

1 

 

Urban Transport 

Increase PPT tariffs to recover 40-50 percent of costs in stages 

1.3 

2.5 

Initial beneficiary is Municipal Government. 

 

Catch up with PPT maintenance backlog

-2 

-2 

 
 

Expand parking program, initiate congestion charging 

- 

- 

Investments financed from additional parking charges. 

 

Subtotal 

0.7 

0.5 

 

Total 

 

12.2 

32.5-45.5 

 

Source: World Bank estimates.

Annex 7.1. Review of Czech Railway's (CD) Financial Performance

 

 

A summary of CD's financial accounts for the years 1994 -1998 are attached to this Annex. CD's operating ratio excluding subsidies ranged from a high of 138 percent in 1995 to a low of 127 percent in 1994 and was 130 percent in 1998. The operating ratio including subsidies ranged from a high of 115 percent in 1996 to a low of 107 percent in 1998. CD's income during the four years decreased by 2 percent to CZK35.9 billion in 1998. This decrease resulted from a 63 percent reduction in other income from CZK11.6 billion in 1994 to CZK4.2 billion in 1998. However, all other revenue increased with freight up 22 percent, passenger up 86 percent and subsidies up 11 percent. Total operating costs decreased by 3 percent during the period to CZK38.5 billion. Wages increased by 54 percent and depreciation by 15 percent but all other expenses decreased with energy and material costs falling by 4 percent, maintenance costs by 13 percent and other expenses by 79 percent. CD's net losses after interest ranged from CZK2.7 billion in 1994 to CZK4.7 billion in 1996 and CZK3.4 billion in 1998.

 

During 1994-98 inflation as measured by the CPI increased by about 57 percent. To reduce the effects of inflation, CD's income statements for the five years were converted to December 1998 price levels using the CPI index. The revised statements show that that total revenue decreased by 32 percent in real terms to CZK37.7 billion during the five years. Freight revenue decreased by 14 percent, other revenue by 74 percent and subsidies by 23 percent. However, passenger revenue increased by 30 percent. During the period there was a substantial fall in traffic levels with freight traffic falling by 19 percent in tkm and passenger traffic by 17 percent in pkm. If the change in revenue is adjusted by the decrease in traffic levels the freight tariff increased on average by about 6 percent to CZK1.20 per tkm during the period while passenger tariffs increased on average by about 57 percent to CZK0.65 per pkm. Freight revenue as a percentage of operating costs increased from 43 percent in 1994 to 55 percent in 1998 while passenger revenue increased from 6 percent to 11 percent and subsidies from 15 percent to 17 percent during the same period. However, other revenue fell from 29 percent to 11 percent.

 

Total operating expenses decrease in real terms by 32 percent to CZK40.4 billion while the traffic volume decreased by about 18 percent. This should indicate an increase in efficiency, but most of the decline appears to be related to a reduction in the level of maintenance. Fuel and materials decreased by 33 percent, maintenance by 39 percent, other expenses by 85 percent and depreciation by 19 percent. Wages, however, increased by 8 percent while the number of workers decreased by 14 percent. This gave a real increase in CD's per capita wage level of about 26 percent. The general increase in wages in the Czech Republic was 22 percent during the same period. Revenue per employee increased by 6 percent to CZK0.29 billion but this was due to the increase in tariffs. If labor productivity is measured in traffic volume there was a decrease in productivity of about 5 percent. CD's wage expenses have increased from 31 percent of operating costs in 1994 to 49 percent in 1998. Operating losses decreased by about 34 percent to CZK2.6 billion but net losses decreased by only 12 percent due to a substantial increase in interest on long loans in 1998.

 

The income statements underestimate CD's losses, as there is a substantial backlog of maintenance, estimated by CD at CZK130 billion in 2000, that was not undertaken due to a shortage of funds. In addition, the level of depreciation is understated, as fixed assets were not re-valued while inflation has been running at an average of 10 percent per annum.

 

CD's internal accounting system estimates that the freight services incurred a loss of CZK0.5 billion in 1994 but earned a profit in 1995 of CZK2.8 billion gradually decreasing to CZK1.6 billion in 1998. Passenger services incurred a loss of CZK2.4 billion in 1994 rising to CZK8.2 billion in 1996 and falling to CZK5.5 billion by 1998. These losses were incurred after taking credit for government operating subsidies of over CZK5.0 billion per annum.

 

CD did not publish a cash flow statement but estimates prepared by the Bank indicate that CD's net internal cash generation from operations is marginal at a total of CZK1.9 billion for the four years 1995 –1998. CD therefore financed the major part of its investment from Government investment grants. However, in 1996 CD began to fund part of its investment program with medium-term loans. These loans totaled about CZK20.6 billion as of December 1998 with plans to borrow a further CZK28.0 billion over the following four years. In addition to interest payments, the repayment on these loans is estimated at CZK13.0 billion commencing in 2003. CD will not be in a position to meet the debt on these loans, as already in 1998 CD net internal cash generation after payment of debt service of CZK2.3 billion was negative at CZK-1.1 billion. In effect, in 1998 CD is already using loan or grant funds to finance a major part of its debt service. Further borrowing by CD to finance its investment program is inappropriate unless viable unless accompanied by an improvement in revenue.

 

1. CD's Income Statements 1994-1998

 

1994 

1995 

1996 

1997 

1998 

Revenue 

CZK Millions

Freight  

17,148 

18,286 

19,525 

20,534 

20,975 

Passengers 

2,329 

2,747 

4,057 

3,963 

4,323 

Other 

11,562

4,092 

4,415 

3,703 

4,244 

Total 

31,039 

25,125 

27,997 

28,200 

29,542 

Operating Subsidies  

5,771 

5,248 

5,150 

5,657 

6,388 

Total Revenue 

36,810 

30,373 

33,147 

33,857 

35,930 

Operating Expenses 

     

Wages and Salaries 

12,109 

13,160 

15,492 

17,504 

18,690 

Fuel 

   

2,090 

2,178 

Energy 

   

2,453 

2,433 

Materials 

   

2,374 

1,984 

Total Fuel Energy & Materials 

6,891 

7,243 

7,253 

6,917 

6,595 

Repair and Maintenance 

   

3,469 

2,941 

Services 

   

4,538 

3,954 

Total Maintenance & Services 

7,929 

7,914 

9,011 

8,007 

6,895 

Other Expenses

8,611 

2,615 

2,497 

1,879 

1,832 

Depreciation  

4,126 

3,987 

4,131 

4,110 

4,750 

Capital Expenditure 

(185) 

(250) 

(311) 

(323) 

(309) 

Total Operating Expenses 

39,481 

34,669 

38,073 

38,094 

38,453 

      

Operating Profit/Loss 

(2,671) 

(4,296) 

(4,926) 

(4,237)

(2,523) 

Interest on L/T loans 

   

496 

1,126 

Total

(2,671) 

(4,296) 

(4,926) 

(4,733) 

(3,649) 

Extraordinary Income/Expenses 

(30) 

1,203 

182 

34 

256 

Net Profit/Loss 

(2,701) 

(3,093) 

(4,744) 

(4,699) 

(3,393) 

      

Operating Ratio 

107% 

114% 

115% 

113% 

107%

Operating Ratio Excluding Subsidies 

127% 

138% 

136% 

135% 

130% 

Source: CD.

 

Because of cash flow problems, CD's current ratio fell from 1.9 times in 1994 to a low of 0.6 times in 1999 before rising to 0.9 times in 1998. As a result CD is subject to penalty interest on accounts payable. CD's long-term debt equity ratio has increased rapidly during the last five years rising from 1:99 in 1994 to 21:79 in 1998. While this ratio would be satisfactory for a capital-intensive enterprise similar to CD, unfortunately CD does not have the cash flow from operations to enable it to service this debt. This is an inappropriate way to finance CD's capital investments as the Government will eventually have to assume this obligation when CD is restructured as has happened with most railway companies.

 

Table 7.A1.2. CD's Income Statements 1994-1999

 

1994 

1995 

1996 

1997 

1998 

Revenue

CZK Millions (December 1998 Prices)

Freight  

25,722  

25,052  

22,063  

23,614  

22,024  

Passengers

3,494  

3,763  

4,584  

4,557  

4,539  

Other 

17,343  

5,606  

4,989  

4,258  

4,456  

Total 

46,559  

34,421  

31,637  

32,430  

31,019  

Operating Subsidies  

8,657  

7,190  

5,820  

6,506  

6,707  

Total Revenue 

55,215  

41,611  

37,456  

38,936  

37,727  

      

Operating Expenses

     

Wages and Salaries 

18,164  

18,029  

17,506  

20,130  

19,625  

Fuel 

   

2,404  

2,287  

Energy 

   

2,821  

2,555  

Materials 

10,337  

9,923  

8,196  

2,730  

2,083  

Repair and Maintenance 

   

3,989  

3,088  

Services 

11,894  

10,842

10,182  

5,219  

4,152  

Other Expenses 

12,917  

3,583  

2,822  

2,161  

1,924  

Depreciation  

6,189  

5,462  

4,668  

4,727  

4,988  

Capital Expenditure 

(278) 

(343) 

(351) 

(371) 

(324) 

Total Operating Expenses 

59,222  

47,497  

43,022  

43,808  

40,376  

      

Operating Profit/Loss

(4,007)

(5,886)

(5,566)

(4872)

(2649)

Interest on L/T loans 

   

570  

1,182  

Total  

(4,007) 

(5,886) 

(5,566) 

(5,442)

(3,831) 

Extraordinary Income/Expenses 

(45) 

1,648  

206  

39  

269  

Net Profit/Loss 

(4,052) 

(4,237) 

(5,361) 

(5,403)

(3,563) 

      

Operating Ratio 

107% 

114% 

115% 

113% 

107% 

Source: CD.

 

 

Table 7.A1.3. CD's Balance Sheets

 

1994 

1995 

1996 

1997 

1998 

ASSETS 

CZK Millions

Fixed Assets 

72,244 

75,444 

81,295 

91,543 

99,397 

      

Long –term Receivables

222 

169 

51 

49 

17 

Other Assets  

657 

1,736 

2,082 

3,283 

1,644 

Total  

879 

1,905 

2,133 

3,332 

1,661 

      

Current Assets 

     

Stocks  

1,875 

1,790 

1,599 

1,530 

1,705 

Receivables 

3,719 

3,519 

3,092 

3,599 

3,466 

Financial Assets 

1,714 

1,475 

1,798

1,752 

1,926 

Total

7,308 

6,784 

6,489 

6,881 

7,097 

      

Total Assets 

80,431 

84,133 

89,917 

101,756 

108,155 

      

LIABILITIES 

     

Equity 

     

Capital  

75,535 

75,944 

76,895 

80,164 

79,894 

Capital Funds 

3,233 

3,449 

3,791 

5,494 

11,975 

Accumulated Profits/losses

-2,336 

-2,834 

-4,434 

-9,093 

-12,472 

Total  

76,432 

76,559 

76,252 

76,565 

79,397 

      

Long-term Liabilities 

1,054 

1,728 

5,145 

14,440 

20,554 

      

Current Liabilities 

     

Provisions 

27 

26 

 

250 

657 

Liabilities 

3,379 

5,191 

6,674 

7,352 

5,853

Short-term loans 

 

90 

700 

917 

589 

Others  

539 

539 

1,146 

2,232 

1,105 

Total  

3,945 

5,846 

8,520 

10,751 

8,204 

      

Total Liabilities 

81,431 

84,133 

89,917 

101,756 

108,155 

      

Current Ratio 

1.9 

1.2 

0.8 

0.6 

0.9 

Long-term Debt Equity Ratio 

1% 

2% 

6% 

16%

21% 

Source: CD.

Annex 7.2. Summary of Proposal for Restructuring of Czech Railways

(December 1999 draft)

 

 

In accordance with decision No. 507 on restructuring of Czech railways from April 27, 1997, and following approval of the Transport Policy of July 17, 1998, the Ministry of Transport and Communication (MTC) is currently working on second draft proposal for law on restructuring of state owned railway company Ceske Drahy (CD). The first draft proposal was approved by the government on June 16, 1999. However, the Parliament returned the draft with comments to MTC for finalization. The proposed law was included on the "List of legislative proposals" that Czech Republic submits (at the end of each calendar year) to the EU. Transformation of CD into more business oriented company through separation of infrastructure and operations, allowing private sector to participate in development of rail transport, is now proposed. The proposal already addresses EC directives that are now being prepared (91/440 EHS about railway companies; 95/18/ES about licensing in railway sector; and 95/19/ES about capacity and fees for usage of infrastructure). The principles of the restructuring are as follows:

 

Operations: CD joint-stock company (CDjsc)

 

  • the operator - CDjsc- will be established (on behalf of the government) by the MTC;

 

  • the operator would receive 5-year license on entire rail network. Request for renewal of the license would than need to be submitted;

 

  • rolling stock, together with workshops, transfer and repair equipment (including land), and remaining loans would be transferred to CDjsc;

 

  • rolling stock, repair, maintenance, and traffic management personnel would be transferred to CDjsc;

 

  • CDjsc would have a balanced budget; expenditures would be covered by tariffs and subsidies for tariffs;

 

  • CDjsc would be managed by the steering committee and supervised by supervisory board;

 

  • CDjsc would be 100 percent owned by state, with possibility of future involvement of private sector investments (for example through leasing of the rolling stock);

 

  • bonds of CDjsc would be transferable only upon approval of the MTC; and

 

  • CDjsc would be led by the board of directors, overlooked by the statutory committee (elected for 5 years), and administered by the director. The board of directors prepares the budget, marketing plan, final annual account and annual reports. The MTC would present the annual report of the CDjsc to the government on a yearly basis. The MTC would also decide on tariffs, and all reductions and exemptions (for students, MTC's and CDjsc employees).

 

 

 

Infrastructure: CDso

 

  • railway infrastructure would temporarily remain (for about two years) with the state owned organization – CDso

 

  • all other assets (railway infrastructure – as it is in road sector; that will be precisely inventoried; about CZK100 million) and that part of current debts that is not to be covered by the state budget would remain with CDso;

 

  • CDso would manage revenues from all assets not related to transport (long term rents), and those would be used for repayment of debts and/or transferred to the Transport Fund for further development of the railway infrastructure;

 

  • CDso would be responsible for management of entire infrastructure; all rehabilitation/construction works will be tendered competitively, while CDjsc will also have right to tender;

 

  • CDso would be responsible for operation, maintenance and repair of stations, and in cooperation with local government and private sector will ensure stations' commercial and social functions;

 

  • CDso would be responsible for social program dealing with consequences of restructuring (re-qualification and retrenchment).

 

Railway infrastructure would be provided (through contract for up to 5 years, prepared by MTC) by CDso to the CDjsc for undertaking the operations, and for traffic management. CDjsc would pay fee for use of the infrastructure to CDso, and it would be responsible for operating and traffic management. Therefore one of its obligations would be to provide access of other authorized operators to the network. Regulation of the access to the network would be, following Railway Law provided by the Rail Office.

 

The proposed legislation foresees balanced accounts of the CDjsc. Therefore, while regulated fares are in effect, CDjsc does not have to cover non-profitable lines. The state (or regional/local government) is responsible for non-profitable lines. It has to provide other transport means to ensure accessibility to transport.

 

The 2000 budget foresees state subsidy in the amount of CZK6.75 billion, of which CZK3.75 billion for infrastructure and CZK3.0 billion to cover losses in passenger transport. Together with other payments and loans for operations the total budget 2000 allocations would be about CZK10.0 billion.

Annex 7.3. Summary of Proposal for Establishing a Transport Fund

 

 

In the last two years, the government has decided to reconsider its transportation policy. To ensure a permanent source of financing given current pressures to tighten the state expenditure, the Ministry of Transport proposed a creation of extra-budgetary fund. By bringing the transport expenditure outside the state budget parameters during 2001, the state budget deficit will indeed be reduced to a specified target of CZK20 billion. However, as acknowledged by the Ministry of Finance, this is a mere cosmetic change.

 

The Law on Transportation State Fund came into force on July 1, 2000. The expenditure programs identified by the Fund have been financed by the Ministry of Transport and Communications until end of September 2000, when the Fund became operational. The objective that the government is aiming to achieve with this Fund is to assure a permanent and stable source for financing transport infrastructure. The Fund will finance maintenance, rehabilitation, modernization, and construction of: (i) roads and motorways; (ii) transit road and motorway sections within Prague and other statutory cities; (iii) state and regional railways; (iv) waterways; and financing of (v) maintenance and technological equipment of the road organizations; (vi) repayment of loans and their interests; (vii) designs and studies;(viii) road safety programs; (ix) bike routes; and (x) operational costs of the fund.

 

The Fund is being proposed as a stable extra-budgetary resource of funds for transport infrastructure with a possibility to transfer unused funds from one calendar year to the next, without losing them or decreasing the allocation (as is the case with the state budget). Its existence should eliminate substantial differences in yearly budget allocation for the transport sector, and therefore guarantee a steady employment in the construction industry. The main motivation to create the Fund is substantial (and increasing) backlog in maintenance of transport assets (currently estimated at US$100,000 million). For further illustration, it is estimated (using PMS) that in order to bring the roads of first, second and third class from bad to good condition an amount of US$1,000 million (compared to US$200 million budgeted in 1999) is needed. In the railway sector, due to the obsolete railway track infrastructure, the average speed had to be reduced: (i) temporarily on the length of 315 km and (ii) permanently on 835 km of truck.

 

According to the EC Accession Committee, the accession countries should allocate about 1.2 percent of GDP to the development of the transport infrastructure, and recently during the third Pan-European conference in 1997 in Helsinki it was recommended to increase this percentage to 2.0 percent. In 1997, Czech Republic allocated about 1.5 percent of the GDP for development of the transport infrastructure. However, in 1999 it was only about 1.2 percent, of which about 0.93 percent come from the state budget and remaining was covered by long term loans. Creation of the Fund is expected to solve this problem.

 

The Fund is administered by the Ministry of Transport and Communications, with the Minister acting as the chairman of the executive board. Chamber of Deputies of the Parliament appoints the supervisory board. The Director of the Fund manages the operational activities. The executive board prepares the budget, final annual account and annual reports. It also hires/fires the director who executes minister's decisions about use of the funds and administers funds employees. None of the above functions is compatible with functions of senator, member of the Parliament, or any representatives of the subjects to whom the funds are being granted.

 

Besides obtaining financing from the NPF, the Fund will have its own clearly defined sources of revenues. It will collect vehicle tax (100 percent), mineral fuel tax (20 percent), and motorway vignettes (100 percent). Revenue is expected to come from securities yield, loans, interest payments on deposit, penalties, and contributions from the EU-related funds. In the draft proposal, the state budget would allocate (via the budgetary chapters of the Ministry of Transportation and the General Cash Administration) around CZK20.7 billion. However, once the proposal was adopted, this amount has been completely reduced. Accordingly, total revenues of the Fund are excluding any transfer from state budget, and relying – at least initially - on privatization revenues and user taxes. Since the budget of the Fund has to be balanced the expenditures for the year 2000 and 2001 are expected to equal the revenues.

 

Table 7.A3.1. Total Revenues for the Transportation State Fund, 2000

(In millions of CZK)

 

2000 

2001 budget

Subsidy from the National Property Fund 

6,000 

13,100 

Mineral Fuel User Tax 

0 

10,200 

Vehicle Tax and Motorway Vignettes 

3,280 

7,900 

Total Revenues

9,280 

31,200 

Total Expenditures 

9,280 

31,200 

Source: Ministry of Finance, State Budget 2001.

 

Initially, almost half of the revenues of the Fund would arrive from the state budget. In total state budget draft for 2000, this amount represented around 3.3 percent of total state expenditure, or almost 60 percent of the projected state budget deficit. By transferring infrastructure related capital expenditure to a new extrabudgetary fund, the government was to be closer to balance its budget. However, the adopted proposal for the creation of Transportation State Fund eliminated the state budget transfers as a source of revenues. Nevertheless, the future fiscal implications can be worrisome. Once the Fund depletes the resources obtained from the NPF, other sources of revenue might prove insufficient to finance the already launched expenditure programs. In a scenario, in which the Fund increases its capital expenditures, there might be simultaneous pressures for more state budget funding to close the gap. At the end of each calendar year the remaining funds will be transferred to the next calendar year.

 

The structure of the Road User Charges (RUC), consisting of vehicle tax (that so far applies on trucks), fuel tax and motorway vignettes, is expected to be modified. Namely, in this area, the Czech Republic is having space for improvement. For example, in 1999, about CZK5.7 billion was collected through the vehicle tax. It is apparent that heavy vehicles are not being weighed and taxed properly and harmonization with EU countries should take place with increases in prices. This would eliminate undesired overloading of Czech road network by EU heavy vehicles that uses it as an alternative to highly taxed EU corridors. In addition, Czech Republic, compared to the neighboring Central European countries did not sufficiently increase fuel prices (total income from fuel tax in 1999 was about CZK48 billion), that results in so called "fuel tourism" from Germany and Austria.

 

Motorway vignettes system (about CZK1.8 billion collected in 1999) that presently provides only one year vignettes should be soon improved by providing one month, one week and 10 days vignettes. Their price shall be harmonized with EC prices, while keeping the same price for passenger vehicles (CZK800/year), increasing price for heavy (weighting more than 12t presently paying CZK8,000/year), and decreasing price for medium (less than 12t; CZK4,000/year) freight vehicles. This system shall be later replaced by electronic "smart card" system that efficiently charges only for kilometers driven, as planned in neighboring Austria.

 

The 2000-2010 transport program/strategy and financial needs for road, railway, combined and water transport sector infrastructure (aviation is self-financed and public transport has been included in basic transport service). The program is expected to cost about CZK74 billion (CZK25 billion in 2000-2003; and CZK49 billion in 2004-2010) in total, with Czech counterpart of about CZK16 billion.

 

About CZK900 billion is needed to put all transport infrastructure in Czech Republic in good condition. This amount seems unobtainable. However, once proper (and socially acceptable) user charges are set and (together with revenues from fuel tax) levied into well functioning State Transportation Fund, about CZK350 billion should become available for development of transport infrastructure. Private sector is also expected to participate with about CZK100 billion, and EU about CZK450 billion.

 

 

 

Annex 7.4. Review of Prague Public Transit's Financial Performance

 

 

A summary of the Prague Public Transit (PPT) financial accounts for the years 1996 –1998 are included in this Annex. Between 1996 and 1998, PPT's revenue increased by 15 percent to CZK8.2 billion. Revenue from passengers increased by 23 percent while subsidies increased by 15 percent. However, other revenue declined by 11 percent. During the same period, total operating expenses increased by 15 percent to CZK8.2 billion. Fuel costs declined by 1 percent while all expenditure increased. Wages increased by 27 percent, depreciation by 28 percent, other expenses by 13 percent and vehicle repairs increased by only 3 percent. During this period the general wage level in the Czech Republic increased by 25 percent. The increase in depreciation charges reflects the substantial increase in fixed assets in 1998 with the inauguration of a new metro extension. PPT broke even on its operations during the three years as the Municipality provided subsidies to finance the short fall between revenue and costs. The accounts, however, understate PPT's costs, as there is a considerable backlog in maintenance that PPT is unable to finance due to shortage of funds. This is confirmed by the small rise in maintenance costs. In addition, depreciation is understated as inflation has been running at an average of about 10 percent per annum for a number of years but fixed assets have not been revalued. PPT's cost recovery from passengers was 25 percent in 1996, 23 percent in 1997 and 27 percent in 1998. Wages as a percentage of operating expenses increased by 2 percent to 26 percent between 1996 and 1998 but vehicle repair costs decreased by 2 percent to 16 percent.

 

To reduce the effects of inflation, PPT's income statements were converted into December 1998 price levels using the CPI. The revised statements show that total revenue decreased by 3 percent between 1996 and 1998. Revenue from passengers, however, increased by 4 percent but other income and subsidies declined 25 percent and 4 percent respectively. Wages and depreciation both increased in real terms by 7 percent. All other expenses decreased with fuel costs declining by 17 percent, vehicle repairs by 13 percent and other expenses by 5 percent. During the three years period the changes in the level of PPT's staff, number of passengers carried and level of services provided were marginal.

 

PPT did not publish a cash flow statement, but the Bank estimates that during the three years 1996-1999 PPT's internal cash generation amounted to CZK3.6 billion that financed about 30 percent of the capital investment program. The Municipality's investment grant of CZK5.9 billion financed a further 52 percent and the Governments grant of CZK2.1 billion financed the balance of 18 percent.

 

PPT has been experiencing liquidity problems resulting mainly from the late payment of the Municipality's operating and investment payments. This is reflected in its current ratios, which remain at 1.0 times during the three-year period. PPT has no long-term debt and so could finance a substantial part of its capital requirements by borrowing provided it could maintain sufficient cash flow from operations to meet the debt service obligations.

 

 

Table 7.A4.1. Prague Public Transit Company Income Statement

 

1996 

1997 

1998 

REVENUE 

CZK million

Passenger Revenue 

1,782 

1,807 

2,197 

Other Income 

468 

684 

418 

Total 

2,250 

2,491 

2,615 

Subsidies 

4,901 

5,379 

5,620 

Total Revenue 

7,151 

7,870 

8,235 

    

OPERATING EXPENSES 

   

Wages  

1,702 

1,965 

2,163 

Fuel 

1,000 

1,033 

989 

Vehicle Repairs 

1,304 

1,362 

1,344 

Other Expenses 

1,835 

1,853 

2,068 

Depreciation 

1,310 

1,657 

1,671 

Total Expenses  

7,151 

7,870 

8,235 

    

Operating Profit/loss 

0 

0 

0 

Operating Ratio (including subsidies)

1 

1 

1 

Operating Ratio (excluding subsidies) 

318% 

316% 

315% 

    

Percentage of Expenses from Pass. 

25% 

23% 

27% 

Source: PPT.

 

 

Table 7.A4.2. Prague Public Transit Company Income Statement

 

1996 

1997

1998 

REVENUE 

CZK Million December 1998 Prices

Passenger Revenue 

2,228 

2,078 

2,307 

Other Income 

585 

787 

439 

Total 

2,813 

2,865 

2,746 

Subsidies 

6,126 

6,186 

5,901 

Total Revenue 

8,939 

9,051 

8,647 

    

OPERATING EXPENSES 

   

Wages  

2,128 

2,260 

2,271 

Fuel 

1,250 

1,188 

1,038 

Vehicle Repairs 

1,630 

1,566 

1,411 

Other Expenses 

2,294 

2,131 

2,171 

Depreciation 

1,638 

1,906 

1,755 

Total Expenses  

8,939 

9,051 

8,647 

Source: PPT.

 

Table 7.A4.3. Prague Public Transit Company Balance Sheet

 

1995 

1996 

1997 

1998 

ASSETS 

CZK million

Fixed Assets 

43,203 

45,790 

48,450 

61,745 

     

Current Assets 

    

Inventory 

488 

467 

482 

501 

Long- term receivables 

6 

4 

8 

18 

Short- term Receivables 

856 

1,095 

1,339 

738 

Other assets 

5 

25 

5 

39 

Financial Assets

120 

35 

225 

973 

Total  

1,475 

1,626 

2,059 

2,269 

     

Total Assets 

44,678 

47,416 

50,509 

64,014 

     

LIABILITIES  

    

Registered Capital  

30,726 

30,726 

30,920 

30,726 

Capital Funds  

12,255 

15,153 

17,403 

20,134 

Accumulated Profit/Losses  

-171 

-172

-173 

-173 

Total 

42,810 

45,707 

48,150 

50,687 

     

Long-term Liabilities

43 

43 

11 

16 

     

Current Liabilities  

    

Reserves 

 

18 

  

Short- liabilities 

878 

1,087 

1,872 

1,635 

Bank Credit 

817 

125 

4 

1 

Other liabilities  

130 

436 

472 

520 

Total

1,825 

1,666 

2,348 

2,156 

     

Total liabilities 

44,678 

47,416 

50,509 

52,859 

Source: PPT.

 

Table 7.A4.4. Prague Public Transit Company Cash Flow Statement

 

1996 

1997 

1998 

SOURCES 

CZK million

Depreciation 

1,310 

1,657 

1,671 

Increase/decrease in Working Capital 

-328 

267 

-403 

Internal Cash Generation 

982 

1,924 

1,268 

    

Municipal Inv. Grant 

1,621 

1,124 

3,204 

Government Inv. Grant 

1,256 

717 

77 

Total Grants 

2,877 

1,841 

3,281 

    

Long- term Loans 

 

-32 

5 

    

Increase/Decrease in Financial Assets

-85 

190 

-748 

Funds Available for Investment 

3,774 

3,923 

3,806 

Source: World Bank estimates based on PPT accounts.

 

Annex 7.5. Approved 2000 MTC Budget

(Valued at US$=CZK35)

 

 

Table 7.A5.1. MTC Incomes/Expenditure

 

1998 actual

1999 budget

1999 actual

2000 budget

 

(US$ millions) 

Incomes 

12.2 

11.5 

50.2 

11.4 

Expenditures 

740.4 

879.8 

880.1 

784.7 

Source: MTC.

 

Priority capital investments

 

Expressways and Motorways                CZK12,370 million (US$353 million)

Railways                            CZK12,916 million (US$369 million)

Aviation (non-military)                    CZK200 million (US$5.7 million)

Waterways                             CZK211 million (US$6 million)

Combined Transport                     CZK380 million (US$11 million)

Roads                             CZK150 million (US$4 million)

Metro                             CZK300 million (US$8 million)

State admin. (including railway repair)            CZK813 million (US$23 million)

Other organizations                     CZK26 million (US$0.7 million)

Subsidy to peoples assembly                 CZK2 million (US$0.06 million)

Research                             CZK95 million (US$2.7 million)

 

State subsidy to MTC

 

1999 actual:                            CZK6,586 million (US$188 million)

2000 proposed:                        CZK7,986 million (US$228 million)

 

of which

a. railway

- infrastructure                CZK3,715 million (US$106.1 million)

- passenger transport subsidy        CZK3,000 million (US$85.7 million)

- for loans servicing:            CZK800 million (US$22.8 million)

- for redundancy:                CZK304 million (US$8.7 million)

b. combined transport:                CZK92 million (US$2.6 million)

c. bus fleet renewal:                CZK75 million (US$2.1 million)

 

EU accession costs (main trans-European corridors)

 

- from the state budget:                CZK8,029 million (US$229.4 million)

- from EU (ISPA):                    CZK320 million (US$9.1 million)

- loans (EIB):                    CZK7,048 million (US$201.4 million)

TOTAL                        CZK15,397 million (US$439.9 million)

 

State Guarantees

 

It is expected that the state guarantee will be given for about €200 million of loans for road/motorway construction and rehabilitation (8 percent or CZK29,082 million of total state budget's incomes is earmarked for debt service – for all sectors). MoF expects that 2000 debt service needs (for about CZK148.3 billion of loans) will be in the amount of CZK18,290 million (for all sectors).

 

Table 7.A5.2. State Guarantees for Transport Sector

 

 

Purpose of the Guarantee 

 

Year 

 

Amount

Total 

Drawn down

As of 

 

Repayments in years

 

Year

of Repayment

  

US$ million 

Dec. 31, 1999 

2000 

2001 

2002 

2003 

2000-2003

Procurement of Boeing Planes

 

Leasing of Airbus Planes

 

Prague airport terminal

 

Corridor I (railways):

(i) first loan;

(ii) second loan from EIB

 

Corridor II

 

railcar modernization:

(i) loan from CSOB;

(ii) loan from CLB

 

improvement of international road corridors

 

D5 motorway

 

D8, D11, R1, R35 motorway

 

investment financing in 1999 MTT (metro) line 

1993

 

 

1995

 

1995

 

 

1996

1997

 

1997

 

 

1996

1997

 

1996

 

 

1998

 

1999

 

 

1999 

164.1

 

 

122.2

 

276.6

 

 

320.1

75.0

 

671.4

 

 

31.4

14.3

 

60.0

 

 

165.0

 

230.0

 

 

56.6 

49.5

 

 

26.1

 

142.1

 

 

252.2

78.7

 

105.7

 

 

14.3

8.6

 

21.1

 

 

176.6

 

21.5

 

 

56.6

1.1

 

 

17.4

 

23.1

 

 

33.8

4.57

 

14.1

 

 

5.7

2.8

 

1.42

 

 

20.3

 

2.8

 

 

0 

10.5

 

 

8.7

 

23.4

 

 

37.0

4.6

 

22.1

 

 

8.6

2.9

 

3.9

 

 

19.5

 

5.4

 

 

14.2 

9.9

 

 

0

 

23.3

 

 

42.3

9.0

 

43.5

 

 

0

2.8

 

3.8

 

 

18.9

 

8.7

 

 

14.2 

9.3

 

 

0

 

23.0

 

 

43.3

9.3

 

33.2

 

 

0

0

 

3.6

 

 

18.3

 

11.7

 

 

14.2 

40.7

 

 

26.0

 

92.8

 

 

156.4

27.5

 

113.0

 

 

14.3

8.6

 

12.9

 

 

76.9

 

28.6

 

 

42.5 

2004

 

 

2001

 

2005

 

 

2008

2009

 

2015

 

 

2001

2002

 

2010

 

 

2017

 

2018

 

 

2004 

Total 

 

2,186.7 

953.0 

137.9 

160.8 

176.4 

165.9 

640.2 

 

Source: Ministry of Transport and Communication.

 

As State Transport Fund was not yet approved, its expected expenditures (about US$591.4 million) are included in the MTC budget line of the 2000 State Budget proposal.

Annex 7.6. Summary of Government's 2000-2010

Transport Investment Program

(US$=CZK35)

 

Roads

 

Proposed list of express- and motor-way section to be constructed under the 2000-2010 program is an immediate reply to the needs of the sector, particularly needs to interconnect big agglomerations within the CR and provide good quality transit connection of the country with the neighboring countries. It is also expected to have a positive impact on the environmental conditions of the cities that are presently congested by the transit traffic. Early start of some of the important motorway sections is however impossible due to unavailability of the designs, clearances of the Min. of Environment, and problems with expropriation.

 

In addition to the state budget resources and contribution of the cities, an international financial assistance is foreseen from PHARE, CBC (Cross Border Cooperation), ISPA, and EIB. The list of road works proposed, together with the proposed (loans/grants listed were already agreed) sources of financing is summarized in Table 1 (attached).

 

Railways

 

Objective is to provide a good quality infrastructure for international Berlin-Vienna-Warsaw-Nurnberg-Munchen-Linz traffic (max. speed of 160 km/h), at the same time connecting main Czech agglomerations. Specifically, the program (costing about CZK220.0 billion, or US$6.3 billion) consists of modernization of the Corridor I, II, III and IV, including 9 railway cross sections and stations: as follows Decin, Prague, Kolin, Pardubice, Usti n. Orlici, Chocen, Ceska Trebova, Brno, and Breclav. Following restructuring of Czech Railways, the costs would be covered from the state budget, TF (from the revenues from selling off railway assets and subsequently transferred to the TF), and from the EU sources. The list of tasks proposed, together with the possible sources of financing is summarized in Table 2 (attached).

 

Waterways

 

As of July 27, 1999, the CR become a member of the AGN (European Agreement on Main Inland Waterways of International Importance), and agreed to improve navigation of Elbe and Labe rivers sections to comply with the classification V a. with min. draft of 2.2 m. The list of tasks proposed, together with the possible sources of financing is summarized in Table 3 (attached).

 

Passenger Transport

 

Suburban Transport: Since 1997, an amount of CZK150 million (US$4.3 million equivalent) is yearly allocated for renewal of the bus fleet. This is not enough and the bus fleet is aging too quickly. Therefore the increase in state subsidy is proposed.

 

Table 7.A6.1. State Subsidy for Suburban Transport

(CZK and US$ million)

 

Year 

Total

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

CZK

US$

5,000

143.0 

150

4.3 

450

12.9 

450

12.9 

450

12.9 

500

14.3 

500

14.3 

500

14.3 

500

14.3 

500

14.3 

500

14.3 

500

14.3 

Source: Ministry of Transport and Communication.

 

Urban Transport: Since congestion in all major cities becomes a serious problem (the number of private vehicles in the CR increased 100 times since '68), the government provides a subsidy for renewal of the bus fleet in the amount of CZK550 million/year (US$15.7 million), which is not sufficient. Furthermore, this amount does not cover needs for development of infrastructure. The following table summarizes financing needs.

 

Table 7.A6.2. Financing Needs for Urban Transport

(CZK million)

 

Infra. 

Total

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

Prague Metro 

11,843 

300 

780 

867 

1,237 

1,237 

1,237 

1,237 

1,237 

1,237 

1,237 

1,237 

North-South tram in Brno 

6,165 

- 

25 

25 

650 

800 

800 

800 

800 

800 

800 

665 

Other infra. in CR 

4,000 

- 

400 

400 

400 

400

400 

400 

400 

400 

400 

400 

Vehicle Fleet 

7,573 

           

Prague Metro 

8.315 

- 

712 

712 

487 

810 

810 

810 

810 

810 

810 

802 

Other cities 

8,315 

315 

800 

800 

800 

800 

800 

800 

800 

800 

800 

800 

Source: Ministry of Transport and Communication.

 

The total 2000-2010 investment in the public passenger transport (suburban and urban together) would be CZK44.1 billion (US$1.26 billion).

 

Combined Transport

 

An adequate terminals and special equipment are prerequisites for efficiency of combined transport. The proposed 2000-2010 investments and its sources can be summarized as follows (subsidy represents 30 percent of the total, as required by the EU):

 

Table 7.A6.3. Combined Transport Revenues and Expenditures

(CZK million)

 

Infra/

Sources

Total 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

State budget 

675 

0 

20 

30 

50 

60 

65 

70 

80 

90 

100 

110 

Own and Others 

1,577 

- 

47 

70 

117 

140 

152 

164 

187 

210 

233 

257 

Sub-Total 

2,252 

- 

67 

100 

167 

200 

217 

234 

267 

300 

333 

367 

Equipment

            

Rail wagons

2,735 

250 

265 

280 

300 

315 

33- 

280 

230 

190 

165 

130 

Loaders 

290 

10 

20 

20 

25 

25 

30 

25 

3- 

30 

35 

40 

Sp. Cranes 

363 

18 

25 

20 

30 

30 

35 

30 

40 

40 

50 

45 

Modification of Boats

75 

10 

- 

10 

- 

10 

- 

15 

- 

15 

- 

15 

Sub-Total 

3,463 

288 

310 

330 

355 

380

395 

350 

300 

275 

250 

230 

TOTAL 

5,715 

288 

377 

430 

522 

580 

612 

584 

567 

575 

583 

597 

Source: Ministry of Transport and Communication.

Aviation

 

The main investments needed in aviation are at the Prague Ruzine airport: (i) terminal modernization and enlargement due to separation of the EU passenger traffic from the other; (ii) construction of the CARGO buildings, (iii) environmental protection; and (iv) enlargement of runways. Furthermore, Brno, Ostrava and Karlovy Vary airports shall be further developed.

 

Table 7.A6.4. Financial Needs per Airport

(CZK million)

 

Airport 

Total 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

Prague 

3,605 

400 

385 

365 

300 

280 

220 

345 

320 

330 

330 

330 

Brno 

230 

5 

5 

5 

5 

40 

60 

50 

50 

5 

5 

- 

Ostrava 

147 

6 

13 

13 

45 

25 

30 

- 

- 

5 

5 

5 

Karlovy Vary 

65 

12 

18 

6 

9 

5 

5 

- 

- 

5 

- 

5 

Total 

4,047 

423 

421 

389 

359 

350 

315 

395 

370 

345 

340 

340 

Source: Ministry of Transport and Communication.

 

 

Table 7.A6.5. Financing Plan

(CZK million)

 

Year 

Total 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

Own resources 

9,061 

791 

876 

849 

819 

937 

878 

765 

795 

820 

800 

740 

Loans 

5,500 

- 

300 

400 

800 

2,000

1,500 

500 

- 

- 

- 

- 

ISPA 

2,800 

- 

350 

1,400

1,050 

- 

- 

- 

- 

- 

- 

- 

State Budget 

7,862 

238 

905 

1,175

610 

430 

595 

510 

723 

1,048 

1,282 

346 

Total 

25,223 

1,029 

2,431 

3,824 

3,279 

3,367 

2,973 

1,775 

1,518 

1,868 

2,082 

1,086 

Source: Ministry of Transport and Communication.

 

 

Bike Paths

 

Financing of bike paths (including international Euro-Velo) and walk-sides will be generally covered by the state budget.

 

Table 7.A6.6. Bike Paths Financing

(CZK million)

 

Year 

Total 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 

2010 

Regions 

85 

- 

- 

5 

10 

10 

10

10 

10 

10 

10 

10 

Source: Ministry of Transport and Communication.

 

The future Transport Fund is expected to cover some of the financing, however, private sector participation (via BOT) has not been considered. It is expected that the proposed financing plan will be, in close cooperation with the MoF updated each year while budget is being negotiated.

 

Table 7.A6.7. Total needs in Transport Sector by Mode

(CZK million)

 

Year 

Total 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008

2009 

2010 

Roads 

479,866 

23,677

28,079

30,991

32,853

35,350

39,363

44,261

50,165

56,810

64,672

73,645

Railways 

210,946 

15,044

17,552

16,350

14,360

15,420

18,280

20,850

22,090

22,700

24,200

24,100

Waterways 

8,894 

166 

668 

1,122

1,950

1,995

1,805

710 

147 

75

86 

170 

Passenger Public 

43,431 

1300 

3167 

3,254

4,024

4,547

4,547

4,547

4,547

4,547

4,547

4,404

Combined 

4,138 

288 

330 

360 

405 

440 

460 

420 

380 

365 

350 

340 

Airways 

25,232 

1,029

2431 

3,824

3,279

3,367

2,973

1,775

1,518

1,868

2,082

1,086

Cyclist 

85 

- 

- 

5

10 

10 

10 

10 

10 

10 

10 

10 

Total 

772,592 

41,504

52,227

56,118

56,881

61,129

70,588

72,573

78,857

86,375

95,947

103,755

Source: Ministry of Transport and Communication.

 

 

Table 7.A6.8. Different Sources of Financing for all Modes of Transport

(CZK million)

 

Year 

Total 

2000 

2001 

2002 

2003-2010 

Total Transport Needs

775,954 

41,504 

52,227 

56,118 

626,105 

State Budget 

14,581 

14,581 

- 

- 

- 

Transport Fund

377,307 

15,807 

27,500 

30,000 

304,000 

ISPA, PHARE, private sector

362,966 

11,116 

24,727 

26,118 

301,005 

Structural fund after 2003 

22,000 

- 

- 

- 

22,000 

Total 

776,854 

41,504 

52,227 

56,118 

626,105 

Source: Ministry of Transport and Communication.