The planned enlargement of the European Union is giving added urgency to the development of a more efficient rail network in the former eastern bloc, and multi-lateral institutions are stepping up their lending into the rail sector, while also trying to attract private capital into the next wave of projects.

In the 10 years since the collapse of eastern bloc communism, the European Bank for Reconstruction and Development (EBRD) has been involved in twelve railway projects, including loans to Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Russia and Slovenia. The most recent deal was a $20 million loan to help Georgian National Railways improve the Georgian section of the trans-Caucasian railway.

These loans totalled Eu500 million, and according to Roy Knighton, director of the transport team at the EBRD, total rail sector lending volume will be increased by another Eu160 million this year, via participation in four large projects further East, in the Ukraine, Kazakstan, Uzbekistan and Azerbaijan.

These projects are the fruit of several years work in the Caucausus and Central Asia, though the focus is now returning to projects in countries closer to the EU. It is a function of the project cycle, explains Knighton. We had gone further East, and now we are shifting back again and developing a second round of projects in Central Europe. Of course that is timely, in that the restructuring of these railways is very important as part of the EU expansion process.

This second wave of projects may be different from the first, in that the time is seen as ripe for substantial private sector investment. Initially our dialogue has been with governments, and the state railways in these countries, and we tend to play the role of a go-between for governments and railways in the restructuring process, Knighton explains. But by our presence in those countries, and the dialogue we have on railway restructuring, we are beginning to attract interest from private sector sponsors. The EBRD is involved in negotiations on a number of projects that include private sector capital, although none have been signed as yet.

Up to now most EBRD loans have been made in support of basic rail infrastructure, such as signalling and track, though it does also get involved on the rolling stock side. Many countries manufacture rolling stock domestically, so the best way in for foreign manufacturers is usually via a joint venture with a local partner. The JV can bid on the international tender for locomotives or wagons, with exoprt credit agency (ECA) support for the West European element. In fact the EBRD has a commercial co-financing unit which tries to encourage ECA support for rolling stock and other equipment purchases. In addition manufacturers such as Adtranz and GEC Alsthom get the usual backing from ECAs such as Hermes and Coface in support of deliveries of locomotives, passenger cars and metro trains to rail operators in Eastern Europe.

We have got involved in the refurbishment of rolling stock in quite a number of countries, particularly in Central Europe, and in the medium to longer term we would like to do that more with private sector sponsors, Knighton says. We have financed both infrastructure and operating assets, although there is a tendency now in Central Europe, through our co-operation with the European Investment Bank, that they tend to do more on the infrastructure side and we tend to do more on the operating asset side. But we are doing infrastructure as well, so it is difficult to draw a clear line.

The EIB is the long term financing institution of the EU, and its mission is to support capital investment projects that further European integration. Most of its funds are aimed at economically weak regions within the EU, but some loans go to countries outside of the community. Rail development in eastern Europe has been one area of focus, given the importance to the EU of being able to move goods to and from the new markets to the east.

Since 1990 around Eu8.7 billion has been lent to projects in what it terms the Central European Countries (CECs), and much of this has been aimed at improving transport and telecoms networks. Rail infrastructure project financings have included s200 million to upgrade the Berlin-Prague-Vienna railway, another s200 million upgrading the Czech stretch of the Warsaw-Ostrava-Vienna railway, and Eu240 million to upgrade the Polish section of the Berlin-Warsaw-Minsk-Moscow line. And in Poland s20 million has been lent to modernise the locomotive repair centres and telecommunications network of the Polish railway (PKP). "We are mainly active in the ten countries which have applied to be part of the expanded European Union," says Max Messner, spokesman at the European Investment Bank in Luxembourg.

Thus far the EIB has provided Eu1.2 billion specifically for rail projects, mostly signalling and track, and we have co-financed some projects with other organisations such as the EBRD, he explains. Our typical participation is 30% of the financing of a project, which leaves room for the EBRD and others to come in as well.

In addition to loans from the EIB and EBRD, the EU is also helping rail development by providing non repayable grants under its PHARE program. The strategy is to invest in roads, rail links and better border posts in order to link up the countries of eastern Europe, and link them with the West.

The EBRD and EIB have also made loans under the PHARE program, including Eu34 million from the EIB to finance an upgrade of the rail corridor between Russia and the Latvian ports, and Eu17 million from the EBRD to co-finance a new railyard and a northern rail bypass for the Latvian port of Ventspills.

Freight

Although signalling and track improvement will be of as much benefit to passenger services as freight, it is nonetheless the importance of a good freight network which has been the main motivation for all this EU aid.

Eastern Europe already has a much higher level of freight market share than in the West. Although slow and inefficient, rail haulage was the favoured means of freight transport in the old command economies of the East, whereas in Western Europe the excellent network of motorways has resulted in a system where trucks carry the bulk of goods.

Thus organisations such as the EBRD inevitably find themselves doing a lot of work on the freight side, although initial projects have been on infrastructure and could benefit both passenger and freight services.

"The main priority for us is the transition of the organisation, from state control to a more commercial outlook," explains Paul Amos, senior banker, rail operations, at the EBRD. "Our priority is to invest in things which will lead to better services and higher productivity. That may occur in all sectors, such as infrastructure, rolling stock, management systems and so on, though as the basis infrastructure improves, going forward we may see more emphasis upon freight."

Amos points out that though there has been little privatisation thus far, the UK is the only country in Western Europe that has a fully privatized rail system, and that the emphasis is upon Eastern European rail systems taking a more commercial and approach and becoming more efficient. Some state railways have begun to sell off ancilliaries such as heavy workshops and support industries, but it is early days, he says. Only Estonia is at present looking at privatizing management.

In April the EBRD signed an Eu14.9 million loan to Estonia Railways, one of whose objectives is to help provide the conditions for the successful privatisation of Estonia's rail freight operations.

The loan will support the reconstruction and upgrading of the freight yard station at Narva, and will increase the yards capacity and promote greater operational efficiency by helping introduce a modern train operating strategy. The loan complements Eu16 million worth of financing which has already been provided by the EIB, as well as an s5 million grant from EU-PHARE for rail infrastructure development.

Some other governments in Eastern Europe have at least taken the step of splitting their railways into separate operating units, even if they are further away from privatisation than Estonia. In Romania the state railway SNCFR has been split into five new operating entities, covering passenger transport, freight, infrastructure, excess assets management and finance.

But, illustrating the controversial nature of the privatisation process, and the kind of union opposition that it can inspire, the Polish state railway PKP has run into plenty of trouble over its privatisation plans. It still subsidises passenger services from freight revenues, and potential buyers would undoubtedly want to see an end to these cross subsidies, and PKP split into different operating units.

Such union opposition may explain why thus far there has been little in the way of private sector debt or equity flowing into eastern european railways, with most investors preferring the telecoms sector, where privatisation and the introduction of competition is an easier task.

Indeed one of the few examples of private sector lending has done little to inspire confidence among bankers and project backers. In late 1997 the Export Credits Guarantee Department, the UKs official export credit agency, came in as guarantor to help an order won by British contractors to build the Transportation and Commercial Centre in St Petersburg in Russia.

The contract, to build a railway terminal, plus office, retail and hotel facilities, was awarded by High Speed Railways Russian Shareholding Company, and the ECGD guaranteed a $200 million loan arranged by Credit Agricole Indosuez and SBC Warburg Dillon Read.

Since that time the high speed rail project has floundered, and bankers say that the project was never given much in the way of support by the Railway Ministry in Russia.