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FEATURE STORY

Croatia’s Railway Sector: On Route to Efficiency and Competitiveness?

July 18, 2013

Highlights
  • Croatia's railway system underwent deep reform to prepare for entry to the European transport market.
  • However, the country's railway system is still below the EU average in terms of performance and infrastructure.
  • The World Bank outlines how the railway sector can become a greater engine of growth and its railway companies more efficient and competitive.

 

Croatia became an integral part of the European transport market when it joined the European Union (EU) on 1 July, 2013, opening up both opportunities and challenges for its railway sector. The Government had worked hard to prepare the legal and institutional framework of the railway sector to comply with the requirements of the EU’s Acquis Communautaire (the cumulative body of European Community laws), which in turn contributed to strengthening the role of regulatory institutions and improving the sector’s operating environment.

Croatia’s railway sector was the subject of significant analysis undertaken by the World Bank between December 2011 and September 2012. The results of this work were presented in a Policy Note to the Government on 19 July, 2013 in Zagreb, with specific advice for the Ministry of Maritime Affairs, Transport and Infrastructure (MMATI) and Ministry of Finance (MOF) about how the railway sector can become a greater engine of growth and its railway companies more efficient and competitive. Prior to this, an ongoing dialogue between the World Bank and the Government in 2012 had produced earlier versions of this Policy Note which informed the Government’s restructuring plan for the railway sector that led, inter alia, to the dismantlement of the public railway holding company and the autonomy of public infrastructure, passenger services and cargo services companies.

What is the current state of Croatia’s railway network?

From the mid 1990’s to 2010, Croatia invested heavily in the development of a national motorway network, which is now almost complete. By comparison, the railway network has only marginally improved over the past decade, despite investment in modernizing certain bottlenecks in the country’s international corridors and the increased competitiveness of its sea ports. With 2,723 km of tracks, Croatia’s rail network is close to the European average in terms of network density, and has the potential to increase transit along key European transport corridors, particularly for international cargo to Central European markets.

Despite the progress that has been achieved with regard to its regulatory institutions, however, Croatia’s railways still lag behind those of other European Union countries in terms of performance, infrastructure, and safety. In addition, traffic intensity remains stubbornly low. The global economic crisis that began in 2008 impacted negatively on the financial position of the State-owned railway undertakings, and the rail network still requires substantial State subsidies (0.7 percent of GDP in 2011), most of which are for operations.

Croatia continues to experience high unemployment, a growing trade deficit, uneven regional development, and a difficult investment climate, which puts additional pressure on the Croatian railway system to improve its financial sustainability and to reduce its dependence on public funds.

Nevertheless, Croatia’s accession to the EU provides unique opportunities for the country to modernize its key international corridors through the use of EU Structural Funds, and to open up the railway sector to increased investment, market competitiveness, and efficiency.

What are the main challenges facing Croatia’s railway sector?

There are three fundamental challenges facing Croatia’s railway sector. The first challenge is to ensure that the Government receives value for the money it provides to the railway companies. The survival of the railways system so far has largely been due to significant financial support from the State, with relatively little effort given to rationalizing its assets or human resources. In the context of EU accession, this bias for operations over investments raises questions about the sustainability of the current model.

The EU accession requirements ensured that the Government implemented a new legal and institutional framework for the railway sector, but this does not guarantee that the railways will develop as a viable transport industry. A major challenge for the Croatian authorities over the coming years is to create a rail industry that is competitive and that can adapt quickly to changing market conditions, while refraining from intervening directly in the management of the sector.

The third challenge is to ensure that the key operators in Croatia’s railway industry attain financial sustainability, with minimum reliance on Government subsidies to cover operating costs. Failure to meet this challenge would limit the Government’s capacity to allocate much-needed funds to productive investment and to the country’s overall economic development.

How can Croatia address these challenges effectively?

The Policy Note makes proposals for how Croatia’s railway sector can meet challenges in four key areas: Sector Governance, Corporate Governance, Business Culture, and Sector Financing Strategy.

Sector Governance

Government action is vital for the effective formulation and implementation of public policies in the railway sector, and should be based on clear and consistent ownership, and transparent, accountable and professional relationships between the state and railway operators. Railway related activities should be coordinated among the relevant Ministries and among government, railway agencies and railway operators.

The Government is advised to undertake a range of steps, including to: develop a long-term strategy for railway network development; put in place a sound system for absorbing EU funds; encourage competition in rail freight; enhance its institutional capacity; and develop a sustainable railway network. In addition, the Government is encouraged to improve the contractual relationships required by the EU to rule subsidized operations (infrastructure maintenance and passenger services) by increasing performance incentives and the accountability of the infrastructure manager and the rail passenger operator. The Government is also expected to finalize the privatization of rail cargo operations

Corporate Governance

The corporate management and performance of rail service providers needs to improve, and should be monitored closely, in order to ensure their long-term sustainability. The Government is advised to: restructure companies, ensuring that CEOs are selected by a merit-based process; develop a business plan and enhance infrastructure business planning; improve the efficiency of infrastructure management; and improve the efficiency of cargo and passenger operations.

Business Culture

Croatia’s railway sector not only needs a new vision, but a new business model - one that is based on the country being an important transit and logistics hub in South East Europe. Without a collective effort, however, on the part of both public and private stakeholders and a change in the business culture, this model will be difficult to sustain.

Croatia is now an important part of the European transport market, and its railway companies will need to be versatile and adapt to market changes in order to become more efficient and competitive over the long-term, while the Government will need to ensure that the other actors in the logistic chain (Port and border agencies) also contribute to this objective.

Sector Financing Strategy

In its highly constrained financial situation today, Croatia’s Government needs to be selective in its use of public funds. The Policy Note advocates: 1) rationalizing and, if possible, diminishing operating subsidies through more incentives for productivity and a review of the value for money of passenger services; 2) focusing public resources on the co-financing of EU funded investment in the main transport corridors and in critical investment, and 3) providing medium-term visibility to the operators about future investments over the coming years.

Read the full policy note here.