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The World Bank

Reducing the ‘Economic Distance’ to Market - A Framework for the Development of the Transport System in South East Europe

Reducing the Economic Distance to Market Final Report – December 2004

Infrastructure and Energy DivisionEurope and Central Asia Region December 2004

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ABBREVIATIONS AND ACRONYMS

ASYCUDA Automated SYstem of CUstoms Data management (developed by UNCTAD)BEEPs Business Environment and Enterprise Performance SurveyCIM International Consignment Note for rail transport under COTIFCIS Community of Independent StatesCMEA Council for Mutual Economic Assistance (also known as COMECON)COTIF Convention Concerning the International Transport of Goods by Rail, 1980 EBRD European Bank for Reconstruction and DevelopmentECA Europe and Central Asia (World Bank region)ECE Economic Commission for Europe of the UNECMT European Conference of Ministers of Transport (Part of OECD)EDI Electronic Data InterchangeEIB European Investment BankEU European UnionFDI Foreign Direct InvestmentFIATA International Association of Freight ForwardersGFP Global Facilitation Partnership for Transport and Trade (World Bank)IBRD International Bank for Reconstruction and Development; part of the World Bank GroupIDA International Development Agency, part of the World Bank GroupIFI International Financial InstitutionsIRU International Road UnionIWT Inland Water TransportOECD Organization of Economic Co-operation and DevelopmentOSJD Organization for Railways Cooperation, comprises CIS countries SAP Stabilization and Accession ProcessSECI Southeast European Cooperation InitiativeSMGS Agreement on International Railway Freight Communications, used in OSJDSOE State Owned EnterpriseSME Small and Medium EnterprisesTEU Twenty-foot equivalent unit (measurement for unitized cargo)TIR International convention for road transport in transit trafficUNECE United Nations Economic Commission for EuropeUNCTAD United Nations Conference for Trade and DevelopmentWCO World Customs OrganizationWTO World Trade Organization

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Disclaimer:

This paper has been published to communicate the results of the Bank’s work to the development community with minimum delay. The typescript of this paper, therefore, has not been prepared in accordance with the procedures appropriate to formal printed texts and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available.

The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries. The map used on the front cover has been used to indicate the countries covered in this paper. It reveals the countries for which projects had been approved by the WB board as part of the TTFSE program up to the end of 2002.

© 2004 International Bank for Reconstruction and Development (IBRD), The World Bank.

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TABLE OF CONTENTSAbbreviations And Acronyms....................................................................................................................................iii

Acknowledgments.......................................................................................................................................................vii

Executive Summary...................................................................................................................................................viii

Introduction...................................................................................................................................................................1The Background to the Paper...................................................................................................................................1

Transport in South East Europe..................................................................................................................................3The Macro-Economic Context.................................................................................................................................3Trade in the Region..................................................................................................................................................4The Transport Sector................................................................................................................................................7The Road Transport Sector......................................................................................................................................9The Rail Transport Sector......................................................................................................................................15The Inland Water Transport Sector........................................................................................................................22

The Main Impediments to A More Efficient and Effective Transport System.....................................................30The Road Transport Sector....................................................................................................................................30The Rail Transport Sector......................................................................................................................................38The Inland Water Transport Sector........................................................................................................................42

A New Framework for the Development of the Transport Sector in South East Europe...................................44Reducing the Economic Distance to Markets........................................................................................................44Towards Fair and Efficient Pricing on all Modes..................................................................................................45Increased Recognition for the Axiom of Trade and Transport Facilitation...........................................................45The Potential Role of the Individual Modes..........................................................................................................49

The Specific Recommendations.................................................................................................................................54The Institutional Recommendations......................................................................................................................54The Improvements to the Physical Infrastructure..................................................................................................57The Operational Recommendations.......................................................................................................................58The Next Steps.......................................................................................................................................................59

The Prospective Timetable and Scope of Activites..................................................................................................61

References....................................................................................................................................................................66

Annex A – Options for the Private Financing of Infrastructure............................................................................69

Annex B - Trade and Transport Facilitation in South East Europe......................................................................74

Annex C – National Progress in Meeting the Requirements of the Transport Acquis.........................................79

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LIST OF TABLES

Table 1 Macroeconomic Indicators in the South East Europe Countries in 2002.............................................4Table 2 Volumes of trade for the South East Europe countries 1999-2003 (US$ Mill).....................................5Table 3 Imports from EU15, Accession Countries, Eastern Europe and Turkey towards SE Europe (000 tonnes) in 2000...............................................................................................................................................................6Table 4 Exports from the South East Europe countries towards EU15, Accession Countries, Eastern Europe and Turkey (000 tonnes) in 2000....................................................................................................................7Table 5 The SEE Road Network, by Country, Class and Length (km) 2003...................................................10Table 6 Annual vehicle registration fees by country (Euro) 2002.........................................................................12Table 7 Fuel Prices and Duties (December 2002).....................................................................................................13Table 8 Characteristics of typical transport routes in SEE...............................................................................14Table 9 Output statistics for the railways in the SEE region, 1995-2002 (Mill tonne-km and Mill pass-km)

16Table 10 Trends in Railway Labor Productivity in South East Europe, 1995-2002....................................20Table 11 Summary of national railway assets for the SEE countries (2000)................................................21Table 12 Financial performance of the SEE railways and international comparators (2002)....................22Table 13 Number of Waiting Days for River Traffic Per Ship and Per Quarter during 2001 and 2002...23Table 14 Volume of good carried on the Danube in 2001/2002 (000 tonnes)................................................25Table 15 Reported status of Principal Shipping Companies on the Danube in 2000...................................27Table 16 Number Road Accident Fatalities 2000/2002, % Change and Rate per 100,000 of Population. .32Figure 1 Achievements in reducing processing time at selected border crossings 2001-2004.............................35Table 17 A comparison of the context and performance of EU railways and SEE Railways (2002)..........40Table 18 Train Activity in South East Europe (2001).....................................................................................42Figure 2 Indication of Optimal Border Layout.............................................................................................................48

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ACKNOWLEDGMENTS

This paper was prepared by a team comprising Jean-Charles Crochet (Original Task Team Leader), Martin Humphreys (Current Task Team Leader), Paul Amos (Transport Advisor, TUDTR), Michel Audige (Lead Transport Specialist), Janardan P. Singh (Senior Operations Officer), Paul Guitink, (Senior Transport Specialist), Gerald Ollivier (Transport Specialist), and Luisa Velardi, (Senior Transport Specialist), Julie Morel, (consultant) from the Infrastructure and Energy Services Department (ECSIE) within the Europe and Central Asia Region of the World Bank, unless indicated otherwise. The external contributors were Rene Meeuws and Klass Westerkamp (consultants, NEA Transport Research and Training), and Alan Harding, (independent consultant).

Thanks are also given to Motoo Konishi (Sector Manager, Transport, ECSIE), Henry Kerali (Senior Transport Specialist, ECSIE), together with Peer Reviewers, Robin C. Carruthers (Lead Transport Economist, TUDTR), and Michel Zarnowiecki (Senior Trade Facilitation Specialist, TUDTR), for their helpful and substantive contributions to the draft of this paper.

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EXECUTIVE SUMMARY

The Background to the Paper

Why was this paper prepared?

1. The World Bank has recognized for a number of years1 that there are also a number of reasons to consider the supra-national level in its assistance to the South East Europe (SEE) region. This reflects both the commonalities of the countries of the region, in terms of a shared geography, history and many socio-economic characteristics, and the common aspirations and movement amongst the countries of the region towards meeting the acquis communautaire and progressing towards eventual membership of the European Union.

2. The transport system has long been acknowledged to be a necessary component in facilitating economic development, leading to increased employment opportunities, and hence poverty alleviation (World Bank, 2004e). In addition, the size of the countries in the SEE region, primarily small (excepting Romania), underlines the importance of international trade, as reflected in the proportion (62 to 113 percent) of Gross Domestic Product (GDP) that trade represents in the respective countries.

3. There was also recognition, at the conception stage of the study, that there had been a great deal of attention paid to the investment requirements of the international transport networks2, but correspondingly less attention paid to those institutional impediments, in an economic sense, which inhibit the development of international and regional trade. In addition, the investment recommendations that emerged from the earlier studies, which in some cases amounted to a long list of potential projects to bring an exogenously defined network to a defined “European Standard”, were regarded as unhelpful in identifying national investment priorities, in light of the fiscal and macroeconomic constraints within some of the countries and their current state of development.

Why was the remit of the study restricted to this set of countries?

4. The SEE region is defined here as encompassing the countries of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Romania, and Serbia and Montenegro (formerly the Federal Republic of Yugoslavia). Moldova shares many of the same characteristics as these countries and also benefits from membership of the Stability Pact for South East Europe. However, it does not, at present, share the same prospects for membership of the European Union and has therefore been excluded from explicit consideration in this paper3. Nevertheless, much of the policy guidance will also be applicable to that country.

1 See World Bank, (2000) and (2004d).2 See TIR (2002) and REBIS (2003) as the most recent examples.

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What was the intended audience for the work?

5. The intended audience for the work was World Bank staff working in both the Country Units and the Country Offices, sector specialists, working in the countries of the defined SEE region, and other donor institutions. The individual Governments in the region, other donors and international financial institutions were consulted during the course of the study, and are considered a central part of the dissemination strategy.

What are the specific objectives of the work?

6. The paper was commissioned to synthesize the contents, conclusions, and recommendations of a series of sector reports in the road, railway and inland waterway sectors, together with other ongoing initiatives, such as in the area of trade and transport facilitation and road safety. The former reports were commissioned by the World Bank in 2003, and the main objectives of this work was to: i) identify, describe and prioritize those regional measures, or national measures of regional significance, which were considered necessary to alleviate the ‘regional market failure’ within the sector and reduce the ‘economic distance’ of the region; and ii) identify the potential role of the World Bank in the implementation of those measures. National issues were to be considered only in so far as they had a regional or international impact.

A Summary of the Main Findings from the Study

What is the current scale and condition of the regional transport network?

7. The road transport network in the SEE countries stretches for over 240,000 kilometers, of which some 13 % are primary or arterial roads, 30% are secondary roads and 56% are tertiary or local roads. The proportion of motorways within the first category has been increasing, reflecting the exogenous classification of certain corridors and the concomitant domestic political importance.

8. The individual national networks represent a sizeable asset for each of the countries, possibly one of their largest and most significant, which would be comparable to many of the largest commercial enterprises4 in the respective countries. On a replacement costs basis, the primary road network alone in the region is worth an estimated US$9.6 billion, predicating a unit replacement cost of US$ 400,000 per kilometer, which is a conservative estimate.

9. The overall condition of the road transport network is poor, reflecting the limitations, despite progress, in both managerial capacity and maintenance expenditures over the previous decade. Overall5, 28% of the defined ‘core6 road network’ in the region is in good condition; 25% needs new surfacing; 24% requires the rehabilitation of the current pavement; and 23% needs reconstruction in the form of significant overlay, new wearing course or completely new pavement.

3 Following the position established by the recent World Bank Framework Paper on SE Europe (see World Bank, 2004d).4 Heggie & Vickers (1998).5 Cowi (2003).6 defined as 6000km of the primary road network of the highest strategic importance (Cowi 2003) Ibid.

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10. There is significant variation in the condition of the road networks within the different countries; Croatia’s road network is, generally, in good condition while Albania’s road network is in poor overall condition. In 2002, only 10 percent of the national road network in Albania was considered to be in good condition, with an additional 22 percent in fair condition, whilst the remaining 68% was in poor condition7.

11. The railway industry has substantial assets in this region, including nearly 25,000 km of route, over 34,000 km of track, over 3000 locomotives, over 10,000 passenger cars and units of multiple formations, and around 100,000 freight wagons (including privately-owned wagons). But only 10% of the rail network is regarded as being in good condition, despite having sufficient capacity to carry current traffic volumes, which are considerably below historic levels.

12. The reform process on the railways of the region has started and is progressing, with a recent report characterizing two of the countries as ‘high reformers’8, Bulgaria and Romania. However, further work is required in all the remaining countries of the region, with the reform process yet to leave the ‘station, in Albania.

13. Despite investment, most of the rail lines of the region need to be modernized and the backlog in maintenance, stemming from insufficient recurrent expenditure, reduces both operational capacity and operational speeds. In addition, the quality of much of the locomotive and rolling stock fleet is poor. The average age of stock has been increasing by over nine months for each elapsed year for a decade and a substantial proportion of the units are out of service, either awaiting repair, being cannibalized or due for scrapping.

14. The Inland Water Transport Network in the SEE Region, comprises the River Danube and the River Sava, and offers a navigable system of some 4,300 kilometers, through Serbia, Bosnia and Herzegovina, Croatia and Slovenia. However, there are a number of sectors on the Danube where recurrent bottlenecks exist, which represent an obstacle to navigation during some or all of the year, as well as the exceptional impediments on the River Sava, resulting from local conflict.

What are the projected traffic levels?

15. Projected traffic growth in the region, if accurate, underlines the need for additional reform, further institutional strengthening and the improvement of the physical infrastructure to alleviate the regional market failure and reduce the ‘economic distance’ of the region. The Regional Balkans Infrastructure Study (REBIS)9 study projected traffic volumes and expected growth rates over the period 2001- 2025, and estimated that road traffic will increase by between 200-300%, with growth in Albania expected to be substantially higher. At the end of this period, the expectation is that vehicle ownership will have reached Western European levels of 500-600 vehicles per 1000 head of population. Rail traffic is estimated by the same study to grow at a slower pace, 60-140% (although current trends still indicate decline over the region as a whole), but the financial position underscores the need for reform in this sector. Inland waterway

7 World Bank (2004c).8 World Bank (2004g).9 Cowi (2003) op cit.

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transport (IWT) growth is estimated to increase by between 160% - 215%, and air traffic is forecast to grow by between 315% - 830%.

16. Although, the specific forecasting techniques employed in the REBIS study are regarded as simplistic, as they omit the influence of the relative attractiveness, or changes therein, of the different modes in terms of cost, time and quality. The result is that the forecasts preclude any diversion between the different modes over time, potentially overestimating demand on some of the modes, primarily rail and inland waterways, and providing a misleading signal of future infrastructure needs in those sectors. As one example, the REBIS study identified investments totaling over Euro 800 million in the rail sector in Albania, albeit based on the railways own estimates, whereas the EU funded Albania National Transport Plan10, identified necessary investments of Euro 5-10 million between 2004 and 2013.

What are the main impediments to the development of the transport system?

The Road Transport Sector

An incomplete policy and regulatory framework

17. The Southeast European Cooperative Initiative (SECI)11 was originally established to contribute to the alleviation of perceived deficiencies in the operation of international road transport in SEE. One component of this program related to the harmonization of the domestic institutional framework with internationally accepted rules and standards, inter alia, by simplifying and harmonizing procedures, formalities and documentation. There is, however, someway to go until this process is complete in the region. Albania, for example, has not yet signed and ratified most of the relevant agreements and conventions.

Limited capacities in the organizations in the sector

18. A continuing problem in the region is the relatively limited capacity of the public sector institutions in the transport sector, although progress has been made in many countries. Systematic weaknesses remain with regard to systems and procedures for planning, monitoring, regulating and managing transport activities. In addition, the relatively low level of wages of the public sector vis-à-vis the private sector makes it difficult to retain, or attract, qualified personnel, even if available.

19. A further weakness in the institutions of the sector relates to the road transport associations in the respective countries. Although, the process of strengthening the associations in the region has started, with some now recognized as International Road Union (IRU) members. Despite these improvements, further capacity building is required in conducting effective trade and transport facilitation dialogue with public authorities and in further aligning the conditions governing access to the profession for drivers and transport of dangerous goods.

10 Louis Berger (2004).11 Participating countries are: Turkey, Bosnia and Herzegovina, Slovenia, Republic of Moldova, Romania, Hungary, Bulgaria, Greece, Albania, FYR of Macedonia and Serbia and Montenegro.

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The problem of road safety

20. Every year more than 1.17 million people die in road crashes around the world. The majority of these deaths, about 70 percent occur in developing countries. A recent report issued by the World Bank and the World Health Organization12 (WB/WHO) notes that the cost of road traffic crashes is estimated at approximately 1% of Gross National Product (GNP) in low income countries 1.5% in middle income countries and 2% in high income countries. The direct economic costs of global road crashes have been estimated at US$ 518 Billion, with the costs to low income countries, at US$65 Billion, exceeding the total annual amount of development assistance.

21. Within the European and Central Asia Region, poor driver behavior, old vehicles, increases in traffic volume and speeds, limited signage, and poor quality pavement all contribute to accident rates, in terms of fatalities per 100,000 capita, that are high by Western European levels. The overall forecast is for fatalities to increase by nearly 20% in this region between 2000 and 2020, compared to a decrease of nearly 30% in the high income countries, defined as the G-7 countries, together with the Euro area countries and Korea, Hong Kong and Singapore. Indeed, one of the key messages of the WB/WHO report is that road accident fatalities are largely avoidable.

Inadequate cost recovery

22. The road user charges in many of the countries of the region require restructuring as, at present, the current level of the road charges, in the form of both access charges and the duties on fuel, are both below the average of the equivalent charges in the EU, and in some cases significantly below, and below the amounts necessary to cover the full costs of provision and operation of the road network.

23. The objective of a road user charge system is that each user should pay an amount equivalent to the social cost that their trip imposes on society from their use of, in this case, the road. The revenue raised from the sector should, to ensure sustainability, cover the capital and recurrent costs associated with maintaining the network, and the other social costs. Thus, the sector should be neutral in fiscal terms. Thus, a heavy goods vehicle that creates more congestion, emits more particulate matter, and damages the infrastructure to the fourth power of its axle load (thus doubling the axle load, increases road damage 16-fold), would be expected to pay considerably more, than a small passenger car.

24. Yet, the average annual fee for a twenty tonne truck approximated Euro 450 across the region, compared to a range of Euro 700-2000 for a comparable vehicle in the EU. In respect of the latter, the regional average of the duty paid on diesel (Euro 0.31/litre), is 38% below the comparable figure for the EU. A similar story emerges with respect to fuel duty on petrol, with the regional average (Euro 0.42/litre) 32% below the comparable average in the EU (Euro 0.66/litre)13.

12 World Bank/World Health Organization (2004).13 All figures from International Fuel Prices, (2003), cited in NEA (2003).

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Governance issues

25. Corruption continues to rank among the top third of business obstacles in countries in the Balkans. With regard to the frequency of administrative corruption, the highest frequency of bribery is reported by firms in the SEE region as compared to firms in the new member countries of the EU14. A recent study15 in the transport sector estimated that the cost of administrative corruption in 2002, ‘small’ petty payments, at border crossings in the region totaled more than Euro 100 million. By the very nature of its work, public sector bodies involved in clearance operations, with comparatively poorly paid public employees, dealing with consignments of significant value provide ample incentives for corruption.

A need for staff retrenchment

26. A significant number of the former public sector companies that now operate in the road transport sector as joint stock companies suffer from over-employment. In some cases the over employment can amount to 30% of the total work force, with significant over-manning found in the repair and maintenance departments.

Poor utilization of assets

27. The poor quality of the infrastructure, increased journey time, and the delays at the border, means that even if the regionally based operator is competitive in other ways, he is unable to utilize his assets, the vehicle fleet, to the same extent as a EU based operator, and so will not be able to offer competitive rates, on a sustainable basis. International commercial vehicles in the EU undertake an annual average commercial mileage of 120,000 kilometers, and in the movement of perishable goods this could go up to more than 150,000 kilometers. In the SEE region, the comparable figures are well below these levels.

Excessive waiting time at borders / Customs procedures

28. The SEE countries have demonstrated that progress can be achieved in reducing border crossing times, although there is room for further improvement, particularly on the major corridors X and V. Under the regional Trade and Transport Facilitation Program in Southeast Europe (TTFSE-see www.seerecon.com/ttfse and Annex B) combining infrastructure, technical services and information systems upgrades, the SEE countries managed to reduce average waiting times at more than 20 selected border crossings and clearance facilities by more than 60 percent on average, while traffic was continuously increasing. This program, designed in 1999, did not however target border crossing points with Serbia and Montenegro, due to the political situation in the region at that time and focused exclusively on road transport. The effective reopening of Serbia and Montenegro to international traffic led to significantly increased traffic flows on Corridor X (Greece-EU and Turkey-EU via Serbia), leaving the related border crossing points congested, 200 to 500 trucks a day, and traffic commonly facing delays of 6 hours at most Corridor X crossing locations and up to 24 hours at specific bottlenecks (such as on the Turkish-Bulgarian border).

14 World Bank (2004b), p. xii. 15 PlanConsult, (2004).

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Difficult access to leasing and capital

29. Road transport companies in the SEE countries face significant impediments in obtaining credit, or appropriate leasing arrangements, to renew their vehicle fleets. The main impediments are the lack of interest on the part of the financial institutions to invest in a sector that is perceived to be marginal in profitability terms, particularly in comparison with other sectors. Where terms are offered, they either tend not to reflect the realities of the market, in the sense that the repayment period may be too short, or a ‘risk premium’ may be charged that makes the investment unviable. Alternatively, in the case of leasing, the institutional framework does not support the development of leasing as an approach (no legal framework / no leasing companies) in the region16.

Slow implementation of innovations in logistics

30. In the EU, a noticeable trend has emerged over the last decade of manufacturers contracting out their transport operations to larger professional transport companies and focusing on core manufacturing operations. This process has lead to a significant increase in the utilization of the road transport fleet. The contrast with the SEE countries is marked, as in this region, since there are few high quality operators, most manufacturers in SEE are being forced to invest in their own transport and warehousing, leading to underutilization of expensive capital assets.

The Rail Transport Sector

The financial sustainability of the railway network

31. There has been significant reform in the region, and significant reductions in costs have been achieved, but a daunting challenge remains to sustain the railway industry at its existing scale. All the railways in the region have operated at a loss for the last three years, despite various levels of support for passenger services and capital renewals. The problem can be illustrated by comparing some basic indicators of railway network sustainability in SE Europe with EU averages. Railway network density (and to a lesser extent population density) is not greatly dissimilar in the two regions (although there are clearly wide internal variations in both blocs). However, the traffic density, productivity and national income per head is lower in SEE than in the EU.

32. All railway systems in the EU receive substantial financial support (by one mechanism or another) from governments to sustain their respective railway networks. The stark challenge for the SEE countries is to sustain, from a commercial perspective, a railway network of much the same density as Europe with less than half the traffic density, a third of the total labor productivity and a fraction of the per capita income. If the countries try to keep renewing the whole of the existing rail network, the likely outcome is a patchwork approach that will make it difficult to maintain the standards of efficiency and service necessary in those key areas of competitive advantage for rail, which play a vital part in national and international transport needs. The sustainability of the whole sector is at stake.

16 The IFC initiative SEED has developed a leasing law in Serbia and Montenegro, and assisted in Macedonia recently, but it is as yet unclear if these laws offer help regarding fleet renewal.

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Management of rail freight operations

33. The freight transport market in the region, based on experience elsewhere, is likely to increasingly develop in ways which will not offer a decisive advantage to railway transport. The demand for freight transport is likely to become more sophisticated, with customers and freight forwarders demanding, not just a line-haul price advantage, but ever higher standards of service, timeliness, specialist equipment, integrated business systems, high reliability of transit schedules, security of goods etc.

34. A substantive response to this challenge will require specialist investments, improved commercial management, and different skills and experience to those deployed in traditional bulk freight operations. It is unlikely that the traditional railway freight departments in South East Europe’s railways will be able to exercise the required market-responsiveness within the current constraints on commercial management associated with state-ownership.

Addressing the problem of passenger railway services

35. The railways of the SEE region remain, from an operational (if not commercial) point of view, predominantly passenger railways. The main impediment to the improvement of passenger services is the scale of service relative to the ability of the community to pay for it. Given the current tariff levels and the high proportion of riders traveling free or on concessionary fares, it is usually the case that the more passengers who are carried the greater the losses. There is an understandable reluctance to reduce the affordability of public transport to the concession groups, who include some of the poorer members of the community. Also, in the absence of political will to cut back on service levels, there is always short-term pressure to keep fares low so as to at least maximize utilization of those services. However, as with the scale of networks, the ability of the region to sustain a railway industry depends on concentrating resources where railways can be most efficient and effective.

The Inland Water Transport Sector

The lack of a framework for development

36. One of the major impediments to the development of the IWT sector in the region is the absence of a strategic plan for the development of the sector, and the Rivers Danube and Sava in particular. There is a need to define the potential contribution of the IWT sector within a broader framework, developed with stakeholder input, which embraces land use issues, water management and environmental development, and the framework to govern the potential contribution of the private sector. Implicit in the process is the need to harmonize the legal and regulatory frameworks of the Danube and the Rhine to facilitate through working. The recent commissioning of a consultant to develop a Masterplan and Feasibility Study for the sector, by the European Agency of Reconstruction, is a substantive step in the right direction.

What is the framework for the development of the Transport Sector in the SEE Region?

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The need to reduce the economic distance to/from South East Europe

37. The physical size of the SEE countries, their location, and the size of their domestic markets, with the singular exception of Romania, all underline the importance of international trade in their economic development and poverty alleviation. These factors all underscore the need for regional cooperation to facilitate the environment for the passage of international trade, if the region is to maximize its potential given its geographical location vis-à-vis the EU.

38. The overall objective for the development of the transport sector in the region can be described as the need to reduce, what can be termed, as the ‘economic distance’ to the main markets. This measure reflects all the necessary and unnecessary transportation and clearance expenditures. Thus, a reduction in economic distance can be realized not only from improved physical infrastructure, where justified by economic criteria, a necessary condition for economic development, but also from improvements in the institutional framework (harmonized and simplified policies and regulations which offer significant unrealized gains in some of the countries at present), better cost recovery and improved maintenance, simplified transit procedures, improved provision of information, and the reduction of unofficial payments or corruption, across the whole region. A further crucial component will be the identification and optimal utilization of the individual modes through the introduction of a fair and efficient system of pricing on all modes and stimulation of complementarity for long distance haulage within a broad transport strategy, maximizing the contribution of the private sector where appropriate.

39. The implication is that for some countries, development requires not only improved physical infrastructure, fully integrated with that of neighboring countries, but also an institutional framework that is consistent across the region, and with the main markets. A crucial component of this process is increased recognition for the facilitation of trade, it is almost an axiom for development, reflecting the importance of trade for the realization of sustainable economic growth and poverty reduction17. Efficient regional transportation and clearance systems reduce the costs of trade, leading to increases both in the value of local products and in trade volumes by broadening market access and releasing latent demand. A key part of this initiative is the recommended emphasis on corridors, both in a physical and institutional sense.

The need for a corridor based approach

40. The importance of some of the international corridors to the region, notably Corridors IV, V and X, which carry the bulk of international traffic flows to and from the EU, frequently 90 percent in the case of rail flows, underline the need for a corridor approach to address both physical and institutional impediments on those key corridors. This type of approach, which tries to optimize the role of the various transport modes to ensure that each plays its part, is now a core trade facilitation priority. The explicit ranking of the corridors, reflecting their relative attractiveness for international trade, also provides a way of prioritizing limited capital resources within the fiscal constraints of the individual countries.

17 See Winters et al, (2004) for a comprehensive survey of the links.

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41. This type of approach is fully supported by the business community, particularly the Business Advisory Council of SECI and the Stability Pact and the PRO-Committees18 of SEE. These groups have all placed renewed emphasis on key corridor development over the past 12 months, citing corridor impediments within the main commercial corridors, as major business bottlenecks and establishing working groups to support the development of key corridors in the SEE region.

42. The proposed approach entails a combination of elements including: (i) appropriate investment in road and rail infrastructure to service mid-term requirements, supported by transit charges commensurate with the use of the network; (ii) improved quality of rail services on corridors reducing forwarders’ quoted time to and from Europe from 10 days to 4 to 5 days (train station to station); (iii) low, predictable processing times at border crossing points, particularly for vehicles in transit, reducing border time to no more than 5 percent of the corridor travel time (as opposed to about 24 percent today); (iv) reduced petty corruption on the itinerary through a regional integrity program; (v) simplified export and import procedures, avoiding time and resource intensive submission of paper documents; and (vi) agile private sector operators with good knowledge of trade and transport operating rules, solid understanding of supply chain management, operating in a environment providing strong processing cost incentives for compliant traders, and strong disincentives for erroneous or fraudulent behavior.

What are the Specific Recommendations?

43. Continue to strengthen and harmonize the policy and regulatory framework in the region. Despite considerable progress, there remain significant gaps in the policy and regulatory framework of the sector, both with the countries and in the harmonization with neighboring countries and the EU: generic areas include the delineation of the responsibilities between the policy and operational responsibilities of the sector, harmonization with European Union norms and the role of the private sector.

44. The key emphasis in the harmonization initiative should remain EU accession, and efforts should focus on adopting the acquis communautaire as soon as possible, whilst being reflective of the actual national needs and available fiscal space in each of the countries.

45. The structure, organization and required resources of the respective Ministries of Transport need to be enhanced to ensure that they can meet their responsibilities. The institutions within the sector need further strengthening to ensure adequate capacity for the countries in the region as they develop under the European Union’s Stabilization and Association Process (SAP). This need for further institutional strengthening includes the capacities to plan and budget road maintenance expenditures, to undertake an extensive program of road maintenance and rehabilitation, involving the private sector, where appropriate, using the latest developments and technologies, to mitigate the adverse effects on the environment, and improve road safety.

46. There is a need to introduce a fair and efficient system of comparable pricing and costing of the infrastructure on all modes in the region. A significant foundation in the development of the regional transport system and the socially optimal level and distribution of 18 Public-private committees aiming at sustaining an active dialogue among stakeholders on trade and transport facilitation matters (see www.secipro.net).

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traffic across the modes would be a consistent framework for the costing and pricing of the use of the infrastructure in the region. Concerns over cost recovery from the rail sector would suggest that a two part pricing system, with a variable component reflecting the marginal cost of running the service, together with a fixed component, reflecting the share of fixed costs attributable to the service, would appear to be the most appropriate and pragmatic solution. What would appear to be needed is some regional co-ordination to ensure that the design and implementation of such a system, introduced nationally, introduced no new barrier to the development of international rail freight.

The road transport sector

47. Ensure a sustainable level of funding for road maintenance in the countries of the region: The funding of road maintenance is generally inadequate in the region a point noted by the REBIS study. In Serbia and Montenegro, average annual maintenance expenditures on main and regional roads have been of the order of 0.3% of GNP, whilst a comparable figure from countries at similar stages of development would be around 1% of GNP. The recommendation is that countries of the region progress to the latter figure, over a timeframe that reflects their own particular macroeconomic contexts. One ‘vehicle’ that is often recommended to assist the process is the establishment of a ‘road fund’, which through a process of ‘ear-marking of revenues raised from the sector, has made a positive contribution in a number of countries. However, the key objective is an adequate and sustainable source of finance for the maintenance needs of the sector.

48. Increase cost recovery in the road transport sector. A constant refrain in a number of studies19 is that cost recovery from some road users is presently too low. The levels of diesel fuel duty and the registration fees, particularly for larger, heavier commercial vehicles, do not, currently, cover the social costs of use, including the damage caused by the vehicle to the road itself. In respect of motorway tolls, domestic users are, in some countries in the region20, paying levels below those paid by international users, a practice that is incompatible with EU norms. The recommendations are that road user charges should be restructured, over time if necessary, to harmonize with EU norms, and raised to ensure that each class of users pays an aggregate amount equal to the full social costs of use.

49. Improve road safety in the region – There is a genuine need to improve road safety in the region, and many of the countries need to define a road safety strategy, with a defined implementing agency, who will enhance co-ordination between key stakeholders, including communities and civil society, define targets and identify procedural and physical improvements, which would then be prioritized to realize those targets. A substantive step would be, where desired, to conduct a Road Safety Country Capacity Review, as recommended by the WB/WHO report. These can be described as a quick and systematic review of national road safety management capacity. These reviews, depending on the perspective of the subsequent initiative, could be undertaken at a national, regional or local/city level, with the findings forming the core of any subsequent road safety initiatives. The World Bank is funding the undertaking of a limited number of pilot studies in FY2005, one of which will be in the ECA Region.19 Cowi (2003).20 Notably Serbia and Montenegro.

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The railway sector

50. Ensure that railways in the regions are placed on a financially sustainable basis, through improved business performance and more appropriate budget support mechanisms - A number of rail services are, presently, provided at a price that does not cover their operating costs. In addition, the corresponding subsidy systems are inefficient, as they do not relate the subsidy to a well defined output, and unsustainable, reflecting the increasing inability of the state to continue to support these programs. The most striking example of this is the use of block grants to some of the national railways, which in the case of Serbian Railways, represents two thirds of its revenues. Even after receipt of these subsidies, the revenues of the 'commercial parastatals’ are insufficient to allow them to maintain assets properly, or set aside sufficient reserves for asset replacement at the end of the working life.

51. Create an extra-national rail infrastructure access co-ordination group. This group would co-ordinate access to slots along international freight transit corridors. The introduction of such an institution could enhance the service to potential entrants to the freight market, by removing many of the transactions costs and physical difficulties that are currently manifest in negotiating access with separate national railways at this time.

52. The national rail freight companies should be privatized. The earlier section noted that the most promising business model, consistent with EU rail policies, will be international train operating companies running trans-European freight trains across international borders. The privatization of the national rail freight companies, as a medium term objective, will provide impetus to the reform process, represent a significant step towards consolidation in this market, and improving efficiency.

53. Local Passenger Services should be regionalized. The responsibility for the planning of local passenger services should be delegated to the benefiting regions, with appropriate funding of socially necessary services to be directed via the relevant local government bodies. The recommended mechanism for the delivery of those services that are considered socially necessary, but which are not commercially viable, is the Public Service Contract. It is recommended that PSC frameworks be created to develop an explicit means of delivering and subsiding these services, with in-built efficiency incentives.

54. Divest non core businesses. There is a need for the railway companies of the region to divest themselves of all non-core activities, to reduce overheads and focus managerial attention on the core business of identifying and servicing those markets where rail has a viable future.

The inland water transport sector

55. The commissioning of a strategy and action plan for the River Danube basin - should be adopted as the first priority. Such a regional plan, possibly elaborated from national plans prepared by the riparian countries, will provide a guiding strategy. The recent initiative of the European Agency for Reconstruction in commissioning a consultant to undertake the preparation of a master-plan and feasibility study is a substantive step in the right direction.

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Trade and Transport Facilitation

56. The achievements of the countries in the region, under programs such as the World Bank supported TTFSE Program, launched in 2000, have shown that a coordinated approach to trade facilitation can produce significant results. New challenges have nonetheless appeared and existing impediments require focused remedial actions to ensure the sustainability of achievements to date. Lessons learned from these earlier activities have led to the following broad recommendations for the follow-up initiatives:

57. Define and Implement Integrated Border Management Principles. Strengthened cooperation among border agencies and coordination of their control and inspection activities is central to shortening border processing times, while increasing the effectiveness of controls. This entails the designation of a lead agency for border processing, usually Border Police for passengers and Customs for freight, and the streamlining of processing from a control effectiveness and facilitation angle. The Geneva Convention (1982) on the Harmonization of Frontier Control of Goods can be used a basis for these institutional reform, since all SEE countries, apart from Albania, are members of this convention. Institutional reform should also build on the new Integrated Border Management approach of the European Union. Several countries have initiated efforts in that direction (Macedonia and Serbia), but high level political support will be required to implement those changes.

58. Simplify the visa requirements for drivers the sector. One initiative that could be introduced to facilitate trade, would be to simplify the issuing of visa for professional drivers. The main recommendations include:

the issue of annual multi-entry visas to professional drivers; the introduction of simplified procedures, designed in consultation with the IRU; and a reduction in the price of a visa for haulage operators/drivers.

The Improvements to the Physical Infrastructure

59. The primary focus should be on establishing/maintaining a core road network in the region. Over 70% of the road network in the region needs some form of pavement renewal, so the primary emphasis should be placed on maintenance expenditures. However, there are undoubted needs for capacity enhancements on certain key corridors, in the form of motorways, around congested urban areas and bypasses around linear communities, where justified by the benefits. The REBIS study identified a wider program of investment requirements to bring the road network of the system up to an acceptable European standard: The economic, or political justification, given the available fiscal space in many of these countries, is less clear.

60. This should be accompanied by a focus on improving the border crossings to reduce the delays to international transport - The REBIS study identified 14 border crossings as requiring immediate infrastructure improvements, with an estimated total cost of Euro 50 million. An additional 12 border crossings were identified as possible bottlenecks, the timing and justification for which required further study. Experience shows however that border infrastructure in itself is not a solution to improve processing time. It needs to be integrated in broader institutional modernization and procedural streamlining (see examples of border design

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supporting border controls21). Careful reviews by all concerned border agencies and preferably border processing experts can optimize the impact of such investments.

61. On the rail network, the primary emphasis should be places on rolling stock rehabilitation and track renewals, vis-à-vis major upgrades, on the defined core network, together with further labor restructuring in all areas: freight, passengers and infrastructure as well as other cost saving areas. Any investments in new capacity should focus on developing the niche markets, and only take forward projects on the defined core network and in rolling stock that are viable in terms of core long-term business needs. The latter would include further investment in overcoming operating bottlenecks in international traffic services, including the attainment of reducing border delays.

The Improvements in the Operational Framework

62. Support the development of leasing legislation to facilitate fleet renewal. In a number of SEE countries financial leasing laws22 do not exist, or are not fully developed, which hinders the development of a leasing industry. Earlier initiatives in this field should be continued, and harmonized with the demands of the transport industry.

63. There is a need to strengthen the road transport associations of the region. The regional road transport associations could play an important role in improving the performance of the sector. This role would encompass the provision of information to members about markets, developments in transport and logistics, legislative and regulatory changes, both in their own and neighboring markets, the provision of training programs to keep their skills up-to-date and acting as a focal point to represents the interests of the sector in policy making circles.

64. Facilitate the introduction of European wide freight exchange systems. By using freight exchange systems SEE hauliers might be better able to find cargo, which in turn increases the utilization of their vehicle fleet. Such freight exchange systems should be operating on a European wide scale, and accessible for both hauliers and their clients.

65. Optimize border processing. Many of the present impediments can be addressed at minimum costs, by implementing high impact short-term to mid-term measures. although they do require rethinking of the overall border organization, and hence political will. Shorter processing time at borders can be achieved by: (ii) ensuring continuous availability of border agencies involved in freight processing at major border crossing points -“first category”; (iii) replicating TTFSE pilot site experience to all first category crossing points and major clearance facilities; (iv) providing incentives to border officials to make trade facilitation one of their core focus, including the introduction of regular performance measurement against which their work is rated; (v) harmonizing border crossing procedures, and standardizing trade and transport documents, such as international weight certificates for commercial vehicles, allowing wherever feasible for electronic submission of these documents; (vi) optimizing the layout of border crossing points from an operational standpoint, with dedicated lanes for quick processing of compliant transport companies.

21 http://www.gfptt.org/Entities/ReferenceReadingProfile.aspx?id=18d15931-4fba-4857-83f0-9c28b68e8ccc 22 The IFC initiative SEED has developed a leasing law in Serbia and Montenegro, and assisted in Macedonia recently, but it is as yet unclear if these laws offer help regarding fleet renewal.

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http://www.gfptt.org/Entities/ReferenceReadingProfile.aspx?id=18d15931-4fba-4857-83f0-9c28b68e8ccc


66. Allow for processing on the basis of electronic documents. Moving from paper based processing requiring documents to be delivered physically by traders or their representatives to electronic processing would reduce significantly processing time. This coincides with the Paperless Trade approach of the European Commission. Further developments (electronic signature recognition, e-document acceptance) are required to allow for the submission, acceptance and processing of electronic documents enabling advance decisions by border agencies.

67. Relocate Rail Border Processing to Shunting Yards. Locomotive changes at border crossing points lead to significant delays linked to technical checks and coordination among many stakeholders. Relocating processing to in-country shunting yards, where trains do have to stop, could reduce significantly border time and the variability in train delivery times, if this aspect is addressed regionally.

What are the Immediate Next Steps For the World Bank?

68. The immediate next steps, on the part of the World Bank at the regional level, involve the commissioning and completion of two studies in the railway sector: the first is a standalone policy paper on the rail sector, reviewing the reform process, and presenting in more detail than this paper the proposed strategy for rail sector reform and potential regional investments, reflecting on the fiscal space issues in each of the countries, the proposed corridor approach, and the implications both for the pace and scope of reform. This is scheduled to be completed by June 2005.

69. The second study is a more disaggregate regional rail freight study over a slightly longer time frame (with delivery scheduled for June 2006). The provisional expectation is that this study will take a ‘bottom-up’ perspective on the broad objective of reducing the ‘economic distance’ to market for international rail freight in the region. It will focus on identifying in detail the physical and institutional impediments, at an operational level, to international rail freight, on a number of corridors with adequate potential, and define a realistic investment plan, reflecting the available fiscal space/affordability in the corridor countries. A recent study undertaken by the World Bank in Bosnia and Herzegovina, albeit for all infrastructure sectors, illustrates the nature of the proposed approach (see World Bank 2004f).

70. In the area of trade and transport facilitation, preparatory activities, in the form of a number of studies and ongoing dialogue with local counterparts, continue, or will be initiated, on the second phase of the Trade and Transport Facilitation in SEE program in each of the countries.

71. A provisional Action Plan, indicating the broad phasing and provisional timing for the different recommendations in this paper, and indicating whether they require regional or national implementation, is provided in the final section of the report.

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INTRODUCTION

THE BACKGROUND TO THE PAPER

72. The World Bank is actively involved in the South East Europe (SEE) region, assisting the countries within the area to fight poverty and promote equitable and sustainable development. The general instrument employed to guide this assistance across the sectors is the Country Assistance Strategy (CAS), which is defined at a national level, reflecting the particular needs of the respective countries. However, The World Bank has recognized for a number of years23 that there are also a number of reasons to consider the supra-national level in its assistance to the South East Europe region. This reflects both the commonalities of the countries of the region, in terms of a shared geography, history and many socio-economic characteristics, and the common aspirations and movement amongst the countries of the region towards meeting the acquis communautaire and progressing towards eventual membership of the European Union.

73. The transport system has long been acknowledged to be an essential component in facilitating economic development, leading to employment opportunities, and poverty alleviation (World Bank, 2004e). In addition, the nature of the countries in the SEE region, which are primarily small (excepting Romania), underlines the fact that international trade is particularly important, as reflecting as a proportion (62 to 113 percent) of Gross Domestic Product (GDP). With growing international competition from countries like China, the traditional competitive response for smaller countries and economies is to emphasize flexibility in manufacturing and agility in transport and logistics to rapidly respond to markets located nearby, thereby capitalizing on their lower economic distances. Impediments in the SEE region at a country level, which can be interpreted as regional ‘market failure’, in terms of patchy transport infrastructure, long delays at border crossing points located on major corridors, and low international rail service quality are presently undermining its geographical advantages vis-à-vis Europe. This recognition of this regional market failure in the sector highlights the need for comprehensive coordinated approach to improving the transport infrastructure, the quality of service and the regional streamlining of trade and transport administrative processing, within the fiscal constraints of the individual countries.

74. There was also recognition, at the conception stage of the study, that there had been a great deal of attention paid to the investment requirements of the international transport networks24, but the wisdom of the resulting recommendations, which amounted to a long list of potential projects to bring the network to an “European Standard”, in light of the fiscal status of the respective countries and their current state of development, was regarded as a little tendentious. In addition, there had been correspondingly less attention paid to the institutional barriers, in an economic sense, which inhibit the development of international and regional trade.

23 See World Bank (2000) and World Bank (2004d).24 See TIR (2002) and REBIS (2003) as the most recent examples.

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75. The paper was commissioned to synthesize the contents, conclusions, and recommendations of a series of sector reports in the road, railway and inland waterway sectors, together with other ongoing initiatives, such as in the area of trade and transport facilitation and road safety. The former reports were commissioned by the World Bank in 2003, and the main objectives of this work was to: i) identify, describe and prioritize those regional measures, or national measures of regional significance, which were considered necessary to alleviate the ‘market failure’ within the sector and reduce the ‘economic distance’ of the region; and ii) identify the potential role of the World Bank in the implementation of those measures. National issues were to be considered only in so far as they had a regional or international impact.

76. The SEE region is defined here as encompassing the countries of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Romania, and Serbia and Montenegro (formerly the Federal Republic of Yugoslavia). Moldova shares many of the same characteristics as these countries and also benefits from membership of the Stability Pact for South East Europe. However, it does not, at present, share the same prospects for membership of the European Union and has therefore been excluded from explicit consideration in this paper25. Nevertheless, much of the policy guidance will also be applicable to that country

77. The intended audience for the work was World Bank staff working in both the Country Units and the Country Offices, Sector specialists, working in the countries of the defined SEE region, and other donor institutions. The individual Governments in the region, other donors and international financial institutions were consulted during the course of the study, and are considered a central part of the dissemination strategy.

25 Following the position established by the recent World Bank Framework Paper on SE Europe (see World Bank, 2004d).

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TRANSPORT IN SOUTH EAST EUROPE

THE MACRO-ECONOMIC CONTEXT

78. In the last ten years, the countries of the SEE region, defined here as including Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Romania, and Serbia and Montenegro (formerly the Federal Republic of Yugoslavia), have endured political turmoil, civil unrest and military strife. These events have had a significant impact on the direction and volume of trade and passenger flows in the region, which were still recovering from the upheaval engendered by the break-up of the former Soviet Union (FSU) and the concomitant changes in the orientation of the regional economy.

79. The region has an eclectic mix of ethnic groups, which together comprise a population of approximately fifty five million people26, with average annual per capita income ranging from US$1280 in Albania to US$5440 in Croatia. According to the most recent World Bank Poverty Assessments, all of the countries of South East Europe are characterized by low incomes and a high incidence of poverty - especially in relation to the most comparable earlier entrants to join the European Union (EU) in the past (Ireland and Portugal), as well as in relation to the countries in the next wave of accession (Cyprus and Malta, the Baltics, and Central and Eastern Europe). The incidence of poverty ranges from 10% of the national population in Croatia27, to approximately 25%28 of the national population in Albania (both in 2002).

80. The level of recorded unemployment is high in all countries, even after considering the existence of large informal markets, at approximately 15%, with the exception of Romania where it is lower. Although, there is no consistent pattern in the statistics between gender and unemployment, with no one sex dominating, there does seem to be a trend towards longer-term unemployment amongst both the young and ethnic minorities29, as unemployed workers find it more difficult to get new jobs or retraining.

81. Since the end of the Kosovo crisis in 1999, and the emergence of political stability in the SEE countries, albeit fragile in some, good progress has been made in all the countries of the region. Macroeconomic stability is being maintained and progress towards reform of the public sector is continuing in the majority of the countries. As a result, economic growth has resumed, as revealed in Table 1, with the regional economy growing, on average, at slightly less than 5% per year, in real terms, since 2000, together with a moderation of inflation in the majority of countries.

26 WB Development Indicators (2003).27 WB Development Indicators (2003).28 WB Development Indicators (2003).29 World Bank (2004d).

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Table 1 Macroeconomic Indicators in the South East Europe Countries in 2002

AL BiH BG HR MK RO SMReal GDP growth (%) 4.7 3.9 4.7 5.2 1.0 4.3 3.9GDP per capita in constant 1995 US$ 1278 1674 1720 5439 2429 1614 1829Trade, % of GDP 62 85 113 100 95 76 64Trade balance, % of GDP -22.1 -33.5 -7.5 -21.5 -11.4 -8.1 -25.8Inflation, (CPI %) 5.4 0.5 5.8 2.2 1.9 22.5 21.2Population in millions 3.1 4.1 7.9 4.4 2.0 22.3 8.1Source: World Development Indicators (2003)

82. Trade deficits as a proportion of GDP across the region are still large, ranging from 7.5% in Bulgaria to nearly 34% in Bosnia and Herzegovina in 2002. Private remittances, positive balance of services, and official transfers have all contributed to limit current account deficits. Overall, the economic climate is gradually improving in all the SEE countries, although challenges remain with regard to privatization, public sector reform, and governance issues. Despite these challenges, one recent report30 concluded that, predicating sustained improvement in the external macroeconomic environment, political stability, and the continuation of similar policies of macroeconomic stabilization in the countries, the GDP growth rate in the region would outpace that of the EU over the medium/long term.

TRADE IN THE REGION

83. Trade among the SEE countries declined markedly in the 1990s, and in the year 2000, it constituted not more than 6% of total external trade. The fall in regional trade can be attributed to; the breakdown of the centrally planned economy, the civil and political upheaval over the last decade and, at least partially, the imposition of new physical and administrative barriers in the region following the emergence of the new sovereign nations. Since then, and particularly following the reopening of the borders of Serbia and Montenegro, intra-regional trade has resumed and increased significantly. The region also exhibits strong trade relations with the EU, accounting for 52.5% of the region’s external trade. Trade among Greece, Turkey, and Bulgaria and Romania comprises 14% of the external trade for the entire region. While trade with the Commonwealth of Independent States (CIS) is significant for Bulgaria, Serbia and Montenegro and the FYR Macedonia and represents 15% of the total external trade for the region.

84. The growth of China as a supplier to the world for a complete range of manufactured goods has impacted both SEE exporters and producers. The development of exports from the SEE countries would appear to be increasingly focused on niche markets requiring rapid replenishment and efficient logistics (an example is provided in the following text box). However, even these markets are under increasing competition from new EU countries, which no longer experience delays at borders and from third countries in Northern Africa or Eastern Europe (Ukraine, Russia), brought closer by the EU enlargement. Delivery terms regularly specify the exact time of delivery and order cycles are commonly down to 21 days in the garment industry. Any potential disruption in reliable and timely deliveries increases the ‘economic distance’ of SEE countries vis-à-vis the main European markets.

30 EC (2004)

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Economic Distance as a Competitiveness Driver (Garments in Bulgaria)

The traditional competitive response of smaller countries and economies is to emphasize flexibility in manufacturing and agility in logistics. This has been the case for Bulgaria’s garment industry where typical orders are now less than 10,000 units compared to a typical orders from Asia which can amount to more than 100,000 units. Bulgaria has used its location to become a rapid replenishment supplier for Western Europe. The larger orders generally have lead times of several months whereas smaller orders are typically associated with higher fashion goods or with adjustments in inventory to reflect variations in demand. In these situations, buyers (mostly from the EU) are willing to use higher cost producers, who have much shorter lead times. Orders are received, fabric ordered (often from abroad), garments manufactured and delivered in about 3 weeks in total. As such, Bulgaria can deliver to Western Europe two to three weeks faster than China. Given the frequent delays faced in international transport (and the certainty of losing a client if on time delivery does not occur), five days are estimated for incoming shipments and five for outgoing shipments, leaving about ten days for production. Border delays lead to lost opportunities.

An illustration of economic distance is the competition faced by Bulgarian firms in the North American market. The market is more difficult for Bulgarian firms given the proximity of the West Coast to Asia and of the East coast to rapid replenishment producers in Central American and the Caribbean. Nevertheless, Bulgarian garment manufacturers have been able to ship higher value garments to the East Coast using airfreight (2.5 days delivery). With garment quotas phased out in 2005, lead time will become even more essential for this industry accounting for 25 percent of Bulgarian exports and 108,000 employees.


85. Table 2 presents a summary of the trends in total imports and exports for each of the countries from 1999 to 2003. The table indicates a general increase in trade in most countries, in terms of both export and import volumes.

Table 2 Volumes of trade for the South East Europe countries 1999-2003 (US$ Mill)

Country 1999 2000 2001 2002 2003

Albania Imports (cif) 1143 1094 1329 1496 1855

Exports 264 261 305 328 451

Bosnia and Herzegovina

Imports (fob) 3294 3100 3353 3872 4744

Exports 748 1066 1032 1005 1363

Bulgaria Imports (cif) 10052 13857 15897 16451 18797

Exports 7302 10247 11176 11857 13042

Croatia Imports (cif) 7798 7886 9147 10713 14209

Exports 4302 4431 4665 4898 6186

FYR Macedonia

Imports (cif) 1776 2093 1693 1995 2299

Exports 1191 1322 1157 1115 1363

Romania Imports (cif) 10392 13054 15560 17861 24002

Exports 8504 10366 11390 13875 17618

Serbia and Montenegro1

Imports (cif) 3296 3711 4837 6320 73242

Exports 1498 1723 1903 2275 24772

Source: IMF (2004) unless otherwise indicated.1. EIU, (2004) Serbia and Montenegro Country Profile.2. Serbia data only.

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The modal split

86. Tables 3 and 4 display exports and imports by trade direction and mode of transportation for 200031. The region currently imports around 10.5 million tonnes and exports 8.3 million tonnes by road transport with the EU, CEE, other Eastern European countries and Turkey, while the corresponding figures for rail exports and imports are 11.5 million tonnes and 4 million tones respectively.

Table 3 Imports from EU15, Accession Countries, Eastern Europe and Turkey towards SE Europe (000 tonnes) in 2000

Commodity Turkey Accession Countries without Romania,

Bulgaria

EU15 Eastern Europe without Accession

Countries

Totals

Agricultural prod. 31 411 693 10 1146Foodstuffs 30 992 923 13 1957Solid mineral fuels 0 27 17 6 50Crude oil 0 0 1 . 1Ores, metal waste 0 14 20 0 35Metal products 8 129 416 367 920Build.min+mat 5 269 1038 6 1319Fertilizers 0 1 17 1 18Chemicals 57 336 761 19 1173Mach+other man. 34 812 1898 91 2836Petroleum products 1 356 662 6 1025Total by road 165 3349 6446 520 10480By rail 32 2305 1524 7574 11435By Inland waterways 1 491 140 1066 1698By short sea 359 468 5555 12539 18921Total 557 6613 13665 21699 42534

Source: NEA (2003)

87. 56% of the exports of the SEE countries were to the European Union countries in 2000. In the same year, the main export commodities from the South Eastern Countries to the EU15 were machinery & other manufacturing products (39%), metal products (9%), and agricultural products (28%), while the main import product from the EU toward the SE Europe countries were: Foodstuffs (14%), building minerals & material (16%), machinery & other manufacturing (29%).

88. Patterns of trade between the SEE countries and the EU are evident, with the physical volume of trade from Western Europe to the SEE countries approximately twice the volume in the opposite direction. This pattern is repeated in the value of trade, with the value of the transported commodities per ton from South East Europe to Western Europe approximately half of the value of the trade in the opposite direction.

31 Although, suitable qualifications are made vis-à-vis the age of this data and the concomitant conclusions.

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Table 4 Exports from the South East Europe countries towards EU15, Accession Countries, Eastern Europe and Turkey (000 tonnes) in 2000

Turkey EU Accession Countries without Romania, Bulgaria

EU15 Eastern Europe without Accession

Countries

Totals

Agricultural prod. 16 264 1298 18 1597Foodstuffs 9 164 275 149 597Solid min. Fuels 0 5 1 0 6Crude Oil . 153 . . 153Ores, metal waste 1 28 120 . 149Metal products 12 191 396 7 607Build. Min&mat 0 472 275 9 756Fertilizers 0 120 29 0 149Chemicals 64 285 401 191 942Mach+other man. 55 639 1830 72 2596Petroleum prod. 0 731 17 1 749Total by road 158 3052 4643 447 8300By rail 252 1843 1596 526 4217By Inland waterway - 846 434 62 1342By short sea 2320 831 10343 161 13655Total 2730 6572 17016 1196 27514Source: NEA (2003)

89. In respect of the accession countries (excluding Romania and Bulgaria) the main growth is expected in chemical products, agricultural products, machinery and other manufacturing, ores, and metal waste. Romania and Bulgaria are both expected to have a significant export of chemical products, as both countries have a strong chemical industry.

THE TRANSPORT SECTOR

The Institutional Context

90. The institutional context of the sector in the region is defined, to a greater and lesser extent, by the European Union, and the requirement and desire of the countries to ensure that they are able to take on the “obligations of membership” and harmonize with the acquis communautaire. Approximately, 10% of the legislation included in the acquis is directly related to the transport sector. The transport acquis consists primarily of secondary legislation, comprising several hundred regulations, directives and decisions. Preparation for accession not only requires the adoption of this legislation by each of the countries, but requires that each has an ‘adequate’ level of administrative capacity, and the capacity to prepare for the introduction of forthcoming directives32.

91. However, the cost of implementation will be high for the remaining accession countries, as the adjustment process involves greater distance, reflecting the great disparities in infrastructure condition, institutional capacity, existing legislation, and governance, and in some cases they are less able to pay for it. Whilst, the respective national timetables will address some of this concern, the inherent conflict between the country wishing to progress quickly towards

32 The legislation in force regarding transport can be found at http://europa.eu.int/eur-lex/en/lif/ind/en_analytical_index_07.html.

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membership, and their capacity to implement and pay for the required reforms, given fiscal space, in the countries, could lead to certain distortions. As one example, the condition of the existing transport network is often poor and upgrading to meet the required standards on weight and dimensions, which can be inappropriate for the context at this time, imposes considerable addition costs. Whilst the emphasis on international corridors can lead to fiscal and social distortions, as countries emphasis the importance of these links, often neglecting the secondary and local road networks, the rehabilitation of which can have a more direct benefit in terms of poverty alleviation.

92. Despite these issues, there has been progress in the introduction of much needed reforms in the transport sector, mainly in response to the need to harmonize with the acquis communautaire. All the countries in the region have initiated the process towards the separation of railway infrastructure from operations in accordance with the broad principles set out in EC Directive 91/440, and some have completed this process, although harmonization with the later Directives, such as EC Dir. 2001/12, amending EC Dir. 91/440, EC Dir. 2001/13 on the licensing of international freight services, EC Dir. 2001/14, which replaces EC Dir. 1995/19, and mandates the introduction of marginal cost pricing in the rail sector, and Com (2003) 448, which initiates the updating of EC Dir. 1999/62 on the introduction of a comparable charging system for road transport, are not quite so well advanced. A summary of current progress in each of the countries is provided in Annex C.

The Projected Growth of Transport Demand

93. Estimates of overall traffic growth in the region, if shown to be accurate, underline the need for additional reform, further institutional strengthening and the improvement of the physical infrastructure to alleviate the regional market failure and reduce the ‘economic distance’ of the region. The Regional Balkans Infrastructure Study (REBIS)33 study projected traffic volumes and expected growth rates over the period 2001- 2025, and estimated that road traffic will increase by between 200-300%, with growth in Albania expected to be substantially higher. At the end of this period, the expectation is that vehicle ownership will have reached Western European levels of 500-600 vehicles per 1000 head of population. Rail traffic is estimated by the same study to grow at a slower pace, 60-140% (although current trends still indicate decline over the region as a whole), but the financial position underscores the need for reform in this sector. Inland waterway transport (IWT) growth is estimated to increase by between 160% - 215%, and air traffic is forecast to grow by between 315% - 830%.

94. Although, the specific forecasting techniques employed in the study are regarded as overly simplistic, as they reflect expectations of growth in GDP and population in the region over the forecasting period, and omit the influence of the relative attractiveness, or changes therein, of the different modes in terms of cost, time and quality. The result is that the forecasts preclude any diversion between the different modes over time, overestimating demand on some of the modes, primarily rail and inland waterways, and providing, potentially, a misleading signal of future infrastructure needs in those sectors. As one example, the REBIS study identified investments totaling over Euro 800 million in the rail sector in Albania, albeit based on the

33 Cowi (2003).

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railways own estimates, whereas the EU funded Albania National Transport Plan34, identified necessary investments of Euro 5-10 million between 2004 and 2013.

95. The earlier Transport Infrastructure Regional Study (TIR)35, which reported in March 2002, undertook a rigorous multi-modal demand forecasting exercise, and was a little more orthodox in its approach and conservative in its forecasts. However, the latter suggested that road traffic would increase on the network by between 168-260% over the period 2000-2015, depending on the assumptions made about economic growth. Rail traffic was projected to remain broadly steady over the same period, reflecting that much of the current traffic volume involves the movement of primary commodities or the output of the heavy industrial sectors, which are undergoing restructuring, privatization and retrenchment. In addition, increasing per capita income associated with economic growth was considered likely to contribute to increased motorization, rather than increased demand for rail transport per se.

96. A similar conclusion was drawn in the study about the contribution of the IWT sector, where current capacity, predicating the removal of some impediments that are a legacy of the conflict, was determined to exceed the requirements of both current and forecast demand, as historic traffic levels were reported to be approximately twice the level of current volumes. The following sections discuss the individual sectors in more detail.

THE ROAD TRANSPORT SECTOR

The Size of the Asset Base

97. The road transport network in the SEE countries stretches for over 240,000 kilometers, of which some 13 % are primary or arterial roads, 30% are secondary roads and 56% are tertiary or local roads, as revealed in Table 5. The proportion of motorways within the first category has been increasing, reflecting the exogenous classification of certain corridors and the concomitant domestic political importance. The individual national networks represent a sizeable asset for each of the countries, possibly one of their largest and most significant, which would be comparable to many of the largest commercial enterprises36 in the respective countries. On a replacement costs basis, the primary road network alone in the region is worth an estimated US$9.6 billion, predicating a unit cost of US$ 400,000 per kilometer, which is a conservative estimate.

Table 5 The SEE Road Network, by Country, Class and Length (km) 2003

Country National roads Secondary roads Tertiary roads TotalAlbania 3200 7600 6200 17000Bosnia and Herzegovina 3800 4800 14000 22600Bulgaria 3300 3800 29900 37000Croatia 600 6200 21300 28100F.Y.R. Macedonia 900 2600 4700 8200Romania 14500 36000 28000 78500Serbia and Montenegro 6300 12500 31000 49800Total 32600 73500 135100 241,200

34 Louis Berger (2004).35 Louis Berger (2002).36 Heggie & Vickers (1998).

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Source: ECSIE Transport Website, World Bank

98. In many cases, the Governments of the region have accepted the principles of the market, and commenced, if not completed, the privatization of many state-owned enterprises in the sector, but they have, so far, been reluctant to face the fact that one of their largest national assets is, often, run on a non-commercial basis by an agency with limited capacity and resources.

The Condition of the Asset Base

99. The overall condition of the road transport network in the region is poor, reflecting the limitations in managerial capacity and the limited maintenance over the previous decade. Overall37, 28% of the defined ‘core38 road network’ in the region is in good condition; 25% needs new surfacing; 24% requires the rehabilitation of the current pavement; and 23% needs reconstruction in the form of significant overlay, new wearing course or completely new pavement. There is no reason to believe that the condition of the non-core network would be better than this proportion, indeed the opposite is likely to be true.

100. In addition, there is significant variation in the condition of the road networks in the different countries; Croatia’s road network is, generally, in good condition while Albania’s road network is in poor condition overall. In 2002, only 10% of the national road network in Albania was considered to be in good condition, with an additional 22% in fair condition, and the remaining 68% in poor condition39.

The Need for New Capacity

101. The earlier section noted the broad consistency of the forecasts of both the REBIS40

study, which projected traffic volumes and expected growth rates over the period 2001- 2025, and estimated that road traffic will increase by 200-300%, except in Albania. Similarly, the earlier, and more conservative, TIR Study41, estimated that road traffic would increase by between 168-260% over the period 2000-2015, depending on assumptions made about economic growth. And whilst, caveats were raised about the former study, and the concomitant implications for infrastructure needs in the rail sector particularly, few such concerns were issued about the need for infrastructure rehabilitation and enhancement in the road sector.

102. However, concern could be expressed about the wisdom of defining a core regional road network of some 6,000 kilometers, and then assessing investment need by bringing the network to a defined ‘European Standard42’ by 2015, which may bear little relevance to the actual needs, or macroeconomic affordability of the respective countries. This paper proposes a slightly different approach, and suggests that within this broad objective, the inclusion and scheduling of the projects identified in these earlier studies should reflect both actual need and the fiscal space of the particular countries of the region.

37 Cowi (2003).38 defined as 6000km of the primary road network of the highest strategic importance (Cowi 2003).39 World Bank (2004c). 40 Cowi (2003). 41 Louis Berger (2002).42 The TINA Methodology.

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103. Thus, the heaviest traffic volumes on the current road networks in the SEE region are concentrated on sections in or close to major urban areas and on some key inter-urban corridors, e.g. Ploiesti – Brasov in Romania, so limited resources should be focused on those areas of immediate need within each country, followed by those projects that would address ‘regional market failure’. The precise form of enhancement would be determined within a orthodox project cycle, but in the former cases, there would appear to be a case for a combination of capacity enhancement, in the form of widening or increasing the number of lanes (e.g. dualing, moving from 2 to 4 lanes, even to motorway standard in some places), or the introduction of bypasses around certain linear communities, common in the region, or junctions which are key black spots in terms of road safety.

104. A further priority would be the need to increase the maintenance budgets to the sector, to levels defined to ensure that the existing network can be maintained in a sustainable manner. Additional levels of income will be needed for the sector, as well as the further strengthening of the capacity of the public sector bodies, to initiate and manage private sector involvement, where appropriate. It will require increased emphasis on network management, maintenance planning and selective rehabilitation to ensure both improved allocative efficiency and network condition.

The Financial Performance of the Sector

The poor levels of cost recovery

105. The current orthodoxy, in second best terms, in road user charging is to levy a charge to permit access to the network, which is represented broadly by the vehicle registration fee, together with a fee on the actual use of a vehicle. The latter is represented, in an approximate manner, by the duty charged on fuel. The REBIS43 study examined the level of the former and found the average annual fee for a twenty-tonne truck to approximate Euro 450 across the region, compared to a range of Euro 700-2000 in the EU. Table 6 contains a summary of the vehicle registration fees for some of the countries of the region.

Table 6 Annual vehicle registration fees by country (Euro) 2002

Albania Croatia Bosnia & Herzegovina

FYR Macedonia

Serbia

Cars 18 16-110 12-125 17-93 2-54Bus (40 seat) 44+285 600 420 140 3310-tonne truck 45+395 265 175 280 5720 tonne truck 60+835 530 415 740 7520 tonne trailer 75+835 345 490 400 75Source: REBIS, 2003

106. Albania is the only country in the region to charge a yearly registration fee and an axle load fee, although the latter provides the perverse incentive to utilise trucks with the lowest number of axles, the opposite of what is required to minimise road damage44. Overall, the data suggest that vehicle registration fees are below what would be required for heavy goods vehicles to cover the full road damage costs that they incur.

43 COWI (2003).44 Although this is now being reformed.

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107. In terms of the latter, the fuel duty, the regional average of the duty paid on diesel (Euro 0.31/litre), is 38% below the comparable figure for the EU, as revealed in Table 7. A similar story emerges with respect to fuel duty on petrol, with the regional average (Euro 0.42/litre) 32% below the comparable average in the EU (Euro 0.66/litre)45.

108. The objective of a road user charge system is that each user should pay an amount equivalent to the social cost that their trip imposes on society from their use of, in this case, the road. The revenue raised from the sector should, to ensure sustainability, cover the capital and recurrent costs associated with maintaining the network, and the other social costs. Thus, the sector should be neutral in fiscal terms. Thus, a heavy goods vehicle that creates more congestion, emits more particulate matter, and damages the infrastructure to the fourth power of its axle load (thus doubling the axle load, increases road damage 16-fold), would be expected to pay considerably more, than a small passenger car.

Table 7 Fuel Prices and Duties (December 2002)

Country Diesel price

Euro/litre

Taxes (%) Tax paid per litre in

Euro

Gasoline price

Euro/Litre

Taxes (%) Tax paid per litre in

Euro

Total Tax Revenue

(Mill Euro)

Bulgaria 0.58 47% 0.28 0.67 53% 0.36 1,225Albania 0.5 39% 0.2 0.79 60% 0.48 137Serbia & Montenegro

0.65 53% 0.35 0.73 57% 0.42 1,750

Bosnia & Herzegovina

0.73 58% 0.43 0.73 57% 0.42 102

Romania 0.56 46% 0.26 0.63 50% 0.32 1,620FYROM 0.62 51% 0.32 0.84 62% 0.52 204Regional Average

0.61 50% 0.31 0.73 57% 0.42 839

EU Average 0.81 62% 0.5 0.98 68% 0.66 16,450Source: International Fuel Prices, 2003

The Road Transport fleet

109. A large share of the international road transport in the SEE region is undertaken by a large number of hauliers from Romania, Bulgaria and Turkey. Many of these hauliers are small in size. One indicator of the competitiveness of the operators from those countries vis-à-vis hauliers from the remaining countries of SEE region, is the number of TIR carnets issued by the IRU via the national associations of road transport companies. In 2001 the number of issued TIR carnets for Romania, Turkey and Bulgaria was 363,800, 327,000 and 211,000 respectively, whereas the comparable figures for Albania, Croatia, Greece, FYR Macedonia and Serbia and Montenegro were 250, 7,900, 22,000, 22,100 and 700 respectively46. A reflection, at least partially, of the atomized nature and low quality of the haulage operators in those countries and their relative lack of competitiveness47.

45 All figures from International Fuel Prices, (2003), cited in NEA (2003).46 International Road Union data.47 Acknowledged to be a major constraint to the implementation of such a system (see Arvis, 2004).

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110. The cost of road transport operations48 in the SEE countries has been estimated at approximately Euro 0.64 – 0.82 per kilometer for local firms, compared to approximately Euro 1 per kilometer for EU firms, working in the EU. Driver wages in the SEE countries tend to be around 20% to 25% of driver wages in the EU, and the share of driver wages in total costs in the EU is around 44% to 50% of total costs49. Despite the low level of driver costs in SEE, total costs still amount to around 60-80% of total costs in the EU, as indicated above, with the difference being explained by frequent empty trips to the EU linked to trade imbalances, small company size, high overhead costs, poor management, low productivity of drivers, high repair and maintenance costs (reflecting the hidden unemployment and cost of unilateral facilities), delay and parking fees at border crossings. One implication is that rising driver wages will erode any differential in the respective total costs, making it more difficult for domestic operators to compete in international road haulage, without significant improvements in management and asset utilization.

111. An earlier study50 collected primary data on the transport costs of moving goods along the main transport corridors. Table 8 displays relevant origin-destination routes, estimates of the total number of kilometers for the route, the number of borders, costs, average road transport time (driving time together with waiting time at borders), and average of the total waiting time at borders per border.

Table 8 Characteristics of typical transport routes in SEE

Km No. of borders

Costs in USD

Average durationin hours

Average of total waiting

time at borders per

border

Percentage of border time/

duration

AlbaniaTirana – Athens 738 1 1000 40 4-8 15%

FYROMSkopje – Rome 1681 4 1800 60 4.5 – 9 45%Skopje – Berlin 1661 3 1800 80 Up to 6 15%Skopje – Athens 669 1 700 30-35 2 7%BiHSarajevo – Rome 1254 3 1150 69 6.7 29%Sarajevo – Berlin 1444 3 1540 69 4.0 17%BulgariaSofia – Rome 1639 4 1630 110 6-9 43%Sofia – Berlin 1621 4 1700 100 5.5 31%Sofia – Athens 755 1 500 22 5.0 22%Sofia – Istanbul 559 1 300 33 10 30%RomaniaBucharest – Rome 1865 3 1100 72 6.7 28%Bucharest – Berlin 1680 2 920 72 6 17%

Source: Adapted from Planconsult, (2004)

48 Drawing on a number of earlier studies on international goods transport costs comparisons, NEA (2003).49 NEA (2003).50 NEA (2003).

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112. The transport costs in the table should be considered indicative, as they depend on the type of freight forwarder surveyed, the nature of the commodity and the forwarder, i.e. the degree of specialization of the latter in the carriage of the former, and the market itself. More specifically, they are defined as "transport costs which usually are charged by medium-sized joint-venture-forwarders calculated as yearly average based on reliable data on fees covering expenses and profit, which are paid by the client in hard currency for the case that the truck comes empty back from the export destination or goes empty to the import origin and for the transport of goods needing no special attention and/or treatment during the transport (no dangerous goods, no chemicals, no foods needing refrigeration etc.) ".51 With imbalances in trade flows, transport cost to SEE tends to be more expensive than transport cost from SEE, as shippers receive discounts to use empty capacity traveling to Europe. Freight forwarders play an informal market place role by purchasing this empty capacity.

113. Table 8 provides a number of indicators about the nature and level of transport service on these corridors: Firstly, the average proportion of total journey time expended waiting at border crossings comprises a element in total transport costs, before taking into consideration the costs of the other non-physical barriers at the border crossings. 52 The average waiting time at each border crossing is very high compared to the average waiting times of 30 minutes in Western Europe in the period before 1992. This survey indicates that on average 24% of the corridor travel time is spent at borders, while a reasonable waiting time should be about 2 percent of travel time (target average based on pre-Schengen crossing times). As a result the major Trans-European Corridors fail at present to offer a dependable and seamless access to EU markets.

114. Secondly, aside from the average waiting times, the table reports a significant differential between minimum and maximum waiting times, indicating that temporal reliability, so necessary for modern logistical systems, is difficult in these countries. This lack of reliability causes most concern, as shippers and exporters need to include significant extra time (about a day from Bulgaria to Central Europe) when estimating their delivery times, to ensure that they meet their commitment. Unpredictable delays are considered first and foremost as a business risk and a competitiveness impediment, leading to lost market opportunities, as an export firm would rather forego a business transaction, than risk not delivering on time (in which case it may face full cost for no payment). The cost is over and above the opportunity costs of the capital for the shipment or the value of the immobilized truck. In formal terms, reliability is measured by the standard deviation of the travel time, multiplied by the monetary value of delay53.

THE RAIL TRANSPORT SECTOR

115. Railways have traditionally played a major role in meeting the transportation needs of the SEE Countries. However, industrial restructuring, the break-up of Yugoslavia as a unitary state54, subsequent conflict, and ethnic unrest have resulted in a significant reduction in traffic levels. Table 6 displays the trends in passenger-km and tonne-km over the period 1995 to 2002.

51 PlanConsult (2004), page 82. 52 Although, the report concedes the collected border crossing time might include rest time, especially considering that drivers prefer resting at secured parking places at borders.53 United Kingdom, Department for Transport, (2003).54 An unitary state is defined as a state that is governed constitutionally as one single unit.

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Table 9 Output statistics for the railways in the SEE region, 1995-2002 (Mill tonne-km and Mill pass-km)

Year 1995 1996 1997 1998 1999 2000 2001 2002FREIGHT (Mill tonne-km) Albania 53 42 23 25 26 28 19 21Bosnia & H. - 25 48 85 146 224 282 309Bulgaria 8594 7549 7444 6152 5297 5540 4904 4627Croatia 1974 1717 1876 2001 1849 1928 2249 2206Macedonia 169 271 279 408 380 527 462 334Romania 27179 26877 24789 19708 15927 17982 17757 17197Serbia & Montenegro 1364 1865 2398 2538 1190 1917 1989 2263Total tonne-km 39333 38346 36857 30917 24815 28146 27662 26957 PASSENGERS (Mill pass-km) Albania 197 168 95 116 121 125 138 123Bosnia & H - 61 39 57 51 47 50 52Bulgaria 4693 5065 5886 4740 3819 3470 2988 2598Croatia 943 1029 981 921 943 996 1241 1195Macedonia 65 120 141 150 150 176 133 98Romania 18879 18356 15795 13422 12304 11632 10965 8502Serbia & Montenegro 2326 1647 1546 1368 893 1389 1198 1023Total pass-km 27103 26446 24483 20774 18281 17835 16713 13591

Source: World Bank Railway Database

116. Over the period 1995-2002, freight traffic carried by the railways (in million tonne-km) declined by nearly 32 per cent, (See the following text box Rail or Road Transport) while passenger traffic (in terms of million passenger-km) declined by 50 per cent. In some of the countries, especially those involved in conflict, traffic levels are recovering from very low levels. In the region as a whole, the traffic carried by rail is still declining, consistent with the a priori assumption that increasing incomes are likely to contribute to increased motorization.

The rail network

117. The rail network has sufficient capacity to carry current traffic volumes, which are considerably below historic levels. However, most lines need to be modernized, as only 10% are in good condition, and the backlog in maintenance, stemming from insufficient recurrent expenditure, reduces both operational capacity and operational speeds. The short term challenge, or what could be regarded as the initial objective, is to restore the original design speeds and technical standards on those parts of the network that have a viable long-term future. This would be closely followed by improvements to infrastructure quality on key routes and the creation of additional capacity, where economically justified.

118. In the planned economy, large flows of bulk materials (coal, ores, oil, iron and steel and building materials) were produced by public sector industries and moved between the different CMEA countries and the republics of the former Yugoslavia. Since rail transport generally has a

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positive cost advantage in carrying such commodities, an advantage that has been retained, the former socialist administrations that controlled all stages of the production and supply chain would take advantage of that price advantage. The resulting earnings from the carriage of these ‘profitable’ products were then used to cross-subsidize the loss-making passenger services.

119. In the early stages of transition in Central and Eastern Europe, a reduction in rail market share was widely predicted and subsequently occurred. Private car ownership increased substantially and the road transport industry (including many privatized bus and road haulage companies) greatly increased their role in the road transport system. But perhaps the biggest factor in the decline of the rail sector has been the underlying changes in industrial structure, trading relationships, and trade flows following the break up of the CMEA. One of the first changes wrought by transition was the rapid decline in the traditional smokestack industries. The changes were dramatic throughout Eastern Europe, but especially so in the SEE countries, where the trends were exacerbated by the break-up of the former Yugoslavia and the subsequent conflicts.

120. For example, in Bosnia and Herzegovina, one steelworks at Zenica, recently sold to the private investor, generated more than 10 million tonnes of traffic per year, comprising raw material inputs and iron and steel outputs on railway lines that currently carry fewer than a million tones (although the EBRD is currently preparing a project to rehabilitate these lines). In Serbia, in 1990, nearly half the tonnage carried by the railways represented trade with other Yugoslav republics. Today, the equivalent proportion is less than 5 percent. In Bulgaria, the amount of coal, oil products and building materials carried by rail in 1990 exceeds total freight

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Accessing markets: rail or road transport?

For the most part, products transported by rail or road differ in terms of their time sensitivity and service quality expectations. The private road transport sector in SEE offers a broad range of service (groupage, less than truck load, full truck load), with different duration (3 to 10 days to main European markets) at different rates, building on emerging private distribution centers. State railways have been slower to adapt to new requirements from shippers. For example, while Bulgarian forwarders would quote about 4 days to travel by road to or from Central Europe (600 to 800 km) for regular service, the corresponding quoted time for rail transport is about 10 days. Price wise, a 20 ton wagon from Central Europe to Sofia costs about 1000 Euros, compared to 1500 to 2000 Euros by truck. For the return trip, truckers discount their fares given high volumes of empty trucks to Europe at a level comparable with rail cost, leaving very limited freight to move by rail.

Over the past 7 to 8 years, forwarders have been marketing long distance freight services in the region by rail (block train), but the low service quality, at present, makes it suitable for only a few products. This has been compounded by difficulties in negotiating freight slots on overcrowded EU rail networks. Regional rail transport functions today as a poorly coordinated chain including many stakeholders, given the relative small size of SEE countries. Locomotive changes and wagon checks at each border, lack of communication tools and technical cooperation among railways reduces the quality and reliability of service.

An increasing number of operators are nonetheless reviewing options to run through trains in the region and connect particularly Greece and Turkey to European Countries by rail in predictable and reasonable transport time. The approval of several small projects, that would facilitate the development of such operations under the EC Marco Polo program, demonstrate operators’ interest to develop a potential attractive market niche for dependable and reasonably fast rail services.


tonnage by rail today. Similarly, Romania’s railways carried more coal and minerals in 1990 than their total railway tonnage today.55

121. The transition to a market economy has led to an increase in the demand for lighter industrial and consumer goods for which the primary means of transport needs to be fast, reliable and responsive. In addition, the demand for transport for the movement of these goods is determined by private companies, rather than by central planning by the public sector. These types of commodities are usually more suited to movement by road transport, and a privatized road transport industry is an aggressive competitor to more traditional public sector rail companies used to specializing in bulk transport movements.

122. The impact of these negative trends, which occurred over decades in Western Europe but were compressed by events into a few short years in Eastern Europe, has been an increase in the requirements of the sector for financial support from the central budget. At the same time, budgetary allocations have not always been sufficient to meet recurrent needs and prevent the deterioration of assets. The financial and market pressures on the railway industry to reform and adapt have been very intense.

123. The railway sector has been adapting to the adverse trends discussed above, and reform initiatives have been progressing in three main areas: i) institutional restructuring; ii) labor restructuring; and iii) network service rationalization. In the case of the first, institutional restructuring, most of the countries support the principles contained in the European Union Railway Policies.56 Broadly, these principles include:

greater commercialization of state-owned railway companies; relief of unsustainable inherited debt levels; third-party access rights to the railway network; non-discriminatory access whereby access is managed by entities that do not provide

rail transport services; separation of infrastructure and operations to facilitate transparency and access

charges; and cessation of internal cross-subsidies and implementation of explicit and contractual

funding of loss-making obligations to provide public services.

124. In addition, most of the countries in the region have adopted, or will soon adopt, new laws and policies that separate the role of the state from the commercial functions and introduce explicit mechanisms for funding passenger services. Most of the larger systems have medium-term business plans and also have developed new marketing capability.

125. In the case of Romania, which has the largest railway industry in the region, the Government has created a structure with independently accountable infrastructure, freight and passenger businesses, and with third party access rights to its network, which has already attracted, to date, eleven new rail freight operators. More specifically, Romania reorganized its National Railway Company in 1998. Although this followed the general principles established in European Union policy, the new structure goes further in applying some of those principles

55 WB Railway Database.56 EU (2001).

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than is the case in many EU countries. It had five new companies, each with its own budget. The three main entities are infrastructure, freight and passengers, whilst the other two are in charge of surplus equipment and properties and financial management and information systems. In the restructured environment, five private freight companies have also recently been established. The other national railway companies in the region have yet to implement such advanced arrangements.

126. Substantial labor restructuring is occurring in the railway sector, with the total railway labor force in the region falling from 279,000 in 1995 to 182,000 in 2002. In a context of high unemployment, this degree of labor restructuring demonstrates a high degree of political commitment. Notwithstanding this downsizing, the decline in rail traffic has still outpaced the reductions in labor, and the railway industry is chasing a moving target in terms of trying to keep up with both the impact of the restructuring of the regional economy and the development of the road transport industry, on traffic volume on the rail network. The result is that labor productivity, measured by thousands of traffic units per employee, has declined from 242 in 1995 to 223 in 2002 as revealed in Table 10.

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Table 10 Trends in Railway Labor Productivity in South East Europe, 1995-2002

TOTAL TRAFFIC

1995 1996 1997 1998 1999 2000 2001 2002

(t-km+pax-km mill)Albania 250 210 118 141 147 153 157 144Bosnia & H - 86 87 142 197 271 332 361Bulgaria 13287 12614 13330 10892 9116 9010 7892 7226Croatia 2917 2746 2857 2922 2792 2924 3490 3401Macedonia 234 391 420 558 530 703 595 432Romania 46058 45233 40584 33130 28231 29614 28722 25699Serbia & M 3690 3512 3944 3906 2083 3306 3187 3286total units 66436 64792 61340 51691 43096 45981 44375 40549

STAFF (Total Employees)Albania 4808 3750 3576 3133 2940 2833 2617 2323Bosnia & H - 4300 5118 6174 6355 7743 6776 6811Bulgaria 57272 56565 54856 49285 46274 42103 37226 36495Croatia 1769 22883 22856 20723 19524 18506 18177 16042Macedonia 4979 4344 4375 4292 4206 4135 3993 3857Romania 148574 103984 135280 104842 105340 103909 101491 87710Serbia & M 37653 34431 34000 33672 33063 32733 30644 28825total employees 275054 230258 260060 222122 217703 211962 200924 182063

PRODUCTIVITY‘000 Units/empl.)Albania 52 56 33 45 50 54 60 62Bosnia & H - 20 17 23 31 35 49 53Bulgaria 232 223 243 221 197 214 212 198Croatia 134 120 125 141 143 158 192 212Macedonia 47 90 96 130 126 170 149 112Romania 310 435 300 316 268 285 283 293Serbia &M 98 102 116 116 63 101 104 114Average 242 281 236 233 198 217 221 223Source: WB Railways Database

127. The third potential area of restructuring, rail network rationalization, has proved to be as difficult in the SEE countries, as in many Western European countries. The rationalization of the rail networks of the region, in response to market shrinkage, has not progressed. The total length of line, nominally open for traffic in the region, is about 24,600 km and has not changed in the last ten years. Passengers traveling free, or at heavily discounted fares, remain a large proportion of the market. Numerous low volume freight trains continue to serve a multitude of small freight locations, which are unviable in a commercial environment. In addition, numerous passenger branch lines remain open, carrying very small amounts of traffic on grossly underutilized trains. These services could often be replaced by buses at a fraction of the cost, and with higher service levels. However, the decision process on railway line closures is within the purview of governments, rather than the railways themselves, and the required political consensus to achieve closures or service cutbacks has not been realized.

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The assets of the railway companies

128. The railway industry has substantial assets in this region, including nearly 25,000 km of route, over 34,000 km of track, over 3000 locomotives, over 10,000 passenger cars and units of multiple formations, and around 100,000 freight wagons (including privately-owned wagons). The total number of these assets is summarized in Table 8.

Table 11 Summary of national railway assets for the SEE countries (2000)

Route-km Track-km Locos# Pass. Cars Freight carsAlbania 440 n/a n/a N/a n/aBosnia & H. 1032 n/a 151 312 3800Bulgaria 4290 7350 434 1935 32044Croatia 2727 4057 147 698 8111Macedonia 699 925 13 139 2431Romania 11364 21583 2199 6245 69286Serbia & M. 4059 n/a 405 936 n/aTOTAL 24611 - - - -#excludes small/shunting diesel locomotives.Source: WB Railways Database.

129. However, the quality of much of the locomotive and rolling stock fleet is poor. The average age of stock has been increasing by over nine months for each elapsed year for a decade. A substantial proportion of the units in Table 11 are out of service, either awaiting repair, being cannibalized or due for scrapping. The number available for service is much lower. As one (extreme) example, of Serbia’s 170 electric locomotives, fewer than 50 were available for service at any one time in 2001.

130. Of the total network, around 86 percent is single-tracked and 41 percent is diesel operated. Given that traffic has declined by more than half in 15 years, the proportion of single-tracked and non-electrified line is not a constraint in the market (though there are local pinch-points): indeed single-track diesel operation is the most appropriate option for the current volume of traffic on most parts of the network.

131. There is a degree of uncertainty over the exact condition of the track, as there has been no independent assessment of its scale and condition, relative to market needs, over the network as a whole. The REBIS study asked the railways of the region to judge and provide an assessment of the quality of the track over their defined core international networks, which totaled some 4300 kilometers, about 16 percent of the total regional network. Responses were received for approximately 80 percent of this network and the results suggest that 11 percent of this portion of the network was classified as being in good condition, 41 percent in medium condition, and 48 percent in bad condition.

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The financial performance of the railways

132. Table 12 presents a summary of recent research into the comparative financial performance of the railways in the SEE region. The data in the table have been collated from a number of sources, including directly from countries where there has been a recent, or ongoing, WB railway project.

Table 12 Financial performance of the SEE railways and international comparators (2002)

Total Support as % of GDP

Total Support (Mill US$)

Subsidy and PSO support

(Mill US$)

Staff Costs (% of total revenue)

Number of staff (000)

Albania 0.1 9 2.8 50 2.3Bosnia & H#. 0.41 23 23 74 6.5Bulgaria 0.4 66 40 48 35.2Croatia 1.0 222 149 57 16.0Macedonia# 0.26 9.6 9.6 85 3.9Romania 0.5 248 189 33 87.6Serbia 1.0 160 160 47 39France# 0.35 587857 2919 55 177Germany# 0.35 772958 3676 38 214Italy# 0.55 677859 2760 50 107United Kingdom# 0.22 2565 2552 25 63Source: Collated from various sources.# Indicates 2001 data.

133. The table reveals the extent of financial support for the railways from the public budget, with total support, including contributions to investment, comprising between 0.4% and 1% of GDP, with an average level of support at 0.6% of GDP. These levels, despite representing a significant burden on the national finances of the respective countries, are not inconsistent with average levels of support as a proportion of GDP provided to Western European railways, as revealed in the table, although Serbia and Croatia stand out. The levels are, however, generally insufficient to maintain the SEE railways in a sustainable manner and underline the need for significant restructuring, due to increased competition, high asset replacement needs, excessive staff levels, and hence falling productivity.

THE INLAND WATER TRANSPORT SECTOR

The inland waterway network

134. Inland waterway transport offers an efficient but underutilized mode of transport in the SEE region. The inland waterway transport network in the SEE region comprises the River Danube and the River Sava. The former is second in Europe only to the Volga in its physical characteristics and offers the possibility of low-cost navigation with better than Class IV navigability60, for cargo and passenger ships between Germany, Austria, Slovakia, Hungary, Croatia, Serbia, Romania, Bulgaria, Moldova, and Ukraine, where it enters the Black Sea. An

57 Figure includes payments for capital investment, staff and pension obligations and debt service.58 Figure includes payments for capital investment and debt service.59 Figure includes payments for capital investment and debt service.60 This requires minimum vessel dimensions of 85 meters by 9.5 meters with 1500dwt.

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alternative and shorter access to the Black Sea is provided by the Cernavoda-Constantza canal, which opened in 1984. Finally, with the inauguration of the Rhine-Main-Danube canal in 1992, the Danube was linked to the River Rhine, thus connecting the Black Sea to the North Sea and forming the Pan European Corridor VII, which extends for some 3,500 kilometers.

135. The River Sava enters the Danube at Belgrade, extending the navigable system to some 4,300 kilometers of navigable waterway, through Serbia, Bosnia and Herzegovina, Croatia and Slovenia. The Sava Initiative is a plan for the management of the river basin, signed in December 2002, by the four South East European countries that share the basin – Bosnia and Herzegovina, Croatia, Serbia and Montenegro, and Slovenia to ensure sustainable use of the system.

The use of the channel and navigation issues

136. River traffic is affected by periodic depth reduction that limits navigation during dry spells. The locations of affected stretches are typically found on the higher reaches of the river in Germany and Austria, and in exceptional circumstances, in the Romanian/Bulgarian sectors. The impact of draught restrictions is similar to axle load restrictions on the railway, necessitating a reduction in vessel loading, lower operational speeds and, potentially, alternative transport arrangements. Table 9 displays the number of waiting days per ship per quarter for the years of 2001 and 2002, and clearly reveals the poor performance of the Danube vis-à-vis the Rhine over the period.

Table 13 Number of Waiting Days for River Traffic Per Ship and Per Quarter during 2001 and 2002

Sector 20011st Qtr

20012nd Qtr

20013rd Qtr

20014th Qtr

20021st Qtr

20022nd Qtr

20023rd Qtr

20024th Qtr

Rhine + 4.9 3.9 1.7 2.3 3.2 1.9 1.5 1.0Rhine - 1.6 1.5 1.9 1.8 2.5 1.6 2.0 1.5North-South 10.9 8.3 9.8 12.7 10.7 4.7 5.3 4.7Danube 21.2 20.0 21.7 24.4 26.4 16.1 27.9 19.4Easterly 1.4 1.1 0.8 1.2 2.1 1.9 2.2 1.3Domestic EU 3.4 3.1 1.2 1.2 1.4 2.4 2.2 2.1Source: EC Transport website

137. The provision of navigational aids on the river and routine channel maintenance are the responsibility of the individual member countries, in consultation with the Danube Commission (discussed in the section on institutions below). A substantial effort has been made by EC-financed studies to design improved information systems for the river (e.g. RIS River Information Systems). No figures are available on the volumes of channel maintenance undertaken in recent years, and little information is available on the current condition of channel structures, although, it is reported that the locks of the Iron Gate require maintenance.

138. There are a number of sectors on the Danube where bottlenecks exist, which represent an obstacle to navigation during some or all of the year. One recent report61 identified a number of priority projects to be implemented before 2010 to eliminate bottlenecks, including on the sections between Vilshofen-Straubing (estimated costs Euro 128 Million), Wien-Bratislava cross-border section (estimated costs Euro 180 Million), Palkovicovo-Mohacs (estimated costs

61 Priority projects for the trans-European transport network up to 2020: High-Level group report June 30, 2003.

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Euro 250 Million) and key bottlenecks in Romania and Bulgaria.(excl. works already financed, estimated cost Euro 637 Million), comprising a total investment of Euro 1,195 Million.

139. There are 78 ports on the River Danube, with 30 significant enough to be listed in the statistics of the Danube Commission. No data are available on the condition of their infrastructure and equipment, and little has been spent on maintenance in recent years. Equipment presents a mixed picture, with some rehabilitated while many other items are obsolete. All the ports were formerly owned by the states or by state-owned industries, but the exact position vis-à-vis ownership is now less clear: In Ukraine the ports have been commercialized under state control and the (unfinished) port in Moldova is to be concessioned to a Russian group. In Romania there have been a number of port concessions, whilst Bulgaria, Serbia and Montenegro, and Hungary are at various stages of making concessions or selling stock in the state ports. Croatia Vukovarhas prepared a Masterplan for the port area and is seeking a strategic partner, while in Slovakia, the state ports are in the process of being privatized.

140. Overall, there are too many ports, and in a number of cases, substantial areas of port owned land surround the ports. Based on experience elsewhere, it is unlikely that market forces alone will ensure the most productive long-term uses for these land areas, reflecting the inherent conflict between land use issues, which are generally addressed at a local level, and transport policy, which is addressed at a national level. A Regional Masterplan of the whole IWT system, which explicitly indicated which ports are needed for the development of the IWT system, and which could be turned over to more productive use, would be substantive step forward in the development of the system. In the former case, the mechanism for introducing the private sector to port operation could then clarify the optimum way to utilize the land area surrounding the port; inclusion with the port, allowing the ‘new’ port operator to determine its best use; separation and sale; or separation and inclusion in the assets of a development company62. In the latter case, the proposed Masterplan could also indicate alternative uses for the land, and the institutional steps needed to dispose of the asset. The EAR has recently commissioned (November 2003) a consultant to undertake a Masterplan, which should identify funding priorities on the Danube, Sava and Tisa Rivers.

141. For improved river transport, private investment is needed in a smaller number of modern and well-equipped terminals and in areas where road and rail connections do not have to pass through congested urban areas. However, at a time of excess capacity, particularly across national boundaries, there are always risks with piecemeal changes that the strategic perspective is overlooked. A master plan for the region is urgently needed to address questions such as whether to concession the whole port or terminals, and whether future use should be restricted to logistical activities or industrial activities, and how to optimize the use of the surplus land in the port areas. This risk is especially pertinent for the ports in or close to major cities such as Belgrade and Budapest.

62 Forth Ports (UK) Ltd makes more money from property development than from port activities.

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The current and potential traffic volumes

142. The freight traffic on the River Danube reached a peak in 1987, when 92 million tonnes was carried by vessels on the waterways63. By 1994, this had declined to less than 20 million tonnes, reflecting the impact of transition and conflict. After the UN sanctions against the Federal Republic of Yugoslavia were lifted in November 1995, traffic on the Danube started to recover. In 1997, the volume of goods traffic recovered to 26.8 million tonnes, growing at an annual rate of 9%. Since April 1999, however, when, as a result of the Kosovo conflict, the bridges at Novi Sad were destroyed, the volume of traffic fell again, with flows restricted to the upper Danube and to/from the Main-Danube Canal.

143. Three replacement bridges have since been opened, although only one of these is a permanent structure. In 2002, traffic had recovered to approximately 32 million tones, although navigation remains impeded by a temporary pontoon bridge which is opened three times per week for vessels to pass. This will be replaced by the EAR funded (Euro 41 million) Sloboda (Liberty) bridge, which was scheduled for completion in the middle of 200464, although it is reported to be some 7 months behind schedule65 due to poor local contractor performance. There is a parallel project to improve access on the road infrastructure to the bridgeheads, through clearing the tunnel entrances to the Sloboda Bridge linking the City of Novi Sad on one side with the road from Novi Sad to Ruma (M21) on the other side.

Table 14 Volume of good carried on the Danube in 2001/2002 (000 tonnes)

Countries Goods leaving the countries

Goods carried within the country (cabotage)

Total goods movement

2001 2002 2001 2002 2001 2002 %Austria 1,258 1,555 1,206 561 2,464 2,116 -14.1Bulgaria 303 392 949 1,402 1,253 1,794 +43.2

Croatia 89 96 223 12 312 108 -65.5Germany 7,777 8,331 ... ... 7,777 8,331 +7.1Hungary 3,432 3,452 ... ... 3,432 3,452 +0.5Republic of Moldova … … … … … … …Romania 140 678 7,652 8,606 7,792 9,284 +19.1Slovakia 1,164 ... ... ... ...8/ ... ...Ukraine 3,952 5,539 548 649 4,499 6,188 +37.5Serbia and Montenegro 342 ... 2,284 ... ... 8/ ... ...Goods brought to the Danube from the sea 541 395 -27.0

Total 66 28,070 31,668 +12.8Source: UNECE (2003)

63 Statistics on traffic on the River Danube were obtained from the Statistics of the Danube Commission (2000).64 See EC (2002) for more information.65 EAR (2004a).66 To compare data for 2001 and 2002, the total does not include data for Serbia and Montenegro nor Slovakia since they are available only for 2001.

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144. Traffic on the River Sava, in 1990, amounted to around 9.5 million tonnes, comprising, primarily industrial raw materials and construction materials. No figures are available for current traffic volumes, but anecdotal reports suggest movements of oil in Croatia, construction materials and some local traffic between Belgrade and Brcko, which together amount to some 1/2 million tonnes in 2003.

145. There has also been a change in the composition of the traffic on the inland waterway network, with the biggest reductions occurring in steel products and crude minerals, mostly sand and gravel, which were required for the construction programs of the 1980s. There is a steady flow of relatively long distance traffic from both east to west, which arises from sea-barge transfer of bulk materials at the Black Sea terminals, prior to onward movement up the navigable system. From west to east, traffic is concentrated in the German and Austrian sectors, with relatively little long distance movement to the SEE or CEE countries.

146. In terms of passenger traffic, the volume on the River Danube has demonstrated good recovery in recent years: In 1990, passenger use was 724,000 passengers; this figure declined to 221,000 in 1995, but the number has increased, since, to 531,000 passengers in 2000. Much of the recent growth has occurred on the sections between Germany/Austria and Hungary.

147. In terms of future traffic volumes, three recent studies have tried to predict future traffic volumes on the navigable waterways. The EUDET study67 estimated that traffic volumes could increase to 60 million tonnes of general cargo on the navigable waterway system by 2010, an increase of 285% over 1995 volumes, predicating certain improvements in navigability and transshipment facilities and the realization of forecast economic growth. Without these improvements, the report predicted a more modest increase of 170% over the same period. The later TIR study predicted that traffic would grow by 160-260% over the period 2000 - 201568, while the REBIS study predicted, reflecting the lower actual volumes, a more modest increase of 80-93% over the same period.

148. Danube cargo traffic prospects are asserted to depend on three main factors: the economic recovery of the riparian countries, and the relative proportions of their domestic and foreign trade that that will use the river, and the impact of the EU accession of Hungary and Slovakia. Accession is likely to facilitate the use of the Danube, together with the Rhine, as a main transport corridor for trade between the North and Black Seas, offering enhanced transport opportunities for businesses seeking new markets in an enlarged Europe. The recent trends observed in western Europe, especially on the Rhine river, would suggest that river transport along the Danube river has the potential to increase significantly, from either attracting new or/and diverting existing traffic from other modes using modern logistics concepts, intermodal technologies, and efficient management information systems.

The fleet on the IWT system

149. The fleet on the River Danube comprises, primarily, ‘pushed barges’ of between 2-12 tonnes, that are literally pushed by a single tug. There are no recent data on the quality of the fleet. By contrast, the Rhine barges are mainly self-propelled vessels, that combine cargo space

67 EUDET (1999).68 Louis Berger (2002).

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and motor in a single ship of greater size. These barges can enter the Danube without difficulty, while the larger Danube convoys with pusher tubs and barges have difficulty traversing the relatively narrow locks of the Rhine-Main-Danube canal.

150. The technical differences in the vessels on the Danube and the Rhine are also reflected in the size of the crews: The Rhine self-propelled vessels operate with a crews of 4 to 5 members, while the large Danube vessels have a crew of 11, or sometimes 22 members, if 24 hour navigation is required.

151. The Danube fleets were predominately state-owned although some transfer to the private sector has taken place. Some difficulties have occurred during these transitions, not least in the area of labor retrenchment. The extent of private ownership in 2000 (although an appropriate caution should be issued reflecting the age of this data), summarized in Table 11, reveals the differing degrees to which the state-owned fleets, at that time, had been privatized in each of the riparian states. Based on this information, there would appear to be a general need for fleet modernization to meet the changed economic conditions and technical requirements, but so far investment has been hampered by the uncertainties surrounding the sale of the state-owned shipping companies.

Table 15 Reported status of Principal Shipping Companies on the Danube in 2000

Riparian State Principal Shipping Company

Ownership of Principal Shipping Company

Riparian State 2000: Total Carrying Capacity (tonnes)

Germany

Austria

Slovakia

Hungary

Croatia

Serbia

Bulgaria

Romania

Moldova

Ukraine

Bayerischer Lloyd

DDSG-Cargo

SpaP

MAHART

Dunavski

JRB

BRP

Navrom/NFR/CNF

Small Danube fleet

UDP

Privatized 1995

Privatized 1993

Privatized 2002

State owned (1)

State owned

State owned

State owned (2)

Privatized 1998 (3)

N/A

State owned

93,566 (1999)

232,403

347,370

196,624

99,616

579,357

325,754

1,777,939

17,789

809,134

Notes: (1) several attempts to privatize have been made(2) privatization in progress(3) with some level of indirect government control remaining

Source: E Martin (2002)

The competitive position of the IWT sector

152. The cost of river transport is relatively modest compared to other modes of transport: The cost of bulk freight movements by river transport, for which the mode is most suitable, expressed in ton/km, is, on average, half the transport cost of a similar movement by rail and

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one-fourth the cost of a similar movement by road transport. The EUDET69 study provides comparative costs per ton-km for selected commodities between Romania and Germany, undertaken by road, rail and river transport, and road was estimated to cost 3.7 cents(US)/ton-km, rail about 2 cents (US) per ton-km and river transport between 1 and 2 cents (US) per ton-km, depending on the particular commodity and the distance.

153. The primary competition to the IWT sector is the railways, although the former has certain inherent advantages over the latter (low track maintenance costs, low entry cost, flexibility in response to changing market needs, no debt overhang) that should allow it to maintain its competitive advantage for the movement of bulk commodities over medium to long distances. However, the IWT sector needs to continue to enhance its competitive position, both in these areas where it can compete currently and in those sectors where it could be competitive with selective investments. This implies a need to consider investing in improved inter-modality in terminals to facilitate the movement of bulk commodities and permit the carriage of containers.

154. Recent trends in Western Europe on the River Rhine suggest a potential path, where the port of Antwerp now handles more than 50 percent of its total traffic on barges, following the introduction of modern logistics concepts, inter-modal technologies and efficient information management systems. The positive trend observed in recent years on the Rhine for the transportation of containerized cargo using barges, in particular, could be replicated on the River Danube over time, particularly with the next phase of EU enlargement. Other potential areas of improvement lie in the sea-barge interchange at the ports, where improved facilities could lead to greater utilization.

The Main Institutions in the Sector

The Danube Commission

155. The Belgrade Convention (1948) guarantees unrestricted navigation on the River Danube for member countries and also created the Danube Commission, which is based in Budapest. Seven additional protocols were proposed in 2002, but not yet ratified. The original membership of eight countries: Austria, Bulgaria, Hungary, Slovakia, Romania, Russia, Ukraine and Yugoslavia (now Serbia) has been increased with the inclusion of Croatia, Germany and Moldova and there are 4 observers: France, Georgia, Netherlands and Turkey.

156. The Commission should play a central role in the coordination of navigational aspects of the river for the riparian countries and in representing the interests of Danube navigation in the international context. However, there has been limited progress. Members should maintain their sections of the Danube in navigable conditions, carrying out the works necessary for that purpose and commit to do nothing that might hinder navigation on that section of the river. The Commission is financed by an equal levy from each of its member countries, irrespective of the length of their riparian frontage, whilst observer states pay a reduced levy.

157. In June 2004, a Sava River Commission was formally established by the four former Yugoslav republics to manage navigation and hydro-electricity in the Sava basin in an effort to

69 EUDET (1999) Page 109, Table 2.48.

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facilitate the recovery of river transport. After parliamentary ratification by Bosnia, Croatia, Serbia and Montenegro and Slovenia, the ground for the Sava River Commission was laid at a ceremony in Belgrade. The legal framework for the Sava River Commission was signed in Slovenia in December 2002, which will serve as a depository for the legal instruments.

The Regulatory Framework for IWT Operation

158. The 1991 Budapest European Inter-ministerial Conference of 25 nations70 agreed to coordinate their inland water transport policies by measures including: (i) the establishment in Europe of an adequate network of inland waterways of international importance; (ii) building an integrated all-European inland navigation system based on market principles; and (iii) harmonization of technical and professional standards aimed at reciprocal recognition of national ship's certificates and boatmaster's licences71.

159. This Conference was followed up in 2001, at the Pan-European Conference on Inland Waterway Transport, with a four point Declaration on Infrastructure; Legislative Harmonization and Access to the Market; Safety and Sustainability; and Promotion, known as the Rotterdam Declaration. This declaration was endorsed by the ECMT at its 2002 "Seminar on inland waterways".72 These Declarations, the AGN Agreement on Main Inland Waterways of International Importance, the above Conventions and other documents effectively define the policy framework for the River Danube. However, the application of these policies is a complex process reflecting the geographical, economic and political differences among participating countries.

160. The opening of the Rhine-Main-Danube canal highlighted the need for the harmonization of certification requirements for ships and their crews (and accession will further emphasize this requirement). UNECE is pursuing the identification of differences between the two systems and potential areas of improvement, with a view to the preparation of recommendations in this complex area. For ships, the Act of Mannheim requires bilateral agreements if a ship is to operate between a CCNR (Central Commission for Navigation on the Rhine) country and an outside country. This has resulted in various bilateral agreements e.g. between Germany and Hungary. The Belgrade Convention is less restrictive and reserves only cabotage to member countries. Whilst under EU legislation, all transport within the EU is open to all member countries (with some exceptions for the Spanish islands), the Danube is of course a mixture of EU member countries, accession countries and long list countries and some interim agreements appear to be required.

70 Ministerial Conference on Timely Issues of European Waterway Transportation (Budapest September 1991)71 quoted from the "White paper on Trends in and Development of Inland Navigation and its Infrastructure",

TRANS/SC.3/138, UNECE 1996.72 ECMT/CM(2002).

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THE MAIN IMPEDIMENTS TO A MORE EFFICIENT AND EFFECTIVE TRANSPORT SYSTEM

THE ROAD TRANSPORT SECTOR

161. An inefficient transport system imposes significant costs on a society in the form of higher prices for imports and reduced competitiveness for exports, additional time and money expenditures due to delays and congestion, together with other externalities such as noise, poor air quality, visual intrusion and community severance. One study73, undertaken in 1998, for the International Road Transport Union (IRU) estimated the economic costs of barriers to road transport, in the form of traffic congestion, border delays, traffic bans, strikes and blockades, and speed restrictions. The countries included in the estimate were the Czech Republic, France, Ireland, Poland and the United Kingdom.

162. The estimated direct transport costs arising from these five main barriers for freight and passenger transport operators amounted to Euro 6 billion per year. The additional costs arising from further lost business opportunities of producers, traders and tour operators were estimated to amount to a further Euro 13 billion per year. Although quantitative data concerning the economic costs of the impediments to road transport in South East Europe (SEE) are lacking, research conducted for this review revealed many constraints to efficient road transport in SEE74.

The Main Institutional Issues

An incomplete policy and regulatory framework

163. The Southeast European Cooperative Initiative (SECI)75 was originally established to contribute to the alleviation of perceived deficiencies in the operation of international road transport in SEE. One component of this program is the continued progress towards the harmonization of the domestic framework with internationally accepted rules and standards, inter alia, by simplifying and harmonizing procedures, formalities and documentation, particularly as they relate to border processing. There is, however, someway to go until this process is complete in the region. Albania, for example, has not yet signed and ratified most of the relevant agreements and conventions.

73 Hague Consulting Group (1998).74 The Balkan Transport and Storage Sector Review, NEA transport research and training, 2000. This review was carried for the International Finance Corporation (IFC) within the SEED framework.75 Participating countries are: Turkey, Bosnia and Herzegovina, Slovenia, Republic of Moldova, Romania, Hungary, Bulgaria, Greece, Albania, FYR of Macedonia and Serbia and Montenegro.

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Limited capacities in the public sector organizations

164. A continuing problem in the region is the relatively limited capacity of the public sector institutions in the transport sector, although progress has been made in many countries. Systematic weaknesses remain with regard to systems and procedures for planning, monitoring, regulating and managing transport activities. In addition, the relatively low level of wages of the public sector vis-à-vis the private sector makes it difficult to retain, or attract, qualified personnel, even if available. The European Union’s Stabilization and Accession Process (SAP) imposes a requirement for improvements in the capacity of the public sector to be able to plan and budget road maintenance expenditures, to improve road safety, to undertake extensive programs of road maintenance and rehabilitation, involving the private sector, to be capable of employing the latest developments and technologies, whilst also capable of mitigating the adverse effects on the environment.

165. A further weakness in the institutions of the sector relates to the road transport associations in the respective countries. Although, the process of strengthening the associations in the region has started, with some now recognized as International Road Union (IRU) members, such as the road transport association, AEBTRI. They now provide a range of services to their members such as lobbying, information on trade requirements, training and licensing. Most recently, as part of its involvement in the Trade and Transport Facilitation Program in Southeast Europe, ECOS, the road transport association in Bosnia and Herzegovina, became an accredited IRU Training Institute providing EU compatible training for Road Transport Managers. Croatia has a professional association on the same path, and most of the SEE countries are working on aligning the conditions governing access to the road transport profession with EU requirements, and building up their training capacity for road transport managers. Further capacity building is required in conducting effective trade and transport facilitation dialogue with public authorities and in further aligning the conditions governing access to the profession for drivers and transport of dangerous goods.

The problem of road safety

166. Every year more than 1.17 million people die in road crashes around the world. The majority of these deaths, about 70 percent occur in developing countries. Recent research conducted within the World Bank76 suggests that global road fatalities will increase by more than 65 percent between 2000 and 2020, unless intensified safety interventions are implemented. Fatalities are predicted to increase by more than 80% in low and middle income countries, whilst decrease by nearly 30% in high income countries. The recent report issued by the World Bank and the World Health Organization77 notes that the cost of road traffic crashes is estimated at approximately 1% of Gross National Product (GNP) in low income countries 1.5% in middle income countries and 2% in high income countries. The direct economic costs of global road crashes have been estimated at US$ 518 Billion, with the costs to low income countries, at US$65 Billion, exceeding the total annual amount of development assistance.

167. Within the European and Central Asia Region, poor driver behavior, old vehicles, increases in traffic volume and speeds, limited signage, and poor quality pavement all

76 Kopits & Cropper (2003).77 World Bank/WHO (2004).

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contributing to accident rates, in terms of fatalities per 100,000 capita, that are high by European levels. Table 16 presents the number of fatalities for 2000 and 2002, together with the percentage change and the rate per 100,000 of population.

Table 16 Number Road Accident Fatalities 2000/2002, % Change and Rate per 100,000 of Population

Country Population (mills)

Number of fatalities (within 30 days)

% Change2000/2002

Fatalities/100,000 of population

(2002)2000 2002Albania 3.1 280 250 -11% 8.06Bulgaria 8.2 1012 959 -5% 11.7Croatia 4.4 655 627 -4% 14.0FYR Macedonia 2.0 162 176 9% 8.69Romania 22.4 2499 2398 -4% 10.7Serbia 8.3 1048 847 -19% 10.2Czech Republic 10.2 1486 1431 -4% 14.0Hungary 10.2 1200 1429 19% 14.0Source: WDI /ECMT Databases

168. Table 16 indicates that the rate of fatalities per 100,000 in the region fell over the period 2000 to 2002 in the majority of the countries of the region. The exceptions being the FYR Macedonia and Hungary. This seems to imply an improving performance, but the reality is that the current and latent rates of increase in vehicle ownership and use in these countries, suggests that it is, at best, a temporary respite. The overall forecast is for fatalities to increase by nearly 20% between 2000 and 2020, compared to a decrease of nearly 30% in the high income countries, defined as the G-7 countries, together with the Euro area countries and Korea, Hong Kong and Singapore.

Inadequate cost recovery

169. The road user charges in many of the countries of the region require restructuring as, at present, the current level of the road charges, in the form of both access charges and the duties on fuel, are below the average of the equivalent charges in the EU, and in some cases significantly below. The earlier section noted that the average annual fee for a twenty tonne truck approximated Euro 450 across the region, compared to a range of Euro 700-2000 for a comparable vehicle in the EU. In respect of the latter, the regional average of the duty paid on diesel (Euro 0.31/litre), is 38% below the comparable figure for the EU. A similar story emerges with respect to fuel duty on petrol, with the regional average (Euro 0.42/litre) 32% below the comparable average in the EU (Euro 0.66/litre)78.

Governance issues

170. The problem of ‘rent-seeking’ or corruption is a problem endemic in the region, varying only in nature and intensity across the different countries. The EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) is a long-term collaborative project to monitor the investment climate, governance and firm performance across all the transition countries. The survey focuses on corruption in its two main forms of state capture and administrative corruption, in interactions between businesses and government. Among its

78 All figures from International Fuel Prices, (2003), cited in NEA (2003)

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findings, during the period 1999 to 2002, ratings of corruption as an obstacle to business stayed relatively constant at high levels in Bosnia and Herzegovina, Bulgaria, FYR Macedonia, Romania, and the Slovak Republic.79 Measures of corruption used to assess trends in the region encompass sectors beyond the transport sector. Corruption continues to rank among the top third of business obstacles in countries in the Balkans. With regard to the frequency of administrative corruption, the highest frequency of bribery is reported by firms in the SEE region as compared to firms in the new member countries of the EU.80

171. A recent study81 in the transport sector estimated that the cost of administrative corruption in 2002, ‘small’ petty payments, at border crossings in the region totaled more than Euro 100 million. By the very nature of its work, border agency operations, with comparatively poorly paid public employees dealing with consignments of significant value, provide ample incentives for corruption. In the SEE countries, the percentage of trucks paying bribes to the respective national border services, at the sampled border crossings, ranges from 45% at the border stations of Serbia and Montenegro to 77% at those of Romania, with unofficial payments of Euro 154 and Euro 44 respectively, per crossing, with a regional average of approximately Euro 100 per crossing. These are not small payments for ‘good’ or normal service, but unofficial payments, or rents, extorted by public officials to ensure that a particular consignment is not subjected to increased waiting time, or excessive control of the carrying vehicle(s). Over a three year period, Albania has made the most progress in terms of average bribe reduction.

The Main Operational Issues

Limited capacities in the private sector

172. The technical competence of transport management in the SEE countries appears satisfactory. The majority of countries in the region comply with Directive 98/76, which regulates access to the profession of road transport operator; one of the criteria is the competence of the management of the undertaking. A general perception on the part of much of the management in the region is that large investments in state-of-the-art vehicle fleets and warehouses would bring them from the ‘bottom’ of the European market to the top. There is still a strong belief in technical solutions for management problems. Knowledge of supply chain management, modern logistics, quality requirements, strategic marketing, activity based costing and financial and operational ratios of EU based companies appears to be lacking.

A need for staff retrenchment

173. A significant number of the former public sector companies that now operate in the sector as joint stock companies suffer from over-employment. In some cases the over employment can amount to 30% of the total work force, with significant over-manning found in the repair and maintenance departments. In the SEE region, the majority of companies continue to undertake their own repair and maintenance, often employing a large staff of mechanics. In some cases, this can amount to two mechanics per truck and there are indications that there is a lot of hidden employment. The contrast with EU operators is stark, where the evolution of vehicle technology

79 World Bank (2004). 80 World Bank (2004), p. xii. 81 PlanConsult, (2004).

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and the increasing environmental demands of national governments and the EU, have forced many EU based road transport companies to contract out their repair and maintenance to specialized dealers. A few mechanics might be retained to undertake smaller repairs on the whole fleet, while regular preventive maintenance and the more complex repairs are undertaken by dealers.

174. The problem for the SEE operator is that, in some countries, the legislative framework prescribes that companies, owning their own fleet of vehicles, must have both qualified transport engineers and appropriate facilities to undertake repair and maintenance. These are regarded as conditions for receiving an operator’s license. An additional constraint in some of the countries is that domestic legislation may prevent labor retrenchment. The result of both is higher overheads and reduced competitiveness for the firms in the region.

Poor utilization of assets

175. The poor quality of the infrastructure, increased journey time, and the delays at the border, means that even if the regionally based operator is competitive in other ways, he is unable to utilize his assets, the vehicle fleet, to the same extent as a EU based operator, and so will not be able to offer competitive rates, on a sustainable basis. International commercial vehicles in the EU undertake an annual average commercial mileage of 120,000 kilometers, and in the movement of perishable goods this could go up to more than 150,000 kilometers. In the SEE region, the comparable figures are well below these levels.

Excessive waiting time at borders / border crossing procedures

176. The SEE countries have demonstrated that progress can be acheived in reducing border crossing times, although there is scope for considerable further progress on the major corridors X and V. Under the regional Trade and Transport Facilitation Program in Southeast Europe (TTFSE - see Annex B for further information) which combined infrastructure, technical services and information systems upgrades, the SEE countries managed to reduce average waiting times at more than 20 selected border crossings and clearance facilities by more than 60 percent on average (see the selected examples provided in the following figure), while traffic was continuously increasing.

177. This program, designed in 1999, did not however target border crossing points with Serbia and Montenegro, due to the political situation in the region at that time and focused exclusively on road transport. The effective reopening of Serbia and Montenegro to international traffic led to significantly increased traffic flows on Corridor X (Greece and Turkey-EU via Serbia), leaving the related border crossing points congested -200 to 500 trucks a day- and traffic commonly facing delays of 6 hours at most Corridor X crossing locations and of up to 24 hours at specific bottlenecks (Turkish-Bulgarian border).

Figure 1 Achievements in reducing processing time at selected border crossings 2001-2004

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Reduction in Terminal Clearance Times: 63%

050

100150200250300350

Inland Clearance Facility Name

Min

utes

Project start Nov-03

Reduction in Border Crossing Times: 65%

050

100150200250300350

Border Crossing Point Name

Min

utes

Project start Dec-03

MACEDONIA, TABANOVCEBORDER ENTRY TIMES (min.)

020406080

100120140

Jan-

01

Apr

-01

Jul-0

1

Oct

-01

Jan-

02

Apr

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BOSNIA AND HERZEGOVINA FEDERATIONIZACIC BORDER ENTRY TIMES

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178. The review of the performance of the TTFSE pilot sites enabled the identification of the origin and scale of the major causes of delay. International trade, by its nature, brings together a wide array of stakeholders with varying, and often conflicting, mandates. Trade facilitation, although regularly mentioned as a primary objective by SEE border agencies, remains for most border institutions and their staff, a secondary priority compared to other objectives such as increasing government revenue or applying international and national laws. Long standing rivalries both at headquarters and border crossing points, and, often, a tradition of police control over borders has led some border agencies to closely protect their individual mandate, as opposed to the overall objective of optimizing the functioning of border crossing points as a whole. There is also limited personal incentive for staff to willingly facilitate trade. In this environment, coordination of control, optimized from a user standpoint, does not take place. This is compounded by a fairly high incidence of errors in submissions by traders reflecting both a

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partially immature private sector, with many very small inexperienced operators, and an insufficiently developed framework of administrative penalties for erroneous submissions.

179. In addition, several SEE countries have not signed relevant international customs conventions, including the International Convention on the Simplification and Harmonization of customs procedures (Kyoto Convention), or are only partially applying earlier conventions, such as the 1982 Geneva Convention on the Harmonization of Frontier Control of Goods. Neither Bosnia and Herzegovina nor Serbia and Montenegro are members of the World Customs Organization, and although the former is a contracting party of the TIR Convention, it is not a full member -Montenegro is not covered. The ATA convention has been signed by only three of the SEE countries: Bulgaria, Romania and the FYR of Macedonia. In addition, the national rules and procedures in SEE frequently change and there is lack of information and transparency both about the rules and the decisions to amend the rules.

Difficulties obtaining visa for professional drivers

180. One operational issue facing professional drivers, working in the SEE region, reflects the difficulties they face in obtaining the necessary visa(s). The impediments include unreasonable delays, high cost, overcomplicated documentation, difficult or limited access to consular services, and the absence of the required consulate in a given country. In addition, in a number of cases, work permits are required for simple transport operations, with the approval procedure appearing cumbersome. It would appear that there is scope for simplification of the process, and a reduction in the cost, in a number of the countries of the region.

Lack of bilateral trip permits and the link with vehicle technology

181. The earlier section noted the changing direction and composition of trade in the region, away from the movement of bulk commodities, and towards lighter manufactured products and consumer goods. These changes form an impediment to the emergence of a competitive domestic road transport sector, as operators that move consignments to the EU countries need to be both efficient enough to absorb the lack of ‘backloads’, but also need to conform to the strict emission standards imposed by the EU, as exemplified by the current EURO 3 standard.

182. Following the introduction of this classification system, individual EU member states and the multilateral organization "ECMT82" have linked their trip licensing systems to vehicle technology. These trip licensing systems are called bilateral trip permit systems, and the number of permits is negotiated on a bilateral basis. Foreign trip permits are usually distributed among hauliers by respective Ministries of Transport or national transport associations.

183. There are many different bilateral trip permit systems. For instance, the system used by the Netherlands is quite liberal, in the sense that trip permits are usually given to foreign governments on the basis of market demand. Other countries (especially Germany and Austria) have bilateral trip permit systems that are less liberal, and in the case of Germany the system is also linked to the EURO vehicle classification. As a result, it is very difficult for SEE hauliers to get Austrian or German trip permits, especially for older vehicles. Since Germany and Austria

82 The European Conference of Ministers of Transport was founded in 1954 with the aim to facilitate transport in Europe

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are important (transit) countries in transport between SEE and the EU, this linkage between trip permits and vehicle technology requires ‘external’ haulage operators to invest in the latest vehicle technology, which represents a significant barrier to entry for the atomized haulage sector in some of the SEE countries.

Lack of multilateral trip permits

184. There is also a lack of multilateral trip permits available from the ECMT. ECMT licenses are multilateral licenses for the international carriage of goods by road for hire or reward by transport undertakings established in an ECMT member country. They are distributed on the basis of a quota system, for use between two or more ECMT Member countries83. So, a single ECMT license gives the right to transit most of the countries in Central and Eastern Europe (CEE) and the EU, without requiring a national trip permit from any country. It also gives the right for third country transport, meaning that a transport company from country A is allowed to transport goods from country B to country C. The ECMT license is valid for one year (or 3 months), and a haulier is allowed to make as many trips with the license as possible. The ECMT distributes the licenses to the national governments and usually the national Ministries of Transport distribute the licenses among their hauliers.

185. The ECMT system is also linked to the EURO classification: Each member country has a certain quota84, but it is allowed to convert its base quota for EURO-1 vehicles into a quota for EURO-2 vehicles at a rate of 1 : 2, or for EURO-3 at a rate of 1 : 4. For instance, if a country has a base quota of a 1000 ECMT licenses, it has the possibility to trade this quota for 2000 EURO-2 licenses or 4000 EURO-3 licenses. As a consequence, national governments, given the shortage of EURO-1 permits, prefer to give licenses only to the most modern vehicles, which the SEE countries do not have. In addition, there are problems of access for smaller companies, with many operators perceiving that larger operators being favored in the allocation, and there are significant differences in the prices of the licenses85.

186. Accordingly, SECI has started the initiative to establish a quota-free regime for bilateral and transit road transport of goods within the SECI region. For “green” (EURO-1) and “greener and safe” (EURO-2) lorries this has generally been achieved and several existing bilateral agreements already contain provisions which offset the effects of quantitative restrictions.

Difficult access to leasing and capital

187. Road transport companies in the SEE countries face significant impediments in obtaining credit, or appropriate leasing arrangements, to renew their vehicle fleets. The main impediments are the lack of interest on the part of the financial institutions to invest in a sector that is perceived to be marginal in profitability terms, particularly in comparison with other sectors. 83 There are 42 full ECMT Member countries: Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Federal Republic of Yugoslavia, Finland, France, FYR Macedonia, Georgia, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Moldova, Netherlands, Norway, Poland, Portugal, Romania, the Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine and the United Kingdom. 84 Quota's are based on criteria such as the number of vehicles, transport volume etc.85The importance of the ECMT multilateral quota of transport licences for the European transport market, NEA Transport research and training, (2001), a study carried out for the ECMT.

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Where terms are offered, they either tend not to reflect the realities of the market, in the sense that the repayment period may be specified at twelve months, whereas a modern truck has an average life span of seven years, or they charge a ‘risk premium’ that makes the investment unviable, or, in the case of leasing, the institutional framework does not support the development of leasing as an approach (no legal framework / no leasing companies ) in the region86.

Slow implementation of innovations in logistics

188. In the EU a noticeable trend has emerged over the last decade of manufacturers contracting out their transport operations to larger professional transport companies and focusing on core manufacturing operations. This process has lead to a significant increase in the utilization of the road transport fleet. In addition, the larger transport companies have also undergone a substantial change in the way they organize their business due to increasing competition, focusing on value added logistics, such as warehousing, or the establishment of large connected international transport networks to meet the needs of multinationals clients. One implication of these changes is that manufacturers and the larger transport companies (or better "logistic service providers") focused their attention on the total supply chain. This focus led to the trend that large transport companies increasingly contract out transport services to (very) small high quality companies.

189. The contrast with the SEE countries is marked, as in this region, since there are few high quality operators, most manufacturers in SEE are being forced to invest in their own transport and warehousing, leading to underutilization of expensive capital assets. The implication is less investment in the core business, and hence lower competitiveness of the final product, as a result of lower investment and the higher fixed costs of the transport operation.

THE RAIL TRANSPORT SECTOR

The Main Institutional Issues

The issue of marginal social cost pricing

190. Some of the, potentially, most significant harmonization requirements facing the transport sector in these countries is represented by the Directives, 1991/440, 2001/12, 2001/13, 2001/14 and the proposed Directive Com (2003) 448, which updates an earlier Directive 1999/62. All relate, broadly, to the framework for ensuring access, at a fee, to the rail and road infrastructure of member and candidate countries. The restructuring of the rail industry, engendered by the former, was discussed earlier, reflecting the requirement to separate rail infrastructure from rail operations. By contrast, Directive 2001/14 provides some common rules and principles to try and ensure fair and non-discriminatory access to the rail networks for both national and international open access railway operators, whilst also setting out the framework for the introduction of a system of marginal cost pricing for the railways of the community.

191. The theoretical rationale for such a system, expressed in policy terms in the EC White Paper on Pricing (COM (1998) 466 final) is for each user, irrespective of mode, to face a price at

86 The IFC initiative SEED has developed a leasing law in Serbia and Montenegro, and assisted in Macedonia recently, but it is as yet unclear if these laws offer help regarding fleet renewal.

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the point of use, exactly equal to the ‘marginal social cost’(MSC) of his/her use. The latter includes not only the direct costs of the operation and use of a mode, but also the congestion and environmental costs, or what are known as ‘externalities’ in the vernacular of the economist87. In this way, a user in deciding to make a trip or not, faces a cost that is exactly equal to the cost that his/her trip imposes on society in resource terms. Such a system, if introduced on all modes, would lead to an ‘economically efficient’ level and distribution of traffic across the modes.

192. The economic case for the introduction of marginal social cost pricing is unquestioned, and the World Bank has long advocated the introduction of such a system in an appropriate context88. However, there are a number of practical problems in the implementation of such a system: Firstly, the MSC includes the environmental costs of the operation of a mode, which in many cases are currently outside the market. All of these latter ‘costs’ are currently borne by ‘society’, i.e. the individuals living along noisy roads, not by the users responsible for their creation. There has been considerable research and debate into the scale and significance of externalities in the transport sector in the Europe Union89 and the principle of internalization has been accepted both in theory and in policy terms. But the difficulties in defining, identifying, calculating and charging the MSC, means that the comprehensive implementation of such a policy, even in a simplified form, has been restricted to a limited number of countries at this time.90 Although, steps to move closer to optimum charging systems have been introduced in a larger number of countries91.

193. A second, and possibly more substantive, problem is the lack of guidance on parameter selection, and the scale and coverage of the cost elements in a MSC system. The guidelines in Directive 2001/14 are noted to be general, with country differentials in terms of cost levels at a ratio of 1:7 in Western Europe, which is acknowledged as a risk to the growth of international traffic (Scherp, 2002). In a context such as SEE, where the survival of the railways depends on their ability to work together to enhance their competitiveness, this generality, and the implicit uncertainty for potential operators, together with the potential for discrimination are considered unhelpful to the development of international freight transport by rail.

194. A third problem is that there is no mandatory requirement at this time to introduce a similar system of marginal cost pricing on the road mode, despite the potential risk of resource misallocation. There is a proposed Directive Com (2003) 448 to introduce such a system for HGVs, but there are some significant differences with Directive 2001/14: The former limits the consideration of capital costs to new investment, whereas the latter allows the infrastructure manager to include projects from up to fifteen years ago. A further problem is that the technology to charge road users for every journey, as they make it, and hence facilitate the introduction of a sophisticated road pricing system, is available, but it is expensive and still not that reliable92.

87 See Cornes and Sandler, (1986) for a fuller discussion of the externality concept.88 See Walters (1968) for an early exposition.89 Maddison et al, (1996) ; Newbery (1988). 90 Finland, Sweden and Denmark are countries were multi-modal MSC pricing has been introduced. The Netherlands has introduced MCP for all modes.91 Weight/distance taxes for trucks in New Zealand, inter-urban tolls in Germany and urban tolls in Singapore and Oslo/Bergen/Trondheim. 92 Witness the recent travails in introducing an electronic charging system in Germany.

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195. A final problem with the introduction of marginal cost pricing on the railways in the SEE countries is that the average cost of use (total costs divided by traffic units) will exceed the marginal cost of use (additional costs engendered by an additional traffic unit). The result of such a divergence, which is likely in the context of falling traffic and excess capacity, will be low levels of cost recovery and the retention of significant deficits. However, the parlous financial position of the majority of the railways, discussed earlier, and the fiscal position of the respective countries, usually leads to an explicit requirement of deficit reduction on the railways and a movement towards overall cost recovery, with some reduced targeted subsidy for socially-necessary services, in the form of a Public Service Contract.

The financial sustainability of the railway network

196. There has been significant reform in the region, and significant reductions in costs have been achieved, but a daunting challenge remains to sustain the railway industry at its existing scale. All the railways in the region have operated at a loss for the last three years, despite various levels of support for passenger services and capital renewals. The problem is summarized in Table 17, which compares some basic indicators of railway network sustainability in SE Europe with EU averages. Railway network density (and to a lesser extent population density) is not greatly dissimilar in the two regions (although there are clearly wide internal variations in both blocs). However, the traffic density, productivity and national income per head is much lower in SEE than in the EU.

Table 17 A comparison of the context and performance of EU railways and SEE Railways (2002)

European Union South East EuropePopulation density (persons/000sq km) 106 92Route density (rail route-km/000sq km) 44 42Traffic density (000 traffic units/rail route-km) 3670 1640Labor productivity (000 traffic units/rail staff) 650 223Gross National Income ($000/capita 2003) 21.1 1.8Source: WB Railway Database

197. All railway systems in the EU receive substantial financial support (by one mechanism or another) from governments to sustain their respective railway networks. The stark challenge for the SEE countries is to sustain, from a commercial perspective, a railway network of much the same density as Europe with less than half the traffic density, a third of the total labor productivity and a tenth of the GNI/head. If the countries try to keep renewing the whole of the existing network, they risk a serious misallocation of recurrent and capital resources, both within and across the sectors. The likely outcome is a patchwork approach that will make it difficult to maintain the standards of efficiency and service necessary in those key areas of competitive advantage for rail, which play a vital part in national and international transport needs.

Management of rail freight operations

198. The freight transport market in the region is likely to increasingly develop in ways which will not offer a decisive advantage to railway transport, as discussed earlier. The demand for freight transport is likely to become more sophisticated, with customers and freight forwarders demanding, not just a line-haul price advantage, but ever higher standards of service, timeliness,

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specialist equipment, integrated business systems, high reliability of transit schedules, security of goods etc.

199. A substantive response to this challenge will require specialist investments, improved commercial management, and different skills and experience to those deployed in traditional bulk freight operations. It is unlikely that the traditional railway freight departments in South East Europe’s railways will be able to exercise the required market-responsiveness within the current constraints on commercial management associated with state-ownership. These constraints affect staffing levels and productivity, pay scales, freedom of investment and pricing, and commercial accountability. Despite attempts to end internal cross-subsidy, the freight operations of railways still carry the disproportionate burden of supporting passenger services, through the provision of direct cross-subsidy, through bearing an excessive portion of the charge for track access (despite passenger trains representing 70 percent of regional usage), and/or the diversion of cash flow from freight earnings and profits.

200. A very strong case exists for the Governments in the region to privatize freight train operations. This case is greatly reinforced by policies which have been adopted to encourage third party access to the network for private freight train operations. While access and competition is beneficial, new entrants will (and are) targeting those market segments with the highest profitability. Private companies will not be burdened by any of the management constraints and financial strains imposed on the state-owned freight operators. Their cherry-picking will rapidly reduce the value of the state-owned companies. Governments that privatize will enable the companies to respond to road and the nascent on-rail competition, and realize the value of their freight companies while there is still some value to be realized.

The problem of passenger railway services

201. While freight operations may be privatized and capable of profitable operation, the railways of the SEE region remain, from an operational (if not commercial) point of view, predominantly passenger railways. Table 18 reveals that passenger trains represent about seventy percent of train movements in the region. Many of these services are very heavily used and perform a valuable transport role that could not be easily replaced by other means. At the same time, as noted earlier, there are numerous poorly patronized services which could be provided at a higher level of service for less cost by the withdrawal of the railway service and its replacement by a tendered bus service.

Table 18 Train Activity in South East Europe (2001)

Country Freighttrain-km (000)

PassengerTrain-km (000)

TotalTrain-km (000)

Proportion passenger trains

Bosnia & H 903 2019 2922 69%Bulgaria 12159 25034 37193 67%Croatia 5899 16975 22874 74%FYR Macedonia 977 1575 2552 62%Romania 29334 67911 97245 70%TOTAL 49272 113514 162786 70%Source: WB Railways Database

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202. A number of rail services are, presently, provided at a price that does not cover their operating costs. In addition, the corresponding subsidy systems are inefficient, as they do not relate the subsidy to a well defined output, and unsustainable, reflecting the increasing inability of the state to continue to support these programs. The most striking example of this is the use of block grants to some of the national railways, which in the case of Serbian Railways, represents two thirds of its revenues. Even after receipt of these subsidies, the revenues of the 'commercial parastatals’ are insufficient to allow them to maintain assets properly, or set aside sufficient reserves for asset replacement at the end of the working life.

203. The main impediment to the improvement of passenger services is the scale of service relative to the ability of the community to pay for it. Given the current tariff levels and the high proportion of riders traveling free or on concessionary fares, it is usually the case that the more passengers who are carried the greater the losses. There is an understandable reluctance to reduce the affordability of public transport to the concession groups, who include some poorer members of the community. Also, in the absence of political will to cut back on service levels, there is always short-term pressure to keep fares low so as to at least maximize utilization of those services. However, as with the scale of networks, the ability of the region to sustain a railway industry depends on concentrating resources where railways can be most efficient and effective.

204. Ultimately, the SEE countries will need to specify the levels of service they are able and willing in the long-term to support from taxes and from fares which the users can afford. European Union regulations are moving towards, what is termed, a Public Services Contract model for establishing this balance. This approach suggests that such contracts should be drawn up by the level of Government best able to determine the services required and to administer and monitor the contract. In the case of regional and suburban services, this will usually be the appropriate subsidiary level of government. If such contracts are specified, there is scope to procure the contracted service by private tender. Whether through competition or built-in incentives, Public Service Contracts offer the prospect of a rational determination of the role of passenger rail and the possibility of significant improvement in the efficiency of the service.

THE INLAND WATER TRANSPORT SECTOR

The lack of a framework for development

205. One of the major impediments to the development of the IWT sector in the region is the absence of a strategic plan for the development of the sector, and the Rivers Danube and Sava in particular. There is a need to define the potential contribution of the IWT sector within a broader framework, developed with stakeholder input, which embraces land use issues, water management and environmental development, and the framework to govern the potential contribution of the private sector. Implicit in the process is the need to harmonize the legal and regulatory frameworks of the Danube and the Rhine to facilitate through working. The recent commissioning of a consultant to develop a Masterplan for the sector, by the European Agency of Reconstruction, is a substantive step in the right direction.

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The weakness of the current sector institutions

206. The earlier sections revealed that a common theme in all the sectors of the region is the weakness of the current institutions, and the IWT sector is no different. The existing institutions in the sector are under-funded and have no clear strategic direction. The development of a regional strategy for the sector, and action plan, would enhance the role of these institutions and provide new impetus to their status and scope. The recent formal establishment of a Sava River Commission, in an agreement between the four riparian countries brokered by the Stability Pact for South East Europe, if successful, represents significant progress in addressing institutional weakness.

The current business environment

207. A related issue is the unattractive business environment for investors and operators. The impact is limited modernization and transport services which are declining in reliability. The policy on private sector involvement has been defined in a series of Declarations, that have yet to be turned into actions. The respective Governments have to define clear rules for private sector participation in ports, terminals and fleets. The concept of ‘door-to-door’ transport is central to the development of river transport and the improvement of sea-river interfaces.

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A NEW FRAMEWORK FOR THE DEVELOPMENT OF THE TRANSPORT SECTOR IN SOUTH EAST EUROPE

REDUCING THE ECONOMIC DISTANCE TO MARKETS

208. The physical size of the SEE countries, their location and the size of their domestic markets underscore the need for regional cooperation, if the region is to maximize its potential, and optimize its locational advantage vis-à-vis the EU. The progress of Slovenia and Slovakia, both small open economies, offer a template for the southern countries to emulate. However, the countries of the SEE region also need to overcome the additional distance from the main markets of Europe, so considerable effort must be made to reduce, what can be termed, the ‘economic distance’ to the main markets.

209. This concept reflects the idea that one of the most important elements for a country in maximizing its international trade, after macroeconomic stabilization and trade liberalization, is its ‘economic distance’ from the main markets, or the generalized logistical cost, defined as the sum of all time and cost expenditures of moving a consignment to a market presented in commensurate terms93. This measure of economic distance reflects all the necessary and unnecessary transportation and clearance expenditures. Thus, a reduction in economic distance can be realized not only from improved physical infrastructure, where justified in economic terms, which is a necessary condition for economic development, but also from improvements in the institutional framework (harmonized and simplified policies and regulations), better cost recovery and improved maintenance, simplified transit procedures, improved provision of information, and the reduction of unofficial payments or corruption, across the whole region. A further crucial component will be the identification and optimal utilization of the individual modes through the introduction of a fair and efficient system of pricing on all modes and stimulation of complementarity of transport modes for long distance haulage within a broad transport strategy, that seeks to maximize the contribution of the private sector where appropriate and attractive to potential contributors.

210. The implication is that for some countries, development requires not only improved physical infrastructure that meets national needs and integrated with that of neighboring countries, but also an institutional framework that is consistent both across the region and with the main markets. A crucial component of this process is the facilitation of trade; it is almost an axiom for development, reflecting the importance of trade for the realization of sustainable economic growth and poverty reduction94. Efficient regional transportation and clearance systems reduce the costs of trade, leading to increases both in the value of local products and in trade volumes by broadening market access and releasing latent demand.

93 Halcrow (2002).94 See Winters et al, (2004) for a comprehensive survey of the links.

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TOWARDS FAIR AND EFFICIENT PRICING ON ALL MODES

211. A significant foundation in the development of the regional transport system and the socially optimal level and distribution of traffic across the modes, would be a consistent framework for the costing and pricing of the use of the infrastructure in the region. The theoretical optimum is for each individual user, freight or passenger on road or rail, to face a price at the point of use that is exactly equal the social costs of his/her trip. This is the concept of marginal social cost pricing, which was discussed earlier.

212. The World Bank has long supported the principles of marginal social cost pricing95 in certain circumstances, and more recently the European Union has advocated a similar policy (COM (1998) 466 final), making it mandatory for member railways (Dir. 2001/14). The attractions of such a system are many; it provides both an efficient signal to potential users, encourages the most efficient use of the infrastructure and provides a signal to infrastructure managers vis-à-vis investment needs at particular ‘pinch-points’ in the system. The acknowledged difficulty lies in the design and implementation of a practical system. The World Bank has no wish to be prescriptive, but believes that there are certain advantages in the SEE countries adopting a regional approach towards the design and implementation of an infrastructure pricing system at the national level.

213. A further area of concern relates to the coverage of infrastructure costs, as a system of MSC pricing can, in certain circumstances as mentioned earlier, lead to the non-coverage of fixed costs, and hence the retention of deficits. This would suggest that a two part pricing system, with a variable component reflecting the marginal cost of running the service, together with a fixed component, reflecting the share of fixed costs attributable to the service, would appear to be the most appropriate and pragmatic solution. What is needed is some regional co-ordination to ensure that the design and implementation of such a system, introduced nationally, introduced no new barrier to the development of international rail freight.

214. However, whilst such a two-part tariff, potentially, addresses the financial issue, it is also likely to lead to less traffic on rail, and hence more traffic on the road, exacerbating any congestion or environmental issues on that mode, and strengthening the need for further investment in the road mode. It is also advisable that the introduction of such a system across all modes would need to be accompanied by organizational restructuring, as proposed elsewhere in this paper, the definition of a sustainable service level and an appropriate cost allocation exercise.

INCREASED RECOGNITION FOR THE AXIOM OF TRADE AND TRANSPORT FACILITATION

215. More than 5,000 km of new international borders were created with the dissolution of the former Federal Republic of Yugoslavia, leading to the creation of many new border crossings affecting trade and transport flows. From a competitiveness standpoint, these borders reduce the ability of SEE countries to capitalize on their geographical proximity to large European Union markets. This translates into lost opportunities for traders due to risks of untimely deliveries or, at best, into reduced profitability linked to increased logistical costs. As an illustration, Turkish trucking firms have established direct ferry connections between Turkey and Italy by-passing the 95 See Walters (1968); World Bank (1986).

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region, a trend that did not reverse, following the reopening of Corridor X through Serbia. Significant waiting times, variable customer service, and frequent requests for rents, or unofficial payments, are simply not an option in a highly competitive trade environment.

216. The SEE countries have already succeeded in reducing border crossing times at more than 20 locations, under the World Bank supported Trade and Transport Facilitation Program in Southeast Europe (TTFSE) (see Annex B for a detailed description and www.seerecon.org/ttfse). This program, which started in 2000, was designed as the first phase of an eight to ten year reform process covering eight countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Romania, and Serbia and Montenegro. The objective of the program was to foster trade by promoting more efficient and less costly trade flows across the countries in the SEE region, and improving customs operations in line with European Union standards. Over the implementation period, the SEE countries also experienced significant growth in trade volumes and customs’ collected revenues, as a result of the multiple programs targeted at trade expansion.

217. The TTFSE program confirmed the effectiveness of an approach including incentives (monthly performance measurement at pilot locations), capacity building through technical assistance, investments in enabling infrastructure (facilities, equipment, information system), support to private sector compliance in the form of training96, and provision of information. It also confirmed that delays at borders do not have to be part of the operating environment if there is sufficient political will and appropriate institutional follow up.

The need for a corridor based approach

218. As illustrated in the Impediments section, there is considerable scope for further improvement in trade facilitation in the SEE countries. The TTFSE program intentionally took a targeted approach, with a primary emphasis on road transport, on selected locations and on Customs administrations, and a secondary emphasis on other border agencies. The importance of some of the international corridors to the region, notably Corridors IV, V and X, which carry the bulk of international traffic flows to and from the EU, frequently 90 percent in the case of rail flows, underline the need for a corridor approach. This type of approach, which balances the role of the various transport modes to ensure its plays its part, is now a core trade facilitation priority.

219. The business community, and particularly the Business Advisory Council of SECI and the Stability Pact and the PRO-Committees97 of SEE, reinforced this priority by placing renewed emphasis on corridor development over the past 12 months, citing corridor impediments as a major business bottleneck and establishing working groups to support the development of corridors.

220. As such, improving the competitiveness and efficiency of rail and road transport corridors, in a sustainable manner, is central to the proposed approach. This entails a combination of elements including: (i) proper road and rail infrastructure to service mid-term requirements, supported by transit charges commensurate with their use of the network; (ii)

96 More than 3,000 individuals in 85 cities participated in training on trade and transport procedures, documentation, and business ethics. This was supplemented with training programs with certification in partnership with the International Road Transport Union and the International Freight Forwarders’ Association.97 Public-private committees aiming at sustaining an active dialogue among stakeholders on trade and transport facilitation matters (see www.secipro.net).

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http://www.secipro.net/

http://www.seerecon.org/ttfse


improved quality of rail services on corridors reducing forwarders’ quoted time to and from Europe from 10 days to 4 to 5 days (train station to station); (iii) low, predictable processing times at border crossing points, particularly for vehicles in transit, reducing border time to no more than 5 percent of the corridor travel time (as opposed to about 24 percent today); (iv) reduced petty corruption on the itinerary through a regional integrity program; (v) simplified export and import procedures, avoiding time and resource intensive submission of paper documents; and (vi) agile private sector operators with good knowledge of trade and transport operating rules, solid understanding of supply chain management, operating in a environment providing strong processing cost incentives for compliant traders, and strong disincentives for erroneous or fraudulent behavior.

221. Proper road and rail infrastructure. While issues related to infrastructure are addressed in other sections of the report, trade and transport facilitation cannot occur in the absence of proper transport infrastructure designed, built and maintained to meet mid-term traffic projections. The physical infrastructure needs to be ready to address the projected increases, where justified by the demand and affordable in terms of the macro-economic considerations.

222. Improved quality of rail services. Regional rail freight can only be expanded in a sustainable manner if it minimizes the impact of border processing. Leaving aside the much needed broad reform and modernization national programs, a number of operational measures would greatly enhance service delivery times. These measures include: (i) relocate the change of locomotives for freight trains and the related train technical checks (brake testing) from border crossing points to marshalling yard; (ii) implement information technology solutions to facilitate advance processing by railways and border agencies; (iii) promote joint processing of freight trains by Customs administrations at marshalling yards; (iv) improve scheduling to build on the first three points.

223. Low, predictable processing at borders. The detailed review of border processing under the TTFSE program highlighted a number of critical measures to reduce border processing times. Most delays result from the many border agencies (commonly 5 or 6) involved in border processing with frequently overlapping mandates, limited coordination if any, inconsistent working schedules, lack of cooperation with neighboring countries and little incentives to facilitate trade. The priority measures include: (i) strengthen cooperation among border agencies and coordination by giving a clear mandate to one border agency, typically Customs, regarding the overall processing of freight at border crossings, in line with the Geneva Convention (1982) on the Harmonization of Frontier Control of Goods and the Integrated Border Management policy of the European Union; (ii) ensure continuous availability of border agencies involved in freight processing at major border crossing points -“first category”; (iii) replicate TTFSE pilot site experience to all first category crossing points and major clearance facilities; (iv) provide incentives to border officials to make trade facilitation one of their core focus; (v) harmonize border crossing procedures, and standardize trade and transport documents, such as international weight certificates for commercial vehicles, allowing wherever feasible for electronic submission of these documents; (vi) optimize the layout of border crossing points from an operational standpoint98 (see following figure), with dedicated lanes for quick processing of compliant transport companies.Figure 2 Indication of Optimal Border Layout

98 http://www.gfptt.org/Entities/ReferenceReadingProfile.aspx?id=18d15931-4fba-4857-83f0-9c28b68e8ccc

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224. Simplified export and import procedures. Export and import procedures have improved considerably over the past four years as shown by reductions in processing times and the introduction of simplified procedures for legitimate traders with processing on traders’ premises. While most SEE Customs adopted risk management and selectivity approach to processing and most are in the process of allowing for direct trader inputs, processing still require paper documents to be delivered physically by traders or their representatives in most countries for the processing to be initiated. Further developments (electronic signature recognition, e-document acceptance) are required to allow for the submission, acceptance and processing of electronic documents enabling advance decisions by border agencies. This would significantly reduce present delays in processing.

225. Compliant Private Sector. Facilitation and control goals need to be balanced to ensure that legitimate traders can conduct effectively their activities, while illegitimate traders are swiftly penalized. Transparency of information requirements combined with regular training of operators are essential to that end. Under the TTFSE program, border agencies started providing detailed information regionally on border requirements, using a shared portal (www.ttfse.org), with regular alerts on given itineraries when rules change. This undertaking combined with intensive training in partnership with Chambers of Commerce led to greater informed compliance. Based on user feedback, this endeavor would warrant continuation to keep information up-to-date and further upgrade the portal platform to cover additional transport modes and languages. While strengthening the ability of operators to comply and incentives to

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http://www.ttfse.org/


do so through expedited services, border administrations need to reinforce the disincentives related to illegal or untrustworthy trade operators, by introducing administrative penalties sanctioning poor compliance, such as the submission of intentionally inaccurate declarations.

THE POTENTIAL ROLE OF THE INDIVIDUAL MODES

The contribution of the road transport sector

226. The road transport sector has a crucial role to play in the regional transport system, as in future, as currently, the majority of freight transport and passenger transport is likely to be carried by road transport. A key requirement is an institutional framework, in the economic sense of the rules of the game, i.e. a policy and regulatory framework, that is fair and consistent, within the region and neighboring countries. The introduction of such a framework would reduce the economic distance to the main markets for road transport operators, enabling a significant reduction in transport cost and time, and improving the safety and environmental performance of the sector.

227. The vision in the road transport sector might be presented as a road transport operator collecting a container from Thessalonika in Greece, and driving via Macedonia, Serbia, Croatia, Slovenia and Austria to arrive at a destination in Germany, on one Single Administrative Document, with no delays or illegal payments at any border on route, paying a broadly similar road toll on the main highway in each of the countries, within a fairly narrow range of journey time, where the institutional framework that governs the movement and the driver’s behavior was consistent across all transit countries.

Harnessing Positive Contributions from the Private Sector

228. With limited budgetary resources and competing transport infrastructure needs, many governments have turned to the private sector to finance, concession, and operate real and shadow toll roads. The number of Governments using this approach has increased, primarily, in the road sector, with greater and lesser success. The recent case of the Novi Sad bypass, described in the accompanying text box, illustrates the potential risks of failing to plan, design and implement any potential public–private partnership without due care.

229. This example, along with the other projects in the region, show that the introduction of the private sector is not a panacea for the development of the road network. A recent study completed by the World Bank99 undertook some detailed analysis of the experience with motorway development in the past ten to fifteen years in Hungary, the Czech Republic, Poland, 99 World Bank (2003b).

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The case of the Belgrade – Novi Sad MotorwayOne of the largest motorway projects in Serbia at this time is the Belgrade-Novi Sad motorway, which was originally proposed and taken forward under a PPP arrangement. In the summer of 2000 the Government signed a concession contract with a consortium led by Beogradska Banka and composed of companies apparently not experienced in road construction. The consortium was appointed without competitive procurement and took over immediately the operation and toll collection on that 70.4 km long semi-motorway, promising to construct the second carriageway within 23 months from the signature of the contract. Earthworks started very slowly and were poorly executed with unsuitable materials and work meeting design standards. Only 10-15% of the originally planned works were carried out during the 23 months. After the change of government, the contract was terminated in July 2002 without compensation to the concessionaire who had failed to comply with the terms and conditions. Toll revenues collected by the concessionaire during the two years were presumably not used to finance construction works, but have not been recovered yet. Completion of the motorway will be financed by sovereign loans from EIB and EBRD


Slovenia, Croatia, Romania, and Serbia. The main lessons that emerged from this exercise is that any motorway project, although the findings are generic to all transport schemes implemented under a PPP scheme100, in order to be successful, requires strong (material) Government support and long lasting political will and engagement. At a more specific level, the following lessons, reproduced from the above study, also emerged:

Highly complex transactions like development, tendering, negotiation, financing, construction and operation of a toll motorway concession project can be completed successfully only if and when the appropriate regulatory and legal framework is in place, the economic background is evaluated by the private sector as promising, and there is strong political will to achieve a deal;

Under the prevailing conditions in the Central and East European countries, a substantial public sector contribution (up to 40-60% of total project cost) is needed, through the provision of existing assets as in kind contribution, equity participation, sovereign guarantees, subsidies, etc, to make motorway concession projects bankable under a PPP scheme;

The amount and kind of this Government contribution (presumably reimbursed completely, under an appropriate profit sharing scheme, within the concession period) would have to be determined and agreed during commercial negotiations carried out with the preferred bidder(s) and preferably with the participation of potential lenders;

To mitigate conflict of interests (implied by the fact that, in most cases, road contractors are the main shareholders of motorway concession companies), negotiations aimed at formulating the main agreements attached to the concession contract (construction contract, operation and maintenance contract, independent engineer’s contract, insurance contracts, etc.) should be attended and supervised by representatives of potential lenders;

The reluctance of private investors and lenders to accept commercial (traffic) risk exposure, means that financing structures with cash flow deficiency guarantees (operational subsidy, shadow toll, availability fee/capacity charge) are preferred, especially in the initial years of the operation before traffic levels build-up and the commercial and financial risks are highest;

A sound in-depth traffic and revenue study should be carried out by an independent consultant (selected with consent of and guided by potential lenders), and use of that study should be mandatory for preparing reliable financial plans including governmental support mechanisms needed to make the toll motorway project bankable;

If tolling is used, special attention should be paid to the potential loss of traffic on the motorways as a function of the toll rates, as high tolls and skewed value of time distribution for trucks may result in low capture rates by the motorway, heavy truck

100 In the form of a concession with limited recourse financing.

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traffic on roads in the vicinity of the motorways, high damage of such roads, serious environmental nuisances, and public upheaval;

Commercial contracts regulating the partnerships should be conceived in a manner that provides flexibility and appropriate time to find the right measures if ever a hardship or emergency situation arises; and

Intervention based on political motivation instead of sound economic principles, or incongruent transport policies of subsequent governments may prevent or seriously hamper private sector involvement into the motorway financing, construction and operation business.

230. In conclusion, the above points can be summarized to highlight the key pre-requisites, whose absence would undermine the rationale for progressing a PPP:

A strong political will, an appropriate and stable regulatory and legal framework, and a stable macro-economic environment;

The willingness of the public sector to provide the (substantial) public sector contribution (up to 40-60% of total project cost) through the provision of existing assets as an in kind contribution, equity participation, sovereign guarantees, subsidies, etc.;

Sufficient traffic volumes to make it viable to the private sector - A new road is unlikely to be viable without a flow equal to, or exceeding, 15,000 vehicles per day, unless the respective national Government offers an additional substantial subsidy to the concessionaire. By contrast, the rehabilitation of a road, particularly where there are no competing corridors, can be viable where the flow is just 6,500 vehicles per day; and

A robust economic and financial appraisal of the project that asks, and endeavors to answer three questions; is the project beneficial for society, is it commercially viable for the potential concessionaire, and is the required public sector contribution justified in terms of the additional benefits engendered by that contribution?

231. The World Bank has, together with the Public-Private Infrastructure Advisory Service (PPIAF), developed the Toolkit for Public-Private Partnership in Highways (World Bank/PPIAF, (2003). This resource, when used appropriately, provides a reliable way of screening potential projects, in any transport sub-sector, as for private sector participation, prior to further detailed investigation.

The contribution of the railway sector

The need for regional co-ordination in service delivery

232. As the market for local bulk freight declines, the role of international long-distance freight will become more important for SEE railways. The majority of the forecasts of future freight flows between the region and the European Union show strong growth rates. Although, road transport is expected to win the greater part of this increased freight. The railway industry has the opportunity to participate in this growing market, but it will need to greatly improve the

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service it provides. This is partly a matter of creating an entrepreneurial private rail freight industry with an international outlook, within a suitable timeframe, but it also demands a coordinated and market-friendly approach to selling and managing infrastructure access.

233. Potential customers will be looking for service attributes which railways in the region do not yet deliver. A ‘pass the parcel’ style of operation as one state-owned railway passes on wagons to the next did not succeed in Western Europe, where rail market share is substantially lower than in South East Europe. It will also not be a successful model in the growing market for long-distance freight between South East Europe and the EU. The most promising business model, consistent with EU rail policies, will be international train operating companies running trans-European freight trains across international borders. They will use the track infrastructure of whichever territory they cross and expect to pay a fair price for such access without cross-subsidizing any other train operating activity on the lines.

234. In the European Union, the high level of track utilization, and the protectionist pressures exerted by incumbent state-owned operators has proven to be a constraint in realizing this concept in some corridors. The main constraint to the realization of this model in South East Europe is not the capacity or quality of infrastructure, as there is a reasonably high degree of technical interoperability between the countries in this region. Freight trains do not need to travel fast if they minimize stopping time on a reliable schedule, which does not happen now. For example, it is reported that because of the stopping time associated with discontinuities in service, fragmented management and border delays, wagons traveling from Greece to Austria generally take more than 5 days, yielding an average commercial speed of less than 10 km/hr. In these circumstances, major investment in achieving faster train speeds would seem to be an expensive way of tackling the wrong problem.

235. While international transit times can be improved through various means it is equally important to deliver reliability. High variability of performance is particularly damaging because shippers and forwarders of higher value inter-modal freight who use rail transport, base their marketing commitments to their customers on the performance level they can reasonably depend on, not on the average performance of the railway. The higher the variation in transit time the more they will penalize an already slow transit time by adding ‘buffer time’ to the service they offer in the market.

236. Capital investments at borders and at other pinch points are required to realize this vision, but the main impediments to improved international rail freight services are institutional and managerial. Infrastructure managers in different countries need to co-operate to plan and offer reliable train paths on a multi-country basis at access charges which are attractive in the market. Such access regimes and charges should not discriminate between state-owned freight train operators or private operators. Privatization of national rail freight companies offers a more secure basis for non-discrimination; this is another argument in its favor. Moreover, it is likely that privatized freight operators will be better able to consolidate and reorganize to create specialist companies of a multi-national character to address these markets.

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THE SPECIFIC RECOMMENDATIONS

THE INSTITUTIONAL RECOMMENDATIONS

237. Strengthen and harmonize the policy and regulatory framework in the region. There have been significant gaps in the policy and regulatory framework of the sector, both with the countries and in the harmonization with neighboring countries and the EU: generic areas include the delineation of the responsibilities between the policy and operational responsibilities of the sector, harmonization with European Union norms and the role of the private sector.

238. There are three broad principles to guide any strengthening of the policy framework for the sector; firstly, separating the ‘manager’ of service delivery from the ‘service provider’ can lead to efficiency gains, through the clarification of responsibilities and improved accountability. Secondly, the involvement of the private sector, particularly in a competitive context, in the provision of services, leads to improvements in allocative efficiency. And finally, responsibilities for service management and delivery should be ‘decentralized’ to those individuals who have the greatest knowledge about the specific activities.

239. The key focus in the harmonization initiative should be EU accession, and efforts should focus on adopting the acquis communautaire as soon as possible, whilst being reflective of the needs and fiscal space in each of the countries.

240. The structure, organization and required resources of the respective Ministries of Transport need to be enhanced to ensure that they can meet their responsibilities. The institutions within the sector need further strengthening to ensure adequate capacity for the countries in the region as they develop under the European Union’s Stabilization and Association Process (SAP). This need for further institutional strengthening includes the capacities to plan and budget road maintenance expenditures, to undertake an extensive program of road maintenance and rehabilitation, involving the private sector, where appropriate, using the latest developments and technologies, to mitigate the adverse effects on the environment, and improve road safety.

241. There is a need to introduce a fair and efficient system of comparable pricing and costing of the infrastructure on all modes in the region. A significant foundation in the development of the regional transport system and the socially optimal level and distribution of traffic across the modes, would be a consistent framework for the costing and pricing of the use of the infrastructure in the region. Concerns over cost recovery from the sector would suggest that a two part pricing system, with a variable component reflecting the marginal cost of running the service, together with a fixed component, reflecting the share of fixed costs attributable to the service, would appear to be the most appropriate and pragmatic solution. What is needed is

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some regional co-ordination to ensure that the design and implementation of such a system, introduced nationally, introduced no new barrier to the development of international rail freight.

The road transport sector

242. Ensure a sustainable level of funding for road maintenance in the countries of the region: The funding of road maintenance is generally inadequate in the region a point noted by the REBIS study. In Serbia and Montenegro, average annual maintenance expenditures on main and regional roads have been of the order of 0.3% of GNP, whilst a comparable figure from countries at similar stages of development would be around 1% of GNP. The recommendation is that countries of the region aspire to the latter figure, within their own particular macroeconomic contexts. One ‘vehicle’ that is often recommended to assist the process is the establishment of a ‘road fund’, which through a process of ‘ear-marking of revenues raised from the sector, has made a positive contribution in a number of countries. However, the key objective is an adequate and sustainable source of finance for the maintenance needs of the sector.

243. Increase cost recovery in the road transport sector. A constant refrain in a number of studies101 is that cost recovery from some road users is presently too low. The levels of diesel fuel duty and the registration fees, particularly for larger, heavier commercial vehicles, do not, currently, cover the social costs of use, including the damage caused by the vehicle to the road itself. In respect of motorway tolls, domestic users are, in some countries in the region102, paying levels below those paid by international users, a practice that is incompatible with EU norms. The recommendations are that road user charges should be restructured, over time if necessary, to harmonize with EU norms, and raised to ensure that each class of users pays an aggregate amount equal to the full social costs of use.

244. Improve road safety in the region – There is a genuine need to improve road safety in the region, and many of the countries need to define a road safety strategy, with a defined implementing agency, who will enhance co-ordination between key stakeholders, including communities and civil society, define targets and identify procedural and physical improvements, which would then be prioritized to realize those targets.

245. A substantive step would be, where desired, to conduct a Road Safety Country Capacity Review, as recommended by the WB/WHO report. These can be described as a quick and systematic review of national road safety management capacity. These reviews, depending on the perspective of the subsequent initiative, could be undertaken at a national, regional or local/city level, with the findings forming the core of any subsequent road safety initiatives. The World Bank is funding the undertaking of a limited number of these studies in FY2005, as pilot cases.

246. Further support is required for trade and transport facilitation in the region: The World Bank supported TTFSE Program, launched in the region in 2000, requires active follow up to ensure that the gains realized under the existing project are retained and enhanced. The earlier section noted the centrality of TTF work to the development of the region, and it is notable that initiatives of this sort are also progressing in some of the Accession countries.

101 Cowi (2003).102 Notably Serbia and Montenegro.

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247. Simplify the visa requirements for drivers the sector. One initiative that could be introduced and which would have a direct impact on the facilitation of trade and transport, would be to simplify the issuing of visas to these countries for professional drivers. The main recommendations include:

the issue of annual multi-entry visas to professional drivers; the introduction of simplified procedures, designed in consultation with the IRU; and reducing the price of a visa for haulage operators/drivers.

The railway sector

248. Ensure that railways in the regions are placed on a financially sustainable basis, through improved business performance and more appropriate budget support mechanisms - A number of rail services are, presently, provided at a price that does not cover their operating costs. In addition, the corresponding subsidy systems are inefficient, as they do not relate the subsidy to a well defined output, and unsustainable, reflecting the increasing inability of the state to continue to support these programs. The most striking example of this is the use of block grants to some of the national railways, which in the case of Serbian Railways, represents two thirds of its revenues. Even after receipt of these subsidies, the revenues of the 'commercial parastatals’ are insufficient to allow them to maintain assets properly, or set aside sufficient reserves for asset replacement at the end of the working life.

249. Create an extra-national rail infrastructure access co-ordination group. This group would co-ordinate access to slots along international freight transit corridors. The introduction of such an institution could enhance the service to potential entrants to the freight market, by removing many of the transactions costs and physical difficulties that are currently manifest in negotiating access with separate national railways at this time.

250. The national rail freight companies should be privatized. The earlier section noted that the most promising business model, consistent with EU rail policies, will be international train operating companies running trans-European freight trains across international borders. The privatization of the national rail freight companies will represent a significant step towards consolidation in this market, and improved efficiency.

251. Local Passenger Services should be regionalized. The responsibility for the planning of local passenger services should be delegated to the benefiting regions, with appropriate funding of socially necessary services to be directed via the relevant local government bodies. The recommended mechanism for the delivery of those services that are considered socially necessary, but which are not commercially viable, is the Public Service Contract. It is recommended that PSC frameworks be created to develop an explicit means of delivering and subsiding these services, with in-built efficiency incentives.

252. Divest non core businesses. There is a need for the railway companies of the region to divest themselves of all non-core activities, to reduce overheads and focus managerial attention on the core business of identifying and servicing those markets where rail has a viable future.

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The inland water transport sector

253. The commissioning of a strategy and action plan for the River Danube basin - should be adopted as the first priority. Such a regional plan, possibly elaborated from national plans prepared by the riparian countries, will provide a guiding strategy. The recent initiative of the European Agency for Reconstruction in commissioning a consultant to undertake the preparation of a master-plan and feasibility study is a substantive step in the right direction.

Trade and Transport Facilitation

254. Accomplishment by countries in the region, under programs such as the World Bank supported TTFSE Program, launched in 2000, have shown that coordinated approach to trade facilitation lead to results. New challenges have nonetheless appeared and existing impediments require focused remedial actions to ensure the sustainability of achievements to date. The earlier section noted the centrality of TTF work to the development of the region, and it is notable that initiatives of this sort are also progressing in some of the Accession countries. Lessons learned from these activities led to the following recommendations.

255. Define and Implement Integrated Border Management Principles. Strengthened cooperation among border agencies and coordination of their control and inspection activities is central to shortening border processing times, while increasing the effectiveness of controls. This entails the designation of a lead agency for border processing, usually Border Police for passengers and Customs for freight, and the streamlining of processing from a control effectiveness and facilitation angle. The Geneva Convention (1982) on the Harmonization of Frontier Control of Goods can be used a basis for these institutional reform, since all SEE countries, apart from Albania, are members of this convention. Institutional reform should also build on the new Integrated Border Management approach of the European Union. Several countries have initiated efforts in that direction (Macedonia and Serbia), but high level political support will be required to implement those changes.

256. Simplify the visa requirements for drivers the sector. One initiative that could be introduced to facilitate trade, would be to simplify the issuing of visa for professional drivers. The main recommendations include:

the issue of annual multi-entry visas to professional drivers; the introduction of simplified procedures, designed in consultation with the IRU; and a reduction in the price of a visa for haulage operators/drivers.

THE IMPROVEMENTS TO THE PHYSICAL INFRASTRUCTURE

257. The primary focus should be on establishing/maintaining a core road network in the region. Over 70% of the road network in the region needs some form of pavement renewal, so the primary emphasis should be placed on maintenance expenditures. However, there are undoubted needs for capacity enhancements on certain key corridors, in the form of motorways, around congested urban areas and bypasses around linear communities, where justified by the benefits. The REBIS study identified a wider program of investment requirements to bring the

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road network of the system up to an acceptable European standard: The economic, or political justification, given the fiscal space available in many of these countries, is less clear.

258. This should be accompanied by a focus on improving the border crossings to reduce the delays to international transport - The REBIS study identified 14 border crossings as requiring immediate infrastructure improvements, with an estimated total cost of Euro 50 million. An additional 12 border crossings were identified as possible bottlenecks, the timing and justification for which required further studying. Experience shows however that border infrastructure in itself is not a solution to improve processing time. It needs to be integrated in broader institutional modernization and procedural streamlining outlined in earlier sections (see examples of border design supporting border controls103). Careful reviews by all concerned border agencies and preferably border processing experts can optimize the impact of such investments.

259. On the rail network, the primary emphasis should be places on rolling stock rehabilitation and track renewals, vis-à-vis major upgrades, on the defined core network, together with further labor restructuring in all areas: freight, passengers and infrastructure as well as other cost saving areas. Any investments in new capacity should focus on developing the niche markets, and only take forward projects on the defined core network and in rolling stock that serve core long-term business needs. The latter would include further investment in overcoming operating bottlenecks in international traffic services, including the attainment of reducing border delays.

THE OPERATIONAL RECOMMENDATIONS

The road transport Sector

260. Support the development of leasing legislation to facilitate fleet renewal. In a number of SEE countries financial leasing laws104 do not exist, or are not fully developed, which hinders the development of a leasing industry. Earlier initiatives in this field should be continued, and harmonized with the demands of the transport industry.

261. There is a need to strengthen the road transport associations of the region. The regional road transport associations could play an important role in improving the performance of the sector. This role would encompass the provision of information to members about markets, developments in transport and logistics, legislative and regulatory changes, both in their own and neighboring markets, the provision of training programs to keep their skills up-to-date and acting as a focal point to represents the interests of the sector in policy making circles.

262. Facilitate the introduction of European wide freight exchange systems. By using freight exchange systems SEE hauliers might be better able to find cargo, which in turn increases the utilization of their vehicle fleet. Such freight exchange systems should be operating on a European wide scale, and accessible for both hauliers and their clients.

103 http://www.gfptt.org/Entities/ReferenceReadingProfile.aspx?id=18d15931-4fba-4857-83f0-9c28b68e8ccc 104 The IFC initiative SEED has developed a leasing law in Serbia and Montenegro, and assisted in Macedonia recently, but it is as yet unclear if these laws offer help regarding fleet renewal.

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263. Optimize border processing. Many of the present impediments can be addressed at minimum costs, by implementing high impact short-term to mid-term measures. although they do require rethinking of the overall border organization, and hence political will. Shorter processing time at borders can be achieved by: (ii) ensuring continuous availability of border agencies involved in freight processing at major border crossing points -“first category”; (iii) replicating TTFSE pilot site experience to all first category crossing points and major clearance facilities; (iv) providing incentives to border officials to make trade facilitation one of their core focus, including the introduction of regular performance measurement against which their work is rated; (v) harmonizing border crossing procedures, and standardizing trade and transport documents, such as international weight certificates for commercial vehicles, allowing wherever feasible for electronic submission of these documents; (vi) optimizing the layout of border crossing points from an operational standpoint, with dedicated lanes for quick processing of compliant transport companies.

264. Allow for processing on the basis of electronic documents. Moving from paper based processing requiring documents to be delivered physically by traders or their representatives to electronic processing would reduce significantly processing time. This coincides with the Paperless Trade approach of the European Commission. Further developments (electronic signature recognition, e-document acceptance) are required to allow for the submission, acceptance and processing of electronic documents enabling advance decisions by border agencies.

265. Relocate Rail Border Processing to Shunting Yards. Locomotive changes at border crossing points lead to significant delays linked to technical checks and coordination among many stakeholders. Relocating processing to in-country shunting yards, where trains do have to stop, could reduce significantly border time and the variability in train delivery times, if this aspect is addressed regionally.

THE NEXT STEPS

266. The immediate next steps, on the part of the World Bank at the regional level in the sector, involve the commissioning and completion of two studies in the railway sector: the first is a standalone policy paper on the rail sector, reviewing the reform process, and presenting in more detail the proposed strategy for rail sector reform and required regional investments, reflecting on the fiscal space issues in each of the countries, and the implications both for the pace and scope of reform. This should be completed by June 2005. The second study is more detailed, disaggregate regional rail freight study over a slightly longer time frame (with delivery scheduled for June 2006). The provisional expectation is that this study will take a ‘bottom-up’ perspective on the broad objective of reducing the ‘economic distance’ to market for international rail freight in the region. It will focus on identifying in detail the physical and institutional impediments, at an operational level, to international rail freight, on a number of corridors with adequate potential, and define a realistic investment plan, after considering the available fiscal space in the corridor countries. A recent study undertaken by the World Bank in Bosnia and Herzegovina, albeit for all infrastructure sectors, illustrates the nature of the proposed approach (see World Bank 2004f).

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267. In the area of trade and transport facilitation, preparatory activities, in the form of a number of studies and ongoing dialogue with local counterparts, continue, or will be initiated, on the second phase of the Trade and Transport Facilitation in SEE program in each of the countries. A provisional Action Plan, indicating the provisional timing for the different recommendations in this paper, and indicating whether they require regional or national implementation, is provided in the following section of the report.

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THE PROSPECTIVE TIMETABLE AND SCOPE OF ACTIVITES

Proposed Components and Activities – Perspective Financing Needs (US$ Mill)

Short Term 2005-2006 Horizon

Lead Agency

(ies)

Indicators External

Domestic

Total

Complementary Initiatives

THE RAIL SECTORRail Strategy Paper – Short stand-alone paper, based primarily on secondary sources, which lays out the strategy for railways in the region in more detail, in terms of the pace of reform, phased investments and consistency with fiscal space.

Mid 2005

Regional - World Bank

Final Report 0.05 - 0.05 SEETO Masterplan for extension of the TEN to neighboring countries

Undertake a rail freight corridor study - Study to identify detailed operational impediments to rail freight in defined corridors, identifying a robust investment plan, consistent with the fiscal space of the beneficiary countries.

End 2006


Final Report 0.3 - 0.3

Develop robust business plan – A number of the railways need to develop a robust business plan, defining their core network, increasing tariffs, rationalizing the size of their services/ network and their labor force, and divesting non-core activities.

End 2005

Regional and

national -Respective MoT and Railways

Robust Business

Plan

TA where necessary

Define and introduce necessary legislative End Regional Relevant TA where necessary

changes – a number of railways need to define appropriate legislation to ensure consistency with, inter alia, EC Directives, 2001/12/13/14, allow tariff flexibility etc.

2006 and national -

Respective MoT and Railways

Laws, approved by Parliament

Identify appropriate phased investment – as part of the development of the business plan to sustain core network, and attract new traffics where viable, consistent with fiscal constraints within the respective countries.

End 2006

Regional and

national -Respective MoT and Railways

SEETO Masterplan for extension of the TEN to neighboring countries

THE ROAD SECTORImprove Cost Recovery from the Sector – Define a realistic program of increasing fuel duty and reforming vehicle registration fees to increase cost recovery from the road sector.

End 2005

Respective MoT

TA where necessary

Increase maintenance expenditures to the sector - Develop a phased plan, agreed with the Ministry of Finance and consistent with the Medium Term Expenditure Framework, to increase recurrent expenditures in the sector to 1% of GDP in the medium term.

End 2005

Respective MoT and

MoF

TA where necessary

Identify national priorities in rehabilitation and enhancement – Identify key priorities in terms of capital investment and develop a robust phased plan, agreed with the Ministry of Finance, and consistent with the Medium Term Expenditure Framework of the country.

End 2005

Regional and

national -Respective MoT/MoF and public

bodies

SEETO Masterplan for extension of the TEN to neighboring countries

Invest in key border crossing facilities – undertake necessary investments in the 14 key border crossings on key corridors to enhance

End 2006

Regional and

national -

Improved facilities 50 Estimate US$ 3.5 mill

per crossing. External resources available

international trade flows. Respective MoT and

public bodies

from IFIs as appropriate and available

Identify forthcoming priorities in border crossing facilities – Identify the new priorities in terms of key border crossings requiring investment.

End 2006

Regional and

national -Respective MoT and

public bodies

Investment plan

INLAND WATER TRANSPORT SECTORDevelop a master-plan for the sector - Study to develop a master-plan to provide a framework and action plan for the development of the sector

End 2005

Regional - EAR

Final Report 0.25 - 0.25EAR Study is believed to cover only the Serbian IWT system

TRADE AND TRANSPORT FACILITATIONPreparation of TTFSE II Project – Initial discussions and preparations of the follow-up Trade and Transport Facilitation Project to commence in all the countries.

Mid 2006


Project Approved

External resources as necessary and available

Corridor Approach – Confirm the findings of the Corridor Study and identify key investments in physical and institutional infrastructure

Mid 2006

Regional- World Bank To be

confirmed


Simplify Visa Requirements for Drivers – Countries should, with EU/WB assistance, agree a simplified approach for visa issue and coverage for professional drivers

End 2006

Regional and

National - MoT and external partners

To be confirmed

Further develop leasing legislation to facilitate road fleet renewal - Earlier initiatives in this field should be continued, and harmonized with the demands of the transport industry

End 2007

Regional and


Facilitate the introduction of European wide freight exchange systems - Such freight exchange systems should be operating on a European wide scale, and accessible for both hauliers and clients.

End 2007

Regional and


Optimize border processing. Many of the present impediments can be addressed at minimum costs, by implementing high impact short-term to mid-term measures. although they do require rethinking of the overall border organization, and hence political will.

End 2006

MoT and external partners

To be confirmed


Proposed Components and Activities – Financing Needs (US$ Mill)

Medium Term 2007-2012 Horizon Responsible Bodies

Indicators External

Domestic

Total

Complementary Initiatives

THE RAILWAY SECTORComplete implementation of business plan – rationalizing the size of their services/network and labor force, divesting non-core activities, opening up network.

End 2009 Regional and

national -respectiv

e Railways and MoT

Network size, employee

totals

External resources available from IFIs as appropriate and available

Implement appropriate phased investment – as part of the implementation of the robust business plan to sustain core network, and attract new traffics where viable, consistent with the fiscal space of the countries.


national respectiv

e Railways and MoT

Network improvement

s

External support resources available from IFIs as appropriate and available

Establish an extra-national rail infrastructure access group – which would assist international rail freight operators gain access at a fair price to the networks of the SEE region.

End 2008 Regional - Respectiv

e Railways and MoT

External support and resources available from IFIs as appropriate and available

Privatize national rail freight companies – The national railways should aim to be in a position to privatize their national rail freight companies by the end of this year.


national - Respectiv

e Railways and MoT

Private sector

operators

Regionalize local passenger services – the local passenger services should be devolved to local authority control, with Public Service Contracts in place for all socially necessary services.

End 2010 Respective

Railways and MoT

External support and resources available from IFIs as appropriate and available

ROADSInvest in key border crossing facilities – undertake necessary investments in the identified remaining key border crossings on key corridors to enhance international trade flows.


national - relevant MoT and

public bodies

Improved facilities 50 External support and

resources available from IFIs as appropriate and available

Improve Cost Recovery from the Sector – Implement the defined national program of increasing fuel duty and reforming vehicle registration fees to ensure cost recovery from the road sector for both domestic and transit traffics.

End 2007 Respective MoT

and MoF

Implement appropriate phased investment – as part of the strategy for the development of the regional road network, consistent with the macroeconomic and fiscal constraints of the countries


national respectiv

e MoT and MoF

Network improvement

s

External support resources available from IFIs as appropriate and available

INLAND WATER TRANSPORT SECTORTo be defined in the IWT Masterplan

Regional -EAR

To be confirmed

TRADE FACILITATIONImplementation of TTFSE II Project – Implementation of the follow-up Trade and Transport Facilitation Project to commence in all the countries.

End 2012 Regional -World Bank

To be confirmed External resources as

necessary and available

REFERENCES

Arvis, J.F. (2004) “Transit and the Special Case of Landlocked Countries” Chapter 10 in World Bank/WCO “Customs Modernization Handbook”.

Cornes, R & Sandler, T. (1986) “The Theory of Externalities, Public Goods and Club Goods”, Cambridge University Press.

COWI, (2003) “Regional Balkans Infrastructure Study – Transport: Final Report”, The REBIS report funded by the CARDS Program, European Union.

Department of Transport, (2003) “Transport Analysis Guidance – Economy Objective”, London, available for download from http://www.webtag.org.uk/webdocuments/doc_index.htm.

Eggertson, T., (1990) “Economic Behavior and Institutions”, Cambridge University Press.

EUDET, (1999) “Evaluation of the Danube as a Key European Transport Resource”, Final Report, 4th Framework Program.

Economist Intelligence Unit, (2004) Serbia and Montenegro Country Profile 2004, London.

European Agency for Reconstruction, (2004) “Annual Report to the European Parliamentand the Council January to December 2003”Thessalonika, Greece.

European Agency for Reconstruction, (2004a) “Quarterly Report April-June”.

European Commission, (1991) “Directive 1991/440 – On the development of the Communities railways”, Brussels.

European Commission, (2001a) “Directive 2001/14 – On the allocation of railway infrastructure and the levying of charges for the use of railway infrastructure and safety certification”, Brussels.

European Commission, (2001b) “European transport policy for 2010 : time to decide”, DG for Economic and Financial Affairs, Brussels.

European Commission, (2002) IP/02/1123, which is available at: http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/02/1123&format=HTML&aged=0&language=EN&guiLanguage=en

http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/02/1123&format=HTML&aged=0&language=EN&guiLanguage=en

http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/02/1123&format=HTML&aged=0&language=EN&guiLanguage=en

European Commission, (2004) “The Western Balkans in Transition”, DG for Economic and Financial Affairs, Brussels.

Hague Consultancy Group, (1998) “The economic costs of barriers to road transport”, a report for the IRU.

Halcrow Group Ltd, (2002) “Trade and Transport Facilitation in the South Caucasus”, A Report for the World Bank.

Heggie I., & P. Vickers, (1998) “Commercial Management and Financing of Roads”, World Bank Technical Paper 409, Washington D.C.

Hillman, M. & J. Whalley (1980) “The Social Consequences of Rail Closure”, Policy Studies Institute, London.

International Monetary Fund, (2004) International Financial Statistics, Washington DC

Kopits, E. & M. Cropper, (2003) Traffic Fatalities and Economic Growth, Policy Research Working Paper 3035, Washington D.C.

Louis Berger Inc (2002) “Transport Infrastructure in the Balkans”, the TIRs study for the ECMT.

Maddison, D. et al (1996) “Blueprint 5 – The True Costs of Road Transport”, Earthscan, London.

Martin, E., (2002), “International Waterways in Crisis: the Case of the River Danube”, A paper presented to IAMME Panama, 2002.

Newbery, D.M., (1988) “Road User Charges in Britain”, The Economic Journal, pp 161-176.

Newbury, D.M. (2002) “Road User and Congestion Charges”, A paper prepared for the conference Excise Tax Policy and Administration, held in the Ministry of Finance in The Hague 11-12, April 2002.

PlanConsult (2002) “Provision of Consulting Services in User Survey Design and Implementation”, Interim Report I. Vienna, Austria.

PlanConsult (2004) “Provision of Consulting Services in User Survey Design and Implementation”, Interim Report 111 - Final Report , Vienna. Austria.

Scherp, J (2002) “A New Framework for Access to the Railway Infrastructure in the European Union”, Paper prepared for the Imprint Europe Seminar, Brussels.

United Nations Economic Commission for Europe (2003) Trans/WP.5/Working Paper/2003.

Walters, A.A., (1968) “The Economics of Road User Charges”, World bank Occasional Paper Number 5, Washington D.C.

Winters, L. Alan., N. McCulloch and A. McKay (2004) “Trade Liberalization and Poverty: The Evidence so Far”, Journal of Economic Literature, Volume XLII, No.1, Pages 72-115.

World Bank (1986) “Urban Transport : Sector Policy Paper ”, Washington D.C.

World Bank (2000) “The Road to Regional Stability and Prosperity ”, Washington D.C.

World Bank/PPIAF (2003) “Toolkit for Public-Private Partnerships in Highways”, Washington D.C.

World Bank (2004a) “Serbia and Montenegro – Transport Rehabilitation Project ”, Project Appraisal Document, Europe and Central Asia Region of the World Bank, Washington D.C.

World Bank (2004b) “Anticorruption in Transition 2: Corruption in Enterprise-State Interactions in Europe and Central Asia 1999-2002”, Washington D.C.

World Bank (2004c) “Albania – Transport Rehabilitation Project ”, Project Appraisal Document – under preparation, Europe and Central Asia Region of the World Bank, Washington D.C.

World Bank, (2004d) “The World Bank Group in South Eastern Europe: Regional Framework Paper”, Europe and Central Asia Region of the World Bank, Washington D.C.

World Bank, (2004e) “Reforming Infrastructure: Privatization, Regulation and Competition”, Policy Research Report, Washington D.C.

World Bank, (2004f) “Bosnia and Herzegovina: Infrastructure and Energy Strategy”, Report No.29023-BA, Europe and Central Asia Region of the World Bank, Washington D.C.

World Bank/WHO, (2004) The World Report on Road Traffic Injury Prevention, Geneva.

ANNEX A – OPTIONS FOR THE PRIVATE FINANCING OF INFRASTRUCTURE

IntroductionThe main options available for private (non tax) financing – excluding such sources as

service area concessions, advertising and development fees – are tolling and off-budget financing via a road tariff. This note focuses on tolling. There are several types of toll roads as follows:

Private toll roads which recover all their costs through tolls (Cofiroute in France is one of the best known examples);

Public-private toll roads where costs are shared between government and a private concessionaire;

Public-public toll roads where the concessionaire is a public, rather than private, entity; Public toll roads, operated by a public entity but collecting its revenues directly from road

users; and Securitization of an existing (public) toll road.

Some examples of how different countries manage their toll roads are shown below (see Box 1).

Private financing of tolls roadsMany countries turned to private toll roads to generate additional revenues for roads. However, tolls can only be economically collected on roads carrying relatively high volumes of traffic. The broad rule of thumb is that, with a 20-year cost-recovery period and a toll of $0.03 to $0.06 per vehicle km for light vehicles, you need at least 15,000 vehicles per day (vpd) to cover all costs. You can cover rehabilitation, operation and maintenance costs only with 6,500 vpd, maintenance costs only with 3,500 vpd, and toll collection costs only with 1,500 vpd (see Box 2). Since such volumes of traffic only occur on limited parts of the road network – typically on no more than 5 to 10 percent of the national road network and 1 to 2 percent of the total road network – this means that wholly private toll roads can only meet a small part of the road sector’s overall financing needs. However, since expressways are the busiest and most expensive sections of road to build and maintain, tolling can make a valuable contribution to the financing of the main trunk road network.

Public-Private PartnershipsA recent innovation has been the public-private partnership, where the (tolled) road is operated under a concession agreement. The concessionaire collects as much revenue as possible from users, while the balance of the revenues come from government, either in the form of an up-front payment, or as a recurrent shadow toll. Many of these concessions apply to existing roads where the toll revenue only has to cover the costs of operation and maintenance. This has enabled many more roads to be tolled and hence more revenues to be collected directly from road users. Argentina has taken this concept about as far as it can go and now has about 10,000 km of

national roads operated under private sector concession agreements. These roads account for nearly one quarter of the national road network, but still only account for less than 5 percent of the overall road network. Several other countries in Latin America, including Chile, Uruguay and Venezuela, operate similar road concessions.

When the volume of traffic, combined with the agreed (often regulated) toll, do not generate sufficient revenues to cover all costs, governments have to realistically accept shared costs. It is the pragmatic approach taken towards the South African toll roads which has made them an example of emerging good practice. Right from the start, the South African Roads Board recognised that many of the roads they wished to toll would not be financially viable. So they developed the “loans supportable by revenue” (LSR) approach to toll road financing (see Box 3). The LSR approach involves taking the proposed toll level, combining it with the expected traffic volume, and calculating the net revenue the road would generate (net of operation and maintenance). The net revenues are then used to float revenue bonds on the domestic capital market. The difference, if any, between the initial capital costs of the toll road and the value of these revenue bonds, is then provided by government in the form of a soft loan from the Treasury (i.e., as a low, or zero, interest rate loan repayable only after all revenue bonds have been serviced and repaid).

Box 1: How different countries manage toll roads

KOREA (DESIGN, BUILD, FINANCE, AND OPERATE): Korea Highway Corporation is a public corporation charged with constructing, reconstructing, and maintaining national expressways, all of which are operated as toll roads. By the end of 1996 Korea had 20 expressways with a total length of 1,840 km. There is a bold plan to add a further 1,800 km and to expand 500 km of existing roads by 2004. Then, expressways will account for about 25 percent of the national road network and nearly 5 percent of the overall public road network.

Average traffic volume on expressways is more than 44,000 vehicles per day. Revenues are pooled, and there is a unified toll fee of $0.031 per km for cars, $0.035 per km for buses, and $0.065 per km for trucks. Tolls were originally introduced to generate sufficient revenues to cover the costs of operating and maintaining the expressway network. But shortage of public revenues has meant that Korea Highway Corporation is increasingly required to contribute part of the costs of new expressway schemes. The government provides the balance of the capital in the form of equity.

Korea Highway Corporation operates on a break-even basis, and tolls are adjusted from time to time to ensure that revenues cover costs, including redemption of loans and payment of interest on government loans and corporate loans and bonds. Efforts are currently underway to persuade the private sector to build and operate selected toll roads under concession agreements. The first such project is being implemented, and it is expected that several more will be agreed during the next few years.

SOUTH AFRICA (PRIVATE FINANCE AND OPERATE): South Africa currently has 10 continuous toll roads totalling 709 km in length. Average daily traffic taken over all toll plazas was 8,892 vpd during 1995–96, with variations from a low of 2,292 vpd to a high of 26,143. These limited-access freeways are either new or have been significantly rebuilt. Almost all work, including construction, maintenance, and operation of toll plazas is carried out by the private sector under open-tender contracts. The roads are overseen by the Department of Transport, which acts as the administrative arm of the South African Roads Board. The legislation under which these roads are tolled stipulates, among other things, that the Ministry of Transport determines toll tariffs based on recommendations submitted by the South African Roads Board.

The toll tariffs are raised regularly to account for inflation. The toll system operates on an open basis (that is, motorists can use sections of road between toll plazas without paying the toll). Regular users are given substantial discounts through concessions to local residents and frequent-user cards. In addition to the above roads, there is one private sector toll road carrying a government guarantee and another under consideration without any guarantees.

ARGENTINA (PRIVATE DESIGN, BUILD, FINANCE, AND OPERATE): The Dirección Nacional de Vialidad is responsible for 38,000 km of roads. Many of these needed to be rehabilitated, and the Dirección Nacional de Vialidad decided to invite bids from the private sector to rehabilitate, operate, and maintain up to 10,000 km of this network and to recover the costs through tolls. The roads were divided into 20 corridors varying in length from 300 to 1,000 km. Improvement needs were identified for each corridor, and a schedule was established for the work to be carried out by the concessionaire.

Some work had to be done before any tolls could be collected, while other work had to be completed within 36 months. After a bidding process, in which concessions were awarded to bidders offering the highest lump-sum payment for the concession, 14 concessions were awarded to 13 consortia covering 9,800 km. The government remained owner of the roads and set the basic tariff (indexed on the basis of the cost of living and the exchange rate). The concessions were for 12 years, and the roads had to be maintained to specified standards. The initial tariff was set at an average rate of $0.015 per km.

The concessions operated for only about six months—the tariff rose rapidly, a public outcry arose, and the concessions were suspended. After further negotiation, the concessions were reinstated based on an average toll rate of $0.01 per km, the lump-sum payments were abolished, and the government agreed to pay an annual subsidy of $57 million to the concessionaires.

Source: Heggie, Ian G. and P. Vickers. 1998.

Box 2: Volumes of Traffic Needed to Cover Costs on Toll Roads

Costs of construction $ 4.0 million per kmLoans 20 years @ 10 percentToll rates $0.065 per km

Volumes of traffic required to: Cover all costs 15,000 to 25,000 vpd Cover costs of operation 3,500 vpd Cover toll collection only 1,500 vpd

Source: (Fayard, 1993).

PUBLIC-PUBLIC PARTNERSHIPSThis is a common arrangement used in France. The agency operating the toll roads under

a concession agreement does not have to be owned by the private sector. As a relatively autonomous public entity, the public concessionaire can increase the funding available for investment by calling on private capital markets (by issuing revenue bonds). It also does not necessarily have to be owned by the private sector to be effective. The most important points are stringent accounting practices, a high public profile and technical know-how. It also needs to be genuinely autonomous.

The relationship between the (public) owner of the road and the (public) concessionaire then needs to be spelled out in exactly the same way as if the concessionaire had been private. Benchmarking is then used to create peer competition between public and quasi-public entities to create a form of quasi competition. The use of public-public partnerships (and not only public private partnerships) can therefore offer an effective solution. It is used widely in France, not only in the roads area but also for railways (e.g., the co-operation between French and Spanish railways with regard to the TGV Sud high-speed train line).

Box 3: Financing toll roads in South Africa: the loan supportable by revenue approach In South Africa none of the initial toll road schemes implemented by the Department of Transport on behalf of the South African Roads Board were wholly self-financing. The concept applied in designing the initial schemes was called the loan supportable by revenue approach. The loan supportable by revenue is determined by calculating the present value of the project over 30 years, using a projected real interest rate, expected traffic growth, and forecast expenditures. This figure determines the size of the loan that can be repaid from toll revenues over 30 years at a borrowing rate above the rate of inflation. The balance of the capital is provided in the form of a long-term loan from the National Road Fund. These loans (together with any interest determined by the Board) are repayable only when all private sector loan obligations have been met.

Experience to date indicates that traffic growth has exceeded initial expectations, and real interest rates have been higher than forecast after an initial period of being less than forecast. The loan supportable by revenue calculations are revised on a regular basis to ensure that all private sector financial obligations will be met. Although the toll roads incurred deficits during their early years, a combination of inflation-linked tolls and traffic growth is expected to enable the toll roads to break even within 20 years and fully repay private sector loans within 30 years.

Private sector financing involves both capital and money market loans using a variety of instruments. The total borrowings as of March 31, 1997 amounted to $645 million in the capital market at nominal values with redemption dates up to and including 2015, and $99 million in the money markets. Overall financing costs in 1996–97 were 13.5 percent. No interest was paid on National Road Fund loans, amounting to more than $390 million.

Public Toll Roads

These are fairly common, particularly in the USA where most toll roads are operated by State governments. They are relatively autonomous, can borrow on the bond markets and sometime have representatives of the bond holders who sit on their boards. The need to rely on external financing imposes a degree of market discipline on the toll road operators, since they have to prepare a convincing prospectus to access bond finance and must then meet the conditions laid down by the financial intermediaries who represent these bond holders.

Securitization of Toll Roads

This is practiced extensively in China at the provincial level, although it is doubted that this model could be used widely elsewhere. The government builds a toll road (usually several of them) and, after the road is complete and most construction and traffic risks have disappeared, it sets up the road(s) as a public limited company. The company is then listed on the stock exchange and the government sells shares in the toll road corporation. The share holders earn dividends on their shares – with profitability depending primarily on the growth of traffic, inflation and approved toll increases – and the provincial government invests the money paid by share holders into constructing new toll roads.

ANNEX B - TRADE AND TRANSPORT FACILITATION IN SOUTH EAST EUROPE

The Trade and Transport Facilitation in Southeast Europe105 (TTFSE) started in late 2000 as the first regional program supported by the World Bank in Europe and Central Asia (ECA). It includes eight countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Romania, and Serbia and Montenegro. Most of the individual projects will close in 2004-2005, while Serbia and Montenegro and Moldova will take one or two additional years to complete due to the late start. The program seeks to reduce non-tariff costs to trade and transport, to reduce smuggling and corruption at border crossings, and to strengthen and modernize the customs administrations and other border control agencies.

A brief description of the components supported throughout the region may provide better understanding of the program achievements, lessons learned, and next steps: (i) supporting Customs reforms; (ii) strengthening mechanisms of interaction and cooperation between private and public parties at regional, national, and local levels; (iii) disseminating information and providing training to the private sector; (iv) financing infrastructure and equipment at selected border crossings; and (v) implementing, at pilot sites, an integrated set of new Customs procedures, information technology, human resource management techniques, and cooperation mechanisms for agencies at border crossings.

After more than three years of implementation, SEE countries involved in the program have achieved significant results: (i) significant reduction of waiting time at both at the borders and at inland clearance terminals (over 60 percent on average); (ii) improved dialogue among Customs administrations; (iii) constant monitoring of performance through indicators leading to the building of a regional data base -see all monthly statistics at www.seerecon.org/TTFSE/ttfse-indicators.htm; (iv) user surveys published for 2002 and 2003; (v) training of Small and Medium Enterprises' (SME) staff through the Trade Facilitation component; (vi) increased transparency on border agency requirements through the TTFSE website (www.ttfse.org) and (vi) favorable preliminary evaluation of the economic impact of the program. These achievements are discussed in detail in the TTFSE 2003 Report (June, 2004) available at http://www.seerecon.org/TTFSE/ttfse_progress_report_2003.pdf .

105 This Annex is based on the World Bank (2004) Annual TTFSE Report for 2003

http://www.seerecon.org/TTFSE/ttfse-indicators.htm

http://www.seerecon.org/TTFSE/ttfse-indicators.htm

The TTFSE Program has raised the awareness of participating countries regarding the need for: (i) increased in-country and inter-agency dialogue and cooperation, and (ii) treating trade facilitation bottlenecks in a holistic manner within a chain and corridor approach at a regional level. Each country nominated national coordinators to participate in the regional TTF dialogue. Those senior officials, sometimes Ministers of Finance, or Directors General of Customs, were given a mandate to represent the entire government, particularly during meeting of the TTFSE Regional Steering Committee meeting. At the same time, the program implementation highlighted such recurrent issues as: (i) resistance or delays in implementing risk management and selectivity; (ii) excessive turnover of staff in Customs administration; (iii) cooperation challenges among border agencies; and (iv) difficulties in addressing corruption across multiple agencies..

One of the original approach of the TTFSE program was the focus on about 20 pilot sites, either border crossing points or clearance facilities. At those locations, the implementation of border procedures was closely monitored, with monthly performance measurements. Local project teams made of specialists from the various border agencies, and at times users, met regularly with advisors funded under the project to make recommendations to facilitate trade. The implementation of their recommendations enabled significant time reduction.

Most of the lessons learned during program implementation have resulted in as many recommendations that may equally benefit the client countries – and help them sustain the reforms initiated by the TTFSE – as well as the World Bank and other international financing institutions in their endeavors to support cross-border cooperation programs. They follow below:

1. Interagency Cooperation at Border Cross Points

Insufficient interagency cooperation at border crossing points are central to the delays experienced by users. The Local Project Teams at pilots sites were the specific mechanisms intended to facilitate collaboration at the operational level. Although the local project teams increased communication, follow-up actions in many cases have been limited by the need to involve the respective headquarters in any local changes. The delegation of authority to agents at the border crossing is essential to enabling sustainable change and promoting pragmatic approaches to the resolution of problems. A cooperative culture should be encouraged and promoted from the top-down by management of regulatory agencies.

2. Replication of Procedures at Pilot Sites

The lessons learned and the success experienced at the more progressive border crossing points provide a model for replication throughout each TTFSE country. The economic returns from such replication could be considerable, multiplying the economic returns to date by several times. Both Bulgaria and Romania have moved in this direction, making changes in procedures at border crossing points that were not included as pilot sites under their projects. Both countries have set up, and started to implement phased action plans aiming at expanding the performance monitoring process. These encouraging initiatives provide for the sustainability of reforms beyond the TTFSE life.

3. Shared Border Crossing Facilities

A practical way to reduce duplication of controls consists in setting up a common border post for two countries in a single physical location. In addition, the construction and maintenance of duplicate facilities on both sides of a border crossing is perhaps not the best use of resources. This approach reduces costs for both the countries in question and traders. It makes the communication of trade documentation between the two neighboring border administrations easier, reduces clearance processing time by unifying border control processes within a single sequence and results in significant savings (both investment and maintenance of border facilities). This physical setup requires however strong political support and must be accompanied by a realignment and streamlining of the procedures themselves, to avoid a sub-optimal design of the joint physical facilities and to optimize outcomes in terms of facilitation.

While the shared border concept was not initially included in the TTFSE program and its components were not designed to finance such a scheme, the idea has been nevertheless advanced and discussed during Regional Steering Committee meetings and Bank supervision missions. Some shared border control activities based on bilateral agreements between countries (e.g. Bulgaria and Romania at Rousse-Giurgiu crossing point) existed even before launching of the TTFSE program. However, under the TTFSE (but going beyond the scope of projects)

two joint border crossing points are being established between Croatia and Bosnia and Herzegovina with a cost sharing arrangement among the two countries. The border crossing of Tabanovce (between Macedonia and Serbia and Montenegro, on the Macedonian side) is a good candidate for a similar approach; significant investment in upgrading the facilities is on-going with Bank financing. The World Bank has encouraged both countries to follow the example cited above. The benefits of such an arrangement can be maximized when this approach is coupled with a single window environment.106

4. Continued Data Collection

The initiation of data collection at border crossing points and inland clearance centers was largely made possible as a result of support by the STAT under grant funding by the United States. TTFSE countries need to consider how the continue such data collection after projects completion and the discontinuation of the role of STAT. Bulgaria is considering reliance upon the Chamber of Commerce to provide this service, and Romania is proposing that the Customs service itself would take on this function according to an expansion plan that would gradually be applied to all borders and inland terminals within one year. Albania will start collecting data at two additional locations, and Macedonia will expand the performance monitoring through indicators at a main border with Greece. This is a priority need for all of the TTFSE countries.

5. Regional Steering Committee (RSC)

The MOU establishing the RSC envisioned a minimum life of seven years for this vital communication mechanism. The utility of the RSC that has already been demonstrated would support an extended if not indefinite life for the RSC. Some of the support functions needed for the RSC have been provided by grant funding. Alternate funding and support arrangements need to be considered and implemented to ensure the sustainability of the RSC.

During program implementation there have been eight RSC meetings and one working meeting of the regional Directors General of Customs organized between February 2000 and April 2004 (http://www.seerecon.org/TTFSE/ttfse-rsc.htm). It has been recognized that the initial meetings were not very productive, nor did they achieve the objectives stated in the MOU. Some of the reasons for the lack of original success were (i) lack of experience in organizing the events, with logistical arrangements that created an intimidating atmosphere not conducive to open dialogue; (ii) lack of ownership over the agenda, that did not allow discussion of relevant border; (iii) insufficient understanding of the cross-border and Customs issues by some of the participants (especially those who were not Customs directors).

It took time to understand and recognize the shortcomings. During the latest gatherings starting with Belgrade, the quality and usefulness of RSC meetings improved, in particular through organization of smaller focus groups, and provision of more time for informal bilateral discussions. Participants indicated that the Sarajevo Regional Steering Committee meeting, the latest in the series, had been the most successful in terms of dialogue. In parallel, National Coordinators have been meeting regularly in smaller, more informal meetings in the region (Macedonia, Greece) or outside (UK), to ensure better sustained follow up.

106 To learn more about joint border posts and single electronic window, visit www.gfptt.org

http://www.gfptt.org/

Several lessons have been learned on these occasions, of which a couple may be of particular importance for the future. First - Customs directors are more willing to openly discuss and address important issues when they are among themselves; and second – effective leadership and permanent contact throughout the period of RSC chairmanship provide quality and sustainability to these events.

6. Support for the TTFSE Web Site (www.ttfse.org)

Although the Memorandum of Understanding (MoU) signed by all of the participating TTFSE countries included a pledge to share information on border agency requirements, this has only been partially achieved, with some ministries failing to update information as their staff were changing. The resulting TTFSE website offers quite detailed information at present for all TTFSE countries, but its sustainability requires the provision of regular updates from the various ministries and agencies within each country. Although the concept of transparency as an element of good governance is acknowledged, frequent staff changes and lack of incentives for the provision of updates have led the Chambers of Commerce to look for further support to build on the cooperation and tool they created, to continue updating the site and further expand it.

ANNEX C – NATIONAL PROGRESS IN MEETING THE REQUIREMENTS OF THE TRANSPORT ACQUIS

Bulgaria

Road transport A new Roads Act entered into force in April 2000 regulating ownership, operation, management, construction and repairs of road infrastructure. In the framework of the 1999 Road Traffic Act, a number of secondary acts have been issued over the last year, relating to the acquis on road traffic safety, driver's qualifications, vehicle road worthiness tests, registration and statistics. Road transport administration was reorganized in January 2000. Much of the social and technical acquis on tachographs, admission to the occupation, licensing requirements, driving times and rest periods, roadside inspections and transport of dangerous goods was transposed in 2002. Amendments to the Roads Law have introduced a vignette system for levying charges for use of the Bulgarian road infrastructure as of January 2004, and provide the legal basis for further alignment with the fiscal acquis.

Rail transport. In 1999, the "railway infrastructure" was divided, in an accounting separation, from railway operations within the State railway company. A new law provided the basis for the unbundling and ended the state monopoly on the transport of passengers and goods by rail. BDZ (Bulgarian Railways) has been transformed into a state-owned joint stock company. It now has its own accounts and budget, and prepares its own business plan. Now an executive agency, a separate legal entity with budget funding from the Ministry of Transport, is responsible for all issues relating to infrastructure charges, control of capacity allocation for infrastructure, traffic safety, etc.

Inland waterways, a law on maritime spaces, inland waterways and ports was adopted in February 2000. The law amending the Merchant Shipping Code was adopted in December 2002.

Romania

Roads sector - New rules on driving licenses and admission to the occupation of road transport operator and road passenger transport operator were adopted. In April 2002, Romania ratified the multilateral European agreement on international occasional carriage of passengers by coach and bus (INTERBUS), the implementation of which will result in partial alignment with road passenger transport acquis. An Ordinance of January 2002 introduced the concept of collecting fees for the use of road transport infrastructure. The Road Traffic Code has been updated, with the harmonization of the provisions on driving licenses and compulsory use of safety belts. Progress has been made in the field of fiscal harmonization. Charges for exceeding the admissible total weight, axle load or dimensions have been set for the period 2003-2007. However, further efforts are required to transpose and implement the acquis in the area of

professional and financial requirements for road hauliers, technical requirements and safety legislation, and road taxation which is judged discriminatory by the EU.

Rail transport The freight transport sector has been fully liberalized; five different operators have been licensed and subsidies are no longer provided. In 2003 a Government Decision was adopted on the interoperability of the conventional rail transport system.

Inland waterway transport has suffered greatly from the blockage of the Danube following the Kosovo crisis, which has deprived this sector of the financial resources necessary to adapt itself to the EU acquis. The practical aspects of compliance of Romanian vessels with EU norms might be difficult, for economic reasons, given that the target of the Romanian authorities is access to the Rhine.

Croatia:

Road transport - Rules are already applied that are close to the acquis. Access to the road goods and passenger transport market is regulated both for national and international operators but would need to be further aligned with the acquis. In the area of the social acquis, Croatia is moving towards a Community approach on driving times and rest periods applying the terms of the European Agreement concerning the Work of Crews of Vehicles Engaged in International Road Transport (AETR) also to the national transport.

Croatia applies the terms of the European Agreement concerning the International Carriage of Dangerous Goods by Road (ADR), and has national legislation close to but not fully compatible with the acquis on roadworthiness inspection, driver licensing, weights and dimensions and speed limitation devices. As regards the fiscal acquis, Croatia would have to align the level of both annual vehicle taxes and user charges with the acquis and address the issue of non discriminatory charges.

Rail sector - The acquis concerning the separation of accounts between the infrastructure management and the railway operations has been adopted. The incumbent (still integrated) operator (Hrvatske Željeznice) conducts its management autonomously, but, being entirely State-owned, under the supervision of a 'supervisory board' appointed by the government. The recent EU rail legislation (first railway package) has been incorporated into Croatia’s legislation in this area, which will be implemented as of 2005, including non-discriminatory access to the national network. However, most secondary legislation (i.a. concerning the independence of the allocation of capacity) remains to be adopted. Croatia would also stillneed to align its legislation with the acquis on interoperability.

The inland waterway transport sector in Croatia is relatively small, with only a limited portion of the Croatian fleet able to operate on the main Community waterways. The ownership of infrastructure and ports is separate from fleet ownership. Social rules are already being aligned with the acquis, whereby Croatian legislation on access to the profession includes numerous additional and special requirements. Further alignment is still necessary.

Albania

The Government has successfully introduced a number of market-based policies since 1991 with the objectives of increasing transport efficiency and achieving harmony with European Union (EU) regulations. These initiatives have included the following activities which are now largely completed: (i) Development and adoption of a Road Act; (ii)Adopting a strategy to require all road works (excluding routine maintenance) to be carried out by contractors selected on a competitive basis; Deregulation of inter-city road transport; (iii) Approval of a port authority law by the Albanian Parliament during September 2003; (iv) Creation of independent joint stock companies to manage Rinas Airport and operate the air traffic control system; and (v) Transforming the Albanian Railways into a joint stock company (JSC).

The following activities are ongoing and await completion: (i) Contracting out of the maintenance works (including routine maintenance) to be carried out by contractors selected on a competitive basis; (ii) Establishment of an independent port authority at Durres and progressively transferring port operations to the private sector; (iii) Development of road vehicle registration and inspection systems; and (iv) Updating of the 1988 Railway Law to make it more consistent with the EU Directives in the railway sector.

Serbia and Montenegro

In both Serbia and Montenegro, new laws were drafted in the area of road, rail and air transport. In Serbia, the Law on Railways, the key document for restructuring and reorganization of the railway sector and opening for privatization, is pending. An Air Traffic Control agency, jointly owned with the Republic of Serbia, has been set up to bring this operation up to European standards. Likewise, a new Maritime Safety Agency has been established to regulate shipping, including ship inspections, navigational aids, search and rescue, and ecological controls, again in keeping with EU standards.

Bosnia and Herzegovina

Reconstruction of infrastructure remained the highest priority after the Balkan Conflict. Bosnia is left far behind other CEE and SEE countries in its development of transport infrastructure and transport institutional reform and strengthening. The commission has not yet formulated clearly, throughout its council decision report107 any key priories for conforming to the EU standards in the transport sector. Yet ongoing projects financed by the WB and EBRD are providing technical assistance for transport restructuring in broad compliance with EU standards.

FYR Macedonia

Macedonia is also constrained by a difficult budgetary and economic situation. The Macedonian Government has clearly made a serious effort during the last ten years to upgrade its main network, particularly on the two Pan-European transport corridors which cross the country. A new Railway Law approved in February 1998 established a clear relationship between the state as owner of the infrastructure and MR as the provider of services and gives sufficient independence to MR in terms of tariffs and staffing decisions to permit it to operate on a

107 EUROPEAN COMISSION, 2004,Council decision on the principles, priorities and conditions contained in the European Partnership with Bosnia and Herzegovina

commercial basis. Still in all transport sectors, a substantial effort in legislation is required in order comply with EU Standards.

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