Economic Policy Review ISSN 1313 - 0544

Old Subsidies with a New Railway Chord

Author: Tzvetelina Nenova / 08.02.2010
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The State Railways succeeded to attract much attention in the first days of the New Year. Fist, the strike of railway workers led the Ministry of Finance to transfer the subsidy rapidly in January totaling 13.3 million, but last Wednesday the Council of Ministers decided to increase capital by 24 million to enable the State Railways to pay off government-guaranteed loans. Congratulations! Only in January the railways will receive more than 37 million leva from the pocket of the Bulgarian taxpayer. Let us imagine that this could continue each month. This year the taxpayer will give the railways 444 million leva, or about 0.6 percent of GDP. 

The Transport Ministry reassures us that the European Commission has given its approval, because state aid is fully consistent with the requirements of the State Aid Act. I.e. the Bulgarian taxpayer will not be punished twice - once for a subsidy to Railways and the second time with the sanction of Commission of unlawful state aid, but only once. Great relief ... but they should have asked the Bulgarian citizens for consent... 

Indeed, the law sets out several general conditions for a state aid to be compatible with the common market. In the case of the State Railways we could consider the following as compatible:

  • The aid promotes economic development in regions with low standard of living or high unemployment;
  • The aid assists a project of significant economic interest to the European Community or for overcoming substantial difficulties in the Bulgarian economy;
  • The assistance supports the development of certain economic activities or certain economic areas, so far not affected trading conditions to an extent contrary to the common interest.

The real impact of subsidies for Railways is that they maintain the status quo in railroad transport, they slow down the reorientation of employees in the company to other spheres of activity, and they impose barriers to entry for new competitors in the rail market and in the transport sector as a whole. These effects could be comparable to the objectives set by the European Commission to develop a pan-European railway infrastructure at any cost, but they show just how market-oriented are the principles of the Common Market. That creates an artificial sector employment in certain areas and the central business, respectively, during periods when there is economic hardship does not mean that generate economic development. Or at least certainly not mean that the market would generate less economic development, if left to direct the flow of capital to the most attractive sectors for an activity and development. 

The following table illustrates how the amount of subsidies received Railways in 2009, and those budget ** Ministry of Transport plans to get through this and the next two years. It should be noted that data for 2011 and 2012 are only estimates of the Ministry of Transport, which will be approved in adopting the state budget for the next two years. For all these years and not sure what the cost estimates will be made in the form of direct transfers for capital expenditures. *** The report of the Ministry of Finance to the draft budget 2010 is stated that "quality renewal of passenger rolling stock and ensuring the safe transport over the coming years need to be delivered to 420 the number of new passenger cars totaling 443 million Euro. There are currently no possibility for realization of investment program in such a scale. "Investments in exactly what scale will be implemented by the government in the coming years, however, is unclear.

Type of subsidy for the State Railways /mln.lv/

2009

2010

2011*

2012*

Operating subsidies

171

160

175,8

195,1

Defined in the budget

162

160

-

-

Additional

9

-

-

-

Compensations for some categories of passengers

22,5

22

25,5

26

Capital transfers

8

20

-

-

Capital increase

-

24

-

-

Total

201,5

226

201,3

221,1

Sources: Ministry of Finance, Ministry of transport, informational technologies and messages

In recent years, the amounts that expire in Railways in the form of subsidies have been continuously growing. To these are added and subsidies for the infrastructure operator National Railway Infrastructure Company, as well as costs arising from problems with the government guaranteed repayment of loans received by enterprises. All these costs are based on the taxpayer's understanding of the social impact of railways as a public service. This service, however, be assessed as useful by fewer passengers - passengers transported by the Railways fell by 32.5 percent from 2000 to 2008 for the same period, subsidies and NC State Railways Railroads have increased by 217%. The estimated cost do not give indications that the usefulness of passenger transport relative to public spending for the railway sector will improve in the coming years.

Sources: Ministry of Finance, Bulgarian State Railways

The decision 

The best option is the state not to carry people, i.e. to privatize the Railways. In this case, the private sector will carry out the services for which there is solvent demand. 

If, however, reach consensus (which currently does not) that the state should assist certain groups in their movement in the country, then let them provide direct aid, provided that passengers choose their own mode of transport and the carrier. Currently, users of community services are public, but real support for state-owned companies. And this is a sure way to be distorted incentives for market participants - government or private - to manage their business. 

For detailed information on how much we gave to subsidize rail transport in recent years and what is the effect of this, expect a new study by the IME.