Railway Restructuring

Achievements in the railway sector in regards to 2007 PEP pertain primarily to the adoption of a legislative framework, to ensure further measures of improving business processes, more efficient business operation and other criteria in accordance with guidelines and the railways development strategy. The legislative framework was adopted with the aim of aligning the "first and second railways package" of the acquis communautaire in the railway sector. During the same period the following legal regulations were adopted:

• Act on the Railway Transport Safety Agency (OG 120/08) (Safety Authority);

• preparation of subordinate legislation in regards to the Railway Transport Safety Act

(4 ordinances);

• National Railway Infrastructure Programme (OG 31/08);

• creation of the Independent Department for Railway Accident Investigation

(Investigation Body);

• Publishing the Network Report 2009;

• contract with the infrastructure manager signed;

• ISPA project "Reconstruction of the Railway Tracks Vinkovci – Tovarnik – State

Border";

• proposed projects through the IPA fund.

Liberalisation of the railway sector and establishing the network primarily implies further legislation alignment and the creation of an institutional framework aligned with the existing EU practice.

The "legislation package", regulating the railway sector so far, encompassed the Railway Act, Act on the Division of Croatian Railways, Railway Transport Safety Act and four related ordinances. In the course of 2007 and 2008 the following acts were adopted:

In cooperation with the competent directorate, Ministry of the Sea, Transport and Infrastructure (MSTI) founded nine working groups for the preparation of new ordinances resulting from the Railway Transport Safety Act. The existing subordinate legislation has shown to be inadequate and immense, and this complex technical field will be regulated in another manner, where the existing 250 ordinances/regulations are to be reduced to 31 new ordinances/regulations. The anticipated benefits from the adoption of new regulations are expected in regards to the alignment with the EU technical legislation and determining appropriate criteria for a new system of posts (recruitment) within the existing railway companies. The finalisation has been planned by the end of June 2010.

In the forthcoming period, activities of creating new administrative authorities are planned, namely: the Agency for the Railway Services Market Regulation (Regulatory Body) and the Railway Transport Safety Agency (Safety Authority). Since a new Regulation is in force regarding the inner organisation of MSTI, a new Independent Department for Railway Accident Investigation (Investigation Body) was founded. In the same period, recruitment for the available posts in this Department was anticipated.

The Croatian Parliament adopted the "National Railway Infrastructure Programme“ (NRIP) in March 2008. NRIP constitutes a strategic document for the development of the railway network in the Republic of Croatia, in the period 2008 - 2012. This Programme lays down the management and modernisation criteria for the existing railway track network, plans the development and construction of new sections of tracks and proposes solutions for the existing problem of local tracks and issues of railway and road crossings. The overall financial resources allocated for the implementation of NRIP are estimated at about HRK 18.1 billion, in the structure of which budget resources amount to 88%, EU funds to 6% and other sources to 6%. Out of the total HRK 18.1 billion planned, about HRK 12 billion is intended for investments into the construction of new sections and modernisation of the existing railway network, while about HRK 6 billion is intended for maintaining the existing network and traffic regulation. Activities pertaining to revising the status of railway infrastructure as a public domain in general usage are ongoing, this being a significant precondition for implementing NRIP, and in this respect regulating ownership issues in regards to certain real estate. Upon completion of these activities, the infrastructure data base will be organised. In accordance with the Railway Act and the Act on the Division of Croatian Railways, the newly founded company HŽ – Infrastruktura d.o.o. has assumed the role of the Railway Infrastructure Manager. Based on these Acts, the Railway Infrastructure Manager has the obligation of adopting and publishing annually the document entitled "Network Report". The first Network Statement for 2009 is published on the official web site www.hznet.hr and will be in force for the next Timetable 2008/2009. The Network Statement document focuses on the consumer of services and provides all relevant information regarding the description of the railway network, access conditions, procedure for capacity allocation as well as calculation and charging models for the usage of routes.

The baseline for structuring the fee price or the future model of calculation and charging a fee for infrastructure usage will be derived from the amount of the total current (operational) business of the Railway Infrastructure Manager. At present, when only one passenger operator (railway operator) and only one cargo railway operator are available, the total fee amount has been determined as a lump sum, amounting to a total of HRK 80 million in 2008. In accordance with the legislation in force and the regular EU practice in regards to public financing in the course of 2008, activities pertaining to the introduction of a new public financing model have intensified. In this respect, the Contract on Railway Infrastructure Management has been signed in June 2008 between the Croatian Government (represented by its Transport Minister) and the infrastructure manager (Company HŽ – Infrastruktura d.o.o.). The Contract is concluded on a multi-year basis, while its annexes, constituting its integral

part, are prepared annually and are based on financial resources secured in the current year. In cooperation with foreign consultants, the Proposals of the Contract on Subsidising Transport Services in Railway Transport have been prepared (PSO Contracts). As of 2008 two PSO Contracts will be concluded: PSO for subsidising passenger services and a new PSO for subsidising combined transport. Since there are currently only two operators for each type of transport, these contracts will be concluded between MSTI and HŽ – Passenger Transport d.o.o. and between MSTI and HŽ – Cargo d.o.o.

In order to secure long-term sustainability of the railway sector with a lasting reduction of need for resources from the government budget, and competitiveness with foreign railway operators once the market is fully liberalised, the MSTI has initiated a new round of consultations with all interested parties in order to prepare and apply the new strategic document, with a working title "Sustainability and Competitiveness Programme for the Railway Sector in the Republic of Croatia".

The main goal, like in the previous period, pertains to the organisation of the railway sector of the Republic of Croatia aligned with the existing practice in the EU. In accordance with the relevant EU guidelines transposed into national legislation, this goal primarily refers to the organisation of new and independent institutions, the founding and functioning of which would guarantee compliance with fundamental principles of a liberalised railway sector. Actual restructuring activities by the end of 2008 were conducted exclusively according to conditions set by the World Bank for the PAL 1 and PAL 2 loan – determined by the matrix of measures. After the World Bank mission in March 2008 and based on the existing annual Business Plans of companies within the HŽ - Holding group, a redefining of former goals was agreed with the World Bank, following which a new targeted working ratio was defined at 187%. On this occasion the Managements of all companies have undertaken all necessary rationalisation measures in their operation and the implementation of adequate measures for achieving the determined success indicator values. The commitment of dependent companies in the further privatisation process was confirmed, as well as a significant decrease in the number of employees. The standstill in the privatisation finalisation is due to the inexistence of sufficient interest in the private sector, so certain tenders were repeated, whereby the privatisation completion of 10 dependent companies is planned by the end of 2009.

When restructuring was initiated in 2004 within the PAL 2 loan, the working ratio value was 243% and the targeted value for 2007 amounted to 170%. The salary policy and non- fulfilment of Business Plans for companies within the HŽ – Holding group resulted in a deterioration of the working ratio to 193% by the end of 2007.

Table12: Working Ratio

2004 2005 2006 2007

Working ratio (state budget co-financing

excluded) 243% 220% 190% 193%

Source: HŽ - Croatian Railways, Financial Reports 2004 - 2007

Cooperation in the usage of EU funds continued during 2008. Within the PHARE 2006 programme, a project worth EUR 2 million was approved for "Restructuring and Development of the Railway Sector of the Republic of Croatia in line with EU Legislation". Three contracts were signed within the context of realising the ISPA project "Reconstruction of the Railway Tracks Vinkovci – Tovarnik – State Border": the contract on construction works, the contract on the reconstruction of safety signalling devices and the contract on

In continuation of the cooperation through ISPA projects, the European Commission approved new co-financing through the IPA fund in the forthcoming period from 2009 to 2011. The overall goal to be achieved in the forthcoming period refers to the application and introduction of interoperability criteria on main railway corridors X and V. The MSTI have been formally informed that the European Commission approved the financing for four infrastructure projects. This encompasses the following railway tracks reconstruction and

modernisation projects: Okuč_{ani – Novska (IPA grant amounting to EUR 30.1 million),}

Novska – Dugo Selo (IPA grant amounting to EUR 2.3 million) and Savski Marof – Zaprešić

tracks (IPA grant amounting to EUR 750,000). The fourth project pertains to the reconstruction of signalling and safety devices and the modernisation of the Main Railway Station in Zagreb (IPA grant amounting to EUR 14 million). The relevant co-financing amounts from the national component are planned and indicated in the budget forecasts 2009- 2011.