Bulgaria

TRANSPORT SECTOR OVERVIEW

The transport sector is important for Bulgaria in view of the country's major goals of improving the competitiveness and efficiency of its economy and preparing for EU accession. International trade (the sum of imports and exports) amounted to about 92% of GDP in 2003. The peripheral location of Bulgaria in Europe and its mountainous geography also make transport a special constraint to its development.

The transport sector is also important for the Bank's FY03-05 Country Assistance Strategy for Bulgaria. This strategy, presented to the Board on May 9, 2002, has three main objectives: (i) promoting competitive private sector led growth; (ii) mitigating the social impact of restructuring and delivering social services more efficiently; and (iii) strengthening public administration and anti-corruption initiatives.

Transport is important for many reasons, including: (i) Bulgaria is a small country of about 7.8 million inhabitants, with very low labor costs, for which international trade is essential to economic growth as shown by the very large share of trade in GDP; (ii) much of Bulgaria's trade is with Western Europe and its exports are largely raw materials and semi-processed goods which are sensitive to the cost of transport; this is an issue given the largely inland location of Bulgaria's economic activities that requires transport mostly by road or rail which are more expensive than maritime transport; (iii) few large towns exist and the population and factories are spread over many small settlements, which makes transport demand higher than usual; (iv) as social and administrative services are being restructured with many inefficient middle size facilities (hospitals and schools in particular) being closed, people will be more dependent on transport to access services; (v) transport expenditures are a key part of the State and local budgets (with State support to the railway amounting to about 0.2% of GDP and road expenditures about 1.2%) and there is much potential for improving the efficiency of allocation and use of State funds in transport; and (vi) except for road transport, the sector is still dominated by State-owned enterprises; privatization and competitively awarded public private partnerships in maritime, river, air, and urban transport are necessary to increase efficiency and supply necessary investment funds that the State does not have the means of providing.

Bulgaria has an extensive transport infrastructure but in generally poor condition. Road and rail transport are the two most important modes of transport. In the freight area, road transport, which has a share of about 55% of the combined road plus rail market, largely complements rail transport, focusing on shorter distance, higher value, and more time sensitive shipments. In the passenger area, on the contrary, road transport competes aggressively with rail transport and has gained a share of about 70% of the intercity transport market.

The Bank briefly reviewed the transport sector as an input to the 2001 Country Economic Memorandum, and the railway sub-sector as part of the 2002 Public Expenditure Review. Recently the Bank examined the status and the investment needs for the road sector. These partial reviews have revealed substantial problems in the sector. These are discussed below.

As far as the road and road transport sub-sector is concerned, significant progress has been made in the past ten years. The road transport industry has been almost entirely privatized and, with the exception of axle load controls, it operates under a satisfactory regulatory framework with strong competition. In a survey of road freight transport costs among EU accession countries carried out in 2001 by the International Road Union (IRU), Bulgaria had the lowest cost at about 60,000 Euros per truck on average or about 75% of the mean value for all countries. However, the road network is in poor condition. The 2004 Bank analysis showed that 33.6% of the 19,000 km of main roads are classified in "bad" state, and a good part of the rural population (which is 30% of the total population) has no good access to the main road network, which is a serious handicap for the development of agriculture.

The Road Executive Agency (REA), which manages the main road network, is financed within the State budget. Its main sources of revenues are budget transfers and income from vignettes. Vignettes for access to the national road network were introduced for trucks in 2004 and for passenger cars in 2005. The expected revenue for 2005 reaches Euro 112 million. Other sources of revenue include for REA include transit fees paid by foreign vehicles and external loans and grants. IFI-financed projects have so far focused only on the rehabilitation and improvement of a few main axes (for about 2000 Km in the past seven years). Main issues in the road and road transport sub-sectors are: (i) REA's relatively weak capacity to assess its priorities and prepare sound expenditure plans; and (ii) the insufficient allocation of funds to road maintenance (only about 34% of all expenditures for road works). The Bank analysis of the ambitious Government construction and maintenance program shows a financial gap of the magnitude of 2-3.5% of GDP while the expected EU investments would cover only 15% of this deficit. Improvement of customs and main road border crossings is already underway as part of the Bank's Trade and Transport Facilitation Project in Southeast Europe.

Since 1997, the Government has taken significant steps to improve the efficiency of the State Railway under the umbrella of the Bank/EBRD sponsored Railway Rehabilitation Project. This included investments in infrastructure and rolling stock, major reductions in personnel, and divestiture of almost all ancillary activities. Based on the Railway Law in 2002 the Government separated the infrastructure and rail service parts of BDZ into two new independent companies complying with the main EU railway regulations. The law also created the base for the opening of the railway infrastructure to competing rail service suppliers. All relevant regulations have been formulated and a powerful Railway Administration Executive Agency has been created to regulate the railway sub-sector. After the separation the railway sector has gradually improved its performance. The losses have been substantially reduced from Euro 49.7 million in 2001 to Euro 19.49 in 2004. After 2003 the railway operator has achieved a gradual increase of the freight and passenger shipments.

Much remains to be done, however, to set the railway sub-sector on a sustainable path. Despite recent measures, the railway remains very fragile financially mainly because passenger fares are below costs. The new infrastructure access tariff and the accounting separation between the fright and passenger operations of BDZ had limited the cross-subsidy within the company and demonstrated the low efficiency of the passenger services. The two new railway companies need to sustain their efforts on rationalizing the rail network and services and, therefore improve their productivity. The Government is partially covering the losses from the uneconomic passenger services through a Public Service Obligation (PSO) contract. While this contract is a positive step in supporting the sector reforms it may need to be strengthened based on the experience from its initial implementation. The corporate governance arrangements under which the new railway companies operate also needs review so as to greatly increase the autonomy and accountability of their managers. Recently the Government has achieved success in addressing the above issues through working with the Bank on a series of Programmatic Adjustment Loans (PAL).

The reforms of the ports and shipping sub-sector have been strengthened in the last year. The Government has established a state enterprise - Port Management Company to be responsible for the ports maintenance. It has also initiated the process for the award of concessions for parts of the sea and river ports. Strategies for the privatization of the Maritime and River fleets were submitted to Parliament. The privatization of the River fleet has started through selling a minority package of the company through the Bulgarian Stock Exchange.

Similarly, the main need in the air transport sub-sector is to introduce adequate arrangements to concession airport activities and thus attracting private financing of infrastructure investments. The Government has intitiated the process for the award of concession for the two major seaside airports. The strategy for the privatization of the national carier - Bulgaria Air is also being developed.

The Bank has not been involved in urban transport. This subsector is of much importance though, given its impact on the population's access to jobs, social services, and social networks, and, therefore, the alleviation of urban poverty. To identify appropriate investment priorities and to establish ways to involve the private sector in the provision of urban public transport services appear to be the main challenges.

The Government has not issued yet a comprehensive strategy to tackle all the above issues, despite the severe funding constraints. Actions in the transport sector have been guided essentially by the need to adapt as quickly as possible to the requirements of the EU and improve Pan-European corridors. In the coming years, it will be a considerable challenge for the Government to re-define its role as a policy maker and regulator, and not an operator, and to formulate a realistic long term strategy that is financially sustainable and establishes sound market mechanisms wherever this is possible.

The issue of road safety has been moving inexorably up the policy agenda in Bulgaria. As in the rest of the world, road accidents are responsible for many deaths and serious injuries each year. In an effort to curb this trend in Central and Eastern Europe, a strategic alliance has recently been formed between the Dutch programme Partners for Roads and the World Bank to jointly contribute to further the development and incorporation of safe road design and to facilitate the transfer of knowledge in Bulgaria as well as in a number of other countries. The intention is that, via a series of training courses, representatives from the public sector bodies involved in road safety will learn to observe a road from a road safety perspective. The outputs from the project are expected to be specific short-term recommendations that will both prevent accidents and increase the capacity of the road, whilst also building capacity in the recipient countries.

WB ongoing activities: The Bank is involved in Bulgaria's transport sector, given the seriousness of the problems that it faces and its impact on both the economy and the population's standard of living. Two main activities are underway: (i) implementation of the Trade and Transport Facilitation Project which is aimed at improving the performance of Customs and removing impediments to international road transport, including greatly increasing the efficiency of road border crossing points; and (ii) implementation of a comprehensive program of railway reforms as a main component of three coordinated Programmatic Adjustment Loans.

WB future activities: The Bank started discussions with the Government for a potential follow-up to the current TTFSE project. The new project will build on the achievements of the current one and will focus on supporting infrastructure and procedural improvements along the lines of the major pan-European corridors. Further dialogue with the Government will be conducted as part of the preparation of the new Country Assistance Strategy.