During the years leading up to EU accession, Bulgaria has implemented coherent reforms that laid the foundations for a competitive railway industry and aligned the institutional and legal framework of the Bulgarian rail sector with those of the EU, so that railway services are now vertically unbundled. The track access charge system enables market access to rail infrastructure, while public service obligations for passenger services make state contributions to the sector more transparent.
This railway transport industry structure provides the basis to develop transparent relationships between the state as policymaker, regulator, client, and owner on one hand and the various rail service providers including the National Railway Infrastructure Company (NRIC) and Bulgarian Railways (BDZ) on the other hand. Railway reforms coincided with a sustained period of economic growth in Bulgaria and increased business for railways, which enabled the Government in Sofia to increase its railway funding, decreased the risk of the sector’s threat on Bulgaria’s fiscal position—which was a serious issue in late 1990s and early 2000s—and by end 2007, NRIC and BDZ’s accounts were still fragile but balanced, and historic arrears were cleared.
However, the global financial crisis of 2008-2009 has caused a major setback to the very fragile financial stability of Bulgaria’s railway industry. Since mid-2008, the financial situation of railways in Bulgaria—and in all EU countries—significantly deteriorated due to the global financial crisis which led to a collapse in freight volumes and to the bankruptcy of one of BDZ’s major clients—Bulgaria’s largest metalworking company Kremikovtzi. The combined passenger and freight traffic in 2009 contracted by more than 40 percent from 2007 levels. NRIC and BDZ have had severe short term cash problems in 2009 and 2010, including problems to fund their operations, and—for BDZ—to service its outstanding debt.
The first generation of railway reforms was remarkable, according to a World Bank’s report, but they stopped short of addressing the sector’s difficult structural issues which continue to threaten the sector’s sustainability and pose serious threats to Bulgaria’s fiscal balances. However, railways in Bulgaria suffer from low asset and staff productivity—less than one third of the EU’s average productivity—and from the legacy of an extensive railway network—developed during the planned economy that has yet to be adjusted to current market conditions. This not only generates high fixed costs to the railway industry making it less competitive vis-à-vis road transport, but also leads to higher costs to taxpayers, and misallocation of scarce public resources. For example, the level of state financial contributions to railways has been in line with EU practices for new member states, but they are predominantly used for operating subsidies—mostly labour cost and little or no money to maintenance, renewals, or investment.