Panel 9: Restructuring the Railroad Industry

Thursday, November 17 (1:30-2:30)

12th Symposium on

Development and Social Transformation

Rail Privatization and Regulation in Argentina and UK: Lessons for India

Ashwani Kumar

Panel 9: Restructuring the Railroad Industry

12th Symposium on

Development and Social Transformation

Background

• State owned Argentine Rail-roads, FA, operating Freight, intercity pass. and commuter Services

• In 1989, Argentine economy in bad shape:

Hyperinflation, High Fiscal Deficit• FA running losses: US$600 million annually• Declining market-share, bad track & rolling stock• No money to take care of depreciating assets• Surplus employees, strong labor Unions

Why Decline ?

• Production oriented culture, no customer or cost focus

• Competition from other modes

• Weak management, no incentives

• Inadequate Investment

Objectives of Privatization

• To reduce financial burden on national budget by cutting subsidy

• To improve service to customers

• To rebuild facilities by increasing investments

How it proceeded ?

• Break-up into freight, inter-city passenger and suburban business; Further break-up into vertically integrated smaller units

• Identification of commercially viable, unviable, & essential but unviable services

• Multi-parameter concession bid Evaluation

• Strong conditions related to investment

Benefits of concessioning

• Rider-ship increased : ranging from 52% to 802% for various services from 93 to 98.

• Freight traffic nearly doubled, labour productivity quadrupled, tariffs reduced by 35% in real terms

• Absolute punctuality increased from 77% to 96%• Total subsidy bill reduced by more than 2/3rd, per

passenger subsidy declined from US$0.74 to US$0.2

• Fares on avg. increased by 9% : due to service quality improvement and inflation correction

Where concessioning fell short?

• Freight companies’ performance not matching the projections; for the best performing company, revenues just 59% of the forecast

• Many inter-city passenger services shut down• Under-investment in freight corridors as

investment linked with revenues• Problems in framing the concessioning

agreements : lots of optimistic assumptions

Regulatory Challenges

• CNRT created as regulatory body for all purposes for rail as well as road sector

• Lack of adequate information: a major handicap

• No teeth given to regulator to impose penalties

• No dispute resolution power to regulator

Lessons for India

• Privatization of Rail-roads is an idea that works.

• Concessioning agreements to be more realistic and objective

• An independent regulator to decide tariff, quality and network usage charge related issues

Restructuring / Privatizing German Railways: Lessons to be Learnt

U. Subba Rao

Panel 9: Restructuring the Railroad Industry

12th Symposium on

Development and Social Transformation

Need for reforms-German Railways

Successful and profitable till 1950 Increase in personal car ownership Modern day goods favor road transport New logistic concepts Govt Department—bogged down by PSO Managerial inefficiency and inflexibility

Need for reforms-German Railways(contd)

In 1990 Deutsche Bundesbhan provided only 6% passenger transport compared to 16% in 1960

Freight reduced from 37% to 20% Deutsche Reichsbahn provided 18% of

passenger and 67% freight transport requirements before unification

Need for reforms-German Railways(contd)

Govt subsidies from 1970 to 1980 was DM55 billion

Total debts of DB and DR in 1993 was DM 70 billion twice the sales in 1993

From mid 1980s negative consequences of existing regulations were apparent

Regional and local govt were also feeling the pinch

Need for reforms-German Railways(contd)

The unions could not check the decline in jobs

Shot in the arm-EC directive 91/440 Extant of reforms is a surprise

Reform Approach

German Railway corporation DBAG absorbing DB and DR

DBAG split into four divisions DB netz, DB Reise and Touristik, DB regio and DB cargo

Became Public companies as part of the holding company

Third party access

Reform Approach (contd)

Infrastructure to be financed by federal govt, regional govt, DBAG itself

Third parties also allowed All long term debts transferred to BEV All personnel transferred to BEV Investment backlog of DR taken over by BEV Regionalization of suburban rail transport

Outcome of reforms

DB Reise and Touristik runs the profitable long distance trains

Local services are put to competitive bidding Closing down of unprofitable lines Staff reduced by 30% Discontinuation of loss making interregional

services Concentration on long distance freight

Financial performance of DBAG

Rail transport performance

Outcome of reforms

290 private operators by 2004 They account for almost 10 of rail traffic in

Germany Turnover has hovered at €15 billion First time in 2004 came out of red (profit

€372 million)

Lessons For India

Govt organization Financial problems Investment decisions politically motivated Cross subsidization Non profit suburban services Loosing market share

Lessons For India

Restructuring cannot be avoided Not a good idea to concentrate only in long

distance passenger traffic ie only in profitable sectors

Private participation will encourage competition

Public owned infrastructure arm

Lessons For India

Regional separation before functional separation

Recasting the railway accounts using GAAP Strong regulatory authority Regionalization of suburban traffic

Conclusion

Will separation bring separate management? Coordination for safety, seamless service,

efficiency Are private organizations available? What is the best method of subsidy

provision? What will be the investment policy

Railway Reforms in New Zealand and Lessons for India

Braj Mohan Agrawal

Panel 9: Restructuring the Railroad Industry

12th Symposium on

Development and Social Transformation

Network Map of New Zealand railway

• Network length approx.3,898 km,

• 1067 mm gauge.• About 500 km of Main

Trunk line between Palmerton North and Hamilton North Island, electrified at 25 kV AC.

• 230 no.diesel locomotives,

• 17 no. electric locomotives

• 77 EMU car sets.

Difficulties faced by Government Railway System

• overall freight and passenger market share steadily declined due to deregulation in 80’s

• uncompetitive cost structure and heavy investment

• continued to make financial losses • Accumulated losses reached $1.2 b

by 1989 due to operational losses

Privatization of NZ Rail

• The Board of The Railways Corporation decided in 1988 to privatize

• Sold in 1993 to a consortium led by Tranz Rail for $400 million

• purchase included the tracks but not the land occupied by the railways

• The company got a lease from the crown to occupy land for its railway operations until 2030

• In 2003 the Australian transport company, Toll Holding Ltd., acquired the majority share holding (84%) It was renamed Toll Rail in May 2004

Performance during Privatization Phase

• Improvement in both market share and financial performance

• Successful marketing and performance enhancement strategy targeted at the long haul of bulk commodities and in the distribution of door-to-door goods.

• Passenger services showed a turnaround in demand volumes.

• Cost reduction, innovative operations and targeting technology investments.

• The out-sourcing of maintenance services to Alstom resulted in improved availability of locomotives.

Performance during Privatization Phase

Operational Innovations

• Toll rail’s Tranz Link sister company provides freight transport by rail, road or sea. It also offers warehousing, distribution and freight management services, including a freight forwarding division based in Australia.

• “Amicus 11 computer system” connected to all freight terminals to monitor consignments.

• “Ontrack” , freight tracking system , using barcode technology applied to individual freight items rather than tracking the paper trail that goes with the freight , as with conventional system.

• Ontrack Direct, allows customer to track the progress of their freight in close to real time through internet

• Toll also operates roll-on/roll-off train ferries across Cook Straight between Wellington and Picton.

• Intermodal operation by carrying containers

Improvement in Productivity

• Two stages of change to rail productivity• the period up to 1989 saw only a small improvement

(aggregate of +10%) with declines in 1986, 1987 and 1989 • the period 1989 to 1997 growth averaged over 7% per year

and +68% in aggregate• improvement was primarily due to a 61% reduction in input

growth, which was shared between significant reductions in labor and capital.

Problems faced during privatization phase

• The railroad’s profitability declined after 1996 when government decided to allow foreign ships to carry cargo between New Zealand ports

• increasing volume of lower freight rated traffic

• Boardroom conflicts, maximise profit in short term or long term perspective

• Tranz Rail's shares rose from an initial $NZ 1 each in 1993 to $NZ 9 by 1997 and then plummeted to to $NZ 0.40 at one stage in year 2003 and the company slid inexorably into financial crisis.

Negative fallout of Privatization • Lack of long term capital investment• Compromise on operational safety, Land

Transport Safety Authority (LTSA) reduced the average speed on the network to just 40km/h

• Diversion of some freight to its road trucks. • Deliberately running down some lines through

lack of maintenance.• Denial of reasonable access to the rail network by

heritage operators • intention to abandon passenger service and some

freight lines• Societal needs ignored/ neglected for commercial

gains

Renationalization of Network • The N Z government repurchased the track

infrastructure for a sum of $230 million, in 2003-04

• track infrastructure to be operated and maintained through Track Co., a government agency established in July 2004

• to improve the infrastructure to support services that might be unprofitable but socially worthwhile

• The Toll Rail would continue to have exclusive right of access to the network, subject to existing access arrangements, third party rights and renewal until the end of 2070

• Penalty for traffic level below agreed level• the government to invest NZ$200 million in the

system over five years

Lessons learnt from Privatization experience of NZ Rail

• If a privatized company is a natural monopoly or exists in a market which is prone to serious market failure, consumer may be worse off when the company is in private hand.

• Private sector participation is essential to provide investments and create competitive environment.

• Private sector investments are also required to upgrade technology, systems, creation of new assets as state is not able to fund these on its own.

• Private sector participation by way of investments and management brings in private sector culture of value for money, efficiency, innovation, quick response to changing market needs etc

• Railway restructuring does not mean out right privatization

• Indian Railways that also face financial and operational problems can draw a lesson from this experience.

Panel 9: Restructuring the Railroad Industry

Thursday, November 17 (1:30-2:30)

Ashwani Kumar Rail Privatization and Regulation in Argentina

U. Subba Rao Restructuring German Railways

Braj Mohan Agrawal Railway Reforms in New Zealand

12th Symposium on

Development and Social Transformation