THE RESTRUCTURING AND PRIVATISATION PROCESS

PAPER PRESENTED TO THE UNION OF AFRICAN RAILWAYS 7TH MEETING ON RESTRUCTURING AND PRIVATISATION

KINSHASA, DEMOCRATIC REPUBLIC OF CONGO

By

Bernard Dzawanda

31 August 2007

Presentation layout1. Restructuring in general

1.1 Definition1.2 Driving forces of restructuring1.3 Objectives of restructuring1.4 Forms of restructuring1.5 Key issues under restructuring

2. Context of Railway Restructuring2.1 Definition of railway restructuring2.2 Driving forces of railway restructuring2.3 Objectives of railway restructuring2.4 Key policy issues to be addressed2.5 Structural options2.6 Ownership2.7 Forms of private sector participation2.8 Privatisation concerns

3. Conclusion

Restructuring in general

Restructuring is a major change in the composition and configuration of an organisation’s assets combined with a major change in strategy.

“Structure follows strategy”

Driving forces of restructuring

globalisation of markets, consumer preferences, commerce, supply chains and financial flows

rapid technological changes deregulation and trade liberalisation changing capital ownership a shift from an industrial economy to a knowledge and

information based economy changing expectations and value systems growing direct foreign investment and threats to

environmental sustainability. changing demographics

Objectives of restructuring

Optimising management processes Enhancing performance Reducing costs Optimising product mix Increasing productivity Refocusing strategically to meet competition Increasing sales and enhancing growth Improving service Controlling costs Eliminating overlaps Maximising utilisation of critical resources

Forms of restructuringThe broad forms of restructuring are;

Portfolio restructuring Involves major changes on the mix of the firm’s main

business lines through acquisitions and divestitures

Financial restructuring concerned with changing the company’s ownership and

capital structure. Issues for consideration are debt and equity and their mix.

Organisational restructuring fundamental changes made to the structural properties of

the organisation following either financial or portfolio restructuring to increase

efficiency and effectiveness

Key issues under restructuring Organisation structure

Stakeholder management

Ownership, management & corporate governance

Restructuring & employees

Funding

Organisational Restructuring

Environmental Drivers

Institutional Leadership, Training, Communication etc.

Organizational Goals

Sustainable Outcomes

Social

Economic

Stakeholder Influence Environmental

Source: Sarkis et al (2000): Organizational Restructuring Implications for Corporate Sustainability

Figure 1: Organisational Restructuring Framework

Context of railway restructuring United Nations (2003) identified the following railways problems;

Chronic financial deficits. Archaic pricing systems where charges are not related to cost. Lack of equitable fare structure and excessive fares. Excessive costs. Poor management and technical efficiency. Low labour productivity. Severely congested services. Poor service quality Failure of service to respond to need. Deficiencies in physical infrastructure. Poor asset maintenance. Inadequate funds to invest in transport infrastructure and or services. Low private sector participation.

Definition of railway restructuring

The United Nations (2003) defined railway restructuring as;

“The adaptation of railway industry structures, institutions and business processes in response to changing customer needs and technological change”.

Key policy issues to be addressed

Huff and Thompson(1990) & United Nations(2003) identified the following policy issues;

Cost recovery from users – both operating and capital cost.

Pricing policies – value of service and marginal pricing.

Social service obligations – direct subsidies.

Labour adjustment – optimal staff numbers.

Modal competition – levelling the playing field.

Driving forces of railway restructuring

The need to improve railway performance (e.g. Japan, United States of America, Germany, Argentina, Mexico, Brazil & Poland)

Increased competition from other modes of transport.

The mismatch between what the railways offers and what the customers want.

Government finds it costly to fund railways.

Driving forces of railway restructuring cont’d

Regulatory framework that prohibits the emergence of business reactions among railway managers and consequently an improvement in financial performance.

Loss of rail market share.

The need to retain and develop the railways as an important component of the national transport system.

Regional pressures, for example in the European Union and North America Free Trade Area.

Globalisation, which stresses international linkages.

Objectives of railway restructuring

Railway restructuring seeks to address; commercialisation through independent management

decisions clear division of responsibility between owner

governments and their railway organisations change of culture from production orientation to

market minded and customer oriented financial viability to create independence from

government financial support streamlining the core network to serve commercially

attractive traffic and/or routes generating revenue mainly from core activities (train

operations) to have a well trained and highly motivated workforce

able to achieve increased productivity.

Determinants of structural options

Relative weight and urgency of governmental objectives. Relative importance of markets served by the railways. Available technology. Scale of railway operations as a whole. Administrative capabilities of the government and the railway. Compound nature of the cost structure – consisting of

operations, infrastructure, terminal and station and administration costs.

Railway infrastructure as a monopoly – efficient and economic to have a single rail network providing access to train operators.

Indivisibilities – capital intensive in nature implying inability to instantly adjust capacity on a marginal basis when demand fluctuates.

Public service obligations

Structural options

Structural options seek to address;

The degree of separation between railway infrastructure and railway services (operations)

The nature and extent of competition to be created

The extent of private sector participation (ownership).

Structural options cont’d

Competitive Access

Single dominant railway owning infrastructure and performing operations (integrated services) with other operators paying access fees for the usage of infrastructure.

Vertical Separation (Institutional separation)

Complete separation of infrastructure from operations. All operators pay access fees in order to access the infrastructure.

Structural options cont’d

Competitive Access

Advantages:

i. Performance of incremental users and assuming reasonable access fees, their operations are strengthened – regulation required to ensure availability of facilities on a “fair and equal basis”.

ii. Better coordination of infrastructure investment can be achieved where there is one primary user.

Disadvantages:

i. dominant user may be unfair to minority users thereby affecting service reliability, increasing costs and safety hazards for other operators.

ii. Does not promote competition

Structural options cont’d

Vertical separation

Advantages:

Ensures equal access to all operators. It places the rail transport operator into a similar position

with a road operator. Increasing economies of density. Improving market focus by various operators. Non-profitable services are encouraged to improve

efficiency through competition for the market. Promotes intra-rail competition. Enhances the clarity of government policy and

expenditures. Facilitates the introduction of the private sector into rail

operations.

Structural options cont’d

Disadvantages:

May create coordination problems

Loss of economies of scale

Competition may not arise in thin

markets

Ownership

Private vs Public ownership

Private sector participation in railways is expected to improve

i. Efficiency

ii. Investment

iii. Transparency

iv. Accountability

v. Market focus.

Forms of private sector participation service contracts for;

i. equipment maintenanceii. ticket issuingiii. catering etc.

management contracts undertakingi. operationsii. maintenance responsibilities

leasing of fixed assets to private sector

leasing equipment from private sector

Concessions

joint ventures

outright ownership of railway infrastructure and equipment.

Privatisation concerns Private sector does not want to invest but “sweat”

existing assets

Effective regulatory framework required

Private sector “cherry picking” i.e. interested in profit making services at the expense of social services;

i. Unprofitable passenger services

ii. Uneconomic branch lines

Government support required in this regard through

a well designed institutional framework.

Government

Regional AuthoritiesMinistries, Central Authorities

Regulator

Operators

State-Owned

New CompaniesInfrastructure Management

Shareholders

State Owned Enterprise

Public Organization

Private Company

Infrastructure Services Organizations

State Owned Enterprises

Joint Ventures

Private Companies

Other Stakeholders

Social Alliances

Employees

Figure 2: New Organisation Structure of Railways and Interactions between Various Subsystems.

Source: Adapted from Profillidis (2001): Separation of Railway Infrastructure and Operations.

Conclusion

Organisational restructuring is a complex exercise with a lot of diverse challenges to contend with.

There are various forms of restructuring driven by various forces and organisational objectives.

The organisation’s structure must follow strategy. Different organisations are therefore bound to have different structures due to the differences in strategy, size, technology and environment.

Vertical Separation is generally preferred to Competitive Access for railway restructuring

THANK YOU FOR YOUR KIND ATTENTION

Contact details:e-mail: bdzawanda@sararail.org