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