Panel 9: Restructuring the Railroad Industry Thursday, November 17 (1:30-2:30)

1. 12th Symposium on Development and Social Transformation Panel 9: Restructuring the Railroad IndustryThursday, November 17 (1:30-2:30)

2. 12th Symposium on Development and Social Transformation Panel 9: Restructuring the Railroad Industry Rail Privatization and Regulation in Argentina and UK: Lessons for IndiaAshwani Kumar

3. 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

4. Why Decline ? • Production oriented culture, no customer or cost focus • Competition from other modes • Weak management, no incentives • Inadequate Investment

5. Objectives of Privatization • To reduce financial burden on national budget by cutting subsidy • To improve service to customers • To rebuild facilities by increasing investments

6. 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

7. 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

8. 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

9. 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

10. 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

11. 12th Symposium on Development and Social Transformation Panel 9: Restructuring the Railroad Industry Restructuring / Privatizing German Railways: Lessons to be LearntU. Subba Rao

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. Financial performance of DBAG

20. Rail transport performance

21. 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)

22. Lessons For India • Govt organization • Financial problems • Investment decisions politically motivated • Cross subsidization • Non profit suburban services • Loosing market share

23. 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

24. Lessons For India • Regional separation before functional separation • Recasting the railway accounts using GAAP • Strong regulatory authority • Regionalization of suburban traffic

25. 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

26. 12th Symposium on Development and Social Transformation Panel 9: Restructuring the Railroad Industry Railway Reforms in New Zealand and Lessons for IndiaBraj Mohan Agrawal

27. 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.

28. 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

29. 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

30. 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.

31. Performance during Privatization PhaseOperational 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

32. 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.

33. 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.

34. 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

35. Renationalization of Network • The N Zgovernment 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

36. 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.

37. 12th Symposium on Development and Social Transformation Panel 9: Restructuring the Railroad Industry Thursday, November 17 (1:30-2:30)