Policy Research
WORKING PAP EPS
Transport
Transport,Water, and Urban Public Disclosure Authorized DevelopmentDepartment and the TechnicalDepartment, Europeand CentralAsia RegionalOffice The WorldBank May 1993 WPS 1137 Railway Reform in the Central and Eastern Public Disclosure Authorized EuropeanEconomies
Public Disclosure Authorized Philip W. Blackshaw and Louis S. Thompson
Public Disclosure Authorized A strategypaper for restructuringrailways to meet the changing needs of the Centraland Eastern Europeancountries.
PolicyRes arhWo&ingPap sadisseninatethefindingsof workin progressand enaoungetheeachangeof ideas amaigBank staff and all othersintcrsted in developFentissues. These papers carry the namesof the autho, reflect 1y thdirviews. and shouldbe used and cited accordingly.The findings,interpretaions, and conclusionsar the authors' own.They should not be attributedto the WorldBank, its Boardof Directos, its management,or any of its membercountries. j ~~PollcyResearchi
Transport
WPS 1137
This paper - a joint product of the Transport Division, Transport, Water, and Urban Development Department and the Technical Department, Europe and Central Asia Regional Office - is part of a larger effort in the Bank to clarify and refine the Bank's approach to institutional reform. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact TWUTD, room S10-029, extension 31005 (May 1993, 18 pages).
In May 1992, the World Bank hosted a Railway plan should define the market; project the level Roundtable in Vienna, Austi!a, attended by of activity (tons, ton-kilometers and freight transport ministers, advisors, and senior railway tariffs, passenger-kilometers and passenger staff from the Central and Eastern European fares) for all business activities; include a five- (CEE) countries. The Roundtable reviewed year financial plan for the different lines of recent trends in the railways' roles in these railway business (to malce options concrete); and countries and identified appropriate actions to define all government policies and changes that address emerging transport issues in the CEE would put the railway on a level playing field region. The Bai- prepared this strategy paper with competing modes of transportation. based on the discussions and the apparent widespread consensus that emerged at the Two items on the agenda for change (among Roundtable. many others) are to:
The financial situation of the CEE railways * Convert the current railway "enterprise" or is beginning to deteriorate rapidly, and the CEE ministry into a joint stock company (JSC) or, at railways are not well positioned to provide good, least, an independent enterprise operating under reliable service to their increasingly market- normal commercial law. The board of directors driven customers. These countries are thus under should include representatives from govemment, increasing pressure to restructure their railways the railway executive and high-level business or to relieve financial pressures and meet future public representatives from outside of govem- needs. ment. Formation of a JSC or independent enterprise does not necessarily imply privatiza- Railways in market economies have faced a tion of the railway because the underlying assets steadily declining role in the transport market, may well remain in public hands. The objective and have typically dealt with emerging problems is to change the enterprises' authority and by "tinkering at the margin" - for example, by enhance their commercial orientation. debt write-offs - and thus delaying attacking their underlying structural problems. Many of * Have the explicit mission of the railway be these govenmmentshave come to the conclusion to operate freight and intercity passenger ser- that "drastic surgery" is required - as illustrated vices on a commercial basis, with revenues from by the British, German, and Japanese railways. services covering all costs, including a return on investment. "Social" services, such as urban The agenda for change that emerged from passengers, should be identified and supported this Roundtable emphasized developing a by the approptiate govemmental agencies. strategic plan for restructuring the railway. This
The Policy Research Working Paper Series disseminates the fmdings of work under way in theBank. Anobjectiveof the series is to get these findings out quickly, even if presentations are less than fully pol shed. The findings, interpretations, and conclusions in these papers c4o not necessarily represent official Bank policy.
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RAiLWAY REFORM IN TILE CENTRAL AND EASTERNEUROPEAN (CEE) ECONOMIES
Philip W. Blackshaw Louis S. Thompson CONTENTS
Introducion ...... 1
An Agendafor Change ...... 9
Measuresand Issues for Implementation ...... 14
Sources ...... 18
Figures Figure 1: TransportTon-Km per $ of GDP (Road, Rail & Water) ...... 2 Figure 2: Tonnesof Crude Steel per million$ of GNP. 3 Figure 3: Tonnesof Coal and Ligniteper $000,000of GNP. 3 Figure 4: Tonnesof Cementper $000,000of GNP. 3 Figure 5: Millionsof KWH of Electricityper $000,000of GNP. 3 Figure 6: Rail Share of Rail + Truck Ton-Kmvs Length of Haul for Developing,Developed and SocialistCountries. 4 Figure 7: Rail Pass-Kilometersper Capita (000) (1988). 5 Figure 8: Automobilesper Capita 1988. 5 Figure 9: Percent Growth in Autosper Capita 1980 to 1988. 5 Figure 10: Rail Freight Traffic Trendsin Europe. 6 Figure 11: Sharesof the US FreightMarket. 7 Figure 12: Sharesof the U.S. Public PassengerMarket. 8 Figure 13: Sharesof West EuropeanFreight Market. 8 Figure 14: Sharesof West EuropeanSurface PassengerMarket. 9 Figure 15: GeneralizedRailway Organization Chart .15 RAILWAYREFORM IN THE CENTRALAND EASTERNEUROPEAN ECONOMIES
INTRODUCFION
1. In May 1992,the WorldBank hosted a RailwayRoundtable in Vienna, Austria,attended by transportministers, advisers, and senior railway staff from Centraland Eastern European (CEE)1' countries. The purposeof the Roundtablewas to review recent and prospectivetrends in the role of the railwaysin these countriesand, based on experiencewith similarsituations in other countries, identifyappropriate actions to address emergingtransport issues in the CEE region. While the Roundtabledid not attempt to reach agreementon a formalcommunique summarizing concluslons, this strategypaper has been preparedby the Bankon the basis of the discussionsand the apparent widespreadconsensus emerging at the Roundtable.
2. The financialsituation of CEE railwaysis beginningto deterioraterapidly. In Hungary,the railway(MAV) operatingloss doubledbetween 1987 and 1991,is forecastto doubie againin 1992 and accountspayable have almosttrebled since 1989. In Czechoslovakia,the railway(CSD) subsidy doubledjuist between 1990 and 1991, and is climbingrapidly in 1992. In Poland, the ratio of operatingrevenues (before subsidy)to operatingcosts fell from 87 percent to 70 percent between 1988 and 1991. In Croatia, the same ratio fell from 83 percentto 49 percent between 1985 and 1991. All of the CEE railwaysare losing traffic and market share, with rail traffic in Hungary, Poland, and Czechoslovakianow hoveringat about 40 percent below 1988 levels. In Bulgaria, despite substantialtariff increases, revenuesfell far short of covering workingexpenses, and the railwayis facingbankruptcy. Further,there is clearevidence that the transportsystems of the future are goingto require high qualityand reliable service,requirements which the CEE railwaysare not now well posturedto meet. All of these factorsare workingtogether to causegovernments and their railwaysto embark on programsto restructurethe railwaysto meet future needs. Thesepressures have four sources,of whichthree have tendedto reduce the railway'srole and one has acted, or may act to increasethe railway's role slightly.
3. First, the formerlysocialist CEE economiesare undergoinga basic changein structure,away from the productionof basic materialsand heavy industry(both natural rail markets)and towardthe productionof manufacturedgoods and serviceswhere transport speed and reliabilityrequirements are higher. Secondly,as the transport infrastructuredevelops, markets are deregulated,and road transportprivatized, competitionfrom other modes of transport, especially road, will erode the traditionalmarket share which railways have held. Thirdly, the loci of economic activity are becomingless centralized,placing higher emphasisthan in the past on the ability of a mode to provide door-to-doorservices, and to provide convenientconnections with road-orientedWestern
It For purposesof this paper, "Central and Eastern Europe" includesAlbania, Bulgaria, The CzechRepublic, Hungary,Poland, Romania,and The SlovakRepublic. It does not includethe Commonwealthof IndependentStates (CIS) countries or the Former Soviet Union (FSU) countries,which may (or may not) have similar problems. In this paper, "Czechoslovakia," "CSFR," and 'CSD" refer to the former Czech and Slovak Federal Republic and the railway which existed before these countries decided to separate. At the present time, it appears that many of the prescriptionsin this paper may apply to at least some of the CIS countriesas well, but exactly how, and in what relative proportions, is not yet known. 2 RailwayReform in the Cetral and EasternEuropean (CEE)Economies
provide door-to-doorservices, and to provide convenientconnections with road-orientedWestern Europe. The fourth factor, operatingin the directionof increasedrail demand, is the environment: all economiesare facingthe problemof growingair and noisepollution in their majorurban centers. Undercertain circumstances, rail's environmentaladvantages will encouragemore rapid development of rail services in urban commuterapplications.
4. All of the above considerationswill operate with particular force in the structural transformationwhich the former socialist economiesin the CEE and the CIS countries are now undergoing. This is becausethe past practiceof emphasizingproduction of basic industrialmaterials and on under-pricingof transportationrelative to other activitieshas acted to create excessiveuse of transport. Figure 1, for example,compares the intensityof transportuse (measuredin ton-km of total transport per US$ of GDP - purchasingpower corrected).2' The uniform ranking of socialisteconomies toward the top furnishesstrong evidence of their excessuse of transportper unit of economicactivity compared with use of transport in market economies. Figures 2-5 display typicalexamples of the reasons for transportintensity: all of the primarycommodities and materials of construction,and most of the heavy, low value commoditiesgenerating tran.port activity, are producedin much greater quantitiesin the CEE countriesand the former Soviet Union(FSU) than in the westerneconomies.
Figure 1
TransportTonKrm per $ of GDP (Road,Rail & Water)
Area,000 Km2 F9Ut22,2721 , .i POLAND(305) 085 CSFR(125) 6,8 CHINA(9.597) 78 CANADA(2,005Q7 BULGARIAV I I}I Qu72 USA 'O9.171 0.64 HUNJ(ARY(92- INDLA(2.973) - Q YUGOSIAVIAt255) S 4 SPAJN(4991 0.3 7 HOllAND 1341)- a STEDEN (41293) 32 RQJ3QUMt301 - a 32 : W.GERMAWYt244) 0.20 : UK242 0.26: ll-ALY(2794)1 -0{23' FRANCE(548)- G2 AUSTRIA(83)- 0.21 0 1 2 a 4 5 Ton-Km per doGDP GDPis PurchasingPower Adjusted
2/ This is at best an approximatecalculation. Detailedstudies broadly confirm the conclusionthat the former socialist economiesare; highly transport intensive. See, for example, EsrmBennatha-, Julie Fraser, and Louis S. Thompson, "Freight Transport Demand, Determinantsand Intensity," World Bank, INUTD, September1992. RailwayReforn in the Central and Eastern European (CEE)Economies 3
Figure 2 Figure 3
Tonnesof CnudeSteel - 1988 Tonnesof Coaland Ugnite - 1988 per $00,000 of GNP per $000,000 of GNP
cb- =13 9 POA FD-A M"",2 SI CSF 1140 FOU- 12 UGAN 907 BEU-ILGARIA. eaasFtJ - 9 HUNGARYP 3 YGL 4 CANADAAUBTRA , 6 W HUNAR.GEMN 3011
N. GEFW 3e USA 177W SWE J. CANADA 152 IrALYIJ LUK GPMF SPAIN- sa HOLUW0A2 AUSTR 151 UK 20 BEEU1 14 USA ula WNE1 FRANCE 1 a FRANC 1 YLOSLAVI 16 r ... rr AL 2 , , a 20 40 60 so IoW120 1401C 0 00 1000 1500 200 25sc 198S GNPbisPxMg PcwaA4utd 1388 GW b Purchasing PowerAdjustd
Figure 4 Figure S
Tonnesof Cement- 1988 Millionsof KWH of Electrcityy-1988 per $000.000 of GNP per $000000 of GNP
POLAND4 1272 137 BILGARIA 7. 77 PLD a7107 FUB :**J 105.9AAA 01
CSFR - _ .3 BULGAF11A Xeow lNNN YUGOSLAVIA _V 88S HLINGARY 572 cam~~~~___ 737
SPAN -Y 4SA -12 AUSt _s402ea US
LUM -E'LU3E frALr 5 FRANCE 1347 CANADA- 25.7 ALIRIA 348
:PA m 23J N.ERAY 1 332 J.IERMANY -UK 325 IIK HOLL1ANFDZ
HOLAND 132 ffAY 1elB a s0 40 eo ma 100 120 140 ISC 0 400 8a0 1200 IBOM 200 600 1000 1400 jq8GW1B~PPwhuriNgPawsrA*nWd 19888GNPisPurchasingPowaA4uMtd 4 RailwayReform in the Centraland Eastern European (CEE) Economies
5. ;Figure6 carriesthe transportintensity issue one step further. It showsfor socialistand r.on- socialistcountries the degree to which rail dominatesthe surfacetransport market availableto rail and truck. Figure 6 also takes into accountthe size of the country,by comparingrail share with the average lengthof haul for rail, an atajustm-'ntto take into accountrail's advantageover longertrip lengths. From Figure 6 it is clear that the -ocialisteconomies make a distinctivelyhigher use of rail. As these economiesrestructure, it seemsequally clear that there will be a shift in the modalbalance of transportationaway from rail and toward truck. Figures 7-9 display much the same point for passengerservices in the socialisteconomies, showing that rail occupiesa disproportionateshare of the passengermarket when comparedwith the developedeconomies of the West, primarilybecause the rates of automobileownership have been a-tificiallyconstrained, but are now growing rapidly in the CEE and CIS countries.
Figure 6
RailShare of Rail + TruckTon-Km - 1988 vs Lengthof Haulfor Developing, Developedand Socialist Countries
RailShare (%J 100 0 Romania O FSU 0 C7echosloval0a 80. O Poland 0 China
60 0 Hungary Sudan Canada ')Yugoslavia IL USA India 40 A
ZO ~A A A Pakistan
20- 0 X ,nA I, _ I~II, Padsa
0 200 4000 0 0 800 1000 12W0 Lengthof Haul(K1m)
Developing ° Scoialist A Developed RailwayReforn In the Centraland EasternEuropean (CEE) EconomMa 5
Figure 7
RailParsKilometers per Capita (000) (1988)
cam i - 1.28 POLAND 1.28
HUNOAfR? AUgrRA 0,97
1 8ALY 17 C2019 8WEEN - CQ72 W.IANYAAW CX64 HMXAND 'C_c 84
IaKM-Q_Q6
YL4MGAV-A SPAIN- l Q30
0 0 .2 0Q4 OSC 1 12 0a 0A 8S
Fi8ure 8 Figure 9
Automobilesper C:apita PercentGrowth in Autos per Capke 1988I 1980to 1988 CANADA HW±DCANAD USA~CW - A POLAND - Q 2 FOWD -- = a 78 YUGODSAVL4A C113 FU -1M 85 BULJABNA - n13 SUPAAFA - 49 HUNG3R 0a.1 CNY 549
EPAI NQ 28 SPAIN 3 7 LK 60.3 W.ERMANYW 27 Ha {C Q~~~~~36 tx 26 =PUM a37 AUA 2
FPJWXQ 4 1~~~~L4 SWEDEN 20 SWEEDB ,& .4 8E13LJM- W14 rrALY Oa44RANCE 13 CANA1DA 0.48 HOAN II w.Nf~~~~~~~~~~~~a t4sS4^A-aB
O al Q.2 CX3 0.4 0.5 CIB C17 CL 0 20 40 W; 80 10W
Auto8/COpep; %Growt I 980-1 988 6 RailwayReform in the Centraland EasternEuropean (CEE) Economies
6. Figure 10 shows the changes already happening in the CEE and CIScountries as compared with France and the former West Germany. 3 ' As Figure 10 shows, rail freight activity in the CEE countries has now fallen to 60 percent, or less (to only 25 percent on the DR), of its level in 1988. To some extent, of course, this loss of rail traffic merely reflects (hopefully) temporary factors such as the drop in total economic activity in these economies and disruptions to rail traffic among the former socialist countries (especially with the former Yugoslavia). At the seme time, though, it is clearly early evidence of the more permanent structural changes describod above. Much of the rail traffic that has been lost will never return, and total rail traffic is not likely to enjoy 1988 levels for many years, if ever. Trends in the CIS are, as yet, not as dramatic as in the CEE countries, but that is primarily because economic restructuruig activity in the CIS began later, has proceeded more slowly, and still has not undergone the same degree of change as in the CEE countries.
Figure 10
RailFreight Traffic Trends in Europe Index Tonne-KmIndex, 1988 = 100 110
0 DB DR
7& - O PKP
i a < OMAV01 A FSU
40} \ ~v BDZ(tons) 30 X ROM
20 1968 1989 1990 1991 1992 (9 mos.) 1992 FSUis actuallybased on Russiafor first 5 months. 1992 BDZis esbmatefor entireyear.
3/ Fortunately, the data are still available to compare the former West Germany wvth the former Egst Germany. Traffic on the Deutsche Bundesbahn(DB) in (former) West Germany has remained stable, while rail traffic on the Deutsche Reichsbahn(DR) in the former East Germany has collapsed. Railway Reformin the Centrul and EasternsEuropean (CEE)Economies 7
7. The combined results of these forces aLting together seem very clear: first, the total use of transport per unit of economic activity by the restructuring socialist economies will decline significantly; second, the role which rail plays In the transport system is also going to decline. As a result, the process cf transition will lead to a more rapid decrease in rail activity than in overall economic activity, and a much alower increase (if any)4' in rail activity as the economies bottom-out and begin to grow again. In a general way, this broad transition from basic production to services has occurred since World War II in all thAwest.rn economies, with a resulting decrease in the role of rail (see Figures 11-14, for example). The difference in the case of the CEE and CIS countries is that, whereas the broad transition took place over three to four decades in the West, it will necessarily be compressed into a Faiuchshorter time period (as short as five to ten years) in the formerly socialist economies, and the kind of giadual adaptation which occurred in the western economies simply wiil not be feasible.
Figure 11
Sharesof the US Freight Market (Percentof Tonne-Km) Share(%/6)
2C(-
29 34 39 44 49 54 59 64 69 74 79 84 d9 Year
+i--- Rail x Truck E- Lakes e Rivers ° Pipes
4/ The futureof railtraffic will dependon thebalance between structuraland cyclicaleffects, which will vary fromcountry to country dependingon theirstage in the restructuringprocess. 8 RailwayRefonrr In the Centraland Enstern European (CEE) Economies
Figure 12
Sharesof the U.S.Public Passenger Market (Percentof PassengerXKm) Share N
sao
29 34 39 44 4S 54 58 84 69 74 7b; 84 89 Yewr
-Rail E3usB Air o WOW
Figure 13
ohares of WestEuropean Freight Market (Percentof Tonne-Kn) SharARS6)
60
40
20
1985 1970 1975 1980 1985 1969 Year
Rail -- Trudck Railway Reform in the Centraland Eastern European (CEE) Economies 9
Figure 14
Sharesof West European SurfacePassenger Market Bheare 100
so -
40
20 g,
1965 1970 1975 1980 1985 1989 Year
Rai Cas & Ta8ds Busas&Coaches
8. This rapid and wrenching change in the railway role means that there must be a correspondingchange in the organizationof the railway and in its relationshipwith the government and the transport sector. W!'en the governmentcommanded the economy, the railway role was simple: just as all other sectorsof the economywere requiredto do, the railwayserved the "Plan." As competitive,market-oriented structures begin to drive the economy,CEE and CIS railwaysmust makethe sametransition in organizationand mentalityas has been, or is being, made in the market economies. The railway can no longer focus on the operationof trains and the repair of track (a production-drivenrole); it must insteadfocus on the needs of the customer.
9. This will not be a simpletransition. Nor will it take place on the same time scale in all the CEE economies because some are already further ahead than others in the transition. This restructuringof the railway may also not includeexactly the same aspects or facets in all of the different countries because the size and functionof the railway varies considerablyamong the economies(see Figure6). Thisbeing said, there are a seriesof initiativeswhich, with an appropriate adjustmentfor the particularcharacteristics of each economy,should probably form an underlying, comprehensiveagenda for use in the restructuringprocess. This agenda is describedbelow.
AN AGENDA FOR CHANGE
10. As noted in paragraph7, railwaysin marketeconomies have faceda steadilydeclining role in the transport market. Typically,rail managementand governmentsdealt with the emerging problems by "tinkeringat the margin" -- for example, by debt write-offs -- only to find that the problemreappeared within a few years. Followinga series of such failuresto attackthe underlying causeof the malaise,governments in the marketeconomies are increasinglycoming to the conclusion 10 RailwayReform in the Central and EasternEuropean (CEE)Economies
that "drastic surgery" is required. This is illustratedby the current approachesof the British, German, and Japanese railways.s5 Becauseof the much greater speed at which the changes are occurring in the CEE countries, and much more severe budgetary constraints faced by their governments,the CEE countriescannot afford the luxuryof gradualadaptation: bolder initiatives are required. As importantas the statementof what the futurerailway will do, is the statementof what it will not do. In this connection,it is importantnot to conferon the railwayexclusive rights (e.g., for intermodaltraffic) which might have the effect of restricting competitionand the role of the private sector.
11. Developa StrategicPlan for Restructuringthe Railway. The most importantinitiative to be undertaken,and it shouldbe done as rapidly as possible, is the developmentof a strategicplan for the railway. This plan, developedjointly by the cognizantministry or ministries6' and railway management,should includemarket definitionand projectionof activity(tons, ton-km and freight tariffs, passenger-kmand fares) for all businessactivities. Next, the strategicplan shouldinclude a five year financialplan for the railway by lines of business,showing revenues, costs and profits, PSO contract payments(see footnote7 below), and all other payment amountsand sources. The financialplan is importantbecause it puts numbers on the various policy options -- thus making concrete, and probably more difficult, that which would otherwise be abstract. Another major elementof the strategicplan is a definitionof all governmentpolicies and changestherein which will put the railway on a level playing field with all the competingmodes of transportation.7 The overallpurpose is to ensure that the new railway has a valid mission and adequateresources and authorityto accomplishthat mission.
12. Joint Stock Company. As soon as possible,the current railway "enterprise" or ministry shouldbe convertedinto a Joint StockCompany (JSC) or, at least, a limitedliability company under normal commerciallaw. 8' The JSC shouldhave a Board of Directors selected from government, the RailwayExecutive and high levelbusiness representatives from outsidegovernment. Thisaction wouldhave the effect of transformingthe identityand mranagementpractices (and public image)of the railway toward that of a commercialenterprise and away from that of a governmentministry. This wouldinclude, Inter alla, changingthe railway's accountingstandards to those of a corporation
5/ See Report of the Railway Reform Commission(Germany), Fukui, and British GovernmentWhite Paper.
6/ In general, the cognizant ministry should be the Transport Ministry. Under certain circumstances,the Ministry of Finance and/or the immediateoffice of the Chief Executiveof the country mayalso be included in the group preparing the strategic plan.
7/ See Huff and Thompsonfor a more thoroughdiscussion of the contentof a strategicplan, and for further discussionof performance agreements. In the terms used in that document, the objective in this paragraph is the preparationof the strategic plan (SP). It would be the responsibilityof the new railway managementto develop the managementplan (MP) as it is describedin Huff and Thompson.
S/ rTe terms "Joint Stock Company" or "limited liability company" have slightly different meanings in different countries. What is meant here by JSC is that the new railway will issue stock certificateswhich represent the equity owaershipof the company,the owner(s)of these stockswill have full controlover the businessdecisions of the company,and that the liability of the shareholdersshall be limited to the value of the stock. Placing the companyunder normal commerciallaw meansthat the companyshould function like any other commercialentity. It should not enjoy the sovereignpowers or rights of a governmentministry. It can sue or be sued, must pay its obligations,and can go bankrupt. RailwayRefonn in the Central and Eastern European (CEE) Economies 11
under the commercial laws of the country rather than a government ministry, and a shift in the status of the labor force from civil service to corporate status.
13. Formation of a JSC does not necessarily imply privatization of the railway: the initial objective is, instead, to secure the changes in enterprise authority and commercial orientation that the enterprise form will bring. Among other things, however, the JSC form will make dealing with the truly private sector easier and more effective, and will facilitate the contracting and joint ventures which will represent a better balance between private and public. At some point in the future, the JSC form would be helpful in facilitating true privatization, when that becomes appropriate, through sale of branch lines, franchising of particular operations, or other possibilities. 9' Certainly, adopting eventual privatization as a serious commitment will exert useful discipline on rail management.
14. The Railway Mission. The railway shall have the explicit mission to operate freight and intercity passenger services on a commercial basis; i.e., revenues from these services should be adequate to cover all costs associated with providing them, including a return on investment (preferably, if the playing field is to be kept level, at least roughly equivalent to that earned by its private sector competitors). In general, the railway approach to these markets should be exactly that of a commercially driven enterprise: prices should be as high as competition permits, and costs should be as low as is consistent with the level of quality the market demands. The suburban or commuter services of the railway should be operated efficiently under a contract with government (or governments -- there is likely to be a role for regional and local governments in the definition of, and funding for, local suburban services), under which the railway shall be compensated for all appropriate costs of an efficient entity, including investment, not covered by fares or Public Service Obligation (PSO) payments.' 0' It is vital to agree, also, that whatever is not profitable and not subject to adequate PSO support can and should be dropped, solely in the business judgement of the new railway: PSO services must be terminated if the PSO payments are not made. While much of the discussion in paragraphs 3-6 focussed on the structural changes in rail's role in the freight market, it is important to recognize that probably the biggest single adjustment that has to be made in CEE rail operations is on the passenger side. Paseenger revenues are often covering only one- third of costs on average, with many services covering much less than this. The railways, and their governments, need to consider very carefully their future role in such markets.
15. The Contract Plan (or Performance Agreement). The intent of performance agreements is to clarify the relationship of the railway with the go /ernment in those cases where the government wishes to keep a continuing role in policies and operating practices of the railway. In general, a
9/ See Moyer and Thompson, "Options for Reshapingthe Railway," The World Bank, Infrastructure and Urban Department, WPS 926, June 1992, and Louis S. Thompson, "Increasing the Role of the Private Sector in Railway Transport," paper for World Conferenceon TransportationResearch (WCTR), July 1992.
10 PSO payments can be made either as operating support or as capital support. A public authority might, for example, acquire passenger rolling stock and transfer it to the railway for operation. The railway would not need to earn a rate of return on such public investments. See "Cost and Revenue Allocation" below. 'Public Service Obligation," or PSO, has becomea commonterm in Europe to describe the circumstanceunder which a public entity wishes the railway to provide a service for which revenuescannot, or will not be permittedto, cover costs. Typical examplesare found in urban commuting,but also include student discounts,discounts to the elderly or veterans, and rural passengerservices, among others. Thoughnot often viewed this way, other examplesshould be uneconomicbranch lines carrying mostlyfreight, and the added costs of mandatedexcess labor where the railway is, in effect, acting as a welfare agency on the government's account and under the government's instructions. 12 Railway Refonnin the Central and Eastern European (CEE)Economies
thorough transition to the JSC form, and a clear statementof the new corporation's roles and responsibilities,combined with a suitableBoard of Directors and the signing of PSO contracts, should obviatethe need for a performanceagreement between railway and government.''I
16. Costs and RevenueAllocation. The railwayshould develop and implement(with agreement from the government)a reportingsystem for allocatingthe railway's costs and revenuesamong the markets designatedas lines of business. This cost and revenueallocation system should include agreed formulaeand methodsfor PSO contractbilling so that PSO paymentscan be auditedex post, but will not be subjectto dispute and approvalprior to payment. However,adjustment of the scale of rail operationsto the new marketrealities should not awaitthe developmentof refined cost and revenue allocationmethods. Even on the basis of existingallocations, or other rough "rules of thumb," the grossly inviablebusinesses can be identified,and remedialaction taken.
17. Regulation. The railway's freighttariffs shouldnot be regulatedat all, except in thosecases where the railway is shown to be abusingits monopolyposition. 1 2' That is, regulationshould be passiverather than interventionist.The railwayshould not have to file tariff schedulesor contracts as a matter of routine; the regulator should interveneonly in response to shippergrievances. In general, the need for railway freightregulation will declinerapidly as competitionemerges and as shipperchoice becomesmore importanton transportdecisions. The railway's intercitypassenger fares should also not be regulatedexcept, perhaps, for slidingprice controls during the transition period when all other prices are changing. RailwayPSO fares should be set by the terms of the contract with the governmentalauthorities: in general, the railway would be compensatedfor the differencebetween costs allowableunder the contract and fares, and the contract should contain incentivesfor productivityimprovement, such as price cap regulation. An appropriateregulatory authority or agency may need to be establishedin order to assess efficiency and adjudicatecost reportingand allocationin order that acceptableand adequateinformation is availablefor regulatory and PSO payment purposes. This paragraph assumes,of course, that all other modes, especially truckingand buses, will be similarlyunregulated.
18. Government Support. Apart from PSO compensation("railway mission" above) and initial assistancein makingup for any deferred maintenancewhich may exist ("sins of the past" below), governmentsupport shouldbe limitedto equity investmentin and loans (on essentiallycommercial terms) to the railway. There may be economicjustification for making capital grants to the commercialrailway (freight and intercitypassenger, as per "railwaymission" above)for purposes such as a one-timecorrection of the deferredmaintenance backlog of the past, once the enterprise has been set up with an appropriateinitial balance sheet tailored to its futureearning potentialand
II/ BR does not have an explicit performance agreement with its government. Amtrak does not have a performanceagreement with the US Governmentbecause Amtrak's status as an "as if for profit" corporationunder District of Columbialaw, combinedwith governmentmembership on the Amtrak Board (and the need to submit Amtrak's subsidy and capital budget to the President and the Congress for approval)make additional agreements unnecessary. The new JR companiesin Japando not have performanceagreements as their profitabilitytargets are sufficient for guidance and evaluation.
12/ Abuse of monopolyposition can be evidencedeither by individualtariffs which are far above their cost, or by the generationof total revenuesgreater than thoseneeded to provideearnings adequate for capital replacement and expansionrequirements. Railway Reform in the Central and Eastern European (CEE) Economies 13 borrowingneeds.1 31 Governmentmay choose to pay some of its PSO contract compensationin the form of capitalgrants (e.g., for new line constructionor coachesfor commuteroperations) and indeedthis formof compensationshould replace ongoing compensation for revenueshortfalls vis-vis operatingcosts, becauseit is more explicitand less "open-ended." The issue of capital grants and PSO support will probablyhave a resolutionunique to each country.
19. The Sins of the Past. The new, restructuredrailway shouldcommence operation with an efficientlabor force, adequatefinancial resources, and an appropriatefinancial structure. It maywell be essential, similar to the experience in Japan and the proposal in Germany, to establish a "settlements"agency, or its equivalent. The settlementsagency would have immediateresponsibility for redundantlabor and administrationof labor redundancyschemes and re-trainingprogramns. If there is excessive debt on the railway's current balance sheet, this excessive debt should be transferredto the settlementsagency as an obligationwhich can be managedover time. Finally,as was the case in Japan, many of the non-coreor non-railactivities and assets shol1dbe transferred to the settlementsagency, along with all uneconomicproperties (such as branch lineswhich are being closed) which will not be operated by the new railway.14' This has the benefit of prompting railway managementto focuson railwaybusiness from the outsetof the restructuringand furnishing a pool of assets which can be used over time to offset the labor redundancyand excess debt obligationsof the settlementagency. In any event, it separatesthe issues associatedwith past policies and practicesfrom the need to provide viable rail service in the future.
20. Reorganization. The managementof the new railway must develop a clear organization chart showingthe assignmentof functions,objectives, and staffingby activity(profit or cost)center. In general, the activitycenter shouldeither be a line of business(including both revenuesand costs allocatedto the line of business),or shouldbe a cost center in the case that certain functions(the legal or accountingdepartments) will be centralizedin order to reduce overheadcosts.
21. Lines of Business. The railwayshould have appropriate lines of businessactivity where both revenues and costs are collectedand compared. These should reflect the differ, _.markets the railway serves. Generally,these lines of businesswill be freight (with appropriatesub-lines such as coal, steel, international,containers, etc.), intercitypassenger (with appropriate sub-markets such
13! Any disadvantagethat the railway inherits, such as deferred maintenanceof track on commerciallyviable parts of the network, should be reflected in the values attached to the relevantassets in the initial balance sheet, rather than in compensatorycapital grants to overcomebacklog needs during a transitionalperiod. Thelatter practice runs the distinct risk of allowingthe existing engineeringand productiondriven budgetingapproach to control a large capital program which a commerciallydriven managementwould probably not undertakeat all, and certainly not to the samedegree. The objectiveis, as rapidlyas possible, to permit commercialconsiderations to determinewhat assets are repaired or improved, and to reflect only these values in the balance sheet. See Fukui.
14/ In Japan, the SettlementsCorporation also "owns" the shares of the new railways. If, and when, they are tmly privatized, the SettlementsCorporation will be able to use the proceedsto defray the costs of paying off the obligationsit assumed. Dependingon the time frame within which sale of the stock to the public is to take place, it may, or maynot, be appropriatefor the SettlementsAgency to have ownershipand control of the voting rights of the railway's stock. 14 Railway Reform in the Central and Eastern European (CEE)Economies
as international,long haul, regionall5s), and suburbanpassenger services (generallybroken down by the major city aroundwhich the subsetof suburbanservices is focused). Each line of business activityshould have its own assignedemphasis and shouldown ana manage(and pay for) its solely relatedfacilities such as specializedrolling stock, equipmentshops, stations,and yards. Thepurpose of line of businessorganization is to permit profit responsibilityto be assignedat a level below that of the GeneralManager.
22. Infrastructure Accounting and Maintenance. As required in the European Community Directive, a separate "cost center" should be establishedto accountfor infrastructuremaintenance and constructionfor facilities,primarily track structures, electrificationand signalling,which are commonto more than one line of business. Thisdoes not meanthat the so-called"Swedish Model" of establishinga separate and independentagency to own and maintain the infrastructure is necessarilyan appropriateapproach. It does mean that cost for infrastructureshould be separated, with the maintenanceof infrastructureperformed in accordancewith (and only with) the business needs of the railway, and that the managementof the infrastructuremaintenance should be fully under control of the railway's Executive. As envisioned in the CommunityDirective, the infrastructurecosting should also be adequatefor use in billing other railwayswhich may use the infrastructureof the owningrailway.
23. Infrastructure Operations. A separatecost centershould be establishedwithin the railway to manage those parts of infrastructureoperations which require integrationamong the lines of business. This would include a commontrain schedulingunit and a train dispatchingunit which wouldoperate in accordwith agreed dispatching rules and servicepriorities. Figure 15 (organization chart) illustratesone way161in which these principlesmight be put together.
24. Ancillary, non-Rail Operations. The railway should divest itself of all non-rail related activities, such as schools, hospitals, and manufacturingfacilities (signal companies, locomotive manufacture,etc). Experienceindicates that these types of activitiesare performed much more effectivelyoutside the railway in a marketeconomy.
MEASURES AND ISSUES FOR IMPLEMENTATION
25. Experiencewith railway restructuringto date indicatesthat there will be a series of critical issuesof implementationas the pointsdiscussed above are brought intopractice. In most instances, these issues will apply with particular force to railway restructuringprograms within the former socialisteconomies.
L. Cultural Change. The railwayconstitutes a uniqueculture which, in the past, has been highly engineeringand productionoriented, even by comparisonwith other economicentities withir the country. In general,existing railway personnel will resist the transitionto a marketoriented method of operationbecause it reduces
15/ In some cases, as in Britain, the regional line of businesswill need to have separate status if there is a separableand large set of mral, 'regional" lineswhich constitute a separateactivity and whosejustification is primarilylocal or regional,and not national. Otherexamples would be the state and locallysupported routes of Amtrakin the US, or similaractivities by SNCFin France. 16 There willobviously be manyaltematives: Figure 15 is illustrativeonly. Figuere15 Railwa §;lg llqe 15 ~~~Esxecutive
* Setsgoals & ae fotal sem functia andbusess goups * ResolesconitLc settlements * Maksess s decso. Agency * Ogapie Ik satwy. * Revi * AajordnvestmetdecnsMdminis edunn
' Service Functions * AdmInessold.xos Busioess Groups debL < ------___- _----- * Reivunddcdop (Cost Centers) (P10f1t Centers) susplus I ~~~~~~~~~~~~*Recieand dsposes [ ~~~~~~~~~~o(o-rilbulnuc
longrOPeMIed.
Fixed Traffic I Corporate Facility' Control I Freight Passenger Services Service Service I Group Group
Cctral legal,acctg g Maintai -- * Controls,schedules, * Completely sevicesnecesry for requircdand rove all tric commciar |%. corporateintqeity. coampnaled-- flows I * Deuateibotact I commonandkased * Setsstandards for Miates(phasing?). fixedhiliaiesi aUsgnals and * Caan onrmaintain *ills au osts to communaiations I cadusiv facilitiesa business goups * Al ota biled to 5 * Paysfor maintemnnce Urban/ -- cai businss Srops. of Commonfaclities. nterily Oty Rural * Ownsand maintains all freCightroingStoCL MocoSnmenirdar i Reonl. Couldsave other (som PublicSevice , 2 R on 2 I freaohcompanies by Obligation-- IO) at: _Opeates * loc actinagasWholesaler. * Ratesdereguited * Operatessubutan serv unda PSO * fHas oWn employees (phaftig~- servicesunder P90 contactL. * Ownsandmainains contacL * Ratescoatolled. | interityroliin stock. * Rates ontoiled * OwnsNWmaintaina an I * Paysfor minienace * Owansandmainaim all bureolingstock I ofcommonfmd suburtbanw glinockL * Paysfor maintemunce fadlitieL * Paysfor ma eraue anduse oteofmn trvac * Couldownmnd/or anduse oformmno trak. * Hs wnempblyce maintainexdusivefc * lAH s aneM ployees * Coul mainainorown facilities(Ie., shops, * Couldmaintain orown exclusivetfacisiies(a, stations,or bne)c eadusiefacilit (Le. shot stio,6 or inec)s I* ibsown employees shops,stationa or li4 * Loa fixedfaclie Faed faciiuies ecanstrack ad trk stuctures,sigalling elecrifitio | * Lcal fied facilitis couldbe tsansfered to buildinpandaiotber non-t lcfaclie Does Includebtlling I I couldbe uansfrred stockor wagonand locomotive to localgovernmats. shops,or satios localgovernmentLs eaihpr,Si.k I'-' 16 Railway Reformin the Centraland Eastern European (CEE)Economies
their role, status and security. Changein the railwayculture will require forcefulaction on the part of the government,a clear definitionof the railway's mission,re-training of railwaystaff, and hiring from outsidethe railway to fill those key executivepositions which require businessand marketing skills. As was the casein BR, JNR and Conrail,it may also require dismissalof those key personnel who do not fully supportthe restructuring.
ii. Redundant Labor. The managementof redundantlabor is emergingas one of the key issuesin railway restructuringeverywhere. That there is redundantlabor in the CEE railwaysis beyondquestion: Polishrailways, for example,has nearly twice as many employeesas the entire US railway industry,but only one-ninthof the traffic.171 This labor force must flnd more productiveuse elsewherein the economy,but the transitionwill have to be supportedby financialassistance, such as redundancypayments and a significantre-training effort, as well as help in finding other employment."8 This issue will be one of the primary focusesof the settlementagency.
iii. Management Skills in a Market Context. A!,houghthey are often highly competentin the technicaland managerialissues of running the railway, railway managementin the CEE countriesoften lack the techniquesand skills necessary for managementin a market economy, such as strategic planning, market definition and forecasting, traffic pricing, and financial modeling and investment analysis. Over the short term, this gap will almostcertainly have to be filledby bringingin a limitednumber of key executivesfrom outsidethe railway, and by an extensivetraining program in managementskills.
iv. Regulation. Most (with the partial exceptionof Hungary)CEE railwaysoccupy a position of marketdominance, even monopoly,in many areas of the transport system of their countries. It will thus be necessary to focus on the development and implementationof an appropriatesystem of regulationto controlthe abuseof monopolypower. Several models of such regulation are available,'9' but the emphasisshould be on establishingthe absoluteminimum of regulatoryauthority necessaryto controlmarket abuse so that the old relationshipbetween government and railway will simplynot be recreatedthrough a regulatoryauthority.
17/ Admittedly,allowance needs to be made for the muchhigher proportion of (more labor-intensive)passenger operationson Polish railways, but even so the relative orders of magnitudeclearly demonstratea serious degree of labor redundancy.
18/ The design of redundancy paymentsand other instruments for dealing with surplus labor needs to be adapted to the particulars of each case -- for example,where national unemploymentinsurance or social security is inadequate, it may be necessary to allow dismissedworkers to retain health benefits or housing, at least for a transition period. Similarly, regional differences should be taken into account: for example, the prospects for findingalternative employment will usually be greater in the capital cities than in more remote regions. Lump sum paymentsmay be more costly than monthlypayments, but may be justified if they are more likely to be successful (in part because they provide employeeswith the means to start small businesses). Voluntaryseparation schemes need to be carefully targeted, to avoid losing key skills still needed by the enterprise. For more on this, see Galensonand Havlicek. 19/ The US, Canada and the UK have useful approaches. RailwayReform in the Central and Eastern European (CEE Economies) 17
v. Accounting. In general, the books of account of the CEE railways reflect the managementpolicies (if any) of public authoritiesin a plannedeconomy. They sufferboth from the fact that the structureof the accountsdoes not provide useful businessmanagement information, and the fact that the input informationon costs of inputs is completely distorted. A significant effort will be required to restructurethe accountsso that they will supportdecision making in the new lines of businessand so that theywill be adequatelyresponsive to the input cost changes which will occur over the next few years as prices are adjustedto marketclearing levels.
vi. PSO Contracts. The signingof a PSO contract impliesa completelydifferent relationshipbetween railway and governmentalauthorities. The legal foundation for this kindof relationshipwill be entirelynew or maynot even exist at this time. A significanteffort will be required in order to understandthe existing legal frameworkdefining relations between governmental authorities and suppliersof servicesand to modifythis framework,if required, for effectivecontract provision of rail servicesby the railway to government(s).
vii. A New Allocation of Government Responsibilities. Under the current, highly centralized governmentforms in the CEE countries, most local or regional authoritiesdo not have the legal authorityor the financialresources necessary to carry out their side of a PSO contractfor local services. If, as appearsdesirable, the local authoritiesare going to be askedto take some shareof the responsibility for planningand fundingof regionalor local passengerservices which are not of national importance,then the authorityand resourcesof local governmentsvis a vis nationalgovernment will have to be appropriatelychanged. 20'
viii. The Private Sector. Althoughgreat emphasishas been placedon convertingthe railway to the JSC form, it appears likely that true and complete"privatization' of the railway or someof its major businessgroups (by which is meant actualsale of a majorityof the stock to the private sector) may be beyond the immediate agendasof the governmentsinvolved. Privatizationalso probablyawaits several years of provenperformance before a price can reasonablybe placed on the stock. At the same time, privatesector development (by which is meanta shiftingof the boundarybetween the railway and the private sector) is high.y desirable. This could take a number of forms, includingsale of non-coreactivities to private investors, contractingwith the private sector for provision of services (such as equipmentmaintenance) which are now providedwithin the railway, transfer of smallerpieces of the railway for private sector operationin connectionwith the railway, and joint venturesfor the developmentof real estate which the railway will continueto own becauseit is also essentiallyfor railway services.
26. The approachdiscussed above is sufficientlyambitious that a full descriptionof all of the aspectsof the agendais beyondthe scopeof a summarypresentation such as this. Most of the issues are describedin greater detail in the sourcesbelow.
7N/ See "Poland:Decentralization and Reformof the State' in referencesbelow. 18 RailwayReforim In the Central and EasternEuropean (CEE) Economies
SOURCES
Blackshaw,Philip, 1991, "Issues in Centraland Eastern EuropeanLand Transport." World Bank, Europe, MiddleEast and North Africa TechnicalDepartment, Washington, D.C.
Fukui, Koichiro,1991, "JapaneseNational Railways Privatization Study." WorldBank, Discussion Paper Series No. 172, Washington.D.C.
Galenson,Alice, 1989, "LaborRedundancy in the TransportSector." WorldBank, WorkingPaper Series No. 158, Washington,D.C.
Galenson,Alice and Louis Thompson,1993, "The Bank's Experiencewith RailwayLending: An Evolving Approach." World Bank, Infrastructure and Urban Department, Transport Division,Washington, D.C.
Halicek, Dieter, 1988, "Experiencewith Labor RedundancySchemes in the TransportSector in Western Europe, the United States and Japan." World Bank DiscussionPaper INU 9, Washington,D.C.
Huff, Lee, and Louis Thompson, 1990, "Techniquesfor RailwayRestructuring." World Bank, WorkingPaper Series No. 380, Washington,D.C.
Moyer, Neil, and Louis Thompson, 1992, "Options for Reshapingthe Railway." World Bank, WorkingPaper Series, No. 926, Washington,D.C.
",Poland: Decentralization and Reformof the State." World Bank CountryStudy, Europe, Middle East and North Africa TechnicalDepartnent, Washington,D.C.
- , 1992, "New Opportunities for the Railways: The Privatization of British Rail.' Departmentof Transport, U.K. GovernmentCm2012, London, England. (cited as British Rail White Paper).
, 1991, "Report of the GovernmentCommission 'Railways'." Governmentof the Federal Republicof Germany,Railways Reform Commission, Bonn, Germany. Policy Research Working Paper Series
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