CFS Discussion Paper Series, Number 111 Best Methods of Railway Restructuring and Privatization Ron Kopicki Louis S. Thompson with Koichiro Fukui Murray King Jorge C. Kohon Jan-Eric Nilsson Brian Wadsworth For additional copies, please contact the CFS Information Office, tel: (202) 473-7594, fax: (202) 477-3045. ii BEST METHODS OF RAILWAY RESTRUCTURING AND PRIVATIZATION TABLE OF CONTENTS LIST OF ABBREVIATIONS X ACKOWLEDGMENTS XII FOREWORD XIII EXECUTIVE SUMMARY 1 1. Introduction 1 2. Case Study Experiences 2 3. Alternative Railway Structures 3 4. Alternative Asset Restructuring Mechanisms 4 5. Design of Intermediate Institutional Mechanisms 5 6. Managing the Railway Restructuring Process 6 CHAPTER ONE: INTRODUCTION 9 1. Scope of the Study 9 2. Importance of Railway Restructuring 10 3. Economic Features of Railways 10 4. “Best Methods” Approach 12 5. Railway Case Studies 13 6. Organization of the Study 17 CHAPTER TWO: STRUCTURAL OPTIONS 19 1. Introduction 19 2. Restructuring a Railway: General Design Considerations 19 3. Asset Restructuring: Structural Forms 21 4. Asset Restructuring: Mechanisms 24 5. Liability Restructuring 29 6. Work Force Restructuring 32 7. Management Restructuring 36 8. Strategic Refocusing 37 9. Best Methods 39 CHAPTER THREE: INTERMEDIATE INSTITUTIONAL MECHANISMS 41 1. Introduction 41 2. The Need for Intermediation 41 3. Relationship between the Intermediary and the Railway 43 4. Essential Functions Performed by Restructuring Intermediaries 44 5. Larger Transport Policy Context and the Need to Rebalance Policy Principles 48 6. Alternative Organizational Forms 49 7. Prerequisites for Effective Intermediation Operations 52 8. Best Methods 52 CHAPTER FOUR: MANAGING THE RESTRUCTURING PROCESS 55 1. Introduction 55 2. Differences among Restructuring Processes 55 3. Similarities among Restructuring Methods 57 BEST METHODS OF RAILWAY RESTRUCTURING AND PRIVATIZATION iii 4. Cycle Times and Resource Requirements 60 5. A Conceptual Model of Top Down Restructuring 62 6. A Model of Bottom Up Restructuring 70 7. Best Methods 72 CHAPTER FIVE: JAPAN NATIONAL RAILWAY CASE STUDY 73 Summary 73 1. Introduction 73 2. Lessons Learned from the Experience 73 3. The Case Study 74 Part I: Baseline Conditions 74 1. Brief History 74 2. The Market and Competition 75 3. Organization Prior to Privatization 76 4. Business Reorganization 77 5. Role of Government 77 6. Sources of Funding 79 7. Description of the Network 79 8. Labor Relations 79 9. Legal Framework for Collective Bargaining 82 10. Labor and Capital Productivity 82 11. Operating Performance: 1970-87 82 Part II: Reform of Japan National Railway 83 1. Overview 83 2. Origins and Objectives of Reform 87 3. Reorganization of JNR 87 4. Restructuring 88 5. Privatization 90 Part III: Performance since 1987 92 1. Overview 92 2. Employment and Productivity Improvements 92 3. Liquidated Assets and Capital Expenditures 92 4. Liabilities 93 5. Overall Financial Performance of the JRs 94 6. Service Quality 95 7. Beneficiaries of Reform 96 Part IV: Lessons Learned 96 Appendix 1: Funding and Subsidies for Light Density Lines 99 CHAPTER SIX: NEW ZEALAND RAILWAYS CASE STUDY 101 Summary 101 1. Introduction 101 2. Lessons Learned from the Experience 101 3. The Case Study 102 Part I: Baseline Conditions 102 1. The Market and Competition 102 2. Objectives of the Business Prior to Privatization 102 3. Business Organization 102 4. Role of Government 103 iv BEST METHODS OF RAILWAY RESTRUCTURING AND PRIVATIZATION 5. Description of the Network 104 6. Employment, Unionization, and Technology Development 104 7. Performance, 1980-83 104 Part II: Corporatization and Reform of New Zealand Rail 106 1. Overview 106 2. Origins of Reform 106 3. Corporatization of New Zealand Rail 107 4. Financial Restructuring 108 5. Restructuring the Organization 109 6. New Technologies and Work Restructuring 112 7. Work Force Restructuring 113 8. Capital Structure 114 9. Labor Relations 115 10. Privatization of New Zealand Rail 117 11. Privatization Process 118 12. Final Sale 119 13. Role of the Private Sector 121 Part III: Performance since Reform 121 1. Overview 121 2. Employment Levels 122 3. Assets 122 4. Traffic Levels 122 5. Financial Performance 123 6. Service Quality 123 7. Beneficiaries of Reform 124 Part IV: Lessons Learned 125 Appendix 1: Restructuring Deregulation and Reregulation of the Transport Industry 127 Appendix 2: Land Issues: The Treaty of Waitangi 131 Appendix 3: Legislative Processes 133 Appendix 4: Railway Productivity: Case Study 135 CHAPTER SEVEN: ARGENTINA RAILWAYS CASE STUDY Summary 137 1. Introduction 137 2. Lessons Learned from the Experience 137 3. The Case Study 138 Part I: Baseline Conditions 138 1. Historical Background 138 2. The Decline of FA 140 3. Transport Markets and FA Marketing 140 4. Early Dialogue on Downsizing 141 5. Increasing Competition and the Final Crisis 142 6. Preamble to Radical Reform 143 7. Events Leading Up to Railway Restructuring 145 Part II: Restructuring of Argentine Railways 148 1. The Railway Restructuring Unit 148 2. Preparation in Freight Concessions 150 3. The Effects of the 1991 Strike 151 BEST METHODS OF RAILWAY RESTRUCTURING AND PRIVATIZATION v 4. The Bidding Process for Freight Concessions 152 5. Concessioning Commuter Services in Buenos Aires 153 6. Privatization of Intercity Passenger Services 159 Part III: Performance since Restructuring 161 1. Freight Concessions 161 2. Commuter Rail Concessions 162 3. The Railway System, July 1994 162 4. Real Estate 163 5. Financial Needs 163 6. Labor Unions and Work Force Restructuring 164 7. Labor Contract Negotiations 164 8. The Future 165 Part IV: Lessons Learned 166 CHAPTER EIGHT: SWEDISH RAILWAYS CASE STUDY 169 Summary 169 1. Introduction 169 2. Lessons Learned from the Experience 170 3. The Case Study 170 Part I: Baseline Conditions 170 1. The Regulated Business Administration 170 2. The Rail Industry before 1963 171 3. The 1963-79 Period 172 4. The 1979 Transport Policy Act 174 5. The 1979-85 Period 175 6. The Market for Transport Services 176 7. Comparative Productivity 178 8. Rail Labor Relations 178 Part II: The Swedish Railways Reform Experience 180 1. The Political Decisionmaking Process 180 2. The Process Leading Up to the 1988 Transport Policy Act4 181 3. The Financial Arrangements 183 4. SJ and the Post-1988 Organization 183 5. BV and Its Post-1988 Organization 185 6. The Federal Dimension of the Post-1988 Organization 187 7. Post-1988 Links between Railway Organizations 189 8. Preliminary Studies on Deregulation 191 9. Further Studies of Deregulation 192 10. The 1994 Deregulation Act 193 Part III: Sector Performance after 1988 193 1. Commercialization of SJ 193 2. SJ Production and Operating Efficiency 195 3 . Financial Performance 196 4. Quality of Service 198 5. County Lines and Private Entry 199 6. State Involvement 200 Part IV: Lessons Learned 200 Appendix 1: The Swedish Transport Model 205 Appendix 2: Labor Market Institutions and Contracts 207 vi BEST METHODS OF RAILWAY RESTRUCTURING AND PRIVATIZATION CHAPTER NINE: BRITISH RAILWAYS CASE STUDY 209 Summary 209 1. Introduction 209 2. Lessons Learned from the Experience 209 3. The Case Study 209 Part I: Baseline Conditions 209 1. Historical Overview 209 2. Modernizing the Railways 210 3. Organizational Structure of the British Railways Board 213 4. Physical Attributes of British Rail 217 5. Financial Performance 218 Part II: The Restructuring Process 219 1. Railway Privatization: The Beginning 219 2. Development of Railway Privatization Policy 220 3. The Rail Freight Business 221 4. The Railway Passenger Business 225 5. Rolling Stock Leasing Arrangements 229 6. Stations 229 7. Railtrack 229 8. Unbundling Support Services 231 9. The Railway Regulator 231 10. The Franchising Director 232 11. Safety Validation 232 Part III: Implementation of Restructuring Solutions 233 1. Institutional Context 233 2. The Implementation Phase: Policy Announcement and Legislation 233 3. Labor Relations 234 4. Organizational Change 235 Part IV: Lessons from the Railway Revolution 236 Appendix 1: Track Access Charging Regime 239 Appendix 2: The Main Rail Freight and Parcels Businesses 241 Appendix 3: The First Eight Passenger Franchises 243 Appendix 4: Railway Support Services to be Privatized 245 Appendix 5: Outline Timetable of the Railway Privatization Process 247 CHAPTER TEN: UNITED STATES SMALL RAILROADS CASE STUDY 249 Summary 249 1. Introduction 249 2. Lessons Learned from the Experience 249 3. The Case Study 250 Part I: Baseline Conditions 250 1. The Small Railroad Segment 250 2. Successful Small Railroad Operations 255 3. The U.S. Service Network 256 4. The Market for Freight and Passenger Services 256 5. The Evolving Competition 258 6. Rail Deregulation and Its Implications 259 7. Exit and Entry Processes under Current Legislation 262 8. Economics of Small Railroad Operations 262 BEST METHODS OF RAILWAY RESTRUCTURING AND PRIVATIZATION vii Part II: Restructuring of Private Railroads 265 1. Private Sector Development and Growth: 1827-86 265 2. Federal Regulation and Continued Growth: 1887-1917 265 3. World War I and the Federal Takeover: 1918-20 266 4. Continued Regulation and Decline: 1920-40 266 5. Post-World War II and the Big Slide: 1946-79 267 6. Mergers and Consolidation 267 7. Emergence of the Small Railroad Segment 268 8. Work Rules and Unionization 268 Part III: Performance of Small Railroads 270 1. Incidence of Success and Failure 270 2. Mini Case Study: Wisconsin Central 271 3. Mini Case Study: Iowa Interstate Railroad 273 Part IV: Lessons Learned 274 CHAPTER ELEVEN: CANADIAN RAILWAYS CASE STUDY 279 Summary 279 1. Introduction 279 2. Lessons Learned from the Experience 279 3. The Case Study 280 Part I: Baseline Conditions 280 1. Structural Evolution of Canadian Railways 280 2. CN’s Status as a Crown Corporation 281 3. The Canadian Transport Market and Rail Competition 282 4. Network Characteristics and Traffic Patterns 284 5. Early Economic Regulation 287 6. Subsequent Regulatory Reform: 1967 and 1987 288 7. Elimination of Statutory Grain Rates: WGTA, 1983 289 8.