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 layout Restructuring in general 1.1 Definition 1.2 Driving forces of restructuring 1.3 Objectives of restructuring 1.4 Forms of restructuring 1.5 Key issues under restructuring Context of Railway Restructuring 2.1 Definition of railway restructuring 2.2 Driving forces of railway restructuring 2.3 Objectives of railway restructuring 2.4 Key policy issues to be addressed 2.5 Structural options 2.6 Ownership 2.7 Forms of private sector participation 2.8 Privatisation concerns Conclusion

Restructuring in general

1.1 Definition

1.2 Driving forces of restructuring

1.3 Objectives of restructuring

1.4 Forms of restructuring

1.5 Key issues under restructuring

Context of Railway Restructuring

2.1 Definition of railway restructuring

2.2 Driving forces of railway restructuring

2.3 Objectives of railway restructuring

2.4 Key policy issues to be addressed

2.5 Structural options

2.6 Ownership

2.7 Forms of private sector participation

2.8 Privatisation concerns

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”

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

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

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 restructuring The 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

The 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

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.

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”.

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.

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.

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.

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.

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

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 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.

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: 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”. Better coordination of infrastructure investment can be achieved where there is one primary user. Disadvantages: dominant user may be unfair to minority users thereby affecting service reliability, increasing costs and safety hazards for other operators. Does not promote competition

Competitive Access

Advantages:

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”.

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

Disadvantages:

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

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.

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

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 Efficiency Investment Transparency Accountability Market focus.

Private vs Public ownership

Private sector participation in railways is expected to improve

Efficiency

Investment

Transparency

Accountability

Market focus.

Forms of private sector participation service contracts for; equipment maintenance ticket issuing catering etc. management contracts undertaking operations maintenance responsibilities leasing of fixed assets to private sector leasing equipment from private sector Concessions joint ventures outright ownership of railway infrastructure and equipment.

service contracts for;

equipment maintenance

ticket issuing

catering etc.

management contracts undertaking

operations

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; Unprofitable passenger services Uneconomic branch lines Government support required in this regard through a well designed institutional framework.

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;

Unprofitable passenger services

Uneconomic branch lines

Government support required in this regard through a well designed institutional framework.

Government Regional Authorities Ministries, Central Authorities Regulator Operators State-Owned New Companies Infrastructure 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

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

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THANK YOU FOR YOUR KIND ATTENTION

Contact details:

e-mail: [email_address]