The Restructuring And Privatisation Process

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The Restructuring And Privatisation Process

  1. 1. 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
  2. 2. Presentation layout <ul><li>Restructuring in general </li></ul><ul><ul><li>1.1 Definition </li></ul></ul><ul><ul><li>1.2 Driving forces of restructuring </li></ul></ul><ul><ul><li>1.3 Objectives of restructuring </li></ul></ul><ul><ul><li>1.4 Forms of restructuring </li></ul></ul><ul><ul><li>1.5 Key issues under restructuring </li></ul></ul><ul><li>Context of Railway Restructuring </li></ul><ul><ul><li>2.1 Definition of railway restructuring </li></ul></ul><ul><ul><li>2.2 Driving forces of railway restructuring </li></ul></ul><ul><ul><li>2.3 Objectives of railway restructuring </li></ul></ul><ul><ul><li>2.4 Key policy issues to be addressed </li></ul></ul><ul><ul><li>2.5 Structural options </li></ul></ul><ul><ul><li>2.6 Ownership </li></ul></ul><ul><ul><li>2.7 Forms of private sector participation </li></ul></ul><ul><ul><li>2.8 Privatisation concerns </li></ul></ul><ul><li>Conclusion </li></ul>
  3. 3. Restructuring in general <ul><li>Restructuring is a major change in the composition and configuration of an organisation’s assets combined with a major change in strategy. </li></ul><ul><ul><li>“Structure follows strategy” </li></ul></ul>
  4. 4. Driving forces of restructuring <ul><ul><li>globalisation of markets, consumer preferences, commerce, supply chains and financial flows </li></ul></ul><ul><ul><li>rapid technological changes </li></ul></ul><ul><ul><li>deregulation and trade liberalisation </li></ul></ul><ul><ul><li>changing capital ownership </li></ul></ul><ul><ul><li>a shift from an industrial economy to a knowledge and information based economy </li></ul></ul><ul><ul><li>changing expectations and value systems </li></ul></ul><ul><ul><li>growing direct foreign investment and threats to environmental sustainability. </li></ul></ul><ul><ul><li>changing demographics </li></ul></ul>
  5. 5. Objectives of restructuring <ul><ul><li>Optimising management processes </li></ul></ul><ul><ul><li>Enhancing performance </li></ul></ul><ul><ul><li>Reducing costs </li></ul></ul><ul><ul><li>Optimising product mix </li></ul></ul><ul><ul><li>Increasing productivity </li></ul></ul><ul><ul><li>Refocusing strategically to meet competition </li></ul></ul><ul><ul><li>Increasing sales and enhancing growth </li></ul></ul><ul><ul><li>Improving service </li></ul></ul><ul><ul><li>Controlling costs </li></ul></ul><ul><ul><li>Eliminating overlaps </li></ul></ul><ul><ul><li>Maximising utilisation of critical resources </li></ul></ul>
  6. 6. Forms of restructuring <ul><li>The broad forms of restructuring are; </li></ul><ul><ul><li>Portfolio restructuring </li></ul></ul><ul><ul><ul><li>Involves major changes on the mix of the firm’s main business lines through acquisitions and divestitures </li></ul></ul></ul><ul><ul><li>Financial restructuring </li></ul></ul><ul><ul><ul><li>concerned with changing the company’s ownership and capital structure. </li></ul></ul></ul><ul><ul><ul><li>Issues for consideration are debt and equity and their mix. </li></ul></ul></ul><ul><ul><li>Organisational restructuring </li></ul></ul><ul><ul><ul><li>fundamental changes made to the structural properties of the organisation </li></ul></ul></ul><ul><ul><ul><li>following either financial or portfolio restructuring to increase efficiency and effectiveness </li></ul></ul></ul>
  7. 7. Key issues under restructuring <ul><ul><li>Organisation structure </li></ul></ul><ul><ul><li>Stakeholder management </li></ul></ul><ul><ul><li>Ownership, management & corporate governance </li></ul></ul><ul><ul><li>Restructuring & employees </li></ul></ul><ul><ul><li>Funding </li></ul></ul>
  8. 8. 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
  9. 9. Context of railway restructuring <ul><li>United Nations (2003) identified the following railways problems; </li></ul><ul><ul><li>Chronic financial deficits. </li></ul></ul><ul><ul><li>Archaic pricing systems where charges are not related to cost. </li></ul></ul><ul><ul><li>Lack of equitable fare structure and excessive fares. </li></ul></ul><ul><ul><li>Excessive costs. </li></ul></ul><ul><ul><li>Poor management and technical efficiency. </li></ul></ul><ul><ul><li>Low labour productivity. </li></ul></ul><ul><ul><li>Severely congested services. </li></ul></ul><ul><ul><li>Poor service quality </li></ul></ul><ul><ul><li>Failure of service to respond to need. </li></ul></ul><ul><ul><li>Deficiencies in physical infrastructure. </li></ul></ul><ul><ul><li>Poor asset maintenance. </li></ul></ul><ul><ul><li>Inadequate funds to invest in transport infrastructure and or services. </li></ul></ul><ul><ul><li>Low private sector participation. </li></ul></ul>
  10. 10. Definition of railway restructuring <ul><li>The United Nations (2003) defined railway restructuring as; </li></ul><ul><ul><li>“ The adaptation of railway industry structures, institutions and business processes in response to changing customer needs and technological change”. </li></ul></ul>
  11. 11. Key policy issues to be addressed <ul><ul><li>Huff and Thompson(1990) & United Nations(2003) identified the following policy issues; </li></ul></ul><ul><ul><li>Cost recovery from users – both operating and capital cost. </li></ul></ul><ul><ul><li>Pricing policies – value of service and marginal pricing. </li></ul></ul><ul><ul><li>Social service obligations – direct subsidies. </li></ul></ul><ul><ul><li>Labour adjustment – optimal staff numbers. </li></ul></ul><ul><ul><li>Modal competition – levelling the playing field. </li></ul></ul>
  12. 12. Driving forces of railway restructuring <ul><ul><ul><ul><li>The need to improve railway performance (e.g. Japan, United States of America, Germany, Argentina, Mexico, Brazil & Poland) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Increased competition from other modes of transport. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The mismatch between what the railways offers and what the customers want. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Government finds it costly to fund railways. </li></ul></ul></ul></ul>
  13. 13. Driving forces of railway restructuring cont’d <ul><ul><ul><ul><li>Regulatory framework that prohibits the emergence of business reactions among railway managers and consequently an improvement in financial performance. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Loss of rail market share. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The need to retain and develop the railways as an important component of the national transport system. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Regional pressures, for example in the European Union and North America Free Trade Area. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Globalisation, which stresses international linkages. </li></ul></ul></ul></ul>
  14. 14. Objectives of railway restructuring <ul><li>Railway restructuring seeks to address; </li></ul><ul><ul><li>commercialisation through independent management decisions </li></ul></ul><ul><ul><li>clear division of responsibility between owner governments and their railway organisations </li></ul></ul><ul><ul><li>change of culture from production orientation to market minded and customer oriented </li></ul></ul><ul><ul><li>financial viability to create independence from government financial support </li></ul></ul><ul><ul><li>streamlining the core network to serve commercially attractive traffic and/or routes </li></ul></ul><ul><ul><li>generating revenue mainly from core activities (train operations) </li></ul></ul><ul><ul><li>to have a well trained and highly motivated workforce able to achieve increased productivity. </li></ul></ul>
  15. 15. Determinants of structural options <ul><ul><li>Relative weight and urgency of governmental objectives. </li></ul></ul><ul><ul><li>Relative importance of markets served by the railways. </li></ul></ul><ul><ul><li>Available technology. </li></ul></ul><ul><ul><li>Scale of railway operations as a whole. </li></ul></ul><ul><ul><li>Administrative capabilities of the government and the railway. </li></ul></ul><ul><ul><li>Compound nature of the cost structure – consisting of operations, infrastructure, terminal and station and administration costs. </li></ul></ul><ul><ul><li>Railway infrastructure as a monopoly – efficient and economic to have a single rail network providing access to train operators. </li></ul></ul><ul><ul><li>Indivisibilities – capital intensive in nature implying inability to instantly adjust capacity on a marginal basis when demand fluctuates. </li></ul></ul><ul><ul><li>Public service obligations </li></ul></ul>
  16. 16. Structural options <ul><li>Structural options seek to address; </li></ul><ul><li>The degree of separation between railway infrastructure and railway services (operations) </li></ul><ul><li>The nature and extent of competition to be created </li></ul><ul><li>The extent of private sector participation (ownership). </li></ul>
  17. 17. Structural options cont’d <ul><li>Competitive Access </li></ul><ul><li>Single dominant railway owning infrastructure and performing operations (integrated services) with other operators paying access fees for the usage of infrastructure. </li></ul><ul><li>Vertical Separation (Institutional separation) </li></ul><ul><li>Complete separation of infrastructure from operations. All operators pay access fees in order to access the infrastructure. </li></ul>
  18. 18. Structural options cont’d <ul><li>Competitive Access </li></ul><ul><li>Advantages: </li></ul><ul><ul><li>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”. </li></ul></ul><ul><ul><li>Better coordination of infrastructure investment can be achieved where there is one primary user. </li></ul></ul><ul><ul><li>Disadvantages: </li></ul></ul><ul><ul><li>dominant user may be unfair to minority users thereby affecting service reliability, increasing costs and safety hazards for other operators. </li></ul></ul><ul><ul><li>Does not promote competition </li></ul></ul>
  19. 19. Structural options cont’d <ul><li>Vertical separation </li></ul><ul><li>Advantages: </li></ul><ul><ul><li>Ensures equal access to all operators. </li></ul></ul><ul><ul><li>It places the rail transport operator into a similar position with a road operator. </li></ul></ul><ul><ul><li>Increasing economies of density. </li></ul></ul><ul><ul><li>Improving market focus by various operators. </li></ul></ul><ul><ul><li>Non-profitable services are encouraged to improve efficiency through competition for the market. </li></ul></ul><ul><ul><li>Promotes intra-rail competition. </li></ul></ul><ul><ul><li>Enhances the clarity of government policy and expenditures. </li></ul></ul><ul><ul><li>Facilitates the introduction of the private sector into rail operations. </li></ul></ul>
  20. 20. Structural options cont’d <ul><li>Disadvantages: </li></ul><ul><ul><li>May create coordination problems </li></ul></ul><ul><ul><li>Loss of economies of scale </li></ul></ul><ul><ul><li>Competition may not arise in thin markets </li></ul></ul>
  21. 21. Ownership <ul><li>Private vs Public ownership </li></ul><ul><ul><li>Private sector participation in railways is expected to improve </li></ul></ul><ul><ul><ul><li>Efficiency </li></ul></ul></ul><ul><ul><ul><li>Investment </li></ul></ul></ul><ul><ul><ul><li>Transparency </li></ul></ul></ul><ul><ul><ul><li>Accountability </li></ul></ul></ul><ul><ul><ul><li>Market focus. </li></ul></ul></ul>
  22. 22. Forms of private sector participation <ul><li>service contracts for; </li></ul><ul><ul><li>equipment maintenance </li></ul></ul><ul><ul><li>ticket issuing </li></ul></ul><ul><ul><li>catering etc. </li></ul></ul><ul><li>management contracts undertaking </li></ul><ul><ul><li>operations </li></ul></ul><ul><ul><li>maintenance responsibilities </li></ul></ul><ul><li>leasing of fixed assets to private sector </li></ul><ul><li>leasing equipment from private sector </li></ul><ul><li>Concessions </li></ul><ul><li>joint ventures </li></ul><ul><li>outright ownership of railway infrastructure and equipment. </li></ul>
  23. 23. Privatisation concerns <ul><li>Private sector does not want to invest but “sweat” existing assets </li></ul><ul><ul><li>Effective regulatory framework required </li></ul></ul><ul><li>Private sector “cherry picking” i.e. interested in profit making services at the expense of social services; </li></ul><ul><ul><li>Unprofitable passenger services </li></ul></ul><ul><ul><li>Uneconomic branch lines </li></ul></ul><ul><ul><li>Government support required in this regard through a well designed institutional framework. </li></ul></ul>
  24. 24. 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.
  25. 25. Conclusion <ul><li>Organisational restructuring is a complex exercise with a lot of diverse challenges to contend with. </li></ul><ul><li>There are various forms of restructuring driven by various forces and organisational objectives. </li></ul><ul><li>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. </li></ul><ul><li>Vertical Separation is generally preferred to Competitive Access for railway restructuring </li></ul>
  26. 26. <ul><li>THANK YOU FOR YOUR KIND ATTENTION </li></ul><ul><li>Contact details: </li></ul><ul><li>e-mail: [email_address] </li></ul>

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