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The Restructuring And Privatisation Process


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Southern African Railways Association (SARA) - Papers and Publications.

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The Restructuring And Privatisation Process

  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>